ETF Prospectus

The sections below set out the purpose of a prospectus, the registered investment companies that have prospectuses, Form N-1A, the statutory prospectus and the Statement of Additional Information (SAI), how an ETF prospectus differs from a mutual fund prospectus, investment objective and strategy, risks, fees and expenses, performance, premiums, discounts and bid-ask spreads, the summary prospectus, shareholder reports, and where the topic appears in the Securities Industry Essentials (SIE) Exam content outline and the Series 7 content outline.

The Purpose of a Prospectus

Often referred to as the “truth in securities” law, the Securities Act of 1933 (the Securities Act) has two basic objectives: require that investors receive financial and other significant information concerning securities being offered for public sale; and prohibit deceit, misrepresentations, and other fraud in the sale of securities.

A primary means of accomplishing these goals is the disclosure of important financial information through the registration of securities. This information enables investors, not the government, to make informed judgments about whether to purchase a company’s securities. While the Securities and Exchange Commission (SEC) requires that the information provided be accurate, it does not guarantee it.

Registration statements and prospectuses become public shortly after filing with the SEC.

The Investment Company Act of 1940 regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. The Act requires these companies to disclose their financial condition and investment policies to investors when stock is initially sold and, subsequently, on a regular basis.

The focus of the Investment Company Act of 1940 is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations. The Act does not permit the SEC to directly supervise the investment decisions or activities of these companies or judge the merits of their investments.

Registered Investment Companies and Prospectus Delivery

Registered investment companies include: mutual funds, ETFs, registered closed-end funds, unit investment trusts (UITs), variable annuity contracts, and variable life insurance contracts.

All funds and variable contracts must provide investors with a prospectus. When an investor purchases shares of a mutual fund, ETF, or UIT, the fund must provide the investor with a prospectus. Depending on the investor’s preferences and the fund’s practices, this could mean delivery of a paper copy of the prospectus or e-delivery of the prospectus.

Form N-1A, the Statutory Prospectus and the Statement of Additional Information

Form N-1A is divided into three parts. Part A includes the information required in a fund’s prospectus under section 10(a) of the Securities Act. Part B includes the information required in a fund’s SAI. Part C includes other information required in a fund’s registration statement.

Under Rule 498(a)(3), fund means an open-end management investment company, or any series of such a company, that has, or is included in, an effective registration statement on Form N-1A and that has a current prospectus that satisfies the requirements of section 10(a) of the Securities Act.

Under Rule 498(a)(6), statutory prospectus means a prospectus that satisfies the requirements of section 10(a) of the Securities Act.

Mutual funds, ETFs, registered closed-end funds, and some variable contracts generally will have statements of additional information (SAIs). The SAI conveys additional information about the fund or variable contract that some investors find useful.

The purpose of the SAI is to provide additional information about the fund that the Commission has concluded is not necessary or appropriate in the public interest or for the protection of investors to be in the prospectus, but that some investors may find useful. The SAI generally includes the fund’s financial statements.

Funds and variable contracts are not required to deliver SAIs to investors unless investors request it. Under Rule 498(a)(5), Statement of Additional Information means the statement of additional information required by Part B of Form N-1A.

How an ETF Prospectus Differs From a Mutual Fund Prospectus

In General Instruction A to Form N-1A, Exchange-Traded Fund means a fund or class, the shares of which are listed and traded on a national securities exchange, and that has formed and operates under an exemptive order granted by the Commission or in reliance on rule 6c-11 under the Investment Company Act of 1940. In the same instruction, Market Price has the same meaning as in rule 6c-11 under the Investment Company Act of 1940.

Unlike mutual funds, ETFs do not sell individual shares directly to, or redeem their individual shares directly from, retail investors. ETF shares are traded throughout the day on national stock exchanges and at market prices. Most ETFs post their portfolio holdings on their websites daily. These differences create different benefits and risks.

Typically only authorized participants purchase and redeem shares directly from the ETF. They can do so only in large aggregations or blocks. Other investors, including retail investors, purchase and sell ETF shares in market transactions at market prices.

Item 6(a) of Form N-1A calls for the fund to disclose the fund’s minimum initial or subsequent investment requirements. Under Item 6(c), if the fund is an Exchange-Traded Fund, the fund may omit the information required by paragraphs (a) and (b) of that Item and must disclose five items.

The first disclosure is that individual fund shares may only be bought and sold in the secondary market through a broker or dealer at a market price.

The second disclosure is that because ETF shares trade at market prices rather than net asset value (NAV), shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).

The third disclosure is that an investor may incur costs attributable to the difference between the highest price a buyer is willing to pay to purchase shares of the fund (bid) and the lowest price a seller is willing to accept for shares of the fund (ask) when buying or selling shares in the secondary market (the “bid-ask spread”).

The fourth disclosure is, if applicable, how to access recent information, including information on the fund’s net asset value, Market Price, premiums and discounts, and bid-ask spreads, on the Exchange-Traded Fund’s website. The fifth disclosure is the median bid-ask spread for the fund’s most recent fiscal year.

Item 11(a)(1) of Form N-1A calls for an explanation that the price of fund shares is based on the fund’s net asset value and the method used to value fund shares (market price, fair value, or amortized cost); except that if the fund is an Exchange-Traded Fund, an explanation that the price of fund shares is based on a market price.

Investment Objective and Strategy

The investment objective of a fund frequently will be: (1) capital appreciation; (2) income; or (3) a combination of the two. Funds that seek capital appreciation primarily invest in assets the fund expects to increase in value. Funds that seek income primarily invest in securities that produce income such as bonds that pay interest or securities that pay dividends.

Funds that seek a combination of growth and income generally invest in equity securities that pay dividends or else invest in a mix of equity securities and bonds. Generally, funds that seek capital appreciation are considered a more aggressive investment strategy, while funds that seek income are considered a more conservative investment strategy.

The principal strategies of the fund indicate how the fund intends to achieve its investment objective. These strategies indicate the approach the fund’s adviser takes in deciding which securities to buy or sell. The fund may choose to concentrate in one or more industries, geographic regions or types of securities.

ETFs can be index-based or actively managed. For an index-based ETF, the adviser seeks to track an underlying securities index and achieve returns that closely correspond to the returns of that index. For an actively managed ETF, the adviser buys or sells components in the portfolio without regard to conformity with an index. The trades must still be consistent with the overall investment objective of the fund.

Item 4 of Form N-1A calls for the Principal Investment Strategies of the Fund and the Principal Risks of Investing in the Fund.

Risks

All investments in funds involve risk of financial loss. The reward for taking on risk is the potential for a greater investment return. The types of risks to which a fund is subject vary considerably with the nature of its investments.

Market risk. The fund may incur losses due to declines in the markets in which it invests.

Business or issuer risk. The fund may invest in a company that goes out of business, suffers financial problems, or otherwise does not perform as expected, especially if the fund primarily invests in companies without an established record.

Credit risk. The fund may invest in bonds or other debt instruments from an issuer who is unable to pay interest payments as scheduled or repay the principal.

Interest rate risk. The value of the fund’s investments in bonds or other debt instruments may decrease if interest rates rise.

Inflation risk. The value of the fund’s investments in bonds or other debt instruments also may not keep track with price increases from inflation.

Concentration risk. The fund may concentrate its investments in a particular industry, sector or geographical area, which can result in a less diversified portfolio that may be subject to greater volatility in performance than a fund that does not concentrate its investments.

The market price of an ETF fluctuates during the trading day as a result of a variety of factors, including the underlying prices of the ETF’s assets and the demand for the ETF. Due to this fluctuation, the ETF’s market price may not equal the ETF’s end-of-day NAV per share. The premiums and discounts for specific ETFs may vary over time.

Unlike with a mutual fund, retail investors may transact at prices that can deviate, sometimes significantly, from the underlying value of the exchange-traded product (ETP). ETFs that are more liquid and have higher trading volume typically have tighter or smaller spreads.

Tracking error occurs when the returns of the ETP deviate from the returns of its underlying benchmark, which can impact investor performance (either negatively or positively).

Like mutual funds, ETFs are not guaranteed or insured by the Federal Deposit Insurance Corporation (FDIC) or any other government agency.

Item 9 of Form N-1A directs the fund to disclose the principal risks of investing in the fund, including the risks to which the fund’s particular portfolio as a whole is expected to be subject and the circumstances reasonably likely to affect adversely the fund’s net asset value, yield, or total return.

Fees and Expenses

Prospectuses are required to present fees and expenses in a standardized format to help investors more easily compare them across different funds. Mutual funds and ETFs are required to provide a standardized table of fees and expenses in their prospectuses.

Under Item 3 of Form N-1A, the fee table is captioned Fees and Expenses of the Fund, and the two tables are captioned Shareholder Fees and Annual Fund Operating Expenses.

Shareholder transaction expenses include sales charges (also known as “loads” or “commissions”), which are generally paid to the investment professionals who sold the fund to the investor to compensate them for their services. While it is uncommon for ETFs to charge shareholder fees, some mutual funds do.

Annual fund operating expenses are frequently referred to as the “expense ratio.” Annual fund operating expenses indicate the percentage of net assets that are used by the fund each year to pay for fees and expenses. These fees and expenses include management fees, “rule 12b-1” fees, and other expenses.

Management fees are paid to compensate the investment adviser for determining what securities the fund should invest in and providing related services. “Rule 12b-1” fees are paid out of fund assets for marketing and sales costs. Other expenses include miscellaneous expenses such as auditing, legal, custodial, and transfer agency fees.

Typically, 12b-1 fees apply to mutual funds but not to ETFs. In addition to any brokerage commission that an investor might pay, ETPs have expense ratios, like mutual funds, calculated as a percentage of the assets invested, but they don’t have loads or 12b-1 fees.

When fund fees are paid out of fund assets, the value of the fund decreases and the value of all the investors’ shares decreases. ETF investors may pay their brokers sales commissions with each purchase or sale of ETF shares. The prospectus fee table does not show other fees an investor may pay, such as brokerage commissions and other fees to financial intermediaries.

Instruction 1(e) to Item 3 of Form N-1A applies to an ETF: if the fund is an Exchange-Traded Fund, exclude any fees charged for the purchase and redemption of the fund’s creation units. An ETF may impose fees in connection with the purchase or redemption of creation units that are intended to defray operational processing and brokerage costs to prevent possible shareholder dilution (“transaction fees”).

Fees and expenses vary from fund to fund. Even small differences in fees and expenses can mean large differences in returns over time.

Performance

Item 4(b)(2) of Form N-1A is captioned Risk/Return Bar Chart and Table. The bar chart will depict the fund’s historic performance, and will demonstrate how consistent (or not) the fund’s returns have been. The table will compare the performance of the fund to that of the broader market (as represented by a market index).

The fund’s performance for its best and worst calendar quarters indicates how volatile its returns have been. Past performance is no guarantee of future results.

Premiums, Discounts and Bid-Ask Spreads

An ETF’s market price typically will be more or less than the fund’s NAV per share, which is called selling at a premium or discount. An ETF share is trading at a premium when its market price is higher than the NAV per share. An ETF share is trading at a discount when its market price is lower than the NAV per share.

Under Rule 6c-11(a)(1), premium or discount means the positive or negative difference between the market price of an exchange-traded fund share at the time as of which the current net asset value is calculated and the exchange-traded fund’s current net asset value per share, expressed as a percentage of the exchange-traded fund share’s current net asset value per share.

Under Rule 6c-11(c)(1), each business day, an exchange-traded fund must disclose prominently on its website, which is publicly available and free of charge, six categories of information. Under Rule 6c-11(c)(1)(ii), the second category is the exchange-traded fund’s current net asset value per share, market price, and premium or discount, each as of the end of the prior business day.

Under Rule 6c-11(c)(1)(iii), the third category is a table showing the number of days the exchange-traded fund’s shares traded at a premium or discount during the most recently completed calendar year and the most recently completed calendar quarters since that year, or the life of the exchange-traded fund, if shorter. Under Rule 6c-11(c)(1)(v), the fifth category is the exchange-traded fund’s median bid-ask spread.

The Summary Prospectus

Some mutual funds and ETFs may provide investors with a summary prospectus containing key information about the fund. If an investor receives a summary prospectus, the fund’s full prospectus will be available on its website. An investor can also always request a paper copy free of charge.

Under Rule 498(b)(2), except as otherwise provided in paragraph (b), the summary prospectus provides the information required or permitted by Items 2 through 8 of Form N-1A, and only that information, in the order required by the form.

Under Rule 498(b)(1)(ii), if the fund is an Exchange-Traded Fund, the summary prospectus must also identify the principal U.S. market or markets on which the fund shares are traded.

Under Rule 498(e)(1), the fund’s current summary prospectus, statutory prospectus, Statement of Additional Information, and most recent annual and semi-annual reports to shareholders under Rule 30e-1 are publicly accessible, free of charge, at the website address specified on the cover or at the beginning of the summary prospectus on or before the time that the summary prospectus is sent or given.

Shareholder Reports and Where the Documents Are Available

A mutual fund, an ETF, and a registered closed-end fund must provide shareholders with annual and semi-annual reports. Shareholder reports generally contain expense, performance, and other information. They also include a graphical representation of the fund’s underlying investments (portfolio holdings).

A fund’s prospectus and most recent shareholder report are available on the SEC’s website and the fund’s website, free of charge. The prospectus, the SAI and shareholder reports can be obtained by visiting the fund’s website, contacting the fund, contacting a broker that sells the fund’s shares, or accessing the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) database.

Exam Relevance

Candidates should check the current outline for their examination.

The SIE Exam content outline lists, in Section 1, Knowledge of Capital Markets, Topic 1.4, Offerings, the bullet Types and purpose of offering documents and delivery requirements, with the official statement, program disclosure document, and prospectus named in parentheses. The Rules list for Topic 1.4 includes, under the Securities Act of 1933, Section 10 – Information Required in Prospectus and Rule 431 – Summary Prospectuses.

The SIE Exam content outline lists, in Section 2, Understanding Products and Their Risks, Topic 2.1.4, Packaged Products, the bullet Investment companies, with Types of investment companies beneath it: closed-end funds, open-end funds, unit investment trusts (UITs), and variable contracts/annuities. The knowledge bullets for that topic list loads, share classes, net asset value (NAV), disclosures, costs and fees, breakpoints, right of accumulation (ROA), letter of intent (LOI), net transactions, surrender charges, and sales charges.

The SIE Exam content outline lists, in Section 2, Topic 2.1.9, Exchange-traded Products (ETPs). Types of ETPs lists exchange-traded funds (ETFs) and exchange-traded notes (ETNs) beneath it. The knowledge bullets for that topic list alternative investments to mutual funds, fee considerations, and active vs. passive. The Rules list for Section 2 includes 12b-1 – Distribution of Shares by Registered Open-end Management Investment Company.

The Series 7 content outline lists, in Function 1, Section 1.1, under SEC Rules and Regulations and the Securities Act of 1933, 498 – Summary Prospectuses for Open-End Management Investment Companies. It lists, in Function 3, Section 3.3, Provides required disclosures regarding investment products and their characteristics, risks, services and expenses, the knowledge bullet Required disclosures on specific transactions, with material aspects of investments, statement of additional information, material events, and control relationships named in parentheses.

The Series 7 content outline lists, in Function 3, Section 3.2, Reviews and analyzes customers’ investment profiles and product options to determine that investment recommendations meet applicable standards, under Packaged products, the bullet Investment companies, exchange-traded funds (ETFs), unit investment trusts (UITs).

Common Misunderstandings

The SEC judges the merits of the investments described in a fund’s prospectus. The Investment Company Act of 1940 does not permit the SEC to directly supervise the investment decisions or activities of these companies or judge the merits of their investments, and the SEC does not guarantee the accuracy of the information provided.

ETFs charge loads and 12b-1 fees like mutual funds. ETPs have expense ratios, like mutual funds, calculated as a percentage of the assets invested, but they don’t have loads or 12b-1 fees, and typically 12b-1 fees apply to mutual funds but not to ETFs.

The fee table in the prospectus shows every cost of owning an ETF. The prospectus fee table does not show other fees an investor may pay, such as brokerage commissions and other fees to financial intermediaries.

ETF shares are bought from the fund at net asset value. Under Item 6(c) of Form N-1A, an Exchange-Traded Fund must disclose that individual fund shares may only be bought and sold in the secondary market through a broker or dealer at a market price.

An ETF share always trades at its NAV per share. An ETF share is trading at a premium when its market price is higher than the NAV per share, and at a discount when its market price is lower than the NAV per share.

The summary prospectus and the statutory prospectus are the same document. Under Rule 498(b)(2), except as otherwise provided in paragraph (b), the summary prospectus provides the information required or permitted by Items 2 through 8 of Form N-1A, and only that information, and if an investor receives a summary prospectus, the fund’s full prospectus will be available on its website.

An investor must receive the Statement of Additional Information with the prospectus. Funds and variable contracts are not required to deliver SAIs to investors unless investors request it.

Past performance in the prospectus guarantees future results. Past performance is no guarantee of future results.

Key Points to Retain

The purpose of the prospectus is to provide essential information about the fund in a way that will help investors to make informed decisions about whether to purchase the fund’s shares described in the prospectus.

Part A of Form N-1A includes the information required in a fund’s prospectus under section 10(a) of the Securities Act. Part B includes the information required in a fund’s SAI. Part C includes other information required in a fund’s registration statement.

ETF shares are traded throughout the day on national stock exchanges and at market prices. Under Item 6(c) of Form N-1A, an Exchange-Traded Fund may omit the information required by paragraphs (a) and (b) of that Item and must disclose that individual fund shares may only be bought and sold in the secondary market through a broker or dealer at a market price, that shares may trade at a premium or discount, that an investor may incur costs attributable to the bid-ask spread, how to access recent information on the fund’s website, if applicable, and the median bid-ask spread for the fund’s most recent fiscal year.

ETFs can be index-based or actively managed. ETPs have expense ratios, like mutual funds, but they don’t have loads or 12b-1 fees.

Instruction 1(e) to Item 3 of Form N-1A directs an Exchange-Traded Fund to exclude any fees charged for the purchase and redemption of the fund’s creation units from the fee table. The prospectus fee table does not show other fees an investor may pay, such as brokerage commissions.

Under Rule 498(b)(2), except as otherwise provided in paragraph (b), the summary prospectus provides the information required or permitted by Items 2 through 8 of Form N-1A, and only that information, in the order required by the form.

Funds and variable contracts are not required to deliver SAIs to investors unless investors request it.