NOTES TO FINANCIAL STATEMENTS
October 31, 2019 (Unaudited) (Continued)
NOTE 6 – SHARE TRANSACTIONS
Shares of the Fund are listed and trade on the New York Stock Exchange Arca, Inc. (“NYSE Arca”). Market prices for the shares may be different from their NAV. The Fund issues and redeems shares on a continuous basis at NAV generally in blocks of 50,000 shares called “Creation Units.” Creation Units are issued and redeemed principally in-kind for securities included in a specified universe. Once created, shares generally trade in the secondary market at market prices that change throughout the day. Except when aggregated in Creation Units, shares are not redeemable securities of the Fund. Creation Units may only be purchased or redeemed by certain financial institutions (“Authorized Participants”). An Authorized Participant is either (i) a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the National Securities Clearing Corporation or (ii) a Depository Trust Company participant and, in each case, must have executed a Participant Agreement with the Distributor. Most retail investors do not qualify as Authorized Participants nor have the resources to buy and sell whole Creation Units. Therefore, they are unable to purchase or redeem shares directly from the Fund. Rather, most retail investors may purchase shares in the secondary market with the assistance of a broker and are subject to customary brokerage commissions or fees.
The Fund currently offers one class of shares, which has no front end sales load, no deferred sales charge, and no redemption fee. A fixed transaction fee is imposed for the transfer and other transaction costs associated with the purchase or sale of Creation Units. The standard fixed transaction is $250, payable to the Custodian. The fixed fee may be waived on certain orders if the Fund’s Custodian has determined to waive some or all of the creation order costs associated with the order, or another party, such as the Adviser, has agreed to pay such fee. In addition, a variable fee may be charged on all cash transactions or substitutes for Creation Units of up to a maximum of 2% as a percentage of the value of the Creation Units subject to the transaction. Variable fees are imposed to compensate the Fund for the transaction costs associated with the cash transactions. Variable fees received by the Fund, if any, are displayed in the capital shares transactions section of the Statement of Changes in Net Assets. The Fund may issue an unlimited number of shares of beneficial interest, with no par value. All shares of the Fund have equal rights and privileges.
NOTE 7 – PRINCIPAL RISK
Concentration Risk. To the extent that the Fund invests more heavily in particular sectors of the economy, its performance will be especially sensitive to developments that significantly affect those sectors.
20
The Acquirers Fund
Expense Example
For the Period Ended October 31, 2019 (Unaudited)
As a shareholder of the Funds you incur two types of costs: (1) transaction costs, including brokerage commissions on purchases and sales of Fund shares, and (2) ongoing costs, including management fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period as indicated below in the Expense Example table.
Actual Expenses
The first line of the table provides information about actual account values based on actual returns and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then, multiply the result by the number in the first line under the heading entitled “Expenses Paid During Period’’ to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table provides information about hypothetical account values based on a hypothetical return and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as brokerage commissions paid on purchases and sales of Fund shares. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. If these transactional costs were included, your costs would have been higher.
21
The Acquirers Fund
Expense Example
For the Period Ended October 31, 2019 (Unaudited) (Continued)
The Acquirers Fund
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|
Beginning
Account Value
May 14, 2019(1)
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Ending
Account Value
October 31, 2019
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Expenses
Paid During
the Period
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Actual
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$ 1,000.00
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$ 1,020.90
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$3.72(2)
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Hypothetical (5% annual return before expenses)
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$ 1,000.00
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$ 1,021.17
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$4.02(3)
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(1)
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Fund commencement.
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(2)
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The dollar amount shown as expenses paid during the period is equal to the annualized net expense ratio, 0.79%, multiplied by the average account value during the period, multiplied by 170/365, to reflect the current fiscal period.
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(3)
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The dollar amount shown as expenses paid during the period is equal to the annualized net expense ratio, 0.79%, multiplied by the average account value during the period, multiplied by 184/365, to reflect one-half year period.
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22
The Acquirers Fund
Approval of Advisory Agreements and Board Considerations
(Unaudited)
Pursuant to Section 15(c) of the Investment Company Act of 1940 (the “1940 Act”), the Board of Trustees (the “Board”) of ETF Series Solutions (the “Trust”) considered the approval of the Advisory Agreement (the “Advisory Agreement”) between Acquirers Funds, LLC (“Acquirers” or the “Adviser”) and the Trust, on behalf of The Acquirers Fund (“ZIG” or the “Fund”) and the Sub-Advisory Agreement (the “Sub-Advisory Agreement”) (together, the “Agreements”) between the Adviser, the Trust, on behalf of the Fund, and CSat Investment Advisory, L.P. (“CSat” or the “Sub-Adviser”) at the following meetings (the “Meetings”):
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|
●
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at a meeting held January 9-10, 2019 (the “January Meeting”) with respect to the approval of the Advisory Agreement for the Fund; and
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●
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at a meeting held April 10-11, 2019 (the “April Meeting”) with respect to the Sub-Advisory Agreement for the Fund.
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Prior to the Meetings, the Board, including the Trustees who are not parties to the Agreements or “interested persons” of any party thereto, as defined in the 1940 Act (the “Independent Trustees”), reviewed written materials from the Adviser and Sub-Adviser regarding, among other things: (i) the nature, extent, and quality of the services provided by the Adviser and Sub-Adviser; (ii) the cost of the services provided and the profits realized by the Adviser and Sub-Adviser from services rendered to the Fund; (iii) comparative fee and expense data for the Fund and other investment companies with similar investment objectives; (iv) the extent to which economies of scale would be realized as the Fund grows and whether the advisory fee for the Fund reflects these economies of scale for the benefit of the Fund; and (v) other financial benefits to the Adviser and Sub-Adviser resulting from services rendered to the Fund.
Prior to the Meetings, representatives from the Adviser and Sub-Adviser, along with other service providers of the Fund, presented written information to help the Board evaluate each firm’s fees and other aspects of the Agreements.
Additionally, during the January Meeting, the Managing Member of the Adviser provided oral overviews of the Fund’s strategy, the services to be provided to the Fund by the Adviser, and additional information about the Adviser’s personnel, business continuity plans, and financial resources. The Board then discussed the written materials and oral presentation that it had received and any other information that the Board received at the January Meeting, and deliberated on the approval of the Advisory Agreement in light of this information.
During the April Meeting, representatives from the Sub-Adviser provided oral overviews of the Fund’s strategy, the services to be provided to the Fund by the Sub-Adviser, and additional information about the Sub-Adviser’s personnel, other clients, and compliance program. The Board then discussed the written materials and oral
23
The Acquirers Fund
Approval of Advisory Agreements and Board Considerations
(Unaudited) (Continued)
presentation that it had received and any other information that the Board received at the April Meeting, and deliberated on the approval of the Sub-Advisory Agreement in light of this information.
In each of its deliberations, the Board did not identify any single piece of information discussed below that was all-important or controlling.
Approval of the Advisory Agreement with the Adviser
Nature, Extent, and Quality of Services to be Provided. The Trustees considered the scope of services to be provided under the Advisory Agreement, noting that the Adviser will be providing investment management services to ZIG. In considering the nature, extent, and quality of the services to be provided by the Adviser, the Board considered the quality of the Adviser’s compliance program, including the support the Adviser would receive from a third-party compliance consulting firm, and the report from the Trust’s Chief Compliance Officer regarding his review of the Adviser’s compliance program. The Board noted that it had received a copy of the Adviser’s registration form (“Form ADV”), as well as the response of the Adviser to a detailed series of questions that included, among other things, information about the background and experience of the firm’s key compliance personnel, the services to be provided by the Adviser, and the ownership structure of the firm.
The Board also considered other services to be provided to ZIG, such as monitoring adherence to ZIG’s investment restrictions, monitoring compliance with various ZIG policies and procedures and with applicable securities regulations, and monitoring the extent to which ZIG achieved its investment objective as a passively-managed fund. The Board noted that the Adviser was also the index provider for ZIG and would be responsible for implementing a replication or sampling strategy to track the performance of the index. The Board considered that, because the Adviser is the index provider, the Adviser may have certain conflicts of interest with respect to its management of the index, but noted that the Adviser had adopted policies and procedures to mitigate such conflicts.
Historical Performance. The Board noted that ZIG had not yet commenced operations and concluded that the performance of ZIG, thus, was not a relevant factor in their deliberations. The Board also considered that ZIG is designed to track the performance of an index. Consequently, with respect to ZIG’s performance, the Board in the future would focus on the Adviser’s services, including whether ZIG’s performance exhibited significant tracking error.
Cost of Services Provided and Economies of Scale. The Board then reviewed the proposed expense ratio for ZIG and compared it to the universe of Long-Short Equity ETFs as reported by Morningstar (the “Category Peer Group”). The Board noted that the proposed expense ratio for ZIG was above the median of the Category Peer Group,
24
The Acquirers Fund
Approval of Advisory Agreements and Board Considerations
(Unaudited) (Continued)
but significantly less than the highest expense ratios in the Category Peer Group. The Board determined that ZIG’s expense ratio was reasonable given the unique nature of ZIG’s passively-managed strategy relative to traditional long-short equity funds.
The Board took into consideration that the advisory fee for ZIG was a “unified fee,” meaning it would pay no expenses other than the advisory fee and certain other costs such as interest, brokerage, extraordinary expenses and, to the extent it is implemented, fees pursuant to a Distribution and/or Shareholder Servicing (12b-1) Plan. The Board noted that the Adviser would be responsible for compensating the Trust’s other service providers and paying ZIG’s other expenses out of its own fee and resources. The Board also evaluated the compensation and benefits expected to be received by the Adviser from its relationship with ZIG, taking into account an analysis of the Adviser’s profitability with respect to ZIG and the financial resources the Adviser had committed and proposed to commit to its business. The Board determined such analyses were not a significant factor given that ZIG had not yet commenced operations and consequently, the future size of ZIG was generally unpredictable. The Board noted it intends to monitor fees as ZIG grows in size and assess whether fee breakpoints may be warranted.
Conclusion. No single factor was determinative of the Board’s decision to approve the Advisory Agreement; rather, the Board based its determination on the total mix of information available to it. Based on a consideration of all the factors in their totality, the Board, including a majority of the Independent Trustees, determined that the Advisory Agreement, including the compensation payable under the agreement, was fair and reasonable to the Fund. The Board, including a majority of the Independent Trustees, therefore determined that the approval of the Advisory Agreement was in the best interests of the Fund and its shareholders.
Approval of the Sub-Advisory Agreement with the Sub-Adviser
Nature, Extent, and Quality of Services to be Provided. The Board considered the scope of services to be provided to ZIG under the Sub-Advisory Agreement, noting that CSat would provide investment management services to ZIG, as well as other ETFs, including certain series of the Trust. The Board noted the responsibilities that CSat would have as ZIG’s investment sub-adviser, including: responsibility for the general management of the day-to-day investment and reinvestment of the assets of ZIG; determining the daily baskets of deposit securities and cash components; executing portfolio security trades for purchases and redemptions of ZIG’s shares conducted on a cash-in-lieu basis; oversight of general portfolio compliance with relevant law; responsibility for daily monitoring of tracking error; quarterly reporting to the Board; and implementation of Board directives as they relate to ZIG.
25
The Acquirers Fund
Approval of Advisory Agreements and Board Considerations
(Unaudited) (Continued)
In considering the nature, extent, and quality of the services to be provided by CSat, the Board considered reports of the Trust’s Chief Compliance Officer with respect to CSat’s compliance program and CSat’s experience providing investment management services to other ETFs, including other series of the Trust. The Trustees considered information they had received and reviewed with regard to CSat at previous Board meetings, as well as the materials from the April Meeting, including information about the background and experience of the portfolio managers primarily responsible for the day-to-day management of ZIG. The Board also considered CSat’s resources and capacity with respect to portfolio management, compliance, and operations given the number of funds for which it would be advising or sub-advising.
Historical Performance. The Board noted that ZIG had not yet commenced operations. Consequently, the Board determined performance was not a relevant consideration with respect to ZIG. The Board also considered that ZIG is designed to track the performance of an index. Consequently, with respect to ZIG’s performance, the Board in the future would focus on the Sub-Adviser’s services, including whether ZIG’s performance exhibited significant tracking error.
Costs of Services Provided and Economies of Scale. The Board reviewed the advisory fees to be paid by Acquirers to CSat for its services to ZIG. The Board considered the fees to be paid to CSat would be paid by Acquirers from the fee Acquirers received from ZIG and noted that the fee reflected an arm’s-length negotiation between Acquirers and CSat based on the nature and expected size of ZIG and was in line with fees charged by other trading sub-advisers to index-based series of the Trust. The Board further determined that the fee reflected an appropriate allocation of the advisory fee paid to each adviser given the work performed by each firm. The Board also evaluated the compensation and benefits expected to be received by CSat from its relationship with ZIG, taking into account an analysis of CSat’s projected profitability with respect to ZIG. The Board determined that the Sub-Adviser might realize economies of scale in managing the Fund as assets grow in size. The Board further determined that, based on the amount and structure of the sub-advisory fee, such economies of scale are currently shared with Fund shareholders, although the Board intends to monitor fees as the Fund grows in size and assess whether fee breakpoints may be warranted.
Conclusion. No single factor was determinative of the Board’s decision to approve the Sub-Advisory Agreement; rather, the Board based its determination on the total mix of information available to it. Based on a consideration of all the factors in their totality, the Board, including a majority of the Independent Trustees, determined that the Sub-Advisory Agreement, including the compensation payable under the agreement, was fair and reasonable to the Fund. The Board, including a majority of the Independent Trustees, therefore determined that the approval of the Sub-Advisory Agreement was in the best interests of the Fund and its shareholders.
26
The Acquirers Fund
Information About Portfolio Holdings
(Unaudited)
The Fund files its complete schedules of portfolio holdings for its first and third fiscal quarters with the SEC on Form N-Q. The Fund’s Form N-Q is available without charge, upon request, by calling toll-free at (800) 617-0004. Furthermore, you may obtain the Form N-Q on the SEC’s website at www.sec.gov. The Fund’s portfolio holdings are posted on its website at www.acquirersfund.com daily.
Information About Proxy Voting
(Unaudited)
A description of the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities is provided in the Statement of Additional Information (“SAI”). The SAI is available without charge, upon request, by calling toll-free at (800) 617-0004, by accessing the SEC’s website at www.sec.gov, or by accessing the Fund’s website at www.acquirersfund.com.
Information regarding how the Fund voted proxies relating to portfolio securities during the period ending June 30 is available by calling toll-free at (800) 617-0004 or by accessing the SEC’s website at www.sec.gov.
Information About the Fund’s Trustees
(Unaudited)
The Statement of Additional Information (“SAI”) includes additional information about the Fund’s Trustees and is available without charge, upon request, by calling (800) 617-0004 or by accessing the SEC’s website at www.sec.gov or by accessing the Fund’s website at www.acquirersfund.com.
27
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Advisor and Index Provider
Acquirers Funds, LLC
21515 Hawthorne Boulevard, Suite 200 PMB#82
Torrance, California 90503
Sub-Adviser
CSat Investment Advisory, L.P. d/b/a Exponential ETFs
625 Avis Drive
Ann Arbor, Michigan 48108
Distributor
Quasar Distributors, LLC
777 East Wisconsin Street, 6th Floor
Milwaukee, Wisconsin 53202
Custodian
U.S. Bank National Association
1555 North Rivercenter Drive, Suite 302
Milwaukee, Wisconsin 53212
Transfer Agent
U.S. Bancorp Fund Services, LLC
615 East Michigan Street
Milwaukee, Wisconsin 53202
Independent Registered Public Accounting Firm
Cohen & Company, Ltd.
342 North Water Street, Suite 830
Milwaukee, Wisconsin 53202
Legal Counsel
Morgan, Lewis, & Bockius, LLP
1111 Pennsylvania Avenue, NW
Washington, DC 20004
The Acquirers Fund
Symbol – ZIG
CUSIP – 26922A263