As filed with the Securities and Exchange Commission on June 21, 2013
1933 Act File No. 333-150525
1940 Act File No. 811-22201
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
|
|
|
|
|
|
|
THE SECURITIES ACT OF 1933
|
|
x
|
|
|
Pre-Effective Amendment No.
|
|
¨
|
|
|
Post-Effective Amendment No. 85
|
|
x
|
and/or
REGISTRATION STATEMENT
UNDER
|
|
|
|
|
|
|
THE INVESTMENT COMPANY ACT OF 1940
|
|
x
|
|
|
Amendment No. 87
|
|
x
|
(Check appropriate box or boxes.)
DIREXION SHARES ETF TRUST
(Exact name of Registrant as Specified in Charter)
1301 Avenue of the Americas (6
th
Avenue),
35
th
Floor
New York, New York 10019
(Address of Principal Executive Office) (Zip Code)
Registrants
Telephone Number, including Area Code: (646) 572-3390
Daniel D. ONeill, Chief Executive Officer
1301 Avenue of the Americas (6
th
Avenue), 35
th
Floor
New York, New York 10019
(Name and Address of Agent for Service)
Copy to:
|
|
|
Adam R. Henkel
|
|
Eric S. Purple
|
U.S. Bancorp Fund Services, LLC
|
|
K&L Gates LLP
|
615 East Michigan
|
|
1601 K Street, NW
|
Milwaukee, WI 53202
|
|
Washington, DC 20006
|
It is proposed that this filing will become effective (check appropriate box)
|
¨
|
immediately upon filing pursuant to paragraph (b)
|
|
x
|
On June 22, 2013 pursuant to paragraph (b)
|
|
¨
|
60 days after filing pursuant to paragraph (a)(1)
|
|
¨
|
On (date) pursuant to paragraph (a)(1)
|
|
¨
|
75 days after filing pursuant to paragraph (a)(2)
|
|
¨
|
on (date) pursuant to paragraph (a)(2) of Rule 485.
|
If appropriate, check the following box:
|
¨
|
This post-effective amendment designates a new effective date for a previously filed post-effective amendment.
|
DIREXION SHARES ETF TRUST
CONTENTS OF REGISTRATION STATEMENT
This registration document is comprised of the following:
Cover Sheet
Contents of Registration Statement:
Combined Prospectus and Statement of Additional Information for the following funds:
|
|
|
3X BULL FUNDS
|
|
3X BEAR FUNDS
|
Direxion Daily Chile Bull 3X Shares
|
|
Direxion Daily Chile Bear 3X Shares
|
Direxion Daily Hong Kong Bull 3X Shares
|
|
Direxion Daily Hong Kong Bear 3X Shares
|
Direxion Daily Japan Bull 3X Shares
|
|
Direxion Daily Japan Bear 3X Shares
|
Direxion Daily Mexico Bull 3X Shares
|
|
Direxion Daily Mexico Bear 3X Shares
|
and
Part C of Form N-1A;
Signature Page; and
Exhibits.
D
IREXION
S
HARES
E
TF
T
RUST
PROSPECTUS
|
|
|
|
|
1301 Avenue of the Americas (6th Avenue), 35th Floor
|
|
New York, New York 10019
|
|
866-476-7523
|
|
|
|
3X BULL FUNDS
|
|
3X BEAR FUNDS
|
I
NTERNATIONAL
F
UNDS
|
Direxion Daily Chile Bull 3X Shares
|
|
Direxion Daily Chile Bear 3X Shares
|
Direxion Daily Hong Kong Bull 3X Shares
|
|
Direxion Daily Hong Kong Bear 3X Shares
|
Direxion Daily Japan Bull 3X Shares (JPNL)
|
|
Direxion Daily Japan Bear 3X Shares (JPNS)
|
Direxion Daily Mexico Bull 3X Shares
|
|
Direxion Daily Mexico Bear 3X Shares
|
JUNE 22, 2013
The funds offered in this prospectus (collectively, the Funds) trade on, or will trade on, NYSE Arca, Inc. The Funds seek
daily
leveraged
investment results and are intended to be used as short-term trading vehicles. The Funds with Bull in their names attempt to provide daily investment results that correlate to the performance of an index or benchmark
and are collectively referred to as the 3X Bull Funds. The Funds with Bear in their names attempt to provide daily investment results that correlate to the inverse (or opposite) of the performance of an index or benchmark and
are collectively referred to as the 3X Bear Funds. The Funds are not intended to be used by, and are not appropriate for, investors who do not intend to actively monitor and manage their portfolios. The Funds are very different from most
mutual funds and exchange-traded funds. Investors should note that:
(1) The Funds pursue
daily leveraged
investment goals, which means that the Funds are riskier than alternatives that do not use leverage because the Funds magnify the performance of the benchmark of an investment.
(2) Each 3X Bear Fund pursues investment goals that are inverse to the performance of its benchmark, a result opposite of most mutual funds and exchange-traded funds.
(3) The Funds seek
daily leveraged
investment results. The pursuit of these investment goals means that the return of a
Fund for a period longer than a full trading day will be the product of the series of daily leveraged returns for each trading day during the relevant period. As a consequence, especially in periods of market volatility, the path of the benchmark
during the longer period may be at least as important to a Funds return for the longer period as the cumulative return of the benchmark for the relevant longer period. Further, the return for investors that invest for periods less than a full
trading day or for a period different than a trading day will not be the product of the return of the Funds stated goal and the performance of the target index for the full trading day. The Funds are not suitable for all investors.
The Funds are designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies.
Such investors are expected to monitor and manage their portfolios frequently. Investors in the Funds should:
(a) understand the risks associated with the use of leverage,
(b) understand the consequences of seeking daily leveraged investment results,
(c) understand the risk of shorting, and
(d) intend to actively monitor and manage their investments.
Investors who do not
understand the Funds or do not intend to actively manage their funds and monitor their investments should not buy the Funds. There is no assurance that any of the Funds offered in this prospectus will achieve their objectives and an investment in a
Fund could lose money. No single Fund is a complete investment program.
If a Funds underlying benchmark moves more than 33% on a
given trading day in a direction adverse to the Fund, the Funds investors would lose all of their money. The Funds investment adviser, Rafferty Asset Management, LLC (Rafferty or Adviser), will attempt to position
each Funds portfolio to ensure that a Fund does not lose more than 90% of its net asset value on a given trading day. The cost of such downside protection will be limitations on a Funds gains. As a consequence, a Funds
portfolio may not be responsive to benchmark movements beyond 33% on a given trading day in a direction favorable to the Fund. For example, if a 3X Bull Funds underlying benchmark was to gain 35%, that Fund might be limited to a daily
gain of 90%, which corresponds to 300% of a benchmark gain of 30%, rather than 300% of a benchmark gain of 35%.
The Securities and
Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
SUMMARY OF DIREXION SHARES
Direxion Daily Chile Bull 3X Shares
Important Information Regarding the Fund
The Direxion Daily Chile Bull 3X Shares (Fund) seeks
daily
leveraged investment results. The pursuit of daily
leveraged goals means that the Fund is riskier than alternatives that do not use leverage because the Funds objective is to magnify the performance of an index. The pursuit of daily leveraged investment goals means that the return of the Fund
for a period longer than a full trading day may bear no resemblance to 300% of the return of its index for such longer period because the aggregate return of the Fund is the product of the series of daily leveraged returns for each trading day. The
path of the benchmark during the longer period may be at least as important to the Funds return for the longer period as the cumulative return of the benchmark for the relevant longer period, especially in periods of market volatility.
Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of the Funds stated goal and the performance of the target index for the
full trading day.
Investment Objective
The Fund seeks daily investment results, before fees and expenses, of 300% of the performance of the MSCI Chile IMI 25/50 Index.
The Fund seeks
daily
leveraged investment results
and does not seek to achieve its stated investment objective over a period of time greater than one day.
The Fund is different and much riskier than most exchange-traded funds.
The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged
investment results, understand the risks associated with the use of leverage and are willing to monitor their portfolios frequently. The Fund seeks daily leveraged investment results relative to the Index and is different and riskier than similarly
benchmarked exchange-traded funds that do not use leverage. Therefore, the Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy or hold shares of the Fund (Shares). Investors purchasing
shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
A
nnual Fund Operating Expenses
(1
)
(expenses that you pay each year as a percentage of the value of your investment)
|
|
|
|
|
Management Fees
|
|
|
0.75%
|
|
Distribution and/or Service (12b-1) Fees
|
|
|
0.00%
|
|
Other Expenses of the Fund
|
|
|
0.25%
|
|
Acquired Fund Fees and Expenses
|
|
|
0.15%
|
|
|
|
|
|
|
Total Annual Fund Operating Expenses
|
|
|
1.15%
|
|
Expense Cap/Reimbursement
|
|
|
(0.05%
|
)
|
|
|
|
|
|
Total Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
|
|
1.10%
|
|
|
|
|
|
|
(1)
|
|
The Funds adviser, Rafferty Asset Management, LLC (Rafferty or the Adviser) has contractually agreed to cap all or a portion
of its management fee and/or reimburse the Fund for Other Expenses through March 1, 2015, to the extent that the Funds Total Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest,
Acquired Fund Fees and Expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation). Any expense
cap is subject to reimbursement by the Fund within the following three years only if overall expenses fall below these percentage limitations. This agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Expense Example
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem 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 Funds operating expenses remain the same. 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 rate may indicate higher transaction costs and
may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Funds performance.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
1
|
|
|
Principal Investment Strategies
The Fund, under normal circumstances, creates long positions by investing at least 80% of its assets in the securities that comprise the MSCI
Chile IMI 25/50 Index (Index) and/or financial instruments that provide leveraged and unleveraged exposure to the Index. These financial instruments include: futures contracts; options on securities, indices and futures contracts; equity
caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; exchange-traded funds (ETFs); and other financial instruments. On a day-to-day basis, the Fund also may hold short-term debt
instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
Chile is considered an emerging market, as that term is defined by the index provider. The determination that Chile is an emerging market is based on it being an economy that is in
the initial stages of industrialization and has been historically marked by low per capita income and lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market
transparency, increased access for foreign investors and generally improved economic conditions. Emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than more developed economies.
The Index is designed to measure the performance of the large, mid and small cap segments of the Chilean equity market, covering
approximately 99% of the free float-adjusted market capitalization in Chile. As of the date of its last reconstitution, the Index had a total dollar value of approximately $77.5 billion, composed of 43 constituent securities ranging in market
capitalization from approximately $250.9 million to $6.9 billion.
The Index applies certain screens and weightings to take
into account the investment limits placed on regulated investment companies (RICs) under federal tax regulations. One such requirement is that at the end of each quarter of a RICs tax year, no more than 25% of its assets may be
invested in a single issuer and the sum of the weights of all issuers representing more than 5% of the RIC should not exceed 50% of its total assets. The Index aims to reflect these requirements in the selection and weighting of its component
securities.
The Fund may gain exposure to only a representative sample of the securities in the Index that have aggregate
characteristics similar to those of the Index. The Fund gains this exposure either by directly investing in the underlying securities of the Index or by investing in derivatives that provide exposure to those securities. The Fund seeks to remain
fully invested at all times consistent with its stated goal. At the close of the markets each trading day, Rafferty positions the Funds portfolio so that its exposure to the Index is consistent with the Funds investment objective. The
impact of the Indexs movements during the day will affect whether the Funds portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Funds
exposure will need to be increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Funds exposure will need to be reduced. This re-positioning strategy typically results in high portfolio
turnover.
Because of daily rebalancing and the compounding of each days return over time, the return of the Fund for
periods longer than a single day will be the result of each days returns compounded over the period, which will very likely differ from 300% of the return of the Index over the same period. The Fund will lose money if the Index performance is
flat over time, and as a result of daily rebalancing, the Indexs volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Indexs performance increases.
Additionally, because a significant portion of the assets of the Fund may come from investors using asset allocation and
market timing investment strategies, the Fund may further need to engage in frequent trading. The Fund will concentrate its investment in a particular industry or group of industries to approximately the same extent as the Index is so
concentrated.
Principal Risks
An investment in the Fund entails risk. The Fund could lose money or its performance could trail that of other investment alternatives. The Adviser cannot guarantee that the Fund will achieve its objective.
In addition, the Fund presents some risks not traditionally associated with most mutual funds and exchange-traded funds. It is important that investors closely review all of the risks listed below and understand how these risks interrelate before
making an investment in the Fund. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets could negatively affect issuers worldwide, including the Fund. There is the risk that you could lose all or a portion
of your money invested in the Fund.
Adverse Market Conditions Risk
Because the Fund magnifies the performance of the Index, its performance will suffer during conditions in which the Index declines.
Advisers Investment Strategy Risk
The Adviser utilizes a quantitative methodology to select investments for the Fund. Although this methodology is designed to correlate the
Funds performance with the
|
|
|
|
|
|
|
|
|
2
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
performance of the Index, there is no assurance that such methodology will be successful and will enable the Fund to achieve its investment objective.
Investment in securities of Chilean issuers involves risks that may be greater than if the Funds investments were more geographically
diverse. Chiles economy is heavily dependent on trading with key partners. Any increases or decreases in the volume of this trading, changes in taxes or tariffs, or variance in political relationships between nations may impact the Chilean
economy overall in a way that would be adverse to the Funds investments. Additionally, investment in Chile may be subject to any positive or adverse effects of the varying nature of its economic landscape with respect to expropriation and/or
nationalization of assets, strengthened or lessened restrictions on and government intervention in international trade, confiscatory taxation, political instability, including authoritarian and/or military involvement in governmental decision
making, armed conflict, the impact on the economy as a result of civil war and social instability as a result of religious, ethnic and/or socioeconomic unrest.
The Fund may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure to a particular group of
securities or an asset class without actually purchasing those securities or investments, or to hedge a position. These financial instruments may include swap agreements. The use of swap agreements and other counterparty instruments involves risks
that are different from those associated with ordinary portfolio securities transactions. For example, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap
agreement counterparty. Swap agreements and other counterparty instruments also may be considered to be illiquid. In addition, the Fund may enter into swap agreements that involve a limited number of counterparties, which may increase the
Funds exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is a risk that no suitable counterparties will be willing to enter into, or continue
to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its investment objective.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will affect the value of what the Fund owns and the Funds share price. Generally, when the
U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Devaluation of a currency by a countrys government or banking authority also will have a
significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily investment
objective. To achieve a high degree of correlation with the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily target. The Fund may have difficulty achieving its daily target due to fees and expenses,
high portfolio turnover, transaction costs and costs associated with the use of leveraged investment techniques and/or a temporary lack of liquidity in the markets for the securities held by the Fund. Market disruptions, regulatory restrictions or
extreme volatility will also adversely affect the Funds ability to adjust exposure to the required levels. The Fund may not have investment exposure to all securities in its underlying Index, or its weighting of investment exposure to such
stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the underlying Index. The Fund may be subject to large movements of assets into and out of the
Fund, potentially resulting in the Fund being over- or under-exposed to its Index. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Indexs movement. Because of this, it is unlikely that the Fund
will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to its Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding
annual index reconstitutions and other index rebalancing or reconstitution events may hinder the Funds ability to meet its daily investment objective on that day.
To the extent the Fund seeks exposure to foreign companies, the Funds investments may be in the form of depositary receipts or other
securities convertible into securities of foreign issuers, including American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), and Global Depositary Receipts (GDRs). While the use of ADRs, EDRs and
GDRs, which are traded on exchanges and represent and ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs, EDRs,
and GDRs continue to be subject to certain of the risks associated with investing directly in foreign securities.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
3
|
|
|
The Fund uses investment techniques, including
investments in derivatives such as futures and forward contracts, options and swaps, which may be considered aggressive. Investments in such derivatives are subject to market risks that may cause their prices to fluctuate over time and may increase
the volatility of the Fund. The use of derivatives may expose the Fund to additional risks that it would not be subject to if it invested directly in the securities underlying those derivatives, such as counterparty risk and the risk that the
derivatives may become illiquid. The use of derivatives may result in larger losses or smaller gains than otherwise would be the case. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move in value that
causes a material decline in the Funds net asset value (NAV), the terms of the swap agreement between the Fund and its counterparty may allow the counterparty to immediately close out of the transaction with the Fund. In such
circumstances, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the Funds daily investment objective. This may prevent the Fund from achieving its daily
investment objective particularly if the Index reverses all or a portion of its intraday move by the end of the day. In addition, the Funds investments in derivatives, as of the date of this Prospectus, are subject to the following risks:
Futures and Forward Contracts
. There may be an imperfect correlation between the changes in market value of the
securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts. Forward currency transactions include the risks associated with fluctuations in currency.
Options
. There may be an imperfect correlation between the prices of options and movements in the price of the securities (or
indices) hedged or used for cover, which may cause a given hedge not to achieve its objective.
Swap Agreements
. Interest
rate swaps are subject to interest rate and credit risk. Total return swaps are subject to counterparty risk, which relates to credit risk of the counterparty and liquidity risk of the swaps themselves.
Early Close/Trading Halt Risk
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial
instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its
investments and/or may incur substantial trading losses.
Effects of Compounding and Market Volatility Risk
The Fund does not attempt to, and should not be expected to, provide returns which are a multiple of the return of the Index for periods
other than a single day. The Fund rebalances its portfolio on a daily basis, increasing exposure in response to that days gains or reducing exposure in response to that days losses. This means that for a period longer than one day, the
pursuit of daily goals may result in daily leveraged compounding. It also means that the return of an index over a period of time greater than one day multiplied by the Funds daily target (300%) generally will not equal the Funds
performance over that same period.
As a result, over time, the cumulative percentage increase or decrease in the value of the
Funds portfolio may diverge significantly from the cumulative percentage increase or decrease in the multiple of the return of the Funds underlying index due to the compounding effect of losses and gains on the returns of the Fund. It
also is expected that the Funds use of leverage will cause the Fund to underperform the return of three times its benchmark in a trendless or flat market.
The effect of compounding becomes more pronounced on the Funds performance as the Index experiences volatility. The Indexs volatility rate is a statistical measure of the magnitude of
fluctuations in the returns of the Index. The table below provides examples of how Index volatility could affect the Funds performance. The chart shows estimated Fund returns for a number of combinations of performance and volatility over a
one-year period and is shown to illustrate how holding the Fund for a period longer than one day may negatively impact investment return. As shown below, this Fund, or any other 3X Bull Fund, would be expected to lose 17.1% (as shown in Table 1
below) if its Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. If the Indexs annualized volatility were to rise to 75%, the hypothetical loss for a one year period for the Fund
widens to approximately 81.5%.
At higher ranges of volatility, there is a chance of a near complete loss of value even if the
Index is flat. For instance, if the Indexs annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was only 0%.
|
|
|
|
|
|
|
|
|
4
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
Year
Index
Return
|
|
|
300%
One Year
Index
Return
|
|
|
Volatility Rate
|
|
|
|
10%
|
|
|
25%
|
|
|
50%
|
|
|
75%
|
|
|
100%
|
|
|
60%
|
|
|
|
180%
|
|
|
|
93.8%
|
|
|
|
94.7%
|
|
|
|
97.0%
|
|
|
|
98.8%
|
|
|
|
99.7%
|
|
|
50%
|
|
|
|
150%
|
|
|
|
87.9%
|
|
|
|
89.6%
|
|
|
|
94.1%
|
|
|
|
97.7%
|
|
|
|
99.4%
|
|
|
40%
|
|
|
|
120%
|
|
|
|
79.0%
|
|
|
|
82.1%
|
|
|
|
89.8%
|
|
|
|
96.0%
|
|
|
|
98.9%
|
|
|
30%
|
|
|
|
90%
|
|
|
|
66.7%
|
|
|
|
71.6%
|
|
|
|
83.8%
|
|
|
|
93.7%
|
|
|
|
98.3%
|
|
|
20%
|
|
|
|
60%
|
|
|
|
50.3%
|
|
|
|
57.6%
|
|
|
|
75.8%
|
|
|
|
90.5%
|
|
|
|
97.5%
|
|
|
10%
|
|
|
|
30%
|
|
|
|
29.3%
|
|
|
|
39.6%
|
|
|
|
65.6%
|
|
|
|
86.5%
|
|
|
|
96.4%
|
|
|
0%
|
|
|
|
0%
|
|
|
|
3.0%
|
|
|
|
17.1%
|
|
|
|
52.8%
|
|
|
|
81.5%
|
|
|
|
95.0%
|
|
|
10%
|
|
|
|
30%
|
|
|
|
29.2%
|
|
|
|
10.3%
|
|
|
|
37.1%
|
|
|
|
75.4%
|
|
|
|
93.4%
|
|
|
20%
|
|
|
|
60%
|
|
|
|
67.7%
|
|
|
|
43.3%
|
|
|
|
18.4%
|
|
|
|
68.0%
|
|
|
|
91.4%
|
|
|
30%
|
|
|
|
90%
|
|
|
|
113.2%
|
|
|
|
82.1%
|
|
|
|
3.8%
|
|
|
|
59.4%
|
|
|
|
89.1%
|
|
|
40%
|
|
|
|
120%
|
|
|
|
166.3%
|
|
|
|
127.5%
|
|
|
|
29.6%
|
|
|
|
49.2%
|
|
|
|
86.3%
|
|
|
50%
|
|
|
|
150%
|
|
|
|
227.5%
|
|
|
|
179.8%
|
|
|
|
59.4%
|
|
|
|
37.6%
|
|
|
|
83.2%
|
|
|
60%
|
|
|
|
180%
|
|
|
|
297.5%
|
|
|
|
239.6%
|
|
|
|
93.5%
|
|
|
|
24.2%
|
|
|
|
79.6%
|
|
The Indexs annualized historical volatility rate for the period from May 30, 2008 through
May 31, 2013 is 25.33%. The Indexs highest volatility rate for any one calendar year during the five-year period is 40.95% and volatility for a shorter period of time may have been substantially higher. The Indexs annualized
performance for the five-year period from May 30, 2008 through May 31, 2013 is 5.82%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future.
For additional graphs and charts demonstrating the effects of volatility and index performance on the long-term performance of the Fund,
see Additional Information Regarding Investment Techniques and Policies and Negative Implications of Daily Goals in Volatile Markets in the Funds statutory prospectus, and Special Note Regarding the Correlation
Risks of the Funds in the Funds Statement of Additional Information.
Holding an unmanaged position opens the
investor to the risk of market volatility adversely affecting the performance of the investment. The Fund is not appropriate for investors who do not intend to actively monitor and manage their portfolios. This table is intended to underscore the
fact that the Fund is designed as a short-term trading vehicle for investors who intend to actively monitor and manage their portfolios.
To fully understand the risks of market volatility on the Fund, see Negative Implications of Daily Goals in Volatile Markets found in the statutory prospectus.
Indirectly investing in emerging markets instruments involve greater risks than indirectly investing in foreign instruments in general. Risks
of investing in emerging market countries include: political or social upheaval; nationalization of businesses; restrictions on foreign ownership; prohibitions on the repatriation of assets; and risks from an economys dependence on revenues
from particular commodities or industries. In addition, currency transfer restrictions, limited potential buyers for such instruments, delays and disruption in settlement procedures and illiquidity or low volumes of transactions may make exits
difficult or impossible at times.
Investments in publicly issued equity securities and securities that provide exposure to equity securities, including common stocks, in
general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the NAV of the Fund to fluctuate.
Indirectly investing in foreign instruments may involve greater risks than investing in domestic instruments. As a result, the Funds
returns and NAVs may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The laws and accounting, auditing, and
financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
If the Funds benchmark moves more than 33% on a given trading day in a direction adverse to the Fund, you would lose all of your money.
Rafferty will attempt to position the Funds portfolio to ensure that the Fund does not lose more than 90% of its NAV on a given day. The cost of such downside protection will be limitations on the Funds gains. As a consequence, the
Funds portfolio may not be responsive to Index gains beyond 30% in a given day. For example, if the Index were to gain 35%, the Fund might be limited to a daily gain of 90% rather than 105%, which is 300% of the Index gain of 35%.
Geographic Concentration Risk
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or economic conditions and
regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
5
|
|
|
High Portfolio Turnover Risk
Daily rebalancing of the Funds
holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most exchange-traded funds. Such frequent and active trading leads to significantly higher transaction costs because of
increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased capital gains, including short-term and/or long-term capital gains that will be taxable to shareholders as ordinary
income. The Fund calculates portfolio turnover without including the short term cash instruments or derivative transactions that comprise the majority of the Funds trading. As such, if the Funds extensive use of derivative instruments
were reflected, the calculated portfolio turnover rate would be significantly higher.
Intra-Day Investment Risk
The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the
subsequent trading day. The exact exposure of an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the
time of purchase. If the Index gains value, the Funds net assets will rise by the same amount as the Funds exposure. Conversely, if the Index declines, the Funds net assets will decline by the same amount as the Funds
exposure. Since a Fund starts each trading day with exposure which is 300% of its net assets, a change in both the exposure and the net assets of the Fund by the same absolute amount results in a change in the comparative relationship of the two. As
an example (using simplified numbers), if the Fund had $100 in net assets at the market close, it would seek $300 of exposure to the next trading days Index performance. If the Index rose by 1% by noon the following trading day, the exposure
of the Fund will have risen by 1% to $303 and the net assets will have risen by that $3 gain to $103. With net assets of $103 and exposure of $303, a purchaser at that point would be receiving 294% exposure of her investment instead of 300%.
If you invest in the Fund, you are exposed to the risk that a decline in the daily performance of the Index will be leveraged. This means that your investment in the Fund will be reduced by an amount equal
to 3% for every 1% daily decline, not including the cost of financing the portfolio and the impact of operating expenses, which would further lower your investment. The Fund could theoretically lose an amount greater than its net assets in the event
of an Index decline of more than 33%. Further, purchasing shares during a day may result in greater than 300% exposure to the performance of the Index if the Index declines between the close of the markets on one trading day and before the close of
the markets on the next trading day.
To fully understand the risks of using leverage in the Fund, see Effects of
Compounding and Market Volatility Risk above.
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Illiquid securities also may be difficult to value. If the Fund is
forced to sell an illiquid security at an unfavorable time or at a price that is lower than Raffertys judgment of the securitys true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the
Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
The Fund is subject to market risks that can affect the value of its shares. These risks include political, regulatory, market and economic developments, including developments that impact specific economic
sectors, industries or segments of the market.
Rafferty expects a significant portion of the assets of the Fund to come from professional money managers and investors who use the Funds as
part of asset allocation and market timing investment strategies. These strategies often call for frequent trading which may lead to increased portfolio turnover, higher transaction costs, and the possibility of increased
capital gains, including short-term and/or long-term capital gain that will be taxable to shareholders as ordinary income.
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities. A non-diversified
funds NAV and total return may fluctuate more or fall greater in times of weaker markets than a conventional diversified fund.
The Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Funds operations and/or change the
competitive landscape.
|
|
|
|
|
|
|
|
|
6
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
Risks of Investing in Other Investment Companies (including ETFs)
Investments in the securities of other investment companies, including ETFs, may involve duplication of advisory fees and certain other
expenses. Fund shareholders indirectly bear the Funds proportionate share of the fees and expenses indirectly paid by shareholders of the other investment company or ETF, in addition to the fees and expenses Fund shareholders bear in
connection with the Funds own operations. The Funds performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the investment company or ETF fails to achieve its investment
objective, the value of the Funds investment will decline, adversely affecting the Funds performance. In addition, closed end investment company and ETF shares potentially may trade at a discount or a premium and are subject to brokerage
and other trading costs, which could result in greater expenses to the Fund. Finally, because the value of ETF shares depends on the demand in the market, the Adviser may not be able to liquidate the Funds holdings in those shares at the most
optimal time, adversely affecting the Funds performance.
Small and Mid Capitalization Company Risk
Investing in the securities of small and/or mid capitalization companies, and securities that provide exposure to small and/or mid
capitalization companies, involves greater risks and the possibility of greater price volatility than investing in more-established, larger capitalization companies. Small and mid capitalization companies often have narrower markets for their goods
and/or services and more limited managerial and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management
group. In addition, because these stocks are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information
concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund.
As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Funds portfolio.
Tax and Distribution Risk
The Fund has extremely high portfolio turnover which causes the Fund to generate significant amounts of taxable income. This income is
typically short-term capital gain, which is generally treated as ordinary income when distributed to shareholders, or short-term capital loss. The Fund rarely generates long-term capital gain or loss. The Fund will generally need to distribute net
short-term capital gain to satisfy certain tax requirements. As a result of the Funds high portfolio turnover, the Fund could make larger and/or more frequent distributions than traditional unleveraged ETFs. Because the Funds asset level
changes frequently, these distributions could comprise a substantial portion or even all of the Funds net assets if the Fund distributes this income after a decline in its net assets. In addition, the Fund may be held by short-term investors
and these investors may exit the Fund prior to the record date of a distribution. As a result, shareholders in the Fund on the day of a distribution may receive substantial distributions, which could lead to negative tax implications for such
shareholders. Potential investors are urged to consult their own tax advisers for more detailed information.
Rules governing the
federal income tax aspects of certain derivatives, including total return equity swaps, real estate-related swaps, credit default swaps and other credit derivatives are not entirely clear. Because the Funds status as a regulated investment
company might be affected if the Internal Revenue Service did not accept the Funds treatment of certain transactions involving derivatives, the Funds ability to engage in these transactions may be limited.
The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs, and/or a
temporary lack of liquidity in the markets for the securities held by the Fund. A failure to achieve a daily target may cause the Fund to provide returns for a longer period that are worse than expected. In addition, even though the Fund may meet
its daily target for a period of time, this will not necessarily produce the returns that might be expected in light of the returns of the Index or the Funds benchmark for that period.
The Fund values its portfolio as of the close of regular trading on the New York Stock Exchange (NYSE) (generally 4:00 P.M.
Eastern time). In some cases, foreign market indices close before the NYSE opens or may not be open for business on the same calendar days as the Fund. As a result, the daily performance of the Fund can vary from the performance of the Index.
Special Risks of Exchange-Traded Funds
Not Individually Redeemable.
Shares are not individually redeemable and may be redeemed by the Fund at NAV only in large blocks
known as Creation Units. You may incur brokerage costs purchasing enough Shares to constitute a Creation Unit.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
7
|
|
|
Trading Issues.
Trading in Shares on an exchange may be halted due to market
conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or other reasons. There can be no assurance that Shares will continue to meet the listing requirements of the
exchange on which it trades, and the listing requirements may be amended from time to time.
Market Price Variance
Risk.
Individual Shares of the Fund that are listed for trading on an exchange can be bought and sold in the secondary market at market prices. The market prices of Shares will fluctuate in response to changes in NAV and supply and demand
for Shares. The Adviser cannot predict whether Shares will trade above, below or at their NAV. Differences between secondary market prices and NAV for Shares may be due largely to supply and demand forces in the secondary market, which forces may
not be the same as those influencing prices for securities or instruments held by the Fund at a particular time. Given the fact that Shares can be created and redeemed in Creation Units, the Adviser believes that large discounts or premiums to the
NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and you may pay more than NAV when buying Shares on the secondary market, and you may receive less than NAV when you sell those
Shares. The market price of Shares, like the price of any exchange-traded security, includes a bid-ask spread charged by the exchange specialists, 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 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. The Funds investment results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent
with those experienced by those creating and redeeming directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund.
Fund Performance
The Fund has not yet commenced operations; therefore,
performance information is not yet available. In the future, performance information for the Fund will be presented in this section. Performance information also will be available on the Funds website at
http://www.direxionfunds.com/products?presets=etfs&activetab=performance or by calling the Fund toll free at 1-866-476-7523.
Management
Investment Adviser
Rafferty Asset Management, LLC is the Funds investment
adviser.
Portfolio Manager
Paul Brigandi, the Funds Portfolio Manager, is primarily responsible for the day-to-day management of the Fund and has served in this role since the Funds inception.
Purchase and Sale of Fund Shares
The Fund will issue and redeem Shares only to Authorized Participants (typically, broker-dealers) in exchange for the deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known
as Creation Units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Fund Shares on a national securities exchange through a broker-dealer. Because the Shares trade at market prices rather than NAV, Shares may
trade at a price greater than NAV (premium) or less than NAV (discount).
Tax Information
The Fund intends to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject
to federal income taxes and may also be subject to state and local taxes. Distributions by the Fund may be significantly higher than those of most exchange-traded funds.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase
the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or the Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of
interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediarys website for more information.
|
|
|
|
|
|
|
|
|
8
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
Direxion Daily Chile Bear 3X Shares
Important
Information Regarding the Fund
The Direxion Daily Chile Bear 3X Shares (Fund) seeks
daily
leveraged
investment results. The pursuit of daily leveraged goals means that the Fund is riskier than alternatives that do not use leverage because the Funds objective is to magnify the performance of an index. The pursuit of daily leveraged investment
goals means that the return of the Fund for a period longer than a full trading day may bear no resemblance to 300% of the return of its index for such longer period because the aggregate return of the Fund is the product of the series of
daily leveraged returns for each trading day. The path of the benchmark during the longer period may be at least as important to the Funds return for the longer period as the cumulative return of the benchmark for the relevant longer period,
especially in periods of market volatility. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of the Funds stated goal and
the performance of the target index for the full trading day.
Investment Objective
The Fund seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the performance of the MSCI Chile IMI 25/50 Index.
The Fund seeks
daily
leveraged investment results and does not seek to achieve its stated investment objective over a period of time greater than one day.
The Fund is different and much riskier than most exchange-traded funds.
The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged
investment results, understand the risks associated with shorting and the use of leverage, and are willing to monitor their portfolios frequently. The Fund seeks daily leveraged investment results relative to the Index and is different and riskier
than similarly benchmarked exchange-traded funds that do not use leverage. Therefore, the Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy or hold shares of the Fund (Shares). Investors purchasing
shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(1)
(expenses that you pay each year as a percentage of the value of your investment)
|
|
|
|
|
Management Fees
|
|
|
0.75%
|
|
Distribution and/or Service (12b-1) Fees
|
|
|
0.00%
|
|
Other Expenses of the Fund
|
|
|
0.25%
|
|
Acquired Fund Fees and Expenses
|
|
|
0.15%
|
|
|
|
|
|
|
Total Annual Fund Operating Expenses
|
|
|
1.15%
|
|
Expense Cap/Reimbursement
|
|
|
(0.05%
|
)
|
|
|
|
|
|
Total Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
|
|
1.10%
|
|
|
|
|
|
|
(1)
|
|
The Funds adviser, Rafferty Asset Management, LLC (Rafferty or the Adviser) has contractually agreed to cap all or a portion
of its management fee and/or reimburse the Fund for Other Expenses through March 1, 2015, to the extent that the Funds Total Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest,
Acquired Fund Fees and Expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation). Any expense
cap is subject to reimbursement by the Fund within the following three years only if overall expenses fall below these percentage limitations. This agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Expense Example
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem 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 Funds operating expenses remain the same. 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 rate may indicate higher transaction costs and
may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Funds performance.
Principal Investment Strategies
The Fund, under normal circumstances, creates short positions by investing at least 80% of its assets in: futures
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
9
|
|
|
contracts; options on securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements;
exchange-traded funds (ETFs); and other financial instruments that, in combination, provide leveraged and unleveraged exposure to the MSCI Chile IMI 25/50 Index (Index). The Fund invests the remainder of its assets in
short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements. The Fund does not invest in equity securities.
Chile is considered an emerging market, as that term is defined by the index provider. The determination that Chile is an
emerging market is based on it being an economy that is in the initial stages of industrialization and has been historically marked by low per capita income and lack of capital market transparency, but appears to be implementing
political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions. Emerging markets have the potential for significantly higher or lower rates of
return and carry greater risks than more developed economies.
The Index is designed to measure the performance of the large,
mid and small cap segments of the Chilean equity market, covering approximately 99% of the free float-adjusted market capitalization in Chile. As of the date of its last reconstitution, the Index had a total dollar value of approximately $77.5
billion, composed of 43 constituent securities ranging in market capitalization from approximately $250.9 million to $6.9 billion.
The Index applies certain screens and weightings to take into account the investment limits placed on regulated investment companies (RICs) under federal tax regulations. One such requirement is
that at the end of each quarter of a RICs tax year, no more than 25% of its assets may be invested in a single issuer and the sum of the weights of all issuers representing more than 5% of the RIC should not exceed 50% of its total assets. The
Index aims to reflect these requirements in the selection and weighting of its component securities.
The Fund may gain exposure
to only a representative sample of the securities in the Index that have aggregate characteristics similar to those of the Index. The Fund gains this exposure by investing in a combination of financial instruments that, in combination, provide
exposure to the underlying securities of the Index. The Fund seeks to remain fully invested at all times consistent with its stated goal. At the close of the markets each trading day, Rafferty positions the Funds portfolio so that its exposure
to the Index is consistent with the Funds investment objective. The impact of the Indexs movements during the day will affect whether the Funds portfolio needs to be re-positioned. For example, if the Index has fallen on a given
day, net assets of the Fund should rise, meaning that the Funds exposure will need to be increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Funds exposure will need to be
reduced. This re-positioning strategy typically results in high portfolio turnover.
Because of daily rebalancing and the
compounding of each days return over time, the return of the Fund for periods longer than a single day will be the result of each days returns compounded over the period, which will very likely differ from 300% of the return of the
Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Indexs volatility and the effects of compounding, it is even possible that the Fund will lose money over
time while the Indexs performance decreases.
Additionally, because a significant portion of the assets of the Fund may
come from investors using asset allocation and market timing investment strategies, the Fund may further need to engage in frequent trading. The Fund will concentrate its investment in a particular industry or group of
industries to approximately the same extent as the Index is so concentrated.
Principal Risks
An investment in the Fund entails risk. The Fund could lose money or its performance could trail that of other investment alternatives. The
Adviser cannot guarantee that the Fund will achieve its objective. In addition, the Fund presents some risks not traditionally associated with most mutual funds and exchange-traded funds. It is important that investors closely review all of the
risks listed below and understand how these risks interrelate before making an investment in the Fund. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets could negatively affect issuers worldwide,
including the Fund. There is the risk that you could lose all or a portion of your money invested in the Fund.
Adverse Market Conditions Risk
Because the Fund magnifies the inverse performance of the Index, its performance will suffer during conditions in which the Index rises.
Advisers Investment Strategy Risk
The Adviser utilizes a quantitative methodology to select investments for the Fund. Although this methodology is designed to correlate the
Funds performance with the performance of the Index, there is no assurance that such methodology will be successful and will enable the Fund to achieve its investment objective.
|
|
|
|
|
|
|
|
|
10
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
Unlike most ETFs, the Fund currently intends
to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments
in conventional ETFs.
Investment in securities of Chilean issuers involves risks that may be greater than if the Funds investments were more geographically
diverse. Chiles economy is heavily dependent on trading with key partners. Any increases or decreases in the volume of this trading, changes in taxes or tariffs, or variance in political relationships between nations may impact the Chilean
economy overall in a way that would be adverse to the Funds investments. Additionally, investment in Chile may be subject to any positive or adverse effects of the varying nature of its economic landscape with respect to expropriation and/or
nationalization of assets, strengthened or lessened restrictions on and government intervention in international trade, confiscatory taxation, political instability, including authoritarian and/or military involvement in governmental decision
making, armed conflict, the impact on the economy as a result of civil war and social instability as a result of religious, ethnic and/or socioeconomic unrest.
The Fund may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure to a particular group of
securities or an asset class without actually purchasing those securities or investments, or to hedge a position. These financial instruments may include swap agreements. The use of swap agreements and other counterparty instruments involves risks
that are different from those associated with ordinary portfolio securities transactions. For example, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap
agreement counterparty. Swap agreements and other counterparty instruments also may be considered to be illiquid. In addition, the Fund may enter into swap agreements that involve a limited number of counterparties, which may increase the
Funds exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is a risk that no suitable counterparties will be willing to enter into, or continue
to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its investment objective.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will affect the value of what the Fund owns and the Funds share price. Generally, when the
U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Devaluation of a currency by a countrys government or banking authority also will have a
significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily investment
objective. To achieve a high degree of correlation with the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily target. The Fund may have difficulty achieving its daily target due to fees and expenses,
high portfolio turnover, transaction costs and costs associated with the use of leveraged investment techniques and/or a temporary lack of liquidity in the markets for the securities held by the Fund. Market disruptions, regulatory restrictions or
extreme volatility will also adversely affect the Funds ability to adjust exposure to the required levels. The Fund may not have investment exposure to all securities in its underlying Index, or its weighting of investment exposure to such
stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the underlying Index. The Fund may be subject to large movements of assets into and out of the
Fund, potentially resulting in the Fund being over- or under-exposed to its Index. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Indexs movement. Because of this, it is unlikely that the Fund
will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to its Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding
annual index reconstitutions and other index rebalancing or reconstitution events may hinder the Funds ability to meet its daily investment objective on that day.
The Fund uses investment techniques, including investments in derivatives such as futures and forward contracts, options and swaps, which may be considered aggressive. Investments in such derivatives are
subject to market risks that may cause their prices to fluctuate over time and may increase the volatility of the Fund. The use of derivatives may expose the Fund to additional risks that it would not be subject to if it invested directly in the
securities underlying
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
11
|
|
|
those derivatives, such as counterparty risk and the risk that the derivatives may become illiquid. The use of derivatives may result in larger losses or smaller gains than otherwise would be the
case. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move in value that causes a material decline in the Funds net asset value (NAV), the terms of the swap agreement between the Fund
and its counterparty may allow the counterparty to immediately close out of the transaction with the Fund. In such circumstances, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired
exposure consistent with the Funds daily investment objective. This may prevent the Fund from achieving its daily investment objective particularly if the Index reverses all or a portion of its intraday move by the end of the day. In addition,
the Funds investments in derivatives, as of the date of this Prospectus, are subject to the following risks:
Futures
and Forward Contracts.
There may be an imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts.
Forward currency transactions include the risks associated with fluctuations in currency.
Options
. There may be an
imperfect correlation between the prices of options and movements in the price of the securities (or indices) hedged or used for cover, which may cause a given hedge not to achieve its objective.
Swap Agreements
. Interest rate swaps are subject to interest rate and credit risk. Total return swaps are subject to counterparty
risk, which relates to credit risk of the counterparty and liquidity risk of the swaps themselves.
Early Close/Trading Halt Risk
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial
instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its
investments and/or may incur substantial trading losses.
Effects of Compounding and Market Volatility Risk
The Fund does not attempt to, and should not be expected to, provide returns which are a multiple of the return of the Index for periods
other than a single day. The Fund rebalances its portfolio on a daily basis, increasing exposure in response to that days gains or reducing exposure in response to that days losses. This means that for a period longer than one day, the
pursuit of daily goals may result in daily leveraged compounding. It also means that the return of an index over a period of time greater than one day multiplied by the Funds daily target (300%) generally will not equal the Funds
performance over that same period.
As a result, over time, the cumulative percentage increase or decrease in the value of the
Funds portfolio may diverge significantly from the cumulative percentage increase or decrease in the multiple of the return of the Funds underlying index due to the compounding effect of losses and gains on the returns of the Fund. It
also is expected that the Funds use of leverage will cause the Fund to underperform the return of three times its benchmark in a trendless or flat market.
The effect of compounding becomes more pronounced on the Funds performance as the Index experiences volatility. The Indexs volatility rate is a statistical measure of the magnitude of
fluctuations in the returns of the Index. The table below provides examples of how Index volatility could affect the Funds performance. The chart shows estimated Fund returns for a number of combinations of performance and volatility over a
one-year period and is shown to illustrate how holding the Fund for a period longer than one day may negatively impact investment return. As shown below, this Fund, or any other 3X Bear Fund, would be expected to lose 31.3% (as shown in Table 1
below) if its Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. If the Indexs annualized volatility were to rise to 75%, the hypothetical loss for a one year period for the Fund
widens to approximately 96.6%.
At higher ranges of volatility, there is a chance of a near complete loss of value even if the
Index is flat. For instance, if the Indexs annualized volatility is 100%, the Fund would be expected to lose approximately 100% of its value, even if the cumulative Index return for the year was only 0%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
Year
Index
Return
|
|
|
300%
One Year
Index
Return
|
|
|
Volatility Rate
|
|
|
|
10%
|
|
|
25%
|
|
|
50%
|
|
|
75%
|
|
|
100%
|
|
|
60%
|
|
|
|
180%
|
|
|
|
1371.5%
|
|
|
|
973.9%
|
|
|
|
248.6%
|
|
|
|
46.5%
|
|
|
|
96.1%
|
|
|
50%
|
|
|
|
150%
|
|
|
|
653.4%
|
|
|
|
449.8%
|
|
|
|
78.5%
|
|
|
|
72.6%
|
|
|
|
98.0%
|
|
|
40%
|
|
|
|
120%
|
|
|
|
336.0%
|
|
|
|
218.2%
|
|
|
|
3.3%
|
|
|
|
84.2%
|
|
|
|
98.9%
|
|
|
30%
|
|
|
|
90%
|
|
|
|
174.6%
|
|
|
|
100.4%
|
|
|
|
34.9%
|
|
|
|
90.0%
|
|
|
|
99.3%
|
|
|
20%
|
|
|
|
60%
|
|
|
|
83.9%
|
|
|
|
34.2%
|
|
|
|
56.4%
|
|
|
|
93.3%
|
|
|
|
99.5%
|
|
|
10%
|
|
|
|
30%
|
|
|
|
29.2%
|
|
|
|
5.7%
|
|
|
|
69.4%
|
|
|
|
95.3%
|
|
|
|
99.7%
|
|
|
0%
|
|
|
|
0%
|
|
|
|
5.8%
|
|
|
|
31.3%
|
|
|
|
77.7%
|
|
|
|
96.6%
|
|
|
|
99.8%
|
|
|
10%
|
|
|
|
30%
|
|
|
|
29.2%
|
|
|
|
48.4%
|
|
|
|
83.2%
|
|
|
|
97.4%
|
|
|
|
99.8%
|
|
|
20%
|
|
|
|
60%
|
|
|
|
45.5%
|
|
|
|
60.2%
|
|
|
|
87.1%
|
|
|
|
98.0%
|
|
|
|
99.9%
|
|
|
30%
|
|
|
|
90%
|
|
|
|
57.1%
|
|
|
|
68.7%
|
|
|
|
89.8%
|
|
|
|
98.4%
|
|
|
|
99.9%
|
|
|
40%
|
|
|
|
120%
|
|
|
|
65.7%
|
|
|
|
75.0%
|
|
|
|
91.9%
|
|
|
|
98.8%
|
|
|
|
99.9%
|
|
|
50%
|
|
|
|
150%
|
|
|
|
72.1%
|
|
|
|
79.6%
|
|
|
|
93.4%
|
|
|
|
99.0%
|
|
|
|
99.9%
|
|
|
60%
|
|
|
|
180%
|
|
|
|
77.0%
|
|
|
|
83.2%
|
|
|
|
94.6%
|
|
|
|
99.2%
|
|
|
|
99.9%
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
The Indexs annualized historical volatility rate for the period from May 30,
2008 through May 31, 2013 is 25.33%. The Indexs highest volatility rate for any one calendar year during the five-year period is 40.95% and volatility for a shorter period of time may have been substantially higher. The Indexs
annualized performance for the five-year period from May 30, 2008 through May 31, 2013 is 5.82%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future.
For additional graphs and charts demonstrating the effects of volatility and index performance on the long-term
performance of the Fund, see Additional Information Regarding Investment Techniques and Policies and Negative Implications of Daily Goals in Volatile Markets in the Funds statutory prospectus, and Special Note
Regarding the Correlation Risks of the Funds in the Funds Statement of Additional Information.
Holding an
unmanaged position opens the investor to the risk of market volatility adversely affecting the performance of the investment. The Fund is not appropriate for investors who do not intend to actively monitor and manage their portfolios. This table is
intended to underscore the fact that the Fund is designed as a short-term trading vehicle for investors who intend to actively monitor and manage their portfolios.
To fully understand the risks of market volatility on the Fund, see Negative Implications of Daily Goals in Volatile Markets found in the statutory prospectus.
Indirectly investing in emerging markets instruments involve greater risks than indirectly investing in foreign instruments in general. Risks
of investing in emerging market countries include: political or social upheaval; nationalization of businesses; restrictions on foreign ownership; prohibitions on the repatriation of assets; and risks from an economys dependence on revenues
from particular commodities or industries. In addition, currency transfer restrictions, limited potential buyers for such instruments, delays and disruption in settlement procedures and illiquidity or low volumes of transactions may make exits
difficult or impossible at times.
Indirectly investing in foreign instruments may involve greater risks than investing in domestic instruments. As a result, the Funds
returns and NAVs may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The laws and accounting, auditing, and
financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
If the Funds benchmark moves more than 33% on a given trading day in a direction adverse to the Fund, you would lose all of your money.
Rafferty will attempt to position the Funds portfolio to ensure that the Fund does not lose more than 90% of its NAV on a given day. The cost of such downside protection will be limitations on the Funds gains. As a consequence, the
Funds portfolio may not be responsive to Index losses beyond 30% in a given day. For example, if the Index were to lose 35%, the Fund might be limited to a daily gain of 90% rather than 105%, which is 300% of the Index loss of 35%.
Geographic Concentration Risk
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or economic conditions and
regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
High Portfolio Turnover Risk
Daily rebalancing of the Funds holdings pursuant to its daily investment objective causes a much greater number of portfolio
transactions when compared to most exchange-traded funds. Such frequent and active trading leads to significantly higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the
possibility of significantly increased capital gains, including short-term and/or long-term capital gains that will be taxable to shareholders as ordinary income. The Fund calculates portfolio turnover without including the short term cash
instruments or derivative transactions that comprise the majority of the Funds trading. As such, if the Funds extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Intra-Day Investment Risk
The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the
subsequent trading day. The exact exposure of an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the
time of purchase. The Funds gains occur as its market exposure declines and its losses are accompanied by increases in market exposure. If the Index declines, the Funds net assets will rise by an amount equal to the decline in the
Funds exposure. Conversely, if the Index rises the Funds net assets will decline by the same amount as the increase in the Funds exposure. As an example (using simplified numbers), if the Fund had $100 in
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
13
|
|
|
net assets at the market close, it would seek $300 of exposure to the next trading days Index performance. If the Index declined by 1% by noon the following trading day, the exposure
of the Fund will fall by 1% to $297 and the net assets will rise by $3 to $103. With net assets of $103 and exposure of $297, a purchaser at that point would be receiving 288% exposure of her investment instead of 300%
Shareholders should lose money when the Index rises, which is a result that is the opposite from traditional funds.
If you invest in the Fund, you are exposed to the risk that an increase in the daily performance of the Index will be leveraged. This means that your investment in the Fund will be reduced by an amount equal
to 3% for every 1% daily increase, not including the cost of financing the portfolio and the impact of operating expenses, which would further lower your investment. The Fund could theoretically lose an amount greater than its net assets in the
event of an Index increase of more than 33%. Further, purchasing shares during a day may result in greater than 300% exposure to the performance of the Index if the Index rises between the close of the markets on one trading day and before the
close of the markets on the next trading day.
To fully understand the risks of using leverage in the Fund, see Effects of
Compounding and Market Volatility Risk above.
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Illiquid securities also may be difficult to value. If the Fund is
forced to sell an illiquid security at an unfavorable time or at a price that is lower than Raffertys judgment of the securitys true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the
Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
The Fund is subject to market risks that can affect the value of its shares. These risks include political, regulatory, market and economic developments, including developments that impact specific economic
sectors, industries or segments of the market.
Rafferty expects a significant portion of the assets of the Fund to come from professional money managers and investors who use the Funds as
part of asset allocation and market timing investment strategies. These strategies often call for frequent trading which may lead to increased portfolio turnover, higher transaction costs, and the possibility of increased
capital gains, including short-term and/or long-term capital gain that will be taxable to shareholders as ordinary income.
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities. A non-diversified
funds NAV and total return may fluctuate more or fall greater in times of weaker markets than a conventional diversified fund.
The Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Funds operations and/or change the
competitive landscape.
Risks of Investing in Other Investment Companies (including ETFs)
Investments in the securities of other investment companies, including ETFs, may involve duplication of advisory fees and certain other
expenses. Fund shareholders indirectly bear the Funds proportionate share of the fees and expenses indirectly paid by shareholders of the other investment company or ETF, in addition to the fees and expenses Fund shareholders bear in
connection with the Funds own operations. The Funds performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the investment company or ETF fails to achieve its investment
objective, the value of the Funds investment will decline, adversely affecting the Funds performance. In addition, closed end investment company and ETF shares potentially may trade at a discount or a premium and are subject to brokerage
and other trading costs, which could result in greater expenses to the Fund. Finally, because the value of ETF shares depends on the demand in the market, the Adviser may not be able to liquidate the Funds holdings in those shares at the most
optimal time, adversely affecting the Funds performance.
|
|
|
|
|
|
|
|
|
14
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
The Fund may engage in short sales designed to earn
the Fund a profit from the decline in the price of particular securities, baskets of securities or indices. However, there is a risk that the Fund will experience a loss as a result of engaging in these short sales.
Small and Mid Capitalization Company Risk
Investing in the securities of small and/or mid capitalization companies, and securities that provide exposure to small and/or mid
capitalization companies, involves greater risks and the possibility of greater price volatility than investing in more-established, larger capitalization companies. Small and mid capitalization companies often have narrower markets for their goods
and/or services and more limited managerial and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management
group. In addition, because these stocks are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information
concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund.
As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Funds portfolio.
Tax and Distribution Risk
The Fund has extremely high portfolio turnover which causes the Fund to generate significant amounts of taxable income. This income is
typically short-term capital gain, which is generally treated as ordinary income when distributed to shareholders, or short-term capital loss. The Fund rarely generates long-term capital gain or loss. The Fund will generally need to distribute net
short-term capital gain to satisfy certain tax requirements. As a result of the Funds high portfolio turnover, the Fund could make larger and/or more frequent distributions than traditional unleveraged ETFs. Because the Funds asset level
changes frequently, these distributions could comprise a substantial portion or even all of the Funds net assets if the Fund distributes this income after a decline in its net assets. In addition, the Fund may be held by short-term investors
and these investors may exit the Fund prior to the record date of a distribution. As a result, shareholders in the Fund on the day of a distribution may receive substantial distributions, which could lead to negative tax implications for such
shareholders. Potential investors are urged to consult their own tax advisers for more detailed information.
Rules governing the
federal income tax aspects of certain derivatives, including total return equity swaps, real estate-related swaps, credit default swaps and other credit derivatives are not entirely clear. Because the Funds status as a regulated investment
company might be affected if the Internal Revenue Service did not accept the Funds treatment of certain transactions involving derivatives, the Funds ability to engage in these transactions may be limited.
The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs, and/or a
temporary lack of liquidity in the markets for the securities held by the Fund. A failure to achieve a daily target may cause the Fund to provide returns for a longer period that are worse than expected. In addition, even though the Fund may meet
its daily target for a period of time, this will not necessarily produce the returns that might be expected in light of the returns of the Index or the Funds benchmark for that period.
The Fund values its portfolio as of the close of regular trading on the New York Stock Exchange (NYSE) (generally 4:00 P.M.
Eastern time). In some cases, foreign market indices close before the NYSE opens or may not be open for business on the same calendar days as the Fund. As a result, the daily performance of the Fund can vary from the performance of the Index.
Special Risks of Exchange-Traded Funds
Not Individually Redeemable.
Shares are not individually redeemable and may be redeemed by the Fund at NAV only in large blocks
known as Creation Units. You may incur brokerage costs purchasing enough Shares to constitute a Creation Unit.
Trading
Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or other reasons. There can be no
assurance that Shares will continue to meet the listing requirements of the exchange on which it trades, and the listing requirements may be amended from time to time.
Market Price Variance Risk.
Individual Shares of the Fund that are listed for trading on an exchange can be bought and sold in the secondary market at market prices. The market prices of Shares
will fluctuate in response to changes in NAV and supply and demand for Shares. The Adviser cannot predict whether Shares will trade above, below or at their NAV. Differences between secondary market prices and
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
15
|
|
|
NAV for Shares may be due largely to supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for securities or instruments held by the Fund
at a particular time. Given the fact that Shares can be created and redeemed in Creation Units, the Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price
and the NAV vary significantly and you may pay more than NAV when buying Shares on the secondary market, and you may receive less than NAV when you sell those Shares. The market price of Shares, like the price of any exchange-traded security,
includes a bid-ask spread charged by the exchange specialists, 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 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. The Funds investment results are measured based
upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent with those experienced by those creating and redeeming directly with the Fund.
There is no guarantee that an active secondary market will develop for Shares of the Fund.
Fund Performance
The Fund has not yet commenced operations; therefore, performance information is not yet available. In the future, performance information
for the Fund will be presented in this section. Performance information also will be available on the Funds website at http://www.direxionfunds.com/products?presets=etfs&activetab=performance or by calling the Fund toll free at
1-866-476-7523.
Management
Investment Adviser
Rafferty Asset Management, LLC is the Funds investment
adviser.
Portfolio Manager
Paul Brigandi, the Funds Portfolio Manager, is primarily responsible for the day-to-day management of the Fund and has served in this role since the Funds inception.
Purchase and Sale of Fund Shares
The Fund will issue and redeem Shares in exchange for cash only to Authorized Participants in large blocks, known as Creation Units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Fund Shares on a national securities exchange through a broker-dealer. Because the Shares trade at market prices rather than NAV, Shares may trade at a price greater than NAV (premium) or less than NAV (discount).
Tax Information
The Fund intends to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject
to federal income taxes and may also be subject to state and local taxes. Distributions by the Fund may be significantly higher than those of most exchange-traded funds.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase
the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or the Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of
interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediarys website for more information.
|
|
|
|
|
|
|
|
|
16
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
Direxion Daily Hong Kong Bull 3X Shares
Important Information Regarding the Fund
The Direxion Daily Hong Kong Bull 3X Shares (Fund) seeks
daily
leveraged investment results. The pursuit of daily leveraged goals means that the Fund is riskier than alternatives
that do not use leverage because the Funds objective is to magnify the performance of an index. The pursuit of daily leveraged investment goals means that the return of the Fund for a period longer than a full trading day may bear no
resemblance to 300% of the return of its index for such longer period because the aggregate return of the Fund is the product of the series of daily leveraged returns for each trading day. The path of the benchmark during the longer period may be at
least as important to the Funds return for the longer period as the cumulative return of the benchmark for the relevant longer period, especially in periods of market volatility. Further, the return for investors that invest for periods less
than a full trading day or for a period different than a trading day will not be the product of the return of the Funds stated goal and the performance of the target index for the full trading day.
Investment Objective
The Fund seeks daily investment results, before fees and expenses, of 300% of the performance of the MSCI Hong Kong Index.
The Fund seeks
daily
leveraged investment results and
does not seek to achieve its stated investment objective over a period of time greater than one day.
The Fund is different and much riskier than most exchange-traded funds.
The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged
investment results, understand the risks associated with the use of leverage and are willing to monitor their portfolios frequently. The Fund seeks daily leveraged investment results relative to the Index and is different and riskier than similarly
benchmarked exchange-traded funds that do not use leverage. Therefore, the Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy or hold shares of the Fund (Shares). Investors purchasing
shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(1)
(expenses that you pay each year as a percentage of the value of your investment)
|
|
|
|
|
Management Fees
|
|
|
0.75%
|
|
Distribution and/or Service (12b-1) Fees
|
|
|
0.00%
|
|
Other Expenses of the Fund
|
|
|
0.25%
|
|
Acquired Fund Fees and Expenses
|
|
|
0.13%
|
|
|
|
|
|
|
Total Annual Fund Operating Expenses
|
|
|
1.13%
|
|
Expense Cap/Reimbursement
|
|
|
(0.05%
|
)
|
|
|
|
|
|
Total Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
|
|
1.08%
|
|
|
|
|
|
|
(1)
|
|
The Funds adviser, Rafferty Asset Management, LLC (Rafferty or the Adviser) has contractually agreed to cap all or a portion
of its management fee and/or reimburse the Fund for Other Expenses through March 1, 2015, to the extent that the Funds Total Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest,
Acquired Fund Fees and Expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation). Any expense
cap is subject to reimbursement by the Fund within the following three years only if overall expenses fall below these percentage limitations. This agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Expense Example
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem 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 Funds operating expenses remain the same. 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 rate may indicate higher transaction costs and
may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Funds performance.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
17
|
|
|
Principal Investment Strategies
The Fund, under normal circumstances, creates long positions by investing at least 80% of its assets in the securities that comprise the MSCI
Hong Kong Index (Index) and/or financial instruments that provide leveraged and unleveraged exposure to the Index. These financial instruments include: futures contracts; options on securities, indices and futures contracts; equity caps,
floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; exchange-traded funds (ETFs); and other financial instruments. On a day-to-day basis, the Fund also may hold short-term debt
instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
Hong Kong is considered an emerging market, as that term is defined by the index provider. The determination that Hong Kong is an emerging market is based on it being an economy that
is in the initial stages of industrialization and has been historically marked by low per capita income and lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market
transparency, increased access for foreign investors and generally improved economic conditions. Emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than more developed economies.
The Index is designed to measure the performance of the large and mid cap segments of the Hong Kong equity market, covering
approximately 85% of the free float-adjusted market capitalization in Hong Kong. As of the date of its last reconstitution, the Index had a total dollar value of approximately $662.8 billion, composed of 41 constituent securities ranging in market
capitalization from approximately $2.9 billion to $207.3 billion. Additionally, as of May 31, 2013, the Index is concentrated in the financial sector, but this concentration may change in the future based on the Indexs methodology and the
varying nature of Hong Kongs economy.
The Fund may gain exposure to only a representative sample of the securities in
the Index that have aggregate characteristics similar to those of the Index. The Fund gains this exposure either by directly investing in the underlying securities of the Index or by investing in derivatives that provide exposure to those
securities. The Fund seeks to remain fully invested at all times consistent with its stated goal. At the close of the markets each trading day, Rafferty positions the Funds portfolio so that its exposure to the Index is consistent with the
Funds investment objective. The impact of the Indexs movements during the day will affect whether the Funds portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should
rise, meaning that the Funds exposure will need to be increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Funds exposure will need to be reduced. This re-positioning strategy
typically results in high portfolio turnover.
Because of daily rebalancing and the compounding of each days return over
time, the return of the Fund for periods longer than a single day will be the result of each days returns compounded over the period, which will very likely differ from 300% of the return of the Index over the same period. The Fund will lose
money if the Index performance is flat over time, and as a result of daily rebalancing, the Indexs volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Indexs performance
increases.
Additionally, because a significant portion of the assets of the Fund may come from investors using asset
allocation and market timing investment strategies, the Fund may further need to engage in frequent trading. The Fund will concentrate its investment in a particular industry or group of industries to approximately the same extent
as the Index is so concentrated.
Principal Risks
An investment in the Fund entails risk. The Fund could lose money or its performance could trail that of other investment alternatives. The Adviser cannot guarantee that the Fund will achieve its objective.
In addition, the Fund presents some risks not traditionally associated with most mutual funds and exchange-traded funds. It is important that investors closely review all of the risks listed below and understand how these risks interrelate before
making an investment in the Fund. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets could negatively affect issuers worldwide, including the Fund. There is the risk that you could lose all or a portion
of your money invested in the Fund.
Adverse Market Conditions Risk
Because the Fund magnifies the performance of the Index, its performance will suffer during conditions in which the Index declines.
Advisers Investment Strategy Risk
The Adviser utilizes a quantitative methodology to select investments for the Fund. Although this methodology is designed to correlate the
Funds performance with the performance of the Index, there is no assurance that such methodology will be successful and will enable the Fund to achieve its investment objective.
|
|
|
|
|
|
|
|
|
18
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
The Index is concentrated in the financial
sector, however, in the future, the Index concentration may change. The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated. The performance of the
Fund may be more volatile than a fund that does not concentrate its investments in a specific industry or group of industries. The Fund also may be more susceptible to any single economic market, political or regulatory occurrence affecting that
industry or group of industries. However, the Fund only may concentrate its investments (
i.e.
, hold 25% or more of its total assets in the stocks of a particular industry or group of industries) to approximately the same extent that its
underlying index concentrates in the stocks of a 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 subdivisions are not considered to be issued by members of any industry.
The Fund may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure to a particular group of
securities or an asset class without actually purchasing those securities or investments, or to hedge a position. These financial instruments may include swap agreements. The use of swap agreements and other counterparty instruments involves risks
that are different from those associated with ordinary portfolio securities transactions. For example, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap
agreement counterparty. Swap agreements and other counterparty instruments also may be considered to be illiquid. In addition, the Fund may enter into swap agreements that involve a limited number of counterparties, which may increase the
Funds exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is a risk that no suitable counterparties will be willing to enter into, or continue
to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its investment objective.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will affect the value of what the Fund owns and the Funds share price. Generally, when the
U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Devaluation of a currency by a countrys government or banking authority also will have a
significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily investment
objective. To achieve a high degree of correlation with the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily target. The Fund may have difficulty achieving its daily target due to fees and expenses,
high portfolio turnover, transaction costs and costs associated with the use of leveraged investment techniques and/or a temporary lack of liquidity in the markets for the securities held by the Fund. Market disruptions, regulatory restrictions or
extreme volatility will also adversely affect the Funds ability to adjust exposure to the required levels. The Fund may not have investment exposure to all securities in its underlying Index, or its weighting of investment exposure to such
stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the underlying Index. The Fund may be subject to large movements of assets into and out of the
Fund, potentially resulting in the Fund being over- or under-exposed to its Index. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Indexs movement. Because of this, it is unlikely that the Fund
will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to its Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding
annual index reconstitutions and other index rebalancing or reconstitution events may hinder the Funds ability to meet its daily investment objective on that day.
To the extent the Fund seeks exposure to foreign companies, the Funds investments may be in the form of depositary receipts or other
securities convertible into securities of foreign issuers, including American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), and Global Depositary Receipts (GDRs). While the use of ADRs, EDRs and
GDRs, which are traded on exchanges and represent and ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs, EDRs,
and GDRs continue to be subject to certain of the risks associated with investing directly in foreign securities.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
19
|
|
|
The Fund uses investment techniques, including
investments in derivatives such as futures and forward contracts, options and swaps, which may be considered aggressive. Investments in such derivatives are subject to market risks that may cause their prices to fluctuate over time and may increase
the volatility of the Fund. The use of derivatives may expose the Fund to additional risks that it would not be subject to if it invested directly in the securities underlying those derivatives, such as counterparty risk and the risk that the
derivatives may become illiquid. The use of derivatives may result in larger losses or smaller gains than otherwise would be the case. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move in value that
causes a material decline in the Funds net asset value (NAV), the terms of the swap agreement between the Fund and its counterparty may allow the counterparty to immediately close out of the transaction with the Fund. In such
circumstances, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the Funds daily investment objective. This may prevent the Fund from achieving its daily
investment objective particularly if the Index reverses all or a portion of its intraday move by the end of the day. In addition, the Funds investments in derivatives, as of the date of this Prospectus, are subject to the following risks:
Futures and Forward Contracts
. There may be an imperfect correlation between the changes in market value of the
securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts. Forward currency transactions include the risks associated with fluctuations in currency.
Options
. There may be an imperfect correlation between the prices of options and movements in the price of the securities (or
indices) hedged or used for cover, which may cause a given hedge not to achieve its objective.
Swap Agreements
. Interest
rate swaps are subject to interest rate and credit risk. Total return swaps are subject to counterparty risk, which relates to credit risk of the counterparty and liquidity risk of the swaps themselves.
Early Close/Trading Halt Risk
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial
instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its
investments and/or may incur substantial trading losses.
Effects of Compounding and Market Volatility Risk
The Fund does not attempt to, and should not be expected to, provide returns which are a multiple of the return of the Index for periods
other than a single day. The Fund rebalances its portfolio on a daily basis, increasing exposure in response to that days gains or reducing exposure in response to that days losses. This means that for a period longer than one day, the
pursuit of daily goals may result in daily leveraged compounding. It also means that the return of an index over a period of time greater than one day multiplied by the Funds daily target (300%) generally will not equal the Funds
performance over that same period.
As a result, over time, the cumulative percentage increase or decrease in the value of the
Funds portfolio may diverge significantly from the cumulative percentage increase or decrease in the multiple of the return of the Funds underlying index due to the compounding effect of losses and gains on the returns of the Fund. It
also is expected that the Funds use of leverage will cause the Fund to underperform the return of three times its benchmark in a trendless or flat market.
The effect of compounding becomes more pronounced on the Funds performance as the Index experiences volatility. The Indexs volatility rate is a statistical measure of the magnitude of
fluctuations in the returns of the Index. The table below provides examples of how Index volatility could affect the Funds performance. The chart shows estimated Fund returns for a number of combinations of performance and volatility over a
one-year period and is shown to illustrate how holding the Fund for a period longer than one day may negatively impact investment return. As shown below, this Fund, or any other 3X Bull Fund, would be expected to lose 17.1% (as shown in Table 1
below) if its Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. If the Indexs annualized volatility were to rise to 75%, the hypothetical loss for a one year period for the Fund
widens to approximately 81.5%.
At higher ranges of volatility, there is a chance of a near complete loss of value even if the
Index is flat. For instance, if the Indexs annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was only 0%.
|
|
|
|
|
|
|
|
|
20
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
Year
Index
Return
|
|
|
300%
One Year
Index
Return
|
|
|
Volatility Rate
|
|
|
|
10%
|
|
|
25%
|
|
|
50%
|
|
|
75%
|
|
|
100%
|
|
|
60%
|
|
|
|
180%
|
|
|
|
93.8%
|
|
|
|
94.7%
|
|
|
|
97.0%
|
|
|
|
98.8%
|
|
|
|
99.7%
|
|
|
50%
|
|
|
|
150%
|
|
|
|
87.9%
|
|
|
|
89.6%
|
|
|
|
94.1%
|
|
|
|
97.7%
|
|
|
|
99.4%
|
|
|
40%
|
|
|
|
120%
|
|
|
|
79.0%
|
|
|
|
82.1%
|
|
|
|
89.8%
|
|
|
|
96.0%
|
|
|
|
98.9%
|
|
|
30%
|
|
|
|
90%
|
|
|
|
66.7%
|
|
|
|
71.6%
|
|
|
|
83.8%
|
|
|
|
93.7%
|
|
|
|
98.3%
|
|
|
20%
|
|
|
|
60%
|
|
|
|
50.3%
|
|
|
|
57.6%
|
|
|
|
75.8%
|
|
|
|
90.5%
|
|
|
|
97.5%
|
|
|
10%
|
|
|
|
30%
|
|
|
|
29.3%
|
|
|
|
39.6%
|
|
|
|
65.6%
|
|
|
|
86.5%
|
|
|
|
96.4%
|
|
|
0%
|
|
|
|
0%
|
|
|
|
3.0%
|
|
|
|
17.1%
|
|
|
|
52.8%
|
|
|
|
81.5%
|
|
|
|
95.0%
|
|
|
10%
|
|
|
|
30%
|
|
|
|
29.2%
|
|
|
|
10.3%
|
|
|
|
37.1%
|
|
|
|
75.4%
|
|
|
|
93.4%
|
|
|
20%
|
|
|
|
60%
|
|
|
|
67.7%
|
|
|
|
43.3%
|
|
|
|
18.4%
|
|
|
|
68.0%
|
|
|
|
91.4%
|
|
|
30%
|
|
|
|
90%
|
|
|
|
113.2%
|
|
|
|
82.1%
|
|
|
|
3.8%
|
|
|
|
59.4%
|
|
|
|
89.1%
|
|
|
40%
|
|
|
|
120%
|
|
|
|
166.3%
|
|
|
|
127.5%
|
|
|
|
29.6%
|
|
|
|
49.2%
|
|
|
|
86.3%
|
|
|
50%
|
|
|
|
150%
|
|
|
|
227.5%
|
|
|
|
179.8%
|
|
|
|
59.4%
|
|
|
|
37.6%
|
|
|
|
83.2%
|
|
|
60%
|
|
|
|
180%
|
|
|
|
297.5%
|
|
|
|
239.6%
|
|
|
|
93.5%
|
|
|
|
24.2%
|
|
|
|
79.6%
|
|
The Indexs annualized historical volatility rate for the five-year period from May 30, 2008
through May 31, 2013 is 24.99%. The Indexs highest volatility rate for any one calendar year during the five-year period is 41.21% and volatility for a shorter period of time may have been substantially higher. The Indexs annualized
performance for the five-year period from May 30, 2008 through May 31, 2013 is 5.59%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future.
For additional graphs and charts demonstrating the effects of volatility and index performance on the long-term performance of the Fund,
see Additional Information Regarding Investment Techniques and Policies and Negative Implications of Daily Goals in Volatile Markets in the Funds statutory prospectus, and Special Note Regarding the Correlation
Risks of the Funds in the Funds Statement of Additional Information.
Holding an unmanaged position opens the
investor to the risk of market volatility adversely affecting the performance of the investment. The Fund is not appropriate for investors who do not intend to actively monitor and manage their portfolios. This table is intended to underscore the
fact that the Fund is designed as a short-term trading vehicle for investors who intend to actively monitor and manage their portfolios.
To fully understand the risks of market volatility on the Fund, see Negative Implications of Daily Goals in Volatile Markets found in the statutory prospectus.
Indirectly investing in emerging markets instruments involve greater risks than indirectly investing in foreign instruments in general. Risks
of investing in emerging market countries include: political or social upheaval; nationalization of businesses; restrictions on foreign ownership; prohibitions on the repatriation of assets; and risks from an economys dependence on revenues
from particular commodities or industries. In addition, currency transfer restrictions, limited potential buyers for such instruments, delays and disruption in settlement procedures and illiquidity or low volumes of transactions may make exits
difficult or impossible at times.
Investments in publicly issued equity securities and securities that provide exposure to equity securities, including common stocks, in
general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the NAV of the Fund to fluctuate.
Financial Services Companies Risk
The Fund currently focuses its investments in securities issued by, and/or has exposure to, financial services companies. As a result, the
Fund is subject to risks of legislative or regulatory changes, adverse market conditions and/or increased competition affecting the financial services companies. Profitability is largely dependent on the availability and cost of capital, and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector.
Indirectly investing in foreign instruments may involve greater risks than investing in domestic instruments. As a result, the Funds
returns and NAVs may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The laws and accounting, auditing, and
financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
If the Funds benchmark moves more than 33% on a given trading day in a direction adverse to the Fund, you would lose all of your money.
Rafferty will attempt to position the Funds portfolio to ensure that the Fund does not lose more than 90% of its NAV on a given day. The cost of such downside protection will be limitations on the Funds gains. As a consequence, the
Funds portfolio may not be responsive to Index gains beyond 30% in a given day. For example, if the Index were to gain 35%, the Fund might be limited to a daily gain of 90% rather than 105%, which is 300% of the Index gain of 35%.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
21
|
|
|
Geographic Concentration Risk
Investments in a particular country
or geographic region may be particularly susceptible to political, diplomatic or economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
High Portfolio Turnover Risk
Daily rebalancing of the Funds holdings pursuant to its daily investment objective causes a much greater number of portfolio
transactions when compared to most exchange-traded funds. Such frequent and active trading leads to significantly higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the
possibility of significantly increased capital gains, including short-term and/or long-term capital gains that will be taxable to shareholders as ordinary income. The Fund calculates portfolio turnover without including the short term cash
instruments or derivative transactions that comprise the majority of the Funds trading. As such, if the Funds extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Hong Kong Securities Risk
Investment in securities of Hong Kong issuers involves risks that may be greater than if the Funds investments were more geographically
diverse. Hong Kongs reversion to China has been marked by increased volatility and uncertainty in its economic and political status, which may result in adverse affects for the Funds investments. Hong Kongs economy has become more
dependent on Chinas role in the global market and the strength or diminishment of that relationship may impact Hong Kong issuers. Additionally, because Hong Kong has few natural resources, any surplus or shortage in the commodity markets could
impact the Hong Kong economy as a whole.
Intra-Day Investment Risk
The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the
subsequent trading day. The exact exposure of an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the
time of purchase. If the Index gains value, the Funds net assets will rise by the same amount as the Funds exposure. Conversely, if the Index declines, the Funds net assets will decline by the same amount as the Funds
exposure. Since a Fund starts each trading day with exposure which is 300% of its net assets, a change in both the exposure and the net assets of the Fund by the same absolute amount results in a change in the comparative relationship of the two. As
an example (using simplified numbers), if the Fund had $100 in net assets at the market close, it would seek $300 of exposure to the next trading days Index performance. If the Index rose by 1% by noon the following trading day, the exposure
of the Fund will have risen by 1% to $303 and the net assets will have risen by that $3 gain to $103. With net assets of $103 and exposure of $303, a purchaser at that point would be receiving 294% exposure of her investment instead of 300%.
If you invest in the Fund, you are exposed to the risk that a decline in the daily performance of the Index will be leveraged. This means that your investment in the Fund will be reduced by an amount equal
to 3% for every 1% daily decline, not including the cost of financing the portfolio and the impact of operating expenses, which would further lower your investment. The Fund could theoretically lose an amount greater than its net assets in the event
of an Index decline of more than 33%. Further, purchasing shares during a day may result in greater than 300% exposure to the performance of the Index if the Index declines between the close of the markets on one trading day and before the close of
the markets on the next trading day.
To fully understand the risks of using leverage in the Fund, see Effects of
Compounding and Market Volatility Risk above.
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Illiquid securities also may be difficult to value. If the Fund is
forced to sell an illiquid security at an unfavorable time or at a price that is lower than Raffertys judgment of the securitys true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the
Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
The Fund is subject to market risks that can affect the value of its shares. These risks include political, regulatory, market and economic developments, including developments that impact specific economic
sectors, industries or segments of the market.
Rafferty expects a significant portion of the assets of the Fund to come from professional money managers and investors who use the Funds as
part of asset allocation
|
|
|
|
|
|
|
|
|
22
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
and market timing investment strategies. These strategies often call for frequent trading which may lead to increased portfolio turnover, higher transaction costs, and the possibility
of increased capital gains, including short-term and/or long-term capital gain that will be taxable to shareholders as ordinary income.
Mid Capitalization Company Risk
Investing in the securities of mid capitalization companies, and securities that provide exposure to mid capitalization companies, involves
greater risks and the possibility of greater price volatility than investing in more-established, larger capitalization companies. Mid capitalization companies often have narrower markets for their goods and/or services and more limited managerial
and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks
are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what
is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result, their performance can be more
volatile and they face greater risk of business failure, which could increase the volatility of the Funds portfolio.
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities. A non-diversified
funds NAV and total return may fluctuate more or fall greater in times of weaker markets than a conventional diversified fund.
The Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Funds operations and/or change the
competitive landscape.
Risks of Investing in Other Investment Companies (including ETFs)
Investments in the securities of other investment companies, including ETFs, may involve duplication of advisory fees and certain other
expenses. Fund shareholders indirectly bear the Funds proportionate share of the fees and expenses indirectly paid by shareholders of the other investment company or ETF, in addition to the fees and expenses Fund shareholders bear in
connection with the Funds own operations. The Funds performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the investment company or ETF fails to achieve its investment
objective, the value of the Funds investment will decline, adversely affecting the Funds performance. In addition, closed end investment company and ETF shares potentially may trade at a discount or a premium and are subject to brokerage
and other trading costs, which could result in greater expenses to the Fund. Finally, because the value of ETF shares depends on the demand in the market, the Adviser may not be able to liquidate the Funds holdings in those shares at the most
optimal time, adversely affecting the Funds performance.
Tax and Distribution Risk
The Fund has extremely high portfolio turnover which causes the Fund to generate significant amounts of taxable income. This income is
typically short-term capital gain, which is generally treated as ordinary income when distributed to shareholders, or short-term capital loss. The Fund rarely generates long-term capital gain or loss. The Fund will generally need to distribute net
short-term capital gain to satisfy certain tax requirements. As a result of the Funds high portfolio turnover, the Fund could make larger and/or more frequent distributions than traditional unleveraged ETFs. Because the Funds asset level
changes frequently, these distributions could comprise a substantial portion or even all of the Funds net assets if the Fund distributes this income after a decline in its net assets. In addition, the Fund may be held by short-term investors
and these investors may exit the Fund prior to the record date of a distribution. As a result, shareholders in the Fund on the day of a distribution may receive substantial distributions, which could lead to negative tax implications for such
shareholders. Potential investors are urged to consult their own tax advisers for more detailed information.
Rules governing the
federal income tax aspects of certain derivatives, including total return equity swaps, real estate-related swaps, credit default swaps and other credit derivatives are not entirely clear. Because the Funds status as a regulated investment
company might be affected if the Internal Revenue Service did not accept the Funds treatment of certain transactions involving derivatives, the Funds ability to engage in these transactions may be limited.
The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs, and/or a
temporary lack of liquidity in the markets for the securities held by the Fund. A failure to achieve a daily target may cause the Fund to provide returns for a longer period that are worse than expected. In addition, even
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
23
|
|
|
though the Fund may meet its daily target for a period of time, this will not necessarily produce the returns that might be expected in light of the returns of the Index or the Funds
benchmark for that period.
The Fund values its portfolio as of the close of regular trading on the New York Stock Exchange (NYSE) (generally 4:00 P.M.
Eastern time). In some cases, foreign market indices close before the NYSE opens or may not be open for business on the same calendar days as the Fund. As a result, the daily performance of the Fund can vary from the performance of the Index.
Special Risks of Exchange-Traded Funds
Not Individually Redeemable.
Shares are not individually redeemable and may be redeemed by the Fund at NAV only in large blocks
known as Creation Units. You may incur brokerage costs purchasing enough Shares to constitute a Creation Unit.
Trading
Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or other reasons. There can be no
assurance that Shares will continue to meet the listing requirements of the exchange on which it trades, and the listing requirements may be amended from time to time.
Market Price Variance Risk.
Individual Shares of the Fund that are listed for trading on an exchange can be bought and sold in the secondary market at market prices. The market prices of Shares
will fluctuate in response to changes in NAV and supply and demand for Shares. The Adviser cannot predict whether Shares will trade above, below or at their NAV. Differences between secondary market prices and NAV for Shares may be due largely to
supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for securities or instruments held by the Fund at a particular time. Given the fact that Shares can be created and redeemed in Creation
Units, the Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and you may pay more than NAV when buying Shares on the
secondary market, and you may receive less than NAV when you sell those Shares. The market price of Shares, like the price of any exchange-traded security, includes a bid-ask spread charged by the exchange specialists, 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 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. The Funds investment results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in
the secondary market may not experience investment results consistent with those experienced by those creating and redeeming directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund.
Fund Performance
The Fund has not yet commenced operations; therefore, performance information is not yet available. In the future, performance information for the Fund will be presented in this section. Performance
information also will be available on the Funds website at http://www.direxionfunds.com/products?presets=etfs&activetab=performance or by calling the Fund toll free at 1-866-476-7523.
Management
Investment Adviser
Rafferty Asset Management, LLC is the Funds investment
adviser.
Portfolio Manager
Paul Brigandi, the Funds Portfolio Manager, is primarily responsible for the day-to-day management of the Fund and has served in this role since the Funds inception.
Purchase and Sale of Fund Shares
The Fund will issue and redeem Shares only to Authorized Participants (typically, broker-dealers) in exchange for the deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known
as Creation Units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Fund Shares on a national securities exchange through a broker-dealer. Because the Shares trade at market prices rather than NAV, Shares may
trade at a price greater than NAV (premium) or less than NAV (discount).
Tax Information
The Fund intends to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject
to federal income taxes and may also be subject to state and local taxes. Distributions by the Fund may be significantly higher than those of most exchange-traded funds.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase
the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or the Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of
interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediarys website for more information.
|
|
|
|
|
|
|
|
|
24
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
Direxion Daily Hong Kong Bear 3X Shares
Important Information Regarding the Fund
The Direxion Daily Hong Kong Bear 3X Shares (Fund) seeks
daily
leveraged investment results. The pursuit of daily leveraged goals means that the Fund is riskier than alternatives
that do not use leverage because the Funds objective is to magnify the performance of an index. The pursuit of daily leveraged investment goals means that the return of the Fund for a period longer than a full trading day may bear no
resemblance to 300% of the return of its index for such longer period because the aggregate return of the Fund is the product of the series of daily leveraged returns for each trading day. The path of the benchmark during the longer period may
be at least as important to the Funds return for the longer period as the cumulative return of the benchmark for the relevant longer period, especially in periods of market volatility. Further, the return for investors that invest for periods
less than a full trading day or for a period different than a trading day will not be the product of the return of the Funds stated goal and the performance of the target index for the full trading day.
Investment Objective
The Fund seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the performance of the MSCI Hong Kong Index.
The Fund seeks
daily
leveraged investment results and does not seek to achieve its stated investment objective over a period of time greater than one day.
The Fund is different and much riskier than most exchange-traded funds.
The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged
investment results, understand the risks associated with shorting and the use of leverage, and are willing to monitor their portfolios frequently. The Fund seeks daily leveraged investment results relative to the Index and is different and riskier
than similarly benchmarked exchange-traded funds that do not use leverage. Therefore, the Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy or hold shares of the Fund (Shares). Investors purchasing
shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(1)
(expenses that you pay each year as a percentage of the value of your investment)
|
|
|
|
|
Management Fees
|
|
|
0.75%
|
|
Distribution and/or Service (12b-1) Fees
|
|
|
0.00%
|
|
Other Expenses of the Fund
|
|
|
0.25%
|
|
Acquired Fund Fees and Expenses
|
|
|
0.13%
|
|
|
|
|
|
|
Total Annual Fund Operating Expenses
|
|
|
1.13%
|
|
Expense Cap/Reimbursement
|
|
|
(0.05%
|
)
|
|
|
|
|
|
Total Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
|
|
1.08%
|
|
|
|
|
|
|
(1)
|
|
The Funds adviser, Rafferty Asset Management, LLC (Rafferty or the Adviser) has contractually agreed to cap all or a portion
of its management fee and/or reimburse the Fund for Other Expenses through March 1, 2015, to the extent that the Funds Total Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest,
Acquired Fund Fees and Expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation). Any expense
cap is subject to reimbursement by the Fund within the following three years only if overall expenses fall below these percentage limitations. This agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Expense Example
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem 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 Funds operating expenses remain the same. 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 rate may indicate higher transaction costs and
may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Funds performance.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
25
|
|
|
Principal Investment Strategies
The Fund, under normal circumstances, creates short positions by investing at least 80% of its assets in: futures contracts; options on
securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; exchange-traded funds (ETFs); and other financial instruments that, in
combination, provide leveraged and unleveraged exposure to the MSCI Hong Kong Index (Index). The Fund invests the remainder of its assets in short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high
quality credit profiles, including U.S. government securities and repurchase agreements. The Fund does not invest in equity securities.
Hong Kong is considered an emerging market, as that term is defined by the index provider. The determination that Hong Kong is an emerging market is based on it being an economy that
is in the initial stages of industrialization and has been historically marked by low per capita income and lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market
transparency, increased access for foreign investors and generally improved economic conditions. Emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than more developed economies.
The Index is designed to measure the performance of the large and mid cap segments of the Hong Kong equity market, covering
approximately 85% of the free float-adjusted market capitalization in Hong Kong. As of the date of its last reconstitution, the Index had a total dollar value of approximately $662.8 billion, composed of 41 constituent securities ranging in market
capitalization from approximately $2.9 billion to $207.3 billion. Additionally, as of May 31, 2013, the Index is concentrated in the financial sector, but this concentration may change in the future based on the Indexs methodology and the
varying nature of Hong Kongs economy.
The Fund may gain exposure to only a representative sample of the securities in
the Index that have aggregate characteristics similar to those of the Index. The Fund gains this exposure by investing in a combination of financial instruments that, in combination, provide exposure to the underlying securities of the Index. The
Fund seeks to remain fully invested at all times consistent with its stated goal. At the close of the markets each trading day, Rafferty positions the Funds portfolio so that its exposure to the Index is consistent with the Funds
investment objective. The impact of the Indexs movements during the day will affect whether the Funds portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning
that the Funds exposure will need to be increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Funds exposure will need to be reduced. This re-positioning strategy typically results
in high portfolio turnover.
Because of daily rebalancing and the compounding of each days return over time, the return of
the Fund for periods longer than a single day will be the result of each days returns compounded over the period, which will very likely differ from 300% of the return of the Index over the same period. The Fund will lose money if the
Index performance is flat over time, and as a result of daily rebalancing, the Indexs volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Indexs performance decreases.
Additionally, because a significant portion of the assets of the Fund may come from investors using asset allocation
and market timing investment strategies, the Fund may further need to engage in frequent trading. The Fund will concentrate its investment in a particular industry or group of industries to approximately the same extent as the Index is
so concentrated.
Principal Risks
An investment in the Fund entails risk. The Fund could lose money or its performance could trail that of other investment alternatives. The Adviser cannot guarantee that the Fund will achieve its objective.
In addition, the Fund presents some risks not traditionally associated with most mutual funds and exchange-traded funds. It is important that investors closely review all of the risks listed below and understand how these risks interrelate before
making an investment in the Fund. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets could negatively affect issuers worldwide, including the Fund. There is the risk that you could lose all or a portion
of your money invested in the Fund.
Adverse Market Conditions Risk
Because the Fund magnifies the inverse performance of the Index, its performance will suffer during conditions in which the Index rises.
Advisers Investment Strategy Risk
The Adviser utilizes a quantitative methodology to select investments for the Fund. Although this methodology is designed to correlate the
Funds performance with the performance of the Index, there is no assurance that such methodology will be successful and will enable the Fund to achieve its investment objective.
Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind
securities, because of the nature of the financial instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs.
|
|
|
|
|
|
|
|
|
26
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
The Index is concentrated in the financial
sector, however, in the future, the Index concentration may change. The Fund will concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated. The performance of the
Fund may be more volatile than a fund that does not concentrate its investments in a specific industry or group of industries. The Fund also may be more susceptible to any single economic market, political or regulatory occurrence affecting that
industry or group of industries. However, the Fund only may concentrate its investments (
i.e.
, hold 25% or more of its total assets in the stocks of a particular industry or group of industries) to approximately the same extent that its
underlying index concentrates in the stocks of a 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 subdivisions are not considered to be issued by members of any industry.
The Fund may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure to a particular group of
securities or an asset class without actually purchasing those securities or investments, or to hedge a position. These financial instruments may include swap agreements. The use of swap agreements and other counterparty instruments involves risks
that are different from those associated with ordinary portfolio securities transactions. For example, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap
agreement counterparty. Swap agreements and other counterparty instruments also may be considered to be illiquid. In addition, the Fund may enter into swap agreements that involve a limited number of counterparties, which may increase the
Funds exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is a risk that no suitable counterparties will be willing to enter into, or continue
to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its investment objective.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will affect the value of what the Fund owns and the Funds share price. Generally, when the
U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Devaluation of a currency by a countrys government or banking authority also will have a
significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily investment
objective. To achieve a high degree of correlation with the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily target. The Fund may have difficulty achieving its daily target due to fees and expenses,
high portfolio turnover, transaction costs and costs associated with the use of leveraged investment techniques and/or a temporary lack of liquidity in the markets for the securities held by the Fund. Market disruptions, regulatory restrictions or
extreme volatility will also adversely affect the Funds ability to adjust exposure to the required levels. The Fund may not have investment exposure to all securities in its underlying Index, or its weighting of investment exposure to such
stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the underlying Index. The Fund may be subject to large movements of assets into and out of the
Fund, potentially resulting in the Fund being over- or under-exposed to its Index. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Indexs movement. Because of this, it is unlikely that the Fund
will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to its Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding
annual index reconstitutions and other index rebalancing or reconstitution events may hinder the Funds ability to meet its daily investment objective on that day.
The Fund uses investment techniques, including investments in derivatives such as futures and forward contracts, options and swaps, which may be considered aggressive. Investments in such derivatives are
subject to market risks that may cause their prices to fluctuate over time and may increase the volatility of the Fund. The use of derivatives may expose the Fund to additional risks that it would not be subject to if it invested directly in the
securities underlying those derivatives, such as counterparty risk and the risk that the derivatives may become illiquid. The use of derivatives may result in larger losses or smaller gains than otherwise would be the case. Additionally, with
respect to the use of swap agreements, if the Index has a dramatic intraday move in value that causes a material decline in the Funds net asset value (NAV), the terms of the swap agreement
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
27
|
|
|
between the Fund and its counterparty may allow the counterparty to immediately close out of the transaction with the Fund. In such circumstances, the Fund may be unable to enter into another
swap agreement or invest in other derivatives to achieve the desired exposure consistent with the Funds daily investment objective. This may prevent the Fund from achieving its daily investment objective particularly if the Index reverses all
or a portion of its intraday move by the end of the day. In addition, the Funds investments in derivatives, as of the date of this Prospectus, are subject to the following risks:
Futures and Forward Contracts
. There may be an imperfect correlation between the changes in market value of the securities held by
the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts. Forward currency transactions include the risks associated with fluctuations in currency.
Options
. There may be an imperfect correlation between the prices of options and movements in the price of the securities (or
indices) hedged or used for cover, which may cause a given hedge not to achieve its objective.
Swap Agreements
. Interest
rate swaps are subject to interest rate and credit risk. Total return swaps are subject to counterparty risk, which relates to credit risk of the counterparty and liquidity risk of the swaps themselves.
Early Close/Trading Halt Risk
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial
instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its
investments and/or may incur substantial trading losses.
Effects of Compounding and Market Volatility Risk
The Fund does not attempt to, and should not be expected to, provide returns which are a multiple of the return of the Index for periods
other than a single day. The Fund rebalances its portfolio on a daily basis, increasing exposure in response to that days gains or reducing exposure in response to that days losses. This means that for a period longer than one day, the
pursuit of daily goals may result in daily leveraged compounding. It also means that the return of an index over a period of time greater than one day multiplied by the Funds daily target (300%) generally will not equal the Funds
performance over that same period.
As a result, over time, the cumulative percentage increase or decrease in the value of the
Funds portfolio may diverge significantly from the cumulative percentage increase or decrease in the multiple of the return of the Funds underlying index due to the compounding effect of losses and gains on the returns of the Fund. It
also is expected that the Funds use of leverage will cause the Fund to underperform the return of three times its benchmark in a trendless or flat market.
The effect of compounding becomes more pronounced on the Funds performance as the Index experiences volatility. The Indexs volatility rate is a statistical measure of the magnitude of
fluctuations in the returns of the Index. The table below provides examples of how Index volatility could affect the Funds performance. The chart shows estimated Fund returns for a number of combinations of performance and volatility over a
one-year period and is shown to illustrate how holding the Fund for a period longer than one day may negatively impact investment return. As shown below, this Fund, or any other 3X Bear Fund, would be expected to lose 31.3% (as shown in Table 1
below) if its Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. If the Indexs annualized volatility were to rise to 75%, the hypothetical loss for a one year period for the Fund
widens to approximately 96.6%.
At higher ranges of volatility, there is a chance of a near complete loss of value even if the
Index is flat. For instance, if the Indexs annualized volatility is 100%, the Fund would be expected to lose approximately 100% of its value, even if the cumulative Index return for the year was only 0%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
Year
Index
Return
|
|
|
300%
One Year
Index
Return
|
|
|
Volatility Rate
|
|
|
|
10%
|
|
|
25%
|
|
|
50%
|
|
|
75%
|
|
|
100%
|
|
|
60%
|
|
|
|
180%
|
|
|
|
1371.5%
|
|
|
|
973.9%
|
|
|
|
248.6%
|
|
|
|
46.5%
|
|
|
|
96.1%
|
|
|
50%
|
|
|
|
150%
|
|
|
|
653.4%
|
|
|
|
449.8%
|
|
|
|
78.5%
|
|
|
|
72.6%
|
|
|
|
98.0%
|
|
|
40%
|
|
|
|
120%
|
|
|
|
336.0%
|
|
|
|
218.2%
|
|
|
|
3.3%
|
|
|
|
84.2%
|
|
|
|
98.9%
|
|
|
30%
|
|
|
|
90%
|
|
|
|
174.6%
|
|
|
|
100.4%
|
|
|
|
34.9%
|
|
|
|
90.0%
|
|
|
|
99.3%
|
|
|
20%
|
|
|
|
60%
|
|
|
|
83.9%
|
|
|
|
34.2%
|
|
|
|
56.4%
|
|
|
|
93.3%
|
|
|
|
99.5%
|
|
|
10%
|
|
|
|
30%
|
|
|
|
29.2%
|
|
|
|
5.7%
|
|
|
|
69.4%
|
|
|
|
95.3%
|
|
|
|
99.7%
|
|
|
0%
|
|
|
|
0%
|
|
|
|
5.8%
|
|
|
|
31.3%
|
|
|
|
77.7%
|
|
|
|
96.6%
|
|
|
|
99.8%
|
|
|
10%
|
|
|
|
30%
|
|
|
|
29.2%
|
|
|
|
48.4%
|
|
|
|
83.2%
|
|
|
|
97.4%
|
|
|
|
99.8%
|
|
|
20%
|
|
|
|
60%
|
|
|
|
45.5%
|
|
|
|
60.2%
|
|
|
|
87.1%
|
|
|
|
98.0%
|
|
|
|
99.9%
|
|
|
30%
|
|
|
|
90%
|
|
|
|
57.1%
|
|
|
|
68.7%
|
|
|
|
89.8%
|
|
|
|
98.4%
|
|
|
|
99.9%
|
|
|
40%
|
|
|
|
120%
|
|
|
|
65.7%
|
|
|
|
75.0%
|
|
|
|
91.9%
|
|
|
|
98.8%
|
|
|
|
99.9%
|
|
|
50%
|
|
|
|
150%
|
|
|
|
72.1%
|
|
|
|
79.6%
|
|
|
|
93.4%
|
|
|
|
99.0%
|
|
|
|
99.9%
|
|
|
60%
|
|
|
|
180%
|
|
|
|
77.0%
|
|
|
|
83.2%
|
|
|
|
94.6%
|
|
|
|
99.2%
|
|
|
|
99.9%
|
|
|
|
|
|
|
|
|
|
|
28
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
The Indexs annualized historical volatility rate for the five-year period from
May 30, 2008 through May 31, 2013 is 24.99%. The Indexs highest volatility rate for any one calendar year during the five-year period is 41.21% and volatility for a shorter period of time may have been substantially higher. The
Indexs annualized performance for the five-year period from May 30, 2008 through May 31, 2013 is 5.59%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the
future.
For additional graphs and charts demonstrating the effects of volatility and index performance on the long-term
performance of the Fund, see Additional Information Regarding Investment Techniques and Policies and Negative Implications of Daily Goals in Volatile Markets in the Funds statutory prospectus, and Special Note
Regarding the Correlation Risks of the Funds in the Funds Statement of Additional Information.
Holding an
unmanaged position opens the investor to the risk of market volatility adversely affecting the performance of the investment. The Fund is not appropriate for investors who do not intend to actively monitor and manage their portfolios. This table is
intended to underscore the fact that the Fund is designed as a short-term trading vehicle for investors who intend to actively monitor and manage their portfolios.
To fully understand the risks of market volatility on the Fund, see Negative Implications of Daily Goals in Volatile Markets found in the statutory prospectus.
Indirectly investing in emerging markets instruments involve greater risks than indirectly investing in foreign instruments in general. Risks
of investing in emerging market countries include: political or social upheaval; nationalization of businesses; restrictions on foreign ownership; prohibitions on the repatriation of assets; and risks from an economys dependence on revenues
from particular commodities or industries. In addition, currency transfer restrictions, limited potential buyers for such instruments, delays and disruption in settlement procedures and illiquidity or low volumes of transactions may make exits
difficult or impossible at times.
Financial Services Companies Risk
The Fund currently focuses its investments in securities issued by, and/or has exposure to, financial services companies. As a result, the
Fund is subject to risks of legislative or regulatory changes, adverse market conditions and/or increased competition affecting the financial services companies. Profitability is largely dependent on the availability and cost of capital, and can
fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector.
Indirectly investing in foreign instruments may involve greater risks than investing in domestic instruments. As a result, the Funds
returns and NAVs may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The laws and accounting, auditing, and
financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
If the Funds benchmark moves more than 33% on a given trading day in a direction adverse to the Fund, you would lose all of your money.
Rafferty will attempt to position the Funds portfolio to ensure that the Fund does not lose more than 90% of its NAV on a given day. The cost of such downside protection will be limitations on the Funds gains. As a consequence, the
Funds portfolio may not be responsive to Index losses beyond 30% in a given day. For example, if the Index were to lose 35%, the Fund might be limited to a daily gain of 90% rather than 105%, which is 300% of the Index loss of 35%.
Geographic Concentration Risk
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or economic conditions and
regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
High Portfolio Turnover Risk
Daily rebalancing of the Funds holdings pursuant to its daily investment objective causes a much greater number of portfolio
transactions when compared to most exchange-traded funds. Such frequent and active trading leads to significantly higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the
possibility of significantly increased capital gains, including short-term and/or long-term capital gains that will be taxable to shareholders as ordinary income. The Fund calculates portfolio turnover without including the short term cash
instruments or derivative transactions that comprise the majority of the Funds trading. As such, if the Funds extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
29
|
|
|
Hong Kong Securities Risk
Investment in securities of Hong Kong
issuers involves risks that may be greater than if the Funds investments were more geographically diverse. Hong Kongs reversion to China has been marked by increased volatility and uncertainty in its economic and political status, which
may result in adverse affects for the Funds investments. Hong Kongs economy has become more dependent on Chinas role in the global market and the strength or diminishment of that relationship may impact Hong Kong issuers.
Additionally, because Hong Kong has few natural resources, any surplus or shortage in the commodity markets could impact the Hong Kong economy as a whole.
Intra-Day Investment Risk
The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the
subsequent trading day. The exact exposure of an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the
time of purchase. The Funds gains occur as its market exposure declines and its losses are accompanied by increases in market exposure. If the Index declines, the Funds net assets will rise by an amount equal to the decline in the
Funds exposure. Conversely, if the Index rises the Funds net assets will decline by the same amount as the increase in the Funds exposure. As an example (using simplified numbers), if the Fund had $100 in net assets at the market
close, it would seek $300 of exposure to the next trading days Index performance. If the Index declined by 1% by noon the following trading day, the exposure of the Fund will fall by 1% to $297 and the net assets will rise by $3 to
$103. With net assets of $103 and exposure of $297, a purchaser at that point would be receiving 288% exposure of her investment instead of 300%
Shareholders should lose money when the Index rises, which is a result that is the opposite from traditional funds.
If you invest in the Fund, you are exposed to the risk that an increase in the daily performance of the Index will be leveraged. This means that your investment in the Fund will be reduced by an amount equal
to 3% for every 1% daily increase, not including the cost of financing the portfolio and the impact of operating expenses, which would further lower your investment. The Fund could theoretically lose an amount greater than its net assets in the
event of an Index increase of more than 33%. Further, purchasing shares during a day may result in greater than 300% exposure to the performance of the Index if the Index rises between the close of the markets on one trading day and before the
close of the markets on the next trading day.
To fully understand the risks of using leverage in the Fund, see Effects of
Compounding and Market Volatility Risk above.
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Illiquid securities also may be difficult to value. If the Fund is
forced to sell an illiquid security at an unfavorable time or at a price that is lower than Raffertys judgment of the securitys true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the
Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
The Fund is subject to market risks that can affect the value of its shares. These risks include political, regulatory, market and economic developments, including developments that impact specific economic
sectors, industries or segments of the market.
Rafferty expects a significant portion of the assets of the Fund to come from professional money managers and investors who use the Funds as
part of asset allocation and market timing investment strategies. These strategies often call for frequent trading which may lead to increased portfolio turnover, higher transaction costs, and the possibility of increased
capital gains, including short-term and/or long-term capital gain that will be taxable to shareholders as ordinary income.
Mid Capitalization Company Risk
Investing in the securities of mid capitalization companies, and securities that provide exposure to mid capitalization companies, involves
greater risks and the possibility of greater price volatility than investing in more-established, larger capitalization companies. Mid capitalization companies often have narrower markets for their goods and/or services and more limited managerial
and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks
are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will
|
|
|
|
|
|
|
|
|
30
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
normally be less publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions,
whether based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of
the Funds portfolio.
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities. A non-diversified
funds NAV and total return may fluctuate more or fall greater in times of weaker markets than a conventional diversified fund.
The Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Funds operations and/or change the
competitive landscape.
Risks of Investing in Other Investment Companies (including ETFs)
Investments in the securities of other investment companies, including ETFs, may involve duplication of advisory fees and certain other
expenses. Fund shareholders indirectly bear the Funds proportionate share of the fees and expenses indirectly paid by shareholders of the other investment company or ETF, in addition to the fees and expenses Fund shareholders bear in
connection with the Funds own operations. The Funds performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the investment company or ETF fails to achieve its investment
objective, the value of the Funds investment will decline, adversely affecting the Funds performance. In addition, closed end investment company and ETF shares potentially may trade at a discount or a premium and are subject to brokerage
and other trading costs, which could result in greater expenses to the Fund. Finally, because the value of ETF shares depends on the demand in the market, the Adviser may not be able to liquidate the Funds holdings in those shares at the most
optimal time, adversely affecting the Funds performance.
The Fund may engage in short sales designed to earn the Fund a profit from the decline in the price of particular securities, baskets of securities or indices. However, there is a risk that the Fund will
experience a loss as a result of engaging in these short sales.
Tax and Distribution Risk
The Fund has extremely high portfolio turnover which causes the Fund to generate significant amounts of taxable income. This income is
typically short-term capital gain, which is generally treated as ordinary income when distributed to shareholders, or short-term capital loss. The Fund rarely generates long-term capital gain or loss. The Fund will generally need to distribute net
short-term capital gain to satisfy certain tax requirements. As a result of the Funds high portfolio turnover, the Fund could make larger and/or more frequent distributions than traditional unleveraged ETFs. Because the Funds asset level
changes frequently, these distributions could comprise a substantial portion or even all of the Funds net assets if the Fund distributes this income after a decline in its net assets. In addition, the Fund may be held by short-term investors
and these investors may exit the Fund prior to the record date of a distribution. As a result, shareholders in the Fund on the day of a distribution may receive substantial distributions, which could lead to negative tax implications for such
shareholders. Potential investors are urged to consult their own tax advisers for more detailed information.
Rules governing the
federal income tax aspects of certain derivatives, including total return equity swaps, real estate-related swaps, credit default swaps and other credit derivatives are not entirely clear. Because the Funds status as a regulated investment
company might be affected if the Internal Revenue Service did not accept the Funds treatment of certain transactions involving derivatives, the Funds ability to engage in these transactions may be limited.
The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs, and/or a
temporary lack of liquidity in the markets for the securities held by the Fund. A failure to achieve a daily target may cause the Fund to provide returns for a longer period that are worse than expected. In addition, even though the Fund may meet
its daily target for a period of time, this will not necessarily produce the returns that might be expected in light of the returns of the Index or the Funds benchmark for that period.
The Fund values its portfolio as of the close of regular trading on the New York Stock Exchange (NYSE) (generally 4:00 P.M.
Eastern time). In some cases, foreign market indices close before the NYSE opens or may not be open for business on the same calendar days as the Fund. As a result, the daily performance of the Fund can vary from the performance of the Index.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
31
|
|
|
Special Risks of Exchange-Traded Funds
Not Individually
Redeemable.
Shares are not individually redeemable and may be redeemed by the Fund at NAV only in large blocks known as Creation Units. You may incur brokerage costs purchasing enough Shares to constitute a Creation Unit.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of
that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or other reasons. There can be no assurance that Shares will continue to meet the listing requirements of the exchange on which it trades, and the listing
requirements may be amended from time to time.
Market Price Variance Risk.
Individual Shares of the Fund that are
listed for trading on an exchange can be bought and sold in the secondary market at market prices. The market prices of Shares will fluctuate in response to changes in NAV and supply and demand for Shares. The Adviser cannot predict whether Shares
will trade above, below or at their NAV. Differences between secondary market prices and NAV for Shares may be due largely to supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for
securities or instruments held by the Fund at a particular time. Given the fact that Shares can be created and redeemed in Creation Units, the Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may,
however, be times when the market price and the NAV vary significantly and you may pay more than NAV when buying Shares on the secondary market, and you may receive less than NAV when you sell those Shares. The market price of Shares, like the price
of any exchange-traded security, includes a bid-ask spread charged by the exchange specialists, 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 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. The Funds
investment results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent with those experienced by those creating and
redeeming directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund.
Fund Performance
The Fund has not yet commenced operations; therefore, performance information is not yet available. In the future, performance information for the Fund will be presented in this section. Performance
information also will be available on the Funds website at http://www.direxionfunds.com/products?presets=etfs&activetab=performance or by calling the Fund toll free at 1-866-476-7523.
Management
Investment Adviser
Rafferty Asset Management, LLC is the Funds investment
adviser.
Portfolio Manager
Paul Brigandi, the Funds Portfolio Manager, is primarily responsible for the day-to-day management of the Fund and has served in this role since the Funds inception.
Purchase and Sale of Fund Shares
The Fund will issue and redeem Shares in exchange for cash only to Authorized Participants in large blocks, known as Creation Units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Fund Shares on a national securities exchange through a broker-dealer. Because the Shares trade at market prices rather than NAV, Shares may trade at a price greater than NAV (premium) or less than NAV (discount).
Tax Information
The Fund intends to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject
to federal income taxes and may also be subject to state and local taxes. Distributions by the Fund may be significantly higher than those of most exchange-traded funds.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase
the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or the Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of
interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediarys website for more information.
|
|
|
|
|
|
|
|
|
32
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
Direxion Daily Japan Bull 3X Shares
Important
Information Regarding the Fund
The Direxion Daily Japan Bull 3X Shares (Fund) seeks
daily
leveraged
investment results. The pursuit of daily leveraged goals means that the Fund is riskier than alternatives that do not use leverage because the Funds objective is to magnify the performance of an index. The pursuit of daily leveraged investment
goals means that the return of the Fund for a period longer than a full trading day may bear no resemblance to 300% of the return of its index for such longer period because the aggregate return of the Fund is the product of the series of daily
leveraged returns for each trading day. The path of the benchmark during the longer period may be at least as important to the Funds return for the longer period as the cumulative return of the benchmark for the relevant longer period,
especially in periods of market volatility. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of the Funds stated goal and
the performance of the target index for the full trading day.
Investment Objective
The Fund seeks daily investment results, before fees and expenses, of 300% of the performance of the MSCI Japan Index.
The Fund seeks
daily
leveraged investment results and does
not seek to achieve its stated investment objective over a period of time greater than one day.
The Fund is different and much riskier than most exchange-traded funds.
The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged
investment results, understand the risks associated with the use of leverage and are willing to monitor their portfolios frequently. The Fund seeks daily leveraged investment results relative to the Index and is different and riskier than similarly
benchmarked exchange-traded funds that do not use leverage. Therefore, the Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy or hold shares of the Fund (Shares). Investors purchasing
shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(1)
(expenses that you pay each year as a percentage of the value of your investment)
|
|
|
|
|
Management Fees
|
|
|
0.75%
|
|
Distribution and/or Service (12b-1) Fees
|
|
|
0.00%
|
|
Other Expenses of the Fund
|
|
|
0.25%
|
|
Acquired Fund Fees and Expenses
|
|
|
0.13%
|
|
|
|
|
|
|
Total Annual Fund Operating Expenses
|
|
|
1.13%
|
|
Expense Cap/Reimbursement
|
|
|
(0.05%
|
)
|
|
|
|
|
|
Total Annual Fund Operating Expenses After
Expense Cap/Reimbursement
|
|
|
1.08%
|
|
|
|
|
|
|
(1)
|
|
The Funds adviser, Rafferty Asset Management, LLC (Rafferty or the Adviser) has contractually agreed to cap all or a portion
of its management fee and/or reimburse the Fund for Other Expenses through March 1, 2015, to the extent that the Funds Total Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest,
Acquired Fund Fees and Expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation). Any expense
cap is subject to reimbursement by the Fund within the following three years only if overall expenses fall below these percentage limitations. This agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Expense Example
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem 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 Funds operating expenses remain the same. 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 rate may indicate higher transaction costs and
may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Funds performance.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
33
|
|
|
Principal Investment Strategies
The Fund, under normal circumstances, creates long positions by investing at least 80% of its assets in the securities that comprise the MSCI
Japan Index (Index) and/or financial instruments that provide leveraged and unleveraged exposure to the Index. These financial instruments include: futures contracts; options on securities, indices and futures contracts; equity caps,
floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; exchange-traded funds (ETFs); and other financial instruments. On a day-to-day basis, the Fund also may hold short-term debt
instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is designed to measure the performance of the large and mid cap segments of the Japan equity market, covering approximately 85% of the free float-adjusted market capitalization in Japan. As of the
date of its last reconstitution, the Index had a total dollar value of approximately $3.3 trillion, composed of 318 constituent securities ranging in market capitalization from approximately $1.4 billion to $207.3 billion.
The Fund may gain exposure to only a representative sample of the securities in the Index that have aggregate characteristics similar to
those of the Index. The Fund gains this exposure either by directly investing in the underlying securities of the Index or by investing in derivatives that provide exposure to those securities. The Fund seeks to remain fully invested at all times
consistent with its stated goal. At the close of the markets each trading day, Rafferty positions the Funds portfolio so that its exposure to the Index is consistent with the Funds investment objective. The impact of the Indexs
movements during the day will affect whether the Funds portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Funds exposure will need to be
increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Funds exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover.
Because of daily rebalancing and the compounding of each days return over time, the return of the Fund for periods longer than a
single day will be the result of each days returns compounded over the period, which will very likely differ from 300% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as
a result of daily rebalancing, the Indexs volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Indexs performance increases.
Additionally, because a significant portion of the assets of the Fund may come from investors using asset allocation and
market timing investment strategies, the Fund may further need to engage in frequent trading. The Fund will concentrate its investment in a particular industry or group of industries to approximately the same extent as the Index is so
concentrated.
Principal Risks
An investment in the Fund entails risk. The Fund could lose money or its performance could trail that of other investment alternatives. The
Adviser cannot guarantee that the Fund will achieve its objective. In addition, the Fund presents some risks not traditionally associated with most mutual funds and exchange-traded funds. It is important that investors closely review all of the
risks listed below and understand how these risks interrelate before making an investment in the Fund. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets could negatively affect issuers worldwide,
including the Fund. There is the risk that you could lose all or a portion of your money invested in the Fund.
Adverse Market Conditions Risk
Because the Fund magnifies the performance of the Index, its performance will suffer during conditions in which the Index declines.
Advisers Investment Strategy Risk
The Adviser utilizes a quantitative methodology to select investments for the Fund. Although this methodology is designed to correlate the
Funds performance with the performance of the Index, there is no assurance that such methodology will be successful and will enable the Fund to achieve its investment objective.
The Fund may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure to a particular group of
securities or an asset class without actually purchasing those securities or investments, or to hedge a position. These financial instruments may include swap agreements. The use of swap agreements and other counterparty instruments involves risks
that are different from those associated with ordinary portfolio securities transactions. For example, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap
agreement counterparty. Swap agreements and other counterparty instruments also may be considered to be illiquid. In addition, the Fund may enter into swap agreements that involve a limited number of counterparties, which may increase the
Funds exposure to counterparty credit risk. The Fund does not specifically limit its
|
|
|
|
|
|
|
|
|
34
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
counterparty risk with respect to any single counterparty. Further, there is a risk that no suitable counterparties will be willing to enter into, or continue to enter into, transactions with the
Fund and, as a result, the Fund may not be able to achieve its investment objective.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will affect the value of what the Fund owns and the Funds share price. Generally, when the
U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Devaluation of a currency by a countrys government or banking authority also will have a
significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily investment
objective. To achieve a high degree of correlation with the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily target. The Fund may have difficulty achieving its daily target due to fees and expenses,
high portfolio turnover, transaction costs and costs associated with the use of leveraged investment techniques and/or a temporary lack of liquidity in the markets for the securities held by the Fund. Market disruptions, regulatory restrictions or
extreme volatility will also adversely affect the Funds ability to adjust exposure to the required levels. The Fund may not have investment exposure to all securities in its underlying Index, or its weighting of investment exposure to such
stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the underlying Index. The Fund may be subject to large movements of assets into and out of the
Fund, potentially resulting in the Fund being over- or under-exposed to its Index. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Indexs movement. Because of this, it is unlikely that the Fund
will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to its Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding
annual index reconstitutions and other index rebalancing or reconstitution events may hinder the Funds ability to meet its daily investment objective on that day.
To the extent the Fund seeks exposure to foreign companies, the Funds investments may be in the form of depositary receipts or other
securities convertible into securities of foreign issuers, including American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), and Global Depositary Receipts (GDRs). While the use of ADRs, EDRs and
GDRs, which are traded on exchanges and represent and ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs, EDRs,
and GDRs continue to be subject to certain of the risks associated with investing directly in foreign securities.
The Fund uses investment techniques, including investments in derivatives such as futures and forward contracts, options and swaps, which may be considered aggressive. Investments in such derivatives are
subject to market risks that may cause their prices to fluctuate over time and may increase the volatility of the Fund. The use of derivatives may expose the Fund to additional risks that it would not be subject to if it invested directly in the
securities underlying those derivatives, such as counterparty risk and the risk that the derivatives may become illiquid. The use of derivatives may result in larger losses or smaller gains than otherwise would be the case. Additionally, with
respect to the use of swap agreements, if the Index has a dramatic intraday move in value that causes a material decline in the Funds net asset value (NAV), the terms of the swap agreement between the Fund and its counterparty may
allow the counterparty to immediately close out of the transaction with the Fund. In such circumstances, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the
Funds daily investment objective. This may prevent the Fund from achieving its daily investment objective particularly if the Index reverses all or a portion of its intraday move by the end of the day. In addition, the Funds investments
in derivatives, as of the date of this Prospectus, are subject to the following risks:
Futures and Forward Contracts
.
There may be an imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts. Forward currency transactions
include the risks associated with fluctuations in currency.
Options
. There may be an imperfect correlation between the
prices of options and movements in the price of the securities (or indices) hedged or used for cover, which may cause a given hedge not to achieve its objective.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
35
|
|
|
Swap Agreements
. Interest rate swaps are subject to interest rate and credit risk.
Total return swaps are subject to counterparty risk, which relates to credit risk of the counterparty and liquidity risk of the swaps themselves.
Early Close/Trading Halt Risk
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial
instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its
investments and/or may incur substantial trading losses.
Effects of Compounding and Market Volatility Risk
The Fund does not attempt to, and should not be expected to, provide returns which are a multiple of the return of the Index for periods
other than a single day. The Fund rebalances its portfolio on a daily basis, increasing exposure in response to that days gains or reducing exposure in response to that days losses. This means that for a period longer than one day, the
pursuit of daily goals may result in daily leveraged compounding. It also means that the return of an index over a period of time greater than one day multiplied by the Funds daily target (300%) generally will not equal the Funds
performance over that same period.
As a result, over time, the cumulative percentage increase or decrease in the value of the
Funds portfolio may diverge significantly from the cumulative percentage increase or decrease in the multiple of the return of the Funds underlying index due to the compounding effect of losses and gains on the returns of the Fund. It
also is expected that the Funds use of leverage will cause the Fund to underperform the return of three times its benchmark in a trendless or flat market.
The effect of compounding becomes more pronounced on the Funds performance as the Index experiences volatility. The Indexs volatility rate is a statistical measure of the magnitude of
fluctuations in the returns of the Index. The table below provides examples of how Index volatility could affect the Funds performance. The chart shows estimated Fund returns for a number of combinations of performance and volatility over a
one-year period and is shown to illustrate how holding the Fund for a period longer than one day may negatively impact investment return. As shown below, this Fund, or any other 3X Bull Fund, would be expected to lose 17.1% (as shown in Table 1
below) if its Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. If the Indexs annualized volatility were to rise to 75%, the hypothetical loss for a one year period for the Fund
widens to approximately 81.5%.
At higher ranges of volatility, there is a chance of a near complete loss of value even if the
Index is flat. For instance, if the Indexs annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was only 0%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
Year
Index
Return
|
|
|
300%
One Year
Index
Return
|
|
|
Volatility Rate
|
|
|
|
10%
|
|
|
25%
|
|
|
50%
|
|
|
75%
|
|
|
100%
|
|
|
60%
|
|
|
|
180%
|
|
|
|
93.8%
|
|
|
|
94.7%
|
|
|
|
97.0%
|
|
|
|
98.8%
|
|
|
|
99.7%
|
|
|
50%
|
|
|
|
150%
|
|
|
|
87.9%
|
|
|
|
89.6%
|
|
|
|
94.1%
|
|
|
|
97.7%
|
|
|
|
99.4%
|
|
|
40%
|
|
|
|
120%
|
|
|
|
79.0%
|
|
|
|
82.1%
|
|
|
|
89.8%
|
|
|
|
96.0%
|
|
|
|
98.9%
|
|
|
30%
|
|
|
|
90%
|
|
|
|
66.7%
|
|
|
|
71.6%
|
|
|
|
83.8%
|
|
|
|
93.7%
|
|
|
|
98.3%
|
|
|
20%
|
|
|
|
60%
|
|
|
|
50.3%
|
|
|
|
57.6%
|
|
|
|
75.8%
|
|
|
|
90.5%
|
|
|
|
97.5%
|
|
|
10%
|
|
|
|
30%
|
|
|
|
29.3%
|
|
|
|
39.6%
|
|
|
|
65.6%
|
|
|
|
86.5%
|
|
|
|
96.4%
|
|
|
0%
|
|
|
|
0%
|
|
|
|
3.0%
|
|
|
|
17.1%
|
|
|
|
52.8%
|
|
|
|
81.5%
|
|
|
|
95.0%
|
|
|
10%
|
|
|
|
30%
|
|
|
|
29.2%
|
|
|
|
10.3%
|
|
|
|
37.1%
|
|
|
|
75.4%
|
|
|
|
93.4%
|
|
|
20%
|
|
|
|
60%
|
|
|
|
67.7%
|
|
|
|
43.3%
|
|
|
|
18.4%
|
|
|
|
68.0%
|
|
|
|
91.4%
|
|
|
30%
|
|
|
|
90%
|
|
|
|
113.2%
|
|
|
|
82.1%
|
|
|
|
3.8%
|
|
|
|
59.4%
|
|
|
|
89.1%
|
|
|
40%
|
|
|
|
120%
|
|
|
|
166.3%
|
|
|
|
127.5%
|
|
|
|
29.6%
|
|
|
|
49.2%
|
|
|
|
86.3%
|
|
|
50%
|
|
|
|
150%
|
|
|
|
227.5%
|
|
|
|
179.8%
|
|
|
|
59.4%
|
|
|
|
37.6%
|
|
|
|
83.2%
|
|
|
60%
|
|
|
|
180%
|
|
|
|
297.5%
|
|
|
|
239.6%
|
|
|
|
93.5%
|
|
|
|
24.2%
|
|
|
|
79.6%
|
|
The Indexs annualized historical volatility rate for the five-year period from May 30, 2008
through May 31, 2013 is 26.04%. The Indexs highest volatility rate for any one calendar year during the five-year period is 42.34% and volatility for a shorter period of time may have been substantially higher. The Indexs annualized
performance for the five-year period from May 30, 2008 through May 31, 2013 is 1.72%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future.
For additional graphs and charts demonstrating the effects of volatility and index performance on the long-term performance of the
Fund, see Additional Information Regarding Investment Techniques and Policies and Negative Implications of Daily Goals in Volatile Markets in the Funds statutory prospectus, and Special Note Regarding the
Correlation Risks of the Funds in the Funds Statement of Additional Information.
Holding an unmanaged position
opens the investor to the risk of market volatility adversely affecting the performance of the investment. The Fund is not appropriate for investors who do not intend to actively monitor and manage their portfolios. This table is intended to
underscore the fact that the Fund is designed as a short-term trading vehicle for investors who intend to actively monitor and manage their portfolios.
To fully understand the risks of market volatility on the Fund, see Negative Implications of Daily Goals in Volatile Markets found in the statutory prospectus.
|
|
|
|
|
|
|
|
|
36
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
Investments in publicly issued equity
securities and securities that provide exposure to equity securities, including common stocks, in general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the
Fund invests will cause the NAV of the Fund to fluctuate.
Indirectly investing in foreign instruments may involve greater risks than investing in domestic instruments. As a result, the Funds
returns and NAVs may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The laws and accounting, auditing, and
financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
If the Funds benchmark moves more than 33% on a given trading day in a direction adverse to the Fund, you would lose all of your money.
Rafferty will attempt to position the Funds portfolio to ensure that the Fund does not lose more than 90% of its NAV on a given day. The cost of such downside protection will be limitations on the Funds gains. As a consequence, the
Funds portfolio may not be responsive to Index gains beyond 30% in a given day. For example, if the Index were to gain 35%, the Fund might be limited to a daily gain of 90% rather than 105%, which is 300% of the Index gain of 35%.
Geographic Concentration Risk
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or economic conditions and
regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
High Portfolio Turnover Risk
Daily rebalancing of the Funds holdings pursuant to its daily investment objective causes a much greater number of portfolio
transactions when compared to most exchange-traded funds. Such frequent and active trading leads to significantly higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the
possibility of significantly increased capital gains, including short-term and/or long-term capital gains that will be taxable to shareholders as ordinary income. The Fund calculates portfolio turnover without including the short term cash
instruments or derivative transactions that comprise the majority of the Funds trading. As such, if the Funds extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Intra-Day Investment Risk
The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the
subsequent trading day. The exact exposure of an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the
time of purchase. If the Index gains value, the Funds net assets will rise by the same amount as the Funds exposure. Conversely, if the Index declines, the Funds net assets will decline by the same amount as the Funds
exposure. Since a Fund starts each trading day with exposure which is 300% of its net assets, a change in both the exposure and the net assets of the Fund by the same absolute amount results in a change in the comparative relationship of the two. As
an example (using simplified numbers), if the Fund had $100 in net assets at the market close, it would seek $300 of exposure to the next trading days Index performance. If the Index rose by 1% by noon the following trading day, the exposure
of the Fund will have risen by 1% to $303 and the net assets will have risen by that $3 gain to $103. With net assets of $103 and exposure of $303, a purchaser at that point would be receiving 294% exposure of her investment instead of 300%.
Investment in securities of Japanese issuers involves risks that may be greater than if the Funds investments were more geographically
diverse. The Japanese economy has recently emerged from a prolonged economic downturn. Since 2000, Japans economic growth rate has remained relatively low. Its economy is characterized by government intervention and protectionism, an unstable
financial services sector and relatively high unemployment. Japans economy is heavily dependent on international trade and has been adversely affected by trade tariffs and competition from emerging economies. As such, economic growth is
heavily dependent on continued growth in international trade, government support of the financial services sector, among other troubled sectors, and consistent government policy. Any changes or trends in these economic factors could have a
significant impact on Japans economy overall and may negatively affect the Funds investment. Japans economy is also closely tied to its two largest trading partners, the U.S. and China. Economic volatility in either nation may
create volatility for Japans economy as well. Additionally, as China has increased its role with Japan as a trading partner, political tensions between the countries has
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
37
|
|
|
become strained. Any increase or decrease in such tension may have consequences for investment in Japanese issuers.
If you invest in the Fund, you are exposed to the risk that a decline in the daily performance of the Index will be leveraged. This means that your investment in the Fund will be reduced by an amount equal
to 3% for every 1% daily decline, not including the cost of financing the portfolio and the impact of operating expenses, which would further lower your investment. The Fund could theoretically lose an amount greater than its net assets in the event
of an Index decline of more than 33%. Further, purchasing shares during a day may result in greater than 300% exposure to the performance of the Index if the Index declines between the close of the markets on one trading day and before the close of
the markets on the next trading day.
To fully understand the risks of using leverage in the Fund, see Effects of
Compounding and Market Volatility Risk above.
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Illiquid securities also may be difficult to value. If the Fund is
forced to sell an illiquid security at an unfavorable time or at a price that is lower than Raffertys judgment of the securitys true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the
Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
The Fund is subject to market risks that can affect the value of its shares. These risks include political, regulatory, market and economic developments, including developments that impact specific economic
sectors, industries or segments of the market.
Rafferty expects a significant portion of the assets of the Fund to come from professional money managers and investors who use the Funds as
part of asset allocation and market timing investment strategies. These strategies often call for frequent trading which may lead to increased portfolio turnover, higher transaction costs, and the possibility of increased
capital gains, including short-term and/or long-term capital gain that will be taxable to shareholders as ordinary income.
Mid Capitalization Company Risk
Investing in the securities of mid capitalization companies, and securities that provide exposure to mid capitalization companies, involves
greater risks and the possibility of greater price volatility than investing in more-established, larger capitalization companies. Mid capitalization companies often have narrower markets for their goods and/or services and more limited managerial
and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks
are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what
is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result, their performance can be more
volatile and they face greater risk of business failure, which could increase the volatility of the Funds portfolio.
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities. A non-diversified
funds NAV and total return may fluctuate more or fall greater in times of weaker markets than a conventional diversified fund.
The Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Funds operations and/or change the
competitive landscape.
Risks of Investing in Other Investment Companies (including ETFs)
Investments in the securities of other investment companies, including ETFs, may involve duplication of advisory fees and certain other
expenses. Fund shareholders indirectly bear the Funds proportionate share of the fees and expenses indirectly paid by shareholders of the other investment company or ETF, in addition to the fees and expenses Fund shareholders bear in
connection with the Funds own operations. The Funds performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the investment company or ETF fails to achieve its investment
objective, the value of the Funds investment will decline, adversely affecting the Funds performance. In addition, closed end investment
|
|
|
|
|
|
|
|
|
38
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
company and ETF shares potentially may trade at a discount or a premium and are subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, because
the value of ETF shares depends on the demand in the market, the Adviser may not be able to liquidate the Funds holdings in those shares at the most optimal time, adversely affecting the Funds performance.
Tax and Distribution Risk
The Fund has extremely high portfolio turnover which causes the Fund to generate significant amounts of taxable income. This income is
typically short-term capital gain, which is generally treated as ordinary income when distributed to shareholders, or short-term capital loss. The Fund rarely generates long-term capital gain or loss. The Fund will generally need to distribute net
short-term capital gain to satisfy certain tax requirements. As a result of the Funds high portfolio turnover, the Fund could make larger and/or more frequent distributions than traditional unleveraged ETFs. Because the Funds asset level
changes frequently, these distributions could comprise a substantial portion or even all of the Funds net assets if the Fund distributes this income after a decline in its net assets. In addition, the Fund may be held by short-term investors
and these investors may exit the Fund prior to the record date of a distribution. As a result, shareholders in the Fund on the day of a distribution may receive substantial distributions, which could lead to negative tax implications for such
shareholders. Potential investors are urged to consult their own tax advisers for more detailed information.
Rules governing the
federal income tax aspects of certain derivatives, including total return equity swaps, real estate-related swaps, credit default swaps and other credit derivatives are not entirely clear. Because the Funds status as a regulated investment
company might be affected if the Internal Revenue Service did not accept the Funds treatment of certain transactions involving derivatives, the Funds ability to engage in these transactions may be limited.
The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs, and/or a
temporary lack of liquidity in the markets for the securities held by the Fund. A failure to achieve a daily target may cause the Fund to provide returns for a longer period that are worse than expected. In addition, even though the Fund may meet
its daily target for a period of time, this will not necessarily produce the returns that might be expected in light of the returns of the Index or the Funds benchmark for that period.
The Fund values its portfolio as of the close of regular trading on the New York Stock Exchange (NYSE) (generally 4:00 P.M.
Eastern time). In some cases, foreign market indices close before the NYSE opens or may not be open for business on the same calendar days as the Fund. As a result, the daily performance of the Fund can vary from the performance of the Index.
Special Risks of Exchange-Traded Funds
Not Individually Redeemable.
Shares are not individually redeemable and may be redeemed by the Fund at NAV only in large blocks
known as Creation Units. You may incur brokerage costs purchasing enough Shares to constitute a Creation Unit.
Trading
Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or other reasons. There can be no
assurance that Shares will continue to meet the listing requirements of the exchange on which it trades, and the listing requirements may be amended from time to time.
Market Price Variance Risk.
Individual Shares of the Fund that are listed for trading on an exchange can be bought and sold in the secondary market at market prices. The market prices of Shares
will fluctuate in response to changes in NAV and supply and demand for Shares. The Adviser cannot predict whether Shares will trade above, below or at their NAV. Differences between secondary market prices and NAV for Shares may be due largely to
supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for securities or instruments held by the Fund at a particular time. Given the fact that Shares can be created and redeemed in Creation
Units, the Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and you may pay more than NAV when buying Shares on the
secondary market, and you may receive less than NAV when you sell those Shares. The market price of Shares, like the price of any exchange-traded security, includes a bid-ask spread charged by the exchange specialists, 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 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. The Funds investment results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in
the secondary market may not experience investment results consistent
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
39
|
|
|
with those experienced by those creating and redeeming directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund.
Fund Performance
The Fund has not yet commenced operations; therefore, performance information is not yet available. In the future, performance information for the Fund will be presented in this section. Performance
information also will be available on the Funds website at http://www.direxionfunds.com/products?presets=etfs&activetab=performance or by calling the Fund toll free at 1-866-476-7523.
Management
Investment Adviser
Rafferty Asset Management, LLC is the Funds investment
adviser.
Portfolio Manager
Paul Brigandi, the Funds Portfolio Manager, is primarily responsible for the day-to-day management of the Fund and has served in this role since the Funds inception.
Purchase and Sale of Fund Shares
The Fund will issue and redeem Shares only to Authorized Participants (typically, broker-dealers) in exchange for the deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known
as Creation Units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Fund Shares on a national securities exchange through a broker-dealer. Because the Shares trade at market prices rather than NAV, Shares may
trade at a price greater than NAV (premium) or less than NAV (discount).
Tax Information
The Fund intends to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject
to federal income taxes and may also be subject to state and local taxes. Distributions by the Fund may be significantly higher than those of most exchange-traded funds.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase
the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or the Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of
interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediarys website for more information.
|
|
|
|
|
|
|
|
|
40
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
Direxion Daily Japan Bear 3X Shares
Important
Information Regarding the Fund
The Direxion Daily Japan Bear 3X Shares (Fund) seeks
daily
leveraged
investment results. The pursuit of daily leveraged goals means that the Fund is riskier than alternatives that do not use leverage because the Funds objective is to magnify the performance of an index. The pursuit of daily leveraged investment
goals means that the return of the Fund for a period longer than a full trading day may bear no resemblance to 300% of the return of its index for such longer period because the aggregate return of the Fund is the product of the series of
daily leveraged returns for each trading day. The path of the benchmark during the longer period may be at least as important to the Funds return for the longer period as the cumulative return of the benchmark for the relevant longer period,
especially in periods of market volatility. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of the Funds stated goal and
the performance of the target index for the full trading day.
Investment Objective
The Fund seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the performance of the MSCI Japan Index.
The Fund seeks
daily
leveraged
investment results and does not seek to achieve its stated investment objective over a period of time greater than one day.
The Fund is different and much riskier than most exchange-traded funds.
The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged
investment results, understand the risks associated with shorting and the use of leverage, and are willing to monitor their portfolios frequently. The Fund seeks daily leveraged investment results relative to the Index and is different and riskier
than similarly benchmarked exchange-traded funds that do not use leverage. Therefore, the Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy or hold shares of the Fund (Shares). Investors purchasing
shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(1)
(expenses that you pay each year as a percentage of the value of your investment)
|
|
|
|
|
Management Fees
|
|
|
0.75%
|
|
Distribution and/or Service (12b-1) Fees
|
|
|
0.00%
|
|
Other Expenses of the Fund
|
|
|
0.25%
|
|
Acquired Fund Fees and Expenses
|
|
|
0.13%
|
|
|
|
|
|
|
Total Annual Fund Operating Expenses
|
|
|
1.13%
|
|
Expense Cap/Reimbursement
|
|
|
(0.05%
|
)
|
|
|
|
|
|
Total Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
|
|
1.08%
|
|
|
|
|
|
|
(1)
|
|
The Funds adviser, Rafferty Asset Management, LLC (Rafferty or the Adviser) has contractually agreed to cap all or a portion
of its management fee and/or reimburse the Fund for Other Expenses through March 1, 2015, to the extent that the Funds Total Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest,
Acquired Fund Fees and Expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation). Any expense
cap is subject to reimbursement by the Fund within the following three years only if overall expenses fall below these percentage limitations. This agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Expense Example
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem 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 Funds operating expenses remain the same. 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 rate may indicate higher transaction costs and
may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Funds performance.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
41
|
|
|
Principal Investment Strategies
The Fund, under normal circumstances, creates short positions by investing at least 80% of its assets in: futures contracts; options on
securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; exchange-traded funds (ETFs); and other financial instruments that, in
combination, provide leveraged and unleveraged exposure to the MSCI Japan Index (Index). The Fund invests the remainder of its assets in short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high
quality credit profiles, including U.S. government securities and repurchase agreements. The Fund does not invest in equity securities.
The Index is designed to measure the performance of the large and mid cap segments of the Japan equity market, covering approximately 85% of the free float-adjusted market capitalization in Japan. As of the
date of its last reconstitution, the Index had a total dollar value of approximately $3.3 trillion, composed of 318 constituent securities ranging in market capitalization from approximately $1.4 billion to $207.3 billion.
The Fund may gain exposure to only a representative sample of the securities in the Index that have aggregate characteristics similar to
those of the Index. The Fund gains this exposure by investing in a combination of financial instruments that, in combination, provide exposure to the underlying securities of the Index. The Fund seeks to remain fully invested at all times consistent
with its stated goal. At the close of the markets each trading day, Rafferty positions the Funds portfolio so that its exposure to the Index is consistent with the Funds investment objective. The impact of the Indexs movements
during the day will affect whether the Funds portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Funds exposure will need to be increased.
Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Funds exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover.
Because of daily rebalancing and the compounding of each days return over time, the return of the Fund for periods longer than a
single day will be the result of each days returns compounded over the period, which will very likely differ from 300% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time,
and as a result of daily rebalancing, the Indexs volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Indexs performance decreases.
Additionally, because a significant portion of the assets of the Fund may come from investors using asset allocation and
market timing investment strategies, the Fund may further need to engage in frequent trading. The Fund will concentrate its investment in a particular industry or group of industries to approximately the same extent as the Index is so
concentrated.
Principal Risks
An investment in the Fund entails risk. The Fund could lose money or its performance could trail that of other investment alternatives. The Adviser cannot guarantee that the Fund will achieve its objective.
In addition, the Fund presents some risks not traditionally associated with most mutual funds and exchange-traded funds. It is important that investors closely review all of the risks listed below and understand how these risks interrelate before
making an investment in the Fund. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets could negatively affect issuers worldwide, including the Fund. There is the risk that you could lose all or a portion
of your money invested in the Fund.
Adverse Market Conditions Risk
Because the Fund magnifies the inverse performance of the Index, its performance will suffer during conditions in which the Index rises.
Advisers Investment Strategy Risk
The Adviser utilizes a quantitative methodology to select investments for the Fund. Although this methodology is designed to correlate the
Funds performance with the performance of the Index, there is no assurance that such methodology will be successful and will enable the Fund to achieve its investment objective.
Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind
securities, because of the nature of the financial instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs.
The Fund may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure to a particular group of
securities or an asset class without actually purchasing those securities or investments, or to hedge a position. These financial instruments may include swap agreements. The use of swap agreements and other counterparty instruments involves risks
that are different from those associated with ordinary portfolio
|
|
|
|
|
|
|
|
|
42
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
securities transactions. For example, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement
counterparty. Swap agreements and other counterparty instruments also may be considered to be illiquid. In addition, the Fund may enter into swap agreements that involve a limited number of counterparties, which may increase the Funds exposure
to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is a risk that no suitable counterparties will be willing to enter into, or continue to enter into,
transactions with the Fund and, as a result, the Fund may not be able to achieve its investment objective.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will affect the value of what the Fund owns and the Funds share price. Generally, when the
U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Devaluation of a currency by a countrys government or banking authority also will have a
significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily investment
objective. To achieve a high degree of correlation with the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily target. The Fund may have difficulty achieving its daily target due to fees and expenses,
high portfolio turnover, transaction costs and costs associated with the use of leveraged investment techniques and/or a temporary lack of liquidity in the markets for the securities held by the Fund. Market disruptions, regulatory restrictions or
extreme volatility will also adversely affect the Funds ability to adjust exposure to the required levels. The Fund may not have investment exposure to all securities in its underlying Index, or its weighting of investment exposure to such
stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the underlying Index. The Fund may be subject to large movements of assets into and out of the
Fund, potentially resulting in the Fund being over- or under-exposed to its Index. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Indexs movement. Because of this, it is unlikely that the Fund
will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to its Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding
annual index reconstitutions and other index rebalancing or reconstitution events may hinder the Funds ability to meet its daily investment objective on that day.
The Fund uses investment techniques, including investments in derivatives such as futures and forward contracts, options and swaps, which may be considered aggressive. Investments in such derivatives are
subject to market risks that may cause their prices to fluctuate over time and may increase the volatility of the Fund. The use of derivatives may expose the Fund to additional risks that it would not be subject to if it invested directly in the
securities underlying those derivatives, such as counterparty risk and the risk that the derivatives may become illiquid. The use of derivatives may result in larger losses or smaller gains than otherwise would be the case. Additionally, with
respect to the use of swap agreements, if the Index has a dramatic intraday move in value that causes a material decline in the Funds net asset value (NAV), the terms of the swap agreement between the Fund and its counterparty may
allow the counterparty to immediately close out of the transaction with the Fund. In such circumstances, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the
Funds daily investment objective. This may prevent the Fund from achieving its daily investment objective particularly if the Index reverses all or a portion of its intraday move by the end of the day. In addition, the Funds investments
in derivatives, as of the date of this Prospectus, are subject to the following risks:
Futures and Forward Contracts.
There may be an imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts. Forward currency transactions
include the risks associated with fluctuations in currency.
Options.
There may be an imperfect correlation between the
prices of options and movements in the price of the securities (or indices) hedged or used for cover, which may cause a given hedge not to achieve its objective.
Swap Agreements.
Interest rate swaps are subject to interest rate and credit risk. Total return swaps are subject to counterparty risk, which relates to credit risk of the counterparty and liquidity
risk of the swaps themselves.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
43
|
|
|
Early Close/Trading Halt Risk
An exchange or market may close or
issue trading halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such
circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Effects of Compounding and Market Volatility Risk
The Fund does not attempt to, and should not be expected to, provide returns which are a multiple of the return of the Index for periods
other than a single day. The Fund rebalances its portfolio on a daily basis, increasing exposure in response to that days gains or reducing exposure in response to that days losses. This means that for a period longer than one day, the
pursuit of daily goals may result in daily leveraged compounding. It also means that the return of an index over a period of time greater than one day multiplied by the Funds daily target (300%) generally will not equal the Funds
performance over that same period.
As a result, over time, the cumulative percentage increase or decrease in the value of the
Funds portfolio may diverge significantly from the cumulative percentage increase or decrease in the multiple of the return of the Funds underlying index due to the compounding effect of losses and gains on the returns of the Fund. It
also is expected that the Funds use of leverage will cause the Fund to underperform the return of three times its benchmark in a trendless or flat market.
The effect of compounding becomes more pronounced on the Funds performance as the Index experiences volatility. The Indexs volatility rate is a statistical measure of the magnitude of
fluctuations in the returns of the Index. The table below provides examples of how Index volatility could affect the Funds performance. The chart shows estimated Fund returns for a number of combinations of performance and volatility over a
one-year period and is shown to illustrate how holding the Fund for a period longer than one day may negatively impact investment return. As shown below, this Fund, or any other 3X Bear Fund, would be expected to lose 31.3% (as shown in Table 1
below) if its Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. If the Indexs annualized volatility were to rise to 75%, the hypothetical loss for a one year period for the Fund
widens to approximately 96.6%.
At higher ranges of volatility, there is a chance of a near complete loss of value even if the
Index is flat. For instance, if the Indexs annualized volatility is 100%, the Fund would be expected to lose approximately 100% of its value, even if the cumulative Index return for the year was only 0%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
Year
Index
Return
|
|
|
300%
One Year
Index
Return
|
|
|
Volatility Rate
|
|
|
|
10%
|
|
|
25%
|
|
|
50%
|
|
|
75%
|
|
|
100%
|
|
|
60%
|
|
|
|
180%
|
|
|
|
1371.5%
|
|
|
|
973.9%
|
|
|
|
248.6%
|
|
|
|
46.5%
|
|
|
|
96.1%
|
|
|
50%
|
|
|
|
150%
|
|
|
|
653.4%
|
|
|
|
449.8%
|
|
|
|
78.5%
|
|
|
|
72.6%
|
|
|
|
98.0%
|
|
|
40%
|
|
|
|
120%
|
|
|
|
336.0%
|
|
|
|
218.2%
|
|
|
|
3.3%
|
|
|
|
84.2%
|
|
|
|
98.9%
|
|
|
30%
|
|
|
|
90%
|
|
|
|
174.6%
|
|
|
|
100.4%
|
|
|
|
34.9%
|
|
|
|
90.0%
|
|
|
|
99.3%
|
|
|
20%
|
|
|
|
60%
|
|
|
|
83.9%
|
|
|
|
34.2%
|
|
|
|
56.4%
|
|
|
|
93.3%
|
|
|
|
99.5%
|
|
|
10%
|
|
|
|
30%
|
|
|
|
29.2%
|
|
|
|
5.7%
|
|
|
|
69.4%
|
|
|
|
95.3%
|
|
|
|
99.7%
|
|
|
0%
|
|
|
|
0%
|
|
|
|
5.8%
|
|
|
|
31.3%
|
|
|
|
77.7%
|
|
|
|
96.6%
|
|
|
|
99.8%
|
|
|
10%
|
|
|
|
30%
|
|
|
|
29.2%
|
|
|
|
48.4%
|
|
|
|
83.2%
|
|
|
|
97.4%
|
|
|
|
99.8%
|
|
|
20%
|
|
|
|
60%
|
|
|
|
45.5%
|
|
|
|
60.2%
|
|
|
|
87.1%
|
|
|
|
98.0%
|
|
|
|
99.9%
|
|
|
30%
|
|
|
|
90%
|
|
|
|
57.1%
|
|
|
|
68.7%
|
|
|
|
89.8%
|
|
|
|
98.4%
|
|
|
|
99.9%
|
|
|
40%
|
|
|
|
120%
|
|
|
|
65.7%
|
|
|
|
75.0%
|
|
|
|
91.9%
|
|
|
|
98.8%
|
|
|
|
99.9%
|
|
|
50%
|
|
|
|
150%
|
|
|
|
72.1%
|
|
|
|
79.6%
|
|
|
|
93.4%
|
|
|
|
99.0%
|
|
|
|
99.9%
|
|
|
60%
|
|
|
|
180%
|
|
|
|
77.0%
|
|
|
|
83.2%
|
|
|
|
94.6%
|
|
|
|
99.2%
|
|
|
|
99.9%
|
|
The Indexs annualized historical volatility rate for the five-year period from May 30, 2008
through May 31, 2013 is 26.04%. The Indexs highest volatility rate for any one calendar year during the five-year period is 42.34% and volatility for a shorter period of time may have been substantially higher. The Indexs annualized
performance for the five-year period from May 30, 2008 through May 31, 2013 is 1.72%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future.
For additional graphs and charts demonstrating the effects of volatility and index performance on the long-term performance of the
Fund, see Additional Information Regarding Investment Techniques and Policies and Negative Implications of Daily Goals in Volatile Markets in the Funds statutory prospectus, and Special Note Regarding the
Correlation Risks of the Funds in the Funds Statement of Additional Information.
Holding an unmanaged position
opens the investor to the risk of market volatility adversely affecting the performance of the investment. The Fund is not appropriate for investors who do not intend to actively monitor and manage their portfolios. This table is intended to
underscore the fact that the Fund is designed as a short-term trading vehicle for investors who intend to actively monitor and manage their portfolios.
To fully understand the risks of market volatility on the Fund, see Negative Implications of Daily Goals in Volatile Markets found in the statutory prospectus.
|
|
|
|
|
|
|
|
|
44
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
Indirectly investing in foreign instruments
may involve greater risks than investing in domestic instruments. As a result, the Funds returns and NAVs may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic
conditions and regulatory requirements in other countries. The laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information
available about foreign companies.
If the Funds benchmark moves more than 33% on a given trading day in a direction adverse to the Fund, you would lose all of your money.
Rafferty will attempt to position the Funds portfolio to ensure that the Fund does not lose more than 90% of its NAV on a given day. The cost of such downside protection will be limitations on the Funds gains. As a consequence, the
Funds portfolio may not be responsive to Index losses beyond 30% in a given day. For example, if the Index were to lose 35%, the Fund might be limited to a daily gain of 90% rather than 105%, which is 300% of the Index loss of 35%.
Geographic Concentration Risk
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or economic conditions and
regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
High Portfolio Turnover Risk
Daily rebalancing of the Funds holdings pursuant to its daily investment objective causes a much greater number of portfolio
transactions when compared to most exchange-traded funds. Such frequent and active trading leads to significantly higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the
possibility of significantly increased capital gains, including short-term and/or long-term capital gains that will be taxable to shareholders as ordinary income. The Fund calculates portfolio turnover without including the short term cash
instruments or derivative transactions that comprise the majority of the Funds trading. As such, if the Funds extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Intra-Day Investment Risk
The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the
subsequent trading day. The exact exposure of an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the
time of purchase. The Funds gains occur as its market exposure declines and its losses are accompanied by increases in market exposure. If the Index declines, the Funds net assets will rise by an amount equal to the decline in the
Funds exposure. Conversely, if the Index rises the Funds net assets will decline by the same amount as the increase in the Funds exposure. As an example (using simplified numbers), if the Fund had $100 in net assets at the market
close, it would seek $300 of exposure to the next trading days Index performance. If the Index declined by 1% by noon the following trading day, the exposure of the Fund will fall by 1% to $297 and the net assets will rise by $3 to
$103. With net assets of $103 and exposure of $297, a purchaser at that point would be receiving 288% exposure of her investment instead of 300%
Shareholders should lose money when the Index rises, which is a result that is the opposite from traditional funds.
Investment in securities of Japanese issuers involves risks that may be greater than if the Funds investments were more geographically
diverse. The Japanese economy has recently emerged from a prolonged economic downturn. Since 2000, Japans economic growth rate has remained relatively low. Its economy is characterized by government intervention and protectionism, an unstable
financial services sector and relatively high unemployment. Japans economy is heavily dependent on international trade and has been adversely affected by trade tariffs and competition from emerging economies. As such, economic growth is
heavily dependent on continued growth in international trade, government support of the financial services sector, among other troubled sectors, and consistent government policy. Any changes or trends in these economic factors could have a
significant impact on Japans economy overall and may negatively affect the Funds investment. Japans economy is also closely tied to its two largest trading partners, the U.S. and China. Economic volatility in either nation may
create volatility for Japans economy as well. Additionally, as China has increased its role with Japan as a trading partner, political tensions between the countries has become strained. Any increase or decrease in such tension may have
consequences for investment in Japanese issuers.
If you invest in the Fund, you are exposed to the risk that an increase in the daily performance of the Index will be
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
45
|
|
|
leveraged. This means that your investment in the Fund will be reduced by an amount equal to 3% for every 1% daily increase, not including the cost of financing the portfolio and the impact of
operating expenses, which would further lower your investment. The Fund could theoretically lose an amount greater than its net assets in the event of an Index increase of more than 33%. Further, purchasing shares during a day may result in greater
than 300% exposure to the performance of the Index if the Index rises between the close of the markets on one trading day and before the close of the markets on the next trading day.
To fully understand the risks of using leverage in the Fund, see Effects of Compounding and Market Volatility Risk above.
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Illiquid securities also may be difficult to value. If the Fund is
forced to sell an illiquid security at an unfavorable time or at a price that is lower than Raffertys judgment of the securitys true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the
Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
The Fund is subject to market risks that can affect the value of its shares. These risks include political, regulatory, market and economic developments, including developments that impact specific economic
sectors, industries or segments of the market.
Rafferty expects a significant portion of the assets of the Fund to come from professional money managers and investors who use the Funds as
part of asset allocation and market timing investment strategies. These strategies often call for frequent trading which may lead to increased portfolio turnover, higher transaction costs, and the possibility of increased
capital gains, including short-term and/or long-term capital gain that will be taxable to shareholders as ordinary income.
Mid Capitalization Company Risk
Investing in the securities of mid capitalization companies, and securities that provide exposure to mid capitalization companies, involves
greater risks and the possibility of greater price volatility than investing in more-established, larger capitalization companies. Mid capitalization companies often have narrower markets for their goods and/or services and more limited managerial
and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group. In addition, because these stocks
are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning these securities compared to what
is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund. As a result, their performance can be more
volatile and they face greater risk of business failure, which could increase the volatility of the Funds portfolio.
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities. A non-diversified
funds NAV and total return may fluctuate more or fall greater in times of weaker markets than a conventional diversified fund.
The Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Funds operations and/or change the
competitive landscape.
Risks of Investing in Other Investment Companies (including ETFs)
Investments in the securities of other investment companies, including ETFs, may involve duplication of advisory fees and certain other
expenses. Fund shareholders indirectly bear the Funds proportionate share of the fees and expenses indirectly paid by shareholders of the other investment company or ETF, in addition to the fees and expenses Fund shareholders bear in
connection with the Funds own operations. The Funds performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the investment company or ETF fails to achieve its investment
objective, the value of the Funds investment will decline, adversely affecting the Funds performance. In addition, closed end investment company and ETF shares potentially may trade at a discount or a premium and are subject to brokerage
and other trading costs, which could result in greater expenses to the Fund. Finally, because the value of ETF shares depends on the demand in the market, the Adviser may not be able to liquidate the Funds holdings in those shares at the most
optimal time, adversely affecting the Funds performance.
|
|
|
|
|
|
|
|
|
46
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
The Fund may engage in short sales designed to earn
the Fund a profit from the decline in the price of particular securities, baskets of securities or indices. However, there is a risk that the Fund will experience a loss as a result of engaging in these short sales.
Tax and Distribution Risk
The Fund has extremely high portfolio turnover which causes the Fund to generate significant amounts of taxable income. This income is
typically short-term capital gain, which is generally treated as ordinary income when distributed to shareholders, or short-term capital loss. The Fund rarely generates long-term capital gain or loss. The Fund will generally need to distribute net
short-term capital gain to satisfy certain tax requirements. As a result of the Funds high portfolio turnover, the Fund could make larger and/or more frequent distributions than traditional unleveraged ETFs. Because the Funds asset level
changes frequently, these distributions could comprise a substantial portion or even all of the Funds net assets if the Fund distributes this income after a decline in its net assets. In addition, the Fund may be held by short-term investors
and these investors may exit the Fund prior to the record date of a distribution. As a result, shareholders in the Fund on the day of a distribution may receive substantial distributions, which could lead to negative tax implications for such
shareholders. Potential investors are urged to consult their own tax advisers for more detailed information.
Rules governing the
federal income tax aspects of certain derivatives, including total return equity swaps, real estate-related swaps, credit default swaps and other credit derivatives are not entirely clear. Because the Funds status as a regulated investment
company might be affected if the Internal Revenue Service did not accept the Funds treatment of certain transactions involving derivatives, the Funds ability to engage in these transactions may be limited.
The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs, and/or a
temporary lack of liquidity in the markets for the securities held by the Fund. A failure to achieve a daily target may cause the Fund to provide returns for a longer period that are worse than expected. In addition, even though the Fund may meet
its daily target for a period of time, this will not necessarily produce the returns that might be expected in light of the returns of the Index or the Funds benchmark for that period.
The Fund values its portfolio as of the close of regular trading on the New York Stock Exchange (NYSE) (generally 4:00 P.M.
Eastern time). In some cases, foreign market indices close before the NYSE opens or may not be open for business on the same calendar days as the Fund. As a result, the daily performance of the Fund can vary from the performance of the Index.
Special Risks of Exchange-Traded Funds
Not Individually Redeemable.
Shares are not individually redeemable and may be redeemed by the Fund at NAV only in large blocks
known as Creation Units. You may incur brokerage costs purchasing enough Shares to constitute a Creation Unit.
Trading
Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or other reasons. There can be no
assurance that Shares will continue to meet the listing requirements of the exchange on which it trades, and the listing requirements may be amended from time to time.
Market Price Variance Risk.
Individual Shares of the Fund that are listed for trading on an exchange can be bought and sold in the secondary market at market prices. The market prices of Shares
will fluctuate in response to changes in NAV and supply and demand for Shares. The Adviser cannot predict whether Shares will trade above, below or at their NAV. Differences between secondary market prices and NAV for Shares may be due largely to
supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for securities or instruments held by the Fund at a particular time. Given the fact that Shares can be created and redeemed in Creation
Units, the Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and you may pay more than NAV when buying Shares on the
secondary market, and you may receive less than NAV when you sell those Shares. The market price of Shares, like the price of any exchange-traded security, includes a bid-ask spread charged by the exchange specialists, 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 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. The Funds investment results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in
the secondary
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
47
|
|
|
market may not experience investment results consistent with those experienced by those creating and redeeming directly with the Fund. There is no guarantee that an active secondary market will
develop for Shares of the Fund.
Fund Performance
The Fund has not yet commenced operations; therefore, performance information is not yet available. In the future, performance information for the Fund will be presented in this section. Performance
information also will be available on the Funds website at http://www.direxionfunds.com/products?presets=etfs&activetab=performance or by calling the Fund toll free at 1-866-476-7523.
Management
Investment Adviser
Rafferty Asset Management, LLC is the Funds investment
adviser.
Portfolio Manager
Paul Brigandi, the Funds Portfolio Manager, is primarily responsible for the day-to-day management of the Fund and has served in this role since the Funds inception.
Purchase and Sale of Fund Shares
The Fund will issue and redeem Shares in exchange for cash only to Authorized Participants in large blocks, known as Creation Units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Fund Shares on a national securities exchange through a broker-dealer. Because the Shares trade at market prices rather than NAV, Shares may trade at a price greater than NAV (premium) or less than NAV (discount).
Tax Information
The Fund intends to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject
to federal income taxes and may also be subject to state and local taxes. Distributions by the Fund may be significantly higher than those of most exchange-traded funds.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase
the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or the Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of
interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediarys website for more information.
|
|
|
|
|
|
|
|
|
48
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
Direxion Daily Mexico Bull 3X Shares
Important
Information Regarding the Fund
The Direxion Daily Mexico Bull 3X Shares (Fund) seeks
daily
leveraged investment results. The pursuit of daily leveraged goals means that the Fund is riskier than alternatives that do not use leverage because the Funds objective is to magnify the performance of an index. The pursuit of daily leveraged
investment goals means that the return of the Fund for a period longer than a full trading day may bear no resemblance to 300% of the return of its index for such longer period because the aggregate return of the Fund is the product of the series of
daily leveraged returns for each trading day. The path of the benchmark during the longer period may be at least as important to the Funds return for the longer period as the cumulative return of the benchmark for the relevant longer period,
especially in periods of market volatility. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of the Funds stated goal and
the performance of the target index for the full trading day.
Investment Objective
The Fund seeks daily investment results, before fees and expenses, of 300% of the performance of the MSCI Mexico IMI 25/50 Index.
The Fund seeks
daily
leveraged investment results
and does not seek to achieve its stated investment objective over a period of time greater than one day.
The Fund is different and much riskier than most exchange-traded funds.
The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged
investment results, understand the risks associated with the use of leverage and are willing to monitor their portfolios frequently. The Fund seeks daily leveraged investment results relative to the Index and is different and riskier than similarly
benchmarked exchange-traded funds that do not use leverage. Therefore, the Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy or hold shares of the Fund (Shares). Investors purchasing
shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(1)
(expenses that you pay each year as a percentage of the value of your investment)
|
|
|
|
|
Management Fees
|
|
|
0.75%
|
|
Distribution and/or Service (12b-1) Fees
|
|
|
0.00%
|
|
Other Expenses of the Fund
|
|
|
0.25%
|
|
Acquired Fund Fees and Expenses
|
|
|
0.15%
|
|
|
|
|
|
|
Total Annual Fund Operating Expenses
|
|
|
1.15%
|
|
Expense Cap/Reimbursement
|
|
|
(0.05%
|
)
|
|
|
|
|
|
Total Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
|
|
1.10%
|
|
|
|
|
|
|
(1)
|
|
The Funds adviser, Rafferty Asset Management, LLC (Rafferty or the Adviser) has contractually agreed to cap all or a portion
of its management fee and/or reimburse the Fund for Other Expenses through March 1, 2015, to the extent that the Funds Total Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest,
Acquired Fund Fees and Expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation). Any expense
cap is subject to reimbursement by the Fund within the following three years only if overall expenses fall below these percentage limitations. This agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Expense Example
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem 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 Funds operating expenses remain the same. 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 rate may indicate higher transaction costs and
may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Funds performance.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
49
|
|
|
Principal Investment Strategies
The Fund, under normal circumstances, creates long positions by investing at least 80% of its assets in the securities that comprise the MSCI
Mexico IMI 25/50 Index (Index) and/or financial instruments that provide leveraged and unleveraged exposure to the Index. These financial instruments include: futures contracts; options on securities, indices and futures contracts;
equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; exchange-traded funds (ETFs); and other financial instruments. On a day-to-day basis, the Fund also may hold short-term
debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements.
Mexico is considered an emerging market, as that term is defined by the index provider. The determination that Mexico is an emerging market is based on it being an economy that is in
the initial stages of industrialization and has been historically marked by low per capita income and lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market
transparency, increased access for foreign investors and generally improved economic conditions. Emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than more developed economies.
The Index is designed to measure the performance of the large, mid and small cap segments of the Mexican equity market, covering
approximately 99% of the free float-adjusted market capitalization in Mexico. As of the date of its last reconstitution, the Index had a total dollar value of approximately $198.1 billion, composed of 47 constituent securities ranging in market
capitalization from approximately $76.9 million to $37.8 billion. Additionally, as of May 31, 2013, the Index is concentrated in the consumer staples sector, but this concentration may change in the future based on the Indexs methodology and
the varying nature of Mexicos economy.
The Index applies certain screens and weightings to take into account the
investment limits placed on regulated investment companies (RICs) under federal tax regulations. One such requirement is that at the end of each quarter of a RICs tax year, no more than 25% of its assets may be invested in a single
issuer and the sum of the weights of all issuers representing more than 5% of the RIC should not exceed 50% of its total assets. The Index aims to reflect these requirements in the selection and weighting of its component securities.
The Fund may gain exposure to only a representative sample of the securities in the Index that have aggregate characteristics similar to
those of the Index. The Fund gains this exposure either by directly investing in the underlying securities of the Index or by investing in derivatives that provide exposure to those securities. The Fund seeks to remain fully invested at all times
consistent with its stated goal. At the close of the markets each trading day, Rafferty positions the Funds portfolio so that its exposure to the Index is consistent with the Funds investment objective. The impact of the Indexs
movements during the day will affect whether the Funds portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the Funds exposure will need to be
increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Funds exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover.
Because of daily rebalancing and the compounding of each days return over time, the return of the Fund for periods longer than a
single day will be the result of each days returns compounded over the period, which will very likely differ from 300% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as
a result of daily rebalancing, the Indexs volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Indexs performance increases.
Additionally, because a significant portion of the assets of the Fund may come from investors using asset allocation and
market timing investment strategies, the Fund may further need to engage in frequent trading. The Fund will concentrate its investment in a particular industry or group of industries to approximately the same extent as the Index is so
concentrated.
Principal Risks
An investment in the Fund entails risk. The Fund could lose money or its performance could trail that of other investment alternatives. The Adviser cannot guarantee that the Fund will achieve its objective.
In addition, the Fund presents some risks not traditionally associated with most mutual funds and exchange-traded funds. It is important that investors closely review all of the risks listed below and understand how these risks interrelate before
making an investment in the Fund. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets could negatively affect issuers worldwide, including the Fund. There is the risk that you could lose all or a portion
of your money invested in the Fund.
Adverse Market Conditions Risk
Because the Fund magnifies the performance of the Index, its performance will suffer during conditions in which the Index declines.
|
|
|
|
|
|
|
|
|
50
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
Advisers Investment Strategy Risk
The Adviser utilizes a
quantitative methodology to select investments for the Fund. Although this methodology is designed to correlate the Funds performance with the performance of the Index, there is no assurance that such methodology will be successful and will
enable the Fund to achieve its investment objective.
The Index is concentrated in the consumer staples sector, however, in the future, the Index concentration may change. The Fund will
concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated. The performance of the Fund may be more volatile than a fund that does not concentrate its investments in a
specific industry or group of industries. The Fund also may be more susceptible to any single economic market, political or regulatory occurrence affecting that industry or group of industries. However, the Fund only may concentrate its investments
(
i.e.
, hold 25% or more of its total assets in the stocks of a particular industry or group of industries) to approximately the same extent that its underlying index concentrates in the stocks of a 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 subdivisions are not considered to be issued by members of any industry.
Consumer Staples Sector Risk
The Fund currently focuses its investments in securities issued by, and/or has exposure to, companies in the consumer staples sector. The
consumer staples sector may be affected by the permissibility of using various food additives and production methods, changing consumer tastes, marketing campaigns and other factors affecting consumer demand. In particular, tobacco companies may be
adversely affected by new laws, regulations and litigation. The consumer staples sector may also be adversely affected by changes or trends in commodity prices, which may be influenced or characterized by unpredictable factors.
The Fund may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure to a particular group of
securities or an asset class without actually purchasing those securities or investments, or to hedge a position. These financial instruments may include swap agreements. The use of swap agreements and other counterparty instruments involves risks
that are different from those associated with ordinary portfolio securities transactions. For example, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap
agreement counterparty. Swap agreements and other counterparty instruments also may be considered to be illiquid. In addition, the Fund may enter into swap agreements that involve a limited number of counterparties, which may increase the
Funds exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is a risk that no suitable counterparties will be willing to enter into, or continue
to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its investment objective.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will affect the value of what the Fund owns and the Funds share price. Generally, when the
U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Devaluation of a currency by a countrys government or banking authority also will have a
significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily investment
objective. To achieve a high degree of correlation with the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily target. The Fund may have difficulty achieving its daily target due to fees and expenses,
high portfolio turnover, transaction costs and costs associated with the use of leveraged investment techniques and/or a temporary lack of liquidity in the markets for the securities held by the Fund. Market disruptions, regulatory restrictions or
extreme volatility will also adversely affect the Funds ability to adjust exposure to the required levels. The Fund may not have investment exposure to all securities in its underlying Index, or its weighting of investment exposure to such
stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the underlying Index. The Fund may be subject to large movements of assets into and out of the
Fund, potentially resulting in the Fund being over- or under-exposed to its Index. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Indexs movement. Because of this, it is unlikely that the Fund
will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over-
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
51
|
|
|
or under-exposed to its Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding annual index reconstitutions and other index rebalancing or
reconstitution events may hinder the Funds ability to meet its daily investment objective on that day.
To the extent the Fund seeks exposure to foreign companies, the Funds investments may be in the form of depositary receipts or other
securities convertible into securities of foreign issuers, including American Depositary Receipts (ADRs), European Depositary Receipts (EDRs), and Global Depositary Receipts (GDRs). While the use of ADRs, EDRs and
GDRs, which are traded on exchanges and represent and ownership in a foreign security, provide an alternative to directly purchasing the underlying foreign securities in their respective national markets and currencies, investments in ADRs, EDRs,
and GDRs continue to be subject to certain of the risks associated with investing directly in foreign securities.
The Fund uses investment techniques, including investments in derivatives such as futures and forward contracts, options and swaps, which may be considered aggressive. Investments in such derivatives are
subject to market risks that may cause their prices to fluctuate over time and may increase the volatility of the Fund. The use of derivatives may expose the Fund to additional risks that it would not be subject to if it invested directly in the
securities underlying those derivatives, such as counterparty risk and the risk that the derivatives may become illiquid. The use of derivatives may result in larger losses or smaller gains than otherwise would be the case. Additionally, with
respect to the use of swap agreements, if the Index has a dramatic intraday move in value that causes a material decline in the Funds net asset value (NAV), the terms of the swap agreement between the Fund and its counterparty may
allow the counterparty to immediately close out of the transaction with the Fund. In such circumstances, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the
Funds daily investment objective. This may prevent the Fund from achieving its daily investment objective particularly if the Index reverses all or a portion of its intraday move by the end of the day. In addition, the Funds investments
in derivatives, as of the date of this Prospectus, are subject to the following risks:
Futures and Forward Contracts
.
There may be an imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts. Forward currency transactions
include the risks associated with fluctuations in currency.
Options
. There may be an imperfect correlation between the
prices of options and movements in the price of the securities (or indices) hedged or used for cover, which may cause a given hedge not to achieve its objective.
Swap Agreements
. Interest rate swaps are subject to interest rate and credit risk. Total return swaps are subject to counterparty risk, which relates to credit risk of the counterparty and liquidity
risk of the swaps themselves.
Early Close/Trading Halt Risk
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial
instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its
investments and/or may incur substantial trading losses.
Effects of Compounding and Market Volatility Risk
The Fund does not attempt to, and should not be expected to, provide returns which are a multiple of the return of the Index for periods
other than a single day. The Fund rebalances its portfolio on a daily basis, increasing exposure in response to that days gains or reducing exposure in response to that days losses. This means that for a period longer than one day, the
pursuit of daily goals may result in daily leveraged compounding. It also means that the return of an index over a period of time greater than one day multiplied by the Funds daily target (300%) generally will not equal the Funds
performance over that same period.
As a result, over time, the cumulative percentage increase or decrease in the value of the
Funds portfolio may diverge significantly from the cumulative percentage increase or decrease in the multiple of the return of the Funds underlying index due to the compounding effect of losses and gains on the returns of the Fund. It
also is expected that the Funds use of leverage will cause the Fund to underperform the return of three times its benchmark in a trendless or flat market.
The effect of compounding becomes more pronounced on the Funds performance as the Index experiences volatility. The Indexs volatility rate is a statistical measure of the magnitude of
fluctuations in the returns of the Index. The table below provides examples of how Index volatility could affect the Funds performance. The chart shows estimated Fund returns for a number of combinations of performance and volatility over a
one-year period and is shown to illustrate how holding the Fund for a period longer than one day may negatively impact investment return. As shown below, this Fund, or any other 3X Bull Fund, would be
|
|
|
|
|
|
|
|
|
52
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
expected to lose 17.1% (as shown in Table 1 below) if its Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. If the Indexs
annualized volatility were to rise to 75%, the hypothetical loss for a one year period for the Fund widens to approximately 81.5%.
At higher ranges of volatility, there is a chance of a near complete loss of value even if the Index is flat. For instance, if the
Indexs annualized volatility is 100%, the Fund would be expected to lose 95% of its value, even if the cumulative Index return for the year was only 0%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
Year
Index
Return
|
|
|
300%
One Year
Index
Return
|
|
|
Volatility Rate
|
|
|
|
10%
|
|
|
25%
|
|
|
50%
|
|
|
75%
|
|
|
100%
|
|
|
60%
|
|
|
|
180%
|
|
|
|
93.8%
|
|
|
|
94.7%
|
|
|
|
97.0%
|
|
|
|
98.8%
|
|
|
|
99.7%
|
|
|
50%
|
|
|
|
150%
|
|
|
|
87.9%
|
|
|
|
89.6%
|
|
|
|
94.1%
|
|
|
|
97.7%
|
|
|
|
99.4%
|
|
|
40%
|
|
|
|
120%
|
|
|
|
79.0%
|
|
|
|
82.1%
|
|
|
|
89.8%
|
|
|
|
96.0%
|
|
|
|
98.9%
|
|
|
30%
|
|
|
|
90%
|
|
|
|
66.7%
|
|
|
|
71.6%
|
|
|
|
83.8%
|
|
|
|
93.7%
|
|
|
|
98.3%
|
|
|
20%
|
|
|
|
60%
|
|
|
|
50.3%
|
|
|
|
57.6%
|
|
|
|
75.8%
|
|
|
|
90.5%
|
|
|
|
97.5%
|
|
|
10%
|
|
|
|
30%
|
|
|
|
29.3%
|
|
|
|
39.6%
|
|
|
|
65.6%
|
|
|
|
86.5%
|
|
|
|
96.4%
|
|
|
0%
|
|
|
|
0%
|
|
|
|
3.0%
|
|
|
|
17.1%
|
|
|
|
52.8%
|
|
|
|
81.5%
|
|
|
|
95.0%
|
|
|
10%
|
|
|
|
30%
|
|
|
|
29.2%
|
|
|
|
10.3%
|
|
|
|
37.1%
|
|
|
|
75.4%
|
|
|
|
93.4%
|
|
|
20%
|
|
|
|
60%
|
|
|
|
67.7%
|
|
|
|
43.3%
|
|
|
|
18.4%
|
|
|
|
68.0%
|
|
|
|
91.4%
|
|
|
30%
|
|
|
|
90%
|
|
|
|
113.2%
|
|
|
|
82.1%
|
|
|
|
3.8%
|
|
|
|
59.4%
|
|
|
|
89.1%
|
|
|
40%
|
|
|
|
120%
|
|
|
|
166.3%
|
|
|
|
127.5%
|
|
|
|
29.6%
|
|
|
|
49.2%
|
|
|
|
86.3%
|
|
|
50%
|
|
|
|
150%
|
|
|
|
227.5%
|
|
|
|
179.8%
|
|
|
|
59.4%
|
|
|
|
37.6%
|
|
|
|
83.2%
|
|
|
60%
|
|
|
|
180%
|
|
|
|
297.5%
|
|
|
|
239.6%
|
|
|
|
93.5%
|
|
|
|
24.2%
|
|
|
|
79.6%
|
|
The Indexs annualized historical volatility rate for the five-year period from May 30, 2008
through May 31, 2013 is 30.79%. The Indexs highest volatility rate for any one calendar year during the five-year period is 52.75% and volatility for a shorter period of time may have been substantially higher. The Indexs annualized
performance for the five-year period from May 30, 2008 through May 31, 2013 is 2.89%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future.
For additional graphs and charts demonstrating the effects of volatility and index performance on the long-term performance of the Fund,
see Additional Information Regarding Investment Techniques and Policies and Negative Implications of Daily Goals in Volatile Markets in the Funds statutory prospectus, and Special Note Regarding the Correlation
Risks of the Funds in the Funds Statement of Additional Information.
Holding an unmanaged position opens the
investor to the risk of market volatility adversely affecting the performance of the investment. The Fund is not appropriate for investors who do not intend to actively monitor and manage their portfolios. This table is intended to underscore the
fact that the Fund is designed as a short-term trading vehicle for investors who intend to actively monitor and manage their portfolios.
To fully understand the risks of market volatility on the Fund, see Negative Implications of Daily Goals in Volatile Markets found in the statutory prospectus.
Indirectly investing in emerging markets instruments involve greater risks than indirectly investing in foreign instruments in general. Risks
of investing in emerging market countries include: political or social upheaval; nationalization of businesses; restrictions on foreign ownership; prohibitions on the repatriation of assets; and risks from an economys dependence on revenues
from particular commodities or industries. In addition, currency transfer restrictions, limited potential buyers for such instruments, delays and disruption in settlement procedures and illiquidity or low volumes of transactions may make exits
difficult or impossible at times.
Investments in publicly issued equity securities and securities that provide exposure to equity securities, including common stocks, in
general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which the Fund invests will cause the NAV of the Fund to fluctuate.
Indirectly investing in foreign instruments may involve greater risks than investing in domestic instruments. As a result, the Funds
returns and NAVs may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The laws and accounting, auditing, and
financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
If the Funds benchmark moves more than 33% on a given trading day in a direction adverse to the Fund, you would lose all of your money.
Rafferty will attempt to position the Funds portfolio to ensure that the Fund does not lose more than 90% of its NAV on a given day. The cost of such downside protection will be limitations on the Funds gains. As a consequence, the
Funds portfolio may not be responsive to Index gains beyond 30% in a given day. For example, if the Index were to gain 35%, the Fund might be limited to a daily gain of 90% rather than 105%, which is 300% of the Index gain of 35%.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
53
|
|
|
Geographic Concentration Risk
Investments in a particular country
or geographic region may be particularly susceptible to political, diplomatic or economic conditions and regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
High Portfolio Turnover Risk
Daily rebalancing of the Funds holdings pursuant to its daily investment objective causes a much greater number of portfolio
transactions when compared to most exchange-traded funds. Such frequent and active trading leads to significantly higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the
possibility of significantly increased capital gains, including short-term and/or long-term capital gains that will be taxable to shareholders as ordinary income. The Fund calculates portfolio turnover without including the short term cash
instruments or derivative transactions that comprise the majority of the Funds trading. As such, if the Funds extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Intra-Day Investment Risk
The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the
subsequent trading day. The exact exposure of an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the
time of purchase. If the Index gains value, the Funds net assets will rise by the same amount as the Funds exposure. Conversely, if the Index declines, the Funds net assets will decline by the same amount as the Funds
exposure. Since a Fund starts each trading day with exposure which is 300% of its net assets, a change in both the exposure and the net assets of the Fund by the same absolute amount results in a change in the comparative relationship of the two. As
an example (using simplified numbers), if the Fund had $100 in net assets at the market close, it would seek $300 of exposure to the next trading days Index performance. If the Index rose by 1% by noon the following trading day, the exposure
of the Fund will have risen by 1% to $303 and the net assets will have risen by that $3 gain to $103. With net assets of $103 and exposure of $303, a purchaser at that point would be receiving 294% exposure of her investment instead of 300%.
If you invest in the Fund, you are exposed to the risk that a decline in the daily performance of the Index will be leveraged. This means that your investment in the Fund will be reduced by an amount equal
to 3% for every 1% daily decline, not including the cost of financing the portfolio and the impact of operating expenses, which would further lower your investment. The Fund could theoretically lose an amount greater than its net assets in the event
of an Index decline of more than 33%. Further, purchasing shares during a day may result in greater than 300% exposure to the performance of the Index if the Index declines between the close of the markets on one trading day and before the close of
the markets on the next trading day.
To fully understand the risks of using leverage in the Fund, see Effects of
Compounding and Market Volatility Risk above.
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Illiquid securities also may be difficult to value. If the Fund is
forced to sell an illiquid security at an unfavorable time or at a price that is lower than Raffertys judgment of the securitys true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the
Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
The Fund is subject to market risks that can affect the value of its shares. These risks include political, regulatory, market and economic developments, including developments that impact specific economic
sectors, industries or segments of the market.
Rafferty expects a significant portion of the assets of the Fund to come from professional money managers and investors who use the Funds as
part of asset allocation and market timing investment strategies. These strategies often call for frequent trading which may lead to increased portfolio turnover, higher transaction costs, and the possibility of increased
capital gains, including short-term and/or long-term capital gain that will be taxable to shareholders as ordinary income.
|
|
|
|
|
|
|
|
|
54
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
Investment in securities of Mexican issuers
involves risks that may be greater than if the Funds investments were more geographically diverse. Mexicos economy is heavily dependent on trading with key partners. Any increases or decreases in the volume of this trading, changes in
taxes or tariffs, or variance in political relationships between those nations may impact the Mexican economy overall in a way that would be adverse to the Funds investments. Additionally, investment in Mexico may be subject to any positive or
adverse effects of the varyingnature of its economic landscape with respect to expropriation and/or nationalization of assets, strengthened or lessened restrictions on and government intervention in international trade, confiscatory taxation,
political instability, including authoritarian and/or military involvement in governmental decision making, armed conflict, the impact on the economy as a result of civil war and social instability as a result of religious, ethnic and/or
socioeconomic unrest.
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities. A non-diversified
funds NAV and total return may fluctuate more or fall greater in times of weaker markets than a conventional diversified fund.
The Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Funds operations and/or change the
competitive landscape.
Risks of Investing in Other Investment Companies (including ETFs)
Investments in the securities of other investment companies, including ETFs, may involve duplication of advisory fees and certain other
expenses. Fund shareholders indirectly bear the Funds proportionate share of the fees and expenses indirectly paid by shareholders of the other investment company or ETF, in addition to the fees and expenses Fund shareholders bear in
connection with the Funds own operations. The Funds performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the investment company or ETF fails to achieve its investment
objective, the value of the Funds investment will decline, adversely affecting the Funds performance. In addition, closed end investment company and ETF shares potentially may trade at a discount or a premium and are subject to brokerage
and other trading costs, which could result in greater expenses to the Fund. Finally, because the value of ETF shares depends on the demand in the market, the Adviser may not be able to liquidate the Funds holdings in those shares at the most
optimal time, adversely affecting the Funds performance.
Small and Mid Capitalization Company Risk
Investing in the securities of small and/or mid capitalization companies, and securities that provide exposure to small and/or mid
capitalization companies, involves greater risks and the possibility of greater price volatility than investing in more-established, larger capitalization companies. Small and mid capitalization companies often have narrower markets for their goods
and/or services and more limited managerial and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management
group. In addition, because these stocks are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information
concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund.
As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Funds portfolio.
Tax and Distribution Risk
The Fund has extremely high portfolio turnover which causes the Fund to generate significant amounts of taxable income. This income is
typically short-term capital gain, which is generally treated as ordinary income when distributed to shareholders, or short-term capital loss. The Fund rarely generates long-term capital gain or loss. The Fund will generally need to distribute net
short-term capital gain to satisfy certain tax requirements. As a result of the Funds high portfolio turnover, the Fund could make larger and/or more frequent distributions than traditional unleveraged ETFs. Because the Funds asset level
changes frequently, these distributions could comprise a substantial portion or even all of the Funds net assets if the Fund distributes this income after a decline in its net assets. In addition, the Fund may be held by short-term investors
and these investors may exit the Fund prior to the record date of a distribution. As a result, shareholders in the Fund on the day of a distribution may receive substantial distributions, which could lead to negative tax implications for such
shareholders. Potential investors are urged to consult their own tax advisers for more detailed information.
Rules governing the
federal income tax aspects of certain derivatives, including total return equity swaps, real estate-
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
55
|
|
|
related swaps, credit default swaps and other credit derivatives are not entirely clear. Because the Funds status as a regulated investment company might be affected if the Internal Revenue
Service did not accept the Funds treatment of certain transactions involving derivatives, the Funds ability to engage in these transactions may be limited.
The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs, and/or a
temporary lack of liquidity in the markets for the securities held by the Fund. A failure to achieve a daily target may cause the Fund to provide returns for a longer period that are worse than expected. In addition, even though the Fund may meet
its daily target for a period of time, this will not necessarily produce the returns that might be expected in light of the returns of the Index or the Funds benchmark for that period.
The Fund values its portfolio as of the close of regular trading on the New York Stock Exchange (NYSE) (generally 4:00 P.M.
Eastern time). In some cases, foreign market indices close before the NYSE opens or may not be open for business on the same calendar days as the Fund. As a result, the daily performance of the Fund can vary from the performance of the Index.
Special Risks of Exchange-Traded Funds
Not Individually Redeemable.
Shares are not individually redeemable and may be redeemed by the Fund at NAV only in large blocks
known as Creation Units. You may incur brokerage costs purchasing enough Shares to constitute a Creation Unit.
Trading
Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or other reasons. There can be no
assurance that Shares will continue to meet the listing requirements of the exchange on which it trades, and the listing requirements may be amended from time to time.
Market Price Variance Risk.
Individual Shares of the Fund that are listed for trading on an exchange can be bought and sold in the secondary market at market prices. The market prices of Shares
will fluctuate in response to changes in NAV and supply and demand for Shares. The Adviser cannot predict whether Shares will trade above, below or at their NAV. Differences between secondary market prices and NAV for Shares may be due largely to
supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for securities or instruments held by the Fund at a particular time. Given the fact that Shares can be created and redeemed in Creation
Units, the Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and you may pay more than NAV when buying Shares on the
secondary market, and you may receive less than NAV when you sell those Shares. The market price of Shares, like the price of any exchange-traded security, includes a bid-ask spread charged by the exchange specialists, 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 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. The Funds investment results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in
the secondary market may not experience investment results consistent with those experienced by those creating and redeeming directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund.
Fund Performance
The Fund has not yet commenced operations; therefore, performance information is not yet available. In the future, performance information for the Fund will be presented in this section. Performance
information also will be available on the Funds website at http://www.direxionfunds.com/products?presets=etfs&activetab=performance or by calling the Fund toll free at 1-866-476-7523.
Management
Investment Adviser
Rafferty Asset Management, LLC is the Funds investment
adviser.
Portfolio Manager
Paul Brigandi, the Funds Portfolio Manager, is primarily responsible for the day-to-day management of the Fund and has served in this role since the Funds inception.
Purchase and Sale of Fund Shares
The Fund will issue and redeem Shares only to Authorized Participants (typically, broker-dealers) in exchange for the deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known
as Creation Units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Fund Shares on a national securities exchange through a broker-dealer. Because the Shares trade at market prices rather than NAV, Shares may
trade at a price greater than NAV (premium) or less than NAV (discount).
|
|
|
|
|
|
|
|
|
56
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
Tax Information
The Fund intends to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject
to federal income taxes and may also be subject to state and local taxes. Distributions by the Fund may be significantly higher than those of most exchange-traded funds.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase
the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or the Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of
interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediarys website for more information.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
57
|
|
|
Direxion Daily Mexico Bear 3X Shares
Important
Information Regarding the Fund
The Direxion Daily Mexico Bear 3X Shares (Fund) seeks
daily
leveraged investment results. The pursuit of daily leveraged goals means that the Fund is riskier than alternatives that do not use leverage because the Funds objective is to magnify the performance of an index. The pursuit of daily
leveraged investment goals means that the return of the Fund for a period longer than a full trading day may bear no resemblance to 300% of the return of its index for such longer period because the aggregate return of the Fund is the product
of the series of daily leveraged returns for each trading day. The path of the benchmark during the longer period may be at least as important to the Funds return for the longer period as the cumulative return of the benchmark for the relevant
longer period, especially in periods of market volatility. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of the Funds
stated goal and the performance of the target index for the full trading day.
Investment Objective
The Fund seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the performance of the MSCI Mexico IMI 25/50 Index.
The Fund seeks
daily
leveraged investment results and does not seek to achieve its stated investment objective over a period of time greater than one day.
The Fund is different and much riskier than most exchange-traded funds.
The Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged
investment results, understand the risks associated with shorting and the use of leverage, and are willing to monitor their portfolios frequently. The Fund seeks daily leveraged investment results relative to the Index and is different and riskier
than similarly benchmarked exchange-traded funds that do not use leverage. Therefore, the Fund is not intended to be used by, and is not appropriate for, investors who do not intend to actively monitor and manage their portfolios.
Fees and Expenses of the Fund
This table describes the fees and expenses that you may pay if you buy or hold shares of the Fund (Shares). Investors purchasing
shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(1)
(expenses that you pay each year as a percentage of the value of your investment)
|
|
|
|
|
Management Fees
|
|
|
0.75%
|
|
Distribution and/or Service (12b-1) Fees
|
|
|
0.00%
|
|
Other Expenses of the Fund
|
|
|
0.25%
|
|
Acquired Fund Fees and Expenses
|
|
|
0.15%
|
|
|
|
|
|
|
Total Annual Fund Operating Expenses
|
|
|
1.15%
|
|
Expense Cap/Reimbursement
|
|
|
(0.05%
|
)
|
|
|
|
|
|
Total Annual Fund Operating Expenses After
Expense Cap/Reimbursement
|
|
|
1.10%
|
|
|
|
|
|
|
(1)
|
|
The Funds adviser, Rafferty Asset Management, LLC (Rafferty or the Adviser) has contractually agreed to cap all or a portion
of its management fee and/or reimburse the Fund for Other Expenses through March 1, 2015, to the extent that the Funds Total Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest,
Acquired Fund Fees and Expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation). Any expense
cap is subject to reimbursement by the Fund within the following three years only if overall expenses fall below these percentage limitations. This agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Expense Example
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem 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 Funds operating expenses remain the same. 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 rate may indicate higher transaction costs and
may result in higher taxes when Fund shares are held in a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Funds performance.
Principal Investment Strategies
The Fund, under normal circumstances, creates short positions by investing at least 80% of its assets in: futures
|
|
|
|
|
|
|
|
|
58
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
contracts; options on securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements;
exchange-traded funds (ETFs); and other financial instruments that, in combination, provide leveraged and unleveraged exposure to the MSCI Mexico IMI 25/50 Index (Index). The Fund invests the remainder of its assets in
short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements. The Fund does not invest in equity securities.
Mexico is considered an emerging market, as that term is defined by the index provider. The determination that Mexico is an
emerging market is based on it being an economy that is in the initial stages of industrialization and has been historically marked by low per capita income and lack of capital market transparency, but appears to be implementing
political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions. Emerging markets have the potential for significantly higher or lower rates of
return and carry greater risks than more developed economies.
The Index is designed to measure the performance of the large,
mid and small cap segments of the Mexican equity market, covering approximately 99% of the free float-adjusted market capitalization in Mexico. As of the date of its last reconstitution, the Index had a total dollar value of approximately $198.1
billion, composed of 47 constituent securities ranging in market capitalization from approximately $76.9 million to $37.8 billion. Additionally, as of May 31, 2013, the Index is concentrated in the consumer staples sector, but this
concentration may change in the future based on the Indexs methodology and the varying nature of Mexicos economy.
The Index applies certain screens and weightings to take into account the investment limits placed on regulated investment companies
(RICs) under federal tax regulations. One such requirement is that at the end of each quarter of a RICs tax year, no more than 25% of its assets may be invested in a single issuer and the sum of the weights of all issuers
representing more than 5% of the RIC should not exceed 50% of its total assets. The Index aims to reflect these requirements in the selection and weighting of its component securities.
The Fund may gain exposure to only a representative sample of the securities in the Index that have aggregate characteristics similar to
those of the Index. The Fund gains this exposure by investing in a combination of financial instruments that, in combination, provide exposure to the underlying securities of the Index. The Fund seeks to remain fully invested at all times consistent
with its stated goal. At the close of the markets each trading day, Rafferty positions the Funds portfolio so that its exposure to the Index is consistent with the Funds investment objective. The impact of the Indexs movements
during the day will affect whether the Funds portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning that the Funds exposure will need to be increased.
Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Funds exposure will need to be reduced. This re-positioning strategy typically results in high portfolio turnover.
Because of daily rebalancing and the compounding of each days return over time, the return of the Fund for periods longer than a
single day will be the result of each days returns compounded over the period, which will very likely differ from 300% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time,
and as a result of daily rebalancing, the Indexs volatility and the effects of compounding, it is even possible that the Fund will lose money over time while the Indexs performance decreases.
Additionally, because a significant portion of the assets of the Fund may come from investors using asset allocation and
market timing investment strategies, the Fund may further need to engage in frequent trading. The Fund will concentrate its investment in a particular industry or group of industries to approximately the same extent as the Index is so
concentrated.
Principal Risks
An investment in the Fund entails risk. The Fund could lose money or its performance could trail that of other investment alternatives. The Adviser cannot guarantee that the Fund will achieve its objective.
In addition, the Fund presents some risks not traditionally associated with most mutual funds and exchange-traded funds. It is important that investors closely review all of the risks listed below and understand how these risks interrelate before
making an investment in the Fund. Turbulence in financial markets and reduced liquidity in equity, credit and fixed income markets could negatively affect issuers worldwide, including the Fund. There is the risk that you could lose all or a portion
of your money invested in the Fund.
Adverse Market Conditions Risk
Because the Fund magnifies the inverse performance of the Index, its performance will suffer during conditions in which the Index rises.
Advisers Investment Strategy Risk
The Adviser utilizes a quantitative methodology to select investments for the Fund. Although this methodology is designed to correlate the
Funds performance with the
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
59
|
|
|
performance of the Index, there is no assurance that such methodology will be successful and will enable the Fund to achieve its investment objective.
Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind
securities, because of the nature of the financial instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs.
The Index is concentrated in the consumer staples sector, however, in the future, the Index concentration may change. The Fund will
concentrate its investments in a particular industry or group of industries to approximately the same extent as the Index is so concentrated. The performance of the Fund may be more volatile than a fund that does not concentrate its investments in a
specific industry or group of industries. The Fund also may be more susceptible to any single economic market, political or regulatory occurrence affecting that industry or group of industries. However, the Fund only may concentrate its investments
(
i.e.
, hold 25% or more of its total assets in the stocks of a particular industry or group of industries) to approximately the same extent that its underlying index concentrates in the stocks of a 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 subdivisions are not considered to be issued by members of any industry.
Consumer Staples Sector Risk
The Fund currently focuses its investments in securities issued by, and/or has exposure to, companies in the consumer staples sector. The
consumer staples sector may be affected by the permissibility of using various food additives and production methods, changing consumer tastes, marketing campaigns and other factors affecting consumer demand. In particular, tobacco companies may be
adversely affected by new laws, regulations and litigation. The consumer staples sector may also be adversely affected by changes or trends in commodity prices, which may be influenced or characterized by unpredictable factors.
The Fund may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure to a particular group of
securities or an asset class without actually purchasing those securities or investments, or to hedge a position. These financial instruments may include swap agreements. The use of swap agreements and other counterparty instruments involves risks
that are different from those associated with ordinary portfolio securities transactions. For example, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap
agreement counterparty. Swap agreements and other counterparty instruments also may be considered to be illiquid. In addition, the Fund may enter into swap agreements that involve a limited number of counterparties, which may increase the
Funds exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is a risk that no suitable counterparties will be willing to enter into, or continue
to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its investment objective.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will affect the value of what the Fund owns and the Funds share price. Generally, when the
U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Devaluation of a currency by a countrys government or banking authority also will have a
significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily investment
objective. To achieve a high degree of correlation with the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily target. The Fund may have difficulty achieving its daily target due to fees and expenses,
high portfolio turnover, transaction costs and costs associated with the use of leveraged investment techniques and/or a temporary lack of liquidity in the markets for the securities held by the Fund. Market disruptions, regulatory restrictions or
extreme volatility will also adversely affect the Funds ability to adjust exposure to the required levels. The Fund may not have investment exposure to all securities in its underlying Index, or its weighting of investment exposure to such
stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the underlying Index. The Fund may be subject to large movements of assets into and out of the
Fund, potentially resulting in the Fund being over- or under-exposed to its Index. In addition, the target amount of
|
|
|
|
|
|
|
|
|
60
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
portfolio exposure to the Index is impacted dynamically by the Indexs movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day.
The possibility of the Fund being materially over- or under-exposed to its Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding annual index reconstitutions and other index rebalancing or
reconstitution events may hinder the Funds ability to meet its daily investment objective on that day.
The Fund uses investment techniques, including investments in derivatives such as futures and forward contracts, options and swaps, which may be considered aggressive. Investments in such derivatives are
subject to market risks that may cause their prices to fluctuate over time and may increase the volatility of the Fund. The use of derivatives may expose the Fund to additional risks that it would not be subject to if it invested directly in the
securities underlying those derivatives, such as counterparty risk and the risk that the derivatives may become illiquid. The use of derivatives may result in larger losses or smaller gains than otherwise would be the case. Additionally, with
respect to the use of swap agreements, if the Index has a dramatic intraday move in value that causes a material decline in the Funds net asset value (NAV), the terms of the swap agreement between the Fund and its counterparty may
allow the counterparty to immediately close out of the transaction with the Fund. In such circumstances, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the
Funds daily investment objective. This may prevent the Fund from achieving its daily investment objective particularly if the Index reverses all or a portion of its intraday move by the end of the day. In addition, the Funds investments
in derivatives, as of the date of this Prospectus, are subject to the following risks:
Futures and Forward Contracts
.
There may be an imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts. Forward currency transactions
include the risks associated with fluctuations in currency.
Options
. There may be an imperfect correlation between the
prices of options and movements in the price of the securities (or indices) hedged or used for cover, which may cause a given hedge not to achieve its objective.
Swap Agreements
. Interest rate swaps are subject to interest rate and credit risk. Total return swaps are subject to counterparty risk, which relates to credit risk of the counterparty and liquidity
risk of the swaps themselves.
Early Close/Trading Halt Risk
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial
instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to accurately price its
investments and/or may incur substantial trading losses.
Effects of Compounding and Market Volatility Risk
The Fund does not attempt to, and should not be expected to, provide returns which are a multiple of the return of the Index for periods
other than a single day. The Fund rebalances its portfolio on a daily basis, increasing exposure in response to that days gains or reducing exposure in response to that days losses. This means that for a period longer than one day, the
pursuit of daily goals may result in daily leveraged compounding. It also means that the return of an index over a period of time greater than one day multiplied by the Funds daily target (300%) generally will not equal the Funds
performance over that same period.
As a result, over time, the cumulative percentage increase or decrease in the value of the
Funds portfolio may diverge significantly from the cumulative percentage increase or decrease in the multiple of the return of the Funds underlying index due to the compounding effect of losses and gains on the returns of the Fund. It
also is expected that the Funds use of leverage will cause the Fund to underperform the return of three times its benchmark in a trendless or flat market.
The effect of compounding becomes more pronounced on the Funds performance as the Index experiences volatility. The Indexs volatility rate is a statistical measure of the magnitude of
fluctuations in the returns of the Index. The table below provides examples of how Index volatility could affect the Funds performance. The chart shows estimated Fund returns for a number of combinations of performance and volatility over a
one-year period and is shown to illustrate how holding the Fund for a period longer than one day may negatively impact investment return. As shown below, this Fund, or any other 3X Bear Fund, would be expected to lose 31.3% (as shown in Table 1
below) if its Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. If the Indexs annualized volatility were to rise to 75%, the hypothetical loss for a one year period for the Fund
widens to approximately 96.6%.
At higher ranges of volatility, there is a chance of a near complete loss of value even if the
Index is flat. For instance, if the Indexs annualized volatility is 100%, the Fund would be
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
61
|
|
|
expected to lose approximately 100% of its value, even if the cumulative Index return for the year was only 0%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
Year
Index
Return
|
|
|
300%
One Year
Index
Return
|
|
|
Volatility Rate
|
|
|
|
10%
|
|
|
25%
|
|
|
50%
|
|
|
75%
|
|
|
100%
|
|
|
60%
|
|
|
|
180%
|
|
|
|
1371.5%
|
|
|
|
973.9%
|
|
|
|
248.6%
|
|
|
|
46.5%
|
|
|
|
96.1%
|
|
|
50%
|
|
|
|
150%
|
|
|
|
653.4%
|
|
|
|
449.8%
|
|
|
|
78.5%
|
|
|
|
72.6%
|
|
|
|
98.0%
|
|
|
40%
|
|
|
|
120%
|
|
|
|
336.0%
|
|
|
|
218.2%
|
|
|
|
3.3%
|
|
|
|
84.2%
|
|
|
|
98.9%
|
|
|
30%
|
|
|
|
90%
|
|
|
|
174.6%
|
|
|
|
100.4%
|
|
|
|
34.9%
|
|
|
|
90.0%
|
|
|
|
99.3%
|
|
|
20%
|
|
|
|
60%
|
|
|
|
83.9%
|
|
|
|
34.2%
|
|
|
|
56.4%
|
|
|
|
93.3%
|
|
|
|
99.5%
|
|
|
10%
|
|
|
|
30%
|
|
|
|
29.2%
|
|
|
|
5.7%
|
|
|
|
69.4%
|
|
|
|
95.3%
|
|
|
|
99.7%
|
|
|
0%
|
|
|
|
0%
|
|
|
|
5.8%
|
|
|
|
31.3%
|
|
|
|
77.7%
|
|
|
|
96.6%
|
|
|
|
99.8%
|
|
|
10%
|
|
|
|
30%
|
|
|
|
29.2%
|
|
|
|
48.4%
|
|
|
|
83.2%
|
|
|
|
97.4%
|
|
|
|
99.8%
|
|
|
20%
|
|
|
|
60%
|
|
|
|
45.5%
|
|
|
|
60.2%
|
|
|
|
87.1%
|
|
|
|
98.0%
|
|
|
|
99.9%
|
|
|
30%
|
|
|
|
90%
|
|
|
|
57.1%
|
|
|
|
68.7%
|
|
|
|
89.8%
|
|
|
|
98.4%
|
|
|
|
99.9%
|
|
|
40%
|
|
|
|
120%
|
|
|
|
65.7%
|
|
|
|
75.0%
|
|
|
|
91.9%
|
|
|
|
98.8%
|
|
|
|
99.9%
|
|
|
50%
|
|
|
|
150%
|
|
|
|
72.1%
|
|
|
|
79.6%
|
|
|
|
93.4%
|
|
|
|
99.0%
|
|
|
|
99.9%
|
|
|
60%
|
|
|
|
180%
|
|
|
|
77.0%
|
|
|
|
83.2%
|
|
|
|
94.6%
|
|
|
|
99.2%
|
|
|
|
99.9%
|
|
The Indexs annualized historical volatility rate for the five-year period from May 30, 2008
through May 31, 2013 is 30.79%. The Indexs highest volatility rate for any one calendar year during the five-year period is 52.75% and volatility for a shorter period of time may have been substantially higher. The Indexs annualized
performance for the five-year period from May 30, 2008 through May 31, 2013 is 2.89%. Historical Index volatility and performance are not indications of what the Index volatility and performance will be in the future.
For additional graphs and charts demonstrating the effects of volatility and index performance on the long-term performance of the Fund,
see Additional Information Regarding Investment Techniques and Policies and Negative Implications of Daily Goals in Volatile Markets in the Funds statutory prospectus, and Special Note Regarding the Correlation
Risks of the Funds in the Funds Statement of Additional Information.
Holding an unmanaged position opens the
investor to the risk of market volatility adversely affecting the performance of the investment. The Fund is not appropriate for investors who do not intend to actively monitor and manage their portfolios. This table is intended to underscore the
fact that the Fund is designed as a short-term trading vehicle for investors who intend to actively monitor and manage their portfolios.
To fully understand the risks of market volatility on the Fund, see Negative Implications of Daily Goals in Volatile Markets found in the statutory prospectus.
Indirectly investing in emerging markets instruments involve greater risks than indirectly investing in foreign instruments in general. Risks
of investing in emerging market countries include: political or social upheaval; nationalization of businesses; restrictions on foreign ownership; prohibitions on the repatriation of assets; and risks from an economys dependence on revenues
from particular commodities or industries. In addition, currency transfer restrictions, limited potential buyers for such instruments, delays and disruption in settlement procedures and illiquidity or low volumes of transactions may make exits
difficult or impossible at times.
Indirectly investing in foreign instruments may involve greater risks than investing in domestic instruments. As a result, the Funds
returns and NAVs may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The laws and accounting, auditing, and
financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
If the Funds benchmark moves more than 33% on a given trading day in a direction adverse to the Fund, you would lose all of your money.
Rafferty will attempt to position the Funds portfolio to ensure that the Fund does not lose more than 90% of its NAV on a given day. The cost of such downside protection will be limitations on the Funds gains. As a consequence, the
Funds portfolio may not be responsive to Index losses beyond 30% in a given day. For example, if the Index were to lose 35%, the Fund might be limited to a daily gain of 90% rather than 105%, which is 300% of the Index loss of 35%.
Geographic Concentration Risk
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or economic conditions and
regulatory requirements. As a result, the Fund may be more volatile than a more geographically diversified fund.
High Portfolio Turnover Risk
Daily rebalancing of the Funds holdings pursuant to its daily investment objective causes a much greater number of portfolio
transactions when compared to most exchange-traded funds. Such frequent and active trading leads to significantly higher transaction costs because of increased
|
|
|
|
|
|
|
|
|
62
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased capital gains, including short-term and/or long-term capital gains that will
be taxable to shareholders as ordinary income. The Fund calculates portfolio turnover without including the short term cash instruments or derivative transactions that comprise the majority of the Funds trading. As such, if the Funds
extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Intra-Day Investment Risk
The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the
subsequent trading day. The exact exposure of an investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the
time of purchase. The Funds gains occur as its market exposure declines and its losses are accompanied by increases in market exposure. If the Index declines, the Funds net assets will rise by an amount equal to the decline in the
Funds exposure. Conversely, if the Index rises the Funds net assets will decline by the same amount as the increase in the Funds exposure. As an example (using simplified numbers), if the Fund had $100 in net assets at the market
close, it would seek $300 of exposure to the next trading days Index performance. If the Index declined by 1% by noon the following trading day, the exposure of the Fund will fall by 1% to $297 and the net assets will rise by $3 to
$103. With net assets of $103 and exposure of $297, a purchaser at that point would be receiving 288% exposure of her investment instead of 300%
Shareholders should lose money when the Index rises, which is a result that is the opposite from traditional funds.
If you invest in the Fund, you are exposed to the risk that an increase in the daily performance of the Index will be leveraged. This means that your investment in the Fund will be reduced by an amount equal
to 3% for every 1% daily increase, not including the cost of financing the portfolio and the impact of operating expenses, which would further lower your investment. The Fund could theoretically lose an amount greater than its net assets in the
event of an Index increase of more than 33%. Further, purchasing shares during a day may result in greater than 300% exposure to the performance of the Index if the Index rises between the close of the markets on one trading day and before the
close of the markets on the next trading day.
To fully understand the risks of using leverage in the Fund, see Effects of
Compounding and Market Volatility Risk above.
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Illiquid securities also may be difficult to value. If the Fund is
forced to sell an illiquid security at an unfavorable time or at a price that is lower than Raffertys judgment of the securitys true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the
Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
The Fund is subject to market risks that can affect the value of its shares. These risks include political, regulatory, market and economic developments, including developments that impact specific economic
sectors, industries or segments of the market.
Rafferty expects a significant portion of the assets of the Fund to come from professional money managers and investors who use the Funds as
part of asset allocation and market timing investment strategies. These strategies often call for frequent trading which may lead to increased portfolio turnover, higher transaction costs, and the possibility of increased
capital gains, including short-term and/or long-term capital gain that will be taxable to shareholders as ordinary income.
Investment in securities of Mexican issuers involves risks that may be greater than if the Funds investments were more geographically
diverse. Mexicos economy is heavily dependent on trading with key partners. Any increases or decreases in the volume of this trading, changes in taxes or tariffs, or variance in political relationships between those nations may impact the
Mexican economy overall in a way that would be adverse to the Funds investments. Additionally, investment in Mexico may be subject to any positive or adverse effects of the varyingnature of its economic landscape with respect to expropriation
and/or nationalization of assets, strengthened or lessened restrictions on and government intervention in international trade, confiscatory taxation, political instability, including authoritarian and/or military involvement in governmental decision
making, armed conflict, the impact on the economy as a result of civil war and social instability as a result of religious, ethnic and/or socioeconomic unrest.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
63
|
|
|
The Fund is non-diversified, which means
it invests a high percentage of its assets in a limited number of securities. A non-diversified funds NAV and total return may fluctuate more or fall greater in times of weaker markets than a conventional diversified fund.
The Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Funds operations and/or change the
competitive landscape.
Risks of Investing in Other Investment Companies (including ETFs)
Investments in the securities of other investment companies, including ETFs, may involve duplication of advisory fees and certain other
expenses. Fund shareholders indirectly bear the Funds proportionate share of the fees and expenses indirectly paid by shareholders of the other investment company or ETF, in addition to the fees and expenses Fund shareholders bear in
connection with the Funds own operations. The Funds performance may be magnified positively or negatively by virtue of its investment in other investment companies. If the investment company or ETF fails to achieve its investment
objective, the value of the Funds investment will decline, adversely affecting the Funds performance. In addition, closed end investment company and ETF shares potentially may trade at a discount or a premium and are subject to brokerage
and other trading costs, which could result in greater expenses to the Fund. Finally, because the value of ETF shares depends on the demand in the market, the Adviser may not be able to liquidate the Funds holdings in those shares at the most
optimal time, adversely affecting the Funds performance.
The Fund may engage in short sales designed to earn the Fund a profit from the decline in the price of particular securities, baskets of securities or indices. However, there is a risk that the Fund will
experience a loss as a result of engaging in these short sales.
Small and Mid Capitalization Company Risk
Investing in the securities of small and/or mid capitalization companies, and securities that provide exposure to small and/or mid
capitalization companies, involves greater risks and the possibility of greater price volatility than investing in more-established, larger capitalization companies. Small and mid capitalization companies often have narrower markets for their goods
and/or services and more limited managerial and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management
group. In addition, because these stocks are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information
concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by the Fund.
As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of the Funds portfolio.
Tax and Distribution Risk
The Fund has extremely high portfolio turnover which causes the Fund to generate significant amounts of taxable income. This income is
typically short-term capital gain, which is generally treated as ordinary income when distributed to shareholders, or short-term capital loss. The Fund rarely generates long-term capital gain or loss. The Fund will generally need to distribute net
short-term capital gain to satisfy certain tax requirements. As a result of the Funds high portfolio turnover, the Fund could make larger and/or more frequent distributions than traditional unleveraged ETFs. Because the Funds asset level
changes frequently, these distributions could comprise a substantial portion or even all of the Funds net assets if the Fund distributes this income after a decline in its net assets. In addition, the Fund may be held by short-term investors
and these investors may exit the Fund prior to the record date of a distribution. As a result, shareholders in the Fund on the day of a distribution may receive substantial distributions, which could lead to negative tax implications for such
shareholders. Potential investors are urged to consult their own tax advisers for more detailed information.
Rules governing the
federal income tax aspects of certain derivatives, including total return equity swaps, real estate-related swaps, credit default swaps and other credit derivatives are not entirely clear. Because the Funds status as a regulated investment
company might be affected if the Internal Revenue Service did not accept the Funds treatment of certain transactions involving derivatives, the Funds ability to engage in these transactions may be limited.
The Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs, and/or a
temporary lack of liquidity in the markets for the securities held by the Fund. A failure to achieve a daily target may cause the Fund to provide returns for a longer
|
|
|
|
|
|
|
|
|
64
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
period that are worse than expected. In addition, even though the Fund may meet its daily target for a period of time, this will not necessarily produce the returns that might be expected in
light of the returns of the Index or the Funds benchmark for that period.
The Fund values its portfolio as of the close of regular trading on the New York Stock Exchange (NYSE) (generally 4:00 P.M.
Eastern time). In some cases, foreign market indices close before the NYSE opens or may not be open for business on the same calendar days as the Fund. As a result, the daily performance of the Fund can vary from the performance of the Index.
Special Risks of Exchange-Traded Funds
Not Individually Redeemable.
Shares are not individually redeemable and may be redeemed by the Fund at NAV only in large blocks
known as Creation Units. You may incur brokerage costs purchasing enough Shares to constitute a Creation Unit.
Trading
Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or other reasons. There can be no
assurance that Shares will continue to meet the listing requirements of the exchange on which it trades, and the listing requirements may be amended from time to time.
Market Price Variance Risk.
Individual Shares of the Fund that are listed for trading on an exchange can be bought and sold in the secondary market at market prices. The market prices of Shares
will fluctuate in response to changes in NAV and supply and demand for Shares. The Adviser cannot predict whether Shares will trade above, below or at their NAV. Differences between secondary market prices and NAV for Shares may be due largely to
supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for securities or instruments held by the Fund at a particular time. Given the fact that Shares can be created and redeemed in Creation
Units, the Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly and you may pay more than NAV when buying Shares on the
secondary market, and you may receive less than NAV when you sell those Shares. The market price of Shares, like the price of any exchange-traded security, includes a bid-ask spread charged by the exchange specialists, 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 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. The Funds investment results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in
the secondary market may not experience investment results consistent with those experienced by those creating and redeeming directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund.
Fund Performance
The Fund has not yet commenced operations; therefore, performance information is not yet available. In the future, performance information for the Fund will be presented in this section. Performance
information also will be available on the Funds website at http://www.direxionfunds.com/products?presets=etfs&activetab=performance or by calling the Fund toll free at 1-866-476-7523.
Management
Investment Adviser
Rafferty Asset Management, LLC is the Funds investment
adviser.
Portfolio Manager
Paul Brigandi, the Funds Portfolio Manager, is primarily responsible for the day-to-day management of the Fund and has served in this role since the Funds inception.
Purchase and Sale of Fund Shares
The Fund will issue and redeem Shares in exchange for cash only to Authorized Participants in large blocks, known as Creation Units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Fund Shares on a national securities exchange through a broker-dealer. Because the Shares trade at market prices rather than NAV, Shares may trade at a price greater than NAV (premium) or less than NAV (discount).
Tax Information
The Fund intends to make distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject
to federal income taxes and may also be subject to state and local taxes. Distributions by the Fund may be significantly higher than those of most exchange-traded funds.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase
the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or the Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may create a conflict of
interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediarys website for more information.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
65
|
|
|
OVERVIEW OF THE DIREXION SHARES ETF TRUST
The Direxion
Shares ETF Trust (Trust) is a registered investment company offering a number of separate exchange-traded funds (ETFs). Rafferty Asset Management, LLC (Rafferty, or Adviser) serves as the investment
adviser to each Fund. This Prospectus describes the exchange-traded funds (each a Fund and collectively, the Funds) noted below of the Trust.
The shares of certain of the Funds (Shares) are, or will be, listed on NYSE Arca, Inc. (the Exchange). When the Shares are listed and traded on the Exchange, the market prices for the
Shares may be different from the intra-day value of the Shares disseminated by the Exchange and from their net asset value (NAV). Unlike conventional mutual funds, Shares are not individually redeemable securities. Rather, each Fund
issues and redeems Shares on a continuous basis at NAV only in large blocks of Shares called Creation Units. A Creation Unit consists of 50,000 Shares. Creation Units of the 3X Bull Funds are issued and redeemed in cash and/or in-kind
for securities included in the relevant underlying index. Creation Units of the 3X Bear Funds are issued and redeemed for cash.
Shares may only be purchased from or redeemed with the Funds in Creation Units. As a result, retail investors generally will not be able to
purchase or redeem Shares directly from or with the Funds. Most retail investors will purchase or sell Shares in the secondary market with the assistance of a broker. Thus, some of the information contained in this prospectus, such as information
about purchasing and redeeming Shares from or with a Fund and all references to the transaction fee imposed on purchases and redemptions, is not relevant to retail investors.
The Funds seek a multiple of 300% of the total return, or inverse return, of their benchmark indices on a given day. The Funds seek to provide
daily leveraged
investment results, before fees and
expenses, which correspond to the performance of a particular index or benchmark.
As used in this prospectus, the terms
daily, day, and trading day, refer to the period from the close of the markets one trading day to the close of the markets on the next trading day. The Funds with the word Bull in their name
(collectively, the 3X Bull Funds) attempt to provide investment results that correlate positively to the return of an index or benchmark, meaning the 3X Bull Funds attempt to move in the same direction as the target index or benchmark.
The Funds with the word Bear in their name (collectively, the 3X Bear Funds) attempt to provide investment results that correlate negatively to the return of an index or benchmark, meaning that the 3X Bear Funds attempt to
move in the opposite or inverse direction of the target index or benchmark. The correlations sought by the 3X Bull Funds and the 3X Bear Funds are generally a multiple of the returns of the target index or benchmark. For example, the benchmark for
the Direxion Daily Chile Bull 3X Shares is 300% of the daily total return of the performance of the MSCI Chile IMI 25/50 Index, while the benchmark for the Direxion Daily Chile Bear 3X Shares is 300% of the inverse, or opposite, of the daily total
return of the performance of the MSCI Chile IMI 25/50 Index. If, on a given day, the MSCI Chile IMI 25/50 Index gains 1%, the Direxion Daily Chile Bull 3X Shares is designed to gain approximately 3% (which is equal to 300% of 1%), while the Direxion
Daily Chile Bear 3X Shares is designed to lose approximately 3%. Conversely, if the MSCI Chile IMI 25/50 Index loses 1% on a given day, the Direxion Daily Chile Bull 3X Shares is designed to lose approximately 3%, while the Direxion Daily Chile Bear
3X Shares is designed to gain approximately 3% (which is equal to 300% of the 1% index loss).
|
|
|
|
|
|
|
Fund
|
|
Index
|
|
Daily Target
|
|
Direxion Daily Chile Bull 3X Shares
Direxion Daily Chile Bear 3X Shares
|
|
MSCI Chile IMI 25/50 Index
|
|
|
300%
300%
|
|
Direxion Daily Hong Kong Bull 3X Shares
Direxion Daily Hong Kong Bear 3X Shares
|
|
MSCI Hong Kong Index
|
|
|
300%
300%
|
|
Direxion Daily Japan Bull 3X Shares
Direxion Daily Japan Bear 3X Shares
|
|
MSCI Japan Index
|
|
|
300%
300%
|
|
Direxion Daily Mexico Bull 3X Shares
Direxion Daily Mexico Bear 3X Shares
|
|
MSCI Mexico IMI 25/50
Index
|
|
|
300%
300%
|
|
To pursue these results, the Funds
listed above use aggressive investment techniques such as engaging in futures, swaps and options transactions. As a result, the Funds are designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking
daily
and
daily leveraged
investment results, understand the risks associated with the Funds use of leverage and are willing to monitor their portfolios frequently. The Funds are not intended to be used by, and are not
appropriate for, investors who do not intend to actively monitor and manage their portfolios. There is no assurance that any Fund will achieve its objective and an investment in a Fund could lose money. No single Fund is a complete investment
program.
Changes in Investment Objective.
Each Funds investment objective is not a fundamental policy and may be
changed by the Funds Board of Trustees without shareholder approval.
|
|
|
|
|
|
|
|
|
66
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
ADDITIONAL INFORMATION REGARDING INVESTMENT
TECHNIQUES AND POLICIES
Rafferty, the
investment adviser to the Funds, uses a number of investment techniques in an effort to achieve the stated goal for each Fund. The Funds each seek a multiple of 300% of the return of their benchmark indices on a given day. For the 3X Bull Funds,
Rafferty attempts to magnify the returns of a 3X Bull Funds index or benchmark for a one-day period. The 3X Bear Funds are managed to provide returns inverse (or opposite) by a defined percentage to the return of a 3X Bear Funds index or
benchmark for a one-day period.
Rafferty creates net long positions for the 3X Bull Funds and net short
positions for the 3X Bear Funds. (Rafferty may create short positions in 3X Bull Funds and long positions in the 3X Bear Funds even though the net exposure in the 3X Bull Funds will be long and the net exposure in the 3X Bear Funds will be short.)
Long positions move in the same direction as their index or benchmark, advancing when the index or benchmark advances and declining when the index or benchmark declines. Short positions move in the opposite direction of the index or benchmark,
advancing when the index or benchmark declines and declining when the index or benchmark advances. Additionally, none of the Funds seek income that is exempt from federal, state or local income taxes.
In seeking to achieve each Funds investment objective, Rafferty uses statistical and quantitative analysis to determine the
investments each Fund makes and the techniques it employs. Rafferty relies upon a pre-determined model to generate orders that result in repositioning each Funds investments in accordance with its daily investment objective. Using this
approach, Rafferty determines the type, quantity and mix of investment positions that it believes in combination should produce daily returns consistent with a Funds objective. In general, if a Fund is performing as designed, the return of the
index or benchmark will dictate the return for that Fund. Each Fund pursues its investment objective regardless of the market conditions and does not take defensive positions.
Each Fund has a clearly articulated goal which requires the Fund to seek economic exposure in excess of its net assets. To meet its objectives, each Fund invests in some combination of financial instruments
so that it generates economic exposure consistent with the Funds investment objective.
Each Fund offered in this
prospectus significantly invests in: futures contracts; options on securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; ETFs; and other
financial instruments. In addition, Rafferty uses these types of investments for the Funds to produce economically leveraged investment results. Leveraging allows Rafferty to generate a greater positive or negative return for the Funds
than what would be generated on the invested capital without leverage, thus changing small market movements into larger changes in the value of the investments of a Fund.
The 3X Bull Funds generally may hold a representative sample of the securities in its benchmark index. The sampling of securities that is held by a Fund is intended to maintain high correlation with, and
similar aggregate characteristics (
e.g.
, market capitalization and industry weightings) to, the benchmark index. A Fund also may invest in securities that are not included in the index or may overweight or underweight certain components of
the index. Certain Funds assets may be concentrated in an industry or group of industries to the extent that the Funds benchmark index concentrates in a particular industry or group of industries. In addition, each Fund offered in this
prospectus is non-diversified, which means that it may invest in the securities of a limited number of issuers.
At the close of
the markets each trading day, each Fund will position its portfolio to ensure that the Funds exposure to its benchmark is consistent with the Funds stated goals. The impact of market movements during the day determines whether a
portfolio needs to be repositioned. If the target index has risen on a given day, a 3X Bull Funds net assets should rise, meaning their exposure may need to be increased. Conversely, if the target index has fallen on a given day, a 3X Bull
Funds net assets should fall, meaning their exposure may need to be reduced. If the target index has risen on a given day, a 3X Bear Funds net assets should fall, meaning its exposure may need to be reduced. If the target index has
fallen on a given day, a 3X Bear Funds net assets should rise, meaning its exposure may need to be increased. Any of the Funds portfolios may also need to be changed to reflect changes in the composition of their index. Rafferty
increases a Funds exposure when its assets rise and reduces a Funds exposure when its assets fall.
The Funds are
designed to provide daily leveraged investment returns, before fees and expenses, that are a multiple of the returns of their indices or benchmarks. While Rafferty attempts to minimize any tracking error (the statistical measure of the
difference between the investment results of a Fund and the performance of its index or benchmark), certain factors will tend to cause a Funds investment results to vary from the stated objective. A Fund may have difficulty in achieving its
daily target due to fees and expenses, high portfolio turnover, transaction costs, significant purchase and redemption activity by Fund shareholders and/or a temporary lack of liquidity in the markets for the securities held by the Fund.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
67
|
|
|
Seeking daily leveraged investment results provides potential for greater gains and losses for
the Funds relative to benchmark performance. For instance, the Direxion Daily Chile Bull 3X Shares seeks to provide, before fees and expenses, 300% of the daily return of the MSCI Chile IMI 25/50 Index. If the MSCI Chile IMI 25/50 Index gains 2% on
a given day, the Direxion Daily Chile Bull 3X Shares would be expected to gain about 6%. Conversely, if the MSCI Chile IMI 25/50 Index declines 2% on a given day, the Direxion Daily Chile Bull 3X Shares would be expected to lose about 6%. However,
for a period longer than one day, the pursuit of daily goals may result in daily leveraged compounding for the Funds, which means that the return of an index over a period of time greater than one day multiplied by the Funds daily target
(
e.g.,
300% or 300%) generally will not equal a Funds performance over that same period. Consider the following examples:
Mary is considering investments in two Funds, Funds A, and B. Fund A is a traditional index ETF which seeks (before fees and expenses) to match the performance of the XYZ index. Fund B is a leveraged ETF and
seeks daily leveraged investment results (before fees and expenses) that correspond to 300% of the daily performance of the XYZ index.
On Day 1, the XYZ index increases in value from $100 to $105, a gain of 5%. On Day 2, the XYZ index declines from $105 back to $100, a loss of 4.76%. In the aggregate, the XYZ index has not moved.
An investment in Fund A would be expected to gain 5% on Day 1 and lose 4.76% on Day 2 to return to its original value. The
following example assumes a $100 investment in Fund A when the index is also valued at $100:
|
|
|
|
|
|
|
|
|
|
|
|
|
Day
|
|
Index
Value
|
|
|
Index
Performance
|
|
|
Value of
Investment
|
|
|
|
$
|
100.00
|
|
|
|
|
|
|
$
|
100.00
|
|
1
|
|
$
|
105.00
|
|
|
|
5.00%
|
|
|
$
|
105.00
|
|
2
|
|
$
|
100.00
|
|
|
|
4.76%
|
|
|
$
|
100.00
|
|
The same $100 investment in Fund B, however, would be expected to gain in value on Day 1 but decline in
value on Day 2.
The $100 investment in Fund B would be expected to gain 15% on Day 1 (300% of 5%) but decline 14.28% on Day 2.
|
|
|
|
|
|
|
|
|
|
|
|
|
Day
|
|
Index
Performance
|
|
|
300% of
Index
Performance
|
|
|
Value of
Investment
|
|
|
|
|
|
|
|
|
|
|
|
$
|
100.00
|
|
1
|
|
|
5.00%
|
|
|
|
15.0%
|
|
|
$
|
115.00
|
|
2
|
|
|
4.76%
|
|
|
|
14.28%
|
|
|
$
|
98.57
|
|
Although the percentage decline in Fund B is smaller on Day 2 than the percentage gain on Day 1, the loss is
applied to a higher principal amount, so the investment in Fund B experiences a loss even when the aggregate index value for the two-day period has not declined. (These calculations do not include the charges for expense ratio and financing
charges.)
As you can see, an investment in Fund B has additional risks due to the effects of leverage and compounding.
The Funds are ETFs that seek
daily leveraged
investment results. The Funds are intended to be used as short-term trading
vehicles. The Funds are not intended to be used by, and are not appropriate for, investors who do not intend to actively monitor and manage their portfolios. The Funds are very different from most mutual funds and ETFs. First, the Funds pursue daily
leveraged investment goals, which means that the Funds are riskier than alternatives that do not use leverage because the Funds magnify the performance of the benchmark of an investment. Second, each 3X Bear Fund pursues investment goals which are
inverse to the performance of its benchmark, a result opposite of most mutual funds and ETFs. Third, the Funds seek daily leveraged investment results. An investor who purchases shares of a Fund intra-day will generally receive more, or less, than
300% exposure to the target index from that point until the end of the trading day. The actual exposure is a function of the performance of the benchmark from the end of the prior trading day. If a Funds shares are held for a period longer
than a single trading day, the Funds performance is likely to deviate from the multiple of the benchmark performance for the longer period. This deviation will increase with higher index volatility and longer holding periods. As a consequence,
investors should not plan to hold the Funds unmonitored for periods longer than a single trading day. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the
product of the return of the Funds stated goal and the performance of the target index for the full trading day. The Funds are not suitable for all investors.
For investments held for longer than a trading day, volatility in the performance of the benchmark from day to day is the primary cause of any disparity between a Funds actual returns, the product of
the Funds beta and the returns of the benchmark for such longer period. Volatility causes such disparity because it exacerbates the effects of compounding on a Funds returns. In addition, the effects of volatility are magnified in the
Funds due to leverage. For example, consider the following three examples that demonstrate the effect of volatility on a hypothetical Fund:
Example 1 Benchmark Index Experiences Low Volatility
Mary invests $10.00
in a 3X Bull Fund at the close of trading on Day 1. During Day 2, the Funds benchmark rises from 100 to 102, a 2% gain. Marys investment rises 6% to $10.60. Mary
|
|
|
|
|
|
|
|
|
68
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
holds her investment through the close of trading on Day 3, during which the Funds benchmark rises from 102 to 104, a gain of 1.96%. Marys investment rises to $11.22, a gain during
Day 3 of 5.88%. For the two day period since Mary invested in the Fund, the benchmark gained 4% although Marys investment increased by 12.2%. Because the benchmark index continued to trend upwards with low volatility, Marys return
closely correlates to the 300% return of the return of the index for the period.
John invests $10.00 in a 3X Bear Fund at the
close of trading on Day 1. During Day 2, the Funds benchmark gains 2%, and Johns investment falls by 6% to $9.40. On Day 3, the benchmark rises by 1.96%, and Johns fund falls by 5.88% to $8.85. For the two day period the benchmark
returned 4% while the fund lost 11.5%. Johns return still correlates to 300% return of the index, but not as closely as Marys investment in a 3X Bull Fund.
Example 2 Benchmark Index Experiences High Volatility
Mary invests
$10.00 in a 3X Bull Fund after the close of trading on Day 1. During Day 2, the Funds benchmark rises from 100 to 102, a 2% gain, and Marys investment rises 6% to $10.60. Mary continues to hold her investment through the end of Day 3,
during which the Funds benchmark declines from 102 to 98, a loss of 3.92%. Marys investment declines by 11.76%, from $10.60 to $9.35. For the two day period since Mary invested in the Fund, the Funds benchmark index lost 2% while
Marys investment decreased from $10 to $9.35, a 6.47% loss. The volatility of the benchmark affected the correlation between the benchmark indexs return for the two day period and Marys return. In this situation, Mary lost more
than three times the return of the benchmark index.
Conversely, John invests $10.00 in a 3X Bear Fund after the close of trading
on Day 1. During Day 2, the Funds benchmark rises from 100 to 102, a 2% gain, and Johns investment falls 6% to $9.40. John continues to hold his investment through the end of Day 3, during which the Funds benchmark declines from
102 to 98, a loss of 3.92%. Johns investment rises by 11.76%, from $9.40 to $10.51. For the two day period since John invested in the Fund, the Funds benchmark index lost 2% while Johns investment increased from $10 to $10.51, a
5.06% gain. The volatility of the benchmark affected the correlation between the benchmark indexs return for the two day period and Johns return. In this situation, John gained less than three times the return of the benchmark index.
Example 3 Intra-day Investment with Volatility
The examples above assumed that Mary purchased the Fund at the close of trading on Day 1 and sold her investment at the close of trading on
a subsequent day. However, if she made an investment intra-day, she would have received a beta determined by the performance of the benchmark from the end of the prior trading day until her time of purchase on the next trading day. Consider the
following example.
Mary invests $10.00 in a 3X Bull Fund at 11 a.m. on Day 2. From the close of trading on Day 1 until 11 a.m.
on Day 2, the index moved from 100 to 102, a 2% gain. In light of that gain, the Fund beta at the point at which Mary invests is 289%. During the remainder of Day 2, the Funds benchmark rises from 102 to 110, a gain of 7.84%, and Marys
investment rises 22.7% (which is the benchmark gain of 7.84% multiplied by the 289% beta that she received) to $12.27. Mary continues to hold her investment through the close of trading on Day 2, during which the Funds benchmark declines from
110 to 90, a loss of 18.18%. Marys investment declines by 54.5%, from $12.27 to $5.58. For the period of Marys investment, the Funds benchmark declined from 102 to 90, a loss of 11.76%, while Marys investment decreased from
$10.00 to $5.58, a 44% loss. The volatility of the benchmark affected the correlation between the benchmark indexs return for period and Marys return. In this situation, Mary lost more than three times the return of the benchmark index.
Mary was also hurt because she missed the first 2% move of the benchmark and had a beta of 289% for the remainder of Day 2.
The Funds are designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies.
Such investors are expected to monitor and manage their portfolios frequently. Investors in the Funds should: (a) understand the risks associated with the use of leverage, (b) understand the consequences of seeking daily leveraged
investment results, (c) understand the risk of shorting, and (d) intend to actively monitor and manage their investments. Investors who do not understand the Funds or do not intend to actively manage their funds and monitor their
investments should not buy the Funds. There is no assurance that any of the Funds offered in this prospectus will achieve their objectives and an investment in any Fund could lose money. No single Fund is a complete investment program.
Market Volatility.
Each Fund seeks to provide a return which is a multiple of the daily performance of its benchmark. No Fund
attempts to, and no Fund should be expected to, provide returns which are a multiple of the return of the benchmark for periods other than a single day. Each Fund rebalances its portfolio on a daily basis, increasing exposure in response to that
days gains or reducing exposure in response to that days losses.
Daily rebalancing will impair a Funds
performance if the benchmark experiences volatility. For instance, a hypothetical 3X Bull Fund would be expected to lose 11% (as shown in Table 1 below) if its benchmark provided no return over a one year period during which its benchmark
experienced annualized volatility of 20%. A hypothetical 3X Bear Fund
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
69
|
|
|
would be expected to lose 21% (as shown in Table 1 below) if its benchmark provided no return over a one year period during which its benchmark experienced annualized volatility of 20%. If the
benchmarks annualized volatility were to rise to 40%, the hypothetical loss for a one year period for a 3X Bull Fund widens to approximately 38% while the loss for a 3X Bear Fund rises to 62%.
At higher ranges of volatility, there is a chance of a near complete loss of Fund value even if the benchmark is flat. For instance, if
annualized volatility of the benchmark is 90%, both the 3X Bull and the 3X Bear Funds targeted to the same benchmark would be expected to lose more than 90% of their value even if the cumulative benchmark return for the year was 0%. An indexs
volatility rate is a statistical measure of the magnitude of fluctuations in the returns of an index.
|
|
|
|
|
|
|
|
|
Volatility
Range
|
|
3X Bull Fund
Loss
|
|
|
3X Bear Fund
Loss
|
|
10%
|
|
|
3%
|
|
|
|
6%
|
|
20%
|
|
|
11%
|
|
|
|
21%
|
|
30%
|
|
|
24%
|
|
|
|
42%
|
|
40%
|
|
|
38%
|
|
|
|
62%
|
|
50%
|
|
|
53%
|
|
|
|
78%
|
|
60%
|
|
|
67%
|
|
|
|
89%
|
|
70%
|
|
|
78%
|
|
|
|
95%
|
|
80%
|
|
|
87%
|
|
|
|
98%
|
|
90%
|
|
|
92%
|
|
|
|
99%
|
|
100%
|
|
|
96%
|
|
|
|
99%
|
|
Table 2 shows the annualized rate for each of the indexes to which one of the Funds is benchmarked over
the five year period from May 30, 2008 through May 31, 2013. If an index has been in existence for less than 5 years, its inception date is noted next to its name in Table 2. The indexes to which the Funds are benchmarked have annualized historical
volatility rates over that period ranging from 24.99% to 30.79%. Since market volatility has negative implications for Funds which rebalance daily, investors should be sure to monitor and manage their investments in the Funds particularly in
volatile markets. The negative implications of volatility in Table 1 can be combined with the recent volatility ranges of various indexes in Table 2 to give investors some sense of the risks of holding the Funds for long periods.
These tables are
intended to simply underscore the fact that the Funds are designed as short-term trading vehicles for investors who intend to actively monitor and manage their portfolios. The Funds are not intended to be used by, and are not appropriate for,
investors who do not intend to actively monitor and manage their portfolios.
|
|
|
|
|
Index
|
|
Volatility
|
|
MSCI Chile IMI 25/50 Index
|
|
|
25.33%
|
|
MSCI Hong Kong Index
|
|
|
24.99%
|
|
MSCI Japan Index
|
|
|
26.04%
|
|
MSCI Mexico IMI 25/50 Index
|
|
|
30.79%
|
|
A Precautionary Note to Investors Regarding Dramatic Index Movement.
A 3X Bull Fund seeks daily
exposure to its target index equal to 300% of its net assets while a 3X Bear Fund seeks daily exposure to its target index equal to 300% of its net assets. As a consequence, a Fund could theoretically lose an amount greater than its net assets
in the event of a movement of its target index in excess of 33% in a direction adverse to the Fund (meaning a decline in the value of the target index of a 3X Bull Fund and a gain in the value of the target index for a 3X Bear Fund). Rafferty will
attempt to position each Funds portfolio to ensure that a Fund does not lose more than 90% of its net asset value on a given day. The cost of such downside protection will be symmetrical limitations on gains. If Rafferty successfully positions
a Funds portfolio to provide such limits, a Funds portfolio and net asset value will not be responsive to movements in its target index beyond 30% in a given day, whether that movement is favorable or adverse to the Fund. For example, if
a 3X Bull Funds target index were to gain 35%, the 3X Bull Fund might be limited to a daily gain of 90%, which corresponds to 300% of an index gain of 30%, rather than 105%, which is 300% of the index gain of 35%. Rafferty cannot be assured of
similarly limiting a Funds losses and shareholders should not expect such protection. In short, the risk of total loss exists. In the event of a severe index movement within one trading day, which results in such a limit on gains and losses, a
Funds performance may be inconsistent with its stated investment objective.
The intra-day value of each Funds
shares, otherwise known as the intraday indicative value or IIV, which is disseminated by the Exchange every 15 seconds throughout the business day, is based on the current market value of the securities and cash required to
be deposited in exchange for a Creation Unit on the prior business day. The IIV does not necessarily reflect the precise composition of the current portfolio of securities held by a Fund at a particular point in time, nor the best possible valuation
of the current portfolio. Therefore, the IIV should not be viewed as a real-time update of the Funds NAV, which is computed only once a day.
The Projected Return of a 3X Bull Fund for a Single Trading Day.
Each 3X Bull Fund seeks to provide a daily return that is a multiple of the daily return of a target index or benchmark. Doing so
requires the use of leveraged investment techniques, which necessarily incur financing charges. For instance, the Direxion Daily Chile Bull 3X Shares seeks exposure to its benchmark in an amount equal to 300% of its
|
|
|
|
|
|
|
|
|
70
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
assets, meaning it uses leveraged investment techniques to seek exposure to the MSCI Chile IMI 25/50 Index in an amount equal to 300% of its net assets. In light of the financing charges and the
3X Bull Funds operating expenses, the expected return of the 3X Bull Funds over one trading day is equal to the gross expected return, which is the daily benchmark return
multiplied
by the 3X Bull Funds target,
minus
(i) financing charges incurred by the portfolio and (ii) daily operating expenses. For instance, if the MSCI Chile IMI 25/50 Index returns 2% on a given day, the gross expected return of the Direxion Daily Chile Bull 3X Shares would be 6%,
but the net expected return, which factors in the cost of financing the portfolio and the impact of operating expenses, would be lower. Each Fund will reposition its portfolio at the end of every trading day. Therefore, if an investor purchases Fund
shares at close of the markets on a given trading day, the investors exposure to the target index of a 3X Bull Fund would reflect 300% of the performance of the index during the following trading day, subject to the charges and expenses noted
above, regardless of whether the investor sells the shares during that day.
The Projected Return of a 3X Bear Fund for a
Single Trading Day.
Each 3X Bear Fund seeks to provide a daily return which is a multiple of the inverse (or opposite) of the daily return of a target index or benchmark. To create the necessary exposure, a 3X Bear Fund engages in short selling
borrowing and selling securities it does not own. The money that a 3X Bear Fund receives from short sales the short sale proceeds is an asset of the 3X Bear Fund that can generate income to help offset the 3X Bear Funds
operating expenses. However, the costs of creating short exposure, which may require the Funds counterparties to borrow and sell certain securities, may offset or outweigh such income. As the holder of a short position, a 3X Bear Fund also is
responsible for paying the dividends and interest accruing on the short position, which is an expense to the Fund that could cause the Fund to lose money on the short sale and may adversely affect its performance. Each Fund will reposition its
portfolio at the end of every trading day. Therefore, if an investor purchases Fund shares at close of the markets on a given trading day, the investors exposure to the target index of a 3X Bear Fund would reflect 300% of the inverse
performance of the index during the following trading day, subject to the charges and expenses noted above, regardless of whether the investor sells the shares during that day.
The Projected Returns of Funds for Intra-Day Purchases.
Because the Funds rebalance their portfolios once daily, an investor who
purchases shares during a day will likely have more, or less, than 300% leveraged investment exposure to the target index. The exposure to the target index received by an investor who purchases a Fund intra-day will differ from the Funds
stated daily leveraged investment goal (
e.g.,
300% or 300%) by an amount determined by the movement of the target index from its value at the end of the prior day. If the target index moves in a direction favorable to the Fund between
the close of the market on one trading day through the time on the next trading day when the investor purchases Fund shares, the investor will receive less exposure to the target index than the stated fund daily goal (
e.g.,
300% or
300%). Conversely, if the target index moves in a direction adverse to the Fund, the investor will receive more exposure to the target index than the stated fund daily goal (
e.g.,
300% or 300%).
Table 3 below indicates the exposure to the target index that an intra-day purchase of a 3X Bull Fund would be expected to provide based
upon the movement in the value of a 3X Bull Funds target index from the close of the market on the prior trading day. Such exposure holds until a subsequent sale on that same trading day or until the close of the market on that trading day.
For instance, if the target index of a 3X Bull Fund has moved 2% in a direction favorable to a 3X Bull Fund, the investor would receive exposure to the performance of the target index from that point until the investor sells later that day or the
end of the day equal to approximately 289% of the investors investment.
Conversely, if the target index has moved 2% in a
direction unfavorable to a 3X Bull Fund, an investor at that point would receive exposure to the performance of the target index from that point until the investor sells later that day or the end of the day equal to approximately 313% of the
investors investment.
The table includes ranges of index moves from 5% to 5% for the 3X Bull Fund. Index moves
beyond the range noted below will result in exposure further from the Funds daily goal.
|
|
|
|
|
Index Move
|
|
Resulting Exposure
for 3X Bull Fund
|
|
5%
|
|
|
3.35
|
|
4%
|
|
|
3.27
|
|
3%
|
|
|
3.20
|
|
2%
|
|
|
3.13
|
|
1%
|
|
|
3.06
|
|
0%
|
|
|
3.00
|
|
1%
|
|
|
2.94
|
|
2%
|
|
|
2.89
|
|
3%
|
|
|
2.83
|
|
4%
|
|
|
2.79
|
|
5%
|
|
|
2.74
|
|
Table 4 below indicates the exposure to the target index that an intra-day purchase of a 3X Bear Fund would
be expected to provide based upon the movement in the value of the 3X Bear Funds target index from the close of the market on the
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
71
|
|
|
prior trading day. Such exposure holds until a subsequent sale on that same trading day or until the close of the market on that trading day. Table 4 indicates that, if the target index of a 3X
Bear Fund has moved 2% in a direction favorable to the 3X Bear Fund, the investor would receive exposure to the performance of the target index from that point until the investor sells later that day or the end of the day equal to approximately
277% of the investors investment. Conversely, if the target index has moved 2% in a direction unfavorable to the 3X Bear Fund, an investor would receive exposure to the performance of the target index from that point until the investor
sells later that day or the end of the day equal to approximately 326% of the investors investment.
The table
includes a range of index moves from 5% to 5% for the 3X Bear Fund. Index moves beyond the range noted below will result in exposure further from the Funds daily goal.
|
|
|
|
|
Index Move
|
|
Resulting Exposure
for 3X Bear Fund
|
|
5%
|
|
|
2.48
|
|
4%
|
|
|
2.57
|
|
3%
|
|
|
2.67
|
|
2%
|
|
|
2.77
|
|
1%
|
|
|
2.88
|
|
0%
|
|
|
3.00
|
|
1%
|
|
|
3.12
|
|
2%
|
|
|
3.26
|
|
3%
|
|
|
3.40
|
|
4%
|
|
|
3.55
|
|
5%
|
|
|
3.71
|
|
The Projected Returns of Funds for Periods Other Than a Single Trading Day.
The Funds seek leveraged
investment results on a daily basis from the close of regular trading on one trading day to the close on the next trading day which should not be equated with seeking a leveraged goal for any other period. For instance, if the MSCI
Chile IMI 25/50 Index gains 10% for a week, the Direxion Daily Chile Bull 3X Shares should not be expected to provide a return of 30% for the week even if it meets its daily target throughout the week. This is true because of the financing charges
noted above but also because the pursuit of daily goals may result in daily leveraged compounding, which means that the return of an index over a period of time greater than one day multiplied by a Funds daily target or inverse daily target
(
e.g.,
300% or 300%) will not generally equal a Funds performance over that same period. In addition, the effects of compounding become greater the longer Shares are held beyond a single trading day.
The following charts set out a range of hypothetical daily performances during a given 10 trading days of an index and demonstrate how
changes in the index impact the Funds performance for trading day and cumulatively up to, and including, the entire 10 trading day period. The charts are based on a hypothetical $100 investment in the Funds over a 10 trading day period and do
not reflect expenses of any kind.
Table 5 The Market Lacks a Clear Trend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index
|
|
|
|
|
|
3X Bull Fund
|
|
|
3X Bear Fund
|
|
|
|
Value
|
|
|
Daily
Performance
|
|
|
Cumulative
Performance
|
|
|
NAV
|
|
|
Daily
Performance
|
|
|
Cumulative
Performance
|
|
|
NAV
|
|
|
Daily
Performance
|
|
|
Cumulative
Performance
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
$
|
100.00
|
|
|
|
|
|
|
|
|
|
|
$
|
100.00
|
|
|
|
|
|
|
|
|
|
Day 1
|
|
|
105
|
|
|
|
5.00%
|
|
|
|
5.00%
|
|
|
$
|
115.00
|
|
|
|
15.00%
|
|
|
|
15.00%
|
|
|
$
|
85.00
|
|
|
|
15.00%
|
|
|
|
15.00%
|
|
Day 2
|
|
|
110
|
|
|
|
4.76%
|
|
|
|
10.00%
|
|
|
$
|
131.43
|
|
|
|
14.29%
|
|
|
|
31.43%
|
|
|
$
|
72.86
|
|
|
|
14.29%
|
|
|
|
27.14%
|
|
Day 3
|
|
|
100
|
|
|
|
9.09%
|
|
|
|
0.00%
|
|
|
$
|
95.58
|
|
|
|
27.27%
|
|
|
|
4.42%
|
|
|
$
|
92.73
|
|
|
|
27.27%
|
|
|
|
7.27%
|
|
Day 4
|
|
|
90
|
|
|
|
10.00%
|
|
|
|
10.00%
|
|
|
$
|
66.91
|
|
|
|
30.00%
|
|
|
|
33.09%
|
|
|
$
|
120.55
|
|
|
|
30.00%
|
|
|
|
20.55%
|
|
Day 5
|
|
|
85
|
|
|
|
5.56%
|
|
|
|
15.00%
|
|
|
$
|
55.76
|
|
|
|
16.67%
|
|
|
|
44.24%
|
|
|
$
|
140.64
|
|
|
|
16.67%
|
|
|
|
40.64%
|
|
Day 6
|
|
|
100
|
|
|
|
17.65%
|
|
|
|
0.00%
|
|
|
$
|
85.28
|
|
|
|
52.94%
|
|
|
|
14.72%
|
|
|
$
|
66.18
|
|
|
|
52.94%
|
|
|
|
33.82%
|
|
Day 7
|
|
|
95
|
|
|
|
5.00%
|
|
|
|
5.00%
|
|
|
$
|
72.48
|
|
|
|
15.00%
|
|
|
|
27.52%
|
|
|
$
|
76.11
|
|
|
|
15.00%
|
|
|
|
23.89%
|
|
Day 8
|
|
|
100
|
|
|
|
5.26%
|
|
|
|
0.00%
|
|
|
$
|
83.93
|
|
|
|
15.79%
|
|
|
|
16.07%
|
|
|
$
|
64.09
|
|
|
|
15.79%
|
|
|
|
35.91%
|
|
Day 9
|
|
|
105
|
|
|
|
5.00%
|
|
|
|
5.00%
|
|
|
$
|
96.52
|
|
|
|
15.00%
|
|
|
|
3.48%
|
|
|
$
|
54.48
|
|
|
|
15.00%
|
|
|
|
45.52%
|
|
Day 10
|
|
|
100
|
|
|
|
4.76%
|
|
|
|
0.00%
|
|
|
$
|
82.73
|
|
|
|
14.29%
|
|
|
|
17.27%
|
|
|
$
|
62.26
|
|
|
|
14.29%
|
|
|
|
37.74%
|
|
The cumulative performance of the index
in Table 5 is 0% for 10 trading days. The hypothetical return of the 3X Bull Fund for the 10 trading day period is 17.27%, while the hypothetical return of the 3X Bear Fund is 37.74%. The volatility of the benchmark performance and lack
of clear trend results in performance for each Fund for the period which bears little relationship to the performance of the index for the 10 trading day period.
|
|
|
|
|
|
|
|
|
72
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
Table 6 The Market Rises in a Clear Trend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index
|
|
|
|
|
|
3X Bull Fund
|
|
|
3X Bear Fund
|
|
|
|
Value
|
|
|
Daily
Performance
|
|
|
Cumulative
Performance
|
|
|
NAV
|
|
|
Daily
Performance
|
|
|
Cumulative
Performance
|
|
|
NAV
|
|
|
Daily
Performance
|
|
|
Cumulative
Performance
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
$
|
100.00
|
|
|
|
|
|
|
|
|
|
|
$
|
100.00
|
|
|
|
|
|
|
|
|
|
Day 1
|
|
|
102
|
|
|
|
2.00%
|
|
|
|
2.00%
|
|
|
$
|
106.00
|
|
|
|
6.00%
|
|
|
|
6.00%
|
|
|
$
|
94.00
|
|
|
|
6.00%
|
|
|
|
6.00%
|
|
Day 2
|
|
|
104
|
|
|
|
1.96%
|
|
|
|
4.00%
|
|
|
$
|
112.24
|
|
|
|
5.88%
|
|
|
|
12.24%
|
|
|
$
|
88.47
|
|
|
|
5.88%
|
|
|
|
11.53%
|
|
Day 3
|
|
|
106
|
|
|
|
1.92%
|
|
|
|
6.00%
|
|
|
$
|
118.71
|
|
|
|
5.77%
|
|
|
|
18.71%
|
|
|
$
|
83.37
|
|
|
|
5.77%
|
|
|
|
16.63%
|
|
Day 4
|
|
|
108
|
|
|
|
1.89%
|
|
|
|
8.00%
|
|
|
$
|
125.43
|
|
|
|
5.66%
|
|
|
|
25.43%
|
|
|
$
|
78.65
|
|
|
|
5.66%
|
|
|
|
21.35%
|
|
Day 5
|
|
|
110
|
|
|
|
1.85%
|
|
|
|
10.00%
|
|
|
$
|
132.40
|
|
|
|
5.56%
|
|
|
|
32.40%
|
|
|
$
|
74.28
|
|
|
|
5.56%
|
|
|
|
25.72%
|
|
Day 6
|
|
|
112
|
|
|
|
1.82%
|
|
|
|
12.00%
|
|
|
$
|
139.62
|
|
|
|
5.45%
|
|
|
|
39.62%
|
|
|
$
|
70.23
|
|
|
|
5.45%
|
|
|
|
29.77%
|
|
Day 7
|
|
|
114
|
|
|
|
1.79%
|
|
|
|
14.00%
|
|
|
$
|
147.10
|
|
|
|
5.36%
|
|
|
|
47.10%
|
|
|
$
|
66.46
|
|
|
|
5.36%
|
|
|
|
33.54%
|
|
Day 8
|
|
|
116
|
|
|
|
1.75%
|
|
|
|
16.00%
|
|
|
$
|
154.84
|
|
|
|
5.26%
|
|
|
|
54.84%
|
|
|
$
|
62.97
|
|
|
|
5.26%
|
|
|
|
37.03%
|
|
Day 9
|
|
|
118
|
|
|
|
1.72%
|
|
|
|
18.00%
|
|
|
$
|
162.85
|
|
|
|
5.17%
|
|
|
|
62.85%
|
|
|
$
|
59.71
|
|
|
|
5.17%
|
|
|
|
40.29%
|
|
Day 10
|
|
|
120
|
|
|
|
1.69%
|
|
|
|
20.00%
|
|
|
$
|
171.13
|
|
|
|
5.08%
|
|
|
|
71.13%
|
|
|
$
|
56.67
|
|
|
|
5.08%
|
|
|
|
43.33%
|
|
The cumulative performance of the index
in Table 6 is 20% for 10 trading days. The hypothetical return of the 3X Bull Fund for the 10 trading day period is 71.13%, while the hypothetical return of the 3X Bear Fund is 43.33%. In this case, because of the positive index trend, the 3X
Bull Fund gain is greater than 300% of the index gain and the 3X Bear Fund decline is less than 300% of the index gain for the 10 trading day period.
Table 7 The Market Declines in a Clear Trend
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index
|
|
|
|
|
|
3X Bull Fund
|
|
|
3X Bear Fund
|
|
|
|
Value
|
|
|
Daily
Performance
|
|
|
Cumulative
Performance
|
|
|
NAV
|
|
|
Daily
Performance
|
|
|
Cumulative
Performance
|
|
|
NAV
|
|
|
Daily
Performance
|
|
|
Cumulative
Performance
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
$
|
100.00
|
|
|
|
|
|
|
|
|
|
|
$
|
100.00
|
|
|
|
|
|
|
|
|
|
Day 1
|
|
|
98
|
|
|
|
2.00%
|
|
|
|
2.00%
|
|
|
$
|
94.00
|
|
|
|
6.00%
|
|
|
|
6.00%
|
|
|
$
|
106.00
|
|
|
|
6.00%
|
|
|
|
6.00%
|
|
Day 2
|
|
|
96
|
|
|
|
2.04%
|
|
|
|
4.00%
|
|
|
$
|
88.24
|
|
|
|
6.12%
|
|
|
|
11.76%
|
|
|
$
|
112.49
|
|
|
|
6.12%
|
|
|
|
12.49%
|
|
Day 3
|
|
|
94
|
|
|
|
2.08%
|
|
|
|
6.00%
|
|
|
$
|
82.73
|
|
|
|
6.25%
|
|
|
|
11.76%
|
|
|
$
|
119.52
|
|
|
|
6.25%
|
|
|
|
19.52%
|
|
Day 4
|
|
|
92
|
|
|
|
2.13%
|
|
|
|
8.00%
|
|
|
$
|
77.45
|
|
|
|
6.38%
|
|
|
|
22.55%
|
|
|
$
|
127.15
|
|
|
|
6.38%
|
|
|
|
27.15%
|
|
Day 5
|
|
|
90
|
|
|
|
2.17%
|
|
|
|
10.00%
|
|
|
$
|
72.40
|
|
|
|
6.52%
|
|
|
|
27.60%
|
|
|
$
|
135.44
|
|
|
|
6.52%
|
|
|
|
35.44%
|
|
Day 6
|
|
|
88
|
|
|
|
2.22%
|
|
|
|
12.00%
|
|
|
$
|
67.57
|
|
|
|
6.67%
|
|
|
|
32.43%
|
|
|
$
|
144.47
|
|
|
|
6.67%
|
|
|
|
44.47%
|
|
Day 7
|
|
|
86
|
|
|
|
2.27%
|
|
|
|
14.00%
|
|
|
$
|
62.96
|
|
|
|
6.82%
|
|
|
|
37.04%
|
|
|
$
|
154.32
|
|
|
|
6.82%
|
|
|
|
54.32%
|
|
Day 8
|
|
|
84
|
|
|
|
2.33%
|
|
|
|
16.00%
|
|
|
$
|
58.57
|
|
|
|
6.98%
|
|
|
|
41.43%
|
|
|
$
|
165.09
|
|
|
|
6.98%
|
|
|
|
65.09%
|
|
Day 9
|
|
|
82
|
|
|
|
2.38%
|
|
|
|
18.00%
|
|
|
$
|
54.39
|
|
|
|
7.14%
|
|
|
|
45.61%
|
|
|
$
|
176.88
|
|
|
|
7.14%
|
|
|
|
76.88%
|
|
Day 10
|
|
|
80
|
|
|
|
2.44%
|
|
|
|
20.00%
|
|
|
$
|
50.41
|
|
|
|
7.32%
|
|
|
|
49.59%
|
|
|
$
|
189.82
|
|
|
|
7.32%
|
|
|
|
89.82%
|
|
The cumulative performance of the index
in Table 7 is 20% for 10 trading days. The hypothetical return of the 3X Bull Fund for the 10 trading day period is 49.59%, while the hypothetical return of the 3X Bear Fund 89.82%. In this case, because of the negative index trend, the
3X Bull Fund decline is less than 300% of the index decline and the 3X Bear Fund gain is greater than 300% of the index decline for the 10 trading day period.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
73
|
|
|
ADDITIONAL INFORMATION REGARDING RISKS
An investment
in any of the Funds entails risks. The Funds could lose money, or their performance could trail that of other investment alternatives. Rafferty cannot guarantee that any of the Funds will achieve their investment objectives. In addition, the Funds
present some risks not traditionally associated with most mutual funds and ETFs. It is important that investors closely review and understand these risks before making an investment in any of the Funds. Turbulence in financial markets and reduced
liquidity in equity, credit and fixed income markets could negatively affect issuers worldwide, including the Funds. The table below provides the risks of investing in the Funds. Following the table, each risk is explained.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adverse
Market
Conditions
Risk
|
|
Advisers
Investment
Strategy
Risk
|
|
Cash
Transaction
Risk
|
|
Chilean
Securities
Risk
|
|
Concentration
Risk
|
|
Consumer
Staples
Sector
Risk
|
|
Counterparty
Risk
|
|
Currency
Exchange
Rate Risk
|
|
Daily
Correlation
Risk
|
|
Depositary
Receipt
Risk
|
|
Derivatives
Risk
|
|
Early
Close/
Trading
Halt
Risk
|
|
Effects of
Compounding
and Market
Volatility
Risk
|
Direxion Daily Chile Bear 3X Shares
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
|
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
Direxion Daily Chile Bull 3X Shares
|
|
X
|
|
X
|
|
|
|
X
|
|
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
Direxion Daily Hong Kong Bear 3X Shares
|
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
Direxion Daily Hong Kong Bull 3X Shares
|
|
X
|
|
X
|
|
|
|
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
Direxion Daily Japan Bear 3X Shares
|
|
X
|
|
X
|
|
X
|
|
|
|
|
|
|
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
Direxion Daily Japan Bull 3X Shares
|
|
X
|
|
X
|
|
|
|
|
|
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
Direxion Daily Mexico Bear 3X Shares
|
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
Direxion Daily Mexico Bull 3X Shares
|
|
X
|
|
X
|
|
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Emerging
Markets
Risk
|
|
Equity
Securities
Risk
|
|
Financial
Services
Companies
Risk
|
|
Foreign
Securities
Risk
|
|
Gain
Limitation
Risk
|
|
Geographic
Concentration
Risk
|
|
High
Portfolio
Turnover
Risk
|
|
Hong
Kong
Securities
Risk
|
|
Intra-Day
Investment
Risk
|
|
Inverse
Correlation
Risk
|
|
Japanese
Securities
Risk
|
|
Leverage
Risk
|
|
Liquidity
Risk
|
|
Market
Risk
|
Direxion Daily Chile Bear 3X Shares
|
|
X
|
|
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
Direxion Daily Chile Bull 3X Shares
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
|
|
|
|
X
|
|
X
|
|
X
|
Direxion Daily Hong Kong Bear 3X Shares
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
Direxion Daily Hong Kong Bull 3X Shares
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
|
|
X
|
|
X
|
|
X
|
Direxion Daily Japan Bear 3X Shares
|
|
|
|
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
Direxion Daily Japan Bull 3X Shares
|
|
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
Direxion Daily Mexico Bear 3X Shares
|
|
X
|
|
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
Direxion Daily Mexico Bull 3X Shares
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
|
|
|
|
X
|
|
X
|
|
X
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
Timing
Risk
|
|
Mid
Capitalization
Company
Risk
|
|
Mexican
Securities
Risk
|
|
Negative
Implications
of Daily
Goals in
Volatile
Markets
|
|
Non-Diversification
Risk
|
|
Regulatory
Risk
|
|
Risks of
Investing in
Other
Investment
Companies
(including
ETFs)
|
|
Shorting
Risk
|
|
Small and
Mid
Capitalization
Company
Risk
|
|
Tax and
Distribution
Risk
|
|
Tracking
Error
Risk
|
|
Valuation
Time
Risk
|
|
Special
Risks of
Exchange-
Traded
Funds
|
Direxion Daily Chile Bear 3X Shares
|
|
X
|
|
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
Direxion Daily Chile Bull 3X Shares
|
|
X
|
|
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
Direxion Daily Hong Kong Bear 3X Shares
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
Direxion Daily Hong Kong Bull 3X Shares
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
Direxion Daily Japan Bear 3X Shares
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
Direxion Daily Japan Bull 3X Shares
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
Direxion Daily Mexico Bear 3X Shares
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
Direxion Daily Mexico Bull 3X Shares
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
X
|
|
X
|
|
X
|
|
X
|
|
X
|
|
|
|
|
|
|
|
|
|
74
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
Adverse Market Conditions Risk
The performance of each Fund is
designed to correlate to the performance of an index or benchmark. As a consequence, a Funds performance will suffer during conditions which are adverse to its investment goals. For example, if the target index has risen on a given day, a 3X
Bear Funds performance should fall. Conversely, if the target index has fallen on a given day, a 3X Bull Funds performance also should fall.
Advisers Investment Strategy Risk
The Adviser utilizes a quantitative methodology to select investments for each Fund. Although this methodology is designed to correlate each
Funds performance with the performance of its respective Index, there is no assurance that such methodology will be successful and will enable the Funds to achieve their investment objectives.
Unlike most ETFs, the 3X Bear Funds currently intend to effect creation and redemptions principally for cash, rather than principally for
in-kind securities, because of the nature of the financial instruments held by each 3X Bear Fund. As such, investments in 3X Bear Funds may be less tax efficient than investments in conventional ETFs. ETFs generally are able to make in-kind
redemptions and avoid being taxed on gain on the distributed portfolio securities at the fund level. Because the 3X Bear Funds currently intend to effect redemptions principally for cash, a 3X Bear Fund may be required to sell portfolio securities
in order to obtain the cash needed to distribute redemption proceeds. A 3X Bear Fund may recognize a capital gain on these sales that might not have been incurred if such 3X Bear Fund had made a redemption in-kind and this may decrease the tax
efficiency of the 3X Bear Funds compared to ETFs that utilize an in-kind redemption process.
Investment in securities of Chilean issuers involves risks that may be greater than if a Funds investments were more geographically
diverse. Chiles economy is heavily dependent on trading with key partners. Any increases or decreases in the volume of this trading, changes in taxes or tariffs, or variance in political relationships between nations may impact the Chilean
economy overall in a way that would be adverse to a Funds investments. Additionally, investment in Chile may be subject to any positive or adverse effects of the varying nature of its economic landscape with respect to expropriation and/or
nationalization of assets, strengthened or lessened restrictions on and government intervention in international trade, confiscatory taxation, political instability, including authoritarian and/or military involvement in governmental decision
making, armed conflict, the impact on the economy as a result of civil war and social instability as a result of religious, ethnic and/or socioeconomic unrest.
Concentration risk results from a Fund focusing its investments in a specific industry or group of industries to approximately the same
extent that the Funds underlying index is so concentrated. The performance of a Fund that focuses its investments in a particular industry or sector may be more volatile than a fund that does not concentrate its investments. A Fund that
concentrates its investments in an industry or group of industries also may be more susceptible to any single economic market, political or regulatory occurrence affecting that industry or group of industries. However, a Fund only may concentrate
its investments (
i.e.
, hold 25% or more of its total assets in the stocks of a particular industry or group of industries) to approximately the same extent that its underlying index concentrates in the stocks of a 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 subdivisions are not considered to be issued by members of any industry.
Consumer Staples Sector Risk
A Fund may focus its investments in securities issued by, and/or have exposure to, companies in the consumer staples sector. The consumer
staples sector may be affected by the permissibility of using various food additives and production methods, changing consumer tastes, marketing campaigns and other factors affecting consumer demand. In particular, tobacco companies may be adversely
affected by new laws, regulations and litigation. The consumer staples sector may also be adversely affected by changes or trends in commodity prices, which may be influenced or characterized by unpredictable factors.
The Funds may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure to a particular group
of securities or an asset class without actually purchasing those securities or investments, or to hedge a position. Such financial instruments include, but are not limited to, total return, index and interest rate swap agreements. The Funds will
use short-term counterparty agreements to exchange the returns (or differentials in rates of return) earned or realized in particular predetermined investments or instruments. The Funds will not enter into any agreement involving a counterparty
unless the Adviser believes that the other party
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
75
|
|
|
to the transaction is creditworthy. The use of swap agreements involves risks that are different from those associated with ordinary portfolio securities transactions. For example, the Funds bear
the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. In addition, the Funds may enter into swap agreements with a limited number of counterparties,
which may increase the Funds exposure to counterparty credit risk. Swap agreements and other counterparty instruments also may be considered to be illiquid. Further, there is a risk that no suitable counterparties will be willing to enter
into, or continue to enter into, transactions with the Funds and, as a result, the Funds may not be able to achieve their investment objectives.
Currency Exchange Rate Risk
In seeking exposure to foreign companies, changes in foreign currency exchange rates will affect the value of what a Fund owns and the
Funds share price. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Devaluation of a currency by a countrys government
or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
There is no guarantee that the Fund will achieve a high degree of correlation to the Index and therefore achieve its daily investment
objective. To achieve a high degree of correlation with the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily target. The Fund may have difficulty achieving its daily target due to fees and expenses,
high portfolio turnover, transaction costs and costs associated with the use of leveraged investment techniques and/or a temporary lack of liquidity in the markets for the securities held by the Fund. Market disruptions, regulatory restrictions or
extreme volatility will also adversely affect the Funds ability to adjust exposure to the required levels. The Fund may not have investment exposure to all securities in its underlying Index, or its weighting of investment exposure to such
stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the underlying Index. The Fund may be subject to large movements of assets into and out of the
Fund, potentially resulting in the Fund being over- or under-exposed to its Index. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Indexs movement. Because of this, it is unlikely that the Fund
will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to its Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding
annual index reconstitutions and other index rebalancing or reconstitution events may hinder the Funds ability to meet its daily investment objective on that day.
In seeking exposure to foreign companies, a Funds investments may be in the form of depositary receipts or other securities convertible
into securities of foreign issuers. American Depositary Receipts (ADRs) are receipts typically issued by an American bank or trust company that evidence ownership of underlying securities issued by a foreign corporation. European
Depositary Receipts (EDRs) are receipts issued in Europe that evidence a similar ownership arrangement. Global Depositary Receipts (GDRs) are receipts issued throughout the world that evidence a similar arrangement.
Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are designed for use in European securities markets. GDRs are tradable both in the United States and in Europe and are designed for
use throughout the world. Depositary receipts will not necessarily be denominated in the same currency as their underlying securities.
Depositary receipts may be purchased through sponsored or unsponsored facilities. A sponsored facility is established jointly by the issuer of the underlying security and a
depositary, whereas a depositary may establish an unsponsored facility without participation by the issuer of the depositary security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of
an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts of the deposited securities.
Fund investments in depositary receipts, which include ADRs, GDRs and EDRs, are deemed to be investments in foreign securities
for purposes of a Funds investment strategy.
The Funds use investment techniques, including investments in derivatives such as futures contracts, forward contracts, options and swaps, and other instruments that attempt to track the price movement of
underlying securities or indices, which may be considered aggressive. The derivative instruments that the Funds may invest in are described in Additional Information Regarding Investment Techniques and Policies. Investments in
derivatives in general are subject to market risks that may cause their prices to
|
|
|
|
|
|
|
|
|
76
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
fluctuate over time. In addition, such instruments may experience potentially dramatic price changes (losses) and imperfect correlations between the price of the contract and the underlying
security or index which will increase the volatility of the Funds and may involve a small investment of cash relative to the magnitude of the risk assumed. The use of derivatives may expose the Funds to additional risks that they would not be
subject to if they invested directly in the securities underlying those derivatives, such as counterparty risk and the risk that the derivatives may become illiquid. The use of derivatives may result in larger losses or smaller gains than otherwise
would be the case. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move in value that causes a material decline in the Funds NAV, the terms of the swap agreement between the Fund and its
counterparty may allow the counterparty to immediately close out of the transaction with the Fund. In such circumstances, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desire exposure
consistent with the Funds daily investment objective. This may prevent the Fund from achieving its daily investment objective particularly if the Index reverses all or a portion of its intraday move by the end of the day. The derivatives that
the Funds may invest in include:
|
|
|
Futures.
A futures contact is a contract to purchase or sell a particular security, or the cash value of an index, at a specified future date at a
price agreed upon when the contract is made. Under such contracts, no delivery of the actual securities is required. Rather, upon the expiration of the contract, settlement is made by exchanging cash in an amount equal to the difference between the
contract price and the closing price of a security or index at expiration, net of the variation margin that was previously paid.
|
|
|
|
Forward Contracts.
Forward contracts are two-party contracts pursuant to which one party agrees to pay the counterparty a fixed price for an agreed
upon amount of commodities, securities, or the cash value of the commodities, securities or the securities index, at an agreed upon date. A forward currency contract is an obligation to buy 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.
|
|
|
|
Options.
An option is a contract that gives the purchaser (holder) of the option, in return for a premium, the right to buy from (call) or sell to
(put) the seller (writer) of the option the security or currency underlying the option at a specified exercise price at any time during the term of the option (normally not exceeding nine months). The writer of an option has the obligation upon
exercise of the option to deliver the underlying security or currency upon payment of the exercise price or to pay the exercise price upon delivery of the underlying security or currency.
|
|
|
|
Options on Futures Contracts.
An option on a futures contract provides the holder with the right to enter into a long position in the
underlying futures contract, in the case of a call option, or a short position in the underlying futures contract in the case of a put option, at a fixed exercise price to a stated expiration date. Upon exercise of the option by the
holder, the contract market clearing house establishes a corresponding short position for the writer of the option, in the case of a call option, or a corresponding long position, in the case of a put option.
|
|
|
|
Swap Agreements.
In an interest rate swap, a Fund and another party exchange the right to receive interest payments on a security or other
reference rate. The terms of the instrument are generally negotiated by a Fund and its swap counterparty. In a total return swap, one party agrees to pay the other party an amount equal to the total return on a defined underlying asset or a
non-asset reference during a specified period of time. The underlying asset might be a security or basket of securities or a non-asset reference such as a securities index. In return, the other party would make periodic payments based on a fixed or
variable interest rate or on a total return from a different underlying asset or non-asset reference.
|
Early Close/Trading Halt Risk
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain securities or financial
instruments may be restricted, which may result in a Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, a Fund may be unable to rebalance its portfolio, may be unable to accurately price its
investments and/or may incur substantial trading losses.
Effects of Compounding and Market Volatility Risk
There can be no guarantee that a Fund will achieve a high degree of correlation with its investment objective relative to its benchmark
index. A failure to achieve a high degree of correlation may prevent a Fund from achieving its investment objective. A number of factors may adversely affect a Funds correlation with its benchmark, including fees, expenses, transaction costs,
costs associated with the Funds use of leveraged investment techniques, income items and accounting standards. A Fund may not have investment exposure to all securities in its underlying benchmark index, or its weighting of investment exposure
to such stocks or industries may be different from that of the index. In addition, a Fund may invest in securities or financial
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
77
|
|
|
instruments not included in the index underlying its benchmark. A Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or
under-exposed to its benchmark. Activities surrounding periodic index reconstitutions and other index rebalancing or reconstitution events may hinder the Funds ability to meet their daily investment objective on that day. Each Fund seeks to
rebalance its portfolio daily to keep leverage consistent with each Funds daily investment objective.
Each Fund does not
attempt to, and should not be expected to, provide returns which are a multiple of the return of the Index for periods other than a single day. Each Fund rebalances its portfolio on a daily basis, increasing exposure in response to that days
gains or reducing exposure in response to that days losses. This means that for a period longer than one day, the pursuit of daily goals may result in daily leveraged compounding for the Funds. It also means that the return of an index over a
period of time greater than one day multiplied by the Funds daily target (
e.g.,
300% or 300%) generally will not equal the Funds performance over that same period.
As a result, over time, the cumulative percentage increase or decrease in the value of the Funds portfolio may diverge significantly
from the cumulative percentage increase or decrease in the multiple of the return of the Funds underlying index due to the compounding effect of losses and gains on the returns of the Fund. It also is expected that the Funds use of
leverage will cause the Fund to underperform the return of three times its benchmark in a trendless or flat market.
The effect
of compounding becomes more pronounced on the Funds performance as the Index experiences volatility. The Indexs volatility rate is a statistical measure of the magnitude of fluctuations in the returns of the Index. The tables below
provide examples of how Index volatility could affect the Funds performance. The charts show estimated Fund returns for a number of combinations of performance and volatility over a five-year period.
As shown in Table 8 and 9 below, a 3X Bull Fund would be expected to lose 17.1% and a 3X Bear Fund would be expected to lose 31.3% if their
Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. If the Indexs annualized volatility were to rise to 75%, the hypothetical loss for a one year period widens to approximately 81.5%
for the 3X Bull Fund and 96.6% for the 3X Bear Fund.
At higher ranges of volatility, there is a chance of a near complete loss
of value even if the Index is flat. For instance, if the Indexs annualized volatility is 100%, it is likely that the 3X Bull Fund would lose 95% of its value, and the 3X Bear Fund would lose approximately 100% of its value, even if the
cumulative Index return for the year was only 0%.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
Year
Index
Return
|
|
|
300%
One
Year
Index
Return
|
|
|
Volatility Rate
|
|
|
|
10%
|
|
|
25%
|
|
|
50%
|
|
|
75%
|
|
|
100%
|
|
|
60%
|
|
|
|
180%
|
|
|
|
93.8%
|
|
|
|
94.7%
|
|
|
|
97.0%
|
|
|
|
98.8%
|
|
|
|
99.7%
|
|
|
50%
|
|
|
|
150%
|
|
|
|
87.9%
|
|
|
|
89.6%
|
|
|
|
94.1%
|
|
|
|
97.7%
|
|
|
|
99.4%
|
|
|
40%
|
|
|
|
120%
|
|
|
|
79.0%
|
|
|
|
82.1%
|
|
|
|
89.8%
|
|
|
|
96.0%
|
|
|
|
98.9%
|
|
|
30%
|
|
|
|
90%
|
|
|
|
66.7%
|
|
|
|
71.6%
|
|
|
|
83.8%
|
|
|
|
93.7%
|
|
|
|
98.3%
|
|
|
20%
|
|
|
|
60%
|
|
|
|
50.3%
|
|
|
|
57.6%
|
|
|
|
75.8%
|
|
|
|
90.5%
|
|
|
|
97.5%
|
|
|
10%
|
|
|
|
30%
|
|
|
|
29.3%
|
|
|
|
39.6%
|
|
|
|
65.6%
|
|
|
|
86.5%
|
|
|
|
96.4%
|
|
|
0%
|
|
|
|
0%
|
|
|
|
3.0%
|
|
|
|
17.1%
|
|
|
|
52.8%
|
|
|
|
81.5%
|
|
|
|
95.0%
|
|
|
10%
|
|
|
|
30%
|
|
|
|
29.2%
|
|
|
|
10.3%
|
|
|
|
37.1%
|
|
|
|
75.4%
|
|
|
|
93.4%
|
|
|
20%
|
|
|
|
60%
|
|
|
|
67.7%
|
|
|
|
43.3%
|
|
|
|
18.4%
|
|
|
|
68.0%
|
|
|
|
91.4%
|
|
|
30%
|
|
|
|
90%
|
|
|
|
113.2%
|
|
|
|
82.1%
|
|
|
|
3.8%
|
|
|
|
59.4%
|
|
|
|
89.1%
|
|
|
40%
|
|
|
|
120%
|
|
|
|
166.3%
|
|
|
|
127.5%
|
|
|
|
29.6%
|
|
|
|
49.2%
|
|
|
|
86.3%
|
|
|
50%
|
|
|
|
150%
|
|
|
|
227.5%
|
|
|
|
179.8%
|
|
|
|
59.4%
|
|
|
|
37.6%
|
|
|
|
83.2%
|
|
|
60%
|
|
|
|
180%
|
|
|
|
297.5%
|
|
|
|
239.6%
|
|
|
|
93.5%
|
|
|
|
24.2%
|
|
|
|
79.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
Year
Index
Return
|
|
|
300%
One
Year
Index
Return
|
|
|
Volatility Rate
|
|
|
|
10%
|
|
|
25%
|
|
|
50%
|
|
|
75%
|
|
|
100%
|
|
|
60%
|
|
|
|
180%
|
|
|
|
1371.5%
|
|
|
|
973.9%
|
|
|
|
248.6%
|
|
|
|
46.5%
|
|
|
|
96.1%
|
|
|
50%
|
|
|
|
150%
|
|
|
|
653.4%
|
|
|
|
449.8%
|
|
|
|
78.5%
|
|
|
|
72.6%
|
|
|
|
98.0%
|
|
|
40%
|
|
|
|
120%
|
|
|
|
336.0%
|
|
|
|
218.2%
|
|
|
|
3.3%
|
|
|
|
84.2%
|
|
|
|
98.9%
|
|
|
30%
|
|
|
|
90%
|
|
|
|
174.6%
|
|
|
|
100.4%
|
|
|
|
34.9%
|
|
|
|
90.0%
|
|
|
|
99.3%
|
|
|
20%
|
|
|
|
60%
|
|
|
|
83.9%
|
|
|
|
34.2%
|
|
|
|
56.4%
|
|
|
|
93.3%
|
|
|
|
99.5%
|
|
|
10%
|
|
|
|
30%
|
|
|
|
29.2%
|
|
|
|
5.7%
|
|
|
|
69.4%
|
|
|
|
95.3%
|
|
|
|
99.7%
|
|
|
0%
|
|
|
|
0%
|
|
|
|
5.8%
|
|
|
|
31.3%
|
|
|
|
77.7%
|
|
|
|
96.6%
|
|
|
|
99.8%
|
|
|
10%
|
|
|
|
30%
|
|
|
|
29.2%
|
|
|
|
48.4%
|
|
|
|
83.2%
|
|
|
|
97.4%
|
|
|
|
99.8%
|
|
|
20%
|
|
|
|
60%
|
|
|
|
45.5%
|
|
|
|
60.2%
|
|
|
|
87.1%
|
|
|
|
98.0%
|
|
|
|
99.9%
|
|
|
30%
|
|
|
|
90%
|
|
|
|
57.1%
|
|
|
|
68.7%
|
|
|
|
89.8%
|
|
|
|
98.4%
|
|
|
|
99.9%
|
|
|
40%
|
|
|
|
120%
|
|
|
|
65.7%
|
|
|
|
75.0%
|
|
|
|
91.9%
|
|
|
|
98.8%
|
|
|
|
99.9%
|
|
|
50%
|
|
|
|
150%
|
|
|
|
72.1%
|
|
|
|
79.6%
|
|
|
|
93.4%
|
|
|
|
99.0%
|
|
|
|
99.9%
|
|
|
60%
|
|
|
|
180%
|
|
|
|
77.0%
|
|
|
|
83.2%
|
|
|
|
94.6%
|
|
|
|
99.2%
|
|
|
|
99.9%
|
|
Holding an unmanaged position opens the investor to the risk of market volatility adversely affecting the
performance of the investment. The Funds are not appropriate for investors who do not intend to actively monitor and manage their portfolios. These tables are intended to underscore the fact that the Funds are designed as short-term trading vehicles
for investors who intend to actively monitor and manage their portfolios.
Indirectly investing in emerging markets instruments involve greater risks than indirectly investing in foreign instruments in general. Risks
of investing in emerging market countries
|
|
|
|
|
|
|
|
|
78
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
include political or social upheaval, nationalization of businesses, restrictions on foreign ownership and prohibitions on the repatriation of assets. There may also be risks from an
economys dependence on revenues from particular commodities or industries. In addition, currency transfer restrictions, limited potential buyers for such instruments, delays and disruption in settlement procedures and illiquidity or low
volumes of transactions may make exits difficult or impossible at times.
Investments in publicly issued equity securities and securities that provide exposure to equity securities, including common stocks, in
general are subject to market risks that may cause their prices to fluctuate over time. Fluctuations in the value of equity securities in which a Fund invests will cause the NAV of the Fund to fluctuate.
Financial Services Companies Risk
Certain Funds may focus their investments in securities issued by, and/or have exposure to, financial services companies. As a result, a Fund
may be subject to risks of legislative or regulatory changes, adverse market conditions and/or increased competition affecting the financial services companies. Financial services companies are subject to extensive governmental regulation, which may
limit both the amounts and types of loans and other financial commitments they can make, and the rates and fees that they can charge. Profitability is largely dependent on the availability and cost of capital, and can fluctuate significantly when
interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector.
Indirectly investing in foreign instruments may involve greater risks than investing in domestic instruments. As a result, a Funds
returns and net asset values may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The laws and accounting,
auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Rafferty will attempt to position each Funds portfolio to ensure that a Fund does not lose more than 90% of its net asset value on a
given day. The cost of such downside protection will be limitations on a Funds gains. As a consequence, a Funds portfolio may not be responsive to index movements beyond 30% in a given day in a direction favorable to the Fund. For
example, if a 3X Bull Funds target index were to gain 35%, a 3X Bull Fund might be limited to a daily gain of 90% rather than 105%, which is 300% of the index gain of 35%.
Geographic Concentration Risk
Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or economic conditions and
regulatory requirements. As a result, Funds that focus their investments in a particular country or geographic region may be more volatile than a more geographically diversified fund.
High Portfolio Turnover Risk
Daily rebalancing of Fund holdings pursuant to each Funds daily investment objective causes a much greater number of portfolio
transactions when compared to most exchange-traded funds. Such frequent and active trading leads to significantly higher transaction costs for the Funds because of increased broker commissions resulting from such transactions. In addition, there is
the possibility of significantly increased capital gains, including short-term and/or long-term capital gains that will be taxable to shareholders as ordinary income. Each Fund calculates portfolio turnover without including the short term cash
instruments or derivative transactions that comprise the majority of that Funds trading. As such, if a Funds extensive use of derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
Hong Kong Securities Risk
Investment in securities of Hong Kong issuers involves risks that may be greater than if a Funds investments were more geographically
diverse. Hong Kongs reversion to China has been marked by increased volatility and uncertainty in its economic and political status, which may result in adverse affects for a Funds investments. Hong Kongs economy has become more
dependent on Chinas role in the global market and the strength or diminishment of that relationship may impact Hong Kong issuers. Additionally, because Hong Kong has few natural resources, any surplus or shortage in the commodity markets could
impact the Hong Kong economy as a whole.
Intra-Day Investment Risk
The Funds seek daily leveraged investment results, which should not be equated with seeking an investment goal for shorter than a day. Thus,
an investor who purchases Fund shares after the close of the markets on one trading day and before the close of the markets on the next trading day will likely have more, or less, than 300% or 300% leveraged investment exposure to the target
index, depending upon the
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
79
|
|
|
movement of the target index from the end of one trading day until the time of purchase. If the target index moves in a direction favorable to the Fund, the investor will receive exposure to the
target index less than 300% or 300% exposure to the target index. Conversely, if the target index moves in a direction adverse to the Fund, the investor will receive exposure to the target index greater than 300% or 300% exposure to the
target index. Investors may consult the Funds website at any point during the day to determine how the current value of a Funds target index relates to the value of the target index at the end of the previous day. In addition, Graphs 1
through 4 and the accompanying text included in the risk titled Negative Implications of Daily Goals in Volatile Markets provide a detailed discussion of such risk.
Each 3X Bear Fund is negatively correlated to its index and should lose money when its index rises a result that is the opposite from
conventional funds. Because each 3X Bear Fund seeks daily returns inverse by a defined percentage to its index, the difference between a 3X Bear Funds daily return and the performance of its index may be negatively compounded during
periods in which the markets decline. By its nature, inverse correlation magnifies the impact of compounding and market volatility. For instance, if an index gains 5%, a 3X Bull Fund would be expected to gain 15% and a 3X Bear Fund would be expected
to lose 15%. The 3X Bull Funds performance differs from the index by 10%, while the 3X Bear Funds performance differs by 20%. The 3X Bear Fund has moved a greater distance from its index, which illustrates the greater volatility
experienced by 3X Bear Funds.
Investment in securities of Japanese issuers involves risks that may be greater than if a Funds investments were more geographically
diverse. The Japanese economy has recently emerged from a prolonged economic downturn. Since 2000, Japans economic growth rate has remained relatively low. Its economy is characterized by government intervention and protectionism, an unstable
financial services sector and relatively high unemployment. Japans economy is heavily dependent on international trade and has been adversely affected by trade tariffs and competition from emerging economies. As such, economic growth is
heavily dependent on continued growth in international trade, government support of the financial services sector, among other troubled sectors, and consistent government policy. Any changes or trends in these economic factors could have a
significant impact on Japans economy overall and may negatively affect a Funds investment. Japans economy is also closely tied to its two largest trading partners, the U.S. and China. Economic volatility in either nation may create
volatility for Japans economy as well. Additionally, as China has increased its role with Japan as a trading partner, political tensions between the countries has become strained. Any increase or decrease in such tension may have consequences
for investment in Japanese issuers.
If you invest in the Funds, you are exposed to the risk that any adverse daily performance of a Funds target index will be leveraged. This means that, if a Funds target index experiences adverse
daily performance, your investment in the Fund will be reduced by an amount equal to 3% for every 1% of adverse performance, not including the cost of financing the portfolio and the impact of operating expenses, which would further lower your
investment.
A Fund could theoretically lose an amount greater than its net assets in the event of a movement of its target index
in excess of 33% in a direction adverse to the Fund. Further, purchasing shares of a Fund during a day may result in greater than 300% or 300% exposure to the performance of the target index if the target index moves in a direction adverse to
the Fund between the close of the markets on one trading day and before the close of the markets on the next trading day. Graphs 1 through 4 and the accompanying text included in the risk titled Negative Implications of Daily Goals in Volatile
Markets provide a detailed discussion of such risks. In addition, the Funds website will provide information on a daily basis regarding the current relevant exposure if an investor purchases new shares of a Fund.
Some securities held by the Funds, including derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Illiquid securities also may be difficult to value. If the Fund is
forced to sell an illiquid security at an unfavorable time or at a price that is lower than Raffertys judgment of the securitys true market value, the Fund may be forced to sell the security at a loss. Such a situation may prevent the
Fund from limiting losses, realizing gains or achieving a high correlation with the Index.
Each Fund is subject to market risks that can affect the value of its shares. These risks include political, regulatory, market and economic developments, including developments that impact specific economic
sectors, industries or segments of the market. A 3X Bull Fund typically would lose value on a day when its underlying index declines. A 3X Bear Fund typically would lose value on a day when its underlying index increases.
|
|
|
|
|
|
|
|
|
80
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
Rafferty expects a significant portion of the
assets of each Fund to come from professional money managers and investors who use the Funds as part of asset allocation and market timing investment strategies. These strategies often call for frequent trading to take
advantage of anticipated changes in market conditions. Frequent trading could increase the rate of the Funds portfolio turnover, which involves correspondingly greater expenses to a Fund, including brokerage commissions or dealer
mark-ups/mark-downs and other transaction costs on the sale of securities and reinvestments in other securities. Such sales also may result in adverse tax consequences to a Funds shareholders. The trading costs and tax effects associated with
portfolio turnover may adversely affect the Funds performance. In addition, large movements of assets into and out of the Funds may have a negative impact on their ability to achieve their investment objectives or their desired level of
operating expenses. The risks associated with market timing activity and high portfolio turnover will have a negative impact on longer-term investments.
Investment in securities of Mexican issuers involves risks that may be greater than if a Funds investments were more geographically
diverse. Mexicos economy is heavily dependent on trading with key partners. Any increases or decreases in the volume of this trading, changes in taxes or tariffs, or variance in political relationships between those nations may impact the
Mexican economy overall in a way that would be adverse to a Funds investments. Additionally, investment in Mexico may be subject to any positive or adverse effects of the varyingnature of its economic landscape with respect to expropriation
and/or nationalization of assets, strengthened or lessened restrictions on and government intervention in international trade, confiscatory taxation, political instability, including authoritarian and/or military involvement in governmental decision
making, armed conflict, the impact on the economy as a result of civil war and social instability as a result of religious, ethnic and/or socioeconomic unrest.
Mid Capitalization Company Risk
Certain Funds may invest in the securities of mid capitalization companies and securities which provide exposure to mid capitalization
companies. Such investment involves greater risks and the possibility of greater price volatility than investing in more established, larger capitalization companies. Mid capitalization companies often have narrower markets for their goods and/or
services and more limited managerial and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are dependent on a small management group.
In addition, because these stocks are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less publicly available information concerning
these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity of securities held by a Fund. As a result,
their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of a Funds portfolio.
Negative Implications of Daily Goals in Volatile Markets
Each Fund seeks to provide a return which is a multiple of the daily performance of its benchmark. No Fund attempts to, and no Fund should be
expected to, provide returns which are a multiple of the return of the benchmark for periods longer than a single trading day. Each Fund repositions its portfolio at the end of each trading day, increasing exposure in response to that days
gains or reducing exposure in response to that days losses. If adverse daily performance of a Funds target index reduces the amount of a shareholders investment, any further adverse daily performance will lead to a smaller dollar
loss because the shareholders investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of a Funds target index increases the amount of a shareholders investment, the
dollar amount lost due to future adverse performance will increase correspondingly.
Daily repositioning will impair a
Funds performance if the benchmark experiences volatility. For instance, a hypothetical 3X Bull Fund and 3X Bear Fund would be expected to lose 9.96% and 12.16%, respectively (as shown in Graphs 1 and 2 below) if their benchmark was flat over
a hypothetical one year period during which the benchmark experienced annualized volatility of 15%. If the benchmarks annualized volatility were to rise to 40%, the hypothetical loss for a one year period would widen to approximately 55.51%
for the 3X Bull Fund and 77.75% for the 3X Bear Fund (as illustrated in Graphs 3 and 4). An indexs volatility rate is a statistical measure of the magnitude of fluctuations in the returns of an index. Since market volatility, like that
experienced by the markets currently, has negative implications for Funds which rebalance daily, investors should be sure to monitor and manage their investments in the Funds in volatile markets.
The following graphs assume that the Funds perfectly achieve their investment objectives. To isolate the impact of leverage, these graphs
assume a) no dividends paid by the companies included on the index; b) no fund expenses; and
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
81
|
|
|
c) borrowing/lending rates (to obtain required leverage) of zero percent. If Fund expenses were included, the Funds performance would be lower than that shown.
Graph 1 Hypothetical 3X Bull Fund Performance with Low Volatility
Graph 2 Hypothetical -3X Bear Fund Performance with Low Volatility
Graph 3 Hypothetical 3X Bull Fund Performance with High Volatility
Graph 4 Hypothetical -3X Bear Fund Performance with High Volatility
Each Fund is non-diversified. A non-diversified fund invests a high percentage of its assets in a limited number of securities. A
non-diversified funds NAV and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Each Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Funds operate, increase the particular costs of the Funds operations and/or change the
competitive landscape. In particular, there is no guarantee that the Bear Funds will be permitted to continue to engage in short sales, which are designed to earn the Fund a profit from the decline of the price of a particular security, basket of
securities or index.
Risks of Investing in Other Investment Companies (including ETFs)
Investments in the securities of other investment companies, including ETFs, (which may, in turn invest in equities, bonds, and other
financial vehicles) may involve duplication of advisory fees and certain other expenses. By investing in another investment company or ETF, a Fund becomes a shareholder of that investment company or ETF. As a result, Fund shareholders indirectly
bear the Funds proportionate share of the fees and expenses indirectly paid by shareholders of the other investment company or ETF, in addition to the fees and expenses Fund shareholders bear in connection with the Funds own operations.
The Funds performance may be magnified positively or negatively by virtue of its investment in other investment companies. As a shareholder, the Fund must rely on the investment company or ETF to achieve its investment objective. If the
investment company or ETF fails to achieve its investment objective, the value of the Funds investment will decline, adversely affecting the Funds performance. In addition, because closed end investment companies and ETFs are listed on
|
|
|
|
|
|
|
|
|
82
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
national stock exchanges and are traded like stocks listed on an exchange, their shares potentially may trade at a discount or a premium. Investments in such shares are also subject to brokerage
and other trading costs, which could result in greater expenses to a Fund. Finally, because the value of ETF shares depends on the demand in the market, the Adviser may not be able to liquidate a Funds holdings at the most optimal time,
adversely affecting the Funds performance.
Each 3X Bear Fund may engage in short sales designed to earn the 3X Bear Fund a profit from the decline in the price of particular securities, baskets of securities or indices. Short sales are transactions
in which a 3X Bear Fund borrows securities from a broker and sells the borrowed securities. The 3X Bear Fund is obligated to replace the security borrowed by purchasing the security at the market price at the time of replacement. If the market price
of the underlying security goes down between the time the 3X Bear Fund sells the security and buys it back, the 3X Bear Fund will realize a gain on the transaction. Conversely, if the underlying security goes up in price during the period, the 3X
Bear Fund will realize a loss on the transaction. Any such loss is increased by the amount of premium or interest the Fund must pay to the lender of the security. Likewise, any gain will be decreased by the amount of premium or interest the 3X Bear
Fund must pay to the lender of the security. The 3X Bear Funds investment performance may also suffer if the 3X Bear Fund is required to close out a short position earlier than it had intended. This would occur if the securities lender
required the 3X Bear Fund to deliver the securities the 3X Bear Fund borrowed at the commencement of the short sale and the 3X Bear Fund was unable to borrow the securities from another securities lender or otherwise obtain the security by other
means. In addition, a 3X Bear Fund may be subject to expenses related to short sales that are not typically associated with investing in securities directly, such as costs of borrowing and margin account maintenance costs associated with the 3X Bear
Funds open short positions. As the holder of a short position, a 3X Bear Fund also is responsible for paying the dividends and interest accruing on the short position, which is an expense to the 3X Bear Fund that could cause the 3X Bear Fund
to lose money on the short sale and may adversely affect its performance.
Small and/or Mid Capitalization Company Risk
Certain Funds may invest in the securities of small and/or mid capitalization companies and securities which provide exposure to small and/or
mid capitalization companies. Such investment involves greater risks and the possibility of greater price volatility than investing in more established, larger capitalization companies. Small and mid capitalization companies often have narrower
markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are
dependent on a small management group. In addition, because these stocks are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less
publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity
of securities held by a Fund. As a result, their performance can be more volatile and they face greater risk of business failure, which could increase the volatility of a Funds portfolio.
Tax and Distribution Risk
The Funds have extremely high portfolio turnover which causes the Funds to generate significant amounts of taxable income. This income is
typically short-term capital gain, which is generally treated as ordinary income when distributed to shareholders, or short-term capital loss. The Funds rarely generate long-term capital gain or loss. Each Fund will generally need to distribute net
short-term capital gain to satisfy certain tax requirements. As a result of the Funds high portfolio turnover, the Funds could make larger and/or more frequent distributions than traditional unleveraged ETFs. Because each Funds asset
level changes frequently, these distributions could comprise a substantial portion or even all of a Funds net assets if a Fund distributes this income after a decline in its net assets. In addition, a Fund may be held by short-term investors
and these investors may exit a Fund prior to the record date of a distribution. As a result, shareholders in the Funds on the day of a distribution may receive substantial distributions, which could lead to negative tax implications for such
shareholders. Potential investors are urged to consult their own tax advisers for more detailed information.
Rules governing the
federal income tax aspects of certain derivatives, including total return equity swaps, real estate-related swaps, credit default swaps and other credit derivatives are not entirely clear. Because the Funds status as a regulated investment
company might be affected if the Internal Revenue Service did not accept the Funds treatment of certain transactions involving derivatives, the Funds ability to engage in these transactions may be limited.
Several factors may affect a Funds ability to achieve its daily target. A Fund may have difficulty achieving its daily target due to
fees and expenses, high portfolio turnover,
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
83
|
|
|
transaction costs, and/or a temporary lack of liquidity in the markets for the securities held by a Fund. A failure to achieve a daily target may cause a Fund to provide returns for a longer
period that are worse than expected. In addition, a Fund that meets its daily target for a period of time may not necessarily produce the returns that might be expected in light of the returns of its index or benchmark for that period.
Each Fund values its portfolio as of the close of regular trading on the New York Stock Exchange (NYSE) (generally 4:00 P.M. Eastern time). In some cases, foreign market indices close before the
NYSE opens or may not be open for business on the same calendar days as the Funds. As a result, the daily performance of a Fund that tracks a foreign market index can vary from the performance of that index.
Trading Issues
. Trading in Shares on the Exchange may be halted due to market conditions or for reasons that, in the view of the
Exchange, make trading in Shares inadvisable, such as extraordinary market volatility or other reasons. There can be no assurance that Shares will continue to meet the listing requirements of the Exchange, and the listing requirements may be amended
from time to time.
Market Price Variance Risk
. Individual Shares of a Fund that are listed for trading on the Exchange
can be bought and sold in the secondary market at market prices. The market prices of Shares will fluctuate in response to changes in NAV and supply and demand for Shares. The Adviser cannot predict whether Shares will trade above, below or at their
NAV. Differences between secondary market prices and NAV for Shares may be due largely to supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for securities or instruments held by a Fund at
a particular time. Given the fact that Shares can be created and redeemed in Creation Units, the Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and
the NAV vary significantly and you may pay more than NAV when buying Shares on the secondary market, and you may receive less than NAV when you sell those Shares. The market price of Shares, like the price of any exchange-traded security, includes a
bid-ask spread charged by the exchange specialists, 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 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. A Funds investment results are measured based upon the daily
NAV of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent with those experienced by those creating and redeeming directly with a Fund. There is no
guarantee that an active secondary market will develop for Shares of the Funds.
A Precautionary Note to Retail Investors
.
The Depository Trust Company (DTC), a limited trust company and securities depositary that serves as a national clearinghouse for the settlement of trades for its participating banks and broker-dealers, or its nominee will be the
registered owner of all outstanding Shares of each Fund of the Trust. Your ownership of Shares will be shown on the records of DTC and the DTC Participant broker through whom you hold the Shares. THE TRUST WILL NOT HAVE ANY RECORD OF YOUR OWNERSHIP.
Your account information will be maintained by your broker, who will provide you with account statements, confirmations of your purchases and sales of Shares, and tax information. Your broker also will be responsible for ensuring that you receive
shareholder reports and other communications from the Fund whose Shares you own. Typically, you will receive other services (
e.g.
, average basis information) only if your broker offers these services.
A Precautionary Note to Purchasers of Creation Units
. You should be aware of certain legal risks unique to investors purchasing
Creation Units directly from the issuing Fund. Because new Shares may be issued on an ongoing basis, a distribution of Shares could be occurring at any time. As a dealer, certain activities on your part could, depending on the
circumstances, result in your being deemed a participant in the distribution, in a manner that could render you a statutory underwriter and subject you to the prospectus delivery and liability provisions of the Securities Act of 1933, as amended
(Securities Act). For example, you could be deemed a statutory underwriter if you purchase Creation Units from an issuing Fund, break them down into the constituent Shares and sell those Shares directly to customers, or if you choose to
couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for Shares. Whether a person is an underwriter depends upon all of the facts and circumstances pertaining to that
persons activities, and the examples mentioned here should not be considered a complete description of all the activities that could cause you to be deemed an underwriter. Dealers who are not underwriters, but are participating in
a distribution (as opposed to engaging in ordinary secondary market transactions), and thus dealing with Shares as part of an unsold allotment within the meaning of Section 4(3)(C) of the Securities Act, will be unable to take
advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act.
|
|
|
|
|
|
|
|
|
84
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
A Precautionary Note to Investment Companies
. For purposes of the Investment Company
Act of 1940, as amended (1940 Act) each Fund is a registered investment company, and the acquisition of Shares by other investment companies is subject to the restrictions of Section 12(d)(1) thereof.
The Trust and the Funds have obtained an exemptive order from the U.S. Securities and Exchange Commission (the SEC) allowing a
registered investment company to invest in a Fund beyond the limits of Section 12(d)(1) subject to certain conditions, including that a registered investment company enters into a Participation Agreement with the Trust regarding the terms of
the investment. Any investment company considering purchasing Shares of a Fund in amounts that would cause it to exceed the restrictions under Section 12(d)(1) should contact the Trust.
A Precautionary Note Regarding Unusual Circumstances
. The Trust can postpone payment of redemption proceeds for any period during
which (1) the Exchange is closed other than customary weekend and holiday closings, (2) trading on the Exchange is restricted, as determined by the SEC, (3) any emergency circumstances exist, as determined by the SEC, or (4) the
SEC by order permits for the protection of shareholders of a Fund.
UNDERLYING INDEX LICENSORS
The Funds are not sponsored, endorsed, sold or promoted by Morgan Stanley Capital International Inc. (MSCI), any of its affiliates, any of its information providers or any other third party
involved in, or related to, compiling, computing or creating any MSCI Index (collectively, the MSCI Parties). The MSCI Indexes are the exclusive property of MSCI. MSCI and the MSCI Index names are service marks of MSCI or its affiliates
and have been licensed for use for certain purposes by the Trust. None of the MSCI Parties makes any representation or warranty, express or implied, to the issuer or shareholders of these Funds or any other person or entity regarding the
advisability of investing in Funds generally or in these Funds particularly or the ability of any MSCI Index to track corresponding stock market performance. MSCI or its affiliates are the licensors of certain trademarks, service marks and trade
names and of the MSCI Indexes which are determined, composed and calculated by MSCI without regard to the Funds or the issuer or shareholders of the Funds or any other person or entity into consideration in determining, composing or calculating the
MSCI Indexes. None of the MSCI Parties is responsible for or has participated in the determination of the timing of, prices at, or quantities of these Funds to be issued or in the determination or calculation of the equation by or the consideration
into which these Funds are redeemable. Further, none of the MSCI Parties has any obligation or liability to the issuer or owners of these Funds or any other person or entity in connection with the administration, marketing or offering of these
Funds.
Although MSCI shall obtain information for inclusion in or for use in the calculation of the MSCI Indexes from sources
that MSCI considers reliable, none of the MSCI Parties warrants or guarantees the originality, accuracy and/or the completeness of any MSCI Index or any data included therein. None of the MSCI Parties makes any warranty, express or implied, as to
results to be obtained by the issuer of the Funds, shareholders of the Funds, or any other person or entity, from the use of any MSCI Index or any data included therein. None of the MSCI Parties shall have any liability for any errors, omissions or
interruptions of or in connection with any MSCI Index or any data included therein. Further, none of the MSCI Index or any data included therein. Further, none of the MSCI Parties makes any express or implied warranties of any kind, and the MSCI
Parties hereby expressly disclaim all warranties of merchantability and fitness for a particular purpose, with respect to each MSCI Index and any data included therein. Without limiting any of the foregoing, in no event shall any of the MSCI Parties
have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No purchaser, seller or holder of this security, product or fund, or any
other person or entity, should use or refer to any MSCI trade name, trademark or service mark to sponsor, endorse, market or promote this security without first contacting MSCI to determine whether MSCIs permission is required. Under no
circumstances may any person or entity claim any affiliation with MSCI without the prior written permission of MSCI.
HOW TO BUY AND SELL SHARES
Each Fund issues and redeems Shares only in large blocks of Shares
called Creation Units.
Most investors will buy and sell Shares of each Fund in secondary market transactions through
brokers. Shares of each Fund that are listed for trading on the secondary market on the Exchange can be bought and sold throughout the trading day like other publicly traded shares. There is no minimum investment. Although Shares are generally
purchased and sold in round lots of 50,000 Shares,
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
85
|
|
|
brokerage firms typically permit investors to purchase or sell Shares in smaller oddlots at no per-share price differential.
When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges, and you may pay some or all of
the spread between the bid and the offer price in the secondary market on each leg of a round trip (purchase and sale) transaction. In addition, because secondary market transactions occur at market prices, you may pay more than NAV when you buy
Shares, and receive less than NAV when you sell those Shares.
The Funds Exchange trading symbols are as follows:
|
|
|
|
|
Fund
|
|
Symbol
|
|
Direxion Daily Chile Bull 3X Shares
|
|
|
|
|
Direxion Daily Chile Bear 3X Shares
|
|
|
|
|
Direxion Daily Hong Kong Bull 3X Shares
|
|
|
|
|
Direxion Daily Hong Kong Bear 3X Shares
|
|
|
|
|
Direxion Daily Japan Bull 3X Shares
|
|
|
JPNL
|
|
Direxion Daily Japan Bear 3X Shares
|
|
|
JPNS
|
|
Direxion Daily Mexico Bull 3X Shares
|
|
|
|
|
Direxion Daily Mexico Bear 3X Shares
|
|
|
|
|
Share prices are reported in dollars and cents per Share.
Investors may acquire Shares directly from each Fund, and shareholders may tender their Shares for redemption directly to each Fund, only in
Creation Units, as discussed in the Creations, Redemptions and Transaction Fees section below. A Creation Unit consists of 50,000 Shares.
For information about acquiring Shares through a secondary market purchase, please contact your broker. If you wish to sell Shares of a Fund on the secondary market, you must do so through your broker.
Book Entry. Shares are held in book-entry form, which means that no stock certificates are issued. The DTC or its nominee is the
record owner of all outstanding Shares of the Funds and is recognized as the owner of all Shares for all purposes.
Investors
owning Shares are beneficial owners as shown on the records of the DTC or its participants. DTC serves as the securities depository for all Shares. Participants in the DTC include securities brokers and dealers, banks, trust companies, clearing
corporations and other institutions that directly or indirectly maintain a custodial relationship with DTC. As a beneficial owner of Shares, you are not entitled to receive physical delivery of stock certificates or to have Shares registered in your
name, and you are not considered a registered owner of Shares. Therefore, to exercise any right as an owner of Shares, you must rely upon the procedures of DTC and its participants. These procedures are the same as those that apply to any other
stocks that you hold in book entry or street name through your brokerage account.
ABOUT YOUR INVESTMENT
A Funds share price is known as its NAV. Each Fund calculates its NAV as of the close of regular trading on the NYSE, usually 4:00 p.m.
Eastern Time, each day the NYSE is open for business (Business Day.) The NYSE is open every week, Monday through Friday, except when the following holidays are celebrated: New Years Day, Martin Luther King, Jr. Day (the third
Monday in January), Presidents Day (the third Monday in February), Good Friday, Memorial Day (the last Monday in May), July 4th, Labor Day (the first Monday in September), Thanksgiving Day (the fourth Thursday in November) and Christmas
Day. The NYSE may close early on the Business Day before each of these holidays and on the day after Thanksgiving Day. NYSE holiday schedules are subject to change without notice.
If the exchange or market on which a Funds investments are primarily traded closes early, the NAV may be calculated prior to its
normal calculation time. Creation/redemption transaction order time cutoffs would also be accelerated. The value of a Funds assets that trade in markets outside the United States or in currencies other than the U.S. dollar may fluctuate when
foreign markets are open but the Funds are not open for business.
Share price is calculated by dividing a Funds net assets by its shares outstanding. In calculating its NAV, each Fund generally values its assets on the basis of market quotations, last sale prices, or
estimates of value furnished by a pricing service or brokers who make markets in such instruments. If such information is not available for a security held by the Fund, is determined to be unreliable, or (to the Advisers knowledge) does not
reflect a significant event occurring after the close of the market on which the security principally trades (but before the close of trading on the NYSE), the security will be valued at fair value estimates by the Adviser under guidelines
established by the Board of Trustees. Foreign securities, currencies and other assets denominated in foreign currencies are translated into U.S. dollars at the exchange rate of such currencies against the U.S. Dollar, as provided by an
independent pricing service or reporting agency. The Funds also rely on a pricing service in circumstances where the U.S. securities markets exceed a pre-determined threshold to value foreign securities held in the Funds portfolio. The pricing
service, its methodology or the threshold may change from time to time. Debt obligations with maturities of 60 days or less are valued at amortized cost.
Fair Value Pricing.
Securities are priced at a fair value as determined by the Adviser, under the oversight of the Board
|
|
|
|
|
|
|
|
|
86
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
of Trustees, when reliable market quotations are not readily available, the Funds pricing service does not provide a valuation for such securities, the Funds pricing service provides
a valuation that in the judgment of the Adviser does not represent fair value, the Adviser believes that the market price is stale, or an event that affects the value of an instrument (a Significant Event) has occurred since closing
prices were established, but before the time as of which the Funds calculate their NAVs. Examples of Significant Events may include: (1) events that relate to a single issuer or to an entire market sector; (2) significant fluctuations in
domestic or foreign markets; or (3) occurrences not tied directly to the securities markets, such as natural disasters, armed conflicts, or significant government actions. If such Significant Events occur, the Funds may value the instruments at
fair value, taking into account such events when it calculates each Funds NAV. Fair value determinations are made in good faith in accordance with procedures adopted by the Board of Trustees. In addition, the Funds may also fair value an
instrument if trading in a particular instrument is halted and does not resume prior to the closing of the exchange or other market.
Attempts to determine the fair value of securities introduce an element of subjectivity to the pricing of securities. As a result, the price of a security determined through fair valuation techniques may
differ from the price quoted or published by other sources and may not accurately reflect the market value of the security when trading resumes. If a reliable market quotation becomes available for a security formerly valued through fair valuation
techniques, Rafferty compares the market quotation to the fair value price to evaluate the effectiveness of the Funds fair valuation procedures and will use that market value in the next calculation of NAV.
The Board of Trustees of the Trust has adopted a Distribution and Service Plan (the Plan) pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Plan, each Fund is authorized to pay an
amount up to 0.25% of its average daily net assets each year for certain distribution-related activities and shareholder services.
No 12b-1 fees are currently paid by any Fund, and there are no plans to impose these fees. However, in the event 12b-1 fees are charged in
the future, because the fees are paid out of each Funds assets, over time these fees will increase the cost of your investment and may cost you more than certain other types of sales charges.
SHORT-TERM TRADING
Rafferty expects a significant portion of the Funds
assets to come from professional money managers and investors who use the Funds as part of asset allocation and market timing investment strategies. These strategies often call for frequent trading to take advantage of
anticipated changes in market conditions. Frequent trading of Fund Shares could increase the rate of creations and redemptions of Fund Shares and the Funds portfolio turnover, which could involve correspondingly adverse tax consequences to a
Funds shareholders. Although the Funds reserve the right to reject any purchase orders or suspend the offering of Shares, the Funds do not currently impose any trading restrictions on frequent trading nor actively monitor for trading abuses.
CREATIONS,
REDEMPTIONS AND TRANSACTION FEES
Creation Units.
Investors such as market makers, large investors and institutions who wish to deal in Creation Units directly with a Fund must have entered into an authorized participant agreement with the principal underwriter and the transfer agent, or purchase
through a dealer that has entered into such an agreement. These investors are known as Authorized Participants. Set forth below is a brief description of the procedures applicable to the purchase and redemption of Creation Units.
Purchase of 3X Bull Funds.
To purchase Creation Units directly from a 3X Bull Fund, you must deposit with the Fund a
basket of securities and/or cash. Each Business Day, prior to the opening of trading on the Exchange, an agent of the Fund (Index Receipt Agent) will make available through the NSCC a list of the names and number of shares of each
security, if any, to be included in that days creation basket (Deposit Securities). The identity and number of shares of the Deposit Securities required for a Creation Unit will change from time to time. Each 3X Bull Fund reserves
the right to permit or require the substitution of an amount of cash
i.e.
, a cash in lieu amount to be added to the Balancing Amount (defined below) to replace any Deposit Security that may not be available in
sufficient quantity for delivery, eligible for transfer through the clearing process (discussed below) or the Federal Reserve System or eligible for trading by an Authorized Participant or the investor for which it is acting. For such custom orders,
cash in lieu may be added to the Balancing Amount (defined below). The Balancing Amount and any cash in lieu must be paid to the
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
87
|
|
|
Trust on or before the third Business Day following the Transmittal Date. You must also pay a Transaction Fee, described below, in cash.
In addition to the in-kind deposit of securities, Authorized Participants will either pay to, or receive from, a 3X Bull Fund an amount of
cash referred to as the Balancing Amount. The Balancing Amount is the amount equal to the differential, if any, between the market value of the Deposit Securities and the NAV of a Creation Unit. The Fund will publish, on a daily basis,
information about the previous days Balancing Amount. The Balancing Amount may, at times, represent a significant portion of the aggregate purchase price (or, in the case of redemptions, the redemption proceeds). This is because the
mark-to-market value of the financial instruments held by the Funds will be included in the Balancing Amount (not in the Deposit Basket or Redemption Basket). The Balancing Amount for the 3X Bull Funds may fluctuate significantly due to the
leveraged nature of the 3X Bull Funds.
All purchase orders for Creation Units must be placed by or through an Authorized
Participant. Purchase orders will be processed either through a manual clearing process run at the DTC (Manual Clearing Process) or through an enhanced clearing process (Enhanced Clearing Process) that is available only to
those DTC participants that also are participants in the Continuous Net Settlement System of the National Securities Clearing Corporation (NSCC). Authorized Participants that do not use the Enhanced Clearing Process will be charged a
higher Transaction Fee (discussed below). A purchase order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agents automated system, telephone, facsimile or
other means permitted under the Participant Agreement, in order to receive that days NAV per Share. All other procedures set forth in the Participant Agreement must be followed in order for you to receive the NAV determined on that day.
Shares may be issued in advance of receipt of Deposit Securities subject to various conditions including a requirement to
maintain on deposit with the Trust cash in an amount up to 115% of the market value of the missing Deposit Securities. Any such transaction effected with the Trust must be effected using the Manual Clearing Process consistent with the terms of the
Authorized Participant Agreement.
Purchase of 3X Bear Funds.
The 3X Bear Funds only accept cash to purchase Creation
Units. The purchaser must transfer cash in an amount equal to the value of the Creation Unit(s) purchased and the applicable Transaction Fee. All purchase orders will be processed through the Manual Clearing Process. The Trust will deliver Shares of
the 3X Bear Funds upon payment of cash to the Trust on or before the third Business Day following the Transmittal Date consistent with the terms of the Authorized Participant Agreement.
Redemption from a 3X Bull Fund.
Redemption proceeds will be paid either in cash or in-kind with a basket of securities
(Redemption Securities). In most cases, Redemption Securities will be the same as Deposit Securities on a given day. There will be times, however, when the Deposit and Redemption Securities differ. The composition of the Redemption
Securities will be available through the NSCC. Each Fund reserves the right to honor a redemption request with a non-conforming redemption basket.
If the value of a Creation Unit is higher than the value of the Redemption Securities, you will receive from the Fund a Balancing Amount in cash. If the value of a Creation Unit is lower than the value of
the Redemption Securities, you will be required to pay to the Fund a Balancing Amount in cash. If you are receiving a Balancing Amount, the amount due will be reduced by the amount of the applicable Transaction Fee.
As with purchases, redemptions may be processed either through the Manual Clearing Process or the Enhanced Clearing Process. A redemption
order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agents automated system, telephone, facsimile or other means permitted under the Participant Agreement, in
order to receive that days NAV per Share. All other procedures set forth in the Participant Agreement must be followed in order for you to receive the NAV determined on that day.
An investor may request a redemption in cash, which a 3X Bull Fund may in its sole discretion permit. Investors that elect to receive cash
in lieu of one or more of the Redemption Securities are subject to an additional charge. Redemptions of Creation Units for cash (when available) and/or outside of the Enhanced Clearing Process also require the payment of an additional charge.
Redemption from 3X Bear Funds.
Redemption proceeds will be paid in cash. As with purchases, redemptions may be processed
either through the Manual Clearing Process or the Enhanced Clearing Process. A redemption order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agents automated
system, telephone, facsimile or other means permitted under the Participant Agreement in order to receive that days NAV per Share. All other procedures set forth in the Participant Agreement must be followed in order for you to receive the NAV
determined on that day.
|
|
|
|
|
|
|
|
|
88
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
Transaction Fees on Creation and Redemption Transactions.
Each Fund will impose
Transaction Fees to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units. There is a fixed and a variable component to the total Transaction Fee on transactions in Creation Units. A fixed
Transaction Fee is applicable to each creation and redemption transaction, regardless of the number of Creation Units transacted. A variable Transaction Fee based upon the value of each Creation Unit also is applicable to each redemption
transaction. Purchasers and redeemers of Creation Units of the Funds effected through the Manual Clearing Process are required to pay an additional charge to compensate for brokerage and other expenses. In addition, purchasers of Creation Units are
responsible for payment of the costs of transferring the Deposit Securities to the Trust. However, in no instance will the fees charged exceed 2% of the value of the Creation Units subject to the transaction. Redeemers of Creation Units are
responsible for the costs of transferring securities from the Trust. Investors who use the services of a broker or other such intermediary may pay additional fees for such services. In addition, Rafferty may, from time to time, at its own expense,
compensate purchasers of Creation Units who have purchased substantial amounts of Creation Units and other financial institutions for administrative or marketing services.
The table on the next page summarizes the components of the Transaction
Fees.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Transaction Fee
|
|
|
Maximum
Additional
Charge
for
Purchases
and
Redemptions*
|
|
|
|
|
|
In-Kind
|
|
Cash
|
|
|
Direxion Shares ETF Trust
|
|
NSCC
|
|
|
Outside NSCC
|
|
Outside
NSCC
|
|
|
Direxion Daily Chile Bull 3X Shares
|
|
|
$250
|
|
|
Up to 300% of NSCC Amount
|
|
|
$250
|
|
|
Up to 0.50%
|
Direxion Daily Chile Bear 3X Shares
|
|
|
N/A
|
|
|
N/A
|
|
|
$250
|
|
|
Up to 0.50%
|
Direxion Daily Hong Kong Bull 3X Shares
|
|
|
$250
|
|
|
Up to 300% of NSCC Amount
|
|
|
$250
|
|
|
Up to 0.50%
|
Direxion Daily Hong Kong Bear 3X Shares
|
|
|
N/A
|
|
|
N/A
|
|
|
$250
|
|
|
Up to 0.50%
|
Direxion Daily Japan Bull 3X Shares
|
|
|
$250
|
|
|
Up to 300% of NSCC Amount
|
|
|
$250
|
|
|
Up to 0.50%
|
Direxion Daily Japan Bear 3X Shares
|
|
|
N/A
|
|
|
N/A
|
|
|
$250
|
|
|
Up to 0.50%
|
Direxion Daily Mexico Bull 3X Shares
|
|
|
$250
|
|
|
Up to 300% of NSCC Amount
|
|
|
$250
|
|
|
Up to 0.50%
|
Direxion Daily Mexico Bear 3X Shares
|
|
|
N/A
|
|
|
N/A
|
|
|
$250
|
|
|
Up to 0.50%
|
|
*
|
|
As a percentage of the amount invested.
|
MANAGEMENT OF THE FUNDS
Rafferty provides investment management services to the Funds. Rafferty has been managing investment companies since 1997. Rafferty is located at 1301 Avenue of the Americas (6th Avenue), 35th Floor, New
York, New York 10019. As of March 31, 2013, the Adviser had approximately $6.5 billion in assets under management.
Under an investment advisory agreement between the Trust and Rafferty, the Funds pay Rafferty the following fees at an annualized rate based
on a percentage of the Funds daily net assets.
|
|
|
|
|
|
|
Advisory Fees Charged
|
|
All Funds
|
|
|
0.75%
|
|
Rafferty has entered into an Operating Expense Limitation Agreement with each Fund. Under this Operating
Expense Limitation Agreement, Rafferty, has contractually agreed to cap all or a portion of its management fee and/or reimburse the Fund for Other Expenses through March 1, 2015, to the extent that each Funds Total Annual Operating
Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, Acquired Fund Fees and Expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in
connection with any merger or reorganization and extraordinary expenses such as litigation). Any expense cap is subject to reimbursement by a Fund only within the following three years only if overall expenses fall below these percentage
limitations. This agreement may be terminated or revised at any time with the consent of the Board of Trustees.
A
discussion regarding the basis on which the Board of Trustees approved the investment advisory agreements for the Funds will be available in the Trusts annual report to shareholders for the fiscal year ended October 31, 2013.
An investment team of Rafferty employees has the day-to-day responsibility for managing the Funds. The investment team generally decides the
target allocation of each Funds investments and on a day-to-day basis, an individual portfolio manager executes transactions for the Funds consistent with the target allocation. The portfolio managers rotate among the Funds periodically so
that no single portfolio manager is responsible for a specific Fund for
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
89
|
|
|
extended periods of time. Paul Brigandi, each Funds Portfolio Manager, is primarily responsible for the day-to-day management of the Funds.
Mr. Brigandi has been a Portfolio Manager at Rafferty since June 2004. Mr. Brigandi was previously involved in the equity trading
training program for Fleet Boston Financial Corporation from August 2002 to April 2004. Mr. Brigandi is a 2002 graduate of Fordham University.
The Funds SAI provides additional information about the investment team members compensation, other accounts they manage and their ownership of securities in the Funds.
PORTFOLIO HOLDINGS
A description of the Funds policies and procedures
with respect to the disclosure of the Funds portfolio securities is available in the Funds SAI.
OTHER SERVICE PROVIDERS
Foreside Fund Services, LLC (Distributor) serves as the
Funds distributor. U.S. Bancorp Fund Services, LLC serves as the Funds administrator. Bank of New York Mellon serves as the Funds transfer agent, custodian and index receipt agent. The Distributor is not affiliated with the
Adviser, Rafferty or the Funds transfer agent.
PAYMENTS BY RAFFERTY
Rafferty may, from time to time, at its own expense, compensate purchasers of Creation Units who have purchased substantial amounts of Creation Units and other financial institutions for administrative or
marketing services. These payments may be made from profits received by Rafferty from management fees paid to Rafferty by the Funds. Such activities by Rafferty may provide incentives to financial institutions to purchase or market shares of the
Funds. Additionally, these activities may give Rafferty additional access to sales representatives of such financial institutions, which may increase sales of a Funds shares.
DISTRIBUTIONS
Fund Distributions.
Each Fund pays out dividends from its net
investment income, and distributes any net capital gains, if any, to its shareholders at least annually. Each Fund is authorized to declare and pay capital gain distributions in additional Shares thereof or in cash. The Funds have extremely high
portfolio turnover, which may cause them to generate significant amounts of taxable income. The Funds will generally need to distribute net short-term capital gain to satisfy certain tax requirements. Because of the Funds high portfolio
turnover, they could need to make larger and/or more frequent distributions than traditional unleveraged ETF.
Dividend
Reinvestment Service.
Brokers may make the DTC book-entry dividend reinvestment service (Reinvestment Service) available to their customers who are shareholders of a Fund. If the Reinvestment Service is used with respect to a Fund,
its distributions of both net income and capital gains will automatically be reinvested in additional and fractional Shares thereof purchased in the secondary market. Without the Reinvestment Service, investors will receive Fund distributions in
cash, except as noted above under Fund Distributions. To determine whether the Reinvestment Service is available and whether there is a commission or other charge for using the service, consult your broker. Fund shareholders should be
aware that brokers may require them to adhere to specific procedures and timetables to use the Reinvestment Service.
TAXES
As with any investment, you should consider the tax consequences of buying, holding, and disposing of Shares. The tax information in this
Prospectus is only a general summary of some important federal tax considerations generally affecting the Funds and their shareholders. No attempt is made to present a complete explanation of the
|
|
|
|
|
|
|
|
|
90
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
federal tax treatment of the Funds activities, and this discussion is not intended as a substitute for careful tax planning. Accordingly, potential investors are urged to consult their own
tax advisers for more detailed information and for information regarding any state, local, or foreign taxes applicable to the Funds and to an investment in Shares.
Fund distributions to you and your sale of your Shares will have tax consequences to you unless you hold your Shares through a tax-exempt entity or tax-deferred retirement arrangement, such as an individual
retirement account or 401(k) plan.
Each Fund intends to qualify or to continue to qualify each taxable year for taxation as a
regulated investment company. If a Fund so qualifies and satisfies certain distribution requirements, the Fund will not be subject to federal income tax on income that is distributed in a timely manner to its shareholders in the form of
income dividends or capital gain distributions.
Taxes on Distributions.
Dividends from a Funds investment
company taxable income generally, the sum of net investment income, the excess of net short-term capital gain over net long-term capital loss, and net gains and losses from certain foreign currency transactions, if any, all determined without
regard to any deduction for dividends paid will be taxable to you as ordinary income to the extent of its earnings and profits, whether they are paid in cash or reinvested in additional Shares. However, dividends a Fund pays to you that are
attributable to its qualified dividend income (
i.e.,
dividends it receives on stock of most domestic and certain foreign corporations with respect to which it satisfies certain holding period and other restrictions) generally will
be taxed to you, if you are an individual, trust, or estate and satisfy those restrictions with respect to your Shares, for federal income tax purposes, at the rates of 15% for a single shareholder with taxable income not exceeding $400,000
($450,000 for married shareholders filing jointly) and 20% for other such shareholders with taxable income exceeding those respective amounts. A portion of a Funds dividends also may be eligible for the dividends-received deduction allowed to
corporations the eligible portion may not exceed the aggregate dividends the Fund receives from domestic corporations subject to federal income tax (excluding real estate investment trusts) and excludes dividends from foreign corporations
subject to similar restrictions; however, dividends a corporate shareholder deducts pursuant to that deduction are subject indirectly to the federal alternative minimum tax. None of the Funds expects to earn a significant amount of income
that would qualify for those maximum rates or that deduction.
Distributions of a Funds net capital gain (which is the
excess of net long-term capital gain over net short-term capital loss) that it recognizes on sales or exchanges of capital assets will be taxable to you as long-term capital gains, at the maximum rates mentioned above if you are an individual,
trust, or estate, regardless of your holding period for the Shares on which the distributions are paid and regardless of whether they are paid in cash or reinvested in additional Shares. A Funds capital gain distributions may vary considerably
from one year to the next as a result of its investment activities and cash flows and the performance of the markets in which it invests.
Distributions in excess of a Funds current and accumulated earnings and profits first will reduce your adjusted tax basis in your Shares in that Fund and, after that basis is reduced to zero, will
constitute capital gain. That capital gain will be long-term capital gain, and thus will be taxed at the maximum rates mentioned above if you are an individual, trust, or estate if the distributions are attributable to Shares you held for more than
one year.
Investors should be aware that the price of Shares at any time may reflect the amount of a forthcoming dividend or
capital gain distribution, so if they purchase Shares shortly before the record date for an income dividend or capital gain distribution, they will pay full price for the Shares and receive some part of the purchase price back as a taxable
distribution even though it represents a partial return of invested capital.
In general, distributions are subject to federal
income tax for the year when they are paid. However, certain distributions paid in January may be treated as paid on December 31 of the prior year.
Because of high portfolio turnover, the Funds may generate significant amounts of taxable income. Accordingly, the Funds may need to make larger and/or more frequent distributions than traditional
unleveraged ETFs. A substantial portion of that income typically will be short-term capital gain, which will generally be treated as ordinary income when distributed to shareholders.
Fund distributions to tax-deferred or qualified plans, such as an IRA, retirement plan or pension plan, generally will not be taxable.
However, distributions from such plans will be taxable to the individual participant notwithstanding the character of the income earned by the qualified plan. Please consult a tax adviser for a more complete explanation of the federal, state, local
and foreign tax consequences of investing in a Fund through such a plan.
Taxes When Shares are Sold.
Generally, you will
recognize taxable gain or loss if you sell or otherwise dispose of your Shares. Any gain arising from such a disposition generally will be treated as long-term capital gain if you held the Shares for more than one year, taxable at the maximum
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
91
|
|
|
rates mentioned above if you are an individual, trust, or estate; otherwise, the gain will be treated as short-term capital gain. However, any capital loss arising from the disposition of Shares
held for six months or less will be treated as long-term capital loss to the extent of capital gain distributions received with respect to those Shares. In addition, all or a portion of any loss recognized on a sale or exchange of Shares will be
disallowed to the extent other Shares of the same Fund are purchased (whether through reinvestment of distributions or otherwise) within a period of 61 days beginning 30 days before and ending 30 days after the date of the sale or exchange; in that
event, the basis in the newly purchased Shares will be adjusted to reflect the disallowed loss.
Holders of Creation
Units.
A person who purchases Shares of a 3X Bull Fund by exchanging securities for a Creation Unit generally will recognize capital gain or loss equal to the difference between the market value of the Creation Unit and the persons
aggregate basis in the exchanged securities, adjusted for any Balancing Amount paid or received. A shareholder who redeems a Creation Unit generally will recognize gain or loss to the same extent and in the same manner as described above under
Taxes When Shares are Sold.
Miscellaneous.
Backup Withholding.
A Fund must withhold and remit to the
U.S. Treasury 28% of dividends and capital gain distributions otherwise payable to any individual or certain other non-corporate shareholder who fails to certify that the social security or other taxpayer identification number furnished to the Fund
is correct or who furnishes an incorrect number (together with the withholding described in the next sentence, backup withholding). Withholding at that rate also is required from a Funds dividends and capital gain distributions
otherwise payable to such a shareholder who is subject to backup withholding for any other reason. Backup withholding is not an additional tax, and any amounts so withheld may be credited against a shareholders federal income tax liability or
refunded.
Additional Tax
. For taxable years beginning after December 31, 2012, an individual must pay a 3.8% federal
tax on the lesser of (1) the individuals net investment income, which generally includes dividends, interest, and net gains from the disposition of investment property (including dividends and capital gain distributions a Fund
pays), or (2) the excess of the individuals modified adjusted gross income over a threshold amount ($250,000 for married persons filing jointly and $200,000 for single taxpayers). This tax is in addition to any other taxes due
on that income. A similar tax will apply for those years to estates and trusts. Shareholders should consult their own tax advisers regarding the effect, if any, this provision may have on their investment in Fund shares.
Basis Determination
. A shareholder who wants to use the average basis method for determining basis in Shares he or she acquires after
December 31, 2011 (Covered Shares), must elect to do so in writing (which may be electronic) with the broker through which he or she purchased the Shares. A shareholder who wishes to use a different IRS-acceptable method for basis
determination (
e.g.
, a specific identification method) may elect to do so. Fund shareholders are urged to consult with their brokers regarding the application of the basis determination rules to them.
You may also be subject to state and local taxes on Fund distributions and dispositions of Shares.
Non-U.S. Shareholders. A non-U.S. shareholder is an investor that, for federal tax purposes, is a nonresident alien
individual, a foreign corporation or a foreign estate or trust. Except where discussed otherwise, the following disclosure assumes that a non-U.S. shareholders ownership of Shares in a Fund is not effectively connected with a trade or business
conducted by such non-U.S. shareholder in the United States and does not address non-U.S. shareholders who are present in the United States for 183 days or more during the taxable year. The tax consequences to a non-U.S. shareholder entitled to
claim the benefits of an applicable tax treaty may be different from those described herein. Non-U.S. shareholders should consult their tax advisers with respect to the particular tax consequences to them of an investment in a Fund.
Withholding.
Dividends paid by a Fund to non-U.S. shareholders will be 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 (other than qualified interest income or qualified short-term capital gains, as described below). In order to obtain a reduced rate of
withholding, a non-U.S. shareholder will be required to provide an IRS Form W-8BEN (or substitute form) certifying its entitlement to benefits under a treaty. The withholding tax does not apply to regular dividends paid to a non-U.S. shareholder who
provides an IRS Form W-8ECI, certifying that the dividends are effectively connected with the non-U.S. shareholders conduct of a trade or business within the United States. Instead, the effectively connected dividends will be subject to
regular U.S. income tax as if the non-U.S. shareholder were a U.S. shareholder. A non-U.S. corporations earnings and profits attributable to such dividends may also be subject to additional branch profits tax imposed at a rate of
30% (or lower treaty rate).
A non-U.S. shareholder who fails to provide an IRS Form W-8BEN or other applicable form may be
subject to backup withholding at the appropriate rate. See the discussion of backup withholding under Miscellaneous above.
|
|
|
|
|
|
|
|
|
92
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
Exemptions from Withholding.
In general, federal income tax will not apply to gain
realized on the sale or other disposition of Shares or to any Fund distributions reported as capital gain dividends, short-term capital gain dividends, or interest-related dividends.
The exemption for short-term capital gain dividends and interest-related dividends applies only with respect to a Fund taxable year ending
on or before October 31, 2014. Short-term capital gain dividends are dividends that are attributable to qualified short-term gain a Fund realizes (generally, the excess of a Funds net short-term capital gain over
long-term capital loss for a taxable year, computed with certain adjustments). Interest-related dividends are dividends that are attributable to qualified net interest income from U.S. sources. Depending on its circumstances,
a Fund may report all, some or none of its potentially eligible dividends as short-term capital gain dividends and interest-related dividends and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. To
qualify for the exemption, a non-U.S. shareholder will need to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN or substitute form). In the case of shares held
through an intermediary, the intermediary may withhold even if a Fund designates the payment as a short-term capital gain dividend or an interest-related dividend. Non-U.S. shareholders should contact their intermediaries with respect to the
application of these rules to their accounts.
FATCA
. Pursuant to the Foreign Account Tax Compliance Act
(FATCA), each Fund will be required to withhold 30% of (1) income dividends it pays after December 31, 2013, and (2) capital gain distributions and the proceeds of share redemptions it pays after December 31, 2016, to
certain non-U.S. shareholders that fail to meet certain information reporting or certification requirements. Those non-U.S. shareholders include foreign financial institutions (FFIs), such as non-U.S. investment funds, and non-financial
foreign entities (NFFEs). To avoid withholding under FATCA, (1) an FFI must enter into an information-sharing agreement with the IRS in which it agrees to report identifying information (including name, address, and taxpayer
identification number) of the shareholders direct and indirect U.S. owners and (2) an NFFE must provide to the withholding agent a certification and, in certain circumstances, requisite information regarding its U.S. owners, if any. Those
non-U.S. shareholders also may fall into certain exempt, excepted, or deemed compliant categories established by regulations and other guidance. A non-U.S. shareholder resident or doing business in a country that has entered into an
intergovernmental agreement with the United States to implement FATCA will be exempt from FATCA withholding provided that the shareholder and the applicable foreign government comply with the terms of the agreement. A non-U.S. shareholder that
invests in a Fund will need to provide the Fund with documentation properly certifying the entitys status under FATCA (currently proposed as Form W-8BEN-E) to avoid the FATCA withholding. Non-U.S. shareholders should consult their own tax
advisors regarding the impact of these requirements on their investment in a Fund.
More information about taxes is in the
Funds SAI.
|
|
|
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
|
|
|
93
|
|
|
No financial
information is available for the Funds because they had not commenced operations prior to the date of this Prospectus.
|
|
|
|
|
|
|
|
|
94
|
|
|
|
DIREXION SHARES ETF TRUST PROSPECTUS
|
PROSPECTUS
|
|
|
|
|
1301 Avenue of the Americas (6th Avenue), 35th Floor
|
|
New York, New York 10019
|
|
866-476-7523
|
M
ORE
I
NFORMATION ON THE
D
IREXION
S
HARES
E
TF
T
RUST
Statement of
Additional Information (SAI):
The Funds SAI contains more information on the Funds and their investment policies. The
SAI is incorporated in this Prospectus by reference (meaning it is legally part of this Prospectus). A current SAI is on file with the Securities and Exchange Commission (SEC).
Annual and Semi-Annual Reports to Shareholders:
The Funds reports will provide
additional information on the Funds investment holdings, performance data and a letter discussing the market conditions and investment strategies that significantly affected the Funds performance during that period.
To Obtain the SAI or Fund Reports Free of Charge:
|
|
|
Write to:
|
|
Direxion Shares ETF Trust
1301 Avenue of the Americas (6th Avenue), 35th Floor
New York, New York 10019
|
Call:
|
|
866-476-7523
|
By Internet:
|
|
www.direxionfunds.com
|
These documents and other information about the
Funds can be reviewed and copied at the SEC Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (202) 551-8090. Reports and other information about the Funds
may be viewed on screen or downloaded from the EDGAR Database on the SECs website at http://www.sec.gov. Copies of these documents may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov, or by writing the SECs Public Reference Section, Washington, D.C. 20549-0102.
SEC File Number: 811-22201
DIREXION SHARES ETF TRUST
STATEMENT OF ADDITIONAL INFORMATION
1301 Avenue of the Americas (6
th
Avenue),
35
th
Floor New York, New York 10019 866-476-7523
The Direxion Shares ETF Trust (Trust) is an investment company that offers shares of a variety of exchange-traded funds (each a
Fund and collectively, the Funds) to the public. The shares of the Funds (Shares) offered in this Statement of Additional Information (
SAI
) trade, or, upon commencement of operations will trade,
on the NYSE Arca, Inc.
This SAI relates to the Funds listed below.
|
|
|
3X BULL FUNDS
|
|
3X BEAR FUNDS
|
International Funds
|
Direxion Daily Chile Bull 3X Shares
|
|
Direxion Daily Chile Bear 3X Shares
|
Direxion Daily Hong Kong Bull 3X Shares
|
|
Direxion Daily Hong Kong Bear 3X Shares
|
Direxion Daily Japan Bull 3X Shares (JPNL)
|
|
Direxion Daily Japan Bear 3X Shares (JPNS)
|
Direxion Daily Mexico Bull 3X Shares
|
|
Direxion Daily Mexico Bear 3X Shares
|
The Funds seek daily
leveraged
investment results and are intended to be used as short-term
trading vehicles.
The Funds with the word Bull in their name attempt to provide investment results that correlate positively to an index or benchmark and are collectively referred to as the 3X Bull Funds. The Funds with
the word Bear in their name attempt to provide investment results that correlate negatively to the return of an index or benchmark and are collectively referred to as the 3X Bear Funds.
The Funds seek daily leveraged investment results and are intended to be used as short-term trading vehicles. The Funds are not intended to be used
by, and are not appropriate for, investors who do not intend to actively monitor and manage their portfolios. The Funds are very different from most mutual funds and exchange-traded funds. Investors should note that:
(1) The Funds pursue
daily leveraged
investment goals, which means that the Funds are riskier than alternatives that do not use
leverage because the Funds magnify the performance of the benchmark of an investment.
(2) Each 3X Bear Fund pursues investment goals
that are inverse to the performance of its benchmark, a result opposite of most mutual funds and exchange-traded funds.
(3) The Funds
seek
daily leveraged
investment results. The pursuit of these investment goals means that the return of a Fund for a period longer than a full trading day will be the product of the series of daily leveraged returns for each
trading day during the relevant period. As a consequence, especially in periods of market volatility, the path of the benchmark during the longer period may be at least as important to a Funds return for the longer period as the cumulative
return of the benchmark for the relevant longer period. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of the Funds
stated goal and the performance of the target index for the full trading day. The Funds are not suitable for all investors.
The Funds
are designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies. Such investors are expected to monitor and manage their portfolios frequently. Investors in the Funds should:
(a) understand the risks associated with the use of leverage,
(b) understand the consequences of seeking daily leveraged investment results,
(c) understand the risk of shorting, and
(d) intend to actively monitor and manage their investments.
Investors who do not
understand the Funds or do not intend to actively manage their funds and monitor their investments should not buy the Funds. There is no assurance that any of the Funds offered in this prospectus will achieve their objectives and an investment in a
Fund could lose money. No single Fund is a complete investment program.
If a Funds underlying benchmark moves more than 33% on a
given trading day in a direction adverse to the Fund, the Funds investors would lose all of their money. The Funds investment adviser, Rafferty Asset Management, LLC
(Rafferty or Adviser), will attempt to position each Funds portfolio to ensure that a Fund does not lose more than 90% of its net asset value on a given trading day.
The cost of such downside protection will be limitations on a Funds gains. As a consequence, a Funds portfolio may not be responsive to benchmark movements beyond 33% on a given trading day in a direction favorable to the Fund. For
example, if a 3X Bull Funds underlying benchmark was to gain 35% that Fund might be limited to a daily gain of 90%, which corresponds to 300% of a benchmark gain of 30%, rather than 300% of the benchmark gain of 35%.
This SAI, dated June 22, 2013, is not a prospectus. It should be read in conjunction with the Funds prospectus dated June 22, 2013
(Prospectus). This SAI is incorporated by reference into the Prospectus. In other words, it is legally part of the Prospectus. To receive a copy of the Prospectus, without charge, write or call the Trust at the address or telephone
number listed above.
June 22, 2013
TABLE OF CONTENTS
i
ii
THE DIREXION SHARES ETF TRUST
The Trust is a Delaware statutory trust organized on April 23, 2008 and is registered with the Securities and Exchange Commission (SEC)
as an open-end management investment company under the Investment Company Act of 1940, as amended (1940 Act). The Trust currently consists of 124 separate series or Funds.
The Funds seek to provide daily leveraged investment results, before fees and expenses, which correspond to the performance of a particular index or
benchmark. The 3X Bull Funds attempt to provide investment results that correlate positively to an index or benchmark. The 3X Bear Funds attempt to provide investment results that correlate negatively to the return of an index or benchmark.
The correlations sought by the 3X Bull Funds and the 3X Bear Funds are a multiple of the returns of the target index or benchmark. The Funds
seek a multiple of 300% of the returns of their benchmark indices. For example, the benchmark for the Direxion Daily Chile Bull 3X Shares is 300% of the daily total return of the performance of the MSCI Chile IMI 25/50 Index, while the benchmark for
the Direxion Daily Chile Bear 3X Shares is 300% of the inverse, or opposite, of the daily total return of the performance of the MSCI Chile IMI 25/50 Index. If, on a given day, the MSCI Chile IMI 25/50 Index gains 1%, the Direxion Daily Chile Bull
3X Shares is designed to gain approximately 3% (which is equal to 300% of the 1% index gain), while the Direxion Daily Chile Bear 3X Shares is designed to lose approximately 3%. Conversely, if the MSCI Chile IMI 25/50 Index loses 1% on a given day,
the Direxion Chile Bull 3X Shares is designed to lose approximately 3%, while the Direxion Daily Chile Bear 3X Shares is designed to gain approximately 3% (which is equal to -300% of the 1% index loss).
Each Fund issues and redeems Shares only in large blocks of Shares called Creation Units. Most investors will buy and sell Shares of each
Fund in secondary market transactions through brokers. Shares of the Funds upon commencement of operations will be listed for trading on the secondary market on the NYSE Arca, Inc. Shares can be bought and sold throughout the trading day like other
publicly traded shares. There is no minimum investment. Although Shares are generally purchased and sold in round lots of 100 Shares, brokerage firms typically permit investors to purchase or sell Shares in smaller odd lots,
at no per-share price differential. Investors may acquire Shares directly from each Fund, and shareholders may tender their Shares for redemption directly to each Fund, only in Creation Units of 50,000 Shares, as discussed in the Purchases and
Redemptions section below.
The Funds offered in this SAI trade, or, upon commencement of operations will trade, on NYSE Arca, Inc.(the
Exchange). The Funds seek daily leveraged investment results and are intended to be used as short-term trading vehicles. The Funds are not intended to be used by, and are not appropriate for, investors who do not intend to actively
monitor and manage their portfolios. The Funds are very different from most mutual funds and exchange-traded funds.
(1)
|
The Funds pursue
daily leveraged
investment goals, which means that the Funds are riskier than alternatives that do not use leverage because the Funds magnify
the performance of the benchmark of an investment.
|
(2)
|
Each 3X Bear Fund pursues investment goals which are inverse to the performance of its benchmark, a result opposite of most mutual funds and exchange-traded funds.
|
(3)
|
The Funds seek
daily leveraged
investment results. The pursuit of these investment goals means that the return of a Fund for a period longer than a full trading
day will be the product of the series of daily leveraged returns for each trading day during the relevant period. As a consequence, especially in periods of market volatility, the path of the benchmark during the longer period may be at least as
important to a Funds return for the longer period as the cumulative return of the benchmark for the relevant longer period. Further, the return for investors that invest for periods less than a full trading day or for a period different than a
trading day will not be the product of the return of the Funds stated goal and the performance of the target index for the full trading day. The Funds are not suitable for all investors.
|
The Funds are designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies. Such investors
are expected to monitor and manage their portfolios frequently. Investors in the Funds should:
1
(a)
|
understand the risks associated with the use of leverage,
|
(b)
|
understand the consequences of seeking daily leveraged investment results,
|
(c)
|
understand the risk of shorting, and
|
(d)
|
intend to actively monitor and manage their investments.
|
Investors who do not understand the Funds or do not intend to actively manage their funds and monitor their investments should not buy the Funds. There is no assurance that any of the Funds offered in
this prospectus will achieve their objectives and an investment in a Fund could lose money. No single Fund is a complete investment program.
If a Funds underlying benchmark moves more than 33% on a given trading day in a direction adverse to the Fund, the Funds investors would lose
all of their money. The Funds investment adviser, Rafferty, will attempt to position each Funds portfolio to ensure that a Fund does not lose more than 90% of its net asset value on a given trading day. The cost of such downside
protection will be limitations on a Funds gains. As a consequence, a Funds portfolio may not be responsive to index movements beyond 33% on a given trading day in a direction favorable to the Fund. For example, if a 3X Bull Funds
target index was to gain 35%, a 3X Bull Fund might be limited to a daily gain of 90%, which corresponds to 300% of an index gain of 30%, rather than 300% of the index gain of 35%.
CLASSIFICATION OF THE FUNDS
Each Fund is a non-diversified series of the Trust pursuant to the 1940 Act. A Fund is considered non-diversified because a relatively high percentage of its assets may be invested
in the securities of a limited number of issuers. To the extent that a Fund assumes large positions in the securities of a small number of issuers, the Funds net asset value (NAV) may fluctuate to a greater extent than that of a
diversified company as a result of changes in the financial condition or in the markets assessment of the issuers, and the Fund may be more susceptible to any single economic, political or regulatory occurrence than a diversified company.
Each Funds classification as a non-diversified investment company means that the proportion of its assets that may be
invested in the securities of a single issuer is not limited by the 1940 Act. Each Fund, however, intends to meet or to continue to meet certain tax-related diversification standards at the end of each quarter of its taxable year.
EXCHANGE LISTING AND TRADING
The Shares of certain of the Funds are currently, or, upon commencement of operations will be, listed on the Exchange. If the Shares (which are redeemable only when aggregated in Creation Units) trade on
the Exchange, they may trade at prices that differ to some degree from their net asset value. There can be no assurance that the requirements of the Exchange necessary to maintain the listing of Shares of each 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 at the commencement of trading of a Fund, there are fewer than 50 beneficial owners of the Shares of the Fund
for 30 or more consecutive trading days; (ii) the value of the Underlying Index is no longer calculated or available; or (iii) such other event shall occur or condition exist that, in the opinion of the Exchange, makes further dealings on
the Exchange inadvisable. The Exchange will remove the Shares of a Fund from listing and trading upon termination of such Fund.
As is the
case of other stocks traded on the Exchange, brokers commissions on transactions will be based on negotiated commission rates at customary levels. The Trust reserves the right to adjust the price levels of the Shares in the future to help
maintain convenient trading ranges for investors. Any adjustments would be accomplished through stock splits or reverse stock splits, which would have no effect on the net assets of a Fund.
The trading prices of each Funds shares in the secondary market generally differ from each Funds daily NAV per share and are affected by market forces such as supply and demand, economic
conditions and other factors. Rafferty Asset Management, LLC (Rafferty or Adviser) may, from time to time, make payments to certain market makers in the Trusts shares. Information regarding the intraday value of shares
of each Fund, also known as the
2
intraday indicative value (IIV), is disseminated every 15 seconds throughout the trading day by the national securities exchange on which a Fund is listed or by market
data vendors or other information providers. The IIV is based on the current market value of the securities and cash required to be deposited in exchange for a Creation Unit. The IIV does not necessarily reflect the precise composition of the
current portfolio of securities held by a Fund as a particular point in time, nor the best possible valuation of the current portfolio. Therefore, the IIV should not be viewed as a real-time update of the NAV, which is computed only once
a day. The IIV 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 Funds. The quotations of certain Fund holdings may not be
updated during U.S. trading hours is such holdings do not trade in the U.S. The Funds are not involved in, nor responsible for, the calculation or dissemination of the IIV and make no representations or warranty as to its accuracy.
INVESTMENT POLICIES AND TECHNIQUES
The 3X Bull Funds generally invest at least 80% of their net assets (plus any borrowings for investment purposes) in the securities of an index and/or: futures contracts; options on securities, indices
and futures contracts; equity caps, collars and floors; swap agreements; forward contracts; short positions, reverse repurchase agreements; and other financial instruments (collectively, Financial Instruments). The 3X Bear Funds
generally invest at least 80% of their net assets (plus any borrowings for investment purposes) in Financial Instruments, and the remainder in short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality
credit profiles, including U.S. government securities and repurchase agreements (collectively, Money Market Instruments). In particular, the Funds below seek the following investment results as compared to their indices or benchmarks:
|
|
|
|
|
|
|
Fund
|
|
Index
|
|
Daily Target
|
|
Direxion Daily Chile Bull 3X Shares
|
|
MSCI Chile IMI 25/50 Index
|
|
|
300
|
%
|
Direxion Daily Chile Bear 3X Shares
|
|
|
|
|
-300
|
%
|
Direxion Daily Hong Kong Bull 3X Shares
|
|
MSCI Hong Kong Index
|
|
|
300
|
%
|
Direxion Daily Hong Kong Bear 3X Shares
|
|
|
|
|
-300
|
%
|
Direxion Daily Japan Bull 3X Shares
|
|
MSCI Japan Index
|
|
|
300
|
%
|
Direxion Daily Japan Bear 3X Shares
|
|
|
|
|
-300
|
%
|
Direxion Daily Mexico Bull 3X Shares
|
|
MSCI Mexico IMI 25/50 Index
|
|
|
300
|
%
|
Direxion Daily Mexico Bear 3X Shares
|
|
|
|
|
-300
|
%
|
With the exception of limitations described in the Investment Restrictions section below, each Fund may
engage in the investment strategies discussed below. There is no assurance that any of these strategies or any other strategies and methods of investment available to a Fund will result in the achievement of the Funds objective.
This section provides a description of the securities in which a Fund may invest to achieve its investment objective, the strategies it may employ and
the corresponding risks of such securities and strategies. The greatest risk of investing in an exchange-traded fund (ETF) is that its returns will fluctuate and you could lose money. Recent events in the financial sector have resulted,
and may continue to result, in an unusually high degree of volatility in the financial markets. Both domestic and foreign equity markets could experience increased volatility and turmoil, with issuers that have exposure to the real estate, mortgage
and credit markets particularly affected, and it is uncertain whether or for how long these conditions could continue. The U.S. government has already taken a number of unprecedented actions designed to support certain financial institutions and
segments of the financial markets that have experienced extreme volatility, and in some cases a lack of liquidity.
Reduced liquidity in
equity, credit and fixed-income markets may adversely affect many issuers worldwide. This reduced liquidity may result in less money being available to purchase raw materials, goods and services from emerging markets, which may, in turn, bring down
the prices of these economic staples. It may also result in emerging market issuers having more difficulty obtaining financing, which may, in turn, cause a decline in their stock prices. These events and possible continued market turbulence may have
an adverse effect on the Funds.
3
Bank Obligations
Money Market Instruments
. The Funds may invest in bankers acceptances, certificates of deposit, demand and time deposits, savings shares and
commercial paper of domestic banks and savings and loans that have assets of at least $1 billion and capital, surplus, and undivided profits of over $100 million as of the close of their most recent fiscal year, or instruments that are insured by
the Bank Insurance Fund or the Savings Institution Insurance Fund of the Federal Deposit Insurance Corporation (FDIC). The Funds also may invest in high quality, short-term, corporate debt obligations, including variable rate demand
notes, having a maturity of one year or less. Because there is no secondary trading market in demand notes, the inability of the issuer to make required payments could impact adversely a Funds ability to resell when it deems advisable to do
so.
A Fund may invest in foreign money market instruments, which typically involve more risk that investing in U.S. money market instruments.
See Foreign Securities below. These risks include, among others, higher brokerage commissions, less public information, and less liquid markets in which to sell and meet large shareholder redemption requests.
Bankers Acceptances
. Bankers acceptances generally are negotiable instruments (time drafts) drawn to finance the export, import,
domestic shipment or storage of goods. They are termed accepted when a bank writes on the draft its agreement to pay it at maturity, using the word accepted. The bank is, in effect, unconditionally guaranteeing to pay the
face value of the instrument on its maturity date. The acceptance may then be held by the accepting bank as an asset, or it may be sold in the secondary market at the going rate of interest for a specified maturity.
Certificates of Deposit (CDs)
. The FDIC is an agency of the U.S. government that insures the deposits of certain banks and savings and
loan associations up to $100,000 per deposit. The interest on such deposits may not be insured to the extent this limit is exceeded. Current federal regulations also permit such institutions to issue insured negotiable CDs in amounts of $100,000 or
more without regard to the interest rate ceilings on other deposits. To remain fully insured, these investments must be limited to $100,000 per insured bank or savings and loan association.
Commercial Paper
. Commercial paper includes notes, drafts or similar instruments payable on demand or having a maturity at
the time of issuance not exceeding nine months, exclusive of days of grace or any renewal thereof. A Fund may invest in commercial paper rated A-l or A-2 by Standard & Poors
®
Ratings Services
(S&P
®
) or Prime-1 or Prime-2 by Moodys Investors Service
®
, Inc. (Moodys), and in other lower quality commercial paper.
Caps, Floors and Collars
The Funds may enter into caps, floors and collars relating to securities, interest rates or currencies. In a cap or floor, the buyer pays a premium (which is generally, but not always a single up-front
amount) for the right to receive payments from the other party if, on specified payment dates, the applicable rate, index or asset is greater than (in the case of a cap) or less than (in the case of a floor) an agreed level, for the period involved
and the applicable notional amount. A collar is a combination instrument in which the same party buys a cap and sells a floor. Depending upon the terms of the cap and floor comprising the collar, the premiums will partially or entirely offset each
other. The notional amount of a cap, collar or floor is used to calculate payments, but is not itself exchanged. The Funds may be both buyers and sellers of these instruments. In addition, the Funds may engage in combinations of put and call options
on securities (also commonly known as collars), which may involve physical delivery of securities. Like swaps, caps, floors and collars are very flexible products. The terms of the transactions entered by the Funds may vary from the typical examples
described here.
Depositary Receipts
To the extent a Fund invests in stocks of foreign corporations, a Funds investment in such stocks may also be in the form of depositary receipts or other securities convertible into securities of
foreign issuers. Depositary receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted. American Depositary Receipts (ADRs) are receipts typically issued by an American
bank or trust company that evidence ownership of underlying securities issued by a foreign corporation. European Depositary Receipts (EDRs) are receipts issued in Europe that evidence a similar ownership arrangement. Global Depositary
Receipts (GDRs) are receipts issued throughout the world that evidence a similar arrangement. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are designed for use
4
in European securities markets. GDRs are tradable both in the United States and in Europe and are designed for use throughout the world. Depositary receipts will not necessarily be denominated in
the same currency as their underlying securities.
Depositary receipts may be purchased through sponsored or
unsponsored facilities. A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an unsponsored facility without participation by the issuer of the
depositary security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from
the issuer of the deposited security or to pass through voting rights to the holders of such receipts of the deposited securities.
Fund
investments in depositary receipts, which include ADRs, GDRs and EDRs, are deemed to be investments in foreign securities for purposes of a Funds investment strategy.
Equity Securities
Common Stocks
. A Fund may invest
in common stocks. Common stocks represent the residual ownership interest in the issuer and are entitled to the income and increase in the value of the assets and business of the entity after all of its obligations and preferred stock are satisfied.
Common stocks generally have voting rights. Common stocks fluctuate in price in response to many factors including historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor
perceptions and market liquidity.
Convertible Securities
. A Fund may invest in convertible securities that may be considered high
yield securities. Convertible securities include corporate bonds, notes and preferred stock that can be converted into or exchanged for a prescribed amount of common stock of the same or a different issue within a particular period of time at a
specified price or formula. A convertible security entitles the holder to receive interest paid or accrued on debt or dividends paid on preferred stock until the convertible stock matures or is redeemed, converted or exchanged. While no securities
investment is without some risk, investments in convertible securities generally entail less risk than the issuers common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed income security. The market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. While convertible securities
generally offer lower interest or dividend yields than nonconvertible debt securities of similar quality, they do enable the investor to benefit from increases in the market price of the underlying common stock. When investing in convertible
securities, a Fund may invest in the lowest credit rating category.
Preferred Stock
. A Fund may invest in preferred stock. A preferred
stock blends the characteristics of a bond and common stock. It can offer the higher yield of a bond and has priority over common stock in equity ownership, but does not have the seniority of a bond and its participation in the issuers growth
may be limited. Preferred stock has preference over common stock in the receipt of dividends and in any residual assets after payment to creditors if the issuer is dissolved. Although the dividend is set at a fixed annual rate, in some circumstances
it can be changed or omitted by the issuer. When investing in preferred stocks, a Fund may invest in the lowest credit rating category.
Warrants and Rights
. A Fund may purchase warrants and rights, which are instruments that permit a Fund to acquire, by subscription, the capital
stock of a corporation at a set price, regardless of the market price for such stock. Warrants may be either perpetual or of limited duration, but they usually do not have voting rights or pay dividends. The market price of warrants is usually
significantly less than the current price of the underlying stock. Thus, there is a greater risk that warrants might drop in value at a faster rate than the underlying stock.
Foreign Currencies
A Fund may invest directly and
indirectly in foreign currencies. Investments in foreign currencies are subject to numerous risks not least being the fluctuation of foreign currency exchange rates with respect to the U.S. dollar. Exchange rates fluctuate for a number of reasons.
5
Inflation
.
Exchange rates change to reflect changes in a currencys buying power.
Different countries experience different inflation rates due to different monetary and fiscal policies, different product and labor market conditions, and a host of other factors.
Trade Deficits.
Countries with trade deficits tend to experience a depreciating currency. Inflation may be the cause of a trade deficit, making a countrys goods more expensive and less
competitive and so reducing demand for its currency.
Interest Rates.
High interest rates may raise currency values in the short
term by making such currencies more attractive to investors. However, since high interest rates are often the result of high inflation, long-term results may be the opposite.
Budget Deficits and Low Savings Rates.
Countries that run large budget deficits and save little of their national income tend to suffer a depreciating currency because they are forced to
borrow abroad to finance their deficits. Payments of interest on this debt can inundate the currency markets with the currency of the debtor nation. Budget deficits also can indirectly contribute to currency depreciation if a government chooses
inflationary measure to cope with its deficits and debt.
Political Factors.
Political instability in a country can cause a
currency to depreciate. Demand for a certain currency may fall if a country appears a less desirable place in which to invest and do business.
Government Control.
Through their own buying and selling of currencies, the worlds central banks sometimes manipulate exchange rate
movements. In addition, governments occasionally issue statements to influence peoples expectations about the direction of exchange rates, or they may instigate policies with an exchange rate target as the goal.
The value of a Funds investments is calculated in U.S. dollars each day that the New York Stock Exchange is open for business. As a result, to the
extent that a Funds assets are invested in instruments denominated in foreign currencies and the currencies appreciate relative to the U.S. dollar, a Funds NAV per share as expressed in U.S. dollars (and, therefore, the value of your
investment) should increase. If the U.S. dollar appreciates relative to the other currencies, the opposite should occur.
The currency-related
gains and losses experienced by a Fund will be based on changes in the value of portfolio securities attributable to currency fluctuations only in relation to the original purchase price of such securities as stated in U.S. dollars. Gains or losses
on shares of a Fund will be based on changes attributable to fluctuations in the NAV of such shares, expressed in U.S. dollars, in relation to the original U.S. dollar purchase price of the shares. The amount of appreciation or depreciation in a
Funds assets also will be affected by the net investment income generated by the money market instruments in which each Fund invests and by changes in the value of the securities that are unrelated to changes in currency exchange rates.
A Fund may incur currency exchange costs when it sells instruments denominated in one currency and buy instruments denominated in another.
Currency Transactions.
A Fund conducts currency exchange transactions on a spot basis. Currency transactions made on a spot
basis are for cash at the spot rate prevailing in the currency exchange market for buying or selling currency. A Fund also enters into forward currency contracts. See Options, Futures and Other Strategies below. A forward currency
contract is an obligation to buy 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 entered
into on the interbank market conducted directly between currency traders (usually large commercial banks) and their customers.
A Fund may
invest in a combination of forward currency contracts and U.S. dollar-denominated market instruments in an attempt to obtain an investment result that is substantially the same as a direct investment in a foreign currency-denominated instrument.
This investment technique creates a synthetic position in the particular foreign-currency instrument whose performance the Adviser is trying to duplicate. For example, the combination of U.S. dollar-denominated instruments with
long forward currency exchange contracts creates a position
6
economically equivalent to a money market instrument denominated in the foreign currency itself. Such combined positions are sometimes necessary when the money market in a particular foreign
currency is small or relatively illiquid.
A Fund may invest in forward currency contracts to hedge either specific transactions (transaction
hedging) or portfolio positions (position hedging). Transaction hedging is the purchase or sale of forward currency contracts with respect to specific receivables or payables of a Fund in connection with the purchase and sale of portfolio
securities. Position hedging is the sale of a forward currency contract on a particular currency with respect to portfolio positions denominated or quoted in that currency.
A Fund may use forward currency contracts for position hedging if consistent with its policy of trying to expose its net assets to foreign currencies. A Fund is not required to enter into forward currency
contracts for hedging purposes and it is possible that a Fund may not be able to hedge against a currency devaluation that is so generally anticipated that a Fund is unable to contract to sell the currency at a price above the devaluation level it
anticipates. It also is possible, under certain circumstances, that a Fund may have to limit its currency transactions to qualify as a regulated investment company under Subchapter M of Chapter 16/Subtitle A of the Internal Revenue Code
of 1986, as amended (Code)(RIC). See Dividends, Other Distributions and Taxes.
A Fund currently does not
intend to enter into a forward currency contract with a term of more than one year, or to engage in position hedging with respect to the currency of a particular country to more than the aggregate market value (at the time the hedging transaction is
entered into) of its portfolio securities denominated in (or quoted in or currently convertible into or directly related through the use of forward currency contracts in conjunction with money market instruments to) that particular currency.
At or before the maturity of a forward currency contract, a Fund may either sell a portfolio security and make delivery of the currency, or
retain the security and terminate its contractual obligation to deliver the currency by buying an offsetting contract obligating it to buy, on the same maturity date, the same amount of the currency. If a Fund engages in an offsetting
transaction, it may later enter into a new forward currency contract to sell the currency.
If a Fund engages in an offsetting transaction, it
will incur a gain or loss to the extent that there has been movement in forward currency contract prices. If forward prices go down during the period between the date a Fund enters into a forward currency contract for the sale of a currency and the
date it enters into an offsetting contract for the purchase of the currency, a Fund will realize a gain to the extent that the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to buy. If forward prices go
up, a Fund will suffer a loss to the extent the price of the currency it has agreed to buy exceeds the price of the currency it has agreed to sell.
Since a Fund invests in money market instruments denominated in foreign currencies, it may hold foreign currencies pending investment or conversion into U.S. dollars. Although a Fund values its assets
daily in U.S. dollars, it does not convert its holdings of foreign currencies into U.S. dollars on a daily basis. A Fund will convert its holdings from time to time, however, and incur the costs of currency conversion. Foreign exchange dealers do
not charge a fee for conversion, but they do realize a profit based on the difference between the prices at which they buy and sell various currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, and offer to buy the
currency at a lower rate if a Fund tries to resell the currency to the dealer.
Foreign Currency Options.
A Fund may invest in
foreign currency-denominated securities and may buy or sell put and call options on foreign currencies. A Fund may buy or sell put and call options on foreign currencies either on exchanges or in the over-the-counter (OTC) market. A put
option on a foreign currency gives the purchaser of the option the right to sell a foreign currency at the exercise price until the option expires. A call option on a foreign currency gives the purchaser of the option the right to purchase the
currency at the exercise price until the option expires. Currency options traded on U.S. or other exchanges may be subject to position limits which may limit the ability of a Fund to reduce foreign currency risk using such options. OTC options
differ from traded options in that they are two-party contracts with price and other terms negotiated between buyer and seller, and generally do not have as much market liquidity as exchange-traded options.
7
Foreign Currency Exchange-Related Securities.
Foreign currency warrants
. Foreign currency warrants such as Currency Exchange Warrants
SM
(CEWs
SM
) are warrants which entitle the holder
to receive from their issuer an amount of cash (generally, for warrants issued in the United States, in U.S. dollars) which is calculated pursuant to a predetermined formula and based on the exchange rate between a specified foreign currency and the
U.S. dollar as of the exercise date of the warrant. Foreign currency warrants generally are exercisable upon their issuance and expire as of a specified date and time. Foreign currency warrants have been issued in connection with U.S.
dollar-denominated debt offerings by major corporate issuers in an attempt to reduce the foreign currency exchange risk which, from the point of view of prospective purchasers of the securities, is inherent in the international fixed-income
marketplace. Foreign currency warrants may attempt to reduce the foreign exchange risk assumed by purchasers of a security by, for example, providing for a supplemental payment in the event that the U.S. dollar depreciates against the value of a
major foreign currency such as the Japanese yen or the Euro. The formula used to determine the amount payable upon exercise of a foreign currency warrant may make the warrant worthless unless the applicable foreign currency exchange rate moves in a
particular direction (
e.g.,
unless the U.S. dollar appreciates or depreciates against the particular foreign currency to which the warrant is linked or indexed). Foreign currency warrants are severable from the debt obligations with which
they may be offered, and may be listed on exchanges. Foreign currency warrants may be exercisable only in certain minimum amounts, and an investor wishing to exercise warrants who possesses less than the minimum number required for exercise may be
required either to sell the warrants or to purchase additional warrants, thereby incurring additional transaction costs. In the case of any exercise of warrants, there may be a time delay between the time a holder of warrants gives instructions to
exercise and the time the exchange rate relating to exercise is determined, during which time the exchange rate could change significantly, thereby affecting both the market and cash settlement values of the warrants being exercised. The expiration
date of the warrants may be accelerated if the warrants should be delisted from an exchange or if their trading should be suspended permanently, which would result in the loss of any remaining time value of the warrants (
i.e.,
the
difference between the current market value and the exercise value of the warrants), and, in the case the warrants were out-of-the-money, in a total loss of the purchase price of the warrants.
Warrants are generally unsecured obligations of their issuers and are not standardized foreign currency options issued by the Options Clearing
Corporation (OCC). Unlike foreign currency options issued by OCC, the terms of foreign exchange warrants generally will not be amended in the event of governmental or regulatory actions affecting exchange rates or in the event of the
imposition of other regulatory controls affecting the international currency markets. The initial public offering price of foreign currency warrants is generally considerably in excess of the price that a commercial user of foreign currencies might
pay in the interbank market for a comparable option involving significantly larger amounts of foreign currencies. Foreign currency warrants are subject to significant foreign exchange risk, including risks arising from complex political or economic
factors.
Principal exchange rate linked securities
. Principal exchange rate linked securities (PERLs
SM
) are debt obligations the principal on which is payable at
maturity in an amount that may vary based on the exchange rate between the U.S. dollar and a particular foreign currency at or about that time. The return on standard principal exchange rate linked securities is enhanced if the foreign
currency to which the security is linked appreciates against the U.S. dollar, and is adversely affected by increases in the foreign exchange value of the U.S. dollar; reverse principal exchange rate linked securities are like the
standard securities, except that their return is enhanced by increases in the value of the U.S. dollar and adversely impacted by increases in the value of foreign currency. Interest payments on the securities are generally made in U.S.
dollars at rates that reflect the degree of foreign currency risk assumed or given up by the purchaser of the notes (
i.e.,
at relatively higher interest rates if the purchaser has assumed some of the foreign exchange risk, or relatively lower
interest rates if the issuer has assumed some of the foreign exchange risk, based on the expectations of the current market). Principal exchange rate linked securities may in limited cases be subject to acceleration of maturity (generally, not
without the consent of the holders of the securities), which may have an adverse impact on the value of the principal payment to be made at maturity.
Performance indexed paper
. Performance indexed paper
(PIPs
SM
) is U.S. dollar-denominated commercial
paper the yield of which is linked to certain foreign exchange rate movements. The yield to the investor on performance indexed paper is established at maturity as a function of spot exchange rates between the U.S. dollar and a designated currency
as of or about that time (generally, the index maturity two days prior to maturity). The yield to
8
the investor will be within a range stipulated at the time of purchase of the obligation, generally with a guaranteed minimum rate of return that is below, and a potential maximum rate of return
that is above, market yields on U.S. dollar-denominated commercial paper, with both the minimum and maximum rates of return on the investment corresponding to the minimum and maximum values of the spot exchange rate two business days prior to
maturity.
Foreign Securities
A Fund may have both direct and indirect exposure through investments in stock index futures contracts, options on stock index futures contracts and options on securities and on stock indices to foreign
securities. In most cases, the best available market for foreign securities will be on exchanges or in OTC markets located outside the United States.
Investing in foreign securities carries political and economic risks distinct from those associated with investing in the United States. Investments in foreign securities also involve the risk of possible
adverse changes in investment or exchange control regulations, expropriation or confiscatory taxation, limitation on or delays in the removal of funds or other assets of a fund, political or financial instability or diplomatic and other developments
that could affect such investments. Foreign investments may be affected by actions of foreign governments adverse to the interests of U.S. investors, including the possibility of expropriation or nationalization of assets, confiscatory taxation,
restrictions on U.S. investment or on the ability to repatriate assets or to convert currency into U.S. dollars. There may be a greater possibility of default by foreign governments or foreign-government sponsored enterprises. Investments in foreign
countries also involve a risk of local political, economic or social instability, military action or unrest or adverse diplomatic developments.
Developing and Emerging Markets.
Emerging and developing markets abroad may offer special opportunities for investing but may have greater
risks than more developed foreign markets, such as those in Europe, Canada, Australia, New Zealand and Japan. There may be even less liquidity in their securities markets, and settlements of purchases and sales of securities may be subject to
additional delays. They are subject to greater risks of limitations on the repatriation of income and profits because of currency restrictions imposed by local governments. Those countries may also be subject to the risk of greater political and
economic instability, which can greatly affect the volatility of prices of securities in those countries.
Investing in emerging market
securities imposes risks different from, or greater than, risks of investing in foreign developed countries. These risks include: smaller market capitalization of securities markets, which may suffer periods of relative illiquidity; significant
price volatility; restrictions on foreign investment; possible repatriation of investment income and capital. In addition, foreign investors may be required to register the proceeds of sales; future economic or political crises could lead to price
controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization, or creation of government monopolies. The currencies of emerging market countries may experience significant declines against the U.S. dollar. Inflation and
rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries. Additional risks of emerging markets securities may include: greater social,
economic and political uncertainty and instability; more substantial governmental involvement in the economy; less governmental supervision and regulation; unavailability of currency hedging techniques; companies that are newly organized and small;
differences in auditing and financial reporting standards, which may result in unavailability of material information about issuers; and less developed legal systems. In addition, emerging securities markets may have different clearance and
settlement procedures, which may be unable to keep pace with the volume of securities transactions or otherwise make it difficult to engage in such transactions.
Asia-Pacific Countries
. In addition to the risks of foreign investing and the risks of investing in emerging markets, the developing market Asia-Pacific countries in which the Funds may
invest are subject to certain additional or specific risks. Certain Funds may make substantial investments in Asia-Pacific countries. In the Asia-Pacific markets, there is a high concentration of market capitalization and trading volume in a small
number of issuers representing a limited number of industries, as well as a high concentration of investors and financial intermediaries. Many of these markets also may be affected by developments with respect to more established markets in the
region, such as Japan and Hong Kong. Brokers in developing market Asia-Pacific countries typically are fewer in number and less well capitalized than brokers in the United States. These factors, combined with the U.S. regulatory requirements for
open-end investment companies and the restrictions on foreign investment, result in potentially fewer investment opportunities for a Fund and may have an adverse impact on a Funds investment performance.
9
Many of the developing market Asia-Pacific countries may be subject to a greater degree of economic,
political and social instability than is the case in the United States and Western European countries. Such instability may result from, among other things: (i) authoritarian governments or military involvement in political and economic
decision-making, including changes in government through extra-constitutional means; (ii) popular unrest associated with demands for improved political, economic and social conditions; (iii) internal insurgencies; (iv) hostile
relations with neighboring countries; and/or (v) ethnic, religious and racial disaffection. In addition, the governments of many of such countries, such as Indonesia, have a heavy role in regulating and supervising the economy.
An additional risk common to most such countries is that the economy is heavily export-oriented and, accordingly, is dependent upon international trade.
The existence of overburdened infrastructure and obsolete financial systems also present risks in certain countries, as do environmental problems. Certain economies also depend to a significant degree upon exports of primary commodities and,
therefore, are vulnerable to changes in commodity prices that, in turn, may be affected by a variety of factors. The legal systems in certain developing market Asia-Pacific countries also may have an adverse impact on a Fund. For example, while the
potential liability of a shareholder in a U.S. corporation with respect to acts of the corporation is generally limited to the amount of the shareholders investment, the notion of limited liability is less clear in certain emerging market
Asia-Pacific countries. Similarly, the rights of investors in developing market Asia-Pacific companies may be more limited than those of shareholders of U.S. corporations. It may be difficult or impossible to obtain and/or enforce a judgment in a
developing market Asia-Pacific country.
Governments of many developing market Asia-Pacific countries have exercised and continue to exercise
substantial influence over many aspects of the private sector. In certain cases, the government owns or controls many companies, including the largest in the country. Accordingly, government actions in the future could have a significant effect on
economic conditions in developing market Asia-Pacific countries, which could affect private sector companies and a Fund itself, as well as the value of securities in a Funds portfolio. In addition, economic statistics of developing market
Asia-Pacific countries may be less reliable than economic statistics of more developed nations.
It is possible that developing market
Asia-Pacific issuers may not be subject to the same accounting, auditing and financial reporting standards as U.S. companies. Inflation accounting rules in some developing market Asia-Pacific countries require companies that keep accounting records
in the local currency, for both tax and accounting purposes, to restate certain assets and liabilities on the companys balance sheet in order to express items in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits for certain developing market Asia-Pacific companies. In addition, satisfactory custodial services for investment securities may not be available in some developing Asia-Pacific countries, which may result in a
Fund incurring additional costs and delays in providing transportation and custody services for such securities outside such countries.
Certain developing Asia-Pacific countries are especially large debtors to commercial banks and foreign governments. Fund management may determine that,
notwithstanding otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular developing Asia-Pacific country. A Fund may invest in countries in which foreign investors, including management of the Fund,
have had no or limited prior experience.
Hong Kong
. In 1984, China and Britain signed the Joint Declaration, which allowed for
the termination of British rule in Hong Kong on June 30, 1997, but which maintains the previously existing capitalist economic and social system of Hong Kong for 50 years beyond that date. Accordingly, there are risks arising from Hong
Kongs return to China under the one country two systems proposal. However, Hong Kong and China are interdependent in terms of tourism, financial services and investment. Today, Hong Kongs stock market is one of the largest in
the world and is highly liquid and extensively regulated. Hong Kong has been named as the offshore centre for trading in the Chinese currency, the Renminbi. However, investors should realize that there are significant risks to investing in Hong
Kong. These risks include that: (1) Chinas attitude towards Hong Kong could change, and as a result, changes in policy could increase risks of nationalization, expropriation or confiscation of property; (2) political instability may
arise as a result of indecisive leadership; and (3) the government of China could discontinue or alter economic reforms in Hong Kong.
10
Japan
.
Japanese investments may be significantly affected by events
influencing Japans economy and the exchange rate between the Japanese yen and the U.S. dollar. Japans economy fell into a long recession in the 1990s. After a few years of mild recovery in the mid-2000s, Japans economy fell into
another recession as a result of the recent global economic crisis. Japan is heavily dependent on exports and foreign oil. Japan is located in a seismically active area, and in 2011 experienced an earthquake of a sizeable magnitude and a tsunami
that significantly affected important elements of its infrastructure and resulted in a nuclear crisis. Since these events, Japans financial markets have fluctuated dramatically. The full extent of the impact of these events on Japans
economy and on foreign investment in Japan is difficult to estimate. Japans economic prospects may be affected by the political and military situations of its near neighbors, notably North and South Korea, China, and Russia.
Latin America.
Investments in Latin American countries involve special considerations not typically associated with investing in the United
States. Most Latin American countries have experienced, at one time or another, severe and persistent levels of inflation, including, in some cases, hyperinflation. This has, in turn, led to high interest rates, extreme measures by governments to
keep inflation in check, and a generally debilitating effect on economic growth. Although inflation in many countries has lessened, there is no guarantee it will remain at lower levels. In addition, the political history of certain Latin American
countries has been characterized by political uncertainty, intervention by the military in civilian and economic spheres, and political corruption. Such developments, if they were to reoccur, could reverse favorable trends toward market and economic
reform, privatization, and removal of trade barriers, and result in significant disruption in securities markets. Certain Latin American countries may also have managed currencies which are maintained at artificial levels to the U.S. dollar rather
than at levels determined by the market. This type of system can lead to sudden and large adjustments in the currency which, in turn, can have a disruptive and negative effect on foreign investors. For example, in late 1994 the value of the Mexican
peso lost more than one-third of its value relative to the dollar. Certain Latin American countries also restrict the free conversion of their currency into foreign currencies, including the U.S. dollar. There is no significant foreign exchange
market for many currencies and it would, as a result, be difficult for the Fund to engage in foreign currency transactions designed to protect the value of the Funds interests in securities denominated in such currencies. Finally, a number of
Latin American countries are among the largest debtors of developing countries. There have been moratoria on, and reschedulings of, repayment with respect to these debts. Such events can restrict the flexibility of these debtor nations in the
international markets and result in the imposition of onerous conditions on their economies.
Hybrid
Instruments
A Fund may invest in hybrid instruments. A hybrid instrument is a type of potentially high-risk derivative that combines a
traditional stock, bond, or commodity with an option or forward contract. Generally, the principal amount, amount payable upon maturity or redemption, or interest rate of a hybrid is tied (positively or negatively) to the price of some commodity,
currency or securities index or another interest rate or some other economic factor (each a benchmark). The interest rate or (unlike most fixed income securities) the principal amount payable at maturity of a hybrid security may be
increased or decreased, depending on changes in the value of the benchmark. A hybrid could be, for example, a bond issued by an oil company that pays a small base level of interest, in addition to interest that accrues when oil prices exceed a
certain predetermined level. Such a hybrid instrument would be a combination of a bond and a call option on oil.
Hybrids can be used as an
efficient means of pursuing a variety of investment goals, including currency hedging, and increased total return. Hybrids may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a
result, may be leveraged and move (up or down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive to economic and political events, such as commodity shortages and currency devaluations, which cannot be readily foreseen
by the purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may entail significant market risks that are not associated with a similar investment in a traditional, U.S.
dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase of hybrids also exposes a Fund to the credit risk of the issuer of the hybrids. These risks may cause significant fluctuations
in the NAV of a Fund.
11
Certain issuers of structured products such as hybrid instruments may be deemed to be investment companies
as defined in the 1940 Act. As a result, a Funds investment in these products may be subject to limits applicable to investments in investment companies and may be subject to restrictions contained in the 1940 Act.
Illiquid Investments and Restricted Securities
Each Fund may purchase and hold illiquid investments. No Fund will purchase or otherwise acquire any security if, as a result, more than 15% of its net assets (taken at current value) would be invested in
investments that are illiquid by virtue of the absence of a readily available market or legal or contractual restrictions on resale. This policy does not include restricted securities eligible for resale pursuant to Rule 144A under the Securities
Act of 1933, as amended (1933 Act), which the Board of Trustees (Board or Trustees) or Rafferty, the Funds investment adviser, has determined under Board-approved guidelines are liquid. No Fund, however,
currently anticipates investing in such restricted securities.
The term illiquid investments for this purpose means investments
that cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which a Fund has valued the investments. Investments currently considered to be illiquid include: (1) repurchase agreements not
terminable within seven days; (2) securities for which market quotations are not readily available; (3) OTC options and their underlying collateral; (4) bank deposits, unless they are payable at principal amount plus accrued interest
on demand or within seven days after demand; and (5) restricted securities not determined to be liquid pursuant to guidelines established by the Board; and (6) in certain circumstances, securities involved in swap, cap, floor or collar
transactions. The assets used as cover for OTC options written by a Fund will be considered illiquid unless the OTC options are sold to qualified dealers who agree that a Fund may repurchase any OTC option it writes at a maximum price to be
calculated by a formula set forth in the option agreement. The cover for an OTC option written subject to this procedure would be considered illiquid only to the extent that the maximum repurchase price under the formula exceeds the intrinsic value
of the option.
A Fund may not be able to sell illiquid investments when Rafferty considers it desirable to do so or may have to sell such
investments at a price that is lower than the price that could be obtained if the investments were liquid. In addition, the sale of illiquid investments may require more time and result in higher dealer discounts and other selling expenses than does
the sale of investments that are not illiquid. Illiquid investments also may be more difficult to value due to the unavailability of reliable market quotations for such investments, and investment in illiquid investments may have an adverse impact
on NAV.
Rule 144A establishes a safe harbor from the registration requirements of the 1933 Act for resales of certain securities
to qualified institutional buyers. Institutional markets for restricted securities that have developed as a result of Rule 144A provide both readily ascertainable values for certain restricted securities and the ability to liquidate an investment to
satisfy share redemption orders. An insufficient number of qualified institutional buyers interested in purchasing Rule 144A-eligible securities held by a Fund, however, could affect adversely the marketability of such portfolio securities, and a
Fund may be unable to dispose of such securities promptly or at reasonable prices.
Indexed Securities
A Fund may purchase indexed securities, which are securities, the value of which varies positively or negatively in relation to the
value of other securities, securities indices or other financial indicators, consistent with its investment objective. Indexed securities may be debt securities or deposits whose value at maturity or coupon rate is determined by reference to a
specific instrument or statistic. Recent issuers of indexed securities have included banks, corporations and certain U.S. government agencies.
The performance of indexed securities depends to a great extent on the performance of the security or other instrument to which they are indexed and also
may be influenced by interest rate changes in the United States and abroad. At the same time, indexed securities are subject to the credit risks associated with the issuer of the security, and their values may decline substantially if the
issuers creditworthiness deteriorates. Indexed securities may be more volatile than the underlying instruments. Certain indexed securities that are not traded on an established market may be deemed illiquid. See Illiquid Investments and
Restricted Securities above.
12
Interest Rate Swaps
A Fund may enter into interest rate swaps for hedging purposes and non-hedging purposes. Since swaps are entered into for good faith hedging purposes or
are offset by a segregated account maintained by an approved custodian, Rafferty believes that swaps do not constitute senior securities as defined in the 1940 Act and, accordingly, will not treat them as being subject to a Funds borrowing
restrictions. The net amount of the excess, if any, of a Funds obligations over its entitlement with respect to each interest rate swap will be accrued on a daily basis and an amount of cash or other liquid securities having an aggregate NAV
at least equal to such accrued excess will be maintained in a segregated account by each Funds custodian. A Fund will not enter into any interest rate swap unless Rafferty believes that the other party to the transaction is creditworthy. If
there is a default by the other party to such a transaction, a Fund will have contractual remedies pursuant to the agreement. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. In addition, some interest rate swaps are, and more in the future may be, centrally cleared. As a result, the swap market has become relatively liquid in comparison with the
markets for other similar instruments which are traded in the interbank market.
Options, Futures and Other
Strategies
General
.
A Fund may use certain options (traded on an exchange or OTC, or otherwise), futures contracts
(sometimes referred to as futures) and options on futures contracts (collectively, Financial Instruments) as a substitute for a comparable market position in the underlying security, to attempt to hedge or limit the exposure
of a Funds position, to create a synthetic money market position, for certain tax-related purposes or to effect closing transactions.
The use of Financial Instruments is subject to applicable regulations of the SEC, the several exchanges upon which they are traded and the Commodity
Futures Trading Commission (the CFTC). In addition, a Funds ability to use Financial Instruments will be limited by tax considerations. See Dividends, Other Distributions and Taxes. Pursuant to a claim for exemption
filed with the National Futures Association on behalf of each Fund, each Fund is not deemed to be a commodity pool operator or a commodity pool under the Commodity Exchange Act (the CEA) and is not subject to registration or regulation
as such under the CEA. However, the registration exclusion was amended in February 2012, and such amendments took effect on April 24, 2012.
Under current CFTC regulations, if a Fund uses commodity interests (such as futures contracts, options on futures contracts and swaps) other than for
bona fide
hedging purposes (as defined by the
CFTC) the aggregate initial margin and premiums required to establish these positions (after taking into account unrealized profits and unrealized losses on any such positions and excluding the amount by which options that are
in-the-money at the time of purchase) may not exceed 5% of a funds NAV, or alternatively, the aggregate net notional value of those positions, as determined at the time the most recent position was established, may not exceed 100%
of the funds NAV (after taking into account unrealized profits and unrealized losses on any such positions). Accordingly, the Funds will register prior to commencement of operations, as commodity pools, and the Adviser has registered as a
commodity pool operator with the National Futures Association. Each Fund is subject to the risk that a change in U.S. law and related regulations will impact the way a Fund operates, increase the particular costs of a Funds operation and/or
change the competitive landscape. In this regard, any further amendment to the CEA or its related regulations that subject a Fund to additional regulation may have adverse impacts on a Funds operations and expenses.
In addition to the instruments, strategies and risks described below and in the Prospectus, Rafferty may discover additional opportunities in connection
with Financial Instruments and other similar or related techniques. These new opportunities may become available as Rafferty develops new techniques, as regulatory authorities broaden the range of permitted transactions and as new Financial
Instruments or other techniques are developed. Rafferty may utilize these opportunities to the extent that they are consistent with a Funds investment objective and permitted by a Funds investment limitations and applicable regulatory
authorities. A Funds Prospectus or this SAI will be supplemented to the extent that new products or techniques involve materially different risks than those described below or in the Prospectus.
13
Special Risks
.
The use of Financial Instruments involves special considerations and risks,
certain of which are described below. Risks pertaining to particular Financial Instruments are described in the sections that follow.
(1)
Successful use of most Financial Instruments depends upon Raffertys ability to predict movements of the overall securities markets, which requires different skills than predicting changes in the prices of individual securities. The ordinary
spreads between prices in the cash and futures markets, due to the differences in the natures of those markets, are subject to distortion. Due to the possibility of distortion, a correct forecast of stock market trends by Rafferty may still not
result in a successful transaction. Rafferty may be incorrect in its expectations as to the extent of market movements or the time span within which the movements take place, which, thus, may result in the strategy being unsuccessful.
(2) Options and futures prices can diverge from the prices of their underlying instruments. Options and futures prices are affected by such factors as
current and anticipated short-term interest rates, changes in volatility of the underlying instrument and the time remaining until expiration of the contract, which may not affect security prices the same way. Imperfect or no correlation also may
result from differing levels of demand in the options and futures markets and the securities markets, from structural differences in how options and futures and securities are traded, and from imposition of daily price fluctuation limits or trading
halts.
(3) As described below, a Fund might be required to maintain assets as cover, maintain segregated accounts or make margin
payments when it takes positions in Financial Instruments involving obligations to third parties (
e.g.
, Financial Instruments other than purchased options). If a Fund were unable to close out its positions in such Financial Instruments, it
might be required to continue to maintain such assets or accounts or make such payments until the position expired or matured. These requirements might impair a Funds ability to sell a portfolio security or make an investment when it would
otherwise be favorable to do so or require that a Fund sell a portfolio security at a disadvantageous time. A Funds ability to close out a position in a Financial Instrument prior to expiration or maturity depends on the existence of a liquid
secondary market or, in the absence of such a market, the ability and willingness of the other party to the transaction (the counterparty) to enter into a transaction closing out the position. Therefore, there is no assurance that any
position can be closed out at a time and price that is favorable to a Fund.
(4) Losses may arise due to unanticipated market price movements,
lack of a liquid secondary market for any particular instrument at a particular time or due to losses from premiums paid by a Fund on options transactions.
Cover
.
Transactions using Financial Instruments, other than purchased options, expose a Fund to an obligation to another party. A Fund will not enter into any such transactions unless it
owns either (1) an offsetting (covered) position in securities or other options or futures contracts or (2) cash and liquid assets with a value, marked-to-market daily, sufficient to cover its potential obligations to the
extent not covered as provided in (1) above. Each Fund will comply with SEC guidelines regarding cover for these instruments and will, if the guidelines so require, set aside cash or liquid assets in an account with its custodian, the Bank of
New York Mellon (BNYM), in the prescribed amount as determined daily.
Assets used as cover or held in an account cannot be sold
while the position in the corresponding Financial Instrument is open, unless they are replaced with other appropriate assets. As a result, the commitment of a large portion of a Funds assets to cover or accounts could impede portfolio
management or a Funds ability to meet redemption requests or other current obligations.
Options
.
The
value of an option position will reflect, among other things, the current market value of the underlying investment, the time remaining until expiration, the relationship of the exercise price to the market price of the underlying investment and
general market conditions. Options that expire unexercised have no value. Options currently are traded on the Chicago Board Options Exchange
®
(CBOE
®
), the
Exchange and other exchanges, as well as the OTC markets.
By buying a call option on a security, a Fund has the right, in return for the
premium paid, to buy the security underlying the option at the exercise price. By writing (selling) a call option and receiving a premium, a Fund becomes obligated during the term of the option to deliver securities underlying the option at the
exercise price if the option is exercised. By buying a put option, a Fund has the right, in return for the premium, to sell the security
14
underlying the option at the exercise price. By writing a put option, a Fund becomes obligated during the
term of the option to purchase the securities underlying the option at the exercise price.
Because options premiums paid or received by a
Fund are small in relation to the market value of the investments underlying the options, buying and selling put and call options can be more speculative than investing directly in securities.
A Fund may effectively terminate its right or obligation under an option by entering into a closing transaction. For example, a Fund may terminate its
obligation under a call or put option that it had written by purchasing an identical call or put option; this is known as a closing purchase transaction. Conversely, a Fund may terminate a position in a put or call option it had purchased by writing
an identical put or call option; this is known as a closing sale transaction. Closing transactions permit a Fund to realize profits or limit losses on an option position prior to its exercise or expiration.
Risks of Options on Securities
.
Exchange-traded options in the United States are issued by a clearing organization affiliated with the
exchange on which the option is listed that, in effect, guarantees completion of every exchange-traded option transaction. In contrast, OTC options are contracts between a Fund and its counterparty (usually a securities dealer or a bank) with no
clearing organization guarantee. Thus, when a Fund purchases an OTC option, it relies on the counterparty from whom it purchased the option to make or take delivery of the underlying investment upon exercise of the option. Failure by the
counterparty to do so would result in the loss of any premium paid by a Fund as well as the loss of any expected benefit of the transaction.
A Funds ability to establish and close out positions in exchange-traded options depends on the existence of a liquid market. However, there can be
no assurance that such a market will exist at any particular time. Closing transactions can be made for OTC options only by negotiating directly with the counterparty, or by a transaction in the secondary market if any such market exists. There can
be no assurance that a Fund will in fact be able to close out an OTC option position at a favorable price prior to expiration. In the event of insolvency of the counterparty, a Fund might be unable to close out an OTC option position at any time
prior to its expiration.
If a Fund were unable to effect a closing transaction for an option it had purchased, it would have to exercise the
option to realize any profit. The inability to enter into a closing purchase transaction for a covered call option written by a Fund could cause material losses because a Fund would be unable to sell the investment used as cover for the written
option until the option expires or is exercised.
Risks of Options on Currencies and Securities
.
Exchange-traded options in the
United States are issued by a clearing organization affiliated with the exchange on which the option is listed that, in effect, guarantees completion of every exchange-traded option transaction. In contrast, OTC options are contracts between a Fund
and its counterparty (usually a securities dealer or a bank) with no clearing organization guarantee. Thus, when a Fund purchases an OTC option, it relies on the counterparty from which it purchased the option to make or take delivery of the
underlying investment upon exercise of the option. Failure by the counterparty to do so would result in the loss of any premium paid by a Fund as well as the loss of any expected benefit of the transaction.
A Funds ability to establish and close out positions in exchange-traded options depends on the existence of a liquid market. However, there can be
no assurance that such a market will exist at any particular time. Closing transactions can be made for OTC options only by negotiating directly with the counterparty, or by a transaction in the secondary market if any such market exists. There can
be no assurance that a Fund will in fact be able to close out an OTC option position at a favorable price prior to expiration. In the event of insolvency of the counterparty, a Fund might be unable to close out an OTC option position at any time
prior to its expiration.
If a Fund were unable to effect a closing transaction for an option it had purchased, it would have to exercise the
option to realize any profit. The inability to enter into a closing purchase transaction for a covered call option written by a Fund could cause material losses because a Fund would be unable to sell the investment used as cover for the written
option until the option expires or is exercised.
Options on Indices
.
An index fluctuates with changes in the market values of
the securities included in the index. Options on indices give the holder the right to receive an amount of cash upon exercise of the option. Receipt of this
15
cash amount will depend upon the closing level of the index upon which the option is based being greater than (in the case of a call) or less than (in the case of put) the exercise price of the
option. Some stock index options are based on a broad market index such as the S&P 500
®
Composite Stock
Index, the NYSE Composite Index or the AMEX
®
Major Market Index or on a narrower index such as the Philadelphia
Stock Exchange Over-the-Counter Index.
The Exchange has established limitations governing the maximum number of call or put options on the
same index that may be bought or written by a single investor, whether acting alone or in concert with others (regardless of whether such options are written on the same or different exchanges or are held or written on one or more accounts or
through one or more brokers). Under these limitations, option positions of all investment companies advised by Rafferty are combined for purposes of these limits. Pursuant to these limitations, an exchange may order the liquidation of positions and
may impose other sanctions or restrictions. These positions limits may restrict the number of listed options that a Fund may buy or sell.
Puts and calls on indices are similar to puts and calls on securities or futures contracts except that all settlements are in cash and gain or loss
depends on changes in the index in question rather than on price movements in individual securities or futures contracts. When a Fund writes a call on an index, it receives a premium and agrees that, prior to the expiration date, the purchaser of
the call, upon exercise of the call, will receive from a Fund an amount of cash if the closing level of the index upon which the call is based is greater than the exercise price of the call. The amount of cash is equal to the difference between the
closing price of the index and the exercise price of the call times a specified multiple (multiplier), which determines the total value for each point of such difference. When a Fund buys a call on an index, it pays a premium and has the
same rights to such call as are indicated above. When a Fund buys a put on an index, it pays a premium and has the right, prior to the expiration date, to require the seller of the put, upon a Funds exercise of the put, to deliver to a Fund an
amount of cash if the closing level of the index upon which the put is based is less than the exercise price of the put, which amount of cash is determined by the multiplier, as described above for calls. When a Fund writes a put on an index, it
receives a premium and the purchaser of the put has the right, prior to the expiration date, to require a Fund to deliver to it an amount of cash equal to the difference between the closing level of the index and the exercise price times the
multiplier if the closing level is less than the exercise price.
Risks of Options on Indices
.
If a Fund has purchased an index
option and exercises it before the closing index value for that day is available, it runs the risk that the level of the underlying index may subsequently change. If such a change causes the exercised option to fall out-of-the-money, a Fund will be
required to pay the difference between the closing index value and the exercise price of the option (times the applicable multiplier) to the assigned writer.
OTC Options
.
Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size and strike price, the terms of OTC options
(options not traded on exchanges) generally are established through negotiation with the other party to the option contract. While this type of arrangement allows a Fund great flexibility to tailor the option to its needs, OTC options generally
involve greater risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded.
Forward Contracts
. The Funds may enter into equity, equity index or interest rate forward contracts for purposes of attempting to gain
exposure to an index or group of securities without actually purchasing these securities, or to hedge a position. Forward contracts are two-party contracts pursuant to which one party agrees to pay the counterparty a fixed price for an agreed upon
amount of commodities, securities, or the cash value of the commodities, securities or the securities index, at an agreed upon date. Because they are two-party contracts and because they may have terms greater than seven days, forward contracts may
be considered to be illiquid for the Funds illiquid investment limitations. A Fund will not enter into any forward contract unless Rafferty believes that the other party to the transaction is creditworthy. A Fund bears the risk of loss of the
amount expected to be received under a forward contract in the event of the default or bankruptcy of a counterparty. If such a default occurs, a Fund will have contractual remedies pursuant to the forward contract, but such remedies may be subject
to bankruptcy and insolvency laws which could affect the Funds rights as a creditor.
Futures Contracts and Options on Futures
Contracts
.
A futures contract obligates the seller to deliver (and the purchaser to take delivery of) the specified security on the expiration date of the contract. An index futures contract obligates the seller to deliver (and the purchaser
to take) an amount of cash equal to a specific dollar amount times
16
the difference between the value of a specific index at the close of the last trading day of the contract and the price at which the agreement is made. No physical delivery of the underlying
securities in the index is made.
When a Fund writes an option on a futures contract, it becomes obligated, in return for the premium paid, to
assume a position in the futures contract at a specified exercise price at any time during the term of the option. If a Fund writes a call, it assumes a short futures position. If it writes a put, it assumes a long futures position. When a Fund
purchases an option on a futures contract, it acquires the right in return for the premium it pays to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put).
Whether a Fund realizes a gain or loss from futures activities depends upon movements in the underlying security or index. The extent of a Funds
loss from an unhedged short position in futures contracts or from writing unhedged call options on futures contracts is potentially unlimited. A Fund only purchases and sells futures contracts and options on futures contracts that are traded on a
U.S. exchange or board of trade.
No price is paid upon entering into a futures contract. Instead, at the inception of a futures contract a
Fund is required to deposit initial margin in an amount generally equal to 10% or less of the contract value. Margin also must be deposited when writing a call or put option on a futures contract, in accordance with applicable exchange
rules. Unlike margin in securities transactions, initial margin does not represent a borrowing, but rather is in the nature of a performance bond or good-faith deposit that is returned to a Fund at the termination of the transaction if all
contractual obligations have been satisfied. Under certain circumstances, such as periods of high volatility, a Fund may be required by an exchange to increase the level of its initial margin payment, and initial margin requirements might be
increased generally in the future by regulatory action.
Subsequent variation margin payments are made to and from the futures
commission merchant daily as the value of the futures position varies, a process known as marking-to-market. Variation margin does not involve borrowing, but rather represents a daily settlement of a Funds obligations to or from a
futures commission merchant. When a Fund purchases an option on a futures contract, the premium paid plus transaction costs is all that is at risk. In contrast, when a Fund purchases or sells a futures contract or writes a call or put option
thereon, it is subject to daily variation margin calls that could be substantial in the event of adverse price movements. If a Fund has insufficient cash to meet daily variation margin requirements, it might need to sell securities at a time when
such sales are disadvantageous.
Purchasers and sellers of futures contracts and options on futures can enter into offsetting closing
transactions, similar to closing transactions in options, by selling or purchasing, respectively, an instrument identical to the instrument purchased or sold. Positions in futures and options on futures contracts may be closed only on an exchange or
board of trade that provides a secondary market. However, there can be no assurance that a liquid secondary market will exist for a particular contract at a particular time. In such event, it may not be possible to close a futures contract or
options position.
Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures
contract or an option on a futures contract can vary from the previous days settlement price; once that limit is reached, no trades may be made that day at a price beyond the limit. Daily price limits do not limit potential losses because
prices could move to the daily limit for several consecutive days with little or no trading, thereby preventing liquidation of unfavorable positions.
If a Fund were unable to liquidate a futures contract or an option on a futures position due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial
losses. A Fund would continue to be subject to market risk with respect to the position. In addition, except in the case of purchased options, a Fund would continue to be required to make daily variation margin payments and might be required to
maintain cash or liquid assets in an account.
17
Risks of Futures Contracts and Options Thereon
.
The ordinary spreads between prices in the
cash and futures markets (including the options on futures markets), due to differences in the natures of those markets, are subject to the following factors, which may create distortions. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions, which could distort the normal relationships between the cash and futures
markets. Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market
could be reduced, thus producing distortion. Third, from the point of view of speculators, the deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by
speculators in the futures market may cause temporary price distortions.
Risks Associated with Commodity Futures Contracts.
There are several additional risks associated with transactions in commodity futures contracts.
Storage.
Unlike the financial
futures markets, in the commodity futures markets there are costs of physical storage associated with purchasing the underlying commodity. The price of the commodity futures contract will reflect the storage costs of purchasing the physical
commodity, including the time value of money invested in the physical commodity. To the extent that the storage costs for an underlying commodity change while a Fund is invested in futures contracts on that commodity, the value of the futures
contract may change proportionately.
Reinvestment.
In the commodity futures markets, producers of the underlying commodity may
decide to hedge the price risk of selling the commodity by selling futures contracts today to lock in the price of the commodity at delivery tomorrow. In order to induce speculators to purchase the other side of the same futures contract, the
commodity producer generally must sell the futures contract at a lower price than the expected future spot price. Conversely, if most hedgers in the futures market are purchasing futures contracts to hedge against a rise in prices, then speculators
will only sell the other side of the futures contract at a higher futures price than the expected future spot price of the commodity. The changing nature of the hedgers and speculators in the commodity markets will influence whether futures prices
are above or below the expected future spot price, which can have significant implications for a Fund. If the nature of hedgers and speculators in futures markets has shifted when it is time for a Fund to reinvest the proceeds of a maturing contract
in a new futures contract, the Fund might reinvest at higher or lower futures prices, or choose to pursue other investments.
Other
Economic Factors.
The commodities which underlie commodity futures contracts may be subject to additional economic and non-economic variables, such as drought, floods, weather, livestock disease, embargoes, tariffs, and international
economic, political and regulatory developments. These factors may have a larger impact on commodity prices and commodity-linked instruments, including futures contracts, than on traditional securities. Certain commodities are also subject to
limited pricing flexibility because of supply and demand factors. Others are subject to broad price fluctuations as a result of the volatility of the prices for certain raw materials and the instability of supplies of other materials. These
additional variables may create additional investment risks which subject a Funds investments to greater volatility than investments in traditional securities.
Combined Positions
.
A Fund may purchase and write options in combination with each other. For example, a Fund may purchase a put option and write a call option on the same underlying
instrument, in order to construct a combined position whose risk and return characteristics are similar to selling a futures contract. Another possible combined position would involve writing a call option at one strike price and buying a call
option at a lower price, in order to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
18
Other Investment Companies
Open-End and Closed-End Investment Companies
.
The Funds may invest in shares of open-end and closed-end investment companies in accordance
with the investment restrictions in the 1940 Act. Shares of an ETF that has received exemptive relief from the SEC to permit other funds to invest in the shares without these limitations are excluded from such restrictions to the extent that a Fund
has complied with the requirements of such orders. A Fund, as a shareholder of another investment company, will bear its pro-rata portion of the other investment companys advisory fee and other expenses, in addition to its own expenses and
will be exposed to the investment risks associated with the other investment company. To the extent that a Fund invests in open-end or closed-end investment companies that invest primarily in the securities of companies located outside the United
States, see the risks related to foreign securities set forth above.
Exchange-Traded Products
.
The Funds may invest in ETFs,
which are registered investment companies, partnerships or trusts that are bought and sold on a securities exchange. A Fund may also invest in exchange-traded notes (ETN), which are structured debt securities. Additionally, a Fund may
invest in swap agreements referencing ETFs. Whereas ETFs liabilities are secured by their portfolio securities, ETNs liabilities are unsecured general obligations of the issuer. Most ETFs and ETNs are designed to track a particular
market segment or index. ETFs and ETNs share expenses associated with their operation, typically including, with respect to ETFs, advisory fees. When a Fund invests in an ETF or ETN, in addition to directly bearing expenses associated with its own
operations, it will bear its pro rata portion of the ETFs or ETNs expenses. The risks of owning an ETF or ETN generally reflect the risks of owning the underlying securities the ETF or ETN is designed to track, although lack of liquidity
in an ETF or ETN could result in it being more volatile than the underlying portfolio of securities. If a Fund invests in ETFs or swap agreements referencing ETFs, the underlying ETFs may not necessarily track the same index as the Fund. In
addition, because of ETF or ETN expenses, compared to owning the underlying securities directly, it may be more costly to own an ETF or ETN. The value of an ETN security should also be expected to fluctuate with the credit rating of the issuer.
Zero-Coupon Securities
A Fund may invest in zero-coupon securities of any rating or maturity. Zero-coupon securities make no periodic interest payment, but are sold at a deep discount from their face value (original issue
discount). The buyer recognizes a rate of return determined by the gradual appreciation of the security, which is redeemed at face value on a specified maturity date. The original issue discount varies depending on the time remaining until
maturity, as well as market interest rates, liquidity of the security, and the issuers perceived credit quality. If the issuer defaults, a Fund may not receive any return on its investment. Because zero-coupon securities bear no interest and
compound semi-annually at the rate fixed at the time of issuance, their value generally is more volatile than the value of other fixed-income securities. Since zero-coupon security holders do not receive interest payments, when interest rates rise,
zero-coupon securities fall more dramatically in value than securities paying interest on a current basis. When interest rates fall, zero-coupon securities rise more rapidly in value because the securities reflect a fixed rate of return. An
investment in zero-coupon and delayed interest securities (which do not make interest payments until after a specified time) may cause a Fund to recognize income and to be required to make distributions thereof to shareholders before it receives any
cash payments on its investment. Thus, a Fund could be required at times to liquidate other investments to satisfy distribution requirements. See Payment-In-Kind Securities and Strips below and Dividends, Other Distributions and
Taxes Income from Zero-Coupon and Payment-in-Kind Securities.
Payment-In-Kind Securities and
Strips
A Fund may invest in payment-in-kind securities and strips of any rating or maturity. Payment-in-kind securities allow the
issuer, at its option, to make current interest payments on the bonds either in cash or in bonds. Both zero-coupon securities and payment-in-kind securities allow an issuer to avoid the need to generate cash to meet current interest payments. Even
though such securities do not pay current interest in cash, a Fund nonetheless is required to accrue interest income on these investments and to distribute the interest income at least annually to shareholders. Thus, a Fund could be required at
times to liquidate other investments to satisfy distribution requirements.
A Fund may also invest in strips, which are debt securities whose
interest coupons are taken out and traded separately after the securities are issued but otherwise are comparable to zero-coupon securities. Like zero-coupon
19
securities and payment-in-kind securities, strips are generally more sensitive to interest rate fluctuations than interest paying securities of comparable term and quality.
Repurchase Agreements
A Fund may enter into repurchase agreements with banks that are members of the Federal Reserve System or securities dealers who are members of a national securities exchange or are primary dealers in U.S.
government securities. Repurchase agreements generally are for a short period of time, usually less than a week. Under a repurchase agreement, a Fund purchases a U.S. government security and simultaneously agrees to sell the security back to the
seller at a mutually agreed-upon future price and date, normally one day or a few days later. The resale price is greater than the purchase price, reflecting an agreed-upon market interest rate during a Funds holding period. While the
maturities of the underlying securities in repurchase agreement transactions may be more than one year, the term of each repurchase agreement always will be less than one year. Repurchase agreements with a maturity of more than seven days are
considered to be illiquid investments. No Fund may enter into such a repurchase agreement if, as a result, more than 15% of the value of its net assets would then be invested in such repurchase agreements and other illiquid investments. See
Illiquid Investments and Restricted Securities above.
A Fund will always receive, as collateral, securities whose market value,
including accrued interest, at all times will be at least equal to 100% of the dollar amount invested by a Fund in each repurchase agreement. In the event of default or bankruptcy by the seller, a Fund will liquidate those securities (whose market
value, including accrued interest, must be at least 100% of the amount invested by a Fund) held under the applicable repurchase agreement, which securities constitute collateral for the sellers obligation to repurchase the security. If the
seller defaults, a Fund might incur a loss if the value of the collateral securing the repurchase agreement declines and might incur disposition costs in connection with liquidating the collateral. In addition, if bankruptcy or similar proceedings
are commenced with respect to the seller of the security, realization upon the collateral by a Fund may be delayed or limited.
Reverse Repurchase Agreements
A Fund may borrow by entering into reverse repurchase agreements with the same parties with whom it
may enter into repurchase agreements. Under a reverse repurchase agreement, a Fund sells securities and agrees to repurchase them at a mutually agreed to price. At the time a Fund enters into a reverse repurchase agreement, it will establish and
maintain a segregated account with an approved custodian containing liquid high-grade securities, marked-to-market daily, having a value not less than the repurchase price (including accrued interest). Reverse repurchase agreements involve the risk
that the market value of securities retained in lieu of sale by a Fund may decline below the price of the securities a Fund has sold but is obliged to repurchase. If the buyer of securities under a reverse repurchase agreement files for bankruptcy
or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce a Funds obligation to repurchase the securities. During that time, a Funds use of the proceeds of the reverse
repurchase agreement effectively may be restricted. Reverse repurchase agreements create leverage, a speculative factor, and are considered borrowings for the purpose of a Funds limitation on borrowing.
Short Sales
A Fund may engage in short sale transactions under which a Fund sells a security it does not own. To complete such a transaction, a Fund must borrow the security to make delivery to the buyer. A Fund then
is obligated to replace the security borrowed by purchasing the security at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by a Fund. Until the security is
replaced, a Fund is required to pay to the lender amounts equal to any dividends that accrue during the period of the loan. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet the margin requirements, until
the short position is closed out.
Until a Fund closes its short position or replaces the borrowed stock, a Fund will: (1) maintain an
account containing cash or liquid assets at such a level that (a) the amount deposited in the account plus the amount deposited with the broker as collateral will equal the current value of the stock sold short and (b) the amount
20
deposited in the account plus the amount deposited with the broker as collateral will not be less than the market value of the stock at the time the stock was sold short; or (2) otherwise
cover a Funds short position.
Swap Agreements
A Fund may enter into swap agreements. Swap agreements are generally two-party contracts entered into primarily by institutional investors for periods
ranging from a day to more than one year. In a standard swap transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The
gross returns to be exchanged or swapped between the parties are calculated with respect to a notional amount,
i.e.,
the return on or increase in value of a particular dollar amount invested in a basket of
securities representing a particular index. Some swaps are, and more in the future will be, centrally cleared. Swaps that are centrally-cleared are subject to the creditworthiness of the clearing organizations involved in the transaction. For
example, an investor could lose margin payments it has deposited with the clearing organization as well as the net amount of gains not yet paid by the clearing organization if it breaches its agreement with the investor or becomes insolvent or goes
into bankruptcy. In the event of bankruptcy of the clearing organization, the investor may be entitled to the net amount of gains the investor is entitled to receive plus the return of margin owed to it only in proportion to the amount received by
the clearing organizations other customers, potentially resulting in losses to the investor.
Most swap agreements entered into by a
Fund calculate the obligations of the parties to the agreement on a net basis. Consequently, a Funds current obligations (or rights) under a swap agreement generally will be equal to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to the agreement (the net amount). Payments may be made at the conclusion of a swap agreement or periodically during its term.
Swap agreements do not involve the delivery of securities or other underlying assets. Accordingly, if a swap is entered into on a net basis, if the other
party to a swap agreement defaults, a Funds risk of loss consists of the net amount of payments that such Fund is contractually entitled to receive, if any.
The net amount of the excess, if any, of a Funds obligations over its entitlements with respect to a swap agreement entered into on a net basis will be accrued daily and an amount of cash or liquid
asset having an aggregate NAV at least equal to the accrued excess will be maintained in an account with the Custodian that satisfies the 1940 Act. A Fund also will establish and maintain such accounts with respect to its total obligations under any
swaps that are not entered into on a net basis. Obligations under swap agreements so covered will not be construed to be senior securities for purposes of a Funds investment restriction concerning senior securities.
Because they are generally two-party contracts and because they may have terms of greater than seven days, swap agreements may be considered to be
illiquid for a Funds illiquid investment limitations. A Fund will not enter into any swap agreement unless Rafferty believes that the other party to the transaction is creditworthy. A Fund bears the risk of loss of the amount expected to be
received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty.
A Fund may enter into a swap
agreement with respect to an equity market index in circumstances where Rafferty believes that it may be more cost effective or practical than buying the securities represented by such index or a futures contract or an option on such index. The
counterparty to any swap agreement will typically be a bank, investment banking firm or broker-dealer. The counterparty will generally agree to pay a Fund the amount, if any, by which the notional amount of the swap agreement would have increased in
value had it been invested in the particular stocks represented in the index, plus the dividends that would have been received on those stocks. A Fund will agree to pay to the counterparty a floating rate of interest on the notional amount of the
swap agreement plus the amount, if any, by which the notional amount would have decreased in value had it been invested in such stocks. Therefore, the return to a Fund on any swap agreement should be the gain or loss on the notional amount plus
dividends on the stocks less the interest paid by a Fund on the notional amount.
The swap market has grown substantially in recent years with
a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. In addition, as discussed above, some swaps currently are, and more in the future will be, centrally cleared,
which affects how swaps are transacted.
21
As a result, the swap market has become relatively liquid in comparison with the markets for other similar instruments that are traded in the OTC market. Rafferty, under the supervision of the
Board, is responsible for determining and monitoring the liquidity of Fund transactions in swap agreements.
The use of equity swaps is a
highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities transactions.
Unrated Debt Securities
A Fund may also invest in
unrated debt securities. Unrated debt, while not necessarily lower in quality than rated securities, may not have as broad a market. Because of the size and perceived demand for the issue, among other factors, certain issuers may decide not to pay
the cost of getting a rating for their bonds. The creditworthiness of the issuer, as well as any financial institution or other party responsible for payments on the security, will be analyzed to determine whether to purchase unrated bonds.
U.S. Government Sponsored Enterprises (GSE)
GSE securities are securities issued or guaranteed by the U.S. government or its agencies or instrumentalities. Some obligations issued by GSEs and
instrumentalities are supported by the full faith and credit of the U.S. Treasury; others by the right of the issuer to borrow from the U.S. Treasury; others by discretionary authority of the U.S. government to purchase certain obligations of the
agency or instrumentality; and others only by the credit of the agency or instrumentality. Those securities bear fixed, floating or variable rates of interest. Interest may fluctuate based on generally recognized reference rates or the relationship
of rates. While the U.S. government currently provides financial support to such GSEs or instrumentalities, no assurance can be given that it will always do so, since it is not so obligated by law.
Certain U.S. government debt securities, such as securities of the Federal Home Loan Banks, are supported by the right of the issuer
to borrow from the U.S. Treasury. Others, such as securities issued by the Fannie Mae
©
and Freddie Mac
©
, are supported only by the credit of the corporation. In the case of securities not backed by the full faith and
credit of the United States, a fund must look principally to the agency issuing or guaranteeing the obligation in the event the agency or instrumentality does not meet its commitments. The U.S. government may choose not to provide financial support
to GSEs or instrumentalities if it is not legally obligated to do so. A fund will invest in securities of such instrumentalities only when Rafferty is satisfied that the credit risk with respect to any such instrumentality is comparatively minimal.
U.S. Government Securities
A Fund may invest in securities issued or guaranteed by the U.S. government or its agencies or instrumentalities (U.S. government securities) in pursuit of its investment objective, in order
to deposit such securities as initial or variation margin, as cover for the investment techniques it employs, as part of a cash reserve or for liquidity purposes.
U.S. government securities are high-quality instruments issued or guaranteed as to principal or interest by the U.S. Treasury or by an agency or instrumentality of the U.S. government. Not all U.S.
government securities are backed by the full faith and credit of the United States. Some are backed by the right of the issuer to borrow from the U.S. Treasury; others are backed by discretionary authority of the U.S. government to purchase the
agencies obligations; while others are supported only by the credit of the instrumentality. In the case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment.
U.S. government securities include U.S. Treasury Bills (which mature within one year of
the date they are issued), U.S. Treasury Notes (which have maturities of one to ten years) and U.S. Treasury Bonds (which generally have maturities of more than 10 years). All such U.S. Treasury securities are backed by the full faith and credit of
the United States.
22
U.S. government agencies and instrumentalities that issue or guarantee securities
include the Federal Housing Administration, Fannie Mae
©
, the Farmers Home Administration, the Export-Import
Bank of the United States, the Small Business Administration, Ginnie Mae
®
, the General Services Administration,
the Central Bank for Cooperatives, the Federal Home Loan Banks, Freddie Mac
©
, the Farm Credit Banks, the
Maritime Administration, the Tennessee Valley Authority, the Resolution Funding Corporation and the Student Loan Marketing Association (Sallie Mae
©
).
In September 2008, the U.S.
Treasury and the Federal Housing Finance Agency (FHFA) announced that Fannie Mae
©
and Freddie Mac
®
had been placed in conservatorship. Since that time, Fannie Mae
©
and Freddie Mac
®
have
received significant capital support through U.S. Treasury preferred stock purchases, as well as U.S. Treasury and Federal Reserve purchases of their mortgage backed securities (MBS). The FHFA and the U.S. Treasury (through its agreement
to purchase Fannie Mae
©
and Freddie Mac
®
preferred stock) have imposed strict limits on the size of their mortgage portfolios. While the MBS purchase programs ended in 2010, the U.S. Treasury continues its
support for the entities capital as necessary to prevent a negative net worth through at least 2012. While the U.S. Treasury is committed to offset negative equity at Fannie Mae
©
and Freddie Mac
®
through its
preferred stock purchases through 2012, no assurance can be given that any Federal Reserve, U.S. Treasury, or FHFA initiatives will ensure that Fannie Mae
©
and Freddie Mac
®
will remain
successful in meeting their obligations with respect to the debt and mortgage-backed securities they issue beyond that date.
In addition, the problems faced by Fannie Mae
©
and Freddie Mac
®
, resulting in their being placed into federal conservatorship and receiving significant U.S. Government support,
have sparked serious debate among federal policy makers regarding the continued role of the U.S. Government in providing liquidity for mortgage loans. The Obama Administration produced a report to Congress on February 11, 2011, outlining a
proposal to wind down Fannie Mae
©
and Freddie Mac
®
by increasing their guarantee fees, reducing their conforming loan limits (the maximum amount of each loan they are authorized to purchase), and continuing
progressive limits on the size of their investment portfolio. From the end of 2007 through the second quarter of 2012, the Fannie Mae
®
and Freddie Mac
®
required
U.S. Treasury support of approximately $187 billion through draws under the preferred stock purchase agreements. However, they have repaid approximately $46 billion in dividends. Both Fannie Mae
®
and Freddie Mac
®
ended the second quarter of 2012 with positive net worth, and as a result, neither required a draw from the U.S. Treasury. Serious discussions among policymakers
continue, however, as to whether Fannie Mae
©
and Freddie Mac
®
should be nationalized, privatized, restructured, or eliminated altogether. Fannie Mae
©
and Freddie Mac
®
also are
the subject of several continuing legal actions and investigations over certain accounting, disclosure or corporate governance matters, which (along with any resulting financial restatements) may continue to have an adverse effect on the
guaranteeing entities. Importantly, the future of Fannie Mae
©
and Freddie Mac
®
is in question as the U.S. Government considers multiple options.
Yields on short-, intermediate- and long-term U.S. government securities are dependent on a variety of factors, including the general conditions of the
money and bond markets, the size of a particular offering and the maturity of the obligation. Debt securities with longer maturities tend to produce higher capital appreciation and depreciation than obligations with shorter maturities and lower
yields. The market value of U.S. government securities generally varies inversely with changes in the market interest rates. An increase in interest rates, therefore, generally would reduce the market value of a Funds portfolio investments in
U.S. government securities, while a decline in interest rates generally would increase the market value of a Funds portfolio investments in these securities.
When-Issued Securities
A Fund may enter into firm
commitment agreements for the purchase of securities on a specified future date. A Fund may purchase, for example, new issues of fixed-income instruments on a when-issued basis, whereby the payment obligation, or yield to maturity, or coupon rate on
the instruments may not be fixed at the time of transaction. A Fund will not purchase securities on a when-issued basis if, as a result, more than 15% of its net assets would be so invested. If a Fund enters into a firm commitment agreement,
liability for the purchase price and the rights and risks of ownership of the security accrue to a Fund at the time it becomes obligated to purchase such security, although delivery and payment occur at a later date. Accordingly, if the market price
of the security should decline, the effect of such an agreement would be to obligate a Fund to purchase the security at a price above the current market price on the date of delivery and payment. During the time a Fund is obligated to purchase such
a
23
security, it will be required to segregate assets with an approved custodian in an amount sufficient to settle the transaction.
Other Investment Risks and Practices
Borrowing
. A
Fund may borrow money for investment purposes, which is a form of leveraging. Leveraging investments, by purchasing securities with borrowed money, is a speculative technique that increases investment risk while increasing investment opportunity.
Leverage will magnify changes in a Funds NAV and on a Funds investments. Although the principal of such borrowings will be fixed, a Funds assets may change in value during the time the borrowing is outstanding. Leverage also
creates interest expenses for a Fund. To the extent the income derived from securities purchased with borrowed funds exceeds the interest a Fund will have to pay, that Funds net income will be greater than it would be if leverage were not
used. Conversely, if the income from the assets obtained with borrowed funds is not sufficient to cover the cost of leveraging, the net income of a Fund will be less than it would be if leverage were not used, and therefore the amount available for
distribution to shareholders as dividends will be reduced. The use of derivatives in connection with leverage creates the potential for significant loss.
A Fund may borrow money to facilitate management of a Funds portfolio by enabling a Fund to meet redemption requests when the liquidation of portfolio instruments would be inconvenient or
disadvantageous. Such borrowing is not for investment purposes and will be repaid by the borrowing Fund promptly.
As required by the 1940
Act, a Fund must maintain continuous asset coverage (total assets, including assets acquired with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If at any time the value of the required asset coverage
declines as a result of market fluctuations or other reasons, a Fund may be required to sell some of its portfolio investments within three days to reduce the amount of its borrowings and restore the 300% asset coverage, even though it may be
disadvantageous from an investment standpoint to sell portfolio instruments at that time.
Lending Portfolio Securities
.
Each Fund may lend portfolio securities with a value not exceeding 33 1/3% of its total assets to brokers, dealers, and financial
institutions. Borrowers are required continuously to secure their obligations to return securities on loan from a Fund by depositing any combination of short-term government securities, shares of registered and unregistered money market funds and
cash as collateral with a Fund. The collateral must be equal to at least 100% of the market value of the loaned securities, which will be marked to market daily. The value of this collateral could decline, causing the Fund to experience a loss.
While a Funds portfolio securities are on loan, a Fund continues to receive interest on the securities loaned and simultaneously earns either interest on the investment of the collateral or fee income if the loan is otherwise collateralized. A
Fund may invest the interest received and the collateral, thereby earning additional income. Loans would be subject to termination by the lending Fund on a four-business days notice or by the borrower on a one-day notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of the borrowed securities that occurs during the term of the loan inures to the lending Fund and that Funds shareholders. A lending Fund may pay reasonable finders,
borrowers, administrative and custodial fees in connection with a loan. A Fund could lose money from securities lending if, for example, it is delayed or prevented from selling the collateral after a loan is made, in recovering the securities loaned
or if the Fund incurs losses on the reinvestment of cash collateral. Each Fund currently has no intention of lending its portfolio securities.
Portfolio Turnover
. The Trust anticipates that each Funds annual portfolio turnover will vary. A Funds portfolio turnover rate
is calculated by the value of the securities purchased or securities sold, excluding all securities whose maturities at the time of acquisition were one year or less, divided by the average monthly value of such securities owned during the year.
Based on this calculation, instruments with remaining maturities of less than one year are excluded from the portfolio turnover rate. Such instruments generally would include futures contracts and options, since such contracts generally have a
remaining maturity of less than one year. In any given period, all of a Funds investments may have a remaining maturity of less than one year; in that case, the portfolio turnover rate for that period would be equal to zero. However, each
Funds portfolio turnover rate calculated with all securities whose maturities were one year or less is anticipated to be unusually high.
24
High portfolio turnover involves correspondingly greater expenses to a Fund, including brokerage commissions
or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities. Such sales also may result in adverse tax consequences to a Funds shareholders resulting from its distributions of increased net
capital gains, if any, recognized as a result of the sales. The trading costs and tax effects associated with portfolio turnover may adversely affect a Funds performance.
Risk of Tracking Error
Several factors may affect a
Funds ability to track the performance of its applicable index. Among these factors are: (1) Fund expenses, including brokerage expenses and commissions (which may be increased by high portfolio turnover); (2) less than all of the
securities in the target index being held by a Fund and securities not included in the target index being held by a Fund; (3) an imperfect correlation between the performance of instruments held by a Fund, such as futures contracts and options,
and the performance of the underlying securities in the cash market comprising an index; (4) bid-ask spreads; (5) a Fund holding instruments that are illiquid or the market for which becomes disrupted; (6) the need to conform a
Funds portfolio holdings to comply with that Funds investment restrictions or policies, or regulatory or tax law requirements; and (7) market movements that run counter to a 3X Bull Funds investments (which will cause
divergence between a Fund and its target index over time due to the mathematical effects of leveraging).
While index futures and options
contracts closely correlate with the applicable indices over long periods, shorter-term deviation, such as on a daily basis, does occur with these instruments. As a result, a Funds short-term performance will reflect such deviation from its
target index.
In the case of a Bear Fund whose NAV is intended to move inversely from its target indices, the factor of compounding also may
lead to tracking error. Even if there is a perfect inverse correlation between a Fund and the return of its applicable target index on a daily basis, the symmetry between the changes in the benchmark and the changes in a Funds NAV can be
altered significantly over time by a compounding effect. For example, if a Fund achieved a perfect inverse correlation with its target index on every trading day over an extended period and the level of returns of that index significantly decreased
during that period, a compounding effect for that period would result, causing an increase in a Funds NAV by a percentage that is somewhat greater than the percentage that the indexs returns decreased. Conversely, if a Fund maintained a
perfect inverse correlation with its target index over an extended period and if the level of returns of that index significantly increased over that period, a compounding effect would result, causing a decrease of a Funds NAV by a percentage
that would be somewhat less than the percentage that the index returns increased.
Leverage
Each Fund intends regularly to use leveraged investment techniques in pursuing its investment objectives. Utilization of leverage
involves special risks and should be considered to be speculative. Leverage exists when a Fund achieves the right to a return on a capital base that exceeds the amount the Fund has invested. Leverage creates the potential for greater gains to
shareholders of these Funds during favorable market conditions and the risk of magnified losses during adverse market conditions. Leverage is likely to cause higher volatility of the net asset values of these Funds Shares. Leverage may involve
the creation of a liability that does not entail any interest costs or the creation of a liability that requires the Fund to pay interest which would decrease the Funds total return to shareholders. If these Funds achieve their investment
objectives, during adverse market conditions, shareholders should experience a loss greater than they would have incurred had these Funds not been leveraged.
25
Special Note Regarding the Correlation Risks of the Funds
. As discussed in the Prospectus, each of
the Funds is leveraged in the sense that each has an investment objective to match a multiple of the performance of an index on a given day. The Funds are subject to all of the correlation risks described in the Prospectus. In addition,
there is a special form of correlation risk that derives from the Funds use of leverage, which is that for periods greater than one day, the use of leverage tends to cause the performance of a Fund to be either greater than, or less than, the
index performance times the stated multiple in the fund objective.
A Funds return for periods longer than one day is
primarily a function of the following:
|
c)
|
financing rates associated with leverage;
|
|
e)
|
dividends paid by companies in the index; and
|
The fund performance for a
Fund can be estimated given any set of assumptions for the factors described above. The tables below illustrate the impact of two factors, index volatility and index performance, on a Fund. Index volatility is a statistical measure of the magnitude
of fluctuations in the returns of an index and is calculated as the standard deviation of the natural logarithms of one plus the index return (calculated daily), multiplied by the square root of the number of trading days per year (assumed to be
252). The tables show estimated Fund returns for a number of combinations of index performance and index volatility over a one year period. Assumptions used in the tables include: a) no dividends paid by the companies included in the index; b) no
fund expenses; and c) borrowing/lending rates (to obtain leverage) of zero percent. If fund expenses were included, the Funds performance would be lower than shown.
As shown in Tables 1 and 2 below, a 3X Bull Fund would be expected to lose 17.1% and a 3X Bear Fund would be expected to lose 31.3% if their Index provided no return over a one year period during which
the Index experienced annualized volatility of 25%. If the Indexs annualized volatility were to rise to 75%, the hypothetical loss for a one year period widens to approximately 81.5% for the 3X Bull Fund and 96.6% for the 3X Bear Fund.
At higher ranges of volatility, there is a chance of a near complete loss of value even if the Index is flat. For instance, if the
Indexs annualized volatility is 100%, it is likely that a 3X Bull Fund would lose 95% of its value and a 3X Bear Fund would lose approximately 100% of its value, even if the cumulative Index return for the year was only 0%.
In the charts below, areas shaded green represent those scenarios where a Fund with the investment objective described will outperform (
i.e.
,
return more than) the index performance times the stated multiple in the Funds investment objective; conversely areas shaded red represent those scenarios where the Fund will underperform (
i.e.
, return less than) the index performance
times the stated multiple in the Funds investment objective. These tables are intended to underscore the fact that the Funds are designed as short-term trading vehicles for investors who intend to actively monitor and manage their portfolios.
They are not intended to be used by, and are not appropriate for, investors who do not intend to actively monitor and manage their portfolios. For additional information regarding correlation and volatility risk for the Funds, see Effects of
Compounding and Market Volatility Risk in the prospectus.
26
Table 1 3X Bull Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
Year
Index
|
|
300%
One
Year
Index
|
|
|
Volatility Rate
|
|
Return
|
|
Return
|
|
|
10%
|
|
|
25%
|
|
|
50%
|
|
|
75%
|
|
|
100%
|
|
-60%
|
|
|
-180
|
%
|
|
|
-93.8
|
%
|
|
|
-94.7
|
%
|
|
|
-97.0
|
%
|
|
|
-98.8
|
%
|
|
|
-99.7
|
%
|
-50%
|
|
|
-150
|
%
|
|
|
-87.9
|
%
|
|
|
-89.6
|
%
|
|
|
-94.1
|
%
|
|
|
-97.7
|
%
|
|
|
-99.4
|
%
|
-40%
|
|
|
-120
|
%
|
|
|
-79.0
|
%
|
|
|
-82.1
|
%
|
|
|
-89.8
|
%
|
|
|
-96.0
|
%
|
|
|
-98.9
|
%
|
-30%
|
|
|
-90
|
%
|
|
|
-66.7
|
%
|
|
|
-71.6
|
%
|
|
|
-83.8
|
%
|
|
|
-93.7
|
%
|
|
|
-98.3
|
%
|
-20%
|
|
|
-60
|
%
|
|
|
-50.3
|
%
|
|
|
-57.6
|
%
|
|
|
-75.8
|
%
|
|
|
-90.5
|
%
|
|
|
-97.5
|
%
|
-10%
|
|
|
-30
|
%
|
|
|
-29.3
|
%
|
|
|
-39.6
|
%
|
|
|
-65.6
|
%
|
|
|
-86.5
|
%
|
|
|
-96.4
|
%
|
0%
|
|
|
0
|
%
|
|
|
-3.0
|
%
|
|
|
-17.1
|
%
|
|
|
-52.8
|
%
|
|
|
-81.5
|
%
|
|
|
-95.0
|
%
|
10%
|
|
|
30
|
%
|
|
|
29.2
|
%
|
|
|
10.3
|
%
|
|
|
-37.1
|
%
|
|
|
-75.4
|
%
|
|
|
-93.4
|
%
|
20%
|
|
|
60
|
%
|
|
|
67.7
|
%
|
|
|
43.3
|
%
|
|
|
-18.4
|
%
|
|
|
-68.0
|
%
|
|
|
-91.4
|
%
|
30%
|
|
|
90
|
%
|
|
|
113.2
|
%
|
|
|
82.1
|
%
|
|
|
3.8
|
%
|
|
|
-59.4
|
%
|
|
|
-89.1
|
%
|
40%
|
|
|
120
|
%
|
|
|
166.3
|
%
|
|
|
127.5
|
%
|
|
|
29.6
|
%
|
|
|
-49.2
|
%
|
|
|
-86.3
|
%
|
50%
|
|
|
150
|
%
|
|
|
227.5
|
%
|
|
|
179.8
|
%
|
|
|
59.4
|
%
|
|
|
-37.6
|
%
|
|
|
-83.2
|
%
|
60%
|
|
|
180
|
%
|
|
|
297.5
|
%
|
|
|
239.6
|
%
|
|
|
93.5
|
%
|
|
|
-24.2
|
%
|
|
|
-79.6
|
%
|
Table 2 3X Bear Fund
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One
Year
Index
|
|
-300%
One
Year
Index
|
|
|
Volatility Rate
|
|
Return
|
|
Return
|
|
|
10%
|
|
|
25%
|
|
|
50%
|
|
|
75%
|
|
|
100%
|
|
-60%
|
|
|
180
|
%
|
|
|
1371.5
|
%
|
|
|
973.9
|
%
|
|
|
248.6
|
%
|
|
|
-46.5
|
%
|
|
|
-96.1
|
%
|
-50%
|
|
|
150
|
%
|
|
|
653.4
|
%
|
|
|
449.8
|
%
|
|
|
78.5
|
%
|
|
|
-72.6
|
%
|
|
|
-98.0
|
%
|
-40%
|
|
|
120
|
%
|
|
|
336.0
|
%
|
|
|
218.2
|
%
|
|
|
3.3
|
%
|
|
|
-84.2
|
%
|
|
|
-98.9
|
%
|
-30%
|
|
|
90
|
%
|
|
|
174.6
|
%
|
|
|
100.4
|
%
|
|
|
-34.9
|
%
|
|
|
-90.0
|
%
|
|
|
-99.3
|
%
|
-20%
|
|
|
60
|
%
|
|
|
83.9
|
%
|
|
|
34.2
|
%
|
|
|
-56.4
|
%
|
|
|
-93.3
|
%
|
|
|
-99.5
|
%
|
-10%
|
|
|
30
|
%
|
|
|
29.2
|
%
|
|
|
-5.7
|
%
|
|
|
-69.4
|
%
|
|
|
-95.3
|
%
|
|
|
-99.7
|
%
|
0%
|
|
|
0
|
%
|
|
|
-5.8
|
%
|
|
|
-31.3
|
%
|
|
|
-77.7
|
%
|
|
|
-96.6
|
%
|
|
|
-99.8
|
%
|
10%
|
|
|
-30
|
%
|
|
|
-29.2
|
%
|
|
|
-48.4
|
%
|
|
|
-83.2
|
%
|
|
|
-97.4
|
%
|
|
|
-99.8
|
%
|
20%
|
|
|
-60
|
%
|
|
|
-45.5
|
%
|
|
|
-60.2
|
%
|
|
|
-87.1
|
%
|
|
|
-98.0
|
%
|
|
|
-99.9
|
%
|
30%
|
|
|
-90
|
%
|
|
|
-57.1
|
%
|
|
|
-68.7
|
%
|
|
|
-89.8
|
%
|
|
|
-98.4
|
%
|
|
|
-99.9
|
%
|
40%
|
|
|
-120
|
%
|
|
|
-65.7
|
%
|
|
|
-75.0
|
%
|
|
|
-91.9
|
%
|
|
|
-98.8
|
%
|
|
|
-99.9
|
%
|
50%
|
|
|
-150
|
%
|
|
|
-72.1
|
%
|
|
|
-79.6
|
%
|
|
|
-93.4
|
%
|
|
|
-99.0
|
%
|
|
|
-99.9
|
%
|
60%
|
|
|
-180
|
%
|
|
|
-77.0
|
%
|
|
|
-83.2
|
%
|
|
|
-94.6
|
%
|
|
|
-99.2
|
%
|
|
|
-99.9
|
%
|
The foregoing tables are intended to isolate the effect of index volatility and index performance on the return of a 3X
Bull Fund. The Funds actual returns may be significantly greater or less than the returns shown above as a result of any of factors discussed above or under Effects of Compounding and Market Volatility Risk in the Prospectus.
27
INVESTMENT RESTRICTIONS
The Trust, on behalf of each Fund, has adopted the following investment policies which are fundamental policies that may not be changed without the
affirmative vote of a majority of the outstanding voting securities of the Fund, as defined by the 1940 Act. As defined by the 1940 Act, a vote of a majority of the outstanding voting securities of the Fund means the affirmative vote of
the lesser of (1) more than 50% of the outstanding shares of the Fund or (2) 67% or more of the shares present at a meeting, if more than 50% of the outstanding shares are represented at the meeting in person or by proxy.
Each Funds investment objective is a non-fundamental policy of the Fund. Non-fundamental policies may be changed by the Board without shareholder
approval.
For purposes of the following limitations, all percentage limitations apply immediately after a purchase or initial investment.
Except with respect to borrowing money, if a percentage limitation is adhered to at the time of the investment, a later increase or decrease in the percentage resulting from any change in value or net assets will not result in a violation of such
restrictions. If at any time a Funds borrowings exceed its limitations due to a decline in net assets, such borrowings will be reduced promptly to the extent necessary to comply with the limitation.
Each Fund may not:
1.
|
Borrow money, except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
2.
|
Issue senior securities, except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
3.
|
Make loans, except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
4.
|
Except for any Fund that is concentrated in an industry or group of industries within the meaning of the 1940 Act, purchase the securities of any issuer
(other than securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities) if, as a result, 25% or more of the Funds total assets would be invested in the securities of companies whose principal business
activities are in the same industry. However, each Fund that tracks an underlying index will only concentrate its investment in a particular industry or group of industries to approximately the same extent as its underlying index is so concentrated.
|
5.
|
Purchase or sell real estate, except that, to the extent permitted by applicable law, each Fund may (a) invest in securities or other instruments directly secured
by real estate, and (b) invest in securities or other instruments issued by issuers that invest in real estate.
|
6.
|
Purchase or sell commodities or commodity contracts unless acquired as a result of ownership of securities or other instruments issued by persons that purchase or sell
commodities or commodities contracts; but this shall not prevent a Fund from purchasing, selling and entering into financial futures contracts (including futures contracts on indices of securities, interest rates and currencies), and options on
financial futures contracts (including futures contracts on indices of securities, interest rates and currencies), warrants, swaps, forward contracts, foreign currency spot and forward contracts and other financial instruments.
|
7.
|
Underwrite securities issued by others, except to the extent that a Fund may be considered an underwriter within the meaning of the 1933 Act in the disposition of
restricted securities or other investment company securities.
|
28
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision by the Trustees, Rafferty is responsible for decisions to buy and sell securities for each Fund, the selection of
broker-dealers to effect the transactions, and the negotiation of brokerage commissions, if any. Rafferty expects that a Fund may execute brokerage or other agency transactions through registered broker-dealers, for a commission, in conformity with
the 1940 Act, the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.
When selecting a broker or dealer to
execute portfolio transactions, Rafferty considers many factors, including the rate of commission or the size of the broker-dealers spread, the size and difficulty of the order, the nature of the market for the security,
operational capabilities of the broker-dealer and the research, statistical and economic data furnished by the broker-dealer to Rafferty.
In
effecting portfolio transactions for a Fund, Rafferty seeks to receive the closing prices of securities that are in line with those of the securities included in the applicable index and seeks to execute trades of such securities at the lowest
commission rate reasonably available. With respect to agency transactions, Rafferty may execute trades at a higher rate of commission if reasonable in relation to brokerage and research services provided to a Fund or Rafferty. Such services may
include the following: information as to the availability of securities for purchase or sale; statistical or factual information or opinions pertaining to investment; wire services; and appraisals or evaluations of portfolio securities. Each Fund
believes that the requirement always to seek the lowest possible commission cost could impede effective portfolio management and preclude a Fund and Rafferty from obtaining a high quality of brokerage and research services. In seeking to determine
the reasonableness of brokerage commissions paid in any transaction, Rafferty relies upon its experience and knowledge regarding commissions generally charged by various brokers and on its judgment in evaluating the brokerage and research services
received from the broker effecting the transaction.
Rafferty may use research and services provided to it by brokers in servicing all Funds;
however, not all such services may be used by Rafferty in connection with a Fund. While the receipt of such information and services is useful in varying degrees and generally would reduce the amount of research or services otherwise performed by
Rafferty, this information and these services are of indeterminable value and would not reduce Raffertys investment advisory fee to be paid by a Fund.
Purchases and sales of U.S. government securities normally are transacted through issuers, underwriters or major dealers in U.S. government securities acting as principals. Such transactions are made on a
net basis and do not involve payment of brokerage commissions. The cost of securities purchased from an underwriter usually includes a commission paid by the issuer to the underwriters; transactions with dealers normally reflect the spread between
bid and asked prices.
No brokerage commissions are provided for the Funds because they had not commenced operations prior to the date of this
SAI.
PORTFOLIO HOLDINGS INFORMATION
Disclosure of a Funds complete holdings is required to be made quarterly within 60 days of the end of each fiscal quarter in the Annual Report and
Semi-Annual Report to Fund shareholders and in the quarterly holdings report on Form N-Q. These reports are available, free of charge, on the EDGAR database on the SECs website at www.sec.gov. In addition, each Funds portfolio holdings
will be made available on the Funds website at www.direxionfunds.com each day the Funds are open for business.
The portfolio
composition file (PCF) and the IIV, which contain portfolio holdings information, is made available daily, including to the Funds service providers to facilitate the provision of services to the Funds and to certain other entities
as necessary for transactions in Creation Units. Such entities may be limited to National Securities Clearing Corporation (NSCC) members, subscribers to various fee-based services, investors that have entered into an authorized
participant agreement with the Distributor and the transfer agent or purchase Creation Units through a dealer that has entered into such an agreement (Authorized Participants), and other institutional market participants that provide
information services. Each business day, Fund portfolio holdings information will be
29
provided to the Distributor or other agent for dissemination through the facilities of the NSCC and/or through other fee-based services to NSCC members and/or subscribers to the fee-based
services, including Authorized Participants, and to entities that publish and/or analyze such information in connection with the process of purchasing or redeeming Creation Units or trading shares of Funds in the secondary market.
Daily access to the PCF file and IIV is permitted to: (i) certain personnel of service providers that are involved in portfolio management and
providing administrative, operational, or other support to portfolio management; (ii) Authorized Participants through NSCC, and (iii) other personnel of the Adviser and the Funds distributor, administrator, custodian and fund
accountant who are involved in functions which may require such information to conduct business in the ordinary course.
From time to time, rating and ranking organizations such as Standard & Poors
®
and Morningstar
®
, Inc. may request complete portfolio holdings information in connection with rating a Fund. To prevent such parties from potentially misusing the complete portfolio
holdings information, a Fund will generally only disclose such information no earlier than one business day following the date of the information. Portfolio holdings information made available in connection with the creation/redemption process may
be provided to other entities that provide additional services to the Funds in the ordinary course of business after it has been disseminated to the NSCC.
In addition, the Funds President may grant exceptions to permit additional disclosure of the complete portfolio holdings information at differing times and with differing lag times to rating
agencies and to the parties noted above, provided that (1) a Fund has a legitimate business purpose for doing so; (2) it is in the best interests of shareholders; (3) the recipient is subject to a confidentiality agreement; and
(4) the recipient is subject to a duty not to trade on the nonpublic information. The Chief Compliance Officer shall report any disclosures made pursuant to this exception to the Board.
MANAGEMENT OF THE TRUST
The Board of Trustees
The Trust is governed by its
Board. The Board is responsible for and oversees the overall management and operations of the Trust and the Funds, which includes the general oversight and review of the Funds investment activities, in accordance with federal law and the law
of the State of Delaware, as well as the stated policies of the Funds. The Board oversees the Trusts officers and service providers, including Rafferty, which is responsible for the management of the day-to-day operations of the Funds based on
policies and agreements reviewed and approved by the Board. In carrying out these responsibilities, the Board regularly interacts with and receives reports from senior personnel of service providers, including personnel from Rafferty, BNYM, U.S.
Bancorp Fund Services, LLC (USBFS) and Alaric Compliance Services, LLC (Alaric), and the Trusts Chief Compliance Officer (CCO). The Board also is assisted by the Trusts independent auditor (who reports
directly to the Trusts Audit Committee), independent counsel and other professionals as appropriate.
Risk Oversight
Consistent with its responsibility for oversight of the Trust and the Funds, the Board oversees the management of risks relating to the administration and operation of the Trust and the Funds. Rafferty,
as part of its responsibilities for the day-to-day operations of the Funds, is responsible for day-to-day risk management for the Funds. The Board, in the exercise of its reasonable business judgment performs its risk management oversight directly
and, as to certain matters, through its committees (described below) and through the Independent Trustees. The following provides an overview of the principal, but not all, aspects of the Boards oversight of risk management for the Trust and
the Funds.
The Board has adopted, and periodically reviews, policies and procedures designed to address risks to the Trust and the Funds. In
addition, under the general oversight of the Board, Rafferty and other service providers to the Funds have themselves adopted a variety of policies, procedures and controls designed to address particular risks to the Funds. Different processes,
procedures and controls are employed with respect to different types of risks.
30
The Board also oversees risk management for the Trust and the Funds through review of regular reports,
presentations and other information from officers of the Trust and other persons. The CCO and senior officers of Rafferty, BNYM and Alaric regularly report to the Board on a range of matters, including those relating to risk management. The Board
also regularly receives reports from Rafferty, BNYM and USBFS with respect to the Funds investments. In addition to regular reports from these parties, the Board also receives reports regarding other service providers to the Trust, either
directly or through Rafferty, BNYM, USBFS, Alaric or the CCO, on a periodic or regular basis. At least annually, the Board receives a report from the CCO regarding the effectiveness of the Funds compliance program. Also, on an annual basis,
the Board receives reports, presentations and other information from Rafferty in connection with the Boards consideration of the renewal of each of the Trusts agreements with Rafferty and the Trusts distribution plan under Rule
12b-1 under the 1940 Act.
The CCO reports regularly to the Board on Fund valuation matters. The Audit Committee receives regular reports from
the Trusts independent registered public accounting firm on internal control and financial reporting matters. On at least a quarterly basis, the Independent Trustees meet with the CCO to discuss matters relating to the Funds compliance
program.
Board Structure and Related Matters
Board members who are not interested persons of the Funds as defined in Section 2(a)(19) of the 1940 Act (Independent
Trustees) constitute three-quarters of the Board. The Trustees discharge their responsibilities collectively as a Board, as well as through Board committees, each of which operates pursuant to a charter approved by the Board that delineates
the specific responsibilities of that committee. The Board has established three standing committees: the Audit Committee, the Nominating Committee and the Qualified Legal Compliance Committee. For example, the Audit Committee is responsible for
specific matters related to oversight of the Funds independent auditors, subject to approval of the Audit Committees recommendations by the Board. The members and responsibilities of each Board committee are summarized below.
The Board periodically evaluates its structure and composition as well as various aspects of its operations. The Chairman of the Board is not an
Independent Trustee and the Board has chosen not to have a lead Independent Trustee. However, the Board believes that its leadership structure, including its Independent Trustees and Board committees, is appropriate for the Trust in light of, among
other factors, the asset size and nature of the Funds, the number of Funds overseen by the Board, the arrangements for the conduct of the Funds operations, the number of Trustees, and the Boards responsibilities. On an annual basis, the
Board conducts a self-evaluation that considers, among other matters, whether the Board and its committees are functioning effectively and whether, given the size and composition of the Board and each of its committees, the Trustees are able to
oversee effectively the number of Funds in the complex.
The Trust is part of the Direxion Family of Investment Companies, which is
comprised of the 124 portfolios within the Trust, 21 portfolios within the Direxion Funds and 1 portfolio within Direxion Insurance Trust. The Independent Trustees constitute three-quarters of the Board of trustees of Trust.
The Board holds four regularly scheduled in-person meetings each year. The Board may hold special meetings, as needed, either in person or by telephone,
to address matters arising between regular meetings. During a portion of each in-person meeting, the Independent Trustees meet outside of managements presence. The Independent Trustees may hold special meetings, as needed, either in person or
by telephone.
The Trustees of the Trust are identified in the tables below, which provide information regarding their age, business address
and principal occupation during the past five years including any affiliation with Rafferty, the length of service to the Trust, and the position, if any, that they hold on the board of directors of companies other than the Trust as of
December 31, 2012. Each of the non-interested Trustees of the Trust also serve on the Board of the Direxion Funds and Direxion Insurance Trust, the other registered investment companies in the Direxion mutual fund complex. Unless otherwise
noted, an individuals business address is 1301 Avenue of the Americas (6th Avenue), 35th Floor, New York, New York 10019.
31
Interested Trustees
|
|
|
|
|
|
|
|
|
|
|
Name, Address and Age
|
|
Position(s)
Held with
Fund
|
|
Term of
Office and
Length of
Time Served
|
|
Principal Occupation(s)
During Past Five Years
|
|
# of
Portfolios in
Direxion
Family of
Investment
Companies
Overseen by
Trustee
(2)
|
|
Other Trusteeships/
Directorships Held by
Trustee During Past
Five Years
|
Daniel D. ONeill
(1)
Age: 45
|
|
Chairman of the Board of Trustees
|
|
Lifetime of Trust until removal or resignation; Since 2008
|
|
Managing Director of Rafferty, 1999-present.
|
|
121
|
|
None.
|
|
|
|
|
|
|
Non-Interested Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name, Address and Age
|
|
Position(s)
Held with
Fund
|
|
Term of
Office and
Length of
Time Served
|
|
Principal Occupation(s)
During Past Five Years
|
|
# of
Portfolios in
Direxion
Family of
Investment
Companies
Overseen by
Trustee
(2)
|
|
Other Trusteeships/
Directorships Held by
Trustee During Past
Five Years
|
Daniel J. Byrne
Age:
69
|
|
Trustee
|
|
Lifetime of Trust until removal or resignation; Since 2008
|
|
President and Chief Executive Officer of Byrne Securities Florida Inc. (formerly, Byrne Securities Inc.), 1992-present.
|
|
143
|
|
None.
|
|
|
|
|
|
|
Gerald E. Shanley III
Age:
69
|
|
Trustee
|
|
Lifetime of Trust until removal or resignation; Since 2008
|
|
Retired, Since 2002; Business Consultant, 1985-present; Trustee of Trust Under Will of Charles S. Payson, 1987-present; C.P.A., 1979-present.
|
|
143
|
|
None.
|
|
|
|
|
|
|
John Weisser
Age:
71
|
|
Trustee
|
|
Lifetime of Trust until removal or resignation; Since 2008
|
|
Retired, Since 1995; Salomon Brothers, Inc, 1971-1995, most recently as Managing Director.
|
|
143
|
|
Director, Eclipse Funds, Inc. (1 Fund); Director, The MainStay Funds Trust (28 Funds), The MainStay Funds (12 Funds), MainStay VP
Fund Series (28 Funds); Mainstay Defined Term Municipal Opportunities Fund (1 Fund); Private Advisers Alternative Strategy Fund
(1
Fund).
|
(1)
|
Mr. ONeill is affiliated with Rafferty. Mr. ONeill is the Managing Director of Rafferty and owns a beneficial interest in
Rafferty.
|
(2)
|
The Direxion Family of Investment Companies consists of the Direxion Funds which, as of the date of this SAI, offers for sale to the public 21
portfolios, the Direxion Insurance Trust which, as of the date of this SAI, offers for sale 1 portfolio and
|
32
|
the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 48 of the 124 funds as of the date of this SAI registered with the SEC.
|
In addition to the information set forth in the tables above and other relevant qualifications, experience, attributes or skills applicable to a
particular Trustee, the following provides further information about the qualifications and experience of each Trustee.
Daniel J. Byrne:
Mr. Byrne has extensive financial services and business experience as an executive at a securities broker-dealer firm, a partner in a hedge fund, and president and chief executive officer of a private corporation. He has served as a director of
a civic organization. He also has multiple years of service as a Trustee.
Daniel D. ONeill: Mr. ONeill has extensive
experience in the investment management business, including as managing director of Rafferty.
Gerald E. Shanley III: Mr. Shanley has
audit experience and spent ten years in the tax practice of an international public accounting firm. He is a certified public accountant and has a JD degree. He has extensive business experience as the president of a closely held manufacturing
company, a director of several closely held companies, a business and tax consultant and a trustee of a private investment trust. He has served on the boards of several charitable and not for profit organizations. He also has multiple years of
service as a Trustee.
John Weisser: Mr. Weisser has extensive experience in the investment management business, including as managing
director of an investment bank and a director of other registered investment companies. He also has multiple years of service as a Trustee.
Board Committees
The Trust has an Audit Committee, consisting of Messrs. Weisser, Byrne and Shanley. The members of the Audit Committee are not interested persons of the Trust (as defined in the 1940 Act). The
primary responsibilities of the Trusts Audit Committee are, as set forth in its charter, to make recommendations to the Board Members as to: the engagement or discharge of the Trusts independent registered public accounting firm
(including the audit fees charged by the accounting firm); the supervision of investigations into matters relating to audit matters; the review with the independent registered public accounting firm of the results of audits; and addressing any other
matters regarding audits. The Audit Committee met two times during the Funds most recent fiscal year.
The Trust also has a Nominating
Committee, consisting of Messrs. Weisser, Byrne and Shanley, each of whom is a disinterested member of the Board. The primary responsibilities of the nominating committee are to make recommendations to the Board on issues related to the composition
and operation of the Board, and communicate with management on those issues. The Nominating Committee also evaluates and nominates Board member candidates. The Nominating Committee will consider nominees recommended by shareholders. Such
recommendations should be in writing and addressed to a Fund with attention to the Nominating Committee Chair. The recommendations must include the following Preliminary Information regarding the nominee: (1) name; (2) date of birth;
(3) education; (4) business professional or other relevant experience and areas of expertise; (5) current business and home addresses and contact information; (6) other board positions or prior experience; and (7) any
knowledge and experience relating to investment companies and investment company governance. The Nominating Committee did not meet during the Trusts most recent fiscal year.
The Trust has a Qualified Legal Compliance Committee, consisting of Messrs. Weisser, Byrne and Shanley. The members of the Qualified Legal Compliance Committee are not interested persons of
the Trust (as defined in the 1940 Act). The primary responsibility of the Trusts Qualified Legal Compliance Committee is to receive, review and take appropriate action with respect to any report (Report) made or referred to the
Committee by an attorney of evidence of a material violation of applicable U.S. federal or state securities law, material breach of a fiduciary duty under U.S. federal or state law or a similar material violation by the Trust or by any officer,
director, employee or agent of the Trust. The Qualified Legal Compliance Committee did not meet during the Trusts most recent fiscal year.
33
Principal Officers of the Trust
The officers of the Trust conduct and supervise its daily business. Unless otherwise noted, an individuals business address is 1301 Avenue of the
Americas (6th Avenue), 35th Floor, New York, New York 10019. As of the date of this SAI, the officers of the Trust, their ages, their business address and their principal occupations during the past five years are as follows:
|
|
|
|
|
|
|
|
|
|
|
Name, Address and Age
|
|
Position(s)
Held with
Fund
|
|
Term of
Office and
Length of
Time
Served
(1)
|
|
Principal Occupation(s)
During Past Five Years
|
|
# of Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by
Trustee
(2)
|
|
Other Trusteeships/
Directorships
Held
by Trustee During
Past Five Years
|
Daniel D. ONeill
Age: 45
|
|
Chief Executive Officer and Chief Investment Officer
|
|
One Year; Since 2008
|
|
Managing Director of Rafferty, 1999-present.
|
|
121
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
Chairman of the Board of Trustees
|
|
Lifetime of Trust until removal or resignation; Since 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Eric Falkeis:
Age:
40
|
|
President
|
|
One Year; Since 2013
|
|
President, Rafferty Asset Management, LLC, since March 2013; formerly, Senior Vice President, U.S. Bancorp Fund Services, LLC (USBFS), September 2007 March 2013;
Chief Financial Officer, USBFS, April 2006 March 2013; Vice President, USBFS, 1997-2007; formerly, Chief Financial Officer, Quasar Distributors, LLC (2000-2003).
|
|
N/A
|
|
Trustee, Professionally Managed Portfolios (35 Funds)
|
|
|
|
|
|
|
Patrick J. Rudnick
Age:
39
|
|
Principal Financial Officer and Assistant Secretary
|
|
One Year;
Since
2010
|
|
Senior Vice President and Principal Financial Officer, Rafferty Asset Management, LLC, since March 2013; formerly, Vice President, USBFS, since 2006; formerly, Manager,
PricewaterhouseCoopers LLP (1999-2006).
|
|
N/A
|
|
N/A
|
34
|
|
|
|
|
|
|
|
|
|
|
Name, Address and Age
|
|
Position(s)
Held with
Fund
|
|
Term of
Office and
Length of
Time
Served
(1)
|
|
Principal Occupation(s)
During Past Five Years
|
|
# of Portfolios
in Direxion
Family of
Investment
Companies
Overseen by
Trustee
(2)
|
|
Other Trusteeships/
Directorships Held
by Trustee During
Past Five Years
|
Angela Brickl
Age:
37
|
|
Chief Compliance Officer;
|
|
One Year; Since 2012
|
|
General Counsel and Chief Compliance Officer, Rafferty Asset Management, LLC, since October 2010; Summer Associate at Skadden, Arps, Slate, Meagher & Flom, LLP, May
Aug 2009; Summer Associate at Foley & Lardner, LLP May - August 2008; Vice President USBFS November 2003 August 2007.
|
|
N/A
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
Secretary
|
|
One Year;
Since
2011
|
|
|
|
|
|
(1)
|
Each officer of the Trust holds office until his or her successor is elected and qualified or until his or her earlier death, inability to serve,
removal or resignation.
|
(2)
|
The Direxion Family of Investment Companies consists of the Direxion Funds which, as of the date of this SAI, offers for sale to the public 21
portfolios, the Direxion Insurance Trust which, as of the date of this SAI, offers for sale 1 portfolio and the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public 48 of the 124 funds as of the date of this SAI
registered with the SEC.
|
As of the calendar year ended December 31, 2012, no Trustee owns Shares of any of the
Funds, except as shown below. The following table shows the amount of equity securities owned in the Direxion Family of Investment Companies by the Trustees as of the calendar year ended December 31, 2012:
|
|
|
|
|
|
|
|
|
Dollar Range of Equity
Securities Owned:
|
|
Interested Trustee:
|
|
Non-Interested Trustees:
|
|
|
Daniel D.
ONeill
|
|
Daniel J.
Byrne
|
|
Gerald E.
Shanley III
|
|
John Weisser
|
Aggregate Dollar Range of Equity Securities in the Direxion Family of Investment Companies
(1)
|
|
$50,001 - $100,000
|
|
$0
|
|
$0
|
|
$50,001 - $100,000
|
(1)
|
The Direxion Family of Investment Companies consists of: (1) the Direxion Shares ETF Trust, which, as of the date of this SAI, offers
for sale to the public 48 of the 124 funds registered with the SEC; (2) Direxion Funds, which, as of the date of this SAI, offers for sale to the public 21 funds; and (3) the Direxion Insurance Trust, which, as of the date of this SAI,
offers for sale to the public 1 fund.
|
The Trusts Trust Instrument provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law. However, they are not protected against any liability to which they would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of their office.
No officer, director or employee of Rafferty receives any compensation from the Funds for acting as
a Trustee or officer of the Trust. The following table shows the compensation earned by each Trustee for the Trusts fiscal year ending October 31, 2012:
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Person, Position
|
|
Aggregate
Compensation
From the Funds
(1)
|
|
|
Pension or Retirement
Benefits Accrued As
Part of the
Trusts
Expenses
|
|
|
Estimated Annual
Benefits Upon
Retirement
|
|
|
Aggregate
Compensation From
the Direxion Family
of Investment
Companies Paid to
the
Trustees
(2)
|
|
Interested Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel D. ONeill
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Disinterested Trustees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daniel J. Byrne
|
|
$
|
75,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
100,000
|
|
Gerald E. Shanley III
|
|
$
|
75,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
100,000
|
|
John Weisser
|
|
$
|
75,000
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
100,000
|
|
(1)
|
Costs associated with Trustee compensation are allocated across the operational Funds based on the net assets of each Fund in the Trust.
|
(2)
|
For the fiscal year ended October 31, 2012 trustees fees and expenses in the amount of $225,000 were incurred by the Trust.
|
Principal Shareholders, Control Persons and Management Ownership
A principal shareholder is any person who owns of record or beneficially 5% or more of the outstanding shares of a Fund. A control person is a shareholder
that owns beneficially or through controlled companies more than 25% of the voting securities of a company or acknowledges the existence of control. Shareholders owning voting securities in excess of 25% may determine the outcome of any matter
affecting and voted on by shareholders of a Fund.
Because the Funds had not commenced operations prior to the date of this SAI, the Funds did
not have control persons or principal shareholders and the Trustees and officers did not own shares of the Funds.
Investment Adviser
Rafferty Asset Management, LLC, 1301 Avenue of the Americas (6th Avenue), 35th Floor, New York, New York 10019,
provides investment advice to the Funds. Rafferty was organized as a New York limited liability company in June 1997. Lawrence C. Rafferty controls Rafferty through his ownership in Rafferty Holdings, LLC.
Under an Investment Advisory Agreement (Advisory Agreement) between the Trust, on behalf of each Fund, and Rafferty dated August 13,
2008, Rafferty provides a continuous investment program for each Funds assets in accordance with its investment objectives, policies and limitations, and oversees the day-to-day operations of a Fund, subject to the supervision of the Trustees.
Rafferty bears all costs associated with providing these advisory services and the expenses of the Trustees who are affiliated with or interested persons of Rafferty. The Trust bears all other expenses that are not assumed by Rafferty as described
in the Prospectus. The Trust also is liable for nonrecurring expenses as may arise, including litigation to which a Fund may be a party. The Trust also may have an obligation to indemnify its Trustees and officers with respect to any such
litigation.
The Advisory Agreement was initially approved by the Trustees (including all non-interested Trustees) and Rafferty, as sole
shareholder of each Fund in compliance with the 1940 Act. The Advisory Agreement with respect to each Fund will continue in force for an initial period of two years after the date of its approval. Thereafter, the Advisory Agreement will be renewable
from year to year with respect to each Fund, so long as its continuance is approved at least annually (1) by the vote, cast in person at a meeting called for that purpose, of a majority of those Trustees who are not interested
persons of Rafferty or the Trust; and (2) by the majority vote of either the full Board or the vote of a majority of the outstanding shares of a Fund. The Advisory Agreement automatically terminates on assignment and is terminable on a
60-day written notice either by the Trust or Rafferty.
Pursuant to the Advisory Agreement, each Fund pays Rafferty 0.75% at an annual rate
based on its average daily net assets.
36
No advisory fees are provided for the Funds because they had not commenced operations prior to the date of
this SAI.
Each Fund is responsible for its own operating expenses. Rafferty has entered into an Operating Expense Limitation Agreement with
each Fund. Under this Operating Expense Limitation Agreement, Rafferty has contractually agreed to cap all or a portion of its management fee and/or reimburse the Funds operating expenses (excluding, as applicable, among other expenses, taxes,
leverage interest, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation) through March 1, 2014
to the extent that they exceed 0.95% of the Funds daily net assets. Any expense cap is subject to reimbursement by a Fund only within the following three years only if overall expenses fall below these percentage limitations. This agreement
may be terminated at any time at the discretion of the Board upon notice to the Adviser and without the approval of Fund shareholders. The agreement may be terminated by the Adviser only with the consent of the Board.
Rafferty shall not be liable to the Trust or any shareholder for anything done or omitted by it, except acts or omissions involving willful misfeasance,
bad faith, negligence or reckless disregard of the duties imposed upon it by its agreement with the Trust or for any losses that may be sustained in the purchase, holding or sale of any security.
Pursuant to Section 17(j) of the 1940 Act and Rule 17j-1 thereunder, the Trust and Rafferty have adopted Codes of Ethics. These codes permit
portfolio managers and other access persons of a Fund to invest in securities that may be owned by a Fund, subject to certain restrictions.
Portfolio Managers
An investment team of Rafferty employees has the day-to-day responsibility for managing the Funds. The investment team generally decides the target allocation of each Funds investments and on a
day-to-day basis, an individual portfolio manager executes transactions for the Funds consistent with the target allocation. The portfolio managers rotate among the Funds periodically so that no single portfolio manager is responsible for a
specific Fund for extended periods of time. Paul Brigandi, each Funds Portfolio Manager, is primarily responsible for the day-to-day management of the Funds.
In addition to the Funds, each member of the investment team manages the following other accounts as of October 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
|
|
Total Number
of Accounts
|
|
Total Assets
(in
millions)
|
|
|
Total Number of
Accounts with
Performance Based
Fees
|
|
Total Assets of
Accounts with
Performance
Based Fees
|
|
Registered Investment Companies
|
|
29
|
|
$
|
786
|
|
|
0
|
|
$
|
0
|
|
Other Pooled Investment Vehicles
|
|
0
|
|
$
|
0
|
|
|
0
|
|
$
|
0
|
|
Other Accounts
|
|
1
|
|
$
|
48
|
|
|
0
|
|
$
|
0
|
|
Rafferty manages other accounts with investment objectives similar to that of the Funds. In addition, two or more Funds
may invest in the same securities but the nature of each investment (long or short) may be opposite and in different proportions. Rafferty ordinarily executes transactions for a Fund market-on-close, in which Funds purchasing or selling
the same security receive the same closing price.
Rafferty has not identified any additional material conflicts between a Fund and other
accounts managed by the investment team. However, the portfolio managers management of other accounts may give rise to potential conflicts of interest in connection with their management of a Funds investments, on the one
hand, and the investments of other accounts, on the other. The other accounts may have the same investment objective as the Funds. Therefore, a potential conflict of interest may arise as a result of the identical investment objectives,
37
whereby the portfolio managers could favor one account over and devote unequal time and attention to a Fund and other accounts. Another potential conflict could include the portfolio
managers knowledge about size, timing and possible market impact of Fund trades, whereby a portfolio manager could use this information to the advantage of other accounts and to the disadvantage of a Fund. This could create potential conflicts
of interest resulting in a Fund paying higher fees or one investment vehicle out performing another. The Adviser has established policies ad procedures to ensure that the purchase and sale of securities among all accounts it manages are fairly and
equitably allocated.
The investment teams compensation is paid by Rafferty. Their compensation primarily consists of a fixed base
salary and a bonus. The investment teams salary is reviewed annually and increases are determined by factors such as performance and seniority. Bonuses are determined by the individual performance of an employee including factors such as
attention to detail, process, and efficiency, and are impacted by the overall performance of the firm. The investment teams salary and bonus are not based on a Funds performance and as a result, no benchmarks are used. Along with all
other employees of Rafferty, the investment team may participate in the firms 401(k) retirement plan where Rafferty may make matching contributions up to a defined percentage of their salary.
The members of the investment team do not own any shares of the Funds as of October 31, 2012.
Proxy Voting Policies and Procedures
The Board has adopted proxy voting policies and procedures (Proxy Policies) wherein the Trust has delegated to Rafferty the responsibility for voting proxies relating to portfolio securities
held by a Fund as part of their investment advisory services, subject to the supervision and oversight of the Board. The Proxy Voting Policies of Rafferty are attached as Appendix B. Notwithstanding this delegation of responsibilities, however, each
Fund retains the right to vote proxies relating to its portfolio securities. The fundamental purpose of the Proxy Policies is to ensure that each vote will be in a manner that reflects the best interest of a Fund and their shareholders, taking into
account the value of a Funds investments.
More Information.
The actual voting records relating to portfolio securities
for future 12-month periods ending June 30 will be available without charge, upon request by calling toll-free, 1-866-476-7523 or by accessing the SECs website at www.sec.gov.
Fund Administrator, Fund Accounting Agent, Transfer Agent and Custodian
U.S. Bancorp Fund Services, LLC (USBFS), 615 East Michigan Street, Milwaukee, Wisconsin 53202, serves as the Funds administrator. The Bank of New York Mellon, One Wall Street, New York,
New York 10286, serves as the Funds transfer agent, and custodian. Rafferty also performs certain administrative services for the Funds.
Pursuant to a Fund Administration and Servicing Agreement between the Trust and USBFS, USBFS provides the Trust with administrative and management services (other than investment advisory services). As
compensation for these services, the Trust pays USBFS a fee based on the Trusts total average daily net assets. USBFS also is entitled to certain out-of-pocket expenses.
No administrative and management services fees are shown for the Funds because they had not commenced operations prior to the date of this SAI.
Pursuant to an Accounting Agreement between the Trust and BNYM, BNYM provides the Trust with accounting services, including portfolio accounting services, tax accounting services and furnishing financial
reports. As compensation for these accounting services, the Trust pays BNYM a fee based on the Trusts total average daily net assets of 0.03% and a minimum annual complex fee of approximately $160,000. BNYM also is entitled to certain
out-of-pocket expenses for the services mentioned above, including pricing expenses.
Pursuant to a Custodian Agreement, BNYM serves as the
custodian of a Funds assets. The custodian holds and administers the assets in a Funds portfolios. Pursuant to the Custodian Agreement, the custodian receives an annual fee based on the Trusts total average daily net assets of
0.0075% and certain settlement charges. The custodian also is entitled to certain out-of-pocket expenses.
38
No accounting services fees or custodian fees are shown for the Funds because they had not commenced
operations prior to the date of this SAI.
Distributor
Foreside Fund Services, LLC, located at 3 Canal Plaza, Suite 100, Portland, Maine 04101, serves as the distributor (Distributor) in connection
with the continuous offering of each Funds shares. The Distributor is a broker-dealer registered with the SEC under the Securities Exchange Act of 1934 and a member of the Financial Industry Regulatory Authority. The Trust offers Shares of the
Funds for sale through the Distributor in Creation Units, as described below. The Distributor will not sell or redeem Shares in quantities less than Creation Units. The Distributor will deliver a Prospectus to persons purchasing Creation Units and
will maintain records of Creation Unit orders placed and confirmations furnished by it. Pursuant to a written agreement, the Adviser pays the Distributor for distribution-related services.
Distribution and Service Plan
Rule 12b-1 under the 1940
Act provides that an investment company may bear expenses of distributing its shares only pursuant to a plan adopted in accordance with the Rule. The Trustees have adopted a Rule 12b-1 Distribution and Service Plan (Rule 12b-1 Plan)
pursuant to which each Fund may pay certain expenses incurred in the distribution of its shares and the servicing and maintenance of existing shareholder accounts. The Distributor, as the Funds principal underwriter, and Rafferty may have a
direct or indirect financial interest in the Plan or any related agreement. Pursuant to the Rule 12b-1 Plan, each Fund may pay a fee of up to 0.25% of the Funds average daily net assets. No Rule 12b-1 fee is currently being charged to any of
the Funds.
The Plan was approved by the Board, including a majority of the non-interested Trustees of the Funds. In approving each Plan, the
Trustees determined that there is a reasonable likelihood that the Plans will benefit the Funds and their shareholders. The Trustees will review quarterly and annually a written report provided by the Treasurer of the amounts expended under the
Plans and the purpose for which such expenditures were made.
The Plan permits payments to be made by each Fund to the Distributor or other
third parties for expenditures incurred in connection with the distribution of Fund shares to investors and the provision of certain shareholder services. The distributor or other third parties are authorized to engage in advertising, the
preparation and distribution of sales literature and other promotional activities on behalf of each Fund. In addition, the Plan authorizes payments by each Fund to the Distributor or other third parties for the cost related to selling or servicing
efforts, preparing, printing and distributing Fund prospectuses, statements of additional information, and shareholder reports to investors.
Independent Registered Public Accounting Firm
Ernst & Young LLP (E&Y), 5 Times Square New York, New York, 10036 is the independent registered public accounting firm for the Trust.
Legal Counsel
The Trust has selected K&L Gates LLP, 1601 K Street, N.W., Washington, DC 20006, as its legal counsel.
DETERMINATION OF NET ASSET VALUE
A
Funds share price is known as its NAV. Each Fund calculates its NAV as of the close of regular trading on the NYSE, usually 4:00 p.m. Eastern Time, each day the NYSE is open for business (Business Day.) The NYSE is open every week,
Monday through Friday, except when the following holidays are celebrated: New Years Day, Martin Luther King, Jr. Day (the third Monday in January), Presidents Day (the third Monday in February), Good Friday, Memorial Day (the last Monday
in May), July 4
th
, Labor Day (the first Monday in
September), Thanksgiving Day (the fourth Thursday in November) and Christmas Day. The NYSE may close early on the
39
business day before each of these holidays and on the day after Thanksgiving Day. NYSE holiday schedules are subject to change without notice.
If the exchange or market on which the other Funds investments are primarily traded closes early, the NAV may be calculated prior to its normal
calculation time. Creation/redemption transaction order time cutoffs would also be accelerated. The value of a Funds assets that trade in markets outside the United States or in currencies other than the U.S. dollar may fluctuate when foreign
markets are open but the Funds are not open for business.
A security listed or traded on an exchange, domestic or
foreign, is valued at its last sales price on the principal exchange on which it is traded prior to the time when assets are valued. If no sale is reported at that time, the mean of the last bid and asked prices is used. Securities primarily traded
on the NASDAQ Global Market
®
(NASDAQ
®
) for which market quotations are readily available shall be valued using the NASDAQ
®
Official Closing Price (NOCP) provided by NASDAQ
®
each business day. The NOCP is the most recently reported price as of 4:00:02 p.m. Eastern time, unless that price is outside the range of the inside bid
and asked prices in that case, NASDAQ
®
will adjust the price to equal the inside bid or asked price,
whichever is closer. If the NOCP is not available, such securities shall be valued at the last sale price on the day of valuation, or if there has been no sale on such day, at the mean between the bid and asked prices.
When market quotations for options and futures positions held by a Fund are readily available, those positions will be valued based upon such quotations.
Securities and other assets for which market quotations are not readily available, or for which Rafferty has reason to question the validity of quotations received, are valued at fair value by procedures as adopted by the Board.
For purposes of determining NAV per share of a Fund, options and futures contracts are valued at the last sales prices of the exchanges on which they
trade. The value of a futures contract equals the unrealized gain or loss on the contract that is determined by marking the contract to the last sale price for a like contract acquired on the day on which the futures contract is being valued. The
value of options on futures contracts is determined based upon the last sale price for a like option acquired on the day on which the option is being valued. A last sale price may not be used for the foregoing purposes if the market makes a limited
move with respect to a particular instrument.
For valuation purposes, quotations of foreign securities or other assets denominated in foreign
currencies are translated to U.S. dollar equivalents using the net foreign exchange rate in effect at the close of the stock exchange in the country where the security is issued. Short-term debt instruments having a maturity of 60 days or less are
valued at amortized cost, which approximates market value. If the Board determines that the amortized cost method does not represent the fair value of the short-term debt instrument, the investment will be valued at fair value as determined by
procedures as adopted by the Board. U.S. government securities are valued at the mean between the closing bid and asked price provided by an independent third party pricing service (Pricing Service).
OTC securities held by a Fund will be valued at the last sales price or, if no sales price is reported, the mean of the last bid and asked price is used.
The portfolio securities of a Fund that are listed on national exchanges are valued at the last sales price of such securities; if no sales price is reported, the mean of the last bid and asked price is used.
Dividend income and other distributions are recorded on the ex-distribution date.
Illiquid securities, securities for which reliable quotations or pricing services are not readily available, and all other assets not valued in accordance with the foregoing principles will be valued at
their respective fair value as determined in good faith by, or under procedures established by, the Trustees, which procedures may include the delegation of certain responsibilities regarding valuation to Rafferty or the officers of the Trust. The
officers of the Trust report, as necessary, to the Trustees regarding portfolio valuation determinations. The Trustees, from time to time, will review these methods of valuation and will recommend changes that may be necessary to assure that the
investments of a Fund are valued at fair value.
40
ADDITIONAL INFORMATION CONCERNING SHARES
Organization and Description of Shares of Beneficial Interest
The Trust is a Delaware statutory trust and registered investment company. The Trust was organized on April 23, 2008, and has authorized capital of
unlimited Shares of beneficial interest of no par value which may be issued in more than one class or series. Currently, the Trust consists of multiple separately managed series. The Board may designate additional series of beneficial interest and
classify Shares of a particular series into one or more classes of that series.
All Shares of the Trust are freely transferable. The Shares
do not have preemptive rights or cumulative voting rights, and none of the Shares have any preference to conversion, exchange, dividends, retirements, liquidation, redemption, or any other feature. Shares have equal voting rights, except that, in a
matter affecting a particular series or class of Shares, only Shares of that series of class may be entitled to vote on the matter. Trust shareholders are entitled to require the Trust to redeem Creation Units of their Shares. The Trust Instrument
confers upon the Broad of Trustees the power, by resolution, to alter the number of Shares constituting a Creation Unit or to specify that Shares of the Trust may be individually redeemable. The Trust reserves the right to adjust the stock prices of
Shares of the Trust to maintain convenient trading ranges for investors. Any such adjustments would be accomplished through stock splits or reverse stock splits which would have no effect on the net assets of the applicable Fund.
Under Delaware law, the Trust is not required to hold an annual shareholders meeting if the 1940 Act does not require such a meeting. Generally, there
will not be annual meetings of Trust shareholders. Trust shareholders may remove Trustees from office by votes cast at a meeting of Trust shareholders or by written consent. If requested by shareholders of at least 10% of the outstanding Shares of
the Trust, the Trust will call a meeting of Funds shareholders for the purpose of voting upon the question of removal of a Trustee of the Trust and will assist in communications with other Trust shareholders.
The Trust Instrument disclaims liability of the shareholders of the officers of the Trust for acts or obligations of the Trust which are binding only on
the assets and property of the Trust. The Trust Instrument provides for indemnification from the Trusts property for all loss and expense of any Fund shareholder held personally liable for the obligations of the Trust. The risk of a Trust
shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Funds would not be able to meet the Trusts obligations and this risk, thus, should be considered remote.
If a Fund does not grow to a size to permit it to be economically viable, the Fund may cease operations. In such an event, investors may be required to
liquidate or transfer their investments at an inopportune time.
Book Entry Only System
The Depository Trust Company (DTC) acts as securities depositary for the Shares. The Shares of each Fund are represented by global securities
registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC. Except as provided below, certificates will not be issued for Shares.
DTC has advised the Trust as follows: it is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a clearing corporation
within the meaning of the New York Uniform Commercial Code, and a clearing agency registered pursuant to the provisions of Section 17A of the Exchange Act. DTC 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 New York Stock Exchange, Inc., the AMEX 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). DTC agrees with and represents to DTC
41
Participants that it will administer its book-entry system in accordance with its rules and by-laws and requirements of law. 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.
Beneficial owners of Shares are not entitled to have Shares registered in their names, will not receive or be entitled to receive physical delivery of
certificates in definitive form and are not considered the registered holder thereof. Accordingly, each Beneficial owner must rely on the procedures of DTC, the DTC Participant and any Indirect Participant through which such Beneficial owner holds
its interests, to exercise any rights of a holder of Shares. 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. As described above, the Trust recognizes DTC or its nominee as the owner of all Shares for all purposes. 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 Share holdings of 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.
Distributions of Shares shall be made to DTC or its nominee, Cede & Co., as the
registered holder of all Shares. DTC or its nominee, upon receipt of any such distributions, shall credit immediately DTC Participants accounts with payments in amounts proportionate to their respective beneficial interests in Shares as shown
on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial owners of Shares held through such DTC Participants will be governed by standing instructions and customary practices, as is now the case with
securities held for the accounts of customers in bearer form or registered in a street name, and will be the responsibility of such DTC Participants. The Trust has no responsibility or liability for any aspects 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 an the Indirect Participants and Beneficial owners owning through such DTC Participants.
DTC may determine to discontinue providing its service with respect to Shares at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect thereto under
applicable law. Under such circumstances, the Trust shall take action either to find a replacement for DTC to perform its functions at a comparable cost or, if such a replacement is unavailable, to issue and deliver printed certificates representing
ownership of Shares, unless the Trust makes other arrangements with respect thereto satisfactory to the Exchange. The Trust will not make the DTC book-entry Dividend Reinvestment Service available for use by Beneficial Owners for reinvestment of
their cash proceeds but certain brokers may make a dividend reinvestment service available to their clients. Brokers offering such services may require investors to adhere to specific procedures and timetables in order to participate. Investors
interested in such a service should contact their broker for availability and other necessary details.
42
PURCHASES AND REDEMPTIONS
The Trust issues and redeems Shares of each Fund only in aggregations of Creation Units. The number of Shares of a Fund that constitute a Creation Unit
for each Fund and the value of such Creation Unit as of each Funds inception were 50,000 and $2,000,000 for each Fund.
See
Purchase and Issuance of Shares in Creation Units and Redemption of Creation Units below. The Board reserves the right to declare a split or a consolidation in the number of Shares outstanding of any Fund, and may make a
corresponding change in the number of Shares constituting a Creation Unit, in the event that the per Shares price in the secondary market rises (or declines) to an amount that falls outside the range deemed desirable by the Board for any other
reason.
Purchase and Issuance of Creation Units
The Trust issues and sells Shares only in Creation Units on a continuous basis through the Distributor, without a sales load, at their net asset value
next determined after receipt, on any Business Day (as defined above), of an order in proper form.
Creation Units of Shares may be purchased
only by or through an Authorized Participant. Such Authorized Participant will agree pursuant to the terms of such Authorized Participant Agreement on behalf of itself or any investor on whose behalf it will act, as the case may be, to certain
conditions, including that such Authorized Participant will make available an amount of cash sufficient to pay the Balancing Amount and the transaction fee described below. The Authorized Participant may require the investor to enter into an
agreement with such Authorized Participant with respect to certain matters, including payment of the Balancing Amount. Investors who are not Authorized Participants must make appropriate arrangements with an Authorized Participant. 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 therefore orders to purchase Creation Units of Shares may have to be placed by the investors broker
through an Authorized Participant. As a result, purchase orders placed through an Authorized Participant may result in additional charges to such investor.
Creation Units also will be sold only for cash (Cash Purchase Amount) for 3X Bear Funds. Creation Units are sold at their net asset value, plus a transaction fee, as described below.
Purchases through the Clearing Process (3X Bull Funds)
An Authorized Participant may place an order to purchase (or redeem) Creation Units (i) through the Continuous Net Settlement clearing processes of
NSCC as such processes have been enhanced to effect purchases (and redemptions) of Creation Units, such processes being referred to herein as the Enhanced Clearing Process, or (ii) outside the Enhanced Clearing Process, being
referred to herein as the Manual Clearing Process. To purchase or redeem through the Enhanced Clearing Process, an Authorized Participant must be a member of National Securities Clearing Corporation (NSCC) that is eligible to use the
Continuous Net Settlement system. For purchase orders placed through the Enhanced Clearing Process, in the Authorized Participant Agreement the Participant authorizes the Transfer Agent to transmit to the NSCC, on behalf of an Authorized
Participant, such trade instructions as are necessary to effect the Authorized Participants purchase order. Pursuant to such trade instructions to the NSCC, the Authorized Participant agrees to deliver the Portfolio Deposit and such additional
information as may be required by the Transfer Agent or the Distributor. A purchase order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agents automated
system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in order to receive that days NAV per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for
you to receive the NAV determined on that day.
The consideration for purchase of a Creation Unit of Shares of a 3X Bull Fund consists of
either cash or the Deposit Securities that is a representative sample of the securities in the Funds underlying index, the Balancing Amount, and the appropriate Transaction Fee (collectively, the Portfolio Deposit). The Balancing
Amount will be the amount equal to the differential, if any, between the total aggregate market value of the Deposit Securities and the
43
NAV of the Creation Unit(s) being purchased and will be paid to, or received from, the Trust after the NAV has been calculated.
BNYM makes available through the NSCC on each Business Day, either immediately prior to the opening of business on the Exchange or the night before, the list of the names and the required number of shares
of each Deposit Security to be included in the current Portfolio Deposit (based on information at the end of the previous Business Day) for each 3X Bull Fund. Such Portfolio Deposit is applicable, subject to any adjustments as described below, in
order to effect purchases of Creation Units of Shares of a given 3X Bull Fund until such time as the next-announced Portfolio Deposit made available.
The identity and number of shares of the Deposit Securities required for each 3X Bull Fund changes as rebalancing adjustments and corporate action events are reflected from time to time by Rafferty with a
view to the investment objective of the 3X Bull Fund. The composition of the Deposit Securities may also change in response to adjustments to the weighting or composition of the securities constituting the relevant securities index. In addition, the
Trust reserves the right to permit or require the substitution of an amount of cash (
i.e.
, a cash in lieu amount) to be added to the Balancing Amount to replace any Deposit Security which may not be available in sufficient
quantity for delivery or for other similar reasons. The adjustments described above will reflect changes, known to Rafferty on the date of announcement to be in effect by the time of delivery of the Portfolio Deposit, in the composition of the
subject index being tracked by the relevant 3X Bull Fund, or resulting from stock splits and other corporate actions.
In addition to the list
of names and numbers of securities constituting the current Deposit Securities of a Portfolio Deposit, on each Business Day, the Balancing Amount effective through and including the previous Business Day, per outstanding Share of each 3X Bull Fund,
will be made available.
Shares may be issued in advance of receipt by the Trust of all or a portion of the applicable Deposit Securities as
described below. In these circumstances, the initial deposit will have a greater value than the NAV of the Shares on the date the order is placed in proper form since, in addition to the available Deposit Securities, cash must be deposited in an
amount equal to the sum of (i) the Balancing Amount, plus (ii) 115% of the market value of the undelivered Deposit Securities (the Additional Cash Deposit). An additional amount of cash shall be required to be deposited with
the Trust, pending delivery of the missing Deposit Securities to the extent necessary to maintain the Additional Cash Deposit with the Trust in an amount at least equal to 115% of the daily marked to market value of the missing Deposit Securities.
The Participation Agreement will permit the Trust to buy the missing Deposit Securities any time. Authorized Participants will be liable to the Trust for the costs incurred by the Trust in connection with any such purchases. These costs will be
deemed to include the amount by which the actual purchase price of the Deposit Securities exceeds the market value of such Deposit Securities on the day the purchase order was deemed received by the Distributor plus the brokerage and related
transaction costs associated with such purchases. The Trust will return any unused portion of the Additional Cash Deposit once all of the missing Deposit Securities have been properly received by the Custodian Bank or purchased by the Trust and
deposited into the Trust. In addition, a transaction fee, as listed below, will be charged in all cases. The delivery of Shares so purchased will occur no later than the third Business Day following the day on which the purchase order is deemed
received by the Distributor. Due to the schedule of holidays in certain countries, however, the delivery of Shares may take longer than three Business Days following the day on which the purchase order is received. In such cases, the local market
settlement procedures will not commence until the end of local holiday periods. A list of local holidays in the foreign countries or markets relevant to the international funds is set forth under Regular Foreign Holidays below.
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 Trusts determination shall be final and binding.
44
Purchases Through the Manual Clearing Process
An Authorized Participant that wishes to place an order to purchase Creation Units outside the Enhanced Clearing Process must state that it is not using
the Enhanced Clearing Process and that the purchase instead will be effected through a transfer of securities and cash either through the Federal Reserve System (for cash and U.S. government securities) or directly through DTC. All Creation Unit
purchases of the 3X Bear Funds will be settled outside the Enhanced Clearing Process for cash equal to the Creation Units NAV (Cash Purchase Amount). Purchases (and redemptions) of Creation Units of the 3X Bull Funds settled
outside the Enhanced Clearing Process will be subject to a higher Transaction Fee than those settled through the Enhanced Clearing Process. Purchase orders effected outside the Enhanced Clearing Process are likely to require transmittal by the
Authorized Participant earlier on the Transmittal Date than orders effected using the Enhanced Clearing Process. Those persons placing orders outside the Enhanced Clearing Process should ascertain the deadlines applicable to DTC and the Federal
Reserve System (for cash and U.S. government securities) by contacting the operations department of the broker or depository institution effectuating such transfer of the Portfolio Deposit (for the 3X Bull Funds), or of the Cash Purchase Amount (for
the 3X Bear Funds).
Rejection of Purchase Orders
The Trust reserves the absolute right to reject a purchase order transmitted to it by the Distributor in respect of any Fund if (a) the purchaser or
group of purchasers, upon obtaining the shares ordered, would own 80% or more of the currently outstanding Shares of any Fund; (b) the Deposit Securities delivered are not as specified by Rafferty and Rafferty has not consented to acceptance of
an in-kind deposit that varies from the designated Deposit Securities; (c) acceptance of the purchase transaction order would have certain adverse tax consequences to the Fund; (d) the acceptance of the purchase transaction order would, in
the opinion of counsel, be unlawful; (e) the acceptance of the purchase transaction order would otherwise, in the discretion of the Trust or Rafferty, have an adverse effect on the Trust or the rights of beneficial owners; (f) the value of
a Cash Purchase Amount, or the value of the Balancing Amount to accompany an in-kind deposit exceed a purchase authorization limit extended to an Authorized Participant by the custodian and the Authorized Participant has not deposited an amount in
excess of such purchase authorization with the custodian by 4:00 p.m. Eastern Time on the Transmittal Date; or (g) in the event that circumstances outside the control of the Trust, the Distributor and Rafferty make it impractical to process
purchase orders. The Trust shall notify a prospective purchaser of its rejection of the order of such person. The Trust and the Distributor are under no duty, however, to give notification of any defects or irregularities in the delivery of purchase
transaction orders nor shall either of them incur any liability for the failure to give any such notification.
Redemption of Creation Units
Shares may be redeemed only in Creation Units at their NAV next determined after receipt of a redemption request in proper form by the Distributor on any 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 of Shares. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of Shares
to constitute a redeemable Creation Unit.
Placement of Redemption Orders Using Enhanced Clearing Process (3X
Bull Funds)
Orders to redeem Creation Units of Funds through the Enhanced Clearing Process must be delivered through an Authorized
Participant that is a member of NSCC that is eligible to use the Continuous Net Settlement System. A redemption order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer
agents automated system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in order to receive that days NAV per Share. All other procedures set forth in the Authorized Participant Agreement must
be followed in order for you to receive the NAV determined on that day.
With respect to each 3X Bull Fund, Rafferty makes available through
the NSCC immediately prior to the opening of business on the Exchange on each day that the Exchange is open for business the Portfolio Securities that will be
45
applicable (subject to possible amendment or correction) to redemption requests received in proper form (as defined below) on that day (Redemption Securities). These securities may,
at times, not be identical to Deposit Securities which are applicable to a purchase of Creation Units.
The redemption proceeds for a Creation
Unit consist of either cash or Redemption Securities, as announced by Rafferty through the NSCC on any Business Day, plus the Balancing Amount. The redemption transaction fee described below is deducted from such redemption proceeds.
Placement of Redemption Orders Outside Clearing Process (3X Bull Funds and 3X Bear Funds)
Orders to redeem Creation Units of Funds outside the Clearing Process must be delivered through a DTC Participant that has executed the Authorized
Participant Agreement. A DTC Participant who wishes to place an order for redemption of Creation Units of a Fund to be effected outside the Clearing Process need not be an Authorized Participant, but such orders must state that the DTC Participant
is not using the Clearing Process and that redemption of Creation Units will instead be effected through transfer of Shares directly through DTC or the Federal Reserve System (for cash and U.S. government securities). A redemption order must be
received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agents automated system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in
order to receive that days NAV per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day. The order must be accompanied or preceded by the
requisite number of Shares of Funds specified in such order, which delivery must be made through DTC or the Federal Reserve System to the Custodian by the third Business Day following such Transmittal Date (DTC Cut-Off Time); and
(iii) all other procedures set forth in the Authorized Participant Agreement must be properly followed.
For the 3X Bull Funds, if
it is not possible to effect deliveries of the Redemption Securities, the Fund may in its discretion exercise its option to redeem such Shares in cash, and the redeeming shareholder will be required to receive its redemption proceeds in cash. In
addition, an investor may request a redemption in cash which the Fund may, in its sole discretion, permit. The Fund may also, in its sole discretion, upon request of a shareholder, provide such redeemer a portfolio of securities which differs from
the exact composition of the Fund Securities but does not differ in net asset value.
After the Transfer Agent has deemed an order for
redemption of a 3X Bull Funds shares outside the Clearing Process received, the Transfer Agent will initiate procedures to transfer the requisite Redemption Securities, which are expected to be delivered within three Business Days, and the
Balancing Amount minus the Transaction Fee. In addition, with respect to 3X Bull Fund redemptions honored in cash, the redeeming party will receive the Cash Redemption Amount by the third Business Day following the Transmittal Date on which such
redemption order is deemed received by the Transfer Agent. Due to the schedule of holidays in certain countries, however, the receipt of the Cash Redemption Amount may take longer than three Business Days following the Transmittal Date. In such
cases, the local market settlement procedures will not commence until the end of local holiday periods. See below for a list of local holidays in the foreign country relevant to the international funds.
The redemption proceeds for a Creation Unit of a 3X Bear Fund will consist solely of cash in an amount equal to the NAV of the Shares being redeemed, as
next determined after a receipt of a request in proper form, less the redemption transaction fee described below (Cash Redemption Amount).
In certain instances, Authorized Participants may create and redeem Creation Unit aggregations of the same Fund on the same trade date. In this instance, the Trust reserves the right to settle these
transactions on a net basis.
The right of redemption may be suspended or the date of payment postponed with respect to any Fund (1) for
any period during which the New York Stock Exchange is closed (other than customary weekend and holiday closings); (2) for any period during which trading on the New York Stock Exchange is suspended or restricted; (3) for any period during
which an emergency exists as a result of which disposal of the shares of the Funds portfolio securities or determination of its net asset value is not reasonably practicable; or (4) in such other circumstance as is permitted by the SEC.
46
Regular Foreign Holidays
The Funds generally intend to effect deliveries of Creation Units and portfolio securities on a basis of T plus three Business Days (
i.e.
, days on which the national securities exchange
is open). The Funds may effect deliveries of Creation Units and portfolio securities on a basis other than T plus three in order to accommodate local holiday schedules, to account for different treatment among foreign and U.S. markets of dividend
record dates and ex-dividend dates or under certain other circumstances. The ability of the Trust to effect in-kind creations and redemptions within three Business Days of receipt of an order in good form is subject, among other things, to the
condition that, within the time period from the date of the order to the date of delivery of the securities, there are no days that are holidays in the applicable foreign market. For every occurrence of one or more intervening holidays in the
applicable foreign market that are not holidays observed in the U.S. equity market, the redemption settlement cycle will be extended by the number of such intervening holidays. In addition to holidays, other unforeseeable closings in a foreign
market due to emergencies may also prevent the Trust from delivering securities within normal settlement periods. The securities delivery cycles currently practicable for transferring portfolio securities to redeeming Authorized Participants,
coupled with foreign market holiday schedules, will require a delivery process longer than seven calendar days for the international funds, in certain circumstances. The holidays applicable to the international funds during such periods are listed
below, as are instances where more than seven days will be needed to deliver redemption proceeds. Although certain holidays may occur on different dates in subsequent years, the number of days required to deliver redemption proceeds in any given
year is not expected to exceed the maximum number of days listed below for the funds. The proclamation of new holidays, the treatment by market participants of certain days as informal holidays (
e.g.
, days on which no or limited
securities transactions occur, as a result of substantially shortened trading hours), the elimination of existing holidays or changes in local securities delivery practices could affect the information set forth herein at some time in the future.
The dates from January 1, 2013 through December 31, 2013 in which the regular holidays affecting the relevant securities markets of
the below listed countries are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia
|
|
Austria
|
|
Belgium
|
|
Brazil
|
|
Canada
|
|
Chile
|
|
China
|
|
Colombia
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
January 28
|
|
March 29
|
|
March 29
|
|
January 25
|
|
January 2
|
|
March 29
|
|
January 2
|
|
January 7
|
March 4
|
|
April 1
|
|
April 1
|
|
February 11
|
|
February 18
|
|
May 1
|
|
January 3
|
|
March 25
|
March 28
|
|
May 1
|
|
May 1
|
|
February 12
|
|
March 29
|
|
May 21
|
|
February 11
|
|
March 28
|
March 29
|
|
May 9
|
|
May 9
|
|
February 13
|
|
May 20
|
|
July 16
|
|
February 12
|
|
March 29
|
April 1
|
|
May 20
|
|
May 20
|
|
March 29
|
|
June 24
|
|
August 15
|
|
February 13
|
|
May 1
|
April 25
|
|
May 30
|
|
August 15
|
|
May 1
|
|
July 1
|
|
September 18
|
|
February 14
|
|
May 13
|
May 6
|
|
August 15
|
|
November 1
|
|
May 30
|
|
August 5
|
|
September 19
|
|
February 15
|
|
June 3
|
June 10
|
|
November 1
|
|
November 11
|
|
July 9
|
|
September 2
|
|
September 20
|
|
April 4
|
|
June 10
|
August 5
|
|
December 24
|
|
December 25
|
|
November 15
|
|
October 14
|
|
October 31
|
|
April 5
|
|
July 1
|
October 7
|
|
December 25
|
|
December 26
|
|
November 20
|
|
November 11
|
|
November 1
|
|
April 29
|
|
August 7
|
November 5
|
|
December 26
|
|
|
|
December 24
|
|
December 25
|
|
December 25
|
|
April 30
|
|
August 19
|
December 24
|
|
December 31
|
|
|
|
December 25
|
|
December 26
|
|
December 31
|
|
May 1
|
|
October 14
|
December 25
|
|
|
|
|
|
December 31
|
|
|
|
|
|
June 10
|
|
November 4
|
December 26
|
|
|
|
|
|
|
|
|
|
|
|
June 11
|
|
November 11
|
December 31
|
|
|
|
|
|
|
|
|
|
|
|
June 12
|
|
December 25
|
|
|
|
|
|
|
|
|
|
|
|
|
April 4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 7
|
|
|
|
|
|
|
|
|
|
|
Czech Republic
|
|
Denmark
|
|
Egypt
|
|
Finland
|
|
France
|
|
Germany
|
|
Greece
|
|
Hong Kong
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
April 1
|
|
March 28
|
|
January 7
|
|
March 28
|
|
March 29
|
|
March 29
|
|
March 18
|
|
February 11
|
May 1
|
|
March 29
|
|
January 24
|
|
March 29
|
|
April 1
|
|
April 1
|
|
March 25
|
|
February 12
|
May 8
|
|
April 1
|
|
April 25
|
|
April 1
|
|
May 1
|
|
May 1
|
|
March 29
|
|
February 13
|
July 5
|
|
April 26
|
|
May 1
|
|
May 1
|
|
May 8
|
|
May 9
|
|
April 1
|
|
March 29
|
October 28
|
|
May 9
|
|
May 5
|
|
May 9
|
|
May 9
|
|
May 20
|
|
May 1
|
|
April 1
|
December 24
|
|
May 10
|
|
May 6
|
|
June 21
|
|
May 20
|
|
May 30
|
|
May 3
|
|
April 4
|
December 25
|
|
May 20
|
|
July 1
|
|
December 6
|
|
August 15
|
|
October 3
|
|
May 6
|
|
May 1
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26
|
|
June 5
|
|
July 23
|
|
December 24
|
|
November 1
|
|
December 24
|
|
June 24
|
|
May 17
|
|
|
December 24
|
|
August 8
|
|
December 25
|
|
November 11
|
|
December 25
|
|
August 15
|
|
June 12
|
|
|
December 25
|
|
October 6
|
|
December 26
|
|
December 25
|
|
December 26
|
|
October 28
|
|
July 1
|
|
|
December 26
|
|
October 14
|
|
December 31
|
|
December 26
|
|
December 28
|
|
December 24
|
|
September 20
|
|
|
December 31
|
|
October 15
|
|
|
|
|
|
December 31
|
|
December 25
|
|
October 1
|
|
|
|
|
October 16
|
|
|
|
|
|
|
|
December 26
|
|
October 14
|
|
|
|
|
November 5
|
|
|
|
|
|
|
|
|
|
December 25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 26
|
|
|
|
|
|
|
|
|
Hungary
|
|
India
|
|
Indonesia
|
|
Ireland
|
|
Israel
|
|
Italy
|
|
Japan
|
|
Malaysia
|
January 1
|
|
January 25
|
|
January 1
|
|
January 1
|
|
January 22
|
|
January 1
|
|
January 1
|
|
January 1
|
March 15
|
|
February 19
|
|
January 24
|
|
January 21
|
|
February 24
|
|
March 29
|
|
January 2
|
|
January 24
|
April 1
|
|
March 27
|
|
March 12
|
|
February 18
|
|
March 25
|
|
April 1
|
|
January 3
|
|
January 28
|
May 1
|
|
March 29
|
|
March 29
|
|
March 18
|
|
March 26
|
|
April 25
|
|
January 14
|
|
February 1
|
May 20
|
|
April 1
|
|
May 9
|
|
March 29
|
|
March 31
|
|
May 1
|
|
February 11
|
|
February 11
|
August 19
|
|
April 11
|
|
June 6
|
|
April 1
|
|
April 1
|
|
August 15
|
|
March 20
|
|
February 12
|
August 20
|
|
April 19
|
|
August 5
|
|
May 1
|
|
April 15
|
|
November 1
|
|
April 29
|
|
May 1
|
August 24
|
|
April 24
|
|
August 6
|
|
May 6
|
|
April 16
|
|
December 24
|
|
May 3
|
|
May 24
|
October 23
|
|
May 1
|
|
August 7
|
|
May 27
|
|
May 14
|
|
December 25
|
|
May 6
|
|
August 8
|
November 1
|
|
August 9
|
|
August 8
|
|
July 4
|
|
May 15
|
|
December 26
|
|
July 15
|
|
August 9
|
December 7
|
|
August 15
|
|
August 9
|
|
July 12
|
|
July 16
|
|
December 31
|
|
September 16
|
|
September 16
|
December 21
|
|
September 9
|
|
October 14
|
|
August 26
|
|
September 4
|
|
|
|
September 23
|
|
October 15
|
December 24
|
|
September 30
|
|
October 15
|
|
September 2
|
|
September 5
|
|
|
|
October 14
|
|
November 5
|
December 25
|
|
October 2
|
|
November 5
|
|
October 14
|
|
September 6
|
|
|
|
November 4
|
|
December 25
|
December 26
|
|
October 16
|
|
December 25
|
|
November 11
|
|
September 13
|
|
|
|
December 23
|
|
|
December 27
|
|
November 4
|
|
December 26
|
|
November 28
|
|
September 18
|
|
|
|
December 31
|
|
|
|
|
November 14
|
|
December 31
|
|
December 25
|
|
September 19
|
|
|
|
|
|
|
|
|
December 25
|
|
|
|
December 26
|
|
September 25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mexico
|
|
Morocco
|
|
The
Netherlands
|
|
New Zealand
|
|
Norway
|
|
Peru
|
|
The
Philippines
|
|
Poland
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
February 4
|
|
January 11
|
|
March 29
|
|
January 2
|
|
March 27
|
|
March 28
|
|
March 28
|
|
March 29
|
March 18
|
|
May 1
|
|
April 1
|
|
January 21
|
|
March 28
|
|
March 29
|
|
March 29
|
|
April 1
|
March 28
|
|
July 30
|
|
April 30
|
|
January 28
|
|
March 29
|
|
May 1
|
|
April 9
|
|
May 1
|
March 29
|
|
August 14
|
|
May 1
|
|
February 6
|
|
April 1
|
|
July 29
|
|
May 1
|
|
May 3
|
September 16
|
|
August 20
|
|
May 9
|
|
March 29
|
|
May 1
|
|
August 30
|
|
June 12
|
|
May 30
|
|
|
August 21
|
|
May 20
|
|
April 1
|
|
May 9
|
|
October 8
|
|
August 21
|
|
August 15
|
|
|
November 6
|
|
December 25
|
|
April 25
|
|
May 17
|
|
November 1
|
|
August 26
|
|
November 1
|
|
|
November 18
|
|
December 26
|
|
June 3
|
|
May 20
|
|
December 25
|
|
November 1
|
|
November 11
|
|
|
|
|
|
|
October 28
|
|
December 24
|
|
|
|
December 24
|
|
December 24
|
|
|
|
|
|
|
December 25
|
|
December 25
|
|
|
|
December 25
|
|
December 25
|
|
|
|
|
|
|
December 26
|
|
December 26
|
|
|
|
December 30
|
|
December 26
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
December 31
|
|
December 31
|
|
|
|
|
|
|
|
|
Portugal
|
|
Russia
|
|
Singapore
|
|
South Africa
|
|
South Korea
|
|
Spain
|
|
Sweden
|
|
Switzerland
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
February 12
|
|
January 2
|
|
February 11
|
|
March 21
|
|
February 11
|
|
January 7
|
|
March 28
|
|
January 2
|
March 29
|
|
January 3
|
|
February 12
|
|
March 29
|
|
March 1
|
|
March 18
|
|
March 29
|
|
March 29
|
April 1
|
|
January 4
|
|
March 29
|
|
April 1
|
|
May 1
|
|
March 28
|
|
April 1
|
|
April 1
|
April 25
|
|
January 7
|
|
May 1
|
|
May 1
|
|
May 17
|
|
March 29
|
|
May 1
|
|
April 15
|
May 1
|
|
January 8
|
|
May 24
|
|
June 17
|
|
June 6
|
|
April 1
|
|
May 8
|
|
May 1
|
June 10
|
|
February 22
|
|
August 8
|
|
August 9
|
|
August 15
|
|
May 1
|
|
May 9
|
|
May 9
|
June 13
|
|
March 7
|
|
August 9
|
|
September 24
|
|
September 18
|
|
August 15
|
|
June 6
|
|
May 20
|
August 15
|
|
March 8
|
|
October 15
|
|
December 16
|
|
September 19
|
|
November 1
|
|
June 21
|
|
August 1
|
December 24
|
|
April 30
|
|
November 4
|
|
December 25
|
|
September 20
|
|
December 6
|
|
November 1
|
|
September 9
|
December 25
|
|
May 1
|
|
December 25
|
|
December 26
|
|
October 3
|
|
December 25
|
|
December 24
|
|
December 24
|
December 26
|
|
May 2
|
|
|
|
|
|
December 25
|
|
December 26
|
|
December 25
|
|
December 25
|
December 31
|
|
May 3
|
|
|
|
|
|
December 31
|
|
|
|
December 26
|
|
December 26
|
|
|
May 8
|
|
|
|
|
|
|
|
|
|
December 31
|
|
December 31
|
|
|
May 9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 4
|
|
|
|
|
|
|
|
|
|
|
|
|
48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taiwan
|
|
Thailand
|
|
Turkey
|
|
United
Kingdom
|
|
|
|
|
|
|
|
|
January 1
|
|
January 1
|
|
January 1
|
|
January 1
|
|
|
|
|
|
|
|
|
February 7
|
|
February 25
|
|
April 23
|
|
January 21
|
|
|
|
|
|
|
|
|
February 8
|
|
April 8
|
|
May 1
|
|
February 18
|
|
|
|
|
|
|
|
|
February 11
|
|
April 15
|
|
August 7
|
|
March 29
|
|
|
|
|
|
|
|
|
February 12
|
|
April 16
|
|
August 8
|
|
April 1
|
|
|
|
|
|
|
|
|
February 13
|
|
May 1
|
|
August 9
|
|
May 1
|
|
|
|
|
|
|
|
|
February 14
|
|
May 6
|
|
August 30
|
|
May 6
|
|
|
|
|
|
|
|
|
February 15
|
|
May 24
|
|
October 14
|
|
May 27
|
|
|
|
|
|
|
|
|
February 28
|
|
July 1
|
|
October 15
|
|
July 4
|
|
|
|
|
|
|
|
|
April 4
|
|
July 22
|
|
October 16
|
|
August 26
|
|
|
|
|
|
|
|
|
April 5
|
|
August 12
|
|
October 17
|
|
September 2
|
|
|
|
|
|
|
|
|
May 1
|
|
October 23
|
|
October 18
|
|
October 14
|
|
|
|
|
|
|
|
|
June 12
|
|
December 5
|
|
October 28
|
|
November 11
|
|
|
|
|
|
|
|
|
September 19
|
|
December 10
|
|
October 29
|
|
November 28
|
|
|
|
|
|
|
|
|
September 20
|
|
December 31
|
|
|
|
December 25
|
|
|
|
|
|
|
|
|
October 10
|
|
|
|
|
|
December 26
|
|
|
|
|
|
|
|
|
Redemption
The longest redemption cycle for the international funds is a function of the longest redemption cycles among the countries whose stocks comprise the international funds.
Transaction Fees
Transaction fees are imposed as set forth in the table in the Prospectus. Transaction Fees payable to the Trust are imposed to compensate the Trust for the transfer and other transaction costs of a Fund
associated with the issuance and redemption of Creation Units of Shares. There is a fixed and a variable component to the total Transaction Fee. A fixed Transaction Fee is applicable to each creation or redemption transaction, regardless of the
number of Creation Units purchased or redeemed. In addition, a variable Transaction Fee based upon the value of each Creation Unit also is applicable to each redemption transaction.
Purchasers of Creation Units of 3X Bull Funds for cash are required to pay an additional charge to compensate the relevant Fund for brokerage and market impact expenses relating to investing in portfolios
securities. Where the Trust permits an in-kind purchaser to substitute cash in lieu of depositing a portion of the Deposit Securities, the purchaser will be assessed an additional charge for cash purchases.
Purchasers of Shares in Creation Units are responsible for the costs of transferring the securities constituting the Deposit Securities to the account of
the Trust. The purchase transaction fees for in-kind purchases and cash purchases (when available) are listed in the table below. Investors will also bear the costs of transferring securities from the Fund 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. In addition, Rafferty may, from time to time, at its own expense, compensate purchasers of Creation Units who have purchased substantial
amounts of Creation Units and other financial institutions for administrative or marketing services.
Continuous Offering
The method by which Creation Units of Shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Units of Shares are issued and sold by the Trust on an
ongoing basis, at any point a distribution, as such term is used in the Securities Act, may occur. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their
being deemed participants in a distribution in a manner which could render them statutory underwriters and subject them to the prospectus delivery and liability provisions of the Securities Act. For example, a broker-dealer firm or its client may be
deemed a statutory underwriter if it takes Creation Units after placing an order with the Distributor, breaks them down into constituent Shares, and sells some or all of the Shares comprising such Creation Units directly to its customers; or if it
chooses to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for Shares. A determination of whether a person is an underwriter for the
49
purposes of the Securities Act depends upon all the facts and circumstances pertaining to that persons activities. Thus, the examples mentioned above should not be considered a complete
description of all the activities that could lead to a categorization as an underwriter. Broker-dealer firms should also note that dealers who are effecting transactions in Shares, whether or not participating in the distribution of Shares, are
generally required to deliver a prospectus. This is because the prospectus delivery exemption in Section 4(3) of the Securities Act is not available in respect of such transactions as a result of Section 24(d) of the 1940 Act.
Broker-dealer firms should note that dealers who are not underwriters but are participating in a distribution (as contrasted to ordinary secondary market transaction), and thus dealing with Shares that are part of an unsold
allotment within the meaning of section 4(3)(C) of the Securities Act, would be unable to take advantage of the prospectus delivery exemption provided by section 4(3) of the Securities Act. Firms that incur a prospectus-delivery
obligation with respect to Shares are reminded that under Securities Act Rule 153 a prospectus delivery obligation under Section 5(b)(2) of the Securities Act owed to a national securities exchange member in connection with a sale on the
national securities exchange is satisfied by the fact that the Funds prospectus is available at the national securities exchange on which the Shares of such Fund trade upon request. The prospectus delivery mechanism provided in Rule 153 is
only available with respect to transactions on a national securities exchange and not with respect to upstairs transactions.
DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES
Dividends and other Distributions
As stated in the Prospectus, each Fund declares and distributes dividends to its shareholders
from its net investment income at least annually; for these purposes, net investment income includes dividends, accrued interest, and accretion of OID and market discount, less amortization of market premium and estimated expenses, and is calculated
immediately prior to the determination of a Funds NAV per share. Each Fund also distributes its net short-term capital gain, if any, annually but may make more frequent distributions thereof if necessary to avoid income or excise taxes. Each
Fund also distributes the excess of its net short-term capital gain over net long-term capital loss (short-term gain), if any, annually but may make more frequent distributions thereof if necessary to avoid federal income or excise
taxes. Each Fund may realize net capital gain (
i.e.
, the excess of net long-term capital gain over net short-term capital loss) and thus anticipates annual distributions thereof. The Trustees may revise this distribution policy, or postpone
the payment of distributions, if a Fund has or anticipates any large unexpected expense, loss or fluctuation in net assets that, in the Trustees opinion, might have a significant adverse effect on its shareholders.
Investors should be aware that if shares are purchased shortly before the record date for any dividend or capital gain distribution, the shareholder will
pay full price for the shares and receive some portion of the purchase price back as a taxable distribution (with the tax consequences described in the Prospectus).
Taxes
Regulated Investment Company Status
.
Each Fund is treated as a separate corporation for federal tax purposes and intends to qualify for treatment as a RIC. If a Fund so qualifies and satisfies the Distribution Requirement (defined below) for a taxable year, it will not be subject to
federal income tax on the part of its investment company taxable income (generally consisting of net investment income, short-term gain, and net gains and losses from certain foreign currency transactions, all determined without regard to any
deduction for dividends paid) and net capital gain it distributes to its shareholders for that year.
To qualify for treatment as a RIC, a
Fund must distribute to its shareholders for each taxable year at least 90% of its investment company taxable income (Distribution Requirement) and must meet several additional requirements. For each Fund, these requirements include the
following: (1) the Fund must derive at least 90% of its gross income each taxable year from (a) dividends, interest, payments with respect to securities loans, and gains from the sale or other disposition of securities or foreign
currencies, or other income (including gains from options, futures, or forward contracts) derived with respect to its business of investing in securities or those currencies, and (b) net income from an interest in a qualified publicly
traded partnership (QPTP) (Income Requirement); and (2) at the close of each quarter of the Funds taxable year, (a) at least 50% of the value of its total assets must be represented by cash and cash
items, U.S. government securities, securities of other RICs and other securities, with those other securities limited, in respect of any one issuer, to an amount that does not exceed 5% of the value of the Funds total assets and that does not
50
represent more than 10% of the issuers outstanding voting securities (equity securities of QPTPs being considered voting securities for these purposes), and (b) not more than 25% of
the value of its total assets may be invested in (i) securities (other than U.S. government securities or the securities of other RICs) of any one issuer, (ii) securities (other than securities of other RICs) of two or more issuers the
Fund controls that are determined to be engaged in the same, similar or related trades or businesses, or (iii) securities of one or more QPTPs (collectively, Diversification Requirements).
Although each Fund intends to satisfy all the foregoing requirements, there is no assurance that a Fund will be able to do so. The investment by a Fund
primarily in options and futures positions entails some risk that it might fail to satisfy one or both of the Diversification Requirements. There is some uncertainty regarding the valuation of such positions for purposes of those requirements;
accordingly, it is possible that the method of valuation the Funds use, pursuant to which each of them would expect to be treated as satisfying the Diversification Requirements, would not be accepted in an audit by the Internal Revenue Service
(IRS), which might apply a different method resulting in disqualification of one or more of the Funds.
If a Fund failed to
qualify for treatment as a RIC for any taxable year, (1) its taxable income, including net capital gain, would be taxed at corporate income tax rates (up to 35%), (2) it would not receive a deduction for the distributions it makes to its
shareholders, and (3) the shareholders would treat all those distributions, including distributions of net capital gain, as dividends (that is, ordinary income, except for the part of those dividends that is qualified dividend
income (described in the Prospectus) (QDI)) if certain holding period and other requirements are met) to the extent of the Funds earnings and profits; those dividends would be eligible for the dividends-received deduction
available to corporations under certain circumstances. In addition, the Fund would be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying for RIC treatment. However, the
Regulated Investment Company Modernization Act of 2010 provides certain savings provisions that enable a RIC to cure a failure to satisfy any of the Income and Diversification Requirements as long as the failure is due to reasonable cause and
not due to willful neglect and the RIC pays a deductible tax calculated in accordance with those provisions and meets certain other requirements.
Excise Tax
. Each Fund will be subject to a nondeductible 4% excise tax (Excise Tax) to the extent it fails to distribute by the end of any calendar year substantially all of its
ordinary income for that year and capital gain net income for the one-year period ending on October 31 of that year, plus certain other amounts.
Income from Foreign Securities
. Dividends and interest a Fund receives, and gains it realizes, on foreign securities may be subject to income, withholding, or other taxes imposed by foreign
countries and U.S. possessions that would reduce the yield and/or total return on its securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes, however, and many foreign countries do not impose
taxes on capital gains in respect of investments by foreign investors.
Gains or losses (1) from the disposition of foreign currencies,
including forward currency contracts, (2) on the disposition of each foreign-currency-denominated debt security that are attributable to fluctuations in the value of the foreign currency between the dates of acquisition and disposition of the
security, and (3) that are attributable to fluctuations in exchange rates that occur between the time a Fund accrues dividends, interest, or other receivables, or expenses or other liabilities, denominated in a foreign currency and the time the
Fund actually collects the receivables or pays the liabilities, generally will be treated as ordinary income or loss. These gains or losses will increase or decrease the amount of a Funds investment company taxable income to be distributed to
its shareholders.
Each Fund may invest in the stock of passive foreign investment companies (PFICs). A PFIC is any
foreign corporation (with certain exceptions) that, in general, meets either of the following tests: (1) at least 75% of its gross income for the taxable year is passive; or (2) an average of at least 50% of its assets produce, or are held
for the production of, passive income. Under certain circumstances, a Fund will be subject to federal income tax on a portion of any excess distribution it receives on the stock of a PFIC or of any gain on its disposition of the stock
(collectively, PFIC income), plus interest thereon, even if the Fund distributes the PFIC income as a dividend to its shareholders. The balance of the PFIC income will be included in the Funds investment company taxable income and,
accordingly, will not be taxable to it to the extent it distributes that income to its shareholders. Fund distributions thereof will not be eligible for the 15% maximum federal income tax rate on individuals QDI.
51
If a Fund invests in a PFIC and elects to treat the PFIC as a qualified electing fund
(QEF), then, in lieu of the foregoing tax and interest obligation, the Fund would be required to include in income each year its
pro rata
share of the QEFs annual ordinary earnings and net capital gain which the Fund
probably would have to distribute to satisfy the Distribution Requirement and avoid imposition of the Excise Tax even if the Fund did not receive those earnings and gain from the QEF. In most instances it will be very difficult, if not
impossible, to make this election because of certain requirements thereof.
Each Fund may elect to mark to market its stock in any
PFIC. Marking-to-market, in this context, means including in gross income each taxable year (and treating as ordinary income) the excess, if any, of the fair market value of the PFICs stock over a Funds adjusted basis therein
as of the end of that year. Pursuant to the election, a Fund also would be allowed to deduct (as an ordinary, not a capital, loss) the excess, if any, of its adjusted basis in PFIC stock over the fair market value thereof as of the taxable year-end,
but only to the extent of any net mark-to-market gains with respect to that stock the Fund included in income for prior taxable years under the election. A Funds adjusted basis in each PFICs stock with respect to which it makes this
election would be adjusted to reflect the amounts of income included and deductions taken thereunder.
Derivatives Strategies
.
The use of derivatives strategies, such as writing (selling) and purchasing options and futures contracts and entering into forward contracts, involves complex rules that will determine for income tax purposes the amount, character, and timing of
recognition of the gains and losses a Fund realizes in connection therewith. Gains from the disposition of foreign currencies (except certain gains therefrom that may be excluded by future regulations), and gains from options, futures, and forward
contracts a Fund derives with respect to its business of investing in securities or foreign currencies, will be treated as qualifying income under the Income Requirement. Each Fund will monitor its transactions, make appropriate tax elections, and
make appropriate entries in its books and records when it acquires any foreign currency, option, futures contract, forward contract, or hedged investment to mitigate the effect of these rules, seek to prevent its disqualification as a RIC, and
minimize the imposition of federal income and excise taxes.
Some futures contracts, foreign currency contracts that are traded in the
interbank market, and nonequity options (
i.e.
, certain listed options, such as those on a broad-based securities index) except any securities futures contract that is not a dealer securities futures
contract (both as defined in the Code) and any interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement in which a Fund
invests may be subject to Code section 1256 (collectively section 1256 contracts). Section 1256 contracts that a Fund holds at the end of its taxable year must be marked to market (that is, treated as having been sold at
that time for their fair market value) for federal income tax purposes, with the result that unrealized gains or losses will be treated as though they were realized. Sixty percent of any net gain or loss recognized on these deemed sales, and 60% of
any net realized gain or loss from any actual sales of section 1256 contracts, will be treated as long-term capital gain or loss, and the balance will be treated as short-term capital gain or loss. These rules may operate to increase the amount that
a Fund must distribute to satisfy the Distribution Requirement (
i.e.
, with respect to the portion treated as short-term capital gain), which will be taxable to its shareholders as ordinary income when distributed to them, and to increase the
net capital gain a Fund recognizes, without in either case increasing the cash available to it. A Fund may elect not to have the foregoing rules apply to any mixed straddle (that is, a straddle, which the Fund clearly identifies in
accordance with applicable regulations, at least one (but not all) of the positions of which are section 1256 contracts), although doing so may have the effect of increasing the relative proportion of short-term capital gain (taxable as ordinary
income) and thus increasing the amount of dividends it must distribute. Section 1256 contracts also may be marked-to-market for purposes of the Excise Tax.
Code section 1092 (dealing with straddles) also may affect the taxation of options, futures, and forward contracts in which a Fund may invest. That section defines a straddle as offsetting
positions with respect to actively traded personal property; for these purposes, options, futures, and forward contracts are positions in personal property. Under that section, any loss from the disposition of a position in a straddle may be
deducted only to the extent the loss exceeds the unrealized gain on the offsetting position(s) of the straddle. In addition, these rules may postpone the recognition of loss that otherwise would be recognized under the mark-to-market rules discussed
above. The regulations under section 1092 also provide certain wash sale rules, which apply to transactions where a position is sold at a loss and a new offsetting position is acquired within a prescribed period, and short
sale rules applicable to straddles. If a Fund makes certain elections, the amount, character, and timing of recognition of gains and losses from the affected straddle positions would be determined under rules that vary according to the
elections made. Because only a few of the regulations
52
implementing the straddle rules have been promulgated, the tax consequences to a Fund of straddle transactions are not entirely clear.
If a call option written by a Fund lapses (
i.e.
, terminates without being exercised), the amount of the premium it received for the option will be short-term capital gain. If a Fund enters into a
closing purchase transaction with respect to a written call option, it will have a short-term capital gain or loss based on the difference between the premium it received for the option it wrote and the premium it pays for the option it buys. If
such an option is exercised and a Fund thus sells the securities or futures contract subject to the option, the premium the Fund received will be added to the exercise price to determine the gain or loss on the sale. If a call option purchased by a
Fund lapses, it will realize short-term or long-term capital loss, depending on its holding period for the option. If a Fund exercises a purchased call option, the premium it paid for the option will be added to the basis in the subject securities
or futures contract.
If a Fund has an appreciated financial position generally, an interest (including an interest through
an option, futures, or forward contract or short sale) with respect to any stock, debt instrument (other than straight debt), or partnership interest the fair market value of which exceeds its adjusted basis and enters into a
constructive sale of the position, the Fund will be treated as having made an actual sale thereof, with the result that it will recognize gain at that time. A constructive sale generally consists of a short sale, an offsetting notional
principal contract, or a futures or forward contract a Fund or a related person enters into with respect to the same or substantially identical property. In addition, if the appreciated financial position is itself a short sale or such a contract,
acquisition of the underlying property or substantially identical property will be deemed a constructive sale. The foregoing will not apply, however, to any Funds transaction during any taxable year that otherwise would be treated as a
constructive sale if the transaction is closed within 30 days after the end of that year and the Fund holds the appreciated financial position unhedged for 60 days after that closing (
i.e
., at no time during that 60-day period is the
Funds risk of loss regarding that position reduced by reason of certain specified transactions with respect to substantially identical or related property, such as having an option to sell, being contractually obligated to sell, making a short
sale, or granting an option to buy substantially identical stock or securities).
Income from Zero-Coupon and Payment-in-Kind
Securities
. A Fund may acquire zero-coupon or other securities (such as strips) issued with OID. As a holder of those securities, a Fund must include in its gross income the OID that accrues on the securities during the taxable year, even if
it receives no corresponding payment on them during the year. Similarly, a Fund must include in its gross income securities it receives as interest on payment-in-kind securities. With respect to market discount bonds (i.e.,
bonds purchased at a price less than their issue price plus the portion of OID previously accrued thereon), a Fund may elect to accrue and include in income each taxable year a portion of the bonds market discount. Because each Fund annually
must distribute substantially all of its investment company taxable income, including any accrued OID and other non-cash income, to satisfy the Distribution Requirement and avoid imposition of the Excise Tax, a Fund may be required in a particular
year to distribute as a dividend an amount that is greater than the total amount of cash it actually receives. Those distributions will be made from a Funds cash assets or from the proceeds of sales of portfolio securities, if necessary. A
Fund may realize capital gains or losses from those sales, which would increase or decrease its investment company taxable income and/or net capital gain.
* * * * *
The foregoing is only a general summary of some of the important federal tax
considerations generally affecting the Funds. No attempt is made to present a complete explanation of the federal tax treatment of the Funds activities, and this discussion is not intended as a substitute for careful tax planning. Accordingly,
potential investors are urged to consult their own tax advisers for more detailed information and for information regarding any state, local, or foreign taxes applicable to a Fund and to distributions therefrom.
53
FINANCIAL STATEMENTS
Because the Funds had not commenced operations prior to the date of this SAI, no financial statements are available for the Funds.
54
APPENDIX A
Description of Corporate Bond Ratings
Moodys Investors Service and Standard and Poors Corporation are two prominent independent rating agencies that rate the quality of bonds. Following are expanded explanations of the ratings
shown in the Prospectus and this SAI.
Moodys Investors Service Long-Term Corporate Obligation Ratings
Moodys long-term obligation ratings are opinions of the relative credit risk of fixed-income obligations with an original maturity of one year or
more. They address the possibility that a financial obligation will not be honored as promised. Such ratings have been published by Moodys Investors Service, Inc. and Moodys Analytics Inc. and reflect both the likelihood of default and
any financial loss suffered in the event of default.
Aaa
: Obligations rated Aaa are judged to be of the highest quality, with minimal
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 considered upper-medium grade and are subject to low credit risk.
Baa
: Obligations rated Baa are subject to moderate credit risk. They are considered medium-grade and as such may possess certain speculative
characteristics.
Ba
: Obligations rated Ba are judged to have speculative elements 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 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 class of bonds and are typically in default, with little prospect for recovery
of principal or interest.
Note
: Moodys 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.
Moodys Investors Service Municipal Bond Ratings
The following descriptions of Moodys long-term municipal bond ratings have been published by Moodys Investors Service, Inc. and Moodys Analytics Inc.
Aaa:
Issuers or issues rated Aaa demonstrate the strongest creditworthiness relative to other US municipal or tax-exempt issuers or issues.
Aa:
Issuers or issues rated Aa demonstrate very strong creditworthiness relative to other US municipal or tax-exempt issuers or
issues.
A:
Issuers or issues rated A present above-average creditworthiness relative to other US municipal or tax-exempt issuers or
issues.
Baa:
Issuers or issues rated Baa represent average creditworthiness relative to other US municipal or tax- exempt issuers or
issues.
A-1
Ba:
Issuers or issues rated Ba demonstrate below-average creditworthiness relative to other US
municipal or tax-exempt issuers or issues.
B:
Issuers or issues rated B demonstrate weak creditworthiness relative to other US
municipal or tax- exempt issuers or issues.
Caa:
Issuers or issues rated Caa demonstrate very weak creditworthiness relative to other
US municipal or tax-exempt issuers or issues.
Ca:
Issuers or issues rated Ca demonstrate extremely weak creditworthiness relative to
other US municipal or tax-exempt issuers or issues.
C:
Issuers or issues rated C demonstrate the weakest creditworthiness relative to
other US municipal or tax-exempt issuers or issues.
Note
: Moodys appends numerical modifiers 1, 2, and 3 to each generic rating
category from Aa through Caa. The modifier 1 indicates that the issuer or 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.
Standard and Poors Long-Term Corporate and Municipal Bond Ratings
Issue credit ratings are based, in varying degrees, on the following considerations:
|
|
|
Likelihood of paymentcapacity and willingness of the obligor to meet its financial commitment on an obligation in accordance with the terms of
the obligation;
|
|
|
|
Nature of and provisions of the obligation;
|
|
|
|
Protection afforded by, and relative position of, the obligation in the event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors rights.
|
Issue ratings are an assessment of default risk, but may
incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above. (Such differentiation
may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)
AAA
: An obligation rated AAA has the highest rating assigned by S&P. The obligors capacity to meet its financial commitment on the obligation is extremely strong.
AA
: An obligation rated AA differs from the highest-rated obligations only to a small degree. The obligors capacity to meet its
financial commitment 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 obligors capacity to meet its financial commitment 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 lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BB, B, CCC, CC, and C:
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 exposures to adverse conditions.
A-2
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 which could lead to the obligors inadequate capacity to meet its financial commitment 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 commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligors capacity or willingness to meet its financial commitment 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 commitment 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 commitment on the obligation.
CC:
An obligation rated CC is currently highly vulnerable to nonpayment.
C:
A C rating is assigned to obligations that are currently highly vulnerable to nonpayment, obligations that have payment arrearages
allowed by the terms of the documents, or obligations of an issuer that is the subject of a bankruptcy petition or similar action which have not experienced a payment default. Among others, the C rating may be assigned to subordinated
debt, preferred stock or other obligations on which cash payments have been suspended in accordance with the instruments terms or when preferred stock is the subject of a distressed exchange offer, whereby some or all of the issue is either
repurchased for an amount of cash or replaced by other instruments having a total value that is less than par.
D:
An obligation rated
D is in payment default. The D rating category is used when payments on an obligation, including a regulatory capital instrument, are not made on the date due even if the applicable grace period has not expired, unless
Standard & Poors believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of similar action if payments on an obligation are
jeopardized. An obligations rating is lowered to D upon completion of a distressed exchange offer, whereby some or all of the issue is either repurchased for an amount of cash or replaced by other instruments having a total value
that is less than par.
Plus (+) or Minus (-):
The ratings from AA to CCC may be modified by the addition
of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
NR:
This indicates that no rating
has been requested, that there is insufficient information on which to base a rating, or that Standard & Poors does not rate a particular obligation as a matter of policy.
Moodys Investors Service Short-Term Ratings
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.
Standard and Poors Short-Term Municipal Ratings
A-3
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.
Moodys Investors Service Commercial Paper Ratings
P-1:
Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
P-2:
Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
P-3:
Issuers (or supporting institutions) rated Prime-3 have 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.
Note:
Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced by the senior-most long-term rating of the issuer, its guarantor or
support-provider.
Standard and Poors Commercial Paper Ratings
A-1:
A short-term obligation rated A-1 is rated in the highest category by Standard & Poors. The obligors capacity
to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign (+). This indicates that the obligors capacity to meet its financial commitment 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 obligors capacity to meet its financial commitment 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 lead to a weakened
capacity of the obligor to meet its financial commitment on the obligation.
B:
A short-term obligation rated B is regarded
as having significant speculative characteristics. Ratings of B-1, B-2, and B-3 may be assigned to indicate finer distinctions within the B category. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing uncertainties which could lead to the obligors inadequate capacity to meet its financial commitment on the obligation.
B-1:
A short-term obligation rated B-1 is regarded as having significant speculative characteristics, but the obligor has a relatively
stronger capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
B-2:
A
short-term obligation rated B-2 is regarded as having significant speculative characteristics, and the obligor has an average speculative-grade capacity to meet its financial commitments over the short-term compared to other
speculative-grade obligors.
B-3:
A short-term obligation rated B-3 is regarded as having significant speculative
characteristics, and the obligor has a relatively weaker capacity to meet its financial commitments over the short-term compared to other speculative-grade obligors.
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 commitment on the obligation.
A-4
D:
A short-term obligation rated D is in payment default. The D rating
category is used when payments on an obligation , including a regulatory capital instrument, are not made on the date due even if the applicable grace period has not expired, unless Standard & Poors believes that such payments will be
made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
Dual Ratings:
S&P assigns dual ratings to all debt issues that have a put option or demand feature as part of their structure. The
first rating addresses the likelihood of repayment of principal and interest as due, and the second rating addresses only the demand feature. The long-term rating symbols are used for bonds to denote the long-term maturity and the short-term rating
symbols for the put option (for example, AAA/A-1+). With U.S. municipal short-term demand debt, note rating symbols are used with the short-term issue credit rating symbols (for example, SP-1+/A-1+).
A-5
APPENDIX B
Direxion Shares ETF Trust
Proxy Voting Policies and Procedures
Recognizing the increased scrutiny that both
institutions and corporations are under, it is important to have corporate governance that appreciates the importance of consistently applied policy guidelines that are aligned with investors views on key issues. With this in mind we currently
use ISSs proxy voting service to execute ballots on behalf of the Direxion Shares ETF Trust (collectively, the Trust). ISS prepares custom research and votes per their recommendation. If we agree with their recommendation, no
action is required. However, we retain the right and ability to override the vote if you disagree with ISSs vote recommendation.
Rafferty Asset Management, LLC (Rafferty) views seriously its responsibility to exercise voting authority over securities that
are owned by the Trust.
To document that proxies are being voted, ISS (on behalf of the Trust) will maintain a record
reflecting when and how each proxy is voted consistent with the requirements of Rule 206(4)-6 under the Investment Advisors Act of 1940 and other applicable regulations. Rafferty will make its proxy voting history and policies and procedures
available to shareholders upon request.
|
II.
|
Guidelines for Voting Proxies
|
Rafferty generally follows the recommendations of ISSs proxy voting guidelines as outlined below. Proxy proposals are considered on their own merits and a determination is made as to support or
oppose managements recommendation. Rafferty will typically accept ISSs recommendations on social issues as it does not have the means to evaluate the economic impact of such proposals, or determine a consensus among shareholders
social or political viewpoints.
|
III.
|
Review and Compliance
|
It is Raffertys responsibility to oversee ISSs proxy voting to ensure compliance and timely reporting to US Bank. Reports are verified monthly through ISSs Votex website. ISS provides US
Bank with the NP-X file covering the period from July 1
st
through June 30
th
of the following year. US Bank files the NP-X with the SEC on the Trusts behalf. These records are maintained for five years and the previous two years proxy voting records can be accessed by
contacting US Bank.
Below is a summary outlining ISSs US Proxy Voting Guidelines.
1. Auditors
Ratifying Auditors
Vote FOR proposals to ratify auditors, unless:
|
|
|
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 which is neither accurate nor indicative of the companys
financial position; or
|
|
|
|
Fees for non-audit services are excessive.
|
B-1
2. Board of Directors
Voting on Director Nominees in Uncontested Elections
Vote CASE-BY-CASE on director
nominees, examining, but not limited to, the following factors:
|
|
|
Composition of the board and key board committees;
|
|
|
|
Attendance at board and committee meetings;
|
|
|
|
Corporate governance provisions and takeover activity;
|
|
|
|
Disclosures under Section 404 of the Sarbanes-Oxley Act;
|
|
|
|
Long-term company performance relative to a market and peer index;
|
|
|
|
Extent of the directors investment in the company;
|
|
|
|
Existence of related party transactions;
|
|
|
|
Whether the chairman is also serving as CEO;
|
|
|
|
Whether a retired CEO sits on the board;
|
|
|
|
Number of outside boards at which a director serves.
|
WITHHOLD from individual directors who:
|
|
|
Attend less than 75 percent of the board and committee meetings without a valid excuse (such as illness, service to the nation, work on behalf of the
company);
|
|
|
|
Sit on more than six public company boards;
|
|
|
|
Are CEOs of public companies who sit on the boards of more than two public companies besides their own (withhold only at their outside boards).
|
WITHHOLD from the entire board (except for new nominees, who should be considered on a CASE-BY-CASE basis) if:
|
|
|
The companys poison pill has a dead-hand or modified dead-hand feature. Withhold every year until this feature is removed;
|
|
|
|
The board adopts or renews a poison pill without shareholder approval since the beginning of 2005, does not commit to putting it to shareholder vote
within 12 months of adoption or reneges on a commitment to put the pill to a vote and has not yet been withheld from for this issue;
|
|
|
|
The board failed to act on a shareholder proposal that received approval by a majority of the shares outstanding the previous year;
|
|
|
|
The board failed to act on a shareholder proposal that received approval of the majority of shares cast for the previous two consecutive years;
|
|
|
|
The board failed to act on takeover offers where the majority of the shareholders tendered their shares;
|
|
|
|
At the previous board election, any director received more than 50 percent withhold votes of the shares cast and the company has failed to address the
issue(s) that caused the high withhold rate;
|
|
|
|
A Russell 3000 company underperformed its industry group (GICS group). The test will consist of the bottom performers within each industry group.
|
WITHHOLD from inside directors and affiliated outside directors when:
|
|
|
The inside or affiliated outside director serves on any of the three key committees: audit, compensation, or nominating;
|
|
|
|
The company lacks an audit, compensation, or nominating committee so that the full board functions as that committee;
|
|
|
|
The full board is less than majority independent.
|
WITHHOLD from the members of the Audit Committee if:
|
|
|
The non-audit fees paid to the auditor are excessive;
|
B-2
|
|
|
A material weakness identified in the Section 404 disclosures rises to a level of serious concern; there are chronic internal control issues and
an absence of established effective control mechanisms.
|
WITHHOLD from the members of the Compensation Committee if:
|
|
|
There is a negative correlation between chief executive pay and company performance;
|
|
|
|
The company fails to submit one-time transfers of stock options to a shareholder vote;
|
|
|
|
The company fails to fulfill the terms of a burn rate commitment they made to shareholders;
|
|
|
|
The company has poor compensation practices.
|
WITHHOLD from directors, individually or the entire board, for egregious actions or failure to replace management as appropriate.
Classification/Declassification of the Board
Vote AGAINST proposals to classify the board.
Vote FOR proposals to repeal classified boards and to elect all directors annually.
Independent Chair (Separate Chair/CEO)
Generally vote FOR shareholder proposals requiring the position of chair be filled by an independent director unless there are compelling reasons to
recommend against the proposal, such as a counterbalancing governance structure. This should include all of the following:
|
|
|
Designated lead director, elected by and from the independent board members with clearly delineated and comprehensive duties. (The role may
alternatively reside with a presiding director, vice chairman, or rotating lead director; however the director must serve a minimum of one year in order to qualify as a lead director.);
|
|
|
|
Two-thirds independent board;
|
|
|
|
All-independent key committees;
|
|
|
|
Established governance guidelines;
|
|
|
|
The company does not under-perform its peers.
|
Majority Vote Shareholder Proposals
Generally vote FOR reasonably crafted shareholders
proposals calling for directors to be elected with an affirmative majority of votes cast and/or the elimination of the plurality standard for electing directors (including binding resolutions requesting that the board amend the companys
bylaws), provided the proposal includes a carve-out for a plurality voting standard when there are more director nominees than board seats (
e.g.
, contested elections). Consider voting AGAINST the shareholder proposal if the company has
adopted a formal corporate governance policy that present a meaningful alternative to the majority voting standard and provide an adequate response to both new nominees as well as incumbent nominees who fail to receive a majority of votes cast.
At a minimum, a companys policy should articulate the following elements to adequately address each director nominee who fails to
receive an affirmative of majority of votes cast in an election:
|
|
|
Established guidelines disclosed annually in the proxy statement concerning the process to follow for nominees who receive majority withhold votes;
|
|
|
|
The policy needs to outline a clear and reasonable timetable for all decision-making regarding the nominees status;
|
|
|
|
The policy needs to specify that the process of determining the nominees status will be managed by independent directors and must exclude the
nominee in question;
|
|
|
|
An outline of a range of remedies (for example, acceptance of the resignation, maintaining the director but curing the underlying causes of the
withheld votes, etc.);
|
B-3
|
|
|
The final decision on the nominees status should be promptly disclosed via an SEC filing. The policy needs to include the timeframe for
disclosure and require a full explanation of how the decision was reached.
|
In addition, the company should articulate to
shareholders why its policy is the best structure for demonstrating accountability to shareholders.
3. Proxy Contests
Voting for Director Nominees in Contested Elections
Vote CASE-BY-CASE on the election of directors in contested elections, considering the following factors:
|
|
|
Long-term financial performance of the target company relative to its industry;
|
|
|
|
Managements track record;
|
|
|
|
Background to the proxy contest;
|
|
|
|
Qualifications of director nominees (both slates);
|
|
|
|
Strategic plan of dissident slate and quality of critique against management;
|
|
|
|
Likelihood that the proposed goals and objectives can be achieved (both slates);
|
|
|
|
Stock ownership positions.
|
Reimbursing Proxy Solicitation Expenses
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.
4. Takeover Defenses
Poison Pills
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 twelve 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.
|
Vote FOR shareholder proposals calling for poison pills to be put to a vote within a time period of less than one year after adoption. If the company has no non-shareholder approved poison pill in place
and has adopted a policy with the provisions outlined above, vote AGAINST the proposal. If these conditions are not met, vote FOR the proposal, but with the caveat that a vote within twelve months would be considered sufficient.
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 dead-hand, slow-hand, no-hand or similar feature that limits the ability of a future board to redeem the pill;
|
B-4
|
|
|
Shareholder redemption feature (qualifying offer clause); if the board refuses to redeem the pill 90 days after a qualifying offer is announced, ten
percent of the shares may call a special meeting or seek a written consent to vote on rescinding the pill.
|
Supermajority
Vote Requirements
Vote AGAINST proposals to require a supermajority shareholder vote. Vote FOR proposals to lower supermajority vote
requirements.
5. Mergers and Corporate Restructurings
For mergers and acquisitions, evaluate the proposed transaction based on these factors:
|
|
|
Valuation - Is the value to be received by the target shareholders (or paid by the acquirer) reasonable?
|
|
|
|
Market reaction - How has the market responded to the proposed deal?
|
|
|
|
Strategic rationale - Does the deal make sense strategically? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably
achievable.
|
|
|
|
Negotiations and process - Were the terms of the transaction negotiated at arms length? Was the process fair and equitable?
|
|
|
|
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.
|
|
|
|
Governance - Will the combined company have a better or worse governance profile than the parties to the transaction?
|
6. State of Incorporation
Reincorporation Proposals
Vote
CASE-BY-CASE on proposals to change a companys state of incorporation, taking into consideration both financial and corporate governance concerns, including the reasons for reincorporating, a comparison of the governance provisions,
comparative economic benefits, and a comparison of the jurisdictional laws. Vote FOR reincorporation when the economic factors outweigh any neutral or negative governance changes.
7. Capital Structure
Common Stock Authorization
Vote CASE-BY-CASE on proposals to increase the number of shares of common stock authorized for issuance using a model developed by ISS. Vote FOR proposals
to approve increases beyond the allowable increase when a companys shares are in danger of being de-listed or if a companys ability to continue to operate as a going concern is uncertain. In addition, for capital requests less than or
equal to 300 percent of the current authorized shares that marginally fail the calculated allowable cap (
i.e.
, exceed the allowable cap by no more than 5 percent), on a CASE-BY-CASE basis, vote FOR the increase based on the companys
performance and whether the companys ongoing use of shares has shown prudence.
Issue Stock for Use with Rights Plan
Vote AGAINST proposals that increase authorized common stock for the explicit purpose of implementing a non-shareholder approved shareholder rights plan
(poison pill).
B-5
Preferred Stock
Vote AGAINST proposals authorizing the creation of new classes of preferred stock with unspecified voting, conversion, dividend distribution, and other rights (blank check preferred stock).
Vote AGAINST proposals to increase the number of blank check preferred stock authorized for issuance when no shares have been issued or reserved for a specific purpose.
Vote FOR proposals to create de-clawed blank check preferred stock (stock that cannot be used as a takeover defense). Vote FOR proposals to authorize preferred stock in cases where the company
specifies the voting, dividend, conversion, and other rights of such stock and the terms of the preferred stock appear reasonable. Vote CASE-BY-CASE on proposals to increase the number of blank check preferred shares after analyzing the number of
preferred shares available for issue given a companys industry and performance in terms of shareholder returns.
8. Executive and
Director Compensation
Equity Compensation Plans
Vote CASE-BY-CASE on equity-based compensation plans. Vote AGAINST the plan if:
|
|
|
The total cost of the companys equity plans is unreasonable;
|
|
|
|
The plan expressly permits the repricing of stock options without prior shareholder approval;
|
|
|
|
There is a disconnect between CEO pay and the companys performance;
|
|
|
|
The companys three year burn rate exceeds the greater of 2 percent and the mean plus 1 standard deviation of its industry group; or
|
|
|
|
The plan is a vehicle for poor pay practices.
|
Director Compensation
Vote CASE-BY-CASE on compensation plans for non-employee directors,
based on the cost of the plans against the companys allowable cap. Vote for the plan if ALL of the following qualitative factors in the boards compensation plan are met and disclosed in the proxy statement:
|
|
|
Stock ownership guidelines with a minimum of three times the annual cash retainer.
|
|
|
|
Vesting schedule or mandatory holding/deferral period:
|
|
|
|
A minimum vesting of three years for stock options or restricted stock; or
|
|
|
|
Deferred stock payable at the end of a three-year deferral period.
|
|
|
|
A balanced mix between cash and equity. If the mix is heavier on equity, the vesting schedule or deferral period should be more stringent, with the
lesser of five years or the term of directorship.
|
|
|
|
No retirement/benefits and perquisites for non-employee directors; and
|
|
|
|
A table with a detailed disclosure of the cash and equity compensation for each non-employee director for the most recent fiscal year.
|
Disclosure of CEO Compensation-Tally Sheet
Companies should provide better and more transparent disclosure related to CEO pay. Consider withhold votes in the future from the compensation committee and voting against equity plans if compensation
disclosure is not improved and a tally sheet is not provided.
Employee Stock Purchase Plans Qualified Plans
Vote CASE-BY-CASE on qualified employee stock purchase plans. Vote FOR plans if:
|
|
|
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 ten percent or less of the outstanding shares.
|
Employee Stock Purchase PlansNon-Qualified Plans
Vote CASE-by-CASE on nonqualified employee stock purchase plans. Vote FOR plans with:
B-6
|
|
|
Broad-based participation (
i.e.
, all employees with the exclusion of individuals with 5 percent or more of beneficial ownership of the company);
|
|
|
|
Limits on employee contribution (a fixed dollar amount or a percentage of base salary);
|
|
|
|
Company matching contribution up to 25 percent of employees contribution, which is effectively a discount of 20 percent from market value;
|
|
|
|
No discount on the stock price on the date of purchase since there is a company matching contribution.
|
Option Exchange Programs/Re-pricing Options
Vote CASE-by-CASE on management proposals seeking approval to exchange/reprice options, taking into consideration historic trading patterns, rationale for the re-pricing, value-for-value exchange
treatment of surrendered options, option vesting, term of the option, exercise price and participation. Vote FOR shareholder proposals to put option re-pricing to a shareholder vote.
Severance Agreements for Executives/Golden Parachutes
Vote FOR shareholder proposals to
require golden parachutes or executive severance agreements to be submitted for shareholder ratification, unless the proposal requires shareholder approval prior to entering into employment contracts. Vote on a CASE-BY-CASE basis on proposals to
ratify or cancel golden parachutes. An acceptable parachute should include:
|
|
|
A trigger 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 the companys ownership structure has taken place,
and (2) termination of the executive as a result of the change in control.
|
9. Corporate Responsibility
Animal Rights
Generally
vote AGAINST proposals to phase out the use of animals in product testing unless:
|
|
|
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 accepted and used at peer firms;
|
|
|
|
The company has been the subject of recent, significant controversy related to its testing programs.
|
Generally vote FOR proposals seeking a report on the companys animal welfare standards.
Drug Pricing and Re-importation
Generally vote AGAINST 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. Vote CASE-BY-CASE on proposals requesting that the company evaluate their product
pricing considering:
|
|
|
The existing level of disclosure on pricing policies;
|
|
|
|
Deviation from established industry pricing norms;
|
|
|
|
The companys existing initiatives to provide its products to needy consumers;
|
|
|
|
Whether the proposal focuses on specific products or geographic regions.
|
Generally vote FOR proposals requesting that companies report on the financial and legal impact of their policies regarding prescription drug re-importation unless such information is already publicly
disclosed.
B-7
Generally vote AGAINST proposals requesting that companies adopt specific policies to encourage or constrain prescription drug re-importation.
Genetically Modified Foods
Vote AGAINST
proposals asking companies to voluntarily label genetically engineered (GE) ingredients in their products or alternatively to provide interim labeling and eventually eliminate GE ingredients due to the costs and feasibility of labeling and/or
phasing out the use of GE ingredients.
Tobacco
Most tobacco-related proposals (such as on second-hand smoke, advertising to youth and spin-offs of tobacco-related business) should be evaluated on a CASE-BY-CASE basis.
Toxic Chemicals
Generally vote FOR
resolutions requesting that a company discloses its policies related to toxic chemicals. Vote CASE-BY-CASE on resolutions requesting that companies evaluate and disclose the potential financial and legal risks associated with utilizing certain
chemicals.
Generally vote AGAINST resolutions requiring that a company reformulate its products within a certain timeframe unless such
actions are required by law in specific markets.
Arctic National Wildlife Refuge
Generally vote AGAINST request for reports outlining potential environmental damage from drilling in the Arctic National Wildlife Refuge (ANWR) unless:
|
|
|
New legislation is adopted allowing development and drilling in the ANWR region;
|
|
|
|
The company intends to pursue operations in the ANWR; and
|
|
|
|
The company has not disclosed an environmental risk report for its ANWR operations.
|
Concentrated Area Feeding Operations (CAFOs)
Vote FOR resolutions requesting that companies report to shareholders on the risks and liabilities associated with CAFOs unless:
|
|
|
The company has publicly disclosed guidelines for its corporate and contract farming operations, including compliance monitoring; or
|
|
|
|
The company does not directly source from CAFOs.
|
Global Warming and Kyoto Protocol Compliance
Generally vote FOR proposals requesting a
report on greenhouse gas emissions from company operations and/or products unless this information is already publicly disclosed or such factors are not integral to the companys line of business. Generally vote AGAINST proposals that call for
reduction in greenhouse gas emissions by specified amounts or within a restrictive time frame unless the company lags industry standards and has been the subject of recent, significant fines or litigation resulting from greenhouse gas emissions.
Generally vote FOR resolutions requesting that companies outline their preparations to comply with standards established by Kyoto Protocol
signatory markets unless:
|
|
|
The company does not maintain operations in Kyoto signatory markets;
|
|
|
|
The company already evaluates and substantially discloses such information; or,
|
|
|
|
Greenhouse gas emissions do not significantly impact the companys core businesses.
|
Political Contributions
Vote
CASE-BY-CASE on proposals to improve the disclosure of a companys political contributions considering: any recent significant controversy or litigation related to the companys political
B-8
contributions or governmental affairs; and the public availability of a policy on political contributions. Vote AGAINST proposals barring the company from making political contributions.
Link Executive Compensation to Social Performance
Vote CASE-BY-CASE on proposals to review ways of linking executive compensation to social factors, such as corporate downsizings, customer or employee satisfaction, community involvement, human rights,
environmental performance, predatory lending, and executive/employee pay disparities.
Outsourcing/Offshoring
Vote CASE-BY-CASE on proposals calling for companies to report on the risks associated with outsourcing, considering: the risks associated with certain
international markets; the utility of such a report; and the existence of a publicly available code of corporate conduct that applies to international operations.
Human Rights Reports
Vote CASE-BY-CASE on requests for reports detailing the
companys operations in a particular country and on proposals to implement certain human rights standards at company facilities or those of its suppliers and to commit to outside, independent monitoring.
10. Mutual Fund Proxies
Election of
Directors
Vote CASE-BY-CASE on the election of directors and trustees, following the same guidelines for uncontested directors for public
company shareholder meetings. However, mutual fund boards do not usually have compensation committees, so do not withhold for the lack of this committee.
Converting Closed-end Fund to Open-end Fund
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.
|
Establish Director Ownership Requirement
Generally vote AGAINST 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
Vote CASE-BY-CASE on shareholder proposals to reimburse proxy solicitation expenses. When supporting the
dissidents, vote FOR the reimbursement of the solicitation expenses.
Terminate the Investment Advisor
Vote CASE-BY-CASE on proposals to terminate the investment advisor, considering the following factors:
|
|
|
Performance of the funds net asset value;
|
|
|
|
The funds history of shareholder relations;
|
|
|
|
The performance of other funds under the advisors management.
|
B-9
DIREXION SHARES ETF TRUST
PART C
OTHER INFORMATION
|
|
|
|
|
(a)
|
|
(i)
|
|
Certificate of Trust dated April 23, 2008 is herein incorporated by reference from the Direxion Shares ETF Trusts (the Trust) Initial Registration
Statement on Form N-1A filed with the Securities and Exchange Commission (SEC) on April 30, 2008.
|
|
|
|
|
|
(ii)
|
|
Trust Instrument is herein incorporated by reference from the Pre-Effective Amendment No. 1 to the Trusts Registration Statement filed on Form N-1A with the SEC on August
20, 2008.
|
|
|
|
(b)
|
|
|
|
By-Laws dated April 23, 2008 are herein incorporated by reference from the Pre-Effective Amendment No. 1 to the Trusts Registration Statement filed on Form N-1A with the
SEC on August 20, 2008.
|
|
|
|
(c)
|
|
|
|
Shareholders Rights are contained in Articles IV, V, VI, IX, and X of the Trusts Trust Instrument and Articles V, VI, VII, VIII and IX of the Trusts
By-Laws.
|
|
|
|
(d)
|
|
(i)(A)
|
|
Form of Investment Advisory Agreement between the Trust and Rafferty Asset Management, LLC (RAM) is herein incorporated by reference from the Pre-Effective Amendment
No. 1 to the Trusts Registration Statement filed on
Form N-1A with the SEC on August 20, 2008.
|
|
|
|
|
|
(i)(B)
|
|
Amended Schedule A of the Investment Advisory Agreement is herein incorporated by reference from the Post-Effective Amendment No. 4 to the Trusts Registration Statement
filed on Form N-1A with the SEC on April 1, 2009.
|
|
|
|
|
|
(i)(C)
|
|
Second Amended Schedule A of the Investment Advisory Agreement is herein incorporated by reference from the Post-Effective Amendment No. 10 to the Trusts Registration
Statement filed on Form N-1A with the SEC on March 11, 2010.
|
|
|
|
|
|
(i)(D)
|
|
Third Amended Schedule A of the Investment Advisory Agreement is herein incorporated by reference from the Post-Effective Amendment No. 11 to the Trusts Registration
Statement filed on Form N-1A with the SEC on April 16, 2010.
|
|
|
|
|
|
(i)(E)
|
|
Fourth Amended Schedule A of the Investment Advisory Agreement is herein incorporated by reference from the Post-Effective Amendment No. 14 to the Trusts Registration
Statement filed on Form N-1A with the SEC on July 13, 2010.
|
|
|
|
|
|
(i)(F)
|
|
Fifth Amended Schedule A of the Investment Advisory Agreement is herein incorporated by reference from the Post-Effective Amendment No. 20 to the Trusts Registration
Statement filed on Form N-1A with the SEC on March 10, 2011.
|
|
|
|
|
|
(i)(G)
|
|
Sixth Amended Schedule A of the Investment Advisory Agreement is herein incorporated by reference from the Post-Effective Amendment No. 28 to the Trusts Registration
Statement filed on Form N-1A with the SEC on June 13, 2011.
|
|
|
|
|
|
(i)(H)
|
|
Seventh Amended Schedule A of the Investment Advisory Agreement is herein incorporated by reference from the Post-Effective Amendment No. 40 to the Trusts Registration
Statement filed on Form N-1A with the SEC on August 25, 2011.
|
|
|
|
|
|
(i)(I)
|
|
Eighth Amended Schedule A of the Investment Advisory Agreement is herein incorporated by reference from the Post-Effective Amendment No. 77 to the Trusts Registration
Statement
|
1
|
|
|
|
|
|
|
|
|
filed on Form N-1A with the SEC on August 29, 2012.
|
|
|
|
|
|
(i)(J)
|
|
Ninth Amended Schedule A to the Investment Advisory Agreement filed herewith.
|
|
|
|
(e)
|
|
(i)(A)
|
|
Form of Distribution Agreement between the Trust and Foreside Fund Services, LLC (Foreside) is herein incorporated by reference from the Pre-Effective Amendment No. 1 to
the Trusts Registration Statement filed on
Form N-1A with the SEC on August 20, 2008.
|
|
|
|
|
|
(i)(B)
|
|
Amended Exhibit A to the Distribution Agreement is herein incorporated by reference from the Post-Effective Amendment No. 4 to the Trusts Registration Statement filed on Form
N-1A with the SEC on April 1, 2009.
|
|
|
|
|
|
(i)(C)
|
|
Second Amended Exhibit A to the Distribution Agreement is herein incorporated by reference from the Post-Effective Amendment No. 10 to the Trusts Registration Statement filed
on Form N-1A with the SEC on March 11, 2010.
|
|
|
|
|
|
(i)(D)
|
|
Third Amended Exhibit A to the Distribution Agreement is herein incorporated by reference from the Post-Effective Amendment No. 11 to the Trusts Registration Statement filed
on Form N-1A with the SEC on April 16, 2010.
|
|
|
|
|
|
(i)(E)
|
|
Fourth Amended Exhibit A to the Distribution Agreement is herein incorporated by reference from the Post-Effective Amendment No. 14 to the Trusts Registration Statement filed
on Form N-1A with the SEC on July 13, 2010.
|
|
|
|
|
|
(i)(F)
|
|
Fifth Amended Exhibit A to the Distribution Agreement is herein incorporated by reference from the Post-Effective Amendment No. 20 to the Trusts Registration Statement filed
on Form N-1A with the SEC on March 10, 2011.
|
|
|
|
|
|
(i)(G)
|
|
Sixth Amended Exhibit A to the Distribution Agreement is herein incorporated by reference from the Post-Effective Amendment No. 28 to the Trusts Registration Statement filed
on Form N-1A with the SEC on June 13, 2011.
|
|
|
|
|
|
(i)(H)
|
|
Seventh Amended Exhibit A to the Distribution Agreement is herein incorporated by reference from the Post-Effective Amendment No. 70 to the Trusts Registration Statement filed
on Form N-1A with the SEC on June 29, 2012.
|
|
|
|
|
|
(ii)
|
|
Form of Authorized Participant Agreement is herein incorporated by reference from the Pre-Effective Amendment
No. 1 to the Trusts Registration Statement filed on Form N-1A
with the SEC on August 20, 2008.
|
|
|
|
(f)
|
|
|
|
Bonus, profit sharing contracts None.
|
|
|
|
(g)
|
|
(i)(A)
|
|
Form of Custody Agreement between the Trust and The Bank of New York (BONY) is herein incorporated by reference from the Pre-Effective Amendment No. 1 to the
Trusts Registration Statement filed on Form N-1A with the SEC on August 20, 2008.
|
|
|
|
|
|
(i)(B)
|
|
Amended Schedule II to the Custody Agreement is herein incorporated by reference from the Post-Effective Amendment No. 4 to the Trusts Registration Statement filed on Form
N-1A with the SEC on April 1, 2009.
|
|
|
|
|
|
(i)(C)
|
|
Second Amended Schedule II to the Custody Agreement is herein incorporated by reference from the Post-Effective Amendment No. 10 to the Trusts Registration Statement filed on
Form N-1A with the SEC on March 11, 2010.
|
2
|
|
|
|
|
|
|
(i)(D)
|
|
Third Amended Schedule II to the Custody Agreement is herein incorporated by reference from the Post-Effective Amendment No. 11 to the Trusts Registration Statement filed
on Form N-1A with the SEC on April 16, 2010.
|
|
|
|
|
|
(i)(E)
|
|
Fourth Amended Schedule II to the Custody Agreement is herein incorporated by reference from the Post-Effective Amendment No. 14 to the Trusts Registration Statement filed
on Form N-1A with the SEC on July 13, 2010.
|
|
|
|
|
|
(i)(F)
|
|
Fifth Amended Schedule II to the Custody Agreement is herein incorporated by reference from the Post-Effective Amendment No. 28 to the Trusts Registration Statement filed
on Form N-1A with the SEC on June 13, 2011.
|
|
|
|
|
|
(i)(G)
|
|
Sixth Amended Schedule II to the Custody Agreement is herein incorporated by reference from the Post-Effective Amendment No. 40 to the Trusts Registration Statement filed
on Form N-1A with the SEC on August 25, 2011.
|
|
|
|
|
|
(i)(H)
|
|
Seventh Amended Schedule II to the Custody Agreement is herein incorporated by reference from the Post-Effective Amendment No. 80 to the Trusts Registration Statement filed
on Form N-1A with the SEC on November 30, 2012.
|
|
|
|
|
|
(i)(I)
|
|
Eighth Amended Schedule II to the Custody Agreement filed herewith.
|
|
|
|
(h)
|
|
(i)(A)
|
|
Form of Transfer Agency and Service Agreement between the Trust and BONY is herein incorporated by reference from the Pre-Effective Amendment No. 1 to the Trusts
Registration Statement filed on Form N-1A with the SEC on August 20, 2008.
|
|
|
|
|
|
(i)(B)
|
|
Amended Appendix I to the Transfer Agency and Service Agreement is herein incorporated by reference from the Post-Effective Amendment No. 4 to the Trusts Registration
Statement filed on Form N-1A with the SEC on April 1, 2009.
|
|
|
|
|
|
(i)(C)
|
|
Second Amended Appendix I to the Transfer Agency and Service Agreement is herein incorporated by reference from the Post-Effective Amendment No. 10 to the Trusts
Registration Statement filed on Form N-1A with the SEC on
March 11, 2010.
|
|
|
|
|
|
(i)(D)
|
|
Third Amended Appendix I to the Transfer Agency and Service Agreement is herein incorporated by reference from the Post-Effective Amendment No. 11 to the Trusts
Registration Statement filed on Form N-1A with the SEC on
April 16, 2010.
|
|
|
|
|
|
(i)(E)
|
|
Fourth Amended Appendix I to the Transfer Agency and Service Agreement is herein incorporated by reference from the Post-Effective Amendment No. 14 to the Trusts
Registration Statement filed on Form N-1A with the SEC on
July 13, 2010.
|
|
|
|
|
|
(i)(F)
|
|
Fifth Amended Appendix I to the Transfer Agency and Service Agreement is herein incorporated by reference from the Post-Effective Amendment No. 40 to the Trusts
Registration Statement filed on Form N-1A with the SEC on
August 25, 2011.
|
|
|
|
|
|
(i)(G)
|
|
Sixth Amended Appendix I to the Transfer Agency and Service Agreement is herein incorporated by reference from the Post-Effective Amendment No. 80 to the Trusts
Registration Statement filed on Form N-1A with the SEC on November 30, 2012.
|
|
|
|
|
|
(i)(H)
|
|
Seventh Amended Appendix I to the Transfer Agency and Service Agreement filed herewith.
|
|
|
|
|
|
(ii)
|
|
Fund Administration Agreement between the Trust and U. S. Bancorp Fund Services, LLC is herein incorporated by reference from the Post-Effective Amendment No. 80 to the
Trusts Registration Statement filed on Form N-1A with the SEC on November 30, 2012.
|
3
|
|
|
|
|
|
|
(iii)
|
|
Fund Accounting Agreement between the Trust and BONY is herein incorporated by reference from the Post-Effective Amendment No. 80 to the Trusts Registration Statement filed
on Form N-1A with the SEC on November 30, 2012.
|
|
|
|
|
|
(iii)(A)
|
|
Amended Exhibit A to the Fund Accounting Agreement between Trust and BONY filed herewith.
|
|
|
|
|
|
(iv)
|
|
Advisory Fee Waiver Agreement is herein incorporated by reference from the Post-Effective Amendment No. 69 to the Trusts Registration Statement filed on Form N-1A with the
SEC on June 13, 2012.
|
|
|
|
|
|
(iv)(A)
|
|
Amended Schedule A to the Advisory Fee Waiver Agreement is herein incorporated by reference from the Post-Effective Amendment No. 80 to the Trusts Registration Statement
filed on Form N-1A with the SEC on November 30, 2012.
|
|
|
|
|
|
(v)
|
|
Operating Expense Limitation Agreement is herein incorporated by reference from the Post-Effective
Amendment No. 70 to the Trusts Registration Statement filed on Form
N-1A with the SEC on June 29, 2012.
|
|
|
|
|
|
(v)(A)
|
|
Amended Appendix A of the Operating Expense Limitation Agreement is herein incorporated by reference from the Post-Effective Amendment No. 77 to the Trusts Registration
Statement filed on Form N-1A with the SEC on
August 29, 2012.
|
|
|
|
|
|
(v)(B)
|
|
Amended Appendix A of the Operating Expense Limitation Agreement filed herewith.
|
|
|
|
(i)
|
|
|
|
Opinion and consent of counsel - filed herewith.
|
|
|
|
(j)
|
|
(i)
|
|
Power of Attorney dated June 1, 2011 is herein incorporated by reference from the Post-Effective Amendment No. 28 to the Trusts Registration Statement filed on Form N-1A
with the SEC on June 13, 2011.
|
|
|
|
(k)
|
|
|
|
Financial Statements omitted from prospectus None.
|
|
|
|
(l)
|
|
|
|
Initial Capital Agreement is herein incorporated by reference from the Pre-Effective Amendment No. 1 to the Trusts Registration Statement filed on Form N-1A with the SEC on
August 20, 2008.
|
|
|
|
(m)
|
|
(i)(A)
|
|
Rule 12b-1 Distribution Plan is herein incorporated by reference from the Pre-Effective Amendment No. 1 to the Trusts Registration Statement filed on Form N-1A with the SEC
on August 20, 2008.
|
|
|
|
|
|
(i)(B)
|
|
Amended Schedule A to Rule 12b-1 Distribution Plan is herein incorporated by reference from the Post-Effective Amendment No. 4 to the Trusts Registration Statement filed on
Form N-1A with the SEC on April 1, 2009.
|
|
|
|
|
|
(i)(C)
|
|
Second Amended Schedule A to Rule 12b-1 Distribution Plan is herein incorporated by reference from the Post-Effective Amendment No. 10 to the Trusts Registration Statement
filed on Form N-1A with the SEC on March 11, 2010.
|
|
|
|
|
|
(i)(D)
|
|
Third Amended Schedule A to Rule 12b-1 Distribution Plan is herein incorporated by reference from the Post-Effective Amendment No. 11 to the Trusts Registration Statement
filed on Form N-1A with the SEC on April 16, 2010.
|
|
|
|
|
|
(i)(E)
|
|
Fourth Amended Schedule A to Rule 12b-1 Distribution Plan is herein incorporated by reference from the Post-Effective Amendment No. 14 to the Trusts Registration Statement
filed on Form N-1A with the SEC on July 13, 2010.
|
4
|
|
|
|
|
|
|
(i)(F)
|
|
Fifth Amended Schedule A to Rule 12b-1 Distribution Plan is herein incorporated by reference from the Post-Effective Amendment No. 20 to the Trusts Registration Statement
filed on Form N-1A with the SEC on March 10, 2011.
|
|
|
|
|
|
(i)(G)
|
|
Sixth Amended Schedule A to Rule 12b-1 Distribution Plan is herein incorporated by reference from the Post-Effective Amendment No. 40 to the Trusts Registration Statement
filed on Form N-1A with the SEC on August 25, 2011.
|
|
|
|
|
|
(i)(H)
|
|
Seventh Amended Schedule A to Rule 12b-1 Distribution Plan is herein incorporated by reference from the Post-Effective Amendment No. 77 to the Trusts Registration Statement
filed on Form N-1A with the SEC on August 29, 2012.
|
|
|
|
|
|
(i)(I)
|
|
Eighth Amended Schedule A to Rule 12b-1 Distribution Plan filed herewith.
|
|
|
|
(n)
|
|
|
|
Rule 18f-3 Plan None.
|
|
|
|
(o)
|
|
|
|
Reserved.
|
|
|
|
(p)
|
|
(i)
|
|
Code of Ethics for the Trust and RAM is herein incorporated by reference from the Post-Effective Amendment No. 77 to the Trusts Registration Statement filed on Form N-1A
with the SEC on August 29, 2012.
|
Item 29.
|
Persons Controlled by or Under Common Control with Registrant
|
Immediately prior to the public offering of the Registrants shares for each series, the following persons may be deemed individually to control the Funds or the Trust:
Rafferty Asset Management, LLC will be the sole shareholder immediately prior to the public offering of each Fund.
Article
IX of the Trust Instrument of the Registrant provides as follows:
Section 1. LIMITATION OF LIABILITY. All persons
contracting with or having any claim against the Trust or a particular Series shall look only to the assets of the Trust or Assets belonging to such Series, respectively, for payment under such contract or claim; and neither the Trustees nor any of
the Trusts officers or employees, whether past, present or future, shall be personally liable therefor. Every written instrument or obligation on behalf of the Trust or any Series may contain a statement to the foregoing effect, but the
absence of such statement shall not operate to make any Trustee or officer of the Trust liable thereunder. Provided they have exercised reasonable care and have acted under the reasonable belief that their actions are in the best interest of the
Trust, the Trustees and officers of the Trust shall not be responsible or liable for any act or omission or for neglect or wrongdoing of them or any officer, agent, employee, investment adviser, principal underwriter or independent contractor of the
Trust, but nothing contained in this Trust Instrument or in the Delaware Act shall protect any Trustee or officer of the Trust against liability to the Trust or to Shareholders to which he or she would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.
Section 2. INDEMNIFICATION.
|
(a)
|
Subject to the exceptions and limitations contained in subsection (b) below:
|
5
|
(i)
|
every person who is, or has been, a Trustee or an officer, employee or agent of the Trust, including persons who act at the request of the Trust as directors, trustees,
officers, employees or agents of another organization in which the Trust has an interest as a shareholder, creditor or otherwise (Covered Person) shall be indemnified by the Trust or the appropriate Series to the fullest extent permitted
by law against liability and against all expenses reasonably incurred or paid by him or her in connection with any claim, action, suit or proceeding in which he or she becomes involved as a party or otherwise by virtue of his or her being or having
been a Covered Person and against amounts paid or incurred by him or her in the settlement thereof.
|
|
(ii)
|
as used herein, the words claim, action, suit or proceeding shall apply to all claims, actions, suits or proceedings
(civil, criminal or other, including appeals), actual or threatened, and the words liability and expenses shall include, without limitation, counsel fees, costs, judgments, amounts paid in settlement, fines, penalties and
other liabilities.
|
|
(b)
|
No indemnification shall be provided hereunder to a Covered Person:
|
|
(i)
|
who shall have been adjudicated by a court or body before which the proceeding was brought (A) to be liable to the Trust or its Shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office or (B) not to have acted in good faith in the reasonable belief that his or her action was in the best interest of the
Trust; or
|
|
(ii)
|
in the event of a settlement, if there has been a determination that such Covered Person engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office: (A) by the court or other body approving the settlement; (B) by at least a majority of those Trustees who are neither Interested Persons of the Trust nor are parties to
the matter based upon a review of readily available facts (as opposed to a full trial-type inquiry); or (C) by written opinion of independent legal counsel based upon a review of readily available facts (as opposed to a full trial-type
inquiry).
|
|
(c)
|
The rights of indemnification herein provided may be insured against by policies maintained by the Trust, shall be severable, shall not be exclusive of or affect any
other rights to which any Covered Person may now or hereafter be entitled and shall inure to the benefit of the heirs, executors and administrators of a Covered Person. Nothing contained herein shall affect any rights to indemnification to which
Trust personnel other than Covered Persons may be entitled by contract or otherwise under law.
|
|
(d)
|
To the maximum extent permitted by applicable law, expenses in connection with the preparation and presentation of a defense to any claim, action, suit or proceeding of
the character described in subsection (a) of this Section shall be paid by the Trust or applicable Series from time to time prior to final disposition thereof upon receipt of an undertaking by or on behalf of such Covered Person that such
amount will be paid over by him or her to the Trust or applicable Series if it is ultimately determined that he or she is not entitled to indemnification under this Section.
|
|
(e)
|
Any repeal or modification of this Article IX by the Shareholders, or adoption or modification of any other provision of this Trust Instrument or the By-laws
inconsistent with this Article, shall be prospective only, to the extent that such, repeal or modification would, if applied retrospectively, adversely affect any limitation on the liability of any Covered Person or indemnification available to any
Covered Person with respect to any act or omission which occurred prior to such repeal, modification or adoption.
|
Section 3. INDEMNIFICATION OF SHAREHOLDERS. If any Shareholder or former Shareholder of any Series is held personally liable solely
by reason of his or her being or having been a Shareholder and not because of his or her acts or omissions or for some other reason, the Shareholder or former Shareholder (or his or her heirs, executors, administrators or other legal representatives
or, in the case of any entity, its general successor) shall be entitled out of the Assets belonging to the applicable Series to be held harmless from and indemnified against all loss and expense arising from such liability. The Trust, on behalf of
the affected Series, shall, upon request by such Shareholder or former Shareholder, assume the defense of any
6
claim made against him or her for any act or obligation of the Series and satisfy any judgment thereon from the Assets belonging to the Series.
Article IX, Section 3 of the By-laws of the Registrant provides as follows:
Section 3. Advance Payment of Indemnifiable Expenses. Expenses incurred by an agent in connection with the preparation and
presentation of a defense to any proceeding may be paid by the Trust from time to time prior to final disposition thereof upon receipt of an undertaking by, or on behalf of, such agent that such amount will be paid over by him or her to the Trust if
it is ultimately determined that he or she is not entitled to indemnification; provided, however, that (a) such agent shall have provided appropriate security for such undertaking, (b) the Trust is insured against losses arising out of any
such advance payments, or (c) either a majority of the Trustees who are neither Interested Persons of the Trust nor parties to the proceeding, or independent legal counsel in a written opinion, shall have determined, based upon a review of the
readily available facts (as opposed to a trial-type inquiry or full investigation), that there is reason to believe that such agent will be found entitled to indemnification.
Section 7 of the Investment Advisory Agreement provides as follows:
The Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust or any Fund in
connection with the matters to which this Agreement relate except a loss resulting from the willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations and
duties under this Agreement. Any person, even though also an officer, partner, employee, or agent of the Adviser, who may be or become an officer, trustee, employee or agent of the Trust shall be deemed, when rendering services to the Trust or
acting in any business of the Trust, to be rendering such services to or acting solely for the Trust and not as an officer, partner, employee, or agent or one under the control or direction of the Adviser even though paid by it.
Section 6 of the Distribution Agreement provides as follows:
(a) The Trust agrees to indemnify and hold harmless the Distributor, its affiliates and each of their directors, officers and employees
and agents and any person who controls the Distributor within the meaning of Section 15 of the 1933 Act (any of the Distributor, its officers, employees, agents and directors or such control persons, for purposes of this paragraph, a
Distributor Indemnitee) against any loss, liability, claim, damages or expense (including the reasonable cost of investigating or defending any alleged loss, liability, claim, damages or expense and reasonable counsel fees incurred in
connection therewith) arising out of or based upon (i) any claim that the Registration Statement, Prospectus, Statement of Additional Information, Product Description, shareholder reports, sales literature and advertisements specifically
approved by the Trust and Investment Adviser or other information filed or made public by the Trust (as from time to time amended) included an untrue statement of a material fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein (and in the case of the Prospectus, Statement of Additional Information and Product Description, in light of the circumstances under which they were made) not misleading under the 1933 Act, or any
other statute or the common law, (ii) the breach by the Trust of any obligation, representation or warranty contained in this Agreement or (iii) the Trusts failure to comply in any material respect with applicable securities laws.
The Trust does not agree to indemnify the Distributor or hold it harmless to the extent that the statement or omission was
made in reliance upon, and in conformity with, information furnished to the Trust by or on behalf of the Distributor. The Trust will also not indemnify any Distributor Indemnitee with respect to any untrue statement or omission made in the
Registration Statement, Prospectus, Statement of Additional Information or Product Description that is subsequently corrected in such document (or an amendment thereof or supplement thereto) if a copy of the Prospectus (or such amendment or
supplement) was not sent or given to the person asserting any such loss, liability, claim, damage or expense at or before the written confirmation to such person in any case where such delivery is required by the 1933 Act and the Trust had notified
the Distributor of the amendment or supplement prior to the
7
sending of the confirmation. In no case (i) is the indemnity of the Trust in favor of any Distributor Indemnitee to be deemed to protect the Distributor Indemnitee against any liability to
the Trust or its shareholders to which the Distributor Indemnitee would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations
under this Agreement, or (ii) is the Trust to be liable under its indemnity agreement contained in this Section with respect to any claim made against any Distributor Indemnitee unless the Distributor Indemnitee shall have notified the Trust in
writing of the claim within a reasonable time after the summons or other first written notification giving information of the nature of the claim shall have been served upon Distributor Indemnitee (or after Distributor Indemnitee shall have received
notice of service on any designated agent).
Failure to notify the Trust of any claim shall not relieve the Trust from any
liability that it may have to any Distributor Indemnitee against whom such action is brought unless failure or delay to so notify the Trust prejudices the Trusts ability to defend against such claim. The Trust shall be entitled to participate
at its own expense in the defense, or, if it so elects, to assume the defense of any suit brought to enforce any claims, but if the Trust elects to assume the defense, the defense shall be conducted by counsel chosen by it and satisfactory to
Distributor Indemnitee, defendant or defendants in the suit. In the event the Trust elects to assume the defense of any suit and retain counsel, Distributor Indemnitee, defendant or defendants in the suit, shall bear the fees and expenses of any
additional counsel retained by them. If the Trust does not elect to assume the defense of any suit, it will reimburse the Distributor Indemnitee, defendant or defendants in the suit, for the reasonable fees and expenses of any counsel retained by
them. The Trust agrees to notify the Distributor promptly of the commencement of any litigation or proceedings against it or any of its officers or Trustees in connection with the issuance or sale of any of the Creation Units or the Shares.
(b) The Distributor agrees to indemnify and hold harmless the Trust and each of its Trustees and officers and any person who
controls the Trust within the meaning of Section 15 of the 1933 Act (for purposes of this paragraph, the Trust and each of its Trustees and officers and its controlling persons are collectively referred to as the Trust Affiliates)
against any loss, liability, claim, damages or expense (including the reasonable cost of investigating or defending any alleged loss, liability, claim, damages or expense and reasonable counsel fees incurred in connection therewith) arising out of
or based upon (i) the allegation of any wrongful act of the Distributor or any of its directors, officers, employees, (ii) the breach of any obligation, representation or warranty pursuant to this Agreement by the Distributor,
(iii) the Distributors failure to comply in any material respect with applicable securities laws, including applicable FINRA regulations, or (iv) any allegation that the Registration Statement, Prospectus, Statement of Additional
Information, Product Description, shareholder reports, any information or materials relating to the Funds (as described in section 3(g)) or other information filed or made public by the Trust (as from time to time amended) included an untrue
statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements not misleading, insofar as such statement or omission was made in reliance upon, and in conformity with
information furnished to the Trust by or on behalf of the Distributor, it being understood that the Trust will rely upon certain information provided by the Distributor for use in the preparation of the Registration Statement, Prospectus, Statement
of Additional Information, Product Description, shareholder reports or other information relating to the Funds or made public by the Trust.
In no case (i) is the indemnity of the Distributor in favor of any Trust Affiliate to be deemed to protect any Trust Affiliate against any liability to the Trust or its security holders to which such
Trust Affiliate would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement, or (ii) is
the Distributor to be liable under its indemnity agreement contained in this Section with respect to any claim made against any Trust Affiliate unless the Trust Affiliate shall have notified the Distributor in writing of the claim within a
reasonable time after the summons or other first written notification giving information of the nature of the claim shall have been served upon the Trust Affiliate (or after the Trust Affiliate shall have received notice of service on any designated
agent).
8
Failure to notify the Distributor of any claim shall not relieve the Distributor from any
liability that it may have to the Trust Affiliate against whom such action is brought unless failure or delay to so notify the Distributor prejudices the Distributors ability to defend against such claim. The Distributor shall be entitled to
participate at its own expense in the defense or, if it so elects, to assume the defense of any suit brought to enforce the claim, but if the Distributor elects to assume the defense, the defense shall be conducted by counsel chosen by it and
satisfactory to the Trust, its officers and Board and to any controlling person or persons, defendant or defendants in the suit. In the event that Distributor elects to assume the defense of any suit and retain counsel, the Trust or controlling
person or persons, defendant or defendants in the suit, shall bear the fees and expenses of any additional counsel retained by them. If the Distributor does not elect to assume the defense of any suit, it will reimburse the Trust, its officers and
Trustees or controlling person or persons, defendant or defendants in the suit, for the reasonable fees and expenses of any counsel retained by them. The Distributor agrees to notify the Trust promptly of the commencement of any litigation or
proceedings against it or any of its officers or directors in connection with the issuance or sale of any of the Creation Units or the Shares.
(c) No indemnified party shall settle any claim against it for which it intends to seek indemnification from the indemnifying party, under the terms of section 6(a) or 6(b) above, without the prior
written notice to and consent from the indemnifying party, which consent shall not be unreasonably withheld. No indemnified or indemnifying party shall settle any claim unless the settlement contains a full release of liability with respect to the
other party in respect of such action. This section 6 shall survive the termination of this Agreement.
Section 13 of
the Authorized Participant Agreement provides as follows:
(a) The Participant hereby agrees to indemnify and hold harmless
the Distributor, the Funds, the Index Receipt Agent, their respective subsidiaries, affiliates, directors, officers, employees, and agents, and each person, if any, who controls such persons within the meaning of Section 15 of the 1933 Act
(each an Indemnified Party), from and against any loss, liability, cost, or expense (including attorneys fees) incurred by such Indemnified Party as a result of (i) any breach by the Participant of any provision of this
Agreement; (ii) any failure on the part of the Participant to perform any of its obligations set forth in this Agreement; (iii) any failure by the Participant to comply with applicable laws, including rules and regulations of
self-regulatory organizations; (iv) actions of such Indemnified Party in reliance upon any instructions issued in accordance with the Fund Documents, AP Handbook or Annex II (as each may be amended from time to time) reasonably believed by the
Distributor and/or the Index Receipt Agent to be genuine and to have been given by the Participant; or (v) the Participants failure to complete a Purchase Order or Redemption Order that has been accepted. The Participant understands and
agrees that the Funds as third party beneficiaries to this Agreement are entitled to proceed directly against the Participant in the event that the Participant fails to honor any of its obligations under this Agreement that benefit the Fund. The
Distributor shall not be liable to the Participant for any damages arising out of mistakes or errors in data provided to the Distributor, or out of interruptions or delays of communications with the Indemnified Parties who are service providers to
the Fund, nor is the Distributor liable for any action, representation, or solicitation made by the wholesalers of the Fund.
(b) The Distributor hereby agrees to indemnify and hold harmless the Participant and the Index Receipt Agent, their respective
subsidiaries, affiliates, directors, officers, employees, and agents, and each person, if any, who controls such persons within the meaning of Section 15 of the 1933 Act (each an Indemnified Party), from and against any loss,
liability, cost, or expense (including attorneys fees) incurred by such Indemnified Party as a result of (i) any breach by the Distributor of any provision of this Agreement; (ii) any failure on the part of the Distributor to perform
any of its obligations set forth in this Agreement; (iii) any failure by the Distributor to comply with applicable laws, including rules and regulations of self-regulatory organizations; or (iv) actions of such Indemnified Party in
reliance upon any representations made in accordance with the Fund Documents and AP Handbook (as e ach may be amended from time to time) reasonably believed by the Participant to be genuine and to have been given by the Distributor. The Participant
shall not be liable to the Distributor for any damages arising out of mistakes or errors in data provided to the Participant, or out of interruptions or delays of communications
9
with the Indemnified Parties who are service providers to the Fund, nor is the Participant liable for any action, representation, or solicitation made by the wholesalers of the Fund.
(c) The Funds, the Distributor, the Index Receipt Agent, or any person who controls such persons within the meaning of Section 15 of
the 1933 Act, shall not be liable to the Participant for any damages arising from any differences in performance between the Deposit Securities in a Fund Deposit and the Funds benchmark index.
The general effect of this Indemnification will be to indemnify the officers, trustees, employees and agents of the Registrant from costs
and expenses arising from any action, suit or proceeding to which they may be made a party by reason of their being or having been a trustee, officer, employee or agent of the Registrant, except where such action is determined to have arisen out of
the willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the trustees, officers, employees or agents office.
Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
Item 31.
|
Business and Other Connections of Investment Adviser
|
Rafferty Asset Management, LLC (Rafferty) provides investment advisory services to all Funds of the Trust. Rafferty was organized as a New York limited liability corporation in June 1997.
Lawrence C. Rafferty controls Rafferty through his ownership in Rafferty Holdings, LLC. Raffertys offices are located at 1301 Avenue of the Americas (6th Avenue), 35th Floor, New York, New York 10019. Information as to the directors and
officers of Rafferty is included in its current Form ADV filed with the SEC (File No. 801-54679).
Item 32.
|
Principal Underwriter
|
(a) Foreside Fund Services, LLC, the Registrants principal underwriter, also serves as principal underwriter for the following
investment companies registered under the Investment Company Act of 1940, as amended: 361 Absolute Alpha Fund, Series of Investment Managers Series Trust, 361 Long/Short Equity Fund, Series of Investment Managers Series Trust, 361 Managed Futures
Strategy Fund, Series of Investment Managers Series Trust, AdvisorShares Trust, American Beacon Funds, American Beacon Select Funds, Avenue Mutual Funds Trust, Bennett Group of Funds, Bridgeway Funds, Inc., Broadmark Funds, Capital Innovations
Global Agri, Timber, Infrastructure Fund, Series of Investment Managers Series Trust, Center Coast MLP Focus Fund, Series of Investment Managers Series Trust, Central Park Group Multi-Event Fund, Direxion Shares ETF Trust, DundeeWealth Funds,
FlexShares Trust, Forum Funds, FQF Trust, Gottex Multi-Alternatives Fund I, Gottex Multi-Alternatives Fund II, Gottex Multi-Asset Endowment Fund I, Gottex Multi-Asset Endowment Fund II, Henderson Global Funds, Ironwood
Institutional Multi-Strategy Fund LLC, Ironwood Multi-Strategy Fund LLC, Liberty Street Horizon Fund, Series of Investment Managers Series Trust, Manor Investment Funds, Nomura Partners Funds, Inc., Performance Trust Mutual Funds, Series of Trust
for Professional Managers, Perimeter Small Cap Value Fund, Series of Investment Managers Series Trust, PMC Funds, Series of Trust for Professional Managers, Precidian ETFs Trust, Quaker Investment Trust, RevenueShares ETF Trust, Salient MF Trust,
Sound Shore Fund, Inc., The Roxbury Funds, Turner Funds, Wintergreen Fund, Inc.
10
(b) The following table identifies the officers of Foreside and their positions, if any,
with the Registrant. The business address of each of these individuals is Three Canal Plaza, Suite 100, Portland, Maine 04101.
|
|
|
|
|
Name
|
|
Position with Underwriter
|
|
Position with Registrant
|
Mark A. Fairbanks
|
|
President and Manager
|
|
None
|
Richard J. Berthy
|
|
Vice President, Treasurer and Manager
|
|
None
|
Jennifer E. Hoopes
|
|
Secretary
|
|
None
|
Nanette K. Chern
|
|
Vice President and Chief Compliance Officer
|
|
None
|
Lisa S. Clifford
|
|
Vice President and Managing Director of Compliance
|
|
None
|
Nishant Bhatnagar
|
|
Assistant Secretary
|
|
None
|
(c) Not applicable.
Item 33.
|
Location of Accounts and Records
|
The books and records required to be maintained by Section 31(a) of the Investment Company Act of 1940, as amended, (the 1940 Act) are maintained in the physical possession of the
Direxion Shares ETF Trusts investment adviser, subadviser, administrator, custodian, subcustodian, or transfer agent.
Item 34.
|
Management Services
|
Not
applicable.
Not
applicable.
11
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, the Registrant certifies that this Post-Effective Amendment No. 85 to its
Registration Statement meets all the requirements for effectiveness pursuant to Rule 485(b) of the Securities Act, and the Registrant has duly caused this Post-Effective Amendment No. 85 to its Registration Statement on Form N-1A to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New York and the State of New York on June 21, 2013.
|
|
|
DIREXION SHARES ETF TRUST
|
|
|
By:
|
|
/s/ Daniel D. ONeill
|
|
|
Daniel D. ONeill
|
|
|
Chief Executive Officer
|
Pursuant to the requirements of the Securities Act, this Post-Effective Amendment No. 85 to
its Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
/s/ Daniel D. ONeill
|
|
Chief Executive Officer and Chairman of the Board
|
|
June 21, 2013
|
Daniel D. ONeill
|
|
|
|
|
|
|
|
/s/ Patrick J. Rudnick
|
|
Principal Financial Officer and Treasurer
|
|
June 21, 2013
|
Patrick J. Rudnick
|
|
|
|
|
|
|
/s/ Daniel J. Byrne*
|
|
Trustee
|
|
June 21, 2013
|
Daniel J. Byrne
|
|
|
|
|
|
|
|
/s/ Gerald E. Shanley III*
|
|
Trustee
|
|
June 21, 2013
|
Gerald E. Shanley III
|
|
|
|
|
|
|
|
/s/ John Weisser*
|
|
Trustee
|
|
June 21, 2013
|
John Weisser
|
|
|
|
|
|
|
|
*By:
|
|
Patrick J. Rudnick
|
|
|
Patrick J. Rudnick, Principal Financial Officer, Treasurer and Attorney-In Fact
|
INDEX TO EXHIBITS
|
|
|
Exhibit
Number
|
|
Description
|
|
|
(i)
|
|
Opinion and consent of counsel
|
|
|
(d)(i)(J)
|
|
Ninth Amended Schedule A to the Investment Advisory Agreement
|
|
|
(g)(i)(I)
|
|
Eighth Amended Schedule II to the Custody Agreement
|
|
|
(h)(i)(H)
|
|
Seventh Amended Appendix I to the Transfer Agency and Service Agreement
|
|
|
(h)(iii)(A)
|
|
Amended Exhibit A to the Fund Accounting Agreement
|
|
|
(h)(v)(B)
|
|
Amended Appendix A to the Operating Expense Limitation Agreement
|
|
|
(m)(i)(I)
|
|
Eighth Amended Schedule A to Rule 12b-1 Distribution Plan
|
Puget Technologies (CE) (USOTC:PUGE)
Gráfica de Acción Histórica
De Ago 2024 a Sep 2024
Puget Technologies (CE) (USOTC:PUGE)
Gráfica de Acción Histórica
De Sep 2023 a Sep 2024