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As
filed with the Securities and Exchange Commission on July 26, 2023 |
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File
Nos. |
333-186504 |
811-22801 |
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SECURITIES AND EXCHANGE COMMISSION |
Washington, D.C. 20549 |
FORM N-1A |
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REGISTRATION STATEMENT UNDER THE SECURITIES
ACT OF 1933 | [X] |
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Pre-Effective
Amendment No. | |
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Post-Effective Amendment No. | 23 |
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and/or |
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REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 | [X] |
Amendment No. | 25 |
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FRANKLIN ETF TRUST |
(Exact Name of Registrant as Specified in Charter) |
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ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 |
(Address of Principal Executive Offices) (Zip Code) |
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Registrant's
Telephone Number, Including Area Code (650) 312-2000 |
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Alison E. Baur, One Franklin Parkway, San Mateo, CA 94403-1906 |
(Name and Address of Agent for Service
of Process) |
| |
Approximate Date of Proposed Public Offering: |
It is proposed that this filing will become
effective on (check appropriate box) |
[] | immediately upon filing pursuant to paragraph
(b) |
[X ] | on
August
1, 2023 pursuant to paragraph (b) |
[ ] | 60
days after filing pursuant to paragraph (a)(1) |
[
] | on (date) pursuant to
paragraph (a) (1) |
[] | 75 days after filing pursuant to paragraph (a)(2) |
[ ] | on
(date) pursuant to paragraph (a)(2) of Rule 485 |
| |
If
appropriate, check the following box: |
[
] | This post-effective amendment
designates a new effective date for a previously filed post- |
| | |
| | effective
amendment. |
This
Amendment to the registration statement on Form N-1A relates to the prospectus and statement of additional
information of Franklin Short Duration U.S. Government ETF, a series of the Registrant and does not otherwise
delete, amend, or supersede any information contained in the Registration Statement. This Amendment updates
the registration statement of the above-referenced series under the Securities and Exchange Act of 1933,
and the Investment Company of 1940. |
| | | | | | | | |
| | | PROSPECTUS | | | |
| | | | |
| | | FRANKLIN SHORT DURATION U.S. GOVERNMENT ETF Franklin ETF Trust | |
| | | August
1, 2023 | |
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Ticker: | Exchange: |
FTSD | NYSE Arca, Inc. |
The
U.S. Securities and Exchange Commission (SEC) has not approved or disapproved these securities or passed
upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
Contents
Fund Summary
Information about the Fund you should know before investing
Fund
Details
More information on investment
policies, practices and risks/financial highlights
Shareholder Information
Information about Fund transactions
For More Information
Where
to learn more about the Fund
Back Cover
FRANKLIN
SHORT DURATION U.S. GOVERNMENT ETF
FUND SUMMARY
Fund Summary
Investment Goal
A high level of current income as is consistent with prudent
investing, while seeking preservation of capital.
Fees
and Expenses of the Fund
The following table describes the fees and expenses that you will incur if you
buy, hold and sell shares of the Fund. You may also incur other fees, such as usual and customary brokerage
commissions and other fees to financial intermediaries, which are not reflected in the table and the
Example that follows.
Annual Fund Operating Expenses
(expenses
that you pay each year as a percentage of the value of your investment)
| | | |
| | |
Management
fees | | 0.25% |
Distribution and service (12b-1) fees | | None |
Other expenses | | None |
Total annual Fund operating
expenses | | 0.25% |
Example
This
Example is intended to help you compare the cost of investing in the Fund with the cost of investing
in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated
and then sell all of your shares at the end of the period. The Example also assumes that your investment
has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
| | | | | | | | | | |
| | | 1
Year | | 3
Years | | 5
Years | | 10
Years |
Franklin Short Duration U.S. Government ETF | | $26 | | $81 | | $141 | | $318 |
Portfolio Turnover
The Fund pays transaction costs, such as
commissions, when it buys and sells securities (or "turns over" its portfolio). A higher portfolio turnover
rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in annual Fund operating expenses or in the Example,
affect the Fund's performance. During the most recent
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FRANKLIN
SHORT DURATION U.S. GOVERNMENT ETF
FUND SUMMARY
fiscal
year, the Fund's portfolio turnover rate was 196.59% of the average value of its portfolio.
Principal Investment Strategies
Under normal market conditions,
the Fund invests at least 80% of its net assets in securities issued or guaranteed by the U.S. government,
its agencies, or instrumentalities. The Fund currently targets an estimated portfolio duration of three
(3) years or less. The Fund generally invests 50-80% of its assets in mortgage securities issued or guaranteed
by the U.S. government, its agencies, or instrumentalities, including adjustable rate mortgage securities
(ARMs) and collateralized mortgage obligations (CMOs), but the Fund also invests in direct obligations
of the U.S. government (such as Treasury bonds, bills and notes) and in securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities, including government sponsored entities. All
of the Fund’s principal investments are debt securities, including bonds, notes and debentures.
In
comparison to maturity (which is the date on which a debt instrument ceases and the issuer is obligated
to repay the principal amount), duration is a measure of the expected price volatility of a debt instrument
as a result of changes in market rates of interest, based on the weighted average timing of the instrument’s
expected principal and interest payments and other factors. For purposes of calculating the Fund’s
portfolio duration, the Fund includes the effect of interest rate/bond futures contracts and options
on interest rate/bond futures contracts held by the Fund.
Mortgage securities represent an interest
in a pool of mortgage loans made by banks and other financial institutions to finance purchases of homes,
commercial buildings and other real estate. As the underlying mortgage loans are paid off, investors
receive periodic principal and interest payments as well as any unscheduled principal prepayments on
the underlying mortgage loans. The mortgage securities purchased by the Fund include, but are not limited
to, bonds and notes issued or guaranteed by the Government National Mortgage Association (Ginnie Mae)
and U.S. government-sponsored entities, such as the Federal National Mortgage Association (Fannie Mae),
and the Federal Home Loan Mortgage Corporation (Freddie Mac).
Government agency or instrumentality issues
have different levels of credit support. Ginnie Mae pass-through mortgage certificates are backed by
the full faith and credit of the U.S. government. U.S. government-sponsored entities, such as Fannie
Mae and Freddie Mac, may be chartered by Acts of Congress, but their securities are neither issued nor
guaranteed by the U.S. government. Although the U.S. government has provided financial support to Fannie
Mae and Freddie Mac, no assurance can be given that the U.S. government will continue to do so. The Fund
may invest in obligations of other U.S. government-sponsored entities, which may
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FRANKLIN
SHORT DURATION U.S. GOVERNMENT ETF
FUND SUMMARY
be
supported only by the credit of the issuing agency or instrumentality, such as securities issued by members
of the Farm Credit System.
The Fund may invest in mortgage dollar rolls. In a mortgage dollar roll, the Fund
sells (or buys) mortgage securities for delivery on a specified date and simultaneously contracts to
repurchase (or sell) substantially similar (same type, coupon, and maturity) securities on a future date.
The Fund may also purchase or sell mortgage securities on a delayed delivery or forward commitment basis
through the "to-be-announced" (TBA) market. With TBA transactions, the particular securities to be delivered
must meet specified terms and standards. The Fund will invest only in covered mortgage dollar rolls or
TBA transactions, meaning that the Fund designates liquid securities in its portfolio equal in value
to the securities it will repurchase.
The Fund invests in investment grade securities and investments
or in unrated securities and investments that the Fund’s investment manager determines are of comparable
quality. The Fund may invest in U.S. inflation-indexed securities issued by the U.S. government.
To
pursue its investment goal, the Fund may invest in certain interest rate-related derivative transactions,
principally U.S. Treasury futures contracts and options on interest rate/bond futures. The use of these
derivative transactions may allow the Fund to obtain net long or short exposures to selected interest
rates or durations. These derivatives may be used to hedge risks associated with the Fund’s other portfolio
investments and to manage the duration of the Fund’s portfolio.
Principal Risks
You could lose money by investing in the
Fund. ETF shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are
not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency
of the U.S. government. The Fund is subject to the principal risks noted below, any of which may adversely
affect the Fund’s net asset value (NAV), trading price, yield, total return and ability to meet its
investment goal. Unlike many ETFs, the Fund is not an index-based ETF.
Interest
Rate
When interest rates rise, debt security prices generally fall. The opposite is also generally true:
debt security prices rise when interest rates fall. Interest rate changes are influenced by a number
of factors, including government policy, monetary policy, inflation expectations, perceptions of risk,
and supply of and demand for bonds. In general, securities with longer maturities or durations are more
sensitive to interest rate changes.
Mortgage Securities Mortgage securities
differ from conventional debt securities because principal is paid back periodically over the life of
the security rather than at maturity. The Fund may receive unscheduled payments of principal due to
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SHORT DURATION U.S. GOVERNMENT ETF
FUND SUMMARY
voluntary
prepayments, refinancings or foreclosures on the underlying mortgage loans. Because of prepayments, mortgage
securities may be less effective than some other types of debt securities as a means of "locking in"
long-term interest rates and may have less potential for capital appreciation during periods of falling
interest rates. A reduction in the anticipated rate of principal prepayments, especially during periods
of rising interest rates, may increase or extend the effective maturity and duration of mortgage securities,
making them more sensitive to interest rate changes, subject to greater price volatility, and more susceptible
than some other debt securities to a decline in market value when interest rates rise.
Mortgage
securities purchased on a delayed delivery or forward commitment basis through the to-be-announced market
(TBA) are subject to the risk that the actual securities received by the Fund may be less favorable than
anticipated, or that a counterparty will fail to deliver the security. Entering into a when-issued, delayed
delivery or TBA transaction may be viewed as a form of leverage and will result in associated risks for
the Fund. Sales of debt securities on a when-issued or delayed delivery basis are also subject to the
risk that the Fund is unable to purchase securities for delivery at the settlement date with the characteristics
agreed upon at the time of the transaction, which may subject the Fund to market losses or other penalties.
Prepayment
Prepayment risk occurs when a debt security can be repaid in whole or in part prior to the security's
maturity and the Fund must reinvest the proceeds it receives, during periods of declining interest rates,
in securities that pay a lower rate of interest. Also, if a security has been purchased at a premium,
the value of the premium would be lost in the event of prepayment. Prepayments generally increase when
interest rates fall.
Variable Rate Securities Because changes in
interest rates on variable rate securities (including floating rate securities) may lag behind changes
in market rates, the value of such securities may decline during periods of rising interest rates until
their interest rates reset to market rates. During periods of declining interest rates, because the interest
rates on variable rate securities generally reset downward, their market value is unlikely to rise to
the same extent as the value of comparable fixed rate securities.
Income
The Fund's distributions to shareholders may decline when prevailing interest rates fall, when the Fund
experiences defaults on debt securities it holds or when the Fund realizes a loss upon the sale of a
debt security.
Extension Some debt securities, particularly mortgage-backed
securities, are subject to the risk that the debt security’s effective maturity is extended because
calls or prepayments are less or slower than anticipated, particularly when interest
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SHORT DURATION U.S. GOVERNMENT ETF
FUND SUMMARY
rates
rise. The market value of such security may then decline and become more interest rate sensitive.
Inflation-Indexed
Securities Inflation-indexed securities have a tendency to react to changes in real interest
rates. Real interest rates represent nominal (stated) interest rates lowered by the anticipated effect
of inflation. In general, the price of an inflation-indexed security decreases when real interest rates
increase, and increases when real interest rates decrease. Interest payments on inflation-indexed securities
will fluctuate as the principal and/or interest is adjusted for inflation and can be unpredictable.
Market
The
market values of securities or other investments owned by the Fund will go up or down, sometimes rapidly
or unpredictably. The market value of a security or other investment may be reduced by market activity
or other results of supply and demand unrelated to the issuer. This is a basic risk associated with all
investments. When there are more sellers than buyers, prices tend to fall. Likewise, when there are more
buyers than sellers, prices tend to rise.
The global outbreak of the novel strain of
coronavirus, COVID-19 and its subsequent variants, has resulted in market closures and dislocations,
extreme volatility, liquidity constraints and increased trading costs. The long-term impact on economies,
markets, industries and individual issuers is not known. Some sectors of the economy and individual issuers
have experienced or may experience particularly large losses. Periods of extreme volatility in the financial
markets; reduced liquidity of many instruments; and disruptions to supply chains, consumer demand and
employee availability, may continue for some time.
Mortgage Dollar Rolls In a mortgage dollar
roll, the Fund takes the risk that: the market price of the mortgage-backed securities will drop below
their future repurchase price; the securities that it repurchases at a later date will have less favorable
market characteristics; the other party to the agreement will not be able to perform; the roll adds leverage
to the Fund's portfolio; and, it increases the Fund's sensitivity to interest rate changes. In addition,
investment in mortgage dollar rolls may increase the portfolio turnover rate for the Fund.
Portfolio
Turnover The investment manager will sell a security when it believes it is appropriate
to do so, regardless of how long the Fund has held the security. The Fund's portfolio turnover rate may
exceed 100% per year because of the anticipated use of certain investment strategies. The rate of portfolio
turnover will not be a limiting factor for the investment manager in making decisions on when to buy
or sell securities, including entering into mortgage dollar rolls. High turnover will increase the Fund's
transaction costs and may increase your tax liability if the transactions result in capital gains.
Derivative
Instruments The performance of derivative instruments depends largely on the performance
of an underlying instrument, such as a security, interest
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FRANKLIN
SHORT DURATION U.S. GOVERNMENT ETF
FUND SUMMARY
rate
or index, and such instruments often have risks similar to their underlying instrument, in addition to
other risks. Derivative instruments involve costs and can create economic leverage in the Fund's portfolio,
which may result in significant volatility and cause the Fund to participate in losses (as well as gains)
in an amount that exceeds the Fund's initial investment. Other risks include illiquidity, mispricing
or improper valuation of the derivative instrument, and imperfect correlation between the value of the
derivative and the underlying instrument so that the Fund may not realize the intended benefits. When
a derivative is used for hedging, the change in value of the derivative may also not correlate specifically
with the security, interest rate, index or other risk being hedged. With over-the-counter derivatives,
there is the risk that the other party to the transaction will fail to perform.
Management
The Fund is subject to management risk because it is an actively managed ETF. The Fund's investment
manager applies investment techniques and risk analyses in making investment decisions for the Fund,
but there can be no guarantee that these decisions will produce the desired results.
Credit
An issuer of debt securities may fail to make interest payments or repay principal when due, in whole
or in part. Changes in an issuer's financial strength or in a security's or government's credit rating
may affect a security's value. While securities issued by Ginnie Mae are backed by the full faith and
credit of the U.S. government, not all securities of the various U.S. government agencies are, including
those of Fannie Mae and Freddie Mac. Accordingly, securities issued by Fannie Mae and Freddie Mac may
involve a risk of non-payment of principal and interest.
U.S. government guarantees of timely repayment
of principal and interest on government securities do not apply to the market prices and yields of the
securities or to the NAV, trading price or performance of the Fund. Irrespective of such U.S. government
guarantees, the market prices and yields of the securities and, consequently, the NAV, trading price
and performance of the Fund, will vary with changes in interest rates and other market conditions. Any
downgrade of the credit rating of the securities issued by the U.S. government may result in a downgrade
of securities issued by its agencies or instrumentalities, including government-sponsored entities.
Market
Trading The Fund faces numerous market trading risks, including the potential lack of
an active market for Fund shares, losses from trading in secondary markets, periods of high volatility
and disruption in the creation/redemption process of the Fund. Any of these factors, among others, may
lead to the Fund’s shares trading at a premium or discount to NAV. Thus, you may pay more (or less)
than NAV when you buy shares of the Fund in the secondary market, and you may receive less (or more)
than NAV when you sell those shares in the secondary
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FRANKLIN
SHORT DURATION U.S. GOVERNMENT ETF
FUND SUMMARY
market.
The investment manager cannot predict whether shares will trade above (premium), below (discount) or
at NAV.
Authorized
Participant Concentration Only an authorized participant (Authorized Participant) may engage in creation
or redemption transactions directly with the Fund. The Fund has a limited number of institutions that
act as Authorized Participants. To the extent that these institutions exit the business or are unable
to proceed with creation and/or redemption orders with respect to the Fund and no other Authorized Participant
is able to step forward to create or redeem Creation Units (as defined below), Fund shares may trade
at a discount to NAV and possibly face trading halts and/or delisting. This risk may be more pronounced
in volatile markets, potentially where there are significant redemptions in ETFs generally.
Cash
Transactions Unlike certain ETFs, the Fund expects to generally effect its creations and
redemptions entirely for cash, rather than for in-kind securities. Therefore, it may be required to sell
portfolio securities and subsequently recognize gains on such sales that the Fund might not have recognized
if it were to distribute portfolio securities in-kind. As such, investments in Fund shares may be less
tax-efficient than an investment in an ETF that distributes portfolio securities entirely in-kind.
Large
Shareholder Certain shareholders, including other funds or accounts advised by the investment
manager or an affiliate of the investment manager, may from time to time own a substantial amount of
the Fund’s shares. In addition, a third-party investor, the investment manager or an affiliate of the
investment manager, an authorized participant, a lead market maker, or another entity may invest in the
Fund and hold its investment for a limited period of time solely to facilitate commencement of the Fund
or to facilitate the Fund’s achieving a specified size or scale. There can be no assurance that any
large shareholder would not redeem its investment, that the size of the Fund would be maintained at such
levels or that the Fund would continue to meet applicable listing requirements. Redemptions by large
shareholders could have a significant negative impact on the Fund. In addition, transactions by large
shareholders may account for a large percentage of the trading volume on the listing exchange and may,
therefore, have a material upward or downward effect on the market price of the shares.
Cybersecurity
Cybersecurity incidents, both intentional and unintentional, may allow an unauthorized party to gain
access to Fund assets, Fund or customer data (including private shareholder information), or proprietary
information, cause the Fund, the investment manager, authorized participants, or index providers (as
applicable) and listing exchanges, and/or their service providers (including, but not limited to, Fund
accountants, custodians, sub-custodians, transfer agents and financial intermediaries) to suffer data
breaches, data corruption or loss of operational functionality or prevent Fund investors from purchasing,
redeeming shares or receiving distributions. The investment manager has limited ability to
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FRANKLIN
SHORT DURATION U.S. GOVERNMENT ETF
FUND SUMMARY
prevent
or mitigate cybersecurity incidents affecting third party service providers, and such third party service
providers may have limited indemnification obligations to the Fund or the investment manager. Cybersecurity
incidents may result in financial losses to the Fund and its shareholders, and substantial costs may
be incurred in an effort to prevent or mitigate future cybersecurity incidents. Issuers of securities
in which the Fund invests are also subject to cybersecurity risks, and the value of these securities
could decline if the issuers experience cybersecurity incidents.
Because technology is frequently changing,
new ways to carry out cyber attacks are always developing. Therefore, there is a chance that some risks
have not been identified or prepared for, or that an attack may not be detected, which puts limitations
on the Fund's ability to plan for or respond to a cyber attack. Like other funds and business enterprises,
the Fund, the investment manager, and their service providers are subject to the risk of cyber incidents
occurring from time to time.
Performance
The following bar chart and table provide some indication
of the risks of investing in the Fund. The bar chart shows changes in the Fund's performance from year
to year. The table shows how the Fund's average annual returns for 1 year, 5 years, 10 years or since
inception, as applicable, compared with those of a broad measure of market performance. The Fund's past
performance (before and after taxes) is not necessarily an indication of how the Fund will perform in
the future. You can obtain updated performance information at franklintempleton.com or by calling (800)
DIAL BEN/342-5236.
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FRANKLIN
SHORT DURATION U.S. GOVERNMENT ETF
FUND SUMMARY
Annual Total Returns
| | | |
Best Quarter: | 2020, Q2 | 1.25% |
Worst Quarter: | 2022, Q1 | -1.80% |
| |
As of June 30, 2023, the
Fund’s year-to-date return was 1.50%. |
Average Annual Total Returns
For
periods ended December 31, 2022
| | | | | | | | | |
| | 1
Year | | 5
Years | | Since
Inception | |
Franklin
Short Duration U.S. Government ETF | | | | | | | |
| Return before taxes | | -3.13% | | 0.61% | |
0.71% | 1 |
| Return after taxes on distributions | | -3.79% | |
-0.19% | | -0.10% | 1 |
| Return
after taxes on distributions and sale of Fund shares | |
-1.84% | | 0.14% | | 0.19% | 1 |
Bloomberg US Government
Index: 1-3 Year Component (index reflects no deduction for fees, expenses or taxes) | | -3.81% | |
0.74% | | 0.68% | 1 |
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1. | Since inception November 4, 2013. |
The
after-tax returns are calculated using the historical highest individual federal marginal income tax
rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on an investor's
tax situation and may differ from those shown. After-tax returns are not relevant to investors who hold
their Fund shares through tax-advantaged arrangements, such as 401(k) plans or individual retirement
accounts.
Investment
Manager
Franklin Advisers, Inc. (Advisers or investment manager)
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FRANKLIN
SHORT DURATION U.S. GOVERNMENT ETF
FUND SUMMARY
Portfolio Managers
Patrick Klein, Ph.D.
Senior
Vice President of Advisers and portfolio manager of the Fund since inception (2013).
Paul
Varunok
Senior Vice President of Advisers and portfolio manager of the Fund since 2019.
Neil
Dhruv
Vice President of Advisers and portfolio manager of the Fund since 2021.
Purchase and Sale of Fund Shares
The Fund is an ETF. Fund
shares may only be purchased and sold on a national securities exchange through a broker-dealer. The
price of Fund shares is based on market price, and because ETF shares trade at market prices rather than
NAV, shares may trade at a price greater than NAV (a premium) or less than NAV (a discount). The Fund
issues or redeems shares that have been aggregated into blocks of 25,000 shares or multiples thereof
(Creation Units) to Authorized Participants who have entered into agreements with the Fund’s distributor,
Franklin Distributors, LLC (Distributors). The Fund will generally issue or redeem Creation Units in
exchange for a basket of cash and/or securities that the Fund specifies each day.
An investor may incur
costs attributable to the difference between the highest price a buyer is willing to pay to purchase
shares of the Fund (bid) and the lowest price a seller is willing to accept for shares of the Fund (ask)
when buying or selling shares in the secondary market (the “bid-ask spread”). Recent information,
including information on the Fund’s NAV, market price, premiums and discounts, and bid-ask spreads
is available on the Fund’s website at https://www.franklintempleton.com/investor/investments-and-solutions/investment-options/etfs/.
Taxes
The
Fund’s distributions are generally taxable to you as ordinary income, capital gains, or some combination
of both, unless you are investing through a tax-advantaged arrangement, such as a 401(k) plan or an individual
retirement account, in which case your distributions would generally be taxed when withdrawn from the
tax-advantaged account.
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SHORT DURATION U.S. GOVERNMENT ETF
FUND SUMMARY
Payments to Broker-Dealers and Other Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank),
the investment manager or other related companies may pay the intermediary for certain Fund-related activities,
including those that are designed to make the intermediary more knowledgeable about exchange traded products,
such as the Fund, as well as for marketing, education or other initiatives related to the sale or promotion
of Fund shares. These payments may create a conflict of interest by influencing the broker-dealer or
other intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson
or visit your financial intermediary’s website for more information.
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FRANKLIN
SHORT DURATION U.S. GOVERNMENT ETF
FUND DETAILS
Fund Details
Investment Goal
The Fund’s investment goal is to seek to provide a high
level of current income as is consistent with prudent investing, while seeking preservation of capital.
The Fund’s investment goal is non-fundamental, which means it may be changed by the Board of Trustees
without shareholder approval. Shareholders will be given at least 60 days’ advance notice of any change
to the Fund’s investment goal.
Principal
Investment Policies and Practices
Under normal market conditions, the Fund invests at least
80% of its net assets in securities issued or guaranteed by the U.S. government, its agencies, or instrumentalities.
Shareholders will be given at least 60 days’ advance notice of any change to the 80% investment policy.
The Fund currently targets an estimated portfolio duration of three (3) years or less. Such targeted
portfolio duration may change in the future. The Fund generally invests 50-80% of its assets in mortgage
securities issued or guaranteed by the U.S. government, its agencies, or instrumentalities, including
adjustable rate mortgage securities (ARMS) and collateralized mortgage obligations (CMOs), but the Fund
also invests in direct obligations of the U.S. government (such as Treasury bonds, bills and notes) and
in securities issued or guaranteed by the U.S. government, its agencies or instrumentalities, including
government sponsored entities. All of the Fund’s principal investments are debt securities. Debt securities
represent the obligation of the issuer to repay a loan of money to it and generally pay interest to the
holder. Bonds, notes and debentures are examples of debt securities.
In comparison to maturity (which is the date
on which a debt instrument ceases and the issuer is obligated to repay the principal amount), duration
is a measure of the expected price volatility of a debt instrument as a result of changes in market rates
of interest, based on the weighted average timing of the instrument’s expected principal and interest
payments and other factors. Duration differs from maturity in that it considers a security’s yield,
coupon payments, principal payments, call features and coupon adjustments in addition to the amount of
time until the security finally matures. As the value of a security changes over time, so will its duration.
Prices of securities with lower durations tend to be less sensitive to interest rate changes than securities
with higher durations. In general, a portfolio of securities with a lower duration can be expected to
be less sensitive to interest rate changes than a portfolio with a higher duration. Duration measures
a fixed income security's price sensitivity to interest rates by indicating the approximate change in
a fixed income security's price if interest rates move up or down in 1% increments. For example, when
the level of interest rates increases by 1%, the price of a fixed income security or a portfolio of fixed
income securities having a positive duration
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SHORT DURATION U.S. GOVERNMENT ETF
FUND DETAILS
of
five years generally will decrease by approximately 5% and the price of a fixed income security or a
portfolio of fixed income securities having a negative duration of five years generally will increase
by approximately 5%. Conversely when the level of interest rates decreases by 1%, the price of a fixed
income security or a portfolio of fixed income securities having a positive duration of five years generally
will increase by approximately 5% and the price of a fixed income security or a portfolio of fixed income
securities having a negative duration of five years generally will decrease by approximately 5%. The
Fund does not target a specific range or average maturity for the debt securities in which it invests.
The
Fund invests in investment grade securities and investments or in unrated securities and investments
the Fund’s investment manager determines are of comparable quality. Securities rated in the top four
ratings categories by one or more independent rating agencies such as S&P Global Ratings (S&P®)
(rated BBB- or better), Moody’s Investors Service (Moody’s) (rated Baa3 or higher) are considered
investment grade. If subsequent to its purchase, a security is downgraded in rating or goes into default,
the Fund will consider such events in its evaluation of the overall investment merits of that security
but will not necessarily dispose of that security immediately. For purposes of calculating the Fund's
portfolio duration, the Fund includes the effect of interest rate/bond futures contracts and options
on interest rate/bond futures contracts held by the Fund.
The mortgage securities in which the Fund
substantially invests are issued or guaranteed by the U.S. government, its agencies or instrumentalities,
such as Ginnie Mae and U.S. government-sponsored entities, such as Fannie Mae and Freddie Mac. Mortgage
securities represent an interest in a pool of mortgage loans made by banks and other financial institutions
to finance purchases of homes, commercial buildings and other real estate. The individual mortgage loans
are packaged or “pooled” together for sale to investors. As the underlying mortgage loans are paid
off, investors receive principal and interest payments. These securities may be fixed-rate securities
or ARMS. Most mortgage securities are pass-through securities which means they provide investors with
monthly payments consisting of a pro rata share of both regular interest and principal payments as well
as unscheduled prepayments on the underlying mortgage loans. Factors affecting mortgage prepayments include
the prevailing level of interest rates, the location of the mortgaged property, the age of the mortgage
loan and general economic conditions. Because prepayment rates of individual mortgage pools vary widely,
the average life of a particular pool cannot be predicted accurately. Adjustable-rate mortgage securities
include ARMS and other mortgage securities with interest rates that adjust periodically to reflect prevailing
market interest rates.
Government agency or instrumentality issues have different levels of credit support.
Ginnie Maes carry a guarantee as to the timely repayment of principal and interest that is backed by
the full faith and credit of the U.S. government. The full faith and
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credit
guarantee does not apply to the market prices and yields of the Ginnie Maes or to the NAV, trading price
or performance of the Fund, which will vary with changes in interest rates and other market conditions.
U.S.
government-sponsored entities, such as Fannie Mae and Freddie Mac, are chartered by Acts of Congress,
but their securities are neither issued nor guaranteed by the U.S. government. Although the U.S. government
has recently provided financial support to Fannie Mae and Freddie Mac, no assurance can be given that
the U.S. government will continue to do so. For example, Fannie Mae and Freddie Mac pass-through mortgage
certificates are backed by the credit of the respective instrumentality and are not guaranteed by the
U.S. government. The U.S. Department of the Treasury, however, has the authority to support Fannie Mae
and Freddie Mac by purchasing limited amounts of their respective obligations. Other securities issued
by government agencies or instrumentalities, including government sponsored entities, may only be backed
by the credit worthiness of the issuing institution, not the U.S. Government, or the issuers may have
the right to borrow from the U.S. Treasury to meet its obligations. The Fund may invest in securities
with various levels of credit support including, but not limited to, those issued or guaranteed by the
Federal Home Loan Banks, Veterans Administration, Federal Housing Authority, Export-Import Bank of the
United States, Overseas Private Investment Corporation, Commodity Credit Corporation, Small Business
Administration, U.S. Agency for International Development, Tennessee Valley Authority and Farm Credit
System. Investors should remember that guarantees of timely repayment of principal and interest on the
securities do not apply to the market prices and yields of the securities or to the NAV, trading price
or performance of the Fund. Irrespective of such guarantees, the market prices and yields of the securities
and, consequently, the NAV, trading price and performance of the Fund, will vary with changes in interest
rates and other market conditions. Any downgrade of the credit rating of the securities issued by the
U.S. government may result in a downgrade of securities issued by its agencies or instrumentalities,
including government-sponsored entities.
The Fund may also invest in U.S. government inflation-indexed
securities. Inflation-indexed securities are fixed-income securities that are structured to provide protection
against inflation. The value of the security’s principal or the interest income paid on the security
is adjusted to track changes in an official inflation measure. The U.S. Treasury uses the Consumer Price
Index for Urban Consumers as the inflation measure.
The Fund may also invest in mortgage dollar
rolls. In a mortgage dollar roll, the Fund sells (or buys) mortgage securities for delivery on a specified
date and simultaneously contracts to repurchase (or sell) substantially similar (same type, coupon, and
maturity) securities on a future date. During the period between a sale and repurchase, the Fund forgoes
principal and interest paid on the mortgage-
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backed
securities. The Fund earns or loses money on a mortgage dollar roll from any difference between the sale
price and the future purchase price. In a sale and repurchase, the Fund also earns money on the interest
earned on the cash proceeds of the initial sale. The Fund will invest only in covered mortgage dollar
rolls, meaning that the Fund establishes a segregated account with liquid securities equal in value to
the securities it will repurchase.
The Fund may purchase or sell mortgage securities on a delayed
delivery or forward commitment basis through the “to-be-announced” (TBA) market. With TBA transactions,
the particular securities to be delivered are not identified at the trade date but the delivered securities
must meet specified terms and standards (such as yield, duration, and credit quality). In addition to
buying securities on a when-issued, delayed delivery or TBA basis, the Fund may also sell these securities
on a TBA basis to close out an existing TBA position before the settlement date, to take advantage of
an expected decline in value of the securities, or for hedging purposes.
For purposes of pursuing
its investment goal, the Fund may enter into interest rate-related derivative transactions, principally
U.S. Treasury futures contracts and options on interest rate/bond futures. The use of these derivative
transactions may allow the Fund to obtain net long or short exposures to selected interest rates or durations.
These derivatives may be used to hedge risks associated with the Fund’s other portfolio investments
and to manage the duration of the Fund’s portfolio. The investment manager considers various factors,
such as availability and cost, in deciding whether, when and to what extent to enter into derivative
transactions.
A futures contract is a standard binding agreement that trades on an exchange
to buy or sell a specified quantity of an underlying instrument or asset at a specified price at a specified
later date. A “sale” of a futures contract means the acquisition of a contractual obligation to deliver
the underlying instrument called for by the contract at a specified price on a specified date. A “purchase”
of a futures contract means the acquisition of a contractual obligation to acquire a specified quantity
of the underlying instrument called for by the contract at a specified price on a specified date. The
purchase or sale of a futures contract will allow the Fund to increase or decrease its exposure to the
underlying instrument or asset. Although most futures contracts used by the Fund allow for a cash payment
of the net gain or loss on the contract at maturity, in lieu of delivery of the underlying instrument
or asset, some require the actual delivery or acquisition of the underlying instrument or asset.
A
call option gives the purchaser of the option, upon payment of a premium, the right to buy, and the seller
the obligation to sell, the underlying instrument at the exercise price. Conversely, a put option gives
the purchaser of the option, upon
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payment
of a premium, the right to sell, and the seller of the option the obligation to buy, the underlying instrument
at the exercise price.
Exclusion
of Investment Manager from Commodity Pool Operator Definition
With respect to the Fund, the investment
manager has claimed an exclusion from the definition of “commodity pool operator” (CPO) under the
Commodity Exchange Act (CEA) and the rules of the Commodity Futures Trading Commission (CFTC) and, therefore,
is not subject to CFTC registration or regulation as a CPO. In addition, with respect to the Fund, the
investment manager is relying upon a related exclusion from the definition of “commodity trading advisor”
(CTA) under the CEA and the rules of the CFTC.
The terms of the CPO exclusion require the Fund, among other
things, to adhere to certain limits on its investments in commodity futures, commodity options and swaps,
which in turn include non-deliverable currency forward contracts, as further described in the Fund's
Statement of Additional Information (SAI). Because the investment manager and the Fund intend to comply
with the terms of the CPO exclusion, the Fund may, in the future, need to adjust its investment strategies,
consistent with its investment goal, to limit its investments in these types of instruments. The Fund
is not intended as a vehicle for trading in the commodity futures, commodity options, or swaps markets.
The CFTC has neither reviewed nor approved the investment manager’s reliance on these exclusions, or
the Fund, its investment strategies or this prospectus.
Temporary Investments
When
the investment manager believes market or economic conditions are unfavorable for investors, the investment
manager may invest up to 100% of the Fund’s assets in a temporary defensive manner by holding all or
a substantial portion of its assets in cash, cash equivalents or other high quality short-term investments.
Temporary defensive investments generally may include short-term U.S. government securities, high grade
commercial paper, bank obligations, repurchase agreements, money market fund shares (including shares
of an affiliated money market fund), and other money market instruments. The investment manager also
may invest in these types of securities or hold cash while looking for suitable investment opportunities
or to maintain liquidity. In these circumstances, the Fund may be unable to achieve its investment goal.
Principal Risks
Interest Rate
Interest
rate changes can be sudden and unpredictable, and are influenced by a number of factors, including government
policy, monetary policy, inflation expectations, perceptions of risk, and supply of and demand for bonds.
Changes in government or central bank policy, including changes in tax policy or changes in a central
bank’s implementation of specific policy goals, may have a
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substantial
impact on interest rates. There can be no guarantee that any particular government or central bank policy
will be continued, discontinued or changed, nor that any such policy will have the desired effect on
interest rates. Debt securities generally tend to lose market value when interest rates rise and increase
in value when interest rates fall. A rise in interest rates also has the potential to cause investors
to rapidly sell fixed income securities. A substantial increase in interest rates may also have an adverse
impact on the liquidity of a debt security, especially those with longer maturities or durations. Securities
with longer maturities or durations or lower coupons or that make little (or no) interest payments before
maturity tend to be more sensitive to interest rate changes.
Mortgage Securities Mortgage
securities differ from conventional debt securities because principal is paid back over the life of the
security rather than at maturity. The Fund may receive unscheduled prepayments of principal due to voluntary
prepayments, refinancing or foreclosure on the underlying mortgage loans. To the Fund this means a loss
of anticipated interest, and a portion of its principal investment represented by any premium the Fund
may have paid. Mortgage prepayments generally increase when interest rates fall. Because of prepayments,
mortgage securities may be less effective than some other types of debt securities as a means of "locking
in" long-term interest rates and may have less potential for capital appreciation during periods of falling
interest rates. When the Fund reinvests the prepayments of principal it receives, it may receive a rate
of interest that is lower than the rate on the existing security.
Mortgage securities also
are subject to extension risk. An unexpected rise in interest rates could reduce the rate of prepayments
on mortgage securities and extend their life. This could cause the price of the mortgage securities and
the Fund's NAV and trading price to fall and would make the mortgage securities more sensitive to interest
rate changes.
Since
September 2008, the Federal Housing Finance Agency (FHFA), an agency of the U.S. government, has acted
as the conservator to operate Fannie Mae and Freddie Mac until they are stabilized. It is unclear how
long the conservatorship will last or what effect this conservatorship will have on the securities issued
or guaranteed by Fannie Mae or Freddie Mac for the long-term.
Although the mortgage securities that are
delivered in TBA transactions must meet certain standards, there is a risk that the actual securities
received by the Fund may be less favorable than what was anticipated when entering into the transaction.
TBA transactions also involve the risk that a counterparty will fail to deliver the security, exposing
the Fund to losses. Whether or not the Fund takes delivery of the securities at the termination date
of a TBA transaction, it will nonetheless be exposed to changes in the value of the underlying investments
during the term of the agreement. Entering into a when-issued, delayed delivery or TBA transaction may
also be viewed as a form of leverage and will result in
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associated
risks for the Fund. Sales of debt securities on a when-issued or delayed delivery basis are also subject
to the risk that the Fund is unable to purchase securities for delivery at the settlement date with the
characteristics agreed upon at the time of the transaction, which may subject the Fund to market losses
or other penalties.
Prepayment Debt securities are subject to prepayment
risk when the issuer can "call" the security, or repay principal, in whole or in part, prior to the security's
maturity. When the Fund reinvests the prepayments of principal it receives, it may receive a rate of
interest that is lower than the rate on the existing security, potentially lowering the Fund's income,
yield and its distributions to shareholders. Securities subject to partial or complete prepayment(s)
may offer less potential for gains during a declining interest rate environment and have greater price
volatility. Prepayment risk is greater in periods of falling interest rates for fixed-rate investments,
and for floating or variable rate securities, rising interest rates generally increase the risk of refinancings
or prepayments.
Variable Rate Securities Variable rate securities
(which include floating rate debt securities) generally are less price sensitive to interest rate changes
than fixed rate debt securities. However, the market value of variable rate debt securities may decline
or not appreciate as quickly as expected when prevailing interest rates rise if the interest rates of
the variable rate securities do not rise as much, or as quickly, as interest rates in general. Conversely,
variable rate securities will not generally increase in market value if interest rates decline. When
interest rates fall, there may be a reduction in the payments of interest received by the Fund from its
variable rate securities.
The NAV and trading price of the Fund may decline or not appreciate as expected
during periods of rising interest rates until the interest rates on these securities reset to market
rates. You could lose money if you sell your shares of the Fund before these rates reset.
Income The Fund's distributions
to shareholders may decline when prevailing interest rates fall, when the Fund experiences defaults on
debt securities it holds or when the Fund realizes a loss upon the sale of a debt security. The Fund's
income generally declines during periods of falling benchmark interest rates because the Fund must reinvest
the proceeds it receives from existing investments (upon their maturity, prepayment, amortization, sale,
call, or buy-back) at a lower rate of interest or return.
Extension The market value of
some debt securities (such as certain asset-backed and mortgage-backed securities) will be adversely
affected when bond calls or prepayments on underlying mortgages or other assets are less or slower than
anticipated, particularly when interest rates rise. When that occurs, the effective maturity date of
the Fund’s investment may be extended, resulting in an
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increase
in interest rate sensitivity to that of a longer-term instrument. Such extension may also effectively
lock-in a below market interest rate and reduce the value of the debt security.
Inflation-Indexed
Securities Inflation-indexed securities have a tendency to react to changes in real interest
rates. Real interest rates represent nominal (stated) interest rates lowered by the anticipated effect
of inflation. In general, the price of an inflation-indexed security decreases when real interest rates
increase, and increases when real interest rates decrease. Interest payments on inflation-indexed securities
will fluctuate as the principal and/or interest is adjusted for inflation and can be unpredictable. Any
increase in the principal amount of an inflation-protected debt security will be considered taxable ordinary
income, even though investors, such as the Fund, do not receive their principal until maturity.
Market
The market values of securities or other investments owned by the Fund will go
up or down, sometimes rapidly or unpredictably. The Fund’s investments may decline in value due to
factors affecting individual issuers (such as the results of supply and demand), or sectors within the
securities markets. The value of a security or other investment also may go up or down due to general
market conditions that are not specifically related to a particular issuer, such as real or perceived
adverse economic conditions, changes in interest rates or exchange rates, or adverse investor sentiment
generally. Furthermore, events involving limited liquidity, defaults, non-performance or other adverse
developments that affect one industry, such as the financial services industry, or concerns or rumors
about any events of these kinds, have in the past and may in the future lead to market-wide liquidity
problems, may spread to other industries, and could negatively affect the value and liquidity of the
Fund’s investments. In addition, unexpected events and their aftermaths, such as the spread of diseases;
natural, environmental or man-made disasters; financial, political or social disruptions; terrorism and
war; and other tragedies or catastrophes, can cause investor fear and panic, which can adversely affect
the economies of many companies, sectors, nations, regions and the market in general, in ways that cannot
necessarily be foreseen. During a general downturn in the securities markets, multiple asset classes
may decline in value. When markets perform well, there can be no assurance that securities or other investments
held by the Fund will participate in or otherwise benefit from the advance.
The global outbreak of
the novel strain of coronavirus, COVID-19 and its subsequent variants, has resulted in market closures
and dislocations, extreme volatility, liquidity constraints and increased trading costs. The long-term
impact on economies, markets, industries and individual issuers are not known. Some sectors of the economy
and individual issuers have experienced or may experience particularly large losses. Periods of extreme
volatility in the financial markets; reduced liquidity of many instruments; and disruptions to supply
chains, consumer
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demand
and employee availability, may continue for some time. The U.S. government and the Federal Reserve, as
well as certain foreign governments and central banks, have taken extraordinary actions to support local
and global economies and the financial markets in response to the COVID-19 pandemic. This and other government
intervention into the economy and financial markets may not work as intended, and have resulted in a
large expansion of government deficits and debt, the long term consequences of which are not known. In
addition, the COVID-19 pandemic, and measures taken to mitigate its effects, could result in disruptions
to the services provided to the Fund by its service providers.
Mortgage Dollar Rolls
In a mortgage dollar roll, the Fund takes the risk that the market price of the
mortgage-backed securities will drop below their future purchase price. The Fund also takes the risk
that the mortgage-backed securities that it repurchases at a later date will have less favorable market
characteristics than the securities originally sold (e.g., greater prepayment risk). When the Fund uses
a mortgage dollar roll, it is also subject to the risk that the other party to the agreement will not
be able to perform. Mortgage dollar rolls add leverage to the Fund's portfolio and increase the Fund's
sensitivity to interest rate changes. In addition, investment in mortgage dollar rolls will increase
the Fund's portfolio turnover rate.
Portfolio Turnover The investment manager
will sell a security when it believes it is appropriate to do so, regardless of how long the Fund has
held the security. The Fund's portfolio turnover rate may exceed 100% per year because of the anticipated
use of certain investment strategies. The rate of portfolio turnover will not be a limiting factor for
the investment manager in making decisions on when to buy or sell securities, including entering into
mortgage dollar rolls. High turnover will increase the Fund's transaction costs and may increase your
tax liability if the transactions result in capital gains.
Derivative
Instruments The performance of derivative instruments depends largely on the performance of an underlying
instrument, such as a security, interest rate, or index, and such instruments often have risks similar
to the underlying instrument, in addition to other risks. Derivative instruments involve costs and can
create economic leverage in the Fund’s portfolio, which may result in significant volatility and cause
the Fund to participate in losses (as well as gains) in an amount that significantly exceeds the Fund’s
initial investment. Other risks include illiquidity, mispricing or improper valuation of the derivative
instrument, and imperfect correlation between the value of the derivative and the underlying instrument
so that the Fund may not realize the intended benefits. Their successful use will usually depend on the
investment manager’s ability to accurately forecast movements in the market relating to the underlying
instrument. Should a market or markets, or prices of particular classes of investments, move in an unexpected
manner, especially in unusual or extreme market conditions, the Fund may not
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realize
the anticipated benefits of the transaction, and it may realize losses, which could be significant. If
the investment manager is not successful in using such derivative instruments, the Fund’s performance
may be worse than if the investment manager did not use such derivative instruments at all. When a derivative
is used for hedging, the change in value of the derivative instrument also may not correlate specifically
with the security, interest rate, index or other risk being hedged. There is also the risk, especially
under extreme market conditions, that an instrument, which usually would operate as a hedge, provides
no hedging benefits at all.
Use of these instruments could also result in a loss if the counterparty to the
transaction does not perform as promised, including because of such counterparty’s bankruptcy or insolvency.
This risk is heightened with respect to over-the-counter (OTC) instruments and may be greater during
volatile market conditions. Other risks include the inability to close out a position because the trading
market becomes illiquid (particularly in the OTC markets) or the availability of counterparties becomes
limited for a period of time. In addition, the presence of speculators in a particular market could lead
to price distortions. To the extent that the Fund is unable to close out a position because of market
illiquidity, the Fund may not be able to prevent further losses of value in its derivatives holdings
and the Fund’s liquidity may be impaired. Some derivatives can be particularly sensitive to changes
in interest rates or other market prices. Investors should bear in mind that, while the Fund intends
to use derivative strategies on a regular basis, it is not obligated to actively engage in these transactions,
generally or in any particular kind of derivative, if the investment manager elects not to do so due
to availability, cost or other factors.
The use of derivative strategies may also have a tax impact
on the Fund. The timing and character of income, gains or losses from these strategies could impair the
ability of the investment manager to use derivatives when it wishes to do so.
Management The Fund is
actively managed and could experience losses if the investment manager’s judgment about markets, interest
rates or the attractiveness, relative values, liquidity, or potential appreciation of particular investments
made for the Fund's portfolio prove to be incorrect. There can be no guarantee that these techniques
or the investment manager's investment decisions will produce the desired results. Additionally, legislative,
regulatory, or tax developments may affect the investment techniques available to the investment manager
in connection with managing the Fund and may also adversely affect the ability of the Fund to achieve
its investment goal.
Credit The Fund could lose money on a debt security
if the issuer or borrower is unable or fails to meet its obligations, including failing to make interest
payments and/or to repay principal when due. Changes in an issuer's financial strength, the market's
perception of the issuer's financial strength or an issuer's or security's
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credit
rating, which reflects a third party's assessment of the credit risk presented by a particular issuer
or security, may affect debt securities' values. The Fund may incur substantial losses on debt securities
that are inaccurately perceived to present a different amount of credit risk by the market, the investment
manager or the rating agencies than such securities actually do.
While securities issued or guaranteed by
Ginnie Mae are backed by the full faith and credit of the U.S. government, not all securities of the
various U.S. government agencies are, including those of Fannie Mae and Freddie Mac. While the U.S. government
has provided financial support to Fannie Mae and Freddie Mac, no assurance can be given that the U.S.
government will always do so, since the U.S. government is not so obligated by law. Accordingly, securities
issued by Fannie Mae and Freddie Mac may involve a risk of non-payment of principal and interest. Also,
guarantees of principal and interest do not apply to market prices, yields or the Fund's share price.
Any downgrade of the credit rating of the securities issued by the U.S. government may result in a downgrade
of securities issued by its agencies or instrumentalities, including government-sponsored entities.
Large
Shareholder Certain large shareholders, including other funds or accounts advised by the investment
manager or an affiliate of the investment manager, may from time to time own a substantial amount of
the Fund’s shares. In addition, a third party investor, the investment manager or an affiliate of the
investment manager, an authorized participant, a lead market maker, or another entity may invest in the
Fund and hold its investment for a limited period of time solely to facilitate commencement of the Fund
or to facilitate the Fund’s achieving a specified size or scale. There can be no assurance that any
large shareholder would not redeem its investment. Dispositions of a large number of shares by these
shareholders may adversely affect the Fund’s liquidity and net assets to the extent such transactions
are executed directly with the Fund in the form of redemptions through an authorized participant, rather
than executed in the secondary market. These redemptions may also force the Fund to sell portfolio securities
when it might not otherwise do so, which may negatively impact the Fund’s NAV and increase the Fund’s
brokerage costs. To the extent these large shareholders transact in shares on the secondary market, such
transactions may account for a large percentage of the trading volume on the listing exchange and may,
therefore, have a material upward or downward effect on the market price of the shares.
Market Trading
Absence
of active market Although shares of the Fund are listed for trading on one or more stock exchanges,
there can be no assurance that an active trading market for such shares will develop or be maintained.
There are no obligations of market makers to make a market in the Fund’s shares or of an Authorized
Participant to submit purchase or redemption orders for Creation Units. Decisions by market makers or
Authorized Participants to reduce their role or step away from these
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activities
in times of market stress could inhibit the effectiveness of the arbitrage process in maintaining the
relationship between the underlying value of the Fund’s portfolio securities and the Fund’s market
price. This reduced effectiveness could result in Fund shares trading at a premium or discount to its
NAV and also greater than normal intraday bid-ask spreads. Additionally, in stressed market conditions,
the market for the Fund’s shares may become less liquid in response to deteriorating liquidity in the
markets for the Fund’s portfolio holdings, which may cause a significant variance in the market price
of the Fund’s shares and their underlying value and wider bid-ask spreads.
Secondary
listings The Fund's shares may be listed or traded on U.S. and non-U.S. stock exchanges
other than the U.S. stock exchange where the Fund's primary listing is maintained, and may otherwise
be made available to non-U.S. investors through funds or structured investment vehicles similar to depositary
receipts.
The Fund’s shares may be less actively traded in certain markets than in others,
and investors are subject to the execution and settlement risks and market standards of the market where
they or their broker direct their trades for execution. Certain information available to investors who
trade Fund shares on a U.S. stock exchange during regular U.S. market hours may not be available to investors
who trade in other markets, which may result in secondary market prices in such markets being less efficient.
Secondary
market trading Shares of the Fund may trade in the secondary market at times when the Fund
does not accept orders to purchase or redeem shares. At such times, shares may trade in the secondary
market with more significant premiums or discounts than might be experienced at times when the Fund accepts
purchase and redemption orders.
There can be no assurance that the Fund's shares will continue
to trade on a stock exchange or in any market or that the Fund's shares will continue to meet the requirements
for listing or trading on any exchange or in any market, or that such requirements will remain unchanged.
Secondary market trading in Fund shares may be halted by a stock exchange because of market conditions
or other reasons. In addition, trading in Fund shares on a stock exchange or in any market may be subject
to trading halts caused by extraordinary market volatility pursuant to “circuit breaker” rules on
the stock exchange or market.
During a “flash crash,” the market prices of the Fund’s shares may decline
suddenly and significantly. Such a decline may not reflect the performance of the portfolio securities
held by the Fund. Flash crashes may cause Authorized Participants and other market makers to limit or
cease trading in the Fund’s shares for temporary or longer periods. Shareholders could suffer significant
losses to the extent that they sell shares at these temporarily low market prices.
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Shares
of the Fund, similar to shares of other issuers listed on a stock exchange, may be sold short and are
therefore subject to the risk of increased volatility associated with short selling.
Premium/Discount
Shares of the Fund may trade at prices other than NAV. Shares of the Fund trade on stock exchanges at
prices at, above or below their most recent NAV. The NAV of the Fund is calculated at the end of each
business day and fluctuates with changes in the market value of the Fund’s holdings since the most
recent calculation. The trading prices of the Fund’s shares fluctuate continuously throughout trading
hours based on market supply and demand rather than NAV. As a result, the trading prices of the Fund’s
shares may deviate significantly from NAV during periods of market volatility.
Any of these factors,
among others, may lead to the Fund’s shares trading at a premium or discount to NAV. Thus, you may
pay more (or less) than NAV when you buy shares of the Fund in the secondary market, and you may receive
less (or more) than NAV when you sell those shares in the secondary market. The investment manager cannot
predict whether shares will trade above (premium), below (discount) or at NAV. However, because shares
can be created and redeemed in Creation Units at NAV, the investment manager believes that large discounts
or premiums to the NAV of the Fund are not likely to be sustained over the long-term. While the creation/redemption
feature is designed to make it likely that the Fund’s shares normally will trade on stock exchanges
at prices close to the Fund’s next calculated NAV, exchange prices are not expected to correlate exactly
with the Fund’s NAV due to timing reasons as well as market supply and demand factors. In addition,
disruptions to creations and redemptions or extreme market volatility may result in trading prices for
shares of the Fund that differ significantly from its NAV.
Cost of buying or selling
Fund shares Buying or selling Fund shares on an exchange involves two types of costs that
apply to all securities transactions. When buying or selling shares of the Fund through a broker, you
will likely incur a brokerage commission or other charges imposed by brokers as determined by that broker.
In addition, you may incur the cost of the “spread,” that is, the difference between what investors
are willing to pay for Fund shares (the “bid” price) and the price at which they are willing to sell
Fund shares (the “ask” price). Because of the costs inherent in buying or selling Fund shares, frequent
trading may detract significantly from investment results and an investment in Fund shares may not be
advisable for investors who anticipate regularly making small investments.
Authorized Participant
Concentration Only an Authorized Participant may engage in creation or redemption transactions directly
with the Fund. The Fund has a limited number of institutions that act as Authorized Participants. To
the extent that these institutions exit the business or are unable to proceed with creation and/or redemption
orders with respect to the Fund and no other Authorized Participant is
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able
to step forward to create or redeem Creation Units, Fund shares may trade at a discount to NAV and possibly
face trading halts and/or delisting. This risk may be more pronounced in volatile markets, potentially
where there are significant redemptions in ETFs generally.
Cash Transactions ETFs
generally are able to make in-kind redemptions and avoid being taxed on gain on the distributed portfolio
securities at the Fund level. Because the Fund expects to generally effect redemptions entirely in cash,
rather than in-kind, it may be required to sell portfolio securities in order to obtain the cash needed
to distribute redemption proceeds. If the Fund recognizes gain on these sales, this generally will cause
the Fund to recognize gain it might not otherwise have recognized, or to recognize such gain sooner than
would otherwise be required if it were to distribute portfolio securities in-kind. The Fund generally
intends to distribute these gains to shareholders to avoid being taxed on this gain at the Fund level
and otherwise comply with the special tax rules that apply to it. This strategy may cause shareholders
to be subject to tax on gains they would not otherwise be subject to, or at an earlier date than, if
they had made an investment in a different ETF. Moreover, cash transactions may have to be carried out
over several days if the securities market is relatively illiquid and may involve considerable brokerage
fees and taxes. These brokerage fees and taxes, which will be higher than if the Fund sold and redeemed
its shares principally in-kind, could be imposed on the Fund and thus decrease the Fund's NAV to the
extent they are not offset by the creation and redemption transaction fees paid by purchasers and redeemers
of Creation Units.
Liquidity Liquidity risk exists when the markets
for particular securities or types of securities or other investments are or become relatively illiquid
so that the Fund is unable, or it becomes more difficult for the Fund, to sell the security or other
investment at the price at which the Fund has valued the security. Illiquidity may result from political,
economic or issuer specific events; supply/demand imbalances; changes in a specific market’s size or
structure, including the number of participants; or overall market disruptions. Securities or other investments
with reduced liquidity or that become illiquid may involve greater risk than securities with more liquid
markets. Market prices or quotations for illiquid securities may be volatile, and there may be large
spreads between bid and ask prices. Reduced liquidity may have an adverse impact on market price and
the Fund's ability to sell particular securities when necessary to meet the Fund's liquidity needs, which
may arise or increase in response to a specific economic event or because the investment manager wishes
to purchase particular investments or believes that a higher level of liquidity would be advantageous.
An investment may become illiquid if the Fund and its affiliates receive material non-public information
about the issuer or the investment. To the extent that the Fund and its affiliates hold a significant
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portion
of an issuer's outstanding securities, the Fund may be subject to greater liquidity risk than if the
issuer's securities were more widely held.
More
detailed information about the Fund and its policies and risks can be found in the Fund's SAI.
A
description of the Fund's policies and procedures regarding the release of portfolio holdings information
is also available in the Fund's SAI. The Fund discloses its portfolio holdings daily at https://www.franklintempleton.com/investor/investments-and-solutions/investment-options/etfs/.
Management
Franklin Advisers, Inc. (Advisers or investment
manager), One Franklin Parkway, San Mateo, CA 94403-1906, is the Fund’s investment manager. Advisers
is a wholly-owned subsidiary of Franklin Resources, Inc. (Resources). Together, Advisers and its affiliates
manage, as of June 30, 2023, $1.43 trillion in assets, and have been in the investment management business
since 1947.
The Fund is managed by a team of dedicated professionals focused on investments
in securities issued or guaranteed by the U.S. government, its agencies, or instrumentalities. The portfolio
managers of the Fund are as follows:
Patrick Klein, Ph.D. Senior Vice President of Advisers
Dr.
Klein has been a portfolio manager of the Fund since inception and a co-lead portfolio manager of the
Fund since 2019. He joined Franklin Templeton in 2005.
Paul Varunok Senior Vice President
of Advisers
Mr. Varunok has been a co-lead portfolio manager of the Fund since 2019. He joined
Franklin Templeton in 2001.
Neil Dhruv Vice President of Advisers
Mr.
Dhruv has been a co-lead portfolio manager of the Fund since 2021. He joined Franklin Templeton in 2002.
The
portfolio managers of the Fund are jointly and primarily responsible for the day-to-day management of
the Fund's portfolio. They have equal authority over all aspects of the Fund's investment portfolio,
including, but not limited to, purchases and sales of individual securities, portfolio risk assessment,
and the management of daily cash balances in accordance with anticipated investment management requirements.
The degree to which each portfolio manager may perform these functions, and the nature of these functions,
may change from time to time.
The Fund’s SAI provides additional information about portfolio manager compensation,
other accounts that they manage and their ownership of Fund shares.
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Pursuant
to the investment management agreement approved by the board of trustees, the Fund pays Advisers a unified
management fee for managing the Fund’s assets. Advisers reimburses the Fund for all acquired fund fees
and expenses (such as those associated with the Fund’s investment in a Franklin Templeton money fund)
and pays all of the ordinary operating expenses of the Fund, except for (i) the Fund’s management fee,
(ii) payments under the Fund’s Rule 12b-1 plan (if any), (iii) brokerage expenses (including any costs
incidental to transactions in portfolio securities or instruments), (iv) taxes, (v) interest (including
borrowing costs and dividend expenses on securities sold short and overdraft charges), (vi) litigation
expenses (including litigation to which the Trust or the Fund may be a party and indemnification of the
trustees and officers with respect thereto), and (vii) other non-routine or extraordinary expenses.
For
the fiscal year ended March 31, 2023, the Fund paid Advisers an effective management fee of 0.24% of
the Fund’s average daily net assets for management services.
A discussion regarding the basis for the
board of trustees’ approval of the Fund’s investment management agreement is available in the Fund’s
semiannual report for the period ended September 30, 2022.
Manager of Managers Structure
The
investment manager and the Trust have received an exemptive order from the SEC that allows the Fund to
operate in a “manager of managers” structure whereby the investment manager can appoint and replace
both wholly-owned and unaffiliated sub-advisors, and enter into, amend and terminate sub-advisory agreements
with such sub-advisors, each subject to board approval but without obtaining prior shareholder approval
(Manager of Managers Structure). The Fund will, however, inform shareholders of the hiring of any new
sub-advisor within 90 days after the hiring. The SEC exemptive order provides the Fund with greater flexibility
and efficiency and alleviates the need for the Fund to incur the expense and delays associated with obtaining
shareholder approval of such sub-advisory agreements.
The use of the Manager of Managers Structure
with respect to the Fund is subject to certain conditions that are set forth in the SEC exemptive order.
Under the Manager of Managers Structure, the investment manager has the ultimate responsibility, subject
to oversight by the Fund's board of trustees, to oversee sub-advisors and recommend their hiring, termination
and replacement. The investment manager will also, subject to the review and approval of the Fund's board
of trustees: set the Fund's overall investment strategy; evaluate, select and recommend sub-advisors
to manage all or a portion of the Fund's assets; and implement procedures reasonably designed to ensure
that each sub-advisor complies with the Fund's investment goal, policies and restrictions. Subject to
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review
by the Fund's board of trustees, the investment manager will allocate and, when appropriate, reallocate
the Fund's assets among sub-advisors and monitor and evaluate the sub-advisors’ performance.
Distributions and Taxes
Income and Capital Gain Distributions
As
a regulated investment company, the Fund generally pays no federal income tax on the income and gains
it distributes to you. The Fund intends to pay income dividends monthly from its net investment income.
Capital gains, if any, may be paid at least annually. The Fund may distribute income dividends and capital
gains more frequently, if necessary, in order to reduce or eliminate federal excise or income taxes on
the Fund. The amount of any distribution will vary, and there is no guarantee the Fund will pay either
income dividends or capital gain distributions. Distributions in cash may be reinvested automatically
in additional whole Fund shares only if the broker through whom you purchased the shares makes such option
available.
Annual statements. After the close of each calendar year, you will receive tax
information from the broker with respect to the federal income tax treatment of the Fund’s distributions
and any taxable sales of Fund shares occurring during the prior calendar year. You may receive revised
tax information if the Fund must reclassify its distributions or the broker must adjust the cost basis
of any covered shares sold after you receive your tax information. Distributions declared in October,
November or December to shareholders of record in such month and paid in January are taxable as if they
were paid in December. Additional tax information about the Fund’s distributions is available at franklintempleton.com.
Avoid
"buying a dividend." At the time you purchase your Fund shares, the price of the shares may reflect
undistributed income, undistributed capital gains, or net unrealized appreciation in the value of the
portfolio securities held by the Fund. For taxable investors, a subsequent distribution to you of such
amounts, although constituting a return of your investment, would be taxable. Buying shares in the Fund
just before it declares an income dividend or capital gain distribution is sometimes known as “buying
a dividend.”
Tax Considerations
If you are a taxable investor, Fund distributions
are generally taxable to you as ordinary income, capital gains or some combination of both. This is the
case whether you reinvest your distributions in additional Fund shares or receive them in cash.
Dividend
income. Income dividends are generally subject to tax at ordinary rates. Income dividends
reported by the Fund as qualified dividend income may be subject to tax by individuals at reduced long-term
capital gains tax rates provided
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certain
holding period requirements are met. Because the Fund invests primarily in debt securities, it is expected
that either none or only a small portion of the Fund's income dividends may be qualified dividends. A
return-of-capital distribution is generally not taxable but will reduce the cost basis of your shares,
and will result in a higher capital gain or a lower capital loss when you later sell your shares.
Capital
gains. Fund distributions of short-term capital gains are also subject to tax at ordinary
rates. Fund distributions of long-term capital gains are taxable at the reduced long-term capital gains
rates no matter how long you have owned your Fund shares. For single individuals with taxable income
not in excess of $44,625 in 2023 ($89,250 for married individuals filing jointly), the long-term capital
gains tax rate is 0%. For single individuals and joint filers with taxable income in excess of these
amounts but not more than $492,300 or $553,850, respectively, the long-term capital gains tax rate is
15%. The rate is 20% for single individuals with taxable income in excess of $492,300 and married individuals
filing jointly with taxable income in excess of $553,850. An additional 3.8% Medicare tax may also
be imposed as discussed below.
Sales of exchange-listed shares. Currently, any capital
gain or loss realized on the sale of Fund shares generally is treated as long-term capital gain or loss
if the shares have been held for more than one year and as short-term capital gain or loss if the shares
have been held for one year or less.
Cost basis reporting. Contact the broker through whom you purchased
your Fund shares to obtain information with respect to the available cost basis reporting methods and
elections for your account.
Taxes on creation and redemption of creation units.
An Authorized Participant who exchanges securities for Creation Units generally will recognize a gain
or loss. The gain or loss will be equal to the difference between the market value of the Creation Units
at the time of purchase and the exchanger’s aggregate basis in the securities surrendered plus any
cash paid for the Creation Units. An Authorized Participant who exchanges Creation Units for securities
will generally recognize a gain or loss equal to the difference between the exchanger’s basis in the
Creation Units and the aggregate market value of the securities and the amount of cash received. The
Internal Revenue Service, however, may assert that a loss realized upon an exchange of securities for
Creation Units cannot be deducted currently under the rules governing “wash sales,” or on the basis
that there has been no significant change in economic position. Authorized Participants exchanging securities
should consult their own tax advisor with respect to whether wash sale rules apply and when a loss might
be deductible.
Authorized Participants that create or redeem Creation Units will be sent a confirmation
statement showing how many shares they purchased or sold and at what price.
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SHORT DURATION U.S. GOVERNMENT ETF
FUND DETAILS
Under
current federal tax laws, any capital gain or loss realized upon a redemption of Creation Units is generally
treated as long-term capital gain or loss if the shares have been held for more than one year and as
a short-term capital gain or loss if the shares have been held for one year or less.
If the Fund redeems Creation
Units in part or entirely in cash, it may recognize more capital gains than it will if it redeems Creation
Units in-kind.
Medicare tax. An additional 3.8% Medicare tax is imposed on certain net
investment income (including ordinary dividends and capital gain distributions received from the Fund
and net gains from the sales of Fund shares) of U.S. individuals, estates and trusts to the extent that
such person’s “modified adjusted gross income” (in the case of an individual) or “adjusted gross
income” (in the case of an estate or trust) exceeds a threshold amount. Any liability for this additional
Medicare tax is reported on, and paid with, your federal income tax return.
Backup withholding.
A shareholder may be subject to backup withholding on any distributions of income capital gains or proceeds
from the sale of Fund shares if the shareholder has provided either an incorrect tax identification number
or no number at all, is subject to backup withholding by the IRS for failure to properly report payments
of interest or dividends, has failed to certify that the shareholder is not subject to backup withholding,
or has not certified that the shareholder is a U.S. person (including a U.S. resident alien). The backup
withholding rate is currently 24%. State backup withholding may also apply.
State and local taxes.
Distributions of ordinary income and capital gains, and gains from the sale of your Fund shares, are
generally subject to state and local taxes.
Non-U.S. investors. Non-U.S. investors
may be subject to U.S. withholding tax at 30% or a lower treaty rate on Fund dividends of ordinary income.
Non-U.S. investors may be subject to U.S. estate tax on the value of their shares. They are subject to
special U.S. tax certification requirements to avoid backup withholding, claim any exemptions from withholding
and claim any treaty benefits. Exemptions from U.S. withholding tax are generally provided for capital
gains realized on the sale of Fund shares, capital gain dividends paid by the Fund from net long-term
capital gains, short-term capital gain dividends paid by the Fund from net short-term capital gains and
interest-related dividends paid by the Fund from its qualified net interest income from U.S. sources.
However, notwithstanding such exemptions from U.S. withholding tax at source, any such dividends and
distributions of income and capital gains will be subject to backup withholding at a rate of 24% if you
fail to properly certify that you are not a U.S. person.
Other reporting and withholding requirements.
Payments to a shareholder that is either a foreign financial institution or a non-financial foreign
entity within the meaning of the Foreign Account Tax Compliance Act (FATCA) may be subject to a
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30%
withholding tax on income dividends paid by the Fund. The FATCA withholding tax generally can be avoided
by such foreign entity if it provides the broker, and in some cases, the IRS, information concerning
the ownership of certain foreign financial accounts or other appropriate certifications or documentation
concerning its status under FATCA. In order to comply with these requirements, information about a shareholder
in the Fund may be disclosed to the IRS, non-U.S. taxing authorities or other parties as necessary to
comply with FATCA.
Other tax information. This discussion of "Distributions and
Taxes" is for general information only and is not tax advice. You should consult your own tax advisor
regarding your particular circumstances, and about any federal, state, local and foreign tax consequences
before making an investment in the Fund. Additional information about the tax consequences of investing
in the Fund may be found in the SAI.
Financial Highlights
The Financial Highlights present the Fund's
financial performance for the past five years or since its inception. Certain information reflects financial
results for a single Fund share. The total returns represent the rate that an investor would have earned
or lost on an investment in the Fund assuming reinvestment of dividends and capital gains. This information
has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, whose
report, along with the Fund's financial statements, are included in the annual report, which is available
upon request.
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FUND DETAILS
| | | | | | | | | | | | |
| | Year
Ended March 31, |
| | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | |
Per share operating performance
(for a share outstanding throughout the
year) | | | | | | | | | | | |
Net asset value, beginning
of year | | $92.17 | | $95.24 | | $94.84 | | $94.40 | | $95.18 | |
Income from investment
operationsa: | | | | | | | | | | | |
Net investment incomeb | | 1.65 | | 0.41 | | 0.79 | | 2.11 | | 1.95 | |
Net
realized and unrealized gains (losses) | | (1.46 | ) | (2.72 | ) | 0.89 | | 0.85 | | (0.03 | ) |
Total from investment operations | | 0.19 | | (2.31 | ) | 1.68 | | 2.96 | | 1.92 | |
Less distributions from: | | | | | | | | | | | |
Net investment income | | (1.91 | ) | (0.76 | ) | (1.28 | ) | (2.52 | ) | (2.70 | ) |
Net asset value, end of
year | | $90.45 | | $92.17 | | $95.24 | | $94.84 | | $94.40 | |
Total
returnc | | 0.24% | | (2.45)% | | 1.77% | | 3.18% | | 2.04% | |
Ratios to average net assets | | | | | | | | | | | |
Expenses before waiver and payments by affiliates | | 0.25% | | 0.30% | | 0.37% | | 0.43% | | 0.44% | |
Expenses
net of waiver and payments by affiliates | | 0.24% | | 0.25% | d | 0.24% | | 0.23% | | 0.25% | d |
Net investment income | | 1.82% | | 0.43% | | 0.82% | | 2.23% | | 2.06% | |
Supplemental data | | | | | | | | | | | |
Net assets, end of year (000’s) | | $203,612 | | $359,566 | | $435,827 | | $187,395 | | $125,177 | |
Portfolio turnover
ratee | | 196.59% | | 156.78% | | 210.16% | | 169.35% | | 104.49% | |
Portfolio turnover rate excluding mortgage dollar rollse,f | | 107.64% | | 84.03% | | 189.55% | | 105.08% | | 64.69% | |
a.
The amount shown for a share outstanding throughout the period may not correlate with the Statement of
Operations for the period due to the timing of sales and repurchases of creation unit Fund shares in
relation to income earned, adjustments to interest income for the inflation index bonds, and/or fluctuating
market value of the investments of the Fund.
b. Based on average daily shares outstanding.
c. Total return is calculated assuming an initial investment made at the net asset
value at the beginning of the period, reinvestment of all dividends and distributions at net asset value
during the period, and redemption at net asset value on the last day of the period.
d.
Benefit of expense reduction rounds to less than 0.01%.
e. Portfolio turnover
rate includes portfolio transactions that are executed as a result of the Fund offering and redeeming
Creation Units solely for cash (“Cash creations”).
f. See Note 1(d) regarding
mortgage dollar rolls.
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SHORT DURATION U.S. GOVERNMENT ETF
SHAREHOLDER INFORMATION
Shareholder Information
Buying
and Selling Shares
Shares of the Fund may be acquired or redeemed directly from the Fund only in
Creation Units or multiples thereof, as discussed in the Creations and Redemptions section of this prospectus.
Only an Authorized Participant may engage in creation or redemption transactions directly with the Fund.
Once created, shares of the Fund generally trade in the secondary market in amounts less than a Creation
Unit.
Shares
of the Fund are listed on a national securities exchange for trading during the trading day. Shares can
be bought and sold throughout the trading day like shares of other publicly traded companies. Franklin
ETF Trust (Trust) does not impose any minimum investment for shares of the Fund purchased on an exchange.
Shares of the Fund trade under the following symbol: FTSD
Buying or selling Fund shares on an exchange
involves two types of costs that may apply to all securities transactions. When buying or selling shares
of the Fund through a broker, you will likely incur a brokerage commission or other charges determined
by your broker. The commission is frequently a fixed amount and may be a significant proportional cost
for investors seeking to buy or sell small amounts of shares. In addition, you may incur the cost of
the “spread,” that is, any difference between the bid price and the ask price. The spread varies
over time for shares of the Fund based on the Fund’s trading volume and market liquidity, and is generally
lower if the Fund has a lot of trading volume and market liquidity, and higher if the Fund has little
trading volume and market liquidity.
The board of trustees has not adopted a policy of monitoring
for frequent purchases and redemptions of Fund shares (frequent trading) that appear to attempt to take
advantage of a potential arbitrage opportunity presented by a lag between a change in the value of the
Fund’s portfolio securities after the close of the primary markets for the Fund’s portfolio securities
and the reflection of that change in the Fund’s NAV (market timing), because the Fund generally sells
and redeems its shares directly through transactions that are in-kind and/or for cash, subject to the
conditions described below under Creations and Redemptions. The board of trustees has not adopted a policy
of monitoring for frequent trading activity because shares of the Fund are listed for trading on a national
securities exchange.
The primary listing exchange for the Fund is NYSE Arca, Inc. (“NYSE Arca”
or the “Exchange”).
NYSE Arca is open for trading Monday through Friday and is closed on weekends
and the following holidays: New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday,
Memorial Day, Juneteenth National Independence Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
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SHORT DURATION U.S. GOVERNMENT ETF
SHAREHOLDER INFORMATION
Section
12(d)(1) of the Investment Company Act of 1940 (1940 Act) restricts investments by investment companies
in the securities of other investment companies. Registered investment companies are permitted to invest
in the Fund beyond the limits set forth in Section 12(d)(1), subject to certain terms and conditions
set forth in SEC rules or in other exemptive relief as applicable. In order for a registered investment
company to invest in shares of the Fund beyond the limitations of Section 12(d)(1), the registered investment
company must generally enter into an agreement with the Fund.
Book
Entry
Shares
of the Fund are held in book-entry form, which means that no share certificates are issued. The Depository
Trust Company (DTC) or its nominee is the record owner of all outstanding shares of the Fund and is recognized
as the owner of all shares for all purposes.
Investors owning shares of the Fund are beneficial owners
as shown on the records of DTC or its participants. DTC serves as the securities depository for shares
of the Fund. DTC participants include securities brokers and dealers, banks, trust companies, clearing
corporations and other institutions that directly or indirectly maintain a custodial relationship with
DTC. As a beneficial owner of shares, you are not entitled to receive physical delivery of stock certificates
or to have shares registered in your name, and you are not considered a registered owner of shares. Therefore,
to exercise any right as an owner of shares, you must rely upon the procedures of DTC and its participants.
These procedures are the same as those that apply to any other securities that you hold in book-entry
or “street name” form.
Share
Prices
The trading prices of the Fund’s shares in the secondary market generally differ
from the Fund’s daily NAV and are affected by market forces such as supply and demand, economic conditions
and other factors.
Calculating
NAV
The
NAV of the Fund is determined by deducting the Fund’s liabilities from the total assets of the portfolio.
The NAV per share is determined by dividing the total NAV of the Fund by the number of shares outstanding.
The
Fund calculates the NAV per share each business day as of 1 p.m. Pacific time which normally coincides
with the close of trading on the New York Stock Exchange (NYSE). The Fund does not calculate the NAV
on days the NYSE is closed for trading, which include New Year’s Day, Martin Luther King Jr. Day, President’s
Day, Good Friday, Memorial Day, Juneteenth National Independence Day, Independence Day, Labor Day, Thanksgiving
Day and Christmas Day. If the
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SHORT DURATION U.S. GOVERNMENT ETF
SHAREHOLDER INFORMATION
NYSE
has a scheduled early close or unscheduled early close, the Fund’s share price would still be determined
as of 1 p.m. Pacific time/4 p.m. Eastern time. The Fund’s NAV per share is readily available online
at franklintempleton.com.
When determining its NAV, the Fund values cash and receivables at their realizable
amounts, and records interest as accrued and dividends on the ex-dividend date. The Fund generally utilizes
two independent pricing services to assist in determining a current market value for each security. If
market quotations are readily available for portfolio securities listed on a securities exchange, the
Fund values those securities at the last quoted sale price or the official closing price of the day,
respectively, or, if there is no reported sale, within the range of the most recent quoted bid and ask
prices. The Fund values over-the-counter portfolio securities within the range of the most recent bid
and ask prices. If portfolio securities trade both in the over-the-counter market and on a stock exchange,
the Fund values them according to the broadest and most representative market. Prices received by the
Fund for securities may be based on institutional “round lot” sizes, but the Fund may hold smaller,
“odd lot” sizes. Odd lots may trade at lower prices than round lots.
Generally, trading in
corporate bonds, U.S. government securities and money market instruments is substantially completed each
day at various times before 1 p.m. Pacific time. The value of these securities used in computing the
NAV is determined as of such times. Occasionally, events affecting the values of these securities may
occur between the times at which they are determined and 1 p.m. Pacific time that will not be reflected
in the computation of the NAV. The Fund relies on third-party pricing vendors to provide evaluated prices
that reflect current fair market value at 1 p.m. Pacific time.
Fair Valuation – Individual
Securities
The Fund’s investment manager, in its role as valuation designee, has adopted
procedures, approved by the board of trustees, to determine the fair value of individual securities and
other assets for which market prices are not readily available (such as certain restricted or unlisted
securities and private placements) or which may not be reliably priced (such as in the case of trade
suspensions or halts, price movement limits set by certain foreign markets, and thinly traded or illiquid
securities). Some methods for valuing these securities may include: fundamental analysis (earnings multiple,
etc.), matrix pricing, discounts from market prices of similar securities, or discounts applied due to
the nature and duration of restrictions on the disposition of the securities. The board of trustees oversees
the application of fair value pricing procedures with respect to the Fund.
The application of fair
value pricing procedures represents a good faith determination based upon specifically applied procedures.
There can be no assurance that the Fund could obtain the fair value assigned to a security if it were
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SHORT DURATION U.S. GOVERNMENT ETF
SHAREHOLDER INFORMATION
able
to sell the security at approximately the time at which the Fund determines its NAV per share.
Security
Valuation – Pass-Through Securities, CMO, ABS, MBS
Mortgage pass-through securities (such as
Ginnie Mae, Fannie Mae and Freddie Mac), other mortgage-backed securities (MBS), collateralized mortgage
obligations (CMOs) and asset-backed securities (ABS) generally trade in the over-the-counter market rather
than on a securities exchange. The Fund may value these portfolio securities by utilizing quotations
from bond dealers, information with respect to bond and note transactions and may rely on independent
pricing services. The Fund's pricing services use valuation models or matrix pricing to determine current
value. In general, they use information with respect to comparable bond and note transactions, quotations
from bond dealers or by reference to other securities that are considered comparable in such characteristics
as rating, interest rate, maturity date, option adjusted spread models, prepayment projections, interest
rate spreads and yield curves. Matrix pricing is considered a form of fair value pricing.
Creations and Redemptions
Prior to trading in the secondary market,
shares of the Fund are “created” at NAV by market makers, large investors and institutions only in
block-size Creation Units of 25,000 shares or multiples thereof. An “Authorized Participant” is a
member or participant of a clearing agency registered with the SEC, which has a written agreement with
the Fund or one of its service providers (AP Agreement) that allows such member or participant to place
orders for the purchase and redemption of Creation Units. All orders for the creation or redemption of
Creation Units for the Fund must be placed by or through an Authorized Participant that has entered into
an AP Agreement with Distributors, an affiliate of Advisers.
A creation transaction, which is subject
to acceptance by Distributors or its agents, generally takes place when an Authorized Participant deposits
into the Fund a designated portfolio of securities, assets or other positions and/or an amount of cash
(which may include cash in lieu of certain securities, assets or other positions) in exchange for a specified
number of Creation Units. With respect to the Fund, these deposits are generally in cash.
Similarly, shares can
be redeemed only in Creation Units, generally for a designated portfolio of securities, assets or other
positions and/or cash (which may include cash in lieu of certain securities, assets or other positions).
With respect to the Fund, redemptions are generally in cash, although the Fund reserves the right to
meet redemptions on an in-kind basis. Except when aggregated in Creation Units, shares are not redeemable
by the Fund.
| | | |
38 | Prospectus | franklintempleton.com |
FRANKLIN
SHORT DURATION U.S. GOVERNMENT ETF
SHAREHOLDER INFORMATION
The
prices at which creations and redemptions occur are based on the next calculation of NAV after a creation
or redemption order is received in an acceptable form under the AP Agreement.
Creation and redemption
baskets may differ and the Fund will accept “custom baskets.” More information regarding custom baskets
is contained in the Fund’s SAI. As a result of any system failure or other interruption, creation or
redemption orders either may not be executed according to the Fund’s instructions or may not be executed
at all, or the Fund may not be able to place or change such orders. Information about the procedures
regarding creations and redemptions of Creation Units (including the cut-off times for receipt of creation
and redemption orders) is included in the Fund’s SAI.
Because new shares may be created and issued
on an ongoing basis, at any point during the life of the Fund a “distribution,” as such term is used
in the 1933 Act, may be occurring. 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 that could render them statutory underwriters and subject to the prospectus delivery and
liability provisions of the 1933 Act. Any determination of whether one is an underwriter must take into
account all the relevant facts and circumstances of each particular case.
Broker-dealers should
also note that dealers who are not “underwriters” but are participating in a distribution (as contrasted
to ordinary secondary transactions), and thus dealing with shares that are part of an “unsold allotment”
within the meaning of Section 4(a)(3)(C) of the 1933 Act, would be unable to take advantage of the prospectus
delivery exemption provided by Section 4(a)(3) of the 1933 Act. For delivery of prospectuses to exchange
members, the prospectus delivery mechanism of Rule 153 under the 1933 Act is available only with respect
to transactions on a national securities exchange.
Premium/Discount
Information
Information regarding how often the shares of the Fund traded on the Exchange
at a price above (at a premium) or below (at a discount) the NAV of the Fund for the most recently completed
calendar year, and the most recently completed calendar quarters since that year, can be found at https://www.franklintempleton.com/investor/investments-and-solutions/investment-options/etfs/.
Delivery of Shareholder Documents - Householding
You will receive the Fund's
financial reports every six months as well as an annual updated prospectus. Householding for the Fund
is available through certain broker-dealers. Householding is a process in which related shareholders
in a household will be sent only one copy of the financial reports and prospectus. You may contact
| | | |
franklintempleton.com | Prospectus | 39 |
FRANKLIN
SHORT DURATION U.S. GOVERNMENT ETF
SHAREHOLDER INFORMATION
your
broker-dealer to enroll in householding. Once enrolled, this process will continue indefinitely unless
you instruct your broker-dealer otherwise. If you prefer not to have these documents householded, please
contact your broker-dealer. At any time you may view current prospectuses and financial reports on our
website.
Distribution
Distributors
or its agents distribute Creation Units for the Fund on an agency basis. Distributors does not maintain
a secondary market in shares of the Fund. Distributors is an affiliate of Advisers.
Distribution
and service (12b-1) fees
The board of trustees has adopted a distribution plan, sometimes known as a Rule
12b-1 plan, that allows the Fund to pay distribution fees of up to 0.25% per year, to those who sell
and distribute Fund shares and provide other services to shareholders. However, the board of trustees
has determined not to authorize payment of a Rule 12b-1 plan fee at this time.
Because these fees are
paid out of the Fund’s assets on an ongoing basis, to the extent that a fee is authorized, over time
these fees will increase the cost of your investment and may cost you more than paying other types of
sales charges.
| | | |
40 | Prospectus | franklintempleton.com |
FRANKLIN
SHORT DURATION U.S. GOVERNMENT ETF
SHAREHOLDER INFORMATION
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| | | |
franklintempleton.com | Prospectus | 41 |
For More Information
Information on the Fund’s NAV, market price,
premiums and discounts, and bid/ask spreads can be found online at https://www.franklintempleton.com/investor/investments-and-solutions/investment-options/etfs/.
You
can learn more about the Fund in the following documents:
Annual/Semiannual Report to
Shareholders
Includes
a discussion of recent market conditions and Fund strategies that significantly affected Fund performance
during its last fiscal year, financial statements, detailed performance information, portfolio holdings
and, in the annual report only, the independent registered public accounting firm’s report.
Statement
of Additional Information (SAI)
Contains more information about the Fund, its investments and policies. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual
report or the SAI, please contact your investment representative or call us at the number below. You
also can view the current annual/semiannual report and the SAI online through franklintempleton.com.
Reports
and other information about the Fund are available on the EDGAR Database on the SEC's Internet site at
http://www.sec.gov, and copies of this information may be obtained, after paying a duplicating fee, by
electronic request at the following email address: publicinfo@sec.gov.
Individual investors should
contact their financial advisor or broker dealer representative for more information about Franklin Templeton
ETFs.
Financial
Professionals should call (800) DIAL BEN®/342-5236.
| | | | | |
| | | | | |
| One Franklin Parkway
San Mateo, CA 94403-1906
(800) DIAL BEN®/342-5236
franklintempleton.com | | | For
hearing impaired assistance, please contact us via a Relay Service. |
Investment Company Act file #811-22801
© 2023 Franklin
Templeton. All rights reserved. | | | | |
| | | | | | | | |
| | | STATEMENT OF ADDITIONAL INFORMATION | | |
| | | | |
| | | FRANKLIN SHORT DURATION U.S. GOVERNMENT ETF | |
| | | Franklin
ETF Trust | |
| | | August
1, 2023 | |
| | | | |
| | | 
| |
| | | | |
| | | | | |
| | | | | | |
| | |
Ticker: | Exchange: |
FTSD | NYSE Arca, Inc. |
This Statement of Additional
Information (SAI) is not a prospectus. It contains information in addition to the information in the
Fund’s prospectus. The Fund's prospectus, dated August 1, 2023, which we may amend from time to time,
contains the basic information you should know before investing in the Fund. You should read this SAI
together with the Fund's prospectus.
The
audited financial statements and Report of Independent Registered Public Accounting Firm in the Fund’s
Annual Report to shareholders, for the fiscal year ended March 31, 2023, are incorporated by reference
(are legally a part of this SAI).
For a free copy of the current prospectus
or annual report, contact your investment representative or call (800) DIAL BEN/342-5236.
Contents
Appendix A A-1
| | | |
ETFs, annuities, and other investment products: •
are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency of the U.S. government; • are not deposits or obligations of, or
guaranteed or endorsed by, any bank; and • are subject to investment risks, including
the possible loss of principal. |
| | | |
P.O. Box 997151 Sacramento, CA 95899-7151 | | |
Individual investors should contact their
financial advisor or broker dealer representative for more information about Franklin Templeton ETFs.
Financial Professionals should call (800) DIAL BEN®/342-5236. |
| | 1 | FTSD
SAI 08/23 |
General
Description of the Trust and the Fund The Fund is a diversified
series of Franklin ETF Trust (Trust), an open-end management investment company. The Trust was organized
as a Delaware statutory trust effective June 1, 2012 and is registered with the U.S. Securities and Exchange
Commission (SEC).
The Fund's investment manager is Franklin Advisers, Inc. (Advisers).
Advisers is a wholly owned subsidiary of Franklin Resources, Inc. (Resources), a publicly owned company
engaged in the financial services industry through its subsidiaries.
The
Fund offers and issues shares at their net asset value per share (NAV) only in aggregations of a specified
number of shares (Creation Unit). The Fund may offer Creation Units of its shares in exchange for a designated
portfolio of securities, assets or other positions (including any portion of such securities, assets
or other positions for which cash may be substituted) (Deposit Securities), together with the deposit
of a specified cash payment (Cash Component). Currently, the Fund generally offers Creation Units of
its shares solely for cash. Shares of the Fund are listed for trading on NYSE Arca, Inc. (Listing Exchange
or NYSE Arca), a national securities exchange. Shares of the Fund are traded in the secondary market
and elsewhere at market prices that may be at, above or below the Fund’s NAV. Shares of the Fund are
redeemable only in Creation Units. The Fund may redeem Creation Units of its shares in exchange for portfolio
securities, assets or other positions and a Cash Component. Currently, the Fund generally redeems Creation
Units of its shares solely for cash. Creation Units typically are a specified number of shares, generally
25,000 or multiples thereof.
The Trust reserves the right to permit or
require that creations and redemptions of shares are effected fully or partially in cash. Shares may
be issued in advance of receipt of Deposit Securities, subject to various conditions, including a requirement
to maintain with the Trust a cash deposit equal to at least 105% and up to 115%, which percentage the
Trust may change from time to time, of the market value of the omitted Deposit Securities. See the “Creation
and Redemption of Creation Units” section of this SAI. Transaction fees and other costs associated
with creations or redemptions that include a cash portion may be higher than the transaction fees and
other costs associated with in-kind creations or redemptions. In all cases, transaction fees will be
limited in accordance with the requirements of SEC rules and regulations applicable to management investment
companies offering redeemable securities.
Exchange Listing
and Trading A discussion of exchange listing and trading
matters associated with an investment in the Fund is contained in the “Shareholder Information” section
of the Fund’s prospectus. The discussion below supplements, and should be read in conjunction with,
that section of the prospectus.
Shares of the Fund are listed for trading,
and trade throughout the day, on the Listing Exchange and in other secondary markets. Shares of the Fund
may also be listed on certain non-U.S. exchanges. There can be no assurance that the requirements of
the Listing Exchange necessary to maintain the listing of shares of the Fund will continue to be met.
The Listing Exchange may, but is not required to, remove the shares of the Fund from listing if (i) following
the initial 12-month period beginning upon the commencement of trading of Fund shares, there are fewer
than 50 beneficial owners of shares of the Fund, (ii) the Fund is no longer eligible to operate in reliance
on Rule 6c-11 under the Investment Company Act of 1940 (1940 Act), (iii) the Fund fails to meet certain
continued listing standards of the Listing Exchange, or (iv) any other event shall occur or condition
shall exist that, in the opinion of the Listing Exchange, makes further dealings on the Listing Exchange
inadvisable. The Listing Exchange will also remove shares of the Fund from listing and trading upon termination
of the Fund.
As in the case of other publicly traded securities, when you
buy or sell shares through a broker, you will incur a brokerage commission determined by that broker.
The Trust reserves the right to adjust the share prices of the Fund in the future
to maintain convenient trading ranges for investors. Any adjustments would be accomplished through stock
splits or reverse stock splits, which would have no effect on the net assets of the Fund or an investor’s
equity interest in the Fund.
Goal, Strategies and Risks The following information provided with respect to the Fund is in addition to
that included in the Fund’s prospectus. The Fund is an actively managed exchange-traded fund (ETF)
that does not seek to replicate the performance of a specified index. In addition to the main types of
investments and strategies undertaken by the Fund as described in the prospectus, the Fund also may invest
in other types of instruments and engage in and pursue other investment strategies, which are described
in this SAI. Investments and investment strategies with respect to the Fund are discussed in greater
detail in the section below entitled "Glossary of Investments, Techniques, Strategies and Their Risks."
Generally, the policies and restrictions discussed in this SAI and in the prospectus
apply when the Fund makes an investment. In most cases, the Fund is not required to sell an investment
because circumstances change and the investment no longer meets one or more of the Fund's policies or
restrictions. If a percentage restriction or limitation is met at the time of investment, a later increase
or decrease
2
in the percentage due to a change in the value of portfolio investments will not
be considered a violation of the restriction or limitation, with the exception of the Fund's limitations
on borrowing and illiquid securities as described herein or unless otherwise noted herein.
Incidental
to the Fund’s other investment activities, including in connection with a bankruptcy, restructuring,
workout, or other extraordinary events concerning a particular investment the Fund owns, the Fund may
receive securities (including convertible securities, warrants and rights), real estate or other investments
that the Fund normally would not, or could not, buy. If this happens, the Fund may, although it is not
required to, sell such investments as soon as practicable while seeking to maximize the return to shareholders.
The Fund has adopted certain investment restrictions as fundamental and non-fundamental
policies. A fundamental policy may only be changed if the change is approved by (i) more than 50% of
the Fund's outstanding shares or (ii) 67% or more of the Fund's shares present at a shareholder meeting
if more than 50% of the Fund's outstanding shares are represented at the meeting in person or by proxy,
whichever is less. A non-fundamental policy may be changed without the approval of shareholders.
For more information about the restrictions of the 1940 Act on the Fund with respect
to borrowing and senior securities, see “Glossary of Investments, Techniques, Strategies and Their
Risks - Borrowing” below.
Fundamental Investment Policies
The
Fund has adopted the following restrictions as fundamental investment policies:
The
Fund may not:
1. Borrow money, except to the extent permitted by the 1940
Act, or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by
the SEC.
2. Act as an underwriter, except to the extent the Fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own shares.
3.
Make loans if, as a result, more than 33 1/3% of its total assets would be lent to other persons, including
other investment companies to the extent permitted by the 1940 Act or any rules, exemptions or interpretations
thereunder that may be adopted, granted or issued by the SEC. This limitation does not apply to (i) the
lending of portfolio securities, (ii) the purchase of debt securities, other debt instruments, loan participations
and/or engaging in direct corporate loans in accordance with its investment goals and policies, and (iii)
repurchase agreements to the extent the entry into a repurchase agreement is deemed to be a loan.
4. Purchase or sell real estate unless acquired as a result of ownership of securities
or other instruments and provided that this restriction does not prevent the Fund from (i) purchasing
or selling securities or instruments secured by real estate or interests therein, securities or instruments
representing interests in real estate or securities or instruments of issuers that invest, deal or otherwise
engage in transactions in real estate or interests therein, and (ii) making, purchasing or selling real
estate mortgage loans.
5. Purchase or sell commodities, except to the extent permitted
by the 1940 Act or any rules, exemptions or interpretations thereunder that may be adopted, granted or
issued by the SEC.
6. Issue senior securities, except to the extent permitted
by the 1940 Act or any rules, exemptions or interpretations thereunder that may be adopted, granted or
issued by the SEC.
7. Invest more than 25% of the Fund's net assets in securities
of issuers in any one industry (other than securities issued or guaranteed by the U.S. government or
any of its agencies or instrumentalities or securities of other investment companies, whether registered
or excluded from registration under Section 3(c) of the 1940 Act).
8. Purchase the securities
of any one issuer (other than the U.S. government or any of its agencies or instrumentalities or securities
of other investment companies, whether registered or excluded from registration under Section 3(c) of
the 1940 Act) if immediately after such investment (i) more than 5% of the value of the Fund’s total
assets would be invested in such issuer or (ii) more than 10% of the outstanding voting securities of
such issuer would be owned by the Fund, except that up to 25% of the value of the Fund’s total assets
may be invested without regard to such 5% and 10% limitations.
Non-Fundamental Investment
Policies
The
Fund’s investment goal is to seek to provide a high level of current income as is consistent with prudent
investing, while seeking preservation of capital. Under normal market conditions, the Fund invests at
least 80% of its net assets in securities issued or guaranteed by the U.S. government, its agencies,
or instrumentalities. The Fund’s investment goal and 80% policy are non-fundamental, which means that
they may be changed by the board of trustees without the approval of shareholders. Shareholders will
be given at least 60 days’ advance notice of any change to the Fund’s investment goal or 80% policy.
Net assets for purposes of the 80% policy include the amount of any borrowings for investment purposes.
Additional Strategies
In trying to achieve its investment goal,
the Fund may invest in the types of instruments or engage in the types of transactions identified below
and in the section “Glossary of
3
Investments, Techniques, Strategies and Their Risks,” which also describes the
risks associated with these investment policies. The Fund may or may not use all of these techniques
at any one time.
The Fund may invest, buy or engage in:
• zero coupon bonds
issued or guaranteed by the U.S. government, its agencies or instrumentalities
• up to 20% of its
net assets in securities not issued or guaranteed by the U.S. government, its agencies or instrumentalities,
including mortgage-backed securities
• securities of other investment companies, including Franklin
Templeton money market funds
• interest rate, bond, U.S. Treasury and fixed income index
futures contracts and options on these interest rate and bond futures
Glossary
of Investments, Techniques, Strategies and Their Risks
Certain words or phrases
may be used in descriptions of Fund investment policies and strategies to give investors a general sense
of the Fund's levels of investment. They are broadly identified with, but not limited to, the following
percentages of Fund total assets:
| | |
“small portion” | less
than 10% |
“portion” | 10% to 25% |
“significant” | 25%
to 50% |
“substantial” | 50% to 66% |
“primary” | 66%
to 80% |
“predominant” | 80% or more |
If
the Fund intends to limit particular investments or strategies to no more than specific percentages of
Fund assets, the prospectus or SAI will clearly identify such limitations. The percentages above are
not limitations unless specifically stated as such in the Fund's prospectus or elsewhere in this SAI.
The
Fund may invest in securities that are rated by various rating agencies such as Moody's Investors Service
(Moody's) and S&P® Global Ratings (S&P®),
as well as securities that are unrated.
The NAV and trading price
of your shares in the Fund will increase as the value of the investments owned by the Fund increases
and will decrease as the value of the Fund's investments decreases. In this way, you participate in any
change in the value of the investments owned by the Fund. In addition to the factors that affect the
value of any particular investment that the Fund owns, the NAV and trading price of the Fund's shares
may also change with movements in the investment markets as a whole.
The following is a description
of various types of securities, instruments and techniques that may be purchased and/or used by the Fund.
Bank
obligations Bank obligations include fixed, floating or variable rate certificates of deposit
(CDs), letters of credit, time and savings deposits, bank notes and bankers' acceptances. CDs are negotiable
certificates issued against funds deposited in a commercial bank for a definite period of time and earning
a specified return. Time deposits are non-negotiable deposits that are held in a banking institution
for a specified period of time at a stated interest rate. Savings deposits are deposits that do not have
a specified maturity and may be withdrawn by the depositor at any time. Bankers' acceptances are negotiable
drafts or bills of exchange normally drawn by an importer or exporter to pay for specific merchandise.
When a bank “accepts” a bankers' acceptance, the bank, in effect, unconditionally agrees to pay the
face value of the instrument upon maturity. The full amount of the Fund's investment in time and savings
deposits or CDs may not be guaranteed against losses resulting from the default of the commercial or
savings bank or other institution insured by the Federal Deposit Insurance Corporation (FDIC).
Bank obligations are exempt from registration with the SEC if issued by U.S. banks
or foreign branches of U.S. banks. As a result, the Fund will not receive the same investor protections
when investing in bank obligations as opposed to registered securities. Bank notes and other unsecured
bank obligations are not guaranteed by the FDIC, so the Fund will be exposed to the credit risk of the
bank or institution. In the event of liquidation, bank notes and unsecured bank obligations generally
rank behind time deposits, savings deposits and CDs, resulting in a greater potential for losses to the
Fund.
The Fund’s investments in bank obligations may be negatively impacted if adverse
economic conditions prevail in the banking industry (such as substantial losses on loans, increases in
non-performing assets and charge-offs and declines in total deposits). The activities of U.S. banks and
most foreign banks are subject to comprehensive regulations which, in the case of U.S. regulations, have
undergone substantial changes in the past decade. The enactment of new legislation or regulations, as
well as changes in interpretation and enforcement of current laws, may affect the manner of operations
and profitability of domestic and foreign banks. Significant developments in the U.S. banking industry
have included increased competition from other types of financial institutions, increased acquisition
activity and geographic expansion. Banks may be particularly susceptible to certain economic factors,
such as interest rate changes and adverse developments in the market for real estate. Fiscal and monetary
policy and general economic cycles can affect the availability and cost of funds, loan demand and asset
quality and thereby impact the earnings and financial conditions of banks.
4
Borrowing
The 1940 Act and the SEC's current rules, exemptions and interpretations thereunder, permit the Fund
to borrow up to one-third of the value of its total assets (including the amount borrowed, but less all
liabilities and indebtedness not represented by senior securities) from banks. The Fund is required to
maintain continuous asset coverage of at least 300% with respect to such borrowings and to reduce the
amount of its borrowings (within three days excluding Sundays and holidays) to restore such coverage
if it should decline to less than 300% due to market fluctuations or otherwise. In the event that the
Fund is required to reduce its borrowings, it may have to sell portfolio holdings, even if such sale
of the Fund's holdings would be disadvantageous from an investment standpoint.
If
the Fund makes additional investments while borrowings are outstanding, this may be considered a form
of leverage. Leveraging by means of borrowing may exaggerate the effect of any increase or decrease in
the value of portfolio securities on the Fund's net asset value, and money borrowed will be subject to
interest and other costs (which may include commitment fees and/or the cost of maintaining minimum average
balances), which may or may not exceed the income or gains received from the securities purchased with
borrowed funds.
In addition to borrowings that are subject to 300% asset coverage
and are considered by the SEC to be permitted “senior securities,” the Fund is also permitted under
the 1940 Act to borrow for temporary purposes in an amount not exceeding 5% of the value of its total
assets at the time when the loan is made. A loan will be presumed to be for temporary purposes if it
is repaid within 60 days and is not extended or renewed.
Callable
securities Callable securities give the issuer the right to redeem the security on a given
date or dates (known as the call dates) prior to maturity. In return, the call feature is factored into
the price of the debt security, and callable debt securities typically offer a higher yield than comparable
non-callable securities. Certain securities may be called only in whole (the entire security is redeemed),
while others may be called in part (a portion of the total face value is redeemed) and possibly from
time to time as determined by the issuer. There is no guarantee that the Fund will receive higher yields
or a call premium on an investment in callable securities.
The period of time between
the time of issue and the first call date, known as call protection, varies from security to security.
Call protection provides the investor holding the security with assurance that the security will not
be called before a specified date. As a result, securities with call protection generally cost more than
similar securities without call protection. Call protection will make a callable security more similar
to a long-term debt security, resulting in an associated increase in the callable security's interest
rate sensitivity.
Documentation for callable securities usually requires that
investors be notified of a call within a prescribed period of time. If a security is called, the Fund
will receive the principal amount and accrued interest, and may receive a small additional payment as
a call premium. Issuers are more likely to exercise call options in periods when interest rates are below
the rate at which the original security was issued, because the issuer can issue new securities with
lower interest payments. Callable securities are subject to the risks of other debt securities in general,
including prepayment risk, especially in falling interest rate environments.
Cybersecurity With
the increased use of technologies such as mobile devices and Web-based or “cloud” applications, and
the dependence on the Internet and computer systems to conduct business, the Fund is susceptible to operational,
information security and related risks. In general, cybersecurity incidents can result from deliberate
attacks or unintentional events (arising from external or internal sources) that may cause the Fund to
lose proprietary information, suffer data corruption, physical damage to a computer or network system
or lose operational capacity. Cybersecurity attacks include, but are not limited to, infection by malicious
software, such as malware or computer viruses or gaining unauthorized access to digital systems, networks
or devices that are used to service the Fund’s operations (e.g., through “hacking,” “phishing”
or malicious software coding) or other means for purposes of misappropriating assets or sensitive information,
corrupting data, or causing operational disruption. Cybersecurity attacks may also be carried out in
a manner that does not require gaining unauthorized access, such as causing denial-of-service attacks
on the Fund’s websites (i.e., efforts to make network services unavailable to intended users). Recently,
geopolitical tensions may have increased the scale and sophistication of deliberate cybersecurity attacks,
particularly those from nation-states or from entities with nation-state backing. In addition, authorized
persons could inadvertently or intentionally release confidential or proprietary information stored on
the Fund’s systems.
Cybersecurity incidents affecting the Fund’s
investment manager and other service providers to the Fund or its shareholders (including, but not limited
to, sub-advisors, accountants, custodians, sub-custodians, transfer agents, financial intermediaries,
authorized participants, index providers (as applicable) and listing exchanges) have the ability to cause
disruptions and impact business operations, potentially resulting in financial losses to both the Fund
and its shareholders, interference with the Fund’s ability to calculate its net asset value, impediments
to trading, the inability of Fund shareholders to transact business and the Fund to process transactions
(including fulfillment of purchases and redemptions), violations of applicable privacy and other laws
(including the release of private shareholder information) and attendant breach notification and credit
monitoring costs, regulatory fines, penalties, litigation costs, reputational
5
damage, reimbursement or other compensation costs, forensic investigation and
remediation costs, and/or additional compliance costs. Similar adverse consequences could result from
cybersecurity incidents affecting issuers of securities in which the Fund invests, counterparties with
which the Fund engages in transactions, governmental and other regulatory authorities, exchange and other
financial market operators, banks, brokers, dealers, insurance companies and other financial institutions
(including financial intermediaries and other service providers) and other parties. In addition, substantial
costs may be incurred in order to safeguard against and reduce the risk of any cybersecurity incidents
in the future. In addition to administrative, technological and procedural safeguards, the Fund’s investment
manager has established business continuity plans in the event of, and risk management systems to prevent
or reduce the impact of, such cybersecurity incidents. However, there are inherent limitations in such
plans and systems, including the possibility that certain risks have not been identified, as well as
the rapid development of new threats. Furthermore, the Fund cannot control the cybersecurity plans and
systems put in place by its service providers or any other third parties whose operations may affect
the Fund and its shareholders. The Fund and its shareholders could be negatively impacted as a result.
Because technology is frequently changing, new ways to carry out cyber attacks
are always developing. Therefore, there is a chance that some risks have not been identified or prepared
for, or that an attack may not be detected, which puts limitations on the Fund's ability to plan for
or respond to a cyber attack. Like other funds and business enterprises, the Fund, the investment manager
and their service providers are subject to the risk of cyber incidents occurring from time to time.
Debt
securities - general description In general, a debt security represents a loan of money to
the issuer by the purchaser of the security. A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's money over a certain time
period. A company typically meets its payment obligations associated with its outstanding debt securities
before it declares and pays any dividend to holders of its equity securities. Bonds, notes and commercial
paper are examples of debt securities and differ in the length of the issuer's principal repayment schedule,
with bonds carrying the longest repayment schedule and commercial paper the shortest:
Bonds.
A bond is a debt security in which investors lend money to an entity that borrows for a defined period
of time, usually a period of more than five years, at a specified interest rate.
Commercial paper.
Commercial paper is an unsecured, short-term loan to a corporation, typically for financing accounts
receivable and inventory with maturities of up to 270 days.
Debentures. A debenture is
an unsecured debt security backed only by the creditworthiness of the borrower, not by collateral.
Bills.
A bill is a short-term debt instrument, usually with a maturity of two years or less.
Notes.
A note is a debt security usually with a maturity of up to ten years.
For
purposes of the discussion in this SAI of the risks of investing in debt securities generally, loans
or other short-term instruments, which otherwise may not technically be considered securities, are included.
Debt securities are all generally subject to interest rate, credit, income and
prepayment risks and, like all investments, are subject to liquidity and market risks to varying degrees
depending upon the specific terms and type of security. The Fund's investment manager attempts to reduce
credit and market risk through diversification of the Fund's portfolio and ongoing credit analysis of
each issuer, as well as by monitoring economic developments, but there can be no assurance that it will
be successful at doing so.
Defaulted debt securities If the issuer of a debt security in the
Fund's portfolio defaults, the Fund may have unrealized losses on the security, which may lower the Fund's
net asset value. Defaulted securities tend to lose much of their value before they default. Thus, the
Fund's net asset value may be adversely affected before an issuer defaults. The Fund may incur additional
expenses if it tries to recover principal or interest payments on a defaulted security. Defaulted debt
securities often are illiquid. An investment in defaulted debt securities is generally considered speculative
and may expose the Fund to similar risks as an investment in high-yield debt.
The
Fund may not buy defaulted debt securities. However, the Fund is not required to sell a debt security
that has defaulted if the investment manager believes it is advantageous to continue holding the security.
Derivative
instruments Generally, derivatives are financial instruments whose value depends on or is
derived from, the value of one or more underlying assets, reference rates, or indices or other market
factors (a "reference instrument") and may relate to stocks, bonds, interest rates, credit, currencies,
commodities or related indices. Derivative instruments can provide an efficient means to gain or reduce
exposure to the value of a reference instrument without actually owning or selling the instrument. Some
common types of derivatives include options, futures, forwards and swaps.
6
Derivative instruments may be used for “hedging,” which means that they may
be used when the investment manager seeks to protect the Fund's investments from a decline in value resulting
from changes to interest rates, market prices, currency fluctuations or other market factors. Derivative
instruments may also be used for other purposes, including to seek to increase liquidity, provide efficient
portfolio management, broaden investment opportunities(including taking short or negative positions),
implement a tax or cash management strategy, gain exposure to a particular security or segment of the
market, modify the effective duration of the Fund's portfolio investments and/or enhance total return.
However derivative instruments are used, their successful use is not assured and will depend upon, among
other factors, the investment manager's ability to gauge relevant market movements.
Derivative
instruments may be used for purposes of direct hedging. Direct hedging means that the transaction must
be intended to reduce a specific risk exposure of a portfolio security or its denominated currency and
must also be directly related to such security or currency. The Fund’s use of derivative instruments
may be limited from time to time by policies adopted by the board of trustees or the Fund’s investment
manager.
Exclusion
of investment manager from commodity pool operator definition. With respect to
the Fund, the investment manager has claimed an exclusion from the definition of “commodity pool operator”
(CPO) under the Commodity Exchange Act (CEA) and the rules of the Commodity Futures Trading Commission
(CFTC) and, therefore, is not subject to CFTC registration or regulation as a CPO. In addition, with
respect to the Fund, the investment manager is relying upon a related exclusion from the definition of
“commodity trading advisor” (CTA) under the CEA and the rules of the CFTC.
The
terms of the CPO exclusion require the Fund, among other things, to adhere to certain limits on its investments
in “commodity interests.” Commodity interests include commodity futures, commodity options and swaps,
which in turn include non-deliverable currency forward contracts, as further described below. Because
the investment manager and the Fund intend to comply with the terms of the CPO exclusion, the Fund may,
in the future, need to adjust its investment strategies, consistent with its investment goal, to limit
its investments in these types of instruments. The Fund is not intended as a vehicle for trading in the
commodity futures, commodity options or swaps markets. The CFTC has neither reviewed nor approved the
investment manager’s reliance on these exclusions, or the Fund, its investment strategies or this SAI.
Generally, the exclusion from CPO regulation on which the investment manager relies
requires the Fund to meet one of the following tests for its commodity interest positions, other than
positions entered into for bona fide hedging purposes (as defined in the rules of the CFTC): either (1)
the aggregate initial margin and premiums required to establish the Fund’s positions in commodity interests
may not exceed 5% of the liquidation value of the Fund’s portfolio (after taking into account unrealized
profits and unrealized losses on any such positions); or (2) the aggregate net notional value of the
Fund’s commodity interest positions, determined at the time the most recent such position was established,
may not exceed 100% of the liquidation value of the Fund’s portfolio (after taking into account unrealized
profits and unrealized losses on any such positions). In addition to meeting one of these trading limitations,
the Fund may not be marketed as a commodity pool or otherwise as a vehicle for trading in the commodity
futures, commodity options or swaps markets. If, in the future, the Fund can no longer satisfy these
requirements, the investment manager would withdraw its notice claiming an exclusion from the definition
of a CPO, and the investment manager would be subject to registration and regulation as a CPO with respect
to the Fund, in accordance with CFTC rules that apply to CPOs of registered investment companies. Generally,
these rules allow for substituted compliance with CFTC disclosure and shareholder reporting requirements,
based on the investment manager’s compliance with comparable SEC requirements. However, as a result
of CFTC regulation with respect to the Fund, the Fund may incur additional compliance and other expenses.
Futures
contracts. Generally, a futures contract is a standard binding agreement to buy or sell
a specified quantity of an underlying reference instrument, such as a specific security, currency or
commodity, at a specified price at a specified later date. A “sale” of a futures contract means the
acquisition of a contractual obligation to deliver the underlying reference instrument called for by
the contract at a specified price on a specified date. A “purchase” of a futures contract means the
acquisition of a contractual obligation to acquire the underlying reference instrument called for by
the contract at a specified price on a specified date. The purchase or sale of a futures contract will
allow the Fund to increase or decrease its exposure to the underlying reference instrument without having
to buy the actual instrument.
The underlying reference instruments to which
futures contracts may relate include non-U.S. currencies, interest rates, stock and bond indices and
debt securities, including U.S. government debt obligations. In certain types of futures contracts, the
underlying reference instrument may be a swap agreement. In most cases the contractual obligation under
a futures contract may be offset, or “closed out,” before the settlement date so that the parties
do not have to make or take delivery. The closing out of a contractual obligation is usually accomplished
by buying or selling, as the case may be, an identical, offsetting futures contract. This transaction,
which is effected through a member of an exchange, cancels the obligation to make or take delivery of
the underlying instrument or asset. Although some futures contracts by their
7
terms require the actual delivery or acquisition of the underlying instrument
or asset, some require cash settlement.
Futures contracts may be bought and sold
on U.S. and non-U.S. exchanges. Futures contracts in the U.S. have been designed by exchanges that have
been designated “contract markets” by the CFTC and must be executed through a futures commission
merchant (FCM), which is a brokerage firm that is a member of the relevant contract market. Each exchange
guarantees performance of the contracts as between the clearing members of the exchange, thereby reducing
the risk of counterparty default. Futures contracts may also be entered into on certain exempt markets,
including exempt boards of trade and electronic trading facilities, available to certain market participants.
Because all transactions in the futures market are made, offset or fulfilled by an FCM through a clearinghouse
associated with the exchange on which the contracts are traded, the Fund will incur brokerage fees when
it buys or sells futures contracts.
The Fund generally buys and sells futures
contracts only on contract markets (including exchanges or boards of trade) where there appears to be
an active market for the futures contracts, but there is no assurance that an active market will exist
for any particular contract or at any particular time. An active market makes it more likely that futures
contracts will be liquid and bought and sold at competitive market prices. In addition, many of the futures
contracts available may be relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active market will develop or continue to exist.
When
the Fund enters into a futures contract, it must deliver to an account controlled by the FCM (that has
been selected by the Fund), an amount referred to as “initial margin” that is typically calculated
as an amount equal to the volatility in market value of a contract over a fixed period. Initial margin
requirements are determined by the respective exchanges on which the futures contracts are traded and
the FCM. Thereafter, a “variation margin” amount may be required to be paid by the Fund or received
by the Fund in accordance with margin controls set for such accounts, depending upon changes in the marked-to-market
value of the futures contract. The account is marked-to-market daily and the variation margin is monitored
by the Fund’s investment manager and custodian on a daily basis. When the futures contract is closed
out, if the Fund has a loss equal to or greater than the margin amount, the margin amount is paid to
the FCM along with any loss in excess of the margin amount. If the Fund has a loss of less than the margin
amount, the excess margin is returned to the Fund. If the Fund has a gain, the full margin amount and
the amount of the gain is paid to the Fund.
Some futures contracts provide for the delivery
of securities that are different than those that are specified in the contract. For a futures contract
for delivery of debt securities, on the settlement date of the contract, adjustments to the contract
can be made to recognize differences in value arising from the delivery of debt securities with a different
interest rate from that of the particular debt securities that were specified in the contract. In some
cases, securities called for by a futures contract may not have been issued when the contract was written.
Risks
of futures contracts. The Fund’s use of futures contracts is subject to the
risks associated with derivative instruments generally. In addition, a purchase or sale of a futures
contract may result in losses to the Fund in excess of the amount that the Fund delivered as initial
margin. Because of the relatively low margin deposits required, futures trading involves a high degree
of leverage; as a result, a relatively small price movement in a futures contract may result in immediate
and substantial loss, or gain, to the Fund. In addition, if the Fund has insufficient cash to meet daily
variation margin requirements or close out a futures position, it may have to sell securities from its
portfolio at a time when it may be disadvantageous to do so. Adverse market movements could cause the
Fund to experience substantial losses on an investment in a futures contract.
There
is a risk of loss by the Fund of the initial and variation margin deposits in the event of bankruptcy
of the FCM with which the Fund has an open position in a futures contract. The assets of the Fund may
not be fully protected in the event of the bankruptcy of the FCM or central counterparty because the
Fund might be limited to recovering only a pro rata share of all available funds and margin segregated
on behalf of an FCM’s customers. If the FCM does not provide accurate reporting, the Fund is also subject
to the risk that the FCM could use the Fund’s assets, which are held in an omnibus account with assets
belonging to the FCM’s other customers, to satisfy its own financial obligations or the payment obligations
of another customer to the central counterparty.
The Fund may not be able
to properly hedge or effect its strategy when a liquid market is unavailable for the futures contract
the Fund wishes to close, which may at times occur. In addition, when futures contracts are used for
hedging, there may be an imperfect correlation between movements in the prices of the underlying reference
instrument on which the futures contract is based and movements in the prices of the assets sought to
be hedged.
If the investment manager’s investment judgment about the
general direction of market prices or interest or currency exchange rates is incorrect, the Fund’s
overall performance will be poorer than if it had not entered into a futures contract. For example, if
the Fund has purchased futures to hedge against the possibility of an increase in interest rates that
would adversely affect the price of bonds held in its portfolio and interest rates instead decrease,
the Fund will lose part or all of the benefit of the increased value of the bonds which it has hedged.
This is because its losses in its futures positions
8
will offset some or all of its gains from the increased value of the bonds.
The difference (called the “spread”) between prices in the cash market for
the purchase and sale of the underlying reference instrument and the prices in the futures market is
subject to fluctuations and distortions due to differences in the nature of those two markets. First,
all participants in the futures market are subject to initial deposit and variation margin requirements.
Rather than meeting additional variation margin requirements, investors may close futures contracts through
offsetting transactions that could distort the normal pricing spread between the cash and futures markets.
Second, the liquidity of the futures markets depends on participants entering into offsetting transactions
rather than making or taking delivery of the underlying instrument. To the extent participants decide
to make or take delivery, liquidity in the futures market could be reduced, resulting in pricing distortion.
Third, from the point of view of speculators, the margin deposit requirements that apply in the futures
market are less onerous than similar margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may cause temporary price distortions. When such distortions
occur, a correct forecast of general trends in the price of an underlying reference instrument by the
investment manager may still not necessarily result in a profitable transaction.
Futures
contracts that are traded on non-U.S. exchanges may not be as liquid as those purchased on CFTC-designated
contract markets. In addition, non-U.S. futures contracts may be subject to varied regulatory oversight.
The price of any non-U.S. futures contract and, therefore, the potential profit and loss thereon, may
be affected by any change in the non-U.S. exchange rate between the time a particular order is placed
and the time it is liquidated, offset or exercised.
The CFTC and the various
exchanges have established limits referred to as “speculative position limits” on the maximum net
long or net short position that any person, such as the Fund, may hold or control in a particular futures
contract. Trading limits are also imposed on the maximum number of contracts that any person may trade
on a particular trading day. An exchange may order the liquidation of positions found to be in violation
of these limits and it may impose other sanctions or restrictions. The regulation of futures, as well
as other derivatives, is a rapidly changing area of law.
Futures exchanges may
also limit the amount of fluctuation permitted in certain futures contract prices during a single trading
day. This 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. Once the daily limit has been reached in a futures
contract subject to the limit, no more trades may be made on that day at a price beyond that limit. The
daily limit governs only price movements during a particular trading day and does not limit potential
losses because the limit may prevent the liquidation of unfavorable positions. For example, futures prices
have occasionally moved to the daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
Options on futures contracts. Options on futures contracts trade on
the same contract markets as the underlying futures contract. When the Fund buys an option, it pays a
premium for the right, but does not have the obligation, to purchase (call) or sell (put) a futures contract
at a set price (called the exercise price). The purchase of a call or put option on a futures contract,
whereby the Fund has the right to purchase or sell, respectively, a particular futures contract, is similar
in some respects to the purchase of a call or put option on an individual security or currency. Depending
on the premium paid for the option compared to either the price of the futures contract upon which it
is based or the price of the underlying reference instrument, the option may be less risky than direct
ownership of the futures contract or the underlying reference instrument. For example, the Fund could
purchase a call option on a long futures contract when seeking to hedge against an increase in the market
value of the underlying reference instrument, such as appreciation in the value of a non-U.S. currency
against the U.S. dollar.
The seller (writer) of an option becomes
contractually obligated to take the opposite futures position if the buyer of the option exercises its
rights to the futures position specified in the option. In return for the premium paid by the buyer,
the seller assumes the risk of taking a possibly adverse futures position. In addition, the seller will
be required to post and maintain initial and variation margin with the FCM. One goal of selling (writing)
options on futures may be to receive the premium paid by the option buyer.
For
more general information about the mechanics of purchasing and writing options, see "Options" below.
Risks
of options on futures contracts. The Fund’s use of options on futures contracts is subject
to the risks related to derivative instruments generally. In addition, the amount of risk the Fund assumes
when it purchases an option on a futures contract is the premium paid for the option plus related transaction
costs. The purchase of an option also entails the risk that changes in the value of the underlying futures
contract will not be fully reflected in the value of the option purchased. The seller (writer) of an
option on a futures contract is subject to the risk of having to take a possibly adverse futures position
if the purchaser of the option exercises its rights. If the seller were required to take such a position,
it could bear substantial losses. An option writer has potentially unlimited economic risk because its
potential loss, except to the extent offset by the premium received, is equal to the amount the option
is “in-the-money” at the expiration date. A call option is in-the-money if the value of the
9
underlying futures contract exceeds the exercise price of the option. A put option
is in-the-money if the exercise price of the option exceeds the value of the underlying futures contract.
Options.
An option is a contract that gives the purchaser of the option, in return for the premium paid, the
right to buy an underlying reference instrument, such as a specified security, currency, index, or other
instrument, from the writer of the option (in the case of a call option), or to sell a specified reference
instrument to the writer of the option (in the case of a put option) at a designated price during the
term of the option. The premium paid by the buyer of an option will reflect, among other things, the
relationship of the exercise price to the market price and the volatility of the underlying reference
instrument, the remaining term of the option, supply, demand, interest rates and/or currency exchange
rates. An American style put or call option may be exercised at any time during the option period while
a European style put or call option may be exercised only upon expiration or during a fixed period prior
thereto. Put and call options are traded on national securities exchanges and in the OTC market.
Options traded on national securities exchanges are within the jurisdiction of
the SEC or other appropriate national securities regulator, as are securities traded on such exchanges.
As a result, many of the protections provided to traders on organized exchanges will be available with
respect to such transactions. In particular, all option positions entered into on a national securities
exchange in the United States are cleared and guaranteed by the Options Clearing Corporation, thereby
reducing the risk of counterparty default. Furthermore, a liquid secondary market in options traded on
a national securities exchange may be more readily available than in the OTC market, potentially permitting
the Fund to liquidate open positions at a profit prior to exercise or expiration, or to limit losses
in the event of adverse market movements. There is no assurance, however, that higher than anticipated
trading activity or other unforeseen events might not temporarily render the capabilities of the Options
Clearing Corporation inadequate, and thereby result in the exchange instituting special procedures which
may interfere with the timely execution of the Fund’s orders to close out open options positions.
Purchasing
call and put options. As the buyer of a call option, the Fund has a right to buy
the underlying reference instrument (e.g., a currency or security) at the exercise price at any time
during the option period (for American style options). The Fund may enter into closing sale transactions
with respect to call options, exercise them, or permit them to expire. For example, the Fund may buy
call options on underlying reference instruments that it intends to buy with the goal of limiting the
risk of a substantial increase in their market price before the purchase is effected. Unless the price
of the underlying reference instrument changes sufficiently, a call option purchased by the Fund may
expire without any value to the Fund, in which case the Fund would experience a loss to the extent of
the premium paid for the option plus related transaction costs.
As
the buyer of a put option, the Fund has the right to sell the underlying reference instrument at the
exercise price at any time during the option period (for American style options). Like a call option,
the Fund may enter into closing sale transactions with respect to put options, exercise them or permit
them to expire. The Fund may buy a put option on an underlying reference instrument owned by the Fund
(a protective put) as a hedging technique in an attempt to protect against an anticipated decline in
the market value of the underlying reference instrument. Such hedge protection is provided only during
the life of the put option when the Fund, as the buyer of the put option, is able to sell the underlying
reference instrument at the put exercise price, regardless of any decline in the underlying instrument’s
market price. The Fund may also seek to offset a decline in the value of the underlying reference instrument
through appreciation in the value of the put option. A put option may also be purchased with the intent
of protecting unrealized appreciation of an instrument when the investment manager deems it desirable
to continue to hold the instrument because of tax or other considerations. The premium paid for the put
option and any transaction costs would reduce any short-term capital gain that may be available for distribution
when the instrument is eventually sold. Buying put options at a time when the buyer does not own the
underlying reference instrument allows the buyer to benefit from a decline in the market price of the
underlying reference instrument, which generally increases the value of the put option.
If
a put option was not terminated in a closing sale transaction when it has remaining value, and if the
market price of the underlying reference instrument remains equal to or greater than the exercise price
during the life of the put option, the buyer would not make any gain upon exercise of the option and
would experience a loss to the extent of the premium paid for the option plus related transaction costs.
In order for the purchase of a put option to be profitable, the market price of the underlying reference
instrument must decline sufficiently below the exercise price to cover the premium and transaction costs.
Writing
call and put options. Writing options may permit the writer to generate additional
income in the form of the premium received for writing the option. The writer of an option may have no
control over when the underlying reference instruments must be sold (in the case of a call option) or
purchased (in the case of a put option) because the writer may be notified of exercise at any time prior
to the expiration of the option (for American style options). In general, though, options are infrequently
exercised prior to expiration. Whether or not an option expires unexercised, the writer retains the amount
of the premium. Writing “covered” call options means that the writer owns the underlying
10
reference instrument that is subject to the call option. Call options may also
be written on reference instruments that the writer does not own.
As
the writer of a covered call option, the Fund gives up the potential for capital appreciation above the
exercise price of the option should the underlying reference instrument rise in value. If the value of
the underlying reference instrument rises above the exercise price of the call option, the reference
instrument will likely be “called away,” requiring the Fund to sell the underlying instrument at
the exercise price. In that case, the Fund will sell the underlying reference instrument to the option
buyer for less than its market value, and the Fund will experience a loss (which will be offset by the
premium received by the Fund as the writer of such option). If a call option expires unexercised, the
Fund will realize a gain in the amount of the premium received. If the market price of the underlying
reference instrument decreases, the call option will not be exercised and the Fund will be able to use
the amount of the premium received to hedge against the loss in value of the underlying reference instrument.
The exercise price of a call option will be chosen based upon the expected price movement of the underlying
reference instrument. The exercise price of a call option may be below, equal to (at-the-money), or above
the current value of the underlying reference instrument at the time the option is written.
As the writer of a put option, the Fund has a risk of loss should the underlying
reference instrument decline in value. If the value of the underlying reference instrument declines below
the exercise price of the put option and the put option is exercised, the Fund, as the writer of the
put option, will be required to buy the instrument at the exercise price, which will exceed the market
value of the underlying reference instrument at that time. The Fund will incur a loss to the extent that
the current market value of the underlying reference instrument is less than the exercise price of the
put option. However, the loss will be offset in part by the premium received from the buyer of the put.
If a put option written by the Fund expires unexercised, the Fund will realize a gain in the amount of
the premium received.
Closing out options (exchange-traded options). If the writer
of an option wants to terminate its obligation, the writer may effect a “closing purchase transaction”
by buying an option of the same series as the option previously written. The effect of the purchase is
that the clearing corporation will cancel the option writer’s position. However, a writer may not effect
a closing purchase transaction after being notified of the exercise of an option. Likewise, the buyer
of an option may recover all or a portion of the premium that it paid by effecting a “closing sale
transaction” by selling an option of the same series as the option previously purchased and receiving
a premium on the sale. There is no guarantee that either a closing purchase or a closing sale transaction
may be made at a time desired by the Fund. Closing transactions allow the Fund to terminate its positions
in written and purchased options. The Fund will realize a profit from a closing transaction if the price
of the transaction is less than the premium received from writing the original option (in the case of
written options) or is more than the premium paid by the Fund to buy the option (in the case of purchased
options). For example, increases in the market price of a call option sold by the Fund will generally
reflect increases in the market price of the underlying reference instrument. As a result, any loss resulting
from a closing transaction on a written call option is likely to be offset in whole or in part by appreciation
of the underlying instrument owned by the Fund.
Over-the-counter (OTC) options. Like
exchange-traded options, OTC options give the holder the right to buy from the writer, in the case of
OTC call options, or sell to the writer, in the case of OTC put options, an underlying reference instrument
at a stated exercise price. OTC options, however, differ from exchange-traded options in certain material
respects.
OTC options are arranged directly with dealers and not with
a clearing corporation or exchange. Consequently, there is a risk of non-performance by the dealer, including
because of the dealer’s bankruptcy or insolvency. While the Fund uses only counterparties, such as
dealers, that meet its credit quality standards, in unusual or extreme market conditions, a counterparty’s
creditworthiness and ability to perform may deteriorate rapidly, and the availability of suitable replacement
counterparties may become limited. Because there is no exchange, pricing is typically done based on information
from market makers or other dealers. OTC options are available for a greater variety of underlying reference
instruments and in a wider range of expiration dates and exercise prices than exchange-traded options.
There can be no assurance that a continuous liquid secondary market will exist
for any particular OTC option at any specific time. The Fund may be able to realize the value of an OTC
option it has purchased only by exercising it or entering into a closing sale transaction with the dealer
that issued it. When the Fund writes an OTC option, it generally can close out that option prior to its
expiration only by entering into a closing purchase transaction with the dealer with which the Fund originally
wrote the option. The Fund may suffer a loss if it is not able to exercise (in the case of a purchased
option) or enter into a closing sale transaction on a timely basis.
Risks of options.
The Fund’s options investments involve certain risks, including general risks
related to derivative instruments. There can be no assurance that a liquid secondary market on an exchange
will exist for any particular option, or at any particular time, and the Fund may have difficulty effecting
closing transactions in particular options. Therefore, the Fund would have to exercise the options it
purchased in order to realize any profit, thus taking or making delivery of the underlying reference
instrument when not
11
desired. The Fund could then incur transaction costs upon the sale of the underlying
reference instruments. Similarly, when the Fund cannot effect a closing transaction with respect to a
put option it wrote, and the buyer exercises, the Fund would be required to take delivery and would incur
transaction costs upon the sale of the underlying reference instruments purchased. If the Fund, as a
covered call option writer, is unable to effect a closing purchase transaction in a secondary market,
it will not be able to sell the underlying reference instrument until the option expires, or it delivers
the underlying instrument upon exercise. When trading options on non-U.S. exchanges or in the OTC market,
many of the protections afforded to exchange participants will not be available. For example, there may
be no daily price fluctuation limits, and adverse market movements could therefore continue to an unlimited
extent over an indefinite period of time.
The effectiveness of an
options strategy for hedging depends on the degree to which price movements in the underlying reference
instruments correlate with price movements in the relevant portion of the Fund’s portfolio that is
being hedged. In addition, the Fund bears the risk that the prices of its portfolio investments will
not move in the same amount as the option it has purchased or sold for hedging purposes, or that there
may be a negative correlation that would result in a loss on both the investments and the option. If
the investment manager is not successful in using options in managing the Fund’s investments, the Fund’s
performance will be worse than if the investment manager did not employ such strategies.
Developing government
regulation of derivatives. The regulation of cleared and uncleared swaps, as well as
other derivatives, is a rapidly changing area of law and is subject to modification by government and
judicial action. In addition, the SEC, CFTC and the exchanges are authorized to take extraordinary actions
in the event of a market emergency, including, for example, the implementation or reduction of speculative
position limits, the implementation of higher margin requirements, the establishment of daily price limits
and the suspension of trading.
It is not possible to predict fully the effects
of current or future regulation. However, it is possible that developments in government regulation of
various types of derivative instruments, such as speculative position limits on certain types of derivatives,
or limits or restrictions on the counterparties with which the Fund engages in derivative transactions,
may limit or prevent the Fund from using or limit the Fund’s use of these instruments effectively as
a part of its investment strategy, and could adversely affect the Fund’s ability to achieve its investment
goal(s). The investment manager will continue to monitor developments in the area, particularly to the
extent regulatory changes affect the Fund’s ability to enter into desired swap agreements. New requirements,
even if not directly applicable to the Fund, may increase the cost of the Fund’s investments and cost
of doing business.
Illiquid securities Generally, an “illiquid security”
or “illiquid investment” is any investment that the Fund reasonably expects cannot be sold or disposed
of in current market conditions in seven calendar days or less without the sale or disposition significantly
changing the market value of the investment. Illiquid investments generally include investments for which
no market exists or which are legally restricted as to their transfer (such as those issued pursuant
to an exemption from the registration requirements of the federal securities laws). Restricted securities
are generally sold in privately negotiated transactions, pursuant to an exemption from registration under
the Securities Act of 1933, as amended (1933 Act). If registration of a security previously acquired
in a private transaction is required, the Fund, as the holder of the security, may be obligated to pay
all or part of the registration expense and a considerable period may elapse between the time it decides
to seek registration and the time it will be permitted to sell a security under an effective registration
statement. If, during such a period, adverse market conditions were to develop, the Fund might obtain
a less favorable price than prevailed when it decided to seek registration of the security. To the extent
it is determined that there is a liquid institutional or other market for certain restricted securities,
the Fund would consider them to be liquid securities. An example is a restricted security that may be
freely transferred among qualified institutional buyers pursuant to Rule 144A under the 1933 Act, and
for which a liquid institutional market has developed. Rule 144A securities may be subject, however,
to a greater possibility of becoming illiquid than securities that have been registered with the SEC.
The following factors may be taken into account in determining whether a restricted
security is properly considered a liquid security: (i) the frequency of trades and quotes for the security;
(ii) the number of dealers willing to buy or sell the security and the number of other potential buyers;
(iii) any dealer undertakings to make a market in the security; and (iv) the nature of the security and
of the marketplace trades (e.g., any demand, put or tender features, the method of soliciting offers,
the mechanics and other requirements for transfer, and the ability to assign or offset the rights and
obligations of the security). The nature of the security and its trading includes the time needed to
sell the security, the method of soliciting offers to purchase or sell the security, and the mechanics
of transferring the security including the role of parties such as foreign or U.S. custodians, subcustodians,
currency exchange brokers, and depositories.
The sale of illiquid investments often requires
more time and results in higher brokerage charges or dealer discounts and other selling expenses than
the sale of investments eligible for trading on national securities exchanges or in the over-the-counter
(OTC) markets. Illiquid investments often sell at a
12
price lower than similar investments that are not subject to restrictions on resale.
The risk to the Fund in holding illiquid investments is that they may be more
difficult to sell if the Fund wants to dispose of the investment in response to adverse developments
or in order to raise money for redemptions or other investment opportunities. Illiquid trading conditions
may also make it more difficult for the Fund to realize an investment's fair value.
The
Fund may also be unable to achieve its desired level of exposure to a certain investment, issuer, or
sector due to overall limitations on its ability to invest in illiquid investments and the difficulty
in purchasing such investments.
If illiquid investments exceed 15% of the
Fund’s net assets after the time of purchase, the Fund will take steps to reduce its holdings of illiquid
investments to or below 15% of its net assets within a reasonable period of time, and will notify the
Trust’s board of trustees and make the required filings with the SEC in accordance with Rule 22e-4
under the 1940 Act. Because illiquid investments may not be readily marketable, the portfolio managers
and/or investment personnel may not be able to dispose of them in a timely manner. As a result, the Fund
may be forced to hold illiquid investments while their price depreciates. Depreciation in the price of
illiquid investments may cause the net asset value of a Fund to decline.
Inflation-indexed
securities Inflation-indexed securities are debt securities, the value of which is periodically
adjusted to reflect a measure of inflation. Two structures are common for inflation-indexed securities.
The U.S. Treasury and some other issuers use a structure that reflects inflation as it accrues by increasing
the U.S. dollar amount of the principal originally invested. Other issuers pay out the inflation as it
accrues as part of a semiannual coupon. Any amount accrued on an inflation-indexed security, regardless
whether paid out as a coupon or added to the principal, is generally considered taxable income. Where
the accrued amount is added to the principal and no cash income is received until maturity, the Fund
may be required to sell portfolio securities that it would otherwise continue to hold in order to obtain
sufficient cash to make distributions to shareholders required for U.S. tax purposes.
An
investor could experience a loss of principal and income on investments in inflation-indexed securities.
In a deflationary environment, the value of the principal invested in an inflation-indexed security will
be adjusted downward, just as it would be adjusted upward in an inflationary environment. Because the
interest on an inflation-indexed security is calculated with respect to the amount of principal which
is smaller following a deflationary period, interest payments will also be reduced, just as they would
be increased following an inflationary period.
In the case of U.S. Treasury
inflation-indexed securities, the return of at least the original U.S. dollar amount of principal invested
is guaranteed, so an investor receives the greater of its original principal or the inflation-adjusted
principal. If the return of principal is not guaranteed, the investor may receive less than the amount
it originally invested in an inflation-indexed security following a period of deflation. Any guarantee
of principal provided by a party other than the U.S. government will increase the Fund's exposure to
the credit risk of that party.
The value of inflation-indexed securities
is generally expected to change in response to changes in "real" interest rates. The real interest rate
is the rate of interest that would be paid in the absence of inflation. The actual rate of interest,
referred to as the nominal interest rate, is equal to the real interest rate plus the rate of inflation.
If inflation rises at a faster rate than nominal interest rates, real interest rates might decline, leading
to an increase in value of inflation-indexed securities. In contrast, if nominal interest rates increase
at a faster rate than inflation, real interest rates might rise, leading to a decrease in value of inflation-indexed
securities.
While inflation-indexed securities are designed to provide
some protection from long-term inflationary trends, short-term increases in inflation may lead to a decline
in their value. For example, if interest rates rise due to reasons other than inflation, investors in
these securities may not be protected to the extent that the increase is not reflected in the security's
inflation measure. The reasons that interest rates may rise without a corresponding increase in inflation
include changes in currency exchange rates and temporary shortages of credit or liquidity. When interest
rates rise without a corresponding increase in inflation, the Fund's investment in inflation-indexed
securities will forego the additional return that could have been earned on a floating rate debt security.
The periodic adjustment of U.S. inflation-protected debt securities is tied to
the Consumer Price Index for Urban Consumers (CPI-U), which is calculated monthly by the U.S. Bureau
of Labor Statistics. The CPI-U is an index of changes in the cost of living, made up of components such
as housing, food, transportation and energy. Inflation-protected debt securities issued by a foreign
government are generally adjusted to reflect a comparable consumer inflation index, calculated by that
government. There can be no assurance that the CPI-U or any foreign inflation index will accurately measure
the actual rate of inflation in the prices of goods and services. Moreover, there can be no assurance
that the rate of inflation in a foreign country will be correlated to the rate of inflation in the United
States. To the extent that the Fund invests in inflation-indexed securities as a hedge against inflation,
an imperfect hedge will result if the cost of living (as represented in the CPI-U) has a different inflation
rate than the Fund's interests in industries and sectors minimally affected by changes in the cost of
living.
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Interfund
lending program Pursuant to an exemptive order granted by the SEC (Lending Order), the Fund
has the ability to lend money to, and borrow money from, other Franklin Templeton funds for temporary
purposes (Interfund Lending Program) pursuant to a master interfund lending agreement (Interfund Loan).
Lending and borrowing through the Interfund Lending Program provides the borrowing fund with a lower
interest rate than it would have paid if it borrowed money from a bank, and provides the lending fund
with an alternative short-term investment with a higher rate of return than other available short-term
investments. All Interfund Loans would consist only of uninvested cash reserves that the lending fund
otherwise would invest in short-term repurchase agreements or other short-term instruments. The Fund
may only participate in the Interfund Lending Program to the extent permitted by its investment goal(s),
policies and restrictions and only subject to meeting the conditions of the Lending Order.
The limitations of the Interfund Lending Program are described below and these
and the other conditions of the Lending Order permitting interfund lending are designed to minimize the
risks associated with interfund lending for both the lending and borrowing fund. However, no borrowing
or lending activity is without risk. When a fund borrows money from another fund under the Interfund
Lending Program, there is a risk that the Interfund Loan could be called on one business day’s notice,
in which case the borrowing fund may have to utilize a line of credit, which would likely involve higher
rates, seek an Interfund Loan from another fund, or liquidate portfolio securities if no lending sources
are available to meet its liquidity needs. Interfund Loans are subject to the risk that the borrowing
fund could be unable to repay the loan when due, and a delay in repayment could result in a lost opportunity
by the lending fund or force the lending fund to borrow or liquidate securities to meet its liquidity
needs.
Under the Interfund Lending Program, the Fund may borrow on an unsecured basis
through the Interfund Lending Program if its outstanding borrowings from all sources immediately after
the borrowing total 10% or less of its total assets, provided that if the Fund has a secured loan outstanding
from any other lender, including but not limited to another fund, the Fund’s Interfund Loan will be
secured on at least an equal priority basis with at least an equivalent percentage of collateral to loan
value as any outstanding loan that requires collateral. If the Fund’s total outstanding borrowings
immediately after an Interfund Loan exceed 10% of its total assets, the Fund may borrow through the Interfund
Lending Program on a secured basis only. The Fund may not borrow under the Interfund Lending Program
or from any other source if its total outstanding borrowings immediately after such borrowing would be
more than 33 1/3% of its total assets or any lower threshold provided for by the Fund’s investment
restrictions.
If the Fund has outstanding bank borrowings, any Interfund
Loans to the Fund would: (a) be at an interest rate equal to or lower than that of any outstanding bank
loan, (b) be secured at least on an equal priority basis with at least an equivalent percentage of collateral
to loan value as any outstanding bank loan that requires collateral, (c) have a maturity no longer than
any outstanding bank loan (and in any event not over seven days), and (d) provide that, if an event of
default by the Fund occurs under any agreement evidencing an outstanding bank loan to the Fund, that
event of default will automatically (without need for action or notice by the lending Fund) constitute
an immediate event of default under the interfund lending agreement, entitling the lending fund to call
the Interfund Loan (and exercise all rights with respect to any collateral), and that such call would
be made if the lending bank exercises its right to call its loan under its agreement with the borrowing
fund.
In addition, no fund may lend to another fund through the Interfund Lending Program
if the loan would cause the lending fund’s aggregate outstanding loans through the Interfund Lending
Program to exceed 15% of its current net assets at the time of the loan. A fund’s Interfund Loans to
any one fund shall not exceed 5% of the lending fund’s net assets. The duration of Interfund Loans
will be limited to the time required to obtain cash sufficient to repay such Interfund Loan, either through
the sale of portfolio securities or the net sales of the fund’s shares, but in no event more than seven
days, and for purposes of this condition, loans effected within seven days of each other will be treated
as separate loan transactions. Each Interfund Loan may be called on one business day’s notice by a
lending fund and may be repaid on any day by a borrowing fund.
Investment company
securities The Fund may invest in other investment companies to the extent permitted by
the 1940 Act, SEC rules thereunder and exemptions thereto. With respect to funds in which the Fund may
invest, Section 12(d)(1)(A) of the 1940 Act requires that, as determined immediately after a purchase
is made, (i) not more than 5% of the value of the Fund’s total assets will be invested in the securities
of any one investment company, (ii) not more than 10% of the value of the Fund’s total assets will
be invested in securities of investment companies as a group, and (iii) not more than 3% of the outstanding
voting stock of any one investment company will be owned by the Fund. The Fund will limit its investments
in funds in accordance with the Section 12(d)(1)(A) limitations set forth above, except to the extent
that any rules, regulations or no-action or exemptive relief under the 1940 Act permits the Fund’s
investments to exceed such limits. For example, Rule 12d1-4 permits the Fund to invest in other investment
companies beyond the statutory limits, subject to certain conditions. Among other conditions, the Rule
prohibits a fund from acquiring control of another investment company (other than an investment company
in the same group of investment companies),
14
including by acquiring more than 25% of its voting securities. In addition, the
Rule imposes certain voting requirements when a fund's ownership of another investment company exceeds
particular thresholds. If shares of a fund are acquired by another investment company, the “acquired”
fund may not purchase or otherwise acquire the securities of an investment company or private fund if
immediately after such purchase or acquisition, the securities of investment companies and private funds
owned by that acquired fund have an aggregate value in excess of 10% of the value of the total assets
of the fund, subject to certain exceptions. These restrictions may limit the Fund's ability to invest
in other investment companies to the extent desired. In addition, other unaffiliated investment companies
may impose other investment limitations or redemption restrictions which may also limit the Fund's flexibility
with respect to making investments in those unaffiliated investment companies. To the extent that the
Fund invests in another investment company, because other investment companies pay advisory, administrative
and service fees that are borne indirectly by investors, such as the Fund, there may be duplication of
investment management and other fees. The Fund may also invest its cash balances in affiliated money
market funds to the extent permitted by its investment policies and rules and exemptions granted under
the 1940 Act.
The Fund will not acquire shares of other affiliated or unaffiliated
open-end mutual funds, ETFs, or unit investment trusts in reliance on paragraph (F) or (G) of Section
12(d)(1) of the 1940 Act.
Investment grade debt securities Investment grade debt securities are
securities that are rated at the time of purchase in the top four ratings categories by one or more independent
rating organizations such as S&P (rated BBB- or better) or Moody’s (rated Baa3 or higher) or, if
unrated, are determined to be of comparable quality by the Fund’s investment manager. Generally, a
higher rating indicates the rating agency’s opinion that there is less risk of default of obligations
thereunder including timely repayment of principal and payment of interest. Debt securities in the lowest
investment grade category may have speculative characteristics and more closely resemble high-yield debt
securities than investment-grade debt securities. Lower-rated securities may be subject to all the risks
applicable to high-yield debt securities and changes in economic conditions or other circumstances are
more likely to lead to a weakened capacity to make principal and interest payments than is the case with
higher grade debt securities.
A number of risks associated with rating
agencies apply to the purchase or sale of investment grade debt securities.
LIBOR Transition
The Fund may hold financial instruments that may have floating or variable rate calculations for payment
obligations or financing terms that were historically based on LIBOR, which was the benchmark interest
rate at which major global banks lent to one another in the international interbank market for short-term
loans. On July 27, 2017, the United Kingdom’s Financial Conduct Authority (the “FCA”) announced
its intention to cease sustaining the LIBOR after 2021. In addition, global regulators announced that,
with limited exceptions, no new LIBOR-based contracts should be entered into after 2021. In connection
with the global transition away from LIBOR led by regulators and market participants, LIBOR is no longer
published on a representative basis. Alternative reference rates to LIBOR have been established in most
major currencies, including the Secured Overnight Financing Rate (SOFR) for USD LIBOR. In March 2022,
the U.S. federal government enacted legislation to establish a process for replacing LIBOR in certain
existing contracts that do not already provide for the use of a clearly defined or practicable replacement
benchmark rate as described in the legislation. Generally speaking, for contracts that do not contain
a fallback provision as described in the legislation, a benchmark replacement recommended by the Federal
Reserve Board effectively automatically replaced the USD LIBOR benchmark in the contract upon LIBOR’s
cessation at the end of June 2023. The recommended benchmark replacement is based on SOFR, which is a
broad measure of the cost of overnight borrowing of cash collateralized by Treasury securities published
by the Federal Reserve Bank of New York. There remains uncertainty regarding the ultimate effects of
the transition away from LIBOR on the Fund or the Fund’s investments that use a floating rate based
on LIBOR.
The transition process might lead to increased volatility
and illiquidity in markets that historically relied on LIBOR to determine interest rates. It could also
lead to a reduction in the value of some legacy LIBOR-based investments and reduce the effectiveness
of new hedges placed against LIBOR-based instruments.
Mortgage securities
Overview
of mortgage-backed securities. Mortgage-backed securities, represent an ownership interest
in a pool of mortgage loans, usually originated by mortgage bankers, commercial banks, savings and loan
associations, savings banks and credit unions to finance purchases of homes, commercial buildings or
other real estate. The individual mortgage loans are packaged or "pooled" together for sale to investors.
These mortgage loans may have either fixed or adjustable interest rates. A guarantee or other form of
credit support may be attached to a mortgage-backed security to protect against default on obligations.
As the underlying mortgage loans are paid off, investors receive principal and
interest payments, which "pass-through" when received from individual borrowers, net of any fees owed
to the administrator, guarantor or other service providers. Some mortgage-backed securities make payments
of both principal and interest at a range of specified intervals;
15
others make semiannual interest payments at a predetermined rate and repay principal
at maturity (like a typical bond).
Mortgage-backed securities are based on different
types of mortgages, including those on commercial real estate or residential properties. The primary
issuers or guarantors of mortgage-backed securities have historically been the Government National Mortgage
Association (GNMA or Ginnie Mae), the Federal National Mortgage Association (FNMA or Fannie Mae) and
the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac). Other issuers of mortgage-backed securities
include commercial banks and other private lenders. Trading in mortgage-backed securities guaranteed
by a governmental agency, instrumentality or sponsored enterprise may frequently take place in the to-be-announced
(TBA) forward market. On June 3, 2019, under the FHFA's “Single Security Initiative” intended to
maximize liquidity for both Fannie Mae and Freddie Mac mortgage-backed securities in the TBA market,
Fannie Mae and Freddie Mac started issuing uniform mortgage-backed securities (“UMBS”) in place of
their separate offerings of TBA-eligible mortgage-backed securities. The issuance of UMBS may not achieve
the intended results and may have unanticipated or adverse effects on the market for mortgage-backed
securities. See “When-issued, delayed delivery and to-be-announced transactions” below.
Ginnie
Mae is a wholly-owned United States government corporation within the Department of Housing and Urban
Development. Ginnie Mae guarantees the principal and interest on securities issued by institutions approved
by Ginnie Mae (such as savings and loan institutions, commercial banks and mortgage bankers). Ginnie
Mae also guarantees the principal and interest on securities backed by pools of mortgages insured by
the Federal Housing Administration, or guaranteed by the Department of Veterans Affairs. Ginnie Mae's
guarantees are backed by the full faith and credit of the U.S. government. Guarantees as to the timely
payment of principal and interest do not extend to the value or yield of mortgage-backed securities nor
do they extend to the value of the Fund's shares which will fluctuate daily with market conditions.
Fannie Mae is a government-sponsored corporation, but its common stock is owned
by private stockholders. Fannie Mae purchases conventional (i.e., not insured or guaranteed by any government
agency) residential mortgages from a list of approved seller/servicers which include state and federally
chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and
mortgage bankers. Pass-through securities issued by Fannie Mae are guaranteed as to timely payment of
principal and interest by Fannie Mae, but are not backed by the full faith and credit of the U.S. government.
Freddie Mac was created by Congress in 1970 for the purpose of increasing the
availability of mortgage credit for residential housing. It is a government-sponsored corporation formerly
owned by the twelve Federal Home Loan Banks but now its common stock is owned entirely by private stockholders.
Freddie Mac issues Participation Certificates (PCs), which are pass-through securities, each representing
an undivided interest in a pool of residential mortgages. Freddie Mac guarantees the timely payment of
interest and ultimate collection of principal, but PCs are not backed by the full faith and credit of
the U.S. government.
Although the mortgage-backed securities of Fannie Mae and
Freddie Mac are not backed by the full faith and credit of the U.S. government, the Secretary of the
Treasury has the authority to support Fannie Mae and Freddie Mac by purchasing limited amounts of their
respective obligations. The yields on these mortgage-backed securities have historically exceeded the
yields on other types of U.S. government securities with comparable maturities due largely to their prepayment
risk. The U.S. government, in the past, provided financial support to Fannie Mae and Freddie Mac, but
the U.S. government has no legal obligation to do so, and no assurance can be given that the U.S. government
will continue to do so.
On September 6, 2008, the Federal Housing Finance Agency (FHFA)
placed Fannie Mae and Freddie Mac into conservatorship. As the conservator, FHFA succeeded to all rights,
titles, powers and privileges of Fannie Mae and Freddie Mac and of any stockholder, officer or director
of Fannie Mae and Freddie Mac. FHFA selected a new chief executive officer and chairman of the board
of directors for each of Fannie Mae and Freddie Mac. Also, the U.S. Treasury entered into a Senior Preferred
Stock Purchase Agreement imposing various covenants that severely limit each enterprise's operations.
Fannie Mae and Freddie Mac continue to operate as going concerns while in conservatorship
and each remains liable for all of its obligations, including its guaranty obligations associated with
its mortgage-backed securities. The FHFA has the power to repudiate any contract entered into by Fannie
Mae and Freddie Mac prior to FHFA's appointment as conservator or receiver, including the guaranty obligations
of Fannie Mae and Freddie Mac. Accordingly, securities issued by Fannie Mae and Freddie Mac will involve
a risk of non-payment of principal and interest.
Private mortgage-backed securities. Issuers
of private mortgage-backed securities, such as commercial banks, savings and loan institutions, private
mortgage insurance companies, mortgage bankers and other secondary market issuers, are not U.S. government
agencies and may be both the originators of the underlying mortgage loans as well as the guarantors of
the mortgage-backed securities, or they may partner with a government entity by issuing mortgage
16
loans guaranteed or sponsored by the U.S. government or a U.S. government agency
or sponsored enterprise. Pools of mortgage loans created by private issuers generally offer a higher
rate of interest than government and government-related pools because there are no direct or indirect
government or government agency guarantees of payment. The risk of loss due to default on private mortgage-backed
securities is historically higher because neither the U.S. government nor an agency or instrumentality
have guaranteed them. Timely payment of interest and principal is, however, generally supported by various
forms of insurance or guarantees, including individual loan, title, pool and hazard insurance. Government
entities, private insurance companies or the private mortgage poolers issue the insurance and guarantees.
The insurance and guarantees and the creditworthiness of their issuers will be considered when determining
whether a mortgage-backed security meets the Fund's quality standards. The Fund may buy mortgage-backed
securities without insurance or guarantees if, through an examination of the loan experience and practices
of the poolers, the investment manager determines that the securities meet the Fund's quality standards.
Private mortgage-backed securities whose underlying assets are neither U.S. government securities nor
U.S. government-insured mortgages, to the extent that real properties securing such assets may be located
in the same geographical region, may also be subject to a greater risk of default than other comparable
securities in the event of adverse economic, political or business developments that may affect such
region and, ultimately, the ability of property owners to make payments of principal and interest on
the underlying mortgages. Non-government mortgage-backed securities are generally subject to greater
price volatility than those issued, guaranteed or sponsored by government entities because of the greater
risk of default in adverse market conditions. Where a guarantee is provided by a private guarantor, the
Fund is subject to the credit risk of such guarantor, especially when the guarantor doubles as the originator.
Mortgage-backed securities that are issued or guaranteed by the U.S. government,
its agencies or instrumentalities, are not subject to the Fund's industry concentration restrictions,
set forth under "Fundamental Investment Policies," by virtue of the exclusion from that test available
to securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities.
In the case of privately issued mortgage-backed securities, the Fund categorizes the securities by the
issuer's industry for purposes of the Fund's industry concentration restrictions.
Additional risks.
In addition to the special risks described below, mortgage securities are subject to many of the same
risks as other types of debt securities. The market value of mortgage securities, like other debt securities,
will generally vary inversely with changes in market interest rates, declining when interest rates rise
and rising when interest rates decline. Mortgage securities differ from conventional debt securities
in that most mortgage securities are pass-through securities. This means that they typically provide
investors with periodic payments (typically monthly) consisting of a pro rata share of both regular interest
and principal payments, as well as unscheduled early prepayments, on the underlying mortgage pool (net
of any fees paid to the issuer or guarantor of such securities and any applicable loan servicing fees).
As a result, the holder of the mortgage securities (i.e., the Fund) receives scheduled payments of principal
and interest and may receive unscheduled principal payments representing prepayments on the underlying
mortgages. The rate of prepayments on the underlying mortgages generally increases as interest rates
decline, and when the Fund reinvests the payments and any unscheduled payments of principal it receives,
it may receive a rate of interest that is lower than the rate on the existing mortgage securities. For
this reason, pass-through mortgage securities may have less potential for capital appreciation as interest
rates decline and may be less effective than other types of U.S. government or other debt securities
as a means of "locking in" long-term interest rates. In general, fixed rate mortgage securities have
greater exposure to this "prepayment risk" than variable rate securities.
An
unexpected rise in interest rates could extend the average life of a mortgage security because of a lower
than expected level of prepayments or higher than expected amounts of late payments or defaults. In addition,
to the extent mortgage securities are purchased at a premium, mortgage foreclosures and unscheduled principal
prepayments may result in some loss of the holder's principal investment to the extent of the premium
paid. On the other hand, if mortgage securities are purchased at a discount, both a scheduled payment
of principal and an unscheduled payment of principal will increase current and total returns and will
accelerate the recognition of income that, when distributed to shareholders, will generally be taxable
as ordinary income. Regulatory, policy or tax changes may also adversely affect the mortgage securities
market as a whole or particular segments of such market, including if one or more government sponsored
entities, such as Fannie Mae or Freddie Mac, are privatized or their conservatorship is terminated.
Guarantees.
The existence of a guarantee or other form of credit support on a mortgage security usually increases
the price that the Fund pays or receives for the security. There is always the risk that the guarantor
will default on its obligations. When the guarantor is the U.S. government, there is minimal risk of
guarantor default. However, the risk remains if the credit support or guarantee is provided by a private
party or a U.S. government agency or sponsored enterprise. Even if the guarantor meets its obligations,
there can be no assurance that the type of guarantee or credit support provided will be effective at
reducing losses or delays to investors, given the nature of the default. A guarantee only assures timely
payment of interest and principal, not a
17
particular rate of return on the Fund's investment or protection against prepayment
or other risks. The market price and yield of the mortgage security at any given time are not guaranteed
and likely to fluctuate.
Sector focus. The Fund's investments in mortgage securities may cause
the Fund to have significant, indirect exposure to a given market sector. If the underlying mortgages
are predominantly from borrowers in a given market sector, the mortgage securities may respond to market
conditions just as a direct investment in that sector would. As a result, the Fund may experience greater
exposure to that specific market sector than it would if the underlying mortgages came from a wider variety
of borrowers. Greater exposure to a particular market sector may result in greater volatility of the
security's price and returns to the Fund, as well as greater potential for losses in the absence or failure
of a guarantee to protect against widespread defaults or late payments by the borrowers on the underlying
mortgages.
Similar risks may result from an investment in mortgage securities
if the underlying real properties are located in the same geographical region or dependent upon the same
industries or sectors. Such mortgage securities will experience greater risk of default or late payment
than other comparable but diversified securities in the event of adverse economic, political or business
developments because of the widespread affect an adverse event will have on borrowers' ability to make
payments on the underlying mortgages.
Adjustable rate mortgage securities (ARMS) ARMS, like traditional
fixed rate mortgage-backed securities, represent an ownership interest in a pool of mortgage loans and
are issued, guaranteed or otherwise sponsored by governmental or by private entities. Unlike traditional
mortgage-backed securities, the mortgage loans underlying ARMS generally carry adjustable interest rates,
and in some cases principal repayment rates, that are reset periodically. An adjustable interest rate
may be passed-through or otherwise offered on certain ARMS. The interest obtained by owning ARMS (and,
as a result, the value of the ARMS) may vary monthly as a result of resets in interest rates and/or principal
repayment rates of any of the mortgage loans that are part of the pool of mortgage loans comprising the
ARMS. Investing in ARMS may permit the Fund to participate in increases in prevailing current interest
rates through periodic adjustments in the interest rate payments on mortgages underlying the pool on
which the ARMS are based. ARMS generally have lower price fluctuations than is the case with more traditional
fixed income debt securities of comparable rating and maturity.
The
interest rates paid on ARMS generally are readjusted at intervals of one year or less to a rate that
is an increment over some predetermined interest rate index, although some securities may have reset
intervals as long as five years. Some adjustable rate mortgage loans have fixed rates for an initial
period, typically three, five, seven or ten years, and adjust annually thereafter. Generally, categories
of indices include: those based on a variable or floating rate indexed to a benchmark, those based on
U.S. Treasury securities and those derived from a calculated measure such as a cost of funds index (indicating
the cost of borrowing) or a moving average of mortgage rates. Commonly used indices include the one-,
three-, and five-year constant-maturity Treasury rates; the three-month Treasury bill rate; the 180-day
Treasury bill rate; rates on longer-term Treasury securities; the 11th District Federal Home Loan Bank
Cost of Funds; the National Median Cost of Funds; the prime rate of a specific bank; or commercial paper
rates.
In a changing interest rate environment, the reset feature
may act as a buffer to reduce sharp changes in the ARMS' value in response to normal interest rate fluctuations.
However, the time interval between each interest reset causes the yield on the ARMS to lag behind changes
in the prevailing market interest rate. As interest rates are reset on the underlying mortgages, the
yields of the ARMS gradually re-align themselves to reflect changes in market rates so that their market
values remain relatively stable compared to fixed-rate mortgage-backed securities.
As
a result, ARMS generally also have less risk of a decline in value during periods of rising interest
rates than traditional long-term, fixed-rate mortgage-backed securities. However, during such periods,
this reset lag may result in a lower net asset value until the interest rate resets to market rates.
If prepayments of principal are made on the underlying mortgages during periods of rising interest rates,
the Fund generally will be able to reinvest these amounts in securities with a higher current rate of
return. However, the Fund will not benefit from increases in interest rates to the extent that interest
rates exceed the maximum allowable annual or lifetime reset limits (or cap rates) for a particular mortgage-backed
security. See “Caps and floors.” Additionally, borrowers with adjustable rate mortgage loans that
are pooled into ARMS generally see an increase in their monthly mortgage payments when interest rates
rise which in turn may increase their rate of late payments and defaults.
Because
an investor is "locked in" at a given interest rate for the duration of the interval until the reset
date, whereas interest rates continue to fluctuate, the sensitivity of an ARMS' price to changes in interest
rates tends to increase along with the length of the interval. To the extent the Fund invests in ARMS
that reset infrequently, the Fund will be subject to similar interest rate risks as when investing in
fixed-rate debt securities. For example, the Fund can expect to receive a lower interest rate than the
prevailing market rates (or index rates) in a rising interest rate environment because of the lag between
daily increases in interest rates and periodic readjustments.
During periods of declining
interest rates, the interest rates on the underlying mortgages may reset downward with a similar
18
lag, resulting in lower yields to the Fund. As a result, the value of ARMS is
unlikely to rise during periods of declining interest rates to the same extent as the value of fixed-rate
securities do.
Caps and floors. The underlying mortgages that collateralize
ARMS will frequently have caps and floors that limit the maximum amount by which the interest rate to
the residential borrower may change up or down (a) per reset or adjustment interval and (b) over the
life of the loan. Fluctuations in interest rates above the applicable caps or floors on the ARMS could
cause the ARMS to "cap out" and to behave more like long-term, fixed-rate debt securities.
Negative
amortization. Some mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting interest rate changes. These
payment caps may result in negative amortization, where payments are less than the amount of principal
and interest owed, with excess amounts added to the outstanding principal balance, which can extend the
average life of the mortgage-backed securities.
Collateralized mortgage obligations (CMOs),
real estate mortgage investment conduits (REMICs) and multi-class pass-throughs Some mortgage-backed
securities known as collateralized mortgage obligations (CMOs) are divided into multiple classes. Each
of the classes is allocated a different share of the principal and/or interest payments received from
the pool according to a different payment schedule depending on, among other factors, the seniority of
a class relative to their classes. Other mortgage-backed securities such as real estate mortgage investment
conduits (REMICs) are also divided into multiple classes with different rights to the interest and/or
principal payments received on the pool of mortgages. A CMO or REMIC may designate the most junior of
the securities it issues as a "residual" which will be entitled to any amounts remaining after all classes
of shareholders (and any fees or expenses) have been paid in full. Some of the different rights may include
different maturities, interest rates, payment schedules, and allocations of interest and/or principal
payments on the underlying mortgage loans. Multi-class pass-through securities are equity interests in
a trust composed of mortgage loans or other mortgage-backed securities. Payments of principal and interest
on the underlying collateral provide the funds to pay the debt service on CMOs or REMICs or to make scheduled
distributions on the multi-class pass-through securities. Unless the context indicates otherwise, the
discussion of CMOs below also applies to REMICs and multi-class pass-through securities.
All the risks applicable to a traditional mortgage-backed security also apply
to the CMO or REMIC taken as a whole, even though certain classes of the CMO or REMIC will be protected
against a particular risk by subordinated classes. The risks associated with an investment in a particular
CMO or REMIC class vary substantially depending on the combination of rights associated with that class.
An investment in the most subordinated classes of a CMO or REMIC bears a disproportionate share of the
risks associated with mortgage-backed securities generally, be it credit risk, prepayment or extension
risk, interest rate risk, income risk, market risk, illiquidity risk or any other risk associated with
a debt or equity instrument with similar features to the relevant class. As a result, an investment in
the most subordinated classes of a CMO or REMIC is often riskier than an investment in other types of
mortgage-backed securities.
CMOs are generally required to maintain more
collateral than REMICs to collateralize the CMOs being issued. Most REMICs are not subject to the same
minimum collateralization requirements and may be permitted to issue the full value of their assets as
securities, without reserving any amount as collateral. As a result, an investment in the subordinated
classes of a REMIC may be riskier than an investment in equivalent classes of a CMO.
CMOs
may be issued, guaranteed or sponsored by governmental entities or by private entities. Consequently,
they involve risks similar to those of traditional mortgage-backed securities that have been issued,
guaranteed or sponsored by such government and/or private entities. For example, the Fund is generally
exposed to a greater risk of loss due to default when investing in CMOs that have not been issued, guaranteed
or sponsored by a government entity.
CMOs are typically issued in multiple classes.
Each class, often referred to as a "tranche," is issued at a specified coupon rate or adjustable rate
and has a stated maturity or final distribution date. Principal prepayments on collateral underlying
CMOs may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on most classes of a CMO on a monthly, quarterly or semiannual basis.
The principal and interest on the mortgages underlying CMOs may be allocated among the several classes
in many ways. In a common structure, payments of principal on the underlying mortgages, including any
principal prepayments, are applied to the classes of a series of a CMO in the order of their respective
stated maturities or final distribution dates, so that no payment of principal will be made on any class
until all other classes having an earlier stated maturity or final distribution date have been paid in
full.
One or more classes of a CMO may have interest rates that reset periodically as
ARMS do. These adjustable rate classes are known as "floating-rate CMOs" and are subject to most risks
associated with ARMS. Floating-rate CMOs may be backed by fixed- or adjustable-rate mortgages. To date,
fixed-rate mortgages have been more commonly used for this purpose. Floating-rate CMOs are typically
issued with lifetime "caps" on the interest rate. These caps, similar to the caps on ARMS, limit the
Fund's potential to gain from rising interest
19
rates and increasing the sensitivity of the CMO's price to interest rate changes
while rates remain above the cap.
Timely payment of interest and principal
(but not the market value and yield) of some of these pools is supported by various forms of insurance
or guarantees issued by private issuers, those who pool the mortgage assets and, in some cases, by U.S.
government agencies.
CMOs involve risks including the uncertainty of the timing
of cash flows that results from the rate of prepayments on the underlying mortgages serving as collateral,
and risks resulting from the structure of the particular CMO transaction and the priority of the individual
tranches. The prices of some CMOs, depending on their structure and the rate of prepayments, can be volatile.
Some CMOs may be less liquid than other types of mortgage-backed securities. As a result, it may be difficult
or impossible to sell the securities at an advantageous price or time under certain circumstances. Yields
on privately issued CMOs have been historically higher than the yields on CMOs issued or guaranteed by
U.S. government agencies or instrumentalities. The risk of loss due to default on privately issued CMOs,
however, is historically higher since the U.S. government has not guaranteed them.
To
the extent any privately issued CMOs in which the Fund invests are considered by the SEC to be an investment
company, the Fund will limit its investments in such securities in a manner consistent with the provisions
of the 1940 Act.
CMO and REMIC Residuals. The residual in a CMO or REMIC structure
is the interest in any excess cash flow generated by the mortgage pool that remains after first making
the required payments of principal and interest to the other classes of the CMO or REMIC and, second,
paying the related administrative expenses and any management fee of the issuer. Each payment of such
excess cash flow to a holder of the related CMO or REMIC residual represents income and/or a return of
capital. The amount of residual cash flow resulting from a CMO or REMIC will depend on, among other things,
the characteristics of the mortgage assets, the interest rate of each class, prevailing interest rates,
the amount of administrative expenses and the pre-payment experience on the mortgage assets. In particular,
the return on CMO and REMIC residuals is extremely sensitive to pre-payments on the related underlying
mortgage assets. If a class of a CMO or REMIC bears interest at an adjustable rate, the CMO or REMIC
residual will also be extremely sensitive to changes in the level of the index upon which interest rate
adjustments are based. CMO and REMIC residuals are generally purchased and sold by institutional investors
through several investment banking firms acting as brokers or dealers and may not have been registered
under the 1933 Act. CMO and REMIC residuals, whether or not registered under the 1933 Act, may be subject
to certain restrictions on transferability, and may be deemed "illiquid" and subject to the Fund's limitation
on investment in illiquid securities.
Stripped mortgage-backed securities and net interest margin
securities Some mortgage-backed securities referred to as stripped mortgage-backed securities
are divided into classes which receive different proportions of the principal and interest payments or,
in some cases, only payments of principal or interest (but not both). Other mortgage-backed securities
referred to as net interest margin (NIM) securities give the investor the right to receive any excess
interest earned on a pool of mortgage loans remaining after all classes and service providers have been
paid in full. Stripped mortgage-backed securities may be issued by government or private entities. Stripped
mortgage-backed securities issued or guaranteed by agencies or instrumentalities of the U.S. government
are typically more liquid than privately issued stripped mortgage-backed securities.
Stripped
mortgage-backed securities are usually structured with two classes, each receiving different proportions
of the interest and principal distributions on a pool of mortgage assets. In most cases, one class receives
all of the interest (interest-only or "IO" class), while the other class receives all of the principal
(principal-only or "PO" class). The return on an IO class is extremely sensitive not only to changes
in prevailing interest rates but also to the rate of principal payments (including prepayments) on the
underlying mortgage assets. A rapid rate of principal payments may have a material adverse effect on
any IO class held by the Fund. If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the Fund may fail to recoup its initial investment fully, even if the securities
are rated in the highest rating categories, AAA or Aaa, by S&P or Moody's, respectively.
NIM
securities represent a right to receive any "excess" interest computed after paying coupon costs, servicing
costs and fees and any credit losses associated with the underlying pool of home equity loans. Like traditional
stripped mortgage-backed securities, the return on a NIM security is sensitive not only to changes in
prevailing interest rates but also to the rate of principal payments (including prepayments) on the underlying
home equity loans. NIM securities are highly sensitive to credit losses on the underlying collateral
and the timing in which those losses are taken.
Stripped mortgage-backed
securities and NIM securities tend to exhibit greater market volatility in response to changes in interest
rates than other types of mortgage-backed securities and are purchased and sold by institutional investors,
such as the Fund, through investment banking firms acting as brokers or dealers. Some of these securities
may be deemed "illiquid" and therefore subject to the Fund's limitation on investment in illiquid securities
and the risks associated with illiquidity.
Future developments. Mortgage loan
and home equity loan pools offering pass-through investments in addition to those described above may
be created in the future. The mortgages
20
underlying these securities may be alternative mortgage instruments, that is,
mortgage instruments whose principal or interest payments may vary or whose terms to maturity may differ
from customary long-term, fixed-rate mortgages. As new types of mortgage and home equity loan securities
are developed and offered to investors, the Fund may invest in them if they are consistent with the Fund's
goals, policies and quality standards.
Mortgage Dollar and U.S. Treasury Rolls
Mortgage
dollar rolls. In a mortgage dollar roll, the Fund sells or buys mortgage-backed securities
for delivery in the current month and simultaneously contracts to repurchase or sell substantially similar
(same type, coupon, and maturity) securities on a specified future date. During the period between the
sale and repurchase (known as the "roll period"), the Fund forgoes principal and interest payments that
it would otherwise have received on the securities sold. The Fund is compensated by the difference between
the current sales price, which it receives, and the lower forward price that it will pay for the future
purchase (often referred to as the "drop"), as well as by the interest earned on the cash proceeds of
the initial sale.
The Fund is exposed to the credit risk of its counterparty in a mortgage dollar
roll or U.S. Treasury roll transaction. The Fund could suffer a loss if the counterparty fails to perform
the future transaction or otherwise meet its obligations and the Fund is therefore unable to repurchase
at the agreed upon price the same or substantially similar mortgage-backed securities it initially sold.
The Fund also takes the risk that the mortgage-backed securities that it repurchases at a later date
will have less favorable market characteristics than the securities originally sold (e.g., greater prepayment
risk).
The Fund intends to enter into mortgage dollar rolls only with high quality securities
dealers and banks as determined by the investment manager under board approved counterparty review procedures.
Although rolls could add leverage to the Fund's portfolio, the Fund does not consider the purchase and/or
sale of a mortgage dollar roll to be a borrowing for purposes of the Fund's fundamental restrictions
or other limitations on borrowing.
U.S. Treasury rolls. In U.S. Treasury
rolls, the Fund sells U.S. Treasury securities and buys back "when-issued" U.S. Treasury securities of
slightly longer maturity for simultaneous settlement on the settlement date of the "when-issued" U.S.
Treasury security. Two potential advantages of this strategy are (1) the Fund can regularly and incrementally
adjust its weighted average maturity of its portfolio securities (which otherwise would constantly diminish
with the passage of time); and (2) in a normal yield curve environment (in which shorter maturities yield
less than longer maturities), a gain in yield to maturity can be obtained along with the desired extension.
During the period before the settlement date, the Fund continues to earn interest
on the securities it is selling. It does not earn interest on the securities that it is purchasing until
after the settlement date. The Fund could suffer an opportunity loss if the counterparty to the roll
failed to perform its obligations on the settlement date, and if market conditions changed adversely.
The Fund generally enters into U.S. Treasury rolls only with government securities dealers recognized
by the Federal Reserve Board or with member banks of the Federal Reserve System.
Repurchase agreements
Under a repurchase agreement, the Fund agrees to buy securities guaranteed as to payment of principal
and interest by the U.S. government or its agencies or instrumentalities from a qualified bank, broker-dealer
or other counterparty and then to sell the securities back to such counterparty on an agreed upon date
(generally less than seven days) at a higher price, which reflects currently prevailing short-term interest
rates. Entering into repurchase agreements allows the Fund to earn a return on cash in the Fund's portfolio
that would otherwise remain un-invested. The counterparty must transfer to the Fund's custodian, as collateral,
securities with an initial market value of at least 102% of the dollar amount paid by the Fund to the
counterparty. The investment manager will monitor the value of such collateral daily to determine that
the value of the collateral equals or exceeds the repurchase price.
Repurchase
agreements may involve risks in the event of default or insolvency of the counterparty, including possible
delays or restrictions upon the Fund's ability to sell the underlying securities and additional expenses
in seeking to enforce the Fund's rights and recover any losses. The Fund will enter into repurchase agreements
only with parties who meet certain creditworthiness standards, i.e., banks or broker-dealers that the
investment manager has determined, based on the information available at the time, present no serious
risk of becoming involved in bankruptcy proceedings within the time frame contemplated by the repurchase
agreement. Although the Fund seeks to limit the credit risk under a repurchase agreement by carefully
selecting counterparties and accepting only high quality collateral, some credit risk remains. The counterparty
could default which may make it necessary for the Fund to incur expenses to liquidate the collateral.
In addition, the collateral may decline in value before it can be liquidated by the Fund.
A
repurchase agreement with more than seven days to maturity is considered an illiquid security and is
subject to the Fund's investment restriction on illiquid securities.
Securities lending To generate additional
income, the Fund may lend certain of its portfolio securities to qualified banks and broker-dealers (referred
to as "borrowers"). In exchange, the Fund receives cash collateral from a borrower at least equal to
the value of the security loaned by the Fund. Cash collateral typically consists of any combination of
cash,
21
securities issued by the U.S. government and its agencies and instrumentalities,
and irrevocable letters of credit. The Fund may invest this cash collateral while the loan is outstanding
and generally retains part or all of the interest earned on the cash collateral. Securities lending allows
the Fund to retain ownership of the securities loaned and, at the same time, earn additional income.
For each loan, the borrower usually must maintain with the Fund's custodian collateral
with an initial market value at least equal to 102% of the market value of the domestic securities loaned
(or 105% of the market value of foreign securities loaned), including any accrued interest thereon. Such
collateral will be marked-to-market daily, and if the coverage falls below 100%, the borrower will be
required to deliver additional collateral equal to at least 102% of the market value of the domestic
securities loaned (or 105% of the foreign securities loaned).
The Fund retains all or
a portion of the interest received on investment of the cash collateral or receives a fee from the borrower.
The Fund also continues to receive any distributions paid on the loaned securities. The Fund seeks to
maintain the ability to obtain the right to vote or consent on proxy proposals involving material events
affecting securities loaned. The Fund may terminate a loan at any time and obtain the return of the securities
loaned within the normal settlement period for the security involved.
If
the borrower defaults on its obligation to return the securities loaned because of insolvency or other
reasons, the Fund could experience delays and costs in recovering the securities loaned or in gaining
access to the collateral. These delays and costs could be greater for foreign securities. If the Fund
is not able to recover the securities loaned, the Fund may sell the collateral and purchase a replacement
investment in the market. Additional transaction costs would result, and the value of the collateral
could decrease below the value of the replacement investment by the time the replacement investment is
purchased. Until the replacement can be purchased, the Fund will not have the desired level of exposure
to the security which the borrower failed to return. Cash received as collateral through loan transactions
may be invested in other eligible securities, including shares of a money market fund. Investing this
cash subjects the Fund to greater market risk including losses on the collateral and, should the Fund
need to look to the collateral in the event of the borrower's default, losses on the loan secured by
that collateral.
The Fund will loan its securities only to parties who meet
creditworthiness standards approved by the Fund's board (i.e., banks or broker-dealers that the investment
manager has determined are not apparently at risk of becoming involved in bankruptcy proceedings within
the time frame contemplated by the loan). In addition, pursuant to the 1940 Act and SEC interpretations
thereof, the aggregate market value of securities that may be loaned by the Fund is limited to 33 1/3%
of the Fund's total assets or such lower limit as set by the Fund or its board.
Temporary investments
When the investment manager believes market or economic conditions are unfavorable for investors, the
investment manager may invest up to 100% of the Fund's assets in temporary defensive investments, including
cash, cash equivalents or other high quality short-term investments, such as short-term debt instruments,
including U.S. government securities, high grade commercial paper, repurchase agreements, negotiable
certificates of deposit, non-negotiable fixed time deposits, bankers acceptances, and other money market
equivalents. To the extent allowed by exemptions from and rules under the 1940 Act and the Fund's other
investment policies and restrictions, the investment manager also may invest the Fund's assets in shares
of one or more money market funds managed by the investment manager or its affiliates. Unfavorable market
or economic conditions may include excessive volatility or a prolonged general decline in the securities
markets, the securities in which the Fund normally invests, or the economies of the countries where the
Fund invests. Temporary defensive investments can and do experience defaults. The likelihood of default
on a temporary defensive investment may increase in the market or economic conditions which are likely
to trigger the Fund's investment therein.
The investment manager
also may invest in these types of securities or hold cash while looking for suitable investment opportunities
or to maintain liquidity. When the Fund's assets are invested in temporary investments, the Fund may
not be able to achieve its investment goal.
Unrated debt securities Not all debt
securities or their issuers are rated by rating agencies, sometimes due to the size of or manner of the
securities offering, the decision by one or more rating agencies not to rate certain securities or issuers
as a matter of policy, or the unwillingness or inability of the issuer to provide the prerequisite information
and fees to the rating agencies. Some debt securities markets may have a disproportionately large number
of unrated issuers.
In evaluating unrated securities, the investment
manager may consider, among other things, the issuer's financial resources, its sensitivity to economic
conditions and trends, its operating history, the quality of the issuer's management and regulatory matters.
Although unrated debt securities may be considered to be of investment grade quality, issuers typically
pay a higher interest rate on unrated than on investment grade rated debt securities. Less information
is typically available to the market on unrated securities and obligors, which may increase the potential
for credit and valuation risk.
U.S. government securities U.S. government
securities include obligations of, or securities guaranteed by, the U.S.
22
federal government, its agencies, instrumentalities or sponsored enterprises.
Some U.S. government securities are supported by the full faith and credit of the U.S. government. These
include U.S. Treasury obligations and securities issued by the Government National Mortgage Association
(GNMA). A second category of U.S. government securities are those supported by the right of the agency,
instrumentality or sponsored enterprise to borrow from the U.S. government to meet its obligations. These
include securities issued by Federal Home Loan Banks.
A third category of U.S.
government securities are those supported by only the credit of the issuing agency, instrumentality or
sponsored enterprise. These include securities issued by the Federal National Mortgage Association (FNMA)
and Federal Home Loan Mortgage Corporation (FHLMC). In the event of a default, an investor like the Fund
would only have legal recourse to the issuer, not the U.S. government. Although the U.S. government has
provided support for these securities in the past, there can be no assurance that it will do so in the
future. The U.S. government has also made available additional guarantees for limited periods to stabilize
or restore a market in the wake of an economic, political or natural crisis. Such guarantees, and the
economic opportunities they present, are likely to be temporary and cannot be relied upon by the Fund.
Any downgrade of the credit rating of the securities issued by the U.S. government may result in a downgrade
of securities issued by its agencies or instrumentalities, including government-sponsored entities.
Variable
rate securities Variable rate securities are debt securities that provide for periodic adjustments
in the interest rate paid on the debt security. Floating rate securities, adjustable rate securities
and inverse floating rate securities (referred to as "inverse floaters") are types of variable rate securities.
An adjustable rate security is a debt security with an interest rate which is adjusted according to a
formula that specifies the interval at which the rate will be reset and the interest rate index, benchmark
or other mechanism upon which the reset rate is based. A floating rate debt security has a rate of interest
which is usually established as the sum of a base lending rate (e.g., SOFR, the U.S. Prime Rate, the
Prime Rate of a designated U.S. bank or the certificate of deposit rate) plus a specified margin. The
interest rate on prime rate-based loans and securities floats periodically as the prime rate changes.
The interest rate on SOFR-based and CD-based loans and securities is reset periodically, typically at
regular intervals ranging between 30 days and one year. Certain floating rate securities will permit
the borrower to select an interest rate reset period of up to one year.
Some
variable rate securities are structured with put features that permit holders to demand payment of the
unpaid principal balance plus accrued interest from the issuers or certain financial intermediaries at
or about the time the interest rate is reset. If the Fund purchases a variable rate security with a put
feature and market movements make exercise of the put unattractive, the Fund will forfeit the entire
amount of any premium paid plus related transaction costs.
Movements in the relevant
index or benchmark on which adjustments are based will affect the interest paid on these securities and,
therefore, the current income earned by the Fund and the securities' market value. The degree of volatility
in the market value of the variable rate securities held by the Fund will generally increase along with
the length of time between adjustments, the degree of volatility in the applicable index, benchmark or
base lending rate and whether the index, benchmark or base lending rate to which it resets or floats
approximates short-term or other prevailing interest rates. It will also be a function of the maximum
increase or decrease of the interest rate adjustment on any one adjustment date, in any one year, and
over the life of the security. These maximum increases and decreases are typically referred to as "caps"
and "floors," respectively.
During periods when short-term interest rates
move within the caps and floors of the security held by the Fund, the interest rate of such security
will reset to prevailing rates within a short period. As a result, the fluctuation in market value of
the variable rate security held by the Fund is generally expected to be limited.
In
periods of substantial short-term volatility in interest rates, the market value of such debt securities
may fluctuate more substantially if the caps and/or floors prevent the interest rates from adjusting
to the full extent of the movements in the market rates during any one adjustment period or over the
term of the security. In the event of dramatic increases in interest rates, any lifetime caps on these
securities may prevent the securities from adjusting to prevailing rates over the term of the security.
In either the case of caps or floors, the market value of the securities may be reduced.
The
income earned by the Fund and distributed to shareholders will generally increase or decrease along with
movements in the relevant index, benchmark or base lending rate. Thus the Fund's income will be more
unpredictable than the income earned on similar investments with a fixed rate of interest.
When-issued, delayed
delivery and to-be-announced transactions When-issued, delayed delivery and to-be-announced
(TBA) transactions are arrangements under which the parties agree on the sale of securities with payment
for and delivery of the security scheduled for a future time. The securities may have been authorized
but not yet issued, or, in the TBA market for U.S. Government agency mortgage-backed securities, the
parties agree on a price, volume, and basic characteristics of securities to be delivered on the settlement
date, rather than particular securities. In addition to buying securities on a when-issued, delayed delivery
or TBA basis, the Fund may also sell these securities on a TBA basis
23
to close out an existing TBA position before the settlement date, to take advantage
of an expected decline in value of the securities, or for hedging purposes.
Entering
into a when-issued, delayed delivery or TBA transaction may be viewed as a form of leverage and will
result in associated risks for the Fund. The Fund does not consider the purchase and/or sale of securities
on a when-issued, delayed delivery or TBA basis to be a borrowing for purposes of the Fund’s fundamental
restrictions or other limitations on borrowing.
Many when-issued, delayed-delivery
or TBA transactions also are subject to the risk that a counterparty may become bankrupt or otherwise
fail to perform its obligations due to financial difficulties, including making payments or fulfilling
other obligations to the Fund. The Fund may obtain no or only limited recovery in a bankruptcy or other
organizational proceedings, and any recovery may be significantly delayed. With respect to forward settling
TBA transactions involving U.S. Government agency mortgage backed securities, the counterparty risk may
be mitigated by the exchange of variation margin on a regular basis between counterparties as the market
value of the deliverable security fluctuates.
The Fund also relies on
the counterparty to complete the transaction. The counterparty’s failure to do so may cause the Fund
to miss a price or yield considered advantageous to the Fund. Although their price typically reflects
accrued interest, securities purchased on a when-issued or delayed delivery basis do not generally earn
interest until their scheduled delivery date. Purchases or sales of debt securities on a when-issued
or delayed delivery basis are also subject to the risk that the market value or the yield at delivery
may be more or less than the market price or yield available when the transaction was entered into, or
that the Fund is unable to purchase securities for delivery at the settlement date with the characteristics
agreed upon at the time of the transaction.
Zero coupon, deferred interest and pay-in-kind bonds Zero
coupon or deferred interest bonds are debt securities that make no periodic interest payments until maturity
or a specified date when the securities begin paying current interest (cash payment date). Zero coupon
and deferred interest bonds generally are issued and traded at a discount from their face amount or par
value.
The original discount on zero coupon or deferred interest
bonds approximates the total amount of interest the bonds will accumulate over the period until maturity
or the first cash payment date and compounds at a rate of interest reflecting the market rate of the
security at the time of issuance. The discount varies depending on the time remaining until maturity
or the cash payment date, as well as prevailing interest rates, liquidity of the market for the security,
and the perceived credit quality of the issuer. The discount, in the absence of financial difficulties
of the issuer, typically decreases as the final maturity or cash payment date approaches. The discount
typically increases as interest rates rise, the market becomes less liquid or the creditworthiness of
the issuer deteriorates.
Pay-in-kind bonds are debt securities that provide for interest
payments to be made in a form other than cash, generally at the option of the issuer. Common forms include
payment of additional bonds of the same issuer or an increase in principal underlying the pay-in-kind
bonds. To the extent that no cash income will be paid for an extended period of time, pay-in-kind bonds
resemble zero coupon or deferred interest bonds and are subject to similar influences and risks.
For accounting and federal tax purposes, holders of bonds issued at a discount,
such as the Fund, are deemed to receive interest income over the life of the bonds even though the bonds
do not pay out cash to their holders before maturity or the cash payment date. That income is distributable
to Fund shareholders even though no cash is received by the Fund at the time of accrual, which may require
the liquidation of other portfolio securities to satisfy the Fund's distribution obligations.
Because
investors receive no cash prior to the maturity or cash payment date, an investment in debt securities
issued at a discount generally has a greater potential for complete loss of principal and/or return than
an investment in debt securities that make periodic interest payments. Such investments are more vulnerable
to the creditworthiness of the issuer and any other parties upon which performance relies.
The following is
a description of the general risks associated with the Fund's investing
in debt securities:
Credit Debt securities are subject to the risk of an issuer's (or
other party's) failure or inability to meet its obligations under the security. Multiple parties may
have obligations under a debt security. An issuer or borrower may fail to pay principal and interest
when due. A guarantor, insurer or credit support provider may fail to provide the agreed upon protection.
A counterparty to a transaction may fail to perform its side of the bargain. An intermediary or agent
interposed between the investor and other parties may fail to perform the terms of its service. Also,
performance under a debt security may be linked to the obligations of other persons who may fail to meet
their obligations. The credit risk associated with a debt security could increase to the extent that
the Fund's ability to benefit fully from its investment in the security depends on the performance by
multiple parties of their respective contractual or other obligations. The market value of a debt security
is also affected by the market's perception of the creditworthiness of the issuer.
The
Fund may incur substantial losses on debt securities that are inaccurately perceived to present a different
amount of credit risk than they actually do by the market, the investment manager or the rating agencies.
Credit risk is generally greater where less information is publicly available, where
24
fewer covenants safeguard the investors' interests, where collateral may be impaired
or inadequate, where little legal redress or regulatory protection is available, or where a party's ability
to meet obligations is speculative. Additionally, any inaccuracy in the information used by the Fund
to evaluate credit risk may affect the value of securities held by the Fund.
Obligations
under debt securities held by the Fund may never be satisfied or, if satisfied, only satisfied in part.
Some securities are subject to risks as a result of a credit downgrade or default
by a government, or its agencies or, instrumentalities. Credit risk is a greater concern for high-yield
debt securities and debt securities of issuers whose ability to pay interest and principal may be considered
speculative. Debt securities are typically classified as investment grade-quality (medium to highest
credit quality) or below investment grade-quality (commonly referred to as high-yield or junk bonds).
Many individual debt securities are rated by a third party source, such as Moody's or S&P to help
describe the creditworthiness of the issuer.
Debt securities ratings The investment
manager performs its own independent investment analysis of securities being considered for the Fund's
portfolio, which includes consideration of, among other things, the issuer's financial resources, its
sensitivity to economic conditions and trends, its operating history, the quality of the issuer's management
and regulatory matters. The investment manager also considers the ratings assigned by various investment
services and independent rating agencies, such as Moody's and S&P, that publish ratings based upon
their assessment of the relative creditworthiness of the rated debt securities. Generally, a lower rating
indicates higher credit risk. Higher yields are ordinarily available from debt securities in the lower
rating categories. These ratings are described at the end of this SAI under “Description of Ratings.”
Using credit ratings to evaluate debt securities can involve certain risks. For
example, ratings assigned by the rating agencies are based upon an analysis completed at the time of
the rating of the obligor's ability to pay interest and repay principal. Rating agencies typically rely
to a large extent on historical data which may not accurately represent present or future circumstances.
Ratings do not purport to reflect the risk of fluctuations in market value of the debt security and are
not absolute standards of quality and only express the rating agency's current opinion of an obligor's
overall financial capacity to pay its financial obligations. A credit rating is not a statement of fact
or a recommendation to purchase, sell or hold a debt obligation. Also, credit quality can change suddenly
and unexpectedly, and credit ratings may not reflect the issuer's current financial condition or events
since the security was last rated. Rating agencies may have a financial interest in generating business,
including from the arranger or issuer of the security that normally pays for that rating, and providing
a low rating might affect the rating agency's prospects for future business. While rating agencies have
policies and procedures to address this potential conflict of interest, there is a risk that these policies
will fail to prevent a conflict of interest from impacting the rating.
Extension
The market value of some debt securities, particularly mortgage securities and certain asset-backed
securities, may be adversely affected when bond calls or prepayments on underlying mortgages or other
assets are less or slower than anticipated. This risk is extension risk. Extension risk may result from,
for example, rising interest rates or unexpected developments in the markets for the underlying assets
or mortgages. As a consequence, the security's effective maturity will be extended, resulting in an increase
in interest rate sensitivity to that of a longer-term instrument. Extension risk generally increases
as interest rates rise. This is because, in a rising interest rate environment, the rate of prepayment
and exercise of call or buy-back rights generally falls and the rate of default and delayed payment generally
rises. When the maturity of an investment is extended in a rising interest rate environment, a below-market
interest rate is usually locked-in and the value of the security reduced. This risk is greater for fixed-rate
than variable-rate debt securities.
Income Income risk is the risk that the Fund's
income will decline during periods of falling interest rates, when the Fund experiences defaults on debt
securities it holds or when the Fund realizes a loss upon a sale of a debt security. The Fund's income
declines when interest rates fall because, as the Fund's higher-yielding debt securities mature, are
prepaid or are sold, the Fund may have to re-invest the proceeds in debt securities that have lower interest
rates. The amount and rate of distributions that the Fund's shareholders receive are affected by the
income that the Fund receives from its portfolio holdings. If the income is reduced, distributions by
the Fund to shareholders may be less.
Fluctuations in income
paid to the Fund are generally greater for variable rate debt securities. The Fund may be deemed to receive
taxable income on certain securities which pay no cash payments until maturity, such as zero-coupon securities.
The Fund may be required to sell portfolio securities that it would otherwise continue to hold in order
to obtain sufficient cash to make the distribution to shareholders required for U.S. tax purposes.
Inflation
The market price of debt securities generally falls as inflation increases because the purchasing power
of the future income and repaid principal is expected to be worth less when received by the Fund. Debt
securities that pay a fixed rather than variable interest rate are especially vulnerable to inflation
risk because variable-rate debt securities may be able to participate, over the long term, in rising
interest rates which have historically corresponded with long-term inflationary trends.
25
Interest
rate The market value of debt securities generally varies in response to changes
in prevailing interest rates. Interest rate changes can be sudden and unpredictable. In addition, short-term
and long-term rates are not necessarily correlated to each other as short-term rates tend to be influenced
by government monetary policy while long-term rates are market driven and may be influenced by macroeconomic
events (such as economic expansion or contraction), inflation expectations, as well as supply and demand.
During periods of declining interest rates, the market value of debt securities generally increases.
Conversely, during periods of rising interest rates, the market value of debt securities generally declines.
This occurs because new debt securities are likely to be issued with higher interest rates as interest
rates increase, making the old or outstanding debt securities less attractive. In general, the market
prices of long-term debt securities or securities that make little (or no) interest payments are more
sensitive to interest rate fluctuations than shorter-term debt securities. The longer the Fund's average
weighted portfolio duration, the greater the potential impact a change in interest rates will have on
its share price. Also, certain segments of the fixed income markets, such as high quality bonds, tend
to be more sensitive to interest rate changes than other segments, such as lower-quality bonds.
Prepayment
Debt securities, especially bonds that are subject to "calls," such as asset-backed or mortgage-backed
securities, are subject to prepayment risk if their terms allow the payment of principal and other amounts
due before their stated maturity. Amounts invested in a debt security that has been "called" or "prepaid"
will be returned to an investor holding that security before expected by the investor. In such circumstances,
the investor, such as a fund, may be required to re-invest the proceeds it receives from the called or
prepaid security in a new security which, in periods of declining interest rates, will typically have
a lower interest rate. Prepayment risk is especially prevalent in periods of declining interest rates
and will result for other reasons, including unexpected developments in the markets for the underlying
assets or mortgages. For example, a decline in mortgage interest rates typically initiates a period of
mortgage refinancings. When homeowners refinance their mortgages, the investor in the underlying pool
of mortgage-backed securities (such as a fund) receives its principal back sooner than expected, and
must reinvest at lower, prevailing rates.
Securities subject to
prepayment risk are often called during a declining interest rate environment and generally offer less
potential for gains and greater price volatility than other income-bearing securities of comparable maturity.
Call risk is similar to prepayment risk and results from the ability of an issuer
to call, or prepay, a debt security early. If interest rates decline enough, the debt security's issuer
can save money by repaying its callable debt securities and issuing new debt securities at lower interest
rates.
The following is a description of other risks associated with the Fund's investments:
Focus
The greater the Fund's exposure to (or focus on) any single type of investment – including investment
in a given industry, sector, country, region, or type of security – the greater the impact of adverse
events or conditions in such industry, sector, country, region or investment will have on the Fund's
performance. To the extent the Fund has greater exposure to any single type of investment, the Fund's
potential for loss (or gain) will be greater than if its portfolio were invested more broadly in many
types of investments.
The Fund's exposure to such industries, sectors,
regions and other investments may also arise indirectly through the Fund's investments in debt securities
(e.g., mortgage or asset-backed securities) that are secured by such investments. Similar risks associated
with focusing on a particular type of investment may result if real properties and collateral securing
the Fund's investments are located in the same geographical region or subject to the same risks or concerns.
Inside
information The investment manager (through its representatives or otherwise) may receive
information that restricts the investment manager's ability to cause the Fund to buy or sell securities
of an issuer for substantial periods of time when the Fund otherwise could realize profit or avoid loss.
This may adversely affect the Fund's flexibility with respect to buying or selling securities and may
impair the Fund's liquidity.
Liquidity Liquidity risk exists when particular
investments are or become difficult to purchase or sell at the price at which the Fund has valued the
security, whether because of current market conditions, the financial condition of the issuer, or the
specific type of investment. If the market for a particular security becomes illiquid (for example, due
to changes in the issuer's financial condition), the Fund may be unable to sell such security at an advantageous
time or price due to the difficulty in selling such securities. To the extent that the Fund and its affiliates
hold a significant portion of an issuer's outstanding securities, the Fund may also be subject to greater
liquidity risk than if the issuer's securities were more widely held. The Fund may also need to sell
some of the Fund's more liquid securities when it otherwise would not do so in order to meet redemption
requests, even if such sale of the liquid holdings would be disadvantageous from an investment standpoint.
Reduced liquidity may also have an adverse impact on a security's market value and the sale of such securities
often results in higher brokerage charges or dealer discounts and other selling expenses. Reduced liquidity
in the secondary market for certain securities will also make it more difficult for the Fund to obtain
market quotations based on actual trades for purposes of valuing the Fund's portfolio and thus pricing
may be prone to error when market quotations are volatile, infrequent and/or subject to large spreads
between bid and ask prices. In addition, prices
26
received by the Fund for securities may be based on institutional “round lot”
sizes, but the Fund may purchase, hold or sell smaller, “odd lot” sizes, which may be harder to sell.
Odd lots may trade at lower prices than round lots, which may affect the Fund’s ability to accurately
value its investments.
The market for certain equity or debt securities
may become illiquid under adverse market or economic conditions independent of any specific adverse changes
in the conditions of a particular issuer. Liquidity risk generally increases (meaning that securities
become more illiquid) as the number, or relative need, of investors seeking to liquidate in a given market
increases; for example, when an asset class or classes fall out of favor and investors sell their holdings
in such classes, either directly or indirectly through investment funds, such as mutual funds and ETFs.
Management
The Fund is an actively managed ETF. The investment manager's judgments about markets, interest rates
or the attractiveness, relative values or potential appreciation of particular investment strategies
or sectors or securities purchased for the Fund's portfolio may prove to be incorrect, all of which could
cause the Fund to perform less favorably and may result in a decline in the Fund's NAV and trading price.
The investment manager selects investments for the Fund based on its own analysis
and information as well as on external sources of information, such as information that the investment
manager obtains from other sources including through conferences and discussions with third parties,
and data that issuers of securities provide to the investment manager or file with government agencies.
The investment manager may also use information concerning institutional positions and buying activity
in a security.
The investment manager is not in a position to confirm the
completeness, genuineness or accuracy of any of such information that is provided or filed by an issuer,
and in some cases, complete and accurate information is not readily available. It is also possible that
information on which the investment manager relies could be wrong or misleading. Additionally, legislative,
regulatory, or tax developments may affect the investment techniques available to the investment manager
in connection with managing the Fund and may also adversely affect the ability of the Fund to achieve
its investment goal. Management risk is greater when less qualitative information is available to the
investment manager about an investment.
Market The market value of securities owned
by the Fund may go up or down, sometimes rapidly or unpredictably due to general market conditions which
are not specifically related to a single corporate borrower or security issuer. These general market
conditions include real or perceived adverse economic or regulatory conditions, changes in the general
outlook for corporate earnings, changes in interest or currency exchange rates or adverse investor sentiment
generally. Market values may also decline due to factors which affect a particular industry or sector,
such as labor shortages or increased production costs and competitive conditions within an industry,
or a particular segment, such as mortgage or government securities. During a general downturn in the
securities markets, multiple asset classes may decline in value simultaneously. When markets perform
well, there can be no assurance that the Fund's securities will participate in or otherwise benefit from
the advance.
Secondary listings risk The Fund’s shares may be listed or
traded on U.S. and non-U.S. stock exchanges other than the U.S. stock exchange where the Fund’s primary
listing is maintained. There can be no assurance that the Fund’s shares will continue to trade on any
such stock exchange or in any market or that the Fund’s shares will continue to meet the requirements
for listing or trading on any exchange or in any market. The Fund’s shares may be less actively traded
in certain markets than others, and investors are subject to the execution and settlement risks and market
standards of the market where they or their broker direct their trades for execution. Certain information
available to investors who trade Fund shares on a U.S. stock exchange during regular U.S. market hours
may not be available to investors who trade in other markets, which may result in secondary market prices
in such markets being less efficient.
Portfolio turnover Portfolio turnover is a measure of how
frequently the Fund's portfolio securities are bought and sold. High portfolio turnover rates generally
increase transaction costs, which are Fund expenses. Such portfolio transactions may also result in the
realization of taxable capital gains, including short-term capital gains, which are generally taxable
at ordinary income tax rates for federal income tax purposes for shareholders subject to income tax and
who hold their shares in a taxable account. Higher transaction costs reduce the Fund's returns.
The SEC requires annual portfolio turnover to be calculated generally as the lesser
of the Fund's purchases or sales of portfolio securities during a given fiscal year, divided by the monthly
average value of the Fund's portfolio securities owned during that year (excluding securities with a
maturity or expiration date that, at the time of acquisition, was less than one year). For example, a
fund reporting a 100% portfolio turnover rate would have purchased and sold securities worth as much
as the monthly average value of its portfolio securities during the year. The portfolio turnover rates
for the Fund are disclosed in the sections entitled “Portfolio Turnover” and “Financial Highlights”
of the Fund's prospectus.
Portfolio turnover is affected by factors within and outside
the control of the Fund and its investment manager. The investment manager's investment outlook for the
type of securities in which the Fund invests may change as a result of
27
unexpected developments in domestic or international securities markets, or in
economic, monetary or political relationships. High market volatility may result in the investment manager
using a more active trading strategy than it might have otherwise pursued. The Fund's investment manager
will consider the economic effects of portfolio turnover but generally will not treat portfolio turnover
as a limiting factor in making investment decisions. Investment decisions affecting turnover may include
changes in investment policies or management personnel, as well as individual portfolio transactions.
Factors wholly outside the control of the investment manager that may increase
portfolio turnover include increased merger and acquisition activity, increased refinancing of outstanding
debt by an issuer, or increased rates of bankruptcy or default, that may create involuntary transactions
for funds that hold affected securities.
During periods of rapidly declining interest
rates, the rate of prepayments on portfolio investments may increase rapidly. When this happens, "sales"
of portfolio securities are increased due to the return of principal to the Fund followed by purchases
of new portfolio securities to replace the "sold" ones.
The rate of bond calls
by issuers of fixed-income debt securities may increase as interest rates decline. This causes "sales"
of called bonds by the Fund and the subsequent purchase of replacement investments.
In
addition, creations or redemptions by Authorized Participants (as defined below) may require the liquidation
or acquisition of portfolio securities. Changes in particular portfolio holdings may also be made whenever
a security is considered to be no longer the most appropriate investment for the Fund, or another security
appears to have a relatively better opportunity.
Policies and Procedures
Regarding the Release of Portfolio Holdings
On each business day of
the Fund, before the opening of regular trading on the Fund’s primary listing exchange, the Fund will
disclose on its website (https://www.franklintempleton.com/investor/investments-and-solutions/investment-options/etfs/)
certain information relating to the portfolio holdings that will form the basis for the Fund’s next
calculation of NAV per share. Consistent with current law, the Fund also releases complete portfolio
holdings information each fiscal quarter through regulatory filings with no more than a 60-day lag.
Each business day, the Fund’s portfolio holdings information will be provided
to Franklin Distributors, LLC (Distributors) or other agents for dissemination through the facilities
of the National Securities Clearing Corporation (NSCC) and/or other fee-based subscription services to
NSCC members and/or subscribers to those other fee-based subscription services, including large institutional
investors (known as “Authorized Participants”) that have been authorized by Distributors to purchase
and redeem large blocks of shares pursuant to legal requirements, and to entities that publish and/or
analyze such information in connection with the process of purchasing or redeeming Creation Units or
trading shares of the Fund in the secondary market.
Portfolio holdings information
made available in connection with the creation/redemption process may be provided to other entities that
provide services to the Fund in the ordinary course of business after it has been disseminated to the
NSCC. From time to time, information concerning portfolio holdings other than portfolio holdings information
made available in connection with the creation/redemption process, as discussed above, may be provided
to other entities that provide services to the Fund in the ordinary course of business. The eligible
third parties to whom portfolio holdings information may be released in advance of general release fall
into the following categories: data consolidators (including rating agencies), fund rating/ranking services
and other data providers and service providers to the Fund, including Authorized Participants and pricing
services.
Continuous Offering
The method by which Creation
Units are created and traded may raise certain issues under applicable securities laws. Because new Creation
Units are issued and sold by the Fund on an ongoing basis, at any point a “distribution,” as such
term is used in the 1933 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 that could render them statutory underwriters and subject them to the prospectus delivery
requirement and liability provisions of the 1933 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 Distributors, breaks them down into constituent shares and sells such shares directly to customers
or if it chooses to couple the creation of new shares with an active selling effort involving solicitation
of secondary market demand for shares. A determination of whether one is an underwriter for purposes
of the 1933 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,
generally are required to deliver a prospectus. This is
28
because the prospectus delivery exemption in Section 4(3) of the 1933 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 the Fund are reminded that, pursuant to Rule
153 under the 1933 Act, a prospectus delivery obligation under Section 5(b)(2) of the 1933 Act owed to
an exchange member in connection with a sale on the Listing Exchange is satisfied by the fact that the
prospectus is available at the Listing Exchange upon request. The prospectus delivery mechanism provided
in Rule 153 is available only with respect to transactions on an exchange.
The Trust has a board of trustees. Each trustee
will serve until that person resigns or retires and/or a successor is elected and qualified. The board
is responsible for the overall management of the Trust, including general supervision and review of the
Fund's investment activities. The board, in turn, appoints the officers of the Trust who are responsible
for administering the Trust‘s day-to-day operations. While none are expected, the board will act appropriately
to resolve any material conflict that may arise.
The name, year of birth
and address of the officers and board members, as well as their affiliations, positions held with the
Trust, principal occupations during at least the past five years, number of portfolios overseen in the
Franklin Templeton fund complex and other directorships held during at least the past five years are
shown below.
Independent Board Members
| | | | | |
Name,
Year of Birth and Address | Position | Length of Time Served | Number
of Portfolios
in Fund Complex Overseen by
Board Member1 | Other Directorships Held During at Least the Past 5 Years |
Rohit
Bhagat (1964) One Franklin Parkway San Mateo, CA 94403-1906 | Lead
Independent Trustee | Since 2017 | 59 | AssetMark Financial
Holdings, Inc. (investment solutions) (2018-present) and PhonePe (payment and financial services) (2020-present);
formerly,
Axis Bank (financial) (2013-2021), FlipKart Limited (2019-December 2020) (eCommerce company); CapFloat
Financial Services Pvt., Ltd. (non-banking finance company) (2018) and Zentific Investment Management
(hedge fund) (2015-2018). |
Principal Occupation During at Least the
Past 5 Years:
Managing Member, Mukt Capital, LLC (private investment firm) (2014-present); Advisor,
Optimal Asset Management (investment technology and advisory services company) (2015-present); Chief
Executive Officer and Director, FinTech Evolution Acquisition (eCommerce company) (February 2021-present);
and formerly, Chairman, Asia Pacific, BlackRock (2009-2012); Global Chief
Operating Officer, Barclays Global Investors (investment management) (2005-2009); and Senior Partner,
The Boston Consulting Group (management consulting) (1992-2005).
|
Deborah D. McWhinney (1955) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2020 | 59 | IHS Markit (information
services) (2015-present), Borg Warner (automotive) (2018-present), LegalShield (consumer services) (2020-present);
and formerly, Fluor Corporation (construction and engineering) (2014-2020)
and Focus Financial Partners, LLC (financial services) (2018-2020). |
Principal
Occupation During at Least the Past 5 Years:
Director of various companies; and formerly,
Board Member, Lloyds Banking Group (2015-2018) (financial institution) and Fresenius Medical Group (2016-2018)
(healthcare); Chief Executive Officer (2013-2014) and Chief Operating Officer (2011-2013), CitiGroup
Global Enterprise Payments (financial services); and President, Citi’s Personal Banking and Wealth
Management (2009-2011).
|
Anantha K. Pradeep (1963) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee | Since 2017 | 59 | None |
Principal
Occupation During at Least the Past 5 Years:
Chief Executive Officer, Smilable, Inc.
(technology company) (2014-present); Chief Executive Officer, MachineVantage (technology company) (2018-present);
Founder and Managing Partner, Consult Meridian, LLC (consulting company) (2009-present); and formerly,
Founder, BoardVantage (board portal solutions provider delivering paperless process for boards and leadership)
(2000-2002).
|
29
Interested Board Members and Officers
| | | | | |
Name, Year of Birth and Address | Position | Length of Time Served | Number of Portfolios
in Fund Complex Overseen
by
Board Member1 | Other Directorships
Held
During at Least the Past
5 Years |
Jennifer M. Johnson2
(1964) One Franklin Parkway San Mateo, CA 94403-1906 | Trustee
and Chairperson of the Board | Since 2017 | 70 | None |
Principal
Occupation During at Least the Past 5 Years:
Chief Executive Officer, President and
Director, Franklin Resources, Inc.; officer and/or director or trustee, as the case may be, of some of
the other subsidiaries of Franklin Resources, Inc. and of certain funds in the Franklin Templeton/Legg
Mason fund complex; and formerly, Chief Operating Officer and Executive
Vice President, Franklin Resources, Inc. (1994-2015); Executive Vice President of Operations and Technology,
Franklin Resources, Inc. (2005-2010); and Senior Vice President, Franklin Resources, Inc. (2003-2005).
|
Harris
Goldblat (1969) 100 First Stamford Place 6th Floor Stamford, CT. 06902 | Vice President and Secretary | Since June 2023 | Not
Applicable | Not Applicable |
Principal Occupation
During at Least the Past 5 Years:
Associate General Counsel, Franklin Templeton; officer of
certain funds in the Franklin Templeton/Legg Mason fund complex; formerly,
Managing Director and Associate General Counsel for Legg Mason & Co. |
Matthew
T. Hinkle (1971) One Franklin Parkway San Mateo, CA 94403-1906 | Chief
Executive Officer - Finance and Administration | Since 2017 | Not
Applicable | Not Applicable |
Principal Occupation
During at Least the Past 5 Years:
Senior Vice President, Franklin Templeton Services, LLC; officer
of certain funds in the Franklin Templeton/Legg Mason fund complex; and formerly,
Vice President, Global Tax (2012-April 2017) and Treasurer/Assistant Treasurer, Franklin Templeton (2009-2017).
|
Fred Jensen (1963) 280 Park Avenue New
York, NY 10017 | Chief Compliance Officer | Since 2021 | Not
Applicable | Not Applicable |
Principal Occupation
During at Least the Past 5 Years:
Director - Global Compliance of Franklin Templeton; Managing
Director of Legg Mason & Co.; Director of Compliance, Legg Mason Office of the Chief Compliance Officer;
Chief Compliance Officer, Franklin Advisory Services, LLC; Compliance Officer, Franklin Advisers, Inc.;
officer of certain funds in the Franklin Templeton/Legg Mason fund complex; formerly, Chief Compliance
Officer of Legg Mason Global Asset Allocation; Chief Compliance Officer, Legg Mason Private Portfolio;
Chief Compliance Officer to The Reserves Funds (investment adviser, funds and broker-dealer) and Ambac
Financial Group (investment adviser, funds and broker-dealer).
|
Susan Kerr (1949) 280 Park Avenue New York, NY 10017 | Vice President - AML Compliance | Since
2021 | Not Applicable | Not Applicable |
Principal Occupation
During at Least the Past 5 Years:
Senior Compliance Analyst, Franklin Templeton; Chief Anti-Money
Laundering Compliance Officer, Legg Mason & Co., or its affiliates; Anti Money Laundering Compliance
Officer; Senior Compliance Officer, LMIS; and officer of certain funds in the Franklin Templeton/Legg
Mason fund complex.
|
David Mann (1973) One Franklin Parkway San Mateo, CA 94403-1906 | Vice President | Since
March 2023 | Not Applicable | Not Applicable |
Principal Occupation
During at Least the Past 5 Years:
Head of Global ETF Product and Capital Markets, Franklin Templeton;
and officer of certain funds in the Franklin Templeton/Legg Mason fund complex.
|
Todd
Mathias (1983) One Franklin Parkway San Mateo, CA 94403-1906 | Vice
President | Since March 2023 | Not Applicable | Not Applicable |
Principal
Occupation During at Least the Past 5 Years:
Head of US ETF Product Strategy, Franklin
Templeton; and officer of certain funds in the Franklin Templeton/Legg Mason fund complex.
|
Patrick O’Connor (1967) One Franklin Parkway San Mateo, CA 94403-1906 | President and Chief Executive
Officer - Investment Management | Since 2017 | Not Applicable | Not
Applicable |
Principal Occupation During at Least the Past 5 Years:
President and Chief
Investment Officer, Franklin Advisory Services, LLC; Senior Vice President, Franklin Advisers, Inc.;
and officer of certain funds in the Franklin Templeton/Legg Mason fund complex.
|
30
| | | | | |
Name, Year of Birth and Address | Position | Length of Time Served | Number of Portfolios
in Fund Complex Overseen
by
Board Member1 | Other Directorships
Held
During at Least the Past
5 Years |
Vivek Pai (1970) 300 S.E. 2nd Street Fort Lauderdale, FL 33301-1923 | Treasurer,
Chief Financial Officer and Chief Accounting Officer | Since 2019 | Not
Applicable | Not Applicable |
Principal Occupation
During at Least the Past 5 Years:
Treasurer, U.S. Fund Administration & Reporting and officer
of certain funds in the Franklin Templeton/Legg Mason fund complex.
|
Note 1: Officer information is current as of the date of this SAI. It is possible
that after this date, information about officers may change.
1. We base the number
of portfolios on each separate series of the U.S. registered investment companies within the Franklin
Templeton/Legg Mason fund complex. These portfolios have a common investment manager or affiliated investment
managers.
2. Jennifer M. Johnson is considered to be an interested person of the Fund under
the federal securities laws due to her position as an officer and director of Franklin Resources, Inc.,
which is the parent company of the Fund's investment manager and distributor.
The
Trust's independent board members constitute the sole independent board members of five investment companies
in the Franklin Templeton complex. Effective May 1, 2023, each independent board member is paid a $130,000
annual retainer fee, together with a $15,000 per meeting fee for attendance at each regularly scheduled
board meeting, a portion of which fees are allocated to the Trust. To the extent held, compensation may
also be paid for attendance at specially held board meetings. The Trust's lead independent board member
is paid an annual supplemental retainer of $15,000 for services to such investment companies, a portion
of which is allocated to the Trust. Board members who serve on the Audit Committee of the Trust and such
other funds are paid a $3,000 fee per Committee meeting in which they participate, a portion of which
is allocated to the Trust. Rohit Bhagat, who serves as chairman of the Audit Committee of the Trust and
such other funds, receives a fee of $20,000 per year, a portion of which is allocated to the Trust. Board
members who serve on the Nominating and Governance Committee of the Trust and such other funds are paid
a $3,000 fee per Committee meeting in which they participate, a portion of which is allocated to the
Trust. Anantha K. Pradeep, who serves as chairman of the Nominating and Governance Committee of the Trust
and such other funds, receives a fee of $10,000 per year, a portion of which is allocated to the Trust.
Prior to May 1, 2023, each independent board member was paid a $110,000 annual retainer fee, together
with a $7,000 per meeting fee ($3,500 per meeting held via telephone) for attendance at each regularly
scheduled board meeting, a portion of which fees were allocated to the Trust. To the extent held, compensation
may also have been paid for attendance at specially held board meetings. The Trust’s lead independent
board member was paid an annual supplemental retainer of $15,000 for services to such investment companies,
a portion of which was allocated to the Trust. Board members who serve on the Audit Committee of the
Trust and such other funds were paid a $3,000 fee per Committee meeting in which they participated, a
portion of which was allocated to the Trust. Rohit Bhagat, who serves as chairman of the Audit Committee
of the Trust and such other funds, received a fee of $10,000 per year, a portion of which was allocated
to the Trust. Board members who serve on the Nominating and Governance Committee of the Trust and such
other funds were paid a $3,000 fee per Committee meeting in which they participated, a portion of which
was allocated to the Trust. Anantha K. Pradeep, who serves as chairman of the Nominating and Governance
Committee of the Trust and such other funds, received a fee of $10,000 per year, a portion of which was
allocated to the Trust.
The following table provides the total fees
paid to independent board members by the Trust and by other funds in Franklin Templeton.
| | | | | | | | | | | |
Name | | Total
Fees Received from the Trust ($)1 | | | Total Fees Received from Franklin Templeton ($)2 | | | Number
of Boards in Franklin Templeton on which Each Serves3 | |
Rohit Bhagat | | 6,845 | | | 135,008 | | | 5 | |
Deborah D. McWhinney | | 6,115 | | | 113,530 | | | 5 | |
Anantha K. Pradeep | | 6,433 | | | 115,568 | | | 5 | |
| | | | | | | | | | | |
1. |
For the fiscal year ended March 31, 2023. | |
2. |
For the calendar year ended December 31, 2022. | |
3. |
We base the number of boards on the number of U.S. registered investment companies in Franklin Templeton.
This number does not include the total number of series or portfolios within each investment company
for which the board members are responsible. | |
Independent board members
are reimbursed for expenses incurred in connection with attending board meetings and such expenses are
paid pro rata by each fund in Franklin Templeton for which they serve as director or trustee. No officer
or board member received any other compensation, including pension or retirement benefits, directly or
indirectly from the Trust or other funds in Franklin Templeton. Certain officers or board members who
are shareholders of Franklin Resources, Inc. (Resources) may be deemed to receive indirect remuneration
by virtue of their participation, if any, in the fees paid to its subsidiaries.
The
following tables provide the dollar range of equity securities beneficially owned by the board members
of the Trust on December 31, 2022.
31
Independent Board Members
| | | |
Name
of Board Member | Dollar Range of Equity Securities in the Fund | Aggregate
Dollar Range of Equity Securities in All Funds Overseen by the Board Member in the Franklin Templeton
Fund Complex |
Rohit Bhagat | None | None |
Deborah D. McWhinney | None | None |
Anantha K. Pradeep | None | None |
Interested Board Members
| | | |
Name
of Board Member | Dollar Range of Equity Securities in the Fund | Aggregate
Dollar Range of Equity Securities in All Funds Overseen by the Board Member in the Franklin Templeton
Fund Complex |
Jennifer M. Johnson | None | Over $100,000 |
Board
committees The board maintains two standing committees: the Audit Committee and the Nominating
and Governance Committee. The Audit Committee is generally responsible for recommending the selection
of the Fund’s independent registered public accounting firm (auditors), including evaluating their
independence and meeting with such auditors to consider and review matters relating to the Fund’s financial
reports and internal controls. The Audit Committee is comprised of the following independent trustees
of the Fund: Rohit Bhagat (Chair), Deborah D. McWhinney and Anantha Pradeep. The Nominating and Governance
Committee is comprised of the following independent trustees of the Fund: Rohit Bhagat, Deborah D. McWhinney
and Anantha Pradeep (Chair).
The Nominating and Governance Committee is
responsible for selecting candidates to serve as board members and recommending such candidates (a) for
selection and nomination as independent board members by the incumbent independent board members and
the full board; and (b) for selection and nomination as interested board members by the full board. The
Nominating and Governance Committee also oversees Board governance and related Trustee practices, including,
among other things, reviewing and making recommendations concerning Board structure and operations and
overseeing the annual Board self-assessment.
When the board has or expects to have a vacancy,
the Nominating and Governance Committee receives and reviews information on individuals qualified to
be recommended to the full board as nominees for election as board members, including any recommendations
by “Qualifying Fund Shareholders” (as defined below). To date, the Nominating and Governance Committee
has been able to identify, and expects to continue to be able to identify, from its own resources an
ample number of qualified candidates. The Nominating and Governance Committee, however, will review recommendations
from Qualifying Fund Shareholders to fill vacancies on the board if these recommendations are submitted
in writing and addressed to the Nominating and Governance Committee at the Trust's offices at One Franklin
Parkway, San Mateo, CA 94403-1906 and are presented with appropriate background material concerning the
candidate that demonstrates his or her ability to serve as a board member, including as an independent
board member, of the Trust. A Qualifying Fund Shareholder is a shareholder who (i) has continuously owned
of record, or beneficially through a financial intermediary, shares of the Fund having a net asset value
of not less than two hundred and fifty thousand dollars ($250,000) during the 24-month period prior to
submitting the recommendation; and (ii) provides a written notice to the Nominating and Governance Committee
containing the following information: (a) the name and address of the Qualifying Fund Shareholder making
the recommendation; (b) the number of shares of the Fund which are owned of record and beneficially by
such Qualifying Fund Shareholder and the length of time that such shares have been so owned by the Qualifying
Fund Shareholder; (c) a description of all arrangements and understandings between such Qualifying Fund
Shareholder and any other person or persons (naming such person or persons) pursuant to which the recommendation
is being made; (d) the name, age, date of birth, business address and residence address of the person
or persons being recommended; (e) such other information regarding each person recommended by such Qualifying
Fund Shareholder as would be required to be included in a proxy statement filed pursuant to the proxy
rules of the SEC had the nominee been nominated by the board; (f) whether the shareholder making the
recommendation believes the person recommended would or would not be an “interested person” of the
Trust, as defined in the 1940 Act; and (g) the written consent of each person recommended to serve as
a board member of the Trust if so nominated and elected/appointed.
The Nominating and Governance
Committee may amend these procedures from time to time, including the procedures relating to the evaluation
of nominees and the process for submitting recommendations to the Nominating and Governance Committee.
During the fiscal year ended March 31, 2023, the Audit Committee met two times;
the Nominating and Governance Committee met once.
Board role in risk oversight
The board, as a whole, considers risk management issues as part of its general oversight responsibilities
throughout the year at regular board meetings, through regular reports that have been developed by management,
in consultation with the board and its counsel. These reports address certain investment, valuation,
liquidity and compliance matters. The board also may receive special written reports or presentations
on a variety of risk issues, either upon the board’s request or upon the investment manager’s initiative.
In addition, the Audit Committee of the board meets regularly with the investment
32
manager's internal audit group to review reports on their examinations of functions
and processes within Franklin Templeton that affect the Fund.
With
respect to investment risk, the board receives regular written reports describing and analyzing the investment
performance of the Fund. In addition, the portfolio managers of the Fund meet regularly with the board
to discuss portfolio performance, including investment risk. To the extent that the Fund changes a particular
investment strategy that could have a material impact on the Fund’s risk profile, the board generally
is consulted with respect to such change. To the extent that the Fund invests in certain complex securities,
including derivatives, the board receives periodic reports containing information about exposure of the
Fund to such instruments. In addition, the investment manager's investment risk personnel meet regularly
with the board to discuss a variety of issues, including the impact on the Fund of the investment in
particular securities or instruments, such as derivatives and commodities.
With
respect to valuation, the Fund’s investment manager provides periodic reports to the board that enable
the board to oversee the Fund's investment manager, as the board's Valuation Designee, in monitoring
and assessing material risks associated with fair valuation determinations, including material conflicts
of interest. In addition, the board reviews the investment manager's performance of an annual valuation
risk assessment under which the investment manager seeks to identify and enumerate material valuation
risks which are or may be impactful to the Fund including, but not limited to (1) the types of investments
held (or intended to be held) by the Fund, giving consideration to those investments’ characteristics;
(2) potential market or sector shocks or dislocations which may affect the ongoing valuation operations;
and (3) the extent to which each fair value methodology uses unobservable inputs. The investment manager
reports any material changes to the risk assessment, along with appropriate actions designed to manage
such risks, to the Board.
With respect to liquidity risk, the board
receives liquidity risk management reports under the Fund’s Liquidity Risk Management (LRM) Program
and reviews, no less frequently than annually, a written report prepared by the LRM Program Administrator
that addresses, among other items, the operation of the LRM Program and assesses its adequacy and effectiveness
of implementation as well as any material changes to the LRM Program.
With
respect to compliance risks, the board receives regular compliance reports prepared by the investment
manager’s compliance group and meets regularly with the Fund’s Chief Compliance Officer (CCO) to
discuss compliance issues, including compliance risks. In accordance with SEC rules, the independent
board members meet regularly in executive session with the CCO, and the Fund’s CCO prepares and presents
an annual written compliance report to the board. The Fund’s board adopts compliance policies and procedures
for the Fund and approves such procedures for the Fund’s service providers. The compliance policies
and procedures are specifically designed to detect and prevent violations of the federal securities laws.
The investment manager periodically provides an enterprise risk management presentation
to the board to describe the way in which risk is managed on a complex-wide level. Such presentation
covers such areas as investment risk, reputational risk, personnel risk, and business continuity risk.
Board
structure Seventy-five percent of board members consist of independent board members who
are not deemed to be “interested persons” by reason of their relationship with the Fund’s management
or otherwise as provided under the 1940 Act. While the Chairperson of the Board is an interested person,
the board is also served by a lead independent board member. The lead independent board member, together
with independent counsel, reviews proposed agendas for board meetings and generally acts as a liaison
with management with respect to questions and issues raised by the independent board members. The lead
independent board member also presides at separate meetings of independent board members held in advance
of each scheduled board meeting where various matters, including those being considered at such board
meeting are discussed. It is believed such structure and activities assure that proper consideration
is given at board meetings to matters deemed important to the Fund and its shareholders.
Trustee
qualifications Information on the Fund’s officers and board members appears above including
information on the business activities of board members during the past five years and beyond. In addition
to personal qualities, such as integrity, the role of an effective Fund board member inherently requires
the ability to comprehend, discuss and critically analyze materials and issues presented in exercising
judgments and reaching informed conclusions relevant to his or her duties and fiduciary obligations.
The board believes that the specific background of each board member evidences such ability and is appropriate
to his or her serving on the Fund’s board. As indicated, Rohit Bhagat has extensive experience in the
asset management and financial services industries, Deborah D. McWhinney has extensive management, risk
and cyber security experience, Dr. Pradeep has served as chief executive officer of consulting and technology
companies and Jennifer M. Johnson is a high ranking executive officer of Franklin Templeton.
The Fund’s board of trustees has designated
the investment manager as the board’s Valuation Designee to perform fair value determinations for the
Fund and to assess any material
33
risks associated with such determinations, including material conflicts of interest,
if any. The Valuation Designee also performs an annual valuation risk assessment to identify and enumerate
material valuation risks which are or may be impactful to the Fund. The Fund’s investment manager and
its affiliates have formed a Valuation Committee (VC) to assist these obligations. The VC oversees and
administers the policies and procedures governing fair valuation determination of securities. The VC
meets monthly to review and approve fair value reports and conduct other business, and meets whenever
necessary to review potential significant market events and take appropriate steps to adjust valuations
in accordance with established policies. The VC also reviews the investment manager’s annual valuation
risk assessment and provides periodic reports to the board of trustees regarding pricing determinations.
The Fund's policies and procedures governing fair valuation determination of securities
have been initially reviewed and approved by the board of trustees and any material amendments will also
be reviewed and approved by the board. The investment manager's compliance staff, or another group within
Franklin Templeton, conducts periodic reviews of compliance with the policies and provides at least annually
a report to the board of trustees regarding the operation of the policies and any material changes recommended
as a result of such review.
Proxy Voting Policies and Procedures The board of trustees of the Fund has delegated the authority to vote proxies
related to the portfolio securities held by the Fund to the Fund's investment manager, Franklin Advisers,
Inc., in accordance with the Proxy Voting Policies and Procedures (Policies) adopted by the investment
manager. The Policies are included in Appendix A. Shareholders may also view the complete Policies online
at franklintempleton.com. Copies of the Fund’s proxy voting records are available online at franklintempleton.com
(search proxy voting records) and posted on the SEC website at www.sec.gov. The proxy voting records
are updated each year by August 31 to reflect the most recent 12-month period ended June 30.
Management
and Other Services Investment manager and services provided The Fund's investment
manager is Franklin Advisers, Inc. (Advisers), One Franklin Parkway, San Mateo, CA 94403-1906. The investment
manager is a wholly owned subsidiary of Resources, a publicly owned company engaged in the financial
services industry through its subsidiaries. Charles B. Johnson (former Chairman and Director of Resources)
and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
The
investment manager provides investment research and portfolio management services, and selects the securities
for the Fund to buy, hold or sell. The investment manager also selects the brokers who execute the Fund's
portfolio transactions. The investment manager provides periodic reports to the board, which reviews
and supervises the investment manager's investment activities. To protect the Fund, the investment manager
and their officers, directors and employees are covered by fidelity insurance.
The
investment manager makes decisions for the Fund in accordance with its obligations as investment adviser
to the Fund. From time to time, certain affiliates may request that the investment manager focus the
Fund’s investments on certain securities, strategies or markets or shift the Fund’s strategy slightly
to enhance its attractiveness to specific investors, which may create a conflict of interest. The investment
manager may, but is not required to, focus or shift the Fund’s investments in the manner requested
provided that the investment manager believes that such investments are consistent with the Fund’s
stated investment goals and strategies and are in the best interests of the Fund and its shareholders.
In addition, the investment manager and its affiliates manage numerous other investment companies and
accounts. The investment manager may give advice and take action with respect to any of the other funds
it manages, or for its own account, that may differ from action taken by the investment manager on behalf
of the Fund. Similarly, with respect to the Fund, the investment manager is not obligated to recommend,
buy or sell, or to refrain from recommending, buying or selling any security that the investment manager
and access persons, as defined by applicable federal securities laws, may buy or sell for its or their
own account or for the accounts of any other fund. The investment manager is not obligated to refrain
from investing in securities held by the Fund or other funds it manages.
The
Fund, its investment manager and principal underwriter have each adopted a code of ethics, as required
by federal securities laws. Under the code of ethics, employees who are designated as access persons
may engage in personal securities transactions, including transactions involving securities that are
being considered for the Fund or that are currently held by the Fund, subject to certain general restrictions
and procedures. The personal securities transactions of access persons of the Fund, its investment manager
and principal underwriter will be governed by the code of ethics. The code of ethics is on file with,
and available from, the SEC.
Management fees The Fund pays Advisers a unified management
fee for managing the Fund’s assets. Pursuant to the investment management agreement with the Trust
on behalf of the Fund effective October 1, 2021, Advisers reimburses the Fund for all acquired fund fees
and expenses (such as those associated with the Fund's investment in a Franklin Templeton money fund)
and pays all of the ordinary
34
operating expenses of the Fund, except for (i) the Fund’s management fee, (ii)
payments under the Fund’s Rule 12b-1 plan (if any), (iii) brokerage expenses (including any costs incidental
to transactions in portfolio securities or instruments), (iv) taxes, (v) interest (including borrowing
costs and dividend expenses on securities sold short and overdraft charges), (vi) litigation expenses
(including litigation to which the Trust or the Fund may be a party and indemnification of the Trustees
and officers with respect thereto), and (vii) other non-routine or extraordinary expenses. The fee is
equal to the annual rate of 0.25% of the average daily net assets of the Fund.
Prior
to October 1, 2021, the Fund paid the investment manager a management fee equal to an annual rate of
0.30% of the average daily net assets of the Fund. Prior to October 1, 2021, the investment manager had
agreed to waive or limit its fees and to assume as its own certain expenses otherwise payable by the
Fund so that expenses (other than certain excluded items) did not exceed the amount of the management
fee level in effect at that time.
For the last three fiscal years ended March
31, the Fund paid the following management fees:
| | | | |
| | Management Fees Earned
($) | Acquired
Fund Fees and Expenses Reimbursed ($)1 | Management Fee Paid
(After Acquired Fund Fees and Expenses Reimbursed) ($)2 |
2023 | 658,893 | 15,879 | 643,014 |
2022 | 1,215,058 | 230,282 | 984,776 |
2021 | 1,323,684 | 531,172 | 792,512 |
1. For periods prior
to October 1, 2021, represents amounts waived or reimbursed under an agreement by the investment manager
to waive or limit its fees and to assume certain expenses otherwise payable by the Fund.
2.
For periods prior to October 1, 2021, represents management fee paid after waivers and reimbursements
pursuant to an agreement with the investment manager to waive or limit its fees and to assume certain
expenses otherwise payable by the Fund.
Portfolio managers This section
reflects information about the portfolio managers as of March 31, 2023.
The
following table shows the number of other accounts managed by the portfolio managers and the total assets
in the accounts managed within each category:
| | | | | | | |
Name | Number of Other Registered Investment Companies
Managed1 | Assets of Other Registered Investment Companies
Managed (x $1 million)1 | Number of Other Pooled
Investment Vehicles Managed2 | Assets of Other Pooled
Investment Vehicles Managed
(x $1 million)2 | Number of Other Accounts
Managed2 | Assets of Other Accounts Managed
(x
$1 million)2 |
Neil Dhruv | 4 | 3,933.2 | 33 | 2,313.53 | 23 | 2,834.63 |
Patrick Klein | 10 | 12,186.0 | 6 | 1,079.7 | 3 | 566.8 |
Paul Varunok | 4 | 3,933.2 | 44 | 2,353.54 | 94 | 3,028.54 |
1. These figures represent registered investment companies other than the Fund.
2. The various pooled investment vehicles and accounts listed are managed by
a team of investment professionals. Accordingly, the portfolio managers listed would not be solely responsible
for managing such listed amounts.
3. Mr. Dhruv manages one pooled investment
vehicle with $1,561.5 million in assets and one other account with $2,176.4 million in assets with a
performance fee.
4. Mr. Varunok manages one pooled investment vehicle with
$1,561.5 million in assets and one other account with $2,176.4 million in assets with a performance fee.
Portfolio managers that provide investment services to the Fund may also provide
services to a variety of other investment products, including other funds, institutional accounts and
private accounts. The advisory fees for some of such other products and accounts may be different than
that charged to the Fund and may include performance based compensation (as noted in the chart above,
if any). This may result in fees that are higher (or lower) than the advisory fees paid by the Fund.
As a matter of policy, each fund or account is managed solely for the benefit of the beneficial owners
thereof. As discussed below, the separation of the trading execution function from the portfolio management
function and the application of objectively based trade allocation procedures help to mitigate potential
conflicts of interest that may arise as a result of the portfolio managers managing accounts with different
advisory fees.
Conflicts. The management of multiple funds, including the Fund, and
accounts may also give rise to potential conflicts of interest if the funds and other accounts have different
objectives, benchmarks, time horizons, and fees as the portfolio manager must allocate his or her time
and investment ideas across multiple funds and accounts. The investment manager seeks to manage such
competing interests for the time and attention of portfolio managers by having portfolio managers focus
on a particular investment discipline. Most other accounts managed by a portfolio manager are managed
using the same investment strategies that are used in connection with the management of the Fund. Accordingly,
portfolio holdings, position sizes, and industry and sector exposures tend to be similar across similar
portfolios, which may minimize the potential for conflicts of interest. As noted above, the separate
management of the trade execution and valuation functions from the portfolio management process also
helps to reduce potential conflicts of interest. However, securities selected for funds or accounts other
than the Fund may outperform the securities selected for the Fund. Moreover, if a portfolio manager identifies
a limited investment opportunity that may be suitable for more than one fund or other account, the Fund
may not be able to
35
take full advantage of that opportunity due to an allocation of that opportunity
across all eligible funds and other accounts. The investment manager seeks to manage such potential conflicts
by using procedures intended to provide a fair allocation of buy and sell opportunities among funds and
other accounts.
The structure of a portfolio manager’s compensation may
give rise to potential conflicts of interest. A portfolio manager’s base pay and bonus tend to increase
with additional and more complex responsibilities that include increased assets under management. As
such, there may be an indirect relationship between a portfolio manager’s marketing or sales efforts
and his or her bonus.
Finally, the management of personal accounts by a portfolio
manager may give rise to potential conflicts of interest. While the funds and the investment manager
have adopted a code of ethics which they believe contains provisions designed to prevent a wide range
of prohibited activities by portfolio managers and others with respect to their personal trading activities,
there can be no assurance that the code of ethics addresses all individual conduct that could result
in conflicts of interest.
The investment manager and the Fund have adopted certain compliance
procedures that are designed to address these, and other, types of conflicts. However, there is no guarantee
that such procedures will detect each and every situation where a conflict arises.
Compensation.
The investment manager seeks to maintain a compensation program that is competitively positioned to
attract, retain and motivate top-quality investment professionals. Portfolio managers receive a base
salary, a cash incentive bonus opportunity, an equity compensation opportunity, and a benefits package.
Portfolio manager compensation is reviewed annually, and the level of compensation is based on individual
performance, the salary range for a portfolio manager’s level of responsibility and Franklin Templeton
guidelines. Portfolio managers are provided no financial incentive to favor one fund or account over
another. Each portfolio manager’s compensation consists of the following three elements:
Base salary Each portfolio manager is paid a base salary.
Annual bonus Annual bonuses are structured to align the interests of
the portfolio manager with those of the Fund’s shareholders. Each portfolio manager is eligible to
receive an annual bonus. Bonuses generally are split between cash (50% to 65%) and restricted shares
of Resources stock (17.5% to 25%) and fund shares (17.5% to 25%). The deferred equity-based compensation
is intended to build a vested interest of the portfolio manager in the financial performance of both
Resources and funds advised by the investment manager. The bonus plan is intended to provide a competitive
level of annual bonus compensation that is tied to the portfolio manager achieving consistently strong
investment performance, which aligns the financial incentives of the portfolio manager and Fund shareholders.
The Chief Investment Officer of the investment manager and/or other officers of the investment manager,
with responsibility for the Fund, have discretion in the granting of annual bonuses to portfolio managers
in accordance with Franklin Templeton guidelines. The following factors are generally used in determining
bonuses under the plan:
• Investment performance. Primary consideration
is given to the historic investment performance over the 1, 3 and 5 preceding years of all accounts managed
by the portfolio manager. The pre-tax performance of each fund managed is measured relative to a relevant
peer group and/or applicable benchmark as appropriate.
• Non-investment performance. The more qualitative
contributions of the portfolio manager to the investment manager’s business and the investment management
team, including professional knowledge, productivity, responsiveness to client needs and communication,
are evaluated in determining the amount of any bonus award.
• Responsibilities. The characteristics and complexity of
funds managed by the portfolio manager are factored in the investment manager’s appraisal.
Additional long-term equity-based compensation Portfolio managers
may also be awarded restricted shares or units of Resources stock or restricted shares or units of one
or more funds. Awards of such deferred equity-based compensation typically vest over time, so as to create
incentives to retain key talent.
Benefits Portfolio managers
also participate in benefit plans and programs available generally to all employees of the investment
manager.
Ownership of Fund shares. The investment manager has a policy of
encouraging portfolio managers to invest in the funds they manage. Exceptions arise when, for example,
a fund is closed to new investors or when tax considerations or jurisdictional constraints cause such
an investment to be inappropriate for the portfolio manager. The following is the dollar range of Fund
shares beneficially owned by the portfolio managers (such amounts may change from time to time):
| | |
Portfolio Manager | Dollar Range of Fund Shares
Beneficially Owned |
Neil Dhruv | None |
Patrick Klein | $1
- $10,000 |
Paul Varunok | None |
Administrator and
services provided Franklin Templeton Services, LLC (FT Services) has an agreement with the
36
investment manager to provide certain administrative services and facilities for
the Fund. FT Services is an indirect, wholly owned subsidiary of Resources and is an affiliate of the
Fund's investment manager and principal underwriter.
The administrative services
FT Services provides include preparing and maintaining books, records, and tax and financial reports,
and monitoring compliance with regulatory requirements.
Administration fees The Fund’s
investment manager pays FT Services a monthly fee equal to 105% of the internal costs incurred by FT
Services for providing administrative services to the Fund. The investment manager also reimburses FT
Services for fees paid by FT Services to any third-party service provider for sub-administration and
other services contemplated by the agreement between the investment manager and FT Services. The fee
is paid by the Fund’s investment manager and is not an additional expense of the Fund.
For the last three fiscal years ended March 31, the investment manager paid FT
Services the following administration fees:
| | |
| | Administration
Fees Paid (After Waivers / Expenses Reimbursed) ($) |
2023 | 42,352 |
2022 | 42,077 |
2021 | 107,546 |
Transfer agent The Bank of New
York Mellon (BNY Mellon), 111 Sanders Creek Parkway, East Syracuse, NY 13057, acts as the Fund’s transfer
agent and dividend-paying agent.
Sub-administrator BNY Mellon has an agreement with FT Services
to provide certain sub-administrative services for the Fund. The administrative services provided by
BNY Mellon include, but are not limited to, certain fund accounting, financial reporting, tax, corporate
governance and compliance and legal administration services.
Custodian BNY Mellon also
acts as custodian of the Fund’s securities and other assets (Custodian). The Custodian is located at
100 Church Street, New York, NY 10286. As foreign custody manager, the Custodian selects and monitors
foreign subcustodian banks, selects and evaluates non-compulsory foreign depositories, and furnishes
information relevant to the selection of compulsory depositories.
Independent Registered
Public Accounting Firm PricewaterhouseCoopers LLP, 405 Howard Street, Suite 600,
San Francisco, CA 94105, is the Fund's independent registered public accounting firm. The independent
registered public accounting firm audits the financial statements included in the Fund's Annual Report
to shareholders.
Payments to Financial Intermediaries The investment manager, Distributors
and/or their affiliates may enter into contractual arrangements with certain broker-dealers and other
financial intermediaries that the investment manager, Distributors and/or their affiliates believe may
benefit the Fund. Pursuant to such arrangements, the investment manager, Distributors and/or their affiliates
may provide cash payments or non-cash compensation to intermediaries for certain activities related to
the Fund. Such payments are designed to make registered representatives and other professionals more
knowledgeable about exchange-traded products, including the Fund, or for other activities, such as participating
in marketing activities and presentations, educational training programs, conferences, data collection
and provision, technology support, the development of technology platforms and reporting systems. The
investment manager, Distributors and/or their affiliates may also pay intermediaries for certain printing,
publishing and mailing costs associated with the Fund or materials relating to ETFs in general.
In addition, the investment manager, Distributors and/or their affiliates may
make payments to intermediaries that make Fund shares available to their clients or for otherwise promoting
the Fund. Payments of this type are sometimes referred to as revenue-sharing payments. Any payments made
pursuant to such arrangements may vary in any year and may be different for different intermediaries.
In certain cases, the payments described in the preceding sentence may be subject to certain minimum
payment levels. As of March 31, 2023, the intermediaries receiving such payments include Avantax Wealth
Management, LPL Financial LLC, Morgan Stanley Smith Barney LLC and Pershing LLC. Any additions, modifications
or deletions to this list of financial intermediaries that have occurred since the date noted above are
not included in the list.
Any payments described above by the investment
manager, Distributors and/or their affiliates will be made from their own assets and not from the assets
of the Fund. Although a portion of the investment manager’s revenue comes directly or indirectly in
part from fees paid by the Fund, payments to financial intermediaries are not financed by the Fund and
therefore do not increase the price paid by investors for the purchase of shares of, or the cost of owning,
the Fund or reduce the amount received by a shareholder as proceeds from the redemption of Fund shares.
As a result, such payments are not reflected in the fees and expenses listed in the fees and expenses
sections of the Fund’s prospectus.
The investment manager periodically assesses
the advisability of continuing to make these payments. Payments to a financial intermediary may be significant
to that intermediary, and amounts that intermediaries pay to your adviser, broker or other investment
professional, if any, may also be significant to such adviser, broker or investment professional. Because
an intermediary may make decisions about what investment options it will make available or recommend,
and what services to provide in connection with various products, based on payments it receives or is
eligible
37
to receive, such payments create conflicts of interest between the intermediary
and its clients. For example, these financial incentives may cause the intermediary to recommend the
Fund over other investments. The same conflict of interest exists with respect to your financial adviser,
broker or investment professionals if he or she receives similar payments from his or her intermediary
firm.
Please contact your salesperson, adviser, broker or other investment professional
for more information regarding any such payments or financial incentives his or her intermediary firm
may receive. Any payments made, or financial incentives offered, by the investment manager, Distributors
and/or their affiliates made to an intermediary may create the incentive for the intermediary to encourage
customers to buy shares of the Fund.
The investment manager selects brokers and dealers to execute the Fund's portfolio
transactions in accordance with criteria set forth in the management agreement and any directions that
the board may give.
When placing a portfolio transaction, the trading department
of the investment manager seeks to obtain "best execution" -- the best combination of high quality transaction
execution services, taking into account the services and products to be provided by the broker or dealer,
and low relative commission rates with the view of maximizing value for the Fund and its other clients.
Orders for fixed-income securities are ordinarily placed with market makers on a net basis, without any
brokerage commissions.
The investment manager may cause the Fund to pay certain brokers
commissions that are higher than those another broker may charge, if the investment manager determines
in good faith that the amount paid is reasonable in relation to the value of the brokerage and research
services it receives. This may be viewed in terms of either the particular transaction or the investment
manager's overall responsibilities to client accounts over which it exercises investment discretion.
The brokerage commissions that are used to acquire services other than brokerage are known as "soft dollars."
Research provided can be either proprietary (created and provided by the broker-dealer, including tangible
research products as well as access to analysts and traders) or third party (created by a third party
but provided by the broker-dealer). To the extent permitted by applicable law, the investment manager
may use soft dollars to acquire both proprietary and third-party research.
The
research services that brokers may provide to the investment manager include, among others, supplying
information about particular companies, markets, countries, or local, regional, national or transnational
economies, statistical data, quotations and other securities pricing information, and other information
that provides lawful and appropriate assistance to the investment manager in carrying out its investment
advisory responsibilities. These services may not always directly benefit the Fund. They must, however,
be of value to the investment manager in carrying out its overall responsibilities to its clients.
Since most purchases by the Fund are principal transactions at net prices, the
Fund incurs little or no brokerage costs. The Fund deals directly with the selling or buying principal
or market maker without incurring charges for the services of a broker on its behalf, unless it is determined
that a better price or execution may be obtained by using the services of a broker. Purchases of portfolio
securities from underwriters will include a commission or concession paid to the underwriter, and purchases
from dealers will include a spread between the bid and ask price. The Fund seeks to obtain prompt execution
of orders at the most favorable net price. Transactions may be directed to dealers in return for research
and statistical information, as well as for special services provided by the dealers in the execution
of orders.
It is not possible to place an accurate dollar value on the
special execution or on the research services the investment manager receives from dealers effecting
transactions in portfolio securities. The allocation of transactions to obtain additional research services
allows the investment manager to supplement its own research and analysis activities and to receive the
views and information of individuals and research staffs from many securities firms. The receipt of these
products and services does not reduce the investment manager's research activities in providing investment
advice to the Fund.
As long as it is lawful and appropriate to do so, the investment
manager and its affiliates may use this research and data in their investment advisory capacities with
other clients.
Because Distributors is a member of the Financial Industry
Regulatory Authority (FINRA), it may sometimes receive certain fees when the Fund tenders portfolio securities
pursuant to a tender-offer solicitation. To recapture brokerage for the benefit of the Fund, any portfolio
securities tendered by the Fund will be tendered through Distributors if it is legally permissible to
do so. In turn, the next management fee payable to the investment manager will be reduced by the amount
of any fees received by Distributors in cash, less any costs and expenses incurred in connection with
the tender.
If purchases or sales of securities of the Fund and one or
more other investment companies or clients supervised by the investment manager are considered at or
about the same time, transactions in these securities will be allocated among the several investment
companies and clients in a manner deemed equitable to all by the investment manager, taking into account
the respective sizes of the accounts and the amount of securities to be purchased or sold. In some cases,
38
this procedure could have a detrimental effect on the price or volume of the security
so far as the Fund is concerned. In other cases, it is possible that the ability to participate in volume
transactions may improve execution and reduce transaction costs to the Fund.
For
the last three fiscal years ended March 31, the Fund paid the following brokerage commissions:
| | | | | |
| | | Brokerage
Commissions ($) |
| | | 2023 | 2022 | 2021 |
| | | 4,239 | 5,900 | 5,088 |
For the fiscal year ended March 31, 2023, the Fund did not pay brokerage commissions
to brokers who provided research services.
As of March 31, 2023, the Fund did not own
securities issued by its regular broker-dealers.
Because the Fund may,
from time to time, invest in broker-dealers, it is possible that the Fund will own more than 5% of the
voting securities of one or more broker-dealers through whom the Fund places portfolio brokerage transactions.
In such circumstances, the broker-dealer would be considered an affiliated person of the Fund. To the
extent the Fund places brokerage transactions through such a broker-dealer at a time when the broker-dealer
is considered to be an affiliate of the Fund, the Fund will be required to adhere to certain rules relating
to the payment of commissions to an affiliated broker-dealer. These rules require the Fund to adhere
to procedures adopted by the board to ensure that the commissions paid to such broker-dealers do not
exceed what would otherwise be the usual and customary brokerage commissions for similar transactions.
The following discussion is a summary of certain additional tax considerations
generally affecting the Fund and its shareholders, some of which may not be described in the Fund’s
prospectus. No attempt is made to present a complete detailed explanation of the tax treatment of the
Fund or its shareholders. The discussions here and in the prospectus are not intended as a substitute
for careful tax planning.
The following discussion is based on the Internal Revenue
Code of 1986, as amended (the “Code”), and applicable regulations in effect on the date of this SAI,
including any amendments to the Code resulting from 2017 legislation commonly known as the Tax Cuts and
Jobs Act ("TCJA"). Future legislative, regulatory or administrative changes, including any provisions
of law that sunset and thereafter no longer apply, or court decisions may significantly change the tax
rules applicable to the Fund and its shareholders. Any of these changes or court decisions may have a
retroactive effect. Where indicated below, IRS refers to the United States Internal Revenue Service.
This is for general information only and not tax advice. All investors should
consult their own tax advisors as to the federal, state, local and foreign tax provisions applicable
to them.
Distributions The Fund intends to declare and pay income dividends monthly
from its net investment income. Capital gains, if any, may be paid at least annually. The Fund may distribute
income dividends and capital gains more frequently, if necessary or appropriate in the board’s discretion.
The amount of any distribution will vary, and there is no guarantee the Fund will pay either income dividends
or capital gain distributions. Distributions in cash may be reinvested automatically in additional whole
Fund shares only if the broker through whom you purchased the shares makes such option available. Distributions
declared in October, November or December to shareholders of record in such month and paid in January
are taxable as if they were paid in December.
Distributions of net investment income.
The Fund receives income generally in the form of interest on its investments.
The Fund may also recognize ordinary income from other sources. This income, less expenses incurred in
the operation of the Fund, constitutes the Fund's net investment income from which dividends may be paid
to you. If you are a taxable investor, any income dividends (other than qualified dividends) the Fund
pays are taxable to you at ordinary income tax rates. Generally, none or only a small portion of the
income dividends paid to you may be qualified dividends eligible to be taxed at reduced rates.
Investment company dividends paid to you from interest earned on certain U.S.
government securities may be exempt from state and local taxation, subject in some states to minimum
investment or reporting requirements that must be met by the Fund.
Distributions of capital gains. The
Fund may realize capital gains and losses on the sale of its portfolio securities.
Distributions of short-term capital gains are taxable to you as ordinary income.
Distributions of long-term capital gains are taxable to you as long-term capital gains, regardless of
how long you have owned your shares in the Fund. Any net capital gains realized by the Fund (in excess
of any available capital loss carryovers) generally are distributed once each year, and may be distributed
more frequently, if necessary, to reduce or eliminate excise or income taxes on the Fund.
Capital gain dividends and any net long-term capital gains you realize from the
sale of Fund shares are generally taxable at the reduced long-term capital gains tax rates. For single
individuals with taxable income not in excess of $44,625 in 2023 ($89,250 for married individuals filing
jointly), the long-term capital gains tax rate is 0%. For single individuals and joint filers with taxable
income in excess of these amounts but not more than $492,300 or $553,850, respectively, the long-term
capital gains tax rate is 15%. The rate is 20% for single
39
individuals with taxable income in excess of $492,300 and married individuals
filing jointly with taxable income in excess of $553,850. The taxable income thresholds are adjusted
annually for inflation. An additional 3.8% Medicare tax may also be imposed as discussed below.
Returns
of capital. If the Fund's distributions exceed its earnings and profits (i.e., generally,
its taxable income and realized capital gains) for a taxable year, all or a portion of the distributions
made in that taxable year may be characterized as a return of capital to you. A return of capital distribution
will generally not be taxable, but will reduce the cost basis in your Fund shares and will result in
a higher capital gain or in a lower capital loss when you sell your shares. Any return of capital in
excess of the basis in your Fund shares, however, will be taxable as a capital gain. In the case of a
non-calendar year fund, earnings and profits are first allocated to distributions made on or before December
31 of its taxable year and then to distributions made thereafter. The effect of this provision is to
“push” returns of capital into the next calendar year.
Undistributed capital gains.
The Fund may retain or distribute to shareholders its net capital gain for each taxable year. The Fund
currently intends to distribute net capital gains. If the Fund elects to retain its net capital gain,
the Fund will be taxed thereon (except to the extent of any available capital loss carryovers) at the
applicable corporate tax rate. If the Fund elects to retain its net capital gain, it is expected that
the Fund also will elect to have shareholders treated as if each received a distribution of its pro rata
share of such gain, with the result that each shareholder will be required to report its pro rata share
of such gain on its tax return as long-term capital gain, will receive a refundable tax credit for its
pro rata share of tax paid by the Fund on the gain, and will increase the tax basis for its shares by
an amount equal to the deemed distribution less the tax credit.
Dividend reinvestment.
Brokers, at their own discretion, may offer a dividend reinvestment service under which Fund shares
are purchased in the secondary market at current market prices. Investors should consult their broker
for further information regarding any dividend reinvestment service offered by such broker. Dividends
which are reinvested will nevertheless be taxable to the same extent as if such dividends had not been
reinvested.
Investments in foreign securities The following paragraphs describe tax
considerations that are applicable to the Fund's investments in foreign securities.
Foreign
income tax. Investment income received by the Fund from sources within foreign countries
may be subject to foreign income tax withheld at the source and the amount of tax withheld generally
will be treated as an expense of the Fund. The United States has entered into tax treaties with many
foreign countries, which entitle the Fund to a reduced rate of, or exemption from, tax on such income.
Some countries require the filing of a tax reclaim or other forms to receive the benefit of the reduced
tax rate; whether or when the Fund will receive the tax reclaim is within the control of the individual
country. Information required on these forms may not be available such as shareholder information; therefore,
the Fund may not receive the reduced treaty rates or potential reclaims. Other countries have conflicting
and changing instructions and restrictive timing requirements which may cause the Fund not to receive
the reduced treaty rates or potential reclaims. Other countries may subject capital gains realized by
the Fund on sale or disposition of securities of that country to taxation. These and other factors may
make it difficult for the Fund to determine in advance the effective rate of tax on its investments in
certain countries. Under certain circumstances, the Fund may elect to pass-through certain eligible foreign
income taxes paid by the Fund to shareholders, although it reserves the right not to do so. If the Fund
makes such an election and obtains a refund of foreign taxes paid by the Fund in a prior year, the Fund
may be eligible to reduce the amount of foreign taxes reported by the Fund to its shareholders, generally
by the amount of the foreign taxes refunded, for the year in which the refund is received. Certain foreign
taxes imposed on the Fund’s investments, such as a foreign financial transaction tax, may not be creditable
against U.S. income tax liability or eligible for pass through by the Fund to its shareholders.
Effect
of foreign debt investments on distributions. Most foreign exchange gains realized
on the sale of debt securities are treated as ordinary income by the Fund. Similarly, foreign exchange
losses realized on the sale of debt securities generally are treated as ordinary losses. These gains
when distributed are taxable to you as ordinary income, and any losses reduce the Fund's ordinary income
otherwise available for distribution to you. This treatment could increase or decrease the Fund's ordinary
income distributions to you, and may cause some or all of the Fund's previously distributed income to
be classified as a return of capital.
PFIC securities. The Fund may
invest in securities of foreign entities that could be deemed for tax purposes to be passive foreign
investment companies (PFICs). In general, a foreign company is classified as a PFIC if at least one-half
of its assets constitute investment-type assets or 75% or more of its gross income is investment-type
income. When investing in PFIC securities, the Fund intends to mark-to-market these securities and recognize
any gains at the end of its fiscal and excise (described below) tax years. Deductions for losses are
allowable only to the extent of any current or previously recognized gains. These gains (reduced by allowable
losses) are treated as ordinary income that the Fund is required to distribute, even though it has not
sold the securities. Foreign companies are not required to identify themselves as PFICs. Due to various
complexities in identifying PFICs, the Fund can give no assurances that it will be able to identify portfolio
40
securities in foreign corporations that are PFICs in time for the Fund to make
a mark-to-market election. If the Fund is unable to identify an investment as a PFIC and thus does not
make a mark-to-market election, the Fund may be subject to U.S. federal income tax on a portion of any
“excess distribution” or gain from the disposition of such shares even if such income is distributed
as a taxable dividend by the Fund to its shareholders. Additional charges in the nature of interest may
be imposed on the Fund in respect of deferred taxes arising from such distributions or gains.
The
Fund's designation of a foreign security as a PFIC security will cause the income dividends of any designated
securities to fall outside of the definition of qualified foreign corporation dividends. These dividends
generally will not qualify for the reduced rate of taxation on qualified dividends when distributed to
you by the Fund.
Information on the amount and tax character of distributions The broker will
inform you of the amount of your income dividends and capital gain distributions at the time they are
paid, and will advise you of their tax status for federal income tax purposes shortly after the close
of each calendar year. The amount of income dividends reported by the Fund, consisting of qualified dividend
income (which is relevant to U.S. investors) and interest-related and short-term capital gain dividends
(which are relevant to non-U.S. investors) may exceed the total amount of income dividends paid. Such
characterization will not result in more income being reported by the Fund, but rather will allow the
broker to report dividends in a manner that is more tax efficient to both U.S. and non-U.S. investors.
If you have not owned your Fund shares for a full year, the Fund may distribute, for a U.S. investor,
as an ordinary income, qualified dividend, or capital gain dividend (a distribution of net long-term
capital gains) or, for a non-U.S. investor, as an interest-related, short-term capital gain, or capital
gain dividend, a percentage of income that may not be equal to the actual amount of each type of income
earned during the period of your investment in the Fund.
The
Fund makes every effort to identify reclassifications of income to reduce the number of corrected forms
mailed to shareholders. However, the Fund may at times find it necessary to reclassify income after you
receive your tax reporting statement and you may receive a corrected tax reporting statement to reflect
reclassified information. This can result from rules in the Code that effectively prevent regulated investment
companies such as the Fund from ascertaining with certainty until after the calendar year end the final
amount and character of distributions the Fund has received on its investments during the prior calendar
year. If you receive a corrected tax reporting statement, use the information on this statement, and
not the information on your original statement, in completing your tax returns.
Avoid "buying a dividend."
At the time you purchase your Fund shares, the price of the shares may reflect undistributed income,
undistributed capital gains, or net unrealized appreciation in the value of the portfolio securities
held by the Fund. For taxable investors, a subsequent distribution to you of such amounts, although constituting
a return of your investment, would be taxable. Buying shares in the Fund just before it declares an income
dividend or capital gain distribution is sometimes known as “buying a dividend.”
Election to be taxed
as a regulated investment company The Fund has elected to be treated as a regulated investment
company under Subchapter M of the Code. It has qualified as a regulated investment company for its most
recent fiscal year, and intends to continue to qualify during the current fiscal year. As a regulated
investment company, the Fund generally pays no federal income tax on the income and gains it distributes
to you. In order to qualify for treatment as a regulated investment company, the Fund must satisfy the
requirements described below.
Distribution requirement. The Fund must distribute
an amount equal to the sum of at least 90% of its investment company taxable income and 90% of its net
tax-exempt income, if any, for the tax year (including, for purposes of satisfying this distribution
requirement, certain distributions made by the Fund after the close of its taxable year that are treated
as made during such taxable year).
Income requirement. The Fund must derive at least 90% of
its gross income from dividends, interest, certain payments with respect to securities loans, and gains
from the sale or other disposition of stock, securities or foreign currencies, or other income (including,
but not limited to, gains from options, futures or forward contracts) derived from its business of investing
in such stock, securities or currencies and net income derived from qualified publicly traded partnerships
(“QPTPs”).
Asset diversification test. The Fund must satisfy the following asset
diversification test at the close of each quarter of the Fund’s tax year: (1) at least 50% of the value
of the Fund’s assets must consist of cash and cash items, U.S. government securities, securities of
other regulated investment companies, and securities of other issuers (as to which the Fund has not invested
more than 5% of the value of the Fund’s total assets in securities of an issuer and as to which the
Fund does not hold more than 10% of the outstanding voting securities of the issuer); and (2) no more
than 25% of the value of the Fund’s total assets may be invested in the securities of any one issuer
(other than U.S. government securities or securities of other regulated investment companies) or of two
or more issuers which the Fund controls and which are engaged in the same or similar trades or businesses
or, in the securities of one or more QPTPs.
41
In some circumstances, the character and timing of income realized by the Fund
for purposes of the income requirement or the identification of the issuer for purposes of the asset
diversification test is uncertain under current law with respect to a particular investment, and an adverse
determination or future guidance by the IRS with respect to such type of investment may adversely affect
the Fund’s ability to satisfy these requirements. In other circumstances, the Fund may be required
to sell portfolio holdings in order to meet the income requirement, distribution requirement, or asset
diversification test, which may have a negative impact on the Fund’s income and performance. In lieu
of potential disqualification, the Fund is permitted to pay a tax for certain failures to satisfy the
asset diversification test or income requirement, which, in general, are limited to those due to reasonable
cause and not willful neglect.
If for any taxable year the Fund does not
qualify as a regulated investment company, all of its taxable income (including its net capital gain)
would be subject to tax at the applicable corporate tax rate without any deduction for dividends paid
to shareholders, and the dividends would be taxable to the shareholders as ordinary income (or possibly
as qualified dividend income) to the extent of the Fund’s current and accumulated earnings and profits.
Failure to qualify as a regulated investment company, subject to savings provisions for certain qualification
failures, which, in general, are limited to those due to reasonable cause and not willful neglect, would
thus have a negative impact on the Fund’s income and performance. In that case, the Fund would be liable
for federal, and possibly state, corporate taxes on its taxable income and gains, and distributions to
you would be taxed as dividend income to the extent of the Fund’s earnings and profits. Even if such
savings provisions apply, the Fund may be subject to a monetary sanction of $50,000 or more. Moreover,
the board reserves the right not to maintain the qualification of the Fund as a regulated investment
company if it determines such a course of action to be beneficial to shareholders.
Capital loss carryovers
The capital losses of the Fund, if any, do not flow through to shareholders. Rather, the Fund may use
its capital losses, subject to applicable limitations, to offset its capital gains without being required
to pay taxes on or distribute to shareholders such gains that are offset by the losses. If the Fund has
a "net capital loss" (that is, capital losses in excess of capital gains), the excess (if any) of the
Fund's net short-term capital losses over its net long-term capital gains is treated as a short-term
capital loss arising on the first day of the Fund's next taxable year, and the excess (if any) of the
Fund's net long-term capital losses over its net short-term capital gains is treated as a long-term capital
loss arising on the first day of the Fund's next taxable year. Any such net capital losses of the Fund
that are not used to offset capital gains may be carried forward indefinitely, subject to certain limitations,
to reduce any future capital gains realized by the Fund in succeeding taxable years.
Excise
tax distribution requirements
Required distributions. To avoid federal
excise taxes, the Code requires the Fund to distribute to you by December 31 of each year, at a minimum,
the following amounts:
• 98% of its taxable ordinary income earned during the calendar
year;
• 98.2%
of its capital gain net income earned during the 12-month period ending October 31; and
• 100%
of any undistributed amounts of these categories of income or gain from the prior year.
The Fund intends to declare and pay these distributions in December (or to pay
them in January, in which case you must treat them as received in December), but can give no assurances
that its distributions will be sufficient to eliminate all taxes.
Tax reporting for income and excise tax
years. Because the periods for measuring a regulated investment company’s income are
different for income (determined on a fiscal year basis) and excise tax years (determined as noted above),
special rules are required to calculate the amount of income earned in each period, and the amount of
earnings and profits needed to support that income. For example, if the Fund uses the excise tax period
ending on October 31 as the measuring period for calculating and paying out capital gain net income and
realizes a net capital loss between November 1 and the end of the Fund’s fiscal year, the Fund may
calculate its earnings and profits without regard to such net capital loss in order to make its required
distribution of capital gain net income for excise tax purposes. The Fund also may elect to treat part
or all of any "qualified late year loss" as if it had been incurred in the succeeding taxable year in
determining the Fund’s taxable income, net capital gain, net short-term capital gain, and earnings
and profits. The effect of this election is to treat any such “qualified late year loss” as if it
had been incurred in the succeeding taxable year, which may change the timing, amount, or characterization
of Fund distributions.
A "qualified late year loss” includes (i)
any net capital loss incurred after October 31 of the current taxable year, or, if there is no such loss,
any net long-term capital loss or any net short-term capital loss incurred after October 31 of the current
taxable year (“post-October capital losses”), and (ii) the sum of (1) the excess, if any, of (a)
specified losses incurred after October 31 of the current taxable year, over (b) specified gains incurred
after October 31 of the current taxable year and (2) the excess, if any, of (a) ordinary losses incurred
after December 31 of the current taxable year, over (b) the ordinary income incurred after December 31
of the current taxable
42
year. The terms “specified losses” and “specified gains” mean ordinary
losses and gains from the sale, exchange, or other disposition of property (including the termination
of a position with respect to such property), foreign currency losses and gains, and losses and gains
resulting from holding stock in a passive foreign investment company (PFIC) for which a mark-to-market
election is in effect. The terms “ordinary losses” and “ordinary income” mean other ordinary
losses and income that are not described in the preceding sentence. Special rules apply to a fund with
a fiscal year ending in November or December that elects to use its taxable year for determining its
capital gain net income for excise tax purposes. The Fund may only elect to treat any post-October capital
loss, specified gains and specified losses incurred after October 31 as if it had been incurred in the
succeeding year in determining its taxable income for the current year.
Because
these rules are not entirely clear, the Fund may be required to interpret the "qualified late-year loss"
and other rules relating to these different year-ends to determine its taxable income and capital gains.
The Fund’s reporting of income and its allocation between different taxable and excise tax years may
be challenged by the IRS, possibly resulting in adjustments in the income reported by the Fund on its
tax returns and/or on your year-end tax statements.
Medicare tax An additional
3.8% Medicare tax is imposed on net investment income earned by certain individuals, estates and trusts.
“Net investment income,” for these purposes, means investment income, including ordinary dividends
and capital gain distributions received from the Fund and net gains from the sales of Fund shares, reduced
by the deductions properly allocable to such income. In the case of an individual, the tax will be imposed
on the lesser of (1) the shareholder’s net investment income or (2) the amount by which the shareholder’s
modified adjusted gross income exceeds $250,000 (if the shareholder is married and filing jointly or
a surviving spouse), $125,000 (if the shareholder is married and filing separately) or $200,000 (in any
other case). Any liability for this additional Medicare tax is reported by you on, and paid with, your
federal income tax return.
Sales of exchange-listed Fund shares Sales of Fund
shares are generally taxable transactions for federal and state income tax purposes. If you sell your
Fund shares, you are required to report any gain or loss on your sale. If you owned your shares as a
capital asset, any gain or loss that you realize is a capital gain or loss, and is long-term or short-term,
depending on how long you owned your shares. Under current law, shares held one year or less are short-term
and shares held more than one year are long-term. Capital losses in any year are deductible only to the
extent of capital gains plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income.
Sales
at a loss within six months of purchase. Any loss incurred on the sale of Fund
shares owned for six months or less is treated as a long-term capital loss to the extent of any long-term
capital gains distributed to you by the Fund on those shares.
Wash sales. All or a portion
of any loss that you realize on the sale of your Fund shares will be disallowed to the extent that you
buy other shares in the Fund (through reinvestment of dividends or otherwise) within 30 days before or
after your sale. Any loss disallowed under these rules will be added to your tax basis in the new shares.
Reportable
transactions. Under Treasury regulations, if a shareholder recognizes a loss with respect
to the Fund’s shares of $2 million or more for an individual shareholder or $10 million or more for
a corporate shareholder (or certain greater amounts over a combination of years), the shareholder must
file with the IRS a disclosure statement on Form 8886. 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.
Cost basis reporting The cost basis of Fund shares acquired
by purchase will generally be based on the amount paid for the shares and then may be subsequently adjusted
for other applicable transactions as required by the Code. The difference between the selling price and
the cost basis of the Fund shares generally determines the amount of the capital gain or loss realized
on the sale of Fund shares. Contact the broker through whom you purchased your Fund shares to obtain
information with respect to the available cost basis reporting methods and elections for your account.
Capital gains and losses on sales of Fund shares are generally taxable transactions for federal and state
income tax purposes.
Creations and redemptions of creation units. An Authorized
Participant who exchanges securities for Creation Units generally will recognize a gain or a loss. The
gain or loss will be equal to the difference between the market value of the Creation Units at the time
and the sum of the exchanger’s aggregate basis in the securities surrendered plus the amount of cash
paid for such Creation Units. A person who redeems Creation Units will generally recognize a gain or
loss equal to the difference between the exchanger’s basis in the Creation Units and the sum of the
aggregate market value of any securities received plus the amount of any cash received for such Creation
Units. The IRS, however, may assert that a loss realized upon an exchange of securities for Creation
Units cannot be deducted currently under the rules governing “wash sales,” or on the basis that there
has been no significant change in economic position.
Any capital gain or loss
realized upon the creation of Creation Units will generally be treated as long-term capital gain or loss
if the securities exchanged for such Creation Units have been held for more than one year. Any capital
gain or loss realized upon the redemption of Creation Units will generally be
43
treated as long-term capital gain or loss if the Shares comprising the Creation
Units have been held for more than one year. Otherwise, such capital gains or losses will generally be
treated as short-term capital gain or loss. Any loss upon a redemption of Creation Units held for six
(6) months or less will be treated as a long-term capital loss to the extent of any amounts treated as
distributions to the applicable Authorized Participant of long-term capital gain with respect to the
Creation Units (including any amounts credited to the Authorized Participant as undistributed capital
gains).
The Fund has the right to reject an order for Creation Units if the purchaser
(or group of purchasers) would, upon obtaining the Shares so ordered, own 80% or more of the outstanding
shares of the Fund and if, pursuant to sections 351 and 362 of the Code, the Fund would have a basis
in the deposit securities different from the market value of such securities on the date of deposit.
The Fund also has the right to require information necessary to determine beneficial Share ownership
for purposes of the 80% determination. If the Fund does issue Creation Units to a purchaser (or group
of purchasers) that would, upon obtaining the Shares so ordered, own 80% or more of the outstanding Shares
of the Fund, the purchaser (or group of purchasers) may not recognize gain or loss upon the exchange
of securities for Creation Units.
If the Fund redeems Creation Units in cash,
it may recognize more capital gains than it will if it redeems Creation Units in-kind.
Tax certification
and backup withholding Tax laws require that you certify your tax information with
the broker when you become an investor in the Fund. For U.S. citizens and resident aliens, this certification
is made on IRS Form W-9. Under these laws, you may be subject to federal backup withholding at 24%, and
state backup withholding may also apply, on a portion of your taxable distributions and sales proceeds
unless you:
• provide
your correct Social Security or taxpayer identification number,
• certify that this
number is correct,
• certify
that you are not subject to backup withholding, and
• certify that you are a U.S. person (including a U.S. resident
alien).
The broker must also withhold if the IRS instructs it to do
so. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholder’s
U.S. federal income tax liability, provided the appropriate information is furnished to the IRS. Certain
payees and payments are exempt from backup withholding and information reporting.
U.S. government securities
The income earned on certain U.S. government securities is exempt from state and local personal income
taxes if earned directly by you. States also grant tax-free status to investment company dividends paid
to you from interest earned on these securities, subject in some states to minimum investment or reporting
requirements that must be met by the Fund. The income on Fund investments in certain securities, such
as repurchase agreements, commercial paper and federal agency-backed obligations (e.g., Ginnie Mae and
Fannie Mae securities), generally does not qualify for tax-free treatment. The rules on exclusion of
this income are different for corporations.
Qualified dividends and the corporate dividends-received
deduction For individual shareholders, a portion of the dividends paid by the Fund may
be qualified dividend income eligible for taxation at long-term capital gain tax rates. For
single individuals with taxable income not in excess of $44,625 in 2023 ($89,250 for married individuals
filing jointly), the long-term capital gains tax rate is 0%. For single individuals and joint filers
with taxable income in excess of these amounts but not more than $492,300 or $553,850, respectively,
the long-term capital gains tax rate is 15%. The rate is 20% for single individuals with taxable income
in excess of $492,300 and married individuals filing jointly with taxable income in excess of $553,850.
An additional 3.8% Medicare tax may also be imposed as discussed above.
“Qualified
dividend income” means dividends paid to the Fund (a) by domestic corporations, (b) by foreign corporations
that are either (i) incorporated in a possession of the United States, or (ii) are eligible for benefits
under certain income tax treaties with the United States that include an exchange of information program,
or (c) with respect to stock of a foreign corporation that is readily tradable on an established securities
market in the United States. Both the Fund and the investor must meet certain holding period requirements
to qualify Fund dividends for this treatment. Specifically, the Fund must hold the stock for at least
61 days during the 121-day period beginning 60 days before the stock becomes ex-dividend (or in the case
of certain preferred stocks, for at least 91 days during the 181-day period beginning 90 days before
the stock becomes ex-dividend). Similarly, investors must hold their Fund shares for at least 61 days
during the 121-day period beginning 60 days before the Fund distribution goes ex-dividend. Income derived
from investments in derivatives, fixed-income securities, U.S. REITs, PFICs, and income received “in
lieu of” dividends in a securities lending transaction generally is not eligible for treatment as qualified
dividend income. If the qualified dividend income received by the Fund is equal to or greater than 95%
of the Fund's gross income (exclusive of net capital gain) in any taxable year, all of the ordinary income
dividends paid by the Fund will be qualified dividend income.
While
the income received in the form of a qualified dividend is taxed at the same rates as long-term capital
gains, such
44
income will not be considered a long-term capital gain for other federal income
tax purposes. For example, you will not be allowed to offset your long-term capital losses against qualified
dividend income on your federal income tax return. Any qualified dividend income that you elect to be
taxed at these reduced rates also cannot be used as investment income in determining your allowable investment
interest expense.
For corporate shareholders, a portion of the dividends paid
by the Fund may qualify for the corporate dividends-received deduction. This deduction generally is available
to corporations for dividends paid by a fund out of income earned on its investments in domestic corporations.
The availability of the dividends-received deduction is subject to certain holding period and debt financing
restrictions that apply to both the Fund and the investor. Specifically, the amount that the Fund may
report as eligible for the dividends-received deduction will be reduced or eliminated if the shares on
which the dividends earned by the Fund were debt-financed or held by the Fund for less than a minimum
period of time, generally 46 days during a 91-day period beginning 45 days before the stock becomes ex-dividend.
Similarly, if your Fund shares are debt-financed or held by you for less than a 46-day period then the
dividends-received deduction for Fund dividends on your shares may also be reduced or eliminated. Income
derived by the Fund from investments in derivatives, fixed-income and foreign securities generally is
not eligible for this treatment.
Each year the Fund will report the portion
of the income dividends paid by the Fund that are eligible for treatment as qualified dividend income,
if any, and for the corporate dividends-received deduction, if any. The amounts reported by the Fund
may vary significantly each year depending on the particular mix of the Fund’s investments. Because
the income of the Fund is primarily derived from investments earning interest rather than dividend income,
it is anticipated that only a small percentage, if any, of the Fund’s income dividends will be qualified
dividends for individual shareholders or will be eligible for the dividends-received deduction for corporate
shareholders. If the percentage of qualified dividend income or dividend income eligible for the corporate
dividends-received deduction is quite small, the Fund reserves the right to not report the small percentage
of qualified dividend income for individuals or income eligible for the corporate dividends-received
deduction for corporations.
Interest income pass through Final Treasury regulations issued in
January 2021 allows the Fund to pass-through its net business interest income (generally the Fund’s
interest income less applicable expenses and deductions) as a “Section 163(j) interest dividend”
to shareholders, provided certain conditions are met. This can potentially increase the amount of a shareholder’s
interest expense deductible under Code section 163(j) as amended by the TCJA. A dividend will be treated
as interest income only if the shareholder held the Fund’s stock for more than 180 days during the
361-day period beginning on the date that is 180 days before the ex-dividend date or provided that the
shareholder is not under an obligation to make related payments with respect to positions in substantially
similar or related property pursuant to a short sale or other transaction. Each year the Fund intends
to report to shareholders the portion of the income dividends paid by the Fund that are eligible for
treatment as interest income.
Investment in complex securities The Fund’s
investment in certain complex securities could subject it to one or more special tax rules (including,
but not limited to, the wash sale rules), which may affect whether gains and losses recognized by the
Fund are treated as ordinary or capital or as short-term or long-term, accelerate the recognition of
income or gains to the Fund, defer losses to the Fund, and cause adjustments to the holding periods of
the Fund’s securities. These rules, therefore, could affect the amount, timing and/or tax character
of the Fund’s distributions to shareholders. Moreover, because the tax rules applicable to complex
securities, including derivative financial instruments, are in some cases uncertain under current law,
an adverse determination or future guidance by the IRS with respect to these rules (which determination
or guidance could be retroactive) may affect whether the Fund has made sufficient distributions and otherwise
satisfied the relevant requirements to maintain its qualification as a regulated investment company and
avoid a fund-level tax.
In general. Gain or loss recognized by the Fund on
the sale or other disposition of its portfolio investments will generally be capital gain or loss. Such
capital gain and loss may be long-term or short-term depending, in general, upon the length of time a
particular investment position is maintained and, in some cases, upon the nature of the transaction.
Portfolio investments held for more than one year generally will be eligible for long-term capital gain
or loss treatment.
Derivatives. The Fund may invest in certain derivative contracts, including
some or all of the following types of investments: options on securities and securities indices; financial
and futures contracts; options on financial or futures contracts and stock index futures; foreign currency
contracts; and forward and futures contracts on foreign currencies. The tax treatment of certain forward
and futures contracts entered into by the Fund, as well as listed non-equity options written or purchased
by the Fund on U.S. exchanges (including options on futures contracts, broad-based equity indices and
debt securities), may be governed by section 1256 of the Code (“section 1256 contracts”). Gains or
losses on section 1256 contracts generally are considered 60% long-term and 40% short-term capital gains
or losses (“60/40”), although certain foreign currency gains and losses from such contracts may be
treated as ordinary in character. Also, any section 1256 contracts held by the Fund at the end of each
taxable year (and, for purposes of the 4% excise tax, on certain other
45
dates as prescribed under the Code) are “marked to market” with the result
that unrealized gains or losses are treated as though they were realized and the resulting gain or loss
is treated as ordinary or 60/40 gain or loss, as applicable, even though the Fund continues to hold the
contracts. The Fund may be required to distribute this income and gains annually in order to avoid income
or excise taxes on the Fund. Section 1256 contracts do not include any interest rate swap, currency swap,
basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit
default swap, or similar agreement.
Constructive sales. The Fund's entry into certain derivative
instruments, including options, forward contracts, and futures could be treated as the "constructive
sale" of an "appreciated financial position," causing it to realize gain, but not loss, on the position.
Securities
lending transactions. The Fund may obtain additional income by lending its securities,
typically to brokers. All amounts that are paid to the Fund in a securities lending transaction, including
substitute dividend or interest payments, are treated as a “fee” for the temporary use of property.
As a result, any substitute dividend payments received by the Fund are neither qualified dividend income
eligible for taxation at reduced long-term capital gain rates in the case of individual shareholders
nor eligible for the corporate dividends received deduction in the case of corporate shareholders. Similarly,
any foreign tax withheld on payments made “in lieu of” dividends or interest will not qualify for
the pass-through of foreign taxes to shareholders.
Tax straddles. If the Fund invests
in certain derivative instruments, if it actively trades stock or otherwise acquires a position with
respect to substantially similar or related property in connection with certain hedging transactions,
or if it engages in spread, straddle or collar transactions, it could be deemed to hold offsetting positions
in securities. If the Fund’s risk of loss with respect to specific securities in its portfolio is substantially
diminished by the fact that it holds offsetting securities, the Fund could be deemed to have entered
into a tax "straddle" or to hold a "successor position" that would require any loss realized by it to
be deferred for tax purposes.
Certain fixed-income investments. Gain recognized
on the disposition of a debt obligation purchased by the Fund with market discount (generally, at a price
less than its principal amount) will be treated as ordinary income to the extent of the portion of the
market discount that accrued during the period of time the Fund held the debt obligation, unless the
Fund made an election to accrue market discount into income currently. Fund distributions of accrued
market discount, including any current inclusions, are taxable to shareholders as ordinary income to
the extent of the Fund’s earnings and profits. If the Fund purchases a debt obligation (such as a zero
coupon security or pay-in-kind security) that was originally issued at a discount, the Fund generally
is required to include in gross income each year the portion of the original issue discount that accrues
during such year. Therefore an investment in such securities may cause the Fund to recognize income and
make distributions to shareholders before it receives any cash payments on the securities. To generate
cash to satisfy those distribution requirements, the Fund may have to sell portfolio securities that
it otherwise might have continued to hold or to use cash flows from other sources such as the sale of
fund shares.
Investments in debt obligations that are at risk of or in default.
The Fund may also hold obligations that are at risk of or in default. Tax rules are not entirely clear
about issues such as whether and to what extent the Fund should recognize market discount on such a debt
obligation, when the Fund may cease to accrue interest, original issue discount or market discount, when
and to what extent the Fund may take deductions for bad debts or worthless securities and how the Fund
should allocate payments received on obligations in default between principal and income. These and other
related issues will be addressed by the Fund in order to ensure that it distributes sufficient income
to preserve its status as a regulated investment company.
Inflation indexed securities.
The principal amount of inflation indexed securities purchased by the Fund will adjust for inflation
which may cause the Fund to recognize income or loss. The inflation adjustment to the principal generally
is subject to tax in the year that the adjustment is made, not at maturity of the security when the cash
from the repayment of principal is received, and is treated as original issue discount in such year.
Any interest payable on the inflation indexed security is accrued by the Fund. Increases in the indexed
principal in a given year and accrued interest will cause the Fund to distribute income not yet received.
Decreases in the indexed principal in a given year generally (i) will reduce the amount of interest income
otherwise includible in income for that year in respect of the security, (ii) to the extent not treated
as an offset to current income under (i), will constitute an ordinary loss to the extent of prior year
inclusions of interest, original issue discount and market discount in respect of the security that exceed
ordinary losses in respect of the security in such prior years, and (iii) to the extent not treated as
an offset to current income under (i) or an ordinary loss under (ii), can be carried forward as an ordinary
loss to reduce interest, original issue discount and market discount in respect of the security in subsequent
taxable years. If inflation-indexed securities are sold prior to maturity, capital losses or gains generally
are realized in the same manner as traditional debt instruments. Special rules apply in respect of inflation-indexed
securities issued with more than a prescribed de minimis amount of discount or premium.
Investment
in taxable mortgage pools (excess inclusion income). Under a Notice issued by the IRS, the
Code and Treasury regulations to be issued, a portion of the Fund’s
46
income from a U.S. REIT that is attributable to the REIT’s residual interest
in a real estate mortgage investment conduit (REMIC) or equity interests in a “taxable mortgage pool”
(referred to in the Code as an excess inclusion) will be subject to federal income tax in all events.
The excess inclusion income of a regulated investment company, such as the Fund, will be allocated to
shareholders of the regulated investment company in proportion to the dividends received by such shareholders,
with the same consequences as if the shareholders held the related REMIC residual interest or, if applicable,
taxable mortgage pool directly. In general, excess inclusion income allocated to shareholders (i) cannot
be offset by net operating losses (subject to a limited exception for certain thrift institutions), (ii)
will constitute unrelated business taxable income to entities (including a qualified pension plan, an
individual retirement account, a 401(k) plan, a Keogh plan or other tax-exempt entity) subject to tax
on unrelated business income (UBTI), thereby potentially requiring such an entity that is allocated excess
inclusion income, and otherwise might not be required to file a tax return, to file a tax return and
pay tax on such income, and (iii) in the case of a foreign stockholder, will not qualify for any reduction
in U.S. federal withholding tax. In addition, if at any time during any taxable year a “disqualified
organization” (which generally includes certain cooperatives, governmental entities, and tax-exempt
organizations not subject to UBTI) is a record holder of a share in a regulated investment company, then
the regulated investment company will be subject to a tax equal to that portion of its excess inclusion
income for the taxable year that is allocable to the disqualified organization, multiplied by the applicable
corporate tax rate. The Notice imposes certain reporting requirements upon regulated investment companies
that have excess inclusion income. There can be no assurance that the Fund will not allocate to shareholders
excess inclusion income.
These rules are potentially applicable to
a fund with respect to any income it receives from the equity interests of certain mortgage pooling vehicles,
either directly or, as is more likely, through an investment in a U.S. REIT. It is not anticipated that
these rules will apply to a fund that does not invest in any U.S. REITs.
State income taxes
Some state tax codes adopt the Code through a certain date. As a result, such conforming states may
not have adopted the version of the Code as amended by the TCJA, the Regulated Investment Company Modernization
Act of 2010, or other federal tax laws enacted after the applicable conformity date. Other states may
have adopted an income or other basis of tax that differs from the Code.
The
tax information furnished to shareholders and the IRS annually with respect to the amount and character
of dividends paid will be prepared on the basis of current federal income tax law to comply with the
information reporting requirements of the Code, and not necessarily on the basis of the law of any state
in which a shareholder is resident or otherwise subject to tax. Contact your broker with respect to any
state information reporting requirements applicable to your investment in the Fund.
Accordingly,
the amount and character of income, gain or loss realized by a shareholder with respect to an investment
in Fund shares for state income tax purposes may differ from that for federal income tax purposes. Franklin
Templeton provides additional tax information on franklintempleton.com to assist shareholders with the
preparation of their federal and state income tax returns. Shareholders are solely responsible for determining
the amount and character of income, gain or loss to report on their federal, state and local income tax
returns each year as a result of their purchase, holding and sale of Fund shares.
Non-U.S. investors Non-U.S.
investors may be subject to U.S. withholding and estate tax, and are subject to special U.S. tax certification
requirements.
In general. The United States imposes a flat 30%
withholding tax (or a tax at a lower treaty rate) on U.S. source dividends. Exemptions from U.S. withholding
tax are provided for capital gains realized on the sales of Fund shares, capital gain dividends paid
by the Fund from net long-term capital gains, short-term capital gain dividends paid by the Fund from
net short-term capital gains, and interest-related dividends paid by the Fund from its qualified net
interest income from U.S. sources, unless you are a nonresident alien individual present in the United
States for a period or periods aggregating 183 days or more during the calendar year. “Qualified interest
income” includes, in general, the sum of the Fund’s U.S. source: i) bank deposit interest, ii) short-term
original issue discount, iii) portfolio interest, and iv) any interest-related dividend passed through
from another regulated investment company.
However, notwithstanding
such exemptions from U.S. withholding tax at source, any taxable distributions and proceeds from the
sale of your Fund shares will be subject to backup withholding at a rate of 24% if you fail to properly
certify that you are not a U.S. person.
It may not be practical in every case for
the Fund to report, and the Fund reserves the right in these cases to not report, interest-related or
short-term capital gain dividends. Additionally, the Fund’s reporting of interest-related or short-term
capital gain dividends may not, in turn, be passed through to shareholders by intermediaries who have
assumed tax reporting responsibilities for this income in managed or omnibus accounts due to systems
limitations or operational constraints.
Effectively connected income. Taxable
ordinary income dividends paid by the Fund to non-U.S. investors on portfolio investments are generally
subject to U.S. withholding tax at 30% or a lower treaty rate. However, if you hold your Fund
47
shares in connection with a U.S. trade or business, your income and gains may
be considered effectively connected income and taxed in the U.S. on a net basis at graduated income tax
rates in which case you may be required to file a nonresident U.S. income tax return.
U.S. estate tax.
An individual who is a non-U.S. investor will be subject to U.S. federal estate tax on the value of
the Fund shares owned at the time of death, unless a treaty exemption applies between the country of
residence of the non-U.S. investor and the U.S. Even if a treaty exemption is available, a decedent’s
estate may nevertheless be required to file a U.S. estate tax return to claim the exemption, as well
as to obtain a U.S. federal transfer certificate. The transfer certificate will identify the property
(i.e., Fund shares) on which a U.S. federal tax lien has been released and is required before such property
of a nonresident alien decedent can be released to his or her estate. A transfer certificate is not required
for property administered by an executor or administrator appointed, qualified and acting within the
United States. For estates with U.S. situs assets of not more than $60,000 (there is a statutory estate
tax credit for this amount of property), an affidavit from the executor of the estate or other authorized
individual along with additional evidence requested by the IRS relating to the decedent’s estate evidencing
the U.S. situs assets may be provided in lieu of a federal transfer certificate. Transfers by gift of
shares of the Fund by a non-U.S. investor who is a nonresident alien individual will not be subject to
U.S. federal gift tax. The tax consequences to a non-U.S. investor entitled to claim the benefits of
a treaty between the country of residence of the non-U.S. investor and the U.S. may be different from
the consequences described above.
Tax certification and backup withholding
as applied to non-U.S. investors. Non-U.S. investors have special U.S. tax certification
requirements to avoid backup withholding at a rate of 24% and, if applicable, to obtain the benefit of
any income tax treaty between the non-U.S. investor’s country of residence and the United States. To
claim these tax benefits, the non-U.S. investor must provide a properly completed Form W-8BEN (or other
Form W-8, where applicable) to establish his or her status as a non-U.S. investor, to claim beneficial
ownership over the assets in the account, and to claim, if applicable, a reduced rate of or exemption
from withholding tax under the applicable treaty. A Form W-8BEN generally remains in effect for a period
of three years beginning on the date that it is signed and ending on the last day of the third succeeding
calendar year. In certain instances, Form W-8BEN may remain valid indefinitely unless the investor has
a change of circumstances that renders the form incorrect and necessitates a new form and tax certification.
Non-U.S. investors must advise of any change of circumstances that would render the information given
on the form incorrect and must then provide a new W-8BEN to avoid the prospective application of backup
withholding.
Foreign Account Tax Compliance Act Under the Foreign Account Tax Compliance
Act (FATCA), foreign entities, referred to as foreign financial institutions (FFI) or non-financial foreign
entities (NFFE) that are shareholders in the Fund may be subject to a 30% withholding tax on income dividends
paid by the Fund. The FATCA withholding tax generally can be avoided: (a) by an FFI, if it reports certain
direct and indirect ownership of foreign financial accounts held by U.S. persons with the FFI, and (b)
by an NFFE, if it: (i) certifies that it has no substantial U.S. persons as owners, or (ii) if it does
have such owners, reports information relating to them to the withholding agent, which will, in turn,
report that information to the IRS. The U.S. Treasury has negotiated intergovernmental agreements (IGA)
with certain countries and is in various stages of negotiations with a number of other foreign countries
with respect to one or more alternative approaches to implement FATCA. An entity in one of those countries
may be required to comply with the terms of an IGA and applicable local law instead of U.S. Treasury
regulations.
An FFI can avoid FATCA withholding if it is deemed compliant or by becoming a
“participating FFI,” which requires the FFI to enter into a U.S. tax compliance agreement with the
IRS under section 1471(b) of the Code (FFI agreement) under which it agrees to verify, report and disclose
certain of its U.S. accountholders and provided that such entity meets certain other specified requirements.
The FFI will report to the IRS, or, depending on the FFI’s country of residence, to the government
of that country (pursuant to the terms and conditions of an applicable IGA and applicable law), which
will, in turn, report to the IRS. An FFI that is resident in a country that has entered into an IGA with
the U.S. to implement FATCA will be exempt from FATCA withholding provided that the FFI shareholder and
the applicable foreign government comply with the terms of such agreement.
An
NFFE that is the beneficial owner of a payment from the Fund can avoid the FATCA withholding tax generally
by certifying that it does not have any substantial U.S. owners or by providing the name, address and
taxpayer identification number of each substantial U.S. owner. The NFFE will report information either
(i) to the applicable withholding agent, which will, in turn, report information to the IRS, or (ii)
directly to the IRS.
Such foreign shareholders also may fall into certain exempt,
excepted or deemed compliant categories as established by U.S. Treasury regulations, IGAs, and other
guidance regarding FATCA. An FFI or NFFE that invests in a Fund will need to provide documentation properly
certifying the entity’s status under FATCA in order to avoid FATCA withholding. The requirements imposed
by FATCA are different from, and in addition to, the U.S. tax certification rules to avoid backup withholding
described above.
48
Organization, Voting Rights, Principal Holders
and Additional Information Concerning the Trust The Fund is a diversified
series of the Franklin ETF Trust (the "Trust"), an open-end management investment company. The Trust
was organized as a Delaware statutory trust on June 1, 2012, and is registered with the SEC.
The
Trust has noncumulative voting rights. For board member elections, this gives holders of more than 50%
of the shares voting the ability to elect all of the members of the board. If this happens, holders of
the remaining shares voting will not be able to elect anyone to the board.
The
Trust does not intend to hold annual shareholder meetings. The Fund may hold special meetings, however,
for matters requiring shareholder approval.
Although the Trust does
not have information concerning the beneficial ownership of shares held in the names of the Depository
Trust Company (DTC) participants, as of July 3, 2023, the name, address and percentage ownership of each
DTC participant that owned of record 5% or more of the outstanding shares of the Fund were as follows:
| | |
Name and Address | Percentage (%) |
JP
Morgan Chase & Co.*
270 Park Avenue
New York, NY 10017 | 21.55 |
Charles
Schwab & Co.*
Attn: Mutual Funds
211 Main Street
San
Francisco, CA 94105-1905 | 15.47 |
Edward Jones & Co.*
12555
Manchester Road
Saint Louis, MO 63131-3710 | 12.31 |
Pershing
LLC*
1 Pershing Plaza
Jersey City, NJ 07399-0001 | 7.54 |
Morgan Stanley Smith Barney LLC*
1
New York Plaza FL 12
New York, NY 10004-1901 | 7.41 |
Merrill
Lynch Pierce Fenner & Smith*
4800 Deer Lake Drive East
Jacksonville, FL
32246-6486 | 6.86 |
National Financial Services LLC*
499
Washington Boulevard
Jersey City, NJ 07310-1995 | 5.30 |
* For the benefit of its customer(s).
To the best knowledge
of the Fund, no other DTC participant of record held more than 5% of the outstanding shares of the Fund.
As of July 3, 2023, the officers and board members, as a group, owned of record
and beneficially less than 1% of the outstanding shares of the Fund. The board members may own shares
in other funds in Franklin Templeton.
DTC acts as securities
depository for shares of the Fund. Shares of the Fund are represented by securities registered in the
name of DTC or its nominee and deposited with, or on behalf of, DTC.
DTC was created in 1973
to enable electronic movement of securities between its participants (DTC Participants), and NSCC was
established in 1976 to provide a single settlement system for securities clearing and to serve as central
counterparty for securities trades among DTC Participants. In 1999, DTC and NSCC were consolidated within
the Depository Trust & Clearing Corporation (DTCC) and became wholly owned subsidiaries of DTCC.
The common stock of DTCC is owned by the DTC Participants, but the New York Stock Exchange and FINRA,
through subsidiaries, hold preferred shares in DTCC that provide them with the right to elect one member
each to the DTCC Board of Directors. Access to the DTC system is available to entities, such as banks,
brokers, dealers and trust companies, that clear through or maintain a custodial relationship with a
DTC Participant, either directly or indirectly (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. The laws of some jurisdictions may require that certain
purchasers of securities take physical delivery of such securities in definitive form. Such laws may
impair the ability of certain investors to acquire beneficial interests in 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 the 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
49
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 of the Trust. 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 the 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 aspect 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 decide to discontinue
providing its service with respect to shares of the Trust 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 to find a replacement for DTC to perform its functions at
a comparable cost.
Creation and Redemption of Creation Units General.
The Trust issues and sells shares of the Fund only in Creation Units on a continuous basis through Distributors
or its agent, without a sales load, at a price based on the Fund’s NAV next determined after receipt,
on any Business Day (as defined below), of an order received by Distributors or its agent in proper form.
On days when the Listing Exchange closes earlier than normal, the Fund may require orders to be placed
earlier in the day. The number of shares of the Fund that constitutes a Creation Unit is 25,000.
In its discretion, the investment manager reserves the right to increase or decrease
the number of the Fund’s shares that constitute a Creation Unit. The board reserves the right to declare
a split or a consolidation in the number of shares outstanding of the Fund, and to make a corresponding
change in the number of shares constituting a Creation Unit, in the event that the per share price in
the secondary market rises (or declines) to an amount that falls outside the range deemed desirable by
the board.
A “Business Day” with respect to the Fund is any day the
Fund is open for business, including any day when it satisfies redemption requests as required by Section
22(e) of the 1940 Act. The Fund is open for business any day on which the Listing Exchange on which the
Fund is listed for trading is open for business. As of the date of this SAI, the Listing Exchange observes
the following holidays: New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday,
Memorial Day, Juneteenth National Independence Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
To the extent the Fund engages in in-kind transactions, the
Fund intends to comply with the U.S. federal securities laws in accepting securities for deposit and
satisfying redemptions with redemption securities by, among other means, assuring that any securities
accepted for deposit and any securities used to satisfy redemption requests will be sold in transactions
that would be exempt from registration under the 1933 Act. Further, an Authorized Participant that is
not a “qualified institutional buyer,” as such term is defined under Rule 144A of the 1933 Act, will
not be able to receive securities that are restricted securities eligible for resale under Rule 144A.
Fund
Deposit. The consideration for purchase of Creation Units of the Fund may consist of
the Deposit Securities (i.e., the in-kind deposit of a designated portfolio of securities, assets or
other positions (including any portion of such securities, assets or other positions for which cash may
be substituted)) and the Cash Component computed as described below. Together, the Deposit Securities
and the Cash Component constitute the “Fund Deposit,” which will be applicable (subject to possible
amendment or correction) to creation requests received in proper form. The Fund Deposit represents the
minimum initial and subsequent investment amount for a Creation Unit of the Fund. Currently, the Fund
is generally offered in Creation Units solely for cash.
The “Cash Component”
is an amount equal to the difference between the NAV of the shares (per Creation Unit) and the “Deposit
Amount,” which is an amount equal to the market value of the Deposit Securities, and serves to compensate
for any differences between the NAV per Creation Unit and the Deposit Amount. Payment of any stamp duty
or other similar fees and expenses payable upon transfer of beneficial ownership of the Deposit Securities
are the sole responsibility of the Authorized Participant purchasing the Creation Unit. Please see the
Cash purchase method section below and the following discussion summarizing the in-kind method for further
information on purchasing Creation Units of the Fund.
The Fund's current policy
is to accept cash in substitution for the Deposit Securities it might otherwise accept as in-kind consideration
for the purchase of Creation Units. The Fund may, at times, elect to receive Deposit Securities (i.e.,
the in-kind deposit of a designated portfolio of securities, assets or
50
other positions) and a Cash Component as consideration for the purchase of Creation
Units. If the Fund elects to accept Deposit Securities, a purchaser's delivery of the Deposit Securities
together with the Cash Component will constitute the "Fund Deposit," which will represent the consideration
for a Creation Unit of the Fund.
The Fund’s investment manager makes available
through the NSCC on each Business Day prior to the opening of business on the Listing Exchange, the list
of names and the required number of shares of each Deposit Security and the amount of the Cash Component
(if any) to be included in the current Fund Deposit (based on information as of the end of the previous
Business Day for the Fund). Such Fund Deposit is applicable, subject to any adjustments as described
below, to purchases of Creation Units of shares of the Fund until such time as the next-announced Fund
Deposit is made available.
The identity and number of shares of the
Deposit Securities and the amount of the Cash Component changes pursuant to changes in the composition
of the Fund’s portfolio and as rebalancing adjustments and corporate action events are reflected from
time to time by the investment manager with a view to the investment goal of the Fund. The composition
of the Deposit Securities and the amount of the Cash Component may also change in response to adjustments
to the weighting or composition of the component securities constituting the portfolio.
The
Fund reserves the right to accept a nonconforming (i.e., custom) Fund Deposit. All questions as to the
composition of the in-kind creation basket to be included in the Fund Deposit and the validity, form,
eligibility, and acceptance for deposit of any instrument shall be determined by the Trust, and the Trust’s
determination shall be final and binding.
The Trust may require the substitution of
an amount of cash (i.e., a “cash-in-lieu” amount) to replace any Deposit Security of the Fund that
is a TBA transaction or an interest in a mortgage pass-through security. The amount of cash contributed
will be equivalent to the price of the TBA transaction or mortgage pass-through security interest listed
as a Deposit Security. A transaction fee may be charged on the cash amount contributed in lieu of the
TBA transaction or mortgage pass-through security.
The Fund 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 that may not be available in sufficient quantity for delivery or that
may not be eligible for transfer through the facilities of DTC (DTC Facilities) or the clearing process
through the Continuous Net Settlement System of the NSCC (NSCC Clearing Process), a clearing agency that
is registered with the SEC (as discussed below), or that the Authorized Participant is not able to trade
due to a trading restriction. The Fund also reserves the right to permit or require a “cash in lieu”
amount in other circumstances, including circumstances in which: (i) the delivery of the Deposit Security
by the Authorized Participant would be restricted under applicable securities or other local laws; (ii)
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 applicable securities or
other local laws; or (iii) in certain other situations. As noted above, currently Creation Units of the
Fund are generally available only for cash purchases.
Cash purchase method. When partial or
full cash purchases of Creation Units are available or specified for the Fund (currently, Creation Units
of the Fund are generally offered solely for cash), they will be effected in essentially the same manner
as in-kind purchases thereof. In the case of a partial or full cash purchase, the Authorized Participant
must pay the cash equivalent of the Deposit Securities it would otherwise be required to provide through
an in-kind purchase, plus the same Cash Component required to be paid by an in-kind purchaser.
Creation
Units An “Authorized Participant” is a member or participant of a clearing agency
registered with the SEC, which has a written agreement with the Fund or one of its service providers
(Authorized Participant Agreement) that allows such member or participant to place orders for the purchase
and redemption of Creation Units. To be eligible to place orders with Distributors and to create a Creation
Unit of the Fund, an entity must be: (i) a “Participating Party,” i.e., a broker-dealer or other
participant in the NSCC Clearing Process, or (ii) a DTC Participant, and, in either case, must have executed
an Authorized Participant Agreement with Distributors with respect to creations and redemptions of Creation
Units. All shares of the Fund, however created, will be entered on the records of DTC in the name of
Cede & Co. for the account of a DTC Participant.
Role of the Authorized Participant.
Creation Units may be purchased only by or through an Authorized Participant that has entered into an
Authorized Participant Agreement with Distributors. Such Authorized Participant will agree, pursuant
to the terms of such Authorized Participant Agreement and on behalf of itself or any investor on whose
behalf it will act, to certain conditions, including that such Authorized Participant will make available
in advance of each purchase of shares an amount of cash sufficient to pay the Cash Component, once the
net asset value of a Creation Unit is next determined after receipt of the purchase order in proper form,
together with the transaction fees described below. An Authorized Participant, acting on behalf of an
investor, may require the investor to enter into an agreement with such Authorized Participant with respect
to certain matters, including payment of the Cash Component. Investors who are not Authorized Participants
must make appropriate arrangements with an Authorized Participant. Investors should be aware that their
particular broker may not be an Authorized Participant or may not have
51
executed an Authorized Participant Agreement and that orders to purchase Creation
Units may have to be placed by the investor’s broker through an Authorized Participant. As a result,
purchase orders placed through an Authorized Participant may result in additional charges to such investor.
The Trust does not expect to enter into an Authorized Participant Agreement with more than a small number
of Authorized Participants.
Placement of creation orders. An Authorized Participant must submit
an irrevocable order to purchase shares of the Fund, in proper form, generally before 4 p.m., Eastern
time on any Business Day in order to receive that day’s NAV. Orders for Creation Units must be transmitted
by an Authorized Participant by telephone or other transmission method acceptable to Distributors or
its agent pursuant to procedures set forth in the Authorized Participant Agreement and Authorized Participant
Handbook (as may be amended or supplemented from time to time), as described below. Economic or market
disruptions or changes, or telephone or other communication failure, may impede the ability to reach
Distributors or its agent or an Authorized Participant. Orders to create shares of the Fund that are
submitted on the Business Day immediately preceding a holiday or a day (other than a weekend) when the
equity markets in the relevant non-U.S. market are closed may not be accepted. The Fund’s deadline
described above for the submission of purchase orders and the Fund’s deadline for the submission of
redemption orders is referred to as the Fund’s “Cutoff Time.” Please see the Authorized Participant
Agreement and Authorized Participant Handbook for information regarding the Fund’s Cutoff Times. Distributors
or its agent, in their discretion, may permit the submission of such orders and requests by or through
an Authorized Participant at any time (including on days on which the Listing Exchange is not open for
business) via communication through the facilities of Distributors’ or its agent’s proprietary website
maintained for this purpose.
Investors, other than Authorized Participants,
are responsible for making arrangements for a creation request to be made through an Authorized Participant.
Those placing orders to purchase Creation Units through an Authorized Participant should allow sufficient
time to permit proper submission of the purchase order to Distributors or its agent by the Cutoff Time
on such Business Day.
Upon receiving an order for a Creation Unit, Distributors
or its agent will notify the investment manager and the custodian of such order. The custodian will then
provide such information to any appropriate sub-custodian.
The Authorized Participant
must make available on or before the prescribed settlement date, by means satisfactory to the Fund, immediately
available or same day funds estimated by the Fund to be sufficient to pay the Cash Component next determined
after acceptance of the purchase order, together with the applicable purchase transaction fees. Any excess
funds will be returned following settlement of the issue of the Creation Unit. Those placing orders should
ascertain the applicable deadline for cash transfers by contacting the operations department of the broker
or depositary institution effectuating the transfer of the Cash Component. This deadline is likely to
be significantly earlier than the Cutoff Time of the Fund. Investors should be aware that an Authorized
Participant may require orders for purchases of shares placed with it to be in the particular form required
by the individual Authorized Participant.
The Authorized Participant is responsible
for all transaction-related fees, expenses and other costs (as described below), as well as any applicable
cash amounts, in connection with any purchase order.
Once a purchase order
has been accepted, it will be processed based on the NAV next determined after such acceptance in accordance
with the Fund’s Cutoff Times as provided in the Authorized Participant Agreement and Authorized Participant
Handbook (as may be amended or supplemented from time to time) and disclosed in this SAI.
Acceptance of orders
for Creation Units. Subject to the conditions that (i) an irrevocable purchase order has been submitted
by the Authorized Participant (either on its own or another investor’s behalf) and (ii) arrangements
satisfactory to the Fund are in place for payment of the Cash Component and any other cash amounts which
may be due, an order will be accepted, subject to the Fund’s right (and the right of Distributors and
the investment manager to reject any order until acceptance, as set forth below.
Once
an order has been accepted, upon the next determination of the net asset value of the shares, the Fund
will confirm the issuance of a Creation Unit, against receipt of payment, at such net asset value. Distributors
or its agent will then transmit a confirmation of acceptance to the Authorized Participant that placed
the order.
The SEC has expressed the view that a suspension of creations
that impairs the arbitrage mechanism applicable to the trading of ETF shares in the secondary market
is inconsistent with Rule 6c-11 under the 1940 Act. The SEC's position does not prohibit the suspension
or rejection of creations in all instances. The Fund reserves the right, to the extent consistent with
the provisions of Rule 6c-11 under the 1940 Act and the SEC's position, to reject or revoke a creation
order transmitted to it by Distributors or its agent, including, for example, if: (i) the order is not
in proper form; (ii) the investor(s), upon obtaining the shares ordered, would own 80% or more of the
currently outstanding shares of the Fund; (iii) the Deposit Securities delivered do not conform to the
identity and number of shares specified, as described above; (iv) acceptance of the Fund Deposit would,
in the opinion of the Fund, be unlawful; or (v) circumstances outside the
52
control of the Fund make it impossible to process purchase orders for all practical
purposes. Distributors or its agent shall notify a prospective purchaser of a Creation Unit and/or the
Authorized Participant acting on behalf of such purchaser of its rejection of such order. The Fund, the
Fund’s custodian, the sub-custodian and Distributors or its agent are under no duty, however, to give
notification of any defects or irregularities in the delivery of Fund Deposits nor shall any of them
incur any liability for failure to give such notification.
Issuance of a Creation Unit. Except as provided
herein, a Creation Unit will not be issued until the transfer of good title to the Fund of the Deposit
Securities and the payment of the Cash Component have been completed. When the sub-custodian has confirmed
to the custodian that the securities included in the Fund Deposit (or the cash value thereof) have been
delivered to the account of the relevant sub-custodian or sub-custodians, Distributors or its agent and
the investment manager shall be notified of such delivery and the Fund will issue and cause the delivery
of the Creation Unit. Typically, Creation Units are issued on a “T+2 basis” (i.e., two Business Days
after trade date). The Fund reserves the right to settle Creation Unit transactions on a basis other
than T+2 if necessary or appropriate under the circumstances.
To the extent contemplated
by an Authorized Participant Agreement with Distributors, the Fund will issue Creation Units to an Authorized
Participant, notwithstanding the fact that the corresponding Fund Deposits have not been received in
part or in whole, in reliance on the undertaking of the Authorized Participant to deliver the missing
Deposit Securities as soon as possible, which undertaking shall be secured by such Authorized Participant’s
delivery and maintenance of collateral having a value at least equal to 105% and up to 115%, which percentage
the Trust may change at any time, in its sole discretion, of the value of the missing Deposit Securities
in accordance with the Fund’s then-effective procedures. The Trust may use such cash deposit at any
time to buy Deposit Securities for the Fund. The only collateral that is acceptable to the Fund is cash
in U.S. dollars. Such cash collateral must be delivered no later than 1 p.m., Eastern time on the prescribed
settlement date or such other time as designated by the Fund’s custodian. Information concerning the
Fund’s current procedures for collateralization of missing Deposit Securities is available from Distributors
or its agent. The Authorized Participant Agreement will permit the Fund to buy the missing Deposit Securities
at any time and will subject the Authorized Participant to liability for any shortfall between the cost
to the Fund of purchasing such securities and the value of the cash collateral including, without limitation,
liability for related brokerage, borrowings and other charges.
In certain cases, Authorized
Participants may create and redeem Creation Units on the same trade date and in these instances, the
Fund reserves the right to settle these transactions on a net basis or require a representation from
the Authorized Participants that the creation and redemption transactions are for separate beneficial
owners. 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 Fund and the Fund’s determination shall be final and binding.
Costs associated with creation transactions.
A standard creation transaction fee is imposed to offset the transfer and other transaction costs associated
with the issuance of Creation Units. The standard creation transaction fee is charged to the Authorized
Participant on the day such Authorized Participant creates a Creation Unit, and is the same, regardless
of the number of Creation Units purchased by the Authorized Participant on the applicable Business Day.
The Authorized Participant may also be required to cover certain brokerage, tax, foreign exchange, execution,
market impact and other costs and expenses related to the execution of trades resulting from such transaction
(up to the maximum amount shown below). Authorized Participants will also bear the costs of transferring
the Deposit Securities to the Fund. Investors who use the services of a broker or other financial intermediary
to acquire Fund shares may be charged a fee for such services.
The
following table sets forth the Fund’s standard creation transaction fees and maximum additional charge
(as described above):
| | |
Standard Creation Transaction Fee | Maximum Additional
Charge for Creations1 |
$500 | 3% |
| | |
1. | As a percentage of the net asset value per Creation Unit. |
Please see the Authorized Participant Handbook (as may be amended or supplemented
from time to time) for additional information regarding the Fund’s standard creation transaction fees
and any additional fees charged to the Fund.
Redemption of Creation Units. Shares of the
Fund may be redeemed by Authorized Participants only in Creation Units at their NAV next determined after
receipt of a redemption request in proper form by Distributors or its agent and only on a Business Day.
The Fund will not redeem shares in amounts less than Creation Units. There can be no assurance, however,
that there will be sufficient liquidity in the secondary 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 Creation Unit that could be redeemed by an Authorized Participant. Beneficial
owners also may sell shares in the secondary market. Currently, the Fund generally redeems Creation Units
solely for cash; however, the Fund reserves the right to distribute securities in-kind as payment for
Creation Units being redeemed.
53
Please see the Cash redemption method section below and the following discussion
summarizing the in-kind method for further information on redeeming Creation Units of the Fund.
The Fund’s investment manager makes available through the NSCC, prior to the
opening of business on the Listing Exchange on each Business Day, the designated portfolio of securities,
assets or other positions (including any portion of such securities, assets or other positions for which
cash may be substituted) 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), and an amount of cash
as described below (Cash Amount) (if any). Such Fund Securities and the corresponding Cash Amount (each
subject to possible amendment or correction) are applicable in order to effect redemptions of Creation
Units of the Fund until such time as the next announced composition of the Fund Securities and Cash Amount
is made available. Together, the Fund Securities and the Cash Amount constitute the “Fund Redemption.”
Fund Securities received on redemption may not be identical to Deposit Securities that are applicable
to creations of Creation Units.
Unless cash redemptions are available or
specified for the Fund, the redemption proceeds for a Creation Unit generally consist of Fund Securities,
plus the Cash Amount, which is an amount equal to the difference between the net asset value of the shares
being redeemed, as next determined after the receipt of a redemption request in proper form, and the
value of Fund Securities, less a redemption transaction fee (as described below).
The
Fund reserves the right to deliver a nonconforming (i.e., custom) Fund Redemption. All questions as to
the composition of the in-kind redemption basket to be included in the Fund Redemption shall be determined
by the Trust, in accordance with applicable law, and the Trust’s determination shall be final and binding.
The Fund may, in its sole discretion, substitute a “cash in lieu” amount to
replace any Fund Security that may not be eligible for transfer through DTC Facilities or the NSCC Clearing
Process or that the Authorized Participant is not able to trade due to a trading restriction. The Fund
also reserves the right to permit or require a “cash in lieu” amount in other circumstances, including
circumstances in which: (i) the delivery of a Fund Security to the Authorized Participant would be restricted
under applicable securities or other local laws; (ii) the delivery of a Fund Security to the Authorized
Participant would result in the disposition of the Fund Security by the Authorized Participant becoming
restricted under applicable securities or other local laws; or (iii) in certain other situations. The
amount of cash paid out in such cases will be equivalent to the value of the substituted security listed
as a Fund Security. In the event that the Fund Securities have a value greater than the NAV of the shares,
a compensating cash payment equal to the difference is required to be made by or through an Authorized
Participant by the redeeming shareholder. Currently, the Fund generally redeems Creation Units solely
for cash; however, the Fund reserves the right to distribute securities in-kind as payment for Creation
Units being redeemed.
Cash redemption method. When partial or full cash redemptions
of Creation Units are available or specified for the Fund (currently, Creation Units of the Fund are
generally redeemed solely for cash), they will be effected in essentially the same manner as in-kind
redemptions thereof. In the case of partial or full cash redemptions, the Authorized Participant receives
the cash equivalent of the Fund Securities it would otherwise receive through an in-kind redemption,
plus the same Cash Amount to be paid to an in-kind redeemer.
Costs associated with redemption transactions.
A standard redemption transaction fee is imposed to offset transfer and other transaction costs that
may be incurred by the Fund. The standard redemption transaction fee is charged to the Authorized Participant
on the day such Authorized Participant redeems a Creation Unit, and is the same regardless of the number
of Creation Units redeemed by an Authorized Participant on the applicable Business Day. The Authorized
Participant may also be required to cover certain brokerage, tax, foreign exchange, execution, market
impact and other costs and expenses related to the execution of trades resulting from such transaction
(up to the maximum amount shown below). Authorized Participants will also bear the costs of transferring
the Fund Securities from the Fund to their account on their order. Investors who use the services of
a broker or other financial intermediary to dispose of Fund shares may be charged a fee for such services.
The following table sets forth the Fund’s standard redemption transaction fees
and maximum additional charge (as described above):
| | |
Standard Redemption Transaction
Fee | Maximum
Additional Charge for Redemptions1 |
$500 | 2% |
| | |
1. | As a percentage of the net asset value per Creation Unit, inclusive of the standard
redemption transaction fee. |
Please see the Authorized
Participant Handbook (as may be amended or supplemented from time to time) for additional information
regarding the Fund’s standard redemption transaction fees and any additional fees charged to the Fund.
Placement
of redemption orders. Redemption requests for Creation Units of the Fund must
be submitted to Distributors or its agent by or through an Authorized Participant. An Authorized Participant
must submit an irrevocable request to redeem shares of the Fund, in proper form, generally before 4 p.m.,
Eastern time on any Business Day, in order to receive that day’s NAV. On days when the Listing Exchange
closes earlier than normal, the Fund may require orders to redeem
54
Creation Units to be placed earlier that day. Investors, other than Authorized
Participants, are responsible for making arrangements for a redemption request to be made through an
Authorized Participant. Please see the Authorized Participant Agreement and Authorized Participant Handbook
for information regarding the Fund’s Cutoff Times.
The Authorized Participant
must transmit the request for redemption in the form required by the Fund to Distributors or its agent
in accordance with procedures set forth in the Authorized Participant Agreement and Authorized Participant
Handbook (as may be amended or supplemented from time to time). 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. At any time, only a limited number of broker-dealers
will have an Authorized Participant Agreement in effect. 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 Fund’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.
A redemption request is considered to be in “proper form” if: (i) an Authorized
Participant has transferred or caused to be transferred to the Fund’s transfer agent the Creation Unit
redeemed through the book-entry system of DTC so as to be effective by the Listing Exchange closing time
on any Business Day; (ii) a request in form satisfactory to the Fund is received by Distributors or its
agent from the Authorized Participant on behalf of itself or another redeeming investor within the time
periods specified above; and (iii) all other procedures set forth in the Authorized Participant Agreement
and Authorized Participant Handbook (as may be amended or supplemented from time to time) are properly
followed. If the transfer agent does not receive the investor’s shares through DTC Facilities by 10
a.m., Eastern time on the prescribed settlement date, the redemption request may be deemed rejected.
Investors should be aware that the deadline for such transfers of shares through the DTC Facilities may
be significantly earlier than the close of business on the Listing Exchange. Those making redemption
requests should ascertain the deadline applicable to transfers of shares through the DTC Facilities by
contacting the operations department of the broker or depositary institution effecting the transfer of
the shares.
Upon receiving a redemption request, Distributors or its agent
shall notify the Fund and the Fund’s transfer agent of such redemption request. The tender of an investor’s
shares for redemption and the distribution of the securities and/or cash included in the redemption payment
made in respect of Creation Units redeemed will be made through DTC and the relevant Authorized Participant
to the Beneficial Owner thereof as recorded on the book-entry system of DTC or the DTC Participant through
which such investor holds, as the case may be, or by such other means specified by the Authorized Participant
submitting the redemption request. Once a redemption request has been accepted, it will be processed
based on the NAV next determined after such acceptance in accordance with the Fund's Cutoff Times as
provided in the Authorized Participant Agreement and Authorized Participant Handbook (as may be amended
or supplemented from time to time) and disclosed in this SAI.
A redeeming Beneficial
Owner or Authorized Participant acting on behalf of such Beneficial Owner must maintain appropriate security
arrangements with a qualified broker-dealer, bank or other custody providers in each jurisdiction in
which any of the portfolio securities are customarily traded, to which account such portfolio securities
will be delivered.
Deliveries of redemption proceeds by the Fund generally will
be made within two Business Days (i.e., “T+2”). The Fund reserves the right to settle redemption
transactions later than T+2 if necessary or appropriate under the circumstances and compliant with applicable
law. Delayed settlement may occur due to a number of different reasons, including, without limitation,
settlement cycles for the underlying securities, unscheduled market closings, an effort to link distribution
to dividend record dates and ex-dates and newly announced holidays. For example, the redemption settlement
process may be extended beyond T+2 because of the occurrence of a holiday in a non-U.S. market or in
the U.S. bond market that is not a holiday observed in the U.S. equity market.
If
neither the redeeming Beneficial Owner nor the Authorized Participant acting on behalf of such redeeming
Beneficial Owner has appropriate arrangements to take delivery of Fund Securities in the applicable non-U.S.
jurisdiction and it is not possible to make other such arrangements, or if it is not possible to effect
deliveries of Fund Securities in such jurisdiction, the Fund may in its discretion exercise its option
to redeem such shares in cash, and the redeeming Beneficial Owner will be required to receive its redemption
proceeds in cash. In such case, the investor will receive a cash payment equal to the net asset value
of its shares based on the NAV of the Fund next determined after the redemption request is received in
proper form (minus a redemption transaction fee and additional charges specified above, to offset the
Fund’s brokerage and other transaction costs associated with the disposition of Fund Securities). Redemptions
of shares for Fund Securities will be subject to compliance with applicable U.S. federal and state securities
laws and the Fund (whether or not it otherwise permits cash redemptions) reserves the right to redeem
Creation Units for cash to the extent that the Fund cannot lawfully deliver specific Fund Securities
upon
55
redemptions or cannot do so without first registering the Fund Securities under
such laws.
In the event that cash redemptions are permitted or required
by the Trust (currently, Creation Units of the Fund are generally redeemed solely for cash), proceeds
will be paid to the Authorized Participant redeeming shares as soon as practicable after the date of
redemption (within seven calendar days thereafter).
To the extent contemplated
by an Authorized Participant Agreement with Distributors, in the event an Authorized Participant has
submitted a redemption request in proper form but is unable to transfer all or part of the Creation Unit
to be redeemed to the Fund, at or prior to 10 a.m., Eastern time on the prescribed settlement date, Distributors
or its agent will accept the redemption request in reliance on the undertaking by the Authorized Participant
to deliver the missing shares as soon as possible. Such undertaking shall be secured by the Authorized
Participant’s delivery and maintenance of collateral consisting of cash, in U.S. dollars in immediately
available funds, having a value at least equal to 105% and up to 115%, which percentage the Trust may
change at any time, in its sole discretion, of the value of the missing shares. Such cash collateral
must be delivered no later than 10 a.m., Eastern time on the prescribed settlement date and shall be
held by the Fund’s custodian and marked-to-market daily. The fees of the Fund’s custodian and any
sub-custodians in respect of the delivery, maintenance and redelivery of the cash collateral shall be
payable by the Authorized Participant. The Authorized Participant Agreement will permit the Fund to purchase
missing Fund shares or acquire the Deposit Securities and the Cash Amount underlying such shares, and
will subject the Authorized Participant to liability for any shortfall between the cost of the Fund acquiring
such shares, the Deposit Securities or Cash Amount and the value of the cash collateral including, without
limitation, liability for related brokerage and other charges.
Because the portfolio
securities of the Fund may trade on exchange(s) on days that the Listing Exchange is closed or are otherwise
not Business Days for the Fund, shareholders may not be able to redeem their shares of the Fund, or purchase
or sell shares of the Fund on the Listing Exchange on days when the NAV of the Fund could be significantly
affected by events in the relevant non-U.S. markets.
The right of redemption
may be suspended or the date of payment postponed with respect to the Fund: (i) for any period during
which the Listing Exchange is closed (other than customary weekend and holiday closings); (ii) for any
period during which trading on the Listing Exchange is restricted; (iii) for any period during which
an emergency exists as a result of which disposal of the shares of the Fund’s portfolio securities
or determination of its net asset value is not reasonably practicable; or (iv) in such other circumstances
as is permitted by the SEC.
Custom baskets. The Fund may utilize custom creation or redemption baskets
consistent with Rule 6c-11 under the 1940 Act. A custom order may be placed when, for example, an Authorized
Participant cannot transact in an instrument in the in-kind creation or in-kind redemption basket and
therefore has additional cash included in lieu of such instrument. The Trust has adopted policies and
procedures that govern the construction and acceptance of baskets, including heightened requirements
for certain types of custom baskets. These policies and procedures provide detailed parameters for the
construction and acceptance of custom baskets that are in the best interests of the Fund and its shareholders,
including the process for any revisions to, or deviations from, those parameters, and specify the titles
or roles of the employees of the investment manager who are required to review each custom basket for
compliance with the parameters.
Franklin
Distributors, LLC (Distributors) acts as the principal underwriter in the continuous public offering
of the Fund's shares. Distributors is located at One Franklin Parkway, San Mateo, CA 94403-1906.
Shares are continuously offered for sale by the Fund through Distributors or its
agent only in Creation Units, as described in the prospectus and above in the “Creation and Redemption
of Creation Units” section of this SAI. Fund shares in amounts less than Creation Units are generally
not distributed by Distributors or its agent. Distributors or its agent will arrange for the delivery
of the prospectus and, upon request, this SAI to persons purchasing Creation Units and will maintain
records of both orders placed with it or its agents and confirmations of acceptance furnished by it or
its agents.
Distributors may enter into agreements with securities dealers
(Soliciting Dealers) who will solicit purchases of Creation Units of Fund shares. Such Soliciting Dealers
may also be Authorized Participants, DTC participants and/or investor services organizations.
Distributors
may be entitled to payments from the Fund under the Rule 12b-1 plan, as discussed below. Except as noted,
Distributors received no other compensation from the Fund for acting as underwriter.
Distribution and
service (12b-1) fees The board has adopted a plan pursuant to Rule 12b-1 for
the Fund. However, no Rule 12b-1 plan fee is currently charged to the Fund, and there are no plans in
place to impose a Rule 12b-1 plan fee. The plan is designed to benefit the Fund and its shareholders.
The plan is expected to, among other things, increase advertising of the Fund, encourage purchases of
Fund shares and service to its shareholders, and increase or maintain assets of the Fund so that certain
fixed expenses may be spread over a broader asset base, with a positive
56
impact on per share expense ratios. In addition, a positive cash flow into the
Fund is useful in managing the Fund because the investment manager has more flexibility in taking advantage
of new investment opportunities and handling shareholder redemptions.
The
plan is a compensation type plan. Under the plan, the Fund pays Distributors or others for the expenses
of activities that are primarily intended to sell shares of the Fund. These expenses also may include
service fees paid to securities dealers or others who have executed a servicing agreement with the Fund,
Distributors or its affiliates and who provide service or account maintenance to shareholders (service
fees); and the expenses of printing prospectuses and reports used for sales purposes, of marketing support
and of preparing and distributing sales literature and advertisements. Together, these expenses, including
the service fees, are "eligible expenses." The 12b-1 fees charged to the Fund are based only on the fees
attributable to that particular Fund and are calculated, as a percentage of such Fund's net assets, over
the 12-month period of February 1 through January 31. Because this 12-month period may not match the
Fund’s fiscal year, the amount, as a percentage of the Fund's net assets, for the Fund’s fiscal year
may vary from the amount stated under the plan, but will never exceed that amount during the 12-month
period of February 1 through January 31. In addition to the payments that Distributors or others are
entitled to under the plan, the plan also provides that to the extent the Fund, the investment manager
or Distributors or other parties on behalf of the Fund, the investment manager or Distributors make payments
that are deemed to be for the financing of any activity primarily intended to result in the sale of Fund
shares within the context of Rule 12b-1 under the 1940 Act, then such payments shall be deemed to have
been made pursuant to the plan.
To the extent fees are for distribution or
marketing functions, as distinguished from administrative servicing or agency transactions, certain banks
may not participate in the plan because of applicable federal law prohibiting certain banks from engaging
in the distribution of fund shares. These banks, however, are allowed to receive fees under the plan
for administrative servicing or for agency transactions.
Distributors must provide
written reports to the board at least quarterly on the amounts and purpose of any payment made under
the plan and any related agreements, and furnish the board with such other information as the board may
reasonably request to enable it to make an informed determination of whether the plan should be continued.
The plan has been approved according to the provisions of Rule 12b-1. The terms
and provisions of the plan also are consistent with Rule 12b-1.
The ratings of Moody’s Investors Service,
Inc., S&P Global Ratings and Fitch Ratings represent their opinions as to the quality of various
debt obligations. It should be emphasized, however, that ratings are not absolute standards of quality.
Consequently, debt obligations with the same maturity, coupon and rating may have different yields while
debt obligations of the same maturity and coupon with different ratings may have the same yield. As described
by the rating agencies, ratings are generally given to securities at the time of issuances. While the
rating agencies may from time to time revise such ratings, they undertake no obligation to do so.
Moody’s Investors Service, Inc. Global Rating Scales
Ratings assigned
on Moody’s global long-term and short- term rating scales are forward-looking opinions of the relative
credit risks of financial obligations issued by non-financial corporates, financial institutions, structured
finance vehicles, project finance vehicles, and public sector entities. Moody’s defines credit risk
as the risk that an entity may not meet its contractual financial obligations as they come due and any
estimated financial loss in the event of default or impairment. The contractual financial obligations1
addressed by Moody’s ratings are those that call for, without regard to enforceability, the payment
of an ascertainable amount, which may vary based upon standard sources of variation (e.g., floating interest
rates), by an ascertainable date. Moody’s rating addresses the issuer’s ability to obtain cash sufficient
to service the obligation, and its willingness to pay.2 Moody’s ratings
do not address non-standard sources of variation in the amount of the principal obligation (e.g., equity
indexed), absent an express statement to the contrary in a press release accompanying an initial rating.3
Long-term ratings are assigned to issuers or obligations with an original maturity of eleven months or
more and reflect both on the likelihood of a default or impairment on contractual financial obligations
and the expected financial loss suffered in the event of default or impairment. Short-term ratings are
assigned to obligations with an original maturity of thirteen months or less and reflect both on the
likelihood of a default or impairment on contractual financial obligations and the expected financial
loss suffered in the event of default or impairment.4, 5 Moody’s issues
ratings at the issuer level and instrument level on both the long- term scale and the short-term scale.
Typically, ratings are made publicly available although private and unpublished ratings may also be assigned.6
Moody’s
differentiates structured finance ratings from fundamental ratings (i.e., ratings on nonfinancial corporate,
financial institution, and public sector entities) on the global long-term scale by adding (sf ) to all
structured finance ratings.7 The addition of (sf ) to structured finance
ratings should eliminate any presumption that such ratings and fundamental ratings at the same letter
grade level will behave the same.
57
1. In the case of impairments, there can be a financial loss even when contractual
obligations are met.
2. In some cases the relevant credit risk relates to a third
party, in addition to, or instead of the issuer. Examples include credit-linked notes and guaranteed
obligations.
3. Because the number of possible features or structures is
limited only by the creativity of issuers, Moody’s cannot comprehensively catalogue all the types of
non-standard variation affecting financial obligations, but examples include equity indexed principal
values and cash flows, prepayment penalties, and an obligation to pay an amount that is not ascertainable
at the inception of the transaction.
4. For certain preferred stock and hybrid
securities in which payment default events are either not defined or do not match investors’ expectations
for timely payment, long-term and short-term ratings reflect the likelihood of impairment and financial
loss in the event of impairment.
5. Debts held on the balance sheets of official
sector institutions – which include supranational institutions, central banks and certain government-owned
or controlled banks – may not always be treated the same as debts held by private investors and lenders.
When it is known that an obligation is held by official sector institutions as well as other investors,
a rating (short-term or long-term) assigned to that obligation reflects only the credit risks faced by
non-official sector investors.
6. For information on how to obtain a Moody’s
credit rating, including private and unpublished credit ratings, please see Moody’s Investors Service
Products. Please note that Moody’s always reserves the right to choose not to assign or maintain a
credit rating for its own business reasons.
7. Like other global scale ratings, (sf)
ratings reflect both the likelihood of a default and the expected loss suffered in the event of default.
Ratings are assigned based on a rating committee’s assessment of a security’s expected loss rate
(default probability multiplied by expected loss severity), and may be subject to the constraint that
the final expected loss rating assigned would not be more than a certain number of notches, typically
three to five notches, above the rating that would be assigned based on an assessment of default probability
alone. The magnitude of this constraint may vary with the level of the rating, the seasoning of the transaction,
and the uncertainty around the assessments of expected loss and probability of default.
The
(sf) indicator for structured finance security ratings indicates that otherwise similarly rated structured
finance and fundamental securities may have different risk characteristics. Through its current methodologies,
however, Moody’s aspires to achieve broad expected equivalence in structured finance and fundamental
rating performance when measured over a long period of time.
Description of Moody’s
Investors Service, Inc.’s Global Long-Term Ratings:
Aaa—Obligations
rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
Aa—Obligations
rated Aa are judged to be of high quality and are subject to very low credit risk.
A—Obligations
rated A are judged to be upper-medium grade and are subject to low credit risk.
Baa—Obligations
rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain
speculative characteristics.
Ba—Obligations rated Ba are judged to be
speculative and are subject to substantial credit risk.
B—Obligations rated B are considered speculative
and are subject to high credit risk.
Caa—Obligations
rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
Ca—Obligations
rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery
of principal and interest.
C—Obligations rated C are the lowest rated
and are typically in default, with little prospect for recovery of principal or interest.
Note:
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through
Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category;
the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end
of that generic rating category. Additionally, a “(hyb)” indicator is appended to all ratings of
hybrid securities issued by banks, insurers, finance companies, and securities firms.*
*
By their terms, hybrid securities allow for the omission of scheduled dividends, interest, or principal
payments, which can potentially result in impairment if such an omission occurs. Hybrid securities may
also be subject to contractually allowable write-downs of principal that could result in impairment.
Together with the hybrid indicator, the long-term obligation rating assigned to a hybrid security is
an expression of the relative credit risk associated with that security.
Description
of Moody’s Investors Service, Inc.’s Global Short-Term Ratings:
P-1—Ratings of Prime-1
reflect a superior ability to repay short-term obligations.
P-2—Ratings of Prime-2
reflect a strong ability to repay short-term obligations.
P-3—Ratings of Prime-3
reflect an acceptable ability to repay short-term obligations.
NP—Issuers (or
supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
Description of Moody’s Investors Service, Inc.’s US Municipal Ratings:
U.S. Municipal Short-Term Debt and Demand Obligation Ratings:
Moody’s
uses the global short-term Prime rating scale for commercial paper issued by US municipalities and nonprofits.
These commercial paper programs may be backed by external letters of credit or liquidity facilities,
or by an issuer’s self-liquidity.
58
For other short-term municipal obligations, Moody’s uses one of two other short-term
rating scales, the Municipal Investment Grade (MIG) and Variable Municipal Investment Grade (VMIG) scales
discussed below.
MIG Ratings:
Moody’s uses the MIG
scale for US municipal cash flow notes, bond anticipation notes and certain other short-term obligations,
which typically mature in three years or less. Under certain circumstances, Moody’s uses the MIG scale
for bond anticipation notes with maturities of up to five years.
MIG 1—This designation
denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable
liquidity support, or demonstrated broad-based access to the market for refinancing.
MIG 2—This
designation denotes strong credit quality. Margins of protection are ample, although not as large as
in the preceding group.
MIG 3—This designation denotes acceptable
credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is
likely to be less well-established.
SG—This designation denotes speculative-grade
credit quality. Debt instruments in this category may lack sufficient margins of protection.
VMIG Ratings:
For variable rate demand obligations (VRDOs),
Moody’s assigns both a long-term rating and a short-term payment obligation rating. The long-term rating
addresses the issuer’s ability to meet scheduled principal and interest payments. The short-term payment
obligation rating addresses the ability of the issuer or the liquidity provider to meet any purchase
price payment obligations resulting from optional tenders (“on demand”) and/or mandatory tenders
of the VRDO. The short-term payment obligation rating uses the VMIG scale. Transitions of VMIG ratings
with conditional liquidity support differ from transitions of Prime ratings reflecting the risk that
external liquidity support will terminate if the issuer’s long-term rating drops below investment grade.
For VRDOs, Moody’s typically assigns a VMIG rating if the frequency of the payment
obligation is less than every three years. If the frequency of the payment obligation is less than three
years, but the obligation is payable only with remarketing proceeds, the VMIG short-term rating is not
assigned and it is denoted as “NR”. Industrial development bonds in the US where the obligor is a
corporate may carry a VMIG rating that reflects Moody’s view of the relative likelihood of default
and loss. In these cases, liquidity assessment is based on the liquidity of the corporate obligor.
VMIG
1—This designation denotes superior credit quality. Excellent protection is afforded
by the superior short-term credit strength of the liquidity provider and structural and legal protections.
VMIG
2—This designation denotes strong credit quality. Good protection is afforded
by the strong short- term credit strength of the liquidity provider and structural and legal protections.
VMIG
3—This designation denotes acceptable credit quality. Adequate protection is
afforded by the satisfactory short-term credit strength of the liquidity provider and structural and
legal protections.
SG—This designation denotes speculative-grade credit quality.
Demand features rated in this category may be supported by a liquidity provider that does not have a
sufficiently strong short-term rating or may lack the structural or legal protections.
Description
of Moody’s Investors Service, Inc.’s National Scale Long-Term Ratings:
Moody’s
long-term National Scale Ratings (NSRs) are opinions of the relative creditworthiness of issuers and
financial obligations within a particular country. NSRs are not designed to be compared among countries;
rather, they address relative credit risk within a given country. Moody’s assigns national scale ratings
in certain local capital markets in which investors have found the global rating scale provides inadequate
differentiation among credits or is inconsistent with a rating scale already in common use in the country.
In each specific country, the last two characters of the rating indicate the country
in which the issuer is located or the financial obligation was issued (e.g., Aaa.ke for Kenya).
Long-Term NSR Scale
Aaa.n Issuers or issues rated Aaa.n demonstrate
the strongest creditworthiness relative to other domestic issuers and issuances.
Aa.n Issuers
or issues rated Aa.n demonstrate very strong creditworthiness relative to other domestic issuers and
issuances.
A.n Issuers or issues rated A.n present above-average creditworthiness
relative to other domestic issuers and issuances.
Baa.n Issuers or issues
rated Baa.n represent average creditworthiness relative to other domestic issuers and issuances.
Ba.n
Issuers or issues rated Ba.n demonstrate below-average creditworthiness relative to other domestic
issuers and issuances.
B.n Issuers or issues rated B.n demonstrate
weak creditworthiness relative to other domestic issuers and issuances.
Caa.n
Issuers or issues rated Caa.n demonstrate very weak creditworthiness relative to other domestic issuers
and issuances.
59
Ca.n
Issuers or issues rated Ca.n demonstrate extremely weak creditworthiness relative to other domestic
issuers and issuances.
C.n Issuers or issues rated C.n demonstrate
the weakest creditworthiness relative to other domestic issuers and issuances.
Note:
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating classification from Aa through
Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category;
the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the lower end
of that generic rating category.
Description of S&P Global Ratings’ Long-Term
Issue Credit Ratings:
Issue credit ratings are based, in varying degrees, on S&P
Global Ratings’ analysis of the following considerations:
• The likelihood of payment—the capacity and willingness of
the obligor to meet its financial commitments on an obligation in accordance with the terms of the obligation;
• The
nature and provisions of the financial obligation, and the promise S&P Global Ratings imputes; and
• The
protection afforded by, and relative position of, the financial obligation in the event of a bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors’
rights.
An issue rating is an assessment of default risk but may incorporate
an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations
are typically rated lower than senior obligations, to reflect lower priority in bankruptcy, as noted
above. (Such differentiation may apply when an entity has both senior and subordinated obligations, secured
and unsecured obligations, or operating company and holding company obligations.)
AAA—An obligation
rated “AAA” has the highest rating assigned by S&P Global Ratings. The obligor’s capacity to
meet its financial commitments on the obligation is extremely strong.
AA—An obligation
rated “AA” differs from the highest-rated obligations only to a small degree. The obligor’s capacity
to meet its financial commitments on the obligation is very strong.
A—An obligation
rated “A” is somewhat more susceptible to the adverse effects of changes in circumstances and economic
conditions than obligations in higher-rated categories. However, the obligor’s capacity to meet its
financial commitments on the obligation is still strong.
BBB—An obligation
rated “BBB” exhibits adequate protection parameters. However, adverse economic conditions or changing
circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments on
the obligation.
BB, B, CCC, CC, and C—Obligations rated “BB”, “B”,
“CCC”, “CC”, and “C” are regarded as having significant speculative characteristics. “BB”
indicates the least degree of speculation and “C” the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by large uncertainties or major
exposure to adverse conditions.
BB—An obligation rated “BB” is less
vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties
or exposure to adverse business, financial, or economic conditions that could lead to the obligor’s
inadequate capacity to meet its financial commitments on the obligation.
B—An obligation
rated “B” is more vulnerable to nonpayment than obligations rated “BB”, but the obligor currently
has the capacity to meet its financial commitments on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor’s capacity or willingness to meet its financial
commitments on the obligation.
CCC—An obligation rated “CCC” is currently
vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitments on the obligation. In the event of adverse business,
financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial
commitments on the obligation.
CC—An obligation rated “CC” is currently
highly vulnerable to nonpayment.
The “CC” rating is used when a default
has not yet occurred but S&P Global Ratings expects default to be a virtual certainty, regardless
of the anticipated time to default.
C—An obligation rated “C” is currently
highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower
ultimate recovery compared with obligations that are rated higher.
D—An obligation
rated “D” is in default or in breach of an imputed promise. For non-hybrid capital instruments, the
“D” rating category is used when payments on an obligation are not made on the date due, unless S&P
Global Ratings believes that such payments will be made within the next five business days in the absence
of a stated grace period or within the earlier of the stated grace period or the next 30 calendar days.
The “D” rating also will be used upon the filing of a bankruptcy petition or the taking of similar
action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions.
A rating on an
60
obligation is lowered to “D” if it is subject to a distressed debt restructuring.
Ratings from “AA” to “CCC” may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within the rating categories.
Description
of S&P Global Ratings’ Short-Term Issue Credit Ratings:
A-1—A short-term
obligation rated “A-1” is rated in the highest category by S&P Global Ratings. The obligor’s
capacity to meet its financial commitments on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that the obligor’s capacity to meet
its financial commitments on these obligations is extremely strong.
A-2—A short-term
obligation rated “A-2” is somewhat more susceptible to the adverse effects of changes in circumstances
and economic conditions than obligations in higher rating categories. However, the obligor’s capacity
to meet its financial commitments on the obligation is satisfactory.
A-3—A short-term
obligation rated “A-3” exhibits adequate protection parameters. However, adverse economic conditions
or changing circumstances are more likely to weaken an obligor’s capacity to meet its financial commitments
on the obligation.
B—A short-term obligation rated “B” is regarded as vulnerable
and has significant speculative characteristics. The obligor currently has the capacity to meet its financial
commitments; however, it faces major ongoing uncertainties that could lead to the obligor’s inadequate
capacity to meet its financial commitments.
C—A short-term obligation rated “C”
is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitments on the obligation.
D—A short-term
obligation rated “D” is in default or in breach of an imputed promise. For non-hybrid capital instruments,
the “D” rating category is used when payments on an obligation are not made on the date due, unless
S&P Global Ratings believes that such payments will be made within any stated grace period.
However, any stated grace period longer than five business days will be treated
as five business days. The “D” rating also will be used upon the filing of a bankruptcy petition
or the taking of a similar action and where default on an obligation is a virtual certainty, for example
due to automatic stay provisions. A rating on an obligation is lowered to “D” if it is subject to
a distressed debt restructuring.
Description of S&P Global Ratings’ Municipal
Short-Term Note Ratings:
An S&P Global Ratings U.S. municipal note rating reflects
S&P Global Ratings’ opinion about the liquidity factors and market access risks unique to the notes.
Notes due in three years or less will likely receive a note rating. Notes with an original maturity of
more than three years will most likely receive a long-term debt rating. In determining which type of
rating, if any, to assign, S&P Global Ratings’ analysis will review the following considerations:
• Amortization
schedule—the larger the final maturity relative to other maturities, the more likely it will be treated
as a note; and
• Source
of payment—the more dependent the issue is on the market for its refinancing, the more likely it will
be treated as a note.
SP-1—Strong capacity to pay principal and
interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2—Satisfactory capacity to pay principal and interest, with
some vulnerability to adverse financial and economic changes over the term of the notes.
SP-3—Speculative
capacity to pay principal and interest.
D—“D” is assigned upon failure to
pay the note when due, completion of a distressed debt restructuring, or the filing of a bankruptcy petition
or the taking of similar action and where default on an obligation is a virtual certainty, for example
due to automatic stay provisions.
Long-Term Issuer Credit Ratings
AAA An obligor rated
“AAA” has extremely strong capacity to meet its financial commitments. “AAA” is the highest issuer
credit rating assigned by S&P Global Ratings.
AA An obligor rated
“AA” has very strong capacity to meet its financial commitments. It differs from the highest-rated
obligors only to a small degree.
A An obligor rated “A” has strong capacity
to meet its financial commitments but is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than obligors in higher-rated categories.
BBB An obligor rated
“BBB” has adequate capacity to meet its financial commitments. However, adverse economic conditions
or changing circumstances are more likely to weaken the obligor’s capacity to meet its financial commitments.
BB,
B, CCC, and CC Obligors rated “BB”, “B”, “CCC”, and “CC” are regarded as having
significant speculative characteristics. “BB” indicates the least degree of speculation
61
and “CC” the highest. While such obligors will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties or major exposure to adverse
conditions.
BB An obligor rated “BB” is less vulnerable in the near
term than other lower-rated obligors. However, it faces major ongoing uncertainties and exposure to adverse
business, financial, or economic conditions that could lead to the obligor’s inadequate capacity to
meet its financial commitments financial commitments. Adverse business, financial, or economic conditions
will likely impair the obligor’s capacity or willingness to meet its financial commitments.
CCC
An obligor rated “CCC” is currently vulnerable and is dependent upon favorable business, financial,
and economic conditions to meet its financial commitments.
CC An obligor rated “CC” is currently
highly vulnerable. The “CC” rating is used when a default has not yet occurred but S&P Global
Ratings expects default to be a virtual certainty, regardless of the anticipated time to default.
SD
and D An obligor is rated “SD” (selective default) or “D” if S&P Global
Ratings considers there to be a default on one or more of its financial obligations, whether long- or
short-term, including rated and unrated obligations but excluding hybrid instruments classified as regulatory
capital or in nonpayment according to terms. A “D” rating is assigned when S&P Global Ratings
believes that the default will be a general default and that the obligor will fail to pay all or substantially
all of its obligations as they come due. An “SD” rating is assigned when S&P Global Ratings believes
that the obligor has selectively defaulted on a specific issue or class of obligations but it will continue
to meet its payment obligations on other issues or classes of obligations in a timely manner. A rating
on an obligor is lowered to “D” or “SD” if it is conducting a distressed debt restructuring.
Ratings from “AA” to “CCC” may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within the rating categories.
Short-Term
Issuer Credit Ratings
A-1 An obligor rated “A-1” has strong capacity to meet its
financial commitments. It is rated in the highest category by S&P Global Ratings. Within this category,
certain obligors are designated with a plus sign (+). This indicates that the obligor’s capacity to
meet its financial commitments is extremely strong.
A-2 An obligor rated
“A-2” has satisfactory capacity to meet its financial commitments. However, it is somewhat more susceptible
to the adverse effects of changes in circumstances and economic conditions than obligors in the highest
rating category.
A-3 An obligor rated “A-3” has adequate capacity to meet
its financial obligations. However, adverse economic conditions or changing circumstances are more likely
to weaken the obligor’s capacity to meet its financial commitments.
B An obligor rated
“B” is regarded as vulnerable and has significant speculative characteristics. The obligor currently
has the capacity to meet its financial commitments; however, it faces major ongoing uncertainties that
could lead to the obligor’s inadequate capacity to meet its financial commitments.
C An obligor rated
“C” is currently vulnerable to nonpayment that would result in an “SD” or “D” issuer rating
and is dependent upon favorable business, financial, and economic conditions to meet its financial commitments.
SD
and D An obligor is rated “SD” (selective default) or “D” if S&P Global
Ratings considers there to be a default on one or more of its financial obligations, whether long- or
short-term, including rated and unrated obligations but excluding hybrid instruments classified as regulatory
capital or in nonpayment according to terms. A “D” rating is assigned when S&P Global Ratings
believes that the default will be a general default and that the obligor will fail to pay all or substantially
all of its obligations as they come due. An “SD” rating is assigned when S&P Global Ratings believes
that the obligor has selectively defaulted on a specific issue or class of obligations but it will continue
to meet its payment obligations on other issues or classes of obligations in a timely manner. A rating
on an obligor is lowered to “D” or “SD” if it is conducting a distressed debt restructuring.
Description of S&P Global Ratings’ Dual Ratings:
Dual
ratings may be assigned to debt issues that have a put option or demand feature. The first component
of the rating addresses the likelihood of repayment of principal and interest as due, and the second
component of the rating addresses only the demand feature. The first component of the rating can relate
to either a short-term or long-term transaction and accordingly use either short-term or long-term rating
symbols. The second component of the rating relates to the put option and is assigned a short-term rating
symbol (for example, “AAA/A-1+” or “A-1+/A-1”). With U.S. municipal short-term demand debt, the
U.S. municipal short-term note rating symbols are used for the first component of the rating (for example,
“SP-1+/A-1+”).
Description of S&P Global Ratings’ Active Qualifiers:
S&P Global Ratings uses the following qualifiers that limit the scope of a
rating. The structure of the transaction can require the use of a qualifier such as a “p” qualifier,
which indicates the rating addresses the principal portion of the obligation only. A qualifier appears
as a suffix and is part of the rating.
62
Federal
deposit insurance limit: “L” qualifier. Ratings qualified with “L” apply only
to amounts invested up to federal deposit insurance limits.
Principal: “p” qualifier.
This suffix is used for issues in which the credit factors, the terms, or both that determine the likelihood
of receipt of payment of principal are different from the credit factors, terms, or both that determine
the likelihood of receipt of interest on the obligation. The “p” suffix indicates that the rating
addresses the principal portion of the obligation only and that the interest is not rated.
Preliminary
ratings: “prelim” qualifier. Preliminary ratings, with the “prelim” suffix, may
be assigned to obligors or obligations, including financial programs, in the circumstances described
below. Assignment of a final rating is conditional on the receipt by S&P Global Ratings of appropriate
documentation. S&P Global Ratings reserves the right not to issue a final rating. Moreover, if a
final rating is issued, it may differ from the preliminary rating.
• Preliminary ratings
may be assigned to obligations, most commonly structured and project finance issues, pending receipt
of final documentation and legal opinions.
• Preliminary ratings may be assigned to obligations that will
likely be issued upon the obligor’s emergence from bankruptcy or similar reorganization, based on late-stage
reorganization plans, documentation, and discussions with the obligor. Preliminary ratings may also be
assigned to the obligors. These ratings consider the anticipated general credit quality of the reorganized
or post-bankruptcy issuer as well as attributes of the anticipated obligation(s).
• Preliminary ratings
may be assigned to entities that are being formed or that are in the process of being independently established
when, in S&P Global Ratings’ opinion, documentation is close to final. Preliminary ratings may
also be assigned to the obligations of these entities.
• Preliminary ratings may be assigned when a previously unrated
entity is undergoing a well-formulated restructuring, recapitalization, significant financing, or other
transformative event, generally at the point that investor or lender commitments are invited. The preliminary
rating may be assigned to the entity and to its proposed obligation(s). These preliminary ratings consider
the anticipated general credit quality of the obligor, as well as attributes of the anticipated obligation(s),
assuming successful completion of the transformative event. Should the transformative event not occur,
S&P Global Ratings would likely withdraw these preliminary ratings.
• A preliminary recovery
rating may be assigned to an obligation that has a preliminary issue credit rating.
Termination structures:
“t” qualifier. This symbol indicates termination structures that are designed to honor their contracts
to full maturity or, should certain events occur, to terminate and cash settle all their contracts before
their final maturity date.
Counterparty instrument rating: “cir” qualifier.
This symbol indicates a counterparty instrument rating (CIR), which is a forward-looking opinion about
the creditworthiness of an issuer in a securitization structure with respect to a specific financial
obligation to a counterparty (including interest rate swaps, currency swaps, and liquidity facilities).
The CIR is determined on an ultimate payment basis; these opinions do not take into account timeliness
of payment.
Description of Fitch Ratings’ Corporate Finance Obligations:
Ratings of individual securities or financial obligations of a corporate issuer
address relative vulnerability to default on an ordinal scale. In addition, for financial obligations
in corporate finance, a measure of recovery given default on that liability is also included in the rating
assessment. This notably applies to covered bonds ratings, which incorporate both an indication of the
probability of default and of the recovery given a default of this debt instrument. On the contrary,
ratings of debtor-in-possession (DIP) obligations incorporate the expectation of full repayment.
The relationship between the issuer scale and obligation scale assumes a generic
historical average recovery. Individual obligations can be assigned ratings higher, lower, or the same
as that entity’s issuer rating or Issuer Default Rating (IDR), based on their relative ranking, relative
vulnerability to default or based on explicit Recovery Ratings.
As a result, individual
obligations of entities, such as corporations, are assigned ratings higher, lower, or the same as that
entity’s issuer rating or IDR, except DIP obligation ratings that are not based off an IDR. At the
lower end of the ratings scale, Fitch publishes explicit Recovery Ratings in many cases to complement
issuer and obligation ratings.
AAA: Highest Credit Quality. “AAA” ratings
denote the lowest expectation of credit risk. They are assigned only in cases of exceptionally strong
capacity for payment of financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.
AA: Very High Credit Quality. “AA” ratings
denote expectations of very low credit risk. They indicate very strong capacity for payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable events.
A: High Credit Quality.
“A” ratings denote expectations of low credit risk. The capacity for payment of financial commitments
is considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic
conditions than is the case for higher ratings.
63
BBB:
Good Credit Quality. “BBB” ratings indicate that expectations of credit risk are currently low. The
capacity for payment of financial commitments is considered adequate, but adverse business or economic
conditions are more likely to impair this capacity.
BB: Speculative. “BB”
ratings indicate an elevated vulnerability to credit risk, particularly in the event of adverse changes
in business or economic conditions over time; however, business or financial alternatives may be available
to allow financial commitments to be met.
B: Highly Speculative. “B” ratings indicate
that material credit risk is present.
CCC: Substantial Credit Risk. “CCC” ratings
indicate that substantial credit risk is present.
CC: Very High Levels
of Credit Risk. “CC” ratings indicate very high levels of credit risk.
C: Exceptionally
High Levels of Credit Risk. “C” indicates exceptionally high levels of credit risk.
The ratings of corporate finance obligations are linked to Issuer Default Ratings
(IDRs) (or sometimes Viability Ratings for banks and non-bank financial institutions) by i) recovery
expectations, including as often indicated by Recovery Ratings assigned in the case of low speculative
grade issuers and ii) for banks and non-bank financial institutions an assessment of non-performance
risk relative to the risk captured in the IDR or Viability Rating (e.g. in respect of certain hybrid
securities).
For performing obligations, the obligation rating represents
the risk of default and includes the effect of expected recoveries on the credit risk should a default
occur.
If the obligation rating is higher than the rating of the issuer, this indicates
above average recovery expectations in the event of default. If the obligations rating is lower than
the rating of the issuer, this indicates low expected recoveries should default occur.
Ratings
in the categories of “CCC”, “CC” and “C” can also relate to obligations or issuers that are
in default. In this case, the rating does not opine on default risk but reflects the recovery expectation
only.
Description of Fitch Ratings’ Issuer Default Ratings:
Rated
entities in a number of sectors, including financial and non-financial corporations, sovereigns, insurance
companies and certain sectors within public finance, are generally assigned IDRs. IDRs are also assigned
to certain entities or enterprises in global infrastructure, project finance and public finance. IDRs
opine on an entity’s relative vulnerability to default (including by way of a distressed debt exchange)
on financial obligations. The threshold default risk addressed by the IDR is generally that of the financial
obligations whose non-payment would best reflect the uncured failure of that entity. As such, IDRs also
address relative vulnerability to bankruptcy, administrative receivership or similar concepts.
In aggregate, IDRs provide an ordinal ranking of issuers based on the agency’s
view of their relative vulnerability to default, rather than a prediction of a specific percentage likelihood
of default.
AAA: Highest Credit Quality. “AAA” ratings denote the lowest
expectation of default risk. They are assigned only in cases of exceptionally strong capacity for payment
of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA:
Very High Credit Quality. “AA” ratings denote expectations of very low default risk. They indicate
very strong capacity for payment of financial commitments. This capacity is not significantly vulnerable
to foreseeable events.
A: High Credit Quality. “A” ratings denote
expectations of low default risk. The capacity for payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is
the case for higher ratings.
BBB: Good Credit Quality. “BBB” ratings
indicate that expectations of default risk are currently low. The capacity for payment of financial commitments
is considered adequate, but adverse business or economic conditions are more likely to impair this capacity.
BB:
Speculative. “BB” ratings indicate an elevated vulnerability to default risk, particularly in the
event of adverse changes in business or economic conditions over time; however, business or financial
flexibility exists that supports the servicing of financial commitments.
B: Highly Speculative.
“B” ratings indicate that material default risk is present, but a limited margin of safety remains.
Financial commitments are currently being met; however, capacity for continued payment is vulnerable
to deterioration in the business and economic environment.
CCC: Substantial Credit
Risk. Very low margin for safety. Default is a real possibility.
CC: Very high levels
of credit risk. Default of some kind appears probable.
C: Near default. A default or default-like
process has begun, or the issuer is in standstill, or for a closed funding vehicle, payment capacity
is irrevocably impaired. Conditions that are indicative of a “C” category rating for an issuer include:
• The
issuer has entered into a grace or cure period following non-payment of a material financial obligation;
64
• The
issuer has entered into a temporary negotiated waiver or standstill agreement following a payment default
on a material financial obligation;
• The formal announcement by the issuer or their agent of a
distressed debt exchange;
• A closed financing vehicle where payment capacity is irrevocably
impaired such that it is not expected to pay interest and/or principal in full during the life of the
transaction, but where no payment default is imminent
RD: Restricted Default.
“RD” ratings indicate an issuer that in Fitch’s opinion has experienced:
• An uncured payment
default or distressed debt exchange on a bond, loan or other material financial obligation, but
• Has
not entered into bankruptcy filings, administration, receivership, liquidation, or other formal winding-up
procedure, and has not otherwise ceased operating. This would include:
• The selective payment
default on a specific class or currency of debt;
• The uncured expiry of any applicable grace period, cure period
or default forbearance period following a payment default on a bank loan, capital markets security or
other material financial obligation;
• The extension of multiple waivers or forbearance periods upon
a payment default on one or more material financial obligations, either in series or in parallel; ordinary
execution of a distressed debt exchange on one or more material financial obligations.
D: Default. “D”
ratings indicate an issuer that in Fitch’s opinion has entered into bankruptcy filings, administration,
receivership, liquidation or other formal winding-up procedure or that has otherwise ceased business.
Default ratings are not assigned prospectively to entities or their obligations;
within this context, non-payment on an instrument that contains a deferral feature or grace period will
generally not be considered a default until after the expiration of the deferral or grace period, unless
a default is otherwise driven by bankruptcy or other similar circumstance, or by a distressed debt exchange.
In all cases, the assignment of a default rating reflects the agency’s opinion
as to the most appropriate rating category consistent with the rest of its universe of ratings and may
differ from the definition of default under the terms of an issuer’s financial obligations or local
commercial practice.
Description of Fitch Ratings’ Structured Finance Long-Term
Obligation Ratings:
Ratings of structured finance obligations on the long-term
scale consider the obligations’ relative vulnerability to default. These ratings are typically assigned
to an individual security or tranche in a transaction and not to an issuer.
AAA:
Highest Credit Quality.
“AAA” ratings denote the lowest expectation of default
risk. They are assigned only in cases of exceptionally strong capacity for payment of financial commitments.
This capacity is highly unlikely to be adversely affected by foreseeable events.
AA:
Very High Credit Quality.
“AA” ratings denote expectations of very low default risk.
They indicate very strong capacity for payment of financial commitments. This capacity is not significantly
vulnerable to foreseeable events.
A: High Credit Quality.
“A”
ratings denote expectations of low default risk. The capacity for payment of financial commitments is
considered strong. This capacity may, nevertheless, be more vulnerable to adverse business or economic
conditions than is the case for higher ratings.
BBB: Good Credit Quality.
“BBB” ratings indicate that expectations of default risk are currently low.
The capacity for payment of financial commitments is considered adequate, but adverse business or economic
conditions are more likely to impair this capacity.
BB: Speculative.
“BB”
ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes
in business or economic conditions over time.
B: Highly Speculative.
“B” ratings indicate that material default risk is present, but a limited
margin of safety remains. Financial commitments are currently being met; however, capacity for continued
payment is vulnerable to deterioration in the business and economic environment.
CCC:
Substantial Credit Risk.
Very low margin for safety. Default is a real possibility.
CC: Very High Levels of Credit Risk.
Default of some kind appears
probable.
C: Exceptionally High Levels of Credit Risk.
Default
appears imminent or inevitable.
65
D: Default.
Indicates a default. Default generally is
defined as one of the following:
• Failure to make payment of principal and/or interest under
the contractual terms of the rated obligation;
• bankruptcy filings, administration, receivership, liquidation
or other winding-up or cessation of the business of an issuer/obligor; or
• distressed exchange
of an obligation, where creditors were offered securities with diminished structural or economic terms
compared with the existing obligation to avoid a probable payment default.
Description
of Fitch Ratings’ Country Ceilings Ratings:
Country Ceilings are expressed
using the symbols of the long-term issuer primary credit rating scale and relate to sovereign jurisdictions
also rated by Fitch on the IDR scale. They reflect the agency’s judgment regarding the risk of capital
and exchange controls being imposed by the sovereign authorities that would prevent or materially impede
the private sector’s ability to convert local currency into foreign currency and transfer to non-resident
creditors — transfer and convertibility (T&C) risk. They are not ratings but expressions of a cap
for the foreign currency issuer ratings of most, but not all, issuers in a given country. Given the close
correlation between sovereign credit and T&C risks, the Country Ceiling may exhibit a greater degree
of volatility than would normally be expected when it lies above the sovereign Foreign Currency Rating.
Description of Fitch Ratings’ Sovereigns, Public Finance and Global Infrastructure
Obligations:
Ratings of public finance obligations and ratings of infrastructure
and project finance obligations on the long-term scale, including the financial obligations of sovereigns,
consider the obligations’ relative vulnerability to default. These ratings are assigned to an individual
security, instrument or tranche in a transaction. In some cases, considerations of recoveries can have
an influence on obligation ratings in infrastructure and project finance. In limited cases in U.S. public
finance, where Chapter 9 of the Bankruptcy Code provides reliably superior prospects for ultimate recovery
to local government obligations that benefit from a statutory lien on revenues, Fitch reflects this in
a security rating with limited notching above the IDR. Recovery expectations can also be reflected in
a security rating in the U.S. during the pendency of a bankruptcy proceeding under the Code if there
is sufficient visibility on potential recovery prospects.
AAA: Highest Credit
Quality. “AAA” ratings denote the lowest expectation of default risk. They are assigned only in cases
of exceptionally strong capacity for payment of financial commitments. This capacity is highly unlikely
to be adversely affected by foreseeable events.
AA: Very High Credit
Quality. “AA” ratings denote expectations of very low default risk. They indicate very strong capacity
for payment of financial commitments. This capacity is not significantly vulnerable to foreseeable events.
A:
High Credit Quality. “A” ratings denote expectations of low default risk. The capacity for payment
of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to
adverse business or economic conditions than is the case for higher ratings.
BBB:
Good Credit Quality. “BBB” ratings indicate that expectations of default risk are currently low.
The capacity for payment of financial commitments is considered adequate, but adverse business or economic
conditions are more likely to impair this capacity.
BB: Speculative. “BB”
ratings indicate an elevated vulnerability to default risk, particularly in the event of adverse changes
in business or economic conditions over time.
B: Highly Speculative. “B” ratings indicate
that material default risk is present, but a limited margin of safety remains. Financial commitments
are currently being met; however, capacity for continued payment is vulnerable to deterioration in the
business and economic environment.
CCC: Substantial Credit Risk. Very low margin
for safety. Default is a real possibility.
CC: Very High Levels
of Credit Risk. Default of some kind appears probable.
C: Exceptionally High Levels of Credit Risk.
Default appears imminent or inevitable.
D: Default. Indicates a default. Default
generally is defined as one of the following:
• Failure to make payment of principal and/or interest under
the contractual terms of the rated obligation;
• bankruptcy filings, administration, receivership, liquidation
or other winding-up or cessation of the business of an issuer/obligor where payment default on an obligation
is a virtual certainty; or
• distressed exchange of an obligation, where creditors were
offered securities with diminished structural or economic terms compared with the existing obligation
to avoid a probable payment default.
Notes: In U.S. public finance, obligations
may be pre-refunded, where funds sufficient to meet the requirements of the respective obligations are
placed in an escrow account. When obligation ratings are maintained based on the
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escrowed funds and their structural elements, the ratings carry the suffix “pre”
(e.g. “AAApre”, “AA+pre”).
Structured Finance Defaults
Imminent
default, categorized under “C”, typically refers to the occasion where a payment default has been
intimated by the issuer and is all but inevitable. This may, for example, be where an issuer has missed
a scheduled payment but (as is typical) has a grace period during which it may cure the payment default.
Another alternative would be where an issuer has formally announced a distressed debt exchange, but the
date of the exchange still lies several days or weeks in the immediate future.
Additionally,
in structured finance transactions, where analysis indicates that an instrument is irrevocably impaired
such that it is not expected to pay interest and/or principal in full in accordance with the terms of
the obligation’s documentation during the life of the transaction, but where no payment default in
accordance with the terms of the documentation is imminent, the obligation will typically be rated in
the “C” category.
Structured Finance Write-downs
Where
an instrument has experienced an involuntary and, in the agency’s opinion, irreversible write-down
of principal (i.e. other than through amortization, and resulting in a loss to the investor), a credit
rating of “D” will be assigned to the instrument. Where the agency believes the write-down may prove
to be temporary (and the loss may be written up again in future if and when performance improves), then
a credit rating of “C” will typically be assigned. Should the write-down then later be reversed,
the credit rating will be raised to an appropriate level for that instrument. Should the write-down later
be deemed as irreversible, the credit rating will be lowered to “D”.
Notes:
In the case of structured finance, while the ratings do not address the loss severity
given default of the rated liability, loss severity assumptions on the underlying assets are nonetheless
typically included as part of the analysis. Loss severity assumptions are used to derive pool cash flows
available to service the rated liability.
The suffix “sf” denotes an issue that
is a structured finance transaction.
Enhanced Equipment Trust Certificates (EETCs)
are corporate-structured hybrid debt securities that airlines typically use to finance aircraft equipment.
Due to the hybrid characteristics of these bonds, Fitch’s rating approach incorporates elements of
both the structured finance and corporate rating methodologies. Although rated as asset-backed securities,
unlike other structured finance ratings, EETC ratings involve a measure of recovery given default akin
to ratings of financial obligations in corporate finance, as described above.
Description
of Fitch Ratings’ Short-Term Ratings Assigned to Issuers and Obligations:
A
short-term issuer or obligation rating is based in all cases on the short-term vulnerability to default
of the rated entity and relates to the capacity to meet financial obligations in accordance with the
documentation governing the relevant obligation. Short-term deposit ratings may be adjusted for loss
severity. Short-Term Ratings are assigned to obligations whose initial maturity is viewed as “short
term” based on market convention (a long-term rating can also be used to rate an issue with short maturity).
Typically, this means up to 13 months for corporate, sovereign, and structured obligations, and up to
36 months for obligations in U.S. public finance markets.
F1: Highest Short-Term
Credit Quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments;
may have an added “+” to denote any exceptionally strong credit feature.
F2: Good Short-Term
Credit Quality. Good intrinsic capacity for timely payment of financial commitments.
F3: Fair Short-Term
Credit Quality. The intrinsic capacity for timely payment of financial commitments is adequate.
B:
Speculative Short-Term Credit Quality. Minimal capacity for timely payment of financial commitments,
plus heightened vulnerability to near term adverse changes in financial and economic conditions.
C:
High Short-Term Default Risk. Default is a real possibility.
RD: Restricted Default.
Indicates an entity that has defaulted on one or more of its financial commitments, although it continues
to meet other financial obligations. Typically applicable to entity ratings only.
D: Default. Indicates
a broad-based default event for an entity, or the default of a short-term obligation.
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| | | |
| FRANKLIN TEMPLETON INVESTMENT SOLUTIONS Proxy
Voting Policies & Procedures An SEC Compliance Rule Policy
and Procedures* | March
2023 |
Appendix A
RESPONSIBILITY OF THE INVESTMENT MANAGERS TO VOTE PROXIES
Franklin
Templeton Investment Solutions, a separate investment group within Franklin Templeton, comprised of investment
personnel from the SEC-registered investment advisers listed on Appendix A (hereinafter individually
an “Investment Manager” and collectively the "Investment Managers") have delegated the administrative
duties with respect to voting proxies for securities to the Franklin Templeton Proxy Group. Proxy duties
consist of disseminating proxy materials and analyses of issuers whose stock is owned by any client (including
both investment companies and any separate accounts managed by the Investment Managers) that has either
delegated proxy voting administrative responsibility to the Investment Managers or has asked for information
and/or recommendations on the issues to be voted. The Investment Managers will inform advisory clients
that have not delegated the voting responsibility but that have requested voting advice about the Investment
Managers’ views on such proxy votes. The Proxy Group also provides these services to other advisory
affiliates of the Investment Managers.
The Proxy Group will process
proxy votes on behalf of, and the Investment Managers vote proxies solely in the best interests of, separate
account clients, the Investment Managers’-managed investment company shareholders, or shareholders
of funds that have appointed Franklin Templeton International Services S.à.r.l. (“FTIS S.à.r.l.”)
as the Management Company, provided such funds or clients have properly delegated such responsibility
in writing, or, where employee benefit plan assets subject to the Employee Retirement Income Security
Act of 1974, as amended, are involved (“ERISA accounts”), in the best interests of the plan participants
and beneficiaries (collectively, "Advisory Clients"), unless (i) the power to vote has been specifically
retained by the named fiduciary in the documents in which the named fiduciary appointed the Investment
Managers or (ii) the documents otherwise expressly prohibit the Investment Managers from voting proxies.
The Investment Managers recognize that the exercise of voting rights on securities held by ERISA plans
for which the Investment Managers have voting responsibility is a fiduciary duty that must be exercised
with care, skill, prudence and diligence.
In certain circumstances, Advisory Clients
are permitted to direct their votes in a solicitation pursuant to the Investment Management Agreement.
An Advisory Client that wishes to direct its vote shall give reasonable prior written notice to the Investment
Managers indicating such intention and provide written instructions directing the Investment Managers
or the Proxy Group to vote regarding the solicitation. Where such prior written notice is received, the
Proxy Group will vote proxies in accordance with such written notification received from the Advisory
Client.
The Investment Managers have adopted and implemented Proxy Voting Policies and
Procedures (“Proxy Policies”) that they believe are reasonably designed to ensure that proxies are
voted in the best interest of Advisory Clients in accordance with their fiduciary duties and rule 206(4)-6
under the Investment Advisers Act of 1940. To the extent that the Investment Managers have a subadvisory
agreement with an affiliated investment manager (the “Affiliated Subadviser”) with respect to a particular
Advisory Client, the Investment Managers may delegate proxy voting responsibility to the Affiliated Subadviser.
The Investment Managers may also delegate proxy voting responsibility to a subadviser that is not an
Affiliated Subadviser in certain limited situations as disclosed to fund shareholders (e.g., where an
Investment Manager to a pooled investment vehicle has engaged a subadviser that is not an Affiliated
Subadviser to manage all or a portion of the assets).
HOW THE INVESTMENT MANAGERS
VOTE PROXIES
Proxy Services
All proxies received by
the Proxy Group will be voted based upon the Investment Managers’ instructions and/or policies. To
assist it in analyzing proxies of equity securities, the Investment Managers subscribe to Institutional
Shareholder Services Inc. ("ISS"), an unaffiliated third-party corporate governance research service
that provides in-depth analyses of shareholder meeting agendas and vote recommendations. In addition,
the Investment Managers subscribe to ISS’s Proxy Voting Service and Vote Disclosure Service. These
services include receipt of proxy ballots, custodian bank relations, account maintenance, vote execution,
ballot reconciliation, vote record maintenance, comprehensive reporting capabilities, and vote disclosure
services. Also, the Investment Managers subscribe to Glass, Lewis & Co., LLC ("Glass Lewis"), an
unaffiliated third-party analytical research firm, to receive analyses and vote recommendations on the
shareholder meetings of publicly held U.S. companies, as well as a limited subscription to its international
research.
A-1
* Rule 38a-1 under the Investment Company Act of 1940 (“1940 Act”) and Rule
206(4)-7 under the Investment Advisers Act of 1940 (“Advisers Act”) (together the Compliance Rule”)
require registered investment companies and registered investment advisers to, among other things, adopt
and implement written policies and procedures reasonably designed to prevent violations of the federal
securities laws (“Compliance Rule Policies and Procedures”).
Although
analyses provided by ISS, Glass Lewis, and/or another independent third-party proxy service provider
(each a “Proxy Service”) are thoroughly reviewed and considered in making a final voting decision,
the Investment Managers do not consider recommendations from a Proxy Service or any third-party to be
determinative of the Investment Managers’ ultimate decision. Rather, the Investment Managers exercise
their independent judgment in making voting decisions. As a matter of policy, the officers, directors
and employees of the Investment Managers and the Proxy Group will not be influenced by outside sources
whose interests conflict with the interests of Advisory Clients.
For ease of reference,
the Proxy Policies often refer to all Advisory Clients. However, our processes and practices seek to
ensure that proxy voting decisions are suitable for individual Advisory Clients. In some cases, the Investment
Managers’ evaluation may result in an individual Advisory Client or Investment Manager voting differently,
depending upon the nature and objective of the fund or account, the composition of its portfolio, whether
the Investment Manager has adopted a specialty or custom voting policy, and other factors.
Conflicts
of Interest
All conflicts of interest will be resolved in the best interests
of the Advisory Clients. The Investment Managers are affiliates of a large, diverse financial services
firm with many affiliates and makes its best efforts to mitigate conflicts of interest. However, as a
general matter, the Investment Managers take the position that relationships between certain affiliates
that do not use the “Franklin Templeton” name (“Independent Affiliates”) and an issuer (e.g.,
an investment management relationship between an issuer and an Independent Affiliate) do not present
a conflict of interest for an Investment Manager in voting proxies with respect to such issuer because:
(i) the Investment Managers operate as an independent business unit from the Independent Affiliate business
units, and (ii) informational barriers exist between the Investment Managers and the Independent Affiliate
business units.
Material conflicts of interest could arise in a variety of
situations, including as a result of the Investment Managers’ or an affiliate’s (other than an Independent
Affiliate as described above): (i) material business relationship with an issuer or proponent, (ii) direct
or indirect pecuniary interest in an issuer or proponent; or (iii) significant personal or family relationship
with an issuer or proponent. Material conflicts of interest are identified by the Proxy Group based upon
analyses of client, distributor, broker dealer, and vendor lists, information periodically gathered from
directors and officers, and information derived from other sources, including public filings. The Proxy
Group gathers and analyzes this information on a best-efforts basis, as much of this information is provided
directly by individuals and groups other than the Proxy Group, and the Proxy Group relies on the accuracy
of the information it receives from such parties.
Nonetheless, even though
a potential conflict of interest between the Investment Managers or an affiliate (other than an Independent
Affiliate as described above) and an issuer may exist: (1) the Investment Managers may vote in opposition
to the recommendations of an issuer’s management even if contrary to the recommendations of a third-party
proxy voting research provider; (2) if management has made no recommendations, the Proxy Group may defer
to the voting instructions of the Investment Managers; and (3) with respect to shares held by Franklin
Resources, Inc. or its affiliates for their own corporate accounts, such shares may be voted without
regard to these conflict procedures.
Otherwise, in situations where a material
conflict of interest is identified between the Investment Managers or one of its affiliates (other than
Independent Affiliates) and an issuer, the Proxy Group may vote consistent with the voting recommendation
of a Proxy Service or send the proxy directly to the relevant Advisory Clients with the Investment Managers’
recommendation regarding the vote for approval. To address certain affiliate conflict situations, the
Investment Managers will employ pass-through voting or mirror voting when required pursuant to a fund’s
governing documents or applicable law.
Where the Proxy Group refers a matter to
an Advisory Client, it may rely upon the instructions of a representative of the Advisory Client, such
as the board of directors or trustees, a committee of the board, or an appointed delegate in the case
of a U.S. registered investment company, a conducting officer in the case of a fund that has appointed
FTIS S.à.r.l as its Management Company, the Independent Review Committee for Canadian investment funds,
or a plan administrator in the case of an employee benefit plan. A quorum of the board of directors or
trustees or of a committee of the board can be reached by a majority of members, or a majority of non-recused
members. The Proxy Group may determine to vote all shares held by Advisory Clients of the Investment
Managers and affiliated Investment Managers (other than Independent Affiliates) in accordance with the
instructions of one or more of the Advisory Clients.
A-2
The Investment Managers may also decide whether to vote proxies for securities
deemed to present conflicts of interest that are sold following a record date, but before a shareholder
meeting date. The Investment Managers may consider various factors in deciding whether to vote such proxies,
including the Investment Managers’ long-term view of the issuer’s securities for investment, or it
may defer the decision to vote to the applicable Advisory Client. The Investment Managers also may be
unable to vote, or choose not to vote, a proxy for securities deemed to present a conflict of interest
for any of the reasons outlined in the first paragraph of the section of these policies entitled “Proxy
Procedures.”
Weight Given Management Recommendations
One
of the primary factors the Investment Managers consider when determining the desirability of investing
in a particular company is the quality and depth of that company's management. Accordingly, the recommendation
of management on any issue is a factor that the Investment Managers consider in determining how proxies
should be voted. However, the Investment Managers do not consider recommendations from management to
be determinative of the Investment Managers’ ultimate decision. Each issue is considered on its own
merits, and the Investment Managers will not support the position of a company's management in any situation
where it determines that the ratification of management's position would adversely affect the investment
merits of owning that company's shares.
Engagement with Issuers
The
Investment Managers believe that engagement with issuers is important to good corporate governance and
to assist in making proxy voting decisions. The Investment Managers may engage with issuers to discuss
specific ballot items to be voted on in advance of an annual or special meeting to obtain further information
or clarification on the proposals. The Investment Managers may also engage with management on a range
of environmental, social or corporate governance issues throughout the year.
THE
PROXY GROUP
The Proxy Group is part of the Franklin Templeton’s Global
Sustainability Strategy Team’s Stewardship Team. Full-time staff members and support staff are devoted
to proxy voting administration and oversight and providing support and assistance where needed. On a
daily basis, the Proxy Group will review each proxy upon receipt as well as any agendas, materials and
recommendations that they receive from a Proxy Service or other sources. The Proxy Group maintains a
record of all shareholder meetings that are scheduled for companies whose securities are held by the
Investment Managers’ managed funds and accounts. For each shareholder meeting, a member of the Proxy
Group will consult with the research analyst that follows the security and provide the analyst with the
agenda, analyses of one or more Proxy Services, recommendations and any other information provided to
the Proxy Group. Except in situations identified as presenting material conflicts of interest, the Investment
Managers’ research analyst and relevant portfolio manager(s) are responsible for making the final voting
decision based on their review of the agenda, analyses of one or more Proxy Services, proxy statements,
their knowledge of the company and any other information publicly available.
In
situations where the Investment Managers have not responded with vote recommendations to the Proxy Group
by the deadline date, the Proxy Group may vote consistent with the vote recommendations of a Proxy Service.
Except in cases where the Proxy Group is voting consistent with the voting recommendation of a Proxy
Service, the Proxy Group must obtain voting instructions from the Investment Managers’ research analysts,
relevant portfolio manager(s), legal counsel and/or the Advisory Client prior to submitting the vote.
In the event that an account holds a security that an Investment Manager did not purchase on its behalf,
and the Investment Manager does not normally consider the security as a potential investment for other
accounts, the Proxy Group may vote consistent with the voting recommendations of a Proxy Service or take
no action on the meeting.
PROXY ADMINISTRATION PROCEDURES
Situations
Where Proxies Are Not Voted
The Proxy Group is fully cognizant of its
responsibility to process proxies and maintain proxy records as may be required by relevant rules and
regulations. In addition, the Investment Managers understand their fiduciary duty to vote proxies and
that proxy voting decisions may affect the value of shareholdings. Therefore, the Investment Managers
will generally attempt to process every proxy they receive for all domestic and foreign securities.
However, there may be situations in which the Investment Managers may be unable
to successfully vote a proxy, or may choose not to vote a proxy, such as where: (i) a proxy ballot was
not received from the custodian bank; (ii) a meeting notice was received too late; (iii) there are fees
imposed upon the exercise of a vote and it is determined that such fees outweigh the benefit of voting;
(iv) there are legal encumbrances to voting, including blocking restrictions in certain markets that
preclude the ability to dispose of
A-3
a security if an Investment Manager votes a proxy or where the Investment Manager
is prohibited from voting by applicable law, economic or other sanctions, or other regulatory or market
requirements, including but not limited to, effective Powers of Attorney; (v) additional documentation
or the disclosure of beneficial owner details is required; (vi) the Investment Managers held shares on
the record date but has sold them prior to the meeting date; (vii) the Advisory Client held shares on
the record date, but the Advisory Client closed the account prior to the meeting date; (viii) a proxy
voting service is not offered by the custodian in the market; (ix) due to either system error or human
error, the Investment Managers’ intended vote is not correctly submitted; (x) the Investment Managers
believe it is not in the best interest of the Advisory Client to vote the proxy for any other reason
not enumerated herein; or (xi) a security is subject to a securities lending or similar program that
has transferred legal title to the security to another person.
Rejected Votes
Even if the Investment Managers use reasonable efforts to vote a proxy on behalf
of their Advisory Clients, such vote or proxy may be rejected because of (a) operational or procedural
issues experienced by one or more third parties involved in voting proxies in such jurisdictions; (b)
changes in the process or agenda for the meeting by the issuer for which the Investment Managers do not
have sufficient notice; or (c) the exercise by the issuer of its discretion to reject the vote of the
Investment Managers. In addition, despite the best efforts of the Proxy Group and its agents, there may
be situations where the Investment Managers’ votes are not received, or properly tabulated, by an issuer
or the issuer’s agent.
Securities on Loan
The
Investment Managers or their affiliates may, on behalf of one or more of the proprietary registered investment
companies advised by the Investment Managers or their affiliates, make efforts to recall any security
on loan where the Investment Manager or its affiliates (a) learn of a vote on an event that may materially
affect a security on loan and (b) determine that it is in the best interests of such proprietary registered
investment companies to recall the security for voting purposes. The ability to timely recall shares
is not entirely within the control of the Investment Managers. Under certain circumstances, the recall
of shares in time for such shares to be voted may not be possible due to applicable proxy voting record
dates or other administrative considerations.
Split Voting
There
may be instances in certain non-U.S. markets where split voting is not allowed. Split voting occurs when
a position held within an account is voted in accordance with two differing instructions. Some markets
and/or issuers only allow voting on an entire position and do not accept split voting. In certain cases,
when more than one Franklin Templeton investment manager has accounts holding shares of an issuer that
are held in an omnibus structure, the Proxy Group will seek direction from an appropriate representative
of the Advisory Client with multiple Investment Managers (such as a conducting officer of the Management
Company in the case of a SICAV), or the Proxy Group will submit the vote based on the voting instructions
provided by the Investment Manager with accounts holding the greatest number of shares of the security
within the omnibus structure.
Bundled Items
If
several issues are bundled together in a single voting item, the Investment Managers will assess the
total benefit to shareholders and the extent that such issues should be subject to separate voting proposals.
PROCEDURES FOR MEETINGS INVOLVING FIXED INCOME SECURITIES & PRIVATELY HELD
ISSUERS
From time to time, certain custodians may process events for fixed income securities
through their proxy voting channels rather than corporate action channels for administrative convenience.
In such cases, the Proxy Group will receive ballots for such events on the ISS voting platform. The Proxy
Group will solicit voting instructions from the Investment Managers for each account or fund involved.
If the Proxy Group does not receive voting instructions from the Investment Managers, the Proxy Group
will take no action on the event. The Investment Managers may be unable to vote a proxy for a fixed income
security, or may choose not to vote a proxy, for the reasons described under the section entitled “Proxy
Procedures.”
In the rare instance where there is a vote for a privately
held issuer, the decision will generally be made by the relevant portfolio managers or research analysts.
The Proxy Group will monitor such meetings involving fixed income securities or
privately held issuers for conflicts of interest in accordance with these procedures. If a fixed income
or privately held issuer is flagged as a potential conflict of interest, the Investment Managers may
nonetheless vote as it deems in the best interests of its Advisory Clients. The Investment Managers will
report such decisions on an annual basis to Advisory Clients as may be required.
A-4
Appendix A
These Proxy Policies apply to accounts managed
by personnel within Franklin Templeton Investment Solutions, which includes the following Investment
Managers:
Franklin Advisers, Inc. (FAV)
Franklin
Advisory Services, LLC (FASL)
Franklin Mutual Advisers LLC (FMA)
Franklin Templeton Investments Corp. (FTIC)
Franklin Templeton Investment
Management Limited (FTIML)
Templeton Asset Management Ltd. (TAML)
The following Proxy Policies apply to FAV, FMA, FTIC, FTIML, and TAML only:
HOW THE INVESTMENT MANAGERS VOTE PROXIES
Proxy Services
Certain
of the Investment Managers’ separate accounts or funds (or a portion thereof) are included under Franklin
Templeton Investment Solutions (“FTIS”), a separate investment group within Franklin Templeton, and
employ a quantitative strategy.
For such accounts, FTIS’s proprietary methodologies
rely on a combination of quantitative, qualitative, and behavioral analysis rather than fundamental security
research and analyst coverage that an actively managed portfolio would ordinarily employ. Accordingly,
absent client direction, in light of the high number of positions held by such accounts and the considerable
time and effort that would be required to review proxy statements and ISS or Glass Lewis recommendations,
the Investment Manager may review ISS’s non-US Benchmark guidelines, ISS’s specialty guidelines (in
particular, ISS’s Sustainability guidelines), or Glass Lewis’s US guidelines (the “the ISS and
Glass Lewis Proxy Voting Guidelines”) and determine, consistent with the best interest of its clients,
to provide standing instructions to the Proxy Group to vote proxies according to the recommendations
of ISS or Glass Lewis.
The Investment Manager, however, retains
the ability to vote a proxy differently than ISS or Glass Lewis recommends if the Investment Manager
determines that it would be in the best interests of Advisory Clients.
The
following Proxy Policies apply to FASL only:
HOW THE INVESTMENT MANAGERS VOTE PROXIES
Proxy Services
The Franklin LibertyQ branded smart beta
exchange traded funds and other passively managed exchange traded funds (collectively, “ETFs”), seek
to track a particular securities index. As a result, each ETF may hold the securities of hundreds of
issuers. Because the primary criteria for determining whether a security should be included (or continued
to be included) in an ETF’s investment portfolio is whether such security is a representative component
of the securities index that the ETF is seeking to track, the ETFs do not require the fundamental security
research and analyst coverage that an actively managed portfolio would require. Accordingly, in light
of the high number of positions held by an ETF and the considerable time and effort that would be required
to review proxy statements and ISS or Glass Lewis recommendations, the Investment Manager may review
ISS’s non-US Benchmark guidelines, ISS’s specialty guidelines (in particular, ISS’s Sustainability
guidelines), or Glass Lewis’s US guidelines (the “ISS and Glass Lewis Proxy Voting Guidelines”)
and determine, consistent with the best interest of its clients, to provide standing instructions to
the Proxy Group to vote proxies according to the recommendations of ISS or Glass Lewis rather than analyze
each individual proxy vote. Permitting the Investment Manager of the ETFs to defer its judgment for voting
on a proxy to the recommendations of ISS or Glass Lewis may result in a proxy related to the securities
of a particular issuer held by an ETF being voted differently from the same proxy that is voted on by
other funds managed by the Investment Managers.
The following Proxy Policies
apply to FTIC, FTIML, and TAML only:
HOW THE INVESTMENT MANAGERS VOTE PROXIES
Proxy Services
A-5
For accounts managed by the Templeton Global Equity Group (“TGEG”), in making
voting decisions, the Investment Manager may consider Glass Lewis’s Proxy Voting Guidelines, ISS’s
Benchmark Policies, ISS’s Sustainability Policy, and TGEG’s custom sustainability guidelines, which
reflect what TGEG believes to be good environmental, social, and governance practices.
The
following Proxy Policies apply to FTIC only:
RESPONSIBILITY OF THE INVESTMENT MANAGERS TO
VOTE PROXIES
To the extent that the Investment Manager has
a subadvisory agreement with an affiliated investment manager (the “Affiliated Subadviser”) with
respect to a particular Advisory Client or the Investment Manager chooses securities for an Advisory
Client’s portfolios that are recommended by an Affiliated Subadviser, the Investment Manager may delegate
proxy voting responsibility to the Affiliated Subadviser or vote proxies in accordance with the Affiliated
Subadviser’s recommendations.
A-6
| | | |
FRANKLIN ETF TRUST |
File Nos. 811-22801 & 333-186504 |
| |
PART
C |
Other Information |
| |
| |
Item 28. Exhibits. |
| |
The
following exhibits are incorporated by reference to the previously filed document indicated below, except
as noted: |
| |
(a) Agreement
and Declaration of Trust |
| |
(i) | | Amended and Restated Agreement and Declaration of Trust of Franklin ETF Trust
dated October 19, 2018 Filing: Post-Effective Amendment No. 14 to Registration Statement
on Form N-1A File No. 333-186504 Filing Date: July 26, 2019 |
| |
(b) By-laws |
| |
(i) | | Amended and Restated By-Laws of Franklin ETF Trust dated October 19, 2018 Filing:
Post-Effective Amendment No. 14 to Registration Statement on Form N-1A File No. 333-186504 Filing
Date: July 26, 2019 |
| |
(c) Instruments
Defining Rights of Security Holders |
| |
(i) | | Agreement and Declaration of Trust |
| |
(a) Article III, Shares |
(b) Article
V, Shareholders’ Voting Powers and Meetings |
(c) Article VI, Net
Asset Value; Distributions; Redemptions; |
Transfers |
(d) Article VIII, Certain Transactions: Section 4 |
(e) Article
X, Miscellaneous: Section 4 |
| |
(ii) | | By-Laws |
| |
(a) Article II, Meetings
of Shareholders |
(b) Article VI, Records and Reports: Section 1, 2 and 3 |
(c) Article
VII, General Matters: Section 3, 4, 6 and 7 |
(d) Article VIII,
Amendment: Section 1 |
| |
(iii) | | Part
B, Statement of Additional Information – Item 22 |
| |
(d) Investment Advisory Contracts |
| |
(i) | | Amended and Restated Investment Management Agreement between Registrant,
on behalf of Franklin Liberty Short Duration U.S. Government ETF dated October 1, 2021. Filing:
Pre-Effective Amendment No. 22 to Registration Statement on Form N-1A File No. 333-186504 |
| | | |
| | | Filing Date: August 26, 2022 |
| |
(e) Underwriting Contracts |
| |
| | | |
| | | |
(i) | | Distribution Agreement between Registrant and Franklin Distributors, LLC.
dated July 7, 2021 Filing: Pre-Effective Amendment No. 21 to Registration Statement
on Form N-1A File No. 333-186504 Filing Date: August 26, 2021 |
| | | |
(ii) | | Form of Authorized Participant Agreement Filing: Pre-Effective
Amendment No. 2 to Registration Statement on Form N-1A File No. 333-186504 Filing Date: October
17, 2013 |
| | | |
| |
(f) Bonus or Profit Sharing Contracts |
| |
Not Applicable |
| |
(g) Custodian
Agreements |
| |
| |
(i) | | Master
Custody Agreement between Registrant and The Bank of New York Mellon dated February 16, 1996 Filing:
Pre-Effective Amendment No. 1 Registration Statement on Form N-1A File No. 333-186504 Filing Date: August
1, 2013 |
| |
(ii) | | Amendment dated
April 7, 2022 and to Exhibit A of the Master Custody Agreement between Registrant and The Bank of New
York Mellon dated February 16, 1996 Filing: Pre-Effective Amendment No. 22 to
Registration Statement on Form N-1A File No. 333-186504 Filing Date: August 26, 2022 |
| |
(iii) | | Terminal
Link Agreement between Registrant and The Bank of New York Mellon dated February 16, 1996 Filing: Pre-Effective Amendment No. 1 to Registration Statement on Form N-1A File
No. 333-186504 Filing Date: August 1, 2013 |
| |
(iv) | | Amendment dated April 7, 2022, to Exhibit A of the Terminal Link Agreement
between Registrant and The Bank of New York Mellon dated February 16, 1996 Filing: Pre-Effective
Amendment No. 22 to Registration Statement on Form N-1A File No. 333-186504 Filing Date: August
26, 2022 |
| | | |
| | | |
| |
(v) | | Amendment dated June 1, 2013 to the Master Custody Agreement between Registrant
and The Bank of New York Mellon dated February 16, 1996 Filing: Post-Effective Amendment No.
2 to Registration Statement on Form N-1A File No. 333-186504 Filing Date: September 26, 2014 |
| | | |
(h) Other Material Contracts |
| |
(i) | | Sub-Contract for Fund Administration Services between Franklin Advisers,
Inc. and Franklin Templeton Services, LLC dated February 1, 2019 Filing: Post-Effective
Amendment No. 14 to Registration Statement on Form N-1A File No. 333-186504 Filing Date: July
26, 2019 |
| |
(ii) | | Sub-Contract for Fund Administrative and Accounting Services between Franklin
Templeton Services, LLC and BNY Mellon Investment Servicing (US) Inc. dated October 18, 2013 Filing:
Post-Effective Amendment No. 10 to Registration Statement on Form N-1A File No. 333-186504 Filing
Date: July 27, 2018 |
| | | |
(iii) | | Transfer Agent and Services Agreement between the Registrant on behalf Franklin
Liberty Short Duration U.S. Government ETF (formerly, Franklin Short Duration U.S. Government ETF) and
BNY Mellon Investment Servicing (US) Inc. dated October 18, 2013 Filing: Post-Effective
Amendment No. 10 to Registration Statement on Form N-1A File No. 333-186504 Filing Date: July
27, 2018 |
| | | |
(iv) | | Form of Rule 12d1-4 Fund of Funds Investment Agreement Filing: Pre-Effective
Amendment No. 22 to Registration Statement on Form N-1A File No. 333-186504 Filing Date: August
26, 2022 |
| |
(i) Legal
Opinion |
| |
(i) | | Opinion
and consent of counsel with respect to Franklin Liberty Short Duration U.S. Government ETF dated October
16, 2013 Filing: Pre-Effective Amendment No. 2 to Registration Statement on Form N-1A File
No. 333-186504 Filing Date: October 17, 2013 |
| | | |
| |
(j) Other
Opinions |
| |
(i) | | Consent of Independent Registered Public
Accounting Firm |
| |
(k) Omitted
Financial Statements |
| | | |
| |
Not Applicable |
| |
(l) Initial
Capital Agreements |
| |
| | | Not Applicable |
| |
(m) Rule
12b-1 Plan |
| |
(i) | | Amended and Restated Distribution
Plan, pursuant to Rule 12b-1 between the Registrant on behalf of Franklin Liberty Short Duration U.S.
Government ETF and Franklin Distributors, LLC. dated July 17, 2013, as revised January 1, 2020, May 13,
2020 and July 7, 2021 Filing: Pre-Effective Amendment
No. 21 to Registration Statement on Form N-1A File No. 333-186504 Filing Date: August
26, 2021 |
| |
(n) Rule
18f-3 Plan |
| |
| | | Not Application |
| |
(p) Code
of Ethics |
| |
(i) | | Code of Ethics dated January 1, 2023 |
| |
(q) Power of Attorney |
| |
(i) | | Power of Attorney dated May 11, 2023 |
| |
| |
Item 30. Indemnification |
| |
The Agreement and Declaration of Trust (the “Declaration”) provides that any
person who is or was a Trustee, officer, employee or other agent, including the underwriter, of such
Trust shall be liable to the Trust and its shareholders only for (1) any act or omission that constitutes
a bad faith violation of the implied contractual covenant of good faith and fair dealing, or (2) the
person’s own willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved
in the conduct of such person (such conduct referred to herein as Disqualifying Conduct) and for nothing
else. Except in these instances and to the fullest extent that limitations of liability of agents are
permitted by the Delaware Statutory Trust Act (the “Delaware Act”), these Agents (as defined in the
Declaration) shall not be responsible or liable for any act or omission of any other Agent of the Trust
or any investment adviser or principal underwriter. Moreover, except and to the extent provided in these
instances, none of these Agents, when acting in their respective capacity as such, shall be personally
liable to any other person, other than such Trust or its shareholders, for any act, omission or obligation
of the Trust or any trustee thereof. |
| |
The Trust shall indemnify, out of its property, to the fullest extent permitted
under applicable law, any of the persons who was or is a party, or is threatened to be made a party to
any Proceeding (as defined in the Declaration) because the person is or was an Agent of such Trust. These
persons shall be indemnified against any Expenses (as defined in the Declaration), judgments, fines,
settlements and other amounts actually and reasonably incurred in connection with the Proceeding if the
person acted in good faith or, in the case of a criminal proceeding, had no reasonable cause to believe
that the conduct was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction
or plea of nolo contendere or its equivalent shall not in itself create a presumption that the person
did not act in good faith or that the person had reasonable cause to believe that the person’s conduct
was unlawful. There shall nonetheless be no indemnification for a person’s own Disqualifying Conduct. |
| |
Insofar as indemnification
for liabilities arising under the Securities Act of 1933, as amended, may be permitted to Trustees, officers
and controlling persons of the Trust pursuant to the foregoing provisions, or otherwise, the Trust has
been advised that in the opinion of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the Trust of expenses incurred or
paid by a Trustee, officer or controlling person of the Trust in the successful defense of any action,
suit or proceeding) is asserted by such Trustee, officer or controlling person in connection with securities
being registered, the Trust may be required, unless in the opinion of its counsel the matter has been
settled by controlling precedent, to submit to a court or appropriate jurisdiction the question whether
such indemnification is against public policy as expressed in the Act and will be governed by the final
adjudication of such issue. |
| |
Item 31. Business and Other Connections of the Investment Adviser |
| |
The officers and
directors of Franklin Advisers, Inc. (Advisers), Registrant's investment manager also serves as officers
and/or directors/trustees for (1) Advisers' corporate parent, Franklin Resources, Inc., and/or (2) other
investment companies in Franklin Templeton Investments. For additional information please see Part B
and Schedules A and D of Form ADV of Advisers (SEC File 801-26292), incorporated herein by reference,
which set forth the officers and directors of Advisers and information as to any business, profession,
vocation or employment of a substantial nature engages in by those officers and directors during the
past two |
| |
years. |
| |
Item 32. Principal
Underwriters |
| |
Franklin Distributors, LLC. (Distributors) also act as principal underwriter of shares of: |
| |
Franklin Alternative
Strategies Funds |
Franklin California Tax-Free Income
Fund |
Franklin California Tax-Free Trust |
Franklin Custodian Funds |
Franklin Federal
Tax-Free Income Fund Franklin Fund Allocator Series Franklin Global Trust Franklin Gold and
Precious Metals Fund Franklin High Income Trust Franklin Investors Securities Trust Franklin
Managed Trust Franklin Municipal Securities Trust Franklin Mutual Series Funds Franklin New York
Tax-Free Income Fund Franklin New York Tax-Free Trust Franklin Real Estate Securities Trust Franklin
Strategic Mortgage Portfolio Franklin Strategic Series Franklin Tax-Free Trust Franklin Templeton
ETF Trust Franklin Templeton Trust Franklin Templeton Variable Insurance Products
Trust Franklin
U.S. Government Money Fund Franklin Value Investors Trust Institutional Fiduciary Trust Templeton
China World Fund Templeton Developing Markets Trust Templeton Funds Templeton Global
Investment Trust Templeton Global Smaller Companies Fund Templeton Growth Fund, Inc. Templeton Income
Trust Templeton
Institutional Funds Legg Mason ETF Investment Trust Legg Mason ETF Investment Trust II Legg
Mason Global Asset Management Trust Legg Mason Partners Income Trust Legg Mason Partners
Institutional Trust Legg Mason Partners Investment Trust
Legg Mason Partners Variable Equity Trust Legg Mason Partners Variable Income
Trust Legg
Mason Partners Institutional Trust Legg Mason Partners Money Market Trust Western Asset Funds,
Inc. |
| | | | |
SIGNATURE |
| |
Pursuant
to the requirements of the Securities Act of 1933, and the Investment Company Act of 1940, the Registrant
certifies that it meets all of the requirements for effectiveness of this Registration Statement pursuant
to Rule 485(b) under the Securities Act of 1933, and has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized in the City of Stamford and the State
of Connecticut, on the 25th day of July, 2023. |
| |
FRANKLIN
ETF TRUST |
(Registrant) |
| |
| |
| | By: | /s/HARRIS
GOLDBLAT | |
Harris Goldblat |
Vice President and Secretary |
| |
Pursuant
to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed
below by the following persons in the capacities and on the dates indicated: |
| |
| | | | | |
Signature | | Title | | Date |
| | | | | |
PATRICK O'CONNOR* | | | | |
Patrick O'Connor | | President and Chief Executive Officer
– Investment Management | | July
25, 2023 |
| | | | | |
MATTHEW T. HINKLE* | | | | |
Matthew T. Hinkle | | Chief Executive
Officer – Finance and Administration | | July 25, 2023 |
| | | | | |
VIVEK
PAI* | | | | |
Vivek Pai | | Chief Financial Officer, Chief Accounting Officer and Treasurer | | July 25, 2023 |
| | | | | |
ROHIT BHAGAT* | | | | |
Rohit Bhagat | | Trustee | | July 25, 2023 |
| | | | | |
JENNIFER M. JOHNSON* | | | | |
Jennifer M. Johnson | | Trustee | | July 25, 2023 |
| | | | | |
ANANTHA K. PRADEEP* | | | | |
Anantha K. Pradeep | | Trustee | | July 25, 2023 |
| | | | | |
DEBORAH D. MCWHINNEY* | | | | July 25, 2023 |
Deborah D. McWhinney | | Trustee | | |
* By: /s/
HARRIS GOLDBLAT
Harris Goldblat Attorney-in-Fact
(Pursuant to Power of Attorney filed herewith)
FRANKLIN
ETF TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
The following exhibits
are attached:
| | |
EXHIBIT NO. | DESCRIPTION |
| | |
EX. 99 (j)(i) | Consent of Independent
Registered Public Accounting Firm |
EX.99 (p) (i) | Code of Ethics dated August 16, 2021 |
EX.99
(q) (i) | Power of Attorney dated May 11, 2023 |
N-1A485BPOS2023-03-310001551895false2023-07-262023-08-010.590.351.010.791.22.972.980.843.13~ http://franklintempleton.com/20230331/role/RRSchedule4 ~~ http://franklintempleton.com/20230331/role/RRSchedule5 ~~ http://franklintempleton.com/20230331/role/RRBarChart6 ~~ http://franklintempleton.com/20230331/role/RRSchedule7 ~00015518952023-03-312023-03-310001551895cik0001551895:S000040579Member2023-03-312023-03-310001551895cik0001551895:S000040579Membercik0001551895:C000125848Member2023-03-312023-03-310001551895cik0001551895:S000040579Memberrr:AfterTaxesOnDistributionsMembercik0001551895:C000125848Member2023-03-312023-03-310001551895cik0001551895:S000040579Memberrr:AfterTaxesOnDistributionsAndSalesMembercik0001551895:C000125848Member2023-03-312023-03-310001551895cik0001551895:S000040579Membercik0001551895:BloombergUSGovernmentIndex1-3YearComponent1Member2023-03-312023-03-31iso4217:USDxbrli:pureutr:YFranklin ETF Trust
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We
hereby consent to the incorporation by reference in this Registration Statement on Form N-1A of Franklin
ETF Trust of our report dated May 18, 2023, relating to the financial statements and financial highlights,
which appears in the Franklin Short Duration U.S. Government ETF’s Annual Report on Form N-CSR for
the year ended March 31, 2023. We also consent to the references to us under the headings “Financial
Highlights” and “Independent Registered Public Accounting Firm” in such Registration Statement.
/s/PricewaterhouseCoopers LLP
San Francisco, California
July 24, 2023
(This Policy
serves as a
code of ethics
adopted pursuant to Rule
17j-1 under the
Investment
Company Act of
1940 and Rule
204A-1 under the
Investment Advisers Act of
1940)
Revised January
1, 2023
| | | |
SECTION 1. | PURPOSE OF THE POLICY | 1 |
1.1 | SCOPE AND PURPOSE OF THE POLICY | 2 |
1.2 | STATEMENT OF PRINCIPLES | 2 |
1.3 | PROHIBITED ACTIVITIES | 2 |
1.4 | MONITORING OF THE POLICY AND ADDITIONAL INFORMATION | 3 |
SECTION 2. | PERSONAL INVESTMENTS | 3 |
2.1 | STATEMENT ON COVERED EMPLOYEE
INVESTMENTS | 3 |
2.2 | CATEGORIES OF PERSONS SUBJECT TO THE POLICY | 3 |
2.3 | ACCOUNTS AND TRANSACTIONS COVERED BY THE POLICY | 4 |
2.4 | PROHIBITED TRANSACTIONS | 4 |
2.5 | ADDITIONAL PROHIBITIONS AND REQUIREMENTS FOR ACCESS PERSONS AND
PORTFOLIO PERSONS | 5 |
2.6 | REPORTING REQUIREMENTS | 6 |
2.7 | PRE-CLEARANCE REQUIREMENTS | 7 |
2.8 | REQUIREMENTS FOR INDEPENDENT DIRECTORS | 7 |
SECTION
3. | INSIDER TRADING | 8 |
3.1 | POLICY ON INSIDER TRADING | 8 |
SECTION 4. | RELATED POLICIES AND REQUIREMENTS | 9 |
4.1 | STATEMENT ON OTHER POLICIES AND REQUIREMENTS | 9 |
SECTION 5. | ADMINISTRATION OF THE POLICY, WAIVERS & REPORTING VIOLATIONS | 9 |
5.1 | CODE OF ETHICS COMMITTEE; REPORTING
TO FT FUND BOARDS | 9 |
5.2 | VIOLATIONS OF THE POLICY | 9 |
5.3 | WAIVERS OF THE
POLICY | 9 |
5.4 | REPORTING VIOLATIONS | 9 |
This
document is the proprietary
product of Franklin Templeton. Any
unauthorized use, reproduction or
transfer of this
document is strictly prohibited. Franklin Templeton © 2023.
All Rights Reserved.
SECTION
1. PURPOSE OF
THE POLICY
1.1 Scope
and Purpose of
the Policy
The Franklin
Templeton Personal Investments and Insider Trading Policy (the
"Policy") applies to the personal investment activities
of all Covered
Employees (as defined in section
2.2 of the
Policy) of Franklin Resources, Inc. ("FRI")
and all of its subsidiaries (collectively, "Franklin Templeton").
Franklin
Templeton provides services to the funds that are advised or sub-advised by a
Franklin Templeton investment adviser (the "FT Funds")
and other client
accounts ("Client Accounts"). Thus,
for purposes of this Policy,
"FT Fund" includes all open-end
and closed-end funds within the Franklin
Templeton Group of Funds,
as well as any other fund that is advised or sub-advised by a Franklin Templeton investment adviser.
The
purpose of the Policy is to summarize the values, principles and business
practices that guide Franklin Templeton's business conduct and to
establish a set of
principles to guide Covered
Employees regarding the conduct expected of them when managing their personal investments.
1.2 Statement
of Principles
All
Covered Employees are required to
conduct themselves in a lawful,
honest and ethical
manner in their business practices and to maintain an environment that
fosters fairness, respect and integrity.
Franklin
Templeton's policy is that the interests of the
FT Funds and Client
Accounts are paramount and come before the interests of any employee.
Information concerning the securities1 holdings
and financial circumstances of the
FT Funds and Client
Accounts, as well as the
identity of certain Client
Accounts, is confidential and Covered
Employees are required to safeguard this information.
The personal
investment activities of Covered Employees must be conducted in a manner
to avoid actual or potential conflicts of interest with the FT
Funds and Client Accounts. In particular, to the extent
that a Covered Employee learns of an investment
opportunity because of his or
her position with
Franklin Templeton (e.g.,
internal or third party
research, Franklin Templeton or company
sponsored conferences, or communications with company
officers), the Covered Employee must give preference to the FT Funds or Client Accounts.
Personal
transactions in a security
may not be executed,
regardless of quantity, if the
Covered Employee has access to information
regarding, or knowledge or even a presumed knowledge of,
FT Fund or Client Account activity in such security, including proposed activity
and recommendations.
1.3 Prohibited Activities
Covered
Employees generally are prohibited from engaging or participating
in any activity
that has the
potential to cause harm to an FT Fund or Client Account. Examples
of prohibited activities include, but are not limited to:
• Making investment
decisions, changes in research ratings
and trading decisions other than
exclusively for the benefit of, and in the best interest of,
the FT Funds or Client Accounts;
• Taking,
delaying or omitting to take
any action with respect
to any research
recommendation, report or rating
or any investment or trading decision for an FT
Fund or Client Account in order to avoid economic injury to
themselves or anyone other than the FT Funds or Client Accounts;
• Purchasing
or selling a security on the basis of knowledge of a possible
trade by or for an FT Fund or Client Account with the intent
of personally profiting from, or avoiding a
loss with respect to,
personal holdings in
the same or related securities;
1. For purposes
of this Policy,
the term "securities"
also includes derivatives,
such as futures,
options and swaps.
• Revealing
to any other
person (except in the
normal course of the
Covered Employee's duties
on behalf of an
FT
Fund or Client
Account) any information regarding securities transactions
by any FT
Fund or Client Account or the consideration
by any FT Fund or Client Account of any such securities transactions; or
• Engaging
in any act, practice or course
of business that operates or would operate as a
fraud or deceit on
an FT Fund or Client Account or engaging
in any manipulative practice with respect to any
FT Fund or Client Account.
1.4 Monitoring of
the Policy and Additional
Information
Questions regarding the
Policy and related requirements should be directed to the Code of Ethics Department located in San Mateo,
CA. The Code of Ethics Department can be reached by e-mail at
lpreclear@franklintempleton.com. The Code
of Ethics Department uses PTA, http://coeprod/pta/index.jsp,
an automated transaction pre-clearance system, to manage
the oversight of personal
investments. Administration
of the Policy is the responsibility of the Code of Ethics Committee.
SECTION
2. PERSONAL INVESTMENTS
2.1 Statement
on Covered Employee
Investments
Franklin Templeton recognizes
the importance to Covered Employees of managing their own financial resources. However,
because of the potential
conflicts of interest
inherent in its business,
Franklin Templeton has implemented this Policy with regard to personal
investments of Covered Employees. This
Policy is designed to minimize these conflicts and help ensure that Franklin Templeton focuses on meeting
its duties as a fiduciary to the FT Funds or Client Accounts.
Covered
Employees should be aware that their ability to invest
in certain securities and to liquidate those positions may be
severely restricted under this Policy due to trading by the FT Funds
or Client Accounts, including during times of market
volatility. Therefore, as a general matter, Franklin Templeton encourages
Covered Employees to exercise caution when investing in
individual securities, particularly in situations
where a Covered Employee wishes to invest in securities held or likely
to be held by the FT Funds or Client Accounts.
Franklin
Templeton also discourages Covered Employees from
engaging in a pattern
of securities transactions that is so
excessively frequent as to potentially
impact the Covered Employee's ability to carry out their
assigned responsibilities, increases the possibility
of potential conflicts or violates the Policy or the FT Funds' prospectuses.
2.2 Categories
of Persons Subject
to the Policy
All
persons subject to the Policy are assigned to the following categories based on their access to information
regarding, or involvement in,
investment activities. Persons
subject to other personal trading policies or codes of ethics adopted
by Franklin Templeton or its affiliates generally are
exempt from this Policy.2 Please consult the Code
of Ethics Department if you have any questions about how this Policy applies to you.
Covered
Employees: Covered Employees are: (1) partners, officers, directors (or
persons
occupying
a similar status or having similar functions) and employees
(including certain designated temporary employees or consultants) of any
Franklin Templeton investment adviser, as well as
any other persons who provide advice on behalf
of any Franklin Templeton investment adviser and
are subject to the supervision and control of that investment adviser; (2)
Access Persons, as defined below;
and (3) Independent
directors of FT Funds
within the Franklin Templeton Group of Funds
and independent directors of Franklin Templeton investment
advisers (collectively, "Independent Directors").
2. In
limited circumstances, certain affiliates of FRI may adopt separate policies or
codes of ethics governing personal trading in order to address the specific
features of their investment activities and operations.
Individuals subject to such separate
policies or codes of ethics generally are exempt from this Policy.
Access
Persons: Access Persons are those who have access to non-public information regarding FT
Funds' or Client Accounts' securities transactions; or have
access to recommendations
that are non-public; or
have access to non-public information
regarding the portfolio holdings of the FT Funds or Client Accounts.
Portfolio
Persons: Portfolio Persons, a subset of
Access Persons, are those who,
in connection with their
regular functions or duties,
make or participate in the decision to
purchase or sell a security by an FT Fund
or Client Account or if his or her functions relate to the making of any recommendations about those
purchases or sales.
Please
see the Appendix to this
Policy for a table indicating
how the provisions
of the Policy
apply to each category
of persons. In addition, please see section 2.8 of the
Policy for a description of the requirements for Independent Directors.
2.3 Accounts
and Transactions Covered
by the Policy
The
Policy covers two types of
securities accounts and transactions:
(1) those in which
Covered Employees have or share investment control, and
(2) those in which Covered Employees have direct or indirect beneficial ownership.
Generally,
a person has a beneficial ownership in a security if he or she,
directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise,
has or shares a direct or indirect pecuniary interest in the security.
"Pecuniary interest" has the same meaning as in
Rule 16a-1(a)(2) under the Securities Exchange Act of 1934.
Generally, a pecuniary interest in a security
means the opportunity, directly or indirectly, to
profit or share in any profit derived from a transaction in
the security. Covered
Employees are presumed to have
a pecuniary interest in securities held by members
of their immediate family or domestic partners sharing the same household.
Certain
types of securities and investments are exempt from the
Policy. These
include, but are not
limited to, direct obligations of the U.S.
government, money market instruments, and registered open-end funds other than
the FT Funds. Cryptocurrencies are reportable
only, (1) by members of those investment teams investing
in cryptocurrencies, and (2) for the cryptocurrencies in which they
are investing on behalf of clients or funds. Please
consult the Code of Ethics
Department for further information about
specific types of securities
that are exempt
from the Policy.
2.4 Prohibited Transactions
Trading
that Conflicts with
FT Funds or Client
Accounts
Covered Employees are
prohibited from any trading activity that
conflicts with the FT
Funds' or Client Accounts' trading
activity. Examples of prohibited trading activity include,
but are not limited to:
• "front running"
or trading ahead
of an FT
Fund or Client
Account; and
• trading
parallel to or
against an FT
Fund or Client
Account.
Short Sales
of Securities Issued by Franklin
Resources and FT Sponsored
Closed-end Funds and Exchange Traded Funds (ETFs)
Covered
Employees are prohibited from effecting short
sales, including "short sales
against the box,"
of securities issued by FRI, or any FT sponsored
closed-end funds or FT exchange traded
funds
(ETFs). This prohibition includes economically equivalent
transactions such as call or put options,
swap transactions or other derivatives that would result in
having a net short exposure to FRI or any closed-end fund or ETF sponsored
or advised by Franklin Templeton.
Pledged Securities
Directors
and Executive Officers are also prohibited from pledging, hypothecating or otherwise encumbering securities
issued by Franklin
Resources as described in greater
detail in the
FRI Code of Ethics
and Business Conduct.
Trading
in Shares of
the FT Funds
A
Covered Employee is prohibited from buying or
selling shares of an
FT Fund while in possession
of material non public information about the FT Fund.
Specifically, Covered Employees are prohibited from taking personal advantage
of their non-public knowledge of recent or impending
investment activities of FT Funds
or the FT Funds'
investment advisers or any other non-public information that
a reasonable investor would likely consider important
in making his or her investment decisions, including information
that may have a material effect on an FT Fund's share price or net asset value.
In
addition, Covered Employees must keep confidential
at all times
non-public information they may obtain about an FT Fund, including but
not limited to information such as portfolio holdings, pricing
or valuation of an FT Fund's portfolio holdings, recent or impending
securities transactions by an FT Fund, changes related to an FT Fund's
investment adviser, offerings of new FT Funds,
changes to investment minimums, FT
Fund closures or
liquidations, changes to investment personnel, FT Fund flow activity, and information
on current or prospective FT Fund shareholders.
Please
consult your local Legal or Compliance department if
you have any questions about materiality, confidentiality, or
any other concerns before trading on or sharing
non-public information relating to FT
Funds.
Short-Term Trading
in Open-end FT
Funds
Franklin Templeton discourages
short-term or excessive trading, often referred to as "market timing," in shares of the open-end
FT Funds. Covered
Employees must be familiar with the "Frequent Trading
Policy" or its equivalent described in the
prospectus of each open-end
FT Fund in which
they invest and must not engage in trading
activity that might violate the purpose or intent of such policy.
Accordingly, all Covered Employees must comply with the purpose and intent of
each open-end FT Fund's Frequent Trading Policy or its equivalent
and must not engage in any short-term or excessive trading in open-end
FT Funds.
For open-end FT Funds within the Franklin
Templeton Group of Funds, including FT Funds purchased through a 401(k) plan, trading activity by Covered
Employees is monitored and any trading patterns or
behaviors that may constitute short-term or excessive
trading is reported to the Code
of Ethics Department. These reports will
include descriptions of any
actions taken and any
sanctions or penalties imposed in response
to such trading activity. This
policy does not apply to purchases and sales of money market funds.
2.5 Additional
Prohibitions and Requirements
for Access Persons
and Portfolio Persons
Initial
Public Offerings
Access
Persons are prohibited from investing in securities
sold in an initial
public offering or a secondary offering (including Initial Coin Offerings ("ICOs")) by an
issuer except for offerings of securities made by closed-end FT Funds
advised or sub-advised by
Franklin Templeton. However, IPOs may
be permissible in certain
circumstances or jurisdictions. Please
contact the Code of Ethics department or your local Compliance
Officer in advance of executing any IPO.
Short Sales
of Securities
Portfolio
Persons are prohibited from selling short any security
held by the
FT Funds, including
"short
sales against the box."
This prohibition also applies to effecting
economically equivalent transactions, including, but not
limited to, sales of uncovered call
options, sales of put options while not owning
the underlying security, and short sales of bonds that are
convertible into equity positions, swaps
or other derivatives where the security
is held by FT Funds.
Short
Swing Rule
Portfolio
Persons are subject to a short swing rule whereby they cannot profit
from the purchase and sale or sale and purchase of
any security within
a 60 calendar
day period, including transactions in derivatives
and transactions that may occur in margin and option
accounts. For purposes of this
rule, profits will be determined based upon the maximum
gain that could
be realized on
the purchases and
sales (or sales
and purchases) occurring
during the 60
calendar
day period. Please
consult the Code of Ethics Department
about how profits
are calculated for purposes of this rule.
Disclosure of
Interest in Securities
or Private Investments
Portfolio
Persons are required to
disclose any interest they have in
the securities of
an issuer or direct
investment in any company if they are involved in either analysis or investment decisions related to
the issuer or company.
Portfolio
Persons must re-disclose any such interest
if they participate
in later recommendations
or investment decisions related to the issuer
or company.
Portfolio Persons must also disclose
any personal transactions
they are contemplating
in the securities
referenced above, any position they hold with the issuer and any
proposed business relationship between the issuer and the Portfolio Person or any party in which the
Portfolio Person has an interest.
The disclosures
above must be
made to their
Chief Investment Officer
and /or Director
of Research.
2.6 Reporting
Requirements
All Accounts
All
Covered Employees must complete an Initial
Code of Ethics
Certification no later than
10 calendar days after the date the person is
notified by a member of the Human Resources Department of the requirement to do so.
Additionally,
by February 15th
of each subsequent
year they must complete an annual
certification that they have complied with
and will comply with the Policy.
Access
Persons must also file
an Initial Broker Accounts Certification and Initial
Holdings Certification no later
than 10 calendar days after the date the person is notified by a member of
the Human Resources Department of the requirement
to do so. Additionally, by February
15th of each subsequent year,
Access Persons must file a then current annual report of all personal securities
accounts and securities holdings and must certify that they have complied with and will comply with the
Policy.
Non-Discretionary Accounts
On
a quarterly basis,
and no later
than 30 calendar days after the
end of each
calendar quarter, every Access Person must report all transactions in securities
covered by this Policy, except for those executed through an Automatic Investment Plan or that would
duplicate information already provided in broker confirmations or statements sent to the Code of Ethics
Department directly from the broker.
No
later than 30 calendar
days after the calendar
quarter, Access Persons must report any account
established in which any securities were held during that calendar quarter.
Discretionary
Accounts
Reporting of
transactions is not required
for discretionary accounts.
A discretionary account is managed
by a non affiliated
third party (registered broker-dealer, a registered
investment adviser, or other investment
manager acting in a similar fiduciary capacity) who exercises
sole investment discretion.
The
Access Person must certify initially and annually thereafter that they do not have investment control
of the discretionary account other than the right to
terminate. If
the Access Person makes or participates
in an investment
decision for an account that has been reported as a discretionary account,
any transactions related to that investment decision must be pre-cleared.
If there is any
uncertainty about whether a particular account would
be deemed discretionary for purposes of the Policy, please consult the Code of Ethics Department.
2.7 Pre-Clearance
Requirements
Securities Transactions
Access
Persons must obtain pre-clearance from the Code of
Ethics Department before buying or selling any security (other than those not
requiring pre-clearance, a full
list of which is available from the Code of Ethics Department)
and are always prohibited from executing
transactions in a security
if aware that the FT Funds
or Client Accounts are active or contemplate
being active in the security
(even if the
transactions have been pre cleared}.
Pre-clearance requests should be submitted via PTA.
Private
Investments and Limited
Offerings
Access Persons must obtain
pre-clearance from the Code of Ethics Department before
investing in a private
placement or purchasing other securities in
a limited offering.
For example, investments
in private or unregistered
funds (i.e., hedge
funds) are required to be pre-cleared under the Policy.
Discretionary
Accounts
Transactions in
discretionary accounts do not
need to be
pre-cleared if satisfactory evidence has
been provided to the
Code of Ethics Department
that sole investment discretion has been granted to an
investment manager. If
the Access Person makes or participates in an investment decision for an account
that has been reported as a discretionary account, any transactions related
to that investment decision must be pre-cleared.
Exemptions
from Pre-Clearance
Certain
types of securities and transactions
are exempt from pre-clearance requirements.
Examples of these types of securities
and transactions include, but are not limited to, shares
issued by FRI; shares
of open-end and closed end funds (including the FT Funds); shares of ETFs;
certain government obligations and transactions effected pursuant to
dividend reinvestment plans.
In addition, transactions in small
quantities of securities
(e.g.,
in the case of equity
securities, 500 shares within a 30 calendar day period} are
not required to be pre-cleared.
Please consult the Code of
Ethics Department for further information about the
types of securities and
transactions that are exempt
from the pre-clearance requirements of the Policy.
"Intent" Is
Important
While pre-clearance of
Access Persons' transactions is a cornerstone
of Franklin Templeton's compliance efforts, it cannot detect
inappropriate or illegal transactions where the intent conflicts
with the principles of the Policy. Thus,
the fact that a proposed transaction received pre-clearance
is not a
defense against a charge of violating
the Policy or the securities laws. For example,
even if an Access Person received pre-clearance for a transaction, that transaction might constitute
front-running if it occurred
shortly before a transaction
by an FT Fund
or Client Account that the Access Person was aware of.
In cases like
this, the intent may not
be evident when a particular
transaction request is analyzed for pre-clearance.
2.8 Requirements
for Independent Directors
Pre-clearance
and Reporting Requirements
An
Independent Director is subject
to the pre-clearance
and transaction reporting requirements of the
Policy only if such Independent Director, at the time of his or her transaction,
knew or should have known that, during the 15 calendar day period before or after the date of the Independent
Director's transaction,
the security was purchased or sold or
considered for purchase or sale by
an
FT Fund or Client Account. The pre-clearance and reporting
requirements of the Policy do not apply to securities
transactions conducted in an account where an Independent Director has granted full investment discretion
to a brokerage firm, bank or investment adviser or conducted in a trust
account in which the trustee has
full investment discretion. Independent
Directors are not required
to disclose any securities holdings or brokerage accounts, including
brokerage accounts where he/she has granted discretionary authority to a brokerage firm, bank or investment
adviser.
Initial
and Annual Acknowledgment
Reports
An Independent
Director must complete and return an
executed Acknowledgment Form to the
Code of Ethics Department no later
than 10 calendar days after the date the person becomes an Independent Director.
Independent
Directors will be asked
to certify by February
15th of each
year that they have
complied with and will
comply with the Policy by filing the Acknowledgment Form with the Code of Ethics Department.
SECTION
3. INSIDER TRADING
3.1 Policy
on Insider Trading
Insider
trading, or trading on material non-public information, is
against the law and penalties are severe, both
for individuals involved in such unlawful conduct and their
employers. No Covered Employee may (1)
trade, either personally or on behalf
of the FT
Funds or Client Accounts, while in
possession of material non-public
information, or (2) communicate material non-public information to others.
Material
non-public information may be
obtained by many means,
both in connection
with a Covered Employee's
job functions (e.g.,
from meetings with
company executives or consultations with
expert networks) or independent of the Covered Employee's employment or relationship
with Franklin Templeton (e.g.,
from friends or relatives).
Before
trading for themselves or others (including FT Funds
and Client Accounts) in the
securities of a company
about which a Covered Employee potentially may have material
non-public information, the Covered Employee should consider the following questions:
• First,
is the information material? Information
is considered material if there is a substantial likelihood that a reasonable investor would
consider the information to be
important in making his or
her investment decision,
or if it is reasonably certain to have a substantial
effect on the price of the company's securities.
• Second,
is the information
non-public? Information is non-public
until it has
been effectively communicated to the marketplace.
For example, information in a
report filed with the U.S. Securities
and Exchange Commission,
or that appears in a publication
of general circulation (e.g.,
The Wall Street
Journal or Reuters) would be
considered public. If the
information has been obtained from someone who is betraying an obligation not to share the information
(e.g., a
company insider), that information is very likely to be non-public.
If,
after consideration of these
questions, the Covered Employee believes that the
information that they have about a company may be material and non-public,
or if the Covered Employee has questions
as to whether the information is material
or non-public, he or
she must report
the matter immediately to Trading
Desk Compliance/IC, the designated Compliance Officer or
Legal Department.
In addition, the Covered Employee must not
purchase or sell any securities issued by
such company on behalf of themselves or
others (including on behalf
of any FT Fund or Client Account), or communicate the information inside or outside Franklin Templeton.
Trading
Desk Compliance/IC or the Compliance Officer will promptly
contact the Legal Department
for advice. After review of the facts, the Legal Department,
Trading Desk Compliance/IC or the Compliance Officer will provide
instructions to the Covered
Employee. If the
information in the Covered Employee's possession
is determined to be material
and non-public, the Covered Employee is required to keep the information confidential and secure.
Those securities for which the Covered Employee has material non-public information
will be placed on restricted trading lists for a timeframe determined
by the Compliance Officer.
SECTION
4. RELATED POLICIES
AND REQUIREMENTS
4.1 Statement on
Other Policies and
Requirements
In addition to the Policy,
Covered Employees are required to observe the applicable policies and procedures prescribed in
the Code of Ethics and Business
Conduct, the policies contained in the U.S.
and non-U.S.
employee handbooks (as applicable), and various other policies adopted by Franklin
Templeton.
SECTION 5.
ADMINISTRATION OF THE
POLICY, WAIVERS &
REPORTING VIOLATIONS
5.1 Code
of Ethics Committee;
Reporting to FT
Fund Boards
The Code
of Ethics Committee is responsible for the administration
of the Policy and provides oversight of compliance with the personal trading requirements
of the Policy. Among other things, the
Committee has the authority and responsibility
to review the Policy
periodically, review sanction guidelines for violations of the
Policy and review trading violations and waivers granted.
At
least annually, the
Franklin Templeton Fund Boards will be
provided with a report
describing any issues arising under the Policy.
5.2 Violations
of the Policy
A
Covered Employee that violates this Policy will be sanctioned in a manner commensurate with the violation.
Prescribed sanctions range from warning
memos for a
first time failure
to pre-clear a transaction
to the immediate
sale of positions, disgorgement of profits, personal trading suspensions and other sanctions, up to
and including termination and reporting to regulatory authorities for more serious
violations.
5.3 Waivers of
the Policy
The
Chief Compliance Officer
of the relevant
investment adviser, or
primary regional officer,
may, in his
or her discretion, waive compliance
by any Covered
Employee with the provisions of the
Policy, if he or
she finds that such
a waiver:
(1) is
necessary to alleviate undue
hardship or in view
of unforeseen circumstances or is
otherwise appropriate under all the relevant facts and circumstances;
(2) will
not be inconsistent
with the purposes
and objectives of the
Policy;
(3) will not
adversely affect the interests of the
FT Funds or Client
Accounts or the interests of Franklin
Templeton; and
(4) will not
result in a
transaction or conduct
that would violate provisions
of applicable laws
or regulations.
Any waiver
will be in writing, will contain a statement of the basis for it, and
any waivers granted by the Chief Compliance Officer of
the relevant investment
adviser, or primary
regional officer, will
be reported to
the SVP of
Regulatory Compliance.
5.4 Reporting
Violations
Covered Employees are
required to report violations
of the Policy
or the related
Procedures, whether by themselves or by others.
Franklin
Templeton is dedicated to providing Covered Employees with
the means and opportunity to report
violations of the
Policy or the related
Procedures, or other instances of wrongdoing,
or any concerns
they may have
regarding ethical violations or accounting, internal control or auditing matters, including fraud.
Several means are provided by which reports to the Compliance and Ethics Hotline
can be made including:
Online
at: https://franklintempleton.ethicspoint.com
U.S.,
U.S. Territories
or Canada can call
toll-free 1-800-648-7932 All other countries can call collect at 704-540-0139
Franklin
Templeton will not allow
retaliation against any Covered Employee who has submitted
a report of
a violation of the Policy or the related Procedures in good faith.
Appendix
| | | | | |
| | Covered
Employees | Access
Persons | Portfolio
Persons | Independent
Directors |
Prohibited Activities (Section 1.3) | X | X | X | X |
Prohibited Transactions and Other Requirements (Sections 2.4 and 2.5) | | | | |
Prohibition
on Trading Activity that Conflicts
with FT Funds or Client Accounts | X | X | X | X |
Prohibition
on Short Sales of FRI and Closed-end
FT Funds | X | X | X | X |
Trading
in Shares of the FT Funds
When in Possession
of Material Non-Public Information | X | X | X | X |
Short-Term Trading in Open-end
FT Funds | X | X | X | X |
Prohibition on Investments in Initial Public Offerings | | X | X | |
Prohibition on Short Sales
of All Securities | | | X | |
Short Swing Rule | | | X | |
Disclosure of Interest in Securities | | | X | |
Reporting Requirements (Section 2.6) | | | | |
Initial Certification/Acknowledgment | X | X | X | X |
Initial Disclosure of Accounts
and Holdings | | X | X | |
Annual Disclosure of Accounts and Holdings | | X | X | |
Annual Certification of Compliance | X | X | X | X |
Quarterly
Disclosure of Transactions | | X | X | X* |
Quarterly Disclosure of New Accounts | | X | X | |
Pre-Clearance Requirements (Section 2.7) | | X | X | X* |
Insider Trading (Section 3) | X | X | X | X |
Requirement to Report Violations (Section 5.4) | X | X | X | X |
*Only
applicable if the Independent
Director, at the time
of his or her
transaction, knew or should have
known that, during the 15
calendar day period before or after
the date of the Independent
Director's transaction, the security was purchased
or sold or considered for purchase or sale by an FT Fund or Client Account.
POWER OF ATTORNEY
The undersigned officers and trustees of
FRANKLIN ETF TRUST (the "Registrant"), hereby appoint BRUCE G. LETO, KRISTIN H. IVES, J. STEPHEN FEINOUR,
ALISON
E. BAUR, HARRIS GOLDBLAT and NAVID J. TOFIGH (with full power to each of them to act alone) his/her attorney-in-fact
and agent, in all capacities, to execute, deliver and file in the names of the undersigned, any and all
instruments that said attorneys and agents may deem necessary or advisable to enable the Registrant to
comply with or register any security issued by the Registrant under the Securities Act of 1933, as amended,
and/or the Investment Company Act of 1940, as amended, and the rules, regulations and interpretations
thereunder, including but not limited to, any registration statement, including any and all pre- and
post-effective amendments thereto, any other document to be filed with the U.S. Securities and Exchange
Commission and any and all documents required to be filed with respect thereto with any other regulatory
authority. Each of the undersigned grants to each of said attorneys, full authority to do every act
necessary to be done in order to effectuate the same as fully, to all intents and purposes, as he/she
could do if personally present, thereby ratifying all that said attorneys-in-fact and agents may lawfully
do or cause to be done by virtue hereof.
This
Power of Attorney may be executed in one or more counterparts, each of which shall be deemed to be an
original and all of which shall be deemed to be a single document.
The undersigned officers and trustees hereby execute this
Power of Attorney as of the 11th day of May, 2023.
| | | |
/s/ Patrick O’Connor | | /s/Rohit
Bhagat |
Patrick
O’Connor | | Rohit
Bhagat |
President
and Chief Executive Officer-Investment Management | | Trustee |
| | | |
| | | |
/s/Deborah
D. McWhinney | | /s/Jennifer
M. Johnson |
Deborah
D. McWhinney | | Jennifer
M. Johnson |
Trustee | | Trustee |
| | | |
/s/Anantha
K. Pradeep | | /s/Matthew
T. Hinkle |
Anantha
K. Pradeep | | Matthew
T. Hinkle |
Trustee | | Chief
Executive Officer-Finance and Administration |
| | | |
/s/Vivek Pai | | |
Vivek Pai | | |
Chief Financial Officer and Chief Accounting Officer | | |
v3.23.2
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v3.23.2
Total |
|---|
| Franklin Short Duration U.S. Government ETF
|
| FRANKLIN SHORT DURATION U.S. GOVERNMENT ETF
|
|
Investment Goal
|
A high level of current income as is consistent with prudent
investing, while seeking preservation of capital.
|
| Fees
and Expenses of the Fund
|
The following table describes the fees and expenses that you will incur if you
buy, hold and sell shares of the Fund. You may also incur other fees, such as usual and customary brokerage
commissions and other fees to financial intermediaries, which are not reflected in the table and the
Example that follows.
|
| Annual Fund Operating Expenses (expenses
that you pay each year as a percentage of the value of your investment)
|
|
|
| Example
|
This
Example is intended to help you compare the cost of investing in the Fund with the cost of investing
in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated
and then sell all of your shares at the end of the period. The Example also assumes that your investment
has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
|
Expense Example
|
Franklin Short Duration U.S. Government ETF
Franklin Short Duration U.S. Government ETF
USD ($)
|
| 1 Year |
$ 26
|
| 3 Years |
81
|
| 5 Years |
141
|
| 10 Years |
$ 318
|
|
|
Portfolio Turnover
|
The Fund pays transaction costs, such as
commissions, when it buys and sells securities (or "turns over" its portfolio). A higher portfolio turnover
rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in annual Fund operating expenses or in the Example,
affect the Fund's performance. During the most recent
fiscal
year, the Fund's portfolio turnover rate was 196.59% of the average value of its portfolio.
|
|
Principal Investment Strategies
|
Under normal market conditions,
the Fund invests at least 80% of its net assets in securities issued or guaranteed by the U.S. government,
its agencies, or instrumentalities. The Fund currently targets an estimated portfolio duration of three
(3) years or less. The Fund generally invests 50-80% of its assets in mortgage securities issued or guaranteed
by the U.S. government, its agencies, or instrumentalities, including adjustable rate mortgage securities
(ARMs) and collateralized mortgage obligations (CMOs), but the Fund also invests in direct obligations
of the U.S. government (such as Treasury bonds, bills and notes) and in securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities, including government sponsored entities. All
of the Fund’s principal investments are debt securities, including bonds, notes and debentures. In
comparison to maturity (which is the date on which a debt instrument ceases and the issuer is obligated
to repay the principal amount), duration is a measure of the expected price volatility of a debt instrument
as a result of changes in market rates of interest, based on the weighted average timing of the instrument’s
expected principal and interest payments and other factors. For purposes of calculating the Fund’s
portfolio duration, the Fund includes the effect of interest rate/bond futures contracts and options
on interest rate/bond futures contracts held by the Fund. Mortgage securities represent an interest
in a pool of mortgage loans made by banks and other financial institutions to finance purchases of homes,
commercial buildings and other real estate. As the underlying mortgage loans are paid off, investors
receive periodic principal and interest payments as well as any unscheduled principal prepayments on
the underlying mortgage loans. The mortgage securities purchased by the Fund include, but are not limited
to, bonds and notes issued or guaranteed by the Government National Mortgage Association (Ginnie Mae)
and U.S. government-sponsored entities, such as the Federal National Mortgage Association (Fannie Mae),
and the Federal Home Loan Mortgage Corporation (Freddie Mac). Government agency or instrumentality issues
have different levels of credit support. Ginnie Mae pass-through mortgage certificates are backed by
the full faith and credit of the U.S. government. U.S. government-sponsored entities, such as Fannie
Mae and Freddie Mac, may be chartered by Acts of Congress, but their securities are neither issued nor
guaranteed by the U.S. government. Although the U.S. government has provided financial support to Fannie
Mae and Freddie Mac, no assurance can be given that the U.S. government will continue to do so. The Fund
may invest in obligations of other U.S. government-sponsored entities, which may be
supported only by the credit of the issuing agency or instrumentality, such as securities issued by members
of the Farm Credit System. The Fund may invest in mortgage dollar rolls. In a mortgage dollar roll, the Fund
sells (or buys) mortgage securities for delivery on a specified date and simultaneously contracts to
repurchase (or sell) substantially similar (same type, coupon, and maturity) securities on a future date.
The Fund may also purchase or sell mortgage securities on a delayed delivery or forward commitment basis
through the "to-be-announced" (TBA) market. With TBA transactions, the particular securities to be delivered
must meet specified terms and standards. The Fund will invest only in covered mortgage dollar rolls or
TBA transactions, meaning that the Fund designates liquid securities in its portfolio equal in value
to the securities it will repurchase. The Fund invests in investment grade securities and investments
or in unrated securities and investments that the Fund’s investment manager determines are of comparable
quality. The Fund may invest in U.S. inflation-indexed securities issued by the U.S. government. To
pursue its investment goal, the Fund may invest in certain interest rate-related derivative transactions,
principally U.S. Treasury futures contracts and options on interest rate/bond futures. The use of these
derivative transactions may allow the Fund to obtain net long or short exposures to selected interest
rates or durations. These derivatives may be used to hedge risks associated with the Fund’s other portfolio
investments and to manage the duration of the Fund’s portfolio.
|
|
Principal Risks
|
You could lose money by investing in the
Fund. ETF shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are
not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency
of the U.S. government. The Fund is subject to the principal risks noted below, any of which may adversely
affect the Fund’s net asset value (NAV), trading price, yield, total return and ability to meet its
investment goal. Unlike many ETFs, the Fund is not an index-based ETF. Interest
Rate
When interest rates rise, debt security prices generally fall. The opposite is also generally true:
debt security prices rise when interest rates fall. Interest rate changes are influenced by a number
of factors, including government policy, monetary policy, inflation expectations, perceptions of risk,
and supply of and demand for bonds. In general, securities with longer maturities or durations are more
sensitive to interest rate changes. Mortgage Securities Mortgage securities
differ from conventional debt securities because principal is paid back periodically over the life of
the security rather than at maturity. The Fund may receive unscheduled payments of principal due to
voluntary
prepayments, refinancings or foreclosures on the underlying mortgage loans. Because of prepayments, mortgage
securities may be less effective than some other types of debt securities as a means of "locking in"
long-term interest rates and may have less potential for capital appreciation during periods of falling
interest rates. A reduction in the anticipated rate of principal prepayments, especially during periods
of rising interest rates, may increase or extend the effective maturity and duration of mortgage securities,
making them more sensitive to interest rate changes, subject to greater price volatility, and more susceptible
than some other debt securities to a decline in market value when interest rates rise. Mortgage
securities purchased on a delayed delivery or forward commitment basis through the to-be-announced market
(TBA) are subject to the risk that the actual securities received by the Fund may be less favorable than
anticipated, or that a counterparty will fail to deliver the security. Entering into a when-issued, delayed
delivery or TBA transaction may be viewed as a form of leverage and will result in associated risks for
the Fund. Sales of debt securities on a when-issued or delayed delivery basis are also subject to the
risk that the Fund is unable to purchase securities for delivery at the settlement date with the characteristics
agreed upon at the time of the transaction, which may subject the Fund to market losses or other penalties.
Prepayment
Prepayment risk occurs when a debt security can be repaid in whole or in part prior to the security's
maturity and the Fund must reinvest the proceeds it receives, during periods of declining interest rates,
in securities that pay a lower rate of interest. Also, if a security has been purchased at a premium,
the value of the premium would be lost in the event of prepayment. Prepayments generally increase when
interest rates fall. Variable Rate Securities Because changes in
interest rates on variable rate securities (including floating rate securities) may lag behind changes
in market rates, the value of such securities may decline during periods of rising interest rates until
their interest rates reset to market rates. During periods of declining interest rates, because the interest
rates on variable rate securities generally reset downward, their market value is unlikely to rise to
the same extent as the value of comparable fixed rate securities. Income
The Fund's distributions to shareholders may decline when prevailing interest rates fall, when the Fund
experiences defaults on debt securities it holds or when the Fund realizes a loss upon the sale of a
debt security. Extension Some debt securities, particularly mortgage-backed
securities, are subject to the risk that the debt security’s effective maturity is extended because
calls or prepayments are less or slower than anticipated, particularly when interest
rates
rise. The market value of such security may then decline and become more interest rate sensitive. Inflation-Indexed
Securities Inflation-indexed securities have a tendency to react to changes in real interest
rates. Real interest rates represent nominal (stated) interest rates lowered by the anticipated effect
of inflation. In general, the price of an inflation-indexed security decreases when real interest rates
increase, and increases when real interest rates decrease. Interest payments on inflation-indexed securities
will fluctuate as the principal and/or interest is adjusted for inflation and can be unpredictable. Market
The
market values of securities or other investments owned by the Fund will go up or down, sometimes rapidly
or unpredictably. The market value of a security or other investment may be reduced by market activity
or other results of supply and demand unrelated to the issuer. This is a basic risk associated with all
investments. When there are more sellers than buyers, prices tend to fall. Likewise, when there are more
buyers than sellers, prices tend to rise. The global outbreak of the novel strain of
coronavirus, COVID-19 and its subsequent variants, has resulted in market closures and dislocations,
extreme volatility, liquidity constraints and increased trading costs. The long-term impact on economies,
markets, industries and individual issuers is not known. Some sectors of the economy and individual issuers
have experienced or may experience particularly large losses. Periods of extreme volatility in the financial
markets; reduced liquidity of many instruments; and disruptions to supply chains, consumer demand and
employee availability, may continue for some time. Mortgage Dollar Rolls In a mortgage dollar
roll, the Fund takes the risk that: the market price of the mortgage-backed securities will drop below
their future repurchase price; the securities that it repurchases at a later date will have less favorable
market characteristics; the other party to the agreement will not be able to perform; the roll adds leverage
to the Fund's portfolio; and, it increases the Fund's sensitivity to interest rate changes. In addition,
investment in mortgage dollar rolls may increase the portfolio turnover rate for the Fund. Portfolio
Turnover The investment manager will sell a security when it believes it is appropriate
to do so, regardless of how long the Fund has held the security. The Fund's portfolio turnover rate may
exceed 100% per year because of the anticipated use of certain investment strategies. The rate of portfolio
turnover will not be a limiting factor for the investment manager in making decisions on when to buy
or sell securities, including entering into mortgage dollar rolls. High turnover will increase the Fund's
transaction costs and may increase your tax liability if the transactions result in capital gains. Derivative
Instruments The performance of derivative instruments depends largely on the performance
of an underlying instrument, such as a security, interest rate
or index, and such instruments often have risks similar to their underlying instrument, in addition to
other risks. Derivative instruments involve costs and can create economic leverage in the Fund's portfolio,
which may result in significant volatility and cause the Fund to participate in losses (as well as gains)
in an amount that exceeds the Fund's initial investment. Other risks include illiquidity, mispricing
or improper valuation of the derivative instrument, and imperfect correlation between the value of the
derivative and the underlying instrument so that the Fund may not realize the intended benefits. When
a derivative is used for hedging, the change in value of the derivative may also not correlate specifically
with the security, interest rate, index or other risk being hedged. With over-the-counter derivatives,
there is the risk that the other party to the transaction will fail to perform. Management
The Fund is subject to management risk because it is an actively managed ETF. The Fund's investment
manager applies investment techniques and risk analyses in making investment decisions for the Fund,
but there can be no guarantee that these decisions will produce the desired results. Credit
An issuer of debt securities may fail to make interest payments or repay principal when due, in whole
or in part. Changes in an issuer's financial strength or in a security's or government's credit rating
may affect a security's value. While securities issued by Ginnie Mae are backed by the full faith and
credit of the U.S. government, not all securities of the various U.S. government agencies are, including
those of Fannie Mae and Freddie Mac. Accordingly, securities issued by Fannie Mae and Freddie Mac may
involve a risk of non-payment of principal and interest. U.S. government guarantees of timely repayment
of principal and interest on government securities do not apply to the market prices and yields of the
securities or to the NAV, trading price or performance of the Fund. Irrespective of such U.S. government
guarantees, the market prices and yields of the securities and, consequently, the NAV, trading price
and performance of the Fund, will vary with changes in interest rates and other market conditions. Any
downgrade of the credit rating of the securities issued by the U.S. government may result in a downgrade
of securities issued by its agencies or instrumentalities, including government-sponsored entities. Market
Trading The Fund faces numerous market trading risks, including the potential lack of
an active market for Fund shares, losses from trading in secondary markets, periods of high volatility
and disruption in the creation/redemption process of the Fund. Any of these factors, among others, may
lead to the Fund’s shares trading at a premium or discount to NAV. Thus, you may pay more (or less)
than NAV when you buy shares of the Fund in the secondary market, and you may receive less (or more)
than NAV when you sell those shares in the secondary market.
The investment manager cannot predict whether shares will trade above (premium), below (discount) or
at NAV. Authorized
Participant Concentration Only an authorized participant (Authorized Participant) may engage in creation
or redemption transactions directly with the Fund. The Fund has a limited number of institutions that
act as Authorized Participants. To the extent that these institutions exit the business or are unable
to proceed with creation and/or redemption orders with respect to the Fund and no other Authorized Participant
is able to step forward to create or redeem Creation Units (as defined below), Fund shares may trade
at a discount to NAV and possibly face trading halts and/or delisting. This risk may be more pronounced
in volatile markets, potentially where there are significant redemptions in ETFs generally. Cash
Transactions Unlike certain ETFs, the Fund expects to generally effect its creations and
redemptions entirely for cash, rather than for in-kind securities. Therefore, it may be required to sell
portfolio securities and subsequently recognize gains on such sales that the Fund might not have recognized
if it were to distribute portfolio securities in-kind. As such, investments in Fund shares may be less
tax-efficient than an investment in an ETF that distributes portfolio securities entirely in-kind. Large
Shareholder Certain shareholders, including other funds or accounts advised by the investment
manager or an affiliate of the investment manager, may from time to time own a substantial amount of
the Fund’s shares. In addition, a third-party investor, the investment manager or an affiliate of the
investment manager, an authorized participant, a lead market maker, or another entity may invest in the
Fund and hold its investment for a limited period of time solely to facilitate commencement of the Fund
or to facilitate the Fund’s achieving a specified size or scale. There can be no assurance that any
large shareholder would not redeem its investment, that the size of the Fund would be maintained at such
levels or that the Fund would continue to meet applicable listing requirements. Redemptions by large
shareholders could have a significant negative impact on the Fund. In addition, transactions by large
shareholders may account for a large percentage of the trading volume on the listing exchange and may,
therefore, have a material upward or downward effect on the market price of the shares. Cybersecurity
Cybersecurity incidents, both intentional and unintentional, may allow an unauthorized party to gain
access to Fund assets, Fund or customer data (including private shareholder information), or proprietary
information, cause the Fund, the investment manager, authorized participants, or index providers (as
applicable) and listing exchanges, and/or their service providers (including, but not limited to, Fund
accountants, custodians, sub-custodians, transfer agents and financial intermediaries) to suffer data
breaches, data corruption or loss of operational functionality or prevent Fund investors from purchasing,
redeeming shares or receiving distributions. The investment manager has limited ability to
prevent
or mitigate cybersecurity incidents affecting third party service providers, and such third party service
providers may have limited indemnification obligations to the Fund or the investment manager. Cybersecurity
incidents may result in financial losses to the Fund and its shareholders, and substantial costs may
be incurred in an effort to prevent or mitigate future cybersecurity incidents. Issuers of securities
in which the Fund invests are also subject to cybersecurity risks, and the value of these securities
could decline if the issuers experience cybersecurity incidents. Because technology is frequently changing,
new ways to carry out cyber attacks are always developing. Therefore, there is a chance that some risks
have not been identified or prepared for, or that an attack may not be detected, which puts limitations
on the Fund's ability to plan for or respond to a cyber attack. Like other funds and business enterprises,
the Fund, the investment manager, and their service providers are subject to the risk of cyber incidents
occurring from time to time.
|
|
Performance
|
The following bar chart and table provide some indication
of the risks of investing in the Fund. The bar chart shows changes in the Fund's performance from year
to year. The table shows how the Fund's average annual returns for 1 year, 5 years, 10 years or since
inception, as applicable, compared with those of a broad measure of market performance. The Fund's past
performance (before and after taxes) is not necessarily an indication of how the Fund will perform in
the future. You can obtain updated performance information at franklintempleton.com or by calling (800)
DIAL BEN/342-5236.
|
| Annual Total Returns
|
|
| | | | Best Quarter: | 2020, Q2 | 1.25% | Worst Quarter: | 2022, Q1 | -1.80% |
| | As of June 30, 2023, the
Fund’s year-to-date return was 1.50%. |
|
| Average Annual Total Returns For
periods ended December 31, 2022
|
|
|
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| X |
- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. When a Multiple Class Fund offers more than one Class in the prospectus, provide annual total returns in the bar chart for only one of those Classes. The Fund can select which Class to include (e.g., the oldest Class, the Class with the greatest net assets). Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
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- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. When a Multiple Class Fund offers more than one Class in the prospectus, provide annual total returns in the bar chart for only one of those Classes. The Fund can select which Class to include (e.g., the oldest Class, the Class with the greatest net assets). Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
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- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. When a Multiple Class Fund offers more than one Class in the prospectus, provide annual total returns in the bar chart for only one of those Classes. The Fund can select which Class to include (e.g., the oldest Class, the Class with the greatest net assets). Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
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- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. When a Multiple Class Fund offers more than one Class in the prospectus, provide annual total returns in the bar chart for only one of those Classes. The Fund can select which Class to include (e.g., the oldest Class, the Class with the greatest net assets). Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
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| X |
- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. When a Multiple Class Fund offers more than one Class in the prospectus, provide annual total returns in the bar chart for only one of those Classes. The Fund can select which Class to include (e.g., the oldest Class, the Class with the greatest net assets). Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
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- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. When a Multiple Class Fund offers more than one Class in the prospectus, provide annual total returns in the bar chart for only one of those Classes. The Fund can select which Class to include (e.g., the oldest Class, the Class with the greatest net assets). Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
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- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. When a Multiple Class Fund offers more than one Class in the prospectus, provide annual total returns in the bar chart for only one of those Classes. The Fund can select which Class to include (e.g., the oldest Class, the Class with the greatest net assets). Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
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- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
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- DefinitionRisk/Return Bar Chart and Table. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
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| X |
- DefinitionDistribution [and/or Service] (12b-1) Fees" include all distribution or other expenses incurred during the most recent fiscal year under a plan adopted pursuant to rule 12b-1 [17 CFR 270.12b-1]. Under an appropriate caption or a subcaption of "Other Expenses," disclose the amount of any distribution or similar expenses deducted from the Fund's assets other than pursuant to a rule 12b-1 plan. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection table
-Paragraph 1
-Subparagraph 9
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- DefinitionHeading for Expense Example. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection instructions
-Paragraph 4
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- DefinitionThe Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection example
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-Subparagraph 1
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- DefinitionContains a command for the SEC Viewer for the role corresponding to ExpenseExample.
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| X |
- DefinitionThe Example assumes that you invest $10,000 in the Fund for the time periods indicated and then you redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return per year and that the Fund's operating expenses remained the same. Although your actual costs may be higher or lower. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection instructions
-Paragraph 4
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| X |
- DefinitionThe Example assumes that you invest $10,000 in the Fund for the time periods indicated and then you redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return per year and that the Fund's operating expenses remained the same. Although your actual costs may be higher or lower. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection example
-Paragraph 1
-Subparagraph 2
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| X |
- DefinitionThe Example assumes that you invest $10,000 in the Fund for the time periods indicated and then you redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return per year and that the Fund's operating expenses remained the same. Although your actual costs may be higher or lower. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection example
-Paragraph 1
-Subparagraph 2
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| X |
- DefinitionThe Example assumes that you invest $10,000 in the Fund for the time periods indicated and then you redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return per year and that the Fund's operating expenses remained the same. Although your actual costs may be higher or lower. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection example
-Paragraph 1
-Subparagraph 2
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| X |
- DefinitionRisk/Return Summary Fee Table Includes the following information, in plain English under rule 421(d) under the Securities Act, after Item 2 Fees and expenses of the Fund This table describes the fees and expenses that you may pay if you buy and hold shared of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $[_____] in [name of fund family] funds. Shareholder Fees (fees paid directly from your investment) Example This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then you redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return per year and that the Fund's operating expenses remained the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be You would pay the following expenses if you did not redeem your shares The Example does not reflect sales charges (loads) on reinvested dividends [and other distributions]. If these sales charges (loads) were included, your costs would be higher. Portfolio Turnover The Fund pays transaction costs, such as commissions, when it buys and sells securities (or "turns over" its portfolio). A higher portfolio turnover may indicate higher transaction costs. These costs, which are not reflected in annual fund operating expenses or in the example, affect the Fund's performance. During the most recent fiscal year, the Fund's portfolio turnover rate was __% of the average value of its whole portfolio. Instructions. A.3.instructions.6 New Funds. For purposes of this Item, a "New Fund" is a Fund that does not include in Form N-1A financial statements reporting operating results or that includes financial statements for the Fund's initial fiscal year reporting operating results for a period of 6 months or less. The following Instructions apply to New Funds. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection instructions
-Paragraph 1
-Subparagraph d
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- DefinitionThis table describes the fees and expenses that you may pay if you buy, hold, and sell shares of the Fund. You may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the tables and examples below. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $[ ] in [name of fund family] funds. More information about these and other discounts is available from your financial intermediary and in [identify section heading and page number] of the Fund's prospectus and [identify section heading and page number] of the Fund's statement of additional information Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection instructions
-Paragraph 1
-Subparagraph b
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| X |
- DefinitionTotal Annual Fund Operating Expenses. If the Fund is a Feeder Fund, reflect the aggregate expenses of the Feeder Fund and the Master Fund in a single fee table using the captions provided. In a footnote to the fee table, state that the table and Example reflect the expenses of both the Feeder and Master Funds. If the prospectus offers more than one Class of a Multiple Class Fund or more than one Feeder Fund that invests in the same Master Fund, provide a separate response for each Class or Feeder Fund. Base the percentages of "Annual Fund Operating Expenses" on amounts incurred during the Fund's most recent fiscal year, but include in expenses amounts that would have been incurred absent expense reimbursement or fee waiver arrangements. If the Fund has changed its fiscal year and, as a result, the most recent fiscal year is less than three months, use the fiscal year prior to the most recent fiscal year as the basis for determining "Annual Fund Operating Expenses." Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection instructions
-Paragraph 3
-Subparagraph d
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| X |
- DefinitionManagement Fees include investment advisory fees (including any fees based on the Fund's performance), any other management fees payable to the investment adviser or its affiliates, and administrative fees payable to the investment adviser or its affiliates that are not included as "Other Expenses." Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection instructions
-Paragraph 3
-Subparagraph a
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| Data Type: |
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| X |
- DefinitionInvestment Objectives/Goals. Disclose the Fund's investment objectives or goals. A Fund also may identify its type or category (e.g., that it is a Money Market Fund or a balanced fund). Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 2
-Subsection a
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| X |
- DefinitionInvestment Objectives/Goals. Disclose the Fund's investment objectives or goals. A Fund also may identify its type or category (e.g., that it is a Money Market Fund or a balanced fund). Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 2
-Subsection a
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| X |
- DefinitionAnnual Fund Operating Expenses (ongoing expenses that you pay each year as a percentage of the value of your investment) Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection table
-Paragraph 1
-Subparagraph 7
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| X |
- Definition"Other Expenses" include all expenses not otherwise disclosed in the table that are deducted from the Fund's assets or charged to all shareholder accounts. The amount of expenses deducted from the Fund's assets are the amounts shown as expenses in the Fund's statement of operations (including increases resulting from complying with paragraph 2(g) of rule 6-07 of Regulation S-X [17 CFR 210.6-07]). "Other Expenses" do not include extraordinary expenses as determined under generally accepted accounting principles (see Accounting Principles Board Opinion No. 30). If extraordinary expenses were incurred that materially affected the Fund's "Other Expenses," disclose in a footnote to the table what "Other Expenses" would have been had the extraordinary expenses been included. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection instructions
-Paragraph 3
-Subparagraph c
-Clause i
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| X |
- DefinitionRisk/Return Bar Chart and Table. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
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| Namespace Prefix: |
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- DefinitionContains a command for the SEC Viewer for the role corresponding to PerformanceTableData.
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| X |
- DefinitionDisclose the portfolio turnover rate provided in response to Item 14(a) for the most recent fiscal year (or for such shorter period as the Fund has been in operation). Disclose the period for which the information is provided if less than a full fiscal year. A Fund that is a Money Market Fund may omit the portfolio turnover information required by this Item. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection instructions
-Paragraph 5
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- DefinitionDisclose the portfolio turnover rate provided in response to Item 14(a) for the most recent fiscal year (or for such shorter period as the Fund has been in operation). Disclose the period for which the information is provided if less than a full fiscal year. A Fund that is a Money Market Fund may omit the portfolio turnover information required by this Item. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection example
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- DefinitionNarrative Risk Disclosure. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 1
| Name: |
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| X |
- DefinitionNarrative Risk Disclosure. A Fund may, in responding to this Item, describe the types of investors for whom the Fund is intended or the types of investment goals that may be consistent with an investment in the Fund. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 1
-Subparagraph i
-Clause instruction
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| X |
- DefinitionRisk/Return Summary Investment Objectives/Goals Include the following information, in plain English under rule 421(d) under the Securities Act, in the order and subject matter indicated Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 2
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| X |
- DefinitionPrincipal investment strategies of the Fund. Summarize how the Fund intends to achieve its investment objectives by identifying the Fund's principal investment strategies (including the type or types of securities in which the Fund invests or will invest principally) and any policy to concentrate in securities of issuers in a particular industry or group of industries. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection a
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- DefinitionPrincipal investment strategies of the Fund. Summarize how the Fund intends to achieve its investment objectives by identifying the Fund's principal investment strategies (including the type or types of securities in which the Fund invests or will invest principally) and any policy to concentrate in securities of issuers in a particular industry or group of industries. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection a
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v3.23.2
| Label |
Element |
Value |
| Franklin Short Duration U.S. Government ETF |
|
|
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| Risk/Return: |
rr_RiskReturnAbstract |
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|
| Risk/Return [Heading] |
rr_RiskReturnHeading |
FRANKLIN SHORT DURATION U.S. GOVERNMENT ETF
|
|
| Objective [Heading] |
rr_ObjectiveHeading |
Investment Goal
|
|
| Objective, Primary [Text Block] |
rr_ObjectivePrimaryTextBlock |
A high level of current income as is consistent with prudent
investing, while seeking preservation of capital.
|
|
| Expense [Heading] |
rr_ExpenseHeading |
Fees
and Expenses of the Fund
|
|
| Expense Narrative [Text Block] |
rr_ExpenseNarrativeTextBlock |
The following table describes the fees and expenses that you will incur if you
buy, hold and sell shares of the Fund. You may also incur other fees, such as usual and customary brokerage
commissions and other fees to financial intermediaries, which are not reflected in the table and the
Example that follows.
|
|
| Operating Expenses Caption [Text] |
rr_OperatingExpensesCaption |
Annual Fund Operating Expenses (expenses
that you pay each year as a percentage of the value of your investment)
|
|
| Portfolio Turnover [Heading] |
rr_PortfolioTurnoverHeading |
Portfolio Turnover
|
|
| Portfolio Turnover [Text Block] |
rr_PortfolioTurnoverTextBlock |
The Fund pays transaction costs, such as
commissions, when it buys and sells securities (or "turns over" its portfolio). A higher portfolio turnover
rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in annual Fund operating expenses or in the Example,
affect the Fund's performance. During the most recent
fiscal
year, the Fund's portfolio turnover rate was 196.59% of the average value of its portfolio.
|
|
| Portfolio Turnover, Rate |
rr_PortfolioTurnoverRate |
196.59%
|
|
| Expense Example [Heading] |
rr_ExpenseExampleHeading |
Example
|
|
| Expense Example Narrative [Text Block] |
rr_ExpenseExampleNarrativeTextBlock |
This
Example is intended to help you compare the cost of investing in the Fund with the cost of investing
in other funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated
and then sell all of your shares at the end of the period. The Example also assumes that your investment
has a 5% return each year and that the Fund's operating expenses remain the same. Although your actual
costs may be higher or lower, based on these assumptions your costs would be:
|
|
| Strategy [Heading] |
rr_StrategyHeading |
Principal Investment Strategies
|
|
| Strategy Narrative [Text Block] |
rr_StrategyNarrativeTextBlock |
Under normal market conditions,
the Fund invests at least 80% of its net assets in securities issued or guaranteed by the U.S. government,
its agencies, or instrumentalities. The Fund currently targets an estimated portfolio duration of three
(3) years or less. The Fund generally invests 50-80% of its assets in mortgage securities issued or guaranteed
by the U.S. government, its agencies, or instrumentalities, including adjustable rate mortgage securities
(ARMs) and collateralized mortgage obligations (CMOs), but the Fund also invests in direct obligations
of the U.S. government (such as Treasury bonds, bills and notes) and in securities issued or guaranteed
by the U.S. government, its agencies or instrumentalities, including government sponsored entities. All
of the Fund’s principal investments are debt securities, including bonds, notes and debentures. In
comparison to maturity (which is the date on which a debt instrument ceases and the issuer is obligated
to repay the principal amount), duration is a measure of the expected price volatility of a debt instrument
as a result of changes in market rates of interest, based on the weighted average timing of the instrument’s
expected principal and interest payments and other factors. For purposes of calculating the Fund’s
portfolio duration, the Fund includes the effect of interest rate/bond futures contracts and options
on interest rate/bond futures contracts held by the Fund. Mortgage securities represent an interest
in a pool of mortgage loans made by banks and other financial institutions to finance purchases of homes,
commercial buildings and other real estate. As the underlying mortgage loans are paid off, investors
receive periodic principal and interest payments as well as any unscheduled principal prepayments on
the underlying mortgage loans. The mortgage securities purchased by the Fund include, but are not limited
to, bonds and notes issued or guaranteed by the Government National Mortgage Association (Ginnie Mae)
and U.S. government-sponsored entities, such as the Federal National Mortgage Association (Fannie Mae),
and the Federal Home Loan Mortgage Corporation (Freddie Mac). Government agency or instrumentality issues
have different levels of credit support. Ginnie Mae pass-through mortgage certificates are backed by
the full faith and credit of the U.S. government. U.S. government-sponsored entities, such as Fannie
Mae and Freddie Mac, may be chartered by Acts of Congress, but their securities are neither issued nor
guaranteed by the U.S. government. Although the U.S. government has provided financial support to Fannie
Mae and Freddie Mac, no assurance can be given that the U.S. government will continue to do so. The Fund
may invest in obligations of other U.S. government-sponsored entities, which may be
supported only by the credit of the issuing agency or instrumentality, such as securities issued by members
of the Farm Credit System. The Fund may invest in mortgage dollar rolls. In a mortgage dollar roll, the Fund
sells (or buys) mortgage securities for delivery on a specified date and simultaneously contracts to
repurchase (or sell) substantially similar (same type, coupon, and maturity) securities on a future date.
The Fund may also purchase or sell mortgage securities on a delayed delivery or forward commitment basis
through the "to-be-announced" (TBA) market. With TBA transactions, the particular securities to be delivered
must meet specified terms and standards. The Fund will invest only in covered mortgage dollar rolls or
TBA transactions, meaning that the Fund designates liquid securities in its portfolio equal in value
to the securities it will repurchase. The Fund invests in investment grade securities and investments
or in unrated securities and investments that the Fund’s investment manager determines are of comparable
quality. The Fund may invest in U.S. inflation-indexed securities issued by the U.S. government. To
pursue its investment goal, the Fund may invest in certain interest rate-related derivative transactions,
principally U.S. Treasury futures contracts and options on interest rate/bond futures. The use of these
derivative transactions may allow the Fund to obtain net long or short exposures to selected interest
rates or durations. These derivatives may be used to hedge risks associated with the Fund’s other portfolio
investments and to manage the duration of the Fund’s portfolio.
|
|
| Strategy Portfolio Concentration [Text] |
rr_StrategyPortfolioConcentration |
Under normal market conditions,
the Fund invests at least 80% of its net assets in securities issued or guaranteed by the U.
|
|
| Risk [Heading] |
rr_RiskHeading |
Principal Risks
|
|
| Risk Narrative [Text Block] |
rr_RiskNarrativeTextBlock |
You could lose money by investing in the
Fund. ETF shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are
not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency
of the U.S. government. The Fund is subject to the principal risks noted below, any of which may adversely
affect the Fund’s net asset value (NAV), trading price, yield, total return and ability to meet its
investment goal. Unlike many ETFs, the Fund is not an index-based ETF. Interest
Rate
When interest rates rise, debt security prices generally fall. The opposite is also generally true:
debt security prices rise when interest rates fall. Interest rate changes are influenced by a number
of factors, including government policy, monetary policy, inflation expectations, perceptions of risk,
and supply of and demand for bonds. In general, securities with longer maturities or durations are more
sensitive to interest rate changes. Mortgage Securities Mortgage securities
differ from conventional debt securities because principal is paid back periodically over the life of
the security rather than at maturity. The Fund may receive unscheduled payments of principal due to
voluntary
prepayments, refinancings or foreclosures on the underlying mortgage loans. Because of prepayments, mortgage
securities may be less effective than some other types of debt securities as a means of "locking in"
long-term interest rates and may have less potential for capital appreciation during periods of falling
interest rates. A reduction in the anticipated rate of principal prepayments, especially during periods
of rising interest rates, may increase or extend the effective maturity and duration of mortgage securities,
making them more sensitive to interest rate changes, subject to greater price volatility, and more susceptible
than some other debt securities to a decline in market value when interest rates rise. Mortgage
securities purchased on a delayed delivery or forward commitment basis through the to-be-announced market
(TBA) are subject to the risk that the actual securities received by the Fund may be less favorable than
anticipated, or that a counterparty will fail to deliver the security. Entering into a when-issued, delayed
delivery or TBA transaction may be viewed as a form of leverage and will result in associated risks for
the Fund. Sales of debt securities on a when-issued or delayed delivery basis are also subject to the
risk that the Fund is unable to purchase securities for delivery at the settlement date with the characteristics
agreed upon at the time of the transaction, which may subject the Fund to market losses or other penalties.
Prepayment
Prepayment risk occurs when a debt security can be repaid in whole or in part prior to the security's
maturity and the Fund must reinvest the proceeds it receives, during periods of declining interest rates,
in securities that pay a lower rate of interest. Also, if a security has been purchased at a premium,
the value of the premium would be lost in the event of prepayment. Prepayments generally increase when
interest rates fall. Variable Rate Securities Because changes in
interest rates on variable rate securities (including floating rate securities) may lag behind changes
in market rates, the value of such securities may decline during periods of rising interest rates until
their interest rates reset to market rates. During periods of declining interest rates, because the interest
rates on variable rate securities generally reset downward, their market value is unlikely to rise to
the same extent as the value of comparable fixed rate securities. Income
The Fund's distributions to shareholders may decline when prevailing interest rates fall, when the Fund
experiences defaults on debt securities it holds or when the Fund realizes a loss upon the sale of a
debt security. Extension Some debt securities, particularly mortgage-backed
securities, are subject to the risk that the debt security’s effective maturity is extended because
calls or prepayments are less or slower than anticipated, particularly when interest
rates
rise. The market value of such security may then decline and become more interest rate sensitive. Inflation-Indexed
Securities Inflation-indexed securities have a tendency to react to changes in real interest
rates. Real interest rates represent nominal (stated) interest rates lowered by the anticipated effect
of inflation. In general, the price of an inflation-indexed security decreases when real interest rates
increase, and increases when real interest rates decrease. Interest payments on inflation-indexed securities
will fluctuate as the principal and/or interest is adjusted for inflation and can be unpredictable. Market
The
market values of securities or other investments owned by the Fund will go up or down, sometimes rapidly
or unpredictably. The market value of a security or other investment may be reduced by market activity
or other results of supply and demand unrelated to the issuer. This is a basic risk associated with all
investments. When there are more sellers than buyers, prices tend to fall. Likewise, when there are more
buyers than sellers, prices tend to rise. The global outbreak of the novel strain of
coronavirus, COVID-19 and its subsequent variants, has resulted in market closures and dislocations,
extreme volatility, liquidity constraints and increased trading costs. The long-term impact on economies,
markets, industries and individual issuers is not known. Some sectors of the economy and individual issuers
have experienced or may experience particularly large losses. Periods of extreme volatility in the financial
markets; reduced liquidity of many instruments; and disruptions to supply chains, consumer demand and
employee availability, may continue for some time. Mortgage Dollar Rolls In a mortgage dollar
roll, the Fund takes the risk that: the market price of the mortgage-backed securities will drop below
their future repurchase price; the securities that it repurchases at a later date will have less favorable
market characteristics; the other party to the agreement will not be able to perform; the roll adds leverage
to the Fund's portfolio; and, it increases the Fund's sensitivity to interest rate changes. In addition,
investment in mortgage dollar rolls may increase the portfolio turnover rate for the Fund. Portfolio
Turnover The investment manager will sell a security when it believes it is appropriate
to do so, regardless of how long the Fund has held the security. The Fund's portfolio turnover rate may
exceed 100% per year because of the anticipated use of certain investment strategies. The rate of portfolio
turnover will not be a limiting factor for the investment manager in making decisions on when to buy
or sell securities, including entering into mortgage dollar rolls. High turnover will increase the Fund's
transaction costs and may increase your tax liability if the transactions result in capital gains. Derivative
Instruments The performance of derivative instruments depends largely on the performance
of an underlying instrument, such as a security, interest rate
or index, and such instruments often have risks similar to their underlying instrument, in addition to
other risks. Derivative instruments involve costs and can create economic leverage in the Fund's portfolio,
which may result in significant volatility and cause the Fund to participate in losses (as well as gains)
in an amount that exceeds the Fund's initial investment. Other risks include illiquidity, mispricing
or improper valuation of the derivative instrument, and imperfect correlation between the value of the
derivative and the underlying instrument so that the Fund may not realize the intended benefits. When
a derivative is used for hedging, the change in value of the derivative may also not correlate specifically
with the security, interest rate, index or other risk being hedged. With over-the-counter derivatives,
there is the risk that the other party to the transaction will fail to perform. Management
The Fund is subject to management risk because it is an actively managed ETF. The Fund's investment
manager applies investment techniques and risk analyses in making investment decisions for the Fund,
but there can be no guarantee that these decisions will produce the desired results. Credit
An issuer of debt securities may fail to make interest payments or repay principal when due, in whole
or in part. Changes in an issuer's financial strength or in a security's or government's credit rating
may affect a security's value. While securities issued by Ginnie Mae are backed by the full faith and
credit of the U.S. government, not all securities of the various U.S. government agencies are, including
those of Fannie Mae and Freddie Mac. Accordingly, securities issued by Fannie Mae and Freddie Mac may
involve a risk of non-payment of principal and interest. U.S. government guarantees of timely repayment
of principal and interest on government securities do not apply to the market prices and yields of the
securities or to the NAV, trading price or performance of the Fund. Irrespective of such U.S. government
guarantees, the market prices and yields of the securities and, consequently, the NAV, trading price
and performance of the Fund, will vary with changes in interest rates and other market conditions. Any
downgrade of the credit rating of the securities issued by the U.S. government may result in a downgrade
of securities issued by its agencies or instrumentalities, including government-sponsored entities. Market
Trading The Fund faces numerous market trading risks, including the potential lack of
an active market for Fund shares, losses from trading in secondary markets, periods of high volatility
and disruption in the creation/redemption process of the Fund. Any of these factors, among others, may
lead to the Fund’s shares trading at a premium or discount to NAV. Thus, you may pay more (or less)
than NAV when you buy shares of the Fund in the secondary market, and you may receive less (or more)
than NAV when you sell those shares in the secondary market.
The investment manager cannot predict whether shares will trade above (premium), below (discount) or
at NAV. Authorized
Participant Concentration Only an authorized participant (Authorized Participant) may engage in creation
or redemption transactions directly with the Fund. The Fund has a limited number of institutions that
act as Authorized Participants. To the extent that these institutions exit the business or are unable
to proceed with creation and/or redemption orders with respect to the Fund and no other Authorized Participant
is able to step forward to create or redeem Creation Units (as defined below), Fund shares may trade
at a discount to NAV and possibly face trading halts and/or delisting. This risk may be more pronounced
in volatile markets, potentially where there are significant redemptions in ETFs generally. Cash
Transactions Unlike certain ETFs, the Fund expects to generally effect its creations and
redemptions entirely for cash, rather than for in-kind securities. Therefore, it may be required to sell
portfolio securities and subsequently recognize gains on such sales that the Fund might not have recognized
if it were to distribute portfolio securities in-kind. As such, investments in Fund shares may be less
tax-efficient than an investment in an ETF that distributes portfolio securities entirely in-kind. Large
Shareholder Certain shareholders, including other funds or accounts advised by the investment
manager or an affiliate of the investment manager, may from time to time own a substantial amount of
the Fund’s shares. In addition, a third-party investor, the investment manager or an affiliate of the
investment manager, an authorized participant, a lead market maker, or another entity may invest in the
Fund and hold its investment for a limited period of time solely to facilitate commencement of the Fund
or to facilitate the Fund’s achieving a specified size or scale. There can be no assurance that any
large shareholder would not redeem its investment, that the size of the Fund would be maintained at such
levels or that the Fund would continue to meet applicable listing requirements. Redemptions by large
shareholders could have a significant negative impact on the Fund. In addition, transactions by large
shareholders may account for a large percentage of the trading volume on the listing exchange and may,
therefore, have a material upward or downward effect on the market price of the shares. Cybersecurity
Cybersecurity incidents, both intentional and unintentional, may allow an unauthorized party to gain
access to Fund assets, Fund or customer data (including private shareholder information), or proprietary
information, cause the Fund, the investment manager, authorized participants, or index providers (as
applicable) and listing exchanges, and/or their service providers (including, but not limited to, Fund
accountants, custodians, sub-custodians, transfer agents and financial intermediaries) to suffer data
breaches, data corruption or loss of operational functionality or prevent Fund investors from purchasing,
redeeming shares or receiving distributions. The investment manager has limited ability to
prevent
or mitigate cybersecurity incidents affecting third party service providers, and such third party service
providers may have limited indemnification obligations to the Fund or the investment manager. Cybersecurity
incidents may result in financial losses to the Fund and its shareholders, and substantial costs may
be incurred in an effort to prevent or mitigate future cybersecurity incidents. Issuers of securities
in which the Fund invests are also subject to cybersecurity risks, and the value of these securities
could decline if the issuers experience cybersecurity incidents. Because technology is frequently changing,
new ways to carry out cyber attacks are always developing. Therefore, there is a chance that some risks
have not been identified or prepared for, or that an attack may not be detected, which puts limitations
on the Fund's ability to plan for or respond to a cyber attack. Like other funds and business enterprises,
the Fund, the investment manager, and their service providers are subject to the risk of cyber incidents
occurring from time to time.
|
|
| Risk Lose Money [Text] |
rr_RiskLoseMoney |
You could lose money by investing in the
Fund.
|
|
| Bar Chart and Performance Table [Heading] |
rr_BarChartAndPerformanceTableHeading |
Performance
|
|
| Performance Narrative [Text Block] |
rr_PerformanceNarrativeTextBlock |
The following bar chart and table provide some indication
of the risks of investing in the Fund. The bar chart shows changes in the Fund's performance from year
to year. The table shows how the Fund's average annual returns for 1 year, 5 years, 10 years or since
inception, as applicable, compared with those of a broad measure of market performance. The Fund's past
performance (before and after taxes) is not necessarily an indication of how the Fund will perform in
the future. You can obtain updated performance information at franklintempleton.com or by calling (800)
DIAL BEN/342-5236.
|
|
| Performance Information Illustrates Variability of Returns [Text] |
rr_PerformanceInformationIllustratesVariabilityOfReturns |
The following bar chart and table provide some indication
of the risks of investing in the Fund. The bar chart shows changes in the Fund's performance from year
to year. The table shows how the Fund's average annual returns for 1 year, 5 years, 10 years or since
inception, as applicable, compared with those of a broad measure of market performance.
|
|
| Performance Availability Website Address [Text] |
rr_PerformanceAvailabilityWebSiteAddress |
franklintempleton.com
|
|
| Performance Past Does Not Indicate Future [Text] |
rr_PerformancePastDoesNotIndicateFuture |
The Fund's past
performance (before and after taxes) is not necessarily an indication of how the Fund will perform in
the future.
|
|
| Bar Chart [Heading] |
rr_BarChartHeading |
Annual Total Returns
|
|
| Bar Chart Closing [Text Block] |
rr_BarChartClosingTextBlock |
| | | | Best Quarter: | 2020, Q2 | 1.25% | Worst Quarter: | 2022, Q1 | -1.80% |
| | As of June 30, 2023, the
Fund’s year-to-date return was 1.50%. |
|
|
| Performance Table Heading |
rr_PerformanceTableHeading |
Average Annual Total Returns For
periods ended December 31, 2022
|
|
| Franklin Short Duration U.S. Government ETF | Bloomberg US Government Index: 1-3 Year Component |
|
|
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| Risk/Return: |
rr_RiskReturnAbstract |
|
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| Index No Deduction for Fees, Expenses, Taxes [Text] |
rr_IndexNoDeductionForFeesExpensesTaxes |
(index reflects no deduction for fees, expenses or taxes)
|
|
| Label |
rr_AverageAnnualReturnLabel |
Bloomberg US Government
Index: 1-3 Year Component
|
|
| 1 Year |
rr_AverageAnnualReturnYear01 |
(3.81%)
|
|
| 5 Years |
rr_AverageAnnualReturnYear05 |
0.74%
|
|
| Since Inception |
rr_AverageAnnualReturnSinceInception |
0.68%
|
[1] |
| Franklin Short Duration U.S. Government ETF | Franklin Short Duration U.S. Government ETF |
|
|
|
| Risk/Return: |
rr_RiskReturnAbstract |
|
|
| Management fees |
rr_ManagementFeesOverAssets |
0.25%
|
|
| Distribution and service (12b-1) fees |
rr_DistributionAndService12b1FeesOverAssets |
none
|
|
| Other expenses |
rr_OtherExpensesOverAssets |
none
|
|
| Total annual Fund operating expenses |
rr_ExpensesOverAssets |
0.25%
|
|
| 1 Year |
rr_ExpenseExampleYear01 |
$ 26
|
|
| 3 Years |
rr_ExpenseExampleYear03 |
81
|
|
| 5 Years |
rr_ExpenseExampleYear05 |
141
|
|
| 10 Years |
rr_ExpenseExampleYear10 |
$ 318
|
|
| Annual Return 2014 |
rr_AnnualReturn2014 |
0.59%
|
|
| Annual Return 2015 |
rr_AnnualReturn2015 |
0.35%
|
|
| Annual Return 2016 |
rr_AnnualReturn2016 |
1.01%
|
|
| Annual Return 2017 |
rr_AnnualReturn2017 |
0.79%
|
|
| Annual Return 2018 |
rr_AnnualReturn2018 |
1.20%
|
|
| Annual Return 2019 |
rr_AnnualReturn2019 |
2.97%
|
|
| Annual Return 2020 |
rr_AnnualReturn2020 |
2.98%
|
|
| Annual Return 2021 |
rr_AnnualReturn2021 |
(0.84%)
|
|
| Annual Return 2022 |
rr_AnnualReturn2022 |
(3.13%)
|
|
| Year to Date Return, Label |
rr_YearToDateReturnLabel |
As of June 30, 2023, the
Fund’s year-to-date return was 1.50%.
|
|
| Bar Chart, Year to Date Return, Date |
rr_BarChartYearToDateReturnDate |
Jun. 30, 2023
|
|
| Bar Chart, Year to Date Return |
rr_BarChartYearToDateReturn |
1.50%
|
|
| Label |
rr_HighestQuarterlyReturnLabel |
Best Quarter
|
|
| Highest Quarterly Return, Date |
rr_BarChartHighestQuarterlyReturnDate |
Jun. 30, 2020
|
|
| Highest Quarterly Return |
rr_BarChartHighestQuarterlyReturn |
1.25%
|
|
| Label |
rr_LowestQuarterlyReturnLabel |
Worst Quarter
|
|
| Lowest Quarterly Return, Date |
rr_BarChartLowestQuarterlyReturnDate |
Mar. 31, 2022
|
|
| Lowest Quarterly Return |
rr_BarChartLowestQuarterlyReturn |
(1.80%)
|
|
| Label |
rr_AverageAnnualReturnLabel |
Return before taxes
|
|
| 1 Year |
rr_AverageAnnualReturnYear01 |
(3.13%)
|
|
| 5 Years |
rr_AverageAnnualReturnYear05 |
0.61%
|
|
| Since Inception |
rr_AverageAnnualReturnSinceInception |
0.71%
|
[1] |
| Franklin Short Duration U.S. Government ETF | Franklin Short Duration U.S. Government ETF | After Taxes on Distributions |
|
|
|
| Risk/Return: |
rr_RiskReturnAbstract |
|
|
| Label |
rr_AverageAnnualReturnLabel |
Return after taxes on distributions
|
|
| 1 Year |
rr_AverageAnnualReturnYear01 |
(3.79%)
|
|
| 5 Years |
rr_AverageAnnualReturnYear05 |
(0.19%)
|
|
| Since Inception |
rr_AverageAnnualReturnSinceInception |
(0.10%)
|
[1] |
| Franklin Short Duration U.S. Government ETF | Franklin Short Duration U.S. Government ETF | After Taxes on Distributions and Sales |
|
|
|
| Risk/Return: |
rr_RiskReturnAbstract |
|
|
| Label |
rr_AverageAnnualReturnLabel |
Return
after taxes on distributions and sale of Fund shares
|
|
| 1 Year |
rr_AverageAnnualReturnYear01 |
(1.84%)
|
|
| 5 Years |
rr_AverageAnnualReturnYear05 |
0.14%
|
|
| Since Inception |
rr_AverageAnnualReturnSinceInception |
0.19%
|
[1] |
|
|
| X |
- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. When a Multiple Class Fund offers more than one Class in the prospectus, provide annual total returns in the bar chart for only one of those Classes. The Fund can select which Class to include (e.g., the oldest Class, the Class with the greatest net assets). Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
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duration |
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| X |
- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. When a Multiple Class Fund offers more than one Class in the prospectus, provide annual total returns in the bar chart for only one of those Classes. The Fund can select which Class to include (e.g., the oldest Class, the Class with the greatest net assets). Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
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|
| X |
- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. When a Multiple Class Fund offers more than one Class in the prospectus, provide annual total returns in the bar chart for only one of those Classes. The Fund can select which Class to include (e.g., the oldest Class, the Class with the greatest net assets). Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
| Name: |
rr_AnnualReturn2016 |
| Namespace Prefix: |
rr_ |
| Data Type: |
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| Balance Type: |
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| Period Type: |
duration |
|
| X |
- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. When a Multiple Class Fund offers more than one Class in the prospectus, provide annual total returns in the bar chart for only one of those Classes. The Fund can select which Class to include (e.g., the oldest Class, the Class with the greatest net assets). Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
| Name: |
rr_AnnualReturn2017 |
| Namespace Prefix: |
rr_ |
| Data Type: |
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| Balance Type: |
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| Period Type: |
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|
| X |
- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. When a Multiple Class Fund offers more than one Class in the prospectus, provide annual total returns in the bar chart for only one of those Classes. The Fund can select which Class to include (e.g., the oldest Class, the Class with the greatest net assets). Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
| Name: |
rr_AnnualReturn2018 |
| Namespace Prefix: |
rr_ |
| Data Type: |
xbrli:pureItemType |
| Balance Type: |
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| Period Type: |
duration |
|
| X |
- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. When a Multiple Class Fund offers more than one Class in the prospectus, provide annual total returns in the bar chart for only one of those Classes. The Fund can select which Class to include (e.g., the oldest Class, the Class with the greatest net assets). Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
| Name: |
rr_AnnualReturn2019 |
| Namespace Prefix: |
rr_ |
| Data Type: |
xbrli:pureItemType |
| Balance Type: |
na |
| Period Type: |
duration |
|
| X |
- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. When a Multiple Class Fund offers more than one Class in the prospectus, provide annual total returns in the bar chart for only one of those Classes. The Fund can select which Class to include (e.g., the oldest Class, the Class with the greatest net assets). Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
| Name: |
rr_AnnualReturn2020 |
| Namespace Prefix: |
rr_ |
| Data Type: |
xbrli:pureItemType |
| Balance Type: |
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| Period Type: |
duration |
|
| X |
- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. When a Multiple Class Fund offers more than one Class in the prospectus, provide annual total returns in the bar chart for only one of those Classes. The Fund can select which Class to include (e.g., the oldest Class, the Class with the greatest net assets). Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
| Name: |
rr_AnnualReturn2021 |
| Namespace Prefix: |
rr_ |
| Data Type: |
xbrli:pureItemType |
| Balance Type: |
na |
| Period Type: |
duration |
|
| X |
- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. When a Multiple Class Fund offers more than one Class in the prospectus, provide annual total returns in the bar chart for only one of those Classes. The Fund can select which Class to include (e.g., the oldest Class, the Class with the greatest net assets). Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
| Name: |
rr_AnnualReturn2022 |
| Namespace Prefix: |
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| Data Type: |
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| Balance Type: |
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| Period Type: |
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|
| X |
- DefinitionThis item represents Average Annual Total Returns. If a Multiple Class Fund offers a Class in the prospectus that converts into another Class after a stated period, compute average annual total returns in the table by using the returns of the other Class for the period after conversion. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph iii
-Clause 1
-Exhibit 2
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| Period Type: |
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| X |
- Definition
+ ReferencesReference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph iii
-Clause 1
-Exhibit 2
| Name: |
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| Data Type: |
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| Balance Type: |
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| Period Type: |
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| X |
- Definition
+ ReferencesReference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph iii
-Clause 1
-Exhibit 2
| Name: |
rr_AverageAnnualReturnYear01 |
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| Data Type: |
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| Balance Type: |
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| Period Type: |
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| X |
- Definition
+ ReferencesReference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph iii
-Clause 1
-Exhibit 2
| Name: |
rr_AverageAnnualReturnYear05 |
| Namespace Prefix: |
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| Data Type: |
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| Balance Type: |
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| Period Type: |
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| X |
- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
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| Balance Type: |
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| Period Type: |
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| X |
- DefinitionRisk/Return Bar Chart and Table. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
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| X |
- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
| Name: |
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| Data Type: |
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| X |
- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
| Name: |
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| Data Type: |
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| Period Type: |
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| X |
- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
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rr_BarChartLowestQuarterlyReturn |
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| X |
- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
| Name: |
rr_BarChartLowestQuarterlyReturnDate |
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| Data Type: |
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| Balance Type: |
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| Period Type: |
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| X |
- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
| Name: |
rr_BarChartYearToDateReturn |
| Namespace Prefix: |
rr_ |
| Data Type: |
xbrli:pureItemType |
| Balance Type: |
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| Period Type: |
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|
| X |
- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
| Name: |
rr_BarChartYearToDateReturnDate |
| Namespace Prefix: |
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| Data Type: |
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| Balance Type: |
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| Period Type: |
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|
| X |
- DefinitionDistribution [and/or Service] (12b-1) Fees" include all distribution or other expenses incurred during the most recent fiscal year under a plan adopted pursuant to rule 12b-1 [17 CFR 270.12b-1]. Under an appropriate caption or a subcaption of "Other Expenses," disclose the amount of any distribution or similar expenses deducted from the Fund's assets other than pursuant to a rule 12b-1 plan. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection table
-Paragraph 1
-Subparagraph 9
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rr_DistributionAndService12b1FeesOverAssets |
| Namespace Prefix: |
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|
| X |
- DefinitionHeading for Expense Example. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection instructions
-Paragraph 4
| Name: |
rr_ExpenseExampleHeading |
| Namespace Prefix: |
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| Data Type: |
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| X |
- DefinitionThe Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection example
-Paragraph 1
-Subparagraph 1
| Name: |
rr_ExpenseExampleNarrativeTextBlock |
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| X |
- DefinitionThe Example assumes that you invest $10,000 in the Fund for the time periods indicated and then you redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return per year and that the Fund's operating expenses remained the same. Although your actual costs may be higher or lower. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection instructions
-Paragraph 4
| Name: |
rr_ExpenseExampleYear01 |
| Namespace Prefix: |
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| Data Type: |
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| Balance Type: |
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| Period Type: |
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|
| X |
- DefinitionThe Example assumes that you invest $10,000 in the Fund for the time periods indicated and then you redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return per year and that the Fund's operating expenses remained the same. Although your actual costs may be higher or lower. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection example
-Paragraph 1
-Subparagraph 2
| Name: |
rr_ExpenseExampleYear03 |
| Namespace Prefix: |
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| Data Type: |
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| Balance Type: |
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| X |
- DefinitionThe Example assumes that you invest $10,000 in the Fund for the time periods indicated and then you redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return per year and that the Fund's operating expenses remained the same. Although your actual costs may be higher or lower. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection example
-Paragraph 1
-Subparagraph 2
| Name: |
rr_ExpenseExampleYear05 |
| Namespace Prefix: |
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| Data Type: |
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| Balance Type: |
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| Period Type: |
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| X |
- DefinitionThe Example assumes that you invest $10,000 in the Fund for the time periods indicated and then you redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return per year and that the Fund's operating expenses remained the same. Although your actual costs may be higher or lower. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection example
-Paragraph 1
-Subparagraph 2
| Name: |
rr_ExpenseExampleYear10 |
| Namespace Prefix: |
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| Data Type: |
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| X |
- DefinitionRisk/Return Summary Fee Table Includes the following information, in plain English under rule 421(d) under the Securities Act, after Item 2 Fees and expenses of the Fund This table describes the fees and expenses that you may pay if you buy and hold shared of the Fund. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $[_____] in [name of fund family] funds. Shareholder Fees (fees paid directly from your investment) Example This Example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then you redeem all of your shares at the end of those periods. The Example also assumes that your investment has a 5% return per year and that the Fund's operating expenses remained the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be You would pay the following expenses if you did not redeem your shares The Example does not reflect sales charges (loads) on reinvested dividends [and other distributions]. If these sales charges (loads) were included, your costs would be higher. Portfolio Turnover The Fund pays transaction costs, such as commissions, when it buys and sells securities (or "turns over" its portfolio). A higher portfolio turnover may indicate higher transaction costs. These costs, which are not reflected in annual fund operating expenses or in the example, affect the Fund's performance. During the most recent fiscal year, the Fund's portfolio turnover rate was __% of the average value of its whole portfolio. Instructions. A.3.instructions.6 New Funds. For purposes of this Item, a "New Fund" is a Fund that does not include in Form N-1A financial statements reporting operating results or that includes financial statements for the Fund's initial fiscal year reporting operating results for a period of 6 months or less. The following Instructions apply to New Funds. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection instructions
-Paragraph 1
-Subparagraph d
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| Namespace Prefix: |
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| X |
- DefinitionThis table describes the fees and expenses that you may pay if you buy, hold, and sell shares of the Fund. You may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the tables and examples below. You may qualify for sales charge discounts if you and your family invest, or agree to invest in the future, at least $[ ] in [name of fund family] funds. More information about these and other discounts is available from your financial intermediary and in [identify section heading and page number] of the Fund's prospectus and [identify section heading and page number] of the Fund's statement of additional information Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection instructions
-Paragraph 1
-Subparagraph b
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| X |
- DefinitionTotal Annual Fund Operating Expenses. If the Fund is a Feeder Fund, reflect the aggregate expenses of the Feeder Fund and the Master Fund in a single fee table using the captions provided. In a footnote to the fee table, state that the table and Example reflect the expenses of both the Feeder and Master Funds. If the prospectus offers more than one Class of a Multiple Class Fund or more than one Feeder Fund that invests in the same Master Fund, provide a separate response for each Class or Feeder Fund. Base the percentages of "Annual Fund Operating Expenses" on amounts incurred during the Fund's most recent fiscal year, but include in expenses amounts that would have been incurred absent expense reimbursement or fee waiver arrangements. If the Fund has changed its fiscal year and, as a result, the most recent fiscal year is less than three months, use the fiscal year prior to the most recent fiscal year as the basis for determining "Annual Fund Operating Expenses." Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 3
-Subsection instructions
-Paragraph 3
-Subparagraph d
| Name: |
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| Namespace Prefix: |
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| Data Type: |
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|
| X |
- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
-Chapter A
-Section 4
-Subsection b
-Paragraph 2
-Subparagraph ii
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- DefinitionThe Performance Table includes a parenthetical, indicating that the Index "(reflects no deduction for fees, expenses or taxes)". This tag is used when this is reflected in a footnote. Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher SEC
-Name Form
-Number N-1A
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-Section 4
-Subsection b
-Paragraph 2
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-Clause 1
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- DefinitionIf the Fund has annual returns for at least one calendar year, provide a bar chart showing the Fund's annual total returns for each of the last 10 calendar years (or for the life of the Fund if less than 10 years), but only for periods subsequent to the effective date of the Fund's registration statement. Present the corresponding numerical return adjacent to each bar. If the Fund's fiscal year is other than a calendar year, include the year-to-date return information as of the end of the most recent quarter in a footnote to the bar chart. Following the bar chart, disclose the Fund's highest and lowest return for a quarter during the 10 years or other period of the bar chart. Reference 1: http://www.xbrl.org/2003/role/presentationRef
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- DefinitionManagement Fees include investment advisory fees (including any fees based on the Fund's performance), any other management fees payable to the investment adviser or its affiliates, and administrative fees payable to the investment adviser or its affiliates that are not included as "Other Expenses." Reference 1: http://www.xbrl.org/2003/role/presentationRef
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- DefinitionInvestment Objectives/Goals. Disclose the Fund's investment objectives or goals. A Fund also may identify its type or category (e.g., that it is a Money Market Fund or a balanced fund). Reference 1: http://www.xbrl.org/2003/role/presentationRef
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- DefinitionAnnual Fund Operating Expenses (ongoing expenses that you pay each year as a percentage of the value of your investment) Reference 1: http://www.xbrl.org/2003/role/presentationRef
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- Definition"Other Expenses" include all expenses not otherwise disclosed in the table that are deducted from the Fund's assets or charged to all shareholder accounts. The amount of expenses deducted from the Fund's assets are the amounts shown as expenses in the Fund's statement of operations (including increases resulting from complying with paragraph 2(g) of rule 6-07 of Regulation S-X [17 CFR 210.6-07]). "Other Expenses" do not include extraordinary expenses as determined under generally accepted accounting principles (see Accounting Principles Board Opinion No. 30). If extraordinary expenses were incurred that materially affected the Fund's "Other Expenses," disclose in a footnote to the table what "Other Expenses" would have been had the extraordinary expenses been included. Reference 1: http://www.xbrl.org/2003/role/presentationRef
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- DefinitionDisclose the portfolio turnover rate provided in response to Item 14(a) for the most recent fiscal year (or for such shorter period as the Fund has been in operation). Disclose the period for which the information is provided if less than a full fiscal year. A Fund that is a Money Market Fund may omit the portfolio turnover information required by this Item. Reference 1: http://www.xbrl.org/2003/role/presentationRef
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-Name Form
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-Number N-1A
-Chapter A
-Section 4
-Subsection b
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-Clause A
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-Name Form
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-Chapter A
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Franklin Short Duration ... (AMEX:FTSD)
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Franklin Short Duration ... (AMEX:FTSD)
過去 株価チャート
から 5 2023 まで 5 2024
