UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-22668
ETF Series Solutions
(Exact name of registrant as specified in charter)
615 East Michigan Street
Milwaukee, WI 53202
(Address of principal executive offices) (Zip code)
Kristina R. Nelson
ETF Series Solutions
615 East Michigan Street
Milwaukee, WI 53202
(Name and address of agent for service)
(414) 765-6076
Registrant's telephone number, including area code
Date of fiscal year end: December 31
Date of reporting period: June 30, 2021
Item 1. Reports to Stockholders.
(a) |
Semi-Annual Report
June 30, 2021
LHA Market State® Alpha Seeker ETF
Ticker: MSVX
LHA Market State® Tactical Beta ETF
Ticker: MSTB
Beginning on January 1, 2022, as permitted by regulations adopted by the U.S. Securities and Exchange Commission, paper copies of the Funds’ shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the Funds’ reports from your financial intermediary, such as a broker-dealer or bank. Instead, the reports will be made available on a website, and you will be notified by mail each time a report is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. Please contact your financial intermediary to elect to receive shareholder reports and other Fund communications electronically.
You may elect to receive all future reports in paper free of charge. Please contact your financial intermediary to inform them that you wish to continue receiving paper copies of shareholder reports and for details about whether your election to receive reports in paper will apply to all funds held with your financial intermediary.
LHA Market State® Shares
TABLE OF CONTENTS
Page | |
Letter to Shareholders | 1 |
Portfolio Allocation | 4 |
Schedules of Investments | 5 |
Statements of Assets & Liabilities | 10 |
Statements of Operations | 11 |
Statements of Changes in Net Assets | 12 |
Financial Highlights | 14 |
Notes to Financial Statements | 16 |
Expense Examples | 32 |
Review of Liquidity Risk Management Program | 34 |
Federal Tax Information | 35 |
Information About Portfolio Holdings | 35 |
Information About Proxy Voting | 36 |
Frequency Distribution of Premiums and Discounts | 36 |
Dear Shareholder,
This semi-annual report reflects performance for the period of January 1, 2021 through June 30, 2021 (the “current fiscal period”) for LHA Market State® Alpha Seeker ETF (“MSVX”) and for LHA Market State® Tactical Beta ETF (“MSTB”).
US Equity markets continued to defy gravity and reached all-time highs despite recording valuations that stretched the imaginations of many. Yields continued to counter some of the equity euphoria and stayed at levels that would signify a much more stagnant economy – likely the result of the extended Federal Reserve largess. Debt also remains in a global growth spurt. While some countries have been able to have a large portion of their populations vaccinated, new strains cast doubt upon any critical level of herd immunity emerging any time soon. It is not unreasonable to expect some greater level of volatility as we go forward, given the uncertainty surrounding the economic impact of COVID-19 over the coming months.
While signs of “stretched” pricing abound, whether they be for equities, fixed income or credit. Experience tells us that those signposts only indicate that certain events may be in the offing. They do not tell us when any event is going to take place. Fortunately, our investment process is about reacting to market changes, not attempting to divine the future directions from the proverbial tea leaves.
MSVX – SO FAR, SO GOOD
MSVX may be described as an absolute return strategy that seeks to provide positive returns across multiple market cycles for purposes of portfolio diversification. For the first half of 2021, MSVX’s Net Asset Value (“NAV”) increased by 8.23% as a relatively benign volatility environment allowed for few periods of mixed signals. MSVX’s market value increased 8.24% during the current fiscal period. The S&P 500 (TR) Index® increased 15.25% during the current fiscal period.
From the lowest to the highest VIX readings in history over the past decade, MSVX has powerful diversifying exposure characteristics that can act like a hedge during crisis periods, but also seek to provide return in calm markets when dedicated hedges often suffer substantial losses. This profile has the potential to add distinct optionality that can improve the risk / reward tradeoff of a traditional diversified portfolio.
MSTB: IN LINE WITH EXPECTATIONS
As equity markets continued to soar, the MSTB had a net return of 13.61% on a NAV basis during the current fiscal period. MSTB’s market value returned 13.39% during the same period. The S&P 500 (TR) Index® increased 15.25% during the current fiscal period. The strategy MSTB deploys is intended to be hedging during a crisis and just
Little Harbor Advisors, LLC | 30 Doaks Lane ● Marblehead, MA 01945 | www.LittleHarborAdvisors.com
as importantly, strives to remove those hedges during an ensuing rally - a hallmark of an investment approach that seeks better results through limiting losses rather than magnifying gains.
We thank you once again for your support and confidence and are optimistic that MSVX and MSTB will continue to fulfill expectations in 2021.
Sincerely,
Jeff Landle, CFA
Chief Investment Officer
Must be proceeded or accompanied by a current prospectus.
Little Harbor Advisors, LLC | 30 Doaks Lane ● Marblehead, MA 01945 | www.LittleHarborAdvisors.com
This information is provided for informational purposes only. This is not an offer to sell or a solicitation of an offer to buy an interest in any investment fund or for the provision of any investment management or advisory services. Investing involves risk. Principal loss is possible. Past performance does not guarantee future results.
Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV, and are not individually redeemed from the particular fund. Brokerage commissions will reduce returns. MSVX and MSTB (each referred to as a “Fund”) will use future contracts. The potential loss of principal in regard to futures contracts can be in amounts greater than the initial amount invested in the futures contract. The Fund will invest in other ETFs which involves additional risks such as limited liquidity and greater volatility.
Fund holdings and sector allocations are subject to change at any time and should not be considered recommendations to buy or sell any security. Please see the Schedule of Investments in this report for a complete list of fund holdings.
The Cboe Volatility Index® (VIX®) is a leading measure of market expectations of near-term volatility conveyed by S&P 500 Index® (SPX) option prices. It is not possible to invest directly in an index.
The S&P 500 (TR) Index® is an unmanaged index containing common stocks of 500 industrial, transportation, utility, and financial companies, regarded as generally representative of the U.S. stock market. The index return reflects the reinvestment of income dividends and capital gain distributions, if any, but does not reflect fees, brokerage commissions, or other expenses of investing. It is not possible to invest directly in an index.
Opinions expressed are subject to change at any time, are not guaranteed, and should not be considered investment advice. Diversification does not assure a profit, nor does it protect against a loss in a declining market.
MSVX and MSTB are distributed by Quasar Distributors, LLC. No other products mentioned are distributed by Quasar Distributors, LLC.
Little Harbor Advisors, LLC | 30 Doaks Lane ● Marblehead, MA 01945 | www.LittleHarborAdvisors.com
LHA Market State® Shares
Portfolio Allocation
As of June 30, 2021 (Unaudited)
LHA Market State® Alpha Seeker ETF
Security Type | Percentage of |
Short-Term Investments | 92.9% |
Investment Companies | 20.0 |
Purchased Options | 1.0 |
Liabilities in Excess of Other Assets | (13.9) |
Total | 100.0% |
LHA Market State® Tactical Beta ETF
Security Type | Percentage of |
Investment Companies | 55.0% |
Short-Term Investments | 44.8 |
Other Assets in Excess of Liabilities | 0.2 |
Total | 100.0% |
4
LHA Market State® Alpha Seeker ETF
Schedule of Investments
June 30, 2021 (Unaudited)
Shares | Security Description | Value | ||||||
INVESTMENT COMPANIES — 20.0% | ||||||||
85,375 | ProShares Short VIX Short-Term Futures ETF (a) | $ | 4,742,581 | |||||
TOTAL INVESTMENT COMPANIES (Cost $4,748,764) | 4,742,581 |
Contracts | Notional | Value | ||||||||||||||
PURCHASED OPTIONS — 1.0% | ||||||||||||||||
Call Options — 0.0% (b) | ||||||||||||||||
CBOE S&P 500® Index | ||||||||||||||||
50 | Expires: 06/21/2021, Exercise Price: $4,305.00 | $ | 21,487,500 | 250 | ||||||||||||
Put Options — 1.0% | ||||||||||||||||
CBOE Volatility Index | ||||||||||||||||
1,000 | Expires: 07/21/2021, Exercise Price: $16.00 | 1,583,000 | 57,500 | |||||||||||||
300 | Expires: 07/21/2021, Exercise Price: $19.00 | 474,900 | 76,500 | |||||||||||||
100 | Expires: 07/21/2021, Exercise Price: $21.00 | 158,300 | 42,000 | |||||||||||||
ProShares Ultra VIX Short-Term Futures ETF | ||||||||||||||||
500 | Expires: 07/21/2021, Exercise Price: $25.00 | 1,399,000 | 44,250 | |||||||||||||
200 | Expires: 07/21/2021, Exercise Price: $28.00 | 559,600 | 17,200 | |||||||||||||
237,450 | ||||||||||||||||
TOTAL PURCHASED OPTIONS (Cost $216,338) | 237,700 | |||||||||||||||
Par | Effective | Maturity | Value | |||||||||||||
SHORT-TERM INVESTMENTS — 92.9% | ||||||||||||||||
U.S. Treasury Bills — 25.3% | ||||||||||||||||
6,001,000 | United States Treasury Bill (c) (d) | 0.05 | % | 4/21/2022 | 5,998,599 |
The accompanying notes are an integral part of these financial statements.
5
LHA Market State® Alpha Seeker ETF
Schedule of Investments
June 30, 2021 (Unaudited) (Continued)
Shares | Security Description | Value | ||||||||||||||
Money Market Funds — 67.6% | ||||||||||||||||
7,991,884 | First American Government Obligations Fund, Class X, 0.03% (c) (e) | $ | 7,991,884 | |||||||||||||
7,991,884 | First American Treasury Obligations Fund, Class X, 0.01% (c) (e) | 7,991,884 | ||||||||||||||
15,983,768 | ||||||||||||||||
TOTAL SHORT-TERM INVESTMENTS (Cost $21,983,543) | 21,982,367 | |||||||||||||||
TOTAL INVESTMENTS — 113.9% (Cost $26,948,645) | 26,962,648 | |||||||||||||||
LIABILITIES IN EXCESS OF OTHER ASSETS — (13.9)% | (3,302,182 | ) | ||||||||||||||
NET ASSETS — 100.0% | $ | 23,660,466 |
Percentages are stated as a percentage of net assets.
(a) | Non-income producing security. |
(b) | Represents less than 0.05% of net assets. |
(c) | A portion of this security is held as collateral for futures contracts. At June 30, 2021, the total value of this security held as collateral amounted to $648,918 or 2.7% of net assets. |
(d) | Zero coupon bond. |
(e) | Annualized seven-day yield as of June 30, 2021. |
The accompanying notes are an integral part of these financial statements.
6
LHA Market State® Alpha Seeker ETF
Schedule of Open Futures Contracts
June 30, 2021 (Unaudited)
Number of | Description | Expiration | Notional | Value & | |||||||||
29 | S&P 500 E-Mini Future (a) | September 2021 | $ | 6,218,470 | $ | 68,874 |
(a) | Exchange Traded. |
The accompanying notes are an integral part of these financial statements.
7
LHA Market State® Tactical Beta ETF
Schedule of Investments
June 30, 2021 (Unaudited)
Shares | Security Description | Value | ||||||
INVESTMENT COMPANIES — 55.0% (a) | ||||||||
190,695 | SPDR S&P 500 ETF Trust (b) | $ | 81,628,902 | |||||
TOTAL INVESTMENT COMPANIES (Cost $73,540,173) | 81,628,902 |
Par | Effective | Maturity | Value | |||||||||||||
SHORT-TERM INVESTMENTS — 44.8% | ||||||||||||||||
U.S. Treasury Bills — 8.3% | ||||||||||||||||
8,023,000 | United States Treasury Bill (c) (d) | 0.04 | % | 9/9/2021 | 8,022,352 | |||||||||||
4,328,000 | United States Treasury Bill (c) (d) | 0.05 | % | 1/27/2022 | 4,326,801 | |||||||||||
12,349,153 | ||||||||||||||||
Shares | ||||||||||||||||
Money Market Funds — 36.5% | ||||||||||||||||
27,063,368 | First American Government Obligations Fund, Class X, 0.03% (e) | 27,063,368 | ||||||||||||||
27,063,066 | First American Treasury Obligations Fund, Class X, 0.01% (e) | 27,063,066 | ||||||||||||||
54,126,434 | ||||||||||||||||
TOTAL SHORT-TERM INVESTMENTS (Cost $66,475,501) | 66,475,587 | |||||||||||||||
TOTAL INVESTMENTS — 99.8% (Cost $140,015,674) | 148,104,489 | |||||||||||||||
OTHER ASSETS IN EXCESS OF LIABILITIES — 0.2% | 291,068 | |||||||||||||||
NET ASSETS — 100.0% | $ | 148,395,557 |
Percentages are stated as a percentage of net assets.
(a) | The risks of investing in investment companies, such as the underlying ETFs, typically reflect the risks of the types of investments in which the investment companies invest. See Note 9 in Notes to Financial |
(b) | Fair value of this security exceeds 25% of the Fund’s net assets. Additional information about this security, including the financial statements, is available from the SEC’s EDGAR database at www.sec.gov. |
(c) | All or a portion of this security is held as collateral for futures contracts. At June 30, 2021, the total value of the securities held as collateral amounted to $ 31,424,842 or 21.2% of net assets. |
(d) | Zero coupon bond. |
(e) | Annualized seven-day yield as of June 30, 2021. |
The accompanying notes are an integral part of these financial statements.
8
LHA Market State® Tactical Beta ETF
Schedule of Open Futures Contracts
June 30, 2021 (Unaudited)
Number of | Description | Expiration | Notional | Value & | |||||||||
346 | S&P 500 E-Mini Future (a) | September 2021 | $ | 74,192,780 | $ | 694,792 |
(a) | Exchange Traded. |
The accompanying notes are an integral part of these financial statements.
9
LHA Market State® Shares
Statements of Assets and Liabilities
June 30, 2021 (Unaudited)
| LHA Market | LHA Market | ||||||
ASSETS | ||||||||
Investments in Securities, at Value (a) | $ | 26,962,648 | $ | 148,104,489 | ||||
Deposits at Broker for Futures and Options | — | 418,139 | ||||||
Dividends and Interest Receivable | 238 | 259,346 | ||||||
Variation Margin Receivable | 9,570 | 93,926 | ||||||
Receivables for Securities Sold | 3,188 | — | ||||||
Total Assets | 26,975,644 | 148,872,900 | ||||||
LIABILITIES | ||||||||
Payable for Securities Purchased | 2,427,203 | 352,859 | ||||||
Payable to Broker for Futures and Options | 865,869 | — | ||||||
Management Fees Payable | 21,157 | 127,416 | ||||||
Broker Interest Payable | 949 | 68 | ||||||
Total Liabilities | 3,315,178 | 480,343 | ||||||
NET ASSETS | $ | 23,660,466 | $ | 148,395,557 | ||||
NET ASSETS CONSIST OF: | ||||||||
Paid-in Capital | $ | 23,810,644 | $ | 134,505,596 | ||||
Total Distributable Earnings (Accumulated Deficit) | (150,178 | ) | 13,889,961 | |||||
Net Assets | $ | 23,660,466 | $ | 148,395,557 | ||||
Net Asset Value: | ||||||||
Net Assets | $ | 23,660,466 | $ | 148,395,557 | ||||
Shares Outstanding (b) | 925,000 | 4,850,000 | ||||||
Net Asset Value, Offering and Redemption Price per Share | $ | 25.58 | $ | 30.60 | ||||
(a) Identified Cost: | ||||||||
Investments in Securities | $ | 26,948,645 | $ | 140,015,674 | ||||
(b) No par value, unlimited number of shares authorized. |
The accompanying notes are an integral part of these financial statements.
10
LHA Market State® Shares
Statements of Operations
For the Six-Months Ended June 30, 2021 (Unaudited)
LHA Market | LHA Market | |||||||
INVESTMENT INCOME | ||||||||
Dividends | $ | 7 | $ | 437,715 | ||||
Interest | 4,006 | 7,514 | ||||||
Total Investment Income | 4,013 | 445,229 | ||||||
EXPENSES | ||||||||
Management Fees | 111,767 | 565,136 | ||||||
Broker Interest Expense | 8,441 | 16,968 | ||||||
Total Expenses | 120,208 | 582,104 | ||||||
Net Investment Income (Loss) | (116,195 | ) | (136,875 | ) | ||||
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS | ||||||||
Net Realized Gain (Loss) on: | ||||||||
Investments | 1,553,492 | (951,817 | ) | |||||
Written Options | 60,555 | 94,915 | ||||||
Futures | (153,272 | ) | 5,976,414 | |||||
Net Change in Unrealized Appreciation (Depreciation) on: | ||||||||
Investments | 18,371 | 7,056,017 | ||||||
Futures | 68,874 | 391,792 | ||||||
Net Realized and Unrealized Gain (Loss) on Investments | 1,548,020 | 12,567,321 | ||||||
NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS | $ | 1,431,825 | $ | 12,430,446 |
The accompanying notes are an integral part of these financial statements.
11
LHA Market State® Alpha Seeker ETF
Statements of Changes in Net Assets
Six-Months | Period Ended | |||||||
OPERATIONS | ||||||||
Net Investment Income (Loss) | $ | (116,195 | ) | $ | (222,196 | ) | ||
Net Realized Gain (Loss) on Investments, Written Options and Futures | 1,460,775 | (921,628 | ) | |||||
Net Change in Unrealized Appreciation (Depreciation) on Investments, Written Options and Futures | 87,245 | (4,368 | ) | |||||
Net Increase (Decrease) in Net Assets Resulting from Operations | 1,431,825 | (1,148,192 | ) | |||||
DISTRIBUTIONS TO SHAREHOLDERS | ||||||||
Net Distributions to Shareholders | — | (344,552 | ) | |||||
Total Distributions to Shareholders | — | (344,552 | ) | |||||
CAPITAL SHARE TRANSACTIONS | ||||||||
Proceeds from Shares Sold | 5,777,636 | 36,787,960 | ||||||
Payments for Shares Redeemed | (1,279,200 | ) | (17,577,297 | ) | ||||
Transaction Fees (Note 8) | 1,413 | 10,873 | ||||||
Net Increase (Decrease) in Net Assets Derived from Capital Share Transactions (b) | 4,499,849 | 19,221,536 | ||||||
Net Increase (Decrease) in Net Assets | 5,931,674 | 17,728,792 | ||||||
NET ASSETS | ||||||||
Beginning of Period | $ | 17,728,792 | $ | — | ||||
End of Period | $ | 23,660,466 | $ | 17,728,792 |
(a) | The Fund commenced operations on May 13, 2020. The information presented is for the period from May 13, 2020 to December 31, 2020. |
(b) | Summary of capital share transactions is as follows: |
Shares | Shares | |||||||
Shares Sold | 225,000 | 1,475,000 | ||||||
Shares Redeemed | (50,000 | ) | (725,000 | ) | ||||
Net Increase (Decrease) | 175,000 | 750,000 |
The accompanying notes are an integral part of these financial statements.
12
LHA Market State® Tactical Beta ETF
Statements of Changes in Net Assets
Six-Months | Period Ended | |||||||
OPERATIONS | ||||||||
Net Investment Income (Loss) | $ | (136,875 | ) | $ | (8,607 | ) | ||
Net Realized Gain (Loss) on Investments, Written Options and Futures | 5,119,512 | 1,393,328 | ||||||
Net Change in Unrealized Appreciation (Depreciation) on Investments, Written Options and Futures | 7,447,809 | 1,333,102 | ||||||
Net Increase (Decrease) in Net Assets Resulting from Operations | 12,430,446 | 2,717,823 | ||||||
DISTRIBUTIONS TO SHAREHOLDERS | ||||||||
Net Distributions to Shareholders | — | (648,256 | ) | |||||
Total Distributions to Shareholders | — | (648,256 | ) | |||||
CAPITAL SHARE TRANSACTIONS | ||||||||
Proceeds from Shares Sold | 108,569,640 | 65,667,018 | ||||||
Transaction Fees (Note 8) | 29,091 | — | ||||||
Reimbursement from Administrator | 2,168 | — | ||||||
Payments for Shares Redeemed | (8,978,695 | ) | (31,393,678 | ) | ||||
Net Increase (Decrease) in Net Assets Derived from Capital Share Transactions (b) | 99,622,204 | 34,273,340 | ||||||
Net Increase (Decrease) in Net Assets | 112,052,650 | 36,342,907 | ||||||
NET ASSETS | ||||||||
Beginning of period | $ | 36,342,907 | $ | — | ||||
End of Period | $ | 148,395,557 | $ | 36,342,907 |
(a) | The Fund commenced operations on September 29, 2020. The information presented is for the period from September 29, 2020 to December 31, 2020. |
(b) | Summary of capital share transactions is as follows: |
Shares | Shares | |||||||
Shares Sold | 3,800,000 | 2,575,000 | ||||||
Shares Redeemed | (300,000 | ) | (1,225,000 | ) | ||||
Net Increase (Decrease) | 3,500,000 | 1,350,000 |
The accompanying notes are an integral part of these financial statements.
13
LHA Market State® Alpha Seeker ETF
Financial Highlights
For a capital share outstanding throughout the period
Six-Months | Period Ended | |||||||
Net Asset Value, Beginning of Period | $ | 23.64 | $ | 25.00 | ||||
INCOME (LOSS) FROM INVESTMENT OPERATIONS: | ||||||||
Net Investment Income (Loss) (b)(g) | (0.14 | ) | (0.20 | ) | ||||
Net Realized and Unrealized Gain (Loss) on Investments | 2.08 | (0.71 | ) | |||||
Total from Investment Operations | 1.94 | (0.91 | ) | |||||
DISTRIBUTIONS TO SHAREHOLDERS: | ||||||||
From Net Investment Income | — | (0.46 | ) | |||||
Total Distributions | — | (0.46 | ) | |||||
CAPITAL SHARE TRANSACTIONS: | ||||||||
Transaction Fees (Note 8) | 0.00 | (i) | 0.01 | |||||
Net Asset Value, End of Period | $ | 25.58 | $ | 23.64 | ||||
Total Return | 8.23 | %(c) | -3.62 | %(c) | ||||
SUPPLEMENTAL DATA: | ||||||||
Net Assets at End of Period (000’s) | $ | 23,660 | $ | 17,729 | ||||
RATIOS TO AVERAGE NET ASSETS: | ||||||||
Expenses to Average Net Assets (f) | 1.18 | %(d)(h) | 1.42 | %(d)(h) | ||||
Net Investment Income (Loss) to Average Net Assets (g) | -1.14 | %(d) | -1.33 | %(d) | ||||
Portfolio Turnover Rate (e) | 1,255 | %(c) | 1,603 | %(c) |
(a) | The Fund commenced operations on May 13, 2020. |
(b) | Calculated based on average shares outstanding during the period. |
(c) | Not annualized. |
(d) | Annualized. |
(e) | Excludes impact of in-kind transactions. |
(f) | Does not include expenses of investment companies in which the Fund invests. |
(g) | Recognition of net investment income by the Fund is affected by the timing of the declaration of dividends by the underlying investment companies in which the Fund invests. The ratio does not include net investment income of the underlying companies in which the Fund invests. |
(h) | Includes broker interest expense of 0.08% and 0.32%, respectively. |
(i) | Represents less than $0.005 per share. |
The accompanying notes are an integral part of these financial statements.
14
LHA Market State® Tactical Beta ETF
Financial Highlights
For a capital share outstanding throughout the period
Six-Months | Period Ended | |||||||
Net Asset Value, Beginning of Period | $ | 26.92 | $ | 25.00 | ||||
INCOME (LOSS) FROM INVESTMENT OPERATIONS: | ||||||||
Net Investment Income (Loss) (b)(g) | (0.04 | ) | (0.01 | ) | ||||
Net Realized and Unrealized Gain (Loss) on Investments | 3.71 | 2.41 | ||||||
Total from Investment Operations | 3.67 | 2.40 | ||||||
LESS DISTRIBUTIONS: | ||||||||
From Net Investment Income | — | (0.27 | ) | |||||
From Net Realized Gains | — | (0.21 | ) | |||||
Total Distributions | — | (0.48 | ) | |||||
CAPITAL SHARE TRANSACTIONS: | ||||||||
Transaction fees (Note 8) | 0.01 | — | ||||||
Net Asset Value, End of Period | $ | 30.60 | $ | 26.92 | ||||
Total Return | 13.61 | %(c) | 9.65 | %(c) | ||||
SUPPLEMENTAL DATA: | ||||||||
Net Assets at End of Period (000’s) | $ | 148,396 | $ | 36,343 | ||||
RATIOS TO AVERAGE NET ASSETS: | ||||||||
Expenses to Average Net Assets (f) | 1.13 | %(d)(h) | 1.13 | %(d)(h) | ||||
Net Investment Income (Loss) to Average Net Assets (g) | -0.27 | %(d) | -0.11 | %(d) | ||||
Portfolio Turnover Rate (e) | 93 | %(c) | 132 | %(c) |
(a) | The Fund commenced operations on September 29, 2020. |
(b) | Calculated based on average shares outstanding during the period. |
(c) | Not annualized. |
(d) | Annualized. |
(e) | Excludes impact of in-kind transactions. |
(f) | Does not include expenses of investment companies in which the Fund invests. |
(g) | Recognition of net investment income by the Fund is affected by the timing of the declaration of dividends by the underlying investment companies in which the Fund invests. The ratio does not include net investment income of the underlying companies in which the Fund invests. |
(h) | Includes broker interest expense of 0.03%. |
The accompanying notes are an integral part of these financial statements.
15
LHA Market State® Shares
Notes to Financial Statements
June 30, 2021 (Unaudited)
NOTE 1 – ORGANIZATION
LHA Market State® Alpha Seeker ETF and LHA Market State® Tactical Beta ETF (individually each a “Fund” or collectively the “Funds”) are non-diversified series of ETF Series Solutions (“ESS” or the “Trust”), an open-end management investment company consisting of multiple investment series, organized as a Delaware statutory trust on February 9, 2012. The Trust is registered with the Securities and Exchange Commission (“SEC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company and the offering of the Funds’ shares is registered under the Securities Act of 1933, as amended (the “Securities Act”). LHA Market State® Alpha Seeker ETF is an actively-managed exchange-traded fund (“ETF”) that seeks to provide positive returns across multiple market cycles that are generally not correlated to the U.S. equity or fixed income markets by investing long or short in instruments linked directly or indirectly to the performance and/or volatility of the S&P 500® Index based on models and analyses that seek to estimate the direction of the U.S. equity market. LHA Market State® Tactical Beta is an actively-managed ETF and seeks long-term out-performance relative to the large-capitalization U.S. equity market by investing long or short in instruments linked directly or indirectly to the performance and/or volatility of the S&P 500 Index based on models and analyses that seek to estimate the direction of the S&P 500® Index. LHA Market State® Alpha Seeker ETF commenced operations on May 13, 2020, and LHA Market State® Tactical Beta ETF commenced operations on September 29, 2020.
The end of the reporting period for the Funds is June 30, 2021. The period covered by these Notes to Financial Statements is the six-months ended June 30, 2021 (the “current fiscal period”).
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
The Funds are investment companies and accordingly follow the investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 Financial Services - Investment Companies.
The following is a summary of significant accounting policies consistently followed by the Funds. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
A. | Security Valuation. All equity securities, including domestic and foreign common stocks, preferred stocks, and exchange-traded funds that are traded on a national securities exchange, except those listed on the Nasdaq Global Market®, Nasdaq Global Select Market®, and the Nasdaq Capital Market Exchange® (collectively, “Nasdaq”) are valued at the last reported sale price on the exchange on which the security is principally traded. Securities traded |
16
LHA Market State® Shares
NOTES TO FINANCIAL STATEMENTS
June 30, 2021 (Unaudited) (Continued)
on Nasdaq will be valued at the Nasdaq Official Closing Price (“NOCP”). If, on a particular day, an exchange-traded or Nasdaq security does not trade, then the mean between the most recent quoted bid and asked prices will be used. All equity securities that are not traded on a listed exchange are valued at the last sale price in the over-the-counter market. If a non-exchange traded security does not trade on a particular day, then the mean between the last quoted closing bid and asked price will be used. Prices denominated in foreign currencies are converted to U.S. dollar equivalents at the current exchange rate, which approximates fair value.
Futures contracts will be valued at the settlement price from the exchange on which they are traded.
Exchange traded options are valued at the composite mean price, which calculates the mean of the highest bid price and lowest asked price across the exchanges where the option is principally traded. On the last trading day prior to expiration, expiring options will be priced at intrinsic value.
Investments in mutual funds, including money market funds, are valued at their net asset value (“NAV”) per share.
Debt securities, including short-term debt instruments having a maturity of less than 60 days, are valued in accordance with prices provided by a pricing service. Pricing services may use various valuation methodologies such as the mean between the bid and asked prices, matrix pricing and other analytical pricing models as well as market transactions and dealer quotations.
Securities for which quotations are not readily available are valued at their respective fair values in accordance with pricing procedures adopted by the Funds’ Board of Trustees (the “Board”). When a security is “fair valued,” consideration is given to the facts and circumstances relevant to the particular situation, including a review of various factors set forth in the pricing procedures adopted by the Board. The use of fair value pricing by the Funds may cause the NAV of their shares to differ significantly from NAV that would be calculated without regard to such considerations.
As described above, the Funds utilize various methods to measure the fair value of their investments on a recurring basis. U.S. GAAP establishes a hierarchy that prioritizes inputs to valuations methods. The three levels of inputs are:
Level 1 – | Unadjusted quoted prices in active markets for identical assets or liabilities that the Funds have the ability to access. |
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LHA Market State® Shares
NOTES TO FINANCIAL STATEMENTS
June 30, 2021 (Unaudited) (Continued)
Level 2 – | Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data. |
Level 3 – | Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available; representing the Funds’ own assumptions about the assumptions a market participant would use in valuing the asset or liability, and would be based on the best information available. |
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety, is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The following is a summary of the inputs used to value the Funds’ investments as of the end of the current fiscal period:
LHA Market State® Alpha Seeker ETF
Assets^ | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Investment Companies | $ | 4,742,581 | $ | — | $ | — | $ | 4,742,581 | ||||||||
Purchased Options | — | 237,700 | — | 237,700 | ||||||||||||
Short-Term Investments | 15,983,768 | 5,998,599 | — | 21,982,367 | ||||||||||||
Total Investments in Securities | $ | 20,726,349 | $ | 6,236,299 | $ | — | $ | 26,962,648 |
^ | See Schedule of Investments for further disaggregation of investment categories. |
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LHA Market State® Shares
NOTES TO FINANCIAL STATEMENTS
June 30, 2021 (Unaudited) (Continued)
Other Financial | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Futures Contracts | $ | 68,874 | $ | — | $ | — | $ | 68,874 |
(a) | Other financial instruments are derivative instruments not reflected in the Schedule of Investments, such as futures contracts which are reflected at the unrealized appreciation (depreciation) on the instrument. |
LHA Market State® Tactical Beta ETF
Assets^ | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Investment Companies | $ | 81,628,902 | $ | — | $ | — | $ | 81,628,902 | ||||||||
Short-Term Investments | 54,126,434 | 12,349,153 | — | 66,475,587 | ||||||||||||
Total Investments in Securities | $ | 135,755,336 | $ | 12,349,153 | $ | — | $ | 148,104,489 |
^ | See Schedule of Investments for further disaggregation of investment categories. |
Other Financial | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Futures Contracts | $ | 694,792 | $ | — | $ | — | $ | 694,792 |
(a) | Other financial instruments are derivative instruments not reflected in the Schedule of Investments, such as futures contracts which are reflected at the unrealized appreciation (depreciation) on the instrument. |
During the current fiscal period, the Funds did not recognize any transfers to or from Level 3.
B. | Federal Income Taxes. The Funds’ policy is to comply with the provisions of Subchapter M of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies and to distribute substantially all of their net investment income and net capital gains to shareholders. Therefore, no federal income tax provision is required. The Funds plan to file U.S. Federal and various state and local tax returns. |
The Funds recognize the tax benefits of uncertain tax positions only when the position is more likely than not to be sustained. Management has analyzed the Funds’ uncertain tax positions and concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions. Management is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months. Income and capital gain distributions
19
LHA Market State® Shares
NOTES TO FINANCIAL STATEMENTS
June 30, 2021 (Unaudited) (Continued)
are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. The Funds recognize interest and penalties, if any, related to unrecognized tax benefits on uncertain positions as income tax expenses in the Statements of Operations. During the current fiscal period, the Funds did not incur any interest or penalties.
C. | Security Transactions and Investment Income. Investment securities transactions are accounted for on the trade date. Gains and losses realized from sales of securities are determined on a specific identification basis. Dividend income is recorded on the ex-dividend date. Interest income is recorded on an accrual basis. |
D. | Distributions to Shareholders. Distributions to shareholders from net investment income and net realized gains on securities are declared and paid at least on an annual basis. Distributions are recorded on the ex-dividend date. |
E. | Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the current fiscal period. Actual results could differ from those estimates. |
F. | Share Valuation. The NAV per share of each Fund is calculated by dividing the sum of the value of the securities held by the Funds, plus cash and other assets, minus all liabilities (including estimated accrued expenses) by the total number of shares outstanding of each Fund, rounded to the nearest cent. The Funds’ shares will not be priced on the days on which the New York Stock Exchange (“NYSE”) is closed for trading. The offering and redemption price per share of each Fund is equal to each Fund’s NAV per share. |
G. | Reclassification of Capital Accounts. U.S. GAAP requires that certain components of net assets relating to permanent differences be reclassified between financial and tax reporting. These reclassifications have no effect on net assets or NAV per share. |
These timing differences are primarily due to differing book and tax treatments for in-kind transactions. For the fiscal period ended December 31, 2020, the following table shows the reclassifications made:
20
LHA Market State® Shares
NOTES TO FINANCIAL STATEMENTS
June 30, 2021 (Unaudited) (Continued)
Distributable | Paid-In | |||||||
LHA Market State® Alpha Seeker ETF | $ | (89,259 | ) | $ | 89,259 | |||
LHA Market State® Tactical Beta ETF | $ | (610,052 | ) | $ | 610,052 |
During the fiscal period ended December 31, 2020, the Funds realized the following net capital gains (losses) from in-kind redemptions, in which shareholders exchanged Fund shares for securities held by the Funds rather than for cash. Because such gains (losses) are not taxable to the Funds, and gains are not distributed to shareholders, they have been reclassified from distributable earnings (accumulated deficit) to paid-in capital.
LHA Market State® Alpha Seeker ETF | $ | 89,259 | ||
LHA Market State® Tactical Beta ETF | $ | 610,052 |
H. | Guarantees and Indemnifications. In the normal course of business, the Funds enter into contracts with service providers that contain general indemnification clauses. The Funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be against the Funds that have not yet occurred. However, based on experience, the Funds expect the risk of loss to be remote. |
I. | Subsequent Events. In preparing these financial statements, management has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued. There were no events or transactions that occurred during the period subsequent to the end of the current fiscal period that materially impacted the amounts or disclosures in the Funds’ financial statements. |
NOTE 3 – ADDITIONAL DISCLOSURES ABOUT DERIVATIVE INSTRUMENTS
Futures Contracts. Each Fund may invest in futures contracts to hedge or manage risks associated with the Fund’s investments in securities or to gain exposure to certain asset classes or markets. Each Fund may purchase or sell futures contracts only if the Fund’s liabilities for the futures position are “covered” by an offsetting position in a futures contract or by the Fund segregating liquid assets equal to the Fund’s liabilities on the futures contract. Upon entering into a financial futures contract, a Fund is required to pledge to the broker an amount of cash, U.S. government securities or other assets, equal to a certain percentage of the contract amount (initial margin deposit).
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LHA Market State® Shares
NOTES TO FINANCIAL STATEMENTS
June 30, 2021 (Unaudited) (Continued)
Subsequent payments, known as “variation margin,” are made or received by the Funds on an as needed basis. The Funds record an unrealized gain or loss by marking each futures contract to market. A realized gain or loss is recorded when the contract is closed. Should market conditions move unexpectedly, the Funds may not achieve the anticipated benefits of the financial futures contracts and may realize a loss. The use of futures transactions involves the risk of imperfect correlation in movements in the price of futures contracts, interest rates and the underlying assets. Futures contracts may have off-balance sheet risk. Off-balance sheet risk exists when the maximum potential loss on a particular financial instrument is greater than the value of such financial instrument, as reflected in the Schedules of Open Futures Contracts.
Positions in futures contracts may be closed out only on an exchange that provides a secondary market for such futures. However, there can be no assurance that a liquid secondary market will exist for any particular futures contract at any specific time. Thus, it may not be possible to close a futures position. In the event of adverse price movements, the Funds may be required to make cash payments to maintain the required margin. In such situations, if a Fund had insufficient cash, it might have to sell portfolio securities to meet margin requirements at a time when it would be disadvantageous to do so. In addition, the Fund might be required to make delivery of the underlying instruments of futures contracts it holds. The inability to close positions in futures could also have an adverse impact on the Funds’ ability to hedge or manage risks effectively. Cash collateral held by the Funds is presented on the Statements of Assets and Liabilities under segregated cash at broker for futures and options.
Options Contracts. The Funds may also purchase put or call options (or options spreads) on the VIX Index, the S&P 500, or in ETNs or ETFs that seek exposure to short-term VIX Index futures contracts.
Purchasing a call option gives the buyer the right to purchase shares of the reference asset at a specified price (“strike price”) until a specified date (“expiration date”) (American-style options) or at the expiration date (European-style options). The buyer of the call option pays an amount (premium) for buying the option. In the event the reference asset appreciates above the strike price, the buyer can exercise the option and receive the reference asset (for American-style options) or receive the difference between the value of the reference asset and the strike price (for European-style options) (which gain is offset by the premium initially paid), and in the event the reference asset declines in value, the call option may end up worthless and the
22
LHA Market State® Shares
NOTES TO FINANCIAL STATEMENTS
June 30, 2021 (Unaudited) (Continued)
Funds’ loss is limited to the amount of premium it paid. The Funds’ investments in call options and put options on the S&P 500 or the VIX Index are generally expected to be European-style options.
Purchasing a put option gives the buyer the right to sell shares of a reference asset at a strike price until the expiration date (American-style options) or at the expiration date (European-style options). The buyer of the put option pays an amount (premium) for buying the option. In the event the reference asset declines in value below the strike price and a Fund exercises its put option, the Fund will be entitled to deliver the reference asset (for American-style options) or receive the difference between the strike price and the value of the reference asset (for European-style options) (which gain is offset by the premium originally paid by the Fund), and in the event the reference asset closes above the strike price as of the expiration date, the put option may end up worthless and the Fund’s loss is limited to the amount of premium it paid.
A call spread entails the purchase of a call option and the sale of a call option on the same reference asset with the same expiration date but a higher strike price. A put spread entails the purchase of a put option and the sale of a put option on the same reference asset with the same expiration date but a lower strike price. The premium received from the sale of the call or put options is generally expected to offset the cost to the Fund of the purchased options in exchange for limiting the maximum return from such options.
The Funds may also write options. A written (sold) call option gives the seller the obligation to sell shares of the underlying asset at a specified prince (“strike price”) at a specified date (“expiration date”). The writer (seller) of the call option receives an amount (premium) for writing (selling) the option. In the event the underlying asset appreciates above the strike price as of the expiration date, the writer (seller) of the call option will have to pay the difference between the value of the underlying asset and the strike price (which loss is offset by the premium initially received), and in the event the underlying asset declines in value, the call option may end up worthless and the writer (seller) of the call option retains the premium.
A written (sold) put option gives the seller the obligation to buy shares of the underlying asset at a specified price (“strike price”) at a specified date (“expiration date”). The writer (seller) of the put option receives an amount (premium) for writing (selling) the option. In the event the underlying asset depreciates below the strike price as of the expiration date, the writer (seller) of the put option pays the difference between the value of the underlying asset and the strike price (which loss is offset by
23
LHA Market State® Shares
NOTES TO FINANCIAL STATEMENTS
June 30, 2021 (Unaudited) (Continued)
the premium initially received), and in the event the underlying asset appreciates in value, the put option may end up worthless and the writer (seller) of the call option retains the premium.
When the Funds write an option, an amount equal to the premium received by the Funds is recorded as a liability and is subsequently adjusted to the current fair value of the options written. Premiums received from writing options that expire unexercised are treated by the Funds on the expiration date as realized gains from options written. The difference between the premium and the amount paid on effecting a closing purchase transaction, including brokerage commissions, is also treated as a realized gain, or, if the premium is less than the amount paid for the closing purchase transaction, as a realized loss. If a call option is exercised, the premium is added to the proceeds from the sale of the underlying security in determining whether the Funds have realized a gain or loss. The Funds, as a writer of an option, bear the market risk of an unfavorable change in the price of the security underlying the written option.
For financial statement purposes, cash held at or due to the broker for futures and options is included in the Statements of Assets and Liabilities as deposits at broker for futures and options or payable to broker for futures and options. Broker interest paid by the Funds, if any, is included as broker interest expense in the Statements of Operations. As collateral for written options, the Funds maintain segregated assets consisting of cash, cash equivalents, or liquid securities (e.g. Permissible Assets). Segregated cash is included as segregated cash at broker for futures and options in the Statements of Assets and Liabilities. The Advisor may earmark or instruct the Funds’ custodian to segregate Permissible Assets in an amount at least equal to the market value, calculated on a daily basis, of the written options. Alternatively, a written call option contract can be “covered” through (a) ownership of the underlying instruments or (b) ownership of an option on such instruments at an exercise price equal to or lower than the exercise price of the short option, and a written put option contract can be “covered” (a) through ownership of a put option with an exercise price at least equal to the Funds’ delivery or purchase obligation or (b) through selling short the underlying instrument at a price at least equal to the Funds’ purchase obligation.
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LHA Market State® Shares
NOTES TO FINANCIAL STATEMENTS
June 30, 2021 (Unaudited) (Continued)
The effect of derivative instruments on the Statements of Assets and Liabilities as of the end of the current fiscal period was as follows:
Asset Derivatives | ||||||
Fund | Derivatives | Statement of | Value | |||
LHA Market State® Alpha Seeker ETF | Equity Contracts - Purchased Options | Investments in Securities, at value | $ | 237,700 | ||
LHA Market State® Alpha Seeker ETF | Equity Contracts - Futures | Variation Margin Receivable | 9,570 | |||
LHA Market State® Tactical Beta ETF | Equity Contracts - Futures | Variation Margin Receivable | 93,926 |
The effect of derivative instruments on the Statements of Operations for the current fiscal period was as follows:
Fund | Derivatives | Net Realized | Change in | ||||||
LHA Market State® Alpha Seeker ETF | Equity Contracts - Futures | $ | (153,272 | ) | $ | 68,874 | |||
LHA Market State® Alpha Seeker ETF | Equity Contracts - Purchased Options | (480,214 | )* | 21,362 | ** | ||||
LHA Market State® Alpha Seeker ETF | Equity Contracts - Written Options | 60,555 | — | ||||||
LHA Market State® Tactical Beta ETF | Equity Contracts - Futures | 5,976,414 | 391,792 | ||||||
LHA Market State® Tactical Beta ETF | Equity Contracts - Written Options | 94,915 | — |
* | Included in net realized gain (loss) on investments as reported on the Statement of Operations. |
** | Included in net change in unrealized appreciation (depreciation) of investments as reported on the Statements of Operations. |
The average monthly market values of outstanding purchased and written options during the current fiscal period were as follows:
25
LHA Market State® Shares
NOTES TO FINANCIAL STATEMENTS
June 30, 2021 (Unaudited) (Continued)
Purchased | Written | |||||||
LHA Market State® Alpha Seeker ETF | $ | 84,333 | $ | (430 | ) | |||
LHA Market State® Tactical Beta ETF | — | (1,417 | ) |
The average monthly notional amount of short and long futures during the current fiscal period were as follows:
Short | Long | |||||||
LHA Market State® Alpha Seeker ETF | $ | (657,950 | ) | $ | 3,651,712 | |||
LHA Market State® Tactical Beta ETF | — | 55,009,720 |
Offsetting of Financial Assets and Derivatives Assets:
During the ordinary course of business, the Funds may enter into transactions subject to enforceable netting agreements or other similar arrangements (“netting agreements”). Generally, the right to offset in netting agreements allows the Funds to offset any exposure to a specific counterparty with any collateral received or delivered to that counterparty based on the terms of the agreement. Generally, the Funds manage their cash collateral and securities collateral on a counterparty basis.
The following table provides a summary of offsetting financial assets and derivatives and the effect of derivative instruments on the Statements of Assets and Liabilities as of the end of the current fiscal period.
LHA Market State® Alpha Seeker ETF
Gross | Gross | Net | Gross Amounts not | |||||||||||||||||||||
Description / | Amounts of | of Assets | of Assets | Financial | Collateral | Net | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Goldman Sachs | ||||||||||||||||||||||||
Futures Contracts | $ | 9,570 | $ | — | $ | 9,570 | $ | — | $ | — | $ | 9,570 | ||||||||||||
Options Contracts | 237,700 | — | 237,700 | — | — | 237,700 | ||||||||||||||||||
$ | 247,270 | $ | — | $ | 247,270 | $ | — | $ | — | $ | 247,270 |
26
LHA Market State® Shares
NOTES TO FINANCIAL STATEMENTS
June 30, 2021 (Unaudited) (Continued)
LHA Market State® Tactical Beta ETF
Gross | Gross | Net | Gross Amounts not | |||||||||||||||||||||
Description / | Amounts of | of Assets | of Assets | Financial | Collateral | Net | ||||||||||||||||||
Assets | ||||||||||||||||||||||||
Goldman Sachs | ||||||||||||||||||||||||
Futures Contracts | $ | 93,926 | $ | — | $ | 93,926 | $ | — | $ | — | $ | 93,926 | ||||||||||||
$ | 93,926 | $ | — | $ | 93,926 | $ | — | $ | — | $ | 93,926 |
In some instances, the collateral amounts disclosed in the tables were adjusted due to the requirement to limit the collateral amounts to avoid the effect of overcollateralization. Actual collateral received/pledged may be more than the amounts disclosed herein.
NOTE 5 – COMMITMENTS AND OTHER RELATED PARTY TRANSACTIONS
Little Harbor Advisors, LLC (“the Adviser”), serves as the investment adviser to the Funds. Pursuant to an Investment Advisory Agreement (“Advisory Agreement”) between the Trust, on behalf of the Funds, and the Adviser, the Adviser provides investment advice to the Funds and oversees the day-to-day operations of the Funds, subject to the direction and control of the Board and the officers of the Trust. Under the Advisory Agreement, the Adviser is also responsible for arranging transfer agency, custody, fund administration, and all other related services necessary for the Funds to operate. Under the Advisory Agreement, the Adviser has agreed to pay all expenses incurred by the Fund, except for: the fee paid to the Adviser pursuant to the Advisory Agreement, interest charges on any borrowings, dividends and other expenses on securities sold short, taxes, brokerage commissions and other expenses incurred in placing orders for the purchase and sale of securities and other investment instruments, acquired fund fees and expenses, accrued deferred tax liability, extraordinary expenses, and distribution (12b-1) fees and expenses. For services provided to the Funds, the Funds each pay the Adviser 1.10% at an annual rate based on the Fund’s average daily net assets.
U.S. Bancorp Fund Services, LLC (“Fund Services” or “Administrator”), doing business as U.S. Bank Global Fund Services, acts as the Funds’ Administrator and, in that capacity, performs various administrative and accounting services for the Funds. The Administrator prepares various federal and state regulatory filings, reports and returns for the Funds, including regulatory compliance monitoring and financial
27
LHA Market State® Shares
NOTES TO FINANCIAL STATEMENTS
June 30, 2021 (Unaudited) (Continued)
reporting; prepares reports and materials to be supplied to the board; monitors the activities of the Funds’ Custodian, transfer agent and fund accountant. Fund Services also serves as the transfer agent and fund accountant to the Fund. U.S. Bank N.A. (the “Custodian”), an affiliate of Fund Services, serves as the Fund’s Custodian.
A Trustee and all officers of the Trust are affiliated with the Administrator and Custodian.
NOTE 6 – PURCHASES AND SALES OF SECURITIES
During the current fiscal period, purchases and sales of securities by the Funds, excluding short-term securities and in-kind transactions, were as follows:
Purchases | Sales | |||||||
LHA Market State® Alpha Seeker ETF | $ | 76,535,914 | $ | 75,968,348 | ||||
LHA Market State® Tactical Beta ETF | 67,636,826 | 53,859,237 |
During the current fiscal period, there were no purchases or sales of long-term U.S. Government securities by the Funds. The Funds held U.S. Treasury Bills during the current fiscal period which are considered short-term securities.
During the current fiscal period, in-kind transactions associated with creations and redemptions were as follows:
In-Kind | In-Kind | |||||||
LHA Market State® Alpha Seeker ETF | $ | 293,689 | $ | 266,037 | ||||
LHA Market State® Tactical Beta ETF | 42,600,227 | 4,953,720 |
28
LHA Market State® Shares
NOTES TO FINANCIAL STATEMENTS
June 30, 2021 (Unaudited) (Continued)
NOTE 7 – INCOME TAX INFORMATION
The components of distributable earnings/(accumulated deficit) and cost basis of investments for federal income tax purposes as of December 31, 2020 in the Funds, were as follows:
LHA Market | LHA Market | |||||||
Tax cost of investments | $ | 18,107,095 | $ | 38,515,630 | ||||
Gross tax unrealized appreciation | $ | 1,615 | $ | 1,158,155 | ||||
Gross tax unrealized depreciation | (5,986 | ) | (128,447 | ) | ||||
Net tax unrealized appreciation (depreciation) | (4,371 | ) | 1,029,708 | |||||
Undistributed ordinary income | 112,533 | — | ||||||
Undistributed long-term gain | — | 464,963 | ||||||
Other accumulated gain (loss) | (1,690,165 | ) | (35,156 | ) | ||||
Distributable earnings (accumulated deficit) | $ | (1,582,003 | ) | $ | 1,459,515 |
The difference between book and tax-basis cost is attributable to wash sales.
At December 31, 2020, the Funds deferred, on a tax basis, no post-October capital losses or late-year ordinary losses.
As of December 31, 2020, the Funds had the following capital loss carryforwards with no expiration:
Short-Term | Long-Term | |||||||
LHA Market State® Alpha Seeker ETF | $ | 1,390,419 | $ | 299,748 | ||||
LHA Market State® Tactical Beta ETF | — | — |
The tax character of distributions paid by the Funds during the fiscal year ended December 31, 2020, were as follows:
Year Ended December 31, 2020 | ||||||||
Ordinary | Long-Term | |||||||
LHA Market State® Alpha Seeker ETF | $ | 344,552 | $ | — | ||||
LHA Market State® Tactical Beta ETF | 369,067 | 279,189 |
29
LHA Market State® Shares
NOTES TO FINANCIAL STATEMENTS
June 30, 2021 (Unaudited) (Continued)
NOTE 8 – SHARE TRANSACTIONS
Shares of the Funds are listed and traded on the Cboe BZX Exchange, Inc. (“Cboe”). Market prices for the shares may be different from their NAV. The Funds issue and redeem shares on a continuous basis at NAV generally in blocks of 25,000 shares, called “Creation Units.” Creation Units are issued and redeemed principally in-kind for securities included in a specified universe. Once created, shares generally trade in the secondary market at market prices that change throughout the day. Except when aggregated in Creation Units, shares are not redeemable securities of the Funds. Shares of the Funds may only be purchased or redeemed by certain financial institutions (“Authorized Participants”). An Authorized Participant is either (i) a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the National Securities Clearing Corporation or (ii) a Depository Trust Company participant and, in each case, must have executed a Participant Agreement with the Distributor. Most retail investors do not qualify as Authorized Participants nor have the resources to buy and sell whole Creation Units. Therefore, they are unable to purchase or redeem shares directly from the Fund. Rather, most retail investors may purchase shares in the secondary market with the assistance of a broker and are subject to customary brokerage commissions or fees.
The Funds currently offer one class of shares, which has no front-end sales load, no deferred sales charge, and no redemption fee. A fixed transaction fee is imposed for the transfer and other transaction costs associated with the creation or redemption of Creation Units. The standard fixed creation and redemption transaction fee for the Funds are $250 payable to the Custodian. The fixed transaction fee may be waived on certain orders if the Funds’ Custodian has determined to waive some or all of the costs associated with the order, or another party, such as the Adviser, has agreed to pay such fee. In addition, a variable fee may be charged on all cash transactions or substitutes for Creation Units of up to a maximum of 2% as a percentage of the value of the Creation Units subject to the transaction. Variable fees received by the Funds, if any, are displayed in the Capital Shares Transactions section of the Statements of Changes in Net Assets. The Funds may issue an unlimited number of shares of beneficial interest, with no par value. All shares of the Funds have equal rights and privileges.
NOTE 9 – PRINCIPAL RISKS
Investment Company Risk. The risks of investing in investment companies, such as the Underlying ETFs, typically reflect the risks of the types of instruments in which the investment companies invest. By investing in another investment company, the Funds become a shareholder of that investment company and bear their proportionate share of the fees and expenses of the other investment company. The Funds may be subject to statutory limits with respect to the amount they can invest in other ETFs, which may adversely affect the Funds’ ability to achieve their investment objective. Investments in
30
LHA Market State® Shares
NOTES TO FINANCIAL STATEMENTS
June 30, 2021 (Unaudited) (Continued)
ETFs are also subject to the following risks: (i) the market price of an ETF’s shares may trade above or below their NAV; (ii) an active trading market for an ETF’s shares may not develop or be maintained; and (iii) trading of an ETF’s shares may be halted for a number of reasons.
COVID-19 Risk. The recent global outbreak of COVID-19 has disrupted economic markets and the prolonged economic impact is uncertain. The operational and financial performance of the issuers of securities in which the Funds invest depends on future developments, including the duration and spread of the outbreak, and such uncertainty may in turn impact the value of the Funds’ investments.
31
LHA Market State® Shares
Expense Examples
For the Period Ended June 30, 2021 (Unaudited)
As a shareholder of the Funds you incur two types of costs: (1) transaction costs, including brokerage commissions on purchases and sales of Funds shares, and (2) ongoing costs, including management fees and other Funds expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in each Fund and to compare these costs with the ongoing costs of investing in other funds. These examples are based on an investment of $1,000 invested at the beginning of the period and held for the entire period as indicated in the following Expense Example tables.
Actual Expenses
The first line of the table provides information about actual account values based on actual returns and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then, multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period’’ to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table provides information about hypothetical account values based on a hypothetical return and hypothetical expenses based on the Funds’ actual expense ratios and an assumed rate of return of 5% per year before expenses, which is not the Funds’ actual returns. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in each Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as brokerage commissions paid on purchases and sales of Funds shares. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. If these transactional costs were included, your costs would have been higher.
32
LHA Market State® Shares
Expense Examples
For the Period Ended June 30, 2021 (Unaudited) (Continued)
LHA Market State® Alpha Seeker ETF
Beginning | Ending | Expenses Paid | |
Actual | $1,000.00 | $1,082.30 | $6.09 |
Hypothetical (5% annual return before expenses) | $1,000.00 | $1,018.94 | $5.91 |
LHA Market State® Tactical Beta ETF
Beginning | Ending | Expenses Paid | |
Actual | $1,000.00 | $1,136.10 | $5.98 |
Hypothetical (5% annual return before expenses) | $1,000.00 | $1,019.19 | $5.66 |
(1) | The dollar amounts shown as expenses paid during the period are equal to the annualized expense ratio, 1.18%, multiplied by the average account value during the six-month period, multiplied by 181/365, to reflect the one-half year period. |
(2) | The dollar amounts shown as expenses paid during the period are equal to the annualized expense ratio, 1.13%, multiplied by the average account value during the six-month period, multiplied by 181/365, to reflect the one-half year period. |
33
LHA Market State® Shares
Review of Liquidity Risk Management Program
(Unaudited)
Pursuant to Rule 22e-4 under the Investment Company Act of 1940, the Trust, on behalf of the series of the Trust covered by this shareholder report (the “Series”), has adopted a liquidity risk management program to govern the Trust’s approach to managing liquidity risk. Rule 22e-4 seeks to promote effective liquidity risk management, thereby reducing the risk that a fund will be unable to meet its redemption obligations and mitigating dilution of the interests of fund shareholders. The Trust’s liquidity risk management program is tailored to reflect the Series’ particular risks, but not to eliminate all adverse impacts of liquidity risk, which would be incompatible with the nature of such Series.
The investment adviser to the Series has adopted and implemented its own written liquidity risk management program (the “Program”) tailored specifically to assess and manage the liquidity risk of the Series.
At a recent meeting of the Board of Trustees of the Trust, the Trustees received a report pertaining to the operation, adequacy, and effectiveness of implementation of the Program for the period ended December 31, 2020. The report concluded that the Program is reasonably designed to assess and manage the Series’ liquidity risk and has operated adequately and effectively to manage such risk. The report reflected that there were no liquidity events that impacted the Series’ ability to timely meet redemptions without dilution to existing shareholders. The report further noted that no material changes have been made to the Program since its implementation.
There can be no assurance that the Program will achieve its objectives in the future. Please refer to the prospectus for more information regarding the Series’ exposure to liquidity risk and other principal risks to which an investment in the Series may be subject.
34
LHA Market State® Shares
Federal Tax Information
(Unaudited)
QUALIFIED DIVIDEND INCOME/DIVIDENDS RECEIVED DEDUCTION
For the fiscal period ended December 31, 2020, certain dividends paid by the Funds may be subject to a maximum tax rate of 23.8%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of dividends declared from ordinary income designated as qualified dividend income was as follows:
LHA Market State® Alpha Seeker ETF | 0.00% |
LHA Market State® Tactical Beta ETF | 0.00% |
For corporate shareholders, the percent of ordinary income distributions qualifying for the corporate dividend received deduction for the period ended December 31, 2020 was as follows:
LHA Market State® Alpha Seeker ETF | 0.00% |
LHA Market State® Tactical Beta ETF | 0.00% |
The percentage of taxable ordinary income distributions that are designated as short-term capital gain distributions under Internal Revenue Section 871(k)(2)(C) for each Fund was as follows:
LHA Market State® Alpha Seeker ETF | 0.00% |
LHA Market State® Tactical Beta ETF | 56.93% |
Information About Portfolio Holdings
(Unaudited)
The Funds file their complete schedules of portfolio holdings for their first and third fiscal quarters with the SEC on Part F of Form N-PORT. The Funds’ Part F of Form N-PORT is available without charge, upon request, by calling toll-free at (800) 617-0004. Furthermore, you may obtain the Part F of Form N-PORT on the SEC’s website at www.lhafunds.com.
35
LHA Market State® Shares
Information About Proxy Voting
(Unaudited)
A description of the policies and procedures the Funds use to determine how to vote proxies relating to portfolio securities is provided in the Statement of Additional Information (“SAI”). The SAI is available without charge, upon request, by calling toll-free at (800) 617-0004, by accessing the SEC’s website at www.sec.gov, or by accessing the Fund’s website at www.lhafunds.com.
When available, information regarding how the Funds voted proxies relating to portfolio securities during the twelve-months ending June 30 will be (1) available by calling toll-free at (800) 617-0004 and (2) the SEC’s website at www.sec.gov.
INFORMATION ABOUT THE FUNDS’ TRUSTEES
(Unaudited)
The SAI includes additional information about the Funds’ Trustees and is available without charge, upon request, by calling (800) 617-0004 or by accessing the SEC’s website at www.sec.gov or by accessing the Funds’ website at www.lhafunds.com.
Frequency Distribution of Premiums and Discounts
(Unaudited)
Information regarding how often shares of the Funds trade on the exchange at a price above (i.e., at a premium) or below (i.e., at a discount) the daily net asset value (NAV) is available, without charge, on the Funds’ website at www.lhafunds.com.
36
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Adviser
Little Harbor Advisors, LLC
30 Doaks Lane
Marblehead, MA 01945
Distributor
Quasar Distributors, LLC
111 East Kilbourn Avenue, Suite 2200
Milwaukee, Wisconsin 53202
Custodian
U.S. Bank National Association
1555 North Rivercenter Drive, Suite 302
Milwaukee, Wisconsin 53212
Transfer Agent
U.S. Bancorp Fund Services, LLC
615 East Michigan Street
Milwaukee, Wisconsin 53202
Independent Registered Public Accounting Firm
Cohen & Company, Ltd.
342 North Water Street, Suite 830
Milwaukee, WI 53202
Legal Counsel
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Avenue, NW
Washington, DC 20004-2541
LHA Market State® Alpha Seeker ETF
Symbol – MSVX
CUSIP – 26922A156
LHA Market State® Tactical Beta ETF
Symbol – MSTB
CUSIP – 26922B105
(b) | Not applicable for this Registrant. |
Item 2. Code of Ethics.
Not applicable for semi-annual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semi-annual reports.
Item 4. Principal Accountant Fees and Services.
Not applicable for semi-annual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable for semi-annual reports.
Item 6. Investments.
Schedule of Investments is included as part of the report to shareholders filed under Item 1 of this Form.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable to open-end investment companies.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable to open-end investment companies.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable to open-end investment companies.
Item 10. Submission of Matters to a Vote of Security Holders.
There have been no material changes to the procedures by which shareholders may recommend nominees to the registrant’s board of trustees.
Item 11. Controls and Procedures.
(a) | The Registrant’s President(principal executive officer) and Treasurer(principal financial officer) have reviewed the Registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940 (the “Act”)) as of a date within 90 days of the filing of this report, as required by Rule 30a-3(b) under the Act and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934. Based on their review, such officers have concluded that the disclosure controls and procedures are effective in ensuring that information required to be disclosed in this report is appropriately recorded, processed, summarized and reported and made known to them by others within the Registrant and by the Registrant’s service provider. |
(b) | There were no changes in the Registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting. |
Item 12. Disclosure of Securities Lending Activities for Closed-End Management Investment Companies.
Not applicable to open-end investment companies.
Item 13. Exhibits.
(a) | (1) Any code of ethics or amendment thereto, that is the subject of the disclosure required by Item 2, to the extent that the registrant intends to satisfy Item 2 requirements through filing an exhibit. Not Applicable. |
(3) Any written solicitation to purchase securities under Rule 23c-1 under the Act sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons. Not applicable to open-end investment companies.
(4) Change in the registrant’s independent public accountant. There was no change in the registrant’s public accountant for the period covered by this report.
(b) | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Furnished herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) | ETF Series Solutions |
By (Signature and Title) * | /s/ Kristina R. Nelson | |
Kristina R. Nelson, President (principal executive officer) |
Date | 9/1/2021 |
Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By (Signature and Title)* | /s/ Kristina R. Nelson | |
Kristina R. Nelson, President (principal executive officer) |
Date | 9/1/2021 |
By (Signature and Title)* | /s/ Kristen M. Weitzel | |
Kristen M. Weitzel, Treasurer (principal financial officer) |
Date | 9/1/2021 |
* | Print the name and title of each signing officer under his or her signature. |