PROSPECTUS ALPHACLONE ALTERNATIVE ALPHA ETF (ALFA) Listed on Cboe BZX Exchange, Inc. July 31, 2018

Transcription

1 PROSPECTUS ALPHACLONE ALTERNATIVE ALPHA ETF (ALFA) Listed n Cbe BZX Exchange, Inc. July 31, 2018 The U.S. Securities and Exchange Cmmissin ( SEC ) has nt apprved r disapprved f these securities r passed upn the accuracy r adequacy f this Prspectus. Any representatin t the cntrary is a criminal ffense.

2 TABLE OF CONTENTS AlphaClne Alternative Alpha ETF Summary...3 Investment Objective... 3 Fees and Expenses f the Fund... 3 Expense Example... 3 Prtfli Turnver... 3 Principal Investment Strategies... 3 Principal Investment Risks... 4 Perfrmance... 6 Prtfli Management... 7 Purchase and Sale f Shares... 7 Tax Infrmatin... 7 Financial Intermediary Cmpensatin... 7 Additinal Infrmatin Abut the Index...8 Additinal Infrmatin Abut the Fund...8 Investment Objective... 8 Manager f Managers Structure... 8 Principal Investment Risks... 8 Additinal Infrmatin Abut the Fund s Nn-Principal Risks Prtfli Hldings Infrmatin...13 Management...13 Investment Adviser Sub-Adviser Prtfli Manager Hw t Buy and Sell Shares...14 Bk Entry Share Trading Prices n the Exchange Frequent Purchases and Redemptins f Shares Determinatin f NAV Fair Value Pricing Delivery f Sharehlder Dcuments Husehlding Investments by Registered Investment Cmpanies Dividends, Distributins, and Taxes...15 Dividends and Distributins Taxes Taxes n Distributins Taxes When Shares are Sld n the Exchange Taxes n Purchases and Redemptins f Creatin Units Freign Taxes Distributin...17 Premium/Discunt Infrmatin...17 Index/Trademark Licenses/Disclaimers...17 Financial Highlights...18

3 ALPHACLONE ALTERNATIVE ALPHA ETF SUMMARY Investment Objective The AlphaClne Alternative Alpha ETF (the Fund ) seeks t track the price and yield, befre fees and expenses, f the AlphaClne Hedge Fund Masters Index (the Index ). Fees and Expenses f the Fund This table describes the fees and expenses that yu may pay if yu buy and hld shares f the Fund ( Shares ). This table and the example belw d nt include the brkerage cmmissins that investrs may pay n their purchases and sales f Shares. Annual Fund Operating Expenses (expenses that yu pay each year as a percentage f the value f yur investment) Management Fees % Distributin and Service (Rule 12b-1) Fees 0.00% Other Expenses 0.00% Acquired Fund Fees and Expenses % Ttal Annual Fund Operating Expenses 1,2 0.69% 1 Restated t reflect the Fund s cntractual management fee and investment bjective effective December 27, Acquired Fund Fees and Expenses are the indirect csts f investing in ther investment cmpanies. Ttal Annual Fund Operating Expenses d nt crrelate t the expense ratis in the Fund s Financial Highlights because the Financial Highlights include nly the direct perating expenses incurred by the Fund and exclude Acquired Fund Fees and Expenses. Expense Example This Example is intended t help yu cmpare the cst f investing in the Fund with the cst f investing in ther funds. The Example assumes that yu invest $10,000 in the Fund fr the time perids indicated and then redeem all f yur Shares at the end f thse perids. The Example als assumes that yur investment has a 5% return each year and that the Fund s perating expenses remain the same. Althugh yur actual csts may be higher r lwer, based n these assumptins yur csts wuld be: Prtfli Turnver 1 Year: $70 3 Years: $221 5 Years: $ Years: $859 The Fund pays transactin csts, such as cmmissins, when it buys and sells securities (r turns ver its prtfli). A higher prtfli turnver rate may indicate higher transactin csts and may result in higher taxes when Shares are held in a taxable accunt. These csts, which are nt reflected in annual fund perating expenses r in the example, affect the Fund s perfrmance. Fr the fiscal year ended March 31, 2018, the Fund s prtfli turnver rate was 371% f the average value f its prtfli. Principal Investment Strategies The Fund uses a passive management (r indexing) apprach t track the perfrmance, befre fees and expenses, f the Index. AlphaClne Hedge Fund Masters Index The Index utilizes a prprietary, quantitative Clne Scre methdlgy develped by AlphaClne, Inc. ( AlphaClne ), the Fund s index prvider, t replicate the U.S. equity securities favred as investments by hedge funds and institutinal investrs. The Index was established by AlphaClne in 2017 and is cmpsed f up t 50 U.S.-listed equity securities f small, mid, r large capitalizatin cmpanies and recnstituted quarterly. AlphaClne s Clne Scre methdlgy analyzes the histrical returns f a given hedge fund s r institutinal investr s hldings and assigns a Clne Scre (i.e., ranking) t each such hedge fund and institutinal investr based n such returns. Clne Scres are recalculated semi-annually. The Clne Scre methdlgy incrprates infrmatin frm hedge fund and institutinal investr public disclsure filings (e.g., Frm 13F filings) with the U.S. Securities and Exchange Cmmissin t identify their disclsed hldings at the end f each quarter. The Index is made up f the equity securities held by thse hedge funds and institutinal investrs with the highest Clne Scres. Index cnstituents are equal weighted at the time f each recnstitutin, althugh each individual cnstituent is limited t a 5% weighting at the time f each recnstitutin. The equity securities that may cmprise the Index include, but are nt limited t, U.S.-listed cmmn and preferred stck f dmestic and freign cmpanies, including thse in emerging markets, real estate investment trusts ( REITs ), master limited partnerships 3

4 ( MLPs ), and American Depsitary Receipts ( ADRs ). Such securities may be issued by small, mid, r large capitalizatin cmpanies and must meet certain liquidity threshlds at the time f recnstitutin t be included in the Index. The Fund s Investment Strategy The Fund attempts t invest all, r substantially all, f its assets in the cmpnent securities that make up the Index. Under nrmal circumstances, at least 80% f the Fund s ttal assets (exclusive f any cllateral held frm securities lending) will be invested in the cmpnent securities f the Index. The Fund expects that, ver time, the crrelatin between the Fund s perfrmance and that f the Index, befre fees and expenses, will be 95% r better. The Fund will generally use a replicatin strategy t achieve its investment bjective, meaning the Fund generally will invest in all f the cmpnent securities f the Index in apprximately the same prprtin as in the Index. Hwever, the Fund may use a representative sampling strategy, meaning it may invest in a sample f the securities in the Index whse risk, return and ther characteristics clsely resemble the risk, return and ther characteristics f the Index as a whle, when the Fund s sub-adviser believes it is in the best interests f the Fund (e.g., when replicating the Index invlves practical difficulties r substantial csts, an Index cnstituent becmes temprarily illiquid, unavailable r less liquid, r as a result f legal restrictins r limitatins that apply t the Fund but nt t the Index). The Fund generally may invest up t 20% f its ttal assets (exclusive f any cllateral held frm securities lending) in securities r ther investments nt included in the Index, but which the Fund s sub-adviser believes will help the Fund track the Index. Fr example, the Fund may invest in securities that are nt cmpnents f the Index t reflect varius crprate actins and ther changes t the Index (such as recnstitutins, additins and deletins). On a day-t-day basis, the Fund als may hld mney market mutual funds r shrtterm debt instruments that have terms-t-maturity f less than 397 days and exhibit high quality credit prfiles, including U.S. gvernment securities and repurchase agreements. T the extent the Index cncentrates (i.e., hlds mre than 25% f its ttal assets) in the securities f a particular industry r grup f related industries, the Fund will cncentrate its investments t apprximately the same extent as the Index. As f March 31, 2018, securities in the cnsumer, financial, health care, industrial, and infrmatin technlgy sectrs represented a significant prtin f the Index. Principal Investment Risks The principal risks f investing in the Fund are summarized belw. As with any investment, there is a risk that yu culd lse all r a prtin f yur investment in the Fund. The fllwing risks culd affect the value f yur investment in the Fund: ADR Risk. ADRs invlve risks similar t thse assciated with investments in freign securities, such as changes in plitical r ecnmic cnditins f ther cuntries and changes in the exchange rates f freign currencies. ADRs listed n U.S. exchanges are issued by banks r trust cmpanies, and entitle the hlder t all dividends and capital gains that are paid ut n the underlying freign shares. Cncentratin Risk. The Fund s investments will be cncentrated in an industry r grup f industries t the extent that the Index is s cncentrated. In such event, the value f the Shares may rise and fall mre than the value f Shares that invests in securities f cmpanies in a brader range f industries. Currency Exchange Rate Risk. The underlying freign shares f ADRs in which the Fund invests may be denminated in nn- U.S. currencies. Changes in currency exchange rates and the relative value f nn-u.s. currencies may affect the value f the ADRs and the value f yur Shares. Currency exchange rates can be very vlatile and can change quickly and unpredictably. As a result, the value f an investment in the Fund may change quickly and withut warning and yu may lse mney. Emerging Markets Risk. Investments in ADRs that prvide expsure t securities traded in develping r emerging markets may additinally invlve substantial risk due t limited infrmatin; different accunting, auditing and financial reprting standards; a cuntry s dependence n revenue frm particular cmmdities r internatinal aid; and exprpriatin, natinalizatin r ther adverse plitical r ecnmic develpments. Plitical and ecnmic structures in many emerging market cuntries may be underging significant evlutin and rapid develpment, and such cuntries may lack the scial, plitical and ecnmic stability characteristics f mre develped cuntries. Sme f these cuntries may have in the past failed t recgnize private prperty rights and have at times natinalized r exprpriated the assets f private cmpanies. Equity Market Risk. The equity securities held in the Fund s prtfli may experience sudden, unpredictable drps in value r lng perids f decline in value. This may ccur because f factrs that affect securities markets generally r factrs affecting specific issuers, industries, sectrs r cmpanies in which the Fund invests. Cmmn stcks are generally expsed t greater risk than ther types f securities, such as preferred stck and debt bligatins, because cmmn stckhlders generally have inferir rights t receive payment frm issuers. Freign Markets Risk. Investments in ADRs that prvide expsure t nn-u.s. securities invlve certain risks that may nt be present with investments in U.S. securities. Fr example, the value f nn-u.s. securities may be subject t risk f decline due t 4

5 freign currency fluctuatins r t plitical r ecnmic instability. Investments in ADRs als may be subject t withhlding r ther taxes and may be indirectly subject t additinal trading, settlement, custdial, and peratinal risks. These and ther factrs can make investments in the Fund mre vlatile and ptentially less liquid than ther types f investments. High Prtfli Turnver Risk. The Fund may trade all r a significant prtin f the securities in its prtfli in cnnectin with each rebalance and recnstitutin f its Index. A high prtfli turnver rate increases transactin csts, which may increase the Fund s expenses. Frequent trading may als cause adverse tax cnsequences fr investrs in the Fund due t an increase in shrtterm capital gains. MLP Risk. MLP investment returns are enhanced during perids f declining r lw interest rates and tend t be negatively influenced when interest rates are rising. In additin, mst MLPs are fairly leveraged and typically carry a prtin f a flating rate debt. As such, a significant upward swing in interest rates wuld als drive interest expense higher. Furthermre, mst MLPs grw by acquisitins partly financed by debt, and higher interest rates culd make it mre difficult t make acquisitins. MLP investments als entail many f the general tax risks f investing in a partnership. Limited partners in an MLP typically have limited cntrl and limited rights t vte n matters affecting the partnership. Additinally, there is always the risk that an MLP will fail t qualify fr favrable tax treatment. Mdels and Data Risk. The cmpsitin f the Index is heavily dependent n prprietary quantitative mdels as well as infrmatin and data supplied by third parties ( Mdels and Data ). When Mdels and Data prve t be incrrect r incmplete, any decisins made in reliance theren may lead t the inclusin r exclusin f securities frm the Index that wuld have been excluded r included had the Mdels and Data been crrect and cmplete. If the cmpsitin f the Index reflects such errrs, the Fund s prtfli can be expected t reflect the errrs, t. Passive Investment Risk. The Fund is nt actively managed and its sub-adviser wuld nt sell shares f an equity security due t current r prjected underperfrmance f a security, industry r sectr, unless that security is remved frm the Index r the selling f shares f that security is therwise required upn a rebalancing f the Index as addressed in the Index methdlgy. REIT Investment Risk. Investments in REITs invlve unique risks. REITs may have limited financial resurces, may trade less frequently and in limited vlume, and may be mre vlatile than ther securities. REITs may be affected by changes in the value f their underlying prperties r mrtgages r by defaults by their brrwers r tenants. Furthermre, these entities depend upn specialized management skills, have limited diversificatin and are, therefre, subject t risks inherent in financing a limited number f prjects. In additin, the perfrmance f a REIT may be affected by changes in the tax laws r by its failure t qualify fr taxfree pass-thrugh f incme. Sectr Risk. T the extent the Fund invests mre heavily in particular sectrs f the ecnmy, its perfrmance will be especially sensitive t develpments that significantly affect thse sectrs. Cnsumer Sectrs Risk. The success f cnsumer prduct manufacturers and retailers is tied clsely t the perfrmance f dmestic and internatinal ecnmies, interest rates, exchange rates, cmpetitin, cnsumer cnfidence, changes in demgraphics and cnsumer preferences. Cmpanies in the cnsumer staples sectr, such as cmpanies that prduce r sell fd, beverage, and drug retail r ther husehld items, may be adversely impacted by changes in glbal and ecnmic cnditins, rising energy prices, and changes in the supply r price f cmmdities. Cmpanies in the cnsumer discretinary sectr, such as autmbile, textile, retail, and media cmpanies, depend heavily n dispsable husehld incme and cnsumer spending, and may be strngly affected by scial trends and marketing campaigns. These cmpanies may be subject t severe cmpetitin, which may have an adverse impact n their prfitability. Financial Sectr Risk. This sectr can be significantly affected by changes in interest rates, gvernment regulatin, the rate f defaults n crprate, cnsumer and gvernment debt, the availability and cst f capital, and fallut frm the husing and sub-prime mrtgage crisis. Insurance cmpanies, in particular, may be significantly affected by changes in interest rates, catastrphic events, price and market cmpetitin, the impsitin f premium rate caps, r ther changes in gvernment regulatin r tax law and/r rate regulatin, which may have an adverse impact n their prfitability. This sectr has experienced significant lsses in the recent past, and the impact f mre stringent capital requirements and f recent r future regulatin n any individual financial cmpany r n the sectr as a whle cannt be predicted. In recent years, cyber attacks and technlgy malfunctins and failures have becme increasingly frequent in this sectr and have caused significant lsses. Health Care Sectr Risk. Cmpanies in the health care sectr are subject t extensive gvernment regulatin and their prfitability can be significantly affected by restrictins n gvernment reimbursement fr medical expenses, rising csts f medical prducts and services, pricing pressure (including price discunting), limited prduct lines, an increased emphasis n the delivery f healthcare thrugh utpatient services, lss r impairment f intellectual prperty rights and litigatin regarding prduct r service liability. Industrial Sectr Risk. The industrial sectr can be significantly affected by, amng ther things, wrldwide ecnmic grwth, supply and demand fr specific prducts and services, rapid technlgical develpments, internatinal plitical and ecnmic develpments, envirnmental issues, and tax and gvernmental regulatry plicies. As the demand fr, r prices f, industrials increase, the value f the Fund s investments generally wuld be expected t als increase. Cnversely, declines in 5

6 the demand fr, r prices f, industrials generally wuld be expected t cntribute t declines in the value f such securities. Such declines may ccur quickly and withut warning and may negatively impact the value f the Fund and yur investment. Infrmatin Technlgy Sectr Risk. Market r ecnmic factrs impacting infrmatin technlgy cmpanies and cmpanies that rely heavily n technlgical advances culd have a significant effect n the value f the Fund's investments. The value f stcks f infrmatin technlgy cmpanies and cmpanies that rely heavily n technlgy is particularly vulnerable t rapid changes in technlgy prduct cycles, rapid prduct bslescence, gvernment regulatin and cmpetitin, bth dmestically and internatinally, including cmpetitin frm freign cmpetitrs with lwer prductin csts. Stcks f infrmatin technlgy cmpanies and cmpanies that rely heavily n technlgy, especially thse f smaller, less-seasned cmpanies, tend t be mre vlatile than the verall market. Infrmatin technlgy cmpanies are heavily dependent n patent and intellectual prperty rights, the lss r impairment f which may adversely affect prfitability. Shares May Trade at Prices Other Than Net Asset Value ( NAV ). As with all ETFs, Shares may be bught and sld in the secndary market at market prices. Althugh it is expected that the market price f Shares will apprximate the Fund s NAV, there may be times when the market price f Shares is mre than the NAV intra-day (premium) r less than the NAV intra-day (discunt) due t supply and demand f Shares r during perids f market vlatility. This risk is heightened in times f market vlatility, perids f steep market declines, and perids when there is limited trading activity fr Shares in the secndary market, in which case such premiums r discunts may be significant. Smaller Cmpanies Risk. The equity securities f smaller cmpanies have histrically been subject t greater investment risk than securities f larger cmpanies. The prices f equity securities f smaller cmpanies tend t be mre vlatile and less liquid than the prices f equity securities f larger cmpanies. Tracking Errr Risk. As with all index funds, the perfrmance f the Fund and its Index may differ frm each ther fr a variety f reasns. Fr example, the Fund incurs perating expenses and prtfli transactin csts nt incurred by the Index. In additin, the Fund may nt be fully invested in the securities f the Index at all times r may hld securities nt included in the Index. Perfrmance The fllwing perfrmance infrmatin indicates sme f the risks f investing in the Fund. The bar chart shws the Fund s perfrmance fr calendar years ended December 31. The table illustrates hw the Fund s average annual returns fr the 1-year, 5-year, and since inceptin perids cmpare with thse f a brad measure f market perfrmance and the indexes tracked by the Fund during the applicable perid. The Fund s past perfrmance, befre and after taxes, des nt necessarily indicate hw it will perfrm in the future. Updated perfrmance infrmatin is als available n the Fund s website at Calendar Year Ttal Returns 40% 36.13% 30% 20% 10% 0% 12.39% 21.53% -10% -20% % -5.96% Fr the year-t-date perid ended June 30, 2018, the Fund s ttal return was 9.66%. During the perid f time shwn in the bar chart, the Fund s highest quarterly return was 11.81% fr the quarter ended September 30, 2013, and the lwest quarterly return was % fr the quarter ended March 31,

7 Average Annual Ttal Returns Fr the Perid Ended December 31, 2017 AlphaClne Alternative Alpha ETF 1 Year 5 Year Since Inceptin (5/30/2012) Return Befre Taxes 21.53% 9.13% 10.36% Return After Taxes n Distributins 21.53% 9.04% 10.27% Return After Taxes n Distributins and Sale f Shares 12.18% 7.18% 8.24% AlphaClne Hedge Fund Masters Index/AlphaClne Hedge Fund Dwnside Hedged Index 1 (reflects n deductin fr fees, expenses, r taxes) 23.03% 9.92% 10.94% S&P 500 Index (reflects n deductin fr fees, expenses, r taxes) 21.83% 15.79% 15.99% 1 Effective December 27, 2017, the Fund s investment bjective changed t track the perfrmance, befre fees and expenses, f the AlphaClne Hedge Fund Masters Index. Prir t December 27, 2017, the Fund s investment bjective was t track the price and ttal return perfrmance, befre fees and expenses, f the AlphaClne Hedge Fund Dwnside Hedged Index. Perfrmance shwn fr perids prir t December 27, 2017 is that f the AlphaClne Hedge Fund Dwnside Hedged Index. After-tax returns are calculated using the histrical highest individual federal marginal incme tax rates during the perid cvered by the table abve and d nt reflect the impact f state and lcal taxes. Actual after-tax returns depend n an investr s tax situatin and may differ frm thse shwn. After-tax returns shwn are nt relevant t investrs wh hld their Shares thrugh tax-deferred arrangements such as an individual retirement accunt ( IRA ) r ther tax-advantaged accunts. Prtfli Management Adviser Sub-Adviser Prtfli Manager Exchange Traded Cncepts, LLC ( ETC ) Vident Investment Advisry, LLC ( VIA ) Denise M. Krisk, CFA, President f VIA, has primary respnsibility fr the day-t-day management f the Fund. Ms. Krisk has managed the Fund with VIA since January 2015 and previusly managed the Fund with the Fund s previus sub-adviser frm its inceptin in 2012 until Nvember Purchase and Sale f Shares Shares are listed n Cbe BZX Exchange, Inc. (the Exchange ), and mst investrs will buy and sell Shares thrugh brkers at market prices, rather than NAV. Because Shares trade at market prices rather than NAV, Shares may trade at a price greater than NAV (premium) r less than NAV (discunt). The Fund issues and redeems Shares at NAV nly in large blcks knwn as Creatin Units, which nly Authrized Participants ( APs ) (typically, brker-dealers) may purchase r redeem. Creatin Units generally cnsist f 50,000 Shares, thugh this may change frm time t time. The Fund generally issues and redeems Creatin Units in exchange fr a prtfli f securities clsely apprximating the hldings f the Fund (the Depsit Securities ) and/r a designated amunt f U.S. cash. Tax Infrmatin Fund distributins are generally taxable as rdinary incme, qualified dividend incme, r capital gains (r a cmbinatin), unless yur investment is in an IRA r ther tax-advantaged accunt. Distributins n investments made thrugh tax-deferred arrangements may be taxed later upn withdrawal f assets frm thse accunts. Financial Intermediary Cmpensatin If yu purchase Shares thrugh a brker-dealer r ther financial intermediary (such as a bank) (an Intermediary ), ETC, VIA, r their affiliates may pay Intermediaries fr certain activities related t the Fund, including participatin in activities that are designed t make Intermediaries mre knwledgeable abut exchange traded prducts, including the Fund, r fr ther activities, such as marketing, educatinal training r ther initiatives related t the sale r prmtin f Shares. These payments may create a cnflict f interest by influencing the Intermediary and yur salespersn t recmmend the Fund ver anther investment. Any such arrangements d nt result in increased Fund expenses. Ask yur salespersn r visit the Intermediary s website fr mre infrmatin. 7

8 ADDITIONAL INFORMATION ABOUT THE INDEX AlphaClne prvides the underlying Index t the Fund. AlphaClne created and develped the Index and is respnsible fr maintaining and applying the rules-based methdlgy fr the Index. The Index is calculated by Slactive AG. Slactive AG is nt affiliated with the Trust, AlphaClne, ETC (the Adviser ), VIA (the Sub-Adviser ), the Fund s distributr, r any f their respective affiliates. ADDITIONAL INFORMATION ABOUT THE FUND Investment Objective The Fund s investment bjective has been adpted as a nn-fundamental investment plicy and may be changed withut sharehlder apprval upn written ntice t sharehlders. Manager f Managers Structure The Fund and the Adviser have received an exemptive rder frm the U.S. Securities and Exchange Cmmissin ( SEC ) permitting the Adviser (subject t certain cnditins and the Bard s apprval) t select r change sub-advisers withut btaining sharehlder apprval. The rder als permits the Adviser t materially amend the terms f agreements with a sub-adviser (including an increase in the fee paid by the Adviser t the sub-adviser (and nt paid by the Fund)) r t cntinue the emplyment f a sub-adviser after an event that wuld therwise cause the autmatic terminatin f services with Bard apprval, but withut sharehlder apprval. Sharehlders will be ntified f any sub-adviser changes. Principal Investment Risks An investment in the Fund entails risks. The Fund culd lse mney, r its perfrmance culd trail that f ther investment alternatives. The fllwing prvides additinal infrmatin abut the Fund s principal risks. It is imprtant that investrs clsely review and understand these risks befre making an investment in the Fund. ADR Risk. The Fund may hld the securities f nn-u.s. cmpanies in the frm f ADRs. ADRs are negtiable certificates issued by a U.S. financial institutin that represent a specified number f shares in a freign stck and trade n a U.S. natinal securities exchange, such as the New Yrk Stck Exchange. Spnsred ADRs are issued with the supprt f the issuer f the freign stck underlying the ADRs and carry all f the rights f cmmn shares, including vting rights. The underlying securities f the ADRs in the Fund s prtfli are usually denminated r quted in currencies ther than the U.S. Dllar. As a result, changes in freign currency exchange rates may affect the value f the Fund s prtfli. In additin, because the underlying securities f ADRs trade n freign exchanges at times when the U.S. markets are nt pen fr trading, the value f the securities underlying the ADRs may change materially at times when the U.S. markets are nt pen fr trading, regardless f whether there is an active U.S. market fr shares. Cncentratin Risk. The Fund s investments will be cncentrated in an industry r grup f industries t the extent that the Index is s cncentrated. In such event, the value f the Shares may rise and fall mre than the value f Shares that invests in securities f cmpanies in a brader range f industries. Currency Exchange Rate Risk. Changes in currency exchange rates and the relative value f nn-u.s. currencies will affect the value f the Fund s investments in ADRs and the value f yur Shares. Because the Fund s NAV is determined n the basis f U.S. dllars, the U.S. dllar value f yur investment in the Fund may g dwn if the value f the lcal currency f the nn-u.s. markets in which the Fund invests thrugh ADRs depreciates against the U.S. dllar. This is true even if the lcal currency value f securities in an ADR held by the Fund ges up. Cnversely, the dllar value f yur investment in the Fund may g up if the value f the lcal currency appreciates against the U.S. dllar. The value f the U.S. dllar measured against ther currencies is influenced by a variety f factrs. These factrs include: natinal debt levels and trade deficits, changes in balances f payments and trade, dmestic and freign interest and inflatin rates, glbal r reginal plitical, ecnmic r financial events, mnetary plicies f gvernments, actual r ptential gvernment interventin, and glbal energy prices. Plitical instability, the pssibility f gvernment interventin and restrictive r paque business and investment plicies may als reduce the value f a cuntry s currency. Gvernment mnetary plicies and the buying r selling f currency by a cuntry s gvernment may als influence exchange rates. Currency exchange rates can be very vlatile and can change quickly and unpredictably. As a result, the value f an investment in the Fund may change quickly and withut warning, and yu may lse mney. Emerging Markets Risk. Investments in securities and instruments traded in develping r emerging markets, r that prvide expsure t such securities r markets, can invlve additinal risks relating t plitical, ecnmic, r regulatry cnditins nt assciated with investments in U.S. securities and instruments. Fr example, develping and emerging markets may be subject t (i) greater market vlatility, (ii) lwer trading vlume and liquidity, (iii) greater scial, plitical and ecnmic uncertainty, (iv) gvernmental cntrls n freign investments and limitatins n repatriatin f invested capital, (v) lwer disclsure, crprate gvernance, auditing and financial reprting standards, (vi) fewer prtectins f prperty rights, (vii) restrictins n the transfer f securities r currency, and (viii) settlement and trading practices that differ frm thse in U.S. markets. Each f these factrs may 8

9 impact the ability f the Fund t buy, sell r therwise transfer securities, adversely affect the trading market and price fr Shares and cause the Fund t decline in value. Capital Cntrls and Sanctins Risk. Ecnmic cnditins, such as vlatile currency exchange rates and interest rates, plitical events, military actin and ther cnditins may, withut prir warning, lead t gvernment interventin (including interventin by the U.S. gvernment with respect t freign gvernments, ecnmic sectrs, freign cmpanies and related securities and interests) and the impsitin f capital cntrls and/r sanctins, which may als include retaliatry actins f ne gvernment against anther gvernment, such as seizure f assets. Capital cntrls and/r sanctins include the prhibitin f, r restrictins n, the ability t transfer currency, securities r ther assets. Levies may be placed n prfits repatriated by freign entities (such as the Fund). Capital cntrls and/r sanctins may als impact the ability f the Fund t buy, sell r therwise transfer securities r currency, negatively impact the value and/r liquidity f such instruments, adversely affect the trading market and price fr Shares, and cause the Fund t decline in value. Geplitical Risk. Sme cuntries and regins in which the Fund invests have experienced security cncerns, war r threats f war and aggressin, terrrism, ecnmic uncertainty, natural and envirnmental disasters and/r systemic market dislcatins that have led, and in the future may lead, t increased shrt-term market vlatility and may have adverse lng-term effects n the U.S. and wrld ecnmies and markets generally. Such geplitical and ther events may als disrupt securities markets and, during such market disruptins, the Fund s expsure t the ther risks described herein will likely increase. Each f the freging may negatively impact the Fund s investments. Equity Market Risk. Cmmn stcks are susceptible t general stck market fluctuatins and t vlatile increases and decreases in value as market cnfidence in and perceptins f their issuers change. These investr perceptins are based n varius and unpredictable factrs including: expectatins regarding gvernment, ecnmic, mnetary and fiscal plicies; inflatin and interest rates; ecnmic expansin r cntractin; and glbal r reginal plitical, ecnmic and banking crises. If yu held cmmn stck, r cmmn stck equivalents, f any given issuer, yu wuld generally be expsed t greater risk than if yu held preferred stcks and debt bligatins f the issuer because cmmn stckhlders, r hlders f equivalent interests, generally have inferir rights t receive payments frm issuers in cmparisn with the rights f preferred stckhlders, bndhlders, and ther creditrs f such issuers. Freign Markets Risk. Investments in ADRs that prvide expsure t nn-u.s. cmpanies invlve certain risks that may nt be present with investments in U.S. cmpanies. Fr example, investments in nn-u.s. cmpanies may be subject t risk f lss due t freign currency fluctuatins r t plitical r ecnmic instability. There may be less infrmatin publicly available abut a nn- U.S. issuer than a U.S. issuer. Securities f nn-u.s. cmpanies may be subject t different accunting, auditing, financial reprting and investr prtectin standards than thse f U.S. cmpanies. Investments tied t nn-u.s. cmpanies may be subject t withhlding r ther taxes and may be subject t additinal trading, settlement, custdial, and peratinal risks. Because legal systems differ, there is als the pssibility that it will be difficult t btain r enfrce legal judgments in certain cuntries. Since freign exchanges may be pen n days when the Fund des nt price their Shares, the value f the securities in the Fund s prtflis may change n days when sharehlders will nt be able t purchase r sell Shares. Cnversely, Shares may trade n days when freign exchanges are clsed. Each f these factrs can make investments in the Fund mre vlatile and ptentially less liquid than ther types f investments. High Prtfli Turnver Risk. The Fund may trade all r a significant prtin f the securities in its prtfli in cnnectin with each rebalance and recnstitutin f its Index. A high prtfli turnver rate increases transactin csts, which may increase the Fund s expenses. Frequent trading may als cause adverse tax cnsequences fr investrs in the Fund due t an increase in shrtterm capital gains. Market Capitalizatin Risk. Large-Capitalizatin Investing. The securities f large-capitalizatin cmpanies may be relatively mature cmpared t smaller cmpanies and therefre subject t slwer grwth during times f ecnmic expansin. Large-capitalizatin cmpanies may als be unable t respnd quickly t new cmpetitive challenges, such as changes in technlgy and cnsumer tastes. Mid-Capitalizatin Investing. The securities f mid-capitalizatin cmpanies may be mre vulnerable t adverse issuer, market, plitical, r ecnmic develpments than securities f large-capitalizatin cmpanies. The securities f midcapitalizatin cmpanies generally trade in lwer vlumes and are subject t greater and mre unpredictable price changes than large capitalizatin stcks r the stck market as a whle. Sme medium capitalizatin cmpanies have limited prduct lines, markets, financial resurces, and management persnnel and tend t cncentrate n fewer gegraphical markets relative t large-capitalizatin cmpanies. Small-Capitalizatin Investing. The securities f small-capitalizatin cmpanies may be mre vulnerable t adverse issuer, market, plitical, r ecnmic develpments than securities f larger-capitalizatin cmpanies. The securities f smallcapitalizatin cmpanies generally trade in lwer vlumes and are subject t greater and mre unpredictable price changes than larger capitalizatin stcks r the stck market as a whle. Sme small capitalizatin cmpanies have limited prduct lines, markets, and financial and managerial resurces and tend t cncentrate n fewer gegraphical markets relative t larger 9

10 capitalizatin cmpanies. There is typically less publicly available infrmatin cncerning smaller-capitalizatin cmpanies than fr larger, mre established cmpanies. Small-capitalizatin cmpanies als may be particularly sensitive t changes in interest rates, gvernment regulatin, brrwing csts and earnings. MLP Risk. MLPs invlve risks related t limited cntrl and limited rights t vte n matters affecting the MLP, risks related t ptential cnflicts f interest between the MLP and the MLP s general partner, and cash flw risks. MLP cmmn units and ther equity securities can be affected by macrecnmic and ther factrs affecting the stck market in general, expectatins f interest rates, investr sentiment twards MLPs r the energy sectr, changes in a particular issuer s financial cnditin r unfavrable r unanticipated pr perfrmance f a particular issuer (in the case f MLPs, generally measured in terms f distributable cash flw). Prices f cmmn units f individual MLPs and ther equity securities als can be affected by fundamentals unique t the partnership r cmpany, including earnings pwer and cverage ratis. MLPs typically d nt pay U.S. federal incme tax at the partnership level. Instead, each partner is allcated a share f the partnership s incme, gains, lsses, deductins and expenses. A change in current tax law r in the underlying business mix f a given MLP culd result in an MLP being treated as a crpratin fr U.S. federal incme tax purpses, which wuld result in such MLP being required t pay U.S. federal incme tax n its taxable incme. The classificatin f an MLP as a crpratin fr U.S. federal incme tax purpses wuld have the effect f reducing the amunt f cash available fr distributin by the MLP. Thus, if any MLP wned by the Fund were treated as a crpratin fr U.S. federal incme tax purpses, the result culd be a reductin f the value f yur investment in the Fund and lwer incme, as cmpared t if the MLP were nt taxed as a crpratin. Tax Risks. Regulated investment cmpanies ( RICs ) are subject t a favrable tax treatment under the U.S. Internal Revenue Cde f 1986, as amended (the Cde ). T qualify as a RIC, the Fund must meet certain surce-f-incme, asset diversificatin and annual distributin requirements. Under the diversificatin requirements, the Fund must generally limit its investments in MLPs t n mre than 25% f its ttal assets. If the Fund were t fail t qualify as a RIC (e.g. by investing mre than 25% f its assets in MLPs), it wuld be subject t federal incme tax as a crpratin, and its distributins t sharehlders wuld be taxed as dividend incme t the extent f the Fund s earnings and prfits. Under certain circumstances, the Fund culd cure a failure t qualify as a RIC, but t d s, the Fund culd incur significant Fund-level taxes and culd be frced t dispse f certain assets. Depreciatin r ther cst recvery deductins passed thrugh t the Fund frm investments in MLPs in a given year will generally reduce the Fund s taxable incme, but thse deductins may be recaptured in the Fund s incme in ne r mre subsequent years. When recgnized and distributed, recapture incme will generally be taxable t sharehlders at the time f the distributin at rdinary incme tax rates, even thugh thse sharehlders might nt have held shares in the Fund at the time the deductins were taken by the Fund, and even thugh thse sharehlders will nt have crrespnding ecnmic gain n their shares at the time f the recapture. In rder t distribute recapture incme r t fund redemptin requests, the Fund may need t liquidate investments. Mdels and Data Risk. When Mdels and Data prve t be incrrect r incmplete, any decisins made in reliance theren expse the Fund t ptential risks. Fr example, by relying n Mdels and Data, AlphaClne may be induced t buy certain investments at prices that are t high, t sell certain ther investments at prices that are t lw, r t miss favrable pprtunities altgether. Similarly, any hedging based n faulty Mdels and Data may prve t be unsuccessful. Sme f the mdels used by AlphaClne fr the Fund are predictive in nature. The use f predictive mdels has inherent risks. Fr example, such mdels may incrrectly frecast future behavir, leading t ptential lsses n a cash flw and/r a mark-t-market basis. In additin, in unfreseen r certain lw-prbability scenaris (ften invlving a market disruptin f sme kind), such mdels may prduce unexpected results, which can result in lsses fr the Fund. Furthermre, because predictive mdels are usually cnstructed based n histrical data supplied by third parties, the success f relying n such mdels may depend heavily n the accuracy and reliability f the supplied histrical data. All mdels rely n crrect market data inputs. If incrrect market data is entered int even a well-funded mdel, the resulting infrmatin will be incrrect. Hwever, even if market data is input crrectly, mdel prices will ften differ substantially frm market prices, especially fr instruments with cmplex characteristics, such as derivative instruments. Passive Investment Risk. The Fund invests in the securities included in, r representative f, its Index regardless f their investment merit. The Fund des nt attempt t utperfrm the Index r take defensive psitins in declining markets. As a result, the Fund s perfrmance may be adversely affected by a general decline in the market segments relating t the Index. The returns frm the types f securities in which the Fund invests may underperfrm returns frm the varius general securities markets r different asset classes. This may cause the Fund t underperfrm ther investment vehicles that invest in different asset classes. Different types f securities (fr example, large-, mid- and small-capitalizatin stcks) tend t g thrugh cycles f ding better r wrse than the general securities markets. In the past, these perids have lasted fr as lng as several years. REIT Investment Risk. Investments in REITs invlve unique risks. REITs may have limited financial resurces, may trade less frequently and in limited vlume, and may be mre vlatile than ther securities. In additin, t the extent the Fund hlds interests in REITs, it is expected that investrs in the Fund will bear tw layers f asset-based management fees and expenses (directly at 10

11 the Fund level and indirectly at the REIT level). The risks f investing in REITs include certain risks assciated with the direct wnership f real estate and the real estate industry in general. These include risks related t general, reginal and lcal ecnmic cnditins; fluctuatins in interest rates and prperty tax rates; shifts in zning laws, envirnmental regulatins and ther gvernmental actin such as the exercise f eminent dmain; cash flw dependency; increased perating expenses; lack f availability f mrtgage funds; lsses due t natural disasters; verbuilding; lsses due t casualty r cndemnatin; changes in prperty values and rental rates; and ther factrs. In additin t these risks, residential/diversified REITs and cmmercial equity REITs may be affected by changes in the value f the underlying prperty wned by the trusts, while mrtgage REITs may be affected by the quality f any credit extended. Further, REITs are dependent upn management skills and generally may nt be diversified. REITs are als subject t heavy cash flw dependency, defaults by brrwers and self-liquidatin. In additin, REITs culd pssibly fail t qualify fr the beneficial tax treatment available t REITs under the Cde, r t maintain their exemptins frm registratin under the Investment Cmpany Act f 1940, as amended (the 1940 Act ). The Fund expects that dividends received frm a REIT and distributed t Fund sharehlders generally will be taxable t the sharehlder as rdinary incme. The abve factrs may als adversely affect a brrwer s r a lessee s ability t meet its bligatins t the REIT. In the event f a default by a brrwer r lessee, the REIT may experience delays in enfrcing its rights as a mrtgagee r lessr and may incur substantial csts assciated with prtecting investments. Sectr Risk. The Fund s investing apprach may result in an emphasis n certain sectrs r sub-sectrs f the market at any given time. T the extent the Fund invests mre heavily in ne sectr r sub-sectr f the market, it thereby presents a mre cncentrated risk and its perfrmance will be especially sensitive t develpments that significantly affect thse sectrs r sub-sectrs. In additin, the value f the Fund s shares may change at different rates cmpared t the value f shares f a fund with investments in a mre diversified mix f sectrs and industries. An individual sectr r sub-sectr f the market may have abve-average perfrmance during particular perids, but may als mve up and dwn mre than the brader market. The several industries that cnstitute a sectr may all react in the same way t ecnmic, plitical r regulatry events. The Fund s perfrmance culd als be affected if the sectrs r sub-sectrs d nt perfrm as expected. Alternatively, the lack f expsure t ne r mre sectrs r subsectrs may adversely affect perfrmance. Cnsumer Sectrs Risk. The success f cnsumer prduct manufacturers and retailers is tied clsely t the perfrmance f dmestic and internatinal ecnmies, interest rates, exchange rates, cmpetitin, cnsumer cnfidence, tarrifs and trade barriers, changes in demgraphics, and cnsumer preferences. Cmpanies in cnsumer-riented sectrs depend heavily n dispsable husehld incme and cnsumer spending, and may be strngly affected by scial trends and marketing campaigns. These cmpanies may be subject t severe cmpetitin, which may have an adverse impact n their prfitability. Financial Sectr Risk. Cmpanies in the financial sectr f an ecnmy are ften subject t extensive gvernmental regulatin and interventin, which may adversely affect the scpe f their activities, the prices they can charge and the amunt f capital they must maintain. Gvernmental regulatin may change frequently and may have significant adverse cnsequences fr cmpanies in the financial sectr, including effects nt intended by such regulatin. The impact f recent r future regulatin in varius cuntries n any individual financial cmpany r n the sectr as a whle cannt be predicted. Certain risks may impact the value f investments in the financial sectr mre severely than thse f investments utside this sectr, including the risks assciated with cmpanies that perate with substantial financial leverage. Cmpanies in the financial sectr may als be adversely affected by increases in interest rates and lan lsses, decreases in the availability f mney r asset valuatins, credit rating dwngrades and adverse cnditins in ther related markets. Insurance cmpanies, in particular, may be subject t severe price cmpetitin and/r rate regulatin, which may have an adverse impact n their prfitability. Insurance cmpanies are subject t extensive gvernment regulatin in sme cuntries and can be significantly affected by changes in interest rates, general ecnmic cnditins, price and marketing cmpetitin, the impsitin f premium rate caps, r ther changes in gvernment regulatin r tax law. Different segments f the insurance industry can be significantly affected by mrtality and mrbidity rates, envirnmental clean-up csts and catastrphic events such as earthquakes, hurricanes and terrrist acts. The financial sectr is als a target fr cyber attacks and may experience technlgy malfunctins and disruptins. In recent years, cyber attacks and technlgy failures have becme increasingly frequent and have caused significant lsses. Health Care Sectr Risk. Cmpanies in the health care sectr are subject t extensive gvernment regulatin and their prfitability can be significantly affected by restrictins n gvernment reimbursement fr medical expenses, rising csts f medical prducts and services, pricing pressure (including price discunting), limited prduct lines and an increased emphasis n the delivery f healthcare thrugh utpatient services. Cmpanies in the health care sectr are heavily dependent n btaining and defending patents, which may be time cnsuming and cstly, and the expiratin f patents may als adversely affect the prfitability f these cmpanies. Health care cmpanies are als subject t extensive litigatin based n prduct liability and similar claims. In additin, their prducts can becme bslete due t industry innvatin, changes in technlgies r ther market develpments. Many new prducts in the health care sectr require significant research and develpment and may be subject t regulatry apprvals, all f which may be time cnsuming and cstly with n guarantee that any prduct will cme t market. 11

12 Industrial Sectr Risk. The industrial sectr can be significantly affected by, amng ther things, wrldwide ecnmic grwth, supply and demand fr specific prducts and services, rapid technlgical develpments, internatinal plitical and ecnmic develpments, envirnmental issues, tarrifs and trade barriers, and tax and gvernmental regulatry plicies. As the demand fr, r prices f, industrials increase, the value f the Fund s investments generally wuld be expected t als increase. Cnversely, declines in the demand fr, r prices f, industrials generally wuld be expected t cntribute t declines in the value f such securities. Such declines may ccur quickly and withut warning and may negatively impact the value f the Fund and yur investment. Infrmatin Technlgy Sectr Risk. Market r ecnmic factrs impacting infrmatin technlgy cmpanies and cmpanies that rely heavily n technlgical advances culd have a significant effect n the value f the Fund s investments. The value f stcks f infrmatin technlgy cmpanies and cmpanies that rely heavily n technlgy is particularly vulnerable t rapid changes in technlgy prduct cycles, rapid prduct bslescence, gvernment regulatin and cmpetitin, bth dmestically and internatinally, including cmpetitin frm freign cmpetitrs with lwer prductin csts. Stcks f infrmatin technlgy cmpanies and cmpanies that rely heavily n technlgy, especially thse f smaller, less-seasned cmpanies, tend t be mre vlatile than the verall market. Infrmatin technlgy cmpanies are heavily dependent n patent and intellectual prperty rights, the lss r impairment f which may adversely affect prfitability. Additinally, cmpanies in the technlgy sectr may face dramatic and ften unpredictable changes in grwth rates and cmpetitin fr the services f qualified persnnel. Shares May Trade at Prices Other Than NAV. As with all ETFs, Shares may be bught and sld in the secndary market at market prices. Althugh it is expected that the market price f the Shares will apprximate the Fund s NAV, there may be times when the market price and the NAV vary significantly, including due t supply and demand f Shares and/r during perids f market vlatility. Thus, yu may pay mre (r less) than NAV intra-day when yu buy Shares in the secndary market, and yu may receive mre (r less) than NAV when yu sell thse Shares in the secndary market. This risk is heightened in times f market vlatility, perids f steep market declines, and perids when there is limited trading activity fr Shares in the secndary market, in which case such premiums r discunts may be significant. Tracking Errr Risk. As with all index funds, the perfrmance f the Fund and the Index may differ frm each ther fr a variety f reasns. Fr example, the Fund incurs perating expenses and prtfli transactin csts nt incurred by an Index. In additin, the Fund may nt be fully invested in the securities f the Index at all times r may hld securities nt included in the Index. Additinal Infrmatin Abut the Fund s Nn-Principal Risks This sectin prvides additinal infrmatin regarding certain nn-principal risks f investing in the Fund. Each f the factrs belw culd have a negative impact n the Fund s perfrmance and trading prices. Trading. Althugh Shares are listed fr trading n the Exchange and may be listed r traded n U.S. and nn-u.s. stck exchanges ther than the Exchange, there can be n assurance that an active trading market fr such Shares will develp r be maintained. Trading in Shares may be halted due t market cnditins r fr reasns that, in the view f the Exchange, make trading in Shares inadvisable. In additin, trading in Shares n the Exchange is subject t trading halts caused by extrardinary market vlatility pursuant t Exchange circuit breaker rules, which temprarily halt trading n the Exchange when a decline in the S&P 500 Index during a single day reaches certain threshlds (e.g., 7%, 13% and 20%). Additinal rules applicable t the Exchange may halt trading in Shares when extrardinary vlatility causes sudden, significant swings in the market price f Shares. There can be n assurance that Shares will trade with any vlume, r at all, n any stck exchange. In stressed market cnditins, the liquidity f the Shares may begin t mirrr the liquidity f the Fund s underlying prtfli hldings, which can be significantly less liquid than the Shares. Csts f Buying r Selling Shares. Investrs buying r selling Shares in the secndary market will pay brkerage cmmissins r ther charges impsed by brkers, as determined by that brker. Brkerage cmmissins are ften a fixed amunt and may be a significant prprtinal cst fr investrs seeking t buy r sell relatively small amunts f Shares. In additin, secndary market investrs will als incur the cst f the difference between the price at which an investr is willing t buy Shares (the bid price) and the price at which an investr is willing t sell Shares (the ask price). This difference in bid and ask prices is ften referred t as the spread r bid/ask spread. The bid/ask spread varies ver time fr Shares based n trading vlume and market liquidity, and is generally lwer if Shares have mre trading vlume and market liquidity and higher if Shares have little trading vlume and market liquidity. Further, a relatively small investr base in the Fund, asset swings in the Fund and/r increased market vlatility may cause increased bid/ask spreads. Due t the csts f buying r selling Shares, including bid/ask spreads, frequent trading f Shares may significantly reduce investment results and an investment in Shares may nt be advisable fr investrs wh anticipate regularly making small investments. Authrized Participants, Market Makers and Liquidity Prviders Cncentratin Risk. The Fund may have a limited number f financial institutins that may act as APs. In additin, there may be a limited number f market makers and/r liquidity prviders in the marketplace. T the extent either f the fllwing events ccur, Shares may trade at a material discunt t NAV and pssibly face delisting: (i) APs exit the business r therwise becme unable t prcess creatin and/r redemptin rders and n ther APs 12