The Trust’s portfolio was constructed using the Security Selection Rules described below.
Security Selection Rules:
In constructing the Trust’s portfolio, 30 securities were selected based on the following rules-based criteria. Except as set forth herein, the investment strategy utilizes information provided by FactSet Research Systems, Inc.
- Initial Universe: Start with an initial universe of equity securities in the Morningstar Emerging Markets Index (common shares or depositary receipts referencing common shares) which also meet the following criteria as of the security selection date:
- Exclude securities with a market capitalization less than $200 million. Market capitalization is determined by the closing price as of the security selection date. If the security is not U.S. dollar-denominated, the currency rate used for the security is the closing price, with currency exchange rates provided by WM/Reuters.
- Exclude securities with a liquidity of less than $1 million calculated as the median of 90 days of dollar trading volume looking back from the security selection date (i.e., trading volume in shares multiplied by the closing price for the day, with currency exchange rates provided by WM/Reuters when share price is non-U.S. dollar-denominated).
- For companies with multiple listings, only one security is included. Preference is given to a ADR traded on either the New York Stock Exchange or NASDAQ Stock Market, if available, or to the most liquid security, as determined by the above calculation, if the company is only traded on non-U.S. exchanges.
- Rank on Fundamentals: Rank every company identified in the initial universe against other companies in the same sector, as provided by FactSet Industry Classification System, along each of the following reported financial metrics. Each ranking is determined as of the security selection date using the most recently reported information and uses a scale of 1 through 10 (1 representing the highest scoring 10% in the sector and 10 representing the lowest scoring 10% in the sector):
- Return on assets as provided by FactSet Research Systems, Inc., and calculated as latest four quarters of reported operating income divided by the average of most recent reported total assets and year ago reported total assets.
- Earnings before interest and taxes for the latest four quarters divided by enterprise value, as provided by FactSet Research Systems, Inc. Enterprise value is determined by adding the equity market capitalization as of the most recent closing price with the total outstanding long term and short term debt as determined by the most recently available balance sheet, and then subtracting any cash and short term investments as determined by the most recently available balance sheet.
- Year-over-year growth in sales per share, as provided by FactSet Research Systems, Inc. Trailing year-over-year growth is the percentage change in sales per-share for the trailing 12 months versus the sales per-share from the prior 12 months. Sales per-share is the trailing 12 months of sales from the most recent trailing quarterly or semi-annual filings, whichever is most current, divided by the end of period reported count of common shares outstanding used to calculate basic earnings per share. Trailing year-over-year growth is the percentage change in sales per-share for the trailing 12 months versus the sales per-share from the prior 12 months. Sales per-share is the trailing 12 months of sales from the most recent trailing quarterly or semi-annual filings, whichever is most current, divided by the end of period reported count of common shares outstanding used to calculate basic earnings per share. Each financial metric will create a separate score so that every company will have three scores. These three scores are averaged together to create one composite score for a company. This composite score is used to rank the companies in the next step in order to determine the sub-universe of securities.
- Define Sub-Universe: Reduce the initial universe of securities to a sub-universe that meets the following requirements, with each requirement being applied independently to the initial universe from the other requirements in this step, as of the security selection date:
- Exclude the lowest ranked 25% of securities from the initial universe determined by the average of the three financial rankings described in step 2.
- Exclude the 20% of the initial universe with the lowest trailing six month total return.
- Exclude securities not listed on a public securities exchange located in one of the following countries: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Mexico, the Netherlands, New Zealand, Norway, the Philippines, Singapore, South Africa, Spain, Sri Lanka, Sweden, Switzerland, the United Kingdom and the United States.
- Exclude securities that have a pending cash or stock merger and acquisition or bankruptcy which will lead to delisting the security from the qualifying exchanges above. 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 exclusion.
- Selection: Select from the sub-universe the 30 top dividend yielding securities (based on the “indicated dividend yield” as provided by Bloomberg L.P. and with higher rank given to larger market capitalization when yields are equal) and equally weight these securities as of the security selection date. Selected securities must adhere to following portfolio limits as of the security selection date:
- Maximum 20% weight in any sector as of the security selection date.
- Maximum one-third weight will be within the top 70% of the cumulative capitalization of the Morningstar Emerging Markets Index.
- Minimum two-thirds weight will be within the top 90% of the cumulative capitalization of the Morningstar Emerging Markets Index.
- Maximum 40% weight in any one geographic region as of the security selection date. Geographic regions are based on a selected company’s country of headquarters and are defined as follows: Africa, Australasia, Eastern Europe, Far East Asia, Latin America, Middle East, North America, South Asia and Western Europe.
- Country weight (as categorized by Morningstar) must remain within +/- 10% of the same country weight within the Morningstar Emerging Markets Index.
- Maximum of 25% of the Trust portfolio in securities traded on a non-U.S. public securities exchange.
Once an investment limitation has been reached, additional securities of that type will not be included in the Trust and the next highest yielding security will be used.
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.
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:
- 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. Changes in legal, political, regulatory, tax and economic conditions may cause fluctuations in markets and securities prices, which could negatively impact the value of the Trust. Additionally, event such war, terrorism, natural and environmental disasters and the spread of infectious illnesses or other public health emergencies may adversely affect the economy, various markets and issuers. Recently, the outbreak of a novel and highly contagious form of coronavirus (“COVID-19”) has adversely impacted global commercial activity and contributed to significant volatility in certain markets. Many governments and businesses have instituted quarantines and closures, which has resulted in significant disruption in manufacturing, supply chains, consumer demand and economic activity. The potential impacts are increasingly uncertain, difficult to assess and impossible to predict, and may result in significant losses. Any adverse event could materially and negatively impact the value and performance of Trust and the Trust’s ability to achieve its investment objectives. 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.
- Securities selected according to this strategy may not perform as intended. The Trust is exposed to additional risk due to its policy of investing in accordance with an investment strategy. Although the Trust’s investment strategy is designed to achieve the Trust’s investment objective, the strategy may not prove to be successful. The investment decisions may not produce the intended results and there is no guarantee that the investment objective will be achieved.
- The Trust is concentrated in securities issued by Asian companies. As a result, political, economic or social developments in Asia may have a significant impact on the securities included in the Trust. Certain Asian economies have experienced rapid growth and industrialization, while other Asian economies have experienced high inflation, high unemployment, currency devaluations and restrictions, and over-extension of credit. Many Asian countries are subject to political risk, including political instability, corruption and regional conflict with neighboring countries. In addition, many Asian countries are subject to social and labor risks associated with demands for improved political, economic and social conditions.
- The Trust is concentrated in securities issued by companies located in China. As a result, political, economic or social developments in China may have a significant impact on the securities included in the Trust. China is an emerging market and demonstrates significantly higher volatility from time to time in comparison to developed markets. The central government has historically exercised substantial control over virtually every sector of the Chinese economy through administrative regulation and/or state ownership and actions of the Chinese central and local government authorities continue to have a substantial effect on economic conditions in China. Export growth continues to be a major driver of China's rapid economic growth. Reduction in spending on Chinese products and services, institution of tariffs or other trade barriers, or a downturn in any of the economies of China's key trading partners may have an adverse impact on the Chinese economy. Recent developments in relations between the U.S. and China have heightened concerns of increased tariffs and restrictions on trade between the two countries. An increase in tariffs or trade restrictions, or even the threat of such developments, could lead to a significant reduction in international trade, which could have a negative impact on China's export industry and a commensurately negative impact on the Trust.
- The Trust invests in ADRs, a GDR and foreign securities listed on a foreign exchange. The Trust’s investment in ADRs, a GDR and foreign securities listed on a foreign exchange presents additional risk. ADRs and GDRs 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 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.
- The Trust includes securities issued by companies headquartered 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.
- The Trust includes 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.
- The Trust invests 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 may be susceptible to potential risks through breaches in cybersecurity. A breach in cybersecurity refers to both intentional and unintentional events that may cause the Trust to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause the Sponsor of the Trust to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cybersecurity breaches of the Trust’s third-party service providers, or issuers in which the Trust invests, can also subject the Trust to many of the same risks associated with direct cybersecurity breaches.
- The Trust is subject to risks arising from various operational factors and their service providers. Operational factors include, but not limited to, human error, processing and communication errors, errors of the Trust’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. Additionally, the Trust may be subject to the risk that a service provider may not be willing or able to perform their duties as required or contemplated by their agreements with the Trust. Although the Trust seeks to reduce these operational risks through controls and procedures, there is no way to completely protect against such risks.
- Share prices or dividend rates on the securities in the Trust may decline during the life of the Trust. There is no guarantee that share prices of the securities in the Trust will not decline and 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.
- 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.