[The following "ETF Industry Perspective" is sponsored by AccuShares]
Today's range of ETFs is so broad that investors can execute a long or short position in almost any asset class without leaving the ETF marketplace. Conventional ETFs deliver their impressive range of long, short and geared positions through creatively accessing securities, futures and swaps. While most ETFs strive for simplicity, the underlying positions can introduce complexities in exposure, rebalancing and taxes.
AccuShares Funds are the first U.S.-listed funds with two share classes designed to eliminate many of these complications and enable investors to directly access both sides of a market through a single fund's shares.
Many investors have wanted to access the "short side" of a market without the complications and uncertainties that can come from daily rebalancing in conventional inverse funds. Conventional inverse funds are usually hampered by daily rebalancing, which can prevent them from delivering institutional returns—AccuShares Funds do not compound or rebalance daily, and the Down (or "inverse") shares are designed to mirror the Up (or "long") shares between index settings.
Similarly, many investors are discouraged from investing in certain ETFs because of the complexity of K-1 tax reporting.
AccuShares Funds provide investors market access without the burden of K-1s, as tax reporting is delivered through Form 1099.
AccuShares funds are designed to operate in markets where there are historically robust flows in products used by bullish and bearish investors such as conventional and inverse ETPs as well as previously attempted "teeter-totter" funds.
How Does A 2-Share Class Fund Work?
At fund launch (and immediately following each distribution date), the class values (aka the "NAV"s) for the Up and Down share classes are equal. Up shares are designed to increase the class value with an increase in the level of the index, and Down shares are designed to increase the class value with a decline in the level of the index. Index gains in either share class has a corresponding decline in the other share class.
Regular distribution dates are monthly, but an intramonth index movement of 75% or greater will trigger an interim ("Special") distribution.
AccuShares Funds hold only cash and cash equivalents, and the share classes receive any interest earned less Fund management fees.
When the index rises, the class value for the Up share is designed to increase, and the class value for the Down share is designed to decline.
The gain in the Up share class relating to the index increase is offset by a decline in the Down share class—it is this "offsetting" feature of the Fund's share classes that allows an AccuShares Fund to deliver index returns without reliance on transacting in securities related to the underlying index.
To illustrate the above concept, if the depicted share class values of 27 and 23 for the Up and Down shares, respectively, occurs on a distribution date, the Up share class would receive a distribution of 4 (i.e., 27-23).
Movements in share class values in either direction are subject to the Special distribution trigger and are limited to 90% between resets.
Investors should purchase Up or Down class shares based on their belief in the future direction of the underlying index.
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.
Key Risk Factors:
The Funds are not intended to be used as long-term passive investment vehicles and should be used by investors who understand the risks of the volatility market. By purchasing the Up Shares, investors should have an expectation that the Underlying Index will increase during the period between Distribution Dates. If the Underlying Index decreases during the time between Distribution Dates, investors in the Up Shares will experience a significant loss and could lose their entire investment. The Funds are not appropriate for you if you do not intend to actively monitor and manage your holdings in the Funds before and immediately following each Fund distribution date. By purchasing the Down Shares, investors should have an expectation that the Underlying Index will decrease during the period between Distribution Dates. If the Underlying Index increases during the time between Distribution Dates, investors in the Down Shares will experience a significant loss and could lose their entire investment. Funds are not appropriate for you if you do not intend to actively monitor and manage your holdings in the Funds before and immediately following each Fund distribution date.
Investing in the Fund involves substantial risk and high volatility, including possible loss of entire principal. Receipt of distributions of cash or shares will reduce an investor's opportunity for gains in subsequent periods. Special Distributions will alter the timing of distributions to investors and reduce an investor's opportunity for gains in subsequent periods. A Corrective Distribution will eliminate an investor's opportunity for gains relating to the Underlying Index if an investor fails to rebalance his/her investments. Net income distributions may not occur.
Decreases in Class Values per Share from distributions and/or net losses may reduce Class Values per Share leading to an adverse effect on the liquidity of the market for the Fund's Shares and may deplete the Fund's assets. Additionally, a less liquid market for the fund's shares would increase the difficulty for investors seeking to acquire or sell fund shares at any price. Moreover, a significant decline in the fund's class values may cause the sponsor to terminate the fund if its continued operation would be uneconomical.
AccuShares Trust I (formally known as AccuShares Commodity Trust I) is a Delaware statutory trust organized by AccuShares Management LLC, the trust's sponsor, into separate Fund series. Neither the Fund nor the Trust is an investment company under the Investment Company Act of 1940 or is subject to regulation under the Commodities Exchange Act or by the Commodity Futures Trading Commission, and investors in the Fund are not afforded protection under such laws and regulations. Each Fund's shares represent fractional undivided interests in and ownership of that Fund only. Each Fund will offer its shares on a continuous basis and be listed on the NASDAQ OMX.
Distributions and Exposure to Underlying Index:
Exposure to changes in an Underlying Index will be achieved through the allocation of the Fund's liquidation value to each of its share classes, and the resulting distribution to Fund shareholders of cash or cash and paired Up and Down shares on prescribed distribution dates. A Fund's Up shares will be entitled to a distribution when the Fund's Underlying Index has increased as of specified dates ("Regular Distributions") or by 75% ("Special Distributions"). Similarly, a Fund's Down shares will be entitled to a distribution when the Fund's Underlying Index has decreased as of specified dates ("Regular Distributions") or by 75% ("Special Distributions"). Any Regular or Special Distribution will not take into account any index change of more than 90%, in either direction, since the previous distribution date.
Regular and Special Distributions are expected to be made principally in cash, though the sponsor reserves the right to make all or any part of any such distribution in paired shares.
Distributions in Full or in Part:
Regular and/or Special Distributions will be paid in full or in part via paired shares in various circumstances: After the first six months of trading, where further cash distributions would adversely affect the liquidity of the market for the Fund's shares or impact the Fund's ability to meet minimum asset size Exchange listing standards. After the first six months of trading, if a distribution in cash would result in the Fund having aggregate Class Values of less than $25 million. If the Fund cannot liquidate its eligible Treasurys or eligible repos on reasonably acceptable terms. If the Sponsor becomes aware of any specific or general fund size limitation in the formal and written policy of any institutional investor who may hold shares of the Fund.
Investors who receive distributions in the form of paired shares should determine whether the distributed shares have altered the intended exposure. In the event of a paired share distribution, shares will be received that provide the opposite exposure, and as a result, an investor might consider selling the unwanted shares and purchasing the desired share class.
Sales and purchases of shares to maintain a desired exposure are subject to regular commissions and transaction costs.
The share class having an adverse experience from Underlying Index changes will receive no Regular or Special Distribution and will experience dilution in value caused by the distribution to the opposing share class. Please see the prospectus for other factors that could trigger a distribution of paired shares instead of cash.
Corrective distributions of shares ("Corrective Distributions") may occur if the Fund's share classes' exchange-trading prices deviate persistently from the value per share representing their share class' relative portion of the Fund's liquidation value ("Class Value per Share"). See "Investment Objectives," "Distributions and Distribution Dates" and "Description of the Shares & Certain Terms of the Trust Agreement."
Each Fund will hold only cash, short-dated U.S. Treasurys or eligible repurchase agreements collateralized by U.S. Treasurys. The Fund will not invest in commodities, futures, swaps or other derivatives. The Fund does not directly invest in the index, or in the securities it tracks.
Redemptions by Authorized Participants:
Fund Shares are not individually redeemable and will be issued and redeemed at their Class Value per Share only through certain authorized broker-dealers in blocks of Shares called creation units, consisting of 25,000 Up Shares and 25,000 Down Shares.
Authorized participants will pay a transaction fee of $600 per order plus 0.005% of the aggregate order value in connection with each order for the creation or redemption of creation units.
All other investors may only buy or sell a Fund's shares in the secondary market at current market prices, and may incur fees or brokerage commissions on their transactions. A Fund's Up and Down Shares will trade separately.
Secondary Market Purchases:
All other investors may only buy or sell a Fund's shares in the secondary market at current prices and may incur fees or brokerage commissions on their transactions. A Fund's Up and Down Shares will trade separately.
The Funds have been designed to be used by investors who are prepared to reassess their holding of the shares at least as frequently as each Distribution Date.
Investors in a Fund who wish to maintain a maximum exposure, a targeted absolute exposure or a targeted relative exposure to such Fund's Underlying Index over multiple Distribution Dates should reassess their positions following all cash, share and Net Income Distributions, and all Fund resets relating to the Share Index Factors.
The Funds will not compound investor gains or otherwise rebalance investor positions to maximize investor exposure.
The Funds are designed to make Regular Distributions of cash, and in some cases, shares to facilitate regular distribution of investor gains and to promote a deliberate and regular reassessment by investors of their investment in the Funds.
Investors who hold shares over one or more consecutive Distribution Dates without reassessment of their Fund share portfolio may experience decreased exposure to the Fund's Underlying Index as well as a reduced opportunity for gain and loss.
Class Value per Share:
As the funds make Regular and Special Distributions, in cash or in paired shares, the Class Value per Share will decline over time.
The fund anticipates making periodic reverse share splits in order to maintain NASDAQ OMX listing requirements. Reverse Splits are expected to occur in the event of a Special Distribution.
Foreside Fund Services, LLC Marketing Agent