Pre-Effective Amendment to Registration Statement by an Open-End Management Investment Company — Form N-1A Filing Table of Contents
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‘N-1A/A’ — Pre-Effective Amendment to Registration Statement by an Open-End Management Investment Company Document Table of Contents
Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of
this Registration Statement.
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary
to delay its effective date until the Registrant shall file a further amendment which specifically
states that this Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting pursuant to said Section
8(a), may determine.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE
SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER
TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
As with all exchange traded funds, the Securities and Exchange Commission (SEC)
has not approved these securities or passed on whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
The funds described in this Prospectus are advised by Charles Schwab Investment Management, Inc.
(the “Adviser”). Each of the funds is an “exchange traded fund” (“ETF”). ETFs are funds that
trade like other publicly-traded securities. Because the composition of an index tends to be
comparatively stable, index funds historically have shown low portfolio turnover compared to
actively managed funds.
This strategy distinguishes an index fund from an “actively managed” fund. Instead of choosing
investments for the fund based on portfolio management’s judgment, an index is used to determine
which securities the fund should own.
Unlike shares of a mutual fund, shares of the funds are listed on a national securities exchange
and trade at market prices that change throughout the day. The market price for each of the fund’s
shares may be different from its net asset value per share (“NAV”). The funds have their own CUSIP
numbers and trade on the NYSE Arca, Inc. under the following tickers:
Schwab International Equity ETF™
SCHF
Schwab International Small-Cap Equity ETF™
SCHC
Schwab Emerging Markets Equity ETF™
SCHE
The funds issue and redeem shares at their NAV only in large blocks of shares, typically 25,000
shares or more (“Creation Units”). These transactions are usually in exchange for a basket of
securities and an amount of cash. As a practical matter, only institutions or large investors
purchase or redeem Creation Units. Except when aggregated in Creation Units, shares of the funds
are not redeemable securities.
A NOTE TO RETAIL INVESTORS
Shares can be purchased directly from the funds only in exchange for a basket of securities that is
expected to be worth several million dollars. Most individual investors, therefore, will not be
able to purchase shares directly from the funds. Instead, these investors will purchase shares in
the secondary market through a brokerage account or with the assistance of a broker. Thus, some of
the information contained in this Prospectus — such as information about purchasing and redeeming
shares from the funds and references to transaction fees imposed on purchases and redemptions — is
not relevant to most individual investors. Shares purchased or sold through a brokerage account or
with the assistance of a broker may be subject to brokerage commissions and charges.
Except as explicitly described otherwise, the investment objective, the benchmark index and
the investment policies of each of the funds may be changed without shareholder approval.
The funds’ performance will fluctuate over time and, as with all investments, future performance
may differ from past performance.
The fund’s goal is to track as closely as possible, before fees and expenses, the total return of
the FTSE Developed ex-US Index.1
Index
The fund’s benchmark index includes is comprised of large and mid capitalization companies in
developed countries outside the United States, as defined by the index provider. The index defines
the large and mid capitalization universe as approximately the top 90% of the eligible universe. As
of June 30, 2009, the index was composed of 1,325 stocks in 23 developed market countries.
Strategy
To pursue its goal, the fund generally invests in stocks that are included in the index. It is the
fund’s policy that under normal circumstances it will invest at least 90% of its net assets in
these stocks, including depositary receipts representing securities of the index; which may be in
the form of American Depositary receipts (“ADRs”), Global Depositary receipts (“GDRs”) and European
Depositary receipts (“EDRs”). The fund will notify its shareholders at least 60 days before
changing this policy. The fund will generally give the same weight to a given stock as the index
does. However, when the Adviser believes it is appropriate to do so, such as to avoid purchasing
odd-lots (i.e., purchasing less than the usual number of shares traded for a security), to address
liquidity considerations with respect to a stock, for tax considerations or when purchasing
ADRs, GDRs or EDRs in lieu of local securities, the Adviser may cause the fund’s weighting of a
stock to be more or less than the index’s weighting of the stock. The fund may sell securities
that are represented in the index in anticipation of their removal from the index. The fund does
not hedge its exposure to foreign currencies beyond using forward foreign currency contracts to
lock in exchange rates for the portfolio securities purchased or sold, but awaiting settlement.
These transactions establish a rate of exchange that can be expected to be received upon settlement
of the securities.
Under normal circumstances, the fund may invest up to 10% of its net assets in securities not
included in its index. The principal types of these investments include those which the Adviser
believes will help the fund track the index, such as investments in (a) securities that are not
1
Index ownership — “FTSE®” is a trademark of
The Financial Times Limited (“FT”) and the London Stock Exchange Plc (the
“Exchange”) and is used by the fund under license. The Schwab International
Equity ETF is not sponsored, endorsed, sold or promoted by FT or the Exchange
and FT and the Exchange do not make any representation regarding the
advisability of investing in shares of the fund. Fees payable under the
license are paid by the Adviser.
represented in the index but the Adviser anticipates will be added to the index or as necessary to
reflect various corporate actions (such as mergers and spin-offs), (b) other investment companies,
and (c) forward foreign currency contracts, futures contracts,
options on futures contracts,
options and swaps. The fund may also invest in cash and cash equivalents, and may lend its securities to
minimize the difference in performance that naturally exists between an index fund and its
corresponding index.
Because it may not be possible or practicable to purchase all of the stocks in the index, the
Adviser may attempt to replicate the total return of the index by using statistical sampling
techniques. These techniques involve investing in a limited number of index securities which, when
taken together, are expected to perform similarly to the index as a whole. These techniques are
based on a variety of factors, including performance attributes, tax considerations, country
weightings, capitalization, industry factors, risk factors and other characteristics. The fund
generally expects that its portfolio will hold less than the total number of securities in the
index, but reserves the right to hold as many securities as it believes necessary to achieve the
fund’s investment objective.
The fund will concentrate its investments (i.e., hold 25% or more of its total assets) in a
particular industry, group of industries or sector to approximately the same extent that its index
is so concentrated. For purposes of this limitation, securities of the U.S. government (including
its agencies and instrumentalities), and repurchase agreements collateralized by U.S. government
securities are not considered to be issued by members of any industry.
The Adviser seeks to achieve, over time, a correlation between the fund’s performance and that of
its index, before fees and expenses, of 95% or better. However, there can be no guarantee that the
fund will achieve a high degree of correlation with the index. A number of factors may affect the
fund’s ability to achieve a high correlation with its index, including the degree to which the fund
utilizes a sampling technique. The correlation between the performance of the fund and its index
may also diverge due to transaction costs, asset valuations, corporate actions (such as mergers and
spin-offs), timing variances, and differences between the fund’s portfolio and the index resulting
from legal restrictions (such as diversification requirements) that apply to the fund but not to
the index.
Risks
Market Risk. Stock markets rise and fall daily. As with any investment whose performance is tied to
these markets, the value of your investment in the fund will fluctuate, which means that you could
lose money.
Investment Style Risk. The fund is not actively managed. Therefore, the fund follows the stocks
included in the index during upturns as well as downturns. Because of its indexing strategy, the
fund does not take steps to reduce market exposure or to lessen the effects of a declining market.
In addition, because of the fund’s expenses, the fund’s performance is normally below that of the
index.
Equity Risk. The prices of equity securities rise and fall daily. These price movements may result
from factors affecting individual companies, industries or the securities market as a whole.
Individual companies may report poor results or be negatively affected by industry and/or economic
trends and developments. The prices of securities issued by such companies may suffer a decline in
response. In addition, the equity market tends to move in cycles which may cause stock prices to
fall over short or extended periods of time.
Large-Cap and Mid-Cap Risk. Although the index encompasses stocks from many different sectors of
the economy, its performance primarily reflects that of large- and mid-cap stocks. Both large- and
mid-cap stocks tend to go in and out of favor based on market and economic conditions. However,
stocks of mid-cap companies tend to be more volatile than those of large-cap companies because
mid-cap companies tend to be more susceptible to adverse business or economic events than larger
more established companies. During a period when large- and mid-cap stocks fall behind other types
of investments- bonds or small-cap stocks, for instance-the fund’s performance also will lag those
investments.
Foreign Investment Risk. The fund’s investments in securities of foreign issuers involve certain
risks that are greater than those associated with investments in securities of U.S. issuers. These
include risks of adverse changes in foreign economic, political, regulatory and other conditions,
or changes in currency exchange rates or exchange control regulations (including limitations on
currency movements and exchanges). In certain countries, legal remedies available to investors may
be more limited than those available with respect to investments in the United States. The
securities of some foreign issuers may be less liquid and, at times, more volatile than securities
of comparable U.S. companies. The fund may also experience more rapid or extreme changes in value
as compared to a fund that invests solely in securities of U.S. companies because the securities’
markets of many foreign countries are relatively small, with a limited number of companies
representing a small number of industries. There also is the risk that the cost of buying,
selling, and holding foreign securities, including brokerage, tax, and custody costs, may be higher
than those involved in domestic transactions.
Currency Risk. As a result of its investments in securities denominated in, and/or receiving
revenues in, foreign currencies, the fund will be subject to currency risk. This is the risk that
those currencies will decline in value relative to the U.S. Dollar, or, in the case of hedging
positions, that the U.S. Dollar will decline in value relative to the currency hedged. In either
event, the dollar value of an investment in the fund would be adversely affected. Currency
exchange rates may fluctuate in response to factors extrinsic to that country’s economy, which
makes the forecasting of currency market movements extremely difficult. Currency rates in foreign
countries may fluctuate significantly over short periods of time for a number of reasons, including
changes in interest rates, intervention (or failure to intervene) by U.S. or foreign governments,
central banks or supranational entities such as the International Monetary Fund, or by the
imposition of currency controls or other political developments in the United States or abroad.
These can result in losses to the fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be rendered useless,
resulting in full currency exposure as well as incurring transaction costs. Forward contracts on
foreign currencies are not traded on exchanges; rather, a bank or dealer will act as agent or as
principal in order to make or take future delivery of a specified lot of a particular currency for
the fund’s account. The fund is subject to the risk of a principal’s failure, inability or refusal
to perform with respect to such contracts.
Depositary Receipt Risk. Foreign securities also include ADRs, which are U.S. dollar-denominated
receipts representing shares of foreign-based corporations. ADRs are issued by U.S.
banks or trust companies, and entitle the holder to all dividends and capital gains that are paid
out on the underlying foreign shares. Foreign securities also include GDRs, which are similar to
ADRs, but are shares of foreign-based corporations generally issued by international banks in one
or more markets around the world. In addition, foreign securities includes EDRs, similar to GDRs,
are shares of foreign-based corporations generally issued by European banks that trade on exchanges
outside of the bank’s home country. Investment in ADRs, GDRs and EDRs may be less liquid than the
underlying shares in their primary trading market and GDRs, many of which are issued by companies
in emerging markets, may be more volatile.
Sampling Index Tracking Risk. The fund does not fully replicate the index and may hold securities
not included in the index. As a result, the fund is subject to the risk that the Adviser’s
investment management strategy, the implementation of which is subject to a number of constraints,
may not produce the intended results. Because the fund utilizes a sampling approach it may not
track the return of the index as well as it would if the fund purchased all of the equity
securities in the index.
Tracking Error Risk. The fund’s return may not match the return of the index. For example,
differences between the fund’s securities and those in the index, rounding of prices, changes to
the index and regulatory requirements may cause tracking error, the divergence of the fund’s
performance from that of its index. The fund also incurs fees and expenses while the index does
not, which may result in tracking error.
Derivatives Risk. The principal types of derivatives used by the fund are options, futures, options on
futures, swaps, and forward foreign currency contracts. An option is the right to buy or sell an
instrument at a specific price before a specific date. A future is an agreement to buy or sell a
financial instrument at a specific price on a specific day. A swap is an agreement whereby two
parties agree to exchange payment streams calculated in relation to a rate, index, instrument or
certain securities and a predetermined amount.
The fund’s use of derivative instruments involves risks different from or possibly greater than,
the risks associated with investing directly in securities and other traditional investments.
Certain of these risks, such as leverage risk, market risk, and liquidity risk are discussed
elsewhere in this section. The fund’s use of derivatives is also subject to credit risk, liquidity
risk, lack of availability risk, valuation risk, correlation risk and tax risk. Credit risk is the
risk that the counterparty to a derivative transaction may not fulfill its contractual obligations.
Lack of availability risk is the risk that suitable derivative transactions may not be available
in all circumstances for risk management or other purposes. Valuation risk is the risk that a
particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the
value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax
risk is the risk that the use of derivatives may cause the fund to realize higher amounts of
short-term capital gain. These risks could cause the fund to lose more than the principal amount
invested.
Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be
unable to sell illiquid securities at an advantageous time or price.
Leverage Risk. Certain fund transactions, such as derivatives, may give rise to a form of leverage
and may expose the fund to greater risk. Leverage tends to magnify the effect of any decrease or
increase in the value of the fund’s portfolio securities. The use of leverage may cause the fund to
liquidate portfolio positions when it would not be advantageous to do so in order to satisfy its
obligations.
Securities Lending Risk. The fund may lend its portfolio securities to brokers, dealers, and other
financial institutions provided a number of conditions are satisfied, including that the loan is
fully collateralized. When the fund lends portfolio securities, its investment performance will
continue to reflect changes in the value of the securities loaned, and the fund will also receive a
fee or interest on the collateral. Securities lending involves the risk of loss of rights in the
collateral or delay in recover of the collateral if the borrower fails to return the security
loaned or becomes insolvent. The fund will also bear the risk of any decline in value of
securities acquired with cash collateral. The fund may pay lending fees to a party arranging the
loan.
Concentration Risk. To the extent that the fund’s or the index’s portfolio is concentrated in the
securities of issuers in a particular market, industry, group of industries, sector or asset class,
the fund may be adversely affected by the performance of those securities, may be subject to
increased price volatility and may be more susceptible to adverse economic, market, political or
regulatory occurrences affecting that market, industry, group of industries, sector or asset class.
Market Trading Risk. Although fund shares are listed on national securities exchanges, there can
be no assurance that an active trading market for fund shares will develop or be maintained. If an
active market is not maintained, investors may find it difficult to buy or sell fund shares.
Trading of shares of the fund on a stock exchange may be halted if exchange officials deem such
action appropriate, if the fund is delisted, or if the activation of marketwide “circuit breakers”
halts stock trading generally. If the fund’s shares are delisted, the fund may seek to list its
shares on another market, merge with another ETF, or redeem its shares at NAV. The Adviser
believes that, under normal market conditions, large market price discounts or premiums to NAV will
not be sustained because of arbitrage opportunities.
Shares of the Fund May Trade at Prices Other Than NAV. As with all ETFs, fund shares may be bought
and sold in the secondary market at market prices. Although it is expected that the market price of
the shares of the fund will approximate the fund’s NAV, there may be times when the market price
and the NAV vary significantly. Thus, you may pay more than NAV when you buy shares of the fund in
the secondary market, and you may receive less than NAV when you sell those shares in the secondary
market.
The market price of fund shares during the trading day, 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 fund shares. The bid/ask spread on ETF shares is likely to be larger on
ETFs that are traded less frequently. In addition, in times of severe market disruption, the
bid/ask spread can increase significantly. At those times, fund 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. The Adviser believes that,
under normal market conditions, large market price discounts or premiums to NAV will not be
sustained because of arbitrage opportunities.
Lack of Governmental Insurance or Guarantee. An investment in the fund is not a bank deposit and
it is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Performance
The fund is new and therefore does not have a performance history. Once the fund has completed a
full calendar year of operations a bar chart and table will be included that will provide some
indication of the risks of investing in the fund by showing the variability of the fund’s returns
and comparing the fund’s performance to the index.
Fund Fees and Expenses
The following table describes what you could expect to pay as a fund investor. “Shareholder Fees”
are charged to you directly by the fund. “Annual Operating Expenses” are paid out of fund assets,
so their effect is included in the fund’s total return. You may also incur customary brokerage
charges when buying or selling fund shares.
Fee table (%)
Shares
Shareholder fees*
None
Annual operating expenses**
Management fees
Distribution (12b-1) fees***
0.00
%
Other expenses****
None
Total annual operating expenses
0.XX%
*
Fees paid directly from your investment, but the fund may impose creation and redemption
transaction fees to offset transaction costs associated with the issuance and redemption of
Creation Units. A standard transaction fee of $15,000 is charged in connection with the
creation or redemption of a Creation Unit on the day of the transaction. Cash purchases and
redemptions of Creation Units are subject to an additional variable charge of up to four times
the Additional Creation/Redemption Transaction Fee. See the “Creation and Redemption
Transaction Fees for Creation Units” section further in this prospectus.
**
Expressed as a percentage of average net assets.
***
The fund has adopted a Distribution and Shareholder Services (12b-1) Plan pursuant to which
the fund is subject to an annual 12b-1 fee of up to 0.25% of its average daily net assets.
However, the Board has determined that no such fees will be charged prior to November 14, 2011
(more than 12 months from the commencement of the fund’s operations).
****
The fund’s Investment Advisory Agreement provides that the Adviser will pay the operating
expenses of the fund, excluding interest expense, taxes, any brokerage expenses, future
distribution fees or expenses (i.e., 12b-1 fees) and extraordinary or non-routine expenses.
Designed to help you compare expenses, the example below uses the same assumptions as other fund
prospectuses: a $10,000 investment, 5% return each year and that the fund’s operating expenses
remain the same. The expenses would be the same whether you stayed in the fund or sold your shares
at the end of each period. Your actual costs may be higher or lower.
The fund’s goal is to track as closely as possible, before fees and expenses, the total return of
the FTSE Developed Small Cap ex-US Liquid Index. 2
Index
The fund’s benchmark index includes is comprised of small capitalization companies in developed
countries outside the United States, as defined by the index provider. The index defines the small
capitalization universe as approximately the bottom 10% of the eligible universe with a minimum
free float capitalization of $150 million. As of June 30, 2009, the index was composed of 1820
stocks in 23 developed market countries.
Strategy
To pursue its goal, the fund generally invests in stocks that are included in the index. It is the
fund’s policy that under normal circumstances it will invest at least 90% of its net assets in
these stocks, including depositary receipts representing securities of the index; which may be in
the form of American Depositary receipts (“ADRs”), Global Depositary receipts (“GDRs”) and European
Depositary receipts (“EDRs”). The fund will notify its shareholders at least 60 days before
changing this policy. The fund will generally give the same weight to a given stock as the index
does. However, when the Adviser believes it is appropriate to do so, such as to avoid purchasing
odd-lots (i.e., purchasing less than the usual number of shares traded for a security), to address
liquidity considerations with respect to a stock, for tax considerations or when purchasing
ADRs, GDRs or EDRs in lieu of local securities, the Adviser may cause the fund’s weighting of a
stock to be more or less than the index’s weighting of the stock. The fund may sell securities
that are represented in the index in anticipation of their removal from the index. The fund does
not hedge its exposure to foreign currencies beyond using forward foreign currency contracts to
lock in exchange rates for the portfolio securities purchased or sold, but awaiting settlement.
These transactions establish a rate of exchange that can be expected to be received upon settlement
of the securities. The fund generally expects that its country weightings will be similar to those
of the index.
2
Index ownership — “FTSE®” is a trademark of
The Financial Times Limited (“FT”) and the London Stock Exchange Plc (the
“Exchange”) and is used by the fund under license. The Schwab International
Small-Cap Equity ETF is not sponsored, endorsed, sold or promoted by FT or the
Exchange and FT and the Exchange do not make any representation regarding the
advisability of investing in shares of the fund. Fees payable under the
license are paid by the Adviser.
Under normal circumstances, the fund may invest up to 10% of its total assets in securities not
included in its index. The principal types of these investments include those which the Adviser
believes will help the fund track the index, such as investments in (a) securities that are not
represented in the index but the Adviser anticipates will be added to the index or as necessary to
reflect various corporate actions (such as mergers and spin-offs), (b) other investment companies,
and (c) forward foreign currency contracts, futures contracts,
options on futures contracts,
options and swaps. The fund may also invest in cash and cash equivalents, and may lend its securities to
minimize the difference in performance that naturally exists between an index fund and its
corresponding index.
Because it may not be possible or practicable to purchase all of the stocks in the index, the
Adviser may attempt to replicate the total return of the index by using statistical sampling
techniques. These techniques involve investing in a limited number of index securities which, when
taken together, are expected to perform similarly to the index as a whole. These techniques are
based on a variety of factors, including performance attributes, tax considerations, country
weightings, capitalization, industry factors, risk factors and other characteristics. The fund
generally expects that its portfolio will hold less than the total number of securities in the
index, but reserves the right to hold as many securities as it believes necessary to achieve the
fund’s investment objective.
The fund will concentrate its investments (i.e., hold 25% or more of its total assets) in a
particular industry, group of industries or sector to approximately the same extent that its index
is so concentrated. For purposes of this limitation, securities of the U.S. government (including
its agencies and instrumentalities), and repurchase agreements collateralized by U.S. government
securities are not considered to be issued by members of any industry.
The Adviser seeks to achieve, over time, a correlation between the fund’s performance and that of
its index, before fees and expenses, of 95% or better. However, there can be no guarantee that the
fund will achieve a high degree of correlation with the index. A number of factors may affect the
fund’s ability to achieve a high correlation with its index, including the degree to which the fund
utilizes a sampling technique. The correlation between the performance of the fund and its index
may also diverge due to transaction costs, asset valuations, corporate actions (such as mergers and
spin-offs), timing variances, and differences between the fund’s portfolio and the index resulting
from legal restrictions (such as diversification requirements) that apply to the fund but not to
the index.
Risks
Market Risk. Stock markets rise and fall daily. As with any investment whose performance is tied to
these markets, the value of your investment in the fund will fluctuate, which means that you could
lose money.
Investment Style Risk. The fund is not actively managed. Therefore, the fund follows the stocks
included in the index during upturns as well as downturns. Because of its indexing strategy, the
fund
does not take steps to reduce market exposure or to lessen the effects of a declining market. In
addition, because of the fund’s expenses, the fund’s performance is normally below that of the
index.
Equity Risk. The prices of equity securities rise and fall daily. These price movements may result
from factors affecting individual companies, industries or the securities market as a whole.
Individual companies may report poor results or be negatively affected by industry and/or economic
trends and developments. The prices of securities issued by such companies may suffer a decline in
response. In addition, the equity market tends to move in cycles which may cause stock prices to
fall over short or extended periods of time.
Small-Cap Risk. Historically, small-cap stocks have been riskier than large- and mid-cap stocks.
Stock prices of smaller companies may be based in substantial part on future expectations rather
than current achievements and may move sharply, especially during market upturns and downturns.
Small-cap companies themselves may be more vulnerable to adverse business or economic events than
larger, more established companies. During a period when small-cap stocks fall behind other types
of investments – bonds or large-cap stocks, for instance – the fund’s performance also will lag
those investments.
Foreign Investment Risk. The fund’s investments in securities of foreign issuers involve certain
risks that are greater than those associated with investments in securities of U.S. issuers. These
include risks of adverse changes in foreign economic, political, regulatory and other conditions,
or changes in currency exchange rates or exchange control regulations (including limitations on
currency movements and exchanges). In certain countries, legal remedies available to investors may
be more limited than those available with respect to investments in the United States. The
securities of some foreign issuers may be less liquid and, at times, more volatile than securities
of comparable U.S. companies. The fund may also experience more rapid or extreme changes in value
as compared to a fund that invests solely in securities of U.S. companies because the securities’
markets of many foreign countries are relatively small, with a limited number of companies
representing a small
number of industries. There also is the risk that the cost of buying, selling, and holding foreign
securities, including brokerage, tax, and custody costs, may be higher than those involved in
domestic transactions.
Currency Risk. As a result of its investments in securities denominated in, and/or receiving
revenues in, foreign currencies, the fund will be subject to currency risk. This is the risk that
those currencies will decline in value relative to the U.S. Dollar, or, in the case of hedging
positions, that the U.S. Dollar will decline in value relative to the currency hedged. In either
event, the dollar value of an investment in the fund would be adversely affected. Currency
exchange rates may fluctuate in response to factors extrinsic to that country’s economy, which
makes the forecasting of currency market movements extremely difficult. Currency rates in foreign
countries may fluctuate significantly over short periods of time for a number of reasons, including
changes in interest rates, intervention (or failure to intervene) by U.S. or foreign governments,
central banks or supranational entities such as the International Monetary Fund, or by the
imposition of currency controls or other political developments in the United States or abroad.
These can result in losses to the fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be rendered useless,
resulting in full currency exposure as well as incurring transaction costs. Forward contracts on
foreign currencies are not traded on exchanges; rather, a bank or dealer will act as agent or as
principal in order to make or take future delivery of a
specified lot of a particular currency for the fund’s account. The fund is subject to the risk of
a principal’s failure, inability or refusal to perform with respect to such contracts.
Depositary Receipt Risk. Foreign securities also include ADRs, which are U.S. dollar-denominated
receipts representing shares of foreign-based corporations. ADRs are issued by U.S. banks or trust
companies, and entitle the holder to all dividends and capital gains that are paid out on the
underlying foreign shares. Foreign securities also include GDRs, which are similar to ADRs, but
are shares of foreign-based corporations generally issued by international banks in one or more
markets around the world. In addition, foreign securities includes EDRs, similar to GDRs, are
shares of foreign-based corporations generally issued by European banks that trade on exchanges
outside of the bank’s home country. Investment in ADRs, GDRs and EDRs may be less liquid than the
underlying shares in their primary trading market and GDRs, many of which are issued by companies
in emerging markets, may be more volatile.
Sampling Index Tracking Risk. The fund does not fully replicate the index and may hold securities
not included in the index. As a result, the fund is subject to the risk that the Adviser’s
investment management strategy, the implementation of which is subject to a number of constraints,
may not produce the intended results. Because the fund utilizes a sampling approach it may not
track the return of the index as well as it would if the fund purchased all of the equity securities in the
index.
Tracking Error Risk. The fund’s return may not match the return of the index. For example,
differences between the fund’s securities and those in the index, rounding of prices, changes to
the index and regulatory requirements may cause tracking error, the divergence of the fund’s
performance from that of its index. The fund also incurs fees and expenses while the index does
not, which may result in tracking error.
Derivatives Risk. The principal types of derivatives used by the fund are options, futures, options
on futures, swaps, and forward foreign currency contracts. An option is the right to buy or sell an
instrument at a specific price before a specific date. A future is an agreement to buy or sell a
financial instrument at a specific price on a specific day. A swap is an agreement whereby two
parties agree to exchange payment streams calculated in relation to a rate, index, instrument or
certain securities and a predetermined amount.
The fund’s use of derivative instruments involves risks different from or possibly greater than,
the risks associated with investing directly in securities and other traditional investments.
Certain of these risks, such as leverage risk, market risk, and liquidity risk are discussed
elsewhere in this section. The fund’s use of derivatives is also subject to credit risk, liquidity
risk, lack of availability risk, valuation risk, correlation risk and tax risk. Credit risk is the
risk that the counterparty to a derivative transaction may not fulfill its contractual obligations.
Lack of availability risk is the risk that suitable derivative transactions may not be available
in all circumstances for risk management or other purposes. Valuation risk is the risk that a
particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the
value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax
risk is the risk that the use of derivatives may cause the fund to realize higher amounts of
short-term capital gain. These risks could cause the fund to lose more than the principal amount
invested.
Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be
unable to sell illiquid securities at an advantageous time or price.
Leverage Risk. Certain fund transactions, such as derivatives, may give rise to a form of leverage
and may expose the fund to greater risk. Leverage tends to magnify the effect of any decrease or
increase in the value of the fund’s portfolio securities. The use of leverage may cause the fund to
liquidate portfolio positions when it would not be advantageous to do so in order to satisfy its
obligations.
Securities Lending Risk. The fund may lend its portfolio securities to brokers, dealers, and other
financial institutions provided a number of conditions are satisfied, including that the loan is
fully collateralized. When the fund lends portfolio securities, its investment performance will
continue to reflect changes in the value of the securities loaned, and the fund will also receive a
fee or interest on the collateral. Securities lending involves the risk of loss of rights in the
collateral or delay in recover of the collateral if the borrower fails to return the security
loaned or becomes insolvent. The fund will also bear the risk of any decline in value of
securities acquired with cash collateral. The fund may pay lending fees to a party arranging the
loan.
Concentration Risk. To the extent that the fund’s or the index’s portfolio is concentrated in the
securities of issuers in a particular market, industry, group of industries, sector or asset class,
the fund may be adversely affected by the performance of those securities, may be subject to
increased price volatility and may be more susceptible to adverse economic, market, political or
regulatory occurrences affecting that market, industry, group of industries, sector or asset class.
Market Trading Risk. Although fund shares are listed on national securities exchanges, there can
be no assurance that an active trading market for fund shares will develop or be maintained. If an
active market is not maintained, investors may find it difficult to buy or sell fund shares.
Trading of shares of the fund on a stock exchange may be halted if exchange officials deem such
action appropriate, if the fund is delisted, or if the activation of marketwide “circuit breakers”
halts stock trading generally. If the fund’s shares are delisted, the fund may seek to list its
shares on another market, merge with another ETF, or redeem its shares at NAV. The Adviser
believes that, under normal market conditions, large market price discounts or premiums to NAV will
not be sustained because of arbitrage opportunities.
Shares of the Fund May Trade at Prices Other Than NAV. As with all ETFs, fund shares may be bought
and sold in the secondary market at market prices. Although it is expected that the market price of
the shares of the fund will approximate the fund’s NAV, there may be times when the market price
and the NAV vary significantly. Thus, you may pay more than NAV when you buy shares of the fund in
the secondary market, and you may receive less than NAV when you sell those shares in the secondary
market.
The market price of fund shares during the trading day, 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 fund shares. The bid/ask spread on ETF shares is likely to be larger on
ETFs that are traded less frequently. In addition, in times of severe market disruption, the
bid/ask spread can increase significantly. At those times, fund 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. The Adviser believes that, under
normal market conditions, large market price discounts or premiums to NAV will not be sustained
because of arbitrage opportunities.
Lack of Governmental Insurance or Guarantee. An investment in the fund is not a bank deposit and
it is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
Performance
The fund is new and therefore does not have a performance history. Once the fund has completed a
full calendar year of operations a bar chart and table will be included that will provide some
indication of the risks of investing in the fund by showing the variability of the fund’s returns
and comparing the fund’s performance to the index.
Fund Fees and Expenses
The following table describes what you could expect to pay as a fund investor. “Shareholder Fees”
are charged to you directly by the fund. “Annual Operating Expenses” are paid out of fund assets,
so their effect is included in the fund’s total return. You may also incur customary brokerage
charges when buying or selling fund shares.
Fee table (%)
Shares
Shareholder fees*
None
Annual operating expenses**
Management fees
Distribution (12b-1) fees***
0.00
%
Other expenses****
None
Total annual operating expenses
0.XX%
*
Fees paid directly from your investment, but the fund may impose creation and redemption
transaction fees to offset transaction costs associated with the issuance and redemption of
Creation Units. A standard transaction fee of $15,000 is charged in connection with the
creation or redemption of a Creation Unit on the day of the transaction. Cash purchases and
redemptions of Creation Units are subject to an additional variable charge of up to four times
the Additional Creation/Redemption Transaction Fee. See the “Creation and Redemption
Transaction Fees for Creation Units” section further in this prospectus.
**
Expressed as a percentage of average net assets.
***
The fund has adopted a Distribution and Shareholder Services (12b-1) Plan pursuant to which
the fund is subject to an annual 12b-1 fee of up to 0.25% of its average daily net assets.
However, the Board has determined that no such fees will be charged prior to November 14, 2011
(More than 12 months from the commencement of the fund’s operations).
****
The fund’s Investment Advisory Agreement provides that the Adviser will pay the operating
expenses of the fund, excluding interest expense, taxes, any brokerage expenses, future
distribution fees or expenses (i.e., 12b-1 fees) and extraordinary or non-routine expenses.
Example
Designed to help you compare expenses, the example below uses the same assumptions as other fund
prospectuses: a $10,000 investment, 5% return each year and that the fund’s operating expenses
remain the same. The expenses would be the same whether you stayed in the fund or sold your shares
at the end of each period. Your actual costs may be higher or lower.
The fund’s goal is to track as closely as possible, before fees and expenses, the total return of
the FTSE All-Emerging Index. 3
Index
The fund’s benchmark index includes is comprised of large and mid capitalization companies in
emerging market countries, as defined by the index provider. The index defines the large and mid
capitalization universe as approximately the top 90% of the eligible universe. As of June 30, 2009,
the index was composed of 824 stocks in 23 emerging market countries.
Strategy
To pursue its goal, the fund generally invests in stocks that are included in the index. It is the
fund’s policy that under normal circumstances it will invest at least 90% of its net assets in
these stocks, including depositary receipts representing securities of the index; which may be in
the form of American Depositary receipts (“ADRs”), Global Depositary receipts (“GDRs”) and European
Depositary receipts (“EDRs”). The fund will notify its shareholders at least 60 days before
changing this policy. The fund will generally give the same weight to a given stock as the index
does. However, when the Adviser believes it is appropriate to do so, such as to avoid purchasing
odd-lots (i.e., purchasing less than the usual number of shares traded for a security), to address
liquidity considerations with respect to a stock, for tax considerations or when purchasing
ADRs, GDRs or EDRs in lieu of local securities, the Adviser may cause the fund’s weighting of a
stock to be more or less than the index’s weighting of the stock. The fund may sell securities
that are represented in the index in anticipation of their removal from the index. The fund does
not hedge its exposure to foreign currencies beyond using forward
foreign currency contracts to lock in exchange
rates for the portfolio securities purchased or sold, but awaiting settlement. These transactions
establish a rate of exchange that can be expected to be received upon settlement of the securities.
Under normal circumstances, the fund may invest up to 10% of its total assets in securities not
included in its index. The principal types of these investments include those which the Adviser
3
Index ownership — “FTSE®” is a trademark of
The Financial Times Limited (“FT”) and the London Stock Exchange Plc (the
“Exchange”) and is used by the fund under license. The Schwab Emerging Markets
Equity ETF is not sponsored, endorsed, sold or promoted by FT or the Exchange
and FT and the Exchange do not make any representation regarding the
advisability of investing in shares of the fund. Fees payable under the
license are paid by the Adviser.
believes will help the fund track the index, such as investments in (a) securities that are not
represented in the index but the Adviser anticipates will be added to the index or as necessary to
reflect various corporate actions (such as mergers and spin-offs), (b) other investment companies,
and (c) forward foreign currency contracts, futures contracts,
options on futures contracts,
options and swaps. The fund may also invest in cash and cash equivalents, and may lend its securities to
minimize the difference in performance that naturally exists between an index fund and its
corresponding index.
Because it may not be possible or practicable to purchase all of the stocks in the index, the
Adviser may attempt to replicate the total return of the index by using statistical sampling
techniques. These techniques involve investing in a limited number of index securities which, when
taken together, are expected to perform similarly to the index as a whole. These techniques are
based on a variety of factors, including performance attributes, tax considerations, country
weightings, capitalization, industry factors, risk factors and other characteristics. The fund
generally expects that its portfolio will hold less than the total number of securities in the
index, but reserves the right to hold as many securities as it believes necessary to achieve the
fund’s investment objective.
The fund will concentrate its investments (i.e., hold 25% or more of its total assets) in a
particular industry, group of industries or sector to approximately the same extent that its index
is so concentrated. For purposes of this limitation, securities of the U.S. government (including
its agencies and instrumentalities), and repurchase agreements collateralized by U.S. government
securities are not considered to be issued by members of any industry.
The Adviser seeks to achieve, over time, a correlation between the fund’s performance and that of
its index, before fees and expenses, of 95% or better. However, there can be no guarantee that the
fund will achieve a high degree of correlation with the index. A number of factors may affect the
fund’s ability to achieve a high correlation with its index, including the degree to which the fund
utilizes a sampling technique. The correlation between the performance of the fund and its index
may also diverge due to transaction costs, asset valuations, corporate actions (such as mergers and
spin-offs), timing variances, and differences between the fund’s portfolio and the index resulting
from legal restrictions (such as diversification requirements) that apply to the fund but not to
the index.
Risks
Market Risk. Stock markets rise and fall daily. As with any investment whose performance is tied to
these markets, the value of your investment in the fund will fluctuate, which means that you could
lose money.
Investment Style Risk. The fund is not actively managed. Therefore, the fund follows the stocks
included in the index during upturns as well as downturns. Because of its indexing strategy, the
fund does not take steps to reduce market exposure or to lessen the effects of a declining market.
In addition, because of the fund’s expenses, the fund’s performance is normally below that of the
index.
Equity Risk. The prices of equity securities rise and fall daily. These price movements may result
from factors affecting individual companies, industries or the securities market as a whole.
Individual companies may report poor results or be negatively affected by industry and/or economic
trends and developments. The prices of securities issued by such companies may suffer a decline in
response. In addition, the equity market tends to move in cycles which may cause stock prices to
fall over short or extended periods of time.
Large-Cap and Mid-Cap Risk. Although the index encompasses stocks from many different sectors of
the economy, its performance primarily reflects that of large- and mid-cap stocks. Both large- and
mid-cap stocks tend to go in and out of favor based on market and economic conditions. However,
stocks of mid-cap companies tend to be more volatile than those of large-cap companies because
mid-cap companies tend to be more susceptible to adverse business or economic events than larger
more established companies. During a period when large- and mid-cap stocks fall behind other types
of investments- bonds or small-cap stocks, for instance-the fund’s performance also will lag those
investments.
Emerging Markets Risk. Emerging market countries may be more likely to experience political turmoil
or rapid changes in market or economic conditions than more developed countries. Emerging market
countries often have less uniformity in accounting and reporting requirements, unreliable
securities valuation and greater risk associated with the custody of securities. It is sometimes
difficult to obtain and enforce court judgments in such countries and there is often a greater
potential for nationalization and/or expropriation of assets by the government of an emerging
market country. In addition, the financial stability of issuers (including
governments) in emerging market countries may be more precarious than in other countries. As a
result, there will tend to be an increased risk of price volatility associated with the fund’s
investments in emerging market countries, which may be magnified by currency fluctuations relative
to the U.S. dollar.
Foreign Investment Risk. The fund’s investments in securities of foreign issuers involve certain
risks that are greater than those associated with investments in securities of U.S. issuers. These
include risks of adverse changes in foreign economic, political, regulatory and other conditions,
or changes in currency exchange rates or exchange control regulations (including limitations on
currency movements and exchanges). In certain countries, legal remedies available to investors may
be more limited than those available with respect to investments in the United States. The
securities of some foreign issuers may be less liquid and, at times, more volatile than securities
of comparable U.S. companies. The fund may also experience more rapid or extreme changes in value
as compared to a fund that invests solely in securities of U.S. companies because the securities’
markets of many foreign countries are relatively small, with a limited number of companies
representing a small
number of industries. There also is the risk that the cost of buying, selling, and holding foreign
securities, including brokerage, tax, and custody costs, may be higher than those involved in
domestic transactions.
Currency Risk. As a result of its investments in securities denominated in, and/or receiving
revenues in, foreign currencies, the fund will be subject to currency risk. This is the risk that
those currencies will decline in value relative to the U.S. Dollar, or, in the case of hedging
positions, that the U.S. Dollar will decline in value relative to the currency hedged. In either
event, the dollar value of an investment in the fund would be adversely affected. Currency
exchange rates may fluctuate in
response to factors extrinsic to that country’s economy, which makes the forecasting of currency
market movements extremely difficult. Currency rates in foreign countries may fluctuate
significantly over short periods of time for a number of reasons, including changes in interest
rates, intervention (or failure to intervene) by U.S. or foreign governments, central banks or
supranational entities such as the International Monetary Fund, or by the imposition of currency
controls or other political developments in the United States or abroad. These can result in
losses to the fund if it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as incurring transaction costs. Forward contracts on foreign
currencies are not traded on exchanges; rather, a bank or dealer will act as agent or as principal
in order to make or take future delivery of a specified lot of a particular currency for the fund’s
account. The fund is subject to the risk of a principal’s failure, inability or refusal to perform
with respect to such contracts.
Depositary Receipt Risk. Foreign securities also include ADRs, which are U.S. dollar-denominated
receipts representing shares of foreign-based corporations. ADRs are issued by U.S. banks or trust
companies, and entitle the holder to all dividends and capital gains that are paid out on the
underlying foreign shares. Foreign securities also include GDRs, which are similar to ADRs, but
are shares of foreign-based corporations generally issued by international banks in one or more
markets around the world. In addition, foreign securities includes EDRs, similar to GDRs, are
shares of foreign-based corporations generally issued by European banks that trade on exchanges
outside of the bank’s home country. Investment in ADRs, GDRs and EDRs may be less liquid than the
underlying shares in their primary trading market and GDRs, many of which are issued by companies
in emerging markets, may be more volatile.
Sampling Index Tracking Risk. The fund does not fully replicate the index and may hold securities
not included in the index. As a result, the fund is subject to the risk that the Adviser’s
investment management strategy, the implementation of which is subject to a number of constraints,
may not produce the intended results. Because the fund utilizes a sampling approach it may not
track the return of the index as well as it would if the fund purchased all of the equity
securities in the index.
Tracking Error Risk. The fund’s return may not match the return of the index. For example,
differences between the fund’s securities and those in the index, rounding of prices, changes to
the index and regulatory requirements may cause tracking error, the divergence of the fund’s
performance from that of its index. The fund also incurs fees and expenses while the index does
not, which may result in tracking error.
Derivatives Risk. The principal types of derivatives used by the fund are options, futures, options
on futures, swaps, and forward foreign currency contracts. An option is the right to buy or sell an
instrument at a specific price before a specific date. A future is an agreement to buy or sell a
financial instrument at a specific price on a specific day. A swap is an agreement whereby two
parties agree to exchange payment streams calculated in relation to a rate, index, instrument or
certain securities and a predetermined amount.
The fund’s use of derivative instruments involves risks different from or possibly greater than,
the risks associated with investing directly in securities and other traditional investments.
Certain of these risks, such as leverage risk, market risk, and liquidity risk are discussed
elsewhere in this
section. The fund’s use of derivatives is also subject to credit risk, liquidity risk, lack of
availability risk, valuation risk, correlation risk and tax risk. Credit risk is the risk that the
counterparty to a derivative transaction may not fulfill its contractual obligations. Lack of
availability risk is the risk that suitable derivative transactions may not be available in all
circumstances for risk management or other purposes. Valuation risk is the risk that a particular
derivative may be valued incorrectly. Correlation risk is the risk that changes in the value of
the derivative may not correlate perfectly with the underlying asset, rate or index. Tax risk is
the risk that the use of derivatives may cause the fund to realize higher amounts of short-term
capital gain. These risks could cause the fund to lose more than the principal amount invested.
Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be
unable to sell illiquid securities at an advantageous time or price.
Leverage Risk. Certain fund transactions, such as derivatives, may give rise to a form of leverage
and may expose the fund to greater risk. Leverage tends to magnify the effect of any decrease or
increase in the value of the fund’s portfolio securities. The use of leverage may cause the fund to
liquidate portfolio positions when it would not be advantageous to do so in order to satisfy its
obligations.
Securities Lending Risk. The fund may lend its portfolio securities to brokers, dealers, and other
financial institutions provided a number of conditions are satisfied, including that the loan is
fully collateralized. When the fund lends portfolio securities, its investment performance will
continue to reflect changes in the value of the securities loaned, and the fund will also receive a
fee or interest on the collateral. Securities lending involves the risk of loss of rights in the
collateral or delay in recover of the collateral if the borrower fails to return the security
loaned or becomes insolvent. The fund will also bear the risk of any decline in value of securities
acquired with cash collateral. The fund may pay lending fees to a party arranging the loan.
Concentration Risk. To the extent that the fund’s or the index’s portfolio is concentrated in the
securities of issuers in a particular market, industry, group of industries, sector or asset class,
the fund may be adversely affected by the performance of those securities, may be subject to
increased price volatility and may be more susceptible to adverse economic, market, political or
regulatory occurrences affecting that market, industry, group of industries, sector or asset class.
Market Trading Risk. Although fund shares are listed on national securities exchanges, there can
be no assurance that an active trading market for fund shares will develop or be maintained. If an
active market is not maintained, investors may find it difficult to buy or sell fund shares.
Trading of shares of the fund on a stock exchange may be halted if exchange officials deem such
action appropriate, if the fund is delisted, or if the activation of marketwide “circuit breakers”
halts stock trading generally. If the fund’s shares are delisted, the fund may seek to list its
shares on another market, merge with another ETF, or redeem its shares at NAV. The Adviser
believes that, under normal market conditions, large market price discounts or premiums to NAV will
not be sustained because of arbitrage opportunities.
Shares of the Fund May Trade at Prices Other Than NAV. As with all ETFs, fund shares may be bought
and sold in the secondary market at market prices. Although it is expected that the market price of
the shares of the fund will approximate the fund’s NAV, there may be times when the
market price and the NAV vary significantly. Thus, you may pay more than NAV when you buy shares of
the fund in the secondary market, and you may receive less than NAV when you sell those shares in
the secondary market.
The market price of fund shares during the trading day, 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 fund shares. The bid/ask spread on ETF shares is likely to be larger on
ETFs that are traded less frequently. In addition, in times of severe market disruption, the
bid/ask spread can increase significantly. At those times, fund 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. The Adviser believes that,
under normal market conditions, large market price discounts or premiums to NAV will not be
sustained because of arbitrage opportunities.
Lack of Governmental Insurance or Guarantee. An investment in the fund is not a bank deposit and
it is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
Performance
The fund is new and therefore does not have a performance history. Once the fund has completed a
full calendar year of operations a bar chart and table will be included that will provide some
indication of the risks of investing in the fund by showing the variability of the fund’s returns
and comparing the fund’s performance to the index.
Fund Fees and Expenses
The following table describes what you could expect to pay as a fund investor. “Shareholder Fees”
are charged to you directly by the fund. “Annual Operating Expenses” are paid out of fund assets,
so their effect is included in the fund’s total return. You may also incur customary brokerage
charges when buying or selling fund shares.
Fee table (%)
Shares
Shareholder fees*
None
Annual operating expenses**
Management fees
Distribution (12b-1) fees***
0.00
%
Other expenses****
None
Total annual operating expenses
0.XX%
*
Fees paid directly from your investment, but the fund may impose creation and redemption
transaction fees to offset transaction costs associated with the issuance and redemption of
Creation Units. A standard transaction fee of $8,000 is charged in connection with the
creation or redemption of a Creation Unit on the day of the transaction. Cash purchases and
redemptions of Creation Units are subject to an additional variable charge of up to four times
the Additional Creation/Redemption Transaction Fee. See the “Creation and Redemption
Transaction Fees for Creation Units” section further in this prospectus.
**
Expressed as a percentage of average net assets.
***
The fund has adopted a Distribution and Shareholder Services (12b-1) Plan pursuant to which
the fund is subject to an annual 12b-1 fee of up to 0.25% of its average daily net assets.
However, the Board has determined that no such fees will be charged prior to November 14, 2011
(More than 12 months from the commencement of the fund’s operations).
****
The fund’s Investment Advisory Agreement provides that the Adviser will pay the operating
expenses of the fund, excluding interest expense, taxes, any brokerage expenses, future
distribution fees or expenses (i.e., 12b-1 fees) and extraordinary or non-routine expenses.
Example
Designed to help you compare expenses, the example below uses the same assumptions as other fund
prospectuses: a $10,000 investment, 5% return each year and that the fund’s operating expenses
remain the same. The expenses would be the same whether you stayed in the fund or sold your shares
at the end of each period. Your actual costs may be higher or lower.
The investment adviser for the Schwab International ETFs is Charles Schwab Investment Management,
Inc., (“CSIM”) 211 Main Street Street, San Francisco, CA94105. Founded in 1989, the firm today
serves as investment adviser for all of the Schwab Funds® and Laudus Funds®.
The firm has more than $ billion under management. (All figures on this page are as of
08/31/09.)
As the investment adviser, the firm oversees the asset management and administration of the fund.
As compensation for these services, the firm receives a management fee from the funds, expressed as
a percentage of each fund’s average daily net assets.
Schwab International Equity ETF™
%
Schwab International Small-Cap Equity ETF™
%
Schwab Emerging Markets Equity ETF™
%
A discussion regarding the basis for the Board of Trustees’ approval of the funds’ investment
advisory agreements will be available in the funds’ annual and/or semi-annual report.
Pursuant to the Investment Advisory Agreement between the Adviser and each fund, the Adviser will
pay the operating expenses of the fund, excluding interest expense, taxes, any brokerage expenses,
future distribution fees or expenses (i.e., 12b-1 fees) and extraordinary or non-routine expenses.
Jeffrey Mortimer, CFA, senior vice president and chief investment officer of the Adviser, is
responsible for the overall management of each of the funds. Prior to joining the firm in
October 1997, he worked for more than eight years in asset management.
Dustin
Lewellyn, CFA, a managing director of the Adviser, oversees the
Adviser’s management of ETFs. Prior to joining
the firm in May 2009, he worked for two years as director of ETF product management and development
at a major financial institution focused on asset and wealth
management. Prior to that, he was a
portfolio manager for institutional clients at a financial services firm for three years. In
addition, he held roles in portfolio operations and product management at several large asset
management firms for more than 6 years.
Agnes Hong, CFA, a managing director and portfolio manager of the Adviser, has day-to-day
responsibility for the management of the funds. Prior to joining the firm in September 2009, she
worked for more than 5 years as a portfolio manager for a major asset management firm.
Additional information about the portfolio managers’ compensation, other accounts managed by the
portfolio managers and the portfolio managers’ ownership of securities in the funds is available in
the Statement of Additional Information.
Distribution
and Shareholder Services (12b-1) Plan. Each fund has adopted a Distribution and
Shareholder Services (12b-1) Plan in accordance with Rule 12b-1 under the 1940 Act pursuant to
which each fund is subject to an annual 12b-1 fee of up to 0.25% of the fund’s average daily net
assets. The plan allows the funds to pay distribution and shareholder service fees to the funds’ distributor and
other firms that provide distribution and shareholder services. However, the Board has determined that no such
fees will be charged prior to November 14, 2011 (more than 12 months from the commencement of a
fund’s operations). Because these fees would be paid out of each funds’ assets
on an on-going basis, if payments are made in the future, these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
Payments by the Adviser. The Adviser may, from time to time, at its own expense, compensate
purchasers of Creation Units who have purchased substantial amounts of Creation Units and other
financial institutions for administrative or marketing services. These payments may be made from
profits received by the Adviser from management fees paid to the Adviser by the funds. Such
activities by the Adviser may provide incentives to financial institutions to purchase or market
shares of the funds. Additionally, these activities may give the Adviser additional access to sales
representatives of such financial institutions, which may increase sales of fund shares.
Distributor. The Fund’s Distributor is SEI Investments Distribution Co. The Distributor, located
at 1 Freedom Valley Drive, Oaks, PA19456, is a broker-dealer registered with the Securities and
Exchange Commission (“SEC”). The Distributor distributes Creation Units for the funds and does not
maintain a secondary market in shares of the funds.
INVESTING IN THE FUNDS
On the following pages, you will find information on buying and selling shares. Most investors will
invest in the funds through an intermediary by placing orders through their brokerage account at
Charles Schwab & Co., Inc. (Schwab) or an account with another broker/dealer or other intermediary.
Authorized Participants (as defined in “Transaction Policies,” below) may invest directly in the
funds by placing orders for Creation Units through the funds’ transfer agent. Helpful information
on taxes is included as well.
Shares of the funds trade on national securities exchanges and elsewhere during the trading day and
can be bought and sold throughout the trading day like other shares of publicly traded securities.
When buying or selling shares through a broker most investors will incur customary brokerage
commissions and charges. In addition, you may incur the cost of the “spread” – that is, any
difference between the bid price and the ask price.
Shares of the funds trade under the following trading symbols:
Shares of the funds may be acquired or redeemed directly from the funds only in Creation Units or
multiples thereof; as discussed in the “Creation and Redemption” section below. Once created,
shares of the fund trade in the secondary market in amounts less than a Creation Unit. The funds do
not impose any minimum investment for shares of the funds purchased on an exchange or in the
secondary market. Except when aggregated in Creation Units, shares are not redeemable by the
funds.
Share Trading Prices
As with other types of securities, the trading prices of shares in the secondary market can be
affected by market forces such as supply and demand, economic conditions and other factors. The
price you pay or receive when you buy or sell your shares in the secondary market may be more (a
premium) or less (a discount) than the NAV of such shares.
The approximate value of shares of the funds are disseminated every fifteen seconds throughout the
trading day by the national securities exchange on which the funds are listed or by other
information providers. This approximate value should not be viewed as a “real-time” update of the
NAV, because the approximate value may not be calculated in the same manner as the NAV, which is
computed once per day. The approximate value generally is determined by using current market
quotations and/or price quotations obtained from broker-dealers that may trade in the portfolio
securities held by the funds. The funds and Adviser are not involved in, or responsible for, the
calculation or dissemination of the approximate value and make no warranty as to its accuracy.
Determination of Net Asset Value
The NAV of the funds’ shares is calculated as of the close of regular trading on the New York Stock
Exchange, generally 4:00 p.m. Eastern time, on each day the NYSE is open for trading (each, a
“Business Day”). NAV per share is calculated by dividing the funds’ net assets by the number of
funds’ shares outstanding.
In valuing their securities, the funds use market quotes or official closing prices if they are
readily available. In cases where quotes are not readily available, the funds may value securities
based on fair values developed using methods approved by the funds’ Board of Trustees (described
below). When valuing fixed income securities with remaining maturities of more than 60 days, the
funds use the value of the security provided by pricing services. The pricing services may value
fixed income securities at an evaluated price by employing methodologies that utilize actual market
transaction, broker-supplied valuations, or other methodologies designed to identify the market
value for such securities. When valuing fixed income securities with remaining maturities of
60 days or less, the funds may use the security’s amortized cost, which approximates the security’s
market value. When valuing an option, future or swap, the funds use the value provided by a pricing
service, if available.
The funds’ Board of Trustees has adopted procedures, which include fair value methodologies, to
fair value the funds’ securities when market prices are not “readily available” or are unreliable.
For example, the funds may fair value a security when a security is de-listed or its trading is
halted or suspended; when a security’s primary pricing source is unable or unwilling to provide a
price; when a security’s primary trading market is closed during regular market hours; or when a
security’s value is materially affected by events occurring after the close of the security’s
primary trading market.
By fair valuing securities whose prices may have been affected by events occurring after the close
of trading, the funds seek to establish prices that investors might expect to realize upon the
current sales of these securities. The funds’ fair value methodologies seeks to ensure that the
prices at which the funds’ shares are purchased and redeemed are fair and do not result in dilution
of shareholder interest or other harm to shareholders. Generally, when fair valuing a security,
the funds will take into account all reasonably available information that may be relevant to a
particular valuation including, but not limited to, fundamental analytical data regarding the
issuer, information relating to the issuer’s business, recent trades or offers of the security,
general and specific market conditions and the specific facts giving
rise to the need to fair value
the security. The funds make fair value determinations in good faith and in accordance with the
fair value methodologies included in the Board adopted valuation procedures. Due to the subjective
and variable nature of fair value pricing, there can be no assurance that the funds could obtain
the fair value assigned to the security upon the sale of such security.
Shareholders of the funds should be aware that because foreign markets are often open on weekends
and other days when the funds are closed, the value of the funds’ portfolio may change on days when
it is not possible to buy or sell shares of the funds.
Transactions in funds’ shares will be priced at NAV only if you purchase or redeem shares directly
from the funds in Creation Units. Fund shares that are purchased or sold on a national securities
exchange will be effected at prevailing market prices, which may be higher or lower than NAV, and
may be subject to brokerage commissions and charges. As described below, purchases and redemptions
of Creation Units will be priced at the NAV next determined after receipt of the purchase or
redemption order.
PURCHASE AND REDEMPTION OF CREATION UNITS
Creation and Redemption
The shares that trade in the secondary market are “created” at NAV. The funds issue and redeem
shares only in Creation Units, which are large blocks of shares, typically 25,000 shares or more.
Only institutional investors, who have entered into an authorized participant agreement (known as
“Authorized Participants”), may purchase or redeem Creation Units. Creation Units generally are
issued and redeemed in exchange for a specified basket of securities approximating the holdings of
the funds and a designated amount of cash. Each Business Day, prior to the opening of trading, the
funds publish the specific securities and designated amount of cash included in that day’s basket
for the funds through the National Securities Clearing Corporation (“NSCC”) or other method of
public dissemination. The funds reserve the right to accept or pay out a basket of securities or
cash that differs from the published basket. The prices at which creations and redemptions occur
are based on the next calculation of NAV after an order is received and deemed acceptable by the
Distributor. Orders from Authorized Participants to create or redeem Creation Units will only be
accepted on a Business Day and are also subject to acceptance by the funds and the Distributor.
Creations and redemptions must be made by an Authorized Participant or through a firm that is
either a member of the Continuous Net Settlement System of the NSCC or a Depository Trust Company
(“DTC”) participant, and in each case, must have executed an agreement with the Distributor with
respect to creations and redemptions of Creation Unit aggregations. Information
about the procedures regarding creation and redemption of Creation Units is included in the funds’
Statement of Additional Information (“SAI”).
Authorized Participants and the Continuous Offering of Shares
Because new shares may be created and issued on an ongoing basis, at any point during the life of
the funds, a “distribution,” as such term is used in the Securities Act of 1933 (“Securities Act”),
may be occurring. Broker-dealers and other persons are cautioned that some activities on their part
may, depending on the circumstances, result in them being deemed participants in a distribution in
a manner that could render them statutory underwriters and subject to the prospectus-delivery and
liability provisions of the Securities Act. Nonetheless, any determination of whether one is an
underwriter must take into account all the relevant facts and circumstances of each particular
case.
Broker-dealers should also note that dealers who are not “underwriters,” but are participating in a
distribution (as contrasted to ordinary secondary transactions), 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. For delivery of prospectuses to exchange members, the prospectus delivery
mechanism of Rule 153 under the Securities Act is only available with respect to transactions on a
national securities exchange.
Creation and Redemption Transaction Fees for Creation Units
The funds may impose a creation transaction fee and a redemption transaction fee to offset transfer
and other transaction costs associated with the issuance and redemption of Creation Units of
shares. The creation and redemption transaction fees applicable to the funds are listed below. The
standard creation transaction fee is charged to each purchaser on the day such purchaser creates a
Creation Unit. The standard fee is a single charge and will be the amount indicated below
regardless of the number of Creation Units purchased by an investor on the same day. Similarly, the
standard redemption transaction fee will be the amount indicated regardless of the number of
Creation Units redeemed that day. Purchasers and redeemers of Creation Units for cash will be
subject to an additional variable charge up to four times the additional amount shown below under
“Additional Creation/Redemption Transaction Fee” to offset the transaction cost to the funds of
buying portfolio securities. In addition, purchasers and redeemers of shares in Creation Units are
responsible for payment of the costs of transferring securities to or out of the funds. From time
to time, the Adviser may cover the cost of any transaction fees when believed to be in the best
interests of the funds.
The following table also shows, as of November 3, 2009, the approximate value of one Creation Unit
of the funds, including the standard creation and redemption transaction fee. These fees are
payable only by investors who purchase shares directly from the funds. Retail investors who
purchase shares through their brokerage account will not pay these fees. Investors who use the
services of a broker or other such intermediary may pay fees for such services.
Policy regarding short-term or excessive trading. The funds have adopted policies and procedures
with respect to frequent purchases and redemptions of Creation Units of fund shares. However,
because the funds are ETFs, only Authorized Participants are authorized to purchase and redeem
shares directly with the funds. Because purchase and redemption transactions with Authorized
Participants are an essential part of the ETF process and help keep ETF trading prices in line with
NAV, the funds accommodate frequent purchases and redemptions by Authorized Participants. Frequent
purchases and redemptions for cash may increase index tracking error and portfolio transaction
costs and may lead to realization of capital gains. Frequent in-kind creations and redemptions do
not give rise to these concerns. The funds reserve the right to reject any purchase order at any
time.
The funds reserve the right to impose restrictions on disruptive, excessive, or short-term trading.
Such trading is defined by the funds as purchases and sales of fund shares in amounts and frequency
determined by the funds to be significant and in a pattern of activity that can potentially be
detrimental to the funds and their shareholders, such as by diluting the value of the shareholders’
holdings, increasing fund transaction costs, disrupting portfolio management strategy, incurring
unwanted taxable gains, or forcing funds to hold excess levels of cash. The funds may reject
purchase or redemption orders in such instances. The funds also impose a transaction fee on
Creation Unit transactions that is designed to offset the funds’ transfer and other transaction
costs associated with the issuance and redemption of the Creation Units. Although the funds have
adopted policies and procedures designed to discourage disruptive, excessive or short-term trading,
there can be no guarantee that the funds will be able to identify and restrict investors that
engage in such activities or eliminate the risks associated with such activities. In addition, the
decisions to restrict trading are inherently subjective and involve judgement in their application.
The funds may amend these policies and procedures in response to changing regulatory requirements
or to enhance their effectiveness.
Investments by Registered Investment Companies. Section 12(d)(1) of the Investment Company Act of
1940 restricts investments by registered investment companies in the securities of other investment
companies, including shares of the funds. Registered investment companies are permitted to invest
in the funds beyond the limits set forth in section 12(d)(1), subject to certain terms and
conditions set forth in an SEC exemptive order issued to the Schwab Strategic Trust, including that
such investment companies enter into an agreement with the funds.
Portfolio holdings information
A description of the funds’ policies and procedures with respect to the disclosure of the funds’
portfolio securities is available in the funds’ SAI.
Distributions and Taxes
Any investment in the funds typically involves several tax considerations. The information below is
meant as a general summary for U.S. citizens and residents. Because each person’s tax situation is
different, you should consult your tax advisor about the tax implications of your investment in a
fund. You also can visit the Internal Revenue Service (IRS) web site at www.irs.gov.
As a shareholder, you are entitled to your share of the dividends and gains your fund earns. Each
fund distributes to its shareholders substantially all of its net investment income and net capital
gains, if any, annually, although it may do so more frequently as determined by the Board of
Trustees. These distributions typically are paid in December to all shareholders of record. During
the fourth quarter of the year, typically in early November, an estimate of the funds’ year-end
distribution, if any, may be made available on the funds’
website www.schwab.com/SchwabETFs.
Each fund reserves the right to declare special distributions if, in its reasonable discretion,
such action is necessary or advisable to preserve its status as a regulated investment company or
to avoid imposition of income or excise taxes on undistributed income or realized gains. Dividends
and other distributions on shares of the funds are distributed on a pro rata basis to beneficial
owners of such shares.
Unless you are investing through an IRA, 401(k) or other tax-advantaged retirement account, your
fund distributions generally have tax consequences. Each fund’s net investment income and
short-term capital gains are distributed as dividends and will be taxable as ordinary income or
qualified dividend income. Other capital gain distributions are taxable as long-term capital gains,
regardless of how long you have held your shares in the fund. Distributions generally are taxable
in the tax year in which they are declared, whether you reinvest them or take them in cash.
Generally, any sale of your shares is a taxable event. A sale of your shares may give rise to a
gain or loss. In general, any gain or loss realized upon a taxable disposition of shares will be
treated as long-term capital gain or loss if the shares have been held for more than 12 months.
Otherwise, the gain or loss on the taxable disposition of shares will be treated as short-term
capital gain or loss. Absent further legislation, the reduced maximum rates on qualified dividend
income and long-term capital gains will cease to apply to taxable years beginning after December31, 2010. Any loss realized upon a taxable disposition of shares held for six months or less will
be treated as long-term, rather than short-term, to the extent of any long-term capital gain
distributions received (or deemed received) by you with respect to the shares. All or a portion of
any loss realized upon a taxable
disposition of shares will be disallowed if you purchase other substantially identical shares
within 30 days before or after the disposition. In such a case, the basis of the newly purchased
shares will be adjusted to reflect the disallowed loss.
At the beginning of every year, the funds provide shareholders with information detailing the tax
status of any distributions the funds paid during the previous calendar year. Schwab customers also
receive information on distributions and transactions in their monthly account statements.
More on qualified dividend income and distributions. Dividends that are designated by the funds as
qualified dividend income are eligible for a reduced maximum tax rate. Qualified dividend income
is, in general, dividend income from taxable domestic corporations and certain foreign
corporations. The funds expect that a portion of the funds’ ordinary income distributions will be
eligible to be treated as qualified dividend income subject to the reduced tax rates.
If you are investing through a taxable account and purchase shares of the funds just before it
declares a distribution, you may receive a portion of your investment back as a taxable
distribution. This is because when the funds make a distribution, the share price is reduced by the
amount of the distribution.
You can avoid “buying a dividend,” as it is often called, by finding out if a distribution is
imminent and waiting until afterwards to invest. Of course, you may decide that the opportunity to
gain a few days of investment performance outweighs the tax consequences of buying a dividend.
Shareholders in the funds may have additional tax considerations as a result of foreign tax
payments made by the funds. Typically, these payments will reduce the funds’ dividends but will
still be included in your taxable income. You may be able to claim a tax credit or deduction for
your portion of foreign taxes paid by a fund, however.
Taxes on Creation and Redemption of Creation Units
An Authorized Participant who exchanges securities for Creation Units generally will recognize a
gain or a loss equal to the difference between the market value of the Creation Units at the time
of the exchange and the sum of the exchanger’s aggregate basis in the securities surrendered and
the cash component paid. A person who redeems Creation Units will generally recognize a gain or
loss equal to the difference between the exchanger’s basis in the Creation Units and the sum of the
aggregate market value of the securities and the amount of cash received for such Creation Units.
The Internal Revenue Service, however, 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. Persons exchanging
securities for Creation Units should consult a tax advisor with respect to whether wash sale rules
apply and when a loss might be deductible.
Any capital gain or loss realized upon a redemption (or creation) of Creation Units is generally
treated as long-term capital gain or loss if the funds’ shares (or securities surrendered) have
been held for more than one year and as short-term capital gain or loss if the shares (or
securities surrendered) have been held for one year or less.
If you purchase or redeem Creation Units, you will be sent a confirmation statement showing how
many shares you purchased or sold and at what price. Persons purchasing or redeeming Creation Units
should consult their own tax advisors with respect to the tax treatment of any creation or
redemption transaction.
FTSE International Limited (“FTSE”) is an independent company whose sole business is the creation
and management of indexes and associated data services. FTSE is a joint venture between The
Financial Times (“FT”) and the London Stock Exchange Plc (the “Exchange”). FTSE calculates more
than 60,000 indexes daily, including more than 600 real-time indexes. “FTSEtm”
is a trademark jointly owned by the Exchange and FT and is used by FTSE under license. FTSE is not
affiliated with the funds. CSIM , the Distributor or any of their respective affiliates.
CSIM has entered into a license agreement with FTSE to use the FTSE Developed ex-US Index, FTSE
All-Emerging Index and FTSE Developed Small Cap ex-US Liquid Index (the “Indexes”).
Fees payable under the license agreement are paid by CSIM. FTSE has no obligation to
continue to provide the Indexes to CSIM beyond the term of the license agreement.
DISCLAIMER
The funds are not in any way sponsored, endorsed, sold or promoted by FTSE, FT or by the Exchange
(together the “Licensor Parties”) and none of the Licensor Parties make any warranty or
representation whatsoever, expressly or impliedly, either as to the results to be obtained from the
use of the Indexes and/or the figure at which the said Index stands at any particular time on any
particular day or otherwise. The Licensor Parties 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 trading in the funds. The Indexes are compiled and calculated by FTSE. None of
the Licensor Parties shall be liable (whether in negligence or otherwise) to any person for any
error in the Indexes and none of the Licensor Parties shall be under any obligation to advise any
person of any error therein. FTSE®, FT-SE®, Footsie®,
FTSE4Good® and techMARK® are trade marks of the Exchange and the FT and are
used by FTSE under license. All-World®, All-Share® and All-Small®
are trade marks of FTSE.
Shares of the funds are not sponsored, endorsed or promoted by NYSE Arca. NYSE Arca makes no
representation or warranty, express or implied, to the owners of the shares of the funds or any
member of the public regarding the ability of the funds to track the total return performance of
the Underlying Index or the ability of the Underlying Index to track stock market performance.
NYSE Arca is not responsible for, nor has it participated in, the determination of the compilation
or the calculation of the Underlying Index, nor in the determination of the timing of, prices of,
or quantities of shares of the funds to be issued, nor in the determination or calculation of the
equation by which the shares are redeemable. NYSE Arca has no obligation or liability to owners of
the shares of the funds in connection with the administration, marketing or trading of the shares
of the funds.
NYSE Arca shall have no liability for damages, claims, losses or expenses caused by any errors,
omissions, or delays in calculating or disseminating any current index or portfolio value the
current value of the portfolio of securities required to be deposited to the funds; the amount of
any dividend equivalent payment or cash distribution to holders of shares of the funds; net asset
value; or other information relating to the creation, redemption or trading of shares of the funds,
resulting from any negligent act or omission by NYSE Arca, or any act, condition or cause beyond
the reasonable control of NYSE Arca, including, but not limited to, an act of God; fire; flood;
extraordinary weather conditions; war; insurrection; riot; strike; accident; action of government;
communications or power
failure; equipment or software malfunction; or any error, omission or delay in the reporting of
transactions in one or more underlying securities. NYSE Arca makes no warranty, express or implied,
as to results to be obtained by any person or entity from the use of any underlying index or data
included therein and NYSE Arca makes no express or implied warranties, and disclaims all warranties
of merchantability or fitness for a particular purpose with respect to shares of the funds or any
underlying index or data included therein.
THE FUNDS AND CSIM DO NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE INDEXES OR ANY DATA
INCLUDED THEREIN AND SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN.
THE FUNDS AND CSIM MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE FUNDS,
OR ANY OTHER PERSON OR ENTITY FROM THE USE OF INDEXES OR ANY DATA INCLUDED THEREIN. THE FUNDS AND
CSIM MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE INDEXES OR ANY DATA
INCLUDED THEREIN, WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL THE FUNDS AND CSIM HAVE
ANY LIABILITY FOR ANY LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
We do not and will not sell your personal information to anyone, for any reason.
We are committed to protecting the privacy of information we maintain about you. Below are details
about our commitment, including the types of information we collect and how we use and share that
information. This Privacy Notice applies to you only if you are an individual who invests directly
in the funds by placing orders through the funds’ transfer agent. If you place orders through your
brokerage account at Charles Schwab & Co., Inc. or an account with another broker-dealer,
investment advisor, 401(k) plan, employee benefit plan, administrator, bank or other financial
intermediary, you are covered by the privacy policies of that financial institution and should
consult those policies.
How We Collect Information About You
We collect personal information about you in a number of ways.
•
Application and registration information. We collect personal information from you when you
open an account or utilize one of our services. We may also collect information about you from
third parties such as consumer reporting agencies to verify your identity. The information we
collect may include personal information, including your Social Security number, as well as
details about your interests, investments and investment experience.
•
Transaction and experience information. Once your account has been opened, we collect and
maintain personal information about your account activity, including your transactions,
balances, positions and history. This information allows us to administer your account and
provide the services you have requested.
•
Website usage. When you visit our websites, we may use devices known as “cookies,” graphic
interchange format files (GIFs), or other similar web tools to enhance your web experience.
These tools help us to recognize you, maintain your web session, and provide a more
personalized experience. To learn more, please click the Privacy link on our website.
How We Share and Use Your Information
We provide access to information about you to our affiliated companies, outside companies and other
third parties in certain limited circumstances, including:
• to help us process transactions for your account;
when we use other companies to provide services for us, such as printing and mailing your
account statements;
•
when we believe that disclosure is required or permitted under law (for example, to cooperate
with regulators or law enforcement, resolve consumer disputes, perform credit/authentication
checks, or for risk control).
State Laws
We will comply with state laws that apply to the disclosure or use of information about you.
Safeguarding Your Information—Security Is a Partnership
We take precautions to ensure the information we collect about you is protected and is accessed
only by authorized individuals or organizations.
Companies we use to provide support services are not allowed to use information about our
shareholders for their own purposes and are contractually obligated to maintain strict
confidentiality. We limit their use of information to the performance of the specific services we
have requested.
We restrict access to personal information by our employees and agents. Our employees are trained
about privacy and are required to safeguard personal information.
We maintain physical, electronic and procedural safeguards that comply with federal standards to
guard your nonpublic personal information.
Contact Us
To provide us with updated information, report suspected fraud or identity theft, or for any other
questions, please call one of the numbers below.
This prospectus contains important information on the funds and should be read and kept for
reference. You also can obtain more information from the following sources.
Annual and semi-annual reports, which are mailed to current fund investors, contain more
information about the funds’ holdings and detailed financial information about the funds. Annual
reports also contain information from the funds’ managers about strategies, recent market
conditions and trends and their impact on fund performance.
The Statement of Additional Information (SAI) includes a more detailed discussion of investment
policies and the risks associated with various investments. The SAI is incorporated by reference
into the prospectus, making it legally part of the prospectus.
For a free copy of any of these documents or to request other information or ask questions about
the funds, call Schwab ETFstm at 1-800-435-4000. In addition, you may visit
Schwab ETFs web site at www.schwab.com/SchwabETFProspectus for a free copy of a prospectus, SAI
or an annual or semi-annual report.
The SAI, the funds’ annual and semi-annual reports and other related materials are available from
the EDGAR Database on the SEC’s web site (http://www.sec.gov). You can obtain copies of this
information, after paying a duplicating fee, by sending a request by e-mail to publicinfo@sec.gov
or by writing the Public Reference Section of the SEC, Washington, D.C. 20549-1520. You can also
review and copy information about the funds, including the funds’ SAI, at the SEC’s Public
Reference Room in Washington, D.C. Call 1-202-551-8090 for information on the operation of the
SEC’s Public Reference Room.
SEC File Number
Schwab International ETFs 811-22311
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE
SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER
TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
As with all exchange traded funds, the Securities and Exchange Commission (SEC)
has not approved these securities or passed on whether the information in this
prospectus is adequate and accurate. Anyone who indicates otherwise is
committing a federal crime.
The funds described in this Prospectus are advised by Charles Schwab Investment Management, Inc.
(“CSIM” or the “Adviser”). Each of the funds is an “exchange traded fund” (“ETF”). ETFs are funds
that trade like other publicly-traded securities. Because the composition of an index tends to be
comparatively stable, index funds historically have shown low portfolio turnover compared to
actively managed funds.
This strategy distinguishes an index fund from an “actively managed” fund. Instead of choosing
investments for the fund based on portfolio management’s judgment, an index is used to determine
which securities the fund should own.
Unlike shares of a mutual fund, shares of the funds are listed on a national securities exchange
and trade at market prices that change throughout the day. The market price for each of the fund’s
shares may be different from its net asset value per share (“NAV”). The funds have their own CUSIP
numbers and trade on the NYSE Arca, Inc. under the following tickers:
Schwab U.S. Broad Market ETFtm
SCHB
Schwab U.S. Large-Cap ETFtm
SCHX
Schwab U.S. Large-Cap Growth ETFtm
SCHG
Schwab U.S. Large-Cap Value ETFtm
SCHV
Schwab U.S. Small-Cap ETFtm
SCHA
The funds issue and redeem shares at their NAV only in large blocks of shares, typically 50,000
shares or more (“Creation Units”). These transactions are usually in exchange for a basket of
securities and an amount of cash. As a practical matter, only institutions or large investors
purchase or redeem Creation Units. Except when aggregated in Creation Units, shares of the funds
are not redeemable securities.
A NOTE TO RETAIL INVESTORS
Shares can be purchased directly from the funds only in exchange for a basket of securities that is
expected to be worth several million dollars. Most individual investors, therefore, will not be
able to purchase shares directly from the funds. Instead, these investors will purchase shares in
the secondary market through a brokerage account or with the assistance of a broker. Thus, some of
the information contained in this Prospectus — such as information about purchasing and redeeming
shares from the funds and references to transaction fees imposed on purchases and redemptions — is
not relevant to most individual investors. Shares purchased or sold through a brokerage account or
with the assistance of a broker may be subject to brokerage commissions and charges.
Except as explicitly described otherwise, the investment objective, the benchmark index and the
investment policies of each of the funds may be changed without shareholder approval.
The funds’ performance will fluctuate over time and, as with all investments, future performance
may differ from past performance.
The fund’s goal is to track as closely as possible, before fees and expenses, the total return of
the Dow Jones U.S. Broad Stock Market IndexSM.1
Index
The fund’s benchmark index includes the largest 2,500 publicly traded U.S. companies for which
pricing information is readily available. The index is a float-adjusted market capitalization
weighted index that reflects the shares of securities actually available to investors in the
marketplace. As of June 30, 2009, the index was composed of 2,493 stocks.
Strategy
To pursue its goal, the fund generally invests in stocks that are included in the index. It is the
fund’s policy that under normal circumstances it will invest at least 90% of its net assets in
these stocks. The fund will notify its shareholders at least 60 days before changing this policy.
The fund will generally give the same weight to a given stock as the index does. However, when the
Adviser believes it is appropriate to do so, such as to avoid purchasing odd-lots (i.e., purchasing
less than the usual number of shares traded for a security), for tax considerations, or to
address liquidity considerations with respect to a stock, the Adviser may cause the fund’s
weighting of a stock to be more or less than the index’s weighting of the stock. The fund may sell
securities that are represented in the index in anticipation of their removal from the index.
Under
normal circumstances, the fund may invest up to 10% of its net assets in securities not
included in its index. The principal types of these investments include those which the Adviser
believes will help the fund track the index, such as investments in (a) securities that are not
represented in the index but the Adviser anticipates will be added to the index or as necessary to
reflect various corporate actions (such as mergers and spin-offs), (b) other investment companies,
and (c) futures contracts, options on futures contracts, options and swaps. The fund may also
invest in cash and cash equivalents, and may lend its securities to minimize the difference in
performance that naturally exists between an index fund and its corresponding index.
1
Index ownership — “Dow Jones” and “The Dow Jones U.S.
Broad Stock Market IndexSM” are trademarks of Dow Jones & Company,
Inc. and have been licensed for use for certain purposes by CSIM. Fees payable
under the license are paid by the Adviser. The Schwab U.S. Broad Market ETF,
based on The Dow Jones U.S. Broad Stock Market IndexSM, is not
sponsored, endorsed, sold or promoted by Dow Jones and Dow Jones makes no
representation regarding the advisability of trading in such product.
Because it may not be possible or practicable to purchase all of the stocks in the index, the
Adviser may attempt to replicate the total return of the index by using statistical sampling
techniques. These techniques involve investing in a limited number of index securities which, when
taken together, are expected to perform similarly to the index as a whole. These techniques are
based on a variety of factors, including performance attributes, tax considerations,
capitalization, dividend yield, price/earnings ratio, industry factors, risk factors and other
characteristics. The fund generally expects that its portfolio will hold less than the total
number of securities in the index, but reserves the right to hold as many securities as it believes
necessary to achieve the fund’s investment objective. The fund generally expects that its industry
weightings, dividend yield and price/earnings ratio will be similar to those of the index.
The fund will concentrate its investments (i.e., hold 25% or more of its total assets) in a
particular industry, group of industries or sector to approximately the same extent that its index
is so concentrated. For purposes of this limitation, securities of the U.S. government (including
its agencies and instrumentalities), and repurchase agreements collateralized by U.S. government
securities are not considered to be issued by members of any industry.
The Adviser seeks to achieve, over time, a correlation between the fund’s performance and that of
its index, before fees and expenses, of 95% or better. However, there can be no guarantee that the
fund will achieve a high degree of correlation with the index. A number of factors may affect the
fund’s ability to achieve a high correlation with its index, including the degree to which the fund
utilizes a sampling technique. The correlation between the performance of the fund and its index
may also diverge due to transaction costs, asset valuations, corporate actions (such as mergers and
spin-offs), timing variances, and differences between the fund’s portfolio and the index resulting
from legal restrictions (such as diversification requirements) that apply to the fund but not to
the index.
Risks
Market Risk. Stock markets rise and fall daily. As with any investment whose performance is tied to
these markets, the value of your investment in the fund will fluctuate, which means that you could
lose money.
Investment Style Risk. The fund is not actively managed. Therefore, the fund follows the stocks
included in the index during upturns as well as downturns. Because of its indexing strategy, the
fund does not take steps to reduce market exposure or to lessen the effects of a declining market.
In addition, because of the fund’s expenses, the fund’s performance is normally below that of the
index.
Equity Risk. The prices of equity securities rise and fall daily. These price movements may result
from factors affecting individual companies, industries or the securities market as a whole.
Individual companies may report poor results or be negatively affected by industry and/or economic
trends and developments. The prices of securities issued by such companies may suffer a decline in
response. In addition, the equity market tends to move in cycles which may cause stock prices to
fall over short or extended periods of time.
Large-Cap and Mid-Cap Risk. Although the index encompasses stocks from many different sectors of
the economy, its performance primarily reflects that of large- and mid-cap segments of the U.S.
stock market. Both large- and mid-cap stocks tend to go in and out of favor based on market and
economic conditions. However, stocks of mid-cap companies tend to be more volatile than those of
large-cap companies because mid-cap companies tend to be more susceptible to adverse business or
economic events than larger more established companies. During a period when large- and mid-cap
U.S. stocks fall behind other types of investments – bonds or small-cap stocks, for instance – the
fund’s performance also will lag those investments.
Small-Cap Risk. Historically, small-cap stocks have been riskier than large- and mid-cap stocks.
Stock prices of smaller companies may be based in substantial part on future expectations rather
than current achievements and may move sharply, especially during market upturns and downturns.
Small-cap companies themselves may be more vulnerable to adverse business or economic events than
larger, more established companies. During a period when small-cap stocks fall behind other types
of investments – bonds or large-cap stocks, for instance – the fund’s performance also will lag
those investments.
Sampling Index Tracking Risk. The fund does not fully replicate the index and may hold securities
not included in the index. As a result, the fund is subject to the risk that the Adviser’s
investment management strategy, the implementation of which is subject to a number of constraints,
may not produce the intended results. Because the fund utilizes a sampling approach it may not
track the return of the index as well as it would if the fund purchased all of the equity
securities in the index.
Tracking Error Risk. The fund’s return may not match the return of the index. For example,
differences between the fund’s securities and those in the index, rounding of prices, changes to
the index and regulatory requirements may cause tracking error, the divergence of the fund’s
performance from that of its index. The fund also incurs fees and expenses while the index does
not, which may result in tracking error.
Derivatives Risk. The principal types of derivatives used by the fund are options, futures, options
on futures and swaps. An option is the right to buy or sell an instrument at a specific price
before a specific date. A future is an agreement to buy or sell a financial instrument at a
specific price on a specific day. A swap is an agreement whereby two parties agree to exchange
payment streams calculated in relation to a rate, index, instrument or certain securities and a
predetermined amount.
The fund’s use of derivative instruments involves risks different from, or possibly greater than,
the risks associated with investing directly in securities and other traditional investments.
Certain of these risks, such as leverage risk, market risk and liquidity risk, are discussed
elsewhere in this section. The fund’s use of derivatives is also subject to credit risk, liquidity
risk, lack of availability risk, valuation risk, correlation risk and tax risk. Credit risk is the
risk that the counterparty to a derivative transaction may not fulfill its contractual obligations.
Lack of availability risk is the risk that suitable derivative transactions may not be available
in all circumstances for risk management or other purposes. Valuation risk is the risk that a
particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the
value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax
risk is the risk that the use of derivatives may cause the fund
to realize higher amounts of short-term capital gain. These risks could cause the fund to lose
more than the principal amount invested.
Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be
unable to sell illiquid securities at an advantageous time or price.
Leverage Risk. Certain fund transactions, such as derivatives, may give rise to a form of leverage
and may expose the fund to greater risk. Leverage tends to magnify the effect of any decrease or
increase in the value of the fund’s portfolio securities. The use of leverage may cause the fund to
liquidate portfolio positions when it would not be advantageous to do so in order to satisfy its
obligations.
Securities Lending Risk. The fund may lend its portfolio securities to brokers, dealers, and other
financial institutions provided a number of conditions are satisfied, including that the loan is
fully collateralized. When the fund lends portfolio securities, its investment performance will
continue to reflect changes in the value of the securities loaned, and the fund will also receive a
fee or interest on the collateral. Securities lending involves the risk of loss of rights in the
collateral or delay in recover of the collateral if the borrower fails to return the security
loaned or becomes insolvent. The fund will also bear the risk of any decline in value of
securities acquired with cash collateral. The fund may pay lending fees to a party arranging the
loan.
Concentration Risk. To the extent that the fund’s or the index’s portfolio is concentrated in the
securities of issuers in a particular market, industry, group of industries, sector or asset class,
the fund may be adversely affected by the performance of those securities, may be subject to
increased price volatility and may be more susceptible to adverse economic, market, political or
regulatory occurrences affecting that market, industry, group of industries, sector or asset class.
Market Trading Risk. Although fund shares are listed on national securities exchanges, there can
be no assurance that an active trading market for fund shares will develop or be maintained. If an
active market is not maintained, investors may find it difficult to buy or sell fund shares.
Trading of shares of the fund on a stock exchange may be halted if exchange officials deem such
action appropriate, if the fund is delisted, or if the activation of marketwide “circuit breakers”
halts stock trading generally. If the fund’s shares are delisted, the fund may seek to list its
shares on another market, merge with another ETF, or redeem its shares at NAV. The Adviser
believes that, under normal market conditions, large market price discounts or premiums to NAV will
not be sustained because of arbitrage opportunities.
Shares of the Fund May Trade at Prices Other Than NAV. As with all ETFs, fund shares may be bought
and sold in the secondary market at market prices. Although it is expected that the market price of
the shares of the fund will approximate the fund’s NAV, there may be times when the market price
and the NAV vary significantly. Thus, you may pay more than NAV when you buy shares of the fund in
the secondary market, and you may receive less than NAV when you sell those shares in the secondary
market.
The market price of fund shares during the trading day, 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 fund shares. The bid/ask spread on ETF shares is likely to be larger
on
ETFs that are traded less frequently. In addition, in times of severe market disruption, the
bid/ask spread can increase significantly. At those times, fund 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. The Adviser
believes that, under normal market conditions, large market price discounts or premiums to NAV will
not be sustained because of arbitrage opportunities.
Lack of Governmental Insurance or Guarantee. An investment in the fund is not a bank deposit and
it is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other
government agency.
Performance
The fund is new and therefore does not have a performance history. Once the fund has completed a
full calendar year of operations a bar chart and table will be included that will provide some
indication of the risks of investing in the fund by showing the variability of the fund’s returns
and comparing the fund’s performance to the index.
Fund Fees and Expenses
The following table describes what you could expect to pay as a fund investor. “Shareholder Fees”
are charged to you directly by the fund. “Annual Operating Expenses” are paid out of fund assets,
so their effect is included in the fund’s total return. You may also incur customary brokerage
charges when buying or selling fund shares.
Fee table (%)
Shares
Shareholder fees*
None
Annual operating expenses**
Management fees
Distribution (12b-1) fees***
0.00
%
Other expenses****
None
Total annual operating expenses
0.XX
%
*
Fees paid directly from your investment, but the fund may impose creation and redemption
transaction fees to offset transaction costs associated with the issuance and redemption of
Creation Units. A standard transaction fee of $1,500 is charged in connection with the
creation or redemption of a Creation Unit on the day of the transaction. Cash purchases and
redemptions of Creation Units are subject to an additional variable charge of up to four times
the Additional Creation/Redemption Transaction Fee. See the “Creation and Redemption
Transaction Fees for Creation Units” section further in this prospectus.
**
Expressed as a percentage of average net assets.
***
The fund has adopted a Distribution and Shareholder Services (12b-1) Plan pursuant to which
the fund is subject to an annual 12b-1 fee of up to 0.25% of its average daily net assets.
However, the Board has determined that no such fees will be charged prior to
November 14, 2011, (more than 12 months from the commencement of the fund’s
operations).
****
The fund’s Investment Advisory Agreement provides that the Adviser will pay the operating
expenses of the fund, excluding interest expense, taxes, any brokerage expenses, future
distribution fees or expenses (i.e., 12b-1 fees) and extraordinary or non-routine expenses.
Example
Designed to help you compare expenses, the example below uses the same assumptions as other fund
prospectuses: a $10,000 investment, 5% return each year and that the fund’s operating expenses
remain the same. The expenses would be the same whether you stayed in the fund or sold your shares
at the end of each period. Your actual costs may be higher or lower.
The fund’s goal is to track as closely as possible, before fees and expenses, the total return of
the Dow Jones U.S. Large-Cap Total Stock Market IndexSM. 2
Index
The fund’s benchmark index includes the large-cap portion of the Dow Jones U.S. Total Stock Market
IndexSMactually available to investors in the marketplace. The Dow Jones U.S.
Large-Cap Total Stock Market IndexSM includes the components ranked 1-750 by full market
capitalization. The index is a float-adjusted market capitalization weighted index. As of June30, 2009, the index was composed of 743 stocks.
Strategy
To pursue its goal, the fund generally invests in stocks that are included in the index. It is the
fund’s policy that under normal circumstances it will invest at least 90% of its net assets in
these stocks. The fund will notify its shareholders at least 60 days before changing this policy.
The fund will generally give the same weight to a given stock as the index does. However, when the
Adviser believes it is appropriate to do so, such as to avoid purchasing odd-lots (i.e., purchasing
less than the usual number of shares traded for a security), for tax considerations, or to
address liquidity considerations with respect to a stock, the Adviser may cause the fund’s
weighting of a stock to be more or less than the index’s weighting of the stock. The fund may sell
securities that are represented in the index in anticipation of their removal from the index.
Under
normal circumstances, the fund may invest up to 10% of its net assets in securities not
included in its index. The principal types of these investments include those which the Adviser
believes will help the fund track the index, such as investments in (a) securities that are not
represented in the index but the Adviser anticipates will be added to the index or as necessary to
reflect various corporate actions (such as mergers and spin-offs), (b) other investment companies,
and (c) futures contracts, options on futures contracts, options and swaps. The fund may also
invest in cash and cash equivalents, and may lend its securities to minimize the difference in
performance that naturally exists between an index fund and its corresponding index.
2
Index ownership — “Dow Jones” and “The Dow Jones U.S.
Large-Cap Total Stock Market IndexSM” are trademarks of Dow Jones &
Company, Inc. and have been licensed for use for certain purposes by CSIM. Fees
payable under the license are paid by the Adviser. The Schwab U.S. Large-Cap
ETF, based on The Dow Jones U.S. Large-Cap Total Stock Market
IndexSM, is not sponsored, endorsed, sold or promoted by Dow Jones
and Dow Jones makes no representation regarding the advisability of trading in
such product.
The fund will concentrate its investments (i.e., hold 25% or more of its total assets) in a
particular industry, group of industries or sector to approximately the same extent that its index
is so concentrated. For purposes of this limitation, securities of the U.S. government (including
its agencies and instrumentalities), and repurchase agreements collateralized by U.S. government
securities are not considered to be issued by members of any industry.
The Adviser seeks to achieve, over time, a correlation between the fund’s performance and that of
its index, before fees and expenses, of 95% or better. However, there can be no guarantee that the
fund will achieve a high degree of correlation with the index. A number of factors may affect the
fund’s ability to achieve a high correlation with its index, including the degree to which the fund
utilizes a sampling technique. The correlation between the performance of the fund and its index
may also diverge due to transaction costs, asset valuations, corporate actions (such as mergers and
spin-offs), timing variances, and differences between the fund’s portfolio and the index resulting
from legal restrictions (such as diversification requirements) that apply to the fund but not to
the index.
Risks
Market Risk. Stock markets rise and fall daily. As with any investment whose performance is tied to
these markets, the value of your investment in the fund will fluctuate, which means that you could
lose money.
Investment Style Risk. The fund is not actively managed. Therefore, the fund follows the stocks
included in the index during upturns as well as downturns. Because of its indexing strategy, the
fund does not take steps to reduce market exposure or to lessen the effects of a declining market.
In addition, because of the fund’s expenses, the fund’s performance is normally below that of the
index.
Equity Risk. The prices of equity securities rise and fall daily. These price movements may result
from factors affecting individual companies, industries or the securities market as a whole.
Individual companies may report poor results or be negatively affected by industry and/or economic
trends and developments. The prices of securities issued by such companies may suffer a decline in
response. In addition, the equity market tends to move in cycles which may cause stock prices to
fall over short or extended periods of time.
Large-Cap Risk. The index’s performance primarily reflects that of the large-cap segment of the
U.S. stock market. Large-cap stocks tend to go in and out of favor based on market and economic
conditions. During a period when large-cap U.S. stocks fall behind other types of investments –
bonds or small-cap stocks, for instance – the fund’s performance also will lag those investments.
Tracking Error Risk. The fund’s return may not match the return of the index. For example,
differences between the fund’s securities and those in the index, rounding of prices, changes to
the index and regulatory requirements may cause tracking error, the divergence of the fund’s
performance from that of its index. The fund also incurs fees and expenses while the index does
not, which may result in tracking error.
Derivatives Risk. The principal types of derivatives used by the fund are options, futures, options
of futures and swaps. An option is the right to buy or sell an instrument at a specific price
before a specific date. A future is an agreement to buy or sell a financial instrument at a
specific price on a specific day. A swap is an agreement whereby two parties agree to exchange
payment streams calculated in relation to a rate, index, instrument or certain securities and a
predetermined amount.
The fund’s use of derivative instruments involves risks different from or possibly greater than,
the risks associated with investing directly in securities and other traditional investments.
Certain of these risks, such as leverage risk, market risk and liquidity risk, are discussed
elsewhere in this section. The fund’s use of derivatives is also subject to credit risk, liquidity
risk, lack of availability risk, valuation risk, correlation risk and tax risk. Credit risk is the
risk that the counterparty to a derivative transaction may not fulfill its contractual obligations.
Lack of availability risk is the risk that suitable derivative transactions may not be available
in all circumstances for risk management or other purposes. Valuation risk is the risk that a
particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the
value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax
risk is the risk that the use of derivatives may cause the fund to realize higher amounts of
short-term capital gain. These risks could cause the fund to lose more than the principal amount
invested.
Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be
unable to sell illiquid securities at an advantageous time or price.
Leverage Risk. Certain fund transactions, such as derivatives, may give rise to a form of leverage
and may expose the fund to greater risk. Leverage tends to magnify the effect of any decrease or
increase in the value of the fund’s portfolio securities. The use of leverage may cause the fund to
liquidate portfolio positions when it would not be advantageous to do so in order to satisfy its
obligations.
Securities Lending Risk. The fund may lend its portfolio securities to brokers, dealers, and other
financial institutions provided a number of conditions are satisfied, including that the loan is
fully collateralized. When the fund lends portfolio securities, its investment performance will
continue to reflect changes in the value of the securities loaned, and the fund will also receive a
fee or interest on the collateral. Securities lending involves the risk of loss of rights in the
collateral or delay in recover of the collateral if the borrower fails to return the security
loaned or becomes insolvent. The fund will also bear the risk of any decline in value of
securities acquired with cash collateral. The fund may pay lending fees to a party arranging the
loan.
Concentration Risk. To the extent that the fund’s or the index’s portfolio is concentrated in the
securities of issuers in a particular market, industry, group of industries, sector or asset class,
the fund may be adversely affected by the performance of those securities, may be subject to
increased price volatility and may be more susceptible to adverse economic, market, political or
regulatory occurrences affecting that market, industry, group of industries, sector or asset class.
Market Trading Risk. Although fund shares are listed on national securities exchanges, there can
be no assurance that an active trading market for fund shares will develop or be maintained. If an
active market is not maintained, investors may find it difficult to buy or sell fund shares.
Trading of shares of the fund on a stock exchange may be halted if exchange officials deem such
action appropriate, if the fund is delisted, or if the activation of marketwide “circuit breakers”
halts stock trading generally. If the fund’s shares are delisted, the fund may seek to list its
shares on another market, merge with another ETF, or redeem its shares at NAV. The Adviser
believes that, under normal market conditions, large market price discounts or premiums to NAV will
not be sustained because of arbitrage opportunities.
Shares of the Fund May Trade at Prices Other Than NAV. As with all ETFs, fund shares may be bought
and sold in the secondary market at market prices. Although it is expected that the market price of
the shares of the fund will approximate the fund’s NAV, there may be times when the market price
and the NAV vary significantly. Thus, you may pay more than NAV when you buy shares of the fund in
the secondary market, and you may receive less than NAV when you sell those shares in the secondary
market.
The market price of fund shares during the trading day, 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 fund shares. The bid/ask spread on ETF shares is likely to be larger on
ETFs that are traded less frequently. In addition, in times of severe market disruption, the
bid/ask spread can increase significantly. At those times, fund 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. The Adviser believes that,
under normal market conditions, large market price discounts or premiums to NAV will not be
sustained because of arbitrage opportunities.
Lack of Governmental Insurance or Guarantee. An investment in the fund is not a bank deposit and
it is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
Performance
The fund is new and therefore does not have a performance history. Once the fund has completed a
full calendar year of operations a bar chart and table will be included that will provide some
indication of the risks of investing in the fund by showing the variability of the fund’s returns
and comparing the fund’s performance to the index.
Fund Fees and Expenses
The following table describes what you could expect to pay as a fund investor. “Shareholder Fees”
are charged to you directly by the fund. “Annual Operating Expenses” are paid out of fund assets,
so their effect is included in the fund’s total return. You may also incur customary brokerage
charges when buying or selling fund shares.
Fee table (%)
Shares
Shareholder fees*
None
Annual operating expenses**
Management fees
Distribution (12b-1) fees***
0.00
%
Other expenses****
None
Total annual operating expenses
0.XX
%
*
Fees paid directly from your investment, but the fund may impose creation and redemption
transaction fees to offset transaction costs associated with the issuance and redemption of
Creation Units. A standard transaction fee of $1,500 is charged in connection with the
creation or redemption of a Creation Unit on the day of the transaction. Cash purchases and
redemptions of Creation Units are subject to an additional variable charge of up to four
times the Additional Creation/ Redemption Transaction Fee. See the “Creation and Redemption
Transaction Fees for Creation Units” section further in this prospectus.
**
Expressed as a percentage of average net assets.
***
The fund has adopted a Distribution and Shareholder Services (12b-1) Plan pursuant to which
the fund is subject to an annual 12b-1 fee of up to 0.25% of its average daily net assets.
However, the Board has determined that no such fees will be charged prior to November 14, 2011
(more than 12 months from the commencement of the fund’s operations).
****
The fund’s Investment Advisory Agreement provides that the Adviser will pay the operating
expenses of the fund, excluding interest expense, taxes, any brokerage expenses, future
distribution fees or expenses (i.e., 12b-1 fees) and extraordinary or non-routine expenses.
Example
Designed to help you compare expenses, the example below uses the same assumptions as other fund
prospectuses: a $10,000 investment, 5% return each year and that the fund’s operating expenses
remain the same. The expenses would be the same whether you stayed in the fund or sold your shares
at the end of each period. Your actual costs may be higher or lower.
The fund’s goal is to track as closely as possible, before fees and expenses, the total return of
the Dow Jones U.S. Large-Cap Growth Total Stock Market IndexSM. 3
Index
The fund’s benchmark index includes the large-cap portion of the Dow Jones U.S. Total Stock Market
IndexSMactually available to investors in the marketplace. The Dow Jones U.S.
Large-Cap Growth Total Stock Market IndexSM includes the components ranked 1-750 by full
market capitalization and that are classified as “growth” based on a number of factors. The index
is a float-adjusted market capitalization weighted index. As of June 30, 2009, the index was
composed of 433 stocks.
Strategy
To pursue its goal, the fund generally invests in stocks that are included in the index. It is the
fund’s policy that under normal circumstances it will invest at least 90% of its net assets in
these stocks. The fund will notify its shareholders at least 60 days before changing this policy.
The fund will generally give the same weight to a given stock as the index does. However, when the
Adviser believes it is appropriate to do so, such as to avoid purchasing odd-lots (i.e., purchasing
less than the usual number of shares traded for a security), for tax considerations, or to
address liquidity considerations with respect to a stock, the Adviser may cause the fund’s
weighting of a stock to be more or less than the index’s weighting of the stock. The fund may sell
securities that are represented in the index in anticipation of their removal from the index.
Under
normal circumstances, the fund may invest up to 10% of its net assets in securities not
included in its index. The principal types of these investments include those which the Adviser
believes will help the fund track the index, such as investments in (a) securities that are not
represented in the index but the Adviser anticipates will be added to the index or as necessary to
reflect various corporate actions (such as mergers and spin-offs), (b) other investment companies,
and (c) futures contracts, options on futures contracts, options and swaps. The fund may also
invest
3
Index ownership — “Dow Jones” and “The Dow Jones U.S.
Large-Cap Growth Total Stock Market IndexSM” are trademarks of Dow
Jones & Company, Inc. and have been licensed for use for certain purposes by
CSIM. Fees payable under the license are paid by the Adviser. The Schwab U.S.
Large-Cap Growth ETF, based on The Dow Jones U.S. Large-Cap Growth Total Stock
Market IndexSM, is not sponsored, endorsed, sold or promoted by Dow
Jones and Dow Jones makes no representation regarding the advisability of
trading in such product.
in cash and cash equivalents, and may lend its securities to minimize the difference in performance
that naturally exists between an index fund and its corresponding index.
The fund will concentrate its investments (i.e., hold 25% or more of its total assets) in a
particular industry, group of industries or sector to approximately the same extent that its index
is so concentrated. For purposes of this limitation, securities of the U.S. government (including
its agencies and instrumentalities), and repurchase agreements collateralized by U.S. government
securities are not considered to be issued by members of any industry.
The Adviser seeks to achieve, over time, a correlation between the fund’s performance and that of
its index, before fees and expenses, of 95% or better. However, there can be no guarantee that the
fund will achieve a high degree of correlation with the index. A number of factors may affect the
fund’s ability to achieve a high correlation with its index, including the degree to which the fund
utilizes a sampling technique. The correlation between the performance of the fund and its index
may also diverge due to transaction costs, asset valuations, corporate actions (such as mergers and
spin-offs), timing variances, and differences between the fund’s portfolio and the index resulting
from legal restrictions (such as diversification requirements) that apply to the fund but not to
the index.
Risks
Market Risk. Stock markets rise and fall daily. As with any investment whose performance is tied to
these markets, the value of your investment in the fund will fluctuate, which means that you could
lose money.
Investment Style Risk. The fund is not actively managed. Therefore, the fund follows the stocks
included in the index during upturns as well as downturns. Because of its indexing strategy, the
fund does not take steps to reduce market exposure or to lessen the effects of a declining market.
In addition, because of the fund’s expenses, the fund’s performance is normally below that of the
index.
Equity Risk. The prices of equity securities rise and fall daily. These price movements may result
from factors affecting individual companies, industries or the securities market as a whole.
Individual companies may report poor results or be negatively affected by industry and/or economic
trends and developments. The prices of securities issued by such companies may suffer a decline in
response. In addition, the equity market tends to move in cycles which may cause stock prices to
fall over short or extended periods of time.
Large-Cap Risk. The index’s performance primarily reflects that of the large-cap segment of the
U.S. stock market. Large-cap stocks tend to go in and out of favor based on market and economic
conditions. During a period when large-cap U.S. stocks fall behind other types of investments –
bonds or small-cap stocks, for instance – the fund’s performance also will lag those investments.
Growth Risk. The fund emphasizes a “growth” style of investing. The market values of growth
stocks may be more volatile than other types of investments. Prices of growth stocks tend to
reflect future expectations, and when those expectations are not met or change, share prices
generally fall.
The returns on “growth” securities may not move in tandem with the returns on other styles of
investing or the stock market in general.
Tracking Error Risk. The fund’s return may not match the return of the index. For example,
differences between the fund’s securities and those in the index, rounding of prices, changes to
the index and regulatory requirements may cause tracking error, the divergence of the fund’s
performance from that of its index. The fund also incurs fees and expenses while the index does
not, which may result in tracking error.
Derivatives Risk. The principal types of derivatives used by the fund are options, futures, options
on futures and swaps. An option is the right to buy or sell an instrument at a specific price
before a specific date. A future is an agreement to buy or sell a financial instrument at a
specific price on a specific day. A swap is an agreement whereby two parties agree to exchange
payment streams calculated in relation to a rate, index, instrument or certain securities and a
predetermined amount.
The fund’s use of derivative instruments involves risks different from or possibly greater than,
the risks associated with investing directly in securities and other traditional investments.
Certain of these risks, such as leverage risk, market risk and liquidity risk, are discussed
elsewhere in this section. The fund’s use of derivatives is also subject to credit risk, liquidity
risk, lack of availability risk, valuation risk, correlation risk and tax risk. Credit risk is the
risk that the counterparty to a derivative transaction may not fulfill its contractual obligations.
Lack of availability risk is the risk that suitable derivative transactions may not be available
in all circumstances for risk management or other purposes. Valuation risk is the risk that a
particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the
value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax
risk is the risk that the use of derivatives may cause the fund to realize higher amounts of
short-term capital gain. These risks could cause the fund to lose more than the principal amount
invested.
Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be
unable to sell illiquid securities at an advantageous time or price.
Leverage Risk. Certain fund transactions, such as derivatives, may give rise to a form of leverage
and may expose the fund to greater risk. Leverage tends to magnify the effect of any decrease or
increase in the value of the fund’s portfolio securities. The use of leverage may cause the fund to
liquidate portfolio positions when it would not be advantageous to do so in order to satisfy its
obligations.
Securities Lending Risk. The fund may lend its portfolio securities to brokers, dealers, and other
financial institutions provided a number of conditions are satisfied, including that the loan is
fully collateralized. When the fund lends portfolio securities, its investment performance will
continue to reflect changes in the value of the securities loaned, and the fund will also receive a
fee or interest on the collateral. Securities lending involves the risk of loss of rights in the
collateral or delay in recover of the collateral if the borrower fails to return the security
loaned or becomes insolvent. The fund will also bear the risk of any decline in value of
securities acquired with cash collateral. The fund may pay lending fees to a party arranging the
loan.
Concentration Risk. To the extent that the fund’s or the index’s portfolio is concentrated in the
securities of issuers in a particular market, industry, group of industries, sector or asset class,
the fund may be adversely affected by the performance of those securities, may be subject to
increased price volatility and may be more susceptible to adverse economic, market, political or
regulatory occurrences affecting that market, industry, group of industries, sector or asset class.
Market Trading Risk. Although fund shares are listed on national securities exchanges, there can
be no assurance that an active trading market for fund shares will develop or be maintained. If an
active market is not maintained, investors may find it difficult to buy or sell fund shares.
Trading of shares of the fund on a stock exchange may be halted if exchange officials deem such
action appropriate, if the fund is delisted, or if the activation of marketwide “circuit breakers”
halts stock trading generally. If the fund’s shares are delisted, the fund may seek to list its
shares on another market, merge with another ETF, or redeem its shares at NAV. The Adviser
believes that, under normal market conditions, large market price discounts or premiums to NAV will
not be sustained because of arbitrage opportunities.
Shares of the Fund May Trade at Prices Other Than NAV. As with all ETFs, fund shares may be bought
and sold in the secondary market at market prices. Although it is expected that the market price of
the shares of the fund will approximate the fund’s NAV, there may be times when the market price
and the NAV vary significantly. Thus, you may pay more than NAV when you buy shares of the fund in
the secondary market, and you may receive less than NAV when you sell those shares in the secondary
market.
The market price of fund shares during the trading day, 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 fund shares. The bid/ask spread on ETF shares is likely to be larger on
ETFs that are traded less frequently. In addition, in times of severe market disruption, the
bid/ask spread can increase significantly. At those times, fund 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. The Adviser believes that,
under normal market conditions, large market price discounts or premiums to NAV will not be
sustained because of arbitrage opportunities.
Lack of Governmental Insurance or Guarantee. An investment in the fund is not a bank deposit and
it is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
Performance
The fund is new and therefore does not have a performance history. Once the fund has completed a
full calendar year of operations a bar chart and table will be included that will provide some
indication of the risks of investing in the fund by showing the variability of the fund’s returns
and comparing the fund’s performance to the index.
Fund Fees and Expenses
The following table describes what you could expect to pay as a fund investor. “Shareholder Fees”
are charged to you directly by the fund. “Annual Operating Expenses” are paid out of fund assets,
so
their effect is included in the fund’s total return.. You may also incur customary brokerage
charges when buying or selling fund shares.
Fee table (%)
Shares
Shareholder fees*
None
Annual operating expenses**
Management fees
Distribution (12b-1) fees***
0.00
%
Other expenses****
None
Total annual operating expenses
0.XX
%
*
Fees paid directly from your investment, but the fund may impose creation and redemption
transaction fees to offset transaction costs associated with the issuance and redemption of
Creation Units. A standard transaction fee of $1,500 is charged in connection with the
creation or redemption of a Creation Unit on the day of the transaction. Cash purchases and
redemptions of Creation Units are subject to an additional variable charge of up to four times
the Additional Creation /Redemption Transaction Fee. See the “Creation and Redemption
Transaction Fees for Creation Units” section further in this prospectus.
**
Expressed as a percentage of average net assets.
***
The fund has adopted a Distribution and Shareholder Services (12b-1) Plan pursuant to which
the fund is subject to an annual 12b-1 fee of up to 0.25% of its average daily net assets.
However, the Board has determined that no such fees will be charged prior to November 14, 2011
(more than 12 months from the commencement of the fund’s operations).
****
The fund’s Investment Advisory Agreement provides that the Adviser will pay the operating
expenses of the fund, excluding interest expense, taxes, any brokerage expenses, future
distribution fees or expenses (i.e., 12b-1 fees) and extraordinary or non-routine expenses.
Example
Designed to help you compare expenses, the example below uses the same assumptions as other fund
prospectuses: a $10,000 investment, 5% return each year and that the fund’s operating expenses
remain the same. The expenses would be the same whether you stayed in the fund or sold your shares
at the end of each period. Your actual costs may be higher or lower.
The fund’s goal is to track as closely as possible, before fees and expenses, the total return of
the Dow Jones U.S. Large-Cap Value Total Stock Market IndexSM. 4
Index
The fund’s benchmark index includes the large-cap portion of the Dow Jones U.S. Total Stock Market
IndexSMactually available to investors in the marketplace. The Dow Jones U.S.
Large-Cap Value Total Stock Market IndexSM includes the components ranked 1-750 by full
market capitalization and that are classified as “value” based on a number of factors. The index
is a float-adjusted market capitalization weighted index. As of June 30, 2009, the index was
composed of 310 stocks.
Strategy
To pursue its goal, the fund generally invests in stocks that are included in the index. It is the
fund’s policy that under normal circumstances it will invest at least 90% of its net assets in
these stocks. The fund will notify its shareholders at least 60 days before changing this policy.
The fund will generally give the same weight to a given stock as the index does. However, when the
Adviser believes it is appropriate to do so, such as to avoid purchasing odd-lots (i.e., purchasing
less than the usual number of shares traded for a security), for tax considerations, or to
address liquidity considerations with respect to a stock, the Adviser may cause the fund’s
weighting of a stock to be more or less than the index’s weighting of the stock. The fund may sell
securities that are represented in the index in anticipation of their removal from the index.
Under normal circumstances, the fund may invest up to 10% of its net assets in securities not
included in its index. The principal types of these investments include those which the Adviser
believes will help the fund track the index, such as investments in (a) securities that are not
represented in the index but the Adviser anticipates will be added to the index or as necessary to
reflect various corporate actions (such as mergers and spin-offs), (b) other investment companies,
and (c) futures contracts, options on futures contracts, options and swaps. The fund may also
invest
4
Index ownership — “Dow Jones” and “The Dow Jones U.S.
Large-Cap Value Total Stock Market IndexSM” are trademarks of Dow
Jones & Company, Inc. and have been licensed for use for certain purposes by
CSIM. Fees payable under the license are paid by the Adviser. The Schwab U.S.
Large-Cap Value ETF, based on The Dow Jones U.S. Large-Cap Value Total Stock
Market IndexSM, is not sponsored, endorsed, sold or promoted by Dow
Jones and Dow Jones makes no representation regarding the advisability of
trading in such product.
in cash and cash equivalents, and may lend its securities to minimize the difference in performance
that naturally exists between an index fund and its corresponding index.
The fund will concentrate its investments (i.e., hold 25% or more of its total assets) in a
particular industry, group of industries or sector to approximately the same extent that its index
is so concentrated. For purposes of this limitation, securities of the U.S. government (including
its agencies and instrumentalities), and repurchase agreements collateralized by U.S. government
securities are not considered to be issued by members of any industry.
The Adviser seeks to achieve, over time, a correlation between the fund’s performance and that of
its index, before fees and expenses, of 95% or better. However, there can be no guarantee that the
fund will achieve a high degree of correlation with the index. A number of factors may affect the
fund’s ability to achieve a high correlation with its index, including the degree to which the fund
utilizes a sampling technique. The correlation between the performance of the fund and its index
may also diverge due to transaction costs, asset valuations, corporate actions (such as mergers and
spin-offs), timing variances, and differences between the fund’s portfolio and the index resulting
from legal restrictions (such as diversification requirements) that apply to the fund but not to
the index.
Risks
Market Risk. Stock markets rise and fall daily. As with any investment whose performance is tied to
these markets, the value of your investment in the fund will fluctuate, which means that you could
lose money.
Investment Style Risk. The fund is not actively managed. Therefore, the fund follows the stocks
included in the index during upturns as well as downturns. Because of its indexing strategy, the
fund does not take steps to reduce market exposure or to lessen the effects of a declining market.
In addition, because of the fund’s expenses, the fund’s performance is normally below that of the
index.
Equity Risk. The prices of equity securities rise and fall daily. These price movements may result
from factors affecting individual companies, industries or the securities market as a whole.
Individual companies may report poor results or be negatively affected by industry and/or economic
trends and developments. The prices of securities issued by such companies may suffer a decline in
response. In addition, the equity market tends to move in cycles which may cause stock prices to
fall over short or extended periods of time.
Large-Cap Risk. The index’s performance primarily reflects that of the large-cap segment of the
U.S. stock market. Large-cap stocks tend to go in and out of favor based on market and economic
conditions. During a period when large-cap U.S. stocks fall behind other types of investments –
bonds or small-cap stocks, for instance – the fund’s performance also will lag those investments.
Value Risk. The fund emphasizes a “value” style of investing, which targets undervalued companies
with characteristics for improved valuations. This style of investing is subject to the risk that
the valuations never improve or that the returns on “value” securities may not move in tandem with
the returns on other styles of investing or the stock market in general.
Tracking Error Risk. The fund’s return may not match the return of the index. For example,
differences between the fund’s securities and those in the index, rounding of prices, changes to
the index and regulatory requirements may cause tracking error, the divergence of the fund’s
performance from that of its index. The fund also incurs fees and expenses while the index does
not, which may result in tracking error.
Derivatives Risk. The principal types of derivatives used by the fund are options, futures,
options on futures and swaps. An option is the right to buy or sell an instrument at a specific
price before a specific date. A future is an agreement to buy or sell a financial instrument at a
specific price on a specific day. A swap is an agreement whereby two parties agree to exchange
payment streams calculated in relation to a rate, index, instrument or certain securities and a
predetermined amount.
The fund’s use of derivative instruments involves risks different from or possibly greater than,
the risks associated with investing directly in securities and other traditional investments.
Certain of these risks, such as leverage risk, market risk and liquidity risk, are discussed
elsewhere in this section. The fund’s use of derivatives is also subject to credit risk, liquidity
risk, lack of availability risk, valuation risk, correlation risk and tax risk. Credit risk is the
risk that the counterparty to a derivative transaction may not fulfill its contractual obligations.
Lack of availability risk is the risk that suitable derivative transactions may not be available
in all circumstances for risk management or other purposes. Valuation risk is the risk that a
particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the
value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax
risk is the risk that the use of derivatives may cause the fund to realize higher amounts of
short-term capital gain. These risks could cause the fund to lose more than the principal amount
invested.
Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be
unable to sell illiquid securities at an advantageous time or price.
Leverage Risk. Certain fund transactions, such as derivatives, may give rise to a form of leverage
and may expose the fund to greater risk. Leverage tends to magnify the effect of any decrease or
increase in the value of the fund’s portfolio securities. The use of leverage may cause the fund to
liquidate portfolio positions when it would not be advantageous to do so in order to satisfy its
obligations.
Securities Lending Risk. The fund may lend its portfolio securities to brokers, dealers, and other
financial institutions provided a number of conditions are satisfied, including that the loan is
fully collateralized. When the fund lends portfolio securities, its investment performance will
continue to reflect changes in the value of the securities loaned, and the fund will also receive a
fee or interest on the collateral. Securities lending involves the risk of loss of rights in the
collateral or delay in recover of the collateral if the borrower fails to return the security
loaned or becomes insolvent. The fund will also bear the risk of any decline in value of securities
acquired with cash collateral. The fund may pay lending fees to a party arranging the loan.
Concentration Risk. To the extent that the fund’s or the index’s portfolio is concentrated in the
securities of issuers in a particular market, industry, group of industries, sector or asset class,
the fund may be adversely affected by the performance of those securities, may be subject to
increased
price volatility and may be more susceptible to adverse economic, market, political or regulatory
occurrences affecting that market, industry, group of industries, sector or asset class.
Market Trading Risk. Although fund shares are listed on national securities exchanges, there can
be no assurance that an active trading market for fund shares will develop or be maintained. If an
active market is not maintained, investors may find it difficult to buy or sell fund shares.
Trading of shares of the fund on a stock exchange may be halted if exchange officials deem such
action appropriate, if the fund is delisted, or if the activation of marketwide “circuit breakers”
halts stock trading generally. If the fund’s shares are delisted, the fund may seek to list its
shares on another market, merge with another ETF, or redeem its shares at NAV. The Adviser
believes that, under normal market conditions, large market price discounts or premiums to NAV will
not be sustained because of arbitrage opportunities.
Shares of the Fund May Trade at Prices Other Than NAV. As with all ETFs, fund shares may be bought
and sold in the secondary market at market prices. Although it is expected that the market price of
the shares of the fund will approximate the fund’s NAV, there may be times when the market price
and the NAV vary significantly. Thus, you may pay more than NAV when you buy shares of the fund in
the secondary market, and you may receive less than NAV when you sell those shares in the secondary
market.
The market price of fund shares during the trading day, 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 fund shares. The bid/ask spread on ETF shares is likely to be larger on
ETFs that are traded less frequently. In addition, in times of severe market disruption, the
bid/ask spread can increase significantly. At those times, fund 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. The Adviser believes that,
under normal market conditions, large market price discounts or premiums to NAV will not be
sustained because of arbitrage opportunities.
Lack of Governmental Insurance or Guarantee. An investment in the fund is not a bank deposit and
it is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
Performance
The fund is new and therefore does not have a performance history. Once the fund has completed a
full calendar year of operations a bar chart and table will be included that will provide some
indication of the risks of investing in the fund by showing the variability of the fund’s returns
and comparing the fund’s performance to the index.
Fund Fees and Expenses
The following table describes what you could expect to pay as a fund investor. “Shareholder Fees”
are charged to you directly by the fund. “Annual Operating Expenses” are paid out of fund assets,
so their effect is included in the fund’s total return. You may also incur customary brokerage
charges when buying or selling fund shares.
Fees paid directly from your investment, but the fund may impose creation and redemption
transaction fees to offset transaction costs associated with the issuance and redemption of
Creation Units. A standard transaction fee of $1,500 is charged in connection with the
creation or redemption of a Creation Unit on the day of the transaction. Cash purchases and
redemptions of Creation Units are subject to an additional variable charge of up to four times
the Additional Creation/Redemption Transaction Fee. See the “Creation and Redemption
Transaction Fees for Creation Units” section further in this prospectus.
**
Expressed as a percentage of average net assets.
***
The fund has adopted a Distribution and Shareholder Services (12b-1) Plan pursuant to which
the fund is subject to an annual 12b-1 fee of up to 0.25% of its average daily net assets.
However, the Board has determined that no such fees will be charged prior to November 14, 2011
(more than 12 months from the commencement of the fund’s operations).
****
The fund’s Investment Advisory Agreement provides that the Adviser will pay the operating
expenses of the fund, excluding interest expense, taxes, any brokerage expenses, future
distribution fees or expenses (i.e., 12b-1 fees) and extraordinary or non-routine expenses.
Example
Designed to help you compare expenses, the example below uses the same assumptions as other fund
prospectuses: a $10,000 investment, 5% return each year and that the fund’s operating expenses
remain the same. The expenses would be the same whether you stayed in the fund or sold your shares
at the end of each period. Your actual costs may be higher or lower.
The fund’s goal is to track as closely as possible, before fees and expenses, the total return of
the Dow Jones U.S. Small-Cap Total Stock Market
IndexSM. 6
Index
The fund’s benchmark index includes the small-cap portion of the Dow Jones U.S. Total Stock Market
IndexSMactually available to investors in the marketplace. The Dow Jones U.S.
Small-Cap Total Stock Market IndexSM includes the components ranked 751-2500 by full
market capitalization. The index is a float-adjusted market capitalization weighted index. As of
June 30, 2009, the index was composed of 1,750 stocks.
Strategy
To pursue its goal, the fund generally invests in stocks that are included in the index. It is the
fund’s policy that under normal circumstances it will invest at least 90% of its net assets in
these stocks. The fund will notify its shareholders at least 60 days before changing this policy.
The fund will generally give the same weight to a given stock as the index does. However, when the
Adviser believes it is appropriate to do so, such as to avoid purchasing odd-lots (i.e., purchasing
less than the usual number of shares traded for a security), for tax considerations, or to
address liquidity considerations with respect to a stock, the Adviser may cause the fund’s
weighting of a stock to be more or less than the index’s weighting of the stock. The fund may sell
securities that are represented in the index in anticipation of their removal from the index.
Under normal circumstances, the fund may invest up to 10% of its net assets in securities not
included in its index. The principal types of these investments include those which the Adviser
believes will help the fund track the index, such as investments in (a) securities that are not
represented in the index but the Adviser anticipates will be added to the index or as necessary to
reflect various corporate actions (such as mergers and spin-offs), (b) other investment companies,
and (c) futures contracts, options on futures contracts, options and swaps. The fund may also
invest in cash and cash equivalents, and may lend its securities to minimize the difference in
performance that naturally exists between an index fund and its corresponding index.
6
Index ownership — “Dow Jones” and “The Dow Jones U.S.
Small-Cap Total Stock Market IndexSM” are trademarks of Dow Jones &
Company, Inc. and have been licensed for use for certain purposes by CSIM. Fees
payable under the license are payable by the Adviser. The Schwab U.S. Small-Cap
ETF, based on The Dow Jones U.S. Small-Cap Total Stock Market
IndexSM, is not sponsored, endorsed, sold or promoted by Dow Jones
and Dow Jones makes no representation regarding the advisability of trading in
such product.
Because it may not be possible or practicable to purchase all of the stocks in the index, the
Adviser may attempt to replicate the total return of the index by using statistical sampling
techniques. These techniques involve investing in a limited number of index securities which, when
taken together, are expected to perform similarly to the index as a whole. These techniques are
based on a variety of factors, including performance attributes, tax considerations,
capitalization, dividend yield, price/earnings ratio, industry factors risk factors and other
characteristics. The fund generally expects that its portfolio will hold less than the total
number of securities in the index, but reserves the right to hold as many securities as it believes
necessary to achieve the fund’s investment objective. The fund generally expects that its industry
weightings, dividend yield and price/earnings ratio will be similar to those of the index.
The fund will concentrate its investments (i.e., hold 25% or more of its total assets) in a
particular industry, group of industries or sector to approximately the same extent that its index
is so concentrated. For purposes of this limitation, securities of the U.S. government (including
its agencies and instrumentalities), and repurchase agreements collateralized by U.S. government
securities are not considered to be issued by members of any industry.
The Adviser seeks to achieve, over time, a correlation between the fund’s performance and that of
its index, before fees and expenses, of 95% or better. However, there can be no guarantee that the
fund will achieve a high degree of correlation with the index. A number of factors may affect the
fund’s ability to achieve a high correlation with its index, including the degree to which the fund
utilizes a sampling technique. The correlation between the performance of the fund and its index
may also diverge due to transaction costs, asset valuations, corporate actions (such as mergers and
spin-offs), timing variances, and differences between the fund’s portfolio and the index resulting
from legal restrictions (such as diversification requirements) that apply to the fund but not to
the index.
Risks
Market Risk. Stock markets rise and fall daily. As with any investment whose performance is tied to
these markets, the value of your investment in the fund will fluctuate, which means that you could
lose money.
Investment Style Risk. The fund is not actively managed. Therefore, the fund follows the stocks
included in the index during upturns as well as downturns. Because of its indexing strategy, the
fund does not take steps to reduce market exposure or to lessen the effects of a declining market.
In addition, because of the fund’s expenses, the fund’s performance is normally below that of the
index.
Equity Risk. The prices of equity securities rise and fall daily. These price movements may result
from factors affecting individual companies, industries or the securities market as a whole.
Individual companies may report poor results or be negatively affected by industry and/or economic
trends and developments. The prices of securities issued by such companies may suffer a decline in
response. In addition, the equity market tends to move in cycles which may cause stock prices to
fall over short or extended periods of time.
Small-Cap Risk. Historically, small-cap stocks have been riskier than large- and mid-cap stocks.
Stock prices of smaller companies may be based in substantial part on future expectations rather
than current achievements and may move sharply, especially during market upturns and downturns.
Small-cap companies themselves may be more vulnerable to adverse business or economic events than
larger, more established companies. During a period when small-cap stocks fall behind other types
of investments – bonds or large-cap stocks, for instance – the fund’s performance also will lag
those investments.
Sampling Index Tracking Risk. The fund does not fully replicate the index and may hold securities
not included in the index. As a result, the fund is subject to the risk that the Adviser’s
investment management strategy, the implementation of which is subject to a number of constraints,
may not produce the intended results. Because the fund utilizes a sampling approach it may not
track the return of the index as well as it would if the fund purchased all of the equity
securities in the index.
Tracking Error Risk. The fund’s return may not match the return of the index. For example,
differences between the fund’s securities and those in the index, rounding of prices, changes to
the index and regulatory requirements may cause tracking error, the divergence of the fund’s
performance from that of its index. The fund also incurs fees and expenses while the index does
not, which may result in tracking error.
Derivatives Risk. The principal types of derivatives used by the fund are options, futures, options
on futures and swaps. An option is the right to buy or sell an instrument at a specific price
before a specific date. A future is an agreement to buy or sell a financial instrument at a
specific price on a specific day. A swap is an agreement whereby two parties agree to exchange
payment streams calculated in relation to a rate, index, instrument or certain securities and a
predetermined amount.
The fund’s use of derivative instruments involves risks different from or possibly greater than,
the risks associated with investing directly in securities and other traditional investments.
Certain of these risks, such as leverage risk, market risk and liquidity risk, are discussed
elsewhere in this section. The fund’s use of derivatives is also subject to credit risk, liquidity
risk, lack of availability risk, valuation risk, correlation risk and tax risk. Credit risk is the
risk that the counterparty to a derivative transaction may not fulfill its contractual obligations.
Lack of availability risk is the risk that suitable derivative transactions may not be available
in all circumstances for risk management or other purposes. Valuation risk is the risk that a
particular derivative may be valued incorrectly. Correlation risk is the risk that changes in the
value of the derivative may not correlate perfectly with the underlying asset, rate or index. Tax
risk is the risk that the use of derivatives may cause the fund to realize higher amounts of
short-term capital gain. These risks could cause the fund to lose more than the principal amount
invested.
Liquidity Risk. A particular investment may be difficult to purchase or sell. The fund may be
unable to sell illiquid securities at an advantageous time or price.
Leverage Risk. Certain fund transactions, such as derivatives, may give rise to a form of leverage
and may expose the fund to greater risk. Leverage tends to magnify the effect of any decrease or
increase in the value of the fund’s portfolio securities. The use of leverage may cause the fund to
liquidate portfolio positions when it would not be advantageous to do so in order to satisfy its
obligations.
Securities Lending Risk. The fund may lend its portfolio securities to brokers, dealers, and other
financial institutions provided a number of conditions are satisfied, including that the loan is
fully collateralized. When the fund lends portfolio securities, its investment performance will
continue to reflect changes in the value of the securities loaned, and the fund will also receive a
fee or interest on the collateral. Securities lending involves the risk of loss of rights in the
collateral or delay in recover of the collateral if the borrower fails to return the security
loaned or becomes insolvent. The fund will also bear the risk of any decline in value of
securities acquired with cash collateral. The fund may pay lending fees to a party arranging the
loan.
Concentration Risk. To the extent that the fund’s or the index’s portfolio is concentrated in the
securities of issuers in a particular market, industry, group of industries, sector or asset class,
the fund may be adversely affected by the performance of those securities, may be subject to
increased price volatility and may be more susceptible to adverse economic, market, political or
regulatory occurrences affecting that market, industry, group of industries, sector or asset class.
Market Trading Risk. Although fund shares are listed on national securities exchanges, there can
be no assurance that an active trading market for fund shares will develop or be maintained. If an
active market is not maintained, investors may find it difficult to buy or sell fund shares.
Trading of shares of the fund on a stock exchange may be halted if exchange officials deem such
action appropriate, if the fund is delisted, or if the activation of marketwide “circuit breakers”
halts stock trading generally. If the fund’s shares are delisted, the fund may seek to list its
shares on another market, merge with another ETF, or redeem its shares at NAV. The Adviser
believes that, under normal market conditions, large market price discounts or premiums to NAV will
not be sustained because of arbitrage opportunities.
Shares of the Fund May Trade at Prices Other Than NAV. As with all ETFs, fund shares may be bought
and sold in the secondary market at market prices. Although it is expected that the market price of
the shares of the fund will approximate the fund’s NAV, there may be times when the market price
and the NAV vary significantly. Thus, you may pay more than NAV when you buy shares of the fund in
the secondary market, and you may receive less than NAV when you sell those shares in the secondary
market.
The market price of fund shares during the trading day, 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 fund shares. The bid/ask spread on ETF shares is likely to be larger on
ETFs that are traded less frequently. In addition, in times of severe market disruption, the
bid/ask spread can increase significantly. At those times, fund 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. The Adviser believes that,
under normal market conditions, large market price discounts or premiums to NAV will not be
sustained because of arbitrage opportunities.
Lack of Governmental Insurance or Guarantee. An investment in the fund is not a bank deposit and
it is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency.
Performance
The fund is new and therefore does not have a performance history. Once the fund has completed a
full calendar year of operations a bar chart and table will be included that will provide some
indication of the risks of investing in the fund by showing the variability of the fund’s returns
and comparing the fund’s performance to the index.
Fund Fees and Expenses
The following table describes what you could expect to pay as a fund investor. “Shareholder Fees”
are charged to you directly by the fund. “Annual Operating Expenses” are paid out of fund assets,
so their effect is included in the fund’s total return. You may also incur customary brokerage
charges when buying or selling fund shares.
Fee table (%)
Shares
Shareholder fees*
None
Annual operating expenses**
Management fees
Distribution (12b-1) fees***
0.00
%
Other expenses****
None
Total annual operating expenses
0.XX
%
*
Fees paid directly from your investment, but the fund may impose creation and redemption
transaction fees to offset transaction costs associated with the issuance and redemption of
Creation Units. A standard transaction fee of $1,500 is charged in connection with the
creation or redemption of a Creation Unit on the day of the transaction. Cash purchases and
redemptions of Creation Units are subject to an additional variable charge of up to four times
the Additional Creation/Redemption Transaction Fee. See the “Creation and Redemption
Transaction Fees for Creation Units” section further in this prospectus.
**
Expressed as a percentage of average net assets.
***
The fund has adopted a Distribution and Shareholder Services (12b-1) Plan pursuant to which
the fund is subject to an annual 12b-1 fee of up to 0.25% of its average daily net assets.
However, the Board has determined that no such fees will be charged prior to November 14, 2011
(more than 12 months from the commencement of the fund’s operations).
****
The fund’s Investment Advisory Agreement provides that the Adviser will pay the operating
expenses of the fund, excluding interest expense, taxes, any brokerage expenses, future
distribution fees or expenses (i.e., 12b-1 fees) and extraordinary or non-routine expenses.
Designed to help you compare expenses, the example below uses the same assumptions as other fund
prospectuses: a $10,000 investment, 5% return each year and that the fund’s operating expenses
remain the same. The expenses would be the same whether you stayed in the fund or sold your shares
at the end of each period. Your actual costs may be higher or lower.
The investment adviser for the Schwab U.S. ETFs is Charles Schwab Investment Management, Inc.,
(“CSIM”) 211 Main Street, San Francisco, CA94105. Founded in 1989, the firm today serves as
investment adviser for all of the Schwab Funds® and Laudus Funds®. The firm
has more than $ billion under management. (All figures on this page are as of 08/31/09.)
As the investment adviser, the firm oversees the asset management and administration of the funds.
As compensation for these services, the firm receives a management fee from the funds, expressed as
a percentage of each fund’s average daily net assets.
Schwab U.S. Broad Market ETF™
%
Schwab U.S. Large-Cap ETF™
%
Schwab U.S. Large-Cap Growth ETF™
%
Schwab U.S. Large-Cap Value ETF™
%
Schwab U.S. Small-Cap ETF™
%
A discussion regarding the basis for the Board of Trustees’ approval of the funds’ investment
advisory agreements will be available in the funds’ annual and/or semi-annual report.
Pursuant to the Investment Advisory Agreement between the Adviser and each fund, the Adviser will
pay the operating expenses of the fund, excluding interest expense, taxes, any brokerage expenses,
future distribution fees or expenses (i.e., 12b-1 fees) and extraordinary or non-routine expenses.
Jeffrey Mortimer, CFA, senior vice president and chief investment officer of the Adviser, is
responsible for the overall management of each of the funds. Prior to joining the firm in
October 1997, he worked for more than eight years in asset management.
Dustin Lewellyn, CFA, a
managing director of the Adviser, oversees the Adviser’s management of ETFs. Prior to joining
the firm in May 2009, he worked for two years as director of ETF product management and development
at a major financial institution focused on asset and wealth management. Prior to that, he was a
portfolio manager for institutional clients at a financial services firm for three years. In
addition, he held roles in portfolio operations and product management at several large asset
management firms for more than 6 years.
Agnes Hong, CFA, a managing director and portfolio manager of the Adviser, has day-to-day
responsibility for the management of the funds. Prior to joining the firm in September 2009, she
worked for more than 5 years as a portfolio manager for a major asset management firm.
Additional information about the portfolio managers’ compensation, other accounts managed by the
portfolio managers and the portfolio managers’ ownership of securities in the funds is available in
the Statement of Additional Information.
Distribution
and Shareholder Services (12b-1) Plan. Each fund has adopted a Distribution and
Shareholder Services (12b-1) Plan in accordance with Rule 12b-1 under the 1940 Act pursuant to
which each fund is subject to an annual 12b-1 fee of up to 0.25% of the fund’s average daily net
assets. The plan allows the funds to pay distribution and shareholder service fees to the funds’ distributor and
other firms that provide distribution and shareholder services. However, the Board has determined that no such
fees will be charged prior to November 14, 2011 (more than 12 months from the commencement of a
fund’s operations and shareholder). Because these fees would be paid out of each funds’ assets
on an on-going basis, if payments are made in the future, these fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
Payments by the Adviser. The Adviser may, from time to time, at its own expense, compensate
purchasers of Creation Units who have purchased substantial amounts of Creation Units and other
financial institutions for administrative or marketing services. These payments may be made from
profits received by the Adviser from management fees paid to the Adviser by the funds. Such
activities by the Adviser may provide incentives to financial institutions to purchase or market
shares of the funds. Additionally, these activities may give the Adviser additional access to sales
representatives of such financial institutions, which may increase sales of fund shares.
Distributor. The Fund’s Distributor is SEI Investments Distribution Co. The Distributor, located
at 1 Freedom Valley Drive, Oaks, PA19456, is a broker-dealer registered with the Securities and
Exchange Commission (“SEC”). The Distributor distributes Creation Units for the funds and does not
maintain a secondary market in shares of the funds.
INVESTING IN THE FUNDS
On the following pages, you will find information on buying and selling shares. Most investors will
invest in the funds through an intermediary by placing orders through their brokerage account at
Charles Schwab & Co., Inc. (“Schwab”) or an account with another broker/dealer or other
intermediary. Authorized Participants (as defined in “Transaction Policies,” below) may invest
directly in the funds by placing orders for Creation Units through the funds’ transfer agent
(direct orders). Helpful information on taxes is included as well.
Shares of the funds trade on national securities exchanges and elsewhere during the trading day and
can be bought and sold throughout the trading day like other shares of publicly traded securities.
When buying or selling shares through a broker most investors will incur customary brokerage
commissions and charges. In addition, you may incur the cost of the “spread” – that is, any
difference between the bid price and the ask price.
Shares of the funds trade under the following trading symbols:
Shares of the funds may be acquired or redeemed directly from the funds only in Creation Units or
multiples thereof; as discussed in the “Creation and Redemption” section below. Once created,
shares of the funds trade in the secondary market in amounts less than a Creation Unit. The funds
do not impose any minimum investment for shares of the funds purchased on an exchange or in the
secondary market. Except when aggregated in Creation Units, shares are not redeemable by the
funds.
Share Trading Prices
As with other types of securities, the trading prices of shares in the secondary market can be
affected by market forces such as supply and demand, economic conditions and other factors. The
price you pay or receive when you buy or sell your shares in the secondary market may be more a
premium or less a discount than the NAV of such shares.
The approximate value of shares of the funds are disseminated every fifteen seconds throughout the
trading day by the national securities exchange on which the funds are listed or by other
information providers. This approximate value should not be viewed as a “real-time” update of the
NAV, because the approximate value may not be calculated in the same manner as the NAV, which is
computed once per day. The approximate value generally is determined by using current market
quotations and/or price quotations obtained from broker-dealers that may trade in the portfolio
securities held by the funds. The funds and adviser are not involved in, or responsible for, the
calculation or dissemination of the approximate value and make no warranty as to its accuracy.
Determination of Net Asset Value
The NAV of the funds’ shares is calculated as of the close of regular trading on the New York Stock
Exchange, generally 4:00 p.m. Eastern time, on each day the NYSE is open for trading (each, a
“Business Day”). NAV per share is calculated by dividing the funds’ net assets by the number of
funds’ shares outstanding.
In valuing their securities, the funds use market quotes or official closing prices if they are
readily available. In cases where quotes are not readily available, the funds may value securities
based on fair values developed using methods approved by the funds’ Board of Trustees (described
below). When valuing fixed income securities with remaining maturities of more than 60 days, the
funds use the value of the security provided by pricing services. The pricing services may value
fixed income securities at an evaluated price by employing methodologies that utilize actual market
transaction, broker-supplied valuations, or other methodologies designed to identify the market
value for such securities. When valuing fixed income securities with remaining maturities of
60 days or less, the funds may use the security’s amortized cost, which approximates the security’s
market value. When valuing an option, future or swap, the funds use the value provided by a pricing
service, if available.
The funds’ Board of Trustees has adopted procedures, which include fair value methodologies, to
fair value the funds’ securities when market prices are not “readily available” or are unreliable.
For
example, the funds may fair value a security when a security is de-listed or its trading is halted
or suspended; when a security’s primary pricing source is unable or unwilling to provide a price;
when a security’s primary trading market is closed during regular market hours; or when a
security’s value is materially affected by events occurring after the close of the security’s
primary trading market. By fair valuing securities whose prices may have been affected by events
occurring after the close of trading, the funds seek to establish prices that investors might
expect to realize upon the current sales of these securities. The funds’ fair value methodologies
seeks to ensure that the prices at which the funds’ shares are purchased and redeemed are fair and
do not result in dilution of shareholder interest or other harm to shareholders. Generally, when
fair valuing a security, the funds will take into account all reasonably available information that
may be relevant to a particular valuation including, but not limited to, fundamental analytical
data regarding the issuer, information relating to the issuer’s business, recent trades or offers
of the security, general and specific market conditions and the
specific facts giving rise to the
need to fair value the security. The funds make fair value determinations in good faith and in
accordance with the fair value methodologies included in the Board adopted valuation procedures.
Due to the subjective and variable nature of fair value pricing, there can be no assurance that the
funds could obtain the fair value assigned to the security upon the sale of such security.
Transactions in funds’ shares will be priced at NAV only if you purchase or redeem shares directly
from the funds in Creation Units. Fund shares that are purchased or sold on a national securities
exchange will be effected at prevailing market prices, which may be higher or lower than NAV, and
may be subject to brokerage commissions and charges. As described below, purchases and redemptions
of Creation Units will be priced at the NAV next determined after receipt of the purchase or
redemption order.
PURCHASE AND REDEMPTION OF CREATION UNITS
Creation and Redemption
The shares that trade in the secondary market are “created” at NAV. The funds issue and redeem
shares only in Creation Units, which are large blocks of shares, typically 25,000 shares or more.
Only institutional investors, who have entered into an authorized participant agreement (known as
“Authorized Participants”), may purchase or redeem Creation Units. Creation Units generally are
issued and redeemed in exchange for a specified basket of securities approximating the holdings of
the funds and a designated amount of cash. Each Business Day, prior to the opening of trading, the
funds publish the specific securities and designated amount of cash included in that day’s basket
for the funds through the National Securities Clearing Corporation (“NSCC”) or other method of
public dissemination. The funds reserve the right to accept or pay out a basket of securities or
cash that differs from the published basket. The prices at which creations and redemptions occur
are based on the next calculation of NAV after an order is received and deemed acceptable by the
Distributor. Orders from Authorized Participants to create or redeem Creation Units will only be
accepted on a Business Day and are also subject to acceptance by the funds and the Distributor.
Creations and redemptions must be made by an Authorized Participant or through a firm that is
either a member of the Continuous Net Settlement System of the NSCC or a Depository Trust Company
(“DTC”) participant, and in each case, must have executed an agreement with the Distributor with
respect to creations and redemptions of Creation Unit aggregations. Information
about the procedures regarding creation and redemption of Creation Units is included in the funds’
Statement of Additional Information (“SAI”).
Authorized Participants and the Continuous Offering of Shares
Because new shares may be created and issued on an ongoing basis, at any point during the life of
the funds, a “distribution,” as such term is used in the Securities Act of 1933 (“Securities Act”),
may be occurring. Broker-dealers and other persons are cautioned that some activities on their part
may, depending on the circumstances, result in them being deemed participants in a distribution in
a manner that could render them statutory underwriters and subject to the prospectus-delivery and
liability provisions of the Securities Act. Nonetheless, any determination of whether one is an
underwriter must take into account all the relevant facts and circumstances of each particular
case.
Broker-dealers should also note that dealers who are not “underwriters,” but are participating in a
distribution (as contrasted to ordinary secondary transactions), 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. For delivery of prospectuses to exchange members, the prospectus delivery
mechanism of Rule 153 under the Securities Act is only available with respect to transactions on a
national securities exchange.
Creation and Redemption Transaction Fees for Creation Units
The funds may impose a creation transaction fee and a redemption transaction fee to offset transfer
and other transaction costs associated with the issuance and redemption of Creation Units of
shares. The creation and redemption transaction fees applicable to the funds are listed below. The
standard creation transaction fee is charged to each purchaser on the day such purchaser creates a
Creation Unit. The standard fee is a single charge and will be the amount indicated below
regardless of the number of Creation Units purchased by an investor on the same day. Similarly, the
standard redemption transaction fee will be the amount indicated regardless of the number of
Creation Units redeemed that day. Purchasers and redeemers of Creation Units for cash will be
subject to an additional variable charge up to four times the additional amount shown below under
“Additional Creation/Redemption Transaction Fee” to offset the transaction cost to the funds of
buying portfolio securities. In addition, purchasers and redeemers of shares in Creation Units are
responsible for payment of the costs of transferring securities to or out of the funds. From time
to time, the Adviser may cover the cost of any transaction fees when believed to be in the best
interests of the funds.
The following table also shows, as of November 3, 2009, the approximate value of one Creation Unit
of the funds, including the standard creation and redemption transaction fee. These fees are
payable only by investors who purchase shares directly from the funds. Retail investors who
purchase shares through their brokerage account will not pay these fees. Investors who use the
services of a broker or other such intermediary may pay fees for such services.
Policy regarding short-term or excessive trading. The funds have adopted policies and procedures
with respect to frequent purchases and redemptions of Creation Units of fund shares. However,
because the funds are ETFs, only Authorized Participants are authorized to purchase and redeem
shares directly with the funds. Because purchase and redemption transactions with Authorized
Participants are an essential part of the ETF process and help keep ETF trading prices in line with
NAV, the funds accommodate frequent purchases and redemptions by Authorized Participants. Frequent
purchases and redemptions for cash may increase index tracking error and portfolio transaction
costs and may lead to realization of capital gains. Frequent in-kind creations and redemptions do
not give rise to these concerns. The funds reserve the right to reject any purchase order at any
time.
The funds reserve the right to impose restrictions on disruptive, excessive, or short-term trading.
Such trading is defined by the funds as purchases and sales of fund shares in amounts and
frequency determined by the funds to be significant and in a pattern of activity that can
potentially be detrimental to the funds and their shareholders, such as by diluting the value of
the shareholders’ holdings, increasing fund transaction costs, disrupting portfolio management
strategy, incurring unwanted taxable gains, or forcing funds to hold excess levels of cash. The
funds may reject purchase or redemption orders in such instances. The funds also impose a
transaction fee on Creation Unit transactions that is designed to offset the funds’ transfer and
other transaction costs associated with the issuance and redemption of the Creation Units.
Although the funds have adopted policies and procedures designed to discourage disruptive,
excessive or short-term trading, there can be no guarantee that the funds will be able to identify
and restrict investors that engage in such activities or eliminate the risks associated with such
activities. In addition, the decisions to restrict trading are inherently subjective and involve
judgment in their application. The funds may amend these policies and procedures in response to
changing regulatory requirements or to enhance their effectiveness.
Investments by Registered Investment Companies. Section 12(d)(1) of the Investment Company Act of
1940 restricts investments by registered investment companies in the securities of other investment
companies, including shares of the funds. Registered investment companies are permitted to invest
in the funds beyond the limits set forth in section 12(d)(1), subject to certain terms and
conditions set forth in an SEC exemptive order issued to the Schwab Strategic Trust, including that
such investment companies enter into an agreement with the funds.
Portfolio holdings information
A description of the funds’ policies and procedures with respect to the disclosure of the funds’
portfolio securities is available in the funds’ SAI.
Distributions and Taxes
Any investment in the funds typically involves several tax considerations. The information below is
meant as a general summary for U.S. citizens and residents. Because each person’s tax situation is
different, you should consult your tax advisor about the tax implications of your investment in a
fund. You also can visit the Internal Revenue Service (IRS) web site at www.irs.gov.
As a shareholder, you are entitled to your share of the dividends and gains your fund earns.
Dividends from net investment income, if any, are generally declared and paid quarterly by each
fund. Distributions of net realized capital gains, if any, generally are declared and paid once a
year, although the Trust may do so more frequently as determined by the Trustees of the Trust.
The Trust reserves the right to declare special distributions if, in its reasonable discretion,
such action is necessary or advisable to preserve its status as a regulated investment company
(“RIC”) or to avoid imposition of income or excise taxes on undistributed income or realized gains.
Dividends and other distributions on shares of the funds are distributed on a pro rata basis to
beneficial owners of such shares. During the fourth quarter of the year, typically in early
November, an estimate of the funds’ year-end net capital gains distribution, if any, may be made
available on the funds’ website www.schwab.com/SchwabETFs.
Unless you are investing through an IRA, 401(k) or other tax-advantaged retirement account, your
fund distributions generally have tax consequences. Each fund’s net investment income and
short-term capital gains are distributed as dividends and will be taxable as ordinary income or
qualified dividend income. Other capital gain distributions are taxable as long-term capital gains,
regardless of how long you have held your shares in the fund. Distributions generally are taxable
in the tax year in which they are declared, whether you reinvest them or take them in cash.
Generally, any sale of your shares is a taxable event. A sale of your shares may give rise to a
gain or loss. In general, any gain or loss realized upon a taxable disposition of shares will be
treated as long-term capital gain or loss if the shares have been held for more than 12 months.
Otherwise, the gain or loss on the taxable disposition of shares will be treated as short-term
capital gain or loss. Absent further legislation, the reduced maximum rates on qualified dividend
income and long-term capital gains will cease to apply to taxable years beginning after December31, 2010. Any loss realized upon a taxable disposition of shares held for six months or less will
be treated as long-term, rather than short-term, to the extent of any long-term capital gain
distributions received (or deemed received) by you with respect to the shares. All or a portion of
any loss realized upon a taxable
disposition of shares will be disallowed if you purchase other substantially identical shares
within 30 days before or after the disposition. In such a case, the basis of the newly purchased
shares will be adjusted to reflect the disallowed loss.
At the beginning of every year, the funds provide shareholders with information detailing the tax
status of any distributions the funds paid during the previous calendar year. Schwab customers also
receive information on distributions and transactions in their monthly account statements.
More on qualified dividend income and distributions. Dividends that are designated by the funds as
qualified dividend income are eligible for a reduced maximum tax rate. Qualified dividend income
is, in general, dividend income from taxable domestic corporations and certain foreign
corporations. The funds expects that a portion of the funds’ ordinary income distributions will be
eligible to be treated as qualified dividend income subject to the reduced tax rates.
If you are investing through a taxable account and purchase shares of the funds just before it
declares a distribution, you may receive a portion of your investment back as a taxable
distribution. This is because when the funds make a distribution, the share price is reduced by the
amount of the distribution.
You can avoid “buying a dividend,” as it is often called, by finding out if a distribution is
imminent and waiting until afterwards to invest. Of course, you may decide that the opportunity to
gain a few days of investment performance outweighs the tax consequences of buying a dividend.
Taxes on Creation and Redemption of Creation Units
An Authorized Participant who exchanges securities for Creation Units generally will recognize a
gain or a loss equal to the difference between the market value of the Creation Units at the time
of the exchange and the sum of the exchanger’s aggregate basis in the securities surrendered and
the cash component paid. A person who redeems Creation Units will generally recognize a gain or
loss equal to the difference between the exchanger’s basis in the Creation Units and the sum of the
aggregate market value of the securities and the amount of cash received for such Creation Units.
The Internal Revenue Service, however, 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. Persons exchanging
securities for Creation Units should consult a tax advisor with respect to whether wash sale rules
apply and when a loss might be deductible.
Any capital gain or loss realized upon a redemption (or creation) of Creation Units is generally
treated as long-term capital gain or loss if the funds’ shares (or securities surrendered) have
been held for more than one year and as short-term capital gain or loss if the shares (or
securities surrendered) have been held for one year or less.
If you purchase or redeem Creation Units, you will be sent a confirmation statement showing how
many shares you purchased or sold and at what price. Persons purchasing or redeeming Creation Units
should consult their own tax advisors with respect to the tax treatment of any creation or
redemption transaction.
Dow Jones Indexes, a business unit of Dow Jones & Company, Inc., is a full service index provider
which develops, maintains and licenses indexes for use as benchmarks and as the basis of investment
products. Dow Jones & Company is a News Corporation company (NYSE: NWS). Dow Jones is a leading
provider of global business news and information services.
CSIM has entered into a license agreement with Dow Jones to use the Indexes (as defined below).
Fees payable under the license agreement are paid by CSIM. Dow Jones has no obligation to continue
to provide the Indexes to CSIM beyond the term of the license agreement.
DISCLAIMERS
The funds are not sponsored, endorsed, sold or promoted by Dow Jones. Dow Jones makes 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 trading in the funds. Dow Jones’ only relationship to
CSIM is the licensing of certain trademarks and trade names of Dow Jones and of the Dow Jones U.S.
Broad Stock Market IndexSM, Dow Jones U.S. Large-Cap Total Stock Market
IndexSM, Dow Jones U.S. Large-Cap Growth Total Stock Market IndexSM, Dow
Jones U.S. Large-Cap Value Total Stock Market IndexSM, and Dow Jones U.S. Small-Cap
Total Stock Market IndexSM (the “Indexes”) which is determined, composed and calculated
by Dow Jones without regard to CSIM or the funds, Dow Jones has no obligation to take the needs of
CSIM or the owners of shares of the funds into consideration in determining, composing or
calculating the Indexes. Dow Jones is not responsible for and has not participated in the
determination of the timing of, prices at, or quantities of the shares of the funds to be listed or
in the determination or calculation of the equation by which the shares of the funds are to be
redeemable for cash. Dow Jones has no obligation or liability in connection with the
administration, marketing or trading of the funds.
DOW JONES DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE INDEXES OR ANY DATA
INCLUDED THEREIN AND DOW JONES SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS
THEREIN. DOW JONES MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY CSIM,
OWNERS OF THE SHARES OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF INDEXES OR ANY
DATA INCLUDED THEREIN. DOW JONES MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS
ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
INDEXES OR ANY DATA INCLUDED THEREIN, WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL DOW
JONES HAVE ANY LIABILITY FOR ANY LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL
DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. THERE ARE
NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN DOW JONES AND CSIM.
Shares of the funds are not sponsored, endorsed or promoted by NYSE Arca. NYSE Arca makes no
representation or warranty, express or implied, to the owners of the shares of the funds or any
member of the public regarding the ability of the funds to track the total return performance of
the Underlying Index or the ability of the Underlying Index to track stock market performance.
NYSE Arca is not responsible for, nor has it participated in, the determination of the compilation
or the calculation of the Underlying Index, nor in the determination of the timing of, prices of,
or quantities of shares of the funds to be issued, nor in the determination or calculation of the
equation by which the shares are redeemable. NYSE Arca has no obligation or liability to owners of
the shares of the funds in connection with the administration, marketing or trading of the shares
of the funds.
NYSE Arca shall have no liability for damages, claims, losses or expenses caused by any errors,
omissions, or delays in calculating or disseminating any current index or portfolio value the
current value of the portfolio of securities required to be deposited to the funds; the amount of
any dividend equivalent payment or cash distribution to holders of shares of the funds; net asset
value; or other information relating to the creation, redemption or trading of shares of the funds,
resulting from any negligent act or omission by NYSE Arca, or any act, condition or cause beyond
the reasonable control of NYSE Arca, including, but not limited to, an act of God; fire; flood;
extraordinary weather conditions; war; insurrection; riot; strike; accident; action of government;
communications or power failure; equipment or software malfunction; or any error, omission or delay
in the reporting of transactions in one or more underlying securities. NYSE Arca makes no warranty,
express or implied, as to results to be obtained by any person or entity from the use of any
underlying index or data included therein and NYSE Arca makes no express or implied warranties, and
disclaims all warranties of merchantability or fitness for a particular purpose with respect to
shares of the funds or any underlying index or data included therein.
THE FUNDS AND CSIM DO NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE INDEXES OR ANY DATA
INCLUDED THEREIN AND SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN.
THE FUNDS AND CSIM MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE FUNDS,
OR ANY OTHER PERSON OR ENTITY FROM THE USE OF INDEXES OR ANY DATA INCLUDED THEREIN. THE FUNDS AND
CSIM MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE INDEXES OR ANY DATA
INCLUDED THEREIN, WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL THE FUNDS AND CSIM HAVE
ANY LIABILITY FOR ANY LOST PROFITS OR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
We do not and will not sell your personal information to anyone, for any reason.
We are committed to protecting the privacy of information we maintain about you. Below are details
about our commitment, including the types of information we collect and how we use and share that
information. This Privacy Notice applies to you only if you are an individual who invests directly
in the funds by placing orders through the funds’ transfer agent. If you place orders through your
brokerage account at Charles Schwab & Co., Inc. or an account with another broker-dealer,
investment advisor, 401(k) plan, employee benefit plan, administrator, bank or other financial
intermediary, you are covered by the privacy policies of that financial institution and should
consult those policies.
How We Collect Information About You
We collect personal information about you in a number of ways.
•
Application and registration information. We collect personal information from you when you
open an account or utilize one of our services. We may also collect information about you from
third parties such as consumer reporting agencies to verify your identity. The information we
collect may include personal information, including your Social Security number, as well as
details about your interests, investments and investment experience.
•
Transaction and experience information. Once your account has been opened, we collect and
maintain personal information about your account activity, including your transactions,
balances, positions and history. This information allows us to administer your account and
provide the services you have requested.
•
Website usage. When you visit our websites, we may use devices known as “cookies,” graphic
interchange format files (GIFs), or other similar web tools to enhance your web experience.
These tools help us to recognize you, maintain your web session, and provide a more
personalized experience. To learn more, please click the Privacy link on our website.
How We Share and Use Your Information
We provide access to information about you to our affiliated companies, outside companies and other
third parties in certain limited circumstances, including:
when we use other companies to provide services for us, such as printing and mailing your
account statements;
•
when we believe that disclosure is required or permitted under law (for example, to cooperate
with regulators or law enforcement, resolve consumer disputes, perform credit/authentication
checks, or for risk control).
State Laws
We will comply with state laws that apply to the disclosure or use of information about you.
Safeguarding Your Information—Security Is a Partnership
We take precautions to ensure the information we collect about you is protected and is accessed
only by authorized individuals or organizations.
Companies we use to provide support services are not allowed to use information about our
shareholders for their own purposes and are contractually obligated to maintain strict
confidentiality. We limit their use of information to the performance of the specific services we
have requested.
We restrict access to personal information by our employees and agents. Our employees are trained
about privacy and are required to safeguard personal information.
We maintain physical, electronic and procedural safeguards that comply with federal standards to
guard your nonpublic personal information.
Contact Us
To provide us with updated information, report suspected fraud or identity theft, or for any other
questions, please call one of the numbers below.
This prospectus contains important information on the funds and should be read and kept for
reference. You also can obtain more information from the following sources.
Annual and semi-annual reports, which are mailed to current fund investors, contain more
information about the funds’ holdings and detailed financial information about the funds. Annual
reports also contain information from the funds’ managers about strategies, recent market
conditions and trends and their impact on fund performance.
The Statement of Additional Information (SAI) includes a more detailed discussion of investment
policies and the risks associated with various investments. The SAI is incorporated by reference
into the prospectus, making it legally part of the prospectus.
For a free copy of any of these documents or to request other information or ask questions about
the funds, call Schwab
ETFs™ at 1-800-435-4000. In addition, you may visit Schwab
ETFs web site at www.schwab.com/SchwabETFProspectus for a free copy of a prospectus, SAI or an annual or
semi-annual report.
The SAI, the funds’ annual and semi-annual reports and other related materials are available from
the EDGAR Database on the SEC’s web site (http://www.sec.gov). You can obtain copies of this
information, after paying a duplicating fee, by sending a request by e-mail to publicinfo@sec.gov
or by writing the Public Reference Section of the SEC, Washington, D.C. 20549-1520. You can also
review and copy information about the funds, including the funds’ SAI, at the SEC’s Public
Reference Room in Washington, D.C. Call 1-202-551-8090 for information on the operation of the
SEC’s Public Reference Room.
THE
INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT
COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL
THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IS EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS
NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN OFFER
TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED. THE STATEMENT OF ADDITIONAL INFORMATION IS NOT A
PROSPECTUS.
STATEMENT OF ADDITIONAL INFORMATION
Schwab ETFs
Schwab U.S. Broad Market ETF™
Schwab U.S. Large-Cap ETF™
Schwab U.S. Large-Cap Growth ETF™
Schwab U.S. Large-Cap Value ETF™
Schwab U.S. Small-Cap ETF™
Schwab International Equity ETF™
Schwab International Small-Cap Equity ETF™
Schwab Emerging Markets Equity ETF™
The Statement of Additional Information (SAI) is not a prospectus. It should be read in conjunction
with the funds’ prospectuses, each dated November 3, 2009 (as amended from time to time). To obtain
a free copy of any of the prospectuses, please contact Schwab ETFs at 1-800-435-4000. For TDD
service call 1-800-345-2550. The prospectus also may be available on the Internet at:
http://www.schwab.com/SchwabETFProspectus.
Each fund is a series of the Schwab Strategic Trust (the trust). The funds are part of the Schwab
complex of funds (“Schwab Funds®”).
INVESTMENT OBJECTIVES, STRATEGIES, RISKS AND LIMITATIONS
Investment Objectives
Each fund’s investment objective is not fundamental and therefore may be changed by the funds’
board of trustees without shareholder approval.
The Schwab U.S. Broad Market ETF™ seeks to track as closely as possible, before fees and expenses,
the total return of the Dow Jones U.S. Broad Stock Market Index.
The Schwab U.S. Large-Cap ETF™ seeks to track as closely as possible, before fees and expenses, the
total return of the Dow Jones U.S. Large-Cap Total Stock Market Index.
The Schwab U.S. Large-Cap Growth ETF™ seeks to track as closely as possible, before fees and
expenses, the total return of the Dow Jones U.S. Large-Cap Growth Total Stock Market Index.
The Schwab U.S. Large-Cap Value ETF™ seeks to track as closely as possible, before fees and
expenses, the total return of the Dow Jones U.S. Large-Cap Value Total Stock Market Index.
The Schwab U.S. Small-Cap ETF™ seeks to track as closely as possible, before fees and expenses, the
total return of the Dow Jones U.S. Small-Cap Total Stock Market Index.
The Schwab International Equity ETF™ seeks to track as closely as possible, before fees and
expenses, the total return of the FTSE Developed ex-US Index.
The Schwab International Small-Cap Equity ETF™ seeks to track as closely as possible, before fees
and expenses, the total return of the FTSE Developed Small Cap ex-US Liquid Index.
The Schwab Emerging Markets Equity ETF™ seeks to track as closely as possible, before fees and
expenses, the total return of the FTSE All-Emerging Index.
There is no guarantee the funds will achieve their investment objectives.
Description of Benchmark Indices
The Schwab U.S. Broad Market ETF’s benchmark index, Dow Jones U.S. Broad Stock Market
IndexSM, includes the largest 2,500 publicly traded U.S. companies for which pricing
information is readily available. The index is a float-adjusted market capitalization weighted
index that reflects the shares of securities actually available to investors in the marketplace.
As of June 30, 2009, the index was composed of 2,493 stocks.
The Schwab U.S. Large-Cap ETF’s benchmark index, Dow Jones U.S. Large-Cap Total Stock Market
IndexSM, includes the large-cap portion of the Dow Jones U.S. Total Stock Market Index
actually available to investors in the marketplace. The Dow Jones U.S. Large-Cap Total Stock
Market Index includes the components ranked 1-750 by full market capitalization. The index is a
float-adjusted market capitalization weighted index. As of June 30, 2009, the index was comprised
of 743 stocks.
The Schwab U.S. Large-Cap Growth ETF’s benchmark index, Dow Jones U.S. Large-Cap Growth Total Stock
Market IndexSM, includes the large-cap portion of the Dow Jones U.S. Total Stock Market
Index actually available to investors in the marketplace. The Dow Jones U.S. Large-Cap Growth
Total Stock Market Index includes the components ranked 1-750 by full market capitalization and
that are classified as “growth” based on a number of factors. The index is a float-adjusted market
capitalization weighted index. As of June 30, 2009, the index was comprised of 433 stocks.
The Schwab U.S. Large-Cap Value ETF’s benchmark index, Dow Jones U.S. Large-Cap Value Total Stock
Market IndexSM, includes the large-cap portion of the Dow Jones U.S. Total Stock Market
Index actually available to investors in the marketplace. The Dow Jones U.S. Large-Cap Value Total
Stock Market Index includes the components ranked 1-750 by full market capitalization and that are
classified as “value” based on a number of factors. The index is a float-adjusted market
capitalization weighted index. As of June 30, 2009, the index was comprised of 310 stocks.
The Schwab U.S. Small-Cap ETF’s benchmark index, Dow Jones U.S. Small-Cap Total Stock Market
IndexSM, includes the small-cap portion of the Dow Jones U.S. Total Stock Market
Indexactually available to investors in the marketplace. The Dow Jones U.S. Small-Cap
Total Stock Market Index includes the components ranked 751-2500 by full market capitalization.
The index is a float-adjusted market capitalization weighted index. As of June 30, 2009, the index
was comprised of 1,750 stocks.
The Schwab International Equity ETF’s benchmark, the FTSE Developed ex-US Index, is comprised of
large and mid capitalization companies in developed countries outside the United States, as defined
by the index provider. The index defines the large and mid capitalization universe as
approximately the top 90% of the eligible universe. As of June 30, 2009, the index was composed of
1,325 stocks in 23 developed market countries.
The Schwab International Small-Cap Equity ETF’s benchmark, the FTSE Developed Small Cap ex-US
Liquid Index, is comprised of small capitalization companies in developed countries outside the
United States, as defined by the index provider. The index defines the small capitalization
universe as approximately the bottom 10% of the eligible universe with a minimum free float
capitalization of $150 million. As of June 30, 2009, the index was composed of 1820 stocks in 23
developed market countries.
The Schwab Emerging Markets Equity ETF’s benchmark, the FTSE All-Emerging Index, is comprised of
large and mid capitalization companies in emerging market countries, as defined by the index
provider. The index defines the large and mid capitalization universe as approximately the top 90%
of the eligible universe. As of June 30, 2009, the index was composed of 824 stocks in 23 emerging
market countries.
Dow Jones Indexes, a business unit of Dow Jones & Company, Inc., is a full service index
provider which develops, maintains and licenses indexes for use as benchmarks and as the basis of
investment products. Dow Jones & Company, Inc. is a News Corporation company (NYSE: NWS). Dow
Jones is a leading provider of global business news and information services. Dow Jones’ only
relationship to the funds and CSIM (as defined herein) is the licensing of certain
trademarks and trade names of Dow Jones and of the Dow Jones U.S. Broad Stock Market
IndexSM, Dow Jones U.S. Large-Cap Total Stock Market IndexSM, Dow Jones U.S.
Large-Cap Growth Total Stock Market IndexSM, Dow Jones U.S. Large-Cap Value Total Stock
Market IndexSM, and Dow Jones U.S. Small-Cap Total Stock Market IndexSM (the
“Dow Jones Indexes”). The funds are not sponsored, endorsed, sold or promoted by Dow Jones.
DOW JONES DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE DOW JONES INDEXES OR
ANY DATA INCLUDED THEREIN AND DOW JONES SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR
INTERRUPTIONS THEREIN. DOW JONES MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE
OBTAINED BY CSIM, OWNERS OF THE SHARES OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF
DOW JONES INDEXES OR ANY DATA INCLUDED THEREIN. DOW JONES MAKES NO EXPRESS OR IMPLIED WARRANTIES,
AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR
USE WITH RESPECT TO THE DOW JONES INDEXES OR ANY DATA INCLUDED THEREIN, WITHOUT LIMITING ANY OF THE
FOREGOING, IN NO EVENT SHALL DOW JONES HAVE ANY LIABILITY FOR ANY LOST PROFITS OR INDIRECT,
PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR
ARRANGEMENTS BETWEEN DOW JONES AND CSIM.
FTSE International Limited (“FTSE”) is an independent company whose sole business is the
creation and management of indexes and associated data services. FTSE is a joint venture between
The Financial Times Limited (“FT”) and the London Stock Exchange Plc (the “Exchange”). FTSE
calculates more than 60,000 indexes daily, including more than 600 real-time indexes.
“FTSEtm” is a trademark jointly owned by the Exchange and FT and is used by
FTSE under license. FTSE is not affiliated with the funds, CSIM (as defined herein), the
Distributor (as defined herein) or any of their respective affiliates. The funds are not
sponsored, endorsed, sold or promoted by FTSE, FT or the Exchange. FTSE, FT and the Exchange 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 trading in the funds, and make no warranty or
representation whatsoever, expressly or impliedly, either as to the results to be obtained from the
use of the FTSE Indexes and/or the figure at which the said FTSE Index stands at any particular
time on any particular day or otherwise.
Shares of the funds are not sponsored, endorsed or promoted by NYSE Arca. NYSE Arca makes no
representation or warranty, express or implied, to the owners of the shares of the funds or any
member of the public regarding the ability of the funds to track the total return performance of
the underlying index or the ability of the underlying index to track stock market performance.
NYSE Arca is not responsible for, nor has it participated in, the determination of the compilation
or the calculation of the underlying index, nor in the determination of the timing of, prices of,
or quantities of shares of the funds to be issued, nor in the determination or calculation of the
equation by which the shares are redeemable. NYSE Arca has no obligation or liability to owners of
the shares of the funds in connection with the administration, marketing or trading of the shares
of the funds.
NYSE Arca shall have no liability for damages, claims, losses or expenses caused by any errors,
omissions, or delays in calculating or disseminating any current index or portfolio value the
current value of the portfolio of securities required to be deposited to the funds; the amount of
any dividend equivalent payment or cash distribution to holders of shares of the funds; net asset
value; or other information relating to the creation, redemption or trading of shares of the funds,
resulting from any negligent act or omission by NYSE Arca, or any act, condition or cause beyond
the reasonable control of NYSE Arca, including, but not limited to, an act of God; fire; flood;
extraordinary weather conditions; war; insurrection; riot; strike; accident; action of government;
communications or power failure; equipment or software malfunction; or any error, omission or delay
in the reporting of transactions in one or more underlying securities. NYSE Arca makes no warranty,
express or implied, as to results to be obtained by any person or entity from the use of any
underlying index or data included therein and NYSE Arca makes no express or implied warranties, and
disclaims all warranties of merchantability or fitness for a particular purpose with respect to
shares of the funds or any underlying index or data included therein.
Fund Investment Policies
The Schwab U.S. Broad Market ETF™ will, under normal circumstances, invest at least 90% of its net
assets in the stocks of its benchmark index. The fund will notify its shareholders at least 60 days
before changing this policy. For purposes of this policy, net assets mean net assets plus the
amount of any borrowings for investment purposes.
The Schwab U.S. Large-Cap ETF™ will, under normal circumstances, invest at least 90% of its net
assets in the stocks of its benchmark index. The fund will notify its shareholders at least 60 days
before changing this policy. For purposes of this policy, net assets mean net assets plus the
amount of any borrowings for investment purposes.
The Schwab U.S. Large-Cap Growth ETF™ will, under normal circumstances, invest at least 90% of its
net assets in the stocks of its benchmark index. The fund will notify its shareholders at least 60
days before changing this policy. For purposes of this policy, net assets mean net assets plus the
amount of any borrowings for investment purposes.
The Schwab U.S. Large-Cap Value ETF™ will, under normal circumstances, invest at least 90% of its
net assets in the stocks of its benchmark index. The fund will notify its shareholders at least 60
days before changing this policy. For purposes of this policy, net assets mean net assets plus the
amount of any borrowings for investment purposes.
The Schwab U.S. Small-Cap ETF™ will, under normal circumstances, invest at least 90% of its net
assets in the stocks of its benchmark index. The fund will notify its shareholders at least 60 days
before changing this policy. For purposes of this policy, net assets mean net assets plus the
amount of any borrowings for investment purposes.
The Schwab International Equity ETF™ will, under normal circumstances, invest at least 90% of its
net assets in the stocks of its benchmark index, including depositary receipts representing
securities of the index; which may be in the form of American Depositary Receipts (“ADRs”), Global
Depositary Receipts (“GDRs”) and European Depositary Receipts (“EDRs”). The fund will notify its
shareholders at least 60 days before changing this policy. For purposes of this policy, net assets
mean net assets plus the amount of any borrowings for investment purposes.
The Schwab International Small-Cap Equity ETF™ will, under normal circumstances, invest at least
90% of its net assets in the stocks of its benchmark index, including depositary receipts
representing securities of the index; which may be in the form of ADRs, GDRs and EDRs. The fund
will notify its shareholders at least 60 days before changing this policy. For purposes of this
policy, net assets mean net assets plus the amount of any borrowings for investment purposes.
The Schwab Emerging Markets Equity ETF™ will, under normal circumstances, invest at least 90% of
its net assets in the stocks of its benchmark index, including depositary receipts representing
securities of the index; which may be in the form of ADRs, GDRs and EDRs. The fund will notify its
shareholders at least 60 days before changing this policy. For purposes of this policy, net assets
mean net assets plus the amount of any borrowings for investment purposes.
Investments, Risks and Limitations
The following investment strategies, risks and limitations supplement those set forth in the
prospectus and may be changed without shareholder approval unless otherwise noted. Also, policies
and limitations that state a maximum percentage of assets that may be invested in a security or
other asset, or that set forth a quality standard, shall be measured immediately after and as a
result of a fund’s acquisition of such security or asset unless otherwise noted. Thus, except with
respect to limitations on borrowing and futures and option contracts, any subsequent change in
values, net assets or other circumstances does not require a fund to sell an investment if it could
not then make the same investment.
Principal Investment Strategy Investments
Unless otherwise indicated, the following investments may be used as part of each fund’s
principal investment strategy.
Concentration means that substantial amounts of assets are invested in a particular industry or
group of industries. Concentration increases investment exposure to industry risk. For example, the
automobile industry may have a greater exposure to a single factor, such as an increase in the
price of oil, which may adversely affect the sale of automobiles and, as a result, the value of the
industry’s securities. As part of each fund’s principal investment strategy, each fund will not
concentrate its investments in a particular industry or group of industries, except that each fund
will concentrate to approximately the same extent that its benchmark index concentrates in the
securities of such particular industry or group of industries.
Depositary Receipts (Principal investments for Schwab International Equity ETF, Schwab
International Small-Cap Equity ETF and Schwab Emerging Markets Equity ETF. Permissible
non-principal investments for each other fund). Depositary receipts include American Depositary
Receipts (ADRs) as well as other “hybrid” forms of ADRs, such as European Depositary Receipts
(EDRs) and Global Depositary Receipts (GDRs), are certificates evidencing ownership of shares of a
foreign issuer. Depositary receipts may be sponsored or unsponsored. These certificates are issued
by depository banks and generally trade on an established market in the United States or elsewhere.
The underlying shares are held in trust by a custodian bank or similar financial institution in the
issuer’s home country. The depository bank may not have physical custody of the underlying
securities at all times and may charge fees for various services,
including forwarding dividends and interest and corporate actions. ADRs are alternatives to
directly purchasing the underlying foreign securities in their national markets and currencies.
However, ADRs continue to be subject to many of the risks associated with investing directly in
foreign securities.
Investments in the securities of foreign issuers may subject a fund to investment risks that differ
in some respects from those related to investments in securities of U.S. issuers. Such risks
include future adverse political and economic developments, possible imposition of withholding
taxes on income, possible seizure, nationalization or expropriation of foreign deposits, possible
establishment of exchange controls or taxation at the source or greater fluctuation in value due to
changes in exchange rates. Foreign issuers of securities often engage in business practices
different from those of domestic issuers of similar securities, and there may be less information
publicly available about foreign issuers. In addition, foreign issuers are, generally speaking,
subject to less government supervision and regulation and different accounting treatment than are
those in the United States.
Although the two types of depositary receipt facilities (unsponsored or sponsored) are similar,
there are differences regarding a holder’s rights and obligations and the practices of market
participants. A depository may establish an unsponsored facility without participation by (or
acquiescence of) the underlying issuer; typically, however, the depository requests a letter of
non-objection from the underlying issuer prior to establishing the facility. Holders of unsponsored
depositary receipts generally bear all the costs of the facility. The depository usually charges
fees upon the deposit and withdrawal of the underlying securities, the conversion of dividends into
U.S. dollars or other currency, the disposition of non-cash distributions, and the performance of
other services. The depository of an unsponsored facility frequently is under no obligation to
distribute shareholder communications received from the underlying issuer or to pass through voting
rights to depositary receipt holders with respect to the underlying securities.
Sponsored depositary receipt facilities are created in generally the same manner as unsponsored
facilities, except that sponsored depositary receipts are established jointly by a depository and
the underlying issuer through a deposit agreement. The deposit agreement sets out the rights and
responsibilities of the underlying issuer, the depository, and the depositary receipt holders. With
sponsored facilities, the underlying issuer typically bears some of the costs of the depositary
receipts (such as dividend payment fees of the depository), although most sponsored depositary
receipts holders may bear costs such as deposit and withdrawal fees. Depositories of most sponsored
depositary receipts agree to distribute notices of shareholder meetings, voting instructions, and
other shareholder communications and information to the depositary receipt holders at the
underlying issuer’s request.
Derivative Instruments are commonly defined to include securities or contracts whose values depend
on (or “derive” from) the value of one or more other assets such as securities, currencies, or
commodities. These “other assets” are commonly referred to as “underlying assets.” The principal
types of derivatives used by the funds are swaps, options, futures, options on futures and,
with respect to the Schwab International Equity ETF, Schwab International Small-Cap Equity ETF
and Schwab Emerging Markets Equity ETF, forward foreign currency contracts.
A derivative instrument generally consists of, is based upon, or exhibits characteristics similar
to options or forward contracts. Options and forward contracts are considered to be the basic
“building blocks” of derivatives. For example, forward-based derivatives include forward contracts,
as well as exchange-traded futures. Option-based derivatives include privately negotiated,
over-the-counter (OTC) options (including caps, floors, collars, and options on forward and swap
contracts) and exchange-traded options on futures. Diverse types of derivatives may be created by
combining options or forward contracts in different ways, and applying these structures to a wide
range of underlying assets. Risk management strategies include investment techniques designed to
facilitate the sale of portfolio securities, manage the average duration of the portfolio or create
or alter exposure to certain asset classes, such as equity, other debt or foreign securities.
Each fund may allocate up to 10% of its net assets to derivatives investments.
Diversification involves investing in a wide range of securities and thereby spreading and reducing
the risks of investment. Each fund is a series of an open-end investment management company with
limited redeemability. The funds are diversified exchange traded funds.
Emerging or Developing Markets (Principal investment for Schwab Emerging Markets Equity ETF only.
Permissible non-principal investment for all other funds.) Emerging or developing markets exist in
countries that are considered to be in the initial stages of industrialization. The risks of
investing in these markets are similar to the risks of international investing in general, although
the risks are greater in emerging and developing markets. Countries with emerging or developing
securities markets tend to have economic structures that are less stable than countries with
developed securities markets. This is because their economies may be based on only a few industries
and their securities markets may trade a small number of securities. Prices on these exchanges tend
to be volatile, and securities in these countries historically have offered greater potential for
gain (as well as loss) than securities of companies located in developed countries.
Equity Securities represent ownership interests in a company, and are commonly called “stocks.”
Equity securities historically have outperformed most other securities, although their prices can
fluctuate based on changes in a company’s financial condition, market conditions and political,
economic or even company-specific news. When a stock’s price declines, its market value is lowered
even though the intrinsic value of the company may not have changed. Sometimes factors, such as
economic conditions or political events, affect the value of stocks of companies of the same or
similar industry or group of industries, and may affect the entire stock market.
Types of equity securities include common stocks, preferred stocks, convertible securities,
warrants, ADRs, EDRs, and interests in real estate investment trusts, (for more information on real
estate investment trusts, “REITs”, see the section entitled “Real Estate Investment Trusts”).
Common stocks, which are probably the most recognized type of equity security, represent an equity
or ownership interest in an issuer and usually entitle the owner to voting rights in the
election of the corporation’s directors and any other matters submitted to the corporation’s
shareholders for voting, as well as to receive dividends on such stock. The market value of common
stock can fluctuate widely, as it reflects increases and decreases in an issuer’s earnings. In the
event an issuer is liquidated or declares bankruptcy, the claims of bond owners, other debt holders
and owners of preferred stock take precedence over the claims of common stock owners.
Preferred stocks are a permissible non-principal investment for each fund. Preferred stocks
represent an equity or ownership interest in an issuer but do not ordinarily carry voting rights,
though they may carry limited voting rights. Preferred stocks normally have preference over the
corporation’s assets and earnings, however. For example, preferred stocks have preference over
common stock in the payment of dividends. Preferred stocks normally pay dividends at a specified
rate. However, preferred stock may be purchased where the issuer has omitted, or is in danger of
omitting, payment of its dividend. Such investments would be made primarily for their capital
appreciation potential. In the event an issuer is liquidated or declares bankruptcy, the claims of
bond owners take precedence over the claims of preferred and common stock owners. Certain classes
of preferred stock are convertible into shares of common stock of the issuer. By holding
convertible preferred stock, a fund can receive a steady stream of dividends and still have the
option to convert the preferred stock to common stock. Preferred stock is subject to many of the
same risks as common stock and debt securities.
Convertible securities are a permissible non-principal investment for each fund. Convertible
securities are typically preferred stocks or bonds that are exchangeable for a specific number of
another form of security (usually the issuer’s common stock) at a specified price or ratio. A
convertible security generally entitles the holder to receive interest paid or accrued on bonds or
the dividend paid on preferred stock until the convertible security matures or is redeemed,
converted or exchanged. A corporation may issue a convertible security that is subject to
redemption after a specified date, and usually under certain circumstances. A holder of a
convertible security that is called for redemption would be required to tender it for redemption to
the issuer, convert it to the underlying common stock or sell it to a third party. The convertible
structure allows the holder of the convertible bond to participate in share price movements in the
company’s common stock. The actual return on a convertible bond may exceed its stated yield if the
company’s common stock appreciates in value and the option to convert to common stocks becomes more
valuable.
Convertible securities typically pay a lower interest rate than nonconvertible bonds of the same
quality and maturity because of the convertible feature. Convertible securities are also rated
below investment grade (“high yield”) or are not rated, and are subject to credit risk.
Prior to conversion, convertible securities have characteristics and risks similar to
nonconvertible debt and equity securities. In addition, convertible securities are often
concentrated in economic sectors, which, like the stock market in general, may experience
unpredictable declines in value, as well as periods of poor performance, which may last for several
years. There may be a small trading market for a particular convertible security at any given time,
which may adversely impact market price and a fund’s ability to liquidate a particular security or
respond to an economic event, including deterioration of an issuer’s creditworthiness.
Convertible preferred stocks are nonvoting equity securities that pay a fixed dividend. These
securities have a convertible feature similar to convertible bonds, but do not have a maturity
date. Due to their fixed income features, convertible securities provide higher income potential
than the issuer’s common stock, but typically are more sensitive to interest rate changes than the
underlying common stock. In the event of a company’s liquidation, bondholders have claims on
company assets senior to those of shareholders; preferred shareholders have claims senior to those
of common shareholders.
Convertible securities typically trade at prices above their conversion value, which is the current
market value of the common stock received upon conversion, because of their higher yield potential
than the underlying common stock. The difference between the conversion value and the price of a
convertible security will vary depending on the value of the underlying common stock and interest
rates. When the underlying value of the common stocks declines, the price of the issuer’s
convertible securities will tend not to fall as much because the convertible security’s income
potential will act as a price support. While the value of a convertible security also tends to rise
when the underlying common stock value rises, it will not rise as much because their conversion
value is more narrow. The value of convertible securities also is affected by changes in interest
rates. For example, when interest rates fall, the value of convertible securities may rise because
of their fixed income component.
Warrants are a permissible non-principal investment for each fund. Warrants are types of securities
usually issued with bonds and preferred stock that entitle the holder to purchase a proportionate
amount of common stock at a specified price for a specific period of time. The prices of warrants
do not necessarily move parallel to the prices of the underlying common stock. Warrants have no
voting rights, receive no dividends and have no rights with respect to the assets of the issuer. If
a warrant is not exercised within the specified time period, it will become worthless and a fund
will lose the purchase price it paid for the warrant and the right to purchase the underlying
security.
Initial Public Offering. As part of its non-principal investment strategy, each fund may purchase
shares issued as part of, or a short period after, a company’s initial public offering (“IPOs”),
and may at times dispose of those shares shortly after their acquisition. A fund’s purchase of
shares issued in IPOs exposes it to the risks associated with companies that have little operating
history as public companies, as well as to the risks inherent in those sectors of the market where
these new issuers operate. The market for IPO issuers has been volatile, and share prices of
newly-public companies have fluctuated significantly over short periods of time.
Master Limited Partnerships (“MLPs”). As part of its non-principal investment strategy, each fund
may purchase units of MLPs. MLPs are limited partnerships or limited liability companies, whose
partnership units or limited liability interests are listed and traded on a U.S. securities
exchange, and are treated as publicly traded partnerships for federal income tax purposes. To
qualify to be treated as a partnership for tax purposes, an MLP must receive at least 90% of its
income from qualifying sources as set forth in Section 7704(d) of the Internal Revenue Code of
1986, as amended (the “Code”). These qualifying sources include activities such as the exploration,
development, mining, production, processing, refining, transportation, storage and marketing of
mineral or natural resources. MLPs generally have two classes of owners, the general partner and
limited partners. MLPs that are formed as limited liability companies generally have two analogous
classes of owners, the managing member and
the members. For purposes of this section, references to general partners also apply to managing
members and references to limited partners also apply to members. The general partner is typically
owned by a major energy company, an investment fund, the direct management of the MLP or is an
entity owned by one or more of such parties. The general partner may be structured as a private or
publicly traded corporation or other entity. The general partner typically controls the operations
and management of the MLP through an equity interest of as much as 2% in the MLP plus, in many
cases, ownership of common units and subordinated units. Limited partners own the remainder of the
MLP through ownership of common units and have a limited role in the MLP’s operations and
management.
MLPs are typically structured such that common units and general partner interests have first
priority to receive quarterly cash distributions up to an established minimum amount (“minimum
quarterly distributions” or “MQD”). Common and general partner interests also accrue arrearages in
distributions to the extent the MQD is not paid. Once common and general partner interests have
been paid, subordinated units receive distributions of up to the MQD; however, subordinated units
do not accrue arrearages. Distributable cash in excess of the MQD paid to both common and
subordinated units is distributed to both common and subordinated units generally on a pro rata
basis. The general partner is also eligible to receive incentive distributions if the general
partner operates the business in a manner which results in distributions paid per common unit
surpassing specified target levels. As the general partner increases cash distributions to the
limited partners, the general partner receives an increasingly higher percentage of the incremental
cash distributions. A common arrangement provides that the general partner can reach a tier where
it receives 50% of every incremental dollar paid to common and subordinated unit holders. These
incentive distributions encourage the general partner to streamline costs, increase capital
expenditures and acquire assets in order to increase the partnership’s cash flow and raise the
quarterly cash distribution in order to reach higher tiers. Such results benefit all security
holders of the MLP.
General partner interests of MLPs are typically retained by an MLP’s original sponsors, such as its
founders, corporate partners, entities that sell assets to the MLP and investors such as us. A
holder of general partner interests can be liable under certain circumstances for amounts greater
than the amount of the holder’s investment in the general partner interest. General partner
interests often confer direct board participation rights and in many cases, operating control, over
the MLP. These interests themselves are not publicly traded, although they may be owned by publicly
traded entities. General partner interests receive cash distributions, typically 2% of the MLP’s
aggregate cash distributions, which are contractually defined in the partnership agreement. In
addition, holders of general partner interests typically hold incentive distribution rights
(“IDRs”), which provide them with a larger share of the aggregate MLP cash distributions as the
distributions to limited partner unit holders are increased to prescribed levels. General partner
interests generally cannot be converted into common units. The general partner interest can be
redeemed by the MLP if the MLP unitholders choose to remove the general partner, typically with a
supermajority vote by limited partner unitholders.
Exchange Traded Funds (“ETFs”) such as the funds or Standard and Poor’s Depositary Receipts
(“SPDRs”) Trust, are investment companies that typically are registered under the Investment
Company Act of 1940 (“1940 Act”) as open-end fund as is the funds’ case or unit investment trusts
(“UITs”). ETFs are actively traded on national securities exchanges and are generally based on
specific domestic and foreign market indices. Shares of an ETF may be bought and sold through the
day at market prices, which may be higher or lower than the shares’ net asset value. An
“index-based ETF” seeks to track the performance of an index holding in its portfolio either the
contents of the index or a representative sample of the securities in the index. Because ETFs are
based on an underlying basket of stocks or an index, they are subject to the same market
fluctuations as these types of securities in volatile market swings. ETFs, like mutual funds, have
expenses associated with their operation, including advisory fees. When a fund
invests in an ETF, in addition to directly bearing expenses associated with its own operations, it
will bear a pro rata portion of the ETF’s expenses. As with any exchange listed security, ETF
shares purchased in the secondary market are subject to customary brokerage charges.
Foreign Securities (Principal investment of the Schwab International Equity ETF, Schwab
International Small-Cap Equity ETF and Schwab Emerging Markets Equity ETF only. Permissible
non-principal investment for all other funds). Foreign securities involve additional risks,
including foreign currency exchange rate risks, because they are issued by foreign entities,
including foreign governments, banks and corporations or because they are traded principally
overseas. Foreign securities in which a fund may invest include foreign entities that are not
subject to uniform accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to U.S. corporations. In addition, there may be less
publicly available information about foreign entities. Foreign economic, political and legal
developments, as well as fluctuating foreign currency exchange rates and withholding taxes, could
have more dramatic effects on the value of foreign securities. For example, conditions within and
around foreign countries, such as the possibility of expropriation or confiscatory taxation,
political or social instability, diplomatic developments, change of government or war could affect
the value of foreign investments. Moreover, individual foreign economies may differ favorably or
unfavorably from the U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of payments position.
Foreign securities typically have less volume and are generally less liquid and more volatile than
securities of U.S. companies. Fixed commissions on foreign securities exchanges are generally
higher than negotiated commissions on U.S. exchanges, although a fund will endeavor to achieve the
most favorable overall results on portfolio transactions. There is generally less government
supervision and regulation of foreign securities exchanges, brokers, dealers and listed companies
than in the United States, thus increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities. There may be difficulties in
obtaining or enforcing judgments against foreign issuers as well. These factors and others may
increase the risks with respect to the liquidity of a fund, and its ability to meet a large number
of shareholder redemption requests.
Foreign markets also have different clearance and settlement procedures and, in certain markets,
there have been times when settlements have been unable to keep pace with the volume of securities
transactions, making it difficult to conduct such transactions. Such delays in settlement could
result in temporary periods when a portion of the assets of a fund is uninvested and no return is
earned thereon. The inability to make intended security purchases due to settlement problems could
cause a fund to miss attractive investment opportunities. Losses to a fund arising out of the
inability to fulfill a contract to sell such securities also could result in potential liability
for a fund.
Investments in the securities of foreign issuers may be made and held in foreign currencies. In
addition, a fund may hold cash in foreign currencies. These investments may be affected favorably
or unfavorably by changes in currency rates and in exchange control regulations, and may cause a
fund to incur costs in connection with conversions between various currencies. The
rate of exchange between the U.S. dollar and other currencies is determined by the forces of supply
and demand in the foreign exchange market as well as by political and economic factors. Changes in
the foreign currency exchange rates also may affect the value of dividends and interest earned,
gains and losses realized on the sale of securities, and net investment income and gains, if any,
to be distributed to shareholders by a fund.
Forward Foreign Currency Exchange Contracts (Schwab International Equity ETF, Schwab International
Small-Cap Equity ETF and Schwab Emerging Markets Equity ETF only) involve the purchase or sale of
foreign currency at an established exchange rate, but with payment and delivery at a specified
future time. Many foreign securities markets do not settle trades within a time frame that would be
considered customary in the U.S. stock market. Therefore, a fund may engage in forward foreign
currency exchange contracts in order to secure exchange rates for portfolio securities purchased or
sold, but awaiting settlement. These transactions do not seek to eliminate any fluctuations in the
underlying prices of the securities involved. Instead, the transactions simply establish a rate of
exchange that can be expected when a fund settles its securities transactions in the future.
Forwards involve certain risks. For example, if the counterparties to the contracts are unable to
meet the terms of the contracts or if the value of the foreign currency changes unfavorably, a fund
could sustain a loss.
Futures Contracts are instruments that represent an agreement between two parties that obligates
one party to buy, and the other party to sell, specific instruments at an agreed-upon price on a
stipulated future date. In the case of futures contracts relating to an index or otherwise not
calling for physical delivery at the close of the transaction, the parties usually agree to deliver
the final cash settlement price of the contract. A fund may purchase and sell futures contracts
based on securities, securities indices and foreign currencies, interest rates, or any other
futures contracts traded on U.S. exchanges or boards of trade that the Commodities Future Trading
Commission (“CFTC”) licenses and regulates on foreign exchanges. Consistent with CFTC regulations,
the trust has claimed an exclusion from the definition of the term “commodity pool operator” under
the Commodity Exchange Act and, therefore, is not subject to registration or regulation as a pool
operator under the Commodity Exchange Act.
A fund must maintain a small portion of its assets in cash to process shareholder transactions in
and out of it and to pay its expenses. In order to reduce the effect this otherwise uninvested cash
would have on its performance, a fund may purchase futures contracts. Such transactions allow a
fund’s cash balance to produce a return similar to that of the underlying security or index on
which the futures contract is based. Also, a fund may purchase or sell futures contracts on a
specified foreign currency to “fix” the price in U.S. dollars of the foreign security it has
acquired or sold or expects to acquire or sell. A fund may enter into futures contracts for other
reasons as well.
When buying or selling futures contracts, a fund must place a deposit with its broker equal to a
fraction of the contract amount. This amount is known as “initial margin” and must be in the form
of liquid debt instruments, including cash, cash-equivalents and U.S. government securities.
Subsequent payments to and from the broker, known as “variation margin” may be made daily, if
necessary, as the value of the futures contracts fluctuate. This process is known as
“marking-to-market.” The margin amount will be returned to a fund upon termination of the futures
contracts
assuming all contractual obligations are satisfied. Because margin requirements are normally only a
fraction of the amount of the futures contracts in a given transaction, futures trading can involve
a great deal of leverage. In order to avoid this, a fund will earmark or segregate assets for any
outstanding futures contracts as may be required under the federal securities laws.
While a fund intends to purchase and sell futures contracts in order to simulate full investment,
there are risks associated with these transactions. Adverse market movements could cause a fund to
experience substantial losses when buying and selling futures contracts. Of course, barring
significant market distortions, similar results would have been expected if a fund had instead
transacted in the underlying securities directly. There also is the risk of losing any margin
payments held by a broker in the event of its bankruptcy. Additionally, a fund incurs transaction
costs (i.e. brokerage fees) when engaging in futures trading. To the extent a fund also invests in
futures in order to simulate full investment, these same risks apply.
When interest rates are rising or securities prices are falling, a fund may seek, through the sale
of futures contracts, to offset a decline in the value of their current portfolio securities. When
rates are falling or prices are rising, a fund, through the purchase of futures contracts, may
attempt to secure better rates or prices than might later be available in the market when they
effect anticipated purchases. Similarly, a fund may sell futures contracts on a specified currency
to protect against a decline in the value of that currency and their portfolio securities that are
denominated in that currency. A fund may purchase futures contracts on a foreign currency to fix
the price in U.S. dollars of a security denominated in that currency that a fund has acquired or
expects to acquire.
Futures contracts normally require actual delivery or acquisition of an underlying security or cash
value of an index on the expiration date of the contract. In most cases, however, the contractual
obligation is fulfilled before the date of the contract by buying or selling, as the case may be,
identical futures contracts. Such offsetting transactions terminate the original contracts and
cancel the obligation to take or make delivery of the underlying securities or cash. There may not
always be a liquid secondary market at the time a fund seeks to close out a futures position. If a
fund is unable to close out its position and prices move adversely, a fund would have to continue
to make daily cash payments to maintain its margin requirements. If a fund had insufficient cash to
meet these requirements it may have to sell portfolio securities at a disadvantageous time or incur
extra costs by borrowing the cash. Also, a fund may be required to make or take delivery and incur
extra transaction costs buying or selling the underlying securities. A fund seeks to reduce the
risks associated with futures transactions by buying and selling futures contracts that are traded
on national exchanges or for which there appears to be a liquid secondary market.
With respect to futures contracts that are not legally required to “cash settle,” a fund may cover
the open position by setting aside or earmarking liquid assets in an amount equal to the market
value of the futures contracts. With respect to futures contracts that are required to “cash
settle,” however, a fund is permitted to set aside or earmark liquid assets in an amount equal to
the fund’s daily marked to market (net) obligation, if any, (in other words, the fund’s daily net
liability, if any) rather than the market value of the futures contracts. By setting aside assets
or earmarking equal to only its net obligation under cash-settled futures, a fund will have the
ability to employ
leverage to a greater extent than if the fund were required to set aside or earmark assets equal to
the full market value of the futures contract.
Indexing Strategies involve tracking the securities represented in, and therefore the performance
of, an index. Each fund normally will invest primarily in the securities of its index. Moreover,
each fund seeks to invest so that its portfolio performs similarly to that of its index. Each fund
will seek a correlation between its performance and that of its index of 0.95 or better.
Correlation for each fund is calculated daily, according to a mathematical formula (“R-squared)
which measures correlation between a fund’s portfolio and benchmark index returns. A perfect
correlation of 1.0 is unlikely as the funds incur operating and trading expenses unlike their
indices. The Board will monitor each fund’s correlation to its index on a periodic basis. If
determined to be in the best interest of a fund and its shareholders, the Board may determine to
substitute a different index for the index a fund currently tracks, such determination to be made
by the Board based on its evaluation of all pertinent facts and circumstances, including the review
of any period(s) of time for which a fund did not achieve its intended correlation and the reasons
for such non-correlation. The Board has not established any particular time period of
non-correlation that would cause the Board to automatically consider substituting a different index
for the index a fund currently tracks.
Money Market Securities are high-quality, short term debt securities that may be issued by entities
such as the U.S. government, corporations and financial institutions (like banks). Money market
securities include commercial paper, certificates of deposit, banker’s acceptances, notes and time
deposits. Certificates of deposit and time deposits are issued against funds deposited in a banking
institution for a specified period of time at a specified interest rate. Banker’s acceptances are
credit instruments evidencing a bank’s obligation to pay a draft drawn on it by a customer. These
instruments reflect the obligation both of the bank and of the drawer to pay the full amount of the
instrument upon maturity. Commercial paper consists of short term, unsecured promissory notes
issued to finance short term credit needs.
Money market securities pay fixed, variable or floating rates of interest and are generally subject
to credit and interest rate risks. The maturity date or price of and financial assets
collateralizing a security may be structured in order to make it qualify as or act like a money
market security. These securities may be subject to greater credit and interest rate risks than
other money market securities because of their structure. Money market securities may be issued
with puts or sold separately, sometimes called demand features or guarantees, which are agreements
that allow the buyer to sell a security at a specified price and time to the seller or “put
provider.” When a fund buys a put, losses could occur as a result of the costs of the put or if it
exercises its rights under the put and the put provider does not perform as agreed.
A fund may keep a portion of its assets in cash for business operations. In order to reduce the
effect this otherwise uninvested cash would have on its performance, a fund may invest in money
market securities. A fund may also invest in money market securities to the extent it is consistent
with its investment objective.
Options Contracts generally provide the right to buy or sell a security, commodity, futures
contract or foreign currency in exchange for an agreed upon price. If the right is not exercised
after a specified period, the option expires and the option buyer forfeits the money paid to the
option seller.
A call option gives the buyer the right to buy a specified number of shares of a security at a
fixed price on or before a specified date in the future. For this right, the call option buyer pays
the call option seller, commonly called the call option writer, a fee called a premium. Call option
buyers are usually anticipating that the price of the underlying security will rise above the price
fixed with the call writer, thereby allowing them to profit. If the price of the underlying
security does not rise, the call option buyer’s losses are limited to the premium paid to the call
option writer. For call option writers, a rise in the price of the underlying security will be
offset in part by the premium received from the call option buyer. If the call option writer does
not own the underlying security, however, the losses that may ensue if the price rises could be
potentially unlimited. If the call option writer owns the underlying security or commodity, this is
called writing a covered call. All call and put options written by a fund will be covered, which
means that a fund will own the securities subject to the option so long as the option is
outstanding or a fund will earmark or segregate assets for any outstanding option contracts.
A put option is the opposite of a call option. It gives the buyer the right to sell a specified
number of shares of a security at a fixed price on or before a specified date in the future. Put
option buyers are usually anticipating a decline in the price of the underlying security, and wish
to offset those losses when selling the security at a later date. All put options a fund writes
will be covered, which means that a fund will earmark or segregate cash, U.S. government securities
or other liquid securities with a value at least equal to the exercise price of the put option. The
purpose of writing such options is to generate additional income for a fund. However, in return for
the option premium, a fund accepts the risk that they may be required to purchase the underlying
securities at a price in excess of the securities’ market value at the time of purchase.
A fund may purchase and write put and call options on any securities in which they may invest or
any securities index or basket of securities based on securities in which they may invest. In
addition, a fund may purchase and sell foreign currency options and foreign currency futures
contracts and related options. A fund may purchase and write such options on securities that are
listed on domestic or foreign securities exchanges or traded in the over-the-counter market. Like
futures contracts, option contracts are rarely exercised. Option buyers usually sell the option
before it expires. Option writers may terminate their obligations under a written call or put
option by purchasing an option identical to the one it has written. Such purchases are referred to
as “closing purchase transactions.” A fund may enter into closing sale transactions in order to
realize gains or minimize losses on options they have purchased or wrote.
An exchange-traded currency option position may be closed out only on an options exchange that
provides a secondary market for an option of the same series. Although a fund generally will
purchase or write only those options for which there appears to be an active secondary market,
there is no assurance that a liquid secondary market will exist for any particular option or at any
particular time. If a fund is unable to effect a closing purchase transaction with respect to
options it has written, it will not be able to sell the underlying securities or dispose of assets
earmarked
or held in a segregated account until the options expire or are exercised. Similarly, if a fund is
unable to effect a closing sale transaction with respect to options it has purchased, it would have
to exercise the options in order to realize any profit and will incur transaction costs upon the
purchase or sale of underlying securities.
Reasons for the absence of a liquid secondary market on an exchange include the following: (1)
there may be insufficient trading interest in certain options; (2) an exchange may impose
restrictions on opening transactions or closing transactions or both; (3) trading halts,
suspensions or other restrictions may be imposed with respect to particular classes or series of
options; (4) unusual or unforeseen circumstances may interrupt normal operations on an exchange;
(5) the facilities of an exchange or the Options Clearing Corporation (“OCC”) may not at all times
be adequate to handle current trading volume; or (6) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the trading of options (or
a particular class or series of options), although outstanding options on that exchange that had
been issued by the OCC as a result of trades on that exchange would continue to be exercisable in
accordance with their terms.
The ability to terminate over-the-counter options is more limited than with exchange-traded options
and may involve the risk that broker-dealers participating in such transactions will not fulfill
their obligations. Until such time as the staff of the SEC changes its position, a fund will treat
purchased over-the-counter options and all assets used to cover written over-the-counter options as
illiquid securities, except that with respect to options written with primary dealers in U.S.
government securities pursuant to an agreement requiring a closing purchase transaction at a
formula price, the amount of illiquid securities may be calculated with reference to a formula the
staff of the SEC approves.
Additional risks are involved with options trading because of the low margin deposits required and
the extremely high degree of leverage that may be involved in options trading. There may be
imperfect correlation between the change in market value of the securities held by a fund and the
prices of the options, possible lack of a liquid secondary market, and the resulting inability to
close such positions prior to their maturity dates.
A fund may write or purchase an option only when the market value of that option, when aggregated
with the market value of all other options transactions made on behalf of a fund, does not exceed
5% of its net assets.
Securities Lending of portfolio securities is a common practice in the securities industry. A fund
may engage in security lending arrangements. For example, a fund may receive cash collateral, and
it may invest it in short term, interest-bearing obligations, but will do so only to the extent
that it will not lose the tax treatment available to regulated investment companies. Lending
portfolio securities involves risks that the borrower may fail to return the securities or provide
additional collateral. Also, voting rights with respect to the loaned securities may pass with the
lending of the securities.
A fund may loan portfolio securities to qualified broker-dealers or other institutional investors
provided: (1) the loan is secured continuously by collateral consisting of U.S. government
securities, letters of credit, cash or cash equivalents or other appropriate instruments maintained
on a daily marked-to-market basis in an amount at least equal to the current market value of the
securities loaned; (2) a fund may at any time call the loan and obtain the return of the securities
loaned; (3) a fund will receive any interest or dividends paid on the loaned securities; and (4)
the aggregate market value of securities loaned will not at any time exceed one-third of the total
assets of a fund, including collateral received from the loan (at market value computed at the time
of the loan).
Although voting rights with respect to loaned securities pass to the borrower, the lender retains
the right to recall a security (or terminate a loan) for the purpose of exercising the security’s
voting rights. Efforts to recall such securities promptly may be unsuccessful, especially for
foreign securities or thinly traded securities such as small-cap stocks. In addition, because
recalling a security may involve expenses to a fund, it is expected that a fund will do so only
where the items being voted upon are, in the judgment of the investment adviser, either material to
the economic value of the security or threaten to materially impact the issuer’s corporate
governance policies or structure.
Securities of Other Investment Companies. Investment companies generally offer investors the
advantages of diversification and professional investment management, by combining shareholders’
money and investing it in securities such as stocks, bonds and money market instruments. Investment
companies include: (1) open-end funds (commonly called mutual funds) that issue and redeem their
shares on a continuous basis; (2) closed-end funds that offer a fixed number of shares, and are
usually listed on an exchange; and (3) unit investment trusts that generally offer a fixed number
of redeemable shares. Certain open-end funds, closed-end funds and unit investment trusts are
traded on exchanges.
Investment companies may make investments and use techniques designed to enhance their performance.
These may include delayed-delivery and when-issued securities transactions; swap agreements;
buying and selling futures contracts, illiquid, and/or restricted securities and repurchase
agreements; and borrowing or lending money and/or portfolio securities. The risks of investing in
a particular investment company will generally reflect the risks of the securities in which it
invests and the investment techniques it employs. Also, investment companies charge fees and incur
expenses.
The funds may buy securities of other investment companies, including those of foreign issuers, in
compliance with the requirements of federal law or any SEC exemptive order. A fund may invest in
investment companies that are not registered with the SEC or privately placed securities of
investment companies (which may or may not be registered), such as hedge funds and offshore funds.
Unregistered funds are largely exempt from the regulatory requirements that apply to registered
investment companies. As a result, unregistered funds may have a greater ability to make
investments, or use investment techniques, that offer a higher potential investment return (for
example, leveraging), but which may carry high risk. Unregistered funds, while not regulated by
the SEC like registered funds, may be indirectly supervised by the financial institutions (e.g.,
commercial and investment banks) that may provide them with loans
or other sources of capital. Investments in unregistered funds may be difficult to sell, which
could cause a fund selling an interest in an unregistered fund to lose money. For example, many
hedge funds require their investors to hold their investments for at least one year.
Federal law restricts the ability of one registered investment company to invest in another. As a
result, the extent to which a fund may invest in another investment company may be limited. With
respect to investments in other mutual funds, the SEC has granted the funds an exemption from the
limitations of the 1940 Act that restrict the amount of securities of underlying mutual funds a
fund may hold, provided that certain conditions are met. The conditions requested by the SEC were
designed to address certain abuses perceived to be associated with funds of funds, including
unnecessary costs (such as sales loads, advisory fees and administrative costs), and undue
influence by a fund of funds over the underlying fund. The conditions apply only when a fund and
its affiliates in the aggregate own more than 3% of the outstanding shares of any one underlying
fund.
Under the terms of the exemptive order, each fund and its affiliates may not control a
non-affiliated underlying fund. Under the 1940 Act, any person who owns beneficially, either
directly or through one or more controlled companies, more than 25% of the voting securities of a
company is assumed to control that company. This limitation is measured at the time the investment
is made.
Small-Cap Stocks (Principal investment for Schwab U.S. Broad Market ETF, Schwab U.S. Small-Cap ETF
and Schwab International Small-Cap Equity ETF only. Permissible non-principal investment for each
other fund.) Small-cap stocks include common stocks issued by operating companies with market
capitalizations that place them at the lower end of the stock market, as well as the stocks of
companies that are determined to be small based on several factors, including the capitalization of
the company and the amount of revenues. Historically, small company stocks have been riskier than
stocks issued by large- or mid-cap companies for a variety of reasons. Small-companies may have
less certain growth prospects and are typically less diversified and less able to withstand
changing economic conditions than larger capitalized companies. Small-cap companies also may have
more limited product lines, markets or financial resources than companies with larger
capitalizations, and may be more dependent on a relatively small management group. In addition,
small-cap companies may not be well known to the investing public, may not have institutional
ownership and may have only cyclical, static or moderate growth prospects. Most small company
stocks pay low or no dividends.
These factors and others may cause sharp changes in the value of a small company’s stock, and even
cause some small-cap companies to fail. Additionally, small-cap stocks may not be as broadly traded
as large- or mid-cap stocks, and a fund’s positions in securities of such companies may be
substantial in relation to the market for such securities. Accordingly, it may be difficult for a
fund to dispose of securities of these small-cap companies at prevailing market prices in order to
meet redemptions. This lower degree of liquidity can adversely affect the value of these
securities. For these reasons and others, the value of a fund’s investments in small-cap stocks is
expected to be more volatile than other types of investments, including other types of stock
investments. While small-cap stocks are generally considered to offer greater growth
opportunities for investors, they involve greater risks and the share price of a fund that invests
in small-cap stocks may change sharply during the short term and long term.
Stock Substitution Strategy is a strategy, whereby each fund may, in certain circumstances,
substitute a similar stock for a security in its index. For example, a stock issued by a foreign
corporation and included in a fund’s index may not be available for purchase by a fund because the
fund does not reside in the foreign country in which the stock was issued. However, the foreign
corporation may have issued a series of stock that is sold only to
foreign investors such as a fund.
In these cases, a fund may buy that issue as a substitute for the security included in its index.
Each fund may invest up to 10% of its assets in stocks that are designed to substitute for
securities in its index.
Swap Agreements are privately negotiated over-the-counter derivative products in which two parties
agree to exchange payment streams calculated in relation to a rate, index, instrument or certain
securities (referred to as the “underlying”) and a predetermined amount (referred to as the
“notional amount”). The underlying for a swap may be an interest rate (fixed or floating), a
currency exchange rate, a commodity price index, a security, group of securities or a securities
index, a combination of any of these, or various other rates, assets or indices. Swap agreements
generally do not involve the delivery of the underlying or principal, and a party’s obligations
generally are equal to only 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 swap agreement.
Swap agreements can be structured to increase or decrease a fund’s exposure to long or short term
interest rates, corporate borrowing rates and other conditions, such as changing security prices
and inflation rates. They also can be structured to increase or decrease a fund’s exposure to
specific issuers or specific sectors of the bond market such as mortgage securities. For example,
if a fund agreed to pay a longer-term fixed rate in exchange for a shorter-term floating rate while
holding longer-term fixed rate bonds, the swap would tend to decrease the fund’s exposure to
longer-term interest rates. Swap agreements tend to increase or decrease the overall volatility of
a fund’s investments and its share price and yield. Changes in interest rates, or other factors
determining the amount of payments due to and from a fund, can be the most significant factors in
the performance of a swap agreement. If a swap agreement calls for payments from a fund, the fund
must be prepared to make such payments when they are due. In order to help minimize risks, a fund
will earmark or segregate appropriate assets for any accrued but unpaid net amounts owed under the
terms of a swap agreement entered into on a net basis. All other swap agreements will require a
fund to earmark or segregate assets in the amount of the accrued amounts owed under the swap. A
fund could sustain losses if a counterparty does not perform as agreed under the terms of the swap.
A fund will enter into swap agreements with counterparties deemed creditworthy by the investment
adviser. Swap counterparties will generally be primary dealers or banks rated single A or greater
or subsidiaries of entities rated A or greater. The funds do not intend to enter swap agreements
with counterparties that are unrated, unless they are subsidiaries of issuers that meet the minimum
rating requirement.
In addition, as a non-principal investment, a fund may invest in swaptions, which are
privately-negotiated option-based derivative products that are subject to the risks of both options
and swap agreements, each of which are discussed elsewhere in this SAI. Swaptions give the holder
the right to enter into a swap. A fund may use a swaption in addition to or in lieu of a swap
involving a similar rate or index.
For purposes of applying a fund’s investment policies and restrictions (as stated in the prospectus
and this SAI) swap agreements are generally valued by the fund at market value. The manner in which
certain securities or other instruments are valued by a fund for purposes of applying investment
policies and restrictions may differ from the manner in which those investments are valued by other
types of investors.
Each fund may allocate up to 10% of its net assets to derivatives investments, which includes swaps
and swaptions.
U.S. Government Securities are issued by the U.S. Treasury or issued or guaranteed by the U.S.
government or any of its agencies or instrumentalities. Not all U.S. government securities are
backed by the full faith and credit of the United States. Some U.S. government securities, such as
those issued by the Federal National Mortgage Association (known as Fannie Mae), Federal Home Loan
Mortgage Corporation (known as Freddie Mac), the Student Loan Marketing Association (known as
Sallie Mae), and the Federal Home Loan Banks, are supported by a line of credit the issuing entity
has with the U.S. Treasury. Others are supported solely by the credit of the issuing agency or
instrumentality such as obligations issued by the Federal Farm Credit Banks Funding Corporation.
There can be no assurance that the U.S. government will provide financial support to U.S.
government securities of its agencies and instrumentalities if it is not obligated to do so under
law. Of course U.S. government securities, including U.S. Treasury securities, are among the safest
securities, however, not unlike other debt securities, they are still sensitive to interest rate
changes, which will cause their yields and prices to fluctuate.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae and Freddie Mac,
placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S.
Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and
obtained warrants for the purchase of common stock of each instrumentality. Under this agreement,
the U.S. Treasury has pledged to provide up to $100 billion per instrumentality as needed,
including the contribution of cash capital to the instrumentalities in the event their liabilities
exceed their assets. This is intended to ensure that the instrumentalities maintain a positive net
worth and meet their financial obligations preventing mandatory triggering of receivership.
Additionally, the U.S. Treasury has implemented a temporary program to purchase new mortgage-backed
securities issued by the instrumentalities. This is intended to create more affordable mortgage
rates for homeowners, enhance the liquidity of the mortgage market and potentially maintain or
increase the value of existing mortgage-backed securities. The program expires in December 2009.
No assurance can be given that the U.S. Treasury initiatives will be successful.
Non-Principal Investment Strategy Investments
The following investments may be used as part of each fund’s non-principal investment strategy:
Bankers’ Acceptances or notes are credit instruments evidencing a bank’s obligation to pay a draft
drawn on it by a customer. These instruments reflect the obligation both of the bank and of the
drawer to pay the full amount of the instrument upon maturity. A fund will invest only in bankers’
acceptances of banks that have capital, surplus and undivided profits in the aggregate in excess of
$100 million.
Borrowing. A fund may borrow money from banks for any purpose in an amount up to 1/3 of the fund’s
total assets. The funds also may borrow money for temporary purposes in an amount not to exceed 5%
of the funds’ total assets. Provisions of the 1940 Act, as amended, require the funds to maintain
continuous asset coverage (that is, total assets including borrowings, less liabilities exclusive
of borrowings) of 300% of the amount borrowed, with an exception for borrowings not in excess of 5%
of a fund’s total assets made for temporary purposes. Any borrowings for temporary purposes in
excess of 5% of a fund’s total assets must maintain continuous asset coverage. If the 300% asset
coverage should decline as a result of market fluctuations or other reasons, the funds may be
required to sell some of its portfolio holdings within three days to reduce the debt and restore
the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to
sell securities at that time.
A fund may borrow for temporary or emergency purposes; for example, a fund may borrow at times to
meet redemption requests rather than sell portfolio securities to raise the necessary cash. The
fund’s borrowings will be subject to interest costs. Borrowing can also involve leveraging when
securities are purchased with the borrowed money. Leveraging creates interest expenses that can
exceed the income from the assets purchased with the borrowed money. In addition, leveraging may
magnify changes in the net asset value of a fund’s shares and in its portfolio yield. A fund will
earmark or segregate assets to cover such borrowings in accordance with positions of the Securities
and Exchange Commission (“SEC”). If assets used to secure a borrowing decrease in value, a fund may
be required to pledge additional collateral to avoid liquidation of those assets.
A fund may establish lines-of-credit (“lines”) with certain banks by which it may borrow funds for
temporary or emergency purposes. A borrowing is presumed to be for temporary or emergency purposes
if it is repaid by a fund within 60 days and is not extended or renewed. A fund may use the lines
to meet large or unexpected redemptions that would otherwise force a fund to liquidate securities
under circumstances which are unfavorable to a fund’s remaining shareholders. A fund will pay a fee
to the bank for using the lines.
Certificates of Deposit or time deposits are issued against funds deposited in a banking
institution for a specified period of time at a specified interest rate. A fund will invest only in
certificates of deposit of banks that have capital, surplus and undivided profits in the aggregate
in excess of $100 million.
Commercial Paper consists of short term, promissory notes issued by banks, corporations and other
institutions to finance short term credit needs. These securities generally are discounted but
sometimes may be interest bearing. Commercial paper, which also may be unsecured, is subject to
credit risk.
Debt Securities are obligations issued by domestic and foreign entities, including governments and
corporations, in order to raise money. They are basically “IOUs,” but are commonly referred to as
bonds or money market securities. These securities normally require the issuer to pay a fixed,
variable or floating rate of interest on the amount of money borrowed (“principal”) until it is
paid back upon maturity.
Debt securities experience price changes when interest rates change. For example, when interest
rates fall, the prices of debt securities generally rise. Also, issuers tend to pre-pay their
outstanding debts and issue new ones paying lower interest rates.
Conversely, in a rising interest rate environment, prepayment on outstanding debt securities
generally will not occur. This is known as extension risk and may cause the value of debt
securities to depreciate as a result of the higher market interest rates. Typically,
longer-maturity securities react to interest rate changes more severely than shorter-term
securities (all things being equal), but generally offer greater rates of interest.
Debt securities also are subject to the risk that the issuers will not make timely interest and/or
principal payments or fail to make them at all. This is called credit risk. Debt instruments also
may be subject to price volatility due to market perception of future interest rates, the
creditworthiness of the issuer and general market liquidity (market risk). Investment-grade debt
securities are considered medium- or/and high-quality securities, although some still possess
varying degrees of speculative characteristics and risks.
The funds will limit their investments in
debt securities to those that are rated investment-grade,
which means that the securities are rated by at least one Nationally Recognized
Statistical Rating Organization (“NRSRO”), such as Standard
& Poor’s Corporation,
Moody’s Investors Service, Fitch, Inc. or Dominion Bond Rating Service, in one of the
four highest rating categories (within which there may be sub-categories or gradations
indicating relative standing). See Appendix A for a description of the ratings. The
ratings of NRSROs represent their opinions as to the quality of the securities. It should be
emphasized, however, that these ratings are general and are not absolute standards of
quality. Consequently, obligations with the same rating, maturity and interest rate may
have different market prices. Further, NRSROs may have conflicts of interest relating to
the issuance of a credit rating and such conflicts may affect the integrity of the credit
rating process or the methodologies used to develop credit ratings for securities. Such
conflicts may include, but are not limited to, NRSROs being paid by issuers or
underwriters to determine the credit ratings with respect to the securities they issue or
underwrite, NRSROs being paid by issuers and underwriters for services in addition to
the NRSROs determination of credit ratings; allowing persons with the NRSRO to
directly own securities or money market instruments of, or having other direct ownership
interests in, issuers or obligors subject to a credit rating determined by the NRSRO; and
allowing persons within the NRSRO to have a business relationship that is more than an
arms length ordinary course of business relationship with issuers or obligors subject to a
credit rating determined by the NRSRO.
In addition, credit ratings are generally given to securities at the time of issuance. While
the rating agencies may from time to time revise such ratings, they undertake no
obligation to do so, and the ratings given to securities at issuance do not necessarily
represent ratings which would be given to these securities on a particular subsequent date.
Accordingly, investors should note that the assignment of a rating to a security by a rating
service may not reflect the effect of recent developments on the issuer’s ability to make
interest and principal payments.
The market for these securities has historically been less liquid than investment grade securities.
Delayed-Delivery Transactions include purchasing and selling securities on a delayed-delivery or
when-issued basis. These transactions involve a commitment to buy or sell specific securities at a
predetermined price or yield, with payment and delivery taking place after the customary settlement
period for that type of security. When purchasing securities on a delayed-delivery basis, a fund
assumes the rights and risks of ownership, including the risk of price and yield fluctuations.
Typically, no interest will accrue to a fund until the security is delivered. A fund will earmark
or segregate appropriate liquid assets to cover its delayed-delivery purchase obligations. When a
fund sells a security on a delayed-delivery basis, a fund does not participate in further gains or
losses with respect to that security. If the other party to a delayed-delivery transaction fails
to deliver or pay for the securities, a fund could suffer losses.
Foreign
Currency Transactions
(Non-principal investments of the Schwab
International Equity ETF, the Schwab International Small-Cap Equity ETF and the Schwab
Emerging Markets Equity ETF only). A fund may invest in foreign currency-denominated securities,
may purchase and sell foreign currency options and foreign currency futures contracts and related
options and may engage in foreign currency transactions on a spot (cash) basis at the rate prevailing in the
currency exchange market at the time. A fund may engage in these transactions in order to protect against
uncertainty in the level of future foreign exchange rates in the purchase and sale of securities.
A fund may also use foreign currency options and futures to increase exposure to a foreign currency or
to shift exposure to foreign currency fluctuations from one country to another.
Buying and selling foreign currency options and
foreign currency futures contracts and related options involves costs and may result in losses. The ability
of a fund to engage in these transactions may be limited by tax considerations. Although these techniques
tend to minimize the risk of loss due to declines in the value of the hedged currency, they tend to limit any potential
gain that might result from an increase in the
value of such currency. Transactions in these contracts involve certain other risks. Unanticipated fluctuations
in currency prices may result in a poorer overall performance for a fund than if it had not engaged in any
such transactions. Moreover, there may be imperfect correlation between a fund’s holdings of securities denominated
in a particular currency and the currency transactions into which a fund enters. Such imperfect correlation may cause
a fund to sustain losses, which
will prevent it from achieving a complete hedge or expose it to risk of foreign exchange loss.
Suitable hedging transactions may not be available in all
circumstances and there can be no assurance that a fund will engage in such transactions at any given time or from time
to time. Also, such transactions may not be successful and may eliminate any chance for a fund to benefit from favorable
fluctuations in relevant foreign currencies.
A fund may buy or sell foreign currency
options and foreign currency futures contracts and related options under the same circumstances, and such
use is subject to the same risks and costs, as those set forth in the section “Forward Foreign Currency Exchange Contracts”
with respect to the fund’s use of forward foreign currency exchange contracts.
Illiquid Securities generally are any securities that cannot be disposed of promptly and in the
ordinary course of business within seven days at approximately the amount at which a fund has
valued the instruments. The liquidity of a fund’s investments is monitored under the supervision
and direction of the Board of Trustees. Each fund may not invest more than 15% of its net assets in
illiquid securities. In the event that a subsequent change in net assets or other circumstances
cause a fund to exceed this limitation, the fund will take steps to bring the aggregate amount of
illiquid instruments back within the limitations as soon as reasonably practicable.
In making liquidity determinations before purchasing a particular security, the Adviser considers a
number of factors including, but not limited to: the nature and size of the security; the number of
dealers that make a market in the security; and data which indicates that a security’s price has
not changed for a period of a week or longer. After purchase, it is the Adviser’s policy to
maintain awareness of developments in the marketplace that could cause a change in a security’s
liquid or illiquid status. Investments currently not considered liquid include repurchase
agreements not maturing within seven days and certain restricted securities.
Interfund Borrowing and Lending. A fund may borrow money from and/or lend money to other
funds/portfolios in the Schwab complex (“Schwab Funds®), including funds/portfolios not
discussed in this SAI or in the corresponding prospectus. All loans are for temporary or emergency
purposes and the interest rates to be charged will be the average of the overnight repurchase
agreement rate and the short term bank loan rate. All loans are subject to numerous conditions
designed to ensure fair and equitable treatment of all participating funds/portfolios. These
conditions include, for example, that a fund’s participation in the credit facility must be
consistent with its investment policies and limitations and organizational documents; no fund may
lend to another fund through the interfund lending facility if the loan would cause the aggregate
outstanding loans through the credit facility to exceed 15% of the lending fund’s current net
assets at the time of the loan; and that a fund’s interfund loans to any one fund shall not exceed
5% of the lending fund’s net assets. With respect to the funds discussed in this SAI, a fund
lending to another fund may forego gains which could have been made had those assets been invested
in securities of its applicable underlying index. The interfund lending facility is subject to the
oversight and periodic review of the Board of Trustees.
Non-Publicly Traded Securities and Private Placements. A fund may receive in securities that are
neither listed on a stock exchange nor traded over-the-counter, including privately placed
securities. Such unlisted securities may involve a higher degree of business and financial risk
that can result in substantial losses. As a result of the absence of a public trading market for
these securities, they may be less liquid than publicly traded securities. Although these
securities may be sold in privately negotiated transactions, the prices realized from these sales
could be less than those originally paid by a fund or less than what may be considered the fair
value of such
securities. Furthermore, companies whose securities are not publicly traded may not be subject to
the disclosure and other investor protection requirements which might be applicable if their
securities were publicly traded. If such securities are required to be registered under the
securities laws of one or more jurisdictions before being sold, a fund may be required to bear the
expenses of registration. Though the funds do not intend to purchase these securities, they may
receive such securities as a result of another transaction, such as the spin-off of a company’s
subsidiary to a separate entity.
Promissory Notes are written agreements committing the maker or issuer to pay the payee a specified
amount either on demand or at a fixed date in the future, with or without interest. These are
sometimes called negotiable notes or instruments and are subject to credit risk. Bank notes are
notes used to represent obligations issued by banks in large denominations.
Real Estate Investment Trusts (REITS) are pooled investment vehicles, which invest primarily in
income producing real estate or real estate related loans or interests and, in some cases, manage
real estate. REITs are sometimes referred to as equity REITs, mortgage REITs or hybrid REITs. An
equity REIT invests primarily in properties and generates income from rental and lease properties
and, in some cases, from the management of real estate. Equity REITs also offer the potential for
growth as a result of property appreciation and from the sale of appreciated property. Mortgage
REITs invest primarily in real estate mortgages, which may secure construction, development or long
term loans, and derive income for the collection of interest payments. Hybrid REITs may combine the
features of equity REITs and mortgage REITs. REITs are generally organized as corporations or
business trusts, but are not taxed as a corporation if they meet certain requirements of Subchapter
M of the Code. To qualify, a REIT must, among other things, invest substantially all of its assets
in interests in real estate (including other REITs), cash and government securities, distribute at
least 95% of its taxable income to its shareholders and receive at least 75% of that income from
rents, mortgages and sales of property.
Like any investment in real estate, a REIT’s performance depends on many factors, such as its
ability to find tenants for its properties, to renew leases, and to finance property purchases and
renovations. In general, REITs may be affected by changes in underlying real estate values, which
may have an exaggerated effect to the extent a REIT concentrates its investment in certain regions
or property types. For example, rental income could decline because of extended vacancies,
increased competition from nearby properties, tenants’ failure to pay rent, or incompetent
management. Property values could decrease because of overbuilding, environmental liabilities,
uninsured damages caused by natural disasters, a general decline in the neighborhood, losses due to
casualty or condemnation, increases in property taxes, or changes in zoning laws. Ultimately, a
REIT’s performance depends on the types of properties it owns and how well the REIT manages its
properties. Additionally, declines in the market value of a REIT may reflect not only depressed
real estate prices, but may also reflect the degree of leverage utilized by the REIT.
In general, during periods of rising interest rates, REITs may lose some of their appeal for
investors who may be able to obtain higher yields from other income-producing investments, such as
long term bonds. Higher interest rates also mean that financing for property purchases and
improvements is more costly and difficult to obtain. During periods of declining interest
rates, certain mortgage REITs may hold mortgages that mortgagors elect to prepay, which can reduce
the yield on securities issued by mortgage REITs. Mortgage REITs may be affected by the ability of
borrowers to repay debts to the REIT when due and equity REITs may be affected by the ability of
tenants to pay rent.
Like small-cap stocks in general, certain REITs have relatively small market capitalizations and
their securities can be more volatile than—and at times will perform differently from—large-cap
stocks. In addition, because small-cap stocks are typically less liquid than large-cap stocks, REIT
stocks may sometimes experience greater share-price fluctuations than the stocks of larger
companies. Further, REITs are dependent upon specialized management skills, have limited
diversification, and are therefore subject to risks inherent in operating and financing a limited
number of projects. By investing in REITs indirectly through a fund, a shareholder will bear
indirectly a proportionate share of the REIT’s expenses in addition to their proportionate share of
a fund’s expenses. Finally, REITs could possibly fail to qualify for tax-free pass-through of
income under the Code or to maintain their exemptions from registration under the 1940 Act.
Repurchase Agreements are instruments under which a buyer acquires ownership of certain securities
(usually U.S. government securities) from a seller who agrees to repurchase the securities at a
mutually agreed-upon time and price, thereby determining the yield during the buyer’s holding
period. Any repurchase agreements a fund enters into will involve a fund as the buyer and banks or
broker-dealers as sellers. The period of repurchase agreements is usually short — from overnight
to one week, although the securities collateralizing a repurchase agreement may have longer
maturity dates. Default by the seller might cause a fund to experience a loss or delay in the
liquidation of the collateral securing the repurchase agreement. A fund also may incur disposition
costs in liquidating the collateral. In the event of a bankruptcy or other default of a repurchase
agreement’s seller, a fund might incur expenses in enforcing its rights, and could experience
losses, including a decline in the value of the underlying securities and loss of income. A fund
will make payment under a repurchase agreement only upon physical delivery or evidence of book
entry transfer of the collateral to the account of its custodian bank. Repurchase agreements are
the economic equivalents of loans.
Restricted Securities are securities that are subject to legal restrictions on their sale.
Restricted securities may be considered to be liquid if an institutional or other market exists for
these securities. In making this determination, a fund, under the direction and supervision of the
Board of Trustees will take into account various factors, including: (1) the frequency of trades
and quotes for the security; (2) the number of dealers willing to purchase or sell the security and
the number of potential purchasers; (3) dealer undertakings to make a market in the security; and
(4) the nature of the security and marketplace trades (e.g., the time needed to dispose of the
security, the method of soliciting offers and the mechanics of transfer). To the extent a fund
invests in restricted securities that are deemed liquid, its general level of illiquidity may be
increased if qualified institutional buyers become uninterested in purchasing these securities.
Short Sales may be used by a fund as part of its overall portfolio management strategies or to
offset (hedge) a potential decline in the value of a security. A fund may engage in short sales
that are either “against the box” or “uncovered.” A short sale is “against the box” if at all times
during which the short position is open, a fund owns at least an equal amount of the securities or
securities convertible into, or has the right to acquire, at no added cost, the securities of the
same issue as the securities that are sold short. A short sale against the box is a taxable
transaction to a fund with respect to the securities that are sold short. “Uncovered” short sales
are transactions under which a fund sells a security it does not own. To complete such transaction,
a fund may borrow the security through a broker to make delivery to the buyer and, in doing so, a
fund becomes obligated to replace the security borrowed by purchasing the security at the market
price at the time of the replacement. A fund also may have to pay a fee to borrow particular
securities, which would increase the cost of the security. In addition, a fund is often obligated
to pay any accrued interest and dividends on the securities until they are replaced. The proceeds
of the short sale position will be retained by the broker until a fund replaces the borrowed
securities.
A fund will incur a loss if the price of the security sold short increases between the time of the
short sale and the time the fund replaces the borrowed security and, conversely, the fund will
realize a gain if the price declines. Any gain will be decreased, and any loss increased, by the
transaction costs described above. A short sale creates the risk of an unlimited loss, as the price
of the underlying securities could theoretically increase without limit, thus increasing the cost
of buying those securities to cover the short position. If a fund sells securities short “against
the box,” it may protect unrealized gains, but will lose the opportunity to profit on such
securities if the price rises. The successful use of short selling as a hedging strategy may be
adversely affected by imperfect correlation between movements in the price of the security sold
short and the securities being hedged.
A fund’s obligation to replace the securities borrowed in connection with a short sale will be
secured by collateral deposited with the broker that consists of cash or other liquid securities.
In addition, a fund will earmark cash or liquid assets or place in a segregated account an amount
of cash or other liquid assets equal to the difference, if any, between (1) the market value of the
securities sold short, marked-to-market daily, and (2) any cash or other liquid securities
deposited as collateral with the broker in connection with the short sale.
Investment Limitations
The investment limitations below may be changed only by vote of a majority of the outstanding
voting securities of the applicable fund. Under the 1940 Act, a “vote of a majority of the
outstanding voting securities” of a fund means the affirmative vote of the lesser of (1) more than
50% of the outstanding shares of the fund or (2) 67% or more of the shares present at a
shareholders meeting if more than 50% of the outstanding shares are represented at the meeting in
person or by proxy.
EACH FUND MAY NOT:
1)
Purchase securities of an issuer, except as consistent with the maintenance of its status as
an open-end diversified company under the 1940 Act, the rules or regulations thereunder or any
exemption therefrom, as such statute, rules or regulations may be amended or interpreted from
time to time.
Concentrate investments in a particular industry or group of industries, as concentration is
defined under the 1940 Act, the rules or regulations thereunder or any exemption therefrom, as
such statute, rules or regulations may be amended or interpreted from time to time, except
that each fund will concentrate to approximately the same extent that its benchmark index
concentrates in the securities of such particular industry or group of industries.
3)
Purchase or sell commodities, commodities contracts or real estate, lend or borrow money,
issue senior securities, underwrite securities issued by others, or pledge, mortgage or
hypothecate any of its assets, except as permitted by (or not prohibited by) the 1940 Act or
the rules or regulations thereunder or any exemption therefrom, as such statute, rules or
regulations may be amended or interpreted from time to time.
THE FOLLOWING DESCRIPTIONS OF THE 1940 ACT MAY ASSIST INVESTORS IN UNDERSTANDING THE ABOVE POLICIES
AND RESTRICTIONS.
BORROWING. The 1940 Act restricts an investment company from borrowing (including pledging,
mortgaging or hypothecating assets) in excess of 33 1/3% of its total assets (not including
temporary borrowings not in excess of 5% of its total assets). Transactions that are fully
collateralized in a manner that does not involve the prohibited issuance of a “senior security”
within the meaning of Section 18(f) of the 1940 Act, shall not be regarded as borrowings for the
purposes of a fund’s investment restriction.
CONCENTRATION. The SEC has defined concentration as investing 25% or more of an investment
company’s total assets in an industry or group of industries, with certain exceptions such as with
respect to investments in obligations issued or guaranteed by the U.S. Government or its agencies
and instrumentalities, or tax-exempt obligations of state or municipal governments and their
political subdivisions.
DIVERSIFICATION. Under the 1940 Act and the rules, regulations and interpretations thereunder, a
“diversified company,” as to 75% of its total assets, may not purchase securities of any issuer
(other than obligations of, or guaranteed by, the U.S. government or its agencies, or
instrumentalities or securities of other investment companies) if, as a result, more than 5% of its
total assets would be invested in the securities of such issuer, or more than 10% of the issuer’s
voting securities would be held by a fund.
LENDING. Under the 1940 Act, an investment company may only make loans if expressly permitted by
its investment policies.
REAL ESTATE. The 1940 Act does not directly restrict an investment company’s ability to invest in
real estate, but does require that every investment company have the fundamental investment policy
governing such investments. Each fund has adopted the fundamental policy that would permit direct
investment in real estate. However, each fund has a non-fundamental investment limitation that
prohibits it from investing directly in real estate. This non-fundamental policy may be changed
only by vote of a fund’s Board of Trustees.
SENIOR SECURITIES. Senior securities may include any obligation or instrument issued by an
investment company evidencing indebtedness. The 1940 Act generally prohibits a fund from issuing
senior securities, although it provides allowances for certain borrowings and certain other
investments, such as short sales, reverse repurchase agreements, and firm commitment agreements ,
when such investments are “covered” or with appropriate earmarking or segregation of assets to
cover such obligations.
UNDERWRITING. Under the 1940 Act, underwriting securities involves an investment company purchasing
securities directly from an issuer for the purpose of selling (distributing) them or participating
in any such activity either directly or indirectly. Under the 1940 Act, a diversified fund may not
make any commitment as underwriter, if immediately thereafter the amount of its outstanding
underwriting commitments, plus the value of its investments in securities of issuers (other than
investment companies) of which it owns more than 10% of the outstanding voting securities, exceeds
25% of the value of its total assets.
THE FOLLOWING ARE NON-FUNDAMENTAL INVESTMENT POLICIES AND RESTRICTIONS, AND MAY BE CHANGED BY THE
BOARD OF TRUSTEES.
EACH FUND MAY NOT:
1)
Invest more than 15% of its net assets in illiquid securities.
2)
Sell securities short unless it owns the security or the right to obtain the security or
equivalent securities, or unless it covers such short sale as required by current SEC rules
and interpretations (transactions in futures contracts, options and other derivative
instruments are not considered selling securities short).
3)
Purchase securities on margin, except such short term credits as may be necessary for the
clearance of purchases and sales of securities and provided that margin deposits in connection
with futures contracts, options on futures or other derivative instruments shall not
constitute purchasing securities on margin.
4)
Borrow money except that a fund may (i) borrow money from banks or through an interfund
lending facility, if any, only for temporary or emergency purposes (and not for leveraging)
and (ii) engage in reverse repurchase agreements with any party; provided that (i) and (ii) in
combination do not exceed 33 1/3% of its total assets (any borrowings that come to exceed this
amount will be reduced to the extent necessary to comply with the limitation within three
business days).
5)
Lend any security or make any other loan if, as a result, more than 33 1/3% of its total
assets would be lent to other parties (this restriction does not apply to purchases of debt
securities or repurchase agreements).
6)
Purchase securities (other than securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities) if, as a result of such purchase, 25% or more of the value of
its total assets would be invested in any industry or group of industries (except that each
fund
may purchase securities to the extent that the index the fund is designed to track is also so
concentrated).
7)
Purchase or sell commodities, commodity contracts or real estate, including interests in real
estate limited partnerships, provided that a fund may (i) purchase securities of companies
that deal in real estate or interests therein (including REITs); (ii) purchase securities of
companies that deal in precious metals or interests therein; and (iii) purchase, sell and
enter into futures contracts (including futures contracts on indices of securities, interest
rates and currencies), options on futures contracts (including futures contracts on indices of
securities, interest rates and currencies), warrants, swaps, forward contracts, foreign
currency spot and forward contracts or other derivative instruments.
Policies and investment limitations that state a maximum percentage of assets that may be invested
in a security or other asset, or that set forth a quality standard shall be measured immediately
after and as a result of a fund’s acquisition of such security or asset, unless otherwise noted.
Except with respect to limitations on borrowing and futures and option contracts, any subsequent
change in net assets or other circumstances does not require a fund to sell an investment if it
could not then make the same investment. With respect to the limitation on illiquid securities, in
the event that a subsequent change in net assets or other circumstances cause a fund to exceed its
limitation, a fund will take steps to bring the aggregate amount of illiquid instruments back
within the limitations as soon as reasonably practicable.
CONTINUOUS OFFERING
The funds offer and issue shares at their net asset value per share (“NAV”) only in aggregations of
a specified number of shares (“Creation Units”). The method by which Creation Units are created
and trade may raise certain issues under applicable securities laws. Because new Creation Units are
issued and sold by the funds on an ongoing basis, at any point a “distribution,” as such term is
used in the Securities Act of 1933 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 requirement 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 fund’s distributor, breaks them down into
constituent shares, and sells such shares directly to 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 one is an underwriter for purposes
of the Securities Act must take into account all the facts and circumstances pertaining to the
activities of the broker-dealer or its client in the particular case, and the examples mentioned
above should not be considered a complete description of all the activities that could lead to
categorization as an underwriter.
Broker-dealer firms should also note that dealers who are not “underwriters” but are effecting
transactions in shares, whether or not participating in the distribution of shares, generally are
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 1940 Act. Firms that incur a prospectus delivery obligation with respect to
shares of the fund are reminded that, pursuant to Rule 153 under the Securities Act, a prospectus
delivery obligation under Section 5(b)(2) of the Securities Act owed to an exchange member in
connection with the sale on an exchange is satisfied by the fact that the prospectus is available
at the exchange upon request. The prospectus delivery mechanism provided in Rule 153 is only
available with respect to transactions on an exchange.
MANAGEMENT OF THE FUNDS
The funds are overseen by a Board of Trustees. The trustees are responsible for protecting
shareholder interests. The trustees regularly meet to review the investment activities, contractual
arrangements and the investment performance of the fund. The trustees did not meet during the most
recent fiscal year.
Certain trustees are “interested persons.” A trustee is considered an interested person of the
trust under the 1940 Act if he or she is an officer, director, or an employee of Charles Schwab
Investment Management, Inc. (“CSIM”) or Charles Schwab & Co., Inc. (“Schwab”). A trustee also may
be considered an interested person of the trust under the 1940 Act if he or she owns stock of The
Charles Schwab Corporation, a publicly traded company and the parent company of CSIM.
As used herein the term “Family of Investment Companies” collectively refers to The Charles Schwab
Family of Funds, Schwab Investments, Schwab Annuity Portfolios, Schwab Capital Trust and Schwab
Strategic Trust which, as of September 30, 2009, included 66 funds.
The tables below provide information about the trustees and officers for the trusts, which includes
the funds, in this SAI. The “Fund Complex” includes The Charles Schwab Family of Funds, Schwab
Investments, Schwab Capital Trust, Schwab Strategic Trust, Schwab Annuity Portfolios, Laudus Trust,
and Laudus Institutional Trust. As of September 30, 2009, the Fund Complex included 81 funds. The
address of each individual listed below is 211 Main Street, San Francisco, California94105.
Management table to be provided by amendment.
Trustee Committees
The Board of Trustees has established certain committees and adopted Committee charters with
respect to those committees, each as described below [to be provided by amendment].
Trustee Compensation
The following table provides estimated trustee compensation for the fiscal year ending August 31,2009. Certain information provided relates to the Fund Complex, which included ___funds as of
___. [To be provided by amendment.]
The following tables provide each trustee’s equity ownership of the fund and ownership of all
registered investment companies overseen by each trustee in the Family of Investment Companies as
of December 31, 2008. As of December 31, 2008, the Family of Investment Companies included [___]
funds. [To be provided by amendment.]
Code of Ethics
The funds, the investment adviser and the distributor have adopted Codes of Ethics as required
under the 1940 Act. Subject to certain conditions or restrictions, the Codes of Ethics permit the
trustees, directors, officers or advisory representatives of the fund or the investment adviser or
the directors or officers of the distributor to buy or sell directly or indirectly securities for
their own accounts. This includes securities that may be purchased or held by the funds. Securities
transactions by some of these individuals may be subject to prior approval of each entity’s Chief
Compliance Officer or alternate. Most securities transactions are subject to quarterly reporting
and review requirements.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of August 31, 2009, the officers and trustees of the trust, as a group owned, of record or
beneficially, less than 1 % of the outstanding voting securities of the funds.
As of August 31, 2009, no persons or entities owned, of record or beneficially, more than 5% of the
outstanding voting securities of any fund.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Adviser
CSIM, a wholly owned subsidiary of The Charles Schwab Corporation, 211 Main Street, San FranciscoCA94105, serves as the fund’s investment adviser pursuant to Investment Advisory Agreements
(Advisory Agreement) between it and the trust. As a result of his ownership of administration The Charles Schwab Corporation, Charles Schwab may be deemed to be a controlling person of CSIM.
A fund’s Advisory Agreement must be specifically approved initially for a 2 year term, and after
the expiration of the 2 year term, at least annually (1) thereafter, by the vote of the trustees or
by a vote of the shareholders of the fund, and (2) by the vote of a majority of the trustees who
are not parties to the Advisory Agreement or “interested persons” of any party (the “Independent
Trustees”), cast in person at a meeting called for the purpose of voting on such approval.
Each year, the Board of Trustees will call and hold a meeting to decide whether to renew the
Advisory Agreement between the trust and CSIM with respect to any existing funds in the trust. In
preparation for the meeting, the Board requests and reviews a wide variety of materials provided by
the fund’ investment adviser, as well as extensive data provided by third parties.
As described below, the investment adviser is entitled to receive a fee from the funds, payable
monthly, for its advisory and administrative services to the funds. The funds are new and have not
yet paid any fees to CSIM. As compensation for these services, the firm receives a management fee
from the funds expressed as a percentage of each fund’s average daily net assets.
FUND
Schwab U.S. Broad Market ETF™
%
Schwab U.S. Large-Cap ETF™
%
Schwab U.S. Large-Cap Growth ETF™
%
Schwab U.S. Large-Cap Value ETF™
%
Schwab U.S. Small-Cap ETF™
%
Schwab International Equity ETF™
%
Schwab International Small Cap Equity ETF™
%
Schwab Emerging Markets Equity ETF™
%
Pursuant to the Advisory Agreement, the Adviser is responsible for substantially all expenses of
the funds, including the cost of transfer agency, custody, fund administration, legal, audit and
other services, but excluding interest expense and taxes, brokerage expenses, future distribution
fees or expenses (i.e., 12b-1 fees) and extraordinary expenses.
Distributor
SEI Investments Distribution Co. (the “Distributor”) is the principal underwriter and distributor
of shares of the funds. Its principal address is 1 Freedom Valley Drive, Oaks, PA19456. The
Distributor has entered into agreement with the trust pursuant to which it distributes shares of
the funds (the “Distribution Agreement”). The Distributor continually distributes shares of the
funds on a best effort basis. The Distributor has no obligation to sell any specific quantity of
fund shares. The Distribution Agreement will continue for two years from its effective date and is
renewable annually in accordance with the 1940 Act. Shares are continuously offered for sale by
the funds through the Distributor only in Creation Units, as described in the funds’ prospectuses.
Shares in less than Creation Units are not distributed by the Distributor. The Distributor is a
broker-dealer registered under the Securities Exchange Act of 1934 and a member of the Financial
Industry Regulatory Authority. The Distributor is not affiliated with the trust, CSIM, or any
stock exchange.
The Distribution Agreement provides that it may be terminated at any time, without the payment of
any penalty, on at least sixty (60) days prior written notice to the other party. The Distribution
Agreement will terminate automatically in the event of its “assignment” (as defined in the 1940
Act).
DISTRIBUTION AND SHAREHOLDER SERVICES PLAN
The funds have adopted a Distribution and Shareholder Services (12b-1) Plan applicable to the
shares. Under the Distribution and Shareholder Services Plan, the Distributor, or other firms that
provide distribution and shareholder services, may receive up to 0.25% of a fund’s assets
attributable to shares as compensation for distribution and shareholder services pursuant to Rule
12b-1 of the 1940 Act. Distribution services may include: (i) services in connection with
distribution assistance, or (ii) payments to financial institutions and other financial
intermediaries, such as broker-dealers, mutual fund “supermarkets” and the Distributor’s affiliates
and subsidiaries, as compensation for services or reimbursement of expenses incurred in connection
with distribution assistance. The Distributor also will provide one or more of the following
service activities: (i) maintaining accounts relating to shareholders that invest in shares
(including Creation Units) of the funds; (ii) arranging for bank wires; (iii)
responding to shareholder inquiries relating to the services performed by Distributor and/or
service organizations; (iv) responding to inquiries from shareholders concerning their investment
in shares (including Creation Units) of the funds; (v) assisting shareholders in
changing dividend options, account designations and addresses; (vi) providing information
periodically to shareholders showing their position in shares (including Creation Units) of the
funds; (vii) forwarding shareholder communications from the funds such as proxies,
shareholder reports, annual reports, and dividend distribution and tax notices to shareholders;
(viii) processing purchase, exchange and redemption requests from shareholders and placing orders
with the funds or its service providers; and (ix) processing dividend payments from the funds on
behalf of shareholders. The Distributor may, at its discretion, retain a portion of such payments
to compensate itself for distribution and shareholder services and distribution related expenses such as the costs
of preparation, printing, mailing or otherwise disseminating sales literature, advertising, and
prospectuses (other than those furnished to current shareholders of the funds), promotional and
incentive programs, and such other marketing expenses that the Distributor may incur.
The Board has determined that no such fees will be charged prior to November 14, 2011. Because
these fees would be paid out of each fund’s assets on an on-going basis, if payments are made in
the future, these fees will increase the cost of your investment and may cost you more than paying
other types of sales charges.
Transfer Agent
State Street Bank and Trust Company, One Lincoln Street, Boston, Massachusetts02111, serves as the
funds’ transfer agent. As part of these services, the firm maintains records pertaining to the
sale, redemption and transfer of the funds’ shares.
Custodian and Fund Accountants
State Street Bank and Trust Company, One Lincoln Street, Boston, Massachusetts02111, serves as
custodian and accountant for the funds.
The custodian is responsible for the daily safekeeping of securities and cash held or sold by the
funds. The funds’ accountant maintains all books and records related to the funds’ transactions.
Independent Registered Public Accounting Firm
The fund’s independent registered public accounting firm, PricewaterhouseCoopers LLP, audits and
reports on the annual financial statements of the fund and reviews certain regulatory reports and
the funds’ federal income tax return. They also perform other professional, accounting, auditing,
tax and advisory services when the trust engages them to do so. Their address is Three Embarcadero
Center, San Francisco, CA94111-4004.
Legal Counsel
Morgan, Lewis & Bockius LLP represents the trust with respect to certain legal matters.
PORTFOLIO MANAGERS
Other Accounts. Each portfolio manager (collectively referred to as the “Portfolio
Managers”) is responsible for the day-to-day management of certain accounts, as listed below. The
accounts listed below are not subject to a performance-based advisory fee. The information below is
provided as of August 31, 2009.
Registered Investment
Companies
(this amount does not include
the funds in this Statement of
Other Pooled
Additional Information)
Investment Vehicles
Other Accounts
Number of
Number of
Total
Number of
Name
Accounts
Total Assets
Accounts
Assets
Accounts
Total Assets
Jeffrey Mortimer
$
Dustin Lewellyn
0
$
0
0
0
0
0
Agnes Hong
0
$
0
0
0
0
0
Conflicts of Interest. A Portfolio Manager’s management of other accounts may give rise to
potential conflicts of interest in connection with its management of the funds’ investments, on the
one hand, and the investments of the other accounts, on the other. These other accounts include
separate accounts and other mutual funds advised by CSIM (collectively, the “Other Managed
Accounts”). The Other Managed Accounts might have similar investment objectives as the funds, track
the same index the funds track or otherwise hold, purchase, or sell securities that are eligible to
be held, purchased, or sold by the funds. While the Portfolio Managers’ management of Other Managed
Accounts may give rise to the potential conflicts of interest listed below, CSIM does not believe
that the conflicts, if any, are material or, to the extent any such
conflicts are material, CSIM believes it has adopted policies and procedures that are designed to
manage those conflicts in an appropriate way.
Knowledge of the Timing and Size of Fund Trades. A potential conflict of interest may arise as a
result of the Portfolio Managers’ day-to-day management of the funds. Because of their positions
with the funds, the Portfolio Managers know the size, timing, and possible market
impact of fund
trades. It is theoretically possible that the Portfolio Managers could use this information to the
advantage of the Other Managed Accounts they manage and to the possible detriment of the funds.
However, CSIM has adopted policies and procedures reasonably designed to allocate investment
opportunities on a fair and equitable basis over time. Moreover, with respect to an index fund,
which seeks to track its benchmark index, much of this information is publicly available. When it
is determined to be in the best interest of both accounts, the Portfolio Managers may aggregate
trade orders for the Other Managed Accounts, excluding Schwab Personal Portfolio Managed Accounts,
with those of the funds. All aggregated orders are subject to CSIM’s aggregation and allocation
policy and procedures, which provide, among other things, that (i) a Portfolio Manager will not
aggregate orders unless he or she believes such aggregation is consistent with his or her duty to
seek best execution; (ii) no account will be favored over any other account; (iii) each account
that participates in an aggregated order will participate at the average security price with all
transaction costs shared on a pro-rata basis; and (iv) if the aggregated order cannot be executed
in full, the partial execution is allocated pro-rata among the participating accounts in accordance
with the size of each account’s order.
Investment Opportunities. A potential conflict of interest may arise as a result of the Portfolio
Managers’ management of the funds and Other Managed Accounts which, in theory, may allow them to
allocate investment opportunities in a way that favors the Other Managed Accounts over the funds,
which conflict of interest may be exacerbated to the extent that CSIM or the Portfolio Managers
receive, or expect to receive, greater compensation from their management of the Other Managed
Accounts than the funds. Notwithstanding this theoretical conflict of interest, it is CSIM’s policy
to manage each account based on its investment objectives and related restrictions and, as
discussed above, CSIM has adopted policies and procedures reasonably designed to allocate
investment opportunities on a fair and equitable basis over time and in a manner consistent with
each account’s investment objectives and related restrictions. For example, while the Portfolio
Managers may buy for an Other Managed Account securities that differ in identity or quantity from
securities bought for the fund or refrain from purchasing securities for an Other Managed Account
that they are otherwise buying for the fund in an effort to outperform its specific benchmark, such
an approach might not be suitable for the fund given its investment objectives and related
restrictions.
Compensation. Schwab compensates each CSIM Portfolio Manager for his or her management of
the funds. Each portfolio manager’s compensation consists of a fixed annual (“base”) salary and a
discretionary bonus. The base salary is determined considering compensation payable for a similar
position across the investment management industry and an evaluation of the individual portfolio
manager’s overall performance such as the portfolio manager’s contribution to the firm’s overall
investment process, being good corporate citizens, and contributions to the firm’s asset growth and
business relationships. The discretionary bonus is determined in accordance with the CSIM Equity
and Fixed Income Portfolio Management Incentive Plan (the “Plan”), which is designed to reward
consistent and superior investment performance relative to established benchmarks and/or industry
peer groups. The Plan is an annual incentive plan that, at the discretion of Executive Management,
provides quarterly
advances against the corporate component of the Plan at a fixed rate that is standard for the
employee’s level. Meanwhile, the portion of the incentive tied to fund performance is paid in its
entirety following the end of the Plan year (i.e. the Plan does not provide advances against the
portion of the Plan tied to fund performance) at management’s discretion based on their
determination of whether funds are available under the Plan as well as factors such as the
portfolio manager’s contribution to the firm’s overall
investment process, being good corporate
citizens, and contribution to the firm’s asset growth and business relationships.
The Plan consists of two independent funding components: fund investment performance and the
Charles Schwab Corporation’s (“CSC”) corporate performance. For the CSIM Fixed Income and Equity
Portfolio Management Plan, 75% of the funding is based on fund investment performance and 25% of
the funding is based in Schwab’s corporate performance. Funding for this Plan is pooled into
separate incentive pools (one for Fixed Income portfolio managers and one for Equity portfolio
managers) and then allocated to the plan participants by CSIM senior management. This allocation
takes into account fund performance as well as the portfolio manager’s leadership, teamwork, and
contribution to CSIM goals and objectives.
•
Fund Investment Performance
Investment Performance will be determined based on each fund’s performance relative to an
established industry peer group or benchmark. The peer group or benchmark will be determined by
the CSIM “Peer Group Committee” comprised of officer representation from CSIM Product
Development, Fund Administration and SCIR (Schwab Center for Investment Research) and approved
by CSIM’s President and CSIM’s Chief Investment Officers. The peer group is reviewed on a
regular basis and is subject to change in advance of each performance period (calendar year).
Any changes will be communicated to affected participants as soon as is reasonably possible
following the decision to change peer group or benchmark composition.
•
At the close of the year, each fund’s performance will be determined by its 1-year
and/or 1 and 3-year percentile standing within its designated peer group using standard
statistical methods approved by CSIM senior management. Relative position and the
respective statistical method used to determine percentile standing will result in a single
performance percentile number for each fund to allow for comparisons over time and between
funds. As each participant may manage and/or support a number of funds, there will be
several fund performance percentiles for each participant that may be considered in
arriving at the incentive compensation annual payout.
•
Schwab Corporate Performance
CSC’s corporate plan (the “Corporate Plan”) is an annual plan, which provides for discretionary
awards aligned with company and individual performance. Funding for the Corporate Plan is
determined at the conclusion of the calendar year using a payout rate that is applied to the
Company’s pre-tax operating margin before variable compensation expense. The exact payout rate
will vary and will be determined by Executive Management and recommended to the Compensation
Committee of the Board of Directors for final approval. Funding will be capped at 200% of the
Corporate Plan.
•
Incentive Allocation
At year-end, the full-year funding for both components of the Plan will be pooled together. This
total pool will then be allocated to plan participants by CSIM senior management based on their
assessment of a variety of performance factors. Factors considered in the allocation process
will include, but are not limited to, fund performance relative to benchmarks, individual
performance
against key objectives, contribution to overall group results, team work, and collaboration
between Analysts and Portfolio Managers.
The Portfolio Managers’ compensation is not based on the value of the assets held in a fund’s
portfolio. Mr. Lewellyn will be compensated solely under the Corporate Plan until December 31,2009. Effective
January 1, 2010, Mr. Lewellyn will be compensated under the CSIM Equity and Fixed
Income Portfolio Management Incentive Plan.
Ms. Hong will be compensated under the CSIM Equity and Fixed Income Portfolio Management Incentive
Plan.
Ownership of Fund Shares. Because the funds had not commenced operations prior to the date of this
SAI, no information regarding the Portfolio Managers’ “beneficial ownership” of shares of the funds
has been included. This information will appear in a future version of the SAI.
BROKERAGE ALLOCATION AND OTHER PRACTICES
Portfolio Turnover
For reporting purposes, a fund’s portfolio turnover rate is calculated by dividing the value of
purchases or sales of portfolio securities for the fiscal year, whichever is less, by the monthly
average value of portfolio securities the fund owned during the fiscal year. When making the
calculation, all securities whose maturities at the time of acquisition were one year or less
(“short-term securities”) are excluded.
A 100% portfolio turnover rate would occur, for example, if all portfolio securities (aside from
short-term securities) were sold and either repurchased or replaced once during the fiscal year.
Typically, funds with high turnover (such as 100% or more) tend to generate higher capital gains
and transaction costs, such as brokerage commissions. Since these are new funds there are no
portfolio turnover rates.
Portfolio Holdings Disclosure
The funds’ Board of Trustees has approved policies and procedures that govern the timing and
circumstances regarding the disclosure of funds’ portfolio holdings information to shareholders and
third parties. These policies and procedures are designed to ensure that disclosure of information
regarding the funds’ portfolio securities is in the best interests of funds’ shareholders, and
include procedures to address conflicts between the interests of the funds’ shareholders, on the
one hand, and those of the funds’ investment adviser, principal underwriter or any affiliated
person of the fund, its investment adviser, or its principal underwriter, on the other. Pursuant to
such procedures, the Board has authorized the president of the funds to authorize the release of
the funds’ portfolio holdings, as necessary, in conformity with the foregoing principles.
The Board exercises on-going oversight of the disclosure of fund portfolio holdings by overseeing
the implementation and enforcement of each fund’s policies and procedures by the Chief Compliance
Officer and by considering reports and recommendations by the Chief
Compliance Officer concerning any material compliance matters. The Board will receive periodic
updates, at least annually, regarding entities who may receive portfolio holdings information not
available to other current or prospective fund shareholders in connection with the dissemination of
information necessary for transactions in Creation Units, as contemplated by the exemptive relief
and as discussed below.
Each fund discloses its complete portfolio holdings schedule in public filings with the SEC within
60-80 days after the end of each fiscal quarter and will provide that information to shareholders
as required by federal securities laws and regulations thereunder. A fund may, however, voluntarily
disclose all or part of its portfolio holdings other than in connection with the
creation/redemption process, as discussed above, in advance of required filings with the SEC,
provided that such information is made generally available to all shareholders and other interested
parties in a manner that is consistent with the above policy for disclosure of portfolio holdings
information. Such information may be made available through a publicly-available website or other
means that make the information available to all likely interested parties contemporaneously.
The funds may disclose portfolio holdings information to certain persons and entities prior to and
more frequently than the public disclosure of such information (“early disclosure”). The president
of the funds may authorize early disclosure of portfolio holdings information to such parties at
differing times and/or with different lag times provided that (a) the president of the funds
determines that the disclosure is in the best interests of the funds and that there are no
conflicts of interest between the funds’ shareholders and funds’ adviser and distributor; and (b)
the recipient is, either by contractual agreement or otherwise by law, required to maintain the
confidentiality of the information.
In addition, the funds’ service providers including, without limitation, the investment adviser,
distributor, the custodian, fund accountant, transfer agent, auditor, proxy voting service
provider, pricing information venders, publisher, printer and mailing agent may receive early
disclosure of portfolio holdings information as frequently as daily in connection with the services
they perform for the funds. Service providers will be subject to a duty of confidentiality with
respect to any portfolio holdings information whether imposed by the provisions of the service
provider’s contract with the trust or by the nature of its relationship with the trust.
Further, each business day, each fund’s portfolio holdings information is provided to the
Distributor or other agent for dissemination through the facilities of the National Securities
Clearing Corporation (“NSCC”) and/or other fee-based subscription services to NSCC members and/or
subscribers to those other fee-based subscription services, including Authorized Participants (as
defined below), and to entities that publish and/or analyze such information in connection with the
process of purchasing or redeeming Creation Units or trading shares of funds in the secondary
market. This information typically reflects each fund’s anticipated holdings on the following
business day.
In addition, each fund discloses its portfolio holdings and the percentages they represent of the
fund’s net assets at least monthly, and as often as each day the fund is open for business, at
www.schwab.com/SchwabETFs.
Portfolio holdings information made available in connection with the creation/redemption process
may be provided to other entities that provide services to the funds in the ordinary course of
business after it has been disseminated to the NSCC. From time to time, information concerning
portfolio holdings other than portfolio holdings information made available in connection with the
creation/redemption process, as discussed above, may be provided to other entities that provide
services to the funds, including rating or ranking organizations, in the
ordinary course of
business, no earlier than one business day following the date of the information.
The funds’ policies and procedures prohibit the fund, the funds’ investment adviser or any related
party from receiving any compensation or other consideration in connection with the disclosure of
portfolio holdings information.
The funds may disclose non-material information including commentary and aggregate information
about the characteristics of the funds in connection with or relating to the funds or its portfolio
securities to any person if such disclosure is for a legitimate business purpose, such disclosure
does not effectively result in the disclosure of the complete portfolio securities of any fund
(which can only be disclosed in accordance with the above requirements), and such information does
not constitute material non-public information. Such disclosure does not fall within the portfolio
securities disclosure requirements outlined above.
Whether the information constitutes material non-public information will be made on a good faith
determination, which involves an assessment of the particular facts and circumstances. In most
cases commentary or analysis would be immaterial and would not convey any advantage to a recipient
in making a decision concerning the funds. Commentary and analysis includes, but is not limited to,
the allocation of the funds’ portfolio securities and other investments among various asset
classes, sectors, industries, and countries, the characteristics of the stock components and other
investments of the funds, the attribution of fund returns by asset class, sector, industry and
country, and the volatility characteristics of the funds.
Portfolio Transactions
The investment adviser makes decisions with respect to the purchase and sale of portfolio
securities on behalf of the funds. The investment adviser is responsible for implementing these
decisions, including the negotiation of commissions and the allocation of principal business and
portfolio brokerage. Purchases and sales of securities on a stock exchange or certain riskless
principal transactions placed on NASDAQ are typically effected through brokers who charge a
commission for their services. Purchases and sales of fixed income securities may be transacted
with the issuer, the issuer’s underwriter, or a dealer. The funds do not usually pay brokerage
commissions on purchases and sales of fixed income securities, although the price of the securities
generally includes compensation, in the form of a spread or a mark-up or mark-down, which is not
disclosed separately. The prices the fund pays to underwriters of newly-issued securities usually
include a commission paid by the issuer to the underwriter. Transactions placed through dealers who
are serving as primary market makers reflect the spread between the bid and asked prices. The money
market securities in which the fund may invest are traded primarily in the over-the-counter market
on a net basis and do not normally involve either brokerage commissions or transfer taxes. It is
expected that the cost of executing portfolio
securities transactions of the fund will primarily consist of dealer spreads and brokerage
commissions.
The investment adviser seeks to obtain the best execution for the funds’ portfolio transactions.
The investment adviser may take a number of factors into account in selecting brokers or dealers to
execute these transactions. Such factors may include, without limitation, the following:
execution
price; brokerage commission or dealer spread; size or type of the transaction; nature or character
of the markets; clearance or settlement capability; reputation; financial strength and stability of
the broker or dealer; efficiency of execution and error resolution; block trading capabilities;
willingness to execute related or unrelated difficult transactions in the future; order of call;
ability to facilitate short selling; provision of additional brokerage or research services or
products; whether a broker guarantees that a fund will receive, on aggregate, prices at least as
favorable as the closing prices on a given day when adherence to “market-on-close” pricing aligns
with fund objectives; or whether a broker guarantees that a fund will receive the volume-weighted
average price (VWAP) for a security for a given trading day (or portion thereof) when the
investment adviser believe that VWAP execution is in the fund’s best interest. In addition, the
investment adviser has incentive sharing arrangements with certain unaffiliated brokers who
guarantee market-on-close pricing: on a day when such a broker executes transactions at prices
better, on aggregate, than market-on-close prices, that broker may receive, in addition to his or
her standard commission, a portion of the net difference between the actual execution prices and
corresponding market-on-close prices for that day.
The investment adviser may cause the funds to pay a higher commission than otherwise obtainable
from other brokers or dealers in return for brokerage or research services or products if the
investment adviser believes that such commission is reasonable in relation to the services
provided. In addition to agency transactions, the investment adviser may receive brokerage and
research services or products in connection with certain riskless principal transactions, in
accordance with applicable SEC and other regulatory guidelines. In both instances, these services
or products may include: economic, industry, or company research reports or investment
recommendations; subscriptions to financial publications or research data compilations;
compilations of securities prices, earnings, dividends, and similar data; computerized databases;
quotation equipment and services; research or analytical computer software and services; products
or services that assist in effecting transactions, including services of third-party computer
systems developers directly related to research and brokerage activities; and effecting securities
transactions and performing functions incidental thereto (such as clearance and settlement). The
investment adviser may use research services furnished by brokers or dealers in servicing all fund
accounts, and not all services may necessarily be used in connection with the account that paid
commissions or spreads to the broker or dealer providing such services.
The investment adviser may receive a service from a broker or dealer that has both a “research” and
a “non-research” use. When this occurs, the investment adviser will make a good faith allocation,
under all the circumstances, between the research and non-research uses of the service. The
percentage of the service that is used for research purposes may be paid for with fund commissions
or spreads, while the investment adviser will use its own funds to pay for the percentage of the
service that is used for non-research purposes. In making this good faith allocation, the
investment adviser faces a potential conflict of interest, but the investment adviser
believe that the costs of such services may be appropriately allocated to their anticipated
research and non-research uses.
The investment adviser may purchase for funds, new issues of securities in a fixed price offering.
In these situations, the seller may be a member of the selling group that will, in addition to
selling securities, provide the investment adviser with research services, in accordance with
applicable rules and regulations permitting these types of arrangements. Generally, the seller will
provide research “credits” in these situations at a rate that is higher than that which is
available for typical secondary market transactions. These arrangements may not fall within the
safe harbor of Section 28(e) of the Securities Exchange Act of 1934.
The investment adviser may place orders directly with electronic communications networks or other
alternative trading systems. Placing orders with electronic communications networks or other
alternative trading systems may enable the funds to trade directly with other institutional
holders. At times, this may allow the funds to trade larger blocks than would be possible trading
through a single market maker.
The investment adviser may aggregate securities sales or purchases among two or more funds. The
investment adviser will not aggregate transactions unless it believes such aggregation is
consistent with its duty to seek best execution for each affected fund and is consistent with the
terms of the investment advisory agreement for such fund. In any single transaction in which
purchases and/or sales of securities of any issuer for the account of a fund are aggregated with
other accounts managed by the investment adviser, the actual prices applicable to the transaction
will be averaged among the accounts for which the transaction is effected, including the account of
the fund.
In determining when and to what extent to use Schwab or any other affiliated broker-dealer as its
broker for executing orders for the funds on securities exchanges, the investment adviser follows
procedures, adopted by the funds’ Board of Trustees, that are designed to ensure that affiliated
brokerage commissions (if relevant) are reasonable and fair in comparison to unaffiliated brokerage
commissions for comparable transactions. The Board reviews the procedures annually and approves and
reviews transactions involving affiliated brokers quarterly.
PROXY VOTING
The Board of Trustees of the trust has delegated the responsibility for voting proxies to CSIM
through their Advisory Agreement. The Trustees have adopted CSIM’s Proxy Voting Policy and
Procedures with respect to proxies voted on behalf of the various Schwab Fund portfolios. A
description of CSIM’s Proxy Voting Policy and Procedures is included in the Appendix.
The trust is required to disclose annually each fund’s complete proxy voting record on Form N-PX.
The fund’s proxy voting record for the most recent 12 month period ended June 30th will be
available by visiting the Schwab website at www.schwab.com/SchwabETFs. A fund’s Form N-PX will also
be available on the SEC’s website at www.sec.gov.
Brokerage Commissions
The funds are new and, therefore, for each of the last three fiscal years, the funds paid no
brokerage commissions.
Regular Broker-Dealers
Each fund’s regular broker-dealers during its most recent fiscal year are: (1) the ten
broker-dealers that received the greatest dollar amount of brokerage commissions from the fund; (2)
the ten broker-dealers that engaged as principal in the largest dollar amount of portfolio
transactions;
and (3) the ten broker-dealers that sold the largest dollar amount of the fund’s
shares. The funds are new and, therefore, have not purchased securities issued by any regular
broker-dealers.
DESCRIPTION OF THE TRUST
Each fund is a series of Schwab Strategic Trust, an open-end investment management company
organized as a Delaware statutory trust on January 27, 2009.
The Declaration of Trust provides for the perpetual existence of the Trust. The Trust may, however,
be terminated at any time by vote of at least two-thirds of the outstanding shares of each series
of the Trust or by the vote of the Trustees.
Shareholders are entitled to one vote for each full share held (with fractional votes for
fractional shares held) and will vote (to the extent provided herein) in the election of Trustees
and the termination of the Trust and on other matters submitted to the vote of shareholders.
Shareholders will vote by individual series on all matters except (i) when required by the 1940
Act, shares shall be voted in the aggregate and not by individual series and (ii) when the Trustees
have determined that the matter affects only the interests of one or more series, then only
shareholders of such series shall be entitled to vote thereon. Shareholders of one series shall not
be entitled to vote on matters exclusively affecting another series, such matters including,
without limitation, the adoption of or change in any fundamental policies or restrictions of the
other series and the approval of the investment advisory contracts of the other series.
There will normally be no meetings of shareholders for the purpose of electing Trustees, except
that in accordance with the 1940 Act (i) the Trust will hold a shareholders’ meeting for the
election of Trustees at such time as less than a majority of the Trustees holding office have been
elected by shareholders, and (ii) if, as a result of a vacancy in the Board of Trustees, less than
two-thirds of the Trustees holding office have been elected by the shareholders, that vacancy may
only be filled by a vote of the shareholders. In addition, Trustees may be removed from office by a
written consent signed by the holders of two-thirds of the outstanding shares and filed with the
Trust’s custodian or by a vote of the holders of two-thirds of the outstanding shares at a meeting
duly called for the purpose, which meeting shall be held upon the written request of the holders of
not less than 10% of the outstanding shares. Except as set forth above, the Trustees shall continue
to hold office and may appoint successor Trustees. Voting rights are not cumulative.
The Trust may, without shareholder vote, restate, amend or otherwise supplement the Declaration of
Trust. Shareholders shall have the right to vote on any amendment that could affect their right to
vote, any amendment to the Amendments section, any amendment for which
shareholder vote may be required by applicable law or by the Trust’s registration statement filed
with the SEC, and on any amendment submitted to them by the Trustees.
Any series of the Trust may reorganize or merge with one or more other series of another investment
company. Any such reorganization or merger shall be pursuant to the terms and conditions specified
in an agreement and plan of reorganization authorized and approved by the Trustees and entered into
by the relevant series in connection therewith. In addition, such
reorganization or merger may be
authorized by vote of a majority of the Trustees then in office and, to the extent permitted by
applicable law, without the approval of shareholders of any series.
Shareholders wishing to submit proposals for inclusion in a proxy statement for a future
shareholder meeting should send their written submissions to the Trust at 1 Freedom Valley Drive,
Oaks, PA19456. Proposals must be received a reasonable time in advance of a proxy solicitation to
be included. Submission of a proposal does not guarantee inclusion in a proxy statement because
proposals must comply with certain federal securities regulations.
PURCHASE, REDEMPTION AND PRICING OF SHARES
CREATION AND REDEMPTION OF CREATION UNITS
The funds are open each day that the New York Stock Exchange (NYSE) is open (Business Days). The
NYSE’s trading session is normally conducted from 9:30 a.m. Eastern time until 4:00 p.m. Eastern
time, Monday through Friday, although some days, such as in advance of and following holidays, the
NYSE’s trading session closes early. The following holiday closings are currently scheduled for
2009: New Year’s Day, Martin Luther King Jr.’s Birthday, Presidents’ Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Only orders that are received
and deemed acceptable by the Distributor no later than the time specified by the Trust will be
executed that day at the fund’s share price calculated that day. On any day that the NYSE closes
early, the funds reserve the right to advance the time by which purchase and redemption orders must
be received by the Distributor that day in order to be executed that day at that day’s share price.
Creation. The trust issues and sells shares of the funds only in Creation Units on a continuous
basis through the Distributor, without a sales load, at the NAV next determined after receipt, on
any Business Day, for an order received and deemed acceptable by the Distributor.
Fund Deposit. The consideration for purchase of Creation Units of the funds may consist of (i) the
in-kind deposit of a designated portfolio of securities closely approximating the holdings of a
fund (the “Deposit Securities”), and an amount of cash denominated in U.S. Dollars (the “Cash
Component”) computed as described below. Together, the Deposit Securities and the Cash Component
constitute the “Fund Deposit,” which represents the minimum initial and subsequent investment
amount for a Creation Unit of a fund.
The funds may accept a basket of money market instruments, non-U.S. currency or cash denominated in
U.S. dollars that differs from the composition of the published basket. The funds may permit or
require the consideration for Creation Units to consist solely of cash or non-U.S. currency. The
funds may permit or require the substitution of an amount of cash denominated in
U.S. Dollars (i.e., a “cash in lieu” amount) to be added to the Cash Component to replace any
Deposit Security. For example, the trust reserves the right to permit or require a “cash in lieu”
amount where the delivery of the Deposit Security by the Authorized Participant (as described
below) would be restricted under the securities laws or where the delivery of the Deposit Security
to the Authorized Participant would result in the disposition of the Deposit Security by the
Authorized Participant becoming restricted under the securities laws, or in certain other
situations.
The Cash Component is sometimes also referred to as the “Balancing Amount.” The Cash Component
serves the function of compensating for any differences between the NAV per Creation Unit and the
value of the Deposit Securities. If the Cash Component is a positive number (i.e., the NAV per
Creation Unit exceeds the value of the Deposit Securities), the creator will deliver the Cash
Component. If the Cash Component is a negative number (i.e., the NAV per Creation Unit is less than
the value of the Deposit Securities), the creator will receive the Cash Component. Computation of
the Cash Component excludes any stamp duty tax or other similar fees and expenses payable upon
transfer of beneficial ownership of the Deposit Securities, which shall be the sole responsibility
of the Authorized Participant.
A fund or its agent, through the NSCC or otherwise, makes available on each Business Day, prior to
the opening of business on the NYSE Arca, Inc. Exchange (currently 9:30 a.m., Eastern time), the
current Fund Deposit for the fund. Such Deposit Securities are applicable, subject to any
adjustments, in order to effect creations of Creation Units of the fund until such time as the
next-announced composition of the Deposit Securities is made available.
Procedures for Creation of Creation Units. To be eligible to place orders with the Distributor and
to create a Creation Unit of a fund, an entity must be a Depository Trust Company (“DTC”)
participant, such as a broker-dealer, bank, trust company, clearing corporation or certain other
organization, some of whom (and/or their representatives) own DTC (each a “DTC Participant”). DTC
acts as securities depositary for the shares. The DTC Participant must have executed an agreement
with the Distributor with respect to creations and redemptions of Creation Units (“Participant
Agreement”). A DTC Participant that has executed a Participant Agreement is referred to as an
“Authorized Participant.” Investors should contact the Distributor for the names of Authorized
Participants that have signed a Participant Agreement. All shares of a fund, however created, will
be entered on the records of DTC in the name of DTC or its nominee and deposited with, or on behalf
of, DTC.
All orders to create shares must be placed for one or more Creation Units. Orders must be
transmitted by an Authorized Participant pursuant to procedures set forth in the Participant
Agreement. The date on which an order to create Creation Units (or an order to redeem Creation
Units, as discussed below) is placed is referred to as the “Transmittal Date.” Orders must be
transmitted by an Authorized Participant by telephone or other transmission method acceptable to
the Distributor pursuant to procedures set forth in the Participant Agreement, as described below.
Economic or market disruptions or changes, or telephone or other communication failure, may impede
the ability to reach the Distributor or an Authorized Participant.
On days when the New York Stock Exchange or U.S. or non-U.S. bond markets close earlier than
normal, a fund may require purchase orders to be placed earlier in the day. All questions as
to the number of Deposit Securities to be delivered, and the validity, form and eligibility
(including time of receipt) for the deposit of any tendered securities, will be determined by the
trust, whose determination shall be final and binding.
If the Distributor does not receive both the required Deposit Securities and the Cash Component by
the specified time on the settlement date, the trust may cancel or revoke acceptance of such order.
Upon written notice to the Distributor, such canceled or revoked order may be resubmitted the
following Business Day using the Fund Deposit as newly constituted to reflect the then
current NAV
of a fund. The delivery of Creation Units so created generally will occur no later than the
settlement date.
Creation Units may be created in advance of receipt by the trust of all or a portion of the
applicable Deposit Securities as described below. In these circumstances, the initial deposit will
have a value greater than the NAV of the shares on the date the order is placed since, in addition
to available Deposit Securities, U.S. cash (or an equivalent amount of non-U.S. currency) must be
deposited in an amount equal to the sum of (i) the Cash Component, plus (ii) at least 102%, which
the trust may change from time to time, of the market value of the undelivered Deposit Securities
(the “Additional Cash Deposit”) with the fund pending delivery of any missing Deposit Securities.
The Authorized Participant must deposit with the custodian the appropriate amount of federal funds
by 10:00 a.m. New York time (or such other time as specified by the trust) on the settlement date.
If the Distributor does not receive the Additional Cash Deposit in the appropriate amount by such
time, then the order may be deemed to be rejected and the Authorized Participant shall be liable to
a fund for losses, if any, resulting therefrom. An additional amount of U.S. cash (or an equivalent
amount of non-U.S. currency) shall be required to be deposited with the Distributor, pending
delivery of the missing Deposit Securities to the extent necessary to maintain the Additional Cash
Deposit with the trust in an amount at least equal to 102%, which the trust may change from time to
time, of the daily marked to market value of the missing Deposit Securities. To the extent that
missing Deposit Securities are not received by the specified time on the settlement date, or in the
event a marked-to-market payment is not made within one Business Day following notification by the
Distributor that such a payment is required, the trust may use the cash on deposit to purchase the
missing Deposit Securities. The Authorized Participant will be liable to the trust for the costs
incurred by the trust in connection with any such purchases. These costs will be deemed to include
the amount by which the actual purchase price of the Deposit Securities exceeds the market value of
such Deposit Securities on the transmittal date plus the brokerage and related transaction costs
associated with such purchases. The trust will return any unused portion of the Additional Cash
Deposit once all of the missing Deposit Securities have been properly received by the Distributor
or purchased by the trust and deposited into the trust. In addition, a transaction fee, as listed
below, will be charged in all cases.
Acceptance of Orders for Creation Units. The trust reserves the absolute right to reject or revoke
acceptance of a creation order transmitted to it by the Distributor in respect of a fund. For
example, the trust may reject or revoke acceptance of an order, if (i) the order does not conform
to the procedures set forth in the Participant Agreement; (ii) the investor(s), upon obtaining the
shares ordered, would own 80% or more of the currently outstanding shares of a fund; (iii) the
Deposit Securities delivered are not as disseminated through the facilities of the NSCC for that
date by a fund as described above; (iv) acceptance of the Deposit Securities would have certain
adverse tax consequences to a fund; (v) acceptance of the Fund Deposit would, in the opinion of
counsel, be unlawful; (vi) acceptance of the Fund Deposit would otherwise, in the discretion of the
trust or CSIM, have an adverse effect on the trust or the rights of beneficial owners; or (vii) in
the event that circumstances outside the control of the trust, the custodian, the Distributor or
CSIM make it for all practical purposes impossible to process creation orders. Examples of such
circumstances include natural disaster, war, revolution; public service or utility problems such as
fires, floods, extreme weather conditions and power outages resulting in telephone, telecopy and
computer failures; market conditions or activities causing trading halts; systems
failures
involving computer or other information systems affecting the trust, CSIM, the Distributor, DTC,
NSCC, custodian (or sub-custodian) or any other participant in the creation process, and similar
extraordinary events. The Distributor shall notify a prospective creator of a Creation Unit and/or
the Authorized Participant acting on behalf of the creator of a Creation Unit of its rejection of
the order of such person. The trust, custodian (or sub-custodian) and the Distributor are under no
duty, however, to give notification of any defects or irregularities in the delivery of Fund
Deposits nor shall any of them incur any liability for the failure to give any such notification.
Creation/Redemption Transaction Fee. The funds impose a “Transaction Fee” on investors purchasing
or redeeming Creation Units. The Transaction Fee will be limited to amounts that have been
determined by CSIM to be appropriate. The purpose of the Transaction Fee is to protect the existing
shareholders of the funds from the dilutive costs associated with the purchase and redemption of
Creation Units. Where the funds permit cash creations (or redemptions) or cash in lieu of
depositing one or more Deposit Securities, the purchaser (or redeemer) may be assessed a higher
Transaction Fee to offset the transaction cost to the funds of buying (or selling) those particular
Deposit Securities. Transaction Fees will differ for the funds, depending on the transaction
expenses related to the funds’ portfolio securities. Every purchaser of a Creation Unit will
receive a prospectus that contains disclosure about the Transaction Fee, including the maximum
amount of the Transaction Fee charged by the funds, which is four times the Additional
Creation/Redemption Transaction Fee.
The following table sets forth the standard and additional creation/redemption transaction fee for
the funds.
Placement of Redemption Orders. The process to redeem Creation Units works much like the process to
purchase Creation Units, but in reverse. Orders to redeem Creation Units of the fund must be
delivered through an Authorized Participant. Investors other than Authorized Participants are
responsible for making arrangements for a redemption request to be made through an Authorized
Participant. Orders must be accompanied or followed by the requisite number of shares of the funds
specified in such order, which delivery must be made to the Distributor no later than 10:00 a.m.
New York time on the next Business Day following the Transmittal Date. All other procedures set
forth in the Participant Agreement must be properly followed.
To the extent contemplated by an Authorized Participant’s agreement, in the event the Authorized
Participant has submitted a redemption request but is unable to transfer all or part of the
Creation Units to be redeemed to the Distributor, the Distributor will nonetheless
accept the redemption request in reliance on the undertaking by the Authorized Participant to
deliver the missing shares as soon as possible. Such undertaking shall be secured by the Authorized
Participant’s delivery and maintenance of collateral consisting of cash having a value (marked to
market daily) at least equal to 105%, which CSIM may change from time to time, of the value of the
missing shares.
The current procedures for collateralization of missing shares require, among other things, that
any cash collateral shall be in the form of U.S. dollars (or, at the discretion of the trust,
non-U.S. currency in an equivalent amount) in immediately-available funds and shall be held by the
custodian and marked to market daily. The fees of the custodian (and any sub-custodians) in respect
of the delivery, maintenance and redelivery of the cash collateral shall be payable by the
Authorized Participant. The trust, on behalf of the funds, is permitted to purchase the missing
shares or acquire the Deposit Securities and the Cash Component underlying such shares at any time
and will subject the Authorized Participant to liability for any shortfall between the cost to the
trust of purchasing such shares, Deposit Securities or Cash Component and the value of the
collateral.
If the requisite number of shares of the funds is not delivered on the Transmittal Date as
described above the funds may reject or revoke acceptance of the redemption request. If it is not
possible to effect deliveries of the Fund Securities, the trust may in its discretion exercise its
option to redeem such shares in U.S. cash and the redeeming Authorized Participant will be required
to receive its redemption proceeds in cash. In addition, an investor may request a redemption in
cash that the fund may, in its sole discretion, permit. In either case, the investor
will receive a cash payment equal to the NAV of its shares based on the NAV of shares of a fund
next determined after the redemption request is received (minus a redemption transaction fee and
additional charge for requested cash redemptions specified above, to offset the trust’s brokerage
and other transaction costs associated with the disposition of Fund Securities). The funds may
also, in their sole discretion, upon request of a shareholder, provide such redeemer a portfolio of
securities that differs from the exact composition of the Fund Securities but does not differ in
NAV.
Redemptions of shares for Fund Securities will be subject to compliance with applicable federal and
state securities laws and the funds (whether or not it otherwise permits cash redemptions) reserve
the right to redeem Creation Units for cash to the extent that the trust could not lawfully deliver
specific Fund Securities upon redemptions or could not do so without first registering the Fund
Securities under such laws.
The ability of the trust to effect in-kind creations and redemptions is subject, among other
things, to the condition that, within the time period from the date of the order to the date of
delivery of the securities, there are no days that are holidays in the applicable foreign market.
For every occurrence of one or more intervening holidays in the applicable foreign market that are
not holidays observed in the U.S. equity market, the redemption settlement cycle may be extended by
the number of such intervening holidays. In addition to holidays, other unforeseeable closings in a
foreign market due to emergencies may also prevent the trust from delivering securities within
normal settlement period. The funds will not suspend or postpone redemption beyond seven days,
except as permitted under Section 22(e) of the 1940 Act or pursuant to exemptive relief obtained by
the trust. Section 22(e) provides that the right of redemption may be suspended or the date of
payment postponed with respect to the funds (1) for any period during which the NYSE is closed
(other than customary weekend and holiday closings); (2) for any period during which trading on the
NYSE is suspended or restricted; (3) for any period during which an emergency exists as a result of
which disposal of the shares of a 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.
Pricing of Shares
Each business day, the funds calculate their share price, or NAV, as of the close of the NYSE
(generally, 4 p.m. Eastern time). This means that NAVs are calculated using the values of a fund’s
portfolio securities as of the close of the NYSE. Such values are required to be determined in one
of two ways: securities for which market quotations are readily available are required to be valued
at current market value; and securities for which market quotations are not readily available are
required to be valued at fair value using procedures approved by the Board of Trustees.
Shareholders of funds that invest in foreign securities should be aware that because foreign
markets are often open on weekends and other days when the funds are closed, the value of some of a
fund’s securities may change on days when it is not possible to buy or sell shares of the fund. The
funds use approved pricing services to provide values for their portfolio securities. Current
market values are generally determined by the approved pricing services as follows: generally
securities traded on exchanges are valued at the last-quoted sales price on the exchange
on which such securities are primarily traded, or, lacking any sales, at the mean between the bid
and ask prices; generally securities traded in the over-the-counter market are valued at the last
reported sales price that day, or, if no sales are reported, at the mean between the bid and ask
prices. Generally securities listed on the NASDAQ National Market System are valued in accordance
with the NASDAQ Official Closing Price. In addition, securities that are primarily traded on
foreign exchanges are generally valued at the preceding closing values of such securities on their
respective exchanges with these values then translated into U.S. dollars at the current exchange
rate. Fixed income securities normally are valued based on valuations provided
by approved pricing
services. Securities may be fair valued pursuant to procedures approved by the funds’ Board of
Trustees when a security is de-listed or its trading is halted or suspended; when a security’s
primary pricing source is unable or unwilling to provide a price; when a security’s primary trading
market is closed during regular market hours; or when a security’s value is materially affected by
events occurring after the close of the security’s primary trading market. The Board of Trustees
regularly reviews fair value determinations made by the funds pursuant to the procedures.
NOTE: Transactions in fund shares will be priced at NAV only if you purchase or redeem shares
directly from a fund in Creation Units. Fund shares are purchased or sold on a national securities
exchange at market prices, which may be higher (premium) or lower (discount) than NAV.
TAXATION
Federal Tax Information for the Funds
This discussion of federal income tax consequences is based on the Code and the regulations issued
thereunder as in effect on the date of this Statement of Additional Information. New legislation,
as well as administrative changes or court decisions, may significantly change the conclusions
expressed herein, and may have a retroactive effect with respect to the transactions contemplated
herein.
It is each fund’s policy to qualify for taxation as a “regulated investment company” (RIC) by
meeting the requirements of Subchapter M of the Code. By qualifying as a RIC, each fund expects to
eliminate or reduce to a nominal amount the federal income tax to which it is subject. If a fund
does not qualify as a RIC under the Code, it will be subject to federal income tax on its net
investment income and any net realized capital gains. In addition, each fund could be required to
recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions
before requalifying as a RIC.
Each fund is treated as a separate entity for federal income tax purposes and is not combined with
the trust’s other funds. Each fund intends to qualify as a RIC so that it will be relieved of
federal income tax on that part of its income that is distributed to shareholders. In order to
qualify for treatment as a RIC, a fund must distribute annually to its shareholders at least 90% of
its investment company taxable income (generally, net investment income plus the excess, if any, of
net short-term capital gain over net long-term capital losses) and also must meet several
additional requirements. Among these requirements are the following: (i) at least 90% of a fund’s
gross income each taxable year must be derived from dividends, interest, payments with
respect to 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
or securities or currencies and net income derived from an interest in a qualified publicly traded
partnership; (ii) at the close of each quarter of a fund’s taxable year, at least 50% of the value
of its total assets must be represented by cash and cash items, U.S. Government securities,
securities of other RICs and other securities, with such other securities limited, in respect of
any one issuer, to an amount that does not exceed 5% of the value of a fund’s assets and that does
not represent more than 10% of the outstanding voting securities of such issuer; and (iii) at the
close
of each quarter of a fund’s taxable year, not more than 25% of the value of its assets may be
invested in securities (other than U.S. Government securities or the securities of other RICs) of
any one issuer or of two or more issuers and which are engaged in the same, similar, or related
trades or businesses if the fund owns at least 20% of the voting power of such issuers, or the
securities of one or more qualified publicly traded partnerships.
Certain master limited partnerships may qualify as “qualified publicly traded partnerships” for
purposes of the Subchapter M diversification rules described above. In order to do so, the master
limited partnership must satisfy two requirements during the taxable year. First, the interests of
such partnership either must be traded on an established securities market or must be readily
tradable on a secondary market (or the substantial equivalent thereof). Second, less than 90% of
the partnership’s gross income can consist of dividends, interest, payments with respect to
securities loans, or gains from the sale or other disposition of stock or securities or foreign
currencies, or other income derived with respect to its business of investing in such stock
securities or currencies.
The Code imposes a non-deductible excise tax on RICs that do not distribute in a calendar year
(regardless of whether they otherwise have a non-calendar taxable year) an amount equal to 98% of
their “ordinary income” (as defined in the Code) for the calendar year plus 98% of their net
capital gain for the one-year period ending on October 31 of such calendar year, plus any
undistributed amounts from prior years. The non-deductible excise tax is equal to 4% of the
deficiency. For the foregoing purposes, a fund is treated as having distributed any amount on which
it is subject to income tax for any taxable year ending in such calendar year. A fund may in
certain circumstances be required to liquidate fund investments in order to make sufficient
distributions to avoid federal excise tax liability at a time when the investment adviser might not
otherwise have chosen to do so, and liquidation of investments in such circumstances may affect the
ability of a fund to satisfy the requirements for qualification as a RIC.
Dividends and interest received from a fund’s holding of foreign securities 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. If the funds meet certain
requirements, which include a requirement that more than 50% of the value of the funds total assets
at the close of its respective taxable year consists of stocks or securities of foreign
corporations, then the funds should be eligible to file an election with the Internal Revenue
Service that may enable shareholders, in effect, to receive either the benefit of a foreign tax
credit, or a tax deduction, with respect to any foreign and U.S. possessions income taxes paid to
the funds, subject to certain limitations. Pursuant to this election, the funds will treat those
taxes as dividends paid to its shareholders. Each such shareholder will be required to include a
proportionate share of those taxes in gross income as income received from a foreign source and
must treat the amount so included as if the shareholder had paid the foreign tax directly. The
shareholder may then either deduct the taxes deemed paid by him or her in computing his or her
taxable income or, alternatively, use the foregoing information in calculating any foreign tax
credit the shareholder may be entitled to use against such shareholder’s federal income tax. If
the funds make this election, the funds will report annually to its shareholders the respective
amounts per share of the funds’ income from sources within, and taxes paid to, foreign countries
and U.S. possessions.
The funds’ transactions in foreign currencies and forward foreign currency contracts will be
subject to special provisions of the Internal Revenue Code that, among other things, may affect the
character of gains and losses realized by the funds (i.e., may affect whether gains or losses are
ordinary or capital), accelerate recognition of income to the funds and defer losses. These rules
could therefore affect the character, amount and timing of distributions to shareholders. These
provisions also may require the funds to mark-to-market certain types of positions in their
portfolios (i.e., treat them as if they were closed out) which may cause the funds to recognize
income without receiving cash with which to make distributions in amounts necessary to satisfy the
RIC distribution requirements for avoiding income and excise taxes. The funds intend to monitor
their transactions, intend to make the appropriate tax elections, and intend to make the
appropriate entries in their books and records when they acquire any foreign currency or forward
foreign currency contract in order to mitigate the effect of these rules so as to prevent
disqualification of the funds as a RIC and minimize the imposition of income and excise taxes.
If the funds own shares in certain foreign investment entities, referred to as “passive foreign
investment companies” or “PFIC,” the funds will be subject to one of the following special tax
regimes: (i) the funds are liable for U.S. federal income tax, and an additional interest charge,
on a portion of any “excess distribution” from such foreign entity or any gain from the disposition
of such shares, even if the entire distribution or gain is paid out by the funds as a dividend to
its shareholders; (ii) if the funds were able and elected to treat a PFIC as a “qualifying electing
fund” or “QEF,” the funds would be required each year to include in income, and distribute to
shareholders in accordance with the distribution requirements set forth above, the funds’ pro rata
share of the ordinary earnings and net capital gains of the passive foreign investment company,
whether or not such earnings or gains are distributed to the funds; or (iii) the funds may be
entitled to mark-to-market annually shares of the PFIC, and in such event would be required to
distribute to shareholders any such mark-to-market gains in accordance with the distribution
requirements set forth above.
A fund’s transactions in futures contracts, forward contracts, foreign currency exchange
transactions, options and certain other investment and hedging activities may be restricted by the
Code and are subject to special tax rules. In a given case, these rules may accelerate income to a
fund, defer its losses, cause adjustments in the holding periods of a fund’s assets, convert
short-term capital losses into long-term capital losses or otherwise affect the character of a
fund’s income. These rules could therefore affect the amount, timing and character of distributions
to shareholders. Each fund will endeavor to make any available elections pertaining to these
transactions in a manner believed to be in the best interest of a fund and its shareholders.
Each fund is required for federal income tax purposes to mark-to-market and recognize as income for
each taxable year its net unrealized gains and losses on certain futures contracts as of the end of
the year as well as those actually realized during the year. Gain or loss from futures and options
contracts on broad-based indexes required to be marked to market will be 60% long-term and 40%
short-term capital gain or loss. Application of this rule may alter the timing and character of
distributions to shareholders. Each fund may be required to defer the recognition of losses on
futures contracts, options contracts and swaps to the extent of any unrecognized gains on
offsetting positions held by the fund. It is anticipated that any net gain realized from the
closing out of futures or options contracts will be considered gain from the sale of securities and
therefore will be qualifying income for purposes of the 90% requirement described above. Each fund
distributes to shareholders at least annually any net capital gains which have been recognized for
federal income tax purposes, including unrealized gains at the end of the fund’s fiscal year on
futures or options transactions. Such distributions are combined with distributions of capital
gains realized on the fund’s other investments and shareholders are advised on the nature of the
distributions.
With respect to investments in zero coupon securities which are sold at original issue discount and
thus do not make periodic cash interest payments, a fund will be required to include as part of its
current income the imputed interest on such obligations even though the fund has not received any
interest payments on such obligations during that period. Because each fund distributes all of its
net investment income to its shareholders, a fund may have to sell fund securities to distribute
such imputed income which may occur at a time when the adviser would not have chosen to sell such
securities and which may result in taxable gain or loss.
Federal Income Tax Information for Shareholders
The discussion of federal income taxation presented below supplements the discussion in each fund’s
prospectus and only summarizes some of the important federal tax considerations generally affecting
shareholders of the funds. Accordingly, prospective investors (particularly those not residing or
domiciled in the United States) should consult their own tax advisors regarding the consequences of
investing in the funds.
Any dividends declared by a fund in October, November or December and paid the following January
are treated, for tax purposes, as if they were received by shareholders on December 31 of the year
in which they were declared. In general, distributions by a fund of investment company taxable
income (including net short-term capital gains), if any, whether received in cash or additional
shares, will be taxable to you as ordinary income. A portion of these distributions may be treated
as qualified dividend income (eligible for the reduced maximum rate to individuals of 15% (reduced
rates apply to individuals in lower tax brackets)) to the extent that a fund receives qualified
dividend income. Qualified dividend income is, in general, dividend income from taxable domestic
corporations and certain foreign corporations (e.g., foreign corporations incorporated in a
possession of the United States or in certain countries with a comprehensive tax treaty with the
United States, or the stock of which is readily tradable on an established securities market in the
United States). A dividend will not be treated as qualified dividend income to the extent that (i)
the shareholder has not held the shares of the fund on which the dividend was paid for more than 60
days during the 121-day period that begins on the date that is 60 days before the
date on which the shares of a fund become ex-dividend with respect to such dividend (and each fund
also satisfies those holding period requirements with respect to the securities it holds that paid
the dividends distributed to the shareholder), (ii) the shareholder is under an obligation (whether
pursuant to a short sale or otherwise) to make related payments with respect to substantially
similar or related property, or (iii) the shareholder elects to treat such dividend as investment
income under section 163(d)(4)(B) of the Internal Revenue Code. Dividends received by each fund
from a REIT or another RIC may be treated as qualified dividend income only to the extent the
dividend distributions are attributable to qualified dividend income
received by such REIT or RIC.
It is expected that dividends received by the fund from a REIT and distributed to a shareholder
generally will be taxable to the shareholder as ordinary income.
Distributions from net capital gain (if any) that are designated as capital gains dividends are
taxable as long-term capital gains without regard to the length of time the shareholder has held
shares of a fund. However, if you receive a capital gains dividend with respect to fund shares held
for six months or less, any loss on the sale or exchange of those shares shall, to the extent of
the capital gains dividend, be treated as a long-term capital loss. Long-term capital gains also
will be taxed at a maximum rate of 15%. Absent further legislation, the maximum 15% tax rate on
qualified dividend income and long-term capital gains will cease to apply to taxable years
beginning after December 31, 2010.
A fund will inform you of the amount of your ordinary income dividends and capital gain
distributions, if any, at the time they are paid and will advise you of their tax status for
federal income tax purposes, including what portion of the distributions will be qualified dividend
income, shortly after the close of each calendar year.
If a fund makes a distribution to a shareholder in excess of a fund’s current and accumulated
earnings and profits in any taxable year, the excess distribution will be treated as a return of
capital to the extent of the shareholder’s tax basis in its shares, and thereafter, as capital
gain. A return of capital is not taxable, but reduces a shareholder’s tax basis in its shares,
thus reducing any loss or increasing any gain on a subsequent taxable disposition by the
shareholder of its shares.
For corporate investors in a fund, dividend distributions a fund designates to be from dividends
received from qualifying domestic corporations will be eligible for the 70% corporate
dividends-received deduction to the extent they would qualify if the fund were a regular
corporation. Distributions by a fund also may be subject to state, local and foreign taxes, which
may differ from the federal income tax treatment described above.
A sale of shares in a fund may give rise to a gain or loss. In general, any gain or loss realized
upon a taxable disposition of shares will be treated as long-term capital gain or loss if the
shares have been held for more than 12 months. Otherwise, the gain or loss on the taxable
disposition of shares will be treated as short-term capital gain or loss. Under current law, the
maximum tax rate on long-term capital gains available to non-corporate shareholders is generally
15% for taxable years beginning before January 1, 2011. Any loss realized upon a taxable
disposition of shares held for six months or less will be treated as long-term, rather than
short-term, to the extent of any long-term capital gain distributions received (or deemed received)
by the shareholder with
respect to the shares. All or a portion of any loss realized upon a taxable disposition of shares
will be disallowed if other substantially identical shares of a fund are purchased within 30 days
before or after the disposition. In such a case, the basis of the newly purchased shares will be
adjusted to reflect the disallowed loss.
An Authorized Participant who exchanges securities for Creation Units generally will recognize a
gain or a loss. The gain or loss will be equal to the difference between the market value of the
Creation Units at the time and the sum of the exchanger’s aggregate basis in the securities
surrendered plus the amount of cash paid for such Creation Units. A person who redeems Creation
Units will generally recognize a gain or loss equal to the difference between the exchanger’s basis
in the Creation Units and the sum of the aggregate market value of any securities received plus the
amount of any cash received for such Creation Units. The Internal Revenue Service, however, 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.
Any capital gain or loss realized upon the creation of Creation Units will generally be treated as
long-term capital gain or loss if the securities exchanged for such Creation Units have been held
for more than one year. Any capital gain or loss realized upon the redemption of Creation Units
will generally be treated as long-term capital gain or loss if the shares comprising the Creation
Units have been held for more than one year. Otherwise, such capital gains or losses will be
treated as short-term capital gains or losses. In some circumstances, a redemption of Creation
Units may be treated as resulting in a distribution to which section 301 of the Code applies,
potentially causing amounts received by the shareholder in the redemption to be treated as dividend
income rather than as a payment in exchange for Creation Units. The rules for determining when a
redemption will be treated as giving rise to a distribution under section 301 of the Code and the
tax consequences of Code section 301 distributions are complex. Persons purchasing or redeeming
Creation Units should consult their own tax advisors with respect to the tax treatment of any
creation or redemption transaction.
Certain tax-exempt shareholders, including qualified pension plans, individual retirement accounts,
salary deferral arrangements, 401(k)s, and other tax-exempt entities, generally are exempt from
federal income taxation except with respect to their unrelated business taxable income (“UBTI”).
Under current law, each fund generally serves to block UBTI from being realized by their tax-exempt
shareholders. However, notwithstanding the foregoing, tax-exempt shareholders could realize UBTI
by virtue of its investment in the fund where, for example, (i) a fund invests in REITs that hold
residual interests in real estate mortgage investment conduits (“REMICs”) or (ii) share in a fund
constitutes debt-financed property in the hands of the tax-exempt shareholder within the meaning of
section 514(b) of the Code, a tax-exempt shareholder could realize UBTI by virtue of its investment
in the Fund. Charitable remainder trusts are subject to special rules and should consult their tax
advisors. There are no restrictions preventing a fund from holding investments in REITs that hold
residual interests in REMICs, and a fund may do so. The Internal Revenue Service has issued recent
guidance with respect to these issues and prospective shareholders, especially charitable remainder
trusts, are strongly encouraged to consult with their tax advisors regarding these issues.
Each fund has the right to reject an order to for Creation Units if the purchaser (or group of
purchasers) would, upon obtaining the shares so ordered, own 80% or more of the outstanding shares
of the fund and if, pursuant to section 351 of the Code, the respective fund would have a basis in
the deposit securities different from the market value of such securities on the date of deposit.
Each fund also has the right to require information necessary to determine beneficial Share
ownership for purposes of the 80% determination.
Dividends paid by the funds to shareholders who are nonresident aliens or foreign entities will be
subject to a 30% United States withholding tax unless a reduced rate of withholding or a
withholding exemption is provided under applicable treaty law to the extent derived from investment
income and short-term capital gain (other than “qualified short-term capital gain” described below)
or unless such income is effectively connected with a U.S. trade or business carried on through a
permanent establishment in the United States. Nonresident shareholders are urged to consult their
own tax advisors concerning the applicability of the United States withholding tax and the proper
withholding form(s) to be submitted to the funds. A non-U.S. shareholder who fails to provide an
appropriate Internal Revenue Service Form W-8 may be subject to backup withholding at the
appropriate rate.
The funds may, under certain circumstances, designate all or a portion of a dividend as an
“interest-related dividend” that if received by a nonresident alien or foreign entity generally
would be exempt from the 30% U.S. withholding tax, provided that certain other requirements are
met. The funds may also, under certain circumstances, designate all or a portion of a dividend as
a “qualified short-term capital gain dividend” which if received by a nonresident alien or foreign
entity generally would be exempt from the 30% U.S. withholding tax, unless the foreign person is a
nonresident alien individual present in the United States for a period or periods aggregating 183
days or more during the taxable year. In the case of Shares held through an intermediary, the
intermediary may withhold even if the funds designate the payment as qualified net interest income
or qualified short-term capital gain. Non-U.S. shareholders should contact their intermediaries
with respect to the application of these rules to their accounts. The provisions relating to
dividends to foreign persons would apply to dividends with respect to taxable years of the funds
beginning after December 31, 2004 and before January 1, 2010.
The Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) makes non-U.S. persons subject
to U.S. tax on disposition of a U.S. real property interest as if he or she were a U.S. person.
Such gain is sometimes referred to as “FIRPTA gain”. The Internal Revenue Code provides a
look-through rule for distributions of “FIRPTA gain” by a RIC if all of the following requirements
are met: (i) the RIC is classified as a “qualified investment entity” (a “qualified investment
entity” includes a RIC if, in general, more than 50% of the RIC’s assets consists of interests in
REITs and U.S. real property holding corporations); and (ii) you are a non-U.S. shareholder that
owns more than 5% of a fund’s shares at any time during the one-year period ending on the date of
the distribution. If these conditions are met, fund distributions to you are treated as gain from
the disposition of a U.S. real property interest (“USRPI”), causing the distribution to be subject
to U.S. withholding tax at a rate of 35%, and requiring that you file a nonresident U.S. income tax
return. Also, such gain may be subject to a 30% branch profits tax in the hands of a non-U.S.
shareholder that is a corporation. Even if a non-U.S. shareholder does not own more than 5% of a
fund’s shares, fund distributions to you that are attributable to gain
from the sale or disposition of a USRPI will be taxable as ordinary dividends subject to
withholding at a 30% or lower treaty rate.
Disclosure for Non-U.S. Shareholders — Each fund will be required in certain cases to withhold at
the applicable withholding rate and remit to the U.S. Treasury the withheld amount of taxable
dividends paid to any shareholder who (1) fails to provide a correct taxpayer identification number
certified under penalty of perjury; (2) is subject to withholding by the Internal Revenue
Service
for failure to properly report all payments of interest or dividends; (3) fails to provide a
certified statement that he or she is not subject to “backup withholding;” or (4) fails to provide
a certified statement that he or she is a U.S. person (including a U.S. resident alien). Backup
withholding is not an additional tax and any amounts withheld may be credited against the
shareholder’s ultimate U.S. tax liability.
Foreign shareholders (i.e., nonresident alien individuals and foreign corporations, partnerships,
trusts and estates) are generally subject to U.S. withholding tax at the rate of 30% (or a lower
tax treaty rate) on distributions derived from net investment income and short-term capital gains;
provided, however, that for a fund’s taxable year beginning after December 31, 2004 and not
beginning after December 31, 2009, interest related dividends and short-term capital gain dividends
generally will not be subject to U.S. withholding taxes. Distributions to foreign shareholders of
such short-term capital gain dividends, of long-term capital gains and any gains from the sale or
other disposition of shares of a fund generally are not subject to U.S. taxation, unless the
recipient is an individual who either (1) meets the Code’s definition of “resident alien” or (2) is
physically present in the U.S. for 183 days or more per year. Different tax consequences may result
if the foreign shareholder is engaged in a trade or business within the United States. In addition,
the tax consequences to a foreign shareholder entitled to claim the benefits of a tax treaty may be
different than those described above.
Under U.S. Treasury regulations, if a shareholder recognizes a loss of $2 million or more for an
individual shareholder or $10 million or more for a corporate shareholder, the shareholder must
file with the Internal Revenue Service a disclosure statement on Form 8886. Direct shareholders of
portfolio securities are in many cases excepted from this reporting requirement, but under current
guidance, shareholders of a RIC such as a fund are not excepted. Future guidance may extend the
current exception from this reporting requirement to shareholders of most or all RICs. The fact
that a loss is reportable under these regulations does not affect the legal determination of
whether the taxpayer’s treatment of the loss is proper. Shareholders should consult their tax
advisors to determine the applicability of these regulations in light of their individual
circumstances.
Shareholders are urged to consult their tax advisors as to the state and local tax rules affecting
investments in the funds.
From time to time, the fund may report the percentage of its assets that fall into the rating
categories set forth below.
BONDS
Moody’s Investors Service
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest
degree of investment risk and are generally referred to as “gilt edged.” Interest payments are
protected by a large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all standards. Together with the
Aaa group they comprise what are generally known as high-grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be other elements
present which make the long term risk appear somewhat larger than the Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and are to be considered as
upper-medium grade obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to impairment some time in the
future.
Baa Bonds which are rated Baa are considered as medium-grade obligations (i.e., they are neither
highly protected nor poorly secured). Interest payments and principal security appear adequate for
the present but certain protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their future cannot be
considered as well-assured. Often the protection of interest and principal payments may be very
moderate and thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of the desirable investment. Assurance
of interest and principal payments or of maintenance of other terms of the contract over any long
period of time may be small.
Standard & Poor’s Corporation
Investment Grade
AAA Debt rated ‘AAA’ has the highest rating assigned by S&P. Capacity to pay interest and repay
principal is extremely strong.
AA Debt rated ‘AA’ has a very strong capacity to pay interest and repay principal and differs from
the highest rated debt only in small degree.
A Debt rated ‘A’ has a strong capacity to pay interest and repay principal, although it is somewhat
more susceptible to adverse effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
BBB Debt rated ‘BBB’ is regarded as having an adequate capacity to pay interest and repay
principal. Whereas it normally exhibits adequate protection parameters, adverse economic
conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal for debt in this category than in higher rated categories.
Speculative Grade
Debt rated ‘BB’ and ‘B’ is regarded as having predominantly speculative characteristics with
respect to capacity to pay interest and repay principal. While such debt will likely have some
quality and protective characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB Debt rated ‘BB’ has less near-term vulnerability to default than other speculative grade debt.
However, it faces major ongoing uncertainties or exposure to adverse business, financial, or
economic conditions that could lead to inadequate capacity to meet timely interest and principal
payments. The ‘BB’ rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied ‘BBB-’ rating.
B Debt rate ‘B’ has greater vulnerability to default but presently has the capacity to meet
interest payments and principal repayments. Adverse business, financial, or economic conditions
would likely impair capacity or willingness to pay interest and repay principal. The ‘B’ rating
category also is used for debt subordinated to senior debt that is assigned an actual or implied
‘BB’ or ‘BB-’ rating.
Fitch, Inc.
Investment Grade Bond
AAA
Bonds considered to be investment grade and of the highest credit
quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA
Bonds considered to be investment grade and of very high credit
quality. The obligor’s ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated ‘AAA’.
Because bonds rated in the ‘AAA’ and ‘AA’ categories are not
significantly vulnerable to foreseeable future developments, short
term debt of these issuers is generally rated ‘F1+’.
A
Bonds considered to be investment grade and of high credit quality.
The obligor’s ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes
in economic conditions and circumstances than bonds with higher
ratings.
BBB
Bonds considered to be investment grade and of satisfactory credit
quality. The obligor’s ability to pay interest and repay principal is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to have adverse impact on
these bonds, and therefore impair timely payment. The likelihood that
the
ratings of these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Speculative grade bond
BB
Bonds are considered speculative. The obligor’s ability to pay
interest and repay principal may be affected over time by adverse
economic changes. However, business and financial alternatives can be
identified which could assist the obligor in satisfying its debt
service requirements.
B
Bonds are considered highly speculative. While bonds in this class
are currently meeting debt service requirements, the probability of
continued timely payment of principal and interest reflects the
obligor’s limited margin of safety and the need for reasonable
business and economic activity throughout the life of the issue.
Dominion Bond Rating Service
Bond and Long Term Debt Rating Scale
As is the case with all DBRS rating scales, long term debt ratings are meant to give an indication
of the risk that the borrower will not fulfill its full obligations in a timely manner with respect
to both interest and principal commitments. DBRS ratings do not take factors such as pricing or
market risk into consideration and are expected to be used by purchasers as one part of their
investment process. Every DBRS rating is based on quantitative and qualitative considerations that
are relevant for the borrowing entity.
CCC: Very Highly Speculative
CC: Very Highly Speculative
C: Very Highly Speculative
“AAA” Bonds rated “AAA” are of the highest credit quality, with exceptionally strong protection for
the timely repayment of principal and interest. Earnings are considered stable, the structure of
the industry in which the entity operates is strong, and the outlook for future profitability is
favorable. There are few qualifying factors present which would detract from the performance of the
entity, the strength of liquidity and coverage ratios is unquestioned and the entity has
established a creditable track record of superior performance. Given the extremely tough definition
which DBRS has established for this category, few entities are able to achieve a AAA rating.
“AA” Bonds rated “AA” are of superior credit quality, and protection of interest and principal is
considered high. In many cases, they differ from bonds rated AAA only to a small degree. Given the
extremely tough definition which DBRS has for the AAA category (which few companies are able to
achieve), entities rated AA are also considered to be strong credits which typically
exemplify above-average strength in key areas of consideration and are unlikely to be significantly
affected by reasonably foreseeable events.
“A” Bonds rated “A” are of satisfactory credit quality. Protection of interest and principal is
still substantial, but the degree of strength is less than with AA rated entities. While a
respectable rating, entities in the “A” category are considered to be more susceptible to adverse
economic conditions and have greater cyclical tendencies than higher rated companies.
“BBB” Bonds rated “BBB” are of adequate credit quality. Protection of interest and principal is
considered adequate, but the entity is more susceptible to adverse changes in financial and
economic conditions, or there may be other adversities present which reduce the strength of the
entity and its rated securities.
“BB” Bonds rated “BB” are defined to be speculative, where the degree of protection afforded
interest and principal is uncertain, particularly during periods of economic recession. Entities in
the BB area typically have limited access to capital markets and additional liquidity support and,
in many cases, small size or lack of competitive strength may be additional negative
considerations.
“B” Bonds rated “B” are highly speculative and there is a reasonably high level of uncertainty
which exists as to the ability of the entity to pay interest and principal on a continuing basis in
the future, especially in periods of economic recession or industry adversity.
“CCC” / “CC” / “C” Bonds rated in any of these categories are very highly speculative and are in
danger of default of interest and principal. The degree of adverse elements present is more severe
than bonds rated “B”. Bonds rated below “B” often have characteristics which, if not remedied, may
lead to default. In practice, there is little difference between the “C” to “CCC” categories, with
“CC” and “C” normally used to lower ranking debt of companies where the senior debt is rated in the
“CCC” to “B” range.
“D” This category indicates Bonds in default of either interest or principal.
(“high”, “low”) grades are used to indicate the relative standing of a credit within a particular
rating category. The lack of one of these designations indicates a rating which is essentially in
the middle of the category. Note that “high” and “low” grades are not used for the AAA category.
COMMERCIAL PAPER AND SHORT-TERM DEBT RATING SCALE
Dominion Bond Rating Service
As is the case with all DBRS rating scales, commercial paper ratings are meant to give an
indication of the risk that the borrower will not fulfill its obligations in a timely manner. DBRS
ratings do not take factors such as pricing or market risk into consideration and are expected to
be used by purchasers as one part of their investment process. Every DBRS rating is based on
quantitative and qualitative considerations which are relevant for the borrowing entity.
All three DBRS rating categories for short term debt use “high”, “middle” or “low” as subset grades
to designate the relative standing of the credit within a particular rating category. The following
comments provide separate definitions for the three grades in the Prime Credit Quality area, as
this is where ratings for active borrowers in Canada continue to be heavily concentrated.
“R-1 (high)” Short term debt rated “R-1 (high)” is of the highest credit quality, and indicates an
entity which possesses unquestioned ability to repay current liabilities as they fall due. Entities
rated in this category normally maintain strong liquidity positions, conservative debt levels and
profitability which is both stable and above average. Companies achieving an “R-1 (high)” rating
are normally leaders in structurally sound industry segments with proven track records, sustainable
positive future results and no substantial qualifying negative factors. Given the extremely tough
definition which DBRS has established for an “R-1 (high)”, few entities are strong enough to
achieve this rating.
“R-1 (middle)” Short term debt rated “R-1 (middle)” is of superior credit quality and, in most
cases, ratings in this category differ from “R-1 (high)” credits to only a small degree. Given the
extremely tough definition which DBRS has for the “R-1 (high)” category (which few companies are
able to achieve), entities rated “R-1 (middle)” are also considered strong credits which typically
exemplify above average strength in key areas of consideration for debt protection.
“R-1 (low)” Short term debt rated “R-1 (low)” is of satisfactory credit quality. The overall
strength and outlook for key liquidity, debt and profitability ratios is not normally as favorable
as with higher rating categories, but these considerations are still respectable. Any qualifying
negative factors which exist are considered manageable, and the entity is normally of sufficient
size to have some influence in its industry.
“R-2 (high)”, “R-2 (middle)”, “R-2 (low)” Short term debt rated “R-2” is of adequate credit quality
and within the three subset grades, debt protection ranges from having reasonable ability for
timely repayment to a level which is considered only just adequate. The liquidity and debt ratios
of entities in the “R-2” classification are not as strong as those in the “R-1” category, and the
past and future trend may suggest some risk of maintaining the strength of key ratios in these
areas. Alternative sources of liquidity support are considered satisfactory; however, even the
strongest liquidity support will not improve the commercial paper rating of the issuer. The size of
the entity may restrict its flexibility, and its relative position in the industry is not typically
as strong as an “R-1 credit”. Profitability trends, past and future, may be less favorable,
earnings not as stable, and there are often negative qualifying factors present which could also
make the entity more vulnerable to adverse changes in financial and economic conditions.
“R-3 (high)”, “R-3 (middle)”, “R-3 (low)” Short term debt rated “R-3” is speculative, and within
the three subset grades, the capacity for timely payment ranges from mildly speculative to
doubtful. “R-3” credits tend to have weak liquidity and debt ratios, and the future trend of these
ratios is also unclear. Due to its speculative nature, companies with “R-3” ratings would normally
have very limited access to alternative sources of liquidity. Earnings would typically be very
unstable, and the level of overall profitability of the entity is also likely to be low. The
industry environment may be weak, and strong negative qualifying factors are also likely to be
present.
SHORT TERM NOTES AND VARIABLE RATE DEMAND OBLIGATIONS
Short term notes/variable rate demand obligations bearing the designations MIG-1/VMIG-1 are
considered to be of the best quality, enjoying strong protection from established cash flows,
superior liquidity support or demonstrated broad-based access to the market for refinancing.
Obligations rated MIG-2/VMIG-3 are of high quality and enjoy ample margins of protection although
not as large as those of the top rated securities.
Standard & Poor’s Corporation
An S&P SP-1 rating indicates that the subject securities’ issuer has a strong capacity to pay
principal and interest. Issues determined to possess very strong safety characteristics are given
a plus (+) designation. S&P’s determination that an issuer has a satisfactory capacity to pay
principal and interest is denoted by an SP-2 rating.
Fitch, Inc.
Obligations supported by the highest capacity for timely repayment are rated F1+. An F1 rating
indicates that the obligation is supported by a very strong capacity for timely repayment.
Obligations rated F2 are supported by a good capacity for timely repayment, although adverse
changes in business, economic, or financial conditions may affect this capacity.
COMMERCIAL PAPER
Moody’s Investors Service
Prime-1 is the highest commercial paper rating assigned by Moody’s. Issuers (or related supporting
institutions) of commercial paper with this rating are considered to have a superior ability to
repay short term promissory obligations. Issuers (or related supporting institutions) of
securities rated Prime-2 are viewed as having a strong capacity to repay short term promissory
obligations. This capacity will normally be evidenced by many of the characteristics of issuers
whose commercial paper is rated Prime-1 but to a lesser degree.
Standard & Poor’s Corporation
A Standard & Poor’s Corporation (“S&P”) A-1 commercial paper rating indicates a strong degree of
safety regarding timely payment of principal and interest. Issues determined to possess
overwhelming safety characteristics are denoted A-1+. Capacity for timely payment on commercial
paper rated A-2 is satisfactory, but the relative degree of safety is not as high as for issues
designated A-1.
Fitch, Inc.
F1+ is the highest category, and indicates the strongest degree of assurance for timely payment.
Issues rated F1 reflect an assurance of timely payment only slightly less than issues rated F1+.
Issues assigned an F2 rating have a satisfactory degree of assurance for timely payment, but the
margin of safety is not as great as for issues in the first two rating categories.
Tax Efficiency
The Schwab 1000 Index® Fund and Schwab Total Stock Market Index Fund employ specific
investment strategies designed to minimize capital gain distributions while achieving each fund’s
investment objective. These strategies include selling the highest tax cost securities first, not
re-balancing the portfolio to reflect changes in their indexes, trading only round-lots or large
blocks of securities and focusing on individual tax lots in deciding when and how to manage the
realization of capital gains. In addition, the investment adviser monitors, analyzes and evaluates
each of these funds’ portfolio as well as market conditions to carefully manage necessary trading
activity and to determine when there are opportunities to realize capital losses, which offset
realized capital gains. These policies will be utilized to the extent they do not have a material
effect on each fund’s ability to track or match the performance of its index. They may affect the
composition of a fund’s index holdings as compared to the index. There can be no assurance that
the investment adviser will succeed in avoiding realized net capital gains.
C:
PART C: OTHER INFORMATION
C:
ITEM 23. EXHIBITS.
(a)(1)
Certificate of Trust, dated January 27, 2009, of Schwab Strategic Trust (the “Registrant” or the “Trust”) is
incorporated by reference to Exhibit (a)(1) of the Registrant’s Registration Statement, filed July 15, 2009.
Reference in made to Article 5 of
the Registrant’s Agreement and Declaration of Trust.
(d)
Form of Advisory Agreement between the Registrant and Charles Schwab Investment Management, Inc. is filed
herewith.
(e)
Form of Distribution Agreement between the Registrant and SEI Investments Distribution Co. is filed herewith.
(f)
Not applicable.
(g)(1)
Custodian Agreement between the Registrant and State Street Bank and Trust Company is filed herewith.
(2)
Form of Amendment to the Custodian Agreement between the Registrant and State Street Bank and Trust Company is
filed herewith.
(h)(1)
Administration Agreement between
the Registrant and Charles Schwab Investment Management, Inc. is filed herewith.
(2)
Transfer Agency Agreement between the Registrant and State Street Bank and Trust Company is filed herewith.
(3)
Form of Authorized Participant Agreement is filed herewith.
(4)
Master Fund Accounting and Services Agreement between the Registrant and State Street Bank and Trust Company is
filed herewith.
(5)
Form of Amendment to the Master Fund Accounting and Services Agreement between the Registrant and State Street
Bank and Trust Company is filed herewith.
(6)
Sub-Administration Agreement between the Charles Schwab Investment Management Company, Inc. and State Street
Bank and Trust Company is filed herewith.
(7)
Form of Amendment of the Sub-Administration Agreement between the Charles Schwab Investment Management Company,
Inc. and State Street Bank and Trust Company is filed herewith.
(i)
Opinion and Consent of Counsel, Morgan, Lewis & Bockius LLP to be filed by amendment.
(j)
Consent of Independent Registered Public Accounting Firm to be filed by amendment.
(k)
Not applicable.
(l)
None.
(m)
Form of Distribution and Shareholder Services Plan (12b-1 Plan) between the Registrant and SEI Investments
Distribution Co. is filed herewith.
(n)
Not applicable.
(o)
Not applicable.
(p)(1)
Joint Code of Ethics for the Registrant and Charles Schwab Investment Management, Inc. is filed herewith.
(p)(2)
Code of Ethics of SEI Investments Distribution Co. is filed herewith.
C:
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE REGISTRANT.
Not Applicable.
C:
ITEM 25. INDEMNIFICATION.
Reference
is made to Article VII of Registrant’s Declaration of Trust
(Exhibit (a) filed July 15, 2009) and
Article 11 of Registrant’s By-Laws
Insofar as indemnification for liability arising under the Securities Act of 1933 may be
permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the successful defense of any action, suit or proceeding)
is asserted by such trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will be governed by the
final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The Registrant’s investment adviser, Charles Schwab Investment Management, Inc. (“CSIM”), a
Delaware corporation, organized in October 1989, also serves as the investment manager to the
Laudus Institutional Trust, Laudus Trust, Schwab Capital Trust, The Charles Schwab Family of Funds,
Schwab Investments, and Schwab Annuity Portfolios, each an open-end, management investment company.
The principal place of business of the investment adviser is 211 Main Street, San Francisco, CA94105. The only business in which the investment adviser engages is that of investment adviser and
administrator to the Schwab Capital Trust, The Charles Schwab Family of Funds, Schwab Investments,
Schwab Annuity Portfolios and any other investment companies that Schwab may sponsor in the future,
investment adviser to the Registrant, Laudus Trust and Laudus Institutional Trust and an investment
adviser to certain non-investment company clients.
The business, profession, vocation or employment of a substantial nature in which each
director and/or senior or executive officer of CSIM is or has been engaged during the past two
fiscal years is listed below. The name of any company for which any director and/or senior or
executive officer of the investment adviser serves as director, officer, employee, partner or
trustee is also listed below.
Name and Position
with Adviser
Name of Other Company
Capacity
Charles R. Schwab,
Chairman and Director
Charles Schwab & Co., Inc.
Chairman and Director
The Charles Schwab Bank, N.A.
Chairman, Director
The Charles Schwab Corporation
Chairman
Schwab Holdings, Inc.
Chief Executive Officer
Schwab International Holdings, Inc.
Chairman and Chief Executive Officer
Schwab (SIS) Holdings, Inc. I
Chairman and Chief Executive Officer
Charles Schwab Holdings (UK)
Chairman
United States Trust Company of New York
Chairman, Director
U.S. Trust Corporation
Chairman, Director
All Kinds of Minds
Director
Charles and Helen Schwab Foundation
Director
Stanford University
Trustee
Randall W. Merk
Director, President and
Chief Executive Officer
Charles Schwab & Co., Inc.
Executive Vice President and
President, Investment Management
Services
Schwab Funds
President, Chief Executive Officer
Laudus Funds
Trustee
Charles Schwab Worldwide Funds, PLC
Director
Charles Schwab Asset Management (Ireland)
Limited
Director
Excelsior Funds
Trustee
Koji E. Felton,
Senior Vice President,
Chief Counsel and
Corporate Secretary
Jeffrey M. Mortimer,
Senior Vice President and
Chief Investment Officer,
Equities and Fixed Income
Schwab Funds
Senior Vice President and Chief
Investment Officer, Equities and
Fixed Income
Laudus Funds
President, Chief Executive Officer
and Chief Investment Officer
George Pereira,
Senior Vice President and
Chief Financial Officer
Laudus Funds
Chief Financial Officer
Excelsior Funds
Chief Financial Officer and Chief
Accounting Officer
Mutual Fund Division, UST Advisers, Inc.
Chief Financial Officer
Charles Schwab Worldwide Funds, PLC
Director
Charles Schwab Asset Management (Ireland)
Limited
Director
C:
ITEM 27. PRINCIPAL UNDERWRITERS:
(a) SEI Investments Distribution Co. (the “Distributor”) is the principal underwriter of the
Trust.
(b) Information with respect to each director, officer or partner of each principal underwriter is
as follows. Unless otherwise noted, the business address of each director or officer is 1 Freedom
Valley Drive, Oaks, PA19456.
All accounts, books and other documents required to be maintained by Section 31(a) of the 1940
Act, as amended, and the Rules thereunder will be maintained at the offices of:
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of
1940, as amended, the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Francisco, State of
California on the 7th day of October, 2009.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities indicated on this 7th day of October, 2009.