AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 21, 2024.
No. 333-138490
No. 811-21977
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
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THE SECURITIES ACT OF 1933
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Pre-Effective Amendment No.
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Post-Effective Amendment No. 846
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and/or
REGISTRATION STATEMENT
UNDER
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THE INVESTMENT COMPANY ACT OF 1940
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Amendment No. 847
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(Exact Name of Registrant as Specified in Charter)
3500 Lacey Road, Suite 700, Downers Grove, Illinois 60515
(Address of Principal Executive Office)
Registrant’s Telephone Number, including Area Code: (800) 983-0903
Adam Henkel, Esquire
3500 Lacey Road, Suite 700, Downers Grove, Illinois 60515
3500 Lacey Road, Suite 700, Downers Grove, Illinois 60515
With Copies to:
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Alan P. Goldberg
Stradley Ronon Stevens & Young LLP
191 North Wacker Drive, Suite 1601
Chicago, Illinois 60606
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Eric S. Purple
Stradley Ronon Stevens & Young LLP
2000 K Street, NW, Suite 700
Washington, DC 20006
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APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
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It is proposed that this filing will become effective (check appropriate box)
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immediately upon filing pursuant to paragraph (b)
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on June 24, 2024 pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)
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on (date) pursuant to paragraph (a)
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75 days after filing pursuant to paragraph (a)(2)
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on (date) pursuant to paragraph (a)(2) of rule 485
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If appropriate, check the following box:
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This post-effective amendment designates a new effective date for a previously filed
post-effective amendment.
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Prospectus
Invesco Exchange-Traded Fund Trust II
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KLMT
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Invesco MSCI Global Climate 500 ETF
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NYSE Arca, Inc.
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The U.S. Securities and Exchange Commission (“SEC”) has not approved or disapproved these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
The Invesco MSCI Global Climate 500 ETF (the “Fund”) seeks to track the investment results (before fees and expenses) of the MSCI ACWI Select Climate 500 Index (the “Underlying Index”).
This table describes the fees and expenses that you may pay if you buy, hold, and sell shares of the Fund (“Shares”). You may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the table and example below.
(expenses that you pay each year as a percentage of the value of your investment)
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| Other Expenses(1) | |
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| Total Annual Fund Operating Expenses | |
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1 “Other Expenses” are based on estimated amounts for the current fiscal year.
The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell all of your Shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund's operating expenses remain the same. This example does not include brokerage commissions that investors may pay to buy and sell Shares. Although your actual costs may be higher or lower, your costs, based on these assumptions, would be:
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1 Year
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3 Years
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The Fund generally will invest at least 90% of its total assets in securities that comprise the Underlying Index as well as American depositary receipts (“ADRs”) and global depositary receipts (“GDRs”) that represent securities in the Underlying Index.
Strictly in accordance with its guidelines and mandated procedures, MSCI Inc. (the “Index Provider”) compiles, maintains and calculates the Underlying Index, which is designed to track the performance of approximately 500 stocks included in the ACWI ex 6 Countries Index (the “Parent Index”) that meet certain environmental and climate criteria relative to their peers, as determined by the Index Provider, including their own reductions in carbon and greenhouse gas emissions.
The Parent Index is itself a subset of the MSCI ACWI Index, an index designed to measure the performance of the broader global equity markets. The MSCI ACWI Index is composed of more than 2,800 securities of large- and mid-capitalization companies in 23 developed and 24 emerging market countries around the world. However, the Parent Index excludes securities of companies located in six of the countries within in the MSCI ACWI Index:
Finland, Qatar, United Arab Emirates, Saudi Arabia, Kuwait and Indonesia. Securities eligible for inclusion in the Underlying Index include ADRs and GDRs.
To construct the Underlying Index, the Index Provider conducts screens on the universe of companies within the Parent Index to exclude companies in the business of tobacco, controversial or nuclear weapons, thermal coal mining, thermal coal-based power generation, or fossil fuel power generation. Certain exclusions (e.g., controversial and nuclear weapons) are categorical, meaning that the Underlying Index will not include any securities from such companies, while others (e.g., tobacco or thermal coal mining) are based on percentage of revenue thresholds.
The Index Provider then evaluates companies that are directly involved in environmental, social, and/or governance (“ESG”) business controversy cases. The Index Provider defines such ESG controversies as an event or ongoing situation in which a company's operations, products and/or services may potentially result in a negative ESG impact. For example, cases could include single events, such as a hazardous spill or accident, company violations of existing laws and/or regulations to which they are subject, or an alleged company action or event that violates commonly accepted international norms. To evaluate companies, the Index Provider utilizes a methodology that assesses companies' reputational and brand risk based on actual or alleged involvement in adverse impact activities as reported by the media, nongovernmental organizations, civil society groups, academia and regulators. The Index Provider monitors across five categories of ESG impact - environment, human rights and community impact, labor rights and supply chain, customers and governance - and 28 sub-categories (including, for example, energy and climate change, human rights concerns, and controversial investments). MSCI has a dedicated team of analytical staff who identify and assess the severity of controversy cases, review the reported allegations and apply consistent scoring for each controversy case, based on, among other things, the severity of impact in each case. The evaluation framework used in MSCI ESG Controversy Scores is designed to be consistent with international norms represented by the UN Declaration of Human Rights, the ILO Declaration on Fundamental Principles and Rights at Work, and the UN Global Compact. In each case, business controversies are scored on a scale of 0 to 10, with 0 being the most severe controversy. All companies having faced very severe controversies pertaining to ESG issues, defined as companies with an MSCI ESG Controversy Score of 0, are ineligible for inclusion in the Underlying Index. Companies not assessed an MSCI Controversy Score are also excluded.
After applying these exclusionary screens to the Parent Index, the Index Provider uses data provided by MSCI ESG Research LLC and other sources to assess companies for inclusion in the Underlying Index based on current emissions intensity and emissions reduction targets. The final portfolio of securities is constructed according to certain constraints within the Underlying Index methodology that are designed to minimize the Parent Index's exposure to physical and transition risks of climate change:
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at least a 10% average reduction per year in greenhouse gas (“GHG”) emissions connected to a company’s revenue, taking into account Scope 1 and 2 emissions relative to the GHG Intensity of the Parent Index as of November 2020. Scope 1 emissions are direct GHG emissions that occur from sources that are controlled or owned by an organization. Scope 2 emissions are indirect GHG emissions generated in the production of electricity consumed by the organization. GHG Intensity measures a company’s Scope 1 and 2 emissions relative to its sales.
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at least a 7% average reduction per year in GHG emissions related to a company’s financing activities, taking into account Scope 1 and 2
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emissions relative to the GHG Intensity of the Parent Index as of November 2020. GHG Intensity measures a company's Scope 1 and 2 emissions relative to its enterprise value including cash.
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at least a 20% increase, relative to the Parent Index, in the aggregate weight of companies having one or more active carbon emissions reduction target(s) approved by the Science Based Targets initiative (“SBTi”), starting from December 2021.
In addition, the Underlying Index's country and sector weightings are constrained so as to minimize significant differences relative to the Parent Index. Sector weights are limited to +/- 3% the weight of that sector in the Parent Index, and country weights are capped at +/- 5% of the weight of that country in the Parent Index.
As of May 31, 2024, the Underlying Index was composed of 500 constituents with market capitalizations ranging from approximately $5 billion to $3 trillion.
The Fund employs a “full replication” methodology in seeking to track the Underlying Index, meaning that the Fund generally invests in all of the securities comprising the Underlying Index in proportion to their weightings in the Underlying Index.
The Fund is “non-diversified” and therefore is not required to meet certain diversification requirements under the Investment Company Act of 1940, as amended (the “1940 Act”).
Concentration Policy. The Fund will concentrate its investments (i.e., invest more than 25% of the value of its net assets) in securities of issuers in any one industry or group of industries only to the extent that the Underlying Index reflects a concentration in that industry or group of industries. The Fund will not otherwise concentrate its investments in securities of issuers in any one industry or group of industries. As of May 31, 2024, the Underlying Index had significant exposure to the information technology sector. The Fund's portfolio, and the extent to which it concentrates its investments, are likely to change over time.
Principal Risks of Investing in the Fund
The following summarizes the principal risks of investing in the Fund.
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Management of the Fund
Investment Adviser. Invesco Capital Management LLC (the “Adviser”).
Portfolio Managers
The following individuals are responsible jointly and primarily for the day-to-day management of the Fund’s portfolio:
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Name
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Title with Adviser/Trust
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Date Began
Managing
the Fund
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Peter Hubbard
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Head of Equities and Director of
Portfolio Management of the Adviser;
Vice President of the Trust
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June 2024
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Michael Jeanette
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Head of North America Equities and
Senior Portfolio Manager of the Adviser
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June 2024
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Pratik Doshi, CFA
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Senior Portfolio Manager of the Adviser
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June 2024
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Tony Seisser
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Senior Portfolio Manager of the Adviser
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June 2024
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Purchase and Sale of Shares
The Fund will issue and redeem Shares at NAV only with APs and only in large blocks of 50,000 Shares (each block of Shares is called a “Creation Unit”) or multiples thereof (“Creation Unit Aggregations”), generally in exchange for the deposit or delivery of a basket of securities. However, the Fund also reserves the right to permit or require Creation Units to be issued in exchange for cash. Except when aggregated in Creation Units, the Shares are not redeemable securities of the Fund.
Individual Shares may only be bought and sold in the secondary market (i.e., on a national securities exchange) through a broker or dealer at a market price. Because the Shares trade at market prices rather than NAV, Shares may trade at a price greater than NAV (at a premium), at NAV, or less than NAV (at a discount). An investor may incur costs attributable to the difference between the highest price a buyer is willing to pay to purchase Shares (bid) and the lowest price a seller is willing to accept for Shares (ask) when buying or selling shares in the secondary market (the “bid-ask spread”).
Recent information, including information on the Fund’s NAV, market price, premiums and discounts, and bid-ask spreads will be made available online at www.invesco.com/ETFs.
Tax Information
The Fund’s distributions generally will be taxed as ordinary income, capital gains or some combination of both, unless you are investing through a tax-advantaged arrangement, such as a 401(k) plan or an individual retirement account, in which case your distributions may be taxed as ordinary income when withdrawn from such account.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase Shares of the Fund through a broker-dealer or other financial intermediary (such as a bank), the Fund’s distributor or its related companies may pay the intermediary for certain Fund-related activities, including those that are designed to make the intermediary more knowledgeable about exchange-traded products, such as the Fund, as well as for marketing, education or other initiatives related to the sale or promotion of Shares. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson or financial adviser to recommend the Fund over another investment. Ask your salesperson or financial adviser or visit your financial intermediary’s website for more information.
Additional Information About the Fund’s Strategies and Risks
Principal Investment Strategies
The Fund generally will invest at least 90% of its total assets in securities that comprise the Underlying Index. The Fund operates as an index fund and is not actively managed, meaning that it does not seek to outperform the Underlying Index. Rather, the Fund seeks to generally track the performance of the Underlying Index as closely as possible (i.e., it seeks to obtain a high degree of correlation with the Underlying Index and to minimize “tracking error” between the two). Tracking error means the variation between the
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Fund’s annual return and the return of the Underlying Index. Because the Underlying Index is a financial calculation based on a grouping of financial instruments, while the Fund is an actual investment portfolio, the Fund may experience tracking error for a number of reasons when tracking the performance of the Underlying Index. For example, the Fund incurs operating expenses and transaction costs not applicable to the Underlying Index.
As an index fund, the Fund does not take temporary defensive positions during periods of adverse market, economic or other conditions.
The Fund employs a “full replication” methodology in seeking to track the Underlying Index, meaning that it generally invests in all of the securities comprising the Underlying Index in proportion to the weightings of the securities in the Underlying Index. However, under various circumstances, it may not be possible or practicable to purchase all of those securities in those same weightings. In those circumstances, the Fund may purchase a sample of securities in the Underlying Index.
A “sampling” methodology means that the Adviser uses a quantitative analysis to select securities from the Underlying Index universe to obtain a representative sample of securities that have, in the aggregate, investment characteristics similar to the Underlying Index in terms of key risk factors, performance attributes and other characteristics. These include industry weightings, market capitalization, return variability, earnings valuation, yield and other financial characteristics of securities. When employing a sampling methodology, the Adviser bases the quantity of holdings in the Fund on a number of factors, including asset size of the Fund, and generally expects the Fund to hold less than the total number of securities in the Underlying Index. However, the Adviser reserves the right to invest the Fund in as many securities as it believes necessary to achieve the Fund’s investment objective. To the extent the Fund uses a sampling methodology, it may have a larger tracking error than if it used a full replication methodology.
At times, the Fund may utilize one or more additional investment techniques in seeking to track the Underlying Index. Such techniques may include: (i) overweighting or underweighting a component security in the Fund’s portfolio compared to its weight in the Underlying Index, (ii) purchasing securities not contained in the Underlying Index that the Adviser believes are appropriate to substitute for certain securities in the Underlying Index, (iii) selling securities included in the Underlying Index in anticipation of
their removal from the Underlying Index, or (iv) purchasing securities not included in the Underlying Index in anticipation of their addition to the Underlying Index.
Additional information about the construction of the Underlying Index is set forth below.
MSCI ACWI Select Climate 500 Index
The Underlying Index is designed to track the performance of approximately 500 stocks included in the Parent Index that meet certain environmental and climate criteria relative to their peers, as determined by the Index Provider. The Parent Index is a subset of the MSCI ACWI Index, which is composed of more than 2,800 securities of large- and mid-capitalization companies located in both developed and emerging market countries around the world, but excludes companies in Finland, Qatar, United Arab Emirates, Saudi Arabia, Kuwait and Indonesia. Securities eligible for inclusion in the Underlying Index include ADRs and GDRs.
To construct the universe of constituents eligible for inclusion in the Underlying Index, the Index Provider first screens companies within the Parent Index using certain exclusionary criteria to remove securities of companies that:
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have any tie to controversial weapons, (e.g., cluster munitions, landmines, depleted uranium weapons, biological/chemical weapons, blinding lasers, non-detectable fragments and incendiary weapons);
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manufacture nuclear weapons or components for use in nuclear weapons, manufacture or assemble delivery platforms for the delivery of nuclear weapons (or the components of such platforms), or provide related auxiliary services;
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produce tobacco or derive 5% or more of their revenues from the production, distribution, retail, supply and licensing of tobacco-related products;
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derive 5% or more revenue from the mining of thermal coal and its sale;
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derive 10% or more revenue from thermal coal-based power generation, have 10% or more capacity attributed to thermal coal-based power generation, or generate 10% or more power from thermal coal;
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generate 50% or more power from thermal coal, liquid fuel and natural gas; and
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have an MSCI ESG Controversy Score of 0.
After applying these screens to the Parent Index, the Index Provider uses data provided by MSCI ESG Research LLC and other sources to assess companies for inclusion in the Underlying Index based on current emissions intensity and emissions reduction targets. The final portfolio of securities is constructed according to certain constraints within the Underlying Index methodology that are designed to minimize the Parent Index's exposure to physical and transition risks of climate change:
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at least a 10% average reduction per year in GHG emissions connected to a company’s revenue, taking into account Scope 1 and 2 emissions relative to the GHG Intensity of the Parent Index as of November 2020. Scope 1 emissions are direct GHG emissions that occur from sources that are controlled or owned by an organization. Scope 2 emissions are indirect GHG emissions generated in the production of electricity consumed by the organization. GHG Intensity measures a company’s Scope 1 and 2 emissions relative to its sales.
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at least a 7% average reduction per year in GHG emissions related to a company’s financing activities, taking into account Scope 1 and 2 emissions relative to the GHG Intensity of the Parent Index as of November 2020. GHG Intensity measures a company's Scope 1 and 2 emissions relative to its enterprise value including cash.
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at least a 20% increase, relative to the Parent Index, in the aggregate weight of companies having one or more active carbon emissions reduction target(s) approved by the SBTi, starting from December 2021. The SBTi is a partnership among the CDP (an international non-profit that operates a system for the disclosure of issuers’ environmental impact), the World Resources Institute, the World Wide Fund for Nature; and the United Nations Global Compact. It develops standards, tools and guidance designed to allow companies to set GHG emissions reductions targets.
The Index Provider uses an optimization process in weighting the approximately 500 component securities within the Underlying Index, to seek to minimize differences between the Underlying Index and the Parent Index with respect to country and sector weightings. Sector weights are limited to +/- 3% the weight of that sector in the Parent Index, and country weights are capped at +/- 5% of the weight of that country in the Parent Index. Additional information regarding the Underlying Index's methodology is available on the Index Provider's website (although the Index Provider's website forms no part of this prospectus and is not incorporated into this prospectus).
The Underlying Index is rebalanced semi-annually at the start of June and December. The Fund is rebalanced in accordance with the Underlying Index.
Principal Risks of Investing in the Fund
The following provides additional information regarding certain of the principal risks identified under “Principal Risks of Investing in the Fund” in the Fund's “Summary Information” section. Any of the following risks may impact the Fund’s NAV which could result in the Fund trading at a premium or discount to NAV.
Market Risk. Securities in the Underlying Index are subject to market fluctuations, and the Fund could lose money due to short-term market movements and over longer periods during market downturns. You should anticipate that the value of the Shares will decline, more or less, in
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correlation with any decline in value of the securities in the Underlying Index. The value of a security may decline due to general market conditions, economic trends or events that are not specifically related to the issuer of the security or due to factors that affect a particular industry or group of industries. During a general downturn in the securities markets, multiple asset classes may be negatively affected. Additionally, natural or environmental disasters, widespread disease or other public health issues, war, military conflicts, acts of terrorism, economic crises or other events could result in increased premiums or discounts to the Fund’s NAV.
Market Disruption Risks Related to Armed Conflict. As a result of increasingly interconnected global economies and financial markets, armed conflict between countries or in a geographic region, for example the current conflicts between Russia and Ukraine in Europe and Hamas and Israel in the Middle East, has the potential to adversely impact the Fund’s investments. Such conflicts, and other corresponding events, have had, and could continue to have, severe negative effects on regional and global economic and financial markets, including increased volatility, reduced liquidity, and overall uncertainty. The negative impacts may be particularly acute in certain sectors. The timing and duration of such conflicts, resulting sanctions, related events and other implications cannot be predicted. The foregoing may result in a negative impact on Fund performance and the value of an investment in the Fund, even beyond any direct investment exposure the Fund may have to issuers located in or with significant exposure to an impacted country or geographic region.
Index Risk. Unlike many investment companies that are “actively managed,” the Fund is a “passive” investor and therefore does not utilize an investing strategy that seeks returns in excess of the Underlying Index. Therefore, the Fund would not necessarily buy or sell a security unless that security is added or removed, respectively, from the Underlying Index, even if that security generally is underperforming. If a specific security is removed from the Underlying Index, the Fund may be forced to sell such security at an inopportune time or for a price lower than the security’s current market value. The Underlying Index may not contain the appropriate mix of securities for any particular economic cycle. Additionally, the Fund rebalances its portfolio in accordance with the Underlying Index, and, therefore, any changes to the Underlying Index’s rebalance schedule will result in corresponding changes to the Fund’s rebalance schedule. Further, unlike with an actively managed fund, the Adviser does not use techniques or defensive strategies designed to lessen the impact of periods of market volatility or market decline. This means that, based on certain market and economic conditions, the Fund’s performance could be lower than other types of funds with investment advisers that actively manage their portfolio assets to take advantage of market opportunities or defend against market events.
Equity Risk. Equity risk is the risk that the value of equity securities, including common stocks, will fall. The value of an equity security may fall due to changes in general economic conditions that impact the market as a whole and that are relatively unrelated to an issuer or its industry. These conditions include changes in interest rates, specific periods of overall market turbulence or instability, or general and prolonged periods of economic decline and cyclical change. An issuer's common stock in particular may be especially sensitive to, and more adversely affected by, these general movements in the stock market; it is possible that a drop in the stock market may depress the price of most or all of the common stocks that the Fund holds.
In addition, equity risk includes the risk that investor sentiment toward, and perceptions regarding, one or more particular industries or economic sectors will become negative, resulting in those investors exiting their investments in those industries, which could cause a reduction in the value of companies in those industries or sectors more broadly. Price changes of equity securities may occur in a particular region, industry, or sector of the market, and as a result, the value of an issuer's common stock may fall solely because of factors, such as increases in production costs, that
negatively impact other companies in the same industry or in a number of different industries.
Equity risk also includes the financial risks of a specific company, including that the value of the company's securities may fall as a result of factors directly relating to that company, such as decisions made by its management or lower demand for the company's products or services. In particular, the common stock of a company may decline significantly in price over short periods of time. For example, an adverse event, such as an unfavorable earnings report, may depress the value of common stock; similarly, the common stock of an issuer may decline in price if the issuer fails to make anticipated dividend payments because, among other reasons, the issuer experiences a decline in its financial condition.
Mid-Capitalization Company Risk. Securities of mid-capitalization companies may be more volatile and thinly traded (that is, less liquid) than those of more established companies. These securities may have returns that vary, sometimes significantly, from the overall securities market. Often, mid-capitalization companies and the industries in which they focus are still evolving and, as a result, they may be more sensitive to changing market conditions. In addition, mid-capitalization companies are typically less financially stable than larger, more established companies, and they may depend on a small number of essential personnel, making them more vulnerable to loss of personnel. Mid-capitalization companies also normally have less diverse product lines than large-capitalization companies and are more susceptible to adverse developments concerning their products. As such, mid-capitalization companies typically are more likely to be adversely affected than large-capitalization companies by changes in earnings results, business prospects, investor expectations or poor economic or market conditions.
Foreign and Emerging Markets Investment Risk. Investments in foreign securities involve risks that are beyond those associated with investments in U.S. securities, and investments in securities of issuers in emerging market countries involve risks not often associated with investments in securities of issuers in developed countries. Fluctuations in the value of the U.S. dollar relative to the values of other currencies may adversely affect investments in foreign and emerging market securities. Foreign and emerging markets may have greater concentration in a few industries, resulting in greater vulnerability to regional and global trade conditions. Emerging market countries may also have higher rates of inflation or deflation and more rapid and extreme fluctuations in inflation rates and greater sensitivity to interest rate changes. Issuers in emerging markets also may have relatively low market liquidity, decreased publicly available and less reliable information, and inconsistent and less stringent regulatory, disclosure, accounting, auditing and financial reporting requirements and standards of practice, including recordkeeping standards, comparable to those applicable to issuers in more developed markets. As a result, the nature and quality of such information may vary. The ability to conduct adequate due diligence in emerging markets may be limited. In addition, certain emerging market countries may impose material limitations on Public Company Accounting Oversight Board (“PCAOB”) inspection, investigation and enforcement capabilities which can hinder the PCAOB’s ability to engage in independent oversight or inspection of accounting firms located in or operating in certain emerging markets. There is no guarantee that the quality of financial reporting or the audits conducted by audit firms of emerging market issuers meet PCAOB standards.
Foreign and emerging market securities also are subject to the risks of expropriation, nationalization or other adverse political or economic developments and the difficulty of enforcing obligations in other countries. Investments in foreign and emerging market securities also may be subject to dividend withholding or confiscatory taxes, currency blockage and/or transfer restrictions and higher transactional costs. Emerging markets are subject to greater market volatility, lower trading volume, political, social and
economic instability, uncertainty regarding the existence of trading markets and more governmental limitations on foreign investment than more developed markets. In addition, securities in emerging markets may be
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subject to greater price fluctuations than securities in more developed markets. Securities law in many emerging market countries is relatively new and unsettled. Therefore, laws regarding foreign investment in emerging market securities, securities regulation, title to securities, and shareholder rights may change quickly and unpredictably. The ability to bring and enforce actions in emerging market countries, or to obtain information needed to pursue or enforce such actions, may be limited, and shareholder claims may be difficult or impossible to pursue. In addition, the taxation systems at the federal, regional and local levels in emerging market countries may be less transparent and inconsistently enforced, and subject to sudden change. Emerging market countries may have a higher degree of corruption and fraud than developed market countries, as well as counterparties and financial institutions with less financial sophistication, creditworthiness and/or resources. Investments in emerging market securities may also be subject to delays in settlement procedures, unexpected market closures, and lack of timely information. Lack of relevant data and reliable public information, including financial information, about securities in emerging markets may contribute to incorrect weightings and data and computational errors when the Index Provider selects securities for inclusion in the Underlying Index or rebalances the Underlying Index.
Each country has different laws specific to that country that impact investments, which may increase the risks to which investors are subject. Country-specific rules or legislation addressing investment-related transactions may inhibit or prevent certain transactions from transpiring in a particular country.
From time to time, certain companies in which the Fund invests may operate in, or have dealings with, countries subject to sanctions or embargoes imposed by the U.S. government and the United Nations and/or in countries the U.S. government identified as state sponsors of terrorism. One or more of these companies may be subject to constraints under U.S. law or regulations that could negatively affect the company’s performance.
Furthermore, foreign exchanges and broker-dealers generally are subject to less government and exchange scrutiny and regulation than their U.S. counterparts. Differences in clearance and settlement procedures in foreign markets may cause delays in settlement of the Fund's trades effected in those markets and could result in losses to the Fund due to subsequent declines in the value of the securities subject to the trades. Depositary receipts also involve substantially identical risks to those associated with investments in foreign securities. Additionally, the issuers of certain depositary receipts, particularly unsponsored or unregistered depositary receipts, have no obligation to distribute shareholder communications to the holders of such receipts or to pass through to them any voting rights with respect to the deposited securities.
ESG Investing Strategy Risk. The stocks of companies with favorable ESG attributes may underperform the stock market as a whole. As a result, the Fund may underperform other funds that do not screen companies based on ESG attributes. The criteria used to select companies for investment may result in the Fund investing in securities, industries or sectors that underperform the market as a whole or underperform other funds screened for ESG standards.
Industry Concentration Risk. In following its methodology, the Underlying Index from time to time may be concentrated to a significant degree in securities of issuers operating in a single industry or industry group. To the extent that the Underlying Index concentrates in the securities of issuers in a particular industry or industry group, the Fund will also concentrate its investments to approximately the same extent. By concentrating its investments in an industry or industry group, the Fund may face more risks than if it were diversified broadly over numerous industries or industry groups. Such industry-based risks, any of which may adversely affect the companies in which the Fund invests, may include, but are not limited to, the following: general economic conditions or cyclical market patterns that could negatively affect supply and demand in a particular industry, competition for resources, adverse labor relations, political or world events, obsolescence of technologies, and increased competition or new
product introductions that may affect the profitability or viability of companies in an industry. In addition, at times, such industry or industry group may be out of favor and underperform other industries or the market as a whole. Information about the Fund’s exposure to a particular sector, industry, industry group or sub-industry (as applicable) will be available in the Fund’s Annual and Semi-Annual Reports to Shareholders on the Fund’s website, and on required forms filed with the SEC.
Information Technology Sector Risk. Companies in the information technology sector may be adversely affected by the failure to obtain, or delays in obtaining, financing or regulatory approval, intense competition, both domestically and internationally, product compatibility, consumer preferences, corporate capital expenditure, rapid obsolescence and competition for the services of qualified personnel. Companies in the information technology sector also face competition or potential competition with numerous alternative technologies. In addition, the highly competitive information technology sector may cause the prices for these products and services to decline in the future.
Information technology companies may have limited product lines, markets, financial resources or personnel. Companies in the information technology sector are heavily dependent on patent and intellectual property rights. The loss or impairment of these rights may adversely affect the profitability of these companies.
The information technology sector is subject to rapid and significant changes in technology that are evidenced by the increasing pace of technological upgrades, evolving industry standards, ongoing improvements in the capacity and quality of digital technology, shorter development cycles for new products and enhancements, developments in emerging wireless transmission technologies and changes in customer requirements and preferences. The success of sector participants depends substantially on the timely and successful introduction of new products.
Non-Diversified Fund Risk. Because the Fund is considered non-diversified and can invest a greater portion of its assets in securities of individual issuers than a diversified fund, changes in the market value of a single investment could cause greater fluctuations in Share price than would occur in a diversified fund. This may increase the Fund’s volatility and cause the performance of a relatively small number of issuers to have a greater impact on the Fund’s performance.
ADR and GDR Risk. ADRs are certificates that evidence ownership of shares of a foreign issuer and are alternatives to purchasing the underlying foreign securities directly in their national markets and currencies. GDRs are certificates issued by an international bank that generally are traded and denominated in the currencies of countries other than the home country of the issuer of the underlying shares. ADRs and GDRs may be subject to certain of the risks associated with direct investments in the securities of foreign companies, such as currency, political, economic and market risks, because their values depend on the performance of the non-dollar denominated underlying foreign securities. Moreover, ADRs and GDRs may not track the price of the underlying foreign securities on which they are based, and their value may change materially at times when U.S. markets are not open for trading.
Certain countries may limit the ability to convert ADRs into the underlying foreign securities and vice versa, which may cause the securities of the foreign company to trade at a discount or premium to the market price of the related ADR. ADRs may be purchased through “sponsored” or “unsponsored” facilities. A sponsored facility is established jointly by a depositary and the issuer of the underlying security. A depositary may establish an unsponsored facility without participation by the issuer of the deposited security. Unsponsored receipts may involve higher expenses and may be less liquid. Holders of unsponsored ADRs generally bear all the costs of such facilities, and the depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from
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the issuer of the deposited security or to pass through voting rights to the holders of such receipts in respect of the deposited securities.
GDRs can involve currency risk since, unlike ADRs, they may not be U.S. dollar-denominated. Because the Fund’s NAV is determined in U.S. dollars, the Fund’s NAV could decline if the currency of the non-U.S. market in which the Fund invests depreciates against the U.S. dollar, even if the value of the Fund’s holdings, measured in the foreign currency, increases.
Currency Risk. Because the Fund’s NAV is determined in U.S. dollars, the Fund’s NAV could decline if the currency of the non-U.S. market in which the Fund invests depreciates against the U.S. dollar, even if the value of the Fund’s holdings, measured in the foreign currency, increases. Generally, an increase in the value of the U.S. dollar against a foreign currency will reduce the value of a security denominated in that foreign currency, thereby decreasing the Fund’s overall NAV. In addition, fluctuations in the exchange values of currencies could affect the economy or particular business operations of companies in a geographic region in which the Fund invests, causing an adverse impact on the Fund. As a result, investors have the potential for losses regardless of the length of time they intend to hold Shares.
When the Fund receives income in foreign currencies, the Fund will compute and distribute its income in U.S. dollars, and the computation of income will be made on the date that the Fund earns the income at the foreign exchange rates in effect on that date. Therefore, if the values of the relevant foreign currencies fall relative to the U.S. dollar between the earning of the income and the time at which the Fund converts the foreign currencies to U.S. dollars, the Fund may be required to liquidate securities in order to make distributions if it has insufficient cash in U.S. dollars to meet distribution requirements.
Furthermore, the Fund may incur costs in connection with conversions between U.S. dollars and foreign currencies. Foreign exchange dealers realize a profit based on the difference between the prices at which they are buying and selling various currencies. Thus, a dealer normally will offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund desire immediately to resell that currency to the dealer. The Fund will conduct its foreign currency exchange transactions either on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market, or through entering into forwards, futures or options contracts to purchase or sell foreign currencies.
Geographic Concentration Risk. Funds that are less diversified across geographic regions or countries are generally riskier than more geographically diversified funds. The economies and financial markets of certain regions can be interdependent and may all decline at the same time. A natural or other disaster could occur in a country or geographic region in which the Fund invests, which could affect the economy or particular business operations of companies in that specific country or geographic region and adversely impact the Fund's investments in the affected region. The Schedule of Investments included in the Fund’s annual and semi-annual reports identifies the countries in which the Fund had invested and the level of investment, as of the date of the reports.
Valuation Risk. Financial information related to securities of non-U.S. issuers may be less reliable than information related to securities of U.S. issuers, which may make it difficult to obtain a current price for a non-U.S. security held by the Fund. In certain circumstances, market quotations may not be readily available for some securities, and those securities may be fair valued. The value established for a security through fair valuation may be different from what would be produced if the security had been valued using market quotations. Fund securities that are valued using techniques other than market quotations, including “fair valued” securities, may be subject to greater fluctuations in their value from one day to the next than would be the case if market quotations were used. In addition, there is no assurance that the Fund could sell a portfolio security for the value established for it at
any time, and it is possible that the Fund would incur a loss because a security is sold at a discount to its established value.
Valuation Time Risk. Because foreign exchanges may be open on days when the Fund does not price its Shares, the value of the non-U.S. securities in the Fund’s portfolio may change on days when you will not be able to purchase or sell your Shares. As a result, trading spreads and the resulting premium or discount on the Shares may widen, and, therefore, increase the difference between the market price of the Shares and the NAV of such Shares.
Issuer-Specific Changes Risk. The performance of the Fund depends on the performance of individual securities to which the Fund has exposure. The value of an individual security or particular type of security may be more volatile than the market as a whole and may perform worse than the market as a whole, causing the value of its securities to decline. Poor performance may be caused by poor management decisions, competitive pressures, changes in technology, expiration of patent protection, disruptions in supply, labor problems or shortages, corporate restructurings, fraudulent disclosures or other factors. Issuers may, in times of distress or at their own discretion, decide to reduce or eliminate dividends, which may also cause their stock prices to decline.
Non-Correlation Risk. The Fund’s returns may not match the returns of the Underlying Index (that is, it may experience tracking error) for a number of reasons. For example, the Fund incurs operating expenses not applicable to the Underlying Index and incurs costs in buying and selling securities, especially when rebalancing the Fund’s securities holdings to reflect changes in the composition of the Underlying Index. To the extent that the Fund has recently commenced operations and/or otherwise has a relatively small amount of assets, such transaction costs could have a proportionally greater impact on the Fund. Additionally, if the Fund uses a sampling methodology, it may result in returns for the Fund that are not as well-correlated with the return of the Underlying Index as would be the case if the Fund purchased all of the securities in the Underlying Index in the proportions represented in the Underlying Index.
The performance of the Fund and the Underlying Index may vary due to asset valuation differences and differences between the Fund’s portfolio and the Underlying Index resulting from legal restrictions, costs or liquidity constraints. Additionally, if the Fund issues or redeems Creation Units principally for cash, it will incur higher costs in buying or selling securities than if it issued and redeemed Creation Units principally in-kind, which may contribute to tracking error. The Fund may fair value certain of the securities it holds. To the extent the Fund calculates its NAV based on fair value prices, the Fund’s ability to track the Underlying Index may be adversely affected. Since the Underlying Index is not subject to the tax diversification requirements to which the Fund must adhere, the Fund may be required to deviate its investments from the securities contained in, and relative weightings of, the Underlying Index. The Fund may not invest in certain securities included in the Underlying Index due to liquidity constraints. Liquidity constraints also may delay the Fund’s purchase or sale of securities included in the Underlying Index. For tax efficiency purposes, the Fund may sell certain securities to realize losses, causing it to deviate from the Underlying Index.
The Fund generally attempts to remain fully invested in the constituents of the Underlying Index. However, at times, the Adviser may not fully invest the Fund’s assets in constituents of the Underlying Index, such as during times of increased market volatility or other unusual or unexpected circumstances, during periods of Underlying Index rebalances, or due to cash flows into the Fund, the need to retain a reserve of cash to meet redemptions and expenses, or low Fund assets.
The investment activities of one or more of the Adviser’s affiliates, including other subsidiaries of the Adviser’s parent company, Invesco Ltd., for their proprietary accounts and for client accounts also may adversely impact the Fund’s ability to track the Underlying Index. For example, in regulated industries, certain emerging or international markets and under corporate and regulatory ownership definitions, there may be limits on the aggregate amount of investment by affiliated investors that may not be exceeded, or that may not be exceeded without the grant of a license or
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other regulatory or corporate consent, or, if exceeded, may cause the Adviser, the Fund or other client accounts to suffer disadvantages or business restrictions. As a result, the Fund may be restricted in its ability to acquire particular securities due to positions held by the Fund and the Adviser’s affiliates.
Authorized Participant Concentration Risk. Only APs may engage in creation or redemption transactions directly with the Fund. The Fund has a limited number of institutions that may act as APs, and such APs have no obligation to submit creation or redemption orders. Consequently, there is no assurance that APs will establish or maintain an active trading market for the Shares. The risk may be heightened to the extent that securities held by the Fund are traded outside a collateralized settlement system. In that case, APs may be required to post collateral on certain trades on an agency basis (i.e., on behalf of other market participants), which only a limited number of APs may be able to do. In addition, to the extent that APs exit the business or are unable to proceed with creation and/or redemption orders with respect to the Fund and no other AP is able to step forward to create or redeem Creation Units, this may result in a significantly diminished trading market for Shares, and Shares may be more likely to trade at a premium or discount to NAV and to face trading halts and/or delisting. Investments in non-U.S. securities, which may have lower trading volumes or could experience extended market closures or trading halts, may increase the risk that APs may not be able to effectively create or redeem Creation Units or the risk that the Shares may be halted and/or delisted.
Market Trading Risk. The Fund faces numerous market trading risks, including losses from trading in secondary markets, periods of high volatility and disruption in the creation/redemption process of the Fund. Although Shares are listed for trading on a securities exchange, there can be no assurance that an active trading market for Shares will develop or be maintained by market makers or APs, that Shares will continue to trade on any such exchange or that Shares will continue to meet the requirements for listing on an exchange. Any of these factors, among others, may lead to the Shares trading at a premium or discount to the Fund’s NAV. As a result, an investor could lose money over short or long periods. Further, the Fund may experience low trading volume and wide bid/ask spreads. Bid/ask spreads vary over time based on trading volume and market liquidity (including for the underlying securities held by the Fund), and are generally lower if Shares have more trading volume and market liquidity and higher if Shares have little trading volume and market liquidity.
In stressed market conditions, the market for Shares may become less liquid in response to deteriorating liquidity in the markets for the Fund’s portfolio holdings, which may cause a variance in the market price of Shares and their underlying NAV. In addition, an exchange or market may issue trading halts on specific securities or financial instruments. As a result, the ability to trade certain securities or financial instruments may be restricted, which may disrupt the Fund’s creation/redemption process, potentially affect the price at which Shares trade in the secondary market, and/or result in the Fund being unable to trade certain securities or financial instruments at all. In these circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Operational Risk. The Fund is exposed to operational risks arising from a number of factors, including, but not limited to, human error, processing and communication errors, errors of the Fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. The Fund and the Adviser seek to reduce these operational risks through controls and procedures. However, these measures do not address every possible risk and may be inadequate to address these risks.
Shares May Trade at Prices Different than NAV. Shares trade on a stock exchange at prices at, above or below the Fund’s most recent NAV. The Fund’s NAV is calculated at the end of each business day and fluctuates with changes in the market value of the Fund’s holdings. The trading price of the Shares fluctuates continuously throughout trading hours on the
exchange, based on both the relative market supply of, and demand for, the Shares and the underlying value of the Fund’s portfolio holdings. As a result, the trading prices of the Shares may deviate from the Fund’s NAV. ANY OF THESE FACTORS, AMONG OTHERS, MAY LEAD TO THE SHARES TRADING AT A PREMIUM OR DISCOUNT TO NAV. The Adviser cannot predict whether the Shares will trade below, at or above the Fund’s NAV. Exchange prices are not expected to correlate exactly with the Fund’s NAV due to timing reasons, supply and demand imbalances and other factors. In addition, disruptions to creations and redemptions, including disruptions at market makers, APs, or other market participants, or periods of significant market volatility or stress, may result in trading prices for the Shares that differ significantly from the value of the Fund’s underlying holdings, with the result that investors may pay significantly more or receive significantly less than the underlying value of the Shares bought or sold. This can be reflected as a spread between the bid and ask prices for the Fund quoted during the day or a premium or discount in the closing price from the Fund’s NAV. Additionally, APs may be less willing to create or redeem the Shares if there is a lack of an active market for such Shares or the Fund’s underlying investments, which may contribute to the Shares trading at a premium or discount.
Non-Principal Investment Strategies
The Fund, after investing at least 90% of its total assets in securities that comprise the Underlying Index, may invest its remaining assets in securities (including other funds) not included in the Underlying Index, and in money market instruments, including repurchase agreements and other funds, including affiliated funds, that invest exclusively in money market instruments (subject to applicable limitations under the 1940 Act, or exemptions therefrom), convertible securities, structured notes (notes on which the amount of principal repayment and interest payments is based on the movement of one or more specified factors, such as the movement of a particular security or securities index) and in futures contracts, options, options on futures contracts or other derivatives. The Fund may use futures contracts, options, options on futures contracts, convertible securities and structured notes to seek performance that corresponds to the Underlying Index, and to manage cash flows. The Adviser anticipates that it may take approximately two business days (a business day is any day that the New York Stock Exchange (“NYSE”) is open) for additions to and deletions from the Underlying Index to fully settle in the portfolio composition of the Fund.
The Fund’s investment objective is a non-fundamental policy that the Board of Trustees (the “Board”) of the Invesco Exchange-Traded Fund Trust II (the “Trust”) may change without shareholder approval upon 60 days’ prior written notice to shareholders.
The fundamental and non-fundamental policies of the Fund are set forth in the Fund’s Statement of Additional Information (“SAI”) under the section “Investment Restrictions.”
Borrowing Money
The Fund may borrow money up to the limits set forth in the Fund’s SAI under the section “Investment Restrictions.”
Securities Lending
The Fund may lend its portfolio securities to brokers, dealers, and other financial institutions. In connection with such loans, the Fund receives liquid collateral equal to at least 102% (105% for international securities) of the value of the loaned portfolio securities. This collateral is marked-to-market on a daily basis.
Additional Risks of Investing in the Fund
The Fund may also be subject to certain other non-principal risks associated with its investments and investment strategies. The following provides additional non-principal risk information regarding investing in the Fund.
Cash Transaction Risk. The Fund generally expects to make in-kind redemptions to avoid being taxed at the fund level on gains on the distributed portfolio securities. However, from time to time, the Fund reserves the right to effect redemptions for cash, rather than in-kind. In
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such circumstances, the Fund may be required to sell portfolio securities to obtain the cash needed to distribute redemption proceeds. Therefore, the Fund may recognize a capital gain on these sales that might not have been incurred if the Fund had made a redemption in-kind. This may decrease the tax efficiency of the Fund compared to utilizing an in-kind redemption process.
Convertible Securities Risk. A convertible security generally is a preferred stock that may be converted within a specified period of time into common stock. Convertible securities nevertheless remain subject to the risks of both debt securities and equity securities. As with other equity securities, the value of a convertible security tends to increase as the price of the underlying stock goes up, and to decrease as the price of the underlying stock goes down. Declining common stock values therefore also may cause the value of the Fund’s investments to decline. Like a debt security, a convertible security provides a fixed-income stream and also tends to decrease in value when interest rates rise. Moreover, many convertible securities have credit ratings that are below investment grade and are subject to the same risks as lower-rated debt securities, which are considered to have more speculative characteristics and greater susceptibility to default or decline in market value than investment grade (or higher-rated) securities.
Cybersecurity Risk. With the increased use of technologies such as the Internet to conduct business, the Fund, like all companies, may be susceptible to operational, information security and related risks. Cybersecurity incidents involving the Fund and its service providers (including, without limitation, the Adviser, fund accountant, custodian, transfer agent and financial intermediaries) have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, impediments to trading, the inability of Fund shareholders to transact business, violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs, and/or additional compliance costs. Similar adverse consequences could result from cybersecurity incidents affecting issuers of securities in which the Fund invests, counterparties with which the Fund engages, governmental and other regulatory authorities, exchanges and other financial market operators, banks, brokers, dealers, insurance companies, other financial institutions and other parties. The Fund and its shareholders could be negatively impacted as a result.
Derivatives Risk. The Fund may invest in derivatives, such as futures contracts, options, and options on futures contracts, as applicable. Derivatives are financial instruments that derive their value from an underlying asset, such as a security, index or exchange rate. Their use is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. Derivatives may be riskier than other types of investments and may be more volatile, less tax efficient and less liquid than other securities.
Derivatives may be used to create synthetic exposure to an underlying asset or to hedge a portfolio risk. If the Fund uses derivatives to “hedge” a portfolio risk, the change in value of a derivative may not correlate as expected with the underlying asset being hedged, and it is possible that the hedge therefore may not succeed. In addition, given their complexity, derivatives may be difficult to value.
Derivatives are subject to a number of risks including credit risk, interest rate risk, and market risk. Credit risk refers to the possibility that a
counterparty will be unable and/or unwilling to perform under the agreement. Interest rate risk refers to fluctuations in the value of an asset resulting from changes in the general level of interest rates. Over-the-counter derivatives are also subject to counterparty risk (sometimes referred to as “default risk”), which is the risk that the other party to the contract will not fulfill its contractual obligations.
Derivatives may be especially sensitive to changes in economic and market conditions, and their use may give rise to a form of leverage. Leverage may cause the portfolio of the Fund to be more volatile than if the portfolio had not been leveraged because leverage can exaggerate the
effect of any increase or decrease in the value of securities and other instruments held by the Fund. For some derivatives, such leverage could result in losses that exceed the original amount invested in the derivative. The Fund’s use of derivatives may be limited by the requirements for taxation of the Fund as a regulated investment company, as well as by regulatory changes.
Index Provider Risk. The Fund seeks to track the investment results, before fees and expenses, of the Underlying Index, as published by the Index Provider. There is no assurance that the Index Provider will compile the Underlying Index accurately, or that the Underlying Index will be determined, composed or calculated accurately. While the Index Provider gives descriptions of what the Underlying Index is designed to achieve, the Index Provider generally does not provide any warranty or accept any liability in relation to the quality, accuracy or completeness of data in the Underlying Index, and it generally does not guarantee that the Underlying Index will be in line with its methodology. Errors made by the Index Provider with respect to the quality, accuracy and completeness of the data within the Underlying Index may occur from time to time and may not be identified and corrected by the Index Provider for a period of time, if at all. Therefore, gains, losses or
costs associated with Index Provider errors will generally be borne by the Fund and its shareholders.
Index Rebalancing Risk. Pursuant to the methodology that the Index Provider uses to calculate and maintain the Underlying Index, a security may be removed from the Underlying Index in the event that it does not comply with the eligibility requirements of the Underlying Index. As a result, the Fund may be forced to sell securities at inopportune times or for prices other than at current market values or may elect not to sell such securities on the day that they are removed from the Underlying Index, due to market conditions or otherwise. Due to these factors, the variation between the Fund’s annual return and the return of the Underlying Index may increase significantly.
Apart from scheduled rebalances, the Index Provider may carry out additional ad hoc rebalances to the Underlying Index, for example, to correct an error in the selection of index constituents. When the Fund in turn rebalances its portfolio, any transaction costs and market exposure arising from such portfolio rebalancing will be borne by the Fund and its shareholders. Unscheduled rebalances also expose the Fund to additional tracking error risk. Therefore, errors and additional ad hoc rebalances carried out by the Index Provider may increase the Fund’s costs and market exposure.
Large Shareholder Risk. Certain shareholders, including a third party investor, the Adviser or an affiliate of the Adviser, an AP, a lead market maker, or another entity, may from time to time own a substantial amount of Shares or may invest in the Fund and hold its investment for a limited period of time solely to facilitate the commencement of the Fund or to facilitate the Fund achieving a specified size or scale. There can be no assurance that any large shareholder would not redeem its investment. Dispositions of a large number of Shares by these shareholders may adversely affect the Fund’s liquidity and net assets to the extent such transactions are executed directly with the Fund in the form of redemptions through an AP, rather than executed in the secondary market. These redemptions may also force the Fund to sell portfolio securities when it might not otherwise do so, which may negatively impact the Fund’s NAV and increase the Fund’s brokerage costs. Further, such sales may accelerate the realization of taxable income and/or gains to shareholders, or the Fund may be required to sell its more liquid Fund investments to meet a large redemption, in which case the Fund’s remaining assets may be less liquid, more volatile, and more difficult to price. To the extent the Fund permits cash purchases, large purchases of Shares may adversely affect the Fund’s performance to the extent that the Fund is delayed in investing new cash and is required to maintain a larger cash position than it ordinarily would. To the extent these large shareholders transact in shares on the secondary market, such transactions may account for a large percentage of the trading volume on the Fund’s exchange and may, therefore, have a material upward or downward effect on the market
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price of the Shares. To the extent the Fund permits redemptions in cash, the Fund may hold a relatively large proportion of its assets in cash in anticipation of large redemptions, diluting its investment returns.
Leverage Risk. To the extent that the Fund borrows money, it may be leveraged. Leveraging generally exaggerates the effect on NAV of any increase or decrease in the market value of the Fund’s portfolio securities. Borrowing creates interest expenses and other expenses (e.g., commitment fees) for the Fund that affect the Fund’s performance. Interest expenses are excluded from the Fund expenses borne by the Adviser under the unitary management fee.
Licensing, Custody and Settlement Risk. Approval of governmental authorities may be required prior to investing in the securities of companies based in certain foreign countries. Delays in obtaining such an approval would delay investments in the particular country, and, as a consequence, the Fund may not be able to invest in all of the securities included in the Underlying Index while an approval is pending. Rules adopted under the 1940 Act permit the Fund to maintain its foreign securities and cash in the custody of certain eligible non-U.S. banks and securities depositories. Certain banks in foreign countries that are eligible foreign sub-custodians may be recently organized or otherwise lack extensive operating experience. In addition, in certain countries there may be legal restrictions or limitations on the ability of the Fund to recover assets
held in custody by a foreign sub-custodian in the event of the bankruptcy of the sub-custodian. Settlement systems in emerging markets may be less well organized than in developed markets. Thus, there may be a risk that settlement may be delayed and that cash or securities of the Fund may be in jeopardy because of failures of or defects in the systems. Under the laws of certain countries in which the Fund invests, the Fund may be required to release local shares before receiving cash payment or may be required to make cash payment prior to receiving local shares.
Money Market Funds Risk. Money market funds are subject to management fees and other expenses, and the Fund's investments in money market funds will cause it to bear proportionately the costs incurred by the money market funds' operations while simultaneously paying its own management fees and expenses. An investment in a money market fund is not a bank account and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency; it is possible to lose money by investing in a money market fund. To the extent that the Fund invests in money market funds, the Fund will be subject to the same risks that investors experience when investing in money market funds. These risks may include the impact of significant fluctuations in assets as a result of the cash sweep program or purchase and redemption activity in those funds.
Money market funds are open-end registered investment companies that historically have traded at a stable $1.00 per share price. However, money market funds that do not meet the definition of a “retail money market fund” or “government money market fund” under the 1940 Act are required to transact at a floating NAV per share (i.e., in a manner similar to how all other non-money market mutual funds transact), instead of at a $1.00 stable share price. Money market funds may also impose liquidity fees in certain circumstances, including times of market stress or heavy redemptions. If the Fund invested in a money market fund with a floating NAV, the impact on the trading and value of the money market instrument may negatively affect the Fund's return potential.
Natural Disaster/Epidemic Risk. Natural or environmental disasters, such as earthquakes, fires, floods, hurricanes, tsunamis and other severe weather-related phenomena generally, and widespread disease, including pandemics and epidemics, have been and may be highly disruptive to economies and markets, adversely impacting individual companies, sectors, industries, markets, currencies, interest and inflation rates, credit ratings, investor sentiment, and other factors affecting the value of the Fund’s investments. Additionally, if a sector or sectors in which the Underlying Index is concentrated is negatively impacted to a greater extent by such events, the Fund may experience heightened volatility. Given the
increasing interdependence among global economies and markets, conditions in one country, market, or region are increasingly likely to adversely affect markets, issuers, and/or foreign exchange rates in other countries, including the U.S. Any such events could have a significant adverse impact on the value of the Fund’s investments.
Repurchase Agreements Risk. Repurchase agreements are agreements pursuant to which the Fund acquires securities from a third party with the understanding that the seller will repurchase them at a fixed price on an agreed date. Repurchase agreements may be characterized as loans secured by the underlying securities. If the seller of securities under a repurchase agreement defaults on its obligation to repurchase the underlying securities, as a result of its bankruptcy or otherwise, the Fund will seek to dispose of such securities, which could involve costs or delays. If the seller becomes insolvent and subject to liquidation or reorganization under applicable bankruptcy or other laws, the Fund’s ability to dispose of the underlying securities may be restricted. If the seller fails to repurchase the securities, the Fund may suffer a loss to the extent proceeds from the sale of the underlying securities are less than the repurchase prices.
Risks of Futures and Options. The Fund may enter into U.S. futures contracts, options and options on futures contracts to simulate full investment in the Underlying Index, or to manage cash flows. The Fund will not use futures or options for speculative purposes. The Fund intends to use futures and options contracts to limit its risk exposure to levels comparable to direct investment in securities.
An option gives a holder the right to buy or sell a specific security or instrument, including a futures contract, at a specified price within a specified period of time. An option on a futures contract gives the purchaser the right, in return for the premium paid, to assume a position in the underlying futures contract at a specified price at any time prior to the expiration date of the option. Exchanges can limit the number of futures or options positions that can be held or controlled by the Fund or the investment adviser, thus limiting the ability to implement the Fund’s strategies. Options are subject to correlation risk, and the successful use of options depends on the investment adviser’s ability to predict correctly future price fluctuations and the degree of correlation between the markets for options and the underlying instruments. Options are also particularly subject to leverage risk and can be subject to liquidity risk. Because option premiums paid or received by the Fund are small in relation to the market value of the investments underlying the options, the Fund is exposed to the risk that buying and selling options can be more speculative than investing directly in securities.
Futures contracts are typically exchange-traded contracts that provide for the future delivery of a specified amount of a specific instrument at a specified future price and date, or for cash settlement (payment of the gain or loss on the contract). Futures contracts are subject to the risk of imperfect correlation between movements in the price of the instruments and the price of the underlying securities. Because futures contracts project price levels in the future, market circumstances may cause a discrepancy between the price of an index future and the movement in the Underlying Index. In the event of adverse price movements, the Fund would remain required to make daily cash payments to maintain its required margin. There is no assurance that a liquid secondary market will exist for any particular futures contract at any particular time. Futures markets are highly volatile and the use of futures may increase the volatility of the Fund’s NAV. Futures are also subject to leverage risk and liquidity risk. The risk of loss in trading
futures contracts potentially is unlimited.
Securities Lending Risk. Securities lending involves a risk of loss because the borrower may fail to return the securities in a timely manner or at all. If the Fund lends its securities and is unable to recover the securities loaned, it may sell the collateral and purchase a replacement security in the market. Lending securities entails a risk of loss to the Fund if and to the extent that the market value of the loaned securities increases and the collateral is not increased accordingly. Any cash received as collateral for loaned securities will be invested in an affiliated money market fund. This
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investment is subject to market appreciation or depreciation and the Fund will bear any loss on the investment of its cash collateral.
Structured Notes Risk. Investments in structured notes involve risks including interest rate risk, credit risk and market risk. Interest rate risk refers to fluctuations in the value of a note resulting from changes in the general level of interest rates. When the general level of interest rates goes up, the prices of notes tend to go down. Credit risk refers to the possibility that the issuer of a note will be unable and/or unwilling to make timely interest payments and/or repay the principal on its debt. Depending on the factors used, changes in interest rates and movement of such factors may cause significant price fluctuations. Structured notes may be less liquid than other types of securities and more volatile than the reference factor underlying the note. This means that the Fund may lose money if the issuer of the note defaults, as the Fund may not be able to readily close out its investment in such notes without incurring losses.
Trading Issues Risk. Investors buying or selling Shares in the secondary market may pay brokerage commissions or other charges, which may be a significant proportional cost for investors seeking to buy or sell relatively small amounts of Shares. Moreover, trading in Shares on the NYSE Arca, Inc. (the “Exchange”) may be halted due to market conditions or for reasons that, in the view of the Exchange, make trading in Shares inadvisable. In addition, trading in Shares on the Exchange is subject to trading halts caused by extraordinary market volatility pursuant to the Exchange’s “circuit breaker” rules. There can be no assurance that the requirements of the Exchange necessary to maintain the listing of the Fund will continue to be met or will remain unchanged. Foreign exchanges may be open on days when Shares are not priced, and therefore, if the Fund holds securities that are primarily listed on such exchanges, the value of such securities in the Fund’s portfolio may change on days when shareholders will not be able to purchase or sell Shares.
Tax Structure of ETFs
Unlike interests in conventional mutual funds, which typically are bought and sold only at closing NAVs, Shares are traded throughout the day in the secondary market on a national securities exchange, and are created and redeemed principally in-kind in Creation Units at each day’s next calculated NAV. These in-kind arrangements are designed to protect shareholders from the adverse effects on the Fund’s portfolio that could arise from frequent cash creation and redemption transactions. In a conventional mutual fund, redemptions can have an adverse tax impact on taxable shareholders because the mutual fund may need to sell portfolio securities to obtain cash to meet such redemptions. These sales may generate taxable gains that must be distributed to the shareholders of the mutual fund, whereas the Shares’ in-kind redemption mechanism generally will not lead to such taxable events for the Fund or its shareholders.
The Fund may recognize gains as a result of rebalancing its securities holdings to reflect changes in the securities included in the Underlying Index. The Fund also may be required to distribute any such gains to its shareholders to avoid adverse federal income tax consequences. For information concerning the tax consequences of distributions, see the section entitled “Dividends, Other Distributions and Taxes” in this prospectus.
Portfolio Holdings
A description of the Trust's policies and procedures with respect to the disclosure of the Fund’s portfolio holdings is available in the Fund’s SAI, which is available at www.invesco.com/ETFs.
Management of the Fund
Invesco Capital Management LLC is a registered investment adviser with its offices at 3500 Lacey Road, Suite 700, Downers Grove, IL 60515. Invesco Capital Management LLC serves as the investment adviser to the Invesco Actively Managed Exchange-Traded Commodity Fund Trust, Invesco Actively Managed Exchange-Traded Fund Trust, Invesco Exchange-Traded Fund Trust, Invesco Exchange-Traded Fund Trust II, Invesco Exchange-Traded Self-Indexed Fund Trust and Invesco India Exchange-Traded Fund Trust, a family of ETFs, with combined assets under management of $241.2 billion as of April 30, 2024.
As the Fund’s investment adviser, the Adviser has overall responsibility for selecting and continuously monitoring the Fund’s investments, managing the Fund’s business affairs, and providing certain clerical, bookkeeping and other administrative services for the Trust.
Portfolio Managers
The Adviser uses a team of portfolio managers, investment strategists and other investment specialists in managing the Fund. This team approach brings together many disciplines and leverages the Adviser's extensive resources. In this regard, Peter Hubbard, Michael Jeanette, Pratik Doshi, CFA and Tony Seisser (the “Portfolio Managers”) are jointly and primarily responsible for the day-to-day management of the Fund.
Each Portfolio Manager is responsible for various functions related to portfolio management, including investing cash flows, coordinating with other team members to focus on certain asset classes, implementing investment strategies and researching and reviewing investment strategies.
Each Portfolio Manager has limitations on their authority for risk management and compliance purposes that the Adviser believes to be appropriate.
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Peter Hubbard, Head of Equities and Director of Portfolio Management of the Adviser and Vice President of the Trust, has been responsible for the management of the Fund since June 2024. He has been responsible for the management of certain funds in the Invesco family of ETFs since June 2007 and has been associated with the Adviser since 2005.
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Michael Jeanette, Head of North America Equities and Senior Portfolio Manager of the Adviser, has been responsible for the management of the Fund since June 2024. He has been responsible for the management of certain funds in the Invesco family of ETFs since August 2008 and has been associated with the Adviser since 2008.
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Pratik Doshi, CFA, Senior Portfolio Manager of the Adviser, has been responsible for the management of the Fund since June 2024. He has been responsible for the management of certain funds in the Invesco family of ETFs since October 2019 and has been associated with the Adviser since 2018.
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Tony Seisser, Senior Portfolio Manager of the Adviser, has been responsible for the management of the Fund since June 2024. He has been responsible for the management of certain funds in the Invesco family of ETFs since August 2014 and has been associated with the Adviser since 2013.
The Fund's SAI provides additional information about the Portfolio Managers’ compensation structure, other accounts that the Portfolio Managers manage and the Portfolio Managers' ownership of Shares.
Advisory Fees
Pursuant to an investment advisory agreement between the Adviser and the Trust (the “Investment Advisory Agreement”), the Fund pays the Adviser an annual unitary management fee equal to 0.10% of its average daily net assets (the “Advisory Fee”).
Out of the Fund's unitary management fee, the Adviser pays substantially all expenses of the Fund, including the cost of transfer agency, custody, fund administration, legal, audit and other services, except for distribution fees, if any, brokerage expenses, taxes, interest, Acquired Fund Fees and Expenses, if any, litigation expenses, and other extraordinary
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expenses, including proxy expenses (except for such proxies related to: (i) changes to the Investment Advisory Agreement, (ii) the election of any Board member who is an “interested person” of the Trust, or (iii) any other matters that directly benefit the Adviser).
The Fund may invest in money market funds that are managed by affiliates of the Adviser and other funds (including ETFs) managed by the Adviser or affiliates of the Adviser (collectively, “Underlying Affiliated Investments”). The indirect portion of the advisory fees that the Fund incurs through such Underlying Affiliated Investments is in addition to the Advisory Fee payable to the Adviser by the Fund. Therefore, the Adviser has agreed to waive the Advisory Fee payable by the Fund in an amount equal to the lesser of: (i) 100% of the net advisory fees earned by the Adviser or an affiliate of the Adviser that are attributable to the Fund’s Underlying Affiliated Investments or (ii) the Advisory Fee available to be waived. This waiver does not apply to the Fund’s investment of cash collateral received for securities lending. This waiver is in place through at least August 31, 2026, and there is no guarantee that the Adviser will extend it past that date.
A discussion regarding the Board's basis for approving the Investment Advisory Agreement with respect to the Fund will be available on the Fund's website and filed on the Trust's Form N-CSR for the fiscal year ending October 31, 2024.
How to Buy and Sell Shares
The Fund issues or redeems its Shares at NAV per Share only in Creation Units or Creation Unit Aggregations.
Most investors buy and sell Shares in secondary market transactions through brokers. Shares are listed for trading on the secondary market on the Exchange. Shares can be bought and sold throughout the trading day like other publicly traded shares. There is no minimum investment. Although Shares generally are purchased and sold in “round lots” of 100 Shares, brokerage firms typically permit investors to purchase or sell Shares in smaller “odd lots,” at no per share price differential. When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges, and you may pay some or all of the spread between the bid and the offered price in the secondary market on each leg of a round trip (purchase and sale) transaction.
The Shares trade on the Exchange under the symbol “KLMT.”
Share prices are reported in dollars and cents per Share.
APs may acquire Shares directly from the Fund, and APs may tender their Shares for redemption directly to the Fund, at NAV per Share, only in Creation Units or Creation Unit Aggregations, and in accordance with the procedures described in the SAI.
Under normal circumstances, the Fund will pay out redemption proceeds to a redeeming AP within two days after the AP’s redemption request is received, in accordance with the process set forth in the Fund’s SAI and in the agreement between the AP and the Fund’s distributor. However, the Fund reserves the right, including under stressed market conditions, to take up to seven days after the receipt of a redemption request to pay an AP, all as permitted by the 1940 Act. If the Fund has foreign investments in a country where local market holiday(s) prevent the Fund from delivering such foreign investments to an AP in response to a redemption request, the Fund may take up to 15 days after the receipt of the redemption request to deliver such investments to the AP.
The Fund anticipates meeting redemption requests either by paying redemption proceeds to an AP primarily through in-kind redemptions or in cash. Cash used for redemptions will be raised from the sale of portfolio assets or may come from existing holdings of cash or cash equivalents. If the Fund holds Rule 144A securities, an AP that is not a “qualified institutional buyer,” as such term is defined under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”), will not be able to receive those Rule 144A securities.
The Fund may liquidate and terminate at any time without shareholder approval.
Book Entry
Shares are held in book-entry form, which means that no stock certificates are issued. The Depository Trust Company (“DTC”) or its nominee is the record owner of all outstanding Shares and is recognized as the record owner of all Shares for all purposes.
Investors owning Shares are beneficial owners as shown on the records of DTC or its participants. DTC serves as the securities depository for all Shares. Participants in DTC include securities brokers and dealers, banks, trust companies, clearing corporations and other institutions that directly or indirectly maintain a custodial relationship with DTC. As a beneficial owner of Shares, you are not entitled to receive physical delivery of stock certificates or to have Shares registered in your name, and you are not considered a registered owner of Shares. Therefore, to exercise any right as an owner of Shares, you must rely upon the procedures of DTC and its participants. These procedures are the same as those that apply to any other stocks that you hold in book entry or “street name” form.
Share Trading Prices
The trading prices of Shares on the Exchange may differ from the Fund’s daily NAV. Market forces of supply and demand, economic conditions and other factors may affect the trading prices of Shares.
Frequent Purchases and Redemptions of Shares
Shares may be purchased and redeemed directly from the Fund only in Creation Units by APs. The vast majority of trading in Shares occurs on the secondary market and does not involve the Fund directly. In-kind purchases and redemptions of Creation Units by APs and cash trades on the secondary market are unlikely to cause many of the harmful effects of frequent purchases or redemptions of the Shares. Cash purchases and/or redemptions of Creation Units, however, can result in increased tracking error, disruption of portfolio management, dilution to the Fund and increased transaction costs, which could negatively impact the Fund’s ability to achieve its investment objective, and may lead to the realization of capital gains. These consequences may increase as the frequency of cash purchases and redemptions of Creation Units by APs increases. However, direct trading by APs is critical to ensuring that Shares trade at or close to NAV.
To minimize these potential consequences of frequent purchases and redemptions of Shares, the Fund imposes transaction fees on purchases and redemptions of Creation Units to cover the custodial and other costs the Fund incurs in effecting trades. In addition, the Adviser monitors trades by APs for patterns of abusive trading and the Fund reserves the right not to accept orders from APs that the Adviser has determined may be disruptive to the management of the Fund, or otherwise are not in the best interests of the Fund. For these reasons, the Board has not adopted policies and procedures with respect to frequent purchases and redemptions of Shares.
Dividends, Other Distributions and Taxes
Dividends and Other Distributions
Generally, dividends from net investment income, if any, are declared and paid quarterly by the Fund. The Fund also intends to distribute its net realized capital gains, if any, to shareholders annually. Dividends and other distributions may be declared and paid more frequently to comply with the distribution requirements of Subchapter M of the Internal Revenue Code of
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1986, as amended (the “Code”), and to avoid a federal excise tax imposed on regulated investment companies.
Distributions in cash may be reinvested automatically in additional whole Shares only if the broker through whom you purchased Shares makes such option available.
Taxes
The Fund intends to qualify each year as a regulated investment company (“RIC”) and, as such, is not subject to entity-level tax on the income and gain it distributes. If you are a taxable investor, dividends and distributions you receive generally are taxable to you whether you reinvest distributions in additional Shares or take them in cash. Every year, you will be sent information showing the amount of dividends and distributions you received during the prior calendar year. In addition, investors in taxable accounts should be aware of the basic tax points listed below:
Fund Tax Basics
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The Fund earns income generally in the form of dividends or interest on its investments. This income, less expenses incurred in the operation of the Fund, constitutes the Fund’s net investment income from which dividends may be paid to shareholders. If you are a taxable investor, distributions of net investment income generally are taxable to you as ordinary income.
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Distributions of net short-term capital gains are taxable to you as ordinary income. A fund with a high portfolio turnover rate (a measure of how frequently assets within the fund are bought and sold) is more likely to generate short-term capital gains than a fund with a low portfolio turnover rate.
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Distributions of net long-term capital gains are taxable to you as long-term capital gains no matter how long you have owned your Shares.
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A portion of income dividends paid by the Fund may be reported as qualified dividend income eligible for taxation by individual shareholders at long-term capital gain rates, provided certain holding period requirements are met. These reduced rates generally are available for dividends derived from the Fund’s investment in stocks of domestic corporations and qualified foreign corporations. If the Fund invests primarily in debt securities, either none or only a nominal portion of the dividends paid by the Fund will be eligible for taxation at these reduced rates.
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The use of derivatives by the Fund may cause the Fund to realize higher amounts of ordinary income or short-term capital gain, distributions from which are taxable to individual shareholders at ordinary income tax rates rather than at the more favorable tax rates for long-term capital gain.
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Distributions declared to shareholders with a record date in October, November or December—if paid to you by the end of January—are taxable for federal income tax purposes as if received in December.
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Any long-term or short-term capital gains realized on the sale of your Shares will be subject to federal income tax.
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If the Fund is terminated, a shareholder will receive a liquidating distribution(s) which should be treated as payment in exchange for the Shares held by the shareholder. As a result, each shareholder should recognize gain or loss in an amount equal to the difference between the shareholder’s adjusted tax basis in his or her shares and the liquidating distribution(s) he or she receives, except to the extent the Shares are held in a tax-advantaged arrangement. A liquidating distribution may be subject to backup withholding as described below.
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A shareholder’s cost basis information will be provided on the sale of any of the shareholder’s Shares, subject to certain exceptions for exempt recipients. Please contact the broker (or other nominee) that holds your Shares with respect to reporting of your cost basis and available elections for your account.
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At the time you purchase your Shares, the Fund’s NAV may reflect undistributed income or undistributed capital gains. A subsequent distribution to you of such amounts, although constituting a return of your investment, would be taxable. Buying Shares just before the Fund declares an income dividend or capital gains distribution is sometimes known as “buying a dividend.” In addition, the Fund’s NAV may, at any time, reflect net unrealized appreciation, which may result in future taxable distributions to you.
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By law, if you do not provide the Fund with your proper taxpayer identification number and certain required certifications, you may be subject to backup withholding on any distributions of income, capital gains, or proceeds from the sale of your Shares. The Fund also must withhold if the IRS instructs it to do so. When withholding is required, the amount will be 24% of any distributions or proceeds paid.
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An additional 3.8% Medicare tax is imposed on certain net investment income (including ordinary dividends and capital gain distributions received from the Fund and net gains from taxable dispositions of Shares) of U.S. individuals, estates and trusts to the extent that such person’s “modified adjusted gross income” (in the case of an individual) or “adjusted gross income” (in the case of an estate or trust) exceeds a threshold amount. This Medicare tax, if applicable, is reported by you on, and paid with, your federal income tax return.
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You will not be required to include the portion of dividends paid by the Fund derived from interest on U.S. government obligations in your gross income for purposes of personal and, in some cases, corporate income taxes in many state and local tax jurisdictions. The percentage of dividends that constitutes dividends derived from interest on federal obligations will be determined annually. This percentage may differ from the actual percentage of interest received by the Fund on federal obligations for the particular days on which you hold shares.
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Fund distributions and gains from the sale of Shares generally are subject to state and local income taxes.
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If the Fund qualifies to pass through the tax benefits from foreign taxes it pays on its investments, and elects to do so, then any foreign taxes it pays on these investments may be passed through to you. You will then be required to include your pro rata share of these taxes in gross income, even though not actually received by you, and will be entitled either to deduct your share of these taxes in computing your taxable income, or to claim a foreign tax credit for these taxes against your U.S. federal income tax.
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Foreign investors should be aware that U.S. withholding, special certification requirements to avoid U.S. backup withholding and claim any treaty benefits, and estate taxes may apply to an investment in the Fund.
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Under the Foreign Account Tax Compliance Act (“FATCA”), a 30% withholding tax is imposed on income dividends made by the Fund to certain foreign entities, referred to as foreign financial institutions or non-financial foreign entities, that fail to comply (or be deemed compliant) with extensive reporting and withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. After December 31, 2018, FATCA withholding also would have applied to certain capital gain distributions, return of capital distributions and the proceeds arising from the sale of Shares; however, based on proposed regulations issued by the IRS, which can be relied upon currently, such withholding is no longer required unless final regulations provide otherwise (which is not expected). The Fund may disclose the information that it receives from its shareholders to the IRS, non-U.S. taxing authorities or other parties as necessary to comply with FATCA or similar laws. Withholding also may be required if a foreign entity that is a shareholder of the Fund fails to provide the Fund with appropriate certifications or other documentation concerning its status under FATCA.
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To the extent the Fund invests in an underlying fund that is taxed as a RIC, please see the section titled “Taxes – Taxation of the Funds” in the Fund’s SAI for more information regarding the tax consequences of such investment.
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The above discussion concerning the taxability of Fund dividends and distributions and of sales of Shares is inapplicable to investors that generally are exempt from federal income tax, such as retirement plans that are qualified under Section 401 and 403 of the Code and individual retirement accounts (“IRAs”) and Roth IRAs.
Taxes on Purchase and Redemption of Creation Units
To the extent that the Fund permits in-kind transactions, an AP that exchanges equity securities for a Creation Unit generally will recognize a capital gain or loss equal to the difference between the market value of the Creation Units at the time of exchange (plus any cash received by the AP as part of the issue) and the sum of the AP's aggregate basis in the securities surrendered plus any cash component paid. Similarly, an AP that redeems a Creation Unit in exchange for securities generally will recognize a capital gain or loss equal to the difference between the AP's basis in the Creation Units (plus any cash paid by the AP as part of the redemption) and the aggregate market value of the securities received (plus any cash received by the AP as part of the redemption). The IRS, however, may assert that a loss realized upon an exchange of securities for a Creation Unit, or of a Creation Unit for securities, cannot be deducted currently under the rules governing “wash sales” or on the ground that there has been no significant change in the AP's economic position. An AP exchanging securities should consult its own tax advisor(s) with respect to whether wash sale rules apply and when a loss otherwise might not be deductible.
Any capital gain or loss realized on a redemption of a Creation Unit generally is treated as long-term capital gain or loss if the Shares have been held for more than one year and as short-term capital gain or loss if the Shares have been held for one year or less, assuming that such Creation Units are held as a capital asset. If you purchase or redeem one or more Creation Units, you will be sent a confirmation statement showing how many Shares you purchased or sold and at what price.
The foregoing discussion summarizes some of the more important possible consequences under current federal, state and local tax law of an investment in the Fund. It is not a substitute for personal tax advice. You also may be subject to state, local and/or foreign tax on the Fund's distributions and sales and/or redemptions of Shares. Consult your personal tax advisor(s) about the potential tax consequences of an investment in the Shares under all applicable tax laws.
Distributor
Invesco Distributors, Inc. (the “Distributor”) serves as the distributor of Creation Units for the Fund on an agency basis. The Distributor does not maintain a secondary market in Shares. The Distributor is an affiliate of the Adviser.
Net Asset Value
The NAV for the Fund will be calculated and disseminated daily on each day that the NYSE is open for trading. The Bank of New York Mellon (“BNYM”) normally calculates the Fund’s NAV as of the regularly scheduled close of business of the NYSE (normally 4:00 p.m., Eastern time). The Fund’s NAV is based on prices at the time of closing, and U.S. fixed-income assets may be valued as of the announced closing time for trading in fixed-income instruments in a particular market or exchange. NAV is calculated by deducting all of the Fund’s liabilities from the total value of its assets and then dividing the result by the number of Shares outstanding, rounding to
the nearest cent. Generally, the portfolio securities are recorded in the NAV no later than the trade date plus one day. In determining NAV, expenses are accrued and applied daily and securities and other assets for which market quotations are readily available and reliable are valued at market value. The Trust’s Board has designated the Adviser to fair value the Fund’s portfolio securities and other assets for which market quotations are not readily available and reliable in accordance with Board-approved policies and related Adviser procedures (the “Valuation Procedures”), subject to the Board’s oversight.
Securities listed or traded on an exchange (except convertible securities) generally are valued at the last trade price or official closing price
that day as of the close of the exchange where the security primarily trades. Securities of investment companies that are not exchange-traded (e.g., open-end mutual funds) are valued using such company’s end-of-business day NAV per share, whereas securities of investment companies that are exchange-traded are valued at the last trade price or official closing price on the exchange on which they primarily trade. Deposits, other obligations of U.S. and non-U.S. banks and financial institutions, and cash equivalents are valued at their daily account value. Fixed-income securities (including convertible securities) normally are valued on the basis of prices provided by independent pricing services. Pricing services generally value fixed-income securities assuming orderly transactions of institutional round lot size, but the Fund may hold or transact in the same securities in smaller, odd lot sizes. Odd lots often trade at lower prices than institutional round lots, and their value may be adjusted accordingly. Futures contracts are valued at the daily settlement price set by an exchange on which they are principally traded. U.S. exchange-traded options are valued at the mean between the last bid and asked prices from the exchange on which they principally trade. Non-U.S. exchange-traded options are valued at the final settlement price set by the exchange on which they trade. Options not listed on an exchange and swaps generally are valued using pricing provided from independent pricing services. Unlisted securities will be valued using prices provided by independent pricing services or by another method that the Adviser, in its judgment, believes better reflects the security’s fair value in accordance with the Valuation Procedures. Foreign exchange-traded equity securities are valued at their market value if market quotations are available and reliable. The Adviser may use various pricing services to obtain market quotations as well as fair value prices. The Adviser may discontinue the use of any pricing service at any time.
At times, a listed security’s market price may not be readily available. Moreover, even when market quotations are available for a security, they may be stale or unreliable. A security’s last market quotation may become stale because, among other reasons, (i) the security is not traded frequently, (ii) the security ceased trading before its exchange closed; (iii) market or issuer-specific events occurred after the security ceased trading; or (iv) the passage of time between when the security’s trading market closes and when the Fund calculates its NAV caused the quotation to become stale. A security’s last market quotation may become unreliable because of (i) certain issuer- or security-specific events, including a merger or insolvency, (ii) events which affect a geographical area or an industry segment, such as political events or natural disasters, or (iii) market events, such as a significant movement in the U.S. market. When a security’s market price is not readily available, or the Adviser determines, in its judgment, that such price is stale or unreliable, the Adviser will value the security at fair value in
good faith using the Valuation Procedures.
Fair value pricing involves subjective judgments, and fair value pricing methods may change from time to time. Consequently, while such determinations may be made in good faith, it may nevertheless be more difficult for the Adviser to accurately assign a daily value, and Fund securities that are fair valued may be subject to greater fluctuation in their value from one day to the next than would be the case if market quotations were used. Because of the inherent uncertainties of valuation, and the degree of subjectivity in such decisions, it is possible that a fair value determination for a security is materially different than the value that could
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be realized upon the sale of the security. There is no assurance that the Fund could sell a portfolio security for the value established for it at any time, and it is possible that the Fund would incur a loss if a security is sold at a discount to its established value. Because the Fund seeks to track the Underlying Index, the use of fair value pricing could result in a difference between the prices used to calculate the Fund’s NAV and the prices used by the Underlying Index, which may increase the Fund’s tracking error.
Fund Service Providers
BNYM, 240 Greenwich Street, New York, New York 10286, is the administrator, custodian, transfer agent and fund accounting and dividend disbursing agent for the Fund.
Stradley Ronon Stevens & Young, LLP, 191 North Wacker Drive, Suite 1601, Chicago, Illinois 60606, and 2000 K Street, NW, Suite 700, Washington, D.C. 20006, serves as legal counsel to the Trust.
PricewaterhouseCoopers LLP (“PwC”), One North Wacker Drive, Chicago, Illinois 60606, serves as the Fund’s independent registered public accounting firm. PwC is responsible for auditing the annual financial statements of the Fund and assists in the preparation and/or review of the Fund’s federal and state income tax returns.
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Financial Highlights
The Fund is new and has no performance history as of the date of this prospectus. Financial information for the Fund therefore is not available.
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Index Provider
No entity that creates, compiles, sponsors or maintains the Underlying Index is or will be an affiliated person, as defined in Section 2(a)(3) of the 1940 Act, or an affiliated person of an affiliated person, of the Trust, the Adviser, the Distributor or a promoter of the Fund.
Neither the Adviser nor any affiliate of the Adviser has any rights to influence the selection of the securities in the Underlying Index.
The Underlying Index is calculated and maintained by the Index Provider or its affiliate, agent or partner. The Index Provider is not affiliated with the
Trust, the Adviser or the Distributor. The Adviser has entered into a license agreement with the Index Provider. The Fund is entitled to use the Underlying Index pursuant to a sub-licensing agreement with the Adviser.
Disclaimers
THE FUND IS NOT SPONSORED, ENDORSED, SOLD OR PROMOTED BY MSCI, ANY OF ITS AFFILIATES, ANY OF ITS INFORMATION PROVIDERS OR ANY OTHER THIRD PARTY INVOLVED IN, OR RELATED TO, COMPILING, COMPUTING OR CREATING ANY MSCI INDEX (COLLECTIVELY, THE “MSCI PARTIES”). THE UNDERLYING INDEX (REFERRED TO HEREIN AS THE MSCI INDEX) IS THE EXCLUSIVE PROPERTY OF MSCI. MSCI AND THE MSCI INDEX NAME ARE SERVICE MARKS OF MSCI OR ITS AFFILIATES AND HAVE BEEN LICENSED FOR USE FOR CERTAIN PURPOSES BY THE ADVISER. NONE OF THE MSCI PARTIES MAKES ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, TO THE ISSUER OR OWNERS OF THE FUND OR ANY OTHER PERSON OR ENTITY REGARDING THE ADVISABILITY OF INVESTING IN FUNDS GENERALLY OR IN THE FUND PARTICULARLY OR THE ABILITY OF ANY MSCI INDEX TO TRACK CORRESPONDING STOCK MARKET PERFORMANCE. MSCI OR ITS AFFILIATES ARE THE LICENSORS OF CERTAIN TRADEMARKS, SERVICE MARKS AND TRADE NAMES AND OF THE MSCI INDEX WHICH ARE DETERMINED, COMPOSED AND CALCULATED BY MSCI WITHOUT REGARD TO THE FUND OR THE ISSUER OR OWNERS OF THE FUND OR ANY OTHER PERSON OR ENTITY. NONE OF THE MSCI PARTIES HAS ANY OBLIGATION TO TAKE THE NEEDS OF THE ISSUER OR OWNERS OF THE FUND OR ANY OTHER PERSON OR ENTITY INTO CONSIDERATION IN DETERMINING, COMPOSING OR CALCULATING THE MSCI INDEXES. NONE OF THE MSCI PARTIES IS RESPONSIBLE FOR OR HAS PARTICIPATED IN THE DETERMINATION OF THE TIMING OF, PRICES AT, OR QUANTITIES OF THE FUND TO BE ISSUED OR IN THE DETERMINATION OR CALCULATION OF THE EQUATION BY OR THE CONSIDERATION INTO WHICH THE FUND IS REDEEMABLE. FURTHER, NONE OF THE MSCI PARTIES HAS ANY OBLIGATION OR LIABILITY TO THE ISSUER OR OWNERS OF THE FUND OR ANY OTHER PERSON OR ENTITY IN CONNECTION WITH THE ADMINISTRATION, MARKETING OR OFFERING OF THE FUND.
ALTHOUGH MSCI SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN THE CALCULATION OF THE MSCI INDEX FROM SOURCES THAT MSCI CONSIDERS RELIABLE, NONE OF THE MSCI PARTIES WARRANTS OR GUARANTEES THE ORIGINALITY, ACCURACY AND/OR THE COMPLETENESS OF ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. NONE OF THE MSCI PARTIES MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE ISSUER OF THE FUND, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY, FROM THE USE OF ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. NONE OF THE MSCI PARTIES SHALL HAVE ANY LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS OF OR IN CONNECTION WITH ANY MSCI INDEX OR ANY DATA INCLUDED THEREIN. FURTHER, NONE OF THE MSCI PARTIES MAKES ANY EXPRESS OR IMPLIED WARRANTIES OF ANY KIND, AND THE MSCI PARTIES HEREBY EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, WITH RESPECT TO THE MSCI INDEX AND ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE
FOREGOING, IN NO EVENT SHALL ANY OF THE MSCI PARTIES HAVE ANY LIABILITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
No purchaser, seller, or holder of this security, product or fund, or any other person or entity, should use or refer to any MSCI trade name, trademark or service mark to sponsor, endorse, market or promote this security without first contacting MSCI to determine whether MSCI’s permission is required. Under no circumstances may any person or entity claim any affiliation with MSCI without the prior written permission of MSCI.
The Adviser does not guarantee the accuracy and/or the completeness of the Underlying Index or any data included therein, and the Adviser shall have no liability for any errors, omissions, restatements, re-calculations or interruptions therein. The Adviser makes no warranty, express or implied, as to results to be obtained by the Fund, owners of the Shares or any other person or entity from the use of the Underlying Index or any data included therein. The Adviser makes no express or implied warranties and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to the Underlying Index or any data included therein. Without limiting any of the foregoing, in no event shall the Adviser have any liability for any special, punitive, direct, indirect or consequential damages (including lost profits) arising out of matters relating to the use of the Underlying Index, even if notified of the possibility of such damages.
Premium/Discount Information
Information showing the number of days the market price of the Shares was greater (at a premium) and less (at a discount) than the Fund’s NAV for the most recently completed calendar year and the most recently completed calendar quarters since that year (or the life of the Fund, if shorter) is available on the Fund’s website at www.invesco.com/ETFs.
Other Information
Continuous Offering
The method by which Creation Unit Aggregations of Shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Unit Aggregations of Shares are issued and sold by the Fund on an ongoing basis, a “distribution,” as such term is used in the Securities Act, may occur at any point. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner which could render them statutory underwriters and subject them to the prospectus delivery requirement and liability provisions of the Securities Act.
For example, a broker-dealer firm or its client may be deemed a statutory underwriter if it takes Creation Unit Aggregations after placing an order with the Distributor, breaks them down into constituent Shares and sells such Shares directly to customers, or if it chooses to couple the creation of a supply of new Shares with an active selling effort involving the solicitation of secondary market demand for Shares. A determination of whether one is an underwriter for purposes of the Securities Act must take into account all the facts and circumstances pertaining to the activities of the broker-dealer or its client in the particular case, and the examples mentioned above should not be considered a complete description of all the activities that could lead to a characterization as an underwriter.
Broker-dealer firms also should note that dealers who are not “underwriters” but are effecting transactions in Shares, whether or not
18
participating in the distribution of Shares, generally are required to deliver a prospectus. This is because the prospectus delivery exemption in Section 4(a)(3)(C) of the Securities Act is not available in respect of such transactions as a result of Section 24(d) of the 1940 Act. As a result, broker-dealer firms should note that dealers who are not “underwriters” but are participating in a distribution (as contrasted with engaging in ordinary secondary market transactions), and thus dealing with the Shares that are part of an overallotment within the meaning of Section 4(a)(3)(C) of the Securities Act, will be unable to take advantage of the prospectus delivery exemption provided by Section 4(a)(3) of the Securities Act. For delivery of prospectuses to exchange members, the prospectus delivery mechanism of Rule 153 under the Securities Act only is available with respect to transactions on a national exchange.
Delivery of Shareholder Documents–Householding
Householding is an option available to certain investors of the Fund. Householding is a method of delivery, based on the preference of the individual investor, in which a single copy of certain shareholder documents can be delivered to investors who share the same address, even if their accounts are registered under different names. Householding for the Fund is available through certain broker-dealers. If you are interested in enrolling in householding and receiving a single copy of the prospectus and other shareholder documents, please contact your broker-dealer. If you currently are enrolled in householding and wish to change your householding status, please contact your broker-dealer.
For More Information
For more detailed information on the Trust, the Fund and the Shares, you may request a copy of the Fund’s SAI. The SAI provides detailed information about the Fund and is incorporated by reference into this prospectus. This means that the SAI legally is a part of this prospectus. Additional information about the Fund’s investments also will appear in the Fund’s Annual and Semi-Annual Reports to Shareholders and on Form N-CSR filed with the
SEC, when available. In the Fund’s Annual Report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during its most recent fiscal year, when available. In Form N-CSR you will find the Fund’s annual and semi-annual financial statements. If you have questions about the Fund or Shares or you wish to obtain the SAI, Annual Report and/or Semi-Annual Report, or the Fund’s financial statements, when available, free of charge, or to make shareholder inquiries, please:
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Call:
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Invesco Distributors, Inc. at 1-800-983-0903
Monday through Friday
8:00 a.m. to 5:00 p.m. Central Time
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Write:
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Invesco Exchange-Traded Fund Trust II
c/o Invesco Distributors, Inc.
11 Greenway Plaza
Houston, Texas 77046-1173
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Visit:
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www.invesco.com/ETFs
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Reports and other information about the Fund are available on the EDGAR Database on the SEC's website at www.sec.gov, and copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov.
No person is authorized to give any information or to make any representations about the Fund and its Shares not contained in this prospectus, and you should not rely on any other information. Read and keep this prospectus for future reference.
Dealers effecting transactions in the Shares, whether or not participating in this distribution, generally are required to deliver a prospectus. This is in addition to any obligation of dealers to deliver a prospectus when acting as underwriters.
The Trust's registration number under the 1940 Act is 811-21977.
19
Investment Company Act File No. 811-21977
Invesco Exchange-Traded Fund Trust II
STATEMENT OF ADDITIONAL INFORMATION
Dated June 24, 2024
This Statement of Additional Information (the “SAI”) for Invesco Exchange-Traded Fund Trust II (the “Trust”), relating to the series of the Trust listed below (the "Fund") is not a prospectus. The SAI should be read in conjunction with the prospectus (the “Prospectus”) for the Fund dated June 24, 2024, as the Prospectus may be revised from time to time.
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Fund
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Principal U.S. Listing Exchange
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Ticker
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Invesco MSCI Global Climate 500 ETF
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NYSE Arca, Inc.
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KLMT
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Capitalized terms used herein that are not defined have the same meaning as in the Fund’s Prospectus, unless otherwise noted. A copy of the Fund’s Prospectus may be obtained without charge by writing to the Trust's Distributor, Invesco Distributors, Inc. (the “Distributor”), 11 Greenway Plaza, Houston, Texas 77046-1173, or by calling toll free 1-800-983-0903.
STATEMENT OF ADDITIONAL INFORMATION
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i
GENERAL DESCRIPTION OF THE TRUST AND THE FUND
The Trust was organized as a Massachusetts business trust on October 10, 2006 and
is authorized to have multiple series or portfolios. The Trust is an open-end management investment
company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Trust currently consists of 85 Funds. This SAI contains information for one series of the Trust, the Invesco MSCI
Global Climate 500 ETF (the “Fund”). The Fund is classified as “non-diversified”, and as such, the Fund's investments are not required to meet certain diversification requirements under the 1940 Act. The shares of the
Fund are referred to herein as "Shares."
The investment objective of the Fund is to seek to track the investment results (before
fees and expenses) of its underlying index (the “Underlying Index”). Invesco Capital Management LLC (the “Adviser”), an indirect, wholly-owned subsidiary of Invesco Ltd., manages the Fund.
The Fund issues and redeems Shares at net asset value (“NAV”) only in aggregations of a specified number of Shares as set forth in the Fund’s Prospectus (each, a “Creation Unit” or a “Creation Unit Aggregation”).
The Fund generally issues and redeems Creation Units principally in exchange for a
basket of securities included in its Underlying Index (the “Deposit Securities”), together with the deposit of a specified cash payment (the “Cash Component”), plus certain transaction fees; however, the Fund also reserves the right to permit or require Creation Units to be issued in exchange for cash.
The Fund may issue Shares in advance of receipt of Deposit Securities subject to various
conditions, including a requirement to maintain on deposit with the Trust cash at least equal
to 105% of the market value of the missing Deposit Securities. See the “Creation and Redemption of Creation Unit Aggregations” section. To offset the added brokerage and other transaction costs the Fund incurs with using
cash to purchase the requisite Deposit Securities, during each instance of cash creations or redemptions,
the Fund may impose transaction fees that will be higher than the transaction fees associated with in-kind
creations or redemptions. For more information, see the section below titled “Creation and Redemption of Creation Unit Aggregations.”
The Fund is expected to be approved for listing, subject to notice of issuance, on
NYSE Arca, Inc. (the “Exchange”). Shares will trade throughout the day on the Exchange at market prices that may be below, at, or above NAV. In the event of the liquidation of the Fund, the Trust may decrease the
number of Shares in a Creation Unit.
EXCHANGE LISTING AND TRADING
There can be no assurance that the Fund, once listed, will continue to meet the requirements
of the Exchange necessary to maintain the listing of its Shares. The Exchange may, but is
not required to, remove the Shares from listing if: (i) following the initial 12-month period beginning at
the commencement of trading of the Fund, there are fewer than 50 beneficial owners of Shares; (ii) the Fund is no
longer eligible to operate in reliance on Rule 6c-11 under the 1940 Act; (iii) the Fund fails to meet certain continued
listing standards of the Exchange; or (iv) such other event shall occur or condition shall exist that,
in the opinion of the Exchange, makes further dealings on the Exchange inadvisable. The Exchange will remove the Shares
from listing and trading upon termination of the Fund.
As in the case of other stocks traded on the Exchange, brokers' commissions on transactions
will be based on negotiated commission rates at customary levels.
The Trust reserves the right to adjust the price levels of the Shares in the future
to help maintain convenient trading ranges for investors. Any adjustments would be accomplished through
stock splits or reverse stock splits, which would have no effect on the net assets of the Fund.
INVESTMENT RESTRICTIONS
The Fund has adopted as fundamental policies the investment restrictions numbered
(1) through (7) below. Except as otherwise noted below, the Fund, as a fundamental policy, may not:
1
(1)
Invest more than 25% of the value of its net assets in securities of issuers in any
one industry or group of industries, except to the extent that the underlying index that the Fund
replicates concentrates in an industry or group of industries. This restriction does not apply
to obligations issued or guaranteed by the U.S. government, its agencies or instrumentalities.
(2)
Borrow money, except that the Fund may borrow money to the extent permitted by (i)
the 1940 Act, (ii) the rules and regulations promulgated by the Securities and Exchange Commission (“SEC”) under the 1940 Act, or (iii) an exemption or other relief applicable to the Fund from
the provisions of the 1940 Act.
(3)
Act as an underwriter of another issuer’s securities, except to the extent that the Fund may be deemed to be an underwriter within the meaning of the Securities Act of 1933, as amended
(the “Securities Act”), in connection with the purchase and sale of portfolio securities.
(4)
Make loans to other persons, except through (i) the purchase of debt securities permissible
under the Fund’s investment policies, (ii) repurchase agreements or (iii) the lending of portfolio securities, provided that no such loan of portfolio securities may be made by the Fund if, as
a result, the aggregate of such loans would exceed 33 1/3% of the value of the Fund’s total assets.
(5)
Purchase or sell physical commodities unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Fund (i) from purchasing or selling
options, futures contracts or other derivative instruments, or (ii) from investing in securities or
other instruments backed by physical commodities).
(6)
Purchase or sell real estate unless acquired as a result of ownership of securities
or other instruments (but this shall not prohibit the Fund from purchasing or selling securities
or other instruments backed by real estate or of issuers engaged in real estate activities).
(7)
Issue senior securities, except as permitted under the 1940 Act.
Except for restrictions (2), (4)(iii), and (7), if the Fund adheres to a percentage
restriction at the time of investment, a later increase in percentage resulting from a change in market value
of the investment or the total assets, or the sale of a security out of the portfolio, will not constitute
a violation of that restriction. With respect to restrictions (2), (4)(iii), and (7), in the event that the Fund’s borrowings, repurchase agreements and loans of portfolio securities at any time exceed 33 1/3% of the value of the Fund’s total assets (including the amount borrowed and the collateral received) less the Fund’s liabilities (other than borrowings or loans) due to subsequent changes in the value of the Fund’s assets or otherwise, within three days (excluding Sundays and holidays), the Fund will take corrective action to reduce the amount of
its borrowings, repurchase agreements and loans of portfolio securities to an extent that such borrowings,
repurchase agreements and loans of portfolio securities will not exceed 33 1/3% of the value of the Fund’s total assets (including the amount borrowed and the collateral received) less the Fund’s liabilities (other than borrowings or loans).
For purposes of classifying the Fund as either a “diversified company” or a “non-diversified company” (as such terms are defined in the 1940 Act), the ultimate issuer of debt securities is
determined by the Adviser based on certain factors, such as responsibility for the payment of the obligations
of such securities and whether such issuer’s assets and revenues principally back those obligations, and/or other available information.
The foregoing fundamental investment policies cannot be changed as to the Fund without
approval by holders of a “majority of the Fund’s outstanding voting securities.” As defined in the 1940 Act, this means the vote of (i) 67% or more of the Fund’s Shares present at a meeting, if the holders of more than 50% of the Shares are present or represented by proxy, or (ii) more than 50% of the Shares, whichever
is less.
In addition to the foregoing fundamental investment policies, the Fund also is subject
to the following non-fundamental investment restrictions and policies, which may be changed by the Board of Trustees
of the Trust (the “Board”) without shareholder approval. The Fund may not:
2
(1)
Sell securities short, unless the Fund owns or has the right to obtain securities
equivalent in kind and amount to the securities sold short at no added cost, and provided that transactions
in options, futures contracts, options on futures contracts or other derivative instruments are
not deemed to constitute selling securities short.
(2)
Purchase securities on margin, except that the Fund may obtain such short-term credits
as are necessary for the clearance of transactions; and provided that margin deposits in
connection with futures contracts, options on futures contracts or other derivative instruments shall
not constitute purchasing securities on margin.
(3)
Purchase securities of open-end or closed-end investment companies except in compliance
with the 1940 Act, although the Fund may not acquire any securities of registered open-end
investment companies or registered unit investment trusts in reliance on Sections 12(d)(1)(F)
and 12(d)(1)(G) of the 1940 Act.
(4)
Invest in direct interests in oil, gas or other mineral exploration programs or leases;
however, the Fund may invest in the securities of issuers that engage in these activities.
(5)
Invest in illiquid investments if, as a result of such investment, more than 15% of the Fund’s net assets would be invested in illiquid investments.
The investment objective of the Fund is a non-fundamental policy that the Board may
change without approval by shareholders upon 60 days’ written notice to shareholders.
INVESTMENT STRATEGIES AND RISKS
Investment Strategies
The Fund's investment objective is to seek to track the investment results, before
fees and expenses, of the Underlying Index. The Fund seeks to achieve its investment objective by investing
primarily in securities that comprise the Underlying Index.
The Fund operates as an index fund and will not be actively managed. The Fund attempts
to replicate, before fees and expenses, the performance of its Underlying Index by generally investing
in all of the securities comprising the Underlying Index in proportion to their weightings in the Underlying Index (a “full replication” methodology), although the Fund may use sampling techniques for the purpose of complying with regulatory or investment restrictions or when sampling is deemed appropriate to track
the Underlying Index.
Investment Risks
A discussion of the risks associated with an investment in the Fund is contained in the Fund’s Prospectus in the “Summary Information—Principal Risks of Investing in the Fund”, “Additional Information About the Fund’s Strategies and Risks—Principal Risks of Investing in the Fund” and “—Additional Risks of Investing in the Fund” sections. The discussion below supplements, and should be read in conjunction with, these sections.
An investment in the Fund should be made with an understanding that the value of the
Fund's portfolio holdings may fluctuate in accordance with changes in the financial condition of the
issuers of the portfolio securities, the value of securities in general and other factors that affect the market.
An investment in the Fund also should be made with an understanding of the risks inherent
in an investment in securities, including the risk that the financial condition of issuers
may become impaired or that the general condition of the securities market may deteriorate (either of which may
cause a decrease in the value of the portfolio holdings and thus in the value of Shares). The Fund’s portfolio holdings are susceptible to general market fluctuations and to volatile increases and decreases in value as
market confidence and investor emotions and perceptions of the companies issuing the securities change.
These investor perceptions are based on various and unpredictable factors, including expectations
regarding government,
3
economic, monetary and fiscal policies, inflation and interest rates, economic expansion
or contraction, and global or regional political, economic or banking crises.
The Fund is not actively managed, and therefore, the adverse financial condition of
any one issuer will not result in the elimination of its securities from the Fund's portfolio unless the index
provider removes the securities of such issuer from the Underlying Index.
Borrowing. The Fund may borrow money from a bank or another person up to the limits set forth
in the section “Investment Restrictions” to meet shareholder redemptions, for temporary or emergency purposes and for other lawful purposes. Borrowed money will cost the Fund interest expense
and/or other fees. The costs of borrowing may reduce the Fund’s return. Borrowing also may cause the Fund to liquidate positions when it may not be advantageous to do so to satisfy its obligations to repay borrowed
monies. To the extent that the Fund has outstanding borrowings, it will be leveraged. Leveraging generally
exaggerates the effect on NAV of any increase or decrease in the market value of the Fund’s portfolio securities.
Under the 1940 Act, a registered investment company can borrow an amount up to 33
1/3% of its assets for temporary or emergency purposes or to allow for an orderly liquidation of securities
to meet redemption requests. If there are unusually heavy redemptions, the Fund may have to sell a portion
of its investment portfolio at a time when it may not be advantageous to do so. Selling securities under
these circumstances may result in the Fund having a lower NAV per Share.
China Investment Risk. The value of securities of companies that derive the majority of their revenues from China is likely to be more volatile than that of other issuers. The economy of
China differs, often unfavorably, from the U.S. economy in such respects as structure, general development,
government involvement, including the lack of willingness or ability of the Chinese government to support
the economies and markets of the Greater China region, lack of publicly available information, wealth distribution, rate of inflation, growth rate, allocation of resources and capital reinvestment, among others. Under China’s political and economic system, the central government has historically exercised substantial
control over virtually every sector of the Chinese economy through administrative regulation and/or state
ownership. Since 1978, the Chinese government has been, and is expected to continue, reforming its economic
policies, which has resulted in less direct central and local government control over the business and
production activities of Chinese enterprises and companies. Notwithstanding the economic reforms instituted
by the Chinese government and the Chinese Communist Party, actions of the Chinese central and local
government authorities continue to have a substantial effect on economic conditions in China,
which could affect its public and private sector companies. In the past, the Chinese government has, from time to
time, taken actions that influenced the prices at which certain goods may be sold, encouraged companies to
invest or concentrate in particular industries, induced mergers between companies in certain industries and
induced private companies to publicly offer their securities to increase or continue the rate of economic
growth, controlled the rate of inflation or otherwise regulated economic expansion. It may do so in the future
as well. As a result, Chinese markets generally continue to experience inefficiency, volatility and pricing
anomalies. Further, public health emergencies resulting in markets closures, travel restrictions, quarantines or other interventions, such as the coronavirus (“COVID-19”) outbreak, may cause uncertainty and volatility in the Chinese economy, especially in the consumer discretionary (leisure, retail, gaming, tourism), industrials,
and commodities sectors. In addition, any reduction in spending on Chinese products and services,
institution of tariffs, sanctions, capital controls, embargoes, trade wars, or other trade barriers or a downturn in any of the economies of China’s key trading partners may have an adverse impact on the Chinese economy. In addition, actions by the U.S. government, such as delisting of certain Chinese companies from
U.S. securities exchanges or otherwise restricting their operations in the U.S., may negatively impact
the value of such securities held by the Fund. Further, from time to time, certain companies in which the Fund invests may operate in, or have dealings with, countries subject to sanctions or embargoes imposed
by the U.S. government and the United Nations and/or in countries the U.S. government identified as state sponsors of terrorism. One or more of these companies may be subject to constraints under U.S.
law or regulations that could negatively affect the company’s performance. Additionally, one or more of these companies could suffer damage to its reputation if the market identifies it as a company that invests or
deals with countries that the U.S. government identifies as state sponsors of terrorism or subjects to sanctions.
4
China A-Share Investment Risk. The Shanghai-Hong Kong Stock Connect program and the Shenzhen-Hong Kong Stock Connect program (both programs collectively referred to as
the Stock Connect Program) are securities trading and clearing programs through which the Fund can trade eligible listed China A-shares. Investing in A-shares through the Stock Connect Program is subject to trading, clearance, settlement and other procedures, which could pose risks to the Fund. Trading through the Stock Connect Program is subject to the daily quota, which may restrict or preclude the Fund's ability to invest in Stock Connect securities. Foreign investors, individually and in the aggregate, are subject to ownership limitations from Shanghai or Shenzhen listed companies, including those purchased through the Stock Connect Program. Once the daily quota is reached, orders to purchase additional China A-shares through the Stock Connect Program will be rejected.
Chinese Variable Interest Entity Investment Risk. Many Chinese companies have created a special structure, which is based in China, known as a variable interest entity (“VIE”) as a means to circumvent limits on direct foreign ownership of equity in Chinese operating companies
in certain sectors, such as internet, media, education and telecommunications, imposed by the
Chinese government. Typically in such an arrangement, a China-based operating company establishes
an offshore “holding” company in another jurisdiction that likely does not have the same disclosure, reporting, and governance requirements as the United States. The holding company issues
shares, i.e., is “listed”, on a foreign exchange such as the New York Stock Exchange or the Hong Kong Stock Exchange. The listed holding company enters into service and other contracts with
the China-based operating company, typically through the China-based VIE. The VIE must be owned by
Chinese nationals (and/or other Chinese companies), which often are the VIE’s founders, in order to obtain the licenses and/or assets required to operate in the restricted or prohibited sector
in China. The operations and financial position of the VIE are included in consolidated financial statements
of the listed holding company. Foreign investors, including mutual funds and ETFs (such as the Fund), hold stock in the listed holding company rather than directly in the China-based operating company.
The VIE structure allows foreign shareholders to exert a degree of control and obtain
economic benefits arising from the operating company but without formal legal ownership because
the listed holding company’s control over the operating company is predicated entirely on contracts with the VIE. The listed holding company is distinct from the underlying operating company, and
an investment in the listed holding company represents exposure to a company that maintains service contracts
with the operating company, not equity ownership.
Investments in companies that use VIEs may pose additional risks because the investment
is made through the listed holding company’s service and other contractual arrangements with the underlying Chinese operating company. As a result, such investment may limit the rights of an
investor with respect to the underlying Chinese operating company. The contractual arrangements between
the VIE and the operating company may not be as effective in providing operational control as direct
equity ownership. The Chinese government could determine at any time and without notice that the underlying
contractual arrangements on which control of the VIE is based violate Chinese law. While VIEs
are a longstanding industry practice, well known to Chinese officials and regulators, VIEs historically
have not been formally recognized under Chinese law. The owners of the VIE could decide to breach the contractual
arrangements with the listed holding company and it is uncertain whether the contractual
arrangements, which may be subject to conflicts of interest between the legal owners of the VIE
and foreign investors, would be enforced by Chinese courts or arbitration bodies. Prohibitions of these structures
by the Chinese government, or the inability to enforce such contracts, from which the shell
company derives its value, would likely cause the VIE-structured holding(s) to suffer significant, detrimental,
and possibly permanent loss, and in turn, adversely affect the Fund’s returns and NAV.
The Chinese government previously placed restrictions on China-based companies raising
capital offshore in certain sectors, including through VIEs, and investors face uncertainty
about future actions by the Chinese government that could significantly affect the operating company’s financial performance and the enforceability of the contractual arrangements underlying the VIE structure.
It is uncertain whether Chinese officials or regulators will withdraw their acceptance of the VIE
structure, generally, or
5
with respect to certain industries, or whether any new laws, rules or regulations relating to VIE structures will be adopted and what impact such laws may have on foreign investors.
There is a risk that China might prohibit the existence of VIEs or sever their ability to transmit
economic and governance rights to foreign individuals and entities; if so, the market value of
any associated portfolio holdings would likely suffer substantial, detrimental, and possibly permanent loss.
Chinese companies, including those listed on U.S. exchanges, are generally not subject
to the same degree of regulatory requirements, accounting standards or auditor oversight as companies
in more developed countries. As a result, information about VIEs may be less reliable or complete.
Foreign companies with securities listed on U.S. exchanges, including those that utilize VIEs,
may be delisted if they do not meet the requirements of the listing exchange, the Public Company Accounting
Oversight Board and the U.S. government, which could significantly decrease the liquidity and
value of such securities. Actions by the U.S. government, such as delisting of certain Chinese companies
from U.S. securities exchanges or otherwise restricting their operations in the U.S., may negatively
impact the liquidity and value of such securities.
Correlation and Tracking Error. Correlation measures the degree of association between the returns of the Fund and the Underlying Index. The Fund seeks a correlation over time of 0.95 or better between
the Fund's performance and the performance of the Underlying Index; a figure of 1.00 would
indicate perfect correlation. Correlation is calculated at the Fund's fiscal year-end by comparing
the Fund's average monthly total returns, before fees and expenses, to the Underlying Index's average monthly total returns over the prior one-year period or since inception if the Fund has been in existence for less than
one year. Another means of evaluating the degree of correlation between the returns of the Fund and the Underlying Index is to assess the “tracking error” between the two. Tracking error means the variation between the Fund's annual return and the return of the Underlying Index, expressed in terms of standard deviation. The Fund seeks to have
a tracking error of less than 5%, measured on a monthly basis over a one-year period
by taking the standard deviation of the difference in the Fund's returns versus the Underlying Index's returns.
An investment in the Fund should be made with an understanding that the Fund will
not be able to replicate exactly the performance of the Underlying Index, because the total return that the securities generate will be reduced by transaction costs incurred in adjusting the actual balance
of the securities and other Fund expenses, whereas such transaction costs and expenses are not included
in the calculation of the Underlying Index. Also, to the extent that the Fund were to issue and/or redeem Creation
Units principally for cash, it generally will incur higher costs in buying and selling securities than if
it issued and/or redeemed Creation Units principally in-kind.
In addition, the use of a representative sampling methodology (which may arise for
a number of reasons, including a large number of securities within an Underlying Index, or the limited
assets of the Fund) may cause the Fund not to be as well correlated with the return of its Underlying Index
as would be the case if the Fund purchased all of the securities in its Underlying Index in the proportions represented
in the Underlying Index. It also is possible that, for short periods of time, the Fund may not replicate
fully the performance of the Underlying Index due to the temporary unavailability of certain Underlying Index securities
in the secondary market or due to other extraordinary circumstances. Such events are unlikely to continue
for an extended period of time because the Fund is required to correct such imbalances by means of
adjusting the composition of its portfolio holdings. It also is possible that the composition of
the Fund may not replicate exactly the composition of the Underlying Index if the Fund has to adjust its portfolio holdings to continue to
qualify as a “regulated investment company” (a “RIC”) under Subchapter M of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986, as amended (the “Code”).
Equity Securities. Equity securities represent ownership interests in a company or partnership and consist of common stocks, preferred stocks, warrants to acquire common stock, securities
convertible into common stock, and investments in master limited partnerships. Investments in equity
securities in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations
in the value of equity securities in which the Fund invests will cause the NAV of the Fund to fluctuate.
The value of equity securities may fall as a result of factors directly relating to the issuer, such as decisions
made by its management or
6
lower demand for its products or services. An equity security’s value also may fall because of factors affecting not just the issuer, but also companies in the same industry or in a number of different
industries, such as increases in production costs. The value of an issuer’s equity securities also may be affected by changes in financial markets that are relatively unrelated to the issuer or its industry, such
as changes in interest rates or currency exchange rates. Global stock markets, including the U.S. stock market, tend
to be cyclical, with periods when stock prices generally rise and periods when stock prices generally decline.
Equity securities may include:
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Common Stock. Common stock represents an equity or ownership interest in an issuer.
In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds and preferred
stock take precedence over the claims of those who own common stock.
●
Preferred Stock. Preferred stock represents an equity or ownership interest in an
issuer that pays dividends at a specified rate and that has precedence over common stock in the payment
of dividends. Preferred stocks may pay fixed or adjustable rates of return. Preferred stocks usually
do not have voting rights. In the event an issuer is liquidated or declares bankruptcy, the claims of
owners of preferred stock take precedence over the claims of those who own common stock, but are subordinate
to those of bond owners.
●
Convertible Securities. Convertible securities are bonds, debentures, notes, preferred
stocks or other securities that may be converted or exchanged (by the holder or by the issuer) into
shares of the underlying common stock (or cash or securities of equivalent value) at a stated exchange
ratio. A convertible security may also be called for redemption or conversion by the issuer
after a particular date and under certain circumstances (including a specified price) established upon issue.
If a convertible security held by the Fund is called for redemption or conversion, the Fund could be
required to tender it for redemption, convert it into the underlying common stock, or sell it to a third
party. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of bonds take precedence
over the claims of those who own convertible securities.
Convertible securities generally have less potential for gain or loss than common
stocks. Convertible securities generally provide yields higher than the underlying common stocks, but
generally lower than comparable nonconvertible securities. Because of this higher yield, convertible securities
generally sell at a price above their “conversion value,” which is the current market value of the stock to be received upon conversion. The difference between this conversion value and the price of convertible
securities will vary over time depending on changes in the value of the underlying common stocks
and interest rates. When the underlying common stocks decline in value, convertible securities
tend not to decline to the same extent because of the interest or dividend payments and the repayment of
principal at maturity for certain types of convertible securities. However, securities that are convertible
other than at the option of the holder generally do not limit the potential for loss to the same extent
as securities convertible at the option of the holder. When the underlying common stocks rise in
value, the value of convertible securities may also be expected to increase. At the same time, however,
the difference between the market value of convertible securities and their conversion value will
narrow, which means that the value of convertible securities will generally not increase to the same extent
as the value of the underlying common stocks. Because convertible securities may also be interest-rate
sensitive, their value may increase as interest rates fall and decrease as interest rates rise. Convertible
securities are also subject to credit risk, and are often lower-quality securities.
●
Small and Medium Capitalization Issuers. Investing in equity securities of small and
medium capitalization companies often involves greater risk than do investments in larger
capitalization companies. This increased risk may be due to greater business risks customarily associated
with a smaller size, limited markets and financial resources, narrow product lines and frequent
lack of depth of management. The securities of smaller companies are often traded in the over-the-counter (“OTC”) market and even if listed on a national securities exchange may not be traded in volumes
typical for that exchange. Consequently, the securities of smaller companies are less likely to be
liquid, may have
7
limited market stability, and may be subject to more abrupt or erratic market movements
than securities of larger, more established growth companies or market averages in general.
●
Master Limited Partnerships (“MLPs”). MLPs are limited partnerships in which the ownership units are publicly traded. MLP units are registered with the SEC and are freely traded on a
securities exchange or in the OTC market. MLPs often own several properties or businesses (or own interests)
that are related to real estate development and oil and gas industries, but they also may finance motion
pictures, research and development and other projects. Generally, a MLP is operated under the
supervision of one or more managing general partners. Limited partners are not involved in the day-to-day
management of the partnership.
The risks of investing in a MLP are generally those involved in investing in a partnership
as opposed to a corporation. For example, state law governing partnerships is often less
restrictive than state law governing corporations. Accordingly, there may be fewer protections afforded
investors in a MLP than investors in a corporation. Additional risks involved with investing in a
MLP are risks associated with the specific industry or industries in which the partnership invests,
such as the risks of investing in real estate or oil and gas industries.
●
Warrants. Warrants are instruments that entitle the holder to buy an equity security
at a specific price for a specific period of time. Changes in the value of a warrant do not necessarily correspond
to changes in the value of its underlying security. The price of a warrant may be more volatile
than the price of its underlying security, and a warrant may offer greater potential for capital appreciation
as well as capital loss. Warrants do not entitle a holder to dividends or voting rights with respect
to the underlying security and do not represent any rights in the assets of the issuing company. A warrant ceases
to have value if it is not exercised prior to its expiration date. These factors can make warrants more
speculative than other types of investments.
●
Rights. A right is a privilege granted to existing shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued. Rights normally have a short life of
usually two to four weeks, are freely transferable and entitle the holder to buy the new common stock
at a price lower than the public offering price. An investment in rights may entail greater risks than certain
other types of investments. Generally, rights do not carry the right to receive dividends or exercise
voting rights with respect to the underlying securities, and they do not represent any rights in the
assets of the issuer. In addition, their value does not necessarily change with the value of the underlying
securities, and they cease to have value if they are not exercised on or before their expiration date.
Investing in rights increases the potential profit or loss to be realized from the investment as compared
with investing the same amount in the underlying securities.
Cybersecurity Risk. With the increased use of technologies such as the Internet to conduct business,
the Fund, like all companies, may be susceptible to operational, information security
and related risks. Cybersecurity incidents involving the Fund or its service providers (including, without limitation, the Fund’s investment adviser, fund accountant, custodian, transfer agent and financial intermediaries)
have the ability to cause disruptions and impact business operations, potentially resulting in financial
losses, impediments to trading, the inability of Fund shareholders to transact business, violations of applicable
privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation
costs, and/or additional compliance costs.
Cybersecurity incidents can result from deliberate cyberattacks or unintentional events
and may arise from external or internal sources. Cyberattacks may include infection by malicious
software or gaining unauthorized access to digital systems, networks or devices that are used to service the Fund’s operations (e.g., by “hacking” or “phishing”). Cyberattacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service attacks on websites
(i.e., efforts to make network services unavailable to intended users). These cyberattacks could cause the
misappropriation of assets or personal information, corruption of data or operational disruptions. Geopolitical
tensions may, from time to time, increase the scale and sophistication of deliberate cyberattacks.
8
Similar adverse consequences could result from cybersecurity incidents affecting issuers
of securities in which the Fund invests, counterparties with which the Fund engages, governmental and
other regulatory authorities, exchanges and other financial market operators, banks, brokers, dealers,
insurance companies, other financial institutions and other parties. In addition, substantial costs may
be incurred in order to prevent any cybersecurity incidents in the future. Although the Fund’s service providers may have established business continuity plans and risk management systems to mitigate cybersecurity risks,
there can be no guarantee or assurance that such plans or systems will be effective, or that all risks
that exist, or may develop in the future, have been completely anticipated and identified or can be protected
against. The Fund and its shareholders could be negatively impacted as a result.
Natural Disaster/Epidemic Risk. Natural or environmental disasters, such as earthquakes, fires, floods, hurricanes, tsunamis and other severe weather-related phenomena generally, and widespread
disease, including pandemics and epidemics, have been and can be highly disruptive to economies
and markets, adversely impacting individual companies, sectors, industries, markets, currencies,
interest and inflation rates, credit ratings, investor sentiment, and other factors affecting the value of the Fund’s investments. Additionally, if a sector or sectors in which the Underlying Index is concentrated is negatively
impacted to a greater extent by such events, the Fund may experience heightened volatility. Given the increasing
interdependence among global economies and markets, conditions in one country, market, or region are increasingly
likely to adversely affect markets, issuers, and/or foreign exchange rates in other countries,
including the U.S. These disruptions could prevent the Fund from executing advantageous investment decisions
in a timely manner and negatively impact the Fund’s ability to achieve its investment objective. Any such event(s) could have a significant adverse impact on the value and risk profile of the Fund.
The recent spread of the human coronavirus disease 2019 (“COVID-19”) is an example. In the first quarter of 2020, the World Health Organization (the “WHO”) recognized COVID-19 as a global pandemic and both the WHO and the United States declared the outbreak a public health emergency.
The subsequent spread of COVID-19 resulted in, among other significant adverse economic impacts,
instances of market closures and dislocations, extreme volatility, liquidity constraints and increased
trading costs. Efforts to contain the spread of COVID-19 resulted in travel restrictions, closed international borders,
disruptions of healthcare systems, business operations (including business closures) and supply chains, employee
layoffs and general lack of employee availability, lower consumer demand, and defaults and credit downgrades,
all of which contributed to disruption of global economic activity across many industries and exacerbated
other pre-existing political, social and economic risks domestically and globally. Although the WHO
and the United States ended their declarations of COVID-19 as a global health emergency in May 2023,
the full economic impact at the macro-level and on individual businesses, as well as the potential for
a future reoccurrence of COVID-19 or the occurrence of a similar epidemic or pandemic, are unpredictable and
could result in significant and prolonged adverse impact on economies and financial markets in specific
countries and worldwide and thereby could negatively affect the Fund’s performance.
Derivatives Risk. Derivatives are financial instruments that derive their performance from an underlying
asset, index, interest rate or currency exchange rate. Derivatives are subject to
a number of risks including credit risk, interest rate risk, and market risk. They also involve the risk that
changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. The
counterparty to a derivative contract might default on its obligations. Derivatives can be volatile and may be
less liquid than other securities. As a result, the value of an investment in the Fund that invests in derivatives
may change quickly and without warning.
For some derivatives, it is possible to lose more than the amount invested in the
derivative. Derivatives may be used to create synthetic exposure to an underlying asset or to hedge a portfolio
risk. If the Fund uses derivatives to “hedge” a portfolio risk, it is possible that the hedge may not succeed. This may happen for various reasons, including unexpected changes in the value of the rest of the portfolio
of the Fund. Over-the-counter derivatives are also subject to counterparty risk, which is the risk that the other
party to the contract will not fulfill its contractual obligation to complete the transaction with the Fund.
9
The regulation of derivatives is a rapidly changing area of law and is subject to
modification by government and judicial action. In addition, the SEC, the Commodity Futures Trading Commission (“CFTC”) and the exchanges are authorized to take extraordinary actions in the event of a market
emergency, including, for example, the implementation or reduction of speculative position limits, the implementation
of higher margin requirements, the establishment of daily price limits and the suspension of
trading.
It is not possible to predict fully the effects of current or future regulation. However,
it is possible that developments in government regulation of various types of derivative instruments,
such as speculative position limits on certain types of derivatives, or limits or restrictions on the
counterparties with which the Fund engages in derivative transactions, may limit or prevent the Fund from using or limit the Fund’s use of these instruments effectively as a part of its investment strategy, and could adversely affect the Fund’s ability to achieve its investment objective. The Adviser will continue to monitor developments
in the area, particularly to the extent regulatory changes affect the Fund’s ability to enter into desired swap agreements. New requirements, even if not directly applicable to the Fund, may increase the cost of the Fund’s investments and cost of doing business.
Environmental Investing Strategy Risk. The Fund invests in securities that meet its index provider’s environmental criteria. The criteria may be based on the index provider’s proprietary research or on third-party research, as described in the Fund’s Prospectus. The securities of companies with favorable attributes (as determined by the index provider) may underperform the market as a whole. As a result,
the Fund may underperform other funds that do not screen companies based on this criteria or that
use a different methodology to identify and/or incorporate such criteria. The criteria used to select
companies for investment may result in the Fund investing in securities, industries or sectors that underperform
the market as a whole or underperform other funds screened for such standards. There is no guarantee that
the evaluation of environmental criteria will benefit the Fund’s performance. As investors can differ in their views regarding these factors and ratings may vary, the Fund may invest in issuers that do not reflect
the views of any particular investor or do not rate strongly on certain environmental criteria.
Foreign Currency Transactions. The Fund's transactions in foreign currencies, foreign currency-denominated debt obligations and certain foreign currency options, futures contracts and forward
contracts (and similar instruments) may give rise to ordinary income or loss to the extent such
income or loss results from fluctuations in the value of the foreign currency concerned. This treatment could
increase or decrease the Fund's ordinary income distributions to you, and may cause some or all of the
Fund's previously distributed income to be classified as a return of capital. In certain cases, the
Fund may make an election to treat such gain or loss as capital.
Forward Foreign Currency Contracts. The Fund may enter into forward foreign currency transactions in anticipation of, or to protect itself against, fluctuations in exchange rates. A forward
foreign currency contract is an obligation to buy or sell a particular currency in exchange for another currency,
which may be U.S. dollars, at a specified exchange rate on a future date. Forward foreign currency contracts
are typically individually negotiated and privately traded by currency traders and their customers
in the interbank market. The Fund may enter into forward foreign currency contracts with respect to a specific
purchase or sale of a security, or with respect to its portfolio positions generally.
At the maturity of a forward foreign currency contract, the Fund may either exchange
the currencies specified at the maturity of the contract or, prior to maturity, enter into a closing
transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect to forward
foreign currency contracts may or may not be effected with the counterparty to the original forward
contract. The Fund may also enter into forward foreign currency contracts that do not provide for physical
exchange of the two currencies on the settlement date but instead provide for settlement by a single cash
payment calculated as the difference between the agreed upon exchange rate and the spot rate at settlement
based upon an agreed upon notional amount. These contracts are known as “non-deliverable forwards”.
Under definitions adopted by the CFTC and SEC, non-deliverable forwards are considered
swaps, and therefore are included in the definition of commodity interests. Although non-deliverable
forwards have historically been traded in the OTC market, as swaps they may in the future be required
to be centrally
10
cleared and traded on public execution facilities. Forward foreign currency contracts
that qualify as deliverable forwards are not regulated as swaps for most purposes, and are not included in the
definition of commodity interests. However these forwards are subject to some requirements applicable to swaps,
including reporting to swap data repositories, margin requirements, documentation requirements, and business
conduct rules applicable to swap dealers. CFTC regulation of forward foreign currency contracts,
especially non-deliverable forwards, may restrict the Fund’s ability to use these instruments in the manner described above.
The cost to the Fund of engaging in forward foreign currency contracts varies with
factors such as the currencies involved, the length of the contract period, differences in prevailing
interest rates in the jurisdictions associated with the two currencies and the prevailing market conditions. Because forward
foreign currency contracts are usually entered into on a principal basis, no fees or commissions are
typically involved. The use of forward foreign currency contracts for hedging does not eliminate fluctuations
in the prices of the underlying securities the Fund owns or intends to acquire, but it does establish a rate of exchange
in advance. While forward foreign currency contract sales limit the risk of loss due to a decline in
the value of the hedged currencies, they also limit any potential gain that might result should the value
of the currencies increase.
Futures and Options. The Fund may enter into futures contracts, options and options on futures contracts. These futures contracts and options will be used to simulate full investment
in the Underlying Index, to facilitate trading or to reduce transaction costs. The Fund will only enter into
futures contracts and options on futures contracts that are traded on an exchange. The Fund will not use futures
or options for speculative purposes.
A call option gives a holder the right to purchase a specific security or an index
at a specified price (“exercise price”) within a specified period of time. A put option gives a holder the right to sell a specific security or an index at a specified price within a specified period of time. The initial
purchaser of a call option pays the “writer,” i.e., the party selling the option, a premium which is paid at the time of purchase and is retained by the writer whether or not such option is exercised. The Fund may purchase
put options to hedge its portfolio against the risk of a decline in the market value of securities held
and may purchase call options to hedge against an increase in the price of securities it is committed to purchase.
Futures contracts provide for the future sale by one party and purchase by another
party of a specified amount of a specific instrument or index at a specified future time and at a specified
price. Stock index contracts are based on indices that reflect the market value of common stock of the
firms included in the indices. The Fund may enter into futures contracts to purchase security indices when
the Adviser anticipates purchasing the underlying securities and believes prices will rise before the purchase
will be made.
An option on a futures contract, as contrasted with the direct investment in such
a contract, gives the purchaser the right, in return for the premium paid, to assume a position in the underlying
futures contract at a specified exercise price at any time prior to the expiration date of the option. Upon
exercise of an option, the delivery of the futures position by the writer of the option to the holder of the
option will be accompanied by delivery of the accumulated balance in the writer’s futures margin account that represents the amount by which the market price of the futures contract exceeds (in the case of a call) or
is less than (in the case of a put) the exercise price of the option on the futures contract. The potential for loss
related to the purchase of an option on a futures contract is limited to the premium paid for the option plus
transaction costs. Because the value of the option is fixed at the point of purchase, there are no daily cash
payments by the purchaser to reflect changes in the value of the underlying contract; however, the value of the
option changes daily and that change would be reflected in the NAV of the Fund. The potential for loss related
to writing call options on equity securities or indices is unlimited. The potential for loss related to writing
put options is limited only by the aggregate strike price of the put option less the premium received.
The Fund may purchase and write put and call options on futures contracts that are
traded on an exchange as a hedge against changes in value of its portfolio securities, or in anticipation
of the purchase of securities, and may enter into closing transactions with respect to such options to
terminate existing positions. There is no guarantee that such closing transactions can be effected.
11
Upon entering into a futures contract, the Fund will be required to deposit with the
broker an amount of cash or cash equivalents in the range of approximately 5% to 7% of the contract amount
(this amount is subject to change by the exchange on which the contract is traded). This amount, known as “initial margin,” is in the nature of a performance bond or good faith deposit on the contract and is returned
to the Fund upon termination of the futures contract, assuming all contractual obligations have been
satisfied. Subsequent payments, known as “variation margin,” to and from the broker will be made daily as the price of the index underlying the futures contract fluctuates, making the long and short positions in
the futures contract more or less valuable, a process known as “marking-to-market.” At any time prior to expiration of a futures contract, the Fund may elect to close the position by taking an opposite position, which will
operate to terminate the existing position in the contract.
Risks of Futures and Options Transactions. There are several risks accompanying the utilization of futures contracts and options on futures contracts. First, there is no guarantee that
a liquid market will exist for a futures contract at a specified time. The Fund may utilize futures contracts only
if an active market exists for such contracts.
Furthermore, because, by definition, futures contracts project price levels in the
future and not current levels of valuation, market circumstances may result in a discrepancy between the
price of the future and the movement in the Underlying Index. In the event of adverse price movements, the Fund would continue to be required to make daily cash payments to maintain its required margin. In such situations,
if the Fund has insufficient cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, the Fund may be required to deliver
the instruments underlying futures contracts it has sold.
The risk of loss in trading futures contracts or uncovered call options in some strategies
(e.g., selling uncovered stock index futures contracts) potentially is unlimited. The Fund does not
plan to use futures and options contracts in this way. The risk of a futures position may still be large as
traditionally measured due to the low margin deposits required. In many cases, a relatively small price movement
in a futures contract may result in immediate and substantial loss or gain to the investor relative to the size
of a required margin deposit. The Fund, however, intends to utilize futures and options in a manner designed
to limit their risk exposure to levels comparable to direct investment in stocks.
Utilization of futures and options on futures by the Fund involves the risk of imperfect
or even negative correlation to the Underlying Index if the index underlying the futures contract differs
from the Underlying Index of the Fund.
There also is the risk of loss by the Fund of margin deposits in the event of bankruptcy
of a broker with whom the Fund has an open position in the futures contract or option; however, this
risk substantially is minimized because (a) of the regulatory requirement that the broker has to “segregate” customer funds from its corporate funds, and (b) in the case of regulated exchanges in the United States,
the clearing corporation stands behind the broker to make good losses in such a situation. The purchase of
put or call options could be based upon predictions by the Adviser as to anticipated trends, which could prove
to be incorrect and a part or all of the premium paid therefore could be lost.
Because the futures market imposes less burdensome margin requirements than the securities
market, an increased amount of participation by speculators in the futures market could result
in price fluctuations. Certain financial futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the maximum amount by which the price
of a futures contract may vary either up or down from the previous day's settlement price at the end of
a trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made
on that day at a price beyond that limit. It is possible that futures contract prices could move to the daily
limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures
positions and subjecting the Fund to substantial losses. In the event of adverse price movements, the Fund
would be required to make daily cash payments of variation margin.
12
Restrictions on the Use of Futures Contracts, Options on Futures Contracts and Swaps. Rule 4.5 of the Commodity Exchange Act (“CEA”) significantly limits the ability of certain regulated entities, including registered investment companies such as the Trust, to rely on an exclusion that would
not require its investment adviser to register with the Commodity Futures Trading Commission (“CFTC”) as a commodity pool operator (“CPO”). However, under Rule 4.5, the investment adviser of a registered investment company may claim exclusion from registration as a CPO only if the registered investment company
that it advises uses futures contracts solely for “bona fide hedging purposes” or limits its use of futures contracts for non-bona fide hedging purposes such that (i) the aggregate initial margin and premiums required
to establish non-bona fide hedging positions with respect to futures contracts do not exceed 5% of the liquidation
value of the registered investment company's portfolio, or (ii) the aggregate “notional value” of the non-bona fide hedging commodity interests do not exceed 100% of the liquidation value of the registered investment
company's portfolio (taking into account unrealized profits and unrealized losses on any such positions). The
Adviser has claimed exclusion on behalf of the Fund under Rule 4.5 which effectively limits the Fund’s use of futures, options on futures, swaps, or other commodity interests. The Fund currently intends to comply
with the terms of Rule 4.5 so as to avoid regulation as a commodity pool, and as a result, the ability of the
Fund to utilize futures, options on futures, swaps, or other commodity interests may be limited in accordance with
the terms of the rule, as well as any limits set forth in the Fund’s Prospectus and this SAI. The Fund therefore is not subject to CFTC registration or regulation as a commodity pool.
The terms of the CPO exclusion require the Fund claiming such exemption, among other
things, to adhere to certain limits on its investments in “commodity interests.” Commodity interests include commodity futures, commodity options and swaps, which in turn include non-deliverable forwards.
The Fund is permitted to invest in these instruments as further described in this SAI. However, the Fund
is not intended as a vehicle for trading in the commodity futures, commodity options or swaps markets. The CFTC
has neither reviewed nor approved the Adviser's reliance on these exclusions, or the Fund, its investment
strategies or the Prospectus.
While not anticipated, should the Fund invest in futures contracts for purposes that
are not solely for “bona fide hedging” in excess of the limitations imposed by Rule 4.5, the Fund may be subject to regulation under the CEA and CFTC Rules as a commodity pool. Registration as a commodity pool
may have negative effects on the ability of the Fund to engage in its planned investment program, while
registration as a CPO imposes additional laws, regulations and enforcement policies, which could increase
compliance costs and may affect the operations and financial performance of the Fund.
Illiquid Investments. The Fund may not acquire any illiquid investment if, immediately after the acquisition, the Fund would have invested more than 15% of its net assets in illiquid
investments. For purposes of this 15% limitation, illiquid investment means any investment that the
Fund reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days
or less without the sale or disposition significantly changing the market value of the investment, as determined
pursuant to the 1940 Act and applicable rules and regulations thereunder. The Fund will monitor its portfolio
liquidity on an ongoing basis to determine whether, in light of current circumstances, the appropriate level
of liquidity is being maintained, and will take steps to ensure it adjusts its liquidity consistent with
the policies and procedures adopted by the Trust on behalf of the Fund. The existence of a liquid trading market
for certain securities may depend on whether dealers will make a market in such securities. There can be no assurance
that dealers will make or maintain a market or that any such market will be or remain liquid. The price
at which securities may be sold and the value of Shares will be adversely affected if trading markets for the Fund’s portfolio securities are limited or absent, or if bid/ask spreads are wide.
Lending Portfolio Securities. From time to time, the Fund (as the Adviser shall so determine) may lend its portfolio securities (principally to brokers, dealers or other financial institutions)
to generate additional income. Such loans are callable at any time and are secured continuously by segregated
collateral equal to at least 102% (105% for international securities) of the market value, determined daily,
of the loaned securities. The Fund may lend portfolio securities to the extent of one-third of its total assets.
The Fund will loan its securities only to parties that the Adviser has determined are in good standing and when, in the Adviser’s judgment, the potential income earned would justify the risks.
13
Although voting rights may pass with the lending of portfolio securities, the Fund
will be entitled to call loaned securities, or otherwise obtain rights to vote or consent, when deemed necessary
by the Adviser with respect to a material event affecting securities on loan. The Fund would receive income
in lieu of dividends on loaned securities and may, at the same time, generate income on the loan collateral
or on the investment of any cash collateral.
Securities lending involves a risk of loss because the borrower may fail to return
the securities in a timely manner or at all. If the borrower defaults on its obligation to return the securities
loaned because of insolvency or other reasons, the Fund could experience delays and costs in recovering securities
loaned or gaining access to the collateral. If the Fund is not able to recover the securities loaned,
the Fund may sell the collateral and purchase a replacement security in the market. Lending securities entails
a risk of loss to the Fund if, and to the extent that, the market value of the loaned securities increases
and the collateral is not increased accordingly. Securities lending also involves exposure to operational risk
(the risk of loss resulting from errors in the settlement and accounting process) and “gap risk” (the risk that the return on cash collateral reinvestments will be less than the fees paid to the borrower).
Any cash received as collateral for loaned securities will be invested, in accordance with the Fund’s investment guidelines, in an affiliated money market fund. Investing this cash subjects
that investment to market appreciation or depreciation. For purposes of determining whether the Fund
is complying with its investment policies, strategies and restrictions, the Fund or the Adviser will consider
the loaned securities as assets of the Fund, but will not consider any collateral received as a Fund asset.
The Fund will bear any loss on the investment of cash collateral. The Fund may have to pay the borrower a fee
based on the amount of cash collateral.
For a discussion of the federal income tax considerations relating to lending portfolio
securities, see “Taxes.”
Leverage Risk. Leverage exists when the Fund can lose more than it originally invests because it
purchases or sells an instrument or enters into a transaction without investing an
amount equal to the full economic exposure of the instrument or transaction. Leverage may cause the portfolio
of the Fund to be more volatile than if the portfolio had not been leveraged because leverage can exaggerate
the effect of any increase or decrease in the value of securities held by the Fund. The use of some
derivatives may result in economic leverage, which does not result in the possibility of the Fund incurring
obligations beyond its initial investment, but that nonetheless permits the Fund to gain exposure that is greater
than would be the case in an unleveraged instrument.
Money Market Instruments. The Fund may invest a portion of its assets in high-quality money market instruments on an ongoing basis to provide liquidity. The instruments in which the
Fund may invest include: (i) short-term obligations issued by the U.S. government; (ii) negotiable certificates of deposit (“CDs”), fixed time deposits and bankers' acceptances of U.S. and foreign banks and similar institutions;
(iii) commercial paper rated at the date of purchase “Prime-1” by Moody's Investors Service, Inc. ("Moody's") or “A-1+” or “A-1” by S&P Global Ratings, a division of S&P Global Inc. ("S&P") or has a similar rating
from a comparable rating agency, or if unrated, of comparable quality as the Adviser determines; (iv) repurchase
agreements; and (v) money market mutual funds, including affiliated money market funds. CDs are short-term
negotiable obligations of commercial banks. Time deposits are non-negotiable deposits maintained
in banking institutions for specified periods of time at stated interest rates. Banker's acceptances are time
drafts drawn on commercial banks by borrowers, usually in connection with international transactions.
Portfolio Turnover Risk. The Fund may engage in active and frequent trading of its portfolio securities to
reflect the rebalancing of the Underlying Index. A portfolio turnover rate of 200%,
for example, is equivalent to the Fund buying and selling all of its securities two times during the course of the
year. A high portfolio turnover rate (such as 100% or more) could result in high brokerage costs and may
result in higher taxes when Shares are held in a taxable account.
14
Other Investment Companies. Unless otherwise indicated in this SAI or in the Fund’s Prospectus, the Fund may purchase shares of other investment companies, including exchange-traded funds (“ETFs”), non-exchange traded U.S. registered open-end investment companies (mutual funds), closed-end investment
companies, or non-U.S. investment companies traded on foreign exchanges. When the
Fund purchases shares of another investment company, the Fund will indirectly bear its proportionate
share of the advisory fees and other operating expenses of such investment company and will be subject to
the risks associated with the portfolio investments of the underlying investment company.
The investment companies in which the Fund invests may have adopted certain investment
restrictions that are more or less restrictive than the Fund’s investment restrictions, which may permit the Fund to engage in investment strategies indirectly that are prohibited under the Fund’s investment restrictions. For example, to the extent the Fund invests in underlying investment companies that concentrate their
investments in an industry, a corresponding portion of the Fund’s assets may be indirectly exposed to that particular industry. The investment companies in which the Fund may invest include index-based investment
companies. The main risk of investing in index-based investment companies is the same as investing
in a portfolio of securities comprising an index. The market prices of index-based investments will fluctuate in
accordance with both changes in the market value of their underlying portfolio securities and due to supply
and demand for the instruments on the exchanges on which they are traded. Index-based investments may
not replicate exactly the performance of their specified index because of transaction costs and because
of the temporary unavailability of certain component securities of the index.
The Fund’s investment in the securities of other investment companies is subject to the applicable provisions of the 1940 Act and the rules thereunder. Specifically, Section 12(d)(1)
of the 1940 Act contains various limitations on the ability of a registered investment company (an “acquiring fund”) to acquire shares of another registered investment company (an “acquired fund”). Under these limits, an acquiring fund generally cannot (i) purchase more than 3% of the total outstanding voting stock of an acquired
fund; (ii) invest more than 5% of its total assets in securities issued by an acquired company; and (iii)
invest more than 10% of its total assets in securities issued by other investment companies. Likewise, an acquired
fund, as well as its principal underwriter or any broker or dealer registered under the Securities Exchange
Act of 1934, cannot knowingly sell more than 3% of the total outstanding voting stock of the acquired
fund to an acquiring fund, or more than 10% of the total outstanding voting stock of the acquired fund to acquiring
funds generally.
Rule 12d1-4 under the 1940 Act allows a fund to acquire the securities of another
investment company in excess of the limitations imposed by Section 12(d)(1) of the 1940 Act without obtaining
an exemptive order from the SEC, subject to certain limitations and conditions. Among those conditions
is the requirement that, prior to a fund relying on Rule 12d1-4 to acquire securities of another fund in excess
of the limits of Section 12(d)(1), the acquiring fund must enter into a Fund of Funds Agreement with the acquired
fund. (This requirement does not apply when the acquiring fund’s investment adviser acts as the acquired fund’s investment adviser and does not act as sub-adviser to either fund.)
Rule 12d1-4 also is designed to limit the use of complex fund structures. Under Rule
12d1-4, an acquired fund is prohibited from purchasing or otherwise acquiring the securities of another
investment company or private fund if, immediately after the purchase or acquisition, the securities of
investment companies and private funds owned by the acquired fund have an aggregate value in excess of 10%
of the value of the acquired fund’s total assets, subject to certain limited exceptions. Accordingly, to the extent that Fund shares are sold to other investment companies in reliance on Rule 12d1-4, the Fund will be
limited in the amount it could invest in other investment companies and private funds.
In addition to Rule 12d1-4, the 1940 Act and related rules provide other exemptions
from these restrictions. For example, these limitations do not apply to investments by the Fund
in investment companies that are money market funds, including money market funds that have the Adviser or
an affiliate of the Adviser as an investment adviser.
Political and Economic Risks of Investing in China. The value of the Fund’s assets may be adversely affected by political and economic factors, inadequate investor protection and changes
in Chinese laws or regulations. In addition, the Chinese economy may differ favorably or unfavorably
from the U.S. economy in
15
respects such as the rate of growth of gross domestic product, the rate of inflation,
capital reinvestment, resource self-sufficiency, balance of payments position and sensitivity to changes
in global trade. The Chinese government has exercised and continues to exercise significant influence over many
aspects of the economy. Accordingly, future government actions could have a significant effect on the country’s economy, which could affect the fund, market conditions, and prices and yields of securities of the fund.
Real Estate Investment Trusts (“REITs”). REITs pool investors’ funds for investments primarily in real estate properties to the extent allowed by law. Investment in REITs may be the most
practical available means for the Fund to invest in the real estate industry. As a shareholder in a REIT, the Fund would bear its ratable share of the REIT’s expenses, including its advisory and administration fees. At the same time, the Fund would continue to pay its own investment advisory fees and any other expenses not
included in its advisory fees, as a result of which the Fund and its shareholders in effect will be absorbing
duplicate levels of fees with respect to investments in REITs. A REIT may focus on particular projects, such as
apartment complexes, or geographic regions, such as the southeastern United States, or both.
REITs generally can be classified as equity REITs, mortgage REITs and hybrid REITs.
Equity REITs generally invest a majority of their assets in income-producing real estate properties
to generate cash flow from rental income and a gradual asset appreciation. The income-producing real estate
properties in which equity REITs invest typically include properties such as office, retail, industrial,
hotel and apartment buildings, self-storage, specialty and diversified and healthcare facilities. Equity REITs can
realize capital gains by selling properties that have appreciated in value. Mortgage REITs invest the majority
of their assets in real estate mortgages and derive their income primarily from interest payments on the mortgages.
Hybrid REITs combine the characteristics of both equity REITs and mortgage REITs.
REITs can be listed and traded on national securities exchanges or can be traded privately
between individual owners. The Fund may invest in both publicly and privately traded REITs.
The Fund conceivably could own real estate directly as a result of a default on the securities
it owns. The Fund, therefore, may be subject to certain risks associated with the direct ownership
of real estate, including difficulties in valuing and trading real estate, declines in the values of real estate,
risks related to general and local economic conditions, adverse changes in the climate for real estate, environmental
liability risks, increases in property taxes, capital expenditures and operating expenses, changes
in zoning laws, casualty or condemnation losses, limitations on rents, changes in neighborhood values, the appeal
of properties to tenants and increases in interest rates.
In addition to the risks described above, equity REITs may be affected by any changes
in the value of the underlying property owned by the trusts, while mortgage REITs may be affected by the
quality of any credit extended. Equity and mortgage REITs depend upon management skill, are not diversified
and are therefore subject to the risk of financing single or a limited number of projects. Such REITs
also are subject to heavy cash flow dependency, defaults by borrowers, self-liquidation and the possibility
of failing to maintain an exemption from the 1940 Act. Changes in interest rates also may affect the value of
debt securities held by the Fund. By investing in REITs indirectly through the Fund, a shareholder will bear not only his/her proportionate share of the expenses of the Fund, but also, indirectly, similar expenses
of the REITs.
Repurchase Agreements. The Fund may enter into repurchase agreements, which are agreements pursuant to which the Fund acquires securities from a third party with the understanding
that the seller will repurchase them at a fixed price on an agreed date. These agreements may be made with
respect to any of the portfolio securities in which the Fund is authorized to invest. Repurchase agreements
may be characterized as loans secured by the underlying securities. The Fund may enter into
repurchase agreements with (i) member banks of the Federal Reserve System having total assets in excess
of $500 million and (ii) securities dealers (“Qualified Institutions”). The Adviser will monitor the continued creditworthiness of Qualified Institutions.
The use of repurchase agreements involves certain risks. For example, if the seller
of securities under a repurchase agreement defaults on its obligation to repurchase the underlying securities,
as a result of its bankruptcy or otherwise, the Fund will seek to dispose of such securities, which could
involve costs or delays.
16
If the seller becomes insolvent and subject to liquidation or reorganization under
applicable bankruptcy or other laws, the Fund's ability to dispose of the underlying securities may be restricted.
Finally, the Fund may not be able to substantiate its interest in the underlying securities. If the seller
fails to repurchase the securities, the Fund may suffer a loss to the extent proceeds from the sale of the
underlying securities are less than the repurchase price.
The resale price reflects the purchase price plus an agreed upon market rate of interest.
The securities underlying a repurchase agreement will be marked-to-market every business day, and
if the value of the securities falls below a specified percentage of the repurchase price (typically 102%),
the counterparty will be required to deliver additional collateral to the Fund in the form of cash or additional
securities. Custody of the securities will be maintained by the Fund's custodian or sub-custodian for the duration
of the agreement.
Reverse Repurchase Agreements. The Fund may enter into reverse repurchase agreements, which involve the sale of securities by the Fund to financial institutions such as banks
and broker-dealers with an agreement by the Fund to repurchase the securities at an agreed-upon price and date
(or upon demand). During the reverse repurchase agreement period, the Fund continues to receive interest
and principal payments on the securities sold, but pays interest to the other party on the proceeds
received. Reverse repurchase agreements are a form of leverage and involve the risk that the market
value of securities to be repurchased by the Fund may decline below the price at which the Fund is obligated
to repurchase the securities, resulting in a requirement for the Fund to deliver margin to the other
party in the amount of the related shortfall, or that the other party may default on its obligation so that the
Fund is delayed or prevented from completing the transaction. Leverage may make the Fund's returns more volatile
and increase the risk of loss. In the event the buyer of securities under a reverse repurchase agreement files
for bankruptcy or becomes insolvent, the Fund's use of the proceeds from the sale of the securities
may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the
Fund's obligation to repurchase the securities. The Fund intends to use the reverse repurchase technique
only when the Adviser believes it will be advantageous to the Fund.
Political and Economic Risk. The economies of many countries may not be as developed as that of the United States' economy and may be subject to significantly different forces. Political,
economic or social instability and development, expropriation or confiscatory taxation, and limitations
on the removal of funds or other assets could also adversely affect the value of portfolio investments. Certain
foreign companies may be subject to sanctions, embargoes, or other governmental actions that may impair or
otherwise limit the ability to invest in, receive, hold or sell the securities of such companies. These factors may
affect the value of investments in those companies. Certain companies may operate in, or have dealings
with, countries that the U.S. government has identified as state sponsors of terrorism. As a result, such companies
may be subject to specific constraints or regulations under U.S. law and, additionally, may be subject
to negative investor perception, either of which could adversely affect such companies' performance. Further,
war and military conflict between countries or in a region, for example the current conflicts in the
Ukraine and Middle East, may have an impact on the value of portfolio investments.
Risks Related to Armed Conflict. As a result of increasingly interconnected global economies and financial markets, armed conflict between countries or in a geographic region, for
example the current conflicts between Russia and Ukraine in Europe and Hamas and Israel in the Middle
East, has the potential to adversely impact Fund investments. Such conflicts, and other corresponding events,
have had, and could continue to have, severe negative effects on regional and global economic and financial
markets, including increased volatility, reduced liquidity, and overall uncertainty. The negative impacts
may be particularly acute in certain sectors The timing and duration of such conflicts, resulting sanctions,
related events and other implications cannot be predicted. The foregoing may result in a negative impact on
Fund performance and the value of an investment in the Fund, even beyond any direct investment exposure the
Fund may have to issuers located in or with significant exposure to an impacted country or geographic
region.
●
Risks Related to Russian Invasion of Ukraine.
In late February 2022, Russian military forces invaded Ukraine, significantly amplifying
already existing geopolitical tensions among Russia, Ukraine, Europe, the North Atlantic Treaty
Organization
17
(“NATO”), and the West. Russia’s invasion, the responses of countries and political bodies to Russia’s actions, and the potential for wider conflict may increase financial market volatility
and could have severe adverse effects on regional and global economic markets, including the markets
for certain securities and commodities such as oil and natural gas.
Following Russia’s actions, various countries, including the U.S., Canada, the United Kingdom, Germany, and France, among others, as well as the European Union, issued broad-ranging
economic sanctions against Russia. The sanctions freeze certain Russian assets and prohibit
trading by individuals and entities in certain Russian securities, engaging in certain private
transactions, and doing business with certain Russian corporate entities, large financial institutions, officials
and oligarchs. The sanctions include a commitment by certain countries and the European Union to remove
selected Russian banks from the Society for Worldwide Interbank Financial Telecommunications,
commonly called “SWIFT,” the electronic network that connects banks globally, and imposed restrictive measures to prevent the Russian Central Bank from undermining the impact of the sanctions.
A number of large corporations have since withdrawn from Russia or suspended or curtailed their Russia-based
operations.
The imposition of these current sanctions (and the potential for further sanctions
in response to Russia’s continued military activity) and other actions undertaken by countries and businesses may adversely impact various sectors of the Russian economy, including but not limited
to, the financials, energy, metals and mining, engineering, and defense and defense-related materials
sectors. Such actions also may result in the decline of the value and liquidity of Russian securities,
a weakening of the ruble, and could impair the ability of the Fund to buy, sell, receive, or deliver
those securities. Moreover, the measures could adversely affect global financial and energy markets and thereby
negatively affect the value of the Fund’s investments beyond any direct exposure to Russian issuers or those of adjoining geographic regions.
In response to sanctions, the Russian Central Bank raised its interest rates and banned
sales of local securities by foreigners. Russia also prevented the export of certain goods
and payments to foreign shareholders of Russian securities. Russia may take additional countermeasures
or retaliatory actions, which may further impair the value and liquidity of Russian securities and
Fund investments. Such actions could, for example, include restricting gas exports to other countries,
the seizure of U.S. and European residents’ assets, or undertaking or provoking other military conflict elsewhere in Europe, any of which could exacerbate negative consequences on global financial markets and
the economy. The actions discussed above could have a negative effect on the performance of the
Fund. While diplomatic efforts have been ongoing, the conflict between Russia and Ukraine is unpredictable
and has the potential to result in broader military actions. The duration of the ongoing conflict
and corresponding sanctions and related events cannot be predicted and may result in a negative impact
on Fund performance and the value of Fund investments, particularly as it relates to Russian
exposure.
Due to difficulties transacting in impacted securities, the Fund’s Underlying Index may remove such securities or implement caps on the securities as a result of the actions described
above. Consequently, the Fund may experience challenges liquidating the applicable positions and/or sampling
the Underlying Index to continue to seek the Fund’s investment objective. Such circumstances may lead to increased tracking error between the Fund’s performance and the performance of its Underlying Index. Additionally, due to current and potential future sanctions or potential market closures
impacting the ability to trade Russian securities, the Fund may experience higher transaction costs
and/or Shares may trade at a premium or discount to the Fund’s NAV.
Structured Notes. A structured note is a derivative security for which the amount of principal repayment
and/or interest payments is based on the movement of one or more “factors.” These factors include, but are not limited to, currency exchange rates, interest rates (such as the prime lending
rate or Secured Overnight Financing Rate), referenced bonds and stock indices. Some of these factors may or may not correlate
to the total rate of return on one or more underlying instruments referenced in such notes.
Investments in structured notes involve risks including interest rate risk, credit risk and market risk. Depending
on the factor(s) used and
18
the use of multipliers or deflators, changes in interest rates and movement of such
factor(s) may cause significant price fluctuations. Structured notes may be less liquid than other types
of securities and more volatile than the reference factor underlying the note. This means that the Fund may
lose money if the issuer of the note defaults, as the Fund may not be able to readily close out its investment
in such notes without incurring losses.
Swap Agreements. The Fund may enter into swap agreements which are contracts between parties in which one party agrees to make periodic payments to the other party (the “Counterparty”) based on the change in market value or level of a specified rate, index or asset. In return, the
Counterparty agrees to make periodic payments to the first party based on the return of a different specified
rate, index or asset. Swap agreements usually will be done on a net basis, with the Fund receiving or paying
only the net amount of the two payments. The net amount of the excess, if any, of the Fund’s obligations over its entitlements with respect to each swap is accrued on a daily basis and an amount of cash or highly liquid
securities having an aggregate value at least equal to the accrued excess is maintained in an account at the Trust’s custodian bank.
Risks of Swap Agreements. The risk of loss with respect to swaps generally is limited to the net amount of payments that the Fund is contractually obligated to make. Swap agreements are
subject to the risk that the swap counterparty will default on its obligations. If such a default were to occur,
the Fund will have contractual remedies pursuant to the agreements related to the transaction. However,
such remedies may be subject to bankruptcy and insolvency laws that could affect the Fund’s rights as a creditor (e.g., the Fund may not receive the net amount of payments that it contractually is entitled to receive).
Swaps could result in losses for the Fund if the underlying asset or reference does not perform as anticipated.
Total return swaps can have the potential for unlimited losses. Whether the Fund’s use of swap agreements enhance the Fund’s total return will depend on the Adviser’s ability correctly to predict whether certain types of investments are likely to produce greater returns than other investments. Because they are two-party
contracts and may have terms of greater than seven days, swap agreements may be considered to be illiquid.
Moreover, the Fund bears the risk of loss of the amount expected to be received under a swap agreement
in the event of the default or bankruptcy of a swap agreement counterparty.
U.S. Government Obligations. The Fund may invest in short-term U.S. government obligations. U.S. government obligations are a type of bond and include securities issued or guaranteed
as to principal and interest by the U.S. government, its agencies or instrumentalities. These include
bills, notes and bonds issued by the U.S. Treasury, as well as “stripped” or “zero coupon” U.S. Treasury obligations representing future interest or principal payments on U.S. Treasury notes or bonds. Stripped securities
are created when the issuer separates the interest and principal components of an instrument and sells
them as separate securities. In general, one security is entitled to receive the interest payments
on the underlying assets (the interest only or “IO” security) and the other to receive the principal payments (the principal only or “PO” security). Some stripped securities may receive a combination of interest and principal
payments. The yields to maturity on IOs and POs are sensitive to the expected or anticipated rate of principal
payments (including prepayments) on the related underlying assets, and principal payments may have a material
effect on yield to maturity. If the underlying assets experience greater than anticipated prepayments
of principal, the Fund may not fully recoup its initial investment in IOs. Conversely, if the underlying assets
experience less than anticipated prepayments of principal, the yield on POs could be adversely affected.
Stripped securities may be highly sensitive to changes in interest rates and rates of prepayment.
Short-term obligations of certain agencies and instrumentalities of the U.S. government,
such as the Government National Mortgage Association (“GNMA”), are supported by the full faith and credit of the U.S. Treasury; others, such as those of the Federal National Mortgage Association (“Fannie Mae”), are supported by the right of the issuer to borrow from the U.S. Treasury; others, such as those
of the former Student Loan Marketing Association (“SLMA”), are supported by the discretionary authority of the U.S. government to purchase the agency’s obligations; still others, although issued by an instrumentality chartered by the U.S. government, like the Federal Farm Credit Bureau (“FFCB”), are supported only by the credit of the instrumentality.
19
In 2008, the Federal Housing Finance Agency (“FHFA”) placed Fannie Mae and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) into conservatorship. Since that time, Fannie Mae and Freddie Mac have received significant capital support through U.S. Treasury preferred stock purchases
as well as U.S. Treasury and Federal Reserve purchases of their mortgage-backed securities. While
the purchase programs for mortgage-backed securities ended in 2010, the U.S. Treasury continued its support for the entities’ capital as necessary to prevent a negative net worth. However, no assurance can be given that
the Federal Reserve, U.S. Treasury, or FHFA initiatives discussed above will ensure that Fannie Mae and
Freddie Mac will remain successful in meeting their obligations with respect to the debt and mortgage-backed
securities they issue. In addition, Fannie Mae and Freddie Mac are also the subject of several continuing class
action lawsuits and investigations by federal regulators, which (along with any resulting financial restatements)
may adversely affect the guaranteeing entities. Importantly, the future of the entities is in serious
question as the U.S. government is considering multiple options, ranging from significant reform, nationalization,
privatization, consolidation, or abolishment of the entities.
The FHFA and the U.S. Treasury (through its agreements to purchase preferred stock
of Fannie Mae and Freddie Mac) also have imposed strict limits on the size of the mortgage portfolios
of Fannie Mae and Freddie Mac. In August 2012, the U.S. Treasury amended its preferred stock purchase agreements
to provide that the portfolios of Fannie Mae and Freddie Mac will be wound down at an annual rate of 15%
(up from the previously agreed annual rate of 10%), requiring Fannie Mae and Freddie Mac to reach
the $250 billion target four years earlier than previously planned. Further, when a ratings agency downgraded
long-term U.S. government debt in August 2011, the agency also downgraded the bond ratings of Fannie
Mae and Freddie Mac, from AAA to AA+, based on their direct reliance on the U.S. government (although
that rating did not directly relate to their mortgage-backed securities). The U.S. government’s commitment to ensure that Fannie Mae and Freddie Mac have sufficient capital to meet their obligations was, however,
unaffected by the downgrade.
The U.S. Treasury has put in place a set of financing agreements to help ensure that
these entities continue to meet their obligations to holders of bonds they have issued or guaranteed.
The U.S. government may choose not to provide financial support to U.S. government-sponsored agencies
or instrumentalities if it is not legally obligated to do so, in which case, if the issuer were to default, the
Fund holding securities of such issuer might not be able to recover its investment from the U.S. government.
From time to time, policy changes by the U.S. government or its regulatory agencies
and other governmental actions and political events within the United States, changes to the
monetary policy by the Federal Reserve or other regulatory actions, the U.S. government’s inability at times to agree on a long-term budget and deficit reduction plan or other legislation aimed at addressing financial
or economic conditions, the threat of a federal government shutdown, and threats not to increase or suspend the federal government’s debt limit, may affect investor and consumer confidence; increase volatility in the
financial markets, perhaps suddenly and to a significant degree; reduce prices of U.S. Treasury securities and/or
increase the costs of various kinds of debt; result in higher interest rates; and even raise concerns about the U.S. government’s credit rating and ability to service its debt. If a U.S. government-sponsored entity
is negatively impacted by legislative or regulatory action, is unable to meet its obligations, or its creditworthiness
declines, the performance of a fund that holds securities of that entity will be adversely impacted.
Custody and Banking Risks. The Fund’s assets may be maintained with one or more banks or other depository institutions (“banking institutions”), including both US and non-US banking institutions. In addition, the Fund’s assets may be maintained at regional (or mid-size) banking institutions or large banking institutions. Regional banking institutions are generally subject to fewer regulatory
safeguards than large banking institutions, causing regional banking institutions to be perceived as having
greater credit risk than large banking institutions. The Fund may enter into credit facilities or have other
financial relationships with banking institutions. The distress, impairment or failure of one or more banking institutions,
whether or not holding the Fund’s assets, may inhibit the ability of the Fund to access depository accounts or lines of credit at all or in a timely manner. Such events can be caused by various factors including
negative market sentiment, significant withdrawals, fraud, or poor management. In such cases, the Fund may need
to delay or forgo making new investments, or the Fund may need to sell another investment to raise cash
when it is not
20
desirable to do so, which could result in lower performance. In the event of such
a failure of a banking institution, access to such accounts could be restricted and U.S. Federal Deposit
Insurance Corporation (“FDIC”) protection may not be available for balances in excess of the amounts insured by the FDIC (and similar considerations may apply to banking institutions in other jurisdictions not
subject to FDIC protection). In such instances, the Fund may not recover such excess uninsured amounts and instead
would only have an unsecured claim against the banking institution and may be able to recover only the
residual value of the banking institution’s assets, if any value is recovered at all. The loss of any assets maintained with a banking institution or the inability to access such assets for a period of time, even if ultimately
recovered, could be materially adverse to the Fund. In addition, the Adviser may not be able to identify
all potential solvency or stress concerns with respect to a banking institution or transfer assets from one
bank to another in a timely manner in the event a banking institution comes under stress or fails. It is also
possible that the Fund will incur additional expenses or delays in putting in place alternative arrangements or
that such alternative arrangements will be less favorable than those formerly in place (with respect to
access to capital, economic terms, or otherwise).
PORTFOLIO TURNOVER
The Fund calculates its portfolio turnover rate by dividing the value of the lesser
of purchases or sales of portfolio securities for the fiscal period by the monthly average of the value of
portfolio securities owned by the Fund during the fiscal period. A 100% portfolio turnover rate would occur, for example,
if all of the portfolio securities (other than short-term securities) were replaced once during the fiscal
period. Portfolio turnover rates will vary from year to year, depending on market conditions and the nature of
the Fund's holdings. As of the date of this SAI, the Fund is new and has no operating history, and therefore
portfolio turnover information is not yet available.
DISCLOSURE OF PORTFOLIO HOLDINGS
Quarterly Portfolio Schedule. The Trust is required to disclose, after its first and third fiscal quarters, the
complete schedule of the Fund’s portfolio holdings with the SEC on Form N-PORT. The Trust also discloses a complete schedule of the Fund’s portfolio holdings with the SEC on Form N-CSR after its second and fourth fiscal quarters.
The Trust’s Forms N-PORT and Forms N-CSR on behalf of the Fund will be available on the SEC's website at www.sec.gov. The Trust’s Forms N-PORT and Forms N-CSR are available without charge, upon request, by calling 1-630-933-9600 or 1-800-983-0903 or by writing to Invesco Exchange-Traded
Fund Trust II at 3500 Lacey Road, Suite 700, Downers Grove, Illinois 60515.
Portfolio Holdings Policy. The Trust has adopted a policy regarding the disclosure of information about the
Trust's portfolio holdings. The Board must approve all material amendments to this
policy.
Each business day before the opening of regular trading on the Exchange, the Fund
discloses on its website (www.invesco.com/ETFs) the portfolio holdings that will form the basis for the Fund’s next calculation of NAV per Share. The Trust, the Adviser and The Bank of New York Mellon (“BNYM” or the “Administrator”) will not disseminate non-public information concerning the Trust.
Access to information concerning the Fund’s portfolio holdings may be permitted at other times: (i) to personnel of third-party service providers, including the Fund’s custodian, transfer agent, auditors and counsel, as may be necessary to conduct business in the ordinary course in a manner
consistent with such service providers’ agreements with the Trust on behalf of the Fund; or (ii) in instances when the Fund’s President and/or Chief Compliance Officer determines that (x) such disclosure serves
a reasonable business purpose and is in the best interests of the Fund’s shareholders; and (y) in making such disclosure, no conflict exists between the interests of the Fund’s shareholders and those of the Adviser or the Distributor.
21
MANAGEMENT
The primary responsibility of the Board is to represent the interests of the Fund
and to provide oversight of the management of the Fund. The Trust currently has eight Trustees, each of whom is not “interested,” as that term is defined under the 1940 Act, and have no affiliation or business connection
with the Adviser or any of its affiliated persons and do not own any stock or other securities issued by the Adviser (the “Independent Trustees”).
The Independent Trustees of the Trust, their term of office and length of time served,
their principal business occupations during at least the past five years, the number of portfolios
in the Fund Complex (defined below) that they oversee and other directorships, if any, that they hold are shown below. The “Fund Complex” includes all open- and closed-end funds (including all of their portfolios) advised by the Adviser and any affiliated person of the Adviser. As of the date of this SAI, the “Fund Family” consists of the Trust and five other ETF trusts advised by the Adviser.
|
Name, Address and
Year of Birth
of Independent Trustees
|
Position(s) Held
with Trust
|
Term of
Office and
Length of
Time Served*
|
Principal Occupation(s)
During the Past 5 Years
|
Number of
Portfolios in
Fund
Complex
Overseen by
Independent
Trustees
|
Other Directorships
Held by
Independent Trustees
During the Past 5 Years
|
|
Ronn R. Bagge—1958
c/o Invesco Capital
Management LLC
3500 Lacey Road,
Suite 700
Downers Grove, IL 60515
|
Vice Chair of
the Board;
Chair of the
Nominating and
Governance
Committee and
Trustee
|
Vice Chair since
2018; Chair of
the Nominating
and Governance
Committee and
Trustee since
2007
|
Founder and Principal,
YQA Capital Management
LLC (1998-Present);
formerly, Owner/CEO of
Electronic Dynamic
Balancing Co., Inc. (high-
speed rotating equipment
service provider) (1988-
2001).
|
214
|
Chair (since 2021) and
member (since 2017)
of the Joint Investment
Committee, Mission
Aviation Fellowship
and MAF Foundation;
Trustee, Mission
Aviation Fellowship
(2017-Present).
|
|
Todd J. Barre—1957
c/o Invesco Capital
Management LLC
3500 Lacey Road,
Suite 700
Downers Grove, IL 60515
|
Trustee
|
Since 2010
|
Formerly, Assistant
Professor of Business,
Trinity Christian
College (2010-2016); Vice
President and Senior
Investment Strategist
(2001-2008), Director of
Open Architecture and
Trading (2007-2008),
Head of Fundamental
Research (2004-2007)
and Vice President and
Senior Fixed Income
Strategist (1994-2001),
BMO Financial
Group/Harris Private
Bank.
|
214
|
None.
|
|
Victoria J. Herget—1951
c/o Invesco Capital
Management LLC
3500 Lacey Road,
Suite 700
Downers Grove, IL 60515
|
Trustee
|
Since 2019
|
Formerly, Managing
Director (1993-2001),
Principal (1985-1993),
Vice President (1978-
1985) and Assistant Vice
President (1973-1978),
Zurich Scudder
Investments (investment
adviser) (and its
predecessor firms).
|
214
|
Trustee Emerita (2017-
present), Trustee
(2000-2017) and Chair
(2010-2017), Newberry
Library; Member
(2002-present),
Rockefeller Trust
Committee; formerly,
Trustee, Chikaming
Open Lands (2014-
2023); Trustee, Mather
LifeWays (2001-2021);
Trustee, certain funds
|
22
|
Name, Address and
Year of Birth
of Independent Trustees
|
Position(s) Held
with Trust
|
Term of
Office and
Length of
Time Served*
|
Principal Occupation(s)
During the Past 5 Years
|
Number of
Portfolios in
Fund
Complex
Overseen by
Independent
Trustees
|
Other Directorships
Held by
Independent Trustees
During the Past 5 Years
|
|
|
|
|
|
|
in the Oppenheimer
Funds complex (2012-
2019); Board Chair
(2008-2015) and
Director (2004-2018),
United Educators
Insurance Company;
Independent Director,
First American Funds
(2003-2011); Trustee
(1992-2007), Chair of
the Board of Trustees
(1999-2007),
Investment Committee
Chair (1994-1999) and
Investment Committee
member (2007-2010),
Wellesley College;
Trustee, BoardSource
(2006-2009); Trustee,
Chicago City Day
School (1994-2005).
|
|
Marc M. Kole—1960
c/o Invesco Capital
Management LLC
3500 Lacey Road,
Suite 700
Downers Grove, IL 60515
|
Chair of the
Audit Committee
and Trustee
|
Chair of the
Audit Committee
since 2008;
Trustee since
2007
|
Formerly, Managing
Director of Finance (2020-
2021) and Senior Director
of Finance (2015-2020),
By The Hand Club for
Kids (not-for-profit); Chief
Financial Officer, Hope
Network (social services)
(2008-2012); Assistant
Vice President and
Controller, Priority Health
(health insurance) (2005-
2008); Regional Chief
Financial Officer, United
Healthcare (2005); Chief
Accounting Officer, Senior
Vice President of Finance,
Oxford Health Plans
(2000-2004); Audit
Partner, Arthur Andersen
LLP (1996-2000).
|
214
|
Formerly, Treasurer
(2018-2021), Finance
Committee Member
(2015-2021) and Audit
Committee Member
(2015), Thornapple
Evangelical Covenant
Church; Board and
Finance Committee
Member (2009-2017)
and Treasurer (2010-
2015, 2017),
NorthPointe Christian
Schools.
|
|
Yung Bong Lim—1964
c/o Invesco Capital
Management LLC
3500 Lacey Road,
Suite 700
Downers Grove, IL 60515
|
Chair of the
Investment
Oversight
Committee and
Trustee
|
Chair of the
Investment
Oversight
Committee since
2014; Trustee
since 2013
|
Managing Partner, RDG
Funds LLC (real estate)
(2008-Present); formerly,
Managing Director, Citadel
LLC (1999-2007).
|
214
|
Board Director, Beacon
Power Services, Corp.
(2019-Present);
formerly, Advisory
Board Member,
Performance Trust
Capital Partners, LLC
(2008-2020).
|
|
Joanne Pace—1958
c/o Invesco Capital
|
Trustee
|
Since 2019
|
Formerly, Senior Advisor,
SECOR Asset
|
214
|
Board Director, Horizon
Blue Cross Blue Shield
|
23
|
Name, Address and
Year of Birth
of Independent Trustees
|
Position(s) Held
with Trust
|
Term of
Office and
Length of
Time Served*
|
Principal Occupation(s)
During the Past 5 Years
|
Number of
Portfolios in
Fund
Complex
Overseen by
Independent
Trustees
|
Other Directorships
Held by
Independent Trustees
During the Past 5 Years
|
|
Management LLC
3500 Lacey Road,
Suite 700
Downers Grove, IL 60515
|
|
|
Management, LP (2010-
2011); Managing Director
and Chief Operating
Officer, Morgan Stanley
Investment Management
(2006-2010); Partner and
Chief Operating Officer,
FrontPoint Partners, LLC
(alternative investments)
(2005-2006); Managing
Director (2003-2005),
Global Head of Human
Resources and member of
Executive Board and
Operating Committee
(2004-2005), Global Head
of Operations and Product
Control (2003-2004),
Credit Suisse (investment
banking); Managing
Director (1997-2003),
Controller and Principal
Accounting Officer (1999-
2003), Chief Financial
Officer (temporary
assignment) for the
Oversight Committee,
Long Term Capital
Management (1998-1999),
Morgan Stanley.
|
|
of New Jersey (2012-
Present); Council
Member, New York-
Presbyterian Hospital’s
Leadership Council on
Children’s and
Women’s Health
(2012-Present);
formerly, Governing
Council Member
(2016-2023) and Chair
of Education
Committee (2017-
2021), Independent
Directors Council
(IDC); Advisory Board
Director, The Alberleen
Group LLC (2012-
2021); Board Member,
100 Women in Finance
(2015-2020); Trustee,
certain funds in the
Oppenheimer Funds
complex (2012-2019);
Lead Independent
Director and Chair of
the Audit and
Nominating Committee
of The Global Chartist
Fund, LLC,
Oppenheimer Asset
Management (2011-
2012); Board Director,
Managed Funds
Association (2008-
2010); Board Director
(2007-2010) and
Investment Committee
Chair (2008-2010),
Morgan Stanley
Foundation.
|
|
Gary R. Wicker—1961
c/o Invesco Capital
Management LLC
3500 Lacey Road,
Suite 700
Downers Grove, IL 60515
|
Trustee
|
Since 2013
|
Senior Vice President of
Global Finance and Chief
Financial Officer, RBC
Ministries (publishing
company) (2013-Present);
formerly, Executive Vice
President and Chief
Financial Officer,
Zondervan Publishing (a
division of Harper
Collins/NewsCorp) (2007-
2012); Senior Vice
President and Group
Controller (2005- 2006),
Senior Vice President and
|
214
|
Board Member and
Treasurer, Our Daily
Bread Ministries
Canada (2015-
Present); Board and
Finance Committee
Member, West
Michigan Youth For
Christ (2010-Present).
|
24
|
Name, Address and
Year of Birth
of Independent Trustees
|
Position(s) Held
with Trust
|
Term of
Office and
Length of
Time Served*
|
Principal Occupation(s)
During the Past 5 Years
|
Number of
Portfolios in
Fund
Complex
Overseen by
Independent
Trustees
|
Other Directorships
Held by
Independent Trustees
During the Past 5 Years
|
|
|
|
|
Chief Financial Officer
(2003-2004), Chief
Financial Officer (2001-
2003), Vice President,
Finance and Controller
(1999-2001) and Assistant
Controller (1997-1999),
divisions of The Thomson
Corporation (information
services provider); Senior
Audit Manager (1994-
1997),
PricewaterhouseCoopers
LLP.
|
|
|
|
Donald H. Wilson—1959
c/o Invesco Capital
Management LLC
3500 Lacey Road,
Suite 700
Downers Grove, IL 60515
|
Chair of the
Board and
Trustee
|
Chair since
2012; Trustee
since 2007
|
Chair, President and Chief
Executive Officer,
McHenry Bancorp Inc. and
McHenry Savings Bank
(subsidiary) (2018-
Present); formerly, Chair
and Chief Executive
Officer, Stone Pillar
Advisors, Ltd. (2010-
2017); President and
Chief Executive Officer,
Stone Pillar Investments,
Ltd. (advisory services to
the financial sector) (2016-
2018); Chair, President
and Chief Executive
Officer, Community
Financial Shares, Inc. and
Community Bank—
Wheaton/Glen Ellyn
(subsidiary) (2013-2015);
Chief Operating Officer,
AMCORE Financial, Inc.
(bank holding company)
(2007-2009); Executive
Vice President and Chief
Financial Officer,
AMCORE Financial, Inc.
(2006-2007); Senior Vice
President and Treasurer,
Marshall & Ilsley Corp.
(bank holding company)
(1995-2006).
|
214
|
Director, Penfield
Children’s Center
(2004-Present); Board
Chair, Gracebridge
Alliance, Inc.
(2015-Present).
|
*
This is the date the Independent Trustee began serving the Trust. Each Independent
Trustee serves an indefinite term, until his or her successor is elected.
25
The President, Principal Executive Officer and the other executive officers of the
Trust, their term of office and length of time served, and their principal business occupations during at least
the past five years are shown below.
|
Name, Address and
Year of Birth
of Executive Officer
|
Position(s) Held
with Trust
|
Term of
Office and
Length of
Time Served*
|
Principal Occupation(s) During at Least the Past 5 Years
|
|
Brian Hartigan — 1978
Invesco Capital
Management LLC
3500 Lacey Road
Suite 700
Downers Grove, IL 60515
|
President and
Principal
Executive
Officer
|
Since 2023
|
President and Principal Executive Officer, Invesco Exchange-
Traded Fund Trust, Invesco Exchange-Traded Fund Trust II,
Invesco India Exchange-Traded Fund Trust, Invesco Actively
Managed Exchange-Traded Fund Trust, Invesco Actively
Managed Exchange-Traded Commodity Fund Trust and Invesco
Exchange-Traded Self-Indexed Fund Trust (2023 – Present);
Managing Director and Global Head of ETFs, Indexed Strategies,
SMAs and Model Portfolios, Chief Executive Officer and Principal
Executive Officer, Invesco Capital Management LLC (2023 -
Present); Chief Executive Officer, Manager and Principal
Executive Officer, Invesco Specialized Products, LLC (2023
–Present); Director, Co-Chief Executive Officer and Co-President,
Invesco Capital Markets, Inc. (2020 – Present); Manager and
President, Invesco Investment Advisers LLC (2020 – Present) and
Manager, Invesco Indexing LLC (2023 – Present); formerly,
Global Head of ETF Investments and Indexed Strategy (2020-
2023); Global Head of ETF Investments (2017-2020); Head of
Investments-PowerShares (2015-2017) and Executive Director,
Product Development, Invesco Capital Markets, Inc. (2010-2015).
|
|
Adrien Deberghes — 1967
Invesco Capital
Management LLC,
11 Greenway Plaza
Houston, TX 77046
|
Vice President
|
Since 2020
|
Vice President, Invesco Exchange-Traded Fund Trust, Invesco
Exchange-Traded Fund Trust II, Invesco India Exchange-Traded
Fund Trust, Invesco Actively Managed Exchange-Traded Fund
Trust, Invesco Actively Managed Exchange-Traded Commodity
Fund Trust and Invesco Exchange-Traded Self-Indexed Fund
Trust (2020-Present); Head of the Fund Office of the CFO, Fund
Administration and Vice President, Invesco Advisers, Inc. (2020-
Present); Principal Financial Officer (2020-Present), Treasurer
(2020-Present) and Senior Vice President (2023-Present), The
Invesco Funds; formerly, Vice President, The Invesco Funds
(2020-2023); Senior Vice President and Treasurer, Fidelity
Investments (2008-2020).
|
|
Kelli Gallegos — 1970
Invesco Capital
Management LLC,
11 Greenway Plaza
Houston, TX 77046
|
Vice President
and Treasurer
|
Since 2018
|
Vice President, Invesco Advisers, Inc. (2020-Present); Principal
Financial and Accounting Officer- Pooled Investments, Invesco
Specialized Products, LLC (2018-Present); Vice President and
Treasurer, Invesco Exchange-Traded Fund Trust, Invesco
Exchange-Traded Fund Trust II, Invesco India Exchange-Traded
Fund Trust, Invesco Actively Managed Exchange-Traded Fund
Trust, Invesco Actively Managed Exchange-Traded Commodity
Fund Trust and Invesco Exchange-Traded Self-Indexed Fund
Trust (2018-Present); Principal Financial and Accounting Officer-
Pooled Investments, Invesco Capital Management LLC (2018-
Present); Vice President and Assistant Treasurer (2008-Present),
The Invesco Funds; formerly, Principal Financial Officer (2016-
2020) and Assistant Vice President (2008-2016), The Invesco
Funds; Assistant Treasurer, Invesco Specialized Products, LLC
(2018); Assistant Treasurer, Invesco Exchange-Traded Fund
Trust, Invesco Exchange-Traded Fund Trust II, Invesco India
Exchange-Traded Fund Trust and Invesco Actively Managed
Exchange-Traded Fund Trust (2012-2018), Invesco Actively
Managed Exchange-Traded Commodity Fund Trust (2014-2018)
and Invesco Exchange-Traded Self-Indexed Fund Trust (2016-
2018); and Assistant Treasurer, Invesco Capital Management LLC
(2013-2018).
|
26
|
Name, Address and
Year of Birth
of Executive Officer
|
Position(s) Held
with Trust
|
Term of
Office and
Length of
Time Served*
|
Principal Occupation(s) During at Least the Past 5 Years
|
|
Adam Henkel — 1980
Invesco Capital
Management LLC
3500 Lacey Road
Suite 700
Downers Grove, IL 60515
|
Secretary
|
Since 2020
|
Head of Legal - ETFs and Secretary, Invesco Capital
Management LLC and Invesco Specialized Products, LLC (2020-
present); Secretary, Invesco Exchange-Traded Fund Trust,
Invesco Exchange-Traded Fund Trust II, Invesco India Exchange-
Traded Fund Trust, Invesco Actively Managed Exchange-Traded
Fund Trust, Invesco Actively Managed Exchange-Traded
Commodity Fund Trust and Invesco Exchange-Traded Self-
Indexed Fund Trust (2020-Present); Assistant Secretary, Invesco
Capital Markets, Inc. (2020-Present); Assistant Secretary, The
Invesco Funds (2014-Present); Manager (2020-Present) and
Secretary (2022-Present), Invesco Indexing LLC; Manager,
Invesco Investment Advisers LLC (2024-Present); formerly,
Assistant Secretary, Invesco Investment Advisers LLC (2020-
2024); Assistant Secretary of Invesco Exchange-Traded Fund
Trust, Invesco Exchange-Traded Fund Trust II, Invesco India
Exchange-Traded Fund Trust, Invesco Actively Managed
Exchange-Traded Fund Trust and Invesco Actively Managed
Exchange-Traded Commodity Fund Trust (2014-2020); Chief
Compliance Officer of Invesco Capital Management LLC (2017);
Chief Compliance Officer of Invesco Exchange-Traded Fund
Trust, Invesco Exchange-Traded Fund Trust II, Invesco India
Exchange-Traded Fund Trust, Invesco Actively Managed
Exchange-Traded Fund Trust and Invesco Actively Managed
Exchange-Traded Commodity Fund Trust (2017); Senior Counsel,
Invesco, Ltd. (2013-2020); Assistant Secretary, Invesco
Specialized Products, LLC (2018-2020).
|
|
Peter Hubbard — 1981
Invesco Capital
Management LLC
3500 Lacey Road
Suite 700
Downers Grove, IL 60515
|
Vice President
|
Since 2009
|
Vice President, Invesco Specialized Products, LLC (2018-
Present); Vice President, Invesco Exchange-Traded Fund Trust,
Invesco Exchange-Traded Fund Trust II, Invesco India Exchange-
Traded Fund Trust, Invesco Actively Managed Exchange-Traded
Fund Trust (2009-Present), Invesco Actively Managed Exchange-
Traded Commodity Fund Trust (2014-Present) and Invesco
Exchange-Traded Self-Indexed Fund Trust (2016-Present); Vice
President and Director of Portfolio Management, Invesco Capital
Management LLC (2010-Present); Vice President, Invesco
Advisers, Inc. (2020-Present); formerly, Vice President of Portfolio
Management, Invesco Capital Management LLC (2008-2010);
Portfolio Manager, Invesco Capital Management LLC (2007-
2008); Research Analyst, Invesco Capital Management LLC
(2005-2007); Research Analyst and Trader, Ritchie Capital, a
hedge fund operator (2003-2005).
|
|
Rudolf E. Reitmann — 1971
Invesco Capital
Management LLC
3500 Lacey Road
Suite 700
Downers Grove, IL 60515
|
Vice President
|
Since 2013
|
Head of Global Exchange Traded Funds Services, Invesco
Specialized Products, LLC (2018-Present); Vice President,
Invesco Exchange-Traded Fund Trust, Invesco Exchange-Traded
Fund Trust II, Invesco India Exchange-Traded Fund Trust, Invesco
Actively Managed Exchange-Traded Fund Trust (2013-Present),
Invesco Actively Managed Exchange-Traded Commodity Fund
Trust (2014-Present) and Invesco Exchange-Traded Self-Indexed
Fund Trust (2016-Present); Head of Global Exchange Traded
Funds Services, Invesco Capital Management LLC (2013-
Present); Vice President, Invesco Capital Markets, Inc. (2018-
Present).
|
|
Melanie Zimdars — 1976
Invesco Capital
Management LLC
3500 Lacey Road
Suite 700
|
Chief
Compliance
Officer
|
Since 2017
|
Chief Compliance Officer, Invesco Specialized Products, LLC
(2018-Present); Chief Compliance Officer, Invesco Capital
Management LLC (2017-Present); Chief Compliance Officer,
Invesco Exchange-Traded Fund Trust, Invesco Exchange-Traded
Fund Trust II, Invesco India Exchange-Traded Fund Trust, Invesco
|
27
|
Name, Address and
Year of Birth
of Executive Officer
|
Position(s) Held
with Trust
|
Term of
Office and
Length of
Time Served*
|
Principal Occupation(s) During at Least the Past 5 Years
|
|
Downers Grove, IL 60515
|
|
|
Actively Managed Exchange-Traded Fund Trust, Invesco Actively
Managed Exchange-Traded Commodity Fund Trust and Invesco
Exchange-Traded Self-Indexed Fund Trust (2017-Present);
formerly, Vice President and Deputy Chief Compliance Officer,
ALPS Holding, Inc. (2009-2017); Mutual Fund Treasurer/ Chief
Financial Officer, Wasatch Advisors, Inc. (2005-2008); Compliance
Officer, U.S. Bancorp Fund Services, LLC (2001-2005).
|
*
This is the date the Officer began serving the Trust in his or her current position.
Each Officer serves an indefinite term, until his or her successor is elected.
The Fund is newly established. As of the date of this SAI, none of the Trustees held
equity securities in the Fund. As of December 31, 2023, each Trustee held in the aggregate over $100,000
in equity securities in all of the registered investment companies overseen by the Trustees in the Fund Family. The dollar range of Shares for Messrs. Bagge and Lim and Ms. Pace includes Shares of certain funds in
which they are deemed to be invested pursuant to the Trust’s deferred compensation plan (“DC Plan”), which is described below.
As of the date of this SAI, as to each Independent Trustee and his or her immediate
family members, no person owned, beneficially or of record, securities in an investment adviser or principal
underwriter of the Fund, or a person (other than a registered investment company) directly or indirectly
controlling, controlled by or under common control with an investment adviser or principal underwriter of the
Fund.
Board and Committee Structure. As noted above, the Board is responsible for oversight of the Fund, including oversight of the duties performed by the Adviser for the Fund under the
investment advisory agreement, as amended and restated, between the Adviser and the Trust, on behalf of
the Fund (the “Investment Advisory Agreement”). The Board generally meets in regularly scheduled meetings five times a year and may meet more often as required. During the Trust’s fiscal year ended October 31, 2023, the Board held six meetings.
The Board has three standing committees, the Audit Committee, the Investment Oversight
Committee and the Nominating and Governance Committee, and has delegated certain responsibilities
to those Committees.
Mr. Kole (Chair), Ms. Pace, and Messrs. Wicker and Wilson currently serve as members
of the Audit Committee. The Audit Committee has the responsibility, among other things, to: (i)
approve and recommend to the Board the selection of the Trust’s independent registered public accounting firm, (ii) review the scope of the independent registered public accounting firm’s audit activity, (iii) review the audited financial statements, and (iv) review with such independent registered public accounting firm the adequacy
and the effectiveness of the Trust’s internal controls over financial reporting. During the Trust’s fiscal year ended October 31, 2023, the Audit Committee held six meetings.
Mr. Bagge, Dr. Barre, Ms. Herget and Mr. Lim (Chair) currently serve as members of the Investment Oversight Committee. The Investment Oversight Committee has the responsibility, among
other things, (i) to review fund investment performance, including tracking error and correlation to a fund’s underlying index, (ii) to review any proposed changes to a fund’s investment policies, comparative benchmark indices or underlying index, and (iii) to review a fund’s market trading activities and portfolio transactions. The Investment Oversight Committee also oversees the Adviser’s process for fair valuing the Fund’s portfolio investments and receives reports from the Adviser regarding the fair valuation of the Fund’s portfolio investments in accordance with the Adviser’s Valuation Procedures, which have been approved by the Board (the “Valuation Procedures”). During the Trust’s fiscal year ended October 31, 2023, the Investment Oversight Committee held four meetings.
Mr. Bagge (Chair), Dr. Barre, Ms. Herget, Messrs. Kole and Lim, Ms. Pace, and Messrs. Wicker and Wilson currently serve as members of the Nominating and Governance Committee. The
Nominating and Governance Committee has the responsibility, among other things, to identify and recommend
individuals for
28
Board membership and evaluate candidates for Board membership. The Board will consider
recommendations for trustees from shareholders. Nominations from shareholders should
be in writing and sent to the Secretary of the Trust to the attention of the Chair of the Nominating
and Governance Committee, as described below under the caption “Shareholder Communications.” During the Trust’s fiscal year ended October 31, 2023, the Nominating and Governance Committee held four meetings.
Mr. Wilson, one of the Independent Trustees, serves as the chair of the Board (the “Independent Chair”). The Independent Chair, among other things, chairs the Board meetings, participates
in the preparation of the Board agendas and serves as a liaison between, and facilitates communication among,
the other Independent Trustees, the full Board, the Adviser and other service providers with respect to
Board matters. Mr. Bagge, as Chair of the Nominating and Governance Committee, serves as Vice Chair of the Board (“Vice Chair”). In the absence of the Independent Chair, the Vice Chair is responsible for all of the Independent Chair’s duties and may exercise any of the Independent Chair’s powers. The Chairs of each Committee also serve as liaisons between the Adviser and other service providers and the other Independent Trustees
for matters pertaining to the respective Committee. The Board believes that its current leadership structure
is appropriate taking into account the assets and number of funds in the Fund Family overseen by the Trustees,
the size of the Board and the nature of the funds’ business, as the officers of the Trust provide the Board with insight as to the daily management of the funds while the Independent Chair promotes independent oversight
of the funds by the Board.
Risk Oversight. The Fund is subject to a number of risks, including operational, investment and compliance risks. The Board, directly and through its Committees, as part of its oversight
responsibilities, oversees the services provided by the Adviser and the Trust’s other service providers in connection with the management and operations of the Fund, as well as their associated risks. Under the
oversight of the Board, the Trust, the Adviser and other service providers have adopted policies, procedures
and controls to address these risks. The Board, directly and through its Committees, receives and reviews
information from the Adviser, other service providers, the Trust’s independent registered public accounting firm, Trust counsel and counsel to the Independent Trustees to assist it in its oversight responsibilities.
This information includes, but is not limited to, reports regarding the Fund’s investments, including Fund performance and investment practices, valuation of Fund portfolio securities, and compliance. The Board also
reviews, and must approve any proposed changes to, the Fund’s investment objective, policies and restrictions, and reviews any areas of non-compliance with the Fund’s investment policies and restrictions. The Audit Committee monitors the Trust’s accounting policies, financial reporting and internal control system and reviews any internal audit reports impacting the Trust. As part of its compliance oversight, the Board reviews
the annual compliance report issued by the Trust’s Chief Compliance Officer on the policies and procedures of the Trust and its service providers, proposed changes to those policies and procedures and quarterly
reports on any material compliance issues that arose during the period.
Experience, Qualifications and Attributes. As noted above, the Nominating and Governance Committee is responsible for identifying, evaluating and recommending trustee candidates. The Nominating
and Governance Committee reviews the background and the educational, business and professional
experience of trustee candidates and the candidates’ expected contributions to the Board. Trustees selected to serve on the Board are expected to possess relevant skills and experience, time availability
and the ability to work well with the other Trustees. In addition to these qualities and based on each Trustee’s experience, qualifications and attributes and the Trustees’ combined contributions to the Board, the following is a brief summary of the information that led to the conclusion that each Board member should serve as a Trustee.
Mr. Bagge has served as a trustee and Chair of the Nominating and Governance Committee
with the Fund Family since 2003 and as Vice Chair with the Fund Family since 2018. He founded
YQA Capital Management, LLC in 1998 and has since served as a principal. Mr. Bagge has served
as Chair (since 2021) and a member (since 2017) of the Joint Investment Committee of Mission Aviation Fellowship
and MAF Foundation, and has served as a member of the Board of Trustees of Mission Aviation
Fellowship since 2017. Previously, Mr. Bagge was the owner and CEO of Electronic Dynamic Balancing Company
from 1988 to 2001. He began his career as a securities analyst for institutional investors, including
CT&T Asset Management and J.C. Bradford & Co. The Board considered that Mr. Bagge has served as a board member
or advisor for
29
several privately held businesses and charitable organizations and the executive,
investment and operations experience that Mr. Bagge has gained over the course of his career and through his
financial industry experience.
Dr. Barre has served as a trustee with the Fund Family since 2010. He served as Assistant
Professor of Business at Trinity Christian College from 2010 to 2016. Additionally, he earned his
Doctor of Business Administration degree from Anderson University in 2019 with final dissertation research
focused on exchange-traded funds. Previously, he served in various positions with BMO Financial
Group/Harris Private Bank, including Vice President and Senior Investment Strategist (2001-2008), Director
of Open Architecture and Trading (2007-2008), Head of Fundamental Research (2004-2007) and Vice President
and Senior Fixed Income Strategist (1994-2001). From 1983 to 1994, Dr. Barre was with the Office of
the Manager of Investments at Commonwealth Edison Co. He also was a staff accountant at Peat Marwick
Mitchell & Co. from 1981 to 1983. The Board considered the executive, financial and investment experience
that Dr. Barre has gained over the course of his career and through his financial industry experience.
Ms. Herget has served as a trustee with the Fund Family since 2019. She has served
as Trustee (2000- 2017), Chair (2010-2017) and Trustee Emerita (since 2017) of Newberry Library, and
as a member of the Rockefeller Trust Committee since 2002. Previously, she served as Trustee of Chikaming
Open Lands (2014-2023), Trustee of Mather LifeWays (2001-2021), as Board Chair (2008-2015) and Director (2004-2018)
of United Educators Insurance Company, as Trustee of certain funds in the Oppenheimer
Funds complex (2012- 2019) and as Independent Director of the First American Funds (2003-2011). Ms. Herget
served as Managing Director (1993-2001), Principal (1985-1993), Vice President (1978-1985) and Assistant
Vice President (1973- 1978) of Zurich Scudder Investments (and its predecessor firms), as Trustee (1992-2007),
Chair of the Board of Trustees (1999-2007), Investment Committee Chair (1994-1999) and Investment Committee
member (2007-2010) of Wellesley College and as Trustee of BoardSource (2006-2009) and Chicago
City Day School (1994-2005). The Board considered the executive, financial and investment experience
that Ms. Herget has gained over the course of her career and through her financial industry experience.
Mr. Kole has served as a trustee with the Fund Family since 2006 and Chair of the
Audit Committee with the Fund Family since 2008. He was the Managing Director of Finance from 2020 to 2021
and was Senior Director of Finance from 2015 to 2020, of By The Hand Club for Kids. Mr. Kole also
was the Chief Financial Officer of Hope Network from 2008 to 2012 and he was the Assistant Vice President
and Controller at Priority Health from 2005 to 2008, Regional Chief Financial Officer of United Healthcare from
2004 to 2005, Chief Accounting Officer and Senior Vice President of Finance of Oxford Health Plans from
2000 to 2004 and Audit Partner at Arthur Andersen LLP from 1996 to 2000. Mr. Kole served as Treasurer (2018-2021),
Finance Committee Member (2015-2021) and Audit Committee Member (2015) of Thornapple Evangelical
Covenant Church and he served as Board and Finance Committee Member (2009-2017) and Treasurer
(2010-2015, 2017) of NorthPointe Christian Schools. The Board has determined that Mr. Kole qualifies as an “audit committee financial expert” as defined by the SEC. The Board considered the executive, financial and operations experience that Mr. Kole has gained over the course of his career and through
his financial industry experience.
Mr. Lim has served as a trustee with the Fund Family since 2013 and Chair of the Investment
Oversight Committee with the Fund Family since 2014. He has been a Managing Partner of RDG Funds
LLC since 2008. Previously, he was a Managing Director and the Head of the Securitized Products
Group of Citadel LLC (1999-2007). Prior to his employment with Citadel LLC, he was a Managing Director
with Salomon Brothers Inc. Mr. Lim has served as a Board Director of Beacon Power Services, Corp. since
2019 and served as an Advisory Board Member of Performance Trust Capital Partners, LLC (2008-2020). The
Board considered the executive, financial, operations and investment experience that Mr. Lim has gained
over the course of his career and through his financial industry experience.
Ms. Pace has served as a trustee with the Fund Family since 2019. She has served as
Board Director of Horizon Blue Cross Blue Shield of New Jersey since 2012, and as a Council Member of
New York-Presbyterian Hospital’s Leadership Council on Children’s and Women’s Health since 2012. Previously, she has served as Governing Council Member (2016-2023) and Chair of Education Committee
(2017-2021) of
30
Independent Directors Council (IDC), an Advisory Board Director of The Alberleen Group
LLC (2012-2021), a Board Member of 100 Women in Finance (2015-2020), a Trustee of certain funds in the
Oppenheimer Funds complex (2012-2019), as Senior Advisor of SECOR Asset Management, LP (2010-2011),
as Managing Director and Chief Operating Officer of Morgan Stanley Investment Management (2006-2010)
and as Partner and Chief Operating Officer of FrontPoint Partners, LLC (2005-2006). Ms. Pace also
held the following positions at Credit Suisse: Managing Director (2003-2005); Global Head of Human Resources
and member of Executive Board and Operating Committee (2004-2005), and Global Head of Operations
and Product Control (2003-2004). She also held the following positions at Morgan Stanley: Managing Director
(1997-2003), Controller and Principal Accounting Officer (1999-2003); and Chief Financial Officer
(temporary assignment) for the Oversight Committee, Long Term Capital Management (1998-1999). She also served
as Lead Independent Director and Chair of the Audit and Nominating Committee of The Global
Chartist Fund, LLC of Oppenheimer Asset Management (2011-2012), as Board Director of Managed Funds Association
(2008-2010) and as Board Director of Morgan Stanley Foundation (2007-2010) and Investment Committee
Chair (2008-2010). The Board has determined that Ms. Pace qualifies as an “audit committee financial expert” as defined by the SEC. The Board considered the executive, financial, operations and investment
experience that Ms. Pace has gained over the course of her career and through her financial industry experience.
Mr. Wicker has served as a trustee with the Fund Family since 2013. He has served
as Senior Vice President of Global Finance and Chief Financial Officer at RBC Ministries since 2013.
Previously, he was the Executive Vice President and Chief Financial Officer of Zondervan Publishing from
2007 to 2012. Prior to his employment with Zondervan Publishing, he held various positions with divisions of
The Thomson Corporation, including Senior Vice President and Group Controller (2005-2006), Senior Vice President
and Chief Financial Officer (2003-2004), Chief Financial Officer (2001-2003), Vice President, Finance
and Controller (1999-2001) and Assistant Controller (1997-1999). Prior to that, Mr. Wicker was Senior Manager
in the Audit and Business Advisory Services Group of Price Waterhouse (1994-1996). Mr. Wicker has served as
a Board Member and Treasurer of Our Daily Bread Ministries Canada (2015-Present) and as a Board and Finance
Committee Member of West Michigan Youth For Christ (2010-Present). The Board has determined
that Mr. Wicker qualifies as an “audit committee financial expert” as defined by the SEC. The Board considered the executive, financial and operations experience that Mr. Wicker has gained over the course of
his career and through his financial industry experience.
Mr. Wilson has served as a trustee with the Fund Family since 2006 and as the Independent
Chair with the Fund Family since 2012. He also served as lead Independent Trustee in 2011. He
has served as the Chair, President and Chief Executive Officer of McHenry Bancorp Inc. and McHenry Savings
Bank since 2018. Previously, he was Chair and Chief Executive Officer of Stone Pillar Advisors,
Ltd. (2010-2017). He was also President and Chief Executive Officer of Stone Pillar Investments, Ltd. (2016-2018).
Mr. Wilson was also the Chair, President and Chief Executive Officer of Community Financial Shares, Inc.
and its subsidiary, Community Bank—Wheaton/Glen Ellyn (2013-2015). He also was the Chief Operating Officer (2007-2009) and Executive Vice President and Chief Financial Officer (2006-2007) of AMCORE Financial,
Inc. Mr. Wilson also served as Senior Vice President and Treasurer of Marshall & Ilsley Corp. from
1995 to 2006. He started his career with the Federal Reserve Bank of Chicago, serving in several roles in the
bank examination division and the economic research division. Mr. Wilson has served as a Director of Penfield Children’s Center (2004-Present) and as Board Chair of Gracebridge Alliance, Inc. (2015-Present). The Board has determined
that Mr. Wilson qualifies as an “audit committee financial expert” as defined by the SEC. The Board considered the executive, financial and operations experience that Mr. Wilson has gained over the
course of his career and through his financial industry experience.
This disclosure is not intended to hold out any Trustee as having any special expertise
and shall not impose greater duties, obligations or liabilities on the Trustees. The Trustees’ principal occupations during at least the past five years are shown in the above tables.
For his or her services as a Trustee of the Trust and other trusts in the Fund Family,
each Independent Trustee receives an annual retainer of $370,000 (the “Retainer”). The Retainer for the Independent Trustees is allocated half pro rata among all the funds in the Fund Family and the other half
is allocated among all of the funds in the Fund Family based on average net assets. The Independent Chair receives
an additional
31
$120,000 per year for his service as the Independent Chair, allocated in the same
manner as the Retainer. The chairs of the Audit Committee and the Nominating and Governance Committee each
receive an additional fee of $35,000 per year and the chair of the Investment Oversight Committee
receives an additional fee of $30,000 per year, each allocated in the same manner as the Retainer. Prior
to January 1, 2024, the Retainer for each Independent Trustee was $350,000, and the chairs of the Investment
Oversight Committee and Nominating and Governance Committee each received an additional fee of $20,000.
Each Trustee also is reimbursed for travel and other out-of-pocket expenses incurred in attending Board
and committee meetings.
The DC Plan allows each Independent Trustee to defer payment of all, or a portion,
of the fees that the Trustee receives for serving on the Board throughout the year. Each eligible Trustee
generally may elect to have deferred amounts credited with a return equal to the total return of one or more
registered investment companies within the Fund Family that are offered as investment options under the DC Plan. At the Trustee’s election, distributions are either in one lump sum payment, or in the form of equal
annual installments over a period of years designated by the Trustee. The rights of an eligible Trustee and the
beneficiaries to the amounts held under the DC Plan are unsecured, and such amounts are subject to the
claims of the creditors of a fund. The Independent Trustees are not eligible for any pension or profit sharing
plan in their capacity as Trustees.
The following sets forth the fees paid to each Trustee for the fiscal year ended October 31,
2023.
|
Name of Trustee
|
Aggregate
Compensation From
Trust (1)
|
Pension or Retirement
Benefits accrued as part of
Fund Expenses
|
Total Compensation Paid
From Fund Complex (2)
|
|
Independent Trustees
|
|
|
|
|
Ronn R. Bagge
|
$30,804
|
N/A
|
$370,000
|
|
Todd J. Barre
|
$29,139
|
N/A
|
$350,000
|
|
Edmund P. Giambastiani, Jr.(3)
|
$29,139
|
N/A
|
$350,000
|
|
Victoria J. Herget
|
$29,139
|
N/A
|
$350,000
|
|
Marc M. Kole
|
$32,053
|
N/A
|
$385,000
|
|
Yung Bong Lim
|
$30,804
|
N/A
|
$370,000
|
|
Joanne Pace
|
$29,139
|
N/A
|
$350,000
|
|
Gary R. Wicker
|
$29,139
|
N/A
|
$350,000
|
|
Donald H. Wilson
|
$39,130
|
N/A
|
$470,000
|
|
Interested Trustee
|
|
|
|
|
Anna Paglia(4)
|
N/A
|
N/A
|
N/A
|
(1)
Because the Fund had not commenced operations as of October 31, 2023, the Fund did
not pay any portion of the amounts shown in this table.
(2)
The amounts shown in this column represent the aggregate compensation paid by all
of the funds of the trusts in the Fund Family for the fiscal year ended October 31, 2023, before deferral by the Trustees
under the DC Plan. During the fiscal year ended October 31, 2023, Mr. Lim deferred 100% of his compensation, and Ms. Pace deferred
$58,333 of her compensation.
(3)
Admiral Giambastiani retired from the Board effective May 2, 2024.
(4)
Ms. Paglia resigned from the Board effective November 28, 2023.
Management Ownership. As of the date of this SAI, the Trustees and Officers, as a group, owned none of the Fund’s outstanding Shares.
Principal Holders and Control Persons. The Fund is new and, as of the date of this SAI, no person owned of record more than 5% of the Shares.
Shareholder Communications. Shareholders may send communications to the Trust's Board by addressing the communications directly to the Board (or individual Board members)
and/or otherwise clearly indicating in the salutation that the communication is for the Board (or individual
Board members). Shareholders may send the communication to either the Trust's office or directly to
such Board members at the address specified for each Trustee. Management will review and generally respond
to other shareholder communications the Trust receives that are not directly addressed and sent to the
Board. Such communications will be forwarded to the Board at management's discretion based on
the matters contained therein.
32
Investment Adviser. The Adviser provides investment tools and portfolios for advisers and investors.
The Adviser is committed to theoretically sound portfolio construction and empirically
verifiable investment management approaches. Its asset management philosophy and investment discipline are
rooted deeply in the application of intuitive factor analysis and model implementation to enhance investment
decisions.
The Adviser acts as investment adviser for, and manages the investment and reinvestment
of, the assets of the Fund. The Adviser also administers the Trust’s business affairs, provides office facilities and equipment and certain clerical, bookkeeping and administrative services, and permits any of
its officers or employees to serve without compensation as Trustees or officers of the Trust if elected to such
positions.
Invesco Capital Management LLC, organized February 7, 2003, is located at 3500 Lacey
Road, Suite 700, Downers Grove, Illinois 60515. Invesco Ltd. is the parent company of Invesco
Capital Management LLC and is located at 1331 Spring Street N.W., Suite 2500, Atlanta, Georgia 30309. Invesco
Ltd. and its subsidiaries are an independent global investment management group.
Portfolio Managers. The Adviser uses a team of portfolio managers (the “Portfolio Managers”), investment strategists and other investment specialists. This team approach brings together many
disciplines and leverages the Adviser’s extensive resources. Peter Hubbard, Pratik Doshi, Michael Jeanette, and Tony Seisser are jointly and primarily responsible for the day-to-day management of the
Fund.
As of April 30, 2024, Mr. Hubbard managed 208 registered investment companies with approximately $251.1 billion in assets, 125 other pooled investment vehicles with approximately $29.4 billion in assets and 43 other accounts with approximately $52.2 billion in assets.
As of April 30, 2024, Mr. Doshi managed 153 registered investment companies with approximately $201.1 billion in assets, 109 other pooled investment vehicles with approximately $24.3 billion in assets and 43 other accounts with approximately $52.2 billion in assets.
As of April 30, 2024, Mr. Jeanette managed 154 registered investment companies with approximately $201.1 billion in assets, 109 other pooled investment vehicles with approximately $24.3 billion in assets and 43 other accounts with approximately $52.2 billion in assets.
As of April 30, 2024, Mr. Seisser managed 154 registered investment companies with approximately $201.1 billion in assets, 109 other pooled investment vehicles with approximately $24.3 billion in assets and 43 other accounts with approximately $52.2 billion in assets.
To the extent that any of these registered investment companies, other pooled investment
vehicles or other accounts pay advisory fees that are based on performance (“performance-based fees”), information on those accounts is specifically broken out.
Because the Portfolio Managers may manage assets for other investment companies, pooled
investment vehicles and/or other accounts (including institutional clients, pension plans and
certain high net worth individuals), there may be an incentive to favor one client over another, resulting
in conflicts of interest. For instance, the Adviser may receive fees from certain accounts that are higher than
the fee it receives from the Fund, or it may receive a performance-based fee on certain accounts. In those instances,
the Portfolio Managers may have an incentive to favor the higher and/or performance-based fee accounts
over the Fund. In addition, a conflict of interest could exist to the extent that the Adviser has
proprietary investments in certain accounts, where Portfolio Managers have personal investments in certain accounts
or when certain accounts are investment options in the Adviser’s employee benefits and/or deferred compensation plans. The Portfolio Managers may have an incentive to favor these accounts over others. If the
Adviser manages accounts that engage in short sales of assets of the type in which the Fund invests,
the Adviser could be seen as harming the performance of the Fund for the benefit of the accounts engaging in
short sales if the short sales cause the market value of the assets to fall. The Adviser has adopted trade
allocation and other policies and procedures that it believes are reasonably designed to address these and other
conflicts of interest.
Although the other funds that the Portfolio Managers manage may have different investment
strategies, the Adviser does not believe that management of the different funds presents a material
conflict of interest for the Portfolio Managers or the Adviser.
33
Description of Compensation Structure. The Portfolio Managers are compensated with a fixed salary amount by the Adviser. The Portfolio Managers are eligible, along with other senior
employees of the Adviser, to participate in a year-end discretionary bonus pool. The Compensation Committee
of the Adviser will review management bonuses and, depending upon the size, the Compensation Committee may approve
the bonus in advance. There is no policy regarding, or agreement with, the Portfolio Managers
or any other senior executive of the Adviser to receive bonuses or any other compensation in connection
with the performance of any of the accounts managed by the Portfolio Managers.
Portfolio Holdings. As of the date of this SAI, the Fund has not yet commenced investment operations,
and none of the Portfolio Managers beneficially own any Shares.
Investment Advisory Agreement. Pursuant to an investment advisory agreement between the Adviser and the Trust (the “Investment Advisory Agreement”), the Fund has agreed to pay the Adviser for its services an annual fee equal to a percentage of its average daily net assets as set forth below (the “Advisory Fee”).
|
Fund
|
Advisory Fee
|
|
Invesco MSCI Global Climate 500 ETF
|
0.10%
|
|
|
|
The Advisory Fee paid by the Fund to the Adviser set forth in the table above is an
annual unitary management fee. Out of the unitary management fee, the Adviser pays for substantially
all expenses of the Fund including the cost of transfer agency, custody, fund administration, legal, audit
and other services, except for distribution fees, if any, brokerage expenses, taxes, interest, Acquired
Fund Fees and Expenses, if any, litigation expenses, and other extraordinary expenses, including proxy expenses
(except for such proxies related to: (i) changes to the Investment Advisory Agreement, (ii) the election of
any Board member who is an “interested person” of the Trust, or (iii) any other matters that directly benefit the Adviser).
The Fund may invest in money market funds that are managed by affiliates of the Adviser
and other funds (including ETFs) managed by the Adviser or affiliates of the Adviser (collectively, “Underlying Affiliated Investments”). The indirect portion of the advisory fees that the Fund incurs through such Underlying Affiliated Investments is in addition to the Advisory Fee payable to the Adviser by the Fund.
Therefore, the Adviser has agreed to waive the Advisory Fee payable by the Fund in an amount equal to the lesser
of: (i) 100% of the net advisory fees earned by the Adviser or an affiliate of the Adviser that are attributable to the Fund’s Underlying Affiliated Investments or (ii) the Advisory Fee available to be waived. This waiver does not apply to the Fund’s investment of cash collateral received for securities lending. This waiver is in place
through at least August 31, 2026, and there is no guarantee that the Adviser will extend it past that date.
Under the Investment Advisory Agreement, the Adviser will not be liable for any error
of judgment or mistake of law or for any loss suffered by the Fund in connection with the performance
of the Investment Advisory Agreement, except a loss resulting from willful misfeasance, bad faith or
gross negligence on the part of the Adviser in the performance of its duties or from reckless disregard of
its duties and obligations thereunder. The Investment Advisory Agreement continues in effect (following its initial term) only if approved annually by the Board, including a majority of the Independent Trustees. The Investment
Advisory Agreement terminates automatically upon assignment and is terminable at any time without penalty
as to the Fund by the Board, including a majority of the Independent Trustees, or by vote of the holders of a majority of that Fund’s outstanding voting securities on 60 days’ written notice to the Adviser, or by the Adviser on 60 days’ written notice to the Fund.
Payments to Financial Intermediaries. The Adviser, the Distributor and/or their affiliates may enter into contractual arrangements with certain broker-dealers, banks and other financial intermediaries
(each, an “Intermediary” and together, the “Intermediaries”) that the Adviser, the Distributor and/or their affiliates believe may benefit the Fund or other Invesco ETFs generally. Pursuant to such arrangements,
the Adviser, the Distributor and/or their affiliates may provide cash payments or non-cash compensation,
from their own assets and not from the assets of the Fund, to Intermediaries for certain activities
that are designed to make registered representatives and other professionals more knowledgeable about exchange-traded
products, including the Fund; or for other activities, such as marketing, presentations, educational
training programs,
34
conferences, data collection and provision, technology support, the development of
technology platforms and reporting systems, and providing their customers with access to the Fund via online
platforms. The Adviser, the Distributor, or their affiliates may, from their own assets, provide payments
to intermediaries for reimbursement of costs or otherwise support services or other activities that the
Adviser, the Distributor and/or their affiliates believe may facilitate investment in the Fund or other Invesco ETFs.
Any payments made pursuant to such arrangements may vary in any year and may be different
for different Intermediaries. In certain cases, the payments described here may be subject
to certain minimum payment levels. Although a portion of the Adviser’s revenue comes directly or indirectly in part from fees paid by the Fund, payments to Intermediaries are not financed by the Fund and therefore
do not increase the price paid by investors for the purchase of shares of, or the costs of owning, the Fund
or reduce the amount received by a shareholder as proceeds from the redemption of Shares. As a result,
such payments are not reflected in the fees and expenses listed in the fees and expenses sections of the Fund’s Prospectus.
The Adviser periodically assesses the advisability of continuing to make these payments.
Payments to an Intermediary may be significant to that Intermediary, and amounts that Intermediaries
pay to your adviser, broker or other investment professional, if any, may also be significant to such adviser,
broker or investment professional. Because an Intermediary may make decisions about what investment options
it will make available or recommend, and what services to provide in connection with various products,
based on payments it receives or is eligible to receive, such payments create conflicts of
interest between the Intermediary and its clients. For example, these financial incentives may cause the
Intermediary to recommend the Fund over other investments. The same conflict of interest exists with
respect to your financial adviser, broker or investment professionals if he or she receives similar
payments from his or her intermediary firm.
As of the date of this SAI, the Intermediaries receiving such payments include Charles
Schwab, Equitable Advisors, Jane Street Financial Limited, LPL Financial, Morgan Stanley Smith Barney
LLC, Nitrogen Wealth Inc., Pershing LLC, Raymond James and Wells Fargo. Any modifications to this list of financial intermediaries that have occurred since the date of this SAI are not reflected in this list.
Please contact your salesperson, adviser, broker or other investment professional
for more information regarding any such payments or financial incentives his or her intermediary
firm may receive. Any payments made, or financial incentives offered, by the Adviser, Distributor
and/or their affiliates to an Intermediary may create the incentive for the Intermediary to encourage
customers to buy Shares.
Administrator. BNYM serves as administrator for the Fund. Its principal address is 240 Greenwich
Street, New York, NY 10286.
BNYM serves as Administrator for the Fund pursuant to a fund administration and accounting
agreement (the “Administrative Services Agreement”) with the Trust. Under the Administrative Services Agreement, BNYM is obligated, on a continuous basis, to provide such administrative services
as the Board reasonably deems necessary for the proper administration of the Trust and the Fund. BNYM will
generally assist in many aspects of the Trust's and the Fund’s operations, including accounting, bookkeeping and record keeping services (including, without limitation, the maintenance of such books and records
as are required under the 1940 Act and the rules thereunder, except as maintained by other service providers);
assist in preparing reports to shareholders or investors; prepare and file tax returns; supply financial
information and supporting data for reports to and filings with the SEC and various state Blue Sky authorities;
and supply supporting documentation for meetings of the Board.
Pursuant to the Administrative Services Agreement, the Trust has agreed to indemnify
the Administrator for certain liabilities, including certain liabilities arising under the federal securities
laws, unless such loss or liability results from negligence or willful misconduct in the performance of its
duties.
The administrative fees paid to BNYM are included in the Fund’s unitary management fee.
35
Custodian, Transfer Agent and Fund Accounting Agent. BNYM (the “Custodian” or “Transfer Agent”), located at 240 Greenwich Street, New York, NY 10286, also serves as custodian for
the Fund pursuant to a custodian agreement. As Custodian, BNYM holds the Fund’s assets, calculates the NAV of the Shares and calculates net income and realized capital gains or losses. BNYM also serves as Transfer
Agent and dividend disbursing agent for the Fund pursuant to a transfer agency agreement. Further, BNYM
serves as Fund accounting agent pursuant to the Administrative Services Agreement. As compensation
for the foregoing services, BNYM may be reimbursed for its out-of-pocket costs, and receive transaction
fees and asset-based fees which are accrued daily and paid monthly by the Adviser from the Advisory Fee.
Distributor. Invesco Distributors, Inc. (previously defined as the “Distributor”) is the distributor of the Shares. The Distributor's principal address is 11 Greenway Plaza, Houston, TX 77046-1173.
The Distributor has entered into a distribution agreement (the “Distribution Agreement”) with the Trust pursuant to which it distributes the Shares. The Fund continuously offers Shares for sale through the Distributor
only in Creation Unit Aggregations, as described in the Prospectus and below under the heading “Creation and Redemption of Creation Unit Aggregations.”
The Distribution Agreement provides that it may be terminated as to the Fund at any
time, without the payment of any penalty, on at least 60 days' written notice by the Trust to the Distributor
(i) by vote of a majority of the Independent Trustees or (ii) by vote of a majority of the outstanding
voting securities (as defined in the 1940 Act) of the Fund. The Distribution Agreement will terminate automatically
in the event of its assignment (as defined in the 1940 Act).
Securities Lending Arrangements. The Fund may participate in a securities lending program (the “Program”) pursuant to a securities lending agreement that establishes the terms of the loan, including collateral requirements. Collateral may consist of cash, U.S. government securities,
letters of credit, or such other collateral as may be permitted under the Fund’s investment policies. The Fund may lend securities to securities brokers and other borrowers.
Under the Program, each of BNYM and Invesco Advisers, Inc. (“Invesco Advisers”) serves as a securities lending agent for the Fund. To the extent the Fund utilizes Invesco Advisers as an
affiliated securities lending agent, the Fund conducts its securities lending in accordance with, and in reliance
upon, no-action letters issued by the SEC staff that provide guidance on how an affiliate may act as a direct
agent lender and receive compensation for those services without obtaining exemptive relief. The Board has
approved policies and procedures that govern the Fund’s securities lending activities when utilizing an affiliated securities lending agent, such as Invesco Advisers, consistent with the guidance set forth in the no-action
letters.
Invesco Advisers serves as a securities lending agent to other clients in addition
to the Fund. There are potential conflicts of interest involved in the Fund’s use of Invesco Advisers as an affiliated securities lending agent, including but not limited to: (i) Invesco Advisers as securities lending agent
may have an incentive to increase or decrease the amount of securities on loan, lend particular securities,
delay or forgo calling securities on loan, or lend securities to less creditworthy borrowers, in order to
generate additional fees for Invesco Advisers; and (ii) Invesco Advisers as securities lending agent may have an
incentive to allocate loans to clients that would provide more fees to Invesco Advisers. Invesco Advisers
seeks to mitigate these potential conflicts of interest by utilizing a lending methodology designed to provide
its securities lending clients with equal lending opportunities over time.
In addition, the Adviser renders certain administrative services to the funds that
engage in securities lending activities, which include, where applicable: (a) overseeing participation
in the Program to ensure compliance with all applicable regulatory and investment guidelines; (b) assisting
the securities lending agent or principal in determining which specific securities are available for loan; (c)
monitoring the securities lending agent to ensure that securities loans are effected in accordance with the Adviser’s instructions and with procedures adopted by the Board; (d) monitoring the creditworthiness of the securities
lending agent and borrowers to ensure that securities loans are effected in accordance with the Adviser’s risk policies; (e) preparing appropriate periodic Board reports with respect to securities lending activities;
(f) responding to securities lending agent inquiries; and (g) performing such other duties as may be
necessary.
36
Aggregations. The Distributor does not distribute Shares in less than Creation Unit Aggregations.
The Distributor will deliver a Prospectus (or a Summary Prospectus) and, upon request,
this SAI to persons purchasing Creation Unit Aggregations and will maintain records of both orders placed
with it and confirmations of acceptance furnished by it. The Distributor is a broker-dealer registered
under the Exchange Act, and a member of the Financial Industry Regulatory Authority (“FINRA”).
The Distributor also may enter into agreements with securities dealers (“Soliciting Dealers”) who will solicit purchases of Creation Unit Aggregations of the Shares. Such Soliciting Dealers also
may be Participating Parties (as defined in “Creation and Redemption of Creation Unit Aggregations” below) and DTC Participants (as defined in “DTC Acts as Securities Depository for Shares” below).
Index Provider. No entity that creates, compiles, sponsors or maintains the Underlying Index is
or will be an affiliated person, as defined in Section 2(a)(3) of the 1940 Act, or an affiliated
person of an affiliated person, of the Trust, the Adviser, the Distributor or a promoter of the Fund.
Neither the Adviser nor any affiliate of the Adviser has any rights to influence the
selection of the securities in the Underlying Index.
The MSCI ACWI Select Climate 500 Index is the Underlying Index of the Fund.
BROKERAGE TRANSACTIONS AND COMMISSIONS ON AFFILIATED TRANSACTIONS
The policy of the Adviser regarding purchases and sales of securities is to give primary
consideration to obtaining the most favorable prices and efficient executions of transactions under
the circumstances. Consistent with this policy, when securities transactions are effected on a stock exchange, the Adviser’s policy is to pay commissions that are considered fair and reasonable without necessarily
determining that the lowest possible commissions are paid in all circumstances. In seeking to determine the reasonableness
of brokerage commissions paid in any transaction, the Adviser relies upon its experience and knowledge
regarding commissions various brokers generally charge. The sale of Shares by a broker-dealer
is not a factor in the selection of broker-dealers.
In seeking to implement its policies, the Adviser effects transactions with those
brokers and dealers that the Adviser believes provide the most favorable prices and are capable of providing
efficient executions. The Adviser and its affiliates currently do not participate in soft dollar transactions.
The Adviser assumes the general supervision over placing orders on behalf of the Fund
for the purchase or sale of portfolio securities. If purchases or sales of portfolio securities by
the Fund and one or more other investment companies or clients supervised by the Adviser are considered at or about
the same time, the Adviser allocates transactions in such securities among the Fund, the several investment
companies and clients in a manner deemed equitable to all. In some cases, this procedure could have
a detrimental effect on the price or volume of the security as far as the Fund is concerned. However, in other
cases, it is possible that the ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund. The primary consideration is prompt execution of orders at
the most favorable net price under the circumstances.
Purchases and sales of fixed-income securities for the Fund usually are principal
transactions and ordinarily are purchased directly from the issuer or from an underwriter or broker-dealer.
The Fund does not usually pay brokerage commissions in connection with such purchases and sales, although
purchases of new issues from underwriters of securities typically include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers serving as market-makers typically include a dealer’s mark-up (i.e., a spread between the bid and the ask prices). When the Fund purchases a newly issued
security at a fixed price, the Adviser may designate certain members of the underwriting syndicate to
receive compensation associated with that transaction. Certain dealers have agreed to rebate a portion
of such compensation directly to the Fund to offset the Fund’s management expenses.
Affiliated Transactions. The Adviser may place trades with Invesco Capital Markets, Inc. (“ICMI”) a broker-dealer with whom it is affiliated, provided the Adviser determines that ICMI's trade execution
abilities and
37
costs are at least comparable to those of non-affiliated brokerage firms with which
the Adviser could otherwise place similar trades. ICMI receives brokerage commissions in connection with effecting
trades for the Fund and, therefore, use of ICMI presents a conflict of interest for the Adviser. Trades
placed through ICMI, including the brokerage commissions paid to ICMI, are subject to procedures adopted
by the Board.
ADDITIONAL INFORMATION CONCERNING THE TRUST
The Trust is an open-end management investment company registered under the 1940 Act.
The Trust was organized as a Massachusetts business trust on October 10, 2006, pursuant to a
Declaration of Trust (the “Declaration”).
The Trust is authorized to issue an unlimited number of shares in one or more series or “funds.” The Board has the right to establish additional series in the future, to determine the
preferences, voting powers, rights and privileges thereof and to modify such preferences, voting powers, rights
and privileges, without shareholder approval.
Each Share issued by the Fund has a pro rata interest in the assets of the Fund. Shares
have no preemptive, exchange, subscription or conversion rights and are freely transferable.
Each Share is entitled to participate equally in dividends and distributions declared by the Board with respect
to the Fund and in the net distributable assets of the Fund on liquidation.
Shareholders are entitled to vote on any matter as required by the 1940 Act or other
applicable laws, but otherwise the Trustees are permitted to take any action without seeking the consent
of shareholders. The Trustees, without shareholder approval, may amend the Declaration in any respect or
authorize the merger or consolidation of the Trust or any fund into another trust or entity, reorganize the
Trust or any fund into another trust or entity or a series or class of another entity, sell all or substantially
all of the assets of the Trust or the Fund to another entity, or a series or class of another entity, or terminate the Trust
or any fund.
The Trust is not required, and does not intend to hold an annual meeting of shareholders,
but will call special meetings of shareholders whenever required by the 1940 Act or by the terms
of the Declaration.
Each Share has one vote with respect to matters upon which a shareholder vote is required
consistent with the requirements of the 1940 Act and the rules promulgated thereunder. Shares
of all funds of the Trust vote together as a single class except as otherwise required by the 1940 Act, or if
the matter being voted on affects only a particular fund, and, if a matter affects a particular fund differently
from other funds, the shares of that fund will vote separately on such matter.
The Declaration provides that by becoming a shareholder of the Fund, each shareholder
shall be held expressly to have agreed to be bound by the provisions of the Declaration. The holders
of Shares are required to disclose information on direct or indirect ownership of Shares as may
be required to comply with various laws applicable to the Fund or as otherwise determined by the Trustees, and
ownership of Shares may be disclosed by the Fund if so required by law or regulation or as the Trustees
may otherwise determine.
Under Massachusetts law applicable to Massachusetts business trusts, shareholders
of such a trust may, under certain circumstances, be held personally liable as partners for its obligations.
However, the Declaration contains an express disclaimer of shareholder liability for acts or obligations of
the Trust and requires that notice of this disclaimer be given in each agreement, obligation or instrument entered
into or executed by the Trust or the Trustees. The Declaration further provides for indemnification out of
the assets and property of the Trust for all losses and expenses of any shareholder held personally liable for
the obligations of the Trust. Thus, the risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which both inadequate insurance existed and the Trust or Fund itself
was unable to meet its obligations. The Trust believes the likelihood of the occurrence of these circumstances
is remote.
The Trust's Declaration also provides that a Trustee acting in his or her capacity
of trustee is not liable personally to any person other than the Trust or its shareholders for any act, omission,
or obligation of the Trust. The Declaration further provides that a Trustee or officer is liable to the
Trust or its shareholders only for his or her bad faith, willful misfeasance, gross negligence or reckless disregard
of his or her duties, and shall
38
not be liable for errors of judgment or mistakes of fact or law. The Declaration requires
the Trust to indemnify any persons who are or who have been Trustees, officers or employees of the Trust
for any liability for actions or failure to act except to the extent prohibited by applicable federal law. In making
any determination as to whether any person is entitled to the advancement of expenses in connection with a
claim for which indemnification is sought, such person is entitled to a rebuttable presumption that
he or she did not engage in conduct for which indemnification is not available.
The Declaration provides that any Trustee who serves as chair of the Board or of a
committee of the Board, lead independent Trustee, or audit committee financial expert, or in any other
similar capacity will not be subject to any greater standard of care or liability because of such position.
The Declaration provides a detailed process for the bringing of derivative actions
by shareholders in order to permit legitimate inquiries and claims while avoiding the time, expense, distraction,
and other harm that can be caused to the Fund or its shareholders as a result of spurious shareholder demands
and derivative actions. Prior to bringing a derivative action, a demand by the complaining shareholder
must first be made on the Trustees. The Declaration details various information, certifications, undertakings
and acknowledgements that must be included in the demand. Following receipt of the demand, the Trustees
have a period of 90 days, which may be extended by an additional 60 days, to consider the demand. If a majority
of the Trustees who are considered independent for the purposes of considering the demand determine that
maintaining the suit would not be in the best interests of the Fund, the Trustees are required to reject
the demand and the complaining shareholder may not proceed with the derivative action unless the shareholder
is able to sustain the burden of proof to a court that the decision of the Trustees not to pursue the
requested action was not a good faith exercise of their business judgment on behalf of the Fund. Trustees are
not considered to have a personal financial interest by virtue of being compensated for their services as Trustees.
If a demand is rejected, the complaining shareholder will be responsible for the costs
and expenses (including attorneys' fees) incurred by the Fund in connection with the consideration
of the demand, if a court determines that the demand was made without reasonable cause or for an improper purpose.
If a derivative action is brought in violation of the Trust's Declaration, the shareholders bringing
the action may be responsible for the Fund's costs, including attorneys' fees. Insofar as the Federal
securities laws supersede state law, these provisions do not apply to shareholder derivative claims that arise
under the Federal securities laws.
The Declaration further provides that the Fund shall be responsible for payment of
attorneys' fees and legal expenses incurred by a complaining shareholder only if required by law, and
any attorneys' fees that the Fund is obligated to pay on the basis of hourly rates shall be calculated using reasonable
hourly rates. The Declaration also requires that actions by shareholders against the Fund be brought
only in a certain federal court in Illinois, or if not permitted to be brought in federal court, then in an
Illinois state court, and that the right to jury trial be waived to the full extent permitted by law. Insofar as the
Federal securities laws supersede state law, the provisions in the Trust's Declaration related to exclusive forum described
herein do not apply to claims brought under the Federal securities laws to the extent that any such federal
securities laws, rules or regulations, do not permit such application. The designation of exclusive forum may
make it more expensive for a shareholder to bring a suit and may limit a shareholder's ability to litigate
a claim in a jurisdiction or forum that may be more convenient or favorable to the shareholder.
The Trust does not have information concerning the beneficial ownership of Shares
held by DTC Participants (as defined below).
Shareholders may make inquiries by writing to the Trust, c/o the Distributor, Invesco
Distributors, Inc., 11 Greenway Plaza, Houston, Texas 77046-1173.
Book Entry Only System. The following information supplements and should be read in conjunction with the section in the Fund’s Prospectus entitled “Book Entry.”
DTC Acts as Securities Depository for Shares. Shares are represented by securities registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC.
39
DTC, a limited purpose trust company, was created to hold securities of its participants (the “DTC Participants”) and to facilitate the clearance and settlement of securities transactions among the DTC Participants in such securities through electronic book entry changes in accounts
of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC
Participants include securities brokers and dealers, banks, trust companies, clearing corporations and
certain other organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned
by a number of its DTC Participants and by the New York Stock Exchange, Inc. (“NYSE”) and FINRA. Access to the DTC system also is available to others such as banks, brokers, dealers and trust companies that
clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly (the “Indirect Participants”).
Beneficial ownership of Shares is limited to DTC Participants, Indirect Participants
and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial
interests in Shares (owners of such beneficial interests are referred to herein as “Beneficial Owners”) is shown on, and the transfer of ownership is effected only through, records DTC maintains (with respect
to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and Beneficial
Owners that are not DTC Participants). Beneficial Owners will receive from or through the DTC Participant
a written confirmation relating to their purchase and sale of Shares.
Conveyance of all notices, statements and other communications to Beneficial Owners
is effected as follows. Pursuant to the Depositary Agreement between the Trust and DTC, DTC is required
to make available to the Trust upon request and for a fee to be charged to the Trust a listing
of the Shares held by each DTC Participant. The Trust shall inquire of each such DTC Participant as to the
number of Beneficial Owners holding Shares, directly or indirectly, through such DTC Participant. The Trust
shall provide each such DTC Participant with copies of such notice, statement or other communication, in such
form, number and at such place as such DTC Participant may reasonably request, in order that such DTC
Participant may transmit such notice, statement or communication, directly or indirectly, to such Beneficial
Owners. In addition, the Trust shall pay to each such DTC Participant a fair and reasonable amount as reimbursement
for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory
requirements.
Fund distributions shall be made to DTC or its nominee, Cede & Co., as the registered
holder of all Shares. DTC or its nominee, upon receipt of any such distributions, shall immediately
credit DTC Participants' accounts with payments in amounts proportionate to their respective beneficial interests
in Shares as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants
and Beneficial Owners of Shares held through such DTC Participants will be governed by standing instructions
and customary practices, as is now the case with securities held for the accounts of customers
in bearer form or registered in a “street name,” and will be the responsibility of such DTC Participants.
The Trust has no responsibility or liability for any aspect of the records relating
to or notices to Beneficial Owners, or payments made on account of beneficial ownership interests in such Shares,
or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests,
or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between
such DTC Participants and the Indirect Participants and Beneficial Owners owning through such DTC Participants.
DTC may decide to discontinue providing its service with respect to Shares at any
time by giving reasonable notice to the Trust and discharging its responsibilities with respect thereto
under applicable law. Under such circumstances, the Trust shall take action to find a replacement for DTC
to perform its functions at a comparable cost.
Proxy Voting. The Board has delegated responsibility for decisions regarding proxy voting for securities
the Fund holds to the Adviser. The Adviser will vote such proxies in accordance with
its proxy policies and procedures, which are included as Appendix A to this SAI. The Board periodically will
review the Fund's proxy voting record.
The Trust is required to disclose annually the Fund’s complete proxy voting record on Form N-PX covering the period July 1 through June 30 and file it with the SEC no later than
August 31. Form N-PX for the Fund also will be available at no charge upon request by calling 1-800-983-0903 or
by writing to Invesco
40
Exchange-Traded Fund Trust II at 3500 Lacey Road, Suite 700, Downers Grove, Illinois
60515. The Trust's Form N-PX is also available on the SEC's website at www.sec.gov.
Code of Ethics. Pursuant to Rule 17j-1 under the 1940 Act, the Board has adopted a Code of Ethics
for the Trust, the Adviser and the Distributor (collectively the “Ethics Code”). The Ethics Code is intended to ensure that the interests of shareholders and other clients are placed ahead of any
personal interest, that no undue personal benefit is obtained from the person’s employment activities and that actual and potential conflicts of interest are avoided.
The Ethics Code applies to the personal investing activities of Trustees and Officers
of the Trust, the Adviser and the Distributor (“Access Persons”). Rule 17j-1 and the Ethics Code are designed to prevent unlawful practices in connection with the purchase or sale of securities by Access
Persons. Under the Ethics Code, Access Persons may engage in personal securities transactions, but must report
their personal securities transactions for monitoring purposes. The Ethics Code permits personnel
subject to the Ethics Code to invest in securities subject to certain limitations, including securities
that the Fund may purchase or sell. In addition, certain Access Persons must obtain approval before investing in
initial public offerings or private placements. The Ethics Code is on file with the SEC and is available on the
EDGAR Database on the SEC’s Internet site at www.sec.gov. The Ethics Code may be obtained, after paying a duplicating fee, by e-mail at publicinfo@sec.gov.
CREATION AND REDEMPTION OF CREATION UNIT AGGREGATIONS
General
The Trust issues and sells Shares only in Creation Unit Aggregations on a continuous
basis through the Distributor, without a sales load, at the Fund's NAV next determined after receipt of an order in “proper form” (as defined below) on any Business Day. A “Business Day” is any day on which the Exchange is open for business. As of the date of this SAI, the Exchange is closed in observance of the
following holidays: New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Juneteenth National Independence Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
On days when the Exchange closes earlier than normal, the Fund may require orders to be placed earlier
in the day.
The number of Shares that constitute a Creation Unit Aggregation for the Fund is set forth in the Fund’s Prospectus. In its discretion, the Trust reserves the right to increase or decrease
the number of Shares that constitutes a Creation Unit Aggregation for the Fund.
Role of the Authorized Participant
The Fund only may issue Creation Units to, or redeem Creation Units from, an authorized
participant, referred to herein as an “AP.” To be eligible to place orders for the purchase or redemption of a Creation Unit of the Fund, an AP must have executed a written agreement with the Fund or one of
its service providers that allows the AP to place such orders (“Participant Agreement”). In addition, an AP must be a member or participant of a clearing agency that is registered with the SEC. An AP may place
orders for the creation or redemption of Creation Units through the clearing process of the Continuous Net Settlement
System (the “Clearing Process”) of the National Securities Clearing Corporation (“NSCC”), Euroclear, the Fed Book-Entry System and/or DTC, subject to the procedures set forth in the Participant Agreement.
(APs that participate in the Clearing Process are sometimes referred to as a “Participating Party,” and APs that are eligible to utilize the Fed Book Entry System and/or DTC are sometimes referred to as a “DTC Participant.”) Transfers of securities settling through Euroclear or other foreign depositories may require AP
access to such facilities.
Pursuant to the terms of its Participant Agreement, an AP will agree, and on behalf
of itself or any investor on whose behalf it will act, to certain conditions, including that the AP will make
available in advance of each purchase of Shares an amount of cash sufficient to pay the Cash Component, together
with the transaction fees described below. An AP acting on behalf of an investor may require the investor
to enter into an agreement with such AP with respect to certain matters, including payment of the Cash
Component. Investors who are not APs make appropriate arrangements with an AP to submit orders to purchase
or redeem Creation
41
Units of the Fund. Investors should be aware that their particular broker may not
be a DTC Participant or may not have executed a Participant Agreement and that, therefore, orders to purchase
Creation Units may have to be placed by the investor's broker through an AP. In such cases, there may be additional
charges to such investor. At any given time, there may be only a limited number of APs. A list of
current APs may be obtained from the Distributor. In addition, the Distributor may be appointed as the proxy of
the AP and may be granted a power of attorney under the Participant Agreement.
Creations
Portfolio Deposit. The consideration for purchase of a Creation Unit of the Fund generally consists
of the in-kind deposit of a portfolio of securities, assets or other positions constituting
a substantial replication of the Fund’s portfolio holdings (the “Deposit Securities”) and an amount of cash denominated in U.S. dollars (the “Cash Component”) computed as described below, plus any applicable administrative or other transaction fees, also as discussed below. Together, the Deposit Securities and the Cash Component
constitute the “Portfolio Deposit,” which represents the minimum initial and subsequent investment amount for a Creation Unit Aggregation of the Fund.
The “Cash Component” is an amount equal to the difference between the aggregate NAV of the Shares per Creation Unit and the “Deposit Amount,” which is an amount equal to the total aggregate market value (per Creation Unit) of the Deposit Securities. The Cash Component, which is sometimes called the “Balancing Amount,” serves to compensate for any differences between the NAV per Creation Unit and the Deposit Amount. Payment of any stamp duty or other similar fees and expenses payable upon
transfer of beneficial ownership of the Deposit Securities are the sole responsibility of the AP purchasing
the Creation Unit.
Each business day before the opening of regular trading on the Exchange (usually 9:30
a.m., Eastern Time), the Fund discloses on its website (www.invesco.com/ETFs) the Deposit Securities
and/or the amount of the applicable Cash Component to be included in the current Portfolio Deposit (based
on information at the end of the previous Business Day) for the Fund. Such Portfolio Deposit is applicable,
subject to any adjustments as described below, to effect purchases of Creation Units of the Fund
until such time as the next-announced Portfolio Deposit is made available.
The identity and number of shares of the Deposit Securities required for a Portfolio
Deposit will change as rebalancing adjustments and corporate action events are reflected within the Fund
from time to time by the Adviser with a view to the investment objective of the Fund. The composition of the
Deposit Securities also may change in response to adjustments to the weighting or composition of the securities
of the Underlying Index. Such adjustments will reflect changes known to the Adviser by the time of determination
of the Deposit Securities in the composition of the Underlying Index or resulting from stock splits
and other corporate actions.
The Adviser expects that the Deposit Securities should correspond pro rata, to the
extent practicable, to the securities held by the Fund. However, the Trust reserves the right to permit or
require an order containing the substitution of an amount of cash—i.e., a “cash in lieu” amount—to be added, at its discretion, to the Cash Component to replace one or more Deposit Securities. For example, a cash substitution
may be permitted or required for any Deposit Securities that (i) may not be available in sufficient quantity for delivery, (ii) may not be eligible for transfer through the systems of DTC or the Clearing Process (discussed
below), (iii) might not be eligible for trading by an AP or the investor on whose behalf the AP is acting,
or (iv) in certain other situations at the sole discretion of the Trust. Additionally, the Trust may permit
or require the submission of a portfolio of securities or cash that differs from the composition of the published portfolio(s) (a “Custom Order”). The Fund also may permit or require the consideration for Creation Unit Aggregations
to consist solely of cash (see “—Cash Creations” below).
Cash Creations. If the Fund permits or requires partial or full cash creations, such purchases shall
be effected in essentially the same manner as in-kind purchases. In the case of a cash
creation, the AP must pay the same Cash Component required to be paid by an in-kind purchaser, plus the Deposit
Amount (i.e., the cash equivalent of the Deposit Securities it would otherwise be required to provide
through an in-kind purchase, as described in the subsection “—Portfolio Deposit” above).
42
Trading costs, operational processing costs and brokerage commissions associated with
using cash to purchase requisite Deposit Securities will be incurred by the Fund and will affect
the value of its Shares; therefore, the Fund may require APs to pay transaction fees to offset brokerage and
other costs associated with using cash to purchase the requisite Deposit Securities (see “Creation and Redemption Transaction Fees” below).
Creation Orders
Procedures for Creation of Creation Unit Aggregations. Orders must be transmitted by an AP, in such form and by such transmission method acceptable to the Transfer Agent or Distributor, pursuant
to procedures set forth in the Participant Agreement, and such procedures may change from time to time.
APs purchasing Creation Units of funds that invest in domestic equity securities (“Domestic Equity Funds”) may transfer Deposit Securities in one of two ways: (i) through the Clearing Process (see “Placing Creation Orders Using the Clearing Process”), or (ii) with the Fund “outside” the Clearing Process through the facilities of DTC (see “Placing Creation Orders Outside the Clearing Process”). The Clearing Process is not currently available for purchases or redemptions of Creation Units of funds that invest in foreign securities (“International Equity Funds”) or funds that invest in fixed-income securities (“Fixed Income Funds”). Accordingly, APs submitting creation orders for such funds must effect those transactions outside the Clearing
Process, as described further below.
All orders to purchase Creation Units, whether through or outside the Clearing Process,
must be received by the Transfer Agent and/or Distributor no later than the order cut-off time designated
in the Participant Agreement (“Order Cut-Off Time”) on the relevant Business Day in order for the creation of Creation Units to be effected based on the NAV of Shares as determined on such date. With certain exceptions,
the Order Cut-Off Time for the Fund, as set forth in the Participant Agreement, usually is the closing
time of the regular trading session on the NYSE—i.e., ordinarily 4:00 p.m., Eastern time. In the case of Custom Orders, the Order Cut-Off Time is no later than 3:00 p.m., Eastern time. Additionally, on days
when the NYSE, the Exchange or the bond markets close earlier than normal, the Trust may require creation
orders to be placed earlier in the day. The Business Day on which an order is placed and deemed received
is referred to as the “Transmittal Date.”
Orders must be transmitted by an AP by telephone, online portal or other transmission
method acceptable to the Transfer Agent and the Distributor. Economic or market disruptions or changes,
or telephone or other communication failure, may impede the ability to reach the Transfer Agent, the Distributor
or an AP. APs placing creation orders should afford sufficient time to permit proper submission
of the order. Orders effected outside the Clearing Process likely will require transmittal by the DTC Participant
earlier on the Transmittal Date than orders effected through the Clearing Process. APs placing orders outside
the Clearing Process should ascertain all deadlines applicable to DTC and the Federal Reserve Bank wire
system. Additional transaction fees may be imposed with respect to transactions effected outside the
Clearing Process (see “Creation and Redemption Transaction Fees” below).
A creation order is considered to be in “proper form” if: (i) a properly completed irrevocable purchase order has been submitted by the AP (either on its own or another investor's behalf) not later than the Fund’s specified Order Cut-Off Time on the Transmittal Date, and (ii) arrangements satisfactory
to the Fund are in place for payment of the Cash Component and any other cash amounts which may be due,
and (iii) all other procedures regarding placement of a creation order set forth in the Participant Agreement
are properly followed. Special procedures are specific to Custom Orders, as set forth in the Participant
Agreement.
All questions as to the number of shares of each security in the Deposit Securities
to be delivered, and the validity, form, eligibility (including time of receipt) and acceptance for deposit
of any securities to be delivered shall be determined by the Fund, and the Fund’s determination shall be final and binding.
Placing Creation Orders Using the Clearing Process. The Clearing Process is the process of creating or redeeming Creation Unit Aggregations through the Continuous Net Settlement System
of the NSCC. Portfolio Deposits made through the Clearing Process must be delivered through a Participating
Party that has executed a Participant Agreement. The Participant Agreement authorizes the Transfer
Agent to transmit, on
43
behalf of the Participating Party, such trade instructions to the NSCC as are necessary
to effect the Participating Party's creation order. Pursuant to such trade instructions, the Participating
Party agrees to deliver the Portfolio Deposit to the Transfer Agent, together with such additional
information as may be required by the Distributor.
Placing Creation Orders Outside the Clearing Process. Portfolio Deposits made outside the Clearing Process must be delivered through a DTC Participant that has executed a Participant
Agreement. A DTC Participant who wishes to place a creation order outside the Clearing Process need
not be a Participating Party, but such orders must state that the DTC Participant is not using the Clearing
Process and that the creation instead will be effected through a transfer of securities and cash directly
through DTC.
APs purchasing Creation Units of Shares of International Equity Funds must have international
trading capabilities. Once the Custodian has been notified of an order to purchase Creation
Units of an International Equity Fund, it will provide such information to the relevant sub-custodian(s) of
each such Fund. The Custodian shall then cause the sub-custodian(s) of each such Fund to maintain an account
into which the AP shall deliver, on behalf of itself or the party on whose behalf it is acting, the
Portfolio Deposit. Deposit Securities must be maintained by the applicable local sub-custodian(s).
Acceptance of Creation Orders. The Transfer Agent will deliver to the AP a confirmation of acceptance of a creation order within 15 minutes of the receipt of a submission received in proper
form. A creation order is deemed to be irrevocable upon the delivery of the confirmation of acceptance, subject
to the conditions below.
The SEC has expressed the view that a suspension of creations that impairs the arbitrage
mechanism applicable to the trading of ETF shares in the secondary market is inconsistent with
Rule 6c-11 under the 1940 Act. The SEC's position does not prohibit the suspension or rejection of creations
in all instances. The Trust reserves the right, to the extent consistent with the provisions of Rule 6c-11
under the 1940 Act, to reject or revoke a creation order transmitted to it by the Distributor in respect of the
Fund, including, for example, if: (i) the order is not in proper form; (ii) the investor(s), upon obtaining the Shares
ordered, would own 80% or more of the currently outstanding Shares of the Fund; (iii) the Deposit Securities
delivered are not as designated for that date by the Custodian; (iv) acceptance of the Portfolio Deposit
would, in the opinion of counsel, be unlawful; or (v) there exist circumstances outside the control of the
Trust that make it impossible to process creation orders for all practical purposes. Examples of such circumstances
include acts of God; public service or utility problems such as fires, floods, extreme weather conditions
and power outages resulting in telephone, telecopy and computer failures; market conditions or activities
causing trading halts; systems failures involving computer or other information systems affecting the Trust,
the Adviser, a sub-adviser, the Distributor, DTC, NSCC, the Federal Reserve, the Transfer Agent, a sub-custodian
or any other participant in the creation process, and similar extraordinary events. The Transfer
Agent shall notify a prospective purchaser of a Creation Unit (and/or the AP acting on its behalf) of the
rejection of such creation order. The Trust, the Custodian, any sub-custodian and the Distributor are under no
duty, however, to give notification of any defects or irregularities in the delivery of Portfolio Deposits,
nor shall any of them incur any liability for the failure to give any such notification.
Issuance of a Creation Unit
Except as provided herein, a Creation Unit will not be issued until the transfer of
good title to the Fund of the Deposit Securities and the payment of the Cash Component have been completed.
Notwithstanding the foregoing, the Fund may issue Creation Units to an AP, notwithstanding
the fact that the corresponding Portfolio Deposit has not been delivered in part or in whole, in
reliance on the undertaking of the AP to deliver the missing Deposit Securities as soon as possible. To secure
such undertaking, the AP must deposit and maintain cash collateral in an amount equal to the sum of (i) the
Cash Component, plus (ii) at least 105% of the market value of the undelivered Deposit Securities. In such circumstances,
the creation order shall be deemed to be received on the Transmittal Date, provided that (i) such
order is placed in proper form prior to the Order Cut-Off Time, and (ii) requisite federal funds in an appropriate
amount are delivered by certain deadlines on the contractual settlement date, as set forth in such Participant
Agreement (typically, 11:00 a.m., Eastern time on such date for the Fund). If such order is not placed in
proper form prior to the
44
Order Cut-Off Time, and/or all other deadlines and conditions set forth in the Participant
Agreement relating to such additional deposits are not met, then the order may be deemed to be canceled,
and the AP shall be liable to the Fund for losses, if any, resulting therefrom. The Trust may use such
collateral at any time to buy Deposit Securities for the Fund, and the AP agrees to accept liability for any shortfall
between the cost to the Trust of purchasing such Deposit Securities and the value of the collateral, which
may be sold by the Trust at such time, and in such manner, as the Trust may determine in its sole discretion.
Using the Clearing Process. An AP that is a Participating Party is required to transfer to the Transfer Agent: (i) the requisite Deposit Securities expected to be delivered through NSCC,
and (ii) the Cash Component, if any, to the Transfer Agent by means of the Trust's Clearing Process.
In each case, the delivery must occur by the “regular way” settlement date - i.e., generally, the first Business Day following the Transmittal Date (“T+1”), except as otherwise set forth in the Participant Agreement or as agreed to by a
Fund and an AP. At that time, the Transfer Agent shall initiate procedures to transfer the requisite
Shares and the Cash Component, if any, through the Clearing Process so as to be received no later than on the “regular way” settlement date (i.e., T+1, except as otherwise set forth in the Participant Agreement or as agreed to by a
Fund and an AP).
Outside the Clearing Process—Domestic Equity Funds. An AP that is a DTC Participant that orders a creation outside the Clearing Process is required to transfer to the Transfer Agent:
(i) the requisite Deposit Securities through DTC, and (ii) the Cash Component, if any, through the Federal Reserve
Bank wire system. Such Deposit Securities must be received by the Transfer Agent by 11:00 a.m., Eastern time on the “regular way” settlement date (i.e., T+1, except as otherwise set forth in the Participant Agreement or as agreed to by a Fund and an AP), while the Cash Component must be received by 2:00 p.m., Eastern time on that same
date. Otherwise, the creation order shall be canceled. For creation units issued principally
for cash (see “—Cash Creations” above), the DTC Participant shall be required to transfer the Cash Component through the Federal Reserve Bank wire system to be received by 2:00 p.m., Eastern time on
the Contractual Settlement Date (as defined below). At that time, the Transfer Agent shall initiate
procedures to transfer the requisite Shares through DTC and the Cash Component, if any, through the Federal Reserve
Bank wire system so as to be received by the purchaser generally no later than T+1 (except as otherwise set forth in the Participant Agreement or as agreed to by a Fund and an AP).
Outside the Clearing Process—International Equity Funds. Deposit Securities must be delivered to an account maintained at the applicable local sub-custodian on or before 11:00 a.m.,
Eastern time, on the Contractual Settlement Date. The “Contractual Settlement Date” is the earlier of (i) the date upon which all of the required Deposit Securities, the Cash Component and any other cash amounts which
may be due are delivered to the Trust and (ii) the latest day for settlement on the customary settlement
cycle in the jurisdiction where any of the securities of the relevant Fund are customarily traded. The AP also
must make available by the Contractual Settlement Date funds estimated by the Trust to be sufficient to pay
the Cash Component, if any. For Creation Units issued principally for cash, the DTC Participant shall be
required to transfer the Cash Component through the Federal Reserve Bank wire system to be received by 2:00 p.m.,
Eastern time on the Contractual Settlement Date. When the sub-custodian confirms to the Custodian that
the required securities included in the Portfolio Deposit (or, when permitted in the sole discretion of the
Trust, the cash value thereof) have been delivered to the account of the relevant sub-custodian, the Custodian shall
notify the Distributor and Transfer Agent, and the Trust will issue and cause the delivery of the Creation
Unit of Shares via DTC so as to be received by the purchaser by such time as set forth in the Participant Agreement.
Creation and Redemption Transaction Fees
Creation and redemption transactions for the Fund are subject to an administrative
fee, payable to BNYM, in the amount listed in the table below, irrespective of the size of the order. As
shown in the table below, the administrative fee has a base amount for the Fund; however, BNYM may increase the
administrative fee to a
45
maximum of four times the base amount for administration and settlement of non-standard
orders requiring additional administrative processing by BNYM. These fees may be changed by the Trust.
|
Fund
|
Base
Administrative Fee
(Payable to BNYM)
|
Maximum
Administrative Fee
(Payable to BNYM)
|
|
Invesco MSCI Global Climate 500 ETF
|
$2,600
|
$10,400
|
|
|
|
|
|
|
|
|
Additionally, the Adviser may charge an additional, variable fee (sometimes referred to as a “cash-in-lieu” fee) to the extent the Fund permits APs to create or redeem Creation Units for cash,
or otherwise substitute cash for any Deposit Security. Such cash-in-lieu fees are payable to the Fund and
are charged to defray the transaction cost to the Fund of buying (or selling) Deposit Securities, to cover spreads
and slippage costs and to protect existing shareholders. The cash-in-lieu fees will be negotiated between
the Adviser and the AP and may be different for any given transaction, Business Day or AP; however in no instance
will such cash-in-lieu fees exceed 2% of the value of a Creation Unit. From time to time, the Adviser, in
its sole discretion, may adjust the Fund's cash-in-lieu fees or reimburse APs for all or a portion of the creation
or redemption transaction fees.
Redemptions
Shares may be redeemed only by APs at their NAV per Share next determined after receipt
by the Distributor of a redemption request in proper form. The Fund will not redeem Shares
in amounts less than a Creation Unit. Beneficial Owners of Shares may sell their Shares in the secondary
market, but they must accumulate enough Shares to constitute a Creation Unit to redeem those Shares with
the Fund. There can be no assurance that there will be sufficient liquidity in the public trading market
at any time to permit assembly of a Creation Unit. Investors should expect to incur brokerage and other costs in connection
with assembling a sufficient number of Shares to constitute a redeemable Creation Unit.
Fund Securities. The redemption proceeds for a Creation Unit generally consist of a portfolio of securities
(the “Fund Securities”), plus or minus an amount of cash denominated in U.S. dollars (the “Cash Redemption Amount”), representing an amount equal to the difference between the NAV of the Shares being redeemed, as next determined after receipt of a request in proper form, and the total aggregate
market value of the Fund Securities, less any applicable administrative or other transaction fees, as discussed
above. The Cash Redemption Amount is calculated in the same manner as the Balancing Amount. To the
extent that the Fund Securities have a value greater than the NAV of the Shares being redeemed, a Cash
Redemption Amount payment equal to the differential is required to be paid by the redeeming shareholder.
Each business day before the opening of regular trading on the Exchange (usually 9:30
a.m., Eastern Time), the Fund discloses the Fund Securities that will be applicable (subject to
possible amendment or correction) to redemption requests received in proper form (as defined below) on that
day, as well as the Cash Redemption Amount. Such Fund Securities and the corresponding Cash Redemption Amount
are applicable to effect redemptions of Creation Units of the Fund until such time as the next-announced
composition of the Fund Securities and Cash Redemption Amount is made available.
The Adviser expects that the Fund Securities should correspond pro rata, to the extent
practicable, to the securities held by the Fund. However, Fund Securities received on redemption may not
be identical to Deposit Securities that are applicable to creations of Creation Units. The Trust also may
provide such redeemer a Custom Order, which, as described above, is a portfolio of securities that differs
from the exact composition of the published list of Fund Securities, but in no event will the total value of the
securities delivered and the cash transmitted differ from the NAV. In addition, the Trust reserves the right to
permit or require an amount of cash to be added, at its discretion, to the Cash Redemption Amount to replace one
or more Fund Securities (see “— Cash Redemptions” below).
Cash Redemptions. At times, the Fund may elect to pay out the proceeds of redemptions of Creation Units partially or principally for cash (or through any combination of cash and Fund
Securities). In addition, an
46
investor may request a redemption in cash that the Fund may, in its sole discretion,
permit. In either case, the investor will receive a cash payment in an amount equal to the NAV of its Shares next
determined after a redemption request is received (less any redemption transaction fees imposed, as specified
above).
Redemptions of Shares will be subject to compliance with applicable federal and state
securities laws and the Fund (whether or not it otherwise permits cash redemptions) reserves the right
to redeem Creation Unit Aggregations for cash to the extent that the Trust could not lawfully deliver specific
Fund Securities upon redemptions or could not do so without first registering the Fund Securities under
such laws. An AP that is not a “qualified institutional buyer,” as such term is defined under Rule 144A of the Securities Act, will not be able to receive Fund Securities that are restricted securities eligible for resale under
Rule 144. The AP may request the redeeming beneficial owner of the Shares to complete an order form or
to enter into agreements with respect to such matters as compensating cash payment.
Redemption Requests
Procedures for Redemption of Creation Unit Aggregations. Orders must be transmitted by an AP, in such form and by such transmission method acceptable to the Transfer Agent or Distributor,
pursuant to procedures set forth in the Participant Agreement, and such procedures may change from time to
time. APs seeking to redeem Shares may transfer Creation Units through the Clearing Process (see “Placing Redemption Requests Using the Clearing Process”) or outside the Clearing Process through the facilities of DTC (see “Placing Redemption Requests Outside the Clearing Process”). As noted above, the Clearing Process is not currently available for redemptions of Creation Units of International Equity Funds
or Fixed Income Funds; accordingly, APs seeking to redeem Shares of such Funds must effect such transactions
outside the Clearing Process.
All requests to redeem Creation Units, whether through the Clearing Process, or outside
the Clearing Process through DTC or otherwise, must be received by the Distributor no later than
the Order Cut-Off Time on the relevant Business Day. As with creation orders, requests for redemption of
Custom Orders must be received by 3:00 p.m., Eastern time, and some funds, as set forth in the Participant
Agreement, may have different Order Cut-Off Times for redemptions.
A redemption request will be considered to be in “proper form” if (i) a duly completed request form is received by the Distributor from the AP on behalf of itself or another redeeming investor
at the specified Order Cut-Off Time, and (ii) arrangements satisfactory to the Fund are in place for the
AP to transfer or cause to be transferred to the Fund the Creation Unit of the Fund being redeemed on or before
contractual settlement of the redemption request. Special procedures are specific to Custom Orders, as set forth
in the Participant Agreement.
As discussed herein, a redeeming investor will pay a transaction fee to offset the Fund’s trading costs, operational processing costs, brokerage commissions and other similar costs incurred
in transferring the Fund Securities from its account to the account of the redeeming investor. An entity redeeming
Shares in Creation Units outside the Clearing Process may be required to pay a higher transaction fee
than would have been charged had the redemption been effected through the Clearing Process. A redeeming
investor receiving cash in lieu of one or more Fund Securities may also be assessed a higher transaction fee
on the cash in lieu portion. This higher transaction fee will be assessed in the same manner as the transaction
fee incurred in purchasing Creation Units.
Placing Redemption Requests Using the Clearing Process. Requests to redeem Creation Units through the Clearing Process must be delivered through a Participating Party that has executed
a Participant Agreement, in such form and by such transmission method acceptable to the Transfer
Agent or Distributor, pursuant to procedures set forth in the Participant Agreement.
Placing Redemption Requests Outside the Clearing Process. Orders to redeem Creation Units outside the Clearing Process must be delivered through a DTC Participant that has executed
a Participant Agreement. A DTC Participant who wishes to place a redemption order outside the Clearing
Process need not
47
be a Participating Party, but such orders must state that the DTC Participant is not
using the Clearing Process and that redemption instead will be effected through a transfer of Shares directly
through DTC.
In the case of Shares of International Equity Funds, upon redemption of Creation Units
and taking delivery of the Fund Securities into the account of the redeeming shareholder or an
AP acting on behalf of such investor, such person must maintain appropriate custody arrangements with a broker-dealer,
bank or other custody provider in each jurisdiction in which any of such Fund Securities are
customarily traded.
Acceptance of Redemption Requests. The Transfer Agent will deliver to the AP a confirmation of acceptance of a request to redeem Shares in Creation Units within 15 minutes of the
receipt of a submission received in proper form. A redemption order is deemed to be irrevocable upon the delivery
of the confirmation of acceptance.
The right of redemption may be suspended or the date of payment postponed (i) for
any period during which the NYSE is closed (other than customary weekend and holiday closings); (ii)
for any period during which trading on the NYSE is suspended or restricted; (iii) for any period during
which an emergency exists as a result of which disposal of the Shares or determination of the Fund’s NAV is not reasonably practicable; or (iv) in such other circumstances as is permitted by the SEC.
Issuance of Fund Securities
To the extent contemplated by a Participant Agreement, in the event an AP has submitted
a redemption request in proper form but is unable to transfer all or part of the Creation Unit
to be redeemed to the Distributor, on behalf of the Fund, by the closing time of the regular trading session
on the Exchange on the date such redemption request is submitted, the Distributor will nonetheless accept
the redemption request in reliance on the undertaking by the AP to deliver the missing Shares as soon as possible,
which undertaking shall be secured by the AP's delivery and maintenance of collateral consisting of
cash having a value at least equal to 105% of the value of the missing Shares. The Trust may use such collateral
at any time to purchase the missing Shares and will subject the AP to liability for any shortfall between
the cost of the Fund acquiring such Shares and the value of the collateral, which may be sold by the Trust at such
time, and in such manner, as the Trust may determine in its sole discretion.
Using the Clearing Process. An AP that is a Participating Party is required to transfer to the Transfer Agent: (i) the requisite Shares, and (ii) the Cash Redemption Amount, if any, to the
Transfer Agent by means of the Trust's Clearing Process. In each case, the delivery must occur by the “regular way” settlement date (i.e., T+1, except as otherwise set forth in the Participant Agreement or as agreed to by a
Fund and an AP). At that time, the Transfer Agent shall initiate procedures to transfer the requisite
Fund Securities and the Cash Redemption Amount, if any, through the Clearing Process so as to be received no later than on the “regular way” settlement date (i.e., T+1, except as otherwise set forth in the Participant Agreement or as agreed to by a Fund and an AP).
Outside the Clearing Process—Domestic Equity Funds. An AP that is a DTC Participant making a redemption request outside the Clearing Process is required to transfer to the Transfer
Agent: (i) the requisite Shares through DTC, and (ii) the Cash Redemption Amount, if any, through the Federal
Reserve Bank wire system. Such Shares and Cash Redemption Amount must be received by the Transfer Agent
by 11:00 a.m., Eastern time on the Contractual Settlement Date. At that time, the Transfer Agent
shall initiate procedures to transfer the requisite Fund Securities through DTC and the Cash Redemption Amount,
if any, through the Federal Reserve Bank wire system so as to be received generally no later than T+1 (except as otherwise set forth in the Participant Agreement or as agreed to by a Fund and an AP).
Outside the Clearing Process—International Equity Funds. A redeeming AP must maintain appropriate securities broker-dealer, bank or other custody arrangements to which account such
in-kind redemption proceeds will be delivered. If neither the redeeming beneficial owner nor the AP acting
on its behalf has appropriate arrangements to take delivery of the Fund Securities in the applicable
jurisdiction and it is not possible to make other such arrangements, or if it is not possible to effect deliveries
of the Fund Securities in such jurisdiction, the beneficial owner will be required to receive its redemption
proceeds in cash.
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Arrangements satisfactory to the Trust must be in place for the AP to transfer Creation
Units through DTC on or before the settlement date. At that time, the Transfer Agent shall initiate
procedures to transfer the requisite Fund Securities through DTC and the global sub-custodian network and the
Cash Redemption Amount, if any, through the Federal Reserve Bank wire system so as to be received
generally no later than T+1 (except as otherwise set forth in the Participant Agreement or as agreed to by a Fund and an AP).
Regular Holidays
Notwithstanding the foregoing, the Fund may effect deliveries of Creation Units and
Fund Securities on a basis other than T+1 (or as otherwise set forth in the Participant Agreement or as agreed to by the Fund
and an AP) in order to accommodate local holiday schedules, to account for different treatment among
foreign and U.S. markets of dividend record dates and ex-dividend dates or under certain other
circumstances. The ability of the Trust to effect in-kind creations and redemptions on a T+1 basis (or as otherwise set forth in the Participant Agreement or as agreed to by the Fund and an AP) is subject, among other things, to the condition that, in the time between the order date and the delivery date, there are no days
that are holidays in an applicable foreign market. For every occurrence of one or more such intervening holidays
that are not holidays observed in the U.S., the redemption settlement cycle will be extended by
the number of such intervening holidays. In addition, the proclamation of new holidays, the treatment
by market participants of certain days as "informal holidays" (e.g., days on which no or limited securities
transactions occur, as a result of substantially shortened trading hours), the elimination of existing holidays or
changes in local securities delivery practices, and/or other unforeseeable closings in a foreign market due to
emergencies also may prevent the Fund from delivering securities within the normal settlement period. However,
in no case will the Fund take more than 15 days after the receipt of the redemption request to deliver
such securities to an AP.
TAXES
The following is a summary of certain additional tax considerations generally affecting
the Fund and its shareholders that are not described in the Prospectus. No attempt is made to present
a detailed explanation of the tax treatment of the Fund or its shareholders, and the discussion here and
in the Prospectus is not intended as a substitute for careful tax planning.
This section is based on the Code and applicable regulations in effect on the date
of this SAI. Future legislative, regulatory or administrative changes including provisions of current
law that sunset and thereafter no longer apply, or court decisions may significantly change the tax rules applicable
to the Fund and its shareholders. Any of these changes or court decisions may have a retroactive effect.
The following is provided as general information only and is not tax advice. All investors should consult their own tax advisors as to the federal, state, local and foreign tax provisions
applicable to them.
Taxation of the Fund
The Fund has elected and intends to qualify each year as a “regulated investment company” (sometimes referred to as a “RIC”) under Subchapter M of the Code. If the Fund qualifies, the Fund will not be subject to federal income tax on the portion of its investment company taxable income (i.e.,
generally, taxable interest, dividends, net short-term capital gains and other taxable ordinary income net of expenses
without regard to the deduction for dividends paid) and net capital gain (i.e., the excess of net long-term
capital gains over net short-term capital losses) that it distributes.
Qualification as a RIC. In order to qualify for treatment as a RIC, the Fund must
satisfy the following requirements:
●
Distribution Requirement—the Fund must distribute an amount equal to the sum of at least 90% of its investment company taxable income and 90% of its net tax-exempt income, if any, for
the tax year (certain distributions made by the Fund after the close of its tax year are considered
distributions attributable to the previous tax year for purposes of satisfying this requirement).
49
●
Income Requirement—the Fund must derive at least 90% of its gross income from dividends, interest, certain payments with respect to securities loans, and gains from the sale or other
disposition of stock, securities or foreign currencies, or other income (including, but not limited to,
gains from options, futures or forward contracts) derived from its business of investing in such stock,
securities or currencies and net income derived from qualified publicly traded partnerships (“QPTPs”).
●
Asset Diversification Test—the Fund must satisfy the following asset diversification test at the close of each quarter of the Fund’s tax year: (1) at least 50% of the value of the Fund’s assets must consist of cash and cash items, U.S. government securities, securities of other regulated investment
companies, and securities of other issuers (as to which the Fund has not invested more than 5%
of the value of the Fund’s total assets in securities of an issuer and as to which the Fund does not hold more than 10% of the outstanding voting securities of the issuer); and (2) no more than 25%
of the value of the Fund’s total assets may be invested in the securities of any one issuer (other than U.S. government securities or securities of other regulated investment companies) or of two or more
issuers which the Fund controls and which are engaged in the same or similar trades or businesses, or,
collectively, in the securities of QPTPs.
In some circumstances, the character and timing of income realized by the Fund for
purposes of the Income Requirement or the identification of the issuer for purposes of the Asset Diversification
Test is uncertain under current law with respect to a particular investment, and an adverse
determination or future guidance by the Internal Revenue Service (“IRS”) with respect to such type of investment may adversely affect the Fund’s ability to satisfy these requirements. See “Tax Treatment of Portfolio Transactions” below with respect to the application of these requirements to certain types of investments.
In other circumstances, the Fund may be required to sell portfolio holdings in order to meet the Income Requirement,
Distribution Requirement, or Asset Diversification Test, which may have a negative impact on the Fund’s income and performance. In lieu of potential disqualification, the Fund is permitted to pay a
tax for certain failures to satisfy the Asset Diversification Test or Income Requirement, which, in general, are
limited to those due to reasonable cause and not willful neglect.
The Fund may use “equalization accounting” (in lieu of making some cash distributions) in determining the portion of its income and gains that has been distributed. If the Fund uses equalization
accounting, it will allocate a portion of its undistributed investment company taxable income and net
capital gain to redemptions of Shares and will correspondingly reduce the amount of such income and gains that
it distributes in cash. However, the Fund intends to make cash distributions for each taxable year in an aggregate
amount that is sufficient to satisfy the Distribution Requirement without taking into account its
use of equalization accounting. If the IRS determines that the Fund’s allocation is improper and/or that such Fund has under-distributed its income and gain for any taxable year, the Fund may be liable for federal income and/or
excise tax.
If for any taxable year the Fund does not qualify as a RIC, all of its taxable income
(including its net capital gain) would be subject to tax at the corporate income tax rate without any
deduction for dividends paid to shareholders, and the dividends would be taxable to the shareholders as ordinary
income (or possibly as qualified dividend income) to the extent of the Fund’s current and accumulated earnings and profits. Failure to qualify as a RIC thus would have a negative impact on the Fund’s income and performance. Subject to savings provisions for certain inadvertent failures to satisfy the Income Requirement
or Asset Diversification Test which, in general, are limited to those due to reasonable cause and not willful
neglect, it is possible that the Fund will not qualify as a RIC in any given tax year. Even if such savings provisions
apply, the Fund may be subject to a monetary sanction of $50,000 or more. Moreover, the Board reserves
the right not to maintain the qualification of the Fund as a RIC if it determines such a course of action to
be beneficial to shareholders.
Portfolio turnover. For investors that hold Shares in a taxable account, a high portfolio turnover rate
may result in higher taxes. This is because a fund with a high turnover rate may accelerate
the recognition of capital gains and more of such gains are likely to be taxable as short-term rather
than long-term capital gains in contrast to a comparable fund with a low turnover rate. Any such higher taxes would reduce the Fund’s after-tax performance. See “Taxation of Fund Distributions—Capital gain dividends” below.
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For non-U.S. investors, any such acceleration of the recognition of capital gains
that results in more short-term and less long-term capital gains being recognized by the Fund may cause
such investors to be subject to increased U.S. withholding taxes. See “Foreign Shareholders—U.S. withholding tax at the source” below. For ETFs, in-kind redemptions are the primary redemption mechanism and, therefore,
the Fund may be less likely to sell securities in order to generate cash for redeeming shareholders,
which a mutual fund might do. This provides a greater opportunity for ETFs to defer the recognition of
gain on appreciated securities which it may hold thereby reducing the distribution of capital gains to
its shareholders.
Capital loss carryovers. The capital losses of the Fund, if any, do not flow through to shareholders. Rather, the Fund may use its capital losses, subject to applicable limitations, to
offset its capital gains without being required to pay taxes on or distribute to shareholders such gains that are offset
by the losses. If the Fund has a “net capital loss” (that is, capital losses in excess of capital gains), the excess (if any) of the Fund’s net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising on the first day of the Fund’s next taxable year, and the excess (if any) of the Fund’s net long-term capital losses over its net short-term capital gains is treated as a long-term capital
loss arising on the first day of the Fund’s next taxable year. Any net capital losses of the Fund that are not used to offset capital gains may be carried forward indefinitely to reduce any future capital gains realized by
the Fund in succeeding taxable years. The amount of capital losses that can be carried forward and used in
any single year is subject to an annual limitation if there is a more than 50% “change in ownership” of the Fund. An ownership change generally results when shareholders owning 5% or more of the Fund increase their aggregate
holdings by more than 50% over a three-year look-back period. An ownership change could result
in capital loss carryovers being used at a slower rate, thereby reducing the Fund’s ability to offset capital gains with those losses. An increase in the amount of taxable gains distributed to the Fund’s shareholders could result from an ownership change. The Fund undertakes no obligation to avoid or prevent an ownership
change, which can occur in the normal course of shareholder purchases and redemptions or as a result
of engaging in a tax-free reorganization with another fund. Moreover, because of circumstances beyond the Fund’s control, there can be no assurance that the Fund will not experience, or has not already experienced,
an ownership change.
Deferral of late year losses. The Fund may elect to treat part or all of any “qualified late year loss” as if it had been incurred in the succeeding taxable year in determining the Fund’s taxable income, net capital gain, net short-term capital gain, and earnings and profits. The effect of this election is to treat any such “qualified late year loss” as if it had been incurred in the succeeding taxable year, which may change the timing, amount, or characterization of Fund distributions (see “Taxation of Fund Distributions—Capital gain dividends” below). A “qualified late year loss” includes:
(i) any net capital loss incurred after October 31 of the current taxable year, or,
if there is no such loss, any net long-term capital loss or any net short-term capital loss incurred after
October 31 of the current taxable year (post-October capital losses), and
(ii) the sum of (1) the excess, if any, of (a) specified losses incurred after October
31 of the current taxable year, over (b) specified gains incurred after October 31 of the current taxable
year and (2) the excess, if any, of (a) ordinary losses incurred after December 31 of the current taxable
year, over (b) the ordinary income incurred after December 31 of the current taxable year.
The terms “specified losses” and “specified gains” mean ordinary losses and gains from the sale, exchange, or other disposition of property (including the termination of a position
with respect to such property), foreign currency losses and gains, and losses and gains resulting from
holding stock in a passive foreign investment company (“PFIC”) for which a mark-to-market election is in effect. The terms “ordinary losses” and “ordinary income” mean other ordinary losses and income that are not described in the preceding sentence.
Undistributed capital gains. The Fund may retain or distribute to shareholders its net capital gain for each taxable year. The Fund currently intends to distribute net capital gains. If the Fund
elects to retain its net capital gain, the Fund will be taxed thereon (except to the extent of any available
capital loss carryovers) at the corporate income tax rate. If the Fund elects to retain its net capital gain,
it is expected that the Fund also will elect to have shareholders treated as if each received a distribution of its
pro rata share of such gain, with
51
the result that each shareholder will be required to report its pro rata share of
such gain on its tax return as long-term capital gain, will receive a refundable tax credit for its pro rata share
of tax paid by the Fund on the gain and will increase the tax basis for its Shares by an amount equal to the deemed
distribution less the tax credit.
Federal excise tax. To avoid a 4% non-deductible excise tax, the Fund must distribute by December 31
of each year an amount equal to at least: (1) 98% of its ordinary income for the calendar
year, (2) 98.2% of capital gain net income (the excess of the gains from sales or exchanges of capital
assets over the losses from such sales or exchanges) for the one-year period ended on October 31 of such
calendar year, and (3) any prior year undistributed ordinary income and capital gain net income. The Fund
may elect to defer to the following year any net ordinary loss incurred for the portion of the calendar year
which is after the beginning of the Fund’s taxable year. Also, the Fund will defer any “specified gain” or “specified loss” which would be properly taken into account for the portion of the calendar after October 31. Any
net ordinary loss, specified gain, or specified loss deferred shall be treated as arising on January 1 of the following
calendar year. Generally, the Fund may make sufficient distributions to avoid liability for federal
income and excise tax, but can give no assurances that all or a portion of such liability will be avoided. In
addition, under certain circumstances temporary timing or permanent differences in the realization of income
and expense for book and tax purposes can result in the Fund having to pay an excise tax.
Purchase of Shares. As a result of tax requirements, the Trust, on behalf of the Fund, has the right
to reject an order to purchase Shares if the purchaser (or group of purchasers acting
in concert with each other) would, upon obtaining the Shares so ordered, own 80% or more of the outstanding Shares
and if, pursuant to Sections 351 and 362 of the Code, the Fund would have a basis in the Deposit Securities
different from the market value of such securities on the date of deposit. The Trust also has the right
to require information necessary to determine beneficial Share ownership for purposes of the 80% determination.
Foreign income tax. Investment income received by the Fund from sources within foreign countries may
be subject to foreign income tax withheld at the source, and the amount of tax withheld
generally will be treated as an expense of the Fund. The United States has entered into tax treaties
with many foreign countries that entitle the Fund to a reduced rate of, or exemption from, tax on such
income. Some countries require the filing of a tax reclaim or other forms to receive the benefit of the reduced
tax rate; whether or when the Fund will receive the tax reclaim is within the control of the individual country.
Information required on these forms may not be available such as shareholder information; therefore, the Fund
may not receive the reduced treaty rates or potential reclaims. Other countries have conflicting and changing
instructions and restrictive timing requirements which may cause the Fund not to receive the reduced
treaty rates or potential reclaims. Other countries may subject capital gains realized by the Fund on sale or
disposition of securities of that country to taxation. These and other factors may make it difficult for the Fund
to determine in advance the effective rate of tax on its investments in certain countries. Under certain circumstances,
the Fund may elect to pass-through certain eligible foreign income taxes paid by the Fund to shareholders,
although it reserves the right not to do so. If the Fund makes such an election and obtains a refund of
foreign taxes paid by the Fund in a prior year, the Fund may be eligible to reduce the amount of foreign taxes
reported to its shareholders, generally by the amount of the foreign taxes refunded, for the year
in which the refund is received. Certain foreign taxes imposed on the Fund’s investments, such as a foreign financial transaction tax, may not be creditable against U.S. income tax liability or eligible for pass
through by the Fund to its shareholders.
Taxation of Fund Distributions. The Fund anticipates distributing substantially all of its investment company taxable income and net capital gain for each taxable year. Distributions by
the Fund will be treated in the manner described below regardless of whether such distributions are paid in
cash or reinvested in additional Shares of the Fund (or of another Fund). You will receive information annually
as to the federal income tax consequences of distributions made (or deemed made) during the year.
Distributions of ordinary income. The Fund receives income generally in the form of dividends and/or interest on its investments. The Fund may also recognize ordinary income from other
sources, including, but not limited to, certain gains on foreign currency-related transactions. This income,
less expenses incurred in
52
the operation of the Fund, constitutes the Fund’s net investment income from which dividends may be paid to you. If you are a taxable investor, distributions of net investment income generally
are taxable as ordinary income to the extent of the Fund’s earnings and profits. In the case of a fund whose strategy includes investing in stocks of corporations, a portion of the income dividends paid to you
may be qualified dividends eligible to be taxed at reduced rates.
Capital gain dividends. Taxes on distributions of capital gains are determined by how long the Fund owned the investments that generated them, rather than how long a shareholder has
owned his or her Shares. In general, the Fund will recognize long-term capital gain or loss on the
sale or other disposition of assets it has owned for more than one year, and short-term capital gain or loss on
investments it has owned for one year or less. Distributions of net capital gain (the excess of net long-term
capital gain over net short-term capital loss) that are properly reported by the Fund to shareholders as capital gain
dividends generally will be taxable to a shareholder receiving such distributions as long-term capital
gain. Long-term capital gain rates applicable to individuals are 0%, 15% or 20% depending on the nature of the
capital gain and the individual’s taxable income. Distributions of net short-term capital gains for a taxable year in excess of net long-term capital losses for such taxable year generally will be taxable to a shareholder
receiving such distributions as ordinary income.
Qualified dividend income for individuals. Ordinary income dividends reported as derived from qualified dividend income will be taxed in the hands of individuals and other noncorporate shareholders
at the rates applicable to long-term capital gain. Qualified dividend income means dividends paid
to the Fund (a) by domestic corporations, (b) by foreign corporations that are either (i) incorporated
in a possession of the United States, or (ii) are eligible for benefits under certain income tax treaties with the
United States that include an exchange of information program, or (c) with respect to stock of a foreign corporation
that is readily tradable on an established securities market in the United States. Both the Fund and the investor
must meet certain holding period requirements to qualify Fund dividends for this treatment. Income derived
from investments in derivatives, fixed-income securities, U.S. REITs, PFICs, and income received “in lieu of” dividends in a securities lending transaction generally is not eligible for treatment as qualified
dividend income. If the qualifying dividend income received by the Fund is equal to 95% (or a greater percentage) of the Fund’s gross income (exclusive of net capital gain) in any taxable year, all of the ordinary income
dividends paid by the Fund will be qualifying dividend income.
Qualified REIT dividends. Under the Tax Cuts and Jobs Act “qualified REIT dividends” (i.e., ordinary REIT dividends other than capital gain dividends and portions of REIT dividends designated
as qualified dividend income) are treated as eligible for a 20% deduction by noncorporate taxpayers. This
deduction, if allowed in full, equates to a maximum effective tax rate of 29.6% (37% top rate applied to income
after 20% deduction). Proposed regulations issued by the IRS, which can be relied upon currently, enable
the Fund to pass through the special character of “qualified REIT dividends”. The amount of a RIC’s dividends eligible for the 20% deduction for a taxable year is limited to the excess of the RIC’s qualified REIT dividends for the taxable year over allocable expenses. A noncorporate shareholder receiving such dividends would
treat them as eligible for the 20% deduction, provided the shareholder meets certain holding period requirements
for its shares in the RIC (i.e., generally, RIC shares must be held by the shareholder for more than 45
days during the 91-day period beginning on the date that is 45 days before the date on which the shares become
ex-dividend with respect to such dividend).
Corporate dividends-received deduction. Ordinary income dividends reported to Fund shareholders as derived from qualified dividends from domestic corporations will qualify for the 50%
dividends-received deduction generally available to corporations. The availability of the dividends-received
deduction is subject to certain holding period and debt financing restrictions imposed under the Code on the
corporation claiming the deduction. Income derived by the Fund from investments in derivatives, fixed-income
and foreign securities generally is not eligible for this treatment.
Return of capital distributions. Distributions by the Fund that are not paid from earnings and profits will be treated as a return of capital to the extent of (and in reduction of) the shareholder’s tax basis in his or her Shares; any excess will be treated as gain from the sale of his or her Shares. Thus,
the portion of a
53
distribution that constitutes a return of capital will decrease the shareholder’s tax basis in his or her Shares (but not below zero), and will result in an increase in the amount of gain (or decrease
in the amount of loss) that will be recognized by the shareholder for tax purposes on the later sale of such
Shares. Return of capital distributions can occur for a number of reasons including, among others, the Fund
overestimates the income to be received from certain investments such as those classified as partnerships or equity REITs. See “Tax Treatment of Portfolio Transactions—Investments in U.S. REITs.”
Impact of realized but undistributed income and gains, and net unrealized appreciation
of portfolio securities. At the time of your purchase of Shares, the price of the Shares may reflect undistributed
income, undistributed capital gains, or net unrealized appreciation of portfolio securities
held by the Fund. A subsequent distribution to you of such amounts, although constituting a return of
your investment, would be taxable and would be taxed as either ordinary income (some portion of which may be
taxed as qualified dividend income) or capital gain unless you are investing through a tax-advantaged
arrangement, such as a 401(k) plan or an individual retirement account. The Fund may be able to reduce the
amount of such distributions by utilizing its capital loss carryovers, if any.
Pass-through of foreign tax credits. If more than 50% of the value of the Fund’s total assets at the end of a fiscal year is invested in foreign securities, or if the Fund is a qualified fund
of funds (i.e., a fund at least 50% of the value of the total assets of which, at the close of each quarter of the
taxable year, is represented by interests in other RICs), the Fund may elect to “pass-through” the amount of foreign income tax paid by the Fund (the Foreign Tax Election) in lieu of deducting such amount in determining its
investment company taxable income.
Pursuant to the Foreign Tax Election, shareholders will be required: (i) to include
in gross income, even though not actually received, their respective pro rata shares of the foreign income
tax paid by the Fund that are attributable to any distributions they receive; and (ii) either to deduct their
pro rata share of foreign tax in computing their taxable income or to use it (subject to various Code limitations)
as a foreign tax credit against federal income tax (but not both). No deduction for foreign tax may be claimed by
a noncorporate shareholder who does not itemize deductions or who is subject to the alternative minimum tax.
Shareholders may be unable to claim a credit for the full amount of their proportionate shares of the
foreign income tax paid by the Fund due to certain limitations that may apply. The Fund reserves the right not to
pass-through the amount of foreign income taxes paid by the Fund. Additionally, any foreign tax withheld on payments made “in lieu of” dividends or interest will not qualify for the pass-through of foreign tax credits. See “Tax Treatment of Portfolio Transactions—Securities Lending” below.
Tax credit bonds. If the Fund holds, directly or indirectly, one or more “tax credit bonds” (including build America bonds, clean renewable energy bonds and qualified tax credit bonds) on one
or more applicable dates during a taxable year, the Fund may elect to permit its shareholders to claim
a tax credit on their income tax returns equal to each shareholder’s proportionate share of tax credits from the applicable bonds that otherwise would be allowed to the Fund. In such a case, shareholders must include
in gross income (as interest) their proportionate share of the income attributable to their proportionate
share of those offsetting tax credits. A shareholder’s ability to claim a tax credit associated with one or more tax credit bonds may be subject to certain limitations imposed by the Code. (Under the Tax Cuts and Jobs Act,
the build America bonds, clean renewable energy bonds and certain other qualified bonds may no longer
be issued after December 31, 2017.) Even if the Fund is eligible to pass-through tax credits, the
Fund may choose not to do so.
U.S. government interest. Income earned on certain U.S. government obligations is exempt from state and local personal income taxes if earned directly by you. States also grant tax-free
status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject
in some states to minimum investment or reporting requirements that must be met by the Fund. Income on investments
by the Fund in certain other obligations, such as repurchase agreements collateralized by U.S. government
obligations, commercial paper and federal agency-backed obligations (e.g., GNMA or FNMA obligations),
generally does not qualify for tax-free treatment. The rules on exclusion of this income are different
for corporations.
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Dividends declared in October, November or December and paid in January. Ordinarily, shareholders are required to take distributions by the Fund into account in the year in which the distributions
are made. However, dividends declared in October, November or December of any year and payable
to shareholders of record on a specified date in such a month will be deemed to have been received by
the shareholders (and made by the Fund) on December 31 of such calendar year if such dividends are actually
paid in January of the following year. Shareholders will be advised annually as to the U.S. federal income
tax consequences of distributions made (or deemed made) during the year in accordance with the guidance
that has been provided by the IRS.
Medicare tax. A 3.8% Medicare tax is imposed on net investment income earned by certain individuals,
estates and trusts. “Net investment income,” for these purposes, means investment income, including ordinary dividends and capital gain distributions received from the Fund and net gains
from taxable dispositions of Shares, reduced by the deductions properly allocable to such income.
In the case of an individual, the tax will be imposed on the lesser of (1) the shareholder’s net investment income or (2) the amount by which the shareholder’s modified adjusted gross income exceeds $250,000 (if the shareholder is married and filing jointly or a surviving spouse), $125,000 (if the shareholder is
married and filing separately) or $200,000 (in any other case). This Medicare tax, if applicable, is reported by
you on, and paid with, your federal income tax return. Net investment income does not include exempt-interest
dividends.
Sale of Shares. A shareholder will recognize gain or loss on the sale of Shares in an amount equal
to the difference between the proceeds of the sale and the shareholder’s adjusted tax basis in the shares. If you held your Shares as a capital asset, the gain or loss that you realize will be considered
capital gain or loss and will be long-term capital gain or loss if the shares were held for longer than
one year. Capital losses in any year are deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
Taxes on Purchase and Redemption of Creation Units. An AP that exchanges equity securities for Creation Units generally will recognize a gain or a loss. The gain or loss will be
equal to the difference between the market value of the Creation Units at the time of purchase (plus any cash
received by the AP as part of the issue) and the AP’s aggregate basis in the securities surrendered (plus any cash paid by the AP as part of the issue). An AP that exchanges Creation Units for equity securities generally
will recognize a gain or loss equal to the difference between the AP’s basis in the Creation Units (plus any cash paid by the AP as part of the redemption) and the aggregate market value of the securities received
(plus any cash received by the AP as part of the redemption). The IRS, however, may assert that a loss realized
upon an exchange of securities for Creation Units cannot be deducted currently under the rules governing “wash sales,” or on the basis that there has been no significant change in economic position. Persons exchanging
securities should consult their own tax advisor with respect to whether wash sale rules apply and when
a loss might be deductible.
Under current federal tax laws, any capital gain or loss realized upon redemption
of Creation Units is generally treated as long-term capital gain or loss if the Shares have been held for
more than one year and as a short-term capital gain or loss if the Shares have been held for one year or less,
assuming that such Creation Units are held as a capital asset.
If the Fund redeems Creation Units in cash, it may recognize more capital gains than
it will if it redeems Creation Units in-kind.
Tax Basis Information. A shareholder’s cost basis information will be provided on the sale of any of the shareholder’s Shares, subject to certain exceptions for exempt recipients. Please contact the broker (or other nominee) that holds your Shares with respect to reporting of cost basis and available
elections for your account.
Wash Sale Rule. All or a portion of any loss so recognized may be deferred under the wash sale rules
if the shareholder purchases other shares of the Fund within 30 days before or after
the sale. Any loss disallowed under these rules will be added to your tax basis in the new Shares.
55
Sales at a Loss Within Six Months of Purchase. Any loss incurred on a sale of Shares held for six months or less will be treated as long-term capital loss to the extent of any long-term capital
gain distributed to you by the Fund on those Shares.
Reportable transactions. Under Treasury regulations, if a shareholder recognizes a loss with respect to the Shares of $2 million or more for an individual shareholder or $10 million or more
for a corporate shareholder (or certain greater amounts over a combination of years), the shareholder
must file with the IRS a disclosure statement on Form 8886. The fact that a loss is reportable under these
regulations does not affect the legal determination of whether the taxpayer’s treatment of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light of
their individual circumstances.
Tax Treatment of Portfolio Transactions. Set forth below is a general description of the tax treatment of certain types of securities, investment techniques and transactions that may apply
to the Fund. This section should be read in conjunction with the discussion above under “Investment Restrictions” and “Investment Strategies and Risks” for a detailed description of the various types of securities and investment techniques that apply to the Fund.
In general. In general, gain or loss recognized by the Fund on the sale or other disposition
of portfolio investments will be a capital gain or loss. Such capital gain and loss may be long-term
or short-term depending, in general, upon the length of time a particular investment position is
maintained and, in some cases, upon the nature of the transaction. Property held for more than one year generally
will be eligible for long-term capital gain or loss treatment. The application of certain rules described
below may serve to alter the manner in which the holding period for a security is determined or may otherwise
affect the characterization as long-term or short-term, and also the timing of the realization
and/or character, of certain gains or losses.
Certain fixed-income investments. Gain recognized on the disposition of a debt obligation purchased by the Fund at a market discount (generally, at a price less than its principal amount)
will be treated as ordinary income to the extent of the portion of the market discount that accrued during the
period of time the Fund held the debt obligation unless the Fund made a current inclusion election to accrue market
discount into income as it accrues. If the Fund purchases a debt obligation (such as a zero coupon security
or pay-in-kind security) that was originally issued at a discount, the Fund generally is required to include
in gross income each year the portion of the original issue discount that accrues during such year. Therefore, the Fund’s investment in such securities may cause the Fund to recognize income and make distributions to shareholders
before it receives any cash payments on the securities. To generate cash to satisfy those distribution
requirements, the Fund may have to sell portfolio securities that it otherwise might have continued
to hold or to use cash flows from other sources such as the sale of Shares.
Investments in debt obligations that are at risk of or in default present tax issues
for the Fund. Tax rules are not entirely clear about issues such as whether and to what extent the Fund should
recognize market discount on a debt obligation, when the Fund may cease to accrue interest, original
issue discount or market discount, when and to what extent the Fund may take deductions for bad debts or worthless
securities and how the Fund should allocate payments received on obligations in default between principal
and income. These and other related issues will be addressed by the Fund in order to ensure that
it distributes sufficient income to preserve its status as a RIC.
Options, futures, forward contracts, swap agreements and hedging transactions. In general, option premiums received by the Fund are not immediately included in the income of the Fund.
Instead, the premiums are recognized when the option contract expires, the option is exercised
by the holder, or the Fund transfers or otherwise terminates the option (e.g., through a closing transaction).
If an option written by the Fund is exercised and the Fund sells or delivers the underlying stock, the Fund generally
will recognize capital gain or loss equal to (a) the sum of the strike price and the option premium received
by the Fund minus (b) the Fund’s basis in the stock. Such gain or loss generally will be short-term or long-term depending upon the holding period of the underlying stock. If securities are purchased by the Fund pursuant
to the exercise of a put option written by it, the Fund generally will subtract the premium received from
its cost basis in the securities purchased. The gain or loss with respect to any termination of the Fund’s obligation under an option
56
other than through the exercise of the option and related sale or delivery of the
underlying stock generally will be short-term gain or loss depending on whether the premium income received by the
Fund is greater or less than the amount paid by the Fund (if any) in terminating the transaction. Thus, for
example, if an option written by the Fund expires unexercised, the Fund generally will recognize short-term gain
equal to the premium received.
The tax treatment of certain futures contracts entered into by the Fund, as well as
listed non-equity options written or purchased by the Fund on U.S. exchanges (including options on futures
contracts, broad-based equity indices and debt securities), may be governed by section 1256 of the Code
(section 1256 contracts). Gains or losses on section 1256 contracts generally are considered 60%
long-term and 40% short-term capital gains or losses (60/40), although certain foreign currency gains
and losses from such contracts may be treated as ordinary in character. Also, any section 1256 contracts
held by the Fund at the end of each taxable year (and, for purposes of the 4% excise tax, on certain other
dates as prescribed under the Code) are “marked-to-market” with the result that unrealized gains or losses are treated as though they were realized and the resulting gain or loss is treated as ordinary or 60/40 gain
or loss, as applicable. Section 1256 contracts do not include any interest rate swap, currency swap, basis swap, interest
rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or
similar agreement.
In addition to the special rules described above in respect of options and futures transactions, the Fund’s transactions in other derivative instruments (including options, forward contracts
and swap agreements) as well as its other hedging, short sale, or similar transactions, may be subject to
one or more special tax rules (including the constructive sale, notional principal contract, straddle, wash sale
and short sale rules). These rules may affect whether gains and losses recognized by the Fund are treated as ordinary
or capital or as short-term or long-term, accelerate the recognition of income or gains to the Fund,
defer losses to the Fund, and cause adjustments in the holding periods of the Fund’s securities. These rules, therefore, could affect the amount, timing and/or character of distributions to shareholders. Moreover, because
the tax rules applicable to derivative financial instruments are in some cases uncertain under current law,
an adverse determination or future guidance by the IRS with respect to these rules (which determination or guidance
could be retroactive) may affect whether the Fund has made sufficient distributions and otherwise satisfied
the relevant requirements to maintain its qualification as a RIC and avoid a fund-level tax.
Certain of the Fund’s investments in derivatives and foreign currency-denominated instruments, and the Fund’s transactions in foreign currencies and hedging activities, may produce a difference between its book income and its taxable income. If the Fund’s book income is less than the sum of its taxable income and net tax-exempt income (if any), the Fund could be required to make distributions exceeding
book income to qualify as a RIC. If the Fund’s book income exceeds the sum of its taxable income and net tax-exempt income (if any), the distribution of any such excess will be treated as (i) a dividend to the extent of the Fund’s remaining earnings and profits (including current earnings and profits arising from
tax-exempt income, reduced by related deductions), (ii) thereafter, as a return of capital to the extent of the recipient’s basis in the shares, and (iii) thereafter, as gain from the sale or exchange of a capital asset.
Foreign currency transactions. The Fund’s transactions in foreign currencies, foreign currency-denominated debt obligations and certain foreign currency options, futures contracts and forward
contracts (and similar instruments) may give rise to ordinary income or loss to the extent such
income or loss results from fluctuations in the value of the foreign currency concerned. This treatment could
increase or decrease the Fund’s ordinary income distributions to you, and may cause some or all of the Fund’s previously distributed income to be classified as a return of capital. In certain cases, the
Fund may make an election to treat such gain or loss as capital.
PFIC investments. The Fund may invest in securities of foreign companies that may be classified under
the Code as PFICs. In general, a foreign company is classified as a PFIC if at least
one-half of its assets constitute investment-type assets or 75% or more of its gross income is investment-type
income. When investing in PFIC securities, the Fund intends to mark-to-market these securities
under certain provisions of the Code and recognize any unrealized gains as ordinary income at the end of the Fund’s fiscal and excise tax years. Deductions for losses are allowable only to the extent of any current or
previously recognized
57
gains. These gains (reduced by allowable losses) are treated as ordinary income that
the Fund is required to distribute, even though it has not sold or received dividends from these securities.
You should also be aware that the designation of a foreign security as a PFIC security will cause its income
dividends to fall outside of the definition of qualified foreign corporation dividends. These dividends generally
will not qualify for the reduced rate of taxation on qualified dividends when distributed to you by the Fund.
Foreign companies are not required to identify themselves as PFICs. Due to various complexities in identifying
PFICs, the Fund can give no assurances that it will be able to identify portfolio securities in foreign
corporations that are PFICs in time for the Fund to make a mark-to-market election. If the Fund is unable to identify
an investment as a PFIC and thus does not make a mark-to-market election, the Fund may be subject to U.S.
federal income tax on a portion of any “excess distribution” or gain from the disposition of such shares even if such income is distributed as a taxable dividend by the Fund to its shareholders. Additional charges
in the nature of interest may be imposed on the Fund in respect of deferred taxes arising from such distributions
or gains.
Investments in non-U.S. REITs. While non-U.S. REITs often use complex acquisition structures that seek to minimize taxation in the source country, an investment by the Fund in a non-U.S.
REIT may subject the Fund, directly or indirectly, to corporate taxes, withholding taxes, transfer taxes
and other indirect taxes in the country in which the real estate acquired by the non-U.S. REIT is located. The Fund’s pro rata share of any such taxes will reduce the Fund’s return on its investment. The Fund’s investment in a non-U.S. REIT may be considered an investment in a PFIC, as discussed above in “Tax Treatment of Portfolio Transactions—PFIC investments.”
Additionally, foreign withholding taxes on distributions from the non-U.S. REIT may
be reduced or eliminated under certain tax treaties, as discussed above in “Taxation of the Fund—Foreign income tax.” Also, the Fund in certain limited circumstances may be required to file an income tax return
in the source country and pay tax on any gain realized from its investment in the non-U.S. REIT under rules
similar to those in the United States which tax foreign persons on gain realized from dispositions of interests
in U.S. real estate.
Investments in U.S. REITs. A U.S. REIT is not subject to federal income tax on the income and gains it distributes to shareholders. Dividends paid by a U.S. REIT, other than capital gain
distributions, will be taxable as ordinary income up to the amount of the U.S. REIT’s current and accumulated earnings and profits. Capital gain dividends paid by a U.S. REIT to the Fund will be treated as long-term capital
gains by the Fund and, in turn, may be distributed by the Fund to its shareholders as a capital gain distribution.
Because of certain noncash expenses, such as property depreciation, an equity U.S. REIT’s cash flow may exceed its taxable income. The equity U.S. REIT, and in turn the Fund, may distribute this excess cash
to shareholders in the form of a return of capital distribution. However, if a U.S. REIT is operated in a
manner that fails to qualify as a REIT, an investment in the U.S. REIT would become subject to double taxation, meaning
the taxable income of the U.S. REIT would be subject to federal income tax at the corporate income
tax rate without any deduction for dividends paid to shareholders and the dividends would be taxable to
shareholders as ordinary income (or possibly as qualified dividend income) to the extent of the U.S. REIT’s current and accumulated earnings and profits. Also, see “Tax Treatment of Portfolio Transactions—Investment in taxable mortgage pools (excess inclusion income)” and “Foreign Shareholders—U.S. withholding tax at the source” with respect to certain other tax aspects of investing in U.S. REITs.
Investment in taxable mortgage pools (excess inclusion income). Under a Notice issued by the IRS, the Code and Treasury regulations to be issued, a portion of the Fund’s income from a U.S. REIT that is attributable to the REIT’s residual interest in a real estate mortgage investment conduit (“REMIC”) or equity interests in a “taxable mortgage pool” (referred to in the Code as an excess inclusion) will be subject to federal income tax in all events. The excess inclusion income of a RIC will be allocated
to shareholders of the RIC in proportion to the dividends received by such shareholders, with the same consequences
as if the shareholders held the related REMIC residual interest or, if applicable, taxable mortgage
pool directly. In general, excess inclusion income allocated to shareholders (i) cannot be offset by
net operating losses (subject to a limited exception for certain thrift institutions), (ii) will constitute
unrelated business taxable income (“UBTI”) to entities (including qualified pension plans, individual retirement accounts, 401(k) plans, Keogh plans or other tax-exempt entities) subject to tax on UBTI, thereby potentially
requiring such an entity that is allocated excess inclusion income, and otherwise might not be required to
file a tax return, to file a tax
58
return and pay tax on such income, and (iii) in the case of a foreign stockholder,
will not qualify for any reduction in U.S. federal withholding tax. In addition, if at any time during any taxable year a “disqualified organization” (which generally includes certain cooperatives, governmental entities, and tax-exempt organizations not subject to tax on UBTI) is a record holder of a share in a RIC,
then the RIC will be subject to a tax equal to that portion of its excess inclusion income for the taxable year that
is allocable to the disqualified organization, multiplied by the corporate income tax rate. The Notice
imposes certain reporting requirements upon regulated investment companies that have excess inclusion income.
There can be no assurance that the Fund will not allocate to shareholders excess inclusion income.
These rules are potentially applicable to the Fund with respect to any income it receives
from the equity interests of certain mortgage pooling vehicles, either directly or, as is more likely,
through an investment in a U.S. REIT. It is unlikely that these rules will apply to a fund that has a non-REIT
strategy.
Investments in partnerships and QPTPs. For purposes of the Income Requirement, income derived by the Fund from a partnership that is not a QPTP will be treated as qualifying income only
to the extent such income is attributable to items of income of the partnership that would be qualifying
income if realized directly by the Fund. While the rules are not entirely clear with respect to the Fund investing
in a partnership outside a master-feeder structure, for purposes of testing whether the Fund satisfies the Asset
Diversification Test, the Fund generally is treated as owning a pro rata share of the underlying assets of a partnership. See “Taxation of the Fund—Qualification as a RIC.” In contrast, different rules apply to a partnership that is a QPTP. A QPTP is a partnership (a) the interests in which are traded on an established securities
market, (b) that is treated as a partnership for federal income tax purposes, and (c) that derives less than 90%
of its income from sources that satisfy the Income Requirement (e.g., because it invests in commodities). All
of the net income derived by the Fund from an interest in a QPTP will be treated as qualifying income, but the
Fund may not invest more than 25% of its total assets in one or more QPTPs. However, there can be no assurance
that a partnership classified as a QPTP in one year will qualify as a QPTP in the next year. Any such
failure to annually qualify as a QPTP might, in turn, cause the Fund to fail to qualify as a RIC. Although, in
general, the passive loss rules of the Code do not apply to RICs, such rules do apply to the Fund with respect
to items attributable to an interest in a QPTP. Fund investments in partnerships, including in QPTPs, may result
in the Fund being subject to state, local or foreign income, franchise or withholding tax liabilities.
If an MLP is treated as a partnership for U.S. federal income tax purposes (whether
or not a QPTP), all or a portion of the dividends received by the Fund from the MLP likely will be treated
as a return of capital for U.S. federal income tax purposes because of accelerated deductions available with
respect to the activities of such MLPs. Further, because of these accelerated deductions, on the disposition of
interests in such an MLP, the Fund likely will realize taxable income in excess of economic gain with respect
to those MLP interests (or if the Fund does not dispose of the MLP, the Fund could realize taxable income in
excess of cash flow with respect to the MLP in a later period), and the Fund must take such income into account
in determining whether the Fund has satisfied its Distribution Requirement. The Fund may have to
borrow or liquidate securities to satisfy its Distribution Requirement and to meet its redemption requests,
even though investment considerations might otherwise make it undesirable for the Fund to sell securities
or borrow money at such time. In addition, any gain recognized, either upon the sale of the Fund’s MLP interest or sale by the MLP of property held by it, including in excess of economic gain thereon, treated as so-called “recapture income,” will be treated as ordinary income. Therefore, to the extent the Fund invests in MLPs,
fund shareholders might receive greater amounts of distributions from the Fund taxable as ordinary income
than they otherwise would in the absence of such MLP investments.
Although MLPs are generally expected to be treated as partnerships for U.S. federal
income tax purposes, some MLPs may be treated as PFICs or “regular” corporations for U.S. federal income tax purposes. The treatment of particular MLPs for U.S. federal income tax purposes will
affect the extent to which the Fund can invest in MLPs and will impact the amount, character, and timing
of income recognized by the Fund.
Investments in convertible securities. Convertible debt is ordinarily treated as a “single property” consisting of a pure debt interest until conversion, after which the investment becomes
an equity interest. If
59
the security is issued at a premium (i.e., for cash in excess of the face amount payable
on retirement), the creditor-holder may amortize the premium over the life of the bond. If the security
is issued for cash at a price below its face amount, the creditor-holder must accrue original issue discount in
income over the life of the debt. The creditor-holder’s exercise of the conversion privilege is treated as a nontaxable event. Mandatorily convertible debt (e.g., an exchange-traded note or ETN issued in the form of an unsecured
obligation that pays a return based on the performance of a specified market index, exchange currency,
or commodity) is often, but not always, treated as a contract to buy or sell the reference property
rather than debt. Similarly, convertible preferred stock with a mandatory conversion feature is ordinarily, but
not always, treated as equity rather than debt. Dividends received may be qualified dividend income and eligible
for the corporate dividends-received deduction. In general, conversion of preferred stock for common
stock of the same corporation is tax-free. Conversion of preferred stock for cash is a taxable redemption.
Any redemption premium for preferred stock that is redeemable by the issuing company might be required
to be amortized under original issue discount principles. A change in the conversion ratio or conversion
price of a convertible security on account of a dividend paid to the issuer's other shareholders may result
in a deemed distribution of stock to the holders of the convertible security equal to the value of their increased
interest in the equity of the issuer.
Thus, an increase in the conversion ratio of a convertible security can be treated
as a taxable distribution of stock to a holder of the convertible security (without a corresponding receipt
of cash by the holder) before the holder has converted the security.
Securities Lending. While securities are loaned out by the Fund, the Fund generally will receive from
the borrower amounts equal to any dividends or interest paid on the borrowed securities.
For federal income tax purposes, payments made “in lieu of” dividends are not considered dividend income. These distributions will neither qualify for the reduced rate of federal income taxation for individuals on
qualified dividends income, if otherwise available, nor the 50% dividends received deduction for corporations. Also,
any foreign tax withheld on payments made “in lieu of” dividends or interest may not qualify for the pass-through of foreign tax credits to shareholders.
Tax Certification and Backup Withholding. Tax certification and backup withholding tax laws may require that you certify your tax information when you become an investor in the Fund.
For U.S. citizens and resident aliens, this certification is made on IRS Form W-9. Under these laws, the
Fund must withhold a portion of your taxable distributions and sales proceeds unless you:
●
provide your correct Social Security or taxpayer identification number;
●
certify that this number is correct;
●
certify that you are not subject to backup withholding; and
●
certify that you are a U.S. person (including a U.S. resident alien).
The Fund also must withhold if the IRS instructs it to do so. When withholding is
required, the amount will be 24% of any distributions or proceeds paid. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the shareholder’s U.S. federal income tax liability, provided the appropriate information is furnished to the IRS. Certain payees and payments are exempt from backup
withholding and information reporting.
Non-U.S. investors have special U.S. tax certification requirements. See “Foreign Shareholders—Tax certification and backup withholding.”
Foreign Shareholders. Shareholders who, as to the United States, are nonresident alien individuals, foreign trusts or estates, foreign corporations, or foreign partnerships (foreign
shareholder), may be subject to U.S. withholding and estate tax and are subject to special U.S. tax certification
requirements. Taxation of a foreign shareholder depends on whether the income from the Fund is “effectively connected” with a U.S. trade or business carried on by such shareholder.
60
U.S. withholding tax at the source. If the income from the Fund is not effectively connected with a U.S. trade or business carried on by a foreign shareholder, distributions to such shareholder
will be subject to U.S. withholding tax at the rate of 30% (or lower treaty rate) upon the gross amount of
the distribution, subject to certain exemptions including those for dividends reported as:
●
exempt-interest dividends paid by the Fund from its net interest income earned on
municipal securities;
●
capital gain dividends paid by the Fund from its net long-term capital gains (other
than those from disposition of a U.S. real property interest), unless you are a nonresident alien
present in the United States for a period or periods aggregating 183 days or more during the calendar year;
and
●
interest-related dividends paid by the Fund from its qualified net interest income
from U.S. sources and short-term capital gain dividends.
The Fund may report interest-related dividends or short-term capital gain dividends,
but reserves the right not to do so. Additionally, the Fund’s reporting of interest-related dividends or short-term capital gain dividends may not be passed through to shareholders by intermediaries who have assumed tax reporting
responsibilities for this income in managed or omnibus accounts due to systems limitations
or operational constraints. Moreover, notwithstanding such exemptions from U.S. withholding at the
source, any dividends and distributions of income and capital gains, including the proceeds from the sale
of your Shares, will be subject to backup withholding at a rate of 24% if you fail to properly certify that
you are not a U.S. person.
Foreign shareholders may be subject to U.S. withholding tax at a rate of 30% on the
income resulting from an election to pass-through foreign tax credits to shareholders, but may not
be able to claim a credit or deduction with respect to the withholding tax for the foreign tax treated as having
been paid by them.
Amounts reported as capital gain dividends (a) that are attributable to certain capital
gain dividends received from a qualified investment entity (“QIE”) (generally defined as either (i) a U.S. REIT or (ii) a RIC classified as a “U.S. real property holding corporation” or which would be if the exceptions for holding 5% or less of a class of publicly traded shares or an interest in a domestically controlled
QIE did not apply), or (b) that are realized by the Fund on the sale of a “U.S. real property interest” (including gain realized on the sale of shares in a QIE other than one that is domestically controlled), will not be exempt
from U.S. federal income tax and may be subject to U.S. withholding tax at the rate of 30% (or lower treaty
rate) if the Fund by reason of having a REIT strategy is classified as a QIE. If the Fund is so classified, foreign
shareholders owning more than 5% of the Fund’s shares may be treated as realizing gain from the disposition of a U.S. real property interest, causing Fund distributions to be subject to U.S. withholding tax at the
corporate income tax rate, and requiring the filing of a nonresident U.S. income tax return. In addition, if the
Fund is classified as a QIE, anti-avoidance rules apply to certain wash sale transactions. Namely, if the Fund is a domestically-controlled
QIE and a foreign shareholder disposes of the Fund’s shares prior to the Fund paying a distribution attributable to the disposition of a U.S. real property interest and the foreign shareholder later
acquires an identical stock interest in a wash sale transaction, the foreign shareholder may still be required to pay U.S. tax on the Fund’s distribution. Also, the sale of Shares, if classified as a “U.S. real property holding corporation,” could also be considered a sale of a U.S. real property interest with any resulting gain from such
sale being subject to U.S. tax as income “effectively connected with a U.S. trade or business.”
Income effectively connected with a U.S. trade or business. If the income from the Fund is effectively connected with a U.S. trade or business carried on by a foreign shareholder, then
ordinary income dividends, capital gain dividends and any gains realized upon the sale of Shares will be subject
to U.S. federal income tax at the rates applicable to U.S. citizens or domestic corporations and require
the filing of a nonresident U.S. income tax return.
Tax certification and backup withholding. Foreign shareholders may have special U.S. tax certification requirements to avoid backup withholding (at a rate of 24%) and, if applicable, to
obtain the benefit of any income tax treaty between the foreign shareholder’s country of residence and the United States. To claim these tax benefits, the foreign shareholder must provide a properly completed Form
W-8BEN (or other Form W-8, where applicable, or their substitute forms) to establish his or her status as
a non-U.S. investor, to claim
61
beneficial ownership over the assets in the account, and to claim, if applicable,
a reduced rate of or exemption from withholding tax under the applicable treaty. A Form W-8BEN provided without a
U.S. taxpayer identification number remains in effect for a period of three years beginning on the
date that it is signed and ending on the last day of the third succeeding calendar year unless an earlier change
of circumstances makes the information given on the form incorrect, and the shareholder must then provide
a new W-8BEN to avoid the prospective application of backup withholding. Forms W-8BEN with U.S. taxpayer
identification numbers remain valid indefinitely, or until the investor has a change of circumstances that
renders the form incorrect and necessitates a new form and tax certification. Certain payees and payments are
exempt from backup withholding.
Foreign Account Tax Compliance Act (“FATCA”). Under FATCA, the Fund will be required to withhold a 30% tax on income dividends made by the Fund to certain foreign entities, referred
to as foreign financial institutions (“FFI”) or non-financial foreign entities (“NFFE”). After December 31, 2018, FATCA withholding also would have applied to certain capital gain distributions, return of capital distributions
and the proceeds arising from the sale of Shares; however, based on proposed regulations issued by
the IRS, which can be relied upon currently, such withholding is no longer required unless final regulations
provide otherwise (which is not expected). The FATCA withholding tax generally can be avoided: (a) by an FFI,
if it reports certain direct and indirect ownership of foreign financial accounts held by U.S. persons with the
FFI and (b) by an NFFE, if it: (i) certifies that it has no substantial U.S. persons as owners or (ii) if it
does have such owners, reporting information relating to them. The U.S. Treasury has negotiated intergovernmental agreements (“IGAs”) with certain countries and is in various stages of negotiations with a number of other
foreign countries with respect to one or more alternative approaches to implement FATCA.
An FFI can avoid FATCA withholding if it is deemed compliant or by becoming a “participating FFI,” which requires the FFI to enter into a U.S. tax compliance agreement with the IRS under
section 1471(b) of the Code (FFI agreement) under which it agrees to verify, report and disclose certain
of its U.S. accountholders and meet certain other specified requirements. The FFI will either report the specified
information about the U.S. accounts to the IRS, or, to the government of the FFI’s country of residence (pursuant to the terms and conditions of applicable law and an applicable IGA entered into between the U.S. and
the FFI's country of residence), which will, in turn, report the specified information to the IRS. An FFI
that is resident in a country that has entered into an IGA with the U.S. to implement FATCA will be exempt from
FATCA withholding provided that the FFI shareholder and the applicable foreign government comply with
the terms of such agreement.
An NFFE that is the beneficial owner of a payment from the Fund can avoid the FATCA
withholding tax generally by certifying that it does not have any substantial U.S. owners or by providing
the name, address and taxpayer identification number of each substantial U.S. owner. The NFFE will report
the information to the Fund or other applicable withholding agent, which will, in turn, report the information to the IRS.
Such foreign shareholders also may fall into certain exempt, excepted or deemed compliant
categories as established by U.S. Treasury regulations, IGAs, and other guidance regarding FATCA.
An FFI or NFFE that invests in the Fund will need to provide the Fund with documentation properly certifying the entity’s status under FATCA in order to avoid FATCA withholding. Non-U.S. investors should consult
their own tax advisors regarding the impact of these requirements on their investment in the Fund. The requirements
imposed by FATCA are different from, and in addition to, the U.S. tax certification rules to
avoid backup withholding described above. Shareholders are urged to consult their tax advisors regarding the
application of these requirements to their own situation.
U.S. estate tax. Transfers by gift of Shares by a foreign shareholder who is a nonresident alien individual
will not be subject to U.S. federal gift tax. An individual who, at the time of death,
is a foreign shareholder will nevertheless be subject to U.S. federal estate tax with respect to Shares at the graduated
rates applicable to U.S. citizens and residents, unless a treaty exemption applies. If a treaty exemption is available, a decedent’s estate may nonetheless need to file a U.S. estate tax return to claim the exemption
in order to obtain a U.S. federal transfer certificate. The transfer certificate will identify the property
(i.e., Shares) as to which the U.S.
62
federal estate tax lien has been released. In the absence of a treaty, there is a
$13,000 statutory estate tax credit (equivalent to an estate with assets of $60,000).
Local Tax Considerations. Rules of state and local taxation of ordinary income, qualified dividend income and capital gain dividends may differ from the rules for U.S. federal income taxation
described above. Distributions may also be subject to additional state, local and foreign taxes depending
on each shareholder's particular situation.
FEDERAL TAX TREATMENT OF FUTURES AND OPTIONS CONTRACTS
Some futures contracts, foreign currency contracts traded in the interbank market, and “nonequity” options (i.e., certain listed options, such as those on a “broad-based” securities index)—except any “securities futures contract” that is not a “dealer securities futures contract” (both as defined in the Code) and any interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor,
commodity swap, equity swap, equity index swap, credit default swap, or similar agreement—in which the Fund invests may be subject to Code section 1256 (collectively, “Section 1256 contracts”). Any Section 1256 contracts that the Fund holds at the end of its taxable year (and generally for purposes of the Excise Tax, on October
31 of each year) must be “marked to market” (that is, treated as having been sold at that time for their fair market value) for federal tax purposes, with the result that unrealized gains or losses will be treated as though
they were realized. Sixty percent of any net gain or loss recognized on these deemed sales, and 60% of any net
realized gain or loss from any actual sales of Section 1256 contracts, will be treated as long-term capital
gain or loss, and the balance will be treated as short-term capital gain or loss; however, certain foreign
currency gains or losses arising from Section 1256 contracts will be treated as ordinary income or loss. These
rules may operate to increase the amount that the Fund must distribute to satisfy the Distribution Requirement
(i.e., with respect to the portion treated as short-term capital gain, which will be includible in its investment
company taxable income and thus taxable to its shareholders as ordinary income when distributed to
them), and to increase the net capital gain that the Fund recognizes, even though the Fund may not have closed
the transactions and received cash to pay the distributions. The Fund may elect not to have the foregoing rules apply to any “mixed straddle” (that is, a straddle, which the Fund clearly identifies in accordance with applicable regulations, at least one (but not all) of the positions of which are Section 1256 contracts), although
doing so may have the effect of increasing the relative proportion of short-term capital gain (distributions
of which are taxable to its shareholders as ordinary income) and thus increasing the amount of dividends it must
distribute.
Offsetting positions that the Fund enters into or holds in any actively traded security,
option, futures, or forward contract may constitute a “straddle” for federal income tax purposes. Straddles are subject to certain rules that may affect the amount, character, and timing of recognition of the Fund’s gains and losses with respect to positions of the straddle by requiring, among other things, that (1) loss
realized on disposition of one position of a straddle be deferred to the extent of any unrealized gain in an
offsetting position until the latter position is disposed of, (2) the Fund’s holding period for certain straddle positions not begin until the straddle is terminated (possibly resulting in gain being treated as short-term rather
than long-term capital gain), and (3) losses recognized with respect to certain straddle positions, that
otherwise would constitute short-term capital losses, be treated as long-term capital losses. Applicable regulations
also provide certain “wash sale” rules, which apply to transactions where a position is sold at a loss and a new offsetting position is acquired within a prescribed period, and “short sale” rules applicable to straddles. Different elections are available to the Fund, which may mitigate the effects of the straddle rules, particularly
with respect to mixed straddles.
* * * * *
The foregoing discussion is a summary only and is not intended as a substitute for
careful tax planning. Purchasers of Shares should consult their own tax advisors as to the tax consequences
of investing in Shares, including under federal, state, local and other tax laws. Finally, the foregoing
discussion is based on applicable provisions of the Code, regulations, judicial authority, and administrative
interpretations in effect on the date hereof, all of which are subject to change, which change may be retroactive.
Changes in any
63
applicable authority could materially affect the conclusions discussed above, possibly
retroactively, and such changes often occur.
DETERMINATION OF NAV
The NAV for the Fund will be calculated and disseminated daily on each day that the
NYSE is open for trading. The Custodian normally calculates the Fund’s NAV as of the regularly scheduled close of business of the NYSE (normally 4:00 p.m., Eastern time). The Fund’s NAV is based on prices at the time of closing. U.S. fixed-income assets may be valued as of the announced closing time for trading in
fixed-income instruments in a particular market or exchange. NAV is calculated by deducting all of the Fund’s liabilities from the total value of its assets and then dividing the result by the number of Shares outstanding,
rounding to the nearest cent. Generally, the portfolio securities are recorded in the NAV no later than the
trade date plus one day. In determining NAV, expenses are accrued and applied daily and securities and other assets
for which market quotations are readily available and reliable are valued at market value. The Trust’s Board has designated the Adviser to fair value the Fund’s portfolio securities and other assets for which market quotations are not readily available and reliable in accordance with the Valuation Procedures, subject to the Board’s oversight.
Securities listed or traded on an exchange (except convertible securities) generally
are valued at the last trade price or official closing price that day as of the close of the exchange where
the security primarily trades. Securities of investment companies that are not exchange-traded (e.g., open-end mutual
funds) are valued using such company’s end-of-business day NAV per share, whereas securities of investment companies that are exchange-traded are valued at the last trade price or official closing price on
the exchange on which they primarily trade. Deposits, other obligations of U.S. and non-U.S. banks and financial
institutions, and cash equivalents are valued at their daily account value. Fixed income securities (including
convertible securities) normally are valued on the basis of prices provided by independent pricing services.
Pricing services generally value fixed income securities assuming orderly transactions of institutional
round lot size, but the Fund may hold or transact in the same securities in smaller, odd lot sizes. Odd lots
often trade at lower prices than institutional round lots, and their value may be adjusted accordingly. Futures
contracts are valued at the daily settlement price set by an exchange on which they are principally traded. U.S.
exchange-traded options are valued at the mean between the last bid and asked prices from the exchange on
which they principally trade. Non-U.S. exchange-traded options are valued at the final settlement price set
by the exchange on which they trade. Options not listed on an exchange and swaps generally are valued
using pricing provided from independent pricing services. Unlisted securities will be valued using prices
provided by independent pricing services or by another method that the Adviser, in its judgment, believes better reflects the security’s fair value in accordance with the Valuation Procedures. Foreign exchange-traded equity
securities are valued at their market value if market quotations are available and reliable. The Adviser
may use various pricing services to obtain market quotations as well as fair value prices. The Adviser may
discontinue the use of any pricing service at any time.
At times, a listed security’s market price may not be readily available. Moreover, even when market quotations are available for a security, they may be stale or unreliable. A security’s last market quotation may become stale because, among other reasons, (i) the security is not traded frequently,
(ii) the security ceased trading before its exchange closed; (iii) market or issuer-specific events occurred
after the security ceased trading; or (iv) the passage of time between when the security’s trading market closes and when the Fund calculates its NAV caused the quotation to become stale. A security’s last market quotation may become unreliable because of (i) certain issuer- or security-specific events, including a
merger or insolvency, (ii) events which affect a geographical area or an industry segment, such as political
events or natural disasters, or (iii) market events, such as a significant movement in the U.S. market. When a security’s market price is not readily available, or the Adviser determines, in its judgment, that such price
is stale or unreliable, the Adviser will value the security at fair value in good faith using the Valuation Procedures.
Fund securities that are fair valued may be subject to greater fluctuation in their value from one day
to the next than would be the case if market quotations were used.
If the Fund holds securities that are primarily traded on foreign markets, the value
of such securities may change on days that are not business days of the Fund. Because the NAV of the Shares
is only determined
64
on business days of the Fund, the value of such foreign securities may change on days
when you are not able to purchase or sell Shares. If, between the time trading ends on one or more
securities and the close of the customary trading session on the NYSE, a significant event occurs that makes the
closing price of one or more securities unreliable in the Adviser’s judgment, the Adviser may fair value the security. The Adviser also relies on a screening process from a pricing vendor to indicate the degree of certainty,
based on historical data, that the closing price in the principal market where a foreign security trades
is not the current market value as of the close of the NYSE. For foreign securities where the Adviser believes,
at the approved degree of certainty, that the price is not reflective of current market value, the Adviser
will use the indication of fair value from the pricing service to determine the fair value of the security.
If a fair value price provided by a pricing service is unreliable in the Adviser’s judgment, the Adviser will fair value the security using the Valuation Procedures. Fair value pricing involves
subjective judgments, and fair value pricing methods may change from time to time. Consequently, while such
determinations may be made in good faith, it may nevertheless be more difficult for the Fund to accurately
assign a daily value. Because of the inherent uncertainties of valuation, and the degree of subjectivity
in such decisions, it is possible that a fair value determination for a security is materially different than
the value that could be realized upon the sale of the security. There is no assurance that the Fund could
sell a portfolio security for the value established for it at any time, and it is possible that the Fund would incur
a loss if a security is sold at a discount to its established value. Because the Fund seeks to track an Underlying
Index, the use of fair value pricing could result in a difference between the prices used to calculate the Fund’s NAV and the prices used by the Underlying Index, which may increase the Fund’s tracking error.
Additional information regarding the current NAV per share of the Fund can be found
at www.invesco.com/ETFs.
DIVIDENDS AND OTHER DISTRIBUTIONS
The following information supplements and should be read in conjunction with the section
in the Prospectus entitled “Dividends, Other Distributions and Taxes.”
Generally, dividends from net investment income, if any, are declared and paid quarterly
by the Fund.
Distributions of net realized securities gains, if any, generally are declared and
paid once a year, but the Trust may make distributions on a more frequent basis. The Trust reserves the right
to declare special distributions if, in its reasonable discretion, such action is necessary or advisable
to preserve the status of the Fund as a RIC or to avoid imposition of income or excise taxes on undistributed income.
Dividends and other distributions on Shares are distributed, as described below, on
a pro rata basis to Beneficial Owners of the Shares. Dividend payments are made through DTC Participants
and Indirect Participants to Beneficial Owners then of record with proceeds received from the Fund.
Dividend Reinvestment Service. No reinvestment service is provided by the Trust. Broker-dealers may make available the DTC book-entry Dividend Reinvestment Service for use by Beneficial
Owners of Shares for reinvestment of their dividend distributions. Beneficial Owners should contact
their broker to determine the availability and costs of the service and the details of participation therein. Brokers
may require Beneficial Owners to adhere to specific procedures and timetables.
MISCELLANEOUS INFORMATION
Counsel. Stradley Ronon Stevens & Young, LLP, located at 191 North Wacker Drive, Suite 1601,
Chicago, Illinois 60606, and 2000 K Street, NW, Suite 700, Washington, D.C. 20006,
serves as legal counsel to the Trust.
Independent Registered Public Accounting Firm. PricewaterhouseCoopers LLP (“PwC”), located at One North Wacker Drive, Chicago, Illinois 60606, serves as the Fund’s independent registered public accounting firm. PwC has been retained to audit the Fund’s annual financial statements and assists in the preparation and/or review of the Fund’s federal and state income tax returns.
65
FINANCIAL STATEMENTS
The Fund has not yet commenced operations and therefore has no performance history
or financial information as of the date of this SAI. The audited financial statements for the Fund will appear in the Trust’s Form N-CSR filed with the SEC and on the Fund’s website when available. When available, you may request a copy of the Fund’s financial statements at no charge by calling 800.983.0903 during normal business hours.
66
APPENDIX A
Invesco’s Policy Statement on Global Corporate Governance and Proxy Voting
Effective January 2024
Contents
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I.
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Introduction
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A-1
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A.
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Our Approach to Proxy Voting
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A-1
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B.
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Applicability of Policy
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A-2
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II.
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Global Proxy Voting Operational Procedures
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A-2
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A.
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Oversight and Governance
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A-2
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B.
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The Proxy Voting Process
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A-3
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C.
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Retention and Oversight of Proxy Service Providers
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A-3
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D.
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Disclosures and Recordkeeping
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A-4
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E.
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Market and Operational Limitations
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A-5
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F.
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Securities Lending
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A-6
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G.
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Conflicts of Interest
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A-6
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H.
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Review of Policy
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A-7
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III.
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Our Good Governance Principles
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A-7
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A.
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Transparency
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A-8
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B.
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Accountability
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A-8
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C.
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Board Composition and Effectiveness
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A-10
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D.
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Long-Term Stewardship of Capital
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A-12
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E.
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Environmental, Social and Governance Risk Oversight
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A-13
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F.
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Executive Compensation and Alignment
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A-14
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Exhibit A
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A-16
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I.
Introduction
Invesco Ltd. and its wholly owned investment adviser subsidiaries (collectively, “Invesco”, the “Company”, “our” or “we”) have adopted and implemented this Policy Statement on Global Corporate Governance and Proxy Voting (“Global Proxy Voting Policy” or “Policy”), which we believe describe policies and procedures reasonably designed to ensure proxy voting matters are conducted in the best interests
of our clients.
A.
Our Approach to Proxy Voting
Invesco understands proxy voting is an integral aspect of the investment management
services it provides to clients. As an investment adviser, Invesco has a fiduciary duty to act
in the best interests of our clients. Where Invesco has been delegated the authority to vote proxies with respect
to securities held in client portfolios, we exercise such authority in the manner we believe best
serves the interests of our clients and their investment objectives. We recognize that proxy voting is an
important tool that enables us to drive shareholder value.
A summary of our global operational procedures and governance structure is included
in Part II of this Policy. Invesco’s good governance principles, which are included in Part III of this Policy, and our internal proxy voting guidelines are both principles and rules-based and cover topics
that typically
A-1
appear on voting ballots. Invesco’s portfolio management teams retain ultimate authority to vote proxies. Given the complexity of proxy issues across our clients’ holdings globally, our investment teams consider many factors when determining how to cast votes. We seek to evaluate and
make voting decisions that favor proxy proposals and governance practices that, in our view, promote
long-term shareholder value.
B.
Applicability of Policy
Invesco’s portfolio management teams vote proxies on behalf of Invesco-sponsored funds and both fund and non-fund advisory clients that have explicitly granted Invesco authority in writing
to vote proxies on their behalf. In the case of institutional or sub-advised clients, Invesco will vote
the proxies in accordance with this Policy unless the client agreement specifies that the client
retains the right to vote or has designated a named fiduciary to direct voting.
This Policy is implemented by all entities listed in Exhibit A, except as noted below.
Due to regional or asset class-specific considerations, certain entities may have local proxy voting
guidelines or policies and procedures that differ from this Policy. In the event local policies and this
Policy differ, the local policy will apply. These entities subject to local policies are listed in Exhibit
A and include: Invesco Asset Management (Japan) Limited, Invesco Asset Management (India) Pvt. Ltd, Invesco Taiwan
Ltd, Invesco Real Estate Management S.a.r.l and Invesco Capital Markets, Inc. for Invesco Unit
Investment Trusts.
Where our passively managed strategies and certain other client accounts managed in
accordance with fixed income, money market and index strategies (including exchange-traded funds)
(referred to as “passively managed accounts”) hold the same investments as our actively managed equity funds, voting decisions with respect to those accounts generally follow the voting decisions made
by the largest active holder of the equity shares. Invesco refers to this approach as “Majority Voting.” This process of Majority Voting seeks to ensure that our passively managed accounts benefit from the engagement
and deep dialogue of our active investment teams, which Invesco believes benefits shareholders
in passively managed accounts. Invesco will generally apply the majority holder’s vote instruction to these passively managed accounts. Where securities are held only in passively managed accounts and
not owned in our actively managed accounts, the proxy will be generally voted in line with this
Policy and internal proxy voting guidelines. Notwithstanding the above, portfolio management teams of
our passively managed accounts retain full discretion over proxy voting decisions and may determine
it appropriate to individually evaluate a specific proxy proposal or override Majority Voting and vote
the shares as they determine to be in the best interest of those accounts, absent certain types of conflicts
of interest, which are discussed elsewhere in the Policy. To the extent our portfolio management teams
believe a specific proxy proposal requires enhanced analysis or if it is not covered by the Policy or
internal guidelines, our portfolio management teams will evaluate such proposal and execute the voting decision.
II.
Global Proxy Voting Operational Procedures
Invesco’s global proxy voting operational procedures (the “Procedures”) are in place to implement the provisions of this Policy. Invesco aims to vote all proxies where we have been granted
voting authority in accordance with this Policy, as implemented by the Procedures outlined in this Section
II. It is the responsibility of Invesco’s Proxy Voting and Governance team to maintain and facilitate the review of the Procedures annually.
A.
Oversight and Governance
Oversight of the proxy voting process is provided by the Proxy Voting and Governance
team and the Global Invesco Proxy Advisory Committee (“Global IPAC”). For some clients, third parties (e.g., U.S. fund boards) and internal sub-committees also provide oversight of the proxy voting
process.
Guided by its philosophy that investment teams should manage proxy voting, Invesco
has created the Global IPAC. The Global IPAC is an investments-driven committee comprised of representatives
from various investment management teams globally and Invesco’s Global Head of ESG and is chaired by its Director of Proxy Voting and Governance. Representatives from Invesco’s Legal and Compliance, Risk
A-2
and Government Affairs departments may also participate in Global IPAC meetings. The
Global IPAC provides a forum for investment teams, in accordance with this Policy, to:
●
monitor, understand and discuss key proxy issues and voting trends within the Invesco
complex;
●
assist Invesco in meeting regulatory obligations;
●
review votes not aligned with our good governance principles; and
●
consider conflicts of interest in the proxy voting process.
In fulfilling its responsibilities, the Global IPAC meets as necessary, but no less
than semi-annually, and has the following responsibilities and functions: (i) acts as a key liaison between
the Proxy Voting and Governance team and portfolio management teams to ensure compliance with this Policy;
(ii) provides insight on market trends as it relates to stewardship practices; (iii) monitors proxy
votes that present potential conflicts of interest; and (iv) reviews and provides input, at least annually,
on this Policy and related internal procedures and recommends any changes to the Policy based on, but
not limited to, Invesco’s experience, evolving industry practices, or developments in applicable laws or regulations. In addition, when necessary, the Global IPAC Conflict of Interest Sub-committee makes
voting decisions on proxies that require an override of the Policy due to an actual or perceived conflict
of interest; the Global IPAC reviews any such voting decisions.
B.
The Proxy Voting Process
At Invesco, investment teams execute voting decisions through our proprietary voting
platform and are supported by the Proxy Voting and Governance team and a dedicated technology team. Invesco’s proprietary voting platform streamlines the proxy voting process by providing our
global investment teams with direct access to proxy meeting materials including ballots, Invesco’s internal proxy voting guidelines and recommendations, as well as proxy research and vote recommendations
issued by Proxy Service Providers (as such term is defined below). Votes executed on Invesco’s proprietary voting platform are transmitted to our proxy voting agent electronically and are then delivered
to the respective designee for tabulation.
Invesco’s Proxy Voting and Governance team monitors whether we have received proxy ballots for shareholder meetings in which we are entitled to vote. This involves coordination
among various parties in the proxy voting ecosystem, such as our proxy voting agent, custodians and ballot
distributors. If necessary, we may choose to escalate a matter to facilitate our ability to exercise
our right to vote.
Our proprietary systems facilitate internal control and oversight of the voting process.
To facilitate the casting of votes in an efficient manner, Invesco may choose to pre-populate and leverage
the capabilities of these proprietary systems to automatically submit votes based on its
internal proxy voting guidelines and in circumstances where Majority Voting, share blocking (as defined
below) or proportional voting applies. If necessary, votes may be cast by Invesco or via the Proxy Service
Providers Web platform at our direction.
C.
Retention and Oversight of Proxy Service Providers
Invesco has retained two independent third party proxy voting service providers to
provide proxy support globally: Institutional Shareholder Services Inc. (“ISS”) and Glass Lewis (“GL”). In addition to ISS and GL, Invesco may retain certain local proxy service providers to access regionally
specific research (collectively with ISS and GL, “Proxy Service Providers”). The services may include one or more of the following: providing a comprehensive analysis of each voting item and interpretations
of each based on Invesco’s internally developed proxy voting guidelines; and providing assistance with the administration of the proxy process and certain proxy voting-related functions, including, but not
limited to, operational, reporting and recordkeeping services.
While Invesco may take into consideration the information and recommendations provided
by the Proxy Service Providers, including based upon Invesco’s internal proxy voting guidelines and
A-3
recommendations provided to such Proxy Service Providers, Invesco’s portfolio management teams retain full and independent discretion with respect to proxy voting decisions.
Updates to previously issued proxy research reports and recommendations may be provided
to incorporate newly available information or additional disclosure provided by the issuer
regarding a matter to be voted on, or to correct factual errors that may result in the issuance
of revised proxy vote recommendations. Invesco’s Proxy Voting and Governance team periodically monitors for these research alerts issued by Proxy Service Providers that are shared with our portfolio
management teams.
Invesco performs extensive initial and ongoing due diligence on the Proxy Service
Providers it engages globally. Invesco conducts annual due diligence meetings as part of its ongoing oversight
of Proxy Service Providers. The topics included in these annual due diligence reviews include
material changes in service levels, leadership and control, conflicts of interest, methodologies for
formulating vote recommendations, operations, and research personnel, among other things. In addition,
Invesco monitors and communicates with these firms throughout the year and monitors their
compliance with Invesco’s performance and policy standards.
As part of our annual policy development process, Invesco may engage with other external
proxy and governance experts to understand market trends and developments. These meetings provide
Invesco with an opportunity to assess the Proxy Service Providers’ capabilities, conflicts of interest and service levels, as well as provide investment professionals with direct insight into the Proxy Service Providers’ stances on key corporate governance and proxy topics and their policy framework/methodologies.
Invesco completes a review of the System and Organizational Controls (“SOC”) Reports for Proxy Service Providers to confirm the related controls operated effectively to provide
reasonable assurance.
D.
Disclosures and Recordkeeping
Unless otherwise required by local or regional requirements, Invesco maintains voting
records for at least seven (7) years. Invesco makes its proxy voting records publicly available in
compliance with regulatory requirements and industry best practices in the regions below:
●
In accordance with the U.S. Securities and Exchange Commission regulations, Invesco
will file a record of all proxy voting activity for the prior 12 months ending June 30th for each
U.S. registered fund. In addition, Invesco, as an institutional manager that is required to file Form
13F, will file a record of its votes on certain executive compensation (“say on pay”) matters. These fund proxy voting filings and institutional manager say on pay voting filings will generally
be made on or before August 31st of each year. Each year, the proxy voting records for each U.S. registered
fund are made available on Invesco’s website here. Moreover, and to the extent applicable, the U.S. Employee Retirement Income Security Act of 1974, as amended (“ERISA”), including Department of Labor regulations and guidance thereunder, provide that the named fiduciary generally
should be able to review not only the investment adviser’s voting procedure with respect to plan-owned stock, but also to review the actions taken in individual proxy voting situations. In the
case of institutional and sub-advised clients, clients may contact their client service representative to
request information about how Invesco voted proxies on their behalf. Absent specific contractual guidelines,
such requests may be made on a semi-annual basis.
●
In the UK and Europe, Invesco publicly discloses our proxy votes monthly in compliance
with the UK Stewardship Code and for the European Shareholder Rights Directive annually here.
●
In Canada, Invesco publicly discloses our annual proxy votes each year here by August 31st, covering the 12-month period ending June 30th in compliance with the National Instrument
81-106 Investment Fund Continuous Disclosure.
●
In Japan, Invesco publicly discloses our proxy votes annually in compliance with the
Japan Stewardship Code here.
●
In India, Invesco publicly discloses our proxy votes quarterly here in compliance with The Securities
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and Exchange Board of India (“SEBI”) Circular on stewardship code for all Mutual Funds and all categories of Alternative Investment Funds in relation to their investment in listed
equities. SEBI has implemented principles on voting for Mutual Funds through circulars dated March 15,
2010, March 24, 2014 and March 5, 2021, which prescribed detailed mandatory requirements
for Mutual Funds in India to disclose their voting policies and actual voting by Mutual Funds
on different resolutions of investee companies.
●
In Hong Kong, Invesco Hong Kong Limited will provide proxy voting records upon request
in compliance with the Securities and Futures Commission (“SFC”) Principles of Responsible Ownership.
●
In Taiwan, Invesco publicly discloses our proxy voting policy and proxy votes annually
in compliance with Taiwan’s Stewardship Principles for Institutional Investors here.
●
In Australia, Invesco publicly discloses a summary of its proxy voting record annually
here.
●
In Singapore, Invesco Asset Management Singapore Ltd. will provide proxy voting records
upon request in compliance with the Singapore Stewardship Principles for Responsible Investors.
Invesco may engage Proxy Service Providers to make available or maintain certain required
proxy voting records in accordance with the above stated applicable regulations. Separately
managed account clients that have authorized Invesco to vote proxies on their behalf will receive
proxy voting information with respect to those accounts upon request. Certain other clients may obtain information
about how we voted proxies on their behalf by contacting their client service representative or
advisor. Invesco does not publicly pre-disclose voting intentions in advance of shareholder meetings.
E.
Market and Operational Limitations
In the great majority of instances, Invesco will vote proxies. However, in certain
circumstances, Invesco may refrain from voting where the economic or other opportunity costs of voting exceed
any benefit to clients. Moreover, ERISA fiduciaries, in voting proxies or exercising other shareholder
rights, must not subordinate the economic interests of plan participants and beneficiaries to unrelated
objectives. These matters are left to the discretion of the relevant portfolio manager. Such circumstances
could include, for example:
●
Certain countries impose temporary trading restrictions, a practice known as “share blocking.” This means that once the shares have been voted, the shareholder does not have the ability
to sell the shares for a certain period of time, usually until the day after the conclusion of
the shareholder meeting. Invesco generally refrains from voting proxies at companies where share blocking
applies. In some instances, Invesco may determine that the benefit to the client(s) of voting
a specific proxy outweighs the client’s temporary inability to sell the shares.
●
Some companies require a representative to attend meetings in person to vote a proxy,
or submit additional documentation or the disclosure of beneficial owner details to vote. Invesco
may determine that the costs of sending a representative or submitting additional documentation
or disclosures outweigh the benefit of voting a particular proxy.
●
Invesco may not receive proxy materials from the relevant fund or client custodian
with sufficient time and information to make an informed independent voting decision.
●
Invesco held shares on the record date but has sold them prior to the meeting date.
In some non-U.S. jurisdictions, although Invesco uses reasonable efforts to vote a
proxy, proxies may not be accepted or may be rejected due to changes in the agenda for a shareholder
meeting for which Invesco does not have sufficient notice, due to a proxy voting service not being offered
by the custodian in the local market or due to operational issues experienced by third parties involved
in the process or by the issuer or sub-custodian. In addition, despite the best efforts of Invesco and
its proxy voting agent, there may be instances where our votes may not be received or properly tabulated by
an issuer or the
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issuer’s agent. Invesco will generally endeavor to vote and maintain any paper ballots received provided they are delivered in a timely manner ahead of the vote deadline.
F.
Securities Lending
Invesco’s funds may participate in a securities lending program. In circumstances where funds’ shares are on loan, the voting rights of those shares are transferred to the borrower. If
the security in question is on loan as part of a securities lending program, Invesco may determine that the
vote is material to the investment and therefore, the benefit to the client of voting a particular proxy outweighs
the economic benefits of securities lending. In those instances, Invesco may determine to recall
securities that are on loan prior to the meeting record date, so that we will be entitled to vote those shares.
For example, for certain actively managed funds, the lending agent has standing instructions to systematically
recall all securities on loan for Invesco to vote the proxies on those previously loaned shares.
There may be instances where Invesco may be unable to recall shares or may choose not to recall
shares. Such circumstances may include instances when Invesco does not receive timely notice of
the meeting, or when Invesco deems the opportunity for a fund to generate securities lending revenue
to outweigh the benefits of voting at a specific meeting. The relevant portfolio manager will make
these determinations.
G.
Conflicts of Interest
There may be occasions where voting proxies may present a perceived or actual conflict
of interest between Invesco, as investment adviser, and one or more of Invesco’s clients or vendors.
Firm-Level Conflicts of Interest
A conflict of interest may exist if Invesco has a material business relationship with
either the company soliciting a proxy or a third party that has a material interest in the outcome of
a proxy vote or that is actively lobbying for a particular outcome of a proxy vote. Such relationships may
include, among others, a client relationship, serving as a vendor whose products / services are material
or significant to Invesco, serving as a distributor of Invesco’s products, or serving as a significant research provider or broker to Invesco.
Invesco identifies potential conflicts of interest based on a variety of factors,
including but not limited to the materiality of the relationship between the issuer or its affiliates to Invesco.
Material firm-level conflicts of interests are identified by individuals and groups
within Invesco globally based on criteria established by the Proxy Voting and Governance team. These criteria
are monitored and updated periodically by the Proxy Voting and Governance team so up-to-date information
is available when conducting conflicts checks. Operating procedures and associated governance
are designed to seek to ensure conflicts of interest are appropriately considered ahead
of voting proxies. The Global IPAC Conflict of Interest Sub-committee maintains oversight of the process.
Companies identified as conflicted will be voted in line with the principles below as implemented by Invesco’s internal proxy voting guidelines. To the extent a portfolio manager disagrees with
the Policy, our processes and procedures seek to ensure that justifications and rationales are fully
documented and presented to the Global IPAC Conflict of Interest Sub-committee for approval by a
majority vote.
As an additional safeguard, persons from Invesco’s marketing, distribution and other customer-facing functions may not serve on the Global IPAC. For the avoidance of doubt, Invesco may
not consider Invesco Ltd.’s pecuniary interest when voting proxies on behalf of clients. To avoid any appearance of a conflict of interest, Invesco will not vote proxies issued by Invesco Ltd. that are
held in client accounts.
Personal Conflicts of Interest
A conflict also may exist where an Invesco employee has a known personal or business
relationship with other proponents of proxy proposals, participants in proxy contests, corporate
directors, or candidates for directorships. Under Invesco’s Global Code of Conduct, Invesco entities and individuals must act in the best interests of clients and must avoid any situation that gives
rise to an actual or perceived conflict of interest.
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All Invesco personnel with proxy voting responsibilities are required to report any
known personal or business conflicts of interest regarding proxy issues with which they are involved.
In such instances, the individual(s) with the conflict will be excluded from the decision-making process
relating to such issues.
Voting Funds of Funds
There may be conflicts that arise from Invesco voting on matters when shares of Invesco-sponsored
funds are held by other Invesco funds or entities. The scenarios below set out examples
of how Invesco votes in these instances:
●
When required by law or regulation, shares of an Invesco fund held by other Invesco
funds will be voted in the same proportion as the votes of external shareholders of the underlying
fund. If such proportional voting is not operationally possible, Invesco will not vote the shares.
●
When required by law or regulation, shares of an unaffiliated registered fund held
by one or more Invesco funds will be voted in the same proportion as the votes of external shareholders
of the underlying fund. If such proportional voting is not operationally possible, Invesco
will not vote the shares.
●
For U.S. funds of funds where proportional voting is not required by law or regulation,
shares of Invesco funds will be voted in the same proportion as the votes of external shareholders
of the underlying fund. If such proportional voting is not operationally possible, Invesco
will vote in line with our internally developed voting guidelines.
●
Non-U.S. funds of funds will not be voted proportionally. The applicable Invesco entity
will vote in line with its local policies, as indicated in Exhibit A. If no local policies exist, Invesco
will vote non-U.S. funds of funds in line with the firm level conflicts of interest process described
above.
●
Where client accounts are invested directly in shares issued by Invesco affiliates
and Invesco has proxy voting authority, shares will be voted proportionally in line with non-affiliated
holders. If proportional voting is not possible, the shares will be voted in line with a Proxy Service Provider’s recommendation.
H.
Review of Policy
It is the responsibility of the Global IPAC to review this Policy and the internal
proxy voting guidelines annually to consider whether any changes are warranted. This annual review seeks to
ensure this Policy and the internal proxy voting guidelines remain consistent with clients’ best interests, regulatory requirements, local market standards and best practices. Further, this Policy and
our internal proxy voting guidelines are reviewed at least annually by various departments within Invesco
to seek to ensure that they remain consistent with Invesco’s views on best practice in corporate governance and long-term investment stewardship.
III.
Our Good Governance Principles
Invesco’s good governance principles outline our views on best practice in corporate governance and long-term investment stewardship. These principles have been developed by our global investment
teams in collaboration with the Proxy Voting and Governance team and various departments internally.
The broad philosophy and guiding principles in this section inform our approach to long-term
investment stewardship and proxy voting. The principles and positions reflected in this Policy are designed to guide Invesco’s investment professionals in voting proxies; they are not intended to be exhaustive
or prescriptive.
Our portfolio management teams retain full discretion on vote execution in the context
of our good governance principles and internal proxy voting guidelines, except where otherwise
specified in this Policy. The final voting decisions may consider the unique circumstances affecting companies,
regional best practices and any dialogue we have had with company management. As a result, different
portfolio management teams may vote differently on particular proxy votes for the same company.
To the extent
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portfolio management teams choose to vote a proxy in a way that is not aligned with
the principles below, such manager’s rationales are fully documented.
When evaluating proxy issues and determining how to cast our votes, Invesco’s portfolio management teams may engage with companies in advance of shareholder meetings, and throughout
the year. These meetings can be joint efforts between our global investment professionals.
The following guiding principles apply to proxy voting with respect to operating companies.
We apply a separate approach to open-end and closed-end investment companies and unit investment
trusts. Where appropriate, these guidelines may be supplemented by additional internal guidance
that considers regional variations in best practices, company disclosure and region-specific voting items.
Invesco may vote on proposals not specifically addressed by these principles based on an evaluation of a proposal’s likelihood to enhance long-term shareholder value.
Our good governance principles are divided into six key themes that Invesco endorses:
A.
Transparency
We expect companies to provide accurate, timely and complete information that enables
investors to make informed investment decisions and effectively carry out their stewardship activities.
Invesco supports the highest standards in corporate transparency and believes that these disclosures
should be made available ahead of the voting deadlines for the Annual General Meeting or Extraordinary
General Meeting to allow for timely review and decision-making.
Financial reporting: Company accounts and reporting must accurately reflect the underlying economic position of a company. Arrangements that may constitute an actual or perceived conflict
with this objective should be avoided.
●
We will generally support proposals to accept the annual financial statements, statutory
accounts and similar proposals unless these reports are not presented in a timely manner or
significant issues are identified regarding the integrity of these disclosures.
●
We will generally vote against the incumbent audit committee chair, or nearest equivalent,
where the non-audit fees paid to the independent auditor exceed audit fees for two consecutive
years or other problematic accounting practices are identified such as fraud, misapplication of audit
standards or persistent material weaknesses/deficiencies in internal controls over financial reporting.
●
We will generally not support the ratification of the independent auditor and/or ratification
of their fees payable if non-audit fees exceed audit and audit related fees or if there are
significant auditing controversies or questions regarding the independence of the external auditor. We
will consider an auditor’s length of service as a company’s independent auditor in applying this policy.
B.
Accountability
Robust shareholder rights and strong board oversight help ensure that management adhere
to the highest standards of ethical conduct, are held to account for poor performance and
responsibly deliver value creation for stakeholders over the long-term. We therefore encourage companies
to adopt governance features that ensure board and management accountability. In particular,
we consider the following as key mechanisms for enhancing accountability to investors:
One share one vote: Voting rights are an important tool for investors to hold boards and management teams accountable. Unequal voting rights may limit the ability of investors to exercise
their stewardship obligations.
●
We generally do not support proposals that establish or perpetuate dual classes of
voting shares, double voting rights or other means of differentiated voting or disproportionate board
nomination rights.
●
We generally support proposals to decommission differentiated voting rights.
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●
Where unequal voting rights are established, we expect these to be accompanied by
reasonable safeguards to protect minority shareholders’ interests.
Anti-takeover devices: Mechanisms designed to prevent or unduly delay takeover attempts may unduly limit the accountability of boards and management teams to shareholders.
●
We generally will not support proposals to adopt antitakeover devices such as poison
pills. Exceptions may be warranted at entities without significant operations and to preserve
the value of net operating losses carried forward or where the applicability of the pill is limited
in scope and duration.
●
In addition, we will generally not support capital authorizations or amendments to
corporate articles or bylaws at operating companies that may be utilized for antitakeover purposes, for
example, the authorization of classes of shares of preferred stock with unspecified voting, dividend,
conversion or other rights (“blank check” authorizations).
Shareholder rights: We support the rights of shareholders to hold boards and management teams accountable for company performance. We generally support best practice aligned proposals
to enhance shareholder rights, including but not limited to the following:
●
Adoption of proxy access rights
●
Rights to call special meetings
●
Rights to act by written consent
●
Reduce supermajority vote requirements
●
Remove antitakeover provisions
●
Requirement that directors are elected by a majority vote
In addition, we oppose practices that limit shareholders’ ability to express their views at a general meeting such as bundling unrelated proposals or several significant article or bylaw
amendments into a single voting item. We will generally vote against these proposals unless we are satisfied
that all the underlying components are aligned with our views on best practice. We may make exceptions
to this policy for non-operating companies (e.g., open-end and closed-end investment companies).
Director Indemnification: Invesco recognizes that individuals may be reluctant to serve as corporate directors if they are personally liable for all related lawsuits and legal costs.
As a result, reasonable limitations on directors’ liability can benefit a company and its shareholders by helping to attract and retain qualified directors while preserving recourse for shareholders in the event
of misconduct by directors. Accordingly, unless there is insufficient information to make a decision
about the nature of the proposal, Invesco will generally support proposals to limit directors’ liability and provide indemnification and/or exculpation, provided that the arrangements are reasonably limited in scope
to directors acting in good faith and, in relation to criminal matters, limited in scope to directors having
reasonable grounds for believing the conduct was lawful.
Responsiveness: Boards should respond to investor concerns in a timely fashion, including reasonable
requests to engage with company representatives regarding such concerns, and address
matters that receive significant voting dissent at general meetings of shareholders.
●
We will generally vote against the incumbent chair of the governance committee, or
nearest equivalent, in cases where the board has not adequately responded to items receiving
significant voting opposition from shareholders at an annual or extraordinary general meeting.
●
We will generally vote against the incumbent chair of the governance committee, or
nearest equivalent, where the board has not adequately responded to a shareholder proposal
which has received significant support from shareholders.
●
We will generally vote against the incumbent chair of the compensation committee,
or nearest
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equivalent, if there are significant ongoing concerns with a company’s compensation practices that have not been addressed by the committee or egregious concerns with the company’s compensation practices for two years consecutively.
●
We will generally vote against the incumbent compensation committee chair, or nearest
equivalent, where there are ongoing concerns with a company’s compensation practices and there is no opportunity to express dissatisfaction by voting against an advisory vote on executive
compensation, remuneration report (or policy) or nearest equivalent.
●
Where a company has not adequately responded to engagement requests from Invesco or
satisfactorily addressed issues of concern, we may oppose director nominations, including,
but not limited to, nominations for the lead independent director and/or committee chairs.
●
Virtual shareholder meetings: Companies should hold their annual or special shareholder meetings in a manner that best serves the needs of its shareholders and the company. Shareholders
should have an opportunity to participate in such meetings. Shareholder meetings provide
an important mechanism by which shareholders provide feedback or raise concerns without undue censorship
and hear from the board and management.
●
We will generally support management proposals seeking to allow for the convening
of hybrid shareholder meetings (allowing shareholders the option to attend and participate either
in person or through a virtual platform).
●
Management or shareholder proposals that seek to authorize the company to hold virtual-only
meetings (held entirely through virtual platform with no corresponding in-person physical
meeting) will be assessed on a case-by-case basis. Companies have a responsibility to provide
strong justification and establish safeguards to preserve comparable rights and opportunities
for shareholders to participate virtually as they would have during an in-person meeting.
Invesco will consider, among other things, a company’s practices, jurisdiction and disclosure, including the items set forth below:
i.
meeting procedures and requirements are disclosed in advance of a meeting detailing
the rationale for eliminating the in-person meeting;
ii.
clear and comprehensive description of which shareholders are qualified to participate,
how shareholders can join the virtual-only meeting, how and when shareholders submit and
ask questions either in advance of or during the meeting;
iii.
disclosure regarding procedures for questions received during the meeting, but not
answered due to time or other restrictions; and
iv.
description of how shareholder rights will be protected in a virtual-only meeting
format including the ability to vote shares during the time the polls are open.
C.
Board Composition and Effectiveness
Director election process: Board members should generally stand for election annually and individually.
●
We will generally support proposals requesting that directors stand for election annually.
●
We will generally vote against the incumbent governance committee chair or nearest
equivalent, if a company has a classified board structure that is not being phased out. We may make
exceptions to this policy for non-operating companies (e.g., open-end and closed-end investment
companies) or in regions where market practice is for directors to stand for election on a staggered
basis.
●
When a board is presented for election as a slate (e.g., shareholders are unable to
vote against individual nominees and must vote for or against the entire nominated slate of directors)
and this
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approach is not aligned with local market practice, we will generally vote against
the slate in cases where we otherwise would vote against an individual nominee.
●
Where market practice is to elect directors as a slate we will generally support the
nominated slate unless there are governance concerns with several of the individuals included on the
slate or we have broad concerns with the composition of the board such as a lack independence.
Board size: We will generally defer to the board with respect to determining the optimal number
of board members given the size of the company and complexity of the business, provided
that the proposed board size is sufficiently large to represent shareholder interests and sufficiently
limited to remain effective.
Board assessment and succession planning: When evaluating board effectiveness, Invesco considers whether periodic performance reviews and skills assessments are conducted
to ensure the board represents the interests of shareholders. In addition, boards should have a
robust succession plan in place for key management and board personnel.
Definition of independence: Invesco considers local market definitions of director independence but applies a proprietary standard for assessing director independence considering a director’s status as a current or former employee of the business, any commercial or consulting relationships
with the company, the level of shares beneficially owned or represented and familial relationships,
among others.
Board and committee independence: The board of directors, board committees and regional equivalents should be sufficiently independent from management, substantial shareholders
and conflicts of interest. We consider local market practices in this regard and in general we look
for a balance across the board of directors. Above all, we like to see signs of robust challenge
and discussion in the boardroom.
●
We will generally vote against one or more non-independent directors when a board
is less than majority independent, but we will take into account local market practice with regards
to board independence in limited circumstances where this standard is not appropriate.
●
We will generally vote against non-independent directors serving on the audit committee.
●
We will generally vote against non-independent directors serving on the compensation
committee.
●
We will generally vote against non-independent directors serving on the nominating
committee.
●
In relation to the board, compensation committee and nominating committee we will
consider the appropriateness of significant shareholder representation in applying this policy.
This exception will generally not apply to the audit committee.
Separation of Chair and CEO roles: We believe that independent board leadership generally enhances management accountability to investors. Companies deviating from this best
practice should provide a strong justification and establish safeguards to ensure that there is independent
oversight of a board’s activities (e.g., by appointing a lead or senior independent director with clearly defined powers and responsibilities).
●
We will generally vote against the incumbent nominating committee chair, or nearest
equivalent, where the board chair is not independent unless a lead independent or senior director
is appointed.
●
We will generally support shareholder proposals requesting that the board chair be
an independent director.
●
We will generally not vote against a CEO or executive serving as board chair solely
on the basis of this issue, however, we may do so in instances where we have significant concerns
regarding a company’s corporate governance, capital allocation decisions and/or compensation practices.
Attendance and over boarding: Director attendance at board and committee meetings is a fundamental part of their responsibilities and provides efficient oversight for the
company and its
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investors. In addition, directors should not have excessive external board or managerial
commitments that may interfere with their ability to execute the duties of a director.
●
We will generally vote against or withhold votes from directors who attend less than
75% of board and committee meetings for two consecutive years. We expect companies to disclose
any extenuating circumstances, such as health matters or family emergencies, that would
justify a director’s low attendance, in line with good practices.
●
We will generally vote against directors who have more than four total mandates at
public operating companies. We apply a lower threshold for directors with significant commitments such
as executive positions and chairmanships.
Diversity: We believe an effective board should be comprised of directors with a mix of skills,
experience, tenure, and industry expertise together with a diverse profile of individuals
of different genders, ethnicities, race, culture, age, perspectives and backgrounds. The board
should reflect the diversity of the workforce, customers, and the communities in which the business operates.
In our view, greater diversity in the boardroom contributes to robust challenge and debate, avoids
groupthink, fosters innovation, and provides competitive advantage to companies. We consider diversity
at the board level, within the executive management team and in the succession pipeline.
●
In markets where there are regulatory expectations, listing standards or minimum quotas
for board diversity, Invesco will generally apply the same expectations. In all other markets,
we will generally vote against the incumbent nominating committee chair of a board, or nearest equivalent,
where a company failed to demonstrate improvements are being made to diversity practices for
three or more consecutive years, recognizing that building a qualified and diverse board takes time.
We may make exceptions to this policy for non-operating companies (e.g., open-end and closed-end
investment companies).
●
We generally believe that an individual board’s nominating committee is best positioned to determine whether director term limits would be an appropriate measure to help achieve these
goals and, if so, the nature of such limits. Invesco generally opposes proposals to limit the tenure
of outside directors through mandatory retirement ages.
D.
Long-Term Stewardship of Capital
Capital allocation: Invesco expects companies to responsibly raise and deploy capital toward the long-term, sustainable success of the business. In addition, we expect capital allocation authorizations
and decisions to be made with due regard to shareholder dilution, rights of shareholders
to ratify significant corporate actions and pre-emptive rights, where applicable.
Share issuance and repurchase authorizations: We generally support authorizations to issue shares up to 20% of a company’s issued share capital for general corporate purposes. Shares should not be issued at a substantial discount to the market price or be repurchased at a substantial
premium to the market price.
Stock splits: We generally support management proposals to implement a forward or reverse stock
split, provided that a reverse stock split is not being used to take a company private.
In addition, we will generally support requests to increase a company’s common stock authorization if requested to facilitate a stock split.
Increases in authorized share capital: We will generally support proposals to increase a company’s number of authorized common and/or preferred shares, provided we have not identified
concerns regarding a company’s historical share issuance activity or the potential to use these authorizations for antitakeover purposes. We will consider the amount of the request in relation to the company’s current authorized share capital, any proposed corporate transactions contingent on approval
of these requests and the cumulative impact on a company’s authorized share capital, for example, if a reverse stock split is concurrently submitted for shareholder consideration.
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Mergers, acquisitions, proxy contests, disposals and other corporate transactions: Invesco’s investment teams will review proposed corporate transactions including mergers, acquisitions,
reorganizations, proxy contests, private placements, dissolutions and divestitures based on a proposal’s individual investment merits. In addition, we broadly approach voting on other corporate
transactions as follows:
●
We will generally support proposals to approve different types of restructurings that
provide the necessary financing to save the company from involuntary bankruptcy.
●
We will generally support proposals to enact corporate name changes and other proposals
related to corporate transactions that we believe are in shareholders’ best interests.
●
We will generally support reincorporation proposals, provided that management have
provided a compelling rationale for the change in legal jurisdiction and provided further that
the proposal will not significantly adversely impact shareholders’ rights.
●
With respect to contested director elections, we consider the following factors, among
others, when evaluating the merits of each list of nominees: the long-term performance of the company
relative to its industry, management’s track record, any relevant background information related to the contest, the qualifications of the respective lists of director nominees, the strategic merits
of the approaches proposed by both sides, including the likelihood that the proposed goals can be met,
and positions of stock ownership in the company.
E.
Environmental, Social and Governance Risk Oversight
Director responsibility for risk oversight: The board of directors are ultimately responsible for overseeing management and ensuring that proper governance, oversight and control mechanisms
are in place at the companies they oversee. Invesco may take voting action against director
nominees in response to material governance or risk oversight failures that adversely affect shareholder
value.
Invesco considers the adequacy of a company's response to material oversight failures
when determining whether any voting action is warranted. In addition, Invesco will consider
the responsibilities delegated to board sub-committees when determining if it is appropriate to hold the
incumbent chair of the relevant committee, or nearest equivalent, accountable for these material failures.
Material governance or risk oversight failures at a company may include, without limitation:
i.
significant bribery, corruption or ethics violations;
ii.
events causing significant climate-related risks;
iii.
significant health and safety incidents; or
iv.
failure to ensure the protection of human rights.
Reporting of financially material ESG information: Companies should report on their environmental, social and governance opportunities and risks where material to their business operations.
●
Climate risk management: We encourage companies to report on material climate-related
risks and opportunities and how these are considered within the company’s strategy, financial planning, governance structures and risk management frameworks aligned with applicable regional
regulatory requirements. For companies in industries that materially contribute to climate change,
we encourage comprehensive disclosure of greenhouse gas emissions and Paris-aligned emissions reduction
targets, where appropriate. Invesco may take voting action at companies that fail
to adequately address climate-related risks, including opposing director nominations in cases where
we view the lack of effective climate transition risk management as potentially detrimental to
long-term shareholder value.
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Shareholder proposals addressing environmental and social issues: We recognize environmental and social (E&S) shareholder proposals are nuanced and therefore, Invesco will analyze
such proposals on a case-by-case basis.
Invesco may support shareholder resolutions requesting that specific actions be taken
to address E&S issues or mitigate exposure to material E&S risks, including reputational risk, related
to these issues. When considering such proposals, we will consider the following but not limited to:
a company's track record on E&S issues, the efficacy of the proposal's request, whether the requested
action is unduly burdensome, and whether we consider the adoption of such a proposal would promote
long-term shareholder value. We will also consider company responsiveness to the proposal and
any engagement on the issue when casting votes.
●
We generally do not support resolutions where insufficient information has been provided
in advance of the vote or a lack of disclosure inhibits our ability to make fully informed voting
decisions.
Ratification of board and/or management acts: We will generally support proposals to ratify the actions of the board of directors, supervisory board and/or executive decision-making
bodies, provided there are no material oversight failures as described above. When such oversight concerns
are identified, we will consider a company’s response to any issues raised and may vote against ratification proposals instead of, or in addition to, director nominees.
F.
Executive Compensation and Alignment
Invesco supports compensation polices and equity incentive plans that promote alignment
between management incentives and shareholders’ long-term interests. We pay close attention to local market practice and may apply stricter or modified criteria where appropriate.
Advisory votes on executive compensation, remuneration policy and remuneration reports: We will generally not support compensation-related proposals where more than one of the
following is present:
i.
there is an unmitigated misalignment between executive pay and company performance
for at least two consecutive years;
ii.
there are problematic compensation practices which may include, among others, incentivizing
excessive risk taking or circumventing alignment between management and shareholders’ interests via repricing of underwater options;
iii.
vesting periods for long-term incentive awards are less than three years;
iv.
the company “front loads” equity awards;
v.
there are inadequate risk mitigating features in the program such as clawback provisions;
vi.
excessive, discretionary one-time equity grants are awarded to executives;
vii.
less than half of variable pay is linked to performance targets, except where prohibited
by law.
Invesco will consider company reporting on pay ratios as part of our evaluation of
compensation proposals, where relevant.
Equity plans: Invesco generally supports equity compensation plans that promote the proper alignment
of incentives with shareholders’ long-term interests, and generally votes against plans that are overly dilutive to existing shareholders, plans that contain objectionable structural features
which may include provisions to reprice options without shareholder approval, plans that include evergreen
provisions or plans that provide for automatic accelerated vesting upon a change in control.
Employee stock purchase plans: We generally support employee stock purchase plans that are reasonably designed to provide proper incentives to a broad base of employees, provided
that the price at which employees may acquire stock represents a reasonable discount from the market
price.
A-14
Severance Arrangements: Invesco considers proposed severance arrangements (sometimes known as “golden parachute” arrangements) on a case-by-case basis due to the wide variety among their terms. Invesco acknowledges that in some cases such arrangements, if reasonable, may be in shareholders’ best interests as a method of attracting and retaining high-quality executive talent.
We generally vote in favor of proposals requiring shareholder ratification of senior executives’ severance agreements where the proposed terms and disclosure align with good market practice.
A-15
Exhibit A
Harbourview Asset Management Corporation
Invesco Advisers, Inc.
Invesco Asset Management (India) Pvt. Ltd*1
Invesco Asset Management (Japan) Limited*1
Invesco Asset Management (Schweiz) AG
Invesco Asset Management Deutschland GmbH
Invesco Asset Management Limited1
Invesco Asset Management Singapore Ltd
Invesco Australia Ltd
Invesco European RR L.P.
Invesco Canada Ltd.1
Invesco Capital Management LLC
Invesco Capital Markets, Inc.*1
Invesco Fund Managers Limited
Invesco Hong Kong Limited
Invesco Investment Advisers LLC
Invesco Investment Management (Shanghai) Limited
Invesco Investment Management Limited
Invesco Loan Manager, LLC
Invesco Managed Accounts, LLC
Invesco Management S.A.
Invesco Overseas Investment Fund Management (Shanghai) Limited
Invesco Pensions Limited
Invesco Private Capital, Inc.
Invesco Real Estate Management S.a.r.l1
Invesco RR Fund L.P.
Invesco Senior Secured Management, Inc.
Invesco Taiwan Ltd*1
Invesco Trust Company
Oppenheimer Funds, Inc.
WL Ross & Co. LLC
*
Invesco entities with specific proxy voting guidelines
1
Invesco entities with specific conflicts of interest policies
A-16
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Exhibit
Number
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Description
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(2)
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(h)
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(1)
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(a)
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|
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|
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(b)
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|
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|
|
(c)
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|
|
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(2)
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(a)
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(b)
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|
|
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(3)
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(4)
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|
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(5)
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|
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(i)
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|
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(j)
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Consent of Independent Registered Public Accounting Firm – None
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|
(k)
|
|
|
Not applicable.
|
|
(l)
|
|
|
Not applicable.
|
|
(m)
|
|
|
Not applicable.
|
|
(n)
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|
|
Not applicable.
|
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(o)
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|
|
Not applicable.
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(p)
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(q)
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101.INS
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XBRL Instance Document - the instance document does not appear in the Interactive
Data File because its XBRL tags
are embedded within the inline XBRL document
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101.SCH
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XBRL Taxonomy Extension Schema Document
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||
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase Document
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||
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101.LAB
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XBRL Taxonomy Extension Labels Linkbase Document
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101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
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||
(1)
Incorporated by reference to Post-Effective Amendment No. 7 to the Trust’s Registration Statement on Form N-1A, filed on September 18, 2007.
(2)
Incorporated by reference to Post-Effective Amendment No. 707 to the Trust’s Registration Statement on Form N-1A, filed on December 28, 2018.
(3)
Incorporated by reference to Post-Effective Amendment No. 731 to the Trust’s Registration Statement on Form N-1A, filed on October 25, 2019.
(4)
Incorporated by reference to Post-Effective Amendment No. 612 to the Trust’s Registration Statement on Form N-1A, filed on July 3, 2017.
(5)
Incorporated by reference to Post-Effective Amendment No. 579 to the Trust’s Registration Statement on Form N-1A, filed on January 6, 2017.
(6)
Incorporated by reference to Post-Effective Amendment No. 475 to the Trust’s Registration Statement on Form N-1A, filed on February 26, 2015.
(7)
Incorporated by reference to Post-Effective Amendment No. 425 to the Trust’s Registration Statement on Form N-1A, filed on October 25, 2013.
(8)
Incorporated by reference to Post-Effective Amendment No. 26 to the Invesco Exchange-Traded Self-Indexed Fund Trust’s Registration Statement on Form N-1A, filed on November 21, 2018.
(9)
Incorporated by reference to Post-Effective Amendment No. 390 to the Trust’s Registration Statement on Form N-1A, filed on February 27, 2013.
(10)
Incorporated by reference to Post-Effective Amendment No. 272 to the Invesco Exchange-Traded Fund Trust’s Registration Statement on Form N-1A, filed on October 24, 2018.
(11)
Incorporated by reference to Post-Effective Amendment No. 612 to the Trust’s Registration Statement on Form N-1A, filed on June 30, 2017.
(12)
Incorporated by reference to Post-Effective Amendment No. 753 to the Trust’s Registration Statement on Form N-1A, filed on October 6, 2020.
(13)
Incorporated by reference to Post-Effective Amendment No. 757 to the Trust’s Registration Statement on Form N-1A, filed on December 21, 2020.
(14)
Incorporated by reference to Post-Effective Amendment No. 763 to the Trust’s Registration Statement on Form N-1A, filed on February 25, 2021.
(15)
Incorporated by reference to Post-Effective Amendment No. 803 to the Trust’s Registration Statement on Form N-1A, filed on February 25, 2022.
(16)
Incorporated by reference to Post-Effective Amendment No. 94 to the Invesco Actively Managed Exchange-Traded Commodity Fund Trust’s Registration Statement on Form N-1A, filed on August 19, 2022.
(17)
Incorporated by reference to Post-Effective Amendment No. 826 to the Trust’s Registration Statement on Form N-1A, filed on August 25, 2023.
(18)
Incorporated by reference to Post-Effective Amendment No. 839 to the Trust’s Registration Statement on Form N-1A, filed on February 27, 2024.
(19)
Incorporated by reference to Post-Effective Amendment No. 174 to the Invesco Self-Indexed Exchange-Traded Fund Trust’s Registration Statement on Form N-1A, filed on June 4, 2024.
(*)
Filed herewith.
Item 29. Persons Controlled by or Under Common Control with the Fund.
None.
Item 30. Indemnification.
Reference is made to Article IX of the Registrant’s Declaration of Trust:
The Registrant (also, the “Trust”) is organized as a Massachusetts business trust and is operated pursuant to a Declaration of Trust, dated October 10, 2006 and Amended and Restated as of September 17, 2007 (the “Declaration of Trust”), which permits the Registrant to indemnify every person who is, or has been, a Trustee, officer, employee
or agent of the Trust, including persons who serve at the request of the Trust as directors, trustees, officers, employees or agents
of another organization in which the Trust has an interest as a shareholder, creditor or otherwise (hereinafter referred to as a “Covered Person”), to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him in connection
with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having
been such a Trustee, director, officer, employee or agent and against amounts paid or incurred by him in settlement thereof.
No indemnification shall be provided hereunder to a Covered Person to the extent such
indemnification is prohibited by applicable federal law.
The rights of indemnification herein provided may be insured against by policies maintained
by the Trust, shall be severable, shall not affect any other rights to which any Covered Person may now or hereafter
be entitled, shall continue as to a person who has ceased to be such a Covered Person and shall inure to the benefit of the heirs, executors
and administrators of such a person.
Subject to applicable federal law, expenses of preparation and presentation of a defense
to any claim, action, suit or proceeding subject to a claim for indemnification under this Section 9.5 shall be advanced by
the Trust prior to final disposition thereof upon receipt of an undertaking by or on behalf of the recipient to repay such amount if
it is ultimately determined that he is not entitled to indemnification under this Section 9.5.
To the extent that any determination is required to be made as to whether a Covered
Person engaged in conduct for which indemnification is not provided as described herein, or as to whether there is reason
to believe that a Covered Person ultimately will be found entitled to indemnification, the Person or Persons making the determination
shall afford the Covered Person a rebuttable presumption that the Covered Person has not engaged in such conduct and that there
is reason to believe that the Covered Person ultimately will be found entitled to indemnification.
As used in this Section 9.5, the words “claim,” “action,” “suit” or “proceeding” shall apply to all claims, demands, actions, suits, investigations, regulatory inquiries, proceedings or any other occurrence of
a similar nature, whether actual or threatened and
whether civil, criminal, administrative or other, including appeals, and the words “liability” and “expenses” shall include without limitation, attorneys’ fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities.
Further Indemnification. Nothing contained herein shall affect any rights to indemnification to which any
Covered Person or other Person may be entitled by contract or otherwise under law or prevent the Trust
from entering into any contract to provide indemnification to any Covered Person or other Person. Without limiting the foregoing,
the Trust may, in connection with the acquisition of assets subject to liabilities pursuant to Section 4.2 hereof or a reorganization
or consolidation pursuant to Section 10.2 hereof, assume the obligation to indemnify any Person including a Covered Person or
otherwise contract to provide such indemnification, and such indemnification shall not be subject to the terms of this
Article IX.
Amendments and Modifications. Without limiting the provisions of Section 11.1(b) hereof, in no event will any amendment,
modification or change to the provisions of this Declaration or the By-laws adversely
affect in any manner the rights of any Covered Person to (a) indemnification under Section 9.5 hereof in connection with any proceeding
in which such Covered Person becomes involved as a party or otherwise by virtue of being or having been a Trustee, officer
or employee of the Trust or (b) any insurance payments under policies maintained by the Trust, in either case with respect to any
act or omission of such Covered Person that occurred or is alleged to have occurred prior to the time such amendment, modification
or change to this Declaration or the By-laws.
Item 31. Business and Other Connections of the Investment Adviser.
Reference is made to the caption “Management of the Fund” in the Prospectus constituting Part A, which is included in this Registration Statement, and “Management” in the Statement of Additional Information constituting Part B, which is included in this Registration Statement.
The information as to the directors and executive officers of Invesco Capital Management
LLC is set forth in Schedule A of Invesco Capital Management LLC’s Form ADV filed with the Securities and Exchange Commission (the “SEC”) on March 27, 2024 (and as amended through the date hereof) and is incorporated herein by reference.
The Form ADV may be obtained free of charge, at the SEC's website at www.adviserinfo.sec.gov, and may be requested by File No. 801-61851.
Item 32. Principal Underwriters.
(a) The sole principal underwriter for the Registrant is Invesco Distributors, Inc.,
which acts as distributor for the Registrant and the following other funds:
AIM Counselor Series Trust (Invesco Counselor Series Trust)
AIM Equity Funds (Invesco Equity Funds)
AIM Funds Group (Invesco Funds Group)
AIM Growth Series (Invesco Growth Series)
AIM International Mutual Funds (Invesco International Mutual Funds)
AIM Investment Funds (Invesco Investment Funds)
AIM Investment Securities Funds (Invesco Investment Securities Funds)
AIM Sector Funds (Invesco Sector Funds)
AIM Tax-Exempt Funds (Invesco Tax-Exempt Funds)
AIM Treasurer’s Series Trust (Invesco Treasurer’s Series Trust)
AIM Variable Insurance Funds (Invesco Variable Insurance Funds)
Invesco Management Trust
Invesco Senior Loan Fund
Short-Term Investments Trust
Invesco Actively Managed Exchange-Traded Fund Trust
Invesco Actively Managed Exchange-Traded Commodity Fund Trust
Invesco Exchange-Traded Fund Trust II
Invesco Exchange-Traded Fund Trust
Invesco India Exchange-Traded Fund Trust
Invesco Exchange-Traded Self-Indexed Fund Trust
(b) The following are the Officers and Managers of Invesco Distributors, Inc., the Registrant’s underwriter.
|
NAME AND PRINCIPAL
BUSINESS ADDRESS*
|
POSITIONS AND OFFICES
WITH REGISTRANT
|
POSITIONS AND OFFICES
WITH UNDERWRITER
|
|
John McDonough
|
None
|
Director, Chief Executive Officer and
President
|
|
Ben Utt
|
None
|
Executive Vice President
|
|
Terry Gibson Vacheron
|
None
|
Executive Vice President
|
|
Mark W. Gregson
|
None
|
Chief Financial Officer and Financial and
Operations Principal
|
|
Trisha B. Hancock
|
None
|
Chief Compliance Officer and Senior
Vice President
|
|
Rocco Benedetto
|
None
|
Senior Vice President
|
|
David Borrelli
|
None
|
Senior Vice President
|
|
Ken Brodsky
|
None
|
Senior Vice President
|
|
George Fahey
|
None
|
Senior Vice President
|
|
Eliot Honaker
|
None
|
Senior Vice President
|
|
Brian Kiley
|
None
|
Senior Vice President
|
|
Brian Levitt
|
None
|
Senior Vice President
|
|
Kevin Neznek
|
None
|
Senior Vice President
|
|
Adam Rochlin
|
None
|
Senior Vice President
|
|
Benjamin Stewart
|
None
|
Senior Vice President
|
|
Paul E. Temple
|
None
|
Senior Vice President
|
|
Melanie Ringold
|
Chief Legal Officer
|
Secretary
|
|
Greg Ketron
|
None
|
Treasurer
|
|
Crissie Wisdom
|
Anti-Money Laundering Compliance
Officer
|
Anti-Money Laundering Compliance
Officer
|
|
John M. Zerr
|
None
|
Senior Vice President
|
*
The principal business address for all directors and executive officers is Invesco
Distributors, Inc., 11 Greenway Plaza, Houston, Texas 77046-1173.
(c) Not applicable.
Item 33. Location of Accounts and Records.
All accounts, books and other documents required to be maintained by Section 31(a)
of the Investment Company Act of 1940, as amended, and the rules promulgated thereunder, are held in physical possession
at the offices, as applicable, of: (1) the Registrant, (2) the Registrant’s investment adviser and (3) the Registrant’s custodian and administrator.
|
1.
|
Invesco Exchange-Traded Fund Trust II
3500 Lacey Road, Suite 700
Downers Grove, Illinois 60515
|
|
2.
|
Invesco Capital Management LLC
3500 Lacey Road, Suite 700
Downers Grove, Illinois 60515
|
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the Investment
Company Act of 1940, as amended, the Registrant certifies that it meets all of the requirements for effectiveness of this
Registration Statement under Rule 485(b) under the Securities Act of 1933, as amended, and it has duly caused this Registration Statement
to be signed on its behalf by the undersigned, duly authorized, in the City of Downers Grove and State of Illinois, on the 21st day
of June, 2024.
|
Invesco Exchange-Traded Fund Trust II
|
|
|
By:
|
/s/ Brian Hartigan
|
|
|
Brian Hartigan
|
|
Title:
|
President
|
Pursuant to the requirements of the Securities Act of 1933, as amended, this registration
statement has been signed below by the following persons in the capacities indicated on the dates indicated.
|
SIGNATURE
|
TITLE
|
DATE
|
|
/s/ Brian Hartigan
|
President
|
June 21, 2024
|
|
Brian Hartigan
|
|
|
|
/s/ Kelli Gallegos
|
Treasurer
|
June 21, 2024
|
|
Kelli Gallegos
|
|
|
|
/s/ Adam Henkel
|
Secretary
|
June 21, 2024
|
|
Adam Henkel
|
|
|
|
*/s/ Ronn R. Bagge
|
Vice Chairman and Trustee
|
June 21, 2024
|
|
Ronn R. Bagge
|
|
|
|
*/s/ Todd J. Barre
|
Trustee
|
June 21, 2024
|
|
Todd J. Barre
|
|
|
|
*/s/ Victoria J. Herget
|
Trustee
|
June 21, 2024
|
|
Victoria J. Herget
|
|
|
|
*/s/ Marc M. Kole
|
Trustee
|
June 21, 2024
|
|
Marc M. Kole
|
|
|
|
*/s/ Yung Bong Lim
|
Trustee
|
June 21, 2024
|
|
Yung Bong Lim
|
|
|
|
*/s/ Joanne Pace
|
Trustee
|
June 21, 2024
|
|
Joanne Pace
|
|
|
|
*/s/ Gary R. Wicker
|
Trustee
|
June 21, 2024
|
|
Gary R. Wicker
|
|
|
|
*/s/ Donald H. Wilson
|
Chairman and Trustee
|
June 21, 2024
|
|
Donald H. Wilson
|
|
|
|
*By: /s/ Adam Henkel
|
|
June 21, 2024
|
|
Adam Henkel
|
|
|
|
Attorney-In-Fact
|
|
|
*
Adam Henkel signs this Registration Statement pursuant to powers of attorney filed with Post-Effective Amendment No. 753 to the Trust’s Registration Statement and incorporated by reference herein.
Exhibit Index
|
|
|
|
101.INS
|
XBRL Instance Document - the instance document does not appear in the Interactive
Data File because its XBRL tags are
embedded within the inline XBRL document
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101.SCH
|
XBRL Taxonomy Extension Schema Document
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document
|
|
101.LAB
|
XBRL Taxonomy Extension Labels Linkbase Document
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase Document
|