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As filed with the Securities and Exchange Commission
on August 17, 2021
Securities Act File No. 333-170122
Investment Company File No. 811-22487
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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. 474
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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. 476
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(Check appropriate
box or boxes)
________________
DBX ETF TRUST
(Exact name of Registrant as specified in its charter)
________________
875 Third Avenue
New York, New York 10022-6225
(Address of Principal Executive Offices)
Registrant’s
Telephone Number, including Area Code: (212) 454-4500
________________
Freddi Klassen
DBX ETF Trust
875 Third Avenue
New York, New York 10022-6225
(Name and Address
of Agent for Service)
Copy to: Jeremy Senderowicz, Esq.
Vedder Price P.C.
1633 Broadway, 31st Floor
New York, New York
10019
________________
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 August 18, 2021 pursuant to paragraph (b) |
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60 days after filing pursuant to paragraph (a) |
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on ______________ pursuant to paragraph (a) |
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75 days after filing pursuant to paragraph (a)(2) |
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on ______________ pursuant to paragraph (a)(2) of Rule
485 |
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 |
EXPLANATORY
NOTE
This Post-Effective Amendment contains the Prospectus and Statement
of Additional Information relating only to the following series of the Registrant:
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Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF (formerly,
Xtrackers MSCI ACWI ex USA ESG Leaders Equity ETF) |
This Post-Effective Amendment is not intended to update or amend
any other Prospectuses or Statements of Additional Information of the Registrant’s other series.
Prospectus
August 18, 2021
Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF |
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The Securities and Exchange Commission (“SEC”) has not approved or disapproved these securities or passed upon the adequacy of this Prospectus. Any representation to the contrary is a criminal offense.
Your investment in the fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency, entity or person.
Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF
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Stock Exchange: NYSE Arca, Inc. |
Investment Objective
Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF (the “fund”), seeks investment results that correspond generally to the performance, before fees and expenses, of the Solactive ISS Emerging Markets Carbon Reduction & Climate Improvers Index NTR (the “Underlying Index”).
Fees and Expenses
These are the fees and expenses that you will pay when you buy, hold and sell shares. You may also pay other fees, such as brokerage commissions and other fees to financial intermediaries on the purchase and sale of shares of the fund, which are not reflected in the table and example below.
ANNUAL FUND OPERATING EXPENSES
(expenses that you pay each year as a % of the value of your investment)
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Total annual fund operating expenses |
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1 Effective August 18, 2021, the fund’s management fee was reduced from 0.16% to 0.15% of the fund’s average daily net assets.
EXAMPLE
This Example is intended to help you compare the cost of investing in the fund with the cost of investing in other funds. 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. The Example does not take into account brokerage commissions that you may pay on your purchases and sales of shares of the fund. It also does not include the transaction fees on purchases and redemptions of Creation Units (defined herein), because those fees will not be
imposed on retail investors. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
PORTFOLIO TURNOVER
The fund pays transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover may indicate higher transaction costs and may mean higher taxes if you are investing in a taxable account. These costs are not reflected in annual fund operating expenses or in the expense example, and can affect the fund's performance. During the most recent fiscal year, the fund’s portfolio turnover rate was 13% of the average value of its portfolio. Prior to August 18, 2021, the fund tracked its prior Underlying Index, the MSCI ACWI ex USA ESG Leaders Index.
Principal Investment Strategies
The fund, using a “passive” or indexing investment approach, seeks investment results that correspond generally to the performance, before fees and expenses, of the Underlying Index, which is comprised of large and mid-capitalization companies in emerging markets countries that meet certain environmental, social and governance (“ESG”) criteria and/or have committed to greenhouse gas emissions reduction targets. The Underlying Index is then weighted in such a manner seeking to align its constituent companies’ greenhouse gas emissions with the long-term global warming target of the Paris Climate Agreement. Under normal circumstances, the Underlying Index is rebalanced semi-annually in February and August. 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.
Prospectus August 18, 2021 | 1 | Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF |
In constructing the Underlying Index, Solactive AG (“Solactive”) begins with the universe of securities comprising the parent index, the Solactive GBS Emerging Markets Large & Mid Cap USD Index PR, which is designed to track the performance of the large and mid-capitalization segment covering approximately the largest 85% of the free-float market capitalization in the emerging markets. From this universe of securities, Solactive first seeks to identify only those companies operating in accordance with established standards for responsible ESG conduct in the following manner:
Companies in the parent universe are initially excluded from the Underlying Index for:
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Failure to observe established norms with respect to environment, human rights, corruption and labor rights (or if incorporated in countries identified with high social risk);
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Involvement in controversial weapons (i.e., chemical biological or nuclear weapons, depleted uranium, cluster munitions and anti-personnel mines); or
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Deriving a specified percentage of revenues from one of the following sectors (“Sector Criteria”): fossil fuel, oil sands, military, pornography, tobacco, gambling, alcohol or cannabis.
All companies that do not trigger an exclusion listed above are included in the Underlying Index. In addition, companies that were initially excluded based on the Sector Criteria or for being incorporated in countries identified with high social risk may still be included in the Underlying Index if they have committed to setting “science-based” greenhouse gas emissions reduction targets by signing on to the Science Based Targets initiative (“SBTi”). Reduction targets are considered “science-based” if they are in line with the level of decarbonization required to keep global temperature increase below 2°C as described in the Fifth Assessment Report of the Intergovernmental Panel on Climate Change (IPCCAR5) and determined by the SBTi.
Once the constituents of the Underlying Index are selected pursuant to the above criteria, the constituents are then weighted in a manner designed to reduce the “carbon intensity” (defined, for each company included in the Underlying Index, as its greenhouse gas emissions as a percentage of the company’s enterprise value including cash) in the following ways:
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Reduce the carbon intensity of the Underlying Index by at least 60% compared to the parent index, and
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Seek a year-over-year carbon intensity reduction target of at least 7%.
Solactive weights each Underlying Index constituent based on its “Carbon Risk Rating,” as calculated by Solactive’s data provider, Institutional Shareholder Services Inc. (“ISS”), with those companies judged to be doing more to reduce emissions being weighted more heavily. A company’s Carbon Risk Rating is a composite score based on
two components: (i) the company’s Carbon Risk Classification, and (ii) the company’s Carbon Performance Score, each as assessed by ISS.
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The Carbon Risk Classification assesses a company’s exposure to carbon-related transition risks by estimating the emission intensity in the company’s business model, based on its industry and business activities.
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The Carbon Performance Score evaluates the current carbon-related performance of a company as well as a company’s risk management and measures to reduce its carbon intensity in the future.
Under the Underlying Index’s methodology, a company may have considerable carbon intensity today, resulting in a poor Carbon Risk Classification, and at the same time be actively working to improve their climate impact and carbon footprint in the future, resulting in a high Carbon Performance Score. These companies are considered to be “climate improvers” and may be included in the Underlying Index.
In calculating the Carbon Risk Classification and the Carbon Performance Score, ISS collects data from a range of public and private sources including company annual reports and sustainability reports, United Nations Global Compact Participant Communications on Progress, Principles for Responsible Investment Signatory Reporting, subscription databases such as the Carbon Disclosure Project, and correspondence with individual companies during the rating process.
The fund uses a full replication indexing strategy to seek to track the Underlying Index. As such, the fund invests directly in the component securities (or a substantial number of the component securities) of the Underlying Index in substantially the same weightings in which they are represented in the Underlying Index. If it is not possible for the fund to acquire component securities due to limited availability or regulatory restrictions, the fund may use a representative sampling indexing strategy to seek to track the Underlying Index instead of a full replication indexing strategy. “Representative sampling” is an indexing strategy that involves investing in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The securities selected are expected to have, in the aggregate, investment characteristics (based on factors such as market capitalization and industry weightings), fundamental characteristics (such as return variability and yield), and liquidity measures similar to those of the Underlying Index. The fund may or may not hold all of the securities in the Underlying Index when using a representative sampling indexing strategy. The fund will invest at least 80% of its total assets (but typically far more) in component securities (including depositary receipts in respect of such securities) of the Underlying Index.
Prospectus August 18, 2021
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Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF
As of June 30, 2021, the Underlying Index consisted of 1,154 securities, with an average market capitalization of approximately $16.5 billion and a minimum market capitalization of approximately $38.9 million from issuers in the following countries: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Kuwait, Malaysia, Mexico, Pakistan, Peru, Philippines, Qatar, Russia, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand, Turkey and the United Arab Emirates. The fund will normally invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities of issuers from countries classified as emerging markets. Emerging market countries are countries that major international financial institutions, such as the World Bank, generally consider to be less economically mature than developed nations. Emerging market countries can include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and most countries located in Western Europe. As of June 30, 2021, a significant percentage of the Underlying Index was comprised of securities of issuers from China (37.30%) and Taiwan (18.85%).
The fund will concentrate its investments (i.e., hold 25% or more of its total assets) in a particular industry or group of industries to the extent that its Underlying Index is concentrated. As of June 30, 2021, a significant percentage of the Underlying Index was comprised of issuers in the information technology (26.9%), consumer discretionary (20.3%) and financials (20.0%) sectors. The information technology sector includes companies engaged in developing software and providing data processing and outsourced services, along with manufacturing and distributing communications equipment, computers and other electronic equipment and instruments. The consumer discretionary sector includes durable goods, apparel, entertainment and leisure, and automobiles. The financials sector includes companies involved in banking, consumer finance, asset management and custody banks, as well as investment banking and brokerage and insurance.
To the extent that the fund tracks the Underlying Index, the fund’s investment in certain sectors or countries may change over time.
While the fund is currently classified as “non-diversified” under the Investment Company Act of 1940, it may operate as or become classified as “diversified” over time. The fund could again become non-diversified solely as a result of a change in relative market capitalization or index weighting of one or more constituents of the index that the fund is designed to track. Shareholder approval will not be sought when the fund crosses from diversified to non-diversified status under such circumstances.
The fund is not sponsored, endorsed, sold or promoted by Solactive.
Securities lending. The fund may lend its portfolio securities to brokers, dealers and other financial institutions desiring to borrow securities to complete transactions and for other purposes. In connection with such loans, the fund receives liquid collateral equal to at least 102% of the value of the portfolio securities being lent. This collateral is marked to market on a daily basis. The fund may lend its portfolio securities in an amount up to 33 1/3% of its total assets.
Main Risks
As with any investment, you could lose all or part of your investment in the fund, and the fund’s performance could trail that of other investments. The fund is subject to the main risks noted below, any of which may adversely affect the fund’s net asset value (“NAV”), trading price, yield, total return and ability to meet its investment objective, as well as numerous other risks that are described in greater detail in the section of this Prospectus entitled “Additional Information About Fund Strategies, Underlying Index Information and Risks” and in the Statement of Additional Information (“SAI”).
ESG investment strategy risk. The Underlying Index’s ESG methodology, and thus the fund’s investment strategy, limits the types and number of investment opportunities available to the fund and, as a result, the fund may underperform other funds that do not have an ESG focus. The Underlying Index’s ESG methodology may result in the fund investing in securities or industry sectors that underperform the market as a whole or underperform other funds screened for ESG standards. The ESG scores used in the Underlying Index’s ESG methodology are based on publicly available information and/or provided by the companies themselves and such information may be unavailable or unreliable. For those reasons, the index provider may be unsuccessful in creating an index composed of companies that exhibit positive ESG characteristics. Regulatory changes or interpretations regarding the definitions and/or use of ESG criteria could have a material adverse effect on the fund’s ability to invest in accordance with its investment policies and/or achieve its investment objective, as well as the ability of certain classes of investors to invest in funds following an ESG strategy such as the fund.
In addition, companies that fail to meet the Sector Criteria may nevertheless be included in the Underlying Index if they have committed to certain targets regarding climate change. The Underlying Index therefore may include companies involved in sectors that often are excluded by indices attempting to utilize an ESG approach.
Carbon reduction strategy risk. The Underlying Index’s methodology for identifying companies attempting to reduce their carbon footprint limits the types and number of investment opportunities available to the fund and, as a result, the fund may underperform other funds that do not follow a carbon reduction strategy. Carbon reduction
Prospectus August 18, 2021
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Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF
may potentially have an adverse effect on a company’s profitability. Investing in a portfolio of securities of companies attempting to reduce their carbon footprint may impact the Fund’s relative investment performance depending on whether such investments are in or out of favor in the market. The Carbon Risk Rating used to score and weight companies in the Underlying Index is based on publicly available information, third-party data sources and/or provided by the companies themselves and such information may be unavailable or unreliable. In addition, a company's commitment to science-based targets for reduced emissions are voluntary and may not be met by the company, or may be abandoned altogether. For those reasons, the index provider may be unsuccessful in creating an index composed of companies that positively contribute to carbon reduction goals. In addition, the Underlying Index’s methodology allows for the inclusion of companies with high carbon intensity as long as such companies adopt plans to improve their climate impact and carbon footprint in the future. While the Underlying Index’s methodology aims to reflect annual reductions in the carbon intensity of the Underlying Index, there is no assurance that such reduction targets will be achieved.
Stock market risk. When stock prices fall, you should expect the value of your investment to fall as well. Stock prices can be hurt by poor management on the part of the stock’s issuer, shrinking product demand and other business risks. These may affect single companies as well as groups of companies. The market as a whole may not favor the types of investments the fund makes, which could adversely affect a stock’s price, regardless of how well the company performs, or the fund’s ability to sell a stock at an attractive price. There is a chance that stock prices overall will decline because stock markets tend to move in cycles, with periods of rising and falling prices. Events in the US and global financial markets, including actions taken by the US Federal Reserve or foreign central banks to stimulate or stabilize economic growth, may at times result in unusually high market volatility which could negatively affect performance. To the extent that the fund invests in a particular geographic region, capitalization or sector, the fund’s performance may be affected by the general performance of that region, capitalization or sector.
Market disruption risk. Geopolitical and other events, including war, terrorism, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and in the future may lead, to disruptions in the US and world economies and markets, which may increase financial market volatility and have significant adverse direct or indirect effects on the fund and its investments. Market disruptions could cause the fund to lose money, experience significant redemptions, and encounter operational difficulties. Although multiple asset classes may be affected by a market disruption, the duration and effects may not be the same for all types of assets.
Recent market disruption events include the pandemic spread of the novel coronavirus known as COVID-19, and the significant uncertainty, market volatility, decreased economic and other activity, increased government activity, including economic stimulus measures, and supply chain disruptions that it has caused. The full effects, duration and costs of the COVID-19 pandemic are impossible to predict, and the circumstances surrounding the COVID-19 pandemic will continue to evolve, including the risk of future increased rates of infection due to low vaccination rates and/or the lack of effectiveness of current vaccines against new variants. The pandemic has affected and may continue to affect certain countries, industries, economic sectors, companies and investment products more than others, may exacerbate existing economic, political, or social tensions and may increase the probability of an economic recession or depression. The fund and its investments may be adversely affected by the effects of the COVID-19 pandemic, and the pandemic may result in the fund and its service providers experiencing operational difficulties in coordinating a remote workforce and implementing their business continuity plans, among others.
The disruptions caused by the COVID-19 pandemic may magnify the impact of each of the other risks described in this “MAIN RISKS” section and may increase volatility in one or more markets in which the fund invests leading to the potential for greater losses for the fund.
Emerging market securities risk. The securities of issuers located in emerging markets tend to be more volatile and less liquid than securities of issuers located in more mature economies, and emerging markets generally have less diverse and less mature economic structures and less stable political systems than those of developed countries. The securities of issuers located or doing substantial business in emerging markets are often subject to rapid and large changes in price.
Foreign investment risk. The fund faces the risks inherent in foreign investing. Adverse political, economic or social developments could undermine the value of the fund’s investments or prevent the fund from realizing the full value of its investments. Financial reporting standards for companies based in foreign markets differ from those in the US. Additionally, foreign securities markets generally are smaller and less liquid than US markets. To the extent that the fund invests in non-US dollar denominated foreign securities, changes in currency exchange rates may affect the US dollar value of foreign securities or the income or gain received on these securities.
Foreign governments may restrict investment by foreigners, limit withdrawal of trading profit or currency from the country, restrict currency exchange or seize foreign investments. In addition, the fund may be limited in its ability to exercise its legal rights or enforce a counterparty's legal obligations in certain jurisdictions outside of the US. The investments of the fund may also be subject to foreign withholding taxes. Foreign brokerage
Prospectus August 18, 2021
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Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF
commissions and other fees are generally higher than those for US investments, and the transactions and custody of foreign assets may involve delays in payment, delivery or recovery of money or investments.
Foreign markets can have liquidity risks beyond those typical of US markets. Because foreign exchanges generally are smaller and less liquid than US exchanges, buying and selling foreign investments can be more difficult and costly. Relatively small transactions can sometimes materially affect the price and availability of securities. In certain situations, it may become virtually impossible to sell an investment at a price that approaches portfolio management’s estimate of its value. For the same reason, it may at times be difficult to value the fund’s foreign investments. In addition, because non-US markets may be open on days when the fund does not price its shares, the value of the securities in the fund’s portfolio may change on days when shareholders will not be able to purchase or sell the fund’s shares.
Depositary receipt risk. Depositary receipts involve similar risks to those associated with investments in securities of non-US issuers. Depositary receipts also may be less liquid than the underlying shares in their primary trading market.
Currency risk. Changes in currency exchange rates and the relative value of non-US currencies may affect the value of the fund’s investment and the value of your fund shares. Because the fund’s NAV is determined on the basis of the US dollar and the fund does not attempt to hedge against changes in the value of non-US currencies, investors may lose money if the foreign currency depreciates against the US dollar, even if the foreign currency value of the fund’s holdings in that market increases. Conversely, the dollar value of your investment in the fund may go up if the value of the foreign currency appreciates against the US dollar. The value of the US dollar measured against other currencies is influenced by a variety of factors. These factors include: interest rates, national debt levels and trade deficits, changes in balances of payments and trade, domestic and foreign interest and inflation rates, global or regional political, economic or financial events, monetary policies of governments, actual or potential government intervention, and global energy prices. Political instability, the possibility of government intervention and restrictive or opaque business and investment policies may also reduce the value of a country’s currency. Government monetary policies and the buying or selling of currency by a country’s government may also influence exchange rates. Currency exchange rates can be very volatile and can change quickly and unpredictably. Therefore, the value of an investment in the fund may also go up or down quickly and unpredictably and investors may lose money.
Medium-sized company risk. Medium-sized company stocks tend to be more volatile than large company stocks. Because stock analysts are less likely to follow medium-sized companies, less information about them is available to investors. Industry-wide reversals may have a greater impact on medium-sized companies, since they lack the financial resources of larger companies. Medium-sized company stocks are typically less liquid than large company stocks.
Liquidity risk. In certain situations, it may be difficult or impossible to sell an investment at an acceptable price. This risk can be ongoing for any security that does not trade actively or in large volumes, for any security that trades primarily on smaller markets, and for investments that typically trade only among a limited number of large investors (such as certain types of derivatives or restricted securities). In unusual market conditions, even normally liquid securities may be affected by a degree of liquidity risk. This may affect only certain securities or an overall securities market.
Although the fund primarily seeks to redeem shares of the fund on an in-kind basis, if the fund is forced to sell underlying investments at reduced prices or under unfavorable conditions to meet redemption requests or other cash needs, the fund may suffer a loss. This may be magnified in circumstances where redemptions from the fund may be higher than normal.
Focus risk. To the extent that the fund focuses its investments in particular industries, asset classes or sectors of the economy, any market price movements, regulatory or technological changes, or economic conditions affecting companies in those industries, asset classes or sectors may have a significant impact on the fund’s performance.
Information technology sector risk. To the extent that the fund invests significantly in the information technology sector, the fund will be sensitive to changes in, and the fund’s performance may depend to a greater extent on, the overall condition of the information technology sector. Information technology companies are particularly vulnerable to government regulation and competition, both domestically and internationally, including competition from foreign competitors with lower production costs. Information technology companies also face competition for services of qualified personnel. Additionally, the products of information technology companies may face obsolescence due to rapid technological development and frequent new product introduction by competitors. Finally, information technology companies are heavily dependent on patent and intellectual property rights, the loss or impairment of which may adversely affect profitability.
Consumer discretionary sector risk. To the extent that the fund invests significantly in the consumer discretionary sector, the fund will be sensitive to changes in, and the fund’s performance may depend to a greater extent on, the overall condition of the consumer discretionary sector. Companies engaged in the consumer discretionary sector
Prospectus August 18, 2021
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Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF
are subject to fluctuations in supply and demand. These companies may also be adversely affected by changes in consumer spending as a result of world events, political and economic conditions, commodity price volatility, changes in exchange rates, imposition of import controls, increased competition, depletion of resources and labor relations.
Financials sector risk. To the extent that the fund invests significantly in the financials sector, the fund will be sensitive to changes in, and the fund’s performance may depend to a greater extent on, the overall condition of the financials sector. The financials sector is subject to extensive government regulation, can be subject to relatively rapid change due to increasingly blurred distinctions between service segments, and can be significantly affected by the availability and cost of capital funds, changes in interest rates, the rate of corporate and consumer debt defaults, and price competition.
Passive investing risk. Unlike a fund that is actively managed, in which portfolio management buys and sells securities based on research and analysis, the fund invests in securities included in, or representative of, the Underlying Index, regardless of their investment merits. Because the fund is designed to maintain a high level of exposure to the Underlying Index at all times, portfolio management generally will not buy or sell a security unless the security is added or removed, respectively, from the Underlying Index, and will not take any steps to invest defensively or otherwise reduce the risk of loss during market downturns.
Index-related risk. The fund seeks investment results that correspond generally to the performance, before fees and expenses, of the Underlying Index as published by the index provider. There is no assurance that the Underlying Index provider will compile the Underlying Index accurately, or that the Underlying Index will be determined, composed or calculated accurately. Market disruptions could cause delays in the Underlying Index’s rebalancing schedule. During any such delay, it is possible that the Underlying Index and, in turn, the fund will deviate from the Underlying Index’s stated methodology and therefore experience returns different than those that would have been achieved under a normal rebalancing schedule. Generally, the index provider does not provide any warranty, or accept any liability, with respect to the quality, accuracy or completeness of the Underlying Index or its related data, and does not guarantee that the Underlying Index will be in line with its stated methodology. Errors in the Underlying Index data, the Underlying Index computations and/or the construction of the Underlying Index in accordance with its stated methodology may occur from time to time and may not be identified and corrected by the index provider for a period of time or at all, which may have an adverse impact on the fund and its shareholders. The Advisor and its affiliates do not provide any warranty or guarantee against
such errors. Therefore, the gains, losses or costs associated with the index provider’s errors will generally be borne by the fund and its shareholders.
Index-related risk may be higher for a fund that tracks an index comprised of, or an index that includes, foreign securities, and in particular emerging markets securities, because regulatory and reporting requirements may differ from those in the US, resulting in a heightened risk of errors in the index data, index computation and/or index construction due to unreliable, out-dated or unavailable information.
Tracking error risk. The fund may be subject to tracking error, which is the divergence of the fund’s performance from that of the Underlying Index. The performance of the fund may diverge from that of the Underlying Index for a number of reasons, including operating expenses, transaction costs, cash flows and operational inefficiencies. The fund’s return also may diverge from the return of the Underlying Index because the fund bears the costs and risks associated with buying and selling securities (especially when rebalancing the fund’s securities holdings to reflect changes in the Underlying Index) while such costs and risks are not factored into the return of the Underlying Index. Transaction costs, including brokerage costs, will decrease the fund’s NAV to the extent not offset by the transaction fee payable by an “Authorized Participant” (“AP”). Market disruptions and regulatory restrictions could have an adverse effect on the fund’s ability to adjust its exposure in order to track the Underlying Index. To the extent that portfolio management uses a representative sampling approach (investing in a representative selection of securities included in the Underlying Index rather than all securities in the Underlying Index), such approach may cause the fund’s return to not be 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. In addition, the fund may not be able to invest in certain securities included in the Underlying Index, or invest in them in the exact proportions in which they are represented in the Underlying Index, due to government imposed legal restrictions or limitations, a lack of liquidity in the markets in which such securities trade, potential adverse tax consequences or other regulatory reasons. To the extent the fund calculates its net asset value based on fair value prices and the value of the Underlying Index is based on market prices (i.e., the value of the Underlying Index is not based on fair value prices), the fund’s ability to track the Underlying Index may be adversely affected. Tracking error risk may be heightened during times of increased market volatility or other unusual market conditions. For tax efficiency purposes, the fund may sell certain securities, and such sale may cause the fund to realize a loss and deviate from the performance of the Underlying Index. In light of the factors discussed above, the fund’s return may deviate significantly from the return of the Underlying Index.
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Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF
Tracking error risk may be higher for funds that track indices with significant weight in foreign issuers, and in particular emerging markets issuers, than funds that do not track such indices.
Market price risk. Fund shares are listed for trading on an exchange and are bought and sold in the secondary market at market prices. The market prices of shares will fluctuate, in some cases materially, in response to changes in the NAV and supply and demand for shares. As a result, the trading prices of shares may deviate significantly from the NAV during periods of market volatility. The Advisor cannot predict whether shares will trade above, below or at their NAV. Given the fact that shares can be created and redeemed in Creation Units (defined below), the Advisor believes that large discounts or premiums to the NAV of shares should not be sustained in the long-term. If market makers exit the business or are unable to continue making markets in fund shares, shares may trade at a discount to NAV like closed-end fund shares and may even face delisting (that is, investors would no longer be able to trade shares in the secondary market). Further, while the creation/redemption feature is designed to make it likely that shares normally will trade close to the value of the fund’s holdings, disruptions to creations and redemptions, including disruptions at market makers, APs or market participants, or during periods of significant market volatility, may result in market prices that differ significantly from the value of the fund’s holdings. Although market makers will generally take advantage of differences between the NAV and the market price of fund shares through arbitrage opportunities, there is no guarantee that they will do so. In addition, the securities held by the fund may be traded in markets that close at a different time than the exchange on which the fund’s shares trade. Liquidity in those securities may be reduced after the applicable closing times. Accordingly, during the time when the exchange is open but after the applicable market closing, fixing or settlement times, bid-ask spreads and the resulting premium or discount to the shares’ NAV is likely to widen. Further, secondary markets may be subject to irregular trading activity, wide bid-ask spreads and extended trade settlement periods, which could cause a material decline in the fund’s NAV. The fund’s investment results are measured based upon the daily NAV of the fund. Investors purchasing and selling shares in the secondary market may not experience investment results consistent with those experienced by those APs creating and redeeming shares directly with the fund.
Operational and technology risk. Cyber-attacks, disruptions, or failures that affect the fund’s service providers or counterparties, issuers of securities held by the fund, or other market participants may adversely affect the fund and its shareholders, including by causing losses for the fund or impairing fund operations. For example, the fund’s or its service providers’ assets or sensitive or confidential information may be misappropriated, data may be
corrupted and operations may be disrupted (e.g., cyber-attacks, operational failures or broader disruptions may cause the release of private shareholder information or confidential fund information, interfere with the processing of shareholder transactions, impact the ability to calculate the fund’s net asset value and impede trading). Market events and disruptions also may trigger a volume of transactions that overloads current information technology and communication systems and processes, impacting the ability to conduct the fund’s operations.
While the fund and its service providers may establish business continuity and other plans and processes that seek to address the possibility of and fallout from cyber-attacks, disruptions or failures, there are inherent limitations in such plans and systems, including that they do not apply to third parties, such as fund counterparties, issuers of securities held by the fund or other market participants, as well as the possibility that certain risks have not been identified or that unknown threats may emerge in the future and there is no assurance that such plans and processes will be effective. Among other situations, disruptions (for example, pandemics or health crises) that cause prolonged periods of remote work or significant employee absences at the fund’s service providers could impact the ability to conduct the fund’s operations. In addition, the fund cannot directly control any cybersecurity plans and systems put in place by its service providers, fund counterparties, issuers of securities held by the fund or other market participants.
Non-diversification risk. The fund is classified as non-diversified under the Investment Company Act of 1940, as amended. This means that the fund may invest in securities of relatively few issuers. Thus, the performance of one or a small number of portfolio holdings can affect overall performance.
If the fund becomes classified as “diversified” over time and again becomes non-diversified as a result of a change in relative market capitalization or index weighting of one or more constituents of the index that the fund is designed to track, non-diversification risk would apply.
Authorized Participant concentration risk. The fund may have a limited number of financial institutions that may act as APs. Only APs who have entered into agreements with the fund’s distributor may engage in creation or redemption transactions directly with the fund (as described in the section of this Prospectus entitled “Buying and Selling Shares”). If those APs exit the business or are unable to process creation and/or redemption orders, (including in situations where APs have limited or diminished access to capital required to post collateral) and no other AP is able to step forward to create and redeem in either of these cases, shares may trade at a discount to NAV like closed-end fund shares and may even face delisting (that is, investors would no longer be able to trade shares in the secondary market).
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Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF
Geographic focus risk. Focusing investments in a single country or few countries, or regions, involves increased political, regulatory and other risks. Market swings in such a targeted country, countries or regions are likely to have a greater effect on fund performance than they would in a more geographically diversified fund.
Risks related to investing in Asia. Investment in securities of issuers in Asia involves risks and special considerations not typically associated with investment in the US securities markets. Certain Asian economies have experienced high inflation, high unemployment, currency devaluations and restrictions, and over-extension of credit. Many Asian economies have experienced rapid growth and industrialization, and there is no assurance that this growth rate will be maintained. During the recent global recession, many of the export-driven Asian economies experienced the effects of the economic slowdown in the United States and Europe, and certain Asian governments implemented stimulus plans, low-rate monetary policies and currency devaluations. Economic events in any one Asian country may have a significant economic effect on the entire Asian region, as well as on major trading partners outside Asia. Any adverse event in the Asian markets may have a significant adverse effect on some or all of the economies of Asian countries in which the fund invests. Many Asian countries are subject to political risk, including corruption and regional conflict with neighboring countries. In addition, many Asian countries are subject to social and labor risks associated with demands for improved political, economic and social conditions.
Counterparty risk. A financial institution or other counterparty with whom the fund does business, or that underwrites, distributes or guarantees any investments or contracts that the fund owns or is otherwise exposed to, may decline in financial health and become unable to honor its commitments. This could cause losses for the fund or could delay the return or delivery of collateral or other assets to the fund.
Securities lending risk. Securities lending involves the risk that the fund may lose money because the borrower of the loaned securities fails to return the securities in a timely manner or at all. The fund could also lose money in the event of a decline in the value of the collateral provided for the loaned securities or a decline in the value of any investments made with cash collateral. These events, and securities lending in general, could trigger adverse tax consequences for the fund and its investors. For example, if the fund loans its securities, the fund and its investors may lose the ability to treat certain fund distributions associated with those securities as qualified dividend income.
Past Performance
The bar chart and table below provide some indication of the risks of investing in the fund by showing changes in the fund’s performance from year to year and by showing how the fund’s average annual returns compare with those
of the Underlying Index and a broad measure of market performance.The fund’s past performance (before and after taxes) is not necessarily an indication of how the fund will perform in the future. Updated performance information is available on the fund’s website at Xtrackers.com (the website does not form a part of this prospectus).Prior to August 18, 2021, the fund operated with a different investment strategy. Performance would have been different if the fund’s current investment strategy had been in effect. Returns prior to August 18, 2021 reflect those of the fund when it was tracking the prior underlying index.
CALENDAR YEAR TOTAL RETURNS(%)
Average Annual Total Returns
(For periods ended 12/31/2020 expressed as a %)
All after-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of any state or local tax. Your own actual after-tax returns will depend on your tax situation and may differ from what is shown here. After-tax returns are not relevant to investors who hold shares of the fund in tax-deferred accounts such as individual retirement accounts (“IRAs”) or employee-sponsored retirement plans.
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Solactive ISS Emerging
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MSCI ACWI ex USA
ESG Leaders Index |
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1The Solactive ISS Emerging Markets Carbon Reduction & Climate Improvers Index NTR commenced on February 6, 2019 and therefore does not have performance data as of the fund’s inception date.
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Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF
Effective August 18, 2021, the fund changed its underlying index to the Solactive ISS Emerging Markets Carbon Reduction & Climate Improvers Index NTR. Returns prior to August 18, 2021 reflect the performance for the fund when it was seeking investment results of the prior underlying index.
Management
Investment Advisor
DBX Advisors LLC
Portfolio Managers
Bryan Richards, CFA, Vice President of DBX Advisors LLC and Head of Portfolio Engineering, Systematic Investment Solutions, of DWS Investment Management Americas, Inc. Portfolio Manager of the fund. Began managing the fund in 2018.
Patrick Dwyer, Vice President of DBX Advisors LLC and Senior Portfolio Engineer, Systematic Investment Solutions, of DWS Investment Management Americas, Inc. Portfolio Manager of the fund. Began managing the fund in 2018.
Shlomo Bassous, Vice President of DBX Advisors LLC and Portfolio Engineer, Systematic Investment Solutions, of DWS Investment Management Americas, Inc. Portfolio Manager of the fund. Began managing the fund in 2018.
Purchase and Sale of Fund Shares
The fund is an exchange-traded fund (commonly referred to as an “ETF”). Individual fund shares may only be purchased and sold through a brokerage firm. The price of fund shares is based on market price, and because ETF shares trade at market prices rather than NAV, shares may trade at a price greater than NAV (a premium) or less than NAV (a discount). The fund will only issue or redeem shares that have been aggregated into blocks of 50,000 shares or multiples thereof (“Creation Units”) to APs who have entered into agreements with ALPS Distributors, Inc., the fund’s distributor. You may incur costs attributable to the difference between the highest price a buyer is willing to pay to purchase shares of the fund (bid) and the lowest price a seller is willing to accept for shares of the fund (ask) when buying or selling shares (the “bid-ask spread”). Information on the fund’s net asset value, market price, premiums and discounts and bid-ask spreads may be found at Xtrackers.com.
Tax Information
The fund's distributions are generally taxable to you as ordinary income or capital gains, except when your investment is in an IRA, 401(k), or other tax-deferred investment plan. Any withdrawals you make from such tax- advantaged investment plans, however, may be taxable to you.
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 Advisor or other related companies may pay the intermediary for marketing activities and presentations, educational training programs, the support of technology platforms and/or reporting systems or other services related to the sale or promotion of the fund. These payments may create a conflict of interest by influencing the broker-dealer or other intermediary and your salesperson to recommend the fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more information.
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Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF
Additional Information About Fund Strategies, Underlying Index Information and Risks
Investment Objective
Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF (the “fund”), seeks investment results that correspond generally to the performance, before fees and expenses, of the Solactive ISS Emerging Markets Carbon Reduction & Climate Improvers Index NTR (the “Underlying Index”).
Principal Investment Strategies
The fund, using a “passive” or indexing investment approach, seeks investment results that correspond generally to the performance, before fees and expenses, of the Underlying Index, which is comprised of large and mid-capitalization companies in emerging markets countries that meet certain environmental, social and governance (“ESG”) criteria and/or have committed to greenhouse gas emissions reduction targets. The Underlying Index is then weighted in such a manner seeking to align its constituent companies’ greenhouse gas emissions with the long-term global warming target of the Paris Climate Agreement. Under normal circumstances, the Underlying Index is rebalanced semi-annually in February and August. 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.
In constructing the Underlying Index, Solactive AG (“Solactive”) begins with the universe of securities comprising the parent index, the Solactive GBS Emerging Markets Large & Mid Cap USD Index PR, which is designed to track the performance of the large and mid-capitalization segment covering approximately the largest 85% of the free-float market capitalization in the emerging markets. From this universe of securities, Solactive first seeks to identify only those companies operating in accordance with established standards for responsible ESG conduct in the following manner:
Companies in the parent universe are initially excluded from the Underlying Index for:
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Failure to observe established norms with respect to environment, human rights, corruption and labor rights (or if incorporated in countries identified with high social risk);
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Involvement in controversial weapons (i.e., chemical biological or nuclear weapons, depleted uranium, cluster munitions and anti-personnel mines); or
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Deriving a specified percentage of revenues from one of the following sectors (“Sector Criteria”): fossil fuel, oil sands, military, pornography, tobacco, gambling, alcohol or cannabis.
All companies that do not trigger an exclusion listed above are included in the Underlying Index. In addition, companies that were initially excluded based on the Sector Criteria or for being incorporated in countries identified with high social risk may still be included in the Underlying Index if they have committed to setting “science-based” greenhouse gas emissions reduction targets by signing on to the Science Based Targets initiative (“SBTi”). Reduction targets are considered “science-based” if they are in line with the level of decarbonization required to keep global temperature increase below 2°C as described in the Fifth Assessment Report of the Intergovernmental Panel on Climate Change (IPCCAR5) and determined by the SBTi.
Once the constituents of the Underlying Index are selected pursuant to the above criteria, the constituents are then weighted in a manner designed to reduce the “carbon intensity” (defined, for each company included in the Underlying Index, as its greenhouse gas emissions as a percentage of the company’s enterprise value including cash) in the following ways:
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Reduce the carbon intensity of the Underlying Index by at least 60% compared to the parent index, and
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Seek a year-over-year carbon intensity reduction target of at least 7%.
Solactive weights each Underlying Index constituent based on its “Carbon Risk Rating,” as calculated by Solactive’s data provider, Institutional Shareholder Services Inc. (“ISS”), with those companies judged to be doing more to reduce emissions being weighted more heavily. A company’s Carbon Risk Rating is a composite score based on
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two components: (i) the company’s Carbon Risk Classification, and (ii) the company’s Carbon Performance Score, each as assessed by ISS.
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The Carbon Risk Classification assesses a company’s exposure to carbon-related transition risks by estimating the emission intensity in the company’s business model, based on its industry and business activities.
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The Carbon Performance Score evaluates the current carbon-related performance of a company as well as a company’s risk management and measures to reduce its carbon intensity in the future.
Under the Underlying Index’s methodology, a company may have considerable carbon intensity today, resulting in a poor Carbon Risk Classification, and at the same time be actively working to improve their climate impact and carbon footprint in the future, resulting in a high Carbon Performance Score. These companies are considered to be “climate improvers” and may be included in the Underlying Index.
In calculating the Carbon Risk Classification and the Carbon Performance Score, ISS collects data from a range of public and private sources including company annual reports and sustainability reports, United Nations Global Compact Participant Communications on Progress, Principles for Responsible Investment Signatory Reporting, subscription databases such as the Carbon Disclosure Project, and correspondence with individual companies during the rating process.
The fund uses a full replication indexing strategy to seek to track the Underlying Index. As such, the fund invests directly in the component securities (or a substantial number of the component securities) of the Underlying Index in substantially the same weightings in which they are represented in the Underlying Index. If it is not possible for the fund to acquire component securities due to limited availability or regulatory restrictions, the fund may use a representative sampling indexing strategy to seek to track the Underlying Index instead of a full replication indexing strategy. “Representative sampling” is an indexing strategy that involves investing in a representative sample of securities that collectively has an investment profile similar to the Underlying Index. The securities selected are expected to have, in the aggregate, investment characteristics (based on factors such as market capitalization and industry weightings), fundamental characteristics (such as return variability and yield), and liquidity measures similar to those of the Underlying Index. The fund may or may not hold all of the securities in the Underlying Index when using a representative sampling indexing strategy. The fund will invest at least 80% of its total assets (but typically far more) in component securities (including depositary receipts in respect of such securities) of the Underlying Index.
As of June 30, 2021, the Underlying Index consisted of 1,154 securities, with an average market capitalization of approximately $16.5 billion and a minimum market capitalization of approximately $38.9 million from issuers in the following countries: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Kuwait, Malaysia, Mexico, Pakistan, Peru, Philippines, Qatar, Russia, Saudi Arabia, South Africa, South Korea, Taiwan, Thailand, Turkey and the United Arab Emirates. The fund will normally invest at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in equity securities of issuers from countries classified as emerging markets. Emerging market countries are countries that major international financial institutions, such as the World Bank, generally consider to be less economically mature than developed nations. Emerging market countries can include every nation in the world except the United States, Canada, Japan, Australia, New Zealand and most countries located in Western Europe. As of June 30, 2021, a significant percentage of the Underlying Index was comprised of securities of issuers from China (37.30%) and Taiwan (18.85%).
The fund will concentrate its investments (i.e., hold 25% or more of its total assets) in a particular industry or group of industries to the extent that its Underlying Index is concentrated. As of June 30, 2021, a significant percentage of the Underlying Index was comprised of issuers in the information technology (26.9%), consumer discretionary (20.3%) and financials (20.0%) sectors. The information technology sector includes companies engaged in developing software and providing data processing and outsourced services, along with manufacturing and distributing communications equipment, computers and other electronic equipment and instruments. The consumer discretionary sector includes durable goods, apparel, entertainment and leisure, and automobiles. The financials sector includes companies involved in banking, consumer finance, asset management and custody banks, as well as investment banking and brokerage and insurance.
To the extent that the fund tracks the Underlying Index, the fund’s investment in certain sectors or countries may change over time.
While the fund is currently classified as “non-diversified” under the Investment Company Act of 1940, it may operate as or become classified as “diversified” over time. The fund could again become non-diversified solely as a result of a change in relative market capitalization or index weighting of one or more constituents of the index that the fund is designed to track. Shareholder approval will not be sought when the fund crosses from diversified to non-diversified status under such circumstances.
The fund may invest its remaining assets in other securities, including securities not in the Underlying Index, cash and cash equivalents, money market instruments, such as repurchase agreements or money market funds
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Fund Details
(including money market funds advised by the Advisor or its affiliates (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 are based on the movement of one or more specified factors, such as the movement of a particular stock or stock index) and in futures contracts, options on futures contracts and other types of options and swaps related to its Underlying Index. The fund will not use futures and options for speculative purposes.
The fund may also invest in depositary receipts in respect of equity securities that comprise its Underlying Index to seek performance that corresponds to the fund’s respective Underlying Index. Investments in such depositary receipts will count towards the fund’s 80% investment policy discussed above with respect to instruments that comprise the fund’s Underlying Index.
The fund expects to use futures contracts to a limited extent in seeking performance that corresponds to its Underlying Index.
The fund is not sponsored, endorsed, sold or promoted by Solactive.
Securities lending. The fund may lend its portfolio securities to brokers, dealers and other financial institutions desiring to borrow securities to complete transactions and for other purposes. In connection with such loans, the fund receives liquid collateral equal to at least 102% of the value of the portfolio securities being lent. This collateral is marked to market on a daily basis. The fund may lend its portfolio securities in an amount up to 33 1/3% of its total assets.
Underlying Index Information
Solactive ISS Emerging Markets Carbon Reduction & Climate Improvers Index NTR
Index Description. Solactive ISS Emerging Markets Carbon Reduction & Climate Improvers Index NTR seeks to provide exposure to large and mid-capitalization emerging markets companies that operate in accordance with certain international standards for responsible ESG conduct. The Underlying Index is weighted in a manner designed to align the carbon intensity of the index with long-term global carbon reduction goals.
Defining the Equity Universe. In constructing the Underlying Index, Solactive begins with the universe of securities comprising the parent index, the Solactive GBS Emerging Markets Large & Mid Cap USD Index PR. The parent index is designed to track the performance of the large and mid-capitalization segment covering approximately the largest 85% of the free-float market capitalization in the emerging markets.
Companies in the parent universe are first evaluated based on the following ESG criteria utilized by Solactive. A company in the parent universe will initially be excluded from the Underlying Index based on the following:
Norms
■ a verified ongoing failure to respect established international norms, as set forth in the Principles of the UN Global Compact and the OECD Guidelines for Multinational Enterprises with respect to environment, human rights, corruption and labor rights.
■ incorporated in a country identified with high social risk and the respective country’s state ownership exceeds 50% or the company exhibits alleged failure to respect established international norms, consisting of the Principles of the UN Global Compact and the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles for Business and Human Rights.
Controversial Weapons
■ verified ongoing involvement in the area of controversial weapons (including chemical, biological and nuclear weapons (both under and outside the Treaty on Non-Proliferation of Nuclear Weapons), depleted uranium munitions, cluster munitions, and anti-personnel mines).
Sector Criteria
■ generating revenues (in proportion to total revenues) of greater than 50% from services in the sector of fossil fuels, or greater than 5% from production, distribution or exploration of fossil fuels.
■ generating revenues from the production or exploration of oil sands.
■ generating revenues (in proportion to total revenues) of greater than 50% from services, or greater than 5% from production or distribution in the sector of military equipment.
■ generating revenues (in proportion to total revenues) of greater than 5% in the sector of pornography.
■ generating revenues from the production of pornography.
■ generating revenues (in proportion to total revenues) of greater than 50% from services, or greater than 5% from distribution in the sector of tobacco.
■ generating revenues from the production of tobacco.
■ generating revenues (in proportion to total revenues) of greater than 50% from services, or greater than 5% from production or distribution in the sector of gambling.
■ generating revenues (in proportion to total revenues) of greater than 50% from services, or greater than 5% from production or distribution in the sector of alcohol.
■ generating revenues (in proportion to total revenues) of greater than 50% from services, or greater than 5% from production or distribution in the sector of cannabis.
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Fund Details
All companies in the parent universe that do not trigger one of the exclusions listed above are included in the Underlying Index. However, companies in the parent universe not meeting the Sector Criteria or that are incorporated in countries identified with high social risk may still be included in the Underlying Index if they have committed to science-based emissions reduction targets.
Science-based Emissions Reduction Targets
This factor identifies issuers who have signed a commitment letter with the Science Based Targets initiative (“SBTi”) to develop science-based targets to reduce greenhouse gas emissions. The SBTi is a partnership between the Carbon Disclosure Project, The United Nations Global Compact, the World Resources Institute and the World Wildlife Fund for Nature which seeks to drive ambitious climate action in the private sector by enabling companies to set science-based emissions reductions targets. Targets are considered “science-based” if they are in line with the level of decarbonization required to keep global temperature increase below 2°C as described in the Fifth Assessment Report of the Intergovernmental Panel on Climate Change (IPCCAR5) and determined by the SBTi.
Weighting the Index for Carbon Reduction. Once the constituents of the Underlying Index have been identified, Solactive weights each constituent in such a manner seeking to achieve the carbon reductions described above and thus align the Underlying Index components’ greenhouse gas emissions with the long-term global warming target of the Paris Climate Agreement using the Carbon Risk Rating, as calculated by ISS. The Carbon Risk Rating is derived from two key components, the Carbon Risk Classification and the Carbon Performance Score.
The Carbon Risk Classification assesses a company’s exposure to carbon related transition risks by estimating the emission intensity in the company’s business model, based on its industry and business activities. It considers two elements: (i) the emissions based sector classification, which assesses the average sector emission intensity along the entire business model (including both direct and indirect emissions); and (ii) whether a company’s product and services activities contributes to climate change mitigation, thus creating positive impact, or rather obstructs climate change mitigation, thus constituting an adverse impact.
The Carbon Performance Score evaluates the current carbon related performance of a company as well as a company’s risk management and measures to reduce its carbon intensity in the future, thus addressing both material risk as well as adverse impact. The Carbon Performance Score is based on a combination of quantitative indicators (e.g., current intensity and trend of greenhouse gas emissions), and qualitative indicators (e.g., corporate policies, emission reduction targets and action plans). A company may have considerable carbon intensity today, resulting in a poor Carbon Risk Classification, and at the
same time be actively working to improve their climate impact and carbon footprint in the future, resulting in a high Carbon Performance Score.
In calculating the Carbon Risk Classification and the Carbon Performance Score, ISS collects data from a range of public and private sources including company annual reports and sustainability reports, United Nations Global Compact Participant Communications on Progress, Principles for Responsible Investment Signatory Reporting, subscription databases such as the Carbon Disclosure Project, and correspondence with individual companies during the rating process.
ISS combines the Carbon Risk Classification and Carbon Performance Score to calculate the Carbon Risk Rating, which assesses, on a scale from 0 (poor) to 100 (excellent), how well a company deals with industry-specific climate risks. The scale can be translated into four broader performance categories: Climate Laggard (0-24), Climate Underperformer (25-49), Climate Performer (50-74), and Climate Leader (75-100).
To establish initial weightings, Climate Laggards and Climate Underperformers are underweighted and Climate Performers and Climate Leaders are overweighted. After the initial weightings have been assigned, the Underlying Index is optimized to establish a 60% reduction in carbon intensity relative to the parent index at its origination. At each subsequent rebalance, the Underlying Index is optimized to achieve a year-over-year 7% reduction in carbon intensity relative to its initial calculation, and a carbon-intensity level that is 60% lower than the parent index. Solactive also applies sector weight constraints in weighting the Underlying Index components. After the initial weights (aggregated at a sector level) are established, Solactive’s optimization aims to cap sector deviations at 5% (for sectors whose initial weight is 10% or more of the Underlying Index) or half of the initial sector weight (for sectors whose initial weight is less than 10% of the Underlying Index). However, if this constraint cannot be reached due to the exclusions from the Underlying Index under the ESG criteria described above, the maximum sector weight is set as the maximum possible cumulative initial and active weight of all remaining securities (if any) in the respective sector.
Maintaining the Underlying Index. The Underlying Index is rebalanced semi-annually, effective at the close of business on the first Wednesday in February and August. The constituents of the Underlying Index are drawn from the Solactive GBS Emerging Markets Large & Mid Cap USD Index PR.
The Underlying Index is reviewed on an ongoing basis to account for corporate events such as mergers, takeovers, delistings, suspensions, spin-offs/demergers or bankruptcies. Changes to index composition and related weight adjustments are made as soon as they are effective. Generally, no stocks are added to the Underlying Index between rebalancings. If a stock is dropped from the Solactive GBS
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Fund Details
Emerging Markets Large & Mid Cap USD Index PR, it is also removed from the Underlying Index at the next rebalancing of the Underlying Index. Between rebalancings, a stock may be deleted from the Underlying Index due to corporate events such as mergers, takeovers, delistings, suspensions, spinoffs/ demergers or bankruptcies.
The Underlying Index consists of emerging markets companies. As of June 30, 2021, there were approximately 1,154 components in the Underlying Index.
Under normal circumstances, the Underlying Index is rebalanced semi-annually in February and August. 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.
During extraordinary market conditions, the Index Provider may delay any scheduled rebalancing of the Underlying Index. During any such delay it is possible that the Underlying Index will deviate from the Underlying Index’s stated methodology.
Main Risks
As with any investment, you could lose all or part of your investment in the fund, and the fund’s performance could trail that of other investments. The fund is subject to the main risks noted below, any of which may adversely affect the fund’s net asset value (“NAV”), trading price, yield, total return and ability to meet its investment objective.
ESG investment strategy risk. The Underlying Index’s ESG methodology, and thus the fund’s investment strategy, limits the types and number of investment opportunities available to the fund and, as a result, the fund may underperform other funds that do not have an ESG focus. The Underlying Index’s ESG methodology may result in the fund investing in securities or industry sectors that underperform the market as a whole or underperform other funds screened for ESG standards. The ESG scores used in the Underlying Index’s ESG methodology are based on publicly available information and/or provided by the companies themselves and such information may be unavailable or unreliable. For those reasons, the index provider may be unsuccessful in creating an index composed of companies that exhibit positive ESG characteristics. Regulatory changes or interpretations regarding the definitions and/or use of ESG criteria could have a material adverse effect on the fund’s ability to invest in accordance with its investment policies and/or achieve its investment objective, as well as the ability of certain classes of investors to invest in funds following an ESG strategy such as the fund.
In addition, companies that fail to meet the Sector Criteria may nevertheless be included in the Underlying Index if they have committed to certain targets regarding climate
change. The Underlying Index therefore may include companies involved in sectors that often are excluded by indices attempting to utilize an ESG approach.
Carbon reduction strategy risk. The Underlying Index’s methodology for identifying companies attempting to reduce their carbon footprint limits the types and number of investment opportunities available to the fund and, as a result, the fund may underperform other funds that do not follow a carbon reduction strategy. Carbon reduction may potentially have an adverse effect on a company’s profitability. Investing in a portfolio of securities of companies attempting to reduce their carbon footprint may impact the Fund’s relative investment performance depending on whether such investments are in or out of favor in the market. The Carbon Risk Rating used to score and weight companies in the Underlying Index is based on publicly available information, third-party data sources and/or provided by the companies themselves and such information may be unavailable or unreliable. In addition, a company's commitment to science-based targets for reduced emissions are voluntary and may not be met by the company, or may be abandoned altogether. For those reasons, the index provider may be unsuccessful in creating an index composed of companies that positively contribute to carbon reduction goals. In addition, the Underlying Index’s methodology allows for the inclusion of companies with high carbon intensity as long as such companies adopt plans to improve their climate impact and carbon footprint in the future. While the Underlying Index’s methodology aims to reflect annual reductions in the carbon intensity of the Underlying Index, there is no assurance that such reduction targets will be achieved.
Stock market risk. When stock prices fall, you should expect the value of your investment to fall as well. Stock prices can be hurt by poor management on the part of the stock’s issuer, shrinking product demand and other business risks. These may affect single companies as well as groups of companies. The market as a whole may not favor the types of investments the fund makes, which could adversely affect a stock’s price, regardless of how well the company performs, or the fund’s ability to sell a stock at an attractive price. There is a chance that stock prices overall will decline because stock markets tend to move in cycles, with periods of rising and falling prices. Events in the US and global financial markets, including actions taken by the US Federal Reserve or foreign central banks to stimulate or stabilize economic growth, may at times result in unusually high market volatility which could negatively affect performance. To the extent that the fund invests in a particular geographic region, capitalization or sector, the fund’s performance may be affected by the general performance of that region, capitalization or sector.
Market disruption risk. Geopolitical and other events, including war, terrorism, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and in the future may lead, to disruptions
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in the US and world economies and markets, which may increase financial market volatility and have significant adverse direct or indirect effects on the fund and its investments. Market disruptions could cause the fund to lose money, experience significant redemptions, and encounter operational difficulties. Although multiple asset classes may be affected by a market disruption, the duration and effects may not be the same for all types of assets.
Recent market disruption events include the pandemic spread of the novel coronavirus known as COVID-19, and the significant uncertainty, market volatility, decreased economic and other activity, increased government activity, including economic stimulus measures, and supply chain disruptions that it has caused. The full effects, duration and costs of the COVID-19 pandemic are impossible to predict, and the circumstances surrounding the COVID-19 pandemic will continue to evolve, including the risk of future increased rates of infection due to low vaccination rates and/or the lack of effectiveness of current vaccines against new variants. The pandemic has affected and may continue to affect certain countries, industries, economic sectors, companies and investment products more than others, may exacerbate existing economic, political, or social tensions and may increase the probability of an economic recession or depression. The fund and its investments may be adversely affected by the effects of the COVID-19 pandemic, and the pandemic may result in the fund and its service providers experiencing operational difficulties in coordinating a remote workforce and implementing their business continuity plans, among others.
The disruptions caused by the COVID-19 pandemic may magnify the impact of each of the other risks described in this “MAIN RISKS” section and may increase volatility in one or more markets in which the fund invests leading to the potential for greater losses for the fund.
Emerging market securities risk. Investment in emerging markets subjects the fund to a greater risk of loss than investments in a developed market. This is due to, among other things, (i) greater market volatility, (ii) lower trading volume, (iii) political and economic instability, (iv) high levels of inflation, deflation or currency devaluation, (v) greater risk of market shut down, (vi) more governmental limitations on foreign investments and limitations on repatriation of invested capital than those typically found in a developed market, and (vii) the risk that companies may be held to lower disclosure, corporate governance, auditing and financial reporting standards than companies in more developed markets.
The financial stability of issuers (including governments) in emerging market countries may be more precarious than in other countries. As a result, there will tend to be an increased risk of price volatility in the fund’s investments in emerging market countries, which may be magnified by currency fluctuations relative to the US dollar.
Settlement practices for transactions in foreign markets, particularly in emerging markets, may differ from those in US markets. Such differences include delays beyond periods customary in the US and practices, such as delivery of securities prior to receipt of payment, which increase the likelihood of a “failed settlement.” Failed settlements can result in losses to the fund. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle, and governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. Local agents are held only to the standards of care of their local markets.
Foreign investment risk. The fund faces the risks inherent in foreign investing. Adverse political, economic or social developments could undermine the value of the fund’s investments or prevent the fund from realizing the full value of its investments. Financial reporting standards for companies based in foreign markets differ from those in the US. Additionally, foreign securities markets generally are smaller and less liquid than US markets. To the extent that the fund invests in non-US dollar denominated foreign securities, changes in currency exchange rates may affect the US dollar value of foreign securities or the income or gain received on these securities.
Foreign governments may restrict investment by foreigners, limit withdrawal of trading profit or currency from the country, restrict currency exchange or seize foreign investments. In addition, the fund may be limited in its ability to exercise its legal rights or enforce a counterparty's legal obligations in certain jurisdictions outside of the US. The investments of the fund may also be subject to foreign withholding taxes. Foreign brokerage commissions and other fees are generally higher than those for US investments, and the transactions and custody of foreign assets may involve delays in payment, delivery or recovery of money or investments.
Foreign markets can have liquidity risks beyond those typical of US markets. Because foreign exchanges generally are smaller and less liquid than US exchanges, buying and selling foreign investments can be more difficult and costly. Relatively small transactions can sometimes materially affect the price and availability of securities. In certain situations, it may become virtually impossible to sell an investment at a price that approaches portfolio management’s estimate of its value. For the same reason, it may at times be difficult to value the fund’s foreign investments. In addition, because non-US markets may be open on days when the fund does not price its shares, the value of the securities in the fund’s portfolio may change on days when shareholders will not be able to purchase or sell the fund’s shares.
Depositary receipt risk. Foreign investments in American Depositary Receipts and other depositary receipts may be less liquid than the underlying shares in their primary trading market. Certain of the depositary receipts in which
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the fund invests may be unsponsored depositary receipts. Unsponsored depositary receipts may not provide as much information about the underlying issuer and may not carry the same voting privileges as sponsored depositary receipts. Unsponsored depositary receipts are issued by one or more depositaries in response to market demand, but without a formal agreement with the company that issues the underlying securities.
Currency risk. Changes in currency exchange rates and the relative value of non-US currencies may affect the value of the fund’s investment and the value of your fund shares. Because the fund’s NAV is determined on the basis of the US dollar and the fund does not attempt to hedge against changes in the value of non-US currencies, investors may lose money if the foreign currency depreciates against the US dollar, even if the foreign currency value of the fund’s holdings in that market increases. Conversely, the dollar value of your investment in the fund may go up if the value of the foreign currency appreciates against the US dollar. The value of the US dollar measured against other currencies is influenced by a variety of factors. These factors include: interest rates, national debt levels and trade deficits, changes in balances of payments and trade, domestic and foreign interest and inflation rates, global or regional political, economic or financial events, monetary policies of governments, actual or potential government intervention, and global energy prices. Political instability, the possibility of government intervention and restrictive or opaque business and investment policies may also reduce the value of a country’s currency. Government monetary policies and the buying or selling of currency by a country’s government may also influence exchange rates. Currency exchange rates can be very volatile and can change quickly and unpredictably. Therefore, the value of an investment in the fund may also go up or down quickly and unpredictably and investors may lose money.
Medium-sized company risk. Medium-sized company stocks tend to be more volatile than large company stocks. Because stock analysts are less likely to follow medium-sized companies, less information about them is available to investors. Industry-wide reversals may have a greater impact on medium-sized companies, since they lack the financial resources of larger companies. Medium-sized company stocks are typically less liquid than large company stocks.
Liquidity risk. In certain situations, it may be difficult or impossible to sell an investment at an acceptable price. This risk can be ongoing for any security that does not trade actively or in large volumes, for any security that trades primarily on smaller markets, and for investments that typically trade only among a limited number of large investors (such as certain types of derivatives or restricted securities). In unusual market conditions, even normally
liquid securities may be affected by a degree of liquidity risk. This may affect only certain securities or an overall securities market.
Although the fund primarily seeks to redeem shares of the fund on an in-kind basis, if the fund is forced to sell underlying investments at reduced prices or under unfavorable conditions to meet redemption requests or other cash needs, the fund may suffer a loss. This may be magnified in circumstances where redemptions from the fund may be higher than normal.
Focus risk. To the extent that the fund focuses its investments in particular industries, asset classes or sectors of the economy, any market price movements, regulatory or technological changes, or economic conditions affecting companies in those industries, asset classes or sectors may have a significant impact on the fund’s performance.
Information technology sector risk. To the extent that the fund invests significantly in the information technology sector, the fund will be sensitive to changes in, and the fund’s performance may depend to a greater extent on, the overall condition of the information technology sector. Information technology companies are particularly vulnerable to government regulation and competition, both domestically and internationally, including competition from foreign competitors with lower production costs. Information technology companies also face competition for services of qualified personnel. Additionally, the products of information technology companies may face obsolescence due to rapid technological development and frequent new product introduction by competitors. Finally, information technology companies are heavily dependent on patent and intellectual property rights, the loss or impairment of which may adversely affect profitability.
Consumer discretionary sector risk. To the extent that the fund invests significantly in the consumer discretionary sector, the fund will be sensitive to changes in, and the fund’s performance may depend to a greater extent on, the overall condition of the consumer discretionary sector. Companies engaged in the consumer discretionary sector are subject to fluctuations in supply and demand. These companies may also be adversely affected by changes in consumer spending as a result of world events, political and economic conditions, commodity price volatility, changes in exchange rates, imposition of import controls, increased competition, depletion of resources and labor relations.
Financials sector risk. To the extent that the fund invests significantly in the financials sector, the fund will be sensitive to changes in, and the fund’s performance may depend to a greater extent on, the overall condition of the financials sector. The financials sector is subject to extensive government regulation, can be subject to relatively rapid change due to increasingly blurred distinctions between service segments, and can be significantly
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affected by the availability and cost of capital funds, changes in interest rates, the rate of corporate and consumer debt defaults, and price competition.
Numerous financial companies have experienced substantial declines in the valuations of their assets, taken action to raise capital (such as the issuance of debt or equity securities), or even ceased operations. These actions have caused the securities of many financial companies to experience a dramatic decline in value. Moreover, certain financial companies have avoided collapse due to intervention by governmental regulatory authorities, but such interventions have often not averted a substantial decline in the value of such companies’ common stock. Issuers that have exposure to the real estate, mortgage and credit markets have been particularly affected by the foregoing events and the general market turmoil, and it is uncertain whether or for how long these conditions will continue.
Passive investing risk. Unlike a fund that is actively managed, in which portfolio management buys and sells securities based on research and analysis, the fund invests in securities included in, or representative of, the Underlying Index, regardless of their investment merits. Because the fund is designed to maintain a high level of exposure to the Underlying Index at all times, portfolio management generally will not buy or sell a security unless the security is added or removed, respectively, from the Underlying Index, and will not take any steps to invest defensively or otherwise reduce the risk of loss during market downturns.
Index-related risk. The fund seeks investment results that correspond generally to the performance, before fees and expenses, of the Underlying Index as published by the index provider. There is no assurance that the Underlying Index provider will compile the Underlying Index accurately, or that the Underlying Index will be determined, composed or calculated accurately. Market disruptions could cause delays in the Underlying Index’s rebalancing schedule. During any such delay, it is possible that the Underlying Index and, in turn, the fund will deviate from the Underlying Index’s stated methodology and therefore experience returns different than those that would have been achieved under a normal rebalancing schedule. Generally, the index provider does not provide any warranty, or accept any liability, with respect to the quality, accuracy or completeness of the Underlying Index or its related data, and does not guarantee that the Underlying Index will be in line with its stated methodology. Errors in the Underlying Index data, the Underlying Index computations and/or the construction of the Underlying Index in accordance with its stated methodology may occur from time to time and may not be identified and corrected by the index provider for a period of time or at all, which may have an adverse impact on the fund and its shareholders. The Advisor and its affiliates do not provide any warranty or guarantee against
such errors. Therefore, the gains, losses or costs associated with the index provider’s errors will generally be borne by the fund and its shareholders.
Index-related risk may be higher for a fund that tracks an index comprised of, or an index that includes, foreign securities, and in particular emerging markets securities, because regulatory and reporting requirements may differ from those in the US, resulting in a heightened risk of errors in the index data, index computation and/or index construction due to unreliable, out-dated or unavailable information.
Tracking error risk. The fund may be subject to tracking error, which is the divergence of the fund’s performance from that of the Underlying Index. The performance of the fund may diverge from that of the Underlying Index for a number of reasons, including operating expenses, transaction costs, cash flows and operational inefficiencies. The fund’s return also may diverge from the return of the Underlying Index because the fund bears the costs and risks associated with buying and selling securities (especially when rebalancing the fund’s securities holdings to reflect changes in the Underlying Index) while such costs and risks are not factored into the return of the Underlying Index. Transaction costs, including brokerage costs, will decrease the fund’s NAV to the extent not offset by the transaction fee payable by an “Authorized Participant” (“AP”). Market disruptions and regulatory restrictions could have an adverse effect on the fund’s ability to adjust its exposure in order to track the Underlying Index. To the extent that portfolio management uses a representative sampling approach (investing in a representative selection of securities included in the Underlying Index rather than all securities in the Underlying Index), such approach may cause the fund’s return to not be 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. In addition, the fund may not be able to invest in certain securities included in the Underlying Index, or invest in them in the exact proportions in which they are represented in the Underlying Index, due to government imposed legal restrictions or limitations, a lack of liquidity in the markets in which such securities trade, potential adverse tax consequences or other regulatory reasons. To the extent the fund calculates its net asset value based on fair value prices and the value of the Underlying Index is based on market prices (i.e., the value of the Underlying Index is not based on fair value prices), the fund’s ability to track the Underlying Index may be adversely affected. Tracking error risk may be heightened during times of increased market volatility or other unusual market conditions. For tax efficiency purposes, the fund may sell certain securities, and such sale may cause the fund to realize a loss and deviate from the performance of the Underlying Index. In light of the factors discussed above, the fund’s return may deviate significantly from the return of the Underlying Index.
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Tracking error risk may be higher for funds that track indices with significant weight in foreign issuers, and in particular emerging markets issuers, than funds that do not track such indices.
For purposes of calculating the fund’s net asset value, the value of assets denominated in non-US currencies is converted into US dollars using prevailing market rates on the date of valuation as quoted by one or more data service providers. This conversion may result in a difference between the prices used to calculate the fund’s net asset value and the prices used by the Underlying Index, which, in turn, could result in a difference between the fund’s performance and the performance of the Underlying Index.
The need to comply with the tax diversification and other requirements of the Internal Revenue Code of 1986, as amended, may also impact the fund’s ability to replicate the performance of the Underlying Index. In addition, if the fund utilizes derivative instruments or holds other instruments that are not included in the Underlying Index, the fund’s return may not correlate as well with the returns of the Underlying Index as would be the case if the fund purchased all the securities in the Underlying Index directly. Actions taken in response to proposed corporate actions could result in increased tracking error.
Market price risk. Fund shares are listed for trading on an exchange and are bought and sold in the secondary market at market prices. The market prices of shares will fluctuate, in some cases materially, in response to changes in the NAV and supply and demand for shares. As a result, the trading prices of shares may deviate significantly from the NAV during periods of market volatility. Differences between secondary market prices and the value of the fund’s holdings may be due largely to supply and demand forces in the secondary market, which may not be the same forces as those influencing prices for securities held by the fund at a particular time. The Advisor cannot predict whether shares will trade above, below or at their NAV. Given the fact that shares can be created and redeemed in Creation Units, the Advisor believes that large discounts or premiums to the NAV of shares should not be sustained in the long-term. In addition, there may be times when the market price and the value of the fund’s holdings vary significantly and you may pay more than the value of the fund’s holdings when buying shares on the secondary market, and you may receive less than the value of the fund’s holdings when you sell those shares. While the creation/redemption feature is designed to make it likely that shares normally will trade close to the value of the fund’s holdings, disruptions to creations and redemptions, including disruptions at market makers, APs or market participants, or during periods of significant market volatility, may result in trading prices that differ significantly from the value of the fund’s holdings. Although market makers will generally take advantage of differences between the NAV and the market price of fund shares
through arbitrage opportunities, there is no guarantee that they will do so. If market makers exit the business or are unable to continue making markets in fund’s shares, shares may trade at a discount to NAV like closed-end fund shares and may even face delisting (that is, investors would no longer be able to trade shares in the secondary market). The market price of shares, like the price of any exchange-traded security, includes a “bid-ask spread” charged by the exchange specialist, market makers or other participants that trade the particular security. In times of severe market disruption, the bid-ask spread often increases significantly. This means that shares may trade at a discount to the fund’s NAV, and the discount is likely to be greatest when the price of shares is falling fastest, which may be the time that you most want to sell your shares. There are various methods by which investors can purchase and sell shares of the funds and various orders that may be placed. Investors should consult their financial intermediary before purchasing or selling shares of the fund.
In addition, the securities held by the fund may be traded in markets that close at a different time than an exchange. Liquidity in those securities may be reduced after the applicable closing times. Accordingly, during the time when an exchange is open but after the applicable market closing, fixing or settlement times, bid-ask spreads and the resulting premium or discount to the shares’ NAV is likely to widen. More generally, secondary markets may be subject to irregular trading activity, wide bid-ask spreads and extended trade settlement periods, which could cause a material decline in the fund’s NAV. The bid-ask spread varies over time for shares of the fund based on the fund’s trading volume and market liquidity, and is generally lower if the fund has substantial trading volume and market liquidity, and higher if the fund has little trading volume and market liquidity (which is often the case for funds that are newly launched or small in size). The fund’s bid-ask spread may also be impacted by the liquidity of the underlying securities held by the fund, particularly for newly launched or smaller funds or in instances of significant volatility of the underlying securities. The fund’s investment results are measured based upon the daily NAV of the fund. Investors purchasing and selling shares in the secondary market may not experience investment results consistent with those experienced by those APs creating and redeeming shares directly with the fund. In addition, transactions by large shareholders may account for a large percentage of the trading volume on an exchange and may, therefore, have a material effect on the market price of the fund’s shares.
Operational and technology risk. Cyber-attacks, disruptions, or failures that affect the fund’s service providers or counterparties, issuers of securities held by the fund, or other market participants may adversely affect the fund and its shareholders, including by causing losses for the fund or impairing fund operations. For example, the fund’s
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or its service providers’ assets or sensitive or confidential information may be misappropriated, data may be corrupted and operations may be disrupted (e.g., cyber-attacks, operational failures or broader disruptions may cause the release of private shareholder information or confidential fund information, interfere with the processing of shareholder transactions, impact the ability to calculate the fund’s net asset value and impede trading). Market events and disruptions also may trigger a volume of transactions that overloads current information technology and communication systems and processes, impacting the ability to conduct the fund’s operations.
While the fund and its service providers may establish business continuity and other plans and processes that seek to address the possibility of and fallout from cyber-attacks, disruptions or failures, there are inherent limitations in such plans and systems, including that they do not apply to third parties, such as fund counterparties, issuers of securities held by the fund or other market participants, as well as the possibility that certain risks have not been identified or that unknown threats may emerge in the future and there is no assurance that such plans and processes will be effective. Among other situations, disruptions (for example, pandemics or health crises) that cause prolonged periods of remote work or significant employee absences at the fund’s service providers could impact the ability to conduct the fund’s operations. In addition, the fund cannot directly control any cybersecurity plans and systems put in place by its service providers, fund counterparties, issuers of securities held by the fund or other market participants.
Cyber-attacks may include unauthorized attempts by third parties to improperly access, modify, disrupt the operations of, or prevent access to the systems of the fund’s service providers or counterparties, issuers of securities held by the fund or other market participants or data within them. In addition, power or communications outages, acts of god, information technology equipment malfunctions, operational errors, and inaccuracies within software or data processing systems may also disrupt business operations or impact critical data.
Cyber-attacks, disruptions, or failures may adversely affect the fund and its shareholders or cause reputational damage and subject the fund to regulatory fines, litigation costs, penalties or financial losses, reimbursement or other compensation costs, and/or additional compliance costs. In addition, cyber-attacks, disruptions, or failures involving a fund counterparty could affect such counterparty’s ability to meet its obligations to the fund, which may result in losses to the fund and its shareholders. Similar types of operational and technology risks are also present for issuers of securities held by the fund, which could have material adverse consequences for such issuers, and may cause the fund’s investments to lose value. Furthermore, as a result of cyber-attacks, disruptions, or failures, an exchange or market may close or issue
trading halts on specific securities or the entire market, which may result in the fund being, among other things, unable to buy or sell certain securities or financial instruments or unable to accurately price its investments.
For example, the fund relies on various sources to calculate its NAV. Therefore, the fund is subject to certain operational risks associated with reliance on third party service providers and data sources. NAV calculation may be impacted by operational risks arising from factors such as failures in systems and technology. Such failures may result in delays in the calculation of the fund’s NAV and/or the inability to calculate NAV over extended time periods. The fund may be unable to recover any losses associated with such failures.
Non-diversification risk. The fund is classified as non-diversified under the Investment Company Act of 1940, as amended. This means that the fund may invest in securities of relatively few issuers. Thus, the performance of one or a small number of portfolio holdings can affect overall performance.
If the fund becomes classified as “diversified” over time and again becomes non-diversified as a result of a change in relative market capitalization or index weighting of one or more constituents of the index that the fund is designed to track, non-diversification risk would apply.
Authorized Participant concentration risk. The fund may have a limited number of financial institutions that may act as APs. Only APs who have entered into agreements with the fund’s distributor may engage in creation or redemption transactions directly with the fund (as described in the section of this Prospectus entitled “Buying and Selling Shares”). If those APs exit the business or are unable to process creation and/or redemption orders, (including in situations where APs have limited or diminished access to capital required to post collateral) and no other AP is able to step forward to create and redeem in either of these cases, shares may trade at a discount to NAV like closed-end fund shares and may even face delisting (that is, investors would no longer be able to trade shares in the secondary market).
Geographic focus risk. Focusing investments in a single country or few countries, or regions, involves increased political, regulatory and other risks. Market swings in such a targeted country, countries or regions are likely to have a greater effect on fund performance than they would in a more geographically diversified fund.
Risks related to investing in Asia. Investment in securities of issuers in Asia involves risks and special considerations not typically associated with investment in the US securities markets. Certain Asian economies have experienced over-extension of credit, currency devaluations and restrictions, high unemployment, high inflation, decreased exports and economic recessions. Economic events in any one Asian country can have a significant effect on the entire Asian region as well as on major
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trading partners outside Asia, and any adverse effect on some or all of the Asian countries and regions in which the fund invests. The securities markets in some Asian economies are relatively underdeveloped and may subject the fund to higher action costs or greater uncertainty than investments in more developed securities markets. Such risks may adversely affect the value of the fund’s investments.
Governments of many Asian countries have implemented significant economic reforms in order to liberalize trade policy, promote foreign investment in their economies, reduce government control of the economy and develop market mechanisms. There can be no assurance these reforms will continue or that they will be effective. Despite recent reform and privatizations, significant regulation of investment and industry is still pervasive in many Asian countries and may restrict foreign ownership of domestic corporations and repatriation of assets, which may adversely affect fund investments. Governments in some Asian countries are authoritarian in nature, have been installed or removed as a result of military coups or have periodically used force to suppress civil dissent. Disparities of wealth, the pace and success of democratization, and ethnic, religious and racial disaffection have led to social turmoil, violence and labor unrest in some countries. Unanticipated or sudden political or social developments may result in sudden and significant investment losses. Investing in certain Asian countries involves risk of loss due to expropriation, nationalization, or confiscation of assets and property or the imposition of restrictions on foreign investments and on repatriation of capital invested.
Some countries and regions in which the fund invests have experienced acts of terrorism or strained international relations due to territorial disputes, historical animosities or other defense concerns. For example, North and South Korea each have substantial military capabilities, and historical local tensions between the two countries present the risk of war. Any outbreak of hostilities between the two countries could have a severe adverse effect on the South Korean economy and securities markets. These and other security situations may cause uncertainty in the markets of these geographic areas and may adversely affect the performance of local economies.
Risk of investing in China. Investments in China involve certain risks and special considerations, including the following:
Available disclosure about Chinese companies. Chinese companies are required to follow Chinese accounting standards and practices, which only follow international accounting standards to a certain extent. However, the accounting, auditing and financial reporting standards and practices applicable to People’s Republic of China (“China” or the “PRC”) companies, including those listed on US exchanges, may be less rigorous, and there may be significant differences between financial statements prepared
in accordance with Chinese accounting standards and practice and those prepared in accordance with international accounting standards. In particular, the assets and profits appearing on the financial statements of a Chinese issuer may not reflect its financial position or results of operations in the way they would be reflected had such financial statements been prepared in accordance with US Generally Accepted Accounting Principles. The quality of audits in China may be unreliable, which may require enhanced procedures. Consequently, the fund may not be provided the same degree of protection or information as would generally apply in developed countries and the fund may be exposed to significant losses. There is also substantially less publicly available information about Chinese issuers than there is about US issuers. Therefore, disclosure of certain material information may not be made, and less information may be available to the fund and other investors than would be the case if the fund’s investments were restricted to securities of US issuers.
Chinese corporate and securities law. Legal principles relating to corporate affairs and the validity of corporate procedures, directors’ fiduciary duties and liabilities and stockholders’ rights often differ from those that may apply in the US and other countries. Chinese laws providing protection to investors, such as laws regarding the fiduciary duties of officers and directors, are undeveloped and will not provide investors, such as the fund, with protection in all situations where protection would be provided by comparable laws in the US. China lacks a national set of laws that address all issues that may arise with regard to a foreign investor such as the fund. It may therefore be difficult for the fund to enforce its rights as an investor under Chinese corporate and securities laws, and it may be difficult or impossible for the fund to obtain a judgment in court. Moreover, as Chinese corporate and securities laws continue to develop, these developments may adversely affect foreign investors, such as the fund.
Due to restrictions on foreign ownership of Chinese companies imposed under Chinese law, Chinese companies that are listed in the US typically do not offer common stock in the company itself to US investors. Rather, Chinese companies typically offer shares of an offshore shell company that has entered into service and other contracts with the Chinese company. Accordingly, US investors in Chinese companies listed on a US stock exchange do not actually own shares of the Chinese company itself. Moreover, the Chinese government may at any time invalidate or limit the contracts between a Chinese company and the offshore shell company which is offering shares in the US, which may result in the partial or total loss of the value of a US investor’s shares in the offshore shell company even if a direct investment in the Chinese company would retain value.
Chinese securities markets. The securities markets in China have a limited operating history and are not as developed as those in the US. The markets tend to be
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smaller in size, have less liquidity and historically have had greater volatility than markets in the US and some other countries. In addition, under normal market conditions, there is less regulation and monitoring of Chinese securities markets and the activities of investors, brokers and other participants than in the US. Accordingly, issuers of securities in China are not subject to the same degree of regulation as are US issuers with respect to such matters as insider trading rules, tender offer regulation, stockholder proxy requirements and the requirements mandating timely disclosure of information. During periods of significant market volatility, the Chinese government has, from time to time, intervened in its domestic securities markets to a greater degree than would be typical in more developed markets, including both direct and indirect market stabilization efforts, which may affect valuations of Chinese issuers. Stock markets in China are in the process of change and further development. This may lead to trading volatility, difficulty in the settlement and recording of transactions and difficulty in interpreting and applying the relevant regulations.
Hong Kong policy. As part of Hong Kong’s transition from British to Chinese sovereignty in 1997, China agreed to allow Hong Kong to maintain a high degree of autonomy with regard to its political, legal and economic systems for a period of at least 50 years. China controls matters that relate to defense and foreign affairs. Under the agreement, China does not tax Hong Kong, does not limit the exchange of the Hong Kong dollar for foreign currencies and does not place restrictions on free trade in Hong Kong. However, there is no guarantee that China will continue to honor the agreement, and China may change its policies regarding Hong Kong at any time. As of July 2020, the Chinese Standing Committee of the National People's Congress enacted the Law of the PRC on Safeguarding National Security in the Hong Kong Special Administrative Region, (the “Hong Kong Law”), which imposed substantial limits on Hong Kong’s political and legal autonomy in a manner widely considered within Hong Kong and by other countries as a violation of China’s agreement in 1997. Hong Kong has experienced wide protests and extensive turmoil before and after the enactment of this law. Also as of July 2020, Hong Kong is no longer afforded preferential economic treatment by the United States under US law, and there is uncertainty as to how the economy of Hong Kong will be affected. Any further changes in China's policies could adversely affect market conditions and the performance of the Chinese economy and, thus, the value of securities in the fund’s portfolio.
Inflation. Economic growth in China has historically been accompanied by periods of high inflation. Beginning in 2004, the Chinese government commenced the implementation of various measures to control inflation, which included the tightening of the money supply, the raising of interest rates and more stringent control over certain industries. If these measures are not successful, and if inflation
were to steadily increase, the performance of the Chinese economy and the fund’s investments could be adversely affected.
Nationalization and expropriation. After the formation of the Chinese socialist state in 1949, the Chinese government renounced various debt obligations and nationalized private assets without providing any form of compensation. There can be no assurance that the Chinese government will not take similar actions in the future. Accordingly, an investment in the fund involves a risk of a total loss.
Political and economic risk. The economy of China, which has been in a state of transition from a planned economy to a more market oriented economy, differs from the economies of most developed countries in many respects, including the level of government involvement, its state of development, its growth rate, control of foreign exchange, and allocation of resources. Although the majority of productive assets in China are still owned by the PRC government at various levels, in recent years, the PRC government has implemented economic reform measures emphasizing utilization of market forces in the development of the economy of China and a high level of management autonomy. The economy of China has experienced significant growth in recent decades, but growth has been uneven both geographically and among various sectors of the economy. Economic growth has also been accompanied by periods of high inflation. The PRC government has implemented various measures from time to time to control inflation and restrain the rate of economic growth.
For several decades, the PRC government has carried out economic reforms to achieve decentralization and utilization of market forces to develop the economy of the PRC. These reforms have resulted in significant economic growth and social progress. However, there can be no assurance that the PRC government will continue to pursue such economic policies or that such policies, if pursued, will be successful. Any adjustment and modification of those economic policies may have an adverse impact on the securities markets in the PRC as well as the constituent securities of the Underlying Index. Further, the PRC government may from time to time adopt corrective measures to control the growth of the PRC economy which may also have an adverse impact on the capital growth and performance of the fund.
Political changes, social instability and adverse diplomatic developments in the PRC could result in the imposition of additional government restrictions including expropriation of assets, confiscatory taxes or nationalization of some or all of the property held by the issuers of the A-Shares in the fund’s Underlying Index. The laws, regulations, including the investment regulations, government policies and political and economic climate in China may change with little or no advance notice. Any such change
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could adversely affect market conditions and the performance of the Chinese economy and, thus, the value of securities in the fund’s portfolio.
The Chinese government continues to be an active participant in many economic sectors through ownership positions and regulations. The allocation of resources in China is subject to a high level of government control. The Chinese government strictly regulates the payment of foreign currency denominated obligations and sets monetary policy. Through its policies, the government may provide preferential treatment to particular industries or companies. Recently, the Chinese government has become more aggressive about regulating the operations of particular companies or sectors, including large companies which are indirectly listed in the U.S. These regulations may substantially limit or prohibit the operations of such companies and cause investors to lose some or all of the value of their investment. The policies set by the government could have a substantial effect on the Chinese economy and the fund’s investments.
The Chinese economy is export-driven and highly reliant on trade. The performance of the Chinese economy may differ favorably or unfavorably from the US economy in such respects as growth of gross domestic product, rate of inflation, currency depreciation, capital reinvestment, resource self- sufficiency and balance of payments position. The domestic consumer class in China is still emergent, while the economy's dependence on exports may not be sustainable. Adverse changes to the economic conditions of its primary trading partners, such as the European Union, the US, Hong Kong, the Association of South East Asian Nations, and Japan, would adversely affect the Chinese economy and the fund’s investments.
In addition, as much of China’s growth over recent decades has been a result of significant investment in substantial export trade, international trade tensions may arise from time to time which can result in trade tariffs, embargoes, trade limitations, trade wars and other negative consequences. The current political climate has intensified concerns about trade tariffs and a potential trade war between China and the US. These consequences may trigger a significant reduction in international trade, the oversupply of certain manufactured goods, substantial price reductions of goods and possible failure of individual companies and/or large segments of China’s export industry with a potentially severe negative impact to the fund. In addition, it is possible that the continuation or worsening of the current political climate could result in regulatory restrictions being contemplated or imposed in the US or in China that could have a material adverse effect on the fund’s ability to invest in accordance with its investment policies and/or achieve its investment objective. In July 2020, the President’s Working Group on Financial Markets (“PWG”) proposed a number of regulatory changes aimed at addressing potential risks to US investors from investments in issuers that provide limited
access to their financial statements, including Chinese companies. The PWG’s proposals included having the SEC consider encouraging or requiring US registered funds to conduct additional due diligence on an index’s exposure to such issuers and how the index provider addresses concerns arising from limited availability of such issuers’ financial information. If the SEC adopts these proposals, they could have a material adverse effect on the fund’s ability to continue tracking the Underlying Index. In addition, in June 2021, the President of the United States issued an executive order (“CMIC Order”) prohibiting US persons, including the fund, from purchasing or selling publicly traded securities (including publicly traded securities that are derivative of, or are designed to provide exposure to, such securities) of any Chinese company identified as a Chinese Military Industrial Complex Company (“CMIC”). This prohibition, effective August 2, 2021, expands on similar sanctions imposed by the prior administration on certain designated Chinese military companies (“CCMCs”) that took effect in January 2021. To the extent that any company in the Underlying Index is identified as a CMIC at any time (or was previously designated as a CCMC), it may have a material adverse effect on the fund’s ability to track its Underlying Index. Also,in December 2020, the Holding Foreign Companies Accountable Act (“HFCAA”) was signed into law. When implemented, the HFCAA could cause securities of foreign issuers (including China) to be de-listed from US stock exchanges if those companies do not permit US oversight of the auditing of their financial information. The potential impact of the HFCAA is unclear at this time, but to the extent that the fund currently transacts in securities of a foreign company in the Underlying Index on a US exchange but is unable to do so in the future, the fund will have to seek other markets in which to transact in such securities which could increase the fund’s costs and have a material adverse effect on the fund’s ability to continue tracking the Underlying Index. Finally, the Chair of the Securities and Exchange Commission (the “SEC”) announced in July 2021 that the SEC would be requiring additional disclosures about the corporate structure of Chinese companies listing in the US (pursuant to which US investors own shares in an offshore shell company rather than the Chinese company itself) and the risks to U.S. investors, including the risks of such companies being delisted from the US exchange under the HFCAA. Events such as these are difficult to predict and may or may not occur in the future.
China has been transitioning to a market economy since the late seventies, and has only recently opened up to foreign investment and permitted private economic activity. Under the economic reforms implemented by the Chinese government, the Chinese economy has experienced tremendous growth, developing into one of the largest and fastest growing economies in the world. There is no assurance, however, that the Chinese government will not revert to the economic policy of central planning
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that it implemented prior to 1978 or that such growth will be sustained in the future. An economic downturn in China would adversely impact the fund’s investments.
Other sanctions and embargoes. From time to time, certain of the companies in which the fund expects to invest may operate in, or have dealings with, countries subject to sanctions or embargoes imposed by the US government and the United Nations and/or countries identified by the US government as state sponsors of terrorism. A company may suffer damage to its reputation if it is identified as a company which operates in, or has dealings with, countries subject to sanctions or embargoes imposed by the US government and the United Nations and/or countries identified by the US government as state sponsors of terrorism. As an investor in such companies, the fund will be indirectly subject to those risks.
Risks related to investing in Taiwan. Investments in Taiwanese issuers may subject the fund to legal, regulatory, political, currency and economic risks that are specific to Taiwan. Specifically, Taiwan’s geographic proximity and history of political contention with China have resulted in ongoing tensions between the two countries. These tensions may materially affect the Taiwanese economy and its securities market. Taiwan is a small island state with few raw material resources and limited land area and thus it relies heavily on imports for its commodity needs. Any fluctuations or shortages in the commodity markets could have a negative impact on the Taiwanese economy. Also, rising labor costs and increasing environmental consciousness have led some labor-intensive industries to relocate to countries with cheaper work forces, and continued labor outsourcing may adversely affect the Taiwanese economy. Taiwan’s economy also is intricately linked with economies of other Asian countries, which are often emerging market economies that often experience overextensions of credit, frequent and pronounced currency fluctuations, devaluations and restrictions, rising unemployment and fluctuations in inflation. Political and social unrest in other Asian countries could cause further economic and market uncertainty in Taiwan. Taiwan’s economy is export-oriented, so it depends on an open world trade regime and remains vulnerable to fluctuations in the world economy. In particular, the Taiwanese economy is dependent on the economies of Japan and China, and also the US, and a reduction in purchases by any of them of Taiwanese products and services or negative changes in their economies would likely have an adverse impact on the Taiwanese economy.
Risks of investing in Hong Kong. The fund’s investments which are listed and traded in Hong Kong may expose the fund to certain legal, regulatory, political, currency and economic risks. China is Hong Kong’s largest trading partner, both in terms of exports and imports. Any changes in the Chinese economy, trade regulations or currency exchange rates may have an adverse impact on Hong
Kong’s economy. Hong Kong reverted to Chinese sovereignty on July 1, 1997 as a Special Administrative Region of the People’s Republic of China under the principle of “one country, two systems.” Although China is obligated to maintain the current capitalist economic and social system of Hong Kong through June 30, 2047, the continuation of economic and social freedoms enjoyed in Hong Kong is dependent on the government of China. With the enactment of the Hong Kong Law, China has been asserting greater control over Hong Kong’s political and legal systems, which has evoked substantial protests within Hong Kong and policy responses from other countries. China may continue increasing its control over Hong Kong and may further change its policies regarding Hong Kong at any time. Any further attempt by China to tighten its control over Hong Kong’s political, economic or social policies may result in an adverse effect on Hong Kong’s economy. Hong Kong is located in a part of the world that has historically been prone to natural disasters such as earthquakes and flooding and is economically sensitive to environmental events. Any such event could result in a significant adverse impact on the Hong Kong economy.
Counterparty risk. A financial institution or other counterparty with whom the fund does business, or that underwrites, distributes or guarantees any investments or contracts that the fund owns or is otherwise exposed to, may decline in financial health and become unable to honor its commitments. This could cause losses for the fund or could delay the return or delivery of collateral or other assets to the fund.
Securities lending risk. Securities lending involves the risk that the fund may lose money because the borrower of the loaned securities fails to return the securities in a timely manner or at all. The fund could also lose money in the event of a decline in the value of the collateral provided for the loaned securities or a decline in the value of any investments made with cash collateral. These events, and securities lending in general, could trigger adverse tax consequences for the fund and its investors. For example, if the fund loans its securities, the fund and its investors may lose the ability to treat certain fund distributions associated with those securities as qualified dividend income.
Derivatives risk. Derivatives are financial instruments, such as futures and swaps, whose values are based on the value of one or more indicators, such as a security, asset, currency, interest rate, or index. Derivatives involve risks different from, and possibly greater than, the risks associated with investing directly in securities and other more traditional investments. For example, derivatives involve the risk of mispricing or improper valuation and the risk that changes in the value of a derivative may not correlate perfectly with the underlying indicator. Derivative transactions can create investment leverage, may be highly volatile and the fund could lose more than the amount it invests. Many derivative transactions are entered into “over-the-counter” (i.e., not on an exchange or contract market);
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as a result, the value of such a derivative transaction will depend on the ability and the willingness of the fund’s counterparty to perform its obligations under the transaction. If a counterparty were to default on its obligations, the fund’s contractual remedies against such counterparty may be subject to bankruptcy and insolvency laws, which could affect the fund’s rights as a creditor (e.g., the fund may not receive the net amount of payments that it is contractually entitled to receive). A liquid secondary market may not always exist for the fund’s derivative positions at any time.
Futures risk. The value of a futures contract tends to increase and decrease in tandem with the value of the underlying instrument. Depending on the terms of the particular contract, futures contracts are settled through either physical delivery of the underlying instrument on the settlement date or by payment of a cash settlement amount on the settlement date. A decision as to whether, when and how to use futures involves the exercise of skill and judgment and even a well-conceived futures transaction may be unsuccessful because of market behavior or unexpected events. In addition to the derivatives risks discussed above, the prices of futures can be highly volatile, using futures can lower total return and the potential loss from futures can exceed the fund’s initial investment in such contracts.
Other Policies and Risks
While the previous pages describe the main points of the fund’s strategy and risks, there are a few other matters to know about:
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Each of the policies described herein, including the investment objective and 80% investment policies of the fund, constitutes a non-fundamental policy that may be changed by the Board without shareholder approval. The fund’s 80% investment policies require 60 days’ prior written notice to shareholders before they can be changed. Certain fundamental policies of the fund are set forth in the SAI.
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Because the fund seeks to track its Underlying Index, the fund does not invest defensively and the fund will not invest in money market instruments or other short-term investments as part of a temporary defensive strategy to protect against potential market declines.
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The fund may borrow money from a bank up to a limit of 10% of the value of its assets, but only for temporary or emergency purposes.
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The fund may borrow money under a credit facility to the extent necessary for temporary or emergency purposes, including the funding of shareholder redemption requests, trade settlements, and as necessary to distribute to shareholders any income necessary to maintain the fund’s status as a regulated investment company (“RIC”).
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From time to time a third party, the Advisor and/or its affiliates may invest in the fund and hold its investment for a specific period of time in order for the fund to achieve size or scale. There can be no assurance that any such entity would not redeem its investment or that the size of the fund would be maintained at such levels. In order to comply with applicable law, it is possible that the Advisor or its affiliates, to the extent they are invested in the fund, may be required to redeem some or all of their ownership interests in the fund prematurely or at an inopportune time.
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Secondary market trading in fund shares may be halted by a stock exchange because of market conditions or other reasons. In addition, trading in fund shares on a stock exchange or in any market may be subject to trading halts caused by extraordinary market volatility pursuant to “circuit breaker” rules on the exchange or market. If a trading halt or unanticipated early closing of a stock exchange occurs, a shareholder may be unable to purchase or sell shares of the fund. There can be no assurance that the requirements necessary to maintain the listing or trading of fund shares will continue to be met or will remain unchanged or that shares will trade with any volume, or at all, in any secondary market. As with all other exchange traded securities, shares may be sold short and may experience increased volatility and price decreases associated with such trading activity.
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From time to time, the fund may have a concentration of shareholder accounts holding a significant percentage of shares outstanding. Investment activities of these shareholders could have a material impact on the fund. For example, the fund may be used as an underlying investment for other registered investment companies.
Portfolio Holdings Information
A description of DBX ETF Trust’s (“Trust”) policies and procedures with respect to the disclosure of the fund’s portfolio securities is available in the fund’s SAI. The top holdings of the fund can be found at Xtrackers.com. Fund fact sheets provide information regarding the fund’s top holdings and may be requested by calling 1-855-329-3837 (1-855-DBX-ETFS).
Who Manages and Oversees the Fund
The Investment Advisor
DBX Advisors LLC (“Advisor”), with headquarters at 875 Third Avenue, New York, NY 10022, is the investment advisor for the fund. Under the oversight of the Board, the Advisor (or a subadvisor, if applicable, under the oversight of the Advisor) makes the investment decisions, buys and sells securities for the fund and conducts research that leads to these purchase and sale decisions.
The Advisor is an indirect, wholly-owned subsidiary of DWS Group GmbH & Co. KGaA (“DWS Group”), a separate, publicly-listed financial services firm that is an indirect, majority-owned subsidiary of Deutsche Bank AG.
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Founded in 2010, the Advisor managed approximately $22.2 billion in 35 operational exchange-traded funds, as of July 31, 2021.
DWS represents the asset management activities conducted by DWS Group or any of its subsidiaries, including the Advisor and other affiliated investment advisors.
DWS is a global organization that offers a wide range of investing expertise and resources, including hundreds of portfolio managers and analysts and an office network that reaches the world’s major investment centers. This well- resourced global investment platform brings together a wide variety of experience and investment insight across industries, regions, asset classes and investing styles.
The Advisor may utilize the resources of its global investment platform to provide investment management services through branch offices or affiliates located outside the US. In some cases, the Advisor may also utilize its branch offices or affiliates located in the US or outside the US to perform certain services, such as trade execution, trade matching and settlement, or various administrative, back-office or other services. To the extent services are performed outside the US, such activity may be subject to both US and foreign regulation. It is possible that the jurisdiction in which the Advisor or its affiliate performs such services may impose restrictions or limitations on portfolio transactions that are different from, and in addition to, those in the US.
Management Fee. Under the Investment Advisory Agreement, the Advisor is responsible for substantially all expenses of the fund, including the cost of transfer agency, custody, fund administration, compensation paid to the Independent Board Members, legal, audit and other services, except for the fee payments to the Advisor under the Investment Advisory Agreement (also known as a “unitary advisory fee”), interest expense, acquired fund fees and expenses, taxes, brokerage expenses, distribution fees or expenses (if any), litigation expenses and other extraordinary expenses.
For its services to the fund, during the most recent fiscal year, the Advisor received aggregate unitary advisory fees at the following annual rates as a percentage of the fund’s average daily net assets.
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Effective August 18, 2021, the Advisor receives a unitary advisory fee at an annual rate equal to 0.15% of the fund's daily net assets. Prior to August 18, 2021, the Advisor received a unitary advisory fee at an annual rate equal to 0.16% of the fund's average daily net assets.
A discussion regarding the basis for the Board's approval of the fund’s Investment Advisory Agreement will be contained in the fund's annual report for the period ended August 31, 2021. For information on how to obtain shareholder reports, see the back cover.
Multi-Manager Structure. The Advisor and the Trust may rely on an exemptive order (the “Order”) from the SEC that permits the Advisor to enter into investment sub-advisory agreements with unaffiliated and affiliated subadvisors without obtaining shareholder approval. The Advisor, subject to the review and approval of the Board, selects subadvisors for the fund and supervises, monitors and evaluates the performance of the subadvisor.
The Order also permits the Advisor, subject to the approval of the Board, to replace subadvisors and amend investment subadvisory agreements, including fees, without shareholder approval whenever the Advisor and the Board believe such action will benefit the fund and its shareholders. The Advisor thus has the ultimate responsibility (subject to the ultimate oversight of the Board) to recommend the hiring and replacement of subadvisors as well as the discretion to terminate any subadvisor and reallocate the fund’s assets for management among any other subadvisor(s) and itself. This means that the Advisor is able to reduce the subadvisory fees and retain a larger portion of the management fee, or increase the subadvisory fees and retain a smaller portion of the management fee. Pursuant to the Order, the Advisor is not required to disclose its contractual fee arrangements with any subadvisor. The Advisor compensates the subadvisor out of its management fee.
Management
The following Portfolio Managers are primarily responsible for the day-to-day management of the fund. Each Portfolio Manager functions as a member of a portfolio management team.
Bryan Richards, CFA, Vice President of DBX Advisors LLC and Head of Portfolio Engineering, Systematic Investment Solutions, of DWS Investment Management Americas, Inc. Portfolio Manager of the fund. Began managing the fund in 2018.
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Joined DWS in 2011 with 11 years of industry experience. Prior to joining DWS, he worked in ETF management at XShares Advisors, an ETF issuer based in New York, and before that he served as an equity analyst for Fairhaven Capital LLC, a long/short equity fund.
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Head of Passive Portfolio Management, Americas: New York.
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BS in Finance, Boston College.
Patrick Dwyer, Vice President of DBX Advisors LLC and Senior Portfolio Engineer, Systematic Investment Solutions, of DWS Investment Management Americas, Inc. Portfolio Manager of the fund. Began managing the fund in 2018.
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Joined DWS in 2016 with 16 years of industry experience. Prior to joining DWS, he was the head of Northern Trust’s Equity Index, ETF, and Overlay portfolio management team in Chicago, managing portfolios for North American based clients. His time at Northern Trust included working in New York, Chicago, and in Hong Kong building a portfolio management desk. Prior to joining Northern Trust in 2003, he participated in the Deutsche Asset Management graduate training program. He rotated through the domestic fixed income and US structured equity fund management groups.
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Lead Equity Portfolio Manager, US Passive Equities: New York.
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BS in Finance, Rutgers University.
Shlomo Bassous, Vice President of DBX Advisors LLC and Portfolio Engineer, Systematic Investment Solutions, of DWS Investment Management Americas, Inc. Portfolio Manager of the fund. Began managing the fund in 2018.
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Joined DWS in 2017, with twelve years of industry experience. Prior to joining DWS, Mr. Bassous served as Portfolio Manager at Northern Trust Asset Management where he managed equity portfolios across a variety of global benchmarks. While at Northern Trust, he spent several years in Chicago, London and Hong Kong where he managed portfolios on behalf of institutional clients in North America, Europe, the Middle East and Asia. Before joining Northern Trust in 2007, he worked at The Bank of New York Mellon and Morgan Stanley in a variety of roles supporting equity trading and portfolio management.
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Portfolio Manager for Equities, Passive Asset Management: New York.
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BS in Finance from Sy Syms School of Business, Yeshiva University.
The fund’s Statement of Additional Information provides additional information about a portfolio manager’s investments in the fund, a description of the portfolio management compensation structure and information regarding other accounts managed.
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Additional shareholder information, including how to buy and sell shares of the fund, is available free of charge by calling toll-free: 1-855-329-3837 (1-855-DBX-ETFS) or visiting our website at Xtrackers.com.
Buying and Selling Shares
Shares of the fund are listed for trading on a national securities exchange during the trading day. Shares can be bought and sold throughout the trading day at market prices like shares of other publicly-traded companies. The Trust does not impose any minimum investment for shares of the fund purchased on an exchange. Buying or selling fund shares involves two types of costs that may apply to all securities transactions. When buying or selling shares of the fund through a broker, you will likely incur a brokerage commission or other charges determined by your broker. In addition, you may incur the cost of the “spread” – that is, any difference between the bid price and the ask price. The commission is frequently a fixed amount and may be a significant proportional cost for investors seeking to buy or sell small amounts of shares. The spread varies over time for shares of the fund based on its trading volume and market liquidity, and is generally lower if the fund has a lot of trading volume and market liquidity and higher if the fund has little trading volume and market liquidity.
Shares of the fund may be acquired or redeemed directly from the fund only in Creation Units or multiples thereof, as discussed in the section of this Prospectus entitled “Creations and Redemptions.” Only an AP may engage in creation or redemption transactions directly with the fund. Once created, shares of the fund generally trade in the secondary market in amounts less than a Creation Unit.
The Board has evaluated the risks of market timing activities by the fund’s shareholders. The Board noted that shares of the fund can only be purchased and redeemed directly from the fund in Creation Units by APs and that the vast majority of trading in the fund’s shares occurs on the secondary market. Because the secondary market trades do not involve the fund directly, it is unlikely those trades would cause many of the harmful effects of market timing, including dilution, disruption of portfolio management, increases in the fund’s trading costs and the realization of capital gains. With regard to the purchase or redemption of
Creation Units directly with the fund, to the extent effected in-kind (i.e., for securities), such trades do not cause any of the harmful effects (as previously noted) that may result from frequent cash trades. To the extent trades are effected in whole or in part in cash, the Board noted that such trades could result in dilution to the fund and increased transaction costs, which could negatively impact the fund’s ability to achieve its investment objective. However, the Board noted that direct trading by APs is critical to ensuring that the fund’s shares trade at or close to NAV. In addition, the fund imposes both fixed and variable transaction fees on purchases and redemptions of fund shares to cover the custodial and other costs incurred by the fund in effecting trades. These fees increase if an investor substitutes cash in part or in whole for securities, reflecting the fact that the fund’s trading costs increase in those circumstances. Given this structure, the Board determined that with respect to the fund it is not necessary to adopt policies and procedures to detect and deter market timing of the fund’s shares.
The 1940 Act imposes certain restrictions on investments by registered investment companies in the securities of other investment companies, such as the fund. Registered investment companies are permitted to invest in the fund beyond applicable 1940 Act limitations, subject to certain terms and conditions set forth in an SEC exemptive order issued to the Trust, including that such investment companies enter into an agreement with the Trust.
Shares of the fund trade on the exchange and under the ticker symbol as shown in the table below.
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Book Entry
Shares of the fund 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 of the fund and is recognized as the owner of all shares for all purposes.
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Investors owning shares of the fund are beneficial owners as shown on the records of DTC or its participants. DTC serves as the securities depository for shares of the fund. DTC participants 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 securities that you hold in book-entry or “street name” form.
Share Prices
The trading prices of the fund’s shares in the secondary market generally differ from the fund’s daily NAV per share and are affected by market forces such as supply and demand, economic conditions and other factors. Information regarding the intraday value of shares of the fund, also known as the “indicative optimized portfolio value” (“IOPV”), is disseminated every 15 seconds throughout the trading day by the national securities exchange on which the fund’s shares are listed or by market data vendors or other information providers. The IOPV is based on the current market value of the securities and/or cash required to be deposited in exchange for a Creation Unit. The IOPV does not necessarily reflect the precise composition of the current portfolio of securities held by the fund at a particular point in time nor the best possible valuation of the current portfolio. Therefore, the IOPV should not be viewed as a “real-time” update of the NAV, which is computed only once a day. The IOPV is generally determined by using both current market quotations and/or price quotations obtained from broker-dealers that may trade in the portfolio securities held by the fund. The quotations of certain fund holdings may not be updated during US trading hours if such holdings do not trade in the US. The fund is not involved in, or responsible for, the calculation or dissemination of the IOPV and makes no representation or warranty as to its accuracy.
Determination of Net Asset Value
The NAV of the fund is generally determined once daily Monday through Friday generally as of the regularly scheduled close of business of the New York Stock Exchange (“NYSE”) (normally 4:00 p.m., Eastern time) on each day that the NYSE is open for trading, provided that (a) any fund assets or liabilities denominated in currencies other than the US dollar are translated into US dollars at the prevailing market rates on the date of valuation as quoted by one or more data service providers (as detailed below) and (b) US 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 dividing the result by the number of shares outstanding, rounding to the nearest cent. All valuations are subject to review by the Trust’s Board or its delegate.
In determining NAV, expenses are accrued and applied daily and securities and other assets for which market quotations are available are valued at market value. Equity investments are valued at market value, which is generally determined using the last reported official closing or last trading price on the exchange or market on which the security is primarily traded at the time of valuation. Debt securities’ values are based on price quotations or other equivalent indications of value provided by a third-party pricing service. Any such third-party pricing service may use a variety of methodologies to value some or all of the fund’s debt securities to determine the market price. For example, the prices of securities with characteristics similar to those held by a fund may be used to assist with the pricing process. In addition, the pricing service may use proprietary pricing models. In certain cases, some of a fund’s debt securities may be valued at the mean between the last available bid and ask prices for such securities or, if such prices are not available, at prices for securities of comparable maturity, quality, and type. Short-term securities for which market quotations are not readily available are valued at amortized cost, which approximates market value. Money market securities maturing in 60 days or less will be valued at amortized cost. The approximate value of shares of the applicable fund, an amount representing on a per share basis the sum of the current value of the deposit securities based on their then current market price and the estimated cash component will be disseminated every 15 seconds throughout the trading day through the facilities of the Consolidated Tape Association. Foreign currency exchange rates with respect to the fund’s non-US securities are generally determined as of 4:00 p.m., London time. Generally, trading in non-US securities, US government securities, money market instruments and certain fixed-income securities is substantially completed each day at various times prior to the close of business on the NYSE. The values of such securities used in computing the NAV of the fund are determined as of such earlier times. The value of each Underlying Index will not be calculated and disseminated intra-day. The value and return of the fund’s Underlying Index is calculated once each trading day by the Index Provider based on prices received from the international local markets. In addition, with respect to these funds, the value of assets or liabilities denominated in non-US currencies will be converted into US dollars using prevailing market rates on the date of valuation as quoted by one or more data service providers. Use of a rate different from the rate used by the Index Provider may adversely affect the fund’s ability to track its Underlying Index.
If a security’s market price is not readily available or does not otherwise accurately reflect the fair value of the security, the security will be valued by another method that
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the Adviser believes will better reflect fair value in accordance with the Trust’s valuation policies and procedures approved by the Board. The fund may use fair value pricing in a variety of circumstances, including but not limited to, situations when the value of a security in the fund’s portfolio has been materially affected by events occurring after the close of the market on which the security is principally traded (such as a corporate action or other news that may materially affect the price of a security) or trading in a security has been suspended or halted. Fair value pricing involves subjective judgments and it is possible that a fair value determination for a security is materially different from the value that could be realized upon the sale of the security. In addition, fair value pricing could result in a difference between the prices used to calculate the fund’s NAV and the prices used by the fund’s Underlying Index. This may adversely affect the fund’s ability to track its Underlying Index. With respect to securities that are primarily listed on foreign exchanges, the value of the fund’s portfolio securities may change on days when you will not be able to purchase or sell your shares.
Creations and Redemptions
Prior to trading in the secondary market, shares of the fund are “created” at NAV by market makers, large investors and institutions only in block-size Creation Units of 50,000 shares or multiples thereof (“Creation Units”). The size of a Creation Unit will be subject to change. Each “creator” or AP (which must be a DTC participant) enters into an authorized participant agreement (“Authorized Participant Agreement”) with the fund’s distributor, ALPS Distributors, Inc. (the “Distributor”), subject to acceptance by the Transfer Agent. Only an AP may create or redeem Creation Units. Creation Units generally are issued and redeemed in exchange for a specific basket of securities approximating the holdings of a fund and a designated amount of cash. The fund may pay out a portion of its redemption proceeds in cash rather than through the in-kind delivery of portfolio securities. Except when aggregated in Creation Units, shares are not redeemable by the fund. The prices at which creations and redemptions occur are based on the next calculation of NAV after an order is received in a form described in the Authorized Participant Agreement.
Additional information about the procedures regarding creation and redemption of Creation Units (including the cut-off times for receipt of creation and redemption orders) is included in the SAI.
The fund intends to comply with the US federal securities laws in accepting securities for deposits and satisfying redemptions with redemption securities, including that the securities accepted for deposits and the securities used to satisfy redemption requests will be sold in transactions that would be exempt from registration under the Securities Act of 1933, as amended (“1933 Act”). Further, an AP that is not a “qualified institutional buyer,” as such term is
defined under Rule 144A under the 1933 Act, will not be able to receive fund securities that are restricted securities eligible for resale under Rule 144A.
Dividends and Distributions
General Policies. Dividends from net investment income, if any, are generally declared and paid semi-annually by the fund. Distributions of net realized capital gains, if any, generally are declared and paid once a year, but the Trust may make distributions on a more frequent basis for the fund. The Trust reserves the right to declare special distributions if, in its reasonable discretion, such action is necessary or advisable to preserve its status as a regulated investment company or to avoid imposition of income or excise taxes on undistributed income or realized gains.
Dividends and other distributions on shares of the fund are distributed on a pro rata basis to beneficial owners of such shares. Dividend payments are made through DTC participants and indirect participants to beneficial owners as of the record date with proceeds received from the fund.
Dividend Reinvestment Service. No dividend 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 the fund 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. If this service is available and used, dividend distributions of both income and realized gains will be automatically reinvested in additional whole shares of the fund purchased in the secondary market.
Taxes
As with any investment, you should consider how your investment in shares of the fund will be taxed. The tax information in this Prospectus is provided as general information. You should consult your own tax professional about the tax consequences of an investment in shares of the fund.
Unless your investment in fund shares is made through a tax-exempt entity or tax-deferred retirement account, such as an IRA, you need to be aware of the possible tax consequences when the fund makes distributions or you sell fund shares.
Taxes on Distributions
Distributions from a fund’s net investment income (other than qualified dividend income), including distributions of income from securities lending and distributions out of the fund’s net short-term capital gains, if any, are taxable to you as ordinary income. Distributions by a fund of net long-term capital gains in excess of net short-term capital losses (capital gain dividends) are taxable to you as long-term capital gains, regardless of how long you have held
Prospectus August 18, 2021
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Investing in the Fund
such fund’s shares. Distributions by a fund that qualify as qualified dividend income are taxable to you at long-term capital gain rates. The maximum individual rate applicable to “qualified dividend income” and long-term capital gains is generally either 15% or 20%, depending on whether the individual’s income exceeds certain threshold amounts.
Dividends are eligible to be qualified dividend income to you, if you meet certain holding period requirements discussed below, if they are attributable to qualified dividend income received by a fund. Generally, qualified dividend income includes dividend income from taxable US corporations and qualified non-US corporations, provided that a fund satisfies certain holding period requirements in respect of the stock of such corporations and has not hedged its position in the stock in certain ways. For this purpose, a qualified non-US corporation means any non-US corporation that is eligible for benefits under a comprehensive income tax treaty with the US which includes an exchange of information program or if the stock with respect to which the dividend was paid is readily tradable on an established US security market. The term excludes a corporation that is a passive foreign investment company.
For a dividend to be treated as qualified dividend income, the dividend must be received with respect to a share of stock held without being hedged by a fund, and to a share of the fund held without being hedged by you, for 61 days during the 121-day period beginning at the date which is 60 days before the date on which such share becomes ex-dividend with respect to such dividend or in the case of certain preferred stock 91 days during the 181-day period beginning 90 days before such date.
In general, your distributions are subject to US federal income tax for the year when they are paid. Certain distributions paid in January, however, may be treated as paid on December 31 of the prior year.
If a fund’s distributions exceed current and accumulated earnings and profits, all or a portion of the distributions made in the taxable year may be re-characterized as a return of capital to shareholders. A return of capital distribution generally will not be taxable but will reduce the shareholder’s cost basis and result in a higher capital gain or lower capital loss when those shares on which the distribution was received are sold.
If you are neither a resident nor a citizen of the US or if you are a non-US entity, a fund’s ordinary income dividends (which include distributions of net short-term capital gains) will generally be subject to a 30% US withholding tax, unless a lower treaty rate applies, provided that withholding tax will generally not apply to any gain or income realized by a non-US shareholder in respect of any distributions of long-term capital gains or upon the sale or other disposition of shares of a fund.
Dividends and interest received by a fund with respect to non-US securities may give rise to withholding and other taxes imposed by non-US countries. Tax conventions between certain countries and the US may reduce or eliminate such taxes. If more than 50% of the total assets of a fund at the close of a year consist of non-US stocks or securities, the fund may “pass through” to you certain non-US income taxes (including withholding taxes) paid by the fund. This means that you would be considered to have received as additional gross income your share of such non-US taxes, but you may, in such case, be entitled to either a corresponding tax deduction in calculating your taxable income, or, subject to certain limitations, a credit in calculating your US federal income tax.
If you are a resident or a citizen of the US, by law, back-up withholding (currently at a rate of 24%) will apply to your distributions and proceeds if you have not provided a taxpayer identification number or social security number and made other required certifications.
Taxes when Shares are Sold
Currently, any capital gain or loss realized upon a sale of fund shares is generally treated as a long-term gain or loss if the shares have been held for more than one year. Any capital gain or loss realized upon a sale of fund shares held for one year or less is generally treated as short-term gain or loss, except that any capital loss on the sale of shares held for six months or less is treated as long-term capital loss to the extent that capital gain dividends were paid with respect to such shares.
Medicare Tax
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 redemptions or other taxable dispositions of fund shares) of US 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 certain threshold amounts.
The foregoing discussion summarizes some of the consequences under current US federal tax law of an investment in the fund. It is not a substitute for personal tax advice. You may also be subject to state and local taxation on fund distributions and sales of shares. Consult your personal tax advisor about the potential tax consequences of an investment in shares of the fund under all applicable tax laws.
Authorized Participants and the Continuous Offering of Shares
Because new shares may be created and issued on an ongoing basis, at any point during the life of the fund a “distribution,” as such term is used in the 1933 Act, may be occurring. Broker-dealers and other persons are cautioned that some activities on their part may,
Prospectus August 18, 2021
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Investing in the Fund
depending on the circumstances, result in their being deemed participants in a distribution in a manner that could render them statutory underwriters and subject to the prospectus delivery and liability provisions of the 1933 Act. Any determination of whether one is an underwriter must take into account all the relevant facts and circumstances of each particular case.
Broker-dealers should also note that dealers who are not “underwriters” but are participating in a distribution (as contrasted to ordinary secondary transactions), and thus dealing with shares that are part of an “unsold allotment” within the meaning of Section 4(3)(C) of the 1933 Act, would be unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the 1933 Act. For delivery of prospectuses to exchange members, the prospectus delivery mechanism of Rule 153 under the 1933 Act is available only with respect to transactions on a national securities exchange.
Certain affiliates of the fund and the Advisor may purchase and resell fund shares pursuant to this Prospectus.
Transaction Fees
APs are charged standard creation and redemption transaction fees to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units. Purchasers and redeemers of Creation Units for cash are required to pay an additional variable charge (up to a maximum of 2% for redemptions, including the standard redemption fee) to compensate for brokerage and market impact expenses. The standard creation and redemption transaction fee for the fund is set forth in the table below. The maximum redemption fee, as a percentage of the amount redeemed, is 2%.
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Xtrackers Emerging
Markets Carbon Reduction
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Climate Improvers ETF |
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Distribution
The Distributor distributes Creation Units for the fund on an agency basis. The Distributor does not maintain a secondary market in shares of the fund. The Distributor has no role in determining the policies of the fund or the securities that are purchased or sold by the fund. The Distributor’s principal address is 1290 Broadway, Suite 1000, Denver, Colorado 80203.
The Advisor and/or its affiliates may pay additional compensation, out of their own assets and not as an additional charge to the fund, to selected affiliated and unaffiliated brokers, dealers, participating insurance companies or other financial intermediaries (“financial representatives”) in connection with the sale and/or distribution of fund shares or the retention and/or servicing of fund investors and fund shares (“revenue sharing”). For example, the
Advisor and/or its affiliates may compensate financial representatives for providing the fund with “shelf space” or access to a third party platform or fund offering list or other marketing programs, including, without limitation, inclusion of the fund on preferred or recommended sales lists, fund “supermarket” platforms and other formal sales programs; granting the Advisor and/ or its affiliates access to the financial representative’s sales force; granting the Advisor and/or its affiliates access to the financial representative’s conferences and meetings; assistance in training and educating the financial representative’s personnel; and obtaining other forms of marketing support.
The level of revenue sharing payments made to financial representatives may be a fixed fee or based upon one or more of the following factors: gross sales, current assets and/or number of accounts of the fund attributable to the financial representative, the particular fund or fund type or other measures as agreed to by the Advisor and/or its affiliates and the financial representatives or any combination thereof. The amount of these revenue sharing payments is determined at the discretion of the Advisor and/or its affiliates from time to time, may be substantial, and may be different for different financial representatives based on, for example, the nature of the services provided by the financial representative.
Receipt of, or the prospect of receiving, additional compensation may influence your financial representative’s recommendation of the fund. You should review your financial representative’s compensation disclosure and/or talk to your financial representative to obtain more information on how this compensation may have influenced your financial representative’s recommendation of the fund. Additional information regarding these revenue sharing payments is included in the fund’s Statement of Additional Information, which is available to you on request at no charge (see the back cover of this Prospectus for more information on how to request a copy of the Statement of Additional Information).
It is possible that broker-dealers that execute portfolio transactions for the fund will also sell shares of the fund to their customers. However, the Advisor will not consider the sale of fund shares as a factor in the selection of broker-dealers to execute portfolio transactions for the fund. Accordingly, the Advisor has implemented policies and procedures reasonably designed to prevent its traders from considering sales of fund shares as a factor in the selection of broker-dealers to execute portfolio transactions for the fund. In addition, the Advisor and/or its affiliates will not use fund brokerage to pay for their obligation to provide additional compensation to financial representatives as described above.
Prospectus August 18, 2021
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Investing in the Fund
Premium/Discount Information
Information regarding how often shares of the fund traded on NYSE Arca at a price above (i.e., at a premium) or below (i.e., at a discount) the NAV of the fund during the past calendar year can be found at Xtrackers.com.
Prospectus August 18, 2021
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Investing in the Fund
The financial highlights are designed to help you understand recent financial performance. The figures in the first part of the table are for a single share. The total return figures represent the percentage that an investor in the fund would have earned (or lost), assuming all dividends and distributions were reinvested. This information has been audited by Ernst & Young LLP, (except for the information for the six months ended February 28, 2021, which is unaudited), independent registered public accounting firm, whose report, along with the fund’s financial statements, is included in the fund’s Annual Report as of August 31, 2020 and for the fiscal period then ended (see “For More Information” on the back cover).
Effective as of the date of this prospectus, Xtrackers MSCI ACWI ex USA ESG Leaders Equity ETF changed its name to Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF.
Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF
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For the
Six Months Ended
2/28/2021 |
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Net Asset Value, beginning of period |
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Income (loss) from investment operations: |
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Net investment income (loss)b |
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Net realized and unrealized gain (loss) |
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Total from investment operations |
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Net Asset Value, end of period |
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Ratios to Average Net Assets and Supplemental Data |
Net Assets, end of period ($ millions) |
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Ratio of expenses before fee waiver (%) |
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Ratio of expenses after fee waiver (%) |
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Ratio of net investment income (loss) (%) |
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Portfolio turnover rate (%)d |
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a
For the period December 6, 2018 (commencement of operations) through August 31, 2019.
b
Based on average shares outstanding during the period.
c
Total Return would have been lower if certain expenses had not been reimbursed by the Advisor.
d
Portfolio turnover rate does not include securities received or delivered from processing creations or redemptions.
Prospectus August 18, 2021 | 33 | Financial Highlights |
Index Provider and Licenses
Solactive, which is not an affiliate of the Advisor, is responsible for the rules-based methodology of the Solactive Indexes. Solactive is not affiliated with the Trust, the Advisor, The Bank of New York Mellon, the Distributor or any of their respective affiliates.
Solactive is responsible for administration and calculation of the Solactive Indexes. Solactive is responsible for implementing the methodology for the composition of the Underlying Index.
The Advisor has entered into a license agreement with Solactive to use the Underlying Index. All license fees are paid by the Advisor out of its own resources and not the assets of the fund.
Disclaimers
Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF is not sponsored, endorsed, sold or promoted by Solactive. Neither Solactive nor any other party makes any representation or warranty, express or implied, to the owners of the fund or any member of the public regarding advisability of investing in funds generally or in this fund particularly or the ability of the Solactive ISS Emerging Markets Carbon Reduction & Climate Improvers Index NTR (the “Underlying Index”) to track general stock market performance. Solactive is the licensor of certain trademarks, service marks and trade names of Solactive and of the Underlying Index that are determined, composed and calculated by Solactive without regard to the Trust, the Advisor or the fund. Solactive has no obligation to take the needs of the Advisor or the owners of the fund into consideration in determining, composing or calculating the Underlying Index. Solactive is not responsible for and has not 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 which the fund are redeemable for cash. Neither Solactive nor any other party has any obligation or liability to owners of the fund in connection with the administration, marketing or trading of the fund.
Although Solactive shall obtain information for inclusion in or for use in the calculation of the index from sources that Solactive considers reliable, neither Solactive nor any other party guarantees the accuracy and/or the completeness of the index or any data included therein. Solactive is not responsible for informing third parties, including but not limited to, investors and/or financial intermediaries of the fund, of errors in the index. Neither Solactive nor any other party makes any warranty, express or implied, as to results to be obtained by licensee, licensee’s customers and counterparties, owners of the fund, or any other person or entity from the use of the index or any data included hereunder or for any other use. Neither Solactive nor any other party makes any express or implied warranties, and Solactive hereby expressly disclaims all warranties of merchantability or fitness for a particular purpose with respect to the index or any data included therein. Without limiting any of the foregoing, in no event shall Solactive or any other party have any liability for direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
Shares of the fund are not sponsored, endorsed or promoted by NYSE Arca, Inc. (“NYSE Arca”). NYSE Arca makes no representation or warranty, express or implied, to the owners of the shares of the fund or any member of the public regarding the ability of the fund to track the total return performance of the Solactive ISS Emerging Markets Carbon Reduction & Climate Improvers Index NTR (the “Underlying Index”) or the ability of the Underlying Index to track stock market performance. NYSE Arca is not responsible for, nor has it participated in, the determination of the compilation or the calculation of the Underlying Index, nor in the determination of the timing of, prices of, or quantities of shares of the fund to be issued, nor in the determination or calculation of the equation by which the shares are redeemable. NYSE Arca has no obligation or liability to owners of the shares of the fund in connection with the administration, marketing or trading of the shares of the fund.
Prospectus August 18, 2021 | 34 | Appendix |
NYSE Arca does not guarantee the accuracy and/ or the completeness of the Underlying Index or any data included therein. NYSE Arca makes no warranty, express or implied, as to results to be obtained by the Trust on behalf of the fund as licensee, licensee’s customers and counterparties, owners of the shares of the fund, or any other person or entity from the use of the subject index or any data included therein in connection with the rights licensed as described herein or for any other use. NYSE Arca makes no express or implied warranties and hereby expressly disclaims all warranties of merchantability or fitness for a particular purpose with respect to the Underlying Index or any data included therein. Without limiting any of the foregoing, in no event shall NYSE Arca 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.
The Advisor does not guarantee the accuracy or the completeness of the Underlying Index or any data included therein and the Advisor shall have no liability for any errors, omissions or interruptions therein.
The Advisor makes no warranty, express or implied, to the owners of shares of the fund or to any other person or entity, as to results to be obtained by the fund from the use of the Underlying Index or any data included therein. The Advisor 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 Advisor have any liability for any special, punitive, direct, indirect or consequential damages (including lost profits), even if notified of the possibility of such damages.
Prospectus August 18, 2021 | 35 | Appendix |
FOR MORE INFORMATION:
XTRACKERS.COM
1-855-329-3837 (1-855-DBX-ETFS)
Copies of the prospectus, SAI and recent shareholder reports, when available, can be found on our website at Xtrackers.com. For more information about the fund, you may request a copy of the SAI. The SAI provides detailed information about the fund and is incorporated by reference into this prospectus. This means that the SAI, for legal purposes, is a part of this prospectus.
If you have any questions about the Trust or shares of the fund or you wish to obtain the SAI or shareholder report free of charge, please:
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1-855-329-3837 or 1-855-DBX-ETFS
(toll free) Monday through Friday
8:30 a.m. to 6:30 p.m. (Eastern time)
E-mail: dbxquestions@list.db.com |
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DBX ETF Trust
c/o ALPS Distributors, Inc.
1290 Broadway, Suite 1000
Denver, Colorado 80203 |
Information about the fund (including the SAI), reports and other information about the fund are available on the EDGAR Database on the SEC’s website at 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.
Householding is an option available to certain fund investors. 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. Please contact your broker-dealer if you are interested in enrolling in householding and receiving a single copy of prospectuses and other shareholder documents, or if you are currently enrolled in householding and wish to change your householding status.
No person is authorized to give any information or to make any representations about the fund and their shares not contained in this prospectus and you should not rely on any other information. Read and keep the prospectus for future reference.
Investment Company Act File No.: 811-22487
Statement
of Additional Information
August
18, 2021
DBX
ETF TRUST
Xtrackers
Emerging Markets Carbon Reduction and Climate Improvers ETF |
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This
Statement of Additional Information (“SAI”)
is not a prospectus and should be read in conjunction with
the prospectus for the fund dated August 18, 2021, as supplemented, a copy of which
may be obtained without charge by calling 1-855-329-3837 (1-855-DBX-ETFS);
by visiting Xtrackers.com
(the Web site does not form a part of this SAI); or by writing to
the Trust’s distributor, ALPS Distributors, Inc. (the “Distributor”),
1290 Broadway, Suite 1000, Denver, Colorado 80203. This SAI is incorporated by reference
into the prospectus.
Portions
of the Annual and Semi-Annual Reports to Shareholders of the fund are incorporated
herein by reference, and are hereby deemed to be part of this SAI.
Reports to Shareholders may also be obtained without charge by calling the number
provided in the preceding paragraph.
This
SAI is divided into two Parts—Part
I and Part II. Part I contains information that is specific to the fund,
while Part II contains information that generally applies to each of the funds in
the Xtrackers funds.
Statement
of Additional Information (SAI)—Part
I
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Detailed
Part II table of contents precedes page II-1 |
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Definitions
“1933
Act” – the Securities
Act of 1933, as amended
“1934
Act” – the Securities
Exchange Act of 1934, as amended
“1940
Act” – the Investment
Company Act of 1940, as amended
“Administrator”
or “Custodian”
or “Transfer Agent”
or “BNYM”
– The Bank of New York Mellon, 240 Greenwich Street, New York, New York 10286
“Advisor”
or “DBX”
– DBX Advisors LLC, 875 Third Avenue, New York, New York 10022
“ALPS”
or “Distributor”
– ALPS Distributors, Inc., 1290 Broadway, Suite 1000, Denver, Colorado 80203
“Board”
– Board of Trustees of the Trust
“Board
Members” – Members
of the Board of Trustees of the Trust
“Business
Day” – any day
on which the Exchange on which the fund is listed for trading is open for business
“Cash
Component” – deposit
of a specified cash payment
“Creation
Units” – shares
that have been aggregated into blocks
“Code”
– the Internal Revenue Code of 1986, as amended
“DTC”
– Depository Trust Company
“DWS”
– refers to the asset management activities conducted by DWS Group GmbH &
Co. KGaA or any of its subsidiaries, including the Advisor and other affiliated
investment advisors
“DWS
Group” – a separate,
publicly-listed financial services firm that is an indirect, majority-owned subsidiary
of Deutsche Bank AG.
“ETF”
– exchange-traded fund
“Exchange”
– NYSE Arca, Inc.
“Fitch”
– Fitch Ratings, an NRSRO
“Fund
Legal Counsel” –
Vedder Price P.C., 1633 Broadway, 31st Floor, New York, New York 10019
“fund”
or “series”
– Xtrackers Emerging Markets Carbon Reduction and Climate Improvers ETF
“Independent
Board Members” –
Board Members who are not interested persons (as defined in the 1940 Act) of
the fund, the investment advisor or the distributor
“Independent
Registered Public Accounting Firm”
– Ernst & Young LLP, 5 Times Square, New York, New York 10036
“Independent
Trustee Legal Counsel”
– K&L Gates LLP, 1601 K Street, NW, Washington, DC 20006
“IOPV”
– Indicative Optimized Portfolio Value
“Moody’s”
– Moody’s Investors Service, Inc., an NRSRO
“NRSRO”
– a nationally recognized statistical rating organization
“SEC”
– the Securities and Exchange Commission
“Shares”
– shares of beneficial interest registered under the 1933 Act
“Trust”
– DBX ETF Trust
“Underlying
Index” – a specified
benchmark index
“Unitary
Advisory Fee” –
fee payable to the Advisor for its services under the Investment Advisory Agreement
with the fund and the Advisor’s commitment to pay substantially
all expenses of the fund, including the cost of transfer agency, custody, fund administration,
compensation paid to the Independent Board Members, legal, audit
and other services, except for the fee payments to the Advisor under the Investment
Advisory Agreement, interest expense, acquired fund fees and expenses, taxes, brokerage
expenses, distribution fees or expenses (if any), litigation expenses and other
extraordinary expenses
“funds”
– the US registered investment companies advised by DBX
Fund
Organization
DBX
ETF Trust was organized as a Delaware statutory trust on October 7, 2010 and is
authorized to have multiple series or portfolios. The Trust is an open-end management
investment company registered with the SEC under the 1940
Act. Additional information about the Trust is set forth in Part
II under “Fund
Organization.”
Effective
August 18, 2021, Xtrackers MSCI ACWI ex USA ESG Leaders Equity ETF was renamed Xtrackers
Emerging Markets Carbon Reduction and Climate Improvers ETF.
Management
of the Fund
Board
Members and Officers’ Identification and Background
The
identification and background of the Board Members and officers are set forth in
Part II—Appendix
II-A.
Board
Committees and Compensation
Compensation
paid to the Independent Board Members, for certain specified periods is set forth
in Part I—
Appendix I-C.
Information regarding the committees of the Board is set forth in Part
I—Appendix
I-B.
Board
Member Share Ownership and Control Persons
Information
concerning the ownership of fund shares by Board Members and officers, as a group,
as well as the dollar range value of each Board Member’s share ownership
in the fund and, on an aggregate basis, in all Xtrackers funds overseen by them,
by investors who control the fund, if any, and by investors who own 5% or
more of fund shares, if any, is set forth in Part I—
Appendix I-A.
Portfolio
Management
Information
regarding the fund’s portfolio managers, including other accounts managed,
compensation, ownership of fund shares and possible conflicts of interest, is
set forth in Part I—Appendix
I-D and Part
II – Appendix II-B.
Service
Provider Compensation
Compensation
paid by the fund for investment advisory services and other expenses through the
Unitary Advisory Fee is set forth in Part
I—Appendix
I-E. The service provider
compensation is not applicable to new funds that have not completed a fiscal reporting
period. Fee rates are included in Part
II – Appendix II-C.
Portfolio
Transactions, Brokerage Commissions and Securities
Lending Activities
Portfolio
Turnover
The
portfolio turnover rates for the two most recent fiscal years are set forth in Part
I—Appendix
I-F. This section does
not apply to new funds that have not completed a fiscal reporting period.
Brokerage
Commissions
Total
brokerage commissions paid by the fund for the three most recent fiscal years are
set forth in Part I—
Appendix I-F.
This section does not apply to new funds that have not completed a fiscal reporting
period.
The
fund's policy with respect to portfolio transactions and brokerage is set forth
under “Portfolio Transactions”
in Part II of this SAI.
Securities
Lending Activities
Information
regarding securities lending activities of the fund, if any, during its most recent
fiscal year is set forth in Part
I—Appendix
I-H.
Additional
information regarding securities lending in general is set forth under “Lending
of Portfolio Securities”
in Part II
of this SAI.
Investments
Investments,
Practices and Techniques, and Risks
Part
I—Appendix
I-G includes a list of
the investments, practices and techniques, and risks which the fund
may employ (or be subject to) in pursuing its investment objective.
Part II—Appendix
II-E includes a description
of these investments, practices and techniques, and risks.
Investment
Restrictions
It
is possible that certain investment practices and/or techniques may not be permissible
for a fund based on its investment restrictions, as described herein.
Diversification
Status. The fund is classified as “non-diversified”
under the 1940 Act. A non-diversified fund is a fund that is not limited by the
1940 Act with regard to the percentage of its assets that may be invested
in
the securities of a single issuer. The securities of a particular issuer (or securities
of issuers in particular industries) may dominate the underlying index of such a
fund and, consequently, the fund’s investment portfolio. This may
adversely affect the fund’s performance or subject the fund’s shares
to greater price volatility than that experienced by more diversified investment
companies.
Currently,
under the 1940 Act, a “non-diversified”
investment company is a fund that is not “diversified,”
and for a fund to be classified as a “diversified”
investment company, at least 75% of the value of the fund’s total assets
must be represented by cash and cash items (including receivables), government securities,
securities of other investment companies, and securities of other issuers,
which for the purposes of this calculation are limited in respect of any one issuer
to an amount (valued at the time of investment) not greater in value than 5% of
the fund’s total assets and to not more than 10% of the outstanding voting
securities of such issuer. In reliance on no-action relief furnished by the SEC,
the fund may be diversified or non-diversified at any given time, based on
the composition of the index that the fund seeks to track.
Fundamental
Policies
The
following fundamental policies may not be changed without the approval of a majority
of the outstanding voting securities of the fund which, under the 1940 Act and the
rules thereunder and as used in this SAI, means the lesser of (1) 67% or more of
the voting securities present at such meeting, if the holders of more than 50% of
the outstanding voting securities of the fund are present or represented
by proxy, or (2) more than 50% of the outstanding voting securities of the fund.
As
a matter of fundamental policy, the fund may not do any of the following:
(1)
concentrate
its investments (i.e., invest 25% or more of its total assets in the securities
of a particular industry or group of industries), except that the fund will
concentrate to the extent that its underlying index concentrates in the securities
of such particular industry or group of industries. For purposes of this limitation,
securities of the U.S. government (including its agencies and instrumentalities),
repurchase agreements collateralized by U.S. government securities,
and securities of state or municipal governments and their political sub-divisions
are not considered to be issued by members of any industry;
(2)
borrow
money, except that (i) the fund may borrow from banks for temporary or emergency
(not leveraging) purposes, including the meeting of redemption
requests which might otherwise require the untimely disposition of securities; and
(ii) the fund may, to the extent consistent with its investment
policies, enter into repurchase agreements, reverse repurchase agreements, forward
roll transactions and similar investment strategies and
techniques; to the extent that it engages in transactions described in (i) and (ii),
the fund will be limited so that no more than 33 1/3% of the value
of its total assets (including the amount borrowed) is derived from such transactions.
Any borrowings which come to exceed this amount will be
reduced in accordance with applicable law;
(3)
issue
any senior security, except as permitted under the 1940 Act, as amended, and as
interpreted, modified or otherwise permitted by regulatory authority
having jurisdiction, from time to time;
(4)
make
loans, except as permitted under the 1940 Act, as interpreted, modified or otherwise
permitted by regulatory authority having jurisdiction, from time to
time;
(5)
purchase
or sell real estate unless acquired as a result of ownership of securities or other
investments (but this restriction shall not prevent the fund from
investing in securities of companies engaged in the real estate business or securities
or other instruments backed by real estate or mortgages), or
commodities or commodity contracts (but this restriction shall not prevent the fund
from trading in futures contracts and options on futures contracts, including
options on currencies to the extent consistent with the fund’s investment
objectives and policies); or
(6)
engage
in the business of underwriting securities issued by other persons except, to the
extent that the fund may technically be deemed to be an underwriter
under the 1933 Act, the disposing of portfolio securities.
For
purposes of the concentration policy in investment restriction (1), municipal securities
with payments of principal or interest backed by the revenue of a specific project
are considered to be issued by a member of the industry which includes such specific
project.
Senior
securities may include any obligation or instrument issued by an investment company
evidencing indebtedness. The 1940 Act generally prohibits a fund from issuing
senior securities, although it provides allowances for certain borrowings and certain
other investments, such as short sales, reverse repurchase agreements,
and firm commitment agreements, when such investments are “covered”
or with appropriate earmarking or segregation of assets to cover such obligations.
Under
the 1940 Act, an investment company may only make loans if expressly permitted by
its investment policies.
Non-Fundamental
Policies
The
Board has adopted certain additional non-fundamental policies and restrictions which
are observed in the conduct of the fund’s affairs. They differ from fundamental
investment policies in that they may be changed or amended
by action of the Board without requiring prior notice to, or approval of, the shareholders.
As
a matter of non-fundamental policy, the fund may not do any of the following:
(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;
(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; and
(5)
invest
in illiquid securities if, as a result of such investment, more than 15% of the
fund’s net assets would be invested in illiquid securities.
If
any percentage restriction described above is complied with at the time of investment,
a later increase or decrease in percentage resulting from any change in value or
total or net assets will not constitute a violation of such restriction,
except that fundamental limitation (2) will be observed continuously in accordance
with applicable law.
For
purposes of non-fundamental policy (5), an illiquid security is any investment that
the fund reasonably expects cannot be sold or disposed of in current market conditions
in seven calendar days without the sale or disposition significantly changing the
market value of the investment.
The
fund has adopted a non-fundamental investment policy such that the fund may invest
in shares of other open-end management investment companies or unit investment
trusts subject to the limitations of Section 12(d)(1) of the 1940 Act, including
the rules, regulations and exemptive orders obtained thereunder; provided, however,
that if the fund has knowledge that its Shares are purchased by another investment
company investor in reliance on the provisions of subparagraphs (F) or (G) of
Section 12(d)(1) of the 1940 Act, the fund will not acquire any securities of other
open-end management investment companies or unit investment trusts in reliance on
the provisions of subparagraphs (F) or (G) of Section 12(d)(1) of the 1940 Act.
Taxes
Important
information concerning the tax consequences of an investment in the fund is contained
in Part II—
Appendix II-F.
Independent
Registered Public Accounting Firm, Reports to Shareholders
and Financial Statements
The
financial highlights of the fund included in its prospectus and financial statements
incorporated by reference into this SAI have been so included or incorporated
by reference in reliance on the report of Ernst & Young LLP, 5 Times Square,
New York, New York 10036. Ernst & Young LLP is an independent registered public
accounting firm. The report is given on the authority of the
auditors of said firm. The independent registered public accounting
firm audits the financial statements of the
fund
and provides other audit, tax and related services. Shareholders will receive annual
audited financial statements and semi-annual unaudited financial statements.
The
financial statements, together with the report of the Independent Registered Public
Accounting Firm, financial
Additional
Information
For
information on exchange, CUSIP number and fund fiscal year end information, see
Part I—Appendix
I-I.
Part
I: Appendix I-A—Board
Member Share Ownership and Control Persons
Board
Member Share Ownership in the fund
The
following tables show the dollar range of equity securities beneficially owned by each current Board Member in the
fund and in Xtrackers funds as of December 31, 2020.
Dollar
Range of Beneficial Ownership(1)
|
Xtrackers
Emerging
Markets
Carbon
Reduction
and Climate
Improvers
ETF |
Independent
Board Member: |
|
|
|
|
|
|
Aggregate
Dollar Range of Beneficial Ownership(1)
|
Funds
Overseen by
Board
Member in the
Xtrackers
Funds |
Independent
Board Member: |
|
|
|
|
|
|
(1)
The
dollar ranges are: None, $1 – $10,000, $10,001 – $50,000, $50,001 – $100,000, or over $100,000.
Ownership
in Securities of the Advisor and Related Companies
As
reported to the fund, the information in the table below reflects ownership by the current Independent Board Members
and their immediate family members of certain securities as of December 31, 2020. An immediate family member
can be a spouse, children residing in the same household, including step and adoptive children, and any dependents.
The securities represent ownership in the Advisor or Distributor and any persons (other than a registered investment
company) directly or indirectly controlling, controlled by, or under common control with the Advisor or Distributor
(including Deutsche Bank AG and DWS Group).
|
Owner
and
Relationship
to
Board
Member |
|
|
Value
of
Securities
on an
Aggregate
Basis |
Percent
of
Class
on an
Aggregate
Basis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Control
Persons and Principal Holders of Securities
As
of July 30, 2021, all Board
Members and officers owned, as a group, less than 1% of the outstanding shares of the
fund.
Although
the fund does not have information concerning the beneficial ownership of shares held in the names of DTC
participants, the following table identifies those DTC participants who owned of record 5% or more of the fund’s shares
as of July 30, 2021:
Xtrackers
Emerging Markets Carbon Reduction and Climate Improvers ETF
|
|
UBS
Securities LLC
1000
Harbor Blvd., 5th Floor
Weehawken,
NJ 07086 |
|
Pershing
LLC
One
Pershing Plaza
Jersey
City, NJ 07399 |
|
Charles
Schwab & Co., Inc.
2423
E. Lincoln Drive
Phoenix,
AZ 85016-1215 |
|
Citibank,
N.A.
3800
Citibank Center
Building
B/1st Floor/Zone 8
Tampa,
FL 33610-9122 |
|
National
Financial Services LLC
499
Washington Blvd.
Jersey
City, NJ 07310 |
|
Part
I: Appendix I-B—Board
Committees and Meetings
Board
Leadership, Structure and Oversight Responsibilities
Board
Structure. The Board of the Xtrackers funds is responsible for oversight of the
funds, including oversight of the duties performed by the Advisor for the funds
under the investment advisory agreement (the “Investment
Advisory Agreement”).
The Board generally meets in regularly-scheduled meetings four times a year and may meet more often as
required.
Mr.
Byers serves as Chairman of the Board. The Board is comprised of Independent Board Members. The Independent Board
Members are advised by Independent Trustee Legal Counsel and are represented by such Independent Trustee Legal
Counsel at Board and committee meetings. The chairmen of the Audit Committee and Nominating Committee (each
of which consists solely of Independent Board Members) serve as liaisons between the Advisor and other service providers
and the other Independent Board Members. Each such chairman is an Independent Board Member.
The
Board regularly reviews its committee structure and membership and believes that its current structure is appropriate based
on the fact that the Independent Board Members constitute the Board, the role of the committee chairmen (who
are Independent Board Members), the assets and number of funds overseen by the Board Members, as well as
the nature of each fund’s business as an ETF, which is managed to track the performance of a specified index.
Risk
Oversight. The Xtrackers funds are 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
Advisor and the Trust’s other service providers in connection with the management and operations of
the funds, as well as their associated risks. Under the oversight of the Board, the Trust, the Advisor 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 Advisor, other service providers,
the Trust’s Independent Registered Public Accounting Firm and Independent Trustee Legal Counsel to assist it
in its oversight responsibilities. This information includes, but is not limited to, reports regarding the funds’ 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 funds’ investment objectives, policies and restrictions, and
reviews any areas of non-compliance with the funds’ 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 the policies and procedures and quarterly reports on any material compliance issues that arose during the period.
Board
Committees. The Board has two standing committees, the Audit Committee and the Nominating
Committee, and has delegated certain responsibilities to those committees.
|
Number
of
Meetings
in Last
Fiscal
Year |
|
|
|
|
The
Audit Committee has the responsibility,
among
other things, to: (i) approve the
selection,
retention, termination and
compensation
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. |
George
O. Elston
(Chairman),
Stephen R.
Byers
and J. David Officer |
|
Number
of
Meetings
in Last
Fiscal
Year |
|
|
|
|
The
Nominating Committee has the
responsibility,
among other things, to identify
and
recommend individuals for Board
membership,
and evaluate candidates for
Board
membership. The Board will consider
recommendations
for Board Members from
shareholders.
Nominations from shareholders
should
be in writing and sent to the Board, to
the
attention of the Chairman of the
Nominating
Committee, as described in Part II
SAI
Appendix II-A under the caption
“Shareholder
Communications to the Board.” |
J.
David Officer (Chairman),
Stephen
R. Byers and
George
O. Elston |
Part
I: Appendix I-C—Board
Member Compensation
Each
Independent Board Member receives compensation for his or her services, which includes retainer fees and specified
amounts for various committee services and for the Board Chairman. No additional compensation is paid to
any Independent Board Member for travel time to meetings, attendance at directors’ educational seminars or conferences, service
on industry or association committees, participation as speakers at directors’ conferences or service on special fund
industry director task forces or subcommittees. Independent Board Members do not receive any employee benefits such
as pension or retirement benefits or health insurance from the fund or any fund in the Xtrackers fund complex.
Board
Members who are officers, directors, employees or stockholders of DBX or its affiliates receive no direct compensation from
the fund, although they are compensated as employees of DBX, or its affiliates, and as a result may be deemed to
participate in fees paid by the fund. The following table shows, for each current Independent Board Member, the aggregate
compensation from all of the funds in the Xtrackers fund complex during calendar year 2020.
Total
Compensation from Xtrackers Fund Complex
|
Total
Compensation from the
Xtrackers
Fund Complex(1) |
Independent
Board Member: |
|
|
|
|
|
|
(1)
For
each Independent Board Member, total compensation from the Xtrackers fund complex represents compensation from
33 funds as of December 31, 2020. The flat annual retainer for each Independent Board Member increased,
effective January 1, 2021,
to $165,000.
There are
no additional fees for attendance
at meetings of the Board or committees,
or for unscheduled telephonic
meetings or calls.
(2)
Includes
$25,000 in annual retainer fees received by Mr. Byers as Chairman of the Xtrackers funds. The annual retainer
for the Chairperson of the Xtrackers funds increased to $35,000 effective January 1, 2021.
(3)
Includes
$15,000 in annual retainer fees received by Mr. Elston as Chairman of the Audit Committee. The annual retainer
for the Chairperson of the Audit Committee of the Xtracker funds increased to $25,000 effective January 1,
2021.
(4)
The
annual retainer for the Chairperson of the Nominating Committee of the Xtracker funds increased to $10,000 effective
January 1, 2021.
Part
I: Appendix I-D—Portfolio
Management
Fund
Ownership of Portfolio Managers
The
following table shows the dollar range of fund shares owned beneficially and of record by the portfolio management team,
including investments by their immediate family members sharing the same household and amounts invested through
retirement and deferred compensation plans. This information is provided as of the fund's most recent fiscal year
end.
Xtrackers
Emerging Markets Carbon Reduction and Climate Improvers ETF
Name
of Portfolio Manager |
Dollar
Range of
Fund
Shares Owned |
|
|
|
|
|
|
Conflicts
of Interest
In
addition to managing the assets of the fund, a portfolio manager may have responsibility for managing other client accounts
of the Advisor or its affiliates. The tables below show, per portfolio manager, the number and asset size of: (1)
SEC registered investment companies (or series thereof) other than the fund, (2) pooled investment vehicles that are
not registered investment companies and (3) other accounts (e.g., accounts managed for individuals or organizations) managed
by a portfolio manager. Total assets attributed to a portfolio manager in the tables below include total assets of
each account managed, although a portfolio manager may only manage a portion of such account’s assets. For a fund
subadvised by subadvisors unaffiliated with the Advisor, total assets of funds managed may only include assets allocated
to the portfolio manager and not the total assets of a fund managed. The tables also show the number of performance-based
fee accounts, as well as the total assets of the accounts for which the advisory fee is based on the
performance of the account. This information is provided as of the fund's most recent fiscal year end.
Xtrackers
Emerging Markets Carbon Reduction and Climate Improvers ETF
Other
SEC Registered Investment Companies Managed:
Name
of
Portfolio
Manager |
Number
of
Registered
Investment
Companies
|
Total
Assets of
Registered
Investment
Companies
|
Number
of Investment
Company
Accounts
with
Performance-
Based
Fee |
Total
Assets of
Performance-Based
Fee
Accounts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xtrackers
Emerging Markets Carbon Reduction and Climate Improvers ETF
Other
Pooled Investment Vehicles Managed:
Name
of
Portfolio
Manager |
Number
of
Pooled
Investment
Vehicles
|
Total
Assets of
Pooled
Investment
Vehicles
|
Number
of Pooled
Investment
Vehicle
Accounts
with
Performance-
Based
Fee |
Total
Assets of
Performance-
Based
Fee
Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Xtrackers
Emerging Markets Carbon Reduction and Climate Improvers ETF
Other
Accounts Managed:
Name
of
Portfolio
Manager |
|
Total
Assets
of
Other
Accounts
|
Number
of Other
Accounts
with
Performance-
Based
Fee |
Total
Assets of
Performance-
Based
Fee
Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In
addition to the accounts above, an investment professional may manage accounts in a personal capacity that may include
holdings that are similar to, or the same as, those of the fund. The Advisor or Subadvisor, as applicable, has in
place a Code of Ethics that is designed to address conflicts of interest and that, among other things, imposes restrictions
on the ability of portfolio managers and other “access
persons” to invest in
securities that may be recommended or traded in the fund and other client accounts.
Part
I: Appendix I-E—Service
Provider Compensation
Under
the fund’s Investment Advisory Agreement, the Advisor is responsible for substantially all expenses of the fund,
including the cost of transfer agency, custody, fund administration, compensation paid to the Independent Board Members,
legal, audit and other services, except for the fee payments to the Advisor under the Investment Advisory Agreement,
interest expense, acquired fund fees and expenses, taxes, brokerage expenses, distribution fees or expenses (if
any), litigation expenses and other extraordinary expenses.
Xtrackers
Emerging Markets Carbon Reduction and Climate Improvers ETF
|
Gross
Amount
Paid
to DBX
for
Advisory
Services(1)
|
Amount
Waived
by
DBX for
Advisory
Services
|
|
|
|
|
|
|
(1)
Effective August 18, 2021, the Advisor’s Unitary Advisory Fee rate was reduced from 0.16% to 0.15% of the fund’s average
daily net assets.
(2)
For the period December 6, 2018 (commencement of operations) through August 31, 2019.
Part
I: Appendix I-F—Portfolio
Transactions and Brokerage Commissions
Variations
to the fund’s portfolio turnover rate may be due to, among other things, a fluctuating volume of shareholder purchase
and redemption orders, market conditions, and/or changes in the Advisor's investment outlook. The amount of
brokerage commissions paid by the fund may change from year to year because of, among other things, changing asset
levels, shareholder activity and/or portfolio turnover.
Portfolio
Turnover Rates
|
|
|
Xtrackers
Emerging Markets Carbon Reduction and Climate Improvers ETF |
|
|
(1)
For the period December 6, 2018 (commencement of operations) through August 31, 2019.
Brokerage
Commissions
|
|
Brokerage
Commissions
Paid
by Fund |
Xtrackers
Emerging Markets Carbon Reduction and
Climate
Improvers ETF |
|
|
|
|
|
(1)Brokerage
commissions decreased from fiscal year 2019 to fiscal year 2020 due to rebalancing of the fund.
(2)For
the period December 6, 2018 (commencement of operations) through August 31, 2019.
Brokerage
Commissions Paid to Affiliated Brokers
No
trades were effected for the accounts with broker dealers that are affiliated with the Advisor or Subadvisor, if applicable,
as of the end of its most recent fiscal year.
Listed
below are the regular brokers or dealers (as such term is defined in the 1940 Act) of the fund whose securities the
fund held as of the end of its most recent fiscal year and the dollar value of such securities.
Xtrackers
Emerging Markets Carbon Reduction and Climate Improvers ETF
The
fund did not hold any securities of its regular brokers or dealers.
Transactions
for Research Services
No
transactions or related commissions were allocated to broker-dealer firms for research services.
Part
I: Appendix I-G—Investments,
Practices and Techniques, and Risks
Below
is a list of headings related to investments, practices and techniques, and risks which are further described in Appendix
II-E.
Xtrackers
Emerging Markets Carbon Reduction and Climate Improvers ETF
Borrowing
Chinese
Securities
Commodity
Pool Operator Exclusion
Derivatives
Equity
Securities
Foreign
Securities
Illiquid
Securities
Investment
Companies and Other Pooled Investment Vehicles
Lending
of Portfolio Securities
Repurchase
Agreements
Restricted
Securities/Rule 144A Securities
Reverse
Repurchase Agreements
Russian
Securities
Short-Term
Instruments and Temporary Investments
Part
I: Appendix I-H—Securities
Lending Activities
Pursuant
to an agreement between the fund and BNYM, BNYM is responsible for the administration and management of
the fund’s securities lending program, including the negotiation of the terms and conditions of any securities loan, ensuring
that securities loans are properly coordinated and documented with the fund’s custodian, ensuring that loaned securities
are daily valued and that the corresponding required cash collateral is delivered by the borrower(s), arranging for
the investment of cash collateral and arranging for the return of loaned securities upon the termination of the loan.
The
dollar amounts of income and fees and compensation paid to all service providers related to the fund that participated in
securities lending activities during the most recent fiscal year were as follows:
Securities
Lending Activities – Income and Fees for Fiscal Year 2020
|
Xtrackers
Emerging
Markets
Carbon
Reduction
and
Climate
Improvers
ETF
|
Gross
income from securities lending activities (including income from
cash collateral reinvestment) |
|
Fees
paid to securities lending agent from a revenue split(1)
|
|
Fees
paid for any cash collateral management service (including fees deducted from a pooled cash collateral
reinvestment
vehicle) that are not included in the revenue split |
|
Administrative
fees not included in revenue split |
|
Indemnification
fees not included in revenue split |
|
Rebate
(paid to borrower) |
|
|
|
Other
fees not included in revenue split |
|
Aggregate
fees/compensation for securities lending activities and related services |
|
Net
income from securities lending activities |
|
(1)Revenue
split represents the share of revenue generated by the securities lending program and paid to BNYM.
Part
I: Appendix I-I—Additional
Information
Fund
and its Fiscal Year End |
|
|
Xtrackers
Emerging Markets Carbon Reduction and
Climate
Improvers ETF |
|
|
|
|
|
Statement
of Additional Information (SAI)—Part
II
Part
II of this SAI includes policies, investment techniques and information that apply
to the Xtrackers funds. Unless otherwise noted, the use of the term “fund”
applies to each of the Xtrackers funds of the Trust.
Management
of the Funds
Investment
Advisor. DBX Advisors LLC, located at 875 Third
Avenue, New York, New York 10022, serves as investment advisor to each fund pursuant
to an Investment Advisory Agreement between the Trust and the Advisor. The
Advisor is a Delaware limited liability company and was registered as an investment
advisor under the Investment Advisers Act of 1940, as amended, in August 2010.
DBX Advisors LLC was formed in June 2010 and is an indirect, wholly-owned subsidiary
of DWS Group GmbH & Co. KGaA (“DWS
Group”).
DBX
Advisors LLC and its advisory affiliates (“DWS
Service Providers”)
have sought and obtained a permanent order from the Securities and Exchange Commission
providing exemptive relief under Section 9 of the Investment Company Act of 1940,
as amended, on which the DWS Service Providers rely in connection with
the continued provision of investment advisory services to the funds and other registered
investment companies.
Terms
of the Investment Advisory Agreement. Under the
Investment Advisory Agreement, the Advisor, subject to the supervision of the Board
and in conformity with the stated investment policies of each fund, manages and
administers the Trust and manages the duties of the investment and reinvestment
of each fund’s assets.
Under
the Investment Advisory Agreement, the Advisor is responsible for substantially
all expenses of the funds (including the payments to a Subadvisor, if any, the cost
of transfer agency, custody, fund administration, compensation
paid to the Independent Board Members in respect of the Independent Board Members’
service to the fund, legal, audit and other services) except for the fee payments
under the Investment Advisory Agreement, interest expense,
taxes, brokerage expenses, future distribution fees or expenses, litigation expenses
and other extraordinary expenses.
The
Investment Advisory Agreement with respect to each fund continues in effect for
two years from its effective date, and thereafter is subject to annual approval
by (i) the Board or (ii) the vote of a majority of the outstanding
voting
securities (as defined in the 1940 Act) of the applicable fund, provided that in
either event such continuance also is approved by a majority of the Board who are
not interested persons (as defined in the 1940 Act) of the applicable
fund, by a vote cast in person at a meeting called for the purpose of voting on
such approval.
The
Investment Advisory Agreement with respect to each fund is terminable without penalty,
on 60 days’ notice, by the Board or by a vote of the holders of a majority
of the applicable fund’s outstanding voting securities (as defined
in the 1940 Act). The Investment Advisory Agreement is also terminable upon 60 days’
notice by the Advisor and will terminate automatically in the event of
its assignment (as defined in the 1940 Act).
The
annual Unitary Advisory Fee rate for each fund is set forth in Part
II – Appendix II-C.
Subadvisor
(applicable only to those funds that have a Subadvisory arrangement as described
in Part I). The Subadvisor
serves as Subadvisor to a fund pursuant to the terms of an Investment Sub-Advisory
Agreement between it and DBX (Subadvisory Agreement).
Harvest
Global Investments Limited (HGI), located at 31/F One Exchange Square, 8 Connaught
Place, Central, Hong Kong, serves as the investment Subadvisor to all the assets
of two funds. HGI is an investment advisor registered with the SEC. In addition,
HGI is an affiliate of DWS Group.
Terms
of the Subadvisory Agreements. Pursuant to the
terms of the applicable Subadvisory Agreement, a Subadvisor makes the investment
decisions, buys and sells securities, and conducts the research that leads to these
purchase and sale decisions for a fund. A Subadvisor is also responsible for selecting
brokers and dealers to execute portfolio transactions and for negotiating brokerage
commissions and dealer charges on behalf of a fund. Under the terms of the Subadvisory
Agreement, a Subadvisor manages the investment and reinvestment of
a fund's assets and provides such investment advice, research and assistance as
DBX may, from time to time, reasonably request.
Each
Subadvisory Agreement provides that the Subadvisor will not be liable for any error
of judgment or mistake of law or for any loss suffered by a fund in connection with
matters to which the Subadvisory Agreement relates,
except
a loss resulting from (a) the Subadvisor causing a fund to be in violation of any
applicable federal or state law, rule or regulation or any investment policy or
restriction set forth in a fund's prospectus or as may be provided
in writing by the Board or DBX, or (b) willful misconduct, bad faith or gross negligence
on the part of the Subadvisor in the performance of its duties or from reckless
disregard by the Subadvisor of its obligations and duties under the Subadvisory
Agreement.
A
Subadvisory Agreement continues from year to year only as long as such continuance
is specifically approved at least annually (a) by a majority of the Board Members
who are not parties to such agreement or interested persons
of any such party, and (b) by the shareholders or the Board of the Registrant. A
Subadvisory Agreement may be terminated at any time upon 60 days’ written
notice by DBX or by the Board of the Registrant or by majority
vote of the outstanding shares of a fund, and will terminate automatically upon
assignment or upon termination of a fund’s Investment Advisory Agreement.
Under
each Subadvisory Agreement between DBX and a Subadvisor, DBX, not a fund, pays the
Subadvisor a Subadvisory fee based on the percentage of the assets overseen
by the Subadvisor or based on a percentage of the fee received by DBX from a fund.
The Subadvisor fee is paid directly by DBX at specific rates negotiated between
DBX and the Subadvisor. No fund is responsible for paying the Subadvisor.
Codes
of Ethics. Each fund, the Advisor, the Distributor, and,
if applicable, each fund’s subadvisor(s) have adopted codes of ethics under
Rule 17j-1 under the 1940 Act. Board Members, officers of the Trust and employees
of the Advisor and the Distributor are permitted to make personal
securities transactions, including transactions in securities that may be purchased
or held by a fund, subject to requirements and restrictions set forth in the applicable
Code of Ethics. The Advisor’s Code of Ethics contains provisions and requirements
designed to identify and address certain conflicts of interest between personal
investment activities and the interests of a fund. Among other
things, the Advisor’s Code of Ethics prohibits certain types of transactions
absent prior approval, imposes time periods during which personal transactions may
not be made in certain securities, and requires the submission of
duplicate broker confirmations and quarterly reporting of securities transactions.
Additional restrictions apply to portfolio managers, traders, research analysts
and others involved in the investment advisory process. Exceptions
to these and other provisions of the Advisor’s or Subadvisor’s Codes
of Ethics may be granted in particular circumstances after review by appropriate
personnel.
Board
Members
Board
Members and Officers’ Identification and Background. The
identification and background of the Board Members and Officers of the Registrant
are set forth in Part
II—Appendix
II-A.
Board
Committees and Compensation. Information regarding
the Committees of the Board, as well as compensation paid to the Independent Board
Members and to Board Members who are not officers of the Registrant,
for certain specified periods, is set forth in Part I—Appendix
I-B and Part I—Appendix
I-C, respectively.
Other
Service Providers
Administrator.
BNYM serves as administrator for each fund. Pursuant to a Fund Administration and
Accounting Agreement and a Corporate Services Agreement with the
Trust, BNYM provides necessary administrative, tax and accounting and financial
reporting services for the maintenance and operations of the Trust and each fund.
In addition, BNYM makes available the office space, equipment,
personnel and facilities required to provide such services. As compensation for
these services, BNYM receives certain out-of-pocket costs, transaction fees and
asset-based fees which are accrued daily and paid monthly by
the Advisor from its management fee.
Custodian.
BNYM serves as custodian for each fund. Pursuant to a Custody Agreement with the
Trust, BNYM maintains in separate accounts cash, securities and other assets
of the Trust and each fund, keeps all necessary accounts and records and provides
other services. BNYM is required, upon the order of the Trust, to deliver securities
held by BNYM and to make payments for securities purchased
by the Trust for each fund. Also, pursuant to the Custody Agreement, BNYM is authorized
to appoint certain foreign custodians or foreign custody managers for
fund investments outside the US. As compensation for these services, BNYM receives
certain out-of-pocket costs, transaction fees and asset-based fees which are accrued
daily and paid monthly by the Advisor from its management fee.
Transfer
Agent. BNYM serves as transfer agent for each fund.
Pursuant to a Transfer Agency and Service Agreement with the Trust, BNYM acts as
a transfer agent for each fund’s authorized and issued Shares and as the dividend
disbursing agent of the Trust. As compensation for these services, BNYM receives
certain out-of-pocket
costs,
transaction fees and asset-based fees which are accrued daily and paid monthly by
the Advisor from its management fee.
Fund
Legal Counsel. Provides legal services to the funds.
Independent
Trustee Legal Counsel. Serves as legal counsel
to the Independent Board Members.
Distributor.
ALPS serves as the Distributor for each fund. The Distributor has entered into a
Distribution Agreement with the Trust pursuant to which it distributes Shares of
each fund. The Distribution Agreement continues for two years
from its effective date and is renewable annually. Shares are continuously offered
for sale by the fund through the Distributor only in Creation Units, as described
in the applicable Prospectus and below in the “Creation
and Redemption of Creation Units”
section of this SAI. Shares in less than Creation Units are not distributed by the
Distributor. The Distributor will deliver the applicable Prospectus and, upon request,
the SAI to Authorized Participants purchasing Creation Units and will maintain records
of both orders placed with it and confirmations of acceptance furnished by it. The
Distributor is a broker-dealer registered under the 1934 Act, and a member of the
Financial Industry Regulatory Authority.
The
Distribution Agreement for each fund provides that it may be terminated at any time,
without the payment of any penalty, on at least 60 days’ prior written notice
to the other party following (i) the vote of a majority of the
Independent Board Members, or (ii) the vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the relevant fund. The Distribution Agreement
will terminate automatically in the event of its assignment (as defined in the 1940
Act).
Fund
Organization
Shares.
The Trust currently is comprised of separate investment series or portfolios called
funds. The Trust issues Shares of beneficial interest in each fund with no par
value. The Board may designate additional funds.
Each
Share issued by a fund has a pro rata interest in the assets of that 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 relevant fund, and in the net distributable assets
of such fund on liquidation. Each Share has one vote with respect to matters upon
which the shareholder is entitled to vote. In any matter submitted to share
holders
for a vote, each fund shall hold a separate vote, provided that shareholders of
all affected funds will vote together when: (1) required by the 1940 Act or (2)
the Trustees determine that the matter affects the interests of
more than one fund. Under Delaware law, the Trust is not required to hold an annual
meeting of shareholders unless required to do so under the 1940 Act. The policy
of the Trust is not to hold an annual meeting of shareholders
unless required to do so under the 1940 Act. All Shares (regardless of the fund)
have noncumulative voting rights in the election of Board Members. Under Delaware
law, Trustees of the Trust may be removed by vote of the shareholders.
Following
the creation of the initial Creation Unit(s) of Shares of a fund and immediately
prior to the commencement of trading in the fund’s Shares, a holder of
Shares may be a “control
person” of the fund,
as defined in the 1940 Act. The fund cannot predict the length of
time for which one or more shareholders may remain a control person of the fund.
Shareholders
may make inquiries by writing to DBX ETF Trust, c/o the Distributor, ALPS Distributors,
Inc., 1290 Broadway, Suite 1000, Denver, Colorado 80203, by email by
writing to dbxquestions@list.db.com or by telephone by calling 1-855-329-3837 or
1-855-DBX-ETFS (toll free).
Termination
of the Trust or a Fund. The Trust or a fund may
be terminated by a majority vote of the Board or the affirmative vote of a supermajority
of the holders of the Trust or such fund entitled to vote on termination. Although
the Shares are not automatically redeemable upon the occurrence of any specific
event, the Trust’s organizational documents provide that the Board will have
the unrestricted power to alter the number of Shares in a
Creation Unit. In the event of a termination of the Trust or a fund, the Board,
in its sole discretion, could determine to permit the Shares to be redeemable in
aggregations smaller than Creation Units or to be individually redeemable.
In such circumstance, the Trust may make redemptions in kind, for cash or for a
combination of cash or securities.
Purchase
and Redemption of Shares
Exchange
Listing and Trading
A
discussion of exchange listing and trading matters associated with an investment
in each fund is contained in the “Investing
in the Funds” section
of the fund’s
Prospectus.
The discussion below supplements, and should be read in conjunction with, that section
of the Prospectus.
Shares
of each fund are listed for trading and will trade throughout the day on the Exchange.
There can be no assurance that the requirements of the Exchange necessary
to maintain the listing of Shares of any fund will continue to be met. The Exchange
may, but is not required to, remove the Shares of a fund from listing if (i)
following the initial 12-month period beginning upon the commencement of trading
of fund Shares, there are fewer than 50 beneficial owners of Shares of the fund
for 30 or more consecutive trading days, (ii) the value of the
Underlying Index on which a fund is based is no longer calculated or available,
(iii) the IOPV of a fund is no longer calculated or available or (iv) any 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 also remove Shares of a fund from listing and trading upon termination of the
fund.
In
order to provide additional information regarding the indicative value of Shares
of the fund, the Exchange or a market data vendor disseminates every 15 seconds
through the facilities of the Consolidated Tape Association or
other widely disseminated means an updated IOPV for the fund as calculated by an
information provider or market data vendor. The Trust is not involved in or responsible
for any aspect of the calculation or dissemination of the IOPVs and makes no representation
or warranty as to the accuracy of the IOPVs.
An
IOPV has a securities component and a cash component. The securities values included
in an IOPV are the values of the Deposit Securities for a fund. While the
IOPV reflects the current market value of the Deposit Securities required to be
deposited in connection with the purchase of a Creation Unit, it does not necessarily
reflect the precise composition of the current portfolio of
securities held by a fund at a particular point in time because the current portfolio
of the fund may include securities that are not a part of the current Deposit Securities.
Therefore, a fund’s IOPV disseminated during the Exchange trading hours should
not be viewed as a real-time update of the fund’s NAV, which is calculated
only once a day.
The
cash component included in an IOPV consists of estimated accrued interest, dividends
and other income, less expenses. If applicable, each IOPV also reflects changes
in currency exchange rates between the US dollar and the applicable currency.
The
Trust reserves the right to adjust the Share prices of funds in the future to maintain
convenient trading ranges for investors. Any adjustments would be accomplished through
stock splits or reverse stock splits, which would have no effect on the net assets
of the fund.
DTC
as Securities Depository for Shares of the funds.
Shares of each fund are represented by securities registered in the name of DTC
or its nominee and deposited with, or on behalf of, DTC. DTC, a limited-purpose
trust company, was created to hold securities of its participants (“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 NYSE, NYSE Amex Equities and
the Financial Industry Regulatory Authority. Access to the DTC system is also available
to others such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a DTC Participant, either directly or
indirectly (“Indirect
Participants”).
Beneficial
ownership of Shares is limited to DTC Participants, Indirect Participants and persons
holding interests through DTC Participants and Indirect Participants. Ownership
of beneficial interests in Shares (owners of such beneficial interests are referred
to herein as “Beneficial
Owners”) is shown on,
and the transfer of ownership is effected only through, records maintained by
DTC (with respect to DTC Participants) and on the records of DTC Participants (with
respect to Indirect Participants and Beneficial Owners that are not DTC Participants).
Beneficial Owners will receive from or through the DTC Participant a written confirmation
relating to their purchase of Shares. The laws of some jurisdictions may require
that certain purchasers of securities take physical delivery of such securities
in definitive form. Such laws may impair the ability of certain investors to acquire
beneficial interests in 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 of each fund 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 notice, statement or communication
may be transmitted by such DTC Participant, directly or indirectly, to such
Beneficial Owners. In addition, the Trust shall pay to each such DTC Participant
a fair and reasonable amount as reimbursement for the expenses attendant to such
transmittal, all subject to applicable statutory and regulatory
requirements.
The
Trust understands that under existing industry practice, in the event the Trust
requests any action of holders of Shares, or a Beneficial Owner desires to take
any action that DTC, as the record owner of all outstanding Shares, is
entitled to take, DTC would authorize the DTC Participants to take such action and
that the DTC Participants would authorize the Indirect Participants and Beneficial
Owners acting through such DTC Participants to take such
action and would otherwise act upon the instructions of Beneficial Owners owning
through them.
Share
distributions shall be made to DTC or its nominee, Cede & Co., as the registered
holder of all Shares of the Trust. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants’ accounts
with payments in amounts proportionate to their respective beneficial interests
in Shares of each fund as shown on the records of DTC or its nominee. Payments by
DTC Participants to Indirect Participants and Beneficial Owners of Shares held through
such DTC Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in a “street
name,” and will be the
responsibility of such DTC Participants.
The
Trust has no responsibility or liability for any 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 of the Trust 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.
Creation
and Redemption of Creation Units
General.
The Trust issues and sells Shares of each fund only in Creation Units on a continuous
basis through the Distributor, without a sales load, at the fund’s NAV next
determined after receipt, on any Business Day, of an order in
proper form. Information on a fund’s Creation Units can be found in the Prospectus.
The
Board reserves the right to declare a split or a consolidation in the number of
Shares outstanding of any fund of the Trust, and to make a corresponding change
in the number of Shares constituting a Creation Unit, in the event
that the per Share price in the secondary market rises (or declines) to an amount
that falls outside the range deemed desirable by the Board.
As
of the date of this SAI, each Exchange observes the following holidays, as observed:
New Year’s Day, Dr. Martin Luther King, Jr. Day, Presidents’ Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day.
Fund
Deposit. The consideration for purchase of Creation Units
of a fund generally consists of the in-kind (except for Xtrackers MSCI China A Inclusion
Equity ETF, Xtrackers Harvest CSI 300 China A-Shares ETF, and Xtrackers Harvest
CSI 500 China A-Shares Small Cap ETF, which are effected principally in cash) deposit
of a designated portfolio of securities (i.e., the “Deposit
Securities”), which
constitutes an optimized representation of the securities of
the relevant fund’s Underlying Index, and the Cash Component computed as described
below. Together, the Deposit Securities and the Cash Component constitute the
“Fund Deposit,”
which represents the minimum initial and subsequent investment amount for a Creation
Unit of any fund.
The
Cash Component is an amount equal to the difference between the NAV of the Shares
(per Creation Unit) and the “Deposit
Amount,” which is an
amount equal to the market value of the Deposit Securities, and serves to compensate
for any difference 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 shall be the sole responsibility
of the AP purchasing a Creation Unit.
The
Advisor makes available through the National Securities Clearing Corporation (“NSCC”)
on each Business Day, prior to the opening of business on the Exchange,
the list of names and the required number of Shares of each Deposit Security to
be included in the current Fund Deposit (based on information at the end of
the previous Business Day) for each fund. Such Fund Deposit is applicable, subject
to any adjustments as described below, in order to effect purchases of Creation
Units of Shares of a given fund until such time as the next-announced
Fund Deposit is made available.
The
identity and number of Shares of the Deposit Securities pursuant to changes in composition
of a fund’s portfolio and changes as rebalancing adjustments and corporate
action events are reflected from time to time by the Advisor with a view to the
investment objective of the fund. The composition of the Deposit Securities may
also change in response to adjustments to the weighting or composition of the component
securities constituting the relevant Underlying Index.
The
Trust reserves the right to permit or require the substitution of a “cash
in lieu” amount to be
added to the Cash Component to replace any Deposit Security that may not
be available in sufficient quantity for delivery or that may not be eligible for
transfer through the systems of DTC of the Clearing Process (discussed below). The
Trust also reserves the right to permit or require a “cash
in lieu”
amount where the delivery of the Deposit Security by the AP (as described below)
would be restricted under applicable securities laws or where the delivery of the
Deposit Security to the AP would result in the disposition
of the Deposit Security by the AP becoming restricted under applicable securities
laws, or in certain other situations. The adjustments described above will reflect
changes, known to the Advisor on the date of announcement to be in effect by the
time of delivery of the Fund Deposit, in the composition of the subject index being
tracked by the relevant fund, or resulting from stock splits and other corporate
actions. For Xtrackers MSCI China A Inclusion Equity ETF, Xtrackers Harvest CSI
300 China A-Shares ETF, and Xtrackers Harvest CSI 500 China A-Shares
Small Cap ETF, Creation Units are purchased principally for cash.
Role
of the Authorized Participant. Creation Units may be
purchased only by or through a DTC Participant that has entered into an Authorized
Participant Agreement with the Distributor (an authorized participant, or an “AP”),
which agreement has also been accepted by the Transfer Agent.
Such AP will agree, pursuant to the terms of such Authorized Participant Agreement
and on behalf of itself or any investor on whose behalf it will act, to certain
conditions,
including that such AP will make available in advance of each purchase of Shares
an amount of cash sufficient to pay the Cash Component, once the NAV of a
Creation Unit is next determined after receipt of the purchase order in proper form,
together with the transaction fee described below. The AP 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 must make appropriate
arrangements with an AP. Investors should be aware that their particular broker
may not be a DTC Participant or may not have executed an Authorized Participant
Agreement and that orders to purchase Creation Units may
have to be placed by the investor’s broker through an AP. As a result, purchase
orders placed through an AP may result in additional charges to such investor.
The
Trust does not expect the Distributor to enter into an Authorized Participant Agreement
with more than a small number of DTC Participants. A list of current APs may
be obtained from the Distributor.
Purchase
Order. To initiate an order for a Creation Unit, an
AP must submit an irrevocable order to purchase Shares of a fund in accordance with
the Authorized Participant Agreement. If accepted by the Distributor, the Transfer
Agent will notify the Advisor and the Custodian of such order. If applicable, the
Custodian will then provide such information to the appropriate sub-custodian. For
each applicable fund, the Custodian shall cause the applicable
sub-custodian to maintain an account into which the AP shall deliver, on behalf
of itself or the party on whose behalf it is acting, the applicable securities included
in the designated Fund Deposit (or the cash value of all or
a part of such securities, in the case of a permitted or required cash purchase
or “cash in lieu”
amount), with any appropriate adjustments as advised by the Trust. Deposit
Securities located outside the United States must be delivered to an account maintained
at the applicable local sub-custodian. Those placing orders to purchase Creation
Units through an AP should allow sufficient time to permit proper submission of
the purchase order to the Distributor by the cut-off time on such Business Day.
The
AP must also make available on or before the contractual settlement date, by means
satisfactory to the Trust, immediately available or same day funds estimated
by the Trust to be sufficient to pay the Cash Component next determined after acceptance
of the purchase order, together with the applicable purchase transaction
fee. Any excess funds will be returned following settlement of the issue of the
Creation Unit. Those placing orders should ascertain the applicable
deadline
for cash transfers by contacting the operations department of the broker or depositary
institution effectuating the transfer of the Cash Component. This deadline is
likely to be significantly earlier than the closing time of the regular trading
session on the Exchange.
Investors
should be aware that an AP may require orders for purchases of Shares placed with
it to be in the particular form required by the individual AP.
Timing
of Submission of Purchase Orders. An AP must submit
an irrevocable purchase order before 4:00 p.m., Eastern time on any Business Day
in order to receive that day’s NAV. In the case of custom orders, the order
must be received by the Distributor no later than 3:00 p.m.,
Eastern time on the trade date. With respect to in-kind creations, a custom order
may be placed by an AP where cash replaces any Deposit Security which may not
be available in sufficient quantity for delivery or which may not be eligible for
trading by such AP or the investor for which it is acting or other relevant reason.
Notwithstanding the foregoing, the Trust may, but is not required to,
permit custom orders (consisting of a basket of securities or cash that differs
from a published or transacted Fund Deposit) until 4:00 p.m., Eastern time, or until
the market close (in the event the Exchange closes early). Orders
to create Shares of a fund that are submitted on the Business Day immediately preceding
a holiday or day (other than a weekend) when the markets in the relevant
foreign market are closed may not be accepted. The Distributor in its discretion
may permit the submission of such orders and requests by or through an AP at any
time (including on days on which the Exchange is not open
for business) via communication through the facilities of the Transfer Agent’s
proprietary website maintained for this purpose, provided such submission is permissible
pursuant to the terms of the applicable Authorized Participant Agreement. Purchase
orders and redemption requests, if accepted by the Trust, will be processed based
on the NAV next determined after such acceptance in accordance
with the Trust’s standard cut-off times as provided in the Authorized Participant
Agreement and disclosed in this SAI.
Acceptance
of Orders for Creation Unit. Subject to the
conditions that (i) an irrevocable purchase order has been submitted by the AP (either
on its own or another investor’s behalf) and (ii) arrangements satisfactory
to the Trust are in place for payment of the Cash Component and
any other cash amounts which may be due, the Trust will accept the order, subject
to its right (and the right of the Distributor and the Advisor) to reject any order
until acceptance.
Once
the Trust has accepted an order, upon next determination of the NAV of the Shares,
the Trust will confirm the issuance of a Creation Unit, against receipt of payment,
at such NAV. The Distributor will then transmit a confirmation
of acceptance to the AP that placed the order.
The
Trust reserves the absolute right to reject or revoke a creation order transmitted
to it by the Distributor in respect of any fund 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 any fund; (iii) the Deposit
Securities delivered do not conform to the identity and number of Shares specified
by the Advisor, as described above; (iv) acceptance of the Deposit Securities would
have certain adverse tax consequences to the fund; (v) acceptance of the Fund Deposit
would, in the opinion of counsel, be unlawful; (vi) acceptance of the Fund Deposit
would, in the discretion of the Trust or the Advisor, have an adverse effect
on the Trust or the rights of Beneficial Owners; or (vii) circumstances outside
the control of the Trust, the Distributor and the Advisor make it impracticable
to process purchase orders. The Trust shall notify a prospective
purchaser of a Creation Unit and/or the AP acting on behalf of such purchaser of
its rejection of such order. The Trust, the Custodian, the 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 failure to give 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 Trust of
the Deposit Securities and the payment of the Cash Component and any other cash
amounts which may be due have been completed. When (if
applicable) the sub-custodian has confirmed to the Custodian that the securities
included in the Fund Deposit (or the cash value thereof) have been delivered to
the account of the relevant sub-custodian or sub-custodians, the
Distributor and the Advisor shall be notified of such delivery and the Trust will
issue and cause the delivery of the Creation Unit. Creation Units typically are
issued on a “T+2
basis” (i.e., two Business
Days after trade date).
To
the extent contemplated by an AP’s agreement with the Distributor, the Trust
will issue Creation Units to such AP notwithstanding the fact that the corresponding
Portfolio Deposits have not been received in part or in whole,
in reliance on the undertaking of the AP to deliver the missing Deposit Securities
as soon as possible, which undertaking shall be secured by such AP’s delivery
and
maintenance
of collateral having a value at least equal to 115%, which the Advisor may change
from time to time, of the value of the missing Deposit Securities in accordance
with the Trust’s then-effective procedures. The only collateral that is acceptable
to the Trust is cash in US dollars or an irrevocable letter of credit in form, and
drawn on a bank, that is satisfactory to the Trust. The cash collateral posted by
the AP may be invested at the risk of the AP, and income, if any, on invested cash
collateral will be paid to that AP. Information concerning the
Trust’s current procedures for collateralization of missing Deposit Securities
is available from the Transfer Agent. The Authorized Participant Agreement will
permit the Trust to buy the missing Deposit Securities at any time
and will subject the AP to liability for any shortfall between the cost to the Trust
of purchasing such securities and the cash collateral or the amount that may be
drawn under any letter of credit.
In
certain cases, APs may create and redeem Creation Units on the same trade date and
in these instances, the Trust reserves the right to settle these transactions on
a net basis or require a representation from the APs that the creation and redemption
transactions are for separate Beneficial Owners. All questions as to the number
of shares of each security in the Deposit Securities and the validity, form, eligibility
and acceptance for deposit of any securities to be delivered shall be determined
by the Trust, and the Trust’s determination shall be final and binding.
Cash
Purchase Method. In the case of a cash purchase, the
investor must pay the cash equivalent of the Deposit Securities it would otherwise
be required to provide through an in-kind purchase, plus the same Cash Component
required to be paid by an in-kind purchaser. In addition, to offset the Trust’s
brokerage and other transaction costs associated with using the cash to purchase
the requisite Deposit Securities, the investor will be required
to pay a fixed purchase transaction fee, plus an additional variable charge for
cash purchases, which is expressed as a percentage of the value of the Deposit Securities.
Creation
Transaction Fee. A standard creation transaction
fee is imposed to offset the transfer and other transaction costs associated with
the issuance of Creation Units. The standard creation transaction fee will be the
same regardless of the number of Creation Units purchased
by a purchaser on the same day. The AP may also be required to cover certain brokerage,
tax, foreign exchange, execution, price movement and other costs and
expenses related to the execution of trades resulting from such transaction (including
when the Trust permits
an
AP to substitute cash for some or all of the Deposit Securities). APs will also
bear the costs of transferring the Deposit Securities to the Trust. Investors who
use the services of a broker or other such intermediary may be
charged a fee for such services. Certain fees or costs associated with creation
transactions may be waived in certain circumstances. Each fund’s standard
creation transaction fee is set forth in the Prospectus.
Redemption
of Creation Units. Shares of a fund may be
redeemed only in Creation Units at their NAV next determined after receipt of a
redemption request in proper form and only on a Business Day. The Trust will not
redeem Shares in amounts less than Creation Units. Beneficial Owners
also may sell Shares in the secondary market but must accumulate enough Shares to
constitute a Creation Unit in order to have such Shares redeemed by the
Trust. There can be no assurance, however, that there will be sufficient liquidity
in the public trading market at any time to permit assembly of a Creation Unit.
Investors should expect to incur brokerage and other costs in connection
with assembling a sufficient number of Shares to constitute a redeemable Creation
Unit.
Redemptions
are effected primarily in-kind, except for Xtrackers MSCI China A Inclusion Equity
ETF, Xtrackers Harvest CSI 300 China A-Shares ETF, and Xtrackers Harvest
CSI 500 China A-Shares Small Cap ETF, which are effected principally in cash. In
the case of in-kind redemptions, the Advisor makes available through the NSCC,
prior to the opening of business on the Exchange on each Business Day, the identity
and number of Shares that will be applicable (subject to possible amendment or
correction) to redemption requests received in proper form (as defined below) on
that day (“Fund Securities”).
Fund Securities received on redemption may not be identical
to Deposit Securities that are applicable to creations of Creation Units. Each fund
reserves the right to honor a redemption request by delivering a basket of securities
or cash that differs from the Fund Securities.
Unless
cash redemptions are available or specified for a fund, the redemption proceeds
for a Creation Unit generally consist of Fund Securities plus cash in an amount
equal to the difference between the NAV of the Shares being
redeemed, as next determined after a receipt of a request in proper form, and the
value of the Fund Securities, less the redemption transaction fee described below.
Redemption
Transaction Fee. A standard redemption transaction
fee is imposed to offset transfer and other transaction costs that may be incurred
by the relevant
fund.
The standard redemption transaction fees are set forth in the Prospectus. The standard
redemption transaction fee will be the same regardless of the number of Creation
Units redeemed by an investor on the same day. The AP may also be required to cover
certain brokerage, tax, foreign exchange, execution, price movement
and other costs and expenses related to the execution of trades resulting from such
transaction (including when the Trust substitutes cash for some or all
of the Fund Securities), up to a maximum of 2% of the amount redeemed (including
the standard redemption fee set forth in the Prospectus). APs will also bear the
costs of transferring the Fund Securities from the Trust to
their account or on their order. Investors who use the services of a broker or other
such intermediary may be charged a fee for such services. Certain fees or costs
associated with redemption transactions may be waived in
certain circumstances.
The
maximum redemption fee, as a percentage of the amount redeemed, is 2%. Redemption
requests for Creation Units of any fund must be submitted by or through
an AP. An AP must submit an irrevocable redemption request before 4:00 p.m., Eastern
time on any Business Day in order to receive that day’s NAV. In the
case of custom redemptions, the order must be received no later than 3:00 p.m.,
Eastern time. Investors other than through APs are responsible for making arrangements
for a redemption request to be made through an AP. The Distributor will provide
a list of current APs upon request.
Cash
transactions may have to be carried out over several days if the securities market
is relatively illiquid and may involve considerable brokerage fees and taxes. These
brokerage fees and taxes, which will be higher than if a fund
sold and redeemed its shares principally in-kind, will generally be passed on to
purchasers and redeemers of Creation Units in the form of creation and redemption
transaction fees. However, the funds cap the total fees that
may be charged in connection with the redemption of Creation Units at 2% of the
value of the Creation Units redeemed. To the extent transaction and other costs
associated with a redemption exceed that cap those transaction
costs will be borne by a fund’s remaining shareholders.
The
AP must transmit the request for redemption in the form required by the Trust or
the Transfer Agent in accordance with procedures set forth in the Authorized Participant
Agreement. Investors should be aware that their particular broker may not have executed
an Authorized Participant Agreement and that, therefore, requests to
redeem Creation Units may have to be placed by the
investor’s
broker through an AP who has executed an Authorized Participant Agreement in effect.
At any time, there may be only a limited number of broker-dealers that
have an Authorized Participant Agreement. Investors making a redemption request
should be aware that such request must be in the form specified by such AP. Investors
making a request to redeem Creation Units should allow sufficient
time to permit proper submission of the request by an AP and transfer of the Shares
to the Trust’s Transfer Agent; such investors should allow for the additional
time that may be required to effect redemptions through their banks,
brokers or other financial intermediaries if such intermediaries are not APs.
A
redemption request is considered to be in “proper
form” if
(i) an AP has transferred or caused to be transferred to the Trust’s Transfer
Agent the Creation Unit being redeemed through the book-entry system of DTC so as
to be effective by the Exchange closing time on any Business
Day, (ii) a request in form satisfactory to the Trust is received from the AP on
behalf of itself or another redeeming investor within the time periods specified
above and (iii) all other procedures set forth in the Participant
Agreement are properly followed. If the Transfer Agent does not receive the investor’s
Shares through DTC’s facilities by 10:00 a.m., Eastern time, on the Business
Day next following the day that the redemption request is received, the redemption
request shall be rejected. Investors should be aware that the deadline for
such transfers of Shares through the DTC system may be significantly earlier than
the close of business on the Exchange. Those making redemption requests should
ascertain the deadline applicable to transfers of Shares through the DTC system
by contacting the operations department of the broker or depositary institution
effecting the transfer of the Shares.
Upon
receiving a redemption request, the Transfer Agent shall notify the Trust of such
redemption request. The tender of an investor’s Shares for redemption and
the distribution of the cash redemption payment in respect of
Creation Units redeemed will be made through DTC and the relevant AP to the Beneficial
Owner thereof as recorded on the book-entry system of DTC or the DTC Participant
through which such investor holds, as the case may be, or by such other means specified
by the AP submitting the redemption request.
A
redeeming Beneficial Owner or AP acting on behalf of such Beneficial Owner must
maintain appropriate security arrangements with a qualified broker-dealer, bank
or
other custody providers in each jurisdiction in which any of the portfolio securities
are customarily traded, to which account such portfolio securities will be delivered.
If
neither the redeeming Beneficial Owner nor the AP acting on behalf of such redeeming
Beneficial Owner has appropriate arrangements to take delivery of Fund Securities
in the applicable non-US jurisdiction and it is not possible to make other such
arrangements, or if it is not possible to effect deliveries of Fund Securities in
such jurisdiction, the Trust may in its discretion exercise its option
to redeem such Shares in cash, and the redeeming Beneficial Owner will be required
to receive its redemption proceeds in cash. In such case, the investor will receive
a cash payment equal to the NAV of its Shares based on
the NAV of Shares of the relevant fund next determined after the redemption request
is received in proper form (minus a redemption transaction fee and additional variable
charge for cash redemptions specified above, to offset the Trust’s brokerage
and other transaction costs associated with the disposition of portfolio securities
of the fund). Redemptions of Shares for Fund Securities will
be subject to compliance with applicable US federal and state securities laws and
each fund (whether or not it otherwise permits cash redemptions) reserves the right
to redeem Creation Units for cash to the extent that the fund
could not lawfully deliver specific Fund Securities upon redemptions or could not
do so without first registering the Fund Securities under such laws.
In
the case of cash redemptions, proceeds will be paid to the AP redeeming Shares on
behalf of the redeeming investor as soon as practicable after the date of redemption
(within seven calendar days thereafter).
The
right of redemption may be suspended or the date of payment postponed with respect
to any fund (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 of the fund’s portfolio securities
or determination of its NAV is not reasonably practicable or (iv) in such other
circumstance as is permitted by the SEC.
An
AP submitting a redemption request is deemed to represent to the Trust that it is
in compliance with the requirements set forth in the Authorized Participant Agreement.
The Trust reserves the right to verify these representations at its discretion,
but will typically require verification with respect to a redemption request from
a fund in connection with higher levels of redemption activity
and/or short interest in the fund. If the AP, upon
receipt
of a verification request, does not provide sufficient verification of its representations
as determined by the Trust, the redemption request will not be considered to
have been received in proper form and may be rejected by the Trust.
Taxation
on Creation and Redemptions of Creation Units. An
AP generally will recognize either gain or loss upon the exchange of Deposit Securities
for Creation Units. This gain or loss is calculated by taking the market value
of the Creation Units purchased over the AP’s aggregate basis in the Deposit
Securities exchanged therefor. However, the Internal Revenue Service (the “IRS”)
may apply the wash sales rules to determine that any loss realized upon the exchange
of Deposit Securities for Creation Units is not currently deductible. APs should
consult their own tax advisors.
Current
federal tax laws dictate that capital gain or loss realized from the redemption
of Creation Units will generally create long-term capital gain or loss if the AP
holds the Creation Units for more than one year, or short-term
capital gain or loss if the Creation Units were held for one year or less, if the
Creation Units are held as capital assets.
Compensation
of Financial Intermediaries
The
Distributor may also enter into agreements with securities dealers (“Soliciting
Dealers”) who will solicit
purchases of Creation Units of fund Shares. Such Soliciting
Dealers must also be APs.
The
Advisor may, from time to time and from its own resources, pay, defray or absorb
costs relating to distribution, including payments out of its own resources to the
Distributor, or to otherwise promote the sale of Shares. The Advisor currently pays
the Distributor, from the Advisor’s own resources, for such purposes.
The
Advisor and/or its subsidiaries or affiliates (“Xtrackers
Entities”)
may pay certain broker-dealers and other financial intermediaries or solicitors
(“Intermediaries”)
for certain marketing or referral activities related to the fund
or other funds advised by the Advisor or its affiliates. Any payments made by Xtrackers
Entities will be made from their own assets and not from the assets of the fund.
Although a portion of Xtrackers Entities’ revenue comes directly or indirectly
in part from fees paid by the fund and other Xtrackers funds, payments do not increase
the price paid by investors for the purchase of shares of, or
the cost of owning, shares of the fund or other Xtrackers funds. Xtrackers Entities
may make payments for Intermediaries’ participating in activities that are
designed to
make
registered representatives, other professionals and individual investors more knowledgeable
about the fund or for other activities, such as participation in marketing activities
and presentations, educational training programs, the support of technology platforms
and/or reporting systems (“Education
Costs”) or the referral
or introduction of investors to Xtrackers Entities. Xtrackers Entities may
also make payments to Intermediaries for certain printing, publishing and mailing
costs associated with the fund or materials relating to other Xtrackers funds or
exchange-traded funds in general (“Publishing
Costs”). In
addition, Xtrackers Entities may make payments to Intermediaries that make shares
of the fund and certain other Xtrackers funds available to their clients or for
otherwise promoting the fund and other Xtrackers funds. Payments
of this type are sometimes referred to as revenue-sharing payments. Payments to
an Intermediary may be significant to the Intermediary, and amounts that
Intermediaries pay to your salesperson or other investment professional may also
be significant for your salesperson or other investment professional. Because an
Intermediary may make decisions about which investment options or investment advisor
it will recommend or make available to its clients or contacts or
what services to provide for various products based on payments it receives or is
eligible to receive, payments create conflicts of interest between the Intermediary
and its clients or contacts and these financial incentives may cause
the Intermediary to recommend the fund and other Xtrackers funds or their investment
advisor over other investments or to refer a contact to the Xtrackers Entities.
The same conflict of interest exists with respect to your salesperson
or other investment professional if he or she receives similar payments from his
or her Intermediary firm. Ask your salesperson or visit your Intermediary’s
website for more information.
Xtrackers
Entities may determine to make payments based on any number of metrics. For example,
Xtrackers Entities may make payments at year end or other intervals in
a fixed amount, based upon an Intermediary’s services at defined levels or
an amount based on the Intermediary’s net sales of one or more Xtrackers funds
in a year or other period, any of which arrangements may include an
agreed upon minimum or maximum payment, or any combination of the foregoing. Any
payments made by the Xtrackers Entities to an Intermediary may create the incentive
for an Intermediary to encourage customers to buy shares of the fund or other Xtrackers
funds.
Certain
Xtrackers Entities have established revenue sharing arrangements to make Payments
to Intermediaries that make fund shares available to their clients or otherwise
promote certain funds. Pursuant to these
arrangements,
Intermediaries have agreed to promote certain funds to their customers and to not
charge certain of their customers any commissions on the purchase or sale
of fund shares. Payments made pursuant to these arrangements may vary in any year
and may be different for different Intermediaries. In certain cases, the Payments
described in the preceding sentence may be subject to certain
minimum payment levels.
Each
fund has been advised that the Advisor, the Distributor and their affiliates expect
that the firms listed in Part
II—Appendix
II-D will receive revenue sharing payments
at different points during the coming year as described above.
Anti-Money
Laundering Requirements. The funds are subject
to the USA PATRIOT Act (the “Patriot
Act”). The Patriot
Act is intended to prevent the use of the US financial system in furtherance of
money laundering, terrorism or other illicit activities. Pursuant to requirements
under the Patriot Act, a fund may request information from APs to enable it to form
a reasonable belief that it knows the true identity of its APs. This information
will be used to verify the identity of APs or, in some cases, the status of financial
professionals; it will be used only for compliance with the requirements of the
Patriot Act. The funds reserve the right to reject purchase orders from persons
who have not submitted information sufficient to allow a fund to verify their identity.
Each fund also reserves the right to redeem any amounts in
a fund from persons whose identity it is unable to verify on a timely basis. It
is the funds’ policy to cooperate fully with appropriate regulators in any
investigations conducted with respect to potential money laundering, terrorism
or other illicit activities.
Investments
Investments,
Practices and Techniques, and Risks
Part
II - Appendix II-E includes a description of the investment
practices and techniques which a fund may employ in pursuing its investment objective,
as well as the associated risks. Descriptions in this SAI of a particular investment
practice or technique in which a fund may engage (or a risk that a fund may be subject
to) are meant to describe the spectrum of investments that the Advisor (and/or
subadvisor, if applicable) in its discretion might, but is not required to, use
in managing a fund. The Advisor (and/or subadvisor, if applicable) may in its discretion
at any time employ such practice and technique for one or more
funds but not for all funds advised by it. Furthermore,
it
is possible that certain types of investment practices or techniques described herein
may not be available, permissible, economically feasible or effective for their
intended purposes in all markets. Certain practices, techniques
or investments may not be principal activities of the fund, but, to the extent employed,
could from time to time have a material impact on a fund’s performance.
It
is possible that certain investment practices and/or techniques may not be
permissible for a fund based on its investment restrictions, as described herein
(also see Part I: Investments, Practices and Techniques, and
Risks) and in the fund’s prospectus.
Portfolio
Transactions
The
Advisor and/or subadvisor assume general supervision over placing orders on behalf
of the funds for the purchase and sale of portfolio securities. In selecting brokers
or dealers for any transaction in portfolio securities, the Advisor’s and/or
subadvisor’s policy is to make such selection based on factors deemed relevant,
including but not limited to, the breadth of the market in the security, the
price of the security, the reasonableness of the commission or mark-up or mark-down,
if any, execution capability, settlement capability, back office efficiency and
the financial condition of the broker or dealer, both for the
specific transaction and on a continuing basis. The overall reasonableness of brokerage
commissions paid is evaluated by the Advisor and/or subadvisor based upon their
knowledge of available information as to the general level of commissions paid by
other institutional investors for comparable services. Brokers may also be selected
because of their ability to handle special or difficult executions,
such as may be involved in large block trades, less liquid securities, broad distributions,
or other circumstances. The Trust has adopted policies and procedures that
prohibit the consideration of sales of the funds’ Shares as a factor in the
selection of a broker or a dealer to execute its portfolio transactions.
Purchases
and sales of fixed-income securities and certain over-the-counter securities are
effected on a net basis, without the payment of brokerage commissions. Transactions
in fixed income and certain over-the-counter securities are generally placed by
the Advisor with the principal market makers for these securities unless the Advisor
reasonably believes more favorable results are available elsewhere. Transactions
with dealers serving as market makers reflect the spread between the bid and
asked prices. Purchases of underwritten issues will include an underwriting fee
paid to the underwriter. Money
market
instruments are normally purchased in principal transactions directly from the issuer
or from an underwriter or market maker.
To
the extent applicable and consistent with Section 28(e) of the 1934 Act, as amended,
and interpretations thereunder, the Advisor and/or subadvisor may cause a fund to
pay a higher commission than otherwise obtainable from other brokers or dealers
in return for brokerage or research services and products if the Advisor and/or
subadvisor determines in good faith that the commission is
reasonable in relation to the services and products utilized. In addition to agency
transactions, the Advisor and/or subadvisor may receive brokerage or research services
and products in connection with certain riskless principal transactions, in accordance
with applicable SEC and other regulatory guidelines. In both instances, these services
and products may include but are not limited to: economic, industry, or company
research reports or investment recommendations; subscriptions to certain financial
publications; market data such as stock quotes, last sale prices, trading volumes
and similar data; databases and software, including, but not limited to, quantitative
analytical software; and products and services that assist in effecting transactions
and functions incidental thereto, including services of third-party computer systems
directly related to brokerage activities and routing settlement instructions. The
Advisor and/or subadvisor may use brokerage or research services and products furnished
by brokers, dealers or service providers in servicing all client accounts, and not
all services and products may necessarily be used in connection with the
account that paid the commissions or spreads to the broker or dealer.
The
funds’ purchase and sale orders for securities may be combined with those
of other investment companies, clients or accounts that the Advisor and/or subadvisor
manage or advise and for which they have brokerage placement
authority. If purchases or sales of portfolio securities of the funds and one or
more other accounts managed or advised by the Advisor and/or subadvisor are
considered at or about the same time, transactions in such securities are allocated
among the funds and the other accounts in a manner deemed equitable to all by the
Advisor and/or subadvisor. In some cases, this procedure could have a detrimental
effect on the price or volume of the security as far as the funds are concerned.
However, in other cases, it is possible that the ability to participate in volume
transactions and to negotiate lower transaction costs will be beneficial to the
funds. The Advisor and/or subadvisor from time to time deals, trades and invests
for their own account in
the
types of securities in which the funds may invest. The Advisor and/or subadvisor
may effect trades on behalf of and for the account of the funds with brokers or
dealers that are affiliated with the Advisor and/or subadvisor, in conformity
with the 1940 Act and SEC rules and regulations. Under these provisions, any commissions
paid to affiliated brokers or dealers must be reasonable and fair compared
to the commissions charged by other brokers or dealers in comparable transactions.
The funds will not deal with affiliates in principal transactions unless permitted
by applicable SEC rule or regulation or by SEC exemptive order.
Portfolio
Turnover. Portfolio turnover rate is defined by the
SEC as the ratio of the lesser of sales or purchases to the monthly average value
of such securities owned during the year, excluding all securities whose remaining
maturities at the time of acquisition were one year or less.
Portfolio
turnover may vary from year to year as well as within a year. High turnover rates
may result in comparatively greater brokerage expenses and higher taxes (if you
are investing in a taxable account). The overall reasonableness of brokerage commissions
is evaluated by the Advisor and/or subadvisor, if applicable, based upon their knowledge
of available information as to the general level of commissions paid by the other
institutional investors for comparable services.
Portfolio
Holdings Information
The
Trust has adopted a policy regarding the disclosure of information about the Trust’s
portfolio holdings. The Board must approve all material amendments to this policy.
Each
fund’s portfolio holdings are publicly disseminated each day the funds are
open for business through financial reporting and news services, including publicly
accessible Internet web sites. In addition, a basket composition
file, which includes the security names and share quantities to deliver in exchange
for fund shares, together with estimates and actual cash components, is publicly
disseminated daily prior to the opening of the Exchanges via
the NSCC. The basket represents one Creation Unit of each fund. The Trust, the Advisor
and the Administrator will not disseminate non-public information concerning
the Trust.
Net
Asset Value
Each
fund offers and issues Shares at their net asset value (“NAV”)
per Share only in aggregations of a specified number of Shares (“Creation
Units”), generally in
exchange for a basket of securities and other instruments
included in its Underlying Index (the “Deposit
Securities”),
together with the Cash Component. For Xtrackers Harvest CSI 300 China A-Shares ETF,
Xtrackers MSCI China A Inclusion Equity ETF, and Xtrackers Harvest CSI
500 China A-Shares Small Cap ETF, each fund offers and issues Shares at their NAV
per Share only in Creation Units, generally in exchange for a specified amount of
cash totaling the NAV of the Creation Units. Shares trade in
the secondary market at market prices that may be at, above or below NAV. Information
on the Exchange on which each fund trades is set forth in Part
I – Appendix I-I.
Proxy
Voting
Each
fund has delegated proxy voting responsibilities to the Advisor, subject to the
Board’s general oversight. Each fund has delegated proxy voting to the Advisor
with the direction that proxies should be voted consistent with each
fund’s best economic interests. The Advisor has adopted its own Proxy Voting
Policies and Procedures (Policies), and Proxy Voting Guidelines (Guidelines) for
this purpose. The Policies address, among other things, conflicts
of interest that may arise between the interests of a fund, and the interests of
the Advisor and its affiliates. The Policies and Guidelines are included in Part
II—
Appendix II-G.
You
may obtain information about how each fund voted proxies related to its portfolio
securities during the 12-month period ended June 30 by visiting the SEC’s
website at www.sec.gov or by visiting our website at dws.com/en-us/resources/proxy-voting.
Miscellaneous
A
fund’s prospectus(es)
and this SAI omit certain information contained in the Registration
Statement which a fund has
filed with the SEC under the 1933 Act and reference
is hereby made to the Registration Statement for further information with respect
to a fund and the securities
offered hereby.
Ratings
Of Investments
Bonds
and Commercial Paper Ratings
Set
forth below are descriptions of ratings (as of the date of each rating agency’s
annual ratings publication or other current ratings publication, as applicable)
which represent opinions as to the quality of the securities. It should be emphasized,
however, that ratings are relative and subjective and are not absolute standards
of quality.
If
a fixed income security is rated differently among the three major ratings agencies
(i.e., Moody’s Investor Services, Inc., Fitch Investors Services, Inc., and
S&P Global Ratings), portfolio management would rely on the highest
credit rating for purposes of the fund’s investment policies.
Moody’s
Investors Service, Inc. Global Long-Term Rating Scale
Moody’s
long-term ratings are assigned to issuers or obligations with an original maturity
of one year or more and reflect both on the likelihood of a default or impairment
on contractual financial obligations and the expected financial
loss suffered in the event of default or impairment.
Aaa
Obligations rated Aaa are judged to be of the highest quality, subject to the lowest
level of credit risk.
Aa
Obligations rated Aa are judged to be of high quality and are subject to very low
credit risk.
A
Obligations rated A are judged to be upper-medium grade and are subject to low credit
risk.
Baa
Obligations rated Baa are judged to be medium-grade and subject to moderate credit
risk and as such may possess certain speculative characteristics.
Ba
Obligations rated Ba are judged to be speculative and are subject to substantial
credit risk.
B
Obligations rated B are considered speculative and are subject to high credit risk.
Caa
Obligations rated Caa are judged to be speculative of poor standing and are subject
to very high credit risk.
Ca
Obligations rated Ca are highly speculative and are likely in, or very near, default,
with some prospect of recovery of principal and interest.
C
Obligations rated C are the lowest rated and are typically in default, with little
prospect for recovery of principal or interest.
Note:
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification
from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher
end of its generic rating category; the modifier 2 indicates a mid-range ranking;
and the modifier 3 indicates a ranking in the lower end of that generic rating category.
Additionally, a “(hyb)”
indicator is appended to all ratings of hybrid securities issued by banks, insurers,
finance companies, and securities firms.
By
their terms, hybrid securities allow for the omission of scheduled dividends, interest,
or principal payments, which can potentially result in impairment if such an omission
occurs. Hybrid securities may also be subject to contractually allowable write-downs
of principal that could result in impairment. Together with the hybrid indicator,
the long-term obligation rating assigned to a hybrid security is an expression of
the relative credit risk associated with that security.
Moody’s
Investors Service, Inc. Global Short-Term Rating Scale
Moody’s
short-term ratings are assigned to obligations with an original maturity of thirteen
months or less and reflect both on the likelihood of a default or impairment on
contractual financial obligations and the expected financial loss suffered in the
event of default or impairment.
P-1
Ratings of Prime-1 reflect a superior ability to repay short-term obligations.
P-2
Ratings of Prime-2 reflect a strong ability to repay short-term obligations.
P-3
Ratings of Prime-3 reflect an acceptable ability to repay short-term obligations.
NP
Issuers (or supporting institutions) rated Not Prime do not fall within any of the
Prime rating categories.
Moody’s
Investors Service, Inc. US Municipal Short-Term Debt and Demand Obligation
Ratings
Short-Term
Obligation Ratings
The
Municipal Investment Grade (MIG) scale is used to rate US municipal cash flow notes,
bond anticipation notes and certain other short-term obligations, which typically
mature
in three years or less. Under certain circumstances, the MIG scale is used for bond
anticipation notes with maturities of up to five years.
MIG
1 This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly reliable liquidity support,
or demonstrated broad-based access to the market for refinancing.
MIG
2 This designation denotes strong credit quality. Margins
of protection are ample, although not as large as in the preceding group.
MIG
3 This designation denotes acceptable credit quality. Liquidity
and cash-flow protection may be narrow, and market access for refinancing is likely
to be less well-established.
SG
This designation denotes speculative-grade credit quality. Debt instruments in this
category may lack sufficient margins of protection.
Demand
Obligation Ratings
In
the case of variable rate demand obligations (VRDOs), a two-component rating is
assigned. The components are a long-term rating and a short-term demand obligation
rating. The long-term rating addresses the issuer’s ability to
meet scheduled principal and interest payments. The short-term demand obligation
rating addresses the ability of the issuer or the liquidity provider to make payments
associated with the purchase-price-upon-demand feature (“demand
feature”) of the VRDO.
The short-term demand obligation rating uses the Variable Municipal Investment Grade
(VMIG) scale.
The
rating transitions on the VMIG scale differ from those on the Prime scale to reflect
the risk that external liquidity support will terminate if the issuer's long-term
rating drops below investment grade.
VMIG
1 This designation denotes superior credit quality. Excellent
protection is afforded by the superior short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
VMIG
2 This designation denotes strong credit quality. Good
protection is afforded by the strong short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment of
purchase price upon demand.
VMIG
3 This designation denotes acceptable credit quality. Adequate
protection is afforded by the satisfactory short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely payment
of purchase price upon demand.
SG
This designation denotes speculative-grade credit quality. Demand features rated
in this category may be supported by a liquidity provider that does not have a sufficiently
strong short-term rating or may lack the structural or legal protections necessary
to ensure the timely payment of purchase price upon demand.
S&P
Global Ratings Long-Term Issue Credit Ratings
Investment
Grade
AAA
An obligation rated 'AAA' has the highest rating assigned
by S&P Global Ratings. The obligor's capacity to meet its financial commitments
on the obligation is extremely strong.
AA
An obligation rated 'AA' differs from the highest-rated
obligations only to a small degree. The obligor's capacity to meet its financial
commitments on the obligation is very strong.
A
An obligation rated 'A' is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than obligations
in higher-rated categories. However, the obligor's capacity to meet its financial
commitments on the obligation is still strong.
BBB
An obligation rated 'BBB' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are more
likely to weaken the obligor’s capacity to meet its financial commitments
on the obligation.
Speculative
Grade
Obligations
rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having significant speculative
characteristics. 'BB' indicates the least degree of speculation and 'C'
the highest. While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major exposure
to adverse conditions.
BB
An obligation rated 'BB' is less vulnerable to nonpayment
than other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse
business,
financial, or economic conditions that could lead to the obligor's inadequate capacity
to meet its financial commitments on the obligation.
B
An obligation rated 'B' is more vulnerable to nonpayment than obligations rated
'BB', but the obligor currently has the capacity to meet its financial commitments
on the obligation. Adverse business, financial, or economic conditions
will likely impair the obligor's capacity or willingness to meet its financial commitments
on the obligation.
CCC
An obligation rated 'CCC' is currently vulnerable to nonpayment and is dependent
upon favorable business, financial, and economic conditions for the obligor to meet
its financial commitments on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely to
have the capacity to meet its financial commitments on the obligation.
CC
An obligation rated 'CC' is currently highly vulnerable to nonpayment. The 'CC'
rating is used when a default has not yet occurred but S&P Global Ratings expects
default to be a virtual certainty, regardless of the anticipated
time to default.
C
An obligation rated 'C' is currently highly vulnerable to nonpayment, and the obligation
is expected to have lower relative seniority or lower ultimate recovery compared
with obligations that are rated higher.
D
An obligation rated 'D' is in default or in breach of an imputed promise. For non-hybrid
capital instruments, the 'D' rating category is used when payments on an obligation
are not made on the date due, unless S&P Global Ratings believes that such payments
will be made within five business days in the absence of a stated grace period
or within the earlier of the stated grace period or 30 calendar days. The 'D' rating
also will be used upon the filing of a bankruptcy petition or the taking of similar
action and where default on an obligation is a virtual certainty,
for example due to automatic stay provisions. A rating on an obligation is lowered
to 'D' if it is subject to a distressed debt restructuring.
Plus
(+) or Minus (-) Ratings from 'AA' to 'CCC' may be
modified by the addition of a plus (+) or minus (-) sign to show relative standing
within the rating categories.
S&P
Global Ratings Short-Term Issue Credit Ratings
A-1
A short-term obligation rated 'A-1' is rated in the highest category by S&P
Global Ratings. The obligor's capacity to meet its financial commitments on the
obligation
is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial commitments
on these obligations is extremely strong.
A-2
A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher rating categories. However, the obligor's capacity to meet its
financial commitments on the obligation is satisfactory.
A-3
A short-term obligation rated 'A-3' exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to weaken
an obligor’s capacity to meet its financial commitments on
the obligation.
B
A short-term obligation rated 'B' is regarded as vulnerable and has significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitments; however, it faces major ongoing uncertainties
that could lead to the obligor's inadequate capacity to meet its financial commitments.
C
A short-term obligation rated 'C' is currently vulnerable to nonpayment and is dependent
upon favorable business, financial, and economic conditions for the obligor to meet
its financial commitments on the obligation.
D
A short-term obligation rated 'D' is in default or in breach of an imputed promise.
For non-hybrid capital instruments, the 'D' rating category is used when payments
on an obligation are not made on the date due, unless S&P
Global Ratings believes that such payments will be made within any stated grace
period. However, any stated grace period longer than five business days will be
treated as five business days. The 'D' rating also will be used upon
the filing of a bankruptcy petition or the taking of a similar action and where
default on an obligation is a virtual certainty, for example due to automatic stay
provisions. A rating on an obligation is lowered to 'D' if it is subject
to a distressed debt restructuring.
SPUR
(S&P Global Ratings Underlying Rating) A SPUR is
an opinion about the stand-alone capacity of an obligor to pay debt service on a
credit-enhanced debt issue, without giving effect to the enhancement that applies
to it. These ratings are published only at the request of the
debt issuer or obligor with the designation SPUR to distinguish them from the credit-enhanced
rating that applies to the debt issue. S&P Global Ratings maintains surveillance
of an issue with a published SPUR.
S&P
Global Ratings Municipal Short-Term Note Ratings
An
S&P Global Ratings US municipal note rating reflects S&P Global Ratings’
opinion about the liquidity factors and market access risks unique to the notes.
Notes due in three years or less will likely receive a note rating. Notes
with an original maturity of more than three years will most likely receive a long-term
debt rating. In determining which type of rating, if any, to assign, S&P Global
Ratings’ analysis will review the following considerations:
•
Amortization
schedule—the
larger the final maturity relative to other maturities, the more likely it will
be treated as a note; and
•
Source
of payment—the
more dependent the issue is on the market for its refinancing, the more likely it
will be treated as a note.
Note
rating symbols are as follows:
SP-1
Strong capacity to pay principal and interest. An issue determined to possess a
very strong capacity to pay debt service is given a plus (+) designation.
SP-2
Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
SP-3
Speculative capacity to pay principal and interest.
D
‘D’ is assigned upon failure to pay the note when due, completion
of a distressed debt restructuring, or the filing of a bankruptcy petition or the
taking of similar action and where default on an obligation is a virtual certainty,
for example due to automatic stay provisions.
S&P
Global Ratings Dual Ratings
Dual
ratings may be assigned to debt issues that have a put option or demand feature.
The first component of the rating addresses the likelihood of repayment of principal
and interest as due, and the second component of the rating addresses only the demand
feature. The first component of the rating can relate to either a short-term
or long-term transaction and accordingly use either short-term or long-term rating
symbols. The second component of the rating relates to the put option and is assigned
a short-term rating symbol (for example, 'AAA/A-1+' or 'A-1+/A-1'). With US municipal
short-term
demand
debt, the US municipal short-term note rating symbols are used for the first component
of the rating (for example, 'SP-1+/A-1+').
S&P
Global Market Intelligence Earnings and Dividend Rankings for Common Stocks
S&P
Global Market Intelligence, an affiliate of S&P Global Ratings, has provided
Earnings and Dividend Rankings, commonly referred to as Quality Rankings, on common
stocks since 1956. Quality Rankings reflect the long-term growth
and stability of a company’s earnings and dividends.
The
Quality Rankings System attempts to capture the long-term growth and stability of
earnings and dividends record in a single system. In assessing Quality Rankings,
S&P Global Market Intelligence recognizes that earnings and
dividend performance is the end result of the interplay of various factors such
as products and industry position, corporate resources and financial policy. Over
the long run, the record of earnings and dividend performance has
a considerable bearing on the relative quality of stocks.
The
rankings, however, do not profess to reflect all of the factors, tangible or intangible,
that bear on stock quality.
The
rankings are generated by a computerized system and are based on per-share earnings
and dividend records of the most recent 10 years – a period long enough to
measure significant secular (long-term) growth, capture indications
of changes in trend as they develop, encompass the full peak-to-peak range of the
business cycle, and include a bull and a bear market. Basic scores are
computed for earnings and dividends, and then adjusted as indicated by a set of
predetermined modifiers for change in the rate of growth, stability within long-term
trend, and cyclicality. Adjusted scores for earnings and dividends
are then combined to yield a final ranking.
The
ranking system makes allowance for the fact that corporate size generally imparts
certain advantages from an investment standpoint. Conversely, minimum size limits
(in sales volume) are set for the various rankings. However, the
system provides for making exceptions where the score reflects an outstanding earnings
and dividend record. The following table shows the letter classifications
and brief descriptions of Quality Rankings.
The
ranking system grants some exceptions to the pure quantitative rank. Thus, if a
company has not paid any dividend over the past 10 years, it is very unlikely that
it will rank higher than A-. In addition, companies may receive a
bonus score based on their sales volume (higher sales are viewed as better for stability).
If a company omits a dividend on preferred stock, it will receive a rank of no better
than C that year. If a company pays a dividend on the common stock, it is highly
unlikely that the rank will be below B-, even if it has incurred losses. In addition,
if a company files for bankruptcy, the model’s rank is automatically
changed to D.
Fitch
Ratings Long-Term Ratings
Investment
Grade
AAA:
Highest credit quality. ‘AAA’ ratings denote the lowest expectation
of default risk. They are assigned only in cases of exceptionally strong capacity
for payment of financial commitments. This capacity is highly unlikely to be adversely
affected by foreseeable events.
AA:
Very high credit quality. ‘AA’ ratings denote expectations of very low
default risk. They indicate very strong capacity for payment of financial commitments.
This capacity is not significantly vulnerable to foreseeable events.
A:
High credit quality. ‘A’ ratings denote expectations of low default
risk. The capacity for payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to adverse business or
economic conditions than is the case for higher ratings.
BBB:
Good credit quality. ‘BBB’ ratings indicate that expectations of default
risk are currently low. The capacity for payment of financial commitments is considered
adequate, but adverse business or economic conditions are
more likely to impair this capacity.
Speculative
Grade
BB:
Speculative. ‘BB’ ratings indicate an elevated vulnerability to default
risk, particularly in the event of adverse changes in business or economic conditions
over time; however, business or financial flexibility exists that supports the
servicing of financial commitments.
B:
Highly speculative. ‘B’ ratings indicate that material default risk
is present, but a limited margin of safety remains. Financial commitments are currently
being met; however, capacity for continued payment is vulnerable to deterioration
in the business and economic environment.
CCC:
Substantial credit risk. Default is a real possibility.
CC:
Very high levels of credit risk. Default of some kind appears probable.
C:
Near default. A default or default-like process has begun, or the issuer is in standstill,
or for a closed funding vehicle, payment capacity is irrevocably impaired. Conditions
that are indicative of a ‘C’ category rating for an issuer include:
a.
the issuer has entered into a grace or cure period following non-payment of a material
financial obligation;
b.
the issuer has entered into a temporary negotiated waiver or standstill agreement
following a payment default on a material financial obligation;
c.
the formal announcement by the issuer or their agent of a distressed debt exchange;
d.
a closed financing vehicle where payment capacity is irrevocably impaired such that
it is not expected to pay interest and/or principal in full during the life of the
transaction, but where no payment default is imminent.
RD:
Restricted default. ‘RD’ ratings indicate an issuer that in Fitch’s
opinion has experienced:
a.
an uncured payment default or distressed debt exchange on a bond, loan or other
material financial obligation, but
b.
has not entered into bankruptcy filings, administration, receivership, liquidation,
or other formal winding-up procedure, and
c.
has not otherwise ceased operating.
This
would include:
i.
the selective payment default on a specific class or currency of debt;
ii.
the uncured expiry of any applicable grace period, cure period or default forbearance
period following a payment default on a bank loan, capital markets security or other
material financial obligation;
iii.
the extension of multiple waivers or forbearance periods upon a payment default
on one or more material financial obligations, either in series or in parallel;
ordinary execution of a distressed debt exchange on one or more material financial
obligations.
D:
Default. ‘D’ ratings indicate an issuer that in Fitch’s opinion
has entered into bankruptcy filings, administration, receivership, liquidation or
other formal winding-up procedure or that has otherwise ceased business.
Default
ratings are not assigned prospectively to entities or their obligations; within
this context, non-payment on an instrument that contains a deferral feature or grace
period will generally not be considered a default until after the
expiration of the deferral or grace period, unless a default is otherwise driven
by bankruptcy or other similar circumstance, or by a distressed debt exchange.
In
all cases, the assignment of a default rating reflects Fitch’s opinion as
to the most appropriate rating category consistent with the rest of its universe
of ratings, and may differ from the definition of default under the terms of
an issuer’s financial obligations or local commercial practice.
Within
rating categories, Fitch may use modifiers. The modifiers “+”
or “-”
may be appended to a rating to denote relative status within major rating categories.
For example, the rating category ‘AA’ has three notch-specific rating
levels (‘AA+’; ‘AA’; ‘AA–‘; each a rating
level). Such suffixes are not added to ‘AAA’ ratings and ratings below
the ‘CCC’ category. For the short-term rating category of ‘F1’,
a ‘+’ may be appended.
Fitch
Ratings Short-Term Ratings
F1:
Highest Short-Term Credit Quality. Indicates the strongest intrinsic capacity for
timely payment of financial commitments; may have an added “+”
to denote any exceptionally strong credit feature.
F2:
Good Short-Term Credit Quality. Good intrinsic capacity for timely payment of financial
commitments.
F3:
Fair Short-Term Credit Quality. The intrinsic capacity for timely payment of financial
commitments is adequate.
B:
Speculative Short-Term Credit Quality. Minimal capacity for timely payment of financial
commitments, plus heightened vulnerability to near term adverse changes in
financial and economic conditions.
C:
High Short-Term Default risk. Default is a real possibility.
RD:
Restricted Default. Indicates an entity that has defaulted on one or more of its
financial commitments, although it continues to meet other financial obligations.
Typically applicable to entity ratings only.
D:
Default. Indicates a broad-based default event for an entity, or the default of
a short-term obligation.
Part
II: Appendix II-A—Board
Members and Officers
Identification
and Background
The
Board has responsibility for the overall management and operations of the funds, including general supervision of
the duties performed by the Advisor and other service providers. Each Board Member serves until his or her successor is
duly elected or appointed and qualified. Each officer serves until he or she resigns, is removed, dies, retires or becomes
disqualified.
The
Trust currently has three Board Members. The three Independent Board Members have no affiliation or business connection
with the Advisor or any of its affiliated persons and do not own any stock or other securities issued by the
Advisor.
The
Independent Board Members of the Trust, their term of office and length of time served, their principal business occupations
during the past five years, the number of portfolios in the fund complex (defined below) overseen by each
Independent Board Member, and other directorships, if any, held by the Board Members are shown below. The fund
complex includes all registered open- and closed-end funds (including all of their portfolios) advised by the Advisor and
any registered funds that have an investment advisor that is an affiliated person of the Advisor. As of the date of this
SAI, the fund complex consists of the funds in the Trust, as well as the registered funds advised by affiliates of the
Advisor.
Shareholder
Communications to the Board. 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). The shareholder may send the communication
to either the Trust’s office or directly to such Board members c/o 875 Third Avenue, New York, NY 10022.
Other shareholder communications received by the Trust not directly addressed and sent to the Board will be reviewed
and generally responded to by management. Such communications will be forwarded to the Board at management’s discretion
based on the matters contained therein.
Independent
Board Members
Name,
Year of Birth,
Position
with
the Trust and Length
of
Time Served(1)
|
Business
Experience and
Directorships
During the Past 5 Years |
Number
of
Portfolios
in
Fund
Complex
Overseen
|
Other
Directorships
Held
by
Board
Member |
Stephen
R. Byers
(1953)Chairman
since 2016,
and
Board Member since
2011
(formerly, Lead
Independent
Board
Member,
2015-2016) |
Independent
Director (2011- present);
Independent
Consultant (2014-present);
Director
of Investment Management, the
Dreyfus
Corporation (2000-2006) and Vice
Chairman
and Chief Investment Officer, the
Dreyfus
Corporation (2002-2006). |
|
The
Arbitrage Funds, Sierra
Income
Corporation, Mutual
Fund
Directors Forum |
George
O. Elston (1964)
Board
Member since 2011,
Chairman
of the Audit
Committee
since 2015 |
Chief
Financial Officer, Enzyvant (2018-
present);
Chief Executive Officer, 2X
Oncology,
Inc. (2017-2018); Senior Vice
President
and Chief Financial Officer, Juniper
Pharmaceuticals,
Inc. (2014-2016); Senior
Vice
President and Chief Financial Officer,
KBI
BioPharma Inc. (2013-2014); Managing
Partner,
Chatham Street Partners (2010-
2013).
|
|
|
J.
David Officer (1948)
Board
Member since 2011,
Chairman
of the Nominating
Committee
since 2015 |
Independent
Director (2010-present); Vice
Chairman,
the Dreyfus Corporation (2006-
2009);
President, The Dreyfus Family of
Funds,
Inc. (2006-2009). |
|
(Chairman
of) Ilex
Management
Ltd; Old
Westbury
Funds |
Officers(2)
Name,
Year of Birth, Position
with
the Trust and Length of
Time
Served(3)
|
Business
Experience and
Directorships
During the Past 5 Years |
Freddi
Klassen(4)
(1975)
President
and Chief Executive
Officer,
2016-present |
Programmes
(Head since 2021), of DWS Investment Management Americas, Inc. and
Manager
and Chief Operating Officer of the Advisor (2016–present). Formerly: Chief
Operating
Officer in the Americas for the Traditional Asset Classes Department (2014–
2020);
Manager and Chief Operating Officer of DWS Investment Management
Americas,
Inc. (2018–2020); Global Chief Operating Officer for Equities Technology in
the
Investment Bank Division at Deutsche Bank AG (2013-2014); Chief Operating
Officer
for Exchange Traded Funds and Systematic Funds in Europe (2008-2013). |
Diane
Kenneally(5)
(1966)
Treasurer,
Chief Financial
Officer
and Controller, 2019-
present
|
Fund
Administration Treasurer’s Office (Co-Head since 2018), of DWS Investment
Management
Americas, Inc.; Chief Financial Officer and Treasurer for DWS US
registered
investment companies advised by DWS Investment Management Americas,
Inc.
(2018-present); Treasurer and Chief Financial Officer, The European Equity Fund,
Inc.,
The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc.
(2018-present);
formerly: Assistant Treasurer for the DWS funds (2007-2018). |
Frank
Gecsedi(4)
(1967)
Chief
Compliance Officer,
2010-present
|
AFC
Compliance US (Senior Team Lead), of DWS Investment Management Americas,
Inc.;
Compliance Department (2016-present), Vice President in the Deutsche Asset
Management
Compliance Department at Deutsche Bank AG (2013-2016) and Chief
Compliance
Officer of the Advisor (2010-present); Chief Compliance Officer of DWS
Distributors,
Inc. (2019-present); Vice President in Deutsche Bank’s Global Markets
Legal,
Risk and Capital Division (2010-2012). |
Bryan
Richards(4)
(1978)
Vice
President, 2016-present |
Portfolio
Engineering, Systematic Investments Solutions (Head), of DWS Investment
Management
Americas, Inc.(2018-present); Portfolio Manager in the Passive Asset
Management
Department at DWS (2011-present); Primary Portfolio Manager for the
PowerShares
DB Commodity ETFs (2011-2015). |
John
Millette(5)
(1962)
Secretary,
2020-present |
Legal
(Associate General Counsel), DWS US Retail Legal (2003-present), of DWS
Investment
Management Americas, Inc.; Vice President and Secretary of DWS US
registered
investment companies advised by DWS Investment Management Americas,
Inc.
(1999-present); Chief Legal Officer, DWS Investment Management Americas, Inc.
(2015-present);
Director and Vice President of DWS Trust Company (2016-present); Vice
President,
DBX Advisors LLC (2021-present); Secretary, The European Equity Fund,
Inc.,
The New Germany Fund, Inc. and The Central and Eastern Europe Fund, Inc.
(2011-present);
formerly: Secretary of Deutsche Investment Management Americas
Inc.
(2015-2017); and Assistant Secretary of DBX ETF Trust (2019-2020). |
Caroline
Pearson (5)
(1962)
Assistant
Secretary, 2020-
present
|
Legal
(Senior Team Lead), DWS US Retail Legal, of DWS Investment Management
Americas,
Inc.; Chief Legal Officer of DWS US registered investment companies
advised
by DWS Investment Management Americas, Inc. (2010-present); Chief Legal
Officer,
DBX Advisors LLC and DBX Strategic Advisors LLC (2020-present); Chief Legal
Officer,
The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central
and
Eastern Europe Fund, Inc. (2012-present); formerly: Secretary, Deutsche AM
Distributors,
Inc. (2002-2017); and Secretary, Deutsche AM Service Company (2010-
2017).
|
Paul
Antosca(5)
(1957)
Assistant
Treasurer, 2019-
present
|
Fund
Administration Tax (Head), of DWS Investment Management Americas, Inc.;
Assistant
Treasurer for DWS US registered investment companies advised by DWS
Investment
Management Americas, Inc. (2007-present). |
Jeffrey
Berry(5)
(1959)
Assistant
Treasurer, 2019-
present
|
Fund
Administration (Senior Specialist), of DWS Investment Management Americas,
Inc.
|
Sheila
Cadogan(5)
(1966)
Assistant
Treasurer, 2019-
present
|
Fund
Administration Treasurer’s Office (Co-Head since 2018), of DWS Investment
Management
Americas, Inc.; Assistant Treasurer for DWS US registered investment
companies
advised by DWS Investment Management Americas, Inc. (2017-present);
Director
and Vice President, DWS Trust Company (2018-present); Assistant Treasurer,
The
European Equity Fund, Inc., The New Germany Fund, Inc. and The Central and
Eastern
Europe Fund, Inc. (2018-present). |
Christina
A. Morse(6)
(1964)
Assistant
Secretary, 2017-
present
|
Vice
President at BNY Mellon Asset Servicing (2014-present); Vice President and
Counsel
at Lord Abbett & Co. LLC (2013-2014). |
Name,
Year of Birth, Position
with
the Trust and Length of
Time
Served(3)
|
Business
Experience and
Directorships
During the Past 5 Years |
Michelle
Goveia-Pine(4)(1970)
Interim
Anti-Money Laundering
Compliance
Officer, since July
9,
2020 |
Anti-Financial
Crime & Compliance US (Regional Head), of DWS Investment
Management
Americas, Inc.; Interim AML Officer, DWS Trust Company (since July 28,
2020);
and Interim AML Officer of DWS US registered investment companies advised
by
DWS Investment Management Americas, Inc. (since July 10, 2020); Interim AML
Officer,
The European Equity Fund, Inc., The New Germany Fund, Inc. and The Central
and
Eastern Europe Fund, Inc. (since July 24, 2020). |
(1)
The
length of time served is represented by the year in which the Board Member joined the Board.
(2)
As
a result of their respective positions held with the Advisor and its affiliates, these individuals are considered “interested
persons” of the Advisor
within the meaning of the 1940 Act. Interested persons receive no compensation from the fund.
(3)
The
length of time served is represented by the year in which the officer was first elected to the Trust in such capacity.
(4)
Address:
875 Third Avenue, New York, New York 10022.
(5)
Address:
100 Summer Street, Boston, MA 02110.
(6)
Address:
BNY Mellon Asset Servicing, 240 Greenwich Street, New York, NY 10286.
Certain
officers hold similar positions for other investment companies for which DBX or an affiliate serves as the Advisor.
Board
Member Qualifications
The
Board has concluded that, based on each Board Member’s experience, qualifications and attributes, each Board Member
should serve as a Board Member. Following is a brief summary of the information that led to this conclusion:
Mr.
Byers gained extensive experience with a variety of financial, accounting, management, regulatory and operational issues
facing registered investment companies through his more than 30 years of experience on the boards and/or in
senior management of such companies as The Arbitrage Funds, Sierra Income Corporation, Mutual Fund Directors Forum,
College of William and Mary - Graduate School of Business, Lighthouse Growth Advisors LLC, Founders Asset Management,
LLC, The Dreyfus Corporation, Gruntal & Co., LLC, Painewebber, Citibank/Citicorp and American Airlines. Mr.
Byers possesses a strong understanding of the regulatory framework under which registered investment companies must
operate and can provide management input and investment guidance to the Board.
Through
Mr. Elston’s prior positions on the boards and in senior management of such companies as Juniper Pharmaceuticals, Inc.,
KBI BioPharma, Inc., Celldex Therapeutics, Inc., Optherion, Inc. and Elusys Therapeutics, Mr. Elston has experience with
a variety of financial, management, regulatory and operational issues as well as experience with marketing and distribution.
Mr. Elston also has experience as a managing partner of Chatham Partners LLC, as the Senior Vice President and
Chief Financial Officer at Juniper Pharmaceuticals, Inc. and as the Chief Executive Officer at 2X Oncology, Inc. and
Chief Financial Officer of Enzyvant.
Mr.
Officer has over 30 years of experience in the financial services industry and related fields, including his positions on
the boards and/or in senior management of such companies as Ilex Partners (Asia), LLC, Old Westbury Funds, MAN
Long/Short Fund, GLG Investment Series Trust, The Bank of New York Mellon, The Dreyfus Corporation, Laurel Capital
Advisors and Bank of New England. In addition to his experience with financial, investment and regulatory matters,
Mr. Officer has extensive accounting knowledge through his education and experience as a principal financial officer,
principal accounting officer, controller, public accountant or auditor at his previous positions.
Part
II: Appendix II-B—Portfolio
Management Compensation
For
funds advised by DBX or its Affiliates
Each
Portfolio Manager is responsible for various functions related to portfolio management, including, but not limited to,
investing cash inflows, coordinating with members of his or her team to focus on certain asset classes, implementing investment
strategy, researching and reviewing investment strategy and overseeing members of his or her portfolio management
team with more limited responsibilities.
Compensation
of Portfolio Managers
The
Advisor and its affiliates are part of DWS. The brand DWS represents DWS Group GmbH & Co. KGaA (“DWS
Group”)
and any of its subsidiaries such as DWS Investment Management Americas, Inc. and RREEF America L.L.C. which
offer advisory services. As employees of DWS, portfolio managers are paid on a total compensation basis, which
includes Fixed Pay (base salary) and Variable Compensation, as follows:
•
Fixed
Pay (FP) is the key and primary element of compensation for the majority of DWS employees and reflects the
value of the individual’s role and function within the organization. It rewards factors that an employee brings to
the organization such as skills and experience, while reflecting regional and divisional (i.e., DWS) specifics. FP levels
play a significant role in ensuring competitiveness of the Advisor and its affiliates in the labor market, thus benchmarking
provides a valuable input when determining FP levels.
•
Variable
Compensation (VC) is a discretionary compensation element that enables the Advisor and its affiliates to
provide additional reward to employees for their performance and behaviors, while reflecting DWS affordability and
the financial situation of Deutsche Bank AG (the “Bank”)
and DWS. VC aims to:
Recognize
that every employee contributes to the DWS Group’s success through the DWS Group and/or Bank component
of VC (Group Component);
Reflect
individual performance, investment performance, behaviors and culture through discretionary individual VC
(Individual Component); and
Reward
outstanding contributions at the junior levels through the discretionary Recognition Award.
Employee
seniority as well as divisional and regional specifics determine which VC elements are applicable for a given employee
and the conditions under which they apply. Both group and individual components may be awarded in shares or
other share-based instruments and other deferral arrangements.
•
VC
can be delivered via cash, restricted equity awards, and/or restricted incentive awards or restricted compensation. Restricted
compensation may include:
Notional
fund investments;
Restricted
equity, notional equity;
Restricted
cash; or
Such
other form as DWS may decide in its sole discretion.
•
VC
comprises a greater proportion of total compensation as an employee’s seniority and total compensation level increase.
Proportion of VC delivered via a long-term incentive award, which is subject to performance conditions and
forfeiture provisions, will increase significantly as the amount of the VC increases.
•
Additional
forfeiture and claw back provisions, including complete forfeiture and claw back of VC may apply in certain
events if an employee is an InstVV [CRD IV EU Directive4] Material Risk Taker.
•
For
key investment professionals, in particular, a portion of any long-term incentives will be in the form of notional investments
aligned, where possible, to a suite of flagship funds managed by the DWS ETF platform.
To
evaluate their investment professionals in light of and consistent with the compensation principles set forth above, the
Advisor and its affiliates review investment performance for all accounts managed in relation to a fund’s underlying index:
•
Quantitative
measures (e.g. tracking error and tracking difference) are utilized to measure performance.
•
Qualitative
measures (e.g., adherence to, as well as contributions to, the enhancement of the investment process) are
included in the performance review.
•
Other
factors (e.g., non-investment related performance, teamwork, adherence to compliance rules, risk management and
“living the values”
of the Advisor and its affiliates) are included as part of a discretionary component of the review
process, giving management the ability to consider additional markers of performance on a subjective basis.
•
Furthermore,
it is important to note that DWS Group functions within a controlled environment based upon the risk
limits established by DWS Group's Risk division, in conjunction with DWS Group management. Because risk
consideration is inherent in all business activities, performance assessment factors in an employee’s ability to
assess and manage risk.
Conflicts
Real,
potential or apparent conflicts of interest may arise when a portfolio manager has day-to-day portfolio management responsibilities
with respect to more than one fund or account, including the following:
•
Certain
investments may be appropriate for a fund and also for other clients advised by the Advisor and their affiliates,
including other client accounts managed by a fund’s portfolio management team. Investment decisions for
a fund and other clients are made with a view to achieving their respective investment objectives and after consideration
of such factors as their current holdings, availability of cash for investment and the size of their investments
generally. A particular security may be bought or sold for only one client or in different amounts and at
different times for more than one but less than all clients. Likewise, because clients of the Advisor and their affiliates
may have differing investment strategies, a particular security may be bought for one or more clients when
one or more other clients are selling the security. The investment results achieved for a fund may differ from
the results achieved for other clients of the Advisor and their affiliates. In addition, purchases or sales of the
same security may be made for two or more clients on the same day. In such event, such transactions will be
allocated among the clients in a manner believed by the Advisor and their affiliates to be most equitable to each
client, generally utilizing a pro rata allocation methodology. In some cases, the allocation procedure could potentially
have an adverse effect or positive effect on the price or amount of the securities purchased or sold by
a fund. Purchase and sale orders for a fund may be combined with those of other clients of the Advisor and their
affiliates in the interest of achieving the most favorable net results to a fund and the other clients.
•
To
the extent that a portfolio manager has responsibilities for managing multiple client accounts, a portfolio manager will
need to divide time and attention among relevant accounts. The Advisor and their affiliates attempt to minimize these
conflicts by aligning its portfolio management teams by investment strategy and by employing similar investment models
across multiple client accounts.
•
In
some cases, an apparent conflict may arise where the Advisor has an incentive, such as a performance-based fee,
in managing one account and not with respect to other accounts it manages. The Advisor and their affiliates will
not determine allocations based on whether it receives a performance-based fee from the client. Additionally, the
Advisor has in place supervisory oversight processes to periodically monitor performance deviations for accounts with
like strategies.
•
The
Advisor and its affiliates and the investment team of a fund may manage other mutual funds and separate accounts
on a long only or a long-short basis. The simultaneous management of long and short portfolios creates potential
conflicts of interest including the risk that short sale activity could adversely affect the market value of the
long positions (and vice versa), the risk arising from sequential orders in long and short positions, and the risks
associated with receiving opposing orders at the same time. The Advisor has adopted procedures that it believes
are reasonably designed to mitigate these and other potential conflicts of interest. Included in these procedures
are specific guidelines developed to provide fair and equitable treatment for all clients whose accounts are
managed by each fund’s portfolio management team. The Advisor and the portfolio management team have established
monitoring procedures, a protocol for supervisory reviews, as well as compliance oversight to ensure that
potential conflicts of interest relating to this type of activity are properly addressed.
The
Advisor is owned by the DWS Group, a multinational global financial services firm that is a majority-owned subsidiary of
Deutsche Bank AG. Therefore, the Advisor is affiliated with a variety of entities that provide, and/or engage in commercial banking,
insurance, brokerage, investment banking, financial advisory, broker-dealer activities (including sales and trading), hedge
funds, real estate and private equity investing, in addition to the provision of investment management services to
institutional and individual investors. Since Deutsche Bank AG, its affiliates, directors, officers and employees (the “Firm”)
are engaged in businesses and have interests in addition to managing asset management accounts, such wide
ranging activities involve real, potential or apparent conflicts of interest. These interests and activities include potential
advisory, transactional and financial activities and other interests in securities and companies that may be directly
or indirectly purchased or sold by the Firm for its clients’ advisory accounts. The Advisor may take investment positions
in securities in which other clients or related persons within the Firm have different investment positions. There
may be instances in which the Advisor and their affiliates are purchasing or selling for their client accounts, or pursuing
an outcome in the context of a workout or restructuring with respect to, securities in which the Firm is undertaking
the same or differing strategy in other businesses or other client accounts. These are considerations of which
advisory clients should be aware and which will cause conflicts that could be to the disadvantage of the Advisor, and
their affiliate’s advisory clients, including the fund. The Advisor has instituted business and compliance policies, procedures
and disclosures that are designed to identify, monitor and mitigate conflicts of interest and, as appropriate, to
report them to a fund’s Board.
For
funds advised by HGI
Compensation
HGI
compensates the funds’ portfolio managers for their management of the funds. HGI pays portfolio managers (i) fixed
base salaries, which are linked to job function, responsibilities and financial services industry peer comparison, and
(ii) variable compensation, which is linked to investment performance, individual contributions to the team, and the
overall financial results of the firm. Variable compensation may include a cash bonus, as well as potential participation in
a variety of long-term incentive programs. There is no material difference in the method used to calculate the portfolio manager’s
compensation with respect to the funds and other accounts managed by the portfolio manager. HGI maintains competitive
salaries for all employees, based on independent research of the investment management industry.
Conflicts
Real,
potential or apparent conflicts of interest may arise when a portfolio manager has day-to-day portfolio management responsibilities
with respect to more than one fund or account, including the following:
•
Certain
investments may be appropriate for a fund and also for other clients advised by the Advisor, including other
client accounts managed by a fund’s portfolio management team. Investment decisions for a fund and other
clients are made with a view to achieving their respective investment objectives and after consideration of
such factors as their current holdings, availability of cash for investment and the size of their investments generally. A
particular security may be bought or sold for only one client or in different amounts and at different times for more
than one but less than all clients. Likewise, because clients of the Advisor may have differing investment strategies,
a particular security may be bought for one or more clients when one or more other clients are selling the
security. The investment results achieved for a fund may differ from the results achieved for other clients of the
Advisor. In addition, purchases or sales of the same security may be made for two or more clients on the same
day. In such event, such transactions will be allocated among the clients in a manner believed by the Advisor to
be most equitable to each client, generally utilizing a pro rata allocation methodology. In some cases, the allocation procedure
could potentially have an adverse effect or positive effect on the price or amount of the securities purchased
or sold by a fund. Purchase and sale orders for a fund may be combined with those of other clients of
the Advisor in the interest of achieving the most favorable net results to a fund and the other clients.
•
To
the extent that a portfolio manager has responsibilities for managing multiple client accounts, a portfolio manager will
need to divide time and attention among relevant accounts. The Advisor attempts to minimize these conflicts by
aligning its portfolio management teams by investment strategy and by employing similar investment models across
multiple client accounts.
•
In
some cases, an apparent conflict may arise where the Advisor has an incentive, such as a performance-based fee,
in managing one account and not with respect to other accounts it manages. The Advisor will not determine allocations
based on whether it receives a performance-based fee from the client. Additionally, the Advisor has in
place supervisory oversight processes to periodically monitor performance deviations for accounts with like strategies.
•
The
Advisor and its affiliates and the investment team of a fund may manage other mutual funds and separate accounts
on a long only or a long-short basis. The simultaneous management of long and short portfolios creates potential
conflicts of interest including the risk that short sale activity could adversely affect the market value of the
long positions (and vice versa), the risk arising from sequential orders in long and short positions, and the risks
associated with receiving opposing orders at the same time. The Advisor has adopted procedures that it believes
are reasonably designed to mitigate these and other potential conflicts of interest. Included in these procedures
are specific guidelines developed to provide fair and equitable treatment for all clients whose accounts are
managed by each fund’s portfolio management team. The Advisor and the portfolio management team have established
monitoring procedures, a protocol for supervisory reviews, as well as compliance oversight to ensure that
potential conflicts of interest relating to this type of activity are properly addressed.
HGI
is affiliated with DWS Group, a multinational global financial services firm that is a majority-owned subsidiary of Deutsche
Bank AG. Therefore, the Advisor is affiliated with a variety of entities that provide, and/or engage in commercial banking,
insurance, brokerage, investment banking, financial advisory, broker-dealer activities (including sales and trading), hedge
funds, real estate and private equity investing, in addition to the provision of investment management services to
institutional and individual investors. Since Deutsche Bank AG, its affiliates, directors, officers and employees (the “Firm”)
are engaged in businesses and have interests in addition to managing asset management accounts, such wide
ranging activities involve real, potential or apparent conflicts of interest. These interests and activities include potential
advisory, transactional and financial activities and other interests in securities and companies that may be directly
or indirectly purchased or sold by the Firm for its clients’ advisory accounts. The Advisor may take investment positions
in securities in which other clients or related persons within the Firm have different investment positions. There
may be instances in which the Advisor is purchasing or selling for its client accounts, or pursuing an outcome in
the context of a workout or restructuring with respect to, securities in which the Firm is undertaking the same or differing
strategy in other businesses or other client accounts. These are considerations of which advisory clients should
be aware and which will cause conflicts that could be to the disadvantage of the Advisor’s advisory clients, including
the fund. The Advisor has instituted business and compliance policies, procedures and disclosures that are designed
to identify, monitor and mitigate conflicts of interest and, as appropriate, to report them to a fund’s Board.
Part
II: Appendix II-C—Contractual
Fee Rates of Service Providers
Fees
payable to DBX for investment advisory services
The
Unitary Advisory Fee for each fund, at the annual percentage rate of daily net assets, is indicated below:
|
Unitary
Advisory Fee Rate |
MSCI
Currency Hedged Funds |
|
Xtrackers
MSCI All World ex US Hedged Equity ETF |
|
Xtrackers
MSCI EAFE Hedged Equity ETF |
|
Xtrackers
MSCI Emerging Markets Hedged Equity
ETF
|
|
Xtrackers
MSCI Europe Hedged Equity ETF |
|
Xtrackers
MSCI Eurozone Hedged Equity ETF |
|
Xtrackers
MSCI Germany Hedged Equity ETF |
|
Xtrackers
MSCI Japan Hedged Equity ETF |
|
|
|
Xtrackers
International Real Estate ETF |
|
|
|
Xtrackers
Emerging Markets Carbon Reduction and
Climate
Improvers ETF |
|
Xtrackers
Eurozone Equity ETF |
|
Xtrackers
FTSE Developed Ex US Multifactor ETF |
|
Xtrackers
Japan JPX-Nikkei 400 Equity ETF |
|
Xtrackers
MSCI All World ex US High Dividend Yield
Equity
ETF |
|
Xtrackers
MSCI EAFE ESG Leaders Equity ETF |
|
Xtrackers
MSCI EAFE High Dividend Yield Equity ETF |
|
Xtrackers
MSCI Emerging Markets ESG Leaders
Equity
ETF |
|
Xtrackers
MSCI Kokusai Equity ETF |
|
Xtrackers
MSCI USA ESG Leaders Equity ETF |
|
Xtrackers
Russell 1000 US Quality at a Reasonable
Price
ETF |
|
Xtrackers
Russell US Multifactor ETF |
|
Xtrackers
S&P 500 ESG ETF |
|
Xtrackers
S&P MidCap 400 ESG ETF |
|
Xtrackers
S&P SmallCap 600 ESG ETF |
|
|
|
Xtrackers
Harvest CSI 300 China A-Shares ETF |
|
Xtrackers
Harvest CSI 500 China A-Shares Small Cap
ETF
|
|
Xtrackers
MSCI All China Equity ETF |
|
Xtrackers
MSCI China A Inclusion Equity ETF |
|
|
|
Xtrackers
Bloomberg Barclays US Investment Grade
Corporate
ESG ETF |
|
|
Unitary
Advisory Fee Rate |
Xtrackers
High Beta High Yield Bond ETF |
|
Xtrackers
J.P. Morgan ESG Emerging Markets
Sovereign
ETF |
|
Xtrackers
J.P. Morgan ESG USD High Yield Corporate
Bond
ETF |
|
Xtrackers
Low Beta High Yield Bond ETF |
|
Xtrackers
Municipal Infrastructure Revenue Bond
ETF
|
|
Xtrackers
Short Duration High Yield Bond ETF |
|
Xtrackers
USD High Yield Corporate Bond ETF |
|
Part
II: Appendix II-D—Firms
With Which DBX Has Revenue Sharing Arrangements
The
list of financial representatives below is as of the date of this SAI. Any additions, modifications or deletions to the
list of financial representatives identified below that have occurred since the date of this SAI are not reflected. You
can ask your financial representative if it receives revenue sharing payments from the Advisor, the Distributor and/or
their affiliates.
Pershing
LLC
TD
Ameritrade, Inc.
Part
II: Appendix II-E—Investments,
Practices and Techniques, and Risks
To
the extent that a fund invests in an Underlying Fund, or one or more affiliated funds, certain of these risks would also
apply to that fund.
Adjustable
Rate Securities. The interest rates paid on the adjustable rate securities in which
a fund invests generally are readjusted at periodic intervals, usually by reference
to a predetermined interest rate index. Adjustable rate securities include US Government
securities and securities of other issuers. Some adjustable rate securities are backed by pools of
mortgage loans. There are three main categories of interest rate indices: those based on US Treasury securities, those
derived from a calculated measure such as a cost of funds index and those based on a moving average of mortgage
rates. Commonly used indices include the one-year, three-year and five-year constant maturity Treasury rates,
the three-month Treasury bill rate, the 180-day Treasury bill rate, rates on longer-term Treasury securities, the 11th
District Federal Home Loan Bank Cost of Funds, the National Median Cost of Funds, the one-month, three-month, six-month
or one-year London Interbank Offered Rate (LIBOR), the prime rate of a specific bank or commercial paper rates.
As with fixed-rates securities, changes in market interest rates and changes in the issuer’s creditworthiness may
affect the value of adjustable rate securities.
Some
indices, such as the one-year constant maturity Treasury rate, closely mirror changes in market interest rate levels.
Others, such as the 11th District Home Loan Bank Cost of Funds index (Cost of Funds Index), tend to lag behind changes
in market rate levels and tend to be somewhat less volatile. To the extent that the Cost of Funds index may reflect
interest changes on a more delayed basis than other indices, in a period of rising interest rates, any increase may
produce a higher yield later than would be produced by such other indices, and in a period of declining interest rates,
the Cost of Funds index may remain higher for a longer period of time than other market interest rates, which may
result in a higher level of principal prepayments on adjustable rate securities which adjust in accordance with the
Cost of Funds index than adjustable rate securities which adjust in accordance with other indices. In addition, dislocations
in the member institutions of the 11th District Federal Home Loan Bank in recent years have caused and may
continue to cause the Cost of Funds index to change for reasons unrelated to changes in general interest rate levels.
Furthermore, any movement in the Cost of Funds index as compared to other indices based upon specific interest
rates may be affected by changes in the method used to calculate the Cost of Funds index.
If
prepayments of principal are made on the securities during periods of rising interest rates, a fund generally will be able
to reinvest such amounts in securities with a higher current rate of return. However, a fund will not benefit from increases
in interest rates to the extent that interest rates rise to the point where they cause the current coupon of adjustable
rate securities held as investments by a fund to exceed the maximum allowable annual or lifetime reset limits
(cap rates) for a particular adjustable rate security. Also, a fund’s net asset value could vary to the extent that current
yields on adjustable rate securities are different than market yields during interim periods between coupon reset
dates.
During
periods of declining interest rates, the coupon rates may readjust downward, resulting in lower yields to a fund.
Further, because of this feature, the value of adjustable rate securities is unlikely to rise during periods of declining interest
rates to the same extent as fixed-rate instruments. Interest rate declines may result in accelerated prepayment of
adjustable rate securities, and the proceeds from such prepayments must be reinvested at lower prevailing interest rates.
LIBOR,
the benchmark rate for certain floating rate securities, is expected to be phased out by the end of 2021, although the
US Dollar LIBOR phase out may extend past 2021 for certain existing contracts. During this period, it is unclear whether
LIBOR will continue to be available or whether it will continue to be deemed to be an appropriate reference rate
upon which to determine the interest rate on or impacting certain loans, notes, derivatives and other instruments or
investments comprising some or all of a fund’s portfolio. In light of this eventuality, public and private sector industry initiatives
are currently underway to identify new or alternative reference rates to be used in place of LIBOR. There is
no assurance that the composition or characteristics of any such alternative reference rate will be similar to or produce the
same value or economic equivalence as LIBOR or that it will have the same volume or liquidity as did LIBOR prior to
its discontinuance or unavailability, which may affect the value or liquidity or return on certain of a fund’s investments and
result in costs incurred in connection with closing out positions and entering into new trades.
Neither
the effect of the LIBOR transition process nor its ultimate success can yet be known. The transition process might
lead to increased volatility and illiquidity in markets for, and reduce the effectiveness of new hedges placed against,
instruments whose terms currently include LIBOR. While some existing LIBOR-based instruments may contemplate a
scenario where LIBOR is no longer available by providing for an alternative rate-setting methodology, there may be significant
uncertainty regarding the effectiveness of any such alternative methodologies to replicate LIBOR. Not all existing
LIBOR-based instruments may have alternative rate-setting provisions and there remains uncertainty regarding the
willingness and ability of issuers to add alternative rate-setting provisions in certain existing instruments. In addition, a
liquid market for newly-issued instruments that use a reference rate other than LIBOR still may be developing. There may
also be challenges for a fund to enter into hedging transactions against such newly-issued instruments until a market
for such hedging transactions develops. All of the aforementioned may adversely affect a fund’s performance or
net asset value.
Borrowing.
Under the 1940 Act, a fund is required to maintain continuous asset coverage of 300% with respect to permitted
borrowings and to sell (within three days) sufficient portfolio holdings to restore such coverage if it should decline
to less than 300% due to market fluctuations or otherwise, even if such liquidation of a fund's holdings may be
disadvantageous from an investment standpoint.
Credit
Facility. To the extent that a fund and other affiliated funds (“Participants”)
participate, a fund may share in a revolving credit facility provided by a syndication
of banks. A fund may borrow money under a credit facility for temporary or emergency
purposes, including the funding of shareholder redemption requests, that otherwise might require the untimely
disposition of securities. Participants are charged an annual commitment fee as well as other fees associated with
the credit facility, paid by the Advisor out of a fund’s unitary advisory fee, which is allocated based on net assets, among
each of the Participants. Interest is charged to a fund on its borrowings at current commercial rates. A fund can
prepay loans at any time and may at any time terminate, or from time to time reduce, without the payment of a premium
or penalty, its commitment under the credit facility subject to compliance with certain conditions.
Borrowing
may exaggerate changes in the net asset value of fund shares and in the return on a fund’s portfolio. Borrowing will
cost a fund interest expense and other fees, which may reduce a fund’s return. A fund is required to maintain continuous
asset coverage with respect to its borrowings and may be required to sell some of its holdings to reduce debt
and restore coverage at times when it is not advantageous to do so. There is no assurance that a borrowing strategy
will be successful. Upon the expiration of the term of a fund’s existing credit arrangement, the lender may not
be willing to extend further credit to a fund or may only be willing to do so at an increased cost to a fund. If a fund is
not able to extend its credit arrangement, it may be required to liquidate holdings to repay amounts borrowed from the
lender. In addition, if a fund’s assets increase, there is no assurance that the lender will be willing to make additional loans
to a fund in order to allow it to borrow the amounts desired by a fund to facilitate redemptions.
Chinese
Securities. A-Shares are issued by companies incorporated in mainland China and
are traded in RMB on the SZSE and SSE. Under current regulations in the PRC, foreign
investors can invest in the domestic PRC securities markets through certain market
access programs. These programs include the QFII or RQFII licenses obtained from the
CSRC. QFII and RQFII investors have also registered to invest foreign freely convertible currencies (in the case of
a QFII) and RMB (in the case of an RQFII) in the PRC for the purpose of investing in the PRC’s domestic securities markets.
Currently,
there are two stock exchanges in mainland China, the SSE and SZSE. The SSE and SZSE are supervised by
the CSRC and are highly automated with trading and settlement executed electronically. The SSE and SZSE are smaller,
periodically less liquid, and substantially more volatile than the major securities markets in the United States.
The
SSE commenced trading on December 19, 1990, and the SZSE commenced trading on July 3, 1991. The SSE and
SZSE divide listed shares into two classes: A-Shares and B-Shares. Companies whose shares are traded on the SSE
and SZSE that are incorporated in mainland China may issue both A-Shares and B-Shares. In China, the A-Shares and
B-Shares of an issuer may only trade on one exchange. A-Shares and B-Shares may both be listed on either the SSE
or the ZSE. Both classes represent an ownership interest comparable to a share of common stock and all shares are
entitled to substantially the same rights and benefits associated with ownership. A-Shares are traded on the SSE and
SZE in RMB.
A
fund may invest in B-Shares, which are equity securities issued by companies incorporated in China and are denominated and
traded in U.S. dollars and Hong Kong dollars (“HKD”)
on the SSE and SZSE, respectively. B-Shares are available to foreign investors.
H-Shares are equity securities issued by companies incorporated in mainland China and are denominated and
traded in HKD on the Hong Kong Stock Exchange and other foreign exchanges.
A
fund may also invest in red chips and P chips, which are equity securities issued by companies incorporated outside of
mainland China and listed on the Hong Kong Stock Exchange. Companies that issue Red chips generally base their businesses
in mainland China and are controlled, either directly or indirectly, by the state, provincial or municipal governments of
the PRC. Companies that issue P chips generally are non-state-owned Chinese companies incorporated outside of
mainland China that satisfy the following criteria: (i) the company is controlled by PRC individuals, (ii) the company derives
more than 80% of its revenue from the PRC and (iii) the company allocates more than 60% of its assets in the
PRC. Securities listed in the United States and Singapore are considered to be Chinese companies if they satisfy two
out of three of the following criteria: (i) the company is based in the PRC, (ii) the company derives more than 50%
of its revenue from activities conducted in the PRC and (iii) the company has more than 50% of its assets in the
PRC.
A
fund may be exposed to securities listed on the Small and Medium Enterprise (SME) board and the ChiNext market of
the Shenzhen Stock Exchange. Listed companies on the SME board and/or the ChiNext market are usually of an emerging
nature with smaller operating scale. They are subject to higher fluctuation in stock prices and liquidity and have
higher risks and turnover ratios than companies listed on the main board of the Shenzhen Stock Exchange. Securities listed
on the SME board and/or ChlNext may be overvalued and such exceptionally high valuation may not be sustainable. Stock
prices may be more susceptible to manipulation due to fewer circulating shares. It may be more common and faster
for companies listed on the SME board and/or ChiNext to delist. This may have an adverse impact on a fund if the
companies that they invest in are delisted. Also, the rules and regulations regarding companies listed on ChlNext market
are less stringent in terms of profitability and share capital than those on the main board and SME board. Investments
in the SME board and/or ChlNext market may result in significant losses for a fund and its investors.
A-Share
Market Suspension Risk. A-Shares may only be purchased from, or sold to, certain
funds from time to time where the relevant A-Shares may be sold or purchased on
the SSE and SZSE, as appropriate. Given that the A-Share market is considered volatile
and unstable (with the risk of suspension of a particular stock or government intervention), the
creation and redemption of Creation Units may also be disrupted. Such suspensions may be widespread and, on some
occasions, have affected a majority of listed issuers in China. A participating dealer may not be able to create Creation
Units of a fund if A-Shares are not available or not available in sufficient amounts.
A-Share
Tax Risk. Uncertainties in the Chinese tax rules governing taxation of income and
gains from investments in A-Shares could result in unexpected tax liabilities for
a fund. China generally imposes withholding tax at a rate of 10% on dividends and
interest derived by nonresident enterprises (including QFIIs and RQFIIs) from issuers resident in China.
China also imposes withholding tax at a rate of 10% on capital gains derived by nonresident enterprises from investments
in an issuer resident in China, subject to an exemption or reduction pursuant to domestic law or a double taxation
agreement or arrangement.
Since
the respective inception of Shanghai Connect and Shenzhen Connect, foreign investors (including the funds) investing
in A-Shares listed on the SSE through Shanghai Connect and those listed on the SZSE through Shenzhen Connect
would be temporarily exempt from the PRC corporate income tax and value-added tax on the gains on disposal of
such A-Shares. Dividends would be subject to PRC corporate income tax on a withholding basis at 10%, unless reduced
under a double tax treaty with China upon application to and obtaining approval from the competent tax authority.
Since
November 17, 2014, the corporate income tax for QFIIs and RQFIIs, with respect to capital gains, has been temporarily
lifted. The withholding tax relating to the realized gains from shares in land-rich companies prior to November 17,
2014 has been paid by the Xtrackers Harvest ETFs, while realized gains from shares in non-land-rich companies prior
to November 17, 2014 were granted by treaty relief pursuant to the PRC-US Double Taxation Agreement. During 2015,
revenue authorities in the PRC made arrangements for the collection of capital gains taxes for investments realized
between November 17, 2009 and November 16, 2014. A fund could be subject to tax liability for any tax
payments
for which reserves have not been made or that were not previously withheld. The impact of any such tax liability
on a fund’s return could be substantial. A fund may also be liable to the Advisor or Subadvisor for any tax that is
imposed on the Advisor or Subadvisor by the PRC with respect to the fund’s investments. If a fund’s direct investments in
A-Shares through the Advisor’s or Subadvisor’s Stock Connect investments and/or Subadvisor’s RQFII quota become subject
to repatriation restrictions, the fund may be unable to satisfy distribution requirements applicable to Registered Investment
Companies (“RIC”)
under the Internal Revenue Code, and be subject to tax at the fund level. In the event such
restrictions are imposed, a fund may borrow funds to the extent necessary to distribute to shareholders income sufficient
to maintain the fund’s status as a RIC.
The
current PRC tax laws and regulations and interpretations thereof may be revised or amended in the future, including with
respect to the possible liability of a fund for the taxation of income and gains from investments in A-Shares through
Stock Connect or obligations of an RQFII. The withholding taxes on dividends, interest and capital gains may in
principle be subject to a reduced rate under an applicable tax treaty, but the application of such treaties in the case of
an RQFII acting for a foreign investor such as the funds is also uncertain. Finally, it is also unclear whether an RQFII would
also be eligible for PRC Business Tax (BT) exemption, which has been granted to QFIIs, with respect to gains derived
prior to May 1, 2016. In practice, the BT has not been collected. However, the imposition of such taxes on a fund
could have a material adverse effect on a fund’s returns. Since May 1, 2016, RQFIIs are exempt from PRC value-added tax,
which replaced the PRC Business Tax with respect to gains realized from the disposal of securities, including A-Shares.
The
PRC rules for taxation of RQFIIs (and QFIIs) are evolving and certain tax regulations to be issued by the PRC State
Administration of Taxation and/or PRC Ministry of Finance to clarify the subject matter may apply retrospectively, even
if such rules are adverse to a fund and their shareholders. The applicability of reduced treaty rates of withholding in
the case of an RQFII acting for a foreign investor such as the fund is also uncertain.
The
PRC tax authorities are not currently enforcing the collection of withholding tax on capital gains, and at present such
taxes likely will not be collected through withholding. If the PRC begins applying tax rules regarding the taxation of
income from A-Shares investments to RQFIIs and/or begins collecting capital gains taxes on such investments (whether
made through Stock Connect or an RQFII), a fund could be subject to withholding tax liability in excess of the
amount reserved (if any). The impact of any such tax liability on a fund’s return could be substantial. A fund will be
liable to the Advisor and/or Subadvisor for any Chinese tax that is imposed on the Advisor and/or the Subadvisor with
respect to the fund’s investments.
As
described below under “Taxes,”
each fund may elect, for US federal income tax purposes, to treat PRC taxes (including
withholding taxes) paid by a fund as paid by its shareholders. Even if a fund is qualified to make that election and
does so, however, your ability to claim a credit for certain PRC taxes may be limited under general US tax principles.
In
addition, to the extent a fund invests in swaps and other derivative instruments, such investments may be less tax-efficient
from a US tax perspective than direct investment in A-Shares and may be subject to special US federal income
tax rules that could adversely affect a fund. Also each fund may be required to periodically adjust its positions in
those instruments to comply with certain regulatory requirements which may further cause these investments to be
less efficient than a direct investment in A-Shares.
The
PRC government has implemented a number of tax reform policies in recent years. The current tax laws and regulations
may be revised or amended in the future. Any revision or amendment in tax laws and regulations may affect
the after-taxation profit of PRC companies and foreign investors in such companies, such as each fund.
Disclosure
of Interests and Short Swing Profit Rule. A fund may be subject to shareholder disclosure
of interest regulations promulgated by the CSRC. To the extent they are applicable,
these regulations currently would require a fund to make certain public disclosures
when the fund and parties acting in concert with the fund acquire 5% or more of the issued securities
of a listed company (which include A-Shares of the listed company). If the reporting requirement is triggered, a
fund would be required to report information which includes, but is not limited to: (a) information about a fund (and parties
acting in concert with the fund) and the type and extent of its holdings in the company; (b) a statement of a fund’s
purposes for the investment and whether the Fund intends to increase its holdings over the following 12-month
period;
(c) a statement of a fund’s historical investments in the company over the previous six months; (d) the time of,
and other information relating to, the transaction that triggered a fund’s holding in the listed company reaching the
5% reporting threshold; and (e) other information that may be required by the CSRC or the stock exchange. Additional information
may be required if a fund and its concerted parties constitute the largest shareholder or actual controlling shareholder
of the listed company. The report must be made to the CSRC, the stock exchange, the invested company, and
the CSRC local representative office where the listed company is located. Each fund would also be required to make
a public announcement through a media outlet designated by the CSRC. The public announcement must contain the
same content as the official report. The public announcement may require a fund to disclose its holdings to the public,
which could have an adverse effect on the performance of the fund.
The
relevant PRC regulations presumptively treat all affiliated investors and investors under common control as parties acting
in concert. As such, under a conservative interpretation of these regulations, a fund may be deemed as a “concerted
party”
of other funds managed by the Advisor, Subadvisor or their affiliates and therefore may be subject to the risk that
the fund’s holdings may be required to be reported in the aggregate with the holdings of such other funds should the
aggregate holdings trigger the reporting threshold under the PRC law.
If
the 5% shareholding threshold is triggered by a fund and parties acting in concert with the fund, the fund would be
required to file its report within three days of the date the threshold is reached. During the time limit for filing the report,
a trading freeze applies and a fund would not be permitted to make subsequent trades in the invested company’s securities.
Any such trading freeze may undermine the fund’s performance, if the fund would otherwise make trades during
that period but is prevented from doing so by the regulations.
Once
a fund and parties acting in concert reach the 5% trading threshold as to any listed company, any subsequent incremental
increase or decrease of 5% or more will trigger a further reporting requirement and an additional three-day trading
freeze, and also an additional freeze on trading within two days of the fund’s report and announcement of the incremental
change. These trading freezes may undermine a fund’s performance as described above. Also, SSE requirements currently
require a fund and parties acting in concert, once they have reached the 5% threshold, to disclose whenever their
shareholding drops below this threshold (even as a result of trading which is less than the 5% incremental change that
would trigger a reporting requirement under the relevant CSRC regulation). Under interim measures adopted in July
2015, 5% holders of the securities of listed companies may be temporarily prohibited from selling such securities for
a period of six months.
CSRC
regulations also contain additional disclosure (and tender offer) requirements that apply when an investor and parties
acting in concert reach thresholds of 20% and greater than 30% shareholding in a company.
Subject
to the interpretation of PRC courts and PRC regulators, the operation of the PRC short swing profit rule may be
applicable to the trading of a fund with the result that where the holdings of the fund (possibly with the holdings of
other investors deemed as concert parties of the fund) exceed 5% of the total issued shares of a listed company, the
fund may not reduce its holdings in the company within six months of the last purchase of shares of the company. If
a fund violates the rule, it may be required by the listed company to return any profits realized from such trading to the
listed company. In addition, the rule limits the ability of the fund to repurchase securities of the listed company within
six months of such sale. Moreover, under PRC civil procedures, a fund’s assets may be frozen to the extent of
the claims made by the company in question. These risks may greatly impair the performance of the fund.
Economic,
political and social risks of the PRC. The economy of China, which has been in a
state of transition from a planned economy to a more market oriented economy, differs
from the economies of most developed countries in many respects, including the level
of government involvement, its state of development, its growth rate, control of foreign
exchange, and allocation of resources.
Although
the majority of productive assets in China are still owned by the PRC government at various levels, in recent years,
the PRC government has implemented economic reform measures emphasizing utilization of market forces in
the development of the economy of China and a high level of management autonomy. The economy of China has
experienced
significant growth in recent decades, but growth has been uneven both geographically and among various sectors
of the economy. Economic growth has also been accompanied by periods of high inflation. The PRC government has
implemented various measures from time to time to control inflation and restrain the rate of economic growth.
For
several decades, the PRC government has carried out economic reforms to achieve decentralization and utilization of
market forces to develop the economy of the PRC. These reforms have resulted in significant economic growth and
social progress. There can, however, be no assurance that the PRC government will continue to pursue such economic
policies or, if it does, that those policies will continue to be successful. Any such adjustment and modification of
those economic policies may have an adverse impact on the securities markets in the PRC as well as the portfolio securities
of a fund. Further, the PRC government may from time to time adopt corrective measures to control the growth
of the PRC economy which may also have an adverse impact on the capital growth and performance of a fund.
Political changes, social instability and adverse diplomatic developments in the PRC could result in the imposition of
additional government restrictions including expropriation of assets, confiscatory taxes or nationalization of some or
all of the property held by the underlying issuers of a fund’s portfolio securities.
Government
Intervention and Restriction Risk. Governments and regulators may intervene in the
financial markets, such as by the imposition of trading restrictions, a ban on “naked”
short selling or the suspension of short selling for certain stocks. This may affect
the operation and market making activities of each fund, and may have an unpredictable impact
on a fund. Furthermore, such market interventions may have a negative impact on the market sentiment which may
in turn affect the performance of an Underlying Index and as a result the performance of a fund.
Investing
through Stock Connect. In seeking to track its underlying index, a fund may also
invest in A-Shares listed and traded through Stock Connect. Stock Connect is a securities
trading and clearing program between either the Shanghai Stock Exchange (“SSE”)
or Shenzhen Stock Exchange (“SZSE”),
and any of the Stock Exchange of Hong Kong Limited (“SEHK”),
China Securities Depository and Clearing Corporation Limited (“CSDCC”)
and Hong Kong Securities Clearing Company Limited designed to permit mutual stock
market access between mainland China and Hong Kong by allowing investors to trade
and settle shares on each market via their local exchanges. Trading through Stock
Connect is subject to a daily quota (“Daily
Quota”), which limits
the maximum daily net purchases on any particular day by Hong Kong investors (and
foreign investors trading through Hong Kong) trading People’s Republic of China (“PRC”)
listed securities (“Northbound”)
and PRC investors trading Hong Kong listed securities (“Southbound”)
trading through the relevant Stock Connect. Accordingly, each fund’s direct
investments in A-Shares will be limited by the Daily Quotas that limit total purchases
through Stock Connect.
A
fund may invest in A-Shares listed and traded on the SSE and SZSE through Stock Connect, or on such other stock exchanges
in China which participate in Stock Connect from time to time. Trading through Stock Connect is subject to
a number of restrictions that may affect a fund’s investments and returns. Although no individual investment quotas or
licensing requirements apply to investors in Stock Connect, trading through Stock Connect is subject to the Daily Quota.
The Daily Quota does not belong to a fund and is utilized by all investors on a first-come-first-serve basis. As such,
buy orders for A-Shares would be rejected once the Daily Quota is exceeded (although the funds will be permitted to
sell A-Shares regardless of the Daily Quota balance). The Daily Quota may restrict a fund’s ability to invest in A-Shares through
Stock Connect on a timely basis, which could affect the funds’ ability to effectively pursue its investment strategy.
The Daily Quota is also subject to change.
In
addition, investments made through Stock Connect are subject to trading, clearance and settlement procedures that
are untested in the PRC, which could pose risks to a fund. Moreover, Stock Connect A-Shares generally may not be
sold, purchased or otherwise transferred other than through Stock Connect in accordance with applicable rules. A
primary feature of Stock Connect is the application of the home market’s laws and rules applicable to investors in A-Shares
(i.e. the PRC). Therefore, a fund’s investments in Stock Connect A-Shares are subject to PRC securities regulations
and listing rules, among other restrictions. A primary feature of Stock Connect is the application of the home
market’s laws and rules applicable to investors in A-Shares (i.e. the PRC). Therefore, a fund’s investments in Stock
Connect A-Shares are subject to PRC securities regulations and listing rules, among other restrictions.
While
A-shares must be designated as eligible to be traded under Stock Connect (such eligible A-Shares listed on the SSE,
the “SSE Securities,”
and such eligible A-Shares listed on the SZSE, the “SZSE
Securities”), those
A-Shares may also lose such designation, and if this occurs, such A-Shares may be
sold but could no longer be purchased through Stock Connect. With respect to sell
orders under Stock Connect, the Stock Exchange of Hong Kong (“SEHK”)
carries out pre-trade checks to ensure an investor has sufficient A-Shares in its
account before the market opens on the trading day. Accordingly, if there are insufficient
A-Shares in an investor’s account before the market opens on the trading day,
the sell order will be rejected, which may adversely impact a fund’s performance.
In
addition, Stock Connect will only operate on days when both the Chinese and Hong Kong markets are open for trading
and when banking services are available in both markets on the corresponding settlement days. Therefore, an
investment in A-Shares through Stock Connect may subject a fund to the risk of price fluctuations on days when the
Chinese markets are open, but Stock Connect is not trading. Each of the SEHK, SSE and SZSE reserves the right to
suspend trading under Stock Connect under certain circumstances. Where such a suspension of trading is effected, a
fund’s ability to access A-Shares through Stock Connect will be adversely affected. In addition, if one or both of the Chinese
and Hong Kong markets are closed on a US trading day, the funds may not be able to acquire or dispose of A-Shares
through Stock Connect in a timely manner, which could adversely affect the funds’ performance.
A
fund’s investments in A-Shares though Stock Connect are held by its custodian in accounts in Central Clearing and Settlement
System (“CCASS”)
maintained by the Hong Kong Securities Clearing Company Limited (“HKSCC”),
which in turn holds the A-Shares, as the nominee holder, through an omnibus securities
account in its name registered with the CSDCC. The precise nature and rights of
a fund as the Beneficial Owner of the SSE Securities or SZSE Securities through
HKSCC as nominee is not well defined under PRC law. There is a lack of a clear definition of, and distinction between,
legal ownership and beneficial ownership under PRC law and there have been few cases involving a nominee account
structure in the PRC courts. The exact nature and methods of enforcement of the rights and interests of a fund
under PRC law is also uncertain. In the unlikely event that HKSCC becomes subject to winding up proceedings in
Hong Kong, there is a risk that the SSE Securities or SZSE Securities may not be regarded as held for the beneficial ownership
of a fund or as part of the general assets of HKSCC available for general distribution to its creditors.
Notwithstanding
the fact that HKSCC does not claim proprietary interests in the SSE Securities or SZSE Securities held
in its omnibus stock account in the CSDCC, the CSDCC as the share registrar for SSE- or SZSE-listed companies will
still treat HKSCC as one of the shareholders when it handles corporate actions in respect of such SSE Securities or
SZSE Securities. HKSCC monitors the corporate actions affecting SSE Securities and SZSE Securities and keeps participants
of CCASS informed of all such corporate actions that require CCASS participants to take steps in order to
participate in them. A fund will therefore depend on HKSCC for both settlement and notification and implementation of
corporate actions.
The
HKSCC is responsible for the clearing, settlement and the provisions of depositary, nominee and other related services
of the trades executed by Hong Kong market participants and investors. Accordingly, investors do not hold SSE
Securities or SZSE Securities directly – they are held through their brokers’ or custodians’ accounts with CCASS. The
HKSCC and the CSDCC establish clearing links and each has become a participant of the other to facilitate clearing and
settlement of cross-border trades. Should CSDCC default and the CSDCC be declared as a defaulter, HKSCC’s liabilities
in Stock Connect under its market contracts with clearing participants will be limited to assisting clearing participants
in pursuing their claims against the CSDCC. In that event, a fund may suffer delays in the recovery process or
may not be able to fully recover its losses from the CSDCC.
Market
participants are able to participate in Stock Connect subject to meeting certain information technology capability, risk
management and other requirements as may be specified by the relevant exchange and/or clearing house. Further, the
“connectivity”
in Stock Connect requires the routing of orders across the borders of Hong Kong and the PRC. This
requires the development of new information technology systems on the part of the SEHK and exchange participants. There
is no assurance that these systems will function properly or will continue to be adapted to changes and developments in
both markets. In the event that the relevant systems fail to function properly, trading in A-Shares through Stock Connect
could be disrupted, and a fund’s ability to achieve its investment objective may be adversely affected.
Finally,
according to Caishui [2014] 81 (“Circular
81”) and Caishui [2016]
127 (“Circular 127”),
while foreign investors currently are exempt from paying capital gains or business
taxes (later, value-added tax) on income and gains from investments in Stock Connect
A-Shares, these PRC tax rules could be changed, which could result in unexpected tax liabilities
for a fund. Dividends derived from A-Shares are subject to a 10% PRC withholding income tax generally. PRC
stamp duty is also payable for transactions in A-Shares through Stock Connect. Currently, PRC stamp duty on A-Shares
transactions is only imposed on the seller, but not on the purchaser, at the tax rate of 0.1% of the total sales value.
Circular 81 and Circular 127 stipulate that PRC business tax (and, subsequently, PRC value-added tax) is temporarily exempted
on capital gains derived by Hong Kong market participants (including the funds) from the trading of A-Shares through
Stock Connect. According to Caishui [2016] No. 36, the PRC value-added tax reform in the PRC will be expanded to
all industries, including financial services, starting May 1, 2016. The PRC business tax exemption prescribed in Circular
81 is grandfathered under the value-added tax regime. The Stock Connect program is a relatively new program. Further
developments are likely and there can be no assurance as to the program’s continued existence or whether future
developments regarding the program may restrict or adversely affect a fund’s investments or returns. In addition, the
application and interpretation of the laws and regulations of Hong Kong and the PRC, and the rules, policies or guidelines
published or applied by relevant regulators and exchanges in respect of the Stock Connect program are uncertain,
and they may have a detrimental effect on a fund’s investments and returns.
PRC
Broker and PRC Custodian Risk. The Subadvisor is responsible for selecting PRC Brokers
to execute transactions for Xtrackers Harvest CSI 300 China A-Shares ETF and Xtrackers
Harvest CSI 500 China A-Shares ETF and the Advisor is responsible for selecting
PRC Brokers to execute transactions for Xtrackers MSCI China A Inclusion Equity ETF in the
PRC markets. As a matter of practice, only one PRC Broker can be appointed in respect of each stock exchange in
the PRC. Thus, each fund will rely on only one PRC Broker for each stock exchange (the SSE and SZSE) in the PRC, which
may be the same PRC Broker. As such a fund will rely on a limited number of PRC Brokers to execute transactions on
behalf of each fund. If a single PRC Broker is appointed, each fund may not necessarily pay the lowest commission available
in the market. However, in their selection of a PRC Broker(s), the Advisor and/or Subadvisor will consider factors
such as the competitiveness of commission rates, size of the relevant orders and execution standards. Should, for
any reason, a fund’s ability to use one or more of the relevant PRC Brokers be affected, this could disrupt the operations
of the fund and affect the ability of the fund to track its Underlying Index, causing a premium or a discount to
the trading price of the fund’s Shares.
With
respect to the funds which invest in A-Shares through the Subadvisor’s RQFII license, the Subadvisor is responsible for
selecting a custodian in the PRC to custody its assets pursuant to local Chinese laws and regulations (the “PRC
Custodian”).
According to the RQFII regulations and market practice, the securities and cash accounts for a fund in the
PRC are to be maintained by the PRC Custodian in the joint names of the Subadvisor as the RQFII holder and each
fund. Each fund’s PRC Custodian is the Bank of China Limited. The PRC Custodian maintains a fund’s RMB deposit
accounts and oversees each fund’s investments in A-Shares in the PRC to ensure their compliance with the rules
and regulations of the CSRC and the People’s Bank of China. A-Shares that are traded on the SSE or SZSE are dealt
and held in book-entry form through the China Securities Depository and Clearing Corporation Limited (“CSDCC”).
A-Shares purchased by the Subadvisor, in its capacity as an RQFII, on behalf of
a fund, may be received by the CSDCC and credited to a securities trading account
maintained by the PRC Custodian in the names of the fund and the Subadvisor as the
RQFII. If the Advisor obtains an RQFII license in the future with respect to the Xtrackers MSCI China A Inclusion Equity
ETF, the same considerations would apply.
The
assets held or credited in a fund’s securities trading account(s) maintained by the PRC Custodian are segregated and
independent from the proprietary assets of the PRC Custodian. However, under PRC law, cash deposited in a fund’s
cash account(s) maintained with the PRC Custodian will not be segregated but will be a debt owing from the PRC
Custodian to the fund as a depositor. Such cash will be co-mingled with cash that belongs to other clients or creditors
of the PRC Custodian. In the event of bankruptcy or liquidation of the PRC Custodian, a fund will not have any
proprietary rights to the cash deposited in such cash account(s), and the fund will become an unsecured creditor, ranking
pari passu with all other unsecured creditors, of the PRC Custodian.
There
is a risk that each fund may suffer losses from the default, bankruptcy or disqualification of the PRC Broker(s) or
PRC Custodian. In such event, a fund may be adversely affected in the execution of any transaction or face difficulty and/or
encounter delays in recovering its assets, or may not be able to recover it in full or at all. Each fund may also
incur
losses due to the acts or omissions of the PRC Brokers and/or the PRC Custodian in the execution or settlement of
any transaction or in the transfer of any funds or securities. Subject to the applicable laws and regulations in the PRC,
the Advisor and the Subadvisor will make arrangements to ensure that the PRC Brokers and PRC Custodian have
appropriate procedures to properly safe-keep a fund’s assets. This risk is applicable to Xtrackers MSCI All China Equity
ETF to the extent the fund invests in Xtrackers China A-Shares ETFs.
PRC
Laws and Regulations Risk. The regulatory and legal framework for capital markets
and joint stock companies in the PRC may not be as well developed as those of developed
countries. PRC laws and regulations affecting securities markets are relatively
new and evolving, and because of the limited volume of published cases and judicial interpretation and
their non-binding nature, interpretation and enforcement of these regulations involve significant uncertainties. In addition,
as the PRC legal system develops, no assurance can be given that changes in such laws and regulations, their
interpretation or their enforcement will not have a material adverse effect on their business operations.
Renminbi
(RMB). RMB is the official
currency in the People’s Republic of China.
Future
Movements in RMB Exchange Rates Risk. The exchange rate of RMB ceased to be pegged
to US dollars on July 21, 2005, resulting in a more flexible RMB exchange rate system.
China Foreign Exchange Trading System, authorized by the PBOC, promulgates the central
parity rate of RMB against US dollars, Euro, Yen, pound sterling and Hong Kong dollar
at 9:15 a.m. on each business day, which will be the daily central parity rate for transactions on the Inter-bank Spot
Foreign Exchange Market and OTC transactions of banks. The exchange rate of RMB against the above-mentioned currencies
fluctuates within a range above or below such central parity rate. As the exchange rates are based primarily on
market forces, the exchange rates for RMB against other currencies, including US dollars and Hong Kong dollars, are
susceptible to movements based on external factors. There can be no assurance that such exchange rates will not
fluctuate widely against US dollars, Hong Kong dollars or any other foreign currency in the future. From 1994 to July
2005, the exchange rate for RMB against US dollar and the Hong Kong dollar was relatively stable. Following July 2005,
the appreciation of RMB accelerated until being subject to alternating periods of devaluation, appreciation and stability
beginning in 2015. Although the PRC government has constantly reiterated its intention to maintain the stability of
RMB, it may introduce measures (such as a reduction in the rate of export tax refund) to address the concerns of the
PRC’s trading partners. Therefore, the possibility that the appreciation of RMB will be further accelerated cannot be
excluded. On the other hand, there can be no assurance that RMB will not be subject to devaluation.
Offshore
RMB (“CNH”)
Market Risk. The onshore RMB (“CNY”)
is the only official currency of the PRC and is used in all financial transactions
between individuals, state and corporations in the PRC. Hong Kong is the first jurisdiction to
allow accumulation of RMB deposits outside the PRC. Since June 2010, the offshore RMB (“CNH”)
is traded officially, regulated jointly by the Hong Kong Monetary Authority and
the PBOC. While both CNY and CNH represent RMB, they are traded in different and
separated markets. The two RMB markets operate independently where the flow between
them is highly restricted. Though the CNH is a proxy of the CNY, they do not necessarily have the same exchange
rate and their movement may not be in the same direction. This is because these currencies act in separate jurisdictions,
which leads to separate supply and demand conditions for each, and therefore separate but related currency markets.
The
current size of RMB-denominated financial assets outside the PRC is limited. As of October 2019, the total amount of
RMB (CNH) deposits held by institutions authorized to engage in RMB banking business in Hong Kong amounted to
approximately RMB 36.4 billion. In addition, participating authorized institutions are also required by the Hong Kong Monetary
Authority to maintain a total amount of RMB (in the form of cash and its settlement account balance with a
Renminbi clearing bank) of no less than 25% of their RMB deposits, which further limits the availability of RMB that
participating authorized institutions can utilize for conversion services for their customers. RMB business participating banks
do not have direct RMB liquidity support from PBOC. Only the Renminbi clearing bank has access to onshore liquidity
support from PBOC (subject to annual and quarterly quotas imposed by PBOC) to square open positions of participating
banks for limited types of transactions, including open positions resulting from conversion services for corporations
relating to cross-border trade settlement. The Renminbi clearing bank is not obliged to square for participating banks
any open positions resulting from other foreign exchange transactions or conversion services and the participating banks
will need to source RMB from the offshore market to square such open positions. Although it is expected that the
offshore RMB market will continue to grow in depth and size, its growth is subject to many constraints as a result
of
PRC laws and regulations on foreign exchange. There is no assurance that new PRC regulations will not be promulgated or
the Settlement Agreement will not be terminated or amended in the future which will have the effect of restricting availability
of RMB offshore.
RMB
Exchange Controls and Restrictions Risk. It should be noted that the RMB is currently
not a freely convertible currency as it is subject to foreign exchange control policies
and repatriation restrictions imposed by the PRC government. There is no assurance
that there will always be RMB available in sufficient amounts for a fund to remain fully invested. Since
1994, the conversion of RMB into US dollars has been based on rates set by the PBOC, which are set daily based
on the previous day’s PRC interbank foreign exchange market rate. On July 21, 2005, the PRC government introduced
a managed floating exchange rate system to allow the value of RMB to fluctuate within a regulated band based
on market supply and demand and by reference to a basket of currencies. In addition, a market maker system was
introduced to the interbank spot foreign exchange market. In July 2008, China announced that its exchange rate regime
was further transformed into a managed floating mechanism based on market supply and demand. Given the domestic
and overseas economic developments, the PBOC decided to further improve the RMB exchange rate regime in
June 2010 to enhance the flexibility of the RMB exchange rate. In 2012 and 2014, the PBOC subsequently decided to
expand the daily trading band and may seek to do so again in the future.
However
it should be noted that the PRC government’s policies on exchange control and repatriation restrictions are subject
to change, and any such change may adversely impact each fund. There can be no assurance that the RMB exchange
rate will not fluctuate widely against the US dollar or any other foreign currency in the future. Foreign exchange transactions
under the capital account, including principal payments in respect of foreign currency-denominated obligations, currently
continue to be subject to significant foreign exchange controls and require the approval of the SAFE. On the
other hand, the existing PRC foreign exchange regulations have significantly reduced government foreign exchange controls
for transactions under the current account, including trade and service related foreign exchange transactions and
payment of dividends. Nevertheless, neither the Advisor nor the Subadvisor can predict whether the PRC government will
continue its existing foreign exchange policy or when the PRC government will allow free conversion of the RMB to
foreign currencies. Certain investments of Xtrackers MSCI All China Equity ETF may be denominated in RMB and the
fund will be exposed to the risks associated with RMB through its primary investments in the Underlying fund and
through its investments in the Xtrackers Harvest ETFs.
RMB
Trading and Settlement Risk. The trading and settlement of RMB-denominated securities
are recent developments in Hong Kong and there is no assurance that problems will
not be encountered with the systems or that other logistical problems will not arise.
Repatriation
Risk. SAFE regulates
and monitors the repatriation of funds out of the PRC by RQFIIs. Repatriations by RQFIIs
in respect of an open-ended RQFII fund, such as the Xtrackers Harvest CSI 300 China A-Shares ETF, Xtrackers Harvest
CSI 500 China A-Shares Small Cap ETF and, potentially, Xtrackers MSCI China A Inclusion Equity ETF, conducted in
RMB are currently permitted daily and are not subject to repatriation restrictions or prior approval from SAFE, although authenticity
and compliance reviews will be conducted by the PRC Custodian (as that term is defined below), and monthly
reports on remittances and repatriations will be submitted to SAFE by the PRC Custodian. There is no assurance, however,
that PRC and RQFII rules and regulations will not change or that repatriation restrictions will not be imposed in
the future. Further, such changes to the PRC and RQFII rules and regulations may take effect retroactively. Any restrictions
on repatriation of the invested capital and net profits may impact a fund’s ability to meet redemption requests. Furthermore,
as the Custodian’s or the PRC Custodian’s review on authenticity and compliance is conducted on each repatriation,
the repatriation may be delayed or even rejected by the Custodian or the PRC Custodian in case of non-compliance with
the RQFII regulations. In such case, it is expected that redemption proceeds will be paid as soon as practicable and
after the completion of the repatriation of the funds concerned. It should be noted that the actual time required for
the completion of the relevant repatriation will be beyond the Advisor’s and the Subadvisor’s control.
Restricted
Markets Risk. A fund’s investments in A-Shares may be subject to limitations
or restrictions on foreign ownership or holdings imposed by the PRC. Such legal
and regulatory restrictions or limitations may have adverse effects on the liquidity
and performance of each fund’s portfolio holdings as compared to the performance of its Underlying Index.
This may increase the risk of tracking error.
RQFII
Late Settlement Risk.
Each of the funds will be required to remit RMB from Hong Kong to the PRC to settle the
purchase of A-Shares by a fund from time to time through the RQFII program. In the event such remittance is disrupted,
a fund will not be able to fully replicate its Underlying Index by investing in the relevant A-Shares, which may
lead to increased tracking error. This risk is applicable to Xtrackers MSCI All China Equity ETF to the extent it invests
in Xtrackers China A-Shares ETFs.
RQFII
Program Risk. (Xtrackers Harvest CSI 300 China A-Shares ETF and Xtrackers Harvest
CSI 500 China A-Shares Small Cap ETF) Xtrackers MSCI China A Inclusion Equity ETF
intends to invest directly in A-Shares through Stock Connect, but, in the future,
may also utilize any RQFII license applied for by and granted to the Advisor and/or a Subadvisor. Each
fund is not an RQFII, but with respect to Xtrackers Harvest CSI 300 China A-Shares ETF and X-trackers Harvest CSI
500 China will utilize the Subadvisor’s RQFII license granted under RQFII regulations.
Under
current regulations in the PRC, foreign investors can invest in the domestic PRC securities markets through certain
market-access programs. These programs include the QFII or RQFII licenses obtained from the CSRC. QFII and
RQFII investors have also registered to invest foreign freely convertible currencies (in the case of a QFII) and RMB
(in the case of an RQFII) in the PRC for the purpose of investing in the PRC’s domestic securities markets. Neither
the Fund nor the Advisor is an RQFII. Rather, the Fund expects to invest in the Underlying Fund, which invests directly
in A-Shares through Stock Connect, but may, in the future, utilize a RQFII license granted to the Advisor and/or a
Subadvisor. The fund may also invest in the Xtrackers Harvest ETFs, which are subadvised by HGI, an RQFII, and invest
directly in A-Shares via the RQFII license granted to HGI pursuant to RQFII regulations.
In
addition, the Subadvisor’s (or, if applicable in the future, the Advisor’s) RQFII status could be suspended or revoked. There
can be no assurance that the Subadvisor (or, in the future, the Advisor) will continue to maintain its RQFII status. Because
each fund will not be able to invest directly in A-Shares beyond the limits that may be imposed by Stock Connect,
the size of a fund’s direct investments in A-Shares may be limited. In the event the Subadvisor (or, if applicable in
the future, the Advisor) is unable to maintain its RQFII status unless the Subadvisor (or, in the future, the Advisor) is
able to obtain sufficient exposure to A-Shares, it may be necessary for a fund to limit or suspend creations of Creation Units.
In such event it is possible that the trading price of a fund’s Shares on the Exchange will be at a significant premium
to the NAV (which may also increase tracking error of the fund). In extreme circumstances, a fund may incur significant
loss due to limited investment capabilities, or may not be able fully to implement or pursue its investment objectives
or strategies, due to RQFII investment restrictions, illiquidity of the PRC’s securities markets, and delay or disruption
in execution of trades or in settlement of trades.
Pursuant
to PRC and RQFII regulations, each of CSRC and SAFE is vested with the power to impose regulatory sanctions if
the Advisor and/or Subadvisor, in its capacity as RQFII, or the PRC Custodian (as that term is defined below) violates any
provision of the RQFII regulations. Any such violations could result in the revocation of the Subadvisor’s (or, if applicable
in the future, the Advisor’s) license or other regulatory sanctions and may adversely impact a fund’s ability to
access A-Shares.
The
current RQFII regulations also include rules on investment restrictions applicable to a fund, which may adversely affect
the fund’s liquidity and performance. In addition, because transaction sizes for RQFIIs are relatively large, the corresponding
heightened risk of exposure to decreased market liquidity and significant price volatility could lead to possible
adverse effects on the timing and pricing of acquisition or disposal of securities.
The
regulations which regulate investments by RQFIIs in the PRC and the repatriation of capital from RQFII investments are
relatively new. The application and interpretation of such investment regulations are therefore relatively untested and
there is no certainty as to how they will be applied as the PRC authorities and regulators have been given wide discretion
in such investment regulations and there is no precedent or certainty as to how such discretion may be exercised
now or in the future.
On
May 7, 2020, the People's Bank of China (“PBOC”)
and SAFE jointly issued the Regulations on Funds of Securities and Futures Investment
by Foreign· Institutional Investors (PBOC & SAFE Announcement [2020] No. 2) (the “Regulations”)
which came into effect on June 6, 2020. The Regulations supersede certain post-registration
rules applicable to QFII
and
RQFII regimes. One of the key changes of the Regulations is the removal of quota restrictions on investment. However,
as of the date of this SAI, this is a relatively new development, and there is no guarantee that the quotas will
continue to be relaxed.
Commodity
Pool Operator Exclusion. Pursuant to a claim for exclusion filed with the National
Futures Association (“NFA”)
on behalf of each fund, the Trust is not deemed to be a “commodity
pool operator” (“CPO”),
under the CEA, and it is not subject to registration or regulation as such under
the CEA. The Advisor is not deemed to be a “commodity
trading advisor”
with respect to its services as an investment advisor to each fund. Under CFTC Regulations, the Advisor
would need to register with the CFTC as a CPO if a fund is unable to comply with certain trading and marketing limitations
on its investments in futures and certain other instruments. With respect to investments in swap transactions, commodity
futures, commodity options or certain other derivatives used for purposes other than bona fide hedging purposes,
the Trust, on behalf of the fund must meet one of the following tests under the amended regulations in order
to claim an exclusion from the definition of a CPO. First, the aggregate initial margin and premiums required to establish
a fund’s positions in such investments may not exceed five percent of the liquidation value of the fund’s portfolio
(after accounting for unrealized profits and unrealized losses on any such investments). Alternatively, the aggregate
net notional value of such instruments, determined at the time of the most recent position established, may
not exceed one hundred percent (100%) of the liquidation value of the fund’s portfolio (after accounting for unrealized profits
and unrealized losses on any such positions). In addition to meeting one of the foregoing trading limitations, a
fund may not market itself as a commodity pool or otherwise as a vehicle for trading in the commodity futures, commodity
options or swaps and derivatives markets. In the event that the Advisor is required to register as a CPO with
respect to a fund, the disclosure and operations of the fund would need to comply with all applicable CFTC regulations.
Compliance with these additional registration and regulatory requirements could increase operational expenses.
Other potentially adverse regulatory initiatives could also develop.
Costs
of Buying or Selling Fund Shares.
Buying or selling fund shares involves two types of costs that apply to all securities
transactions. When buying or selling shares of a fund through a broker, you will incur a brokerage commission or
other charges imposed by brokers as determined by that broker. In addition, you will also incur the cost of the “spread”
– that is, the difference between what professional investors are willing to pay for fund shares (the “bid”
price) and the price at which they are willing to sell fund shares (the “ask”
price). Because of the costs inherent in buying or selling fund shares, frequent
trading may detract significantly from investment results and an investment in fund
shares may not be advisable for investors who anticipate regularly making small investments.
Delayed
Delivery Transactions. Delayed delivery transactions, also referred to as forward
commitments, involve commitments by the fund to dealers or issuers to acquire or
sell securities at a specified future date beyond the customary settlement for such
securities. These commitments may fix the payment price and interest rate to be received or paid on the investment.
The fund may purchase securities on a delayed delivery basis to the extent that it can anticipate having available
cash on the settlement date. Delayed delivery agreements will not be used as a speculative or leverage technique.
Investment
in securities on a delayed delivery basis may increase the fund’s exposure to market fluctuation and may increase
the possibility that the fund will incur short-term gains subject to federal taxation or short-term losses if the fund
must engage in portfolio transactions in order to honor a delayed delivery commitment. Until the settlement date,
the fund will segregate liquid assets of a dollar value sufficient at all times to make payment for the delayed delivery
transactions. Such segregated liquid assets will be marked-to market daily, and the amount segregated will be
increased if necessary to maintain adequate coverage of the delayed delivery commitments.
The
delayed delivery securities, which will not begin to accrue interest or dividends until the settlement date, will be recorded
as an asset of the fund and will be subject to the risk of market fluctuation. The purchase price of the delayed delivery
securities is a liability of the fund until settlement. The fund may enter into buy/sell back transactions (a form of
delayed delivery agreement). In a buy/sell back transaction, the fund enters a trade to sell securities at one price and
simultaneously enters a trade to buy the same securities at another price for settlement at a future date.
Derivatives.
A derivative is a financial contract, the value of which depends on, or is derived from, the value of an underlying
asset such as a security or an index. A fund may invest in stock index futures contracts and other derivatives. Compared
to conventional securities, derivatives can be more sensitive to changes in interest rates or to sudden fluctuations
in market prices and thus a fund’s losses may be greater if it invests in derivatives than if it invests only in
conventional securities.
Currency
Transactions. Certain of the funds may enter into foreign currency futures contracts
and forward currency contracts designed to offset a fund’s exposure to non-US
currency. A forward foreign currency exchange contract (“forward
contract”) involves
an obligation to purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These
contracts are principally traded in the interbank market conducted directly between currency traders (usually large,
commercial banks) and their customers. A forward contract generally has no margin deposit requirement, and no
commissions are charged at any stage for trades.
A
non-deliverable forward contract (“NDF”)
is a forward contract where there is no physical settlement of two currencies at
maturity. NDFs are contracts between parties in which a net settlement amount based on the change in the specified foreign
exchange rate is paid by one party to the other. Each fund’s obligations with respect to each NDF is accrued on
a daily basis and an amount of cash or liquid securities at least equal to such amount maintained in an account at the
Trust’s custodian bank. The risk of loss with respect to NDFs generally is limited to the net amount of payments that
a fund is contractually obligated to make or receive.
A
foreign currency futures contract is a contract involving an obligation to deliver or acquire the specified amount of a
specific currency, at a specified price and at a specified future time. Futures contracts may be settled on a net cash payment
basis rather than by the sale and delivery of the underlying currency.
Currency
exchange transactions involve a significant degree of risk and the markets in which currency exchange transactions are
effected are highly volatile, specialized and technical. Significant changes, including changes in liquidity and prices, can
occur in such markets within very short periods of time, often within minutes. Currency exchange trading risks include,
but are not limited to, exchange rate risk, maturity gap, interest rate risk, and potential interference by foreign governments
through regulation of local exchange markets, foreign investment or particular transactions in foreign currency.
If a fund utilizes foreign currency transactions at an inappropriate time, such transactions may not serve their
intended purpose of improving the correlation of the fund’s return with the performance of its Underlying Index and
may lower the fund’s return. A fund could experience losses if the value of any currency forwards and futures positions
is poorly correlated with its other investments or if it could not close out its positions because of an illiquid market.
Such contracts are subject to the risk that the counterparty will default on its obligations. In addition, a fund will
incur transaction costs, including trading commissions, in connection with certain foreign currency transactions.
General
Characteristics of Futures and Options. A
fund may enter into futures and options contracts to simulate investment in the
respective Underlying Index, to facilitate trading or to reduce transaction costs. A fund may only enter into futures
contracts and options that are traded on a US or non-US exchange. No fund will use futures or options for speculative
purposes.
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. Each fund may enter into futures contracts to
purchase securities indexes when the Advisor and/or Subadvisor, as applicable, anticipate purchasing the underlying securities
and believe prices will rise before the purchase will be made. To the extent required by law, liquid assets committed
to futures contracts will be maintained.
A
call option gives a holder the right to purchase a specific security 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 at a specified exercise price within
a specified period of time. The initial purchaser of a call option pays the “writer”
a premium, which is paid at the time of purchase and is retained by the writer whether
or not such option is exercised. Each 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. Each Fund may write put
and call options along with a long position in options to increase its ability to hedge against a change in the market value
of the securities it holds or is committed to purchase.
Investments
in futures contracts and other investments that contain leverage may require a fund to maintain liquid assets.
Generally, each fund maintains an amount of liquid assets equal to its obligations relative to the position involved, adjusted
daily on a marked-to-market basis. With respect to futures contracts that are contractually required to “cash-settle,”
each fund maintains liquid assets in an amount at least equal to each fund’s
daily marked-to-market obligation (i.e., each fund’s daily net liability,
if any), rather than the contracts’ notional value (i.e., the value of the underlying asset). By
maintaining assets equal to its net obligation under cash-settled futures contracts, the fund may employ leverage to
a greater extent than if each fund set aside assets equal to the futures contracts’ full notional value. A fund bases its
asset maintenance policies on methods permitted by the staff of the SEC and may modify these policies in the future
to comply with any changes in the guidance articulated from time to time by the SEC or its staff.
There
are several risks accompanying the utilization of futures contracts and options on futures contracts. First, a position
in futures contracts and options on futures contracts may be closed only on the exchange on which the contract was
made (or a linked exchange). While each fund plans to utilize futures contracts only if an active market exists for such
contracts, there is no guarantee that a liquid market will exist for the contract at a specified time. While each Fund
plans to utilize futures contracts only if an active market exists for such contracts, there is no guarantee that a liquid
market will exist for the contract at a specified time. 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 stock index future and the movement in the Underlying Index. In the event of adverse price movements,
a fund would continue to be required to make daily cash payments to maintain its required margin. In such
situations, if a 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, each fund may be required to deliver the instruments underlying
the 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) is potentially unlimited. The funds do not plan to invest in futures and options to a significant extent
or 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.
A fund, however, may utilize futures and options contracts in a manner designed to limit their risk exposure to
levels comparable to a direct investment in the types of stocks in which they invest.
A
fund’s use of futures and options on futures 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. There is also the risk of loss by a fund
of margin deposits in the event of bankruptcy of a broker with whom a fund has an open position in the futures contract
or option. The purchase of put or call options will be based upon predictions by the Advisor and/or Subadvisor, as
applicable, as to anticipated trends which could prove to be incorrect.
Because
the futures market generally 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 each fund to substantial losses. In the event of adverse price
movements, each fund would be required to make daily cash payments of variation margin.
Options
on Futures Contracts. 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 sale, 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 each fund. The
potential for loss related to writing call options is unlimited. The potential for loss related to writing put options is
limited to the agreed upon price per Share, also known as the strike price, less the premium received from writing the
put.
Each
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.
Upon
entering into a futures contract, a fund will be required to deposit with the broker an amount of cash or cash equivalents
known as “initial margin,”
which is in the nature of a performance bond or good faith deposit on the contract and
is returned to each 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 the expiration of a futures contract, each fund may elect to
close the position by taking an opposite position, which will operate to terminate each fund’s existing
position in the contract.
Swap
Agreements. Over-the-counter (“OTC”)
swap agreements are contracts between parties in which one party agrees to make
periodic payments to the other party based on the change in market value or level of a specified rate, index
or asset. In return, the other party agrees to make periodic payments to the first party based on the return of a
different specified rate, index or asset. Swap agreements will usually be performed on a net basis, with each fund receiving
or paying only the net amount of the two payments. The net amount of the excess, if any, of a fund’s obligations over
its entitlements with respect to each swap is accrued on a daily basis and an amount of liquid assets having an aggregate
value at least equal to the accrued excess will be maintained by each fund. Cleared swaps are transacted through
futures commission merchants (“FCMs”)
that are members of central clearinghouses with the clearinghouse serving as a central
counterparty similar to transactions in futures contracts. The use of interest-rate and index swaps is
a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio
security transactions. These transactions generally do not involve the delivery of securities or other underlying assets
or principal.
The
risk of loss with respect to OTC 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 occurs, a fund will have contractual remedies pursuant to the agreements related to the transaction. However,
such remedies may be subject to bankruptcy and insolvency laws which could affect such fund’s rights as a
creditor (e.g., a fund may not receive the net amount of payments that it contractually is entitled to receive). Central clearing
through FCMs is expected to decrease counterparty risk and increase liquidity compared to un-cleared swaps because
central clearing interposes a central clearinghouse as the counterpart to each participant’s swap. However, central
clearing does not eliminate counterparty risk or illiquidity risk entirely. In addition depending on the size of a fund
and other factors, the margin required under the rules of a clearinghouse and by a clearing member FCM may be
in excess of the collateral required to be posted by a fund to support its obligations under a similar un-cleared swap.
It is expected, however, that regulators will adopt rules imposing certain margin requirements, including minimums, on
un-cleared swaps in the near future, which could reduce the distinction.
Regulations
Impacting Derivatives and the Lending of Portfolio Securities.
Regulations adopted by the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and
other regulators throughout the world, which recently took effect with respect to the funds, requires counterparties
that
are part of US or foreign global systemically important banking organizations to include contractual restrictions on
close-out and cross default in agreements relating to qualified financial contracts. Securities lending agreements are
included in the category of qualified financial contracts (as well as repurchase agreements and agreements relating to
swaps, currency forwards and other derivatives). The restrictions prevent the funds from closing out a qualified financial
contract during a specified time period (e.g., two days) if the counterparty is subject to resolution proceedings and
prohibit the funds from exercising default rights during that period due to a receivership or similar proceeding of an
affiliate of the counterparty. Implementation of these requirements may increase credit and other risks to the funds.
Recent
Developments. In October 2020, the SEC adopted a final rule related to the use of
derivatives, short sales, reverse repurchase agreements and certain other transactions
by registered investment companies. In connection with the final rule, the SEC and
its staff will rescind and withdraw applicable guidance and relief regarding asset segregation and
coverage transactions reflected in the Fund’s asset segregation and cover practices discussed herein. The final rule
requires the Fund to trade derivatives and other transactions that create future payment or delivery obligations (except
reverse repurchase agreements and similar financing transactions) subject to a value-at-risk (“VaR”)
leverage limit and certain derivatives risk management program and reporting requirements.
Generally, these requirements apply unless a fund satisfies a “limited
derivatives users” exception
that is included in the final rule. Under the final rule, when a fund trades reverse
repurchase agreements or similar financing transactions, including certain tender option
bonds, it needs to aggregate the amount of indebtedness associated with the reverse repurchase agreements or
similar financing transactions with the aggregate amount of any other senior securities representing indebtedness when
calculating a fund’s asset coverage ratio or treat all such transactions as derivatives transactions. Reverse repurchase agreements
or similar financing transactions aggregated with other indebtedness do not need to be included in the calculation
of whether a fund satisfies the limited derivatives users exception, but for funds subject to the VaR testing requirement,
reverse repurchase agreements and similar financing transactions must be included for purposes of such
testing whether treated as derivatives transactions or not. The SEC also provided guidance in connection with the
final rule regarding the use of securities lending collateral that may limit a fund’s securities lending activities. Compliance
with these new requirements will be required after an eighteen-month transition
period. Following the compliance date, these requirements may limit the ability
of a fund to use derivatives, short sales, and reverse repurchase agreements and
similar financing transactions as part of its investment strategies. These requirements may increase the cost of a
fund’s investments and cost of doing business, which could adversely affect investors. The Advisor cannot predict the
effects of these regulations on a fund. The Advisor intends to monitor developments and seek to manage a fund in
a manner consistent with achieving a fund’s investment objective, but there can be no assurance that it will be successful
in doing so.
Equity
Securities. An investment in a fund should be made with an understanding of the
risks inherent in an investment in equity securities, including the risk that the
financial condition of issuers may become impaired or that the general condition
of the stock market may deteriorate (either of which may cause a decrease in the value of the portfolio securities
and thus in the value of Shares of a fund). Common stocks are susceptible to general stock market fluctuations and
to volatile increases and decreases in value as market confidence and perceptions of their issuers change. These investor
perceptions are based on various and unpredictable factors, including expectations regarding government, economic,
monetary and fiscal policies, inflation and interest rates, economic expansion or contraction, and global or
regional political, economic or banking crises. Holders of common stocks incur more risks than holders of preferred stocks
and debt obligations because common stockholders generally have rights to receive payments from stock issuers
inferior to the rights of creditors, or holders of debt obligations or preferred stocks. Further, unlike debt securities, which
typically have a stated principal amount payable at maturity (the value of which, however, is subject to market fluctuations
prior to maturity), or preferred stocks, which typically have a liquidation preference and which may have stated
optional or mandatory redemption provisions, common stocks have neither a fixed principal amount nor a maturity.
Although
most of the securities in each Underlying Index are listed on a national securities exchange, the principal trading
market for some may be in the over-the-counter market. The existence of a liquid trading market for certain securities
may depend on whether dealers will make a market in such securities.
Dividend-paying
stocks may underperform non-dividend paying stocks (and the stock market as a whole) over any period
of time. In addition, issuers of dividend-paying stocks may have discretion to defer or stop paying dividends for
a stated period of time, or the anticipated acceleration of dividends may not occur as a result of, among other things,
a sharp rise in interest rates or an economic downturn. If the dividend-paying stocks held by the fund reduce or
stop paying dividends, the fund’s ability to generate income may be adversely affected.
Changes
in the dividend policies of companies in a fund’s portfolio and capital resources available for these companies’ dividend
payments may adversely affect the fund. Depending upon market conditions, dividend-paying stocks that meet
the fund’s investment criteria may not be widely available and/or may be highly concentrated in only a few market sectors.
In
addition, in the current economic environment, global markets are experiencing a very high level of volatility and an
increased risk of corporate failures. The insolvency or other corporate failures of any one or more of the constituents of
the Underlying Index may have an adverse effect on an Underlying Index’s and, therefore, a fund’s performance.
Tracking
Stocks. A tracking stock is a separate class of common stock whose value is linked
to a specific business unit or operating division within a larger company and which
is designed to “track”
the performance of such business unit or division. The tracking stock may pay dividends
to shareholders independent of the parent company. The parent company, rather than
the business unit or division, generally is the issuer of tracking stock. However, holders of the tracking
stock may not have the same rights as holders of the company’s common stock.
Fixed
Income Securities. An investment in a fund should also be made with an understanding
of the risks inherent in an investment in fixed income securities or bonds. A bond
is an interest-bearing security issued by a company, governmental unit or, in some
cases, a non-US entity. The issuer of a bond has a contractual obligation to pay interest at
a stated rate on specific dates and to repay principal (the bond’s face value) periodically or on a specified maturity date.
An issuer may have the right to redeem or “call”
a bond before maturity, in which case the investor may have to reinvest the proceeds
at lower market rates. Most bonds bear interest income at a “coupon”
rate that is fixed for the life of the bond. The value of a fixed rate bond usually
rises when market interest rates fall, and falls when market interest rates rise.
Accordingly, a fixed rate bond’s yield (income as a percent of the bond’s current value) may differ from
its coupon rate as its value rises or falls. Other types of bonds bear income at an interest rate that is adjusted periodically.
Because of their adjustable interest rates, the values of “floating-rate”
or “variable-rate”
bonds generally fluctuate less in response to market interest rate movements than
the value of similar fixed rate bonds. The funds may treat some of these bonds as
having a shorter maturity for purposes of calculating the weighted average maturity of
its investment portfolio. In addition, bonds may be senior or subordinated obligations. Senior obligations generally have
the first claim on a corporation’s earnings and assets and, in the event of liquidation, are paid before subordinated obligations.
Bonds may be unsecured (backed only by the issuer’s general creditworthiness) or secured (also backed by
specified collateral).
Negative
Interest Rates. In a low or negative interest rate environment, debt instruments
may trade at negative yields, which means the purchaser of the instrument may receive
at maturity less than the total amount invested. In addition, in a negative interest
rate environment, if a bank charges negative interest, instead of receiving interest on deposits, a
depositor must pay the bank fees to keep money with the bank. To the extent a fund holds a negatively-yielding debt
instrument or has a bank deposit with a negative interest rate, the fund would generate a negative return on that
investment.
In
response to recent market volatility and economic uncertainty, the US government and certain foreign central banks have
taken steps to stabilize markets by, among other things, reducing interest rates. As a result, interest rates in the
United States are at historically low levels, and certain European countries and Japan have pursued negative interest rate
policies. If negative interest rates become more prevalent in the market and/or if low or negative interest rates persist
for a sustained period of time, some investors may seek to reallocate assets to other income-producing assets, such
as investment-grade and higher-yield debt instruments, or equity investments that pay a dividend, absent other market
risks that may make such alternative investments unattractive. This increased demand for higher yielding assets may
cause the price of such instruments to rise while triggering a corresponding decrease in yield over time, thus reducing
the value of such alternative investments. In addition, a move to higher yielding investments may cause
investors,
including a fund (to the extent permitted by its investment objective and strategies), to seek fixed-income investments
with longer maturities and/or potentially reduced credit quality in order to seek the desired level of yield. These
considerations may limit a fund’s ability to locate fixed-income instruments containing the desired risk/return profile.
Changing interest rates, including, but not limited to, rates that fall below zero, could have unpredictable effects on
the markets, may expose fixed-income and related markets to heightened volatility and potential illiquidity and may
increase interest rate risk for a fund.
Foreign
Securities. To the extent a fund invests in stocks of non-US issuers, certain of
the fund’s investments in such stocks may be in the form of American Depositary
Receipts (“ADRs”),
Global Depositary Receipts (“GDRs”)
and Non-Voting Depositary Receipts (“NVDRs”)
(collectively, “Depositary
Receipts”). Depositary
Receipts are receipts, typically issued by a bank or trust issuer, which evidence
ownership of underlying securities issued by a non-US issuer. For ADRs, the depository
is typically a US financial institution and the underlying securities are issued by a non- US issuer.
For other forms of Depositary Receipts, the depository may be a non-US or a US entity, and the underlying securities
may be issued by a non-US or a US issuer. Depositary Receipts are not necessarily denominated in the same
currency as their underlying securities. Generally, ADRs, issued in registered form, are designed for use in the US
securities markets, NVDRs are designed for use in the Thai securities market and GDRs are tradable both in the United
States and in Europe and are designed for use throughout the world.
In
general, Depositary Receipts will be sponsored, but a fund may invest in unsponsored ADRs under certain circumstances. The
issuers of unsponsored Depositary Receipts are not obligated to disclose material information in the United States. Therefore
there may be less information available regarding such issuers and there may be no correlation between available
information and the market value of the Depositary Receipts.
Investing
in the securities of non-US issuers involves special risks and considerations not typically associated with investing
in US issuers. These include differences in accounting, auditing and financial reporting standards, the possibility of
expropriation or confiscatory taxation, adverse changes in investment or exchange control regulations, political instability which
could affect US investments in non-US countries, and potential restrictions on the flow of international capital. Non-US
issuers may be subject to less governmental regulation than US issuers. Moreover, individual non-US economies may
differ favorably or unfavorably from the US economy in such respects as growth of gross domestic product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of payment positions.
Illiquid
Securities. Illiquid securities are investments that a 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 fund’s liquidity risk management program (LRM Program) adopted
pursuant to Rule 22e-4 under the 1940 Act. Under a fund’s LRM Program, the fund may not hold more than 15%
of its net assets in illiquid securities. The LRM Program administrator is responsible for determining the liquidity classification
of a fund’s investments and monitoring compliance with the 15% limit on illiquid securities. Historically, illiquid
securities have included securities subject to contractual or legal restrictions on resale because they have not been
registered under the 1933 Act, securities which are otherwise not readily marketable and repurchase agreements having
a maturity of longer than seven days. Securities which have not been registered under the 1933 Act are referred to
as private placements or restricted securities and are purchased directly from the issuer or in the secondary market. Non-publicly
traded securities (including Rule 144A Securities) may involve a high degree of business and financial risk
and may result in substantial losses. These securities may be less liquid than publicly traded securities, and it may
take longer to liquidate these positions than would be the case for publicly traded securities. Companies whose securities
are not publicly traded may not be subject to the disclosure and other investor protection requirements applicable
to companies whose securities are publicly traded. Certain securities may be deemed to be illiquid as a result
of the Advisor’s receipt from time to time of material, non-public information about an issuer, which may limit the
Advisor’s ability to trade such securities for the account of any of its clients, including a fund. In some instances, these
trading restrictions could continue in effect for a substantial period of time. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and a fund might be unable to dispose of illiquid securities promptly
or at reasonable prices and might thereby experience difficulty funding redemptions and other cash needs. An
investment in illiquid securities is subject to the risk that should a fund desire to sell any of these securities when a
ready buyer is not available at a price that is deemed to be representative of their value, the value of a fund’s net assets
could be adversely affected.
An
investment in illiquid securities is also subject to the risk of delays on resale and uncertainty in valuation. A fund might
also have to register such illiquid securities in order to dispose of them, resulting in additional expense and delay.
A fund selling its securities in a registered offering may be deemed to be an “underwriter”
for purposes of Section 11 of the 1933 Act. In such event, a fund may be liable
to purchasers of the securities under Section 11 if the registration statement prepared
by the issuer, or the prospectus forming a part of it, is materially inaccurate or misleading,
although a fund may have a due diligence defense. Adverse market conditions could impede such a public offering
of securities.
Investment
Companies and Other Pooled Investment Vehicles. A fund may acquire securities of
other registered investment companies and other pooled investment vehicles (collectively,
investment funds) to the extent that such investments are consistent with its investment
objective, policies, strategies and restrictions and the limitations of the 1940
Act. Pursuant to the 1940 Act, a fund’s investment in investment companies is limited to, subject to certain exceptions:
(i) 3% of the total outstanding voting stock of any one investment company; (ii) 5% of the fund’s total assets
with respect to any one investment company; and (iii) 10% of the fund’s total assets with respect to investment companies
in the aggregate. To the extent allowed by law or regulation, each fund may invest its assets in the securities of
investment companies that are money market funds, including those advised by the Advisor or otherwise affiliated with
the Advisor, in excess of the limits discussed above. Investment funds may include money market mutual funds operated
in accordance with Rule 2a-7, closed-end funds, and exchange-traded funds (ETFs) (including investment funds
managed by the Advisor and its affiliates). A fund will indirectly bear its proportionate share of any management fees
and other expenses paid by such other investment funds.
Because
a fund may acquire securities of funds managed by the Advisor or an affiliate of the Advisor, the Advisor may have
a conflict of interest in selecting funds. The Advisor considers such conflicts of interest as part of its investment process
and has established practices designed to minimize such conflicts. The Advisor, any subadvisor and any affiliates of
the Advisor, as applicable, earn fees at varying rates for providing services to underlying affiliated funds. The Advisor and
any subadvisor may, therefore, have a conflict of interest in selecting underlying affiliated funds advised by the Advisor
or an affiliate and in determining whether to invest in an unaffiliated fund from which they will not receive any
fees. However, the Advisor and any subadvisor to a fund will select investments that it believes are appropriate to
meet the fund’s investment objectives.
ETFs
and closed-end funds trade on a securities exchange and their shares may trade at a premium or discount to their
net asset value. A fund will incur brokerage costs when it buys and sells shares of ETFs and closed-end funds. ETFs
that seek to track the composition and performance of a specific index may not replicate exactly the performance of
their specified index because of trading costs and operating expenses incurred by the ETF. At times, there may not
be an active trading market for shares of some ETFs and closed-end funds and trading of ETF and closed-end fund
shares may be halted or delisted by the listing exchange.
To
the extent consistent with its investment objective, policies, strategies and restrictions, a fund may invest in commodity-related
ETFs. Certain commodity-related ETFs may not be registered as investment companies under the 1940
Act and shareholders of such commodity-related ETFs, including the investing affiliated fund, will not have the regulatory
protections provided to investors in registered investment companies. Commodity-related ETFs may invest in
commodities directly (such as purchasing gold) or they may seek to track a commodities index by investing in commodity-linked
derivative instruments. Commodity-related ETFs are subject to the risks associated with the commodities or
commodity-linked derivative instruments in which they invest. A fund’s ability to invest in commodity-related ETFs may
be limited by its intention to qualify as a regulated investment company under the Code. In addition, under recent amendments
to rules of the Commodity Futures Trading Commission (CFTC), a fund’s investment in commodity-related ETFs
may subject the fund and/or the Advisor to certain registration, disclosure and reporting requirements of the CFTC.
The Advisor will monitor a fund’s use of commodity-related ETFs to determine whether the fund and/or the Advisor
will need to comply with CFTC rules.
Lending
of Portfolio Securities. To generate additional income, a fund may lend a percentage
of its investment securities to approved institutional borrowers who need to borrow
securities in order to complete certain transactions, such as covering short sales,
avoiding failures to deliver securities or completing arbitrage operations, in exchange for collateral in
the form of cash or US government securities. By lending its investment securities, a fund attempts to increase
its
net investment income through the receipt of interest on the loan. Any gain or loss in the market price of the securities
loaned that might occur during the term of the loan would belong to a fund. A fund may lend its investment securities
so long as the terms, structure and the aggregate amount of such loans are not inconsistent with the 1940 Act
or the rules and regulations or interpretations of the SEC thereunder, which currently require that (a) the borrower pledge
and maintain with a fund collateral consisting of liquid, unencumbered assets having a value at all times not less
than 100% of the value of the securities loaned, (b) the borrower add to such collateral whenever the price of the
securities loaned rises or the value of non-cash collateral declines (i.e., the borrower “marks
to the market” on a
daily basis), (c) the loan be made subject to termination by a fund at any time, and (d) a fund receives a reasonable return
on the loan (consisting of the return achieved on investment of the cash collateral, less the rebate owed to borrowers,
plus distributions on the loaned securities and any increase in their market value). A fund may pay reasonable fees
in connection with loaned securities, pursuant to written contracts, including fees paid to a fund’s custodian and fees
paid to a securities lending agent, including a securities lending agent that is an affiliate of the Advisor. Voting rights
may pass with the loaned securities, but if an event occurs that the Advisor determines to be a material event affecting
an investment on loan, the loan must be called and the securities voted. Cash collateral received by a fund may
be invested in a money market fund managed by the Advisor (or one of its affiliates).
A
fund is subject to all investment risks associated with the reinvestment of any cash collateral received, including, but
not limited to, interest rate, credit and liquidity risk associated with such investments. To the extent the value or return
of a fund’s investments of the cash collateral declines below the amount owed to a borrower, a fund may incur losses
that exceed the amount it earned on lending the security. If the borrower defaults on its obligation to return securities
lent because of insolvency or other reasons, a fund could experience delays and costs in recovering the securities
lent or gaining access to collateral. If a fund is not able to recover securities lent, a fund may sell the collateral and
purchase a replacement investment in the market, incurring the risk that the value of the replacement security is
greater than the value of the collateral. However, loans will be made only to borrowers selected by a fund’s delegate after
a commercially reasonable review of relevant facts and circumstances, including the creditworthiness of the borrower.
In
the case of securities lending transactions, payments in lieu of dividends are not qualified dividend income.
Municipal
Securities Risk. Municipal securities are subject to the risk that litigation, legislation
or other political events, local business or economic conditions, credit rating
downgrades or the bankruptcy, of the issuer could have a significant effect on an
issuer’s ability to make payments of principal and/or interest or otherwise affect the value of such securities. In
addition, there is a risk that, as a result of the recent economic crisis, the ability of any issuer to pay, when due, the
principal or interest on its municipal bonds may be materially affected. Certain municipalities may have difficulty meeting
their obligations due to, among other reasons, changes in underlying demographics.
Municipal
securities can be significantly affected by political changes as well as uncertainties in the municipal market related
to government regulation, taxation, legislative changes or the rights of municipal security holders. Because many
municipal securities are issued to finance similar projects, especially those relating to education, health care, transportation,
utilities and water and sewer, conditions in those sectors can affect the overall municipal market. In addition,
changes in the financial condition of an individual municipal insurer can affect the overall municipal market. A
number of municipalities have had significant financial problems recently, and these and other municipalities could, potentially,
continue to experience significant financial problems resulting from lower tax revenues and/or decreased aid
from state and local governments in the event of an economic downturn. This could potentially decrease the fund’s income
or hurt its ability to preserve capital and liquidity. Municipal securities may include revenue bonds, which are generally
backed by revenue from a specific project or tax. The issuer of a revenue bond makes interest and principal payments
from revenues generated from a particular source or facility, such as a tax on particular property or revenues generated
from a municipal water or sewer utility or an airport. Revenue bonds generally are not backed by the full faith
and credit and general taxing power of the issuer. Municipal securities backed by current or anticipated revenues from
a specific project or specific assets can be negatively affected by the discontinuance of the taxation supporting the
project or assets or the inability to collect revenues for the project or from the assets due to factors such as lower property
tax collections as a result of lower home values, lower sales tax revenues as a result of consumers cutting back
spending and lower income tax revenue as a result of a higher unemployment rate. In addition, since some municipal
obligations may be secured or guaranteed by banks and other institutions, the risk to the fund could increase
if
the banking or financial sector suffers an economic downturn and/or if the credit ratings of the institutions issuing the
guarantee are downgraded or at risk of being downgraded by a national rating organization. Municipal instruments may
be susceptible to periods of economic stress, which could affect the market values and marketability of many or
all municipal obligations of issuers in a state, US territory, or possession. For example, the COVID-19 pandemic has
significantly stressed the financial resources of many municipal issuers, which may impair a municipal issuer’s ability
to meet its financial obligations when due and could adversely impact the value of its bonds, which could negatively impact
the performance of a fund.
The
market for municipal bonds may be less liquid than for taxable bonds. There may also be less publicly available information
on the financial condition of issuers of municipal securities than for public corporations. This means that it
may be harder to buy and sell municipal securities, especially on short notice, and municipal securities may be more difficult
for the fund to value accurately than securities of public corporations. Since the fund invests a significant portion
of its portfolio in municipal securities, the fund’s portfolio may have greater exposure to liquidity risk than a fund
that invests in non-municipal securities. In addition, the value and liquidity of many municipal securities have decreased
as a result of the recent financial crisis, which has also adversely affected many municipal securities issuers and
may continue to do so. The markets for many credit instruments, including municipal securities, have experienced periods
of illiquidity and extreme volatility since the latter half of 2007. In response to the global economic downturn, governmental
cost burdens may be reallocated among federal, state and local governments. In addition, issuers of municipal
securities may seek protection under the bankruptcy laws. For example, Chapter 9 of the United States Code
(the “Bankruptcy Code”)
provides a financially distressed municipality protection from its creditors while it develops and
negotiates a plan for reorganizing its debts. “Municipality”
is defined broadly by the Bankruptcy Code as a “political
subdivision or public agency or instrumentality of a state”
and may include various issues of securities in which the fund invests. The reorganization
of a municipality’s debts may include extending debt maturities, reducing the amount of
principal or interest, refinancing the debt or taking other measures, which may significantly affect the rights of creditors
and the value of the securities issued by the municipality and the value of the fund’s investments.
Some
longer-term municipal securities give the investor the right to “put”
or sell the security at par (face value) within a specified number of days following
the investor’s request – usually one to seven days. This demand feature enhances a
security’s liquidity by shortening its effective maturity and enables it to trade at a price equal to or very close to par. If
a demand feature terminates prior to being exercised, the fund would hold the longer-term security, which could experience
substantially more volatility. Municipal securities are subject to credit and market risk. Generally, prices of
higher quality issues tend to fluctuate more with changes in market interest rates than prices of lower quality issues and
prices of longer maturity issues tend to fluctuate more than prices of shorter maturity issues.
Prices
and yields on municipal securities are dependent on a variety of factors, including general money-market conditions, the
financial condition of the issuer, general conditions of the municipal securities market, the size of a particular offering,
the maturity of the obligation and the rating of the issue. A number of these factors, including the ratings of particular
issues, are subject to change from time to time. Available information about the financial condition of an issuer
of municipal securities may not be as extensive as that which is made available by corporations whose securities are
publicly traded. As a result, municipal securities may be more difficult to value than securities of public corporations.
Many
state and local governments that issue municipal securities are currently under significant economic and financial stress
and may not be able to satisfy their obligations. The taxing power of any governmental entity may be limited and
an entity’s credit may depend on factors which are beyond the entity’s control.
Electric
Utilities Bond Risk. The electric utilities industry has been experiencing, and
will continue to experience, increased competitive pressures. Federal legislation
may open transmission access to any electricity supplier, although it is not presently
known to what extent competition will evolve. Other risks include: (a) the availability and cost of fuel; (b) the
availability and cost of capital; (c) the effects of conservation on energy demand; (d) the effects of rapidly changing environmental,
safety and licensing requirements, and other federal, state and local regulations, (e) timely and sufficient rate
increases and governmental limitations on rates charged to customers; (f) the effects of opposition to nuclear power;
(g) increases in operating costs; and (h) obsolescence of existing equipment, facilities and products.
Industrial
Development Bond Risk. Industrial developments bonds are revenue bonds issued by
or on behalf of public authorities to obtain funds to finance various public and/or
privately operated facilities, including those for business and manufacturing, housing,
sports, pollution control, airport, mass transit, port and parking facilities. These bonds are
normally secured only by the revenues from the project and not by state or local government tax payments. Consequently, the
credit quality of these securities is dependent upon the ability of the user of the facilities financed by the bonds and
any guarantor to meet its financial obligations. Payment of interest on and repayment of principal of such bonds are
the responsibility of the user and/or any guarantor. These bonds are subject to a wide variety of risks, many of which
relate to the nature of the specific project. Generally, the value and credit quality of these bonds are sensitive to
the risks related to an economic slowdown.
Lease
Obligations Risk. Lease
obligations may have risks not normally associated with general obligation or other revenue
bonds. Leases and installment purchase or conditional sale contracts (which may provide for title to the leased asset
to pass eventually to the issuer) have developed as a means for governmental issuers to acquire property and equipment
without the necessity of complying with the constitutional statutory requirements generally applicable for the
issuance of debt. Certain lease obligations contain “nonappropriation”
clauses that provide that the governmental issuer has no obligation to make future
payments under the lease or contract unless money is appropriated for that purpose
by the appropriate legislative body on an annual or other periodic basis. Consequently, continued lease payments on
those lease obligations containing “non-appropriation”
clauses are dependent on future legislative actions. If these legislative actions
do not occur, the holders of the lease obligation may experience difficulty in exercising their rights, including
disposition of the property. In such circumstances, the fund might not recover the full principal amount of the
obligation.
Municipal
Bond Tax Risk. There is no guarantee that the fund’s income will be exempt
from federal or state income taxes. Events occurring after the date of issuance
of a municipal bond or after the fund’s acquisition of a municipal bond may
result in a determination that interest on that bond is includible in gross income for US federal income tax purposes
retroactively to its date of issuance. Such a determination may cause a portion of prior distributions by the fund
to its shareholders to be taxable to those shareholders in the year of receipt. Federal or state changes in income or
AMT rates or in the tax treatment of municipal bonds may make municipal bonds less attractive as investments and
cause them to lose value.
Municipal
Market Disruption Risk. The value of municipal securities may be affected by uncertainties
in the municipal market related to legislation or litigation involving the taxation
of municipal securities or the rights of municipal securities holders in the event
of a bankruptcy. Proposals to restrict or eliminate the federal income tax exemption for interest on
municipal securities are introduced before Congress from time to time. Proposals also may be introduced before state
legislatures that would affect the state tax treatment of a municipal fund’s distributions. If such proposals were enacted,
the availability of municipal securities and the value of a municipal fund’s holdings would be affected. Municipal bankruptcies
are relatively rare, and certain provisions of the US Bankruptcy Code governing such bankruptcies are unclear
and remain untested. Further, the application of state law to municipal issuers could produce varying results among
the states or among municipal securities issuers within a state. These legal uncertainties could affect the municipal
securities market generally, certain specific segments of the market, or the relative credit quality of particular securities.
There is also the possibility that as a result of litigation or other conditions, the power or ability of issuers to
meet their obligations for the payment of interest and principal on their municipal securities may be materially affected
or their obligations may be found to be invalid or unenforceable. Such litigation or conditions may from time to
time have the effect of introducing uncertainties in the market for municipal securities or certain segments thereof, or
of materially affecting the credit risk with respect to particular bonds. Adverse economic, business, legal or political developments
might affect all or a substantial portion of the fund’s municipal securities in the same manner. Any of these
effects could have a significant impact on the prices of some or all of the municipal securities held by the fund.
Resource
Recovery Bond Risk. Resource recovery bonds are a type of revenue bond issued to
build facilities such as solid waste incinerators or waste-to-energy plants. Typically,
a private corporation is involved, at least during the construction phase, and the
revenue stream is secured by fees or rents paid by municipalities for use of the facilities. These
bonds are normally secured only by the revenues from the project and not by state or local government tax receipts.
Consequently, the credit quality of these securities is dependent upon the ability of the user of the facilities
financed
by the bonds and any guarantor to meet its financial obligations. The viability of a resource recovery project, environmental
protection regulations, and project operator tax incentives may affect the value and credit quality of resource
recovery bonds.
Special
Tax Bond Risk. Special tax bonds are usually backed and payable through a single
tax, or series of special taxes such as incremental property taxes. The failure
of the tax levy to generate adequate revenue to pay the debt service on the bonds
may cause the value of the bonds to decline. Adverse conditions and developments affecting a
particular project may result in lower revenues to the issuer of the municipal securities, which may adversely affect the
value of the fund’s portfolio.
Transportation
Bond Risk. Transportation bonds may be issued to finance the construction of airports,
toll roads, highways or other transit facilities. Airport bonds are dependent on
the general stability of the airline industry and on the stability of a specific
carrier who uses the airport as a hub. Air traffic generally follows broader economic trends and is also affected
by the price and availability of fuel. Toll road bonds are also affected by the cost and availability of fuel as well as
toll levels, the presence of competing roads and the general economic health of an area. Fuel costs and availability also
affect other transportation-related securities, as do the presence of alternate forms of transportation, such as public
transportation. Municipal securities that are issued to finance a particular transportation project often depend solely
on revenues from that project to make principal and interest payments. Adverse conditions and developments affecting
a particular project may result in lower revenues to the issuer of the municipal securities.
Water
and Sewer Bond Risk. Water and sewer revenue bonds are often considered to have
relatively secure credit as a result of their issuer’s importance, monopoly
status and generally unimpeded ability to raise rates. Despite this, lack of water
supply due to insufficient rain, run-off or snow pack is a concern that has led to past defaults. Further, public
resistance to rate increases, costly environmental litigation, and federal environmental mandates are challenges faced
by issuers of water and sewer bonds.
Repurchase
Agreements. A repurchase agreement is an instrument under which the purchaser (i.e.,
a fund) acquires the security and the seller agrees, at the time of the sale, to
repurchase the security at a mutually agreed upon time and price, thereby determining
the yield during the purchaser’s holding period. Repurchase agreements may be construed to
be collateralized loans by the purchaser to the seller secured by the securities transferred to the purchaser. If a repurchase
agreement is construed to be a collateralized loan, the underlying securities will not be considered to be owned
by each fund but only to constitute collateral for the seller’s obligation to pay the repurchase price, and, in the event
of a default by the seller, each fund may suffer time delays and incur costs or losses in connection with the disposition
of the collateral.
In
any repurchase transaction, collateral for a repurchase agreement may include cash items, obligations issued by the
US government or its agencies or instrumentalities and any other debt security that the Advisor and/or Subadvisor, as
applicable, determines at the time the repurchase agreement is entered into: (i) is issued by an issuer that has an exceptionally
strong capacity to meet its financial obligations; and (ii) is sufficiently liquid that it can be sold at approximately its
carrying value in the ordinary course of business within seven calendar days. Collateral, however, is not limited to the
foregoing and may include for example obligations rated below the highest category by NRSROs. Collateral for a
repurchase agreement may also include securities that a fund could not hold directly without the repurchase obligation.
Repurchase
agreements pose certain risks for a fund that utilizes them. Such risks are not unique to the funds but are
inherent in repurchase agreements. The funds seek to minimize such risks but such risks cannot be eliminated. Lower
quality collateral and collateral with longer maturities may be subject to greater price fluctuations than higher quality
collateral and collateral with shorter maturities. If the repurchase agreement counterparty were to default, lower
quality collateral may be more difficult to liquidate than higher quality collateral. Should the counterparty default and
the amount of collateral not be sufficient to cover the counterparty’s repurchase obligation, a fund would retain the
status of an unsecured creditor of the counterparty (i.e., the position the fund would normally be in if it were to hold,
pursuant to its investment policies, other unsecured debt securities of the defaulting counterparty) with respect to
the amount of the shortfall. As an unsecured creditor, a fund would be at risk of losing some or all of the principal and
income involved in the transaction.
Restricted
Securities/Rule 144A Securities. The funds may invest in securities offered pursuant
to Rule 144A under the 1933 Act (“Rule
144A securities”), which
are restricted securities. They may be less liquid and more difficult to value than
other investments because such securities may not be readily marketable in broad public markets. The funds
may not be able to sell a restricted security promptly or at a reasonable price. Although there is a substantial institutional
market for Rule 144A securities, it is not possible to predict exactly how the market for Rule 144A securities will
develop. A restricted security that was liquid at the time of purchase may subsequently become illiquid and its value
may decline as a result. Restricted securities that are deemed illiquid will count towards a fund’s limitation on illiquid
securities. In addition, transaction costs may be higher for restricted securities than for more liquid securities. The
funds may have to bear the expense of registering Rule 144A securities for resale and the risk of substantial delays
in effecting the registration.
Reverse
Repurchase Agreements. Reverse Repurchase agreements involve the sale of securities
with an agreement to repurchase the securities at an agreed-upon price, date and
interest payment and have the characteristics of borrowing. Generally the effect
of such transactions is that a fund can recover all or most of the cash invested in the portfolio securities
involved during the term of the reverse repurchase agreement, while in many cases a fund is able to keep some
of the interest income associated with those securities. Such transactions are advantageous only if a fund has an
opportunity to earn a rate of interest on the cash derived from these transactions that is greater than the interest cost
of obtaining the same amount of cash. Opportunities to realize earnings from the use of the proceeds equal to or
greater than the interest required to be paid may not always be available and a fund intends to use the reverse repurchase
technique only when the Advisor and/or Subadvisor, as applicable, believes it will be advantageous to a fund.
The use of reverse repurchase agreements may exaggerate any interim increase or decrease in the value of a fund’s
assets. A fund’s exposure to reverse repurchase agreements will be covered by assets having a value equal to
or greater than such commitments. Each fund maintains liquid assets in connection with reverse repurchase agreements. Under
the 1940 Act, reverse repurchase agreements are considered borrowings.
Russian
Securities. As a result of political and military actions undertaken by Russia in
recent years, the US and the European Union have instituted sanctions against certain
Russian officials and Bank Rossiya. These sanctions, and any additional sanctions
or other intergovernmental actions that may be undertaken against Russia in the future, may result
in the devaluation of Russian currency, a downgrade in the Russia’s credit rating, and a decline in the value and liquidity
of Russian securities. These sanctions could result in the immediate freeze of Russian securities, impairing the
ability of a fund to buy, sell, receive, or deliver those securities. Retaliatory action by the Russian government could
involve the seizure of US and/or European residents’ assets, and any such actions are likely to impair the value and
liquidity of such assets. Any or all of these potential results could push Russia’s economy into a recession. These sanctions,
and the continued disruption of the Russian economy, could have a negative effect on the performance of a
fund to the extent their Underlying Indexes and their portfolios contain the securities of Russian issuers.
Short
Sales. When a fund makes a short sale, it borrows the security sold short and delivers
it to the broker-dealer through which it made the short sale. Each fund may have
to pay a fee to borrow particular securities and is often obligated to turn over
any payments received on such borrowed securities to the lender of the securities. Each fund secures
its obligation to replace the borrowed security by depositing collateral with the broker-dealer, usually in cash, US
Government securities or other liquid securities similar to those borrowed. With respect to uncovered short positions, the
funds are required to deposit similar collateral with its custodian, if necessary, to the extent that the value of both collateral
deposits in the aggregate is at all times equal to at least 150% of the current market value of the securities sold
short (100% of the current market value if a security is held in the account that is convertible or exchangeable into
the security sold short within 90 days without restriction other than the payment of money). Depending on arrangements made
with the broker-dealer from which a fund borrowed the security, regarding payment received by the fund on such
security, the fund may not receive any payments (including interest) on its collateral deposited with such broker-dealer. Because
making short sales in securities that it does not own exposes a fund to the risks associated with those securities,
such short sales involve speculative exposure risk. Each fund will incur a loss as a result of a short sale if the
price of the security increases between the date of the short sale and the date on which the fund replaces the borrowed
security. Each fund will realize a gain on a short sale if the security declines in price between those dates. There
can be no assurance that the funds will be able to close out a short sale position at any particular time or at an acceptable
price.
Each
fund may also make short sales “against
the box” without being
subject to such limitations. In a short sale “against-the-box,”
at the time of the sale, a fund owns or has the immediate and unconditional right to acquire the identical
security at no additional cost. If a fund makes a short sale against the box, the fund would not immediately deliver
the securities sold and would not receive the proceeds from the sale. The seller is said to have a short position in
the securities sold until it delivers the securities sold, at which time it receives the proceeds of the sale. To secure its
obligation to deliver securities sold short, a fund will deposit in escrow in a separate account with the custodian an
equal amount of the securities sold short or securities convertible into or exchangeable for such securities. Each fund
can close out its short position by purchasing and delivering an equal amount of the securities sold short, rather than
by delivering securities already held by the fund because the fund might want to continue to receive interest and
dividend payments on securities in its portfolio that are convertible into the securities sold short.
Short-Term
Instruments and Temporary Investments. Short-term instruments, including money market
instruments, may be used on an ongoing basis to provide liquidity or for other reasons,
including to the extent necessary to help each fund track its underlying index.
Money market instruments are generally short-term investments that may include but
are not limited to: (i) Shares of money market funds (including those advised by the Advisor and/or Subadvisor, as
applicable); (ii) obligations issued or guaranteed by the US government, its agencies or instrumentalities (including government-sponsored
enterprises); (iii) negotiable certificates of deposit (“CDs”),
bankers’ acceptances, fixed-time deposits and other obligations of US and
non-US banks (including non-US branches) and similar institutions; (iv) commercial paper
rated, at the date of purchase, “Prime-1”
by Moody’s Investors Service, Inc. or “A-1”
by Standard & Poor’s Financial Services LLC or, if unrated, of comparable
quality as determined by the Advisor and/or Subadvisor, as applicable; (v) non-convertible
corporate debt securities (e.g., bonds and debentures) with remaining maturities at the date of purchase
of not more than 397 days and that satisfy the credit quality requirements set forth in Rule 2a-7 under the 1940
Act; (vi) repurchase agreements; and (vii) short-term US dollar-denominated obligations of non-US banks (including US
branches) that, in the opinion of the Advisor and/or Subadvisor, as applicable, are of comparable quality to obligations of
US banks which may be purchased by a fund. Any of these instruments may be purchased on a current or forward-settled basis.
Time deposits are non-negotiable deposits maintained in banking institutions for specified periods of time at stated
interest rates. Bankers’ acceptances are time drafts drawn on commercial banks by borrowers, usually in connection with
international transactions.
Special
Taxation Risks for Funds that Invest in Underlying Funds. To the extent a fund invests
in an Underlying Fund, the fund’s exposure to the portfolio investments of
such Underlying Fund through its investment in the Underlying Fund’s shares
may be less tax efficient than the fund investing directly in the Underlying Fund’s portfolio investments. The
fund will not be able to offset its taxable income and gains with losses incurred by the Underlying Fund because the
Underlying Fund is treated as a corporation for US federal income tax purposes. The fund’s sales of shares in the Underlying
Fund, including those resulting from changes in the fund’s allocation of assets, could cause the recognition of
additional taxable gains. A portion of any such gains may be short-term capital gains, which will be taxable as ordinary dividend
income when distributed to the fund’s shareholders.
Further,
certain losses recognized on sales of shares in an Underlying Fund may be deferred indefinitely under the wash
sale rules. Any loss realized by the fund on a disposition of shares in an Underlying Fund held for six months or less
will be treated as a long-term capital loss to the extent of any amounts treated as distributions to the fund of net long-term
capital gain with respect to the Underlying Fund’s shares (including any amounts credited to the fund as undistributed
capital gains). Short-term capital gains earned by the Underlying Fund will be treated as ordinary dividends when
distributed to the fund and therefore may not be offset by any short-term capital losses incurred by the fund. The
fund’s short-term capital losses might instead offset long-term capital gains realized by the fund, which would otherwise
be eligible for reduced US federal income tax rates when distributed to individual and certain other non-corporate shareholders.
To
the extent a fund invests in an Xtrackers China A-Shares ETF, such investment poses additional taxation risk. Specifically, if
the Chinese government imposes restrictions on the Xtrackers China A-Shares ETF’s ability to repatriate monies associated
with investment in A-Shares, the Xtrackers China A-Shares ETF could fail to qualify for US federal income tax
treatment as a regulated investment company. Under those circumstances, the Xtrackers China A-Shares ETF would
be subject to tax as a regular corporation, and the fund would not be able to treat non-US income taxes paid by
the Xtrackers China A-Shares ETFs as paid by the fund’s shareholders.
Tax
Risks. As with any investment, you should consider how your investment in Shares
of the fund will be taxed. The tax information in the Prospectus and this SAI is
provided as general information. You should consult your own tax professional about
the tax consequences of an investment in Shares of the fund.
When-Issued
Securities. A fund may purchase when-issued securities. Purchasing securities on
a “when-issued”
basis means that the date for delivery of and payment for the securities is not
fixed at the date of purchase, but is set after the securities are issued. The payment
obligation and, if applicable, the interest rate that will be received on the securities
are fixed at the time the buyer enters into the commitment. The fund will only make commitments to purchase
such securities with the intention of actually acquiring such securities, but the fund may sell these securities before
the settlement date if it is deemed advisable.
Securities
purchased on a when-issued basis and the securities held in the fund’s portfolio are subject to changes in market
value based upon the public’s perception of the creditworthiness of the issuer and, if applicable, the changes in
the level of interest rates. Therefore, if the fund is to remain substantially fully invested at the same time that it has purchased
securities on a when-issued basis, there will be a possibility that the market value of the fund’s assets will fluctuate
to a greater degree. Furthermore, when the time comes for the fund to meet its obligations under when-issued commitments,
the fund will do so by using then available cash flow, by sale of the segregated liquid assets, by sale of
other securities, or although it would not normally expect to do so, by directing the sale of when-issued securities themselves
(which may have a market value greater or less than the fund’s payment obligation).
Investment
in securities on a when-issued basis may increase the fund’s exposure to market fluctuation and may increase
the possibility that the fund will incur short-term gains subject to federal taxation or short-term losses if the fund
must sell another security in order to honor a when-issued commitment. The fund will employ techniques designed to
reduce such risks. If the fund purchases a when-issued security, the fund will segregate liquid assets in an amount equal
to the when-issued commitment. If the market value of such segregated assets declines, additional liquid assets will
be segregated on a daily basis so that the market value of the segregated assets will equal the amount of the fund’s
when-issued commitments.
Part
II: Appendix II-F—Taxes
The
following is intended to be a general summary of certain federal income tax consequences of investing in a fund. This
discussion does not address all aspects of taxation (including state, local, and foreign taxes) that may be relevant to
particular shareholders in light of their own investment or tax circumstances, or to particular types of shareholders (including
insurance companies, tax-deferred retirement plans, financial institutions or broker-dealers, foreign corporations, and
persons who are not citizens or residents of the United States) that are subject to special treatment under the US
federal income tax laws. Current and prospective investors are therefore advised to consult with their tax advisors before
making an investment in a fund. This summary is based on the laws in effect on the date of this SAI and on existing
judicial and administrative interpretations thereof, all of which are subject to change, possibly with retroactive effect.
Regulated
Investment Company Qualifications. Each fund intends to qualify for treatment as
a separate RIC under Subchapter M of the Code. To qualify for treatment as a RIC,
each fund must annually distribute at least 90% of its investment company taxable
income (which includes dividends, interest and net short-term capital gains) and meet several
other requirements. Among such other requirements are the following: (i) at least 90% of each fund’s annual gross
income must be derived from dividends, interest, payments with respect to securities loans, gains from the sale
or other disposition of stock or securities or non-US currencies, other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its business of investing in such stock, securities or
currencies, and net income derived from interests in qualified publicly-traded partnerships (i.e., partnerships that are
traded on an established securities market or tradable on a secondary market, other than partnerships that derive 90%
of their income from interest, dividends, capital gains and other traditionally permitted mutual fund income); and
(ii) at the close of each quarter of each fund’s taxable year, (a) at least 50% of the market value of each fund’s total
assets must be represented by cash and cash items, US government securities, securities of other RICs and other
securities, with such other securities limited for purposes of this calculation in respect of any one issuer to an amount
not greater than 5% of the value of the fund’s assets and not greater than 10% of the outstanding voting securities
of such issuer, and (b) not more than 25% of the value of each fund’s total assets may be invested in the securities
(other than US government securities or the securities of other RICs) of any one issuer, or two or more issuers
of which 20% or more of the voting stock is held by the fund and that are engaged in the same or similar trades
or businesses or related trades or businesses, or the securities of one or more qualified publicly-traded partnerships. The
Treasury Department is authorized to promulgate regulations under which gains from foreign currencies (and options,
futures, and forward contracts on foreign currency) would constitute qualifying income for purposes of the test
described in (i) above only if such gains are directly related to investing in securities. To date, such regulations have
not been issued.
Although
in general the passive loss rules of the Code do not apply to RICs, such rules do apply to a RIC with respect to
items attributable to an interest in a qualified publicly-traded partnership. A fund’s investments in partnerships, if any,
including in qualified publicly-traded partnerships, may result in a fund being subject to state, local, or non-US income,
franchise or withholding tax liabilities.
Taxation
of Regulated Investment Companies. As a RIC, a fund will not be subject to US federal
income tax on the portion of its taxable investment income and capital gains that
it distributes to its shareholders, provided that it satisfies a minimum distribution
requirement. To satisfy the minimum distribution requirement, a fund must distribute to
its shareholders an amount at least equal to the sum of (i) 90% of its “investment
company taxable income”
(i.e., taxable income other than its net realized long-term capital gain over its
net realized short-term capital loss), plus or minus certain adjustments, and (ii)
90% of its net tax-exempt income for the taxable year. A fund will be subject to income
tax at regular corporation rates on any taxable income or gains that it does not distribute to its shareholders. If
a fund fails to qualify for any taxable year as a RIC or fails to meet the distribution requirement, all of its taxable income
will be subject to tax at regular corporate income tax rates without any deduction for distributions to shareholders, and
such distributions generally will be taxable to shareholders as ordinary dividends to the extent of the fund’s current and
accumulated earnings and profits. In such event, distributions to individuals should be eligible to be treated as qualified
dividend income and distributions to corporate shareholders generally should be eligible for the dividends received
deduction. Although each fund intends to distribute substantially all of its net investment income and its capital
gains for each taxable year, each fund will be subject to US federal income taxation to the extent any such
income
or gains are not distributed. If a fund fails to qualify as a RIC in any year, it must pay out its earnings and profits
accumulated in that year in order to qualify again as a RIC. If a fund fails to qualify as a RIC for a period greater than
two taxable years, the fund may be required to recognize any net built-in gains with respect to certain of its assets
(i.e., the excess of the aggregate gains, including items of income, over aggregate losses that would have been
realized with respect to such assets if the fund had been liquidated) if it qualifies as a RIC in a subsequent year.
If
a fund does not on a timely basis receive applicable government approvals in the PRC to repatriate funds associated with
direct investment in A-Shares, the fund may be unable to satisfy the minimum distribution requirement described above.
Excise
Tax. A fund will be subject to a 4% excise tax on certain undistributed income if
it does not generally distribute to its shareholders in each calendar year an amount
at least equal to the sum of (i) 98% of its ordinary income for the calendar year
(taking into account certain deferrals and elections) plus (ii) 98.2% of its capital gain net income (reduced by
certain ordinary losses) for the 12 months ended October 31 of such year. For this purpose, however, any ordinary income
or capital gain net income retained by a fund that is subject to corporate income tax in the taxable year ending within
the relevant calendar year will be considered to have been distributed. In addition, the minimum amounts that must
be distributed in any year to avoid the excise tax will be increased or decreased to reflect any under-distribution or
over-distribution, as the case may be, from the previous year. Each fund intends to declare and distribute dividends and
distributions in the amounts and at the times necessary to avoid the application of this 4% excise tax.
If
a fund does not on a timely basis receive applicable government approvals in the PRC to repatriate funds associated with
direct investment in A-Shares, a fund may be unable to avoid the excise tax.
Fund
Losses. If a fund has a “net
capital loss” (that
is, capital losses in excess of capital gains) for a taxable year, the excess of
the fund’s net short-term capital losses over its net long-term capital gains is treated as a short-term capital
loss arising on the first day of the fund’s next taxable year, and the excess (if any) of the fund’s net long-term capital
losses over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the fund’s
next taxable year. These losses can be carried forward indefinitely to offset capital gains, if any, in years following the
year of the loss.
Under
certain circumstances, a fund may elect to treat certain losses as though they were incurred on the first day of
the taxable year following the taxable year in which they were actually incurred.
Taxation
of US Shareholders. Dividends and other distributions by a fund are generally treated
under the Code as received by the shareholders at the time the dividend or distribution
is made. However, any dividend or distribution declared by a fund in October, November
or December of any calendar year and payable to shareholders of record on a specified
date in such a month shall be deemed to have been received by each shareholder on December 31 of such
calendar year and to have been paid by the fund not later than such December 31, provided such dividend is actually
paid by the fund during January of the following calendar year.
Each
fund intends to distribute annually to its shareholders substantially all of its investment company taxable income and
any net realized long-term capital gains in excess of net realized short-term capital losses (including any capital loss
carryovers). However, if a fund retains for investment an amount equal to all or a portion of its net long-term capital
gains in excess of its net short-term capital losses (including any capital loss carryovers), it will be subject to a
corporate tax (currently at a maximum rate of 21%) on the amount retained. In that event, the fund may report such retained
amounts as undistributed capital gains in a notice to its shareholders who (a) will be required to include in income
for US federal income tax purposes, as long-term capital gains, their proportionate shares of the undistributed amount,
(b) will be entitled to credit their proportionate shares of the US federal income tax paid by the fund on the undistributed
amount against their US federal income tax liabilities, if any, and to claim refunds to the extent their credits
exceed their liabilities, if any, and (c) will be entitled to increase their tax basis, for US federal income tax purposes,
in their Shares by an amount equal to 79% of the amount of undistributed capital gains included in the shareholder’s
income. Organizations or persons not subject to US federal income tax on such capital gains will be entitled
to a refund of their pro rata share of such taxes paid by the fund upon filing appropriate returns or claims for refund
with the IRS.
Distributions
of net realized long-term capital gains, if any, that a fund reports as capital gains dividends are taxable as
long-term capital gains, whether paid in cash or in Shares and regardless of how long a shareholder has held Shares of
the fund. All other dividends of a fund (including dividends from short-term capital gains) from its current and accumulated earnings
and profits (“regular
dividends”) are generally
subject to tax as ordinary income, subject to the discussion of qualified dividend
income below.
If
an individual receives a regular dividend qualifying for the long-term capital gains rates and such dividend constitutes an
“extraordinary dividend,”
and the individual subsequently recognizes a loss on the sale or exchange of stock in respect
of which the extraordinary dividend was paid, then the loss will be long-term capital loss to the extent of such
extraordinary dividend. An “extraordinary
dividend” on common
stock for this purpose is generally a dividend (i) in an amount greater than or
equal to 10% of the taxpayer’s tax basis (or trading value) in a Share of stock, aggregating dividends
with ex-dividend dates within an 85-day period or (ii) in an amount greater than 20% of the taxpayer’s tax basis
(or trading value) in a Share of stock, aggregating dividends with ex- dividend dates within a 365-day period.
Distributions
in excess of a fund’s current and accumulated earnings and profits will, as to each shareholder, be treated as
a tax-free return of capital to the extent of a shareholder’s basis in Shares of the fund, and as a capital gain thereafter (if
the shareholder holds Shares of the fund as capital assets). Shareholders receiving dividends or distributions in the
form of additional Shares should generally be treated for US federal income tax purposes as receiving a distribution in
an amount equal to the amount of money that the shareholders receiving cash dividends or distributions will receive and
should generally have a cost basis in the Shares received equal to such amount.
Investors
considering buying Shares just prior to a dividend or capital gain distribution should be aware that, although the
price of Shares purchased at that time may reflect the amount of the forthcoming distribution, such dividend or distribution
may nevertheless be taxable to them. If a fund is the holder of record of any security on the record date for
any dividends payable with respect to such security, such dividends will be included in the fund’s gross income not
as of the date received but as of the later of (a) the date such security became ex-dividend with respect to such dividends
(i.e., the date on which a buyer of the security would not be entitled to receive the declared, but unpaid, dividends);
or (b) the date the fund acquired such security. Accordingly, in order to satisfy its income distribution requirements, a
fund may be required to pay dividends based on anticipated earnings, and shareholders may receive dividends in an
earlier year than would otherwise be the case.
In
certain situations, a fund may, for a taxable year, defer all or a portion of its capital losses, currency losses and certain
other ordinary losses until the next taxable year in computing its investment company taxable income and net
capital gain, which will defer the recognition of such realized losses. Such deferrals and other rules regarding gains and
losses may affect the tax character of shareholder distributions.
An
additional 3.8% Medicare tax is imposed on certain net investment income (including ordinary dividends and capital gain
distributions received from a fund and net gains from redemptions or other taxable dispositions of fund Shares) of
US 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 certain threshold amounts.
Sales
of Shares. Upon the sale or exchange of Shares of a fund, a shareholder will realize
a taxable gain or loss equal to the difference between the amount realized and the
shareholder’s basis in Shares of a fund. A redemption of Shares by a fund
will be treated as a sale for this purpose. Such gain or loss will be treated as capital gain or loss if the Shares are
capital assets in the shareholder’s hands and will be long-term capital gain or loss if the Shares are held for more than
one year and short-term capital gain or loss if the Shares are held for one year or less. Any loss realized on a sale or
exchange will be disallowed to the extent the Shares disposed of are replaced, including replacement through the reinvesting
of dividends and capital gains distributions in the fund, within a 61-day period beginning 30 days before and
ending 30 days after the disposition of the Shares. In such a case, the basis of the Shares acquired will be increased to
reflect the disallowed loss. Any loss realized by a shareholder on the sale of a fund Share held by the shareholder for
six months or less will be treated for US federal income tax purposes as a long-term capital loss to the extent of any
distributions or deemed distributions of long-term capital gains received by the shareholder with respect to such Share.
If
a shareholder incurs a sales charge in acquiring Shares of a fund, disposes of those Shares within 90 days and then acquires,
prior to February 1 of the following calendar year, shares in a mutual fund for which the otherwise applicable sales
charge is reduced by reason of a reinvestment right (e.g., an exchange privilege), the original sales charge will not
be taken into account in computing gain/loss on the original Shares to the extent the subsequent sales charge is reduced.
Instead, the disregarded portion of the original sales charge will be added to the tax basis of the newly acquired
Shares. Furthermore, the same rule also applies to a disposition of the newly acquired Shares made within 90
days of the second acquisition. This provision prevents shareholders from immediately deducting the sales charge by
shifting their investments within a family of mutual funds.
Legislation
passed by Congress requires reporting of adjusted cost basis information for covered securities, which generally
include shares of a RIC acquired after January 1, 2012, to the Internal Revenue Service and to taxpayers.
Shareholders
should contact their financial intermediaries with respect to reporting of cost basis and available elections for
their accounts.
Back-Up
Withholding. In certain cases, withholding will be required at the applicable withholding
rate (currently 24%), from any distributions paid to a shareholder who: (i) has
failed to provide a correct taxpayer identification number; (ii) is subject to back-up
withholding by the IRS; (iii) has failed to certify that such shareholder is not subject to back-up withholding;
or (iv) has not certified that such shareholder is a US person (including a US resident alien). Back-up withholding
is not an additional tax and any amount withheld may be credited against a shareholder’s US federal income
tax liability.
Sections
351 and 362. The Trust, on behalf of each fund, has the right to reject an order
for a purchase of Shares of the fund if the purchaser (or group of purchasers) would,
upon obtaining the Shares so ordered, own 80% or more of the outstanding Shares
of a given Fund and if, pursuant to Sections 351 and 362 of the Code, that fund would have a
basis in the securities different from the market value of such securities on the date of deposit. If a fund’s basis in such
securities on the date of deposit was less than market value on such date, the fund, upon disposition of the securities,
would recognize more taxable gain or less taxable loss than if its basis in the securities had been equal to market
value. It is not anticipated that the Trust will exercise the right of rejection except in a case where the Trust determines
that accepting the order could result in material adverse tax consequences to a fund or its shareholders. The
Trust also has the right to require information necessary to determine beneficial Share ownership for purposes of
the 80% determination.
Investment
in the Underlying Funds. A fund’s exposure to securities through an underlying
fund (i.e., the Underlying Funds) may be less tax efficient than a direct investment
in securities. The fund will not be able to offset its taxable income and gains
with losses incurred by the underlying fund because the underlying fund(s) are treated as corporations for
US federal income tax purposes. The fund’s sales of shares of an underlying fund, including those resulting from changes
in the fund’s allocation of assets, could cause the recognition of additional taxable gains. A portion of any such
gains may be short-term capital gains, which will be taxable as ordinary dividend income when distributed to the
fund’s shareholders. Further, certain losses recognized on sales of shares of the underlying fund may be deferred indefinitely
under the wash sale rules. Any loss realized by the fund on a disposition of shares of the underlying fund held
for six months or less will be treated as a long-term capital loss to the extent of any amounts treated as distributions to
the fund of net long-term capital gain with respect to the underlying fund’s shares (including any amounts credited to
the fund as undistributed capital gains). Short-term capital gains earned by the underlying fund will be treated as ordinary
dividends when distributed to the fund and therefore may not be offset by any short-term capital losses incurred
by the fund. The fund’s short-term capital losses might instead offset long-term capital gains realized by the fund,
which would otherwise be eligible for reduced US federal income tax rates when distributed to individual and certain
other non-corporate shareholders.
Taxation
of Certain Derivatives. A fund’s transactions in zero coupon securities, non-US
currencies, forward contracts, options and futures contracts (including options,
futures contracts and forward contracts on non-US currencies), to the extent permitted,
will be subject to special provisions of the Code (including provisions relating to “hedging
transactions” and
“straddles”)
that, among other things, may affect the character of gains and losses realized by the fund (i.e., may affect
whether gains or losses are ordinary or capital), accelerate recognition of income to the fund and defer fund
losses.
These rules could therefore affect the character, amount and timing of distributions to shareholders. These provisions
also (a) will require a fund to mark-to-market certain types of the positions in its portfolio (i.e., treat them as
if they were closed out at the end of each year) and (b) may cause a fund to recognize income without receiving cash
with which to pay dividends or make distributions in amounts necessary to satisfy the distribution requirements for
avoiding income and excise taxes. Each fund will monitor its transactions, will make the appropriate tax elections and
will make the appropriate entries in its books and records when it acquires any zero coupon security, non-US currency,
forward contract, option, futures contract or hedged investment in order to mitigate the effect of these rules and
prevent disqualification of the fund as a RIC.
A
fund’s investment in so-called “Section
1256 contracts,” such
as regulated futures contracts, most non-US currency forward contracts traded in
the interbank market and options on most security indexes, are subject to special tax rules.
All Section 1256 contracts held by a fund at the end of its taxable year are required to be marked to their market value,
and any unrealized gain or loss on those positions will be included in the fund’s income as if each position had been
sold for its fair market value at the end of the taxable year. The resulting gain or loss will be combined with any gain
or loss realized by the fund from positions in Section 1256 contracts closed during the taxable year. Provided such
positions were held as capital assets and were not part of a “hedging
transaction” nor part
of a “straddle,”
60% of the resulting net gain or loss will be treated as long-term capital gain
or loss, and 40% of such net gain or loss will be treated as short-term capital
gain or loss, regardless of the period of time the positions were actually held by the fund.
As
a result of entering into swap contracts, a fund may make or receive periodic net payments. A fund may also make or
receive a payment when a swap is terminated prior to maturity through an assignment of the swap or other closing transaction.
Periodic net payments will generally constitute ordinary income or deductions, while termination of a swap
will generally result in capital gain or loss (which will be a long-term capital gain or loss if the fund has been a party
to the swap for more than one year). With respect to certain types of swaps, a fund may be required to currently recognize
income or loss with respect to future payments on such swaps or may elect under certain circumstances to
mark such swaps to market annually for tax purposes as ordinary income or loss. The tax treatment of many types of
credit default swaps is uncertain.
Qualified
Dividend Income. Distributions by a fund of investment company taxable income (including
any short-term capital gains), whether received in cash or Shares, will be taxable
either as ordinary income or as qualified dividend income, eligible for the reduced
maximum rate to individuals of either 15% or 20% (depending on whether the individual’s income
exceeds certain threshold amounts) to the extent the fund receives qualified dividend income on the securities it
holds and the fund reports the distribution as qualified dividend income. Distributions by a fund of its net short-term capital
gains will be taxable as ordinary income. Capital gain distributions consisting of a fund’s net capital gains will be
taxable as long-term capital gains. Qualified dividend income is, in general, dividend income from taxable US corporations (but
generally not from US REITs) and certain non-US corporations (e.g., non-US corporations that are not “passive
foreign investment companies”
and which are incorporated in a possession of the US or in certain countries with a comprehensive
tax treaty with the US, or the stock of which is readily tradable on an established securities market in
the US). Under current IRS guidance, the United States has appropriate comprehensive income tax treaties with the
following countries: Australia, Austria, Bangladesh, Barbados, Belgium, Bulgaria, Canada, China (but not with Hong Kong,
which is treated as a separate jurisdiction for US tax purposes), Cyprus, the Czech Republic, Denmark, Egypt, Estonia,
Finland, France, Germany, Greece, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Jamaica, Japan, Kazakhstan,
Latvia, Lithuania, Luxembourg, Malta, Mexico, Morocco, the Netherlands, New Zealand, Norway, Pakistan, the
Philippines, Poland, Portugal, Romania, Russia, Slovak Republic, Slovenia, South Africa, South Korea, Spain, Sri Lanka,
Sweden, Switzerland, Thailand, Trinidad and Tobago, Tunisia, Turkey, Ukraine, the United Kingdom, and Venezuela.
A
dividend from a fund will not be treated as qualified dividend income to the extent that (i) the shareholder has not held
the Shares on which the dividend was paid for 61 days during the 121-day period that begins on the date that is
60 days before the date on which the Shares become ex-dividend with respect to such dividend or the fund fails to
satisfy those holding period requirements with respect to the securities it holds that paid the dividends distributed to
the shareholder (or, in the case of certain preferred stocks, the holding requirement of 91 days during the 181-day period
beginning on the date that is 90 days before the date on which the stock becomes ex- dividend with respect to
such dividend); (ii) the fund or the shareholder is under an obligation (whether pursuant to a short sale or otherwise)
to
make related payments with respect to substantially similar or related property; or (iii) the shareholder elects to treat
such dividend as investment income under Section 163(d)(4)(B) of the Code. Dividends received by a fund from a
REIT or another RIC may be treated as qualified dividend income only to the extent the dividend distributions are attributable
to qualified dividend income received by such REIT or other RIC. It is expected that dividends received by
a fund from a REIT and distributed to a shareholder generally will be taxable to the shareholder as ordinary income and
eligible for a special 20% deduction by shareholders if so reported by the fund.
If
you lend your fund Shares pursuant to securities lending arrangements you may lose the ability to use non-US tax credits
passed through by the fund or to treat fund dividends (paid while the Shares are held by the borrower) as qualified
dividends. Consult your financial intermediary or tax advisor. If you enter into a short sale with respect to Shares
of the fund, substitute payments made to the lender of such Shares may not be deductible. Consult your financial
intermediary or tax advisor.
Corporate
Dividends Received Deduction. Distributions reported to shareholders as derived
from a Fund’s dividend income, if any, that would be eligible for the dividends
received deduction if a Fund were not a regulated investment company may be eligible
for the dividends received deduction for corporate shareholders. The dividends received deduction,
if available, is reduced to the extent the shares with respect to which the dividends are received are treated as
debt-financed under federal income tax law and is eliminated if the shares are deemed to have been held for less than
a minimum period, generally 46 days. The dividends received deduction also may be reduced as a result of a Fund’s
securities lending activities, hedging activities or a high portfolio turnover rate or as a result of certain derivative transactions
entered into by a Fund.
Excess
Inclusion Income. Under current law, the fund serves to block unrelated business
taxable income from being realized by their tax-exempt Shareholders. Notwithstanding
the foregoing, a tax-exempt shareholder could realize unrelated business taxable
income by virtue of its investment in the fund if shares in the fund constitute debt-financed property in
the hands of the tax-exempt shareholder within the meaning of Code Section 514(b). Certain types of income received by
the fund from REITs, real estate mortgage investment conduits, taxable mortgage pools or other investments may cause
the fund to designate some or all of its distributions as “excess
inclusion income.” To
fund shareholders, such excess inclusion income may (i) constitute taxable income,
as “unrelated business
taxable income” for
those shareholders who would otherwise be tax-exempt such as individual retirement
accounts, 401(k) accounts, Keogh plans, pension plans and certain charitable entities;
(ii) not be offset by otherwise allowable deductions for tax purposes; (iii) not be eligible
for reduced US withholding for non-US shareholders even from tax treaty countries; and (iv) cause the fund to
be subject to tax if certain “disqualified
organizations” as defined
by the Code are fund shareholders. If a charitable remainder annuity trust or a
charitable remainder unitrust (each as defined in Code Section 664) has UBTI for a taxable year,
a 100% excise tax on the UBTI is imposed on the trust.
Non-US
Investments. Under Section 988 of the Code, gains or losses attributable to fluctuations
in exchange rates between the time a fund accrues income or receivables or expenses
or other liabilities denominated in a currency other than the fund’s “functional
currency” and the time
the fund actually collects such receivables or income or pays such expenses or liabilities
are generally treated as ordinary income or ordinary loss. In general, assuming the fund’s functional
currency for US federal income tax purposes is the US dollar, gains (and losses) realized on debt instruments will
be treated as Section 988 gain (or loss) to the extent attributable to changes in exchange rates between the US dollar
and the currencies in which the instruments are denominated. Similarly, gain or losses on non-US currency, non-US
currency forward contracts and certain non-US currency options or futures contracts denominated in non-US currency,
to the extent attributable to fluctuations in exchange rates between the acquisition and disposition dates, are
also treated as ordinary income or loss unless the fund were to elect otherwise. Certain funds (or a “qualified
business unit”
of the fund) may treat the RMB as its functional currency. Under those circumstances, the fund generally would
not be expected to recognize gains or losses on its RMB-denominated securities based on the value of the RMB
relative to the US dollar, but a fund may recognize Section 988 gain (or loss) based on fluctuations in the value of
the RMB relative to the US dollar between the acquisition and disposition dates of US currency, between the date on
which a fund dividend is declared and the date on which it is paid, and potentially in connection with Fund redemptions.
Income
received by the funds from sources within foreign countries (including, for example, interest and dividends on
securities of non-US issuers) may be subject to withholding and other taxes imposed by such countries. In the case
of PRC issuers, gain on the sale of shares may also be subject to foreign tax. Tax treaties between such countries and
the US may reduce or eliminate such taxes. Foreign taxes paid by the funds will reduce the return from the funds’ investments.
Each
fund may be subject to non-US income taxes withheld at the source. Each fund, if more than 50% of the value of
its total assets at the close of its taxable year consists of securities of foreign corporations, may elect to “pass
through”
to its investors the amount of non-US income taxes paid by the fund provided that both the fund and the investor
satisfy certain holding period requirements, with the result that each investor at the time of deemed distribution will
(i) include in gross income, even though not actually received, the investor’s pro rata share of the fund’s non-US income
taxes, and (ii) either deduct (in calculating US taxable income) or credit (in calculating US federal income tax) the
investor’s pro rata share of the fund’s non-US income taxes. A non-US person invested in the fund in a year that the
fund elects to “pass
through” its non-US
taxes may be treated as receiving additional dividend income subject to US withholding
tax. A non-US tax credit may not exceed the investor’s US federal income tax otherwise payable with
respect to the investor’s non-US source income. For this purpose, shareholders must treat as non-US source gross
income (i) their proportionate Shares of non-US taxes paid by the fund and (ii) the portion of any dividend paid by
the fund that represents income derived from non-US sources; the fund’s gain from the sale of securities will generally
be treated as US-source income. Certain limitations will be imposed to the extent to which the non-US tax credit
may be claimed.
A-Shares
Tax Risk. Uncertainties in the Chinese tax rules governing taxation of income and
gains from investments in A-Shares could result in unexpected tax liabilities for
a fund. China generally imposes withholding tax at a rate of 10% on dividends and
interest derived by nonresident enterprises from issuers resident in China. China also imposes withholding
tax at a rate of 10% on capital gains derived by nonresident enterprises from investments in an issuer resident
in China, subject to an exemption or reduction pursuant to domestic law or a double taxation agreement or arrangement.
Since
the respective inception of the Shanghai-Hong Kong Stock Connect program (“Shanghai
Connect” and the Shenzhen-Hong
Kong Stock Connect program (“Shenzhen
Connect”), foreign investors
(including the funds) investing in A-Shares listed on the SSE through Shanghai Connect
and those listed on the SZSE through Shenzhen Connect would be temporarily exempt
from the PRC corporate income tax and value-added tax on the gains on disposal of such
A-Shares. Dividends would be subject to PRC corporate income tax on a withholding basis at 10%, unless reduced under
a double tax treaty with China upon application to and obtaining approval from the competent tax authority.
The
current PRC tax laws and regulations and interpretations thereof may be revised or amended in the future, including with
respect to the possible liability of a fund for the taxation of income and gains from investments in A-Shares through
Stock Connect. The withholding taxes on dividends, interest and capital gains may in principle be subject to a
reduced rate under an applicable tax treaty.
Certain
Debt Instruments. Some of the debt securities (with a fixed maturity date of more
than one year from the date of issuance) that may be acquired by a fund may be treated
as debt securities that are issued originally at a discount. Generally, the amount
of the original issue discount (“OID”)
is treated as interest income and is included in income over the term of the debt
security, even though payment of that amount is not received until a later time, usually
when the debt security matures. A portion of the OID includable in income with respect to certain high-yield corporate
debt securities may be treated as a dividend for federal income tax purposes. Some of the debt securities (with
a fixed maturity date of more than one year from the date of issuance) that may be acquired by a fund in the secondary
market may be treated as having market discount. Generally, any gain recognized on the disposition of, and
any partial payment of principal on, a debt security having market discount is treated as ordinary income to the extent
the gain, or principal payment, does not exceed the “accrued
market discount” on
such debt security. Market discount generally accrues in equal daily installments.
The funds may make one or more of the elections applicable to debt securities having
market discount, which could affect the character and timing of recognition of income.
Some
debt securities (with a fixed maturity date of one year or less from the date of issuance) that may be acquired by
a fund may be treated as having acquisition discount, or OID in the case of certain types of debt securities. Generally, the
fund will be required to include the acquisition discount, or OID, in income over the term of the debt security, even
though payment of that amount is not received until a later time, usually when the debt security matures. The funds
may make one or more of the elections applicable to debt securities having acquisition discount, or OID, which could
affect the character and timing of recognition of income.
The
funds generally will be required to distribute dividends to shareholders representing discount on debt securities that
is currently includable in income, even though cash representing such income may not have been received by the
fund. Cash to pay such dividends may be obtained from sales proceeds of securities held by the fund.
A
fund may invest a
portion of its net assets in below investment grade instruments. Investments in these types of instruments
may present special tax issues for the fund. US federal income tax rules are not entirely clear about issues
such as when the fund may cease to accrue interest, OID or market discount, when and to what extent deductions may
be taken for bad debts or worthless instruments, how payments received on obligations in default should be allocated
between principal and income and whether exchanges of debt obligations in a bankruptcy or workout context are
taxable. These and other issues will be addressed by the funds to the extent necessary in order to seek to ensure that
they distribute sufficient income that they do not become subject to US federal income or excise tax.
Passive
Foreign Investment Companies. If a fund holds Shares in “passive
foreign investment companies”
(“PFICs”),
it may be subject to US 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.
A
fund may be eligible to elect to treat the PFIC as a “qualified
electing fund” under
the Code, in which case, the fund would generally be required to include in income
each year a portion of the ordinary earnings and net capital gains of the qualified
electing fund, even if not distributed to the fund, and such amounts would be subject to the 90%
and excise tax distribution requirements described above. In order to make this election, the fund would be required
to obtain certain annual information from the PFICs in which it invests, which may be difficult or impossible to
obtain.
Alternatively,
a fund may make a mark-to-market election that would result in the fund being treated as if it had sold and
repurchased its PFIC stock at the end of each year. In such case, the fund would report any gains resulting from such
deemed sales as ordinary income and would deduct any losses resulting from such deemed sales as ordinary losses
to the extent of previously recognized gains. The election must be made separately for each PFIC owned by the
fund and, once made, would be effective for all subsequent taxable years, unless revoked with the consent of the
IRS. By making the election, the fund could potentially ameliorate the adverse tax consequences with respect to
its ownership of Shares in a PFIC, but in any particular year may be required to recognize income in excess of the distributions
it receives from PFICs and its proceeds from dispositions of PFIC stock. A fund may have to distribute this
excess income and gain to satisfy the 90% distribution requirement and to avoid imposition of the 4% excise tax.
A
fund will make the appropriate tax elections, if possible, and take any additional steps that are necessary to mitigate the
effects of these rules. For example, in order to distribute this income and avoid tax at the fund level, a fund might be
required to liquidate portfolio securities that it might otherwise have continued to hold, potentially resulting in additional
taxable gain or loss.
Reporting.
If a shareholder recognizes a loss with respect to a fund’s Shares of $2 million
or more for an individual shareholder or $10 million or more for a corporate shareholder,
the shareholder must file with the IRS a disclosure statement on Form 8886. Direct
shareholders of portfolio securities are in many cases exempted from this reporting requirement,
but under current guidance, shareholders of a RIC are not exempted. 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.
Other
Taxes. Dividends, distributions and redemption proceeds may also be subject to additional
state, local and non-US taxes depending on each shareholder’s particular situation.
Taxation
of Non-US Shareholders. Dividends paid by a fund to non-US shareholders are generally
subject to withholding tax at a 30% rate or a reduced rate specified by an applicable
income tax treaty to the extent derived from investment income and short-term capital
gains. Non-US investors considering buying Shares just prior to a distribution should be
aware that, although the price of Shares purchased at that time may reflect the amount of the forthcoming distribution, such
distribution may nevertheless be subject to US withholding tax. In order to obtain a reduced rate of withholding, a
non-US shareholder will be required to provide an applicable IRS Form W-8 certifying its entitlement to benefits under
a treaty. The withholding tax does not apply to regular dividends paid to a non-US shareholder who provides a Form
W-8ECI, certifying that the dividends are effectively connected with the non-US shareholder’s conduct of a trade or
business within the United States. Instead, the effectively connected dividends will be subject to regular US income tax
as if the non-US shareholder were a US shareholder. A non-US corporation receiving effectively connected dividends may
also be subject to additional “branch
profits tax” imposed
at a rate of 30% (or lower treaty rate). A non-US shareholder who fails to provide
an applicable IRS Form W-8 or other applicable form may be subject to back-up withholding at the
appropriate rate.
In
general, US federal withholding tax will not apply to any gain or income realized by a non-US shareholder in respect of
any distributions of net long-term capital gains over net short-term capital losses, or upon the sale or other disposition of
Shares of a fund.
The
Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”)
makes a non-US person subject to US tax on disposition of a US real property interest
as if such person were a US person. Such gain is sometimes referred to as “FIRPTA
gain”. The Code provides
a look-through rule for distributions of “FIRPTA
gain” by a RIC if all
of the following requirements are met: (i) the RIC is classified as a “qualified
investment entity” (which
includes a RIC if, in general, more than 50% of the RIC’s assets consists
of interests in REITs and US real property holding corporations); and (ii) you are
a non-US shareholder that owns more than 5% of a fund’s shares at any time during the one-year period ending
on the date of the distribution. If these conditions are met, fund distributions to you to the extent derived from
gain from the disposition of a US real property interest (“USRPI”),
may also be treated as USRPI gain and therefore subject to US federal income tax,
and requiring that you file a nonresident US income tax return. Also, such gain may be
subject to a 30% branch profits tax in the hands of a non-US shareholder that is a corporation. Even if a non-US shareholder
does not own more than 5% of a fund’s shares, fund distributions that are attributable to gain from the sale
or disposition of a USRPI will be taxable as ordinary dividends subject to withholding at a 30% or lower treaty rate.
Further,
if a fund is a “US real
property holding corporation,”
any gain realized on the sale or exchange of fund shares by a foreign shareholder
that owns more than 5% of a class of fund shares would generally be taxed in the same manner
as for a US shareholder. A fund will be a “US
real property holding corporation”
if, in general, 50% or more of the fair market value of its assets consists of US
real property interests, including stock of certain US REITs.
Properly
reported dividends received by a nonresident alien or foreign entity are generally exempt from US federal withholding
tax when they (a) are paid in respect of the fund’s “qualified
net interest income”
(generally, the fund’s US source interest income, reduced by expenses that
are allocable to such income), or (b) are paid in connection with the fund’s
“qualified short-term
capital gains” (generally,
the excess of the fund’s net short-term capital gain over the fund’s
long-term capital loss for such taxable year). However, depending on the circumstances, the fund may report all,
some or none of the fund’s potentially eligible dividends as such qualified net interest income or as qualified short-term capital
gains, and a portion of the fund’s distributions (e.g. interest from non US sources or any foreign currency gains) would
be ineligible for this potential exemption from withholding. In case of shares held through an intermediary, the
intermediary
may withhold on a payment even if the fund reports the payment as eligible for the exemption from withholding.
In order to qualify for this exemption from withholding, a non-US shareholder must have provided appropriate withholding
certificates (e.g., an executed W-8BEN, etc.) certifying foreign status.
Shares
of a fund held by a non-US shareholder at death will be considered situated within the United States and generally
will be subject to the US estate tax.
Withholding
of US tax (at a 30% rate) with respect to certain distributions made to certain non-US entities that fail to
comply (or be deemed compliant) with extensive new reporting and withholding requirements designed to inform the
US Department of the Treasury of US-owned foreign investment accounts. Shareholders may be requested to provide
additional information to enable the applicable withholding agent to determine whether withholding is required.
Standby
Commitments. A fund may purchase municipal securities together with the right to
resell the securities to the seller at an agreed upon price or yield within a specified
period prior to the maturity date of the securities. Such a right to resell is commonly
known as a “put”
and is also referred to as a “standby
commitment.” The fund
may pay for a standby commitment either in cash or in the form of a higher price
for the securities which are acquired subject to the standby commitment, thus increasing
the cost of securities and reducing the yield otherwise available. Additionally, the
fund may purchase beneficial interests in municipal securities held by trusts, custodial arrangements or partnerships and/or
combined with third- party puts or other types of features such as interest rate swaps; those investments may require
the fund to pay “tender
fees” or other fees
for the various features provided. The IRS has issued a revenue ruling to the effect
that, under specified circumstances, a regulated investment company will be the owner of tax-exempt municipal
obligations acquired subject to a put option. The IRS has also issued private letter rulings to certain taxpayers (which
do not serve as precedent for other taxpayers) to the effect that tax-exempt interest received by a regulated investment
company with respect to such obligations will be tax-exempt in the hands of the company and may be distributed
to its shareholders as exempt-interest dividends. The IRS has subsequently announced that it will not ordinarily issue
advance ruling letters as to the identity of the true owner of property in cases involving the sale of securities or
participation interests therein if the purchaser has the right to cause the security, or the participation interest therein, to
be purchased by either the seller or a third-party. The fund, where relevant, intends to take the position that it is the
owner of any municipal obligations acquired subject to a standby commitment or other third-party put and that tax-exempt
interest earned with respect to such municipal obligations will be tax- exempt in its hands. There is no assurance
that the IRS will agree with such position in any particular case. If the fund is not viewed as the owner of such
municipal obligations, it will not be permitted to treat the exempt interest paid on such obligations as belonging to
it. This may affect the fund’s eligibility to pay exempt-interest dividends to its shareholders. Additionally, the federal income
tax treatment of certain other aspects of these investments, including the treatment of tender fees paid by the
fund, in relation to various regulated investment company tax provisions is unclear. However, the Advisor intends to
manage the fund’s portfolio in a manner designed to minimize any adverse impact from the tax rules applicable to these
investments.
As
described herein, in certain circumstances the fund may be required to recognize taxable income or gain even though
no corresponding amounts of cash are received concurrently. The fund may therefore be required to obtain cash
to satisfy its distribution requirements by selling securities at times when it might not otherwise be desirable to
do so or by borrowing the necessary cash, thereby incurring interest expense.
Exempt-interest
dividends. Any dividends paid by the Xtrackers Municipal Infrastructure Revenue
Bond ETF that are reported by the fund as exempt-interest dividends will not be
subject to regular federal income tax. The fund will be qualified to pay exempt-interest
dividends to its shareholders if, at the end of each quarter of the fund’s taxable year,
at least 50% of the total value of the fund’s assets consists of obligations of a state or political subdivision thereof the
interest on which is exempt from federal income tax under Code section 103(a).
Distributions
that the fund reports as exempt-interest dividends are treated as interest excludable from shareholders’ gross
income for federal income tax purposes but may result in liability for federal AMT purposes and for state and local
tax purposes for individual shareholders. For example, if the fund invests in “private
activity bonds,” certain
shareholders may be subject to AMT on the part of the fund’s distributions
derived from interest on such bonds.
Interest
on indebtedness incurred directly or indirectly to purchase or carry shares of the fund will not be deductible to
the extent it is deemed related to exempt-interest dividends paid by the fund. The portion of interest that is not deductible
is equal to the total interest paid or accrued on the indebtedness, multiplied by the percentage of the fund’s total
distributions (not including Capital Gain Dividends) paid to the shareholder that are exempt-interest dividends. Under
rules used by the IRS to determine when borrowed funds are considered incurred for the purpose of purchasing or
carrying particular assets, the purchase of shares may be considered to have been made with borrowed funds even
though such funds are not directly traceable to the purchase of shares. In addition, the Code may require a shareholder
that receives exempt-interest dividends to treat as taxable income a portion of certain otherwise non-taxable social
security and railroad retirement benefit payments. A portion of any exempt-interest dividend paid by the fund that
represents income derived from certain revenue or private activity bonds held by the fund may not retain its tax-exempt
status in the hands of a shareholder who is a “substantial
user” of a facility
financed by such bonds, or a “related
person” thereof. Moreover,
some or all of the exempt-interest dividends distributed by the fund may be a specific
preference item, or a component of an adjustment item, for purposes of the federal individual AMT. The receipt of
dividends and distributions from the fund may affect a foreign corporate shareholder’s federal “branch
profits” tax liability
and the federal “excess
net passive income”
tax liability of a shareholder that is a Subchapter S corporation. Shareholders
should consult their own tax advisors as to whether they are (i) “substantial
users” with respect
to a facility or “related”
to such users within the meaning of the Code or (ii) subject to a federal AMT, the federal “branch
profits”
tax or the federal “excess
net passive income”
tax. Additionally, any loss realized upon the sale or exchange of fund shares with
a tax holding period of six months or less will be disallowed to the extent of any distributions treated
as exempt-interest dividends with respect to such shares.
Shareholders
that are required to file tax returns are required to report tax-exempt interest income, including exempt-interest dividends,
on their federal income tax returns. The fund will inform shareholders of the federal income tax status of its
distributions after the end of each calendar year, including the amounts, if any, that qualify as exempt-interest dividends and
any portions of such amounts that constitute tax preference items under the federal AMT. Shareholders who have not
held shares of the fund for a full taxable year may have reported as tax-exempt or as a tax preference item a percentage
of their distributions which is different from the percentage of the fund’s income that was tax-exempt or comprising
tax preference items during the period of their investment in the fund. Shareholders should consult their tax
advisors for more information.
PRC
Taxation. Uncertainties in the Chinese tax rules governing taxation of income and
gains from investments in A-Shares could result in unexpected tax liabilities for
a fund. China generally imposes withholding tax at a rate of 10% on dividends and
interest derived by nonresident enterprises (including QFIIs and RQFIIs) from issuers resident in China.
China also imposes withholding tax at a rate of 10% on capital gains derived by nonresident enterprises from investments
in an issuer resident in China, subject to an exemption or reduction pursuant to domestic law or a double taxation
agreement or arrangement.
Since
the respective inception of Shanghai Connect and Shenzhen Connect, foreign investors (including the funds) investing
in A-Shares listed on the SSE through Shanghai Connect and those listed on the SZSE through Shenzhen Connect
would be temporarily exempt from the PRC corporate income tax and value-added tax on the gains on disposal of
such A-Shares. Dividends would be subject to PRC corporate income tax on a withholding basis at 10%, unless reduced
under a double tax treaty with China upon application to and obtaining approval from the competent tax authority.
Since
November 17, 2014, the corporate income tax for QFIIs and RQFIIs, with respect to capital gains, has been temporarily
lifted. The withholding tax relating to the realized gains from shares in land-rich companies prior to November 17,
2014 has been paid by the Xtrackers Harvest ETFs, while realized gains from shares in non-land-rich companies prior
to November 17, 2014 were granted by treaty relief pursuant to the PRC-US Double Taxation Agreement. During 2015,
revenue authorities in the PRC made arrangements for the collection of capital gains taxes for investments realized
between November 17, 2009 and November 16, 2014. A fund could be subject to tax liability for any tax payments
for which reserves have not been made or that were not previously withheld. The impact of any such tax liability
on a fund’s return could be substantial. A fund may also be liable to the Subadvisor for any tax that is imposed
on
the Subadvisor by the PRC with respect to the fund’s investments. If a fund’s direct investments in A-Shares through the
Subadvisor’s RQFII quota become subject to repatriation restrictions, the fund may be unable to satisfy distribution requirements
applicable to RICs under the Internal Revenue Code, and be subject to tax at the fund level.
The
current PRC tax laws and regulations and interpretations thereof may be revised or amended in the future, potentially retroactively,
including with respect to the possible liability of a fund for the taxation of income and gains from investments in
A-Shares through Stock Connect or obligations of an RQFII. The withholding taxes on dividends, interest and capital gains
may in principle be subject to a reduced rate under an applicable tax treaty, but the application of such treaties in
the case of an RQFII acting for a foreign investor such as a fund is also uncertain. Finally, it is also unclear whether an
RQFII would also be eligible for BT exemption, which has been granted to QFIIs, with respect to gains derived prior
to May 1, 2016. In practice, the BT has not been collected. However, the imposition of such taxes on a fund could
have a material adverse effect on a fund’s returns. Since May 1, 2016, RQFIIs are exempt from PRC value added tax,
which replaced the PRC Business Tax with respect to gains realized from the disposal of securities, including A-Shares.
The
PRC rules for taxation of RQFIIs (and QFIIs) are evolving and certain tax regulations to be issued by the PRC State
Administration of Taxation and/or PRC Ministry of Finance to clarify the subject matter may apply retrospectively, even
if such rules are adverse to a fund and their shareholders.
If
the PRC begins applying tax rules regarding the taxation of income from A-Shares investments to RQFIIs and/or begins
collecting capital gains taxes on such investments (whether made through Stock Connect or an RQFII), a fund could
be subject to withholding tax liability in excess of the amount reserved (if any). The impact of any such tax liability
on a fund’s return could be substantial. A fund will be liable to the Advisor and/or Subadvisor for any Chinese tax
that is imposed on the Advisor and/or Subadvisor with respect to the fund’s investments.
The
sale or other transfer by the Advisor and/or Subadvisor of A-Shares or B-Shares will be subject to PRC Stamp Duty
at a rate of 0.1% on the transacted value. The Advisor and/or Subadvisor will not be subject to PRC Stamp Duty when
it acquires A-Shares and B-Shares.
It
is also unclear how China’s business tax may apply to activities of an RQFII and how such application may be affected by
tax treaty provisions.
The
foregoing discussion is a summary of certain material US federal income tax considerations 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 such Shares, including under state, local and non-US 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 of this SAI. Changes in applicable authority could materially affect
the conclusions discussed above, and such changes often occur.
Part
II: Appendix II-G—Proxy
Voting Policy and Guidelines
Scope
DWS
has adopted and implemented the following Policies and Guidelines, which it believes are reasonably designed to
ensure that proxies are voted in the best economic interest of clients and in accordance with its fiduciary duties and
local regulation. This Proxy Voting Policy and Guidelines – DWS (“Policy
and Guidelines”) shall
apply to all accounts managed by US domiciled advisers and to all US client accounts
managed by non-US regional offices. Non-US regional offices are required to maintain
procedures and to vote proxies as may be required by law on behalf of their non-US clients.
In addition, DWS’s proxy policies reflect the fiduciary standards and responsibilities for ERISA accounts.
The
attached guidelines represent a set of global recommendations that were determined by the Global Proxy Voting Sub-Committee
(the “GPVSC”).
These guidelines were developed to provide DWS with a comprehensive list of recommendations
that represent how DWS will generally vote proxies for its clients. The recommendations derived from
the application of these guidelines are not intended to influence the various DWS legal entities either directly or
indirectly by parent or affiliated companies. In addition, the organizational structures and documents of the various DWS
legal entities allows, where necessary or appropriate, the execution by individual DWS subsidiaries of the proxy voting
rights independently of any parent or affiliated company. This applies in particular to non US fund management companies.
The individuals that make proxy voting decisions are also free to act independently, subject to the normal and
customary supervision by the Management/Boards of these DWS legal entities.
Capitalised
terms have the meaning ascribed to them in the Glossary.
DWS’S
Proxy Voting Responsibilities
Proxy
votes are the property of DWS’s advisory clients.1
As such, DWS’s authority and responsibility to vote such proxies
depend upon its contractual relationships with its clients or other delegated authority. DWS has delegated responsibility
for effecting its advisory clients’ proxy votes to Institutional Shareholder Services (“ISS”),
an independent third-party proxy voting specialist. ISS votes DWS’s advisory
clients’ proxies in accordance with DWS’s proxy guidelines or DWS’s
specific instructions. Where a client has given specific instructions as to how a proxy should be voted, DWS will
notify ISS to carry out those instructions. Where no specific instruction exists, DWS will follow the procedures in
voting the proxies set forth in this document. Certain Taft-Hartley clients may direct DWS to have ISS vote their proxies
in accordance with Taft-Hartley Voting Guidelines.
Clients
may in certain instances contract with their custodial agent and notify DWS that they wish to engage in securities lending
transactions. In such cases, it is the responsibility of the custodian to deduct the number of shares that are on
loan so that they do not get voted twice. To the extent a security is out on loan and DWS determines that a proxy vote
(or other shareholder action) is materially important to the client’s account, DWS may request, on a best efforts basis,
that the agent recall the security prior to the record date to allow DWS to vote the securities.
1
For purposes of this document, “clients”
refers to persons or entities: (i) for which DWS serves as investment adviser or
sub-adviser; (ii) for which DWS votes proxies; and (iii) that have an economic or beneficial ownership interest in the
portfolio securities of issuers soliciting such proxies.
POLICIES
Proxy
Voting Activities are Conducted in the Best Economic Interest of Clients
DWS
has adopted the following Policies and Guidelines to ensure that proxies are voted in accordance with the best economic
interest of its clients, as determined by DWS in good faith after appropriate review. DWS believes that responsibility
including environmental, social and governance factors, and profitability, complement each other in many respects
and has adopted Policies and Guidelines consistent with this belief.
The
Global Proxy Voting Sub-Committee
The
Global Proxy Voting Sub-Committee is an internal working group established by the applicable DWS’s Investment Risk
Oversight Committee pursuant to a written charter. The GPVSC is responsible for overseeing DWS’s proxy voting activities,
including:
•
Adopting,
monitoring and updating guidelines, attached as Attachment A (the “Guidelines”),
that provide how DWS will generally vote proxies pertaining to a comprehensive list
of common proxy voting matters;
•
Voting
proxies where: (i) the issues are not covered by specific client instruction or the Guidelines; or (ii) where an
exception to the Guidelines may be in the best economic interest of DWS’s clients;
•
Review
recommendations for proxies where the Guidelines specify that the issues are to be determined on a case-by-case
basis and ensure such proxies are voted in accordance with these Policies and Guidelines; and
•
Monitoring
Proxy Vendor Oversight’s proxy voting activities (see below).
DWS’s
Proxy Vendor Oversight, a function of DWS’s Operations Group, is responsible for coordinating with ISS to administer
DWS’s proxy voting process and for voting proxies in accordance with any specific client instructions or, if
there are none, the Guidelines, and overseeing ISS’ proxy responsibilities in this regard.
Availability
of Proxy Voting Policies and Proxy Voting Record
Copies
of this Policy, as it may be updated from time to time, is made available to clients as required by law and otherwise
at DWS’s discretion. Clients may also obtain information on how their proxies were voted by DWS as required by
law and otherwise at DWS’s discretion. Note, however, that DWS must not selectively disclose its investment company
clients’ proxy voting records. Proxy Vendor Oversight will make proxy voting reports available to advisory clients
upon request. The investment companies’ proxy voting records will be disclosed to shareholders by means of
publicly-available annual filings of each company’s proxy voting record for the 12-month periods ending June 30 (see
Section 6 below), if so required by relevant law.
Procedures
The
key aspects of DWS’s proxy voting process are delineated below.
The
GPVSC’s Proxy Voting Guidelines
The
Guidelines set forth the GPVSC’s standard voting positions on a comprehensive list of common proxy voting matters.
The GPVSC has developed and continues to update the Guidelines based on consideration of current corporate governance
principles, industry standards, client feedback, and the impact of the matter on issuers and the value of the
investments.
The
GPVSC will review the Guidelines as necessary to support the best economic interests of DWS’s clients and, in any
event, at least annually. The GPVSC will make changes to the Guidelines, whether as a result of the annual review or
otherwise, taking solely into account the best economic interests of clients. Before changing the Guidelines, the GPVSC
will thoroughly review and evaluate the proposed change and the reasons therefore, and the GPVSC Chair will
ask GPVSC members whether anyone outside of the DWS organization (but within Deutsche Bank and its affiliates) or
any entity that identifies itself as an DWS advisory client has requested or attempted to influence the proposed change
and whether any member has a conflict of interest with respect to the proposed change. If any such matter is
reported to the GPVSC Chair, the Chair will promptly notify the Conflicts of Interest Management Sub-Committee (see
Section 5.4) and will defer the approval, if possible. Lastly, the GPVSC will fully document its rationale for approving any
change to the Guidelines.
The
Guidelines may reflect a voting position that differs from the actual practices of the public company(ies) within the
Deutsche Bank organization or of the investment companies for which DWS or an affiliate serves as investment adviser
or sponsor. Investment companies, particularly closed-end investment companies, are different from traditional operating
companies. These differences may call for differences in the actual practices of the investment company and
the voting positions of the investment company on the same or similar matters. Further, the manner in which DWS
votes proxies on behalf investment company proxies may differ from the voting recommendations made by a DWS-advised
or sponsored investment company soliciting proxies from its shareholders. Proxies solicited by closed-end (and
open-end) investment companies are voted in accordance with the Guidelines.
Specific
Proxy Voting Decisions Made by the GPVSC
Proxy
Vendor Oversight will refer to the GPVSC all proxy proposals: (i) that are not covered by specific client instructions or
the Guidelines; or (ii) that, in accordance with the Guidelines, should be evaluated and voted on a case-by-case basis.
Additionally,
if Proxy Vendor Oversight,2
the GPVSC Chair or any member of the GPVSC, a Portfolio Manager, a Research Analyst
or a sub-adviser believes that voting a particular proxy in accordance with the Guidelines may not be in the best
economic interests of clients, that individual may bring the matter to the attention of the GPVSC Chair and/or Proxy
Vendor Oversight.
2
Proxy Vendor Oversight generally monitors upcoming proxy solicitations for heightened
attention from the press or the industry and for novel or unusual proposals or circumstances,
which may prompt Proxy Vendor Oversight to bring the solicitation to the attention
of the GPVSC Chair. DWS Portfolio Managers, DWS Research Analysts and sub-advisers also
may bring a particular proxy vote to the attention of the GPVSC Chair, as a result of their ongoing monitoring of portfolio
securities held by advisory clients and/or their review of the periodic proxy voting record reports that the GPVSC
Chair distributes to DWS portfolio managers and DWS research analysts.
If
Proxy Vendor Oversight refers a proxy proposal to the GPVSC or the GPVSC determines that voting a particular proxy
in accordance with the Guidelines is not in the best economic interests of clients, the GPVSC will evaluate and vote
the proxy, subject to the procedures below regarding conflicts.
The
GPVSC endeavours to hold meetings to decide how to vote particular proxies sufficiently before the voting deadline so
that the procedures below regarding conflicts can be completed before the GPVSC’s voting determination.
Proxies
that Cannot Be Voted or Instances When DWS Abstains From Voting
In
some cases, the GPVSC may determine that it is in the best economic interests of its clients not to vote certain proxies,
or that it may not be feasible to vote certain proxies. If the conditions below are met with regard to a proxy proposal,
DWS will abstain from voting:
•
Neither
the Guidelines nor specific client instructions cover an issue;
•
ISS
does not make a recommendation on the issue; and
•
The
GPVSC cannot convene on the proxy proposal at issue to make a determination as to what would be in the client’s
best interest. (This could happen, for example, if the Conflicts of Interest Management Sub-Committee found
that there was a material conflict or if despite all best efforts being made, the GPVSC quorum requirement could
not be met).
In
addition, it is DWS’s policy not to vote proxies of issuers subject to laws of those jurisdictions that impose restrictions upon
selling shares after proxies are voted, in order to preserve liquidity. In other cases, it may not be possible to vote
certain proxies, despite good faith efforts to do so. For example, some jurisdictions do not provide adequate
notice
to shareholders so that proxies may be voted on a timely basis. Voting rights on securities that have been loaned
to third-parties transfer to those third-parties, with loan termination often being the only way to attempt to vote
proxies on the loaned securities. Lastly, the GPVSC may determine that the costs to the client(s) associated with
voting a particular proxy or group of proxies outweighs the economic benefits expected from voting the proxy or
group of proxies.
Proxy
Vendor Oversight will coordinate with the GPVSC Chair regarding any specific proxies and any categories of proxies
that will not or cannot be voted. The reasons for not voting any proxy shall be documented.
Conflict
of Interest Procedures
Procedures
to Address Conflicts of Interest and Improper Influence
Overriding
Principle. In the limited circumstances where the GPVSC votes proxies,3
the GPVSC will vote those proxies in accordance with what it, in good faith, determines
to be the best economic interests of DWS’s clients.4
3
As mentioned above, the GPVSC votes proxies where: (i) neither a specific client
instruction nor a Guideline directs how the proxy should be voted; or (ii) where
voting in accordance with the Guidelines may not be in the best economic interests
of clients. Further, the GPVSC will review recommendations for proxies where the Guidelines specify that the
issues are to be determined on a case-by-case basis and ensure such proxies are voted in accordance with these Policies
and Guidelines.
4
Proxy Vendor Oversight, who serves as the non-voting secretary of the GPVSC, may
receive routine calls from proxy solicitors and other parties interested in a particular
proxy vote. Any contact that attempts to exert improper pressure or influence shall
be reported to the Conflicts of Interest Management Sub-Committee.
Independence
of the GPVSC. As a matter of Compliance policy, the GPVSC and Proxy Vendor Oversight
are structured to be independent from other parts of Deutsche Bank. Members of the
GPVSC and the employee responsible for Proxy Vendor Oversight are employees of DWS.
As such, they may not be subject to the supervision or control of any employees
of Deutsche Bank Corporate and Investment Banking division (“CIB”).
Their compensation cannot be based upon their contribution to any business activity
outside of DWS without prior approval of Legal and Compliance. They can have no
contact with employees of Deutsche Bank outside of DWS regarding specific clients, business matters,
or initiatives without the prior approval of Legal and Compliance. They furthermore may not discuss proxy votes
with any person outside of DWS (and within DWS only on a need to know basis).
Conflict
Review Procedures. The “Conflicts
of Interest Management Sub-Committee”
within DWS monitors for potential material conflicts of interest in connection with
proxy proposals that are to be evaluated by the GPVSC. The Conflicts of Interest
Management Sub-Committee members include DWS Compliance, the chief compliance officers of the advisors
and the DWS Funds. Promptly upon a determination that a proxy vote shall be presented to the GPVSC, the GPVSC
Chair shall notify the Conflicts of Interest Management Sub-Committee. The Conflicts of Interest Management Sub-Committee
shall promptly collect and review any information deemed reasonably appropriate to evaluate, in its reasonable
judgment, if DWS or any person participating in the proxy voting process has, or has the appearance of, a
material conflict of interest. For the purposes of this policy, a conflict of interest shall be considered “material”
to the extent that a reasonable person could expect the conflict to influence, or
appear to influence, the GPVSC’s decision on the particular vote at issue.
GPVSC should provide the Conflicts of Interest Management Sub-Committee a reasonable amount
of time (no less than 24 hours) to perform all necessary and appropriate reviews. To the extent that a conflicts review
cannot be sufficiently completed by the Conflicts of Interest Management Sub-Committee the proxies will be voted
in accordance with the standard Guidelines.
The
information considered by the Conflicts of Interest Management Sub-Committee may include without limitation information
regarding: (i) DWS client relationships; (ii) any relevant personal conflict known by the Conflicts of Interest Management
Sub-Committee or brought to the attention of that sub-committee; and (iii) any communications with
members
of the GPVSC (or anyone participating or providing information to the GPVSC) and any person outside of the
DWS organization (but within Deutsche Bank and its affiliates) or any entity that identifies itself as an DWS advisory client
regarding the vote at issue. In the context of any determination, the Conflicts of Interest Management Sub-Committee may
consult with and shall be entitled to rely upon all applicable outside experts, including legal counsel.
Upon
completion of the investigation, the Conflicts of Interest Management Sub-Committee will document its findings and
conclusions. If the Conflicts of Interest Management Sub-Committee determines that: (i) DWS has a material conflict
of interest that would prevent it from deciding how to vote the proxies concerned without further client consent; or
(ii) certain individuals should be recused from participating in the proxy vote at issue, the Conflicts of Interest Management Sub-Committee
will so inform the GPVSC Chair.
If
notified that DWS has a material conflict of interest as described above, the GPVSC chair will obtain instructions as
to how the proxies should be voted either from: (i) if time permits, the affected clients; or (ii) in accordance with the
standard Guidelines. If notified that certain individuals should be recused from the proxy vote at issue, the GPVSC Chair
shall do so in accordance with the procedures set forth below.
Note:
Any DWS employee who becomes aware of a potential, material conflict of interest in respect of any proxy vote
to be made on behalf of clients shall notify Compliance or the Conflicts of Interest Management Sub-Committee. Compliance
shall call a meeting of the Conflicts of Interest Management Sub-Committee to evaluate such conflict and
determine a recommended course of action.
Procedures
to be followed by the GPVSC. At the beginning of any discussion regarding how to
vote any proxy, the GPVSC Chair (or his or her delegate) will inquire as to whether
any GPVSC member (whether voting or ex officio) or any person participating in the
proxy voting process has a personal conflict of interest or has actual knowledge of an actual
or apparent conflict that has not been reported to the Conflicts of Interest Management Sub-Committee.
The
GPVSC Chair also will inquire of these same parties whether they have actual knowledge regarding whether any Director,
officer, or employee outside of the DWS organization (but within Deutsche Bank and its affiliates) or any entity
that identifies itself as an DWS advisory client, has: (i) requested that DWS, Proxy Vendor Oversight (or any member
thereof), or a GPVSC member vote a particular proxy in a certain manner; (ii) attempted to influence DWS, Proxy
Vendor Oversight (or any member thereof), a GPVSC member or any other person in connection with proxy voting
activities; or (iii) otherwise communicated with a GPVSC member, or any other person participating or providing information
to the GPVSC regarding the particular proxy vote at issue and which incident has not yet been reported to
the Conflicts of Interest Management Sub-Committee.
If
any such incidents are reported to the GPVSC Chair, the Chair will promptly notify the Conflicts of Interest Management Sub-Committee
and, if possible, will delay the vote until the Conflicts of Interest Management Sub-Committee can complete
the conflicts report. If a delay is not possible, the Conflicts of Interest Management Sub-Committee will instruct
the GPVSC (i) whether anyone should be recused from the proxy voting process or (ii) whether DWS should vote
the proxy in accordance with the standard guidelines, seek instructions as to how to vote the proxy at issue from
ISS or, if time permits, the affected clients. These inquiries and discussions will be properly reflected in the GPVSC’s
minutes.
Duty
to Report. Any DWS employee, including any GPVSC member (whether voting or ex officio),
that is aware of any actual or apparent conflict of interest relevant to, or any
attempt by any person outside of the DWS organization (but within Deutsche Bank
and its affiliates) or any entity that identifies itself as an DWS advisory client to influence how
DWS votes its proxies has a duty to disclose the existence of the situation to the GPVSC Chair (or his or her designee)
and the details of the matter to the Conflicts of Interest Management Sub-Committee. In the case of any person
participating in the deliberations on a specific vote, such disclosure should be made before engaging in any activities
or participating in any discussion pertaining to that vote.
Recusal
of Members. The GPVSC will recuse from participating in a specific proxy vote any
GPVSC members (whether voting or ex officio) and/or any other person who: (i) are
personally involved in a material conflict of interest; or (ii) who, as determined
by the Conflicts of Interest Management Sub-Committee, have actual knowledge of a circumstance
or
fact that could affect their independent judgment, in respect of such vote. The GPVSC will also exclude from consideration the
views of any person (whether requested or volunteered) if the GPVSC or any member thereof knows, or if the Conflicts
of Interest Management Sub-Committee has determined, that such other person has a material conflict of interest
with respect to the particular proxy or has attempted to influence the vote in any manner prohibited by these policies.
If,
after excluding all relevant GPVSC voting members pursuant to the paragraph above, there are three or more GPVSC voting
members remaining, those remaining GPVSC members will determine how to vote the proxy in accordance with
these Policies and Guidelines. If there are fewer than three GPVSC voting members remaining, the GPVSC Chair will
vote the proxy in accordance with the standard Guidelines or will obtain instructions as to how to have the proxy voted
from, if time permits, the affected clients and otherwise from ISS.
Investment
Companies and Affiliated Public Companies
Investment
Companies. As reflected in the Guidelines, all proxies solicited by open-end and
closed-end investment companies are voted in accordance with the Guidelines, unless
the client directs DWS to vote differently on a specific proxy or specific categories
of proxies. However, regarding investment companies for which DWS or an affiliate serves as
investment adviser or principal underwriter, such proxies are voted in the same proportion as the vote of all other shareholders
(i.e., “mirror”
or “echo”
voting). Master Fund proxies solicited from feeder Funds are voted in accordance with
applicable provisions of Section 12 of the Investment Company Act of 1940 (“Investment
Company Act”).
Subject
to participation agreements with certain Exchange Traded Funds (“ETF”)
issuers that have received exemptive orders from the US Securities and Exchange
Commission (“SEC”)
allowing investing DWS Funds to exceed the limits set forth in Section 12(d)(1)(A)
and (B) of the Investment Company Act, DWS will echo vote proxies for ETFs in which Deutsche
Bank holds more than 25% of outstanding voting shares globally when required to do so by participation agreements
and SEC orders.
Affiliated
Public Companies. For proxies solicited by non-investment company issuers of or
within the DWS or Deutsche Bank organization (e.g., shares of DWS or Deutsche Bank),
these proxies will be voted in the same proportion as the vote of other shareholders
(i.e., “mirror”
or “echo”
voting). In markets where mirror voting is not permitted, DWS will “Abstain”
from voting such shares.
Note:
With respect to the DWS Central Cash Management Government Fund (registered under the Investment Company Act),
the Fund is not required to engage in echo voting and the investment adviser will use these Guidelines and may determine,
with respect to the DWS Central Cash Management Government Fund, to vote contrary to the positions in
the Guidelines, consistent with the Fund’s best interest.
Other
Procedures that Limit Conflicts of Interest
DWS
and other entities in the Deutsche Bank organization have adopted a number of policies, procedures, and internal controls
that are designed to avoid various conflicts of interest, including those that may arise in connection with proxy
voting, including but not limited to:
•
Code
of Conduct– DB Group;
•
Conflicts
of Interest Policy – DWS Group;
•
Code
of Ethics – DWS US;
•
Code
of Ethics – DWS ex US
•
Code
of Professional Conduct – US.
The
GPVSC expects that these policies, procedures, and internal controls will greatly reduce the chance that the GPVSC (or
its members) would be involved in, aware of, or influenced by an actual or apparent conflict of interest.
All
impacted business units are required to adopt, implement, and maintain procedures to ensure compliance with this
Section. At a minimum, such procedures must: (i) assign roles and responsibilities for carrying out the procedures, including
responsibility for periodically updating the procedures; (ii) identify clear escalation paths for identified breaches of
the procedures; and (iii) contain a legend or table mapping the procedures to this Section (e.g., cross-referencing Section
or page numbers).
RECORDKEEPING
At
a minimum, the following records must be properly maintained and readily accessible in order to evidence compliance with
this Policy.
•
DWS
will maintain a record of each proxy vote cast by DWS that includes among other things, company name, meeting
date, proposals presented, vote cast, and shares voted.
•
Proxy
Vendor Oversight maintains records for each of the proxy ballots it votes. Specifically, the records include, but
are not limited to:
−
The
proxy statement (and any additional solicitation materials) and relevant portions of annual statements;
−
Any
additional information considered in the voting process that may be obtained from an issuing company, its
agents, or proxy research firms;
−
Analyst
worksheets created for stock option plan and share increase analyses; and
−
Proxy
Edge print-screen of actual vote election.
•
DWS
will: (i) retain this Policy and the Guidelines; (ii) will maintain records of client requests for proxy voting information;
and (iii) will retain any documents Proxy Vendor Oversight or the GPVSC prepared that were material to
making a voting decision or that memorialized the basis for a proxy voting decision.
•
The
GPVSC also will create and maintain appropriate records documenting its compliance with this Policy, including records
of its deliberations and decisions regarding conflicts of interest and their resolution.
•
With
respect to DWS’s investment company clients, ISS will create and maintain records of each company’s proxy
voting record for the 12-month periods ending June 30. DWS will compile the following information for each
matter relating to a portfolio security considered at any shareholder meeting held during the period covered by
the report (and with respect to which the company was entitled to vote):
−
The
name of the issuer of the portfolio security;
−
The
exchange ticker symbol of the portfolio security (if symbol is available through reasonably practicable means);
−
The
Council on Uniform Securities Identification Procedures (“CUSIP”)
number for the portfolio security (if the number is available through reasonably
practicable means);
−
The
shareholder meeting date;
−
A
brief identification of the matter voted on;
−
Whether
the matter was proposed by the issuer or by a security holder;
−
Whether
the company cast its vote on the matter;
−
How
the company cast its vote (e.g., for or against proposal, or abstain; for or withhold regarding election of
Directors); and
−
Whether
the company cast its vote for or against Management.
Note:
This list is intended to provide guidance only in terms of the records that must be maintained in accordance with
this policy. In addition, please note that records must be maintained in accordance with the Records Management Policy
– Deutsche Bank Group and applicable policies and procedures thereunder.
With
respect to electronically stored records, “properly
maintained” is defined
as complete, authentic (unalterable), usable and backed-up. At a minimum, records
should be retained for a period of not less than six years (or longer, if necessary
to comply with applicable regulatory requirements), the first three years in an appropriate DWS office.
OVERSIGHT
RESPONSIBILITIES
Proxy
Vendor Oversight will review a reasonable sampling of votes on a regular basis to ensure that ISS has cast the votes
in a manner consistent with the Guidelines. Proxy Vendor Oversight will provide the GPVSC with a quarterly report
of its review and identify any issues encountered during the period. Proxy Vendor Oversight will also perform a
post season review once a year on certain proposals to assess whether ISS voted consistent with the Guidelines.
In
addition, the GPVSC will, in cooperation with Proxy Vendor Oversight and DWS Compliance, consider, on at least an
annual basis, whether ISS has the capacity and competence to adequately analyze the matters for which it is responsible. This
includes whether ISS has effective polices, and methodologies and a review of ISS’s policies and procedures with
respect to conflicts.
The
GPVSC also monitors the proxy voting process by reviewing summary proxy information presented by ISS to determine,
among other things, whether any changes should be made to the Guidelines. This review will take place at
least quarterly and is documented in the GPVSC’s minutes.
ANNUAL
REVIEW
The
GPVSC, in cooperation with Proxy Vendor Oversight, will review and document, no less frequently than annually, the
adequacy of the Guidelines, including whether the Guidelines continue to be reasonably designed to ensure that DWS
votes in the best interest of its clients.
GLOSSARY
|
|
|
Documents
the allocation of responsibilities amongst
the
members of the Management Board of DB AG |
|
Decision-making
forum established pursuant to the
“Committee
Governance Policy – Deutsche Bank
Group”
for a specific purpose and an unlimited period
of
time |
|
Council
on Uniform Securities Identification
Procedures
|
|
Any
individual with an employment contract directly
with
a Legal Entity of DB Group |
|
|
|
Global
Proxy Voting Sub-Committee |
Integrated
Consequence Management Framework
(iCMF)
|
Refers
to the framework established and published by
HR
that helps managers and employees in DB AG
understand
how positive and poor performance are
addressed,
as well as how related controls work |
|
Investment
Company Act of 1940 |
|
Institutional
Shareholder Services |
|
|
Management
Board [of DB AG] |
Governing
body of DB AG responsible for managing
DB
AG |
Risk
Type Controller (RTC) |
Global
Head of a Risk Control Function; formally
representing
the respective Risk Control Function and
accountable
for designing, implementing and
maintaining
an effective risk type management /
control
and policy framework for all risk types within
their
mandate. |
|
Individual(s)
authorised by the Risk Type Controller to
fulfil
tasks in relation to the respective RTC mandate
including
authorisation of other Units to issue a Policy
or
Procedure regulating the respective risk type |
|
Securities
and Exchange Commission |
|
Refers
to the organisational areas within DB Group,
such
as corporate divisions and infrastructure
functions,
as per the DB Business Allocation Plan. |
9.
LIST
OF ANNEXES AND ATTACHMENTS
Attachment
A – DWS Proxy Voting Guidelines – DWS Americas
Attachment A
– DWS PROXY VOTING GUIDELINES
DWS
Proxy Voting
Guidelines
Effective March
1, 2021
Table
of Contents
|
|
|
|
|
|
|
|
|
|
|
Voting
on Director Nominees in Contested
Elections
|
|
|
|
Proxy
Contests/Proxy Access |
|
Other
Board Related Proposals |
|
Adopt
Anti-Hedging/Pledging/Speculative
Investments
Policy |
|
|
|
|
|
|
|
|
|
Classification/Declassification
of the Board |
|
|
|
|
|
Director
and Officer Indemnification and Liability
Protection
|
|
Establish/Amend
Nominee Qualifications |
|
Establish
Other Board Committee Proposals |
|
Filling
Vacancies/Removal of Directors |
|
|
|
Majority
of Independent Directors/
Establishment
of Independent Committees |
|
Majority
Vote Standard for the Election of
Directors
|
|
|
|
Require
More Nominees than Open Seats |
|
Shareholder
Engagement Policy (Shareholder
Advisory
Committee) |
|
|
|
Auditor
Indemnification and Limitation of
Liability
|
|
|
|
Shareholder
Proposals Limiting Non-Audit
Services
|
|
Shareholder
Proposals on Audit Firm Rotation |
|
Shareholder
Rights & Defenses |
|
Advance
Notice Requirements for Shareholder
Proposals/Nominations
|
|
Amend
Bylaws without Shareholder Consent |
|
Control
Share Acquisition Provisions |
|
Control
Share Cash—Out Provisions |
|
|
|
|
|
|
|
|
|
Shareholder
Litigation Rights Federal Forum
Selection
Provisions |
|
Exclusive
Forum Provisions for State Law
Matters
|
|
|
|
Net
Operating Loss (NOL) Protective
Amendments
|
|
Poison
Pills (Shareholder Rights Plans) |
|
Shareholder
Proposals to Put Pill to a Vote and/
or
Adopt a Pill Policy |
|
Management
Proposals to Ratify a Poison Pill |
|
Management
Proposals to Ratify a Pill to
Preserve
Net Operating Losses (NOLs) |
|
Proxy
Voting Disclosure, Confidentiality, and
Tabulation
|
|
Ratification
Proposals: Management Proposals
to
Ratify Existing Charter or Bylaw Provisions |
|
Reimbursing
Proxy Solicitation Expenses |
|
Reincorporation
Proposals |
|
Shareholder
Ability to Act by Written Consent |
|
Shareholder
Ability to Call Special Meetings |
|
|
|
State
Antitakeover Statutes |
|
Supermajority
Vote Requirements |
|
Virtual
Shareholder Meetings |
|
|
|
|
|
Adjustments
to Par Value of Common Stock |
|
Common
Stock Authorization |
|
|
|
Issue
Stock for Use with Rights Plan |
|
|
|
Preferred
Stock Authorization |
|
|
|
|
|
Share
Repurchase Programs |
|
Share
Repurchase Programs Shareholder
Proposals
|
|
Stock
Distributions: Splits and Dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
Reorganization/Debt Restructuring/
Prepackaged
Bankruptcy Plans/Reverse
Leveraged
Buyouts/Wrap Plans |
|
Formation
of Holding Company |
|
Going
Private and Going Dark Transactions
(LBOs
and Minority Squeeze-outs) |
|
|
|
|
|
|
|
Private
Placements/Warrants/Convertible
Debentures
|
|
Reorganization/Restructuring
Plan (Bankruptcy) |
|
Special
Purpose Acquisition Corporations
(SPACs)
|
|
Special
Purpose Acquisition Corporations
(SPACs)
- Proposals for Extensions |
|
|
|
Value
Maximization Shareholder Proposals |
|
|
|
|
|
Advisory
Votes on Executive Compensation—
Management
Proposals (Say-on-Pay) |
|
Frequency
of Advisory Vote on Executive
Compensation
(“Say
When on Pay”)
|
|
Voting
on Golden Parachutes in an Acquisition,
Merger,
Consolidation, or Proposed Sale |
|
Equity-Based
and Other Incentive Plans |
|
Further
Information on certain EPSC Factors: |
|
|
|
Liberal
Change in Control Definition |
|
|
|
Problematic
Pay Practices or Significant Pay-for-
Performance
Disconnect |
|
Amending
Cash and Equity Plans (including
Approval
for Tax Deductibility (162(m)) |
|
Specific
Treatment of Certain Award Types in
Equity
Plan Evaluations |
|
Dividend
Equivalent Rights |
|
Operating
Partnership (OP) Units in Equity Plan
Analysis
of Real Estate Investment Trusts
(REITs)
|
|
|
|
401(k)
Employee Benefit Plans |
|
Employee
Stock Ownership Plans (ESOPs) |
|
Employee
Stock Purchase Plans—Qualified
Plans
|
|
Employee
Stock Purchase Plans—Non-Qualified
Plans
|
|
Option
Exchange Programs/Repricing Options |
|
Stock
Plans in Lieu of Cash |
|
Transfer
Stock Option (TSO) Programs |
|
|
|
Shareholder
Ratification of Director Pay
Programs
|
|
Equity
Plans for Non-Employee Directors |
|
Non-Employee
Director Retirement Plans |
|
Shareholder
Proposals on Compensation |
|
Bonus
Banking/Bonus Banking “Plus”
|
|
Compensation
Consultants—Disclosure of
Board
or Company’s Utilization |
|
Disclosure/Setting
Levels or Types of
Compensation
for Executives and Directors |
|
Golden
Coffins/Executive Death Benefits |
|
Hold
Equity Past Retirement or for a Significant
Period
of Time |
|
|
|
Pay
for Performance/Performance-Based
Awards
|
|
Pay
for Superior Performance |
|
Pre-Arranged
Trading Plans (10b5-1 Plans) |
|
Prohibit
Outside CEOs from Serving on
Compensation
Committees |
|
Recoupment
of Incentive or Stock
Compensation
in Specified Circumstances |
|
Severance
Agreements for Executives/Golden
Parachutes
|
|
Share
Buyback Impact on Incentive Program
Metrics
|
|
Supplemental
Executive Retirement Plans
(SERPs)
|
|
|
|
Termination
of Employment Prior to Severance
Payment/Eliminating
Accelerated Vesting of
Unvested
Equity |
|
|
|
|
|
Amend
Quorum Requirements |
|
|
|
|
|
Change
Date, Time, or Location of Annual
Meeting
|
|
|
|
Social
and Environmental Issues |
|
|
|
Endorsement
of Principles |
|
|
|
|
|
|
|
|
|
|
|
Genetically
Modified Ingredients |
|
Reports
on Potentially Controversial Business/
Financial
Practices |
|
Pharmaceutical
Pricing, Access to Medicines,
and
Prescription Drug Reimportation |
|
Product
Safety and Toxic/Hazardous Materials |
|
Tobacco-Related
Proposals |
|
|
|
Climate
Change/Greenhouse Gas (GHG)
Emissions
|
|
|
|
|
|
|
|
|
|
|
|
Gender
Identity, Sexual Orientation, and
Domestic
Partner Benefits |
|
Gender,
Race / Ethnicity Pay Gap |
|
Environment
and Sustainability |
|
Facility
and Workplace Safety |
|
General
Environmental Proposals and
Community
Impact Assessments |
|
|
|
Operations
in Protected Areas |
|
|
|
|
|
|
|
|
|
|
|
Data
Security, Privacy, and Internet Issues |
|
Environmental,
Social, and Governance (ESG)
Compensation-Related
Proposals |
|
Human
Rights, Human Capital Management,
and
International Operations |
|
|
|
|
|
Operations
in High Risk Markets |
|
|
|
|
|
Weapons
and Military Sales |
|
|
|
|
|
|
|
|
|
Registered
Investment Company Proxies |
|
|
|
Closed
End Fund - Unilateral Opt-In to Control
Share
Acquisition Statutes |
|
Converting
Closed-end Fund to Open-end Fund |
|
|
|
Investment
Advisory Agreements |
|
Approving
New Classes or Series of Shares |
|
Preferred
Stock Proposals |
|
|
|
Changing
a Fundamental Restriction to a
Nonfundamental
Restriction |
|
Change
Fundamental Investment Objective to
Nonfundamental
|
|
|
|
Change
in Fund's Subclassification |
|
Business
Development Companies—
Authorization
to Sell Shares of Common Stock
at
a Price below Net Asset Value |
|
Disposition
of Assets/Termination/Liquidation |
|
Changes
to the Charter Document |
|
Changing
the Domicile of a Fund |
|
Authorizing
the Board to Hire and Terminate
Subadvisers
Without Shareholder Approval |
|
|
|
|
|
|
|
Shareholder
Proposals for Mutual Funds |
|
Establish
Director Ownership Requirement |
|
Reimburse
Shareholder for Expenses Incurred |
|
Terminate
the Investment Advisor |
|
|
NOTE:
Because of the unique oversight structure and regulatory scheme applicable to closed-end and open-end investment companies,
except as otherwise noted, these voting guidelines are not applicable to holdings of shares of closed-end and
open-end investment companies (except Real Estate Investment Trusts).
In
voting proxies that are noted case-by-case, DWS will give significant weight to ISS recommendation.
BOARD
OF DIRECTORS
DWS’s
policy is to generally vote for director nominees, except under the following circumstances (with new nominees5
considered on case-by-case basis):
Independence
General
Recommendation: DWS’s policy is to generally vote against6
or withhold from non-independent directors when (See Appendix 1 for Classification
of Directors):
•
Independent
directors comprise 50 percent or less of the board;
•
The
non-independent director serves on the audit, compensation, or nominating committee;
•
The
company lacks an audit, compensation, or nominating committee so that the full board functions as that committee;
or
•
The
company lacks a formal nominating committee, even if the board attests that the independent directors fulfill the
functions of such a committee.
Composition
Attendance
at Board and Committee Meetings: DWS’s policy is to generally vote against or withhold from directors (except
nominees who served only part of the fiscal year7)
who attend less than 75 percent of the aggregate of their board and committee meetings
for the period for which they served, unless an acceptable reason for absences is disclosed
in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following:
•
Medical
issues/illness;
•
Family
emergencies; and
•
Missing
only one meeting (when the total of all meetings is three or fewer).
In
cases of chronic poor attendance without reasonable justification, in addition to voting against the director(s) with poor
attendance, generally vote against or withhold from appropriate members of the nominating/governance committees or
the full board.
If
the proxy disclosure is unclear and insufficient to determine whether a director attended at least 75 percent of the aggregate
of his/her board and committee meetings during his/her period of service, vote against or withhold from the
director(s) in question.
Overboarded
Directors: DWS’s policy is to generally vote against or withhold from individual
directors who:
•
Sit
on more than five public company boards; or
•
Are
CEOs of public companies who sit on the boards of more than two public companies besides their own—withhold only
at their outside boards8
5
A “new
nominee” is a director
who is being presented for election by shareholders for the first time. Recommendations on
new nominees who have served for less than one year are made on a case-by-case basis depending on the timing of
their appointment and the problematic governance issue in question.
6
In general, companies with a plurality vote standard use “Withhold”
as the contrary vote option in director elections; companies with a majority vote
standard use “Against”.
However, it will vary by company and the proxy must be checked to determine the
valid contrary vote option for the particular company.
7
Nominees who served for only part of the fiscal year are generally exempted from the attendance policy.
8
Although all of a CEO’s subsidiary boards with publicly-traded common stock will be counted as separate boards, DWS
will not recommend a withhold vote for the CEO of a parent company board or any of the controlled (>50 percent ownership)
subsidiaries of that parent but may do so at subsidiaries that are less than 50 percent controlled and boards outside
the parent/subsidiary relationships.
Gender
Diversity: For companies in the Russell 3000 or S&P 1500 indices, DWS’s
policy is to generally vote against or withhold from the chair of the nominating
committee (or other directors on a case-by-case basis) at companies where there
are no women on the company's board. An exception will be made if there was a woman on the board at
the preceding annual meeting and the board makes a firm commitment to return to a gender-diverse status within a
year.
Racial
and/or Ethnic Diversity: For companies in the Russell 3000 or S&P 1500 indices,
highlight boards with no apparent racial and/or ethnic diversity9.
•
For
companies in the Russell 3000 or S&P 1500 indices, effective for meetings on or after Feb. 1, 2022, generally vote
against or withhold from the chair of the nominating committee (or other directors on a case-by-case basis) where
the board has no apparent racially or ethnically diverse members. An exception will be made if (i) there was
racial and/or ethnic diversity on the board at the preceding annual meeting and the board makes a firm commitment to
appoint at least one racial and/or ethnic diverse member within a year; or (ii) there are no new nominees proposed for
election to the board.
Responsiveness
DWS’s
policy is to generally vote case-by-case on individual directors, committee members, or the entire board of directors
as appropriate if:
•
The
board failed to act on a shareholder proposal that received the support of a majority of the shares cast in the previous
year or failed to act on a management proposal seeking to ratify an existing charter/bylaw provision that received
opposition of a majority of the shares cast in the previous year. Factors that will be considered are:
•
Disclosed
outreach efforts by the board to shareholders in the wake of the vote;
•
Rationale
provided in the proxy statement for the level of implementation;
•
The
subject matter of the proposal;
•
The
level of support for and opposition to the resolution in past meetings;
•
Actions
taken by the board in response to the majority vote and its engagement with shareholders;
•
The
continuation of the underlying issue as a voting item on the ballot (as either shareholder or management proposals);
and
•
Other
factors as appropriate.
•
The
board failed to act on takeover offers where the majority of shares are tendered;
•
At
the previous board election, any director received more than 50 percent withhold/against votes of the shares cast
and the company has failed to address the issue(s) that caused the high withhold/against vote.
DWS’s
policy is to generally vote case-by-case on Compensation Committee members (or, in exceptional cases, the full
board) and the Say on Pay proposal if:
•
The
company’s previous say-on-pay received the support of less than 70 percent of votes cast. Factors that will be
considered are:
The
company's response, including:
•
Disclosure
of engagement efforts with major institutional investors, including the frequency and timing of engagements and
the company participants (including whether independent directors participated);
•
Disclosure
of the specific concerns voiced by dissenting shareholders that led to the say-on-pay opposition;
•
Disclosure
of specific and meaningful actions taken to address shareholders' concerns;
•
Other
recent compensation actions taken by the company;
•
Whether
the issues raised are recurring or isolated;
•
The
company's ownership structure; and
•
Whether
the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
•
The
board implements an advisory vote on executive compensation on a less frequent basis than the frequency that
received the plurality of votes cast.
Accountability
Problematic
Takeover Defenses/Governance Structure
Poison
Pills: DWS’s policy is to generally vote against or withhold from all nominees
(except new nominees5,
who should be considered case-by-case) if:
•
The
company has a poison pill that was not approved by shareholders10.
However, vote case-by-case on nominees if the board adopts an initial pill with
a term of one year or less, depending on the disclosed rationale for the adoption,
and other factors as relevant (such as a commitment to put any renewal to a shareholder vote);
•
The
board makes a material adverse modification to an existing pill, including, but not limited to, extension, renewal, or
lowering the trigger, without shareholder approval; or
•
The
pill, whether short-term11
or long-term, has a deadhand or slowhand feature.
9
Aggregate diversity statistics provided by the board will only be considered if
specific to racial and/or ethnic diversity.
10
Public shareholders only, approval prior to a company’s becoming public is insufficient.
11
If the short-term pill with a deadhand or slowhand feature is enacted but expires before the next shareholder vote, DWS
will generally still vote withhold or against nominees at the next shareholder meeting following its adoption.
Classified
Board Structure: The board is classified, and a continuing director responsible
for a problematic governance issue at the board/committee level that would warrant
a withhold / against vote recommendation is not up for election. All appropriate
nominees (except new) may be held accountable.
Removal
of Shareholder Discretion on Classified Boards: The company has opted into, or failed
to opt out of, state laws requiring a classified board structure.
Director
Performance Evaluation: The board lacks mechanisms to promote accountability and
oversight, coupled with sustained poor performance relative to peers. Sustained
poor performance is measured by one-, three-, and five-year total shareholder returns
in the bottom half of a company’s four-digit GICS industry group (Russell 3000 companies only).
Take into consideration the company’s operational metrics and other factors as warranted.
Problematic
provisions include but are not limited to:
•
A
classified board structure;
•
A
supermajority vote requirement;
•
Either
a plurality vote standard in uncontested director elections, or a majority vote standard in contested elections;
•
The
inability of shareholders to call special meetings;
•
The
inability of shareholders to act by written consent;
•
A
multi-class capital structure; and/or
•
A
non-shareholder-approved poison pill.
Unilateral
Bylaw/Charter Amendments and Problematic Capital Structures: DWS’s policy
is to generally vote against or withhold from directors individually, committee
members, or the entire board (except new nominees5,
who should be considered case-by-case) if the board amends the company's bylaws
or charter without shareholder approval in a manner that materially diminishes shareholders'
rights or that could adversely impact shareholders, considering the following factors:
•
The
board's rationale for adopting the bylaw/charter amendment without shareholder ratification;
•
Disclosure
by the company of any significant engagement with shareholders regarding the amendment;
•
The
level of impairment of shareholders' rights caused by the board's unilateral amendment to the bylaws/charter;
•
The
board's track record with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions;
•
The
company's ownership structure;
•
The
company's existing governance provisions;
•
The
timing of the board's amendment to the bylaws/charter in connection with a significant business development; and
•
Other
factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders.
Unless
the adverse amendment is reversed or submitted to a binding shareholder vote, in subsequent years vote case-by-case
on director nominees. DWS’s policy is to generally vote against (except new nominees, who should be considered
case-by-case) if the directors:
•
Adopted
supermajority vote requirements to amend the bylaws or charter; or
•
Eliminated
shareholders' ability to amend bylaws.
Problematic
Capital Structure - Newly Public Companies: For newly public companies6,
DWS’s policy is to generally vote against or withhold from the entire board
(except new nominees5,
who should be considered case-by-case) if, prior to or in connection with the company's
public offering, the company or its board implemented a multi-class capital structure
in which the classes have unequal voting rights without subjecting the multi-class capital structure to
a reasonable time-based sunset. In assessing the reasonableness of a time-based sunset provision, consideration will
be given to the company’s lifespan, its post-IPO ownership structure and the board’s disclosed rationale for the sunset
period selected. No sunset period of more than seven years from the date of the IPO will be considered to be
reasonable.
Continue
to vote against or withhold from incumbent directors in subsequent years, unless the problematic capital structure
is reversed or removed.
Problematic
Governance Structure - Newly Public Companies: For newly public companies12,
DWS’s policy is to generally vote against or withhold from directors individually,
committee members, or the entire board (except new nominees5,
who should be considered case-by-case) if, prior to or in connection with the company's public offering, the
company or its board adopted the following bylaw or charter provisions that are considered to be materially adverse to
shareholder rights:
•
Supermajority
vote requirements to amend the bylaws or charter;
•
A
classified board structure; or
•
Other
egregious provisions.
A
reasonable sunset provision will be considered a mitigating factor.
Unless
the adverse provision is reversed or removed, vote case-by-case on director nominees in subsequent years.
12
Newly-public companies generally include companies that emerge from bankruptcy,
spin-offs, direct listings, and those who complete a traditional initial public
offering.
Management
Proposals to Ratify Existing Charter or Bylaw Provisions: DWS’s policy is
to generally vote against/withhold from individual directors, members of the governance
committee, or the full board, where boards ask shareholders to ratify existing charter
or bylaw provisions considering the following factors:
•
The
presence of a shareholder proposal addressing the same issue on the same ballot;
•
The
board's rationale for seeking ratification;
•
Disclosure
of actions to be taken by the board should the ratification proposal fail;
•
Disclosure
of shareholder engagement regarding the board’s ratification request;
•
The
level of impairment to shareholders' rights caused by the existing provision;
•
The
history of management and shareholder proposals on the provision at the company’s past meetings;
•
Whether
the current provision was adopted in response to the shareholder proposal;
•
The
company's ownership structure; and
•
Previous
use of ratification proposals to exclude shareholder proposals.
Restrictions
on Shareholders’ Rights
Restricting
Binding Shareholder Proposals: DWS’s policy is to generally vote against or
withhold from the members of the governance committee if:
•
The
company’s governing documents impose undue restrictions on shareholders’ ability to amend the bylaws.
Such
restrictions include but are not limited to: outright prohibition on the submission of binding shareholder proposals or
share ownership requirements, subject matter restrictions, or time holding requirements in excess of SEC Rule 14a-8.
Vote against or withhold on an ongoing basis.
Submission
of management proposals to approve or ratify requirements in excess of SEC Rule 14a-8 for the submission of
binding bylaw amendments will generally be viewed as an insufficient restoration of shareholders' rights. DWS’s policy
is to generally continue to vote against or withhold on an ongoing basis until shareholders are provided with an
unfettered ability to amend the bylaws or a proposal providing for such unfettered right is submitted for shareholder approval.
Problematic
Audit-Related Practices
DWS’s
policy is to generally vote against or withhold from the members of the Audit Committee if:
•
The
non-audit fees paid to the auditor are excessive;
•
The
company receives an adverse opinion on the company’s financial statements from its auditor; or
•
There
is persuasive evidence that the Audit Committee entered into an inappropriate indemnification agreement with
its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against
the audit firm.
DWS’s
policy is to generally vote case-by-case on members of the Audit Committee and potentially the full board if:
•
Poor
accounting practices are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP;
and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence,
and duration, as well as the company’s efforts at remediation or corrective actions, in determining whether
withhold/against votes are warranted.
Problematic
Compensation Practices
In
the absence of an Advisory Vote on Executive Compensation (Say on Pay) ballot item or in egregious situations, DWS’s
policy is to generally vote against or withhold from the members of the Compensation Committee and potentially the
full board if:
•
There
is an unmitigated misalignment between CEO pay and company performance (pay for performance);
•
The
company maintains significant problematic pay practices; or
•
The
board exhibits a significant level of poor communication and responsiveness to shareholders.
DWS’s
policy is to generally vote against or withhold from the Compensation Committee chair, other committee members, or
potentially the full board if:
•
The
company fails to include a Say on Pay ballot item when required under SEC provisions, or under the company’s declared
frequency of say on pay; or
•
The
company fails to include a Frequency of Say on Pay ballot item when required under SEC provisions.
DWS’s
policy is to generally vote against members of the board committee responsible for approving/setting non-employee director
compensation if there is a pattern (i.e. two or more years) of awarding excessive non-employee director compensation without
disclosing a compelling rationale or other mitigating factors.
Problematic
Pledging of Company Stock:
DWS’s
policy is to generally vote against the members of the committee that oversees risks related to pledging, or the
full board, where a significant level of pledged company stock by executives or directors raises concerns.
The
following factors will be considered:
•
The
presence of an anti-pledging policy, disclosed in the proxy statement, that prohibits future pledging activity;
•
The
magnitude of aggregate pledged shares in terms of total common shares outstanding, market value, and trading
volume;
•
Disclosure
of progress or lack thereof in reducing the magnitude of aggregate pledged shares over time;
•
Disclosure
in the proxy statement that shares subject to stock ownership and holding requirements do not include pledged
company stock; and
•
Any
other relevant factors.
Governance
Failures
Under
extraordinary circumstances, DWS’s policy is to generally vote case-by-case on directors individually, committee members,
or the entire board, due to:
•
Material
failures of governance, stewardship, risk oversight13,
or fiduciary responsibilities at the company, including failures to adequately manage
or mitigate environmental, social and governance (ESG) risks;
•
Failure
to replace management as appropriate; or
•
Egregious
actions related to a director’s service on other boards that raise substantial doubt about his or her ability
to effectively oversee management and serve the best interests of shareholders at any company.
13
Examples of failure of risk oversight include but are not limited to: bribery; large
or serial fines or sanctions from regulatory bodies; demonstrably poor oversight
of environmental and social issues, including climate change; significant adverse
legal judgments or settlement; or hedging of company stock.
Voting
on Director Nominees in Contested Elections
Vote-No
Campaigns
General
Recommendation: In cases where companies are targeted in connection with public
“vote-no”
campaigns, evaluate director nominees under the existing governance policies for
voting on director nominees in uncontested elections. Take into consideration the
arguments submitted by shareholders and other publicly available information.
Proxy
Contests/Proxy Access
General
Recommendation: DWS’s policy is to generally vote case-by-case on the election
of directors in contested elections, considering the following factors:
•
Long-term
financial performance of the company relative to its industry;
•
Management’s
track record;
•
Background
to the contested election;
•
Nominee
qualifications and any compensatory arrangements;
•
Strategic
plan of dissident slate and quality of the critique against management;
•
Likelihood
that the proposed goals and objectives can be achieved (both slates); and
•
Stock
ownership positions.
In
the case of candidates nominated pursuant to proxy access, DWS’s policy is to generally vote case-by-case considering any
applicable factors listed above or additional factors which may be relevant, including those that are specific to the
company, to the nominee(s) and/or to the nature of the election (such as whether there are more candidates than board
seats).
Other
Board-Related Proposals
Adopt
Anti-Hedging/Pledging/Speculative Investments Policy
General
Recommendation: DWS’s policy is to generally vote for proposals seeking a
policy that prohibits named executive officers from engaging in derivative or speculative
transactions involving company stock, including hedging, holding stock in a margin
account, or pledging stock as collateral for a loan. However, the company’s existing policies regarding
responsible use of company stock will be considered.
Board
Refreshment
DWS
believes Board refreshment is best implemented through an ongoing program of individual director evaluations, conducted
annually, to ensure the evolving needs of the board are met and to bring in fresh perspectives, skills, and diversity
as needed.
Term/Tenure
Limits
General
Recommendation: DWS’s policy is to generally vote case-by-case on management
proposals regarding director term/tenure limits, considering:
•
The
rationale provided for adoption of the term/tenure limit;
•
The
robustness of the company’s board evaluation process;
•
Whether
the limit is of sufficient length to allow for a broad range of director tenures;
•
Whether
the limit would disadvantage independent directors compared to non-independent directors; and
•
Whether
the board will impose the limit evenly, and not have the ability to waive it in a discriminatory manner.
Vote
case-by-case on shareholder proposals asking for the company to adopt director term/tenure limits, considering:
•
The
scope of the shareholder proposal; and
•
Evidence
of problematic issues at the company combined with, or exacerbated by, a lack of board refreshment.
Age
Limits
General
Recommendation: DWS’s policy is to generally vote against management and shareholder
proposals to limit the tenure of independent directors through mandatory retirement
ages. DWS’s policy is to generally vote for proposals to remove mandatory
age limits.
Board
Size
General
Recommendation: DWS’s policy is to generally vote for proposals seeking to
fix the board size or designate a range for the board size. DWS’s policy is
to generally vote against proposals that give management the ability to alter the
size of the board outside of a specified range without shareholder approval.
Classification/Declassification
of the Board
General
Recommendation: DWS’s policy is to vote against proposals to classify (stagger)
the board. Vote for proposals to repeal classified boards and to elect all directors
annually.
CEO
Succession Planning
General
Recommendation: DWS’s policy is to generally vote for proposals seeking disclosure
on a CEO succession planning policy, considering, at a minimum, the following factors:
•
The
reasonableness/scope of the request; and
•
The
company’s existing disclosure on its current CEO succession planning process.
Cumulative
Voting
General
Recommendation: DWS’s policy is to generally vote against management proposals
to eliminate cumulate voting, and for shareholder proposals to restore or provide
for cumulative voting, unless:
•
The
company has proxy access14,
thereby allowing shareholders to nominate directors to the company’s ballot; and
•
The
company has adopted a majority vote standard, with a carve-out for plurality voting in situations where there are
more nominees than seats, and a director resignation policy to address failed elections.
DWS’s
policy is to generally vote for proposals for cumulative voting at controlled companies (insider voting power > 50%).
14
A proxy access right that meets the recommended guidelines.
Director
and Officer Indemnification and Liability Protection
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
on director and officer indemnification and liability protection.
Vote
against proposals that would:
•
Eliminate
entirely directors' and officers' liability for monetary damages for violating the duty of care.
•
Expand
coverage beyond just legal expenses to liability for acts that are more serious violations of fiduciary obligation than
mere carelessness.
•
Expand
the scope of indemnification to provide for mandatory indemnification of company officials in connection with
acts that previously the company was permitted to provide indemnification for, at the discretion of the company's board
(i.e., “permissive indemnification”),
but that previously the company was not required to indemnify.
Vote
for only those proposals providing such expanded coverage in cases when a director’s or officer’s legal defense was
unsuccessful if both of the following apply:
•
If
the director was found to have acted in good faith and in a manner that s/he reasonably believed was in the best
interests of the company; and
•
If
only the director’s legal expenses would be covered.
Establish/Amend
Nominee Qualifications
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
that establish or amend director qualifications. Votes should be based on the reasonableness
of the criteria and the degree to which they may preclude dissident nominees from
joining the board.
Vote
case-by-case on shareholder resolutions seeking a director nominee who possesses a particular subject matter expertise,
considering:
•
The
company’s board committee structure, existing subject matter expertise, and board nomination provisions relative
to that of its peers;
•
The
company’s existing board and management oversight mechanisms regarding the issue for which board oversight is
sought;
•
The
company’s disclosure and performance relating to the issue for which board oversight is sought and any significant
related controversies; and
•
The
scope and structure of the proposal.
Establish
Other Board Committee Proposals
General
Recommendation: DWS’s policy is to generally vote against shareholder proposals
to establish a new board committee, as such proposals seek a specific oversight
mechanism/structure that potentially limits a company’s flexibility to determine
an appropriate oversight mechanism for itself. However, the following factors will be considered:
•
Existing
oversight mechanisms (including current committee structure) regarding the issue for which board oversight is
sought;
•
Level
of disclosure regarding the issue for which board oversight is sought;
•
Company
performance related to the issue for which board oversight is sought;
•
Board
committee structure compared to that of other companies in its industry sector; and
•
The
scope and structure of the proposal.
Filling
Vacancies/Removal of Directors
General
Recommendation: DWS’s policy is to generally vote against proposals that provide
that directors may be removed only for cause.
Vote
for proposals to restore shareholders’ ability to remove directors with or without cause.
Vote
against proposals that provide that only continuing directors may elect replacements to fill board vacancies. Vote for
proposals that permit shareholders to elect directors to fill board vacancies.
Independent
Board Chair
General
Recommendation: DWS’s policy is to generally vote for shareholder proposals
requiring that the board chair position be filled by an independent director, taking
into consideration the following:
•
The
scope and rationale of the proposal;
•
The
company's current board leadership structure;
•
The
company's governance structure and practices;
•
Company
performance; and
•
Any
other relevant factors that may be applicable.
The
following factors will increase the likelihood of a “for”
recommendation:
•
A
majority non-independent board and/or the presence of non-independent directors on key board committees;
•
A
weak or poorly-defined lead independent director role that fails to serve as an appropriate counterbalance to a
combined CEO/chair role;
•
The
presence of an executive or non-independent chair in addition to the CEO, a recent recombination of the role of
CEO and chair, and/or departure from a structure with an independent chair;
•
Evidence
that the board has failed to oversee and address material risks facing the company;
•
A
material governance failure, particularly if the board has failed to adequately respond to shareholder concerns or
if the board has materially diminished shareholder rights; or
•
Evidence
that the board has failed to intervene when management’s interests are contrary to shareholders' interests.
Majority
of Independent Directors/Establishment of Independent Committees
General
Recommendation: DWS’s policy is to generally vote for shareholder proposals
asking that a majority or more of directors be independent unless the board composition
already meets the proposed threshold by ISS’ definition of Independent Director.
Vote
for shareholder proposals asking that board audit, compensation, and/or nominating committees be composed exclusively
of independent directors unless they currently meet that standard.
Majority
Vote Standard for the Election of Directors
General
Recommendation: DWS’s policy is to generally vote for management proposals
to adopt a majority of votes cast standard for directors in uncontested elections.
Vote against if no carve-out for a plurality vote standard in contested elections
is included.
DWS’s
policy is to generally vote for precatory and binding shareholder resolutions requesting that the board change the
company’s bylaws to stipulate that directors need to be elected with an affirmative majority of votes cast, provided it
does not conflict with the state law where the company is incorporated. Binding resolutions need to allow for a carve-out
for a plurality vote standard when there are more nominees than board seats.
Companies
are strongly encouraged to also adopt a post-election policy (also known as a director resignation policy) that
will provide guidelines so that the company will promptly address the situation of a holdover director.
Proxy
Access
General
Recommendation: DWS’s policy is to generally vote for management and shareholder
proposals for proxy access with the following provisions:
•
Ownership
threshold: maximum requirement not more than three percent (3%) of the voting power;
•
Ownership
duration: maximum requirement not longer than three (3) years of continuous ownership
for each member of the nominating group;
•
Aggregation:
minimal or no limits on the number of shareholders permitted to form a nominating group;
•
Cap:
cap on nominees of generally twenty-five percent (25%) of the board.
Review
for reasonableness any other restrictions on the right of proxy access. Generally vote against proposals that are
more restrictive than these guidelines.
Require
More Nominees than Open Seats
General
Recommendation: DWS’s policy is to generally vote against shareholder proposals
that would require a company to nominate more candidates than the number of open
board seats.
Shareholder
Engagement Policy (Shareholder Advisory Committee)
General
Recommendation: DWS’s policy is to generally vote for shareholder proposals
requesting that the board establish an internal mechanism/process, which may include
a committee, in order to improve communications between directors and shareholders,
unless the company has the following features, as appropriate:
•
Established
a communication structure that goes beyond the exchange requirements to facilitate the exchange of
information between shareholders and members of the board;
•
Effectively
disclosed information with respect to this structure to its shareholders;
•
Company
has not ignored majority-supported shareholder proposals or a majority withhold vote on a director nominee;
and
•
The
company has an independent chair or a lead director, according to ISS’ definition. This individual must be made
available for periodic consultation and direct communication with major shareholders.
AUDIT-RELATED
Auditor
Indemnification and Limitation of Liability
General
Recommendation: DWS’s policy is to generally vote case-by-case on the issue
of auditor indemnification and limitation of liability. Factors to be assessed include,
but are not limited to:
•
The
terms of the auditor agreement—the degree to which these agreements impact shareholders' rights;
•
The
motivation and rationale for establishing the agreements;
•
The
quality of the company’s disclosure; and
•
The
company’s historical practices in the audit area.
Vote
against or withhold from members of an audit committee in situations where there is persuasive evidence that the
audit committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the
company, or its shareholders, to pursue legitimate legal recourse against the audit firm.
Auditor
Ratification
General
Recommendation: DWS’s policy is to generally vote for proposals to ratify
auditors unless any of the following apply:
•
An
auditor has a financial interest in or association with the company, and is therefore not independent;
•
There
is reason to believe that the independent auditor has rendered an opinion that is neither accurate nor indicative of
the company’s financial position;
•
Poor
accounting practices are identified that rise to a serious level of concern, such as fraud or misapplication of GAAP;
or
•
Fees
for non-audit services (“Other”
fees) are excessive.
Non-audit
fees are excessive if:
•
Non-audit
(“other”)
fees > audit fees + audit-related fees + tax compliance/preparation fees
Tax
compliance and preparation include the preparation of original and amended tax returns and refund claims, and tax
payment planning. All other services in the tax category, such as tax advice, planning, or consulting, should be added
to “Other”
fees. If the breakout of tax fees cannot be determined, add all tax fees to “Other”
fees.
In
circumstances where “Other”
fees include fees related to significant one-time capital structure events (such as initial
public offerings, bankruptcy emergence, and spin-offs) and the company makes public disclosure of the amount and
nature of those fees that are an exception to the standard “non-audit
fee” category, then
such fees may be excluded from the non-audit fees considered in determining the
ratio of non-audit to audit/audit-related fees/tax compliance and preparation for
purposes of determining whether non-audit fees are excessive.
Shareholder
Proposals Limiting Non-Audit Services
General
Recommendation: DWS’s policy is to generally vote case-by-case on shareholder
proposals asking companies to prohibit or limit their auditors from engaging in
non-audit services.
Shareholder
Proposals on Audit Firm Rotation
General
Recommendation: DWS’s policy is to generally vote case-by-case on shareholder
proposals asking for audit firm rotation, taking into account:
•
The
tenure of the audit firm;
•
The
length of rotation specified in the proposal;
•
Any
significant audit-related issues at the company;
•
The
number of Audit Committee meetings held each year;
•
The
number of financial experts serving on the committee; and
•
Whether
the company has a periodic renewal process where the auditor is evaluated for both audit quality and competitive
price.
SHAREHOLDER
RIGHTS & DEFENSES
Advance
Notice Requirements for Shareholder Proposals/Nominations
General
Recommendation: DWS’s policy is to generally vote case-by-case on advance
notice proposals, giving support to those proposals which allow shareholders to
submit proposals/nominations as close to the meeting date as reasonably possible
and within the broadest window possible, recognizing the need to allow sufficient notice for company, regulatory, and
shareholder review.
To
be reasonable, the company’s deadline for shareholder notice of a proposal/nominations must be no earlier than 120
days prior to the anniversary of the previous year’s meeting, and have a submittal window of no shorter than 30 days
from the beginning of the notice period. The submittal window is the period under which shareholders must file their
proposals/nominations prior to the deadline.
In
general, support additional efforts by companies to ensure full disclosure in regard to a proponent’s economic and voting
position in the company so long as the informational requirements are reasonable and aimed at providing shareholders with
the necessary information to review such proposals.
Amend
Bylaws without Shareholder Consent
General
Recommendation: DWS’s policy is to generally vote against proposals giving
the board exclusive authority to amend the bylaws.
Vote
case-by-case on proposals giving the board the ability to amend the bylaws in addition to shareholders, taking into
account the following:
•
Any
impediments to shareholders' ability to amend the bylaws (i.e. supermajority voting requirements);
•
The
company's ownership structure and historical voting turnout;
•
Whether
the board could amend bylaws adopted by shareholders; and
•
Whether
shareholders would retain the ability to ratify any board-initiated amendments.
Control
Share Acquisition Provisions
General
Recommendation: DWS’s policy is to generally vote for proposals to opt out
of control share acquisition statutes unless doing so would enable the completion
of a takeover that would be detrimental to shareholders.
Vote
against proposals to amend the charter to include control share acquisition provisions. Vote for proposals to restore voting
rights to the control shares.
Control
share acquisition statutes function by denying shares their voting rights when they contribute to ownership in
excess of certain thresholds. Voting rights for those shares exceeding ownership limits may only be restored by approval
of either a majority or supermajority of disinterested shares. Thus, control share acquisition statutes effectively require
a hostile bidder to put its offer to a shareholder vote or risk voting disenfranchisement if the bidder continues buying
up a large block of shares.
Control
Share Cash—Out Provisions
General
Recommendation: DWS’s policy is to generally vote for proposals to opt out
of control share cash-out statutes.
Control
share cash-out statutes give dissident shareholders the right to “cash-out”
of their position in a company at the expense of the shareholder who has taken a
control position. In other words, when an investor crosses a preset threshold level,
remaining shareholders are given the right to sell their shares to the acquirer, who must buy them at the
highest acquiring price.
Disgorgement
Provisions
General
Recommendation: DWS’s policy is to generally vote for proposals to opt out
of state disgorgement provisions.
Disgorgement
provisions require an acquirer or potential acquirer of more than a certain percentage of a company's stock
to disgorge, or pay back, to the company any profits realized from the sale of that company's stock purchased 24
months before achieving control status. All sales of company stock by the acquirer occurring within a certain period of
time (between 18 months and 24 months) prior to the investor's gaining control status are subject to these recapture-of-profits
provisions.
Fair
Price Provisions
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
to adopt fair price provisions (provisions that stipulate that an acquirer must
pay the same price to acquire all shares as it paid to acquire the control shares),
evaluating factors such as the vote required to approve the proposed acquisition, the vote required to repeal the
fair price provision, and the mechanism for determining the fair price.
DWS’s
policy is to generally vote against fair price provisions with shareholder vote requirements greater than a majority of
disinterested shares.
Freeze-Out
Provisions
General
Recommendation: DWS’s policy is to generally vote for proposals to opt out
of state freeze-out provisions. Freeze-out provisions force an investor who surpasses
a certain ownership threshold in a company to wait a specified period of time before
gaining control of the company.
Greenmail
General
Recommendation: DWS’s policy is to generally vote for proposals to adopt anti-greenmail
charter or bylaw amendments or otherwise restrict a company’s ability to make
greenmail payments.
Vote
case-by-case on anti-greenmail proposals when they are bundled with other charter or bylaw amendments.
Greenmail
payments are targeted share repurchases by management of company stock from individuals or groups seeking
control of the company. Since only the hostile party receives payment, usually at a substantial premium over the
market value of its shares, the practice discriminates against all other shareholders.
Shareholder
Litigation Rights Federal Forum Selection Provisions
Federal
forum selection provisions require that U.S federal courts be the sole forum for shareholders to litigate claims arising
under federal securities law.
General
Recommendation: DWS’s policy is to generally vote for federal forum selection
provisions in the charter or bylaws that specify “the
district courts of the United States”
as the exclusive forum for federal securities law matters, in the absence of serious
concerns about corporate governance or board responsiveness to shareholders.
Vote
against provisions that restrict the forum to a particular federal district court; unilateral adoption (without a shareholder vote)
of such a provision will generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.
Exclusive
Forum Provisions for State Law Matters
Exclusive
forum provisions in the charter or bylaws restrict shareholders’ ability to bring derivative lawsuits against the
company, for claims arising out of state corporate law, to the courts of a particular state (generally the state of incorporation).
General
Recommendation: DWS’s policy is to generally vote for charter or bylaw provisions
that specify courts located within the state of Delaware as the exclusive forum
for corporate law matters for Delaware corporations, in the absence of serious concerns
about corporate governance or board responsiveness to shareholders.
For
states other than Delaware, vote case-by-case on exclusive forum provisions, taking into consideration:
•
The
company's stated rationale for adopting such a provision;
•
Disclosure
of past harm from duplicative shareholder lawsuits in more than one forum;
•
The
breadth of application of the charter or bylaw provision, including the types of lawsuits to which it would apply
and the definition of key terms; and
•
Governance
features such as shareholders' ability to repeal the provision at a later date (including the vote standard applied
when shareholders attempt to amend the charter or bylaws) and their ability to hold directors accountable through
annual director elections and a majority vote standard in uncontested elections.
Generally
vote against provisions that specify a state other than the state of incorporation as the exclusive forum for corporate
law matters, or that specify a particular local court within the state; unilateral adoption of such provision will
generally be considered a one-time failure under the Unilateral Bylaw/Charter Amendments policy.
Fee
shifting
Fee-shifting
provisions in the charter or bylaws require that a shareholder who sues a company unsuccessfully pay all
litigation expenses of the defendant corporation and its directors and officers.
General
Recommendation: DWS’s policy is to generally vote against provisions that
mandate fee-shifting whenever plaintiffs are not completely successful on the merits
(i.e. including cases where the plaintiffs are partially successful).
Unilateral
adoption of a fee-shifting provision will generally be considered an ongoing failure under the Unilateral Bylaw/Charter Amendments
policy.
Net
Operating Loss (NOL) Protective Amendments
General
Recommendation: DWS’s policy is to generally vote against proposals to adopt
a protective amendment for the stated purpose of protecting a company's net operating
losses (NOL) if the effective term of the protective amendment would exceed the
shorter of three years and the exhaustion of the NOL.
Vote
case-by-case, considering the following factors, for management proposals to adopt an NOL protective amendment that
would remain in effect for the shorter of three years (or less) and the exhaustion of the NOL:
•
The
ownership threshold (NOL protective amendments generally prohibit stock ownership transfers that would result
in a new 5-percent holder or increase the stock ownership percentage of an existing 5-percent holder);
•
Shareholder
protection mechanisms (sunset provision or commitment to cause expiration of the protective amendment upon
exhaustion or expiration of the NOL);
•
The
company's existing governance structure including: board independence, existing takeover defenses, track record
of responsiveness to shareholders, and any other problematic governance concerns; and
•
Any
other factors that may be applicable.
Poison
Pills (Shareholder Rights Plans)
Shareholder
Proposals to Put Pill to a Vote and/or Adopt a Pill Policy
General
Recommendation: DWS’s policy is to generally vote for shareholder proposals
requesting that the company submit its poison pill to a shareholder vote or redeem
it unless the company has: (1) A shareholder-approved poison pill in place; or (2)
The company has adopted a policy concerning the adoption of a pill in the future specifying that the board
will only adopt a shareholder rights plan if either:
•
Shareholders
have approved the adoption of the plan; or
•
The
board, in its exercise of its fiduciary responsibilities, determines that it is in the best interest of shareholders under
the circumstances to adopt a pill without the delay in adoption that would result from seeking stockholder approval
(i.e., the “fiduciary
out” provision). A poison
pill adopted under this fiduciary out will be put to a shareholder ratification
vote within 12 months of adoption or expire. If the pill is not approved by a majority of the votes cast on
this issue, the plan will immediately terminate.
If
the shareholder proposal calls for a time period of less than 12 months for shareholder ratification after adoption, DWS’s
policy is to generally vote for the proposal, but add the caveat that a vote within 12 months would be considered sufficient
implementation.
Management
Proposals to Ratify a Poison Pill
General
Recommendation: DWS’s policy is to generally vote case-by-case on management
proposals on poison pill ratification, focusing on the features of the shareholder
rights plan. Rights plans should contain the following attributes:
•
No
lower than a 20 percent trigger, flip-in or flip-over;
•
A
term of no more than three years;
•
No
deadhand, slowhand, no-hand, or similar feature that limits the ability of a future board to redeem the pill;
•
Shareholder
redemption feature (qualifying offer clause); if the board refuses to redeem the pill 90 days after a qualifying
offer is announced, 10 percent of the shares may call a special meeting or seek a written consent to vote
on rescinding the pill.
In
addition, the rationale for adopting the pill should be thoroughly explained by the company. In examining the request for
the pill, take into consideration the company’s existing governance structure, including: board independence, existing takeover
defenses, and any problematic governance concerns.
Management
Proposals to Ratify a Pill to Preserve Net Operating Losses (NOLs)
General
Recommendation: DWS’s policy is to generally vote against proposals to adopt
a poison pill for the stated purpose of protecting a company's net operating losses
(NOL) if the term of the pill would exceed the shorter of three years and the exhaustion
of the NOL.
DWS’s
policy is to vote case-by-case on management proposals for poison pill ratification, considering the following factors,
if the term of the pill would be the shorter of three years (or less) and the exhaustion of the NOL:
•
The
ownership threshold to transfer (NOL pills generally have a trigger slightly below 5 percent);
•
Shareholder
protection mechanisms (sunset provision, or commitment to cause expiration of the pill upon exhaustion or
expiration of NOLs);
•
The
company's existing governance structure including: board independence, existing takeover defenses, track record
of responsiveness to shareholders, and any other problematic governance concerns; and
•
Any
other factors that may be applicable.
Proxy
Voting Disclosure, Confidentiality, and Tabulation
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
regarding proxy voting mechanics, taking into consideration whether implementation
of the proposal is likely to enhance or protect shareholder rights. Specific issues
covered under the policy include, but are not limited to, confidential voting of individual proxies and ballots,
confidentiality of running vote tallies, and the treatment of abstentions and/or broker non-votes in the company's vote-counting
methodology.
While
a variety of factors may be considered in each analysis, the guiding principles are: transparency, consistency, and
fairness in the proxy voting process. The factors considered, as applicable to the proposal, may include:
•
The
scope and structure of the proposal;
•
The
company's stated confidential voting policy (or other relevant policies) and whether it ensures a “level
playing field”
by providing shareholder proponents with equal access to vote information prior to the annual meeting;
•
The
company's vote standard for management and shareholder proposals and whether it ensures consistency and
fairness in the proxy voting process and maintains the integrity of vote results;
•
Whether
the company's disclosure regarding its vote counting method and other relevant voting policies with respect
to management and shareholder proposals are consistent and clear;
•
Any
recent controversies or concerns related to the company's proxy voting mechanics;
•
Any
unintended consequences resulting from implementation of the proposal; and
•
Any
other factors that may be relevant.
Ratification
Proposals: Management Proposals to Ratify Existing Charter or Bylaw Provisions
General
Recommendation: DWS’s policy is to generally vote against management proposals
to ratify provisions of the company’s existing charter or bylaws, unless these
governance provisions align with best practice.
In
addition, voting against/withhold from individual directors, members of the governance committee, or the full board may
be warranted, considering:
•
The
presence of a shareholder proposal addressing the same issue on the same ballot;
•
The
board's rationale for seeking ratification;
•
Disclosure
of actions to be taken by the board should the ratification proposal fail;
•
Disclosure
of shareholder engagement regarding the board’s ratification request;
•
The
level of impairment to shareholders' rights caused by the existing provision;
•
The
history of management and shareholder proposals on the provision at the company’s past meetings;
•
Whether
the current provision was adopted in response to the shareholder proposal;
•
The
company's ownership structure; and
•
Previous
use of ratification proposals to exclude shareholder proposals.
Reimbursing
Proxy Solicitation Expenses
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
to reimburse proxy solicitation expenses.
When
voting in conjunction with support of a dissident slate, vote for the reimbursement of all appropriate proxy solicitation
expenses associated with the election.
DWS’s
policy is to generally vote for shareholder proposals calling for the reimbursement of reasonable costs incurred in
connection with nominating one or more candidates in a contested election where the following apply:
•
The
election of fewer than 50 percent of the directors to be elected is contested in the election;
•
One
or more of the dissident’s candidates is elected;
•
Shareholders
are not permitted to cumulate their votes for directors; and
The
election occurred, and the expenses were incurred, after the adoption of this bylaw.
Reincorporation
Proposals
General
Recommendation: Management or shareholder proposals to change a company's state
of incorporation should be evaluated case-by-case, giving consideration to both
financial and corporate governance concerns including the following:
•
Reasons
for reincorporation;
•
Comparison
of company's governance practices and provisions prior to and following the reincorporation; and
•
Comparison
of corporation laws of original state and destination state.
DWS’s
policy is to generally vote for reincorporation when the economic factors outweigh any neutral or negative governance
changes.
Shareholder
Ability to Act by Written Consent
General
Recommendation: DWS’s policy is to generally vote against management and shareholder
proposals to restrict or prohibit shareholders' ability to act by written consent.
DWS’s
policy is to generally vote for management and shareholder proposals that provide shareholders with the ability to
act by written consent, taking into account the following factors:
•
Shareholders'
current right to act by written consent;
•
The
inclusion of exclusionary or prohibitive language;
•
Investor
ownership structure; and
•
Shareholder
support of, and management's response to, previous shareholder proposals.
DWS’s
policy is to vote case-by-case on shareholder proposals if, in addition to the considerations above, the company has
the following governance and antitakeover provisions:
•
An
unfettered15
right for shareholders to call special meetings at a 10 percent threshold;
•
A
majority vote standard in uncontested director elections;
•
No
non-shareholder-approved pill; and
•
An
annually elected board.
15
“Unfettered”
means no restrictions on agenda items, no restrictions on the number of shareholders who can group together
to reach the 10 percent threshold, and only reasonable limits on when a meeting can be called: no greater than
30 days after the last annual meeting and no greater than 90 prior to the next annual meeting.
Shareholder
Ability to Call Special Meetings
General
Recommendation: DWS’s policy is to generally vote against management or shareholder
proposals to restrict or prohibit shareholders’ ability to call special meetings.
DWS’s
policy is to generally vote for management or shareholder proposals that provide shareholders with the ability to
call special meetings taking into account the following factors:
•
Shareholders’
current right to call special meetings;
•
Minimum
ownership threshold necessary to call special meetings (10 percent preferred);
•
The
inclusion of exclusionary or prohibitive language;
•
Investor
ownership structure; and
•
Shareholder
support of, and management’s response to, previous shareholder proposals.
Stakeholder
Provisions
General
Recommendation: DWS’s policy is to generally vote against proposals that ask
the board to consider non-shareholder constituencies or other non-financial effects
when evaluating a merger or business combination.
State
Antitakeover Statutes
General
Recommendation: DWS’s policy is to vote case-by-case on proposals to opt in or out of state takeover statutes (including
fair price provisions, stakeholder laws, poison pill endorsements, severance pay and labor contract provisions, and
anti-greenmail provisions).
Supermajority
Vote Requirements
General
Recommendation: DWS’s policy is to vote against proposals to require a supermajority
shareholder vote.
•
Vote
for management or shareholder proposals to reduce supermajority vote requirements. However, for companies with
shareholder(s) who have significant ownership levels, vote case-by-case, taking into account:
•
Quorum
requirements; and
Virtual
Shareholder Meetings
General
Recommendation: DWS’s policy is to generally vote for management proposals
allowing for the convening of shareholder meetings by electronic means, so long
as they do not preclude in-person meetings. Companies are encouraged to disclose
the circumstances under which virtual-only16
meetings would be held, and to allow for comparable rights and opportunities for
shareholders to participate electronically as they would have during an in-person meeting.
Vote
case-by-case on shareholder proposals concerning virtual-only meetings, considering:
•
Scope
and rationale of the proposal; and
•
Concerns
identified with the company’s prior meeting practices.
16
Virtual-only shareholder meeting” refers to a meeting of shareholders that
is held exclusively using technology without a corresponding in-person meeting.
CAPITAL
/ RESTRUCTURING
Capital
Adjustments
to Par Value of Common Stock
General
Recommendation: DWS’s policy is to vote for management proposals to reduce
the par value of common stock unless the action is being taken to facilitate an
anti-takeover device or some other negative corporate governance action.
Vote
for management proposals to eliminate par value.
Common
Stock Authorization
General
Recommendation: DWS’s policy is to generally vote for proposals to increase
the number of authorized common shares where the primary purpose of the increase
is to issue shares in connection with a transaction on the same ballot that warrants
support.
DWS’s
policy is to generally vote against proposals at companies with more than one class of common stock to increase the
number of authorized shares of the class of common stock that has superior voting rights.
DWS’s
policy is to generally vote against proposals to increase the number of authorized common shares if a vote for
a reverse stock split on the same ballot is warranted despite the fact that the authorized shares would not be reduced
proportionally.
DWS’s
policy is to vote case-by-case on all other proposals to increase the number of shares of common stock authorized for
issuance. Take into account company-specific factors that include, at a minimum, the following:
•
Past
Board Performance:
•
The
company's use of authorized shares during the last three years;
•
Disclosure
in the proxy statement of the specific purposes of the proposed increase;
•
Disclosure
in the proxy statement of specific and severe risks to shareholders of not approving the request; and
•
The
dilutive impact of the request as determined relative to an allowable increase calculated by typically 100 percent
of existing authorized shares that reflects the company's need for shares and total shareholder returns.
Dual
Class Structure
General
Recommendation: DWS’s policy is to generally vote against proposals to create
a new class of common stock unless:
•
The
company discloses a compelling rationale for the dual-class capital structure, such as:
•
The
company's auditor has concluded that there is substantial doubt about the company's ability to continue as a
going concern; or
•
The
new class of shares will be transitory;
•
The
new class is intended for financing purposes with minimal or no dilution to current shareholders in both the short
term and long term; and
•
The
new class is not designed to preserve or increase the voting power of an insider or significant shareholder.
Issue
Stock for Use with Rights Plan
General
Recommendation: DWS’s policy is to generally vote against proposals that increase
authorized common stock for the explicit purpose of implementing a non-shareholder-approved
shareholder rights plan (poison pill).
Preemptive
Rights
General
Recommendation: DWS’s policy is to generally vote case-by-case on shareholder
proposals that seek preemptive rights, taking into consideration:
•
The
size of the company;
•
The
shareholder base; and
•
The
liquidity of the stock.
Preferred
Stock Authorization
General
Recommendation: DWS’s policy is to generally vote for proposals to increase
the number of authorized preferred shares where the primary purpose of the increase
is to issue shares in connection with a transaction on the same ballot that warrants
support.
DWS’s
policy is to vote against proposals at companies with more than one class or series of preferred stock to increase the
number of authorized shares of the class or series of preferred stock that has superior voting rights.
DWS’s
policy is to vote case-by-case on all other proposals to increase the number of shares of preferred stock authorized for
issuance. Take into account company-specific factors that include, at a minimum, the following:
•
Past
Board Performance:
•
The
company's use of authorized preferred shares during the last three years;
•
Disclosure
in the proxy statement of the specific purposes for the proposed increase;
•
Disclosure
in the proxy statement of specific and severe risks to shareholders of not approving the request;
•
In
cases where the company has existing authorized preferred stock, the dilutive impact of the request as determined by
an allowable increase calculated by typically 100 percent of existing authorized shares that reflects the company's need
for shares and total shareholder returns; and
•
Whether
the shares requested are blank check preferred shares that can be used for antitakeover purposes.
Recapitalization
Plans
General
Recommendation: DWS’s policy is to generally vote case-by-case on recapitalizations
(reclassifications of securities), taking into account the following:
•
More
simplified capital structure;
•
Fairness
of conversion terms;
•
Impact
on voting power and dividends;
•
Reasons
for the reclassification;
•
Conflicts
of interest; and
•
Other
alternatives considered.
Reverse
Stock Splits
General
Recommendation: DWS’s policy is to generally vote for management proposals
to implement a reverse stock split if:
•
The
number of authorized shares will be proportionately reduced; or
•
The
effective increase in authorized shares is equal to or less than the allowable increase calculated in accordance with
ISS' Common Stock Authorization policy.
DWS’s
policy is to generally vote case-by-case on proposals that do not meet either of the above conditions, taking into
consideration the following factors:
•
Stock
exchange notification to the company of a potential delisting;
•
Disclosure
of substantial doubt about the company's ability to continue as a going concern without additional financing;
•
The
company's rationale; or
•
Other
factors as applicable.
Share
Repurchase Programs
General
Recommendation: For U.S.-incorporated companies, and foreign-incorporated U.S. Domestic
Issuers that are traded solely on U.S. exchanges, DWS’s policy is to generally
vote for management proposals to institute open-market share repurchase plans in
which all shareholders may participate on equal terms, or to grant the board authority to conduct
open-market repurchases, in the absence of company-specific concerns regarding:
•
The
use of buybacks to inappropriately manipulate incentive compensation metrics,
•
Threats
to the company's long-term viability, or
•
Other
company-specific factors as warranted.
DWS’s
policy is to generally vote case-by-case on proposals to repurchase shares directly from specified shareholders, balancing
the stated rationale against the possibility for the repurchase authority to be misused, such as to repurchase shares
from insiders at a premium to market price.
Share
Repurchase Programs Shareholder Proposals
General
Recommendation: DWS’s policy is to generally vote against shareholder proposals
prohibiting executives from selling shares of company stock during periods in which
the company has announced that it may or will be repurchasing shares of its stock.
Vote for the proposal when there is a pattern of abuse by executives exercising options or
selling shares during periods of share buybacks.
Stock
Distributions: Splits and Dividends
General
Recommendation: DWS’s policy is to generally vote for management proposals
to increase the common share authorization for stock split or stock dividend, provided
that the effective increase in authorized shares is equal to or is less than the
allowable increase calculated in accordance with ISS' Common Stock Authorization policy.
Tracking
Stock
General
Recommendation: DWS’s policy is to generally vote case-by-case on the creation
of tracking stock, weighing the strategic value of the transaction against such
factors as:
•
Adverse
governance changes;
•
Excessive
increases in authorized capital stock;
•
Unfair
method of distribution;
•
Diminution
of voting rights;
•
Adverse
conversion features;
•
Negative
impact on stock option plans; and
•
Alternatives
such as spin-off.
Restructuring
Appraisal
Rights
General
Recommendation: DWS’s policy is to generally vote for proposals to restore
or provide shareholders with rights of appraisal.
Asset
Purchases
General
Recommendation: DWS’s policy is to generally vote case-by-case on asset purchase
proposals, considering the following factors:
•
Financial
and strategic benefits;
•
How
the deal was negotiated;
•
Other
alternatives for the business;
Asset
Sales
General
Recommendation: DWS’s policy is to generally vote case-by-case on asset sales,
considering the following factors:
•
Impact
on the balance sheet/working capital;
•
Potential
elimination of diseconomies;
•
Anticipated
financial and operating benefits;
•
Anticipated
use of funds;
•
Value
received for the asset;
•
How
the deal was negotiated;
Bundled
Proposals
General
Recommendation: DWS’s policy is to generally vote case-by-case on bundled
or “conditional”
proxy proposals. In the case of items that are conditioned upon each other, examine
the benefits and costs of the packaged items. In instances when the joint effect
of the conditioned items is not in shareholders’ best interests, vote against the proposals. If
the combined effect is positive, support such proposals.
Conversion
of Securities
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
regarding conversion of securities. When evaluating these proposals, the investor
should review the dilution to existing shareholders, the conversion price relative
to market value, financial issues, control issues, termination penalties, and conflicts of interest.
DWS’s
policy is to vote for the conversion if it is expected that the company will be subject to onerous penalties or will
be forced to file for bankruptcy if the transaction is not approved.
Corporate
Reorganization/Debt Restructuring/Prepackaged Bankruptcy Plans/Reverse Leveraged Buyouts/Wrap
Plans
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
to increase common and/or preferred shares and to issue shares as part of a debt
restructuring plan, after evaluating:
•
Dilution
to existing shareholders' positions;
•
Terms
of the offer - discount/premium in purchase price to investor, including any fairness opinion; termination penalties;
exit strategy;
•
Financial
issues - company's financial situation; degree of need for capital; use of proceeds; effect of the financing on
the company's cost of capital;
•
Management's
efforts to pursue other alternatives;
•
Control
issues - change in management; change in control, guaranteed board and committee seats; standstill provisions;
voting agreements; veto power over certain corporate actions; and
•
Conflict
of interest - arm's length transaction, managerial incentives.
Vote
for the debt restructuring if it is expected that the company will file for bankruptcy if the transaction is not approved.
Formation
of Holding Company
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
regarding the formation of a holding company, taking into consideration the following:
•
The
reasons for the change;
•
Any
financial or tax benefits;
•
Increases
in capital structure; and
•
Changes
to the articles of incorporation or bylaws of the company.
Absent
compelling financial reasons to recommend for the transaction, vote against the formation of a holding company if
the transaction would include either of the following:
•
Increases
in common or preferred stock in excess of the allowable maximum (see discussion under “Capital”);
or
•
Adverse
changes in shareholder rights.
Going
Private and Going Dark Transactions (LBOs and Minority Squeeze-outs)
General
Recommendation: DWS’s policy is to generally vote case-by-case on going private
transactions, taking into account the following:
•
How
the deal was negotiated;
•
Other
alternatives/offers considered; and
DWS’s
policy is to vote case-by-case on going dark transactions, determining whether the transaction enhances shareholder value
by taking into consideration:
•
Whether
the company has attained benefits from being publicly-traded (examination of trading volume, liquidity, and
market research of the stock);
•
Balanced
interests of continuing vs. cashed-out shareholders, taking into account the following:
•
Are
all shareholders able to participate in the transaction?
•
Will
there be a liquid market for remaining shareholders following the transaction?
•
Does
the company have strong corporate governance?
•
Will
insiders reap the gains of control following the proposed transaction?
•
Does
the state of incorporation have laws requiring continued reporting that may benefit shareholders?
Joint
Ventures
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
to form joint ventures, taking into account the following:
•
Percentage
of assets/business contributed;
•
Financial
and strategic benefits;
•
Other
alternatives; and
Liquidations
General
Recommendation: DWS’s policy is to generally vote case-by-case on liquidations,
taking into account the following:
•
Management’s
efforts to pursue other alternatives;
•
Appraisal
value of assets; and
•
The
compensation plan for executives managing the liquidation.
DWS’s
policy is to vote for the liquidation if the company will file for bankruptcy if the proposal is not approved.
Mergers
and Acquisitions
General
Recommendation: DWS’s policy is to generally vote case-by-case on mergers
and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction,
balancing various and sometimes countervailing factors including:
•
Valuation
- Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While the fairness
opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed on
the offer premium, market reaction, and strategic rationale.
•
Market
reaction - How has the market responded to the proposed deal? A negative market
reaction should cause closer scrutiny of a deal.
•
Strategic
rationale - Does the deal make sense strategically? From where is the value derived?
Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably
achievable. Management should also have a favorable track record of successful integration
of historical acquisitions.
•
Negotiations
and process - Were the terms of the transaction negotiated at arm's-length? Was
the process fair and equitable? A fair process helps to ensure the best price for
shareholders. Significant negotiation “wins”
can also signify the deal makers' competency. The comprehensiveness of the sales
process (e.g., full auction, partial auction, no auction) can also affect shareholder
value.
•
Conflicts
of interest - Are insiders benefiting from the transaction disproportionately and
inappropriately as compared to non-insider shareholders? As the result of potential
conflicts, the directors and officers of the company may be more likely to vote
to approve a merger than if they did not hold these interests. Consider whether these interests
may have influenced these directors and officers to support or recommend the merger. The CIC figure presented
in the “ISS Transaction
Summary” section of
this report is an aggregate figure that can in certain cases be a misleading indicator
of the true value transfer from shareholders to insiders. Where such figure appears to be
excessive, analyze the underlying assumptions to determine whether a potential conflict exists.
•
Governance
- Will the combined company have a better or worse governance profile than the current governance profiles
of the respective parties to the transaction? If the governance profile is to change for the worse, the burden
is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance.
Private
Placements/Warrants/Convertible Debentures
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
regarding private placements, warrants, and convertible debentures taking into consideration:
•
Dilution
to existing shareholders' position: The amount and timing of shareholder ownership dilution should be weighed
against the needs and proposed shareholder benefits of the capital infusion. Although newly issued common
stock, absent preemptive rights, is typically dilutive to existing shareholders, share price appreciation is
often the necessary event to trigger the exercise of “out
of the money” warrants
and convertible debt. In these instances from a value standpoint, the negative impact
of dilution is mitigated by the increase in the company's stock price that must
occur to trigger the dilutive event.
•
Terms
of the offer (discount/premium in purchase price to investor, including any fairness opinion, conversion features,
termination penalties, exit strategy):
−
The
terms of the offer should be weighed against the alternatives of the company and in light of company's financial
condition. Ideally, the conversion price for convertible debt and the exercise price for warrants should be
at a premium to the then prevailing stock price at the time of private placement.
−
When
evaluating the magnitude of a private placement discount or premium, consider factors that influence the
discount or premium, such as, liquidity, due diligence costs, control and monitoring costs, capital scarcity, information
asymmetry, and anticipation of future performance.
−
The
company's financial condition;
−
Degree
of need for capital;
−
Effect
of the financing on the company's cost of capital;
−
Current
and proposed cash burn rate;
−
Going
concern viability and the state of the capital and credit markets.
•
Management's
efforts to pursue alternatives and whether the company engaged in a process to evaluate alternatives: A
fair, unconstrained process helps to ensure the best price for shareholders. Financing alternatives can include joint
ventures, partnership, merger, or sale of part or all of the company.
−
Guaranteed
board and committee seats;
−
Veto
power over certain corporate actions; and
−
Minority
versus majority ownership and corresponding minority discount or majority control premium.
−
Conflicts
of interest should be viewed from the perspective of the company and the investor.
−
Were
the terms of the transaction negotiated at arm's length? Are managerial incentives aligned with shareholder interests?
−
The
market's response to the proposed deal. A negative market reaction is a cause for concern. Market reaction
may be addressed by analyzing the one-day impact on the unaffected stock price.
Vote
for the private placement, or for the issuance of warrants and/or convertible debentures in a private placement, if
it is expected that the company will file for bankruptcy if the transaction is not approved.
Reorganization/Restructuring
Plan (Bankruptcy)
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
to common shareholders on bankruptcy plans of reorganization, considering the following
factors including, but not limited to:
•
Estimated
value and financial prospects of the reorganized company;
•
Percentage
ownership of current shareholders in the reorganized company;
•
Whether
shareholders are adequately represented in the reorganization process (particularly through the existence of
an Official Equity Committee);
•
The
cause(s) of the bankruptcy filing, and the extent to which the plan of reorganization addresses the cause(s);
•
Existence
of a superior alternative to the plan of reorganization; and
•
Governance
of the reorganized company.
Special
Purpose Acquisition Corporations (SPACs)
General
Recommendation: DWS’s policy is to generally vote case-by-case on SPAC mergers
and acquisitions taking into account the following:
•
Valuation
- Is the value being paid by the SPAC reasonable? SPACs generally lack an independent fairness opinion and
the financials on the target may be limited. Compare the conversion price with the intrinsic value of the target company
provided in the fairness opinion. Also, evaluate the proportionate value of the combined entity attributable to
the SPAC IPO shareholders versus the pre-merger value of SPAC. Additionally, a private company discount may
be applied to the target, if it is a private entity.
•
Market
reaction - How has the market responded to the proposed deal? A negative market
reaction may be a cause for concern. Market reaction may be addressed by analyzing
the one-day impact on the unaffected stock price.
•
Deal
timing - A main driver for most transactions is that the SPAC charter typically
requires the deal to be complete within 18 to 24 months, or the SPAC is to be liquidated.
Evaluate the valuation, market reaction, and potential conflicts of interest for
deals that are announced close to the liquidation date.
•
Negotiations
and process - What was the process undertaken to identify potential target companies
within specified industry or location specified in charter? Consider the background
of the sponsors.
•
Conflicts
of interest - How are sponsors benefiting from the transaction compared to IPO shareholders?
Potential conflicts could arise if a fairness opinion is issued by the insiders
to qualify the deal rather than a third party or if management is encouraged to
pay a higher price for the target because of an 80 percent rule (the charter requires that
the fair market value of the target is at least equal to 80 percent of net assets of the SPAC). Also, there may be
sense of urgency by the management team of the SPAC to close the deal since its charter typically requires a
transaction to be completed within the 18-24 month timeframe.
•
Voting
agreements - Are the sponsors entering into enter into any voting agreements/tender
offers with shareholders who are likely to vote against the proposed merger or exercise
conversion rights?
•
Governance
- What is the impact of having the SPAC CEO or founder on key committees following the proposed merger?
Special
Purpose Acquisition Corporations (SPACs) - Proposals for Extensions
General
Recommendation: DWS’s policy is to generally vote case-by-case on SPAC extension
proposals taking into account the length of the requested extension, the status
of any pending transaction(s) or progression of the acquisition process, any added
incentive for non-redeeming shareholders, and any prior extension requests.
•
Length
of request: Typically, extension requests range from two to six months, depending
on the progression of the SPAC's acquisition process.
•
Pending
transaction(s) or progression of the acquisition process: Sometimes an initial business
combination was already put to a shareholder vote, but, for varying reasons, the
transaction could not be consummated by the termination date and the SPAC is requesting
an extension. Other times, the SPAC has entered into a definitive transaction agreement,
but needs additional time to consummate or hold the shareholder meeting.
•
Added
incentive for non-redeeming shareholders: Sometimes the SPAC sponsor (or other insiders)
will contribute, typically as a loan to the company, additional funds that will
be added to the redemption value of each public share as long as such shares are
not redeemed in connection with the extension request. The purpose of the “equity
kicker” is to incentivize
shareholders to hold their shares through the end of the requested extension or until
the time the transaction is put to a shareholder vote, rather than electing redemption at the extension proposal meeting.
•
Prior
extension requests: Some SPACs request additional time beyond the extension period
sought in prior extension requests.
Spin-offs
General
Recommendation: DWS’s policy is to generally vote case-by-case on spin-offs,
considering:
•
Tax
and regulatory advantages;
•
Planned
use of the sale proceeds;
•
Benefits
to the parent company;
•
Corporate
governance changes;
•
Changes
in the capital structure.
Value
Maximization Shareholder Proposals
General
Recommendation: DWS’s policy is to generally vote case-by-case on shareholder
proposals seeking to maximize shareholder value by:
•
Hiring
a financial advisor to explore strategic alternatives;
•
Selling
the company; or
•
Liquidating
the company and distributing the proceeds to shareholders.
These
proposals should be evaluated based on the following factors:
•
Prolonged
poor performance with no turnaround in sight;
•
Signs
of entrenched board and management (such as the adoption of takeover defenses);
•
Strategic
plan in place for improving value;
•
Likelihood
of receiving reasonable value in a sale or dissolution; and
•
The
company actively exploring its strategic options, including retaining a financial advisor.
COMPENSATION
Executive
Pay Evaluation
Advisory
Votes on Executive Compensation—Management Proposals (Say-on-Pay)
General
Recommendation: DWS’s policy is to generally vote case-by-case on ballot items
related to executive pay and practices, as well as certain aspects of outside director
compensation.
DWS’s
policy is to vote against Advisory Votes on Executive Compensation (Say-on-Pay or “SOP”)
if:
•
There
is an unmitigated misalignment between CEO pay and company performance (pay for performance);
•
The
company maintains significant problematic pay practices;
•
The
board exhibits a significant level of poor communication and responsiveness to shareholders.
DWS’s
policy is to generally vote against or withhold from the members of the Compensation Committee and potentially the
full board if:
•
There
is no SOP on the ballot, and an against vote on an SOP would otherwise be warranted due to pay-for-performance misalignment,
problematic pay practices, or the lack of adequate responsiveness on compensation issues raised previously,
or a combination thereof;
•
The
board fails to respond adequately to a previous SOP proposal that received less than 70 percent support of votes
cast;
•
The
company has recently practiced or approved problematic pay practices, such as option repricing or option backdating;
or
•
The
situation is egregious.
Frequency
of Advisory Vote on Executive Compensation (“Say
When on Pay”)
General
Recommendation: DWS’s policy is to generally vote for annual advisory votes
on compensation, which provide the most consistent and clear communication channel
for shareholder concerns about companies' executive pay programs.
Voting
on Golden Parachutes in an Acquisition, Merger, Consolidation, or Proposed Sale
General
Recommendation: DWS’s policy is to generally vote case-by-case on say on Golden
Parachute proposals, including consideration of existing change-in-control arrangements
maintained with named executive officers but also considering new or extended arrangements.
Features
that may result in an “against”
recommendation include one or more of the following, depending on the number, magnitude,
and/or timing of issue(s):
•
Single-
or modified-single-trigger cash severance;
•
Single-trigger
acceleration of unvested equity awards;
•
Full
acceleration of equity awards granted shortly before the change in control;
•
Acceleration
of performance awards above the target level of performance without compelling rationale;
•
Excessive
cash severance (generally >3x base salary and bonus);
•
Excise
tax gross-ups triggered and payable;
•
Excessive
golden parachute payments (on an absolute basis or as a percentage of transaction equity value); or
•
Recent
amendments that incorporate any problematic features (such as those above) or recent actions (such as extraordinary
equity grants) that may make packages so attractive as to influence merger agreements that may not
be in the best interests of shareholders; or
•
The
company's assertion that a proposed transaction is conditioned on shareholder approval of the golden parachute advisory
vote.
Recent
amendment(s) that incorporate problematic features will tend to carry more weight on the overall analysis. However,
the presence of multiple legacy problematic features will also be closely scrutinized.
In
cases where the golden parachute vote is incorporated into a company's advisory vote on compensation (management say-on-pay),
DWS will evaluate the say-on-pay proposal in accordance with these guidelines, which may give higher weight
to that component of the overall evaluation.
Equity-Based
and Other Incentive Plans
General
Recommendation: DWS’s policy is to generally vote case-by-case on certain
equity-based compensation plans17
depending on a combination of certain plan features and equity grant practices, where positive factors may counterbalance
negative factors, and vice versa, as evaluated using an “Equity
Plan Scorecard” (EPSC)
approach with three pillars:
•
Plan
Cost: The total estimated cost of the company’s equity plans relative to industry/market
cap peers, measured by the company's estimated Shareholder Value Transfer (SVT)
in relation to peers and considering both:
−
SVT
based on new shares requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants;
and
−
SVT
based only on new shares requested plus shares remaining for future grants.
−
Quality
of disclosure around vesting upon a change in control (CIC);
−
Discretionary
vesting authority;
−
Liberal
share recycling on various award types;
−
Lack
of minimum vesting period for grants made under the plan;
−
Dividends
payable prior to award vesting.
−
The
company’s three-year burn rate relative to its industry/market cap peers;
−
Vesting
requirements in CEO's recent equity grants (3-year look-back);
−
The
estimated duration of the plan (based on the sum of shares remaining available and the new shares requested,
divided by the average annual shares granted in the prior three years);
−
The
proportion of the CEO's most recent equity grants/awards subject to performance conditions;
−
Whether
the company maintains a sufficient claw-back policy;
−
Whether
the company maintains sufficient post-exercise/vesting share-holding requirements.
17
Proposals evaluated under the EPSC policy generally include those to approve or
amend (1) stock option plans for employees and/or employees and directors, (2) restricted
stock plans for employees and/or employees and directors, and (3) omnibus stock
incentive plans for employees and/or employees and directors; amended plans will be further evaluated
case-by-case.
DWS’s
policy is to generally vote against the plan proposal if the combination of above factors indicates that the plan is
not, overall, in shareholders' interests, or if any of the following egregious factors (“overriding
factors”) apply:
•
Awards
may vest in connection with a liberal change-of-control definition;
•
The
plan would permit repricing or cash buyout of underwater options without shareholder approval (either by expressly
permitting it – for NYSE and Nasdaq listed companies – or by not prohibiting it when the company has a
history of repricing – for non-listed companies);
•
The
plan is a vehicle for problematic pay practices or a significant pay-for-performance disconnect under certain circumstances;
•
The
plan is excessively dilutive to shareholders' holdings;
•
The
plan contains an evergreen (automatic share replenishment) feature; or
•
Any
other plan features are determined to have a significant negative impact on shareholder interests.
Further
Information on certain EPSC Factors:
Shareholder
Value Transfer (SVT)
The
cost of the equity plans is expressed as Shareholder Value Transfer (SVT), which is measured using a binomial option
pricing model that assesses the amount of shareholders’ equity flowing out of the company to employees and directors.
SVT is expressed as both a dollar amount and as a percentage of market value, and includes the new shares proposed,
shares available under existing plans, and shares granted but unexercised (using two measures, in the case of
plans subject to the Equity Plan Scorecard evaluation, as noted above). All award types are valued. For omnibus plans,
unless limitations are placed on the most expensive types of awards (for example, full-value awards), the assumption is
made that all awards to be granted will be the most expensive types.
For
proposals that are not subject to the Equity Plan Scorecard evaluation, Shareholder Value Transfer is reasonable if
it falls below a company-specific benchmark. The benchmark is determined as follows: The top quartile performers in
each industry group (using the Global Industry Classification Standard: GICS) are identified. Benchmark SVT levels for
each industry are established based on these top performers’ historic SVT. Regression analyses are run on each industry
group to identify the variables most strongly correlated to SVT. The benchmark industry SVT level is then adjusted
upwards or downwards for the specific company by plugging the company-specific performance measures, size
and cash compensation into the industry cap equations to arrive at the company’s benchmark18.
18
For plans evaluated under the Equity Plan Scorecard policy, the company's SVT benchmark
is considered along with other factors.
Three-Year
Burn Rate
Burn-rate
benchmarks (utilized in Equity Plan Scorecard evaluations) are calculated as the greater of: (1) the mean (μ) plus
one standard deviation (σ) of the company's GICS group segmented by S&P 500, Russell 3000 index (less the S&P500),
and non-Russell 3000 index; and (2) two percent of weighted common shares outstanding. In addition, year-over-year
burn-rate benchmark changes will be limited to a maximum of two (2) percentage points plus or minus the
prior year's burn-rate benchmark.
Egregious
Factors
Liberal
Change in Control Definition
Generally
vote against equity plans if the plan has a liberal definition of change in control and the equity awards could vest
upon such liberal definition of change in control, even though an actual change in control may not occur. Examples of
such a definition include, but are not limited to, announcement or commencement of a tender offer, provisions for acceleration
upon a “potential”
takeover, shareholder approval of a merger or other transactions, or similar language.
Repricing
Provisions
Vote
against plans that expressly permit the repricing or exchange of underwater stock options/stock appreciate rights (SARs)
without prior shareholder approval. “Repricing”
typically includes the ability to do any of the following:
•
Amend
the terms of outstanding options or SARs to reduce the exercise price of such outstanding options or SARs;
•
Cancel
outstanding options or SARs in exchange for options or SARs with an exercise price that is less than the exercise
price of the original options or SARs;
•
Cancel
underwater options in exchange for stock awards; or
•
Provide
cash buyouts of underwater options.
Also,
vote against or withhold from members of the Compensation Committee who approved repricing (as defined above
or otherwise determined by ISS), without prior shareholder approval, even if such repricings are allowed in their equity
plan.
Vote
against plans that do not expressly prohibit repricing or cash buyout of underwater options without shareholder approval
if the company has a history of repricing/buyouts without shareholder approval, and the applicable listing standards
would not preclude them from doing so.
Problematic
Pay Practices or Significant Pay-for-Performance Disconnect
If
the equity plan on the ballot is a vehicle for problematic pay practices, vote against the plan.
ISS
may recommend a vote against the equity plan if the plan is determined to be a vehicle for pay-for-performance misalignment.
Considerations in voting against the equity plan may include, but are not limited to:
•
Severity
of the pay-for-performance misalignment;
•
Whether
problematic equity grant practices are driving the misalignment; and/or
•
Whether
equity plan awards have been heavily concentrated to the CEO and/or the other NEOs.
Amending
Cash and Equity Plans (including Approval for Tax Deductibility (162(m))
General
Recommendation: DWS’s policy is to generally vote case-by-case on amendments
to cash and equity incentive plans.
DWS’s
policy is to vote for proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:
•
Addresses
administrative features only; or
•
Seeks
approval for Section 162(m) purposes only and the plan administering committee consists entirely of independent directors.
Note that if the company is presenting the plan to shareholders for the first time for any reason (including after
the company’s initial public offering), or if the proposal is bundled with other material plan amendments, then
the recommendation will be case-by-case (see below).
DWS’s
policy is to vote against proposals to amend executive cash, stock, or cash and stock incentive plans if the proposal:
•
Seeks
approval for Section 162(m) purposes only, and the plan administering committee does not consist entirely of
independent directors.
Vote
case-by-case on all other proposals to amend c ash incentive plans. This includes plans presented to shareholders for
the first time after the company's IPO and/or proposals that bundle material amendment(s) other than those for Section
162(m) purposes.
Vote
case-by-case on all other proposals to amend equity incentive plans, considering the following:
•
If
the proposal requests additional shares and/or the amendments include a term extension or addition of full value
awards as an award type, the recommendation will be based on the Equity Plan Scorecard evaluation as well
as an analysis of the overall impact of the amendments.
•
If
the plan is being presented to shareholders for the first time (including after the company's IPO), whether or not
additional shares are being requested, the recommendation will be based on the Equity Plan Scorecard evaluation as
well as an analysis of the overall impact of any amendments.
•
If
there is no request for additional shares and the amendments do not include a term extension or addition of full
value awards as an award type, then the recommendation will be based entirely on an analysis of the overall impact
of the amendments, and the EPSC evaluation will be shown only for informational purposes.
In
the first two case-by-case evaluation scenarios, the EPSC evaluation/score is the more heavily weighted consideration.
Specific
Treatment of Certain Award Types in Equity Plan Evaluations
Dividend
Equivalent Rights
Options
that have Dividend Equivalent Rights (DERs) associated with them will have a higher calculated award value than
those without DERs under the binomial model, based on the value of these dividend streams. The higher value will
be applied to new shares, shares available under existing plans, and shares awarded but not exercised per the plan
specifications. DERS transfer more shareholder equity to employees and non-employee directors and this cost should
be captured.
Operating
Partnership (OP) Units in Equity Plan Analysis of Real Estate Investment Trusts (REITs)
For
Real Estate Investment Trusts (REITS), include the common shares issuable upon conversion of outstanding Operating Partnership
(OP) units in the share count for the purposes of determining: (1) market capitalization in the Shareholder Value
Transfer (SVT) analysis and (2) shares outstanding in the burn rate analysis.
Other
Compensation Plans
401(k)
Employee Benefit Plans
General
Recommendation: DWS’s policy is to generally vote for proposals to implement
a 401(k) savings plan for employees.
Employee
Stock Ownership Plans (ESOPs)
General
Recommendation: DWS’s policy is to generally vote for proposals to implement
an ESOP or increase authorized shares for existing ESOPs, unless the number of shares
allocated to the ESOP is excessive (more than five percent of outstanding shares).
Employee
Stock Purchase Plans—Qualified Plans
General
Recommendation: DWS’s policy is to generally vote case-by-case on qualified
employee stock purchase plans. Vote for employee stock purchase plans where all
of the following apply:
•
Purchase
price is at least 85 percent of fair market value;
•
Offering
period is 27 months or less; and
•
The
number of shares allocated to the plan is 10 percent or less of the outstanding shares.
Vote
against qualified employee stock purchase plans where when the plan features do not meet all of the above criteria.
Employee
Stock Purchase Plans—Non-Qualified Plans
General
Recommendation: DWS’s policy is to generally vote case-by-case on nonqualified
employee stock purchase plans. Vote for nonqualified employee stock purchase plans
with all the following features:
•
Broad-based
participation;
•
Limits
on employee contribution, which may be a fixed dollar amount or expressed as a percent of base salary;
•
Company
matching contribution up to 25 percent of employee’s contribution, which is effectively a discount of 20
percent from market value; and
•
No
discount on the stock price on the date of purchase when there is a company matching contribution.
DWS’s
policy is to generally vote against nonqualified employee stock purchase plans when the plan features do not meet
all of the above criteria. If the matching contribution or effective discount exceeds the above, DWS may evaluate the
SVT cost of the plan as part of the assessment.
Option
Exchange Programs/Repricing Options
General
Recommendation: DWS’s policy is to generally vote case-by-case on management
proposals seeking approval to exchange/reprice options taking into consideration:
•
Historic
trading patterns—the
stock price should not be so volatile that the options are likely to be back “in-the-money”
over the near term;
•
Rationale
for the re-pricing—was
the stock price decline beyond management's control?;
•
Is
this a value-for-value exchange?;
•
Are
surrendered stock options added back to the plan reserve?;
•
Timing—repricing
should occur at least one year out from any precipitous drop in company's stock price;
•
Option
vesting—does
the new option vest immediately or is there a black-out period?;
•
Term
of the option—the
term should remain the same as that of the replaced option;
•
Exercise
price—should
be set at fair market or a premium to market;
•
Participants—executive
officers and directors must be excluded.
If
the surrendered options are added back to the equity plans for re-issuance, then also take into consideration the company’s
total cost of equity plans and its three-year average burn rate.
In
addition to the above considerations, evaluate the intent, rationale, and timing of the repricing proposal. The proposal should
clearly articulate why the board is choosing to conduct an exchange program at this point in time. Repricing underwater
options after a recent precipitous drop in the company’s stock price demonstrates poor timing and warrants additional
scrutiny. Also, consider the terms of the surrendered options, such as the grant date, exercise price and vesting
schedule. Grant dates of surrendered options should be far enough back (two to three years) so as not to suggest
that repricings are being done to take advantage of short-term downward price movements. Similarly, the exercise
price of surrendered options should be above the 52-week high for the stock price.
Vote
for shareholder proposals to put option repricings to a shareholder vote.
Stock
Plans in Lieu of Cash
General
Recommendation: DWS’s policy is to generally vote case-by-case on plans that provide participants with the option
of taking all or a portion of their cash compensation in the form of stock.
Vote
for non-employee director-only equity plans that provide a dollar-for-dollar cash-for-stock exchange.
Vote
case-by-case on plans which do not provide a dollar-for-dollar cash for stock exchange. In cases where the exchange is
not dollar-for-dollar, the request for new or additional shares for such equity program will be considered using the binomial
option pricing model. In an effort to capture the total cost of total compensation, DWS will not make any adjustments
to carve out the in-lieu-of cash compensation.
Transfer
Stock Option (TSO) Programs
General
Recommendation: One-time Transfers: DWS’s policy is to generally vote against or withhold from compensation committee
members if they fail to submit one-time transfers to shareholders for approval.
Vote
case-by-case on one-time transfers. Vote for if:
•
Executive
officers and non-employee directors are excluded from participating;
•
Stock
options are purchased by third-party financial institutions at a discount to their fair value using option pricing models
such as Black-Scholes or a Binomial Option Valuation or other appropriate financial models; and
•
There
is a two-year minimum holding period for sale proceeds (cash or stock) for all participants.
Additionally,
management should provide a clear explanation of why options are being transferred to a third-party institution
and whether the events leading up to a decline in stock price were beyond management's control. A review of
the company's historic stock price volatility should indicate if the options are likely to be back “in-the-money”
over the near term.
Ongoing
TSO program: Vote against equity plan proposals if the details of ongoing TSO programs are not provided to shareholders.
Since TSOs will be one of the award types under a stock plan, the ongoing TSO program, structure and mechanics
must be disclosed to shareholders. The specific criteria to be considered in evaluating these proposals include,
but not limited, to the following:
•
Cost
of the program and impact of the TSOs on company’s total option expense; and
•
Option
repricing policy.
Amendments
to existing plans that allow for introduction of transferability of stock options should make clear that only
options granted post-amendment shall be transferable.
Director
Compensation
Shareholder
Ratification of Director Pay Programs
General
Recommendation: DWS’s policy is to generally vote case-by-case on management
proposals seeking ratification of non-employee director compensation, based on the
following factors:
•
If
the equity plan under which non-employee director grants are made is on the ballot, whether or not it warrants support;
and
•
An
assessment of the following qualitative factors:
•
The
relative magnitude of director compensation as compared to companies of a similar profile;
•
The
presence of problematic pay practices relating to director compensation;
•
Director
stock ownership guidelines and holding requirements;
•
Equity
award vesting schedules;
•
The
mix of cash and equity-based compensation;
•
Meaningful
limits on director compensation;
•
The
availability of retirement benefits or perquisites; and
•
The
quality of disclosure surrounding director compensation.
Equity
Plans for Non-Employee Directors
General
Recommendation: DWS’s policy is to generally vote case-by-case on compensation
plans for non-employee directors, based on:
•
The
total estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company’s
estimated Shareholder Value Transfer (SVT) based on new shares requested plus shares remaining for
future grants, plus outstanding unvested/unexercised grants;
•
The
company’s three-year burn rate relative to its industry/market cap peers (in certain circumstances); and
•
The
presence of any egregious plan features (such as an option repricing provision or liberal CIC vesting risk).
On
occasion, non-employee director stock plans will exceed the plan cost or burn-rate benchmarks when combined with
employee or executive stock plans. In such cases, vote case-by-case on the plan taking into consideration the following
qualitative factors:
•
The
relative magnitude of director compensation as compared to companies of a similar profile;
•
The
presence of problematic pay practices relating to director compensation;
•
Director
stock ownership guidelines and holding requirements;
•
Equity
award vesting schedules;
•
The
mix of cash and equity-based compensation;
•
Meaningful
limits on director compensation;
•
The
availability of retirement benefits or perquisites; and
•
The
quality of disclosure surrounding director compensation.
Non-Employee
Director Retirement Plans
General
Recommendation: DWS’s policy is to generally vote against retirement plans
for non-employee directors. Vote for shareholder proposals to eliminate retirement
plans for non-employee directors.
Shareholder
Proposals on Compensation
Bonus
Banking/Bonus Banking “Plus”
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
seeking deferral of a portion of annual bonus pay, with ultimate payout linked to
sustained results for the performance metrics on which the bonus was earned (whether
for the named executive officers or a wider group of employees), taking into account the following factors:
•
The
company’s past practices regarding equity and cash compensation;
•
Whether
the company has a holding period or stock ownership requirements in place, such as a meaningful retention ratio
(at least 50 percent for full tenure); and
•
Whether
the company has a rigorous claw-back policy in place.
Compensation
Consultants—Disclosure of Board or Company’s Utilization
General
Recommendation: DWS’s policy is to generally vote for shareholder proposals
seeking disclosure regarding the company, board, or compensation committee’s
use of compensation consultants, such as company name, business relationship(s),
and fees paid.
Disclosure/Setting
Levels or Types of Compensation for Executives and Directors
General
Recommendation: DWS’s policy is to generally vote for shareholder proposals
seeking additional disclosure of executive and director pay information, provided
the information requested is relevant to shareholders' needs, would not put the
company at a competitive disadvantage relative to its industry, and is not unduly burdensome to the company.
DWS’s
policy is to generally vote against shareholder proposals seeking to set absolute levels on compensation or otherwise
dictate the amount or form of compensation (such as types of compensation elements or specific metrics) to
be used for executive or directors.
DWS’s
policy is to generally vote against shareholder proposals that mandate a minimum amount of stock that directors must
own in order to qualify as a director or to remain on the board.
Vote
case-by-case on all other shareholder proposals regarding executive and director pay, taking into account relevant factors,
including but not limited to: company performance, pay level and design versus peers, history of compensation concerns
or pay-for-performance disconnect, and/or the scope and prescriptive nature of the proposal.
Golden
Coffins/Executive Death Benefits
General
Recommendation: DWS’s policy is to generally vote for proposals calling for
companies to adopt a policy of obtaining shareholder approval for any future agreements
and corporate policies that could oblige the company to make payments or awards
following the death of a senior executive in the form of unearned salary or bonuses, accelerated vesting
or the continuation in force of unvested equity grants, perquisites and other payments or awards made in lieu of
compensation. This would not apply to any benefit programs or equity plan proposals for which the broad-based employee
population is eligible.
Hold
Equity Past Retirement or for a Significant Period of Time
General
Recommendation: DWS’s policy is to generally vote case-by-case on shareholder
proposals asking companies to adopt policies requiring senior executive officers
to retain a portion of net shares acquired through compensation plans. The following
factors will be taken into account:
•
The
percentage/ratio of net shares required to be retained;
•
The
time period required to retain the shares;
•
Whether
the company has equity retention, holding period, and/or stock ownership requirements in place and the
robustness of such requirements;
•
Whether
the company has any other policies aimed at mitigating risk taking by executives;
•
Executives'
actual stock ownership and the degree to which it meets or exceeds the proponent’s suggested holding
period/retention ratio or the company’s existing requirements; and
•
Problematic
pay practices, current and past, which may demonstrate a short-term versus long-term focus.
Pay
Disparity
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
calling for an analysis of the pay disparity between corporate executives and other
non-executive employees. The following factors will be considered:
•
The
company’s current level of disclosure of its executive compensation setting process, including how the company considers
pay disparity;
•
If
any problematic pay practices or pay-for-performance concerns have been identified at the company; and
•
The
level of shareholder support for the company's pay programs.
DWS’s
policy is to generally vote against proposals calling for the company to use the pay disparity analysis or pay ratio
in a specific way to set or limit executive pay.
Pay
for Performance/Performance-Based Awards
General
Recommendation: DWS’s policy is to generally vote case-by-case on shareholder
proposals requesting that a significant amount of future long-term incentive compensation
awarded to senior executives shall be performance-based and requesting that the
board adopt and disclose challenging performance metrics to shareholders, based on the following
analytical steps:
•
First,
vote for shareholder proposals advocating the use of performance-based equity awards, such as performance contingent
options or restricted stock, indexed options or premium-priced options, unless the proposal is overly restrictive
or if the company has demonstrated that it is using a “substantial”
portion of performance-based awards for its top executives. Standard stock options
and performance-accelerated awards do not meet the criteria to be considered as
performance-based awards. Further, premium-priced options should have a meaningful premium to
be considered performance-based awards.
•
Second,
assess the rigor of the company’s performance-based equity program. If the bar set for the performance-based program
is too low based on the company’s historical or peer group comparison, generally vote for the proposal. Furthermore,
if target performance results in an above target payout, vote for the shareholder proposal due to program’s
poor design. If the company does not disclose the performance metric of the performance-based equity program,
vote for the shareholder proposal regardless of the outcome of the first step to the test.
In
general, vote for the shareholder proposal if the company does not meet both of the above two steps.
Pay
for Superior Performance
General
Recommendation: DWS’s policy is to generally vote case-by-case on shareholder
proposals that request the board establish a pay-for-superior performance standard
in the company's executive compensation plan for senior executives. These proposals
generally include the following principles:
•
Set
compensation targets for the plan’s annual and long-term incentive pay components at or below the peer group
median;
•
Deliver
a majority of the plan’s target long-term compensation through performance-vested, not simply time-vested, equity
awards;
•
Provide
the strategic rationale and relative weightings of the financial and non-financial performance metrics or criteria
used in the annual and performance-vested long-term incentive components of the plan;
•
Establish
performance targets for each plan financial metric relative to the performance of the company’s peer companies;
•
Limit
payment under the annual and performance-vested long-term incentive components of the plan to when the
company’s performance on its selected financial performance metrics exceeds peer group median performance.
Consider
the following factors in evaluating this proposal:
•
What
aspects of the company’s annual and long-term equity incentive programs are performance driven?
•
If
the annual and long-term equity incentive programs are performance driven, are the performance criteria and hurdle
rates disclosed to shareholders or are they benchmarked against a disclosed peer group?
•
Can
shareholders assess the correlation between pay and performance based on the current disclosure?
•
What
type of industry and stage of business cycle does the company belong to?
Pre-Arranged
Trading Plans (10b5-1 Plans)
General
Recommendation: DWS’s policy is to generally vote for shareholder proposals
calling for certain principles regarding the use of prearranged trading plans (10b5-1
plans) for executives. These principles include:
•
Adoption,
amendment, or termination of a 10b5-1 Plan must be disclosed within two business days in a Form 8-K;
•
Amendment
or early termination of a 10b5-1 Plan is allowed only under extraordinary circumstances, as determined by
the board;
•
Ninety
days must elapse between adoption or amendment of a 10b5-1 Plan and initial trading under the plan;
•
Reports
on Form 4 must identify transactions made pursuant to a 10b5-1 Plan;
•
An
executive may not trade in company stock outside the 10b5-1 Plan;
•
Trades
under a 10b5-1 Plan must be handled by a broker who does not handle other securities transactions for the
executive.
Prohibit
Outside CEOs from Serving on Compensation Committees
General
Recommendation: DWS’s policy is to generally vote against proposals seeking a policy to prohibit any outside CEO
from serving on a company’s compensation committee, unless the company has demonstrated problematic pay practices
that raise concerns about the performance and composition of the committee.
Recoupment
of Incentive or Stock Compensation in Specified Circumstances
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
to recoup incentive cash or stock compensation made to senior executives if it is
later determined that the figures upon which incentive compensation is earned turn
out to have been in error, or if the senior executive has breached company policy or has engaged in misconduct
that may be significantly detrimental to the company's financial position or reputation, or if the senior executive
failed to manage or monitor risks that subsequently led to significant financial or reputational harm to the company.
Many companies have adopted policies that permit recoupment in cases where an executive's fraud, misconduct, or
negligence significantly contributed to a restatement of financial results that led to the awarding of unearned incentive compensation.
However, such policies may be narrow given that not all misconduct or negligence may result in significant financial
restatements. Misconduct, negligence or lack of sufficient oversight by senior executives may lead to significant financial
loss or reputational damage that may have long-lasting impact.
In
considering whether to support such shareholder proposals, DWS will take into consideration the following factors:
•
If
the company has adopted a formal recoupment policy;
•
The
rigor of the recoupment policy focusing on how and under what circumstances the company may recoup incentive
or stock compensation;
•
Whether
the company has chronic restatement history or material financial problems;
•
Whether
the company’s policy substantially addresses the concerns raised by the proponent;
•
Disclosure
of recoupment of incentive or stock compensation from senior executives or lack thereof; or
•
Any
other relevant factors.
Severance
Agreements for Executives/Golden Parachutes
General
Recommendation: DWS’s policy is to generally vote for shareholder proposals
requiring that golden parachutes or executive severance agreements be submitted
for shareholder ratification, unless the proposal requires shareholder approval
prior to entering into employment contracts.
DWS’s
policy is to generally vote case-by-case on proposals to ratify or cancel golden parachutes. An acceptable parachute should
include, but is not limited to, the following:
•
The
triggering mechanism should be beyond the control of management;
•
The
amount should not exceed three times base amount (defined as the average annual taxable W-2 compensation during
the five years prior to the year in which the change of control occurs);
•
Change-in-control
payments should be double-triggered, i.e., (1) after a change in control has taken place, and (2)
termination of the executive as a result of the change in control. Change in control is defined as a change in the
company ownership structure.
Share
Buyback Impact on Incentive Program Metrics
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
requesting the company exclude the impact of share buybacks from the calculation
of incentive program metrics, considering the following factors:
•
The
frequency and timing of the company's share buybacks;
•
The
use of per-share metrics in incentive plans;
•
The
effect of recent buybacks on incentive metric results and payouts; and
•
Whether
there is any indication of metric result manipulation.
Supplemental
Executive Retirement Plans (SERPs)
General
Recommendation: DWS’s policy is to generally vote for shareholder proposals
requesting to put extraordinary benefits contained in SERP agreements to a shareholder
vote unless the company’s executive pension plans do not contain excessive
benefits beyond what is offered under employee-wide plans.
Generally
vote for shareholder proposals requesting to limit the executive benefits provided under the company’s supplemental
executive retirement plan (SERP) by limiting covered compensation to a senior executive’s annual salary or
those pay elements covered for the general employee population.
Tax
Gross-Up Proposals
General
Recommendation: DWS’s policy is to generally vote for proposals calling for companies to adopt a policy of not
providing tax gross-up payments to executives, except in situations where gross-ups are provided pursuant to a plan,
policy, or arrangement applicable to management employees of the company, such as a relocation or expatriate tax
equalization policy.
Termination
of Employment Prior to Severance Payment/Eliminating Accelerated Vesting of Unvested Equity
General
Recommendation: DWS’s policy is to generally vote case-by-case on shareholder
proposals seeking a policy requiring termination of employment prior to severance
payment and/or eliminating accelerated vesting of unvested equity.
The
following factors will be considered:
•
The
company's current treatment of equity upon employment termination and/or in change-in-control situations (i.e.,
vesting is double triggered and/or pro rata, does it allow for the assumption of equity by acquiring company, the
treatment of performance shares, etc.);
•
Current
employment agreements, including potential poor pay practices such as gross-ups embedded in those agreements.
DWS’s
policy is to generally vote for proposals seeking a policy that prohibits automatic acceleration of the vesting of
equity awards to senior executives upon a voluntary termination of employment or in the event of a change in control
(except for pro rata vesting considering the time elapsed and attainment of any related performance goals between
the award date and the change in control).
ROUTINE
/ MISCELLANEOUS
Adjourn
Meeting
General
Recommendation: DWS’s policy is to generally vote against proposals to provide
management with the authority to adjourn an annual or special meeting absent compelling
reasons to support the proposal.
Vote
for proposals that relate specifically to soliciting votes for a merger or transaction if supporting that merger or transaction.
Vote against proposals if the wording is too vague or if the proposal includes “other
business.”
Amend
Quorum Requirements
General
Recommendation: DWS’s policy is to generally vote against proposals to reduce
quorum requirements for shareholder meetings below a majority of the shares outstanding
unless there are compelling reasons to support the proposal.
Amend
Minor Bylaws
General
Recommendation: DWS’s policy is to generally vote for bylaw or charter changes
that are of a housekeeping nature (updates or corrections).
Change
Company Name
General
Recommendation: DWS’s policy is to generally vote for proposals to change
the corporate name unless there is compelling evidence that the change would adversely
impact shareholder value.
Change
Date, Time, or Location of Annual Meeting
General
Recommendation: DWS’s policy is to generally vote for management proposals
to change the date, time, or location of the annual meeting unless the proposed
change is unreasonable.
Vote
against shareholder proposals to change the date, time, or location of the annual meeting unless the current scheduling
or location is unreasonable.
Other
Business
General
Recommendation: DWS’s policy is to generally vote against proposals to approve
other business when it appears as a voting item.
SOCIAL
AND ENVIRONMENTAL ISSUES
General
Recommendation: DWS’s policy will consider the Coalition for Environmentally
Responsible Economies (“CERES”)
recommendation on Environmental matters contained in the CERES Roadmap for Sustainability as well as
the recommendations of ISS Socially Responsible Investment “SRI”
Policy on social and sustainability issues. DWS supports CERES and as such generally
considers the CERES recommendation, but will vote on a case-by-case basis.
Global
Approach
General
Recommendation: DWS’s policy is to generally vote case-by-case, examining
primarily whether implementation of the proposal is likely to enhance or protect
shareholder value. The following factors will be considered:
•
If
the issues presented in the proposal are more appropriately or effectively dealt with through legislation or government regulation;
•
If
the company has already responded in an appropriate and sufficient manner to the issue(s) raised in the proposal;
•
Whether
the proposal's request is unduly burdensome (scope or timeframe) or overly prescriptive;
•
The
company's approach compared with any industry standard practices for addressing the issue(s) raised by the
proposal;
•
Whether
there are significant controversies, fines, penalties, or litigation associated with the company's environmental or
social practices;
•
If
the proposal requests increased disclosure or greater transparency, whether reasonable and sufficient information is
currently available to shareholders from the company or from other publicly available sources; and
•
If
the proposal requests increased disclosure or greater transparency, whether implementation would reveal proprietary or
confidential information that could place the company at a competitive disadvantage.
Endorsement
of Principles
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
seeking a company's endorsement of principles that support a particular public policy
position. Endorsing a set of principles may require a company to take a stand on
an issue that is beyond its own control and may limit its flexibility with respect to future developments. Management
and the board should be afforded the flexibility to make decisions on specific public policy positions based
on their own assessment of the most beneficial strategies for the company.
Animal
Welfare
Animal
Welfare Policies
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
seeking a report on a company’s animal welfare standards, or animal welfare-related
risks, considering whether:
•
The
company has already published a set of animal welfare standards and monitors compliance;
•
The
company’s standards are comparable to industry peers; and
•
There
are no recent significant fines, litigation, or controversies related to the company’s and/or its suppliers' treatment
of animals.
Animal
Testing
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
to phase out the use of animals in product testing, considering whether:
•
The
company is conducting animal testing programs that are unnecessary or not required by regulation;
•
The
company is conducting animal testing when suitable alternatives are commonly accepted and used by industry peers;
or
•
There
are recent, significant fines or litigation related to the company’s treatment of animals.
Animal
Slaughter
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
requesting the implementation of Controlled Atmosphere Killing (CAK) methods at
company and/or supplier operations unless such methods are required by legislation
or generally accepted as the industry standard.
Vote
case-by-case on proposals requesting a report on the feasibility of implementing CAK methods at company and/or supplier
operations considering the availability of existing research conducted by the company or industry groups on this
topic and any fines or litigation related to current animal processing procedures at the company.
Consumer
Issues
Genetically
Modified Ingredients
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
requesting that a company voluntarily label genetically engineered (GE) ingredients
in its products. The labeling of products with GE ingredients is best left to the
appropriate regulatory authorities and will be taken into account.
Vote
case-by-case on proposals asking for a report on the feasibility of labeling products containing GE ingredients, taking
into account:
•
The
potential impact of such labeling on the company's business;
•
The
quality of the company’s disclosure on GE product labeling, related voluntary initiatives, and how this disclosure compares
with industry peer disclosure; and
•
Company’s
current disclosure on the feasibility of GE product labeling.
DWS’s
policy is to generally vote case-by-case on proposals seeking a report on the social, health, and environmental effects
of genetically modified organisms (GMOs). Studies of this sort are better undertaken by regulators and the scientific
community and will be taken into account.
DWS’s
policy is to generally vote case-by-case on proposals to eliminate GE ingredients from the company's products, or
proposals asking for reports outlining the steps necessary to eliminate GE ingredients from the company’s products. Such
decisions are more appropriately made by management with consideration of current regulations.
Reports
on Potentially Controversial Business/Financial Practices
General
Recommendation: DWS’s policy is to generally vote case-by-case on requests
for reports on a company’s potentially controversial business or financial
practices or products, taking into account:
•
Whether
the company has adequately disclosed mechanisms in place to prevent abuses;
•
Whether
the company has adequately disclosed the financial risks of the products/practices in question;
•
Whether
the company has been subject to violations of related laws or serious controversies; and
•
Peer
companies’ policies/practices in this area.
Pharmaceutical
Pricing, Access to Medicines, and Prescription Drug Reimportation
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
requesting that companies implement specific price restraints on pharmaceutical
products unless the company fails to adhere to legislative guidelines or industry
norms in its product pricing practices.
Vote
case-by-case on proposals requesting that a company report on its product pricing or access to medicine policies, considering:
•
The
potential for reputational, market, and regulatory risk exposure;
•
Existing
disclosure of relevant policies;
•
Deviation
from established industry norms;
•
Relevant
company initiatives to provide research and/or products to disadvantaged consumers;
•
Whether
the proposal focuses on specific products or geographic regions;
•
The
potential burden and scope of the requested report;
•
Recent
significant controversies, litigation, or fines at the company.
DWS’s
policy is to generally vote for proposals requesting that a company report on the financial and legal impact of its
prescription drug reimportation policies unless such information is already publicly disclosed.
DWS’s
policy is to generally vote case-by-case on proposals requesting that companies adopt specific policies to encourage or
constrain prescription drug reimportation. Such matters are more appropriately the province of legislative activity and
may place the company at a competitive disadvantage relative to its peers.
Product
Safety and Toxic/Hazardous Materials
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
requesting that a company report on its policies, initiatives/procedures, and oversight
mechanisms related to toxic/hazardous materials or product safety in its supply
chain, considering whether:
•
The
company already discloses similar information through existing reports such as a supplier code of conduct and/or
a sustainability report;
•
The
company has formally committed to the implementation of a toxic/hazardous materials and/or product safety and
supply chain reporting and monitoring program based on industry norms or similar standards within a specified time
frame; and
•
The
company has not been recently involved in relevant significant controversies, fines, or litigation.
Vote
case-by-case on resolutions requesting that companies develop a feasibility assessment to phase-out of certain toxic/hazardous
materials, or evaluate and disclose the potential financial and legal risks associated with utilizing certain materials,
considering:
•
The
company’s current level of disclosure regarding its product safety policies, initiatives, and oversight mechanisms;
•
Current
regulations in the markets in which the company operates; and
•
Recent
significant controversies, litigation, or fines stemming from toxic/hazardous materials at the company.
Generally
vote case-by-case on resolutions requiring that a company reformulate its products.
Tobacco-Related
Proposals
General
Recommendation: DWS’s policy is to generally vote case-by-case on resolutions
regarding the advertisement of tobacco products, considering:
•
Recent
related fines, controversies, or significant litigation;
•
Whether
the company complies with relevant laws and regulations on the marketing of tobacco;
•
Whether
the company’s advertising restrictions deviate from those of industry peers;
•
Whether
the company entered into the Master Settlement Agreement, which restricts marketing of tobacco to youth;
and
•
Whether
restrictions on marketing to youth extend to foreign countries.
DWS’s
policy is to generally vote case-by-case on proposals regarding second-hand smoke, considering;
•
Whether
the company complies with all laws and regulations;
•
The
degree that voluntary restrictions beyond those mandated by law might hurt the company’s competitiveness; and
•
The
risk of any health-related liabilities.
DWS’s
policy is to generally vote case-by-case on resolutions to cease production of tobacco-related products, to avoid
selling products to tobacco companies, to spin-off tobacco-related businesses, or prohibit investment in tobacco equities.
Such business decisions are better left to company management or portfolio managers.
DWS’s
policy is to generally vote case-by-case on proposals regarding tobacco product warnings. Such decisions are better
left to public health authorities and will be taken into account.
Climate
Change
Climate
Change/Greenhouse Gas (GHG) Emissions
General
Recommendation: DWS’s policy is to generally vote for resolutions requesting
that a company disclose information on the financial, physical, or regulatory risks
it faces related to climate change on its operations and investments or on how the
company identifies, measures, and manages such risks, considering:
•
Whether
the company already provides current, publicly-available information on the impact that climate change may
have on the company as well as associated company policies and procedures to address related risks and/or opportunities;
•
The
company's level of disclosure compared to industry peers; and
•
Whether
there are significant controversies, fines, penalties, or litigation associated with the company's climate change-related
performance.
DWS’s
policy is to generally vote case-by-case on proposals requesting a report on greenhouse gas (GHG) emissions from
company operations and/or products and operations, considering whether:
•
The
company already discloses current, publicly-available information on the impacts that GHG emissions may have
on the company as well as associated company policies and procedures to address related risks and/or opportunities;
•
The
company's level of disclosure is comparable to that of industry peers; and
•
There
are no significant, controversies, fines, penalties, or litigation associated with the company's GHG emissions.
Vote
case-by-case on proposals that call for the adoption of GHG reduction goals from products and operations, taking into
account:
•
Whether
the company provides disclosure of year-over-year GHG emissions performance data;
•
Whether
company disclosure lags behind industry peers;
•
The
company's actual GHG emissions performance;
•
The
company's current GHG emission policies, oversight mechanisms, and related initiatives; and
•
Whether
the company has been the subject of recent, significant violations, fines, litigation, or controversy related to
GHG emissions.
Energy
Efficiency
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
requesting that a company report on its energy efficiency policies, considering
whether:
•
The
company complies with applicable energy efficiency regulations and laws, and discloses its participation in energy
efficiency policies and programs, including disclosure of benchmark data, targets, and performance measures; or
•
The
proponent requests adoption of specific energy efficiency goals within specific timelines.
Renewable
Energy
General
Recommendation: DWS’s policy is to generally vote for requests for reports
on the feasibility of developing renewable energy resources unless the report would
be duplicative of existing disclosure or irrelevant to the company’s line
of business.
Generally
vote case-by-case on proposals requesting that the company invest in renewable energy resources. Such decisions
are best left to management’s evaluation of the feasibility and financial impact that such programs may have on
the company.
Generally
vote case-by-case on proposals that call for the adoption of renewable energy goals, taking into account:
•
The
scope and structure of the proposal;
•
The
company's current level of disclosure on renewable energy use and GHG emissions; and
•
The
company's disclosure of policies, practices, and oversight implemented to manage GHG emissions and mitigate climate
change risks.
Diversity
Board
Diversity
General
Recommendation: DWS’s policy is to generally vote case-by-case on requests
for reports on a company's efforts to diversify the board, considering whether:
•
The
gender and racial minority representation of the company’s board is reasonably inclusive in relation to companies of
similar size and business; and
•
The
board already reports on its nominating procedures and gender and racial minority initiatives on the board and
within the company.
Vote
case-by-case on proposals asking a company to increase the gender and racial minority representation on its board,
taking into account:
•
The
degree of existing gender and racial minority diversity on the company’s board and among its executive officers;
•
The
level of gender and racial minority representation that exists at the company’s industry peers;
•
The
company’s established process for addressing gender and racial minority board representation;
•
Whether
the proposal includes an overly prescriptive request to amend nominating committee charter language;
•
The
independence of the company’s nominating committee;
•
Whether
the company uses an outside search firm to identify potential director nominees; and
•
Whether
the company has had recent controversies, fines, or litigation regarding equal employment practices.
Equality
of Opportunity
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
requesting a company disclose its diversity policies or initiatives, or proposals
requesting disclosure of a company’s comprehensive workforce diversity data,
including requests for EEO-1 data, considering whether:
•
The
company publicly discloses equal opportunity policies and initiatives in a comprehensive manner;
•
The
company already publicly discloses comprehensive workforce diversity data; and
•
The
company has no recent significant EEO-related violations or litigation.
Generally
vote case-by-case on proposals seeking information on the diversity efforts of suppliers and service providers. Such
requests may pose a significant burden on the company.
Gender
Identity, Sexual Orientation, and Domestic Partner Benefits
General
Recommendation: DWS’s policy is to generally vote for proposals seeking to
amend a company’s EEO statement or diversity policies to prohibit discrimination
based on sexual orientation and/or gender identity, unless the change would be unduly
burdensome.
Generally
vote case-by-case on proposals to extend company benefits to, or eliminate benefits from, domestic partners. Decisions
regarding benefits should be left to the discretion of the company and will be taken into account.
Gender,
Race / Ethnicity Pay Gap
General
Recommendation: DWS’s policy is to vote case-by-case on requests for reports
on a company's pay data by gender or race /ethnicity, or a report on a company’s
policies and goals to reduce any gender, or race /ethnicity pay gaps, taking into
account:
•
The
company's current policies and disclosure related to both its diversity and inclusion policies and practices and
its compensation philosophy on fair and equitable compensation practices;
•
Whether
the company has been the subject of recent controversy, litigation, or regulatory actions related to gender, race,
or ethnicity pay gap issues;
•
The
company’s disclosure regarding gender, race, or ethnicity pay gap policies or initiatives is compared to its industry
peers; and
•
Local
laws regarding categorization of race and/or ethnicity and definitions of ethnic and/or racial minorities.
Environment
and Sustainability
Facility
and Workplace Safety
General
Recommendation: DWS’s policy is to generally vote case-by-case on requests
for workplace safety reports, including reports on accident risk reduction efforts,
taking into account:
•
The
company’s current level of disclosure of its workplace health and safety performance data, health and safety management
policies, initiatives, and oversight mechanisms;
•
The
nature of the company’s business, specifically regarding company and employee exposure to health and safety
risks;
•
Recent
significant controversies, fines, or violations related to workplace health and safety; and
•
The
company's workplace health and safety performance relative to industry peers.
Vote
case-by-case on resolutions requesting that a company report on safety and/or security risks associated with its operations
and/or facilities, considering:
•
The
company’s compliance with applicable regulations and guidelines;
•
The
company’s current level of disclosure regarding its security and safety policies, procedures, and compliance monitoring;
and
•
The
existence of recent, significant violations, fines, or controversy regarding the safety and security of the company’s operations
and/or facilities.
General
Environmental Proposals and Community Impact Assessments
General
Recommendation: DWS’s policy is to generally vote case-by-case on requests
for reports on policies and/or the potential (community) social and/or environmental
impact of company operations, considering:
•
Current
disclosure of applicable policies and risk assessment report(s) and risk management procedures;
•
The
impact of regulatory non-compliance, litigation, remediation, or reputational loss that may be associated with failure
to manage the company’s operations in question, including the management of relevant community and stakeholder
relations;
•
The
nature, purpose, and scope of the company’s operations in the specific region(s);
•
The
degree to which company policies and procedures are consistent with industry norms; and
•
The
scope of the resolution.
Hydraulic
Fracturing
General
Recommendation: DWS’s policy is to generally vote for proposals requesting
greater disclosure of a company's (natural gas) hydraulic fracturing operations,
including measures the company has taken to manage and mitigate the potential community
and environmental impacts of those operations, considering:
•
The
company's current level of disclosure of relevant policies and oversight mechanisms;
•
The
company's current level of such disclosure relative to its industry peers;
•
Potential
relevant local, state, or national regulatory developments; and
•
Controversies,
fines, or litigation related to the company's hydraulic fracturing operations.
Operations
in Protected Areas
General
Recommendation: DWS’s policy is to generally vote case-by-case on requests
for reports on potential environmental damage as a result of company operations
in protected regions, considering whether:
•
Operations
in the specified regions are not permitted by current laws or regulations;
•
The
company does not currently have operations or plans to develop operations in these protected regions; or
•
The
company’s disclosure of its operations and environmental policies in these regions is comparable to industry peers.
Recycling
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
to report on an existing recycling program, or adopt a new recycling program, taking
into account:
•
The
nature of the company’s business;
•
The
current level of disclosure of the company's existing related programs;
•
The
timetable and methods of program implementation prescribed by the proposal;
•
The
company’s ability to address the issues raised in the proposal; and
•
How
the company's recycling programs compare to similar programs of its industry peers.
Sustainability
Reporting
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
requesting that a company report on its policies, initiatives, and oversight mechanisms
related to social, economic, and environmental sustainability, considering whether:
•
The
company already discloses similar information through existing reports or policies such as an environment, health,
and safety (EHS) report; a comprehensive code of corporate conduct; and/or a diversity report; or
•
The
company has formally committed to the implementation of a reporting program based on Global Reporting Initiative
(GRI) guidelines or a similar standard within a specified time frame.
Water
Issues
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
requesting a company report on, or adopt a new policy on, water-related risks and
concerns, taking into account:
•
The
company's current disclosure of relevant policies, initiatives, oversight mechanisms, and water usage metrics;
•
Whether
or not the company's existing water-related policies and practices are consistent with relevant internationally recognized
standards and national/local regulations;
•
The
potential financial impact or risk to the company associated with water-related concerns or issues; and
•
Recent,
significant company controversies, fines, or litigation regarding water use by the company and its suppliers.
General
Corporate Issues
Charitable
Contributions
General
Recommendation: DWS’s policy is to generally vote against proposals restricting
a company from making charitable contributions.
Charitable
contributions are generally useful for assisting worthwhile causes and for creating goodwill in the community. In
the absence of bad faith, self-dealing, or gross negligence, management should determine which, and if, contributions are
in the best interests of the company.
Data
Security, Privacy, and Internet Issues
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
requesting the disclosure or implementation of data security, privacy, or information
access and management policies and procedures, considering:
•
The
level of disclosure of company policies and procedures relating to data security, privacy, freedom of speech, information
access and management, and Internet censorship;
•
Engagement
in dialogue with governments or relevant groups with respect to data security, privacy, or the free flow
of information on the Internet;
•
The
scope of business involvement and of investment in countries whose governments censor or monitor the Internet
and other telecommunications;
•
Applicable
market-specific laws or regulations that may be imposed on the company; and
•
Controversies,
fines, or litigation related to data security, privacy, freedom of speech, or Internet censorship.
Environmental,
Social, and Governance (ESG) Compensation-Related Proposals
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
to link, or report on linking, executive compensation to sustainability (environmental
and social) criteria, considering:
•
The
scope and prescriptive nature of the proposal;
•
Whether
the company has significant and/or persistent controversies or regulatory violations regarding social and/or
environmental issues;
•
Whether
the company has management systems and oversight mechanisms in place regarding its social and environmental
performance;
•
The
degree to which industry peers have incorporated similar non-financial performance criteria in their executive compensation
practices; and
•
The
company's current level of disclosure regarding its environmental and social performance.
Human
Rights, Human Capital Management, and International Operations
Human
Rights Proposals
General
Recommendation: DWS’s policy is to generally vote for proposals requesting
a report on company or company supplier labor and/or human rights standards and
policies unless such information is already publicly disclosed.
Vote
case-by-case on proposals to implement company or company supplier labor and/or human rights standards and policies,
considering:
The
degree to which existing relevant policies and practices are disclosed;
•
Whether
or not existing relevant policies are consistent with internationally recognized standards;
•
Whether
company facilities and those of its suppliers are monitored and how;
•
Company
participation in fair labor organizations or other internationally recognized human rights initiatives;
•
Scope
and nature of business conducted in markets known to have higher risk of workplace labor/human rights abuse;
•
Recent,
significant company controversies, fines, or litigation regarding human rights at the company or its suppliers;
•
The
scope of the request; and
•
Deviation
from industry sector peer company standards and practices.
Vote
case-by-case on proposals requesting that a company conduct an assessment of the human rights risks in its operations
or in its supply chain, or report on its human rights risk assessment process, considering:
•
The
degree to which existing relevant policies and practices are disclosed, including information on the implementation of
these policies and any related oversight mechanisms;
•
The
company’s industry and whether the company or its suppliers operate in countries or areas where there is a
history of human rights concerns;
•
Recent
significant controversies, fines, or litigation regarding human rights involving the company or its suppliers, and
whether the company has taken remedial steps; and
•
Whether
the proposal is unduly burdensome or overly prescriptive.
Mandatory
Arbitration
General
Recommendation: DWS’s policy is to generally vote case-by-case on requests
for a report on a company’s use of mandatory arbitration on employment-related
claims, taking into account:
•
The
company's current policies and practices related to the use of mandatory arbitration agreements on workplace claims;
•
Whether
the company has been the subject of recent controversy, litigation, or regulatory actions related to the use
of mandatory arbitration agreements on workplace claims; and
•
The
company's disclosure of its policies and practices related to the use of mandatory arbitration agreements compared
to its peers.
Operations
in High Risk Markets
General
Recommendation: DWS’s policy is to generally vote case-by-case on requests
for a report on a company’s potential financial and reputational risks associated
with operations in “high-risk”
markets, such as a terrorism-sponsoring state or politically/socially unstable region,
taking into account:
•
The
nature, purpose, and scope of the operations and business involved that could be affected by social or political disruption;
•
Current
disclosure of applicable risk assessment(s) and risk management procedures;
•
Compliance
with U.S. sanctions and laws;
•
Consideration
of other international policies, standards, and laws; and
•
Whether
the company has been recently involved in recent, significant controversies, fines, or litigation related to
its operations in “high-risk”
markets.
Outsourcing/Offshoring
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
calling for companies to report on the risks associated with outsourcing/plant closures,
considering:
•
Controversies
surrounding operations in the relevant market(s);
•
The
value of the requested report to shareholders;
•
The
company’s current level of disclosure of relevant information on outsourcing and plant closure procedures; and
•
The
company’s existing human rights standards relative to industry peers.
Sexual
Harassment
General
Recommendation: DWS’s policy is to generally vote case-by-case on requests
for a report on company actions taken to strengthen policies and oversight to prevent
workplace sexual harassment, or a report on risks posed by a company’s failure
to prevent workplace sexual harassment, taking into account:
•
The
company’s current policies, practices, oversight mechanisms related to preventing workplace sexual harassment;
•
Whether
the company has been the subject of recent controversy, litigation, or regulatory actions related to workplace sexual
harassment issues; and
•
The
company’s disclosure regarding workplace sexual harassment policies or initiatives compared to its industry peers.
Weapons
and Military Sales
General
Recommendation: DWS’s policy is to generally vote case-by-case on reports
on foreign military sales or offsets. Such disclosures may involve sensitive and
confidential information. Moreover, companies must comply with government controls
and reporting on foreign military sales.
Generally
vote case-by-case on proposals asking a company to cease production or report on the risks associated with
the use of depleted uranium munitions or nuclear weapons components and delivery systems, including disengaging from
current and proposed contracts. Such contracts are monitored by government agencies, serve multiple military and
non-military uses, and withdrawal from these contracts could have a negative impact on the company’s business and
will be taken into account.
Political
Activities
Lobbying
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
requesting information on a company’s lobbying (including direct, indirect,
and grassroots lobbying) activities, policies, or procedures, considering:
•
The
company’s current disclosure of relevant lobbying policies, and management and board oversight;
•
The
company’s disclosure regarding trade associations or other groups that it supports, or is a member of, that engage
in lobbying activities; and
•
Recent
significant controversies, fines, or litigation regarding the company’s lobbying-related activities.
Political
Contributions
General
Recommendation: DWS’s policy is to generally vote for proposals requesting
greater disclosure of a company's political contributions and trade association
spending policies and activities, considering:
•
The
company's policies, and management and board oversight related to its direct political contributions and payments
to trade associations or other groups that may be used for political purposes;
•
The
company's disclosure regarding its support of, and participation in, trade associations or other groups that may
make political contributions; and
•
Recent
significant controversies, fines, or litigation related to the company's political contributions or political activities.
Vote
case-by-case on proposals barring a company from making political contributions. Businesses are affected by legislation
at the federal, state, and local level; barring political contributions can put the company at a competitive disadvantage.
Vote
case-by-case on proposals to publish in newspapers and other media a company's political contributions. Such publications
could present significant cost to the company without providing commensurate value to shareholders.
Political
Ties
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
asking a company to affirm political nonpartisanship in the workplace, considering
whether:
•
There
are no recent, significant controversies, fines, or litigation regarding the company’s political contributions or
trade association spending; and
•
The
company has procedures in place to ensure that employee contributions to company-sponsored political action
committees (PACs) are strictly voluntary and prohibit coercion.
Vote
case-by-case on proposals asking for a list of company executives, directors, consultants, legal counsels, lobbyists, or
investment bankers that have prior government service and whether such service had a bearing on the business of
the company. Such a list would be burdensome to prepare without providing any meaningful information to shareholders and
will be taken into account.
REGISTERED
INVESTMENT COMPANY PROXIES
Election
of Directors
General
Recommendation: DWS’s policy is to generally vote case-by-case on the election
of directors and trustees.
Closed
End Fund - Unilateral Opt-In to Control Share Acquisition Statutes
General
Recommendation: For closed-end management investment companies (CEFs), DWS’s
policy is to generally vote on a case-by-case basis for nominating/governance committee
members (or other directors on a case-by-case basis) at CEFs that have not provided
a compelling rationale for opting-in to a Control Share Acquisition Statute, nor submitted
a by-law amendment to a shareholder vote.
Converting
Closed-end Fund to Open-end Fund
General
Recommendation: DWS’s policy is to generally vote case-by-case on conversion
proposals, considering the following factors:
•
Past
performance as a closed-end fund;
•
Market
in which the fund invests;
•
Measures
taken by the board to address the discount; and
•
Past
shareholder activism, board activity, and votes on related proposals.
Proxy
Contests
General
Recommendation: DWS’s policy is to generally vote case-by-case on proxy contests,
considering the following factors:
•
Past
performance relative to its peers;
•
Market
in which the fund invests;
•
Measures
taken by the board to address the issues;
•
Past
shareholder activism, board activity, and votes on related proposals;
•
Strategy
of the incumbents versus the dissidents;
•
Independence
of directors;
•
Experience
and skills of director candidates;
•
Governance
profile of the company;
•
Evidence
of management entrenchment.
Investment
Advisory Agreements
General
Recommendation: DWS’s policy is to generally vote case-by-case on investment
advisory agreements, considering the following factors:
•
Proposed
and current fee schedules;
•
Fund
category/investment objective;
•
Performance
benchmarks;
•
Share
price performance as compared with peers;
•
Resulting
fees relative to peers;
•
Assignments
(where the advisor undergoes a change of control).
Approving
New Classes or Series of Shares
General
Recommendation: DWS’s policy is to generally vote case-by-case on the establishment
of new classes or series of shares.
Preferred
Stock Proposals
General
Recommendation: DWS’s policy is to generally vote case-by-case on the authorization
for or increase in preferred shares, considering the following factors:
•
Stated
specific financing purpose;
•
Possible
dilution for common shares;
•
Whether
the shares can be used for antitakeover purposes.
1940
Act Policies
General
Recommendation: DWS’s policy is to generally vote case-by-case on policies
under the Investment Advisor Act of 1940, considering the following factors:
•
Potential
competitiveness;
•
Regulatory
developments;
•
Current
and potential returns; and
•
Current
and potential risk.
Generally
vote for these amendments as long as the proposed changes do not fundamentally alter the investment focus
of the fund and do comply with the current SEC interpretation.
Changing
a Fundamental Restriction to a Nonfundamental Restriction
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
to change a fundamental restriction to a non-fundamental restriction, considering
the following factors:
•
The
fund's target investments;
•
The
reasons given by the fund for the change; and
•
The
projected impact of the change on the portfolio.
Change
Fundamental Investment Objective to Nonfundamental
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
to change a fund’s fundamental investment objective to non-fundamental.
Name
Change Proposals
General
Recommendation: DWS’s policy is to generally vote case-by-case on name change
proposals, considering the following factors:
•
Political/economic
changes in the target market;
•
Consolidation
in the target market; and
•
Current
asset composition.
Change
in Fund's Subclassification
General
Recommendation: DWS’s policy is to generally vote case-by-case on changes
in a fund's sub-classification, considering the following factors:
•
Potential
competitiveness;
•
Current
and potential returns;
•
Consolidation
in target industry.
Business
Development Companies—Authorization to Sell Shares of Common Stock at a Price below Net Asset
Value
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
authorizing the board to issue shares below Net Asset Value (NAV) if:
•
The
proposal to allow share issuances below NAV has an expiration date no more than one year from the date shareholders
approve the underlying proposal, as required under the Investment Company Act of 1940;
•
The
sale is deemed to be in the best interests of shareholders by (1) a majority of the company's independent directors
and (2) a majority of the company's directors who have no financial interest in the issuance; and
•
The
company has demonstrated responsible past use of share issuances by either:
•
Outperforming
peers in its 8-digit GICS group as measured by one- and three-year median TSRs; or
•
Providing
disclosure that its past share issuances were priced at levels that resulted in only small or moderate discounts
to NAV and economic dilution to existing non-participating shareholders.
Disposition
of Assets/Termination/Liquidation
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
to dispose of assets, to terminate or liquidate, considering the following factors:
•
Strategies
employed to salvage the company;
•
The
fund’s past performance;
•
The
terms of the liquidation.
Changes
to the Charter Document
General
Recommendation: DWS’s policy is to generally vote case-by-case on changes
to the charter document, considering the following factors:
•
The
degree of change implied by the proposal;
•
The
efficiencies that could result;
•
The
state of incorporation;
•
Regulatory
standards and implications.
Changing
the Domicile of a Fund
General
Recommendation: DWS’s policy is to generally vote case-by-case on re-incorporations,
considering the following factors:
•
Regulations
of both states;
•
Required
fundamental policies of both states;
•
The
increased flexibility available.
Authorizing
the Board to Hire and Terminate Subadvisers Without Shareholder Approval
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
authorizing the board to hire or terminate subadvisers without shareholder approval
if the investment adviser currently employs only one subadviser.
Distribution
Agreements
General
Recommendation: DWS’s policy is to generally vote case-by-case on distribution
agreement proposals, considering the following factors:
•
Fees
charged to comparably sized funds with similar objectives;
•
The
proposed distributor’s reputation and past performance;
•
The
competitiveness of the fund in the industry;
•
The
terms of the agreement.
Master-Feeder
Structure
General
Recommendation: DWS’s policy is to generally vote case-by-case on the establishment
of a master-feeder structure.
Mergers
General
Recommendation: DWS’s policy is to generally vote case-by-case on merger proposals,
considering the following factors:
•
Resulting
fee structure;
•
Performance
of both funds;
•
Continuity
of management personnel;
•
Changes
in corporate governance and their impact on shareholder rights.
Shareholder
Proposals for Mutual Funds
Establish
Director Ownership Requirement
General
Recommendation: DWS’s policy is to generally vote case-by-case on shareholder
proposals that mandate a specific minimum amount of stock that directors must own
in order to qualify as a director or to remain on the board.
Reimburse
Shareholder for Expenses Incurred
General
Recommendation: DWS’s policy is to generally vote case-by-case on shareholder
proposals to reimburse proxy solicitation expenses. When supporting the dissidents,
vote for the reimbursement of the proxy solicitation expenses.
Terminate
the Investment Advisor
General
Recommendation: DWS’s policy is to generally vote case-by-case on proposals
to terminate the investment advisor, considering the following factors:
•
Performance
of the fund’s Net Asset Value (NAV);
•
The
fund’s history of shareholder relations;
•
The
performance of other funds under the advisor’s management.
Appendix
I
Classification
of Directors – U.S.
1.1.
Current
employee or current officer1
of the company or one of its affiliates2.
2.
Non-Independent
Non-Executive Director
Board
Identification
2.1.
Director
identified as not independent by the board.
Controlling/Significant
Shareholder
2.2.
Beneficial
owner of more than 50 percent of the company's voting power (this may be aggregated if voting
power is distributed among more than one member of a group).
Current
Employment at Company or Related Company
2.3.
Non-officer
employee of the firm (including employee representatives).
2.4.
Officer1,
former officer, or general or limited partner of a joint venture or partnership with the company.
Former
Employment
2.5.
Former
CEO of the company.3, 4
2.6.
Former
non-CEO officer1
of the company or an affiliate2
within the past five years.
2.7.
Former
officer1
of an acquired company within the past five years.4
2.8.
Officer1
of a former parent or predecessor firm at the time the company was sold or split off within the
past five years.
2.9.
Former
interim officer if the service was longer than 18 months. If the service was between 12 and 18
months, an assessment of the interim officer’s employment agreement will be made.5
Family
Members
2.10.
Immediate
family member6
of a current or former officer1
of the company or its affiliates2
within the last five years.
2.11.
Immediate
family member6
of a current employee of company or its affiliates2
where additional factors raise concern (which may include, but are not limited to,
the following: a director related to numerous employees; the company or its affiliates
employ relatives of numerous board members; or a non-Section 16 officer in a key
strategic role).
Professional,
Transactional, and Charitable Relationships
Director
who (or whose immediate family member6)
currently provides professional services7
in excess of the $10,000 per year to the company, an affiliate2
or an individual officer of the company or
2.12.
(an
affiliate; or who is (or whose immediate family member6
is) a partner, employee or controlling shareholder of, an organization which provides
services.
Director
who (or whose immediate family member6)
currently has any material transactional relationship8
with the company or its affiliates2.
2.13.
;
or who is (or whose immediate family member6
is) a partner in, or a controlling shareholder or an executive officer of, an organization
which has the material transactional relationship8
(excluding investments in the company through a private placement).
2.14.
Director
who (or whose immediate family member6)
is) a trustee, director, or employee of a charitable or non-profit organization
that receives material grants or endowments8
from the company or its affiliates2.
Other
Relationships
2.15.
Party
to a voting agreement9
to vote in line with management on proposals being brought to shareholder vote.
2.16.
Has
(or an immediate family member6 has) an interlocking relationship as defined by the SEC involving
members of the board of directors or its Compensation Committee.10
2.17.
Founder11
of the company but not currently an employee.
2.18.
Director
with pay comparable to Named Executive Officers.
2.19.
Any
material12
relationship with the company.
3.1.
No
material12
connection to the company other than a board seat.
Footnotes:
1
The definition of officer will generally follow that of a “Section
16 officer” (officers
subject to Section 16 of the Securities and Exchange Act of 1934) and includes the
chief executive, operating, financial, legal, technology, and accounting officers
of a company (including the president, treasurer, secretary, controller, or any vice president in charge
of a principal business unit, division, or policy function). Current interim officers are included in this category.
For
private companies, the equivalent positions are applicable. A non-employee director serving as an officer due to statutory
requirements (e.g. corporate secretary) will generally be classified as a Non-Independent Non-Executive Director
under 2.19: “Any material
relationship with the company.”
However, if the company provides explicit disclosure that the director is not receiving
additional compensation exceeding $10,000 per year for serving in that capacity, then
the director will be classified as an Independent Director.
2
“Affiliate”
includes a subsidiary, sibling company, or parent company. 50 percent control ownership is used by the parent
company as the standard for applying its affiliate designation. The manager/advisor of an externally managed issuer
(EMI) is considered an affiliate.
3
Includes any former CEO of the company prior to the company’s initial public
offering (IPO).
4
When there is a former CEO of a special purpose acquisition company (SPAC) serving
on the board of an acquired company, DWS will generally classify such directors
as independent unless determined otherwise taking into account the following factors:
the applicable listing standards determination of such director’s independence; any operating ties
to the firm; and the existence of any other conflicting relationships or related party transactions.
5
ISS will look at the terms of the interim officer’s employment contract to
determine if it contains severance pay, long-term health and pension benefits, or
other such standard provisions typically contained in contracts of permanent, non-temporary
CEOs. DWS will also consider if a formal search process was under way for a full-time officer at the time.
6
“Immediate family member”
follows the SEC’s definition of such and covers spouses, parents, children, step-parents, step-children,
siblings, in-laws, and any person (other than a tenant or employee) sharing the household of any director, nominee
for director, executive officer, or significant shareholder of the company.
7
Professional services can be characterized as advisory in nature, generally involve
access to sensitive company information or to strategic decision-making, and typically
have a commission- or fee-based payment structure. Professional services generally
include but are not limited to the following: investment banking/financial advisory services, commercial banking (beyond
deposit services), investment services, insurance services, accounting/audit services, consulting services, marketing
services, legal services, property management services, realtor services, lobbying services, executive search services,
and IT consulting services. The following would generally be considered transactional relationships and not professional
services: deposit services, IT tech support services, educational services, and construction services. The case
of participation in a banking syndicate by a non-lead bank should be considered a transactional (and hence subject to
the associated materiality test) rather than a professional relationship. “Of
Counsel” relationships
are only considered immaterial if the individual does not receive any form of compensation
(in excess of $10,000 per year) from, or is a retired partner of, the firm providing
the professional service. The case of a company providing a professional service to
one of its directors or to an entity with which one of its directors is affiliated, will be considered a transactional rather
than a professional relationship. Insurance services and marketing services are assumed to be professional services
unless the company explains why such services are not advisory.
8
A material transactional relationship, including grants to non-profit organizations,
exists if the company makes annual payments to, or receives annual payments from,
another entity, exceeding the greater of: $200,000 or 5 percent of the recipient’s
gross revenues, for a company that follows NASDAQ listing standards; or the greater of $1,000,000 or
2 percent of the recipient’s gross revenues, for a company that follows NYSE listing standards. For a company that follows
neither of the preceding standards, DWS will apply the NASDAQ-based materiality test. (The recipient is the party
receiving the financial proceeds from the transaction).
9
Dissident directors who are parties to a voting agreement pursuant to a settlement
or similar arrangement may be classified as Independent Directors if an analysis
of the following factors indicates that the voting agreement does not compromise
their alignment with all shareholders’ interests: the terms of the agreement; the duration of the standstill
provision in the agreement; the limitations and requirements of actions that are agreed upon; if the dissident director
nominee(s) is subject to the standstill; and if there any conflicting relationships or related party transactions.
10
Interlocks include: executive officers serving as directors on each other’s
compensation or similar committees (or, in the absence of such a committee, on the
board); or executive officers sitting on each other’s boards and at least one
serves on the other’s compensation or similar committees (or, in the absence of such a committee, on the board).
11
The operating involvement of the founder with the company will be considered; if
the founder was never employed by the company, DWS may deem him or her an Independent
Director.
12
For purposes of ISS’s director independence classification, “material”
will be defined as a standard of relationship (financial, personal or otherwise)
that a reasonable person might conclude could potentially influence one’s objectivity in
the boardroom in a manner that would have a meaningful impact on an individual's ability to satisfy requisite fiduciary standards
on behalf of shareholders.
PART C. OTHER INFORMATION
Item
28 |
Exhibits |
|
|
|
(a) |
(1) |
Certificate
of Trust of DBX ETF Trust (the “Registrant” or the “Trust”) dated October 7, 2010. (Incorporated
by reference to the Trust’s Registration Statement, as filed with the Securities and Exchange Commission (the “SEC”)
on October 25, 2010.) |
|
|
(2) |
Agreement
and Declaration of Trust, dated as of October 7, 2010. (Incorporated
by reference to Pre-Effective Amendment No. 1 to the Trust’s Registration Statement, as filed with the SEC on February 9, 2011.) |
|
(b) |
(1) |
By-Laws
of the Trust, dated October 7, 2010, as amended February 25, 2016 and November 14, 2017. (Incorporated
by reference to Post-Effective Amendment No. 397 to the Trust’s Registration Statement, as filed with the SEC on December 21, 2017.)
|
|
|
(2) |
Amendment
to the By-Laws, dated November 25, 2019. (Incorporated by reference
to Post-Effective Amendment No. 460 to the Trust’s Registration Statement, as filed with the SEC on December 19, 2019.) |
|
(c) |
(1) |
Instruments
defining the rights of shareholders, including the relevant portions of: the Agreement and Declaration of Trust, dated as of October 7,
2010 (see Section 4.3). Referenced in exhibits (a)(1) through (a)(2) to this Item, above. |
|
|
(2) |
Instruments
defining the rights of shareholders, including the relevant portions of the Amended and Restated By-Laws, dated November 25, 2019 (see
Article 9). Referenced in exhibits (b)(1) through (b)(2) to this Item, above. |
|
(d) |
(1) |
Investment
Advisory Agreement, dated January 31, 2011, and amended as of November 17, 2020, with a schedule dated as of May 11, 2021, between the
Trust and DBX Advisors LLC. (Filed herein.) |
|
|
(2) |
Amended
Investment Sub-Advisory Agreement dated August 15, 2013, as amended May 20, 2014, July 23, 2015, and February 14, 2017, between DBX Advisors,
LLC and Harvest Global Investments Limited. (Incorporated by reference
to Post-Effective Amendment No. 457 to the Trust’s Registration Statement, as filed with the SEC on September 26, 2019.) |
|
(e) |
(1) |
Distribution
Agreement, dated April 16, 2018, between the Registrant and ALPS Distributors, Inc. (Incorporated
by reference to Post-Effective Amendment No. 430 to the Trust’s Registration Statement, as filed with the SEC on September 25, 2018.)
|
|
|
(2) |
Amendment
11, dated as of August 18, 2021, to the Distribution Agreement, dated April 16, 2018, between the Registrant and ALPS Distributors, Inc.
(Filed herein.) |
|
(f) |
|
Not
applicable. |
|
|
|
|
|
|
(g) |
(1) |
Custody
Agreement, dated as of January 31, 2011, between the Registrant and The Bank of New York Mellon. (Incorporated
by reference to Pre-Effective Amendment No. 2 to the Trust’s Registration Statement, as filed with the SEC on May 11, 2011.) |
|
|
(2) |
Amended
and Restated Supplement, Hong Kong – China – Stock Connect Service, dated October 18, 2018, to the Global Custody Agreement,
dated as of January 31, 2011, between the Registrant and The Bank of New York Mellon. (Incorporated
by reference to Post-Effective Amendment No. 457 to the Trust’s Registration Statement, as filed with the SEC on September 26, 2019.) |
|
|
(3) |
Amended
Appendix A dated August 18, 2021, to the Amended and Restated Supplement to the Global Custody Agreement, Hong Kong – China –
Stock Connect Service, dated October 18, 2018, which amends the Global Custody Agreement dated as of January 31, 2011, between the Registrant
and The Bank of New York Mellon. (Filed herein.) |
|
|
(4) |
Amendment,
dated as of August 18, 2021, to the Custody Agreement, dated January 31, 2011, between the Registrant and The Bank of New York Mellon.
(Filed herein.) |
|
|
(5) |
Foreign
Custody Manager Agreement, dated January 31, 2011, between the Registrant and The Bank of New York Mellon. (Incorporated
by reference to Pre-Effective Amendment No. 2 to the Trust’s Registration Statement, as filed with the SEC on May 11, 2011.) |
|
|
(6) |
Amendment,
dated as of August 18, 2021, to the Foreign Custody Manager Agreement, dated January 31, 2011, between the Registrant and The Bank of
New York Mellon. (Filed herein.) |
|
(h) |
(1) |
Fund
Administration and Accounting Agreement, dated as of January 31, 2011, between the Registrant and The Bank of New York Mellon.
(Incorporated by reference to Pre-Effective Amendment No. 2 to the Trust’s
Registration Statement, as filed with the SEC on May 11, 2011.) |
|
|
(2) |
Form
of Exhibit A and Schedule II, as revised August 15, 2013 to the Fund Administration and Accounting Agreement, dated as of January 31,
2011, between the Registrant and The Bank of New York Mellon. (Incorporated
by reference to Post-Effective Amendment No. 23 to the Trust’s Registration Statement, as filed with the SEC on August 29, 2013.) |
|
|
(3) |
First
Amendment, dated as of August 30, 2016, to the Fund Administration and Accounting Agreement, dated as of January 31, 2011, between the
Registrant and The Bank of New York Mellon. (Incorporated by reference
to Post-Effective Amendment No. 457 to the Trust’s Registration Statement, as filed with the SEC on September 26, 2019.) |
|
|
(4) |
Second
Amendment, dated as of May 22, 2018, to the Fund Administration and Accounting Agreement, dated as of January 31, 2011, between the Registrant
and The Bank of New York Mellon. (Incorporated by reference to Post-Effective
Amendment No. 457 to the Trust’s Registration Statement, as filed with the SEC on September 26, 2019.) |
|
|
(5) |
Amendment,
dated as of August 18, 2021, to the Fund Administration and Accounting Agreement, dated as of January 31, 2011, between the Registrant
and The Bank of New York Mellon. (Filed herein.) |
|
|
(6) |
Capital
Gains Tax Reporting Service Agreement, dated August 13, 2019, between the Registrant and The Bank of New York Mellon. (Incorporated
by reference to Post-Effective Amendment No. 457 to the Trust’s Registration Statement, as filed with the SEC on September 26, 2019.)
|
|
|
(7) |
Corporate
Services Agreement, dated as of July 6, 2016, between the Registrant and The Bank of New York Mellon. (Incorporated
by reference to Post-Effective Amendment No. 464 to the Trust’s Registration Statement, as filed with the SEC on March 11, 2020.)
|
|
|
(8) |
Amendment,
dated as of January 8, 2020, to the Corporate Services Agreement, dated as of July 6, 2016, between the Registrant and The Bank of New
York Mellon. (Incorporated by reference to Post-Effective Amendment
No. 464 to the Trust’s Registration Statement, as filed with the SEC on March 11, 2020.) |
|
|
(9) |
Amendment,
dated as of August 18, 2021, to the Corporate Services Agreement, dated as of July 6, 2016, between the Registrant and The Bank of New
York Mellon. (Filed herein.) |
|
|
(10) |
Transfer
Agency and Service Agreement, dated January 31, 2011, between the Registrant and The Bank of New York Mellon. (Incorporated
by reference to Pre-Effective Amendment No. 2 to the Trust’s Registration Statement, as filed with the SEC on May 11, 2011.) |
|
|
(11) |
Amendment,
dated as of August 18, 2021, to the Transfer Agency and Service Agreement, dated January 31, 2011, between the Registrant and The Bank
of New York Mellon. (Filed herein.) |
|
|
(12) |
Form
of Authorized Participation Agreement. (Incorporated by reference
to Pre-Effective Amendment No. 2 to the Trust’s Registration Statement, as filed with the SEC on May 11, 2011.) |
|
|
(13) |
Expense
Limitation Agreement (with respect to Xtrackers International Real Estate ETF), effective as of October 1, 2020. (Incorporated
by reference to Post-Effective Amendment No. 467 to the Trust’s Registration Statement, as filed with the SEC on September 28, 2020.)
|
|
|
(14) |
Expense
Limitation Agreement (with respect to Xtrackers MSCI All China Equity ETF), effective as of October 1, 2020. (Incorporated
by reference to Post-Effective Amendment No. 467 to the Trust’s Registration Statement, as filed with the SEC on September 28, 2020.) |
|
|
(15) |
Expense
Limitation Agreement (with respect to Xtrackers FTSE Developed ex US Comprehensive Factor ETF, now Xtrackers FTSE Developed ex US Multifactor
ETF), effective as of December 18, 2020. (Incorporated by reference
to Post-Effective Amendment No. 470 to the Trust’s Registration Statement, as filed with the SEC on December 17, 2020.) |
|
|
(16) |
Expense
Limitation Agreement (with respect to Xtrackers USD High Yield Corporate Bond ETF), effective as of December 18, 2020.
(Incorporated by reference to Post-Effective Amendment No. 470 to the Trust’s Registration Statement, as filed with the SEC on December
17, 2020.) |
|
|
(17) |
Expense
Limitation Agreement (with respect to Xtrackers High Beta High Yield Bond ETF), effective as of December 18, 2020.
(Incorporated by reference to Post-Effective Amendment No. 470 to the Trust’s Registration Statement, as filed with the SEC on December
17, 2020.) |
|
|
(18) |
Expense
Limitation Agreement (with respect to Xtrackers Low Beta High Yield Bond ETF), effective as of December 18, 2020.
(Incorporated by reference to Post-Effective Amendment No. 470 to the Trust’s Registration Statement, as filed with the SEC on December
17, 2020.) |
|
|
(19) |
Amended
and Restated Expense Limitation Agreement, effective as of December 19, 2019. (Incorporated
by reference to Post-Effective Amendment No. 461 to the Trust’s Registration Statement, as filed with the SEC on January 9, 2020.) |
|
|
(20) |
Expense
Limitation Agreement (with respect to Xtrackers S&P 500 ESG ETF), effective as of December 18, 2020.
(Incorporated by reference to Post-Effective Amendment No. 470 to the Trust’s Registration Statement, as filed with the SEC on December
17, 2020.) |
|
(i) |
(1) |
Opinion
of Dechert LLP. (Incorporated by reference to Pre-Effective Amendment
No. 2 to the Trust’s Registration Statement, as filed with the SEC on May 11, 2011.) |
|
|
(2) |
Opinion
and Consent of Counsel, Dechert LLP. (Incorporated by reference to
Post-Effective Amendment No. 430, as filed with the SEC on September 25, 2018.) |
|
|
(3) |
Opinion
and Consent of Counsel, Dechert LLP. (Incorporated by reference to
Post-Effective Amendment No. 440, as filed with the SEC on December 21, 2018.) |
|
|
(4) |
Opinion
and Consent of Counsel, Dechert LLP. (Incorporated by reference to
Post-Effective Amendment No. 446, as filed with the SEC on February 22, 2019.) |
|
|
(5) |
Opinion
and Consent of Counsel, Dechert LLP. (Incorporated by reference to
Post-Effective Amendment No. 447, as filed with the SEC on March 5, 2019.) |
|
|
(6) |
Opinion
and Consent of Counsel, Dechert LLP. (Incorporated by reference to
Post-Effective Amendment No. 452, as filed with the SEC on April 10, 2019.) |
|
|
(7) |
Opinion
and Consent of Counsel, Dechert LLP. (Incorporated by reference to
Post-Effective Amendment No. 461 to the Trust’s Registration Statement, as filed with the SEC on January 9, 2020.) |
|
|
(8) |
Opinion
and Consent of Counsel, Dechert LLP. (Incorporated by reference to
Post-Effective Amendment No. 465 to the Trust’s Registration Statement, as filed with the SEC on May 11, 2020.) |
|
|
(9) |
Opinion
and Consent of Counsel, Dechert LLP. (Incorporated by reference to
Post-Effective Amendment No. 472 to the Trust’s Registration Statement, as filed with the SEC on January 25, 2021.) |
|
|
(10) |
Opinion
of Morgan, Lewis & Bockius LLP, relating to shares of the Xtrackers Harvest CSI 300 China A-Shares ETF (formerly, db X-trackers Harvest
China Fund). (Incorporated by reference to Post-Effective Amendment
No. 23 to the Trust’s Registration Statement, as filed with the SEC on August 29, 2013.) |
|
|
(11) |
Opinion
of Morgan, Lewis & Bockius LLP, relating to shares of the Xtrackers Harvest CSI 500 China A-Shares Small Cap ETF (formerly, db X-trackers
Harvest China A-Shares Small Cap Fund). (Incorporated by reference
to Post-Effective Amendment No. 79 to the Trust’s Registration Statement, as filed with
the SEC on April 7, 2014.) |
|
|
(12) |
Opinion
of Morgan, Lewis & Bockius LLP, relating to shares of the Xtrackers MSCI All China Equity ETF (formerly, db X-trackers Harvest MSCI
All-China Equity Fund). (Incorporated
by reference to Post-Effective Amendment No. 82 to the Trust’s Registration Statement, as filed with the SEC on April 22, 2014.) |
|
(j) |
|
Consent
of Independent Registered Public Accounting Firm. (Filed herein.) |
|
(k) |
|
Not
applicable. |
|
(l) |
|
Initial
Share Purchase Agreement between Registrant and DBX Advisors LLC. (Incorporated
by reference to Pre-Effective Amendment No. 2 to the Trust’s Registration Statement, as filed with the SEC on May 11, 2011.) |
|
(m) |
|
Not
applicable. |
|
(n) |
|
Not
applicable. |
Item 29. |
Persons controlled by or Under Common Control with the Fund. |
Not applicable.
Item 30. |
Indemnification. |
Pursuant to Article
IX of the Registrant’s Agreement and Declaration of Trust, the Trust has agreed that no person who is or has been a Trustee, officer,
or employee of the Trust shall be subject to any personal liability whatsoever to any person, other than the Trust or its Shareholders,
in connection with the affairs of the Trust; and all persons shall look solely to the Trust property or property of a Series for satisfaction
of claims of any nature arising in connection with the affairs of the Trust or such Series.
Every note, bond, contract,
instrument, certificate, Share or undertaking and every other act or thing whatsoever executed or done by or on behalf of the Trust or
the Trustees or any of them in connection with the Trust shall be conclusively deemed to have been executed or done only in or with respect
to their or his capacity as Trustees or Trustee and neither such Trustees or Trustee nor the Shareholders shall be personally liable thereon.
All Persons extending
credit to, contracting with or having any claim against the Trust or a Series shall look only to the assets of the Trust property or the
Trust property of such Series for payment under such credit, contract or claim; and neither the Trustees, nor any of the Trust’s
officers, employees or agents, whether past, present or future, shall be personally liable therefor.
No person
who is or has been a Trustee, officer or employee of the Trust shall be liable to the Trust or to any Shareholder for any action or failure
to act except for his or her own bad faith, willful misfeasance, gross negligence or reckless disregard of his or her duties involved
in the conduct of the individual’s office, and for nothing else, and shall not be liable for errors of judgment or mistakes of fact
or law.
Without limiting the foregoing
limitations of liability, a Trustee shall not be responsible for or liable in any event for any neglect or wrongdoing of any officer,
employee, investment adviser, sub-adviser, principal underwriter, custodian or other agent of the Trust, nor shall any Trustee be responsible
or liable for the act or omission of any other Trustee (or for the failure to compel in any way any former or acting Trustee to redress
any breach of trust), except in the case of such Trustee’s own willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of his or her office.
Item 31. |
Business and Other Connections of Investment Manager. |
With respect to each of
DBX Advisors LLC and Harvest Global Investments Limited (collectively, the “Advisers”), the response to this Item will be
incorporated by reference to the Advisers’ Uniform Applications for Investment Adviser Registration (“Form ADV”) on
file with the SEC. Each Adviser’s Form ADV may be obtained, free of charge, at the SEC’s website at www.adviserinfo.sec.gov.
Item 32. |
Principal Underwriters. |
(a) ALPS Distributors,
Inc. acts as the distributor for the Registrant and the following investment companies: 1WS Credit Income Fund, 1290 Funds, Aberdeen Standard
Investments ETFs, ALPS Series Trust, Alternative Credit Income Fund, The Arbitrage Funds, AQR Funds, Axonic Alternative Income Fund, Axonic
Funds, Barings Funds Trust, BBH Trust, Bluerock Total Income+ Real Estate Fund, Brandes Investment Trust, Bridge Builder Trust, Broadstone
Real Estate Access Fund, Brown Advisory Funds, Brown Capital Management Mutual Funds, Cambria ETF Trust, Centre Funds, CIM Real Assets
& Credit Fund, CION Ares Diversified Credit Fund, Columbia ETF Trust, Columbia ETF Trust I, Columbia ETF Trust II, CRM Mutual Fund
Trust, Cullen Funds Trust, DBX ETF Trust, ETF Series Solutions, Flat Rock Opportunity Fund, Financial Investors Trust, Firsthand Funds,
FS Credit Income Fund, FS Energy Total Return Fund, FS Series Trust, FS Multi-Alternative Income Fund, Goehring & Rozencwajg Investment
Funds, Goldman Sachs ETF Trust, Graniteshares ETF Trust, Griffin Institutional Access Credit Fund, Griffin Institutional Access Real Estate
Fund, Hartford Funds Exchange-Traded Trust, Hartford Funds NextShares Trust, Heartland Group, Inc., IndexIQ Active ETF Trust, Index IQ
ETF Trust, Infusive US Trust, James Advantage Funds, Janus Detroit Street Trust, Lattice Strategies Trust, Litman Gregory Funds Trust,
Longleaf Partners Funds Trust, Meridian Fund, Inc., Natixis ETF Trust, Natixis ETF Trust II, PRIMECAP Odyssey Funds, Principal Exchange-Traded
Funds, Reality Shares ETF Trust, Reaves Utility Income Fund, RiverNorth Funds, RiverNorth Opportunities Fund, Inc., RiverNorth/DoubleLine
Strategic Opportunity Fund, Inc., SPDR Dow Jones Industrial Average ETF Trust, SPDR S&P 500 ETF Trust, SPDR S&P MidCap 400 ETF
Trust, Sprott Funds Trust, Stone Harbor Investment Funds, Stone Ridge Trust, Stone Ridge Trust II, Stone Ridge Trust III, Stone Ridge
Trust IV, Stone Ridge Trust V, Stone Ridge Trust VI, Stone Ridge Residential Real Estate Income Fund I, Inc., USCF ETF Trust, Wasatch
Funds, WesMark Funds, Wilmington Funds, XAI Octagon Credit Trust, X-Square Balanced Fund and YieldStreet Prism Fund.
(b) To the best of Registrant’s knowledge, the
directors and executive officers of ALPS Distributors, Inc., are as follows:
Name* |
Position
with Underwriter |
Positions
with Fund |
Stephen
Kyllo |
President,
Chief Operating Officer, Director, Chief Compliance Officer |
None |
Eric
T. Parsons |
Vice
President, Controller and Assistant Treasurer |
None |
Joseph
J. Frank** |
Secretary |
None |
Patrick
J. Pedonti ** |
Vice
President, Treasurer and Assistant Secretary |
None |
Richard
C. Noyes |
Senior
Vice President, General Counsel, Assistant Secretary |
None |
Liza
Orr |
Vice
President, Senior Counsel |
None |
Jed
Stahl |
Vice
President, Senior Counsel |
None |
James
Stegall |
Vice
President |
None |
Gary
Ross |
Senior
Vice President |
None |
Kevin
Ireland |
Senior
Vice President |
None |
Hilary
Quinn |
Vice
President |
None |
Jennifer
Craig |
Assistant
Vice President |
None |
* Except as otherwise noted, the principal business address for each of
the above directors and executive officers is 1290 Broadway, Suite 1000, Denver, Colorado 80203.
** The principal business address for Messrs. Pedonti and Frank is 333
W. 11th Street, 5th Floor, Kansas City, Missouri 64105.
Item 33. |
Location of Accounts and Records. |
The accounts and records of the Registrant are located, in whole or in
part, at the office of the Registrant and the following locations:
Registrant |
DBX ETF Trust |
|
100 Summer Street
Boston, MA 02110-2146
|
Investment Advisor |
DBX Advisors LLC
875 Third Avenue
New York, NY 10022-6225 |
|
|
|
DBX Advisors LLC
100 Summer Street
Boston, MA 02110-2146 |
|
|
Sub-advisor |
Harvest Global Investments Limited
31/F, One Exchange Square,
8 Connaught Place
Central, Hong Kong |
|
|
Distributor |
ALPS Distributors, Inc.
1290 Broadway, Suite 1000
Denver, CO 80203-5603 |
|
|
Administrator, Transfer
Agent and Custodian |
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286 |
|
|
Regulatory Administrator |
BNY Mellon Investment Servicing (US) Inc.
201 Washington Street
Boston, MA 02108-4403 |
|
|
Storage Vendor |
Iron Mountain Incorporated
1 Federal Street
Boston, MA 02110-2012 |
|
|
|
Iron Mountain Incorporated
12646 NW 115th Avenue
Medley, FL 33178-3179 |
|
|
Item 34. |
Management Services. |
There are no management related service contracts not discussed
in Part A or Part B.
None.
SIGNATURES
Pursuant to the requirements of the Securities
Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of
this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this amendment to its Registration
Statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of New York and the State of New York on
the 11th day of August 2021.
DBX ETF TRUST
By: /s/Freddi
Klassen
Freddi Klassen*
President
and Chief Executive Officer
Pursuant to the requirements of
the Securities Act of 1933, this Post-Effective Amendment to its Registration Statement has been signed below by the following persons
in the capacities and on the dates indicated:
SIGNATURE |
TITLE |
DATE |
|
|
|
/s/Stephen
R. Byers |
|
|
Stephen
R. Byers* |
Trustee and Chairman |
August 11, 2021 |
|
|
|
/s/George O. Elston |
|
|
George O. Elston* |
Trustee |
August 11, 2021 |
|
|
|
/s/Diane Kenneally |
|
|
Diane Kenneally |
Treasurer, Chief Financial Officer and
Controller |
August 11, 2021 |
|
|
|
/s/Freddi Klassen |
|
|
Freddi Klassen* |
President and Chief Executive Officer |
August 11, 2021 |
|
|
|
/s/J. David Officer |
|
|
J. David Officer* |
Trustee |
August 11, 2021 |
|
|
|
*By:
/s/ Caroline
Pearson
Caroline Pearson**
Assistant Secretary
DBX ETF TRUST
EXHIBIT INDEX
|
(d)(1) |
Investment Advisory Agreement, dated January 31, 2011, and amended as of November 17, 2020, with a schedule dated as of May 11, 2021,
between the Trust and DBX Advisors LLC. |
|
(e)(2) |
Amendment 11, dated as of August 18, 2021, to the Distribution Agreement, dated April 16, 2018, between the Registrant and ALPS Distributors,
Inc. |
|
(g)(3) |
Amended Appendix A dated August 18, 2021, to the Amended and Restated Supplement to the Global Custody Agreement, Hong Kong – China
– Stock Connect Service, dated October 18, 2018, which amends the Global Custody Agreement dated as of January 31, 2011, between
the Registrant and The Bank of New York Mellon. |
|
(g)(4) |
Amendment, dated as of August 18, 2021, to the Custody Agreement, dated January 31, 2011, between the Registrant and The Bank of New York
Mellon. |
|
(g)(6) |
Amendment, dated as of August 18, 2021, to the Foreign Custody Manager Agreement, dated January 31, 2011, between the Registrant and The
Bank of New York Mellon. |
|
(h)(5) |
Amendment, dated as of August 18, 2021, to the Fund Administration and Accounting Agreement, dated as of January 31, 2011, between the
Registrant and The Bank of New York Mellon. |
|
(h)(9) |
Amendment, dated as of August 18, 2021, to the Corporate Services Agreement, dated as of July 6, 2016, between the Registrant and The
Bank of New York Mellon. |
|
(h)(11) |
Amendment, dated as of August 18, 2021, to the Transfer Agency and Service Agreement, dated January 31, 2011, between the Registrant and
The Bank of New York Mellon. |
|
(j) |
Consent of Independent Registered Public Accounting Firm. |
|
(p)(1) |
Code of Ethics of the Registrant, dated May 11, 2021. |
|
(p)(2) |
Global Code of Ethics – DWS Group, dated July 1, 2021. |