The Trust's portfolio is divided into five different asset segments: common shares of closed-end investment companies ("Closed-End Funds"), common stocks/American Depositary Receipts ("ADRs"), master limited partnerships ("MLPs"), real estate investment Trusts ("REITs") and stocks of oil and energy companies/royalty Trusts that, according to their most recent Form 10-K filing with the Securities and Exchange Commission, derive the largest percentage of their total revenues from the oil and energy sector ("Oil & Energy Companies/Royalty Trusts"). ZIM uses a proprietary research database to categorize companies. Examples of industries that fall into the oil and energy sector are: oil exploration, oil production, integrated oil services and oil drilling. The selection methodology for each asset segment is described below. Certain of the Closed-End Funds selected for the Trust invest in high-yield or "junk" securities. Please see "Principal Risks" and "Investment Risks" for additional information about the risks of investing in high-yield or "junk" securities. The security selection process begins by identifying an initial universe of all securities that trade on at least one public North American securities exchange as of the Security Selection Date. These securities include only closed-end funds, common stocks, ADRs, MLPs, REITs and royalty Trusts. From this initial universe, the Trust portfolio is compiled using factors designed to identify securities in each segment below that meet certain investment criteria.
Closed-End Fund Segment
- First, closed-end funds, as of the Security Selection Date, which meet all of the following criteria are eliminated: those that do not pay a dividend, that are not trading at a discount to NAV, that do not have a net asset value greater than $300 million and that have liquidity of less than $1 million (where liquidity is defined as share price times the most recent three-month trading volume as reported to Zacks Investment Research, Inc. by Sungard Reference Data Solutions, Inc.)
- Then, select the 15 closed-end funds with the highest dividend yield as of the Security Selection Date, where dividend yield is defined as a fund's annual dividend (trailing 12 months dividend as reported by Morningstar) divided by its current market price. Add together each of the 15 closed-end funds' dividend yields to determine the aggregate dividend yield ("Aggregate Dividend Yield") of the Closed-End Fund Segment. Weight the 15 closed-end funds based on their individual contribution to the Aggregate Dividend Yield of the Closed-End Fund Segment. For example, if the Aggregate Dividend Yield of the Closed-End Fund Segment is 50%, a Closed-End Fund with a dividend yield of 3.5% will have a weighting equal to 7% (in other words, 3.5% divided by 50% equals 7%of the Aggregate Dividend Yield) of the Closed-End Fund Segment. The Closed-End Fund Segment will make up 10% of the Trust portfolio.
Common Stock/ADR Segment
- First, eliminate common stocks/ADRs of Closed-End Funds, REITs, MLPs and royalty Trusts.
- Next, common stocks/ADRs, as of the Security Selection Date, which meet all of the following criteria are eliminated: those with market caps not among the largest 1,000, with payout ratios greater than 80% (where payout ratio, reported by Zacks Investment Research, is defined as a company's most recent dividend per share divided by a company's most recently reported earnings per share) and that have liquidity of less than $2 million (where liquidity is defined as share price times the most recent three-month trading volume as reported to Zacks Investment Research, Inc. by Sungard Reference Data Solutions, Inc.)
- Then, select the 40 common stocks/ADRs with the highest dividend yield as of the Security Selection Date and weight them based on their individual contribution to the Aggregate Dividend Yield generated by the Common Stock/ADR Segment, which will make up 30% of the Trust portfolio.
- First, MLPs, as of the Security Selection Date, which meet all of the following criteria are eliminated: those with a share price of less than $10 and that have liquidity of less than $3 million (where liquidity is defined as share price times the most recent three-month trading volume as reported to Zacks Investment Research, Inc. by Sungard Reference Data Solutions, Inc.)
- Next, eliminate the 10% of remaining MLPs with the highest short interest, where short interest is defined as the percentage of MLP shares outstanding that are held short as reported to the New York Stock Exchange or the Nasdaq Stock Market on the 15th day and last day of each month (the most recent reporting will be used). Then, select the 15 MLPs with the highest dividend yield as of the Security Selection Date and weight them based on their individual contribution to the Aggregate Dividend Yield generated by the MLP Segment, which will make up17.5% of the Trust portfolio.
- First, REITs, as of the Security Selection Date, which meet all of the following criteria are eliminated: those with a share price of less than $10 and that have liquidity of less than $5million (where liquidity is defined as share price times the most recent three-month trading volume as reported to Zacks Investment Research, Inc. by Sungard Reference Data Solutions, Inc.)
- Next, eliminate the 10% of the remaining REITs with the highest short interest, where short interest is defined as the percentage of REIT shares outstanding that are held short as reported to the New York Stock Exchange or Nasdaq Stock Market on the 15th day and last day of each month (the most recent reporting will be used).
- Then, select the 20 REITs with the highest dividend yield as of the Security Selection Date and weight them based on their individual contribution to the Aggregate Dividend Yield generated by the REIT Segment, which will make up 20% of the Trust portfolio.
Oil & Energy Company/Royalty Trust Segment
- First, Oil & Energy Companies/Royalty Trusts, as of the Security Selection Date, which meet all of the following criteria are eliminated: those with a share price of less than $10 and that have liquidity of less than $3 million (where liquidity is defined as share price times the most recent three-month trading volume as reported to Zacks Investment Research, Inc. by Sungard Reference Data Solutions, Inc.)
- Next, select the 10 Oil & Energy Companies/Royalty Trusts with the highest dividend yield as of the Security Selection Date.
- Then, weight the 10 Oil & Energy Companies/Royalty Trusts based on their individual contribution to the aggregate liquidity of the Oil & Energy Company/Royalty Trust Segment, which will make up 22.5% of the Trust portfolio.
Final Trust Portfolio Construction Screen
The asset segments are combined to form the final portfolio. A final liquidity check is performed as follows: Any security eligible for inclusion in the Trust portfolio with liquidity of less than the estimated total dollar value of the security as of the Security Selection Date will be removed from the Trust portfolio and replaced by the next highest ranked security in the same asset segment.
In the event that a security that has a pending cash or stock merger and acquisition or bankruptcy which will lead to delisting the security is chosen, that security will be removed and the next security in the list will be selected for inclusion in the portfolio. Such events will be determined by reviewing the announced merger and acquisition data from Bloomberg and if the announced date falls before the Security Selection Date, an announcement of an agreement to be acquired in whole for cash or stock from an acquiring company or bankruptcy filing will cause removal.
In the event that a non-MLP security is selected which is not treated as a corporation for U.S. tax purposes, that non-MLP security will be removed and the next security in the list will be selected for inclusion in the portfolio.
Please note that due to the fluctuating nature of security prices, the weighting of an individual security or sector in the Trust portfolio may change after the Security Selection Date.
Zacks Investment Management
Zacks Investment Management, founded in1992 as a wholly owned subsidiary of Zacks Investment Research, one of the largest providers of independent research in the U.S.ZIM has over $1.8 billion in assets under management for retail and institutional clients in separately managed accounts that employ proprietary quantitative models and three mutual funds which it markets through its whole sale division. ZIM manages equity and fixed income portfolios for clients using a unique combination of Zacks independent research and Zacks proprietary quantitative models. The Trust will pay a portfolio consulting fee to ZIM for its assistance in the selection of the Trust portfolio.
Risks and Other Considerations
As with all investments, you may lose someor all of your investment in the Trust. No assurance can be given that the Trust's investment objective will be achieved. The Trust also might not perform as well as you expect. This can happen for reasons such as these:
- Securities prices can be volatile.The value of your investment may fall overtime. Market value fluctuates in response to various factors. These caninclude stock market movements, purchases or sales of securities by the Trust, government policies, litigation, and changes in interest rates, inflation, the financial condition of the securities' issuer or even perceptions of the issuer.Units of the Trust are not deposits ofany bank and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
- Due to the current state of the economy, the value of the securities held by the Trust may be subject to steep declines or increased volatility due to changes in performance or perception of the issuers.Starting in December 2007, economic activity declined across all sectors of the economy, and the United States experienced increased unemployment.The economic crisis affected the global economy with European and Asianmarkets also suffering historic losses.Standard & Poor's Rating Serviceslowered its long-term sovereign credit rating on the United States to "AA+" from "AAA," which could lead to increased interest rates and volatility. Extraordinary steps have been taken by the governments of several leading countries to combat the economic crisis; however, the impact of these measures is not yet fully known and cannot bepredicted.
- The Trust invests in MLPs. MLPs are limited partnerships or limited liability companies that are taxed as partnerships and whose interests (limited partnership units or limited liability company units) are traded onsecurities exchanges like shares of common stock. Currently, most MLPs operate in the energy, natural resources or real estate sectors. Investments in MLP interests are subject to the risks generally applicable to companies int he energy and natural resources sectors, including commodity pricing risk, supply and demand risk, depletion risk and exploration risk.
- The Trust includes securities issued by companies in the energy sector.The Trust is concentrated in the energy sector. As a result, the factors that impact the energy sector will likely have a greater affect on this Trust than amore broadly diversified Trust. Some of the risks associated with the energy sector are listed below. Companies in the energy sector are subject to volatile fluctuations in price and supply of energy fuels, and can be impacted by international politics and conflicts, including the unrest in Iraq and hostilities in the Middle East, terrorist attacks, the success of exploration projects, reduced demand as a result of increases in energy efficiency and energy conservation, natural disasters, clean-up and litigation costs associated with environmental damage and extensive regulation.
- The Trust invests and certain Closed-End Funds held by the Trust may invest in securities issued by small-capitalization and mid-capitalization companies.These securities customarily involve more investment risk than securities of large-capitalization companies. Small-capitalization and mid-capitalization companies may have limited product lines, markets or financial resources and may be more vulnerable to adverse general market or economic developments.
- The Trust includes Closed-End Funds.Closed-End Funds are actively managed investment companies that invest in various types of securities. Closed-End Funds issue common shares that are traded on a securities exchange. Closed-End Funds are subject to various risks, including management's ability to meet the Closed-End Fund's investment objective and to manage the Closed-End Fund's portfolio during periods of market turmoil and as investors' perceptions regarding Closed-End Funds or their underlying investments change. Closed-End Funds are not redeemable at the option of the shareholder and they may trade in the market at a discount to their net asset value. Closed-End Funds may also employ the use of leverage which increases risk and volatility. Instability in the auction rate preferred shares market may affect the volatility of Closed-End Funds that use such instruments to provide leverage.
- The Closed-End Funds are subject to annual fees and expenses, including amanagement fee.Unit holders of the Trust will bear these fees in addition tothe fees and expenses of the Trust. See"Fees and Expenses" for additional information.
- The value of the fixed-income securities in the Closed-End Funds will generally fall if interest rates, in general, rise.Typically, fixed-income securities with longer periods before maturity are more sensitive to interest rate changes.
- A Closed-End Fund or an issuer of securities held by a Closed-End Fund may be unwilling or unable to make principal payments and/or to declare distributions in the future, may call a security before its stated maturity, or may reduce the level of distributions declared. This may result in a reductionin the value of your units.
- The financial condition of a Closed-End Fund or an issuer of securities held by a Closed-End Fund may worsen, resulting in a reduction in the value of your units. This may occur at any point in time, including during the primary offering period.
- Certain Closed-End Funds held bythe Trust invest in securities that are rated below investment-grade and are considered to be "junk" securities. Below investment-grade obligations a reconsidered to be speculative and are subject to greater market and credit risks, and accordingly, the risk of non-payment or default is higher than with investment-grade securities. In addition,such securities may be more sensitive to interest rate changes and more likely to receive early returns of principal.
- Certain Closed-End Funds held by the Trust may invest in securities that are rated as investment-grade by only one rating agency. As a result, such split-rated securities may have more speculative characteristics and are subject to a greater risk of default than securities rated as investment-grade by more than one rating agency.
- Certain Closed-End Funds held by the Trust invest in preferred securities. Preferred securities are typically subordinated to bonds and other debt instruments in a company'scapital structure in terms of priority to corporate income and therefore will be subject to greater credit risk than those debt instruments.
- Share prices or dividend rates on the securities in the Trust may decline during the life of the Trust. There is no guarantee that the issuers of the securities will declare dividends in the future and, if declared, whether they will remain at current levels or increase over time.
The Trust and certain Closed-End Funds held by the Trust invest in ADRs, U.S.-listed foreign securities and foreign securities listed on a foreign exchange.The Trust's investment in ADRs and foreign securities presents additional risk.ADRs are issued by a bank or Trust company to evidence ownership of underlying securities issued by foreign corporations. Securities of foreign issuers present risks beyond those of domestic securities. More specifically, foreign risk is the risk that foreign securities will be more volatile than U.S. securities due to such factors as adverse economic, currency, political, social or regulatory developments in acountry, including government seizure of assets, excessive taxation, limitations on the use or transfer of assets, the lack of liquidity or regulatory controls with respect to certain industries or differing legal and/or accounting standards. In addition, the Trust's investment in Energy Companies may expose unit holders to additional risks that maybe associated with Canada or the Canadian securities markets.
- The Trust and certain Closed-End Funds held by the Trust include securities whose value may be dependent on currency exchange rates. The U.S. dollar value of these securities may vary with fluctuations in foreign exchange rates. Most foreign currencies have fluctuated widely in value against the U.S. dollar for various economic and political reasons such as the activity level of large international commercial banks, various central banks, speculators, hedge funds and other buyers and sellers of foreign currencies.
- Certain Closed-End Funds held bythe Trust invest in securities issued by companies headquartered or incorporated in countries considered to be emerging markets. Emerging markets are generally defined as countries with low per capita income in the initial stages of their industrialization cycles. Risks of investing in developing or emerging countries include the possibility of investment and trading limitations, liquidity concerns, delays and disruptions in settlement transactions, political uncertainties and dependence on international trade and development assistance. Companies headquartered in emerging market countries may be exposed to greater volatility and market risk.
- Certain Closed-End Funds held bythe Trust invest in senior loans. Borrowers under senior loans may default on their obligations to pay principal or interest when due. This non-payment would result in a reduction of income to the applicable Closed-End Fund, a reduction in the value of the senior loan experiencing non-payment and a decrease in the net asset value of the Closed-End Fund. Although senior loans in which the Closed-End Funds invest may be secured by specific collateral, there can be no assurance that liquidation of collateral would satisfythe borrower's obligation in the event of non-payment of scheduled principal or interest or that such collateral could bereadily liquidated.
Senior loans in which the Closed-EndFunds invest:
—generally are of below investment-grade credit quality;
—may be unrated at the time of investment;
—generally are not registered with the Securities and Exchange Commission ("SEC") or any statesecurities commission; and
—generally are not listed on anysecurities exchange.
In addition, the amount of publicinformation available on senior loansgenerally is less extensive than thatavailable for other types of assets.
- The Trust may invest in companies that are considered to be passive foreign investment companies ("PFICs"). In general, PFICs are certain non-U.S. corporations that receive at least 75% of their annual gross income from passive sources (such as interest, dividends, certain rents and royalties or capital gains) or that hold at least 50% of their assets in investments producing such passive income. As a result of an investment in PFICs, the Trust could be subject to U.S.federal income tax and additional interest charges on gains and certain distributions with respect to those equity interests, even if all the income or gain is distributed to its unit holders in a timely manner. The Trust will not be able to pass through to its unit holders any credit or deduction for such taxes.
- Economic conditions may lead to limited liquidity and greater volatility.The markets for fixed-income securities, such as those heldby certain Closed-End Funds, may experience periods of illiquidity and volatility. General market uncertainty and consequent repricing risk have led to market imbalances of sellers and buyers, which in turn have resulted insignificant valuation uncertainties in a variety of fixed-income securities.These conditions resulted, and in many cases continue to result in, greater volatility, less liquidity, widening credit spreads and a lack of price transparency, with many debt securities remaining illiquid and of uncertain value. These market conditions may make valuation of some of the securities held by a Closed-End Fund uncertain and/or result in sudden and significant valuation increases ordeclines in its holdings.
- The Trust invests in REITs. REITs may concentrate their investments in specific geographic areas or in specific property types, such as, hotels, shopping malls, residential complexes and office buildings. The value of the REITs and other real estate securities and the ability of such securities to distribute in comemay be adversely affected by several factors, including: rising interest rates; changes in the global and local economic climate and real estate conditions; perceptions of prospective tenants of the safety, convenience and attractiveness of the properties; the ability of the owner to provide adequate management, maintenance and insurance; increased competition from new properties; the impact of present or future environmental legislation and compliance with environmental laws; changes in real estate taxes and other operating expenses; adverse changes in governmental rules and fiscal policies; adverse changes in zoning laws; declines in the value of real estate; the downturn in the subprime mortgage lending market and the reale state markets in the United States; and other factors beyond the control of the issuer of the security.
- Inflation may lead to a decrease in the value of assets or income from investments.
- The Sponsor does not actively manage the portfolio. The Trust will generally hold, and may, when creating additional units, continue to buy, the same securities even though a security's outlook, market value or yield may have changed.
See "Investment Risks" in Part A of the prospectus and "Risk Factors" in Part B of the prospectus for additional information.