The Sponsor, with the assistance of Guggenheim Partners Investment Management, LLC (“GPIM”), an affiliate of Guggenheim Partners, LLC, has selected the securities to be included in the Trust’s portfolio according to the selection criteria described below.
The security selection process begins by identifying the entire universe of Closed-End Funds listed on a U.S. public securities exchange as provided by Morningstar. As of the security selection date, each Closed-End Fund is then ranked by:
- Current NAV Discount versus historic monthly NAV Discounts, a metric commonly referred to as a “Z-Score.” The lowest “Z-Score” values represent the deepest discounts relative to prior range of discounts, and also represent the highest rank.
- Trailing six month total return, where the highest values represent the highest rank.
Closed-End Funds with better ranks will be considered more strongly for inclusion in the Trust, subject to the Sponsor’s discretion. In addition, the Trust will be subject to the following constraints (as measured on the security selection date). For the constraints that reference Closed-End Fund classifications, the “Asset Category” and “Classification” attributes are sourced from Morningstar Traded Fund Center (formerly FundData).
- Exclude Closed-End Funds in the initial universe ranked in the worst 20% in any of the following three metrics: (i) current NAV Discount, where lower values rank better, (ii) “Z-score,” where lower “Z-score” values rank higher, or (iii) trailing six month total return, as sourced from FactSet, where the highest values represent the highest rank;
- No more than 60% in Closed-End Funds with “Asset Category” of “Equity”;
- No more than 60% in Closed-End Funds with “Asset Category” of “Taxable Fixed Income”;
- No more than 20% in Closed-End Funds with “Asset Category” of “Municipal”;
- No more than 30% in Closed-End Funds with “Asset Category” of “Hybrid (Growth & Income)”;
- No more than 25% in Closed-End Funds with the same “Classification”;
- Exclude securities with trading liquidity of less than $400,000 (or less than the median trading liquidity of the entire Closed-End Fund starting universe if that is less than $400,000). Trading liquidity is measured by the median daily dollar volume (daily volume times closing daily price) over the prior 30 trading days, as sourced from FactSet; and
- Exclude Closed-End Funds advised by the Sponsor or its affiliates.
Final Trust selections will be influenced by the rankings and constraints described above as well as the Sponsor’s outlook for an individual fund and/or Closed-End Fund marketplace. Closed-End Funds selected for the portfolio will be equally-weighted as of the selection date. 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 selection date.
Some of the securities held by the Closed- End Funds are income-producing securities, including corporate bonds, preferred securities and high-yield bonds. High-yield or “junk” bonds, the generic names for bonds rated below investment-grade, are frequently issued by corporations in the growth stage of their development or by established companies who are highly leveraged or whose operations or industries are depressed. Obligations rated below investment-grade should be considered speculative as these ratings indicate a quality of less than investment-grade. Because high-yield bonds are generally subordinated obligations and are perceived by investors to be riskier than higher rated securities, their prices tend to fluctuate more than higher rated securities and are affected by short-term credit developments to a greater degree.
Risks and Other Considerations
As with all investments, you may lose some or 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:
See “Investment Risks” in Part A of the prospectus and “Risk Factors” in Part B of the prospectus for additional information.
- Securities prices can be volatile. The value of your investment may fall over time. Market value fluctuates in response to various factors. These can include 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 of any bank and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
- 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.
- The Closed-End Funds are subject to annual fees and expenses, including a management fee. Unitholders of the Trust will bear these fees in addition to the 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. The Trust may be subject to greater risk of rising interest rates than would normally be the case due to the current period of historically low rates.
- 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. A Closed-End Fund or an issuer may suspend distributions during the life of the Trust. This may result in a reduction in 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. As the Trust is unmanaged, a downgraded security will remain in the portfolio.
- Closed-End Funds held by the Trust invest in municipal bonds. Municipal bonds are long-term fixed rate debt obligations that decline in value with increases in interest rates, an issuer’s worsening financial condition, a drop in bond ratings or when there is a decrease in the federal income tax rate. Typically, bonds with longer periods before maturity are more sensitive to interest rate changes. Municipal bonds generally generate income exempt from federal income taxation, but may be subject to the alternative minimum tax. In addition, some or all of the income generated by a Closed-End Fund may not be exempt from regular federal or state income taxes and as a result, the related income paid by the Trust may also be subject to regular federal and state income taxes. Capital gains, if any, may be subject to tax.
- Certain Closed-End Funds held by the Trust invest in securities that are rated below investment-grade and are considered to be “junk” securities. Below investment-grade obligations are considered 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 in falling rate environments.
- 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 foreign securities. Investment in foreign securities presents additional risk. 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 a country, 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.
- Certain Closed-End Funds held by the 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 by the Trust invest in common stocks. Common stocks represent a proportional share of ownership in a company. Common stock prices fluctuate for several reasons including changes in investors’ perceptions of the financial condition of an issuer, changes in the general condition of the relevant stock market, such as the market volatility recently exhibited, or when political or economic events affect the issuers. Common stock prices may also be particularly sensitive to rising interest rates, as the cost of capital rises and borrowing costs increase.
- 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.
- Economic conditions may lead to limited liquidity and greater volatility. The markets for fixed income securities, such as those held by 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 in significant 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 or declines in its holdings.
- 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.