As with all mutual funds, there is no assurance that the Fund will achieve its investment
objective, and a shareholder is subject to the risk that his or her investment could
lose money. The principal risks affecting shareholders’ investments in the Fund
are set forth below. An investment in the Fund is not a bank deposit and is
not insured or guaranteed by the FDIC or any government agency.
Common Stock Risk — Since it purchases common stock, the Fund is
subject to the risk that stock prices will fall over short or extended periods of
time. Historically, the equity markets have moved in cycles, and the value of the
Fund’s common stock may fluctuate drastically from day-to-day. Individual companies
may report poor results or be negatively affected by industry and/or economic trends
and developments. The prices of securities issued by such companies may suffer a
decline in response. These factors contribute to price volatility, which is the
principal risk of investing in the Fund. In addition, common stock is generally
subordinated to preferred stocks, bonds and other debt instruments upon the liquidation
or bankruptcy of the issuing company.
Quantitative Investment Strategy Risk — The Fund seeks to track
a quantitative strategy index, meaning that the Fund invests in securities comprising
an index created by a proprietary model. The success of the Fund’s principal investment
strategies depends on the effectiveness of the model in screening securities for
inclusion in the Index. The factors used in the quantitative analysis and the weight
placed on these factors may not be predictive of a security’s value. As a result,
the Fund may have a lower return than if the Fund were managed using a fundamental
investment strategy or an index based strategy that did not incorporate quantitative
Risks of Index Investing — Unlike many investment companies, the
Fund is not “actively managed.” Therefore, the Fund would not sell an equity security
because the security’s issuer was in financial trouble unless that security is removed
from the Index.
Non-Correlation Risk — The Fund’s return may not match or achieve
a high degree of correlation with the return of the Index for a number of reasons.
For example, the Fund incurs a number of operating expenses not applicable to its
Index and also incurs costs in buying and selling securities, especially when rebalancing
the Fund’s securities holdings to reflect changes in the composition of the Index
or in a representative sampling of the Index. The Fund may not be fully invested
at times, either as a result of cash flows into the Fund or reserves of cash held
by the Fund to meet redemptions and pay expenses. To the extent the Fund uses a
sampling methodology, the Fund will not fully replicate the Index and may hold securities
not included in the Index. As a result, the Fund will be subject to the risk that
the Adviser’s investment management strategy, the implementation of which is subject
to a number of constraints, may not produce the intended results. If the Fund utilizes
a sampling approach, it may not track the return of the Index as well as it would
if the Fund purchased all of the securities in the Index.
Large Capitalization Company Risk — The large capitalization companies
in which the Fund invests may underperform other segments of the equity market or
the equity market as a whole.
Non-Diversified Risk — The Fund is non-diversified and, as a result,
may have greater exposure to volatility than other funds. Because a non-diversified
fund may invest a larger percentage of its assets in securities of a single issuer
than that of a diversified fund, the performance of that issuer can have a substantial
impact on the Fund’s share price. The Fund intends to maintain the required level
of diversification so as to qualify as a “regulated investment company” for purposes
of the Internal Revenue Code in order to avoid liability for federal income tax
to the extent that its earnings are distributed to shareholders. Compliance with
diversification requirements of the Internal Revenue Code could limit the investment
flexibility of the Fund.
Concentration Risk — The Fund’s assets will only be concentrated
in an industry or group of industries to the extent that the Index concentrates
in a particular industry or group of industries. By concentrating its assets in
a single industry or group of industries, the Fund is subject to the risk that economic,
political or other conditions that have a negative effect on that industry or group
of industries will negatively impact the Fund to a greater extent than if the Fund’s
assets were invested in a wider variety of industries. The amount of Fund assets
in a particular industry may not match the industry’s representation in the Index
during rebalancing or when the Fund is small.
Derivatives Risk — A derivative is a financial contract, the value
of which depends on, or is derived from, the value of a financial asset (such as
a stock, bond or currency), a physical asset (such as gold) or a market index (such
as the S&P 500 Index). The Fund’s use of futures contracts, options and swaps is
subject to market risk, leverage risk, correlation risk and liquidity risk. Market
risk is the risk that the market value of a security may move up and down, sometimes
rapidly and unpredictably. Liquidity risk is the risk that a security may be difficult
or impossible to sell at the time and price that the Fund would like. Leverage risk
is the risk that the use of leverage can amplify the effects of market volatility
on the Fund’s share price and may also cause the Fund to liquidate portfolio positions
when it would not be advantageous to do so in order to satisfy its obligations.
Correlation risk is the risk that changes in the value of the derivative may not
correlate perfectly with the underlying asset, rate or index. The Fund’s use of
swap agreements is also subject to credit risk and valuation risk. Valuation risk
is the risk that the derivative may be difficult to value and/or may be valued incorrectly.
Credit risk is the risk that the counterparty to a contract will default or otherwise
become unable to honor a financial obligation. Each of these risks could cause the
Fund to lose more than the principal amount invested in a derivative instrument.
REIT Risk — The Fund is subject to risks related to investment
in real estate investment trusts or “REITs,” including fluctuations in the value
of underlying properties, defaults by borrowers or tenants, lack of diversification,
heavy cash flow dependency, self-liquidation, and potential failure to qualify for
tax-free pass through of income and exemption from registration as an investment
company. By investing in REITs indirectly through the Fund, a shareholder will bear
expenses of the REITs in addition to expenses of the Fund.
U.S. Government Securities Risk — Some of the U.S. government securities
that the Fund may invest in are not backed by the full faith and credit of the United
States government, which means they are neither issued nor guaranteed by the U.S.
Treasury. Also, any government guarantees on securities the Fund owns do not extend
to shares of the Fund.
Repurchase Agreement Risk — The Fund's use of repurchase agreements
involves certain risks. One risk is the seller's ability to pay the agreed-upon
repurchase price on the repurchase date. If the seller defaults, the Fund may incur
costs in disposing of the collateral, which would reduce the amount realized thereon.
If the seller seeks relief under the bankruptcy laws, the disposition of the collateral
may be delayed or limited. Finally, it is possible that the Fund may not be able
to substantiate its interest in the underlying security and may be deemed an unsecured
creditor of the other party to the agreement.
Other Investment Company Risk — When the Fund invests in another
investment company, including an ETF, in addition to directly bearing the expenses
associated with its own operations, it will bear a pro rata portion of the other
investment company's expenses. While the risks of owning shares of an ETF generally
reflect the risks of owning the underlying securities the ETF is designed to track,
lack of liquidity in an ETF can result in its value being more volatile than the
underlying portfolio securities.