AccuShares ETFs: A Look Under The Hood

June 15, 2016

How Much Does An Up Share Or Down Share Move?
Through the use of a share index factor ("SIF"), the Up and Down shares will have known class value responsiveness to index movements. The prospectus for each fund will have the particular details of the SIF calculation—the SIF is useful for all investors because it defines the dollar value change in class value for a 1-unit change in the fund's underlying index. The SIF is always: (a) the smallest class value on a SIF reset date, divided by (b) the index value.

For example, if the smallest class value is $23 (as above), and the index level is 11.5, the SIF is equal to 2. This means that as the index moves from 13 to 14 (or 13 to 12), each class value will move $2.00.

If the index increases by 1 index unit, the Up share class value increases by $2.00, and the Down share class value decreases by $2.00. Conversely, if the index decreases by 1 index unit (-1), it will have the opposite impact.

What Might Be The Benefits And Drawbacks Of Receiving Distributions?

Depending upon index movements and any interest earnings on a Fund's cash equivalent assets, holders of shares may receive distributions of cash. In certain limited instances, distributions may be in equal amounts of Up and Down shares—such share distributions of Up and Down shares are economically equivalent to a cash distribution. Any distribution of shares (instead of cash) may require the investor to incur transaction costs by selling one of the class shares, to maintain his or her position in relation to the underlying index.

Because the AccuShares Funds do not hold futures, swaps or other noncash positions, the Funds should have zero or limited taxable earnings, and cash distributions to U.S. taxable investors are expected to be all or mostly "return of capital" rather than dividends, and as such, not subject to taxation upon receipt (AccuShares does not provide tax advice. Investors should seek their own tax professional).

For those investors who do not seek to compound fund gains through immediate reinvestment (in the fund), this expected tax treatment of cash distributions can provide a tax-efficient mechanism for portfolio rebalancing—cash distributions can be redeployed to alternative investments without incurring the tax consequences of a share sale.

However, those investors who desire to compound received cash distributions to maintain their exposure will be subject to transaction costs relating to reinvestment, and may also have market exposure if share prices move from the time the distribution is received and the reinvestment is made.

How Do The AccuShares Funds Differ From Previous "Teeter-Totter" Funds?

AccuShares Funds make regular distributions and SIF resets. In addition to providing investors within known class value responsiveness, the regular SIF resetting and the Special Distribution trigger allow for the Funds to operate over wide swings in index levels. In contrast, Teeter-Totter funds collapse in the first large index move.

AccuShares Funds are also the first U.S.-listed two-share class ETFs in which a single Fund with a single asset pool (of cash and cash equivalents) issues multiple classes. In contrast, teeter-totter funds relied on multiple trusts, multiple issuers and multiple bilateral swaps, all of which introduced a range of complexities.

Additionally, AccuShares Funds are launched (and, when appropriate, "relaunched") to ensure that they align with existing liquid hedging instruments to assist with arbitrage activity and trading price alignment. In contrast, teeter-totter funds were designed and intended as buy-and-hold shares that risked closure in the event of large market moves.

The AccuShares Funds are designed to present ETF investors with alternatives not previously available. Additionally, the single fund, two-share class format is expected to create direct access to the same Up (or "long") and Down (or "inverse") return for all investor types.

The Fund is very complex and involves a significant degree of risk; therefore, it is not suitable for all investors. Moreover, shares of the Fund are intended for sophisticated, professional and institutional investors. The Fund Shares are only appropriate for short-term holding periods.

Unlike other exchange-traded products, the fund will engage principally in cash distributions and potentially paired share distributions to deliver to the shareholders the economic exposure to the Fund's Underlying Index. Such distributions may not represent any income or gains on the Fund's eligible assets and may represent a return of shareholder's capital. Each Fund will issue its shares in offsetting pairs, where one constituent of the pair is positively linked to the Fund's Underlying Index ("Up Shares") and the other constituent is negatively linked to the Fund's Underlying Index ("Down Shares"). Therefore, the Fund will only issue, distribute, maintain and redeem equal quantities of Up and Down shares at all times.

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