It is proposed that this filing will become effective (check
appropriate box)
This Post-Effective Amendment No. 125 to
the Registration Statement of the Global X Funds (the “Trust” or the “Registrant”) on Form N-1A
(File No. 333-151713) (the “Amendment”) is being filed pursuant to Rule 485(a) to change the name,
investment objective and underlying index of the Global X Next 11
ETF (now named the Global X Next Emerging & Frontier ETF). The Amendment does not affect the currently effective prospectus for other series of the Trust’s shares.
The Securities and Exchange Commission
(“SEC”) has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation
to the contrary is a criminal offense.
Shares in the Fund are not guaranteed or
insured by the Federal Deposit Insurance Corporation (“FDIC”) or any other agency of the U.S. Government, nor are shares
deposits or obligations of any bank. Such shares in the Fund involve investment risks, including the loss of principal.
ADDITIONAL INFORMATION
ABOUT THE FUNDS’ STRATEGIES AND RISKS
ADDITIONAL STRATEGIES
In addition to the investment strategies
discussed above under
Fund
Summaries—Principal Investment Strategies
, the Fund may use the following investment
strategies:
Derivative
Instruments, Cash or Stocks not included in the Underlying Index:
The Fund may invest up to 20% of its assets in (i)
certain futures, options and swap contracts (which may be leveraged and are considered derivatives), (ii) cash and cash equivalents
and (iii) stocks not included in the Underlying Index, provided, in each case, that the Adviser believes the instrument will help
the Fund track the Underlying Index.
Leverage:
The Fund may borrow money from a bank as permitted under the 1940 Act, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time. Specifically, the Fund may borrow money at fiscal quarter ends to maintain the
required level of diversification to qualify as a “regulated investment company” (“RIC”) for purposes of
the Internal Revenue Code of 1986, as amended (“Code”).
Securities
Lending:
The Fund may lend its portfolio securities. In connection with such loans, the Fund receives liquid collateral
equal to at least 102% of the value of domestic equity securities and ADRs and 105% of the value of the foreign equity securities
(other than ADRs) being lent. This collateral is marked-to-market on a daily basis.
ADDITIONAL RISKS
The Fund is subject to the risks described
below. Some or all of these risks may adversely affect the Fund NAV, trading price, yield, total return and/or its ability to meet
its objectives.
African Economic Risk
Investment in African securities involves
heightened risks including, among others, expropriation and/or nationalization of assets, confiscatory taxation, political instability,
including authoritarian and/or military involvement in governmental decision-making, armed conflict, the impact on the economy
as a result of civil war, and social instability as a result of religious, ethnic and/or socioeconomic unrest and, in certain countries,
genocidal warfare. Certain countries in Africa generally have less developed capital markets than traditional emerging market countries,
and, consequently, the risks of investing in foreign securities are magnified in such countries.
Asian Economic Risk
Investments in Asian markets involve risks
not typically associated with investments in securities of issuers in more developed countries that may negatively affect the value
of your investment in the Fund. The countries in Asia present different economic and political conditions from those in Western
markets, and less social, political and economic stability. Political instability could have an adverse effect on economic or social
conditions in these economies and may result in outbreaks of civil unrest, terrorist attacks or threats or acts of war in the affected
areas, any of which could materially and adversely affect the companies in which the Fund may invest.
Asset Class Risk
The returns from the types of securities
in which the Fund invests may under-perform returns from the various general securities markets or different asset classes. The
stocks in the Underlying Indexes may under-perform fixed-income investments and stock market investments that track other markets,
segments and sectors. Different types of securities tend to go through cycles of out-performance and under-performance in comparison
to the general securities markets.
Cash Transactions Risk
Unlike most exchange-traded funds, the
Fund intends to effect all creations and redemptions principally for cash, rather than in-kind securities. As a result, an investment
in the Fund may be less tax-efficient than an investment in a more conventional ETF. ETFs generally are able to make in-kind redemptions
and avoid being taxed on gain on the distributed portfolio securities at the Fund level. Because the Funds currently intend to
affect all redemptions principally for cash, rather than in-kind distributions, it may be required to sell portfolio securities
in order to obtain the cash needed to distribute redemption proceeds. If the Fund recognizes gain on these sales, this generally
will cause the Fund to recognize gain it might not otherwise have recognized, or to recognize such gain sooner than would otherwise
be required if it were to distribute portfolio securities in-kind. The Fund generally intends to distribute these gains to shareholders
to avoid being taxed on this gain at the Fund level and otherwise comply with the special tax rules that apply to it. This strategy
may cause shareholders to be subject to tax on gains they would not otherwise be subject to, or at an earlier date than, if they
had made an investment in a different ETF. Moreover, cash transactions may have to be carried out over several days if the securities
market is relatively illiquid and may involve considerable brokerage fees and taxes. Brazil may also impose higher local tax rates
on transactions involving certain companies. In addition, these factors may result in wider spreads between the bid and the offered
prices of the Fund’s Shares than for more conventional ETFs.
Commodity Exposure Risk
To the extent that its Underlying Index
or portfolio invests in securities and markets that are susceptible to fluctuations in certain commodity markets, any negative
changes in commodity markets could have a great impact on a Fund. Commodity prices may be influenced of characterized by unpredictable
factors, including, where applicable, high volatility, changes in supply and demand relationships, weather, agriculture, trade,
changes in interest rates and monetary and other governmental policies, action and inaction. Securities of companies held by a
Fund that are dependent on a single commodity, or are concentrated on a single commodity sector, may typically exhibit even higher
volatility attributable to commodity prices.
Concentration Risk
To the extent that its Underlying Index
or portfolio is concentrated in the securities of companies in a particular country, market, industry, group of industries, sector
or asset class, the Fund may be adversely affected by the performance of those securities, may be subject to increased price volatility
and may be more susceptible to adverse economic, market, political or regulatory occurrences affecting that market, industry, group
of industries, sector or asset class.
Credit Risk
Credit risk is the risk that the counterparty
to a swap contract is unable or unwilling to honor its obligations.
Currency Risk
Currency risk is the potential for price
fluctuations in the dollar value of foreign securities because of changing currency exchange rates. Because the Fund NAV is determined
on the basis of U.S. dollars, you may lose money if the local currency of a foreign market depreciates against the U.S. dollar,
even if the local currency value of the Fund holdings goes up.
Custody Risk
Custody risk refers to risks in the process
of clearing and settling trades and to the holding of securities by local banks, agents and depositories. Low trading volumes and
volatile prices in less developed markets make trades harder to complete and settle. Local agents are held only to the standard
of care of the local markets. Governments or trade groups may compel local agents to hold securities in designated depositories
that are subject to independent evaluation. The less developed a country’s securities market is, the greater the likelihood
of custody problems occurring.
Derivatives Risk
Derivatives risk is the risk that loss
may result from a Fund’s investments in options, futures and swap contracts, which may be leveraged and are types of derivatives.
Investments in leveraged instruments may result in losses exceeding the amounts invested. The Funds may use these instruments to
help the Funds track their Underlying Indexes. Compared to conventional securities, derivatives can be more sensitive to changes
in interest rates or to sudden fluctuations in market prices and thus a Fund’s losses may be greater if it invests in derivatives
than if it invests only in conventional securities.
Eastern European Economic Risk
An investment in Eastern European issuers
may subject the Fund to legal, regulatory, political, currency, security and economic risks specific to Eastern Europe. Economies
of certain Eastern European countries rely heavily on export of commodities, including oil and gas, and certain metals. As a result,
such economies will be impacted by international commodity prices and are particularly vulnerable to global demand for these products.
Acts of terrorism in certain Eastern European countries may cause uncertainty in their financial markets and adversely affect the
performance of the issuers to which the Fund has exposure. The securities markets in Eastern European countries are substantially
smaller and inexperienced, with less government supervision and regulation of stock exchanges and less liquid and more volatile
than securities markets in the United States or Western European countries.
Other risks related to investing in securities
of Eastern European issuers include: the absence of legal structures governing private and foreign investments and private property;
the possibility of the loss of all or a substantial portion of the Fund’s assets invested in Eastern European issuers as
a result of expropriation; certain national policies which may restrict the Fund’s investment opportunities, including, without
limitation, restrictions on investing in issuers or industries deemed sensitive to relevant national interests.
Emerging Market Risk
Emerging market risk is the risk that the
securities markets of emerging countries are less liquid, are especially subject to greater price volatility, have smaller market
capitalizations, have less government regulation and are not subject to as extensive and frequent accounting, financial and other
reporting requirements as the securities markets of more developed countries, as has historically been the case.
The risks of foreign investment are heightened
when the issuer is located in an emerging country. The Fund purchase and sale of portfolio securities in certain emerging countries
may be constrained by limitations relating to daily changes in the prices of listed securities, periodic trading or settlement
volume and/or limitations on aggregate holdings of foreign investors. Such limitations may be computed based on the aggregate trading
volume by or holdings of the Fund, the Adviser, its affiliates and their respective clients and other service providers. The Fund
may not be able to sell securities in circumstances where price, trading or settlement volume limitations have been reached.
Foreign investment in the securities markets
of certain emerging countries is restricted or controlled to varying degrees, which may limit investment in such countries or increase
the administrative costs of such investments. In addition, certain countries may restrict or prohibit investment opportunities
in issuers or industries deemed important to national interests. Such restrictions may affect the market price, liquidity and rights
of securities that may be purchased by the Fund. The repatriation of both investment income and capital from certain emerging countries
is subject to restrictions such as the need for governmental consents. In situations where a country restricts direct investment
in securities (which may occur in certain Asian, Latin, Central and South American and other countries), the Fund may invest in
such countries through other investment funds in such countries.
Many emerging countries have recently experienced
currency devaluations and substantial (and, in some cases, extremely high) rates of inflation. Other emerging countries have experienced
economic recessions. These circumstances have had a negative effect on the economies and securities markets of those emerging countries.
Economies in emerging countries generally are dependent heavily upon commodity prices and international trade and, accordingly,
have been and may continue to be affected adversely by the economies of their trading partners, trade barriers, exchange controls,
managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which
they trade.
Many emerging countries are subject to
a substantial degree of economic, political and social instability. Governments of some emerging countries are authoritarian in
nature or have been installed or removed as a result of military coups, while governments in other emerging countries have periodically
used force to suppress civil dissent. Disparities of wealth, the pace and success of democratization, and ethnic, religious and
racial disaffection, among other factors, have also led to social unrest, violence and/or labor unrest in some emerging countries.
Many emerging markets have experienced strained international relations due to border disputes, historical animosities or other
defense concerns. These situations may cause uncertainty in the markets and may adversely affect the performance of these economies.
Unanticipated political or social developments may result in sudden and significant investment losses. Investing in emerging countries
involves greater risk of loss due to expropriation, nationalization, confiscation of assets and property or the imposition of restrictions
on foreign investments and on repatriation of capital invested. As an example, in the past some Eastern European governments have
expropriated substantial amounts of private property, and many claims of the property owners have never been fully settled. There
is no assurance that similar expropriations will not occur in other emerging market countries.
The Fund investment in emerging countries
may also be subject to withholding or other taxes, which may be significant and may reduce the return from an investment in such
countries to the Fund.
Settlement and clearance procedures in
emerging countries are frequently less developed and reliable than those in the United States and may involve the Fund delivery
of securities before receipt of payment for their sale. In addition, significant delays may occur in certain markets in registering
the transfer of securities. Settlement, clearance or registration problems may make it more difficult for the Fund to value its
portfolio securities and could cause the Fund to miss attractive investment opportunities, to have a portion of its assets uninvested
or to incur losses due to the failure of a counterparty to pay for securities the Fund has delivered or the Fund inability to complete
its contractual obligations because of theft or other reasons. In addition, local agents and depositories are subject to local
standards of care that may not be as rigorous as developed countries. Governments and other groups may also require local agents
to hold securities in depositories that are not subject to independent verification. The less developed a country’s securities
market, the greater the risk to the Fund.
The creditworthiness of the local securities
firms used by the Fund in emerging countries may not be as sound as the creditworthiness of firms used in more developed countries.
As a result, the Fund may be subject to a greater risk of loss if a securities firm defaults in the performance of its responsibilities.
The Fund use of foreign currency management
techniques in emerging countries may be limited. Due to the limited market for these instruments in emerging countries, all or
a significant portion of the Fund’ currency exposure in emerging countries may not be covered by such instruments.
Equity Securities Risk
The Fund invests in equity securities,
which are subject to changes in value that may be attributable to market perception of a particular issuer or to general stock
market fluctuations that affect all issuers. Investments in equity securities may be more volatile than investments in other asset
classes.
Foreign Security Risk
Fund assets may be invested within the
equity markets of countries outside of the U.S. These markets are subject to special risks associated with foreign investment including,
but not limited to: lower levels of liquidity and market efficiency; greater securities price volatility; exchange rate fluctuations
and exchange controls; less availability of public information about issuers; limitations on foreign ownership of securities; imposition
of withholding or other taxes; imposition of restrictions on the expatriation of the assets of the Fund; higher transaction and
custody costs and delays in settlement procedures; difficulties in enforcing contractual obligations; lower levels of regulation
of the securities market; and weaker accounting, disclosure and reporting requirements. Shareholder rights under the laws of some
foreign countries may not be as favorable as U.S. laws. Thus, a shareholder may have more difficulty in asserting its rights or
enforcing a judgment against a foreign company than a shareholder of a comparable U.S. company. Investment of more than 25% of
the Fund total assets in securities located in one country or region will subject the Fund to increased country or region risk
with respect to that country or region.
Geographic Risk
Geographic risk is the risk that the Fund
assets may be concentrated in countries located in the same geographic region. This concentration will subject the Fund to risks
associated with that particular region, such as a natural disaster.
Issuer Risk
Issuer risk is the risk that any of the
individual companies that the Fund invests in may perform badly, causing the value of its securities to decline. Poor performance
may be caused by poor management decisions, competitive pressures, changes in technology, disruptions in supply, labor problems
or shortages, corporate restructurings, fraudulent disclosures or other factors. Issuers may, in times of distress or on their
own discretion, decide to reduce or eliminate dividends which would also cause their stock prices to decline.
Latin American Economic Risk
Many economies in Latin America have experienced
high interest rates, economic volatility, inflation, currency devaluations and high unemployment rates. Any adverse economic event
in one country can have a significant effect on other countries of this region. In addition, commodities (such as oil, gas and
minerals) represent a significant percentage of the regions' exports and many economies in this region, are particularly sensitive
to fluctuations in commodity prices.
Leverage Risk
The Fund (i) may invest up to 20% of its
assets in certain futures, options and swap contracts, and (ii) borrow money at fiscal quarter ends to maintain the required level
of diversification to qualify as a RIC for purposes of the Code. As a result, the Fund may be exposed to the risks of leverage,
which may be considered a speculative investment technique. Leverage magnifies the potential for gain and loss on amounts invested
and therefore increase the risks associated with investing in our Fund. If the value of the Fund assets increases, then leveraging
would cause the Fund net asset value to increase more sharply than it would have had the Fund not leveraged. Conversely, if the
value of the Fund assets decreases, leveraging would cause the Fund NAV to decline more sharply than it otherwise would have had
the Fund not leveraged. The Fund may incur additional expenses in connection with borrowings.
Management Risk
The Fund may not fully replicate its Underlying
Index and may hold securities not included in its Underlying Index. Therefore, the Fund is subject to management risk. That is,
the Adviser’s investment strategy, the implementation of which is subject to a number of constraints, may not produce the
intended results. The ability of the Adviser to successfully implement the Fund investment strategies will influence the Fund performance
significantly.
The Fund is not actively managed. The Fund
may be affected by a general decline in the market segments relating to its Underlying Index. The Fund invests in securities included
in, or representative of, it’s Underlying Index regardless of their investment merit. The Adviser does not attempt to take
defensive positions in declining markets.
Market Risk
Market risk is the risk that the value
of the securities in which the Fund invests may go up or down in response to the prospects of individual issuers and/or general
economic conditions. Price changes may be temporary or last for extended periods. You could lose money over short periods due to
fluctuation in the Fund NAV in response to market movements, and over longer periods during market downturns.
Market Trading Risks
Absence of Active Market
Although Shares are or will be listed for
trading on a U.S. exchange and may be listed on certain foreign exchanges, there can be no assurance that an active trading market
for such Shares will develop or be maintained.
Lack of Market Liquidity
Secondary market trading in Shares may
be halted by an exchange because of market conditions or for other reasons. In addition, trading in Shares is subject to trading
halts caused by extraordinary market volatility pursuant to “circuit breaker” rules. There can be no assurance that
the requirements necessary to maintain the listing of Shares will continue to be met or will remain unchanged.
Risks of Secondary Listings
The Fund’s Shares may be listed or
traded on U.S. and non-U.S. exchanges other than the U.S. exchange where the Fund primary listing is maintained. There can be no
assurance that the Fund’s Shares will continue to trade on any such exchange or in any market or that the Fund’s Shares
will continue to meet the requirements for listing or trading on any exchange or in any market. The Fund’s Shares may be
less actively traded in certain markets than others, and investors are subject to the execution and settlement risks and market
standards of the market where they or their broker direct their trades for execution. Certain information available to investors
who trade Shares on a U.S. stock exchange during regular U.S. market hours may not be available to investors who trade in other
markets, which may result in secondary market prices in such markets being less efficient.
Secondary Market Trading Risk
Shares of the Fund may trade in the secondary
market on days when the Fund does not accept orders to purchase or redeem Shares. On such days, Shares may trade in the secondary
market with more significant premiums or discounts than might be experienced on days when the Fund accepts purchase and redemption
orders.
Secondary market trading in Fund Shares
may be halted by a stock exchange because of market conditions or other reasons. In addition, trading in Fund Shares on a stock
exchange or in any market may be subject to trading halts caused by extraordinary market volatility pursuant to "circuit breaker"
rules on the stock exchange or market. There can be no assurance that the requirements necessary to maintain the listing or trading
of Fund Shares will continue to be met or will remain unchanged.
Statement
of Additional Information
October __, 2013
This Statement of Additional Information (“SAI”)
is not a prospectus. It should be read in conjunction with the current Prospectus (“Prospectus”) for the following
Fund (“Fund”) of Global X Funds (“Trust”) as such Prospectus may be revised or supplemented from time to
time:
Global X Next
Emerging & Frontier ETF
NYSE Arca,
Inc: EMFM
The Fund’s
Prospectus is dated October __, 2013. Capitalized terms used herein that are not defined have the same meaning as in the Prospectus,
unless otherwise noted. A copy of the Prospectus may be obtained without charge by writing to SEI Investments Global Funds Services,
One Freedom Valley Drive Oaks, PA 19456, calling 1-888-GXFund-1 (1-888-493-8631) or visiting
www.globalxfunds.com
.
The principal U.S. national stock exchange on which the Fund will be listed is NYSE Arca (“Exchange”).
TABLE
OF CONTENTS
GENERAL DESCRIPTION OF THE TRUST AND FUNDs
|
|
1
|
ADDITIONAL INVESTMENT INFORMATION
|
|
1
|
EXCHANGE LISTING AND TRADING
|
|
1
|
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
|
|
2
|
INFORMATION REGARDING THE INDEXES AND THE INDEX PROVIDERS
|
|
15
|
INVESTMENT RESTRICTIONS
|
|
15
|
CONTINUOUS OFFERING
|
|
17
|
PORTFOLIO HOLDINGS
|
|
17
|
MANAGEMENT OF THE TRUST
|
|
18
|
BOARD OF TRUSTEES AND OFFICERS
|
|
18
|
STANDING BOARD COMMITTEES
|
|
22
|
TRUSTEE AND OFFICER OWNERSHIP OF FUND SHARES
|
|
22
|
TRUSTEE OWNERSHIP OF SECURITIES OF THE ADVISER AND RELATED COMPANIES
|
|
23
|
TRUSTEE COMPENSATION
|
|
23
|
CODE OF ETHICS
|
|
24
|
PORTFOLIO MANAGERS
|
|
25
|
BROKERAGE TRANSACTIONS
|
|
26
|
PROXY VOTING
|
|
26
|
SUB-ADMINISTRATOR
|
|
27
|
DISTRIBUTOR
|
|
27
|
CUSTODIAN AND TRANSFER AGENT
|
|
28
|
DESCRIPTION OF SHARES
|
|
28
|
BOOK-ENTRY ONLY SYSTEM
|
|
30
|
PURCHASE AND REDEMPTION OF CREATION UNITS
|
|
31
|
CREATION UNIT AGGREGATIONS
|
|
31
|
PURCHASE AND ISSUANCE OF CREATION UNIT AGGREGATIONS
|
|
31
|
REDEMPTION OF CREATION UNITS
|
|
35
|
TAXES
|
|
37
|
FEDERAL - GENERAL INFORMATION
|
|
38
|
BACK-UP WITHHOLDING
|
|
40
|
SECTIONS 351 AND 362
|
|
40
|
QUALIFIED DIVIDEND INCOME
|
|
40
|
CORPORATE DIVIDENDS RECEIVED DEDUCTION
|
|
41
|
NET CAPITAL LOSS CARRYFORWARDS
|
|
41
|
EXCESS INCLUSION INCOME
|
|
41
|
TAXATION OF INCOME FROM CERTAIN FINANCIAL INSTRUMENTS AND PFICS
|
|
41
|
SALES OF SHARES
|
|
46
|
OTHER TAXES
|
|
46
|
FOREIGN TAXES
|
|
46
|
TAXATION OF NON-U.S. SHAREHOLDERS
|
|
46
|
REPORTING
|
|
47
|
NET ASSET VALUE
|
|
47
|
DIVIDENDS AND DISTRIBUTIONS
|
|
48
|
GENERAL POLICIES
|
|
48
|
DIVIDEND REINVESTMENT SERVICE
|
|
48
|
INDEPENDENT TRUSTEE COUNSEL
|
|
49
|
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
49
|
CONTROL PERSONS AND PRINCIPAL SHAREHOLDERS
|
|
49
|
ADDITIONAL INFORMATION
|
|
49
|
APPENDIX A
|
|
A-1
|
GENERAL
DESCRIPTION OF THE TRUST AND FUNDs
As of the date of this SAI, the Trust currently
consists of 79 investment portfolios, thirty-five of which are operational. The Trust was formed as a Delaware Statutory Trust on
March 6, 2008 and is authorized to have multiple series or portfolios. The Trust is an open-end management investment company,
registered under the Investment Company Act of 1940, as amended (“1940 Act”). The offering of the Trust’s shares
is registered under the Securities Act of 1933, as amended (“Securities Act”). The Fund is “non-diversified”
and, as such, the Fund’s investments are not required to meet certain diversification requirements under the 1940 Act.
The investment objective of the Fund is
to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of a specified
benchmark index (“Underlying Index”). The Fund’s investment objective and Underlying Index may be changed without
shareholder approval. Shareholders will be given 60 days’ prior notice of any change of the Fund’s investment objective.
If the Adviser changes the Underlying Index, the name of the Fund may be changed as well. The Fund is managed by Global X Management
Company LLC (“Adviser”).
The Fund offers and issue shares at its
net asset value per share (“NAV”) only in aggregations of a specified number of shares (the, a “Creation Unit”
or a “Creation Unit Aggregation”), generally in exchange for a basket of securities included in its Underlying Index
(“Deposit Securities”), together with the deposit of a specified cash payment (“Cash Component”). The shares
of the Fund are, or will be, listed and expected to be traded on the Exchange.
Shares trade in the secondary market and
elsewhere at market prices that may be at, above or below NAV. Shares are redeemable only in Creation Unit Aggregations and, generally,
in exchange for portfolio securities and a Cash Component. Creation Units typically are a specified number of shares. The number
of shares per Creation Unit of the Fund is 50,000 shares.
The Trust reserves the right to offer a
“cash” option for creations and redemptions of shares. Shares may be issued in advance of receipt of Deposit Securities
subject to various conditions including a requirement to maintain on deposit with the Trust cash equal to 110% of the market value
of the missing Deposit Securities. The required amount of deposit may be changed by the Adviser from time to time. See the Purchase
and Redemption of Creation Units section of this SAI for further discussion. In the instance of such cash creations or redemptions,
transaction fees may be imposed that will be in addition to the transaction fees associated with in-kind creations or redemptions.
In all cases, such conditions and fees will be limited in accordance with the requirements of the Securities and Exchange Commission
(“SEC”) applicable to management investment companies offering redeemable securities.
ADDITIONAL
INVESTMENT INFORMATION
EXCHANGE LISTING AND TRADING
A discussion of exchange listing and trading
matters associated with an investment in the Fund is contained in the Prospectus. The discussion below supplements, and should
be read in conjunction with, that section of the Prospectus.
Shares of the Fund are listed for trading
on the Exchange and trade throughout the day on the Exchange and other secondary markets. There can be no assurance that the requirements
of the Exchange necessary to maintain the listing of shares of any Fund will continue to be met. The Exchange may, but is not required
to, remove the shares of the Fund from its listing if (1) following the initial twelve-month period beginning upon the commencement
of trading of the Fund, there are fewer than fifty (50) record and/or beneficial holders of the Fund for thirty (30) or more consecutive
trading days, (2) the value of the Underlying Index on which the Fund is based is no longer calculated or available, (3) the “indicative
optimized portfolio value” (“IOPV”) of the Fund is no longer calculated or available, or (4) any other event
shall occur or condition exist that, in the opinion of the Exchange, makes further dealings on the Exchange inadvisable. The Exchange
will remove the shares of the Fund from listing and trading upon termination of the Fund.
As in the case of other publicly-traded
securities, brokers’ commissions on transactions will be based on negotiated
commission rates at customary levels.
In order to provide additional information
regarding the indicative value of shares of the Fund, the Exchange disseminates every fifteen seconds, through the facilities of
the Consolidated Tape Association, an updated IOPV for the Fund as calculated by an information provider or a market data vendor.
The Trust is not involved in or responsible for any aspect of the calculation or dissemination of the IOPVs, and makes no representation
or warranty as to the accuracy of the IOPVs.
An IOPV has a securities value component
and a cash component. The securities values included in an IOPV are the values of the Deposit Securities for the applicable Fund.
While the IOPV reflects the current market value of the Deposit Securities required to be deposited in connection with the purchase
of a Creation Unit Aggregation, it does not necessarily reflect the precise composition of the current portfolio of securities
held by the applicable Fund at a particular point in time because the current portfolio of the Fund may include securities that
are not a part of the Deposit Securities. Therefore, the Fund’s IOPV disseminated during the Exchange trading hours should
not be viewed as a real time update of the Fund’s NAV, which is calculated only once a day.
In addition to the securities component
described in the preceding paragraph, the IOPV for the Fund includes a cash component consisting of estimated accrued dividends
and other income, less expenses. If applicable, the IOPV also reflects changes in currency exchange rates between the U.S. Dollar
and the applicable foreign currency.
The Trust reserves the right to adjust
the share prices of Funds in the future to maintain convenient trading ranges for investors. Any adjustments would be accomplished
through stock splits or reverse stock splits, which would have no effect on the net assets of the applicable Fund.
INVESTMENT OBJECTIVE, STRATEGIES
AND RISKS
The Fund seeks to achieve its objective
by investing primarily in securities issued by companies that comprise the relevant Underlying Index and through transactions that
provide substantially similar exposure to securities in the Underlying Index. The Fund operates as an index fund and will not be
actively managed. Adverse performance of a security in the Fund’s portfolio will ordinarily not result in the elimination
of the security from the Fund’s portfolio. The Fund invests at least 80% of its total assets in the securities of its Underlying
Index and in American Depositary Receipts (“ADRs”) and Global Depositary Receipts (“GDRs”) (collectively
“Depositary Receipts”) based on the securities in its Underlying Index. The Fund may also invest up to 20% of its assets
in certain futures, options and swap contracts, cash and cash equivalents, as well as in stocks not included in its Underlying
Index but which the Adviser believes will help the Fund track its Underlying Index.
The Fund
use a replication strategy. A replication strategy is an indexing strategy that involves investing in the securities of the Underlying
Index in approximately the same proportions as in the Underlying Index. However, the Fund may utilize a representative sampling
strategy with respect to its Underlying Index when a replication strategy might be detrimental to its shareholders, such as when
there are practical difficulties or substantial costs involved in compiling a portfolio of securities to follow its Underlying
Index, or, in certain instances, when securities in the Underlying Index become temporarily illiquid, unavailable or less liquid,
or due to legal restrictions (such as diversification requirements that apply to the Fund but not the Underlying Indexes).
The Fund has adopted a non-fundamental
investment policy in accordance with Rule 35d-1 under the 1940 Act to invest, under normal circumstances, at least 80% of the value
of its net assets, plus the amount of any borrowings for investment purposes, in securities of the Fund’s Underlying Index
and in Depositary Receipts based on securities in the Underlying Index. The Fund has also adopted a policy to provide its shareholders
with at least 60 days’ prior written notice of a change to its investment objective. If, subsequent to an investment, the
80% requirement is no longer met, the Fund’s future investments will be made in a manner that will bring the Fund into compliance
with this policy.
The following supplements the information
contained in the Prospectus concerning the investment objectives and policies of the Fund.
DEPOSITARY RECEIPTS.
The Fund will
normally invest at least 80% of its total assets in the securities of its Underlying Index and in Depositary Receipts based on
the securities in its Underlying Index. ADRs are receipts that are traded in the United States evidencing ownership of the underlying
foreign securities and are denominated in U.S. dollars. GDRs are receipts issued by a non-U.S. financial institution evidencing
ownership of underlying foreign or U.S. securities and usually are denominated in foreign currencies. GDRs may not be denominated
in the same currency as the securities they represent. Generally, GDRs are designed for use in the foreign securities markets.
To the extent the Fund invests in ADRs,
such ADRs will be listed on a national securities exchange. To the extent the Fund invests in GDRs, such GDRs will be listed on
a foreign exchange. The Fund will not invest in any unlisted Depositary Receipt or any Depositary Receipt for which pricing information
is not readily available. Generally, all depositary receipts must be sponsored. The Fund, however, may invest in unsponsored depositary
receipts under certain limited circumstances. A non-sponsored depository may not provide the same shareholder information that
a sponsored depositary is required to provide under its contractual arrangement with the issuer. Therefore, there may be less information
available regarding such issuers and there may not be a correlation between such information and the market value of the depositary
receipts.
NON-DIVERSIFICATION RISK.
Non-diversification
risk is the risk that a non-diversified fund may be more susceptible to adverse financial, economic or other developments affecting
any single issuer, and more susceptible to greater losses because of these developments. The Fund is classified as “non-diversified”
for purposes of the 1940 Act. A “non-diversified” classification means that the Fund is not limited by the 1940 Act
with regard to the percentage of its assets that may be invested in the securities of a single issuer. The securities of a particular
issuer may dominate the Underlying Index of such the Fund and, consequently, the Fund’s investment portfolio. The Fund may
also concentrate its investments in a particular industry or group of industries, as noted in the description of the Fund. The
securities of issuers in particular industries may dominate the Underlying Index of such the Fund and, consequently, the Fund’s
investment portfolio. This may adversely affect its performance or subject the Fund’s shares to greater price volatility
than that experienced by less concentrated investment companies.
The Fund intends to maintain the required
level of diversification and otherwise conduct its operations so as to qualify as a “regulated investment company”
for purposes of the Internal Revenue Code (the “IRC”), and to relieve the Fund of any liability for federal income
tax to the extent that its earnings are distributed to shareholders. Compliance with the diversification requirements of the IRC
may limit the investment flexibility of certain Funds and may make it less likely that such Funds will meet their investment objectives.
SHORT-TERM INSTRUMENTS AND TEMPORARY
INVESTMENTS
. To the extent consistent with its investment policies, the Fund may invest in short-term instruments, including
money market instruments, on an ongoing basis to provide liquidity or for other reasons. Money market instruments are generally
short-term investments that may include but are not limited to: (i) shares of money market funds; (ii) obligations issued or guaranteed
by the U.S. government, its agencies or instrumentalities (including government-sponsored enterprises); (iii) negotiable certificates
of deposit (“CDs”), bankers’ acceptances, fixed time deposits, bank notes and other obligations of U.S. and foreign
banks (including foreign branches) and similar institutions; (iv) commercial paper rated at the date of purchase “Prime-1”
by Moody’s Investors Service, Inc. (“Moody’s”), “A-1” by Standard & Poor’s Rating
Service (“S&P”) or, if unrated, of comparable quality as determined by the Adviser; (v) non-convertible corporate
debt securities (e.g., bonds and debentures) with remaining maturities at the date of purchase of not more than 397 days and that
satisfy the rating requirements set forth in Rule 2a-7 under the 1940 Act; (vi) repurchase agreements; and (vii) short-term U.S.
dollar-denominated obligations of foreign banks (including U.S. branches) that, in the opinion of the Adviser, are of comparable
quality to obligations of U.S. banks which may be purchased by the Fund. Any of these instruments may be purchased on a current
or a forward-settled basis.
Time deposits are non-negotiable deposits
maintained in banking institutions for specified periods of time at stated interest rates. Bankers’ acceptances are time
drafts drawn on commercial banks by borrowers, usually in connection with international transactions. Commercial paper represents
short-term unsecured promissory notes issued in bearer form by banks or bank holding companies, corporations and finance companies.
Certificates of deposit are negotiable certificates issued against funds deposited in a commercial bank for a definite period of
time and earning a specified return. Bankers’ acceptances are negotiable drafts or bills of exchange, normally drawn by an
importer or exporter to pay for specific merchandise, which are “accepted” by a bank, meaning, in effect, that the
bank unconditionally agrees to pay the face value of the instrument on maturity. Fixed time deposits are bank obligations payable
at a stated maturity date and bearing interest at a fixed rate. Fixed time deposits may be withdrawn on demand by the investor,
but may be subject to early withdrawal penalties that vary depending upon market conditions and the remaining maturity of the obligation.
There are no contractual restrictions on the right to transfer a beneficial interest in a fixed time deposit to a third party.
Bank notes generally rank junior to deposit liabilities of banks and pari passu with other senior, unsecured obligations of the
bank. Bank notes are classified as “other borrowings” on a bank’s balance sheet, while deposit notes and certificates
of deposit are classified as deposits. Bank notes are not insured by the FDIC or any other insurer. Congress has temporarily increased
FDIC deposit insurance on deposit notes from $100,000 to $250,000 per depositor through December 31, 2013.
The Fund may invest a portion of its assets
in the obligations of foreign banks and foreign branches of domestic banks. Such obligations include Eurodollar Certificates of
Deposit (“ECDs”), which are U.S. dollar-denominated certificates of deposit issued by offices of foreign and domestic
banks located outside the United States; Eurodollar Time Deposits (“ETDs”), which are U.S. dollar-denominated deposits
in a foreign branch of a U.S. bank or a foreign bank; Canadian Time Deposits (“CTDs”), which are essentially the same
as ETDs except they are issued by Canadian offices of major Canadian banks; Schedule Bs, which are obligations issued by Canadian
branches of foreign or domestic banks; Yankee Certificates of Deposit (“Yankee CDs”), which are U.S. dollar-denominated
certificates of deposit issued by a U.S. branch of a foreign bank and held in the United States; and Yankee Bankers’ Acceptances
(“Yankee BAs”), which are U.S. dollar-denominated bankers’ acceptances issued by a U.S. branch of a foreign bank
and held in the United States.
Commercial paper purchased by the Fund
may include asset-backed commercial paper. Asset-backed commercial paper is issued by a special purpose entity that is organized
to issue the commercial paper and to purchase trade receivables or other financial assets. The credit quality of asset-backed commercial
paper depends primarily on the quality of these assets and the level of any additional credit support.
EQUITY SWAPS, TOTAL RATE OF RETURN SWAPS
AND CURRENCY SWAPS.
The Fund may invest up to 20% of its total assets in swap contracts.
A swap is an agreement involving the exchange
by the Fund with another party of their respective commitments to pay or receive payments at specified dates based upon or calculated
by reference to changes in specified prices or rates (e.g., interest rates in the case of interest rate swaps) based on a specified
amount (the “notional” amount). Some swaps currently are, and more in the future will be, centrally cleared. Examples
of swap agreements include, but are not limited to, equity, index or other total return swaps and foreign currency swaps.
The Fund may enter into equity swap contracts
to invest in a market without owning or taking physical custody of securities in circumstances in which direct investment is restricted
for legal reasons or is otherwise impracticable. These instruments provide a great deal of flexibility. For example, a counterparty
may agree to pay the Fund the amount, if any, by which the notional amount of the equity swap contract would have increased in
value had it been invested in particular stocks (or an index of stocks), plus the dividends that would have been received on those
stocks. In these cases, the Fund may agree to pay to the counterparty the amount, if any, by which that notional amount would have
decreased in value had it been invested in the stocks. Therefore, the return to the Fund on any equity swap contract should be
the gain or loss on the notional amount plus dividends on the stocks less the interest paid by the Fund on the notional amount.
In other cases, the counterparty and the Fund may the agree to pay the other the difference between the relative investment performances
that would have been achieved if the notional amount of the equity swap contract had been invested in different stocks (or indices
of stocks).
Total rate of return swaps are contracts
that obligate a party to pay or receive interest in exchange for the payment by the other party of the total return generated by
a security, a basket of securities, an index or an index component. The Fund also may enter into currency swaps, which involve
the exchange of the rights of the Fund and another party to make or receive payments in specific currencies. Currency swaps involve
the exchange of rights of the Fund and another party to make or receive payments in specific currencies.
Some swaps transactions are entered into
on a net basis, i.e., the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net
amount of the two payments. The Fund will enter into equity swaps only on a net basis. Payments may be made at the conclusion of
an equity swap contract or periodically during its term. Equity swaps do not involve the delivery of securities or other underlying
assets. Accordingly, the risk of loss with respect to equity swaps is limited to the net amount of payments that such Fund is contractually
obligated to make. If the other party to an equity swap, or any other swap entered into on a net basis, defaults, the Fund’s
risk of loss consists of the net amount of payments that such Fund is contractually entitled to receive, if any. In contrast, other
swaps transactions may involve the payment of the gross amount owed. For example, currency swaps usually involve the delivery of
the entire principal amount of one designated currency in exchange for the other designated currency. Therefore, the entire principal
value of a currency swap is subject to the risk that the other party to the swap will default on its contractual delivery obligations.
To the extent that the amount payable by the Fund under a swap is covered by segregated cash or liquid assets, the Fund and the
Adviser believe that transactions do not constitute senior securities under the 1940 Act and, accordingly, will not treat them
as being subject to the Fund’s borrowing restrictions.
Swaps that are centrally-cleared are subject
to the creditworthiness of the clearing organizations involved in the transaction. For example, an investor could lose margin payments
it has deposited with the clearing organization as well as the net amount of gains not yet paid by the clearing organization if
it brthees its agreement with the investor or becomes insolvent or goes into bankruptcy. In the event of bankruptcy of the clearing
organization, the investor may be entitled to the net amount of gains the investor is entitled to receive plus the return of margin
owed to it only in proportion to the amount received by the clearing organization’s other customers, potentially resulting
in losses to the investor.
To the extent a swap is not centrally cleared,
the use of swaps also involves the risk that a loss may be sustained as a result of the insolvency or bankruptcy of the counterparty
or the failure of the counterparty to make required payments or otherwise comply with the terms of the agreement.
The Fund will not enter into any swap transactions
unless the unsecured commercial paper, senior debt or claims-paying ability of the other party is rated either A, or A-1 or better
by S&P, or Fitch Ratings (“Fitch”); or A or Prime-1 or better by Moody’s, or has received a comparable rating
from another organization that is recognized as a nationally recognized statistical rating organization (“NRSRO”) or,
if unrated by such rating organization, is determined to be of comparable quality by the Adviser. If a counterparty’s creditworthiness
declines, the value of the swap might decline, potentially resulting in losses to the Fund. Changing conditions in a particular
market area, whether or not directly related to the referenced assets that underlie the swap agreement, may have an adverse impact
on the creditworthiness of the counterparty. For example, the counterparty may have experienced losses as a result of its exposure
to a sector of the market that adversely affect its creditworthiness. If there is a default by the other party to such a transaction,
the Fund will have contractual remedies pursuant to the agreements related to the transaction. Such contractual remedies, however,
may be subject to bankruptcy and insolvency laws that may affect such Fund’s rights as a creditor (e.g
.
, the Fund
may not receive the net amount of payments that it contractually is entitled to receive). The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid in comparison with markets for other similar instruments
which are traded in the interbank market.
The use of equity, total rate of return
and currency swaps is a highly specialized activity which involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions.
In connection with the Fund’s position
in a swaps contract, the Fund will segregate liquid assets or will otherwise cover its position in accordance with applicable SEC
requirements.
FOREIGN CURRENCY TRANSACTIONS.
To
the extent consistent with its investment policies, the Fund may invest in forward foreign currency exchange contracts and foreign
currency futures contracts. No Fund, however, expects to engage in currency transactions for speculative purposes or for the purpose
of hedging against declines in the value of the Fund’s assets that are denominated in a foreign currency. The Fund may enter
into forward foreign currency exchange contracts and foreign currency futures contracts to facilitate local settlements or to protect
against currency exposure in connection with its distributions to shareholders.
Foreign currency exchange contracts involve
an obligation to purchase or sell a specified currency on a future date at a price set at the time of the contract. Forward currency
contracts do not eliminate fluctuations in the values of portfolio securities but rather allow the Fund to establish a rate of
exchange for a future point in time. Foreign currency futures contracts involve an obligation to deliver or acquire the specified
amount of a specific currency, at a specified price and at a specified future time. Such futures contracts may be settled on a
net cash payment basis rather than by the sale and delivery of the underlying currency. The Fund may incur costs in connection
with forward foreign currency exchange and futures contracts and conversions of foreign currencies and U.S. dollars.
Liquid assets equal to the amount of the
Fund’s assets that could be required to consummate forward contracts will be segregated except to the extent the contracts
are otherwise “covered.” The segregated assets will be valued at market or fair value. If the market or fair value
of such assets declines, additional liquid assets will be segregated daily so that the value of the segregated assets will equal
the amount of such commitments by the Fund. A forward contract to sell a foreign currency is “covered” if the Fund
owns the currency (or securities denominated in the currency) underlying the contract, or holds a forward contract (or call option)
permitting the Fund to buy the same currency at a price that is (i) no higher than the Fund’s price to sell the currency
or (ii) greater than the Fund’s price to sell the currency provided the Fund segregates liquid assets in the amount of the
difference. A forward contract to buy a foreign currency is “covered” if the Fund holds a forward contract (or call
option) permitting the Fund to sell the same currency at a price that is (i) as high as or higher than the Fund’s price to
buy the currency or (ii) lower than the Fund’s price to buy the currency provided the Fund segregates liquid assets in the
amount of the difference.
FOREIGN INVESTMENTS - GENERAL.
To
the extent consistent with its investment policies, the Fund may invest in foreign securities. Investment in foreign securities
involves special risks. These include market risk, interest rate risk and the risks of investing in securities of foreign issuers
and of companies whose securities are principally traded outside the United States on foreign exchanges or foreign over-the-counter
markets and in investments denominated in foreign currencies. Market risk involves the possibility that stock prices will decline
over short or even extended periods. The stock markets tend to be cyclical, with periods of generally rising prices and periods
of generally declining prices. These cycles will affect the value of the Fund to the extent that it invests in foreign stocks.
In addition, the performance of investments in securities denominated in a foreign currency will depend on the strength of the
foreign currency against the U.S. dollar and the interest rate environment in the country issuing the currency. Absent other events
which could otherwise affect the value of a foreign security (such as a change in the political climate or an issuer’s credit
quality), appreciation in the value of the foreign currency generally can be expected to increase the value of a foreign currency-denominated
security in terms of U.S. dollars. A rise in foreign interest rates or decline in the value of the foreign currency relative to
the U.S. dollar generally can be expected to depress the value of a foreign currency-denominated security.
There are other risks and costs involved
in investing in foreign securities, which are in addition to the usual risks inherent in domestic investments. Investment in foreign
securities involves higher costs than investment in U.S. securities, including higher transaction and custody costs as well as
the imposition of additional taxes by foreign governments. Foreign investments also involve risks associated with the level of
currency exchange rates, less complete financial information about the issuers, less market liquidity, more market volatility and
political instability. Future political and economic developments, the possible imposition of withholding taxes on dividend income,
the possible seizure or nationalization of foreign holdings, the possible establishment of exchange controls, or the adoption of
other governmental restrictions might adversely affect an investment in foreign securities. Additionally, foreign banks and foreign
branches of domestic banks are subject to less stringent reserve requirements, and to different accounting, auditing and recordkeeping
requirements. Also, the legal remedies for investors may be more limited than the remedies available in the U.S.
Although the Fund may invest in securities
denominated in foreign currencies, its portfolio securities and other assets are valued in U.S. dollars. Currency exchange rates
may fluctuate significantly over short periods of time causing, together with other factors, the Fund’s NAV to fluctuate
as well. Currency exchange rates can be affected unpredictably by the intervention or the failure to intervene by U.S. or foreign
governments or central banks, or by currency controls or political developments in the U.S. or abroad. To the extent that the Fund’s
total assets, adjusted to reflect the Fund’s net position after giving effect to currency transactions, are denominated in
the currencies of foreign countries, the Fund will be more susceptible to the risk of adverse economic and political developments
within those countries.
Issuers of foreign securities may also
suffer from social, political and economic instability. Such instability can lead to illiquidity or price volatility in foreign
securities traded on affected markets. Foreign issuers may be subject to the risk that during certain periods the liquidity of
securities of a particular issuer or industry, or all the securities within a particular region, will be adversely affected by
economic, market or political events, or adverse investor perceptions, which may cause temporary or permanent devaluation of the
relevant securities. In addition, if a market for a foreign security closes as a result of such instability, it may be more difficult
to obtain accurate independently-sourced prices for securities traded on these markets and may be difficult to value the effected
foreign securities for extended periods of time.
The Fund also is subject to the possible
imposition of exchange control regulations or freezes on the convertibility of currency. In addition, through the use of forward
currency exchange contracts with other instruments, any net currency positions of the Fund may expose them to risks independent
of their securities positions.
The Fund will be subject to foreign withholding
taxes with respect to certain dividends or interest received from sources in foreign countries. To the extent such taxes are not
offset by credits or deductions allowed to investors under U.S. federal income tax law, they may reduce the net return to the shareholders.
The costs attributable to investing abroad
usually are higher than investments in domestic securities for several reasons, such as the higher cost of investment research,
higher costs of custody of foreign securities, higher commissions paid on comparable transactions on foreign markets and additional
costs arising from delays in settlements of transactions involving foreign securities.
Foreign markets also have different clearance
and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the
volume of securities transactions, making it difficult to conduct such transactions. Such delays in settlement could result in
temporary periods when a portion of the assets of the Fund remain un-invested and no return is earned on such assets. The inability
of the Fund to make intended security purchases or sales due to settlement problems could result either in losses to the Fund due
to subsequent declines in value of the portfolio securities or, if the Fund has entered into a contract to sell the securities,
could result in possible liability to the purchaser.
FOREIGN INVESTMENTS – EMERGING
MARKETS.
The securities markets of emerging countries
are less liquid and subject to greater price volatility, and have a smaller market capitalization, than the U.S. securities markets.
In certain countries, there may be fewer publicly traded securities and the market may be dominated by a few issues or sectors.
Issuers and securities markets in such countries are not subject to as extensive and frequent accounting, financial and other reporting
requirements or as comprehensive government regulations as are issuers and securities markets in the U.S. In particular, the assets
and profits appearing on the financial statements of emerging country issuers may not reflect their financial position or results
of operations in the same manner as financial statements for U.S. issuers. Substantially less information may be publicly available
about emerging country issuers than is available about issuers in the United States.
Emerging country securities markets are
typically marked by a high concentration of market capitalization and trading volume in a small number of issuers representing
a limited number of industries, as well as a high concentration of ownership of such securities by a limited number of investors.
The markets for securities in certain emerging countries are in the earliest stages of their development. Even the markets for
relatively widely traded securities in emerging countries may not be able to absorb, without price disruptions, a significant increase
in trading volume or trades of a size customarily undertaken by institutional investors in the securities markets of developed
countries. The limited size of many of these securities markets can cause prices to be erratic for reasons apart from factors that
affect the soundness and competitiveness of the securities issuers. For example, prices may be unduly influenced by traders who
control large positions in these markets. Additionally, market making and arbitrage activities are generally less extensive in
such markets, which may contribute to increased volatility and reduced liquidity of such markets. The limited liquidity of emerging
country securities may also affect the Fund’s ability to accurately value its portfolio securities or to acquire or dispose
of securities at the price and time it wishes to do so or in order to meet redemption requests.
Certain emerging market countries may have
antiquated legal systems, which may adversely impact the Fund. For example, while the potential liability of a shareholder in a
U.S. corporation with respect to acts of the corporation is generally limited to the amount of the shareholder’s investment,
the notion of limited liability is less clear in certain emerging market countries. Similarly, the rights of investors in emerging
market companies may be more limited than those of shareholders in U.S. corporations.
Transaction costs, including brokerage
commissions or dealer mark-ups, in emerging countries may be higher than in developed securities markets. In addition, existing
laws and regulations are often inconsistently applied. As legal systems in emerging countries develop, foreign investors may be
adversely affected by new or amended laws and regulations. In circumstances where adequate laws exist, it may not be possible to
obtain swift and equitable enforcement of the law.
Certain emerging countries may restrict
or control foreign investments in their securities markets. These restrictions may limit the Fund’s investment in certain
emerging countries and may increase the expenses of the Fund. Certain emerging countries require governmental approval prior to
investments by foreign persons or limit investment by foreign persons to only a specified percentage of an issuer’s outstanding
securities or a specific class of securities which may have less advantageous terms (including price) than securities of the company
available for purchase by nationals. In addition, the repatriation of both investment income and capital from emerging countries
may be subject to restrictions which require governmental consents or prohibit repatriation entirely for a period of time. Even
where there is no outright restriction on repatriation of capital, the mechanics of repatriation may affect certain aspects of
the operation of the Fund. The Fund may be required to establish special custodial or other arrangements before investing in certain
emerging countries.
Certain issuers in emerging market countries
may utilize share blocking schemes. Share blocking refers to a practice, in certain foreign markets, where voting rights related
to an issuer’s securities are predicated on these securities being blocked from trading at the custodian or sub custodian
level, for a period of time around a shareholder meeting. These restrictions have the effect of barring the purchase and sale of
certain voting securities within a specified number of days before, and in certain instances, after a shareholder meeting where
a vote of shareholders will be taken. Share blocking may prevent the Fund from buying or selling securities for a period of time.
During the time that shares are blocked, trades in such securities will not settle. The blocking period can last up to several
weeks. The process for having a blocking restriction lifted can be quite onerous with the particular requirements varying widely
by country. In addition, in certain countries, the block cannot be removed. As a result of the ramifications of voting ballots
in markets that allow share blocking, the Adviser, on behalf of the Fund, reserves the right to abstain from voting proxies in
those markets.
Emerging countries may be subject to a
substantially greater degree of economic, political and social instability and disruption than more developed countries. This instability
may result from, among other things, the following: (i) authoritarian governments or military involvement in political and economic
decision making, including changes or attempted changes in governments through extra-constitutional means; (ii) popular unrest
associated with demands for improved political, economic or social conditions; (iii) internal insurgencies; (iv) hostile relations
with neighboring countries; (v) ethnic, religious and racial disaffection or conflict; and (vi) the absence of developed legal
structures governing foreign private investments and private property.; (vii) the small current size of the markets for such securities
and the currently low or nonexistent volume of trading, which result in a lack of liquidity and in greater price volatility; (viii)
certain national policies which may restrict the Fund’s investment opportunities, including restrictions on investment in
issuers or industries deemed sensitive to national interest; (ix) foreign taxation; (x) the absence, in some cases, of a capital
market structure or market-oriented economy; and (xi) the possibility that economic developments may be slowed or reversed by unanticipated
political or social events in such countries. Such economic, political and social instability could disrupt the principal financial
markets in which the Fund may invest and adversely affect the value of the Fund’s assets. The Fund’s investments can
also be adversely affected by any increase in taxes or by political, economic or diplomatic developments.
The economies
of emerging countries may suffer from unfavorable growth of gross domestic product, rates of inflation, capital reinvestment, resources,
self-sufficiency and balance of payments. Many emerging countries have experienced in the past, and continue to experience, high
rates of inflation. In certain countries inflation has at times accelerated rapidly to hyperinflationary levels, creating a negative
interest rate environment and sharply eroding the value of outstanding financial assets in those countries. Other emerging countries,
on the other hand, have recently experienced deflationary pressures and are in economic recessions.
In addition, many emerging
countries are also highly dependent on international trade and exports, including exports of oil and other commodities to sustain
their economic growth. As a result, emerging countries are particularly vulnerable to downturns of the world economy. The recent
global financial crisis tightened international credit supplies and weakened global demand for their exports. As a result, certain
of these economies faced significant economic difficulties, which caused some emerging market economies to fall into recession.
Although economies in certain emerging countries have recently shown signs of recovery, such recovery may be gradual as weak economic
conditions in Europe, Asia and North America may continue to suppress demand for exports from emerging countries.
FUTURES
CONTRACTS AND OPTIONS ON FUTURES CONTRACTS.
To the extent consistent with its investment
policies, the Fund may invest up to 20% of its total assets (minus any percent of Fund assets invested in other derivatives) in
U.S. or foreign futures contracts and may purchase and sell call and put options on futures contracts. These futures contracts
and options will be used to simulate full investment in the respective Underlying Index, to facilitate trading or to reduce transaction
costs. The Fund will only enter into futures contracts and options on futures contracts that are traded on a U.S. or foreign exchange.
The Fund will not use futures or options for speculative purposes. In connection with the Fund’s position in a futures contract
or related option, the Fund will segregate liquid assets or will otherwise cover its position in accordance with applicable SEC
requirements.
Futures Contracts
. The Fund may
enter into certain equity, index and currency futures transactions, as well as other futures transactions that become available
in the markets. By using such futures contracts, the Fund may obtain exposure to certain equities, indexes and currencies without
actually investing in such instruments. Index futures may be based on broad indices, such as the S&P 500 Index, or narrower
indices. A futures contract on foreign currency creates a binding obligation on one party to deliver, and a corresponding obligation
on another party to accept delivery of, a stated quantity of foreign currency for an amount fixed in U.S. dollars. Foreign currency
futures may be used by the Fund to help the Fund track the price and yield performance of its Underlying Index.
Some futures contracts are traded on organized
exchanges regulated by the SEC or Commodity Futures Trading Commission (“CFTC”), and transactions on them are cleared
through a clearing corporation, which guarantees the performance of the parties to the contract. If regulated by the CFTC, such
exchanges may be designated contract markets or swap execution facilities.
The Fund may also engage in transactions
in foreign stock index futures, which may be traded on foreign exchanges. Participation in foreign futures and foreign options
transactions involves the execution and clearing of trades on or subject to the rules of a foreign board of trade. Neither the
National Futures Association (“NFA”) nor any domestic exchange regulates activities of any such organization, even
if it is formally linked to a domestic market. Moreover, foreign laws and regulations and transactions executed under such laws
and regulation may not be afforded certain of the protective measures provided by domestically. In addition, the price of foreign
futures or foreign options contract may be affected by any variance in the foreign exchange rate between the time an order is placed
and the time it is liquidated, offset or exercised.
Unlike purchases or sales of portfolio
securities, no price is paid or received by the Fund upon the purchase or sale of a futures contract. Initially, the Fund will
be required to deposit with the broker or in a segregated account with a custodian or sub-custodian an amount of liquid assets,
known as initial margin, based on the value of the contract. The nature of initial margin in futures transactions is different
from that of margin in security transactions in that futures contract margin does not involve the borrowing of funds by the customer
to finance the transactions. Rather, the initial margin is in the nature of a performance bond or good faith deposit on the contract,
which is returned to the Fund upon termination of the futures contract assuming all contractual obligations have been satisfied.
Subsequent payments, called variation margin, to and from the broker, will be made on a daily basis as the price of the underlying
instruments fluctuates making the long and short positions in the futures contract more or less valuable, a process known as “marking-to-market.”
For example, when the Fund has purchased a futures contract and the price of the contract has risen in response to a rise in the
underlying instruments, that position will have increased in value and the Fund will be entitled to receive from the broker a variation
margin payment equal to that increase in value. Conversely, where the Fund has purchased a futures contract and the price of the
future contract has declined in response to a decrease in the underlying instruments, the position would be less valuable and the
Fund would be required to make a variation margin payment to the broker. Prior to expiration of the futures contract, the Adviser
may elect to close the position by taking an opposite position, subject to the availability of a secondary market, which will operate
to terminate the Fund’s position in the futures contract. A final determination of variation margin is then made, additional
cash is required to be paid by or released to the Fund, and the Fund realizes a loss or gain.
There are several risks in connection with
the use of futures by the Fund. One risk arises because of the imperfect correlation between movements in the price of the futures
and movements in the price of the instruments which are the subject of the hedge. The price of the future may move more than or
less than the price of the instruments being hedged. If the price of the futures moves less than the price of the instruments which
are the subject of the hedge, the hedge will not be fully effective but, if the price of the instruments being hedged has moved
in an unfavorable direction, the Fund would be in a better position than if it had not hedged at all. If the price of the instruments
being hedged has moved in a favorable direction, this advantage will be partially offset by the loss on the futures. If the price
of the futures moves more than the price of the hedged instruments, the Fund involved will experience either a loss or gain on
the futures which will not be completely offset by movements in the price of the instruments that are the subject of the hedge.
To compensate for the imperfect correlation of movements in the price of instruments being hedged and movements in the price of
futures contracts, the Fund may buy or sell futures contracts in a greater dollar amount than the dollar amount of instruments
being hedged if the volatility over a particular time period of the prices of such instruments has been greater than the volatility
over such time period of the futures, or if otherwise deemed to be appropriate by the Adviser. Conversely, the Fund may buy or
sell fewer futures contracts if the volatility over a particular time period of the prices of the instruments being hedged is less
than the volatility over such time period of the futures contract being used, or if otherwise deemed to be appropriate by the Adviser.
In addition to the possibility that there
may be an imperfect correlation, or no correlation at all, between movements in the futures and the instruments being hedged, the
price of futures may not correlate perfectly with movement in the cash market due to certain market distortions. Rather than meeting
additional margin deposit requirements, investors may close futures contracts through off-setting transactions which could distort
the normal relationship between the cash and futures markets. Second, with respect to financial futures contracts, the liquidity
of the futures market depends on participants entering into off-setting transactions rather than making or taking delivery. To
the extent participants decide to make or take delivery, liquidity in the futures market could be reduced thus producing distortions.
Third, from the point of view of speculators, the deposit requirements in the futures market are less onerous than margin requirements
in the securities market. Therefore, increased participation by speculators in the futures market may also cause temporary price
distortions. Due to the possibility of price distortion in the futures market, and because of the imperfect correlation between
the movements in the cash market and movements in the price of futures, a correct forecast of general market trends or interest
rate movements by the Adviser may still not result in a successful hedging transaction over a short time frame.
In general, positions in futures may be
closed out only on an exchange, board of trade or other trading facility that provides a secondary market for such futures. Although
the Fund intends to purchase or sell futures only on trading facilities where there appear to be active secondary markets, there
is no assurance that a liquid secondary market on any trading facility will exist for any particular contract or at any particular
time. In such an event, it may not be possible to close a futures contract position, and in the event of adverse price movements,
the Fund would continue to be required to make daily cash payments of variation margin. However, in the event futures contracts
have been used to hedge portfolio securities, such securities may not be sold until the futures contract can be terminated. In
such circumstances, an increase in the price of the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of the securities will in fact correlate with the price
movements in the futures contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity
of a secondary market in a futures contract may be adversely affected by “daily price fluctuation limits” established
by commodity exchanges which limit the amount of fluctuation in a futures contract price during a single trading day. Once the
daily limit has been exceeded in the contract, no trades may be entered into at a price beyond the limit, thus preventing the liquidation
of open futures positions. The trading of futures contracts is also subject to the risk of trading halts, suspensions, exchange
or clearing house equipment failures, government intervention, insolvency of a brokerage firm or clearing house or other disruptions
of normal trading activity, which could at times make it difficult or impossible to liquidate existing positions or to recover
excess variation margin payments.
Successful use of futures by the Fund is
subject to the Adviser’s ability to predict correctly movements in the direction of the market. In addition, in such situations,
if the Fund has insufficient cash, it may have to sell securities to meet daily variation margin requirements. Such sales of securities
may be, but will not necessarily be, at increased prices which reflect the rising market. The Fund may have to sell securities
at a time when it may be disadvantageous to do so.
Options on Future Contracts
. The
Fund may purchase and write options on the futures contracts described above. A futures option gives the holder, in return for
the premium paid, the right to receive and execute a long futures contract (if the option is a call) or a short futures contract
(if the option is a put) at a specified price at any time during the period of the option. Like the buyer or seller of a futures
contract, the holder, or writer, of an option has the right to terminate its position prior to the scheduled expiration of the
option by selling, or purchasing an option of the same series, at which time the person entering into the closing transaction will
realize a gain or loss. The Fund will be required to deposit initial margin and variation margin with respect to put and call options
on futures contracts written by it pursuant to brokers’ requirements similar to those described above. Net option premiums
received will be included as initial margin deposits.
Investments in futures options involve
some of the same considerations that are involved in connection with investments in futures contracts (for example, the existence
of a liquid secondary market). In addition, the purchase or sale of an option also entails the risk that changes in the value of
the underlying futures contract will not correspond to changes in the value of the option purchased. Depending on the pricing of
the option compared to either the futures contract upon which it is based, or upon the price of the securities being hedged, an
option may or may not be less risky than ownership of the futures contract or such securities. In general, the market prices of
options can be expected to be more volatile than the market prices on the underlying futures contract. Compared to the purchase
or sale of futures contracts, however, the purchase of call or put options on futures contracts may frequently involve less potential
risk to the Fund because the maximum amount at risk is the premium paid for the options (plus transaction costs). The writing of
an option on a futures contract involves risks similar to those risks relating to the purchase or sale of futures contracts.
CFTC
REGULATION.
The Trust, on behalf of the Fund, has claimed
an exclusion from the definition of commodity pool operator (“CPO”) under the Commodity Exchange Act (“CEA”),
and the Adviser has claimed an exemption from registration as a commodity trading advisor (“CTA”) under the CEA. Therefore,
the Fund and the Adviser are not subject to registration as CPO or CTA. In 2012, the CFTC adopted amendments to the applicable
exclusion and exemption, and to the conditions for reliance on the exclusion. Under these amendments, effective January 1, 2013,
the Fund may only use a de minimis amount of commodity interests (such as futures contracts, options on futures contracts and swaps)
other than for bona fide hedging purposes (as defined by the CFTC). A de minimis amount is defined as amount such that the aggregate
initial margin and premiums required to establish these positions (after taking into account unrealized profits and unrealized
losses on any such positions and excluding the amount by which options are “in-the-money” at the time of purchase)
may not exceed 5% of the Fund’s net asset value or, alternatively, the aggregate net notional value of those positions, determined
at the time the most recent position was established, may not exceed 100% of the Fund’s net asset value (after taking into
account unrealized profits and unrealized losses on any such positions). The Fund or the Adviser is currently engaged only in a
de minimus amount of such transactions and, therefore, neither the Fund nor the Adviser is currently subject to the registration
and most regulatory requirements of the CEA. There can be no certainty that the Fund or the Adviser will continue to qualify under
the applicable exclusion or exemption as the Fund’s investments may change over time. If the Fund or the Adviser is subject
to CFTC registration, it may incur additional costs.
GOVERNMENT
INTERVENTION IN FINANCIAL MARKETS.
Recent instability in the financial markets
has led the U.S. Government, other governments and financial and prudential regulators to take a number of unprecedented actions
designed to support certain financial institutions and segments of the financial markets that have experienced extreme volatility,
and in some cases a lack of liquidity. Most significantly, the U.S. Government has enacted a broad-rtheing new regulatory framework
over the financial services industry and consumer credit markets, the potential impact of which on the value of securities held
by the Fund is unknown. Federal, state, and other governments, their regulatory agencies, or self-regulatory organizations may
take actions that affect the regulation of the instruments in which the Fund invests, or the issuers of such instruments, in ways
that are unforeseeable. Legislation or regulation may also change the way in which the Fund itself is regulated. Such legislation
or regulation could limit or preclude the Fund’s ability to achieve its investment objective.
Governments or their agencies may also
acquire distressed assets from financial institutions and acquire ownership interests in those institutions. The implications of
government ownership and disposition of these assets are unclear, and such a program may have positive or negative effects on the
liquidity, valuation and performance of the Fund’s portfolio holdings. Furthermore, volatile financial markets can expose
the Fund to greater market and liquidity risk and potential difficulty in valuing portfolio instruments held by the Fund. The Fund
has established procedures to assess the liquidity of portfolio holdings and to value instruments for which market prices may not
be readily available. The Adviser will monitor developments and seek to manage the Fund in a manner consistent with achieving the
Fund’s investment objective, but there can be no assurance that it will be successful in doing so.
The value of the Fund’s holdings
is also generally subject to the risk of future local, national, or global economic disturbances based on unknown weaknesses in
the markets in which the Fund invests. In the event of such a disturbance, issuers of securities held by the Fund may experience
significant declines in the value of their assets and even cease operations, or may receive government assistance accompanied by
increased restrictions on their business operations or other government intervention. In addition, it is not certain that the U.S.
Government will intervene in response to a future market disturbance and the effect of any such future intervention cannot be predicted.
It is difficult for issuers to prepare for the impact of future financial downturns, although companies can seek to identify and
manage future uncertainties through risk management programs.
ILLIQUID OR RESTRICTED SECURITIES.
To
the extent consistent with its investment policies, the Fund may invest up to 15% of its net assets in securities that are illiquid.
The Fund may purchase commercial paper issued pursuant to Section 4(2) of the Securities Act and securities that are not registered
under the Securities Act but can be sold to “qualified institutional buyers” in accordance with Rule 144A under the
Securities Act. These securities will not be considered illiquid so long as the Adviser determines, under guidelines approved by
the Trust’s Board of Trustees that an adequate trading market exists. This practice could increase the level of illiquidity
during any period that qualified institutional buyers become uninterested in purchasing these securities.
INVESTMENT COMPANIES.
To the extent
consistent with its investment policies, the Fund may invest in the securities of other investment companies. Such investments
will be limited so that, as determined after a purchase is made, either: (a) not more than 3% of the total outstanding stock of
such investment company will be owned by the Fund, the Trust as a whole and its affiliated persons (as defined in the 1940 Act);
or (b) (i) not more than 5% of the value of the total assets of the Fund will be invested in the securities of any one investment
company, (ii) not more than 10% of the value of its total assets will be invested in the aggregate securities of investment companies
as a group and (iii) not more than 3% of the outstanding voting stock of any one investment company will be owned by the Fund.
Investments by the Fund in other investment companies, including exchange-traded funds (“ETFs”), will be subject to
the limitations of the 1940 Act except as permitted by SEC orders. The Fund may rely on SEC orders that permit them to invest in
certain ETFs beyond the limits contained in the 1940 Act, subject to certain terms and conditions. Generally, these terms and conditions
require the Board to approve policies and procedures relating to certain of the Fund’s investments in ETFs. These policies
and procedures require, among other things, that (i) the Adviser conduct the Fund’s investment in ETFs without regard to
any consideration received by the Fund or any of its affiliated persons and (ii) the Adviser certify to the Board quarterly that
it has not received any consideration in connection with an investment by the Fund in an ETF, or if it has, the amount and purpose
of the consideration will be reported to the Board and an equivalent amount of advisory fees shall be waived by the Adviser.
Certain investment companies whose securities
are purchased by the Fund may not be obligated to redeem such securities in an amount exceeding 1% of the investment company’s
total outstanding securities during any period of less than 30 days. Therefore, such securities that exceed this amount may be
illiquid.
If required by the 1940 Act, the Fund expects
to vote the shares of other investment companies that are held by it in the same proportion as the vote of all other holders of
such securities.
LEVERAGE.
The Fund may (i) invest up to 20% of its total assets in certain futures, options and swap contracts or other derivatives,
and (ii) borrow money at fiscal quarter ends to maintain the required level of diversification to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code. As a result, the Fund may be exposed to the risks of leverage,
which may be considered a speculative investment technique. Leverage magnifies the potential for gain and loss on amounts invested
and therefore increase the risks associated with investing in our Funds. If the value of the Fund's assets increases, then leveraging
would cause the Fund's net asset value to increase more sharply than it would have had the Fund not leveraged. Conversely, if the
value of the Fund's assets decreases, leveraging would cause the Fund's net asset value to decline more sharply than it otherwise
would have had the Fund not leveraged. The Fund may incur additional expenses in connection with borrowings.
New
Fund Risks.
The Fund is a new fund, with no operating history, which may result in additional risks for investors in
the Fund. There can be no assurance that these Funds will grow to or maintain an economically viable size, in which case the Board
of Trustees may determine to liquidate the Fund. While shareholder interests will be the paramount consideration, the timing of
any liquidation may not be favorable to certain individual shareholders.
OPTIONS.
To the extent consistent
with its investment policies, the Fund may invest up to 20% of net assets (minus any percent of Fund assets invested in other derivatives)
in put options and buy call options and write covered call and secured put options that the Adviser believes will help the Fund
to track the Underlying Index. Such options may relate to particular securities, foreign and domestic stock indices, financial
instruments, foreign currencies or the yield differential between two securities (“yield curve options”) and may or
may not be listed on a domestic or foreign securities exchange or issued by the Options Clearing Corporation. A call option for
a particular security or currency gives the purchaser of the option the right to buy, and a writer the obligation to sell, the
underlying security at the stated exercise price prior to the expiration of the option, regardless of the market price of the security
or currency. The premium paid to the writer is in consideration for undertaking the obligation under the option contract. A put
option for a particular security or currency gives the purchaser the right to sell the security or currency at the stated exercise
price to the expiration date of the option, regardless of the market price of the security or currency. In contrast to an option
on a particular security, an option on an index provides the holder with the right to make or receive a cash settlement upon exercise
of the option. The amount of this settlement will be equal to the difference between the closing price of the index at the time
of exercise and the exercise price of the option expressed in dollars, times a specified multiple.
Options trading are a highly specialized
activity, which entails greater than ordinary investment risk. Options on particular securities may be more volatile than the underlying
instruments and, therefore, on a percentage basis, an investment in options may be subject to greater fluctuation than an investment
in the underlying instruments themselves.
The Fund will write call options only if
they are “covered.” In the case of a call option on a security or currency, the option is “covered” if
the Fund owns the security or currency underlying the call or has an absolute and immediate right to acquire that security without
additional cash consideration (or, if additional cash consideration is required, liquid assets in such amount are segregated) upon
conversion or exchange of other securities held by it. For a call option on an index, the option is covered if the Fund maintains
with its custodian a portfolio of securities substantially replicating the index, or liquid assets equal to the contract value.
A call option also is covered if the Fund holds a call on the same security, currency or index as the call written where the exercise
price of the call held is (i) equal to or less than the exercise price of the call written, or (ii) greater than the exercise price
of the call written provided the Fund segregates liquid assets in the amount of the difference.
All put options written by the Fund would
be covered, which means that such Fund will segregate cash or liquid assets with a value at least equal to the exercise price of
the put option or will use the other methods described in the next sentence. A put option also is covered if the Fund holds a put
option on the same security or currency as the option written where the exercise price of the option held is (i) equal to or higher
than the exercise price of the option written, or (ii) less than the exercise price of the option written provided the Fund segregates
liquid assets in the amount of the difference.
With respect to yield curve options, a
call (or put) option is covered if the Fund holds another call (or put) option on the spread between the same two securities and
segregates liquid assets sufficient to cover the Fund’s net liability under the two options. Therefore, the Fund’s
liability for such a covered option generally is limited to the difference between the amounts of the Fund’s liability under
the option written by the Fund less the value of the option held by the Fund. Yield curve options also may be covered in such other
manner as may be in accordance with the requirements of the counterparty with which the option is traded and applicable laws and
regulations.
The Fund’s obligation to sell subject
to a covered call option written by it, or to purchase a security or currency subject to a secured put option written by it, may
be terminated prior to the expiration date of the option by the Fund’s execution of a closing purchase transaction, which
is effected by purchasing on an exchange an option of the same series (
i.e
., same underlying security or currency, exercise
price and expiration date) as the option previously written. Such a purchase does not result in the ownership of an option. A closing
purchase transaction will ordinarily be effected to realize a profit on an outstanding option, to prevent an underlying instrument
from being called, to permit the sale of the underlying security or currency or to permit the writing of a new option containing
different terms on such underlying security. The cost of such a liquidation purchase plus transaction costs may be greater than
the premium received upon the original option, in which event the Fund will have incurred a loss in the transaction. There is no
assurance that a liquid secondary market will exist for any particular option. An option writer, unable to effect a closing purchase
transaction, will not be able to sell the underlying security or currency (in the case of a covered call option) or liquidate the
segregated assets (in the case of a secured put option) until the option expires or the optioned security or currency is delivered
upon exercise with the result that the writer in such circumstances will be subject to the risk of market decline or appreciation
in the instrument during such period.
When the Fund purchases an option, the
premium paid by it is recorded as an asset of the Fund. When the Fund writes an option, an amount equal to the net premium (the
premium less the commission) received by the Fund is included in the liability section of the Fund’s statement of assets
and liabilities as a deferred credit. The amount of this asset or deferred credit will be subsequently marked-to-market to reflect
the current value of the option purchased or written. The current value of the traded option is the last sale price or, in the
absence of a sale, the current bid price. If an option purchased by the Fund expires unexercised, the Fund realizes a loss equal
to the premium paid. If the Fund enters into a closing sale transaction on an option purchased by it, the Fund will realize a gain
if the premium received by the Fund on the closing transaction is more than the premium paid to purchase the option or a loss if
it is less. If an option written by the Fund expires on the stipulated expiration date or if the Fund enters into a closing purchase
transaction, it will realize a gain (or loss if the cost of a closing purchase transaction exceeds the net premium received when
the option is sold) and the deferred credit related to such option will be eliminated. If an option written by the Fund is exercised,
the proceeds of the sale will be increased by the net premium originally received and the Fund will realize a gain or loss.
There are several risks associated with
transactions in certain options. For example, there are significant differences between the securities, currency and options markets
that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives.
In addition, a liquid secondary market for particular options, whether traded over-the-counter or on an exchange, may be absent
for reasons which include the following: there may be insufficient trading interest in certain options; restrictions may be imposed
by an exchange on opening transactions or closing transactions or both; trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options or underlying securities or currencies; unusual or unforeseen circumstances
may interrupt normal operations on an exchange; the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading value; or one or more exchanges could, for economic or other reasons, decide or be
compelled at some future date to discontinue the trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options) would cease to exist, although outstanding options
that had been issued by the Options Clearing Corporation as a result of trades on that exchange would continue to be exercisable
in accordance with their terms.
REPURCHASE AGREEMENTS.
To the extent
consistent with its investment policies, the Fund may agree to purchase portfolio securities from financial institutions subject
to the seller’s agreement to repurchase them at a mutually agreed upon date and price (“repurchase agreements”).
Repurchase agreements are considered to be loans under the 1940 Act. Although the securities subject to a repurchase agreement
may bear maturities exceeding one year, settlement for the repurchase agreement will never be more than one year after the Fund’s
acquisition of the securities and normally will be within a shorter period of time. Securities subject to repurchase agreements
normally are held either by the Trust’s custodian or sub-custodian (if any), or in the Federal Reserve/Treasury Book-Entry
System. The seller under a repurchase agreement will be required to maintain the value of the securities subject to the agreement
in an amount exceeding the repurchase price (including accrued interest). Default by the seller would, however, expose the Fund
to possible loss because of adverse market action or delay in connection with the disposition of the underlying obligations. In
addition, in the event of a bankruptcy, the Fund could suffer additional losses if a court determines that the Fund’s interest
in the collateral is unenforceable.
REVERSE REPURCHASE AGREEMENTS.
To
the extent consistent with its investment policies, the Fund may borrow funds by selling portfolio securities to financial institutions
such as banks and broker/dealers and agreeing to repurchase them at a mutually specified date and price (“reverse repurchase
agreements”). The Fund may use the proceeds of reverse repurchase agreements to purchase other securities either maturing,
or under an agreement to resell, on a date simultaneous with or prior to the expiration of the reverse repurchase agreement. Reverse
repurchase agreements are considered to be borrowings under the 1940 Act. Reverse repurchase agreements involve the risk that the
market value of the securities sold by the Fund may decline below the repurchase price. The Fund will pay interest on amounts obtained
pursuant to a reverse repurchase agreement. While reverse repurchase agreements are outstanding, the Fund will segregate liquid
assets in an amount at least equal to the market value of the securities, plus accrued interest, subject to the agreement.
SECURITIES LENDING.
Collateral for
loans of portfolio securities made by the Fund may consist of cash, cash equivalents, securities issued or guaranteed by the U.S.
government or its agencies or irrevocable bank letters of credit (or any combination thereof). The borrower of securities will
be required to maintain the market value of the collateral at not less than the market value of the loaned securities, and such
value will be monitored on a daily basis. When the Fund lends its securities, it continues to receive payments equal to the dividends
and interest paid on the securities loaned and simultaneously may earn interest on the investment of the cash collateral. Investing
the collateral subjects it to market depreciation or appreciation, and the Fund is responsible for any loss that may result from
its investment in borrowed collateral. The Fund will have the right to terminate a loan at any time and recall the loaned securities
within the normal and customary settlement time for securities transactions. Although voting rights, or rights to consent, attendant
to securities on loan pass to the borrower, such loans may be called so that the securities may be voted by the Fund if a material
event affecting the investment is to occur. As with other extensions of credit there are risks of delay in recovering, or even
loss of rights in, the collateral should the borrower of the securities fail financially.
TRACKING VARIANCE.
As discussed
in the Prospectus, the Fund are subject to the risk of tracking variance. Tracking variance may result from share purchases and
redemptions, transaction costs, expenses and other factors. Share purchases and redemptions may necessitate the purchase and sale
of securities by the Fund and the resulting transaction costs which may be substantial because of the number and the characteristics
of the securities held. In addition, transaction costs are incurred because sales of securities received in connection with spin-offs
and other corporate reorganizations are made to conform the Fund’s holdings to its investment objective. Tracking variance
also may occur due to factors such as the size of the Fund, the maintenance of a cash reserve pending investment or to meet expected
redemptions, changes made in the Fund’s designated index or the manner in which the index is calculated or because the indexing
and investment approach of the Adviser does not produce the intended goal of the Fund. Tracking variance is monitored by the Adviser
at least quarterly. In the event the performance of the Fund is not comparable to the performance of its designated index, the
Board of Trustees will evaluate the reasons for the deviation and the availability of corrective measures.
WARRANTS.
To the extent consistent
with its investment policies, the Fund may purchase warrants and similar rights, which are privileges issued by corporations enabling
the owners to subscribe to and purchase a specified number of shares of the corporation at a specified price during a specified
period of time. The prices of warrants do not necessarily correlate with the prices of the underlying shares. The purchase of warrants
involves the risk that the Fund could lose the purchase value of a warrant if the right to subscribe to additional shares is not
exercised prior to the warrant’s expiration. Also, the purchase of warrants involves the risk that the effective price paid
for the warrant added to the subscription price of the related security may exceed the value of the subscribed security’s
market price such as when there is no movement in the level of the underlying security.
INFORMATION REGARDING THE INDEXES AND THE
INDEX PROVIDERS
Solactive Next Emerging & Frontier
Index
The Solactive Next Emerging & Frontier
Index is designed to reflect equity performance of the N
ext Emerging markets
and Frontier markets
companies, as defined by Solactive AG.
Next
Emerging markets are defined as emerging market countries beyond the BRICs (Brazil, Russia, India and China are excluded from the
index) and beyond the most developed tier of Emerging Markets (currently South Korea and Taiwan are also excluded from the index).
The Underlying Index is comprised of common stocks, ADRs and GDRs of selected companies globally that are domiciled, principally
traded in or have their main business operations in these markets or that generate at least 50% of their revenues from these markets.
The index screens the largest stocks according to free-float market capitalization and weights them by modified liquidity.
As of July 31, 2013, the Underlying Index
had 200 constituents from the following countries: Argentina, Bangladesh, Chile, Colombia, Czech Republic, Egypt, Gabon, Georgia,
Hungary, Indonesia, Kazakhstan, Kenya, Kuwait, Laos, Malaysia, Mauritius, Mexico, Mongolia, Namibia, Nigeria, Oman, Pakistan, Panama,
Papua New Guinea, Peru, Philippines, Poland, Qatar, Slovakia, South Africa, Tanzania, Thailand, Turkey, United Arab Emirates and
Vietnam. The index is maintained by Solactive AG.
INVESTMENT RESTRICTIONS
The Fund is subject to the investment policies
enumerated in this section, which may be changed with respect to a particular Fund only by a vote of the holders of a majority
of such Fund’s outstanding shares.
The Fund:
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1.
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May not issue any senior security, except as permitted under the 1940 Act, and as interpreted or
modified by regulatory authority having jurisdiction, from time to time;
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2.
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May not borrow money, except as permitted under the 1940 Act, and as interpreted or modified by
regulatory authority having jurisdiction, from time to time;
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3.
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May not act as an underwriter of securities within the meaning of the Securities Act, except as
permitted under the Securities Act, and as interpreted or modified by regulatory authority having jurisdiction, from time to time.
Among other things, to the extent that the Fund may be deemed to be an underwriter within the meaning of the Securities Act, this
would permit the Fund to act as an underwriter of securities in connection with the purchase and sale of its portfolio securities
in the ordinary course of pursuing its investment objective, investment policies and investment program;
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4.
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May not purchase or sell real estate or any interests therein, except as permitted under the 1940
Act, and as interpreted or modified by regulatory authority having jurisdiction, from time to time. Notwithstanding this limitation,
the Fund may, among other things: (i) acquire or lease office space for its own use; (ii) invest in securities of issuers that
invest in real estate or interests therein; (iii) invest in mortgage-related securities and other securities that are secured by
real estate or interests therein; or (iv) hold and sell real estate acquired by the Fund as a result of the ownership of securities;
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5.
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May not purchase physical commodities or contracts relating to physical commodities, except as
permitted under the 1940 Act, and as interpreted or modified by regulatory authority having jurisdiction, from time to time;
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6.
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May not make loans, except as permitted under the 1940 Act, and as interpreted or modified by regulatory
authority having jurisdiction, from time to time;
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7.
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May not “concentrate” its investments in a particular industry or group of industries:
(I) except that the Fund will concentrate to approximately the same extent that its Underlying Index concentrates in the securities
of such particular industry or group of industries; and (II) except as permitted under the 1940 Act, and as interpreted or modified
by regulatory authority having jurisdiction from time to time, provided that, without limiting the generality of the foregoing:
(a) this limitation will not apply to the Fund’s investments in: (i) securities of other investment companies; (ii) securities
issued or guaranteed as to principal and/or interest by the U.S. government, its agencies or instrumentalities; (iii) repurchase
agreements (collateralized by the instruments described in clause (ii)) or (iv) securities of state or municipal governments and
their political subdivisions are not considered to be issued by Members of any industry; (b) wholly-owned finance companies will
be considered to be in the industries of their parents if their activities are primarily related to the financing activities of
the parents; and (c) utilities will be divided according to their services, for example, gas, gas transmission, electric and gas,
electric and telephone will the be considered a separate industry.
|
Notwithstanding these fundamental investment
restrictions, the Fund may purchase securities of other investment companies to the full extent permitted under Section 12 or any
other provision of the 1940 Act (or any successor provision thereto) or under any regulation or order of the SEC.
If a percentage limitation is satisfied
at the time of investment, a later increase or decrease in such percentage resulting from a change in the value of the Fund’s
investments will not constitute a violation of such limitation, except that any borrowing by the Fund that exceeds the fundamental
investment limitations stated above must be reduced to meet such limitations within the period required by the 1940 Act (currently
three days). In addition, if the Fund’s holdings of illiquid securities exceed 15% of net assets because of changes in the
value of the Fund’s investments, the Fund will take action to reduce its holdings of illiquid securities within a time frame
deemed to be in the best interest of the Fund. Otherwise, the Fund may continue to hold a security even though it causes the Fund
to exceed a percentage limitation because of fluctuation in the value of the Fund’s assets.
Any Investment Restriction which involves
a maximum percentage (other than the restriction set forth above in Investment Restriction No. 2) will not be considered violated
unless an excess over the percentage occurs immediately after, and is caused by, an acquisition or encumbrance of securities or
assets of the Fund. The 1940 Act requires that if the asset coverage for borrowings at any time falls below the limits under the
1940 Act described in Investment Restriction No. 2, the Fund will, within three days thereafter (not including Sundays and holidays),
reduce the amount of its borrowings to an extent that the net asset coverage of such borrowings shall conform to such limits.
CURRENT
1940 ACT LIMITATIONS
BORROWING.
Investment companies generally may not borrow
money, except that an investment company may borrow money in an amount not exceeding 33 1/3% of its total assets (including the
amount borrowed) less liabilities (other than borrowings).
UNDERWRITING.
Investment companies generally may not
act as an underwriter of another issuer’s securities, except to the extent that an investment company may be deemed to be
an underwriter within the meaning of the Securities Act of 1933 in connection with the purchase or sale of portfolio securities.
REAL ESTATE
. Investment companies generally may not purchase
or sell real estate unless acquired as a result of ownership of securities or other instruments (but investment companies may purchase
or sell securities or other instruments backed by real estate or of issuers engaged in real estate activities.)
LOANS.
Investment companies generally may not lend any
security or make any other loan if, as a result, more than 33 1/3% of its total assets would be lent to other parties, but this
limitation does not apply to purchases of debt securities or to repurchase agreements, or to acquisitions of loans, loan participations
or other forms of debt instruments.
PHYSICAL COMMIDITIES.
Investment companies generally
may not purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments (but
investment company may purchase or sell options, futures contracts or other derivative instruments, and invest in securities or
other instruments backed by physical commodities).
CONCENTRATION.
For purposes of calculating
concentration percentages, investment companies investing in (a) affiliated investment companies are required to look through to
the holdings of the affiliated investment companies and include the holdings in calculations of concentration percentages, and
(ii) unaffiliated investment companies are required to include the holdings of the unaffiliated investment companies to the extent
that they are concentrated in calculations of concentration percentages. In addition, revenue bonds are characterized by the industry
in which the revenue is used.
CONTINUOUS OFFERING
The method by which Creation Unit Aggregations
of shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Unit Aggregations
of shares are issued and sold by the Fund on an ongoing basis, at any point a “distribution,” as such term is used
in the Securities Act, may occur. Broker-dealers and other persons are cautioned that some activities on their part may, depending
on the circumstances, result in their being deemed participants in a distribution in a manner which could render them statutory
underwriters and subject them to the prospectus delivery requirement and liability provisions of the Securities Act.
For example, a broker-dealer firm or its
client may be deemed a statutory underwriter if it takes Creation Unit Aggregations after placing an order with the Distributor,
breaks them down into constituent shares, and sells such shares directly to customers, or if it chooses to couple the creation
of a supply of new shares with an active selling effort involving solicitation of secondary market demand for shares. A determination
of whether one is an underwriter for purposes of the Securities Act must take into account all the facts and circumstances pertaining
to the activities of the broker-dealer or its client in the particular case, and the examples mentioned above should not be considered
a complete description of all the activities that could lead to a categorization as an underwriter. Broker-dealer firms should
also note that dealers who are not “underwriters” but are effecting transactions in shares, whether or not participating
in the distribution of shares, generally are required to deliver a prospectus. This is because the prospectus delivery exemption
in Section 4(3) of the Securities Act is not available in respect of such transactions as a result of Section 24(d) of the 1940
Act. Firms that incur a prospectus delivery obligation with respect to shares of the Fund are reminded that, pursuant to Rule 153
under the Securities Act, a prospectus delivery obligation under Section 5(b)(2) of the Securities Act owed to an exchange member
in connection with a sale on the Exchange is satisfied by the fact that the prospectus is available at the Exchange upon request.
The prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions on an exchange.
PORTFOLIO HOLDINGS
Policy On Disclosure Of Portfolio Holdings
The Board of Trustees of the Trust has
adopted a policy on disclosure of portfolio holdings, which it believes is in the best interest of the Fund’s shareholders.
The policy is designed to: (i) protect the confidentiality of the Fund’s non-public portfolio holdings information, (ii)
prevent the selective disclosure of such information, and (iii) ensure compliance by Adviser and the Fund with the federal securities
laws, including the 1940 Act and the rules promulgated thereunder and general principles of fiduciary duty. The Fund’s portfolio
holdings, or information derived from the Fund’s portfolio holdings, may, in the Adviser’s discretion, be made available
to third parties if such disclosure has been included in the Fund’s public filings with the SEC or is disclosed on the Fund’s
publicly accessible Website, ii) such disclosure is determined by the Chief Compliance Officer (“CCO”) to be in the
best interests of Fund shareholders and consistent with applicable law; (iii) such disclosure information is made equally available
to anyone requesting it; and (iv) the Adviser determines that the disclosure does not present the risk of such information being
used to trade against the Fund.
The business day portfolio holdings information
will be provided to the Transfer Agent or other agent for dissemination through the facilities of the National Securities Clearing
Corporation (“NSCC”) and/or other fee based subscription services to NSCC members and/or subscribers to those other
fee based subscription services, including Authorized Participants, (defined below) and to entities that publish and/or analyze
such information in connection with the process of purchasing or redeeming Creation Units or trading shares of Funds in the secondary
market. Information with respect to the Fund’s portfolio holdings is also disseminated daily on the Fund’s website.
The Distributor may also make available
portfolio holdings information to other institutional market participants and entities that provide information services. This
information typically reflects the Fund’s anticipated holdings on the following business day. “Authorized Participants”
are generally large institutional investors that have been authorized by the Distributor to purchase and redeem large blocks of
shares (known as Creation Units) pursuant to legal requirements, including the exemptive order granted by the SEC, to which the
Fund offer and redeem shares (“Global X Order”). Other than portfolio holdings information made available in connection
with the creation/redemption process, as discussed above, portfolio holdings information that is not filed with the SEC or posted
on the publicly available Website may be provided to third parties only in limited circumstances, as described above.
Disclosure to providers of auditing, custody,
proxy voting and other similar services for the Fund, as well as rating and ranking organizations, will generally be permitted;
however, information may be disclosed to other third parties (including, without limitation, individuals, institutional investors,
and Authorized Participants that sell shares of the Fund) only upon approval by the CCO. The recipients who may receive non-public
portfolio holdings information are as follows: the Adviser and its affiliates, the Fund’s independent registered public accounting
firm, the Fund’s distributor, administrator and custodian, the Fund’s legal counsel, the Fund’s financial printer
and the Fund’s proxy voting service. These entities are obligated to keep such information confidential. Third-party providers
of custodial or accounting services to the Fund may release non-public portfolio holdings information of the Fund only with the
permission of the CCO.
Portfolio holdings will be disclosed through
required filings with the SEC. The Fund files its portfolio holdings with the SEC for the fiscal quarter on Form N-CSR (with respect
to the annual period and semiannual period) and Form N-Q (with respect to the first and third quarters of the Fund’s fiscal
year). Shareholders may obtain the Fund’s Forms N-CSR and N-Q filings on the SEC’s Website at sec.gov. In addition,
the Fund’s Forms N-CSR and N-Q filings may be reviewed and copied at the SEC’s public reference room in Washington,
DC. You may call the SEC at 1-800-SEC-0330 for information about the SEC’s Website or the operation of the public reference
room.
Under the policy, the Board is to receive
information, on a quarterly basis, regarding any other disclosures of non-public portfolio holdings information that were permitted
during the preceding quarter.
MANAGEMENT
OF THE TRUST
BOARD OF TRUSTEES AND OFFICERS
The business and affairs of the Trust are
overseen by the Trust’s Board of Trustees (“Board”). Subject to the provisions of the Trust’s Declaration
of Trust and By-Laws and Delaware law, the Board has all powers necessary and convenient to carry out this general oversight responsibility,
including the power to the elect and remove the Trust’s officers. The focus of the Board’s oversight of the business
and affairs of the Trust (and the of the Fund) is to protect the interests of the shareholders in the Fund.
The Board appoints and oversees the Trust’s
officers and service providers. The Trust’s Adviser is responsible for the day-to-day management and operations of the Trust
and the of the Fund based on the Fund’s investment objective, strategies, policies, and restrictions and agreements entered
into by the Trust and/or the Adviser on behalf of the Trust. In carrying out its general oversight responsibility, the Board regularly
interacts with and receives reports from the senior personnel of the Trust’s service providers (including, in particular,
the Adviser) and the Trust’s CCO. The Board is assisted by the Trust’s independent registered public accounting firm
(who reports directly to the Trust’s Audit Committee), independent counsel to the Independent Trustees (as defined below),
counsel to the Trust and the Adviser, and other experts selected and approved by the Board. (For purposes of this discussion and
the discussion below, the term “Fund” or “Funds” means the Fund that has commenced operations.)
BOARD
STRUCTURE AND RELATED MATTERS.
Board members who are not “interested persons”
of the Fund, as defined in Section 2(a)(19) of the 1940 Act (“Independent Trustees”), constitute 75 percent of the
Board. Mr. Kartik Kiran Shah, an Independent Trustee, serves as Independent Chairman of the Board. The Independent Chairman’s
helps to facilitate communication among the Independent Trustees as well as communication between the Independent Trustees and
management of the Trust. The Independent Chairman may assume such other duties and performs such activities as the Board may, from
time to time, determine should be handled by the Independent Chairman. Mr. Bruno del Ama is the sole Board member who is an “interested
person” of the Trust (“Interested Trustee”). Mr. del Ama is an Interested Trustee due to his affiliation with
the Adviser. The Board believes that having an interested person on the Board facilitates the ability of the Independent Trustees
to fully understand (i) the Adviser’s commitment to providing and/or arranging for the provision of quality services to the
Fund and (ii) corporate and financial matters of the Adviser that may be of importance in the Board’s decision-making process.
The Trustees discharge their responsibilities
collectively as a Board, as well as through Board committees, the of which operates pursuant to a charter that delineates the specific
responsibilities of that committee. The Board has established two standing committees: an Audit Committee and a Corporate Governance,
Nomination and Compensation Committee. Currently, the of the Independent Trustee serves on the of these committees, which are comprised
solely of Independent Trustees.
The Board periodically evaluates its structure
and composition as well as various aspects of its operations. On an annual basis, the Board conducts a self-evaluation process
that, among other things, considers (i) whether the Board and its committees are functioning effectively, (ii) given the size and
composition of the Board and the if its committees, whether the Trustees are able to effectively oversee the number of Funds in
the complex and (iii) whether the mix of skills, perspectives, qualifications, attributes, education, and relevant experience of
the Trustees helps to enhance the Board’s effectiveness.
There are no specific required qualifications
for Board membership. The Board believes that the different skills, perspectives, qualifications, attributes, education, and relevant
experience of the of the Board members provide the Board with a variety of complementary skills. Please note that (i) none of the
Board members is an “expert” within the meaning of the federal securities laws and (ii) the Board not is responsible
for the day to day operations of the Trust and the Fund.
The Board of Trustees met five (5) times
during the fiscal period ended October 31, 2012. The Board may hold special meetings, as needed, either in person or by telephone,
to address matters arising between regular meetings.
The Trustees are identified in
the table below, which provides information as to their principal business occupations held during the last five years
and certain other information. The Trustee serves until his or her death, resignation or removal and replacement. As of the
date of this SAI, the of the Trustees oversees 79 Funds (35 of which are operational). The Trustee serves until his death,
resignation or removal and replacement. The address for all Trustees and officers is c/o Global X Funds, 623 Fifth Avenue,
15
th
floor, New York, New York 10022.
Independent Trustees
Name, Address
(Year of Birth)
|
Position(s) Held
with Funds
|
Principal Occupation(s) During
the Past 5 Years
|
Number of Portfolios in Fund Complex Overseen by Directors
|
Other Directorships Held
by Trustees during the Past 5 Years
|
Sanjay Ram Bharwani
(1974)
|
Trustee (since 2008)
|
CEO of Risk Advisors Inc. (since 2007) (consulting firm); Chief Information Officer, M. Safra & Co (2004-2006) (hedge fund).
|
79 (35 of which are operational)
|
None.
|
Scott R. Chichester
1
(1970)
|
Trustee (since 2008)
|
CFO, Sterling Seal & Supply Inc. (since 2011), Director, President & Treasurer, Bayview Acquisition Corp (since 2010); CPA, Penda Aiken Inc. (2009-2011) (consultant); Founder and President, DirectPay USA LLC (since 2006) (payroll company); Chief Financial Officer, Ong Corporation (2002-2010) (technology company); and Proprietor, Scott R. Chichester CPA (since 2001) (CPA firm).
|
79 (35 of which are operational)
|
Director of Bayview Acquisition Corp (since 2010).
|
Kartik Kiran Shah
(1977)
|
Trustee (since 2008)
|
Vice President, Business Development, Cynvenio Biosystems (2012-present); Independent Consultant, Self-Employed (2011-2012) (non-financial services); Director, Wireless Generation (2008-2011) (software).
|
79 (35 of which are operational)
|
None.
|
1
Mr.
Chichester
is currently married to a sister of Mr. del Ama’s wife. While an “immediate
family member” (as defined in Section 2(a)(19) of the 1940 Act) of Mr. del Ama would be considered an Interested Person,
Mr. Chichester is not considered an immediate family member for this purpose. This fact was taken into consideration in determining
that Mr.
Chichester
should be considered to be an Independent Trustee of the Trust.
Interested Trustee/Officers
Name, Address
(Year of Birth)
|
Position(s) Held
with Funds
|
Principal Occupation(s) During
the Past 5 Years
|
Other Directorships Held
by Trustees During the Past 5 Years
|
Bruno del Ama
(1976)
|
Trustee (since 2008), President and Chief Executive Officer (since 2008)
|
Chief Executive Officer and Chief Compliance Officer, Global X Management Company LLC (since 2008); Head of Global Structured Products Operations at Radian Asset Assurance (2004-2008) (financial services firm).
|
None.
|
Jose C. Gonzalez
(1976)
|
Chief Operating Office, Chief Compliance Officer, Treasurer, Principal Accounting Officer and Chief Financial Officer (since 2008)
|
Chief Operating Officer, Global X Management Company LLC (since 2008); Founder and President of GWM Group, Inc. (since 2006) (broker-dealer firm).
|
N/A
|
Daphne Tippens Chisolm
(1969)
|
Secretary (since 2012)
|
General Counsel, Global X Management Company LLC (since 2011); Founder and President of Law Offices of DT Chisolm, P.C. (since 2009) (law firm); Counsel, Dechert (2007-2009) (law firm)
|
N/A
|
Dianne M. Sulzbach
(1977)
|
Assistant Secretary (since 2011)
|
Counsel at SEI Investments (since 2010); Associate at Morgan, Lewis & Bockius LLP (2006-2010).
|
N/A
|
Lisa K. Whittaker
(1978)
|
Assistant Secretary (since 2013)
|
Counsel at SEI Investments (since 2012); Associate Counsel and Compliance Officer at The Glendale Trust Company (2011-2012); Associate of Drinker Biddle & Reath LLP (2006-2011).
|
N/A
|
Peter Rodriguez
(1962)
|
Assistant Treasurer (since 2011)
|
Fund Accounting Director of the Administrator (since 2011); Mutual Fund Trading Director, SEI Global Trust Company (2009-2011); Asset Data Services Director at the Administrator (2006-2009).
|
N/A
|
In addition to the information set forth
in the table above, the Trustee possesses other relevant skills, perspectives, qualifications, attributes, education, and relevant
experience. The following provides additional information about certain qualifications and experience of the of the Trustees and
the reason why he was selected to serve as trustee.
Sanjay Ram Bharwani: Mr. Bharwani
has experience
in capital markets, technology, risk management and security valuation. He is currently
the CEO of Risk Advisors Inc., a risk management consultancy and previously served as the Chief Information Officer of a multi-strategy
hedge fund. Mr.
Bharwani received his MBA from the Wharton Business School.
Scott R. Chichester: Mr. Chichester,
CPA, has experience in accounting and finance, having served as CEO of a payroll business; experience as CFO of a technology start-up;
experience as an accountant at a bulge bracket investment bank; experience as an auditor at a Big Four accounting firm.
Kartik Kiran Shah: Mr. Shah
has experience in organizational design, strategic planning, financial analysis and product development, having served as a senior
manager in an education software and consulting business; manager of corporate strategy at a biotechnology company; and as consultant
with a major management consulting firm. Mr. Shah received his MBA from the Harvard Business School.
Bruno del Ama: Mr. del Ama has
experience in the investment management industry, including as a board member of another investment adviser; management and organizational
experience as chief executive officer of the Fund’s Adviser; experience as a manager at a bond insurance company; experience
as a management consultant. Mr. del Ama received his MBA from the Wharton Business School.
RISK MANAGEMENT OVERSIGHT.
The Fund
are subject to a variety of risks, including (but not limited to) investment risk, financial risk, legal, regulatory and compliance
risk, and operational risk. Consistent with its responsibility for general oversight of business and affairs of the Trust and the
Fund, the Board oversees the Adviser’s day to day management of the risks to which the Trust and the Fund are subject. The
Board has charged the Adviser with (i) identifying possible events and circumstances that could have demonstrable, adverse effects
on the business and affairs of the Trust and the Fund; (ii) implementation of processes and controls to lessen the possibility
that such events or circumstances occur or mitigate the effects of such events or circumstances if they do occur; and (iii) creating
and maintaining a system designed to continuously evaluate business and market conditions to facilitate the processes described
in (i) and (ii) above. The Adviser seeks to address the day-to-day risk management of the Trust and the Fund by relying on the
Trust’s compliance policies and procedures (i.e., the Trust’s compliance program) as well as the compliance programs
of the Trust’s various service providers, internal control mechanisms and other risk oversight mechanisms as well as the
assistance of the Trust’s sub-administrator. The Adviser also separately considers potential risks that may impact the individual
Funds.
As noted above, on behalf of the Trust,
the Board has adopted, and periodically reviews, various compliance policies and procedures that are designed to address certain
of risks to the Trust and the Fund. In addition, under the general oversight of the Board, the Adviser and the Trust’s other
service providers have adopted a variety of processes, policies, procedures and controls designed to address particular risks to
which the Trust and the Fund are subject. Different processes, policies, procedures and controls are employed with respect to different
types of risks. Further, the Adviser oversees and regularly monitors the investments, operations, and compliance of the Fund’s
investments with various regulatory and other requirements.
Because the day to day operations of the
Fund is carried out by the Adviser, the risk exposure of the Trust and the Fund are mitigated but not eliminated by the processes
overseen by the Board. In addition to the risk management processes, policies, procedures, and controls implemented by the Adviser,
the Board seeks to oversee the risk management structure of the Trust and the Fund directly and through its committees (as described
below). In this regard, the Board has requested that the Adviser, the CCO for the Trust and the Adviser, the independent auditors
for the Trust, and counsel to the Trust and Adviser provide the Board with periodic reports regarding issues that should be focused
on the Board members. In large part, the Board oversees Adviser’s management of the Trust’s risk management structure
through the Board’s review of regular reports, presentations and other information from officers of the Trust and other persons.
Senior officers of the Trust, including the Trust’s CCO, regularly report to the Board on a range of matters, including those
relating to risk management. In this regard, the Board periodically receives reports regarding the Trust’s service providers,
either directly or through the CCO. On at least a quarterly basis, the Independent Trustees meet with the CCO to discuss matters
relating to the Trust’s compliance program and, in accordance with Rule 38a-1 under the 1940 Act, the Board receives at least
annually a written report from the CCO regarding the effectiveness of the Trust’s compliance program. In connection with
the CCO’s annual Rule 38a-1 compliance report to the Board, the Independent Trustees meet with the CCO in executive session
to discuss the Trust’s compliance program.
Further, the Board regularly receives reports
from the Adviser with respect to the Fund’s investments and securities trading and, as necessary, any fair valuation determinations
made by the Advisers with respect to certain investments held by the Fund. Senior officers of the Trust and Adviser routinely report
regularly to the Board on valuation matters, internal controls, accounting and financial reporting policies and practices. In
addition, the Audit Committee receives information on the Fund’s internal controls and financial reporting from the Trust’s
independent registered public accounting firm.
The Board recognizes that not all risks
that may affect the Fund can be identified nor can processes and controls be developed to eliminate or mitigate their occurrence
or effects of certain risks. Some risks are simply beyond the reasonable control of the Fund, their management and service providers.
Although the risk management process, policies and procedures of the Fund, their management and service providers are designed
to be effective, there is no guarantee that they will eliminate or mitigate all such risks. Moreover, it may be necessary to bear
certain risks to achieve the Fund’s investment objective.
STANDING BOARD COMMITTEES
The Board of Trustees currently has two
standing committees: an Audit Committee and a Corporate Governance, Nomination and Compensation Committee. Currently, the Independent
Trustee serves on the of these committees.
AUDIT COMMITTEE.
The purposes of
the Audit Committee are to assist the Board of Trustees in (1) its oversight of the Trust’s accounting and financial reporting
principles and policies and related controls and procedures maintained by or on behalf of the Trust; (2) its oversight of the Trust’s
financial statements and the independent audit thereof; (3) selecting, evaluating and, where deemed appropriate, replacing the
independent registered public accounting firm (or nominating the independent registered public accounting firm to be proposed for
shareholder approval in any proxy statement); and (4) evaluating the independence of the independent registered public accounting
firm. During the fiscal period ended October 31, 2012, the Audit Committee held four meetings.
CORPORATE GOVERNANCE, NOMINATION AND
COMPENSATION COMMITTEE.
The purposes of the Corporate Governance, Nomination and Compensation Committee are, among other things,
to assist the Board of Trustees in (1) its assessment of the adequacy of the Board’s adherence to industry corporate governance
best practices; (2) periodic evaluation of the operation of the Trust and meetings with management of the Trust concerning the
Trust’s operations and the policies and procedures application to the Fund; (3) review, consideration and recommendation
to the full Board regarding Independent Trustee compensation; (4) its identification and evaluation of potential candidates to
fill a vacancy on the Board; and (5) selection from among potential candidates of a nominee to be presented to the full Board for
its consideration. The Corporate Governance, Nomination and Compensation Committee will not consider shareholders’ nominees.
During the fiscal period ended October 31, 2012, the Corporate Governance, Nomination and Compensation Committee held three meetings.
TRUSTEE AND OFFICER OWNERSHIP
OF FUND SHARES
To the best of the Trust’s knowledge, as of the date of
this Statement of Additional Information, the Trustees and Officers of the Trust, as a group, owned less than 1% of the shares
of the Fund.
Securities Ownership
Listed below for the Trustee is a dollar range of securities
beneficially owned in the Fund together with the aggregate dollar range of equity securities in all registered investment companies
overseen by the Trustee that are in the same family of investment companies as the Trust, as of December 31, 2012.
Name of Trustee
|
Fund
|
Dollar Range of Equity Securities In Fund
|
Aggregate Dollar Range of Equity Securities in All Funds Overseen by Trustee in Family of Investment Companies
|
Independent Trustees
|
|
|
|
Sanjay Ram Bharwani
|
None
|
None
|
None
|
Scott R. Chichester
|
None
|
None
|
None
|
Kartik Kiran Shah
|
None
|
None
|
None
|
Interested Trustee
|
|
|
|
Bruno del Ama
|
None
|
None
|
over $100,000*
|
|
|
|
|
*Shares
of the Fund may be held by Global X Management Company LLC, which is controlled by Mr. del Ama and Jose C. Gonzalez.
TRUSTEE OWNERSHIP OF SECURITIES
OF THE ADVISER AND RELATED COMPANIES
As of December 31, 2012, no Independent
Trustee (or any of his immediate family members) owned beneficially or of record securities of any Trust investment adviser, its
principal underwriter, or any person directly or indirectly, controlling, controlled by or under common control with any Trust
investment adviser or principal underwriter.
Name of Independent Trustee
|
Name of Owners and Relationship to Director
|
Company
|
Title of Class
|
Value of Securities
|
Percent of Class
|
Sanjay Ram Bharwani
|
None
|
None
|
None
|
None
|
None
|
Scott R. Chichester
|
None
|
None
|
None
|
None
|
None
|
Kartik Kiran Shah
|
None
|
None
|
None
|
None
|
None
|
No Independent Trustee or immediate family
member has during the two most recently completed calendar years had: (i) any material interest, direct or indirect, in any
transaction or series of similar transactions, in which the amount involved exceeds $120,000; (ii) any securities interest
in the principal underwriter of the Trust or the Adviser or their affiliates (other than the Trust); or (iii) any direct or
indirect relationship of any nature, in which the amount involved exceeds $120,000, with:
|
·
|
an officer of the Fund;
|
|
·
|
an investment company, or person that would be an investment company but for the exclusions provided
by Sections 3(c)(1) and 3(c)(7) of the 1940 Act, having the same investment adviser or principal underwriter as the Fund or having
an investment adviser or principal underwriter that directly or indirectly controls, is controlled by, or is under common control
with the Adviser or principal underwriter of the Fund;
|
|
·
|
an officer or an investment company, or a person that would be an investment company but for the
exclusions provided by Sections 3(c)(1) and 3(c)(7) of the 1940 Act, having the same investment adviser or principal underwriter
as the Fund or having an investment adviser or principal underwriter that directly or indirectly controls, is controlled by, or
is under common control with the Adviser or principal underwriter of the Fund;
|
|
·
|
the Adviser or principal underwriter of the Fund;
|
|
·
|
an officer of the Adviser or principal underwriter of the Fund;
|
|
·
|
a person directly or indirectly controlling, controlled by, or under common control with the Adviser
or principal underwriter of the Fund; or
|
|
·
|
an officer of a person directly or indirectly controlling, controlled by, or under common control
with the Adviser or principal underwriter of the Fund.
|
TRUSTEE COMPENSATION
The Interested Trustee is not compensated
by the Trust. Rather, he is compensated by the Adviser. Independent Trustee fees are paid from the unitary fee paid to the Adviser
by the Fund. All of the Independent Trustees are reimbursed for their travel expenses and other reasonable out-of-pocket expenses
incurred in connection with attending Board meetings (these other expenses are subject to Board review to ensure that they are
not excessive). The Trust does not accrue pension or retirement benefits as part of The Fund’s expenses, and Trustees are
not entitled to benefits upon retirement from the Board of Trustees. The Trust’s officers receive no compensation directly
from the Trust.
The following sets forth the fees expected
to be paid to each Independent Trustee for the fiscal year ended October 31, 2013.
Name of Independent Trustee
|
Aggregate Compensation from the Fund*
|
Pension or Retirement Benefits Accrued as Part of Funds Expenses
|
Total Compensation from Trust
|
|
|
|
|
Sanjay Ram Bharwani
|
$160.00
|
$0
|
$14,500
|
Scott R. Chichester
|
$160.00
|
$0
|
$14,500
|
Kartik Kiran Shah
|
$160.00
|
$0
|
$14,500
|
*This information is provided for the period
October 1, 2013 to October 31, 2013.
CODE OF ETHICS
The Trust, the Adviser, and the Distributor
each have adopted a code of ethics, as required by applicable law, which is designed to prevent affiliated persons of the Trust,
the Adviser, and the Distributor from engaging in deceptive, manipulative or fraudulent activities in connection with securities
held or to be acquired by the Fund (which may also be held by persons subject to a code of ethics). There can be no assurance that
the codes of ethics will be effective in preventing such activities. The codes permit personnel subject to them to invest in securities,
including securities that may be held or purchased by the Fund. The codes are on file with the SEC and are available to the public.
INVESTMENT ADVISER.
The Adviser,
Global X Management Company LLC, serves as investment manager to the Fund pursuant to an Investment Advisory Agreement between
the Trust and the Adviser. It is registered as an investment adviser with the SEC and is located at 623 Fifth Ave, 15th floor,
New York, NY 10022. Bruno del Ama and Jose C. Gonzalez the own more than 25% of the outstanding shares of the Adviser, which was
organized in Delaware on March 28, 2008 as a limited liability company.
Pursuant to a Supervision and Administration
Agreement between the Trust and the Adviser, the Adviser oversees the operation of the Fund, provides or causes to be furnished
the advisory, supervisory, administrative, distribution, transfer agency, custody and all other services necessary for the Fund
to operate, and exercises day-to-day oversight over the Fund’s service providers. Under the Supervision and Administration
Agreement, the Adviser also bears all the fees and expenses incurred in connection with its obligations under the Supervision and
Administration Agreement, including, but not limited to, the costs of various third-party services required by the Fund, including
audit, certain custody, portfolio accounting, legal, transfer agency and printing costs, except those fees and expenses specifically
assumed by the Trust on behalf of the Fund.
Under the Investment Advisory Agreement
between the Trust and the Adviser, the Adviser is responsible for the management of the investment portfolio of the Fund. The ability
of the Adviser to successfully implement the Fund's investment strategies will influence the Fund's performance significantly.
The Fund pays the Adviser a fee (“Management
Fee”) for the advisory, supervisory, administrative and other services it requires under an all-in fee structure. The Fund
will pay a monthly Management Fee to the Adviser at the annual rate (stated as a percentage of the Fund’s respective average
daily net assets) of ___%.
The Fund also bears certain other expenses,
which are specifically excluded from being covered under the Management Fee and the Supervision and Administration Agreement (“Excluded
Expenses”) and may vary and will affect the total level of expenses paid by the Fund. Such Excluded Expenses include taxes,
brokerage fees, commissions and other transaction expenses, interest and extraordinary expenses (such as litigation and indemnification
expenses). The Fund also bears asset-based custodial fees not covered by the Supervision and Administration Agreement.
The Adviser and its affiliates deal, trade
and invest for their own accounts in the types of securities in which the Fund also may invest. The Adviser does not use inside
information in making investment decisions on behalf of the Fund.
The of the Supervision and Administration
Agreement and the related Investment Advisory Agreement remains in effect for two (2) years from its effective date and thereafter
continues in effect for as long as its continuance is specifically approved at least annually, by (1) the Board of Trustees of
the Trust, or by the vote of a majority (as defined in the 1940 Act) of the outstanding shares of the Fund, and (ii) by the vote
of a majority of the Trustees of the Trust who are not parties to the Investment Advisory Agreement or interested persons of the
Adviser, cast in person at a meeting called for the purpose of voting on such approval. The of the Supervision and Administration
Agreement and the related Investment Advisory Agreement provides that it may be terminated at any time without the payment of any
penalty, by the Board of Trustees of the Trust or by vote of a majority of the Fund’s shareholders, on 60 calendar days written
notice to the Adviser, and by the Adviser on the same notice to the Trust
,
and that it shall be automatically terminated if it is assigned.
The of the Supervision and Administration
Agreement and the related Investment Advisory Agreement provides that the Adviser shall not be liable to the Fund or its shareholders
for anything other than willful misfeasance, bad faith, gross negligence or reckless disregard of its obligations or duties. The
Investment Advisory Agreement also provides that the Adviser may engage in other businesses, devote time and attention to any other
business
,
whether of a similar or dissimilar nature, and
render investment advisory services to others.
PORTFOLIO MANAGERS
Bruno del Ama and Jose C. Gonzalez are
primarily responsible for the day-to-day management of the Fund’s investments.
Portfolio Manager’s Compensation
The Adviser believes that its compensation
program is competitively positioned to attract and retain high-caliber investment professionals. Portfolio managers receive a salary
and are eligible to receive an annual bonus. The portfolio manager’s salary compensation is designed to be competitive with
the marketplace and reflect the portfolio manager’s relative experience and contribution to the Fund. Base salary compensation
is reviewed and adjusted annually to reflect increases in the cost of living and market rates. The annual incentive bonus opportunity
provides cash bonuses based upon the Fund’s performance and individual contributions. As shareholders of the Adviser, Bruno
del Ama and Jose C. Gonzalez also may benefit economically from any profits generated by the Adviser.
Other Accounts Managed by Portfolio
Manager
It is anticipated that the portfolio manager
will be responsible for multiple investment accounts, including other investment companies registered under the 1940 Act. As a
general matter, certain conflicts of interest may arise in connection with the portfolio manager’s management of the Fund’s
investments, on the one hand, and the investments of other accounts for which the portfolio manager is responsible, on the other.
For example, it is possible that the various accounts managed could have different investment strategies that, at times, might
conflict with one another to the possible detriment of the Fund. Alternatively, to the extent that the same investment opportunities
might be desirable for more than one account, possible conflicts could arise in determining how to allocate them. Other potential
conflicts might include conflicts created by specific portfolio manager compensation arrangements and conflicts relating to selection
of brokers or dealers to execute the Fund’s trades. The Adviser has structured the portfolio manager’s compensation
in a manner, and the Fund and the Adviser have adopted policies, procedures and a code of ethics, reasonably designed to safeguard
the Fund from being negatively affected as a result of any such conflicts that may arise.
As of October 31, 2012, Bruno del Ama and
Jose Gonzalez were responsible for the management of the following accounts:
Name of Portfolio Manager
|
Other Accounts Managed
(As of October 31, 2012)
|
Accounts with respect to which the advisory fee is based on the performance of the account
|
Category of Account
|
Number of Accounts in Category
|
Total Assets in Accounts in Category
|
Number of Accounts in Category
|
Total Assets in Accounts in Category
|
Bruno del Ama
|
Registered investment companies
|
31
|
$1,446,638,595
|
0
|
$0
|
|
Other pooled investment vehicles
|
0
|
$0
|
0
|
$0
|
|
Other accounts
|
0
|
$0
|
0
|
$0
|
Jose C. Gonzalez
|
Registered investment companies
|
31
|
$1,446,638,595
|
0
|
$0
|
|
Other pooled investment vehicles
|
0
|
$0
|
0
|
$0
|
|
Other accounts
|
0
|
$0
|
0
|
$0
|
Although the funds in the Trust that are
managed by Messrs. del Ama and Gonzalez may have different investment strategies, each fund has an investment objective of seeking
to replicate, before fees and expenses, its respective underlying index. The Adviser does not believe that management of the various
accounts presents a material conflict of interest for Messrs. del Ama and Gonzalez or the Adviser.
Disclosure of Securities Ownership
Listed below for the Portfolio Manager is a dollar range of
securities beneficially owned in the Fund as of the date of this SAI.
Name of Portfolio Manager
|
Fund
|
Dollar Range of Equity Securities In Fund
|
Bruno del Ama
|
Global X Next Emerging & Frontier ETF
|
None
|
|
|
|
Jose C. Gonzalez
|
Global X Next Emerging & Frontier ETF
|
None
|
|
|
|
BROKERAGE TRANSACTIONS
The policy of the Trust regarding purchases
and sales of securities is that primary consideration will be given to obtaining the most favorable prices and efficient executions
of transactions. Consistent with this policy, when securities transactions are effected on a stock exchange, the Trust’s
policy is to pay commissions that are considered fair and reasonable without necessarily determining that the lowest possible commissions
are paid in all circumstances. In seeking to determine the reasonableness of brokerage commissions paid in any transaction, the
Adviser relies upon its experience and knowledge regarding commissions generally charged by various brokers and in various jurisdictions.
The Adviser effects transactions for the Fund with those brokers and dealers that the Adviser believes provide the most favorable
prices and are capable of providing the most efficient and best execution of trades. The primary consideration of the Adviser is
to seek prompt execution of orders at the most favorable net price. The sale of Shares by a broker-dealer is not a factor in the
selection of broker-dealers. The Adviser and its affiliates do not currently participate in any soft dollar transactions, although
the Adviser relies on Section 28(e) of the 1934 Act in effecting or executing transactions for the Fund. Accordingly, in selecting
broker-dealers to execute a particular transaction, the Adviser may consider the brokerage and research services (as those terms
are defined in Section 28(e) of the 1934 Act) provided to the Fund and/or other accounts over which the Adviser or its affiliates
exercise investment discretion. The Adviser may cause the Fund to pay a broker-dealer that furnishes brokerage and research services
a higher commission than that which might be charged by another broker-dealer for effecting the same transaction, provided that
the Adviser determines in good faith that such commission is reasonable in relation the value of the brokerage and research services
provided by such broker-dealer, viewed in terms of either the particular transaction or the overall responsibilities of the Adviser
to the Fund. Such brokerage and research services might consist of reports and statistics on specific companies or industries or
broad overviews of the securities markets and the economy. Shareholders of the Fund should understand that the services provided
by such brokers may be useful to the Adviser in connection with its services to other clients.
The Adviser assumes general supervision
over placing orders on behalf of the Fund for the purchase or sale of portfolio securities. If purchases or sales of portfolio
securities by the Fund are considered at or about the same time, transactions in such securities are allocated among the Fund in
a manner deemed equitable to the Fund by the Adviser. Bundling or bunching transactions for the Fund is intended to result in better
prices for portfolio securities and lower brokerage commissions, which should be beneficial to the Fund.
PROXY VOTING
The Fund have delegated proxy voting responsibilities
to the Adviser, subject to the Boards of Trustees’ oversight. In delegating proxy responsibilities, the Board has directed
that proxies be voted consistent with
the Fund’s
and its
shareholders' best interests and in compliance with all applicable proxy voting rules and regulations. The Adviser has adopted
proxy voting policies and guidelines for this purpose ("Proxy Voting
Policies")
and the Adviser has engaged a third party proxy solicitation firm which is responsible for the actual voting of all proxies in
a timely manner, while the CCO is responsible for monitoring the effectiveness of the Proxy Voting Policies. The Proxy Voting Policies
have been adopted by the Trust as the policies and procedures that the Adviser will use when voting proxies on behalf of the Fund.
I. General Policy
The
Proxy Voting Policies
address, among other things, material conflicts of interest that may arise between the interests of
the Fund and the interests of the Adviser.
The Proxy Voting Policies
will ensure that all issues brought to shareholders are analyzed in light of the Adviser’s fiduciary responsibilities.
In voting to elect board nominees for uncontested
seats, the following factors will be taken into account: (i) whether majority of the company’s directors are independent;
(ii) whether key board committees are entirely composed of independent directors; (iii) excessive board memberships and professional
time commitments to effectively serve the company’s board; and (iv) the attendance record of incumbent directors at board
and committee meetings.
Equity compensation plans will also be
reviewed on a case-by-case basis based upon their specific features. For example, stock option plans will be evaluated using criteria
such as: (i) whether the plan is performance-based; (ii) dilution to existing shareholders; (iii) the cost of the plan; (iv) whether
discounted options are allowed under the plan; (v) whether the plan authorizes the re-pricing of options or reload options without
shareholder approval; and (vi) the equity overhang of all plans. Similarly, employee stock purchase plans generally will be supported
under the guidelines upon consideration of factors such as (i) whether the plan sets forth adequate limits on share issuance; (ii)
whether participation limits are defined; and (iii) whether discounts to employees exceed a threshold amount.
The Proxy Voting Policies provide for review
and vote on shareholder proposals on a case-by-case basis. In accordance with this approach, these guidelines support a shareholder
proposal upon the compelling showing that it has a substantial economic impact on shareholder value. As such, proposals that request
that the company report on environmental, labor or human rights issues are only supported when such concerns pose a substantial
risk to shareholder value.
II. Record of Proxy Voting
Information on how the Fund voted proxies
relating to portfolio securities during the most recent 12 month period ended October 31 is available (1) without charge, upon
request, by calling 1-888-843-7824 and (2) on the SEC’s website at www.sec.gov.
SUB-ADMINISTRATOR
SEI Investments Global Funds Services (“SEIGFS”),
located at One Freedom Valley Drive Oaks, PA 19456, serves as Sub-Administrator to the Fund. As sub-administrator, SEIGFS provides
the Fund with all required general administrative services, including, without limitation, office space, equipment, and personnel;
clerical and general back office services; bookkeeping, internal accounting and secretarial services; the calculation of NAV; and
the preparation and filing of all reports, registration statements, proxy statements and all other materials required to be filed
or furnished by the Fund under federal and state securities laws. As compensation for these services, the sub-Administrator receives
certain out-of-pocket costs, transaction fees and asset-based fees which are accrued daily and paid monthly by the Adviser from
its fees.
DISTRIBUTOR
The Trust has entered into a Distribution
Agreement under which SEI Investments Distribution Co. (“SIDCO”), with principal offices at One Freedom Valley Drive
Oaks, PA 19456, as agent, receives orders to create and redeem shares in Creation Unit Aggregations and transmits such orders to
the Trust’s Custodian and Transfer Agent. The Distributor has no obligation to sell any specific quantity of Fund shares.
SIDCO bears the following costs and expenses relating to the distribution of shares: (i) the costs of processing and maintaining
records of creations of Creation Units; (ii) all costs of maintaining the records required of a registered broker/dealer; (iii)
the expenses of maintaining its registration or qualification as a dealer or broker under federal or state laws; (iv) filing fees;
and (v) all other expenses incurred in connection with the distribution services as contemplated in the Distribution Agreement.
No compensation is payable by the Trust to SIDCO for such distribution services. The Distribution Agreement provides that the Trust
will indemnify SIDCO against certain liabilities relating to untrue statements or omissions of material fact except those resulting
from the reliance on information furnished to the Trust by SIDCO, or those resulting from the willful misfeasance, bad faith or
gross negligence of SIDCO, or SIDCO’s reckless disregard of its duties and obligations under the Distribution Agreement.
The Distributor, its affiliates and officers have no role in determining the investment policies or which securities are to be
purchased or sold by the Trust or the Fund. The Distributor is not affiliated with the Trust, the Adviser or any stock exchange.
Additionally, the Adviser or its affiliates
may, from time to time, and from its own resources, pay, defray or absorb costs relating to distribution, including payments out
of its own resources to the Distributor or to otherwise promote the sale of shares.
CUSTODIAN AND TRANSFER AGENT
Brown Brothers Harriman & Co. (“BBH”),
located at 40 Water Street, Boston, MA 02109, serves as Custodian of Funds’ assets. The custodian relationship is managed
through SIDCO. As Custodian, BBH has agreed to (1) make receipts and disbursements of money on behalf of the Fund, (2) collect
and receive all income and other payments and distributions on account of the Fund’s portfolio investments, (3) respond to
correspondence from shareholders, security brokers and others relating to its duties; and (4) make periodic reports to the Fund
concerning the Fund’s operations. BBH does not exercise any supervisory function over the purchase and sale of securities.
As compensation for these services, the Custodian receives certain out-of-pocket costs, transaction fees and asset-based fees which
are accrued daily and paid monthly by the Adviser from its fees.
As Transfer Agent, BBH has agreed to (1)
issue and redeem shares of the Fund, (2) make dividend and other distributions to shareholders of the Fund, (3) respond to correspondence
by Funds shareholders and others relating to its duties; (4) maintain shareholder accounts, and (5) make periodic reports to the
Fund. As compensation for these services, the Transfer Agent receives certain out-of-pocket costs, transaction fees and asset-based
fees which are accrued daily and paid monthly by the Adviser from its fees.
DESCRIPTION OF SHARES
The Declaration of Trust of the Trust (“Declaration”)
permits the Trust’s Board of Trustees to issue an unlimited number of full and fractional shares of beneficial interest of
one or more separate series representing interests in one or more investment portfolios. The Trustees or Trust may create additional
series and the series may be divided into classes.
Under the terms of the Declaration, the
share of the Fund represents a proportionate interest in the particular Fund with the other share of its class in the same Fund
and is entitled to such dividends and distributions out of the income belonging to the Fund as are authorized by the Trustees and
declared by the Trust. Upon any liquidation of the Fund, shareholders of the class of the Fund are entitled to share pro rata in
the net assets belonging to that class available for distribution. Shares do not have any preemptive or conversion rights. The
right of redemption is described in the Prospectus. In addition, pursuant to the terms of the 1940 Act, the right of a shareholder
to redeem shares and the date of payment by the Fund may be suspended for more than seven days (i) for any period during which
the New York Stock Exchange is closed, other than the customary weekends or holidays, or trading in the markets the Fund normally
utilizes is closed or is restricted as determined by the SEC, (ii) during any emergency, as determined by the SEC, as a result
of which it is not reasonably practicable for the Fund to dispose of instruments owned by it or fairly to determine the value of
its net assets, or (iii) for such other period as the SEC may by order permit for the protection of the shareholders of the Fund.
The Trust also may suspend or postpone the recording of the transfer of its shares upon the occurrence of any of the foregoing
conditions. In addition, shares of the Fund are redeemable at the unilateral option of the Trust. The Declaration permits the Board
to alter the number of shares constituting a Creation Unit or to specify that shares of beneficial interest of the Trust may be
individually redeemable. Shares when issued as described in the Prospectus are validly issued, fully paid and non-assessable. In
the interests of economy and convenience, certificates representing shares of the Fund are not issued.
Following the creation of the initial Creation
Unit Aggregation(s) of the Fund and immediately prior to the commencement of trading in such Fund’s shares, a holder of shares
may be a “control person” of the Fund, as defined in the 1940 Act. The Fund cannot predict the length of time for which
one or more shareholders may remain a control person of the Fund.
The proceeds received by the Fund for the
issue or sale of its shares, and all net investment income, realized and unrealized gain and proceeds thereof, subject only to
the rights of creditors of that Fund, will be specifically allocated to and constitute the underlying assets of that Fund. The
underlying assets of the Fund will be segregated on the books of account, and will be charged with the liabilities in respect to
that Fund and with a share of the general liabilities of the Trust. Expenses with respect to the Fund normally are allocated in
proportion to the NAV of the respective Fund except where allocations of direct expenses can otherwise be fairly made.
Shareholders are entitled to one vote for
the full share held and proportionate fractional votes for fractional shares held. The Fund and other funds of the Trust entitled
to vote on a matter will vote in the aggregate and not by Fund, except as required by law or when the matter to be voted on affects
only the interests of shareholders of a particular Fund or class.
Rule 18f-2 under the 1940 Act provides
that any matter required by the provisions of the 1940 Act or applicable state law, or otherwise, to be submitted to the holders
of the outstanding voting securities of an investment company such as the Trust shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of the investment portfolio affected by such matter.
Rule 18f-2 further provides that an investment portfolio shall be deemed to be affected by a matter unless the interests of the
investment portfolio in the matter are substantially identical or the matter does not affect any interest of the investment portfolio.
Under the Rule, the approval of an Investment Advisory Agreement, a distribution plan subject to Rule 12b-1 under the 1940 Act
or any change in the fundamental investment policy would be effectively acted upon with respect to an investment portfolio only
if approved by a majority of the outstanding shares of such investment portfolio. However, the Rule also provides that the ratification
of the appointment of independent accountants, the approval of principal underwriting contracts and the election of Trustees are
exempt from the separate voting requirements stated above.
The Trust is not required to hold annual
meetings of shareholders and does not intend to hold such meetings. In the event that a meeting of shareholders is held, the share
of the Trust will be entitled, as determined by the Trustees without the vote or consent of shareholders to one vote for the share
represented by such shares on all matters presented to shareholders, including the election of Trustees (this method of voting
being referred to as “dollar-based voting”). However, to the extent required by the 1940 Act or otherwise determined
by the Trustees, series and classes of the Trust will vote separately from the other. Shareholders of the Trust do not have cumulative
voting rights in the election of Trustees and, accordingly, the holders of more than 50% of the aggregate voting power of the Trust
may elect all of the Trustees, irrespective of the vote of the other shareholders. Meetings of shareholders of the Trust, or any
series or class thereof, may be called by the Trustees, the President or Secretary of the Trust or upon the written request of
holders of at least a majority of the shares entitled to vote at such meeting. The shareholders of the Trust will have voting rights
only with respect to the limited number of matters specified in the Declaration and such other matters as the Trustees may determine
or may be required by law.
The Declaration authorizes the Trustees,
without shareholder approval (except as stated in the next paragraph), to cause the Trust, or any series thereof, to merge or consolidate
with any corporation, association, trust or other organization or sell or exchange all or substantially all of the property belonging
to the Trust, or any series thereof. In addition, the Trustees, without shareholder approval, may adopt a “master-feeder”
structure by investing substantially all of the assets of a series of the Trust in the securities of another open-end investment
company or pooled portfolio.
The Declaration also authorizes the Trustees,
in connection with the termination or other reorganization of the Trust or any series or class by way of merger, consolidation,
the sale of all or substantially all of the assets, or otherwise, to classify the shareholders of any class into one or more separate
groups and to provide for the different treatment of shares held by the different groups, provided that such termination or reorganization
is approved by a majority of the outstanding voting securities (as defined in the 1940 Act) of the group of shareholders that are
so classified.
The Declaration permits the Trustees to
amend the Declaration without a shareholder vote. However, shareholders of the Trust have the right to vote on any amendment: (i)
that would adversely affect the voting rights of shareholders specified in the Declaration; (ii) that is required by law to be
approved by shareholders; (iii) to the amendment section of the Declaration; or (iv) that the Trustees determine to submit to shareholders.
The Declaration permits the termination
of the Trust or of any series or class of the Trust: (i) by a majority of the affected shareholders at a meeting of shareholders
of the Trust, series or class; or (ii) by a majority of the Trustees without shareholder approval if the Trustees determine that
such action is in the best interest of the Trust or its shareholders. The factors and events that the Trustees may take into account
in making such determination include: (i) the inability of the Trust or any series or class to maintain its assets at an appropriate
size; (ii) changes in laws or regulations governing the Trust, or any series or class thereof, or affecting assets of the type
in which it invests; or (iii) economic developments or trends having a significant adverse impact on their business or operations.
In the event of a termination of the Trust
or the Fund, the Board, in its sole discretion, could determine to permit the shares to be redeemable in aggregations smaller than
Creation Unit Aggregations or to be individually redeemable. In such circumstance, the Trust may make redemptions in-kind, for
cash, or for a combination of cash or securities.
The Declaration provides that the Trustees
will not be liable to any person other than the Trust or a shareholder and that a Trustee will not be liable for any act as a Trustee.
Additionally, subject to applicable federal law, no person who is or who has been a Trustee or officer of the Trust shall be liable
to the Trust or to any shareholder for money damages except for liability resulting from (a) actual receipt of an improper benefit
or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment and which is material
to the cause of action. However, nothing in the Declaration protects a Trustee against any liability to which he or she would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct
of his or her office. The Declaration provides for indemnification of Trustees and officers of the Trust unless the indemnitee
is liable to the Trust or any shareholder by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of such person’s office.
The Declaration provides that the shareholder,
by virtue of becoming such, will be held to have expressly assented and agreed to the terms of the Declaration.
The Declaration provides that a shareholder
of the Trust may bring a derivative action on behalf of the Trust only if the following conditions are met: (i) the shareholder
was a shareholder at the time of the action complained of; (ii) the shareholder was a shareholder at the time demand is made; (iii)
the shareholder must make demand to the Trustees before commencing at derivative action on behalf of the Trust; (iv) any shareholders
that hold at least 10% of the outstanding shares of the Trust (or 10% of the outstanding shares of the series or class to which
such action relates) must join in the request for the Trustees to commence such action; and (v) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to investigate the basis of such claim. The Declaration also
provides that no person, other than the Trustees, who is not a shareholder of a particular series or class shall be entitled to
bring any derivative action, suit or other proceeding on behalf of or with respect to such series or class. The Trustees will be
entitled to retain counsel or other advisers in considering the merits of the request and will require an undertaking by the shareholders
making such request to reimburse the Trust for the expense of any such advisers in the event that the Trustees determine not to
bring such action.
The term “majority of the outstanding
shares” of either the Trust or a particular Fund or investment portfolio means, with respect to the approval of an Investment
Advisory Agreement, a distribution plan or a change in the Fundamental investment policy, the vote of the lesser of (i) 67% or
more of the shares of the Trust or such Fund or portfolio present at a meeting, if the holders of more than 50% of the outstanding
shares of the Trust or such Fund or portfolio are present or represented by proxy, or (ii) more than 50% of the outstanding shares
of the Trust or such Fund or portfolio.
BOOK-ENTRY ONLY SYSTEM
The following information supplements and
should be read in conjunction with the Shareholder Information section in the Prospectus. The Depository Trust Company (“DTC”)
Acts as Securities Depository for the Shares of the Trust. Shares of the Fund are represented by securities registered in the name
of DTC or its nominee and deposited with, or on behalf of, DTC.
DTC, a limited-purpose trust company, was
created to hold securities of its participants (“DTC Participants”) and to facilitate the clearance and settlement
of securities transactions among the DTC Participants in such securities through electronic book-entry changes in accounts of the
DTC Participants, thereby eliminating the need for physical movement of securities’ certificates. DTC Participants include
securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or
their representatives) own DTC. More specifically, DTC is a subsidiary of the Depository Trust and Clearing Corporation (“DTCC”),
which is owned by its member firms including international broker/dealers, correspondent and clearing banks, mutual fund companies
and investment banks. Access to the DTC system is also available to others such as banks, brokers, dealers and Trust companies
that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly (“Indirect
Participants”).
Beneficial ownership of shares is limited
to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership
of beneficial interests in shares (owners of such beneficial interests are referred to herein as “Beneficial Owners”)
is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants)
and on the records of DTC Participants (with respect to Indirect Participants and Beneficial Owners that are not DTC Participants).
Beneficial Owners will receive from or through the DTC Participant a written confirmation relating to their purchase of shares.
The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definitive
form. Such laws may impair the ability of certain investors to acquire beneficial interests in shares.
Beneficial Owners of shares are not entitled
to have shares registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive
form and are not considered the registered holder thereof. Accordingly, the Beneficial Owner must rely on the procedures of DTC,
the DTC Participant and any Indirect Participant through which such Beneficial Owner holds its interests, to exercise any rights
of a holder of shares. The Trust understands that under existing industry practice, in the event the Trust requests any action
of holders of shares, or a Beneficial Owner desires to take any action that DTC, as the record owner of all outstanding shares,
is entitled to take, DTC would authorize the DTC Participants to take such action and that the DTC Participants would authorize
the Indirect Participants and Beneficial Owners acting through such DTC Participants to take such action and would otherwise act
upon the instructions of Beneficial Owners owning through them. As described above, the Trust recognizes DTC or its nominee as
the owner of all shares for all purposes.
Conveyance of all notices, statements and
other communications to Beneficial Owners is effected as follows. Pursuant to the Depositary Agreement between the Trust and DTC,
DTC is required to make available to the Trust upon request and for a fee to be charged to the Trust a listing of the share holdings
of the DTC Participant. The Trust shall inquire of the such DTC Participant as to the number of Beneficial Owners holding shares
of the Fund, directly or indirectly, through such DTC Participant. The Trust shall provide the such DTC Participant with copies
of such notice, statement or other communication, in such form, number and at such place as such DTC Participant may reasonably
request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly,
to such Beneficial Owners. In addition, the Trust shall pay to the such DTC Participant a fair and reasonable amount as reimbursement
for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements.
Share distributions shall be made to DTC
or its nominee, Cede & Co., as the registered holder of all shares of the Trust. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants’ accounts with payments in amounts proportionate to their respective
beneficial interests in shares as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants
and Beneficial Owners of shares held through such DTC Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer form or registered in a “street name,”
and will be the responsibility of such DTC Participants. The Trust has no responsibility or liability for any aspects of the records
relating to or notices to Beneficial Owners, or payments made on account of beneficial ownership interests in such shares, or for
maintaining, supervising or reviewing any records relating to such beneficial ownership interests or for any other aspect of the
relationship between DTC and the DTC Participants or the relationship between such DTC Participants and the Indirect Participants
and Beneficial Owners owning through such DTC Participants.
DTC may determine to discontinue providing
its service with respect to shares of the Trust at any time by giving reasonable notice to the Trust and discharging its responsibilities
with respect thereto under applicable law. Under such circumstances, the Trust shall take action either to find a replacement for
DTC to perform its functions at a comparable cost or, if such a replacement is unavailable, to issue and deliver printed certificates
representing ownership of shares, unless the Trust makes other arrangements with respect thereto satisfactory to the Exchange on
which shares are listed.
PURCHASE
AND REDEMPTION OF CREATION UNITS
CREATION UNIT AGGREGATIONS
The Trust issues and sells shares of the
Fund only in Creation Unit Aggregations. The Board reserves the right to declare a split or a consolidation in the number of shares
outstanding of any Fund of the Trust, and to make a corresponding change in the number of shares constituting a Creation Unit,
in the event that the per share price in the secondary market rises (or declines) to an amount that falls outside the range deemed
desirable by the Board.
PURCHASE AND ISSUANCE OF
CREATION UNIT AGGREGATIONS
General.
The Trust issues and sells
shares of the Fund only in Creation Units on a continuous basis through the Distributor, without a sales load, at the Fund’s
NAV next determined after receipt, on any Business Day (as defined herein), of an order in proper form.
A “Business Day” with respect
to the Fund is any day on which the NYSE is open for business. As of the date of this SAI, the NYSE observes the following holidays:
New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Portfolio Deposit.
The consideration
for purchase of a Creation Unit of shares of the Fund generally consists of the in-kind deposit of a designated portfolio of securities
(the “Deposit Securities”) constituting an optimized representation of the Fund’s Underlying Index and an amount
of cash in U.S. dollars computed as described below (the “Cash Component”). Together, the Deposit Securities and the
Cash Component constitute the “Portfolio Deposit,” which represents the minimum initial and subsequent investment amount
for a Creation Unit of the Fund. The Cash Component is an amount equal to the Balancing Amount (as defined below). The “Balancing
Amount” is an amount equal to the difference between (x) the net asset value (per Creation Unit) of the Fund and (y) the
“Deposit Amount” which is the market value (per Creation Unit) of the Deposit Securities. The Balancing Amount serves
the function of compensating for any differences between the net asset value per Creation Unit and the Deposit Amount. If the Balancing
Amount is a positive number (
i.e.
, the net asset value per Creation Unit is more than the Deposit Amount), the Authorized
Participant will deliver the Balancing Amount. If the Balancing Amount is a negative number (
i.e.
, the net asset value per
Creation Unit is less than the Deposit Amount), the Authorized Participant will receive the Balancing Amount. Payment of any stamp
duty or other similar fees and expenses payable upon transfer of beneficial ownership of the Deposit Securities shall be the sole
responsibility of the Authorized Participant that purchased the Creation Unit. The Authorized Participant must ensure that all
Deposit Securities properly denote change in beneficial ownership.
The Adviser makes available through the
National Securities Clearing Corporation (“NSCC”) on the Business Day, prior to the opening of business on the Exchange
(currently 9:30 a.m., Eastern Time), the list of the names and the required number of shares of the Deposit Security to be included
in the current Portfolio Deposit (based on information at the end of the previous Business Day) for the Fund. Such Portfolio Securities
are applicable, subject to any adjustments as described below, to purchases of Creation Units of a given Fund until such time as
the next-announced Deposit Securities composition is made available.
The identity and number of shares of the
Deposit Securities required for a Portfolio Deposit for the Fund changes pursuant to changes in the composition of the Fund’s
Portfolio and as rebalancing adjustments and corporate action events are reflected from time to time by the Adviser with a view
to the investment objective of the Fund. The composition of the Deposit Securities may also change in response to adjustments to
the weighting or composition of the securities constituting the Underlying Index.
In addition, the Trust reserves the right
to permit or require the substitution of an amount of cash (that is a “cash in lieu” amount) to be added to the Cash
Component to replace any Deposit Security which may not be available in sufficient quantity for delivery or that may not be eligible
for transfer through the systems of DTC or the Clearing Process (discussed below) or for other similar reasons. The Trust also
reserves the right to permit or require a “cash in lieu” amount where the delivery of Deposit Securities by the Authorized
Participant (as described below) would be restricted under the securities laws or where delivery of Deposit Securities to the Authorized
Participant would result in the disposition of Deposit Securities by the Authorized Participant becoming restricted under the securities
laws, and in certain other situations. The adjustments described above will reflect changes, known to the Adviser on the date of
announcement to be in effect by the time of delivery of the Portfolio Deposit, in the composition of the Underlying Index, or resulting
from stock splits and other corporate actions.
In addition to the list of names and numbers
of securities constituting the current Deposit Securities of a Portfolio Deposit, on the Business Day, the Cash Component effective
through and including the previous Business Day, per outstanding Creation Unit of the Fund, will be made available.
Role of the Authorized Participant.
Creation Units of shares may be purchased only by or through a DTC Participant that has entered into an Authorized Participant
Agreement with the Distributor (an Authorized Participant). Such Authorized Participant will agree pursuant to the terms of such
Authorized Participant Agreement on behalf of itself or any investor on whose behalf it will act, as the case may be, to certain
conditions, including that such Authorized Participant will make available in advance of the purchase of Creation Units an amount
of cash sufficient to pay the Cash Component, once the net asset value of a Creation Unit is next determined after receipt of the
purchase order in proper form, together with the transaction fee described below. The Authorized Participant may require the investor
to enter into an agreement with such Authorized Participant with respect to certain matters, including payment of the Cash Component.
Investors who are not Authorized Participants must make appropriate arrangements with an Authorized Participant. Investors should
be aware that their particular broker may not be a DTC Participant or may not have executed an Authorized Participant Agreement,
and that therefore orders to purchase Creation Units may have to be placed by the investor’s broker through an Authorized
Participant. As a result, purchase orders placed through an Authorized Participant may result in additional charges to such investor.
The Trust does not expect to enter into an Authorized Participant Agreement with more than a small number of DTC Participants that
have international capabilities. A list of the current Authorized Participants may be obtained from the Distributor.
Purchase Order.
To initiate an order
for a Creation Unit of shares of the Fund, the Authorized Participant must submit to the Distributor an irrevocable order to purchase
shares of the Fund. With respect to the Fund, the Distributor will notify the Adviser and the Custodian of such order. The Custodian
will then provide such information to the appropriate local sub-custodian(s). The Custodian shall cause the appropriate local sub-custodian(s)
of the Fund to maintain an account into which the Authorized Participant shall deliver, on behalf of itself or the party on whose
behalf it is acting, the securities included in the designated Portfolio Deposit (or the cash value of all or a part of such securities,
in the case of a permitted or required cash purchase or “cash in lieu” amount), with any appropriate adjustments as
advised by the Trust. Deposit Securities must be delivered to an account maintained at the applicable local sub-custodian. Those
placing orders to purchase Creation Units through an Authorized Participant should allow sufficient time to permit proper submission
of the purchase order to the Distributor by the Cut-Off Time (as defined below) on such Business Day.
The Authorized Participant must also make
available on or before the contractual settlement date, by means satisfactory to the Trust, immediately available or same day funds
in U.S. dollars estimated by the Trust to be sufficient to pay the Cash Component next determined after acceptance of the purchase
order, together with the applicable purchase transaction fee. Any excess funds will be returned following settlement of the issue
of the Creation Unit. Those placing orders should ascertain the applicable deadline for cash transfers by contacting the operations
department of the broker or depositary institution effectuating the transfer of the Cash Component. This deadline is likely to
be significantly earlier than the closing time of the regular trading session on the Exchange.
Investors should be aware that an Authorized
Participant may require orders for purchases of shares placed with it to be in the particular form required by the individual Authorized
Participant.
Timing of Submission of Purchase Orders.
An Authorized Participant must submit an irrevocable purchase order no later than the earlier of (i) 4:00 p.m., Eastern Time
or (ii) the closing time of the trading session on the relevant Fund’s Exchange, on any Business Day in order to receive
that Business Day’s NAV.
Acceptance of Purchase Order.
Subject
to the conditions that (i) an irrevocable purchase order has been submitted by the Authorized Participant (either on its own or
another investor’s behalf) and (ii) arrangements satisfactory to the Trust are in place for payment of the Cash Component
and any other cash amounts which may be due, the Trust will accept the order, subject to its right (and the right of the Distributor
and the Adviser) to reject any order until acceptance.
Once the Trust has accepted an order, upon
next determination of the NAV of the shares, the Trust will confirm the issuance of a Creation Unit of the Fund, against receipt
of payment, at such NAV. The Distributor will then transmit a confirmation of acceptance to the Authorized Participant that placed
the order.
The Trust reserves the absolute right to
reject or revoke acceptance of a purchase order transmitted to it by the Distributor in respect of any Fund if (a) the order is
not in proper form; (b) the investor(s), upon obtaining the shares ordered, would own 80% or more of the currently outstanding
shares of any Fund; (c) the Deposit Securities delivered do not conform to the identify and number of shares disseminated through
the facilities of the NSCC for that date by the Adviser, as described above; (d) acceptance of the Deposit Securities would have
certain adverse tax consequences to the Fund; (e) the acceptance of the Portfolio Deposit would, in the opinion of counsel, be
unlawful; (f) the acceptance of the Portfolio Deposit would otherwise, in the discretion of the Trust or the Adviser, have an adverse
effect on the Trust or the rights of beneficial owners; or (g) in the event that circumstances outside the control of the Trust,
the Distributor and the Adviser make it for all practical purposes impossible to process purchase orders. Examples of such circumstances
include acts of God; public service or utility problems resulting in telephone, telecopy or computer failures; fires, floods or
extreme weather conditions; market conditions or activities causing trading halts; systems failures involving computer or other
informational systems affecting the Trust, the Distributor, DTC, NSCC, the Adviser, the Fund’s Custodian, a sub-custodian
or any other participant in the creation process; and similar extraordinary events. The Trust shall notify a prospective purchaser
and/or the Authorized Participant acting on behalf of such person of its rejection of the order of such person. The Trust, the
Fund’s Custodian, any sub-custodian and the Distributor are under no duty, however, to give notification of any defects or
irregularities in the delivery of Portfolio Deposits nor shall either of them incur any liability for the failure to give any such
notification.
Issuance of a Creation Unit.
Except
as provided herein, a Creation Unit of shares of the Fund will not be issued until the transfer of good title to the Trust of the
Deposit Securities and the payment of the Cash Component have been completed. When the applicable local sub-custodian(s) have confirmed
to the Custodian that the required securities included in the Portfolio Deposit (or the cash value thereof) have been delivered
to the account of the applicable local sub-custodian or sub-custodians, the Distributor and the Adviser shall be notified of such
delivery, and the Trust will issue, and cause the delivery of the Creation Unit. Creation Units typically are issued on a “T+3
basis” (that is three Business Days after trade date). However, as discussed in Appendix A, the Fund reserves the right to
settle Creation Unit transactions on a basis other than T+3 in order to accommodate foreign market holiday schedules, to account
for different treatment among foreign and U.S. markets of dividend record dates and ex-dividend dates (that is the last day the
holder of a security can sell the security and still receive dividends payable on the security), and in certain other circumstances.
To the extent contemplated by an Authorized
Participant’s agreement with the Distributor, the Trust will issue Creation Units to such Authorized Participant notwithstanding
the fact that the corresponding Portfolio Deposits have not been received in part or in whole, in reliance on the undertaking of
the Authorized Participant to deliver the missing Deposit Securities as soon as possible, which undertaking shall be secured by
such Authorized Participant’s delivery and maintenance of collateral having a value equal to 110%, which the Adviser may
change from time to time, of the value of the missing Deposit Securities in accordance with the Trust’s then-effective procedures.
Such collateral must be delivered no later than 2:00 p.m., Eastern Time, on the contractual settlement date. The only collateral
that is acceptable to the Trust is cash in U.S. Dollars or an irrevocable letter of credit in form, and drawn on a bank, that is
satisfactory to the Trust. The cash collateral posted by the Authorized Participant may be invested at the risk of the Authorized
Participant, and income, if any, on invested cash collateral will be paid to that Authorized Participant. Information concerning
the Trust’s current procedures for collateralization of missing Deposit Securities is available from the Distributor. The
Authorized Participant Agreement will permit the Trust to buy the missing Deposit Securities at any time and will subject the Authorized
Participant to liability for any shortfall between the cost to the Trust of purchasing such securities and the cash collateral
or the amount that may be drawn under any letter of credit.
In certain cases, Authorized Participants
will create and redeem Creation Units on the same trade date. In these instances, the Trust reserves the right to settle these
transactions on a net basis. All questions as to the number of shares of the security in the Deposit Securities and the validity,
form, eligibility and acceptance for deposit of any securities to be delivered shall be determined by the Trust, and the Trust’s
determination shall be final and binding.
Cash Purchase Method.
When cash
purchases of Creation Units are available or specified for the Fund, they will be effected in essentially the same manner as in-kind
purchases thereof. In addition, the Trust may in its discretion make Creation Units of any of the other funds available for purchase
and redemption in U.S. dollars. In the case of a cash purchase, the investor must pay the cash equivalent of the Deposit Securities
it would otherwise be required to provide through an in-kind purchase, plus the same Cash Component required to be paid by an in-kind
purchaser. In addition, to offset the Trust’s brokerage and other transaction costs associated with using the cash to purchase
the requisite Deposit Securities, the investor will be required to pay a fixed purchase transaction fee, plus an additional variable
charge for cash purchases, which is expressed as a percentage of the value of the Deposit Securities. The transaction fees for
in-kind and cash purchases of Creation Units are described below.
Purchase Transaction Fee.
A fixed
purchase transaction fee payable to the Custodian is imposed on the creation transaction regardless of the number of Creation Units
purchased in the transaction. Purchasers of Creation Units for cash are required to pay an additional variable charge to compensate
the relevant Fund for brokerage and market impact expenses relating to investing in portfolios securities. Where the Trust permits
an in-kind purchaser to substitute cash in lieu of depositing a portion of the Deposit Securities, the purchaser will be assessed
the additional variable charge for cash purchases on the “cash in lieu” portion of its investment. Purchasers of Creation
Units are responsible for the costs of transferring the securities constituting the Deposit Securities to the account of the Trust.
Investors who use the services of a broker, or other such intermediary may be charged a fee for such services. The purchase transaction
fees for in-kind purchases and cash purchases (when available) are listed in the table below. This table is subject to revision
from time to time.
Fund
|
Fee for In-Kind and Cash Purchases
|
Maximum Additional Variable Charge for Cash Purchases
*
|
Global
X Next Emerging & Frontier ETF (___)
|
[___]
|
[___]
|
* As a percentage of the value of the amount invested.
REDEMPTION OF CREATION UNITS
Shares of the Fund may be redeemed only
in Creation Units at their NAV next determined after receipt of a redemption request in proper form by the Distributor. The Trust
will not redeem shares in amounts less than Creation Units. Beneficial owners also may sell shares in the secondary market, but
must accumulate enough shares to constitute a Creation Unit in order to have such shares redeemed by the Trust. There can be no
assurance, however, that there will be sufficient liquidity in the public trading market at any time to permit assembly of a Creation
Unit. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of shares to
constitute a redeemable Creation Unit.
With respect to the Fund the Adviser makes
available through the NSCC prior to the opening of business on the Exchange (currently 9:30 a.m., Eastern Time) on the Business
Day, the identity and number of shares that will be applicable (subject to possible amendment or correction) to redemption requests
received in proper form (as defined below) on that day (“Portfolio Securities”). Portfolio Securities received on redemption
may not be identical to Deposit Securities that are applicable to creation of Creation Units. Unless cash redemptions are available
or specified for the Fund, the redemption proceeds for a Creation Unit generally consist of Portfolio Securities on the Business
Day of the request for redemption, plus cash in an amount equal to the difference between the NAV of the shares being redeemed,
as next determined after a receipt of a request in proper form, and the value of the Portfolio Securities, less the redemption
transaction fee described below. The redemption transaction fee described below is deducted from such redemption proceeds.
A fixed redemption transaction
fee payable to the Custodian is imposed on the redemption transaction. Redemptions of Creation Units for cash are required to pay
an additional variable charge to compensate the relevant Fund for brokerage and market impact expenses relating to disposing of
portfolio securities. The redemption transaction fee for redemptions in kind and for cash and the additional variable charge for
cash redemptions (when cash redemptions are available or specified) are listed in the table below. Investors will also bear the
costs of transferring the Portfolio Deposit from the Trust to their account or on their order. Investors who use the services of
a broker or other such intermediary may be charged a fee for such services.
Fund
|
Fee for In-Kind and Cash Redemptions
|
Maximum Additional Variable Charge for Cash Redemptions*
|
Global X Next Emerging & Frontier ETF (____)
|
[___]
|
[___]
|
*As a percentage of the net asset value per Creation Unit, inclusive
of the standard redemption transaction fee.
Redemption requests in respect of Creation
Units must be submitted to the Distributor by or through an Authorized Participant. Investors other than Authorized Participants
are responsible for making arrangements for a redemption request through an Authorized Participant. An Authorized Participant must
submit an irrevocable redemption request no later than the earlier of (i) 4:00 p.m., Eastern Time or (ii) the closing time of the
trading session on the relevant Fund’s Exchange, on any Business Day in order to receive that Business Day’s NAV.
The Distributor will provide a list of
current Authorized Participants upon request. The Authorized Participant must transmit the request for redemption, in the form
required by the Trust, to the Distributor in accordance with procedures set forth in the Authorized Participant Agreement. Investors
should be aware that their particular broker may not have executed an Authorized Participant Agreement, and that, therefore, requests
to redeem Creation Units may have to be placed by the investor’s broker through an Authorized Participant who has executed
an Authorized Participant Agreement. At any given time there will be only a limited number of broker-dealers that have executed
an Authorized Participant Agreement. Investors making a redemption request should be aware that such request must be in the form
specified by such Authorized Participant. Investors making a request to redeem Creation Units should allow sufficient time to permit
proper submission of the request by an Authorized Participant and transfer of the shares to the Trust’s Transfer Agent; such
investors should allow for the additional time that may be required to effect redemptions through their banks, brokers or other
financial intermediaries if such intermediaries are not Authorized Participants.
Orders to redeem Creation Unit Aggregations
of funds based on foreign indexes must be delivered through an Authorized Participant that has executed an Authorized Participant
Agreement. Investors other than Authorized Participants are responsible for making arrangements for a redemption request to be
made through an Authorized Participant. An order to redeem Creation Unit Aggregations of the Fund is deemed received by the Trust
on the Business Day if: (i) such order is received by the Fund’s Distributor not later than the closing time of the applicable
Exchange on the applicable Business Day; (ii) such order is accompanied or followed by the requisite number of shares of the Fund
specified in such order, which delivery must be made through DTC to the Fund’s Custodian no later than 10:00 a.m., Eastern
Time, on the next Business Day following the day the order was transmitted; and (iii) all other procedures set forth in the Authorized
Participant Agreement are properly followed. Deliveries of Fund securities to redeeming investors generally will be made within
three Business Days. Due to the schedule of holidays in certain countries, however, the delivery of in-kind redemption proceeds
for the Fund may take longer than three Business Days after the day on which the redemption request is received in proper form.
In such cases, the local market settlement procedures will not commence until the end of the local holiday periods as described
in Appendix A.
A redemption request is considered to be
in “proper form” if (i) an Authorized Participant has transferred or caused to be transferred to the Trust’s
Transfer Agent the Creation Unit of shares being redeemed through the book-entry system of DTC so as to be effective by the Exchange
closing time on any Business Day and (ii) a request in form satisfactory to the Trust is received by the Distributor from the Authorized
Participant on behalf of itself or another redeeming investor within the time periods specified above. If the Transfer Agent does
not receive the investor’s shares through DTC’s facilities by 10:00 a.m., Eastern Time, on the Business Day next following
the day that the redemption request is received, the redemption request shall be rejected. Investors should be aware that the deadline
for such transfers of shares through the DTC system may be significantly earlier than the close of business on the Exchange. Those
making redemption requests should ascertain the deadline applicable to transfers of shares through the DTC system by contacting
the operations department of the broker or depositary institution effecting the transfer of the shares.
Upon receiving a redemption request, the
Distributor shall notify the Trust and the Trust’s Transfer Agent of such redemption request. The tender of an investor’s
shares for redemption and the distribution of the cash redemption payment in respect of Creation Units redeemed will be effected
through DTC and the relevant Authorized Participant to the beneficial owner thereof as recorded on the book-entry system of DTC
or the DTC Participant through which such investor holds, as the case may be, or by such other means specified by the Authorized
Participant submitting the redemption request.
In connection with taking delivery of shares
of Portfolio Securities upon redemption of shares of the Fund, a redeeming Beneficial Owner, or Authorized Participant acting on
behalf of such Beneficial Owner, must maintain appropriate security arrangements with a qualified broker-dealer, bank or other
custody providers in the jurisdiction in which any of the Portfolio Securities are customarily traded, to which account such Portfolio
Securities will be delivered.
Deliveries of redemption proceeds by the
Fund generally will be made within three Business Days (that is “T+3”). However, as discussed in Appendix A, the Fund
reserves the right to settle redemption transactions and deliver redemption proceeds on a basis other than T+3 to accommodate foreign
market holiday schedules, to account for different treatment among foreign and U.S. markets of dividend record dates and dividend
ex-dates (that is the last date the holder of a security can sell the security and still receive dividends payable on the security
sold), and in certain other circumstances. For the country relating to the Fund, Appendix A hereto identifies the instances where
more than seven days would be needed to deliver redemption proceeds. Pursuant to an order of the SEC, in respect of the Fund, the
Trust will make delivery of in-kind redemption proceeds within the number of days stated in Appendix A to be the maximum number
of days necessary to deliver redemption proceeds.
If neither the redeeming Beneficial Owner
nor the Authorized Participant acting on behalf of such redeeming Beneficial Owner has appropriate arrangements to take delivery
of the portfolio securities in the applicable jurisdiction and it is not possible to make other such arrangements, or if it is
not possible to effect deliveries of the Portfolio Securities in such jurisdiction, the Trust may in its discretion redeem such
shares in cash, and the redeeming Beneficial Owner will be required to receive its redemption proceeds in cash. In addition, an
investor may request a redemption in cash that the Trust may, in its sole discretion, permit. In either case, the investor will
receive a cash payment equal to the net asset value of its shares based on the NAV of shares of the relevant Fund next determined
after the redemption request is received in proper form (minus a redemption transaction fee and additional variable charge for
cash redemptions specified above, to offset the Trust’s brokerage and other transaction costs associated with the disposition
of Portfolio Securities). The Trust may also, in its sole discretion, upon request of a shareholder, provide such redeemer a portfolio
of securities that differ from the exact composition of the Portfolio Securities but does not differ in NAV. Redemptions of shares
for Deposit Securities will be subject to compliance with applicable U.S. federal and state securities laws and the Fund (whether
or not it otherwise permits cash redemptions) reserves the right to redeem Creation Units for cash to the extent that the Fund
could not lawfully deliver specific Deposit Securities upon redemptions or could not do so without first registering the Deposit
Securities under such laws.
In the event that cash redemptions are
permitted or required by the Trust, proceeds will be paid to the Authorized Participant redeeming shares on behalf of the redeeming
investor as soon as practicable after the date of redemption (within seven calendar days thereafter, except for the instances listed
in Appendix A hereto where more than seven calendar days would be needed).
To the extent contemplated by an Authorized
Participant’s agreement with the Distributor, in the event the Authorized Participant that has submitted a redemption request
in proper form is unable to transfer all or part of the Creation Units to be redeemed to the Trust, at or prior to 10:00 a.m.,
Eastern Time, on the Business Day after the date of submission of such redemption request, the Distributor will nonetheless accept
the redemption request in reliance on the undertaking by the Authorized Participant to deliver the missing shares as soon as possible.
Such undertaking shall be secured by the Authorized Participant’s delivery and maintenance of collateral consisting of cash
having a value equal to 110%, which the Adviser may change from time to time, of the value of the missing shares in accordance
with the Trust’s then-effective procedures. The only collateral that is acceptable to the Trust is cash in U.S. dollars or
an irrevocable letter of credit in form, and drawn on a bank, that is satisfactory to the Trust. The Trust’s current procedures
for collateralization of missing shares require, among other things, that any cash collateral shall be held by the Trust’s
Custodian, and that the fees of the Custodian and any sub-custodians in respect of the delivery, maintenance and redelivery of
the cash collateral shall be payable by the Authorized Participant. The cash collateral posted by the Authorized Participant may
be invested at the risk of the Authorized Participant, and income, if any, on invested cash collateral will be paid to that Authorized
Participant. The Authorized Participant Agreement permits the Trust to purchase the missing shares or acquire the portfolio securities
and the Cash Component underlying such shares at any time and subjects the Authorized Participant to liability for any shortfall
between the cost to the Trust of purchasing such shares, Portfolio Securities or Cash Component and the cash collateral or the
amount that may be drawn under any letter of credit.
Because the portfolio securities of the
Fund may trade on the relevant exchange(s) on days that the Exchange is closed or are otherwise not Business Days for such Fund,
shareholders may not be able to redeem their shares of such Fund, or to purchase or sell shares of such Fund on the Exchange, on
days when the NAV of such Fund could be significantly affected by events in the relevant foreign markets.
The right of redemption may be suspended
or the date of payment postponed with respect to any Fund (1) for any period during which the New York Stock Exchange is closed
(other than customary weekend and holiday closings); (2) for any period during which trading on the New York Stock Exchange is
suspended or restricted; (3) for any period during which an emergency exists as a result of which disposal of the shares of the
Fund’s portfolio securities or determination of its net asset value is not reasonably practicable; or (4) in such other circumstance
as is permitted by the SEC.
TAXES
The following summarizes certain additional
tax considerations generally affecting the Fund and their shareholders that are not described in the Prospectus. No attempt is
made to present a detailed explanation of the tax treatment of the Fund or its shareholders, and the discussions here and in the
Prospectus are not intended as a substitute for careful tax planning. Potential investors should consult their tax advisers with
specific reference to their own tax situations.
The discussions of the federal tax consequences
in the Prospectus and this SAI are based on the Code and the regulations, rulings and decision under it, as in effect on the date
of this SAI. Future legislative or administrative changes or court decisions may significantly change the statements included herein,
and any such changes or decisions may have a retroactive effect with respect to the transactions contemplated herein. This discussion
does not address all aspects of U.S. federal income taxation that may be relevant to shareholders in light of their particular
circumstances or to shareholders subject to special treatment under U.S. federal income tax laws (e.g., certain financial institutions,
insurance companies, dealers in stock or securities, tax-exempt organizations, persons who have entered into hedging transactions
with respect to shares of the Fund, persons who borrow in order to acquire shares, and certain foreign taxpayers). Furthermore,
this discussion does not reflect possible application of the alternative minimum tax (“AMT”). Unless otherwise noted,
this discussion assumes Shares of the Fund are held by U.S. Shareholders and that such Shares are held as capital assets. No representation
is made as to the tax consequences of the operation of any Fund.
U.S. SHAREHOLDER
A U.S. Shareholder is a beneficial owner
of Shares of the Fund that is for U.S. federal income tax purposes:
• a citizen
or individual resident of the United States (including certain former citizens and former long-term residents);
• a domestic
corporation or other entity treated as a corporation for U.S. federal income tax purposes, created or organized in or under the
laws of the United States or any state thereof or the District of Columbia;
• an estate
, the income of which is subject to U.S. federal income taxation regardless of its source; or
• a trust
if a court within the United States is able to exercise primary supervision over its administration and one or more U.S. persons
have the authority to control all of its substantial decisions or the trust has made a valid election in effect under applicable
Treasury Regulations to be treated as a U.S. person.
A “Non-U.S.Shareholder” is
a beneficial owner of Shares of the Fund that is an individual, corporation, trust or estate and is not a U.S. Shareholder. If
a partnership (including any entity treated as a partnership for U.S. federal income tax purposes) holds Shares of the Fund, the
tax treatment of a partner in the partnership generally depends upon the status of the partner and the activities of the partnership.
A prospective Shareholder who is a partner of a partnership holding Shares should consult its tax advisors with respect to the
purchase, ownership and disposition of its Shares.
FEDERAL - GENERAL INFORMATION
The Fund intends to qualify as a regulated
investment company under Subchapter M of Subtitle A, Chapter 1, of the Code. As a regulated investment company, the Fund generally
will be exempt from federal income tax on its net investment income and realized capital gains that it distributes to shareholders,
provided that it distributes an amount equal to at least the sum of 90% of its tax-exempt income and 90% of its investment company
taxable income (net investment income and the excess of net short-term capital gain over net long-term capital loss), if any, for
the year (the “Distribution Requirement”) and satisfies certain other requirements of the Code that are described below.
The Fund intends to make sufficient distributions or deemed distributions the year to avoid liability for corporate income tax.
If the Fund were to fail to make sufficient distributions, it could be liable for corporate income tax and for excise tax in respect
of the shortfall or, if the shortfall is large enough, such Fund could be disqualified as a regulated investment company.
In addition to satisfaction of the Distribution
Requirement, the Fund must derive with respect to a taxable year at least 90% of its gross income from dividends, interest, certain
payments with respect to securities loans and gains from the sale or other disposition of stock or securities or foreign currencies,
or from other income derived with respect to its business of investing in such stock, securities, or currencies or net income derived
from an interest in a qualified publicly traded partnership. A “qualified publicly traded partnership” is generally
defined as a publicly traded partnership under Section 7704 of the Code, which is generally a partnership the interests in which
are “traded on an established securities market” or are “readily tradable on a secondary market (or the substantial
equivalent thereof)”. However, for these purposes, a qualified publicly traded partnership does not include a publicly traded
partnership if 90% or more of its income is described in above.
If a RIC fails this 90% source-of-income test it is no longer
subject to a 35% penalty as long as such failure was due to reasonable cause and not willful neglect. . Instead, the amount of
the penalty for non-compliance is the amount by which the non-qualifying income exceeds one-ninth of the qualifying gross income.
Also, at the close of the quarter of its
taxable year, at least 50% of the value of the Fund’s assets must consist of cash and cash items, U.S. government securities,
securities of other regulated investment companies and securities of other issuers (as to which the Fund does not hold more than
5% of the value of its total assets in securities of such issuer and as to which the Fund does not hold more than 10% of the outstanding
voting securities (including securities of a qualified publicly traded partnership) of such issuer), and no more than 25% of the
value of the Fund’s total assets may be invested in the securities of (i) any one issuer (other than U.S. government securities
and securities of other regulated investment companies), (ii) two or more issuers which such Fund controls and which are engaged
in the same or similar trades or businesses or (iii) one or more qualified publicly traded partnerships. The Fund intends to comply
with these requirements.
If a RIC fails this asset-diversification
test, such RIC, in addition to other cure provisions previously permitted, has a 6-month period to correct any failure without
incurring a penalty if such failure is “de minimis,” meaning that the failure does not exceed the lesser of 1% of the
RIC’s assets, or $10 million. Such cure right is similar to that previously and currently permitted for a REIT.
Similarly if a RIC fails this asset-diversification
test and the failure is not de minimis, a RIC can cure failure if: (a) the RIC files with the Treasury Department a description
of the asset that causes the RIC to fail the diversification tests; (b) the failure is due to reasonable cause and not willful
neglect; and (c) the failure is cured within six months (or such other period specified by the Treasury). In such cases, a tax
is imposed on the RIC equal to the greater of: (a) $50,000 or (b) an amount determined by multiplying the highest rate of corporate
tax (currently 35%) by the amount of net income generated during the period of diversification test failure by the assets that
caused the RIC to fail the diversification test.
If for any taxable year any Fund does not
qualify as a regulated investment company, all of its taxable income will be subject to tax at regular corporate rates without
any deduction for distributions to shareholders. In such event, the shareholders would recognize dividend income on distributions
to the extent of such Fund’s current and accumulated earnings and profits.
The Code imposes a nondeductible 4% excise
tax on regulated investment companies that fail to currently distribute an amount equal to specified percentages of their ordinary
taxable income and capital gain net income (excess of capital gains over capital losses). The Fund intends to make sufficient distributions
or deemed distributions of its ordinary taxable income and capital gain net income the calendar year to avoid liability for this
excise tax.
The Fund intends to distribute annually
to its shareholders all or substantially all of its investment company taxable income, and any net realized long-term capital gains
in excess of net realized short-term capital losses (including any capital loss carryovers). However, if the Fund retains for investment
an amount equal to all or a portion of its net long-term capital gains in excess of its net short-term capital losses (including
any capital loss carryovers), it will be subject to a corporate tax (currently at a maximum rate of 35%) on the amount retained.
In that event, the Fund may designate such retained amounts as undistributed capital gains in a notice to its shareholders who
(a) will be required to include in income for U.S. federal income tax purposes, as long-term capital gains, their proportionate
shares of the undistributed amount, (b) will be entitled to credit their proportionate shares of the tax paid by the Fund on the
undistributed amount against their U.S. federal income tax liabilities, if any, and to claim refunds to the extent their credits
exceed their liabilities, if any, and (c) will be entitled to increase their tax basis, for U.S. federal income tax purposes, in
their shares by an amount equal to the difference between the amount of undistributed capital gains included in the shareholder’s
income and the tax deemed paid by the shareholder. Organizations or persons not subject to U.S. federal income tax on such capital
gains will be entitled to a refund of their pro rata share of such taxes paid by such Fund upon filing appropriate returns or claims
for refund with the Internal Revenue Service.
Distributions of net realized long-term
capital gains, if any, that the Fund designates as capital gains dividends are taxable as long-term capital gains, whether paid
in cash or in shares and regardless of how long a shareholder has held shares of such Fund. All other dividends of the Fund (including
dividends from short-term capital gains) from its current and accumulated earnings and profits (“regular dividends”)
are generally subject to tax as ordinary income except as described below for qualified dividends.
If an individual, trust or estate receives
a regular dividend or qualified dividends qualifying for the long-term capital gains rates and such dividend constitutes an “extraordinary
dividend,” and the individual subsequently recognizes a loss on the sale or exchange of stock in respect of which the extraordinary
dividend was paid, then the loss will be long-term capital loss to the extent of such extraordinary dividend. An “extraordinary
dividend” on common stock for this purpose is generally a dividend (i) in an amount greater than or equal to 10% of the taxpayer’s
tax basis (or trading value) in a share of stock, aggregating dividends with ex-dividend dates within an 85-day period or (ii)
in an amount greater than 20% of the taxpayer’s tax basis (or trading value) in a share of stock, aggregating dividends with
ex-dividend dates within a 365-day period.
Distributions in excess of the Fund’s
current and accumulated earnings and profits will, as to the shareholder, be treated as a tax-free return of capital to the extent
of a shareholder’s basis in his shares of such Fund, and as a capital gain thereafter (if the shareholder holds his shares
of such Fund as capital assets). Shareholders receiving dividends or distributions in the form of additional shares should be treated
for U.S. federal income tax purposes as receiving a distribution in an amount equal to the amount of money that the shareholders
receiving cash dividends or distributions will receive, and should have a cost basis in the shares received equal to such amount.
Dividends paid by the Fund that are attributable to dividends received by the Fund from domestic corporations may qualify for the
federal dividends-received deduction for corporations.
Investors considering buying shares just
prior to a dividend or capital gain distribution should be aware that, although the price of shares just purchased at that time
may reflect the amount of the forthcoming distribution, such dividend or distribution may nevertheless be taxable to them. If the
Fund is the holder of record of any stock on the record date for any dividends payable with respect to such stock, such dividends
will be included in such Fund’s gross income not as of the date received but as of the later of (a) the date such stock became
ex-dividend with respect to such dividends (that is, the date on which a buyer of the stock would not be entitled to receive the
declared, but unpaid, dividends) or (b) the date such Fund acquired such stock. Accordingly, to satisfy its income distribution
requirements, the Fund may be required to pay dividends based on anticipated earnings, and shareholders may receive dividends in
an earlier year than would otherwise be the case.
BACK-UP WITHHOLDING
In certain cases, the Fund will be required
to withhold at the applicable withholding rate, and remit to the U.S. Treasury such amounts withheld from any distributions paid
to a shareholder who: (1) has failed to provide a correct taxpayer identification number; (2) is subject to backup withholding
by the Internal Revenue Service; (3) has failed to certify to the Fund that such shareholder is not subject to backup withholding;
or (4) has not certified that such shareholder is a U.S. person (including a U.S. resident alien).
SECTIONS 351 AND 362
The Trust on behalf of the Fund has the
right to reject an order for a purchase of shares of the Fund if the purchaser (or group of purchasers) would, upon obtaining the
shares so ordered, own 80% or more of the outstanding shares of a given Fund and if, pursuant to Sections 351 and 362 of the Code,
that Fund would have a basis in the securities different from the market value of such securities on the date of deposit. If the
Fund’s basis in such securities on the date of deposit was less than market value on such date, such Fund, upon disposition
of the securities, would recognize more taxable gain or less taxable loss than if its basis in the securities had been equal to
market value. It is not anticipated that the Trust will exercise the right of rejection except in a case where the Trust determines
that accepting the order could result in material adverse tax consequences to the Fund or its shareholders. The Trust also has
the right to require information necessary to determine deemed and beneficial share ownership for purposes of the 80% determination.
QUALIFIED DIVIDEND INCOME
Distributions by the Fund of investment
company taxable income (excluding any short-term capital gains) whether received in cash or shares will be taxable either as ordinary
income or as qualified dividend income, eligible for the reduced maximum rate to individuals of 20% to the extent the Fund receives
qualified dividend income on the securities it holds and such Fund designates the distribution as qualified dividend income. Qualified
dividend income is, in general, dividend income from taxable domestic corporations and certain foreign corporations (e.g., foreign
corporations incorporated in a possession of the United States or in certain countries with a comprehensive tax treaty with the
United States, or the stock of which is readily tradable on an established securities market in the United States). A dividend
will not be treated as qualified dividend income to the extent that (i) the shareholder has not held the shares on which the dividend
was paid for more than 60 days during the 121-day period that begins on the date that is 60 days before the date on which the shares
become ex dividend with respect to such dividend (and the Fund also satisfies those holding period requirements with respect to
the securities it holds that paid the dividends distributed to the shareholder), (ii) the shareholder is under an obligation (whether
pursuant to a short sale or otherwise) to make related payments with respect to substantially similar or related property, or (iii)
the shareholder elects to treat such dividend as investment income under section 163(d)(4)(B) of the Code.
CAPITAL GAINS
Distributions by the Fund of its net short-term
capital gains will be taxable as ordinary income. Capital gain distributions consisting of the Fund’s net capital gains will
be taxable as long-term capital gains.
CORPORATE DIVIDENDS RECEIVED
DEDUCTION
The Fund’s dividends that are paid
to its corporate shareholders and are attributable to qualifying dividends it received from U.S. domestic corporations may be eligible,
in the hands of such shareholders, for the corporate dividends received deduction, subject to certain holding period requirements
and debt financing limitations.
NET CAPITAL LOSS CARRYFORWARDS
To the
extent that the Fund has capital loss carryforwards from prior tax years, those carryforwards will reduce the net capital gains
that can support the Fund’s distribution of capital gain dividends. If the Fund uses net capital losses incurred in taxable
years beginning on or before December 22, 2010 (pre-2011 losses), those carryforwards will not reduce the Fund’s current
earnings and profits, as losses incurred in later years will. As a result, if that Fund then makes distributions of capital gains
recognized during the current year in excess of net capital gains (as reduced by carryforwards), the portion of the excess equal
to pre-2011 losses factoring into net capital gain will be taxable as an ordinary dividend distribution, even though that distributed
excess amount would not have been subject to tax if retained by the Fund. Capital loss carryforwards are reduced to the extent
they offset current-year net realized capital gains, whether the Fund retains or distributes such gains. Beginning in 2011, a RIC
is permitted to carry forward net capital losses indefinitely and may allow losses to retain their original character (as short
or as long-term). For net capital losses recognized prior to such date, such losses are permitted to be carried forward up to 8
years and are characterized as short-term. These capital loss carryforwards may be utilized in future years to offset net realized
capital gains of the Fund, if any, prior to distributing such gains to shareholders.
MEDICARE TAX
For taxable years beginning after December
31, 2012, certain U.S. shareholders, including individuals and estates and trusts, will be subject to an additional 3.8% Medicare
tax on all or a portion of their “net investment income,” which includes dividends from the Fund and net gains from
the disposition of shares of the Fund. U.S. shareholders are urged to consult their own tax advisors regarding the implications
of the additional Medicare tax resulting from an investment in the Fund.
EXCESS INCLUSION INCOME
Certain types of income received by the
Fund from real estate investment Trusts (“REITs”), real estate mortgage investment conduits (“REMICs”),
taxable mortgage pools or other investments may cause the Fund to designate some or all of its distributions as “excess inclusion
income.” To Fund shareholders such excess inclusion income may (1) constitute taxable income, as “unrelated business
taxable income” (“UBTI”) for those shareholders who would otherwise be tax-exempt such as individual retirement
accounts, 401(k) accounts, Keogh plans, pension plans and certain charitable entities; (2) as UBTI cause a charitable remainder
Trust to be subject to a 100% excise tax on its UBTI; (3) not be offset against net operating losses for tax purposes; (4) not
be eligible for reduced U.S. withholding for non-U.S. shareholders even from tax treaty countries; and (5) cause the Fund to be
subject to tax if certain “disqualified organizations” as defined by the Code are Fund shareholders.
TAXATION OF INCOME FROM
CERTAIN FINANCIAL INSTRUMENTS AND PFICS
The tax principles applicable to transactions
in financial instruments and futures contracts and options that may be engaged in by the Fund including the effect of fluctuations
in the value of foreign currencies, and investments in passive foreign investment companies (“PFICs”), are complex
and, in some cases, uncertain. Such transactions and investments may cause the Fund to recognize taxable income prior to the receipt
of cash, thereby requiring such Fund to liquidate other positions, or to borrow money, so as to make sufficient distributions to
shareholders to avoid corporate-level tax. Moreover, some or all of the taxable income recognized may be ordinary income or short-term
capital gain, so that the distributions may be taxable to shareholders as ordinary income.
In addition, in the case of any shares
of a PFIC in which the Fund invests, such Fund may be liable for corporate-level tax on any ultimate gain or distributions on the
shares if such Fund fails to make an election to recognize income annually during the period of its ownership of the shares.
Options, Futures, Forward Contracts,
Swap Agreements, Hedges, Straddles and Other Transactions
.
In general, option premiums received by the Fund are not
immediately included in the income of the Fund. Instead, the premiums are recognized (i) when the option contract expires,
(ii) the option is exercised by the holder, or (iii) the Fund transfers or otherwise terminates the option (e.g., through
a closing transaction). If a call option written by the Fund is exercised and the Fund sells or delivers the underlying stock,
the Fund generally will recognize capital gain or loss equal to (a) sum of the strike price and the option premium received
by the Fund minus (b) the Fund’s basis in the stock. Such gain or loss generally will be short-term or long-term depending
upon the holding period of the underlying stock. If securities are purchased by the Fund pursuant to the exercise of a put option
written by it, the Fund generally will subtract the premium received for purposes of computing its cost basis in the securities
purchased. The gain or loss that may arise in respect of any termination of the Fund’s obligation under an option other than
through the exercise of the option will be short-term gain or loss, depending on whether the premium income received by the Fund
is greater or less than the amount paid by the Fund (if any) in terminating the transaction. Thus, for example, if an option written
by the Fund expires unexercised, the Fund generally will recognize short-term gain equal to the premium received.
Certain covered call writing activities
of the Fund may trigger the U.S. federal income tax straddle rules of Section 1092 of the Internal Revenue Code, requiring
that losses be deferred and holding periods be tolled on offsetting positions in options and stocks deemed to constitute substantially
similar or related property. Options on single stocks that are not “deep in the money” may constitute qualified covered
calls, which generally are not subject to the straddle rules; the holding period on stock underlying qualified covered calls that
are “in the money” although not “deep in the money” will be suspended during the period that such calls
are outstanding. Thus, the straddle rules and the rules governing qualified covered calls could cause gains that would otherwise
constitute long-term capital gains to be treated as short-term capital gains, and distributions that would otherwise constitute
“qualified dividend income” or qualify for the dividends-received deduction to fail to satisfy the holding period requirements
and therefore to be taxed as ordinary income or fail to qualify for the 70% dividends-received deduction, as the case may be.
The tax treatment of certain futures contracts
entered into by the Fund as well as listed non-equity options written or purchased by the Fund on U.S. exchanges (including options
on futures contracts, equity indices and debt securities) will be governed by section 1256 of the Internal Revenue Code (“Section 1256
Contracts”). Gains or losses on Section 1256 Contracts generally are considered 60% long-term and 40% short-term capital
gains or losses (“60/40”), although certain foreign currency gains and losses from such contracts may be treated as
ordinary in character. Also, Section 1256 Contracts held by the Fund at the end of the taxable year (and, for purposes of
the 4% excise tax, on certain other dates as prescribed under the Internal Revenue Code) are “marked to market” with
the result that unrealized gains or losses are treated as though they were realized and the resulting gain or loss is treated as
ordinary or 60/40 gain or loss, as applicable.
In addition to the special rules described
above in respect of futures and options transactions, the Fund’s transactions in other derivative instruments (e.g., forward
contracts and swap agreements) as well as any of its other hedging, short sale or similar transactions, may be subject to one or
more special tax rules (e.g., notional principal contract, straddle, constructive sale, wash sale and short sale rules). These
rules may affect whether gains and losses recognized by the Fund are treated as ordinary or capital or as short-term or long-term,
accelerate the recognition of income or gains to the Fund, defer losses to the Fund, and cause adjustments in the holding periods
of the Fund’s securities. These rules could therefore affect the amount, timing and/or character of distributions to shareholders.
Because these and other tax rules applicable to these types of transactions are in some cases uncertain under current law, an adverse
determination or future guidance by the IRS with respect to these rules (which determination or guidance may be retroactive) may
affect whether the Fund has made sufficient distributions, and otherwise satisfied the relevant requirements, to maintain its qualification
as a regulated investment company and avoid the Fund-level tax. The Fund will monitor its transactions, will make appropriate tax
elections and will make appropriate entries in its books and records in order to mitigate the effect of these rules.
Certain of the Fund’s investments
in derivative instruments and foreign currency-denominated instruments, and any of the Fund’s transactions in foreign currencies
and hedging activities, are likely to produce a difference between the Fund’s book income and the sum of its taxable income
and net tax-exempt income (if any). If there is a difference between the Fund’s book income and the sum of its taxable income
and net tax-exempt income (if any), the Fund may be required to distribute amounts in excess of its book income or a portion of
Fund distributions may be treated as a return of capital to shareholders. If the Fund’s book income exceeds the sum of its
taxable income (including realized capital gains) and net tax-exempt income (if any), the distribution (if any) of such excess
generally will be treated as (i) a dividend to the extent of the Fund’s remaining earnings and profits (including earnings
and profits arising from tax-exempt income), (ii) thereafter, as a return of capital to the extent of the recipient’s basis
in the shares, and (iii) thereafter, as gain from the sale or exchange of a capital asset. If the Fund’s book income is less
than the sum of its taxable income and net tax-exempt income (if any), the Fund could be required to make distributions exceeding
book income to qualify as a regulated investment company that is accorded special tax treatment.
Commodities
.
In August, 2011,
the Internal Revenue Service (“IRS”) announced that it would stop issuing private letter rulings authorizing favorable
tax treatment for funds that invest indirectly in commodities or derivatives based upon commodities. The IRS has previously issued
a number of private letter rulings to funds in this area, concluding that such investments generate “qualifying income”
for RIC qualification purposes. It is unclear how long this suspension will last. The IRS has not indicated that any previously
issued rulings in this area will be affected by this suspension This suspension of guidance by the IRS means that the tax treatment
of such investments is now subject to some uncertainty.
Original Issue Discount, Pay-In-Kind
Securities, Market Discount and Commodity-Linked Notes
.
Some debt obligations with a fixed maturity date of more than
one year from the date of issuance (and zero-coupon debt obligations with a fixed maturity date of more than one year from the
date of issuance) that may be acquired by the Fund may be treated as debt obligations that are issued originally at a discount.
Generally, the amount of the original issue discount (“OID”) is treated as interest income and is included in the Fund’s
taxable income (and required to be distributed by the Fund) over the term of the debt obligation, even though payment of that amount
is not received until a later time, upon partial or full repayment or disposition of the debt security.
Some debt obligations (with a fixed maturity
date of more than one year from the date of issuance) that may be acquired by the Fund in the secondary market may be treated as
having “market discount.” Very generally, market discount is the excess of the stated redemption price of a debt obligation
(or in the case of an obligations issued with OID, its “revised issue price”) over the purchase price of such obligation.
Generally, any gain recognized on the disposition of, and any partial payment of principal on, a debt obligation having market
discount is treated as ordinary income to the extent the gain, or principal payment, does not exceed the “accrued market
discount” on such debt obligation. Alternatively, the Fund may elect to accrue market discount currently, in which case the
Fund will be required to include the accrued market discount in the Fund’s income (as ordinary income) and thus distribute
it over the term of the debt security, even though payment of that amount is not received until a later time, upon partial or full
repayment or disposition of the debt security. The rate at which the market discount accrues, and thus is included in the Fund’s
income, will depend upon which of the permitted accrual methods the Fund elects. In the case of higher-risk securities, the amount
of market discount may be unclear. See “Higher-Risk Securities.”
Some debt obligations (with a fixed maturity
date of one year or less from the date of issuance) that may be acquired by the Fund may be treated as having “acquisition
discount” (very generally, the excess of the stated redemption price over the purchase price), or OID in the case of certain
types of debt obligations. The Fund will be required to include the acquisition discount, or OID, in income (as ordinary income)
over the term of the debt obligation, even though payment of that amount is not received until a later time, upon partial or full
repayment or disposition of the debt security. The Fund may make one or more of the elections applicable to debt obligations having
acquisition discount, or OID, which could affect the character and timing of recognition of income.
In addition, payment-in-kind securities
will, and commodity-linked notes may, give rise to income that is required to be distributed and is taxable even though the Fund
holding the security receives no interest payment in cash on the security during the year.
If the Fund holds the foregoing kinds of
securities, it may be required to pay out as an income distribution the year an amount that is greater than the total amount of
cash interest the Fund actually received. Such distributions may be made from the cash assets of the Fund or by liquidation of
portfolio securities, if necessary (including when it is not advantageous to do so). The Fund may realize gains or losses from
such liquidations. In the event the Fund realizes net capital gains from such transactions, its shareholders may receive a larger
capital gain distribution than they would in the absence of such transactions.
Higher-Risk Securities
.
To
the extent such investments are permissible for the Fund, the Fund may invest in debt obligations that are in the lowest rating
categories or are unrated, including debt obligations of issuers not currently paying interest or who are in default. Investments
in debt obligations that are at risk of or in default present special tax issues for the Fund. Tax rules are not entirely clear
about issues such as when the Fund may cease to accrue interest, OID or market discount, when and to what extent deductions may
be taken for bad debts or worthless securities and how payments received on obligations in default should be allocated between
principal and income. In limited circumstances, it may also not be clear whether the Fund should recognize market discount on a
debt obligation, and if so, what amount of market discount the Fund should recognize. These and other related issues will be addressed
by the Fund when, as and if it invests in such securities, in order to seek to ensure that it distributes sufficient income to
preserve its status as a regulated investment company and does not become subject to U.S. federal income or excise tax.
Issuer Deductibility of Interest
.
A portion of the interest paid or accrued on certain high yield discount obligations owned by the Fund may not be deductible
to (and thus, may affect the cash flow of) the issuer. If a portion of the interest paid or accrued on certain high yield discount
obligations is not deductible, that portion will be treated as a dividend for purposes of the corporate dividends-received deduction.
In such cases, if the issuer of the high yield discount obligations is a domestic corporation, dividend payments by the Fund may
be eligible for the dividends-received deduction to the extent of the deemed dividend portion of such accrued interest.
Interest paid on debt
obligations owned by the Fund, if any, that are considered for U.S. tax purposes to be payable in the equity of the issuer or a
related party will not be deductible to the issuer, possibly affecting the cash flow of the issuer.
Tax-Exempt Shareholders
.
A
tax-exempt shareholder could recognize UBTI by virtue of its investment in the Fund if shares in the Fund constitute debt-financed
property in the hands of the tax-exempt shareholder within the meaning of Internal Revenue Code Section 514(b). Furthermore,
a tax-exempt shareholder may recognize UBTI if the Fund recognizes “excess inclusion income” derived from direct or
indirect investments in residual interests in REMICs or equity interests in TMPs if the amount of such income recognized by the
Fund exceeds the Fund’s investment company taxable income (after taking into account deductions for dividends paid by the
Fund).
In addition, special tax consequences apply
to charitable remainder trusts (“CRTs”) that invest in regulated investment companies that invest directly or indirectly
in residual interests in REMICs or equity interests in TMPs. Under legislation enacted in December 2006, a CRT (as defined
in section 664 of the Internal Revenue Code) that realizes any UBTI for a taxable year, must pay an excise tax annually of an amount
equal to such UBTI. Under IRS guidance issued in October 2006, a CRT will not recognize UBTI solely as a result of investing
in the Fund that recognizes “excess inclusion income.” Rather, if at any time during any taxable year a CRT (or one
of certain other tax-exempt shareholders, such as the United States, a state or political subdivision, or an agency or instrumentality
thereof, and certain energy cooperatives) is a record holder of a share in the Fund that recognizes “excess inclusion income,”
then the regulated investment company will be subject to a tax on that portion of its “excess inclusion income” for
the taxable year that is allocable to such shareholders, at the highest federal corporate income tax rate. The extent to which
this IRS guidance remains applicable in light of the December 2006 legislation is unclear. To the extent permitted under the
1940 Act, the Fund may elect to specially allocate any such tax to the applicable CRT, or other shareholder, and thus reduce such
shareholder’s distributions for the year by the amount of the tax that relates to such shareholder’s interest in the
Fund. The Fund has not yet determined whether such an election will be made. CRTs and other tax-exempt investors are urged to consult
their tax advisers concerning the consequences of investing in the Fund.
Passive Foreign Investment Companies.
A passive foreign investment company (“PFIC”) is any foreign corporation: (i) 75% or more of the gross income
of which for the taxable year is passive income, or (ii) the average percentage of the assets of which (generally by value,
but by adjusted tax basis in certain cases) that produce or are held for the production of passive income is at least 50%. Generally,
passive income for this purpose means dividends, interest (including income equivalent to interest), royalties, rents, annuities,
the excess of gains over losses from certain property transactions and commodities transactions, and foreign currency gains. Passive
income for this purpose does not include rents and royalties received by the foreign corporation from active business and certain
income received from related persons.
Equity investments by the Fund in certain
PFICs could potentially subject the Fund to a U.S. federal income tax or other charge (including interest charges) on the distributions
received from the PFIC or on proceeds received from the disposition of shares in the PFIC. This tax cannot be eliminated by making
distributions to Fund shareholders. However, the Fund may elect to avoid the imposition of that tax. For example, if the Fund is
in a position to and elects to treat a PFIC as a “qualified electing fund” (i.e., make a “QEF election”),
the Fund will be required to include its share of the PFIC s income and net capital gains annually, regardless of whether it receives
any distribution from the PFIC. Alternatively, the Fund may make an election to mark the gains (and to a limited extent losses)
in its PFIC holdings “to the market” as though it had sold and repurchased its holdings in those PFICs on the last
day of the Fund’s taxable year. Such gains and losses are treated as ordinary income and loss. The QEF and mark-to-market
elections may accelerate the recognition of income (without the receipt of cash) and increase the amount required to be distributed
by the Fund to avoid taxation. Making either of these elections therefore may require the Fund to liquidate other investments (including
when it is not advantageous to do so) to meet its distribution requirement, which also may accelerate the recognition of gain and
affect the Fund’s total return. Dividends paid by PFICs will not be eligible to be treated as “qualified dividend income.”
Because it is not always possible to identify
a foreign corporation as a PFIC, the Fund may incur the tax and interest charges described above in some instances.
Foreign Currency Transactions
.
The Fund’s transactions in foreign currencies, foreign currency-denominated debt obligations and certain foreign currency
options, futures contracts and forward contracts (and similar instruments) may give rise to ordinary income or loss to the extent
such income or loss results from fluctuations in the value of the foreign currency concerned. Any such net gains could require
a larger dividend toward the end of the calendar year. Any such net losses will generally reduce and potentially require the re-characterization
of prior ordinary income distributions. Such ordinary income treatment may accelerate Fund distributions to shareholders and increase
the distributions taxed to shareholders as ordinary income. Any net ordinary losses so created cannot be carried forward by the
Fund to offset income or gains earned in subsequent taxable years.
Shareholder Reporting
Obligations With Respect to Foreign Financial Assets.
Certain individuals (and, if provided in
future guidance, certain domestic entities) must disclose annually their interests in “specified foreign financial assets”
on IRS Form 8938, which must be attached to their U.S. federal income tax returns for taxable years beginning after March 18, 2010.
The IRS has not yet released a copy of the Form 8938 and has suspended the requirement to attach Form 8938 for any taxable year
for which an income tax return is filed before the release of Form 8938. Following Form 8938’s release, individuals will
be required to attach to their next income tax return required to be filed with the IRS a Form 8938 for the taxable year for which
the filing of Form 8938 was suspended. Until the IRS provides more details regarding this reporting requirement, including in Form
8938 itself and related Treasury regulations, it remains unclear under what circumstances, if any, a shareholder’s (indirect)
interest in the Fund’s “specified foreign financial assets,” if any, will be required to be reported on this
Form 8938.
Other Reporting and
Withholding Requirements.
Rules enacted in March 2010 require the
reporting to the IRS of direct and indirect ownership of foreign financial accounts and foreign entities by U.S. persons. Failure
to provide this required information can result in a 30% withholding tax on certain payments (“withholdable payments”)
made after December 31, 2012. Specifically, withholdable payments subject to this 30% withholding tax include payments of U.S.-source
dividends and interest made on or after January 1, 2014, and payments of gross proceeds from the sale or other disposal of property
that can produce U.S.-source dividends or interest made on or after January 1, 2015.
The IRS has issued only very preliminary
guidance with respect to these new rules; their scope remains unclear and potentially subject to material change. Very generally,
it is possible that distributions made by the Fund after the dates noted above (or such later dates as may be provided in future
guidance) to a shareholder, including a distribution in redemption of shares and a distribution of income or gains otherwise exempt
from withholding under the rules applicable to non-U.S. shareholders described above (e.g., Capital Gain Dividends, Short-Term
Capital Gain Dividends and interest-related dividends, as described above) will be subject to the new 30% withholding requirement.
Payments to a foreign shareholder that is a “foreign financial institution” will generally be subject to withholding,
unless such shareholder enters into a timely agreement with the IRS. Payments to shareholders that are U.S. persons or foreign
individuals will generally not be subject to withholding, so long as such shareholders provide the Fund with such certifications
or other documentation, including, to the extent required, with regard to such shareholders’ direct and indirect owners,
as the Fund requires to comply with the new rules. Persons investing in the Fund through an intermediary should contact their intermediary
regarding the application of the new reporting and withholding regime to their investments in the Fund.
Shareholders are urged to consult a tax advisor regarding this
new reporting and withholding regime, in light of their particular circumstances.
SALES OF SHARES
Upon the sale or exchange of his shares,
a shareholder will realize a taxable gain or loss equal to the difference between the amount realized and his basis in his shares.
A redemption of shares by the Fund will be treated as a sale for this purpose. Such gain or loss will be treated as capital gain
or loss if the shares are capital assets in the shareholder’s hands, and will be long-term capital gain or loss if the shares
are held for more than one year and short-term capital gain or loss if the shares are held for one year or less. Any loss realized
on a sale or exchange will be disallowed to the extent the shares disposed of are replaced, including replacement through the reinvesting
of dividends and capital gains distributions in the Fund, within a 61-day period beginning 30 days before and ending 30 days after
the disposition of the shares. In such a case, the basis of the shares acquired will be increased to reflect the disallowed loss.
Any loss realized by a shareholder on the sale of the Fund share held by the shareholder for six months or less will be treated
for U.S. federal income tax purposes as a long-term capital loss to the extent of any distributions or deemed distributions of
long-term capital gains received by the shareholder with respect to such share.
OTHER TAXES
Dividends, distributions and redemption
proceeds may also be subject to additional state, local and foreign taxes depending on the shareholder’s particular situation.
FOREIGN TAXES
It is expected that certain income of the
Fund will be subject to foreign withholding taxes and other taxes imposed by countries in which the Fund invest. If the Fund is
liable for foreign income taxes, including such withholding taxes, such Fund may meet the requirements of the Code for “passing
through” to its shareholders the foreign taxes paid, but there can be no assurance that the Fund will be able to do so. Under
the Code, if more than 50% of the value of the Fund’s total assets at the close of the taxable year consists of stock or
securities of foreign corporations, such Fund may file an election with the Internal Revenue Service to “pass through”
to the Fund’s shareholders the amount of foreign income taxes paid by the Fund. The Fund expect to be able to make this election,
though no assurance can be given that they will be able to do so. Pursuant to this election, a shareholder (a) will include in
gross income (in addition to taxable dividends actually received) the shareholder’s pro rata share of the foreign income
taxes paid by the Fund; (b) will treat the shareholder’s pro rata share of such foreign income taxes as having been paid
by the shareholder; and (c) may, subject to certain limitations, be entitled either to deduct the shareholder’s pro rata
share of such foreign income taxes in computing the shareholder’s taxable income or to use it as a foreign tax credit against
U.S. income taxes. Shortly after any year for which the Fund makes such a pass-through election, the Fund will report to its shareholders,
in writing, the amount per share of such foreign tax that must be included in the shareholder’s gross income and the amount
which will be available for deduction or credit.
If the Fund does not make the election,
any foreign taxes paid or accrued will represent an expense to such Fund, which will reduce its net investment income. Absent this
election, shareholders will not be able to claim either a credit or deduction for their pro rata shares of such taxes paid by the
Fund, nor will shareholders be required to treat their pro rata shares of such taxes as amounts distributed to them.
The rules governing foreign tax credits
are complex and, therefore, shareholders should consult their own tax Advisors regarding the availability of foreign tax credits
in their particular circumstances.
TAXATION OF NON-U.S. SHAREHOLDERS
Dividends paid by the Fund to non-U.S.
shareholders are generally subject to withholding tax at a 30% rate or a reduced rate specified by an applicable income tax treaty
to the extent derived from investment income and short-term capital gains. In order to obtain a reduced rate of withholding, a
non-U.S. shareholder will be required to provide an IRS Form W-8BEN certifying its entitlement to benefits under a treaty. The
withholding tax does not apply to regular dividends paid to a non-U.S. shareholder who provides a Form W-8ECI, certifying that
the dividends are effectively connected with the non-U.S. shareholder’s conduct of a trade or business within the United
States. Instead, the effectively connected dividends will be subject to regular U.S. income tax as if the non-U.S. shareholder
were a U.S. shareholder. A non-U.S. corporation receiving effectively connected dividends may also be subject to additional “branch
profits tax” imposed at a rate of 30% (or lower treaty rate). A non-U.S. shareholder who fails to provide an IRS Form W-8BEN
or other applicable form may be subject to backup withholding at the appropriate rate.
In general, United States federal withholding
tax will not apply to any gain or income realized by a non-U.S. shareholder in respect of any distributions of net long-term capital
gains over net short-term capital losses, exempt-interest dividends, or upon the sale or other disposition of shares of the Fund.
For foreign shareholders of the Fund a
distribution attributable to such Fund’s sale of a real estate investment trust or other U.S. real property holding company
will be treated as real property gain subject to 35% withholding tax if 50% or more of the value of such Fund’s assets are
invested in real estate investment trusts and other U.S. real property holding corporations and if the foreign shareholder has
held more than 5% of a class of stock at any time during the one-year period ending on the date of the distribution. A distribution
from the Fund will be treated as attributable to a U.S. real property interest only if such distribution is attributable to a distribution
received by such Fund from a real estate investment trust. Restrictions apply regarding wash sales and substitute payment transactions.
COST BASIS REPORTING
As of January 1, 2012, federal law requires
that mutual fund companies report their shareholders' cost basis, gain/loss, and holding period to the Internal Revenue Service
on the Fund’s shareholders’ Consolidated Form 1099s when “covered” securities are sold. Covered securities
are any regulated investment company and/or dividend reinvestment plan shares acquired on or after January 1, 2012.
The Fund will choose or has chosen a standing
(default) tax lot identification method for all shareholders. A tax lot identification method is the way the Fund will determine
which specific shares are deemed to be sold when there are multiple purchases on different dates at differing net asset values,
and the entire position is not sold at one time. The Fund’s standing tax lot identification method is the method covered
shares will be reported on your Consolidated Form 1099 if you do not select a specific tax lot identification method. You may choose
a method different than the Fund’s standing method and will be able to do so at the time of your purchase or upon the sale
of covered shares. Please refer to the appropriate Internal Revenue Service regulations or consult your tax advisor with regard
to your personal circumstances. The Fund's shareholders will be notified as to which default tax lot identification method the
Fund will use.
For those securities defined as "covered"
under current Internal Revenue Service cost basis tax reporting regulations, the Fund is responsible for maintaining accurate cost
basis and tax lot information for tax reporting purposes. The Fund is not responsible for the reliability or accuracy of the information
for those securities that are not "covered." The Fund and its service providers do not provide tax advice. You should
consult independent sources, which may include a tax professional, with respect to any decisions you may make with respect to choosing
a tax lot identification method.
REPORTING
If a shareholder recognizes a loss with
respect to the Fund’s shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder,
the shareholder may be required to file with the Internal Revenue Service a disclosure statement on Form 8886. Direct shareholders
of portfolio securities are in many cases exempted from this reporting requirement, but under current guidance, shareholders of
a regulated investment company are not exempted. The fact that a loss is reportable under these regulations does not affect the
legal determination of whether the taxpayer’s treatment of the loss is proper. Shareholders should consult their tax Advisors
to determine the applicability of these regulations in light of their individual circumstances. Under recently enacted legislation,
certain tax-exempt entities and their managers may be subject to excise tax if they are parties to certain reportable transactions.
The foregoing discussion is a summary only and is not intended
as a substitute for careful tax planning. Purchasers of shares should consult their own tax advisers as to the tax consequences
of investing in such shares, including under state, local and foreign tax laws. Finally, the foregoing discussion is based on applicable
provisions of the Code, regulations, judicial authority and administrative interpretations in effect on the date of this SAI. Changes
in applicable authority could materially affect the conclusions discussed above, and such changes often occur.
NET ASSET
VALUE
The NAV for the Fund is calculated by deducting
all of the Fund’s liabilities (including accrued expenses) from the total value of its assets (including the securities held
by the Fund plus any cash or other assets, including interest and dividends accrued but not yet received) and dividing the result
by the number of shares outstanding, and generally rounded to the nearest cent, although the Fund reserves the right to calculate
its NAV to more than two decimal places. The NAV for the Fund will generally be determined by SEIGFS once daily Monday through
Friday generally as of the regularly scheduled close of business of the NYSE (normally 4:00 p.m. Eastern Time) on the day that
the NYSE is open for trading, based on prices at the time of closing, provided that (a) any assets or liabilities denominated in
currencies other than the U.S. dollar shall be translated into U.S. dollars at the prevailing market rates on the date of valuation
as quoted by one or more major banks or dealers that makes a two-way market in such currencies (or a data service provider based
on quotations received from such banks or dealers); and (b) U.S. fixed-income assets may be valued as of the announced closing
time for trading in fixed-income instruments on any day that the Bond Market Association announces an early closing time.
In calculating the Fund’s NAV, the
Fund’s investments are generally valued using market valuations. In the event that current market valuations are not readily
available or such valuations do not reflect current market values, the affected investments will be valued using fair value pricing
pursuant to the pricing policy and procedures approved by the Board of Trustees. A market valuation generally means a valuation
(i) obtained from an exchange, a pricing service, or a major market maker (or dealer), (ii) based on a price quotation or other
equivalent indication of value supplied by an exchange, a pricing service, or a major market maker (or dealer) or (iii) based on
amortized cost. In the case of shares of funds that are not traded on an exchange, a market valuation means such fund’s published
net asset value per share. SEIGFS may use various pricing services or discontinue the use of any pricing service. A price obtained
from a pricing service based on such pricing service’s valuation matrix may be considered a market valuation.
The value of assets denominated in foreign
currencies is converted into U.S. dollars using exchange rates deemed appropriate by the Adviser as investment adviser. Any use
of fair value prices, current market valuations or exchange rates different from the prices and rates used by the Index Providers
may adversely affect the Fund’s ability to track its underlying index.
DIVIDENDS
AND DISTRIBUTIONS
GENERAL POLICIES
Dividends from net investment income, including
any net foreign currency gains, are declared and paid at least annually and any net realized securities gains are distributed at
least annually. To improve tracking error or comply with the distribution requirements of the Internal Revenue Code of 1986, dividends
may be declared and paid more frequently than annually for certain Funds. Dividends and securities gains distributions are distributed
in U.S. dollars and cannot be automatically reinvested in additional shares of the Fund. The Trust reserves the right to declare
special distributions if, in its reasonable discretion, such action is necessary or advisable to preserve the status of the Fund
as a registered investment company (“RIC”) or to avoid imposition of income or excise taxes on undistributed income.
Dividends and other distributions of shares
are distributed on a pro rata basis to Beneficial Owners of such shares. Dividend payments are made through DTC Participants and
Indirect Participants to Beneficial Owners then of record with proceeds received from the Fund.
DIVIDEND REINVESTMENT SERVICE
No dividend reinvestment service is provided
by the Trust. Broker-dealers may make available the DTC book-entry Dividend Reinvestment Service for use by Beneficial Owners of
Funds for reinvestment of their dividend distributions. Beneficial Owners should contact their broker to determine the availability
and costs of the service and the details of participation therein. Brokers may require Beneficial Owners to adhere to specific
procedures and timetables. If this service is available and used, dividend distributions of both income and realized gains will
be automatically reinvested in additional whole shares of the same Fund purchased in the secondary market.
OTHER INFORMATION
INDEPENDENT TRUSTEE COUNSEL
Dechert LLP, with offices at 1775 I Street Washington, DC 20006-2401,
is counsel to the Independent Trustees of the Fund.
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
Ernst & Young LLP serves as the independent
registered public accounting firm of the Trust, audits the Fund’s financial statements and may perform other services.
SECURITIES LENDING AGENT
Citibank, N.A. (“Citi”) acts
as the securities lending agent for the Trust. In its capacity as securities lending agent, Citi, among other things, enters into
and maintains securities loan agreements with borrowers, negotiates fees with borrowers, delivers securities to borrowers, receives
collateral from borrowers in connection with the loan, holds and safekeeps the collateral on behalf of the Trust portfolios and
invests the cash collateral in accordance with the Adviser's instructions. The securities lending agents will receive fees from
the Fund and such fee will be calculated on, and deducted from, that Fund's securities lending revenues.
CONTROL PERSONS AND PRINCIPAL
SHAREHOLDERS
As of the date of this SAI, no entity beneficially
owned any voting securities of the Fund.
ADDITIONAL INFORMATION
The Prospectus and this SAI do not contain
all the information included in the Registration Statement filed with the SEC under the Securities Act with respect to the securities
offered by the Trust’s Prospectus. Certain portions of the Registration Statement have been omitted from the Prospectus and
this SAI pursuant to the rules and regulations of the SEC. The Registration Statement, including the exhibits filed therewith,
may be examined at the office of the SEC in Washington, D.C.
Statements contained in the Prospectus
or in this SAI as to the contents of any contract or other documents referred to are not necessarily complete, and in the instance
reference is made to the copy of such contract or other document filed as an exhibit to the Registration Statement of which the
Prospectus and this SAI form a part, the such statement being qualified in all respects by such reference.