STATEMENT OF ADDITIONAL INFORMATION
Dated October 31, 2007 (as supplemented on November 28, 2007 and March 3, 2008)
This Statement of Additional Information ("SAI") is not a Prospectus. With
respect to each of the Trust's series portfolios listed below (except the
SPDR(R) Lehman High Yield Bond ETF), this SAI should be read in conjunction with
the Prospectuses dated October 31, 2007, as they may be revised from time to
time. With respect to the SPDR(R) Lehman High Yield Bond ETF, this SAI should be
read in conjunction with the Prospectus dated November 28, 2007, as it may be
revised from time to time. Each of the foregoing Prospectuses may be referred to
herein as a "Prospectus."
EQUITY ETFS
SPDR(R) DJ WILSHIRE TOTAL MARKET ETF
SPDR(R) DJ WILSHIRE LARGE CAP ETF
SPDR(R) DJ WILSHIRE LARGE CAP GROWTH ETF
SPDR(R) DJ WILSHIRE LARGE CAP VALUE ETF
SPDR(R) DJ WILSHIRE MID CAP ETF
SPDR(R) DJ WILSHIRE MID CAP GROWTH ETF
SPDR(R) DJ WILSHIRE MID CAP VALUE ETF
SPDR(R) DJ WILSHIRE SMALL CAP ETF
SPDR(R) DJ WILSHIRE SMALL CAP GROWTH ETF
SPDR(R) DJ WILSHIRE SMALL CAP VALUE ETF
SPDR(R) DJ GLOBAL TITANS ETF
DJ WILSHIRE REIT ETF
KBW BANK ETF
KBW CAPITAL MARKETS ETF
KBW INSURANCE ETF
MORGAN STANLEY TECHNOLOGY ETF
SPDR(R) S&P(R) DIVIDEND ETF
SPDR(R) S&P(R) AEROSPACE & DEFENSE ETF
SPDR(R) S&P(R) BIOTECH ETF
SPDR(R) S&P(R) BUILDING & CONSTRUCTION ETF
SPDR(R) S&P(R) COMPUTER HARDWARE ETF
SPDR(R) S&P(R) COMPUTER SOFTWARE ETF
SPDR(R) S&P(R) HEALTH CARE EQUIPMENT ETF
SPDR(R) S&P(R) HEALTH CARE SERVICES ETF
SPDR(R) S&P(R) HOMEBUILDERS ETF
SPDR(R) S&P(R) LEISURETIME ETF
SPDR(R) S&P(R) METALS & MINING ETF
SPDR(R) S&P(R) OIL & GAS EQUIPMENT & SERVICES ETF
SPDR(R) S&P(R) OIL & GAS EXPLORATION & PRODUCTION ETF
SPDR(R) S&P(R) OUTSOURCING & IT CONSULTING ETF
SPDR(R) S&P(R) PHARMACEUTICALS ETF
SPDR(R) S&P(R) RETAIL ETF
SPDR(R) S&P(R) SEMICONDUCTOR ETF
SPDR(R) S&P(R) TELECOM ETF
SPDR(R) S&P(R) TRANSPORTATION ETF
KBW REGIONAL BANKING(SM) ETF
KBW MORTGAGE FINANCE(SM) ETF
FIXED INCOME ETFS
SPDR(R) LEHMAN 1-3 MONTH T-BILL ETF
SPDR(R) LEHMAN SHORT TERM MUNICIPAL BOND ETF
SPDR(R) LEHMAN INTERMEDIATE TERM TREASURY ETF
SPDR(R) LEHMAN LONG TERM TREASURY ETF
SPDR(R) BARCLAYS CAPITAL TIPS ETF
SPDR(R) LEHMAN CALIFORNIA MUNICIPAL BOND ETF
SPDR(R) LEHMAN NEW YORK MUNICIPAL BOND ETF
SPDR(R) LEHMAN MUNICIPAL BOND ETF
SPDR(R) LEHMAN AGGREGATE BOND ETF
SPDR(R) LEHMAN INTERNATIONAL TREASURY BOND ETF
SPDR(R) LEHMAN HIGH YIELD BOND ETF
Capitalized terms used herein that are not defined have the same meaning as in
the Prospectus, unless otherwise noted. Copies of the Prospectus may be obtained
without charge by writing to State Street Global Markets, LLC, the Trust's
principal underwriter (referred to herein as "Distributor" or "Principal
Underwriter"), State Street Financial Center, One Lincoln Street, Boston,
Massachusetts 02111. The Report of Independent Registered Public Accounting
Firm, financial highlights and financial statements of the Funds included in the
Trust's Annual Report to Shareholders for the fiscal year ended June 30, 2007,
and the Trust's Semi-Annual Report to Shareholders for the period ended December
31, 2006, are incorporated by reference into this Statement of Additional
Information.
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TABLE OF CONTENTS
General Description of the Trust.................................... 3
Investment Policies................................................. 9
Special Considerations and Risks.................................... 23
Investment Restrictions............................................. 25
Exchange Listing and Trading........................................ 26
Management of the Trust............................................. 28
Brokerage Transactions.............................................. 39
Book Entry Only System.............................................. 42
Purchase and Redemption of Creation Units........................... 53
Determination of Net Asset Value.................................... 58
Dividends and Distributions......................................... 59
Taxes............................................................... 59
Capital Stock and Shareholder Reports............................... 65
Counsel and Independent Registered Public Accounting Firm........... 66
Local Market Holiday Schedules...................................... 66
Financial Statements................................................ 68
Proxy Voting Polices and Procedures................................. 32 and 69
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GENERAL DESCRIPTION OF THE TRUST
The Trust is an open-end management investment company. As of the date of this
SAI, the Trust consists of forty-eight (48) investment series (each a "Fund" and
collectively the "Funds"). The Trust was organized as a Massachusetts business
trust on June 12, 1998. The Trust is an open-end management investment company,
registered under the Investment Company Act of 1940, as amended (the "1940 Act")
and the offering of each Fund's shares is registered under the Securities Act of
1933, as amended (the "Securities Act"). The shares of each Fund are referred to
herein as "Shares." The investment objective of each Fund is to provide
investment results that, before fees and expenses, correspond generally to the
total return, (or in the case of the SPDR Dividend ETF and all Fixed Income
ETFs, the price and yield performance) of a specified market index (each an
"Index"). SSgA Funds Management, Inc. (the "Adviser") manages each Fund.
Each Fund (except the SPDR Lehman Short Term Municipal Bond ETF, SPDR Lehman
Municipal Bond ETF, SPDR Lehman California Municipal Bond ETF, SPDR Lehman New
York Municipal Bond ETF, SPDR Lehman International Treasury Bond ETF and SPDR
Lehman High Yield Bond ETF) offers and issues Shares at their net asset value
only in aggregations of a specified number of Shares (each, a "Creation
Unit")(1) generally in exchange for a basket of securities included in its Index
("Deposit Securities") together with the deposit of a specified cash payment
("Cash Component"). The SPDR Lehman Short Term Municipal Bond ETF, SPDR Lehman
Municipal Bond ETF, SPDR Lehman California Municipal Bond ETF, SPDR Lehman New
York Municipal Bond ETF, SPDR Lehman International Treasury Bond ETF and SPDR
Lehman High Yield Bond ETF generally offer and issue Shares in exchange only for
a cash payment equal in value to the Deposit Securities ("Deposit Cash")
together with the Cash Component, as described in more detail below. The Trust
reserves the right to permit or require the substitution of a "cash in lieu"
amount to be added to the Cash Component to replace any Deposit Security and
reserves the right to permit or require the substitution of Deposit Securities
in lieu of Deposit Cash (subject to applicable legal requirements). The Shares
have been approved for listing and secondary trading on the American Stock
Exchange (the "Exchange"). The Shares will trade on the Exchange at market
prices. These prices may differ from the Shares' net asset values. The Shares
are also redeemable only in Creation Unit aggregations, and generally in
exchange for portfolio securities and a specified cash payment. A Creation Unit
of each Equity Fund consists of 50,000 Shares and a Creation Unit of each Income
Fund consists of 200,000 Shares.
With respect to the SPDR Lehman Short Term Municipal Bond ETF, SPDR Lehman
Municipal Bond ETF, SPDR Lehman California Municipal Bond ETF and SPDR Lehman
New York Municipal Bond ETF, the Trust will accept offers to purchase Creation
Units generally for in kind securities; however, the Trust may from time to time
accept cash in lieu of in kind securities at its discretion. With respect to the
SPDR Lehman International Treasury Bond ETF, the Trust will accept offers to
purchase Creation Units and offers to redeem Creation Units generally for cash
only (subject to applicable legal requirements); however, the Trust may from
time to time accept in kind securities in lieu of cash at its discretion. With
respect to SPDR Lehman High Yield Bond ETF, the Trust will accept offers to
purchase Creation Units for cash; however the Trust may from time to time accept
in kind securities in lieu of cash at its discretion. Additionally, the Trust
will accept offers to redeem Creation Units of SPDR Lehman High Yield Bond ETF
generally for in kind securities; however, the Trust may, from time to time,
distribute cash redemption proceeds in lieu of in kind securities at its
discretion. The Trust also reserves the right to accept offers to purchase or
redeem Creation Units in cash for Funds other than the SPDR Lehman Short Term
Municipal Bond ETF, SPDR Lehman Municipal Bond ETF, SPDR Lehman California
Municipal Bond ETF, SPDR Lehman New York Municipal Bond ETF, the SPDR Lehman
International Treasury Bond ETF and SPDR Lehman High Yield Bond ETF, although it
has no current intention of doing so. Shares may be issued in advance of receipt
of Deposit Securities subject to various conditions including a requirement to
maintain on deposit with the Trust cash at least equal to a specified percentage
of the market value of the missing Deposit Securities as set forth in the
Participant Agreement (as defined below). See "PURCHASE AND REDEMPTION OF
CREATION UNITS." In each instance of such cash creations or redemptions, the
Trust may impose transaction fees that will be higher than the transaction fees
associated with in-kind creations or redemptions. In all cases, such fees will
be limited in accordance with the requirements of the Securities and Exchange
Commission (the "SEC") applicable to management investment companies offering
redeemable securities.
The SPDR Lehman 1-3 Month T-Bill ETF, SPDR Lehman Intermediate Term Treasury ETF
and SPDR Lehman Long Term Treasury ETF may sometimes be collectively referred to
herein as the "Treasury ETFs." The SPDR Barclays Capital TIPS ETF may sometimes
be referred to herein as the "TIPS ETF." The SPDR Lehman Aggregate Bond ETF may
sometimes be referred to herein as the "Aggregate Bond ETF." The SPDR Lehman
Short Term Municipal Bond ETF, SPDR Lehman Municipal Bond ETF, SPDR Lehman
California Municipal Bond ETF and SPDR Lehman New York Municipal Bond ETF may
sometimes be referred to herein as the "Municipal Bond ETFs." The SPDR Lehman
International Treasury Bond ETF may sometimes be referred to herein as the
(1) Except that under the "Dividend Reinvestment Service" described herein,
however, shares may be created in less than a Creation Unit and upon
termination of a Fund, shares may be redeemed in less than a Creation Unit.
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"International Treasury Bond ETF." The SPDR Lehman High Yield Bond ETF may
sometimes be referred to herein as the "High Yield Bond ETF."
ADDITIONAL INDEX INFORMATION
Additional Information with respect to the Dow Jones Wilshire 5000 Composite
Index
The Dow Jones Wilshire 5000 Composite Index (the "Composite Index") sets
certain criteria an issuer must meet before a security can be included in the
Composite Index. To be included in the Composite Index, an issue must be all of
the following:
- An equity issue: a common stock, REIT or limited partnership;
- A security that has its primary market listing in the U.S.; and
- A U.S.-headquartered company.
A company in the Composite Index may be technically based outside of the U.S.,
but considered by the investment community to be "headquartered" in the U.S.
The Composite Index does not include bulletin board listed stocks.
The aggregate value of the Composite Index is based on the following criteria:
- Market capitalization;
- Trading volume;
- Institutional holdings; and
- If applicable, any conversion rules for companies with multiple share
classes.
The capitalization float adjustment of the Composite Index is based on the
following rules:
- Shares outstanding for multiple classes of stock of one company are
combined into the primary class's shares outstanding to reflect the
company's total market capitalization.
- Float adjustments are based on block ownership of each class of stock,
and then are combined to determine total float for a company's
combined shares.
- Float-adjustment factors will be implemented only if the blocked
shares are greater than 5% of the company's total shares outstanding.
Periodic adjustment and ongoing maintenance and review of the Composite Index
are based on the following rules:
- Stock additions and deletions are made after the close of trading on
the third Friday of each month. The additions include all new
non-component companies that met inclusion standards as of the close
of trading on the second Friday of that month, whether from initial
public offerings or new exchange listing.
- An issue that becomes a pink sheet or otherwise stops trading for ten
consecutive days will be removed from the Composite Index at the next
monthly review. It will be removed at its latest quoted value, or at
$0.01 if no recent quoted value is available. Until the monthly
review, the issue will remain in the Composite Index at its last
exchange-traded price.
- Additions and deletions are pre-announced by the second day prior to
the implementation date.
- An issue that fails index inclusion guidelines is removed from the
Composite Index as soon as prudently possible.
- Periodic shares updates are made quarterly after the close of trading
on the third Friday of March, June, September and December. The
changes become effective at the opening of trading on the next
business day.
- If the cumulative impact of corporate actions during the period
between quarterly shares updates changes a company's float-adjusted
shares outstanding by 10% or more, the company's shares and float
factor will be updated as soon as prudently possible. Share and float
changes based on corporate actions will be implemented using standard
Dow Jones Indexes procedures.
Additional Information with respect to the Dow Jones Global Titans 50 Index U.S.
Close
In constructing the Dow Jones Global Titans 50 Index U.S. Close (the
"Global Titans Index"), a unique multi-factor methodology is adopted. First the
5,000 stocks of the Dow Jones Global Indexes are used as the Initial Pool with a
view towards ensuring that all candidates are investable, liquid and
representative of the global markets. Market capitalization is then used as the
first screen to create the Final Pool by selecting the top 100 companies. Dow
Jones' rationale for this step is that market value is a universal measurement
across industries, and also that its use is most appropriate for an index built
for investment purposes. Every company in the final pool of 100 must derive some
revenue from outside its home country. This screen is instituted to ensure that
all of the Titans selected are
4
truly Global companies. The next step in index construction is to combine the
Final Pool components' market capitalization rankings with their rankings
according to four other indicators of size and leadership. These four
indicators, two from the balance sheet and two from the income statement, are
assets, book value, sales/revenue, and net profit. The combined rankings of
these four fundamental factors determine the fundamental rank of each company.
The fundamental rank and the market cap rank are used equally as the basis for
selecting the index components. The inclusion of a stock in the Global Titans
Index in no way implies that Dow Jones believes the stock to be an attractive
investment, nor is Dow Jones a sponsor or in any way affiliated with the Fund.
For purposes of calculation of the Index value, securities for which the primary
market is outside of the U.S. are valued intra day based on the last sale price
on the primary market. The Global Titans Index value is calculated as of the
close of the NYSE (and during periods when the primary market is closed) based
upon the last sale price if any, of any corresponding ADR.
Additional Information with respect to the KBW Bank, Capital Markets and
Insurance Indexes
INDEX CONSTRUCTION
Each KBW Index is owned and administered by Keefe, Bruyette & Woods, Inc.
("KBW"). Each KBW Index's constituents are chosen on the basis of relevance to
the particular sector and the following trading criteria, among others:
- Stock price level
- Stock price volatility
- Stock price correlation to other stocks in the KBW Bank Index
- Market capitalization
- Average daily trading volume
- Availability of options on the stocks
- Country of domicile/operations
- Trading volume.
INDEX REBALANCING
The four largest stocks included in each KBW Index were assigned maximum initial
weights equal to the lesser of their actual capitalization weight or 10% in the
reconstituted KBW Index. All other stocks with a capitalization weight of more
than 4.5% were assigned initial weights of 4.5% in the reconstituted KBW Index.
All companies with capitalization weights under 4.5% share equally in the weight
available for redistribution, but none of these companies was assigned an
initial weight of more than 4.5%. Current percentage weights will be adjusted on
a quarterly basis, taking into account weight adjustments due to stock
repurchases, secondary offerings or other corporate actions, mergers and KBW
Index composition changes.
Based on capitalizations as of the close of business on the NYSE on the Monday
before the third Saturday of the last month in each calendar quarter, each KBW
Index re-balancing will be calculated according to the following rules:
(1) If any of the top four companies' KBW Index weightings have increased
above 12.5%, their weighting will be reduced to a maximum of 10% in
the quarterly rebalancing.
(2) If any of the remaining companies' weightings have increased above 5%,
their weightings will be reduced to a maximum of 4.5% in the
rebalancing.
(3) If any of the top four companies' weightings have dropped below 8%,
their weightings will be increased to the lesser of their actual
capitalization weight or 10% in the rebalancing.
(4) If any of the companies with unadjusted capitalization weights greater
than 5% have declined in KBW Index weighting below 4%, their
weightings will be increased to 4.5% in the rebalancing.
Thereafter, any excess weighting available will be reallocated to the smaller
companies and any weighting needed to increase weighting in the larger companies
will be taken from the smaller companies in the same manner as in the initial
allocation at the time of the rebalancing.
The rebalancing will be implemented at the close of business on the NYSE on the
Friday before the third Saturday of the last month in each calendar quarter. An
Index Committee makes decisions with respect to any changes in each KBW Index.
The Index Committee is required to meet quarterly to review the composition of
each KBW Index.
INDEX MAINTENANCE
In the event of a change in any component company (e.g., change of principal
business, merger, acquisition, delisting), KBW may
5
remove the stock and replace it with another stock which better represents the
banking sector represented by each KBW Index.
KBW reserves the right to add Index-eligible stocks or to remove component
stocks. In the case of a stock removal, KBW expects to replace any stock removed
from each KBW Index with another stock, but is not required to do so; provided,
however, that the number of stocks in each KBW Index may not be less than 20.
MERGERS AND CORPORATE RESTRUCTURINGS
Companies affected by a merger or other transaction that will change the
character of the firm will be removed and replaced as close as practicable to
the effective date of the transaction. Corporate restructuring will be analyzed
on a case-by-case basis to determine appropriate action.
BANKRUPTCY
In the event of bankruptcy, a company will be removed from each KBW Index
effective as soon as practicable after the date of such filing.
Additional Information with respect to the S&P High Yield Dividend Aristocrats
Index
As constituents in the Index are members of the S&P 1500 Composite Index
all constituents meet the S&P 1500 Composite Index inclusion criteria:
For Inclusion:
- U.S. company. To determine what is a "U.S. company", the Index
Committee looks at a number of factors including location of the
company's operations, its corporate structure, accounting standards
and exchange listings.
- Market cap in excess of a minimum threshold. After meeting a minimum
market cap threshold for inclusion in the S&P Composite 1500, a
candidate company must then pass the minimum market cap requirement
for the S&P High Yield Dividend Aristocrats. Market cap minimums are
reviewed from time to time to ensure consistency with market
conditions.
- Financial viability. This is usually determined by four consecutive
quarters of positive as-reported earnings, where as-reported earnings
are defined as GAAP Net Income excluding discontinued operations and
extraordinary items.
- Adequate liquidity and reasonable price. The ratio of annual dollar
value traded to market capitalization should be 0.3 or greater. Very
low stock prices can affect a stock's liquidity.
- Public float of at least 50%.
- Sector representation. The Index Committee strives to maintain a
balance for the S&P 1500(R) in line with the sector balance of the
universe of eligible companies greater than $300 million.
- Must be an operating company. Closed-end funds, holding companies,
partnerships, investment vehicles and royalty trusts are not eligible.
Real Estate Investment Trusts (REITs) are eligible for inclusion.
Continued index membership is not necessarily subject to these
guidelines. The Index Committee strives to minimize unnecessary
turnover in index membership and each removal is determined on a
case-by-case basis.
For Removal:
- Companies that substantially violate one or more of the criteria for
index inclusion.
- Companies involved in merger, acquisition or significant restructuring
such that they no longer meet the inclusion criteria.
Additional Information with respect to the S&P Total Market Index
The S&P(R) Total Market Index ("S&P(R) TMI") includes all common equities
listed on the NYSE, American Stock Exchange, NASDAQ National Market and NASDAQ
Small Cap exchanges. Stocks not eligible for inclusion in the Index include
limited partnerships, pink sheets, OTC bulletin board issues, royalty trusts,
American Depositary Receipts ("ADRs"), American Depositary Shares ("ADSs"),
non-Real Estate Investment Trust closed-end funds (ETFs, country funds, etc.),
master limited partnerships, as well as holding companies and similar
securities.
Only U.S. companies are eligible for inclusion in the S&P(R) TMI. The
determination of whether a company is a U.S. company is based upon a number of
factors, including the registration or incorporation; corporate structure;
accounting principles; currency used in financial reporting; location of
principal offices, employees, operations and revenues; tax treatment; and
location(s) where the stock is traded.
6
If a company is moved to the pink sheets, the bulletin board or enters
bankruptcy, its stock will be removed from the S&P(R) TMI. In cases where
trading cannot be completed or is difficult, the stock may be removed at a zero
price at the discretion of Standard & Poor's.
There is no limit on the market capitalization of a company for inclusion
in the S&P(R) TMI.
The S&P(R) TMI will be reviewed quarterly. Initial public offerings will be
included at quarterly index rebalancings.
Companies will be removed from the S&P(R) TMI Index if they substantially
violate one or more of the criteria for index inclusion. Companies will also be
removed from the S&P(R) TMI Index if they are involved in a merger, acquisition
or significant restructuring such that they no longer meet the inclusion
criteria.
Additional Information with respect to the Lehman Global Treasury Ex-US Capped
Index
Each of the component securities in the Lehman Global Treasury ex-US Capped
Index (the "Global Treasury Ex-US Index") is a component of the Lehman Global
Treasury Ex-US Index, screened such that the following countries are included:
Australia, Austria, Belgium, Canada, Denmark, France, Germany, Greece, Italy,
Japan, Mexico, Netherlands, Poland, South Africa, Spain, Sweden, Taiwan, United
Kingdom (the "Constituent Countries").
The Global Treasury Ex-US Index is calculated by the Lehman Brothers Index Group
using a modified "market capitalization" methodology. This design ensures that
each Constituent Country within the Index is represented in a proportion
consistent with its percentage with respect to the total market capitalization
of the Global Treasury Ex-US Index. Component Securities in each constituent
country are represented in a proportion consistent with its percentage relative
to the other component securities in its constituent country. Under certain
conditions, however, the par amount of a component security within the Global
Treasury Ex-US Index may be adjusted to conform to Internal Revenue Code
requirements.
CONSTRUCTION AND MAINTENANCE STANDARDS FOR THE INDEX
The Global Treasury Ex-US Index is weighted based on the total market
capitalization represented by the aggregate Component Securities within the
Lehman Global Treasury ex-US Index, subject to the following asset
diversification requirements: (i) the market capitalization-based weighted value
of any single Constituent Country measured on the last day of a calendar month
may not exceed 24.99% of the total value of the Global Treasury Index; and (ii)
with respect to 50% of the total value of the Global Treasury Ex-US Index, the
market capitalization-based weighted value of the Constituent Countries must be
diversified so that no single Constituent Country measured on the last day of a
calendar month represents more than 4.99% of the total value of the Global
Treasury Ex-US Index. The modified Constituent Country weight calculated above
is then applied to the individual securities of each country.
Rebalancing the Global Treasury Ex-US Index to meet the asset diversification
requirements will be the responsibility of the Lehman Brothers Index Group
("LBIG"). Each month, the percentage of each Constituent Country (or Constituent
Countries) represented in the Global Treasury Ex-US Index will be reduced and
the market capitalization-based weighted value of such Constituent Country (or
Constituent Countries) will be redistributed across the Constituent Countries so
that they meet the value limits set forth above in accordance with the following
methodology: First, each Constituent Country that exceeds 24% of the total value
of the Global Treasury Ex-US Index will be reduced to 23% of the total value of
the Global Treasury Ex-US Index and the aggregate amount by which all
Constituent Countries exceed 24% will be redistributed equally across the
remaining Constituent Countries that represent less than 23% of the total value
of the Global Treasury Ex-US Index. If as a result of this redistribution,
another Constituent Country then exceeds 24%, the redistribution will be
repeated as necessary. Second, with respect to the 50% of the value of the
Global Treasury Ex-US Index accounted for by the lowest weighted Constituent
Countries, each Constituent Country that exceeds 4.8% of the total value of the
Global Treasury Ex-US Index will be reduced to 4.6% and the aggregate amount by
which all Constituent Countries exceed 4.8% will be distributed equally across
all remaining Constituent Countries that represent less than 4.6% of the total
value of the Global Treasury Ex-US Index. If as a result of this redistribution
another Constituent Country that did not previously exceed 4.8% of the Global
Treasury Ex-US Index value then exceeds 4.8%, the redistribution will be
repeated as necessary until at least 50% of the value of the Global Treasury
Ex-US Index is accounted for by Constituent Countries representing no more than
4.8% of the total value of the Global Treasury Ex-US Index. Third, the weight of
each Constituent Country's Component Securities will be adjusted to reflect the
Component Securities' weight in the Global Treasury Ex-US Index relative to
other Component Securities of the same country by applying the same percentage
adjustment as applied to its country.
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If necessary, this reallocation process may take place more than once per
calendar month to insure that the Global Treasury Ex-US Index and the Fund
portfolio based upon it conform to the requirements for qualification of the
Fund as a regulated investment company.
Additional Information with respect to the Lehman Brothers Very Liquid High
Yield Index
Index Universes
The High Yield Index consists of two universes: the Returns Universe
and the Statistics Universe.
The Returns Universe is based on a static set of securities that are
index-eligible at the beginning of each month and held constant until the
beginning of the next month. They comprise the fixed universe that is used to
calculate official daily and monthly index-returns. The Returns Universe is not
adjusted for securities that become eligible for inclusion in the High Yield
Index during the month (e.g., because of ratings changes, called bonds,
securities falling below one year in maturity) or for issues that are newly
eligible (e.g. ratings changes, newly issued bonds). Interest and principal
payments earned by the Returns Universe are held in the High Yield Index without
a reinvestment return until month-end, when it is removed from the Index.
The Statistics Universe is the dynamic set of bonds changing daily to
reflect the latest composition of the market. It is a projection of what the
High Yield Index will look like at month-end, when the composition of the Index
is next reset. The Statistics Universe accounts for changes due to new issuance,
calls or partial redemptions, ratings changes, and the seasoning of securities.
Statistics such as market value, sector weightings and various averages (e.g.,
coupon, duration, maturity, yield, price, etc.) are updated and reported daily.
At the end of each month, the latest Statistics Universe becomes the Returns
Universe for the coming month. To ensure that the Statistics Universe is up to
date, LBIG maintains an extensive database of call/put features and refunding
and sinking schedules on outstanding bonds and continuously monitors the market
for retirement, new issuance and rating change activity.
Total Return Calculations
The High Yield Index's results are reported for daily, monthly,
quarterly, annual and since-inception reporting periods. Returns are cumulative
for the entire period. Intra-month cash flows contribute to monthly returns, but
are not reinvested during the month and do not earn a reinvestment return.
Intra-month cash flows are reinvested into the returns universe for the
following month so that Index results over two or more months reflect monthly
compounding. Daily, month-to-date and monthly total returns are calculated based
on the sum of price changes, coupon income received or accrued, gain/loss on
repayments of principal and, where applicable, currency value fluctuations
expressed as a percentage of beginning market value. The High Yield Index's
total return is the weighted average of the total returns of the securities that
make up the Index, where the weighting factor is full market value (i.e.,
inclusive of accrued interest) at the start of the period. Cumulative total
returns over periods longer than one month are calculated by multiplicatively
linking monthly returns.
Market Value Weighting
Returns and most summary statistics for the High Yield Index are
market value weighted, accounting for both the market price of index-eligible
securities and the accrued interest. Returns data are weighted by market value
at the beginning of the period. Statistics, such as index average duration and
maturity, are market-value weighted based on end-of-period market value. Average
price and coupon are weighted by end-of-period par value.
Pricing and Settlement
All bonds in the High Yield Index are priced by either LBIG or
Interactive Data Corporation. Bonds may be quoted in a variety of ways,
including nominal spreads over benchmark securities/treasuries, spreads over
swap curves or direct price quotes. In some instances the quote type used is a
spread measure that results in daily security price changes from the movement of
the underlying curve and/or changes in the quoted spread. Bonds in the High
Yield Index are priced on the bid side. The initial price for newly issued
corporate bonds entering the High Yield Index is the offer side; after that, the
bid side price is used. Fallen angels use bid side prices.
The quality of bond pricing is kept at a high level using
multi-contributor verification. This process includes utilizing other
third-party pricing sources plus a variety of statistical techniques to isolate
possible pricing outliers. Significant discrepancies are researched and
corrected, as necessary. Bonds are settled on a T+1 basis.
Bond Ratings
All bonds in the High Yield Index must be rated high-yield
(Ba1/BB+/BB+ or below) using the middle rating of Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's, Inc. ("S&P") and Fitch Ratings Ltd.
("Fitch"), respectively (before July 1, 2005, the lower of Moody's and S&P was
used). When a rating from only two agencies is available, the lower ("most
conservative") of the two is used to determine eligibility. When a rating from
only one agency is available, that rating is used to determine eligibility. A
small number of unrated bonds are included in the High Yield Index; to be
eligible, they must have previously held a high-yield rating or have been
associated with a high-yield issuer, and must trade accordingly.
8
INVESTMENT POLICIES
DIVERSIFICATION
Each Fund is classified as a non-diversified investment company under the 1940
Act. A "non-diversified" classification means that a Fund is not limited by the
1940 Act with regard to the percentage of its assets that may be invested in the
securities of a single issuer. This means that each Fund may invest a greater
portion of its assets in the securities of a single issuer. The securities of a
particular issuer may constitute a greater portion of an Index of a Fund and
therefore, the securities may constitute a greater portion of the Fund's
portfolio. This may have an adverse effect on the Fund's performance or subject
the Fund's Shares to greater price volatility than more diversified investment
companies.
Although each Fund is non-diversified for purposes of the 1940 Act, each Fund
intends to maintain the required level of diversification and otherwise conduct
its operations so as to qualify as a "regulated investment company" for purposes
of the Internal Revenue Code, and to relieve the Fund of any liability for
federal income tax to the extent that its earnings are distributed to
shareholders. Compliance with the diversification requirements of the Internal
Revenue Code severely limits the investment flexibility of certain Funds and
makes it less likely that such Funds will meet their investment objectives.
CONCENTRATION
Some of the Funds may concentrate their investments in a particular
industry or group of industries, as described in the Prospectus. The securities
of issuers in particular industries may dominate the Index of a Fund and
consequently the Fund's investment portfolio. This may adversely affect the
Fund's performance or subject its Shares to greater price volatility than that
experienced by less concentrated investment companies.
In pursuing its objective, a Fund may hold securities of a single issuer in an
amount exceeding 10% of the market value of the outstanding securities of the
issuer, subject to restrictions imposed by the Internal Revenue Code. In
particular, as a Fund's size grows and its assets increase, it will be more
likely to hold more than 10% of the securities of a single issuer if the issuer
has a relatively small public float as compared to other components in an Index.
BONDS
Each Fixed Income ETF, except the International Treasury Bond ETF, invests a
substantial portion of its assets in U.S. registered, dollar-denominated bonds.
A bond is an interest-bearing security issued by a company, governmental unit
or, in some cases, a non-U.S. entity. The issuer of a bond has a contractual
obligation to pay interest at a stated rate on specific dates and to repay
principal (the bond's face value) periodically or on a specified maturity date.
An issuer may have the right to redeem or "call" a bond before maturity, in
which case the investor may have to reinvest the proceeds at lower market rates.
Most bonds bear interest income at a "coupon" rate that is fixed for the life of
the bond. The value of a fixed rate bond usually rises when market interest
rates fall, and falls when market interest rates rise. Accordingly, a fixed rate
bond's yield (income as a percent of the bond's current value) may differ from
its coupon rate as its value rises or falls. Fixed rate bonds generally are also
subject to inflation risk, which is the risk that the value of the bond or
income from the bond will be worth less in the future as inflation decreases the
value of money. This could mean that, as inflation increases, the "real" value
of the assets of a Fund holding fixed rate bonds can decline, as can the value
of the Fund's distributions. Other types of bonds bear income at an interest
rate that is adjusted periodically. Because of their adjustable interest rates,
the value of "floating-rate" or "variable-rate" bonds fluctuates much less in
response to market interest rate movements than the value of fixed rate bonds.
The Fund may treat some of these bonds as having a shorter maturity for purposes
of calculating the weighted average maturity of its investment portfolio. Bonds
may be senior or subordinated obligations. Senior obligations generally have the
first claim on a corporation's earnings and assets and, in the event of
liquidation, are paid before subordinated obligations. Bonds may be unsecured
(backed only by the issuer's general creditworthiness) or secured (also backed
by specified collateral).
In addition, the High Yield Bond ETF invests almost exclusively in corporate
bonds. The investment return of corporate bonds reflects interest on the bond
and changes in the market value of the bond. The market value of a corporate
bond may be affected by the credit rating of the corporation, the corporation's
performance and perceptions of the corporation in the market place. There is a
risk that the issuers of the securities may not be able to meet their
obligations on interest or principal payments at the time called for by such a
security.
9
HIGH YIELD SECURITIES
The High Yield Bond ETF invests a large percentage of its assets in high yield
debt securities. Investment in high yield securities generally provides greater
income and increased opportunity for capital appreciation than investments in
higher quality securities, but they also typically entail greater price
volatility and credit risk. These high yield securities are regarded as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Analysis of the creditworthiness of
issuers of debt securities that are high yield may be more complex than for
issuers of higher quality debt securities. In addition, high yield securities
are often issued by smaller, less creditworthy companies or by highly leveraged
(indebted) firms, which are generally less able than more financially stable
firms to make scheduled payments of interest and principal. The risks posed by
securities issued under such circumstances are substantial.
Investing in high yield debt securities involves risks that are greater than the
risks of investing in higher quality debt securities. These risks include: (i)
changes in credit status, including weaker overall credit conditions of issuers
and risks of default; (ii) industry, market and economic risk; and (iii) greater
price variability and credit risks of certain high yield securities such as zero
coupon and payment-in-kind securities. While these risks provide the opportunity
for maximizing return over time, they may result in greater volatility of the
value of the Fund than a fund that invests in higher-rated securities.
Furthermore, the value of high yield securities may be more susceptible to real
or perceived adverse economic, company or industry conditions than is the case
for higher quality securities. The market values of certain of these lower-rated
and unrated debt securities tend to reflect individual corporate developments to
a greater extent than do higher-rated securities which react primarily to
fluctuations in the general level of interest rates, and tend to be more
sensitive to economic conditions than are higher-rated securities. Adverse
market, credit or economic conditions could make it difficult at certain times
to sell certain high yield securities held by the Fund.
The secondary market on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading market could adversely affect the price at which the High
Yield Bond ETF could sell a high yield security, and could adversely affect the
daily net asset value per share of the High Yield Bond ETF. When secondary
markets for high yield securities are less liquid than the market for higher
grade securities, it may be more difficult to value the securities because there
is less reliable, objective data available. However, the Index seeks to include
primarily high yield securities that the Index provider believes have greater
liquidity than the broader high yield securities market as a whole.
The use of credit ratings as a principal method of selecting high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit ratings
in a timely fashion to reflect events since the security was last rated.
SOVEREIGN DEBT OBLIGATIONS
The International Treasury Bond ETF invests a substantial portion of its assets
in sovereign debt that is issued in local currency. Sovereign debt obligations
are issued or guaranteed by foreign governments or their agencies. Sovereign
debt may be in the form of conventional securities or other types of debt
instruments such as loans or loan participations. Governmental entities
responsible for repayment of the debt may be unable or unwilling to repay
principal and pay interest when due, and may require renegotiation or reschedule
of debt payments. In addition, prospects for repayment of principal and payment
of interest may depend on political as well as economic factors. Although some
sovereign debt, such as Brady Bonds, is collateralized by U.S. Government
securities, repayment of principal and payment of interest is not guaranteed by
the U.S. Government.
U.S. GOVERNMENT OBLIGATIONS
The Treasury ETFs and TIPS ETF invest almost exclusively in various types of
U.S. Government obligations. The Aggregate Bond ETF invests a portion of its
assets in U.S. Government obligations. U.S. Government obligations are a type of
bond. U.S. Government obligations include securities issued or guaranteed as to
principal and interest by the U.S. Government, its agencies or
instrumentalities. Payment of principal and interest on U.S. Government
obligations (i) may be backed by the full faith and credit of the United States
(as with U.S. Treasury obligations and Government National Mortgage Association
(i.e., GNMA) certificates) or (ii) may be backed solely by the issuing or
guaranteeing agency or instrumentality itself (as with Federal National Mortgage
Association (i.e., FNMA), Federal Home Loan Mortgage Corporation (i.e., FHLMC)
and Federal Home Loan Bank (i.e., FHLB) notes). In the latter case, the investor
must look principally to the agency or instrumentality issuing or guaranteeing
the obligation for ultimate
10
repayment, which agency or instrumentality may be privately owned. There can be
no assurance that the U.S. Government would provide financial support to its
agencies or instrumentalities where it is not obligated to do so. As a general
matter, the value of debt instruments, including U.S. Government obligations,
declines when market interest rates increase and rises when market interest
rates decrease. Certain types of U.S. Government obligations are subject to
fluctuations in yield or value due to their structure or contract terms.
MUNICIPAL SECURITIES
General. The Municipal Bond ETFs will invest in securities issued by states,
municipalities and other political subdivisions, agencies, authorities and
instrumentalities of states and multi-state agencies or authorities. Municipal
securities share the attributes of debt/fixed income securities in general, but
are generally issued by states, municipalities and other political subdivisions,
agencies, authorities and instrumentalities of states and multi-state agencies
or authorities. The municipal securities which the Municipal Bond ETFs may
purchase include general obligation bonds and limited obligation bonds (or
revenue bonds), including industrial development bonds issued pursuant to former
federal tax law. General obligation bonds are obligations involving the credit
of an issuer possessing taxing power and are payable from such issuer's general
revenues and not from any particular source. Limited obligation bonds are
payable only from the revenues derived from a particular facility or class of
facilities or, in some cases, from the proceeds of a special excise or other
specific revenue source. Tax-exempt industrial development bonds generally are
also revenue bonds and thus are not payable from the issuer's general revenues.
The credit and quality of industrial development bonds are usually related to
the credit of the corporate user of the facilities. Payment of interest on and
repayment of principal of such bonds is the responsibility of the corporate user
(and/or any guarantor).
Some longer-term municipal securities give the investor the right to "put" or
sell the security at par (face value) within a specified number of days
following the investor's request--usually one to seven days. This demand feature
enhances a security's liquidity by shortening its effective maturity and enables
it to trade at a price equal to or very close to par. If a demand feature
terminates prior to being exercised, a Municipal Bond ETF would hold the
longer-term security, which could experience substantially more volatility.
The market for municipal bonds may be less liquid than for taxable bonds. This
means that it may be harder to buy and sell municipal securities, especially on
short notice, than non-municipal securities. There may also be less information
available on the financial condition of issuers of municipal securities than for
public corporations. This means that it may be harder to buy and sell municipal
securities, especially on short notice, and municipal securities may be more
difficult for the Municipal Bond ETFs to value accurately than securities of
public corporations. Since the Municipal Bond ETFs invest a significant portion
of their portfolios in municipal securities, a Municipal Bond ETF's portfolio
may have greater exposure to liquidity risk than a fund that invests in
non-municipal securities. In addition, the municipal securities market is
generally characterized as a buy and hold investment strategy. As a result, the
accessibility of municipal securities in the market is generally greater closer
to the original date of issue of the securities and lessens as the securities
move further away from such issuance date.
Municipal securities are subject to credit and market risk. Generally, prices of
higher quality issues tend to fluctuate more with changes in market interest
rates than prices of lower quality issues and prices of longer maturity issues
tend to fluctuate more than prices of shorter maturity issues.
Prices and yields on municipal securities are dependent on a variety of factors,
including general money-market conditions, the financial condition of the
issuer, general conditions of the municipal security market, the size of a
particular offering, the maturity of the obligation and the rating of the issue.
A number of these factors, including the ratings of particular issues, are
subject to change from time to time. Information about the financial condition
of an issuer of municipal securities may not be as extensive as that which is
made available by corporations whose securities are publicly traded. As a
result, municipal securities may be more difficult to value than securities of
public corporations.
Obligations of issuers of municipal securities are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors. Congress or state legislatures may seek to extend the time for
payment of principal or interest, or both, or to impose other constraints upon
enforcement of such obligations. In addition, municipal securities are subject
to the risk that their tax treatment could be changed by Congress or state
legislatures, thereby affecting the value of outstanding municipal securities.
There is also the possibility that as a result of litigation or other
conditions, the power or ability of issuers to meet their obligations for the
payment of interest and principal on their municipal securities may be
materially affected or their obligations may be found to be invalid or
unenforceable. Such litigation or conditions may from time to time have the
effect of introducing uncertainties in the market for municipal securities or
certain segments thereof, or of materially affecting the credit risk with
respect to particular bonds. Adverse economic, business, legal or political
developments might affect all or a substantial portion of a Municipal Bond ETF's
municipal securities in the same manner.
11
In January 2006, the Kentucky Court of Appeals held, in Davis v. Department of
Revenue, that the state's exemption of interest on its own bonds and those of
its political subdivisions and its taxation of interest on the bonds of other
states and their political subdivisions unlawfully discriminates against
interstate commerce. After the Kentucky Supreme Court declined to review the
decision, Kentucky officials petitioned the United States Supreme Court to
review the Davis decision, and the request was granted by the Court on May 24,
2007. A decision in the Davis case is anticipated sometime during the next term
of the United States Supreme Court, which commenced on October 1, 2007;
arguments have been scheduled for November 5, 2007. If the United States Supreme
Court were to affirm the Davis decision, the tax treatment of state and local
government bonds of other states also may be held to be unconstitutional. A
determination that the tax-exempt treatment of state and local government bonds
unlawfully discriminates against interstate commerce could cause interest on
such tax-exempt obligations held by the Municipal Bond ETFs to become taxable
and the market value of such obligations to decline, which, in turn, may
negatively affect the value of a Municipal Bond ETF's Shares.
Municipal Leases and Certificates of Participation. Also included within the
general category of municipal securities described in the Municipal Bond ETFs'
prospectus are municipal leases, certificates of participation in such lease
obligations or installment purchase contract obligations (hereinafter
collectively called "Municipal Lease Obligations") of municipal authorities or
entities. Although a Municipal Lease Obligation does not constitute a general
obligation of the municipality for which the municipality's taxing power is
pledged, a Municipal Lease Obligation is ordinarily backed by the municipality's
covenant to budget for, appropriate and make the payments due under the
Municipal Lease Obligation. However, certain Municipal Lease Obligations contain
"non-appropriation" clauses which provide that the municipality has no
obligation to make lease or installment purchase payments in future years unless
money is appropriated for such purpose on a yearly basis. In the case of a
"non-appropriation" lease, a Municipal Bond ETF's ability to recover under the
lease in the event of non-appropriation or default will be limited solely to the
repossession of the leased property, without recourse to the general credit of
the lessee, and disposition or releasing of the property might prove difficult.
Municipal Insurance. A municipal security may be covered by insurance that
guarantees the bond's scheduled payment of interest and repayment of principal.
This type of insurance may be obtained by either (i) the issuer at the time the
bond is issued (primary market insurance), or (ii) another party after the bond
has been issued (secondary market insurance).
Both primary and secondary market insurance guarantee timely and scheduled
repayment of all principal and payment of all interest on a municipal security
in the event of default by the issuer, and cover a municipal security to its
maturity, enhancing its credit quality and value.
Municipal security insurance does not insure against market fluctuations or
fluctuations in a Municipal Bond ETF's share price. In addition, a municipal
security insurance policy will not cover: (i) repayment of a municipal security
before maturity (redemption), (ii) prepayment or payment of an acceleration
premium (except for a mandatory sinking fund redemption) or any other provision
of a bond indenture that advances the maturity of the bond, or (iii) nonpayment
of principal or interest caused by negligence or bankruptcy of the paying agent.
A mandatory sinking fund redemption may be a provision of a municipal security
issue whereby part of the municipal security issue may be retired before
maturity.
Because a significant portion of the municipal securities issued and outstanding
is insured by a small number of insurance companies, an event involving one or
more of these insurance companies could have a significant adverse effect on the
value of the securities insured by that insurance company and on the municipal
markets as a whole.
Municipal Market Disruption Risk. The value of municipal securities may be
affected by uncertainties in the municipal market related to legislation or
litigation involving the taxation of municipal securities or the rights of
municipal securities holders in the event of a bankruptcy. Proposals to restrict
or eliminate the federal income tax exemption for interest on municipal
securities are introduced before Congress from time to time. Proposals also may
be introduced before state legislatures that would affect the state tax
treatment of a municipal fund's distributions. If such proposals were enacted,
the availability of municipal securities and the value of a municipal fund's
holdings would be affected, and the Trustees would reevaluate a Municipal Bond
ETF's investment objectives and policies. Municipal bankruptcies are relatively
rare, and certain provisions of the U.S. Bankruptcy Code governing such
bankruptcies are unclear and remain untested. Further, the application of state
law to municipal issuers could produce varying results among the states or among
municipal securities issuers within a state. These legal uncertainties could
affect the municipal securities market generally, certain specific segments of
the market, or the relative credit quality of particular securities. Any of
these effects could have a significant impact on the prices of some or all of
the municipal securities held by the Municipal Bond ETF. In addition, see
discussion of Davis v. Department of Revenue, above.
CONSIDERATIONS REGARDING INVESTMENT IN CALIFORNIA MUNICIPAL SECURITIES
12
The Municipal Bond ETFs, and more directly, the SPDR Lehman Short Term Municipal
Bond ETF, SPDR Lehman California Municipal Bond ETF and the SPDR Lehman
Municipal Bond ETF, may be particularly affected by political, economic or
regulatory developments affecting the ability of California tax-exempt issuers
to pay interest or repay principal. Provisions of the California Constitution
and State statutes that limit the taxing and spending authority of California
governmental entities may impair the ability of California governmental issuers
to maintain debt service on their obligations. Future California political and
economic developments, constitutional amendments, legislative measures,
executive orders, administrative regulations, litigation and voter initiatives
could have an adverse effect on the debt obligations of California issuers. The
information set forth below constitutes only a brief summary of a number of
complex factors which may impact issuers of California municipal obligations.
The information is derived from sources that are generally available to
investors, including information promulgated by the State's Department of
Finance, the State's Treasurer's Office, and the Legislative Analyst's Office.
The information is intended to give recent historical description and is not
intended to indicate future or continuing trends in the financial or other
positions of California. Such information has not been independently verified by
the Trust, and the Trust assumes no responsibility for the completeness or
accuracy of such information. It should be noted that the financial strength of
local California issuers and the creditworthiness of obligations issued by local
California issuers is not directly related to the financial strength of the
State or the creditworthiness of obligations issued by the State, and there is
no obligation on the part of the State to make payment on such local obligations
in the event of default.
Certain debt obligations held by a Municipal Bond ETF may be obligations of
issuers that rely in whole or in substantial part on California state government
revenues for the continuance of their operations and payment of their
obligations. Whether and to what extent the California Legislature will continue
to appropriate a portion of the State's General Fund to counties, cities and
their various entities, which depend upon State government appropriations, is
not entirely certain. To the extent local entities do not receive money from the
state government to pay for their operations and services, their ability to pay
debt service on obligations held by the Funds may be impaired.
Certain tax-exempt securities in which the Municipal Bond ETFs may invest may be
obligations payable solely from the revenues of specific institutions, or may be
secured by specific properties, which are subject to provisions of California
law that could adversely affect the holders of such obligations. For example,
the revenues of California health care institutions may be subject to state
laws, and California law limits the remedies of a creditor secured by a mortgage
or deed of trust on real property.
With a gross state product of over $1.7 trillion in 2006, California's economy
is the largest state economy in the United States and one of the largest in the
world. In addition to its size, California's economy is diverse, with no
industry sector accounting for more than one-quarter of the State's output.
While California's economy is broad, it does have major concentrations in high
technology, aerospace and defense-related manufacturing, entertainment, real
estate and financial services, and may be sensitive to economic factors
affecting those industries. One example of such potential sensitivity occurred
from mid-1990 to late 1993, when the State suffered a recession. Construction,
manufacturing (especially aerospace), and financial services, among others, were
all severely affected, particularly in Southern California. More recently,
reflective of a nationwide economic slowdown starting in 2001, the high
technology sector of the State's economy entered a cyclical downturn from which
it only recently emerged.
A series of reports after the start of the 2001-02 Fiscal Year indicated that
both the national and the State economies entered a recession starting in 2001.
In California, the impact was particularly felt in the high technology sector
centered in the Bay Area/Silicon Valley, in the construction sector and in
exports. The tragic events of September 11, 2001 exacerbated the impact of the
weakened economy, especially on tourism-related industries and locations. Since
the latter half of 2003, however, California's economy has been improving. The
California Legislative Analyst's Office ("CLAO") predicts continuing modest
economic growth for the near future. Both the U.S. and California experienced
continued economic expansion with modest inflation in 2006. The slowing of the
pace of economic growth during 2006 reflected a sharp decline in real estate
activity and is predicted to continue into 2007, impacted by the ongoing housing
market issues. However, the CLAO expects economic growth to accelerate in 2008
as the sector stabilizes. In August 2006, non-farm payroll employment rose above
15 million for the first time. However, during the first quarter of 2007, the
pace of non-farm job growth had slowed from a 2.1% year-over-year pace in the
first quarter 2006 to 1.8%, attributed to slowdowns in the construction, retail
and finance sectors. The State has projected a 1.3% growth rate for 2007 and
1.5% for 2008. The State's unemployment rate increased from a relatively stable
4.8% over 2006 and into 2007 to 5.1% in April 2007, the largest one month
increase since 2001. According to the State, personal income grew by an
estimated 6.1% in 2006 but slower growth is expected over the next three years,
at 5.3% in 2007, 5.5% in 2008 and 5.8% in 2009. Total revenues for the State of
California in 2006-07 are expected to be $95.7 billion.
California has experienced difficulties with the supply and price of electricity
and natural gas in much of the State since mid-2000, which is likely to continue
as energy prices continue to rise. California's difficulties with energy
supplies could pose serious risks to
13
the State's economy. The State instituted rolling electricity blackouts in 2001
and remains braced for anticipated energy shortages as well as increased energy
costs. Former Governor Gray Davis directed the Department of Water Resources
("DWR") to enter into contracts and arrangements for the purchase and sale of
electric power as necessary to assist in mitigating the effects of the emergency
(the "Power Supply Program"). The Power Supply Program was also implemented
under legislation enacted in 2001 (the "Power Supply Act") and by orders of the
California Public Utilities Commission ("CPUC"). The Power Supply Act provided
that the State funds advanced for energy purchases would be repaid by the
issuance of revenue bonds, to be financed through ratepayer revenue in future
years.
Under the Power Supply Act, the DWR has the sole authority to determine and
present to the CPUC its revenue requirements, although they must be just and
reasonable. The CPUC is required to set electric rates at a level sufficient to
meet the DWR's revenue requirements, which include the cost of debt service and
the cost of the State's power purchaser program. Effective January 1, 2003, the
DWR no longer purchases power, except power provided under the terms of its
existing contracts. However, the DWR retains the legal and financial
responsibility for the existing contracts until such time as there is complete
assignment of the contracts and release of DWR. The severity and long-term
impact of energy supply problems on the State's economy is difficult to predict,
but any future significant interruptions in energy supply or rate increases
could adversely affect California's economy. Governor Arnold Schwarzenegger has
pushed to allow large-scale power users to obtain competitive rates through
direct access to power producers.
In March 2004, voters approved Proposition 57, the California Economic Recovery
Bond Act, authorizing the issuance of up to $15 billion in Economic Recovery
Bonds ("ERBs") to finance the State's negative General Fund balance. Under the
Act, the State will not be permitted to use more than $15 billion of net
proceeds of any bonds issued to address the inherited debt. The ERBs replace the
previously authorized "Fiscal Recovery Bonds."
The repayment of the ERBs is secured by a pledge of revenues from an increase in
the State's share of the sales and use tax of 0.25% starting July 1, 2004, which
are deposited in the Fiscal Recovery Fund. Local governments' shares of the
sales and use tax are expected to decrease by a commensurate amount. These new
sales and use tax rates will automatically revert to previous levels as soon as
the ERBs are repaid. The repayment of the ERBs may be accelerated with transfers
from the State's Budget Stabilization Fund, as specified in the Balanced Budget
Amendment. In the event the dedicated revenue falls short, the State also would
pledge its full faith and credit by using General Fund revenues to repay the
debt service. As of March 1, 2007, California had outstanding approximately $50
billion in long-term general obligation bonds, of which approximately $39
billion were payable primarily from the State's General Fund, and approximately
$10.9 were payable from other revenue sources (including approximately $9
billion of ERBs). In addition, the State had approximately $7.7 billion General
Fund supported lease purchase obligations outstanding as of March 1, 2007.
Governor Schwarzenegger's 2007-08 budget proposes $1.6 billion in prepayments of
the outstanding ERBs. This would bring the total set aside to repay these ERBs
to $7.4 billion in the four years since the bonds were issued. As a result, the
Department of Finance projects that these ERBs will be fully retired in August
of 2009, which is 14 years ahead of schedule.
Also in March 2004, voters approved Proposition 58, which amended the California
State Constitution to require balanced budgets in the future, yet this has not
prevented the State from enacting budgets that rely on borrowing. Proposition 58
requires the State to contribute to a special reserve of 1% of revenues in
2006-07, 2% in 2007-08, and 3% in subsequent years. This special reserve will be
used to repay the ERBs and provide a "rainy-day" fund for future economic
downturns or natural disasters. The amendment allows the Governor to declare a
fiscal emergency whenever he or she determines that General Fund revenues will
decline below budgeted expenditures, or expenditures will increase substantially
above available resources. Finally, it requires the State legislature to take
action on legislation proposed by the Governor to address fiscal emergencies.
In November 2004, voters approved Proposition 60A, which dedicates proceeds from
the sale of surplus property purchased with General Fund monies to payment of
principal and interest on ERBs approved in March 2004 by Proposition 57. This
will likely accelerate repayment, by a few months, of these bonds.
In response to the Governor's proposal for a $220 billion infrastructure
investment plan, which would have used $68 billion in new general obligation
bonds, the Legislature approved four bond measures, totaling approximately $37.3
billion, which were all approved by the voters at the November 2006 general
election. Proposition 84, authorizing approximately $5.4 billion of bonds for
water quality, flood control, parks and similar facilities, was also approved by
the voters.
As of May 24, 2007, California's general obligation bonds were assigned ratings
of A1, A+, and A+ by Moody's, S&P and Fitch, respectively. Moody's upgraded
California's rating in May 2006, citing the State's strong economy and increased
tax revenues. Moody's also increased its ratings outlook from stable to
positive. S&P increased its rating in May 2006 as well. S&P cited strong
economic growth and a surge in revenue as the reasons behind its ratings
increase. Fitch upgraded California's rating in June 2006
14
citing continuing economic recovery, strong revenue performance and continued
progress in reducing fiscal imbalances as the reasons behind its rating
increase. The agencies continue to monitor the state's budget deliberations
closely to determine whether or not to alter the current ratings. It should be
recognized that these ratings are not an absolute standard of quality, but
rather general indicators. Such ratings reflect only the view of the originating
rating agencies, from which an explanation of the significance of such ratings
may be obtained. There is no assurance that a particular rating will continue
for any given period of time or that any such rating will not be revised
downward or withdrawn entirely if, in the judgment of the agency establishing
the rating, circumstances so warrant. A downward revision or withdrawal of such
ratings, or either of them, may have an effect on the market price of the State
municipal obligations in which a Fund invests.
Revenue bonds represent both obligations payable from State revenue-producing
enterprises and projects, which are not payable from the General Fund, and
conduit obligations payable only from revenues paid by private users of
facilities financed by such revenue bonds. Such enterprises and projects include
transportation projects, various public works and exposition projects,
educational facilities (including the California State University and University
of California systems), housing, health facilities, and pollution control
facilities.
The State is party to numerous legal proceedings, many of which normally occur
in governmental operations and which, if decided against the State, might
require the State to make significant future expenditures or impair future
revenue sources.
Constitutional and statutory amendments as well as budget developments may
affect the ability of California issuers to pay interest and principal on their
obligations. The overall effect may depend upon whether a particular California
tax-exempt security is a general or limited obligation bond and on the type of
security provided for the bond. It is possible that measures affecting the
taxing or spending authority of California or its political subdivisions may be
approved or enacted in the future.
CONSIDERATIONS REGARDING INVESTMENT IN NEW YORK MUNICIPAL SECURITIES
The Municipal Bond ETFs, and more directly, the SPDR Lehman Short Term Municipal
Bond ETF, SPDR Lehman New York Municipal Bond ETF and the SPDR Lehman Municipal
Bond ETF, may be particularly affected by political, economic or regulatory
developments affecting the ability of New York tax-exempt issuers to pay
interest or repay principal. Investors should be aware that certain issuers of
New York tax-exempt securities have at times experienced serious financial
difficulties. A reoccurrence of these difficulties may impair the ability of
certain New York issuers to maintain debt service on their obligations. The
following information provides only a brief summary of the complex factors
affecting the financial situation in New York and is derived from sources that
are generally available to investors. The information is intended to give a
recent historical description and is not intended to indicate future or
continuing trends in the financial or other positions of New York. Such
information has not been independently verified by the Trust and the Trust
assumes no responsibility for the completeness or accuracy of such information.
It should be noted that the creditworthiness of obligations issued by local New
York issuers may be unrelated to the creditworthiness of obligations issued by
New York city and state agencies, and that there is no obligation on the part of
New York State to make payment on such local obligations in the event of
default.
The events of September 11, 2001 had a significant impact upon the New York
State economy and more directly on that of New York City. Prior to September 11,
the nation's and the State's economies had been weakening and the loss of over
seventy thousand jobs in New York City as a direct result of September 11
produced material budgetary pressures including increased budget gaps for New
York City and reductions to the State surpluses.
New York State has historically been one of the wealthiest states in the nation,
maintaining the third largest economy in the United States behind California and
Texas. For decades, however, the State's economy grew more slowly than that of
the nation as a whole, gradually eroding the State's relative economic
affluence, as urban centers lost the more affluent to the suburbs and people and
businesses migrated to the South and the West. In addition, the events of
September 11 and the corporate governance scandals resulted in a much sharper
downturn than the rest of the nation. However, the New York State economy has
emerged from recession and, in September 2006, the State's economic expansion
entered its fourth year, with employment, personal income, and wages all
experiencing growth. The momentum of the State's expansion appears to have
peaked, however, and forecasts for the near future predict more moderate rates
of economic growth. New York State employment growth is expected to drop
slightly to 0.7 % in 2007 and 2008 from estimated growth of 0.8% in 2006.
Personal income is expected to grow 5.6% in 2007 compared to 6.8% in 2006.
Relative to other states, New York State has for many years imposed a very high
state and local tax burden on residents. The burden of state and local taxation
in combination with the many other causes of regional economic dislocation, has
contributed to the decisions of some businesses and individuals to relocate
outside of, or not locate within New York. The economic and financial condition
of the
15
State also may be affected by various financial, social, economic and political
factors. For example, the securities industry is more central to New York's
economy than to the national economy, therefore any significant decline in stock
market performance could adversely affect the State's income and employment
levels. Furthermore, such social, economic and political factors can be very
complex, may vary from year to year and can be the result of actions taken not
only by the State and its agencies and instrumentalities, but also by entities,
such as the Federal government, that are not under the control of the State.
The fiscal stability of New York State is related to the fiscal stability of the
State's municipalities, its agencies and authorities (which generally finance,
construct and operate revenue-producing public benefit facilities). This is due
in part to the fact that agencies, authorities and local governments in
financial trouble often seek State financial assistance. The experience has been
that if New York City or any of its agencies or authorities suffers serious
financial difficulty, then the ability of the State, New York City, the State's
political subdivisions, agencies and authorities to obtain financing in the
public credit markets, and the market price of outstanding New York tax-exempt
securities, is adversely affected.
On February 12, 2004, the Office of the State Deputy Comptroller issued a report
that concluded that New York City had overcome its most serious fiscal challenge
since the 1970s. New York City ended FY 2004 with a substantial budget surplus
that continued into 2005 and ended FY 2005 with a surplus of $3.5 billion. The
City ended FY 2006 with a record surplus of $3.8 billion and has realized
unanticipated resources of $8.9 billion for FY 2007 and FY 2008. Continued
strength in the real estate market and Wall Street profits have combined to
produce a projected surplus of $4.4 billion for FY 2007, in addition to more
than $1.2 billion set aside to retire debt, resulting in a net benefit of $5.6
billion during FY 2007. These unanticipated revenues closed the projected budget
gap for FY 2007 and reduced the gap for FY 2009 by 66 percent. However, the
Mayor's Financial Plan currently anticipates an economic slowdown beginning
later in 2007, with a projected decline in Wall Street profits of 60 percent
over the next two years.
Governor Elliot Spitzer's 2007-08 Budget of $120.6 billion represents an
increase of $7.9 billion, or 6.3%, over the 2006-07 fiscal year. The Governor's
2007-08 budget continues to generate sizable out-year gaps. After closing a
structural gap in 2007-08 of $1.6 billion with the use of 2005-06 surplus
dollars and various spending and revenue actions, the State will continue to
face persistent structural imbalance through 2010-11, totaling $13 billion. The
Governor's budget relies on non-recurring resources totaling $1.9 billion. The
Office of the State Comptroller holds that the utilization of non-recurring
resources for ongoing expenses without commensurate spending reductions will
continue to cause considerable pressure on the State's financial plan and is a
contributing factor in the State's recurring structural deficit. According to
the State Comptroller, the Governor's 2007-08 Budget continues to rely on
funding State priorities with debt. New York currently has the fifth highest per
capita debt ratio and debt as a percentage of personal income in the country. It
is projected that outstanding State-funded debt will increase to $64.7 billion
by the end of 2011-12, representing a 27% increase from 2006- 07.
State actions affecting the level of receipts and disbursements, the relative
strength of the State and regional economies and actions of the federal
government may create budget gaps for the State. Although the Governor's Budget
for FY 2007-2008 is ostensibly balanced, it still contains several financial
risks. These risks include the possibility of additional spending needs,
revenues that may not materialize and proposals to reduce spending or raise
revenues that have been previously rejected by the Legislature. The Office of
the State Comptroller reports that the State is facing a three-year General Fund
budget gap of $14.5 billion: $3.1 billion in 2008-09, $4.8 billion in 2009-10
and $6.6 billion in 2010-11. These gaps may result from significant disparities
between recurring revenues and the costs of maintaining or increasing the level
of spending for State programs. To address a potential imbalance in any given
fiscal year, the State would be required to take actions to increase receipts
and/or reduce disbursements as it enacts the budget for that year. Under the
State Constitution, the Governor is required to propose a balanced budget each
year. There can be no assurance, however, that the Legislature will enact the
proposals or that the State's actions will be sufficient to preserve budgetary
balance in a given fiscal year or to align recurring receipts and disbursements
in future fiscal years. The fiscal stability of the State is related to the
fiscal stability of its public authorities.
Authorities have various responsibilities, including those that finance,
construct and/or operate revenue-producing public facilities. Authorities are
not subject to the constitutional restrictions on the incurrence of debt that
apply to the State itself, and may issue bonds and notes within the amounts and
restrictions set forth in their legislative authorization. Authorities are
generally supported by revenues generated by the projects financed or operated,
such as tolls charged for use of highways, bridges or tunnels, charges for
electric power, electric and gas utility services, rentals charged for housing
units and charges for occupancy at medical care facilities. In addition, State
legislation authorizes several financing techniques for authorities. Also, there
are statutory arrangements providing for State local assistance payments
otherwise payable to localities, to be made under certain circumstances directly
to the authorities. Although the State has no obligation to provide additional
assistance to localities whose local assistance payments have been paid to
authorities under these arrangements, if local assistance payments are diverted
the affected localities could seek additional State assistance. Some authorities
also receive monies from State appropriations to pay for the operating costs of
certain of their programs.
16
As of November 16, 2006, Moody's, S&P and Fitch had given New York State's
general obligation bonds ratings of Aa3, AA, AA-, respectively. In May 2007,
Fitch raised its rating outlook from stable to positive for the State, citing
steady economic growth and revenue performance. Such ratings reflect only the
view of the originating rating agencies, from which an explanation of the
significance of such ratings may be obtained. There is no assurance that a
particular rating will continue for any given period of time or that any such
rating will not be revised downward or withdrawn entirely if, in the judgment of
the agency originally establishing the rating, circumstances so warrant. A
downward revision or withdrawal of such ratings, or either of them, may have an
effect on the market price of the State municipal obligations in which a Fund
invests.
Over the long term, New York State and New York City may face potential economic
problems. The economic outlook for New York City continues to be generally
favorable but decreases, especially in consumer spending, could pose a threat to
those forecasts. New York City accounts for a large portion of the State's
population and personal income, and New York City's financial health affects the
State in numerous ways. New York City continues to require significant financial
assistance from the State and depends on State aid to both enable it to balance
its budget and to meet its cash requirements. The State could also be affected
by the ability of the City to market its securities successfully in the public
credit markets as well as by shifts upward or downward in the State's real
estate market.
INFLATION-PROTECTED OBLIGATIONS
The TIPS ETF invests almost exclusively in inflation-protected public
obligations of the U.S. Treasury, commonly known as "TIPS." TIPS are a type of
U.S. government obligation issued by the U.S. Treasury that are designed to
provide inflation protection to investors. TIPS are income-generating
instruments whose interest and principal payments are adjusted for inflation - a
sustained increase in prices that erodes the purchasing power of money. The
inflation adjustment, which is typically applied monthly to the principal of the
bond, follows a designated inflation index, such as the Consumer Price Index. A
fixed coupon rate is applied to the inflation-adjusted principal so that as
inflation rises or falls, both the principal value and the interest payments
will increase or decrease. This can provide investors with a hedge against
inflation, as it helps preserve the purchasing power of an investment. Because
of this inflation adjustment feature, inflation-protected bonds typically have
lower yields than conventional fixed-rate bonds.
MORTGAGE PASS-THROUGH SECURITIES
The Aggregate Bond ETF may invest a substantial portion of its assets in U.S.
agency mortgage pass-through securities. The term "U.S. agency mortgage
pass-through security" refers to a category of pass-through securities backed by
pools of mortgages and issued by one of several U.S. government-sponsored
enterprises: the Government National Mortgage Association ("GNMA"), Federal
National Mortgage Association ("FNMA") or Federal Home Loan Mortgage Corporation
("FHLMC"). In the basic mortgage pass-through structure, mortgages with similar
issuer, term and coupon characteristics are collected and aggregated into a
"pool" consisting of multiple mortgage loans. The pool is assigned a CUSIP
number and undivided interests in the pool are traded and sold as pass-through
securities. The holder of the security is entitled to a pro rata share of
principal and interest payments (including unscheduled prepayments) from the
pool of mortgage loans.
An investment in a specific pool of pass-through securities requires an analysis
of the specific prepayment risk of mortgages within the covered pool (since
mortgagors typically have the option to prepay their loans). The level of
prepayments on a pool of mortgage securities is difficult to predict and can
impact the subsequent cash flows and value of the mortgage pool. In addition,
when trading specific mortgage pools, precise execution, delivery and settlement
arrangements must be negotiated for each transaction. These factors combine to
make trading in mortgage pools somewhat cumbersome.
For the foregoing and other reasons, the Aggregate Bond ETF seeks to obtain
exposure to U.S. agency mortgage pass-through securities primarily through the
use of "to-be-announced" or "TBA transactions." "TBA" refers to a commonly used
mechanism for the forward settlement of U.S. agency mortgage pass-through
securities, and not to a separate type of mortgage-backed security. Most
transactions in mortgage pass-through securities occur through the use of TBA
transactions. TBA transactions generally are conducted in accordance with
widely-accepted guidelines which establish commonly observed terms and
conditions for execution, settlement and delivery. In a TBA transaction, the
buyer and seller decide on general trade parameters, such as agency, settlement
date, par amount, and price. The actual pools delivered generally are determined
two days prior to settlement date. The Fund intends to use TBA transactions in
several ways. For example, the Fund expects that it will regularly enter into
TBA agreements and "roll over" such agreements prior to the settlement date
stipulated in such agreements. This type of TBA transaction is sometimes known
as a "TBA roll." In a "TBA roll" the Fund generally will sell the obligation to
purchase the pools stipulated in the TBA agreement prior to the stipulated
settlement date and will enter into a new TBA agreement for future delivery of
pools of mortgage pass-through securities. In
17
addition, the Fund may enter into TBA agreements and settle such transactions on
the stipulated settlement date by accepting actual receipt or delivery of the
pools of mortgage pass-through securities stipulated in the TBA agreement.
Default by or bankruptcy of a counterparty to a TBA transaction would expose the
Fund to possible loss because of adverse market action, expenses or delays in
connection with the purchase or sale of the pools of mortgage pass-through
securities specified in the TBA transaction. To minimize this risk, the Fund
will enter into TBA transactions only with established counterparties (such as
major broker-dealers) and the Adviser will monitor the creditworthiness of such
counterparties. In addition, the Fund may accept assignments of TBA transactions
from Authorized Participants (as defined below) from time to time. The Fund's
use of "TBA rolls" may cause the Fund to experience higher portfolio turnover,
higher transaction costs and to pay higher capital gain distributions to
shareholders (which may be taxable) than the other Funds described herein.
The Aggregate Bond ETF intends to invest cash pending settlement of any TBA
transactions in money market instruments, repurchase agreements, commercial
paper (including asset-backed commercial paper) or other high-quality, liquid
short-term instruments, which may include money market funds affiliated with the
Adviser.
ASSET-BACKED AND COMMERCIAL MORTGAGE-BACKED SECURITIES
The Aggregate Bond ETF may invest in asset-backed and commercial
mortgaged-backed securities. Asset-backed securities are securities backed by
installment contracts, credit-card receivables or other assets. Commercial
mortgage-backed securities are securities backed by commercial real estate
properties. Both asset-backed and commercial mortgage-backed securities
represent interests in "pools" of assets in which payments of both interest and
principal on the securities are made on a regular basis. The payments are, in
effect, "passed through" to the holder of the securities (net of any fees paid
to the issuer or guarantor of the securities). The average life of asset-backed
and commercial mortgage-backed securities varies with the maturities of the
underlying instruments and, as a result of prepayments, can often be less than
the original maturity of the assets underlying the securities. For this and
other reasons, an asset-backed and commercial mortgage-backed security's stated
maturity may be shortened, and the security's total return may be difficult to
predict precisely.
FOREIGN CURRENCY TRANSACTIONS
The International Treasury Bond ETF may conduct foreign currency transactions on
a spot (i.e., cash) or forward basis (i.e., by entering into forward contracts
to purchase or sell foreign currencies). Although foreign exchange dealers
generally do not charge a fee for such conversions, they do realize a profit
based on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer may offer to sell a foreign currency at one
rate, while offering a lesser rate of exchange should the counterparty desire to
resell that currency to the dealer. Forward contracts are customized
transactions that require a specific amount of a currency to be delivered at a
specific exchange rate on a specific date or range of dates in the future.
Forward contracts are generally traded in an interbank market directly between
currency traders (usually large commercial banks) and their customers. The
parties to a forward contract may agree to offset or terminate the contract
before its maturity, or may hold the contract to maturity and complete the
contemplated currency exchange.
LENDING PORTFOLIO SECURITIES
Each Fund may lend portfolio securities to certain creditworthy borrowers. The
borrowers provide collateral that is maintained in an amount at least equal to
the current market value of the securities loaned. A Fund may terminate a loan
at any time and obtain the return of the securities loaned. Each Fund receives
the value of any interest or cash or non-cash distributions paid on the loaned
securities. Distributions received on loaned securities in lieu of dividend
payments (i.e., substitute payments) would not be considered qualified dividend
income.
With respect to loans that are collateralized by cash, the borrower will be
entitled to receive a fee based on the amount of cash collateral. The Fund is
compensated by the difference between the amount earned on the reinvestment of
cash collateral and the fee paid to the borrower. In the case of collateral
other than cash, the Fund is compensated by a fee paid by the borrower equal to
a percentage of the market value of the loaned securities. Any cash collateral
may be reinvested in certain short-term instruments either directly on behalf of
each lending Fund or through one or more joint accounts or money market funds,
which may include those managed by the Adviser.
A Fund may pay a portion of the interest or fees earned from securities lending
to a borrower as described above, and to one or more securities lending agents
approved by the Board of Trustees (the "Board") who administer the lending
program for one or more Funds in accordance with guidelines approved by the
Fund's Board. In such capacity, the lending agent causes the delivery of loaned
18
securities from a Fund to borrowers, arranges for the return of loaned
securities to the Fund at the termination of a loan, requests deposit of
collateral, monitors the daily value of the loaned securities and collateral,
requests that borrowers add to the collateral when required by the loan
agreements, and provides recordkeeping and accounting services necessary for the
operation of the program. State Street Bank and Trust Company ("State Street"),
an affiliate of the Trust, has been approved by the Board to serve as securities
lending agent for the Fund and the Trust has entered into an agreement with
State Street for such services. Among other matters, the Trust has agreed to
indemnify State Street for certain liabilities. State Street has received an
order of exemption from the Securities and Exchange Commission ("SEC") under
Sections 17(a) and 12(d)(1) under the 1940 Act to serve as the lending agent for
affiliated investment companies such as the Trust and to invest the cash
collateral received from loan transactions to be invested in an affiliated cash
collateral fund.
Securities lending involves exposure to certain risks, including operational
risk (i.e., the risk of losses resulting from problems in the settlement and
accounting process), "gap" risk (i.e., the risk of a mismatch between the return
on cash collateral reinvestments and the fees the Fund has agreed to pay a
borrower), and credit, legal, counterparty and market risk. In the event a
borrower does not return a Fund's securities as agreed, the Fund may experience
losses if the proceeds received from liquidating the collateral do not at least
equal the value of the loaned security at the time the collateral is liquidated
plus the transaction costs incurred in purchasing replacement securities.
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements with commercial banks, brokers or
dealers to generate income from its excess cash balances and to invest
securities lending cash collateral. A repurchase agreement is an agreement under
which a Fund acquires a financial instrument (e.g., a security issued by the
U.S. government or an agency thereof, a banker's acceptance or a certificate of
deposit) from a seller, subject to resale to the seller at an agreed upon price
and date (normally, the next business day). A repurchase agreement may be
considered a loan collateralized by securities. The resale price reflects an
agreed upon interest rate effective for the period the instrument is held by a
Fund and is unrelated to the interest rate on the underlying instrument.
In these repurchase agreement transactions, the securities acquired by a Fund
(including accrued interest earned thereon) must have a total value in excess of
the value of the repurchase agreement and are held by the Custodian until
repurchased. No more than an aggregate of 15% of each Fund's net assets will be
invested in illiquid securities, including repurchase agreements having
maturities longer than seven days and securities subject to legal or contractual
restrictions on resale, or for which there are no readily available market
quotations.
The use of repurchase agreements involves certain risks. For example, if the
other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, a
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under the U.S. Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by a Fund not within the control of
the Fund and, therefore, the Fund may not be able to substantiate its interest
in the underlying security and may be deemed an unsecured creditor of the other
party to the agreement.
REVERSE REPURCHASE AGREEMENTS
Each Fund may enter into reverse repurchase agreements, which involve the sale
of securities with an agreement to repurchase the securities at an agreed-upon
price, date and interest payment and have the characteristics of borrowing. The
securities purchased with the funds obtained from the agreement and securities
collateralizing the agreement will have maturity dates no later than the
repayment date. Generally the effect of such transactions is that the Fund can
recover all or most of the cash invested in the portfolio securities involved
during the term of the reverse repurchase agreement, while in many cases the
Fund is able to keep some of the interest income associated with those
securities. Such transactions are only advantageous if the Fund has an
opportunity to earn a greater rate of interest on the cash derived from these
transactions than the interest cost of obtaining the same amount of cash.
Opportunities to realize earnings from the use of the proceeds equal to or
greater than the interest required to be paid may not always be available and
each Fund intends to use the reverse repurchase technique only when the Adviser
believes it will be advantageous to a Fund. The use of reverse repurchase
agreements may exaggerate any interim increase or decrease in the value of each
Fund's assets. A Fund's exposure to reverse repurchase agreements will be
covered by securities having a value equal to or greater than such commitments.
Under the 1940 Act, reverse repurchase agreements are considered borrowings.
OTHER SHORT-TERM INSTRUMENTS
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In addition to repurchase agreements, each Fund may invest in short-term
instruments, including money market instruments, on an ongoing basis to provide
liquidity or for other reasons. Money market instruments are generally
short-term investments that may include but are not limited to: (i) shares of
money market funds (including those advised by the Adviser); (ii) obligations
issued or guaranteed by the U.S. government, its agencies or instrumentalities
(including government-sponsored enterprises); (iii) negotiable certificates of
deposit ("CDs"), bankers' acceptances, fixed time deposits and other obligations
of U.S. and foreign banks (including foreign branches) and similar institutions;
(iv) commercial paper rated at the date of purchase "Prime-1" by Moody's or
"A-1" by S&P, or if unrated, of comparable quality as determined by the Adviser;
(v) non-convertible corporate debt securities (e.g., bonds and debentures) with
remaining maturities at the date of purchase of not more than 397 days and that
satisfy the rating requirements set forth in Rule 2a-7 under the 1940 Act; and
(vi) short-term U.S. dollar-denominated obligations of foreign banks (including
U.S. branches) that, in the opinion of the Adviser, are of comparable quality to
obligations of U.S. banks which may be purchased by a Fund. Any of these
instruments may be purchased on a current or a forward-settled basis. Money
market instruments also include shares of money market funds. Time deposits are
non-negotiable deposits maintained in banking institutions for specified periods
of time at stated interest rates. Bankers' acceptances are time drafts drawn on
commercial banks by borrowers, usually in connection with international
transactions.
INVESTMENT COMPANIES
Each Fund may invest in the securities of other investment companies, including
money market funds, subject to applicable limitations under Section 12(d)(1) of
the 1940 Act. Pursuant to Section 12(d)(1), a Fund may invest in the securities
of another investment company (the "acquired company") provided that the Fund,
immediately after such purchase or acquisition, does not own in the aggregate:
(i) more than 3% of the total outstanding voting stock of the acquired company;
(ii) securities issued by the acquired company having an aggregate value in
excess of 5% of the value of the total assets of the Fund; or (iii) securities
issued by the acquired company and all other investment companies (other than
Treasury stock of the Fund) having an aggregate value in excess of 10% of the
value of the total assets of the Fund. To the extent allowed by law or
regulation, each Fund may invest its assets in securities of investment
companies that are money market funds, including those advised by the Adviser or
otherwise affiliated with the Adviser, in excess of the limits discussed above.
If a Fund invests in, and, thus, is a shareholder of, another investment
company, the Fund's shareholders will indirectly bear the Fund's proportionate
share of the fees and expenses paid by such other investment company, including
advisory fees, in addition to both the management fees payable directly by the
Fund to the Fund's own investment adviser and the other expenses that the Fund
bears directly in connection with the Fund's own operations.
U.S. REGISTERED SECURITIES OF FOREIGN ISSUERS
The SPDR DJ Global Titans ETF may purchase publicly traded common stocks of
foreign corporations and SPDR Lehman Aggregate Bond ETF and SPDR Lehman High
Yield Bond ETF may invest in U.S. registered, dollar-denominated bonds of
foreign corporations, governments, agencies and supra-national entities.
Investing in U.S. registered, dollar-denominated, common stocks and bonds issued
by non-U.S. issuers involves some risks and considerations not typically
associated with investing in U.S. companies. These include differences in
accounting, auditing and financial reporting standards, the possibility of
expropriation or confiscatory taxation, adverse changes in investment or
exchange control regulations, political instability which could affect U.S.
investments in foreign countries, and potential restrictions of the flow of
international capital. Foreign companies may be subject to less governmental
regulation than U.S. issuers. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross domestic product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payment positions.
The SPDR(R) DJ Global Titans ETF's investment in common stock of foreign
corporations may also be in the form of American Depository Receipts ("ADRs"),
Global Depository Receipts ("GDRs") and European Depositary Receipts ("EDRs")
(collectively "Depositary Receipts"). Depositary Receipts are receipts,
typically issued by a bank or trust company, which evidence ownership of
underlying securities issued by a foreign corporation. For ADRs, the depository
is typically a U.S. financial institution and the underlying securities are
issued by a foreign issuer. For other Depositary Receipts, the depository may be
a foreign or a U.S. entity, and the underlying securities may have a foreign or
a U.S. issuer. Depositary Receipts will not necessarily be denominated in the
same currency as their underlying securities. Generally, ADRs, in registered
form, are designed for use in the U.S. securities market, and EDRs, in bearer
form, are designated for use in European securities markets. GDRs are tradable
both in the United States and in Europe and are designed for use throughout the
world. The Fund may invest in unsponsored Depositary Receipts. The issuers of
unsponsored Depositary Receipts are not obligated to disclose material
information in the Untied States, and, therefore, there may be
20
less information available regarding such issuers and there may not be a
correlation between such information and the market value of the Depositary
Receipts.
FUTURES CONTRACTS, OPTIONS AND SWAP AGREEMENTS
Each Fund may utilize exchange-traded futures and options contracts and swap
agreements. Each Fund will segregate cash and/or appropriate liquid assets if
required to do so by SEC or Commodity Futures Trading Commission ("CFTC")
regulation or interpretation.
Futures contracts generally provide for the future sale by one party and
purchase by another party of a specified commodity or security at a specified
future time and at a specified price. Index futures contracts are settled daily
with a payment by one party to the other of a cash amount based on the
difference between the level of the index specified in the contract from one day
to the next. Futures contracts are standardized as to maturity date and
underlying instrument and are traded on futures exchanges.
The Funds are required to make a good faith margin deposit in cash or U.S.
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying commodity
or payment of the cash settlement amount) if it is not terminated prior to the
specified delivery date. Brokers may establish deposit requirements which are
higher than the exchange minimums. Futures contracts are customarily purchased
and sold on margin deposits which may range upward from less than 5% of the
value of the contract being traded.
After a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, payment of additional
"variation" margin will be required. Conversely, change in the contract value
may reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. In such case, a Fund would
expect to earn interest income on its margin deposits. Closing out an open
futures position is done by taking an opposite position ("buying" a contract
which has previously been "sold," or "selling" a contract previously
"purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract position is opened or closed.
Each Fund may purchase and sell put and call options. Such options may relate to
particular securities and may or may not be listed on a national securities
exchange and issued by the Options Clearing Corporation. Options trading is a
highly specialized activity that entails greater than ordinary investment risk.
Options on particular securities may be more volatile than the underlying
securities, and therefore, on a percentage basis, an investment in options may
be subject to greater fluctuation than an investment in the underlying
securities themselves.
Each Fund intends to use futures and options in accordance with Rule 4.5 of the
CEA. Each Fund may use exchange-traded futures and options, together with
positions in cash and money market instruments, to simulate full investment in
the underlying Index. Exchange-traded futures and options contracts are not
currently available for all of the Indexes. Under such circumstances, the
Adviser may seek to utilize other instruments that it believes to be correlated
to the underlying Index components or a subset of the components. The Trust, on
behalf of each Fund, has filed a notice of eligibility for exclusion from the
definition of the term "commodity pool operator" in accordance with Rule 4.5 so
that each Fund is not subject to registration or regulation as a commodity pool
operator under the CEA.
Restrictions on the Use of Futures and Options. In connection with its
management of the Funds, the Adviser has claimed an exclusion from registration
as a commodity trading advisor under the Commodity Exchange Act ("CEA") and,
therefore, is not subject to the registration and regulatory requirements of the
CEA. The Funds reserve the right to engage in transactions involving futures and
options thereon to the extent allowed by the CFTC regulations in effect from
time to time and in accordance with each Fund's policies. Each Fund would take
steps to prevent its futures positions from "leveraging" its securities
holdings. When it has a long futures position, it will maintain with its
custodian bank, cash or equivalents. When it has a short futures position, it
will maintain with its custodian bank assets substantially identical to those
underlying the contract or cash and equivalents (or a combination of the
foregoing) having a value equal to the net obligation of the Fund under the
contract (less the value of any margin deposits in connection with the
position).
21
Swap Agreements. Each Fund may enter into swap agreements; including interest
rate, index, and total return swap agreements. Swap agreements are contracts
between parties in which one party agrees to make periodic payments to the other
party based on the change in market value or level of a specified rate, index or
asset. In return, the other party agrees to make payments to the first party
based on the return of a different specified rate, index or asset. Swap
agreements will usually be done on a net basis, i.e., where the two parties make
net payments with the Fund receiving or paying, as the case may be, only the net
amount of the two payments. The net amount of the excess, if any, of a Fund's
obligations over its entitlements with respect to each swap is accrued on a
daily basis and an amount of cash or equivalents having an aggregate value at
least equal to the accrued excess is maintained by the Fund.
In the case of a credit default swap ("CDS"), the contract gives one party (the
buyer) the right to recoup the economic value of a decline in the value of debt
securities of the reference issuer if the credit event (a downgrade or default)
occurs. This value is obtained by delivering a debt security of the reference
issuer to the party in return for a previously agreed payment from the other
party (frequently, the par value of the debt security). As the seller of a CDS
contract, the Fund would be required to pay the par (or other agreed upon) value
of a referenced debt obligation to the counterparty in the event of a default or
other credit event by the reference issuer, such as a U.S. or foreign corporate
issuer, with respect to debt obligations. In return, a Fund would receive from
the counterparty a periodic stream of payments over the term of the contract
provided that no event of default has occurred. If no default occurs, a Fund
would keep the stream of payments and would have no payment obligations. As the
seller, a Fund would be subject to investment exposure on the notional amount of
the swap.
CDSs may require initial premium (discount) payments as well as periodic
payments (receipts) related to the interest leg of the swap or to the default of
a reference obligation. The Fund will segregate assets necessary to meet any
accrued payment obligations when it is the buyer of CDS. In cases where the Fund
is a seller of a CDS, if the CDS is physically settled, the Fund will be
required to segregate the full notional amount of the CDS.
REAL ESTATE INVESTMENT TRUSTS ("REITs")
SPDR DJ Wilshire Total Market ETF, SPDR DJ Wilshire Large Cap ETF, SPDR DJ
Wilshire Large Cap Growth ETF, SPDR DJ Wilshire Large Cap Value ETF, SPDR DJ
Wilshire Mid Cap ETF, SPDR DJ Wilshire Mid Cap Growth ETF, SPDR DJ Wilshire Mid
Cap Value ETF, SPDR DJ Wilshire Small Cap ETF, SPDR DJ Wilshire Small Cap Growth
ETF, SPDR DJ Wilshire Small Cap Value ETF and DJ Wilshire REIT ETF will invest
in REITs only to the extent that their underlying Indexes invest in REITs. REITs
pool investor's funds for investment primarily in income producing real estate
or real estate loans or interests. A REIT is not taxed on income distributed to
shareholders if it complies with several requirements relating to its
organization, ownership, assets, and income and a requirement that it distribute
to its shareholders at least 90% of its taxable income (other than net capital
gains) for each taxable year. REITs can generally be classified as Equity REITs,
Mortgage REITs and Hybrid REITs. Equity REITs, which invest the majority of
their assets directly in real property, derive their income primarily from
rents. Equity REITs can also realize capital gains by selling properties that
have appreciated in value. Mortgage REITs, which invest the majority of their
assets in real estate mortgages, derive their income primarily from interest
payments. Hybrid REITs combine the characteristics of both Equity REITs and
Mortgage REITs. The Fund will not invest in real estate directly, but only in
securities issued by real estate companies. However, the Fund may be subject to
risks similar to those associated with the direct ownership of real estate (in
addition to securities markets risks) because of its policy of concentration in
the securities of companies in the real estate industry. These include declines
in the value of real estate, risks related to general and local economic
conditions, dependency on management skill, heavy cash flow dependency, possible
lack of availability of mortgage funds, overbuilding, extended vacancies of
properties, increased competition, increases in property taxes and operating
expenses, changes in zoning laws, losses due to costs resulting from the
clean-up of environmental problems, liability to third parties for damages
resulting from environmental problems, casualty or condemnation losses,
limitations on rents, changes in neighborhood values, the appeal of properties
to tenants and changes in interest rates. Investments in REITs may subject Fund
shareholders to duplicate management and administrative fees.
In addition to these risks, Equity REITs may be affected by changes in the value
of the underlying property owned by the trusts, while Mortgage REITs may be
affected by the quality of any credit extended. Further, Equity and Mortgage
REITs are dependent upon management skills and generally may not be diversified.
Equity and Mortgage REITs are also subject to heavy cash flow dependency,
defaults by borrowers and self-liquidation. In addition, Equity and Mortgage
REITs could possibly fail to qualify for the beneficial tax treatment available
to REITs under the Internal Revenue Code of 1986, as amended (the "Internal
Revenue "Code"), or to maintain their exemptions from registration under the
1940 Act. The above factors may also adversely affect a borrower's or a lessee's
ability to meet its obligations to the REIT. In the event of a default by a
borrower or lessee, the REIT may experience delays in enforcing its rights as a
mortgagee or lessor and may incur substantial costs associated with protecting
investments.
22
RATINGS
An investment-grade rating means the security or issuer is rated
investment-grade by Moody's(R) Investors Service ("Moody's"), Standard &
Poor's(R) ("S&P"), Fitch Inc., Dominion Bond Rating Service Limited, or another
credit rating agency designated as a nationally recognized statistical rating
organization by the SEC, or is unrated but considered to be of equivalent
quality by the Adviser.
Subsequent to purchase by the applicable Funds, a rated security may cease to be
rated or its rating may be reduced below an investment grade rating. Bonds rated
lower than Baa3 by Moody's or BBB- by S&P are below investment grade quality and
are obligations of issuers that are considered predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal according
to the terms of the obligation and, therefore, carry greater investment risk,
including the possibility of issuer default and bankruptcy and increased market
price volatility. Such securities ("lower rated securities") are commonly
referred to as "junk bonds" and are subject to a substantial degree of credit
risk. Lower rated securities are often issued by smaller, less creditworthy
companies or by highly leveraged (indebted) firms, which are generally less able
than more financially stable firms to make scheduled payments of interest and
principal. The risks posed by securities issued under such circumstances are
substantial. Bonds rated below investment grade tend to be less marketable than
higher-quality bonds because the market for them is less broad. The market for
unrated bonds is even narrower. See "HIGH YIELD SECURITIES" above for more
information relating to the risks associated with investing in lower rated
securities.
SPECIAL CONSIDERATIONS AND RISKS
A discussion of the risks associated with an investment in a Fund is contained
in each Prospectus under the heading "Principal Risks of the Fund." The
discussion below supplements, and should be read in conjunction with, such
sections of the Prospectuses.
GENERAL
Investment in a Fund should be made with an understanding that the value of a
Fund's portfolio securities may fluctuate in accordance with changes in the
financial condition of the issuers of the portfolio securities, the value of
securities generally and other factors.
An investment in a Fund should also be made with an understanding of the risks
inherent in an investment in securities, including the risk that the financial
condition of issuers may become impaired or that the general condition of the
securities markets may deteriorate (either of which may cause a decrease in the
value of the portfolio securities and thus in the value of Shares). Securities
are susceptible to general market fluctuations and to volatile increases and
decreases in value as market confidence in and perceptions of their issuers
change. These investor perceptions are based on various and unpredictable
factors including expectations regarding government, economic, monetary and
fiscal policies, inflation and interest rates, economic expansion or
contraction, and global or regional political, economic and banking crises.
Holders of common stocks incur more risk than holders of preferred stocks and
debt obligations because common stockholders, as owners of the issuer, have
generally inferior rights to receive payments from the issuer in comparison with
the rights of creditors of, or holders of debt obligations or preferred stocks
issued by, the issuer. Further, unlike debt securities which typically have a
stated principal amount payable at maturity (whose value, however, will be
subject to market fluctuations prior thereto), or preferred stocks which
typically have a liquidation preference and which may have stated optional or
mandatory redemption provisions, common stocks have neither a fixed principal
amount nor a maturity. Common stock values are subject to market fluctuations as
long as the common stock remains outstanding.
Although most of the securities in the Indexes are listed on a securities
exchange, the principal trading market for some may be in the over-the-counter
market. The existence of a liquid trading market for certain securities may
depend on whether dealers will make a market in such securities. There can be no
assurance that a market will be made or maintained or that any such market will
be or remain liquid. The price at which securities may be sold and the value of
a Fund's Shares will be adversely affected if trading markets for a Fund's
portfolio securities are limited or absent or if bid/ask spreads are wide.
FUTURES AND OPTIONS TRANSACTIONS
Positions in futures contracts and options may be closed out only on an exchange
which provides a secondary market therefore. However, there can be no assurance
that a liquid secondary market will exist for any particular futures contract or
option at any
23
specific time. Thus, it may not be possible to close a futures or options
position. In the event of adverse price movements, a Fund would continue to be
required to make daily cash payments to maintain its required margin. In such
situations, if a Fund has insufficient cash, it may have to sell portfolio
securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, a Fund may be required to make delivery
of the instruments underlying futures contracts it has sold.
A Fund will minimize the risk that it will be unable to close out a futures or
options contract by only entering into futures and options for which there
appears to be a liquid secondary market.
The risk of loss in trading futures contracts or uncovered call options in some
strategies (e.g., selling uncovered index futures contracts) is potentially
unlimited. The Fund does not plan to use futures and options contracts, when
available, in this way. The risk of a futures position may still be large as
traditionally measured due to the low margin deposits required. In many cases, a
relatively small price movement in a futures contract may result in immediate
and substantial loss or gain to the investor relative to the size of a required
margin deposit. The Fund, however, intends to utilize futures and options
contracts in a manner designed to limit their risk exposure to that which is
comparable to what they would have incurred through direct investment in
securities.
Utilization of futures transactions by a Fund involves the risk of imperfect or
even negative correlation to the benchmark Index if the index underlying the
futures contracts differs from the benchmark Index. There is also the risk of
loss by a Fund of margin deposits in the event of bankruptcy of a broker with
whom a Fund has an open position in the futures contract or option.
Certain financial futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of a trading session.
Once the daily limit has been reached in a particular type of contract, no
trades may be made on that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and therefore does
not limit potential losses, because the limit may prevent the liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
RISKS OF SWAP AGREEMENTS
Swap agreements are subject to the risk that the swap counterparty will default
on its obligations. If such a default occurs, a Fund will have contractual
remedies pursuant to the agreements related to the transaction, but such
remedies may be subject to bankruptcy and insolvency laws which could affect
such Fund's rights as a creditor.
The use of interest-rate and index swaps is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio security transactions. These transactions generally do not
involve the delivery of securities or other underlying assets or principal.
TAX RISKS
As with any investment, you should consider how your investment in Shares of a
Fund will be taxed. The tax information in the applicable Prospectus and this
SAI is provided as general information. You should consult your own tax
professional about the tax consequences of an investment in Shares of any Fund.
Unless your investment in Shares is made through a tax-exempt entity or
tax-deferred retirement account, such as an individual retirement account, you
need to be aware of the possible tax consequences when a Fund makes
distributions or you sell Fund Shares.
CONTINUOUS OFFERING
The method by which Creation Units of Shares are created and traded may raise
certain issues under applicable securities laws. Because new Creation Units of
Shares are issued and sold by the Trust on an ongoing basis, at any point a
"distribution," as such term is used in the Securities Act, may occur.
Broker-dealers and other persons are cautioned that some activities on their
part may, depending on the circumstances, result in their being deemed
participants in a distribution in a manner which could render them statutory
underwriters and subject them to the prospectus delivery and liability
provisions of the Securities Act.
For example, a broker-dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Units after placing an order with the
Distributor, breaks them down into constituent Shares, and sells such Shares
directly to customers, or if it chooses to couple the creation of a supply of
new Shares with an active selling effort involving solicitation of secondary
market demand for Shares. A
24
determination of whether one is an underwriter for purposes of the Securities
Act must take into account all the facts and circumstances pertaining to the
activities of the broker-dealer or its client in the particular case, and the
examples mentioned above should not be considered a complete description of all
the activities that could lead to a categorization as an underwriter.
Broker-dealer firms should also note that dealers who are not "underwriters" but
are effecting transactions in Shares, whether or not participating in the
distribution of Shares, are generally required to deliver a prospectus. This is
because the prospectus delivery exemption in Section 4(3) of the Securities Act
is not available in respect of such transactions as a result of Section 24(d) of
the 1940 Act. Firms that incur a prospectus-delivery obligation with respect to
Shares of a Fund are reminded that under Securities Act Rule 153, a
prospectus-delivery obligation under Section 5(b)(2) of the Securities Act owed
to an exchange member in connection with a sale on the Exchange is satisfied by
the fact that such Fund's prospectus is available at the Exchange upon request.
The prospectus delivery mechanism provided in Rule 153 is only available with
respect to transactions on an exchange.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions as fundamental
policies with respect to each Fund. These restrictions cannot be changed with
respect to a Fund without the approval of the holders of a majority of such
Fund's outstanding voting securities. For purposes of the 1940 Act, a majority
of the outstanding voting securities of a Fund means the vote, at an annual or a
special meeting of the security holders of the Trust, of the lesser of (1) 67%
or more of the voting securities of the Fund present at such meeting, if the
holders of more than 50% of the outstanding voting securities of such Fund are
present or represented by proxy, or (2) more than 50% of the outstanding voting
securities of the Fund. Except with the approval of a majority of the
outstanding voting securities, a Fund may not:
1. Concentrate its investments (i.e., hold 25% or more of its total assets in
the stocks of a particular industry or group of industries), except that a Fund
will concentrate to approximately the same extent that its underlying Index
concentrates in the stocks of such particular industry or group of industries.
For purposes of this limitation, securities of the U.S. government (including
its agencies and instrumentalities), repurchase agreements collateralized by
U.S. government securities, and securities of state or municipal governments and
their political subdivisions are not considered to be issued by members of any
industry.
2. Lend any funds or other assets except through the purchase of all or a
portion of an issue of securities or obligations of the type in which it is
permitted to invest (including participation interests in such securities or
obligations) and except that a Fund may lend its portfolio securities in an
amount not to exceed 33% of the value of its total assets;
3. Issue senior securities or borrow money, except borrowings from banks for
temporary or emergency purposes in an amount up to 10% of the value of the
Fund's total assets (including the amount borrowed), valued at market, less
liabilities (not including the amount borrowed) valued at the time the borrowing
is made, and the Fund will not purchase securities while borrowings in excess of
5% of the Fund's total assets are outstanding, provided, that for purposes of
this restriction, short-term credits necessary for the clearance of transactions
are not considered borrowings (this limitation on purchases does not apply to
acceptance by the Fund of a deposit principally of securities included in the
relevant Index for creation of Creation Units);
4. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to
secure permitted borrowings as set forth above in restriction 2. (The deposit of
underlying securities and other assets in escrow and collateral arrangements
with respect to initial or variation margin for futures contracts or options
contracts will not be deemed to be pledges of the Fund's assets);
5. Purchase, hold or deal in real estate, or oil, gas or mineral interests or
leases, but a Fund may purchase and sell securities that are issued by companies
that invest or deal in such assets;
6. Act as an underwriter of securities of other issuers, except to the extent
the Fund may be deemed an underwriter in connection with the sale of securities
in its portfolio;
7. Purchase securities on margin, except for such short-term credits as are
necessary for the clearance of transactions, except that a Fund may make margin
deposits in connection with transactions in options, futures and options on
futures;
8. Sell securities short;
25
9. Invest in commodities or commodity contracts, except that a Fund may transact
in exchange traded futures contracts on securities, indexes and options on such
futures contracts and make margin deposits in connection with such contracts;
10. With respect to the Equity ETFs, change its investment objective;
11. With respect to the SPDR Lehman Municipal Bond ETF and the SPDR Lehman Short
Term Municipal Bond ETF, invest, under normal circumstances, less than 80% of
its assets in investments the income of which is exempt from Federal income tax;
12. With respect to the SPDR Lehman California Municipal Bond ETF, invest, under
normal circumstances, less than 80% of its assets in investments the income of
which is exempt from both Federal income tax and California income tax; or
13. With respect to the SPDR Lehman New York Municipal Bond ETF, invest, under
normal circumstances, less than 80% of its assets in investments the income of
which is exempt from both Federal income tax and New York income tax.
In addition to the investment restrictions adopted as fundamental policies as
set forth above, each Fund observes the following restrictions, which may be
changed by the Board without a shareholder vote. A Fund will not:
1. Invest in the securities of a company for the purpose of exercising
management or control, provided that the Trust may vote the investment
securities owned by each Fund in accordance with its views;
2. Hold illiquid assets in excess of 15% of its net assets. An illiquid asset is
any asset which may not be sold or disposed of in the ordinary course of
business within seven days at approximately the value at which the Fund has
valued the investment;
3. With respect to the Equity ETFs, under normal circumstances, invest less than
95% of its total assets in securities that comprise its relevant Index. Prior to
any change in a Fund's 95% investment policy, such Fund will provide
shareholders with 60 days written notice; or
4. With respect to the Fixed Income ETFs, under normal circumstances, invest
less than 80% of its total assets in securities that comprise its relevant
Index. With respect to the Aggregate Bond ETF, TBA transactions are included
within this 80% investment policy. Prior to any change in a Fund's 80%
investment policy, such Fund will provide shareholders with 60 days written
notice.
5. With respect to the SPDR Lehman High Yield Bond ETF, invest, under normal
circumstances, less than 80% of its assets in bonds that are rated below
investment grade. Prior to any change in SPDR Lehman High Yield Bond ETF's 80%
investment policy, the SPDR Lehman High Yield Bond ETF will provide shareholders
with 60 days written notice.
If a percentage limitation is adhered to at the time of investment or contract,
a later increase or decrease in percentage resulting from any change in value or
total or net assets will not result in a violation of such restriction, except
that the percentage limitations with respect to the borrowing of money and
illiquid securities will be observed continuously.
EXCHANGE LISTING AND TRADING
A discussion of exchange listing and trading matters associated with an
investment in the Funds is contained in the Prospectus under the "DETERMINATION
OF NET ASSET VALUE" and "BUYING AND SELLING THE FUNDS." The discussion below
supplements, and should be read in conjunction with, such sections of the
Prospectus.
The Shares of each Fund are approved for listing and trading on the Exchange,
subject to notice of issuance. The Shares trade on the Exchange at prices that
may differ to some degree from their net asset value. There can be no assurance
that the requirements of the Exchange necessary to maintain the listing of
Shares of any Fund will continue to be met.
The Exchange may, but is not required to, remove the Shares of a Fund from
listing if (1) following the initial twelve-month period beginning upon the
commencement of trading of a Fund, there are fewer than 50 beneficial holders of
the Shares for 30 or more consecutive trading days; (2) the value of the
underlying Index or portfolio of securities on which such Fund is based is no
longer calculated or available; (3) the "indicative optimized portfolio value"
("IOPV") of a Fund is no longer calculated or available; or (4) such other event
shall occur or condition exists that, in the opinion of the Exchange, makes
further dealings on the Exchange inadvisable. In addition, the Exchange will
remove the Shares from listing and trading upon termination of the Trust or a
Fund.
26
As in the case of other publicly traded securities, brokers' commissions on
transactions will be based on negotiated commission rates at customary levels.
In order to provide current Share pricing information, the Exchange disseminates
an updated IOPV relating to the Fund as calculated by Bloomberg, L.P. or the
Exchange. The IOPV calculations are based on local closing prices and may not
reflect events that occur subsequent to the local market's close. As a result,
premiums and discounts between the IOPV and the market price could be affected.
IOPVs also will be disseminated to providers of financial data via the National
Market System. IOPVs are disseminated for each Fund every 15 seconds during
regular Exchange trading hours of 9:30 a.m., New York time to 4:00 p.m., New
York time. Neither the Trust, nor the Adviser, nor any of its affiliates are
involved in or responsible for any aspect of the calculation or dissemination of
such IOPVs and make no warranty as to their accuracy.
An IOPV is solely an estimate of the current market value per Share of the Fund.
As such, IOPVs are not, and should not be taken to be, a real time update of the
net asset value per Share of the Fund, which is calculated only once daily,
normally at 4:00 p.m., New York time. Further, IOPVs are not, and should not be
taken to be, the price at which Shares may be purchased or sold in the secondary
market.
The base and trading currencies of each Fund is the U.S. dollar. The base
currency is the currency in which each Fund's net asset value per Share is
calculated and the trading currency is the currency in which Shares of the Funds
are listed and traded on the applicable Exchange.
27
MANAGEMENT OF THE TRUST
The following information supplements and should be read in conjunction with the
section in the Prospectuses entitled "MANAGEMENT."
TRUSTEES AND OFFICERS OF THE TRUST
The Board has responsibility for the overall management and operations of the
Trust, including general supervision of the duties performed by the Adviser and
other service providers. The Board currently consists of four Trustees, one of
whom is considered to be an "interested person" (as defined in the 1940 Act) of
the Trust.
TRUSTEES AND OFFICERS
NUMBER OF
PORTFOLIOS
TERM OF PRINCIPAL IN FUND
OFFICE AND OCCUPATION(S) COMPLEX OTHER
NAME, ADDRESS POSITION(S) LENGTH OF DURING PAST OVERSEEN DIRECTORSHIPS
AND DATE OF BIRTH WITH FUNDS TIME SERVED 5 YEARS BY TRUSTEE HELD BY TRUSTEE
----------------- ----------- ------------- ----------------------- ---------- -------------------
INDEPENDENT TRUSTEES
DAVID M. KELLY Independent Unlimited Retired. 68 Chicago Stock
c/o SPDR Series Trust Trustee Elected: Exchange
State Street Financial September 2000 (Public Governor/
Center Director);
One Lincoln Street Penson Worldwide Inc.
Boston, MA 02111-2900 (Director);
10/10/38 Custodial Trust Co.
(Director);
SPDR Index
Shares Funds
(Trustee).
FRANK NESVET Independent Unlimited Chief Executive 68 SPDR Index
c/o SPDR Series Trust Trustee, Elected: Officer, Libra Shares Funds,
State Street Financial Chairman September 2000 Group, Inc. (Trustee); The
Center (1998-present) (a Massachusetts Health
One Lincoln Street financial services & Education Tax
Boston, MA 02111-2900 consulting company). Exempt Trust
9/24/43 (Trustee).
HELEN F. PETERS Independent Unlimited Professor of 68 Federal Home Loan
c/o SPDR Series Trust Trustee, Elected: Finance, Carroll Bank of Boston
State Street Financial Chair of September 2000 School of (Director); BJ's
Center Audit Management, Wholesale Clubs
One Lincoln Street Committee Boston College (Director);
Boston, MA 02111-2900 (2003-present); SPDR Index
3/22/48 Dean, Boston Shares Funds
College (August (Trustee).
2000-2003).
INTERESTED TRUSTEE
JAMES E. ROSS* Interested Unlimited President, SSgA 91 SPDR Index
SSgA Funds Management, Inc. Trustee, Elected Funds Management, Shares Funds (Trustee);
State Street Financial President President: Inc. (2005-present); Select Sector SPDR
Center May 2005, Principal, SSgA Funds Trust (Trustee); State
One Lincoln Street elected Management, Inc. Street Master Funds
Boston, MA 02111 Trustee: (2001-present); (Trustee); and State
6/24/65 November 2005 Senior Managing Street Institutional
Director, State Street Investment Trust
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28
NUMBER OF
PORTFOLIOS
TERM OF PRINCIPAL IN FUND
OFFICE AND OCCUPATION(S) COMPLEX OTHER
NAME, ADDRESS POSITION(S) LENGTH OF DURING PAST OVERSEEN DIRECTORSHIPS
AND DATE OF BIRTH WITH FUNDS TIME SERVED 5 YEARS BY TRUSTEE HELD BY TRUSTEE
----------------- ----------- ------------- ----------------------- ---------- -------------------
Global Advisors (Trustee).
(2006-present);
Principal, State
Street Global
Advisors
(2000-2006).
OFFICERS
MICHAEL P. RILEY Vice Unlimited Principal, State N/A N/A
SSgA Funds Management, Inc. President Elected: Street Global
State Street Financial February 2005 Advisors
Center (2005-present);
One Lincoln Street Assistant
Boston, MA 02111 Vice
3/22/69 President, State
Street Bank and
Trust Company
(2000-2004).
GARY L. FRENCH Treasurer Unlimited Senior Vice N/A N/A
State Street Bank and Elected: President,
Trust Company May 2005 State Street Bank
Two Avenue de Lafayette and Trust Company
Boston, MA 02111 (2002-present);
07/04/51 Managing Director,
Deutsche Bank
(2001-2002).
|
* Mr. Ross is an Interested Trustee because of his employment with the
Adviser and ownership interest in an affiliate of the Adviser.
29
NUMBER OF
PORTFOLIOS
TERM OF PRINCIPAL IN FUND
OFFICE AND OCCUPATION(S) COMPLEX OTHER
NAME, ADDRESS POSITION(S) LENGTH OF DURING PAST OVERSEEN DIRECTORSHIPS
AND DATE OF BIRTH WITH FUNDS TIME SERVED 5 YEARS BY TRUSTEE HELD BY TRUSTEE
----------------- ----------- ------------- ----------------------- ---------- -------------------
MARY MORAN ZEVEN Secretary Unlimited Senior Vice President N/A N/A
State Street Bank and Trust Company Elected: and Senior Managing
Two Avenue de Lafayette August 2001 Counsel, State Street
Boston, MA 02111 Bank and Trust Company
2/27/61 (2002-present).
RYAN M. LOUVAR Assistant Unlimited Vice President and N/A N/A
State Street Bank and Trust Company Secretary Elected: Counsel, State Street
Two Avenue de Lafayette October 2006 Bank and Trust
Boston, MA 02111 Company (2005-
2/18/72 present); Counsel,
BISYS Group, Inc.
(2000-2005) (a financial
services company).
MARK E. TUTTLE Assistant Unlimited Vice President and N/A N/A
State Street Bank and Trust Company Secretary Elected: Assistant Counsel, State
Two Avenue de Lafayette August 2007 Street Bank and Trust
Boston, MA 02111 Company (2007-
3/25/70 present); Assistant
Counsel, BISYS Group,
Inc. (2006-2007)
(a financial; services
company); Compliance
Manager, BISYS Group,
Inc. (2005-2006);
Sole Practitioner,
Mark E. Tuttle Attorney
at Law (2004-2005);
Paralegal, John Hancock
Financial Services, Inc.
(2000-2004).
MATTHEW FLAHERTY Assistant Unlimited Assistant Vice N/A N/A
State Street Bank and Trust Company Treasurer Elected: President, State
Two Avenue de Lafayette May 2005 Street Bank and Trust
Boston, MA 02111 (1994-present).*
2/19/71
CHAD C. HALLETT Assistant Unlimited Vice President, N/A N/A
State Street Bank and Trust Company Treasurer Elected: State Street Bank and
Two Avenue de Lafayette May 2006 Trust Company
Boston, MA 02111 (2001-Present).*
1/28/69
LAURA F. HEALY Assistant Unlimited Vice President, Street N/A N/A
State Street Bank and Trust Company Treasurer Elected: Bank and Trust Company
Two Avenue de Lafayette November 2007 (2002-present).*
Boston, MA 02111
3/20/64
|
* Served in various capacities during noted time period
30
NUMBER OF
PORTFOLIOS
TERM OF PRINCIPAL IN FUND
OFFICE AND OCCUPATION(S) COMPLEX OTHER
NAME, ADDRESS POSITION(S) LENGTH OF DURING PAST OVERSEEN DIRECTORSHIPS
AND DATE OF BIRTH WITH FUNDS TIME SERVED 5 YEARS BY TRUSTEE HELD BY TRUSTEE
----------------- ----------- ------------- ----------------------- ---------- -------------------
JULIE B. PIATELLI Chief Unlimited Principal and Senior N/A N/A
SSgA Funds Management, Inc. Compliance Elected: Compliance Officer,
State Street Financial Center Officer August 2007 SSgA Funds Management,
One Lincoln Street Inc. (2004-present);
Boston, MA 02111 Vice President, State
8/5/67 Street Global Advisors
(2004-present); Senior
Manager,
PricewaterhouseCoopers,
LLP (1999-2004)
|
REMUNERATION OF THE TRUSTEES AND OFFICERS
No officer, director or employee of the Adviser, its parent or subsidiaries,
other than the Chief Compliance Officer, receives any compensation from the
Trust for serving as an officer or Trustee of the Trust. Commencing August 11,
2007, the Trust and SPDR Index Shares Funds ("SIS Trust") pay, in the aggregate,
each Independent Trustee an annual fee of $60,000 plus $3,000 per in-person
meeting attended. An Independent Trustee will receive $1,000 for each telephonic
or video conference meeting attended. The Chair of the Board receives an
additional annual fee of $25,000 and the Chair of the Audit Committee receives
an additional annual fee of $9,000. The Trust also reimburses each Independent
Trustee for travel and other out-of-pocket expenses incurred by him/her in
connection with attending such meetings. Trustee fees are allocated between the
Trust and SIS Trust and each of their respective series in such a manner as
deemed equitable, taking into consideration the relative net assets of the
series. Previously, the Trust paid each Independent Trustee an annual fee of
$12,000 plus $4,500 per in person meeting attended. An Independent Trustee
received $500 for each meeting attended via telephone or video conference.
The table below shows the compensation that the Independent Trustees received
during the Trust's fiscal year ended June 30, 2007.
PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS ESTIMATED FROM THE
ACCRUED ANNUAL TRUST AND
AGGREGATE AS PART BENEFITS FUND COMPLEX
NAME OF COMPENSATION OF TRUST UPON PAID TO
INDEPENDENT TRUSTEE FROM THE TRUST EXPENSES RETIREMENT TRUSTEES(1)
------------------- -------------- ---------- ---------- ------------
David M. Kelly $34,500 $0 N/A $60,900
Frank Nesvet $34,500 $0 N/A $65,400
Helen F. Peters $34,500 $0 N/A $65,400
|
(1) The Fund Complex includes the Trust and SIS Trust.
STANDING COMMITTEES
Audit Committee. The Board has an Audit Committee consisting of all Trustees who
are not "interested persons" (as defined in the 1940 Act) of the Trust. Ms.
Peters serves as Chair. The Audit Committee meets with the Trust's independent
auditors to review and approve the scope and results of their professional
services; to review the procedures for evaluating the adequacy of the Trust's
accounting controls; to consider the range of audit fees; and to make
recommendations to the Board regarding the engagement of the Trust's independent
auditors. The Audit Committee met four (4) times during the fiscal year ended
June 30, 2007.
31
Trustee Committee. The Board has established a Trustee Committee consisting of
all Trustees who are not "interested persons" (as defined in the 1940 Act) of
the Trust. Mr. Nesvet serves as Chair. The responsibilities of the Trustee
Committee are to: 1) nominate Independent Trustees; 2) review on a periodic
basis the governance structures and procedures of the Funds; 3) review proposed
resolutions and conflicts of interest that may arise in the business of the
Funds and may have an impact on the investors of the Funds; 4) review matters
that are referred to the Committee by the Chief Legal Officer or other counsel
to the Trust; and 5) provide general oversight of the Funds on behalf of the
investors of the Funds. The Trustee Committee met three (3) times during the
fiscal year ended June 30, 2007.
Pricing Committee. The Board also has established a Pricing and Investment
Committee that is composed of Officers of the Trust, investment management
personnel of the Adviser and senior operations and administrative personnel of
State Street. The Pricing and Investment Committee is responsible for the
valuation and revaluation of any portfolio investments for which market
quotations or prices are not readily available. The Pricing and Investment
Committee meets only when necessary. The Board met four (4) times during the
fiscal year ended June 30, 2007 to review and ratify fair value pricing
determinations of the Pricing Committee. The Pricing Committee reports to the
Board on a quarterly basis.
OWNERSHIP OF FUND SHARES
The following table sets forth information describing the dollar range of equity
securities beneficially owned by each Trustee in the Trust as of December 31,
2006:
AGGREGATE DOLLAR RANGE OF EQUITY
SECURITIES IN ALL
REGISTERED INVESTMENT
COMPANIES OVERSEEN
DOLLAR RANGE OF EQUITY BY TRUSTEE IN FAMILY
NAME OF TRUSTEE SECURITIES IN THE TRUST OF INVESTMENT COMPANIES
--------------- ----------------------- --------------------------------
INDEPENDENT TRUSTEES
David M. Kelly None None
Frank Nesvet None None
Helen F. Peters None None
INTERESTED TRUSTEE
James Ross None None
|
As of December 31, 2006, the Trustees who are not interested persons (as defined
in the 1940 Act) of the Trust or their immediate family members did not own
beneficially or of record any securities in the Adviser, the Sub-Adviser, the
Distributor or any person controlling, controlled by, or under common control
with the Adviser, Sub-Adviser or the Distributor.
CODES OF ETHICS
The Trust, the Adviser, the Sub-Adviser and the Distributor each have adopted a
code of ethics as required by applicable law, which is designed to prevent
affiliated persons of the Trust, the Adviser and the Distributor from engaging
in deceptive, manipulative or fraudulent activities in connection with
securities held or to be acquired by the Funds (which may also be held by
persons subject to the codes of ethics).
There can be no assurance that the codes of ethics will be effective in
preventing such activities. Each code of ethics, filed as exhibits to this
registration statement, may be examined at the office of the SEC in Washington,
D.C. or on the Internet at the SEC's website at http://www.sec.gov.
PROXY VOTING POLICIES
The Board believes that the voting of proxies on securities held by the Funds is
an important element of the overall investment process. As such, the Board has
delegated the responsibility to vote such proxies to the Adviser. The Adviser's
proxy voting policy is attached to this SAI as Appendix B. Information regarding
how the Funds voted proxies relating to their portfolio securities during the
most recent 12-month period ended June 30 is available (1) without charge by
calling 1-866-787-2257; and (2) on the SEC's website at http://www.sec.gov.
DISCLOSURE OF PORTFOLIO HOLDINGS POLICY
32
The Trust has adopted a policy regarding the disclosure of information about the
Trust's portfolio holdings. The Board of the Trust must approve all material
amendments to this policy. The Funds' portfolio holdings are publicly
disseminated each day the Funds are open for business through financial
reporting and news services including publicly accessible Internet web sites. In
addition, a basket composition file, which includes the security names and share
quantities to deliver in exchange for Fund Shares, together with estimates and
actual cash components, is publicly disseminated daily prior to the opening of
the AMEX via the National Securities Clearing Corporation (NSCC). The basket
represents one creation unit of the Funds. The Trust, the Adviser or State
Street will not disseminate non-public information concerning the Trust.
THE INVESTMENT ADVISER
SSgA Funds Management, Inc. (the "Adviser") acts as investment adviser to the
Trust and, subject to the supervision of the Board, is responsible for the
investment management of each Fund. The Adviser's principal address is State
Street Financial Center, One Lincoln Street, Boston, Massachusetts 02111. The
Adviser, a Massachusetts corporation, is a wholly owned subsidiary of State
Street Corporation, a publicly held bank holding company. State Street Global
Advisors ("SSgA"), consisting of the Adviser and other investment advisory
affiliates of State Street Corporation, is the investment management arm of
State Street Corporation.
The Adviser serves as investment adviser to each Fund pursuant to an Investment
Advisory Agreement between the Trust and the Adviser. The Investment Advisory
Agreement, with respect to each Fund, continues in effect for two years from its
effective date, and thereafter is subject to annual approval by (1) the Board or
(2) vote of a majority of the outstanding voting securities (as defined in the
1940 Act) of the Fund, provided that in either event such continuance also is
approved by a majority of the Board who are not interested persons (as defined
in the 1940 Act) of the Trust by a vote cast in person at a meeting called for
the purpose of voting on such approval. The Investment Advisory Agreement with
respect to each Fund is terminable without penalty, on 60 days notice, by the
Board or by a vote of the holders of a majority (as defined in the 1940 Act) of
the applicable Fund's outstanding voting securities. The Investment Advisory
Agreement is also terminable upon 60 days notice by the Adviser and will
terminate automatically in the event of its assignment (as defined in the 1940
Act).
Under the Investment Advisory Agreement, the Adviser, subject to the supervision
of the Board and in conformity with the stated investment policies of each Fund,
manages the investment of each Fund's assets. The Adviser is responsible for
placing purchase and sale orders and providing continuous supervision of the
investment portfolio of each Fund. Pursuant to the Investment Advisory
Agreement, the Trust has agreed to indemnify the Adviser for certain
liabilities, including certain liabilities arising under the federal securities
laws, unless such loss or liability results from willful misfeasance, bad faith
or gross negligence in the performance of its duties or the reckless disregard
of its obligations and duties.
A discussion regarding the basis for Board's approval or continuation of the
Investment Advisory Agreements regarding certain Funds is available in the
Trust's Semi-Annual Report to Shareholders dated December 31, 2006 and in the
Trust's Annual Report to Shareholders dated June 30, 2007.
For the services provided to the Funds under the Investment Advisory Agreement,
each Fund pays the Adviser monthly fees based on a percentage of each Fund's
average daily net assets as set forth in each Fund's Prospectus. From time to
time, the Adviser may waive all or a portion of its fee. The Adviser pays all
expenses of each Fund other than the management fee, distribution fees pursuant
to the Distribution and Service Plan, if any, brokerage, taxes, interest, fees
and expenses of the Independent Trustees (including any Trustee's counsel fees),
litigation expenses and other extraordinary expenses.
For the past three fiscal years ended June 30, the Funds paid the following
amounts to the Adviser:
33
FUND 2007 2006 2005
---- ---------- ---------- ----------
SPDR DJ Wilshire Total Market ETF $ 227,116 $ 212,167 $ 226,407
SPDR DJ Wilshire Large Cap ETF $ 20,064 $ 17,154(6) $ N/A(2)
SPDR DJ Wilshire Large Cap Growth ETF $ 398,028 $ 257,752 $ 153,314
SPDR DJ Wilshire Large Cap Value ETF $ 273,742 $ 196,138 $ 221,327
SPDR DJ Wilshire Mid Cap ETF $ 47,327 $ 34,136(6) $ N/A(2)
SPDR DJ Wilshire Mid Cap Growth ETF $ 54,070 $ 36,953(6) $ N/A(2)
SPDR DJ Wilshire Mid Cap Value ETF $ 26,369 $ 29,064(6) $ N/A(2)
SPDR DJ Wilshire Small Cap ETF $ 37,119 $ 38,393(6) $ N/A(2)
SPDR DJ Wilshire Small Cap Growth ETF $ 194,548 $ 176,083 $ 128,693
SPDR DJ Wilshire Small Cap Value ETF $ 252,641 $ 233,935 $ 225,421
SPDR DJ Global Titans ETF $ 755,195 $ 446,797 $ 473,103
DJ Wilshire REIT ETF $3,265,350 $2,192,601 $1,264,166
KBW Bank ETF $ 297,528 $ 190,630(6) $ N/A(2)
KBW Capital Markets ETF $ 374,033 $ 130,437(6) $ N/A(2)
KBW Insurance ETF $ 219,812 $ 95,899(6) $ N/A(2)
Morgan Stanley Technology ETF $ 836,091 $ 703,022 $ 131,151
SPDR S&P Dividend ETF $ 698,190(1) $ 148,698(6) $ N/A(2)
SPDR S&P Aerospace & Defense ETF $ N/A(2) $ N/A(2) $ N/A(2)
SPDR S&P Biotech ETF $ 225,104 $ 50,081(7) $ N/A(2)
SPDR S&P Building & Construction ETF $ N/A(2) $ N/A(2) $ N/A(2)
SPDR S&P Computer Hardware ETF $ N/A(2) $ N/A(2) $ N/A(2)
SPDR S&P Computer Software ETF $ N/A(2) $ N/A(2) $ N/A(2)
SPDR S&P Health Care Equipment ETF $ N/A(2) $ N/A(2) $ N/A(2)
SPDR S&P Health Care Services ETF $ N/A(2) $ N/A(2) $ N/A(2)
SPDR S&P Homebuilders ETF $ 858,557 $ 109,456(7) $ N/A(2)
SPDR S&P LeisureTime ETF $ N/A(2) $ N/A(2) $ N/A(2)
SPDR S&P Metals & Mining ETF $ 267,776 $ 2,403(8) $ N/A(2)
SPDR S&P Oil & Gas Equipment & Services ETF $ 155,676 $ 1,514(8) $ N/A(2)
SPDR S&P Oil & Gas Exploration & Production ETF $ 110,034 $ 1,876(8) $ N/A(2)
SPDR S&P Outsourcing & IT Consulting ETF $ N/A(2) $ N/A(2) $ N/A(2)
SPDR S&P Pharmaceuticals ETF $ 64,396 $ 1,657(8) $ N/A(2)
SPDR S&P Retail ETF $ 190,588 $ 1,971(8) $ N/A(2)
SPDR S&P Semiconductor ETF $ 249,795 $ 65,746(7) $ N/A(2)
SPDR S&P Telecom ETF $ N/A(2) $ N/A(2) $ N/A(2)
SPDR S&P Transportation ETF $ N/A(2) $ N/A(2) $ N/A(2)
KBW Regional Banking ETF $ 306,864 $ 3,673(8) $ N/A(2)
KBW Mortgage Finance ETF $ N/A(2) $ N/A(2) $ N/A(2)
SPDR Lehman 1-3 Month T-Bill ETF $ 4,865(3) $ N/A(2) $ N/A(2)
SPDR Lehman Short Term Municipal Bond ETF $ N/A(2) $ N/A(2) $ N/A(2)
SPDR Lehman Intermediate Term Treasury ETF $ 1,466(4) $ N/A(2) $ N/A(2)
SPDR Lehman Long Term Treasury ETF $ 1,383(4) $ N/A(2) $ N/A(2)
SPDR Barclays Capital TIPS ETF $ 8,945(3) $ N/A(2) $ N/A(2)
SPDR Lehman California Municipal Bond ETF $ N/A(2) $ N/A(2) $ N/A(2)
SPDR Lehman New York Municipal Bond ETF $ N/A(2) $ N/A(2) $ N/A(2)
SPDR Lehman Municipal Bond ETF $ N/A(2) $ N/A(2) $ N/A(2)
SPDR Lehman Aggregate Bond ETF $ 1,997(4)(5) $ N/A(2) $ N/A(2)
SPDR Lehman International Treasury Bond ETF $ N/A(2) $ N/A(2) $ N/A(2)
|
(1) During this period, the Adviser waived $23,961 of its fees for the SPDR S&P
Dividend ETF, thus the Adviser actually received $674,229 for the period.
(2) The Fund was not operational.
(3) The Fund commenced operations on May 25, 2007.
(4) The Fund commenced operations on May 23, 2007.
(5) During this period, the Adviser waived $583 of its fees for the SPDR Lehman
Aggregate Bond ETF, thus the Adviser actually received $1,414 for the
period.
(6) For the period November 8, 2005, the Fund's inception date, to June 30,
2006. During this period, for the SPDR S&P Dividend ETF, the Adviser waived
$23,781 of its fees, thus the Adviser actually received $124,917 for the
period.
(7) For the period January 31, 2006, the Fund's inception date, to June 30,
2006.
(8) For the period June 19, 2006, the Fund's inception date, to June 30, 2006.
34
INVESTMENT SUB-ADVISER - DJ Wilshire REIT ETF
Pursuant to the Advisory Agreement between the DJ Wilshire REIT ETF and the
Adviser, the Adviser is authorized to engage one or more sub-advisers for the
performance of any of the services contemplated to be rendered by the Adviser.
The Adviser has retained The Tuckerman Group LLC ("Tuckerman"), an affiliate of
the Adviser, as sub-adviser, to be responsible for the day to day management of
the DJ Wilshire REIT ETF's investments, subject to supervision of the Adviser
and the Board while the Adviser will provide administrative, compliance and
general management services to the Fund. Since its organization on April 28,
1999, Tuckerman has provided investment management services to institutional
investors and other mutual funds. As of September 30, 2007, Tuckerman managed
approximately $7.8 billion in assets. Tuckerman's principal business address is
4 International Drive, Suite 230, Rye Brook NY 10573.
A discussion regarding the basis for the Board's approval or continuation of the
Sub-Advisory Agreement is available in the Trust's Semi-Annual Report to
Shareholders dated December 31, 2006.
In accordance with the Sub-Advisory Agreement between the Adviser and Tuckerman,
the Adviser will pay Tuckerman an annual investment sub-advisory fee equal to 0%
of average daily net assets up to the first $50 million in net assets and 0.05%
thereafter with respect to the DJ Wilshire REIT ETF. For the past three fiscal
years ended June 30, the Adviser paid the following amounts to Tuckerman for its
services:
FUND 2007 2006 2005
---- -------- -------- --------
DJ Wilshire REIT ETF $614,726 $411,199 $230,069
|
PORTFOLIO MANAGERS
The Adviser manages the Funds, except for the TIPS ETF, and with respect to DJ
Wilshire REIT ETF the Adviser and Sub-Adviser each manage the Fund, using a team
of investment professionals. Key professionals primarily involved in the
day-to-day portfolio management for each of the following Funds include:
FUND PORTFOLIO MANAGERS
---- ------------------
All Equity ETFs (Excluding the DJ Wilshire REIT ETF) Lynn Blake, John Tucker
DJ Wilshire REIT ETF Amos J. Rogers III, Murat Sensoy
SPDR Lehman Intermediate Term Treasury ETF, SPDR Lehman Long Term Michael Brunell, John Kirby, Elya Schwartzman
Treasury ETF, SPDR Lehman Aggregate Bond ETF, SPDR Lehman
International Treasury Bond ETF and SPDR Lehman High Yield Bond
ETF
SPDR Lehman 1-3 Month T-Bill ETF Todd Bean, Steven Meier, Jeff St. Peters
SPDR Barclays Capital TIPS ETF David Kobuszewski, James Mauro
SPDR Lehman Municipal Bond ETF, SPDR Lehman Short Term Municipal James Donahue, Timothy Ryan
Bond ETF, SPDR Lehman California Municipal Bond ETF and SPDR
Lehman New York Municipal Bond ETF
|
The following table lists the number and types of accounts managed by each of
the key professionals involved in the day-to-day portfolio management for each
Fund and assets under management in those accounts. The total number of accounts
and assets have been allocated to each respective manager. Therefore, some
accounts and assets have been counted twice.
OTHER ACCOUNTS MANAGED AS OF JUNE 30, 2007
REGISTERED POOLED TOTAL
INVESTMENT ASSETS INVESTMENT ASSETS ASSETS ASSETS
PORTFOLIO COMPANY MANAGED VEHICLE MANAGED OTHER MANAGED MANAGED
MANAGER ACCOUNTS (BILLIONS)* ACCOUNTS (BILLIONS)* ACCOUNTS (BILLIONS)* (BILLIONS)*
--------- ---------- ----------- ---------- ----------- -------- ----------- -----------
Lynn Blake 65 $34.16 515 $225.04 556 $201.26 $460.46
John Tucker 65 $34.16 515 $225.04 556 $201.26 $460.46
|
35
REGISTERED POOLED TOTAL
INVESTMENT ASSETS INVESTMENT ASSETS ASSETS ASSETS
PORTFOLIO COMPANY MANAGED VEHICLE MANAGED OTHER MANAGED MANAGED
MANAGER ACCOUNTS (BILLIONS)* ACCOUNTS (BILLIONS)* ACCOUNTS (BILLIONS)* (BILLIONS)*
--------- ---------- ----------- ---------- ----------- -------- ----------- -----------
Michael Brunell*** 13 $ 0.97 21 $ 3.88 59 $ 43.56 $ 48.41
John Kirby*** 13 $ 0.97 21 $ 3.88 59 $ 43.56 $ 48.41
Elya Schwartzman*** 13 $ 0.97 21 $ 3.88 59 $ 43.56 $ 48.41
Todd Bean 8 $88.74 13 $240.32 69 $225.40 $554.47
Steven Meier 8 $88.74 13 $240.32 69 $225.40 $554.47
Jeff St. Peters 8 $88.74 13 $240.32 69 $225.40 $554.47
David Kobuszewski 9 $ 1.09 21 $ 3.80 59 $ 42.70 $ 47.59
James Mauro 9 $ 1.09 21 $ 3.80 59 $ 42.70 $ 47.59
James Donahue** 8 $ 0.40 21 $ 3.80 59 $ 42.70 $ 46.90
Timothy Ryan** 8 $ 0.40 21 $ 3.80 59 $ 42.70 $ 46.90
|
* There are no performance fees associated with these portfolios.
** The total number of accounts and assets for this portfolio manager are
reported as of July 31, 2007. *** The total number of accounts and assets
for this portfolio manager are reported as of September 30, 2007.
The dollar range of equity securities beneficially owned by the portfolio
managers listed above as of June 30, 2007.
PORTFOLIO DOLLAR RANGE OF EQUITY
MANAGER SECURITIES BENEFICIALLY OWNED
--------- -----------------------------
Lynn Blake None
John Tucker None
Michael Burnell** None
John Kirby** None
Elya Schwartzman** None
Todd Bean None
Steven Meier None
Jeff St. Peters None
David Kobuszewski None
James Mauro None
James Donahue* None
Timothy Ryan* None
|
* The total number of accounts and assets for this portfolio manager are
reported as of July 31, 2007.
** The total number of accounts and assets for this portfolio manager are
reported as of September 30, 2007.
A portfolio manager that has responsibility for managing more than one account
may be subject to potential conflicts of interest because he or she is
responsible for other accounts in addition to the fund. Those conflicts could
include preferential treatment of one account over others in terms of: (a) the
portfolio manager's execution of different investment strategies for various
accounts; or (b) the allocation of resources or of investment opportunities. The
Adviser and Sub-Adviser have adopted policies and procedures designed to address
these potential material conflicts. For instance, portfolio managers are
normally responsible for all accounts within a certain investment discipline,
and do not, absent special circumstances, differentiate among the various
accounts when allocating resources. Additionally, the Adviser, the Sub-Adviser
and their advisory affiliates have processes and procedures for allocating
investment opportunities among portfolios that are designed to provide a fair
and equitable allocation among the portfolio manager's accounts with the same
strategy.
Portfolio managers may manage numerous accounts for multiple clients. These
accounts may include registered investment companies, other types of pooled
accounts (e.g., collective investment funds), and separate accounts (i.e.,
accounts managed on behalf
36
of individuals or public or private institutions). Portfolio managers make
investment decisions for each account based on the investment objectives and
policies and other relevant investment considerations applicable to that
portfolio. A potential conflict of interest may arise as a result of the
portfolio managers' responsibility for multiple accounts with similar investment
guidelines. Under these circumstances, a potential investment may be suitable
for more than one of the portfolio managers' accounts, but the quantity of the
investment available for purchase is less than the aggregate amount the accounts
would ideally devote to the opportunity. Similar conflicts may arise when
multiple accounts seek to dispose of the same investment. The portfolio manager
may also manage accounts whose objectives and policies differ from that of the
fund. These differences may be such that under certain circumstances, trading
activity appropriate for one account managed by the portfolio manager may have
adverse consequences for another account managed by the portfolio manager. For
example, an account may sell a significant position in a security, which could
cause the market price of that security to decrease, while the fund maintained
its position in that security.
A potential conflict may arise when the portfolio manager is responsible for
accounts that have different advisory fees - the difference in fees could create
an incentive for the portfolio manager to favor one account over another, for
example, in terms of access to investment opportunities. This conflict may be
heightened if an account is subject to a performance-based fee. Another
potential conflict may arise when the portfolio manager has an investment in one
or more accounts that participate in transactions with other accounts. His or
her investment(s) may create an incentive for the portfolio manager to favor one
account over another. The Adviser and Sub-Adviser have adopted policies and
procedures reasonably designed to address these potential material conflicts.
For instance, portfolio managers are normally responsible for all accounts
within a certain investment discipline, and do not, absent special
circumstances, differentiate among the various accounts when allocating
resources. Additionally, the Adviser and Sub-Adviser and their advisory
affiliates have processes and procedures for allocating investment opportunities
among portfolios that are designed to provide a fair and equitable allocation.
The compensation of the Adviser's investment professionals is based on a number
of factors. The first factor considered is external market. Through a
compensation survey process, the Adviser seeks to understand what its
competitors are paying people to perform similar roles. This data is then used
to determine a competitive baseline in the areas of base pay, bonus, and long
term incentive (i.e. equity). The second factor taken into consideration is the
size of the pool available for this compensation. The Adviser is a part of State
Street Corporation, and therefore works within its corporate environment on
determining the overall level of its incentive compensation pool. Once
determined, this pool is then allocated to the various locations and departments
of the Adviser and its affiliates. The discretionary determination of the
allocation amounts to these locations and departments is influenced by the
competitive market data, as well as the overall performance of the group. The
pool is then allocated on a discretionary basis to individual employees based on
their individual performance. There is no fixed formula for determining these
amounts, nor is anyone's compensation directly tied to the investment
performance or asset value of a product or strategy. The same process is
followed in determining incentive equity allocations.
DJ Wilshire REIT ETF The following table lists the number and types of accounts
managed by each of the key professionals involved in the day-to-day portfolio
management for the DJ Wilshire REIT ETF and assets under management in those
accounts as of June 30, 2007.
REGISTERED POOLED TOTAL
INVESTMENT ASSETS INVESTMENT ASSETS ASSETS ASSETS
COMPANY MANAGED VEHICLE MANAGED OTHER MANAGED MANAGED
PORTFOLIO MANAGER ACCOUNTS (MILLIONS) ACCOUNTS (MILLIONS) ACCOUNTS (MILLIONS) (MILLIONS)
----------------- ---------- ---------- ---------- ---------- -------- ---------- ----------
Amos J. Rogers III 3 $1.66 6 $1.20 59 $3.20 $6.06
Murat Sensoy 3 $1.66 6 $1.20 59 $3.20 $6.06
|
The dollar range of equity securities beneficially owned by the portfolio
managers in the DJ Wilshire REIT ETF as of June 30, 2007 is as follows:
DOLLAR RANGE OF EQUITY
SECURITIES BENEFICIALLY OWNED
-----------------------------
Amos J. Rogers III None
Murat Sensoy None
|
The Tuckerman Groups' portfolio managers are compensated through an industry
competitive fixed base salary and a subjectively determined incentive bonus that
is a portion of a bonus pool the aggregate of which is tied to the firm's income
generated by all accounts included within the manager's investment strategy,
including the fund. A portfolio manager is not compensated based on the
performance of accounts, except to the extent that positive account performance
results in increased investment management fees earned by Tuckerman based on
assets under management. Tuckerman bases incentive bonuses on income earned with
respect to the
37
investment strategy, rather than on investment performance, because the firm
believes that this method aligns the portfolio manager's interests more closely
with the long-term interests of clients. Most senior professionals, including
portfolio managers have ownership interests in the firm.
THE ADMINISTRATOR, CUSTODIAN AND TRANSFER AGENT
State Street, State Street Financial Center, One Lincoln Street, Boston,
Massachusetts 02111, serves as Administrator for the Trust pursuant to an
Administration Agreement. Under the Administration Agreement, State Street is
obligated on a continuous basis to provide such administrative services as the
Board reasonably deems necessary for the proper administration of the Trust and
each Fund. State Street will generally assist in all aspects of the Trust's and
the Funds' operations; supply and maintain office facilities (which may be in
State Street's own offices), statistical and research data, data processing
services, clerical, accounting, bookkeeping and record keeping services
(including without limitation the maintenance of such books and records as are
required under the 1940 Act and the rules thereunder, except as maintained by
other agents), internal auditing, executive and administrative services, and
stationery and office supplies; prepare reports to shareholders or investors;
prepare and file tax returns; supply financial information and supporting data
for reports to and filings with the SEC and various state Blue Sky authorities;
supply supporting documentation for meetings of the Board; provide monitoring
reports and assistance regarding compliance with the Declaration of Trust,
by-laws, investment objectives and policies and with federal and state
securities laws; arrange for appropriate insurance coverage; and negotiate
arrangements with, and supervise and coordinate the activities of, agents and
others to supply services.
Pursuant to the Administration Agreement, the Trust has agreed to a limitation
on damages and to indemnify the Administrator for certain liabilities, including
certain liabilities arising under the federal securities laws, unless such loss
or liability results from gross negligence or willful misconduct in the
performance of its duties.
State Street also serves as Custodian for the Funds pursuant to a Custodian
Agreement. As Custodian, State Street holds the Funds' assets, calculates the
net asset value of the Shares and calculates net income and realized capital
gains or losses.
State Street also serves as Transfer Agent of the Funds pursuant to a Transfer
Agency and Services Agreement. State Street and the Trust will comply with the
self-custodian provisions of Rule 17f-2 under the 1940 Act.
COMPENSATION. As compensation for its services under the Administration
Agreement, the Custodian Agreement, and Transfer Agency and Services Agreement,
State Street shall receive a fee for its services, calculated based on the
average aggregate net assets of each Fund of the Trust, as follows: 0.045% on
the first $4.5 billion, 0.040% on the next $4.5 billion, and 0.0225% on the next
3.5 billion, and 0.0125% thereafter. For each Fund, after the first six months
of operations, a $75,000 minimum fee per Fund applies. The greater of the
minimum fee or the asset based fee will be charged. In addition, State Street
shall receive global safekeeping and transaction fees, which are calculated on a
per-country basis, and in-kind creation (purchase) and redemption transaction
fees (as described below and in the Funds' Prospectus). State Street may be
reimbursed by the Funds for its out-of-pocket expenses. The Investment Advisory
Agreement provides that the Adviser will pay certain operating expenses of the
Trust, including the fees due to State Street under each of the Administration
Agreement, the Custodian Agreement and the Transfer Agency and Service
Agreement.
THE DISTRIBUTOR
State Street Global Markets, LLC is the principal underwriter and Distributor of
Shares. Its principal address is State Street Financial Center, One Lincoln
Street, Boston, Massachusetts 02111. Investor information can be obtained by
calling 1-866-787-2257. The Distributor has entered into a Distribution
Agreement with the Trust pursuant to which it distributes Shares of each Fund.
The Distribution Agreement will continue for two years from its effective date
and is renewable annually thereafter. Shares will be continuously offered for
sale by the Trust through the Distributor only in Creation Units, as described
in the Prospectus and below under "PURCHASE AND REDEMPTION OF CREATION UNITS."
Shares in less than Creation Units are not distributed by the Distributor. The
Distributor will deliver the Prospectus to persons purchasing Creation Units and
will maintain records of both orders placed with it and confirmations of
acceptance furnished by it. The Distributor is a broker-dealer registered under
the Securities Exchange Act of 1934 (the "Exchange Act") and a member of the
Financial Industry Regulatory Authority ("FINRA"). The Distributor has no role
in determining the investment policies of the Trust or which securities are to
be purchased or sold by the Trust.
Each Fund, except for the SPDR DJ Wilshire Total Market ETF, has adopted a
Distribution and Service (Rule 12b-1) Plan (a "Plan") pursuant to which payments
of up to 0.25% may be made. No payments pursuant to the Plan will be made during
the next twelve (12) months of operation. Under its terms, each Fund's Plan
remains in effect from year to year, provided such continuance is approved
annually by vote of the Board, including a majority of the "Independent
Trustees" (Trustees who are not interested persons of the
38
Fund (as defined in the 1940 Act) and have no direct or indirect financial
interest in the operation of the Plan or any agreement related to the Plan). The
Plan may not be amended to increase materially the amount to be spent for the
services provided by the Distributor without approval by the shareholders of the
relevant Fund to which the Plan applies, and all material amendments of the Plan
also require Board approval (as described above). Each Plan may be terminated at
any time, without penalty, by vote of a majority of the Independent Trustees,
or, by a vote of a majority of the outstanding voting securities of such Fund
(as such vote is defined in the 1940 Act). Pursuant to the Distribution
Agreement, the Distributor will provide the Board with periodic reports of any
amounts expended under the Plan and the purpose for which such expenditures were
made.
The Distribution Agreement provides that it may be terminated at any time,
without the payment of any penalty, as to each Fund: (i) by vote of a majority
of the Independent Trustees or (ii) by vote of a majority (as defined in the
1940 Act) of the outstanding voting securities of the Fund, on at least 60 days
written notice to the Distributor. The Distribution Agreement is also terminable
upon 60 days' notice by the Distributor and will terminate automatically in the
event of its assignment (as defined in the 1940 Act).
Pursuant to agreements entered into with such persons, the Distributor will make
payments under each Plan to certain broker-dealers or other persons ("Investor
Services Organizations") that enter into agreements with the Distributor in the
form approved by the Board to provide distribution assistance and shareholder
support, account maintenance and educational and promotional services (which may
include compensation and sales incentives to the registered brokers or other
sales personnel of the broker-dealer or other financial entity that is a party
to an investor services agreement) ("Investor Services Agreements"). No such
Investor Services Agreements will be entered into during the first twelve months
of operation. Each Investor Services Agreement will be a "related agreement"
under the Plan of the relevant Fund. No Investor Services Agreement will provide
for annual fees of more than 0.25% of a Fund's average daily net assets per
annum attributable to Shares subject to such agreement.
Subject to an aggregate limitation of 0.25% of a Fund's average net assets per
annum, the fees paid by a Fund under its Plan will be compensation for
distribution, investor services or marketing services for that Fund. To the
extent the Plan fees aggregate less than 0.25% per annum of the average daily
net assets of a Fund, each Fund may also reimburse the Distributor and other
persons for their respective costs incurred in printing prospectuses and
producing advertising or marketing material prepared at the request of the Fund.
The aggregate payments under each Plan will not exceed, on an annualized basis,
0.25% of average daily net assets of any Fund.
The continuation of the Distribution Agreement, any Investor Services Agreements
and any other related agreements is subject to annual approval of the Board,
including by a majority of the Independent Trustees, as described above.
Each of the Investor Services Agreements will provide that it may be terminated
at any time, without the payment of any penalty, (i) by vote of a majority of
the Independent Trustees or (ii) by vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the relevant Fund, on at least 60
days' written notice to the other party. Each of the Distribution Agreement and
the Investor Services Agreements is also terminable upon 60 days' notice by the
Distributor and will terminate automatically in the event of its assignment (as
defined in the 1940 Act). Each Investor Services Agreement is also terminable by
the applicable Investor Service Organization upon 60 days' notice to the other
party thereto.
The allocation among the Funds of fees and expenses payable under the
Distribution Agreement and the Investor Services Agreements will be made pro
rata in accordance with the daily net assets of the respective Funds.
The Distributor may also enter into agreements with securities dealers
("Soliciting Dealers") who will solicit purchases of Creation Unit aggregations
of Fund Shares. Such Soliciting Dealers may also be Participating Parties (as
defined in the "Book Entry Only System" section below), DTC Participants (as
defined below) and/or Investor Services Organizations.
Pursuant to the Distribution Agreement, the Trust has agreed to indemnify the
Distributor, and may indemnify Soliciting Dealers and Authorized Participants
(as described below) entering into agreements with the Distributor, for certain
liabilities, including certain liabilities arising under the federal securities
laws, unless such loss or liability results from willful misfeasance, bad faith
or gross negligence in the performance of its duties or the reckless disregard
of its obligations and duties under the Distribution Agreement or other
agreement, as applicable.
BROKERAGE TRANSACTIONS
The policy of the Trust regarding purchases and sales of securities for the
Funds is that primary consideration will be given to obtaining the most
favorable prices and efficient executions of transactions. Consistent with this
policy, when securities transactions
39
are effected on a stock exchange, the Trust's policy is to pay commissions which
are considered fair and reasonable without necessarily determining that the
lowest possible commissions are paid in all circumstances. The Trust believes
that a requirement always to seek the lowest possible commission cost could
impede effective portfolio management and preclude the Funds and the Adviser
from obtaining a high quality of brokerage and research services. In seeking to
determine the reasonableness of brokerage commissions paid in any transaction,
the Adviser relies upon its experience and knowledge regarding commissions
generally charged by various brokers and on its judgment in evaluating the
brokerage and research services received from the broker effecting the
transaction. Such determinations are necessarily subjective and imprecise, as in
most cases an exact dollar value for those services is not ascertainable. The
Trust has adopted policies and procedures that prohibit the consideration of
sales of a Fund's Shares as a factor in the selection of a broker or dealer to
execute its portfolio transactions.
The Adviser owes a fiduciary duty to its clients to seek to provide best
execution on trades effected. In selecting a broker/dealer for each specific
transaction, the Adviser chooses the broker/dealer deemed most capable of
providing the services necessary to obtain the most favorable execution. Best
execution is generally understood to mean the most favorable cost or net
proceeds reasonably obtainable under the circumstances. The full range of
brokerage services applicable to a particular transaction may be considered when
making this judgment, which may include, but is not limited to: liquidity,
price, commission, timing, aggregated trades, capable floor brokers or traders,
competent block trading coverage, ability to position, capital strength and
stability, reliable and accurate communications and settlement processing, use
of automation, knowledge of other buyers or sellers, arbitrage skills,
administrative ability, underwriting and provision of information on a
particular security or market in which the transaction is to occur. The specific
criteria will vary depending upon the nature of the transaction, the market in
which it is executed, and the extent to which it is possible to select from
among multiple broker/dealers. The Adviser will also use electronic crossing
networks (ECNs) when appropriate.
The Adviser does not presently participate in any soft dollar arrangements. The
Adviser may aggregate trades with clients of SSgA, whose commission dollars may
be used to generate soft dollar credits. Although the Adviser's clients'
commissions are not used for soft dollars, the clients may benefit from the soft
dollar products/services received by SSgA.
The Adviser assumes general supervision over placing orders on behalf of the
Trust for the purchase or sale of portfolio securities. If purchases or sales of
portfolio securities of the Trust and one or more other investment companies or
clients supervised by the Adviser are considered at or about the same time,
transactions in such securities are allocated among the several investment
companies and clients in a manner deemed equitable and consistent with its
fiduciary obligations to all by the Adviser. In some cases, this procedure could
have a detrimental effect on the price or volume of the security so far as the
Trust is concerned. However, in other cases, it is possible that the ability to
participate in volume transactions and to negotiate lower brokerage commissions
will be beneficial to the Trust. The primary consideration is prompt execution
of orders at the most favorable net price.
The Funds will not deal with affiliates in principal transactions unless
permitted by exemptive order or applicable rule or regulation. The table below
shows the aggregate dollar amount of brokerage commissions paid by the Funds for
the fiscal years ended June 30. None of the brokerage commissions paid were paid
to affiliated brokers.
FUND 2007 2006 2005
---- ------- ------- -------
SPDR DJ Wilshire Total Market ETF $ 6,670 $ 2,463 $53,955
SPDR DJ Wilshire Large Cap ETF $ 113 $ 250 $ N/A(1)
SPDR DJ Wilshire Large Cap Growth ETF $ 968 $ 7,622 $ 1,052
SPDR DJ Wilshire Large Cap Value ETF $ 1,540 $ 3,825 $ 686
SPDR DJ Wilshire Mid Cap ETF $ 264 $ 4,925 $ N/A(1)
SPDR DJ Wilshire Mid Cap Growth ETF $ 286 $ 6,312 $ N/A(1)
SPDR DJ Wilshire Mid Cap Value ETF $ 552 $ 5,402 $ N/A(1)
SPDR DJ Wilshire Small Cap ETF $ 430 $ 2,733 $ N/A(1)
SPDR DJ Wilshire Small Cap Growth ETF $ 3,433 $16,736 $ 1,030
SPDR DJ Wilshire Small Cap Value ETF $ 3,621 $14,764 $12,979
SPDR DJ Global Titans ETF $ 7,119 $ 3,603 $20,139
DJ Wilshire REIT ETF $67,430 $55,775 $56,308
KBW Bank ETF $ 1,653 $ 1,064 $ N/A(1)
KBW Capital Markets ETF $ 3,850 $ 221 $ N/A(1)
KBW Insurance ETF $ 734 $ 152 $ N/A(1)
Morgan Stanley Technology ETF $ 2,428 $ 1,306 $ 3,904
SPDR S&P Dividend ETF $21,516 $ 1,315 $ N/A(1)
SPDR S&P Aerospace & Defense ETF $ N/A(1) $ N/A(1) $ N/A(1)
SPDR S&P Biotech ETF $ 2,409 $ 8,232 $ N/A(1)
SPDR S&P Building & Construction ETF $ N/A(1) $ N/A(1) $ N/A(1)
|
40
FUND 2007 2006 2005
---- ------- ------ ----
SPDR S&P Computer Hardware ETF $ N/A(1) $ N/A(1) $N/A(1)
SPDR S&P Computer Software ETF $ N/A(1) $ N/A(1) $N/A(1)
SPDR S&P Health Care Equipment ETF $ N/A(1) $ N/A(1) $N/A(1)
SPDR S&P Health Care Services ETF $ N/A(1) $ N/A(1) $N/A(1)
SPDR S&P Homebuilders ETF $13,897 $5,323 $N/A(1)
SPDR S&P LeisureTime ETF $ N/A(1) $ N/A(1) $N/A(1)
SPDR S&P Metals & Mining ETF $ 4,638 $ N/A(1) $N/A(1)
SPDR S&P Oil & Gas Equipment & Services ETF $ 952 $ N/A(1) $N/A(1)
SPDR S&P Oil & Gas Exploration & Production ETF $ 2,792 $ N/A(1) $N/A(1)
SPDR S&P Outsourcing & IT Consulting ETF $ N/A(1) $ N/A(1) $N/A(1)
SPDR S&P Pharmaceuticals ETF $ 229 $ N/A(1) $N/A(1)
SPDR S&P Retail ETF $ 7,856 $ N/A(1) $N/A(1)
SPDR S&P Semiconductor ETF $39,235 $8,332 $N/A(1)
SPDR S&P Telecom ETF $ N/A(1) $ N/A(1) $N/A(1)
SPDR S&P Transportation ETF $ N/A(1) $ N/A(1) $N/A(1)
KBW Regional Banking(SM) ETF $12,994 $ N/A(1) $N/A(1)
KBW Mortgage Finance(SM) ETF $ N/A(1) $ N/A(1) $N/A(1)
SPDR Lehman 1-3 Month T-Bill ETF $ 0.00(2) $ N/A(1) $N/A(1)
SPDR Lehman Short Term Municipal Bond ETF $ N/A(1) $ N/A(1) $N/A(1)
SPDR Lehman Intermediate Term Treasury ETF $ 0.00(3) $ N/A(1) $N/A(1)
SPDR Lehman Long Term Treasury ETF $ 0.00(3) $ N/A(1) $N/A(1)
SPDR Barclays Capital TIPS ETF $ 0.00(2) $ N/A(1) $N/A(1)
SPDR Lehman California Municipal Bond ETF $ N/A(1) $ N/A(1) $N/A(1)
SPDR Lehman New York Municipal Bond ETF $ N/A(1) $ N/A(1) $N/A(1)
SPDR Lehman Municipal Bond ETF $ N/A(1) $ N/A(1) $N/A(1)
SPDR Lehman Aggregate Bond ETF $ 0.00(3) $ N/A(1) $N/A(1)
SPDR Lehman International Treasury Bond ETF $ N/A(1) $ N/A(1) $N/A(1)
|
(1) The Fund was not operational.
(2) The Fund commenced operations on May 25, 2007.
(3) The Fund commenced operations on May 23, 2007.
Securities of "Regular Broker-Dealer." The Funds are required to identify any
securities of its "regular brokers and dealers" (as such term is defined in the
1940 Act) which they may hold at the close of their most recent fiscal year.
"Regular brokers or dealers" of the Trust are the ten brokers or dealers that,
during the most recent fiscal year: (i) received the greatest dollar amounts of
brokerage commissions from the Trust's portfolio transactions; (ii) engaged as
principal in the largest dollar amounts of portfolio transactions of the Trust;
or (iii) sold the largest dollar amounts of the Trust's shares. The Funds are
new and have not engaged in transactions prior to the date of this SAI.
Holdings in Shares of Regular Broker-Dealers as of June 30, 2007.
JPMorgan Chase & Co. $14,608,645
Morgan Stanley $11,430,076
The Goldman Sachs Group, Inc. $ 9,401,965
Merrill Lynch & Co., Inc. $ 8,542,879
Lehman Brothers Holdings, Inc. $ 7,598,731
Bank Of New York Mellon Corp. $ 4,209,558
The Bear Stearns Cos., Inc $ 4,036,620
UBS Securities LLC $ 2,522,520
Barclays Capital Inc. $ 2,021,383
Investment Technology Group, Inc. $ 1,897,984
|
Portfolio turnover may vary from year to year, as well as within a year. High
turnover rates are likely to result in comparatively greater brokerage expenses.
The portfolio turnover rate for each Fund is expected to be under 50%. The
overall reasonableness of brokerage commissions is evaluated by the Adviser
based upon its knowledge of available information as to the general level of
commissions paid by other institutional investors for comparable services.
41
BOOK ENTRY ONLY SYSTEM
The following information supplements and should be read in conjunction with the
section in the Prospectuses entitled "BUYING AND SELLING THE FUNDS."
The Depository Trust Company ("DTC") acts as securities depositary for the
Shares. Shares of each Fund are represented by securities registered in the name
of DTC or its nominee, Cede & Co., and deposited with, or on behalf of, DTC.
Except in the limited circumstance provided below, certificates will not be
issued for Shares.
DTC, a limited-purpose trust company, was created to hold securities of its
participants (the "DTC Participants") and to facilitate the clearance and
settlement of securities transactions among the DTC Participants in such
securities through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of securities
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations, some of
whom (and/or their representatives) own DTC. More specifically, DTC is owned by
a number of its DTC Participants and by the New York Stock Exchange ("NYSE"),
the AMEX and the FINRA. Access to the DTC system is also available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a DTC Participant, either directly or
indirectly (the "Indirect Participants").
Beneficial ownership of Shares is limited to DTC Participants, Indirect
Participants and persons holding interests through DTC Participants and Indirect
Participants. Ownership of beneficial interests in Shares (owners of such
beneficial interests are referred to herein as "Beneficial Owners") is shown on,
and the transfer of ownership is effected only through, records maintained by
DTC (with respect to DTC Participants) and on the records of DTC Participants
(with respect to Indirect Participants and Beneficial Owners that are not DTC
Participants). Beneficial Owners will receive from or through the DTC
Participant a written confirmation relating to their purchase of Shares.
CONVEYANCE OF ALL NOTICES, STATEMENTS AND OTHER COMMUNICATIONS TO BENEFICIAL
OWNERS IS EFFECTED AS FOLLOWS. Pursuant to the Depositary Agreement between the
Trust and DTC, DTC is required to make available to the Trust upon request and
for a fee to be charged to the Trust a listing of the Shares of each Fund held
by each DTC Participant. The Trust shall inquire of each such DTC Participant as
to the number of Beneficial Owners holding Shares, directly or indirectly,
through such DTC Participant. The Trust shall provide each such DTC Participant
with copies of such notice, statement or other communication, in such form,
number and at such place as such DTC Participant may reasonably request, in
order that such notice, statement or communication may be transmitted by such
DTC Participant, directly or indirectly, to such Beneficial Owners. In addition,
the Trust shall pay to each such DTC Participant a fair and reasonable amount as
reimbursement for the expenses attendant to such transmittal, all subject to
applicable statutory and regulatory requirements.
Share distributions shall be made to DTC or its nominee, Cede & Co., as the
registered holder of all Shares. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants' accounts with payments
in amounts proportionate to their respective beneficial interests in Shares of
each Fund as shown on the records of DTC or its nominee. Payments by DTC
Participants to Indirect Participants and Beneficial Owners of Shares held
through such DTC Participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in a "street name," and will be the
responsibility of such DTC Participants.
The Trust has no responsibility or liability for any aspects of the records
relating to or notices to Beneficial Owners, or payments made on account of
beneficial ownership interests in such Shares, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests or for
any other aspect of the relationship between DTC and the DTC Participants or the
relationship between such DTC Participants and the Indirect Participants and
Beneficial Owners owning through such DTC Participants.
DTC may determine to discontinue providing its service with respect to Shares at
any time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action either to find a replacement for DTC
to perform its functions at a comparable cost or, if such a replacement is
unavailable, to issue and deliver printed certificates representing ownership of
Shares, unless the Trust makes other arrangements with respect thereto
satisfactory to the Exchange.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Although the Funds do not have information concerning their beneficial ownership
held in the names of DTC Participants, as of
42
October 2, 2007, the names, addresses and percentage ownership of each DTC
Participant that owned of record 5% or more of the outstanding Shares of the
Funds were as follows:
PERCENTAGE
OF
FUND NAME AND ADDRESS OWNERSHIP
---- ---------------- ----------
SPDR DJ Wilshire Total Market ETF National Financial Services, Inc. 33.59%
200 Liberty Street
New York, NY 10281
Schwab (Charles) & Co., Inc. 12.37%
101 Montgomery Street
San Francisco, CA 94101
TD Ameritrade, Inc. 5.90%
4211 South 102nd Street
Omaha, NE 68127
American Enterprise Investment Services Inc. 5.84%
2723 AXP Financial Center
Minneapolis, MN 55474
SPDR DJ Wilshire Large Cap ETF Timber Hill L.L.C. 53.03%
Two Pickwick Plaza
Greenwich, CT 06830
National Financial Services, Inc. 9.68%
200 Liberty Street
New York, NY 10281
Merrill Lynch, Pierce Fenner & Smith, Inc. 6.32%
4 World Financial Center
New York, NY 10080
SPDR DJ Wilshire Large Cap Growth ETF Schwab (Charles) & Co., Inc. 28.66%
101 Montgomery Street
San Francisco, CA 94101
Linsco/Private Ledger Corp. 16.80%
9785 Towne Centre Drive
San Diego, CA 92121
National Financial Services, Inc. 10.04%
200 Liberty Street
New York, NY 10281
Morgan Stanley International, Ltd. 8.42%
901 South Bond Street, 6th floor
Baltimore, MD 21231
Brown Brothers Harriman & Co. 6.43%
525 Washington Blvd.
Jersey City, NJ 07310
TD Ameritrade, Inc. 5.24%
4211 South 102nd Street
Omaha, NE 68127
SPDR DJ Wilshire Large Cap Value ETF Schwab (Charles) & Co., Inc. 16.73%
101 Montgomery Street
San Francisco, CA 94101
|
43
National Financial Services, Inc. 16.27%
200 Liberty Street
New York, NY 10281
Pershing, L.L.C. 8.13%
One Pershing Plaza
Jersey City, NJ 07399
Merrill Lynch, Pierce Fenner & Smith, Inc. 7.56%
4 World Financial Center
New York, NY 10080
Morgan Stanley & Co. Incorporated/Retail 7.50%
75 Varick Street
New York, NY 11201
Citigroup Global Markets, Inc. 6.13%
388 Greenwich Street
New York, NY 10013
TD Ameritrade, Inc. 5.35%
4211 South 102nd Street
Omaha, NE 68127
American Enterprise Investment Services Inc. 5.04%
2723 AXP Financial Center
Minneapolis, MN 55474
SPDR DJ Wilshire Mid Cap ETF Schwab (Charles) & Co., Inc. 17.41%
101 Montgomery Street
San Francisco, CA 94101
Goldman Sachs Execution & Clearing, L.P. 17.31%
120 Broadway, 6th Floor
New York, NY 10271
Timber Hill L.L.C. 10.46%
Two Pickwick Plaza
Greenwich, CT 06830
National Financial Services, Inc. 9.01%
200 Liberty Street
New York, NY 10281
Citigroup Global Markets, Inc. 7.42%
388 Greenwich Street
New York, NY 10013
Pershing, L.L.C. 7.23%
One Pershing Plaza
Jersey City, NJ 07399
Merrill Lynch, Pierce Fenner & Smith, Inc. 5.13%
4 World Financial Center
New York, NY 10080
SPDR DJ Wilshire Mid Cap Growth ETF Linsco/Private Ledger Corp. 43.34%
9785 Towne Centre Drive
|
44
San Diego, CA 92121
National Financial Services, Inc. 17.52%
200 Liberty Street
New York, NY 10281
Timber Hill L.L.C. 16.65%
Two Pickwick Plaza
Greenwich, CT 06830
SPDR DJ Wilshire Mid Cap Value ETF Timber Hill L.L.C. 38.31%
Two Pickwick Plaza
Greenwich, CT 06830
TD Ameritrade, Inc. 16.38%
4211 South 102nd Street
Omaha, NE 68127
Goldman Sachs Execution & Clearing, L.P. 10.96%
120 Broadway, 6th Floor
New York, NY 10271
National Financial Services, Inc. 9.24%
200 Liberty Street
New York, NY 10281
Citigroup Global Markets, Inc. 6.76%
388 Greenwich Street
New York, NY 10013
Schwab (Charles) & Co., Inc. 5.99%
101 Montgomery Street
San Francisco, CA 94101
SPDR DJ Wilshire Small Cap ETF Timber Hill L.L.C. 52.18%
Two Pickwick Plaza
Greenwich, CT 06830
Schwab (Charles) & Co., Inc. 15.18%
101 Montgomery Street
San Francisco, CA 94101
Pershing, L.L.C. 7.57%
One Pershing Plaza
Jersey City, NJ 07399
National Financial Services, Inc. 6.01%
200 Liberty Street
New York, NY 10281
SPDR DJ Wilshire Small Cap Growth ETF Schwab (Charles) & Co., Inc. 29.81%
101 Montgomery Street
San Francisco, CA 94101
TD Ameritrade, Inc. 14.95%
4211 South 102nd Street
Omaha, NE 68127
Linsco/Private Ledger Corp. 9.41%
|
45
9785 Towne Centre Drive
San Diego, CA 92121
National Financial Services Corp. 8.48%
200 Liberty Street
New York, NY 10281
Timber Hill L.L.C. 7.47%
Two Pickwick Plaza
Greenwich, CT 06830
SPDR DJ Wilshire Small Cap Value ETF Schwab (Charles) & Co., Inc. 17.04%
101 Montgomery Street
San Francisco, CA 94101
National Financial Services, Inc. 16.43%
200 Liberty Street
New York, NY 10281
TD Ameritrade, Inc. 10.28%
4211 South 102nd Street
Omaha, NE 68127
Pershing, L.L.C. 7.45%
One Pershing Plaza
Jersey City, NJ 07399
Linsco/Private Ledger Corp. 6.19%
9785 Towne Centre Drive
San Diego, CA 92121
SPDR DJ Global Titans ETF Lehman Brothers Inc. 18.68%
70 Hudson Street
Jersey City, NJ 07302
Merrill Lynch, Pierce Fenner & Smith, Inc. 9.58%
4 World Financial Center
New York, NY 10080
Schwab (Charles) & Co., Inc. 8.86%
101 Montgomery Street
San Francisco, CA 94101
National Financial Services, Inc. 8.70%
200 Liberty Street
New York, NY 10281
DJ Wilshire REIT ETF Schwab (Charles) & Co., Inc. 15.90%
101 Montgomery Street
San Francisco, CA 94101
State Street Bank & Trust Company 15.67%
1776 Heritage Drive
North Quincy, MA 02171
National Financial Services, Inc. 12.28%
200 Liberty Street
New York, NY 10281
|
46
KBW Bank ETF State Street Bank & Trust Company 33.96%
1776 Heritage Drive
North Quincy, MA 02171
First Clearing L.L.C. 11.01%
Riverfront Plaza, 901 East Byrd Street
Richmond, VA 23219
Citigroup Global Markets, Inc. 8.03%
388 Greenwich Street
New York, NY 10013
National Financial Services, Inc. 6.89%
200 Liberty Street
New York, NY 10281
Schwab (Charles) & Co., Inc. 6.26%
101 Montgomery Street
San Francisco, CA 94101
KBW Capital Markets ETF Credit Suisse Securities (USA) L.L.C. 20.42%
One Madison Avenue, 3rd Floor
New York, NY 10010
Lehman Brothers Inc. 12.72%
70 Hudson Street
Jersey City, NJ 07302
Citigroup Global Markets, Inc. 9.99%
388 Greenwich Street
New York, NY 10013
Schwab (Charles) & Co., Inc. 7.97%
101 Montgomery Street
San Francisco, CA 94101
Goldman, Sachs International Ltd. 7.13%
Peterborough Court, 133 Fleet Street
London, UK EC4A 2BB
Merrill Lynch, Pierce Fenner & Smith, Inc. 5.66%
4 World Financial Center
New York, NY 10080
KBW Insurance ETF DKWS/Equity Finance 15.09%
C/O ADP Proxy Services
Edgewood, NY 11717
Citigroup Global Markets, Inc. 14.48%
388 Greenwich Street
New York, NY 10013
First Clearing L.L.C. 12.50%
Riverfront Plaza, 901 East Byrd Street
Richmond, VA 23219
Goldman, Sachs & Co. 8.92%
180 Maiden Lane
New York, NY 10038
|
47
Morgan Stanley & Co. Incorporated 5.66%
1 Pierrepont Plaza, 5th Floor
Brooklyn, NY 11201
Morgan Stanley Technology ETF First Clearing L.L.C. 19.88%
Riverfront Plaza, 901 East Byrd Street
Richmond, VA 23219
The Northern Trust Company 10.66%
50 South LaSalle Street, Level A
Chicago, IL 60675
Schwab (Charles) & Co., Inc. 6.65%
101 Montgomery Street
San Francisco, CA 94101
M&I Marshall & Ilsley Bank 6.12%
1000 North Water Street
Milwaukee, WI 53202
Morgan Stanley & Co. Incorporated/Retail 5.82%
75 Varick Street
New York, NY 11201
SPDR S&P Dividend ETF Schwab (Charles) & Co., Inc. 15.05%
101 Montgomery Street
San Francisco, CA 94101
National Financial Services, Inc. 11.65%
200 Liberty Street
New York, NY 10281
First Clearing L.L.C. 10.26%
Riverfront Plaza, 901 East Byrd Street
Richmond, VA 23219
SPDR S&P Biotech ETF Brown Brothers Harriman & Co. 36.14%
525 Washington Blvd.
Jersey City, NJ 07310
National Financial Services, Inc. 7.22%
200 Liberty Street
New York, NY 10281
Schwab (Charles) & Co., Inc. 6.56%
101 Montgomery Street
San Francisco, CA 94101
SPDR S&P Homebuilders ETF State Street Bank & Trust Company 41.79%
1776 Heritage Drive
North Quincy, MA 02171
National Financial Services, Inc. 6.36%
200 Liberty Street
New York, NY 10281
Schwab (Charles) & Co., Inc. 5.37%
101 Montgomery Street
|
48
San Francisco, CA 94101
SPDR S&P Metals & Mining ETF National Financial Services, Inc. 11.25%
200 Liberty Street
New York, NY 10281
JPMorgan Chase Bank N.A. 8.79%
4 New York Plaza, 11th Floor
New York, NY 10004
Lehman Brothers Inc. 8.77%
70 Hudson Street
Jersey City, NJ 07302
Citigroup Global Markets, Inc. 8.43%
388 Greenwich Street
New York, NY 10013
Schwab (Charles) & Co., Inc. 7.66%
101 Montgomery Street
San Francisco, CA 94101
Morgan Stanley & Co. Incorporated 6.87%
1 Pierrepont Plaza, 5th Floor
Brooklyn, NY 11201
Pershing, L.L.C. 6.31%
One Pershing Plaza
Jersey City, NJ 07399
Credit Suisse Securities (USA) L.L.C. 5.42%
One Madison Avenue, 3rd Floor
New York, NY 10010
SPDR S&P Oil & Gas Equipment & Services ETF First Clearing L.L.C. 39.55%
Riverfront Plaza, 901 East Byrd Street
Richmond, VA 23219
Schwab (Charles) & Co., Inc. 9.66%
101 Montgomery Street
San Francisco, CA 94101
Morgan Stanley & Co. Incorporated 6.74%
1 Pierrepont Plaza, 5th Floor
Brooklyn, NY 11201
National Financial Services, Inc. 6.36%
200 Liberty Street
New York, NY 10281
SPDR S&P Oil & Gas Exploration & Production ETF Goldman, Sachs & Co. 28.51%
180 Maiden Lane
New York, NY 10038
Banc of America Securities, L.L.C. 19.04%
100 West 33rd Street, 9th Floor
New York, NY 10001
Morgan Stanley & Co. Incorporated 5.21%
|
49
1 Pierrepont Plaza, 5th Floor
Brooklyn, NY 11201
National Financial Services, Inc. 5.00%
200 Liberty Street
New York, NY 10281
SPDR S&P Pharmaceuticals ETF Bear Stearns Securities Corp. 19.66%
245 Park Avenue
New York, NY 10167
Schwab (Charles) & Co., Inc. 13.21%
101 Montgomery Street
San Francisco, CA 94101
Morgan Stanley & Co. Incorporated 9.99%
1 Pierrepont Plaza, 5th Floor
Brooklyn, NY 11201
National Financial Services, Inc. 7.95%
200 Liberty Street
New York, NY 10281
UBS Financial Services Inc. 6.23%
1000 Harbor Boulevard
Weehawken, NJ 07086
Morgan Stanley & Co. Incorporated/Retail 5.34%
75 Varick Street
New York, NY 11201
SPDR S&P Retail ETF State Street Bank & Trust Company 87.00%
1776 Heritage Drive
North Quincy, MA 02171
SPDR S&P Semiconductor ETF Bank of New York 39.70%
One Wall Street, 5th Floor
New York, NY 10286
State Street Bank & Trust Company 29.53%
1776 Heritage Drive
North Quincy, MA 02171
JPMorgan Chase Bank N.A. 14.09%
4 New York Plaza, 11th Floor
New York, NY 10004
Schwab (Charles) & Co., Inc. 6.18%
101 Montgomery Street
San Francisco, CA 94101
KBW Regional Banking ETF Merrill Lynch, Pierce Fenner & Smith, Inc. 18.42%
4 World Financial Center
New York, NY 10080
Credit Suisse Securities (USA) L.L.C. 11.84%
One Madison Avenue, 3rd Floor
New York, NY 10010
|
50
Morgan Stanley & Co. Incorporated 10.63%
1 Pierrepont Plaza, 5th Floor
Brooklyn, NY 11201
State Street Bank & Trust Company 7.06%
1776 Heritage Drive
North Quincy, MA 02171
UBS Securities L.L.C. 6.79%
677 Washington Boulevard
Stamford, CT 06912
National Financial Services, Inc. 5.41%
200 Liberty Street
New York, NY 10281
SPDR Lehman 1-3 Month T-Bill ETF Citigroup Global Markets, Inc. 28.58%
388 Greenwich Street
New York, NY 10013
National Financial Services, Inc. 11.32%
200 Liberty Street
New York, NY 10281
Fiserv Trust Company 7.06%
717 17th Street
Denver, CO 80202
Merrill Lynch, Pierce Fenner & Smith, Inc. 5.30%
4 World Financial Center
New York, NY 10080
Bank of New York 5.25%
One Wall Street, 5th Floor
New York, NY 10286
SPDR Lehman Intermediate Term Treasury ETF Merrill Lynch & Co., Inc. 71.62%
4 World Financial Center
250 Vesey Street
New York, NY 10080
Pershing, L.L.C. 5.80%
One Pershing Plaza
Jersey City, NJ 07399
UBS Financial Services Inc. 5.78%
1000 Harbor Boulevard
Weehawken, NJ 07086
SPDR Lehman Long Term Treasury ETF Citigroup Global Markets, Inc. 66.54%
388 Greenwich Street
New York, NY 10013
Merrill Lynch, Pierce Fenner & Smith, Inc. 5.84%
4 World Financial Center
New York, NY 10080
SPDR Barclays Capital TIPS ETF Schwab (Charles) & Co., Inc. 30.35%
101 Montgomery Street
|
51
San Francisco, CA 94101
National Financial Services, Inc. 29.09%
200 Liberty Street
New York, NY 10281
TD Ameritrade, Inc. 7.56%
4211 South 102nd Street
Omaha, NE 68127
SPDR Lehman Aggregate Bond ETF Fiduciary - SSB 43.65%
1776 Heritage Drive, 5th Floor
Quincy, MA 02171
Citigroup Global Markets, Inc. 9.76%
388 Greenwich Street
New York, NY 10013
Bear, Stearns Securities Corp. 7.50%
245 Park Avenue
New York, NY 10167
Merrill Lynch & Co., Inc. 6.86%
4 World Financial Center
250 Vesey Street
New York, NY 10080
First Clearing L.L.C. 5.37%
Riverfront Plaza, 901 East Byrd Street
Richmond, VA 23219
SPDR Lehman Municipal Bond ETF Merrill Lynch & Co., Inc. 60.00%
4 World Financial Center
250 Vesey Street
New York, NY 10080
National Financial Services, Inc. 11.95%
200 Liberty Street
New York, NY 10281
Bear, Stearns Securities Corp. 10.95%
245 Park Avenue
New York, NY 10167
Citigroup Global Markets, Inc. 6.97%
388 Greenwich Street
New York, NY 10013
|
Prior to October 2, 2007, SPDR Lehman Short Term Municipal Bond ETF, SPDR Lehman
California Municipal Bond ETF, SPDR Lehman New York Municipal Bond ETF, SPDR
Lehman International Treasury Bond ETF and SPDR Lehman High Yield Bond ETF had
not yet commenced operations and therefore did not have any shareholders who
beneficially owned of record 5% or more of the outstanding Shares of such Funds.
An Authorized Participant (as defined below) may hold of record more than 25% of
the outstanding Shares of a Fund. From time to time, Authorized Participants may
be a beneficial and/or legal owner of certain Funds, may be affiliated with an
index provider, may be deemed to have control of the applicable Fund and/or may
be able to affect the outcome of matters presented for a vote of the
shareholders of such Fund(s). Authorized Participants may execute an irrevocable
proxy granting the Distributor or another affiliate of State Street (the
"Agent") power to vote or abstain from voting such Authorized Participant's
beneficially or legally owned Shares
52
of the applicable Fund. In such cases, the Agent shall mirror vote (or abstain
from voting) such Shares in the same proportion as all other beneficial owners
of the applicable Fund.
The Trustees and Officers of the Trust, as a group, own less than 1% of the
Trust's voting securities as of the date of this SAI.
PURCHASE AND REDEMPTION OF CREATION UNITS
PURCHASE (CREATION). The Trust issues and sells Shares of each Fund only: (i) in
Creation Units on a continuous basis through the Principal Underwriter, without
a sales load, at their net asset value next determined after receipt, on any
Business Day (as defined below), of an order in proper form pursuant to the
terms of the Authorized Participant Agreement ("Participant Agreement"); or (ii)
pursuant to the Dividend Reinvestment Service (as defined below).
A "Business Day" with respect to each Fund (except for the Aggregate Bond ETF,
Municipal Bond ETFs and High Yield Bond ETF) is any day except weekends and the
following holidays: New Year's Day, Dr. Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day (observed), Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. A "Business Day" with respect to the
Aggregate Bond ETF, Municipal Bond ETFs and High Yield Bond ETF is any day
except weekends and the following holidays: New Year's Day, Dr. Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day (observed),
Independence Day, Labor Day, Columbus Day, Veterans Day, Thanksgiving Day and
Christmas Day.
FUND DEPOSIT. The consideration for purchase of a Creation Unit of a Fund
(except the Municipal Bond ETFs, International Treasury Bond ETF and High Yield
Bond ETF) generally consists of the in-kind deposit of a designated portfolio of
fixed income securities -- the "Deposit Securities" per each Creation Unit,
constituting a substantial replication, or a portfolio sampling representation,
of the securities included in the relevant Fund's benchmark index and an amount
of cash, the "Cash Component", computed as described below. The consideration
for the purchase of a Creation Unit of the Municipal Bond ETFs, International
Treasury Bond ETF and High Yield Bond ETF generally consists of a cash payment
equal in value to the Deposit Securities, the "Deposit Cash", together with the
Cash Component. When accepting purchases of Creation Units for cash, the
Municipal Bond ETFs, International Treasury Bond ETF and High Yield Bond ETF may
incur additional costs associated with the acquisition of Deposit Securities
that would otherwise be provided by an in-kind purchaser.
Together, the Deposit Securities or Deposit Cash, as applicable, and the Cash
Component constitute the "Fund Deposit," which represents the minimum initial
and subsequent investment amount for a Creation Unit of any Fund. The Cash
Component, which in the case of the SPDR S&P Dividend ETF includes a Dividend
Equivalent Payment, is an amount equal to the difference between the net asset
value of the Shares (per Creation Unit) and the market value of the Deposit
Securities or Deposit Cash, as applicable. The "Dividend Equivalent Payment"
enables a Fund (and, in particular, the SPDR S&P Dividend ETF) to make a
complete distribution of dividends on the day preceding the next dividend
payment date, and is an amount equal, on a per Creation Unit basis, to the
dividends on all the portfolio securities of the Fund ("Dividend Securities")
with ex-dividend dates within the accumulation period for such distribution (the
"Accumulation Period"), net of expenses and liabilities for such period, as if
all of the Dividend Securities had been held by the Fund for the entire
Accumulation Period. The Accumulation Period begins on the ex-dividend date for
each Fund and ends on the day preceding the next ex-dividend date. If the Cash
Component is a positive number (i.e., the net asset value per Creation Unit
exceeds the market value of the Deposit Securities or Deposit Cash), the Cash
Component shall be such positive amount. If the Cash Component is a negative
number (i.e., the net asset value per Creation Unit is less than the market
value of the Deposit Securities or Deposit Cash), the Cash Component shall be
such negative amount and the creator will be entitled to receive cash in an
amount equal to the Cash Component. The Cash Component serves the function of
compensating for any differences between the net asset value per Creation Unit
and the market value of the Deposit Securities or Deposit Cash. Computation of
the Cash Component excludes any stamp duty or other similar fees and expenses
payable upon transfer of beneficial ownership of the Deposit Securities, if
applicable, which shall be the sole responsibility of the Authorized Participant
(as defined below).
The Custodian, through NSCC, makes available on each Business Day, immediately
prior to the opening of business on the Exchange (currently 9:30 a.m., Eastern
time), the list of the names and the required number of shares of each Deposit
Security or the required amount of Deposit Cash, as applicable, to be included
in the current Fund Deposit (based on information at the end of the previous
Business Day) for each Fund. Such Fund Deposit is subject to any applicable
adjustments as described below, in order to effect purchases of Creation Units
of a given Fund until such time as the next-announced composition of the Deposit
Securities or the required amount of Deposit Cash, as applicable, is made
available.
The identity and number of shares of the Deposit Securities or the amount of
Deposit Cash, as applicable, required for a Fund Deposit for each Fund changes
as rebalancing adjustments, interest payments and corporate action events are
reflected from time to time by
53
the Adviser with a view to the investment objective of the applicable Fund. The
composition of the Deposit Securities may also change in response to adjustments
to the weighting or composition of the Component Stocks of the relevant index.
The Trust intends to require the substitution of an amount of cash (i.e., a
"cash in lieu" amount) to replace any Deposit Security of the Aggregate Bond ETF
that is a TBA transaction. The amount of cash contributed will be equivalent to
the price of the TBA transaction listed as a Deposit Security. In addition, the
Trust reserves the right to permit or require the substitution of a "cash in
lieu" amount to be added to the Cash Component to replace any Deposit Security
which: (i) may not be available in sufficient quantity for delivery, (ii) may
not be eligible for transfer through the systems of DTC for corporate securities
and municipal securities or the Federal Reserve System for U.S. Treasury
securities; (iii) may not be eligible for trading by an Authorized Participant
(as defined below) or the investor for which it is acting; (iv) would be
restricted under the securities laws or where the delivery of the Deposit
Security to the Authorized Participant would result in the disposition of the
Deposit Security by the Authorized Participant becoming restricted under the
securities laws, or (v) in certain other situations (collectively, "custom
orders"). The Trust also reserves the right to: (i) permit or require the
substitution of Deposit Securities in lieu of Deposit Cash; and (ii) include or
remove Deposit Securities from the basket in anticipation of index rebalancing
changes. The adjustments described above will reflect changes, known to the
Adviser on the date of announcement to be in effect by the time of delivery of
the Fund Deposit, in the composition of the subject index being tracked by the
relevant Fund or resulting from certain corporate actions.
PROCEDURES FOR PURCHASE OF CREATION UNITS. To be eligible to place orders with
the Principal Underwriter to purchase a Creation Unit of a Fund, an entity must
be (i) a "Participating Party", i.e., a broker-dealer or other participant in
the clearing process through the Continuous Net Settlement System of the NSCC
(the "Clearing Process"), a clearing agency that is registered with the SEC; or
(ii) a DTC Participant (see "BOOK ENTRY ONLY SYSTEM"), and, with respect to the
Fixed Income ETFs (except with respect to the International Treasury Bond ETF),
has the ability to clear through the Federal Reserve System. In addition, each
Participating Party or DTC Participant (each, an "Authorized Participant") must
execute a Participant Agreement that has been agreed to by the Principal
Underwriter and the Transfer Agent, and that has been accepted by the Trust,
with respect to purchases and redemptions of Creation Units. Each Authorized
Participant will agree, pursuant to the terms of a Participation Agreement, on
behalf of itself or any investor on whose behalf it will act, to certain
conditions, including that it will pay to the Trust, an amount of cash
sufficient to pay the Cash Component together with the Creation Transaction Fee
(defined below).
All orders to purchase Shares directly from a Fund, including custom orders,
must be placed for one or more Creation Units and in the manner and by the time
set forth in the Participant Agreement and the order form. The date on which an
order to purchase Creation Units (or an order to redeem Creation Units, as set
forth below) is referred to as the "Order Placement Date."
An Authorized Participant may require an investor to make certain
representations or enter into agreements with respect to the order (e.g., to
provide for payments of cash, when required). Investors should be aware that
their particular broker may not have executed a Participant Agreement and that,
therefore, orders to purchase Shares directly from a Fund in Creation Units have
to be placed by the investor's broker through an Authorized Participant that has
executed a Participant Agreement. In such cases there may be additional charges
to such investor. At any given time, there may be only a limited number of
broker-dealers that have executed a Participant Agreement and only a small
number of such Authorized Participants may have international capabilities.
On days when the Exchange closes earlier than normal or, with respect to the
Fixed Income ETFs, the bond markets close earlier than normal, the Funds may
require orders to create Creation Units to be placed earlier in the day. Orders
must be transmitted by an Authorized Participant by telephone or other
transmission method acceptable to the Distributor pursuant to procedures set
forth in the Participant Agreement. Those placing orders through an Authorized
Participant should allow sufficient time to permit proper submission of the
purchase order to the Principal Underwriter by the cut-off time on such Business
Day. Economic or market disruptions or changes, or telephone or other
communication failure may impede the ability to reach the Distributor or an
Authorized Participant.
ADDITIONAL PROCEDURES FOR FIXED INCOME ETFs. Fund Deposits must be delivered by
an Authorized Participant through the Federal Reserve System (for cash and U.S.
government securities) and/or through DTC (for corporate securities and
municipal securities) and/or through a subcustody agent (for foreign securities
with respect to the International Treasury Bond ETF). The Fund Deposit transfer
must be ordered by the DTC Participant in a timely fashion so as to ensure the
delivery of the requisite number of Deposit Securities or Deposit Cash, as
applicable, through DTC to the account of the Fund by no later than 3:00 p.m.,
Eastern time, on the Settlement Date. The "Settlement Date" for all Funds
(except the SPDR Lehman 1-3 Month T-Bill ETF ("T-Bill ETF") and TIPS ETF) is
generally the third business day after the Order Placement Date and the
"Settlement Date" for the T-Bill ETF and TIPS ETF is generally the first
business day after the Order Placement Date. All questions as to the number of
Deposit Securities or Deposit Cash to be delivered, as applicable, and the
validity, form and eligibility (including time of receipt) for the deposit of
any tendered securities
54
or cash, as applicable, will be determined by the Trust, whose determination
shall be final and binding. The amount of cash represented by the Cash Component
must be transferred directly to the Custodian through the Federal Reserve Bank
wire transfer system in a timely manner so as to be received by the Custodian no
later than 3:00 p.m., Eastern time, on the Settlement Date. If the Cash
Component and the Deposit Securities or Deposit Cash, as applicable, are not
received by 3:00 p.m., Eastern time, on the Settlement Date, the creation order
may be cancelled. Upon written notice to the Distributor, such canceled order
may be resubmitted the following Business Day using a Fund Deposit as newly
constituted to reflect the then current NAV of the Fund. The delivery of
Creation Units so created generally will occur no later than the third Business
Day following the day on which the purchase order is deemed received by the
Distributor.
The order shall be deemed to be received on the Business Day on which the order
is placed provided that the order is placed in proper form prior to the
applicable cut-off time and the federal funds in the appropriate amount are
deposited with by 3:00 p.m., Eastern time, with the Custodian on the Settlement
Date. If the order is not placed in proper form as required, or federal funds in
the appropriate amount are not received by 3:00 p.m. Eastern time on the
Settlement Date, then the order may be deemed to be rejected and the Authorized
Participant shall be liable to each Fund for losses, if any, resulting
therefrom.
ISSUANCE OF A CREATION UNIT. Except as provided herein, Creation Units will not
be issued until the transfer of good title to the Trust of the Deposit
Securities or payment of Deposit Cash, as applicable, and the payment of the
Cash Component have been completed. With respect to the International Treasury
Bond ETF, when the subcustodian has confirmed to the Custodian that the required
Deposit Securities (or the cash value thereof) have been delivered to the
account of the relevant subcustodian or subcustodians, the Principal Underwriter
and the Adviser shall be notified of such delivery, and the Trust will issue and
cause the delivery of the Creation Units.
In instances where the Trust accepts Deposit Securities for the purchase of a
Creation Unit, the Creation Unit may be purchased in advance of receipt by the
Trust of all or a portion of the applicable Deposit Securities as described
below. In these circumstances, the initial deposit will have a value greater
than the net asset value of the Shares on the date the order is placed in proper
form since in addition to available Deposit Securities, cash must be deposited
in an amount equal to the sum of (i) the Cash Component, plus (ii) as additional
amount of cash equal to a percentage of the market value as set forth in the
Participant Agreement, of the undelivered Deposit Securities (the "Additional
Cash Deposit"), which shall be maintained in a separate non-interest bearing
collateral account. An additional amount of cash shall be required to be
deposited with the Trust, pending delivery of the missing Deposit Securities to
the extent necessary to maintain the Additional Cash Deposit with the Trust in
an amount at least equal to the applicable percentage, as set forth in the
Participant Agreement, of the daily marked to market value of the missing
Deposit Securities. The Participant Agreement will permit the Trust to buy the
missing Deposit Securities at any time. Authorized Participants will be liable
to the Trust for the costs incurred by the Trust in connection with any such
purchases. These costs will be deemed to include the amount by which the actual
purchase price of the Deposit Securities exceeds the market value of such
Deposit Securities on the day the purchase order was deemed received by the
Principal Underwriter plus the brokerage and related transaction costs
associated with such purchases. The Trust will return any unused portion of the
Additional Cash Deposit once all of the missing Deposit Securities have been
properly received by the Custodian or purchased by the Trust and deposited into
the Trust. In addition, a Transaction Fee as set forth below under "Creation
Transaction Fees" will be charged in all cases. The delivery of Creation Units
so created generally will occur no later than the Settlement Date.
ACCEPTANCE OF ORDERS OF CREATION UNITS. The Trust reserves the absolute right to
reject an order for Creation Units transmitted to it by the Principal
Underwriter in respect of any Fund if (a) the order is not in proper form; (b)
the Deposit Securities or Deposit Cash, as applicable, delivered by the
Participant are not as disseminated through the facilities of the NSCC for that
date by the Custodian; (c) the investor(s), upon obtaining the Shares ordered,
would own 80% or more of the currently outstanding Shares of any Fund; (d)
acceptance of the Deposit Securities would have certain adverse tax consequences
to the Fund; (e) the acceptance of the Fund Deposit would, in the opinion of
counsel, be unlawful; (f) the acceptance of the Fund Deposit would otherwise, in
the discretion of the Trust or the Adviser, have an adverse effect on the Trust
or the rights of beneficial owners; (g) the acceptance or receipt of the order
for a Creation Unit would, in the opinion of counsel to the Trust, be unlawful;
or (h) in the event that circumstances outside the control of the Trust, the
Custodian, the Transfer Agent and/or the Adviser make it for all practical
purposes not feasible to process orders for Creation Units. Examples of such
circumstances include acts of God or public service or utility problems such as
fires, floods, extreme weather conditions and power outages resulting in
telephone, telecopy and computer failures; market conditions or activities
causing trading halts; systems failures involving computer or other information
systems affecting the Trust, the Principal Underwriter, the Custodian, the
Transfer Agent, DTC, NSCC, Federal Reserve System, or any other participant in
the creation process, and other extraordinary events. The Principal Underwriter
shall notify a prospective creator of a Creation Unit and/or the Authorized
Participant acting on behalf of the creator of a Creation Unit of its rejection
of the order of such person. The Trust, the Transfer Agent, the Custodian and
the Principal Underwriter are under no duty, however, to give notification of
any defects or irregularities in the delivery of Fund Deposits nor shall either
of them incur any liability for the failure to give any such notification.
55
The Trust, the Transfer Agent, the Custodian and the Principal Underwriter shall
not be liable for the rejection of any purchase order for Creation Units.
All questions as to the number of shares of each security in the Deposit
Securities and the validity, form, eligibility and acceptance for deposit of any
securities to be delivered shall be determined by the Trust, and the Trust's
determination shall be final and binding.
CREATION TRANSACTION FEE. A purchase (i.e., creation) transaction fee is imposed
for the transfer and other transaction costs associated with the purchase of
Creation Units, and investors will be required to pay a fixed creation
transaction fee regardless of the number of Creation Units created in the
transaction, as set forth in each Fund's Prospectus, as may be revised from time
to time. The Funds may adjust the creation transaction fee from time to time
based upon actual experience. An additional charge for cash purchases, custom
orders, or partial cash purchases for each Fund may be imposed. Investors who
use the services of a broker or other such intermediary may be charged a fee for
such services. Investors are responsible for the costs of transferring the
securities constituting the Deposit Securities to the account of the Trust.
REDEMPTION. Shares may be redeemed only in Creation Units at their net asset
value next determined after receipt of a redemption request in proper form by
the Fund through the Transfer Agent and only on a Business Day. EXCEPT UPON
LIQUIDATION OF A FUND, THE TRUST WILL NOT REDEEM SHARES IN AMOUNTS LESS THAN
CREATION UNITS. Investors must accumulate enough Shares in the secondary market
to constitute a Creation Unit in order to have such Shares redeemed by the
Trust. There can be no assurance, however, that there will be sufficient
liquidity in the public trading market at any time to permit assembly of a
Creation Unit. Investors should expect to incur brokerage and other costs in
connection with assembling a sufficient number of Shares to constitute a
redeemable Creation Unit.
With respect to each Fund, the Custodian, through the NSCC, makes available
immediately prior to the opening of business on the Exchange (currently 9:30 am,
Eastern time) on each Business Day, the list of the names and share quantities
of each Fund's portfolio securities that will be applicable (subject to possible
amendment or correction) to redemption requests received in proper form (as
defined below) on that day ("Fund Securities"). Fund Securities received on
redemption may not be identical to Deposit Securities which are applicable to
purchases of Creation Units for all Funds except the Municipal Bond ETFs and
High Yield Bond ETF.
Redemption proceeds for a Creation Unit generally consist of cash. However, with
respect to in-kind redemptions of a Fund, redemption proceeds for a Creation
Unit will consist of Fund Securities -- as announced by the Custodian on the
Business Day of the request for redemption received in proper form plus cash in
an amount equal to the difference between the net asset value of the Shares
being redeemed, as next determined after a receipt of a request in proper form,
and the value of the Fund Securities (the "Cash Redemption Amount"), less a
fixed redemption transaction fee as set forth below. In the event that the Fund
Securities have a value greater than the net asset value of the Shares, a
compensating cash payment equal to the differential is required to be made by or
through an Authorized Participant by the redeeming shareholder. Notwithstanding
the foregoing: (i) the Trust will substitute a cash-in-lieu amount to replace
any Fund Security of the Aggregate Bond ETF that is a TBA transaction and the
amount of cash paid out in such cases will be equivalent to the value of the TBA
transaction listed as a Fund Security; and (ii) at Trust's discretion with
respect to the Municipal Bond ETFs and High Yield Bond ETF, an Authorized
Participant may receive the corresponding cash value of the securities in lieu
of the in-kind securities value representing one or more Fund Securities.
REDEMPTION TRANSACTION FEE. A redemption transaction fee is imposed for the
transfer and other transaction costs associated with the redemption of Creation
Units, and investors will be required to pay a fixed redemption transaction fee
regardless of the number of Creation Units created in the transaction, as set
forth in each Fund's Prospectus, as may be revised from time to time. The
redemption transaction fee is the same no matter how many Creation Units are
being redeemed pursuant to any one redemption request. The Funds may adjust the
redemption transaction fee from time to time based upon actual experience. An
additional charge for cash redemptions, custom orders, or partial cash
redemptions (when cash redemptions are available) for each Fund may be imposed.
Investors who use the services of a broker or other such intermediary may be
charged a fee for such services. Investors are responsible for the costs of
transferring the Fund Securities from the Trust to their account or on their
order.
PROCEDURES FOR REDEMPTION OF CREATION UNITS - EQUITY ETFs. Orders to redeem
Creation Units must be submitted in proper form to the Transfer Agent prior to
the time as set forth in the Participant Agreement. A redemption request is
considered to be in "proper form" if (i) an Authorized Participant has
transferred or cause to be transferred to the Trust's Transfer Agent the
Creation Unit(s) being redeemed through the book-entry system of DTC so as to be
effective by the time as set forth in the Participant Agreement and (ii) a
request in form satisfactory to the Trust is received by the Transfer Agent from
the Authorized Participant on behalf of itself or another redeeming investor
within the time periods specified in the Participant Agreement. If the Transfer
Agent does not receive the investor's Shares through DTC's facilities by the
times and pursuant to the other terms and conditions set forth in
56
the Participant Agreement, the redemption request shall be rejected.
The Authorized Participant must transmit the request for redemption, in the form
required by the Trust, to the Transfer Agent in accordance with procedures set
forth in the Authorized Participant Agreement. Investors should be aware that
their particular broker may not have executed an Authorized Participant
Agreement, and that, therefore, requests to redeem Creation Units may have to be
placed by the investor's broker through an Authorized Participant who has
executed an Authorized Participant Agreement. Investors making a redemption
request should be aware that such request must be in the form specified by such
Authorized Participant. Investors making a request to redeem Creation Units
should allow sufficient time to permit proper submission of the request by an
Authorized Participant and transfer of the Shares to the Trust's Transfer Agent;
such investors should allow for the additional time that may be required to
effect redemptions through their banks, brokers or other financial
intermediaries if such intermediaries are not Authorized Participants.
PROCEDURES FOR REDEMPTION OF CREATION UNITS - FIXED INCOME ETFs. To be eligible
to place redemption orders for Creation Units of the Funds, an entity must be a
DTC Participant that has executed a Participant Agreement and have the ability
to transact through the Federal Reserve System (except with respect to the
International Treasury Bond ETF). Orders to redeem Creation Units must be
submitted in proper form to the Transfer Agent prior to the time as set forth in
the Participant Agreement and the order form. A redemption request is considered
to be in "proper form" if (i) such order is accompanied or followed by the
requisite number of shares of the Fund specified in such order, which delivery
must be made through DTC to the Custodian no later than 3:00 p.m., Eastern time,
on the Settlement Date; and (ii) all other procedures set forth in the
Participant Agreement and order form are properly followed. On days when the
Exchange or the bond markets close earlier than normal, the Funds may require
orders to redeem Creation Units to be placed earlier in the day. After the Trust
has deemed an order for redemption received, the Trust will initiate procedures
to transfer the requisite Fund Securities and the Cash Redemption Amount to the
Authorized Participant on behalf of the redeeming beneficial owner by the
Settlement Date.
The calculation of the value of the Fund Securities and the Cash Redemption
Amount to be delivered upon redemption will be made by the Custodian according
to the procedures set forth under "Determination of Net Asset Value", computed
on the Business Day on which a redemption order is deemed received by the Trust.
Therefore, if a redemption order in proper form is submitted to the Principal
Underwriter by a DTC Participant by the specified time on the Order Placement
Date, and the requisite number of shares of the relevant Fund are delivered to
the Custodian prior to 3:00 p.m. Eastern time on the Settlement Date, then the
value of the Fund Securities and the Cash Redemption Amount to be delivered will
be determined by the Custodian on such Order Placement Date. If the requisite
number of shares of the relevant Fund are not delivered by 3:00 p.m. Eastern
time on the Settlement Date, the Fund will not release the underlying securities
for delivery unless collateral is posted in such percentage amount of missing
shares as set forth in the Participant Agreement (marked to market daily).
With respect to the International Treasury Bond ETF, in connection with taking
delivery of shares of Fund Securities upon redemption of Creation Units, a
redeeming shareholder or Authorized Participant acting on behalf of such
Shareholder must maintain appropriate custody arrangements with a qualified
broker-dealer, bank or other custody providers in each jurisdiction in which any
of the Fund Securities are customarily traded, to which account such Fund
Securities will be delivered. Deliveries of redemption proceeds generally will
be made within three business days of the trade date. Due to the schedule of
holidays in certain countries, however, the delivery of in-kind redemption
proceeds may take longer than three business days after the day on which the
redemption request is received in proper form. The section below entitled "Local
Market Holiday Schedules" identifies the instances where more than seven days
would be needed to deliver redemption proceeds. Pursuant to an order of the SEC,
in respect of the Fund, the Trust will make delivery of in-kind redemption
proceeds within the number of days stated in the Local Market Holidays section
to be the maximum number of days necessary to deliver redemption proceeds. If
neither the redeeming Shareholder nor the Authorized Participant acting on
behalf of such redeeming Shareholder has appropriate arrangements to take
delivery of the Fund Securities in the applicable foreign jurisdiction and it is
not possible to make other such arrangements, or if it is not possible to effect
deliveries of the Fund Securities in such jurisdiction, the Trust may, in its
discretion, exercise its option to redeem such shares in cash, and the redeeming
Shareholders will be required to receive its redemption proceeds in cash.
ADDITIONAL REDEMPTION PROCEDURES - ALL ETFs. If it is not possible to effect
deliveries of the Fund Securities, the Trust may in its discretion exercise its
option to redeem such shares in cash, and the redeeming investor will be
required to receive its redemption proceeds in cash. In addition, an investor
may request a redemption in cash that the Fund may, in its sole discretion,
permit. In either case, the investor will receive a cash payment equal to the
net asset value of its Shares based on the net asset value of Shares of the
relevant Fund next determined after the redemption request is received in proper
form (minus a redemption transaction fee and additional charge for requested
cash redemptions specified above, to offset the Trust's brokerage and other
transaction costs associated with the disposition of Fund Securities). A Fund
may also, in its sole discretion, upon request of a shareholder, provide
57
such redeemer a portfolio of securities that differs from the exact composition
of the Fund Securities but does not differ in net asset value.
Redemptions of shares for Fund Securities will be subject to compliance with
applicable federal and state securities laws and each Fund (whether or not it
otherwise permits cash redemptions) reserves the right to redeem Creation Units
for cash to the extent that the Trust could not lawfully deliver specific Fund
Securities upon redemptions or could not do so without first registering the
Fund Securities under such laws. An Authorized Participant or an investor for
which it is acting subject to a legal restriction with respect to a particular
security included in the Fund Securities applicable to the redemption of
Creation Units may be paid an equivalent amount of cash. The Authorized
Participant may request the redeeming investor of the Shares to complete an
order form or to enter into agreements with respect to such matters as
compensating cash payment. Further, an Authorized Participant that is not a
"qualified institutional buyer," ("QIB") as such term is defined under Rule 144A
of the Securities Act, will not be able to receive Fund Securities that are
restricted securities eligible for resale under Rule 144A. An Authorized
Participant may be required by the Trust to provide a written confirmation with
respect to QIB status in order to receive Fund Securities.
REQUIRED EARLY ACCEPTANCE OF ORDERS. Notwithstanding the foregoing, as described
in the Participant Agreement and the applicable order form, Authorized
Participants may be notified that the cut-off time for an order may be earlier
on a particular business day.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction with the
section in each Prospectus entitled "DETERMINATION OF NET ASSET VALUE."
Net asset value per Share for each Fund of the Trust is computed by dividing the
value of the net assets of such Fund (i.e., the value of its total assets less
total liabilities) by the total number of Shares outstanding, rounded to the
nearest cent. Expenses and fees, including the management fees, are accrued
daily and taken into account for purposes of determining net asset value. The
net asset value of each Fund is calculated by the Custodian and determined at
the close of the regular trading session on the NYSE (ordinarily 4:00 p.m.
Eastern time) on each day that such exchange is open, provided that fixed-income
assets may be valued as of the announced closing time for trading in
fixed-income instruments on any day that the SIFMA announces an early closing
time.
In calculating a Fund's net asset value per Share, the Fund's investments are
generally valued using market valuations. A market valuation generally means a
valuation (i) obtained from an exchange, a pricing service, or a major market
maker (or dealer), (ii) based on a price quotation or other equivalent
indication of value supplied by an exchange, a pricing service, or a major
market maker (or dealer) or (iii) based on amortized cost. In the case of shares
of other funds that are not traded on an exchange, a market valuation means such
fund's published net asset value per share. The Adviser may use various pricing
services, or discontinue the use of any pricing service, as approved by the
Board from time to time. A price obtained from a pricing service based on such
pricing service's valuation matrix may be considered a market valuation. Any
assets or liabilities denominated in currencies other than the U.S. dollar are
converted into U.S. dollars at the current market rates on the date of valuation
as quoted by one or more sources.
In the event that current market valuations are not readily available or such
valuations do not reflect current market value, the Trust's procedures require
the Pricing and Investment Committee to determine a security's fair value if a
market price is not readily available. In determining such value the Pricing and
Investment Committee may consider, among other things, (i) price comparisons
among multiple sources, (ii) a review of corporate actions and news events, and
(iii) a review of relevant financial indicators (e.g., movement in interest
rates, market indices, and prices from the Funds' index providers). In these
cases, a Fund's net asset value may reflect certain portfolio securities' fair
values rather than their market prices. Fair value pricing involves subjective
judgments and it is possible that the fair value determination for a security is
materially different than the value that could be realized upon the sale of the
security. In addition, fair value pricing could result in a difference between
the prices used to calculate a Fund's net asset value and the prices used by a
Fund's benchmark Index. This may result in a difference between a Fund's
performance and the performance of the applicable Fund's benchmark Index. With
respect to securities that are primarily listed on foreign exchanges, the value
of a Fund's portfolio securities may change on days when you will not be able to
purchase or sell your Shares.
58
DIVIDENDS AND DISTRIBUTIONS
The following information supplements and should be read in conjunction with the
section in each Prospectus entitled "DISTRIBUTIONS."
GENERAL POLICIES
Dividends from net investment income, if any, are declared and paid monthly by
each Fixed Income ETF and quarterly for each Equity ETF. Distributions of net
realized securities gains, if any, generally are declared and paid once a year,
but the Trust may make distributions on a more frequent basis for certain Funds
to improve index tracking or to comply with the distribution requirements of the
Internal Revenue Code, in all events in a manner consistent with the provisions
of the 1940 Act.
Dividends and other distributions on Shares are distributed, as described below,
on a pro rata basis to Beneficial Owners of such Shares. Dividend payments are
made through DTC Participants and Indirect Participants to Beneficial Owners
then of record with proceeds received from the Trust.
The Trust makes additional distributions to the extent necessary (i) to
distribute the entire annual taxable income of the Trust, plus any net capital
gains and (ii) to avoid imposition of the excise tax imposed by Section 4982 of
the Internal Revenue Code. Management of the Trust reserves the right to declare
special dividends if, in its reasonable discretion, such action is necessary or
advisable to preserve the status of each Fund as a regulated investment company
("RIC") or to avoid imposition of income or excise taxes on undistributed
income.
DIVIDEND REINVESTMENT SERVICE
Broker-dealers may make available the DTC book-entry Dividend Reinvestment
Service (the "Service") for use by Beneficial Owners of the Funds through DTC
Participants for reinvestment of their dividend distributions. If the Service is
available and used, dividend distributions of both income and realized gains
will be automatically reinvested in additional whole Shares issued by the Trust
of the same Fund at NAV per share. Shares will be issued at NAV under the
Service regardless of whether the Shares are then trading in the secondary
market at a premium or discount to net asset value. Broker dealers, at their own
discretion, may also offer a dividend reinvestment program under which Shares
are purchased in the secondary market at current market prices. Investors should
consult their broker dealer for further information regarding the Service or
other dividend reinvestment programs.
TAXES
The following is only a summary of certain additional federal income tax
considerations generally affecting the Funds and their shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the federal, state, local or foreign tax treatment of the Funds
or their shareholders, and the discussion here and in the Prospectus is not
intended to be a substitute for careful tax planning.
The following general discussion of certain federal income tax consequences is
based on the Internal Revenue Code and the regulations issued thereunder as in
effect on the date of this Statement of Additional Information. New legislation,
as well as administrative changes or court decisions, may significantly change
the conclusions expressed herein, and may have a retroactive effect with respect
to the transactions contemplated herein.
The following information also supplements and should be read in conjunction
with the section in the Prospectus entitled "TAX MATTERS."
Each Fund intends to qualify for and to elect treatment as a separate RIC under
Subchapter M of the Internal Revenue Code. As such, each Fund should not be
subject to federal income tax on its net investment income and capital gains, if
any, to the extent that it timely distributes such income and capital gains to
its shareholders. In order to be taxable as a RIC, a Fund must distribute
annually to its shareholders at least 90% of its net investment income
(generally net investment income plus the excess of net short-term capital gains
over net long-term capital losses) and at least 90% of its net tax exempt
interest income, for each tax year, if any, to its shareholders ("Distribution
Requirement") and also must meet several additional requirements. Among these
requirements are the following: (i) at least 90% of the Fund's gross income each
taxable year must be derived from dividends, interest, payments with respect to
securities
59
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing in
such stock, securities or currencies, and net income derived from an interest in
qualified publicly traded partnerships; (ii) at the end of each fiscal quarter
of the Fund's taxable year, at least 50% of the market value of its total assets
must be represented by cash and cash items, U.S. government securities,
securities of other RICs and other securities, with such other securities
limited, in respect to any one issuer, to an amount not greater than 5% of the
value of the Fund's total assets or more than 10% of the outstanding voting
securities of such issuer, and (iii) at the end of each fiscal quarter of the
Fund's taxable year, not more than 25% of the value of its total assets is
invested in the securities (other than U.S. government securities or securities
of other RICs) of any one issuer or the securities of two or more issuers
engaged in the same, similar, or related trades or businesses if the Fund owns
at least 20% of the voting power of such issuers, or the securities of one or
more qualified publicly traded partnerships.
Each Fund is treated as a separate corporation for federal income tax purposes.
Each Fund therefore is considered to be a separate entity in determining its
treatment under the rules for RICs described herein and in the Prospectus.
Losses in one Fund do not offset gains in another and the requirements (other
than certain organizational requirements) for qualifying RIC status are
determined at the Fund level rather than at the Trust level.
If any Fund fails to qualify as a RIC for any taxable year, it will be taxable
at regular corporate rates. In such an event, all distributions (including
capital gains distributions) will be taxable as ordinary dividends to the extent
of the Fund's current and accumulated earnings and profits, subject to the
dividends-received deduction for corporate shareholders and the lower tax rates
applicable to qualified dividend income distributed to individuals. The Board
reserves the right not to maintain the qualification of a Fund as a regulated
investment company if it determines such course of action to be beneficial to
shareholders.
Although each Fund intends to distribute substantially all of its net investment
income and its capital gains for each taxable year, a Fund will be subject to
federal income tax to the extent any such income or gains are not distributed.
If a Fund's distributions exceed its taxable income and capital gains realized
during a taxable year, all or a portion of the distributions made in the taxable
year may be recharacterized as a return of capital to shareholders. A return of
capital distribution generally will not be taxable but will reduce the
shareholder's cost basis and result in a higher capital gain or lower capital
loss when those shares on which the distribution was received are sold.
A Fund will be subject to a 4% excise tax on certain undistributed income if it
does not distribute to its shareholders in each calendar year at least 98% of
its ordinary income for the calendar year plus 98% of its capital gain net
income for the twelve months ended October 31 of such year. Each Fund intends to
declare and distribute dividends and distributions in the amounts and at the
times necessary to avoid the application of this 4% excise tax.
As a result of tax requirements, the Trust on behalf of each Fund has the right
to reject an order to create Shares if the purchaser (or group of purchasers)
would, upon obtaining the Shares so ordered, own 80% or more of the outstanding
Shares of a given Fund and if, pursuant to section 351 of the Internal Revenue
Code, the respective Fund would have a basis in the Deposit Securities different
from the market value of such securities on the date of deposit. The Trust also
has the right to require information necessary to determine beneficial Share
ownership for purposes of the 80% determination.
Dividends and interest received by the International Treasury Bond ETF may give
rise to withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. If a Fund meets certain requirements, which include a
requirement that more than 50% of the value of the Fund's total assets at the
close of its respective taxable year consists of stocks or securities of foreign
corporations, then the Fund should be eligible to file an election with the
Internal Revenue Service that may enable shareholders, in effect, to receive
either the benefit of a foreign tax credit, or a tax deduction, with respect to
any foreign and U.S. possessions income taxes paid such Fund, subject to certain
limitations. Pursuant to this election, the Fund will treat those taxes as
dividends paid to its shareholders. Each such shareholder will be required to
include a proportionate share of those taxes in gross income as income received
from a foreign source and must treat the amount so included as if the
shareholder had paid the foreign tax directly. The shareholder may then either
deduct the taxes deemed paid by him or her in computing his or her taxable
income or, alternatively, use the foregoing information in calculating any
foreign tax credit the shareholder may be entitled to use against such
shareholder's federal income tax. If the Fund makes this election, the Fund will
report annually to its shareholders the respective amounts per share of the
Fund's income from sources within, and taxes paid to, foreign countries and U.S.
possessions.
A Fund's transactions in foreign currencies and forward foreign currency
contracts will be subject to special provisions of the Internal Revenue Code
that, among other things, may affect the character of gains and losses realized
by the Funds (i.e., may affect whether gains or losses are ordinary or capital),
accelerate recognition of income to a Fund and defer losses. These rules could
therefore affect
60
the character, amount and timing of distributions to shareholders. These
provisions also may require a Fund to mark-to-market certain types of positions
in their portfolios (i.e., treat them as if they were closed out) which may
cause a Fund to recognize income without receiving cash with which to make
distributions in amounts necessary to satisfy the RIC distribution requirements
for avoiding income and excise taxes. The Funds intend to monitor their
transactions, intend to make the appropriate tax elections, and intend to make
the appropriate entries in their books and records when they acquire any foreign
currency or forward foreign currency contract in order to mitigate the effect of
these rules so as to prevent disqualification of a Fund as a RIC and minimize
the imposition of income and excise taxes.
If a Fund owns shares in certain foreign investment entities, referred to as
"passive foreign investment companies" or "PFIC," the Fund will be subject to
one of the following special tax regimes: (i) the Fund is liable for U.S.
federal income tax, and an additional interest charge, on a portion of any
"excess distribution" from such foreign entity or any gain from the disposition
of such shares, even if the entire distribution or gain is paid out by the Fund
as a dividend to its shareholders; (ii) if the Fund were able and elected to
treat a PFIC as a "qualifying electing fund" or "QEF," the Fund would be
required each year to include in income, and distribute to shareholders in
accordance with the distribution requirements set forth above, the Fund's pro
rata share of the ordinary earnings and net capital gains of the passive foreign
investment company, whether or not such earnings or gains are distributed to the
Fund; or (iii) the Fund may be entitled to mark-to-market annually shares of the
PFIC, and in such event would be required to distribute to shareholders any such
mark-to-market gains in accordance with the distribution requirements set forth
above.
A Fund may invest in complex securities. These investments may be subject to
numerous special and complex rules. These rules could affect whether gains and
losses recognized by the Fund are treated as ordinary income or capital gain,
accelerate the recognition of income to a Fund and/or defer a Fund's ability to
recognize losses. In turn, these rules may affect the amount, timing or
character of the income distributed to you by the Fund.
Each Fund is required for federal income tax purposes to mark-to-market and
recognize as income for each taxable year its net unrealized gains and losses on
certain futures contracts as of the end of the year as well as those actually
realized during the year. Gain or loss from futures and options contracts on
broad-based indexes required to be marked to market will be 60% long-term and
40% short-term capital gain or loss. Application of this rule may alter the
timing and character of distributions to shareholders. A Fund may be required to
defer the recognition of losses on futures contracts, options contracts and
swaps to the extent of any unrecognized gains on offsetting positions held by
the Fund. It is anticipated that any net gain realized from the closing out of
futures or options contracts will be considered gain from the sale of securities
and therefore will be qualifying income for purposes of the 90% requirement.
Each Fund distributes to shareholders at least annually any net capital gains
which have been recognized for federal income tax purposes, including unrealized
gains at the end of a Fund's fiscal year on futures or options transactions.
Such distributions are combined with distributions of capital gains realized on
a Fund's other investments and shareholders are advised on the nature of the
distributions.
As a result of entering into swap contracts, a Fund may make or receive periodic
net payments. Such Fund may also make or receive a payment when a swap is
terminated prior to maturity through an assignment of the swap or other closing
transaction. Periodic net payments, if positive, will generally constitute
taxable ordinary income and, if negative, will reduce net tax-exempt income,
while termination of a swap will generally result in capital gain or loss (which
will be a long-term capital gain or loss if a Fund has been a party to the swap
for more than one year). The tax treatment of many types of credit default swaps
is uncertain and may affect the amount, timing or character of the income
distributed to you by the Fund.
Investments by a Fund in zero coupon or other discount securities will result in
income to the Fund equal to a portion of the excess face value of the securities
over their issue price (the "original issue discount" or "OID") each year that
the securities are held, even though the Fund receives no cash interest
payments. In other circumstances, whether pursuant to the terms of a security or
as a result of other factors outside the control of the Fund, the Fund may
recognize income without receiving a commensurate amount of cash. Such income is
included in determining the amount of income that the Fund must distribute to
maintain its status as a RIC and to avoid the payment of federal income tax,
including the nondeductible 4% excise tax. Because such income may not be
matched by a corresponding cash distribution to the Fund, the Fund may be
required to borrow money or dispose of other securities to be able to make
distributions to its shareholders.
Any market discount recognized on a bond is taxable as ordinary income. A market
discount bond is a bond acquired in the secondary market at a price below
redemption value or adjusted issue price if issued with original issue discount.
Absent an election by the fund to include the market discount in income as it
accrues, gain on the Fund's disposition of such an obligation will be treated as
ordinary income rather than capital gain to the extent of the accrued market
discount.
Special rules apply if a Fund holds inflation-indexed bonds (TIPs). Generally,
all stated interest on such bonds is taken into income by
61
a Fund under its regular method of accounting for interest income. The amount of
positive inflation adjustment, which results in an increase in the
inflation-adjusted principal amount of the bond, is treated as OID. The OID is
included in the Fund's gross income ratably during the period ending with the
maturity of the bond, under the general OID inclusion rules. The amount of a
Fund's OID in a taxable year with respect to a bond will increase a Fund's
taxable income for such year without a corresponding receipt of cash, until the
bond matures. As a result, the Fund may need to use other sources of cash to
satisfy its distributions for such year. The amount of negative inflation
adjustments, which results in a decrease in the inflation-adjusted principal
amount of the bond, reduces the amount of interest (including stated interest,
OID, and market discount, if any) otherwise includable in the Fund's income with
respect to the bond for the taxable year.
Each Fund intends to distribute annually to its shareholders substantially all
of its investment company taxable income, all of its net tax-exempt income and
any net realized long-term capital gains in excess of net realized short-term
capital losses (including any capital loss carryovers). Each Fund will report to
shareholders annually the amount of dividends received from ordinary income, the
amount of distributions received from capital gains and the portion of dividends
which may qualify for the dividends received deduction, if any. A portion of the
dividends received from a Fund may be treated as qualified dividend income
(eligible for the reduced maximum rate to individuals of 15% (5% for individuals
in lower tax brackets)) to the extent that a Fund receives qualified dividend
income. Qualified dividend income includes, in general, subject to certain
holding period requirements and other requirements, dividend income from certain
U.S. and foreign corporations. Eligible foreign corporations include those
incorporated in possessions of the United States, those incorporated in certain
countries with comprehensive tax treaties with the United States and those whose
stock is tradable on an established securities market in the United States. A
Fund may derive capital gains and losses in connection with the sale or other
disposition of its portfolio securities. Distributions from net short-term
capital gains will be taxable to shareholders as ordinary income. Distributions
from net long-term gains will be taxable to you at long-term capital gains
rates, regardless of how long you have held your shares in a Fund. Long-term
capital gains are currently taxed at a maximum rate of 15%. Absent further
legislation, the maximum 15% rate on qualified dividend income and long-term
capital gains will cease to apply to taxable years beginning after December 31,
2010.
Dividends paid by the Municipal Bond ETFs that are properly designated as
exempt-interest dividends will not be subject to regular Federal income tax.
Dividends paid by the Municipal Bond ETFs will be exempt from Federal income tax
(though not necessarily exempt from state and local taxation) to the extent of
the Fund's tax-exempt interest income as long as 50% or more of the value of the
Fund's assets at the end of each quarter is invested in state, municipal and
other bonds that are excluded from gross income for Federal income tax purposes
and as long as the Fund properly designates such dividends as exempt-interest
dividends. Depending on a shareholder's state of residence, exempt interest
dividends paid by the Municipal Bond ETFs from interest earned on municipal
securities of that state, or its political subdivision, may be exempt in the
hands of such shareholder from income tax in that state. However, income from
municipal securities of states other than the shareholder's state of residence
generally will not qualify for tax-free treatment for such shareholder. For a
general discussion of the state and local tax treatment to shareholders of the
SPDR Lehman California Municipal Bond ETF and SPDR Lehman New York Municipal
Bond ETF, see the section titled "State Tax Matters" below. Additionally, please
refer to the earlier discussion in the section titled "Municipal Securities"
regarding Davis v. Department of Revenue about possible changes to the taxation
of income from the Municipal Bond ETFs.
Interest on indebtedness incurred by a shareholder to purchase or carry shares
of the Municipal Bond ETFs will not be deductible for U.S. federal income tax
purposes. If a shareholder receives exempt-interest dividends with respect to
any share of a Municipal Bond ETF and if the share is held by the shareholder
for six months or less, then any loss on the sale or exchange of the share may,
to the extent of the exempt-interest dividends, be disallowed, In addition, the
IRC may require a shareholder in a Municipal Bond ETF that receives
exempt-interest dividends to treat as taxable income a portion of certain
otherwise non-taxable social security and railroad retirement benefit payments.
Furthermore, a portion of any exempt-interest dividend paid by a Municipal Bond
ETF that unexpectedly represents income derived from certain revenue or private
activity bonds held by a Municipal Bond ETF may not retain its tax-exempt status
in the hands of a shareholder who is a "substantial user" of a facility financed
by such bonds, or a "related person" thereof. If addition, the receipt of
dividends and distributions from the Municipal Bond ETF may affect a foreign
corporate shareholder's federal "branch profits" tax liability and the federal
"excess net passive income" tax liability of a shareholder of a Subchapter S
corporation. Shareholders should consult their own tax advisers as to whether
they are (i) "substantial users" with respect to a facility or "related" to such
users within the meaning of the IRC or (ii) subject to the federal "branch
profits" tax, or the deferral "excess net passive income" tax.
In general, a sale of Shares results in capital gain or loss, and for individual
shareholders, is taxable at a federal rate dependent upon the length of time the
Shares were held. A redemption of a shareholder's Fund Shares is normally
treated as a sale for tax purposes. Fund Shares held for a period of one year or
less at the time of such sale or redemption will, for tax purposes, generally
result in short-term capital gains or losses and those held for more than one
year will generally result in long-term capital gains or losses. Under
62
current law, the maximum tax rate on long-term capital gains available to
non-corporate shareholders generally is 15%. As noted above, without future
legislation, the maximum tax rate on long-term capital gains would return to 20%
in 2011.
Gain or loss on the sale or redemption of Shares in each Fund is measured by the
difference between the amount received and the adjusted tax basis of the Shares.
Shareholders should keep records of investments made (including Shares acquired
through reinvestment of dividends and distribution) so they can compute the tax
basis of their Shares.
A loss realized on a sale or exchange of Shares of a Fund may be disallowed if
other substantially identical Shares are acquired (whether through the automatic
reinvestment of dividends or otherwise) within a sixty-one (61) day period
beginning thirty (30) days before and ending thirty (30) days after the date
that the Shares are disposed of. In such a case, the basis of the Shares
acquired must be adjusted to reflect the disallowed loss. Any loss upon the sale
or exchange of Shares held for six (6) months or less is treated as long-term
capital loss to the extent of any capital gain dividends received by the
shareholders.
Distribution of ordinary income and capital gains may also be subject to
foreign, state and local taxes depending on a shareholder's circumstances.
Distributions reinvested in additional Shares of a Fund through the means of the
service (see "DIVIDEND REINVESTMENT SERVICE") will nevertheless be taxable
dividends to Beneficial Owners acquiring such additional Shares to the same
extent as if such dividends had been received in cash.
Dividends paid by a Fund to shareholders who are nonresident aliens or foreign
entities will be subject to a 30% United States withholding tax unless a reduced
rate of withholding or a withholding exemption is provided under applicable
treaty law to the extent derived from investment income and short-term capital
gain (other than "qualified short-term capital gain" described below) or unless
such income is effectively connected with a U.S. trade or business carried on
through a permanent establishment in the United States. Nonresident shareholders
are urged to consult their own tax advisors concerning the applicability of the
United States withholding tax and the proper withholding form(s) to be submitted
to a Fund. A non-U.S. shareholder who fails to provide an appropriate IRS Form
W-8 may be subject to backup withholding at the appropriate rate.
Under recently enacted legislation, the Fund may, under certain circumstances,
designate all or a portion of a dividend as an "interest-related dividend" that
if received by a nonresident alien or foreign entity generally would be exempt
from the 30% U.S. withholding tax, provided that certain other requirements are
met. The Fund may also, under certain circumstances, designate all or a portion
of a dividend as a "qualified short-term capital gain dividend" which if
received by a nonresident alien or foreign entity generally would be exempt from
the 30% U.S. withholding tax, unless the foreign person is a nonresident alien
individual present in the United States for a period or periods aggregating 183
days or more during the taxable year. In the case of Shares held through an
intermediary, the intermediary may withhold even if a Fund designates the
payment as qualified net interest income or qualified short-term capital gain.
Non-U.S. shareholders should contact their intermediaries with respect to the
application of these rules to their accounts. The provisions contained in the
legislation relating to dividends to foreign persons would apply to dividends
with respect to taxable years of the Fund beginning after December 31, 2004 and
before January 1, 2008.
A Fund will be required in certain cases to withhold at applicable withholding
rates and remit to the United States Treasury the amount withheld on amounts
payable to any shareholder who (1) has provided a Fund either an incorrect tax
identification number or no number at all, (2) who is subject to backup
withholding by the Internal Revenue Service for failure to properly report
payments of interest or dividends, (3) who has failed to certify to a Fund that
such shareholder is not subject to backup withholding, or (4) has not certified
that such shareholder is a U.S. person (including a U.S. resident alien).
Under promulgated Treasury regulations, if a shareholder recognizes a loss on
disposition of a Fund's Shares of $2 million or more for an individual
shareholder or $10 million or more for a corporate shareholder, the shareholder
must file with the IRS a disclosure statement on Form 8886. Direct shareholders
of portfolio securities are in many cases excepted from this reporting
requirement, but under current guidance, shareholders of a RIC are not excepted.
Future guidance may extend the current exception from this reporting requirement
to shareholders of most or all regulated investment companies. In addition,
pursuant to recently enacted legislation, significant penalties may be imposed
for the failure to comply with the reporting requirements. The fact that a loss
is reportable under these regulations does not affect the legal determination of
whether the taxpayer's treatment of the loss is proper. Shareholders should
consult their tax advisers to determine the applicability of these regulations
in light of their individual circumstances.
The foregoing discussion is a summary only and is not intended as a substitute
for careful tax planning. Purchasers of Shares should consult their own tax
advisors as to the tax consequences of investing in such Shares, including under
state, local and other tax laws.
63
Finally, the foregoing discussion is based on applicable provisions of the
Internal Revenue Code, regulations, judicial authority and administrative
interpretations in effect on the date hereof. Changes in applicable authority
could materially affect the conclusions discussed above, and such changes often
occur.
STATE TAX MATTERS
The discussion of state and local tax treatment is based on the assumptions that
the Funds will qualify under Subchapter M of the Code as regulated investment
companies, that they will satisfy the conditions which will cause distributions
to qualify as exempt-interest dividends to shareholders when distributed as
intended, and that each Fund will distribute all interest and dividends it
receives to its shareholders. The tax discussion summarizes general state and
local tax laws which are currently in effect and which are subject to change by
legislative, judicial or administrative action; any such changes may be
retroactive with respect to the applicable Fund's transactions. Please refer to
the earlier discussion in the section titled "MUNICIPAL SECURITIES" regarding
Davis v. Department of Revenue about possible changes to the taxation of income
from the Municipal Bond ETFs. Investors should consult a tax advisor for more
detailed information about state and local taxes to which they may be subject.
CALIFORNIA
The following is a general, abbreviated summary of certain provisions of the
applicable California tax law as presently in effect as it directly governs the
taxation of resident individual and corporate shareholders of the SPDR Lehman
California Municipal Bond ETF. This summary does not address the taxation of
other shareholders nor does it discuss any local taxes that may be applicable.
These provisions are subject to change by legislative, administrative or
judicial action, and any such change may be retroactive with respect to
transactions of the SPDR Lehman California Municipal Bond ETF.
The following is based on the assumptions that the SPDR Lehman California
Municipal Bond ETF will qualify under Subchapter M of the Code as a regulated
investment company, that it will satisfy the conditions which will cause its
distributions to qualify as exempt-interest dividends to shareholders, and that
it will distribute all interest and dividends it receives to its shareholders.
The SPDR Lehman California Municipal Bond ETF will be subject to the California
corporate franchise and corporation income tax only if it has a sufficient nexus
with California. If the SPDR Lehman California Municipal Bond ETF is subject to
the California franchise or corporation income tax, it does not expect to pay a
material amount of such tax.
Distributions by the SPDR Lehman California Municipal Bond ETF that are
attributable to interest on any obligation of California and its political
subdivisions or to interest on obligations of the United States, its
territories, possessions or instrumentalities that are exempt from state
taxation under federal law will not be subject to the California personal income
tax. For purposes of determining interest earned on obligations of the United
States, distributions attributable to interest on Fannie Mae securities,
Government National Mortgage Association securities, and repurchase agreements
are not treated as obligations of the United States and therefore will be
subject to California personal income tax. All other distributions, including
distributions attributable to capital gains, will also be subject to the
California personal income tax.
All distributions of the SPDR Lehman California Municipal Bond ETF to corporate
shareholders, regardless of source, will be subject to the California corporate
franchise tax.
Gain on the sale, exchange, or other disposition of shares of the SPDR Lehman
California Municipal Bond ETF will be subject to the California personal income
and corporate franchise taxes.
Shares of the SPDR Lehman California Municipal Bond ETF may be subject to the
California estate tax if held by a California decedent at the time of death.
Shareholders are advised to consult with their own tax advisors for more
detailed information concerning California tax matters.
NEW YORK
The following is a general, abbreviated summary of certain provisions of the
applicable New York tax law as presently in effect as it directly governs the
taxation of resident individual, corporate, and unincorporated business
shareholders of the SPDR Lehman New York Municipal Bond ETF. This summary does
not address the taxation of other shareholders nor does it discuss any other
state or any local taxes, other than New York City taxes, that may be
applicable. These provisions are subject to change by legislative or
64
administrative action, and any such change may be retroactive with respect to
SPDR Lehman New York Municipal Bond ETF transactions.
The SPDR Lehman New York Municipal Bond ETF will be subject to the New York
State corporate franchise tax and the New York City general corporation tax only
if it has a sufficient nexus with New York State or New York City. If the SPDR
Lehman New York Municipal Bond ETF is subject to such taxes, it does not expect
to pay a material amount of either tax.
Individual shareholders of the SPDR Lehman New York Municipal Bond ETF, who are
subject to New York State and/or New York City personal income taxation, will
not be required to include in their New York adjusted gross income that portion
of their exempt-interest dividends (as determined for federal income tax
purposes), which the SPDR Lehman New York Municipal Bond ETF clearly identifies
as directly attributable to interest earned on municipal obligations issued by
governmental authorities in New York and which are specifically exempted from
personal income taxation in New York State or New York City, or interest earned
on obligations of U.S. territories or possessions, that is exempt from taxation
by the states pursuant to federal law. Distributions to individual shareholders
of dividends derived from interest that does not qualify as exempt-interest
dividends (as determined for federal income tax purposes), distributions of
exempt-interest dividends (as determined for federal income tax purposes), which
are derived from interest on municipal obligations issued by governmental
authorities in states other than New York State, and distributions derived from
interest earned on federal obligations will be included in their New York
adjusted gross income as ordinary income. Distributions to individual
shareholders of the SPDR Lehman New York Municipal Bond ETF of capital gain
dividends (as determined for federal income tax purposes) will be included in
their New York adjusted gross income as long-term capital gains. Distributions
to individual shareholders of the SPDR Lehman New York Municipal Bond ETF of
dividends derived from any net income received from taxable temporary
investments and any net short-term capital gains realized by the SPDR Lehman New
York Municipal Bond ETF will be included in their New York adjusted gross income
and taxed at the same rate as ordinary income.
All distributions from the SPDR Lehman New York Municipal Bond ETF, regardless
of source, will increase the taxable base of corporate shareholders subject to
the New York State franchise tax and/or the New York City general corporation
tax.
Gain from the sale, exchange, or other disposition of Shares of the SPDR Lehman
New York Municipal Bond ETF will be subject to the New York State personal
income and franchise taxes and the New York City personal income, unincorporated
business, and general corporation taxes.
Shares of the SPDR Lehman New York Municipal Bond ETF may be subject to the New
York State estate tax if owned by a New York decedent at the time of death.
Shareholders are advised to consult with their own tax advisors for more
detailed information concerning New York and local tax matters.
CAPITAL STOCK AND SHAREHOLDER REPORTS
Each Fund issues Shares of beneficial interest, par value $.01 per Share. The
Board may designate additional Funds.
Each Share issued by the Trust has a pro rata interest in the assets of the
corresponding Fund. Shares have no preemptive, exchange, subscription or
conversion rights and are freely transferable. Each Share is entitled to
participate equally in dividends and distributions declared by the Board with
respect to the relevant Fund, and in the net distributable assets of such Fund
on liquidation.
Each Share has one vote with respect to matters upon which a shareholder vote is
required consistent with the requirements of the 1940 Act and the rules
promulgated thereunder. Shares of all Funds vote together as a single class
except that if the matter being voted on affects only a particular Fund it will
be voted on only by that Fund and if a matter affects a particular Fund
differently from other Funds, that Fund will vote separately on such matter.
Under Massachusetts law, the Trust is not required to hold an annual meeting of
shareholders unless required to do so under the 1940 Act. The policy of the
Trust is not to hold an annual meeting of shareholders unless required to do so
under the 1940 Act. All Shares of the Trust (regardless of the Fund) have
noncumulative voting rights for the election of Trustees. Under Massachusetts
law, Trustees of the Trust may be removed by vote of the shareholders.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for obligations of the
Trust. However, the Declaration of Trust contains an express disclaimer of
shareholder liability for acts or obligations of the Trust, requires that Trust
obligations include such disclaimer, and provides for indemnification and
reimbursement
65
of expenses out of the Trust's property for any shareholder held personally
liable for the obligations of the Trust. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which the Trust itself would be unable to meet its obligations.
Given the above limitations on shareholder personal liability, and the nature of
each Fund's assets and operations, the risk to shareholders of personal
liability is believed to be remote.
Shareholder inquiries may be made by writing to the Trust, c/o the Distributor,
State Street Global Markets, LLC at State Street Financial Center, One Lincoln
Street, Boston, Massachusetts 02111.
COUNSEL AND INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Morgan, Lewis & Bockius LLP serves as counsel to the Trust. Ernst & Young LLP,
200 Clarendon Street, Boston, Massachusetts 02116, serves as the independent
registered public accounting firm of the Trust. Ernst & Young LLP performs
annual audits of the Funds' financial statements and provides other audit, tax
and related services.
LOCAL MARKET HOLIDAY SCHEDULES
The Trust generally intends to effect deliveries of portfolio securities on a
basis of "T" plus three business days (i.e., days on which the AMEX and NYSE are
open) in the relevant foreign market of a Fund. The ability of the Trust to
effect in-kind redemptions within three business days of receipt of a redemption
request is subject, among other things, to the condition that, within the time
period from the date of the request to the date of delivery of the securities,
there are no days that are local market holidays on the relevant business days.
For every occurrence of one or more intervening holidays in the local market
that are not holidays observed in the United States, the redemption settlement
cycle may be extended by the number of such intervening local holidays. In
addition to holidays, other unforeseeable closings in a foreign market due to
emergencies may also prevent the Trust from delivering securities within three
business days.
The securities delivery cycles currently practicable for transferring portfolio
securities to redeeming investors, coupled with local market holiday schedules,
may require a delivery process longer than seven calendar days, in certain
circumstances, during the calendar years 2008 and 2009. The holidays applicable
to the International Treasury Bond ETF during such periods are listed below, as
are instances where more than seven days will be needed to deliver redemption
proceeds. Although certain holidays may occur on different dates in subsequent
years, the number of days required to deliver redemption proceeds in any given
year is not expected to exceed the maximum number of days listed below. The
proclamation of new holidays, the treatment by market participants of certain
days as "informal holidays" (e.g., days on which no or limited securities
transactions occur, as a result of substantially shortened trading hours), the
elimination of existing holidays, or changes in local securities delivery
practices, could affect the information set forth herein at some time in the
future.
The remaining dates in the calendar year 2008 and the beginning of 2009 on which
the regular holidays affecting the relevant securities markets in the countries
listed below fall are as follows:
AUSTRIA
March 21, 2008
March 24, 2008
May 1, 2008
May 12, 2008
May 22, 2008
August 15, 2008
December 8, 2008
December 24, 2008
December 25, 2008
December 26, 2008
December 31, 2008
January 1, 2009
AUSTRALIA
March 20, 2008
March 21, 2008
March 24, 2008
JAPAN
February 11, 2008
March 20, 2008
April 29, 2008
May 5, 2008
May 6, 2008
July 21, 2008
September 15, 2008
September 23, 2008
October 13, 2008
November 3, 2008
November 24, 2008
December 23, 2008
December 30, 2008
December 31, 2008
January 1, 2009
January 2, 2009
January 3, 2009
66
April 25, 2008
June 9, 2008
December 24, 2008
December 25, 2008
December 26, 2008
December 31, 2008
January 1, 2009
January 28, 2009
BELGIUM
March 21, 2008
March 24, 2008
May 1, 2008
December 24, 2008
December 25, 2008
December 26, 2008
December 31, 2008
January 1, 2009
CANADA
February 18, 2008
March 21, 2008
May 19, 2008
July 1, 2008
August 4, 2008
September 1, 2008
October 13, 2008
December 25, 2008
December 26, 2008
January 1, 2009
DENMARK
March 20, 2008
March 21, 2008
March 24, 2008
April 18, 2008
May 1, 2008
May 12, 2008
June 5, 2008
December 24, 2008
December 25, 2008
December 26, 2008
December 31, 2008
January 1, 2009
FRANCE
March 21, 2008
March 24, 2008
May 1, 2008
December 24, 2008
December 25, 2008
December 26, 2008
December 31, 2008
January 1, 2009
GERMANY
March 21, 2008
March 24, 2008
May 1, 2008
May 12, 2008
December 24, 2008
December 25, 2008
December 26, 2008
December 31, 2008
January 1, 2009
January 4, 2009
January 14, 2009
MEXICO
February 4, 2008
March 17, 2008
March 20, 2008
March 21, 2008
May 1, 2008
September 16, 2008
November 17, 2008
December 12, 2008
December 25, 2008
January 1, 2009
NETHERLANDS
March 21, 2008
March 24, 2008
May 1, 2008
December 24, 2008
December 25, 2008
December 26, 2008
December 31, 2008
January 1, 2009
POLAND
March 21, 2008
March 24, 2008
May 1, 2008
May 22, 2008
August 15, 2008
November 11, 2008
December 24, 2008
December 25, 2008
December 26, 2008
January 1, 2009
SOUTH AFRICA
March 21, 2008
March 24, 2008
February 28, 2008
May 1, 2008
June 16, 2008
September 24, 2008
December 16, 2008
December 25, 2008
December 26, 2008
January 1, 2009
SPAIN
March 21, 2008
March 24, 2008
May 1, 2008
December 25, 2008
December 26, 2008
January 1, 2009
SWEDEN
March 20, 2008
March 21, 2008
March 24, 2008
April 30, 2008
May 1, 2008
June 6, 2008
June 20, 2008
October 31, 2008
67
GREECE
March 10, 2008
March 21, 2008
March 24, 2008
March 25, 2008
April 25, 2008
April 28, 2008
May 1, 2008
June 16, 2008
August 15, 2008
October 28, 2008
December 25, 2008
December 26, 2008
January 1, 2009
ITALY
March 21, 2008
March 24, 2008
May 1, 2008
August 15, 2008
December 24, 2008
December 25, 2008
December 26, 2008
December 31, 2008
January 1, 2009
December 24, 2008
December 25, 2008
December 26, 2008
December 31, 2008
January 1, 2009
TAIWAN
February 4, 2008
February 5, 2008
February 6, 2008
February 7, 2008
February 8, 2008
February 11, 2008
February 28, 2008
April 4, 2008
May 1, 2008
October 10, 2008
January 1, 2009
UNITED KINGDOM
March 21, 2008
March 24, 2008
May 5, 2008
May 26, 2008
August 25, 2008
December 25, 2008
December 26, 2008
January 1, 2009
REDEMPTION. The longest redemption cycle for a Fund is a function of the longest
redemption cycles among the countries whose securities comprise a Fund. A
redemption request over certain holidays may result in a settlement period that
will exceed 7 calendar days. In the calendar year 2007, the dates of the regular
holidays affecting the South African securities markets presented the worst-case
redemption cycle as R + 12 calendar days as the maximum number of calendar days
necessary to satisfy a redemption request.
FINANCIAL STATEMENTS
The Report of Ernst & Young LLP, the Trust's Independent Registered Public
Accounting Firm, financial highlights, and financial statements of the Funds
included in the Trust's Annual Report to Shareholders for the fiscal year ended
June 30, 2007 and the Trust's unaudited Semi-Annual Report to Shareholders for
the period ended December 31, 2006, each on Form N-CSR under the Investment
Company Act, are incorporated by reference into this Statement of Additional
Information.
68
PROXY VOTING POLICY (SSGA LOGO)
Funds Management, Inc.
INTRODUCTION
SSgA Funds Management, Inc. ("FM") seeks to vote proxies for which it has
discretionary authority in the best interests of its clients. This entails
voting proxies in a way which FM believes will maximize the monetary value of
each portfolio's holdings with respect to proposals that are reasonably
anticipated to have an impact on the current or potential value of a security.
Absent unusual circumstances or specific client instructions, we vote proxies on
a particular matter in the same way for all clients, regardless of their
investment style or strategies. FM takes the view that voting in a manner
consistent with maximizing the value of our clients' holdings will benefit our
direct clients (e.g. investment funds) and, indirectly, the ultimate owners and
beneficiaries of those clients (e.g. fund shareholders).
Oversight of the proxy voting process is the responsibility of the State Street
Global Advisors ("SSgA") Investment Committee. The SSgA Investment Committee
reviews and approves amendments to the FM Proxy Voting Policy and delegates
authority to vote in accordance with this policy to the FM Proxy Review
Committee, a subcommittee of the SSgA Investment Committee. FM retains the final
authority and responsibility for voting. In addition to voting proxies, FM:
1) describes its proxy voting procedures to its clients in Part II of its
Form ADV;
2) provides the client with this written proxy policy, upon request;
3) discloses to its clients how they may obtain information on how FM
voted the client's proxies;
4) matches proxies received with holdings as of record date;
5) reconciles holdings as of record date and rectifies any discrepancies;
6) generally applies its proxy voting policy consistently and keeps
records of votes for each client;
7) documents the reason(s) for voting for all non-routine items; and
8) keeps records of such proxy voting available for inspection by the
client or governmental agencies.
PROCESS
The FM Manager of Corporate Governance is responsible for monitoring proxy
voting on behalf of our clients and executing the day to day implementation of
this Proxy Voting Policy. As stated above, oversight of the proxy voting process
is the responsibility of the SSgA Investment Committee.
In order to facilitate our proxy voting process, FM retains Institutional
Shareholder Services ("ISS"), a firm with expertise in the proxy voting and
corporate governance fields. ISS assists in the proxy voting process, including
acting as our voting agent (i.e. actually processing the proxies), advising us
as to current and emerging governance issues that we may wish to address,
interpreting this policy and applying it to individual proxy items, and
providing analytical information concerning specific issuers and proxy items as
well as governance trends and developments. This Policy does not address all
issues as to which we may receive proxies nor does it seek to describe in detail
all factors that we may consider relevant to any particular proposal. To assist
ISS in interpreting and applying this Policy, we meet with ISS at least
annually, provide written guidance on certain topics generally on an annual
basis and communicate more regularly as necessary to discuss how specific issues
should be addressed. This guidance permits ISS to apply this Policy without
consulting us as to each proxy but in a manner that is consistent with our
investment view and not their own governance opinions. If an issue raised by a
proxy is not addressed by this Policy or our prior guidance to ISS, ISS refers
the proxy to us for direction on voting. On issues that we do not believe affect
the economic value of our portfolio holdings or are considered by us to be
routine matters as to which we have not provided specific guidance, we have
agreed with ISS to act as our voting agent in voting such proxies in accordance
with its own recommendations which, to the extent possible, take into account
this Policy and FM's general positions on similar matters. The Manager of
Corporate Governance is responsible, working with ISS, for submitting proxies in
a
69
timely manner and in accordance with our policy. The Manager of Corporate
Governance works with ISS to establish and update detailed procedures to
implement this policy.
From time to time, proxy votes will be solicited which fall into one of the
following categories:
(i) proxies which involve special circumstances and require additional
research and discussion (e.g. a material merger or acquisition, or a
material governance issue with the potential to become a significant
precedent in corporate governance); or
(ii) proxies which are not directly addressed by our policies and which are
reasonably anticipated to have an impact on the current or potential
value of a security or which we do not consider to be routine.
These proxies are identified through a number of methods, including but not
limited to notification from ISS, concerns of clients, review by internal proxy
specialists, and questions from consultants. The role of third parties in
identifying special circumstances does not mean that we will depart from our
guidelines; these third parties are all treated as information sources. If they
raise issues that we determine to be prudent before voting a particular proxy or
departing from our prior guidance to ISS, we will weigh the issue along with
other relevant factors before making an informed decision. In all cases, we vote
proxies as to which we have voting discretion in a manner that we determine to
be in the best interest of our clients. As stated above, if the proposal has a
quantifiable effect on shareholder value, we seek to maximize the value of a
portfolio's holdings. With respect to matters that are not so quantifiable, we
exercise greater judgment but still seek to maximize long-term value by
promoting sound governance policies. The goal of the Proxy Voting Committee is
to make the most informed decision possible.
In instances of special circumstances or issues not directly addressed by our
policies or guidance to ISS, the FM Manager of Corporate Governance will refer
the item to the Chairman of the Investment Committee for a determination of the
proxy vote. The first determination is whether there is a material conflict of
interest between the interests of our client and those of FM or its affiliates
(as explained in greater detail below under "Potential Conflicts"). If the
Manager of Corporate Governance and the Chairman of the Investment Committee
determine that there is a material conflict, the process detailed below under
"Potential Conflicts" is followed. If there is no material conflict, we examine
the proposals that involve special circumstances or are not addressed by our
policy or guidance in detail in seeking to determine what vote would be in the
best interests of our clients. At this point, the Chairman of the Investment
Committee makes a voting decision in our clients' best interest. However, the
Chairman of the Investment Committee may determine that a proxy involves the
consideration of particularly significant issues and present the proxy item to
the Proxy Review Committee and/or to the entire Investment Committee for a final
decision on voting the proxy. The Investment Committee will use the same
rationale for determining the appropriate vote.
FM reviews proxies of non-US issuers in the context of these guidelines.
However, FM also endeavors to show sensitivity to local market practices when
voting these proxies, which may lead to different votes. For example, in certain
foreign markets, items are put to vote which have little or no effect on
shareholder value, but which are routinely voted on in those jurisdictions; in
the absence of material effect on our clients, we will follow market practice.
FM votes in all markets where it is feasible to do so. Note that certain
custodians utilized by our clients do not offer proxy voting in every foreign
jurisdiction. In such a case, FM will be unable to vote such a proxy.
VOTING
For most issues and in most circumstances, we abide by the following general
guidelines. However, it is important to remember that these are simply
guidelines. As discussed above, in certain circumstances, we may determine that
it would be in the best interests of our clients to deviate from these
guidelines.
I. Generally, FM votes for the following ballot items:
Board of Directors
- Elections of directors who (i) we determine to be adequately
independent of management and (ii) do not simultaneously serve on an
unreasonable (as determined by FM) number of other boards (other than
those affiliated with the issuer). Factors that we consider in
evaluating independence include whether the nominee is an employee of
or related to an
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employee of the issuer or its auditor, whether the nominee provides
professional services to the issuer, or whether the nominee receives
non-board related compensation from the issuer
- Directors' compensation, provided the amounts are not excessive
relative to other issuers in the market or industry. In making such a
determination, we review whether the compensation is overly dilutive
to existing shareholders.
- Proposals to limit directors' liability and/or expand indemnification
of directors, provided that a director shall only be eligible for
indemnification and liability protection if he or she has not acted in
bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office
- Discharge of board members' duties*, in the absence of pending
litigation, governmental investigation, charges of fraud or other
indicia of significant concern
- The establishment of annual elections of the board of directors unless
the board is composed by a majority of independent directors, the
board's key committees (auditing, nominating and compensation) are
composed of independent directors, and there are no other material
governance issues or performance issues.
- Mandates requiring a majority of independent directors on the Board of
Directors
- Mandates that Audit, Compensation and Nominating Committee members
should all be independent directors
- Mandates giving the Audit Committee the sole responsibility for the
selection and dismissal of the auditing firm and any subsequent result
of audits are reported to the audit committee
- Elimination of cumulative voting
- Establishment of confidential voting
Auditors
- Approval of auditors, unless the fees paid to auditors are excessive;
auditors' fees will be deemed excessive if the non-audit fees for the
prior year constituted 50% or more of the total fees paid to the
auditors
- Auditors' compensation, provided the issuer has properly disclosed
audit and non-audit fees relative to market practice and that
non-audit fees for the prior year constituted no more than 50% of the
total fees paid to the auditors
- Discharge of auditors*
- Approval of financial statements, auditor reports and allocation of
income
- Requirements that auditors attend the annual meeting of shareholders
- Disclosure of Auditor and Consulting relationships when the same or
related entities are conducting both activities
- Establishment of a selection committee responsible for the final
approval of significant management consultant contract awards where
existing firms are already acting in an auditing function
Capitalization
* Common for non-US issuers; request from the issuer to discharge from
liability the directors or auditors with respect to actions taken by them
during the previous year.
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- Dividend payouts that are greater than or equal to country and
industry standards; we generally support a dividend which constitutes
30% or more of net income
- Authorization of share repurchase programs, unless the issuer does not
clearly state the business purpose for the program, a definitive
number of shares to be repurchased, and the time frame for the
repurchase
- Capitalization changes which eliminate other classes of stock and/or
unequal voting rights
- Changes in capitalization authorization for stock splits, stock
dividends, and other specified needs which are no more than 50% of the
existing authorization for U.S. companies and no more than 100% of
existing authorization for non-U.S. companies.
- Elimination of pre-emptive rights for share issuance of less than a
certain percentage (country specific - ranging from 5% to 20%) of the
outstanding shares, unless even such small amount could have a
material dilutive effect on existing shareholders (e.g. in illiquid
markets)
Anti-Takeover Measures
- Elimination of shareholder rights plans ("poison pill")
- Amendment to a shareholder rights plans ("poison pill") where the
terms of the new plans are more favorable to shareholders' ability to
accept unsolicited offers (i.e. if one of the following conditions are
met: (i) minimum trigger, flip-in or flip-over of 20%, (ii) maximum
term of three years, (iii) no "dead hand," "slow hand," "no hand" or
similar feature that limits the ability of a future board to redeem
the pill, and (iv) inclusion of a shareholder redemption feature
(qualifying offer clause), permitting ten percent of the shares to
call a special meeting or seek a written consent to vote on rescinding
the pill if the board refuses to redeem the pill 90 days after a
qualifying offer is announced)
- Adoption or renewal of a non-US issuer's shareholder rights plans
("poison pill") if the following conditions are met: (i) minimum
trigger, flip-in or flip-over of 20%, (ii) maximum term of three
years, (iii) no "dead hand," "slow hand," "no hand" or similar feature
that limits the ability of a future board to redeem the pill, and (iv)
inclusion of a shareholder redemption feature (qualifying offer
clause), permitting ten percent of the shares to call a special
meeting or seek a written consent to vote on rescinding the pill if
the board refuses to redeem the pill 90 days after a qualifying offer
is announced
- Reduction or elimination of super-majority vote requirements, unless
management of the issuer was concurrently seeking to or had previously
made such reduction or elimination
- Mandates requiring shareholder approval of a shareholder rights plans
("poison pill")
- Repeals of various anti-takeover related provisions
Executive Compensation/Equity Compensation
- Stock purchase plans with an exercise price of not less that 85% of
fair market value
- Stock option plans which are incentive based and not excessively
dilutive. In order to assess the dilutive effect, we divide the number
of shares required to fully fund the proposed plan, the number of
authorized but unissued shares, and the issued but unexercised shares
by fully diluted share count. We review that number in light of
certain factors, including the industry of the issuer, in order to
make our determination as to whether the dilution is excessive.
- Other stock-based plans which are not excessively dilutive, using the
same process set forth in the preceding bullet
- Expansions to reporting of financial or compensation-related
information, within reason
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- Proposals requiring the disclosure of executive retirement benefits if
the issuer does not have an independent compensation committee
Routine Business Items
- General updating of or corrective amendments to charter not otherwise
specifically addressed herein, unless such amendments would reasonably
be expected to diminish shareholder rights (e.g. extension of
directors' term limits, amending shareholder vote requirement to amend
the charter documents, insufficient information provided as to the
reason behind the amendment)
- Change in Corporation Name
- Mandates that amendments to bylaws or charters have shareholder
approval
Other
- Adoption of anti-"greenmail" provisions, provided that the proposal:
(i) defines greenmail; (ii) prohibits buyback offers to large block
holders (holders of at least 1% of the outstanding shares and in
certain cases, a greater amount, as determined by the Proxy Review
Committee) not made to all shareholders or not approved by
disinterested shareholders; and (iii) contains no anti-takeover
measures or other provisions restricting the rights of shareholders
- Repeals or prohibitions of "greenmail" provisions
- "Opting-out" of business combination provision
II. Generally, FM votes against the following items:
Board of Directors
- Establishment of classified boards of directors, unless 80% of the
board is independent
- Proposals requesting re-election of insiders or affiliated directors
who serve on audit, compensation, or nominating committees
- Limits to tenure of directors
- Requirements that candidates for directorships own large amounts of
stock before being eligible to be elected
- Restoration of cumulative voting in the election of directors
- Removal of a director, unless we determine the director (i) is not
adequately independent of management or (ii) simultaneously serves on
an unreasonable (as determined by FM) number of other boards (other
than those affiliated with the issuer). Factors that we consider in
evaluating independence include whether the director is an employee of
or related to an employee of the issuer or its auditor, whether the
director provides professional services to the issuer, or whether the
director receives non-board related compensation from the issuer
Elimination of Shareholders' Right to Call Special Meetings
- Proposals that relate to the "transaction of other business as
properly comes before the meeting", which extend "blank check" powers
to those acting as proxy
- Approval of Directors who have failed to act on a shareholder proposal
that has been approved by a majority of outstanding shares
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- Directors at companies where prior non-cash compensation was
improperly "backdated" or "springloaded" where one of the following
scenarios exists:
- (i) it is unknown whether the Compensation Committee had
knowledge of such backdating at the time, (ii) the
Compensation Committee was not independent at the time, and
(iii) the director seeking reelection served on the
Compensation Committee at the time; or
- (i) it is unknown whether the Compensation Committee had
knowledge of such backdating at the time, (ii) the
Compensation Committee was independent at the time, and
(iii) sufficient controls have not been implemented to avoid
similar improper payments going forward; or
- (i) the Compensation Committee had knowledge of such
backdating at the time, and (ii) the director seeking
reelection served on the Compensation Committee at the time;
or
- (i) the Compensation Committee did not have knowledge of
such backdating at the time, and (ii) sufficient controls
have not been implemented to avoid similar improper payments
going forward
Capitalization
- Capitalization changes that add "blank check" classes of stock (i.e.
classes of stock with undefined voting rights) or classes that dilute
the voting interests of existing shareholders
- Capitalization changes that exceed 100% of the issuer's current
authorized capital unless management provides an appropriate rationale
for such change
Anti-Takeover Measures
- Anti-takeover and related provisions that serve to prevent the
majority of shareholders from exercising their rights or effectively
deter appropriate tender offers and other offers
- Adjournment of Meeting to Solicit Additional Votes
- Shareholder rights plans that do not include a shareholder redemption
feature (qualifying offer clause), permitting ten percent of the
shares to call a special meeting or seek a written consent to vote on
rescinding the pill if the board refuses to redeem the pill 90 days
after a qualifying offer is announced
- Adoption or renewal of a US issuer's shareholder rights plan ("poison
pill")
Executive Compensation/Equity Compensation
- Excessive compensation (i.e. compensation plans which are deemed by FM
to be overly dilutive)
- Retirement bonuses for non-executive directors and auditors
- Proposals requiring the disclosure of executive retirement benefits if
the issuer has an independent compensation committee
Routine Business Items
- Amendments to bylaws which would require super-majority shareholder
votes to pass or repeal certain provisions
- Reincorporation in a location which has more stringent anti-takeover
and related provisions
- Proposals asking the board to adopt any form of majority voting,
unless the majority standard indicated is based on a majority of
shares outstanding.
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Other
- Requirements that the company provide costly, duplicative, or
redundant reports, or reports of a non-business nature
- Restrictions related to social, political, or special interest issues
which affect the ability of the company to do business or be
competitive and which have significant financial or best-interest
impact
- Proposals which require inappropriate endorsements or corporate
actions
- Proposals asking companies to adopt full tenure holding periods for
their executives
III. FM evaluates Mergers and Acquisitions on a case-by-case basis. Consistent
with our proxy policy, we support management in seeking to achieve their
objectives for shareholders. However, in all cases, FM uses its discretion in
order to maximize shareholder value. FM generally votes as follows:
- Against offers with potentially damaging consequences for minority
shareholders because of illiquid stock, especially in some non-US
markets
- Against offers when we believe that reasonable prospects exist for an
enhanced bid or other bidders
- Against offers where, at the time of voting, the current market price
of the security exceeds the bid price
- For proposals to restructure or liquidate closed end investment funds
in which the secondary market price is substantially lower than the
net asset value
- For offers made at a premium where no other higher bidder exists
PROTECTING SHAREHOLDER VALUE
We at FM agree entirely with the United States Department of Labor's position
that "where proxy voting decisions may have an effect on the economic value of
the plan's underlying investment, plan fiduciaries should make proxy voting
decisions with a view to enhancing the value of the shares of stock" (IB 94-2).
Our proxy voting policy and procedures are designed with the intent that our
clients receive the best possible returns on their investments. We meet directly
with corporation representatives and participate in conference calls and
third-party inquiries in order to ensure our processes are as fully informed as
possible. However, we use each piece of information we receive-whether from
clients, consultants, the media, the issuer, ISS or other sources -- as one part
of our analysis in seeking to carry out our duties as a fiduciary and act in the
best interest of our clients. We are not unduly influenced by the identity of
any particular source, but use all the information to form our opinion as to the
best outcome for our clients.
Through our membership in the Council of Institutional Investors as well as our
contact with corporate pension plans, public funds, and unions, we are also able
to communicate extensively with other shareholders regarding events and issues
relevant to individual corporations, general industry, and current shareholder
concerns.
In addition, FM monitors "target" lists of underperforming companies prepared by
various shareholder groups, including: California Public Employee Retirement
System, The City of New York - Office of the Comptroller, International
Brotherhood of Teamsters, and Council of Institutional Investors. Companies, so
identified, receive an individual, systematic review by the FM Manager of
Corporate Governance and the Proxy Review Committee, as necessary.
As an active shareholder, FM's role is to support corporate policies that serve
the best interests of our clients. Though we do not seek involvement in the
day-to-day operations of an organization, we recognize the need for
conscientious oversight of and input into management decisions that may affect a
company's value. To that end, our monitoring of corporate management and
industry events is substantially more detailed than that of the typical
shareholder. We have demonstrated our willingness to vote against
management-sponsored initiatives and to support shareholder proposals when
appropriate. To date we have not filed proposals or initiated letter-
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writing or other campaigns, but have used our active participation in the
corporate governance process -- especially the proxy voting process -- as the
most effective means by which to communicate our and our clients' legitimate
shareholder concerns. Should an issue arise in conjunction with a specific
corporation that cannot be satisfactorily resolved through these means, we shall
consider other approaches.
POTENTIAL CONFLICTS
As discussed above under Process, from time to time, FM will review a proxy
which may present a potential conflict of interest. As a fiduciary to its
clients, FM takes these potential conflicts very seriously While FM's only goal
in addressing any such potential conflict is to ensure that proxy votes are cast
in the clients' best interests and are not affected by FM's potential conflict,
there are a number of courses FM may take. Although various relationships could
be deemed to give rise to a conflict of interest, we have determined that two
categories of relationships present a sufficiently serious concern to warrant an
alternative process: customers of FM or its affiliates which are among the top
100 clients of FM and its affiliates based upon revenue; and the 10 largest
broker-dealers used by SSgA, based upon revenue (a "Material Relationship").
When the matter falls clearly within the polices set forth above or the guidance
previously provided by FM to ISS and the proxy is to be voted in accordance with
that guidance, we do not believe that such decision represents a conflict of
interest and no special procedures are warranted.
In circumstances where either (i) the matter does not fall clearly within the
policies set forth above or the guidance previously provided to ISS, or (ii) FM
determines that voting in accordance with such policies or guidance is not in
the best interests of its clients, the Manager of Corporate Governance will
compare the name of the issuer against a list of the top 100 revenue generating
clients of State Street Corporation and its affiliates and a list of the top 10
broker-dealer relationships to determine if a Material Relationship exists.
(These lists are updated quarterly.) If the issuer's name appears on either list
and the pre-determined policy is not being followed, FM will employ the services
of a third party, wholly independent of FM, its affiliates and those parties
involved in the proxy issue, to determine the appropriate vote. However, in
certain circumstances the Proxy Review Committee may determine that the use of a
third party fiduciary is not necessary or appropriate, either because the matter
involved does not involve a material issue or because the issue in question
affects the underlying value of the portfolio position and it is appropriate for
FM, notwithstanding the potential conflict of interest, to vote the security in
a manner that it determines will maximize the value to its client. In such
situations, the Proxy Committee, or if a broader discussion is warranted, the
SSgA Investment Committee, shall make a decision as to the voting of the proxy.
The basis for the voting decision, including the basis for the determination
that the decision is in the best interests of FM's clients, shall be formalized
in writing as a part of the minutes to the Investment Committee.
RECORDKEEPING
In accordance with applicable law, FM shall retain the following documents for
not less than five years from the end of the year in which the proxies were
voted, the first two years in FM's office:
1) FM's Proxy Voting Policy and any additional procedures created
pursuant to such Policy;
2) a copy of each proxy statement FM receives regarding securities held
by its clients (note: this requirement may be satisfied by a third
party who has agreed in writing to do so or by obtaining a copy of the
proxy statement from the EDGAR database);
3) a record of each vote cast by FM (note: this requirement may be
satisfied by a third party who has agreed in writing to do so);
4) a copy of any document created by FM that was material in making its
voting decision or that memorializes the basis for such decision; and
5) a copy of each written request from a client, and response to the
client, for information on how FM voted the client's proxies.
DISCLOSURE OF CLIENT VOTING INFORMATION
Any client who wishes to receive information on how its proxies were voted
should contact its FM client service officer.
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