SUPPLEMENT DATED DECEMBER 31, 2017 TO THE FRANKLIN TEMPLETON 529 COLLEGE SAVINGS PLAN INVESTOR HANDBOOK DATED DECEMBER 31, 2016 AS PREVIOUSLY SUPPLEMENTED ON JUNE 30, 2017, APRIL 1, 2017 AND JANUARY 1, 2017 ( INVESTOR HANDBOOK ) This supplement updates the Investor Handbook. You should review this information carefully and keep it together with your current copy of the Investor Handbook. Any information in the Investor Handbook that is inconsistent with the information provided in this Supplement is superseded by the information in this Supplement. Where applicable, the headings below reference the section and page number of the Investor Handbook that is being updated. I. The Section titled Key Features- Fees and Expenses on page 6 is revised by replacing the last sentence of the second paragraph with the following sentence: In addition, each Trust Portfolio offers Class A, Class B (available only to Account Owners exchanging Class B Trust Shares in a different Trust Portfolio that were acquired prior to April 1, 2012), Class C Trust Shares and Advisor Class Trust Shares (available only to AC-Eligible Account Owners (as defined under Fees and Expenses below); not available for Franklin U.S. Government Money 529 Portfolio), each of which (other than Advisor Class Trust Shares) has its own sales charges and fees. II. The Section titled Opening, Maintaining and Contributing to an Account - Applicable Trust Share Net Asset Value on page 8 is revised by replacing the last sentence with the following sentence: To the extent permitted by law, a Financial Advisor and/or a broker that holds Trust Shares in an omnibus account on behalf of Account Owners may transmit orders to the Program Record-Keeper through the National Securities Clearing Corporation or other electronic order clearinghouse, provided that the Financial Advisor and/or omnibus account broker understands and agrees that it must receive an order for Trust Shares by the Close of Trading on a given business day to submit the order for processing at that day's NAV. III. The Assets Classes and Target Percentage Investments chart that begins on page 16, is revised for the Franklin Founding Funds 529 Portfolio as follows: Franklin Founding Funds 529 Portfolio Non-U.S. Equity 33.33% IV. The Section titled Risk Factors Specific Investment Risks - A. Portfolio Risks that begins on page 25 is replaced in its entirety with the following: A. Portfolio Risks Type 1 Investment Options: Objective-Based Asset Allocations Franklin Founding Funds 529 Portfolio This portfolio is subject to the investment risks of the Underlying Funds in which its assets may be invested, including the following main investment risks of such funds: credit; derivative instruments; equity-linked notes; focus; foreign securities; high-yield debt securities; income; interest rate; liquidity; management; market; merger arbitrage securities and distressed companies; prepayment; smaller and midsize companies; value style investing. Franklin Corefolio 529 Portfolio This portfolio is subject to the investment risks of the Underlying Funds in which it currently invests, including the following main investment risks of such funds: derivative instruments; focus; foreign securities; growth style investing; liquidity; 1
management; market; merger arbitrage securities and distressed companies; smaller and midsize companies; value style investing. Franklin Growth Allocation 529 Portfolio This portfolio is subject to the investment risks of the Underlying Funds in which its assets may be invested, including the following main investment risks of such funds: authorized participant concentration; concentration; credit; currency management strategies; derivative instruments; dividend-oriented companies; extension; focus; foreign securities; gold and precious metals; growth style investing; high-yield debt securities; income; index-related; interest rate; liquidity; management; market; market trading; merger arbitrage securities and dis t ressed companies; mortgage-backed and assetbacked securities; non-diversification; passive investment; portfolio turnover; prepayment; smaller companies; smaller and midsize companies; tracking error; utilities industry; value style investing. Franklin Growth & Income Allocation 529 Portfolio This portfolio is subject to the investment risks of the Underlying Funds in which its assets may be invested, including the following main investment risks of such funds: authorized participant concentration; concentration; credit; derivative instruments; dividend-oriented companies; extension; floating rate corporate investments; focus; foreign securities; Ginnie Maes, gold and precious metals; growth style investing; high-yield debt securities; income; index-related; inflation; interest rate; liquidity; management; market; market trading; master/feeder structure; merger arbitrage securities and distressed companies; mortgage-backed and asset-backed securities; mortgage dollar rolls; non-diversification; passive investment; portfolio turnover; prepayment; repurchase agreements; smaller companies; smaller and midsize companies; tracking error; U.S. Government securities; utilities industry; value style investing; variable rate securities. Franklin Income Allocation 529 Portfolio This portfolio is subject to the investment risks of the Underlying Funds in which it currently invests, including the following main investment risks of such funds: authorized participant concentration; credit; derivative instruments; extension; floating rate corporate investments; focus; foreign securities; Ginnie Maes; high-yield debt securities; income; inflation; interest rate; liquidity; management; market; market trading; master/feeder structure; mortgage-backed securities and asset-backed securities; mortgage dollar rolls; non-diversification; portfolio turnover; prepayment; repurchase agreements; U.S. government securities; variable rate securities. Type 2 Investment Options: Age-Based Allocations The risk and reward profiles of the Age-Based Investment Portfolios vary with the age of the Beneficiary, with the risk and return potential expected to be the highest at the youngest age and the lowest when the Beneficiary's age is 17 and above. The asset allocation in the Age-Based Investment Portfolios is based on the age of the Beneficiary and on the assumption that the assets in the Account will be used to pay for the qualified higher education costs of the Beneficiary during a time period in which individuals of the Beneficiary's age normally attend college. If your Beneficiary attends college during an earlier or later time period than that in which individuals of your Beneficiary's age normally attend college, the asset allocation of amounts invested for your Beneficiary in the Age-Based Investment Portfolios may not be appropriate for your Beneficiary. Franklin Age-Based Growth Allocation Newborn 8 Years 529 Portfolio This portfolio is subject to the investment risks of the Underlying Funds in which its assets may be invested, including the following main investment risks of such funds: authorized participant concentration; concentration; credit; derivative instruments; dividend-oriented companies; extension; focus; foreign securities; gold and precious metals; growth style investing; high-yield debt securities; income; index-related; interest rate; liquidity; management; market; market trading; merger arbitrage securities and distressed companies; mortgage-backed and asset-backed securities; non-diversification; passive investment; portfolio turnover; prepayment; smaller companies; smaller and midsize companies; tracking error; utilities industry; value style investing. 2
Franklin Age-Based Growth Allocation Age 9-12 Years 529 Portfolio This portfolio is subject to the investment risks of the Underlying Funds in which its assets may be invested, including the following main investment risks of such funds: authorized participant concentration; concentration; credit; derivative instruments; dividend-oriented companies; extension; floating rate corporate investments; focus; foreign securities; Ginnie Maes, gold and precious metals; growth style investing; high-yield debt securities; income; index-related; inflation; interest rate; liquidity; management; market; market trading; master/feeder structure; merger arbitrage securities and distressed companies; mortgage-backed and asset-backed securities; mortgage dollar rolls; non-diversification; passive investment; portfolio turnover; prepayment; repurchasing agreements; smaller companies; smaller and midsize companies; tracking error; U.S. Government securities; utilities industry; value style investing; variable rate securities. Franklin Age-Based Growth Allocation Age 13-16 Years 529 Portfolio This portfolio is subject to the investment risks of the Underlying Funds in which its assets may be invested, including the following main investment risks of such funds: authorized participant concentration; concentration; credit; derivative instruments; dividend-oriented companies; extension; floating rate corporate investments; focus; foreign securities; Ginnie Maes; gold and precious metals; growth style investing; high-yield debt securities; income; index-related; inflation; interest rate; liquidity; management; market; market trading; master/feeder structure; merger arbitrage securities and distressed companies; mortgage-backed and asset-backed securities; mortgage dollar rolls; non-diversification; passive investment; portfolio turnover; prepayment; repurchase agreements; smaller companies; smaller and midsize companies; tracking error; U.S. Government securities; utilities industry; value style investing; variable rate securities. Franklin Age-Based Growth Allocation Age 17+ Years 529 Portfolio This portfolio is subject to the investment risks of the Underlying Funds in which its assets may be invested, including the following main investment risks of such funds: authorized participant concentration; concentration; credit; derivative instruments; dividend-oriented companies; extension; floating rate corporate investments; focus; foreign securities; Ginnie Maes, gold and precious metals; growth style investing; high-yield debt securities; income; index-related; inflation; interest rate; liquidity; management; market; market trading; master/feeder structure; merger arbitrage securities and distressed companies; mortgage-backed and asset-backed securities; mortgage dollar rolls; non-diversification; passive investment; portfolio turnover; prepayment; repurchase agreements; smaller companies; smaller and midsize companies; tracking error; U.S. Government securities; utilities industry; value style investing; variable rate securities. Franklin Age-Based Moderate Allocation Newborn-8 Years 529 Portfolio This portfolio is subject to the investment risks of the Underlying Funds in which its assets may be invested, including the following main investment risks of such funds: authorized participant concentration; concentration; credit; derivative instruments; dividend-oriented companies; extension; floating rate corporate investments; focus; foreign securities; Ginnie Maes; gold and precious metals; growth style investing; high-yield debt securities; income; index-related; inflation; interest rate; liquidity; management; market; market trading; master/feeder structure; merger arbitrage securities and distressed companies; mortgage-backed and asset-backed securities; mortgage dollar rolls; non-diversification; passive investment; portfolio turnover; prepayment; repurchase agreements; smaller companies; smaller and midsize companies; tracking error; U.S. Government securities; utilities industry; value style investing; variable rate securities. Franklin Age-Based Moderate Allocation Age 9-12 Years 529 Portfolio. This portfolio is subject to the investment risks of the Underlying Funds in which its assets may be invested, including the following main investment risks of such funds: authorized participant concentration; concentration; credit; derivative instruments; dividend-oriented companies; extension; floating rate corporate investments; focus; foreign securities; Ginnie Maes; gold and precious metals; growth style investing; high-yield debt securities; income; index-related; inflation; interest rate; liquidity; management; market; market trading; master/feeder structure; merger arbitrage securities and distressed companies; mortgage-backed and asset-backed securities; mortgage dollar rolls; non-diversification; passive investment; portfolio turnover; prepayment; repurchase agreements; smaller companies; smaller and midsize companies; tracking error; U.S. Government securities; utilities industry; value style investing; variable rate securities. 3
Franklin Age-Based Moderate Allocation Age 13-16 Years 529 Portfolio. This portfolio is subject to the investment risks of the Underlying Funds in which its assets may be invested, including the following main investment risks of such funds: authorized participant concentration; concentration; credit; derivative instruments; dividend-oriented companies; extension; floating rate corporate investments; focus; foreign securities; Ginnie Maes; gold and precious metals; growth style investing; high-yield debt securities; income; index-related; inflation; interest rate; liquidity; management; market; market trading; master/feeder structure; merger arbitrage securities and distressed companies; mortgage-backed and asset-backed securities; mortgage dollar rolls; non-diversification; passive investment; portfolio turnover; prepayment; repurchase agreements; smaller companies; smaller and midsize companies; tracking error; U.S. Government securities; utilities industry; value style investing; variable rate securities. Franklin Age-Based Moderate Allocation Age 17+ Years 529 Portfolio This portfolio is subject to the investment risks of the Underlying Funds in which its assets may be invested, including the following main investment risks of such funds: authorized participant concentration; credit; derivative instruments; extension; floating rate corporate investments; focus; foreign securities; Ginnie Maes; high-yield debt securities; income; inflation; interest rate; liquidity; management; market; market trading; master/feeder structure; mortgage-backed securities and asset-backed securities; mortgage dollar rolls; non-diversification; portfolio turnover; prepayment; regional; repurchase agreements; U.S. government securities; variable rate securities. Franklin Age-Based Conservative Allocation Newborn 8 Years 529 Portfolio This portfolio is subject to the investment risks of the Underlying Funds in which its assets may be invested, including the following main investment risks of such funds: authorized participant concentration; concentration; credit; derivative instruments; dividend-oriented companies; extension; floating rate corporate investments; focus; foreign securities; Ginnie Maes; gold and precious metals; growth style investing; high-yield debt securities; income; index-related; inflation; interest rate; liquidity; management; market; market trading; master/feeder structure; merger arbitrage securities and distressed companies; mortgage-backed and asset-backed securities; mortgage dollar rolls; non-diversification; passive investment; portfolio turnover; prepayment; repurchase agreements; smaller companies; smaller and midsize companies; tracking error; U.S. Government securities; utilities industry; value style investing; variable rate securities. Franklin Age-Based Conservative Allocation Age 9-12 Years 529 Portfolio This portfolio is subject to the investment risks of the Underlying Funds in which its assets may be invested, including the following main investment risks of such funds: authorized participant concentration; concentration; credit; derivative instruments; dividend-oriented companies; extension; floating rate corporate investments; focus; foreign securities; Ginnie Maes; gold and precious metals; growth style investing; high-yield debt securities; income; index-related; inflation; interest rate; liquidity; management; market; market trading; master/feeder structure; merger arbitrage securities and distressed companies; mortgage-backed and asset-backed securities; mortgage dollar rolls; non-diversification; passive investment; portfolio turnover; prepayment; repurchase agreements; smaller companies; smaller and midsize companies; tracking error; U.S. Government securities; utilities industry; value style investing; variable rate securities. Franklin Age-Based Conservative Allocation Age 13-16 Years 529 Portfolio This portfolio is subject to the investment risks of the Underlying Funds in which it currently invests, including the following main investment risks of such funds: authorized participant concentration; credit; derivative instruments; extension; floating rate corporate investments; focus; foreign securities; Ginnie Maes; high-yield debt securities; income; inflation; interest rate; liquidity; management; market; market trading; master/feeder structure; mortgage-backed securities and asset-backed securities; mortgage dollar rolls; non-diversification; portfolio turnover; prepayment; repurchase agreements; U.S. government securities; variable rate securities. Franklin Age-Based Conservative Allocation Age 17+ Years 529 Portfolio This portfolio is subject to the investment risks of the Underlying Funds in which it currently invests, including the following main investment risks of such funds: authorized participant concentration; credit; derivative instruments; extension; 4
floating rate corporate investments; focus; foreign securities; Ginnie Maes; high-yield debt securities; income; inflation; interest rate; liquidity; management; market; market trading; master/feeder structure; mortgage-backed securities and asset-backed securities; mortgage dollar rolls; non-diversification; portfolio turnover; prepayment; repurchase agreements; U.S. government securities; variable rate securities. Type 3 Investment Options: Individual Portfolios Templeton Global Bond 529 Portfolio This portfolio is subject to the investment risks of the Underlying Fund in which it currently invests, including the following main investment risks of such fund: credit; derivative instruments; foreign securities; high-yield debt securities; income; interest rate; liquidity; management; market; non-diversification. Templeton Growth 529 Portfolio This portfolio is subject to the investment risks of the Underlying Fund in which it currently invests, including the following main investment risks of such fund: focus; foreign securities; management; market; smaller and midsize companies; value style investing. Franklin Growth 529 Portfolio This portfolio is subject to the investment risks of the Underlying Fund in which it currently invests, including the following main investment risks of such fund: focus; growth style investing; management; market; smaller and midsize companies. Franklin U.S. Government Money 529 Portfolio This portfolio is subject to the investment risks of the Underlying Fund in which it currently invests, including the following main investment risks of such fund: credit; extension; Ginnie Maes; income; interest rate; management; market; prepayment. Franklin Small-Mid Cap Growth 529 Portfolio This portfolio is subject to the investment risks of the Underlying Fund in which it currently invests, including the following main investment risks of such fund: focus; growth style investing; liquidity; management; market; smaller and midsize companies,. Franklin Mutual Global Discovery 529 Portfolio This portfolio is subject to the investment risks of the Underlying Fund in which it currently invests, including the following main investment risks of such fund: derivative instruments; foreign securities; liquidity; management; market; merger arbitrage securities and distressed companies; smaller and midsize companies; value style investing. Franklin Mutual Shares 529 Portfolio This portfolio is subject to the investment risks of the Underlying Fund in which it currently invests, including the following main investment risks of such fund: derivative instruments; foreign securities; liquidity; management; market; merger arbitrage securities and distressed companies; smaller and midsize companies; value style investing. S&P 500 Index 529 Portfolio This portfolio is subject to the investment risks of the Underlying Fund in which it invests, including the following main investment risks of such fund: asset class; assets under management; authorized participant concentration; concentration; cyber security; equity securities; index-related; information technology sector; issuer; large-capitalization companies; management; market; market trading; operational; passive investment; investing in the United States; securities lending; tracking error. 5
Franklin Income 529 Portfolio This portfolio is subject to the investment risks of the Underlying Fund in which it currently invests, including the following main investment risks of such fund: credit; equity-linked notes (ELNs); focus; foreign securities; high-yield debt securities; income; interest rate; management; market; prepayment; value style investing. V. The Section titled Risk Factors B. Types of Investment Risk (listed alphabetically) on page 29 is replaced in its entirety with the following: B. Types of Investment Risk (listed alphabetically) Asset Class Securities and other assets in the Underlying Index or in an applicable Underlying Fund s portfolio may underperform in comparison to the general financial markets, a particular financial market or other asset classes. Assets under Management From time to time, an Authorized Participant of an applicable Underlying Fund that is an ETF, a third-party investor, the fund s adviser, an affiliate of such adviser, or a fund may invest in the fund and hold its investment for a specific period of time in order to facilitate commencement of the fund s operations or for the fund to achieve size or scale. There can be no assurance that any such entity would not redeem its investment or that the size of the fund would be maintained at such levels, which could negatively impact the fund. Authorized Participant Concentration Only an Authorized Participant of an Underlying Fund that is an ETF may engage in creation or redemption transactions directly with an applicable Underlying Fund. Such fund has a limited number of institutions that may act as Authorized Participants. To the extent that these institutions exit the business or are unable to proceed with creation and/or redemption orders with respect to the fund and no other Authorized Participant is able to step forward to create or redeem units in the fund, the fund s shares may trade at a discount to NAV and possibly face trading halts and/or delisting. This risk may be more pronounced in volatile markets, potentially where there are significant redemptions in ETFs generally. Concentration By focusing on an industry or a group of industries, an applicable Underlying Fund carries much greater risks of adverse developments and price movements in such industries than a fund that invests in a wider variety of industries. Because a fund may concentrate in a specific industry or group of industries, there is also the risk that the fund will perform poorly during a slump in demand for securities of companies in such industries. An applicable Underlying Fund may be susceptible to an increased risk of loss, including losses due to adverse events that affect the fund s investments more than the market as a whole, to the extent that the fund s investments are concentrated in the securities of a particular issuer or issuers, country, group of countries, region, market, industry, group of industries, sector or asset class. Credit U.S. government investments generally have the least credit risk but are not completely free of credit risk. An applicable Underlying Fund may incur losses on debt securities that are inaccurately perceived to present a different amount of credit risk by the market, the fund s investment manager or the rating agencies than such securities actually do. Any downgrade of securities issued by the U.S. government may result in a downgrade of securities issued by its agencies or instrumentalities, including securities issued by Ginnie Mae. While securities issued by Ginnie Mae are backed by the full faith and credit of the U.S. government, guarantees of principal and interest do not apply to market prices, yields or the fund s share price. 6
An issuer of debt securities may fail to make interest payments or repay principal when due, in whole or in part. Changes in an issuer s financial strength or in a security s credit rating may affect a security s value. Cyber Security Failures or breaches of the electronic systems of an applicable Underlying Fund, the fund s adviser, distributor, and other service providers, market makers, Authorized Participants or the issuers of securities in which the fund invests have the ability to cause disruptions and negatively impact the fund s business operations, potentially resulting in financial losses to the fund and its shareholders. While a fund may have established business continuity plans and risk management systems seeking to address system breaches or failures, there are inherent limitations in such plans and systems. Furthermore, a fund cannot control the cyber security plans and systems of its service providers, the Index Provider, market makers, Authorized Participants or issuers of securities in which a fund invests. Derivative Instruments The performance of derivative instruments (including currency derivatives) depends largely on the performance of an underlying instrument, such as a currency, security, interest rate or index, and such instruments often have risks similar to the underlying instrument, in addition to other risks. Derivatives involve costs and can create economic leverage in an applicable Underlying Fund s portfolio, which may result in significant volatility and cause the fund to participate in losses (as well as gains) in an amount that significantly exceeds the fund s initial investment. Certain derivatives have the potential for unlimited loss, regardless of the size of the initial investment. Other risks include illiquidity, mispricing or improper valuation of the derivative instrument, and imperfect correlation between the value of the derivative and the underlying instrument so that a fund may not realize the intended benefits. The successful use of derivatives will usually depend on the fund investment manager s ability to accurately forecast movements in the market relating to the underlying instrument. Should a market or markets, or prices of particular classes of investments move in an unexpected manner, especially in unusual or extreme market conditions, the fund may not achieve the anticipated benefits of the transaction, and it may realize losses, which could be significant. If the fund s investment manager is not successful in using such derivative instruments, the fund s performance may be worse than if the fund s investment manager did not use such derivative instruments at all. When a derivative is used for hedging, the change in value of the derivative may also not correlate specifically with the currency, security, interest rate, index or other risk being hedged. Derivatives also may present the risk that the other party to the transaction will fail to perform. There is also the risk, especially under extreme market conditions, than an instrument, which usually would operate as a hedge, provides no hedging benefits at all. Dividend-Oriented Companies Companies that have historically paid regular dividends to shareholders may decrease or eliminate dividend payments in the future. A decrease in dividend payments by an issuer may result in a decrease in the value of the issuer s stock and less available income for the applicable Underlying Fund. Equity-Linked Notes (ELNs) Investments in ELNs often have risks similar to their underlying securities, which could include management risk, market risk and, as applicable, foreign securities and currency risks. In addition, since ELNs are in note form, ELNs are also subject to certain debt securities risks, such as interest rate and credit risks. Should the prices of the underlying securities move in an unexpected manner, an applicable Underlying Fund may not achieve the anticipated benefits of an investment in an ELN, and may realize losses, which could be significant and could include the fund s entire principal investment. An investment in an ELN is also subject to counterparty risk, which is the risk that the issuer of the ELN will default or become bankrupt and the fund will have difficulty being repaid, or fail to be repaid, the principal amount of, or income from, its investment. Investments in ELNs are also subject to liquidity risk, which may make ELNs difficult to sell and value. In addition, ELNs may exhibit price behavior that does not correlate with the underlying securities or a fixed-income investment. 7
Equity Securities Equity securities are subject to changes in value, and their values may be more volatile than those of other asset classes. The Underlying Index is comprised of common stocks, which generally subject their holders to more risks than holders of preferred stock and debt securities because common stockholders claims are subordinated to holders of preferred stock and debt securities upon the bankruptcy of the issuer. Extension The market value of some debt securities (such as certain asset-backed and mortgage-backed securities) will be adversely affected when bond calls or prepayments on underlying mortgages or other assets are less or slower than anticipated, particularly when interest rates rise. When that occurs, the effective maturity date of an applicable Underlying Fund s investment may be extended, resulting in an increase in interest rate sensitivity to that of a longer-term instrument. Such extension may also effectively lock-in a below market interest rate and reduce the value of the debt security. Some debt securities are subject to the risk that the debt security s effective maturity is extended because calls or prepayments are less or slower than anticipated, particularly when interest rates rise. The market value of such security may then decline and become more interest rate sensitive. Floating Rate Corporate Investments Floating rate corporate loans and corporate debt securities generally have credit ratings below investment grade and may be subject to resale restrictions. They are often issued in connection with highly leveraged transactions, and may be subject to greater credit risks than other investments including the possibility of default or bankruptcy. In addition, a secondary market in corporate loans may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods, which may impair the ability to accurately value existing and prospective investments and to realize in a timely fashion the full value on sale of a corporate loan. A significant portion of floating rate investments may be covenant lite ; loans that may contain fewer or less restrictive constraints on the borrower or other borrower-friendly characteristics. Focus To the extent that an applicable Underlying Fund focuses on particular countries, regions, industries, sectors or types of investment from time to time, the fund may be subject to greater risks of adverse developments in such areas of focus than a fund that invests in a wider variety of countries, regions, industries, sectors or investments. Foreign Securities Investing in foreign securities typically involves more risks than investing in U.S. securities, and includes risks associated with: (i) internal and external political and economic developments e.g., the political, economic and social policies and structures of some foreign countries may be less stable and more volatile than those in the U.S. or some foreign countries may be subject to trading restrictions or economic sanctions; (ii) trading practices e.g., government supervision and regulation of foreign securities and currency markets, trading systems and brokers may be less than in the U.S.; (iii) availability of information e.g., foreign issuers may not be subject to the same disclosure, accounting and financial reporting standards and practices as U.S. issuers; (iv) limited markets e.g., the securities of certain foreign issuers may be less liquid (harder to sell) and more volatile; and (v) currency exchange rate fluctuations and policies. The risks of foreign investments may be greater in developing or emerging market countries. Certain of these risks also may apply to securities U.S. companies with significant foreign operations. Currency Management Strategies. Currency management strategies may substantially change an applicable Underlying Fund's exposure to currency exchange rates and could result in losses to the fund if currencies do not perform as the fund s investment manager expects. In addition, currency management strategies, to the extent that they reduce a fund's exposure to currency risks, may also reduce the fund's ability to benefit from favorable changes in currency exchange rates. Using currency management strategies for purposes other than hedging further increases the fund s exposure to 8
foreign investment losses. Currency markets generally are not as regulated as securities markets. In addition, currency rates may fluctuate significantly over short periods of time, and can reduce returns. Developing Markets/Developing Market Countries. An applicable Underlying Fund's investments in securities of issuers in developing market countries are subject to all of the risks of foreign investing generally, and have additional heightened risks due to a lack of established legal, political, business and social frameworks to support securities markets, including: delays in settling portfolio securities transactions; currency and capital controls; greater sensitivity to interest rate changes; pervasiveness of corruption and crime; currency exchange rate volatility; and inflation, deflation or currency devaluation. Emerging Market Countries. An applicable Underlying Fund s investment in emerging market countries are subject to all of the risks of foreign investing generally, and have additional heightened risks due to a lack of established legal, political, business and social frameworks to support securities and currency markets, including: delays in settling portfolio transactions; currency and capital controls; greater sensitivity to interest rate changes; pervasiveness of corruption and crime; currency exchange rate volatility; and inflation, deflation or currency devaluation. Frontier Market Countries. Frontier market countries generally have smaller economies and even less developed capital markets than traditional developing markets, and, as a result, the risks of investing in developing market countries are magnified in frontier market countries. The magnification of risks are the result of: potential for extreme price volatility and illiquidity in frontier markets; government ownership or control of parts of private sector and of certain companies; trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by frontier market countries or their trading partners; and the relatively new and unsettled securities laws in many frontier market countries. Regional. Adverse conditions in a certain region or country can adversely affect securities of issuers in other countries whose economies appear to be unrelated. To the extent that an applicable Underlying Fund invests a significant portion of its assets in a specific geographic region or a particular country, the fund will generally have more exposure to the specific regional or country economic risks. In the event of economic or political turmoil or a deterioration of diplomatic relations in a region or country where a substantial portion of the fund's assets are invested, the fund may experience substantial illiquidity or reduction in the value of the fund s investments. Political, social or economic disruptions in the region, even in countries in which the fund is not invested, may adversely affect the value of investments held by the fund. Current political uncertainty surrounding the European Union (EU) and its membership, including the 2016 referendum in which the United Kingdom voted to exit the EU, may increase market volatility. The financial instability of some countries in the EU, including Greece, Italy and Spain, together with the risk of that impacting other more stable countries may increase the economic risk of investing in companies in Europe. Sovereign Debt Securities. Sovereign debt securities are subject to various risks in addition to those relating to debt securities and foreign securities generally, including, but not limited to, the risk that a governmental entity may be unwilling or unable to pay interest and repay principal on its sovereign debt, or otherwise meet its obligations when due because of cash flow problems, insufficient foreign reserves, the relative size of the debt service burden to the economy as a whole, the government s policy towards principal international lenders such as the International Monetary Fund, or the political considerations to which the government may be subject. If a sovereign debtor defaults (or threatens to default) on its sovereign debt obligations, the indebtedness may be restructured. Some sovereign debtors have in the past been able to restructure their debt payments without the approval of some or all debt holders or to declare moratoria on payments. In the event of a default on sovereign debt, an applicable Underlying Fund may have limited legal recourse against the defaulting government entity. Gold and Precious Metals An applicable Underlying Fund s investments may be concentrated in gold and other precious metals (particularly platinum, palladium and silver) operation companies. By concentrating in the industries in a single sector, the fund carries a much greater risk of adverse developments than a fund that invests in companies from a wide variety of industries. Also, there currently are a limited number of platinum and palladium operation companies, which restricts a fund's ability to diversify its investments in those companies. 9
The prices of gold and precious metals operation companies are affected by the prices of gold and other precious metals such as platinum, palladium and silver, as well as other prevailing market conditions. These prices may be volatile, fluctuating substantially over short periods of time. In times of stable economic growth, traditional equity and debt investments could offer greater appreciation potential and the prices of gold and other precious metals may be adversely affected. The prices of gold and other precious metals are affected by such factors as: (1) how much of the worldwide supply is held by large holders, such as governmental bodies and central banks; (2) unpredictable monetary policies and economic and political conditions in countries throughout the world; (3) supply and demand for gold bullion as an investment, including bars, coins or gold-backed financial instruments such as exchange-traded funds; (4) demand for gold jewelry; and (5) government policies meant to influence demand for gold and other precious metals. The prices of gold and precious metals operation companies are directly affected by: (1) declines in the prices of gold and precious metals; (2) rising capital costs as well as labor and other costs in mining and production; (3) adverse currency fluctuations, economic events or natural disasters or other events with a significant economic effect in the countries where these companies operate; (4) labor disruptions; (5) operational issues and failures; (6) access to reliable energy and equipment supplies; and (7) changes in laws relating to environmental permits, mining, production, or sales. These factors may result in deviations between the prices of the underlying metals and the securities of the operation companies in which a fund invests. In addition, some gold and precious metals mining companies have hedged, to varying degrees, their exposure to falls in the prices of gold or precious metals by selling forward future production, which could limit the company s benefit from future rises in the prices of gold or precious metals or increase the risk that the company could fail to meet its contractual obligations. With respect to mining companies, mining operations have varying expected life spans and companies that have mines with a short expected life span may experience more stock price volatility. Changes in U.S. or foreign tax, currency or mining laws may make it more expensive and/or more difficult to pursue a fund's investment strategies. In addition, a fund may invest in securities of foreign entities that could be deemed for tax purposes to be passive foreign investment companies (PFICs). PFIC investments may affect the fund s income distributions, as realized capital gains on a PFIC will be deemed ordinary income regardless of how long the fund held the PFIC. Government National Mortgage Association Obligations ( Ginnie Maes ) Ginnie Maes differ from conventional debt securities because principal is paid back monthly over the life of the security rather than at maturity. An applicable Underlying Fund may receive unscheduled payments of principal due to voluntary prepayments, refinancing or foreclosure on the underlying mortgage loans. Because of prepayments, Ginnie Maes may be less effective than some other types of securities as a means of "locking in" long-term interest rates and may have less potential for capital appreciation during periods of falling interest rates. A reduction in the anticipated rate of principal prepayments, especially during periods of rising interest rates, may increase the effective maturity of Ginnie Maes, making them more susceptible than some other debt securities to a decline in market value when interest rates rise. Growth Style Investing Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. Growth stocks may be more expensive relative to their current earnings or assets compared to value or other stocks, and if earnings growth expectations moderate, their valuations may return to more typical norms, causing their stock prices to fall. Prices of these companies securities may be more volatile than other securities, particularly over the short term. High-Yield Debt Securities Issuers of lower-rated or high-yield debt securities (also known as junk bonds ) are not as strong financially as those issuing higher credit quality debt securities. High-yield debt securities are generally considered predominantly speculative by the applicable rating agencies as their issuers are more likely to encounter financial difficulties and are more vulnerable to changes in the relevant economy, such as a recession or a sustained period of rising interest rates, that could affect 10
their ability to make interest and principal payments when due. The prices of high-yield debt securities generally fluctuate more than those of higher credit quality. High-yield debt securities are generally more illiquid (harder to sell) and harder to value. Income Because an applicable Underlying Fund can only distribute what it earns, the fund's distributions to shareholders may decline when (i) prevailing interest rates fall or when the fund experiences defaults on debt securities it holds; (ii) dividend income from investments in stocks decline, or (iii) the fund does not have PFIC gains to be distributed. If a fund limits its investments to high-quality, short-term securities, its portfolio generally will earn lower yields than a portfolio with lowerquality, longer-term securities subject to more risk. Index-Related There is no assurance that the Underlying Index of an applicable Underlying Fund will be determined, composed or calculated accurately. While an Underlying Index may provide descriptions of what it is designed to achieve, there is no guarantee that the Underlying Index will be in line with the described index methodology. Gains, losses of costs to a fund caused by errors in the Underlying Index may therefore be borne by the fund and its shareholders. Inflation The market price of debt securities generally falls as inflation increases because the purchasing power of the future income and repaid principal is expected to be worth less when received by an applicable Underlying Fund. Debt securities that pay a fixed rather than a variable interest rate are especially vulnerable to inflation risk because variable-rate debt securities may be able to participate, over the long term, in rising interest rates which have historically corresponded with long-term inflationary trends. Information Technology Sector Information technology companies face intense competition and potentially rapid product obsolescence. They are also heavily dependent on intellectual property rights and may be adversely affected by the loss or impairment of those rights. Interest Rate When interest rates rise, debt security prices generally fall. The opposite is also generally true: debt security prices rise when interest rates fall. Interest rate changes are influenced by a number of factors, including government policy, monetary policy, inflation expectations, perceptions of risk, and supply and demand of debt securities. In general, securities with longer maturities or durations are more sensitive to interest rate changes. An applicable Underlying Fund s yield will vary. A sharp and unexpected rise in interest rates could cause the fund s share price to drop below a dollar. A low interest rate environment may prevent the fund from providing a positive yield or paying fund expenses out of current income and could impair the fund s ability to maintain a stable net asset value. Issuer The performance of an applicable Underlying Fund depends on the performance of individual securities to which the fund has exposure. Changes in the financial condition or credit rating of an issuer of those securities may cause the value of the securities to decline. Large-Capitalization Companies Large-capitalization companies may be less able than smaller capitalization companies to adapt to changing market conditions. Large-capitalization companies may be more mature and subject to more limited growth potential compared with smaller capitalization companies. During different market cycles, the performance of large-capitalization companies has trailed the overall performance of the broader securities markets. 11
Liquidity From time to time, the trading market for a particular security or type of security or other investments in which an applicable Underlying Fund invests may become less liquid or even illiquid. Reduced liquidity will have an adverse impact on a fund's ability to sell such securities or other investments when necessary to meet the fund's liquidity needs or in response to a specific economic event and will also generally lower the value of a security or other investments. Market prices for such securities or other investments may be volatile. Management An applicable Underlying Fund that is actively managed is subject to management risk. A fund s investment manager applies investment techniques and risk analyses in making investment decisions for the fund, but there can be no guarantee that these decisions will produce the desired results. An index fund may not fully replicate the Underlying Index, it is subject to the risk that the fund investment manager s investment strategy may not produce the intended results. Market The market values of securities or other investments owned by an applicable Underlying Fund will go up or down, sometimes rapidly or unpredictably. The market value of a security or other investment may be reduced by market activity or other results of supply and demand unrelated to the issuer. This is a basic risk associated with all securities and investments. When there are more sellers than buyers, prices tend to fall. Likewise, when there are more buyers than sellers, prices tend to rise. Stock prices tend to go up and down more dramatically than those of debt securities. A slower-growth or recessionary economic environment could have an adverse effect on the prices of the various stocks held by a fund. A fund could lose money over short periods due to short-term market movements and over longer periods during more prolonged market downturns. Market Trading An applicable Underlying Fund faces numerous market trading risks, including the potential lack of an active market for fund shares, losses from trading in secondary markets, periods of high volatility and disruptions in the creation/redemption process. Any of these factors, among others, may lead to a fund s shares trading at a premium or discount to NAV. Thus, an investor may pay more (or less) than NAV when it buys shares of the fund in the secondary market, and may receive less (or more) than NAV when it sells those shares in the secondary market. Master/Feeder Structure An applicable Underlying Fund (the feeder fund ) may seek to achieve its investment goal by investing all of its assets in shares of another fund (the master portfolio ). The master portfolio has the same investment goal and policies as the feeder fund. The feeder fund buys shares of the master portfolio at net asset value. An investment in the feeder fund is an indirect investment in the master portfolio. It is possible that the feeder fund may have to withdraw its investment in the master portfolio if the master portfolio changes its investment goal or if the feeder fund s board of trustees, at any time, considers it to be in the feeder fund s best interest. Merger Arbitrage Securities and Distressed Companies A merger or other restructuring, or a tender or exchange offer, proposed or pending at the time an applicable Underlying Fund invests in merger arbitrage 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. 12