Newcomer to list Minnesota Muni bond ETF next week

Mairs & Power Minnesota Municipal Bond ETF

Ticker: MINN

Exchange: Cboe BZX Exchange, Inc.

Expense ratio: 0.39%

Original filing date: June 30, 2020

Effective date: March 3, 2021

Listing Date: March 10, 2021

CUSIP: 89834G836

Active: Yes

Index: Not Applicable

 

Investment Objective:

Seek current income that is exempt from federal and Minnesota state income tax consistent with the preservation of capital.

 

Investment Strategy: 

State of Minnesota bonds exempt from state tax.

 

Adviser: Mairs & Power, Inc.

 

Prospectus is here.

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Principal Investment Strategies

Under normal market conditions, the Fund seeks to achieve its investment objective by investing at least 80% of its net assets (including borrowings for investment purposes) in municipal debt securities that pay interest that is exempt from regular federal income tax and Minnesota state income tax (collectively, “Municipal Securities”). Generally, these Municipal Securities are issued by or on behalf of the State of Minnesota and its political subdivisions, agencies, authorities and instrumentalities, and by other qualified issuers located in Minnesota. The Fund may invest up to 20% of its net assets in debt securities that pay interest subject to taxation, including the federal alternative minimum tax (“AMT”).

The Fund can invest in all types of Municipal Securities, including municipal lease obligations (and certificates of participation in such obligations), insured municipal bonds, municipal general obligation bonds, municipal revenue bonds, municipal notes, municipal cash equivalents, private activity bonds, and pre-refunded and escrowed to maturity bonds. In addition, Municipal Securities include securities issued by custodial receipt trusts, which are investment vehicles the underlying assets of which are municipal bonds. Municipal Securities also include instruments evidencing direct ownership of interest payments or principal payments, or both, on municipal securities, such as tender option bonds and participation interests in all or part of specific holdings of municipal obligations, provided that the applicable issuer receives assurances from legal counsel that the interest payable on the securities is exempt from federal income tax. The Fund may invest in Municipal Securities of any duration and any maturity and does not seek to maintain a particular dollar-weighted average maturity. The Fund may purchase and sell securities on a when-issued, delayed delivery or forward commitment basis. The Fund may invest in other investment companies, including exchange-traded funds (“ETFs”), to obtain exposure to certain Municipal Securities, or for liquidity or other reasons. The Fund may invest in zero coupon bonds, which are issued at substantial discounts from their value at maturity and pay no cash income to their holders until they mature. The Fund also may invest in Municipal Securities whose interest payments vary inversely with changes in short-term tax-exempt interest rate (“inverse floaters”). Inverse floaters are derivative securities that provide leveraged exposure to underlying municipal bonds. The Fund’s investment in inverse floaters are designed to increase the Fund’s income and return through this leveraged exposure. These investments are speculative, however, and also create the possibility that income and returns will be diminished. The Fund may invest in inverse floaters with any degree of leverage (measured by comparing the outstanding principal amount of related short-term floating rate securities to the par value of the underlying municipal bond). However, the Fund may only expose up to 10% of its total assets to the effects of leverage from its investments in inverse floaters. The Fund’s investments in inverse floaters are included and will be valued on a marked-to-market basis for purposes of the 80% policy described above.

Under normal market conditions, the Fund will invest at least 75% of its net assets in securities that are, at the time of investment, rated investment grade (i.e., rated Baa3/BBB- or above) by at least one nationally recognized statistical rating organization (“NRSRO”), but may invest up to 25% of its net assets at the time of investment in non-investment-grade securities, which are not in default (i.e., rated within B3/B- to Ba1/BB+, sometimes called “junk bonds”, as well as unrated securities. The Fund is not permitted to invest in securities that are rated below B3/B- or equivalent NRSRO ratings, or securities deemed either in default or near default by the Fund’s investment adviser, Mairs & Power, Inc. (the “Adviser”). The Fund will consider pre-refunded or escrowed-to maturity bonds using U.S. Treasury securities or U.S. government agency securities, regardless of rating, to be investment grade securities.

The Fund is classified as “non-diversified” under the Investment Company Act of 1940 (the “1940 Act”). Since the Fund is non-diversified, it may invest a greater percentage of its assets in a particular investment or issuer than a diversified fund.

The Fund does not seek to replicate any index and is actively managed. The Adviser employs primarily a buy and hold strategy seeking income rather than capital returns. The Adviser conducts fundamental analysis on the issue prior to purchasing debt securities. The Adviser may choose to sell securities for a variety of reasons, such as deteriorating credit or to secure gains, limit losses, extend or shorten duration, or redeploy assets into more promising opportunities.

Putnam enters the ETF game

Putnam is a welcome entrant to ETFs given their history as one of oldest investment managers in the US, and as it emerges as a survivor of the tumultuous mutual fund times of the early 21st century.

The initial four funds they are proposing to launch are:

- Putnam Focused Large Cap Growth ETF

- Putnam Focused Large Cap Value ETF

- Putnam Sustainable Future ETF

- Putnam Sustainable Leaders ETF

The investment objectives and strategies are already covered in the FT article, but here is some more information on the nuts 'n bolts of the funds.

Putnam appears to have entered into some type of agreement with Fidelity to use Fidelity's actively-managed ETF approach, wherein the funds do not completely disclose their daily holdings.

Rather, each fund publishes a daily "Tracking Basket" that lists:

- some fund holdings

- ETFs that are indicative of the fund's holdings

- cash.

In addition, each fund will also publish a daily "Tracking Basket Weight Overlap", which is a percentage number that shows how much the Tracking Basket is similar to the fund's actual holdings.

Links to the initial registration (prospectus) and exemptive relief application here:

https://www.etfhearsay.com/2021/03/putnam-enters-etf-game.html

Here is the Putnam prospectus (initial registration statement):

https://www.sec.gov/Archives/edgar/data/1845809/000092881621000211/0000928816-21-000211-index.htm

Here is the Fidelity exemptive relief application for actively-managed ETFs using the "Tracking Basket" methodology:

https://www.sec.gov/Archives/edgar/data/35336/000119312519287794/d829357d40appa.htm

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FT Article on Putnam ETFs:

https://lnkd.in/gV6FE2H

New ETF filed: SonicShares Airlines, Hotels, Cruise Lines ETF

SonicShares Airlines, Hotels, Cruise Lines ETF
Ticker: TRYP
Exchange: NYSE Arca
Expense ratio: 0.75%

Original filing date: February 25, 2021
Effective date: May 11, 2021
Listing Date: May 13, 2021

CUSIP: 886364728

Active: No

Index: Solactive Airlines, Hotels, Cruise Lines Index

 
Investment Objective:
Track the performance, before fees and expenses, of the Solactive Airlines, Hotels, Cruise Lines Index
 
Investment Strategy / Index Methodology:
Companies can be based or listed anywhere in the world, but must have a minimum of $2 billion in market cap.

To be included in the index, companies must derive at least 50% of revenues from air services or cruise line services, or hotel services, broadly.

Here's an index methodology twist and where it gets interesting:

• Top 3 companies in each industry get allocated 4.5% each, for a total of 40.5% of the index.

• The remainder of the index (50.5%) gets allocated among the remaining eligible companies, weighted by market capitalization.

 
Adviser: Toroso Investments, LLC
Sub-Adviser / License owner of brand name "SonicShares": Lucania Investments LLC

Administrator: Tidal ETF Services LLC
Fund accountant: U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services
Transfer agent: U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services 

Custodian: U.S. Bank National Association
Distributor: Foreside Fund Services, LLC
Legal counsel: Godfrey & Kahn, S.C.
External accounting: Tait, Weller & Baker LLP
Compliance: Cipperman Compliance Services, LLC
 

Prospectus is here.

Final prospectus is here.

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• LinkedIn: Henry Jim
• henry@etfhearsay.com
• Twitter: @ETFhearsay

American Century launches income themed ETFs

HEARSAY Summary and Analysis

Second and third launch for American Century already in 2021, following the launch in January of their Low Vol ETF, LVOL. This brings their total number of ETFs to 12 and total AUM is $1.5B.

American Century has leveraged their mutual fund experience to fill out their ETF lineup in a deliberate manner, and continuing to off the basic add-ons to a core portfolio. QCON and QPFF offer the esoteric yet exotic instruments to the existing quality, focused, and sustainable stable of ETFs. 

QCON and QPFF are welcome income themed members to the American Century family. Under the well-seasoned ETF PM, Rene Casis, formerly of iShares, these ETFs are sure to be well taken care of.

American Century Quality Convertible Securities ETF
Ticker: QCON
Exchange: Cboe BZX
Expense ratio: 0.32%
Original filing date: September 4, 2020
Effective date: November 18, 2020
Listing Date: February 19, 2021
CUSIP: 025072521
Active: Yes
Index (Benchmark if Actively-Managed): ICE BofA Convertible Index

Investment Objective:
The fund seeks total return.
 
Investment Strategy:

Select individual securities utilizing a quantitative and fundamental investment process informed by fundamental and technical measures such as sales or earnings growth, profitability, leverage, balance sheet strength, price momentum relative to peers, and valuation and yield relative to other convertible securities.

Constituents: 135
 
Adviser: American Century Investment Management, Inc.
Short Prospectus is here.
Full Prospectus is here.

American Century Quality Preferred ETF
Ticker: QPFF
Exchange: Cboe BZX
Expense ratio: 0.32%
Original filing date: September 4, 2020
Effective date: November 18, 2020
Listing Date: February 19, 2021
CUSIP: 025072539
Active: Yes
Index (Benchmark if Actively-Managed): ICE Exchange-Listed Preferred & Hybrid Securities Index
 
Investment Objective:
The fund seeks current income and capital appreciation.
 
Investment Strategy:

Preferred securities in which the fund may invest include preferred stock, hybrid preferred securities that have characteristics similar to both preferred stock and debt securities, floating rate preferred securities, junior subordinated debt, senior unsecured debt obligations denominated in $25 par amounts (senior notes or baby bonds), re-packaged preferreds, and convertible securities.

The portfolio managers screen securities utilizing a quantitative and fundamental investment process informed by fundamental and technical measures such as liquidity, credit risk, size, quality, and momentum. The strategy screens for profitability and leverage and selects issuers and issues based on favorable quality, yield and valuation metrics.

Constituents: 150
 
Adviser: American Century Investment Management, Inc.
Short Prospectus is here.
Full Prospectus is here.

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QCON

Principal Investment Strategies

Under normal market conditions, the portfolio managers will invest at least 80% of the fund’s net assets, plus any borrowings for investment purposes, in convertible securities. Convertible securities have characteristics similar to both bonds and common stocks and typically consist of debt securities and preferred stocks that may be converted into or exchanged for a prescribed amount of common stock or other equity security, of the same or a different issuer, within a particular time period, at a specified price.

The portfolio managers select securities using a quantitative and fundamental investment process. They first screen the investment universe for liquidity and then select individual securities utilizing a quantitative and fundamental investment process informed by fundamental and technical measures such as sales or earnings growth, profitability, leverage, balance sheet strength, price momentum relative to peers, and valuation and yield relative to other convertible securities. Portfolio holdings are weighted to achieve the optimal balance between risk and return by considering each portfolio security’s fundamental scores, benchmark weight, and equity sensitivity.

The fund is nondiversified. The fund may invest in high-yield securities (also referred to as “junk bonds”). The fund may engage in active and frequent trading of portfolio securities to achieve its principal investment strategies. This may cause higher transaction costs and may affect performance. It may also result in the realization and distribution of capital gains.

The fund is an actively managed exchange-traded fund (ETF) that does not seek to replicate the performance of a specified index. To determine whether to buy or sell a security, the portfolio managers consider, among other things, various fund requirements and standards, along with economic conditions, alternative investments, interest rates and various credit metrics.

QPFF

Principal Investment Strategies

Under normal market conditions, the portfolio managers will invest at least 80% of the fund’s net assets, plus any borrowings for investment purposes, in preferred securities issued by U.S. and non-U.S. companies. Preferred securities in which the fund may invest include preferred stock, hybrid preferred securities that have characteristics similar to both preferred stock and debt securities, floating rate preferred securities, junior subordinated debt, senior unsecured debt obligations denominated in $25 par amounts (senior notes or baby bonds), re-packaged preferreds, and convertible securities.

The portfolio managers screen securities utilizing a quantitative and fundamental investment process informed by fundamental and technical measures such as liquidity, credit risk, size, quality, and momentum. The strategy screens for profitability and leverage and selects issuers and issues based on favorable quality, yield and valuation metrics.

The fund is nondiversified. The fund concentrates its investments in the group of industries that comprise the financials sector. The fund may engage in active and frequent trading of portfolio securities to achieve its principal investment strategies. This may cause higher transaction costs and may affect performance. It may also result in the realization and distribution of capital gains. The fund may invest in securities of any duration or maturity.

The fund is an actively managed exchange-traded fund (ETF) that does not seek to replicate the performance of a specified index. To determine whether to buy or sell a security, the portfolio managers consider, among other things, various fund requirements and standards, along with economic conditions, alternative investments, interest rates and various credit metrics.

TransAmerica files for three ETFs adding to their roster of DeltaShares, targeting launch in May

DeltaShares Morningstar ESG US Dividend ETF

DeltaShares Morningstar ESG International Dividend ETF

DeltaShares Morningstar ESG Emerging Markets Dividend ETF

Summary & Analysis

Hearsay Research:

The three funds track Morningstar indices that screen stocks that:

1. Pay dividends

2. Have low ESG and "Controversy" scores as determined by Sustainalytics, a Morningstar company

3. Do not derive more than 50% of revenues from tobacco or weapons

4. Have a sustainable competitive advantage

Hearsay Analysis:

Transamerica is rounding out their lineup of managed risk ETFs with super-jacked modular dividend-focused ETFs that cover the world. They like a super meal with all the screens and filters.

Besides the focus on dividends, the ETFs offer an ESG screen and sustainable competitive advantage across the US, developed world, and emerging markets. These features are all good and well, but ultimately it's performance that will dictate the success of these funds in asset gathering.

Tickers: TBD 

Exchange: NYSE Arca

Expense ratio: TBD

Original filing date: February 12, 2021

Effective date: April 28, 2021

Listing Date: May 2021

CUSIP: TBD

Active: No

Indexes:
Morningstar® US Sustainability Dividend Yield Focus IndexSM
Morningstar® Developed Markets ex-US Sustainability Dividend Yield Focus Index
Morningstar® Emerging Markets Sustainability Dividend Yield Focus Index

Investment Objective:

Seeks to track the investment results, before fees and expenses, of their respective indices.

 

Investment Strategy:

Constituents: 

 

Adviser: Transamerica Asset Management, Inc.

Sub-Adviser: Geode Capital Management, LLC

 

Prospectus is here.

Existing Transamerica ETFs:

DMRL DeltaShares S&P 500 Managed Risk ETF

DMRM DeltaShares S&P 400 Managed Risk ETF

DMRS DeltaShares S&P 600 Managed Risk ETF

DMRI DeltaShares S&P International Managed Risk ETF

DMRE DeltaShares S&P EM 100 & Managed Risk ETF

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DeltaShares Morningstar ESG US Dividend ETF

THE FUND’S PRINCIPAL INVESTMENT STRATEGY

Under normal market conditions, the DeltaShares® Morningstar ESG US Dividend ETF (the “fund”) invests a substantial portion of its assets in securities comprising the Morningstar® US Sustainability Dividend Yield Focus IndexSM (the “Underlying Index”). Under normal circumstances, the fund will invest at least 80% of its net assets, plus any borrowings for investment purposes, in dividend-paying securities of US market companies (as defined by the Index Provider).

 

The Underlying Index is designed to provide exposure to high-yielding, qualified-dividend-paying US companies that exhibit superior quality and financial health and that score highly on sustainable-investing criteria. The Underlying Index is a subset of the Morningstar® US Market IndexSM (the “Parent Index”), an index designed to track the US equity market. The Underlying Index first screens the companies in the Parent Index for eligibility. To be eligible for inclusion in the Underlying Index:

 

•

First, a company must pay qualified-dividends. A qualified dividend is generally taxable as long-term capital gains rates rather than ordinary income rates.

 

•

Second, a company must have a current environmental, social and governance (“ESG”) and controversy score (the “controversy score”), as determined by Sustainalytics, a Morningstar company and independent provider of ESG and corporate governance research and ratings. A company’s controversy score measures the degree to which newsworthy events involving the company may negatively impact the environment, society and the company’s business prospects, as well as the quality of the company’s efforts to manage and/or mitigate those negative impacts. Companies assigned the highest controversy score are not eligible for inclusion in the Underlying Index.

 

•

Third, a company must meet the following product involvement screens: (i) must not derive more than 50% of its revenue from involvement in tobacco products, and (ii) must not have involvement in the production of controversial weapons.

 

•

Fourth, a company must possess a sustainable competitive advantage in the market, as determined by the Index Provider (defined below).

After meeting the eligibility screens, the remaining companies are then ranked based on trailing 12-month dividend yield. The Underlying Index next targets an overall Morningstar Five Globe Sustainability Rating, which indicates low portfolio-level risk from ESG factors compared to the Fund’s Morningstar category, as determined by Morningstar. If the remaining companies, as a group, do not meet this rating requirement, companies in the bottom 25% of controversy scores are removed. If the resulting group of companies continues to not meet the rating requirement, then the next bottom 5% of companies are removed. The process is repeated until either the remaining group of companies meets the Five Globe Sustainability Rating or the bottom 50% of eligible companies are removed. The top 50 remaining companies based on trailing 12-month dividend yield are then chosen for inclusion in the Underlying Index.

The Underlying Index constituents are weighted according to the total qualified dividends paid during the past 12 months, with a maximum individual constituent weight of 5%, and a maximum sector weight of the lesser of 40% or 5 times that of the sector’s weight in the Parent Index. As of December 31, 2020, the market capitalizations of companies included in the Underlying Index were between $     billion and $     billion. The Underlying Index is reconstituted semi-annually in June and December. In addition, in March and September the controversy score and product involvement screens are applied and existing constituents failing those screens are deleted from the Underlying Index.

Under normal circumstances, in seeking to track the performance of the Underlying Index, the fund employs a replication strategy, which means the fund invests in substantially all of the securities represented in the Underlying Index in approximately the same proportions as the Underlying Index. The fund may also employ a sampling strategy when determined by the fund’s sub-adviser, Geode Capital Management, LLC (the “Sub-Adviser”), to be in the best interest of the fund in pursuing its investment objective. A sampling strategy means that the fund purchases a subset of the securities in the Underlying Index in an effort to hold a portfolio of securities with generally the same risk and return characteristics of the Underlying Index. The quantity of holdings in the fund will be based on a number of factors, including asset size of the fund.

The Underlying Index was developed and is sponsored by Morningstar® Indexes (the “Index Provider”), which is not affiliated with the fund, the Investment Manager or the Sub-Adviser. The Underlying Index is owned, calculated, and controlled by the Index Provider in its sole discretion. The Index Provider determines the composition of the Underlying Index, relative weightings of the securities in the Index and publishes information regarding the market value of the Underlying Index. The Investment Manager, Sub-Adviser and their respective affiliates do not have the ability to select Underlying Index components or change the Underlying Index methodology.

 

DeltaShares Morningstar ESG International Dividend ETF

THE FUND’S PRINCIPAL INVESTMENT STRATEGY

Under normal market conditions, the DeltaShares® Morningstar ESG International Dividend ETF (the “fund”) invests a substantial portion of its assets in securities comprising the Morningstar® Developed Markets ex-US Sustainability Dividend Yield Focus IndexSM (the “Underlying Index”) and depositary receipts based on component securities in the Underlying Index (or, in the case of depositary receipts which themselves are component securities, underlying stocks in respect of such depositary receipts) Under normal circumstances, the fund will invest at least 80% of its net assets, plus any borrowings for investment purposes, in dividend-paying securities.

The Underlying Index is designed to provide exposure to high-yielding, qualified-dividend-paying companies in developed markets (excluding the United States) that exhibit superior quality and financial health and that score highly on sustainable-investing criteria. The Underlying Index is a subset of the Morningstar® Developed Markets ex-US IndexSM (the “Parent Index”), an index designed to track the developed market (excluding the United States) equity market. The Underlying Index first screens the companies in the Parent Index for eligibility. To be eligible for inclusion in the Underlying Index:

 

•

First, a company must pay qualified-dividends. A qualified dividend is generally taxable at long-term capital gains rates rather than ordinary income rates.

 

•

Second, a company must have a current environmental, social and governance (“ESG”) and controversy score (the “controversy score”), as determined by Sustainalytics, a Morningstar company and independent provider of ESG and corporate governance research and ratings. A company’s controversy score measures the degree to which newsworthy events involving the company may negatively impact the environment, society and the company’s business prospects, as well as the quality of the company’s efforts to manage and/or mitigate those negative impacts. Companies assigned the highest controversy score are not eligible for inclusion in the Underlying Index.

 

•

Third, a company must meet the following product involvement screens: (i) must not derive more than 50% of its revenue from involvement in tobacco products, and (ii) must not have involvement in the production of controversial weapons.

 

•

Fourth, a company must possess a sustainable competitive advantage in the market, as determined by the Index Provider (defined below).

After meeting the eligibility screens, the remaining companies are then ranked based on trailing 12-month dividend yield. The Underlying Index next targets an overall Morningstar Five Globe Sustainability Rating, which indicates low portfolio-level risk from ESG factors compared to the Fund’s Morningstar category, as determined by Morningstar. If the remaining companies, as a group, do not meet this rating requirement, companies in the bottom 25% of controversy scores are removed. If the resulting group of companies continues to not meet the rating requirement, then the next bottom 5% of companies are removed. The process is repeated until either the remaining group of companies meets the Five Globe Sustainability Rating or the bottom 50% of eligible companies are removed. The top 125 remaining companies based on trailing 12-month dividend yield are then chosen for inclusion in the Underlying Index.

The Underlying Index constituents are weighted according to the total qualified dividends paid during the past 12 months, with a maximum individual constituent weight of 5%, and a maximum sector weight of the lesser of 40% or 5 times that of the sector’s weight in the Parent Index. As of December 31, 2020, the market capitalizations of companies included in the Underlying Index were between $     billion and $     billion. The Underlying Index is reconstituted semi-annually in June and December. In addition, in March and September the controversy score and product involvement screens are applied and existing constituents failing those screens are deleted from the Underlying Index.

Under normal circumstances, in seeking to track the performance of the Underlying Index, the fund employs a replication strategy, which means the fund invests in substantially all of the securities represented in the Underlying Index in approximately the same proportions as the Underlying Index. The fund may also employ a sampling strategy when determined by the fund’s sub-adviser, Geode Capital Management, LLC (the “Sub-Adviser”), to be in the best interest of the fund in pursuing its investment objective. A sampling strategy means that the fund purchases a subset of the securities in the Underlying Index in an effort to hold a portfolio of securities with generally the same risk and return characteristics of the Underlying Index. The quantity of holdings in the fund will be based on a number of factors, including asset size of the fund.

The Underlying Index was developed and is sponsored by Morningstar® Indexes (the “Index Provider”), which is not affiliated with the fund, the Investment Manager or the Sub-Adviser. The Underlying Index is owned, calculated, and controlled by the Index Provider in its sole discretion. The Index Provider determines the composition of the Underlying Index, relative weightings of the securities in the Index and publishes information regarding the market value of the Underlying Index. The Investment Manager, Sub-Adviser and their respective affiliates do not have the ability to select Underlying Index components or change the Underlying Index methodology.

DeltaShares Morningstar ESG Emerging Markets Dividend ETF

THE FUND’S PRINCIPAL INVESTMENT STRATEGY

Under normal market conditions, the DeltaShares® Morningstar ESG Emerging Markets Dividend ETF (the “fund”) invests a substantial portion of its assets in securities comprising the Morningstar® Emerging Markets Sustainability Dividend Yield Focus IndexSM (the “Underlying Index”) and depositary receipts based on component securities in the Underlying Index (or, in the case of depositary receipts which themselves are component securities, underlying stocks in respect of such depositary receipts) Under normal circumstances, the fund will invest at least 80% of its net assets, plus any borrowings for investment purposes, in dividend-paying securities of emerging market companies (as defined by the Index Provider).

 

The Underlying Index is designed to provide exposure to high-yielding, qualified-dividend-paying companies in emerging markets that exhibit superior quality and financial health and that score highly on sustainable-investing criteria. The Underlying Index is a subset of the Morningstar® Emerging Markets IndexSM (the “Parent Index”), an index designed to track the emerging market equity market. The Underlying Index first screens the companies in the Parent Index for eligibility. To be eligible for inclusion in the Underlying Index:

 

•

First, a company must pay qualified-dividends. A qualified dividend is generally taxable as long-term capital gains rates rather than ordinary income rates.

 

•

Second, a company must have a current environmental, social and governance (“ESG”) and controversy score (the “controversy score”), as determined by Sustainalytics, a Morningstar company and independent provider of ESG and corporate governance research and ratings. A company’s controversy score measures the degree to which newsworthy events involving the company may negatively impact the environment, society and the company’s business prospects, as well as the quality of the company’s efforts to manage and/or mitigate those negative impacts. Companies assigned the highest controversy score are not eligible for inclusion in the Underlying Index.

 

•

Third, a company must meet the following product involvement screens: (i) must not derive more than 50% of its revenue from involvement in tobacco products, and (ii) must not have involvement in the production of controversial weapons.

 

•

Fourth, a company must possess a sustainable competitive advantage in the market, as determined by the Index Provider (defined below).

After meeting the eligibility screens, the remaining companies are then ranked based on trailing 12-month dividend yield. The Underlying Index next targets an overall Morningstar Five Globe Sustainability Rating, which indicates low portfolio-level risk from ESG factors compared to the Fund’s Morningstar category, as determined by Morningstar. If the remaining companies, as a group, do not meet this rating requirement, companies in the bottom 25% of controversy scores are removed. If the resulting group of companies continues to not meet the rating requirement, then the next bottom 5% of companies are removed. The process is repeated until either the remaining group of companies meets the Five Globe Sustainability Rating or the bottom 50% of eligible companies are removed. The top 75 remaining companies based on trailing 12-month dividend yield are then chosen for inclusion in the Underlying Index.

The Underlying Index constituents are weighted according to the total qualified dividends paid during the past 12 months, with a maximum individual constituent weight of 5%, and a maximum sector weight of the lesser of 40% or 5 times that of the sector’s weight in the Parent Index. As of December 31, 2020, the market capitalizations of companies included in the Underlying Index were between $     million to $     billion. The Underlying Index is reconstituted semi-annually in June and December. In addition, in March and September the controversy score and product involvement screens are applied and existing constituents failing those screens are deleted from the Underlying Index.

Under normal circumstances, in seeking to track the performance of the Underlying Index, the fund employs a replication strategy, which means the fund invests in substantially all of the securities represented in the Underlying Index in approximately the same proportions as the Underlying Index. The fund may also employ a sampling strategy when determined by the fund’s sub-adviser, Geode Capital Management, LLC (the “Sub-Adviser”), to be in the best interest of the fund in pursuing its investment objective. A sampling strategy means that the fund purchases a subset of the securities in the Underlying Index in an effort to hold a portfolio of securities with generally the same risk and return characteristics of the Underlying Index. The quantity of holdings in the fund will be based on a number of factors, including asset size of the fund.

The Underlying Index was developed and is sponsored by Morningstar® Indexes (the “Index Provider”), which is not affiliated with the fund, the Investment Manager or the Sub-Adviser. The Underlying Index is owned, calculated, and controlled by the Index Provider in its sole discretion. The Index Provider determines the composition of the Underlying Index, relative weightings of the securities in the Index and publishes information regarding the market value of the Underlying Index. The Investment Manager, Sub-Adviser and their respective affiliates do not have the ability to select Underlying Index components or change the Underlying Index methodology.