| RISK | NOTE 8 – RISK Correlation and Compounding Risk The Funds do not seek to achieve their stated
investment objective over a period of time greater than a single day (as measured from NAV calculation time to NAV calculation time).
The return of a Fund for a period longer than a single day is the result of its return for each day compounded over the period and usually
will differ in amount and possibly even direction from the inverse (-1x) or two times (2x) the return of the Fund’s benchmark for
the period. A Fund will lose money if its benchmark performance is flat over time, and it is possible for a Fund to lose money over time
even if the performance of its benchmark increases in the case of UVIX (or decreases in the case of SVIX), as a result of daily rebalancing,
the benchmark’s volatility, compounding, and other factors. Compounding is the cumulative effect of applying investment gains and
losses and income to the principal amount invested over time. Gains or losses experienced over a given period will increase or reduce
the principal amount invested from which the subsequent period’s returns are calculated. The effects of compounding will likely
cause the performance of a Fund to differ from the Fund’s stated multiple times the return of its benchmark for the same period.
The effect of compounding becomes more pronounced as benchmark volatility and holding period increase. The impact of compounding will
impact each shareholder differently depending on the period of time an investment in a Fund is held and the volatility of the benchmark
during the holding period of an investment in the Fund. Longer holding periods, higher benchmark volatility, inverse exposure and greater
leverage each affect the impact of compounding on a Fund’s returns. Daily compounding of a Fund’s investment returns can dramatically
and adversely affect its longer-term performance during periods of high volatility. Volatility may be at least as important to a Fund’s
return for a period as the return of the Fund’s underlying benchmark. Each Fund uses leverage and should produce
daily returns that are more volatile than that of its benchmark. For example, the daily return of UVIX should be approximately two times
as volatile on a daily basis as is the return of a fund with an objective of matching the same benchmark. The daily return of SVIX is
designed to return the inverse (-1x) of the return that would be expected of a fund with an objective of matching the same benchmark.
The Funds are not appropriate for all investors and present significant risks not applicable to other types of funds. While the Funds seek to meet their investment
objectives, there is no guarantee they will do so. Factors that may affect a Fund’s ability to meet its investment objective include:
(1) the Sponsor’s ability to purchase and sell Financial Instruments in a manner that correlates to a Fund’s objective; (2)
an imperfect correlation between the performance of Financial Instruments held by a Fund and the performance of the applicable benchmark;
(3) bid-ask spreads on such Financial Instruments; (4) fees, expenses, transaction costs, financing costs associated with the use of Financial
Instruments and commission costs; (5) holding or trading instruments in a market that has become illiquid or disrupted; (6) a Fund’s
Share prices being rounded to the nearest cent and/or valuation methodology; (7) changes to a benchmark Index that are not disseminated
in advance; (8) the need to conform a Fund’s portfolio holdings to comply with investment restrictions or policies or regulatory
or tax law requirements; (9) early and unanticipated closings of the markets on which the holdings of a Fund trade, resulting in the inability
of the Fund to execute intended portfolio transactions; (10) accounting standards; and (11) differences caused by a Fund obtaining exposure
to only a representative sample of the components of a benchmark, over weighting or under weighting certain components of a benchmark
or obtaining exposure to assets that are not included in a benchmark. A number of factors may affect a Fund’s
ability to achieve a high degree of correlation with its benchmark, and there can be no guarantee that a Fund will achieve a high degree
of correlation. Failure to achieve a high degree of correlation may prevent a Fund from achieving its investment objective. In order to
achieve a high degree of correlation with their underlying benchmarks, the Funds seek to rebalance their portfolios daily to keep exposure
consistent with their investment objectives. Being materially under- or over-exposed to the benchmark may prevent such Funds from achieving
a high degree of correlation with such benchmark. Market disruptions or closure, large amounts of assets into or out of the Funds, regulatory
restrictions, extreme market volatility, and other factors will adversely affect such Funds’ ability to adjust exposure to requisite
levels. The target amount of portfolio exposure is impacted dynamically by the benchmarks’ movements during each day. Other things
being equal, more significant movement in the value of its benchmark up or down will require more significant adjustments to a Fund’s
portfolio. Because of this, it is unlikely that the Funds will be perfectly exposed (i.e., --1x, -2x, as applicable) to its benchmark
at the end of each day, and the likelihood of being materially under- or over-exposed is higher on days when the benchmark levels are
volatile near the close of the trading day. Each Fund seeks to rebalance its portfolio
on a daily basis. The time and manner in which a Fund rebalances its portfolio may vary from day to day depending upon market conditions
and other circumstances at the discretion of the Sponsor. Unlike other funds that do not rebalance their portfolios as frequently, each
Fund may be subject to increased trading costs associated with daily portfolio rebalancing in order to maintain appropriate exposure to
the underlying benchmarks. Counterparty Risk Each Fund may use derivatives such as swap
agreements and forward contracts (collectively referred to herein as “derivatives”) in the manner described herein as a means
to achieve their respective investment objectives. The use of derivatives by a Fund exposes the Fund to counterparty risks. Regulatory Treatment Derivatives are generally traded in OTC markets
and have only recently become subject to comprehensive regulation in the United States. Cash-settled forwards are generally regulated
as “swaps”, whereas physically settled forwards are generally not subject to regulation (in the case of commodities other
than currencies) or subject to the federal securities laws (in the case of securities). Title VII of the Dodd-Frank Act (“Title
VII”) created a regulatory regime for derivatives, with the CFTC responsible for the regulation of swaps and the SEC responsible
for the regulation of “security-based swaps.” The SEC requirements have largely yet to be made effective, but the CFTC requirements
are largely in place. The CFTC requirements have included rules for some of the types of transactions in which the Funds will engage,
including mandatory clearing and exchange trading, reporting, and margin for OTC swaps. Title VII also created new categories of regulated
market participants, such as “swap dealers,” “security-based swap dealers,” “major swap participants,”
and “major security-based swap participants” who are, or will be, subject to significant new capital, registration, recordkeeping,
reporting, disclosure, business conduct and other regulatory requirements. The regulatory requirements under Title VII continue to be
developed and there may be further modifications that could materially and adversely impact the Funds, the markets in which a Fund trades
and the counterparties with which the Fund engages in transactions. As noted, the CFTC rules may not apply to
all of the swap agreements and forward contracts entered into by the Funds. Investors, therefore, may not receive the protection of CFTC
regulation or the statutory scheme of the Commodity Exchange Act (the “CEA”) in connection with each Fund’s swap agreements
or forward contracts. The lack of regulation in these markets could expose investors to significant losses under certain circumstances,
including in the event of trading abuses or financial failure by participants. Counterparty Credit Risk The Funds will be subject to the credit risk
of the counterparties to the derivatives. In the case of cleared derivatives, the Funds will have credit risk to the clearing corporation
in a similar manner as the Funds would for futures contracts. In the case of OTC derivatives, the Funds will be subject to the credit
risk of the counterparty to the transaction – typically a single bank or financial institution. As a result, a Fund is subject to
increased credit risk with respect to the amount it expects to receive from counterparties to OTC derivatives entered into as part of
that Fund’s principal investment strategy. If a counterparty becomes bankrupt or otherwise fails to perform its obligations due
to financial difficulties, a Fund could suffer significant losses on these contracts and the value of an investor’s investment in
a Fund may decline. The Funds have sought to mitigate these risks
by generally requiring that the counterparties for each Fund agree to post collateral for the benefit of the Fund, marked to market daily,
subject to certain minimum thresholds. However, there are no limitations on the percentage of assets each Fund may invest in swap agreements
or forward contracts with a particular counterparty. To the extent any such collateral is insufficient or there are delays in accessing
the collateral, the Funds will be exposed to counterparty risk as described above, including possible delays in recovering amounts as
a result of bankruptcy proceedings. The Funds typically enter into transactions only with major global financial institutions. OTC derivatives of the type that may be utilized
by the Funds are generally less liquid than futures contracts because they are not traded on an exchange, do not have uniform terms and
conditions, and are generally entered into based upon the creditworthiness of the parties and the availability of credit support, such
as collateral, and in general, are not transferable without the consent of the counterparty. These agreements contain various conditions,
events of default, termination events, covenants and representations. The triggering of certain events or the default on certain terms
of the agreement could allow a party to terminate a transaction under the agreement and request immediate payment in an amount equal to
the net positions owed to the party under the agreement. For example, if the level of the Fund’s benchmark has a dramatic intraday
move that would cause a material decline in the Fund’s NAV, the terms of the swap may permit the counterparty to immediately close
out the transaction with the Fund. In that event, it may not be possible for the Fund to enter into another swap or to invest in other
Financial Instruments necessary to achieve the desired exposure consistent with the Fund’s objective. This, in turn, may prevent
the Fund from achieving its investment objective, particularly if the level of the Fund’s benchmark reverses all or part of its
intraday move by the end of the day. In addition, cleared derivatives benefit from
daily marking-to-market and settlement, and segregation and minimum capital requirements applicable to intermediaries. To the extent the
Fund enters into cleared swap transactions, the Fund will deposit collateral with a FCM in cleared swaps customer accounts, which are
required by CFTC regulations to be separate from its proprietary collateral posted for cleared swaps transactions. Cleared swap customer
collateral is subject to regulations that closely parallel the regulations governing customer segregated funds for futures transactions
but provide certain additional protections to cleared swaps collateral in the event of a clearing broker or clearing broker customer default.
For example, in the event of a default of both the clearing broker and a customer of the clearing broker, a clearing house is only permitted
to access the cleared swaps collateral in the legally separate (but operationally comingled) account of the defaulting cleared swap customer
of the clearing broker, as opposed to the treatment of customer segregated funds, under which the clearing house may access all of the
commingled customer segregated funds of a defaulting clearing broker. Derivatives entered into directly between two counterparties do
not necessarily benefit from such protections, particularly if entered into with an entity that is not registered as a “swap dealer”
with the CFTC. This exposes the Funds to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions
because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing
the Funds to suffer a loss. The Sponsor regularly reviews the performance
of its counterparties for, among other things, creditworthiness and execution quality. In addition, the Sponsor periodically considers
the addition of new counterparties and the counterparties used by a Fund may change at any time. Each day, the Funds disclose their portfolio
holdings as of the prior Business Day. Each Fund’s portfolio holdings identifies its counterparties, as applicable. This portfolio
holdings information may be accessed through the web on the Sponsor’s website at www.volatilityshares.com. Each counterparty and/or any of its affiliates
may be an Authorized Participant or shareholder of a Fund, subject to applicable law. The counterparty risk for cleared derivatives
transactions is generally lower than for OTC derivatives. Once a transaction is cleared, the clearing organization is substituted and
is a Fund’s counterparty on the derivative. The clearing organization guarantees the performance of the other side of the derivative.
Nevertheless, some risk remains, as there is no assurance that the clearing organization, or its members, will satisfy its obligations
to a Fund. Leverage Risk The Funds may utilize leverage in seeking
to achieve their respective investment objectives and will lose more money in market environments adverse to their respective daily investment
objectives than funds that do not employ leverage. The use of leveraged and/or inverse leveraged positions increases the risk of total
loss of an investor’s investment, even over periods as short as a single day. For example, because UVIX includes a two times
(2x) multiplier, a single-day movement in the relevant benchmark approaching 50% at any point in the day could result in the total loss
or almost total loss of an investor’s investment if that movement is contrary to the investment objective of the Fund in which an
investor has invested, even if such Fund’s benchmark subsequently moves in an opposite direction, eliminating all or a portion of
the movement. This would be the case with downward single-day or intraday movements in the underlying benchmark of a Fund or upward single-day
or intraday movements in the benchmark of a Fund, even if the underlying benchmark maintains a level greater than zero at all times. Liquidity Risk Financial Instruments cannot always be liquidated
at the desired price. It is difficult to execute a trade at a specific price when there is a relatively small volume of buy and sell orders
in a market. A market disruption can also make it difficult to liquidate a position or find a swap or forward contract counterparty at
a reasonable cost. Market illiquidity may cause losses for the Funds. The large size of the positions which the Funds may acquire increases
the risk of illiquidity by both making their positions more difficult to liquidate and increasing the losses incurred while trying to
do so. Any type of disruption or illiquidity will potentially be exacerbated due to the fact that the Funds will typically invest in Financial
Instruments related to one benchmark, which in many cases is highly concentrated. “Contango” and “Backwardation”
Risk The Funds typically hold futures contracts.
As the futures contracts near expiration, they are generally replaced by contracts that have a later expiration. Thus, for example, a
contract purchased and held in November 2019 may specify a January 2020 expiration. As that contract nears expiration, it may be replaced
by selling the January 2020 contract and purchasing the contract expiring in March 2020. This process is referred to as “rolling.”
Rolling may have a positive or negative impact on performance. For example, historically, the prices of certain types of futures contracts
have frequently been higher for contracts with shorter-term expirations than for contracts with longer-term expirations, which is referred
to as “backwardation.” In these circumstances, absent other factors, the sale of the January 2020 contract would take place
at a price that is higher than the price at which the March 2020 contract is purchased, thereby creating a gain in connection with rolling.
While certain types of futures contracts have historically exhibited consistent periods of backwardation, backwardation will likely not
exist in these markets at all times. Since the introduction of VIX futures contracts,
there have frequently been periods where VIX futures prices reflect higher expected volatility levels further out in time. This can result
in a loss from “rolling” the VIX futures to maintain the constant weighted average maturity of the applicable Fund benchmark.
Losses from exchanging a lower priced VIX future for a higher priced longer-term future in the rolling process could adversely affect
the value of a Fund and, accordingly, decrease the return of a Fund. Natural Disaster/Epidemic Risk Natural or environmental disasters, such as
earthquakes, fires, floods, hurricanes, tsunamis and other severe weather-related phenomena generally, and widespread disease, including
pandemics and epidemics (for example, the novel coronavirus COVID-19), have been and can be highly disruptive to economies and markets
and have recently led, and may continue to lead, to increased market volatility and significant market losses. Such natural disaster and
health crises could exacerbate political, social, and economic risks previously mentioned, and result in significant breakdowns, delays,
shutdowns, social isolation, and other disruptions to important global, local and regional supply chains affected, with potential corresponding
results on the operating performance of the Funds and their investments. A climate of uncertainty and panic, including the contagion of
infectious viruses or diseases, may adversely affect global, regional, and local economies and reduce the availability of potential investment
opportunities, and increases the difficulty of performing due diligence and modeling market conditions, potentially reducing the accuracy
of financial projections. Under these circumstances, the Funds may have difficulty achieving their investment objectives which may adversely
impact performance. Further, such events can be highly disruptive to economies and markets, significantly disrupt the operations of individual
companies (including, but not limited to, the Funds’ Sponsor and third party service providers), sectors, industries, markets, securities
and commodity exchanges, currencies, interest and inflation rates, credit ratings, investor sentiment, and other factors affecting the
value of the Funds’ investments. These factors can cause substantial market volatility, exchange trading suspensions and closures
and can impact the ability of the Funds to complete redemptions and otherwise affect Fund performance and Fund trading in the secondary
market. A widespread crisis may also affect the global economy in ways that cannot necessarily be foreseen at the current time. How long
such events will last and whether they will continue or recur cannot be predicted. Impacts from these events could have significant impact
on a Fund’s performance, resulting in losses to your investment. Risk that Current Assumptions and Expectations
Could Become Outdated As a Result of Global Economic Shocks The onset of the novel coronavirus (COVID-19)
has caused significant shocks to global financial markets and economies, with many governments taking extreme actions to slow and contain
the spread of COVID-19. These actions have had, and likely will continue to have, a severe economic impact on global economies as economic
activity in some instances has essentially ceased. Financial markets across the globe are experiencing severe distress at least equal
to what was experienced during the global financial crisis in 2008. In March 2020, U.S. equity markets entered a bear market in the fastest
such move in the history of U.S. financial markets. Contemporaneous with the onset of the COVID-19 pandemic in the US, oil experienced
shocks to supply and demand, impacting the price and volatility of oil. The global economic shocks being experienced as of the date hereof
may cause the underlying assumptions and expectations of the Funds to become outdated quickly or inaccurate, resulting in significant
losses. |
