STATEMENT OF ADDITIONAL INFORMATION
February 28, 2020
DAVIS SELECT U.S. EQUITY ETF
DAVIS SELECT INTERNATIONAL ETF
DAVIS SELECT WORLDWIDE ETF
DAVIS SELECT FINANCIAL ETF
Each an Authorized Series of
Davis Fundamental ETF Trust
2949 East Elvira Road, Suite 101
Tucson, Arizona 85756
1-800-279-0279
This statement of additional information is not a prospectus and should be read in conjunction with the Funds’ prospectus dated February 28, 2020. This statement of additional information
incorporates the prospectus by reference. A copy of the Funds’ prospectus may be obtained, without charge, by calling Investor Services at 1-800-279-0279 or by visiting our website at www.davisetfs.com.
The Funds’ most recent annual report and semi-annual report to shareholders are separate documents that are available on request and without charge by calling Investor Services.
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Ticker Symbol
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Davis Select U.S. Equity ETF
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DUSA
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Davis Select International ETF
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DINT
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Davis Select Worldwide ETF
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DWLD
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Davis Select Financial ETF
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DFNL
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Principal U.S. Listing Exchange for each ETF: NASDAQ
Contents
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SECTION I: INVESTMENT OBJECTIVES, STRATEGIES, RISKS AND RESTRICTIONS
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3
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General Information
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3
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Continuous Offering.
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3
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Investment Objective
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4
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Non-Principal Investment Strategies and Risks
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4
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Investment Restrictions
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24
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Exchange Listing and Trading
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27
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SECTION II: THE TRUST AND KEY PERSONS
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28
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Organization of the Trust
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28
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Trustees and Officers
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28
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Trustees
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28
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Independent Trustees’ Compensation
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29
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Officers
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29
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Standing Committees of the Board of Trustees
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30
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Risk Oversight
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31
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Trustees’ Fund Holdings
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32
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Independent Trustees’ Affiliations and Transactions
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32
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Certain Shareholders of the Funds
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32
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Investment Advisory Services
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34
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Portfolio Managers
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35
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Disclosure of Portfolio Holdings
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37
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Book Entry Only System
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38
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Other Important Service Providers
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38
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SECTION III: PURCHASE AND REDEMPTION OF CREATION UNITS
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40
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SECTION IV: GENERAL INFORMATION
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45
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Determining the Price of Shares
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45
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Dividends and Distributions
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45
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Federal Income Taxes
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46
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General Considerations
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51
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Procedures and Shareholder Rights are Described by Current Prospectus and Other Disclosure Documents
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51
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APPENDIX A: QUALITY RATINGS OF DEBT SECURITIES
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52
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APPENDIX B: SUMMARY OF THE ADVISER’S PROXY VOTING POLICIES AND PROCEDURES (AUGUST 2008)
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54
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Statement of Additional Information | Davis Fundamental ETF Trust | 2
Section I:
Investment Objectives, Strategies, Risks and Restrictions
This statement of additional information (“SAI”) supplements and should be read in conjunction with the prospectus for Davis Select U.S. Equity ETF, Davis Select International ETF, Davis
Select Worldwide ETF, and Davis Select Financial ETF (each a “Fund” and jointly the “Funds”).
The Adviser and Sub-Adviser. The Funds are managed by Davis Selected Advisers, L.P. (the “Adviser”) and Davis Selected Advisers –
NY, Inc. (the “Sub-Adviser”).
Each Fund is a series of Davis Fundamental ETF Trust (the “Trust”), an open-end management investment company organized as a Delaware business trust on March 18, 2016. Each series of the Trust
represents shares of beneficial interest in a separate portfolio of securities and other assets, with its own objective and policies. Davis Select International ETF and Davis Select Worldwide ETF are each a diversified fund within the meaning
of the Investment Company Act of 1940, as amended (the “1940 Act”). The Davis Select U.S. Equity ETF and Davis Select Financial ETF are classified as non-diversified funds under the 1940 Act.
Each Fund issues and redeems shares at its net asset value per share (“NAV”) only in large block aggregations of a specified number of shares (“Creation Units”). Currently, Creation Units
generally consist of 50,000 shares, though this may change from time to time. Creation Units are not expected to consist of less than 50,000 shares. As a practical matter, only institutions or large investors purchase or redeem Creation Units.
Shares of the Funds are not redeemable securities, except when aggregated in Creation Units.
The Funds generally issue and redeem shares either in exchange for (i) a basket of securities included in its portfolio (“Deposit Securities”) together with the deposit of a specified cash
payment (“Cash Component”); or (ii) a cash payment equal in value to the Deposit Securities (“Deposit Cash”) together with the Cash Component. The primary consideration accepted by each Fund (i.e., Deposit Securities or Deposit Cash) is set
forth under “Purchase and Redemption of Creation Units” later in this SAI. The Trust reserves the right to permit or require the substitution of a “cash in lieu” amount to be added to the Cash Component to replace any Deposit Security and
reserves the right to permit or require the substitution of Deposit Securities in lieu of Deposit Cash (subject to applicable legal requirements). The shares have been approved for listing and secondary trading on a national securities exchange
(the “Exchange”). The shares will trade on the Exchange at market prices. These prices may differ from the shares’ NAV.
Shares may be issued in advance of receipt of Deposit Securities subject to various conditions, including a requirement to maintain on deposit with the Trust cash at least equal to a specified
percentage of the market value of the missing Deposit Securities, as set forth in the Participant Agreement (as defined herein). The Trust may impose a transaction fee for each creation or redemption. In all cases, such fees will be limited in
accordance with the requirements of the U.S. Securities and Exchange Commission (the “SEC”) applicable to management investment companies offering redeemable securities. In addition to the fixed creation or redemption transaction fee, an
additional transaction fee of up to three times the fixed creation or redemption transaction fee and/or an additional variable charge may apply.
Each Fund intends to qualify each year for treatment as a regulated investment company (a “RIC”) under Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), so that it
will not be subject to federal income tax on income and gains that are timely distributed to Fund shareholders. Each Fund will invest its assets, and otherwise conduct its operations, in a manner that is intended to satisfy the qualifying
income, diversification and distribution requirements necessary to establish and maintain eligibility for such treatment.
Certain matters under the 1940 Act, which must be submitted to a vote of the holders of the outstanding voting securities of a series, shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding voting shares, as defined under the 1940 Act, of each series affected by such matter.
The method by which Creation Units of shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Units of shares are issued and sold by the
Trust on an ongoing basis, at any point a “distribution,” as such term is used in the Securities Act of 1933 (the “Securities Act”), may occur. Broker-dealers and other persons are cautioned that some activities on their part may, depending on
the circumstances, result in their being deemed participants in a distribution in a manner which could render them statutory underwriters and subject them to the prospectus delivery and liability provisions of the Securities Act.
Statement of Additional Information | Davis Fundamental ETF Trust | 3
For example, a broker-dealer firm or its client may be deemed a statutory underwriter if it takes Creation Units after placing an order with Foreside Fund Services, LLC (the “Distributor”),
breaks them down into constituent shares, and sells such shares directly to customers, or if it chooses to couple the creation of a supply of new shares with an active selling effort
involving solicitation of secondary market demand for shares. A determination of whether one is an underwriter for purposes of the Securities Act must take into account all the facts and
circumstances pertaining to the activities of the broker-dealer or its client in the particular case, and the examples mentioned above should not be considered a complete description of all the activities that could lead to a categorization as
an underwriter.
Broker-dealer firms should also note that dealers who are not “underwriters,” but are effecting transactions in shares, whether or not participating in the distribution of shares, are
generally required to deliver a prospectus. This is because the prospectus delivery exemption in Section 4(3) of the Securities Act is not available in respect of such transactions as a result of Section 24(d) of the 1940 Act. Firms that incur
a prospectus-delivery obligation, with respect to shares of a Fund, are reminded that under Securities Act Rule 153, a prospectus-delivery obligation under Section 5(b)(2) of the Securities Act owed to an exchange member in connection with a
sale on the Exchange is satisfied by the fact that the Funds’ prospectus is available at the Exchange upon request. The prospectus-delivery mechanism provided in Rule 153 is only available with respect to transactions on an exchange.
The investment objective, principal investment strategies and the main risks of investing in each Fund are described in its prospectus. There is no assurance that a Fund will achieve its
investment objective. An investment in a Fund may not be appropriate for all investors and short-term investing is discouraged. The Funds’ investment objectives are not fundamental policies and may be changed by the Board of Trustees without a
vote of shareholders. The Funds’ prospectus would be amended prior to any change in investment objective and shareholders would be provided at least 30 days’ notice before the change in investment objective was implemented.
Non-Principal Investment Strategies and Risks
Each Fund may implement investment strategies that are not principal investment strategies if, in the Adviser’s professional judgment, the strategies are appropriate. A strategy includes any
policy, practice or technique used by the Funds to achieve their investment objectives. Whether a particular strategy, including a strategy to invest in a particular type of security, is a principal investment strategy depends on the strategy’s
anticipated importance in achieving a Fund’s investment objective, and how the strategy affects its potential risks and returns. In determining what a principal investment strategy is, the Adviser considers, among other things, the amount of a
Fund’s assets expected to be committed to the strategy, the amount of its assets expected to be placed at risk by the strategy and the likelihood of it losing some or all of those assets from implementing the strategy. Non-principal investment
strategies are generally those investments that constitute less than 5% to 10% of a Fund’s assets depending upon their potential impact upon its investment performance. There are exceptions to the 5% to 10% of assets test, including, but not
limited to, the percentage of a Fund’s assets invested in a single industry or in a single country.
While the Adviser expects to pursue a Fund’s investment objective by implementing the principal investment strategies described in its prospectus, a Fund may employ non-principal investment
strategies or securities if, in Davis Advisors’ professional judgment, the securities, trading or investment strategies are appropriate. Factors that Davis Advisors considers in pursuing these other strategies include whether the strategy (i)
is likely to be consistent with shareholders’ reasonable expectations; (ii) is likely to assist the Adviser in pursuing a Fund’s investment objective; (iii) is consistent with a Fund’s investment objective; (iv) will not cause a Fund to violate
any of its fundamental or non-fundamental investment restrictions; and (v) will not materially change a Fund’s risk profile from the risk profile that results from following the principal investment strategies as described in the Funds’
prospectus and further explained in this SAI, as amended from time to time.
The composition of a Fund’s portfolio and the strategies that the Adviser may use to try to achieve its investment objective may vary depending on market conditions and available investment
opportunities. A Fund is not required to use any of the investment strategies described below in pursuing its investment objective. A Fund may use some of the investment strategies rarely or not at all. Whether a Fund uses a given investment
strategy at a given time depends on the professional judgment of the Adviser.
The principal investment strategies and risks for each Fund are described in the prospectus. An investment strategy that is a principal investment strategy for one Fund may be a non-principal
investment strategy for one of the other Funds, which therefore may only invest a limited portion of its assets in the non-principal investment strategy, as described above. A number of investment strategies and risks, which are not principal
investment strategies or principal risks for any of the Funds (and, therefore, are not included in the Funds’ prospectus), are described below.
Statement of Additional Information | Davis Fundamental ETF Trust | 4
Equity Strategies and Risks
Emphasizing Investments in Selected Market Sectors (DINT, DWLD and DUSA Only). A Fund may invest up to 25% of its net assets in the
securities of issuers conducting their principal business activities in the same industry (or sub-industry). Significant investments in selected market sectors render a portfolio particularly vulnerable to the risks of its target sectors.
Passive Foreign Investment Companies. Some securities of companies domiciled outside the U.S. in which a Fund may invest may be
considered passive foreign investment companies (“PFICs”) under U.S. tax laws. PFICs are foreign corporations that generate primarily passive income. For federal tax purposes, a corporation is deemed a PFIC if 75% or more of the foreign
corporation’s gross income for its tax year is passive income or, in general, if 50% or more of its assets are assets that produce or are held to produce passive income. Passive income is further defined as any income considered foreign
personal holding company income within the subpart F provisions defined by Section 954 of the Code.
Investing in PFICs involves the risks associated with investing in foreign securities, as described in the prospectus. There is also the risk that a Fund may not realize that a foreign
corporation it invests in is a PFIC for federal tax purposes. Federal tax laws impose severe tax penalties for failure to properly report investment income from PFICs. Each Fund makes efforts to ensure compliance with federal tax reporting of
these investments, however, there can be no guarantee that their efforts will always be successful.
Unsponsored Depositary Receipts. A Fund may invest in both sponsored and unsponsored arrangements. In a sponsored arrangement, the
foreign issuer assumes the obligation to pay some or all of the depositary’s transaction fees, whereas in an unsponsored arrangement the foreign issuer assumes no obligations and the depositary’s transaction fees are paid by the holders.
Foreign issuers in respect of whose securities unsponsored depositary receipts have been issued are not necessarily obligated to disclose material information in the markets in which the unsponsored depositary receipts are traded and,
therefore, such information may not be reflected in the prices of such securities in those markets. Shareholder benefits, voting rights and other attached rights may not be extended to the holders of unsponsored depositary receipts.
Investments in Other Investment Companies. A Fund can invest in securities issued by other investment companies, which can include
open-end funds, closed-end funds or exchange-traded funds (“ETFs”, which are typically open-ended funds or unit investment trusts listed on a stock exchange). In some instances an ETF or closed-end fund may trade at market prices that are
higher or lower than the NAV. A Fund may do so as a way of gaining exposure to securities represented by the investment company’s portfolio at times when it may not be able to buy those securities directly. As shareholders of an investment
company, a Fund would be subject to its ratable share of that investment company’s expenses, including its advisory and administration expenses. To the extent that the management fees paid to an investment company are for the same or similar
services as the management fees paid by the Fund, there would be a layering of fees that would increase expenses and decrease returns. At the same time, a Fund would bear its own management fees and expenses. The Funds do not intend to invest
in other investment companies, unless the portfolio manager believes that the potential benefits of the investment justify the expenses. A Fund’s investments in the securities of other investment companies are subject to the limits that apply
to those kinds of investments under the 1940 Act.
Initial Public Offerings (“IPO”). An IPO is the initial public offering of securities of a particular company. IPOs in which a Fund
invests can have a dramatic impact on Fund performance and assumptions about future performance based on that impact may not be warranted. Investing in IPOs involves risks. Many, but not all, of the companies issuing IPOs are small, unseasoned
companies. Many are companies that have only been in operation for short periods of time. Small company securities, including IPOs, are subject to greater volatility in their prices than are securities issued by more established companies. If a
Fund does not intend to make a long-term investment in an IPO (it is sometimes possible to immediately sell an IPO at a profit), the Adviser may not perform the same detailed research on the company that it does for core holdings.
Rights and Warrants. Rights and warrants are forms of equity securities. Warrants, basically, are options to purchase equity
securities at specific prices valid for a specific period of time. Their prices do not necessarily move parallel to the prices of the underlying securities. Rights are similar to warrants, but normally have shorter maturities and are
distributed directly by issuers to their shareholders. Rights and warrants have no voting rights, receive no dividends and have no rights with respect to the assets of the issuer.
Other Forms of Equity Securities. In addition to common stock, a Fund may invest in other forms of equity securities, including
preferred stocks and securities with equity conversion or purchase rights. The prices of equity securities fluctuate based on changes in the financial condition of their issuers and on market and economic conditions. Events that have a negative
impact on a business probably will be reflected in a decline in the price of its equity securities. Furthermore, when the total value of the stock market declines, most equity securities, even those issued by strong companies, likely will
decline in value.
Inflation Risk. Also called purchasing power risk, is the chance that the cash flows from an investment won’t be worth as much in
the future because of changes in purchasing power due to inflation.
Real Estate Companies, Including REITs. Real estate securities are issued by companies that have at least 50% of the value of their
assets, gross income or net profits attributable to ownership, financing, construction, management or sale of real
Statement of Additional Information | Davis Fundamental ETF Trust | 5
estate, or to products or services that are related to real estate or the real estate industry. The Fund does not invest directly in real estate. Real estate companies include: real estate
investment trusts (“REITs”) or other securitized real estate investments, brokers, developers, lenders and companies with substantial real estate holdings such as paper, lumber, hotel and entertainment companies. REITs pool investors’ funds for
investment primarily in income-producing real estate or real estate-related loans or interests. A REIT is not taxed on income distributed to shareholders if it complies with various requirements relating to its organization, ownership, assets
and income, and with the requirement that it distribute to its shareholders at least 90% of its taxable income (other than net capital gains) each taxable year. REITs generally can be classified as equity
REITs, mortgage REITs and hybrid REITs. Equity REITs invest the majority of their assets directly in real property and derive their income primarily from rents. Equity REITs also can realize
capital gains by selling property that has appreciated in value. Mortgage REITs invest the majority of their assets in real estate mortgages and derive their income primarily from interest payments. Hybrid REITs combine the characteristics of
both equity REITs and mortgage REITs. To the extent that the management fees paid to a REIT are for the same or similar services as the management fees paid by the Fund, there will be a layering of fees, which would increase expenses and
decrease returns. Securities issued by REITs may trade less frequently and be less liquid than common stock issued by other companies.
Real estate securities, including REITs, are subject to risks associated with the direct ownership of real estate including: (i) declines in property values, because of changes in the economy
or the surrounding area or because a particular region has become less appealing to tenants; (ii) increases in property taxes, operating expenses, interest rates or competition; (iii) overbuilding; (iv) changes in zoning laws; (v) losses from
casualty or condemnation;. (vi) declines in the value of real estate, risks related to general and local economic conditions, (vii) uninsured casualties or condemnation losses; (viii) fluctuations in rental income; (ix) changes in neighborhood
values; (x) the appeal of properties to tenants; (xi) increases in interest rates, and (xii) access to the credit markets. The Fund also could be subject to such risks by reason of direct ownership as a result of a default on a debt security it
may own.
Equity REITs may be affected by changes in the value of the underlying property owned by the trusts, while mortgage REITs may be affected by the quality of credit extended. Equity and mortgage
REITs are dependent on management skill, may not be diversified and are subject to project financing risks. REITs also are subject to: heavy cash flow dependency, defaults by borrowers, self-liquidation and the possibility of failing to qualify
for the favorable federal income tax treatment generally available to REITs under the Internal Revenue Code, and failing to maintain exemption from registration under the 1940 Act. Changes in interest rates also may affect the value of the debt
securities in the Fund’s portfolio. By investing in REITs indirectly through the Fund, a shareholder will bear not only his or her proportionate share of the expense of the Fund but also, indirectly, similar expenses of the REITs, including
compensation of management. Some real estate securities may be rated less than investment grade by rating services. Such securities may be subject to the risks of high-yield, high-risk securities discussed below.
Preferred Stock Risk. Preferred stock is a form of equity security and is generally ranked behind an issuer’s debt securities in
claims for dividends and assets of an issuer in a liquidation or bankruptcy. For this reason, the price of a preferred stock may react more strongly than the debt securities of an issuer. Preferred stock is subject to issuer and market risk
that is applicable to equity securities in general. An adverse event may have a negative impact on a company and could result in a decline in the price of its preferred stock. Preferred stock of smaller companies may be more vulnerable to
adverse developments than preferred stock of larger companies.
Convertible Securities. Convertible securities are a form of equity security. Generally, convertible securities are bonds,
debentures, notes, preferred stocks, warrants or other securities that convert or are exchangeable into shares of the underlying common stock at a stated exchange ratio. Usually, the conversion or exchange is solely at the option of the holder.
However, some convertible securities may be convertible or exchangeable at the option of the issuer or are automatically converted or exchanged at a certain time or on the occurrence of certain events, or have a combination of these
characteristics. Usually, a convertible security provides a long-term call on the issuer’s common stock and, therefore, tends to appreciate in value as the underlying common stock appreciates in value. A convertible security also may be subject
to redemption by the issuer after a certain date and under certain circumstances (including a specified price) established on issue. If a convertible security held by a Fund is called for redemption, the Fund could be required to tender it for
redemption, convert it into the underlying common stock or sell it.
Convertible bonds, debentures and notes are varieties of debt securities, and as such are subject to many of the same risks, including interest rate sensitivity, changes in debt rating and
credit risk. In addition, convertible securities are often viewed by the issuer as future common stock subordinated to other debt and carry a lower rating than the issuer’s non-convertible debt obligations. Thus, convertible securities are
subject to many of the same risks as high-yield, high-risk securities. A more complete discussion of these risks is provided below in the sections titled “Bonds and Other Debt Securities” and “High-Yield, High-Risk Debt Securities.”
Due to its conversion feature, the price of a convertible security normally will vary in some proportion to changes in the price of the underlying common stock. A convertible security will
also normally provide a higher yield than the underlying common stock (but generally lower than comparable non-convertible securities). Due to their higher yield, convertible
Statement of Additional Information | Davis Fundamental ETF Trust | 6
securities generally sell above their “conversion value,” which is the current market value of the stock to be received on conversion. The difference between this conversion value and the
price of convertible securities will vary over time depending on the value of the underlying common stocks and interest rates. When the underlying common stocks decline in value, convertible securities will tend not to decline to the same
extent because the yield acts as a price support. When the underlying common stocks rise in value, the value of convertible securities also may be expected to increase, but generally will not increase to the same extent as the underlying common
stocks.
Fixed income securities generally are considered to be interest rate sensitive. The market value of convertible securities will change in response to changes in interest rates. During periods
of falling interest rates, the value of convertible bonds generally rises. Conversely, during periods of rising interest rates, the value of such securities generally declines. Changes by recognized rating services in their ratings of debt
securities and changes in the ability of an issuer to make payments of interest and principal also will affect the value of these investments.
Fixed Income Strategies and Risks
Bonds and Other Debt Securities. Bonds and other debt securities may be purchased by a Fund if the Adviser believes that such
investments are consistent with the Fund’s investment strategies, may contribute to the achievement of the Fund’s investment objective and will not violate any of the Fund’s investment restrictions. The U.S. Government, corporations and other
issuers sell bonds and other debt securities to borrow money. Issuers pay investors interest and generally must repay the amount borrowed at maturity. Some debt securities, such as zero-coupon bonds, do not pay current interest, but are
purchased at discounts from their face values. The prices of debt securities fluctuate, depending on such factors as interest rates, credit quality and maturity.
Bonds and other debt securities, generally, are subject to credit risk and interest rate risk. While debt securities issued by the U.S. Treasury generally are considered free of credit risk,
debt issued by agencies and corporations all entail some level of credit risk. Investment grade debt securities have less credit risk than do high-yield, high-risk debt securities. Credit risk is described more fully in the section titled “High-Yield, High-Risk Debt Securities.”
Bonds and other debt securities, generally, are interest rate sensitive. During periods of falling interest rates, the values of debt securities held by a Fund generally rise. Conversely,
during periods of rising interest rates, the values of such securities generally decline. Changes by recognized rating services in their ratings of debt securities and changes in the ability of an issuer to make payments of interest and
principal also will affect the value of these investments.
U.S. Government Securities. U.S. Government securities represent loans by investors to the U.S. Treasury Department or a wide
variety of government agencies and instrumentalities. Securities issued by most U.S. government entities are neither guaranteed by the U.S. Treasury nor backed by the full faith and credit of the U.S. government. These entities include, among
others, the Federal Home Loan Banks (FHLBs), the Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC). Securities issued by the U.S. Treasury and a small number of U.S. government agencies, such as
the Government National Mortgage Association (GNMA), are backed by the full faith and credit of the U.S. government. The market values of U.S. government and agency securities and U.S. Treasury securities are subject to fluctuation.
U.S. Government securities include mortgage-related securities issued by an agency or instrumentality of the U.S. Government. GNMA certificates are mortgage-backed securities representing part
ownership of a pool of mortgage loans. These loans issued by lenders such as mortgage bankers, commercial banks and savings and loan associations are either insured by the Federal Housing Administration or guaranteed by the Veterans
Administration. A “pool” or group of such mortgages is assembled and, after being approved by GNMA, is offered to investors through securities dealers. Once approved by GNMA, the timely payment of interest and principal on each mortgage is
guaranteed by GNMA and backed by the full faith and credit of the U.S. Government. GNMA certificates differ from bonds in that principal is paid back monthly by the borrower over the term of the loan rather than returned in a lump sum at
maturity. GNMA certificates are characterized as “pass-through” securities because both interest and principal payments (including prepayments) are passed through to the holder of such certificates.
As of September 7, 2008, the Federal Housing Finance Agency (“FHFA”) was appointed as the conservator of FHLMC and FNMA for an indefinite period. In accordance with the Federal Housing Finance
Regulatory Reform Act of 2008 and the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as conservator, the FHFA will control and oversee these entities until the FHFA deems them financially sound and solvent. During the
conservatorship, each entity’s obligations are expected to be paid in the normal course of business. Although no express guarantee exists for the debt or mortgage-backed securities issued by these entities, the U.S. Department of the Treasury,
through a securities lending credit facility and a senior preferred stock purchase agreement, has attempted to enhance the ability of the entities to meet their obligations.
Pools of mortgages also are issued or guaranteed by other agencies of the U.S. Government. The average life of pass-through pools varies with the maturities of the underlying mortgage
instruments. In addition, a pool’s term may be shortened or lengthened by unscheduled or early payment, or by slower than expected prepayment of principal and interest on the underlying mortgages. The occurrence of mortgage prepayments is
affected by the level of interest rates, general economic
Statement of Additional Information | Davis Fundamental ETF Trust | 7
conditions, the location and age of the mortgage and other social and demographic conditions. As prepayment rates of individual pools vary widely, it is not possible to accurately predict the
average life of a particular pool.
A collateralized mortgage obligation (“CMO”) is a debt security issued by a corporation, trust or custodian, or by a U.S. Government agency or instrumentality that is
collateralized by a portfolio or pool of mortgages, mortgage-backed securities, U.S. Government securities or corporate debt obligations. The issuer’s obligation to make interest and principal payments is secured by the underlying pool or
portfolio of securities. CMOs are most often issued in two or more classes (each of which is a separate security) with varying maturities and stated rates of interest. Interest and principal payments from the underlying collateral (generally, a
pool of mortgages) are not necessarily passed directly through to the holders of the CMOs; these payments typically are used to pay interest on all CMO classes and to retire successive class maturities in a sequence. Thus, the issuance of CMO
classes with varying maturities and interest rates may result in greater predictability of maturity with one class and less predictability of maturity with another class than a direct investment in a mortgage-backed pass-through security (such
as a GNMA certificate). Classes with shorter maturities, typically, have lower volatility and yield while those with longer maturities, typically, have higher volatility and yield. Thus, investments in CMOs provide greater or lesser control
over the investment characteristics than mortgage pass-through securities and offer more defensive or aggressive investment alternatives.
Investments in mortgage-related U.S. Government securities, such as GNMA certificates and CMOs, also involve other risks. The yield on a pass-through security typically is quoted based on the
maturity of the underlying instruments and the associated average life assumption. Actual prepayment experience may cause the yield to differ from the assumed average life yield. Accelerated prepayments adversely impact yields for pass-through
securities purchased at a premium; the opposite is true for pass-through securities purchased at a discount. During periods of declining interest rates, prepayment of mortgages underlying pass-through certificates can be expected to accelerate.
When the mortgage obligations are prepaid, a Fund reinvests the prepaid amounts in securities, the yields of which reflect interest rates prevailing at that time. Therefore, a Fund’s ability to maintain a portfolio of high-yielding,
mortgage-backed securities will be adversely affected to the extent that prepayments of mortgages must be reinvested in securities that have lower yields than the prepaid mortgages. Moreover, prepayments of mortgages that underlie securities
purchased at a premium could result in capital losses. Investment in such securities also could subject a Fund to “maturity extension risk,” which is the possibility that rising interest rates may cause prepayments to occur at a slower than
expected rate. This particular risk may effectively change a security that was considered a short- or intermediate-term security at the time of purchase into a long-term security. Long-term securities generally fluctuate more widely in response
to changes in interest rates than short or intermediate-term securities.
If a Fund purchases mortgage-backed securities that are “subordinated” to other interests in the same mortgage pool, the Fund, as a holder of those securities, may only receive payments after
the pool’s obligations to other investors have been satisfied. An unexpectedly high rate of defaults on the mortgages held by a mortgage pool may limit substantially the pool’s ability to make payments of principal or interest to a Fund, as a
holder of such subordinated securities, reducing the values of those securities or in some cases rendering them worthless; the risk of such defaults is generally higher in the case of mortgage pools that include so-called “subprime” mortgages.
An unexpectedly high or low rate of prepayment on a pool’s underlying mortgages may have similar effects on subordinated securities. A mortgage pool may issue securities subject to various levels of subordination; the risk of non-payment
affects securities at each level, although the risk is greatest in the case of more highly subordinate securities.
The guarantees of the U.S. Government, its agencies and instrumentalities are guarantees of the timely payment of principal and interest on the obligations purchased. The value of the shares
issued by a Fund is not guaranteed and will fluctuate with the value of a Fund’s portfolio. Generally, when the level of interest rates rise, the value of a Fund’s investment in U.S. Government securities is likely to decline and, when the
level of interest rates decline, the value of a Fund’s investment in U.S. Government securities is likely to rise.
A Fund may engage in portfolio trading primarily to take advantage of yield disparities. Such trading strategies may result in minor temporary increases or decreases in a Fund’s current income
and in its holding of debt securities that sell at substantial premiums or discounts from face value. If expectations of changes in interest rates or the price of the securities prove to be incorrect, a Fund’s potential income and capital gain
will be reduced or its potential loss will be increased.
Interest Rate Sensitivity Risk. If a security pays a fixed interest rate, and market rates increase, the value of the fixed-rate
security should decline. Interest rates may also have a powerful influence on the earnings of financial institutions.
Credit Risk. Like any borrower, the issuer of a fixed income security may be unable to make timely payments of interest and
principal. If the issuer is unable to make payments in a timely fashion the value of the security will decline and may become worthless. Financial institutions are often highly leveraged and may not be able to make timely payments of interest
and principal. Even U.S. Government Securities are subject to credit risk.
High-Yield, High-Risk Debt Securities. The real estate securities, convertible securities, bonds and other debt securities in which
a Fund may invest may include high-yield, high-risk debt securities rated BB or lower by Standard & Poor’s Corporation (“S&P”), or Ba or lower by Moody’s Investors Service (“Moody’s”) or unrated securities. Securities rated BB or lower
by S&P and Ba or lower by Moody’s are referred to in the financial community as “junk bonds” and may include D-
Statement of Additional Information | Davis Fundamental ETF Trust | 8
rated securities of issuers in default. See Appendix A for a more detailed description of the rating system. Ratings assigned by credit agencies do
not evaluate market risks. The Adviser considers the ratings assigned by S&P or Moody’s as one of several factors in its independent credit analysis of issuers. A description of each bond quality category is set forth in Appendix A titled “Quality Ratings of Debt Securities.” The ratings of Moody’s and S&P represent their opinions as to the quality of the securities that they
undertake to rate. It should be emphasized, however, that ratings are relative and subjective and are not absolute standards of quality. There is no assurance that any rating will not change. A Fund may retain a security whose rating has
changed or has become unrated.
While likely to have some quality and protective characteristics, high-yield, high-risk debt securities, whether or not convertible into common stock, usually involve increased risk as to
payment of principal and interest. Issuers of such securities may be highly leveraged and may not have available to them traditional methods of financing. Therefore, the risks associated with acquiring the securities of such issuers generally
are greater than is the case with higher-rated securities. For example, during an economic downturn or a sustained period of rising interest rates, issuers of high-yield securities may be more likely to experience financial stress, especially
if such issuers are highly leveraged. During such periods, such issuers may not have sufficient revenues to meet their principal and interest payment obligations. The issuer’s ability to service its debt obligations also may be adversely
affected by specific issuer developments, or the issuer’s inability to meet specific projected business forecasts or the unavailability of additional financing. The risk of loss due to default by the issuer is significantly greater for the
holders of high-yield securities because such securities may be unsecured and may be subordinated to other creditors of the issuer.
High-yield, high-risk debt securities are subject to greater price volatility than higher-rated securities, tend to decline in price more steeply than higher-rated securities in periods of
economic difficulty or accelerating interest rates and are subject to greater risk of non-payment in adverse economic times. There may be a thin trading market for such securities, which may have an adverse impact on market price and the
ability of a Fund to dispose of particular issues and may cause a Fund to incur special securities’ registration responsibilities, liabilities and costs, and liquidity and valuation difficulties. Unexpected net redemptions may force a Fund to
sell high-yield, high-risk debt securities without regard to investment merit, thereby possibly reducing return rates. Such securities may be subject to redemptions or call provisions, which, if exercised when investment rates are declining,
could result in the replacement of such securities with lower-yielding securities, resulting in a decreased return. To the extent that a Fund invests in bonds that are original issue discount, zero-coupon, pay-in-kind or deferred interest
bonds, the Fund may have taxable interest income greater than the cash actually received on these issues. In order to avoid taxation at the Fund level, a Fund may have to sell portfolio securities to meet distribution requirements.
The market values of high-yield, high-risk debt securities tend to reflect individual corporate developments to a greater extent than higher-rated securities, which react primarily to
fluctuations in the general level of interest rates. Lower-rated securities also tend to be more sensitive to economic and industry conditions than higher-rated securities. Adverse publicity and investor perceptions, whether or not based on
fundamental analysis regarding individual lower-rated bonds, may result in reduced prices for such securities. If the negative factors such as these adversely impact the market value of high-yield, high-risk securities and a Fund holds such
securities, the Fund’s net asset value will be adversely affected.
A Fund may have difficulty disposing of certain high-yield, high-risk bonds because there may be a thin trading market for such bonds. Because not all dealers maintain markets in all
high-yield, high-risk bonds, a Fund anticipates that such bonds could be sold only to a limited number of dealers or institutional investors. The lack of a liquid secondary market may have an adverse impact on market price and the ability to
dispose of particular issues and also may make it more difficult to obtain accurate market quotations or valuations for purposes of valuing a Fund’s assets. Market quotations generally are available on many high-yield issues only from a limited
number of dealers and may not necessarily represent firm bid prices of such dealers or prices for actual sales. In addition, adverse publicity and investor perceptions may decrease the values and liquidity of high-yield, high-risk bonds
regardless of a fundamental analysis of the investment merits of such bonds. To the extent that a Fund purchases illiquid or restricted bonds, it may incur special securities’ registration responsibilities, liabilities and costs, and liquidity
and valuation difficulties relating to such bonds.
Bonds may be subject to redemption or call provisions. If an issuer exercises these provisions when investment rates are declining, a Fund will be likely to replace such bonds with
lower-yielding bonds, resulting in decreased returns. Zero-coupon, pay-in-kind and deferred interest bonds involve additional special considerations. Zero-coupon bonds are debt obligations that do not entitle the holder to any periodic payments
of interest prior to maturity or a specified cash payment date when the securities begin paying current interest (the “cash payment date”) and therefore are issued and traded at discounts from their face amounts or par value. The market prices
of zero-coupon securities generally are more volatile than the market prices of securities that pay interest periodically and are likely to respond to changes in interest rates to a greater degree than securities paying interest currently with
similar maturities and credit quality. Pay-in-kind bonds pay interest in the form of other securities rather than cash. Deferred interest bonds defer the payment of interest to a later date. Zero-coupon, pay-in-kind or deferred interest bonds
carry additional risk in that, unlike bonds that pay interest in cash throughout the period to maturity, a Fund will realize no cash until the cash payment date, unless a portion of such securities are sold. There is no assurance of the value
or the liquidity of securities received from pay-in-kind bonds. If the issuer defaults, a Fund may obtain no return at all on its investment. To the extent that a Fund invests in bonds that are original issue discount, zero-coupon, pay-in-kind
or
Statement of Additional Information | Davis Fundamental ETF Trust | 9
deferred interest bonds, the Fund may have taxable interest income greater than the cash actually received on these issues. In order to distribute such income to avoid taxation, the Fund may
have to sell portfolio securities to meet its distribution requirements under circumstances that could be adverse.
Federal tax legislation limits the tax advantages of issuing certain high-yield, high-risk bonds. This could have a materially adverse effect on the market for high-yield, high-risk bonds.
Cash Management. For defensive purposes or to accommodate inflows of cash awaiting more permanent investment, a Fund may temporarily
and without limitation hold high-grade, short-term money market instruments, cash and cash equivalents, including repurchase agreements. A Fund also may invest in registered investment companies that are regulated as money market funds or
companies exempted from registration under Sections 3(c)(1) or 3(c)(7) of the 1940 Act that themselves primarily invest in temporary defensive investments, including U.S. Government securities and commercial paper. To the extent that the
management fees paid to other investment companies are for the same or similar services as the management fees paid by a Fund, there will be a layering of fees that would increase expenses and decrease returns. Investments in other investment
companies are limited by the 1940 Act and the rules thereunder.
In certain instances, the Funds may engage in repurchase agreement transactions through the Fixed Income Clearing Corporation (“FICC”). FICC sells U.S. Government or agency securities to each
Fund under agreements to repurchase these securities at a stated repurchase price including interest for the term of the agreement. The term of the agreement will typically be overnight or over the weekend. Each Fund, through FICC, receives
delivery of the underlying U.S. Government or agency securities as collateral, whose market value is required to be at least equal to the repurchase price. If FICC were to become bankrupt, the Fund may be delayed or may incur costs or possible
losses of principal and income in disposing of the collateral.
Master Limited Partnerships Risk. A Fund may invest in securities of master limited partnerships (“MLPs”). Investments in MLPs
involve risks that differ from investments in common stock, including risks related to the following: a common unit holder’s limited control and limited rights to vote on matters affecting the MLP; potential conflicts of interest between the
MLP and the MLP’s general partner; cash flow; dilution; and the general partner’s right to require unit holders to sell their common units at an undesirable time or price. MLP common unit holders may not elect the general partner or its
directors and have limited ability to remove an MLP’s general partner. MLPs may issue additional common units without unit holder approval, which could dilute the ownership interests of investors holding MLP common units. MLP common units, like
other equity securities, can be affected by macro-economic and other factors affecting the stock market in general, expectations of interest rates, investor sentiment towards an issuer or certain market sector, changes in a particular issuer’s
financial condition, or unfavorable or unanticipated poor performance of a particular issuer. Prices of common units of individual MLPs, like prices of other equity securities, also can be affected by fundamentals unique to the partnership or
company, including earnings power and coverage ratios. A holder of MLP common units typically would not be shielded to the same extent that a shareholder of a corporation would be. In certain circumstances, creditors of an MLP would have the
right to seek return of capital distributed to a limited partner, which would continue after an investor sold its investment in the MLP. The value of an MLP security may decline for reasons that directly relate to the issuer, such as management
performance, financial leverage and reduced demand for the issuer’s products or services.
MLPs currently do not pay U.S. federal income tax at the partnership level. A change in current tax law, or a change in the underlying business mix of a given MLP, could result in an MLP being
treated as a corporation for U.S. federal income tax purposes, which could result in a requirement to pay federal income tax on its taxable income and have the effect of reducing the amount of cash available for distribution by the MLP,
resulting in a reduction of the value of the common unit holder’s investment. Changes in the laws, regulations or related interpretations relating to the Fund’s investments in MLPs could increase the Fund’s expenses, reduce its cash
distributions, negatively impact the value of an investment in an MLP, or otherwise impact the Fund’s ability to implement its investment strategy. Due to the heavy state and federal regulations that an MLP’s assets may be subject to, an MLP’s
profitability could be adversely impacted by changes in the regulatory environment.
Generally, the securities markets may move down, sometimes rapidly and unpredictably, based on overall economic conditions and other factors. The market value of a security may decline due to
general market conditions that are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the outlook for corporate earnings, changes in interest or currency rates or adverse investor
sentiment generally. A security’s market value also may decline because of factors that affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry.
Derivative Strategies and Risks. A Fund can invest in a variety of derivative investments to pursue its investment objective using
both speculative and/or hedging strategies, although it is not anticipated that any Fund will invest in derivative investments. A Fund can use some derivative instruments described below.
Hedging. A Fund can use hedging to attempt to protect against declines in the market value of its
portfolio, to permit it to retain unrealized gains in the value of portfolio securities that have appreciated or to facilitate selling securities for investment reasons. To do so, a Fund could:
Statement of Additional Information | Davis Fundamental ETF Trust | 10
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sell futures contracts;
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buy puts on such futures or on securities; or
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write covered calls on securities or futures.
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A Fund can use hedging to establish a position in the securities market as a temporary substitute for purchasing particular securities. In that case, it would normally seek to purchase the
securities and then terminate that hedging position. A Fund might also use this type of hedge to attempt to protect against the possibility that its portfolio securities would not be fully included in a rise in the value of the market. To do
so, a Fund could:
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buy calls on such futures or on securities; or
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sell puts on such futures or on securities.
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A Fund is not obligated to use hedging instruments, even though it is permitted to use them in the Adviser’s discretion, as described below. A Fund’s strategy of hedging with futures and
options on futures will be incidental to its activities in the underlying cash market. The particular hedging instruments a Fund can use are described below. A Fund can employ new hedging instruments and strategies when they are developed, if
those investment methods are consistent with its investment objective and are permissible under applicable regulations governing the Fund.
Futures. A Fund can buy and sell futures contracts that relate to (i) broad-based stock indices (“stock
index futures”); (ii) debt securities (“interest rate futures”); (iii) other broad-based securities indices (“financial futures”); (iv) foreign currencies (“forward contracts”); or (v) commodities (“commodity futures”).
A broad-based stock index is used as the basis for trading stock index futures. They may in some cases be based on stocks of issuers in a particular industry or group of industries. A stock
index assigns relative values to the common stocks included in the index and its value fluctuates in response to the changes in value of the underlying stocks. A stock index cannot be purchased or sold directly. Financial futures are similar
contracts based on the future value of the basket of securities that comprise the index. These contracts obligate the seller to deliver, and the purchaser to take, cash to settle the futures transaction. There is no delivery made of the
underlying securities to settle the futures obligation. Either party may also settle the transaction by entering into an off-setting contract.
An interest rate future obligates the seller to deliver, and the purchaser to take, cash or a specified type of debt security to settle the futures transaction. Either party also could enter
into an off-setting contract to close out the position.
On entering into a futures transaction, a Fund will be required to deposit an initial margin payment with the futures commission merchant (the “futures broker”). Initial margin payments will
be deposited with a Fund’s custodian bank in an account registered in the futures broker’s name. However, the futures broker can gain access to that account only under specified conditions. As the future is marked to market (that is, its value
on the Fund’s books is changed) to reflect changes in its market value, subsequent margin payments (called variation margin) will be paid to or by the futures broker daily.
At any time before expiration of the future, a Fund can elect to close out its position by taking an opposite position, at which time a final determination of variation margin is made and any
additional cash must be paid by or released to the Fund. Any loss or gain on the future is then realized by the Fund for tax purposes. All futures transactions, except forward contracts, are effected through a clearinghouse associated with the
exchange on which the contracts are traded.
Put and Call Options. A Fund can buy and sell (and sell short) certain kinds of put options (“puts”)
and call options (“calls”). A Fund can buy and sell exchange-traded and over-the-counter put and call options, including index options, securities options, currency options, commodities options and options on the other types of futures
described above.
Writing Covered Call Options. A Fund can write (that is, sell) covered calls. If a Fund sells a call
option, it must be covered. That means a Fund must own the security subject to the call while the call is outstanding or, for certain types of calls, the call can be covered by identifying liquid assets on the Fund’s books to enable the Fund to
satisfy its obligations if the call is exercised.
When a Fund writes a call on a security, it receives cash (a premium). The Fund agrees to sell the underlying security to a purchaser of a corresponding call on the same security during the
call period at a fixed exercise price, regardless of market price changes during the call period. The call period is usually not more than nine months. The exercise price may differ from the market price of the underlying security. If the Fund
owns the underlying security, the Fund continues to bear the risk of loss that the price of the underlying security may decline during the call period. That risk may be offset to some extent by the premium the Fund receives. If the value of the
investment does not rise above the call price, it is likely that the call will lapse without being exercised. In that case, the Fund would keep the cash premium and the investment. If the underlying security should rise in value above the call
price, the Fund may either have to deliver the underlying security to the owner of the call without profiting from the rise in value, or pay the owner of the call the difference between the call price and the current value of the underlying
security.
When a Fund writes a call on an index, it receives cash (a premium). If the buyer of the call exercises it, the Fund will pay an amount of cash equal to the difference between the closing
price of the call and the exercise price, multiplied by a specified
Statement of Additional Information | Davis Fundamental ETF Trust | 11
multiple that determines the total value of the call for each point of difference. If the value of the underlying investment does not rise above the call price, it is likely that the call will
lapse without being exercised. In that case, the Fund would keep the cash premium.
The Fund’s custodian bank, or a securities depositary acting for the custodian bank, will act as the Fund’s escrow agent, through the facilities of the Options Clearing Corporation (the
“OCC”), as to the investments on which the Fund has written calls traded on exchanges or as to other acceptable escrow securities. In that way, no margin will be required for such transactions. The OCC will release the securities on the
expiration of the option or when the Fund enters into a closing transaction.
When a Fund writes an over-the-counter (“OTC”) option, it will treat as illiquid (for purposes of its restriction on holding illiquid securities) the marked-to-market value of any OTC option
it holds, unless the option is subject to a buy-back agreement by the executing broker. To terminate its obligation on a call it has written, the Fund can purchase a corresponding call in a “closing purchase transaction.” The Fund will then
realize a profit or loss, depending on whether the net of the amount of the option transaction costs and the premium received on the call the Fund wrote is more or less than the price of the call the Fund purchases to close out the transaction.
The Fund may realize a profit if the call expires unexercised because the Fund will retain the underlying security and the premium it received when it wrote the call. Any such profits are considered short-term capital gains for federal income
tax purposes, as are the premiums on lapsed calls. When distributed by the Fund, they are taxable as ordinary income. If the Fund cannot effect a closing purchase transaction due to the lack of a market, it will have to hold the callable
securities until the call expires or is exercised.
A Fund also can write calls on a futures contract without owning the futures contract or securities deliverable under the contract. To do so, at the time the call is written, the Fund must
cover the call by identifying an equivalent dollar amount of liquid assets on the Fund’s books. The Fund will identify additional liquid assets on its books if the value of the segregated assets drops below 100% of the current value of the
future. Because of this segregation requirement, in no circumstances would the Fund’s receipt of an exercise notice, as to that future, require the Fund to deliver a futures contract. It would simply put the Fund in a short futures position,
which is permitted by the Fund’s hedging policies.
Writing Put Options. A Fund can write/sell put options. A put option on securities gives the purchaser
the right to sell, and the writer the obligation to buy, the underlying investment at the exercise price during the option period.
If a Fund writes a put, the put must be covered by liquid assets identified on its books. The premium a Fund receives from writing a put represents a profit, as long as the price of the
underlying investment remains equal to, or above, the exercise price of the put. However, a Fund also assumes the obligation during the option period to buy the underlying investment from the buyer of the put at the exercise price, even if the
value of the investment falls below the exercise price. If a put a Fund has written expires unexercised, the Fund realizes a gain in the amount of the premium less the transaction costs incurred. If the put is exercised, the Fund must fulfill
its obligation to purchase the underlying investment at the exercise price. The price usually will exceed the market value of the investment at that time. In that case, a Fund may incur a loss if it sells the underlying investment. That loss
will be equal to the sum of the sale price of the underlying investment and the premium received minus the sum of the exercise price and any transaction costs the Fund incurred.
When writing a put option on a security, to secure its obligation to pay for the underlying security a Fund will deposit in escrow or otherwise segregate liquid assets with a value equal to,
or greater than, the exercise price of the underlying securities. The Fund, therefore, foregoes the opportunity of investing the segregated assets or writing calls against those assets.
As long as a Fund’s obligation as the put writer continues, it may be assigned an exercise notice by the broker-dealer through which the put was sold. That notice will require the Fund to take
delivery of the underlying security and pay the exercise price. A Fund has no control over when it may be required to purchase the underlying security, since it may be assigned an exercise notice at any time prior to the termination of its
obligation as the writer of the put. That obligation terminates on expiration of the put. It also may terminate if, before it receives an exercise notice, the Fund effects a closing purchase transaction by purchasing a put of the same series as
it sold. Once a Fund has been assigned an exercise notice, it cannot effect a closing purchase transaction.
A Fund can decide to effect a closing purchase transaction to realize a profit on an outstanding put option it has written or to prevent the underlying security from being exercised. Effecting
a closing purchase transaction also will permit a Fund to write another put option on the security or to sell the security and use the proceeds from the sale for other investments. A Fund will realize a profit or loss from a closing purchase
transaction depending on whether the cost of the transaction is less or more than the premium received from writing the put option. Any profits from writing puts are considered short-term capital gains for federal tax purposes and, when
distributed by a Fund, are taxable as ordinary income.
Purchasing Calls and Puts. A Fund can purchase calls to protect against the possibility that its
portfolio will not participate in an anticipated rise in the securities market. When a Fund buys a call (other than in a closing purchase transaction), it pays a premium. The Fund then has the right to buy the underlying investment from a
seller of a corresponding call on the same investment during the call period at a fixed exercise price. A Fund benefits only if it sells the call at a profit or if, during the
Statement of Additional Information | Davis Fundamental ETF Trust | 12
call period, the market price of the underlying investment is above the sum of the call price plus the transaction costs and the premium paid for the call and the Fund exercises the call. If
the Fund does not exercise the call or sell it (whether or not at a profit), the call will become worthless at its expiration date. In that case, the Fund will have paid the premium, but lost the right to purchase the underlying investment.
A Fund can buy puts regardless of whether it holds the underlying investment in its portfolio. When a Fund purchases a put, it pays a premium and, except as to puts on indices, has the right
to sell the underlying investment to a seller of a put on a corresponding investment during the put period at a fixed exercise price. Buying a put on securities or futures the Fund owns enables the Fund to attempt to protect itself during the
put period against a decline in the value of the underlying investment below the exercise price by selling the underlying investment at the exercise price to a seller of a corresponding put. If the market price of the underlying investment is
equal to, or above, the exercise price and, as a result, the put is not exercised or resold, the put will become worthless at its expiration date. In that case, the Fund will have paid the premium, but lost the right to sell the underlying
investment. However, the Fund can sell the put prior to its expiration. That sale may or may not be at a profit.
When a Fund purchases a call or put on an index or future, it pays a premium, but settlement is in cash rather than by delivery of the underlying investment to the Fund. Gain or loss depends
on changes in the index in question (and, thus, on price movements in the securities market generally), rather than on price movements in individual securities or futures contracts.
Forward Contracts. Forward contracts are foreign currency exchange contracts. They are used to buy or
sell foreign currency for future delivery at a fixed price. A Fund uses them to “lock in” the U.S. dollar price of a security denominated in a foreign currency that the Fund has bought or sold or to protect against possible losses from changes
in the relative values of the U.S. dollar and a foreign currency. A Fund limits its exposure in foreign currency exchange contracts in a particular foreign currency to the amount of its assets denominated in that currency or a closely
correlated currency. A Fund also can use “cross-hedging,” where it hedges against changes in currencies other than the currency in which a security it holds is denominated.
Under a forward contract, one party agrees to purchase, and another party agrees to sell, a specific currency at a future date. That date may be any fixed number of days from the date of the
contract agreed on by the parties. The transaction price is set at the time the contract is entered into. These contracts are traded in the inter-bank market conducted directly among currency traders (usually, large commercial banks) and their
customers.
A Fund can use forward contracts to protect against uncertainty in the level of future exchange rates. The use of forward contracts does not eliminate the risk of fluctuations in the prices of
the underlying securities the Fund owns or intends to acquire, but it does fix a rate of exchange in advance. Although forward contracts may reduce the risk of loss from a decline in the value of the hedged currency, at the same time, they
limit any potential gain if the value of the hedged currency increases.
When a Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency, or when it anticipates receiving dividend payments in a foreign currency, a Fund
might desire to “lock in” the U.S. dollar price of the security or the U.S. dollar equivalent of the dividend payments. To do so, the Fund might enter into a forward contract for the purchase or sale of the amount of foreign currency involved
in the underlying transaction, in a fixed amount of U.S. dollars per unit of the foreign currency (“transaction hedge”). The transaction hedge will protect the Fund against a loss from an adverse change in the currency exchange rates during the
period between the date on which the security is purchased or sold, or on which the payment is declared and the date on which the payments are made or received.
A Fund also could use forward contracts to lock in the U.S. dollar value of portfolio positions (“position hedge”). When a Fund believes that foreign currency might suffer a substantial
decline against the U.S. dollar, it could enter into a forward contract to sell an amount of that foreign currency, approximating the value of some or all of its portfolio securities denominated in that foreign currency. When a Fund believes
that the U.S. dollar may suffer a substantial decline against a foreign currency, it could enter into a forward contract to buy that foreign currency for a fixed dollar amount. Alternatively, a Fund could enter into a forward contract to sell a
different foreign currency for a fixed U.S. dollar amount if the Fund believes that the U.S. dollar value of the foreign currency to be sold, pursuant to its forward contract, will fall whenever there is a decline in the U.S. dollar value of
the currency in which portfolio securities of the Fund are denominated (“cross hedge”).
A Fund will cover its short positions in these cases by identifying to its custodian bank assets having a value equal to the aggregate amount of the Fund’s commitment under forward contracts.
A Fund will not enter into forward contracts or maintain a net exposure to such contracts if the consummation of the contracts would obligate the Fund to deliver an amount of foreign currency in excess of the value of the Fund’s portfolio
securities or other assets denominated in that currency or another currency that is the subject of the hedge. However, to avoid excess transactions and transaction costs, a Fund can maintain a net exposure to forward contracts in excess of the
value of its portfolio securities or other assets denominated in foreign currencies if the excess amount is “covered” by liquid securities denominated in any currency. The cover must be at least equal, at all times, to the amount of that
excess. As one alternative, a Fund can purchase a call option permitting it to purchase the amount of foreign currency being hedged by a forward sale contract at a price no higher than the forward
Statement of Additional Information | Davis Fundamental ETF Trust | 13
contract price. As another alternative, a Fund can purchase a put option permitting it to sell the amount of foreign currency subject to a forward purchase contract at a price as high as or
higher than the forward contract price.
The precise matching of the amounts under forward contracts and the value of the securities involved generally will not be possible because the future value of securities denominated in
foreign currencies will change as a consequence of market movements between the date the forward contract is entered into and the date it is sold. In some cases, the Adviser might decide to sell the security and deliver foreign currency to
settle the original purchase obligation. If the market value of the security is less than the amount of foreign currency that the Fund is obligated to deliver, the Fund might have to purchase additional foreign currency on the “spot” (that is,
cash) market to settle the security trade. If the market value of the security instead exceeds the amount of foreign currency the Fund is obligated to deliver to settle the trade, the Fund might have to sell on the spot market some of the
foreign currency received on the sale of the security. There will be additional transaction costs on the spot market in those cases.
The projection of short-term currency market movements is extremely difficult, and the successful execution of a short-term hedging strategy is highly uncertain. Forward contracts involve the
risk that anticipated currency movements would not be accurately predicted, causing a Fund to sustain losses on these contracts and to pay additional transactions costs. The use of forward contracts in this manner might reduce a Fund’s
performance if there are unanticipated changes in currency prices to a greater degree than if the Fund had not entered into such contracts.
At or before the maturity of a forward contract requiring a Fund to sell a currency, the Fund might sell a portfolio security and use the sale proceeds to make delivery of the currency. In the
alternative, a Fund might retain the security and offset its contractual obligation to deliver the currency by purchasing a second contract. Under that contract the Fund will obtain, on the same maturity date, the same amount of the currency
that it is obligated to deliver. Similarly, the Fund might close out a forward contract requiring it to purchase a specified currency by entering into a second contract, entitling it to sell the same amount of the same currency on the maturity
date of the first contract. The Fund would realize a gain or loss as a result of entering into such an off-setting forward contract under either circumstance. The gain or loss will depend on the extent to which the exchange rate or rates
between the currencies involved moved between the execution dates of the first and off-setting contracts.
The cost to a Fund of engaging in forward contracts varies with factors such as the currencies involved, the length of the contract period and the market conditions then prevailing. Because
forward contracts usually are entered into on a principal basis, no brokerage fees or commissions are involved. Because these contracts are not traded on an exchange, a Fund must evaluate the credit and performance risk of the counterparty
under each forward contract.
Although each Fund values its assets daily in terms of U.S. dollars, it does not intend to convert its holdings of foreign currencies into U.S. dollars on a daily basis. A Fund can convert
foreign currency from time to time and will incur costs in doing so. Foreign exchange dealers do not charge a fee for conversion, but they do seek to realize a profit based on the difference between the prices at which they buy and sell various
currencies. Thus, a dealer might offer to sell a foreign currency to a Fund at one rate, while offering a lesser rate of exchange if the Fund desires to resell that currency to the dealer.
Index-Linked Notes. Principal and/or interest payments on these notes depend on the performance of an
underlying index. Currency-indexed securities are another derivative a Fund can use. Typically, these are short-term or intermediate-term debt securities. Their value at maturity or the rates at which they pay income are determined by the
change in value of the U.S. dollar against one or more foreign currencies or an index. In some cases, these securities may pay an amount at maturity based on a multiple of the amount of the relative currency movements. This type of index
security offers the potential for increased income or principal payments, but at a greater risk of loss than a typical debt security of the same maturity and credit quality.
Debt Exchangeable for Common Stock of an Issuer or “Equity-Linked Debt Securities” of an Issuer. At
maturity, the debt security is exchanged for common stock of the issuer or it is payable in an amount based on the price of the issuer’s common stock at the time of maturity. Both alternatives present a risk that the amount payable at maturity
will be less than the principal amount of the debt because the price of the issuer’s common stock might not be as high as the Adviser expected.
Interest Rate Swap Transactions. A Fund can enter into interest rate swap agreements. In an interest
rate swap, a Fund and another party exchange their right to receive or their obligation to pay interest on a security. For example, they might swap the right to receive floating rate payments for fixed rate payments. A Fund can enter into swaps
only on securities that it owns. Also, a Fund will identify liquid assets on its books (
typically, U.S. Treasury notes, certificates of deposit, other high-grade, short-term obligations or
interest-bearing cash equivalents) to cover any amounts it could owe under swaps that exceed the amounts it is entitled to receive, and it will adjust that amount daily as needed.
Swap Agreements Entail Both Interest Rate Risk and Credit Risk. There is a risk that, based on
movements of interest rates in the future, the payments made by a Fund under a swap agreement will be greater than the payments it received. Credit risk arises from the possibility that the counterparty will default. If the counterparty
defaults, a Fund’s loss will consist of the net amount of contractual interest payments that it has not yet received. The Adviser will monitor the creditworthiness of counterparties to the Fund’s interest rate swap transactions on an ongoing
basis.
Statement of Additional Information | Davis Fundamental ETF Trust | 14
A Fund can enter into swap transactions with certain counterparties pursuant to master netting agreements. A master netting agreement provides that all swaps done between a Fund and that
counterparty shall be regarded as parts of an integral agreement. If amounts are payable on a particular date in the same currency in respect of one or more swap transactions, the amount payable on that date in that currency shall be the net
amount. In addition, the master netting agreement may provide that if one party defaults generally or on one swap, the counterparty can terminate all of the swaps with that party. Under these agreements, if a default results in a loss to one
party, the measure of that party’s damages is calculated by reference to the average cost of a replacement swap for each swap. It is measured by the mark-to-market value at the time of the termination of each swap. The gains and losses on all
swaps are then netted, and the result is the counterparty’s gain or loss on termination. The termination of all swaps and the netting of gains and losses on termination, generally, is referred to as “aggregation.”
Hedging Foreign Currency. To attempt to reduce exposure to currency fluctuations, a Fund may trade in
forward foreign currency exchange contracts (“forward contracts”), currency futures contracts and options thereon and securities indexed to foreign securities. These techniques are not always effective and their use may expose a Fund to other
risks, such as liquidity and counterparty risk. The Adviser exercises its professional judgment as to whether the reduction in currency risk justifies the expense and exposure to liquidity and counterparty risk. These techniques may be used to
lock in an exchange rate in connection with transactions in securities denominated or traded in foreign currencies, to hedge the currency risk in foreign securities held by a Fund and to hedge a currency risk involved in an anticipated purchase
of foreign securities. Cross-hedging also may be utilized, that is, entering into a hedge transaction with respect to a foreign currency different from the one in which a trade is to be made or in which a portfolio security is principally
traded. There is no limitation on the amount of assets that may be committed to currency hedging. However, the currency hedging transactions may be utilized as a tool to reduce currency fluctuation risks due to a current or anticipated position
in foreign securities. The successful use of currency hedging transactions usually depends on the Adviser’s ability to forecast interest rate and currency exchange rate movements. Should interest or exchange rates move in an unexpected manner,
the anticipated benefits of futures contracts, options or forward contracts may not be achieved or losses may be realized and, thus, the Fund could be in a worse position than if such strategies had not been used. Unlike many exchange-traded
futures contracts, there are no daily price fluctuation limits with respect to options on currencies and forward contracts, and adverse market movements, therefore, could continue to an unlimited extent over a period of time. In addition, the
correlation between movements in the prices of such instruments and movements in the prices of the securities and currencies hedged or used for cover will not be perfect and could produce unanticipated losses. Unanticipated changes in currency
prices may result in poorer overall performance for a Fund than if it had not entered into such contracts. When taking a position in an anticipatory hedge (when a Fund purchases a futures contract or other similar instrument to gain market
exposure in anticipation of purchasing the underlying securities at a later date), the Fund is required to set aside cash or high-grade liquid securities to fully secure the obligation.
A forward contract is an obligation to purchase or sell a specific currency for an agreed price at a future date that is individually negotiated and privately traded by currency traders and
their customers. Such a contract gives a Fund a position in a negotiated, currently non-regulated market. A Fund may enter into a transaction hedge via a forward contract, for example, when it enters into a contract for the purchase or sale of
a security denominated in a foreign currency in order to “lock in” the U.S. dollar price of the security. Additionally, when the Adviser believes that a foreign currency may suffer a substantial decline against the U.S. dollar, a Fund may enter
into a forward sale contract to sell an amount of that foreign currency approximating the value of some or all of the Fund’s portfolio securities denominated in such foreign currency. When the Adviser believes that the U.S. dollar may suffer a
substantial decline against a foreign currency, a Fund may enter into a position hedge via a forward purchase contract to buy that foreign currency for a fixed dollar amount in anticipation of purchasing foreign traded securities. In this
situation, a Fund may, in the alternative, enter into cross hedge via a forward contract with respect to a different foreign currency for a fixed U.S. dollar amount. This may be done, for example, where the Adviser believes that the U.S. dollar
value of the currency to be sold pursuant to the forward contract will fall whenever there is a decline in the U.S. dollar value of the currency in which portfolio securities of a Fund are denominated.
A Fund may purchase and write put and call options on foreign currencies for the purpose of protecting against declines in the U.S. dollar value of foreign currency-denominated portfolio
securities and against increases in the U.S. dollar cost of such securities to be acquired. As in the case of other kinds of options, however, the writing of an option on a foreign currency constitutes only a partial hedge, up to the amount of
the premium received, and a Fund could be required to purchase or sell foreign currencies at disadvantageous exchange rates, thereby incurring losses. The purchase of an option on a foreign currency may constitute an effective hedge against
fluctuations in exchange rates although, in the event of rate movements adverse to the Fund’s position, it may forfeit the entire amount of the premium plus related transaction costs. Options on foreign currencies to be written or purchased by
a Fund are traded on U.S. and foreign exchanges or OTC. Currently, a significant portion or all of the value of an OTC option may be treated as an illiquid investment and subject to the restriction on such investments as long as the SEC
requires that OTC options be treated as illiquid. Generally, a Fund would utilize options traded on exchanges where the options are standardized.
A Fund may enter into contracts for the purchase or sale for future delivery of foreign currencies (“currency futures contracts”) and may purchase and write put and call options to buy or sell
currency futures contracts. A “sale” of a currency futures contract means the acquisition of a contractual obligation to deliver the foreign currencies called for by the contract at
Statement of Additional Information | Davis Fundamental ETF Trust | 15
a specified price on a specified date. A “purchase” of a currency futures contract means the incurring of a contractual obligation to acquire the foreign currencies called for by the contract
at a specified price on a specified date. Options on currency futures contracts to be purchased by a Fund will be traded on U.S. or foreign exchanges or OTC. A Fund also may purchase securities (debt securities or deposits) that have their
coupon rate or value at maturity determined by reference to the value of one or more foreign currencies. These strategies will be used for hedging purposes only. A Fund will hold securities or other options or futures positions whose values are
expected to offset its obligations under the hedge strategies. A Fund will not enter into a currency hedging position that exposes it to an obligation to another party, unless it follows its segregated account procedures.
A Fund’s ability to dispose of its positions in futures contracts, options and forward contracts will depend on the availability of liquid markets in such instruments. Markets in options and
futures with respect to currencies are still developing. It is impossible to predict the amount of trading interest that may exist in various types of futures contracts, options and forward contracts. If a secondary market does not exist with
respect to an option purchased or written by a Fund over-the-counter, it might not be possible to effect a closing transaction in the option (i.e., dispose of the option) with the result that (i) an option purchased by a Fund would have to be
exercised in order for it to realize any profit; and (ii) a Fund may not be able to sell currencies covering an option written by the Fund until the option expires or it delivers the underlying futures currency on exercise. Therefore, no
assurance can be given that a Fund will be able to utilize these instruments effectively for the purposes set forth above. A Fund’s ability to engage in currency hedging transactions may be limited by tax considerations.
Risks of Hedging with Options and Futures. The use of hedging instruments requires special skills and
knowledge of investment techniques that are different than what is required for normal portfolio management. If the Adviser uses a hedging instrument at the wrong time or judges market conditions incorrectly, hedging strategies may reduce a
Fund’s return or may compound its losses. A Fund also could experience losses if the prices of its futures and options positions were not correlated with its other investments.
A Fund’s option activities could affect its portfolio turnover rate and brokerage commissions. The exercise of calls written by a Fund might cause it to sell related portfolio securities, thus
increasing its turnover rate. The exercise by a Fund of puts on securities will cause the sale of underlying investments, increasing portfolio turnover. Although the decision whether to exercise a put it holds is within a Fund’s control,
holding a put might cause it to sell the related investments for reasons that would not exist in the absence of the put.
A Fund could pay a brokerage commission each time it buys a call or put, sells a call or put, or buys or sells an underlying investment in connection with the exercise of a call or put. Those
commissions could be higher on a relative basis than the commissions for direct purchases or sales of the underlying investments. Premiums paid for options are small in relation to the market value of the underlying investments. Consequently,
put and call options offer large amounts of leverage. The leverage offered by trading in options could result in a Fund’s NAV being more sensitive to changes in the value of the underlying investment.
If a covered call written by a Fund is exercised on an investment that has increased in value, a Fund will be required to sell the investment at the call price. It will not be able to realize
any profit if the investment has increased in value above the call price.
An option position may be closed out only on a market that provides secondary trading for options of the same series, and there is no assurance that a liquid secondary market will exist for
any particular option. A Fund might experience a loss if it could not close out a position because of an illiquid market for the future or option.
There is a risk in using short hedging by selling futures, or purchasing puts on broad-based indices or futures, to attempt to protect against declines in the value of a Fund’s portfolio
securities. The risk is that the prices of the futures or the applicable index will correlate imperfectly with the behavior of the cash prices of a Fund’s securities. For example, it is possible that while a Fund has used hedging instruments in
a short hedge, the market might advance and the value of the securities held in the Fund’s portfolio might decline. If that occurred, the Fund would lose money on the hedging instruments and also experience a decline in the value of its
portfolio securities. However, while this could occur for a very brief period or to a very small degree, over time the value of a diversified portfolio of securities will tend to move in the same direction as the indices on which the hedging
instruments are based. The risk of imperfect correlation increases as the composition of the Fund’s portfolio diverges from the securities included in the applicable index. To compensate for the imperfect correlation of movements in the price
of the portfolio securities being hedged and movements in the price of the hedging instruments, a Fund might use hedging instruments in a greater dollar amount than the dollar amount of portfolio securities being hedged. It might do so if the
historical volatility of the prices of the portfolio securities being hedged is more than the historical volatility of the applicable index.
The ordinary spreads between prices in the cash and futures markets are subject to distortions, due to differences in the nature of those markets. First, all participants in the futures market
are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through off-setting transactions that could distort the normal relationship between
the cash and futures markets. Second, the liquidity of the futures market depends on participants entering into off-setting transactions rather than making or taking delivery. To the
Statement of Additional Information | Davis Fundamental ETF Trust | 16
extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point of view of speculators, the deposit
requirements in the futures market are less onerous than margin requirements in the securities markets. Therefore, increased participation by speculators in the futures market may cause temporary price distortions.
A Fund can use hedging instruments to establish a position in the securities markets as a temporary substitute for the purchase of individual securities (“long hedging”) by buying futures
and/or calls on such futures, broad-based indices or on securities. It is possible that when a Fund does so, the market might decline. If the Fund then concludes not to invest in securities because of concerns that the market might decline
further or for other reasons, the Fund will realize a loss on the hedging instruments that is not offset by a reduction in the price of the securities purchased.
Regulatory Aspects of Hedging Instruments. If and when a Fund begins using futures and options on
futures, it will be required to operate within certain guidelines and restrictions with respect to the use of futures as established by the Commodities Futures Trading Commission (the “CFTC”). In particular, prior to trading in derivatives, the
Fund intends to comply with Rule 4.5 and make the necessary filings with the CFTC to be exempted from registration with the CFTC as a commodity pool operator. To comply with Rule 4.5, the Fund would be required to limit its transactions in
commodities to below one of two thresholds. One of the thresholds requires that a Fund's aggregate initial margin and premiums posted for its non-bona fide hedging trading in these instruments must not exceed five percent of the liquidating
value of its portfolio. As an alternative, a Fund may limit the aggregate net notional value of its derivatives transactions not used solely for bona fide hedging purposes to no more than 100 percent of the liquidation value of its portfolio
determined at the time the most recent position was established. Transactions in options by a Fund are subject to limitations established by the option exchanges. The exchanges limit the maximum number of options that may be written or held by
a single investor or group of investors acting in concert. Those limits apply regardless of whether the options were written or purchased on the same or different exchanges, or are held in one or more accounts or through one or more different
exchanges or through one or more brokers. Thus, the number of options that a Fund can write or hold may be affected by options written or held by other entities, including other investment companies having the same adviser as the Fund (or an
adviser that is an affiliate of the Fund’s adviser). The exchanges also impose position limits on futures transactions. An exchange may order the liquidation of positions found to be in violation of those limits and may impose certain other
sanctions.
Under the 1940 Act, when a Fund purchases a future, it must maintain cash or readily marketable short-term debt instruments in an amount equal to the market value of the securities underlying
the future, less the margin deposit applicable to it.
Tax Aspects of Certain Hedging Instruments. Certain foreign currency exchange contracts in which a Fund
can invest are treated as “Section 1256 contracts” under the Internal Revenue Code. In general, gains or losses relating to Section 1256 contracts are characterized as 60% long-term and 40% short-term capital gains or losses under the Code.
However, foreign currency gains or losses arising from Section 1256 contracts that are forward contracts, generally, are treated as ordinary income or loss. In addition, Section 1256 contracts held by a Fund at the end of each taxable year are
“marked-to-market,” and unrealized gains or losses are treated as though they were realized. These contracts also may be marked-to-market for purposes of determining the excise tax applicable to investment company distributions and for other
purposes under rules prescribed pursuant to the Internal Revenue Code. An election can be made by a Fund to exempt those transactions from this marked-to-market treatment.
Certain forward contracts a Fund enters into may result in “straddles” for federal income tax purposes. The straddle rules may affect the character and timing of gains (or losses) recognized
by a Fund on straddle positions. Generally, a loss sustained on the disposition of a position making up a straddle is allowed only to the extent that the loss exceeds any unrecognized gain in the off-setting positions making up the straddle. A
previously disallowed loss generally is allowed at the point when there is no unrecognized gain in the off-setting positions making up the straddle, or the off-setting position is disposed of.
Under the Internal Revenue Code, the following gains or losses are treated as ordinary income or loss: (i) gains or losses attributable to fluctuations in exchange rates that occur between the
time a Fund accrues interest or other receivables or accrues expenses or other liabilities denominated in a foreign currency and the time the Fund actually collects such receivables or pays such liabilities; and (ii) gains or losses
attributable to fluctuations in the value of a foreign currency between the date of acquisition of a debt security denominated in a foreign currency or foreign currency forward contracts and the date of disposition.
Currency gains and losses are offset against market gains and losses on each trade before determining a net “Section 988” gain or loss under the Internal Revenue Code for that trade, which may
increase or decrease the amount of a Fund’s investment income available for distribution to its shareholders.
Additional Non-Principal Investment Strategies and Risks
Settlement Risks. Settlement systems in some markets (especially, those of developing countries) are generally less well organized
than those of more developed markets. There may be risks that settlement may be delayed and that cash or securities belonging to a Fund may be at risk because of failures or defects in the systems. In particular, market practice may require
that payment be made before receipt of the security being purchased or that delivery of a security be made before
Statement of Additional Information | Davis Fundamental ETF Trust | 17
payment is received. In such a situation, a default by a broker or bank that is processing the transaction may cause a Fund to suffer a loss.
Distressed Companies. A Fund may invest in, or continue to hold, debt or securities issued
by distressed companies that are, or are about to be, involved in reorganizations, financial restructurings or bankruptcy. A bankruptcy, merger or other restructuring, or a tender or exchange offer, proposed or pending at the time a Fund
invests in the debt or securities may not be completed on the terms or within the time frame contemplated, which may result in losses to the Fund. Debt obligations of distressed companies typically are unrated, lower-rated, in default or close
to default and are generally more likely to become worthless than the securities of more financially stable companies.
Borrowing. A Fund may purchase additional securities so long as borrowings do not exceed 5%
of its total assets. A Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities. A Fund may borrow from banks provided that, immediately after any such borrowing there is an
asset coverage of at least 300% for all borrowings. In the event that such asset coverage at any time falls below 300%, the Fund shall, within three days thereafter (not including Sundays and holidays) reduce the amount of its borrowings to an
extent that the asset coverage of such borrowings shall be at least 300%. Borrowing money would have the effect of temporarily leveraging a Fund’s assets and potentially exposing it to leveraged losses.
Lending Portfolio Securities. A Fund may lend its portfolio securities to certain types of eligible borrowers approved by the Board
of Trustees. A Fund may engage in securities lending to earn additional income or to raise cash for liquidity purposes. The Fund must receive collateral for a loan. Under current applicable regulatory requirements (which are subject to change),
on each business day, the loan collateral must be at least equal to the value of the loaned securities. The collateral must consist of cash, bank letters of credit, securities of the U.S. Government or its agencies or instrumentalities, or
other cash equivalents in which the Fund is permitted to invest.
Lending activities are strictly limited, as described in the section titled “Investment Restrictions.” Lending money or securities involves the risk
that a Fund may suffer a loss if a borrower does not repay a loan when due. To manage this risk, the Fund deals only with counterparties it believes to be creditworthy and requires that the counterparty deposit collateral with the Fund.
When it loans securities, a Fund still owns the securities, receives amounts equal to the dividends or interest on loaned securities and is subject to gains or losses on those securities. The
Fund also receives one or more of (i) negotiated loan fees; (ii) interest on securities used as collateral; and/or (iii) interest on any short-term debt instruments purchased with such loan collateral. Either type of interest may be shared with
the borrower. The Fund also may pay reasonable finder’s, custodian and administrative fees in connection with these loans. The terms of the Fund’s loans must meet applicable tests under the Code and must permit the Fund to reacquire loaned
securities on five days’ notice or in time to vote on any important matter.
For purposes of applying the limitation set forth below in the Investment Restrictions sub-section titled “Making Loans,” there are no limitations
with respect to unsecured loans made by a Fund to an unaffiliated party. However, if a Fund loans its portfolio securities, the obligation on the part of the Fund to return collateral upon termination of the loan could be deemed to involve the
issuance of a senior security within the meaning of Section 18(f) of the 1940 Act. In order to avoid violation of
Section 18(f), a Fund may not make a loan of portfolio securities if, as a result, more than one-third of its total asset value (at market value computed at the time of making a loan) would be
on loan.
As of the most recent fiscal year end:
|
DUSA
|
DFNL
|
DWLD
|
DINT
|
Gross income from securities lending activities (including income from cash collateral reinvestment):
|
$ ‑
|
$ ‑
|
$ ‑
|
$ ‑
|
Fees and/or compensation for securities lending activities and related services:
|
$ ‑
|
$ ‑
|
$ ‑
|
$ ‑
|
Fees paid to State Street from a revenue split for their services as securities lending agent:
|
$ ‑
|
$ ‑
|
$ ‑
|
$ ‑
|
|
$ ‑
|
$ ‑
|
$ ‑
|
$ ‑
|
Fees paid for any cash collateral management services (including fees deducted from a pooled cash collateral reinvestment vehicle) that are not included in the revenue split paid to State Street:
|
$ ‑
|
$ ‑
|
$ ‑
|
$ ‑
|
Administrative fees not included in revenue split:
|
$ ‑
|
$ ‑
|
$ ‑
|
$ ‑
|
Indemnification fees not included in revenue split:
|
$ ‑
|
$ ‑
|
$ ‑
|
$ ‑
|
Rebates (paid to borrowers):
|
$ ‑
|
$ ‑
|
$ ‑
|
$ ‑
|
Other fees not included in revenue split (specify):
|
$ ‑
|
$ ‑
|
$ ‑
|
$ ‑
|
Aggregate fees/compensation for securities lending activities:
|
$ ‑
|
$ ‑
|
$ ‑
|
$ ‑
|
Net income from securities lending activities:
|
$ ‑
|
$ ‑
|
$ ‑
|
$ ‑
|
Statement of Additional Information | Davis Fundamental ETF Trust | 18
Short Sales. When a Fund believes that a security is overvalued, it may sell the security short and borrow the same security from a
broker or other institution to complete the sale. If the price of the security decreases in value, the Fund may make a profit and, conversely, if the security increases in value, the Fund will incur a loss because it will have to replace the
borrowed security by purchasing it at a higher price. There can be no assurance that a Fund will be able to close out the short position at any particular time or at an acceptable price. Although a Fund’s gain is limited to the amount at which
it sold a security short, its potential loss is not limited. A lender may request that the borrowed securities be returned on short notice; if that occurs at a time when other short sellers of the subject security are receiving similar
requests, a “short squeeze” can occur. This means that a Fund might be compelled, at the most disadvantageous time, to replace borrowed securities previously sold short with purchases on the open market at prices significantly greater than
those at which the securities were sold short. Short selling also may produce higher than normal portfolio turnover and result in increased transaction costs to the Fund. If a Fund sells a security short it will either own an off-setting “long
position” (an economically equivalent security that is owned) or establish a “Segregated Account” as described in this SAI.
A Fund also may make short sales “against-the-box,” in which it sells short securities it owns. A Fund will incur transaction costs, including interest expenses, in connection with opening,
maintaining and closing short sales against-the-box, which results in a “constructive sale,” requiring the Fund to recognize any taxable gain from the transaction.
Each Fund has adopted a non-fundamental investment limitation that prevents it from selling any security short if it would cause more than 5% of its total assets, taken at market value, to be
sold short. This limitation does not apply to selling short against the box.
When-Issued and Delayed-Delivery Transactions. A Fund can invest in securities on a “when-issued” basis and can purchase or sell
securities on a “delayed-delivery” basis. When-issued and delayed-delivery are terms that refer to securities whose terms and indenture are available and for which a market exists, but that are not available for immediate delivery.
When such transactions are negotiated, the price (which, generally, is expressed in yield terms) is fixed at the time the commitment is made. Delivery and payment for the securities take place
at a later date (generally, within 45 days of the date the offer is accepted). The securities are subject to change in value from market fluctuations during the period until settlement. The value at delivery may be less than the purchase price.
For example, changes in interest rates before settlement will affect the value of such securities and may cause a loss to the Fund. During the period between purchase and settlement, no payment is made by the Fund to the issuer and no interest
accrues to the Fund from the investment.
A Fund may engage in when-issued transactions to secure what the Adviser considers to be an advantageous price and yield at the time of entering into the obligation. When a Fund enters into a
when-issued or delayed-delivery transaction, it relies on the other party to complete the transaction. Its failure to do so may cause the Fund to lose the opportunity to obtain the security at a price and yield the Adviser considers to be
advantageous. When a Fund engages in when-issued and delayed-delivery transactions, it does so for the purpose of acquiring or selling securities consistent with its investment objective and strategies, and not for the purpose of investment
leverage. Although a Fund will enter into delayed-delivery or when-issued purchase transactions to acquire securities, it can dispose of a commitment before settlement. If a Fund chooses to dispose of the right to acquire a when-issued security
before its acquisition or to dispose of its right to delivery or receive against a forward commitment, it may incur a gain or loss.
At the time a Fund makes the commitment to purchase or sell a security on a when-issued or delayed-delivery basis, it records the transaction on its books and reflects the value of the
security purchased in determining the Fund’s NAV. In a sale transaction, it records the proceeds to be received. A Fund will identify on its books liquid securities of any type at least equal in value to the value of the Fund’s purchase
commitments until the Fund pays for the investment.
When-issued and delayed-delivery transactions can be used by a Fund as defensive techniques to hedge against anticipated changes in interest rates and prices. For instance, in periods of
rising interest rates and falling prices, a Fund might sell securities in its portfolio on a forward commitment basis to attempt to limit its exposure to anticipated falling prices. In periods of falling interest rates and rising prices, a Fund
might sell portfolio securities and purchase the same or similar securities on a when-issued or delayed-delivery basis to obtain the benefit of currently higher cash yields.
Cybersecurity Risk. With the increased use of technologies, such as the Internet, to conduct business, the Funds have become
potentially more susceptible to operational and information security risks through breaches in cybersecurity. In general, a breach in cybersecurity can result from either a deliberate attack or an unintentional event. Cybersecurity breaches may
involve, among other things, infection by computer viruses or other malicious software code or unauthorized access to each Fund’s digital information systems, networks or devices through “hacking” or other means, in each case for the purpose of
misappropriating assets or sensitive information, corrupting data or causing operational disruption or failures in the physical infrastructure or operating systems that support the Funds. Cybersecurity risks also include the risk of losses of
service resulting from external attacks that do not require unauthorized access to the Funds’ systems, networks or devices. For example, denial-of-service attacks on the investment adviser’s or an affiliate’s website could effectively render
the
Funds’ network services unavailable to Fund shareholders and other intended end-users. Any such cybersecurity breaches or losses of service may cause the Funds to lose proprietary information,
suffer data corruption or lose operational capacity,
Statement of Additional Information | Davis Fundamental ETF Trust | 19
which, in turn, could cause the Funds to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. While each Fund
and its investment adviser have established plans and procedures designed to prevent or reduce the impact of a cybersecurity attack, there is no guarantee that these plans and procedures will be successful. There are inherent limitations in
these plans and procedures given the ever changing nature of technology and cybersecurity attack tactics and there is a possibility that certain risks have not been adequately identified or prepared for.
In addition, cybersecurity failures by or breaches of a Fund’s third-party service providers (including, but not limited to, the Fund’s investment adviser, transfer agent, custodian, liquidity
market maker, primary exchange, INAV agent, authorized participants and other financial intermediaries) may disrupt the business operations of the service providers and of the Fund, potentially resulting in financial losses; the inability of
authorized participants to transact business with the Fund and of the Fund to process transactions; the inability of the Fund to calculate its NAV; violations of applicable privacy and other laws, rules, and regulations; regulatory fines and
penalties; reputational damage; reimbursement or other compensatory costs; and/or additional compliance costs associated with implementation of any corrective measures. A Fund and its shareholders could be negatively impacted as a result of any
such cybersecurity breaches, and there can be no assurance that the Fund will not suffer losses relating to cybersecurity attacks or other informational security breaches affecting its third-party service providers in the future, particularly
as it cannot control cybersecurity plans or systems implemented by such service providers.
Securities a Fund invests in are subject to cybersecurity risks in similar ways to the Fund. A cybersecurity risk or cybersecurity event may cause a Fund’s investments in such issuers to lose
value. In extreme cases, a risk or event could cause the issuer to cease business.
Segregated Accounts. A number of each Fund’s potential non-principal investment strategies may require them to establish segregated
accounts. When a Fund enters into an investment strategy that would result in a “senior security,” as that term is defined in the 1940 Act, the Fund will either: (i) own an off-setting position in securities; or (ii) set aside liquid securities
in a segregated account with its custodian bank (or designated in the Fund’s books and records) in the amount prescribed. A Fund will maintain the value of such segregated accounts equal to the prescribed amount by adding or removing additional
liquid securities to account for fluctuations in the value of securities held in such accounts. Securities held in a segregated account cannot be sold while the senior security is outstanding, unless they are replaced with qualifying securities
and the value of the account is maintained.
A segregated account is not required when a Fund holds securities, options, or futures positions whose value is expected to offset its obligations that would otherwise require a segregated
account. A Fund may also use other SEC approved methods to reduce or eliminate the leveraged aspects of senior securities.
The Adviser is responsible for the placement of portfolio transactions, subject to the supervision of the Funds’ Board of Trustees. The following is a summary of the Adviser’s trading
policies, which are described in Part 2 of its Form ADV. The Adviser is primarily a discretionary investment adviser. Accordingly, the Adviser generally determines the securities and quantities to be bought and sold for each client’s account.
Portfolio turnover may vary from year to year, as well as within a year. High turnover rates are likely to result in comparatively greater brokerage expenses or transaction costs. The overall
reasonableness of brokerage commissions and transaction costs is evaluated by the Adviser based upon its knowledge of available information as to the general level of commissions and transaction costs paid by other institutional investors for
comparable services.
Each Fund also has a Brokerage Committee, which reviews the Funds’ trading as described in the section titled “Standing Committees of the Board of Trustees.”
Best Execution. The Adviser follows procedures intended to provide reasonable assurance of
best execution. However, there can be no assurance that best execution will in fact be achieved in any given transaction. The Adviser seeks to place portfolio transactions with brokers or dealers who will execute transactions as efficiently as
possible and at the most favorable net price. Determining what constitutes best execution is not only quantitative, e.g., the lowest possible transaction cost, but also whether the transaction represents the best qualitative execution. In
placing executions and paying brokerage commissions or dealer markups, the Adviser considers, among other factors, price, commission, timing, aggregated trades, capable floor brokers or traders, competent block trading coverage, ability to
position, capital strength and stability, reliable and accurate communication and settlement processing, use of automation, knowledge of other buyers or sellers, arbitrage skills, administrative ability, underwriting and provision of
information on the particular security or market in which the transaction is to occur, research, the range and quality of the services made available to clients and the payment of bona fide client expenses. The Adviser may place orders for
portfolio transactions with broker-dealers who have sold shares of funds that the Adviser serves as adviser or sub-adviser. However, when the Adviser places orders for portfolio transactions, it does not give any consideration to whether a
broker-dealer has sold shares of the funds which the Adviser serves as adviser or sub-adviser.
Statement of Additional Information | Davis Fundamental ETF Trust | 20
The applicability of specific criteria will vary depending on the nature of the transaction, the market in which it is executed and the extent to which it is possible to select from among
multiple broker-dealers.
Cross Trades. When the Adviser deems it to be advantageous, a Fund may purchase or sell securities directly from or to another
client account that is managed by the Adviser. This may happen due to a variety of circumstances, including situations when a Fund must purchase securities due to holding excess cash and, at the same time, a different client of the Adviser must
sell securities in order to increase its cash position. Cross trades are only executed when deemed beneficial to a Fund and the other client, and the Adviser has adopted written procedures to ensure fairness to both parties.
Investment Allocations. The Adviser considers many factors when allocating securities among its clients, (including the Funds)
including, but not limited to, the client’s investment style, applicable restrictions (i.e., a restriction preventing the holding of illiquid securities), availability of securities, available cash, anticipated liquidity and existing holdings.
The Adviser employs several portfolio managers, each of whom performs independent research and develops different levels of conviction concerning potential investments. Clients managed by the portfolio manager performing the research may
receive priority allocations of limited investment opportunities that are in short supply, including IPOs.
Clients are not assured of participating equally, or at all, in particular investment allocations. The nature of a client’s investment style may exclude it from participating in many
investment opportunities, even if the client is not strictly precluded from participation based on written investment restrictions. For example, (i) large-cap value clients are unlikely to participate in IPOs of small-capitalization companies;
(ii) the Adviser may allocate short-term trading opportunities to clients pursuing active trading strategies rather than clients pursuing long-term buy-and-hold strategies; (iii) minimum block sizes may be optimal for liquidity, which may limit
the participation of smaller accounts; (iv) it is sometimes impractical for some custodians to deal with securities that are difficult to settle; and (v) private accounts and managed money/wrap accounts generally do not participate in direct
purchases of foreign securities, but may participate in depositary receipts consisting of American Depositary Receipts (“ADRs”), European Depositary Receipts (“EDRs”) and Global Depositary Receipts (“GDRs”).
The Adviser attempts to allocate limited investment opportunities, including IPOs, among clients in a manner that is fair and equitable when viewed over a considerable period of time and
involving many allocations. When the Adviser is limited in the amount of a particular security it can purchase, due to a limited supply, limited liquidity or other reason, the Adviser may allocate the limited investment opportunity to a subset
of eligible clients. The Adviser would then allocate the next limited investment opportunity to a different subset of eligible clients, rotating among subsets as limited investment opportunities are identified.
The Adviser serves as investment adviser for a number of clients and may deal with conflicts of interest when allocating investment opportunities among its various clients. For example, (i)
the Adviser receives different advisory fees from different clients; (ii) the performance records of some clients are more public than the performance records of other clients; and (iii) the Adviser and its affiliates, owners, officers and
employees have invested substantial amounts of their own capital in some client accounts (notably, the Davis Funds, Selected Funds and Clipper Fund), but do not invest their own capital in every client’s account. The majority of the Adviser’s
clients pursue specific investment strategies, many of which are similar. The Adviser expects that, over long periods of time, most clients pursuing similar investment strategies should experience similar, but not identical, investment
performance. Many factors affect investment performance, including, but not limited to: (i) the timing of cash deposits and withdrawals to and from an account; (ii) the fact that the Adviser may not purchase or sell a given security on behalf
of all clients pursuing similar strategies; (iii) price and timing differences when buying or selling securities; and (iv) the clients’ different investment restrictions. The Adviser’s trading policies are designed to minimize possible
conflicts of interest in trading for its clients.
Limitations on Aggregate Investments in a Single Company. The Adviser’s policy is not to invest for the purpose of exercising
control or management of other companies. In extraordinary circumstances, the Adviser may seek to influence management. In such an event, appropriate government and regulatory filings would be made.
Federal and state laws, as well as company documents (sometimes referred to as “poison pills”) may limit the percentage of a company’s outstanding shares that may be purchased or owned by the
Adviser’s clients. This is especially true in heavily regulated industries such as insurance, banking and real estate investment trusts. Unless it can obtain an exception, the Adviser will not make additional purchases of these companies for
its clients if, as a result of such purchase, shares in excess of the applicable investment limitation (for example, 9.9% of outstanding voting shares) would be held by its clients in the aggregate.
Order Priority. The Adviser’s trading desk prioritizes incoming orders of similar purchases and sales of securities between
institutional and managed money/wrap account orders. The Adviser’s trading desk typically executes orders for institutional clients, including investment companies, institutional private accounts, sub-advised accounts and others. Managed
money/wrap account program sponsors typically execute orders for managed money/wrap accounts.
The Adviser’s trading desk attempts to coordinate the timing of orders with a trade rotation to prevent the Adviser from “bidding against itself” on orders. Generally, a block trade
representing a portion of the total trade is placed first for
Statement of Additional Information | Davis Fundamental ETF Trust | 21
institutional and private accounts. Once this trade is completed, the Adviser places orders for wrap accounts, one sponsor at a time. Sponsors of certain model portfolios will execute trades
for their clients. These model portfolio sponsors are included as a part of the wrap account trade rotation. If the Adviser has not received a response from a model portfolio sponsor within a reasonable period of time, the Adviser will resume
through the trade rotation. If this occurs, it is possible that the model portfolio sponsor and the Adviser will be executing similar trades for discretionary clients. The trading concludes with another block transaction for institutional and
private accounts. The trading desk follows procedures intended to provide reasonable assurance that no clients are disadvantaged by this trade rotation; and the compliance department monitors execution quality. However, there can be no
assurance that best execution will in fact be achieved in any given transaction.
Pattern Accounts. The Adviser serves as investment adviser for a number of clients that are
patterned after model portfolios or designated mutual funds managed by the Adviser. For example, a client pursuing the Adviser’s large-cap value strategy may be patterned after Davis New York Venture Fund. A client patterned after Davis New
York Venture Fund will usually have all of its trading (other than trading reflecting cash flows due to client deposits or withdrawals) aggregated with that of Davis New York Venture Fund. In unusual circumstances, the Adviser may not purchase
or sell a given security on behalf of all clients (even clients managed in a similar style), and it may not execute a purchase of securities or a sale of securities for all participating clients at the same time.
Orders for accounts that are not patterned after model portfolios or designated mutual funds are generally executed in the order received by the trading desk, with the following exceptions:
(i) the execution of orders for clients that have directed that particular brokers be used may be delayed until the orders that do not direct a particular broker have been filled; (ii) the execution of orders may be delayed when the client (or
responsible portfolio manager) requests such delay due to market conditions in the security to be purchased or sold; and (iii) the execution of orders that are to be bunched or aggregated.
Aggregated Trades. Generally, the Adviser’s equity portfolio managers communicate investment decisions to a centralized equity
trading desk, while fixed income portfolio managers normally place their transactions themselves. The Adviser frequently follows the practice of aggregating orders of various institutional clients for execution, if the Adviser believes that
this will result in the best net price and most favorable execution. In some instances, aggregating trades could adversely affect a given client. However, the Adviser believes that aggregating trades generally benefits clients because larger
orders tend to have lower execution costs, and the Adviser’s clients do not compete with one another trading in the market. Directed brokerage trades in a particular security are typically executed separately from, and possibly after, the
Adviser’s other client trades.
In general, all of the Adviser’s clients (excluding clients who are directing brokerage and managed account/wrap programs) seeking to purchase or sell a given security at approximately the
same time will be aggregated into a single order or series of orders. When an aggregated order is filled, all participating clients receive the price at which the order was executed. If, at a later time, the participating clients wish to
purchase or sell additional shares of the same security, or if additional clients seek to purchase or sell the same security, then the Adviser will issue a new order and the clients participating in the new order will receive the price at which
the new order was executed.
In the event that an aggregated order is not entirely filled, the Adviser will allocate the purchases or sales among participating clients in the manner it considers to be most equitable and
consistent with its fiduciary obligations to all such clients. Generally, partially-filled orders are allocated pro rata based on the initial order submitted by each participating client.
In accordance with the various managed account/wrap programs in which the Adviser participates, the Adviser typically directs all trading to the applicable program sponsor, unless, in the
Adviser’s reasonable discretion, doing so would adversely affect the client. Clients typically pay no commissions on trades executed through program sponsors. In the event that an order to the sponsor of a managed account/wrap program is not
entirely filled, the Adviser will allocate the purchases or sales among the clients of that sponsor in the manner it considers to be most equitable and consistent with its fiduciary obligations to all such clients. Generally, partially-filled
orders are allocated among the particular sponsor’s participating clients on a random basis that is anticipated to be equitable over time.
Trading Error Correction. In the course of managing client accounts, it is possible that trading errors will occur from time to
time. The Adviser has adopted Trading Error Correction Policies & Procedures which, when the Adviser is at fault, seek to place a client’s account in the same position it would have been had there been no error. The Adviser retains
flexibility in attempting to place a client’s account in the same position it would have been had there been no error. The Adviser attempts to treat all material errors uniformly, regardless of whether they would result in a profit or loss to
the client. For example, the Adviser may purchase securities from a client account at cost if they were acquired due to a trading error. If more than one trading error, or a series of trading errors, is discovered in a client account, then
gains and losses on the erroneous trades may be netted.
Research Paid for with Commissions (“Soft Dollars”). The Adviser does not use client commissions, “soft dollars,” to pay for: (i)
computer hardware or software, or other electronic communications facilities; (ii) publications, both paper based or electronic, that are available to the general public; and (iii) research reports that are created by parties other than the
broker-dealers providing trade execution, clearing and/or settlement services to the Adviser’s clients. If the Adviser determines to purchase such services, it pays for them using its own resources.
Statement of Additional Information | Davis Fundamental ETF Trust | 22
The Adviser may receive research that is bundled with the trade execution, clearing and/or settlement services provided by a particular broker-dealer. The Adviser may take into account the
products and services, as well as the execution capacity, of a brokerage firm in selecting brokers. Thus, transactions may be directed to a brokerage firm that provides: (i) important information concerning a company; (ii) introductions to key
company officers; (iii) industry and company conferences; and (iv) other value added research services. The Adviser may have an incentive to select or recommend a broker-dealer based on its interest in continuing to receive these value added
research or services that the Adviser believes are useful in its investment decision-making process, but only when, in the Adviser’s judgment, the broker-dealer is capable of providing best execution for that transaction. If the Adviser were to
direct brokerage to a firm providing these value added services, the Adviser may receive a benefit as it may not have to pay for the services it has received.
Research or other services obtained in this manner may be used in servicing the Adviser’s other accounts, including in connection with other Adviser client accounts other than those that pay
commissions to the broker. Such products and services may disproportionately benefit other Adviser client accounts relative to the Funds based on the amount of brokerage commissions paid by the Funds and such other Adviser client accounts. For
example, research or other services that are paid for through one client's commissions may not be used in managing that client's account.
The Adviser follows the concepts of Section 28(e) of the Securities Exchange Act of 1934. Subject to the criteria of Section 28(e), the Adviser may pay a broker a brokerage commission in
excess of that which another broker might have charged for effecting the same transactions, in recognition of the value of the brokerage and research services provided by or through the broker.
The Adviser’s Head Trader
exercises his professional judgment to determine which brokerage firm is best suited to execute any given portfolio transaction. This includes transactions executed through brokerage firms that provide the services listed above. The Adviser
does not attempt to allocate soft dollar benefits to client accounts proportionately to the commissions that the accounts pay to brokerage firms that provide research services.
The Adviser believes it is important to
its investment decision-making to have access to independent research.
Exceptions. There are occasions when the Adviser varies the trading procedures and considerations described above. The Adviser
exercises its best judgment in determining whether clients should execute portfolio transactions simultaneously with, prior to, or subsequent to the model portfolio or designated mutual fund that they are patterned after. The factors that the
Adviser considers in exercising its judgment include, but are not limited to, the need for confidentiality of the purchase or sale, market liquidity of the securities in issue, the particular events or circumstances that prompt the purchase or
sale of the securities and operational efficiencies. Even when transactions are executed on the same day, clients may not receive the same price as the model portfolios or designated mutual funds they are patterned after. If the transactions
are not aggregated, such prices may be better or worse.
Portfolio Turnover. Because the Funds’ portfolios are managed using the Davis Investment
Discipline, portfolio turnover is expected to be low. The Funds anticipate that during normal market conditions, their annual portfolio turnover rate will be less than 100%. However, depending upon market conditions, portfolio turnover rate
will vary. At times, it could be high, which could require the payment of larger amounts in brokerage commissions and possibly more taxable distributions.
When the Adviser deems it to be appropriate, a Fund may engage in active and frequent trading to achieve its investment objective. Active trading may include participation in IPOs. Active
trading may result in the realization and distribution to shareholders of larger amounts of capital gains compared with a Fund with less active trading strategies, which could increase shareholder tax liability. Active trading may also generate
larger amounts of short-term capital gains, which are generally taxable as ordinary income when distributed to taxable shareholders. Frequent trading also increases transaction costs that could detract from a Fund’s performance.
Statement of Additional Information | Davis Fundamental ETF Trust | 23
Portfolio Commissions.
The Funds paid the following brokerage commissions for the Fiscal Year-Ended October 31
|
2019
|
2018
|
2017
|
Davis Select U.S. Equity ETF
|
|
|
|
Brokerage commissions paid:
|
$41,756
|
$41,505
|
$2,238
|
Amount paid to brokers providing research:
|
-
|
-
|
-
|
Amount paid to brokers providing services to funds:
|
-
|
-
|
-
|
|
|
|
|
Davis Select International ETF
|
|
|
|
Brokerage commissions paid:
|
$58,680
|
$19,470
|
N/A
|
Amount paid to brokers providing research:
|
-
|
-
|
N/A
|
Amount paid to brokers providing services to funds:
|
-
|
-
|
N/A
|
|
|
|
|
Davis Select Worldwide ETF
|
|
|
|
Brokerage commissions paid:
|
$80,073
|
$155,410
|
$13,561
|
Amount paid to brokers providing research:
|
-
|
-
|
-
|
Amount paid to brokers providing services to funds:
|
-
|
-
|
-
|
|
|
|
|
Davis Select Financial ETF
|
|
|
|
Brokerage commissions paid:
|
$15,906
|
$22,436
|
$5,594
|
Amount paid to brokers providing research:
|
-
|
-
|
-
|
Amount paid to brokers providing services to funds:
|
-
|
-
|
-
|
|
|
|
|
Investments in Certain Broker-Dealers. Each Fund is required to identify any securities of its
“regular brokers and dealers” (as such term is defined in the 1940 Act) that it may hold at the close of its most recent fiscal year. Regular brokers or dealers of the Trust are the ten brokers or dealers that, during the most recent fiscal
year: (i) received the greatest dollar amounts of brokerage commissions from the Trust’s portfolio transactions; (ii) engaged as principal in the largest dollar amounts of portfolio transactions of the Trust; or (iii) sold the largest dollar
amounts of the Trust’s shares.
As of October 31, 2019
|
|
|
Fund
|
Broker-Dealer
|
Value
|
Davis Select U.S. Equity ETF
|
JP Morgan Chase & Co.
|
$9,130,528
|
Davis Select International ETF
|
none
|
none
|
Davis Select Worldwide ETF
|
none
|
none
|
Davis Select Financial ETF
|
JP Morgan Chase & Co.
|
$8,168,644
|
|
Goldman Sachs Group, Inc.
|
$4,126,342
|
|
Charles Schwab Corp.
|
$3,214,543
|
The Funds follow investment strategies developed in accordance with their investment objectives, policies and restrictions described in their prospectus and this SAI.
The Funds have adopted the fundamental investment policies set forth below, which may not be changed without shareholder approval. Where necessary, an explanation following a fundamental
policy describes the Funds’ practices with respect to that policy, as permitted by governing rules, regulations and interpretations. If the governing rules, regulations and/or interpretations change, the Funds’ investment practices may change
without a shareholder vote. The fundamental investment restrictions set forth below may not be changed without the approval of the lesser of: (i) 67% or more of the voting securities present at such meeting if the holders of more than 50% of
the outstanding voting securities of such company are present or represented by proxy; or (ii) more than 50% of the outstanding voting securities of such company.
Except for the fundamental investment policies regarding borrowing, all percentage restrictions apply as of the time of an investment without regard to any later fluctuations in the value of
portfolio securities or other assets. All references to the assets of a Fund are in terms of current market value.
◾
|
Diversification (Davis Select International ETF & Davis Select Worldwide ETF). The
Fund may not make any investment that is inconsistent with its classification as a diversified investment company under the 1940 Act.
|
Further Explanation of Diversification Policy. To remain classified as a
diversified investment company under the 1940 Act, a Fund must conform with the following: (i) with respect to 75% of its total assets, a diversified investment company may not invest more than 5% of its total assets, determined at market or
other fair value at the time of purchase, in the
Statement of Additional Information | Davis Fundamental ETF Trust | 24
securities of any one issuer; or (ii) invest in more than 10% of the outstanding voting securities of any one issuer, determined at the time of purchase. These limitations
do not apply to investments in securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities or securities issued by investment companies.
Diversification (Davis Select U.S. Equity ETF & Davis Select Financial ETF). The Funds are not required to diversify their investments.
Further Explanation of Diversification Policy. Each Fund intends to remain
classified as a RIC under the Code. This requires the Funds to conform to the following: (i) at the end of each quarter of the taxable year, at least 50% of the value of a Fund’s total assets must be represented by cash and cash items, U.S.
Government securities, securities of other regulated investment companies, and “other securities.” For this purpose, “other securities” does not include investments in the securities of any one issuer that represent more than 5% of the value of
a Fund’s total assets or more than 10% of the issuer’s outstanding voting securities.
◾
|
Concentration (Davis Select U.S. Equity ETF, Davis Select International ETF & Davis Select Worldwide ETF). The Funds may not concentrate their investments in the securities of issuers primarily engaged in any particular industry.
|
Further Explanation of Concentration Policy. The Funds may not invest 25% or more
of their total assets, taken at market value, in the securities of issuers primarily engaged in any particular industry (other than securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities). The Adviser
generally uses the Global Industry Classification Standard (“GICS”), as developed by Morgan Stanley Capital International and Standard & Poor’s Corporation, to determine industry classification. GICS presents industry classification as a
series of levels (i.e., sector, industry group, industry, and sub-industry). For purposes of measuring concentration, the Adviser generally classifies companies at the “industry group” or “industry” level. However, further analysis may lead the
Adviser to classify companies at the sub-industry level. The Adviser will only measure concentration at the sub-industry level when it believes that the various sub-industries in question can reasonably be expected to be impacted differently to
a material extent by future economic events. For example, in the “Insurance” industry, the Adviser believes that the sub-industries (insurance brokers, life & health insurance, multi-line insurance, property & casualty insurance, and
reinsurance) can reasonably be expected to be impacted differently to a material extent by future economic events such as natural disasters, global politics, inflation, unemployment, technology, etc. In addition, the Adviser may reclassify a
company into an entirely different sector if it believes that the GICS classification on a specific company does not accurately describe the company.
Concentration (Davis Select Financial ETF). The Fund concentrates its
investments in the financial services industry.
Further Explanation of Concentration Policy. Financial services are a “sector”
composed of a number of “industries,” examples of which are included in the following paragraph. The concentration policy requires the Fund to invest at least 25% of its assets in securities principally engaged in the financial services group
of industries which together make up the financial services sector. Due to the non-fundamental Name Policy, under normal circumstances the Fund invests at least 80% of its net assets, plus any borrowing for investment purposes, in securities
issued by companies principally engaged in the financial services sector.
A company is “principally engaged” in financial services if it owns financial services related assets constituting at least 50% of the total value of the company’s assets,
or if at least 50% of the company’s revenues are derived from its provision of financial services. The financial services sector consists of several different industries that behave differently in different economic and market environments
(e.g., banks, insurance, and securities brokerage houses). Companies with their principal business activity in one of the following areas are considered financial services firms: banks, thrifts and mortgage, specialized finance, consumer
finance, asset management, custody, investment banking, brokerage, insurance, financial exchanges and data, and mortgage REITs
The Fund may not invest 25% or more of its total assets, taken at market value, in the securities of issuers primarily engaged in any particular industry (other than
issuers in the financial services sector or securities issued or guaranteed by the U.S. Government or its agencies or instrumentalities).
◾
|
Issuing Senior Securities (All Funds). The Funds may not issue senior securities,
except as permitted under applicable law, including the 1940 Act and published SEC staff positions.
|
Further Explanation of Issuing Senior Securities. The Funds may not issue senior
securities, except as provided by the 1940 Act and any rules, regulations, orders, or letters issued thereunder. This limitation does not apply to selling short against the box. See the non-fundamental restriction further limiting short selling
below. The 1940 Act defines a “Senior Security” as any bond, debenture, note, or similar obligation constituting a security and evidencing indebtedness.
◾
|
Borrowing (All Funds). The Funds may not borrow money, except to the extent
permitted by applicable law including the 1940 Act and published SEC staff positions.
|
Further Explanation of Borrowing Policy. Each Fund may borrow from banks, provided
that immediately thereafter the Fund has 300% asset coverage for all borrowings. Each Fund may purchase additional securities so long as borrowings do
Statement of Additional Information | Davis Fundamental ETF Trust | 25
not exceed 5% of its total assets. A Fund may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities. In the
event that market fluctuations cause borrowing to exceed the limits stated above, the Adviser would act to remedy the situation as promptly as possible, normally within three business days, although it is not required to dispose of portfolio
holdings immediately if the Fund would suffer losses as a result.
◾
|
Underwriting (All Funds). The Funds may not underwrite securities of other issuers
except to the extent permitted by applicable law, including the 1940 Act and published SEC staff positions.
|
Further Explanation of Underwriting Policy. The Funds may not underwrite
securities of other issuers, except insofar as a Fund may be deemed to be an underwriter in connection with the disposition of its portfolio securities.
◾
|
Investments in Commodities and Real Estate (All Funds). The Funds may not purchase
or sell commodities or real estate, except to the extent permitted by applicable law, including the 1940 Act and published SEC staff positions.
|
Further Explanation of Policy Restricting Investments in Commodities and Real Estate. The Funds may purchase or sell
financial futures contracts, options on financial futures contracts, currency contracts, and options on currency contracts as described in their prospectus and SAI. A Fund may not purchase or sell real estate, except that a Fund may invest in
securities that are directly or indirectly secured by real estate or issued by issuers that invest in real estate.
◾
|
Making Loans (All Funds). The Funds may not make loans to other persons, except as
allowed by applicable law including the 1940 Act and published SEC staff positions.
|
Further Explanation of Lending Policy. The acquisition of investment securities or
other investment instruments, entering into repurchase agreements, leaving cash on deposit with the Funds’ custodian, and similar actions are not deemed to be the making of a loan.
To generate income and offset expenses, a Fund may lend portfolio securities to broker-dealers and other financial institutions that the Adviser believes to be
creditworthy in an amount up to 331/3% of its total assets, taken at market value. While securities are on loan, the borrower will pay the Fund any income accruing on the security. A Fund may invest any collateral it
receives in additional portfolio securities, typically U.S. Treasury notes, certificates of deposit, other high-grade, short-term obligations, or interest-bearing cash equivalents. A Fund is still subject to gains or losses due to changes in
the market value of securities that it has lent.
When a Fund lends its securities, it will require the borrower to give it collateral in cash or U.S. Government securities. A Fund will require collateral in an amount
equal to at least 100% of the current market value of the securities lent, including accrued interest. A Fund has the right to call a loan and obtain the securities lent any time on notice of not more than five business days. A Fund may pay
reasonable fees in connection with such loans.
Non-Fundamental Investment Policies
The Funds have adopted and will follow the non-fundamental investment policies set forth below, which may be changed by the Funds’ Board of Trustees without the approval of the Funds’
shareholders.
◾
|
Liquidity. The Portfolio shall be invested in publicly traded or otherwise readily
marketable equity securities. A security may become illiquid after purchase. If this occurs the Adviser would attempt to liquidate a Fund’s investment in this illiquid security in an orderly fashion.
|
◾
|
High-Yield, High-Risk Securities. A Fund will not purchase debt securities
rated BB or Ba, or lower (sometimes referred to as “Junk Bonds”), if the securities are in default at the time of purchase or if such purchase would then cause more than 20% of the Fund’s net assets to be invested in such lower-rated
securities.
|
◾
|
Options. A Fund will not
purchase an option if the purchase would cause the total premiums (at market) of all options then owned to exceed 5% of the Fund’s total assets. A Fund will not sell covered calls if the transaction would cause the total premiums
(at market) of all covered calls then written to exceed 25% of the Fund’s total assets. For additional information concerning option strategies and their risks, see the sub-section titled “Derivatives.”
|
◾
|
Futures Contracts. A Fund will not engage in a futures transaction if the transaction would
cause the nominal value of futures contracts then purchased or sold to exceed 25% of the Fund’s total assets. For additional information concerning futures contracts and their risks, see the sub-section titled “Derivatives.”
|
◾
|
Short Selling. A Fund will not sell any security short if it would cause more than 5% of its
total assets, taken at market value, to be sold short. This limitation does not apply to selling short against the box.
|
◾
|
Investing for Control. A Fund does not invest for the purpose of exercising control or
management of other companies.
|
◾
|
Mortgage, Pledge, Lend or Hypothecate Assets. A Fund will not
mortgage, pledge, lend or hypothecate more than 33 1/ 3% of its total assets, taken at market value in securities lending or other activities.
|
Statement of Additional Information | Davis Fundamental ETF Trust | 26
◾
|
Name Policy. Under normal circumstances, Davis Select Financial ETF invests at least 80% of
net assets, plus any borrowing for investment purposes, in securities issued by companies principally engaged in the financial services sector. Under normal circumstances, Davis Select U.S. Equity ETF invests at least 80% of net
assets plus any borrowing for investment purposes in equity securities issued by U.S. companies. Under normal circumstances, Davis Select Worldwide ETF and Davis Select International ETF will invest at least 40% of net assets in
securities issued by companies (i) organized or located outside of the U.S.; (ii) whose primary trading market is located outside the U.S.; or (iii) doing a substantial amount of business outside the U.S., which the Fund considers to
be a company that derives at least 50% of its revenue from business outside the U.S. or has at least 50% of its assets outside the U.S. Each Fund will comply with its Name Policy as of the time an investment is made. If at some point
a Fund no longer meets the 80% test (e.g., due to market value changes), it would not be required to sell assets, although any future investments would need to be made in a manner that tends to bring the Fund back into compliance. In
addition, because the 80% test applies under “normal circumstances,” a Fund could depart from the 80% requirement to take temporary defensive positions or due to other unusual events.
|
Davis Select U.S. Equity ETF, Davis Select Financial ETF, Davis Select International ETF or Davis Select Worldwide ETF would provide Fund shareholders with at least 60
days’ prior notice before changing its Name Policy, as described above.
Exchange Listing and Trading
A discussion of exchange listing and trading matters associated with an investment in a Fund is contained in the prospectus under “Buying and Selling
Shares.” The discussion below supplements, and should be read in conjunction with, such section of the prospectus.
The shares of a Fund are approved for listing and trading on the Exchange, subject to notice of issuance. The shares trade on the Exchange at prices that may differ from their NAV. There can
be no assurance that the requirements of the Exchange necessary to maintain the listing of shares of a Fund will continue to be met.
The Exchange may, but is not required to, remove the shares of a Fund from listing if: (i) following the initial twelve-month period beginning upon the commencement of trading of a Fund, there
are fewer than 50 beneficial holders of the shares for 30 or more consecutive trading days; (ii) the value of its underlying portfolio of securities on which a Fund is based is no longer calculated or available; (iii) the “indicative optimized
portfolio value” (“IOPV”) of a Fund is no longer calculated or available; (iv) the disclosed portfolio holdings are no longer made available or are not made available to all market participants at the same time; (v) if a Fund has failed to file
any filings required by the SEC or it is not in compliance with any exemptive order or no-action relief granted by the commission; or (vi) such other event shall occur or condition exists that, in the opinion of the Exchange, makes further
dealings on the Exchange inadvisable. In addition, the Exchange will remove the shares from listing and trading upon termination of the Trust or a Fund.
The Trust reserves the right to adjust the share price of a Fund in the future to maintain convenient trading ranges for investors. Any adjustments would be accomplished through stock splits
or reverse stock splits, which would have no effect on the net assets of the Fund.
As in the case of other publicly traded securities, brokers’ commissions on transactions will be based on negotiated commission rates at customary levels.
The base and trading currencies of the Funds is the U.S. dollar. The base currency is the currency in which the Funds’ NAV per share is calculated and the trading currency is the currency in
which shares of the Funds are listed and traded on the Exchange.
Statement of Additional Information | Davis Fundamental ETF Trust | 27
Section II:
The Trust and Key Persons
This SAI should be read in conjunction with, and supplements information available in, the prospectus.
Organization of the Trust
The Trust. Davis Fundamental ETF Trust is a business trust established in Delaware in 2016 and registered under the 1940 Act. The
Trust may issue multiple series, each of which would represent an interest in its separate portfolio. Currently, there are four series: (i) Davis Select U.S. Equity ETF (“DUSA”); (ii) Davis Select Financial ETF (“DFNL”); (iii) Davis Select
International ETF (“DINT”); and (iv) Davis Select Worldwide ETF (“DWLD”). For some issues, such as the election of
Trustees, all of the Trust’s authorized series vote together. For other issues, such as approval of the advisory agreement, each authorized series votes separately. Shares do not have
cumulative voting rights; therefore, the holders of more than 50% of the voting power can elect all of the Trustees. Rule 18f-2 under the 1940 Act provides that any matter required to be submitted under the provisions of the 1940 Act or
applicable state law or otherwise to the shareholders of the outstanding voting securities of an investment company will not be deemed to have been effectively acted on unless approved by the holders of a majority of the outstanding shares of
each series affected by such matter. Rule 18f-2 further provides that a series shall be deemed to be affected by a matter unless it is clear that the interests of each series in the matter are identical or that the matter does not affect any
interest of such series. Rule 18f-2 exempts the selection of independent accountants and the election of Board members from the separate voting requirements of the Rule.
The Trust does not hold regular annual shareholder meetings. Shareholder meetings are held when they are required under the 1940 Act or when otherwise called for special purposes. Special
shareholder meetings may be called on the written request of shareholders of at least 2/3 of the voting power that could be cast at the meeting. The Funds will provide assistance in calling and holding such special
meetings to the extent required by applicable Delaware law or SEC rules and regulations then in effect.
The management of the Trust, including general supervision of the duties performed for the Funds by the Adviser under the Investment Management Agreement, is the
responsibility of the Board of Trustees (the “Board”). The Board is comprised of three members, one of whom is an “interested person” (as such term “interested person” is defined in the 1940 Act) and two of whom are not interested persons
(referred to herein as “Independent Trustees”). One Independent Trustee was previously an Officer to the Adviser and its affiliates. The Board establishes each Fund’s policies and meets regularly to review the activities of the Officers, who
are responsible for day-to-day operations of the Funds, the Adviser, and certain other service providers. The Board approves all significant agreements between each Fund and those companies that furnish services to the Funds. Trustees are
elected and serve until their successors are elected and qualified.
Information about the Trustees, including their business addresses, dates of birth, principal occupations during the past five years and other current
Directorships of publicly traded companies or funds, are set forth
in the table below.
Kenneth Eich serves as the Chairman of the Board. The Independent Trustees have designated a Lead Independent Trustee, who functions as a liaison between the Chairman of the Board and the
other Independent Trustee(s). The Lead Independent Trustee presides at all Executive Sessions of the Independent Trustees, reviews and provides input on Board meeting agendas and materials, and typically represents the Independent Trustees in
discussions with Davis Advisors management. Ralph Egizi currently serves as Lead Independent Trustee. The Board has reviewed and determined that its leadership and committee structure is appropriate. The Chairman may perform such other
functions as may be requested by the Board from time to time. The Board has designated a number of standing committees, as further described below, each of which has a Chairman. The Board may also designate working groups or ad hoc committees
as it deems appropriate.
The Board believes that this leadership structure is appropriate because it allows the Board to exercise informed and independent judgment over matters under its purview, and it allocates
areas of responsibility among committees or working groups of Trustees and the full Board in a manner that enhances effective oversight. The Board also believes that having a majority of Independent Trustees is appropriate and in the best
interest of each Fund’s shareholders. Nevertheless, the Board also believes that having interested persons serve on the Board brings corporate and financial viewpoints that are, in the Board’s view, crucial elements in its decision-making
process. The leadership structure of the Board may be changed at any time and at the discretion of the Board, including in response to changes in circumstances or the characteristics of the Funds.
For the purposes of their service as Trustees to the Trust, the business address for each of the Trustees is
:
2949 East Elvira Road, Suite 101, Tucson, AZ
85756.
Statement of Additional Information | Davis Fundamental ETF Trust | 28
Name, Date of Birth, Position Held with Fund, Length of Service
|
Principal Occupation(s) During Past Five Years
|
Number of Portfolios Overseen
|
Other Directorships Held by Trustee During the Past 5 Years
|
|
Independent Trustees:
|
|
Ralph J. Egizi
(03/31/1948)
Trustee since 2016
|
President, EGZ International, LLC (investment and financial consulting company); Director, Benefits Finance and Investments, Eastman Chemical Company (manufacturer of chemicals, fibers and plastics), from 1999 to 2013
|
4
|
None
|
|
Thomas D. Tays
(03/07/1957)
Trustee since 2016
|
Retired. Chief Legal Officer, Davis Selected Advisers, L.P. from 1997 to 2013
|
4
|
Director, Davis Funds SICAV
|
|
|
Interested Trustee:
|
Kenneth C. Eich
(08/14/1953)
Trustee since 2016
|
Chief Operating Officer, Davis Selected Advisers, L.P.
|
4
|
None
|
|
Independent
Trustees’ Compensation
Independent Trustees receive an annual retainer for their service. During the fiscal year ended October 31, 2019, the compensation paid to the Independent Trustees is provided in the table
below. The Trustees receive no pecuniary retirement benefits accrued as Fund expenses. Interested Trustees are not compensated by the Funds.
Independent Trustees
|
Davis Select U.S. Equity ETF
|
Davis Select International ETF
|
Davis Select Financial ETF
|
Davis Select Worldwide ETF
|
Aggregate Fund Compensation(1)
|
Total Complex Compensation(2)
|
Ralph J. Egizi
|
$4,162
|
$2,316
|
$3,481
|
$5,166
|
$15,125
|
$15,125
|
Thomas D. Tays
|
$4,162
|
$2,316
|
$3,481
|
$5,166
|
$15,125
|
$15,125
|
(1)
|
“Aggregate Fund Compensation” is the aggregate compensation paid for service as a Trustee by all series of the Trust.
|
(2)
|
“Total complex compensation” is the aggregate compensation paid for service as a Trustee by all mutual funds with the same investment adviser. There
are seven registered investment companies in the complex.
|
All Officers of the Trust (including the Interested Trustee/Chairman) hold positions as executive officers with the Adviser and its affiliates, including the Sub-Adviser, Davis Distributors,
LLC, Davis Investments, LLC (the sole general partner of the Adviser) and other affiliated companies. The Trust does not pay salaries to any of its Officers. Each of the Trust’s Officers serves for one year, and until his or her successor is
elected and qualified.
Christopher Davis (born 07/13/65, Officer of Davis Fundamental ETF Trust since 2016). President of the Davis Fundamental ETF Trust
(consisting of four portfolios), Davis Funds (consisting of thirteen portfolios), Selected Funds (consisting of two portfolios) and Clipper Funds Trust (consisting of one portfolio); Director Davis Funds, Selected Funds and Clipper Fund;
Chairman, Davis Selected Advisers, L.P.; and also serves as an executive officer of certain companies affiliated with the Adviser, including sole member of the Adviser’s general partner, Davis Investments, LLC.
Kenneth Eich (born 08/14/53, Officer of Davis Fundamental ETF Trust since 2016). Executive
Vice President and Principal Executive Officer of the Davis Fundamental ETF Trust (consisting of four portfolios), Davis Funds (consisting of thirteen portfolios), Selected Funds (consisting of two portfolios) and Clipper Funds Trust
(consisting of one portfolio); Chief Operating Officer, Davis Selected Advisers, L.P.; and also serves as an executive officer of certain companies affiliated with the Adviser.
Douglas Haines (born 03/04/71, Officer of Davis Fundamental ETF Trust since 2016). Vice
President, Treasurer, Chief Financial Officer, Principal Financial Officer and Principal Accounting Officer of the Davis Fundamental ETF Trust (consisting of four portfolios), Davis Funds (consisting of thirteen portfolios), Selected Funds
(consisting of two portfolios)
Statement of Additional Information | Davis Fundamental ETF Trust | 29
and Clipper Funds Trust (consisting of one portfolio); Vice President and Director of Fund Accounting, Davis Selected Advisers, L.P.
Randi Roessler (born 06/26/81, Officer of Davis Fundamental ETF Trust since 2018). Vice President and Chief Compliance Officer of
the Davis Fundamental ETF Trust (consisting of four portfolios), Davis Funds (consisting of thirteen portfolios), Selected Funds (consisting of two portfolios) and Clipper Funds Trust (consisting of one portfolio); Vice President and Chief
Compliance Officer, Davis Selected Advisers, L.P.; and also serves as an executive officer of certain companies affiliated with the Adviser.
Ryan Charles (born 07/25/78, Officer of Davis Fundamental ETF Trust since 2016). Vice President and Secretary of the Davis
Fundamental ETF Trust (consisting of four portfolios), Davis Funds (consisting of thirteen portfolios), Selected Funds (consisting of two portfolios) and Clipper Funds Trust (consisting of one portfolio); Vice President, Chief Legal Officer and
Secretary, Davis Selected Advisers, L.P.; and also serves as an executive officer of certain companies affiliated with the Adviser.
Standing Committees of the Board of Trustees
Although the Board has general criteria that guide its choice of candidates to serve on the Board, there are no specific required qualifications for Board membership, including with respect to
the diversity of candidates for Board membership. Candidates for Board membership nominated by shareholders are not treated differently than candidates nominated from other sources. The Board believes that the different perspectives,
viewpoints, professional experience, education and individual qualities of each Trustee represent a diversity of experiences and a variety of complementary skills. It is the Trustees’ belief that this allows the Board, as a whole, to oversee
the business of each Fund in a manner consistent with the best interests of the Fund’s shareholders. When considering potential nominees to fill vacancies on the Board, and as part of its annual self-evaluation, the Board reviews the mix of
skills and other relevant experiences of the Trustees; qualified candidates will be men or women of proven character and talent who have achieved notable success in their professional careers. The specific talents that the Nominating Committee
of the Board seeks in a candidate depend to a great extent upon the Board’s needs at the time a vacancy occurs.
The table above provides the professional experience of each Trustee on an individual basis. This disclosure includes the length of time serving the Funds, other directorships held and their
principal occupation during the past five years.
Each of the Trustees has spent a significant amount of their professional career working with registered investment companies. For this reason they have become familiar
with the regulatory and investment matters that may impact the Funds. This experience contributes to the Trustees’ deliberations. In light of the Funds’ business and structure, the Board believes the experience of each Trustee is beneficial for
overseeing the business of each Fund. Moreover, the Board believes that the different experiences and backgrounds of the Trustees are complementary and enhance the Board’s ability to oversee the each Fund’s affairs.
Audit Committee. The Board has established an Audit Committee, which is comprised entirely
of Independent Trustees (Thomas Tays, Chair; and Ralph Egizi). The Audit Committee has a charter. The Audit Committee reviews financial statements and other audit-related matters for the Trust. The Audit Committee also holds discussions with
management and with the Independent Accountants concerning the scope of the audit and the auditor’s independence. The Audit Committee meets as often as deemed appropriate by the Audit Committee. The Audit Committee met four times during the
year ended October 31, 2019.
The Board of Trustees has determined that Thomas Tays is the Trust’s Independent Audit Committee Financial Expert, pursuant to Section 407 of the Sarbanes-Oxley Act and as defined by Item 3 of
Form N-CSR of the 1940 Act. In their deliberations, the Board of Trustees considered Mr. Tays’ (i) professional experience; (ii) independence as defined in Item 3 of Form N-CSR; and (iii) integrity and absence of disciplinary history.
Nominating Committee. The Trust has a Nominating Committee, which is comprised entirely of Independent Trustees (Ralph Egizi, Chair;
and Thomas Tays), which meets as often as deemed appropriate by the Nominating Committee. The Funds do not elect Trustees annually. Each Trustee serves until retirement, resignation, death or removal. The Nominating Committee met one time
during the year ended October 31, 2019. The Nominating Committee reviews and nominates persons to serve as members of the Board of Trustees, and reviews and makes recommendations concerning the compensation of the Independent Trustees. The
Chairperson of the Nominating Committee (i) presides over Executive Sessions of the Independent Trustees of the Funds, in addition to presiding over meetings of the committee; (ii) participates with the officers and counsel in the preparation
of agendas and materials for Board meetings; (iii) facilitates communication between the Independent Trustees and management, and among the Independent Trustees; and (iv) has such other responsibilities as the Board or Independent Trustees
shall determine. The Nominating Committee has a charter. When the Board is seeking a candidate to become a Trustee, it considers qualified candidates received from a variety of sources, including having authority to retain third parties that
may receive compensation related to identifying and evaluating candidates. Shareholders may propose nominees by writing to the Nominating Committee, in care of the Secretary of the Davis Fundamental ETF Trust, at 2949 East Elvira, Suite 101,
Tucson, Arizona 85756.
Statement of Additional Information | Davis Fundamental ETF Trust | 30
Brokerage Committee. The Trust has a Brokerage Committee, which is comprised entirely of Independent Trustees (Ralph Egizi, Chair;
and Thomas Tays), which meets as often as deemed appropriate by the Brokerage Committee. The Brokerage Committee met one time during the year ended October 31, 2019. The Brokerage Committee reviews and makes recommendations concerning the
Trust’s portfolio brokerage and trading practices.
Pricing Committee. The Trust has a Pricing Committee (Thomas Tays, Chair; Kenneth Eich; and Douglas Haines, an Officer of the Trust)
that meets as often as deemed appropriate by the Pricing Committee. The Pricing Committee met approximately 56 times during the year ended October 31, 2019. The Pricing Committee reviews and makes recommendations concerning pricing of each
Fund’s portfolio securities.
As a registered investment company, the Funds are subject to a variety of risks, including investment risk, valuation risk, reputational risk, risk of operational failure or lack of business
continuity, and legal, compliance and regulatory risk. Risk management seeks to identify and address risks (i.e., events or circumstances that could have material adverse effects on the business, operations, shareholder services, investment
performance or reputation of the Funds).
Day-to-day management of the Trust, including risk management, is the responsibility of each Fund’s contractual service providers, including each Fund’s Adviser, Sub-Adviser, as applicable,
the Distributor, Custodian and Transfer Agent. Each of these entities is responsible for specific portions of each Fund’s operations, including the processes and associated risks relating to each Fund’s investments, integrity of cash movements,
financial reporting, operations and compliance. The Board oversees the service providers’ discharge of their responsibilities, including the processes they use to manage relevant risks.
As part of its overall activities, the Board reviews the management of each Fund’s risk management structure by various departments of the Adviser, including Portfolio Management, Fund
Operations, Legal and Internal Audit, as well as by the Trust’s Chief Compliance Officer (“CCO”). The responsibility to manage each Fund’s risk management structure on a day-to-day basis is within the Adviser’s overall investment management
responsibilities. The Adviser has its own, independent interest in risk management.
The Board discharges risk oversight as part of its overall activities, with the assistance of its Audit Committee and CCO. In addressing issues regarding the Trust’s risk management between
meetings, appropriate representatives of the Adviser communicate with the Chair of the Board or the Trust’s CCO, who is accountable and reports directly to the Board. Various personnel, including the Trust’s CCO, the Adviser’s management, and
other service providers (such as the independent accountants) make periodic reports to the Board or to the Audit Committee with respect to various aspects of risk management.
The Board recognizes that not all risks that may affect each Fund can be identified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may be
necessary to bear certain risks (such as investment-related risks) to achieve each Fund’s investment objectives, and that the processes, procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover,
reports received by the Trustees as to risk management matters are typically summaries of the relevant information. As a result of the foregoing and other factors, the Board’s risk management oversight is subject to substantial limitations.
The Audit Committee assists the Board in reviewing with the independent auditors, at various times throughout the year, matters relating to the annual audits and financial accounting and
reporting matters. The Pricing Committee reviews and makes recommendations concerning pricing of each Fund’s portfolio securities.
The Trust’s CCO assists the Board in overseeing the significant investment policies of the relevant Fund. The CCO monitors these policies. The Board receives and considers the CCO’s annual
written report, which, among other things, summarizes material compliance issues that arose during the previous year and any remedial action taken to address these issues, as well as any material changes to the compliance programs. The Board
also receives and considers reports from the Trust’s CCO throughout the year. As part of its oversight responsibilities, the Board has approved various compliance policies and procedures. Each Committee presents reports to the Board that may
prompt further discussion of issues concerning the oversight of the Trust’s risk management. The Board also may discuss particular risks that are not addressed in the Committee process.
Statement of Additional Information | Davis Fundamental ETF Trust | 31
Trustees’ Fund Holdings
The information in the table below discloses (i) the dollar ranges of each Trustee’s beneficial ownership in each Fund; and (ii) each Trustee’s aggregate beneficial ownership in all Funds
within the Davis Fundamental ETF complex, as of December 31, 2019.
Investments are listed in the following ranges: none, $1-10,000, $10,001-50,000, $50,001-100,000 and over $100,000:
Independent Trustees
|
Davis Select U.S. Equity ETF
|
Davis Select Financial ETF
|
Davis Select International ETF
|
Davis Select Worldwide ETF
|
Total Invested in All Funds(1)
|
Ralph J. Egizi
|
None
|
None
|
$1-10,000
|
$1-10,000
|
$1-10,000
|
Thomas Tays
|
$10,001-$50,000
|
$10,001-$50,000
|
$10,001-$50,000
|
$10,001-$50,000
|
$50,001-$100,000
|
Interested Trustee
|
Davis Select U.S. Equity ETF
|
Davis Select Financial ETF
|
Davis Select International ETF
|
Davis Select Worldwide ETF
|
Total Invested in All Funds(1)
|
Kenneth Eich
|
$10,001-$50,000
|
$10,001-$50,000
|
$1-$10,000
|
$10,001-$50,000
|
$10,001-$50,000
|
(1)
|
Total Invested in All Funds is the aggregate dollar range of investments in all Funds overseen by the individual Trustee and managed by Davis Selected Advisers, L.P.
|
Independent Trustees’ Affiliations and Transactions
None of the Independent Trustees (or their immediate family members) own any securities issued by the Trust’s investment adviser, sub-adviser, principal underwriter or any company (other than
a registered investment company) directly or indirectly controlling, controlled by or under common control with the above listed companies (hereafter, referred to as the “Adviser and its affiliates”). Mr. Eich owns partnership units (directly,
indirectly or both) in the Adviser and is considered to be an Interested Trustee.
None of the Independent Trustees (or their immediate family members) have had any direct or indirect interest, the value of which exceeds $120,000, during the last two calendar years in the
Adviser or in the Adviser and its affiliates.
None of the Independent Trustees (or their immediate family members) have had any material interest in any transaction, or series of transactions, during the last two years, in which the
amount involved exceeds $120,000 and to which any of the following persons was a party, including any Davis Fundamental ETF Trust, an officer of the Davis Fundamental ETF Trust, or any fund managed by the Adviser or in the Adviser and its
affiliates.
None of the Independent Trustees (or their immediate family members) have had any direct or indirect relationships during the last two years, in which the amount involved exceeds $120,000 and
to which any of the following persons was a party, including any Davis Fundamental ETF Trust, an officer of the Davis Fundamental ETF Trust, or any fund managed by the Adviser or in the Adviser and its affiliates.
None of the officers of the Adviser and its affiliates have served during the last two years on the board of directors/trustees of a company where any Trustee of the Funds (or any of the
Trustees’ immediate family members) served as an officer.
Certain Shareholders of the Funds
As of December 31, 2019, Officers and Trustees, as a group, owned the following percentages of shares issued by the Funds(1):
|
Officers and Trustees
|
Davis Select U.S. Equity ETF
|
*
|
Davis Select Financial ETF
|
*
|
Davis Select Worldwide ETF
|
*
|
Davis Select International ETF
|
*
|
(1) This percentage does not include investments controlled indirectly, including holdings by Davis Selected Advisers, L.P.
* Indicates that Officers and Trustees as a group owned less than 1% of the outstanding shares of the indicated shares.
An Authorized Participant may hold of record more than 25% of the outstanding shares of each Fund. From time to time, Authorized Participants may be a beneficial and/or legal owner of a Fund,
may be affiliated with an index provider, may be deemed to have control of a Fund and/or may be able to affect the outcome of matters presented for a vote of the shareholders of a Fund. Authorized Participants may execute an irrevocable proxy
granting the Distributor or an affiliate of the Distributor
Statement of Additional Information | Davis Fundamental ETF Trust | 32
(the “Agent”) the power to vote or abstain from voting such Authorized Participant’s beneficially or legally owned shares of a Fund. In such cases, the Agent shall mirror vote (or abstain from
voting) such shares in the same proportion as all other beneficial owners of the voting Fund.
The following table sets forth as of February 14, 2020, the name and holdings of each person known by Davis Fundamental ETF Trust to be a record owner of more than 5% of the outstanding
shares of each Fund. Other than as indicated below, the Funds are not aware of any shareholder who beneficially owns more than 25% of each Fund’s total outstanding shares. Shareholders owning a significant percentage of a Fund’s shares do not
affect the voting rights of other shareholders.
|
Name and Address of Shareholders Owning More Than 5% of Fund
|
Percent Outstanding
|
Davis Select Financial ETF
|
|
|
|
Davis Selected Advisers, L.P.
2949 E. Elvira Road, Suite 101
Tucson, AZ 85756
|
30.15%
|
|
Fifth Third Bank (The)
Fifth Third Center
38 Fountain Square Plaza
Cincinnati, OH45263
|
20.43%
|
|
Morgan Stanley Smith Barney LLC
1 Harborside Financial Center, Plaza II
Jersey City, NJ 07311
|
11.38%
|
|
UBS Financial Services, Inc.
1000 Harbor Boulevard
Weehawken, NJ 07086
|
9.42%
|
|
National Financial Services Corporation
200 Liberty Street
New York, NY 10281
|
6.94%
|
|
LPL Financial Corporation
4707 Executive Drive
San Diego, CA 92121
|
5.60%
|
Davis Select U.S. Equity ETF
|
|
|
|
Davis Selected Advisers, L.P.
2949 E. Elvira Road, Suite 101
Tucson, AZ 85756
|
38.51%
|
|
Morgan Stanley Smith Barney LLC
1 Harborside Financial Center, Plaza II
Jersey City, NJ 07311
|
26.36%
|
|
LPL Financial Corporation
4707 Executive Drive
San Diego, CA 92121
|
6.73%
|
|
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, CA 94104
|
5.84%
|
|
NFS LLC
200 Liberty Street
New York, NY 10281
|
5.59%
|
Davis Select Worldwide ETF
|
|
|
|
Morgan Stanley Smith Barney LLC
1 Harborside Financial Center, Plaza II
Jersey City, NJ 07311
|
26.18%
|
|
Davis Selected Advisers, L.P.
2949 E. Elvira Road, Suite 101
Tucson, AZ 85756
|
19.02%
|
|
UBS Financial Services, Inc.
1000 Harbor Boulevard
Weehawken, NJ 07086
|
10.38%
|
|
LPL Financial Corporation
4707 Executive Drive
San Diego, CA 92121
|
8.47%
|
Statement of Additional Information | Davis Fundamental ETF Trust | 33
|
NFS LLC
200 Liberty Street
New York, NY 10281
|
6.19%
|
|
Charles Schwab & Co., Inc.
101 Montgomery Street
San Francisco, CA 94104
|
5.00%
|
Davis Select International ETF
|
|
|
|
Davis Selected Advisers, L.P.
2949 E. Elvira Road, Suite 101
Tucson, AZ 85756
|
44.94%
|
|
Morgan Stanley Smith Barney LLC
1 Harborside Financial Center, Plaza II
Jersey City, NJ 07311
|
14.42%
|
|
Raymond James & Associates, Inc.
880 Carillon Parkway
St. Petersburg, FL 33733
|
10.50%
|
|
Fifth Third Bank (The)
Fifth Third Center
38 Fountain Square Plaza
Cincinnati, OH 45263
|
8.85%
|
|
UBS Financial Services, Inc.
1000 Harbor Boulevard
Weehawken, NJ 07086
|
5.15%
|
Investment Advisory Services
Davis Selected Advisers, L.P. and Davis Selected Advisers – NY, Inc. Davis Selected Advisers, L.P. (the
“Adviser”), whose principal office is at 2949 East Elvira Road, Suite 101, Tucson, Arizona 85756, serves as investment adviser for each Fund. The Adviser is also responsible for managing each Fund’s business affairs and providing day-to-day
administrative services to the Funds. The Adviser also provides advisory or sub-advisory services to other parties including other registered investment companies, private accounts, offshore funds and managed money/wrap accounts. Davis
Investments, LLC, an entity controlled by Christopher Davis, is the Adviser’s sole general partner. Mr. Davis is Chairman of the Adviser and, as the sole member of the general partner, controls the Adviser. Davis Selected Advisers – NY, Inc., a
wholly owned subsidiary of the Adviser, serves as sub-adviser to and performs investment management, research and other services for the Davis Fundamental ETF Trust on behalf of the Adviser, under the agreement with the Adviser. All fees paid
to the Sub-Adviser are paid by the Adviser.
Advisory Agreement with Davis Selected Advisers, L.P. and Sub-Advisory Agreement with Davis Selected Advisers – NY, Inc. Pursuant to an Advisory Agreement, each Fund pays the Adviser a fee at the annual rate of 0.55% of average net assets.
Expense Cap. The Adviser is contractually committed to waive fees and/or reimburse each Fund’s expenses
to the extent necessary to cap total annual fund operating expenses at 0.65% for Davis Select U.S. Equity ETF, Davis Select Financial ETF, and Davis Select Worldwide ETF and at 0.75% for Davis Select International ETF until March 1, 2021. After
that date, there is no assurance that the Adviser will continue to cap expenses.
The aggregate fees paid to the Adviser during the last three fiscal years are not available, as the Funds have not been in existence during all of these periods. The aggregate advisory fees
paid for the fiscal year end are shown for those periods that are available.
|
2019
|
2018
|
2017
|
Davis Select U.S. Equity ETF
|
$986,763
|
$621,584
|
$181,195
|
Davis Select International ETF
|
$570,687
|
$142,327
|
N/A
|
Davis Select Worldwide ETF
|
$1,182,897
|
$1,114,798
|
$198,649
|
Davis Select Financial ETF
|
$789,501
|
$720,174
|
$237,538
|
Statement of Additional Information | Davis Fundamental ETF Trust | 34
For the fiscal year end periods shown below, the Adviser reimbursed the following amounts:
|
2019
|
2018
|
2017
|
Davis Select U.S. Equity ETF
|
$0
|
$21,800
|
$70,966
|
Davis Select International ETF
|
$0
|
$26,590
|
N/A
|
Davis Select Worldwide ETF
|
$0
|
$0
|
$76,322
|
Davis Select Financial ETF
|
$0
|
$0
|
$50,704
|
In accordance with the provisions of the 1940 Act, the Advisory Agreement and Sub-Advisory Agreement will terminate automatically on assignment and are subject to cancellation on 60-days’
written notice by the Board of Trustees, the vote of the holders of a majority of the Funds’ outstanding shares or the Adviser. The continuance of the Advisory Agreement and Sub-Advisory Agreement must be approved at least annually by the
Funds’ Board of Trustees or by the vote of holders of a majority of the outstanding shares of the Funds. In addition, any new agreement, or the continuation of the existing agreement, must be approved by a majority of Trustees who are not
parties to the agreements or interested persons of any such party. The Advisory Agreement also makes provisions for portfolio transactions and brokerage policies of the Funds, which are discussed above under “Portfolio
Transactions.”
The Sub-Adviser performs research and other services on behalf of the Adviser. The Adviser pays all of the Sub-Adviser’s direct and indirect costs of operation. All fees paid to the
Sub-Adviser are paid by the Adviser and not the Funds.
Pursuant to the Advisory Agreement, the Adviser, subject to the general supervision of the Funds’ Board of Trustees, provides management and investment advice and furnishes statistical,
executive and clerical personnel, bookkeeping, office space and equipment necessary to carry out its investment advisory functions and such corporate managerial duties as requested by the Board of Trustees of the Funds. The Funds bear all
expenses other than those specifically assumed by the Adviser under the Advisory Agreement, including preparation of its tax returns, financial reports to regulatory authorities, dividend determinations, transactions and accounting matters
related to its custodian bank, transfer agency, custodial and investor services, and qualification of its shares under federal and state securities laws.
Approval of the Advisory and Sub-Advisory Agreements. The Board of Trustees is scheduled to meet four times a year. The Trustees
believe that matters bearing on the Advisory and Sub-Advisory Agreements are considered at most, if not all, of their meetings. The Independent Trustees are advised by independent legal counsel selected by the Independent Trustees. A discussion
of the Trustees’ considerations
in the annual approval of Advisory and Sub-Advisory Agreements is included in the Funds’ next annual or semi-annual report following the annual approval.
Unique Nature of Each Fund. The Adviser may serve as the investment adviser or sub-adviser to other funds that have investment
objectives and principal investment strategies similar to those of the Funds. While the Trust’s portfolios may have many similarities to these other funds, the investment performance of each fund will be different due to a number of differences
between the funds, including differences in expense ratios and cash flows.
Code of Ethics. The Adviser, Sub-Adviser, Distributor and the Trust have adopted a Code of Ethics, meeting the requirements of Rule
17j-1 under the 1940 Act that regulate the personal securities transactions of the Adviser’s investment personnel, other employees and affiliates with access to information regarding securities transactions of the Funds. Such employees may
invest in securities, including securities that may be purchased or held by the Funds. A copy of the Code of Ethics is on public file with, and available from, the SEC.
Continuing Regulation. The Adviser, like most other asset managers, is subject to ongoing inquiries from the SEC and/or the
Financial Industry Regulatory Authority (“FINRA”) regarding industry practices.
Litigation. In June of 2014 and in August of 2014, two separate class action lawsuits were filed in the United States District Court
for the Southern District of New York on behalf of investors in Davis New York Venture Fund (“DNYVF”) against Davis Selected Advisers, L.P. and Davis Selected Advisers – N.Y., Inc. (the Sub-Adviser of Davis Selected Advisers, L.P.). The
plaintiffs claim that the defendants (the “Davis Entities”) charged DNYVF excessive fees to manage DNYVF. In September of 2014, these two claims were consolidated into one lawsuit. The lawsuit seeks monetary damages and other relief. The Davis
Entities believe that the action is without merit and have undertaken a vigorous defense in these proceedings. Although no determination can be made at this time, it is not anticipated that this lawsuit will have a material adverse effect on
the Davis Entities, their assets or the Fund.
Proxy Voting Policies and Record. The Board of Trustees has directed the Adviser to vote
each Fund’s portfolio securities in conformance with the Adviser’s Proxy Voting Policies and Procedures. These policies and procedures are summarized in Appendix B. Information regarding how the Funds
voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available, without charge, on the Funds’ website, www.davisetfs.com, by calling Davis Fundamental
ETF Trust’s Investor Services at 1-800-279-0279 or on the Commission’s website (www.sec.gov).
Davis Select U.S. Equity ETF. The portfolio managers of Davis Select U.S. Equity ETF are Christopher Davis and Danton Goei. They are
the persons primarily responsible for investing the Fund’s assets on a daily basis.
Statement of Additional Information | Davis Fundamental ETF Trust | 35
Davis Select Financial ETF. The portfolio managers of Davis Select Financial ETF are Christopher Davis and Pierce Crosbie. They are
the persons primarily responsible for investing the Fund’s assets on a daily basis.
Davis Select Worldwide ETF & Davis Select International ETF. The portfolio manager of
Davis Select Worldwide ETF and Davis Select International ETF is Danton Goei. Mr. Goei is the person primarily responsible for investing the Funds’ assets on a daily basis.
Accounts Managed as of October 31, 2019
Portfolio Managers
|
Dollar Range of Fund Shares Owned(5)
|
Number of RICs(2)
|
Assets(1) in RICs in millions
|
Number of OPIV(3)
|
Assets(1) in OPIV(3) in millions
|
Number of OA(4)
|
Assets in OA(4) in millions
|
Davis Select U.S. Equity ETF
|
Christopher Davis
|
$50,001-$100,000
|
11
|
$13,899.0
|
3
|
$389.9
|
40
|
$6,556.0
|
Danton Goei
|
$50,001-$100,000
|
11
|
$13,858.9
|
7
|
$683.7
|
39
|
$6,605.7
|
Davis Select Financial ETF
|
Christopher Davis
|
$50,001-$100,000
|
11
|
$13,960.7
|
3
|
$389.9
|
40
|
$6,556.0
|
Pierce Crosbie
|
$10,001-$50,000
|
3
|
$1,104.5
|
0
|
$0
|
2
|
$438.1
|
Davis Select International ETF
|
Danton Goei
|
$100,001-$500,000
|
11
|
$13,931.8
|
7
|
$683.7
|
39
|
$6,605.7
|
Davis Select Worldwide ETF
|
Danton Goei
|
$100,001-$500,000
|
11
|
$13,840.3
|
7
|
$683.7
|
39
|
$6,605.7
|
(1)
|
“Assets” means total assets managed by the portfolio manager. Some or all of these assets may be co-managed with another portfolio manager who will also be credited with managing the
same assets. The sum of assets managed by Davis Advisors’ portfolio managers may exceed the total assets managed by Davis Advisors.
|
(2)
|
“RIC” means Registered Investment Company.
|
(3)
|
“OPIV” means Other Pooled Investment Vehicles.
|
(4)
|
“OA” means Other Accounts. These accounts are primarily private accounts and sponsors of managed money/wrap accounts.
|
(5)
|
Ownership disclosure is made using the following ranges: None; (F) $1 - $10,000; (E) $10,001 - $50,000; (D) $50,001 - $100,000; (C) $100,001 - $500,000; (B) $500,001 - $1 million; (A)
over $1 million.
|
Structure of Compensation
Christopher Davis’ compensation for services provided to the Adviser consists of a base salary. The
Adviser’s portfolio managers are provided benefits packages including life insurance, health insurance and participation in the Adviser’s 401(k) plan comparable to that received by other company employees.
Danton Goei’s and Pierce Crosbie’s compensation for services provided to the Adviser consists of: (i) a base salary; (ii) an annual
discretionary bonus; (iii) awards of equity (“Units”) in Davis Selected Advisers, L.P., including Units and/or phantom Units; (iv) an incentive plan whereby the Adviser purchases shares in certain mutual funds managed by the Adviser, which vest
based on the passage of time provided that the Portfolio manager is still employed by the Adviser; and (v) an incentive plan whereby the Adviser purchases shares in selected mutual funds managed by the Adviser. In the case of fund shares
purchased as described above in (v), at the end of specified periods, generally five-years following the date of purchase, some, all or none of the Fund shares will be registered in the employee’s name based on fund performance, after expenses
on a pre-tax basis, versus the Fund’s benchmark index, as described in the Fund’s prospectus or, in limited cases, based on performance ranking among established peer groups. The Adviser does not purchase incentive shares in every fund these
portfolio managers manage or assist on. In limited cases, such incentive compensation is tied on a memorandum basis to the performance of the portion of the Fund (“sleeve”) managed by the analyst versus the Fund’s benchmark. The Adviser’s
portfolio managers are provided benefits packages, including life insurance, health insurance and participation in the Adviser’s 401(k) plan comparable to that received by other company employees.
Potential Conflicts of Interest
Potential conflicts of interest may arise in connection with the management of multiple accounts, including potential conflicts of interest related to the knowledge and timing of the Funds’
trades, investment opportunities, broker selection and Fund investments. Portfolio managers and other investment professionals may be privy to the size, timing and possible market impact of a Fund’s trades. It is theoretically possible that
portfolio managers could use this information to the advantage of other accounts they manage and to the possible detriment of a Fund. It is possible that an investment opportunity may be suitable for both a Fund and other accounts managed by
portfolio managers, but may not be available in sufficient quantities
Statement of Additional Information | Davis Fundamental ETF Trust | 36
for both the Fund and the other accounts to participate fully. Similarly, there may be limited opportunity to sell an investment held by a Fund and another account. Management of multiple
portfolios and/or other accounts may result in a portfolio manager devoting unequal time and attention to the management of each portfolio and/or other account. The Adviser seeks to manage such competing interests for the time and attention of
portfolio managers. For example, many of Davis Advisors’ portfolio managers focus on a small set of model accounts, with similar accounts being managed by investing in the same securities and using the same investment weightings that are used
in connection with the management of the model accounts.
If a portfolio manager identifies a limited investment opportunity that may be suitable for more than one portfolio or other account, a portfolio may not be able to take full advantage of that
opportunity due to an allocation of filled purchase or sale orders across all eligible portfolios and other accounts. Large clients may generate more revenue for the Adviser than do smaller accounts. Accounts that pay higher management fees
usually generate more revenue than accounts of the same size paying lower management fees. A portfolio manager may be faced with a conflict of interest when allocating limited investment opportunities given the benefit to the Adviser of
favoring accounts that pay a higher fee or generate more income for the Adviser. To deal with these situations, the Adviser has adopted procedures for allocating limited investment opportunities across multiple accounts.
With respect to securities transactions for the portfolios, the Adviser determines which broker to use to execute each order, consistent with its duty to seek best execution of the
transaction. However, with respect to certain other accounts (such as mutual funds, other pooled investment vehicles that are not registered mutual funds and other accounts managed for organizations and individuals), the Adviser may be limited
by the client with respect to the selection of brokers or may be instructed to direct trades through a particular broker. In these cases, the Adviser may place separate, non-simultaneous, transactions for a portfolio and another account that
may temporarily affect the market price of the security or the execution of the transaction, or both, to the detriment of the portfolio or the other account.
Substantial investment of the Adviser or Davis Family assets in certain mutual funds may lead to conflicts of interest. A portion of a portfolio manager’s compensation may include awards of
equity in Davis Advisors. A portfolio manager may face a conflict of interest given that the Adviser is more heavily invested in some funds than in other funds. A portion of the portfolio manager’s compensation may also include an incentive
plan whereby the Adviser purchases shares in certain funds managed by Davis Advisors. A portfolio manager may face a conflict of interest given that his long-term compensation may be more heavily determined by the performance of one fund, or
portion of a fund, than by another fund that he also manages. To mitigate these potential conflicts of interest, the Adviser has adopted policies and procedures intended to ensure that all clients are treated fairly over time. Davis Advisors
does not receive an incentive based fee on any account.
Davis Advisors expects that, over long periods of time, most clients pursuing similar investment strategies should experience similar, but not identical, investment performance. Many factors
affect investment performance, including, but not limited to: (i) the timing of cash deposits and withdrawals to and from an account; (ii) the possibility that Davis Advisors may not purchase or sell a given security on behalf of all clients
pursuing similar strategies; (iii) price and timing differences when buying or selling securities; and (iv) clients pursuing similar investment strategies but imposing different investment restrictions. Davis Advisors has adopted written
trading policies designed to minimize possible conflicts of interest in trading for its clients.
Conflicts of interest may also arise regarding proxy voting. Davis Advisors has adopted written proxy voting policies designed to minimize possible conflicts of interest when voting proxies on
behalf of its clients.
Disclosure of Portfolio Holdings
Portfolio Holdings Information is Protected. Information about each Fund’s portfolio holdings is proprietary information that the
Adviser is committed to protecting. Each Fund has adopted procedures reasonably designed to ensure that portfolio holdings information is not released on a selective basis, except to qualified persons rendering services to the Fund that require
that those persons receive information concerning the Fund’s portfolio holdings. Neither the Funds nor the Adviser receives compensation with respect to the disclosure of portfolio holdings.
Public Disclosure of Portfolio Holdings. The Trust has adopted a policy regarding the disclosure of information about the Trust’s
portfolio holdings. The Board must approve all material amendments to this policy. Each Fund’s portfolio holdings are publicly disseminated each day the Funds are open for business through financial reporting and news services, including
publicly accessible Internet web sites. In addition, a basket composition file, which includes the security names and share quantities to deliver in exchange for shares, together with estimates and actual cash components, is publicly
disseminated daily prior to the opening of the Exchange via the National Securities Clearing Corporation (“NSCC”). The basket represents one Creation Unit of a Fund. The Trust, the Adviser, the Distributor and the Administrator will not
disseminate non-public information concerning the Trust, except information may be made available prior to its public availability: (i) to a party for a legitimate business purpose related to the day-to-day operations of the Fund, including (a)
a service provider, (b) the stock exchanges upon which the ETF is listed, (c) the NSCC, (d) the Depository Trust Company (“DTC”), and (e) financial data/research companies such as Morningstar, Bloomberg L.P. and Reuters; or (ii) to any other
party for a legitimate business or regulatory purpose, upon waiver or exception, with the consent of an applicable Trust officer.
Statement of Additional Information | Davis Fundamental ETF Trust | 37
Book Entry Only System
The following information supplements, and should be read in conjunction with, the section in the Funds’ prospectus titled “Buying and Selling Shares.”
DTC acts as securities depositary for the shares. Shares of each Fund are represented by securities registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC.
Except in the limited circumstance provided below, certificates will not be issued for shares.
DTC, a limited-purpose trust company, was created to hold securities of its participants (the “DTC Participants”) and to facilitate the clearance and settlement of securities transactions
among the DTC Participants in such securities through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers
and dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the New York Stock
Exchange (“NYSE”) and FINRA. Access to the DTC system is also available to others, such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly
(the “Indirect Participants”).
Beneficial ownership of shares is limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial
interests in shares (owners of such beneficial interests are referred to herein as “Beneficial Owners”) is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the
records of DTC Participants (with respect to Indirect Participants and Beneficial Owners that are not DTC Participants). Beneficial Owners will receive from or through the DTC Participant a written confirmation relating to their purchase of
shares.
Conveyance of all notices, statements and other communications to Beneficial Owners is affected as follows. Pursuant to the Depositary Agreement between the Trust and DTC, DTC is required to
make available to the Trust, upon request and for a fee to be charged to the Trust, a listing of the shares of each Fund held by each DTC Participant. The Trust, either directly or through a third-party service, shall inquire of each such DTC
Participant as to the number of Beneficial Owners holding shares, directly or indirectly, through such DTC Participant. The Trust, either directly or through a third-party service, shall provide each such DTC Participant with copies of such
notice, statement or other communication, in such form, number and at such place as such DTC Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or
indirectly, to such Beneficial Owners. In addition, the Trust shall pay to each such DTC Participant and/or third party service 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 as the registered holder of all shares. DTC or its nominee, upon receipt of any such distributions, shall credit immediately DTC
Participants’ accounts with payments in amounts proportionate to their respective beneficial interests in shares of each Fund as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial
Owners of Shares held through such DTC Participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in a “street name,” and
will be the responsibility of such DTC Participants.
The Trust has no responsibility or liability for any aspects of the records relating to or notices to Beneficial Owners, or payments made on account of beneficial ownership interests in such
shares, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants
and the Indirect Participants and Beneficial Owners owning through such DTC Participants. DTC may determine to discontinue providing its service with respect to shares at any time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such circumstances, the Trust shall take action either to find a replacement for DTC to perform its functions at a comparable cost or, if such a replacement is unavailable, to
issue and deliver printed certificates representing ownership of shares, unless the Trust makes other arrangements with respect thereto satisfactory to the Exchange.
Other Important Service Providers
The Distributor. Foreside Fund Services, LLC, 3 Canal Plaza, Suite 100, Portland, Maine 04101, serves as the Distributor for the
Funds’ shares pursuant to a Distribution Agreement dated October 5, 2016 (the “Distribution Agreement”).
Pursuant to the Distribution Agreement, each Fund appointed the Distributor to be its agent for the distribution of the Fund’s shares on a continuous offering basis. Shares will be
continuously offered for sale by the Trust through the Distributor only in Creation Units, as described in the prospectus and below under “Purchase and Redemption of Creation Units.” Shares in less than
Creation Units are not distributed by the Distributor. The Distributor will deliver the prospectus to persons purchasing Creation Units and will maintain records of both orders placed with it and confirmations of acceptance furnished by it. The
Distributor is a broker-dealer registered under the Securities Exchange Act of 1934 (the “Exchange Act”) and a member of the Financial Industry Regulatory Authority (“FINRA”). The Distributor has no role in determining the investment policies
of
Statement of Additional Information | Davis Fundamental ETF Trust | 38
the Trust or which securities are to be purchased or sold by the Trust. The Distributor may assist Authorized Participants in assembling shares to purchase Creation Units or upon redemption,
for which it may receive commissions or other fees from such Authorized Participants.
The Adviser and/or its affiliates may make payments to broker-dealers, registered investment advisers, banks or other intermediaries (together, “intermediaries”) related to marketing
activities and presentations, educational training programs, conferences, the development of technology platforms and reporting systems, or their making shares of the Funds available to their customers generally and in certain investment
programs. Such payments, which may be significant to the intermediary, are not made by the Funds. Rather, such payments are made by the Adviser and/or its affiliates from their own resources, which come directly or indirectly in part from fees
paid by each Fund. Payments of this type are sometimes referred to as revenue-sharing payments. A financial intermediary may make decisions about which investment options it recommends or makes available, or the level of services provided, to
its customers based on the payments it is eligible to receive. Therefore, such payments to an intermediary create conflicts of interest between the intermediary and its customers and may cause the intermediary to recommend a Fund over another
investment.
Custodian. State Street Bank and Trust Company (“State Street” or the “Custodian”), One
Lincoln Street, Boston, MA 02111, serves as Custodian of the assets of each Fund. The Custodian maintains all of the instruments representing each Fund’s investments and all cash.
Transfer Agent. State Street also serves as each Fund’s Transfer Agent.
Independent Registered Public Accounting Firm. KPMG LLP (“KPMG”), 1225 17th Street, Suite
800, Denver, CO 80202, serves as each Fund’s independent registered public accounting firm. KPMG audits each Fund’s financial statements and financial highlights, performs other related audit services, and meets with the Audit Committee of the
Board of Trustees.
KPMG also acts as the independent registered public accounting firm to certain other funds advised by the Adviser. In addition, KPMG prepares each Fund’s federal and state income tax returns
and related forms. Audit and non-audit services provided by KPMG to each Fund must be pre-approved by the Audit Committee.
Counsel. Greenberg Traurig LLP, 77 W. Wacker Dr., Suite 3100, Chicago, IL 60601, acts as
legal counsel to each Fund and also serves as counsel for the Independent Trustees.
Statement of Additional Information | Davis Fundamental ETF Trust | 39
Section III:
Purchase and Redemption of Creation Units
This SAI should be read in conjunction with, and supplements information available in, the Funds’ prospectus.
Each Fund issues and redeems its shares on a continuous basis, at NAV, only in a large specified number of shares called a “Creation Unit,” either principally in-kind for securities included
in a Fund or in cash for the value of such securities. The value of each Fund is determined once each business day, as described under the “Valuation of Portfolio Securities” section in the Funds’
prospectus. The Creation Unit size for a Fund may change. Authorized Participants will be notified of such change. The principal consideration for creations and redemptions for a Fund is set forth in the table below:
|
Creation*
|
Redemption*
|
Davis Select U.S. Equity ETF
|
In-Kind
|
In-Kind
|
Davis Select Financial ETF
|
In-Kind
|
In-Kind
|
Davis Select International ETF
|
In-Kind
|
In-Kind
|
Davis Select Worldwide ETF
|
In-Kind
|
In-Kind
|
* May be revised at any time without notice
|
Purchase (Creation). The Trust issues and sells shares of each Fund only in Creation Units on a continuous basis
through the Distributor, without a sales load (but subject to transaction fees), at their NAV per share next determined after receipt of an order, on any Business Day (as defined below), in proper form pursuant to the terms of the Authorized
Participant Agreement (“Participant Agreement”). A “Business Day” with respect to a Fund is, generally, any day on which the NYSE is open for business. In some instances a Fund may accept an order to purchase shares on the next Business Day (a
“T-1 Order”). A T-1 Order must be submitted in proper form to the Transfer Agent on the prior Business Day in the manner set forth in the Participant Agreement and/or order form. The order cut off time is subject to change. An Authorized
Participant should consult with the Distributor.
Fund Deposit. The consideration for purchase of a Creation Unit of a Fund generally consists of either (i) the in-kind deposit of a
designated portfolio of securities (the “Deposit Securities”) per each Creation Unit, constituting a substantial replication, or a portfolio sampling representation, of the securities included in a Fund and the Cash Component (defined below),
computed as described below; or (ii) the cash value of the Deposit Securities (“Deposit Cash”) and “Cash Component,” computed as described below. When accepting purchases of Creation Units for cash, a Fund may incur additional costs associated
with the acquisition of Deposit Securities that would otherwise be provided by an in-kind purchaser.
Together, the Deposit Securities or Deposit Cash, as applicable, and the Cash Component constitute the “Fund Deposit,” which represents the minimum initial and subsequent investment amount for
a Creation Unit of a Fund. The “Cash Component,” which may include a Dividend Equivalent Payment, is an amount equal to the difference between the NAV of the shares (per Creation Unit) and the market value of the Deposit Securities or Deposit
Cash, as applicable. The “Dividend Equivalent Payment” enables a Fund to make a complete distribution of dividends on the day preceding the next dividend payment date, and is an amount equal, on a per Creation Unit basis, to the dividends on
all the portfolio securities of a Fund (“Dividend Securities”) with ex-dividend dates within the accumulation period for such distribution (the “Accumulation Period”), net of expenses and liabilities for such period, as if all of the Dividend
Securities had been held by the Fund for the entire Accumulation Period. The Accumulation Period begins on the ex-dividend date for the Fund and ends on the day preceding the next ex-dividend date. If the Cash Component is a positive number
(i.e., the NAV per Creation Unit exceeds the market value of the Deposit Securities or Deposit Cash, as applicable), the Cash Component shall be such positive amount. If the Cash Component is a negative number (i.e., the NAV per Creation Unit
is less than the market value of the Deposit Securities or Deposit Cash, as applicable), the Cash Component shall be such negative amount and the creator will be entitled to receive cash in an amount equal to the Cash Component. The Cash
Component serves the function of compensating for any differences between the NAV per Creation Unit and the market value of the Deposit Securities or Deposit Cash, as applicable. Computation of the Cash Component excludes any stamp duty or
other similar fees and expenses payable upon transfer of beneficial ownership of the Deposit Securities, if applicable, which shall be the sole responsibility of the Authorized Participant.
The Custodian, through NSCC, makes available on each Business Day, immediately prior to the opening of business on the NYSE (currently 9:30 a.m., Eastern time), the list of the names and the
required number of shares of each Deposit Security or the required amount of Deposit Cash, as applicable, to be included in the current Fund Deposit (based on information at the end of the previous Business Day) for the Fund. Such Fund Deposit
is subject to any applicable adjustments as described below, in order to effect purchases of Creation Units of the Fund until such time as the next-announced composition of the Deposit Securities or the required amount of Deposit Cash, as
applicable, is made available.
Statement of Additional Information | Davis Fundamental ETF Trust | 40
The identity and number of shares of the Deposit Securities or the amount of Deposit Cash, as applicable, required for a Fund Deposit for a Fund changes, as rebalancing adjustments, interest
payments and corporate action events are reflected from time to time by the Adviser with a view to the investment objective of a Fund. Information regarding a Fund Deposit necessary for the purchase of a Creation Unit is made available to
Authorized Participants and other market participants seeking to transact in Creation Unit aggregations. The composition of the Deposit Securities may also change in response to adjustments to the weighting or composition of the component
securities of a Fund.
As noted above, the Trust reserves the right to permit or require the substitution of Deposit Cash to replace any Deposit Security, which shall be added to the Cash Component, including,
without limitation, in situations where the Deposit Security (i) may not be available in sufficient quantity for delivery; (ii) may not be eligible for transfer through the systems of DTC for corporate securities and municipal securities or the
Federal Reserve System for U.S. Treasury securities; (iii) may not be eligible for trading by an Authorized Participant or the investor for which it is acting; (iv) would be restricted under the securities laws or where the delivery of the
Deposit Security to the Authorized Participant would result in the disposition of the Deposit Security by the Authorized Participant becoming restricted under the securities laws; or (v) in certain other situations (collectively, “non-standard
orders”). The Trust also reserves the right to (i) permit or require the substitution of Deposit Securities in lieu of Deposit Cash; and (ii) include or remove Deposit Securities from the basket in anticipation of Fund rebalancing changes. The
adjustments described above will reflect changes, known to the Adviser on the date of announcement to be in effect by the time of delivery of the Fund Deposit, resulting from certain corporate actions.
Procedures for Purchase of Creation Units. To be eligible to place orders with the Distributor, as facilitated via the Transfer
Agent, to purchase a Creation Unit of a Fund, an entity must be (i) a “Participating Party” (i.e., a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the NSCC)(the “Clearing Process”), a
clearing agency that is registered with the SEC; or (ii) a DTC Participant (see “Book Entry Only System”). In addition, each Participating Party or DTC Participant (each an “Authorized Participant”)
must execute a Participant Agreement that has been agreed to by the Distributor and the Transfer Agent, and that has been accepted by the Trust, with respect to purchases and redemptions of Creation Units. Each Authorized Participant will
agree, pursuant to the terms of a Participant Agreement, on behalf of itself or any investor on whose behalf it will act, to certain conditions, including that it will pay to the Trust, an amount of cash sufficient to pay the Cash Component
together with the creation transaction fee (described below) and any other applicable fees, taxes and additional variable charge.
All orders to purchase shares directly from a Fund, including non-standard orders, must be placed for one or more Creation Units and in the manner and by the time set forth in the Participant
Agreement and/or the applicable order form. Except in the case of a T-1 Order, the date on which an order to purchase Creation Units (or an order to redeem Creation Units, as set forth below) is received and accepted is referred to as the
“Order Placement Date.”
An Authorized Participant may require an investor to make certain representations or enter into agreements with respect to the order (e.g., to provide for payments of cash, when required).
Investors should be aware that their particular broker may not have executed a Participant Agreement and that, therefore, orders to purchase shares directly from a Fund in Creation Units have to be placed by the investor’s broker through an
Authorized Participant that has executed a Participant Agreement. In such cases, there may be additional charges to such investor. At any given time, there may be only a limited number of broker-dealers that have executed a Participant
Agreement and only a small number of such Authorized Participants may have international capabilities.
On days when the Exchange closes earlier than normal, a Fund may require orders to create Creation Units to be placed earlier in the day. In addition, if a market or markets on which a Fund’s
investments are primarily traded is closed, a Fund will also generally not accept orders on such day(s). Orders must be transmitted by an Authorized Participant by telephone or other transmission method acceptable to the Distributor pursuant to
procedures set forth in the Participant Agreement and in accordance with the applicable order form. Those placing orders through an Authorized Participant should allow sufficient time to permit proper submission of the purchase order by the
cut-off time on such Business Day. Economic or market disruptions or changes, or telephone or other communication failure may impede the ability to reach the Distributor or an Authorized Participant.
Fund Deposits must be delivered by an Authorized Participant through the Federal Reserve System (for cash and U.S. government securities), or through DTC (for corporate securities and
municipal securities), through a sub-custody agent (for foreign securities) and/or through such other arrangements allowed by the Trust or its agents. With respect to foreign Deposit Securities, the Custodian shall cause the sub-custodian of a
Fund to maintain an account into which the Authorized Participant shall deliver, on behalf of itself or the party on whose behalf it is acting, such Deposit Securities. Foreign Deposit
Securities must be delivered to an account maintained at the applicable local sub-custodian. The Fund Deposit transfer must be ordered by the Authorized Participant in a timely fashion so as
to ensure the delivery of the requisite number of Deposit Securities or Deposit Cash, as applicable, to the account of a Fund or its agents by no later than the Settlement Date. The “Settlement Date” for a Fund is generally the third Business
Day after the Order Placement Date. All questions as to the number of Deposit Securities or Deposit Cash to be delivered, as applicable, and the validity, form and eligibility (including time of receipt) for the deposit of any tendered
securities or cash, as applicable, will be determined by the Trust, whose
Statement of Additional Information | Davis Fundamental ETF Trust | 41
determination shall be final and binding. The amount of cash represented by the Cash Component must be transferred directly to the Custodian through the Federal Reserve Bank wire transfer
system in a timely manner so as to be received by the Custodian no later than the Settlement Date. If the Cash Component and the Deposit Securities or Deposit Cash, as applicable, are not received in a timely manner by the Settlement Date, the
creation order may be cancelled. Upon written notice to the Distributor, such canceled order may be resubmitted the following Business Day using a Fund Deposit as newly constituted to reflect the then current NAV of a Fund. The delivery of
Creation Units so created generally will occur no later than the third Business Day following the day on which the purchase order is deemed received by the Distributor.
The order shall be deemed to be received on the Business Day on which the order is placed (except in the case of a T-1 Order as described herein), provided that the order is placed in proper
form prior to the applicable cut-off time and the federal funds in the appropriate amount are deposited by 2:00 p.m. or 3:00 p.m. Eastern time (per applicable instructions) with the Custodian on the Settlement Date. If the order is not placed
in proper form as required, or federal funds in the appropriate amount are not received by 2:00 p.m. or 3:00 p.m. Eastern time (per applicable instructions) on the Settlement Date, then the order may be deemed to be rejected and the Authorized
Participant shall be liable to the Fund for losses, if any, resulting therefrom. A creation request is considered to be in “proper form” if all procedures set forth in the Participant Agreement, order form and this SAI are properly followed.
Issuance of a Creation Unit. Except as provided herein, Creation Units will not be issued until the transfer of good title to the
Trust of the Deposit Securities or payment of Deposit Cash, as applicable, and the payment of the Cash Component have been completed. When the sub-custodian has confirmed to the Custodian that the required Deposit Securities (or the cash value
thereof) have been delivered to the account of the relevant sub-custodian(s), the Distributor and the Adviser shall be notified of such delivery, and the Trust will issue and cause the delivery of the Creation Units.
In instances where the Trust accepts Deposit Securities for the purchase of a Creation Unit, the Creation Unit may be purchased in advance of receipt by the Trust of all or a portion of the
applicable Deposit Securities, as described below. In these circumstances, the initial deposit will have a value greater than the NAV of the shares on the date the order is placed in proper form, since in addition to available Deposit
Securities, cash must be deposited in an amount equal to the sum of (i) the Cash Component, plus (ii) an additional amount of cash equal to a percentage of the market value, as set forth in the Participant Agreement, of the undelivered Deposit
Securities (the “Additional Cash Deposit”), which shall be maintained in a general non-interest bearing collateral account. An additional amount of cash shall be required to be deposited with the Trust, pending delivery of the missing Deposit
Securities to the extent necessary to maintain the Additional Cash Deposit with the Trust in an amount at least equal to the applicable percentage, as set forth in the Participant Agreement, of the daily marked to market value of the missing
Deposit Securities. The Trust may use such Additional Cash Deposit to buy the missing Deposit Securities at any time. Authorized Participants will be liable to the Trust for all costs, expenses, dividends, income and taxes associated with
missing Deposit Securities, including the costs incurred by the Trust in connection with any such purchases. These costs will be deemed to include the amount by which the actual purchase price of the Deposit Securities exceeds the market value
of such Deposit Securities on the day the purchase order was deemed received by the Distributor plus the brokerage and related transaction costs associated with such purchases. The Trust will return any unused portion of the Additional Cash
Deposit once all of the missing Deposit Securities have been properly received by the Custodian, or purchased by the Trust, and deposited into the Trust. In addition, a transaction fee, as set forth below under “Creation Transaction Fees” will be charged in all cases and an additional variable charge may also be applied. The delivery of Creation Units so created generally will occur no later than the Settlement Date.
Acceptance of Orders of Creation Units. The Trust reserves the absolute right to reject an order for Creation Units transmitted in
respect of a Fund at its discretion, including, without limitation, if (i) the order is not in proper form; (ii) the Deposit Securities or Deposit Cash, as applicable, delivered by the Participant are not as disseminated through the facilities
of the NSCC for that date by the Custodian; (iii) the investor(s), upon obtaining the shares ordered, would own 80% or more of the currently outstanding shares of a Fund; (iv) acceptance of the Deposit Securities would have certain adverse tax
consequences to a Fund; (v) the acceptance of the Fund Deposit would, in the opinion of counsel, be unlawful; (vi) the acceptance of the Fund Deposit would otherwise, in the discretion of the Trust or the Adviser, have an adverse effect on the
Trust or the rights of beneficial owners; (vii) the acceptance or receipt of the order for a Creation Unit would, in the opinion of counsel to the Trust, be unlawful; or (viii) in the event that circumstances outside the control of the Trust,
the Custodian, the Transfer Agent and/or the Adviser make it for all practical purposes not feasible to process orders for Creation Units. Examples of such circumstances include: (i) acts of God or public service or utility problems such as
fires, floods, extreme weather conditions and power outages resulting in telephone, telecopy and computer failures; (ii) market conditions or activities causing trading halts; (iii) systems failures involving computer or other information
systems affecting the Trust, the Distributor, the Custodian, the Transfer Agent, DTC, NSCC, Federal Reserve System or any other participant in the creation process; and (iv) other extraordinary events. The Trust or its agents shall communicate
to the Authorized Participant its rejection of an order. The Trust, the Transfer Agent, the Custodian and the Distributor are under no duty, however, to give notification of any defects or irregularities in the delivery of Fund Deposits nor
shall either of them incur any liability for the failure to give any such notification. The Trust, the Transfer Agent, the Custodian and the Distributor shall not be liable for the rejection of any purchase order for Creation Units.
Statement of Additional Information | Davis Fundamental ETF Trust | 42
All questions as to the number of shares of each security in the Deposit Securities and the validity, form, eligibility and acceptance for deposit of any securities to be delivered shall be
determined by the Trust and the Trust’s determination shall be final and binding.
Redemption. Shares may be redeemed only in Creation Units at their NAV next determined after receipt of a redemption request in
proper form by a Fund through the Transfer Agent and only on a Business Day. EXCEPT UPON LIQUIDATION OF A FUND, THE TRUST WILL NOT REDEEM SHARES IN AMOUNTS LESS THAN CREATION UNITS. Investors must accumulate enough shares in the secondary
market to constitute a Creation Unit in order to have such shares redeemed by the Trust. There can be no assurance, however, that there will be sufficient liquidity in the public trading market at any time to permit assembly of a Creation Unit.
Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of shares to constitute a redeemable Creation Unit.
With respect to each Fund, the Custodian, through the NSCC, makes available immediately prior to the opening of business on the NYSE (currently 9:30 a.m. Eastern time) on each Business Day,
the list of the names and share quantities of each Fund’s portfolio securities that will be applicable (subject to possible amendment or correction) to redemption requests received in proper form (as defined below) on that day (“Fund
Securities”). Fund Securities received on redemption may not be identical to Deposit Securities.
Redemption proceeds for a Creation Unit are paid either in-kind or in cash, or a combination thereof, as determined by the Trust. With respect to in-kind redemptions of a Fund, redemption
proceeds for a Creation Unit will consist of Fund Securities – as announced by the Custodian on the Business Day of the request for redemption received in proper form plus cash in an amount equal to the difference between the NAV of the shares
being redeemed, as next determined after a receipt of a request in proper form, and the value of the Fund Securities (the “Cash Redemption Amount”), less a fixed redemption transaction fee and any applicable additional variable charge, as set
forth in the prospectus or this statement of additional information or as provided to Authorized Participant from time to time. In the event that the Fund Securities have a value greater than the NAV of the shares, a compensating cash payment
equal to the differential is required to be made by or through an Authorized Participant by the redeeming shareholder. Notwithstanding the foregoing, at the Trust’s discretion, an Authorized Participant may receive the corresponding cash value
of the securities in lieu of the in-kind securities value representing one or more Fund Securities.
Procedures for Redemption of Creation Units. After the Trust has deemed an order for redemption received, the Trust will initiate
procedures to transfer the requisite Fund Securities and the Cash Redemption Amount to the Authorized Participant by the Settlement Date. With respect to in-kind redemptions of a Fund, the calculation of the value of the Fund Securities and the
Cash Redemption Amount to be delivered upon redemption will be made by the Custodian according to the procedures set forth in the prospectus under “How Your Shares are Value,” computed on the Business
Day on which a redemption order is deemed received by the Trust. Therefore, if a redemption order in proper form is submitted to the Distributor by a DTC Participant by the specified time on the Order Placement Date, and the requisite number of
shares of a Fund are delivered to the Custodian prior to 2:00 p.m. or 3:00 p.m. Eastern time (per applicable instructions) on the Settlement Date, then the value of the Fund Securities and the Cash Redemption Amount to be delivered will be
determined by the Custodian on such Order Placement Date. If the requisite number of shares of the Fund are not delivered by 2:00 p.m. or 3:00 p.m. Eastern time (per applicable instructions) on the Settlement Date, the Fund will not release the
underlying securities for delivery unless collateral is posted in such percentage amount of missing shares as set forth in the Participant Agreement (marked-to-market daily).
With respect to in-kind redemptions of a Fund, in connection with taking delivery of shares of Fund Securities upon redemption of Creation Units, an Authorized Participant must maintain
appropriate custody arrangements with a qualified broker-dealer, bank or other custody providers in each jurisdiction in which any of the Fund Securities are customarily traded (or such other arrangements as allowed by the Trust or its agents),
to which account such Fund Securities will be delivered. Deliveries of redemption proceeds generally will be made within three Business Days of the trade date.
If it is not possible to make other such arrangements, or if it is not possible to effect deliveries of the Fund Securities, the Trust may in its discretion exercise its option to redeem such
shares in cash, and the redeeming investor will be required to receive its redemption proceeds in cash. In addition, an investor may request a redemption in cash that a Fund may, in its sole discretion, permit. In either case, the investor will
receive a cash payment equal to the NAV of its shares based on the NAV of shares of the Fund next determined after the redemption request is received in proper form (minus a redemption transaction fee and additional charge for requested cash
redemptions specified above, to offset the Trust’s brokerage and other transaction costs associated with the disposition of Fund Securities). A Fund may also, in its sole discretion, upon request of a shareholder, provide such redeemer a
portfolio of securities that differs from the exact composition of the Fund Securities, but does not differ in NAV.
An Authorized Participant submitting a redemption request is deemed to repeat representations set forth in the Authorized Participant Agreement upon each redemption request. The Trust reserves
the right to verify these representations at its discretion, but will typically require verification with respect to a redemption request from a Fund in connection with higher levels of redemption activity and/or short interest in a Fund. If
the Authorized Participant, upon receipt of a verification
Statement of Additional Information | Davis Fundamental ETF Trust | 43
request, does not provide sufficient verification of its representations as determined by the Trust, the redemption request will not be considered to have been received in proper form and may
be rejected by the Trust.
Redemptions of shares for Fund Securities will be subject to compliance with applicable federal and state securities laws and each Fund (whether or not it otherwise permits cash redemptions)
reserves the right to redeem Creation Units for cash to the extent that the Trust could not lawfully deliver specific Fund Securities upon redemptions or could not do so without first registering the Fund Securities under such laws. An
Authorized Participant, or an investor for which it is acting subject to a legal restriction with respect to a particular security, included in the Fund Securities applicable to the redemption of Creation Units may be paid an equivalent amount
of cash. The Authorized Participant may request the redeeming investor of the shares to complete an order form or to enter into agreements with respect to such matters as compensating cash payment. Further, an Authorized Participant that is not
a “qualified institutional buyer,” (“QIB”) as such term is defined under Rule 144A of the Securities Act, will not be able to receive Fund Securities that are restricted securities eligible for resale under Rule 144A. An Authorized Participant
may be required by the Trust to provide a written confirmation with respect to QIB status in order to receive Fund Securities.
The right of redemption may be suspended or the date of payment postponed with respect to a Fund (i) for any period during which the Exchange is closed (other than customary weekend and
holiday closings); (ii) for any period during which trading on the Exchange is suspended or restricted; (iii) for any period during which an emergency exists as a result of which disposal of the shares of a Fund or determination of the NAV of
the shares is not reasonably practicable; or (iv) in such other circumstance as is permitted by the SEC.
Required Early Acceptance of Orders. Notwithstanding the foregoing, as described in the Participant Agreement and/or applicable
order form, certain series of the Trust may require orders to be placed up to one or more Business Days prior to the trade date, as described in the Participant Agreement or the applicable order form, in order to receive the trade date’s NAV.
Orders to purchase shares of such funds that are submitted on the Business Day immediately preceding a holiday or a day (other than a weekend) that the equity markets in the relevant foreign market are closed may not be accepted. Authorized
Participants may be notified that the cut-off time for an order may be earlier on a particular Business Day, as described in the Participant Agreement and the applicable order form.
Creation and Redemption Transaction Fees. A transaction fee, as set forth in the table
below, is imposed for the transfer and other transaction costs associated with the purchase or redemption of Creation Units, as applicable. Authorized Participants will be required to pay a fixed creation transaction fee and/or a fixed
redemption transaction fee, as applicable, on a given day regardless of the number of Creation Units created or redeemed on that day. A Fund may adjust the transaction fee from time to time. An additional fee or a variable charge will be
applied to certain creation and redemption transactions, including non-standard orders and whole or partial cash purchases or redemptions. With respect to creation orders, Authorized Participants are responsible for the costs of transferring
the securities constituting the Deposit Securities to the account of the Trust and with respect to redemption orders, Authorized Participants are responsible for the costs of transferring the Fund Securities from the Trust to their account or
on their order. Investors who use the services of a broker or other such intermediary may also be charged a fee for such services.
|
Transaction Fee (1)(2)
|
Davis Select U.S. Equity ETF
|
$400
|
Davis Select Financial ETF
|
$400
|
Davis Select International ETF
|
$400
|
Davis Select Worldwide ETF
|
$400
|
(1) From time to time, a Fund may waive all or a portion of its applicable transaction
fee(s). An additional charge of up to three times the standard transaction fee may be charged to the extent a transaction is outside of the clearing process.
(2) In addition to the transaction fees listed above, a Fund may charge an additional variable
fee for creations and redemptions in cash to offset brokerage and impact expenses associated with the cash transaction. The variable transaction fee will be calculated based on historical transaction cost data and the Adviser’s view of
current market conditions; however, the actual variable fee charged for a given transaction may be lower or higher than the trading expenses incurred by a Fund with respect to that transaction.
Statement of Additional Information | Davis Fundamental ETF Trust | 44
Section IV:
General Information
This SAI should be read in conjunction with, and supplements information available in, the prospectus.
Determining the Price of Shares
The prospectus describes procedures used to determine the NAV. This SAI supplements that discussion.
Valuation of Portfolio Securities. The valuation of each Fund’s portfolio securities is described in the Funds’ prospectus and
annual report.
Dividends and Distributions
The Funds’ prospectus describes the Funds’ dividend and distribution policies. This SAI supplements that discussion.
Each Fund intends to pay out dividends, if any, on an annual basis. Each Fund intends to distribute its net realized capital gains, if any, to investors annually. A Fund may occasionally be
required to make supplemental distributions. Distributions in cash may be reinvested automatically in additional whole shares, only if the broker through whom you purchased shares makes such option available. Your broker is responsible for
distributing the income and capital gain distributions to you. 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 a Fund as a RIC or to
avoid imposition of income or excise taxes on undistributed income.
Capital Stock. Each Fund issues shares of beneficial interest, with no par value. The Board has the
right to establish additional series in the future, to determine the preferences, voting powers, rights and privileges thereof and to modify such preferences, voting powers, rights and privileges without shareholder approval.
The Trust is not required to and does not intend to hold annual meetings of shareholders. The Trust’s Declaration of Trust (the “Declaration”), requires a shareholder vote only on those
matters where the 1940 Act requires a vote of shareholders and otherwise permits the Trustees to take actions without seeking the consent of shareholders. For example, the Declaration gives the Trustees the authority to approve reorganizations
between a Fund and another entity, such as another exchange-traded fund, or the sale of all or substantially all of a Fund’s assets, or the termination of the Trust or a Fund without shareholder approval if the 1940 Act would not require such
approval. Each share has one vote with respect to matters upon which a shareholder vote is required, consistent with the requirements of the 1940 Act and the rules promulgated thereunder.
Shares of all series of the Trust vote together as a single class except as otherwise required by the 1940 Act, or if the matter being voted on affects only a particular series; and, if a
matter affects a particular series differently from other series, the shares of that series will vote separately on such matter.
The Trustees establish the number of Trustees and may fill vacancies on the Board, except when election of Trustees by the shareholders is required under the 1940 Act. Trustees are then
elected by a plurality of votes cast by shareholders at a meeting at which a quorum is present. The Declaration also provides that Trustees may be removed, with cause, by a vote of shareholders holding at least two-thirds of the voting power of
the Trust, or by a vote of two-thirds of the remaining Trustees. “Cause” requires willful misconduct, dishonesty, fraud or a felony conviction. The provisions of the Declaration relating to the election and removal of Trustees may not be
amended without the approval of two-thirds of the Trustees.
Under the Declaration, by becoming a shareholder of a Fund, each shareholder is expressly held to have agreed to be bound by the provisions of the Declaration and the Trust’s By-Laws. The
Declaration may, except in limited circumstances, be amended by the Trustees in any respect without a shareholder vote. Shareholders may be required to disclose information on direct or indirect ownership of Fund shares in order to comply with
various laws applicable to a Fund or as the Trustees may determine, and ownership of Fund shares may be disclosed by a Fund if so required by law or regulation. In addition, pursuant to the Declaration, the Trustees may, in their discretion,
require the Trust to redeem shares held by any shareholder for any reason under terms set by the Trustees.
In order to permit legitimate inquiries and claims while avoiding the time, expense, distraction and other harm that can be caused to a Fund or its shareholders as a result of spurious
shareholder claims, demands and derivative actions, the Declaration provides a detailed process for the bringing of derivative actions by shareholders, and provides that actions that are derivative in nature may not be brought directly.
Consistent with applicable Delaware law, prior to bringing a derivative action, a demand must first be made on the Trustees. The Declaration details various information, certifications, undertakings and acknowledgements that must be included in
the demand. If a majority of the Trustees who are considered independent for the purposes of considering the demand determine that maintaining the suit would not be in the best interests of a Fund, the Trustees are required to reject the demand
and the complaining shareholder may not proceed with the derivative action unless the shareholder is able to sustain the burden of proof to a court that the decision of the Trustees not to pursue the requested action was not a good faith
exercise of their business judgment on behalf of a Fund. In making such a determination, a
Statement of Additional Information | Davis Fundamental ETF Trust | 45
Trustee is not considered to have a personal financial interest by virtue of being compensated for his or her services as a Trustee. If a demand is rejected, the complaining shareholder may be
responsible for the Fund’s costs and expenses if a court determines that a derivative action was made without reasonable cause or for an improper purpose, if a derivative or direct action is dismissed on the basis of a failure to comply with
the procedural provisions relating to shareholder actions as set forth in the Declaration or if a direct action is dismissed by a court for failure to state a claim. Any shareholder bringing an action against a Fund waives the right to trial by
jury to the fullest extent permitted by law and any action commenced by a shareholder may be brought only in the U.S. District Court for the District of Delaware or if any such action may not be brought in that court, then in the Delaware Court
of Chancery (the “Chosen Courts”), under the terms of the Declaration. Except as prohibited by law, if a shareholder commences an applicable action in a court other than a Chosen Court, the shareholder may be obligated to reimburse the Fund and
any applicable Trustee or officer of the Fund made party to such proceeding for the costs and expenses (including attorneys’ fees) incurred in connection with any successful motion to dismiss, stay or transfer of the action.
The Declaration specifically provides, however, that no provision of the Declaration is effective to require a waiver of compliance with any provision of, or restrict any shareholder rights
expressly granted by, the Securities Act of 1933, as amended, the Securities Exchange act of 1934, as amended, or the 1940 Act, or any rule, regulation or order of the SEC thereunder. The provisions of the Declaration are severable, and if the
Trustees determine, with the advice of counsel, that any such provision, in whole or in part, conflict with applicable laws and regulations, the conflicting provisions, or part or parts thereof, will be deemed to be not part of the Declaration
(provided, that any such determination will not render any of the remaining provisions invalid or improper).
The Declaration contains an express disclaimer of shareholder liability for acts or obligations of the Trust and requires that notice of this disclaimer be given in each agreement, obligation
or instrument entered into or executed by the Trust or the Trustees. The Declaration further provides for indemnification out of the assets and property of the Trust for all losses and expenses of any shareholder held personally liable for the
obligations of the Trust. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which both inadequate insurance existed and the Trust or the Fund itself was unable to meet
its obligations. The Trust believes the likelihood of the occurrence of these circumstances is remote.
The Declaration further provides that a Trustee acting in his or her capacity as Trustee is not personally liable to any person other than the Trust or its series, in connection with the
affairs of the Trust or for any act, omission or obligation of the Trust. A Trustee is liable only for his or her own bad faith, willful misfeasance, gross negligence or reckless disregard of his or her duties involved in the conduct of his or
her office. The Declaration requires the Trust to indemnify any persons who are or who have been Trustees, officers or employees of the Trust for any liability for actions or failure to act except to the extent prohibited by applicable federal
law. In making any determination as to whether any person is entitled to the advancement of expenses in connection with a claim for which indemnification is sought, such person is entitled to a rebuttable presumption that he or she did not
engage in conduct for which indemnification is not available. The Declaration provides that any Trustee who serves as Chair of the Board of Trustees or of a committee of the Board of Trustees, Lead Independent Trustee, or Audit Committee
Financial Expert, or in any other similar capacity will not be subject to any greater standard of care or liability because of such position.
Shareholder inquiries may be made by writing to the Trust, c/o the Adviser, Davis Selected Advisers, L.P., at 2949 East Elvira Road, Suite 101, Tucson, Arizona 85756.
The Funds’ prospectus provides a general discussion of federal income taxes. This SAI supplements that discussion.
This discussion is not intended to be a full discussion of all the aspects of the federal income tax law and its effects on the Funds and their shareholders. Shareholders may be subject to
state and local taxes on distributions. Each investor should consult his or her own tax adviser regarding the effect of federal, state and local taxes on any investment in a Fund.
If a Fund qualifies for treatment as a RIC, the Fund will not be subject to federal income tax on income and gains that are distributed in a timely manner to its shareholders in the form of
dividends.
In order to qualify as a RIC under the Code, each Fund must distribute annually to its shareholders at least 90% of its net investment income (which, includes dividends, taxable interest and
the excess of net short-term capital gains over net long-term capital losses, less operating expenses) and at least 90% of its net tax exempt interest income, for each tax year, if any (the “Distribution Requirement”) and also must meet certain
additional requirements. Among these requirements are the following: (i) at least 90% of each Fund’s gross income each taxable year must be derived from dividends, interest, payments with respect to certain securities loans, and gains from the
sale or other disposition of stock, securities, or foreign currencies, or other income (including but not limited to gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities,
or currencies, and net income derived from an interest in a qualified publicly traded partnership (the “Qualifying Income Test”); and (ii) at the close of each quarter of each Fund’s taxable year: (a) at least 50% of the value of each Fund’s
total assets must be represented by cash and cash items, U.S. government securities,
Statement of Additional Information | Davis Fundamental ETF Trust | 46
securities of other RICs and other securities, with such other securities limited, in respect to any one issuer, to an amount not greater than 5% of the value of each Fund’s total assets and
that does not represent more than 10% of the outstanding voting securities of such issuer, including the equity securities of a qualified publicly traded partnership, and (b) not more than 25% of the value of each Fund’s total assets is
invested in the securities (other than U.S. government securities or the securities of other RICs) of any one issuer or the securities (other than the securities of another RIC) of two or more issuers that a Fund controls and which are engaged
in the same or similar trades or businesses or related trades or businesses, or the securities of one or more qualified publicly traded partnerships (the “Asset Test”).
If, for any taxable year, a Fund was to fail to qualify as a RIC or was to fail to meet the distribution requirement described above, it would be taxed in the same manner as an ordinary
corporation and distributions to its shareholders would not be deductible by the Fund in computing its taxable income. In addition, a Fund’s distributions, to the extent derived from the Fund’s current and accumulated earnings and profits,
including any distributions of net long-term capital gains, would be taxable to shareholders as ordinary dividend income for federal income tax purposes. However, such dividends would be eligible, subject to any generally applicable
limitations, (i) to be treated as qualified dividend income in the case of shareholders taxed as individuals; and (ii) for the dividends-received deduction in the case of corporate shareholders. Moreover, the Fund would be required to pay out
its earnings and profits accumulated in that year in order to qualify for treatment as a RIC in a subsequent year. Under certain circumstances, a Fund may be able to cure a failure to qualify as a RIC, but in order to do so the Fund may incur
significant Fund-level taxes and may be forced to dispose of certain assets. If a Fund failed to qualify as a RIC for a period greater than two taxable years, the Fund would generally be required to recognize any net built-in gains with respect
to certain of its assets upon a disposition of such assets within ten years of qualifying as a RIC in a subsequent year.
Each Fund intends to distribute at least annually to its shareholders substantially all of its investment company taxable income (computed without regard to the dividends-paid deduction) and
net capital gain (the excess of the Fund’s net long-term capital gain over its net short-term capital loss). Investment income that is retained by a Fund will generally be subject to tax at regular corporate rates. If a Fund retains any net
capital gain, that gain will be subject to tax at corporate rates, but the Fund may designate the retained amount as undistributed capital gains in a notice to its shareholders who (i) will be required to include in income for federal income
tax purposes, as long-term capital gain, their shares of such undistributed amount; (ii) will be deemed to have paid their proportionate shares of the tax paid by the Fund on such undistributed amount against their federal income tax
liabilities, if any; and (iii) will be entitled to claim refunds on a properly filed U.S. tax return to the extent the credit exceeds such liabilities. For federal income tax purposes, the tax basis of shares owned by a shareholder of a Fund
will be increased by an amount equal to the difference between the amount of undistributed capital gains included in the shareholder’s gross income and the tax deemed paid by the shareholder.
If a Fund fails to distribute in a calendar year an amount at least equal to the sum of 98% of its ordinary income for such year and 98.2% of its capital gain net income for the one-year
period ending October 31 of such year, plus any retained amount from the prior year, the Fund will be subject to a non-deductible 4% excise tax on the undistributed amount. For these purposes, the Fund will be treated as having distributed any
amount on which it has been subject to corporate income tax for the taxable year ending within the calendar year. Each Fund intends to declare and pay dividends and distributions in the amounts and at the times necessary to avoid the
application of the 4% excise tax, although there can be no assurance that it will be able to do so.
A Fund may elect to treat part or all of any “qualified late year loss” as if it had been incurred in the succeeding taxable year in determining the Fund’s taxable income, net capital gain,
net short-term capital gain, and earnings and profits. A “qualified late year loss” generally includes net capital loss, net long-term capital loss or net short-term capital loss incurred after October 31 of the current taxable year, and
certain other late-year losses.
If a Fund has a “net capital loss” (that is, capital losses in excess of capital gains), the excess of the Fund’s net short-term capital losses over its net long-term capital gains is treated
as a short-term capital loss arising on the first day of the Fund’s next taxable year, and the excess (if any) of the Fund’s net long-term capital losses over its net short-term capital gains is treated as a long-term capital loss arising on
the first day of the Fund’s next taxable year.
Distributions. Distributions are generally taxable whether shareholders receive them in cash or
reinvest them in additional shares. Moreover, distributions on a Fund’s shares are generally subject to federal income tax as described herein to the extent they do not exceed the Fund’s realized income and gains, even though such distributions
may economically represent a return of a particular shareholder’s investment. Investors may therefore wish to avoid purchasing shares at a time when a Fund’s NAV reflects gains that are either unrealized, or realized but not distributed.
Realized income and gains must generally be distributed even when a Fund’s NAV also reflects unrealized losses.
Dividends and other distributions by a Fund are generally treated under the Code as received by the shareholders at the time the dividend or distribution is made. However, if any dividend or
distribution is declared by a Fund in October, November or December of any calendar year and payable to its shareholders of record on a specified date in such a month but is actually paid during the following January, such dividend or
distribution will be deemed to have been received by each shareholder on December 31 of the year in which the dividend was declared.
Statement of Additional Information | Davis Fundamental ETF Trust | 47
Distributions by a Fund of investment income are generally taxable as ordinary income. Taxes on distributions of capital gains are determined by how long the Fund owned the assets that
generated those gains, rather than how long a shareholder has owned his or her Fund shares. Sales of assets held by a Fund for more than one year generally result in long-term capital gains and losses, and sales of assets held by a Fund for one
year or less generally result in short-term capital gains and losses. Distributions from a Fund’s net capital gain that are properly reported by the Fund as capital gain dividends (“Capital Gain Dividends”) will be taxable as long-term capital
gains. For individuals, long-term capital gains are subject to tax at reduced maximum tax rates. Distributions of gains from the sale of investments that a Fund owned for one year or less will be taxable as ordinary income.
For non-corporate shareholders, distributions of investment income reported by a Fund as derived from “qualified dividend income” will be taxed at the rates applicable to long-term capital
gain, provided holding period and other requirements are met at both the shareholder and Fund level. In order for some portion of the dividends received by a Fund shareholder to be “qualified dividend income,” the Fund making the distribution
must meet holding period and other requirements with respect to some portion of the dividend-paying stocks in its portfolio and the shareholder must meet holding period and other requirements with respect to the Fund’s shares. A dividend will
not be treated as qualified dividend income (at either the Fund or shareholder level) (i) if the dividend is received with respect to any share of stock held for fewer than 61 days during the 121-day period beginning on the date that is 60 days
before the date on which such share becomes ex-dividend with respect to such dividend (or, in the case of certain preferred stock, 91 days during the 181-day period beginning 90 days before the ex-dividend date); (ii) to the extent that the
recipient is under an obligation (whether pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property; (iii) if the recipient elects to have the dividend income treated
as investment income for purposes of the limitation on deductibility of investment interest; or (iv) if the dividend is received from a foreign corporation that is (a) not eligible for the benefits of a comprehensive income tax treaty with the
United States (with the exception of dividends paid on stock of such a foreign corporation that is readily tradable on an established securities market in the United States), or (b) treated as a passive foreign investment company.
In general, distributions of investment income reported by a Fund as derived from qualified dividend income will be treated as qualified dividend income by a shareholder taxed as an
individual, provided the shareholder meets the holding period and other requirements described above with respect to the Fund’s shares. To the extent that a Fund makes a distribution of income received by the Fund in lieu of dividends (a
“substitute payment”) with respect to securities on loan pursuant to a securities lending transaction, such income will not constitute qualified dividend income to individual shareholders and will not be eligible for the dividends received
deduction for corporate shareholders.
Dividends and distributions from a Fund and capital gain on the sale of Fund shares are generally taken into account in determining a shareholder’s “net investment income” for purposes of the
Medicare contribution tax applicable to certain individuals, estates and trusts.
In the case of corporate shareholders, Fund distributions (other than capital gain distributions) generally qualify for the dividends-received deduction to the extent such distributions are so
reported and do not exceed the gross amount of qualifying dividends received by such Fund for the year. Generally, and subject to certain limitations (including certain holding period limitations), a dividend will be treated as a qualifying
dividend if it has been received from a domestic corporation. All such qualifying dividends (including the deducted portion) must be included in your alternative minimum taxable income calculation.
If a Fund makes distributions in excess of the Fund’s current and accumulated earnings and profits in any taxable year, the excess distribution to each shareholder will be treated as a return
of capital to the extent of the shareholder’s tax basis in its shares, and will reduce the shareholder’s tax basis in its shares. After the shareholder’s basis has been reduced to zero, any such distributions will result in a capital gain,
assuming the shareholder holds his or her shares as capital assets. A reduction in a shareholder’s tax basis in its shares will reduce any loss or increase any gain on a subsequent taxable disposition by the shareholder of its shares
Sale or Exchange of Shares. A sale or exchange of shares in a Fund may give rise to a gain or loss.
In general, any gain or loss realized upon a taxable disposition of shares will be treated as long-term capital gain or loss if the shares have been held for more than 12 months. Otherwise, the gain or loss on the taxable disposition of shares
will be treated as short-term capital gain or loss. However, any loss realized upon a taxable disposition of shares held for six months or less will be treated as long-term, rather than short-term, to the extent of any long-term capital gain
distributions received (or deemed received) by the shareholder with respect to the shares. All or a portion of any loss realized upon a taxable disposition of shares will be disallowed if substantially identical shares of the Fund are purchased
within 30 days before or after the disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss.
Backup Withholding. A Fund (or financial intermediaries, such as brokers, through which a shareholder
holds Fund shares) generally is required to withhold and to remit to the U.S. Treasury a percentage of the taxable distributions and sale or redemption proceeds paid to any shareholder who fails to properly furnish a correct taxpayer
identification number, who has under-reported dividend or interest income, who has failed to certify that he, she or it is a U.S. person (including a resident alien) or who fails to certify that he, she or it is not subject to such withholding.
The backup withholding tax rate is 28%.
Statement of Additional Information | Davis Fundamental ETF Trust | 48
Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder’s U.S. federal income tax liability, provided the appropriate information is furnished
to the Internal Revenue Service (the “IRS”).
Federal Tax Treatment of Certain Fund Investments. Transactions of a Fund in options, futures
contracts, hedging transactions, forward contracts, swap agreements, straddles and foreign currencies may be subject to various special and complex tax rules, including mark-to-market, constructive sale, straddle, wash sale and short sale
rules. These rules could affect a Fund’s ability to qualify as a RIC, affect whether gains and losses recognized by a Fund are treated as ordinary income or capital gain, accelerate the recognition of income to a Fund, and/or defer a Fund’s
ability to recognize losses. These rules may in turn affect the amount, timing or character of the income distributed to shareholders by a Fund.
Each Fund is required, for federal income tax purposes, to mark-to-market and recognize as income for each taxable year its net unrealized gains and losses as of the end of such year on
certain regulated futures contracts, foreign currency contracts and options that qualify as Section 1256 contracts in addition to the gains and losses actually realized with respect to such contracts during the year. Gain or loss from Section
1256 contracts that are required to be marked-to-market annually will generally be 60% long-term and 40% short-term capital gain or loss. Application of this rule may alter the timing and character of distributions to shareholders.
With respect to investments in zero coupon securities that are sold at original issue discount and thus do not make periodic cash interest payments, a Fund will be required to include as part
of its current income the imputed interest on such obligations even though the Fund has not received any interest payments on such obligations during that period. Because a Fund intends to distribute substantially all of its net investment
income to its shareholders, the Fund may have to sell Fund securities to distribute such imputed income that may occur at a time when the Adviser would not have chosen to sell such securities and that may result in taxable gain or loss.
Any market discount recognized on a bond is taxable as ordinary income. A market discount bond is a bond acquired in the secondary market at a price below redemption value or adjusted issue
price if issued with original issue discount. Absent an election by a Fund to include the market discount in income as it accrues, gain on the Fund’s disposition of such an obligation will be treated as ordinary income rather than capital gain
to the extent of the accrued market discount.
A Fund may invest in inflation-linked debt securities. Any increase in the principal amount of an inflation-linked debt security will be original interest discount, which is taxable as
ordinary income and is required to be distributed, even though the Fund will not receive the principal, including any increase thereto, until maturity. As noted above, if a Fund invests in such securities it may be required to liquidate other
investments, including at times when it is not advantageous to do so, in order to satisfy its distribution requirements and to eliminate any possible taxation at the Fund level.
Foreign Investments. Income received by a Fund from sources within foreign countries (including, for
example, dividends or interest on stock or securities of non-U.S. issuers) may be subject to withholding and other taxes imposed by such countries. Tax treaties between such countries and the U.S. may reduce or eliminate such taxes.
If more than 50% of the value of a Fund’s total assets at the close of their taxable year consists of stocks or securities of foreign corporations, the Fund will be eligible to and intends to
file an election with the IRS that may enable shareholders, in effect, to receive either the benefit of a foreign tax credit, or a deduction from such taxes, with respect to any foreign and U.S. possessions income taxes paid by the Fund,
subject to certain limitations. Pursuant to the election, such Fund will treat those taxes as dividends paid to its shareholders. Each such shareholder will be required to include a proportionate share of those taxes in gross income as income
received from a foreign source and must treat the amount so included as if the shareholder had paid the foreign tax directly. The shareholder may then either deduct the taxes deemed paid by him or her in computing his or her taxable income or,
alternatively, use the foregoing information in calculating any foreign tax credit they may be entitled to use against the shareholders’ federal income tax. If a Fund makes the election, such Fund (or its administrative agent) will report
annually to their shareholders the respective amounts per share of the Fund’s income from sources within, and taxes paid to, foreign countries and U.S. possessions.
Tax-Exempt Shareholders. Under current law, income of a RIC that would be treated as unrelated
business taxable income (“UBTI”) if earned directly by a tax-exempt entity generally will not be attributed as UBTI to a tax-exempt entity that is a shareholder in the RIC. Notwithstanding this “blocking” effect, a tax-exempt shareholder could
realize UBTI by virtue of its investment in a Fund if (i) shares in the Fund constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of Code Section 514(b); (ii) if the Fund invests in REITs that hold
residual interests in REMICs; (iii) the Fund invests in a REIT that is a taxable mortgage pool (“TMP”) or in a REIT that has a subsidiary that is a TMP; or (iv) if the Fund holds residual interests in REMICs.
Non-U.S. Investors. In general, dividends, other than Capital
Gain Dividends paid by a Fund to a shareholder that is not a “U.S. person” within the meaning of the Code are subject to withholding of U.S. federal income tax at a rate of 30% (or lower applicable treaty rate) on distributions derived from
taxable ordinary income. A Fund may, under certain circumstances, report all or a portion of a dividend as an “interest-related dividend” or a “short-term capital gain dividend,” which would generally be exempt from this 30% U.S. withholding
tax, provided certain other requirements are met. Short-term capital
Statement of Additional Information | Davis Fundamental ETF Trust | 49
gain dividends received by a nonresident alien individual who is present in the U.S. for a period or periods aggregating 183 days or more during the taxable year are not exempt from this 30%
withholding tax.
A beneficial holder of shares who is a non-U.S. person is not, in general, subject to U.S. federal income tax on gains (and is not allowed a U.S. income tax deduction for losses) realized on a
sale of shares of a Fund or on Capital Gain Dividends, unless (i) such gain or dividend is effectively connected with the conduct of a trade or business carried on by such holder within the United States; or (ii) in the case of an individual
holder, the holder is present in the United States for a period or periods aggregating 183 days or more during the year of the sale or the receipt of the Capital Gain Dividend and certain other conditions are met.
Ordinary dividends, redemption payments and certain Capital Gain Dividends paid after June 30, 2014 to a non-U.S. shareholder that fails to meet certain requirements or make certain required
certifications are generally subject to withholding tax at a 30% rate. Under current IRS guidance, withholding on such payments will begin at different times depending on the type of payment, the type of payee and when the shareholder’s account
is or was opened. In general, withholding with respect to ordinary dividends began on July 1, 2014, although in many cases withholding on ordinary dividends will begin on a later date. Withholding on redemption payments, proceeds of sales in
respect of Fund shares and certain Capital Gain Dividends is currently scheduled to begin on January 1, 2019. A non-U.S. shareholder may be exempt from the withholding described in this paragraph under an intergovernmental agreement between the
U.S. and a foreign government, provided that the shareholder and the applicable foreign government comply with the terms of such agreement. In order for a non-U.S. investor to qualify for an exemption from backup withholding, described above,
the non-U.S. investor must comply with special certification and filing requirements. Non-U.S. investors in a Fund should consult their tax advisors in this regard.
A beneficial holder of shares who is a non-U.S. person may be subject to state and local tax and to the U.S. federal estate tax, in addition to the federal income tax consequences referred to
above. If a shareholder is eligible for the benefits of a tax treaty, any income or gain effectively connected with a U.S. trade or business will generally be subject to U.S. federal income tax on a net basis, only if it is also attributable to
a permanent establishment maintained by the shareholder in the United States.
Creation and Redemption of Creation Units. An Authorized Participant having the U.S. dollar as its
functional currency for U.S. federal income tax purposes that exchanges securities for Creation Units generally will recognize a gain or loss equal to the difference between (i) the sum of the market value of the Creation Units at the time of
the exchange and any cash received by the Authorized Participant in the exchange; and (ii) the sum of the exchanger’s aggregate basis in the securities surrendered and any cash paid for such Creation Units. All or a portion of any gain or loss
recognized by an Authorized Participant exchanging a currency other than its functional currency for Creation Units may be treated as ordinary income or loss. A person who redeems Creation Units will generally recognize a gain or loss equal to
the difference between the exchanger’s basis in the Creation Units and the sum of the aggregate U.S. dollar market value of any securities received plus the amount of any cash received for such Creation Units. The IRS, however, may assert that
a loss that is realized upon an exchange of securities for Creation Units by an Authorized Participant who does not mark-to-market its holdings may not be currently deducted under the rules governing “wash sales,” or on the basis that there has
been no significant change in economic position. All or some portion of any capital gain or loss realized upon the creation of Creation Units in exchange for securities will generally be treated as long-term capital gain or loss if securities
exchanged for such Creation Units have been held for more than one year.
Any capital gain or loss realized upon the redemption of Creation Units will generally be treated as long-term capital gain or loss if the Creation Units have been held for more than one year.
Otherwise, such capital gains or losses will be treated as short-term capital gains or losses.
Persons exchanging securities for Creation Units should consult their own tax advisors with respect to the tax treatment of any creation or redemption transaction and whether the wash sales
rule applies and when a loss might be deductible.
Section 351. The Trust on behalf of each Fund has the right
to reject an order for a purchase of shares of a Fund if the purchaser (or any group of purchasers) would, upon obtaining the shares so ordered, own 80% or more of the outstanding shares of the Fund and if, pursuant to Section 351 of the Code,
the Fund would have a basis in the securities different from the market value of such securities on the date of deposit. The Trust also has the right to require information necessary to determine beneficial share ownership for purposes of the
80% determination.
Certain Reporting Regulations. Under U.S. Treasury regulations, generally, if a shareholder
recognizes a loss of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder (or certain greater amounts over a combination of years), the shareholder must file with the IRS a disclosure statement on
IRS Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this reporting requirement, but under current guidance, shareholders of a RIC are not excepted. Significant penalties may be imposed for the failure to
comply with the reporting regulations. 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.
Statement of Additional Information | Davis Fundamental ETF Trust | 50
Cost Basis Reporting. The cost basis of shares acquired by purchase will generally be based on the amount paid for the shares and
then may be subsequently adjusted for other applicable transactions as required by the Code. The difference between the selling price and the cost basis of shares generally determines the amount of the capital gain or loss realized on the sale
or exchange of shares. Contact the broker through whom you purchased your shares to obtain information with respect to the available cost basis reporting methods and elections for your account.
The federal income tax discussion set forth above is for general information only. Prospective investors should consult their tax advisors regarding the specific federal income tax
consequences of purchasing, holding and disposing of shares of a Fund, as well as the effect of state, local and foreign tax law and any proposed tax law changes.
Procedures and Shareholder Rights are
Described by Current Prospectus and Other Disclosure Documents
Among other disclosures, the Funds’ most current prospectus, SAI, annual and semi-annual reports, and other documents describe (i) the procedures that the Funds follow when interacting with
shareholders; and (ii) shareholders’ rights. The Funds’ procedures and shareholders’ rights may change from time to time to reflect changing laws, rules and operations. The Funds’ prospectus and other disclosure documents will be amended from
time to time to reflect these changes.
Statement of Additional Information | Davis Fundamental ETF Trust | 51
Appendix A:
Quality Ratings of Debt Securities
Moody’s Corporate Bond Ratings
Aaa - Bonds that are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and generally are referred to as
“gilt-edged.” Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are unlikely to impair the
fundamentally strong position of such issues.
Aa - Bonds that are rated Aa are judged to be of high quality by all standards. Together with the Aaa group, they comprise what generally are known as
high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities, fluctuation of protective elements may be of greater amplitude, or there may be other elements present that make
the long-term risks appear somewhat larger than Aaa securities.
A - Bonds that are rated A possess many favorable investment attributes and are to be considered as upper medium-grade-obligations. Factors giving
security to principal and interest are considered adequate, but elements may be present that suggest a susceptibility to impairment sometime in the future.
Baa - Bonds that are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba - Bonds that are rated Ba are judged to have speculative elements as their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class.
B - Bonds that are rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any longer period of time may be small.
Caa - Bonds that are rated Caa are of poor standing. Such issues may be in default, or there may be present elements of danger with respect to principal
or interest.
Ca - Bonds that are rated Ca represent obligations that are speculative in a high degree. Such issues are often in default or have other marked
shortcomings.
C - Bonds that are rated C are the lowest rated class of bonds, and issues so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Standard & Poor’s Corporate Bond Ratings
AAA - Debt rated AAA has the highest rating assigned by Standard and Poor’s. Capacity to pay interest and repay principal is extremely strong.
AA - Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in small degree.
A - Debt rated A has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB - Debt rated BBB is regarded as having an adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category than in higher rated categories.
BB - Debt rated BB has less near-term vulnerability to default than other speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial or economic conditions that could lead to inadequate capacity to meet timely interest and principal payments. The BB rating category also is used for debt subordinated to senior debt that is assigned an actual or
implied BBB- rating.
B - Debt rated B has a greater vulnerability to default but currently has the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions will likely impair capacity or willingness to pay interest and repay principal. The B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB or BB-
rating.
CCC - Debt rated CCC has a currently identifiable vulnerability to default and is dependent on favorable business, financial and economic conditions to
meet timely payment of interest and repayment of principal. In the event of adverse business,
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financial or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied B or B– rating.
CC - The rating CC typically is applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating.
C - The rating C is typically applied to debt subordinated to senior debt that is assigned an actual or implied CCC– debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued.
CI - The rating CI is reserved for income bonds on which no interest is being paid.
D - Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating also will be used on the filing of a bankruptcy petition if debt service payments are jeopardized.
Moody’s Commercial Paper Ratings
Moody’s commercial paper ratings are opinions of the ability of issuers to repay punctually promissory obligations not having an original maturity in excess of nine months. Moody’s employs the
following three designations, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers: Prime-1 (superior capacity), Prime-2 (strong capacity) and Prime-3 (acceptable capacity). In assigning ratings to an
issuer that represents that its commercial paper obligations are supported by the credit of another entity or entities, Moody’s evaluates the financial strength of the indicated affiliated corporations, commercial banks, insurance companies,
foreign governments or other entities, but only as one factor in the total rating assessment.
Standard & Poor’s Commercial Paper Ratings
The S&P commercial paper rating is a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded in four
categories, ranging from A for the highest quality to D for the lowest. Issues assigned an A rating are regarded as having the greatest capacity for timely payment. Within the A category, the numbers 1, 2 and 3 indicate relative degrees of
safety. The addition of a plus sign to the category A-1 denotes that the issue is determined to possess overwhelming safety characteristics.
Statement of Additional Information | Davis Fundamental ETF Trust | 53
Appendix B:
Summary of the Adviser’s Proxy Voting Policies and Procedures (August 2008)
Davis Selected Advisers, L.P. (the “Adviser”) votes on behalf of its clients in matters of corporate governance through the proxy voting process. The Adviser takes its ownership
responsibilities very seriously and believes the right to vote proxies for its clients’ holdings is a significant asset of the clients. The Adviser exercises its voting responsibilities as a fiduciary, solely with the goal of maximizing the
value of its clients’ investments.
The Adviser votes proxies with a focus on the investment implications of each issue. For each proxy vote, the Adviser takes into consideration its duty to clients and all other relevant facts
known to the Adviser at the time of the vote. Therefore, while these guidelines provide a framework for voting, votes are ultimately cast on a case-by-case basis.
The Adviser has adopted written Proxy Voting Policies and Procedures and established a Proxy Oversight Group to oversee voting policies and deal with potential conflicts of interest. In
evaluating issues, the Proxy Oversight Group may consider information from many sources, including the portfolio managers for each client account, management of a company presenting a proposal, shareholder groups, and independent proxy research
services.
Clients may obtain a copy of the Adviser’s Proxy Voting Policies and Procedures, and/or a copy of how their own proxies were voted, by writing to:
Davis Selected Advisers, L.P.
Attn: Chief Compliance Officer
2949 East Elvira Road, Suite 101
Tucson, Arizona, 85756
Guiding Principles
Creating Value for Existing Shareholders. The most important factors that we consider in evaluating proxy issues are: (i) the
company’s or management’s long-term track record of creating value for shareholders. In general, we will consider the recommendations of a management with a good record of creating value for shareholders as more credible than the
recommendations of managements with a poor record; (ii) whether, in our estimation, the current proposal being considered will significantly enhance or detract from long-term value for existing shareholders; and (iii) whether a poor record of
long term performance resulted from poor management or from factors outside of management’s control.
Other factors which we consider may include:
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Shareholder oriented management. One of the factors that the Adviser considers in selecting
stocks for investment is the presence of shareholder-oriented management. In general, such managements will have a large ownership stake in the company. They will also have a record of taking actions and supporting policies designed
to increase the value of the company’s shares and thereby enhance shareholder wealth. The Adviser’s research analysts are active in meeting with top management of portfolio companies and in discussing their views on policies or
actions which could enhance shareholder value. Whether management shows evidence of responding to reasonable shareholder suggestions, and otherwise improving general corporate governance, is a factor which may be taken into
consideration in proxy voting.
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Allow responsible management teams to run the business. Because we try generally to invest
with “owner oriented” managements (see above), we vote with the recommendation of management on most routine matters, unless circumstances such as long standing poor performance or a change from our initial assessment indicate
otherwise. Examples include the election of trustees and ratification of auditors. The Adviser supports policies, plans and structures that give management teams appropriate latitude to run the business in the way that is most likely
to maximize value for owners. Conversely, the Adviser opposes proposals that limit management’s ability to do this. The Adviser will generally vote with management on shareholder social and environmental proposals on the basis that
their impact on share value is difficult to judge and is therefore best done by management.
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Preserve and expand the power of shareholders in areas of corporate governance. Equity
shareholders are owners of the business, and company boards and management teams are ultimately accountable to them. The Adviser supports policies, plans and structures that promote accountability of the board and management to
owners, and align the interests of the board and management with owners. Examples include: annual election of all board members and incentive plans that are contingent on delivering value to shareholders. The Adviser generally opposes
proposals that reduce accountability or misalign interests, including but not limited to classified boards, poison pills, excessive option plans, and re-pricing of options.
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Statement of Additional Information | Davis Fundamental ETF Trust | 54
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Support compensation policies that reward management teams appropriately for performance. We
believe that well thought out incentives are critical to driving long-term shareholder value creation. Management incentives ought to be aligned with the goals of long-term owners. In our view, the basic problem of skyrocketing
executive compensation is not high pay for high performance, but high pay for mediocrity or worse. In situations where we feel that the compensation practices at companies we own are not acceptable, we will exercise our discretion to
vote against compensation committee members and specific compensation proposals.
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The Adviser exercises its professional judgment in applying these principles to specific proxy votes. The Adviser’s Proxy Policies and Procedures provide additional explanation of the analysis
which the Adviser may conduct when applying these guiding principles to specific proxy votes.
Conflicts of Interest
A potential conflict of interest arises when the Adviser has business interests that may not be consistent with the best interests of its client. The Adviser’s Proxy Oversight Group is charged
with resolving material potential conflicts of interest which it becomes aware of. It is charged with resolving conflicts in a manner that is consistent with the best interests of clients. There are many acceptable methods of resolving
potential conflicts, and the Proxy Oversight Group exercises its judgment and discretion to determine an appropriate means of resolving a potential conflict in any given situation:
◾ Votes consistent with the “General Proxy Voting Policies,” are presumed to be consistent with the best
interests of clients;
◾ The Adviser may disclose the conflict to the client and obtain the client’s consent prior to voting the
proxy;
◾ The Adviser may obtain guidance from an independent third-party;
◾ The potential conflict may be immaterial; or
◾ Other reasonable means of resolving potential conflicts of interest which effectively insulate the decision
on how to vote client proxies from the conflict.