specify a trading symbol or expense ratio in the initial filing.
The Fund’s Investment Strategy
The Fund seeks to achieve its investment objective through direct and indirect investment in Local Debt denominated in Chinese yuan. Under normal circumstances, the Fund will invest at least 80% of its net assets in Local Debt. For these purposes, Local Debt includes fixed income securities, such as bonds, notes or other debt obligations, denominated in Chinese yuan, as well as certain derivatives and other instruments or combinations of instruments described herein. The Fund is an actively managed exchange-traded fund (“ETF”).
The Fund intends to focus its investments on yuan-denominated debt instruments issued by governments, quasi-sovereigns, and corporations, domiciled within or outside of China. The Fund also may invest in Local Debt issued by supranational organizations such as the European Investment Bank, Asian Development Bank, International Bank for Reconstruction and Development or International Finance Corporation, and development agencies supported by other national governments. The Fund may invest in inflation-linked fixed income securities, certificates of deposit, time deposits, and money market securities denominated in Chinese yuan.
A large percentage of the Fund’s investments will be in securities issued in Hong Kong that are governed by the Supplementary Memorandum of Co-operation between the People’s Bank of China (PBoC) and the Hong Kong Monetary Authority (HKMA). This agreement allows for the trade and settlement of securities in Chinese yuan in Hong Kong. As a result, a market for Chinese yuan-denominated securities has developed outside of Mainland China in Hong Kong as an initial step in currency liberalization. Additionally, all securities are subject to the HKMA’s general bond-issuing criteria. At present, the largest and most liquid issues of yuan-denominated bonds available to foreign investors are issued and traded in Hong Kong.
The universe of Local Debt within China and its offshore market in Hong Kong currently includes securities that are rated “investment grade” as well as “non-investment grade.” The Fund intends to provide a broad-based exposure to Local Debt and therefore will invest in both investment-grade and non-investment-grade securities. Securities rated investment grade generally are considered to be of higher credit quality and subject to lower default risk. Although securities rated below investment grade may offer the potential for higher yields, they generally are subject to a higher potential risk of loss.
The Fund attempts to limit interest rate risk by maintaining an aggregate portfolio duration between two and eight years under normal market conditions. Aggregate portfolio duration is important to investors as an indication of the Fund’s sensitivity to changes in interest rates. Funds with higher durations generally are subject to greater interest rate risk. An aggregate portfolio duration of between two and eight years generally would be considered “intermediate.” The Fund’s actual portfolio duration may be longer or shorter depending on market conditions.
For purposes of the 80% investment policy described above, Local Debt includes investments in derivatives tied economically to China such as forward currency contracts, interest rate swaps, inflation-linked swaps, total return swaps, and credit linked notes, and combinations of investments that provide similar exposure to Local Debt, such as investments in USD-denominated bonds combined with forward currency positions or swaps. If forward currency and swaps positions are not being implemented in combination with USD-denominated bonds, the Fund’s use of forward contracts will be underpinned by investments in short-term, high-quality U.S. money market securities and is designed to provide exposure similar to investments in local currency deposits. Swap positions will be also supported by U.S. money market investments in absence of a matched bond. A forward contract is an agreement to buy or sell a specific currency at a future date at a price set at the time of the contract. A swap is an agreement between two parties to exchange payments based on a reference asset, which may be a currency or rate, but also may be a single asset, a pool of assets or an index of assets. A currency swap is an agreement between two parties to exchange one currency for another at agreed upon intervals and/or rates. An interest rate swap typically involves the exchange of one interest rate payment for another, such as a floating interest rate payment for a fixed payment. An inflation-linked swap is an agreement between two parties to exchange payments at a future date based on the difference between a fixed payment and a payment linked to the inflation rate at a future date. A total return swap is an agreement between two parties in which one party agrees to make payments of the total return of a reference asset in return for payments equal to a rate of interest on another reference asset. Swap transactions may be settled in U.S. dollars or Chinese yuan. A repurchase agreement is when a fund purchases securities or other obligations from a bank or securities dealer and simultaneously commits to resell them to a counterparty at an agreed-upon date or upon demand. Repurchase agreements are designed to result in a fixed rate of return for the Fund insulated from market fluctuations during the holding period. A futures contract may generally be described as an agreement for the future sale by one party and the purchase by another of a specified security or instrument at a specified price and time. The Fund may invest in interest rate and other futures contracts listed for trading on exchanges in China. A credit linked note is a type of structured note whose value is linked to an underlying reference asset or entity. Credit linked notes typically provide periodic payments of interest as well as payment of principal upon maturity. The decision to secure exposure through direct investment in bonds or indirectly through derivative transactions will be a function of, among other things, market accessibility, credit exposure, tax ramifications and regulatory requirements applicable to U.S. investment companies. If, subsequent to an investment, the 80% requirement is no longer met, the Fund’s future investments will be made in a manner that will bring the Fund into compliance with this policy. The Trust will provide the Fund’s shareholders with sixty (60) days’ prior notice of any change to this policy. In addition, under normal circumstances, the Fund will invest at least 70% of its assets in “Fixed Income Securities.” Fixed Income Securities include debt instruments, such as bonds, notes and other obligations, denominated in Chinese yuan or U.S. dollars; Fixed Income Securities do not include derivatives.
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