This information should be read in conjunction with the financial statements and
notes included in Item 1 of Part I of this Quarterly Report (the "Report"). The
discussion and analysis which follows may contain trend analysis and other
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934 which reflect our current views with respect to future
events and financial results. Words such as "anticipate," "expect," "intend,"
"plan," "believe," "seek," "outlook" and "estimate," as well as similar words
and phrases, signify forward-looking statements.
You should not place undue reliance on any forward-looking statements. Except as
expressly required by the Federal securities laws,
Overview
The Trust is a
The Fund is managed and controlled by
The Sponsor is a wholly-owned subsidiary of
The Sponsor has the power and authority to establish and designate one or more series and to issue shares thereof, from time to time as it deems necessary or desirable. The Sponsor has exclusive power to fix and determine the relative rights and preferences as between the shares of any series as to the right of redemption, special and relative rights as to dividends and other distributions and on liquidation, conversion rights, and conditions under which the series shall have separate voting rights or no voting rights. The term for which the Trust is to exist commenced on the date of the filing of the Certificate of Trust, and the Trust, the Fund, and any additional series created in the future will exist in perpetuity, unless earlier terminated in accordance with the provisions of the Trust Agreement. Separate and distinct records shall be maintained for each Fund and the assets associated with a Fund shall be held in such separate and distinct records (directly or indirectly, including a nominee or otherwise) and accounted for in such separate and distinct records separately from the assets of any other series. The Fund and each future series will be separate from all such series in respect of the assets and liabilities allocated to a Fund and each separate series and will represent a separate investment portfolio of the Trust.
The Fund is a "commodity pool" as defined by the Commodity Exchange Act ("CEA").
Consequently, the Sponsor has registered as a commodity pool operator ("CPO")
with the
The sole Trustee of the Trust is
BDRY commenced trading on NYSE Arca on
The Fund is designed and managed to track the performance of a portfolio (a "Benchmark Portfolio") consisting of futures contracts (the "Benchmark Component Instruments").
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Breakwave Dry Bulk Shipping ETF
The Investment Objective of the Fund
BDRY's investment objective is to provide investors with exposure to the daily change in the price of dry bulk freight futures by tracking the performance of a portfolio (the "BDRY Benchmark Portfolio" and consisting of exchange-cleared futures contracts on the cost of shipping dry bulk freight ("Freight Futures"). BDRY seeks to achieve its investment objective by investing substantially all of its assets in the Freight Futures currently constituting the BDRY Benchmark Portfolio.
The Benchmark Portfolio
The BDRY Benchmark Portfolio is maintained by
? Capesize: the Capesize 5TC Index; ? Panamax: the Panamax 4TC Index; and ? Supramax: the Supramax 6TC Index.
The BDRY Benchmark Component Instruments currently constituting the BDRY
Benchmark Portfolio as of
Market
Name Ticker Value USD
Baltic Panamax T/C Average Shipping Route
BFFATC V21 Index 22,847,500
Baltic Capesize Time Charter Nov 21 BFFATC X21 Index 19,250,000
Baltic Capesize Time Charter Dec 21 BFFATC Z21 Index 17,132,175
The value of the Capesize 5TC Index is disseminated at
BDRY seeks to achieve its investment objective by investing substantially all of its assets in the Freight Futures currently constituting the BDRY Benchmark Portfolio. The BDRY Benchmark Portfolio will include all existing positions to maturity and settle them in cash. During any given calendar quarter, the BDRY Benchmark Portfolio will progressively increase its position to the next calendar quarter three-month strip, thus maintaining constant exposure to the Freight Futures market as positions mature.
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The BDRY Benchmark Portfolio will maintain long-only positions in Freight Futures. The BDRY Benchmark Portfolio will include a combination of Capesize, Panamax and Supramax Freight Futures. More specifically, the BDRY Benchmark Portfolio will include 50% exposure in Capesize Freight Futures contracts, 40% exposure in Panamax Freight Futures contracts and 10% exposure in Supramax Freight Futures contracts. The BDRY Benchmark Portfolio will not include and the Fund will not invest in swaps, non-cleared dry bulk freight forwards or other over-the-counter derivative instruments that are not cleared through exchanges or clearing houses. The Fund may hold exchange-traded options on Freight Futures. The BDRY Benchmark Portfolio is maintained by Breakwave and will be rebalanced annually. The Freight Futures currently constituting the Benchmark Portfolio, as well as the daily holdings of the Fund will be available on the Fund's website at www.drybulketf.com.
When establishing positions in Freight Futures, BDRY will be required to deposit initial margin with a value of approximately 10% to 40% of the notional value of each Freight Futures position at the time it is established. These margin requirements are established and subject to change from time to time by the relevant exchanges, clearing houses or the Fund's futures commission merchant ("FCM"). On a daily basis, the Fund will be obligated to pay, or entitled to receive, variation margin in an amount equal to the change in the daily settlement level of its Freight Futures positions. Any assets not required to be posted as margin with the FCM will be held at the Fund's custodian in cash or cash equivalents.
BDRY will hold cash or cash equivalents such as
The Sponsor
The Sponsor is a wholly-owned subsidiary of
Under the Trust Agreement, the Sponsor has exclusive management and control of all aspects of the Trust's business. The Trustee has no duty or liability to supervise the performance of the Sponsor, nor will the Trustee have any liability for the acts or omissions of the Sponsor. The shareholders have no voice in the day to day management of the business and operations of the Fund and the Trust, other than certain limited voting rights as set forth in the Trust Agreement. In the course of its management of the business and affairs of the Fund and the Trust, the Sponsor may, in its sole and absolute discretion, appoint an affiliate or affiliates of the Sponsor as additional sponsors and retain such persons, including affiliates of the Sponsor, as it deems necessary to effectuate and carry out the purposes, business and objectives of the Trust.
Breakwave Dry Bulk Shipping ETF
During the three months ended
During the three months ended
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NEITHER THE PAST PERFORMANCE OF THE FUND NOR THE PRIOR BENCHMARK PORTFOLIO LEVELS AND CHANGES, POSITIVE OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUND'S FUTURE PERFORMANCE.
The per Share market value of BDRY and its NAV tracked closely for the three
months ended
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NEITHER THE PAST PERFORMANCE OF THE FUND NOR THE PRIOR BENCHMARK PORTFOLIO LEVELS AND CHANGES, POSITIVE OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUND'S FUTURE PERFORMANCE.
The per Share market value of BDRY and its NAV tracked closely for the three
months ended
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[[Image Removed]]
NEITHER THE PAST PERFORMANCE OF THE FUND NOR THE PRIOR BENCHMARK PORTFOLIO LEVELS AND CHANGES, POSITIVE OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUND'S FUTURE PERFORMANCE.
[[Image Removed]]
NEITHER THE PAST PERFORMANCE OF THE FUND NOR THE PRIOR BENCHMARK PORTFOLIO LEVELS AND CHANGES, POSITIVE OR NEGATIVE, SHOULD BE TAKEN AS AN INDICATION OF THE FUND'S FUTURE PERFORMANCE.
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The graphs above compare the returns of BDRY with the benchmark portfolio
returns for the three months ended
? Benchmark portfolio uses settlement prices of freight futures vs. BDRY closing
Share price,
? Benchmark portfolio roll methodology assumes rolls that can happen even at
fractions of lots vs. BDRY that uses the real minimum market lot available (5
days per month),
? Benchmark portfolio assumes rolls are happening at the settlement price of the
day vs. buys at a transaction price during the day that might or might not be
equal to the settlement price,
? Benchmark portfolio assumes no trading commissions vs. BDRY that pays 10 bps
for each transaction,
? Benchmark portfolio assumes no clearing fees vs. BDRY that pays approximately
3-5bps of total clearing fees for each trade,
? Benchmark portfolio assumes no management fees vs. BDRY fee structure of 3.5%
of average net assets on an annualized basis, and
? Creations and redemptions that lead to transactions that occur at prices that
might be different than the settlement prices
There are no competitors. BDRY is the only Freight futures ETF globally.
FOR THE THREE MONTHS ENDED
Fund Share Price Performance
During the three months ended
Fund Share Net Asset Performance
For the three months ended
Net income for the three months ended
FOR THE THREE MONTHS ENDED
Fund Share Price Performance
During the three months ended
Fund Share Net Asset Performance
For the three months ended
Net income for the three months ended
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Calculating NAV
The Fund's NAV is calculated by:
? Taking the current market value of its total assets; ? Subtracting any liabilities; and ? Dividing that total by the total number of outstanding shares.
The Administrator calculates the NAV of the Fund once each NYSE Arca trading
day. The NAV for a particular trading day is released after
In addition, in order to provide updated information relating to the
The IFV is disseminated on a per share basis every 15 seconds during regular
NYSE Arca core trading session hours. The customary trading hours of the Freight
Futures trading are
The NYSE Arca disseminates the IFV through the facilities of CTA/CQ High Speed Lines. In addition, the IFV is published on the NYSE Arca's website and is available through on-line information services such as Bloomberg and Reuters.
Dissemination of the IFV provides additional information that is not otherwise available to the public and is useful to investors and market professionals in connection with the trading of the Fund's shares on the NYSE Arca. Investors and market professionals are able throughout the trading day to compare the market price of the Fund's shares and the IFV. If the market price of the Fund's shares diverges significantly from the IFV, market professionals will have an incentive to execute arbitrage trades. For example, if the Fund's shares appear to be trading at a discount compared to the IFV, a market professional could buy the Fund shares on the NYSE Arca and take the opposite position in Freight Futures. Such arbitrage trades can tighten the tracking between the market price of the Fund's shares and the IFV and thus can be beneficial to all market participants.
Critical Accounting Policies
The Fund's critical accounting policies are as follows:
Preparation of the financial statements and related disclosures in accordance
with
The Fund calculates its net asset value as of the NAV Calculation Time as described above.
The values which are used by the
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Credit Risk
When the Fund enters into Benchmark Component Instruments, it will be exposed to the credit risk that the counterparty will not be able to meet its obligations. For purposes of credit risk, the counterparty for the Benchmark Component Instruments traded on or cleared by the Baltic Exchange and other futures exchanges is the clearinghouse associated with those exchanges. In general, clearinghouses are backed by their members who may be required to share in the financial burden resulting from the nonperformance of one of their members, which should significantly reduce credit risk. There can be no assurance that any counterparty, clearinghouse, or their financial backers will satisfy their obligations to the Fund.
The Sponsor will attempt to minimize certain of these market and credit risks by normally:
? executing and clearing trades with creditworthy counterparties, as
determined by the Sponsor;
? limiting the outstanding amounts due from counterparties of the Funds;
? not posting margin directly with a counterparty;
? limiting the amount of margin or premium posted at the FCM; and
? ensuring that deliverable contracts are not held to such a date when
delivery of an underlying asset could be called for.
The Commodity Exchange Act ("CEA") requires all FCMs, such as the Fund's clearing broker, to meet and maintain specified fitness and financial requirements, to segregate customer funds from proprietary funds and account separately for all customers' funds and positions, and to maintain specified books and records open to inspection by the staff of the CFTC. The CFTC has similar authority over introducing brokers, or persons who solicit or accept orders for commodity interest trades but who do not accept margin deposits for the execution of trades. The CEA authorizes the CFTC to regulate trading by FCMs and by their officers and directors, permits the CFTC to require action by exchanges in the event of market emergencies, and establishes an administrative procedure under which customers may institute complaints for damages arising from alleged violations of the CEA. The CEA also gives the states powers to enforce its provisions and the regulations of the CFTC.
On
Liquidity and Capital Resources
The Fund does not anticipate making use of borrowings or other lines of credit to meet its obligations. The Fund meets its liquidity needs in the normal course of business from the proceeds of the sale of its investments or from the cash, cash equivalents that it holds. The Fund's liquidity needs include: redeeming its shares, providing margin deposits for existing Benchmark Component Instruments, the purchase of additional Benchmark Component Instruments, and paying expenses.
The Fund generates cash primarily from (i) the sale of Creation Baskets and (ii)
interest earned on cash, cash equivalents and its investments in collateralizing
The investments of the Fund in Benchmark Component Instruments could be subject to periods of illiquidity because of market conditions, regulatory considerations and other reasons. Such conditions could prevent the Fund from promptly liquidating a position in Benchmark Component Instruments.
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Market Risk
Trading in Benchmark Component Instruments such as futures contracts will involve the Fund entering into contractual commitments to purchase or sell specific amounts of instruments at a specified date in the future. The gross or face amount of the contracts is expected to significantly exceed the future cash requirements of the Fund as the Fund intends to close out any open positions prior to the contractual expiration date. As a result, the Fund's market risk is the risk of loss arising from the decline in value of the contracts, not from the need to make delivery under the contracts. The Fund considers the "fair value" of derivative instruments to be the unrealized gain or loss on the contracts. The market risk associated with the commitment by the Fund to purchase a specific contract will be limited to the aggregate face amount of the contracts held.
The exposure of the Fund to market risk will depend on a number of factors including the markets for the specific instrument, the volatility of interest rates and foreign exchange rates, the liquidity of the instrument-specific market and the relationships among the contracts held by the Fund.
Regulatory Environment
The regulation of futures markets, futures contracts, and futures exchanges has historically been comprehensive. The CFTC and the exchanges are authorized to take extraordinary actions in the event of a market emergency including, for example, the retroactive implementation of speculative position limits, increased margin requirements, the establishment of daily price limits and the suspension of trading.
The regulation of commodity interest transactions in
The CFTC possesses exclusive jurisdiction to regulate the activities of commodity pool operators and commodity trading advisors with respect "commodity interests," such as futures, swaps and options, and has adopted regulations with respect to the activities of those persons and/or entities. Under the CEA, a registered CPO, such as the Sponsor, is required to make annual filings with the CFTC and NFA describing its organization, capital structure, management and controlling persons. In addition, the CEA authorizes the CFTC to require and review books and records of, and documents prepared by, registered CPOs. Pursuant to this authority, the CFTC requires CPOs to keep accurate, current and orderly records for each pool that they operate. The CFTC may suspend the registration of a commodity pool operator (1) if the CFTC finds that the operator's trading practices tend to disrupt orderly market conditions, (2) if any controlling person of the operator is subject to an order of the CFTC denying such person trading privileges on any exchange, and (3) in certain other circumstances. Suspension, restriction or termination of the Sponsor's registration as a commodity pool operator would prevent it, until that registration were to be reinstated, from managing the Fund, and might result in the termination of the Fund if a successor sponsor is not elected pursuant to the Trust Agreement.
The Fund's investors are afforded prescribed rights for reparations under the CEA. Investors may also be able to maintain a private right of action for violations of the CEA. The CFTC has adopted rules implementing the reparation provisions of the CEA, which provide that any person may file a complaint for a reparations award with the CFTC for violation of the CEA against a floor broker or an FCM, introducing broker, commodity trading advisor, CPO, and their respective associated persons.
Pursuant to authority in the CEA, the NFA has been formed and registered with the CFTC as a registered futures association. At the present time, the NFA is the only self-regulatory organization for commodity interest professionals, other than futures exchanges. The CFTC has delegated to the NFA responsibility for the registration of CPOs and FCMs and their respective associated persons. The Sponsor and the Fund's clearing broker are members of the NFA. As such, it will be subject to NFA standards relating to fair trade practices, financial condition and consumer protection. The NFA also arbitrates disputes between members and their customers and conducts registration and fitness screening of applicants for membership and audits of its existing members. Neither the Trust nor the Fund are required to become a member of the NFA.
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The regulations of the CFTC and the NFA prohibit any representation by a person registered with the CFTC or by any member of the NFA, that registration with the CFTC, or membership in the NFA, in any respect indicates that the CFTC or the NFA has approved or endorsed that person or that person's trading program or objectives. The registrations and memberships of the parties described in this summary must not be considered as constituting any such approval or endorsement. Likewise, no futures exchange has given or will give any similar approval or endorsement.
Futures exchanges in
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") was enacted in response to the economic crisis of 2008 and 2009 and it significantly altered the regulatory regime to which the securities and commodities markets are subject. To date, the CFTC has issued proposed or final versions of almost all of the rules it is required to promulgate under the Dodd-Frank Act. The provisions of the new law include the requirement that position limits be established on a wide range of commodity interests, including agricultural, energy, and metal-based commodity futures contracts, options on such futures contracts and cleared and uncleared swaps that are economically equivalent to such futures contracts and options; new registration and recordkeeping requirements for swap market participants; capital and margin requirements for "swap dealers" and "major swap participants," as determined by the new law and applicable regulations; reporting of all swaps transactions to swap data repositories; and the mandatory use of clearinghouse mechanisms for sufficiently standardized swap transactions that were historically entered into in the over-the-counter market, but are now designated as subject to the clearing requirement; and margin requirements for over-the counter swaps that are not subject to the clearing requirements.
The Dodd-Frank Act was intended to reduce systemic risks that may have
contributed to the 2008/2009 financial crisis. Since the first draft of what
became the Dodd-Frank Act, supporters and opponents have debated the scope of
the legislation. As the administrations of the
Current rules and regulations under the Dodd-Frank Act require enhanced customer protections, risk management programs, internal monitoring and controls, capital and liquidity standards, customer disclosures and auditing and examination programs for FCMs. The rules are intended to afford greater assurances to market participants that customer segregated funds and secured amounts are protected, customers are provided with appropriate notice of the risks of futures trading and of the FCMs with which they may choose to do business, FCMs are monitoring and managing risks in a robust manner, the capital and liquidity of FCMs are strengthened to safeguard the continued operations and the auditing and examination programs of the CFTC and the self-regulatory organizations are monitoring the activities of FCMs in a thorough manner.
Regulatory bodies outside the
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In addition, considerable regulatory attention has been focused on non-traditional publicly distributed investment pools such as the Fund. Furthermore, various national governments have expressed concern regarding the disruptive effects of speculative trading in certain commodity markets and the need to regulate the derivatives markets in general. The effect of any future regulatory change on the Fund is impossible to predict, but could be substantial and adverse.
Management believes that as of
Off Balance Sheet Financing
As of
Redemption Basket Obligation
Other than as necessary to meet the investment objective of the Fund and pay the contractual obligations described below, the Fund will require liquidity to redeem Redemption Baskets. The Fund intends to satisfy this obligation through the transfer of cash of the Fund (generated, if necessary, through the sale of Treasury Instruments) in an amount proportionate to the number of Shares being redeemed.
Contractual Obligations
The primary contractual obligations of the Fund will be with the Sponsor and certain other service providers.
Management and CTA Fees
BDRY pays the Sponsor a management fee (the "Sponsor Fee") in consideration of the Sponsor's advisory services to the Fund. Additionally, BDRY pays its commodity trading advisor a license and service fee (the "CTA Fee").
BDRY pays the Sponsor Fee, monthly in arrears, in an amount equal to the greater
of 0.15% per year of BDRY's average daily net assets; or
Breakwave has agreed to waive its CTA Fee and the Sponsor has agreed to
correspondingly assume the remaining expenses of BDRY so that BDRY's expenses do
not exceed an annual rate of 3.50%, excluding brokerage commissions, interest
expense, and extraordinary expenses, of the value of BDRY's average daily net
assets (the "BDRY Expense Cap"). The assumption of expenses and waiver of BDRY's
CTA Fee are contractual on the part of the Sponsor and Breakwave, respectively,
through
The assumption of expenses by the Sponsor for BDRY, pursuant to the BDRY Expense
Cap, amounted to
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The Fund's ongoing fees, costs and expenses of its operation, not subject to the
applicable Expense Cap include brokerage and other fees and commissions incurred
in connection with the trading activities of the Fund, and extraordinary
expenses (including, but not limited to, legal claims and liabilities and
litigation costs and any indemnification related thereto). Expenses subject to
an Expense Cap include (i) expenses incurred in connection with registering
additional Shares of the Fund or offering Shares of the Fund; (ii) the routine
expenses associated with the preparation and, if required, the printing and
mailing of monthly, quarterly, annual and other reports required by applicable
While the Sponsor has agreed to pay registration fees to the
Any general expenses of the Trust will be allocated to the Fund and any other future series of the Trust as determined by the Sponsor in its sole and absolute discretion. The Trust is also responsible for extraordinary expenses, including, but not limited to, legal claims and liabilities and litigation costs and any indemnification related thereto. The Trust and/or the Sponsor may be required to indemnify the Trustee, Distributor or Administrator under certain circumstances.
The parties cannot anticipate the amount of payments that will be required under these arrangements for future periods as the NAV and trading levels to meet investment objectives for the Fund will not be known until a future date. These agreements are effective for a specific term agreed upon by the parties with an option to renew, or, in some cases, are in effect for the duration of the Fund's existence. The parties may terminate these agreements earlier for certain reasons listed in the agreements.
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