UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number: 811-23078
Virtus ETF Trust II
(Exact name of registrant as specified in charter)
1540 Broadway, 16th Floor
New York, NY 10036
(Address of principal executive offices) (Zip code)
Virtus ETF Trust II
c/o Corporation Service Company
2711 Centerville Road, Suite 400
Wilmington, DE 19808
(Name and address of agent for service)
Registrant’s telephone number, including area code: (212) 593-4383
Date of fiscal year end: July 31
Date of reporting period: January 31, 2017
Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.
Item 1. Reports to Stockholders.
The Report to Shareholders is attached herewith.
Virtus ETF Trust II VIRTUS NEWFLEET DYNAMIC CREDIT ETF | |
| SEMI-ANNUAL REPORT January 31, 2017 |
Table of Contents |
January 31, 2017 |
2 |
Shareholder Letter (unaudited) |
January 31, 2017 |
Dear Shareholder:
On behalf of Virtus ETF Advisers LLC (the “Adviser”), I am pleased to present the shareholder report for the Virtus ETF Trust II (the “Trust”) for the semiannual fiscal period ended January 31, 2017.
The Adviser is part of Virtus Investment Partners, a distinctive partnership of boutique investment managers singularly committed to the long-term success of individual and institutional investors.
The report provides financial statements and portfolio information for the series in the Trust. As of January 31, 2017, the Trust comprises the Virtus Newfleet Dynamic Credit ETF (BLHY), an actively-managed fund that allocates between high yield corporate bonds and floating rate bank loans. The fund is subadvised by Newfleet Asset Management, LLC, a subsidiary of Virtus Investment Partners with longstanding experience managing multi-sector fixed income portfolios.
Thank you for your investment. If you have questions, please contact your financial adviser, or call 1-888-383-0553. For more information about the fund and the other ETFs we offer, we invite you to visit our website, www.virtusetfs.com.
Sincerely,
William Smalley
President
Virtus ETF Trust II
This material must be accompanies or preceded by the prospectus.
3 |
Shareholder Expense Examples (unaudited) |
As a shareholder of the Fund, you incur ongoing costs, including advisory fees and other fund expenses, if any. The following example is intended to help you understand your ongoing costs (in dollars and cents) of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds. The actual example is based on an investment of $1,000 invested at the beginning of the period and held throughout the entire period from December 5, 2016 (commencement of operations) to January 31, 2017. The hypothetical example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period (August 1, 2016 to January 31, 2017).
Actual expenses
The first line under the Fund in the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line for your Fund under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical example for comparison purposes
The second line under the Fund in the table provides information about hypothetical account values and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as brokerage commissions paid on purchases and sales of Fund shares. Therefore, the second line under the Fund in the table is useful in comparing ongoing Fund costs only and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Beginning Account Value | Ending Account Value (1/31/17) | Annualized Expense Ratios for the Period(2) | Expenses Paid During Period | |||||||||||||
Virtus Newfleet Dynamic Credit ETF | ||||||||||||||||
Actual | $ | 1,000 | $ | 1,003.00 | 0.68 | % | $ | 1.06 | (3) | |||||||
Hypothetical(1) | $ | 1,000 | $ | 1,021.78 | 0.68 | % | $ | 3.47 | (4) |
(1) | Assuming 5% return before expenses. |
(2) | Annualized expense ratios reflect expenses net of waived fees or reimbursed expenses, if applicable. |
(3) | Actual expenses are calculated using the Fund’s annualized expense ratio, multiplied by the average account value for the period, multiplied by 57/365 (to reflect the period December 5, 2016 to January 31, 2017). |
(4) | Hypothetical expenses are calculated using the Fund’s annualized expense ratio, multiplied by the average account value for the period, multiplied by 184/365 (to reflect the six-month period). |
4 |
Schedule of Investments — Virtus Newfleet Dynamic Credit ETF |
January 31, 2017 (unaudited) |
Investments | Principal | Value | ||||||
U.S. TREASURY NOTES — 59.0% | ||||||||
U.S. Treasury Bill, 0.00%, 03/23/17 | $ | 13,000,000 | $ | 12,991,836 | ||||
U.S. Treasury Bill, 0.00%, 04/27/17 | 20,000,000 | 19,976,620 | ||||||
U.S. Treasury Bill, 0.00%, 06/22/17 | 30,000,000 | 29,938,620 | ||||||
U.S. Treasury Bill, 0.00%, 07/27/17 | 20,000,000 | 19,939,620 | ||||||
Total U.S. Treasury Notes | ||||||||
(Cost $82,836,040) | 82,846,696 | |||||||
TERM LOANS — 17.6% | ||||||||
Consumer Discretionary — 4.8% | ||||||||
Advantage Sales & Marketing Inc., 7.50%, | ||||||||
07/25/22(1) | 210,000 | 204,881 | ||||||
BJ’s Wholesale Club, Inc., 4.75%, 01/26/24(1) | 90,000 | 89,944 | ||||||
Caesars Entertainment Operating Company, Inc. | ||||||||
(fka Harrah’s Operating Company, Inc.), | ||||||||
1.50%, 03/01/17(1) | 125,000 | 139,156 | ||||||
Federal-Mogul Corporation, 4.75%, | ||||||||
04/15/21(1) | 773,721 | 769,452 | ||||||
Gates Global LLC, 4.25%, 07/05/21(1) | 710,000 | 708,914 | ||||||
Laureate Education, Inc., 8.51%, 03/17/21(1) | 573,718 | 580,634 | ||||||
Penn National Gaming, Inc., 3.25%, | ||||||||
01/12/24(1) | 145,000 | 146,389 | ||||||
PetSmart, Inc., 4.00%, 03/11/22(1) | 565,000 | 560,731 | ||||||
Sinclair Television Group, Inc., 3.03%, | ||||||||
12/20/23(1) | 200,000 | 200,708 | ||||||
Station Casinos LLC, 3.75%, 06/08/23(1) | 310,000 | 311,720 | ||||||
UFC Holdings, L.L.C., 4.00%, 08/18/23(1) | 1,095,000 | 1,103,213 | ||||||
Ziggo Secured Finance Partnership, 2.50%, | ||||||||
04/25/25(1) | 1,905,000 | 1,912,839 | ||||||
Total Consumer Discretionary | 6,728,581 | |||||||
Consumer Staples — 1.0% | ||||||||
JBS USA LUX S.A., 3.28%, 10/30/22(1) | 765,000 | 768,504 | ||||||
Pinnacle Foods Finance LLC, 2.00%, | ||||||||
01/27/24(1) | 255,000 | 255,798 | ||||||
Prestige Brands, Inc., 3.52%, 01/19/24(1) | 180,000 | 182,044 | ||||||
TKC Holdings, Inc., 4.75%, 01/13/23(1) | 160,000 | 159,200 | ||||||
Total Consumer Staples | 1,365,546 | |||||||
Energy — 0.7% | ||||||||
Fieldwood Energy LLC, 8.00%, 08/31/20(1) | 295,000 | 286,150 | ||||||
Seadrill Operating LP (Seadrill Partners | ||||||||
Finco LLC), 4.00%, 02/21/21(1) | 925,000 | 686,618 | ||||||
Total Energy | 972,768 | |||||||
Financials — 1.6% | ||||||||
Asurion, LLC (fka Asurion Corporation), | ||||||||
8.50%, 03/03/21(1) | 295,000 | 299,763 | ||||||
Asurion, LLC (fka Asurion Corporation), | ||||||||
4.25%, 08/04/22(1) | 375,000 | 379,611 | ||||||
Asurion, LLC (fka Asurion Corporation), | ||||||||
4.75%, 11/03/23(1) | 185,000 | 187,216 | ||||||
Avolon TLB Borrower 1 (Luxembourg) S.a r.l., | ||||||||
0.00%, 01/19/22(1)(3) | 30,000 | 30,415 | ||||||
Lightstone Holdco LLC, 6.50%, 12/15/23(1) | 10,435 | 10,582 | ||||||
Lightstone Holdco LLC, 6.50%, 12/15/23(1) | 109,565 | 111,106 | ||||||
VF Holding Corp., 4.25%, 06/30/23(1) | 498,750 | 502,937 | ||||||
Walter Investment Management, 4.75%, | ||||||||
12/18/20(1) | 735,000 | 708,242 | ||||||
Total Financials | 2,229,872 |
Investments | Principal | Value | ||||||
TERM LOANS (continued) | ||||||||
Health Care — 2.0% | ||||||||
CHS / Community Health Systems, Inc., | ||||||||
4.00%, 01/27/21(1) | $ | 248,000 | $ | 235,212 | ||||
Grifols Worldwide Operations USA, Inc., | ||||||||
2.25%, 01/19/25(1) | 185,000 | 186,250 | ||||||
Ortho-Clinical Diagnostics, Inc., 3.75%, | ||||||||
06/30/21(1) | 508,696 | 506,152 | ||||||
Team Health, Inc., 3.75%, 12/15/23(1) | 670,968 | 670,129 | ||||||
U.S. Renal Care, Inc., 4.25%, 12/30/22(1) | 523,678 | 495,268 | ||||||
Valeant Pharmaceuticals International, Inc., | ||||||||
0.00%, 08/05/20(1)(3) | 750,000 | 752,917 | ||||||
Total Health Care | 2,845,928 | |||||||
Industrials — 2.2% | ||||||||
Accudyne Industries Borrower S.C.A. / | ||||||||
Accudyne Industries, LLC (fka Silver II | ||||||||
US Holdings, LLC), 4.00%, 12/13/19(1) | 430,000 | 408,835 | ||||||
Apex Tool Group, LLC, 4.50%, 01/31/20(1) | 420,000 | 413,700 | ||||||
Brand Energy & Infrastructure Services, Inc. | ||||||||
(fka FR Brand Acquisition Corp), 4.75%, | ||||||||
11/26/20 | 485,000 | 484,879 | ||||||
Columbus McKinnon Corporation, 4.00%, | ||||||||
01/20/24(1) | 115,000 | 116,006 | ||||||
Gardner Denver, Inc., 4.25%, 07/30/20(1) | 764,446 | 757,214 | ||||||
Spin Holdco Inc., 4.25%, 11/14/19(1) | 249,364 | 248,808 | ||||||
Transdigm Inc., 3.75%, 06/09/23(1) | 700,000 | 699,444 | ||||||
Total Industrials | 3,128,886 | |||||||
Information Technology — 1.8% | ||||||||
Avaya Inc., 6.25%, 05/29/20(1) | 168,960 | 140,565 | ||||||
BMC Software Finance Inc., 5.00%, | ||||||||
09/10/20(1) | 498,667 | 498,124 | ||||||
Infor (US), Inc. (fka Lawson Software Inc.), | ||||||||
3.75%, 06/03/20(1) | 975,000 | 976,672 | ||||||
Radiate Holdco, LLC (aka RCN Grande), | ||||||||
3.75%, 12/09/23(1) | 266,667 | 269,209 | ||||||
Veritas US, Inc., 6.63%, 01/27/23(1) | 739,146 | 703,345 | ||||||
Total Information Technology | 2,587,915 | |||||||
Materials — 2.0% | ||||||||
Atotech B.V., 4.00%, 01/25/24(1) | 175,000 | 176,531 | ||||||
Berry Plastics Corporation, 3.29%, | ||||||||
01/12/24(1) | 385,000 | 388,336 | ||||||
CPI Acquisition, Inc., 5.83%, 08/17/22(1) | 590,638 | 538,709 | ||||||
Kraton Polymers LLC, 5.00%, 01/06/22(1) | 500,000 | 506,720 | ||||||
Univar USA Inc., 3.52%, 07/01/22 | ||||||||
(Argentina)(1) | 1,150,000 | 1,149,730 | ||||||
Total Materials | 2,760,026 | |||||||
Telecommunication Services — 1.2% | ||||||||
SBA Senior Finance II LLC, 3.25%, | ||||||||
03/24/21(1) | 765,000 | 768,615 | ||||||
Sprint Communications, Inc., 3.25%, | ||||||||
02/29/24(1) | 540,000 | 540,000 | ||||||
Virgin Media Bristol LLC, 3.52%, | ||||||||
01/31/25(1) | 415,000 | 418,048 | ||||||
Total Telecommunication Services | 1,726,663 |
The accompanying notes are an integral part of these financial statements.
5 |
Schedule of Investments — Virtus Newfleet Dynamic Credit ETF (continued) |
January 31, 2017 (unaudited) |
Investments | Principal | Value | ||||||
TERM LOANS (continued) | ||||||||
Utilities — 0.3% | ||||||||
Dynegy Inc., 4.25%, 06/27/23(1) | $ | 220,000 | $ | 221,925 | ||||
Vistra Operations Co. LLC (fka Tex | ||||||||
Operations Co. LLC), 4.02%, 12/14/23(1) | 132,000 | 133,595 | ||||||
Total Utilities | 355,520 | |||||||
Total Term Loans | ||||||||
(Cost $24,619,260) | 24,701,705 | |||||||
CORPORATE BONDS — 15.3% | ||||||||
Consumer Discretionary — 3.2% | ||||||||
Cablevision Systems Corp., 5.88%, 09/15/22 | 400,000 | 403,000 | ||||||
Caesars Growth Properties Holdings LLC / | ||||||||
Caesars Growth Properties Finance, Inc., | ||||||||
9.38%, 05/01/22 | 455,000 | 492,537 | ||||||
Cooper-Standard Automotive, Inc., 5.63%, | ||||||||
11/15/26(2) | 440,000 | 443,573 | ||||||
CSC Holdings LLC, 6.75%, 11/15/21 | 285,000 | 310,222 | ||||||
DISH DBS Corp., 5.00%, 03/15/23 | 420,000 | 414,704 | ||||||
DISH DBS Corp., 7.75%, 07/01/26 | 310,000 | 347,104 | ||||||
Ferrellgas LP / Ferrellgas Finance Corp., | ||||||||
8.63%, 06/15/20(2) | 105,000 | 104,475 | ||||||
iHeartCommunications, Inc., 9.00%, | ||||||||
12/15/19 | 545,000 | 458,141 | ||||||
Landry’s, Inc., 6.75%, 10/15/24(2) | 60,000 | 61,950 | ||||||
Pinnacle Entertainment, Inc., 5.63%, | ||||||||
05/01/24(2) | 250,000 | 254,233 | ||||||
Scientific Games International, Inc., 6.63%, | ||||||||
05/15/21 | 140,000 | 129,500 | ||||||
Tenneco, Inc., 5.00%, 07/15/26 | 280,000 | 280,336 | ||||||
Univision Communications, Inc., 5.13%, | ||||||||
05/15/23(2) | 270,000 | 269,155 | ||||||
William Lyon Homes, Inc., 5.88%, | ||||||||
01/31/25(2) | 480,000 | 478,200 | ||||||
Total Consumer Discretionary | 4,447,130 | |||||||
Consumer Staples — 0.2% | ||||||||
Advancepierre Foods Holdings, Inc., 5.50%, | ||||||||
12/15/24(2) | 225,000 | 230,063 | ||||||
Energy — 1.7% | ||||||||
American Midstream Partners LP / American | ||||||||
Midstream Finance Corp., 8.50%, | ||||||||
12/15/21(2) | 195,000 | 197,437 | ||||||
Cheniere Corpus Christi Holdings LLC, | ||||||||
5.88%, 03/31/25(2) | 390,000 | 413,887 | ||||||
Diamondback Energy, Inc., 5.38%, | ||||||||
05/31/25(2) | 210,000 | 217,350 | ||||||
Ep Energy LLC / Everest Acquisition | ||||||||
Finance, Inc., 9.38%, 05/01/20 | 500,000 | 511,250 | ||||||
Matador Resources Co., 6.88%, 04/15/23(2) | 255,000 | 270,300 | ||||||
Oasis Petroleum, Inc., 6.88%, 01/15/23 | 325,000 | 334,344 | ||||||
QEP Resources, Inc., 5.25%, 05/01/23 | 133,000 | 132,668 | ||||||
Rsp Permian, Inc., 5.25%, 01/15/25(2) | 270,000 | 276,750 | ||||||
Total Energy | 2,353,986 |
Investments | Principal | Value | ||||||
CORPORATE BONDS (continued) | ||||||||
Financials — 0.9% | ||||||||
General Motors Financial Co., Inc., 3.45%, | ||||||||
01/14/22 | $ | 685,000 | $ | 685,074 | ||||
Hexion 2 US Finance Corp., 13.75%, | ||||||||
02/01/22(2) | 160,000 | 162,000 | ||||||
Hexion 2 US Finance Corp., 10.38%, | ||||||||
02/01/22(2) | 215,000 | 220,375 | ||||||
Icahn Enterprises LP / Icahn Enterprises | ||||||||
Finance Corp., 6.25%, 02/01/22(2) | 175,000 | 176,750 | ||||||
Starwood Property Trust, Inc., 5.00%, | ||||||||
12/15/21(2) | 90,000 | 91,687 | ||||||
Total Financials | 1,335,886 | |||||||
Health Care — 4.2% | ||||||||
Alere, Inc., 6.50%, 06/15/20 | 280,000 | 280,812 | ||||||
CHS / Community Health Systems, Inc., | ||||||||
5.13%, 08/15/18 | 150,000 | 150,484 | ||||||
CHS / Community Health Systems, Inc., | ||||||||
5.13%, 08/01/21 | 270,000 | 255,150 | ||||||
CHS / Community Health Systems, Inc., | ||||||||
6.88%, 02/01/22 | 180,000 | 132,300 | ||||||
Davita, Inc., 5.13%, 07/15/24 | 280,000 | 277,900 | ||||||
Envision Healthcare Corp., 6.25%, | ||||||||
12/01/24(2) | 130,000 | 137,150 | ||||||
HCA, Inc., 5.38%, 02/01/25 | 605,000 | 617,856 | ||||||
HCA, Inc., 5.25%, 06/15/26 | 405,000 | 423,225 | ||||||
Iasis Healthcare LLC / Iasis Capital Corp., | ||||||||
8.38%, 05/15/19 | 230,000 | 221,375 | ||||||
MPH Acquisition Holdings LLC, 7.13%, | ||||||||
06/01/24(2) | 395,000 | 420,181 | ||||||
Sterigenics-Nordion Holdings LLC, 6.50%, | ||||||||
05/15/23(2) | 275,000 | 279,813 | ||||||
Surgery Center Holdings, Inc., 8.88%, | ||||||||
04/15/21(2) | 255,000 | 276,675 | ||||||
Tenet Healthcare Corp., 6.00%, 10/01/20 | 460,000 | 486,450 | ||||||
Tenet Healthcare Corp., 8.13%, 04/01/22 | 540,000 | 548,100 | ||||||
Tennessee Merger Sub, Inc., 6.38%, | ||||||||
02/01/25(2) | 700,000 | 686,000 | ||||||
Valeant Pharmaceuticals International, Inc., | ||||||||
6.75%, 08/15/18(2) | 700,000 | 693,875 | ||||||
Total Health Care | 5,887,346 | |||||||
Industrials — 1.0% | ||||||||
Navistar International Corp., 8.25%, | ||||||||
11/01/21 | 270,000 | 274,050 | ||||||
NCI Building Systems, Inc., 8.25%, | ||||||||
01/15/23(2) | 385,000 | 421,575 | ||||||
Transdigm, Inc., 6.50%, 05/15/25 | 700,000 | 706,125 | ||||||
Total Industrials | 1,401,750 | |||||||
Information Technology — 2.3% | ||||||||
Blackboard, Inc., 9.75%, 10/15/21(2) | 135,000 | 138,712 | ||||||
BMC Software Finance, Inc., 8.13%, | ||||||||
07/15/21(2) | 145,000 | 140,650 | ||||||
Broadcom Corp. / Broadcom Cayman | ||||||||
Finance Ltd., 3.00%, 01/15/22(2) | 185,000 | 184,379 | ||||||
Broadcom Corp. / Broadcom Cayman | ||||||||
Finance Ltd., 3.63%, 01/15/24(2) | 340,000 | 339,684 |
The accompanying notes are an integral part of these financial statements.
6 |
Schedule of Investments — Virtus Newfleet Dynamic Credit ETF (continued) |
January 31, 2017 (unaudited) |
Investments | Principal | Value | ||||||
CORPORATE BONDS (continued) | ||||||||
Information Technology (continued) | ||||||||
Cdw LLC / Cdw Finance Corp., 5.00%, | ||||||||
09/01/23 | $ | 340,000 | $ | 347,650 | ||||
Diamond 1 Finance Corp. / Diamond 2 | ||||||||
Finance Corp., 5.45%, 06/15/23(2) | 235,000 | 252,713 | ||||||
Diamond 1 Finance Corp. / Diamond 2 | ||||||||
Finance Corp., 5.45%, 06/15/23 | 130,000 | 139,799 | ||||||
Diamond 1 Finance Corp. / Diamond 2 | ||||||||
Finance Corp., 6.02%, 06/15/26(2) | 100,000 | 108,152 | ||||||
First Data Corp., 7.00%, 12/01/23(2) | 500,000 | 531,250 | ||||||
Inception Merger Sub, Inc. / Rackspace | ||||||||
Hosting, Inc., 8.63%, 11/15/24(2) | 405,000 | 421,200 | ||||||
Radiate Holdco LLC / Radiate Finance, | ||||||||
Inc., 6.63%, 02/15/25(2) | 650,000 | 650,000 | ||||||
Total Information Technology | 3,254,189 | |||||||
Materials — 0.2% | ||||||||
Flex Acquisition Co., Inc., 6.88%, | ||||||||
01/15/25(2) | 185,000 | 188,422 | ||||||
Scotts Miracle-GRO Co. (The), 5.25%, | ||||||||
12/15/26(2) | 30,000 | 30,281 | ||||||
WR Grace & Co.-Conn, 5.13%, 10/01/21(2) | 50,000 | 52,563 | ||||||
Total Materials | 271,266 | |||||||
Real Estate — 0.2% | ||||||||
Communications Sales & Leasing, Inc. / | ||||||||
CSL Capital LLC, 7.13%, 12/15/24(2) | 230,000 | 234,600 | ||||||
Telecommunication Services — 1.3% | ||||||||
Frontier Communications Corp., 10.50%, | ||||||||
09/15/22 | 750,000 | 787,031 | ||||||
Sprint Corp., 7.88%, 09/15/23 | 1,000,000 | 1,095,600 | ||||||
Zayo Group LLC / Zayo Capital, Inc., | ||||||||
5.75%, 01/15/27(2) | 25,000 | 25,625 | ||||||
Total Telecommunication Services | 1,908,256 | |||||||
Utilities — 0.1% | ||||||||
Amerigas Partners LP / Amerigas Finance | ||||||||
Corp., 5.50%, 05/20/25 | 140,000 | 144,025 | ||||||
Total Corporate Bonds | ||||||||
(Cost $21,374,144) | 21,468,497 |
Investments | Principal | Value | ||||||
FOREIGN BONDS — 5.7% | ||||||||
Consumer Discretionary — 1.3% | ||||||||
Altice Luxembourg SA, 7.75%, 05/15/22 | ||||||||
(Luxembourg)(2) | $ | 325,000 | $ | 345,719 | ||||
Intelsat Jackson Holdings SA, 8.00%, 02/15/24 | ||||||||
(Luxembourg)(2) | 200,000 | 208,000 | ||||||
International Game Technology PLC, 6.25%, | ||||||||
02/15/22 (United Kingdom)(2) | 280,000 | 299,773 | ||||||
Upcb Finance IV Ltd., 5.38%, 01/15/25 | ||||||||
(Cayman Islands)(2) | 200,000 | 204,000 | ||||||
Vtr Finance BV, 6.88%, 01/15/24 (Chile)(2) | 400,000 | 421,000 | ||||||
Ziggo Secured Finance BV, 5.50%, 01/15/27 | ||||||||
(Netherlands)(2) | 415,000 | 413,444 | ||||||
Total Consumer Discretionary | 1,891,936 | |||||||
Energy — 0.8% | ||||||||
MEG Energy Corp., 6.50%, 01/15/25 | ||||||||
(Canada)(2) | 350,000 | 354,375 | ||||||
Noble Holding International Ltd., 7.75%, | ||||||||
01/15/24 (United Kingdom) | 350,000 | 348,688 | ||||||
Petrobras Global Finance BV, 8.38%, | ||||||||
05/23/21 (Brazil) | 250,000 | 278,700 | ||||||
Petrobras Global Finance BV, 6.13%, | ||||||||
01/17/22 (Brazil) | 9,000 | 9,324 | ||||||
Petrobras Global Finance BV, 8.75%, | ||||||||
05/23/26 (Brazil) | 125,000 | 141,250 | ||||||
Petrobras Global Finance BV, 7.38%, | ||||||||
01/17/27 (Brazil) | 60,000 | 62,592 | ||||||
Total Energy | 1,194,929 | |||||||
Government — 1.0% | ||||||||
Argentine Republic Government International | ||||||||
Bond, 5.63%, 01/26/22 (Argentina)(2) | 690,000 | 692,588 | ||||||
Argentine Republic Government International | ||||||||
Bond, 6.88%, 01/26/27 (Argentina)(2) | 705,000 | 698,126 | ||||||
Total Government | 1,390,714 | |||||||
Industrials — 1.2% | ||||||||
Bombardier, Inc., 4.75%, 04/15/19 | ||||||||
(Canada)(2) | 225,000 | 230,485 | ||||||
Bombardier, Inc., 8.75%, 12/01/21 | ||||||||
(Canada)(2) | 280,000 | 303,450 | ||||||
Cemex Finance LLC, 6.00%, 04/01/24 | ||||||||
(Mexico)(2) | 690,000 | 711,355 | ||||||
Embraer Netherlands Finance BV, 5.40%, | ||||||||
02/01/27 (Brazil) | 120,000 | 120,690 | ||||||
Park Aerospace Holdings Ltd., 5.25%, | ||||||||
08/15/22 (Ireland)(2) | 50,000 | 51,313 | ||||||
Park Aerospace Holdings Ltd., 5.50%, | ||||||||
02/15/24 (Ireland)(2) | 240,000 | 246,900 | ||||||
Total Industrials | 1,664,193 |
The accompanying notes are an integral part of these financial statements.
7 |
Schedule of Investments — Virtus Newfleet Dynamic Credit ETF (continued) |
January 31, 2017 (unaudited) |
Investments | Principal | Value | ||||||
FOREIGN BONDS (continued) | ||||||||
Materials — 0.8% | ||||||||
Alpha 3 BV / Alpha US Bidco, Inc., 6.25%, | ||||||||
02/01/25 (United Kingdom)(2) | $ | 105,000 | $ | 105,262 | ||||
Mercer International, Inc., 6.50%, 02/01/24 | ||||||||
(Canada)(2) | 50,000 | 50,000 | ||||||
Rusal Capital Dac, 5.13%, 02/02/22 | ||||||||
(Russia)(2) | 420,000 | 417,367 | ||||||
Vedanta Resources PLC, 6.38%, 07/30/22 | ||||||||
(United Kingdom)(2) | 495,000 | 496,980 | ||||||
Total Materials | 1,069,609 | |||||||
Telecommunication Services — 0.6% | ||||||||
Altice Financing SA, 6.63%, 02/15/23 | ||||||||
(Luxembourg)(2) | 600,000 | 628,125 | ||||||
Intelsat Jackson Holdings SA, 7.25%, | ||||||||
04/01/19 (Luxembourg) | 245,000 | 211,772 | ||||||
Total Telecommunication Services | 839,897 | |||||||
Total Foreign Bonds | ||||||||
(Cost $8,012,401) | 8,051,278 | |||||||
Shares | ||||||||
MONEY MARKET FUND — 19.4% | ||||||||
JP Morgan U.S. Government Money Market | ||||||||
Institutional Shares, 0.43%(4) | ||||||||
(Cost $27,229,745) | 27,229,745 | $ | 27,229,745 | |||||
TOTAL INVESTMENTS — 117.0% | ||||||||
(Cost $164,071,590) | 164,297,921 | |||||||
Liabilities in Excess of | ||||||||
Other Assets — (17.0)% | (23,812,686 | ) | ||||||
Net Assets — 100.0% | $ | 140,485,235 |
(1) | Variable rate instrument. The interest rate shown reflects the rate in effect at January 31, 2017. |
(2) | Security was purchased pursuant to Rule 144A under the Securities Act of 1933 and may not be resold subject to that rule except to qualified institutional buyers. Unless otherwise noted, 144A securities are deemed to be liquid. At January 31, 2017, the aggregate value of these securities was $16,959,947, or 12.07% of net assets. |
(3) | The loan will settle after January 31, 2017 at which the interest will be determined. |
(4) | The rate shown reflects the seven day yield as of January 31, 2017. |
Portfolio Composition |
January 31, 2017 (unaudited) |
Asset Allocation as of 01/31/2017 (based on net assets)
Government | 60.0 | % | ||
Money Market Fund | 19.4 | |||
Consumer Discretionary | 9.3 | |||
Health Care | 6.2 | |||
Industrials | 4.4 | |||
Information Technology | 4.1 | |||
Energy | 3.2 | |||
Telecommunication Services | 3.1 | |||
Materials | 3.0 | |||
Financials | 2.5 | |||
Consumer Staples | 1.2 | |||
Utilities | 0.4 | |||
Real Estate | 0.2 | |||
Liabilities in Excess of Other Assets | (17.0 | ) | ||
100.0 | % |
The accompanying notes are an integral part of these financial statements.
8 |
Statement of Assets and Liabilities |
January 31, 2017 (unaudited) |
Virtus Newfleet Dynamic Credit ETF | ||||
Assets: | ||||
Investments, at cost | $ | 164,071,590 | ||
Investments, at value | 164,297,921 | |||
Cash | 640,208 | |||
Receivables: | ||||
Investment securities sold | 4,556,021 | |||
Interest receivable | 398,166 | |||
Total Assets | 169,892,316 | |||
Liabilities: | ||||
Payables: | ||||
Investment securities purchased | 29,326,580 | |||
Advisory fees | 52,554 | |||
Accounting and Administration fees | 7,499 | |||
Insurance fees | 937 | |||
Transfer Agent fees | 3,475 | |||
Custody fees | 1,601 | |||
Professional fees | 7,212 | |||
Pricing fees | 937 | |||
Report to Shareholder fees | 1,484 | |||
Trustee fees | 1,249 | |||
Distribution fees | 1,601 | |||
Exchange listing fees | 1,952 | |||
Total Liabilities | 29,407,081 | |||
Net Assets | $ | 140,485,235 | ||
Net Assets Consist of: | ||||
Paid-in capital | $ | 140,214,336 | ||
Undistributed net investment income | 39,098 | |||
Undistributed net realized gain on investments | 5,470 | |||
Net unrealized appreciation on investments | 226,331 | |||
Net Assets | $ | 140,485,235 | ||
Shares outstanding (unlimited number of shares of beneficial interest authorized, no par value) | 5,604,000 | |||
Net asset value per share | $ | 25.07 |
The accompanying notes are an integral part of these financial statements.
9 |
Statement of Operations |
For the Period Ended January 31, 2017(1) (unaudited) |
Virtus Newfleet Dynamic Credit ETF | ||||
Investment Income: | ||||
Interest Income | $ | 181,654 | ||
Expenses: | ||||
Advisory fees | 88,059 | |||
Accounting and administration fees | 8,005 | |||
Professional fees | 7,212 | |||
Transfer agent fees | 3,475 | |||
Exchange listing fees | 1,952 | |||
Custody fees | 1,601 | |||
Distribution fees | 1,601 | |||
Report to shareholders fees | 1,484 | |||
Trustee fees | 1,249 | |||
Insurance fees | 937 | |||
Pricing fees | 937 | |||
Total Expenses | 116,512 | |||
Less expense waivers/reimbursements | (7,640 | ) | ||
Net Expenses | 108,872 | |||
Net Investment Income | 72,782 | |||
Net Realized Gain on: | ||||
Investments | 5,470 | |||
Total Net Realized Gain | 5,470 | |||
Change in Net Unrealized Appreciation on: | ||||
Investments | 226,331 | |||
Total Change in Net Unrealized Appreciation | 226,331 | |||
Net Realized and Change in Unrealized Gain | 231,801 | |||
Net Increase in Net Assets Resulting from Operations | $ | 304,583 |
(1) | From December 5, 2016 (commencement of operations) through January 31, 2017. |
The accompanying notes are an integral part of these financial statements.
10 |
Statement of Changes in Net Assets |
Virtus Newfleet Dynamic Credit ETF | ||||
For the Period December 5, 2016(1) Through January 31, 2017 (Unaudited) | ||||
Increase in Net Assets Resulting from Operations: | ||||
Net investment income | $ | 72,782 | ||
Net realized gain on investments | 5,470 | |||
Net change in unrealized appreciation on investments | 226,331 | |||
Net increase in net assets resulting from operations | 304,583 | |||
Distributions to Shareholders from: | ||||
Net investment income | (33,684 | ) | ||
Total distributions | (33,684 | ) | ||
Shareholder Transactions: | ||||
Proceeds from shares sold | 140,114,336 | |||
Increase in net assets | 140,385,235 | |||
Net Assets: | ||||
Beginning of period | 100,000 | |||
End of period | $ | 140,485,235 | ||
Undistributed net investment income | $ | 39,098 | ||
Changes in Shares Outstanding: | ||||
Shares outstanding, beginning of period | 4,000 | |||
Shares sold | 5,600,000 | |||
Shares outstanding, end of period | 5,604,000 |
(1) | Commencement of operations. |
The accompanying notes are an integral part of these financial statements.
11 |
Financial Highlights |
Virtus Newfleet Dynamic Credit ETF | ||||
For the Period December 5, 2016(1) Through January 31, 2017 (Unaudited) | ||||
Per Share Data for a Share Outstanding Throughout the Period: | ||||
Net asset value, beginning of period | $ | 25.00 | ||
Investment operations: | ||||
Net investment income(2) | 0.02 | |||
Net realized and unrealized gain on investments | 0.06 | |||
Total from investment operations | 0.08 | |||
Less Distributions from: | ||||
Net Investment Income | (0.01 | ) | ||
Total distributions | (0.01 | ) | ||
Net Asset Value, End of Period | $ | 25.07 | ||
Net Asset Value Total Return(3) | 0.30 | % | ||
Net assets, end of period (000’s omitted) | $ | 140,485 | ||
RATIOS/SUPPLEMENTAL DATA: | ||||
Ratios to Average Net Assets: | ||||
Expenses, net of expense waivers | 0.68 | %(4) | ||
Expenses, prior to expense waivers | 0.73 | %(4) | ||
Net investment income | 0.45 | %(4) | ||
Portfolio turnover rate(5) | 47 | %(6) |
(1) | Commencement of operations. |
(2) | Based on average shares outstanding. |
(3) | Net Asset Value Total Return is calculated assuming an initial investment made at the net asset value on the first day of the period, reinvestment of dividends and distributions at net asset value during the period, and redemption at net asset value on the last day of the period. Total return calculated for a period of less than one year is not annualized. |
(4) | Annualized. |
(5) | Portfolio turnover excludes the value of portfolio securities received or delivered as a result of in-kind creations or redemptions of the Fund’s capital shares. |
(6) | Not annualized. |
The accompanying notes are an integral part of these financial statements.
12 |
Notes to Financial Statements |
January 31, 2017 (unaudited) |
1. ORGANIZATION
Virtus ETF Trust II (the “Trust”) was organized as a Delaware statutory trust on July 14, 2015 and is registered with the Securities and Exchange Commission (the “SEC”) as an open-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”). Virtus Newfleet Dynamic Credit ETF (the “Fund”), a separate investment portfolio of the Trust, is presented herein. The Fund is classified as a diversified management investment company under the 1940 Act. The offering of Shares is registered under the Securities Act of 1933, as amended (the “Securities Act”).
The Fund commenced operations on December 5, 2016.
The Fund’s investment objective is to provide a high level of current income and, secondarily, capital appreciation, primarily through investments in fixed income investments.
The Fund has had no operations from its initial registration until the Fund’s commencement of operations other than matters relating to its organization and registration as an open-end management investment company under the 1940 Act, and the sale and issuance to Virtus ETF Advisers LLC (the “Adviser”), 4,000 shares of the Fund at an aggregate purchase of $100,000.
2. SIGNIFICANT ACCOUNTING POLICIES
The Fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (FASB) Accounting Standard Codification Topic 946 Financial Services — Investment Companies. Each Fund prepares its financial statements in accordance with generally accepted accounting principles (“GAAP”) in the United States of America and follows the significant accounting policies described below.
Use of Estimates
Management makes certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of increases and decreases in the net assets from operations during the reporting period. Actual results could differ from those estimates.
Indemnification
In the normal course of business, the Fund may enter into contracts that contain a variety of representations which provide general indemnifications for certain liabilities. The Fund’s maximum exposure under these arrangements is unknown. However, the Fund has not had prior claims or losses pursuant to these contracts and expects the risk of loss to be remote.
Security Valuation
Security holdings traded on a national securities exchange are valued based on their last sale price. Price information on listed securities is taken from the exchange where the security is primarily traded. Securities regularly traded in an over the counter market are valued at the latest quoted sale price in such market or in the case of the New York Stock Exchange (“NYSE”) or NASDAQ, at the NYSE or NASDAQ Official Closing Price. If market quotations are not readily available, or if it is determined that a quotation of a security does not represent fair value, then the security is valued at fair value as determined in good faith using procedures adopted by the Trust’s Board of Trustees (the “Board”).
Debt securities, including restricted securities, are valued based on evaluated quotations received from independent pricing services or from dealers who make markets in such securities. For most bond types, the pricing service utilizes matrix pricing that considers one or more of the following factors: yield or price of bonds of comparable quality, coupon, maturity, current cash flows, type, and current day trade information, as well as dealer-supplied prices.
Short-term securities with 60 days or less remaining to maturity are valued using the amortized cost method, which approximates current market value.
13 |
Notes to Financial Statements (continued) |
January 31, 2017 (unaudited) |
Fair Value Measurement
Accounting Standards Codification, Fair Value Measurements and Disclosures (“ASC 820”) defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and requires disclosure about fair value measurements. It also provides guidance on determining when there has been a significant decrease in the volume and level of activity for an asset or liability, when a transaction is not orderly, and how that information must be incorporated into fair value measurement. Under ASC 820, various inputs are used in determining the value of the Fund’s investments. These inputs are summarized in the following hierarchy:
• | Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access. |
• | Level 2 — Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar securities, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data. |
• | Level 3 — Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available; representing the Fund’s own assumptions about the assumptions a market participant would use in valuing the asset or liability, and would be based on the best information available. |
The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The following summarizes inputs used as of January 31, 2017 in valuing the Fund’s assets carried at fair value:
Assets | |
Level 1 | |
Money Market Fund | $ 27,229,745 |
Level 2 | |
U.S. Treasury Notes | 82,846,696 |
Term Loans | 24,701,705 |
Corporate Bonds | 21,468,497 |
Foreign Bonds | 8,051,278 |
Level 3 | — |
Totals | $164,297,921 |
For significant movements between levels within the fair value hierarchy, the Fund adopted a policy of recognizing transfers at the end of the period. There were no significant transfers between levels during the period ended January 31, 2017.
A reconciliation of assets in which Level 3 inputs are used in determining fair value is presented when there are significant Level 3 investments at the end of the period. There were no Level 3 securities as of January 31, 2017.
Security Transactions
Security transactions are accounted for on the trade date. Realized gains and losses on sales of investment securities are calculated using specific identification.
Investment Income and Expenses
Dividend income is recognized on the ex-dividend date. Expenses and interest income are recognized on the accrual basis. Amortization of premium and accretion of discount on debt securities are included in interest income.
The Fund pays all of its expenses not assumed by Newfleet Asset Management, LLC (the “Sub-adviser”). General Trust expenses that are allocated among and charged to the assets of the Fund and other series of the Trust are done so on a basis that the Board deems fair and equitable, which may be on a basis of relative net assets of the Fund and other series of the Trust or the nature of the services performed and relative applicability to the Fund and other series of the Trust.
Distributions to Shareholders
Distributions are recorded by the Fund on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations that may differ from GAAP in the United States of America.
14 |
Notes to Financial Statements (continued) |
January 31, 2017 (unaudited) |
Cash
Cash includes non-interest bearing non-restricted cash with one financial institution.
When-issued Purchases and Forward Commitments (Delayed Delivery)
The Fund may engage in when-issued or forward commitment transactions. Securities purchased on a when-issued or forward commitment basis are also known as delayed delivery transactions. Delayed delivery transactions involve a commitment by a fund to purchase or sell a security at a future date, ordinarily up to 90 days later. When-issued or forward commitments enable a fund to lock in what is believed to be an attractive price or yield on a particular security for a period of time, regardless of future changes in interest rates. The Fund records when-issued and delayed delivery securities on the trade date. The Fund maintains collateral for the securities purchased. Securities purchased on a when-issued or delayed delivery basis begin earning interest on the settlement date.
Loan Agreements
The Fund may invest in direct debt instruments which are interests in amounts owed by a corporate, governmental, or other borrower to lenders or lending syndicates. Loan agreements are generally non-investment grade and often involve borrowers that are highly leveraged. The Fund may invest in obligations of borrowers who are in bankruptcy proceedings. Loan agreements are typically senior in the corporate capital structure of the borrower. A loan is often administered by a bank or other financial institution (the “lender”) that acts as agent for all holders. The lender administers the terms of the loan, as specified in the loan agreement. The Fund’s investments in loans may be in the form of participations in loans or assignments of all or a portion of loans from third parties. When investing in loan participations, the Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the lender selling the loan participation and only upon receipt by the lender of payments from the borrower. The Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, the Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. When the Fund purchases assignments from lenders, it acquires direct rights against the borrower on the loan.
The Fund may invest in multiple series or tranches of a loan, which may have varying terms and carry different associated risks. Loan agreements may involve foreign borrowers, and investments may be denominated in foreign currencies. Direct indebtedness of emerging countries involves a risk that the government entities responsible for the repayment of the debt may be unable, or unwilling, to pay the principal and interest when due.
The loan agreements have floating rate loan interests which generally pay interest at rates that are periodically determined by reference to a base lending rate plus a premium. The base lending rates are generally LIBOR (London Interbank Offered Rate), the prime rate offered by one or more U.S. banks or the certificate of deposit rate. When a loan agreement is purchased, the Fund may pay an assignment fee. On an ongoing basis, the Fund may receive a commitment fee based on the undrawn portion of the underlying line of credit portion of a loan agreement. Prepayment penalty fees are received upon the prepayment of a loan agreement by a borrower. Prepayment penalty, facility, commitment, consent and amendment fees are recorded to income as earned or paid.
At January 31, 2017, all loan agreements held by the Fund are assignment loans.
3. INVESTMENT MANAGEMENT AGREEMENT, RELATED PARTIES AND OTHER AGREEMENTS
Investment Advisory Agreement
The Trust has entered into an Investment Advisory Agreement (the “Advisory Agreement”) with the Adviser, a majority owned subsidiary of Virtus Partners, Inc., a wholly owned subsidiary of Virtus Investment Partners, Inc. (Ticker: VRTS) (together with its affiliates, “Virtus”). Pursuant to the Advisory Agreement, the Adviser has overall supervisory responsibility for the general management and investment of the Fund’s securities portfolios. For its services on the Fund, the Adviser is entitled to receive a fee, payable monthly, at an annual rate of 0.55% of the Fund’s average daily net assets.
The Advisory Agreement may be terminated on behalf of the Fund with the approval of the Fund’s Board or by a vote of the majority of the Fund’s shareholders and on behalf of the Adviser, upon not less than 60 day’s written notice.
Expense Limitation Agreement
The Adviser has contractually agreed to reduce its fees and reimburse expenses in order to keep net expenses (excluding dividend and interest expenses, taxes, brokerage commissions, extraordinary expenses, acquired fund fees and expenses and payments, if any, under a Rule 12b-1 Distribution Plan) from exceeding a specified amount for the Fund average daily net assets. The expense limitation agreement will be terminated upon termination of the Advisory Agreement between the Adviser and the Fund. The expense cap in effect for the Fund during the period ended January 31, 2017 was 0.68%.
15 |
Notes to Financial Statements (continued) |
January 31, 2017 (unaudited) |
Pursuant to the Expense Limitation Agreement, the Adviser may recapture operating expenses waived or reimbursed under this arrangement for a period of three years following the date on which such waiver or reimbursement occurred; provided that such recapture may not cause the Fund’s total operating expenses to exceed 0.68% of the average daily net assets of the Fund.
For the period ended January 31, 2017, the Adviser waived fees and reimbursed expenses for the Fund as follows. The Adviser may recoup such waivers until the date indicated.
Expenses Waived/Reimbursed | Recoupment Balance | Recoupment Expiration | ||
$7,640 | $7,640 | 7/31/2020 |
Sub-Advisory Agreement
The Sub-Adviser provides investment advice and management services to the Fund. Pursuant to an investment sub-advisory agreement among the Trust, the Sub-Adviser and the Adviser, the Sub-Adviser fee is entitled to receive a fee, payable monthly, at an annual rate of 50% of the Adviser’s advisory fee. However, the Sub-Adviser has also contractually agreed in the Sub-Advisory Agreement that the Sub-Adviser will waive its advisory fee or reimburse the Adviser in an amount equal to 50% of the Adviser’s waivers and expenditures under the Expense Limitation Agreement. The Sub-Adviser is also entitled to receive 50% of the fees recaptured by the Adviser under the Expense Limitation Agreement. The Sub-Adviser is an indirect wholly-owned subsidiary of Virtus.
Principal Underwriter
Pursuant to the terms of a Distribution Agreement with the Trust, ETF Distributors LLC (the “Distributor”) serves as the Fund’s principal underwriter. The Distributor receives compensation for the statutory underwriting services it provides to the Fund. The Distributor will not distribute shares in less than Creation Units (as hereinafter defined), and does not maintain a secondary market in shares. The shares are expected to be traded in the secondary market in shares. The Distributor is a wholly-owned subsidiary of Virtus.
The Fund pays the Distributor directly for the services it receives from the Distributor, which amounted to $1,601 for the period ended January 31, 2017.
Distribution and Service (12b-1 Plan)
The Board of Trustees has adopted a distribution and service plan, where the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to finance activities primarily intended to result in the sale of Creation Units of the Fund or the provision of investor services. No 12b-1 fees are currently paid by the Fund and there are no current plans to impose these fees.
Operational Administrator
Virtus ETF Solutions LLC (the “Administrator”) serves as the Fund’s operational administrator. The Administrator supervises the overall administration of the Trust and the Fund including, among other responsibilities, the coordination and day-to-day oversight of the Fund’s operations, the service providers’ communications with the Fund and each other and assistance with Trust, Board and contractual matters related to the Fund. The Administrator also provides persons satisfactory to the Board to serve as officers of the Trust. The Administrator is a wholly-owned subsidiary of Virtus.
Accounting Services Administrator, Custodian and Transfer Agent
BNY Mellon provides administrative, accounting, tax and financial reporting for the maintenance and operations of the Trust as the Fund’s accounting services administrator. BNY Mellon also serves as the custodian for the Fund’s assets, and serves as transfer agent and dividend paying agent for the Fund.
4. CREATION AND REDEMPTION TRANSACTIONS
The Fund issues and redeems shares on a continuous basis at Net Asset Value (“NAV”) in groups of 50,000 shares called “Creation Units.” Creation Units of the Fund are issued and redeemed principally in-kind for securities held by the Fund.
Only “Authorized Participants” who have entered into contractual arrangements with the Distributor may purchase or redeem shares directly from the Fund. An Authorized Participant is either (i) a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the National Securities Clearing Corporation or (ii) a DTC participant and, in each case, must have executed a Participant Agreement with the Distributor. Most retail investors will not qualify as Authorized Participants or have the resources to buy and sell whole Creation Units. Therefore, they will be unable to purchase or redeem the shares directly from the Fund. Rather, most retail investors will purchase shares in the secondary market with the assistance of a broker and will be subject to customary brokerage commissions or fees.
16 |
Notes to Financial Statements (continued) |
January 31, 2017 (unaudited) |
5. FEDERAL INCOME TAX
The Fund intends to qualify as a “regulated investment company” under Sub-chapter M of the Internal Revenue Code of 1986, as amended, by distributing substantially all of its net investment income and net capital gains to shareholders. Accounting for Uncertainty in Income Taxes as issued by the Financial Accounting Standards Board provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements, and requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Fund’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. Interest and penalty related to income taxes would be recorded as income tax expense. Management of the Fund is required to analyze all open tax years (2016), as defined by IRS statute of limitations, for all major jurisdictions, including federal tax authorities and certain state tax authorities. As of January 31, 2017, the Fund did not have a liability for any unrecognized tax benefits. The Fund has no examinations in progress and is not aware of any tax positions for which it is reasonably possible that the amounts of unrecognized tax benefits will significantly change in the next twelve months.
The Fund recognizes interest accrued related to unrecognized tax benefits and penalties as income tax expense. For the period from inception to January 31, 2017, the Fund had no accrued penalties or interest.
The adjusted cost basis of investments and gross unrealized appreciation and depreciation of investments for federal income tax purposes were as follows:
Federal Tax Cost of Investments | Gross Unrealized Appreciation | Gross Unrealized Depreciation | Net Unrealized Appreciation (Depreciation) | |||
$164,071,590 | $342,967 | $(116,636) | $226,331 |
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term investments) for the period ended January 31, 2017 were as follows:
Purchases | Sales | Subscriptions In-Kind | Redemptions In-Kind | |||
$65,340,129 | $11,474,919 | $ — | $ — |
7. INVESTMENT RISKS
As with any investment, an investment in the Fund could result in a loss or the performance of the Fund could be inferior to that of other investments. An investor should consider the Fund’s investment objectives, risks, and charges and expenses carefully before investing. The Fund’s prospectus and statement of additional information contain this and other important information.
8. CREDIT RISK
The value of the Fund’s fixed income investments is dependent on the creditworthiness of their issuers. A deterioration in the financial condition of an issuer or a deterioration in general economic conditions may have an adverse effect on the value of the investment and may cause an issuer to fail to pay principal and interest when due.
9. 10% SHAREHOLDERS
As of January 31, 2017, the Fund had individual shareholder account(s) and/or omnibus shareholder account(s) (comprised of a group of individual shareholders), which individually amounted to more than 10% of the total shares outstanding of the Fund as detailed below:
% of Shares Outstanding | Number of Accounts | |
95 | 1 |
17 |
Notes to Financial Statements (continued) |
January 31, 2017 (unaudited) |
10. NEW ACCOUNTING PRONOUNCEMENT
On October 13, 2016 the Securities and Exchange Commission amended existing rules intended to modernize reporting and disclosure of information. These amendments relate to Regulation S-X which sets forth the form and content of financial statements. At this time, management is evaluating the implications of adopting these amendments and their impact on the financial statements and accompanying notes.
11. SUBSEQUENT EVENTS
The Fund paid the following per share distributions after January 31, 2017:
Ordinary Income | Ex-Date | |
$0.03233 | 2/22/17 | |
$0.04004 | 3/20/17 |
The Fund is required to recognize in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed as of the date of the Statement of Assets and Liabilities. For non-recognized subsequent events that must be disclosed to keep the financial statements from being misleading, the Fund is required to disclose the nature of the event as well as an estimate of its financial effect, or a statement that such an estimate cannot be made. Management has evaluated subsequent events through the issuance of these financial statements and has determined that, except as set forth above, there are no material events that would require disclosure.
18 |
Approval of Advisory Agreements & Board Considerations (unaudited) |
On November 10, 2015, at an in-person meeting at which all of the Independent Trustees were present, the Board of Trustees, including the Independent Trustees voting separately, reviewed and unanimously approved an investment advisory agreement between Virtus ETF Advisers LLC (the “Adviser”) and the Trust (the “Advisory Agreement”) and an investment sub-advisory agreement among Newfleet Asset Management, LLC (“Newfleet”), the Adviser and the Trust (the “Newfleet Sub-Advisory Agreement”), each with respect to the Virtus Newfleet Dynamic Credit ETF (formerly known as Virtus Newfleet High Yield Income ETF).
The Board received and reviewed a substantial amount of information provided by the Adviser and Newfleet in response to requests of the Board and counsel, including, without limitation, a memorandum from the Adviser that included a description of the Adviser’s business, a copy of the Adviser’s Form ADV and certain other information about the Adviser to be considered in connection with the Trustees’ review process (the “Adviser Memorandum”), and a memorandum from Newfleet that included a description of Newfleet’s business, a copy of Newfleet’s Form ADV and certain other information about Newfleet to be considered in connection with the Trustees’ review process (the “Newfleet Memorandum”).
In deciding on whether to approve the Advisory Agreement on behalf of the Virtus Newfleet Dynamic Credit ETF, the Board considered numerous factors, including:
The nature, extent, and quality of the services to be provided by the Adviser. The Board considered the responsibilities the Adviser would have under the Advisory Agreement and the services that would be provided by the Adviser to the Virtus Newfleet Dynamic Credit ETF including, without limitation, the management and oversight services that the Adviser and its employees would provide to the Virtus Newfleet Dynamic Credit ETF, the services already provided by the Adviser related to organizing the Trust and the Virtus Newfleet Dynamic Credit ETF, the Adviser’s coordination of services for the Virtus Newfleet Dynamic Credit ETF by the Trust’s service providers, its compliance procedures and practices, particularly with respect to the Trust’s exemptive order permitting the operation of the Virtus Newfleet Dynamic Credit ETF as an exchange-traded fund, and its efforts to promote the Virtus Newfleet Dynamic Credit ETF. The Board also considered the quality of the services that the Adviser provides to another trust in the Virtus fund complex. The Board noted that many of the Trust’s executive officers are employees of the Adviser and serve the Trust without additional compensation from the Virtus Newfleet Dynamic Credit ETF. After reviewing the foregoing information and further information in the Adviser Memorandum (including descriptions of the Adviser’s investment advisory services and its related non-advisory business), and discussing the Adviser’s proposed services to the Virtus Newfleet Dynamic Credit ETF with the Adviser, the Board concluded that the quality, extent, and nature of the services proposed to be provided by the Adviser would be satisfactory and adequate for the Virtus Newfleet Dynamic Credit ETF.
The investment management capabilities and experience of the Adviser. The Board evaluated the management experience of the Adviser, including within the Virtus fund complex, in the light of the services it will be providing. In particular, the Board received information from the Adviser regarding, among other things, the Adviser’s experience in organizing, managing and overseeing exchange-traded funds and coordinating their operation and administration. After consideration of these factors, the Board determined that the Adviser would be an appropriate manager for the Virtus Newfleet Dynamic Credit ETF.
The costs of the services to be provided and profits to be realized by the Adviser from its relationship with the Virtus Newfleet Dynamic Credit ETF. The Board examined and evaluated the arrangements between the Adviser and the Virtus Newfleet Dynamic Credit ETF under the proposed Advisory Agreement, including the fact that the Virtus Newfleet Dynamic Credit ETF would utilize an expense limitation agreement to cap the Virtus Newfleet Dynamic Credit ETF’s total expenses (subject to customary exclusions). The Board also considered potential benefits for the Adviser in managing the Virtus Newfleet Dynamic Credit ETF, including promotion of the Adviser’s name and the interests of the Adviser in providing management and oversight services to the Virtus Newfleet Dynamic Credit ETF. The Board compared the fees and expenses of the Virtus Newfleet Dynamic Credit ETF (including the management fee) to other funds considered by Newfleet to have a similar investment objective and strategies to the Virtus Newfleet Dynamic Credit ETF. Following these comparisons and upon further consideration and discussion of the foregoing, the Board concluded that the fees to be paid to the Adviser by the Virtus Newfleet Dynamic Credit ETF would be appropriate and within the range of what would have been negotiated at arm’s length.
The extent to which economies of scale would be realized as the Virtus Newfleet Dynamic Credit ETF grows and whether management fee levels reflect these economies of scale for the benefit of the Virtus Newfleet Dynamic Credit ETF’s investors. The Board concluded that, in light of the fact that the Virtus Newfleet Dynamic Credit ETF was newly organized and that its assets were expected be low for the foreseeable future, it would be premature to consider economies of scale.
The Board did not identify any single factor as being of paramount importance, and different Trustees may have given different weight to different factors. The Board reviewed with Trustee counsel the legal standards applicable to its consideration of the Advisory Agreement. Based on its review, including consideration of each of the factors referenced above, the Board determined, in the exercise of its reasonable
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Approval of Advisory Agreements & Board Considerations (unaudited) (continued) |
business judgment, that the advisory arrangement, as outlined in the Advisory Agreement, was fair and reasonable in light of the services performed or to be performed, expenses incurred or to be incurred and such other matters as the Board considered relevant.
After full consideration of the above factors as well as other factors, the Board unanimously approved the Advisory Agreement on behalf of the Virtus Newfleet Dynamic Credit ETF.
In deciding on whether to approve the Newfleet Sub-Advisory Agreement on behalf of the Virtus Newfleet Dynamic Credit ETF, the Board considered numerous factors, including:
The nature, extent, and quality of the services to be provided by Newfleet. The Board considered the responsibilities Newfleet would have under the Newfleet Sub-Advisory Agreement and the services that would be provided by Newfleet including, without limitation, its investment advisory services, its compliance procedures and practices, and its efforts to assist in the promotion of the Virtus Newfleet Dynamic Credit ETF. After considering the services provided by Newfleet to other funds in the Virtus fund complex, and after reviewing the foregoing information and further information in the materials, including the Newfleet Memorandum (which included descriptions of Newfleet business and Newfleet’s Form ADV), the Board concluded that the quality, extent, and nature of the services to be provided by Newfleet would be satisfactory and adequate for the Virtus Newfleet Dynamic Credit ETF.
The investment management capabilities and experience of the Newfleet. The Board evaluated the investment management experience of Newfleet. In particular, the Board considered Newfleet’s experience, including the experience of its portfolio managers, in implementing strategies similar to the one proposed for the Virtus Newfleet Dynamic Credit ETF. The Board discussed with Newfleet the investment objective and strategies for the Virtus Newfleet Dynamic Credit ETF and Newfleet’s plans for implementing the strategies. The Board also considered the ability of Newfleet to manage the Virtus Newfleet Dynamic Credit ETF. After consideration of these factors, the Board determined that Newfleet would be an appropriate manager for the Virtus Newfleet Dynamic Credit ETF.
The costs of the services to be provided and profits to be realized by Newfleet from its relationship with the Virtus Newfleet Dynamic Credit ETF. The Board examined and evaluated the proposed arrangements between Newfleet and the Virtus Newfleet Dynamic Credit ETF under the proposed Newfleet Sub-Advisory Agreement, including the fact that the Virtus Newfleet Dynamic Credit ETF would utilize an expense limitation agreement with the Advisor to cap the Virtus Newfleet Dynamic Credit ETF’s total expenses (subject to customary exclusions) to 0.68%, and that Newfleet would agree, pursuant to the Newfleet Sub-Advisory Agreement, to fund 50% of the Adviser’s waivers and reimbursements under the expense limitation agreement. The Board noted that, under such an arrangement, Newfleet would likely supplement a portion of the cost of operating the Virtus Newfleet Dynamic Credit ETF for some period of time.
The Board considered Newfleet’s staffing, personnel, and methods of operating; Newfleet’s compliance policies and procedures; the financial condition of Newfleet and the level of commitment to the Virtus Newfleet Dynamic Credit ETF by Newfleet; the projected asset levels of the Virtus Newfleet Dynamic Credit ETF; Newfleet’s payment of startup costs for the Virtus Newfleet Dynamic Credit ETF; Newfleet’s agreement to share in waivers and reimbursements under the expense limitation agreement; and the overall projected expenses of the Virtus Newfleet Dynamic Credit ETF.
The Board also considered potential benefits to Newfleet in managing the Virtus Newfleet Dynamic Credit ETF, including promotion of Newfleet’s name. The Board compared the fees and expenses of the Virtus Newfleet Dynamic Credit ETF (including the management fee) to other funds considered by Newfleet to have a similar investment objective and strategies to the Virtus Newfleet Dynamic Credit ETF. Following these comparisons and upon further consideration and discussion of the foregoing, the Board concluded that the fees to be paid to Newfleet by the Virtus Newfleet Dynamic Credit ETF would be appropriate and representative of an arm’s length negotiation.
The extent to which economies of scale would be realized as the Virtus Newfleet Dynamic Credit ETF grows and whether management fee levels reflect these economies of scale for the benefit of the Virtus Newfleet Dynamic Credit ETF’s investors. The Board considered that the Virtus Newfleet Dynamic Credit ETF is new, and its fee arrangements with Newfleet involve a capped fee arrangement. The Board considered that the Virtus Newfleet Dynamic Credit ETF would likely experience benefits from the capped fee and would continue to do so until the Virtus Newfleet Dynamic Credit ETF’s assets grow to a level where Newfleet begins to receive the full fee. Accordingly, the Board concluded that it was too early to evaluate potential economies of scale in the Virtus Newfleet Dynamic Credit ETF.
The Board did not identify any single factor as being of paramount importance, and different Trustees may have given different weight to different factors. The Board reviewed with Trustee counsel the legal standards applicable to its consideration of the Newfleet Sub-Advisory Agreement. Based on its review, including consideration of each of the factors referenced above, the Board determined, in the exercise of its reasonable business judgment, that the advisory arrangement, as outlined in the Newfleet Sub-Advisory Agreement, was fair and reasonable in light of the services performed or to be performed, expenses incurred or to be incurred and such other matters as the Board considered relevant.
After full consideration of the above factors as well as other factors, the Board unanimously approved the Newfleet Sub-Advisory Agreement on behalf of the Virtus Newfleet Dynamic Credit ETF.
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Supplemental Information (unaudited) |
INFORMATION ABOUT PORTFOLIO HOLDINGS
The Fund files it complete schedule of portfolio holdings for its first and third fiscal quarters with the Securities and Exchange Commission (the “SEC”) on Form N-Q. The Fund Form N-Q is available without charge, upon request, by calling toll-free at (888) 383-0553. Furthermore, you may obtain the Form N-Q on the SEC’s website at www.sec.gov. The Fund’s portfolio holdings are posted daily on the Fund’s website at www.virtusetfs.com.
The Fund’s premium/discount information that is current as of the most recent month-end is available by visiting www.virtusetfs.com or by calling (888) 383-0553.
INFORMATION ABOUT PROXY VOTING
A description of the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities is provided in the Statement of Additional Information (“SAI”). The SAI is available without charge upon request by calling toll-free at (888) 383-0553, by accessing the SEC’s website at www.sec.gov, or by accessing the Fund’s website at www.virtusetfs.com.
Information regarding how the Fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30th is available by calling toll-free at (888) 383-0553 or by accessing the SEC’s website at www.sec.gov.
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c/o ETF Distributors LLC
1540 Broadway, Suite 1610
New York, NY 10036
8572(03/17)
Item 2. Code of Ethics.
Not applicable.
Item 3. Audit Committee Financial Expert.
Not applicable.
Item 4. Principal Accountant Fees and Services.
Not applicable.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Investments.
(a) | Schedule of Investments in securities of unaffiliated issuers as of the close of the reporting period is included as part of the report to shareholders filed under Item 1 of this form. |
(b) | Not applicable. |
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which the shareholders may recommend nominees to the registrant’s board of trustees, where those changes were implemented after the registrant last provided disclosure in response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR 229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)), or this Item.
Item 11. Controls and Procedures.
(a) | The registrant’s principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). |
(b) | There were no changes in the registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d))) that occurred during the registrant’s second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
Item 12. Exhibits.
(a)(1) | Not applicable. |
(a)(2) | Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. |
(a)(3) | Not applicable. |
(b) | Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto. |
(12.other) | Not applicable. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) | Virtus ETF Trust II |
By | (Signature and Title)* | /s/ William J. Smalley |
William J. Smalley, President and Principal Executive Officer | ||
(principal executive officer) |
Date | 4/6/2017 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By | (Signature and Title)* | /s/ William J. Smalley |
William J. Smalley, President and Principal Executive Officer | ||
(principal executive officer) |
Date | 4/6/2017 |
By | (Signature and Title)* | /s/ Brinton W. Frith |
Brinton W. Frith, Treasurer and Principal Financial Officer | ||
(principal financial officer) |
Date | 4/6/2017 |
* Print the name and title of each signing officer under his or her signature.