-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CmN7cxsg01OkzrId2GERUz1MIvu1mIV9lt2p+T25IDwNQxsVsTjePcPd68uAlPRg WxmmNk0YkdUan09z1fDF9A== 0000950169-02-000176.txt : 20020607 0000950169-02-000176.hdr.sgml : 20020607 20020605122352 ACCESSION NUMBER: 0000950169-02-000176 CONFORMED SUBMISSION TYPE: N-1A PUBLIC DOCUMENT COUNT: 3 FILED AS OF DATE: 20020605 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROFUNDS ETF TRUST CENTRAL INDEX KEY: 0001174610 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-1A SEC ACT: 1933 Act SEC FILE NUMBER: 333-89822 FILM NUMBER: 02670625 BUSINESS ADDRESS: STREET 1: 7501 WISCONSIN AVENUE STREET 2: SUITE 1000 CITY: BETHESDA STATE: MD ZIP: 20814 BUSINESS PHONE: 8005487786 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROFUNDS ETF TRUST CENTRAL INDEX KEY: 0001174610 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-1A SEC ACT: 1940 Act SEC FILE NUMBER: 811-21114 FILM NUMBER: 02670626 BUSINESS ADDRESS: STREET 1: 7501 WISCONSIN AVENUE STREET 2: SUITE 1000 CITY: BETHESDA STATE: MD ZIP: 20814 BUSINESS PHONE: 8005487786 N-1A 1 dn1a.txt FORM N-1A FILING As filed with the Securities and Exchange Commission on June 5, 2002 File No. 811-21114 -------- U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] Pre-Effective Amendment No. [_] Post-Effective Amendment No. [_] And/Or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940[X] Amendment No. [_] PROFUNDS ETF TRUST -------------------------------------------------- (Exact name of Registrant as Specified in Trust Instrument) 7501 Wisconsin Avenue, Suite 1000 Bethesda, MD 20814 ------------------------------------------------- (Address of Principal Executive Office) (Zip Code) (240) 497-6400 ------------------------------------------------- (Area Code and Telephone Number) Michael L. Sapir Chairman ProFund Advisors LLC 7501 Wisconsin Avenue, Suite 1000 Bethesda, MD 20814 ----------------------------------------------------- (Name and Address of Agent for Service) Copy to Stuart M. Strauss, Esq. Mayer, Brown, Rowe & Maw 1675 Broadway New York, NY 10019 Approximate date of Proposed Public Offering: As soon as practicable after the effective date of this Registration statement. Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until Registrant shall file a further amendment which specifically states that this Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. 2 SUBJECT TO COMPLETION PRELIMINARY PROSPECTUS ______, 2002 PROFUNDS ETF TRUST The Bullish Funds The Bearish Funds Ultra500 Fund UltraShort500 Fund Ultra100 Fund UltraShort100 Fund Ultra30 Fund UltraShort30 Fund UltraMid-Cap400 Fund UltraShortMid-Cap400 Fund ProFunds ETF Trust ("Trust") is a Delaware business trust that consists of separate investment portfolios (each a "Fund"). Each Fund described herein seeks daily investment results, before fees and expenses, that correspond to the daily performance of its benchmark. ProFund Advisors LLC ("ProFund Advisors") serves as the investment advisor to each Fund. The shares of each Fund ("Shares") will be listed on a national securities exchange ("Exchange"). The Shares trade on the Exchange at market prices that may differ to some degree from the net asset value ("NAV") of the Shares. Each Fund issues and redeems Shares on a continuous basis at NAV in large, specified numbers of Shares called "Creation Units." Creation Units of the Bullish Funds are issued and redeemed principally in-kind for securities included in the relevant underlying index. Creation Units of the Bearish Funds are purchased and redeemed in cash. Except when aggregated in Creation Units, Shares are not redeemable securities of the Funds. Retail investors, therefore, generally will not be able to purchase the Shares directly. Rather, most retail investors will purchase Shares in the secondary market with the assistance of a broker. Thus, some of the information contained in this prospectus--such as information about purchasing and redeeming Shares from a Fund and all references to the Transaction Fee imposed on purchases and redemptions--is not relevant to retail investors. - -------------------------------------------------------------------------------- Prospectus ____, 2002 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. SHARES OF PROFUNDS ETF TRUST MAY NOT BE SOLD, NOR MAY OFFERS TO BUY BE ACCEPTED, PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS COMMUNICATION SHALL NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN A STATE IN WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAW OF THE STATE. 3 IN ADDITION, THE OFFERING OF SHARES IS CONTINGENT UPON APPROVAL OF AN EXEMPTIVE APPLICATION CURRENTLY PENDING BEFORE THE SEC, WHICH APPROVAL MAY OR MAY NOT BE GRANTED. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. CONTENTS: OVERVIEW INVESTMENT OBJECTIVES OF THE FUNDS INVESTMENT OBJECTIVES OF THE BULLISH FUNDS INVESTMENT OBJECTIVES OF THE BEARISH FUNDS HOW TO BUY AND SELL SHARES OF THE FUNDS PRINCIPAL INVESTMENT STRATEGIES OF THE FUNDS WHAT THE FUNDS DO WHAT THE FUNDS DO NOT DO PRINCIPAL RISKS OF INVESTING IN THE FUNDS SPECIAL RISKS OF EXCHANGE-TRADED FUNDS WHO MAY WANT TO CONSIDER AN INVESTMENT IN PROFUNDS ETF TRUST IMPORTANT CONCEPTS DESCRIPTION OF THE BULLISH FUNDS FEES AND EXPENSES OF THE BULLISH FUNDS DESCRIPTION OF THE BEARISH FUNDS FEES AND EXPENSES OF THE BEARISH FUNDS PURCHASING SHARES DIRECTLY FROM A FUND 4 PROCEDURES APPLICABLE TO PURCHASE OF BULLISH FUNDS PROCEDURES APPLICABLE TO PURCHASE OF BEARISH FUNDS REDEEMING SHARES DIRECTLY FROM A FUND REDEMPTION PROCEDURES APPLICABLE TO BULLISH FUNDS REDEMPTION PROCEDURES APPLICABLE TO BEARISH FUNDS PURCHASING AND SELLING SHARES ON THE SECONDARY MARKET PRECAUTIONARY NOTES INVESTMENT POLICIES DIVIDEND REINVESTMENT SERVICE DISTRIBUTIONS DETERMINATION OF NAV BASIC TAX POINTS MANAGEMENT OF PROFUNDS ETF TRUST OTHER SERVICE PROVIDERS GLOSSARY OF INVESTMENT TERMS [ProFunds ETF Trust Logo] \ProFund Advisors LLC Investment Advisors - -------------------------------------------------------------------------------- 5 OVERVIEW This prospectus contains information that you need to make an informed decision about investing in Shares of the Funds. The Principal Investment Strategies and Principal Risk Factors sections discuss the principal strategies and risks applicable to the Funds. Each individual Fund section provides additional information regarding each Fund, including a description of its benchmark and underlying index and the principal risks specific to that Fund. INVESTMENT OBJECTIVES OF THE FUNDS Each Fund described in this prospectus seeks to provide daily investment results, before fees and expenses, that correspond to the performance of a particular benchmark.1 INVESTMENT OBJECTIVES OF THE BULLISH FUNDS The investment objective of each of the Bullish Funds--Ultra500 Fund, Ultra100 Fund, Ultra30 Fund and UltraMid-Cap400 Fund--is to seek daily investment results that, before fees and expenses, correspond to twice (200%) the daily performance of a specified stock market index. The investment results of these Funds should magnify (both positively and negatively) the daily performance of its benchmark.
- ----------------------------------------------------------------------------------------------- Fund Index Benchmark Types of Companies in Index - ----------------------------------------------------------------------------------------------- Ultra500 Fund S&P 500(R)Index Double (200%) Diverse, widely traded, large capitalization Ultra100 Fund NASDAQ-100 Double (200%) Large capitalization, most Index(R) with technology and/or growth orientation Ultra30 Fund Dow Jones Double (200%) Diverse, widely traded, large Industrial Average capitalization UltraMid-Cap400 S&P MidCap400 Double (200%) Diverse, widely traded, Fund Index mid-capitalization
- -------- 1 A benchmark can be any standard of investment performance to which a fund seeks to compare its return, such as a stock index. A stock index reflects the price of a group of stocks of specified companies. For example, Ultra500 has a benchmark of twice the daily return of the Standard & Poor's Composite Stock Price Index(R) ("S&P 500 Index"). 6 INVESTMENT OBJECTIVES OF THE BEARISH FUNDS The investment objective of each of the Bearish Funds--UltraShort500 Fund, UltraShort100 Fund, UltraShort30 Fund and UltraShortMid-Cap400 Fund--is to seek daily investment results that, before fees and expenses, correspond to double the inverse (opposite) of the daily performance of its benchmark. The NAV of Shares of the Bearish Funds should go down when their benchmark goes up on a given day.
- ------------------------------------------------------------------------------------------------ Fund Index Benchmark Types of Companies in Index - ------------------------------------------------------------------------------------------------ UltraShort500 Fund S&P 500(R)Index 200% of the Inverse Diverse, widely traded, large capitalization UltraShort100 Fund NASDAQ-100 200% of the Inverse Large capitalization, most Index(R) with technology and/or growth orientation UltraShort30 Fund Dow Jones 200% of the Inverse Diverse, widely traded, large Industrial Average capitalization UltraShort S&P MidCap400 200% of the Inverse Diverse, widely traded, Mid-Cap400 Fund Index mid-capitalization
HOW DO I BUY AND SELL SHARES? Each Fund issues and redeems Shares only in bundles of a specified number. These bundles are known as "Creation Units." To purchase or redeem a Creation Unit, you must be an Authorized Participant or you must do so through a broker that is an Authorized Participant. An Authorized Participant is a participant in the Depository Trust Company ("DTC"), a limited trust company and securities depository that serves as a national clearinghouse for the settlement of trades for its participating banks and broker-dealers, that has executed a Participant Agreement with the Funds' distributor ("Distributor"). The Distributor will provide you with a list of Authorized Participants upon request. Because Creation Units likely will cost millions of dollars, it is expected that generally, only institutional investors will purchase and redeem Shares directly with an issuing Fund. Investors may acquire Shares on the secondary market (i.e., not from the issuing Fund) through a broker; Shares of each Fund are listed on the Exchange and publicly traded. For information about acquiring Shares through a secondary market purchase, please contact your broker. If you want to sell Shares of a Fund, you must do so through your broker. Note: When you buy or sell Shares on the secondary market, your broker may charge you a commission or other transaction charges and you may pay some or all of the spread between the bid and the offered price for each purchase or sale transaction. In addition, because secondary 7 market transactions occur at market prices, you may pay more than NAV when you buy the Shares, and receive less than NAV when you sell those Shares. PRINCIPAL INVESTMENT STRATEGIES OF THE FUNDS The following discussion of investment strategies covers all of the Funds of ProFunds ETF Trust. In seeking to achieve a Fund's investment objective of seeking daily investment results, before fees and expenses, that correspond to a specific benchmark, the Funds' investment advisor, ProFund Advisors LLC ("ProFund Advisors") determines the type, quantity and mix of investment positions that a Fund should hold to approximate the performance of its benchmark. ProFund Advisors does not make judgments about the investment merit of a particular security or instrument, nor does it attempt to apply any economic, financial or market analysis. The Funds do not take defensive positions, temporary or otherwise. The Funds take positions in securities and other financial instruments, such as swap agreements and futures contracts, that ProFund Advisors believes should have similar investment characteristics as, and simulate the movement of, their respective benchmarks. The Funds may invest in securities that are not included in the indices underlying their benchmarks if ProFund Advisors believes it is appropriate in view of the Funds' investment objectives. Ultra500, Ultra100, Ultra30 and UltraMid-Cap400 Funds principally invest in: - - A combination of securities and financial instruments that in ProFund Advisors' opinion should simulate the movement of the appropriate benchmark; - - Futures contracts; and - - Financial instruments such as equity caps, collars, floors, and swaps on securities and stock indices. UltraShort500, UltraShort100, UltraShort30 and UltraShortMid-Cap400 Funds generally do not invest in securities such as common stock of operating companies. Rather, they invest principally in futures contracts, swaps and other financial instruments, and engage in short sales. These techniques are utilized in a manner designed to produce a loss if the price of the underlying security or index increases during the period that the position is open. All of the Funds may invest in futures contracts on stock indices and the other financial instruments noted above as a substitute for investing directly in stocks or bonds in order to gain exposure to the appropriate benchmark. These instruments may also be used to produce economically "leveraged" investment results. Leverage is a way to magnify market movements into larger changes in the value of the investments of these Funds. 8 Each Fund may hold U.S. government securities, including government agency securities, money market instruments or cash equivalents. In addition, all of the Funds may borrow money for investment purposes. WHAT THE FUNDS DO Each Fund: - - Seeks to provide its shareholders with predictable daily investment returns approximating its benchmark by investing in securities and other financial instruments. - - Is managed using a passive, mathematical approach to investing its assets. - - Pursues its objective regardless of market conditions, trends or direction. - - Seeks to provide positive (in the case of the Bullish Funds) or negative (in the case of the Bearish Funds) correlation with its benchmark on a daily basis. WHAT THE FUNDS DO NOT DO ProFund Advisors does not: - - Conduct conventional stock research or analysis, or forecast stock market movement or trends, in managing the assets of the Funds. - - Invest the assets of the Funds in stocks or financial instruments based on ProFund Advisors' view of the fundamental prospects of particular companies. - - Adopt defensive positions by investing in cash or other instruments in anticipation of an adverse climate for the benchmarks of the Funds. In addition, the Funds do not seek to provide performance results that track their benchmarks over a period of time other than daily because mathematical compounding prevents the Funds from achieving such results. PRINCIPAL RISKS OF INVESTING IN THE FUNDS Like all investments, the Funds entail risk. ProFund Advisors cannot guarantee that any Fund will achieve its investment objective. The Funds could lose money, or their performance could trail that of other investment alternatives. Some of the risks that are common (unless otherwise specified) to the Funds are: Market Risk. The Funds are subject to market risks that will affect the value of their Shares, including general economic and market conditions, as well as developments that impact specific economic sectors, industries or companies. Investors in the Funds, other than the Bearish Funds, should normally lose money on days when the index underlying their benchmark declines. 9 Investors in a Bearish Fund should lose money on days when the index underlying its benchmark increases. Equity Risk. The Funds seek exposure to the equity markets. The equity markets are volatile, and the value of securities, futures and other instruments tied to the equity markets may fluctuate dramatically from day-to-day. This volatility may cause the value of an investment in a Fund to decrease. Small and mid capitalization companies may lack the financial and personnel resources to handle economic setbacks, and their securities typically are less liquid than larger companies' securities. The risk of equity investing may be particularly acute when a Fund invests in the securities of issuers with small market capitalization. The Bearish Funds respond differently to these risks than positively correlated funds. A Fund will not sell a stock because the stock's issuer is in financial trouble unless the issuer is removed from its benchmark. Correlation Risk. A number of factors may affect a Fund's ability to achieve a high correlation with its benchmark, and there can be no guarantee that a Fund will achieve a high degree of correlation. A Fund may invest in securities or in other financial instruments not included in its underlying index and may not have investment exposure to all securities in its underlying index, or its weighting of investment exposure to such stocks may be different from that of the index. A Fund may be subject to large movements of assets into and out of the Fund and may receive trade information after the exchange or market closes, potentially resulting in the Fund being over or underexposed. It is expected that there will be an imperfect correlation between the performance of instruments held by a Fund, such as futures, and the performance of the underlying securities. The need to comply with various tax laws or regulatory requirements may, at times, limit the investment flexibility of a Fund. An exchange or market may close early, which may result in a Fund being unable to sell or buy securities on that day. An exchange or market may halt trading in securities held by a Fund, which may result in a Fund being unable to sell or buy certain futures contracts. In such circumstances, a Fund may be unable to accurately price its outstanding investments or may incur substantial trading losses. In addition, each Fund incurs a number of operating expenses not applicable to its respective benchmark and incurs costs in buying and selling securities and other financial instruments. These foregoing factors may adversely affect a Fund's correlation with its benchmark. While a close tracking of any Fund to its benchmark may be achieved on any single trading day, over time, the cumulative percentage increase or decrease in the NAV of Shares of a Fund may diverge significantly from the cumulative percentage increase or decrease in the benchmark due to a compounding effect. Leverage Risk. The Funds employ leveraged investment techniques and may borrow money for investment purposes. Leveraged investment techniques provide greater investment exposure than a Fund's investment. Use of leverage can magnify the effects of changes in the value of the Funds and makes them more volatile. The leveraged investment techniques that the Funds employ should cause investors in these Funds to lose more money in adverse environments. Risks of Aggressive Investment Techniques. The Funds use investment techniques that may be considered aggressive. Risks associated with the use of swaps, futures contracts and other similar instruments, particularly when used to create leverage, include potentially dramatic price changes (losses) in the value of the instruments and imperfect movement or tracking between the price of the contract and the underlying security or index. 10 Liquidity Risk. In certain circumstances, such as the disruption of the orderly markets for financial instruments in which the Funds invest, the Funds might not be able to dispose of certain holdings quickly or at prices that represent true market value in the judgment of ProFund Advisors. This may prevent the Funds from limiting losses or realizing gains. Non-Diversification Risk. The Funds are classified as "non-diversified" under the federal securities laws. They have the ability to concentrate a relatively high percentage of their investments in the securities of a small number of companies, if ProFund Advisors determines that doing so is the most efficient means of meeting their daily objective. This would make the performance of a Fund more susceptible to a single economic, political or regulatory event than a more diversified investment company might be. This risk may be particularly acute with respect to a Fund whose benchmark comprises a small number of stocks or other securities. Related to this, each Fund will encounter its own industry concentration risk, in that it seeks to achieve returns related to a specific index or benchmark. Thus, although a Fund may not invest all of its assets in securities that comprise a particular index or benchmark--e.g., the Ultra500 Fund will not invest all of its assets in securities of companies that are included in the S&P 500 Index--the Fund may concentrate its assets in a manner similar to how the appropriate index or benchmark would concentrate its listing of companies. Swap Agreements and Swap Counterparty Credit Risk. A principal investment strategy of the Funds is to enter into swap agreements, and, for the Bearish Funds, that may be the sole investment strategy (along with selling securities short). The Funds are subject to credit or performance risk on the amount each Fund expects to receive from swap agreement counterparties. A swap counterparty default on its payment obligation to a Fund will cause the value of the Fund to decrease. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a day to more than one year. In a standard "swap" transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or "swapped" between the parties are calculated with respect to a "notional amount," i.e., the return on or increase in value of a particular dollar amount invested in a "basket" of securities representing a particular index. Operational Risk. There can be no assurances that any Fund will grow to or maintain an economically viable size, in which case management may determine to liquidate the Fund at a time that may not be opportune for shareholders. The investment objective of each Fund is non-fundamental and may be changed without shareholder approval. There can be no assurance that a Fund will achieve its investment objective. SPECIAL RISKS OF EXCHANGE-TRADED FUNDS Not Individually Redeemable. Shares may be redeemed by a Fund at NAV only in large blocks known as Creation Units. You may incur brokerage costs purchasing enough Shares to constitute a Creation Unit. 11 Difference between Market Price and NAV. Individual Shares of the Funds of ProFunds ETF Trust will be listed for trading on the Exchange and can be bought and sold in the secondary market at market prices. The market prices of Shares will fluctuate in response to changes in NAV and supply and demand for Shares. ProFund Advisors cannot predict whether Shares will trade above, below or at their NAV. Differences between secondary market prices and NAV for Shares may be due largely to supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for securities held by a Fund at a particular time. Given the fact that Shares can be created and redeemed in Creation Units, ProFund Advisors believes that large discounts or premiums to the net value of Shares should not be sustained. There may, however, be times when the market price and the NAV vary significantly. Thus, you may pay more than NAV when buying Shares on the secondary market, and you may receive less than NAV when you sell those Shares. The market price of Shares, like the price of any exchange-traded security, includes a "bid-ask spread" charged by the exchange specialist, market makers or other participants that trade the particular security. In times of severe market disruption, the bid-ask spread often increases significantly. This means that Shares are most likely to be traded at a discount to NAV, and the discount is likely to be greatest, when the price of Shares is falling fastest, which may be the time that you most want to sell your Shares. Trading Issues. Trading in Shares on the Exchange may be halted due to market conditions or for reasons that, in the view of the Exchange, make trading in Shares inadvisable. In addition, trading in Shares on the Exchange may be halted due to extraordinary market volatility or other reasons. There can be no assurance that Shares will continue to meet the listing requirements of the Exchange, as they may be amended from time to time. WHO MAY WANT TO CONSIDER AN INVESTMENT IN PROFUNDS ETF TRUST The Bullish Funds may be appropriate for investors who believe that the value of a particular index will increase, and that by investing with the objective of doubling the index's daily return, they will achieve superior results over time or are seeking to approximate an index's daily return with half the investment required of a conventional investment company. Investors in these Funds should understand that since each Bullish Fund seeks to double the daily performance of its benchmark, before fees and expenses, it should have twice the volatility of a conventional index fund and twice the potential for loss on a daily basis. The Bearish Funds may be appropriate for investors who expect the underlying index to decrease and desire to earn a profit as a result of the index declining or who want to protect (hedge) the value of a diversified portfolio of stocks and/or stock mutual fund from a market downturn that they anticipate. IMPORTANT CONCEPTS - - Leverage and leveraged investment techniques offer a means of magnifying market movements into larger changes in an investment's value. - - Futures, or futures contracts, are contracts to pay a fixed price for an agreed-upon amount of commodities or securities, or the cash value of the commodity or securities, on an agreed-upon date. 12 - - Swap agreements are two-party contracts where the parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. - - Selling short or borrowing stock to sell to a third party, is a technique that may be employed by a Bearish Fund to seek gains when its benchmark declines, or by any Fund to achieve investment exposure to its benchmark. If a Bearish Fund returns the security to the lender at a price lower than the price at which it borrowed the security plus interest incurred, the Bearish Fund makes a profit of the difference. If the current market price is greater when the time comes to return the security, the Bearish Fund will incur a loss on the transaction. THE SHARES OF THE FUNDS: - - Are not federally insured - - Are not guaranteed by any government agency - - Are not bank deposits - - Are not guaranteed to achieve their objectives 13 DESCRIPTION OF THE BULLISH FUNDS Each Bullish Fund is associated with a specific broad market index, such as the S&P 500(R) Index. The following chart outlines the Bullish Funds, their indices and their daily objectives. - ------------------------------------------------------------------------------ Fund Index Daily Benchmark - ------------------------------------------------------------------------------ Ultra500 Fund S&P 500(R) Index Double (200%) Ultra100 Fund NASDAQ-100 Index(R) Double (200%) Ultra30 Fund Dow Jones Double (200%) Industrial Average UltraMid-Cap400 Fund S&P Mid-Cap400 Index Double (200%) 14 Specific information about each Bullish Fund appears below. Ultra500 Fund Goal and Principal Investment Strategy. Ultra500 Fund seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the S&P 500(R) Index. If Ultra500 Fund is successful in meeting its objective, it should gain, on a percentage basis, approximately twice as much as the S&P 500 Index when the prices of the securities in the S&P 500 Index rise on a given day and should lose approximately twice as much when such prices decline on a given day. Investment strategies common to the Funds are discussed above in the Overview. The S&P 500 Index is a widely used measure of large-capitalization U.S. stock market performance. It consists of the common stocks of 500 major corporations selected by Standard & Poor's(R) for their market size, liquidity and industry group representation. Standard & Poor's also attempts to assure that the Index reflects the full range and diversity of the U.S. economy. Principal Risk Considerations. The principal risks associated with Ultra500 Fund are discussed above in the Overview. Fund Performance. Because Ultra500 Fund is newly formed and has no investment track record, it has no performance to compare against other investment companies or broad measures of securities market performance, such as indices. Ultra100 Fund Goal and Principal Investment Strategy. Ultra100 Fund seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the NASDAQ-100 Index(R). If Ultra100 Fund is successful in meeting its objective, it should gain, on a percentage basis, approximately twice as much as the NASDAQ-100 Index when the prices of the securities in the NASDAQ-100 Index rise on a given day and should lose approximately twice as much when such prices decline on a given day. Investment strategies common to the Funds are discussed above in the Overview. The NASDAQ-100 Index contains 100 of the largest and most active non-financial domestic and international issuers listed on the NASDAQ Stock Market based on market capitalization. Eligibility criteria for the NASDAQ-100 Index include a minimum average daily trading volume of 100,000 shares. If the security is a foreign security, the company must have a world wide market value of at least $10 billion, a U.S. market value of at least $4 billion, and average trading volume of at least 200,000 shares per day. Principal Risk Considerations. In addition to the risks discussed in the Overview, Ultra100 Fund is subject to the following risk: Technology Concentration Risk - To the extent the NASDAQ-100 Index is currently concentrated in issuers conducting business in the technology sector, the technology companies 15 making up the Ultra100 Fund's investments are subject to intense competition, both domestically and internationally; limited product lines, markets, financial resources or personnel; product obsolescence due to rapid technological developments and frequent new product introduction; dramatic and often unpredictable changes in growth rates and competition for qualified personnel; and heavy dependence on patent and intellectual property rights, the loss or impairment of which may adversely affect profitability. Fund Performance. Because Ultra100 Fund is newly formed and has no investment track record, it has no performance to compare against other investment companies or broad measures of securities market performance, such as indices. Ultra30 Fund Goal and Principal Investment Strategy. Ultra30 Fund seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the Dow Jones Industrial AverageSM (DJIA). If Ultra30 Fund is successful in meeting its objective, it should gain, on a percentage basis, approximately twice as much as the DJIA on a given day when the index increases and should lose approximately twice as much as the DJIA on a given day when the index decreases. Investment strategies common to the Funds are discussed above in the Overview. The DJIA is a price-weighted index consisting of 30 widely held and traded stocks listed on U.S. stock markets selected by Dow Jones & Company based upon size, reputation, growth, transaction volume and sector coverage and excludes transportation and utility stocks. Principal Risk Considerations. The principal risks associated with Ultra30 Fund are discussed above in the Overview. Fund Performance. Because Ultra30 Fund is newly formed and has no investment track record, it has no performance to compare against other investment companies or broad measures of securities market performance, such as indices. UltraMid-Cap400 Fund Goal and Principal Investment Strategy. UltraMid-Cap400 Fund seeks daily investment results, before fees and expenses, that correspond to twice (200%) the daily performance of the S&P MidCap400 Index. If UltraMid-Cap400 Fund is successful in meeting its objective, it should gain, on a percentage basis, approximately twice as much as the S&P MidCap400 Index when the prices of the securities in the S&P MidCap400 Index rise on a given day and should lose approximately twice as much when such prices decline on a given day. Investment strategies common to the Funds are discussed above in the Overview. The S&P MidCap400 Index is a widely used measure of medium capitalized U.S. company stock performance. It consists of the common stocks of 400 major corporations selected by Standard & Poor's(R) for their market size, liquidity, and industry group representation. Standard & Poor's also attempts to assure that the Index reflects the full range and diversity of the U.S. economy. Principal Risk Considerations. In addition to the common risks discussed above in the Overview, UltraMid-Cap400 Fund is subject to the following risk: 16 Mid-Cap Company Investment Risk - UltraMid-Cap400 Fund could experience risks that a fund that invests in primarily large-capitalization, widely traded companies would not. In comparison to securities of companies with large capitalizations, securities of medium-capitalization companies may have more price volatility, greater spreads between their bid and ask prices, significantly lower trading volumes and cyclical or static growth prospects. Medium-capitalization companies often have limited product lines, markets or financial resources, and may therefore be more vulnerable to adverse developments than large-capitalization companies. Moreover, stocks of mid-sized companies could be more difficult to liquidate during market downturns compared to larger, more widely-traded companies. Fund Performance. Because UltraMid-Cap400 Fund is newly formed and has no investment track record, it has no performance to compare against other investment companies or broad measures of securities market performance, such as indices. 17 FEES AND EXPENSES OF THE BULLISH FUNDS The table below describes the fees and expenses you may pay if you buy and hold Shares of a Bullish Fund. I. Shareholder Transaction Expenses A. Creation Transaction Expenses Through the Continuous Net Settlement System of the National Securities Clearing Corp. ("NSCC")/1/ $[____] Outside NSCC/1/ Up to $[____] B. Redemption Transaction Expenses Through NSCC/2/ $[____] Outside NSCC/2/ Up to $[_____]
II. Annual Operating Expenses (as a percentage of average daily net assets) Management Fee []% Distribution and Service (12b-1) Fees []% Other Expenses []% ----- Total Annual Fund Operating Expenses []% Example: The Bullish Fund sells and redeems Shares in Creation Units principally on an in-kind basis for portfolio securities of the relevant Index. Shares in less than Creation Unit aggregations are not redeemable. An investor purchasing a Creation Unit on an in-kind basis would pay the following expenses on a $10,000 investment (payment with a deposit of securities included in the relevant Index), assuming a 5% annual return and that the Fund's operating expenses remain the same. Investors should note that the presentation below of a $10,000 investment in a Creation Unit is for illustration purposes only, because Shares will be issued by the Funds only in Creation Units. In addition, because this example is hypothetical and for comparison only, your actual costs will be different. - ------------------------------------------------------------------------------ 1 YEAR 3 YEARS $ $ - ------------------------------------------------------------------------------ _________________________ /1 /The creation transaction fee is the same regardless of the number of Creation Units being purchased pursuant to any one creation order. One Creation Unit consists of 50,000 Shares. /2 /The redemption transaction fee is the same regardless of the number of Creation Units being redeemed pursuant to any one redemption order. One Creation Unit consists of 50,000 Shares. 18 DESCRIPTION OF THE BEARISH Funds Each Bearish Fund seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of a specific broad market index, such as the S&P 500 Index. The following chart outlines the Bearish Funds, their indices and their daily objectives. - ------------------------------------------------------------------------------ Fund Index Daily Benchmark - ------------------------------------------------------------------------------ UltraShort500 Fund S&P 500(R)Index 200% of the Inverse UltraShort100 Fund NASDAQ-100 Index(R) 200% of the Inverse UltraShort30 Fund Dow Jones 200% of the Inverse Industrial Average UltraShortMid-Cap400 Fund S&P MidCap400 Index 200% of the Inverse - ------------------------------------------------------------------------------ 19 UltraShort500 Fund Goal and Principal Investment Strategy. UltraShort500 Fund seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the S&P 500(R) Index. If UltraShort500 Fund is successful in meeting its objective, the NAV of Shares of UltraShort500 Fund should increase or decrease approximately twice as much, on a percentage basis, as does that of the S&P 500 Index on any given day. Investment strategies common to the Funds are discussed above in the Overview. The S&P 500 Index is a widely used measure of large-capitalization U.S. company stock performance. It consists of the common stocks of 500 major corporations selected by Standard & Poor's for their market size, liquidity and industry group representation. Standard & Poor's also attempts to assure that the Index reflects the full range and diversity of the U.S. economy. Principal Risk Considerations. In addition to the common risks discussed in the Overview, UltraShort500 Fund is also subject to inverse correlation risk. Shareholders in UltraShort500 Fund should lose money when the S&P 500 Index, its underlying index, rises--a result that is the opposite from traditional equity funds. Fund Performance. Because UltraShort500 Fund is newly formed and has no investment track record, it has no performance to compare against other investment companies or broad measures of securities market performance, such as indices. UltraShort100 Fund Goal and Principal Investment Strategy. UltraShort100 Fund seeks daily investment results that correspond to twice (200%) the inverse (opposite) of the daily performance of the NASDAQ-100 Index(R). If UltraShort100 Fund is successful in meeting its objective, the NAV of Shares of UltraShort100 Fund should increase or decrease approximately twice as much, on a percentage basis, as does that of the NASDAQ-100 Index on any given day. Investment strategies common to the Funds are discussed above in the Overview. The NASDAQ-100 Index contains 100 of the largest and most active non-financial domestic and international issuers listed on the NASDAQ Stock Market based on market capitalization. Eligibility criteria for the NASDAQ-100 Index include a minimum average daily trading volume of 100,000 shares. If the security is a foreign security, the company must have a world wide market value of at least $10 billion, a U.S. market value of at least $4 billion, and average trading volume of at least 200,000 shares per day. Principal Risk Considerations. In addition to the common risks discussed in the Overview, UltraShort100 Fund is also subject to the following risks: Technology Concentration Risk - To the extent the NASDAQ-100 Index is currently concentrated in issuers conducting business in the technology sector, the technology companies making up UltraShort100 Fund's investments are subject to intense competition, both domestically and internationally; limited product lines, markets, financial resources or personnel; product obsolescence due to rapid technological developments and frequent new product introduction; dramatic and often unpredictable changes in growth rates and competition for 20 qualified personnel; and heavy dependence on patent and intellectual property rights the loss or impairment of which may adversely affect profitability. Inverse Correlation Risk - Shareholders in UltraShort100 Fund should lose money when the NASDAQ-100 Index, its underlying index, rises--a result that is the opposite from traditional equity funds. Fund Performance. Because UltraShort100 Fund is newly formed and has no investment track record, it has no performance to compare against other investment companies or broad measures of securities market performance, such as indices. UltraShort30 Fund Goal and Principal Investment Strategy. UltraShort30 Fund seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones Industrial Average(SM) (DJIA). If UltraShort30 Fund is successful in meeting its objective, the NAV of Shares of UltraShort30 Fund should increase or decrease approximately twice as much, on a percentage basis, as the DJIA on any given day. Investment strategies common to the Funds are discussed above in the Overview. The DJIA is a price-weighted index consisting of 30 widely held and traded stocks listed on U.S. stock markets selected by Dow Jones & Company based upon size, reputation, growth, transaction volume and sector coverage and excludes transportation and utility stocks. UltraShort30 Fund will concentrate its investments in a particular industry, group of industries or economic sector to approximately the same extent the Index is so concentrated. Principal Risk Considerations. In addition to the common risks discussed above in the Overview, UltraShort30 Fund is also subject to the following risk: Inverse Correlation Risk - Shareholders in UltraShort30 Fund expect to lose money when the DJIA, its underlying index, rises--a result that is the opposite from traditional equity funds. Fund Performance. Because UltraShort30 Fund is newly formed and has no investment track record, it has no performance to compare against other investment companies or broad measures of securities market performance, such as indices. UltraShortMid-Cap 400 Fund Goal and Principal Investment Strategy. The UltraShortMid-Cap400 Fund seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the S&P MidCap400 Index. If UltraShortMid-Cap400 Fund is successful in meeting its objective, the NAV of Shares of UltraShortMid-Cap400 Fund should increase or decrease approximately twice as much, on a percentage basis, as the S&P MidCap400 Index on a given day. Investment strategies common to the Funds are discussed above in the Overview. The S&P MidCap400 Index is a widely used measure of medium capitalized U.S. company stock performance. It consists of the common stocks of 400 major corporations selected by Standard & Poor's for their market size , industry group representation, 21 and the frequency and ease with which their stocks trade. Standard & Poor's also attempts to assure that the Index reflects the full range and diversity of the American economy. Principal Risk Considerations. In addition to the common risks discussed above in the Overview, UltraShortMid-Cap400 Fund is also subject to the following risks: Mid-Cap Company Investment Risk - UltraMid-Cap400 Fund could experience risks that a fund that invests in primarily large-capitalization, widely traded companies would not. In comparison to securities of companies with large capitalizations, securities of medium-capitalization companies may have more price volatility, greater spreads between their bid and ask prices, significantly lower trading volumes and cyclical or static growth prospects. Medium-capitalization companies often have limited product lines, markets or financial resources, and may therefore be more vulnerable to adverse developments than large-capitalization companies. Moreover, stocks of mid-sized companies could be more difficult to liquidate during market downturns compared to larger, more widely-traded companies. Inverse Correlation Risk - Shareholders in the UltraShortMid-Cap400 Fund should lose money when the S&P Mid-Cap400 Index, its underlying index, rises--a result that is the opposite from traditional equity funds. Fund Performance. Because UltraShortMid-Cap400 Fund is newly formed and has no investment track record, it has no performance to compare against other investment companies or broad measures of securities market performance, such as indices. 22 FEES AND EXPENSES OF THE BEARISH FUNDS The table below describes the fees and expenses you may pay if you buy and hold Shares of Bearish Fund. I. Shareholder Transaction Expenses A. Creation Transaction Expenses Through the Continuous Net Settlement System of the National Securities Clearing Corp. ("NSCC")/1/ [____] Outside NSCC/1/ Up to $[____] B. Redemption Transaction Expenses Through NSCC/2/ $[____] Outside NSCC/2/ Up to $[____]
II. Annual Operating Expenses (as a percentage of average daily net assets) Management Fee []% Distribution and Service (12b-1) Fees []% Other Expenses []% ----- Total Annual Fund Operating Expenses []%
Example: The Bearish Fund sells and redeems Shares in Creation Units principally on an in-kind basis for portfolio securities of the relevant Index. Shares in less than Creation Unit aggregations are not redeemable. An investor purchasing a Creation Unit on an in-kind basis would pay the following expenses on a $10,000 investment (payment with a deposit of securities included in the relevant Index), assuming a 5% annual return and that the Fund's operating expenses remain the same. Investors should note that the presentation below of a $10,000 investment in a Creation Unit is for illustration purposes only, because Shares will be issued by the Funds only in Creation Units. In addition, because this example is hypothetical and for comparison only, your actual costs will be different. - ----------------------------------------------------------------------------- 1 YEAR 3 YEARS $ $ - ------------------------------------------------------------------------------ ________________________ /1/ The creation transaction fee is the same regardless of the number of Creation units being purchased pursuant to any one creation order. One Creation Unit consists of 50,000 Shares. /2/ The redemption transaction fee is the same regardless of the number of Creation Units being redeemed pursuant to any one redemption order. One Creation Unit consists of 50,000 Shares. 23 PURCHASING SHARES DIRECTLY FROM A FUND You can purchase Shares directly from a Fund only if you meet the following criteria and comply with the following procedures. Eligible Investors. To purchase Shares directly from a Fund, you must be an Authorized Participant or you must purchase through a broker that is an Authorized Participant. An Authorized Participant is typically a brokerage firm and is a participant in the DTC that has executed a Participant Agreement with the Distributor. Creation Units. You must purchase Shares in large blocks, known as "Creation Units." The number of Shares that comprise a Creation Unit, and the minimum number of Creation Units you must purchase, are as follows: - ------------------------------------------------------------------------------ FUND NUMBER OF SHARES IN A UNIT MINIMUM PURCHASE - ------------------------------------------------------------------------------ Ultra500 Fund 50,000 1 unit Ultra100 Fund 50,000 1 unit Ultra30 Fund 50,000 1 unit UltraMid-Cap400 Fund 50,000 1 unit UltraShort500 Fund 50,000 1 unit UltraShort100 Fund 50,000 1 unit UltraShort30 Fund 50,000 1 unit UltraShortMid-Cap400 Fund 50,000 1 unit - ------------------------------------------------------------------------------ For any particular Fund, the number of Shares in a Creation Unit will not change, except in the event of a stock split or similar revaluation. The Funds will not issue fractional Creation Units. PROCEDURES APPLICABLE TO PURCHASE OF BULLISH FUNDS In-kind Deposits. To purchase Shares directly from a Bullish Fund, you must deposit with the Fund a basket of securities. Each business day, prior to the opening of trading on the Exchange, an agent of the Fund ("Index Receipt Agent") will make available on the NSCC bulletin board, a list of the names and number of shares of each security to be included in that day's creation basket ("Deposit Securities"). Note: Each Fund reserves the right to accept a non-conforming creation basket. For Authorized Participants that may not trade a particular Deposit Security, custom Creation Unit aggregations are available. Cash Component. In addition to the in-kind deposit of securities, you will generally have to make a cash payment referred to as the "Cash Component." The Cash Component is the amount equal to the differential, if any, between the market value of the Deposit Securities and the NAV 24 of the Shares being purchased. The Fund will publish, on a daily basis, information about the previous day's Cash Component. You also must pay a Transaction Fee, described below, in cash. For custom orders, cash-in-lieu may be added to the Cash Component to replace any Deposit Securities that the Authorized Participant is not able to trade Placement of Purchase Orders. All purchase orders for Shares must be placed by or through an Authorized Participant. Purchase orders will be processed either through a manual clearing process run by the DTC ("Manual Clearing Process") or through an enhanced clearing process ("Enhanced Clearing Process") that is available only to those DTC participants that also are participants in the Continuous Net Settlement System of the National Securities Clearing Corporation ("NSCC"). Authorized Participants that do not use the Enhanced Clearing Process will be charged a higher Transaction Fee (discussed below). A purchase order must be received by the Distributor by 3:00 p.m. New York time on the day the order is placed in order to receive that day's closing NAV per Shares. A custom order must be placed for one or more whole Creation Units of Shares of a Fund and must be received by the Distributor in proper form no later than 3:00 p.m. New York time in order to receive that day's NAV per Share. All other procedures set forth in the Participant Agreement must be followed in order for you to receive the NAV determined on that day. Transaction Fee on Purchases of Creation Units. A fixed Transaction Fee of $[] is applicable to each creation transaction, regardless of the number of Creation Units purchased. An additional fee of up to $______ (for a total of $______) is imposed on transactions effected through the Manual Clearing Process described above. Investors that elect to substitute cash in lieu of one or more Deposit Securities are subject to an additional charge determined at the discretion of the Fund. The Transaction Fee is paid to the Fund, not to ProFund Advisors or other third party. It protects existing shareholders of the Fund from the costs associated with the purchase of Creation Units. Shares may be issued in advance of receipt of Deposit Securities subject to various conditions including a requirement to maintain on deposit with the Trust cash at least equal to 115% of the market value of the missing Deposit Securities. Any such transaction effected with the Trust must be effected using the Manual Clearing Process. PROCEDURES APPLICABLE TO PURCHASE OF BEARISH FUNDS Although the organizational documents of the Trust and the Funds permit Funds to accept in-kind deposits, the Bearish Funds, which invest primarily in financial instruments such as swap agreements and which engage in selling securities short, typically would accept only cash to purchase Creation Units. The purchaser must transfer cash by 3:00 p.m. in an amount equal to (a) the immediately preceding NAV of a Creation Unit; and (b) the appropriate Transaction Fee. Any amounts by which the cash transfer exceeds or is less than the final purchase price of the Creation Unit must be settled the next Business Day by a payment by or to the Trust. Alternatively, the purchaser may make the entire payment on the next Business Day following the Transmittal Date, if permitted, pursuant to the Participation Agreement between the Trust and the Authorized Participant. 25 REDEEMING SHARES DIRECTLY FROM A FUND The redemption process is essentially the reverse of the purchase process described above. To redeem Shares, you must be an Authorized Participant or you must redeem through a broker that is an Authorized Participant, and you must tender the Shares in Creation Unit-size blocks. REDEMPTION PROCEDURES APPLICABLE TO BULLISH FUNDS Redemption Proceeds. Redemption proceeds will be paid in-kind with a basket of securities. In most cases, the basket of securities you receive will be the same as that required of investors purchasing Creation Units on the same day. There will be times, however, when the creation and redemption baskets differ. The composition of the redemption basket will be available on the NSCC bulletin board. Note: Each Fund reserves the right to honor a redemption request with a non-conforming redemption basket, with the consent of the redeeming investor. Balancing Amount. Depending on whether the NAV of a Creation Unit is higher or lower than the value of the redemption securities, you will either receive from or pay to the issuing fund a Balancing Amount in cash. If you are receiving a Balancing Amount, the amount due will be reduced by the amount of the applicable Transaction Fee. Placement of Redemption Orders. As with purchases, redemptions may be processed either through the DTC process or the Enhanced Clearing Process. A redemption order is deemed received on the date of transmittal if it is received by the Distributor prior to 3:00 p.m. New York time on that date, and all other procedures set forth in the Participation Agreement are followed. Transaction Fee on Redemption of Creation Units. A fixed Transaction Fee of $______ is applicable to each redemption transaction, regardless of the number of Creation Units redeemed. An additional fee of up to $______ (for a total of $_____) may be imposed on transactions effected through the DTC clearing process. Investors that elect to receive cash in lieu of one or more securities in the redemption basket are subject to an additional charge determined at the discretion of the Fund. The Transaction Fee is paid to the Fund, not to ProFund Advisors or other third party. It protects existing shareholders of the fund from the expenses associated with the redemption of Creation Units. REDEMPTION PROCEDURES APPLICABLE TO BEARISH FUNDS Redemption Proceeds. Redemption proceeds will be paid in cash. Placement of Redemption Orders. As with purchases, redemptions may be processed either through the DTC process or the Enhanced Clearing Process. A redemption order is deemed received on the date of transmittal if it is received by the Distributor prior to 3:00 p.m. New York time on that date, and all other procedures set forth in the Participation Agreement are followed. Transaction Fee on Redemption of Creation Units. A fixed Transaction Fee of $______ is applicable to each redemption transaction, regardless of the number of Creation Units redeemed. An additional fee of up to $______ (for a total of $_____) may be imposed on transactions effected through the DTC clearing process. The Transaction Fee is paid to the Fund, not to 26 ProFund Advisors or other third party. It protects existing shareholders of the Fund from the expenses associated with the redemption of Creation Units. PURCHASING AND SELLING SHARES ON THE SECONDARY MARKET You can buy and sell Shares on the secondary market in the same way you buy and sell any other exchange-traded security--through a broker. In most cases, the broker will charge you a commission to execute the transaction. The price at which you buy or sell Shares, i.e., the market price, may be more or less than the NAV of the Shares. Unless imposed by your broker, there is no minimum dollar amount you must invest and no minimum number of Shares you must buy. PRECAUTIONARY NOTES A Precautionary Note to Retail Investors. DTC or its nominee will be the registered owner of all outstanding Shares of each Fund of ProFunds ETF Trust. Your ownership of Shares will be shown on the records of DTC and the DTC Participant broker through whom you hold the Shares. PROFUNDS ETF TRUST WILL NOT HAVE ANY RECORD OF YOUR OWNERSHIP. Your account information will be maintained by your broker, who will provide you with account statements, confirmations of your purchases and sales of Shares, and tax information. Your broker also will be responsible for ensuring that you receive shareholder reports and other communications from the Fund whose Shares you own. You will receive other services (e.g., dividend reinvestment and average cost information) only if your broker offers these services. A Precautionary Note to Purchasers of Creation Units. You should be aware of certain legal risks unique to investors purchasing Creation Units directly from the issuing Fund. Because new Shares may be issued on an ongoing basis, a "distribution" of Shares could be occurring at any time. As a dealer, certain activities on your part could, depending on the circumstances, result in your being deemed a participant in the distribution, in a manner that could render you a statutory underwriter and subject you to the prospectus delivery and liability provisions of the Securities Act of 1933, as amended ("Securities Act"). For example, you could be deemed a statutory underwriter if you purchase Creation Units from an issuing Fund, break them down into the constituent Shares, and sell those Shares directly to customers, or if you choose to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for Shares. Whether a person is an underwriter depends upon all of the facts and circumstances pertaining to that person's activities, and the examples mentioned here should not be considered a complete description of all the activities that could cause you to be deemed an underwriter. Dealers who are not "underwriters," but are participating in a distribution (as opposed to engaging in ordinary secondary market transactions), and thus dealing with Shares as part of an "unsold allotment" within the meaning of Section 4(3)(C) of the Securities Act, will be unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act. 27 A Precautionary Note to Investment Companies. For purposes of the Investment Company Act, each Fund is a registered investment company, and the acquisition of Shares by other investment companies is subject to the restrictions of Section 12(d)(1) thereof. A Precautionary Note Regarding Unusual Circumstances. ProFunds ETF Trust can stop selling Shares of any or all of the Funds, and can postpone payment of redemption proceeds, at times when the New York Stock Exchange is closed or under any emergency circumstances as determined by the U.S. Securities and Exchange Commission. INVESTMENT POLICIES Each Fund reserves the right to substitute a different index for the index it currently tracks if the current index is discontinued, the fund's license with the sponsor of its target index is terminated, or for any other reason determined in good faith by the fund's Board of Trustees. In every such instance, the substitute index will measure the same general market (large- or small-cap, growth or value) as the current index. Each fund may invest in foreign securities to the extent necessary to carry out its investment strategy of holding all, or a representative sample, of the stocks that comprise the index it tracks. It is not expected that a fund will invest more than 5% of its assets in foreign securities. To help stay fully invested, and to reduce transaction costs, the Funds may invest in stock futures, warrants, convertible securities, and swap agreements, which are types of derivatives. Losses (or gains) involving futures can sometimes be substantial--in part because a relatively small price movement in a futures contract may result in an immediate and substantial loss (or gain) for a fund. Similar risks exist for warrants (securities that permit their owners to purchase a specific number of stock shares at a predetermined price), convertible securities (securities that may be exchanged for another asset), and swap agreements (contracts in which each party agrees to make payments to the other based on the return of a specified index or asset.) [DIVIDEND REINVESTMENT SERVICE Brokers may make available to their customers who own Shares the DTC book-entry dividend reinvestment service. If this service is available and used, dividend distributions of both income and capital gains will automatically be reinvested in additional whole Shares of the same Fund. Without his service, investors would have to take their distributions in cash. To determine whether the dividend reinvestment service is available and whether there is a commission or other charge for using this service, please consult your broker.] DISTRIBUTIONS Each Fund distributes to shareholders virtually all of its net income (interest and dividends, less expenses), as well as any capital gains realized from the sale of its holdings. As a shareholder, you are entitled to your share of the Fund's income from interest and dividends, and gains from the sale of investments. You receive such earnings as either an income dividend or a capital gains distribution. Income dividends come from both the dividends that the fund earns from its holdings and the interest it receives from its money market and bond investments. Capital gains are realize whenever the fund sells securities for higher prices than it paid for them. These capital 28 gains are either short-term or long-term, depending on whether the fund held the securities for one year or less, or more than one year. DETERMINATION OF NAV NAV per Share of each Fund is computed by dividing the value of the net assets of such Fund (i.e., the value of its total assets less total liabilities) by its total number of Shares outstanding. Expenses and fees are accrued daily and taken into account for purposes of determining NAV. The NAV of each Fund is calculated by the Custodian and determined each business day at the close of regular trading of the New York Stock Exchange ("NYSE") (ordinarily 4:00 p.m. New York time). Securities and other assets are generally valued at their market value. When a market price is not readily available, securities and other assets are valued at fair value in good faith under procedures established by, and under the general supervision and responsibility of the Funds' Board of Trustees. This procedure incurs the unavoidable risk that the valuation may be higher or lower than the securities might actually command if the Funds sold them. See the Statement of Additional Information for more details. The New York Stock Exchange and the Chicago Mercantile Exchange, a leading market for futures and options, are open every week, Monday through Friday, except when the following holidays are celebrated in 2002: New Year's Day, Martin Luther King, Jr. Day (the third Monday in January), Presidents' Day (the third Monday in February), Good Friday, Memorial Day (the last Monday in May), July 4th, Labor Day (the first Monday in September), Thanksgiving Day (the fourth Thursday in November) and Christmas Day. Either or both of these Exchanges may close early on the business day before each of these holidays. Either or both of these Exchanges also may close early on the day after Thanksgiving Day and the day before Christmas holiday. BASIC TAX POINTS Taxable investors should be aware of the following basic tax points: - - Distributions are taxable to you for federal income tax purposes whether or not you reinvest these amounts in additional Shares. - - Distribution declared in December--if paid to you by the end of January--are taxable for federal income tax purposes as if received in December. - - Any dividends and short-term capital gains that you receive are taxable to you as ordinary income for federal income tax purposes. - - Any distributions of net long-term capital gains are taxable to you as long-term capital gains for federal income tax purposes, no matter how long you have owned your Shares. - - Capital gains distributions may vary considerably from year to year as a result of the funds' normal investment activities and cash flows. 29 - - A sale of Shares is a taxable event. This means that you may have a capital gain to report as income, or a capital loss to report as a deduction, when you complete your federal income tax return. - - Dividend and capital gains distributions that you receive, as well as your gains or losses from any sale or exchange of Shares, may be subject to state and local income taxes. - - If you are not a citizen or a permanent resident of the United States, or if you are a foreign entity, any dividends and short term capital gains that you receive) will generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate applies. - - Dividends and interest received by the Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. - - By law, the Fund must withhold a percentage of your distributions and proceeds if you have not provided a taxpayer identification number or social security number. The backup withholding rates are currently: 30% during 2002-2003; 29% during 2004-2005; 28% during 2006-2010; and 31% 2011 and thereafter. In addition, taxable investors who purchase or redeem Creation Units should be aware of the following additional basic tax points: - - A person who exchanges equity securities for Creation Units generally will recognize a gain or loss equal to the difference between the market value of the Creation Units at the time and the exchanger's aggregate basis in the securities surrendered and the Cash Component paid. - - A person who exchanges Creation Units for equity securities generally will recognize a gain or loss equal to the difference between the exchanger's basis in the Creation Units and the aggregate market value of the securities received and any cash received. However, the Internal Revenue Service may assert that a loss realized upon an exchange of securities for Creation Units cannot be deducted currently under the rules governing "wash sales" or on the basis that there has been no significant change in economic position. Note: This prospectus provides general tax information only. If you are investing through a tax-deferred retirement account, such as an IRA, special tax rules apply. Please consult your tax advisor for detailed information about a fund's tax consequences for you. MANAGEMENT OF PROFUNDS ETF TRUST Board of Trustees and Officers. The Board of Trustees of ProFunds ETF Trust is responsible for the general supervision of all of the Funds. The officers of ProFunds ETF Trust are responsible for the day-to-day operations of the Funds. 30 Investment Advisor. ProFund Advisors LLC, located at 7501 Wisconsin Avenue, Suite 1000, Bethesda, Maryland 20814, serves as the investment advisor to all of the Funds and provides investment advice and management services to the Funds. ProFund Advisors oversees the investment and reinvestment of the assets in each Fund. It is entitled to receive fees equal to [_____ to be determined] of the average daily net assets of each Fund. [Michael L. Sapir, Chairman and Chief Executive Officer of ProFund Advisors LLC, formerly served as senior vice president of Padco Advisors, Inc., which advised Rydex(R) Funds. In addition, Mr. Sapir practiced law, primarily representing financial institutions for over 13 years, most recently as a partner in a Washington-based law firm. He holds degrees from Georgetown University Law Center (J.D.) and University of Miami (M.B.A. and B.A.) Louis M. Mayberg, President of ProFund Advisors LLC, co-founded National Capital Companies, L.L.C., an investment bank specializing in financial service companies mergers and acquisitions and equity underwritings in 1986, and managed its financial services hedge fund. He holds a Bachelor of Business Administration degree with a major in Finance from George Washington University. William E. Seale, Ph.D., Director of Portfolio for ProFund Advisors LLC, has more than 30 years of experience in the financial markets. His background includes a five-year presidential appointment as a commissioner of the U.S. Commodity Futures Trading Commission and Chairman of the Finance Department at George Washington University. He earned his degrees at University of Kentucky.] OTHER SERVICE PROVIDERS [TO BE INSERTED] GLOSSARY OF INVESTMENT TERMS Active Management. An investment approach that seeks to exceed the average returns of the financial markets. Active managers rely on research, market forecasts, and their own judgment and experience in selecting securities to buy and sell. Capital Gains Distribution. Payment to fund shareholders of gains realized on securities that a fund has sold at a profit, minus any realized losses. Common Stock. A security representing ownership rights in a corporation. A stockholder is entitled to share in the company's profits, some of which may be paid out as dividends. Creation Unit. A large block of a specified number of Shares of a ProFunds ETF Trust Fund, determined by the issuing Fund. DTC participants must buy Shares in Creation Unit-size aggregations. 31 Dividend Income. Payment to shareholders of income from interest or dividends generated by a fund's investments. Expense Ratio. The percentage of a fund's average net assets used to pay its expenses. The expense ratio includes management fees, administrative fees, and any 12b-1 distribution fees. Index. An unmanaged group of securities whose overall performance is used as a standard to measure investment performance. Investment Advisor. An organization that makes the day-to-day decisions regarding a fund's investments. Passive Management. A investment strategy in which a fund attempts to match--rather than outperform--a particular stock or bond market index. Also known as indexing. PROFUNDS ETF TRUST. A Delaware business trust comprised of multiple exchange-traded Funds, the Shares of which may be bought and sold continuously throughout the day. Volatility. The fluctuations in value of a fund or other security. The greater a fund's volatility, the wider the fluctuations between its high and low prices. Yield. Income (interest or dividends) earned by an investment, expressed as a percentage of the investment's price. - -------------------------------------------------------------------------------- ____________ [SHIP] ProFunds ETF Trust 7501 Wisconsin Avenue, Suite 1000 Bethesda, Maryland 20814 FOR MORE INFORMATION If you'd like more information about ProFunds ETF Trust or any of its Funds, the following documents are available free upon request: ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS Additional information about the issuing funds' investments is available in the funds' annual and semiannual reports to shareholders. 32 STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI for the issuing fund provides more detailed information about ProFunds ETF Trust, the Funds and their Shares. The current annual and semiannual reports and the SAI are incorporated by reference into (and are thus legally a part of) this prospectus. To receive a free copy of the latest annual or semiannual report or the SAI, or to request additional information about ProFunds ETF Trust, the Funds and the Shares, please contact us as follows: PROFUNDS ETF TRUST 7501 Wisconsin Avenue Suite 1000 Bethesda, Maryland 20814 TELEPHONE: (240) 497-6400 WORLD WIDE WEB: WWW.____________.COM INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC) You can review and copy information about the issuing funds (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 1-202-942-8090. Reports and other information about the funds are also available on the SEC's website (www.sec.gov), or you can receive copies of this information, for a fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, Washington, DC 20549-0102. Funds' Investment Company Act file Number: 811-21114 (C) 2002 ProFund Advisors LLC. All rights reserved. 33 PROFUNDS ETF TRUST STATEMENT OF ADDITIONAL INFORMATION 7501 WISCONSIN AVENUE, SUITE 1000 BETHESDA, MARYLAND 20814 PHONE: (240)497-6400 This Statement of Additional Information describes ProFunds ETF Trust, a Delaware business trust ("Trust") comprised of the following portfolios (each a "Fund"): Ultra500 Fund, Ultra100 Fund, Ultra30 Fund, UltraMidCap400 Fund, UltraShort500 Fund, UltraShort100 Fund, UltraShort30 Fund and UltraShortMid-Cap400 Fund. This Statement of Additional Information ("SAI") is not a prospectus. It should be read in conjunction with the Prospectus of ProFunds ETF Trust, dated ______, 2002, which incorporates this Statement of Additional Information by reference. Capitalized terms used herein that are not defined have the same meaning as in the Prospectus, unless otherwise noted. A copy of the Prospectus is available, without charge, upon request to the address above or by telephone at the numbers above. The date of this Statement of Additional Information is dated ______, 2002. PAGE - ------------------------------------------------------------------------------- PROFUNDS ETF TRUST INVESTMENT POLICIES, TECHNIQUES AND RELATED RISKS SPECIAL CONSIDERATIONS INVESTMENT RESTRICTIONS PORTFOLIO TRANSACTIONS AND BROKERAGE MANAGEMENT OF THE PROFUNDS ETF TRUST COSTS AND EXPENSES ADDITIONAL INFORMATION CONCERNING SHARES CAPITALIZATION PURCHASE AND REDEMPTION OF SHARES TAXATION PERFORMANCE INFORMATION OTHER INFORMATION FINANCIAL STATEMENTS -1- PROFUNDS ETF TRUST The Trust is a Delaware business trust and registered investment company comprised of the following Funds: Bullish Funds Ultra500 Fund Ultra100 Fund Ultra30 Fund UltraMid-Cap400 Fund Bearish Funds UltraShort500 Fund UltraShort100 Fund UltraShort30 Fund UltraShortMid-Cap400 Fund Other Funds may be added in the future. Each of the Funds is registered as a non-diversified managed investment company. The shares of each Fund ("Shares") will be listed on a national securities exchange ("Exchange"). The Shares will trade on the Exchange at market prices that may differ to some degree from the Shares' net asset values. Each Fund issues and redeems Shares on a continuous basis at net asset value in large, specified numbers of Shares called "Creation Units." Creation Units of the Bullish Funds are issued and redeemed principally in-kind for securities included in the relevant underlying index. Creation Units of the Bearish Funds are purchased and redeemed in cash. Except when aggregated in Creation Units, Shares are not redeemable securities of the Funds. Retail investors, therefore, generally will not be able to purchase the Shares directly. Rather, most retail investors will purchase Shares in the secondary market with the assistance of a broker. Reference is made to the Prospectus for a discussion of the investment objectives and policies of the Funds. In addition, set forth below is further information relating to the Funds. The discussion below supplements and should be read in conjunction with the Prospectus. Portfolio management is provided to the Funds by ProFund Advisors LLC ("ProFund Advisors"), a Maryland limited liability company with offices at 7501 Wisconsin Avenue, Suite 1000, Bethesda, Maryland. The investment restrictions of the Funds specifically identified as fundamental policies may not be changed without the affirmative vote of at least a majority of the outstanding voting securities of that Fund, as defined in the Investment Company Act of 1940, as amended ("Investment Company Act"). The investment objectives and all other investment policies of the Funds not specified as fundamental (including the benchmarks of the Funds) may be changed by the Trustees of the Funds without the approval of shareholders. -2- The investment strategies of the Funds discussed below, and as discussed in the Prospectus, may be used by a Fund if, in the opinion of ProFund Advisors, these strategies will be advantageous to the Fund. A Fund is free to reduce or eliminate its activity in any of these areas without changing the Fund's fundamental policies. There is no assurance that any of these strategies or any other strategies and methods of investment available to a Fund will result in the achievement of the Fund's objectives. INVESTMENT POLICIES, TECHNIQUES AND RELATED RISKS A Fund may consider changing its benchmark if, for example, the current benchmark becomes unavailable; the Board of Trustees believes that the current benchmark no longer serves the investment needs of a majority of shareholders or another benchmark better serves their needs; or the financial or economic environment makes it difficult for its investment results to correspond sufficiently to its current benchmark. If believed appropriate, a Fund may specify a benchmark for itself that is "leveraged" or proprietary. Of course, there can be no assurance that a Fund will achieve its objective. Fundamental securities analysis is not generally used by ProFund Advisors in seeking to correlate with the Funds' respective benchmarks. Rather, ProFund Advisors primarily uses a mathematical approach to determine the investments a Fund makes and techniques it employs. While ProFund Advisors attempts to minimize any "tracking error," certain factors will tend to cause a Fund's investment results to vary from a perfect correlation to its benchmark. See "Special Considerations." Additional information concerning the characteristics of the investments of the Funds is set forth below. Exchange Listing and Trading. The Shares of each Fund are listed for trading on the Exchange. Shares (redeemable only when aggregated in Creation Units) trade on the Exchange at prices that may differ to some degree from their net asset value. There can be no assurance that the requirements of the Exchange necessary to maintain the listing of Shares of any Fund will continue to be met. In addition, the Exchange may remove the Shares from listing and trading upon termination of the Trust. As in the case of other stocks traded on an Exchange, the brokers' commission on transactions will be based on negotiated commission rates at customary levels for retail customers and rates. In order to provide current Share pricing information, the Exchange disseminates an updated "Indicative Intra-Day Value" ("IIV") for each Fund. The Trust is not involved in or responsible for any aspect of the calculation or dissemination of the IIVs, and makes no warranty as to the accuracy of the IIVs. IIVs are disseminated on a per Fund basis every 15 seconds during regular trading hours of the Exchange. For the Bullish Funds, the IIV has an equity securities value component and a cash component. The equity securities values included in the IIV are the values of the Deposit Securities (as described hereinafter) for each Fund. While the IIV reflects the current market value of the Deposit Securities required to be deposited in connection with the purchase of a Creation Unit (as described hereinafter) of Shares, it does not necessarily reflect the precise composition of the -3- current portfolio of securities held by the Trust for each Fund at a particular point in time, because the current portfolio of a Fund may include securities that are not a part of the current Deposit Securities. Therefore, the IIV on a per Fund basis disseminated during trading hours of the Exchange should not be viewed as a real time update of the net asset value per share of the Trust, which is calculated only once a day. It is possible that the value of the portfolio of securities held by the Trust for a particular Fund may diverge from the applicable IIV during any trading day. In such a case, the IIV would not precisely reflect the value of a Fund's portfolio. The equity securities included in the IIV reflect the same market capitalization weighting as the Deposit Securities of the particular Fund. In addition to the equity component described in the preceding paragraph, the IIV for each Fund includes a cash component consisting of estimated accrued dividend and other income, less expenses. For the Bearish Funds, and for any Fund that holds primarily financial instruments such as swap agreements (as opposed to holding equity securities), IIV per Share of such Fund will be calculated throughout the trading day by including the value of the financial instruments held by such Fund in the Cash Component for creations and redemptions. IIV will be calculated for such Funds by (i) calculating the gains or losses from the equity exposure represented by the financial instruments based on the basket percentage change from the prior day ("Current Value of Deposit Securities"), (ii) calculating the gains of losses from total return swap exposure based on the percentage change of the underlying index associated with such Fund, (iii) calculating the swap costs based on the daily interest rate and the notional value of the swap contracts or other financial instruments, (iv) adding the Current Value of Deposit Securities plus the Cash Component plus the gains or losses from the swap agreements or other financial instruments, and subtracting from that sum the daily swap costs, and arriving at a value, and (v) dividing that value by the number of Shares of the Fund that comprise a Creation Unit (e.g., 50,000, as the case may be), to obtain the current IIV for Shares of such Fund. Equity Securities. The market price of securities owned by a Fund may go up or down, sometimes rapidly or unpredictably. Securities may decline in value due to factors affecting securities markets generally or particular industries represented in the securities markets. The value of a security may decline due to general market conditions which are not specifically related to a particular company, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates, or adverse investor sentiment generally. They may also decline due to factors which affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. The value of a security may also decline for a number of reasons which directly relate to the issuer, such as management performance, financial leverage and reduced demand for the issuer's goods or services. Equity securities generally have greater price volatility than fixed income securities, and the Funds are particularly sensitive to these market risks. Foreign Securities. Each Fund may invest in securities of foreign issuers ("foreign securities"). These securities involve certain risks. These include the risk that an investment in a foreign issuer could be adversely effected as a result of a decline in value of the local currency versus the dollar. There is also the possibility of expropriation, nationalization or confiscatory taxation, taxation of income earned in foreign nations or other taxes imposed with respect to investments -4- in foreign nations, foreign exchange controls (which may include suspension of the ability to transfer currency from a given country), default in foreign government securities, political or social instability or diplomatic developments which could affect investments in securities of issuers in foreign nations. Some countries may withhold portions of interest and dividends at the source. In addition, in many countries there is less publicly available information about issuers than is available in reports about companies in the United States. Foreign companies are not generally subject to uniform accounting, auditing and financial reporting standards, and auditing practices and requirements may not be comparable to those applicable to United States companies. Further, the Funds may encounter difficulties or be unable to pursue legal remedies and obtain judgments in foreign courts. Futures Contracts. The Funds may purchase or sell stock index futures contracts as a substitute for a comparable market position in the underlying securities or to satisfy regulatory requirements. A futures contract obligates the seller to deliver (and the purchaser to take delivery of) the specified commodity on the expiration date of the contract. A stock index futures contract obligates the seller to deliver (and the purchaser to take) an amount of cash equal to a specific dollar amount multiplied by the difference between the value of a specific stock index at the close of the last trading day of the contract and the price at which the agreement is made. No physical delivery of the underlying stocks in the index is made. Whether a Fund realizes a gain or loss from futures activities depends generally upon movements in the underlying commodity. The extent of the Fund's loss from an unhedged short position in futures contracts is potentially unlimited. The Funds intend to engage in transactions in futures contracts that are traded on a U.S. exchange or board of trade or that have been approved for sale in the United States by the Commodity Futures Trading Commission ("CFTC"). When a Fund purchases or sells a stock index futures contract, or sells an option thereon, the Fund "covers" its position. To cover its position, a Fund may enter into an offsetting position or segregate with its custodian bank (and mark-to-market on a daily basis) cash or liquid instruments that, when added to any amounts deposited with a futures commission merchant as margin, are equal to the market value of the futures contract or otherwise "cover" its position. The Funds may purchase and sell futures contracts only to the extent that such activities would be consistent with the requirements of Section 4.5 of the regulations under the Commodity Exchange Act promulgated by the CFTC ("CFTC Regulations"), under which each of these Funds would be excluded from the definition of a "commodity pool operator." Under Section 4.5 of the CFTC Regulations, a Fund may engage in futures transactions, either for "bona fide hedging" purposes, as this term is defined in the CFTC Regulations, or for non-bona fide hedging purposes to the extent that the aggregate initial margins and option premiums required to establish such non-hedging positions do not exceed 5% of the liquidation value of the Fund's portfolio. In the case of an option on futures contracts that is "in-the-money" at the time of purchase (i.e., the amount by which the exercise price of the put option exceeds the current market value of the underlying security or the amount by which the current market value of the underlying security exceeds the exercise price of the call option), the in-the-money amount may be excluded in calculating this 5% limitation. -5- The Funds will cover their positions when they write a futures contract. A Fund may also cover its long position in a futures contract by taking a short position in the instruments underlying the futures contract, or by taking positions in instruments the prices of which are expected to move relatively consistently with the futures contract. A Fund may cover its short position in a futures contract by taking a long position in the instruments underlying the futures contract, or by taking positions in instruments the prices of which are expected to move relatively consistently with the futures contract. Although the Funds intend to sell futures contracts only if there is an active market for such contracts, no assurance can be given that a liquid market will exist for any particular contract at any particular time. Many futures exchanges and boards of trade limit the amount of fluctuation permitted in futures contract prices during a single trading day. Once the daily limit has been reached in a particular contract, no trades may be made that day at a price beyond that limit or trading may be suspended for specified periods during the day. Futures contract prices could move to the limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of futures positions and potentially subjecting a Fund to substantial losses. If trading is not possible, or if a Fund determines not to close a futures position in anticipation of adverse price movements, the Fund will be required to make daily cash payments of variation margin. The risk that the Fund will be unable to close out a futures position will be minimized by entering into such transactions on a national securities exchange with an active and liquid secondary market. Swap Agreements. A principal investment strategy of the Funds is to enter into swap agreements, and, for the Bearish Funds, that may be the sole investment strategy (along with selling securities short). The Funds may enter into equity, equity index or interest rate swap agreements for purposes of attempting to gain exposure to the stocks making up an index of securities in a market without actually purchasing those stocks, or to hedge a position. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a day to more than one year. In a standard "swap" transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or "swapped" between the parties are calculated with respect to a "notional amount," i.e., the return on or increase in value of a particular dollar amount invested in a "basket" of securities representing a particular index. Forms of swap agreements include interest rate caps, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates exceed a specified rate, or "cap"; interest rate floors, under which, in return for a premium, one party agrees to make payments to the other to the extent that interest rates fall below a specified level, or "floor"; and interest rate collars, under which a party sells a cap and purchases a floor or vice versa in an attempt to protect itself against interest rate movements exceeding given minimum or maximum levels. Most swap agreements entered into by the Funds calculate the obligations of the parties to the agreement on a "net basis." Consequently, a Fund's current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the "net amount"). -6- A Fund's current obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by segregating assets determined to be liquid. Obligations under swap agreements so covered will not be construed to be "senior securities" for purposes of a Fund's investment restriction concerning senior securities. Because they are two-party contracts and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid for the Funds' illiquid investment limitations. A Fund will not enter into any swap agreement unless the Advisor believes that the other party to the transaction is creditworthy. A Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. If such a default occurs, a Fund will have contractual remedies pursuant to the swap agreements, but such remedies may be subject to bankruptcy and insolvency laws which could affect the Fund's right as a creditor. Each Fund may enter into swap agreements to invest in a market without owning or taking physical custody of securities in circumstances in which direct investment is restricted for legal reasons or is otherwise impracticable. The counterparty to any swap agreement will typically be a bank, investment banking firm or broker/dealer. The counterparty will generally agree to pay the Fund the amount, if any, by which the notional amount of the swap agreement would have increased in value had it been invested in the particular stocks, plus the dividends that would have been received on those stocks. The Fund will agree to pay to the counterparty a floating rate of interest on the notional amount of the swap agreement plus the amount, if any, by which the notional amount would have decreased in value had it been invested in such stocks. Therefore, the return to the Fund on any swap agreement should be the gain or loss on the notional amount plus dividends on the stocks less the interest paid by the Fund on the notional amount. Swap agreements typically are settled on a net basis, which means that the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. Payments may be made at the conclusion of a swap agreement or periodically during its term. Swap agreements do not involve the delivery of securities or other underlying assets. Accordingly, the risk of loss with respect to swap agreements is limited to the net amount of payments that a Fund is contractually obligated to make. If the other party to a swap agreement defaults, a Fund's risk of loss consists of the net amount of payments that such Fund is contractually entitled to receive, if any. The net amount of the excess, if any, of a Fund's obligations over its entitlements with respect to each equity swap will be accrued on a daily basis and an amount of cash or liquid assets, having an aggregate NAV at least equal to such accrued excess will be segregated by a Fund's custodian. Inasmuch as these transactions are entered into for hedging purposes or are offset by segregated cash of liquid assets, as permitted by applicable law, the Funds and their Advisor believe that transactions do not constitute senior securities within the meaning of the Investment Company Act of 1940, as amended ("Investment Company Act"), and, accordingly, will not treat them as being subject to a Fund's borrowing restrictions. The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid in comparison with the markets for other similar instruments which are traded in the over-the-counter market. The -7- Advisor, under the supervision of the Board of Trustees, is responsible for determining and monitoring the liquidity of the Funds' transactions in swap agreements. The use of equity swaps is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. Short Sales. The Funds may engage in short sales transactions under which the Fund sells a security it does not own. To complete such a transaction, the Fund must borrow the security to make delivery to the buyer. The Fund then is obligated to replace the security borrowed by purchasing the security at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Fund. Until the security is replaced, the Fund is required to pay to the lender amounts equal to any dividends or interest which accrue during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would increase the cost of the security sold. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet the margin requirements, until the short position is closed out. Until the Fund closes its short position or replaces the borrowed security, the Fund will cover its position with an offsetting position or segregate cash or liquid instruments at such a level that the segregated amount plus the amount deposited with the broker as collateral will equal the current value of the security sold short. Depository Receipts. Each Fund may invest in ADRs. For many foreign securities, U.S. Dollar denominated ADRs, which are traded in the United States on exchanges or over-the-counter, are issued by domestic banks. ADRs represent the right to receive securities of foreign issuers deposited in a domestic bank or a correspondent bank. ADRs do not eliminate all the risk inherent in investing in the securities of foreign issuers. However, by investing in ADRs rather than directly in foreign issuers' stock, the Funds can avoid currency risks during the settlement period for either purchase or sales. In general, there is a large, liquid market in the United States for many ADRs. The information available for ADRs is subject to the accounting, auditing and financial reporting standards of the domestic market or exchange on which they are traded, which standards are more uniform and more exacting than those to which many foreign issuers may be subject. Certain ADRs, typically those denominated as unsponsored, require the holders thereof to bear most of the costs of such facilities, while issuers of sponsored facilities normally pay more of the costs thereof. The depository of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited securities or to pass through the voting rights to facility holders with respect to the deposited securities, whereas the depository of a sponsored facility typically distributes shareholder communications and passes through the voting rights. The Funds may invest in both sponsored and unsponsored ADRs. Unsponsored ADRs programs are organized independently and without the cooperation of the issuer of the underlying securities. As result, available information concerning the issuers may not be as current for sponsored ADRs, and the prices of unsponsored depository receipts may be more volatile than if such instruments were sponsored by the issuer. -8- A Fund may also invest in Global Depository Receipts ("GDRs"). GDRs are receipts for shares in a foreign-based corporation traded in capital markets around the world. While ADRs permit foreign corporations to offer shares to American citizens, GDRs allow companies in Europe, Asia, the United States and Latin American to offer shares in many markets around the world. U.S. Government Securities. Each Fund and the Portfolio also may invest in U.S. government securities in pursuit of their investment objectives, as "cover" for the investment techniques these Funds employ, or for liquidity purposes. U.S. government securities include U.S. Treasury securities, which are backed by the full faith and credit of the U.S. Treasury and which differ only in their interest rates, maturities, and times of issuance. U.S. Treasury bills have initial maturities of one year or less; U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally have initial maturities of greater than ten years. Certain U.S. government securities are issued or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited to, obligations of U.S. government agencies or instrumentalities, such as the Federal National Mortgage Association, the Government National Mortgage Association, the Small Business Administration, the Federal Farm Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit Corporation, the Federal Financing Bank, the Student Loan Marketing Association, and the National Credit Union Administration. Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including, for example, Government National Mortgage Association pass-through certificates, are supported by the full faith and credit of the U.S. Treasury. Other obligations issued by or guaranteed by Federal agencies, such as those securities issued by the Federal National Mortgage Association, are supported by the discretionary authority of the U.S. government to purchase certain obligations of the federal agency, while other obligations issued by or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury. While the U.S. government provides financial support to such U.S. government-sponsored Federal agencies, no assurance can be given that the U.S. government will always do so, since the U.S. government is not so obligated by law. U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal at maturity. Yields on U.S. government securities are dependent on a variety of factors, including the general conditions of the money and bond markets, the size of a particular offering, and the maturity of the obligation. Debt securities with longer maturities tend to produce higher yields and are generally subject to potentially greater capital appreciation and depreciation than obligations with shorter maturities and lower yields. The market value of U.S. government securities generally varies inversely with changes in market interest rates. An increase in interest rates, therefore, would generally reduce the market value of a Fund's portfolio investments in U.S. government securities, while a decline in interest rates would generally increase the market value of a Fund's portfolio investments in these securities. Repurchase Agreements. Each of the Funds may enter into repurchase agreements with financial institutions. Under a repurchase agreement, a Fund purchases a debt security and simultaneously agrees to sell the security back to the seller at a mutually agreed-upon future -9- price and date, normally one day or a few days later. The resale price is greater than the purchase price, reflecting an agreed-upon market interest rate during the purchaser's holding period. While the maturities of the underlying securities in repurchase transactions may be more than one year, the term of each repurchase agreement will always be less than one year. The Funds follow certain procedures designed to minimize the risks inherent in such agreements. These procedures include effecting repurchase transactions only with large, well-capitalized and well-established financial institutions whose condition will be continually monitored by ProFund Advisors. In addition, the value of the collateral underlying the repurchase agreement will always be at least equal to the repurchase price, including any accrued interest earned on the repurchase agreement. In the event of a default or bankruptcy by a selling financial institution, a Fund will seek to liquidate such collateral which could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Fund could suffer a loss. A Fund also may experience difficulties and incur certain costs in exercising its rights to the collateral and may lose the interest the Fund expected to receive under the repurchase agreement. Repurchase agreements usually are for short periods, such as one week or less, but may be longer. It is the current policy of the Funds not to invest in repurchase agreements that do not mature within seven days if any such investment, together with any other liquid assets held by the Fund, amounts to more than 15% of the Fund's total net assets. The investments of each of the Funds in repurchase agreements at times may be substantial when, in the view of ProFund Advisors, liquidity, investment, regulatory, or other considerations so warrant. Cash Reserves. To seek its investment objective, as a cash reserve, for liquidity purposes, or as "cover" for positions it has taken, each Fund may temporarily invest all or part of the Fund's assets in cash or cash equivalents, which include, but are not limited to, short-term money market instruments, U.S. government securities, certificates of deposit, bankers acceptances, or repurchase agreements secured by U.S. government securities. Reverse Repurchase Agreements. The Funds may use reverse repurchase agreements as part of that Fund's investment strategy. Reverse repurchase agreements involve sales by a Fund of portfolio assets concurrently with an agreement by the Fund to repurchase the same assets at a later date at a fixed price. Generally, the effect of such a transaction is that the Fund can recover all or most of the cash invested in the portfolio securities involved during the term of the reverse repurchase agreement, while the Fund will be able to keep the interest income associated with those portfolio securities. Such transactions are advantageous only if the interest cost to the Fund of the reverse repurchase transaction is less than the cost of obtaining the cash otherwise. Opportunities to achieve this advantage may not always be available, and the Fund intends to use the reverse repurchase technique only when it will be to the Fund's advantage to do so. The Fund will segregate with their custodian bank cash or liquid instruments equal in value to the Fund's obligations in respect of reverse repurchase agreements. Borrowing. The Funds may borrow money for cash management purposes or investment purposes. Each of the Funds may also enter into reverse repurchase agreements, which may be viewed as a form of borrowing, with financial institutions. However, to the extent a Fund "covers" its repurchase obligations as described above in "Reverse Repurchase Agreements," such agreement will not be considered to be a "senior security" and, therefore, will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by that Fund. -10- Borrowing for investment is known as leveraging. Leveraging investments, by purchasing securities with borrowed money, is a speculative technique which increases investment risk, but also increases investment opportunity. Since substantially all of a Fund's assets will fluctuate in value, whereas the interest obligations on borrowings may be fixed, the net asset value per share of the Fund will increase more when the Fund's portfolio assets increase in value and decrease more when the Fund's portfolio assets decrease in value than would otherwise be the case. Moreover, interest costs on borrowings may fluctuate with changing market rates of interest and may partially offset or exceed the returns on the borrowed funds. Under adverse conditions, a Fund might have to sell portfolio securities to meet interest or principal payments at a time when investment considerations would not favor such sales. As required by the Investment Company Act, a Fund must maintain continuous asset coverage (total assets, including assets acquired with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If at any time the value of a Fund's assets should fail to meet this 300% coverage test, the Fund, within three days (not including weekends and holidays), will reduce the amount of the Fund's borrowings to the extent necessary to meet this 300% coverage. Maintenance of this percentage limitation may result in the sale of portfolio securities at a time when investment considerations would not favor such sale. In addition to the foregoing, the Funds are authorized to borrow money as a temporary measure for extraordinary or emergency purposes in amounts not in excess of 5% of the value of each Fund's total assets. This borrowing is not subject to the foregoing 300% asset coverage requirement. The Funds are authorized to pledge portfolio securities as ProFund Advisors deems appropriate in connection with any borrowings. Lending of Portfolio Securities. Subject to the investment restrictions set forth below, a Fund may lend its portfolio securities to brokers, dealers, and financial institutions, provided that cash equal to at least 100% of the market value of the securities loaned is deposited by the borrower with the Fund and is maintained each business day in a segregated account pursuant to applicable regulations. While such securities are on loan, the borrower will pay the lending Fund any income accruing thereon, and the Fund may invest the cash collateral in portfolio securities, thereby earning additional income. A Fund will not lend more than 33 1/3% of the value of the Fund's total assets. Loans would be subject to termination by the lending Fund on four business days' notice, or by the borrower on one day's notice. Borrowed securities must be returned when the loan is terminated. Any gain or loss in the market price of the borrowed securities which occurs during the term of the loan inures to the lending Fund and that Fund's shareholders. There may be risks of delay in receiving additional collateral or risks of delay in recovery of the securities or even loss of rights in the securities lent should the borrower of the securities fail financially. A Fund may pay reasonable finders, borrowers, administrative, and custodial fees in connection with a loan. When-Issued and Delayed-Delivery Securities. Each Fund, from time to time, in the ordinary course of business, may purchase securities on a when-issued or delayed-delivery basis (i.e., delivery and payment can take place between a month and 120 days after the date of the transaction). These securities are subject to market fluctuations and no interest accrues to the purchaser during this period. At the time a Fund makes the commitment to purchase securities on a when-issued or delayed-delivery basis, the Fund will record the transaction and thereafter reflect the value of the securities, each day, in determining the Fund's net asset value. Each Fund -11- will not purchase securities on a when-issued or delayed-delivery basis if, as a result, more than 15% of the Fund's net assets would be so invested. At the time of delivery of the securities, the value of the securities may be more or less than the purchase price. The Trust will segregate with the Trust's custodian bank cash or liquid instruments equal to or greater in value than the Fund's purchase commitments for such when-issued or delayed-delivery securities, or the Trust does not believe that a Fund's net asset value or income will be adversely affected by the Fund's purchase of securities on a when-issued or delayed delivery basis. Investments in Other Investment Companies. The Funds may invest in the securities of other investment companies to the extent that such an investment would be consistent with the requirements of the Investment Company Act. If a Fund invests in, and, thus, is a shareholder of, another investment company, the Fund's shareholders will indirectly bear the Fund's proportionate share of the fees and expenses paid by such other investment company, including advisory fees, in addition to both the management fees payable directly by the Fund to the Fund's own investment adviser and the other expenses that the Fund bears directly in connection with the Fund's own operations. Illiquid Securities. While none of the Funds anticipates doing so, each Fund may purchase illiquid securities, including securities that are not readily marketable and securities that are not registered ("restricted securities") under the Securities Act of 1933, as amended ("Securities Act"), but which can be sold to qualified institutional buyers under Rule 144A under the Securities Act. A Fund will not invest more than 15% of the Fund's net assets in illiquid securities. The term "illiquid securities" for this purpose means securities that cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which the Fund has valued the securities. Under the current guidelines of the staff of the Securities and Exchange Commission ("Commission"), illiquid securities also are considered to include, among other securities, purchased over-the-counter options, certain cover for OTC options, repurchase agreements with maturities in excess of seven days, and certain securities whose disposition is restricted under the Federal securities laws. The Fund may not be able to sell illiquid securities when ProFund Advisors considers it desirable to do so or may have to sell such securities at a price that is lower than the price that could be obtained if the securities were more liquid. In addition, the sale of illiquid securities also may require more time and may result in higher dealer discounts and other selling expenses than does the sale of securities that are not illiquid. Illiquid securities also may be more difficult to value due to the unavailability of reliable market quotations for such securities, and investments in illiquid securities may have an adverse impact on net asset value. Institutional markets for restricted securities have developed as a result of the promulgation of Rule 144A under the Securities Act, which provides a safe harbor from Securities Act registration requirements for qualifying sales to institutional investors. When Rule 144A securities present an attractive investment opportunity and otherwise meet selection criteria, a Fund may make such investments. Whether or not such securities are illiquid depends on the market that exists for the particular security. The Commission staff has taken the position that the liquidity of Rule 144A restricted securities is a question of fact for a board of trustees to determine, such determination to be based on a consideration of the readily-available trading markets and the review of any contractual restrictions. The staff also has acknowledged that, -12- while a board of trustees retains ultimate responsibility, trustees may delegate this function to an investment adviser. The Board of Trustees of Funds has delegated this responsibility for determining the liquidity of Rule 144A restricted securities which may be invested in by a Fund to ProFund Advisors. It is not possible to predict with assurance exactly how the market for Rule 144A restricted securities or any other security will develop. A security which when purchased enjoyed a fair degree of marketability may subsequently become illiquid and, accordingly, a security which was deemed to be liquid at the time of acquisition may subsequently become illiquid. In such event, appropriate remedies will be considered to minimize the effect on the Fund's liquidity. Portfolio turnover may vary from year to year, as well as within a year. High turnover rates are likely to result in comparatively greater brokerage expenses. The portfolio turnover rate for each Fund is expected to be greater than 100%. The overall reasonableness of brokerage commissions is evaluated by ProFund Advisors based upon its knowledge of available information as to the general level of commissions paid by other institutional investors for comparable services. SPECIAL CONSIDERATIONS To the extent discussed above and in the prospectus, the Funds present certain risks, some of which are further described below. Tracking Error. While the Funds do not expect that their returns over a year will deviate adversely from their respective benchmarks, several factors may affect their ability to achieve this correlation. Among these factors are: (1) a Fund's expenses, including brokerage (which may be increased by high portfolio turnover) and the cost of the investment techniques employed by that Fund; (2) less than all of the securities in the benchmark being held by a Fund and securities not included in the benchmark being held by a Fund; (3) an imperfect correlation between the performance of instruments held by a Fund, such as futures contracts, and the performance of the underlying securities in the cash market; (4) bid-ask spreads (the effect of which may be increased by portfolio turnover); (5) holding instruments traded in a market that has become illiquid or disrupted; (6) a Fund's share prices being rounded to the nearest cent; (7) changes to the 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; and (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. While a close correlation of any Fund to its benchmark may be achieved on any single trading day, over time the cumulative percentage increase or decrease in the net asset value of the Shares of a Fund may diverge significantly from the cumulative percentage decrease or increase in the benchmark due to a compounding effect. Leverage. Each Fund intends to regularly use leveraged investment techniques in pursuing their investment objectives. Utilization of leveraging involves special risks and should be considered to be speculative. Leverage exists when a Fund achieves the right to a return on a capital base that exceeds the amount the Fund has invested. Leverage creates the potential for greater gains to shareholders of these Funds during favorable market conditions and the risk of magnified losses during adverse market conditions. Leverage should cause higher volatility of the net asset values of these Funds' Shares. Leverage may involve the creation of a liability that does not -13- entail any interest costs or the creation of a liability that requires the Fund to pay interest which would decrease the Fund's total return to shareholders. If these Funds achieve their investment objectives, during adverse market conditions, shareholders should experience a loss greater than they would have incurred had these Funds not been leveraged. Non-Diversified Status. Each Fund is a "non-diversified" series. A Fund is considered "non-diversified" because a relatively high percentage of the Fund's assets may be invested in the securities of a limited number of issuers, primarily within the same economic sector. That Fund's portfolio securities, therefore, may be more susceptible to any single economic, political, or regulatory occurrence than the portfolio securities of a more diversified investment company. A Fund's classification as a "non-diversified" investment company means that the proportion of the Fund's assets that may be invested in the securities of a single issuer is not limited by the Investment Company Act. Each Fund, however, intends to seek to qualify as a "regulated investment company" for purposes of the Internal Revenue Code of 1986, as amended ("Code"), which imposes diversification requirements on these Funds that are less restrictive than the requirements applicable to the "diversified" investment companies under the Investment Company Act. INVESTMENT RESTRICTIONS Each Fund has adopted certain investment restrictions as fundamental policies which cannot be changed without the approval of the holders of a "majority" of the outstanding Shares of the Fund, as that term is defined in the Investment Company Act. The term "majority" is defined in the Investment Company Act as the lesser of: (i) 67% or more of the Shares of the series present at a meeting of shareholders, if the holders of more than 50% of the outstanding Shares of the Fund are present or represented by proxy; or (ii) more than 50% of the outstanding Shares of the series. (All policies of a Fund not specifically identified in this Statement of Additional Information or the Prospectus as fundamental may be changed without a vote of the shareholders of the Fund.) For purposes of the following limitations, all percentage limitations apply immediately after a purchase or initial investment. A Fund may not: 1. Make investments for the purpose of exercising control or management. 2. Purchase or sell real estate, except that, to the extent permitted by applicable law, the Fund may invest in securities directly or indirectly secured by real estate or interests therein or issued by companies that invest in real estate or interests therein. 3. Make loans to other persons, except that the acquisition of bonds, debentures or other corporate debt securities and investment in government obligations, commercial paper, pass-through instruments, certificates of deposit, bankers' acceptances and repurchase agreements and purchase and sale contracts and any similar instruments shall not be deemed to be the making of a loan, and except further that the Fund may lend its portfolio securities, provided that the lending of portfolio securities may be made only in accordance with applicable law and the -14- guidelines set forth in the Prospectus and this Statement of Additional Information, as they may be amended from time to time. 4. Issue senior securities to the extent such issuance would violate applicable law. 5. Borrow money, except that the Fund (i) may borrow from banks (as defined in the Investment Company Act) in amounts up to 33 1/3% of its total assets (including the amount borrowed), (ii) may, to the extent permitted by applicable law, borrow up to an additional 5% of its total assets for temporary purposes, (iii) may obtain such short-term credit as may be necessary for the clearance of purchases and sales of portfolio securities, (iv) may purchase securities on margin to the extent permitted by applicable law and (v) may enter into reverse repurchase agreements. The Fund may not pledge its assets other than to secure such borrowings or, to the extent permitted by the Fund's investment policies as set forth in the Prospectus and this Statement of Additional Information, as they may be amended from time to time, in connection with hedging transactions, short sales, when-issued and forward commitment transactions and similar investment strategies. 6. Underwrite securities of other issuers, except insofar as the Fund technically may be deemed an underwriter under the Securities Act, in selling portfolio securities. 7. Purchase or sell commodities or contracts on commodities, except to the extent the Fund may do so in accordance with applicable law and the Fund's Prospectus and Statement of Additional Information, as they may be amended from time to time. No Fund will concentrate (i.e., hold more than 25% of its assets in the stocks of a single industry or group of industries) its investments in issuers of one or more particular industries, except that a Fund will concentrate to approximately the same extent that its underlying Index concentrates in the stocks of such particular industry or industries. For purposes of this limitation, securities of the U.S. government (including its agencies and instrumentalities) and securities of state or municipal governments and their political subdivisions (and repurchase agreements collateralized by government securities) are not considered to be issued by members of any industry. PORTFOLIO TRANSACTIONS AND BROKERAGE Subject to the general supervision by the Trustees, ProFund Advisors is responsible for decisions to buy and sell securities for each of the Funds, the selection of brokers and dealers to effect the transactions, and the negotiation of brokerage commissions, if any. ProFund Advisors expects that the Funds may execute brokerage or other agency transactions through registered broker-dealers, for a commission, in conformity with the Investment Company Act, the Securities Exchange Act of 1934, as amended ("Securities Exchange Act"), and the rules and regulations thereunder. ProFund Advisors may serve as an investment manager to a number of clients, including other investment companies. It is the practice of ProFund Advisors to cause purchase and sale transactions to be allocated among the Funds and others whose assets ProFund Advisors -15- manages in such manner as ProFund Advisors deems equitable. The main factors considered by ProFund Advisors in making such allocations among the Funds and other client accounts of ProFund Advisors are the respective investment objectives, the relative size of portfolio holdings of the same or comparable securities, the availability of cash for investment, the size of investment commitments generally held, and the opinions of the person(s) responsible, if any, for managing the portfolios of the Funds and the other client accounts. The policy of each Fund regarding purchases and sales of securities for a Fund's portfolio is that primary consideration will be given to obtaining the most favorable prices and efficient executions of transactions. Consistent with this policy, when securities transactions are effected on a stock exchange, each Fund's policy is to pay commissions which are considered fair and reasonable without necessarily determining that the lowest possible commissions are paid in all circumstances. Each Fund believes that a requirement always to seek the lowest possible commission cost could impede effective portfolio management and preclude the Fund and ProFund Advisors from obtaining a high quality of brokerage and research services. In seeking to determine the reasonableness of brokerage commissions paid in any transaction, ProFund Advisors relies upon its experience and knowledge regarding commissions generally charged by various brokers and on its judgment in evaluating the brokerage and research services received from the broker effecting the transaction. Such determinations are necessarily subjective and imprecise, as in most cases an exact dollar value for those services is not ascertainable. Purchases and sales of U.S. government securities are normally transacted through issuers, underwriters or major dealers in U.S. government securities acting as principals. Such transactions are made on a net basis and do not involve payment of brokerage commissions. The cost of securities purchased from an underwriter usually includes a commission paid by the issuer to the underwriters; transactions with dealers normally reflect the spread between bid and asked prices. In seeking to implement a Fund's policies, ProFund Advisors effects transactions with those brokers and dealers who ProFund Advisors believes provide the most favorable prices and are capable of providing efficient executions. If ProFund Advisors believes such prices and executions are obtainable from more than one broker or dealer, ProFund Advisors may give consideration to placing portfolio transactions with those brokers and dealers who also furnish research and other services to the Fund or ProFund Advisors. Such services may include, but are not limited to, any one or more of the following: information as to the availability of securities for purchase or sale; statistical or factual information or opinions pertaining to investment; wire services; and appraisals or evaluations of portfolio securities. If the broker-dealer providing these additional services is acting as a principal for its own account, no commissions would be payable. If the broker-dealer is not a principal, a higher commission may be justified, at the determination of ProFund Advisors, for the additional services. The information and services received by ProFund Advisors from brokers and dealers may be of benefit to ProFund Advisors in the management of accounts of some of ProFund Advisors' other clients and may not in all cases benefit a Fund directly. While the receipt of such information and services is useful in varying degrees and would generally reduce the amount of research or services otherwise performed by ProFund Advisors and thereby reduce ProFund Advisors' expenses, this information and these services are of indeterminable value and the management -16- fee paid to ProFund Advisors is not reduced by any amount that may be attributable to the value of such information and services. Subject to the requirements of best execution, ProFund Advisors may consider sales of Trust Shares as a factor in the selection of broker-dealers to execute portfolio transactions. Each Fund has authorized one or more brokers to receive on its behalf purchase and redemption orders. Such brokers are authorized to designate other intermediaries to receive purchase and redemption orders on a Fund's behalf. Each Fund will be deemed to have received and accepted a purchase or redemption order when an authorized broker or, if applicable, a broker's authorized agent receives the order. Customer orders will be priced at a Fund's net asset value next computed after they are received from an authorized broker or the broker's authorized designee and accepted by the Fund. MANAGEMENT OF PROFUNDS ETF TRUST Trustees and Officers The Trust's officers, under the supervision of the Board of Trustees, manage the day-to-day operations of the Trust. The Trustees set broad policies for the Trust and choose its officers. _________ Trustees and all of the officers of the Trust are directors, officers or employees of ProFund Advisors. The other Trustees are not "Interested Persons" as defined under Section 2(a)(19) of the Investment Company Act, as amended ("Non-Interested Trustees"). Trustees and officers of the Trust are also directors and officers of some or all of the funds in the Fund Complex. The Fund Complex includes all funds advised by ProFund Advisors and any funds that have an investment adviser that is an affiliated person of ProFund Advisors. The Non-Interested Trustees of the Trust, their term of office and length of time served, their principal business occupations during the past five years, the number of portfolios in the Fund Complex overseen by each Non-Interested Trustee and other directorships, if any, held by the Trustee, are shown below. Non-Interested Trustees
- ----------------------------------------------------------------------------------------------------------------------- Number of Term of Principal Portfolios in Position(s) Office and Occupation(s) Fund Complex Name, Age and Address of Held with Length of During Past 5 Overseen by Other Directorships Non-Interested Trustee Registrant Time Served* Years Trustee Held by Trustee - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------
_______________________ * Each Trustee serves an indefinite term, until his or her successor is elected. -17-
- ----------------------------------------------------------------------------------------------------------------------- Number of Term of Principal Portfolios in Position(s) Office and Occupation(s) Fund Complex Name, Age and Address of Held with Length of During Past 5 Overseen by Other Directorships Non-Interested Trustee Registrant Time Served* Years Trustee Held by Trustee - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------
- ------------ *Each Trustee serves an indefinite term until his or her successor is elected. -18- The Interested Trustees and executive officers of the Trust, their term of office and length of time served, their principal business occupations during the past five years, the number of portfolios in the Fund Complex overseen by each Interested Trustee and the other directorships, if any, held by the Trustee, are shown below. Interested Trustees
- ----------------------------------------------------------------------------------------------------------------------- Number of Term of Principal Portfolios in Position(s) Office and Occupation(s) Fund Complex Name, Age and Address of Held with Length of During Past 5 Overseen by Other Directorships Management Trustee Registrant Time Served* Years Trustee Held by Trustee - ----------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------- - -----------------------------------------------------------------------------------------------------------------------
_______________________ * Each Trustee serves an indefinite term, until his or her successor is elected. -19- OFFICERS
- --------------------------------------------------------------------------------------------------- Name, Age and Address of Position(s) Held Principal Occupation(s) Executive Officer with Registrant Length of Time Served During Past 5 Years - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------
For each Trustee, the dollar range of equity securities beneficially owned by the Trustee as of the date of this Statement of Additional Information, is shown below.
- ---------------------------------------------------------------------------------------------------------------- Aggregate Dollar Range of Equity Securities in All Registered ______________, 2002 Investment Companies Overseen by Dollar Range of Equity Trustee in Family of Investment Name of Trustee Securities in the Trust Companies - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------
As to each Non-Interested Trustee and his immediate family members, no person owned beneficially or of record securities in an investment advisor or principal underwriter of the Trust, or a person (other than a registered investment company) directly or indirectly controlling, controlled by or under common control with an investment advisor or principal underwriter of the Trust. -20- Committees The Board of Trustees of the Trust has an Audit Committee. The Audit Committee is composed entirely of Non-Interested Trustees. Currently, the Audit Committee is composed of Messrs.________________. The Audit Committee makes recommendations to the full Board of Trustees with respect to the engagement of independent accounts and reviews with the independent accounts the plan and results of the internal controls, audit engagement and matters having a material effect on the Trust's financial operations. Compensation of Trustees and Officers The Trust, together with other funds in the Fund Complex advised by ProFund Advisors for which a Trustee serves as director or trustee, pays each Non-Interested Trustee $--- for attendance at each regular meeting of the Board of Trustees and $--- for attendance at each special meeting of the Board of Trustees. Trustees who are also officers or affiliated persons receive no remuneration from the Trust for their services as Trustees. The Trust's officers and employees are paid by ProFund Advisors or its agents. The Trust does not accrue pension or retirement benefits as part of the Fund's expenses, and Trustees of the Trust are not entitled to benefits upon retirement from the Board of Trustees. The following table shows aggregate compensation to paid to each of the Trust's Trustees by the Fund and the Fund Complex for the fiscal year ending December 31, 2002. COMPENSATION TABLE - -------------------------------------------------------------------------------- Estimated Aggregate Total Compensation from Fund Compensation and Fund Complex Name of Person from Fund* Payable to Trustees - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ______________________ * Assumes that four (4) meetings of the Board of Trustees of the Funds were held during previous calendar year. -21- INVESTMENT ADVISOR ProFund Advisors LLC. Under an investment advisory agreement between ProFund Advisors and the Trust, on behalf of each Fund, dated ____________, 2002 ("Agreement" or "Advisory Agreement"), each Fund pays ProFund Advisors a fee at an annualized rate, based on its average daily net assets, of ____%. ProFund Advisors manages the investment and the reinvestment of the assets of each of the Funds, in accordance with the investment objectives, policies, and limitations of the Fund, subject to the general supervision and control of the Trustees and the officers of the Funds. ProFund Advisors bears all costs associated with providing these advisory services. ProFund Advisors may waive fees, reimburse expenses or otherwise contribute assets to a Fund, which may affect performance. ProFund Advisors, from its own resources, including profits from advisory fees received from the Funds, also may make payments to broker-dealers and other financial institutions for their expenses in connection with the distribution of the Funds' Shares. The address of ProFund Advisors is 7501 Wisconsin Avenue, Suite 1000, Bethesda, Maryland 20814. Codes of Ethics. The Trust, ProFund Advisors, and [ ] ("Distributor") each have adopted a code of ethics, as required by applicable law, which is designed to prevent affiliated persons of the Trust, ProFund Advisors, and the Distributor from engaging in deceptive, manipulative, or fraudulent activities in connection with securities held or to be acquired by the Funds (which may also be held by persons subject to a code). There can be no assurance that the codes will be effective in preventing such activities. The Codes permit personnel subject to them to invest in securities, including securities that may be held or purchased by a Fund. OTHER SERVICE PROVIDERS Administrator, Transfer Agent, and Fund Accounting Agent. [ ] acts as Administrator to the Funds. The Administrator provides the Funds with all required general administrative services, including, without limitation, office space, equipment, and personnel; clerical and general back office services; bookkeeping, internal accounting, and secretarial services; the determination of net asset values; and the preparation and filing of all reports, registration statements, proxy statements, and all other materials required to be filed or furnished by the Funds under federal and state securities laws. The Administrator also maintains the shareholder account records for the Funds, distributes dividends and distributions payable by the Funds, and produces statements with respect to account activity for the Funds and their shareholders. The Administrator pays all fees and expenses that are directly related to the services provided by the Administrator to the Funds; each Fund reimburses the Administrator for all fees and expenses incurred by the Administrator which are not directly related to the services the Administrator provides to the Funds under the service agreement. [ProFund Advisors, pursuant to a separate Management Services Agreement, performs certain client support and other administrative services on behalf of the Funds. For these services, the Funds will pay to ProFund Advisors a fee at the annual rate of _____ of its average daily net assets for all of the Funds.] -22- Custodian. [ ] acts as custodian to the Funds. [Address] Independent Accountants. [ ] serves as independent auditors to the Funds. [ ] provides audit services, tax return preparation and assistance, and consultation in connection with certain SEC filings. [Address] Legal Counsel. Mayer, Brown, Rowe & Maw, 1675 Broadway, New York, NY 10019, serves as counsel to the Funds. DISTRIBUTOR [ ] serves as the distributor and principal underwriter in all fifty states and the District of Columbia. Its address is:____________________. The Distributor has no role in determining the investment policies of the Trust or any of the Funds, or which securities are to be purchased or sold by the Trust or any of the Funds. Distribution and Service Plan. Shares will be continuously offered for sale by the Trust through the Distributor only in Creation Units, as described above under "Purchase and Issuance of Shares in Creation Units." Shares in less than Creation Units are not distributed by the Distributor. The Distributor also acts as agent for the Trust. The Distributor will deliver a prospectus to persons purchasing Shares in Creation Units and will maintain records of both orders placed with it and confirmations of acceptance furnished by it. The Distributor is a broker-dealer registered under the Securities Exchange Act and a member of the National Association of Securities Dealers, Inc. The Distributor has no role in determining the investment policies of the Funds or which securities are to be purchased or sold by the Funds. The Board of Trustees has approved a Distribution and Service Plan under which each Fund may pay financial intermediaries such as broker-dealers and investment advisors ("Authorized Firms") up to ____%, on an annualized basis, of average daily net assets of the Fund as reimbursement or compensation for distribution-related activities with respect to the Shares of Fund and shareholder services. Under the Distribution and Service Plan, the Trust or the Distributor may enter into agreements ("Distribution and Service Agreements") with Authorized Firms that purchase Shares on behalf of their clients. The Distribution and Service Agreements will provide for compensation to the Authorized Firms in an amount up to ____% (on an annual basis) of the average daily net assets of the Shares of the applicable Fund attributable to, or held in the name of the Authorized Firm for, its clients. The Funds may pay different service fee amounts to Authorized Firms, which may provide different levels of services to their clients or customers. The Trustees of the Trust, including a majority of the Trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the operation of the Distribution and Service Plan or the related Distribution and Service Agreements, voted to adopt the Distribution and Service Plan and Distribution and Service Agreements at a meeting called for the purpose of voting on such Distribution and Service Plan and Distribution and Service Agreements on ____________, 2002. The -23- Distribution and Service Plan and Distribution and Service Agreements will remain in effect for a period of one year and will continue in effect thereafter only if such continuance is specifically approved annually by a vote of the Trustees in the manner described above. All material amendments of the Distribution and Service Plan must also be approved by the Trustees in the manner described above. The Distribution and Service Plan may be terminated at any time by a majority of the Trustees as described above or by vote of a majority of the outstanding Service Shares of the affected Fund. The Distribution and Service Agreements may be terminated at any time, without payment of any penalty, by vote of a majority of the Trustees as described above or by a vote of a majority of the outstanding Service Shares of the affected Fund on not more than 60 days' written notice to any other party to the Distribution and Service Agreements. The Distribution and Service Agreements shall terminate automatically if assigned. The Trustees have determined that, in their judgment, there is a reasonable likelihood that the Distribution and Service Plan will benefit the Funds and holders of Service Shares of the Funds. In the Trustees' quarterly review of the Distribution and Service Plan and Distribution and Service Agreements, they will consider their continued appropriateness and the level of compensation and/or reimbursement provided therein. The Distribution and Service Plan is intended to permit the financing of a broad array of distribution-related activities and services, as well as shareholder services, for the benefit of investors. These activities and services are intended to make the Shares an attractive investment alternative, which may lead to increased assets, increased investment opportunities and diversification, and reduced per share operating expenses. COSTS AND EXPENSES Each Fund bears all expenses of its operations other than those assumed by ProFund Advisors or the Administrator. Fund expenses include: the management fee; administrative and transfer agency and shareholder servicing fees; custodian and accounting fees and expenses, legal and auditing fees; securities valuation expenses; fidelity bonds and other insurance premiums; expenses of preparing and printing prospectuses, confirmations, proxy statements, and shareholder reports and notices; registration fees and expenses; proxy and annual meeting expenses, if any; all Federal, state, and local taxes (including, without limitation, stamp, excise, income, and franchise taxes); organizational costs; and non-interested Trustees' fees and expenses. ADDITIONAL INFORMATION CONCERNING SHARES Organization and Description of Shares of Beneficial Interest. ProFunds ETF Trust ("Trust") is a Delaware business trust and registered investment company. The Trust was organized on May 29, 2002, and has authorized capital of unlimited Shares of beneficial interest of no par value which may be issued in more than one class or series. Currently, the Trust consists of multiple separately managed series. The Board may designate additional series of common stock and classify Shares of a particular series into one or more classes of that series. -24- All Shares of the Trust are freely transferable. The Trust Shares do not have preemptive rights or cumulative voting rights, and none of the Shares have any preference to conversion, exchange, dividends, retirements, liquidation, redemption, or any other feature. Trust Shares have equal voting rights, except that, in a matter affecting a particular series or class of Shares, only Shares of that series or class may be entitled to vote on the matter. Trust shareholders are entitled to require the Trust to redeem Creation Units of their Shares. The Declaration of Trust confers upon the Board of Trustees the power, by resolution, to alter the number of Shares constituting a Creation Unit or to specify that Shares of the Trust may be individually redeemable. Under Delaware law, the Trust is not required to hold an annual shareholders meeting if the Investment Company Act does not require such a meeting. Generally, there will not be annual meetings of Trust shareholders. Trust shareholders may remove Trustees from office by votes cast at a meeting of Trust shareholders or by written consent. If requested by shareholders of at least 10% of the outstanding Shares of the Trust, the Trust will call a meeting of Funds' shareholders for the purpose of voting upon the question of removal of a Trustee of the Trust and will assist in communications with other Trust shareholders. The Declaration of Trust of the Trust disclaims liability of the shareholders or the officers of the Trust for acts or obligations of the Trust which are binding only on the assets and property of the Trust. The Declaration of Trust provides for indemnification of the Trust's property for all loss and expense of any Funds shareholder held personally liable for the obligations of the Trust. The risk of a Trust shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which loss of account of shareholder liability is limited to circumstances in which the Funds itself would not be able to meet the Trust's obligations and this risk, thus, should be considered remote. If a Fund does not grow to a size to permit it to be economically viable, the Fund may cease operations. In such an event, investors may be required to liquidate or transfer their investments at an inopportune time. Capitalization. As of the date of this Statement of Additional Information, no person owned of record, or to the knowledge of management beneficially owned, five percent or more of the outstanding Shares of the Funds or classes except as set forth below: Ultra500 Fund TOTAL SHARES PERCENTAGE Ultra100 Fund TOTAL SHARES PERCENTAGE Ultra30 Fund TOTAL SHARES PERCENTAGE -25- UltraMid-Cap400 Fund TOTAL SHARES PERCENTAGE UltraShort500 Fund TOTAL SHARES PERCENTAGE UltraShort100 Fund TOTAL SHARES PERCENTAGE UltraShort30 Fund TOTAL SHARES PERCENTAGE UltraShortMid-Cap400 Fund TOTAL SHARES PERCENTAGE A shareholder who beneficially owns, directly or indirectly, more than 25% of a Fund's voting securities may be deemed a "control person" (as defined in the Investment Company Act) of the Fund and may be able to determine the outcome of any matter submitted for shareholder consideration with respect to that Fund. Book Entry Only System. The Depository Trust Company ("DTC") acts as securities depositary for the Shares. The Shares of each Fund are represented by global securities registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC. Except as provided below, certificates will not be issued for Shares. DTC has advised the Trust as follows: it is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a "clearing corporation" within the meaning of the New York Uniform Commercial Code, and a "clearing agency" registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities of its participants ("DTC Participants") and to facilitate the clearance and settlement of securities transactions among the DTC Participants in such securities through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number -26- of its DTC Participants and by the New York Stock Exchange, Inc., the American Stock Exchange LLC and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly ("Indirect Participants"). DTC agrees with and represents to its Participants that it will administer its book-entry system in accordance with its rules and by-laws and requirements of law. Beneficial ownership of Shares is limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in Shares (owners of such beneficial interests are referred to herein as "Beneficial owners") is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and Beneficial owners that are not DTC Participants). Beneficial owners will receive from or through the DTC Participant a written confirmation relating to their purchase of Shares. The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definitive form. Such laws may impair the ability of certain investors to acquire beneficial interests in Shares. Beneficial owners of Shares are not entitled to have Shares registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive form and are not considered the registered holder thereof. Accordingly, each Beneficial Owner must rely on the procedures of DTC, the DTC Participant and any Indirect Participant through which such Beneficial Owner holds its interests, to exercise any rights of a holder of Shares. The Trust understands that under existing industry practice, in the event the Trust requests any action of holders of Shares, or a Beneficial Owner desires to take any action that DTC, as the record owner of all outstanding Shares, is entitled to take, DTC would authorize the DTC Participants to take such action and that the DTC Participants would authorize the Indirect Participants and Beneficial owners acting through such DTC Participants to take such action and would otherwise act upon the instructions of Beneficial owners owning through them. As described above, the Trust recognizes DTC or its nominee as the owner of all Shares for all purposes. Conveyance of all notices, statements and other communications to Beneficial owners is effected as follows. Pursuant to the Depositary Agreement between the Trust and DTC, DTC is required to make available to the Trust upon request and for a fee to be charged to the Trust a listing of Shares holdings of each DTC Participant. The Trust shall inquire of each such DTC Participant as to the number of Beneficial owners holding Shares, directly or indirectly, through such DTC Participant. The Trust shall provide each such DTC Participant with copies of such notice, statement or other communication, in such form, number and at such place as such DTC Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such Beneficial owners. In addition, the Trust shall pay to each such DTC Participant a fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements. Distributions of Shares shall be made to DTC or its nominee, Cede & Co., as the registered holder of all Shares. DTC or its nominee, upon receipt of any such -27- distributions, shall credit immediately DTC Participants' accounts with payments in amounts proportionate to their respective beneficial interests in Shares as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial owners of Shares held through such DTC Participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in a "street name," and will be the responsibility of such DTC Participants. The Trust has no responsibility or liability for any aspects of the records relating to or notices to Beneficial owners, or payments made on account of beneficial ownership interests in such Shares, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants and the Indirect Participants and Beneficial owners owning through such DTC Participants. DTC may determine to discontinue providing its service with respect to Shares at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the Trust shall take action either to find a replacement for DTC to perform its functions at a comparable cost or, if such a replacement is unavailable, to issue and deliver printed certificates representing ownership of Shares, unless the Trust makes other arrangements with respect thereto satisfactory to the Exchange. PURCHASE AND REDEMPTION OF SHARES The Trust issues and redeems Shares of each Fund only in aggregations of Creation Units. The following table sets forth the number of Shares of a Fund that constitute a Creation Unit for each Fund and the value of such Creation Unit as of the date of this Statement of Additional Information: Value Per Shares Per Creation Fund Creation Unit Unit ($U.S.) --------------------------------------------------------------- Ultra500 Fund $ Ultra100 Fund $ Ultra30 Fund $ UltraMid-Cap400 Fund $ UltraShort500 Fund $ UltraShort100 Fund $ UltraShort30 Fund $ UltraShortMid-Cap400 Fund $ See "Purchase and Issuance of Shares in Creation Units" and "Redemption of Shares in Creation Units" below. The Board of Trustees of the Trust reserves the right to declare a split or a consolidation in the number of Shares outstanding of any Fund of the Trust, and -28- to make a corresponding change in the number of Shares constituting a Creation Unit, in the event that the per Shares price in the secondary market rises (or declines) to an amount that falls outside the range deemed desirable by the Board. Purchase and Issuance of Creation Units. The Trust issues and sells Shares only in Creation Units on a continuous basis through the Distributor, without a sales load, at their net asset value next determined after receipt, on any Business Day (as defined herein), of an order in proper form. A "Business Day" with respect to each Fund is any day on which the New York Stock Exchange and the Chicago Mercantile Exchange are open for business. Creation Units of Shares may be purchased only by or through a DTC Participant that has entered into an Authorized Participant Agreement with the Distributor ("Authorized Participant"). Such Authorized Participant will agree pursuant to the terms of such Authorized Participant Agreement on behalf of itself or any investor on whose behalf it will act, as the case may be, to certain conditions, including that such Authorized Participant will make available in advance of each purchase of Shares an amount of cash sufficient to pay the Cash Component, once the net asset value of a Creation Unit is next determined after receipt of the purchase order in proper form, together with the transaction fee described below. The Authorized Participant may require the investor to enter into an agreement with such Authorized Participant with respect to certain matters, including payment of the Cash Component. Investors who are not Authorized Participants must make appropriate arrangements with an Authorized Participant. Investors should be aware that their particular broker may not be a DTC Participant or may not have executed an Authorized Participant Agreement, and that therefore orders to purchase Creation Units of Shares may have to be placed by the investor's broker through an Authorized Participant. As a result, purchase orders placed through an Authorized Participant may result in additional charges to such investor. The Trust does not expect to enter into an Authorized Participant Agreement with more than a small number of DTC Participants. A list of the current Authorized Participants may be obtained from the Distributor. Portfolio Deposit (Bullish Funds only). The consideration for purchase of a Creation Unit of Shares of a Bullish Fund generally consists of the in-kind deposit of a designated portfolio of equity securities ("Deposit Securities") constituting a representation of the benchmark index for the Bullish Fund and an amount of cash computed as described below ("Cash Component"). Together, the Deposit Securities and the Cash Component constitute the "Portfolio Deposit," which represents the minimum initial and subsequent investment amount for Shares of any Bullish Fund. The Cash Component is an amount equal to the Dividend Equivalent Payment (as defined below), plus or minus, as the case may be, a Balancing Amount (as defined below). The "Dividend Equivalent Payment" enables the Trust to make a complete distribution of dividends on the next dividend payment date, and is an amount equal, on a per Creation Unit basis, to the dividends on all the Portfolio Securities with ex-dividend dates within the accumulation period for such distribution ("Accumulation Period"), net of expenses and liabilities for such period, as if all of the Portfolio Securities had been held by the Trust for the entire Accumulation -29- Period. The "Balancing Amount" is an amount equal to the difference between (x) the net asset value (per Creation Unit) of the Fund and (y) the sum of (i) the Dividend Equivalent Payment and (ii) the market value (per Creation Unit) of the securities deposited with the Trust (the sum of (i) and (ii) is referred to as the "Deposit Amount"). The Balancing Amount serves the function of compensating for any differences between the net asset value per Creation Unit and the Deposit Amount. The Balancing Amount may be significant, depending upon market movements. ProFund Advisors makes available through the National Securities Clearing Corporation ("NSCC") on each Business Day, either immediately prior to the opening of business on the Exchange or the night before, the list of the names and the required number of shares of each Deposit Security to be included in the current Portfolio Deposit (based on information at the end of the previous Business Day) for each Bullish Fund. Such Portfolio Deposit is applicable, subject to any adjustments as described below, in order to effect purchases of Creation Units of Shares of a given Bullish Fund until such time as the next-announced Portfolio Deposit composition is made available. The identity and number of shares of the Deposit Securities required for a Portfolio Deposit for each Fund changes as rebalancing adjustments and corporate action events are reflected from time to time by ProFund Advisors with a view to the investment objective of the Bullish Fund. The composition of the Deposit Securities may also change in response to adjustments to the weighting or composition of the securities constituting the relevant securities index. In addition, the Trust reserves the right to permit or require the substitution of an amount of cash (i.e., a "cash in lieu" amount) to be added to the Cash Component to replace any Deposit Security which may not be available in sufficient quantity for delivery or for other similar reasons. The adjustments described above will reflect changes, known to ProFund Advisors on the date of announcement to be in effect by the time of delivery of the Portfolio Deposit, in the composition of the subject index being tracked by the relevant Bullish Fund, or resulting from stock splits and other corporate actions. In addition to the list of names and numbers of securities constituting the current Deposit Securities of a Portfolio Deposit, on each Business Day, the Cash Component effective through and including the previous Business Day, per outstanding Shares of each Bullish Fund, will be made available. To the extent contemplated by an Authorized Participant's agreement with the Distributor, the Trust will issue Creation Units of Shares to such Authorized Participant notwithstanding the fact that the corresponding Portfolio Deposits have not been received in part or in whole, in reliance on the undertaking of the Authorized Participant to deliver the missing Deposit Securities as soon as possible, which undertaking shall be secured by such Authorized Participant's delivery and maintenance of collateral having a value at least equal to 115% of the value of the missing Deposit Securities in accordance with the Trust's then-effective procedures. The only collateral that is acceptable to the Trust is cash in U.S. dollars or an irrevocable letter of credit in form, and drawn on a bank, that is satisfactory to the Trust. The cash collateral posted by the Authorized Participant may be invested at the risk of the Authorized Participant, and income, if any, on invested cash -30- collateral will be paid to that Authorized Participant. Information concerning the Trust's current procedures for collateralization of missing Deposit Securities is available from the Distributor. The Authorized Participant Agreement will permit the Trust to buy the missing Deposit Securities at any time and will subject the Authorized Participant to liability for any shortfall between the cost to the Trust of purchasing such securities and the cash collateral or the amount that may be drawn under any letter of credit. All questions as to the number of shares of each security in the Deposit Securities and the validity, form, eligibility and acceptance for deposit of any securities to be delivered shall be determined by the Trust, and the Trust's determination shall be final and binding. Cash Deposit (Bearish Funds only). Creation Units of the Bearish Funds will be sold only for cash ("Cash Component"). Creation Units are sold at their net asset value, plus a transaction fee, as described below. Purchases through the Clearing Process. An Authorized Participant may place an order to purchase (or redeem) Creation Units of either (i) through the Continuous Net Settlement clearing processes of NSCC as such processes have been enhanced to effect purchases (and redemptions) of Creation Units, such processes being referred to herein as the "Clearing Process," or (ii) outside the Clearing Process. To purchase or redeem through the Clearing Process, an Authorized Participant must be a member of NSCC that is eligible to use the Continuous Net Settlement system. For purchase orders placed through the Clearing Process, the Authorized Participant Agreement authorizes the Distributor to transmit through the Transfer Agent to NSCC, on behalf of an Authorized Participant, such trade instructions as are necessary to effect the Authorized Participant's purchase order. Pursuant to such trade instructions to NSCC, the Authorized Participant agrees to deliver the requisite Deposit Securities and the Cash Component (for the Bullish Funds), or the Cash Component (for the Bearish Funds) to the Trust, together with such additional information as may be required by the Distributor. An Order to purchase Creation Units through the Clearing Process is deemed received by the Distributor if it is received not later than 3:00 p.m. New York time (or earlier on days when the New York Stock Exchange closes earlier than that time) ("Closing Time"). Purchases Outside the Clearing Process. An Authorized Participant that wishes to place an order to purchase Creation Units outside the Clearing Process must state that it is not using the Clearing Process and that the purchase instead will be effected through a transfer of securities and cash directly through DTC. Purchases (and redemptions) of Creation Units cleared outside the Clearing Process will be subject to a higher Transaction Fee than those cleared through the Clearing Process. Purchase orders effected outside the Clearing Process are likely to require transmittal by the Authorized Participant earlier on the Transmittal Date than orders effected using the Clearing Process. Those persons placing orders outside the Clearing Process should ascertain the deadlines applicable to DTC and the Federal Reserve Bank wire system by contacting the operations department of the broker or depository institution effectuating such transfer of Deposit Securities and Cash Component (for the Bullish Funds), or of Cash Component only (for the Bearish Funds). -31- Rejection of Purchase Orders. The Trust reserves the absolute right to reject a purchase order transmitted to it by the Distributor in respect of any Fund if (a) the purchaser or group of purchasers, upon obtaining the shares ordered, would own 80% or more of the currently outstanding Shares of any Fund; (b) for the Bullish Funds only, the Deposit Securities delivered are not as specified by ProFund Advisors, as described above; (c) for the Bullish Funds only, acceptance of the Deposit Securities would have certain adverse tax consequences to the Fund; (d) for the Bullish Funds only, the acceptance of the Portfolio Deposit would, in the opinion of counsel, be unlawful; (e) for the Bullish Funds only, the acceptance of the Portfolio Deposit would otherwise, in the discretion of the Trust or ProFund Advisors, have an adverse effect on the Trust or the rights of beneficial owners; or (f) in the event that circumstances outside the control of the Trust, the Distributor and ProFund Advisors make it for all practical purposes impossible to process purchase orders. The Trust shall notify a prospective purchaser of its rejection of the order of such person. The Trust and the Distributor are under no duty, however, to give notification of any defects or irregularities in the delivery of Portfolio Deposits nor shall either of them incur any liability for the failure to give any such notification. Purchase Transaction Fees Applicable to Purchases of Shares of the Bullish Funds. A purchase transaction fee payable to the Trust is imposed to compensate the Trust for the transfer and other transaction costs of a Fund associated with the issuance of Creation Units of Shares. Purchasers of Creation Units of Bullish Funds for cash are required to pay an additional variable charge to compensate the relevant Fund for brokerage and market impact expenses relating to investing in portfolios securities. Where the Trust permits an in-kind purchaser to substitute cash in lieu of depositing a portion of the Deposit Securities, the purchaser will be assessed the additional variable charge for cash purchases on the "cash in lieu" portion of its investment. Purchasers of Shares in Creation Units are responsible for the costs of transferring the securities constituting the Deposit Securities to the account of the Trust . The purchase transaction fees for in-kind purchases and cash purchases (when available) are listed in the table below. This table is subject to revision from time to time. Investors are also responsible for payment of the costs of transferring the Deposit Securities to the Trust.
Fund Purchases Through Purchases Outside the Maximum Additional the Clearing Clearing Process Variable Charge for Cash Process Purchases Ultra500 Fund $ $ % Ultra100 Fund $ $ % Ultra30 Fund $ $ % UltraMid-Cap400 Fund $ $ %
Purchase Transaction Fees Applicable to Purchase of Shares of the Bearish Funds. A purchase transaction fee is imposed as set forth in the table below. This table is subject to revision from time to time. -32- Fund Purchase Transaction Fees UltraShort500 Fund $ UltraShort100 Fund $ UltraShort30 Fund $ UltraShortMid-Cap400 Fund $ * As a percentage of the value of amount invested. See "Distribution and Service Plan" herein for additional information concerning the distribution arrangements for Shares. -33- Redemption of Creation Units. Shares may be redeemed only in Creation Units at their net asset value next determined after receipt of a redemption request in proper form by the Distributor and only on a day on which the Exchange is open for trading. The Trust will not redeem Shares in amounts less than Creation Units. Beneficial owners also may sell Shares in the secondary market, but must accumulate enough Shares to constitute a Creation Unit in order to have such Shares redeemed by the Trust. There can be no assurance, however, that there will be sufficient liquidity in the public trading market at any time to permit assembly of a Creation Unit of Shares. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of Shares to constitute a redeemable Creation Unit. Fund Securities (Bullish Funds only). With respect to each Bullish Fund, ProFund Advisors makes available through the NSCC immediately prior to the opening of business on the Exchange on each day that the Exchange is open for business the Portfolio Securities that will be applicable (subject to possible amendment or correction) to redemption requests received in proper form (as defined below) on that day ("Fund Securities"). These securities may, at times, not be identical to Deposit Securities which are applicable to a purchase of Creation Units. The redemption proceeds for a Creation Unit generally consist of Fund Securities as announced by ProFund Advisors through the NSCC on the Business Day of the request for redemption, plus cash in an amount equal to the difference between the net asset value of the Shares being redeemed, as next determined after a receipt of a request in proper form, and the value of the Fund, less the redemption transaction fee described below ("Cash Redemption Amount"). The redemption transaction fee described below is deducted from such redemption proceeds. Cash Redemption Amount (Bearish Funds only). The redemption proceeds for a Creation Unit of a Bearish Fund will consist solely of cash in an amount equal to the difference between the net asset value of the Shares being redeemed, as next determined after a receipt of a request in proper form, less the redemption transaction fee described below ("Cash Redemption Amount"). The redemption transaction fee described below is deducted from such redemption proceeds. Placement of Redemption Orders Using Clearing Process. Orders to redeem Creation Units of Funds through the Clearing Process must be delivered through an Authorized Participant that is a member of NSCC that is eligible to use the Continuous Net Settlement System. An order to redeem Creation Units of Funds using the Clearing Process is deemed received on the Transmittal Date if (i) such order is received by the Transfer Agent not later than 3:00 p.m., New York time, on such Transmittal Date; and (ii) all other procedures set forth in the Agreement are properly followed; such order will be effected based on the net asset value of the Fund as next determined. An order to redeem Creation Units of a Fund using the Clearing Process made in proper form but received by the Fund after 3:00 p.m., New York time, will be deemed received on the next Business Day immediately following the Transmittal Date and will be effected at the net asset value next determined on such Business Day. The requisite Fund Securities and the Cash Redemption Amount (for the Bullish Funds) or the Cash Redemption Amount -34- (for the Bearish Funds) will be transferred by the third (3/rd/) NSCC Business Day following the date on which such request for redemption is deemed received. Placement of Redemption Orders Outside Clearing Process. Orders to redeem Creation Units of Funds outside the Clearing Process must be delivered through a DTC Participant that has executed the Participant Agreement. A DTC Participant who wishes to place an order for redemption of Creation Units of Funds to be effected outside the Clearing Process need not be a Participating Party, but such orders must state that the DTC Participant is not using the Clearing Process and that redemption of Creation Units will instead be effected through transfer of Shares directly through DTC. An order to redeem Creation Units of Funds outside the Clearing Process is deemed received by the Transfer Agent not later than 3:00 p.m., New York time, on such Transmittal Date; (ii) such order is accompanied or proceeded by the requisite number of Shares of Funds specified in such order, which delivery must be made through DTC to the Custodian no later than 11:00 a.m., New York time, on the next Business Day following such Transmittal Date ("DTC Cut-Off Time"); and (iii) all other procedures set forth in the Participant Agreement are properly followed. After the Transfer Agent has deemed an order for redemption outside the Clearing Process received, the Transfer Agent will initiate procedures to transfer the requisite Fund Securities (for the Bullish Funds only) which are expected to be delivered within three Business Days and the Cash Redemption Amount (for all Funds) by the third Business Day following the Transmittal Date on which such redemption order is deemed received by the Transfer Agent. Redemptions in Cash. For Bullish Funds, if it is not possible to effect deliveries of the Fund Securities, the Fund may in its discretion exercise its option to redeem such Shares in cash, and the redeeming shareholder will be required to receive its redemption proceeds in cash. In addition, an investor may request a redemption in cash which the Bullish Fund may, in its sole discretion, permit. In either case, the investor will receive a cash payment equal to the net asset value of its Shares based on the net asset value of Shares of the relevant Fund next determined after the redemption request is received in proper form (minus a redemption transaction fee and additional charge for requested cash redemptions specified above, to offset the Fund's brokerage and other transaction costs associated with the disposition of Fund Securities). The Fund may also, in its sole discretion, upon request of a shareholder, provide such redeemer a portfolio of securities which differs from the exact composition of the Fund Securities but does not differ in net asset value. For Bearish Funds, all redemptions will be in cash. While there will be a redemption transaction fee, there will be no additional charge to offset the Fund's brokerage and other transaction costs associated with liquidating assets of the Fund in order to provide cash to the redeeming shareholder. Redemption Transaction Fees Applicable to Redemption of Shares of the Bullish Funds. A redemption transaction fee payable to the Trust is imposed to offset transfer and other transaction costs that may be incurred by the relevant Bullish Fund, including -35- market impact expenses relating to disposing of portfolio securities. The redemption transaction fee for redemptions in kind and for cash and the additional variable charge for cash redemptions (when cash redemptions are available or specified) are listed in the table below. Investors will also bear the costs of transferring the Fund Securities from the Fund to their account or on their order. Investors who use the services of a broker or other such intermediary may be charged a fee for such services. Fund Redemptions Redemptions Maximum Through The Outside of the Additional Clearing Clearing Variable Charge Process Process for Cash Redemptions* Ultra500 Fund $ $ % Ultra100 Fund $ $ % Ultra30 Fund $ $ % UltraMid-Cap400 Fund $ $ % * As a percentage of net amount invested. Redemption Transaction Fees Applicable to Redemption of Shares of the Bearish Funds. A redemption transaction fee is imposed to offset transfer and other transaction costs that may be incurred by the relevant Bearish Fund including market impact expenses relating to disposing of portfolio securities. Fund Redemption Transaction Fee UltraShort500 Fund $ UltraShort100 Fund $ UltraShort30 Fund $ UltraShortMid-Cap400 Fund $ The right of redemption may be suspended or the date of payment postponed with respect to any Fund (1) for any period during which the New York Stock Exchange is closed (other than customary weekend and holiday closings); (2) for any period during which trading on the New York Stock Exchange is suspended or restricted; (3) for any period during which an emergency exists as a result of which disposal of the shares of the Fund's portfolio securities or determination of its net asset value is not reasonably practicable; or (4) in such other circumstance as is permitted by the SEC. DETERMINING NET ASSET VALUE Net asset value per share for each Fund is computed by dividing the value of the net assets of such Fund (i.e., the value of its total assets less total liabilities) by the total number of Shares outstanding, rounded to the nearest cent. Expenses and fees, including the management, administration and distribution fees, are accrued daily and taken into -36- account for purposes of determining net asset value. The net asset value of each Fund is determined as of the close of the regular trading session on the New York Stock Exchange, Inc. ("NYSE") (ordinarily 4:00 p.m., Eastern time) on each day that the NYSE is open. The Trust may establish additional times for the computation of net asset value of one or more Funds in the future in connection with the possible future trading of Shares of such Funds on one or more foreign exchanges. CONTINUOUS OFFERING The method by which Creation Units of Shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Units of Shares are issued and sold by the Trust on an ongoing basis, at any point a "distribution," as such term is used in the Securities Act, may occur. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner which could render them statutory underwriters and subject them to the prospectus delivery and liability provisions of the Securities Act. For example, a broker-dealer firm or its client may be deemed a statutory underwriter if it takes Creation Units after placing an order with the Distributor, breaks them down into constituent Shares, and sells some or all of the Shares comprising such Creation Units directly to its customers; or if it chooses to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for Shares. A determination of whether a person is an underwriter for the purposes of the Securities Act depends upon all the facts and circumstances pertaining to that person's activities. Thus, the examples mentioned above should not be considered a complete description of all the activities that could lead to a categorization as an underwriter. Broker- dealer firms should also note that dealers who are effecting transactions in Shares, whether or not participating in the distribution of Shares, are generally required to deliver a prospectus. This is because the prospectus delivery exemption in Section 4(3) of the Securities Act is not available in respect of such transactions as a result of Section 24(d) of the Investment Company Act. The Trust has, however, applied to the Securities and Exchange Commission for an exemption from this prospectus delivery obligation in ordinary secondary market transactions involving Shares under certain circumstances, on the condition that purchasers of Shares are provided with a product description of the Shares. If the SEC grants the Trust this relief, broker-dealer firms should note that dealers who are not "underwriters" but are participating in a distribution (as contrasted to ordinary secondary market transaction), and thus dealing with Shares that are part of an "unsold allotment" within the meaning of section 4(3)(C) of the Securities Act, would be unable to take advantage of the prospectus delivery exemption provided by section 4(3) of the Securities Act. Firms that incur a prospectus-delivery obligation with respect to Shares are reminded that under Securities Act Rule 153 a prospectus delivery obligation under Section 5(b)(2) of the Securities Act owed to a national securities exchange member in connection with a sale on the national securities exchange is satisfied by the fact that the Fund's prospectus is available at the national securities exchange on which the Shares of such Fund trade upon request. The prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions on a national securities exchange and not with respect to "upstairs" transactions. -37- TAXATION Overview. Set forth below is a discussion of certain U.S. federal income tax issues concerning the Funds and the purchase, ownership, and disposition of a Fund's Shares. This discussion does not purport to be complete or to deal with all aspects of federal income taxation that may be relevant to shareholders in light of their particular circumstances, nor to certain types of shareholders subject to special treatment under the federal income tax laws (for example, banks and life insurance companies). This discussion is based upon present provisions of the Code, the regulations promulgated thereunder, and judicial and administrative ruling authorities, all of which are subject to change, which change may be retroactive. Prospective investors should consult their own tax advisors with regard to the federal tax consequences of the purchase, ownership, or disposition of a Fund's Shares, as well as the tax consequences arising under the laws of any state, foreign country, or other taxing jurisdiction. Dividends out of net ordinary income and distribution of net short-term capital gains are taxable to the recipient U.S. shareholders as ordinary income, whether received in cash or reinvested in a Fund's Shares. Dividends from net ordinary income may be eligible for the corporate dividends-received deduction. The excess of net long-term capital gains over the net short-term capital losses realized and distributed by a Fund to its U.S. shareholders as capital gains distributions is taxable to the shareholders as gain from the sale of a capital asset held for more than one year, regardless of the length of time a shareholder has held the Fund Shares. If a shareholder holds a Fund's Shares for six months or less and during that period receives a distribution taxable to the shareholder as long-term capital gain, any loss realized on the sale of the Fund's Shares will be long-term loss to the extent of such distribution. The amount of an income dividend or capital gains distribution declared by a Fund during October, November or December of a year to shareholder of record as of a specified date in such a month that is paid during January of the following year will be deemed to be received by shareholders on December 31 of the prior year. Any dividend or distribution paid by a Fund has the effect of reducing the Fund's net asset value per share. Investors should be careful to consider the tax effect of buying Shares shortly before a distribution by a Fund. The price of Shares purchased at that time will include the amount of the forthcoming distribution, but the distribution will be taxable to the shareholder. A dividend or capital gains distribution with respect to Shares of a Fund held by a tax-deferred or qualified plan, such as an IRA, retirement plan or corporate pension or profit sharing plan, will not be taxable to the plan. Distribution from such plans will be taxable to individual participants under applicable tax rules without regard to the character of the income earned by the qualified plan. -38- Shareholders will be advised annually as to the federal tax status of dividends and capital gains distribution made by the Funds for the preceding year. Distributions by Funds generally will be subject to state and local taxes. Each of the Funds intends to qualify and elect to be treated each year as a regulated investment company (a "RIC") under Subchapter M of the Code. A RIC generally is not subject to federal income tax on income and gains distributed in a timely manner to its shareholders. Accordingly, each Fund generally must, among other things, (a) derive in each taxable year at least 90% of its gross income from dividends, interest, payments with respect to certain securities loans, and gains from the sale or other disposition of stock, securities or foreign currencies, or other income derived with respect to its business of investing in such stock, securities or currencies; and (b) diversify its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the market value of the Fund's assets is represented by cash, U.S. government securities, the securities of other regulated investment companies and other securities, with such other securities limited, in respect of any one issuer, to an amount not greater than 5% of the value of the Fund's total assets and 10% of the outstanding voting securities of such issuer, and (ii) not more than 25% of the value of its total assets is invested in the securities of any one issuer (other than U.S. government securities and the securities of other regulated investment companies). As a RIC, a Fund generally will not be subject to U.S. federal income tax on income and gains that it distributes to shareholders, if at least 90% of the Fund's investment company taxable income (which includes, among other items, dividends, interest and the excess of any net short-term capital gains over net long-term capital losses) for the taxable year is distributed. Each Fund intends to distribute substantially all of such income. Amounts not distributed on a timely basis in accordance with a calendar year distribution requirement are subject to a nondeductible 4% excise tax at the Fund level. To avoid the tax, each Fund must distribute during each calendar year an amount equal to the sum of (1) at least 98% of its ordinary income (not taking into account any capital gains or losses) for the calendar year, (2) at least 98% of its capital gains in excess of its capital losses (adjusted for certain ordinary losses) for a one-year period generally ending on October 31 of the calendar year, and (3) all ordinary income and capital gains for previous years that were not distributed during such years. To avoid application of the excise tax, the Funds intend to make distributions in accordance with the calendar year distribution requirement. A distribution will be treated as paid on December 31 of a calendar year if it is declared by the Fund in October, November or December of that year with a record date in such a month and paid by the Fund during January of the following year. Such distributions will be taxable to shareholders in the calendar year in which the distributions are declared, rather than the calendar year in which the distributions are received. Market Discount. If a Fund purchases a debt security at a price lower than the stated redemption price of such debt security, the excess of the stated redemption price over the purchase price is "market discount". If the amount of market discount is more than a de minimis amount, a portion of such market discount must be included as ordinary income (not capital gain) by the Fund in each taxable year in which the Fund owns an interest in -39- such debt security and receives a principal payment on it. In particular, the Fund will be required to allocate that principal payment first to the portion of the market discount on the debt security that has accrued but has not previously been includable in income. In general, the amount of market discount that must be included for each period is equal to the lesser of (i) the amount of market discount accruing during such period (plus any accrued market discount for prior periods not previously taken into account) or (ii) the amount of the principal payment with respect to such period. Generally, market discount accrues on a daily basis for each day the debt security is held by a Fund at a constant rate over the time remaining to the debt security's maturity or, at the election of the Fund, at a constant yield to maturity which takes into account the semi-annual compounding of interest. Gain realized on the disposition of a market discount obligation must be recognized as ordinary interest income (not capital gain) to the extent of the "accrued market discount." Original Issue Discount. Certain debt securities acquired by the Funds may be treated as debt securities that were originally issued at a discount. Original issue discount can generally be defined as the difference between the price at which a security was issued and its stated redemption price at maturity. Although no cash income is actually received by a Fund, original issue discount that accrues on a debt security in a given year generally is treated for federal income tax purposes as interest and, therefore, such income would be subject to the distribution requirements applicable to regulated investment companies. Some debt securities may be purchased by the Funds at a discount that exceeds the original issue discount on such debt securities, if any. This additional discount represents market discount for federal income tax purposes (see above). Futures and Foreign Currency Forward Contracts. Any regulated futures contracts and certain options (namely, nonequity options and dealer equity options) in which a Fund may invest may be "section 1256 contracts." (The Funds do not intend to invest or trade in options.) Gains (or losses) on these contracts generally are considered to be 60% long-term and 40% short-term capital gains or losses; however foreign currency gains or losses arising from certain section 1256 contracts are ordinary in character. Also, section 1256 contracts held by a Fund at the end of each taxable year (and on certain other dates prescribed in the Code) are "marked to market" with the result that unrealized gains or losses are treated as though they were realized. Transactions in futures and forward contracts undertaken by the Funds may result in "straddles" for federal income tax purposes. The straddle rules may affect the character of gains (or losses) realized by a Fund, and losses realized by the Fund on positions that are part of a straddle may be deferred under the straddle rules, rather than being taken into account in calculating the taxable income for the taxable year in which the losses are realized. In addition, certain carrying charges (including interest expense) associated with positions in a straddle may be required to be capitalized rather than deducted currently. Certain elections that a Fund may make with respect to its straddle positions may also affect the amount, character and timing of the recognition of gains or losses from the affected positions. -40- Because only a few regulations implementing the straddle rules have been promulgated, the consequences of such transactions to the Funds are not entirely clear. The straddle rules may increase the amount of short-term capital gain realized by a Fund, which is taxed as ordinary income when distributed to shareholders. Because application of the straddle rules may affect the character of gains or losses, defer losses and/or accelerate the recognition of gains or losses from the affected straddle positions, the amount which must be distributed to shareholders as ordinary income or long-term capital gain may be increased or decreased substantially as compared to a fund that did not engage in such transactions. Constructive Sales. Recently enacted rules may affect the timing and character of gain if a Fund engages in transactions that reduce or eliminate its risk of loss with respect to appreciated financial positions. If the Fund enters into certain transactions in property while holding substantially identical property, the Fund would be treated as if it had sold and immediately repurchased the property and would be taxed on any gain (but not loss) from the constructive sale. The character of gain from a constructive sale would depend upon the Fund's holding period in the property. Loss from a constructive sale would be recognized when the property was subsequently disposed of, and its character would depend on the Fund's holding period and the application of various loss deferral provisions of the Code. Passive Foreign Investment Companies. The Funds may invest in shares of foreign corporations that may be classified under the Code as passive foreign investment companies ("PFICs"). In general, a foreign corporation is classified as a PFIC if at least one-half of its assets constitute investment-type assets, or 75% or more of its gross income is investment-type income. If a Fund receives a so-called "excess distribution" with respect to PFIC stock, the Fund itself may be subject to a tax on a portion of the excess distribution, whether or not the corresponding income is distributed by the Fund to shareholders. In general, under the PFIC rules, an excess distribution is treated as having been realized ratably over the period during which the Fund held the PFIC shares. Each Fund will itself be subject to tax on the portion, if any, of an excess distribution that is so allocated to prior Fund taxable years and an interest factor will be added to the tax, as if the tax had been payable in such prior taxable years. Certain distributions from a PFIC as well as gain from the sale of PFIC shares are treated as excess distributions. Excess distributions are characterized as ordinary income even though, absent application of the PFIC rules, certain excess distributions might have been classified as capital gains. The Funds may be eligible to elect alternative tax treatment with respect to PFIC shares. Under an election that currently is available in some circumstances, a Fund generally would be required to include in its gross income its share of the earnings of a PFIC on a current basis, regardless of whether distributions were received from the PFIC in a given year. If this election were made, the special rules, discussed above, relating to the taxation of excess distributions, would not apply. In addition, another election would involve marking to market the Fund's PFIC shares at the end of each taxable year, with the result that unrealized gains would be treated as though they were realized and reported as ordinary income. Any mark-to-market losses and any loss from an actual -41- disposition of Fund Shares would be deductible as ordinary losses to the extent of any net mark-to-market gains included in income in prior years. Distributions. Distributions of investment company taxable income are taxable to a U.S. shareholder as ordinary income, whether paid in cash or shares. Dividends paid by a Fund to a corporate shareholder, to the extent such dividends are attributable to dividends received from U.S. corporations by the Fund, may qualify for the dividends received deduction. However, the revised alternative minimum tax applicable to corporations may deduct the value of the dividends received deduction. Distributions of net capital gains (the excess of net long-term capital gains over net short-term capital losses), if any, designated by the Fund as capital gain dividends, whether paid in cash or in Shares, are taxable as gain from the sale or exchange of an asset held for more than one year, regardless of how long the shareholder has held the Fund's Shares. Capital gains dividends are not eligible for the dividends received deduction. Shareholders will be notified annually as to the U.S. federal tax status of distributions, and shareholders receiving distributions in the form of newly issued Shares will receive a report as to the net asset value of the Shares received. If the net asset value of Shares is reduced below a shareholder's cost as a result of a distribution by a Fund, such distribution generally will be taxable even though it represents a return of invested capital. Investors should be careful to consider the tax implications of buying Shares of a Fund just prior to a distribution. The price of Shares purchased at this time will include the amount of the forthcoming distribution, but the distribution will generally be taxable. If a shareholder has chosen to receive distributions in cash, and the postal (or other delivery) service is unable to deliver checks to the shareholder's address of record, Funds will change the distribution option so that all distributions are automatically reinvested in additional Shares. Funds will not pay interest on uncashed distribution checks. Disposition of Shares. Upon a redemption, sale or exchange of Shares of a Fund, a shareholder will realize a taxable gain or loss depending upon his or her basis in the Shares. A gain or loss will be treated as capital gain or loss if the Shares are capital assets in the shareholder's hands and generally will be long-term, mid-term or short-term, depending upon the shareholder's holding period for the Shares. Any loss realized on a redemption, sale or exchange will be disallowed to the extent the Shares disposed of are replaced (including through reinvestment of dividends) within a period of 61 days, beginning 30 days before and ending 30 days after the Shares are disposed of. In such a case the basis of the Shares acquired will be adjusted to reflect the disallowed loss. Any loss realized by a shareholder on the disposition of a Fund's Shares held by the shareholder for six months or less will be treated for tax purposes as a long-term capital loss to the extent of any distributions of capital gain dividends received or treated as having been received by the shareholder with respect to such Shares. Backup Withholding. Each Fund may be required to withhold federal income tax ("backup withholding") from dividends paid, capital gains distributions, and redemption -42- proceeds to shareholders. The backup withholding rate is the fourth lowest tax rate applicable to an unmarried individual, which is 30.0% in 2002 and 2003. Federal tax will be withheld if (1) the shareholder fails to furnish the Fund with the shareholder's correct taxpayer identification number or social security number, (2) the IRS notifies the shareholder or the Fund that the shareholder has failed to report properly certain interest and dividend income to the IRS and to respond to notices to that effect, or (3) when required to do so, the shareholder fails to certify that he or she is not subject to backup withholding. Any amounts withheld may be credited against the shareholder's federal income tax liability. Other Taxation. Distributions may be subject to additional state, local and foreign taxes, depending on each shareholder's particular situation. Non-U.S. shareholders and certain types of U.S. shareholders subject to special treatment under the U.S. federal income tax laws (e.g. banks and life insurance companies) may be subject to U.S. tax rules that differ significantly from those summarized above. Equalization Accounting. Each Fund distributes its net investment income and capital gains to shareholders as dividends annually to the extent required to qualify as a regulated investment company under the Code and generally to avoid federal income or excise tax. Under current law, each Fund may on its tax return treat as a distribution of investment company taxable income and net capital gain the portion of redemption proceeds paid to redeeming shareholders that represents the redeeming shareholders' portion of the Fund's undistributed investment company taxable income and net capital gain. This practice, which involves the use of equalization accounting, will have the effect of reducing the amount of income and gains that the Fund is required to distribute as dividends to shareholders in order for the Fund to avoid federal income tax and excise tax. This practice may also reduce the amount of distributions required to be made to nonredeeming shareholders and the amount of any undistributed income will be reflected in the value of the Fund's Shares; the total return on a shareholder's investment will not be reduced as a result of the Fund's distribution policy. Investors who purchase Shares shortly before the record date of a distribution will pay the full price for the Shares and then receive some portion of the price back as a taxable distribution. PERFORMANCE INFORMATION Total Return Calculations. From time to time, each of the Funds may advertise its historical performance. An investor should keep in mind that any return or yield quoted represents past performance and is not a guarantee of future results. The investment return and principal value of investments will fluctuate so that an investor's Shares, when redeemed, may be worth more or less than their original cost. Before-Tax Performance. All pre-tax performance advertisements shall include average annual total return quotations for the most recent one, five, and ten-year periods (or life if a Fund has been in operation less than one of the prescribed periods). Average annual total return represents redeemable value at the end of the quoted period. It is calculated in a uniform manner by dividing the ending redeemable value of a hypothetical initial payment of $1,000 minus the maximum sales charge (if any), for a specified period of -43- time, by the amount of the initial payment, assuming reinvestment of all dividends and distributions. The one, five, and ten-year periods are calculated based on periods that end on the last day of the calendar quarter preceding the date on which an advertisement is submitted for publication. After-Tax Performance. All after-tax performance is calculated as described in the paragraph above and, in addition, takes into account the effect of taxes. After-tax performance is presented using two methodologies. The first deducts taxes paid on distributions. The second deducts taxes paid on distributions and taxes paid upon redemption of Fund Shares. The calculation of after-tax performance assumes the highest individual marginal federal income tax rates currently in effect. The impact of taxes on the Funds' distributions corresponds to the tax characteristics of the distributions (e.g., ordinary income rate for ordinary income, short-term capital gains distribution rate for short-term capital gains distributions, and long-term capital gains distribution rate for long-term capital gains distributions). State, local or federal alternative minimum taxes are not taken into account, and the effect of phase outs of certain exemptions, deductions and credits at various income levels are also not taken into account. Tax rates may vary over the performance measurement period. After-tax returns are not relevant to investors who hold Fund Shares through tax-deferred arrangements such as qualified retirement plans. Actual after-tax returns depend on an investor's tax situation and may differ from those shown. Comparisons of Investment Performance. Performance of a Fund may be compared in publications to the performance of various indices and investments for which reliable performance data is available. The performance of a Fund may be compared in publications to averages, performance rankings, or other information prepared by recognized mutual fund statistical services. In conjunction with performance reports, promotional literature, and/or analyses of shareholder service for a Fund, comparisons of the performance information of the Fund for a given period to the performance of recognized, unmanaged indexes for the same period may be made. Such indexes include, but are not limited to, ones provided by Dow Jones & Company, Standard & Poor's Corporation, Lipper Analytical Services, Inc., Shearson Lehman Brothers, the National Association of Securities Dealers, Inc., The Frank Russell Company, Value Line Investment Survey, the American Stock Exchange, the Philadelphia Stock Exchange, Morgan Stanley Capital International, Wilshire Associates, the Financial Times-Stock Exchange, and the Nikkei Stock Average and Deutcher Aktienindex, all of which are unmanaged market indicators. Such comparisons can be a useful measure of the quality of a Fund's investment performance. In addition, rankings, ratings, and comparisons of investment performance and/or assessments of the quality of shareholder service appearing in publications such as Money, Forbes, Kiplinger's Magazine, Personal Investor, Morningstar, Inc., and similar sources which utilize information compiled (i) internally, (ii) by Lipper Analytical Services, Inc. ("Lipper"), or (iii) by other recognized analytical services, may be used in sales literature. The total return of each Fund also may be compared to the performances of broad groups of comparable mutual funds with similar investment goals, as such -44- performance is tracked and published by such independent organizations as Lipper and CDA Investment Technologies, Inc., among others. Further information about the performance of the Funds will be contained in the Funds' annual reports to shareholders, which may be obtained without charge by writing to the Funds at the address or telephoning the Funds at the telephone number set forth on the cover page of this Statement of Additional Information. Other Information The Funds are not sponsored, endorsed, sold or promoted by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P") or NASDAQ Stock Markets, Inc. ("NASDAQ"). S&P and NASDAQ make no representation or warranty, express or implied, to the owners of Shares of the Funds or any member of the public regarding the advisability of investing in securities generally or in the Funds particularly or the ability of the S&P 500 Index(R) or NASDAQ 100 Index(TM) to track general stock market performance. S&P's and NASDAQ's only relationship to the Funds ("Licensee") is the licensing of certain trademarks and trade names of S&P and NASDAQ. S&P and NASDAQ have no obligation to take the needs of the Licensee or owners of the Shares of the Funds into consideration in determining, composing or calculating the S&P 500 Index(R) and NASDAQ 100 Index(TM), respectively. S&P and NASDAQ are not responsible for and have not participated in the determination or calculation of the equation by which the Shares of Funds are to be converted into cash. S&P and NASDAQ have no obligation or liability in connection with the administration, marketing or trading of Funds. S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX(R) OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX(R) OR ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTIBILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE S&P 500 INDEX(R) OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. "Dow Jones" is a service mark of Dow Jones & Company, Inc. Dow Jones does not: . Sponsor, endorse, sell or promote the Funds. -45- . Recommend that any person invest in the Funds or any other securities. . Have any responsibility or liability for or make any decisions about timing, amount or pricing of the Funds. . Have any responsibility or liability for the administration, management or marketing of the Funds. . Consider the needs of the Funds or the owners of the Funds in determining, composing or calculating the Dow Jones indices or have any obligation to do so. . Dow Jones will not have any liability in connection with the Funds. Specifically, . Dow Jones does not make any warranty, express or implied, and Dow Jones disclaims any warranty about: . The results to be obtained by the Funds, the owner of the Funds or any other person in connection with the use of the Dow Jones sector indices and the data included in the Dow Jones indices; . The accuracy or completeness of the Dow Jones indices and its data; . The merchantability and the fitness for a particular purpose or use of the Dow Jones indices and its data: . Dow Jones will have no liability for any errors, omission or interruptions in the Dow Jones indices or its data; . Under no circumstances will Dow Jones be liable for any lost profits or indirect, punitive, special or consequential damages or losses, even if Dow Jones knows that they might occur. -46- FINANCIAL STATEMENTS Report of Independent Accountants To the Shareholders and Board of Trustees of ProFunds ETF Trust In our opinion, the accompanying statement of assets and liabilities presents fairly, in all material respects, the financial position of ProFunds ETF Trust ("Trust") at ____________, 2002, in conformity with generally accepted accounting principles. This financial statement is the responsibility of the Trust's management; our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit of this financial statement in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Cash ................................................. $100,000 Total Assets ......................................... 100,000 ------- LIABILITIES: Total Liabilities .................................... 0 NET ASSETS ........................................... $100,000 Net assets consist of: Paid-in Capital ...................................... $100,000 NET ASSETS: .......................................... $100,000 Shares outstanding: .................................. [10,000] NET ASSET VALUE: ..................................... $ [10.00] See Notes to Statement of Assets and Liabilities NOTE 1: Organization -47- ProFunds ETF Trust ("Trust") is organized as a Delaware business trust pursuant to a Declaration of Trust dated ____________, 2002, and has had no operations as of the date hereof other than matters relating to its organization and registration as an investment company under the Investment Company Act, the registration of its securities under the Securities Act and the sale and issuance of [10,000] shares of beneficial interest of __________ ("Fund"), a series of the Trust, to ____________ ("Distributor"). The Trust currently offers eight funds: Ultra500 Fund, Ultra100 Fund, Ultra30 Fund, UltraMid-Cap400 Fund, UltraShort500 Fund, UltraShort100 Fund, UltraShort30 Fund and UltraShortMid-Cap400 Fund (collectively, "Funds"). NOTE 2: Significant Accounting Policies Use of Estimates - The preparation of this financial statement in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of this financial statement. Actual results could differ from those estimates. Federal Income Taxes - The Fund intends to qualify as a "regulated investment company" under Subchapter M of the Code. If so qualified, the Fund will not be subject to federal income tax to the extent it distributes substantially all of its net investment income and capital gains to shareholders. NOTE 3: Investment Advisory and Other Agreements ProFund Advisors serves as investment advisor and provides investment guidance and policy direction to the Funds. For its services to the Funds, ProFund Advisors will receive an annual management fee based on __% of each Fund's average daily net assets. The management fee covers all expenses of the Fund except interest, taxes, brokerage commissions and other expenses connected with the executions of portfolio transactions, registration fees based on a percentage of net sales and extraordinary expenses. ____________ (" ") serves as Administrator, Custodian and Transfer Agent for the Funds. As compensation for its services, ( ) receives a fee that is accrued daily and paid monthly, based on each Fund's average daily net assets. ____________ serves as the Fund's principal underwriter and Distributor of the shares of the Fund, pursuant to a Distribution Agreement. The Distribution Agreement will continue for [two] years from its effective date and is renewable thereafter. The Distributor will deliver the Prospectus and Statement of Additional Information, if so requested, to persons purchasing Creation Units Aggregations and will maintain records of both orders placed with it and confirmations of acceptance furnished by it. The Distributor is a broker-dealer registered under the Securities Exchange Act and a member of the National Association of Securities Dealers, Inc. The Distributor has no role in determining the investment policies of the Funds or determining which securities are to be purchased or sold by the Funds. Expenses related to the organization and initial registration of the Trust will be borne by ProFund Advisors LLC. -48- ProFunds ETF Trust PART C. OTHER INFORMATION Item. 23. Exhibits (a) (1) Certificate of Trust of the Registrant, filed herewith. (2) Form of Declaration of Trust of the Registrant, filed herewith. (b) By-laws of the Registrant - To be filed by amendment. (c) Not applicable. (d) (1) Investment Advisory Agreement for UltraSPDR Fund - To be filed by amendment. (2) Investment Advisory Agreement for UltraCube Fund - To be filed by amendment. (3) Investment Advisory Agreement for UltraDIAMOND Fund - To be filed by amendment. (4) Investment Advisory Agreement for UltraMid-Cap Fund - To be filed by amendment. (5) Investment Advisory Agreement for ShortSPDR Fund - To be filed by amendment. (6) Investment Advisory Agreement for ShortCUBE Fund - To be filed by amendment. (7) Investment Advisory Agreement for ShortDIAMOND Fund - To be filed by amendment. (8) Investment Advisory Agreement for ShortMid-Cap Fund - To be filed by amendment. (e) Distribution Agreement between Registrant and ___________ and Dealer Agreement between Registrant and ___________ - To be filed by amendment. (f) Not applicable. (g) (1) Custody Agreement between Registrant and ______ - To be filed by amendment. (2) Foreign Custody Manager Delegation Agreement between Registrant and ____________ - To be filed by amendment. (h) (1) Administration Agreement between Registrant and ________ - To be filed by amendment. (2) Fund Accounting Agreement between Registrant and ________ - To be filed by amendment. (3) Transfer Agency Agreement between Registrant and ________ - To be filed by amendment. (4) Management Services Agreement between Registrant and _________ - To be filed by amendment. (5) Participant Agreement between Registrant and ________- To be filed by amendment. (i) Opinion and Consent of Counsel - To be filed by amendment. (j) Consent of Independent Auditors - To be filed by amendment. (k) Not applicable. (l) Not applicable. (m) Not applicable. (n) Not applicable. (o) Not applicable. (p) (1) Code of Ethics of the Registrant - To be filed by amendment. (2) Code of Ethics of the Advisor - To be filed by amendment. (3) Code of Ethics of the Distributor - To be filed by amendment. (q) Powers of Attorney - To be filed by amendment. Item. 24. Persons Controlled by or Under Common Control with Registrant Provide a list or diagram of all persons directly or indirectly controlled by or under common control with the Registrant. For any person controlled by another person, disclose the percentage of voting securities owned by the immediately controlling person or other basis of that person's control. For each company, also provide the state or other sovereign power under the laws of which the company is organized. None Item. 25. Indemnification State the general effect of any contract, arrangements or statute under which any director, officer, underwriter or affiliated person of the registrant is insured or indemnified against any liability incurred in their official capacity, other than insurance provided by any director, officer, affiliated person, or underwriter for their own protection. 2 Reference is made to Article Eight of the Registrant's Declaration of Trust which is incorporated by reference herein: The Registrant (also, the "Trust") is organized as a Delaware business trust and is operated pursuant to a Declaration of Trust, dated ______________, 2002 (the "Declaration of Trust"), that permits the Registrant to indemnify every person who is, or has been, a Trustee, officer, employee or agent of the Trust, including persons who serve at the request of the Trust as directors, trustees, officers, employees or agents of another organization in which the Trust has an interest as a shareholder, creditor or otherwise (hereinafter referred to as a "Covered Person"), shall be indemnified by the Trust to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him in connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been such a Trustee, director, officer, employee or agent and against amounts paid or incurred by him in settlement thereof. This indemnification is subject to the following conditions: No indemnification shall be provided hereunder to a Covered Person: (a) For any liability to the Trust or its Shareholders arising out of a final adjudication by the court or other body before which the proceeding was brought that the Covered Person engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office; (b) With respect to any matter as to which the Covered Person shall have been finally adjudicated not to have acted in good faith in the reasonable belief that his or her action was in the best interests of the Trust; or (c) In the event of a settlement or other disposition not involving a final adjudication (as provided in paragraph (a) or (b) of this Section 8.5.2)and resulting in a payment by a Covered Person, unless there has been either a determination that such Covered Person did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office by the court or other body approving the settlement or other disposition, or a reasonable determination, based on a review of readily available facts (as opposed to a full trial-type inquiry), that he or she did not engage in such conduct, such determination being made by: (i) a vote of a majority of the Disinterested Trustees (as such term is defined in Section 8.5.5) acting on the matter (provided that a majority of Disinterested Trustees then in office act on the matter); or (ii) a written opinion of independent legal counsel. The rights of indemnification under the Declaration of Trust may be insured against by policies maintained by the Trust, and shall be severable, shall not affect any other rights to which any Covered Person may now or hereafter be entitled, shall continue as to a person who has ceased to be a Covered Person, and shall inure to the benefit of the heirs, executors and administrators of such a person. Nothing contained in the Declaration of Trust shall affect any rights to indemnification to which Trust personnel other than Covered Persons may be entitled by contract or otherwise under law. Expenses of preparation and presentation of a defense to any claim, action, suit or proceeding subject to a claim for indemnification under Section 8.5 of the Declaration of Trust shall be advanced by the Trust prior to final disposition thereof upon receipt of an undertaking by or on behalf of the recipient to repay such amount if it is ultimately determined that he or she is not entitled to indemnification under Section 8.5 of the Declaration of Trust, provided that either: 3 (a) Such undertaking is secured by a surety bond or some other appropriate security or the Trust shall be insured against losses arising out of any such advances; or (b) A majority of the Disinterested Trustees acting on the matter (provided that a majority of the Disinterested Trustees then in office act on the matter) or independent legal counsel in a written opinion shall determine, based upon a review of the readily available facts (as opposed to the facts available upon a full trial), that there is reason to believe that the recipient ultimately will be found entitled to indemnification. As used in Section 8.5 of the Declaration of Trust, the following words shall have the meanings set forth below: (c) A "Disinterested Trustee" is one (i) who is not an Interested Person of the Trust (including anyone, as such Disinterested Trustee, who has been exempted from being an Interested Person by any rule, regulation or order of the Commission), and (ii) against whom none of such actions, suits or other proceedings or another action, suit or other proceeding on the same or similar grounds is then or has been pending; (d) "Claim," "action," "suit" or "proceeding" shall apply to all claims, actions, suits, proceedings (civil, criminal, administrative or other, including appeals), actual or threatened; and (e) "Liability" and "expenses" shall include without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities. Item. 26. Business and Other Connections of Investment Advisers Describe any other business, profession, vocation or employment of a substantial nature in which the investment adviser and each director, officer or partner of the investment adviser, is or has been, engaged within the last two fiscal years for his or her own account or in the capacity of director, officer, employee, partner or trustee. (disclose the name and principal business address of any company for which a person listed above serves in the capacity of director, officer, employee, partner or trustee, and the nature of the relationship.) Reference is made to the caption "Management" in the Prospectuses constituting Part A which is incorporated by reference to this Registration Statement and "Management of the ProFunds ETF Trust" in the Statement of Additional Information constituting Part B which is incorporated by reference to this Registration Statement. Listed below are the officers and directors of ProFund Advisors, LLC: The information as to the directors and executive officers of ProFund Advisors, LLC is set forth in ProFund Advisors, LLC's form ADV filed with the Securities and Exchange Commission on May 7, 2002 (Reference No. 5524427696B2B2) and amended through the date hereof, is incorporated herein by reference. 4 Item. 27. Principal Underwriters (a) State the name of each investment company (other than the registrant) for which each principal underwriter currently distributing securities of the registrant also acts as a principal underwriter, depositor or investment adviser. To be provided by amendment. (b) Provide the information required by the following table with respect to each director, officer or partner of each principal underwriter named in answer to Item 20. To be provided by amendment. 5 Item. 28. Location of Accounts and Records State the name and address of each person maintaining principal possession of each account, book or other document required to be maintained by Section 31(a) of the 1940 act [15 u.s.c. 80a-30(a)] and the rules under that section. The books, accounts and other documents required by Section 31(a) under the Investment Company Act of 1940, as amended, and the rules promulgated thereunder are maintained in the physical possession of : To be provided by amendment. Item. 29. Management Services Provide a summary of the substantive provisions of any management-related service contract not discussed in Part A or Part B, disclosing the parties to the contract and the total amount paid and by whom, for the fund's last three fiscal years. Not applicable. Item. 30. Undertakings Registrant hereby undertakes that whenever a Shareholder or Shareholders who meet the requirements of Section 16(c) of the 1940 Act inform the Board of Trustees of his or their desire to communicate with other Shareholders of the Fund the Trustee will inform such Shareholder(s) as to the approximate number of Shareholders of record and the approximate costs of mailing or afford said Shareholders access to a list of Shareholders. Registrant hereby undertakes to furnish each person to whom a prospectus is delivered with a copy of the Registrant's annual report to shareholders, upon request and without charge. 6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended (the "1933 Act"), and the Investment Company Act of 1940, as amended, the Registrant has duly caused this Amendment to its Registration Statement to be signed on its behalf by the undersigned, duly authorized, in the City of New York and State of New York on June 5, 2002. PROFUNDS ETF TRUST By: /s/ Michael L. Sapir ---------------------------- Title: Initial Trustee Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed below by the following persons in the capacities indicated on the 5th of June, 2002. Signature Title Date --------- ----- ---- /s/ Michael L. Sapir Initial Trustee June 5, 2002 - ------------------------------ By: Michael L. Sapir /s/ Louis M. Mayberg Initial Trustee June 5, 2002 - ------------------------------ By: Louis M. Mayberg 7 EXHIBIT INDEX EX-99 (a) (1) Certificate of Trust (2) Form of Declaration of Trust 8 EX-99.A.1 3 dex99a1.txt EXHIBIT (A)(1) Exhibit 99(a)(1) STATE of DELAWARE CERTIFICATE of TRUST This Certificate of Trust is filed in accordance with the provisions of the Delaware Business Trust Act (12 Del. C. Section 3801 et seq.) and sets forth the following: ... First: The name of the trust is: ProFunds ETF Trust ... Second: The name and address of the trustee or the Registered Agent is (meeting the requirements of subsection 3807) is: The Corporation Trust Company, 1209 Orange Street, Wilmington, DE 19891 ... Third: (Use this paragraph only if the company is to have a specific effective date: "This Certificate shall be effective__________________________________" ... Fourth: (Insert any other information the trustees determine to include therein.) By: /s/ Michael L. Sapir ----------------------- Name: Michael L. Sapir Title: Initial Trustee By: /s/ Louis M. Mayberg ---------------------- Name: Louis M. Mayberg Title: Initial Trustee EX-99.A.2 4 dex99a2.txt EXHIBIT (A)(2) Exhibit 99(a)(2) FORM OF DECLARATION OF TRUST OF PROFUNDS ETF TRUST This DECLARATION OF TRUST is made as of this day, ____________, 2002, by the Trustees hereunder. WHEREAS, the Trustees desire to establish a trust for the purpose of carrying on the business of an open-end management investment company; and WHEREAS, in furtherance of such purpose, the Trustees and any successor Trustee selected in accordance with Article 5 hereof are acquiring and may hereafter acquire assets which they will hold and manage as trustees of a Delaware business trust in accordance with the provisions hereinafter set forth; and WHEREAS, this Trust is authorized to issue its shares of beneficial interest in one or more separate series, all in accordance with the provisions set forth in this Declaration of Trust. NOW, THEREFORE, the Trustees hereby declare that they will hold in trust all cash, securities, and other assets which they may from time to time acquire in any manner as Trustees hereunder, and that they will manage and dispose of the same upon the following terms and conditions for the benefit of the holders of shares of beneficial interest in this Trust as hereinafter set forth. ARTICLE 1 Name and Definitions Section 1.1. Name. This Trust shall be known as the "ProFunds ETF Trust", and the Trustees shall conduct the business of the Trust under that name or any other name or names as they may from time to time determine. Section 1.2. Definitions. Whenever used herein, unless otherwise required by the context or specifically provided below: (a) The "Trust" shall mean the Delaware business trust established by this Declaration of Trust, as amended from time to time; (b) "Trustee" or "Trustees" shall mean each signatory to this Declaration of Trust so long as such signatory shall continue in office in accordance with the terms hereof, and all other individuals who at the time in question have been duly elected or appointed and qualified in accordance with Article 5 hereof and are then in office; (c) "Shares" shall mean the shares of beneficial interest in the Trust described in Article 4 hereof and shall include fractional and whole Shares; (d) "Shareholder" shall mean a record owner of Shares; (e) The "1940 Act" refers to the Investment Company Act of 1940 (and any successor statute) and the rules and regulations thereunder, all as amended from time to time; (f) The terms "Person," "Interested Person," and "Principal Underwriter" shall have the meanings given them in the 1940 Act; (g) The term "Commission" shall mean the United States Securities and Exchange Commission (or any successor agency thereto); (h) "Declaration of Trust" or "Declaration" shall mean this Declaration of Trust as amended or restated from time to time; (i) "By-Laws" shall mean the By-Laws of the Trust as amended from time to time; 1 (j) "Series" shall mean any of the separate series of Shares established and designated under or in accordance with the provisions of Article 4 hereof and to which the Trustees have allocated assets and liabilities of the Trust in accordance with Article 4; (k) The "DBTA" refers to the Delaware Business Trust Act, Chapter 38 of Title 12 of the Delaware Code (and any successor statute), as amended from time to time; (l) The "Code" refers to the Internal Revenue Code of 1986 (and any successor statute) and the rules and regulations thereunder, all as amended from time to time; and (m) "Class" shall mean any of the separate classes of Shares established and designated under or in accordance with the provisions of Article 4 hereof and to which the Trustees have allocated assets and liabilities of the Trust in accordance with Article 4. ARTICLE 2 Nature and Purpose of Trust Section 2.1. Nature of Trust. The Trust is a business trust of the type referred to in the DBTA. The Trustees shall file a certificate of trust in accordance with Section 3810 of the DBTA. The Trust is not intended to be, shall not be deemed to be, and shall not be treated as, a general or a limited partnership, joint venture, corporation or joint stock company, nor shall the Trustees or Shareholders or any of them for any purpose be deemed to be, or be treated in any way whatsoever as though they were, liable or responsible hereunder as partners or joint venturers. Section 2.2. Purpose of Trust. The purpose of the Trust is to engage in, operate and carry on the business of an open-end management investment company and to do any and all acts or things as are necessary, convenient, appropriate, incidental or customary in connection therewith. Section 2.3. Interpretation of Declaration of Trust. Section 2.3.1. Governing Instrument. This Declaration of Trust shall be the governing instrument of the Trust and shall be governed by and construed according to the laws of the State of Delaware. Section 2.3.2. No Waiver of Compliance with Applicable Law. No provision of this Declaration shall be effective to require a waiver of compliance with any provision of the Securities Act of 1933, as amended, or the 1940 Act, or of any valid rule, regulation or order of the Commission thereunder. Section 2.3.3. Power of the Trustees Generally. Except as otherwise set forth herein, the Trustees may exercise all powers of trustees under the DBTA on behalf of the Trust. ARTICLE 3 Registered Agent; Principal Place of Business Section 3.1. Registered Agent. The name of the registered agent of the Trust is The Corporation Trust Company, and the registered agent's business address in Delaware is Corporation Trust Center, 1209 Orange Street, Wilmington, Delaware 19801. Section 3.2. Principal Place of Business. The principal place of business of the Trust is 7501 Wisconsin Avenue, Suite 1000, Bethesda, Maryland 20814. ARTICLE 4 Beneficial Interest Section 4.1. Shares of Beneficial Interest. The beneficial interests in the Trust shall be divided into Shares, all without par value, and the Trustees shall have the authority from time to time to divide the class of Shares into two (2) or more separate and distinct series of Shares ("Series") or classes of Shares ("Classes") as provided in Section 4.9 of this Article 4. 2 Section 4.2. Number of Authorized Shares. The Trustees are authorized to issue an unlimited number of Shares. The Trustees may issue Shares for such consideration and on such terms as they may determine (or for no consideration if pursuant to a Share dividend or split), all without action or approval of the Shareholders. Section 4.3. Ownership and Certification of Shares. The Secretary of the Trust, or the Trust's transfer or similar agent, shall record the ownership and transfer of Shares of each Series and Class separately on the record books of the Trust. The record books of the Trust, as kept by the Secretary of the Trust or any transfer or similar agent, shall contain the name and address of and the number of Shares held by each Shareholder, and such record books shall be conclusive as to who are the holders of Shares and as to the number of Shares held from time to time by such Shareholders. No certificates certifying the ownership of Shares shall be issued except as the Trustees may otherwise determine from time to time. The Trustees may make such rules as they consider appropriate for the issuance of share certificates, transfer of Shares, and similar matters for the Trust or any Series or Class. Section 4.4. Status of Shares. Section 4.4.1. Fully Paid and Non-assessable. All Shares when issued on the terms determined by the Trustees shall be fully paid and non-assessable. Section 4.4.2. Personal Property. Shares shall be deemed to be personal property giving only the rights provided in this Declaration of Trust. Section 4.4.3. Party to Declaration of Trust. Every Person by virtue of having become registered as a Shareholder shall be held to have expressly assented and agreed to the terms of this Declaration of Trust and to have become a party thereto. Section 4.4.4. Death of Shareholder. The death of a Shareholder during the continuance of the Trust shall not operate to terminate the Trust nor entitle the representative of any deceased Shareholder to an accounting or to take any action in court or elsewhere against the Trust or the Trustees. The representative shall be entitled to the same rights as the decedent under this Trust. Section 4.4.5. Title to Trust; Right to Accounting. Ownership of Shares shall not entitle the Shareholder to any title in or to the whole or any part of the Trust property or right to call for a partition or division of the same or for an accounting. Section 4.5. Determination of Shareholders. The Trustees may from time to time close the transfer books or establish record dates and times for the purposes of determining the Shareholders entitled to be treated as such, to the extent provided or referred to in Section 7.3. Section 4.6. Shares Held by Trust. The Trustees may hold as treasury shares, reissue for such consideration and on such terms as they may determine, or cancel, at their discretion from time to time, any Shares of any Series or Class reacquired by the Trust. Section 4.7. Shares Held by Persons Related to Trust. Any Trustee, officer or other agent of the Trust, and any organization in which any such person is interested may acquire, own, hold and dispose of Shares of the Trust to the same extent as if such person were not a Trustee, officer or other agent of the Trust; and the Trust may issue and sell or cause to be issued and sold and may purchase Shares from any such person or any such organization subject only to the general limitations, restrictions or other provisions applicable to the sale or purchase of such Shares generally. Section 4.8. Preemptive and Appraisal Rights. Shareholders shall not, as Shareholders, have any right to acquire, purchase or subscribe for any Shares or other securities of the Trust which it may hereafter issue or sell, other than such right, if any, as the Trustees in their discretion may determine. Shareholders shall have no appraisal rights with respect to their Shares and, except as otherwise determined by resolution of the Trustees in their sole discretion, shall have no exchange or conversion rights with respect to their Shares. No action may be brought by a Shareholder on behalf of the Trust unless Shareholders owning no less than a majority of the then outstanding Shares, or Series or Class thereof, join in the bringing of such action. A Shareholder of Shares in a particular Series or Class of the 3 Trust shall not be entitled to participate in a derivative or class action lawsuit on behalf of any other Series or Class, as appropriate, or on behalf of the Shareholders in any such other Series or Class of the Trust. Section 4.9. Series and Classes of Shares. Section 4.9.1. Classification of Shares. The Trustees may classify or reclassify any unissued Shares or any Shares previously issued and reacquired of any Series or Class into one or more Series or Class that may be established and designated from time to time. Section 4.9.2. Establishment and Designation. The Trustees shall have exclusive power without the requirement of Shareholder approval to establish and designate separate and distinct Series and Classes of Shares. The establishment and designation of any Series or Class (in addition to those established and designated in this Section below) shall be effective upon the execution by a majority of the Trustees of an instrument setting forth such establishment and designation and the relative rights and preferences of the Shares of such Series or Class, or as otherwise provided in such instrument. Each such instrument shall have the status of an amendment to this Declaration of Trust. Without limiting the authority of the Trustees to establish and designate any further Series or Class, the Trustees hereby establish and designate the following eight (8) initial Series: Ultra500 Fund Ultra100 Fund Ultra30 Fund UltraMid-Cap400 Fund UltraShort500 Fund UltraShort100 Fund UltraShort30 Fund UltraShort Mid-Cap400 Fund and the following ___ initial Classes: [ ] Section 4.9.3. Separate and Distinct Nature. Each Series and Class, including without limitation Series and Classes specifically established and designated in Section 4.9.2, shall be separate and distinct from any other Series and Class and shall maintain separate and distinct records on the books of the Trust, and the assets belonging to any such Series or Class shall be held and accounted for separately from the assets of the Trust or any other Series or Class. Section 4.9.4. Conversion Rights. Subject to compliance with the requirements of the 1940 Act, the Trustees shall have the authority to provide that holders of Shares of any Series or Class shall have the right to convert said Shares into Shares of one or more other Series or Class in accordance with such requirements and procedures as may be established by the Trustees. Section 4.9.5. Rights and Preferences. The Trustees shall have exclusive power without the requirement of Shareholder approval to fix and determine the relative rights and preferences as between the Shares of the separate Series and Classes. The initial Series and Classes and any further Series and Classes that may from time to time be established and designated by the Trustees shall (unless the Trustees otherwise determine with respect to some further Series at the time of establishing and designating the same) have relative rights and preferences as set forth in this Section 4.9.5. Section 4.9.5.1. Assets and Liabilities "Belonging" to a Series or Class. All consideration received by the Trust for the issue or sale of Shares of particular Series or Class, together with all assets in which such consideration is invested or reinvested, all income, earnings, profits, and proceeds thereof, including any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall be held and accounted for separately from the other assets of the Trust and of every other Series or Class and may be referred to herein as "assets belonging to" that Series or Class. The assets belonging to a particular Series or Class shall belong to that Series or Class for all purposes, and to no other Series or Class, subject only to the rights of creditors of that Series or Class. Such consideration, assets, 4 income, earnings, profits, and proceeds thereof, including any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments which are not readily identifiable as belonging to any particular Series or Class (collectively "General Items"), the Trustees shall allocate to and among any one or more of the Series and/or Classes in such manner and on such basis as they, in their sole discretion, deem fair and equitable. Any General Items so allocated to a particular Series or Class shall belong to that Series/Class. Each such allocation by the Trustees shall be conclusive and binding upon all Shareholders for all purposes. The assets belonging to each particular Series and Class shall be charged with the liabilities in respect of that Series/Class and all expenses, costs, charges and reserves attributable to that Series/Class, and any general liabilities, expenses, costs, charges or reserves of the Trust which are not readily identifiable as belonging to any particular Series or Class shall be allocated and charged by the Trustees to and among any one or more of the Series and Classes established and designated from time to time in such manner and on such basis as the Trustees in their sole discretion deem fair and equitable. Each allocation of liabilities, expenses, costs, charges and reserves by the Trustees shall be conclusive and binding upon all Shareholders for all purposes. Section 4.9.5.2. Treatment of Particular Items. The Trustees shall have full discretion, to the extent consistent with the 1940 Act and consistent with generally accepted accounting principles, to determine which items shall be treated as income and which items as capital; and each such determination and allocation shall be conclusive and binding upon the Shareholders. Section 4.9.5.3. Limitation on Interseries and Interclass Liabilities. Subject to the right of the Trustees in their discretion to allocate general liabilities, expenses, costs, charges or reserves as provided in Section 4.9.5.1, the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular Series or Class shall be enforceable against the assets of such Series/Class only, and not against the assets of any other Series or Class. Notice of this limitation on liabilities between and among Series shall be set forth in the certificate of trust of the Trust (whether originally or by amendment) as filed or to be filed in the Office of the Secretary of State of the State of Delaware pursuant to the DBTA, and upon the giving of such notice in the certificate of trust, the statutory provisions of Section 3804 of the DBTA relating to limitations on liabilities between and among series (and the statutory effect under Section 3804 of setting forth such notice in the certificate of trust) shall become applicable to the Trust and each Series Section 4.9.5.4. Dividends. Dividends and capital gains distributions on Shares of a particular Series may be paid with such frequency, in such form, and in such amount as the Trustees may determine by resolution adopted from time to time, or pursuant to a standing resolution or resolutions adopted only once or with such frequency as the Trustees may determine. All dividends and distributions on Shares of a particular Series or Class shall be distributed pro rata to the holders of Shares of that Series/Class in proportion to the number of Shares of that Series/Class held by such holders at the date and time of record established for the payment of such dividends or distributions. Such dividends and distributions may be paid in cash, property or additional Shares of that Series/Class, or a combination thereof, as determined by the Trustees or pursuant to any program that the Trustees may have in effect at the time for the election by each Shareholder of the form in which dividends or distributions are to be paid to that Shareholder. Any such dividend or distribution paid in Shares shall be paid at the net asset value thereof as determined in accordance with Section 4.9.5.8. Section 4.9.5.5. Redemption by Shareholder. Each Shareholder of a particular Series or Class shall have the right at such times as may be permitted by the Trust and as otherwise required by the 1940 Act to require the Trust to redeem all or any part of his Shares of that Series or Class, upon and subject to the terms and conditions provided in this Section 4.9.5.5, in accordance with and pursuant to procedures or methods prescribed or approved by the Trustees and, in the case of any Series or Class now or hereafter authorized, if so determined by the Trustees, shall be redeemable only in aggregations of such number of Shares and at such times as may be determined by, or determined pursuant to procedures or methods prescribed by or approved by, the Trustees from time to time with respect to such Series or Class. The number of Shares comprising an aggregation for purposes of redemption or repurchase so determined from time to time with respect to any Series or Class shall be referred to herein as a "Creation Unit" and collectively, as "Creation Units". The Trustees shall have the unrestricted power to determine from time to time the number of Shares constituting a Creation Unit by resolutions adopted at any regular or special meeting of the Trustees. Each holder of a Creation Unit aggregation of a Series or Class, upon request to the Trust accompanied by surrender of the appropriate stock certificate or certificates in proper form for transfer if certificates have been issued to such holder, or in accordance with such other procedures as may from time to time be in effect if 5 certificates have not been issued, shall be entitled to require the Trust to redeem all or any number of such holder's Shares standing in the name of such holder on the books of the Trust, but in the case of Shares of any Series or Class as to which the Trustees have determined that such Shares shall be redeemable in Creation Unit aggregations, only in such Creation Unit aggregations of shares of such Series or Class as the Trustees may determine from time to time in accordance with this Section 4.9.5.5. The Trust shall, upon application of any Shareholder or pursuant to authorization from any Shareholder, redeem or repurchase from such Shareholder outstanding Shares for an amount per share determined by the Trustees in accordance with any applicable laws and regulations; provided that (i) such amount per share shall not exceed the cash equivalent of the proportionate interest of each Share or of any Class or Series of Shares in the assets of the Trust at the time of the redemption or repurchase and (ii) if so authorized by the Trustees, the Trust may, at any time and from time to time, charge fees for effecting such redemption or repurchase, at such rates as the Trustees may establish, as and to the extent permitted under the 1940 Act and the rules and regulations promulgated thereunder, and may, at any time and from time to time, pursuant to such Act and such rules and regulations, suspend such right of redemption. The procedures for effecting and suspending redemption shall be as set forth in the Prospectus from time to time. Payment may be in cash, securities or a combination thereof, as determined by or pursuant to the direction of the Trustees from time to time. Section 4.9.5.6. Redemption by Trust. The Trustees may cause the Trust to redeem the Shares of any Series or Class held by a Shareholder at the redemption price that would be applicable if such Shares were then being redeemed by the Shareholder pursuant to Section 4.9.5.5 upon such conditions as may from time to time be determined by the Trustees. Upon redemption of Shares pursuant to this Section 4.9.5.6, the Trust shall promptly cause payment of the full redemption price to be made to such Shareholder for Shares so redeemed. Section 4.9.5.7. Prevention of Personal Holding Company Status. The Trust may reject any purchase order, refuse to transfer any Shares, and compel the redemption of Shares if, in its opinion, any such rejection, refusal, or redemption would prevent the Trust from becoming a personal holding company as defined by the Code. Section 4.9.5.8. Net Asset Value. The net asset value per Share of any Series or Class shall be determined in accordance with the methods and procedures established by the Trustees from time to time and, to the extent required by applicable law, as disclosed in the then current prospectus or statement of additional information for the Series/Class. Section 4.9.5.9. Maintenance of Stable Net Asset Value. The Trustees may determine to maintain the net asset value per Share of any Series at a designated constant dollar amount and in connection therewith may adopt procedures not inconsistent with the 1940 Act for the continuing declarations of income attributable to that Series, or any Class thereof, as dividends payable in additional Shares of that Series/Class at the designated constant dollar amount and for the handling of any losses attributable to that Series/Class. Such procedures may provide that in the event of any loss each Shareholder shall be deemed to have contributed to the capital of the Trust attributable to that Series/Class his or her pro rata portion of the total number of Shares required to be canceled in order to permit the net asset value per Share of that Series/Class to be maintained, after reflecting such loss, at the designated constant dollar amount. Each Shareholder of the Trust shall be deemed to have agreed, by his investment in any Series with respect to which the Trustees shall have adopted any such procedure, to make the contribution referred to in the preceding sentence in the event of any such loss. The Trustees may delegate any of their powers and duties under this Section 4.9.5.9 with respect to appraisal of assets and liabilities in the determination of net asset value or with respect to a suspension of the determination of net asset value to an officer or officers or agent or agents of the Trust designated from time to time by the Trustees. Section 4.9.5.10. Transfer of Shares. Except to the extent that transferability is limited by applicable law or such procedures as may be developed from time to time by the Trustees or the appropriate officers of the Trust, Shares shall be transferable on the records of the Trust only by the record holder thereof or by his agent thereunto duly authorized in writing, upon delivery to the Trustees or the Trust's transfer agent of a duly executed instrument of transfer, together with a Share certificate, if one is outstanding, and such evidence of the genuineness of each such execution and authorization and of such other matters as may be required by the Trustees. Upon such delivery the transfer shall be recorded on the register of the Trust. Section 4.9.5.11. Equality of Shares. All Shares of each particular Series or Class shall represent an equal proportionate interest in the assets belonging or attributable to that Series/Class (subject to the liabilities belonging 6 to that Series/Class), and each Share of any particular Series or Class shall be equal in this respect to each other Share of that Series or Class, as applicable. Section 4.9.5.12. Fractional Shares. Any fractional Share of any Series or Class, if any such fractional Share is outstanding, shall carry proportionately all the rights and obligations of a whole Share of that Series/Class, including rights and obligations with respect to voting, receipt of dividends and distributions, redemption of Shares, and liquidation of the Trust or any Series or Class. ARTICLE 5 Trustees Section 5.1. Management of the Trust. The business and affairs of the Trust shall be managed by the Trustees, and they shall have all powers necessary and desirable to carry out that responsibility, including those specifically set forth in Sections 5.10 and 5.11 herein. Section 5.2. Qualification. Each Trustee shall be a natural person. A Trustee need not be a Shareholder, a citizen of the United States, or a resident of the State of Delaware. Section 5.3. Number. By the vote or consent of a majority of the Trustees then in office, the Trustees may fix the number of Trustees at a number not less than two (2) nor more than twenty-five (25). No decrease in the number of Trustees shall have the effect of removing any Trustee from office prior to the expiration of his or her term, but the number of Trustees may be decreased in conjunction with the removal of a Trustee pursuant to Section 5.7. Section 5.4. Term and Election. Each Trustee shall hold office until the next meeting of Shareholders called for the purpose of considering the election or re-election of such Trustee or of a successor to such Trustee, and until his or her successor is elected and qualified, and any Trustee who is appointed by the Trustees in the interim to fill a vacancy as provided hereunder shall have the same remaining term as that of his or her predecessor, if any, or such term as the Trustees may determine. Section 5.5. Composition of the Board of Trustees. No election or appointment of any Trustee shall take effect if such election or appointment would cause the number of Trustees who are Interested Persons to exceed the number permitted by Section 10 of the 1940 Act. Section 5.6. Resignation and Retirement. Any Trustee may resign or retire as a Trustee (without need for prior or subsequent accounting) by an instrument in writing signed by such Trustee and delivered or mailed to the Chairman, if any, the President, or the Secretary of the Trust. Such resignation or retirement shall be effective upon such delivery, or at a later date according to the terms of the instrument. Section 5.7. Removal. Any Trustee may be removed with or without cause at anytime: (1) by written instrument signed by two-thirds (2/3) of the number of Trustees in office prior to such removal, specifying the date upon which such removal shall become effective, or (2) by the affirmative vote of Shareholders holding not less than two-thirds (2/3) of Shares outstanding, cast in person or by proxy at any meeting called for that purpose Section 5.8. Vacancies. Any vacancy or anticipated vacancy resulting for any reason, including without limitation the death, resignation, retirement, removal, or incapacity of any of the Trustees, or resulting from an increase in the number of Trustees may (but need not unless required by the 1940 Act) be filled by a majority of the Trustees then in office, subject to the provisions of Section 16 of the 1940 Act, through the appointment in writing of such other person as such remaining Trustees in their discretion shall determine. The appointment shall be effective upon the acceptance of the person named there into serve as a trustee, except that any such appointment in anticipation of a vacancy occurring by reason of the resignation, retirement, or increase in number of Trustees to be effective at a later date shall become effective only at or after the effective date of such resignation, retirement, or increase in number of Trustees. Section 5.9. Ownership of Assets of the Trust. The assets of the Trust shall be held separate and apart from any assets now or hereafter held in any capacity other than as Trustee hereunder by the Trustees or any successor Trustees. Legal title to all the Trust property shall be vested in the Trust as a separate legal entity under the DBTA, 7 except that the Trustees shall have the power to cause legal title to any Trust property to be held by or in the name of one or more of the Trustees or in the name of any other Person on behalf of the Trust on such terms as the Trustees may determine. In the event that title to any part of the Trust property is vested in one or more Trustees, the right, title and interest of the Trustees in the Trust property shall vest automatically in each person who may hereafter become a Trustee upon his or her due election and qualification. Upon the resignation, removal or death of a Trustee, he or she shall automatically cease to have any right, title or interest in any of the Trust property, and the right, title and interest of such Trustee in the Trust property shall vest automatically in the remaining Trustees. To the extent permitted by law, such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered. No Shareholder shall be deemed to have a severable ownership in any individual asset of the Trust or any right of partition or possession thereof. Section 5.10. Powers. Subject to the provisions of this Declaration of Trust, the business of the Trust shall be managed by the Trustees, and they shall have all powers necessary or convenient to carry out that responsibility and the purpose of the Trust including, but not limited to, those enumerated in this Section 5.10. Section 5.10.1. Bylaws. The Trustees may adopt By-Laws not inconsistent with this Declaration of Trust providing for the conduct of the business and affairs of the Trust and may amend and repeal them to the extent that such By-Laws do not reserve that right to the Shareholders. Section 5.10.2. Officers, Agents, and Employees. The Trustees may, as they consider appropriate, elect and remove officers and appoint and terminate agents and consultants and hire and terminate employees, any one or more of the foregoing of whom may be a Trustee, and may provide for the compensation of all of the foregoing. Section 5.10.3. Committees. The Trustees may appoint from their own number, and terminate, any one or more committees consisting of two or more Trustees, including without implied limitation an executive committee, which may, when the Trustees are not in session (but subject to the 1940 Act), exercise some or all of the power and authority of the Trustees as the Trustees may determine. Section 5.10.4. Advisers, Administrators, Depositories, and Custodians. The Trustees may, in accordance with Article 6, employ one or more advisers, administrators, depositories, custodians, and other persons and may authorize any depository or custodian to employ sub custodians or agents and to deposit all or any part of such assets in a system or systems for the central handling of securities and debt instruments, retain transfer, dividend, accounting or Shareholder servicing agents or any of the foregoing, provide for the distribution of Shares by the Trust through one or more distributors, principal underwriters or otherwise, and set record dates or times for the determination of Shareholders. Section 5.10.5. Compensation. The Trustees may compensate or provide for the compensation of the Trustees, officers, advisers, administrators, custodians, other agents, consultants and employees of the Trust or the Trustees on such terms as they deem appropriate. Section 5.10.6. Delegation of Authority. In general, the Trustees may delegate to any officer of the Trust, to any committee of the Trustees and to any employee, adviser, administrator, distributor, depository, custodian, transfer and dividend disbursing agent, or any other agent or consultant of the Trust such authority, powers, functions and duties as they consider desirable or appropriate for the conduct of the business and affairs of the Trust, including without implied limitation, the power and authority to act in the name of the Trust and of the Trustees, to sign documents and to act as attorney-in-fact for the Trustees. Section 5.10.7. Suspension of Sales. The Trustees shall have the authority to suspend or terminate the sales of Shares of any Series or Class at any time or for such periods as the Trustees may from time to time decide. Section 5.11. Certain Additional Powers. Without limiting the foregoing and to the extent not inconsistent with the 1940 Act, other applicable law, and the fundamental policies and limitations of the applicable Series or Class, the Trustees shall have power and authority for and on behalf of the Trust and each separate Series and Class as enumerated in this Section 5.11. 8 Section 5.11.1. Investments. The Trustees shall have the power to invest and reinvest cash and other property, and to hold cash or other property uninvested without in any event being bound or limited by any present or future law or custom in regard to investments by trustees. Section 5.11.2. Disposition of Assets. The Trustees shall have the power to sell, exchange, lend, pledge, mortgage, hypothecate, write options on and lease any or all of the assets of the Trust. Section 5.11.3. Ownership. The Trustees shall have the power to vote, give assent, or exercise any rights of ownership with respect to securities or other property; and to execute and deliver proxies or powers of attorney to such person or persons as the Trustees shall deem proper, granting to such person or persons such power and discretion with relation to securities or other property as the Trustees shall deem proper. Section 5.11.4. Subscription. The Trustees shall have the power to exercise powers and rights of subscription or otherwise which in any manner arise out of ownership of securities. Section 5.11.5. Payment of Expenses. The Trustees shall have the power to pay or cause to be paid all expenses, fees, charges, taxes and liabilities incurred or arising in connection with the Trust or any Series or Class, or in connection with the management thereof, including, but not limited to, the Trustees' compensation and such expenses and charges for the Trust's officers, employees, investment advisers, administrator, distributor, principal underwriter, auditor, counsel, depository, custodian, transfer agent, dividend disbursing agent ,accounting agent, shareholder servicing agent, and such other agents, consultants, and independent contractors and such other expenses and charges as the Trustees may deem necessary or proper to incur. Section 5.11.6. Form of Holding. The Trustees shall have the power to hold any securities or other property in a form not indicating any trust, whether in bearer, unregistered or other negotiable form, or in the name of the Trustees or of the Trust or of any Series or Class or in the name of a custodian, subcustodian or other depository or a nominee or nominees or otherwise. Section 5.11.7. Reorganization, Consolidation, or Merger. The Trustees shall have the power to consent to or participate in any plan for the reorganization, consolidation or merger of any corporation or issuer, any security of which is or was held in the Trust, and to consent to any contract, lease, mortgage, purchase or sale of property by such corporation or issuer, and to pay calls or subscriptions with respect to any security held in the Trust. Section 5.11.8. Compromise. The Trustees shall have the power to arbitrate or otherwise adjust claims in favor of or against the Trust or any Series or Class on any matter in controversy, including but not limited to claims for taxes. Section 5.11.9. Partnerships. The Trustees shall have the power to enter into joint ventures, general or limited partnerships and any other combinations or associations. Section 5.11.10. Borrowing. The Trustees shall have the power to borrow funds and to mortgage and pledge the assets of the Trust or any Series or any part thereof to secure obligations arising in connection with such borrowing, consistent with the provisions of the 1940 Act. Section 5.11.11. Guarantees. The Trustees shall have the power to endorse or guarantee the payment of any notes or other obligations of any person; to make contracts of guaranty or suretyship, or otherwise assume liability for payment thereof; and to mortgage and pledge the Trust property (or Series property) or any part thereof to secure any of or all such obligations. Section 5.11.12. Insurance. The Trustees shall have the power to purchase and pay for entirely out of Trust property such insurance as they may deem necessary or appropriate for the conduct of the business, including, without limitation, insurance policies insuring the assets of the Trust and payment of distributions and principal on its portfolio investments, and insurance policies insuring the Shareholders, Trustees, officers, employees, agents, consultants, investment advisers, managers, administrators, distributors, principal underwriters, or independent contractors, or any thereof (or any person connected therewith), of the Trust individually against all claims and liabilities of every nature arising by reason of holding, being or having held any such office or position, or by reason of any action alleged to have been taken or omitted by any such person in any such capacity, including any action 9 taken or omitted that may be determined to constitute negligence, whether or not the Trust would have the power to indemnify such person against such liability. Section 5.11.13. Pensions. The Trustees shall have the power to pay pensions for faithful service, as deemed appropriate by the Trustees, and to adopt, establish and carry out pension, profit-sharing, share bonus, share purchase, savings, thrift and other retirement, incentive and benefit plans, including the purchasing of life insurance and annuity contracts as a means of providing such retirement and other benefits, for any or all of the Trustees, officers, employees and agents of the Trust. Section 5.12. Vote of Trustees. Section 5.12.1. Quorum. One third of the Trustees then in office being present in person or by proxy shall constitute a quorum. Section 5.12.2. Required Vote. Except as otherwise provided by the 1940 Act or other applicable law, this Declaration of Trust, or the By-Laws, any action to be taken by the Trustees on behalf of the Trust or any Series or Class may betaken by a majority of the Trustees present at a meeting of Trustees at which a quorum is present, including any meeting held by means of a conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other at the same time. Section 5.12.3. Consent in Lieu of a Meeting. Except as otherwise provided by the 1940 Act or other applicable law, the Trustees may, by written consent of a majority of the Trustees then in office, take any action which may have been taken at a meeting of the Trustees. ARTICLE 6 Service Providers Section 6.1. Investment Adviser. The Trust may enter into written contracts with one or more persons to act as investment adviser or investment subadviser to each of the Series, and as such, to perform such functions as the Trustees may deem reasonable and proper, including, without limitation, investment advisory, management, research, valuation of assets, clerical and administrative functions, under such terms and conditions, and for such compensation, as the Trustees may in their discretion deem advisable. Section 6.2. Underwriter and Transfer Agent. The Trust may enter into written contracts with one or more persons to act as underwriter or distributor whereby the Trust may either agree to sell Shares to the other party or parties to the contract or appoint such other party or parties its sales agent or agents for such Shares and with such other provisions as the Trustees may deem reasonable and proper, and the Trustees may in their discretion from time to time enter into transfer agency and/or shareholder service contract(s), in each case with such terms and conditions, and providing for such compensation, as the Trustees may in their discretion deem advisable. Section 6.3. Custodians. The Trust may enter into written contracts with one or more persons to act as custodian to perform such functions as the Trustees may deem reasonable and proper, under such terms and conditions, and for such compensation, as the Trustees may in their discretion deem advisable. Each such custodian shall be a bank or trust company having an aggregate capital, surplus, and undivided profits of at least one million dollars ($1,000,000). Section 6.4. Administrator. The Trust may enter into written contracts with one or more persons to act as an administrator to perform such functions as the Trustees may deem reasonable and proper, under such terms and conditions, and for such compensation, as the Trustees may in their discretion deem advisable. Section 6.5. Parties to Contracts. Any contract of the character described in Sections 6.1, 6.2, 6.3, and 6.4 or in Article 8 hereof may be entered into with any corporation, firm, partnership, trust or association, including, without limitation, the investment adviser, any investment subadviser, or any affiliated person of the investment adviser or investment subadviser, although one or more of the Trustees or officers of the Trust may be an officer, director, trustee, shareholder, or member of such other party to the contract, or may otherwise be interested in such contract, and no such contract shall be invalidated or rendered voidable by reason of the existence of any such relationship, 10 nor shall any person holding such relationship be liable merely by reason of such relationship for any loss or expense to the Trust under or by reason of said contract or be accountable for any profit realized directly or indirectly therefrom; provided, however, that the contract when entered into was not inconsistent with the provisions of this Article 6, Article 8, or the Bylaws. The same person (including a firm, corporation, partnership, trust or association) may provide more than one of the services identified in this Article 6. ARTICLE 7 Shareholders' Voting Powers and Meetings Section 7.1. Voting Powers. The Shareholders shall have power to vote only with respect to matters expressly enumerated in Section 7.1.1, 7.1.3 or with respect to such additional matters relating to the Trust as may be required by the 1940 Act, this Declaration of Trust, the By-Laws, any registration of the Trust with the Commission or any state, or as the Trustees may otherwise deem necessary or desirable. Section 7.1.1. Matters Upon Which Shareholders May Vote. The Shareholders shall have power to vote on the following matters: (a) For the election or removal of Trustees as provided in Sections 5.4 and 5.7; (b) With respect to a contract with a third party provider of services as to which Shareholder approval is required by the 1940 Act; (c) With respect to a termination or reorganization of the Trust to the extent and as provided in Sections 9.1 and 9.2; (d) With respect to an amendment of this Declaration of Trust to the extent and as may be provided by this Declaration of Trust or applicable law; and (e) With respect to any court action, proceeding or claim brought or maintained derivatively or as a class action on behalf of the Trust, any Series or Class thereof or the Shareholders of the Trust; provided, however, that a shareholder of a particular Series or Class shall not be entitled to vote upon a derivative or class action on behalf of any other Series or Class or shareholder of any other Series/Class. Section 7.1.2. Separate Voting by Series. On any matter submitted to a vote of the Shareholders, all Shares shall be voted separately by individual Series, except (i) when required by the 1940 Act, Shares shall be voted in the aggregate or by Class, and not by individual Series; and (ii) when the Trustees have determined that the matter affects the interests of more than one Series, then the Shareholders of all such Series shall be entitled to vote thereon. Section 7.1.3. Number of Votes. On any matter submitted to a vote of the Shareholders, each Shareholder shall be entitled to one vote for each dollar of net asset value standing in such Shareholder's name on the books of each Series or Class in which such Shareholder owns Shares which are entitled to vote on the matter. Section 7.1.4. Cumulative Voting. There shall be no cumulative voting in the election of Trustees. Section 7.1.5. Voting of Shares; Proxies. Votes may be cast in person or by proxy. A proxy with respect to Shares held in the name of two or more persons shall be valid if executed by any one of them unless at or prior to exercise of the proxy the Trust receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise, and the burden of proving the invalidity of a proxy shall rest on the challenger. 11 Section 7.1.6. Actions Prior to the Issuance of Shares. Until Shares are issued, the Trustees may exercise all rights of Shareholders and may take any action required by law, this Declaration of Trust or the Bylaws to be taken by Shareholders. Section 7.2. Meetings of Shareholders. Section 7.2.1. Annual or Regular Meetings. No annual or regular meetings of Shareholders are required to be held. Section 7.2.2. Special Meetings. Special meetings of Shareholders may be called by the President of the Trust or the Trustees from time to time for the purpose of taking action upon any matter requiring the vote or authority of the Shareholders as herein provided or upon any other matter upon which Shareholder approval is deemed by the Trustees to be necessary or desirable. Section 7.2.3. Notice of Meetings. Written notice of any meeting of Shareholders shall be given or caused to be given by the Trustees by mailing or transmitting such notice at least ten (10) days before such meeting, postage prepaid, stating the time, place and purpose of the meeting, to each Shareholder at the Shareholder's address as it appears on the records of the Trust. Section 7.3. Record Dates. For the purpose of determining the Shareholders who are entitled to vote or act at any meeting, or who are entitled to participate in any dividend or distribution, or for the purpose of any other action, the Trustees may from time to time close the transfer books for such period, not exceeding thirty (30) days (except at or in connection with the termination of the Trust), as the Trustees may determine; or without closing the transfer books the Trustees may fix a date and time not more than one hundred twenty (120) days prior to the date of any meeting of Shareholders or other action as the date and time of record for the determination of Shareholders entitled to vote at such meeting or to be treated as Shareholders of record for purposes of such other action. Any Shareholder who was a Shareholder at the date and time so fixed shall be entitled to vote at such meeting or to be treated as a Shareholder of record for purposes of such other action, even though such Shareholder has since that date and time disposed of its Shares, and no Shareholder becoming such after that date and time shall be so entitled to vote at such meeting or to be treated as a Shareholder of record for purposes of such other action. Section 7.4. Quorum and Required Vote. Except as otherwise required by the 1940 Act or other applicable law, this Declaration of Trust, or the By-Laws, one-tenth (1/10) of the Shares entitled to vote in person or by proxy shall be a quorum as to any particular matter; provided, however, that any lesser number shall be sufficient for matters upon which the Shareholders vote at any meeting called in accordance with Section 7.5. Any matter upon which the Shareholders vote shall be approved by a majority of the votes cast on such matter at a meeting of the Shareholders at which a quorum is present, except that Trustees shall be elected by a plurality of the votes cast at such a meeting. Section 7.5. Adjournments. If a meeting at which a quorum was present is adjourned, a meeting may be held within a reasonable time after the date set for the original meeting without the necessity of further notice for the purpose of taking action upon any matter that would have been acted upon at the original meeting but for its adjournment. Section 7.6. Actions by Written Consent. Except as otherwise required by the1940 Act or other applicable law, this Declaration of Trust, or the By-Laws, any action taken by Shareholders may be taken without a meeting if Shareholders entitled to cast at least a majority of all of the votes entitled to be cast on the matter (or such larger proportion thereof as shall be required by the 1940 Act or by any express provision of this Declaration of Trust or the By-Laws) consent to the action in writing and such written consents are filed with the records of the meetings of Shareholders. Such consent shall be treated for all purposes as a vote taken at a meeting of Shareholders. Section 7.7. Inspection of Records. The records of the Trust shall be open to inspection by Shareholders to the same extent as is required for stockholders of a Delaware business corporation under the Delaware General Corporation Law. Section 7.8. Additional Provisions. The By-Laws may include further provisions for Shareholders' votes and meetings and related matters not inconsistent with the provisions hereof. 12 ARTICLE 8 Limitation of Liability and Indemnification Section 8.1. General Provisions. Section 8.1.1. General Limitation of Liability. No personal liability for any debt or obligation of the Trust shall attach to any Trustee of the Trust. Without limiting the foregoing, a Trustee shall not be responsible for or liable in any event for any neglect or wrongdoing of any officer, agent, employee, investment adviser, subadviser, principal underwriter or custodian of the Trust, nor shall any Trustee be responsible or liable for the act or omission of any other Trustee. Every note, bond, contract, instrument, certificate, Share or undertaking and every other act or thing whatsoever executed or done by or on behalf of the Trust or the Trustees or any Trustee in connection with the Trust shall be conclusively deemed to have been executed or done only in or with respect to their or his or her capacity as Trustees or Trustee and neither such Trustees or Trustee nor the Shareholders shall be personally liable thereon. Section 8.1.2. Notice of Limited Liability. Every note, bond, contract, instrument, certificate or undertaking made or issued by the Trustees or by any officers or officer shall recite that the same was executed or made by or on behalf of the Trust by them as Trustees or Trustee or as officers or officer and not individually and that the obligations of such instrument are not binding upon any of them or the Shareholders individually but are binding only upon the assets and property of the Trust or belonging or attributable to a Series or Class thereof, and may contain such further recitals as they or he may deem appropriate, but the omission thereof shall not operate to bind any Trustees or Trustee or officers or officer or Shareholders or Shareholder individually. Section 8.1.3. Liability Limited to Assets of the Trust. All persons extending credit to, contracting with or having any claim against the Trust shall look only to the assets of the Trust or belonging to a Series or Class thereof, as appropriate, for payment under such credit, contract or claim, and neither the Shareholders nor the Trustees nor any of the Trust's officers, employees or agents, whether past, present or future, shall be personally liable therefor. Section 8.2. Liability of Trustees. The exercise by the Trustees of their powers and discretion hereunder shall be binding upon the Trust, the Shareholders, and any other person dealing with the Trust. The liability of the Trustees, however, shall be limited by this Section 8.2. Section 8.2.1. Liability for Own Actions. A Trustee shall be liable to the Trust or the Shareholders only for his own willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of the office of Trustee, and for nothing else, and shall not be liable for errors of judgment or mistakes of fact or law. Section 8.2.2. Liability for Actions of Others. The Trustees shall not be responsible or liable in any event for any neglect or wrongdoing of any officer, agent, employee, consultant, adviser, administrative distributor, principal underwriter, custodian, transfer agent, dividend disbursing agent, Shareholder servicing agent, or accounting agent of the Trust, nor shall any Trustee be responsible for any act or omission of any other Trustee. Section 8.2.3. Advice of Experts and Reports of Others. The Trustees may take advice of counsel or other experts with respect to the meaning and operation of this Declaration of Trust and their duties as Trustees hereunder, and shall be under no liability for any act or omission in accordance with such advice or for failing to follow such advice. In discharging their duties, the Trustees, when acting in good faith, shall be entitled to rely upon the books of account of the Trust and upon written reports made to the Trustees by any officer appointed by them, any independent public accountant and (with respect to the subject matter of the contract involved) any officer, partner or responsible employee of any other party to any contract entered into hereunder. Section 8.2.4. Bond. The Trustees shall not be required to give any bond as such, nor any surety if a bond is required. Section 8.2.5. Declaration of Trust Governs Issues of Liability. The provisions of this Declaration of Trust, to the extent that they restrict the duties and liabilities of the Trustees otherwise existing at law or in equity, are agreed by the Shareholders and all other Persons bound by this Declaration of Trust to replace such other duties and liabilities of the Trustees. 13 Section 8.3. Liability of Third Persons Dealing with Trustees. No person dealing with the Trustees shall be bound to make any inquiry concerning the validity of any transaction made or to be made by the Trustees or to see to the application of any payments made or property transferred to the Trust or upon its order. Section 8.4. Liability of Shareholders. Without limiting the provisions of this Section 8.4 or the DBTA, the Shareholders shall be entitled to the same limitation of personal liability extended to stockholders of private corporations organized for profit under the General Corporation Law of the State of Delaware. Section 8.4.1. Limitation of Liability. No personal liability for any debt or obligation of the Trust shall attach to any Shareholder or former Shareholder of the Trust, and neither the Trustees, nor any officer, employee or agent of the Trust shall have any power to bind any Shareholder personally or to call upon any Shareholder for the payment of any sum of money or assessment whatsoever other than such as the Shareholder may at any time personally agree to pay by way of subscription for any Shares or otherwise. Section 8.4.2. Indemnification of Shareholders. In case any Shareholder or former Shareholder of the Trust shall be held to be personally liable solely by reason of being or having been a Shareholder and not because of such Shareholder's acts or omissions or for some other reason, the Shareholder or former Shareholder (or, in the case of a natural person, his or her heirs, executors, administrators or other legal representatives or, in the case of a corporation or other entity, its corporate or other general successor) shall be entitled out of the assets of the Trust to be held harmless from and indemnified against all loss and expense arising from such liability; provided, however, there shall be no liability or obligation of the Trust arising hereunder to reimburse any Shareholder for taxes paid by reason of such Shareholder's ownership of any Shares or for losses suffered by reason of any changes in value of any Trust assets. The Trust shall, upon request by the Shareholder or former Shareholder, assume the defense of any claim made against the Shareholder for any act or obligation of the Trust and satisfy any judgment thereon. Section 8.5. Indemnification. Section 8.5.1. Indemnification of Covered Persons. Subject to the exceptions and limitations contained in Section 8.5.2, every person who is, or has been, a Trustee, officer, employee or agent of the Trust, including persons who serve at the request of the Trust as directors, trustees, officers, employees or agents of another organization in which the Trust has an interest as a shareholder, creditor or otherwise (hereinafter referred to as a "Covered Person"), shall be indemnified by the Trust to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him in connection with any claim, action, suit or proceeding in which he becomes involved as a party or otherwise by virtue of his being or having been such a Trustee, director, officer, employee or agent and against amounts paid or incurred by him in settlement thereof. Section 8.5.2. Exceptions. No indemnification shall be provided hereunder to a Covered Person: (a) For any liability to the Trust or its Shareholders arising out of a final adjudication by the court or other body before which the proceeding was brought that the Covered Person engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office; (b) With respect to any matter as to which the Covered Person shall have been finally adjudicated not to have acted in good faith in the reasonable belief that his or her action was in the best interests of the Trust; or (c) In the event of a settlement or other disposition not involving a final adjudication (as provided in paragraph (a) or (b) of this Section 8.5.2)and resulting in a payment by a Covered Person, unless there has been either a determination that such Covered Person did not engage in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his office by the court or other body approving the settlement or other disposition, or a reasonable determination, based on a review of readily available facts (as opposed to a full trial-type inquiry), that he or she did not engage in such conduct, such determination being made by: (i) a vote of a majority of the Disinterested Trustees (as such term is defined in Section 8.5.5) acting on the matter (provided that a majority of Disinterested Trustees then in office act on the matter); or (ii) a written opinion of independent legal counsel. 14 Section 8.5.3. Rights of Indemnification. The rights of indemnification herein provided may be insured against by policies maintained by the Trust, and shall be severable, shall not affect any other rights to which any Covered Person may now or hereafter be entitled, shall continue as to a person who has ceased to be a Covered Person, and shall inure to the benefit of the heirs, executors and administrators of such a person. Nothing contained herein shall affect any rights to indemnification to which Trust personnel other than Covered Persons may be entitled by contract or otherwise under law. Section 8.5.4. Expenses of Indemnification. Expenses of preparation and presentation of a defense to any claim, action, suit or proceeding subject to a claim for indemnification under this Section 8.5 shall be advanced by the Trust prior to final disposition thereof upon receipt of an undertaking by or on behalf of the recipient to repay such amount if it is ultimately determined that he or she is not entitled to indemnification under this Section 8.5, provided that either: (a) Such undertaking is secured by a surety bond or some other appropriate security or the Trust shall be insured against losses arising out of any such advances; or (b) A majority of the Disinterested Trustees acting on the matter (provided that a majority of the Disinterested Trustees then in office act on the matter) or independent legal counsel in a written opinion shall determine, based upon a review of the readily available facts (as opposed to the facts available upon a full trial), that there is reason to believe that the recipient ultimately will be found entitled to indemnification. Section 8.5.5. Certain Defined Terms Relating to Indemnification. As used in this Section 8.5, the following words shall have the meanings set forth below: (a) A "Disinterested Trustee" is one (i) who is not an Interested Person of the Trust (including anyone, as such Disinterested Trustee, who has been exempted from being an Interested Person by any rule, regulation or order of the Commission), and (ii) against whom none of such actions, suits or other proceedings or another action, suit or other proceeding on the same or similar grounds is then or has been pending; (b) "Claim," "action," "suit" or "proceeding" shall apply to all claims, actions, suits, proceedings (civil, criminal, administrative or other, including appeals), actual or threatened; and (c) "Liability" and "expenses" shall include without limitation, attorneys' fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities. ARTICLE 9 Termination or Reorganization Section 9.1. Termination of Trust or Series. Unless terminated as provided herein, the Trust and each Series or Class designated and established pursuant to this Declaration of Trust shall continue without limitation of time. Section 9.1.1. Termination. Subject to approval by a majority of the affected Shareholders, the Trust or any Series or Class (and the establishment and designation thereof) may be terminated by an instrument executed by a majority of the Trustees then in office; provided, however, that no approval of affected Shareholders is necessary if a majority of the Trustees then in office determines that the continuation of the Trust or Series is not in the best interests of the Trust, such Series or Class, or the affected Shareholders as a result of factors or events adversely affecting the ability of the Trust, Series or Class to conduct its business and operations in an economically viable manner. Section 9.1.2. Distribution of Assets. Upon termination of the Trust or any Series or Class, after paying or otherwise providing for all charges, taxes, expenses and liabilities, whether due or accrued or anticipated, as may be determined by the Trustees, the Trust shall, in accordance with such procedures as the Trustees consider appropriate, reduce the remaining assets of the Trust to distributable form in cash or other securities, or any combination thereof, and distribute the proceeds to the affected Shareholders in the manner set forth by resolution of the Trustees. Section 9.1.3. Certificate of Cancellation. Upon termination of the Trust, the Trustees shall file a certificate of cancellation in accordance with Section 3810 of the DBTA. 15 Section 9.2. Reorganization. The Trustees may sell, convey, merge and transfer the assets of the Trust, or the assets belonging to any one or more Series or Classes, to another trust, partnership, association or corporation organized under the laws of any state of the United States, or to the Trust to be held as assets belonging to another Series or Class of the Trust, in exchange for cash, shares or other securities (including, in the case of a transfer to another Series or Class of the Trust, Shares of such other Series or Classes) with such transfer either (i) being made subject to, or with the assumption by the transferee of, the liabilities belonging to each Series or Class the assets of which are so transferred, or (ii) not being made subject to, or not with the assumption of, such liabilities. Following such transfer, the Trustees shall distribute such cash, Shares or other securities (giving due effect to the assets and liabilities belonging to and any other differences among the various Series or Classes the assets belonging to which have so been transferred) among the Shareholders of the Series or Classes the assets belonging to which have been so transferred. If all of the assets of the Trust have been so transferred, the Trust shall be terminated. Section 9.3. Merger or Consolidation. Section 9.3.1. Authority to Merge or Consolidate. Pursuant to an agreement of merger or consolidation, the Trust, or any one or more Series or Classes, may merge or consolidate with or into one or more business trusts or other business entities formed or organized or existing under the laws of the State of Delaware or any other state or the United States or any foreign country or other foreign jurisdiction. Section 9.3.2. No Shareholder Approval Required. Any merger or consolidation described in Section 9.3.1or any reoganization described in Section 9.2, shall not require the vote of the Shareholders affected thereby, unless such vote is required by the 1940 Act or other applicable laws, or unless such merger or consolidation would result in an amendment of this Declaration of Trust which would otherwise require the approval of such Shareholders. Section 9.3.3. Subsequent Amendments. In accordance with Section 3815(f) of DBTA, an agreement of merger or consolidation may effect any amendment to this Declaration of Trust or the By-Laws or effect the adoption of a new declaration of trust or By-Laws of the Trust if the Trust is the surviving or resulting business trust. Section 9.3.4. Certificate of Merger or Consolidation. Upon completion of the merger or consolidation, the Trustees shall file a certificate of merger or consolidation in accordance with Section 3810 of the DBTA. ARTICLE 10 Miscellaneous Provisions Section 10.1. Signatures. To the extent permitted by applicable law, any instrument signed pursuant to a validly executed power of attorney shall be deemed to have been signed by the Trustee or officer executing the power of attorney. To the extent permitted by law, any Trustee or officer may, in his or her discretion, accept a facsimile signature as evidence of a valid signature on any document. Section 10.2. Certified Copies. The original or a copy of this Declaration of Trust and of each amendment hereto shall be kept in the office of the Trust where it may be inspected by any Shareholder. Anyone dealing with the Trust may rely on a certificate by an officer or Trustee of the Trust as to whether or not any such amendments have been made and as to any matters in connection with the Trust hereunder, and with the same effect as if it were the original, may rely on a copy certified by an officer or Trustee of the Trust to be a copy of this Declaration of Trust or of any such amendments. Section 10.3. Certain Internal References. In this Declaration of Trust or in any such amendment, references to this Declaration of Trust, and all expressions like "herein," "hereof" and "hereunder," shall be deemed to refer to this Declaration of Trust as a whole and as amended or affected by any such amendment. Section 10.4. Headings. Headings are placed herein for convenience of reference only, and in case of any conflict, the text of this instrument, rather than the headings, shall control. This instrument may be executed in any number of counterparts, each of which shall be deemed an original. 16 Section 10.5.Resolution of Ambiguities. The Trustees may construe any of the provisions of this Declaration insofar as the same may appear to be ambiguous or inconsistent with any other provisions hereof, and any such construction hereof by the Trustees in good faith shall be conclusive as to the meaning to be given to such provisions. In construing this Declaration, the presumption shall be in favor of a grant of power to the Trustees. Section 10.6. Amendments. Section 10.6.1. Generally. Except as otherwise specifically provided herein or as required by the 1940 Act or other applicable law, this Declaration of Trust may be amended at any time by an instrument in writing signed by a majority of the Trustees then in office. Section 10.6.2. Certificate of Amendment. In the event of any amendment to this Declaration of Trust which affects the Trust's certificate of trust, the Trustees shall file a certificate of amendment in accordance with Section 3810 of the DBTA. Section 10.6.3. Prohibited Retrospective Amendments. No amendment of this Declaration of Trust or repeal of any of its provisions shall limit or eliminate the limitation of liability provided to Trustees and officers hereunder with respect to any act or omission occurring prior to such amendment or repeal. Section 10.7. Governing Law. This Declaration of Trust is executed and delivered with reference to DBTA and the laws of the State of Delaware by all of the Trustees whose signatures appear below, and the rights of all parties and the validity and construction of every provision hereof shall be subject to and construed according to DBTA and the laws of the State of Delaware (unless and to the extent otherwise provided for and/or preempted by the 1940 Act or other applicable federal securities laws); provided, however, that there shall not be applicable to the Trust, the Trustees, or this Declaration of Trust (a) the provisions of Section 3540 of Title 12 of the Delaware Code or (b) any provisions of the laws (statutory or common) of the State of Delaware (other than the DBTA) pertaining to trusts which are inconsistent with the rights, duties, powers, limitations or liabilities of the Trustees set forth or referenced in this Declaration of Trust. All references to sections of the DBTA or the 1940 Act, or any rules or regulations thereunder, refer to such sections, rules, or regulations in effect as of the date of this Declaration of Trust, or any successor sections, rules, or regulations thereto. Section 10.8. Severability. The provisions of this Declaration of Trust are severable, and if the Trustees shall determine, with the advice of counsel, that any of such provision is in conflict with the 1940 Act, the DBTA, or with other applicable laws and regulations, the conflicting provision shall be deemed never to have constituted a part of this Declaration of Trust; provided, however, that such determination shall not affect any of the remaining provisions of this Declaration of Trust or render invalid or improper any action taken or omitted prior to such determination. If any provision of this Declaration of Trust shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of this Declaration of Trust in any jurisdiction. IN WITNESS WHEREOF, the undersigned, being the Trustees of the Trust, have executed this Declaration of Trust as of the date first written above. /s/________________ /s/________________ 17 -----END PRIVACY-ENHANCED MESSAGE-----