It is our intention that beginning on January 1, 2021, paper
copies of the Funds annual and semi-annual shareholder reports will not be sent by mail, unless you specifically request paper copies of the reports from your financial intermediary. 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. At any time, you may elect to receive reports and certain communications from the Fund electronically by contacting your
financial intermediary.
You may elect to receive all future shareholder reports in paper free of charge. You can inform your
financial intermediary that you wish to receive paper copies of reports by contacting your financial intermediary. Your election to receive reports in paper will apply to all Goldman Sachs Funds held in your account.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The Goldman Sachs Hedge Industry VIP
ETF (the Fund) seeks to provide investment results that closely correspond, before fees and expenses, to the performance of the Goldman Sachs Hedge Fund VIP
IndexTM (the Index).
STATEMENT OF ADDITIONAL INFORMATION
DATED DECEMBER 27, 2019
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FUND
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PRINCIPAL U.S.
LISTING
EXCHANGE
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TICKER
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GOLDMAN SACHS HEDGE INDUSTRY VIP ETF
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NYSE Arca, Inc.
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GVIP
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(A Portfolio of Goldman Sachs ETF Trust)
Goldman Sachs ETF Trust
200 West
Street
New York, New York 10282
This Statement of Additional Information (the SAI) is not a Prospectus. This SAI should be read in conjunction with the prospectus
for the Goldman Sachs Hedge Industry VIP ETF (the Fund), dated December 27, 2019, as it may be further amended and/or supplemented from time to time (the Prospectus). The Prospectus may be obtained without charge from Goldman
Sachs & Co. LLC by calling 1-800-621-2550 or writing to Goldman Sachs Funds, P.O. Box 06050, Chicago, Illinois 60606.
The
audited financial statements and related report of PricewaterhouseCoopers LLP, independent registered public accounting firm for the Fund, contained in the Funds 2019 Annual Report is incorporated herein by reference in the section
FINANCIAL STATEMENTS. No other portions of the Funds Annual Report are incorporated by reference herein. The Funds Annual Report may be obtained upon request and without charge by calling Goldman Sachs & Co. LLC toll
free at 1-800-621-2550.
GSAM® is a registered service mark of Goldman Sachs & Co. LLC.
TABLE OF CONTENTS
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GOLDMAN SACHS ASSET MANAGEMENT, L.P.
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ALPS DISTRIBUTORS, INC.
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Investment Adviser
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Distributor
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200 West Street
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1290 Broadway, Suite 1000
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New York, New York 10282
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Denver, Colorado 80203
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THE BANK OF NEW YORK MELLON
Transfer Agent
240 Greenwich Street
New York, New York 10286
Toll-free (in U.S.) 1-800-621-2550
(for Shareholders/Authorized Participants) or 1-800-292-4726 (for Financial Advisors).
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INTRODUCTION
Goldman Sachs ETF Trust (the Trust) is an open-end management investment company. The Trust is organized as a Delaware statutory
trust and was established by an Agreement and Declaration of Trust dated December 16, 2009. The following series of the Trust is described in this SAI: Goldman Sachs Hedge Industry VIP ETF. The Fund is passively-managed and seeks to
track a specified index: Goldman Sachs Hedge Fund VIP Index (the Index).
The Trustees of the Trust have authority under
the Declaration of Trust to create and classify Shares of the Trust into separate series. Pursuant thereto, the Trustees have created the Fund and other series. Additional series may be added in the future from time to time. See SHARES OF THE
TRUST.
Goldman Sachs Asset Management, L.P. (GSAM or the Investment Adviser), an affiliate of Goldman
Sachs & Co. LLC (Goldman Sachs), serves as the Investment Adviser to the Fund. In addition, ALPS Distributors, Inc. (ALPS or the Distributor) serves as the Funds distributor, and The Bank of New
York Mellon (BNYM or the Transfer Agent) serves as the Funds transfer agent. The Funds custodian is BNYM, which also provides administrative services to the Fund.
The following information relates to and supplements the description of the Funds investment policies contained in the Prospectus. See
the Prospectus for a more complete description of the Funds investment objectives and policies. Investing in the Fund entails certain risks, and there is no assurance that the Fund will achieve its investment objective. Capitalized terms used
but not defined herein have the same meaning as in the Prospectus.
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EXCHANGE LISTING AND TRADING
A discussion of exchange listing and trading matters associated with an investment in the Fund is contained in the Shareholder
Guide section of the Prospectus. The discussion below supplements, and should be read in conjunction with, such section of the Prospectus.
The Shares of the Fund are listed and traded on the NYSE Arca, Inc. (the Exchange). The Shares trade on the Exchange at prices
that may differ from their net asset value (NAV). There can be no assurance that the Fund will continue to meet the requirements of the Exchange necessary to maintain the listing of Shares.
The Exchange may, but is not required to, remove the Shares of the Fund from listing if: (1) following the initial twelve-month period
beginning upon the commencement of trading of the Fund, there are fewer than 50 beneficial holders of the Shares for 30 or more consecutive trading days; (2) the value of its underlying index or portfolio of securities on which the Fund is
based is no longer calculated or available; (3) the intra-day indicative value (IIV) of the Fund is no longer calculated or available; (4) certain continued listing standards relating to index composition set forth
in the Exchange rules are not continuously maintained; or (5) such other event shall occur or condition exists that, in the opinion of the Exchange, makes further dealings on the Exchange inadvisable. In addition, the Exchange will remove the
Shares of the Fund from listing and trading upon termination of the Trust or the Fund.
As in the case of other publicly-traded
securities, when you buy or sell shares through a broker, you will incur a brokerage commission determined by that broker.
In order to
provide additional information regarding the indicative value of Shares of the Fund, the Exchange or a market data vendor disseminates every 15 seconds through the facilities of the Consolidated Tape Association, or through other widely disseminated
means, an IIV for the Fund as calculated by an information provider or market data vendor. The Trust, GSAM, and their affiliates, are not responsible for any aspect of the calculation or dissemination of the IIVs and make no representation or
warranty as to the accuracy of the IIVs.
The Funds IIV is based on a securities component and a cash component which comprises that
days Fund Deposit (as defined below), as disseminated prior to that Business Days (as defined below) commencement of trading. The IIV does not necessarily reflect the precise composition of the current portfolio of securities held by the
Fund at a particular point in time or the best possible valuation of the current portfolio. Therefore, the IIV should not be viewed as a real-time update of the Funds NAV, which is computed only once a day. The IIV is generally
determined by using both current market quotations and/or price quotations obtained from broker-dealers that may trade in the portfolio securities held by the Fund. The quotations of certain Fund holdings may not be updated during U.S. trading hours
if such holdings do not trade in the United States.
The cash component included in an IIV consists of estimated accrued interest,
dividends and other income, less expenses. If applicable, each IIV also reflects changes in currency exchange rates between the U.S. dollar and the applicable currency.
The Trust reserves the right to adjust the Share prices of the Fund in the future to maintain convenient trading ranges for investors. Any
adjustments would be accomplished through stock splits or reverse stock splits, which would have no effect on the net assets of the Fund or an investors equity interest in the Fund.
The base and trading currencies of the Fund are the U.S. dollar. The base currency is the currency in which the Funds NAV per Share is
calculated and the trading currency is the currency in which Shares of the Fund are listed and traded on the Exchange.
B-2
INDEX CONSTRUCTION AND METHODOLOGY
Goldman Sachs Asset Management, L.P. (the Index Provider) is the provider of the Index, which is constructed in accordance with a
rules-based methodology.
Goldman Sachs Hedge Fund VIP Index
1. Determination of Hedge Fund Manager Universe
A third-party data provider is used to identify those entities that have filed Form 13F with the Securities and Exchange Commission
(SEC) and are primarily characterized as hedge fund managers. The classification of hedge fund managers by the third-party data provider is done using a rules-based methodology based on information from Investment Adviser Registration
Depository (IARD) filings with the SEC. The third-party data provider characterizes an entity as a hedge fund manager if the primary part of its business consists of hedge fund management, meaning it has more than 50% of its assets under
management in pooled investment vehicles and 50% or more of its funds are hedge funds based on IARD filings. Additionally, if 25-50% of the managers assets under management are in pooled investment vehicles, 50% or more of which are hedge
funds, and 51-100% of the managers clients are hedge funds, the manager is classified as a hedge fund manager.
To seek to isolate
hedge fund managers that employ fundamental analysis (rather than quantitative analysis or activist strategies), the Index screens the third-party database to restrict the universe of hedge fund managers to U.S. hedge fund managers with no fewer
than 10 and no more than 200 distinct U.S. equity positions, as reported in the hedge fund managers most recent Form 13F filings. Hedge fund managers with less than $10 million of disclosed equity assets and managers that report holdings on a
date other than the previous calendar quarter end are excluded. The resulting set of hedge fund managers forms the Hedge Fund Manager Universe.
2. Stock Selection
The
New York Stock Exchange (NYSE) trading day after the SEC-mandated 45-day deadline for 13F filings, the most recent regulatory filings reported to the SEC (13F filings) are retrieved for each of the members of the Hedge Fund
Manager Universe using the third-party database. If 85% or more of the hedge fund managers from the previous quarters Hedge Fund Manager Universe have updated their filings, the data are collected and the new composition of the Index is
determined. If not, the analysis is run on the next business day regardless of whether 85% or more of the hedge fund managers from the previous quarters Hedge Fund Manager Universe have updated their filings.
The equity positions reported by each of the members of the Hedge Fund Manager Universe are valued using the reported share counts multiplied
by prices adjusted for splits and spin-offs from the reporting date through the previous nights market close (the Selection Date) to calculate the most recent dollar market value of each reported position. Composition changes
determined using data as of the Selection Date are effective in the Index six NYSE trading days after the SEC 13F filing deadline (the Rebalance Date).
Any stocks that are not U.S.-listed common shares or American Depositary Receipts (ADRs) are excluded. Only the primary or most
liquid share class is included for each company. The liquidity for multiple share classes is defined as the average daily dollar value traded over the past 3 months.
Stocks with announced corporate actions which would render them ineligible for the Index (e.g., delisting from a U.S. exchange) and which have
expected completion dates within one month of the Rebalance Date are excluded.
The remaining equity positions reported by members of the
Hedge Fund Manager Universe are ranked by descending market value for each member. The 50 stocks that appear most frequently in the top ten holdings of the Hedge Fund Manager Universe are selected as Index constituents. In the case of a tie in
ranking, stocks will be included based on an alphabetical sort by ticker. Index constituents will exclude names that GSAM is restricted from holding for legal or regulatory reasons.
3. Weighting
Constituents are equal dollar-weighted with a 2% basket weight at each Selection Date and allowed to float due to variations in individual
constituent performance until the next Rebalance Date. Any corporate actions with ex-dates that fall between the Selection and Rebalance Dates are reflected in the Index composition prior to the rebalancing of the Index.
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4. Rebalancing
The Index is rebalanced quarterly as of the close on the sixth NYSE trading day following the SEC-mandated 45-day deadline for 13F filings.
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INVESTMENT OBJECTIVES AND POLICIES
The Fund has a distinct investment objective and policies. The investment objective of the Fund is to provide investment results that closely
correspond, before fees and expenses, to the performance of the Index. The Fund issues and redeems shares in exchange for in-kind securities or instruments. There can be no assurance that the Funds investment objective will be achieved. The
Fund is a diversified series of an open-end management company as defined in the Investment Company Act of 1940, as amended (the Investment Company Act or the Act). The investment objective and policies of the Fund, and the
associated risks of the Fund, are discussed in the Prospectus, which should be read carefully before an investment is made. All investment objectives and investment policies not specifically designated as fundamental may be changed without
shareholder approval.
The Fund offers and issues Shares at its NAV per Share only in aggregations of a specified number of shares
(Creation Units), generally in exchange for a basket of securities and/or instruments (the Deposit Securities) together with a deposit of a specified cash payment (the Cash Component), if any. Shares are
redeemable by the Fund only in Creation Units and, generally, in exchange for securities and instruments. Shares trade in the secondary market and elsewhere at market prices that may be at, above or below NAV. Creation Units typically are a
specified number of Shares.
The Fund may charge creation/redemption transaction fees for each creation and redemption. In all cases,
transaction fees will be limited in accordance with the requirements of the SEC applicable to management investment companies offering redeemable securities. See the CREATIONS AND REDEMPTIONS section below.
The Trust, on behalf of the Fund, has filed a notice of eligibility claiming an exclusion from the definition of the term commodity pool
operator (CPO) under the Commodity Exchange Act (CEA) and therefore is not subject to registration or regulation as a CPO under the CEA.
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DESCRIPTION OF INVESTMENT SECURITIES
AND PRACTICES
Asset-Backed Securities
The Fund may invest in asset-backed securities. Asset-backed securities represent participations in, or are secured by and payable from, assets
such as motor vehicle installment sales, installment loan contracts, leases of various types of real and personal property, receivables from revolving credit (credit card) agreements and other categories of receivables. Such assets are securitized
through the use of trusts and special purpose corporations. Payments or distributions of principal and interest may be guaranteed up to certain amounts and for a certain time period by a letter of credit or a pool insurance policy issued by a
financial institution unaffiliated with the trust or corporation, or other credit enhancements may be present.
Such securities are often
subject to more rapid repayment than their stated maturity date would indicate as a result of the pass-through of prepayments of principal on the underlying loans. During periods of declining interest rates, prepayment of loans underlying
asset-backed securities can be expected to accelerate. Accordingly, the Funds ability to maintain positions in such securities will be affected by reductions in the principal amount of such securities resulting from prepayments, and its
ability to reinvest the returns of principal at comparable yields is subject to generally prevailing interest rates at that time. To the extent that the Fund invests in asset-backed securities, the values of the Funds portfolio securities will
vary with changes in market interest rates generally and the differentials in yields among various kinds of asset-backed securities.
Asset-backed securities present certain additional risks because asset-backed securities generally do not have the benefit of a security
interest in collateral that is comparable to mortgage assets. Credit card receivables are generally unsecured and the debtors on such receivables are entitled to the protection of a number of state and federal consumer credit laws, many of which
give such debtors the right to set-off certain amounts owed on the credit cards, thereby reducing the balance due. Automobile receivables generally are secured, but by automobiles rather than residential real property. Most issuers of automobile
receivables permit the loan servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders
of the asset-backed securities. In addition, because of the large number of vehicles involved in a typical issuance and technical requirements under state laws, the trustee for the holders of the automobile receivables may not have a proper security
interest in the underlying automobiles. Therefore, if the issuer of an asset-backed security defaults on its payment obligations, there is the possibility that, in some cases, the Fund will be unable to possess and sell the underlying collateral and
that the Funds recoveries on repossessed collateral may not be available to support payments on these securities.
Asset Segregation
As investment companies registered with the SEC, the Fund must identify on its books (often referred to as asset segregation)
liquid assets, or engage in other SEC- or SEC staff-approved or other appropriate measures, to cover open positions with respect to certain kinds of derivative instruments. In the case of swaps, futures contracts, options, forward
contracts and other derivative instruments that do not cash settle, for example, the Fund must identify on its books liquid assets equal to the full notional amount of the instrument while the positions are open, to the extent there is not a
permissible offsetting position or contractual netting agreement with respect to swaps (other than credit default swaps where the Fund is the protection seller). However, with respect to certain swaps, futures contracts, options, forward
contracts and other derivative instruments that are required to cash settle, the Fund may identify liquid assets in an amount equal to the Funds daily marked-to-market net obligations (i.e., the Funds daily net liability) under
the instrument, if any, rather than its full notional amount. Forwards and futures contracts that do not cash settle may be treated as cash settled for asset segregation purposes when the Fund has entered into a contractual arrangement with a third
party futures commission merchant (FCM) or other counterparty to off-set the Funds exposure under the contract and, failing that, to assign its delivery obligation under the contract to the counterparty. The Fund reserves the right
to modify its asset segregation policies in the future in its discretion, consistent with the Investment Company Act and SEC or SEC staff guidance. By identifying assets equal to only its net obligations under certain instruments, the Fund will have
the ability to employ leverage to a greater extent than if the Fund were required to identify assets equal to the full notional amount of the instrument.
In November 2019, the SEC published a proposed rulemaking related to the use of derivatives and certain other transactions by registered
investment companies that would, if adopted, for the most part rescind the guidance of the SEC and its staff regarding asset segregation and cover transactions. Instead of complying with current guidance, the Fund would need to trade derivatives and
other transactions that create future payment or delivery obligations (except reverse repurchase agreements and similar financing transactions) subject to a value-at-risk (VaR) leverage limit, certain other derivatives risk management
program and testing requirements and requirements related to board and SEC reporting. These new requirements would apply unless the Fund qualified as a limited derivatives user, as defined in the SECs proposal. If the Fund trades
reverse repurchase agreements or similar financing transactions, it would need to aggregate the amount of indebtedness associated with the reverse repurchase agreements or similar financing transactions with the aggregate amount of any other senior
securities representing indebtedness when calculating the Funds asset coverage ratio. Reverse repurchase agreements or similar financing transactions would not be included in the calculation of whether the Fund is a limited derivatives user.
Any new requirements, if adopted, may increase the cost of the Funds investments and cost of doing business, which could adversely affect investors.
Combined Transactions
The Fund may enter
into multiple transactions, including multiple options transactions, multiple futures transactions, multiple currency transactions (as applicable) (including forward currency contracts) and multiple interest rate and other swap transactions and any
combination of futures, options, currency and swap transactions (component transactions) as part of a single or combined strategy when, in the opinion of the Investment Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in each of its component transactions. Although combined transactions are normally entered
B-6
into based on the Investment Advisers judgment that the combined strategies will reduce risk or otherwise more effectively achieve the desired portfolio management goal, it is possible that
the combination will instead increase such risks or hinder achievement of the portfolio management objective.
Commercial Paper and Other Short-Term
Corporate Obligations
The Fund may invest in commercial paper and other short-term obligations issued or guaranteed by U.S.
corporations, non-U.S. corporations or other entities. Commercial paper represents short-term unsecured promissory notes issued in bearer form by banks or bank holding companies, corporations and finance companies.
Convertible Securities
The Fund may
invest in convertible securities. Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted into or exchanged for a specified amount of common stock (or other securities) of the same or different
issuer within a particular period of time at a specified price or formula. A convertible security entitles the holder to receive interest that is generally paid or accrued on debt or a dividend that is paid or accrued on preferred stock until the
convertible security matures or is redeemed, converted or exchanged. Convertible securities have unique investment characteristics, in that they generally (i) have higher yields than common stocks, but lower yields than comparable
non-convertible securities, (ii) are less subject to fluctuation in value than the underlying common stock due to their fixed-income characteristics and (iii) provide the potential for capital appreciation if the market price of the
underlying common stock increases.
The value of a convertible security is a function of its investment value (determined by
its yield in comparison with the yields of other securities of comparable maturity and quality that do not have a conversion privilege) and its conversion value (the securitys worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is influenced by changes in interest rates, with investment value normally declining as interest rates increase and increasing as interest rates decline. The credit standing of
the issuer and other factors may also have an effect on the convertible securitys investment value. The conversion value of a convertible security is determined by the market price of the underlying common stock. If the conversion value is low
relative to the investment value, the price of the convertible security is governed principally by its investment value. To the extent the market price of the underlying common stock approaches or exceeds the conversion price, the price of the
convertible security will be increasingly influenced by its conversion value. A convertible security generally will sell at a premium over its conversion value by the extent to which investors place value on the right to acquire the underlying
common stock while holding a fixed income security.
A convertible security may be subject to redemption at the option of the issuer at a
price established in the convertible securitys governing instrument. If a convertible security held by the Fund is called for redemption, the Fund will be required to permit the issuer to redeem the security, convert it into the underlying
common stock or sell it to a third party or permit the issuer to redeem the security. Any of these actions could have an adverse effect on the Funds ability to achieve its investment objective, which, in turn, could result in losses to the
Fund. To the extent that the Fund holds a convertible security, or a security that is otherwise converted or exchanged for common stock (e.g., as a result of a restructuring), the Fund may, consistent with its investment objective, hold such
common stock in its portfolio.
Corporate Debt Obligations
The Fund may invest in corporate debt obligations, including obligations of industrial, utility and financial issuers. Corporate debt
obligations include bonds, notes, debentures and other obligations of corporations to pay interest and repay principal. Corporate debt obligations are subject to the risk of an issuers inability to meet principal and interest payments on the
obligations and may also be subject to price volatility due to such factors as market interest rates, market perception of the creditworthiness of the issuer and general market liquidity.
Corporate debt obligations rated BBB or Baa are considered medium grade obligations with speculative characteristics, and adverse economic
conditions or changing circumstances may weaken their issuers capacity to pay interest and repay principal. Medium to lower rated and comparable non-rated securities tend to offer higher yields than
higher rated securities with the same maturities because the historical financial condition of the issuers of such securities may not have been as strong as that of other issuers. The price of corporate debt obligations will generally fluctuate in
response to fluctuations in supply and demand for similarly rated securities. In addition, the price of corporate debt obligations will generally fluctuate in response to interest rate levels. Fluctuations in the prices of portfolio securities
subsequent to their acquisition will not affect cash income from such securities but will be reflected in the Funds NAV. Because medium to lower rated securities generally involve greater risks of loss of income and principal than higher rated
securities, investors should consider carefully the relative risks associated with investment in securities which carry medium to lower ratings and in comparable unrated securities. In addition to the risk of default, there are the related costs of
recovery on defaulted issues.
B-7
Custodial Receipts and Trust Certificates
The Fund may invest in custodial receipts and trust certificates, which may be underwritten by securities dealers or banks, representing
interests in securities held by a custodian or trustee. The securities so held may include U.S. Government Securities (as defined below), which are obligations issued or guaranteed by the U.S. Government, its agencies, instrumentalities or sponsored
enterprises (U.S. Government Securities), municipal securities or other types of securities in which the Fund may invest. The custodial receipts or trust certificates are underwritten by securities dealers or banks and may evidence
ownership of future interest payments, principal payments or both on the underlying securities, or, in some cases, the payment obligation of a third party that has entered into an interest rate swap or other arrangement with the custodian or
trustee. For certain securities laws purposes, custodial receipts and trust certificates may not be considered obligations of the U.S. Government or other issuer of the securities held by the custodian or trustee. As a holder of custodial receipts
and trust certificates, the Fund will bear its proportionate share of the fees and expenses charged to the custodial account or trust. The Fund may also invest in separately issued interests in custodial receipts and trust certificates.
Although under the terms of a custodial receipt or trust certificate the Fund would typically be authorized to assert its rights directly
against the issuer of the underlying obligation, the Fund could be required to assert through the custodian bank or trustee those rights as may exist against the underlying issuers. Thus, in the event an underlying issuer fails to pay principal
and/or interest when due, the Fund may be subject to delays, expenses and risks that are greater than those that would have been involved if the Fund had purchased a direct obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying securities have been deposited is determined to be an association taxable as a corporation, instead of a non-taxable entity, the yield on the underlying securities would be reduced in recognition of any
taxes paid.
Certain custodial receipts and trust certificates may be synthetic or derivative instruments that have interest rates that
reset inversely to changing short-term rates and/or have embedded interest rate floors and caps that require the issuer to pay an adjusted interest rate if market rates fall below or rise above a specified rate. Because some of these instruments
represent relatively recent innovations, and the trading market for these instruments is less developed than the markets for traditional types of instruments, it is uncertain how these instruments will perform under different economic and
interest-rate scenarios. Also, because these instruments may be leveraged, their market values may be more volatile than other types of fixed income instruments and may present greater potential for capital gain or loss. The possibility of default
by an issuer or the issuers credit provider may be greater for these derivative instruments than for other types of instruments. In some cases, it may be difficult to determine the fair value of a derivative instrument because of a lack of
reliable objective information and an established secondary market for some instruments may not exist. In many cases, the Internal Revenue Service (IRS) has not ruled on the tax treatment of the interest or payments received on the
derivative instruments and, accordingly, purchases of such instruments are based on the opinion of counsel to the sponsors of the instruments.
Equity
Investments
The Fund may purchase equity investments. In addition, after its purchase, a portfolio investment (such as a convertible
debt obligation) may convert to an equity security. The Fund may also acquire equity securities in connection with a restructuring event related to one or more of its investments. If this occurs, the Fund may continue to hold the investment if the
Investment Adviser believes it is in the best interest of the Fund and its shareholders.
Equity-Linked Structured Notes
The Fund may invest in equity-linked structured notes. Equity-linked structured notes are derivatives that are specifically designed to combine
the characteristics of one or more underlying securities and their equity derivatives in a single note form. The return and/or yield or income component may be based on the performance of the underlying equity securities, an equity index, and/or
option positions. Equity-linked structured notes are typically offered in limited transactions by financial institutions in either registered or non-registered form. An investment in equity-linked notes creates exposure to the credit risk of the
issuing financial institution, as well as to the market risk of the underlying securities. There is no guaranteed return of principal with these securities and the appreciation potential of these securities may be limited by a maximum payment or
call right. In certain cases, equity-linked notes may be more volatile and less liquid than less complex securities or other types of fixed-income securities. Such securities may exhibit price behavior that does not correlate with other fixed-income
securities.
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Events Relating to the Mortgage- and Asset-Backed Securities Markets and the Overall Economy
The unprecedented disruption in the market for mortgage loans, mortgage pass-through securities and other securities representing an interest
in or collateralized by adjustable and fixed rate mortgage loans (Mortgage-Backed Securities) (and in particular, the subprime residential mortgage market), the broader Mortgage-Backed Securities market and the asset-backed
securities market in 2008 and 2009 resulted in downward price pressures and increasing foreclosures and defaults in residential and commercial real estate. Concerns over inflation, energy costs, geopolitical issues, the availability and cost of
credit, the mortgage market and a depressed real estate market contributed to increased volatility and diminished expectations for the economy and markets going forward, and contributed to dramatic declines in the housing market, with falling home
prices and increasing foreclosures and unemployment, and significant asset write-downs by financial institutions. These conditions prompted a number of financial institutions to seek additional capital, to merge with other institutions and, in some
cases, to fail or seek bankruptcy protection. Between 2008 and 2009, the market for Mortgage-Backed Securities (as well as other asset-backed securities) was particularly adversely impacted by, among other factors, the failure and subsequent sale of
Bear, Stearns & Co. Inc. to J.P. Morgan Chase, the merger of Bank of America Corporation and Merrill Lynch & Co., the insolvency of Washington Mutual Inc., the failure and subsequent bankruptcy of Lehman Brothers Holdings, Inc.,
the extension of approximately $152 billion in emergency credit by the U.S. Treasury to American International Group Inc., and, as described above, the conservatorship and the control by the U.S. Government of Freddie Mac and Fannie Mae. The global
markets also saw an increase in volatility due to uncertainty surrounding the level and sustainability of sovereign debt of certain countries that are part of the European Union (EU), including Greece, Spain, Portugal, Ireland and Italy,
as well as the sustainability of the EU itself. Concerns over the level and sustainability of the sovereign debt of the United States have aggravated this volatility. No assurance can be made that this uncertainty will not lead to further disruption
of the credit markets in the United States or around the globe. These events, coupled with the general global economic downturn, have resulted in a substantial level of uncertainty in the financial markets, particularly with respect to
mortgage-related investments.
These events may lead to further declines in income from, or the value of, real estate, including the real
estate which secures the Mortgage-Backed Securities which may be held by the Fund. Additionally, a lack of credit liquidity, adjustments of mortgages to higher rates and decreases in the value of real property have occurred and may reoccur, and
potentially prevent borrowers from refinancing their mortgages, which may increase the likelihood of default on their mortgage loans. These economic conditions, coupled with high levels of real estate inventory and elevated incidence of underwater
mortgages, may also adversely affect the amount of proceeds the holder of a mortgage loan or Mortgage-Backed Securities (including the Mortgaged-Backed Securities in which certain Funds may invest) would realize in the event of a foreclosure or
other exercise of remedies. Moreover, even if such Mortgage-Backed Securities are performing as anticipated, the value of such securities in the secondary market may nevertheless fall or continue to fall as a result of deterioration in general
market conditions for such Mortgage-Backed Securities or other asset-backed or structured products. Trading activity associated with market indices may also drive spreads on those indices wider than spreads on Mortgage-Backed Securities, thereby
resulting in a decrease in value of such Mortgage-Backed Securities, including the Mortgage-Backed Securities which may be owned by the Fund.
The U.S. Government, the Federal Reserve, the U.S. Department of the Treasury (the Treasury or U.S. Treasury), the
SEC, the Federal Deposit Insurance Corporation (the FDIC) and other governmental and regulatory bodies have taken or are considering taking actions to address the financial crisis. These actions include, but are not limited to, the
enactment by the United States Congress of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which was signed into law on July 21, 2010 and imposes a new regulatory framework over the U.S. financial
services industry and the consumer credit markets in general, and the promulgation of additional regulations in this area which could affect these securities. Given the broad scope, sweeping nature, and relatively recent enactment of some of these
regulatory measures, the potential impact they could have on any of the asset-backed or Mortgage-Backed Securities which may be held by the Fund is unknown. There can be no assurance that these measures will not have an adverse effect on the value
or marketability of any asset-backed or Mortgage-Backed Securities which may be held by the Fund. Furthermore, no assurance can be made that the U.S. Government or any U.S. regulatory body (or other authority or regulatory body) will not continue to
take further legislative or regulatory action in response to the economic crisis or otherwise, and the effect of such actions, if taken, cannot be known.
Among its other provisions, the Dodd-Frank Act creates a liquidation framework under which the FDIC, may be appointed as receiver following a
systemic risk determination by the Secretary of Treasury (in consultation with the President) for the resolution of certain nonbank financial companies and other entities, defined as covered financial companies, and commonly
referred to as systemically important entities, in the event such a company is in default or in danger of default and the resolution of such a company under other applicable law would have serious adverse effects on financial stability
in the United States, and also for the resolution of certain of their subsidiaries. No assurances can be given that this new liquidation framework would not apply to the originators of asset-backed securities, including Mortgage-Backed Securities,
or their respective subsidiaries, including the issuers and depositors of such securities, although the expectation embedded in the Dodd-Frank Act is that the framework will be invoked only very rarely. Guidance
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from the FDIC indicates that such new framework will largely be exercised in a manner consistent with the existing bankruptcy laws, which is the insolvency regime that would otherwise apply to
the sponsors, depositors and issuing entities with respect to asset-backed securities, including Mortgage-Backed Securities. The application of such liquidation framework to such entities could result in decreases or delays in amounts paid on, and
hence the market value of, the Mortgage-Backed or asset-backed securities that may be owned by the Fund.
Delinquencies, defaults and
losses on residential mortgage loans may increase substantially over certain periods, which may affect the performance of the Mortgage-Backed Securities in which the Fund may invest. Mortgage loans backing non-agency Mortgage-Backed Securities are
more sensitive to economic factors that could affect the ability of borrowers to pay their obligations under the mortgage loans backing these securities. In addition, housing prices and appraisal values in many states and localities over certain
periods have declined or stopped appreciating. A continued decline or an extended flattening of those values may result in additional increases in delinquencies and losses on Mortgage-Backed Securities generally (including the Mortgaged-Backed
Securities that the Fund may invest in as described above).
The foregoing adverse changes in market conditions and regulatory climate may
reduce the cash flow which the Fund, to the extent it invests in Mortgage-Backed Securities or other asset-backed securities, receives from such securities and increase the incidence and severity of credit events and losses in respect of such
securities. In addition, interest rate spreads for Mortgage-Backed Securities and other asset-backed securities are subject to widening and increased volatility due to these adverse changes in market conditions. In the event that interest rate
spreads for Mortgage-Backed Securities and other asset-backed securities widen following the purchase of such assets by the Fund, the market value of such securities is likely to decline and, in the case of a substantial spread widening, could
decline by a substantial amount. Furthermore, adverse changes in market conditions may result in reduced liquidity in the market for Mortgage-Backed Securities and other asset-backed securities (including the Mortgage-Backed Securities and other
asset-backed securities in which certain Funds may invest) and increased unwillingness by banks, financial institutions and investors to extend credit to servicers, originators and other participants in the market for Mortgage-Backed and other
asset-backed securities. As a result, the liquidity and/or the market value of any Mortgage-Backed or asset-backed securities that are owned by the Fund may experience further declines after they are purchased by the Fund.
Foreign Investments
The Fund may invest
in securities of foreign issuers, including securities quoted or denominated in a currency other than U.S. dollars. Investments in foreign securities may offer potential benefits not available from investments solely in U.S. dollar-denominated or
quoted securities of domestic issuers. Such benefits may include the opportunity to invest in foreign issuers that appear, in the opinion of the Investment Adviser, to offer the potential for better long term growth of capital and income than
investments in U.S. securities, the opportunity to invest in foreign countries with economic policies or business cycles different from those of the United States and the opportunity to reduce fluctuations in portfolio value by taking advantage of
foreign securities markets that do not necessarily move in a manner parallel to U.S. markets. Investing in the securities of foreign issuers also involves, however, certain special risks, including those discussed in the Funds Prospectus and
those set forth below, which are not typically associated with investing in U.S. dollar-denominated securities or quoted securities of U.S. issuers. Many of these risks are more pronounced for investments in emerging economies.
With respect to investments in certain foreign countries, there exist certain economic, political and social risks, including the risk of
adverse political developments, nationalization, military unrest, social instability, war and terrorism, confiscation without fair compensation, expropriation or confiscatory taxation, limitations on the movement of funds and other assets between
different countries, or diplomatic developments, any of which could adversely affect the Funds investments in those countries. Governments in certain foreign countries continue to participate to a significant degree, through ownership interest
or regulation, in their respective economies. Action by these governments could have a significant effect on market prices of securities and dividend payments.
As described more fully below, the Fund may invest in countries with emerging economies or securities markets. Political and economic
structures in many of such countries may be undergoing significant evolution and rapid development, and such countries may lack the social, political and economic stability characteristic of more developed countries. Certain of such countries have
in the past failed to recognize private property rights and have at times nationalized or expropriated the assets of, or ignored internationally accepted standards of due process against, private companies. In addition, a country may take these and
other retaliatory actions against a specific private company, including the Fund or the Investment Adviser. There may not be legal recourse against these actions, which could arise in connection with the commercial activities of Goldman Sachs or its
affiliates or otherwise, and the Fund could be subject to substantial losses. In addition, the Fund or the Investment Adviser may determine not to invest in, or may limit its overall investment in, a particular issuer, country or geographic region
due to, among other things, heightened risks regarding repatriation restrictions, confiscation of assets and property, expropriation or nationalization. See Investing in Emerging Countries, below.
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Many countries throughout the world are dependent on a healthy U.S. economy and are
adversely affected when the U.S. economy weakens or its markets decline. Additionally, many foreign country economies are heavily dependent on international trade and are adversely affected by protective trade barriers and economic conditions of
their trading partners. Protectionist trade legislation enacted by those trading partners could have a significant adverse effect on the securities markets of those countries. 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.
From time to time, certain of the companies in which the Fund may invest may operate in, or have dealings with, countries subject to sanctions
or embargos imposed by the U.S. Government and the United Nations and/or countries identified by the U.S. Government as state sponsors of terrorism. A company may suffer damage to its reputation if it is identified as a company which operates in, or
has dealings with, countries subject to sanctions or embargoes imposed by the U.S. Government as state sponsors of terrorism. As an investor in such companies, the Fund will be indirectly subject to those risks. For example, the United Nations
Security Council has imposed certain sanctions relating to Iran and Sudan and both countries are embargoed countries by the Office of Foreign Assets Control (OFAC) of the Treasury.
In addition, from time to time, certain of the companies in which the Fund may invest may engage in, or have dealings with countries or
companies that engage in, activities that may not be considered socially and/or environmentally responsible. Such activities may relate to human rights issues (such as patterns of human rights abuses or violations, persecution or discrimination),
impacts to local communities in which companies operate and environmental sustainability. For a description of the Investment Advisers approach to responsible and sustainable investing, please see GSAMs Statement on Responsible and
Sustainable Investing at https://www.gsam.com/content/dam/gsam/pdfs/common/en/public/miscellaneous/GSAM_statement_on_respon_sustainable_investing.pdf.
As a result, a company may suffer damage to its reputation if it is identified as a company which engages in, or has dealings with countries
or companies that engage in, the above referenced activities. As an investor in such companies, the Fund would be indirectly subject to those risks.
The Investment Adviser is committed to complying fully with sanctions in effect as of the date of this Statement of Additional Information and
any other applicable sanctions that may be enacted in the future with respect to Sudan or any other country.
Investments in foreign
securities often involve currencies of foreign countries. Accordingly, the Fund may be affected favorably or unfavorably by changes in currency rates and in exchange control regulations and may incur costs in connection with conversions between
various currencies. The Fund may be subject to currency exposure independent of its securities positions. To the extent that the Fund is fully invested in foreign securities while also maintaining net currency positions, it may be exposed to greater
combined risk.
Currency exchange rates may fluctuate significantly over short periods of time. They generally are determined by the
forces of supply and demand in the foreign exchange markets and the relative merits of investments in different countries, actual or anticipated changes in interest rates and other complex factors, as seen from an international perspective. Currency
exchange rates also can be affected unpredictably by intervention (or the failure to intervene) by U.S. or foreign governments or central banks or by currency controls or political developments in the United States or abroad. To the extent that a
portion of the Funds total assets, adjusted to reflect the Funds net position after giving effect to currency transactions, is denominated or quoted in the currencies of foreign countries, the Fund will be more susceptible to the risk of
adverse economic and political developments within those countries. The Funds net currency positions may expose it to risks independent of its securities positions.
Because foreign issuers generally are not subject to uniform accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to U.S. companies, there may be less publicly available information about a foreign company than about a U.S. company. Volume and liquidity in most foreign securities markets are less than in the United
States and securities of many foreign companies are less liquid and more volatile than securities of comparable U.S. companies. The securities of foreign issuers may be listed on foreign securities exchanges or traded in foreign over-the-counter
markets. Fixed commissions on foreign securities exchanges are generally higher than negotiated commissions on U.S. exchanges, although the Fund endeavors to achieve the most favorable net results on its portfolio transactions. There is generally
less government supervision and regulation of foreign securities exchanges, brokers, dealers and listed and unlisted companies than in the United States, and the legal remedies for investors may be more limited than the remedies available in the
United States. For example, there may be no comparable provisions under certain foreign laws to insider trading and similar investor protections that apply with respect to securities transactions consummated in the United States. Mail service
between the United States and foreign countries may be slower or less reliable than within the United States, thus increasing the risk of delayed settlement of portfolio transactions or loss of certificates for portfolio securities.
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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 some of the
Funds assets are uninvested and no return is earned on such assets. The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability to dispose
of portfolio securities due to settlement problems could result either in losses to the Fund due to subsequent declines in value of the portfolio securities, or, if the Fund has entered into a contract to sell the securities, in possible liability
to the purchaser.
These and other factors discussed in the section below, entitled Illiquid Investments, may impact the
liquidity of investments in securities of foreign issuers.
The Fund may invest in foreign securities which take the form of sponsored and
unsponsored ADRs, Global Depositary Receipts (GDRs), European Depositary Receipts (EDRs) or other similar instruments representing securities of foreign issuers) (together, Depositary Receipts). ADRs represent the
right to receive securities of foreign issuers deposited in a domestic bank or a correspondent bank. ADRs are traded on domestic exchanges or in the U.S. over-the-counter market and, generally, are in registered form. EDRs and GDRs are receipts
evidencing an arrangement with a non-U.S. bank similar to that for ADRs and are designed for use in the non-U.S. securities markets. EDRs and GDRs are not necessarily quoted in the same currency as the underlying security.
To the extent the Fund acquires Depositary Receipts through banks which do not have a contractual relationship with the foreign issuer of the
security underlying the Depositary Receipts to issue and service such unsponsored Depositary Receipts, there is an increased possibility that the Fund will not become aware of and be able to respond to corporate actions such as stock splits or
rights offerings involving the foreign issuer in a timely manner. In addition, the lack of information may result in inefficiencies in the valuation of such instruments. Investment in Depositary Receipts does not eliminate all the risks inherent in
investing in securities of non-U.S. issuers. The market value of Depositary Receipts is dependent upon the market value of the underlying securities and fluctuations in the relative value of the currencies in which the Depositary Receipts and the
underlying securities are quoted. However, by investing in Depositary Receipts, such as ADRs, which are quoted in U.S. dollars, the Fund may avoid currency risks during the settlement period for purchases and sales.
Foreign Government Obligations. Foreign government obligations include securities, instruments and obligations issued or guaranteed by
a foreign government, its agencies, instrumentalities or sponsored enterprises. Investment in foreign government obligations can involve a high degree of risk. The governmental entity that controls the repayment of foreign government obligations may
not be able or willing to repay the principal and/or interest when due in accordance with the terms of such debt. A governmental entitys willingness or ability to repay principal and interest due in a timely manner may be affected by, among
other factors, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the governmental
entitys policy towards the International Monetary Fund and the political constraints to which a governmental entity may be subject. Governmental entities may also be dependent on expected disbursements from foreign governments, multilateral
agencies and others abroad to reduce principal and interest on their debt. The commitment on the part of these governments, agencies and others to make such disbursements may be conditioned on a governmental entitys implementation of economic
reforms and/or economic performance and the timely service of such debtors obligations. Failure to implement such reforms, achieve such levels of economic performance or repay principal or interest when due may result in the cancellation of
such third parties commitments to lend funds to the governmental entity, which may further impair such debtors ability or willingness to service its debts in a timely manner. Consequently, governmental entities may default on their debt.
Holders of foreign government obligations (including the Fund) may be requested to participate in the rescheduling of such debt and to extend further loans to governmental agencies.
Forward Foreign Currency Exchange Contracts
The Fund may enter into forward foreign currency exchange contracts for investment and speculative purposes, as well as for hedging purposes,
to seek to protect against anticipated changes in future foreign currency exchange rates and to seek to increase total return. A forward foreign currency exchange contract involves an obligation to purchase or sell a specific currency at a future
date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are traded in the interbank market between currency traders (usually large commercial
banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are generally charged at any stage for trades.
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At the maturity of a forward contract the Fund may either accept or make delivery of the
currency specified in the contract or, at or prior to maturity, enter into a closing transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect to forward contracts are often, but not always, effected
with the currency trader who is a party to the original forward contract.
The Fund may, from time to time, engage in non-deliverable
forward transactions to manage currency risk or to gain exposure to a currency without purchasing securities denominated in that currency. A non-deliverable forward is a transaction that represents an agreement between the Fund and a counterparty
(usually a commercial bank) to pay the other party the amount that it would have cost based on current market rates as of the termination date to buy or sell a specified (notional) amount of a particular currency at an agreed upon foreign exchange
rate on an agreed upon future date. If the counterparty defaults, the Fund will have contractual remedies pursuant to the agreement related to the transaction, but the Fund may be delayed or prevented from obtaining payments owed to it pursuant to
non-deliverable forward transactions. Such non-deliverable forward transactions will be settled in cash.
The Fund may enter into forward
foreign currency exchange contracts in several circumstances. First, when the Fund enters into a contract for the purchase or sale of a security denominated or quoted in a foreign currency, or when the Fund anticipates the receipt in a foreign
currency of dividend or interest payments on such a security which it holds, the Fund may desire to lock in the U.S. dollar price of the security or the U.S. dollar equivalent of such dividend or interest payment, as the case may be. By
entering into a forward contract for the purchase or sale, for a fixed amount of dollars, of the amount of foreign currency involved in the underlying transactions, the Fund will attempt to protect itself against an adverse change in the
relationship between the U.S. dollar and the subject foreign currency during the period between the date on which the security is purchased or sold, or on which the dividend or interest payment is declared, and the date on which such payments are
made or received.
Additionally, when the Investment Adviser believes that the currency of a particular foreign country may suffer a
substantial decline against the U.S. dollar, it may enter into a forward contract to sell, for a fixed amount of U.S. dollars, the amount of foreign currency approximating the value of some or all of the Funds portfolio securities quoted or
denominated in such foreign currency. The precise matching of the forward contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a
consequence of market movements in the value of those securities between the date on which the contract is entered into and the date it matures. Using forward contracts to protect the value of the Funds portfolio securities against a decline
in the value of a currency does not eliminate fluctuations in the underlying prices of the securities. It simply establishes a rate of exchange, which the Fund can achieve at some future point in time. The precise projection of short-term currency
market movements is not possible, and short-term hedging provides a means of fixing the U.S. dollar value of only a portion of the Funds foreign assets.
The Fund may engage in cross-hedging by using forward contracts in one currency to hedge against fluctuations in the value of securities
quoted or denominated in a different currency. In addition, certain Fund may enter into foreign currency transactions to seek a closer correlation between the Funds overall currency exposures and the currency exposures of the Funds
performance benchmark.
While the Fund may enter into forward contracts to reduce currency exchange rate risks, transactions in such
contracts involve certain other risks. Thus, while the Fund may benefit from such transactions, unanticipated changes in currency prices may result in a poorer overall performance for the Fund than if it had not engaged in any such transactions.
Moreover, there may be imperfect correlation between the Funds portfolio holdings of securities quoted or denominated in a particular currency and forward contracts entered into by the Fund. Such imperfect correlation may cause the Fund to
sustain losses which will prevent the Fund from achieving a complete hedge or expose the Fund to risk of foreign exchange loss.
Certain
forward foreign currency exchange contracts and other currency transactions are not exchange traded or cleared. Markets for trading such foreign forward currency contracts offer less protection against defaults than is available when trading in
currency instruments on an exchange. Such forward contracts are subject to the risk that the counterparty to the contract will default on its obligations. Because these contracts are not guaranteed by an exchange or clearinghouse, a default on a
contract would deprive the Fund of unrealized profits, transaction costs or the benefits of a currency hedge or force the Fund to cover its purchase or sale commitments, if any, at the current market price. In addition, the institutions that deal in
forward currency contracts are not required to continue to make markets in the currencies they trade and these markets can experience periods of illiquidity. To the extent that a portion of the Funds total assets, adjusted to reflect the
Funds net position after giving effect to currency transactions, is denominated or quoted in the currencies of foreign countries, the Fund will be more susceptible to the risk of adverse economic and political developments within those
countries.
These and other factors discussed in the section below, entitled Illiquid Investments, may impact the liquidity of
investments in issuers of emerging country securities.
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Futures Contracts and Options on Futures Contracts
The Fund may purchase and sell futures contracts and may also purchase and write call and put options on futures contracts. The Fund may
purchase and sell futures contracts based on various securities, securities indices, foreign currencies and other financial instruments and indices. Financial futures contracts used by the Fund include interest rate futures contracts including,
among others, Eurodollar futures contracts. Eurodollar futures contracts are U.S. dollar-denominated futures contracts that are based on the implied forward London Interbank Offered Rate (LIBOR) of a three-month deposit. The Fund will
engage in futures and related options transactions in order to seek to increase total return or to hedge against changes in interest rates, securities prices or, to the extent the Fund invests in foreign securities, currency exchange rates, or to
otherwise manage its term structure, sector selection and duration in accordance with its investment objective and policies. The Fund may also enter into closing purchase and sale transactions with respect to such contracts and options.
Futures contracts utilized by funds have historically been traded on U.S. exchanges or boards of trade that are licensed and regulated by the
U.S. Commodity Futures Trading Commission (CFTC) or with respect to certain funds on foreign exchanges. More recently, certain futures may also be traded either over-the-counter or on trading facilities such as derivatives transaction
execution facilities, exempt boards of trade or electronic trading facilities that are licensed and/or regulated to varying degrees by the CFTC. Also, certain single stock futures and narrow based security index futures may be traded either
over-the-counter or on trading facilities such as contract markets, derivatives transaction execution facilities and electronic trading facilities that are licensed and/or regulated to varying degrees by both the CFTC and the SEC or on foreign
exchanges.
Neither the CFTC, National Futures Association (NFA), SEC nor any domestic exchange regulates activities of any
foreign exchange or boards of trade, including the execution, delivery and clearing of transactions, or has the power to compel enforcement of the rules of a foreign exchange or board of trade or any applicable foreign law. This is true even if the
exchange is formally linked to a domestic market so that a position taken on the market may be liquidated by a transaction on another market. Moreover, such laws or regulations will vary depending on the foreign country in which the foreign futures
or foreign options transaction occurs. For these reasons, the Funds investments in foreign futures or foreign options transactions may not be provided the same protections in respect of transactions on United States exchanges. In particular,
persons who trade foreign futures or foreign options contracts may not be afforded certain of the protective measures provided by the CEA, the CFTCs regulations and the rules of the NFA and any domestic exchange, including the right to use
reparations proceedings before the CFTC and arbitration proceedings provided by the NFA or any domestic futures exchange. Similarly, those persons may not have the protection of the United States securities laws.
Futures Contracts. A futures contract may generally be described as an agreement between two parties to buy and sell particular
financial instruments or currencies for an agreed price during a designated month (or to deliver the final cash settlement price, in the case of a contract relating to an index or otherwise not calling for physical delivery at the end of trading in
the contract).
When interest rates are rising or securities prices are falling, the Fund can seek through the sale of futures contracts
to offset a decline in the value of its current portfolio securities. When interest rates are falling or securities prices are rising, the Fund, through the purchase of futures contracts, can attempt to secure better rates or prices than might later
be available in the market when it effects anticipated purchases. Similarly, the Fund can purchase and sell futures contracts on a specified currency in order to seek to increase total return or to protect against changes in currency exchange rates.
For example, the Fund may seek to offset anticipated changes in the value of a currency in which its portfolio securities, or securities that it intends to purchase, are quoted or denominated by purchasing and selling futures contracts on such
currencies. As another example, the Fund may enter into futures transactions to seek a closer correlation between the Funds overall currency exposures and the currency exposures of the Funds performance benchmark.
Positions taken in the futures market are not normally held to maturity, but are instead liquidated through offsetting transactions which may
result in a profit or a loss. While the Fund will usually liquidate futures contracts on securities or currency in this manner, the Fund may instead make or take delivery of the underlying securities or currency whenever it appears economically
advantageous for the Fund to do so. A clearing corporation associated with the exchange on which futures on securities or currency are traded guarantees that, if still open, the sale or purchase will be performed on the settlement date.
Hedging Strategies Using Futures Contracts. Hedging, by use of futures contracts, seeks to establish with more certainty than would
otherwise be possible the effective price, rate of return or currency exchange rate on portfolio securities or securities that the Fund owns or proposes to acquire. The Fund may, for example, take a short position in the futures market
by selling futures contracts to seek to hedge against an anticipated rise in interest rates or a decline in market prices or foreign currency rates that would adversely affect the dollar value of the Funds portfolio securities. Similarly, the
Fund may sell futures contracts on a currency in which its portfolio securities are quoted or denominated, or sell futures contracts on one currency to seek to hedge against fluctuations in the value
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of securities quoted or denominated in a different currency if there is an established historical pattern of
correlation between the two currencies. If, in the opinion of the Investment Adviser, there is a sufficient degree of correlation between price trends for the Funds portfolio securities and futures contracts based on other financial
instruments, securities indices or other indices, the Fund may also enter into such futures contracts as part of a hedging strategy. Although under some circumstances prices of securities in the Funds portfolio may be more or less volatile
than prices of such futures contracts, the Investment Adviser may attempt to estimate the extent of this volatility difference based on historical patterns and compensate for any such differential by having the Fund enter into a greater or lesser
number of futures contracts or by attempting to achieve only a partial hedge against price changes affecting the Funds portfolio securities. When hedging of this character is successful, any depreciation in the value of portfolio securities
will be substantially offset by appreciation in the value of the futures position. On the other hand, any unanticipated appreciation in the value of the Funds portfolio securities would be substantially offset by a decline in the value of the
futures position.
On other occasions, the Fund may take a long position by purchasing such futures contracts. This may be
done, for example, when the Fund anticipates the subsequent purchase of particular securities when it has the necessary cash, but expects the prices or currency exchange rates then available in the applicable market to be less favorable than prices
or rates that are currently available.
Options on Futures Contracts. The acquisition of put and call options on futures contracts
will give the Fund the right (but not the obligation), for a specified price, to sell or to purchase, respectively, the underlying futures contract at any time during the option period. As the purchaser of an option on a futures contract, the Fund
obtains the benefit of the futures position if prices move in a favorable direction but limits its risk of loss in the event of an unfavorable price movement to the loss of the premium and transaction costs.
The writing of a call option on a futures contract generates a premium which may partially offset a decline in the value of the Funds
assets. By writing a call option, the Fund becomes obligated, in exchange for the premium, to sell a futures contract if the option is exercised, which may have a value higher than the exercise price. The writing of a put option on a futures
contract generates a premium, which may partially offset an increase in the price of securities that the Fund intends to purchase. However, the Fund becomes obligated (upon the exercise of the option) to purchase a futures contract if the option is
exercised, which may have a value lower than the exercise price. Thus, the loss incurred by the Fund in writing options on futures is potentially unlimited and may exceed the amount of the premium received. The Fund will incur transaction costs in
connection with the writing of options on futures.
The holder or writer of an option on a futures contract may terminate its position by
selling or purchasing an offsetting option on the same financial instrument. There is no guarantee that such closing transactions can be effected. The Funds ability to establish and close out positions on such options will be subject to the
development and maintenance of a liquid market.
Other Considerations. The Fund will engage in transactions in futures contracts
and related options transactions only to the extent such transactions are consistent with the requirements of the Internal Revenue Code of 1986, as amended (the Code) for maintaining its qualification as a regulated investment company
for federal income tax purposes. Transactions in futures contracts and options on futures involve brokerage costs, require margin deposits and, in certain cases, require the Fund to identify on its books cash or liquid assets. The Fund may cover its
transactions in futures contracts and related options by identifying on its books cash or liquid assets or by other means, in any manner permitted by applicable law. For more information about these practices, see Description of Investment
Securities and Practices Asset Segregation.
While transactions in futures contracts and options on futures may reduce
certain risks, such transactions themselves entail certain other risks. Thus, unanticipated changes in interest rates, securities prices or currency exchange rates may result in a poorer overall performance for the Fund than if it had not entered
into any futures contracts or options transactions. When futures contracts and options are used for hedging purposes, perfect correlation between the Funds futures positions and portfolio positions may be impossible to achieve, particularly
where futures contracts based on individual equity or corporate fixed income securities are currently not available. In the event of imperfect correlation between a futures position and a portfolio position which is intended to be protected, the
desired protection may not be obtained and the Fund may be exposed to risk of loss. In addition, it is not possible for the Fund to hedge fully or perfectly against currency fluctuations affecting the value of securities quoted or denominated in
foreign currencies because the value of such securities is likely to fluctuate as a result of independent factors unrelated to currency fluctuations. The profitability of the Funds trading in futures depends upon the ability of the Investment
Adviser to analyze correctly the futures markets.
Illiquid Investments
Pursuant to Rule 22e-4 under the 1940 Act, the Fund may not acquire any illiquid investment if, immediately after the acquisition,
the Fund would have invested more than 15% of its net assets in illiquid investments that are assets. An illiquid investment is any investment that the Fund reasonably expects cannot be sold or disposed of in current market conditions in
seven calendar days or less
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without the sale or disposition significantly changing the market value of the investment. Illiquid investments include repurchase agreements with a notice or demand period of more than seven
days, certain stripped mortgage-backed securities, certain municipal leases, certain over-the-counter derivative instruments, securities and other financial instruments that are not readily marketable, and Restricted Securities unless, based upon a
review of the relevant market, trading and investment-specific considerations, those investments are determined not to be illiquid. The Trust has implemented a liquidity risk management program and related procedures to identify illiquid investments
pursuant to Rule 22e-4, and the Trustees have approved the designation of the Investment Adviser to administer the Trusts liquidity risk management program and related procedures. In determining whether an investment is an illiquid investment,
the Investment Adviser will take into account actual or estimated daily transaction volume of an investment, group of related investments or asset class and other relevant market, trading, and investment-specific considerations. In addition, in
determining the liquidity of an investment, the Investment Adviser must determine whether trading varying portions of a position in a particular portfolio investment or asset class, in sizes that the Fund would reasonably anticipate trading, is
reasonably expected to significantly affect its liquidity, and if so, the Fund must take this determination into account when classifying the liquidity of that investment or asset class.
In addition to actual or estimated daily transaction volume of an investment, group of related investments or asset class and other relevant
market, trading, and investment-specific considerations, the following factors, among others, will generally impact the classification of an investment as an illiquid investment: (i) any investment that is placed on the Investment
Advisers restricted trading list; and (ii) any investment that is delisted or for which there is a trading halt at the close of the trading day on the primary listing exchange at the time of classification (and in respect of which no
active secondary market exists). Investments purchased by the Fund that are liquid at the time of purchase may subsequently become illiquid due to these and other events and circumstances. If one or more investments in the Funds portfolio
become illiquid, the Fund may exceed the 15% limitation in illiquid investments. In the event that changes in the portfolio or other external events cause the Fund to exceed this limit, the Fund must take steps to bring its illiquid investments that
are assets to or below 15% of its net assets within a reasonable period of time. This requirement would not force the Fund to liquidate any portfolio instrument where the Fund would suffer a loss on the sale of that instrument.
Index Swaps, Interest Rate Swaps, Mortgage Swaps, Credit Swaps, Currency Swaps, Total Return Swaps, Equity Swaps, Volatility and Variance Swaps, Inflation
and Inflation Asset Swaps, Correlation Swaps, Options on Swaps and Interest Rate Swaps, Caps, Floors and Collars
The Fund may enter
into interest rate, credit, total return, equity, mortgage and currency swaps. The Fund may also enter into interest rate caps, floors and collars. The Fund may also purchase and write (sell) options contracts on swaps, commonly referred to as
swaptions. The Fund may enter into index swaps, volatility and variance swaps, inflation and inflation asset swaps and correlation swaps.
The Fund may enter into swap transactions for hedging purposes or to seek to increase total return. As examples, the Fund may enter into swap
transactions for the purpose of attempting to obtain or preserve a particular return or spread at a lower cost than obtaining a return or spread through purchases and/or sales of instruments in other markets, to protect against currency
fluctuations, as a duration management technique, to protect against any increase in the price of securities the Fund anticipates purchasing at a later date, or to gain exposure to certain markets in an economical way.
In a standard swap transaction, two parties agree to exchange the returns, differentials in rates of return or some other amount
earned or realized on particular predetermined investments or instruments, which may be adjusted for an interest factor. The gross returns to be exchanged or swapped between the parties are generally calculated with respect to a
notional amount, i.e., the return on or increase in value of a particular dollar amount invested at a particular interest rate, in a particular foreign currency or security, or in a basket of securities representing a
particular index. Bilateral swap agreements are two party contracts entered into primarily by institutional investors. Cleared swaps are transacted through FCMs that are members of central clearinghouses with the clearinghouse serving as a central
counterparty similar to transactions in futures contracts. The Fund posts initial and variation margin by making payments to their clearing member FCMs.
Index swaps involve the exchange by the Fund with another party of payments based on a notional principal amount of a specified index or
indices. Interest rate swaps involve the exchange by the Fund with another party of their respective commitments to pay or receive payments for floating rate payments based on interest rates at specified intervals in the future. Two types of
interest rate swaps include fixed-for-floating rate swaps and basis swaps. Fixed-for-floating rate swaps involve the exchange of payments based on a fixed interest rate for payments based on a floating interest rate index. By
contrast, basis swaps involve the exchange of payments based on two different floating interest rate indices. Mortgage swaps are similar to interest rate swaps in that they represent commitments to pay and receive interest. The notional principal
amount, however, is tied to a reference pool or pools of mortgages.
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Credit default swaps involve the exchange of a floating or fixed rate payment in return for
assuming potential credit losses of an underlying security or pool of securities. Loan credit default swaps are similar to credit default swaps on bonds, except that the underlying protection is sold on secured loans of a reference entity rather
than a broader category of bonds or loans. Loan credit default swaps may be on single names or on baskets of loans, both tranched and untranched. Currency swaps involve the exchange of the parties respective rights to make or receive payments
in specified currencies. Total return swaps are contracts that obligate a party to pay or receive interest in exchange for payment by the other party of the total return generated by a security, a basket of securities, an index, or an index
component. Equity swap contracts may be structured in different ways. For example, as a total return swap where a counterparty may agree to pay the Fund the amount, if any, by which the notional amount of the equity swap contract would have
increased in value had it been invested in the particular stocks (or a group of stocks), plus the dividends that would have been received on those stocks. In other cases, the counterparty and the Fund may each agree to pay the difference between the
relative investment performances that would have been achieved if the notional amount of the equity swap contract had been invested in different stocks (or a group of stocks).
A volatility swap is an agreement between two parties to make payments based on changes in the volatility of a reference instrument over a
stated period of time. Volatility swaps can be used to adjust the volatility profile of the Fund. For example, the Fund may buy a volatility swap to take the position that the reference instruments volatility will increase over a stated period
of time. If this occurs, the Fund will receive a payment based upon the amount by which the realized volatility level of the reference instrument exceeds an agreed upon volatility level. If volatility is less than the agreed upon volatility level,
then the Fund will make a payment to the counterparty calculated in the same manner. A variance swap is an agreement between two parties to exchange cash payments based on changes in the variance of a reference instrument over a stated period of
time. Volatility is the mathematical square root of variance, and variance swaps are used for similar purposes as volatility swaps.
An
inflation swap is an agreement between two parties in which one party agrees to pay the cumulative percentage increase in a reference inflation index (e.g., the Consumer Price Index) and the other party agrees to pay a compounded fixed rate
over a stated period of time. In an inflation asset swap, the reference instrument is a bond with a value that is tied to inflation (e.g., Treasury Inflation-Protected Security) and one party pays the cash flows from the reference instrument
in exchange for a payment based on a fixed rate from the other party. The Fund may enter into inflation swaps and inflation asset swaps to protect the Fund against changes in the rate of inflation.
A correlation swap is an agreement in which two parties agree to exchange cash payments based on the correlation between specified reference
instruments over a set period of time. Two assets would be considered closely correlated if, for example, their daily returns vary in similar proportions or along similar trajectories. For example, the Fund may enter into correlation swaps to change
its exposure to increases or decreases in the correlation between prices or returns of different Fund holdings.
A swaption is an option
to enter into a swap agreement. Like other types of options, the buyer of a swaption pays a non-refundable premium for the option and obtains the right, but not the obligation, to enter into or modify an underlying swap or to modify the terms of an
existing swap on agreed-upon terms. The seller of a swaption, in exchange for the premium, becomes obligated (if the option is exercised) to enter into or modify an underlying swap on agreed-upon terms, which generally entails a greater risk of loss
than incurred in buying a swaption. The purchase of an interest rate cap entitles the purchaser, to the extent that a specified index exceeds a predetermined interest rate, to receive payment of interest on a notional principal amount from the party
selling such interest rate cap. The purchase of an interest rate floor entitles the purchaser, to the extent that a specified index falls below a predetermined interest rate, to receive payments of interest on a notional principal amount from the
party selling the interest rate floor. An interest rate collar is the combination of a cap and a floor that preserves a certain return within a predetermined range of interest rates.
A great deal of flexibility may be possible in the way swap transactions are structured. However, generally the Fund will enter into interest
rate, total return, credit, mortgage and equity swaps on a net basis, which means that the two payment streams are netted out, with the Fund receiving or paying, as the case may be, only the net amount of the two payments. Interest rate, total
return, credit, mortgage and equity swaps do not normally involve the delivery of securities, other underlying assets or principal. Accordingly, the risk of loss with respect to interest rate, total return, credit, mortgage and equity swaps is
normally limited to the net amount of payments that the Fund is contractually obligated to make. If the other party to an interest rate, total return, credit, mortgage or equity swap defaults, the Funds risk of loss consists of the net amount
of interest payments that the Fund is contractually entitled to receive, if any.
In contrast, currency swaps usually involve the delivery
of a gross payment stream in one designated currency in exchange for a gross payment stream in another designated currency. Therefore, the entire payment stream under a currency swap is subject to the risk that the other party to the swap will
default on its contractual delivery obligations. A credit swap may have as reference obligations one or more securities that may, or may not, be currently held by the Fund. The protection buyer in a credit swap is generally obligated to
pay the protection seller an upfront or a periodic stream of payments over the term of the swap provided that no credit event, such as a default, on a reference obligation has occurred. If a credit event occurs, the seller generally must
pay the buyer the par value (full notional value) of the swap in exchange for an equal face amount of deliverable obligations of the reference entity described in the swap,
B-17
or the seller may be required to deliver the related net cash amount, if the swap is cash settled. The Fund may be either the protection buyer or seller in the transaction. If the Fund is a buyer
and no credit event occurs, the Fund may recover nothing if the swap is held through its termination date. However, if a credit event occurs, the buyer generally may elect to receive the full notional value of the swap in exchange for an equal face
amount of deliverable obligations of the reference entity whose value may have significantly decreased. As a seller, the Fund generally receives an upfront payment or a rate of income throughout the term of the swap provided that there is no credit
event. As the seller, the Fund would effectively add leverage to its portfolio because, in addition to its total net assets, the Fund would be subject to investment exposure on the notional amount of the swap. If a credit event occurs, the value of
any deliverable obligation received by the Fund as seller, coupled with the upfront or periodic payments previously received, may be less than the full notional value it pays to the buyer, resulting in a loss of value to the Fund.
As a result of recent regulatory developments, certain standardized swaps are currently subject to mandatory central clearing and some of
these swaps must be traded on an exchange or swap execution facility (SEF). A SEF is a trading platform in which multiple market participants can execute swap transactions by accepting bids and offers made by multiple other participants
on the platform. Transactions executed on a SEF may increase market transparency and liquidity but may cause the Fund to incur increased expenses to execute swaps. Central clearing should decrease counterparty risk and increase liquidity compared to
bilateral swaps because central clearing interposes the central clearinghouse as the counterparty to each participants swap. However, central clearing does not eliminate counterparty risk or liquidity risk entirely. In addition, depending on
the size of the Fund and other factors, the margin required under the rules of a clearinghouse and by a clearing member may be in excess of the collateral required to be posted by the Fund to support its obligations under a similar bilateral swap.
However, the CFTC and other applicable regulators have adopted rules imposing certain margin requirements, including minimums, on uncleared swaps which may result in the Fund and its counterparties posting higher margin amounts for uncleared swaps.
Requiring margin on uncleared swaps may reduce, but not eliminate, counterparty credit risk.
To the extent that the Funds exposure
in a transaction involving a swap, swaption or an interest rate floor, cap or collar is covered by identifying cash or liquid assets on the Funds books or is covered by other means in accordance with SEC or SEC-staff approved guidance or other
appropriate measures, the Fund and the Investment Adviser believe that the transactions do not constitute senior securities under the Act and, accordingly, will not treat them as being subject to the Funds borrowing restrictions. For more
information about these practices, see Description of Investment Securities and Practices Asset Segregation.
The use
of swaps and swaptions, as well as interest rate caps, floors and collars, is a highly specialized activity which involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. The use of a
swap requires an understanding not only of the referenced asset, reference rate, or index but also of the swap itself, without the benefit of observing the performance of the swap under all possible market conditions.
In addition, these transactions can involve greater risks than if the Fund had invested in the reference obligation directly because, in
addition to general market risks, swaps are subject to liquidity risk, counterparty risk, credit risk and pricing risk. Regulators also may impose limits on an entitys or group of entities positions in certain swaps. However, certain
risks are reduced (but not eliminated) if the Fund invests in cleared swaps. Bilateral swap agreements are two party contracts that may have terms of greater than seven days. Moreover, the Fund bears the risk of loss of the amount expected to be
received under a swap agreement in the event of the default or bankruptcy of a swap counterparty. Many swaps are complex and often valued subjectively. Swaps and other derivatives may also be subject to pricing or basis risk, which
exists when the price of a particular derivative diverges from the price of corresponding cash market instruments. Under certain market conditions it may not be economically feasible to imitate a transaction or liquidate a position in time to avoid
a loss or take advantage of an opportunity. If a swap transaction is particularly large or if the relevant market is illiquid, it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price, which may
result in significant losses.
Certain rules also require centralized reporting of detailed information about many types of cleared and
uncleared swaps. This information is available to regulators and, to a more limited extent and on an anonymous basis, to the public. Reporting of swap data may result in greater market transparency, which may be beneficial to funds that use swaps to
implement trading strategies. However, these rules place potential additional administrative obligations on these funds, and the safeguards established to protect anonymity may not function as expected.
The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, the swap market has become relatively liquid in comparison with the markets for other similar instruments which are traded in the interbank market. These and other factors
discussed in the section below, entitled Illiquid Investments, may impact the liquidity of investments in swaps.
B-18
Investing in Asia
Although many countries in Asia have experienced a relatively stable political environment over the last decade, there is no guarantee that
such stability will be maintained in the future. As an emerging region, many factors may affect such stability on a country-by-country as well as on a regional basis increasing gaps between the rich and poor, agrarian unrest, instability of
existing coalitions in politically-fractionated countries, hostile relations with neighboring countries, and ethnic, religious and racial disaffection and may result in adverse consequences to the Fund. The political history of some Asian
countries has been characterized by political uncertainty, intervention by the military in civilian and economic spheres, and political corruption. Such developments, if they continue to occur, could reverse favorable trends toward market and
economic reform, privatization, and removal of trade barriers, and could result in significant disruption to securities markets.
The
legal infrastructure in each of the countries in Asia is unique and often undeveloped. In most cases, securities laws are evolving and far from adequate for the protection of the public from serious fraud. Investment in Asian securities involves
considerations and possible risks not typically involved with investment in other issuers, including changes in governmental administration or economic or monetary policy or changed circumstances in dealings between nations. The application of tax
laws (e.g., the imposition of withholding taxes on dividend or interest payments) or confiscatory taxation may also affect investment in Asian securities. Higher expenses may result from investments in Asian securities than would from
investments in other securities because of the costs that must be incurred in connection with conversions between various currencies and brokerage commissions that may be higher than more established markets. Asian securities markets also may be
less liquid, more volatile and less subject to governmental supervision than elsewhere. Investments in countries in the region could be affected by other factors not present elsewhere, including lack of uniform accounting, auditing and financial
reporting standards, inadequate settlement procedures and potential difficulties in enforcing contractual obligations.
Some Asian
economies have limited natural resources, resulting in dependence on foreign sources for energy and raw materials and economic vulnerability to global fluctuations of price and supply. Certain countries in Asia are especially prone to natural
disasters, such as flooding, drought and earthquakes. Combined with the possibility of man-made disasters, the occurrence of such disasters may adversely affect companies in which the Fund is invested and, as a result, may result in adverse
consequences to the Fund.
Many of the countries in Asia periodically have experienced significant inflation. Should the governments and
central banks of the countries in Asia fail to control inflation, this may have an adverse effect on the performance of the Funds investments in Asian securities.
Several of the countries in Asia remain dependent on the U.S. economy as their largest export customer, and future barriers to entry into the
U.S. market or other important markets could adversely affect the Funds performance. Intraregional trade is becoming an increasingly significant percentage of total trade for the countries in Asia. Consequently, the intertwined economies are
becoming increasingly dependent on each other, and any barriers to entry to markets in Asia in the future may adversely affect the Funds performance.
Certain Asian countries may have managed currencies which are maintained at artificial levels to the U.S. dollar rather than at levels
determined by the market. This type of system can lead to sudden and large adjustments in the currency which, in turn, can have a disruptive and negative effect on foreign investors. Certain Asian countries also may restrict the free conversion of
their currency into foreign currencies, including the U.S. dollar. There is no significant foreign exchange market for certain currencies, and it would, as a result, be difficult to engage in foreign currency transactions designed to protect the
value of the Funds interests in securities denominated in such currencies.
Although the Fund will generally attempt to invest in
those markets which provide the greatest freedom of movement of foreign capital, there is no assurance that this will be possible or that certain countries in Asia will not restrict the movement of foreign capital in the future. Changes in
securities laws and foreign ownership laws may have an adverse effect on the Fund.
Investing in Emerging Countries
Emerging Markets Equity Securities. The securities markets of emerging countries are less liquid and subject to greater price
volatility, and have a smaller market capitalization, than the U.S. securities markets. In certain countries, there may be fewer publicly traded securities and the market may be dominated by a few issuers or sectors. Issuers and securities markets
in such countries are not subject to as extensive and frequent accounting, financial and other reporting requirements or as comprehensive government regulations as are issuers and securities markets in the U.S. In particular, the assets and profits
appearing on the financial statements of emerging country issuers may not reflect their financial position or results of operations in the same manner as financial statements for U.S. issuers. Substantially less information may be publicly available
about emerging country issuers than is available about issuers in the United States.
B-19
Emerging country securities markets are typically marked by a high concentration of market
capitalization and trading volume in a small number of issuers representing a limited number of industries, as well as a high concentration of ownership of such securities by a limited number of investors. The markets for securities in certain
emerging countries are in the earliest stages of their development. Even the markets for relatively widely traded securities in emerging countries may not be able to absorb, without price disruptions, a significant increase in trading volume or
trades of a size customarily undertaken by institutional investors in the securities markets of developed countries. The limited size of many of these securities markets can cause prices to be erratic for reasons apart from factors that affect the
soundness and competitiveness of the securities issuers. For example, prices may be unduly influenced by traders who control large positions in these markets. Additionally, market making and arbitrage activities are generally less extensive in such
markets, which may contribute to increased volatility and reduced liquidity of such markets. The limited liquidity of emerging country securities may also affect the Funds ability to accurately value its portfolio securities or to acquire or
dispose of securities at the price and time it wishes to do so or in order to meet redemption requests.
The Funds purchase and sale
of portfolio securities in certain emerging countries may be constrained by limitations as to daily changes in the prices of listed securities, periodic trading or settlement volume and/or limitations on aggregate holdings of foreign investors. Such
limitations may be computed based on the aggregate trading volume by or holdings of the Fund, the Investment Adviser, its affiliates and their respective clients and other service providers. The Fund may not be able to sell securities in
circumstances where price, trading or settlement volume limitations have been reached.
Market Characteristics. Securities
markets of emerging countries may also have less efficient clearance and settlement procedures than U.S. markets, making it difficult to conduct and complete transactions. Delays in the settlement could result in temporary periods when a portion of
the Funds assets is uninvested and no return is earned thereon. Inability to make intended security purchases could cause the Fund to miss attractive investment opportunities. Inability to dispose of portfolio securities could result either in
losses to the Fund due to subsequent declines in value of the portfolio security or, if the Fund has entered into a contract to sell the security, could result in possible liability of the Fund to the purchaser.
Transaction costs, including brokerage commissions and dealer mark-ups, in emerging countries may be higher than in the U.S. and other
developed securities markets. As legal systems in emerging countries develop, foreign investors may be adversely affected by new or amended laws and regulations. In circumstances where adequate laws exist, it may not be possible to obtain swift and
equitable enforcement of the law.
Custodial and/or settlement systems in emerging markets countries may not be fully developed. To the
extent the Fund invests in emerging markets, Fund assets that are traded in such markets and will have been entrusted to such sub-custodians in those markets may be exposed to risks for which the sub-custodian will have no liability.
With respect to investments in certain emerging countries, antiquated legal systems may have an adverse impact on the Fund. For example, while
the potential liability of a shareholder of a U.S. corporation with respect to acts of the corporation is generally limited to the amount of the shareholders investment, the notion of limited liability is less clear in certain emerging market
countries. Similarly, the rights of investors in emerging market companies may be more limited than those of investors of U.S. corporations.
Economic, Political and Social Factors. Emerging countries may be subject to a greater degree of economic, political and social
instability than the United States, Japan and most Western European countries, and unanticipated political and social developments may affect the value of the Funds investments in emerging countries and the availability to the Fund of
additional investments in such countries. Moreover, political and economic structures in many emerging countries may be undergoing significant evolution and rapid development. Instability may result from, among other things: (i) authoritarian
governments or military involvement in political and economic decision-making, including changes or attempted changes in government through extra-constitutional means; (ii) popular unrest associated with demands for improved economic, political
and social conditions; (iii) internal insurgencies; (iv) hostile relations with neighboring countries; (v) ethnic, religious and racial disaffection and conflict; and (vi) the absence of developed legal structures governing
foreign private property. Many emerging countries have experienced in the past, and continue to experience, high rates of inflation. In certain countries, inflation has at times accelerated rapidly to hyperinflationary levels, creating a negative
interest rate environment and sharply eroding the value of outstanding financial assets in those countries. The economies of many emerging countries are heavily dependent upon international trade and are accordingly affected by protective trade
barriers and the economic conditions of their trading partners. In addition, the economies of some emerging countries may differ unfavorably from the U.S. economy in such respects as growth of gross domestic product, rate of inflation, capital
reinvestment, resources, self-sufficiency and balance of payments position.
B-20
The Fund may invest in issuers located in former Eastern bloc countries. Most of
these countries had a centrally planned, socialist economy for a substantial period of time. The governments of many of these countries have more recently been implementing reforms directed at political and economic liberalization, including efforts
to decentralize the economic decision-making process and move towards a market economy. However, business entities in many of these countries do not have an extended history of operating in a market-oriented economy, and the ultimate impact of these
countries attempts to move toward more market-oriented economies is currently unclear. In addition, any change in the leadership or policies of these countries may halt the expansion of or reverse the liberalization of foreign investment
policies now occurring and adversely affect existing investment opportunities. In addition, Eastern European markets are particularly sensitive to social, economic and currency events in Western Europe and Russia. Russia may attempt to assert its
influence in the region through military measures.
Restrictions on Investment and Repatriation. Certain emerging countries require
governmental approval prior to investments by foreign persons or limit investments by foreign persons to only a specified percentage of an issuers outstanding securities or a specific class of securities which may have less advantageous terms
(including price) than securities of the issuer available for purchase by nationals. The repatriation of investment income, capital or the proceeds of securities sales from certain emerging countries is subject to certain governmental consents,
which may make it difficult for the Fund to invest in such emerging countries. The Fund could be adversely affected by delays in, or a refusal to grant, any required governmental approval for such repatriation. Even where there is no outright
restriction on repatriation of capital, the mechanics of repatriation may affect the operation of the Fund.
Emerging Country
Government Obligations. Emerging country governmental entities are among the largest debtors to commercial banks, foreign governments, international financial organizations and other financial institutions. Certain emerging country governmental
entities have not been able to make payments of interest on or principal of debt obligations as those payments have come due. Obligations arising from past restructuring agreements may affect the economic performance and political and social
stability of those entities.
The ability of emerging country governmental entities to make timely payments on their obligations is likely
to be influenced strongly by the entitys balance of payments, including export performance, and its access to international credits and investments. An emerging country whose exports are concentrated in a few commodities could be vulnerable to
a decline in the international prices of one or more of those commodities. Increased protectionism on the part of an emerging countrys trading partners could also adversely affect the countrys exports and tarnish its trade account
surplus, if any. To the extent that emerging countries receive payment for their exports in currencies other than dollars or non-emerging country currencies, the emerging country governmental entitys ability to make debt payments denominated
in dollars or non-emerging market currencies could be affected.
To the extent that an emerging country cannot generate a trade surplus,
it must depend on continuing loans from foreign governments, multilateral organizations or private commercial banks, aid payments from foreign governments and on inflows of foreign investment. The access of emerging countries to these forms of
external funding may not be certain, and a withdrawal of external funding could adversely affect the capacity of emerging country governmental entities to make payments on their obligations. In addition, the cost of servicing emerging country debt
obligations can be affected by a change in international interest rates because the majority of these obligations carry interest rates that are adjusted periodically based upon international rates.
Another factor bearing on the ability of emerging countries to repay debt obligations is the level of international reserves of a country.
Fluctuations in the level of these reserves affect the amount of foreign exchange readily available for external debt payments and thus could have a bearing on the capacity of emerging countries to make payments on these debt obligations.
As a result of the foregoing or other factors, a governmental obligor, especially in an emerging country, may default on its obligations. If
such an event occurs, the Fund may have limited legal recourse against the issuer and/or guarantor. Remedies must, in some cases, be pursued in the courts of the defaulting party itself, and the ability of the holder of foreign government
obligations to obtain recourse may be subject to the political climate in the relevant country. In addition, no assurance can be given that the holders of commercial bank debt will not contest payments to the holders of other foreign government
obligations in the event of default under the commercial bank loan agreements.
Investing in Europe
The Fund may operate in euros and/or may hold euros and/or euro-denominated bonds and other obligations. The euro requires participation of
multiple sovereign states forming the Euro zone and is therefore sensitive to the credit, general economic and political position of each such state, including each states actual and intended ongoing engagement with and/or support for the
other sovereign states then forming the EU, in particular those within the Euro zone. Changes in these factors might materially adversely impact the value of securities that the Fund has invested in.
B-21
European countries can be significantly affected by the tight fiscal and monetary controls
that the European Economic and Monetary Union (EMU) imposes for membership. Europes economies are diverse, its governments are decentralized, and its cultures vary widely. Several EU countries, including Greece, Ireland, Italy,
Spain and Portugal, have faced budget issues, some of which may have negative long-term effects for the economies of those countries and other EU countries. There is continued concern about national-level support for the euro and the accompanying
coordination of fiscal and wage policy among EMU member countries. Member countries are required to maintain tight control over inflation, public debt, and budget deficit to qualify for membership in the EMU. These requirements can severely limit
the ability of EMU member countries to implement monetary policy to address regional economic conditions.
In a June 2016 referendum,
citizens of the United Kingdom voted to leave the EU. In March 2017, the United Kingdom formally notified the European Council of its intention to withdraw from the EU (commonly known as Brexit) by invoking Article 50 of the Treaty on
European Union, which triggered a two-year period of negotiations on the terms of Brexit. Brexit has resulted in volatility in European and global markets and may also lead to weakening in political, regulatory, consumer, corporate and financial
confidence in the markets of the United Kingdom and throughout Europe. The longer term economic, legal, political, regulatory and social framework to be put in place between the United Kingdom and the EU remains unclear and may lead to ongoing
political, regulatory and economic uncertainty and periods of exacerbated volatility in both the United Kingdom and in wider European markets for some time. Additionally, the decision made in the British referendum may lead to a call for similar
referenda in other European jurisdictions, which may cause increased economic volatility in European and global markets. The mid-to long-term uncertainty may have an adverse effect on the economy generally and on the value of the Funds
investments. This may be due to, among other things: fluctuations in asset values and exchange rates; increased illiquidity of investments located, traded or listed within the United Kingdom, the EU or elsewhere; changes in the willingness or
ability of counterparties to enter into transactions at the price and terms on which the Fund is prepared to transact; and/or changes in legal and regulatory regimes to which certain of the Funds assets are or become subject. Fluctuations in
the value of the British Pound and/or the Euro, along with the potential downgrading of the United Kingdoms sovereign credit rating, may also have an impact on the performance of the Funds assets or investments economically tied to the
United Kingdom or Europe.
The effects of Brexit will depend, in part, on agreements the United Kingdom negotiates to retain access to EU
markets either during a transitional period or more permanently including, but not limited to, current trade and finance agreements. Brexit could lead to legal and tax uncertainty and potentially divergent national laws and regulations as the United
Kingdom determines which EU laws to replace or replicate. The extent of the impact of the withdrawal negotiations in the United Kingdom and in global markets as well as any associated adverse consequences remain unclear, and the uncertainty may have
a significant negative effect on the value of the Funds investments.
The withdrawal agreement between the United Kingdom and the
EU, endorsed by the European Council on November 25, 2018, sets out the basis on which the United Kingdom will withdraw from the EU and includes certain transitional provisions which have the effect of preserving the application of European
Union law in the United Kingdom until December 2020 (or such other later date as may be agreed). The withdrawal agreement, and the associated transitional provisions, will only become effective once approved by the United Kingdom parliament which
approval has not yet happened and may not happen, meaning that the United Kingdom may leave the EU without any transitional period (a so-called hard Brexit). On October 28, 2019, the United Kingdom came to an agreement with the EU
to delay the deadline for withdrawal. Unless the United Kingdom parliament approves the withdrawal agreement by January 31, 2020, it is expected that there will be a hard Brexit on that date absent any further agreements to delay the
withdrawal. Consequently, due to this political uncertainty, it is not possible to anticipate, in the absence of an intervening action, when the United Kingdom will leave the EU and whether such departure will benefit from the terms of the
withdrawal agreement and the transitional provisions. In the event of a hard Brexit, the relationship between the United Kingdom and the EU would be based on the World Trade Organization rules. While it is not currently possible to
determine the extent of the impact a hard Brexit may have on the Funds investments, certain measures are being proposed and/or will be introduced, at the EU level or at the member state level, which are designed to minimize disruption in the
financial markets. Notwithstanding the foregoing, the prolonged and continued uncertainty of the status of the United Kingdoms withdrawal from the EU could negatively impact current and future economic conditions in the United Kingdom which,
in turn, could negatively impact the Funds investments.
Other economic challenges facing the region include high levels of public
debt, significant rates of unemployment, aging populations, and heavy regulation in certain economic sectors. European policy makers have taken unprecedented steps to respond to the economic crisis and to boost growth in the region, which has
increased the risk that regulatory uncertainty could negatively affect the value of the Funds investments.
Certain countries have
applied to become new member countries of the EU, and these candidate countries accessions may become more controversial to the existing EU members. Some member states may repudiate certain candidate countries joining the EU upon concerns
about the possible economic, immigration and cultural implications. Also, Russia may be opposed to the expansion of the EU to members of the former Soviet bloc and may, at times, take actions that could negatively impact EU economic activity.
B-22
Investment in Unseasoned Companies
The Fund may invest in companies (including predecessors) which have operated less than three years. The securities of such companies may have
limited liquidity, which can result in their being priced higher or lower than might otherwise be the case. In addition, investments in unseasoned companies are more speculative and entail greater risk than do investments in companies with an
established operating record.
Lending of Portfolio Securities
The Fund may lend its portfolio securities to brokers, dealers and other institutions, including Goldman Sachs. By lending its securities, the
Fund attempts to increase its net investment income.
Securities loans are required to be secured continuously by collateral in cash, cash
equivalents, letters of credit or U.S. Government Securities equal to at least 100% of the value of the loaned securities. This collateral must be valued, or marked to market, daily. Borrowers are required to furnish additional
collateral to the Fund as necessary to fully cover their obligations.
With respect to loans that are collateralized by cash, the Fund may
reinvest that cash in short-term investments and pay the borrower a pre-negotiated fee or rebate from any return earned on the investment. Investing the collateral subjects it to market depreciation or appreciation, and the Fund is
responsible for any loss that may result from its investment of the borrowed collateral. Cash collateral may be invested in, among other things, other registered or unregistered funds, including private investing funds or money market funds that are
managed by the Investment Adviser or its affiliates, and which pay the Investment Adviser or its affiliates for their services. If the Fund would receive non-cash collateral, the Fund receives a fee from the borrower equal to a negotiated percentage
of the market value of the loaned securities.
For the duration of any securities loan, the Fund will continue to receive the equivalent
of the interest, dividends or other distributions paid by the issuer on the loaned securities. The Fund will not have the right to vote its loaned securities during the period of the loan, but the Fund may attempt to recall a loaned security in
anticipation of a material vote if it desires to do so. The Fund will have the right to terminate a loan at any time and recall the loaned securities within the normal and customary settlement time for securities transactions.
Securities lending involves certain risks. The Fund may lose money on its investment of cash collateral, resulting in a loss of principal, or
may fail to earn sufficient income on its investment to cover the fee or rebate it has agreed to pay the borrower. The Fund may incur losses in connection with its securities lending activities that exceed the value of the interest income and fees
received in connection with such transactions. Securities lending subjects the Fund to the risk of loss resulting from problems in the settlement and accounting process, and to additional credit, counterparty and market risk. These risks could be
greater with respect to non-U.S. securities. Engaging in securities lending could have a leveraging effect, which may intensify the other risks associated with investments in the Fund. In addition, the Fund bears the risk that the price of the
securities on loan will increase while they are on loan, or that the price of the collateral will decline in value during the period of the loan, and that the counterparty will not provide, or will delay in providing, additional collateral. The Fund
also bears the risk that a borrower may fail to return securities in a timely manner or at all, either because the borrower fails financially or for other reasons. If a borrower of securities fails financially, the Fund may also lose its rights in
the collateral. The Fund could experience delays and costs in recovering loaned securities or in gaining access to and liquidating the collateral, which could result in actual financial loss and which could interfere with portfolio management
decisions or the exercise of ownership rights in the loaned securities. If the Fund is not able to recover the securities lent, the Fund may sell the collateral and purchase replacement securities in the market. However, the Fund will incur
transaction costs on the purchase of replacement securities. These events could trigger adverse tax consequences for the Fund. In determining whether to lend securities to a particular borrower, and throughout the period of the loan, the
creditworthiness of the borrower will be considered and monitored. Loans will only be made to firms deemed to be of good standing, and where the consideration that can be earned currently from securities loans of this type is deemed to justify the
attendant risk. It is intended that the value of securities loaned by the Fund will not exceed one-third of the value of the Funds total assets (including the loan collateral).
The Fund will consider the loaned securities as assets of the Fund, but will not consider any collateral as the Fund asset except when
determining total assets for the purpose of the above one-third limitation. Loan collateral (including any investment of the collateral) is not subject to the percentage limitations stated elsewhere in this SAI or in the Prospectus regarding
investing in fixed income securities and cash equivalents.
B-23
The Funds Board of Trustees may approve a securities lending program where an
affiliate of the Investment Adviser is retained to serve as the securities lending agent for the Fund to the extent that the Fund engages in the securities lending program. For its services, the securities lending agent may receive a fee from the
Fund, including a fee based on the returns earned on the Funds investment of cash received as collateral for the loaned securities. In addition, the Fund may make brokerage and other payments to Goldman Sachs and its affiliates in connection
with the Funds portfolio investment transactions. The Funds Board of Trustees periodically reviews securities loan transactions for which a Goldman Sachs affiliate has acted as lending agent for compliance with the Funds securities
lending procedures. Goldman Sachs may also be approved as a borrower under the Funds securities lending program, subject to certain conditions.
Options on Securities and Securities Indices and Foreign Currencies
Writing and Purchasing Call and Put Options on Securities and Securities Indices. The Fund may write (sell) call and put options on any
securities in which it may invest or any securities index consisting of securities in which it may invest. The Fund may write such options on securities that are listed on national domestic securities exchanges or foreign securities exchanges or
traded in the over-the-counter market. A call option written by the Fund obligates that Fund to sell specified securities to the holder of the option at a specified price if the option is exercised on or before the expiration date. Depending upon
the type of call option, the purchaser of a call option either (i) has the right to any appreciation in the value of the security over a fixed price (the exercise price) on a certain date in the future (the expiration
date) or (ii) has the right to any appreciation in the value of the security over the exercise price at any time prior to the expiration of the option. If the purchaser exercises the option, the Fund pays the purchaser the difference
between the price of the security and the exercise price of the option. The premium, the exercise price and the market value of the security determine the gain or loss realized by the Fund as the seller of the call option. The Fund can also
repurchase the call option prior to the expiration date, ending its obligation. In this case, the cost of entering into closing purchase transactions will determine the gain or loss realized by the Fund. All call options written by the Fund are
covered, which means that the Fund will own the securities subject to the option so long as the option is outstanding or the Fund will use the other methods described below. The Funds purpose in writing call options is to realize greater
income than would be realized on portfolio securities transactions alone. However, the Fund may forego the opportunity to profit from an increase in the market price of the underlying security.
A put option written by the Fund obligates the Fund to purchase specified securities from the option holder at a specified price if the option
is exercised on or before the expiration date. All put options written by the Fund would be covered, which means that the Fund will identify on its books cash or liquid assets with a value at least equal to the exercise price of the put option (less
any margin on deposit) or will use the other methods described below. For more information about these practices, see Description of Investment Securities and Practices Asset Segregation.
The purpose of writing such options is to generate additional income for the Fund. However, in return for the option premium, the Fund accepts
the risk that it may be required to purchase the underlying securities at a price in excess of the securities market value at the time of purchase.
In the case of a call option, the option may be covered if the Fund owns the instrument underlying the call or has an absolute and
immediate right to acquire that instrument without additional cash consideration (or, if additional cash consideration is required, liquid assets in such amount are identified on the Funds books) upon conversion or exchange of other
instruments held by it. A call option may also be covered if the Fund holds a call on the same instrument as the option written where the exercise price of the option held is (i) equal to or less than the exercise price of the option written,
or (ii) greater than the exercise price of the option written provided the Fund identifies liquid assets in the amount of the difference. A put option may also be covered if the Fund holds a put on the same security as the option written where
the exercise price of the option held is (i) equal to or higher than the exercise price of the option written, or (ii) less than the exercise price of the option written provided the Fund identifies on its books liquid assets in the amount
of the difference. The Fund may also cover options on securities by identifying cash or liquid assets, as permitted by applicable law, with a value, when added to any margin on deposit that is equal to the market value of the securities in the case
of a call option. Identified cash or liquid assets may be quoted or denominated in any currency. Identified cash or liquid assets may be quoted or denominated in any currency.
The Fund may terminate its obligations under an exchange-traded call or put option by purchasing an option identical to the one it has
written. Obligations under over-the-counter options may be terminated only by entering into an offsetting transaction with the counterparty to such option. Such purchases are referred to as closing purchase transactions.
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The Fund may also write (sell) call and put options on any securities index consisting of
securities in which it may invest. Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash settlement payments and does not involve the actual purchase or sale of
securities. In addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security.
The Fund may cover call options on a securities index by owning securities whose price changes are expected to be similar to those of the
underlying index or by having an absolute and immediate right to acquire such securities without additional cash consideration (or if additional cash consideration is required, liquid assets in such amount are identified on the Funds books)
upon conversion or exchange of other securities held by it. The Fund may also cover call and put options by identifying cash or liquid assets, as permitted by applicable law, with a value, when added to any margin on deposit, that is equal to the
market value of the underlying securities in the case of a call option or the exercise price in the case of a put option or by owning offsetting options as described above.
The writing of options is a highly specialized activity which involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. The use of options to seek to increase total return involves the risk of loss if the Investment Adviser is incorrect in its expectation of fluctuations in securities prices or interest rates. The
successful use of options for hedging purposes also depends in part on the ability of the Investment Adviser to predict future price fluctuations and the degree of correlation between the options and securities markets. If the Investment Adviser is
incorrect in its expectation of changes in securities prices or determination of the correlation between the securities indices on which options are written and purchased and the securities in the Funds investment portfolio, the investment
performance of the Fund will be less favorable than it would have been in the absence of such options transactions. The writing of options could increase the Funds portfolio turnover rate and, therefore, associated brokerage commissions or
spreads.
The Fund may also purchase put and call options on any securities in which it may invest or any securities index consisting of
securities in which it may invest. In addition, the Fund may enter into closing sale transactions in order to realize gains or minimize losses on options it had purchased.
The Fund may purchase call options in anticipation of an increase, or put options in anticipation of a decrease (protective puts),
in the market value of securities or other instruments of the type in which it may invest. The purchase of a call option would entitle the Fund, in return for the premium paid, to purchase specified securities or other instruments at a specified
price during the option period. The Fund would ordinarily realize a gain on the purchase of a call option if, during the option period, the value of such securities exceeded the sum of the exercise price, the premium paid and transaction costs;
otherwise the Fund would realize either no gain or a loss on the purchase of the call option. The purchase of a put option would entitle the Fund, in exchange for the premium paid, to sell specified securities or other instruments at a specified
price during the option period. The purchase of protective puts is designed to offset or hedge against a decline in the market value of the Funds securities or other instruments. Put options may also be purchased by the Fund for the purpose of
affirmatively benefiting from a decline in the price of securities or other instruments which it does not own. The Fund would ordinarily realize a gain if, during the option period, the value of the underlying securities or other instruments
decreased below the exercise price sufficiently to cover the premium and transaction costs; otherwise the Fund would realize either no gain or a loss on the purchase of the put option. Gains and losses on the purchase of put options may be offset by
countervailing changes in the value of the underlying portfolio securities or other instruments.
The Fund may purchase put and call
options on securities indices for the same purposes as it may purchase options on securities. Options on securities indices are similar to options on securities, except that the exercise of securities index options requires cash payments and does
not involve the actual purchase or sale of securities. In addition, securities index options are designed to reflect price fluctuations in a group of securities or segment of the securities market rather than price fluctuations in a single security.
Special Risks Associated with Options on Currency. An exchange-traded option position may be closed out only on an options
exchange that provides a secondary market for an option of the same series. Although the Fund will generally 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 on an exchange will exist for any particular option or at any particular time. For some options no secondary market on an exchange may exist. In such event, it might not be possible to effect closing transactions in particular options, with
the result that the Fund would have to exercise its options in order to realize any profit and would incur transaction costs upon the sale of underlying securities pursuant to the exercise of its options. If the Fund as a call option writer is
unable to effect a closing purchase transaction in a secondary market, it will not be able to sell the underlying currency (or security quoted or denominated in that currency), or dispose of the identified assets, until the option expires or it
delivers the underlying currency upon exercise.
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There is no assurance that higher-than-anticipated trading activity or other unforeseen
events might not, at times, render certain of the facilities of the Options Clearing Corporation inadequate, and thereby result in the institution by an exchange of special procedures which may interfere with the timely execution of customers
orders.
The Fund may purchase and write over-the-counter options. Trading in over-the-counter options is subject to the risk that the
other party will be unable or unwilling to close out options purchased or written by the Fund.
The amount of the premiums that the Fund
may pay or receive, may be adversely affected as new or existing institutions, including other investment companies, engage in or increase their option purchasing and writing activities.
Writing and Purchasing Call and Put Options on Currency. The Fund may write put and call options and purchase put and call options on
foreign currencies in an attempt to protect against declines in the U.S. dollar value of foreign portfolio securities and against increases in the U.S. dollar cost of foreign securities to be acquired. The Fund may also use options on currency to
cross-hedge, which involves writing or purchasing options on one currency to seek to hedge against changes in exchange rates for a different currency with a pattern of correlation. As with other kinds of option transactions, however, the writing of
an option on foreign currency will constitute only a partial hedge, up to the amount of the premium received. If an option that the Fund has written is exercised, the Fund could be required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on foreign currency may constitute an effective hedge against exchange rate fluctuations; however, in the event of exchange rate movements adverse to the Funds position, the
Fund may forfeit the entire amount of the premium plus related transaction costs. Options on foreign currencies may be traded on U.S. and foreign exchanges or over-the-counter. In addition, the Fund may purchase call options on currency to seek to
increase total return.
A currency call option written by the Fund obligates the Fund to sell specified currency to the holder of the
option at a specified price if the option is exercised at any time before the expiration date. A currency put option written by the Fund obligates the Fund to purchase specified currency from the option holder at a specified price if the option is
exercised at any time before the expiration date. The writing of currency options involves a risk that the Fund will, upon exercise of the option, be required to sell currency subject to a call at a price that is less than the currencys market
value or be required to purchase currency subject to a put at a price that exceeds the currencys market value. Written put and call options on foreign currencies may be covered in a manner similar to written put and call options on securities
and securities indices described under Options on Securities and Securities IndicesWriting Covered Options above.
The
Fund may terminate its obligations under a written call or put option by purchasing an option identical to the one written. Such purchases are referred to as closing purchase transactions. The Fund may enter into closing sale
transactions in order to realize gains or minimize losses on purchased options.
The Fund may purchase call options on foreign currency in
anticipation of an increase in the U.S. dollar value of currency in which securities to be acquired by the Fund are denominated or quoted. The purchase of a call option would entitle the Fund, in return for the premium paid, to purchase specified
currency at a specified price during the option period. The Fund would ordinarily realize a gain if, during the option period, the value of such currency exceeded the sum of the exercise price, the premium paid and transaction costs; otherwise, the
Fund would realize either no gain or a loss on the purchase of the call option.
The Fund may purchase put options in anticipation of a
decline in the U.S. dollar value of currency in which securities in its portfolio are denominated or quoted (protective puts). The purchase of a put option would entitle the Fund, in exchange for the premium paid, to sell specified
currency at a specified price during the option period. The purchase of protective puts is usually designed to offset or hedge against a decline in the U.S. dollar value of the Funds portfolio securities due to currency exchange rate
fluctuations. The Fund would ordinarily realize a gain if, during the option period, the value of the underlying currency decreased below the exercise price sufficiently to more than cover the premium and transaction costs; otherwise, the Fund would
realize either no gain or a loss on the purchase of the put option. Gains and losses on the purchase of protective put options would tend to be offset by countervailing changes in the value of the underlying currency.
In addition to using options for the hedging purposes described above, the Fund may use options on currency to seek to increase total return.
The Fund may write (sell) put and call options on any currency in an attempt to realize greater income than would be realized on portfolio securities transactions alone. However, in writing call options for additional income, the Fund may forego the
opportunity to profit from an increase in the market value of the underlying currency. Also, when writing put options, the Fund accept, in return for the option premium, the risk that it may be required to purchase the underlying currency at a price
in excess of the currencys market value at the time of purchase.
B-26
The Fund may purchase call options to seek to increase total return in anticipation of an
increase in the market value of a currency. The Fund would ordinarily realize a gain if, during the option period, the value of such currency exceeded the sum of the exercise price, the premium paid and transaction costs. Otherwise the Fund would
realize either no gain or a loss on the purchase of the call option. Put options may be purchased by the Fund for the purpose of benefiting from a decline in the value of currencies which they do not own. The Fund would ordinarily realize a gain if,
during the option period, the value of the underlying currency decreased below the exercise price sufficiently to more than cover the premium and transaction costs. Otherwise, the Fund would realize either no gain or a loss on the purchase of the
put option.
Yield Curve Options. The Fund may enter into options on the yield spread or differential between two
securities. Such transactions are referred to as yield curve options. In contrast to other types of options, a yield curve option is based on the difference between the yields of designated securities, rather than the prices of the
individual securities, and is settled through cash payments. Accordingly, a yield curve option is profitable to the holder if this differential widens (in the case of a call) or narrows (in the case of a put), regardless of whether the yields of the
underlying securities increase or decrease.
The Fund may purchase or write yield curve options for the same purposes as other options on
securities. For example, the Fund may purchase a call option on the yield spread between two securities if the Fund owns one of the securities and anticipates purchasing the other security and wants to hedge against an adverse change in the yield
spread between the two securities. The Fund may also purchase or write yield curve options in an effort to increase current income if, in the judgment of the Investment Adviser, the Fund will be able to profit from movements in the spread between
the yields of the underlying securities. The trading of yield curve options is subject to all of the risks associated with the trading of other types of options. In addition, however, such options present a risk of loss even if the yield of one of
the underlying securities remains constant, or if the spread moves in a direction or to an extent which was not anticipated.
Yield curve
options written by the Fund will be covered. A call (or put) option is covered if the Fund holds another call (or put) option on the spread between the same two securities and identifies on its books cash or liquid assets sufficient to
cover the Funds net liability under the two options. Therefore, the Funds liability for such a covered option is generally limited to the difference between the amount of the Funds liability under the option written by the Fund
less the value of the option held by the Fund. Yield curve options may also be covered in such other manner as may be in accordance with the requirements of the counterparty with which the option is traded and applicable laws and regulations. Yield
curve options are traded over-the-counter, and established trading markets for these options may not exist.
Risks Associated with
Options Transactions. There is no assurance that a liquid secondary market on a domestic or foreign options exchange will exist for any particular exchange-traded option or at any particular time. If the Fund is unable to effect a closing
purchase transaction with respect to covered options it has written, the Fund will not be able to sell the underlying securities or dispose of the assets identified on its books to cover the position until the options expire or are exercised.
Similarly, if the Fund is unable to effect a closing sale transaction with respect to options it has purchased, it will 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, but are not limited to, the
following: (i) there may be insufficient trading interest in certain options; (ii) restrictions may be imposed by an exchange on opening or closing transactions or both; (iii) trading halts, suspensions or other restrictions may be
imposed with respect to particular classes or series of options; (iv) unusual or unforeseen circumstances may interrupt normal operations on an exchange; (v) the facilities of an exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or (vi) 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), in which event the secondary market on that exchange (or in that class or series of options) would cease to exist although outstanding options on that exchange that had been issued by the Options Clearing Corporation as a result of trades
on that exchange would continue to be exercisable in accordance with their terms.
There can be no assurance that higher trading activity,
order flow or other unforeseen events will not, at times, render certain of the facilities of the Options Clearing Corporation or various exchanges inadequate. Such events have, in the past, resulted in the institution by an exchange of special
procedures, such as trading rotations, restrictions on certain types of order or trading halts or suspensions with respect to one or more options. These special procedures may limit liquidity.
The Fund may purchase and sell both options that are traded on U.S. and foreign exchanges and options traded over-the-counter with
broker-dealers and other types of institutions that make markets in these options. The ability to terminate over-the-counter options is more limited than with exchange-traded options and may involve the risk that the broker-dealers or financial
institutions participating in such transactions will not fulfill their obligations.
B-27
Transactions by the Fund in options will be subject to limitations established by each of
the exchanges, boards of trade or other trading facilities on which such options are traded governing the maximum number of options in each class which may be written or purchased by a single investor or group of investors acting in concert
regardless of whether the options are written or purchased on the same or different exchanges, boards of trade or other trading facilities or are held in one or more accounts or through one or more brokers. Thus, the number of options which the Fund
may write or purchase may be affected by options written or purchased by other investment advisory clients of the Investment Adviser. An exchange, board of trade or other trading facility may order the liquidation of positions found to be in excess
of these limits, and it may impose certain other sanctions.
The writing and purchase of options is a highly specialized activity which
involves investment techniques and risks different from those associated with ordinary portfolio securities transactions. The use of options to seek to increase total return involves the risk of loss if the Investment Adviser is incorrect in its
expectation of fluctuations in securities prices or interest rates. The successful use of options for hedging purposes also depends in part on the ability of the Investment Adviser to manage future price fluctuations and the degree of correlation
between the options and securities (or currency) markets. If the Investment Adviser is incorrect in its expectation of changes in securities prices or determination of the correlation between the securities or securities indices on which options are
written and purchased and the securities in the Funds investment portfolio, the Fund may incur losses that it would not otherwise incur. The writing of options could increase the Funds portfolio turnover rate and, therefore, associated
brokerage commissions or spreads.
Pooled Investment Vehicles
The Fund may invest in securities of pooled investment vehicles, including ETFs. The Fund will indirectly bear its proportionate share of any
management fees and other expenses paid by pooled investment vehicles in which it invests, in addition to the management fees (and other expenses) paid by the Fund. The Funds investments in pooled investment vehicles are subject to statutory
limitations prescribed by the Act, including in certain circumstances a prohibition on the Fund acquiring more than 3% of the voting shares of any other investment company, and a prohibition on investing more than 5% of the Funds total assets
in securities of any one investment company or more than 10% of its total assets in the securities of all investment companies. Many ETFs, however, have obtained exemptive relief from the SEC to permit unaffiliated funds (such as the Fund) to invest
in their shares beyond these statutory limits, subject to certain conditions and pursuant to contractual arrangements between the ETFs and the investing funds. The Fund may rely on these exemptive orders in investing in ETFs. Moreover, subject to
applicable law and/or pursuant to an exemptive order obtained from the SEC or under an exemptive rule adopted by the SEC, the Fund may invest in investment companies, including ETFs and money market funds, for which the Investment Adviser, or any of
its affiliates, serves as investment adviser, administrator and/or distributor. With respect to the Funds investments in money market funds, to the extent that the Fund invests in a money market fund for which the Investment Adviser or any of
its affiliates acts as investment adviser, the management fees payable by the Fund to the Investment Adviser will, to the extent required by the SEC, be reduced by an amount equal to the Funds proportionate share of the management fees paid by
such money market fund to its investment adviser. Although the Fund does not expect to do so in the foreseeable future, the Fund is authorized to invest substantially all of its assets in a single open-end investment company or series thereof that
has substantially the same investment objective, policies and fundamental restrictions as the Fund.
The Fund may purchase shares of
investment companies investing primarily in foreign securities, including country funds. Country funds have portfolios consisting primarily of securities of issuers located in specified foreign countries or regions.
Preferred Stock, Warrants and Stock Purchase Rights
The Fund may invest in preferred stock, warrants or stock purchase rights (in addition to those acquired in units or attached to other
securities) (rights). Preferred stocks are securities that represent an ownership interest providing the holder with claims on the issuers earnings and assets before common stock owners but after bond owners. Unlike debt
securities, the obligations of an issuer of preferred stock, including dividends and other payment obligations, may not typically be accelerated by the holders of such preferred stock on the occurrence of an event of default (such as a covenant
default or filing of a bankruptcy petition) or other non-compliance by the issuer with the terms of the preferred stock. Often, however, on the occurrence of any such event of default or non-compliance by the issuer, preferred stockholders will be
entitled to gain representation on the issuers board of directors or increase their existing board representation. In addition, preferred stockholders may be granted voting rights with respect to certain issues on the occurrence of any event
of default.
Warrants and other rights are options to buy a stated number of shares of common stock at a specified price at any time
during the life of the warrant. The holders of warrants and rights have no voting rights, receive no dividends and have no rights with respect to the assets of the issuer.
B-28
Repurchase Agreements
The Fund may enter into repurchase agreements with counterparties that furnish collateral at least equal in value or market price to the amount
of their repurchase obligation. The Fund may also enter into repurchase agreements involving obligations other than U.S. Government Securities, which may be subject to additional risks. A repurchase agreement is an arrangement under which the Fund
purchases securities and the seller agrees to repurchase the securities within a particular time and at a specified price. Custody of the securities is maintained by the Funds custodian (or subcustodian). The repurchase price may be higher
than the purchase price, the difference being income to the Fund, or the purchase and repurchase prices may be the same, with interest at a stated rate due to the Fund together with the repurchase price on repurchase. In either case, the income to
the Fund is unrelated to the interest rate on the security subject to the repurchase agreement.
For purposes of the Act, and generally
for tax purposes, a repurchase agreement is deemed to be a loan from the Fund to the seller of the security. For other purposes, it is not always clear whether a court would consider the security purchased by the Fund subject to a repurchase
agreement as being owned by the Fund or as being collateral for a loan by the Fund to the seller. In the event of commencement of bankruptcy or insolvency proceedings with respect to the seller of the security before repurchase of the security under
a repurchase agreement, the Fund may encounter delay and incur costs before being able to sell the security. Such a delay may involve loss of interest or a decline in value of the security. If the court characterizes the transaction as a loan and
the Fund has not perfected a security interest in the security, the Fund may be required to return the security to the sellers estate and be treated as an unsecured creditor of the seller. As an unsecured creditor, the Fund would be at risk of
losing some or all of the principal and interest involved in the transaction.
Apart from the risk of bankruptcy or insolvency
proceedings, there is also the risk that the seller may fail to repurchase the security. However, if the market value of the security subject to the repurchase agreement becomes less than the repurchase price (including accrued interest), the Fund
will direct the seller of the security to deliver additional securities so that the market value of all securities subject to the repurchase agreement equals or exceeds the repurchase price. Certain repurchase agreements which provide for settlement
in more than seven days can be liquidated before the nominal fixed term on seven days or less notice.
The Fund, together with other
registered investment companies having management agreements with the Investment Adviser or their affiliates, may transfer uninvested cash balances into a single joint account, the daily aggregate balance of which will be invested in one or more
repurchase agreements.
Restricted Securities
The Fund may purchase securities and other financial instruments that are not registered or that are offered in an exempt non-public offering
(Restricted Securities) under the Securities Act of 1933 (the 1933 Act), including securities eligible for resale to qualified institutional buyers pursuant to Rule 144A under the 1933 Act.
The purchase price and subsequent valuation of Restricted Securities may reflect a discount from the price at which such securities trade when
they are not restricted, because the restriction makes them less liquid. The amount of the discount from the prevailing market price is expected to vary depending upon the type of security, the character of the issuer, the party who will bear the
expenses of registering the Restricted Securities and prevailing supply and demand conditions. These and other factors discussed in the section above, entitled Illiquid Investments, may impact the liquidity of investments in Restricted
Securities.
Reverse Repurchase Agreements
The Fund may borrow money by entering into transactions called reverse repurchase agreements. Under these arrangements, the Fund may sell
portfolio securities to dealers in U.S. Government Securities or members of the Federal Reserve System, with an agreement to repurchase the security on an agreed date, price and interest payment. These reverse repurchase agreements may involve
foreign government securities. Reverse repurchase agreements involve the possible risk that the value of portfolio securities the Fund relinquishes may decline below the price the Fund must pay when the transaction closes. Borrowings may magnify the
potential for gain or loss on amounts invested resulting in an increase in the speculative character of the Funds outstanding shares.
When the Fund enters into a reverse repurchase agreement, it identifies on its books cash or liquid assets that have a value equal to or
greater than the repurchase price. The amount of cash or liquid assets so identified is then monitored continuously by the Investment Adviser to make sure that an appropriate value is maintained. Reverse repurchase agreements are considered to be
borrowings under the Investment Company Act.
B-29
Risks of Qualified Financial Contracts
Regulations adopted by federal banking regulators under the Dodd-Frank Act which are scheduled to take effect throughout 2019, require that
certain qualified financial contracts (QFCs) with counterparties that are part of U.S. or foreign global systemically important banking organizations be amended to include contractual restrictions on close-out and cross-default rights.
QFCs include, but are not limited to, securities contracts, commodities contracts, forward contracts, repurchase agreements, securities lending agreements and swaps agreements, as well as related master agreements, security agreements, credit
enhancements, and reimbursement obligations. If a covered counterparty of the Fund or certain of the covered counterpartys affiliates were to become subject to certain insolvency proceedings, the Fund may be temporarily unable to exercise
certain default rights, and the QFC may be transferred to another entity. These requirements may impact the Funds credit and counterparty risks.
Short Sales
Short sales are transactions
in which the Fund sells a security it does not own in anticipation of a decline in the market value of that security. To complete such a transaction, the Fund must borrow the security to make delivery to the buyer. The Fund then is obligated to
replace the security borrowed by purchasing it at the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by the Fund. Until the security is replaced, the Fund is required
to pay to the lender amounts equal to any dividend which accrues during the period of the loan. To borrow the security, the Fund also may be required to pay a premium, which would increase the cost of the security sold. There will also be other
costs associated with short sales.
The Fund will incur a loss as a result of the short sale if the price of the security increases
between the date of the short sale and the date on which the Fund replaces the borrowed security. The Fund will realize a gain if the security declines in price between those dates. This result is the opposite of what one would expect from a cash
purchase of a long position in a security. The amount of any gain will be decreased, and the amount of any loss increased, by the amount of any premium or amounts in lieu of interest the Fund may be required to pay in connection with a short sale,
and will be also decreased by any transaction or other costs.
Until the Fund replaces a borrowed security in connection with a short
sale, the Fund will (a) identify on its books cash or liquid assets at such a level that the identified assets plus any amount deposited as collateral will equal the current value of the security sold short or (b) otherwise cover its short
position in accordance with applicable law.
There is no guarantee that the Fund will be able to close out a short position at any
particular time or at an acceptable price. During the time that the Fund is short a security, it is subject to the risk that the lender of the security will terminate the loan at a time when the Fund is unable to borrow the same security from
another lender. If that occurs, the Fund may be bought in at the price required to purchase the security needed to close out the short position, which may be a disadvantageous price.
The Fund may engage in short sales against the box. As noted above, a short sale is made by selling a security the seller does not own. A
short sale is against the box to the extent that the seller contemporaneously owns or has the right to obtain, at no added cost, securities identical to those sold short. It may be entered into by the Fund, for example, to lock in a
sales price for a security the Fund does not wish to sell immediately. If the Fund sells securities short against the box, it may protect itself from loss if the price of the securities declines in the future, but will lose the opportunity to profit
on such securities if the price rises.
If the Fund effects a short sale of securities at a time when it has an unrealized gain on the
securities, it may be required to recognize that gain as if it had actually sold the securities (as a constructive sale) on the date it effects the short sale. However, such constructive sale treatment may not apply if the Fund closes
out the short sale with securities other than the appreciated securities held at the time of the short sale and if certain other conditions are satisfied. Uncertainty regarding the tax consequences of effecting short sales may limit the extent to
which the Fund may effect short sales.
U.S. Government Securities
The Fund may invest in U.S. Government Securities. Some U.S. Government Securities (such as Treasury bills, notes and bonds, which differ only
in their interest rates, maturities and times of issuance) are supported by the full faith and credit of the United States. Others, such as obligations issued or guaranteed by U.S. Government agencies, instrumentalities or sponsored enterprises, are
supported either by (i) the right of the issuer to borrow from the U.S. Treasury, (ii) the discretionary authority of the U.S. government to purchase certain obligations of the issuer or (iii) the credit of the issuer. The U.S.
Government is under no legal obligation, in general, to purchase the obligations of its agencies, instrumentalities or sponsored enterprises. No assurance can be given that the U.S. Government will provide financial support to U.S. government
agencies, instrumentalities or sponsored enterprises in the future, and the U.S. Government may be unable to pay debts when due.
B-30
U.S. Government Securities include (to the extent consistent with the Act) securities for
which the payment of principal and interest is backed by an irrevocable letter of credit issued by the U.S. Government, or its agencies, instrumentalities or sponsored enterprises. U.S. Government Securities may also include (to the extent
consistent with the Act) participations in loans made to foreign governments or their agencies that are guaranteed as to principal and interest by the U.S. Government or its agencies, instrumentalities or sponsored enterprises. The secondary market
for certain of these participations is extremely limited. These and other factors discussed in the section above, entitled Illiquid Investments, may impact the liquidity of investments in these participations.
The Fund may also purchase U.S. Government Securities in private placements and may also invest in separately traded principal and interest
components of securities guaranteed or issued by the U.S. Treasury that are traded independently under the separate trading of registered interest and principal of securities program. The Fund may also invest in zero coupon U.S. Treasury securities
and in zero coupon securities issued by financial institutions which represent a proportionate interest in underlying U.S. Treasury securities.
Inflation-Protected Securities. The Fund may invest in inflation protected securities (IPS) of varying maturities issued by
the U.S. Treasury and other U.S. and non-U.S. Government agencies and corporations, which are securities whose principal value is periodically adjusted according to the rate of inflation. The interest rate on IPS is fixed at issuance, but over the
life of the bond this interest may be paid on an increasing or decreasing principal value that has been adjusted for inflation. Although repayment of the greater of the adjusted or original bond principal upon maturity is guaranteed, the market
value of IPS is not guaranteed, and will fluctuate.
The values of IPS generally fluctuate in response to changes in real interest rates,
which are in turn tied to the relationship between nominal interest rates and the rate of inflation. If inflation were to rise at a faster rate than nominal interest rates, real interest rates might decline, leading to an increase in the value of
IPS. In contrast, if nominal interest rates were to increase at a faster rate than inflation, real interest rates might rise, leading to a decrease in the value of IPS. If inflation is lower than expected during the period the Fund holds IPS, the
Fund may earn less on the IPS than on a conventional bond. If interest rates rise due to reasons other than inflation (for example, due to changes in the currency exchange rates), investors in IPS may not be protected to the extent that the increase
is not reflected in the bonds inflation measure. There can be no assurance that the inflation index for IPS will accurately measure the real rate of inflation in the prices of goods and services.
Any increase in principal value of IPS caused by an increase in the consumer price index is taxable in the year the increase occurs, even
though the Fund holding IPS will not receive cash representing the increase at that time. As a result, the Fund could be required at times to liquidate other investments, including when it is not advantageous to do so, in order to satisfy its
distribution requirements as a regulated investment company.
If the Fund invests in IPS, it will be required to treat as original issue
discount any increase in the principal amount of the securities that occurs during the course of its taxable year. If the Fund purchases such IPS that are issued in stripped form either as stripped bonds or coupons, it will be treated as if it had
purchased a newly issued debt instrument having original issue discount.
Because the Fund is required to distribute substantially all of
its net investment income (including accrued original issue discount), the Funds investment in either zero coupon bonds or IPS may require the Fund to distribute to shareholders an amount greater than the total cash income it actually
receives. Accordingly, in order to make the required distributions, the Fund may be required to borrow or liquidate securities.
When-Issued Securities
and Forward Commitments
The Fund may purchase securities on a when-issued basis or purchase or sell securities on a forward commitment
basis beyond the customary settlement time. These transactions involve a commitment by the Fund to purchase or sell securities at a future date. The price of the underlying securities (usually expressed in terms of yield) and the date when the
securities will be delivered and paid for (the settlement date) are fixed at the time the transaction is negotiated. In addition, recently finalized rules of the Financial Industry Regulatory Authority (FINRA) include mandatory margin
requirements that require the Fund to post collateral in connection with its to-be-announced (TBA) transactions. There is no similar requirement applicable to the Funds TBA counterparties. The required collateralization of TBA
trades could increase the cost of to-be-announced (TBA) transactions to the Fund and impose added operational complexity. When-issued purchases and forward commitment transactions are negotiated directly with the other party, and such
commitments are not traded on exchanges. The Fund will generally purchase securities on a when-issued basis or purchase or sell securities on a forward commitment basis only with the intention of completing the transaction and actually purchasing or
selling the securities. If deemed advisable as a matter of investment strategy, however, the Fund may dispose of or negotiate a commitment after entering into it. The Fund may also sell securities it has committed to purchase before those securities
are delivered to the Fund on the settlement date. The Fund may realize capital gains or losses in connection with these transactions. For purposes of determining the
B-31
Funds duration, the maturity of when-issued or forward commitment securities for fixed-rate obligations will be calculated from the commitment date. The Fund is generally required to
identify on its books cash and liquid assets in an amount sufficient to meet the purchase price unless the Funds obligations are otherwise covered. Alternatively, the Fund may enter into offsetting contracts for the forward sale of other
securities that it owns. Securities purchased or sold on a when-issued or forward commitment basis involve a risk of loss if the value of the security to be purchased declines prior to the settlement date or if the value of the security to be sold
increases prior to the settlement date.
Zero Coupon, Deferred Interest, Pay-In-Kind and Capital Appreciation Bonds
The Fund may invest in zero coupon, deferred interest, pay-in-kind (PIK) and capital appreciation bonds. Zero coupon, deferred
interest and capital appreciation bonds are debt securities issued or sold at a discount from their face value and which do not entitle the holder to any periodic payment of interest prior to maturity or a specified date. The original issue discount
varies depending on the time remaining until maturity or cash payment date, prevailing interest rates, the liquidity of the security and the perceived credit quality of the issuer. These securities also may take the form of debt securities that have
been stripped of their unmatured interest coupons, the coupons themselves or receipts or certificates representing interests in such stripped debt obligations or coupons.
PIK securities may be debt obligations or preferred shares that provide the issuer with the option of paying interest or dividends on such
obligations in cash or in the form of additional securities rather than cash. Similar to zero coupon bonds and deferred interest bonds, PIK securities are designed to give an issuer flexibility in managing cash flow. PIK securities that are debt
securities can be either senior or subordinated debt and generally trade flat (i.e., without accrued interest). The trading price of PIK debt securities generally reflects the market value of the underlying debt plus an amount representing
accrued interest since the last interest payment.
The market prices of zero coupon, deferred interest, capital appreciation bonds and PIK
securities generally are more volatile than the market prices of interest bearing securities and are likely to respond to a greater degree to changes in interest rates than interest bearing securities having similar maturities and credit quality.
Moreover, zero coupon, deferred interest, capital appreciation and PIK securities involve the additional risk that, unlike securities that periodically pay interest to maturity, the Fund will realize no cash until a specified future payment date
unless a portion of such securities is sold and, if the issuer of such securities defaults, the Fund may obtain no return at all on its investment. The valuation of such investments requires judgment regarding the collection of future payments. In
addition, even though such securities do not provide for the payment of current interest in cash, the Fund is nonetheless required to accrue income on such investments for each taxable year and generally are required to distribute such accrued
amounts (net of deductible expenses, if any) to avoid being subject to tax. Because no cash is generally received at the time of the accrual, the Fund may be required to liquidate other portfolio securities to obtain sufficient cash to satisfy
federal tax distribution requirements applicable to the Fund. A portion of the discount with respect to stripped tax exempt securities or their coupons may be taxable. See TAXATION.
Special Note Regarding Market Events
Federal, state, and foreign governments, regulatory agencies, and self-regulatory organizations may take actions that affect the regulation of
the Fund or the instruments in which the Fund invests, or the issuers of such instruments, in ways that are unforeseeable. Future legislation or regulation or other governmental actions could limit or preclude the Funds ability to achieve its
investment objective or otherwise adversely impact an investment in the Fund.
In the aftermath of the 2007-2008 financial crisis, the
financial sector experienced reduced liquidity in credit and other fixed income markets, and an unusually high degree of volatility, both domestically and internationally. While entire markets were impacted, issuers that had exposure to the real
estate, mortgage and credit markets were particularly affected. The instability in the financial markets led the U.S. Government to take a number of unprecedented actions designed to support certain financial institutions and certain segments of the
financial markets. For example, the Dodd-Frank Act, which was enacted in 2010, provides for broad regulation of financial institutions, consumer financial products and services, broker-dealers, over-the-counter derivatives, investment advisers,
credit rating agencies and mortgage lending.
Governments or their agencies may also acquire distressed assets from financial institutions
and acquire ownership interests in those institutions. The implications of government ownership and disposition of these assets are unclear, and such ownership or disposition may have positive or negative effects on the liquidity, valuation and
performance of the Funds portfolio holdings.
B-32
Special Note Regarding Operational, Cyber Security and Litigation Risks
An investment in the Fund may be negatively impacted because of the operational risks arising from factors such as processing errors and human
errors, inadequate or failed internal or external processes, failures in systems and technology, changes in personnel, and errors caused by third-party service providers or trading counterparties. The use of certain investment strategies that
involve manual or additional processing, such as over-the-counter derivatives, increases these risks. Although the Fund attempts to minimize such failures through controls and oversight, it is not possible to identify all of the operational risks
that may affect the Fund or to develop processes and controls that completely eliminate or mitigate the occurrence of such failures. The Fund and its shareholders could be negatively impacted as a result.
The Fund is also susceptible to operational and information security risks resulting from cyber-attacks. In general, cyber-attacks result from
deliberate attacks, but other events may have effects similar to those caused by cyber-attacks. Cyber-attacks include, among others, stealing or corrupting confidential information and other data that is maintained online or digitally for financial
gain, denial-of-service attacks on websites causing operational disruption, and the unauthorized release of confidential information and other data. Cyber-attacks affecting the Fund or its Investment Adviser, sub-adviser, custodian, Transfer Agent,
intermediary or other third-party service provider may adversely impact the Fund and its shareholders. These cyber-attacks have the ability to cause significant disruptions and impact business operations; to result in financial losses; to prevent
shareholders from transacting business; to interfere with the Funds calculation of NAV and to lead to violations of applicable privacy and other laws, regulatory fines, penalties, reputational damage, reimbursement or other compensation costs
and/or additional compliance costs. Similar to operational risk in general, the Fund and its service providers, including GSAM, have instituted risk management systems designed to minimize the risks associated with cyber security. However, there is
a risk that these systems will not succeed (or that any remediation efforts will not be successful), especially because the Fund does not directly control the risk management systems of the service providers to the Fund, its trading counterparties
or the issuers in which the Fund may invest. Moreover, there is a risk that cyber-attacks will not be detected.
The Fund may be subject
to third-party litigation, which could give rise to legal liability. These matters involving the Fund may arise from its activities and investments and could have a materially adverse effect on the Fund, including the expense of defending against
claims and paying any amounts pursuant to settlements or judgments. There can be no guarantee that these matters will not arise in the normal course of business. If the Fund was to be found liable in any suit or proceeding, any associated damages
and/or penalties could have a materially adverse effect on the Funds finances, in addition to being materially damaging to its reputation.
B-33
INVESTMENT RESTRICTIONS
The investment restrictions set forth below have been adopted by the Trust as fundamental policies that cannot be changed with respect to the
Fund without the affirmative vote of the holders of a majority of the outstanding voting securities (as defined in the Act) of the Fund. The investment objective of the Fund and all other investment policies or practices of the Fund are considered
by the Trust not to be fundamental and accordingly may be changed without shareholder approval. For purposes of the Act, a majority of the outstanding voting securities means the lesser of (i) 67% or more of the shares of the Trust
or the Fund present at a meeting, if the holders of more than 50% of the outstanding shares of the Trust or the Fund are present or represented by proxy, or (ii) more than 50% of the outstanding shares of the Trust or the Fund.
For purposes of the following limitations (except for the asset coverage requirement with respect to borrowings, which is subject to different
requirements under the Act), any limitation which involves a maximum percentage shall not be considered violated unless an excess over the percentage occurs immediately after, and is caused by, an acquisition or encumbrance of securities or assets
of, or borrowings by, the Fund. In applying fundamental investment restriction number (1) below to derivative transactions or instruments, including, but not limited to, futures, swaps, forwards, options and structured notes, the Fund will look
to the industry of the reference asset(s) and not to the counterparty or issuer. With respect to the Funds fundamental investment restriction number (2) below, in the event that asset coverage (as defined in the Act) at any time falls
below 300%, the Fund, within three days thereafter (not including Sundays and holidays) or such longer period as the SEC may prescribe by rules and regulations, will reduce the amount of its borrowings to the extent required so that the asset
coverage of such borrowings will be at least 300%.
Fundamental Investment Restrictions
As a matter of fundamental policy, the Fund may not:
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(1)
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Invest more than 25% of its total assets in the securities of one or more issuers conducting their principal
business activities in the same industry except that the Fund may invest more than 25% of the value of its total assets in securities of issuers in the same industry if the index that the Fund replicates concentrates in an industry (for the purposes
of this restriction, the U.S. Government, state and municipal governments and their agencies, authorities and instrumentalities are not deemed to be industries);
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(2)
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Borrow money, except as permitted by the Act, or interpretations or modifications by the SEC, SEC staff or
other authority with appropriate jurisdiction;
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The following interpretation applies to, but is not part of, this
fundamental policy: In determining whether a particular investment in portfolio instruments or participation in portfolio transactions is subject to this borrowing policy, the accounting treatment of such instrument or participation shall be
considered, but shall not by itself be determinative. Whether a particular instrument or transaction constitutes a borrowing shall be determined by the Board, after consideration of all of the relevant circumstances;
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(3)
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Make loans, except through (a) the purchase of debt obligations, loan interests and other interests or
obligations in accordance with the Funds investment objective and policies; (b) repurchase agreements with banks, brokers, dealers and other financial institutions; (c) loans of securities as permitted by applicable law or pursuant
to an exemptive order granted under the Act; and (d) loans to affiliates of the Fund to the extent permitted by law;
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(4)
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Underwrite securities issued by others, except to the extent that the sale of portfolio securities by the Fund
may be deemed to be an underwriting;
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(5)
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Purchase, hold or deal in real estate, although the Fund may purchase and sell securities that are secured by
real estate or interests therein or that reflect the return of an index of real estate values, securities of issuers which invest or deal in real estate, securities of real estate investment trusts and mortgage-related securities and may hold and
sell real estate it has acquired as a result of the ownership of securities;
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(6)
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Invest in physical commodities, except that the Fund may invest in currency and financial instruments and
contracts in accordance with its investment objective and policies, including, without limitation, structured notes, futures contracts, swaps, options on commodities, currencies, swaps and futures, ETFs, investment pools and other instruments,
regardless of whether such instrument is considered to be a commodity; and
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B-34
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(7)
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Issue senior securities to the extent such issuance would violate applicable law.
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The Fund may, notwithstanding any other fundamental investment restriction or policy, invest some or all of its assets in a single open-end
investment company or series thereof with substantially the same fundamental investment restrictions and policies as the Fund.
B-35
TRUSTEES AND OFFICERS
The Trusts Leadership Structure
The
business and affairs of the Fund are managed under the direction of the Board of Trustees (the Board), subject to the laws of the State of Delaware and the Trusts Declaration of Trust. The Trustees are responsible for deciding
matters of overall policy and reviewing the actions of the Trusts service providers. The officers of the Trust conduct and supervise the Funds daily business operations. Trustees who are not deemed to be interested persons of
the Trust as defined in the Act are referred to as Independent Trustees. Trustees who are deemed to be interested persons of the Trust are referred to as Interested Trustees. The Board is currently composed of
four Independent Trustees and one Interested Trustee. The Board has selected an Independent Trustee to act as Chairman, whose duties include presiding at meetings of the Board and acting as a focal point to address significant issues that may arise
between regularly scheduled Board and Committee meetings. In the performance of the Chairmans duties, the Chairman will consult with the other Independent Trustees and the Funds officers and legal counsel, as appropriate. The Chairman
may perform other functions as requested by the Board from time to time.
The Board meets as often as necessary to discharge its
responsibilities. Currently, the Board conducts regular, in-person meetings at least four times a year, and holds special in-person or telephonic meetings as necessary to address specific issues that require attention prior to the next regularly
scheduled meeting. In addition, the Independent Trustees meet at least annually to review, among other things, investment management agreements, distribution and/or service plans and related agreements, transfer agency agreements and certain other
agreements providing for the compensation of Goldman Sachs and/or its affiliates by the Fund, and to consider such other matters as they deem appropriate.
The Board has established five standing committees Audit, Governance and Nominating, Compliance, Valuation and Contract Review
Committees. The Board may establish other committees, or nominate one or more Trustees to examine particular issues related to the Boards oversight responsibilities, from time to time. Each Committee meets periodically to perform its delegated
oversight functions and reports its findings and recommendations to the Board. For more information on the Committees, see the section STANDING BOARD COMMITTEES, below.
The Trustees have determined that the Trusts leadership structure is appropriate because it allows the Trustees to effectively perform
their oversight responsibilities.
B-36
Trustees of the Trust
Information pertaining to the Trustees of the Trust as of December 27, 2019 is set forth below.
Independent Trustees
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Name, Address
and Age1
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Position(s)
Held with
the
Trust
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Term of
Office and
Length
of
Time Served2
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Principal Occupation(s)
During Past 5 Years
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Number
of
Portfolios
in Fund
Complex
Overseen
by
Trustee3
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Other
Directorships
Held by
Trustee4
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Lawrence W. Stranghoener
Age:
65
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Chairman of the Board of Trustees
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Trustee since 2015; Chairman since 2017
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Mr. Stranghoener is retired. He is Chairman, Kennametal, Inc. (a global manufacturer and distributor of tooling and industrial materials)
(2003-Present); Director, Aleris Corporation and Aleris International, Inc. (a producer of aluminum rolled products) (2011-Present); and was formerly Interim Chief Executive Officer (2014); and Executive Vice President and Chief Financial Officer
(20042014), Mosaic Company (a fertilizer manufacturing company).
Chairman of
the Board of TrusteesGoldman Sachs ETF Trust; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund.
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44
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Kennametal, Inc. (a global manufacturer and distributor of tooling and industrial materials)
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Caroline Dorsa
Age: 60
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Trustee
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Since 2016
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Ms. Dorsa is retired. She is Director, Biogen Inc. (a biotechnology company) (2010Present); Director, Intellia Therapeutics Inc. (a
gene-editing company) (2015Present); and Director, Illumina, Inc. (a life sciences company) (2017Present). She was formerly Executive Vice President and Chief Financial Officer, Public Service Enterprise Group, Inc. (a generation and
energy services company) (20092015); Senior Vice President, Merck & Co, Inc. (a pharmaceutical company) (2008-2009 and 19872007); Senior Vice President and Chief Financial Officer, Gilead Sciences, Inc. (a pharmaceutical company)
(2007-2008); and Senior Vice President and Chief Financial Officer, Avaya, Inc. (a technology company) (2007).
TrusteeGoldman Sachs ETF Trust; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Credit Income
Fund; and Goldman Sachs Real Estate Diversified Income Fund.
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44
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Biogen Inc. (a biotechnology company); Intellia Therapeutics Inc. (a gene-editing company); Illumina, Inc. (a life sciences company)
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B-37
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Name, Address
and Age1
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Position(s)
Held with
the
Trust
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Term of
Office and
Length
of
Time Served2
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Principal Occupation(s)
During Past 5 Years
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Number
of
Portfolios
in Fund
Complex
Overseen
by
Trustee3
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Other
Directorships
Held by
Trustee4
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Linda A. Lang
Age: 61
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Trustee
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Since 2016
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Ms. Lang is retired. She was formerly Chair of the Board of Directors (2016 2019); and Member of the Board of Directors, WD-40 Company
(20042019); Chairman and Chief Executive Officer (20052014); and Director, President and Chief Operating Officer, Jack in the Box, Inc. (a restaurant company) (20032005). Previously, Ms. Lang served as an Advisory Board Member of
Goldman Sachs MLP Income Opportunities Fund and Goldman Sachs MLP and Energy Renaissance Fund (February 2016 March 2016).
TrusteeGoldman Sachs ETF Trust; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Credit Income
Fund; and Goldman Sachs Real Estate Diversified Income Fund.
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44
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None
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Michael Latham
Age: 54
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Trustee
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Since 2015
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Mr. Latham is retired. Formerly, he held senior management positions with the iShares exchange-traded fund business, including Chairman
(20112014); Global Head (20102011); U.S. Head (20072010); and Chief Operating Officer (20032007).
TrusteeGoldman Sachs ETF Trust; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Credit Income
Fund; and Goldman Sachs Real Estate Diversified Income Fund.
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44
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None
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Interested Trustee
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James A. McNamara*
Age: 57
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President and Trustee
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Since 2014
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Advisory Director, Goldman Sachs (January 2018Present); Managing Director, Goldman Sachs (January 2000December 2017); Director of
Institutional Fund Sales, GSAM (April 1998December 2000); and Senior Vice President and Manager, Dreyfus Institutional Service Corporation (January 1993April 1998).
President and TrusteeGoldman Sachs ETF Trust; Goldman Sachs Trust; Goldman Sachs
Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund.
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165
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None
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*
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Mr. McNamara is considered to be an Interested Trustee because he holds positions with Goldman
Sachs and owns securities issued by The Goldman Sachs Group, Inc. Mr. McNamara holds comparable positions with certain other companies of which Goldman Sachs, GSAM or an affiliate thereof is the investment adviser, administrator and/or
distributor.
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B-38
1
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Each Trustee may be contacted by writing to the Trustee, c/o Goldman Sachs, 200 West Street, New York, New
York, 10282, Attn: Caroline Kraus.
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2
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Subject to such policies as may be adopted by the Board from time-to-time, each Trustee holds office for an
indefinite term, until the earliest of: (a) the election of his or her successor; (b) the date the Trustee resigns or is removed by the Board or shareholders, in accordance with the Trusts Declaration of Trust; or (c) the
termination of the Trust. The Board has adopted policies which provide that (a) no Trustee shall hold office for more than 15 years and (b) a Trustee shall retire as of December 31st of the calendar year in which he or she reaches his
or her 74th birthday, unless a waiver of such requirement shall have been adopted by a majority of the other Trustees. These policies may be changed by the Trustees without shareholder vote.
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3
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The Goldman Sachs Fund Complex includes certain other companies listed above for each respective Trustee. As of
December 27, 2019, Goldman Sachs ETF Trust consisted of 40 portfolios (21 of which offered shares to the public); Goldman Sachs Trust consisted of 89 portfolios; Goldman Sachs Variable Insurance Trust consisted of 13 portfolios; Goldman Sachs Trust
II consisted of 19 portfolios (17 of which offered shares to the public); and Goldman Sachs MLP Income Opportunities Fund, Goldman Sachs MLP and Energy Renaissance Fund, Goldman Sachs Credit Income Fund and Goldman Sachs Real Estate Diversified
Income Fund each consisted of one portfolio. Goldman Sachs Credit Income Fund and Goldman Sachs Real Estate Diversified Income Fund did not offer shares to the public.
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4
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This column includes only directorships of companies required to report to the SEC under the Securities
Exchange Act of 1934 (i.e., public companies) or other investment companies registered under the Act.
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The
significance or relevance of a Trustees particular experience, qualifications, attributes and/or skills is considered by the Board on an individual basis. Experience, qualifications, attributes and/or skills common to all Trustees include the
ability to critically review, evaluate and discuss information provided to them and to interact effectively with the other Trustees and with representatives of the Investment Adviser and its affiliates, other service providers, legal counsel and the
Funds independent registered public accounting firm, the capacity to address financial and legal issues and exercise reasonable business judgment, and a commitment to the representation of the interests of the Fund and its shareholders. The
Governance and Nominating Committees charter contains certain other factors that are considered by the Governance and Nominating Committee in identifying and evaluating potential nominees to serve as Independent Trustees. Based on each
Trustees experience, qualifications, attributes and/or skills, considered individually and with respect to the experience, qualifications, attributes and/or skills of other Trustees, the Board has concluded that each Trustee should serve as a
Trustee. Below is a brief discussion of the experience, qualifications, attributes and/or skills of each individual Trustee as of December 27, 2019 that led the Board to conclude that such individual should serve as a Trustee.
Lawrence W. Stranghoener. Mr. Stranghoener has served as a Trustee of the Trust since 2015 and Chairman of the Board of Trustees since 2017.
Mr. Stranghoener is retired. Mr. Stranghoener is Chairman of the Board of Directors of Kennametal, Inc., a global manufacturer and distributor of tooling and industrial materials. He is also a member of the Board of Directors of Aleris
Corporation and Aleris International, Inc., which provides aluminum rolled products and extrusions, aluminum recycling, and specification alloy production, where he chairs the Audit Committee and also serves on the Compensation Committee.
Previously, Mr. Stranghoener held several senior management positions at Mosaic Company, a fertilizer manufacturing company, where he worked for 10 years, most recently as Interim Chief Executive Officer, Executive Vice President and Chief
Financial Officer. As Executive Vice President and Chief Financial Officer at Mosaic Company, Mr. Stranghoener implemented public company processes, policies and performance standards to transition the company from private to public ownership
and oversaw the companys controller, treasury, tax, investor relations, strategy and business development, and internal audit functions. He also led the integration of Mosaic Company with IMC Global, Inc. during their merger. Previously,
Mr. Stranghoener served for three years as Executive Vice President and Chief Financial Officer for Thrivent Financial, a non-profit, financial services organization and Techies.com, an internet-based professional services company.
Mr. Stranghoener also held several senior management positions at Honeywell International, Inc. where he worked for 17 years, most recently as Vice President and Chief Financial Officer. In addition, he serves as Chairman of the Board of
Regents of St. Olaf College. Based on the foregoing, Mr. Stranghoener is experienced with financial and investment matters.
Caroline Dorsa.
Ms. Dorsa has served as a Trustee of the Trust since 2016. Ms. Dorsa is retired. Ms. Dorsa has been designated as the Boards audit committee financial expert given her extensive accounting and finance experience.
Ms. Dorsa is a member of the Board of Directors of Biogen Inc., a biotechnology company, where she chairs the Audit Committee and also serves on the Risk Committee. In addition, Ms. Dorsa also serves as a member of the Board of Directors
of Intellia Therapeutics Inc., a gene-editing company, where she chairs the Audit Committee and serves on the Compensation Committee and Nominating and Corporate Governance Committee. Furthermore, Ms. Dorsa serves as a member of the Board of
Directors of Illumina Inc., a life sciences company, where she serves on the Audit Committee. Previously, she served as Executive Vice President and Chief Financial Officer of Public Service Enterprise Group, Inc. (PSEG), a generation
and energy services company. As Executive Vice President and Chief Financial Officer, Ms. Dorsa was responsible for finance, accounting and internal audit, risk management and investor relations. Prior to becoming Chief Financial Officer, she
was a member of PSEGs Board of Directors and a member of its Audit, Corporate Governance and Finance committees for six years. Prior to joining PSEG, Ms. Dorsa held various management positions at Merck &Co, Inc., where she worked for
over 20 years, most recently in the position of Senior Vice President of Global Human Health Strategy and Integration. As Vice President and Treasurer of Merck from 1994 through 2006, her responsibilities also included the global tax function,
transfer pricing, global entity management and financial planning for both the research and manufacturing divisions. Based on the foregoing, Ms. Dorsa is experienced with financial and investment matters.
B-39
Linda A. Lang. Ms. Lang has served as a Trustee of the Trust since 2016. Ms. Lang is
retired. Ms. Lang was formerly the Chair of the Board of Directors of WD-40 Company, a global consumer products company, where she served on the Compensation and Finance Committees. Ms. Lang also previously held several senior management
positions at Jack in the Box, Inc., a restaurant company listed on The NASDAQ Stock Market, where she worked for 30 years, most recently as Chairman and Chief Executive Officer. Over that time, she was involved in the areas of strategic
planning, capital structure and deployment, and enterprise risk management. Ms. Lang previously served on the Board of Directors of the San Diego Regional Economic Development Corporation and as a Trustee of the California State University
System. In addition, she also serves as a member of the Board of Directors of San Diego State Universitys College of Business Administration and is a member of the Corporate Directors Forum. Based on the foregoing, Ms. Lang is experienced
with financial and investment matters.
Michael Latham. Mr. Latham has served as a Trustee of the Trust since 2015. Mr. Latham is
retired. Previously, he held several senior management positions for 15 years with the iShares exchange-traded fund business owned by BlackRock, Inc. and previously owned by Barclays Global Investors, most recently as Chairman and Global Head of the
business. In that capacity he was one of the lead executives responsible for the growth of the business. He was also involved in governance of the iShares funds, serving initially as Principal Financial Officer and later as President and Principal
Executive Officer and a member of the Board of Directors. Mr. Latham is a certified public accountant, and before joining Barclays Global Investors, he worked at Ernst and Young for over five years. Based on the foregoing, Mr. Latham is
experienced with accounting, financial and investment matters.
James A. McNamara. Mr. McNamara has served as a Trustee and President of the
Trust since 2014. Mr. McNamara is an Advisory Director to Goldman Sachs. Prior to retiring as Managing Director at Goldman Sachs in 2017, Mr. McNamara was head of Global Third Party Distribution at GSAM and he was previously head of U.S.
Third Party Distribution. Prior to that role, Mr. McNamara served as Director of Institutional Fund Sales. Prior to joining Goldman Sachs, Mr. McNamara was Vice President and Manager at Dreyfus Institutional Service Corporation. Based on
the foregoing, Mr. McNamara is experienced with financial and investment matters.
Officers of the Trust
Information pertaining to the Officers of the Trust as of December 27, 2019 is set forth below.
|
|
|
|
|
|
|
Name
|
|
Position(s) Held
with the Trust(s)
|
|
Term of Office and
Length of Time
Served1
|
|
Principal Occupation(s)
During Past 5 Years
|
James A. McNamara
200 West Street
New York, NY 10282
Age: 57
|
|
Trustee and
President
|
|
Since 2014
|
|
Advisory Director, Goldman Sachs (January 2018 Present); Managing Director, Goldman Sachs (January 2000 December 2017);
Director of Institutional Fund Sales, GSAM (April 1998 December 2000); and Senior Vice President and Manager, Dreyfus Institutional Service Corporation (January 1993 April 1998).
President and TrusteeGoldman Sachs ETF Trust; Goldman Sachs Trust; Goldman Sachs
Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income
Fund.
|
B-40
|
|
|
|
|
|
|
Name
|
|
Position(s) Held
with the Trust(s)
|
|
Term of Office and
Length of Time
Served1
|
|
Principal Occupation(s)
During Past 5 Years
|
Joseph F. DiMaria
30 Hudson Street
Jersey City, NJ 07302
Age: 51
|
|
Treasurer, Principal Financial Officer and Principal Accounting Officer
|
|
Since 2017 (Treasurer and Principal Financial Officer since 2019)
|
|
Managing Director, Goldman Sachs (November 2015 Present) and Vice President Mutual Fund Administration, Columbia Management
Investment Advisers, LLC (May 2010 October 2015).
Treasurer, Principal
Financial Officer and Principal Accounting OfficerGoldman Sachs ETF Trust (previously Assistant Treasurer (2017)); Goldman Sachs Trust (previously Assistant Treasurer (2016)); Goldman Sachs Variable Insurance Trust (previously Assistant
Treasurer (2016)); Goldman Sachs Trust II (previously Assistant Treasurer (2017)); Goldman Sachs MLP Income Opportunities Fund (previously Assistant Treasurer (2017)); Goldman Sachs MLP and Energy Renaissance Fund (previously Assistant Treasurer
(2017)); Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund.
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|
|
|
|
Julien Yoo
200 West Street
New York, NY 10282
Age: 48
|
|
Chief Compliance Officer
|
|
Since 2014
|
|
Managing Director, Goldman Sachs (effective January 2020); Vice President, Goldman Sachs (December 2014December 2019); Contingent
Worker, Goldman Sachs (September 2013May 2014); and Vice President, Morgan Stanley Investment Management (20052010).
Chief Compliance OfficerGoldman Sachs ETF Trust; Goldman Sachs Trust; Goldman Sachs Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs BDC,
Inc.; Goldman Sachs Private Middle Market Credit LLC; Goldman Sachs Private Middle Market Credit II LLC; Goldman Sachs Middle Market Lending Corp.; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs MLP and Energy Renaissance Fund; Goldman
Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund.
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|
|
|
|
Peter W. Fortner
30 Hudson Street
Jersey City, NJ 07302
Age: 61
|
|
Assistant Treasurer
|
|
Since 2014
|
|
Vice President, Goldman Sachs (July 2000 Present); and Principal Accounting Officer, Commerce Bank Mutual Fund Complex (2008
Present).
Assistant TreasurerGoldman Sachs ETF Trust; Goldman Sachs
Trust; Goldman Sachs Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income
Fund.
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|
|
|
|
Allison Fracchiolla
30 Hudson Street
Jersey City, NJ 07302
Age: 36
|
|
Assistant Treasurer
|
|
Since 2014
|
|
Vice President, Goldman Sachs (January 2013 Present).
Assistant TreasurerGoldman Sachs ETF Trust; Goldman Sachs Trust; Goldman Sachs Variable Insurance Trust; and Goldman Sachs Trust
II.
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B-41
|
|
|
|
|
|
|
Name
|
|
Position(s) Held
with the Trust(s)
|
|
Term of Office and
Length of Time
Served1
|
|
Principal Occupation(s)
During Past 5 Years
|
Tyler Hanks
222 S. Main St
Salt Lake City, UT 84101
Age: 37
|
|
Assistant Treasurer
|
|
Since 2019
|
|
Vice President, Goldman Sachs (January 2016 Present); and Associate, Goldman Sachs (January 2014 January 2016).
Assistant TreasurerGoldman Sachs ETF Trust; Goldman Sachs Trust; Goldman Sachs
Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund.
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|
|
|
|
Kirsten Frivold Imohiosen
200 West Street
New York, NY 10282
Age: 49
|
|
Assistant
Treasurer
|
|
Since 2019
|
|
Managing Director, Goldman Sachs (January 2018
Present); and Vice President, Goldman Sachs (May 1999 December 2017).
Assistant TreasurerGoldman Sachs ETF Trust; Goldman Sachs Trust; Goldman Sachs Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs MLP Income
Opportunities Fund; Goldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs BDC, Inc.; Goldman Sachs Private Middle Market Credit LLC; Goldman Sachs Private Middle Market Credit II LLC; Goldman Sachs Middle Market Lending Corp.; Goldman Sachs
Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund.
|
|
|
|
|
Steven Z. Indich
30 Hudson Street
Jersey City, NJ 07302
Age: 50
|
|
Assistant
Treasurer
|
|
Since 2019
|
|
Vice President, Goldman Sachs (February 2010 Present).
Assistant TreasurerGoldman Sachs ETF Trust; Goldman Sachs Trust; Goldman Sachs Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs MLP Income
Opportunities Fund; Goldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs BDC, Inc.; Goldman Sachs Private Middle Market Credit LLC; Goldman Sachs Private Middle Market Credit II LLC; Goldman Sachs Middle Market Lending Corp.; Goldman Sachs
Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund.
|
|
|
|
|
Carol Liu
30 Hudson Street
Jersey City, NJ 07302
Age: 44
|
|
Assistant
Treasurer
|
|
Since 2019
|
|
Vice President, Goldman Sachs (October 2017 Present); Tax Director, The Raine Group LLC (August 2015 October 2017); and Tax
Director, Icon Investments LLC (January 2012 August 2015).
Assistant
Treasurer Goldman Sachs ETF Trust; Goldman Sachs Trust; Goldman Sachs Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs BDC, Inc.;
Goldman Sachs Private Middle Market Credit LLC; Goldman Sachs Private Middle Market Credit II LLC; Goldman Sachs Middle Market Lending Corp.; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income
Fund.
|
B-42
|
|
|
|
|
|
|
Name
|
|
Position(s) Held
with the Trust(s)
|
|
Term of Office and
Length of Time
Served1
|
|
Principal Occupation(s)
During Past 5 Years
|
Michael Crinieri
200 West Street
New York, NY 10282
Age: 54
|
|
Vice President
|
|
Since 2014
|
|
Managing Director, Goldman Sachs (January 2002 Present); and Vice President, Goldman Sachs (April 2000 January 2002).
Vice PresidentGoldman Sachs ETF Trust.
|
|
|
|
|
Levee Brooks
200 West Street
New York, NY 10282
Age: 38
|
|
Vice President
|
|
Since 2019
|
|
Managing Director, Goldman Sachs (2017 Present); Vice President, Goldman Sachs (2009 2017); Associate, Goldman Sachs (2006
2009); Analyst, Goldman Sachs (2005 2006); and Chairman of the Board of Directors, Moogi, Inc. (2008 2013).
Vice PresidentGoldman Sachs ETF Trust; Goldman Sachs Trust; Goldman Sachs Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs MLP Income
Opportunities Fund; Goldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund.
|
|
|
|
|
Patrick Hyland
200 West Street
New York, NY 10282
Age: 45
|
|
Vice President
|
|
Since 2019
|
|
Vice President, Goldman Sachs (2010 Present).
Vice PresidentGoldman Sachs ETF Trust; Goldman Sachs Trust; Goldman Sachs Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs MLP Income
Opportunities Fund; Goldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund.
|
|
|
|
|
Michael Twohig
200 West Street
New York, NY 10282
Age: 54
|
|
Vice President
|
|
Since 2019
|
|
Vice President, Goldman Sachs (2014 Present).
Vice PresidentGoldman Sachs ETF Trust; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Credit
Income Fund; and Goldman Sachs Real Estate Diversified Income Fund.
|
|
|
|
|
Caroline L. Kraus
200 West Street
New York, NY 10282
Age: 42
|
|
Secretary
|
|
Since 2014
|
|
Managing Director, Goldman Sachs (January 2016 Present); Vice President, Goldman Sachs (August 2006 December 2015); Associate
General Counsel, Goldman Sachs (2012 Present); Assistant General Counsel, Goldman Sachs (August 2006 December 2011); and Associate, Weil, Gotshal & Manges, LLP (2002 2006).
SecretaryGoldman Sachs ETF Trust; Goldman Sachs Trust (previously Assistant
Secretary (2012)); Goldman Sachs Variable Insurance Trust (previously Assistant Secretary (2012)); Goldman Sachs Trust II; Goldman Sachs BDC, Inc.; Goldman Sachs Private Middle Market Credit LLC; Goldman Sachs Private Middle Market Credit II LLC;
Goldman Sachs Middle Market Lending Corp.; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income
Fund.
|
B-43
|
|
|
|
|
|
|
Name
|
|
Position(s) Held
with the Trust(s)
|
|
Term of Office and
Length of Time
Served1
|
|
Principal Occupation(s)
During Past 5 Years
|
Robert Griffith
200 West Street
New York, NY 10282
Age: 45
|
|
Assistant Secretary
|
|
Since 2018
|
|
Vice President, Goldman Sachs (August 2011 Present); Associate General Counsel, Goldman Sachs (December 2014 Present);
Assistant General Counsel, Goldman Sachs (August 2011 December 2014); Vice President and Counsel, Nomura Holding America, Inc. (2010 2011); and Associate, Simpson Thacher & Bartlett LLP (2005 2010).
Assistant SecretaryGoldman Sachs ETF Trust; Goldman Sachs Trust; Goldman Sachs
Variable Insurance Trust; Goldman Sachs Trust II; Goldman Sachs MLP Income Opportunities Fund; Goldman Sachs MLP and Energy Renaissance Fund; Goldman Sachs Credit Income Fund; and Goldman Sachs Real Estate Diversified Income Fund.
|
1
|
Officers hold office at the pleasure of the Board of Trustees or until their successors are duly elected and
qualified. Each officer holds comparable positions with certain other companies of which Goldman Sachs, GSAM or an affiliate thereof is the investment adviser, administrator and/or distributor.
|
Standing Board Committees
The Audit
Committee oversees the audit process and provides assistance to the Board with respect to fund accounting, tax compliance and financial statement matters. In performing its responsibilities, the Audit Committee selects and recommends annually to the
Board an independent registered public accounting firm to audit the books and records of the Trust for the ensuing year, and reviews with the firm the scope and results of each audit. All of the Independent Trustees serve on the Audit Committee, and
Ms. Dorsa serves as the Chair of the Audit Committee. The Audit Committee met five times during the fiscal year ended August 31, 2019.
The Governance and Nominating Committee has been established to: (i) assist the Board in matters involving fund governance, which
includes making recommendations to the Board with respect to the effectiveness of the Board in carrying out its responsibilities in governing the Fund and overseeing its management; (ii) select and nominate candidates for appointment or
election to serve as Independent Trustees; and (iii) advise the Board on ways to improve its effectiveness. All of the Independent Trustees serve on the Governance and Nominating Committee. As stated above, each Trustee holds office for an
indefinite term until the occurrence of certain events. In filling Board vacancies, the Governance and Nominating Committee will consider nominees recommended by shareholders. Nominee recommendations should be submitted to the Trust at its mailing
address stated in the Funds Prospectus and should be directed to the attention of the Goldman Sachs Trust Governance and Nominating Committee. The Governance and Nominating Committee met three times during the fiscal year ended August 31,
2019.
The Compliance Committee has been established for the purpose of overseeing the compliance processes: (i) of the Fund; and
(ii) insofar as they relate to services provided to the Fund, of the Funds Investment Adviser, Distributor, administrator (if any), and Transfer Agent, except that compliance processes relating to the accounting and financial reporting
processes, and certain related matters, are overseen by the Audit Committee. In addition, the Compliance Committee provides assistance to the full Board with respect to compliance matters. All of the Independent Trustees serve on the Compliance
Committee. The Compliance Committee met four times during the fiscal year ended August 31, 2019.
The Valuation Committee is
authorized to act for the Board in connection with the valuation of portfolio securities held by the Fund in accordance with the Trusts Valuation Procedures. Messrs. McNamara and DiMaria serve on the Valuation Committee. The Valuation
Committee was established by the Board on September 21, 2018. The Valuation Committee met twelve times during the fiscal year ended August 31, 2019.
The Contract Review Committee has been established for the purpose of overseeing the processes of the Board for reviewing and monitoring
performance under the Funds investment management, distribution, transfer agency, and certain other agreements with the Funds Investment Adviser and its affiliates. The Contract Review Committee is also responsible for overseeing the
Boards processes for considering and reviewing performance under the operation of the Funds distribution, service, shareholder administration and other plans, and any agreements related to the plans. The Contract Review Committee also
provides appropriate assistance to the Board in connection with the Boards approval, oversight and review of the Funds other service providers including, without limitation, the Funds custodian/accounting agent, sub-transfer
agents, professional (legal and accounting) firms and printing firms. All of the Independent Trustees serve on the Contract Review Committee. The Contract Review Committee met once during the fiscal year ended August 31, 2019.
B-44
Risk Oversight
The Board is responsible for the oversight of the activities of the Fund, including oversight of risk management. Day-to-day risk management
with respect to the Fund is the responsibility of GSAM or other service providers (depending on the nature of the risk), subject to supervision by GSAM. The risks of the Fund include, but are not limited to, liquidity risk, investment risk,
compliance risk, operational risk, reputational risk, credit risk and counterparty risk. Each of GSAM and the other service providers have their own independent interest in risk management and their policies and methods of risk management may differ
from the Fund and each others in the setting of priorities, the resources available or the effectiveness of relevant controls. As a result, the Board recognizes that it is not possible to identify all of the risks that may affect the Fund or
to develop processes and controls to eliminate or mitigate their occurrence or effects, and that some risks are simply beyond the control of the Fund or GSAM, their respective affiliates or other service providers.
The Board effectuates its oversight role primarily through regular and special meetings of the Board and Board committees. In certain cases,
risk management issues are specifically addressed in reports, presentations and discussions. For example, on an annual basis, GSAM will provide the Board with a written report that addresses the operation, adequacy and effectiveness of the
Trusts liquidity risk management program, which is designed to assess and manage the Funds liquidity risk. In addition, investment risk is discussed in the context of regular presentations to the Board on Fund strategy. Other types of
risk are addressed as part of presentations on related topics (e.g. compliance policies) or in the context of presentations focused specifically on one or more risks. The Board also receives reports from GSAM management on operational risks,
reputational risks and counterparty risks relating to the Fund.
Board oversight of risk management is also performed by various Board
committees. For example, the Audit Committee meets with both the Funds independent registered public accounting firm and GSAMs internal audit group to review risk controls in place that support the Fund as well as test results, and the
Compliance Committee meets with the CCO and representatives of GSAMs compliance group to review testing results of the Funds compliance policies and procedures and other compliance issues. Board oversight of risk is also performed as
needed between meetings through communications between the GSAM and the Board. The Board may, at any time and in its discretion, change the manner in which it conducts risk oversight. The Boards oversight role does not make the Board a
guarantor of the Funds investments or activities.
Trustee Ownership of Fund Shares
The following table shows the dollar range of shares beneficially owned by each Trustee in the Fund and other portfolios of the Goldman Sachs
Fund Complex as of December 31, 2018.
|
|
|
|
|
Name of Trustee
|
|
Dollar Range of
Equity Securities in the Fund1
|
|
Aggregate Dollar Range of
Equity Securities in All
Portfolios in Fund Complex
Overseen By
Trustee
|
Lawrence W. Stranghoener
|
|
None
|
|
Over $100,000
|
Caroline Dorsa
|
|
Over $100,000
|
|
Over $100,000
|
Linda A. Lang
|
|
None
|
|
Over $100,000
|
Michael Latham
|
|
None
|
|
Over $100,000
|
James A. McNamara
|
|
None
|
|
Over $100,000
|
1
|
Includes the value of shares beneficially owned by each Trustee in the Fund.
|
As of December 1, 2019, the Trustees and Officers as a group owned less than 1% of the outstanding shares of beneficial interest of the
Fund.
Board Compensation
Each
Independent Trustee is compensated with a unitary annual fee for his or her services as a Trustee of the Trust and as a member of the Governance and Nominating Committee, Compliance Committee, Contract Review Committee, and Audit Committee. The
Chairman and audit committee financial expert receive additional compensation for their services. The Independent Trustees are also reimbursed for reasonable travel expenses incurred in connection with attending such meetings. The Trust
may also pay the reasonable incidental costs of a Trustee to attend training or other types of conferences relating to the investment company industry.
B-45
The following table sets forth certain information with respect to the compensation of each
Trustee of the Trust for the fiscal year ended August 31, 2019:
Trustee Compensation
|
|
|
|
|
|
|
Name of Trustee
|
|
Goldman Sachs Hedge
Industry VIP ETF
|
|
Lawrence W.
Stranghoener(1)
|
|
$
|
2,179.10
|
|
Caroline Dorsa(2)
|
|
$
|
2,058.04
|
|
Linda A. Lang
|
|
$
|
1,936.98
|
|
Michael Latham
|
|
$
|
1,936.98
|
|
James A. McNamara(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Trustee
|
|
Pension or
Retirement
Benefits Accrued as
Part
Of the Trusts
Expenses
|
|
|
Total Compensation
From the Fund Complex
(including the Fund)(4)
|
|
Lawrence W. Stranghoener(1)
|
|
$
|
0
|
|
|
$
|
231,964
|
|
Caroline Dorsa(2)
|
|
$
|
0
|
|
|
$
|
190,408
|
|
Linda A. Lang
|
|
$
|
0
|
|
|
$
|
199,642
|
|
Michael Latham
|
|
$
|
0
|
|
|
$
|
201,736
|
|
James A. McNamara(3)
|
|
|
|
|
|
|
|
|
1
|
Includes compensation as Board Chair.
|
2
|
Includes compensation as audit committee financial expert, as defined in Item 3 of Form N-CSR.
|
3
|
Mr. McNamara is an Interested Trustee, and as such, receives no compensation from the Fund or the Goldman
Sachs Fund Complex.
|
4
|
Represents fees paid to each Trustee during the fiscal year ended August 31, 2019 from the Goldman Sachs
Fund Complex.
|
Miscellaneous
The Trust, its Investment Adviser and the Distributor have adopted codes of ethics under Rule 17j-1 of the Act that permit personnel subject to
their particular codes of ethics to invest in securities, including securities that may be purchased or held by the Fund.
B-46
MANAGEMENT SERVICES
As stated in the Funds Prospectus, GSAM, 200 West Street, New York, New York 10282, serves as Investment Adviser to the Fund. GSAM
is an indirect, wholly-owned subsidiary of The Goldman Sachs Group, Inc. and an affiliate of Goldman Sachs. See Service Providers in the Funds Prospectus for a description of the Investment Advisers duties to the Fund.
Founded in 1869, The Goldman Sachs Group, Inc. is a publicly-held financial holding company and a leading global investment banking,
securities and investment management firm. Goldman Sachs is a leader in developing portfolio strategies and in many fields of investing and financing, participating in financial markets worldwide and serving individuals, institutions, corporations
and governments. Goldman Sachs is also among the principal market sources for current and thorough information on companies, industrial sectors, markets, economies and currencies, and trades and makes markets in a wide range of equity and debt
securities 24 hours a day. The firm is headquartered in New York with offices in countries throughout the world. It has trading professionals throughout the United States, as well as in London, Frankfurt, Tokyo, Seoul, Sao Paulo and other major
financial centers around the world. The active participation of Goldman Sachs in the worlds financial markets enhances its ability to identify attractive investments. Goldman Sachs has agreed to permit the Fund to use the name
Goldman Sachs or a derivative thereof as part of the Funds name for as long as the Funds management agreement (the Management Agreement) is in effect.
The Management Agreement provides that GSAM, in its capacity as Investment Adviser, may render similar services to others so long as the
services under the Management Agreement are not impaired thereby. The Funds Management Agreement was most recently approved by the Trustees of the Trust, including a majority of the Trustees of the Trust who are not parties to such agreement
or interested persons (as such term is defined in the Act) of any party thereto (the non-interested Trustees), on September 17-18, 2019. A discussion regarding the Board of Trustees basis for approving the Management
Agreement with respect to the Fund is available in the Funds semi-annual report for the period ended February 28, 2019. A discussion regarding the Board of Trustees basis for approving a Management Agreement with respect to each Fund in
September 2019 will be available in the Funds semi-annual report for the period ended February 29, 2020.
The Management Agreement
will remain in effect for an initial two-year period and will continue in effect with respect to the Fund from year to year thereafter provided such continuance is specifically approved at least annually by (i) the vote of a majority of the
Funds outstanding voting securities or a majority of the Trustees of the Trust, and (ii) the vote of a majority of the non-interested Trustees of the Trust, cast in person at a meeting called for the purpose of voting on such approval.
The Management Agreement will terminate automatically if assigned (as defined in the Act). The Management Agreement is also terminable at
any time without penalty by the Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Fund on 60 days written notice to the Investment Adviser or by the Investment Adviser on 60 days written notice to
the Trust.
Pursuant to the Management Agreement, the Investment Adviser is entitled to receive the fee set forth below, payable monthly
based on the Funds average daily net assets. Under the Management Agreement, the Investment Adviser is responsible for substantially all the expenses of the Fund, excluding payments under the Funds 12b-1 plan (if any), interest,
expenses, taxes, acquired fund fees and expenses, brokerage fees, costs of holding shareholder meetings and litigation, indemnification and extraordinary expenses.
|
|
|
|
|
Fund
|
|
Contractual Rate
|
|
Goldman Sachs Hedge Industry VIP ETF
|
|
|
0.45
|
%
|
For the fiscal years ended August 31, 2017, August 31, 2018 and August 31, 2019, the
amounts of the fees incurred by the Fund under the Management Agreement were as follows (with and without the fee limitations that were then in effect):
|
|
|
|
|
|
|
|
|
Fund
|
|
2019
With Fee Limitations
|
|
|
Without Fee Limitations
|
|
Goldman Sachs Hedge Industry VIP ETF
|
|
$
|
396,468
|
|
|
$
|
396,468
|
|
|
|
|
Fund
|
|
2018
With Fee Limitations
|
|
|
Without Fee Limitations
|
|
Goldman Sachs Hedge Industry VIP ETF
|
|
$
|
350,385
|
|
|
$
|
350,385
|
|
|
|
|
Fund
|
|
2017
With Fee Limitations
|
|
|
Without Fee Limitations
|
|
Goldman Sachs Hedge Industry VIP ETF
|
|
$
|
83,836
|
|
|
$
|
83,836
|
|
B-47
The imposition of the Investment Advisers fees will have the effect of reducing the
total return to investors. From time to time, the Investment Adviser may waive receipt of its fees, which would have the effect of lowering the Funds overall expense ratio and increasing total return to investors at the time such amounts are
waived.
In addition to providing advisory services, under its Management Agreement, the Investment Adviser also, to the extent such
services are not required to be performed by others pursuant to the fund administration and accounting agreement, the custodian agreement, the transfer agency agreement, distribution agreement or such other agreements with service providers to the
Fund that the Board has approved: (i) supervises all non-advisory operations of the Fund that it advises; (ii) provides personnel to perform such executive, administrative and clerical services as are reasonably necessary to provide
effective administration of the Fund; (iii) arranges for: (a) the preparation of all required tax returns, (b) the preparation and submission of reports to existing shareholders, (c) the periodic updating of prospectuses and
statements of additional information and (d) the preparation of reports to be filed with the SEC and other regulatory authorities; (iv) maintains the Funds records; and (v) provides office space and all necessary office
equipment and services.
B-48
Portfolio Managers Other Accounts Managed by the Portfolio Managers
The following table discloses accounts within each type of category listed below for which the portfolio managers are jointly and primarily responsible for day
to day portfolio management as of August 31, 2019, unless otherwise indicated.
For each portfolio manager listed below, the total number of accounts
managed is a reflection of accounts within the strategy they oversee or manage. There are multiple portfolio managers involved with each account.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Other Accounts Managed and Total Assets by Account
Type
|
|
|
Number of Accounts and Total Assets for Which Advisory Fee is Performance Based
|
|
Name of
Portfolio
Manager
|
|
Registered
Investment
Companies
|
|
|
Other Pooled
Investment Vehicles
|
|
|
Other
Accounts
|
|
|
Registered
Investment
Companies
|
|
|
Other Pooled
Investment Vehicles
|
|
|
Other
Accounts
|
|
|
|
Number
of
Accounts
|
|
|
Assets
Managed
|
|
|
Number
of
Accounts
|
|
|
Assets
Managed
|
|
|
Number
of
Accounts
|
|
|
Assets
Managed
|
|
|
Number
of
Accounts
|
|
|
Assets
Managed
|
|
|
Number
of
Accounts
|
|
|
Assets
Managed
|
|
|
Number
of
Accounts
|
|
|
Assets
Managed
|
|
Portfolio Management Team
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Raj Garigipati
|
|
|
14
|
|
|
$
|
10,410
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
Jamie McGregor
|
|
|
14
|
|
|
$
|
10,410
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
|
0
|
|
|
$
|
0
|
|
|
1.
|
Asset information is in USD millions unless otherwise specified.
|
|
2.
|
Other Pooled Investment Vehicles includes private investment funds and SICAVs (a type of open-end
investment company organized outside the U.S.).
|
|
3.
|
Other Accounts includes a separately managed account platform, advisory mutual fund platform,
advisory relationships and others. For purposes of the above, a platform is included as a single account.
|
B-49
Conflicts of Interest. The Investment Advisers portfolio managers are often
responsible for managing the Fund as well as other registered funds, accounts, including proprietary accounts, separate accounts and other pooled investment vehicles, such as unregistered private funds. A portfolio manager may manage a separate
account or other pooled investment vehicle which may have materially higher fee arrangements than the Fund and may also have a performance-based fee. The side-by-side management of these funds may raise potential conflicts of interest relating to
cross trading, the allocation of investment opportunities and the aggregation and allocation of trades.
The Investment Adviser has a
fiduciary responsibility to manage all client accounts in a fair and equitable manner. To this end, the Investment Adviser has developed policies and procedures designed to mitigate and manage the potential conflicts of interest that may arise from
side-by-side management. In addition, the Investment Adviser and the Fund have adopted policies limiting the circumstances under which cross-trades may be effected between the Fund and another client account. The Investment Adviser conducts periodic
reviews of trades for consistency with these policies. For more information about conflicts of interests that may arise in connection with the portfolio managers management of the Funds investments and the investments of other accounts,
see POTENTIAL CONFLICTS OF INTEREST.
Portfolio Managers Compensation
Compensation for portfolio managers of the Investment Adviser is comprised of a base salary and year-end discretionary variable
compensation. The base salary is fixed from year to year. Year-end discretionary variable compensation is primarily a function of each portfolio managers individual performance and his or her contribution to overall team performance; the
performance of the Investment Adviser and Goldman Sachs; the teams net revenues for the past year which is primarily derived from advisory fees; and anticipated compensation levels among competitor firms.
The discretionary variable compensation for portfolio managers is also significantly influenced by various factors, including:
(1) effective participation in team discussions and process; and (2) management of risk in alignment with the targeted risk parameter and investment objective of the Fund. Other factors may also be considered including: (1) general
client/shareholder orientation and (2) teamwork and leadership. Portfolio managers may receive equity-based awards as part of their discretionary variable compensation.
Other CompensationIn addition to base salary and year-end discretionary variable compensation, the Investment Adviser has a number of
additional benefits in place including (1) a 401(k) program that enables employees to direct a percentage of their base salary and bonus income into a tax-qualified retirement plan; and (2) investment opportunity programs in which certain
professionals may participate subject to certain eligibility requirements.
Portfolio Managers Portfolio Managers Ownership of
Securities in the Fund
The following table shows the portfolio managers ownership of shares of the Fund they manage as of August 31, 2019.
|
|
|
Name of Portfolio Manager
|
|
Dollar Range of Equity Securities Beneficially
Owned by Portfolio Manager
|
Raj Garigipati
|
|
None
|
Jamie McGregor
|
|
$10,001$50,000
|
Distributor and Transfer Agent
Distributor: ALPS Distributors, Inc., 1290 Broadway, Suite 1000, Denver, Colorado 80203, serves as the exclusive distributor of Creation
Units of shares of the Fund pursuant to a best efforts arrangement as provided by a distribution agreement with the Trust on behalf of the Fund. Shares of the Fund are offered and sold on a continuous basis by ALPS, acting as agent. The
Distributor does not maintain a secondary market in the Funds Shares.
Transfer Agent: The Bank of New York Mellon, 240
Greenwich Street, New York, New York 10286, serves as the Trusts transfer and dividend disbursing agent. Under its transfer agency agreement with the Trust, BNYM has undertaken with the Trust to provide the following services with respect to
the Fund: (i) perform and facilitate the performance of purchases and redemptions of Creation Units, (ii) prepare and transmit by means of Depository Trust Companys (DTC) book-entry system payments for dividends and
distributions on or with respect to the Shares declared by the Trust on behalf of the Fund, (iii) prepare and deliver reports, information and documents as specified in the transfer agency agreement, (iv) perform the customary services of
a transfer agent and dividend disbursing agent, and (v) render certain other miscellaneous services as specified in the transfer agency agreement or as otherwise agreed upon.
B-50
The Trusts distribution and transfer agency agreements each provide that BNYM may
render similar services to others so long as the services BNYM provides thereunder are not impaired thereby. Such agreements also provide that the Trust will indemnify BNYM against certain liabilities.
Expenses
The Board of Trustees of the
Trust has approved a unitary management fee structure for the Fund. Under the unitary fee structure, the Investment Adviser is responsible for paying substantially all the expenses of the Fund, excluding payments under the Funds 12b-1 plan (if
any), interest expenses, taxes, acquired fund fees and expenses, brokerage fees, costs of holding shareholder meetings and litigation, indemnification and extraordinary expenses.
The imposition of the Investment Advisers fees, as well as any other operating expenses not borne by the Investment Adviser as described
above, will have the effect of reducing the total return to investors. From time to time, the Investment Adviser may waive receipt of its fees, which would have the effect of lowering the Funds overall expense ratio and increasing total return
to investors at the time such amounts are waived or assumed, as the case may be.
Custodian, Sub-Custodians and Provider of Administrative Services
BNYM is the custodian of the Trusts portfolio securities and cash. The custodian of the Trust may change from time to time. BNYM
also maintains the Trusts accounting records. BNYM may appoint domestic and foreign sub-custodians and use depositories from time to time to hold securities and other instruments purchased by the Trust in foreign countries and to hold cash and
currencies for the Trust.
BNYM provides administrative services pursuant to a fund administration agreement with the Trust (the
Fund Administration and Accounting Agreement) pursuant to which BNYM provides certain services, including, among others, (i) preparation of certain shareholder reports and communications; (ii) preparation of certain reports and
filings with the Securities and Exchange Commission; (iii) certain net asset value computation services; and (iv) such other services for the Trust as may be mutually agreed upon between the Trust and BNYM. For its services under the Fund
Administration and Accounting Agreement, BNYM receives such fees based on a stated percentage of net assets as are agreed upon from time to time between the parties. In addition, BNYM is reimbursed by the Fund for reasonable out-of-pocket expenses
incurred in connection with the Fund Administration and Accounting Agreement. In addition, an affiliate of BNYM will also provide certain other services for the Trust, including, (i) providing foreign exchange transaction services and
(ii) executing trades in connection with certain creation and redemption transactions effected partially in cash. For these services, the BNYM affiliate will receive compensation based on levels that are negotiated with the Trust and/or the
Investment Adviser. BNYM also provides certain middle office services to GSAM pursuant to a service agreement.
Independent Registered Public
Accounting Firm
PricewaterhouseCoopers LLP, 101 Seaport Boulevard, Suite 500, Boston, MA 02210, is the Funds independent
registered public accounting firm. The Funds independent registered public accounting firm may change from time to time. In addition to audit services, PricewaterhouseCoopers LLP provides assistance on certain non-audit matters.
Securities Lending
Pursuant to an
agreement between the Fund and BNYM, the Fund may lend its securities through BNYM as securities lending agent to certain qualified borrowers, including Goldman Sachs and its affiliates (the Securities Agency Lending Agreement). As
securities lending agent of the Fund, BNYM administers the Funds securities lending program. These services include arranging the securities loans with approved borrowers and collecting fees and rebates due to the Fund from each borrower. BNYM
also collects and maintains collateral intended to secure the obligations of each borrower and marks to market daily the value of loaned securities. If a borrower defaults on a loan, BNYM is authorized to exercise contractual remedies as securities
lending agent to the Fund and, pursuant to the terms of the Securities Lending Agency Agreement, has agreed to indemnify the Fund for losses due to a borrowers failure to return a lent security, which exclude losses associated with collateral
reinvestment. BNYM may also, in its capacity as securities lending agent, invest cash received as collateral in pre-approved investments in accordance with the Securities Lending Agency Agreement. BNYM maintains records of loans made and income
derived therefrom and makes available such records that the Fund deems necessary to monitor the securities lending program.
B-51
For the fiscal year ended August 31, 2019, the Fund earned income and incurred the
following costs and expenses as a result of its securities lending activities:
|
|
|
|
|
|
|
Hedge
Industry
VIP ETF
|
|
Gross Income from Securities Lending
Activities1
|
|
$
|
367,323
|
|
Fees and/or Compensation for Securities Lending Activities and Related
Services
|
|
|
|
|
Revenue Split2
|
|
$
|
35,773
|
|
Cash Collateral Management
Fees3
|
|
$
|
1,150
|
|
Administrative Fees
|
|
|
|
|
Indemnification Fees
|
|
|
|
|
Rebates to Borrowers
|
|
$
|
8,438
|
|
Other Fees
|
|
|
|
|
Aggregate Fees/Compensation for Securities Lending Activities
|
|
$
|
45,361
|
|
Net Income from the Securities Lending Activities
|
|
$
|
321,962
|
|
Amounts shown above may differ from amounts disclosed in the Funds Annual Report as a result of timing differences,
reconciliations, and certain other adjustments.
1
|
Gross income includes income from the reinvestment of cash collateral, premium income (i.e., rebates paid by
borrowers to the Fund), loan fees paid by borrowers when collateral is noncash, management fees from a pooled cash collateral reinvestment vehicle that are deducted from the vehicles assets before income is distributed, and any other income.
|
2
|
Revenue split represents the share of revenue generated by the securities lending program and paid to BNYM, the
lending agent.
|
3
|
Cash collateral management fees include the contractual management fees deducted from a pooled cash collateral
reinvestment vehicle that are not included in the revenue split. The contractual management fees are derived from the pooled cash collateral reinvestment vehicles most recently available prospectus or offering memorandum. Actual fees incurred
from a pooled cash collateral reinvestment vehicle may differ due to other expenses, fee waivers and expense reimbursements.
|
B-52
POTENTIAL CONFLICTS OF INTEREST
General Categories of Conflicts Associated with the Funds
Goldman Sachs (which, for purposes of this POTENTIAL CONFLICTS OF INTEREST section, shall mean, collectively, The Goldman Sachs
Group, Inc., the Investment Adviser and their affiliates, directors, partners, trustees, managers, members, officers and employees) is a worldwide, full-service investment banking, broker-dealer, asset management and financial services organization
and a major participant in global financial markets. As such, it provides a wide range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments and high net-worth individuals.
Goldman Sachs acts as an investment banker, research provider, investment adviser, financier, adviser, market maker, prime broker, derivatives dealer, lender, counterparty, agent, principal and investor. In those and other capacities, Goldman Sachs
advises clients in all markets and transactions and purchases, sells, holds and recommends a broad array of investments, including securities, derivatives, loans, commodities, currencies, credit default swaps, indices, baskets and other financial
instruments and products, for its own account and for the accounts of clients and of its personnel, through client accounts and the relationships and products it sponsors, manages and advises. Goldman Sachs has direct and indirect interests in the
global fixed income, currency, commodity, equities, bank loan and other markets, and the securities and issuers, in which the Funds may directly and indirectly invest. As a result, Goldman Sachs activities and dealings may affect the Funds in
ways that may disadvantage or restrict the Funds and/or benefit Goldman Sachs or other Accounts. For purposes of this POTENTIAL CONFLICTS OF INTEREST section, Funds shall mean, collectively, the Fund and any of the other
Goldman Sachs Funds, and Accounts shall mean Goldman Sachs own accounts, accounts in which personnel of Goldman Sachs have an interest, accounts of Goldman Sachs clients, including separately managed accounts (or separate
accounts), and investment vehicles that Goldman Sachs sponsors, manages or advises, including the Fund.
The following are descriptions of
certain conflicts of interest and potential conflicts of interest that may be associated with the financial or other interests that the Investment Adviser and Goldman Sachs may have in transactions effected by, with, or on behalf of the Funds. In
addition, the Investment Advisers activities on behalf of certain other entities that are not investment advisory clients of the Investment Adviser may create conflicts of interest between such entities, on the one hand, and Accounts
(including the Funds), on the other hand, that are the same as or similar to the conflicts that arise between the Funds and other Accounts, as described herein. The conflicts herein do not purport to be a complete list or explanation of the
conflicts associated with the financial or other interests the Investment Adviser or Goldman Sachs may have now or in the future. Additional information about potential conflicts of interest regarding the Investment Adviser and Goldman Sachs is set
forth in the Investment Advisers Form ADV. A copy of Part 1 and Part 2A of the Investment Advisers Form ADV is available on the SECs website (www.adviserinfo.sec.gov).
The Sale of Fund Shares and the Allocation of Investment Opportunities
Sales Incentives and Related Conflicts Arising from Goldman Sachs Financial and Other Relationships with Intermediaries
Goldman Sachs and its personnel, including employees of the Investment Adviser, may receive benefits and earn fees and compensation for
services provided to Accounts (including the Funds) and in connection with the distribution of the Funds. Any such fees and compensation may be paid directly or indirectly out of the fees payable to the Investment Adviser in connection with the
management of such Accounts (including the Funds). Moreover, Goldman Sachs and its personnel, including employees of the Investment Adviser, may have relationships (both involving and not involving the Funds, and including without limitation
placement, brokerage, advisory and board relationships) with distributors, consultants and others who recommend, or engage in transactions with or for, the Funds. Such distributors, consultants and other parties may receive compensation from Goldman
Sachs or the Funds in connection with such relationships. As a result of these relationships, distributors, consultants and other parties may have conflicts that create incentives for them to promote the Funds.
To the extent permitted by applicable law, Goldman Sachs and the Funds may make payments to authorized dealers and other financial
intermediaries and to salespersons to promote the Funds. These payments may be made out of Goldman Sachs assets or amounts payable to Goldman Sachs. These payments may create an incentive for such persons to highlight, feature or recommend the
Funds.
Allocation of Investment Opportunities Among the Funds and Other Accounts
The Investment Adviser may manage or advise multiple Accounts (including Accounts in which Goldman Sachs and its personnel have an interest)
that have investment objectives that are the same or similar to the Funds and that may seek to make or sell investments in the same securities or other instruments, sectors or strategies as the Funds. This creates potential
B-53
conflicts, particularly in circumstances where the availability or liquidity of such investment opportunities is limited (e.g., in local and emerging markets, high yield securities, fixed income
securities, regulated industries, small capitalization, direct or indirect investments in private investment funds, investments in master limited partnerships in the oil and gas industry and initial public offerings/new issues).
The Investment Adviser does not receive performance-based compensation in respect of its investment management activities on behalf of the
Funds, but may simultaneously manage Accounts for which the Investment Adviser receives greater fees or other compensation (including performance-based fees or allocations) than it receives in respect of the Funds. The simultaneous management of
Accounts that pay greater fees or other compensation and the Funds creates a conflict of interest as the Investment Adviser has an incentive to favor Accounts with the potential to receive greater fees when allocating resources, services, functions
or investment opportunities among Accounts. For instance, the Investment Adviser may be faced with a conflict of interest when allocating scarce investment opportunities given the possibly greater fees from Accounts that pay performance-based fees.
To address these types of conflicts, the Investment Adviser has adopted policies and procedures under which it will allocate investment opportunities in a manner that it believes is consistent with its obligations and fiduciary duties as an
investment adviser. However, the availability, amount, timing, structuring or terms of an investment by the Funds may differ from, and performance may be lower than, the investments and performance of other Accounts.
To address these potential conflicts, the Investment Adviser has developed allocation policies and procedures that provide that the Investment
Advisers personnel making portfolio decisions for Accounts will make investment decisions for, and allocate investment opportunities among, such Accounts consistent with the Investment Advisers fiduciary obligations. These policies and
procedures may result in the pro rata allocation (on a basis determined by the Investment Adviser) of limited opportunities across eligible Accounts managed by a particular portfolio management team, but in other cases such allocation may not be pro
rata.
Allocation-related decisions for the Funds and other Accounts may be made by reference to one or more factors. Factors may include:
the Accounts portfolio and its investment horizons, objectives, guidelines and restrictions (including legal and regulatory restrictions affecting certain Accounts or affecting holdings across Accounts); client instructions; strategic fit and
other portfolio management considerations, including different desired levels of exposure to certain strategies; the expected future capacity of the Funds and the applicable Accounts; limits on the Investment Advisers brokerage discretion;
cash and liquidity needs and other considerations; the availability of other appropriate or substantially similar investment opportunities; and differences in benchmark factors and hedging strategies among Accounts. Suitability considerations,
reputational matters and other considerations may also be considered.
In a case in which one or more Accounts are intended to be the
Investment Advisers primary investment vehicles focused on, or to receive priority with respect to, a particular trading strategy, other Accounts (including the Funds) may not have access to such strategy or may have more limited access than
would otherwise be the case. To the extent that such Accounts are managed by areas of Goldman Sachs other than the Investment Adviser, such Accounts will not be subject to the Investment Advisers allocation policies. Investments by such
Accounts may reduce or eliminate the availability of investment opportunities to, or otherwise adversely affect, the Fund. Furthermore, in cases in which one or more Accounts are intended to be the Investment Advisers primary investment
vehicles focused on, or receive priority with respect to, a particular trading strategy or type of investment, such Accounts may have specific policies or guidelines with respect to Accounts or other persons receiving the opportunity to invest
alongside such Accounts with respect to one or more investments (Co-Investment Opportunities). As a result, certain Accounts or other persons will receive allocations to, or rights to invest in, Co-Investment Opportunities that are not
available generally to the Funds.
In addition, in some cases the Investment Adviser may make investment recommendations to Accounts that
make investment decisions independently of the Investment Adviser. In circumstances in which there is limited availability of an investment opportunity, if such Accounts invest in the investment opportunity at the same time as, or prior to, a Fund,
the availability of the investment opportunity for the Fund will be reduced irrespective of the Investment Advisers policies regarding allocations of investments.
The Investment Adviser may, from time to time, develop and implement new trading strategies or seek to participate in new trading strategies
and investment opportunities. These strategies and opportunities may not be employed in all Accounts or employed pro rata among Accounts where they are used, even if the strategy or opportunity is consistent with the objectives of such Accounts.
Further, a trading strategy employed for a Fund that is similar to, or the same as, that of another Account may be implemented differently, sometimes to a material extent. For example, a Fund may invest in different securities or other assets, or
invest in the same securities and other assets but in different proportions, than another Account with the same or similar trading strategy. The implementation of the Funds trading strategy will depend on a variety of factors, including the
portfolio managers
B-54
involved in managing the trading strategy for the Account, the time difference associated with the location of different portfolio management teams, and the factors described above and in
Item 6 (PERFORMANCE-BASED FEES AND SIDE-BY-SIDE MANAGEMENTSide-by-Side Management of Advisory Accounts; Allocation of Opportunities) of the Investment Advisers Form ADV.
During periods of unusual market conditions, the Investment Adviser may deviate from its normal trade allocation practices. For example, this
may occur with respect to the management of unlevered and/or long-only Accounts that are typically managed on a side-by-side basis with levered and/or long-short Accounts.
The Investment Adviser and the Funds may receive notice of, or offers to participate in, investment opportunities from third parties for
various reasons. The Investment Adviser in its sole discretion will determine whether a Fund will participate in any such investment opportunities and investors should not expect that the Fund will participate in any such investment opportunities
unless the opportunities are received pursuant to contractual requirements, such as preemptive rights or rights offerings, under the terms of the Funds investments. Moreover, Goldman Sachs businesses outside of the Investment Adviser are under
no obligation or other duty to provide investment opportunities to the Funds, and generally are not expected to do so. Further, opportunities sourced within particular portfolio management teams within the Investment Adviser may not be allocated to
Accounts (including the Funds) managed by such teams or by other teams. Opportunities not allocated (or not fully allocated) to the Funds or other Accounts managed by the Investment Adviser may be undertaken by Goldman Sachs (including the
Investment Adviser), including for Goldman Sachs Accounts, or made available to other Accounts or third parties, and the Funds will not receive any compensation related to such opportunities. Additional information about the Investment
Advisers allocation policies is set forth in Item 6 (PERFORMANCE-BASED FEES AND SIDE-BY-SIDE MANAGEMENTSide-by-Side Management of Advisory Accounts; Allocation of Opportunities) of the Investment Advisers Form ADV.
As a result of the various considerations above, there will be cases in which certain Accounts (including Accounts in which Goldman Sachs
and personnel of Goldman Sachs have an interest) receive an allocation of an investment opportunity at times that the Funds do not, or when the Funds receive an allocation of such opportunities but on different terms than other Accounts (which may
be less favorable). The application of these considerations may cause differences in the performance of different Accounts that employ strategies the same or similar to those of the Funds.
Multiple Accounts (including the Funds) may participate in a particular investment or incur expenses applicable in connection with the
operation or management of the Accounts, or otherwise may be subject to costs or expenses that are allocable to more than one Account (which may include, without limitation, research expenses, technology expenses, expenses relating to participation
in bondholder groups, restructurings, class actions and other litigation, and insurance premiums). The Investment Adviser may allocate investment-related and other expenses on a pro rata or different basis.
Accounts will generally incur expenses with respect to the consideration and pursuit of transactions that are not ultimately consummated
(broken-deal expenses). Examples of broken-deal expenses include (i) research costs, (ii) fees and expenses of legal, financial, accounting, consulting or other advisers (including the Investment Adviser or its affiliates) in
connection with conducting due diligence or otherwise pursuing a particular non-consummated transaction, (iii) fees and expenses in connection with arranging financing for a particular non-consummated transaction, (iv) travel and
entertainment costs, (v) deposits or down payments that are forfeited in connection with, or amounts paid as a penalty for, a particular non-consummated transaction and (vi) other expenses incurred in connection with activities related to
a particular non-consummated transaction.
The Investment Adviser has adopted a policy relating to the allocation of broken-deal expenses
among Accounts (including the Funds) and other potential investors. Pursuant to the policy, broken-deal expenses generally will be allocated among Accounts in the manner that the Investment Adviser determines to be fair and equitable, which may be
pro rata or on a different basis.
Goldman Sachs Financial and Other Interests May Incentivize Goldman Sachs to Promote the Sale of Fund
Shares
Goldman Sachs and its personnel have interests in promoting sales of Fund shares, and the compensation from such sales may
be greater than the compensation relating to sales of interests in other Accounts. Therefore, Goldman Sachs and its personnel may have a financial interest in promoting Fund shares over interests in other Accounts.
B-55
Management of the Funds by the Investment Adviser
Considerations Relating to Information Held by Goldman Sachs
Goldman Sachs has established certain information barriers and other policies to address the sharing of information between different
businesses within Goldman Sachs. As a result of information barriers, the Investment Adviser generally will not have access, or will have limited access, to certain information and personnel in other areas of Goldman Sachs relating to business
transactions for clients (including transactions in investing, banking, prime brokerage and certain other areas), and generally will not manage the Funds with the benefit of information held by such other areas. Goldman Sachs, due to its access to
and knowledge of funds, markets and securities based on its prime brokerage and other businesses, may make decisions based on information or take (or refrain from taking) actions with respect to interests in investments of the kind held (directly or
indirectly) by the Funds in a manner that may be adverse to the Funds, and will not have any obligation or other duty to share information with the Investment Adviser.
In limited circumstances, however, including for purposes of managing business and reputational risk, and subject to policies and procedures,
personnel on one side of an information barrier may have access to information and personnel on the other side of the information barrier through wall crossings. The Investment Adviser faces conflicts of interest in determining whether
to engage in such wall crossings. Information obtained in connection with such wall crossings may limit or restrict the ability of the Investment Adviser to engage in or otherwise effect transactions on behalf of the Funds (including purchasing or
selling securities that the Investment Adviser may otherwise have purchased or sold for an Account in the absence of a wall crossing). In managing conflicts of interest that may arise as a result of the foregoing, the Investment Adviser generally
will be subject to fiduciary requirements.
Information barriers also exist between certain businesses within the Investment Adviser, and
the conflicts described herein with respect to information barriers and otherwise with respect to Goldman Sachs and the Investment Adviser will also apply to the businesses within the Investment Adviser. There may also be circumstances in which, as
a result of information held by certain portfolio management teams in the Investment Adviser, the Investment Adviser limits an activity or transaction for a Fund, including if the Fund is managed by a portfolio management team other than the team
holding such information.
In addition, regardless of the existence of information barriers, Goldman Sachs will not have any obligation or
other duty to make available for the benefit of the Funds any information regarding Goldman Sachs trading activities, strategies or views, or the activities, strategies or views used for other Accounts. Furthermore, to the extent that the
Investment Adviser has access to fundamental analysis and proprietary technical models or other information developed by Goldman Sachs and its personnel, or other parts of the Investment Adviser, the Investment Adviser will not be under any
obligation or other duty to effect transactions on behalf of Accounts (including the Funds) in accordance with such analysis and models. In the event Goldman Sachs elects not to share certain information with the Investment Adviser or personnel
involved in decision-making for Accounts (including the Funds), the Funds may make investment decisions that differ from those they would have made if Goldman Sachs had provided such information, which may be disadvantageous to the Funds.
Different areas of the Investment Adviser and Goldman Sachs may take views, and make decisions or recommendations, that are different than
other areas of the Investment Adviser and Goldman Sachs. Different portfolio management teams within the Investment Adviser may make decisions based on information or take (or refrain from taking) actions with respect to Accounts they advise in a
manner that may be different than or adverse to the Funds. Such teams may not share information with the Funds portfolio management teams, including as a result of certain information barriers and other policies, and will not have any
obligation or other duty to do so.
Goldman Sachs operates a business known as Goldman Sachs Securities Services (GSS), which
provides prime brokerage, administrative and other services to clients which may involve investment funds (including pooled investment vehicles and private funds) in which one or more Accounts invest (Underlying Funds) or markets and
securities in which Accounts invest. GSS and other parts of Goldman Sachs have broad access to information regarding the current status of certain markets, investments and funds and detailed information about fund operators that is not available to
the Investment Adviser. In addition, Goldman Sachs may act as a prime broker to one or more Underlying Funds, in which case Goldman Sachs will have information concerning the investments and transactions of such Underlying Funds that is not
available to the Investment Adviser. As a result of these and other activities, parts of Goldman Sachs may be in possession of information in respect of markets, investments, investment advisers that are affiliated or unaffiliated with Goldman Sachs
and Underlying Funds, which, if known to the Investment Adviser, might cause the Investment Adviser to seek to dispose of, retain or increase interests in investments held by Accounts or acquire certain positions on behalf of Accounts, or take other
actions. Goldman Sachs will be under no obligation or other duty to make any such information available to the Investment Adviser or personnel involved in decision-making for Accounts (including the Funds).
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Valuation of the Funds Investments
The Investment Adviser, while not the primary valuation agent of the Funds, performs certain valuation services related to securities and
assets held in the Funds. The Investment Adviser performs such valuation services in accordance with its valuation policies. The Investment Adviser may value an identical asset differently than another division or unit within Goldman Sachs values
the asset, including because such other division or unit has information or uses valuation techniques and models that it does not share with, or that are different than those of, the Investment Adviser. This is particularly the case in respect of
difficult-to-value assets. The Investment Adviser may also value an identical asset differently in different Accounts, including because different Accounts are subject to different valuation guidelines pursuant to their respective governing
agreements (e.g., in connection with certain regulatory restrictions applicable to different Accounts), different third -party vendors are hired to perform valuation functions for the Accounts, the Accounts are managed or advised by different
portfolio management teams within the Investment Adviser that employ different valuation policies or procedures, or otherwise. The Investment Adviser will face a conflict with respect to valuations generally because of their effect on the Investment
Advisers fees and other compensation. Furthermore, the application of particular valuation policies with respect to the Funds may result in improved performance of the Funds or enable the Investment Adviser to more easily track the performance
of an Index than might have been the case had the Investment Adviser applied different valuation policies.
Goldman Sachs and the Investment
Advisers Activities on Behalf of Other Accounts
Goldman Sachs engages in a variety of activities in the global financial
markets. The extent of Goldman Sachs activities in the global financial markets, including without limitation in its capacity as an investment banker, research provider, investment adviser, financier, adviser, market maker, prime broker,
derivatives dealer, lender, counterparty, agent, principal and investor, as well as in other capacities, may have potential adverse effects on the Funds.
The Investment Adviser provides advisory services to the Funds. The Investment Advisers decisions and actions on behalf of the Funds may
differ from those on behalf of other Accounts. Advice given to, or investment or voting decisions made for, one or more Accounts may compete with, affect, differ from, conflict with, or involve timing different from, advice given to or investment
decisions made for the Funds. Goldman Sachs (including the Investment Adviser), the clients it advises, and its personnel have interests in and advise Accounts that have investment objectives or portfolios similar to, related to or opposed to those
of the Funds. Goldman Sachs may receive greater fees or other compensation (including performance-based fees) from such Accounts than it does from the Funds. In addition, Goldman Sachs (including the Investment Adviser), the clients it advises, and
its personnel may engage (or consider engaging) in commercial arrangements or transactions with Accounts, and/or may compete for commercial arrangements or transactions in the same types of companies, assets securities and other instruments, as the
Funds. Decisions and actions of the Investment Adviser on behalf of the Funds may differ from those by Goldman Sachs (including the Investment Adviser) on behalf of other Accounts, including Accounts sponsored, managed or advised by the Investment
Adviser. Advice given to, or investment or voting decisions made for, the Funds may compete with, affect, differ from, conflict with, or involve timing different from, advice given to, or investment or voting decisions made for, other Accounts,
including Accounts sponsored, managed or advised by the Investment Adviser. Additionally, as described below, the Investment Adviser faces conflicts of interest arising out of Goldman Sachs relationships and business dealings in connection
with decisions to take or refrain from taking certain actions on behalf of Accounts when doing so would be adverse to Goldman Sachs relationships or other business dealings with such parties.
Transactions by, advice to and activities of Accounts (including with respect to investment decisions, voting and the enforcement of rights)
may involve the same or related companies, securities or other assets or instruments as those in which the Funds invest, and such Accounts may engage in a strategy while a Fund is undertaking the same or a differing strategy, any of which could
directly or indirectly disadvantage the Fund (including its ability to engage in a transaction or other activities) or the prices or terms at which the Funds transactions or other activities may be effected.
Moreover, Goldman Sachs may be engaged to provide advice to an Account that is considering entering into a transaction with a Fund, and
Goldman Sachs may advise the Account not to pursue the transaction with the Fund, or otherwise in connection with a potential transaction provide advice to the Account that would be adverse to the Fund. Additionally, a Fund may buy a security and an
Account may establish a short position in that same security or in similar securities. This short position may result in the impairment of the price of the security that the Fund holds or may be designed to profit from a decline in the price of the
security. A Fund could similarly be adversely impacted if it establishes a short position, following which an Account takes a long position in the same security or in similar securities. In addition, Goldman Sachs (including the Investment Adviser)
may make filings in connection with a shareholder class action lawsuit or similar matter involving a particular security on behalf of an Account (including a Fund), but not on behalf of a different Account (including a Fund) that holds or held the
same security, or that is invested in or has extended credit to different parts of the capital structure of the same issuer.
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To the extent a Fund engages in transactions in the same or similar types of securities or
other investments as other Accounts, the Fund and other Accounts may compete for such transactions or investments, and transactions or investments by such other Accounts may negatively affect the transactions of the Fund (including the ability of
the Fund to engage in such a transaction or investment or other activities), or the price or terms at which the Funds transactions or investments or other activities may be effected. In some cases, such adverse impacts may result from
differences in the timing of transactions by Accounts relative to when a Fund executes transactions in the same securities. Moreover, a Fund, on the one hand, and Goldman Sachs or other Accounts, on the other hand, may vote differently on or take or
refrain from taking different actions with respect to the same security, which may be disadvantageous to the Fund. Accounts may also have different rights in respect of an investment with the same issuer, or invest in different classes of the same
issuer that have different rights, including, without limitation, with respect to liquidity. The determination to exercise such rights by the Investment Adviser on behalf of such other Accounts may have an adverse effect on the Funds.
Goldman Sachs (including, as applicable, the Investment Adviser) and its personnel, when acting as an investment banker, research provider,
investment adviser, financier, adviser, market maker, prime broker, derivatives dealer, lender, counterparty or investor, or in other capacities, may advise on transactions, make investment decisions or recommendations, provide differing investment
views or have views with respect to research or valuations that are inconsistent with, or adverse to, the interests and activities of the Funds. Shareholders may be offered access to advisory services through several different Goldman Sachs advisory
businesses (including Goldman Sachs & Co. LLC and the Investment Adviser). Different advisory businesses within Goldman Sachs manage Accounts according to different strategies and may also apply different criteria to the same or similar
strategies and may have differing investment views in respect of an issuer or a security or other investment. Similarly, within the Investment Adviser, certain investment teams or portfolio managers may have differing or opposite investment views in
respect of an issuer or a security, and the positions a Funds investment team or portfolio managers take in respect of the Fund may be inconsistent with, or adversely affected by, the interests and activities of the Accounts advised by other
investment teams or portfolio managers of the Investment Adviser. Research, analyses or viewpoints may be available to clients or potential clients at different times. Goldman Sachs will not have any obligation or other duty to make available to the
Funds any research or analysis prior to its public dissemination. The Investment Adviser is responsible for making investment decisions on behalf of the Funds, and such investment decisions can differ from investment decisions or recommendations by
Goldman Sachs on behalf of other Accounts. Goldman Sachs, on behalf of one or more Accounts, may implement an investment decision or strategy ahead of, or contemporaneously with, or behind similar investment decisions or strategies made for the
Funds (whether or not the investment decisions emanate from the same research analysis or other information). The relative timing for the implementation of investment decisions or strategies for Accounts (including Accounts sponsored, managed or
advised by the Investment Adviser), on the one hand, and the Funds, on the other hand, may disadvantage the Funds. Certain factors, for example, market impact, liquidity constraints, or other circumstances, could result in the Funds receiving less
favorable investment or trading results or incurring increased costs associated with implementing such investment decisions or strategies, or being otherwise disadvantaged.
Subject to applicable law, the Investment Adviser may cause the Funds to invest in securities, bank loans or other obligations of companies
affiliated with or advised by Goldman Sachs or in which Goldman Sachs or Accounts have an equity, debt or other interest, or to engage in investment transactions that may result in other Accounts being relieved of obligations or otherwise divested
of investments, which may enhance the profitability of Goldman Sachs or other Accounts investment in and activities with respect to such companies. Goldman Sachs may, in its discretion, recommend that the Funds have ongoing business
dealings, arrangements or agreements with persons who are (i) former employees of Goldman Sachs, (ii) affiliates or other portfolio companies of Goldman Sachs or other Accounts, (iii) Goldman Sachs employees family members
and/or relatives and/or certain of their portfolio companies or (iv) persons otherwise associated with an investor in an Account or a portfolio company or service provider of Goldman Sachs or an Account. The Funds may bear, directly or
indirectly, the costs of such dealings, arrangements or agreements. These recommendations, and recommendations relating to continuing any such dealings, arrangements or agreements, may pose conflicts of interest and may be based on differing
incentives due to Goldman Sachs relationships with such persons. In particular, when acting on behalf of, and making decisions for, Accounts, the Investment Adviser may take into account Goldman Sachs interests in maintaining its
relationships and business dealings with such persons. As a result, the Investment Adviser faces conflicts of interest arising out of Goldman Sachs relationships and business dealings in connection with decisions to take or refrain from taking
certain actions on behalf of Accounts when doing so would be adverse to Goldman Sachs relationships or other business dealings with such parties.
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When the Investment Adviser wishes to place an order for different types of Accounts
(including the Funds) for which aggregation is not practicable, the Investment Adviser may use a trade sequencing and rotation policy to determine which type of Account is to be traded first. Under this policy, each portfolio management team may
determine the length of its trade rotation period and the sequencing schedule for different categories of clients within this period provided that the trading periods and these sequencing schedules are designed to be fair and equitable over time.
The portfolio management teams currently base their trading periods and rotation schedules on the relative amounts of assets managed for different client categories (e.g., unconstrained client accounts, wrap program accounts, etc.) and,
as a result, the Funds may trade behind other Accounts. Within a given trading period, the sequencing schedule establishes when and how frequently a given client category will trade first in the order of rotation. The Investment Adviser may deviate
from the predetermined sequencing schedule under certain circumstances, and the Investment Advisers trade sequencing and rotation policy may be amended, modified or supplemented at any time without prior notice to clients.
Potential Conflicts Relating to Follow-On Investments
From time to time, the Investment Adviser may provide opportunities to Accounts (including potentially the Funds) to make investments in
companies in which certain Accounts have already invested. Such follow-on investments can create conflicts of interest, such as the determination of the terms of the new investment and the allocation of such opportunities among Accounts (including
the Funds). Follow-on investment opportunities may be available to the Funds notwithstanding that the Funds have no existing investment in the issuer, resulting in the assets of the Funds potentially providing value to, or otherwise supporting the
investments of, other Accounts. Accounts (including the Funds) may also participate in releveraging, recapitalization, and similar transactions involving companies in which other Accounts have invested or will invest. Conflicts of interest in these
and other transactions may arise between Accounts (including the Funds) with existing investments in a company and Accounts making subsequent investments in the company, which may have opposing interests regarding pricing and other terms. The
subsequent investments may dilute or otherwise adversely affect the interests of the previously-invested Accounts (including the Funds).
Diverse
Interests of Shareholders
The various types of investors in and beneficiaries of the Funds, including to the extent applicable the
Investment Adviser and its affiliates, may have conflicting investment, tax and other interests with respect to their interests in the Funds. When considering a potential investment for a Fund, the Investment Adviser will generally consider the
investment objectives of the Fund, not the investment objectives of any particular investor or beneficiary. The Investment Adviser may make decisions, including with respect to tax matters, from time to time that may be more beneficial to one type
of investor or beneficiary than another, or to the Investment Adviser and its affiliates than to investors or beneficiaries unaffiliated with the Investment Adviser. In addition, Goldman Sachs may face certain tax risks based on positions taken by
the Funds, including as a withholding agent. Goldman Sachs reserves the right on behalf of itself and its affiliates to take actions adverse to the Funds or other Accounts in these circumstances, including withholding amounts to cover actual or
potential tax liabilities.
Selection of Service Providers
The Funds expect to engage service providers (including attorneys and consultants) that may also provide services to Goldman Sachs and other
Accounts. In addition, certain service providers to the Investment Adviser or Funds may also be portfolio companies or other affiliates of the Investment Adviser or Accounts (for example, a portfolio company of an Account may retain a portfolio
company of another Account). To the extent it is involved in such selection, the Investment Adviser intends to select these service providers based on a number of factors, including expertise and experience, knowledge of related or similar products,
quality of service, reputation in the marketplace, relationships with the Investment Adviser, Goldman Sachs or others, and price. These service providers may have business, financial, or other relationships with Goldman Sachs (including its
personnel), which may influence the Investment Advisers selection of these service providers for the Funds. In such circumstances, there may be a conflict of interest between Goldman Sachs (acting on behalf of the Funds) and the Funds or
between Funds if the Funds determine not to engage or continue to engage these service providers.
The Investment Adviser may, in its sole
discretion, determine to provide, or engage or recommend an affiliate of the Investment Adviser to provide, certain services to the Funds, instead of engaging or recommending one or more third parties to provide such services. Subject to the
governance requirements of a particular Fund and applicable law, the Investment Adviser or its affiliates, as applicable, will receive compensation in connection with the provision of such services. As a result, the Investment Adviser faces a
conflict of interest when selecting service providers for the Funds. Notwithstanding the foregoing, the selection of service providers for the Funds will be conducted in accordance with the Investment Advisers fiduciary obligations to the
Funds. The service providers selected by the Investment Adviser may charge different rates to different recipients based on the specific services provided, the personnel providing the services, the complexity of the services provided or other
factors. As a result, the rates paid with respect to these service providers by a Fund, on the one hand, may be more or
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less favorable than the rates paid by Goldman Sachs, including the Investment Adviser, on the other hand. In addition, the rates paid by the Investment Adviser or the Funds, on the one hand, may
be more or less favorable than the rates paid by other parts of Goldman Sachs or Accounts managed by other parts of Goldman Sachs, on the other hand. Goldman Sachs (including the Investment Adviser), its personnel, and/or Accounts may hold
investments in companies that provide services to entities in which the Funds invest generally, and, subject to applicable law, the Investment Adviser may refer or introduce such companies services to entities that have issued securities held
by the Funds.
Investments in Goldman Sachs Funds
To the extent permitted by applicable law, the Funds may invest in money market and other funds sponsored, managed or advised by Goldman Sachs.
In connection with any such investments, a Fund, to the extent permitted by the Act, will pay all advisory, administrative or Rule 12b-1 fees applicable to the investment, and certain Funds that invest in other funds sponsored, managed or advised by
Goldman Sachs pay advisory fees to the Investment Adviser that are not reduced by any fees payable by such other funds to Goldman Sachs as manager of such other funds (i.e., there will be double fees involved in making any such
investment, which would not arise in connection with the direct allocation of assets by investors in the Funds to such other funds), other than in certain specified cases, including as may be required by applicable law. In such circumstances, as
well as in all other circumstances in which Goldman Sachs receives any fees or other compensation in any form relating to the provision of services, no accounting or repayment to the Funds will be required.
Goldman Sachs May In-Source or Outsource
Subject to applicable law, Goldman Sachs, including the Investment Adviser, may from time to time and without notice to investors in-source or
outsource certain processes or functions in connection with a variety of services that it provides to the Funds in its administrative or other capacities. Such in-sourcing or outsourcing may give rise to additional conflicts of interest.
Distributions of Assets Other Than Cash
With respect to redemptions from the Funds, the Funds may, in certain circumstances, have discretion to decide whether to permit or limit
redemptions and whether to make distributions in connection with redemptions in the form of securities or other assets, and in such case, the composition of such distributions. In making such decisions, the Investment Adviser may have a potentially
conflicting division of loyalties and responsibilities to redeeming investors and remaining investors.
Goldman Sachs May Act in a Capacity Other
Than Investment Adviser to the Funds
Investments in Different Parts of an Issuers Capital Structure
Goldman Sachs (including the Investment Adviser) or Accounts, on the one hand, and the Funds, on the other hand, may invest in or extend credit
to different parts of the capital structure of a single issuer. As a result, Goldman Sachs (including the Investment Adviser) or Accounts may take actions that adversely affect the Funds. In addition, Goldman Sachs (including the Investment Adviser)
may advise Accounts with respect to different parts of the capital structure of the same issuer, or classes of securities that are subordinate or senior to securities, in which the Funds invest. Goldman Sachs (including the Investment Adviser) may
pursue rights, provide advice or engage in other activities, or refrain from pursuing rights, providing advice or engaging in other activities, on behalf of itself or other Accounts with respect to an issuer in which the Funds have invested, and
such actions (or refraining from action) may have a material adverse effect on the Funds.
For example, in the event that Goldman Sachs
(including the Investment Adviser) or an Account holds loans, securities or other positions in the capital structure of an issuer that ranks senior in preference to the holdings of a Fund in the same issuer, and the issuer experiences financial or
operational challenges, Goldman Sachs (including the Investment Adviser), acting on behalf of itself or the Account, may seek a liquidation, reorganization or restructuring of the issuer, or terms in connection with the foregoing, that may have an
adverse effect on or otherwise conflict with the interests of the Funds holdings in the issuer. In connection with any such liquidation, reorganization or restructuring, the Funds holdings in the issuer may be extinguished or
substantially diluted, while Goldman Sachs (including the Investment Adviser) or another Account may receive a recovery of some or all of the amounts due to them. In addition, in connection with any lending arrangements involving the issuer in which
Goldman Sachs (including the Investment Adviser) or an Account participates, Goldman Sachs (including the Investment Adviser) or the Account may seek to exercise its rights under the applicable loan agreement or other document, which may be
detrimental to the Fund. In situations in which Goldman Sachs (including the Investment Adviser) holds positions in multiple parts of the capital structure of an issuer across Accounts (including the Funds), the Investment Adviser may not pursue
actions or remedies that may be available to the Fund, as a result of legal and regulatory requirements or otherwise.
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These potential issues are examples of conflicts that Goldman Sachs (including the
Investment Adviser) will face in situations in which the Funds, and Goldman Sachs (including the Investment Adviser) or other Accounts, invest in or extend credit to different parts of the capital structure of a single issuer. Goldman Sachs
(including the Investment Adviser) addresses these issues based on the circumstances of particular situations. For example, Goldman Sachs (including the Investment Adviser) may determine to rely on information barriers between different Goldman
Sachs (including the Investment Adviser) business units or portfolio management teams. Goldman Sachs (including the Investment Adviser) may determine to rely on the actions of similarly situated holders of loans or securities rather than, or in
connection with, taking such actions itself on behalf of the Funds.
As a result of the various conflicts and related issues described
above and the fact that conflicts will not necessarily be resolved in favor of the interests of the Funds, the Funds could sustain losses during periods in which Goldman Sachs (including the Investment Adviser) and other Accounts (including Accounts
sponsored, managed or advised by the Investment Adviser) achieve profits generally or with respect to particular holdings in the same issuer, or could achieve lower profits or higher losses than would have been the case had the conflicts described
above not existed. The negative effects described above may be more pronounced in connection with transactions in, or the Funds use of, small capitalization, emerging market, distressed or less liquid strategies.
Principal and Cross Transactions
When permitted by applicable law and the Investment Advisers policies, the Investment Adviser, acting on behalf of the Funds, may enter
into transactions in securities and other instruments with or through Goldman Sachs or in Accounts managed by the Investment Adviser or its affiliates, and may (but is under no obligation or other duty to) cause the Funds to engage in transactions
in which the Investment Adviser acts as principal on its own behalf (principal transactions), advises both sides of a transaction (cross transactions) and acts as broker for, and receives a commission from, the Funds on one side of a transaction and
a brokerage account on the other side of the transaction (agency cross transactions). There may be potential conflicts of interest, regulatory issues or restrictions contained in the Investment Advisers internal policies relating to these
transactions which could limit the Investment Advisers determination to engage in these transactions for Accounts (including the Funds). In certain circumstances such as when Goldman Sachs is the only or one of a few participants in a
particular market or is one of the largest such participants, such limitations may eliminate or reduce the availability of certain investment opportunities to Accounts (including the Funds) or impact the price or terms on which transactions relating
to such investment opportunities may be effected.
Goldman Sachs will have a potentially conflicting division of loyalties and
responsibilities to the parties in such transactions. The Investment Adviser has developed policies and procedures in relation to such transactions and conflicts. Cross transactions may disproportionately benefit some Accounts relative to other
Accounts, including the Funds, due to the relative amount of market savings obtained by the Accounts. Principal, cross or agency cross transactions will be effected in accordance with fiduciary requirements and applicable law (which may include
disclosure and consent).
Goldman Sachs May Act in Multiple Commercial Capacities
To the extent permitted by applicable law, Goldman Sachs may act as broker, dealer, agent, counterparty, lender or advisor or in other
commercial capacities for the Funds or issuers of securities held by the Funds, including issuers whose securities are components of one or more indices, such as the Indexes, that are created and operated by Goldman Sachs. Goldman Sachs may be
entitled to compensation in connection with the provision of such services and the operation of the Indexes that are tracked by the Funds, and the Funds will not be entitled to any such compensation. Goldman Sachs will have an interest in obtaining
fees and other compensation in connection with such services that are favorable to Goldman Sachs, and in connection with providing such services may take commercial steps in its own interest, or may advise the parties to which it is providing
services, or take other actions, any of which may have an adverse effect on the Funds. For example, Goldman Sachs may require repayment of all or part of a loan from a company in which an Account (including a Fund) holds an interest, which could
cause the company to default or be required to liquidate its assets more rapidly, which could adversely affect the value of the company and the value of the Funds invested therein. Goldman Sachs may also advise such a company to make changes to its
capital structure the result of which would be a reduction in the value or priority of a security held (directly or indirectly) by one or more Funds. Actions taken or advised to be taken by Goldman Sachs in connection with other types of
transactions may also result in adverse consequences for the Funds. Goldman Sachs may also provide various services to companies in which the Funds have an interest, or to the Funds, which may result in fees, compensation and remuneration as well as
other benefits, to Goldman Sachs. Such fees, compensation and remuneration may be substantial. Providing services to the Funds and companies (or their personnel) in which the Funds invest may enhance Goldman Sachs relationships with various
parties, facilitate additional business development and enable Goldman Sachs to obtain additional business and generate additional revenue.
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Goldman Sachs activities on behalf of its clients may also restrict investment
opportunities that may be available to the Funds. For example, Goldman Sachs is often engaged by companies as a financial advisor, or to provide financing or other services, in connection with commercial transactions that may be potential investment
opportunities for the Funds. There may be circumstances in which the Funds are precluded from participating in such transactions as a result of Goldman Sachs engagement by such companies. Goldman Sachs reserves the right to act for these
companies in such circumstances, notwithstanding the potential adverse effect on the Funds. Goldman Sachs may also represent creditor or debtor companies in proceedings under Chapter 11 of the U.S. Bankruptcy Code (and equivalent non-U.S. bankruptcy
laws) or prior to these filings. From time to time, Goldman Sachs may serve on creditor or equity committees. These actions, for which Goldman Sachs may be compensated, may limit or preclude the flexibility that the Funds may otherwise have to buy
or sell securities issued by those companies, as well as certain other assets. Please also see Management of the Funds by the Investment AdviserConsiderations Relating to Information Held by Goldman Sachs above and
Potential Limitations and Restrictions on Investment Opportunities and Activities of Goldman Sachs and the Funds below.
Subject to applicable law, the Investment Adviser may cause the Funds to invest in securities, bank loans or other obligations of companies
affiliated with or advised by Goldman Sachs or in which Goldman Sachs or Accounts have an equity, debt or other interest, or to engage in investment transactions that may result in Goldman Sachs or other Accounts being relieved of obligations or
otherwise divested of investments. For example, subject to applicable law a Fund may acquire securities or indebtedness of a company affiliated with Goldman Sachs directly or indirectly through syndicate or secondary market purchases, or may make a
loan to, or purchase securities from, a company that uses the proceeds to repay loans made by Goldman Sachs. These activities by a Fund may enhance the profitability of Goldman Sachs or other Accounts with respect to their investment in and
activities relating to such companies. The Fund will not be entitled to compensation as a result of this enhanced profitability.
To the
extent permitted by applicable law, Goldman Sachs (including the Investment Adviser) may create, write, sell, issue, invest in or act as placement agent or distributor of derivative instruments related to the Funds, or with respect to
underlying securities or assets of the Funds, or which may be otherwise based on or seek to replicate or hedge the performance of the Funds. Such derivative transactions, and any associated hedging activity, may differ from and be adverse to the
interests of the Funds.
Goldman Sachs may make loans to, or enter into margin, asset-based or other credit facilities or similar
transactions with, clients, companies or individuals that may (or may not) be secured by publicly or privately held securities or other assets, including a clients Fund shares as described above. Some of these borrowers may be public or
private companies, or founders, officers or shareholders in companies in which the Funds (directly or indirectly) invest, and such loans may be secured by securities of such companies, which may be the same as, pari passu with, or more senior or
junior to, interests held (directly or indirectly) by the Funds. In connection with its rights as lender, Goldman Sachs may act to protect its own commercial interest and may take actions that adversely affect the borrower, including by liquidating
or causing the liquidation of securities on behalf of a borrower or foreclosing and liquidating such securities in Goldman Sachs own name. Such actions may adversely affect the Funds (e.g., if a large position in a security is liquidated,
among the other potential adverse consequences, the value of such security may decline rapidly and the Funds may in turn decline in value or may be unable to liquidate their positions in such security at an advantageous price or at all). In
addition, Goldman Sachs may make loans to shareholders or enter into similar transactions that are secured by a pledge of, or mortgage over, a shareholders Fund shares, which would provide Goldman Sachs with the right to redeem such Fund
shares in the event that such shareholder defaults on its obligations. These transactions and related redemptions may be significant and may be made without notice to the shareholders.
Code of Ethics and Personal Trading
Each of the Funds and Goldman Sachs, as each Funds Investment Adviser and Distributor, has adopted a Code of Ethics (the Code of
Ethics) in compliance with Section 17(j) of the Act designed to provide that personnel of the Investment Adviser, and certain additional Goldman Sachs personnel who support the Investment Adviser, comply with applicable federal securities
laws and place the interests of clients first in conducting personal securities transactions. The Code of Ethics imposes certain restrictions on securities transactions in the personal accounts of covered persons to help avoid conflicts of interest.
Subject to the limitations of the Code of Ethics, covered persons may buy and sell securities or other investments for their personal accounts, including investments in the Funds, and may also take positions that are the same as, different from, or
made at different times than, positions taken (directly or indirectly) by the Funds. The Codes of Ethics are available on the EDGAR Database on the SECs Internet site at http://www.sec.gov. Copies may also be obtained after paying a
duplicating fee by electronic request to publicinfo@sec.gov. Additionally, all Goldman Sachs personnel, including personnel of the Investment Adviser, are subject to firm-wide policies and procedures regarding confidential and proprietary
information, information barriers, private investments, outside business activities and personal trading.
B-62
Proxy Voting by the Investment Adviser
The Investment Adviser has implemented processes designed to prevent conflicts of interest from influencing proxy voting decisions that it
makes on behalf of advisory clients, including the Funds, and to help ensure that such decisions are made in accordance with its fiduciary obligations to its clients. Notwithstanding such proxy voting processes, proxy voting decisions made by the
Investment Adviser in respect of securities held by the Funds may benefit the interests of Goldman Sachs and/or Accounts other than the Funds. For a more detailed discussion of these policies and procedures, see the section of this SAI entitled
PROXY VOTING.
Potential Limitations and Restrictions on Investment Opportunities and Activities of Goldman Sachs and the Funds
The Investment Adviser may restrict its investment decisions and activities on behalf of the Funds in various circumstances,
including as a result of applicable regulatory requirements, information held by the Investment Adviser or Goldman Sachs, Goldman Sachs roles in connection with other clients and in the capital markets (including in connection with advice it
may give to such clients or commercial arrangements or transactions that may be undertaken by such clients or by Goldman Sachs), Goldman Sachs internal policies and/or potential reputational risk in connection with Accounts (including the
Funds). The Investment Adviser might not engage in transactions or other activities for, or enforce certain rights in favor of, one or more Funds due to Goldman Sachs activities outside the Funds (e.g., the Investment Adviser may refrain from
making investments for the Funds that would cause Goldman Sachs to exceed position limits or cause Goldman Sachs to have additional disclosure obligations and may limit purchases or sales of securities in respect of which Goldman Sachs is engaged in
an underwriting or other distribution) and regulatory requirements, policies and reputational risk assessments.
In addition, the
Investment Adviser may restrict, limit or reduce the amount of a Funds investment, or restrict the type of governance or voting rights it acquires or exercises, where the Fund (potentially together with Goldman Sachs and other Accounts)
exceeds a certain ownership interest, or possesses certain degrees of voting or control or has other interests. For example, such limitations may exist if a position or transaction could require a filing or license or other regulatory or corporate
consent, which could, among other things, result in additional costs and disclosure obligations for, or impose regulatory restrictions on, Goldman Sachs, including the Investment Adviser, or on other Accounts, or where exceeding a threshold is
prohibited or may result in regulatory or other restrictions. In certain cases, restrictions and limitations will be applied to avoid approaching such threshold. Circumstances in which such restrictions or limitations may arise include, without
limitation: (i) a prohibition against owning more than a certain percentage of an issuers securities; (ii) a poison pill that could have a dilutive impact on the holdings of the Fund should a threshold be exceeded;
(iii) provisions that would cause Goldman Sachs to be considered an interested stockholder of an issuer; (iv) provisions that may cause Goldman Sachs to be considered an affiliate or control person of
the issuer; and (v) the imposition by an issuer (through charter amendment, contract or otherwise) or governmental, regulatory or self-regulatory organization (through law, rule, regulation, interpretation or other guidance) of other
restrictions or limitations.
When faced with the foregoing limitations, Goldman Sachs may avoid exceeding the threshold because exceeding
the threshold could have an adverse impact on the ability of the Investment Adviser or Goldman Sachs to conduct its business activities. The Investment Adviser may also reduce a Funds interest in, or restrict a Fund from participating in, an
investment opportunity that has limited availability or where Goldman Sachs has determined to cap its aggregate investment in consideration of certain regulatory or other requirements so that other Accounts that pursue similar investment strategies
may be able to acquire an interest in the investment opportunity. The Investment Adviser may determine not to engage in certain transactions or activities which may be beneficial to the Funds because engaging in such transactions or activities in
compliance with applicable law would result in significant cost to, or administrative burden on, the Investment Adviser or create the potential risk of trade or other errors.
The Investment Adviser generally is not permitted to use material non-public information in effecting purchases and sales in transactions for
the Funds that involve public securities. The Investment Adviser may limit an activity or transaction (such as a purchase or sale transaction) which might otherwise be engaged in by the Funds, including as a result of information held by Goldman
Sachs (including the Investment Adviser or its personnel). For example, directors, officers and employees of Goldman Sachs may take seats on the boards of directors of, or have board of directors observer rights with respect to, companies in which
Goldman Sachs invests on behalf of the Funds. To the extent a director, officer or employee of Goldman Sachs were to take a seat on the board of directors of, or have board of directors observer rights with respect to, a public company, the
Investment Adviser (or certain of its investment teams) may be limited and/or restricted in its or their ability to trade in the securities of the
B-63
company. In addition, any such director, officer or employee of Goldman Sachs that is a member of the board of directors of a portfolio company may have duties in his or her capacity as a
director that conflict with the Investment Advisers duties to Accounts, and may act in a manner that may disadvantage or otherwise harm a Fund and/or Goldman Sachs.
Different areas of Goldman Sachs may come into possession of material non-public information regarding an issuer of securities held by an
Underlying Fund in which an Account invests. In the absence of information barriers between such different areas of Goldman Sachs, the Account may be prohibited, including by internal policies, from redeeming from such Underlying Fund during the
period such material non-public information is held by such other part of Goldman Sachs, which period may be substantial. As a result, the Account may not be permitted to redeem from an Underlying Fund in whole or in part during periods when it
otherwise would have been able to do so, which could adversely affect the Account. Other investors in the Underlying Fund that are not subject to such restrictions may be able to redeem from the Underlying Fund during such periods.
In addition, the Investment Advisers clients may partially or fully fund a new Account with in-kind securities in which the Investment
Adviser may be restricted. In such circumstances, the Investment Adviser may sell any such securities at the next available trading window, subject to operational and technological limitations (unless such securities are subject to another express
arrangement). As a result, such Accounts may be required to dispose of investments at an earlier or later date and/or at a less favorable price than would otherwise have been the case had the Investment Adviser not been so restricted. Accounts will
be responsible for all tax liabilities that result from any such sale transactions.
The Investment Adviser operates a program reasonably
designed to ensure compliance generally with economic and trade sanctions-related obligations applicable directly to its activities (although such obligations are not necessarily the same obligations that the Funds may be subject to). Such economic
and trade sanctions may prohibit, among other things, transactions with and the provision of services to, directly or indirectly, certain countries, territories, entities and individuals. These economic and trade sanctions, and the application by
the Investment Adviser of its compliance program in respect thereof, may restrict or limit the Funds investment activities.
The
Investment Adviser may determine to limit or not engage at all in transactions and activities on behalf of the Funds for reputational or other reasons. Examples of when such determinations may be made include, but are not limited to, where Goldman
Sachs is providing (or may provide) advice or services to an entity involved in such activity or transaction, where Goldman Sachs or an Account is or may be engaged in the same or a related activity or transaction to that being considered on behalf
of the Funds, where Goldman Sachs or an Account has an interest in an entity involved in such activity or transaction, where there are political, public relations, or other reputational considerations relating to counterparties or other participants
in such activity or transaction or where such activity or transaction on behalf of or in respect of the Funds could affect in tangible or intangible ways Goldman Sachs, the Investment Adviser, an Account or their activities.
In order to engage in certain transactions on behalf of a Fund, the Investment Adviser will also be subject to (or cause the Fund to become
subject to) the rules, terms and/or conditions of any venues through which it trades securities, derivatives or other instruments. This includes, but is not limited to, where the Investment Adviser and/or the Fund may be required to comply with the
rules of certain exchanges, execution platforms, trading facilities, clearinghouses and other venues, or may be required to consent to the jurisdiction of any such venues. The rules, terms and/or conditions of any such venue may result in the
Investment Adviser and/or the Fund being subject to, among other things, margin requirements, additional fees and other charges, disciplinary procedures, reporting and recordkeeping, position limits and other restrictions on trading, settlement
risks and other related conditions on trading set out by such venues.
From time to time, a Fund, the Investment Adviser or its affiliates
and/or their service providers or agents may be required, or may determine that it is advisable, to disclose certain information about the Fund, including, but not limited to, investments held by the Fund, and the names and percentage interest of
beneficial owners thereof (and the underlying beneficial owners of such beneficial owners), to third parties, including local governmental authorities, regulatory organizations, taxing authorities, markets, exchanges, clearing facilities,
custodians, brokers and trading counterparties of, or service providers to, the Investment Adviser or the Fund. The Investment Adviser generally expects to comply with requests to disclose such information as it so determines including through
electronic delivery platforms; however, the Investment Adviser may determine to cause the sale of certain assets for the Fund rather than make certain required disclosures, and such sale may be at a time that is inopportune from a pricing or other
standpoint. In addition, the Investment Adviser may provide third parties with aggregated data regarding the activities of, or certain performance or other metrics associated with the Accounts, and the Investment Adviser may receive compensation
from such third parties for providing them such information.
B-64
Goldman Sachs may become subject to additional restrictions on its business activities that could have an
impact on the Funds activities. In addition, the Investment Adviser may restrict its investment decisions and activities on behalf of the Funds and not other Accounts, including Accounts sponsored, managed or advised by the Investment Adviser.
Brokerage Transactions
The
Investment Adviser often selects U.S. and non-U.S. broker-dealers (including affiliates of the Investment Adviser) that furnish the Investment Adviser, the Funds, Investment Adviser affiliates and other Goldman Sachs personnel with proprietary or
third party brokerage and research services (collectively, brokerage and research services) that provide, in the Investment Advisers view, appropriate assistance to the Investment Adviser in the investment decision-making process.
These brokerage and research services may be bundled with the trade execution, clearing or settlement services provided by a particular broker-dealer and, subject to applicable law, the Investment Adviser may pay for such brokerage and research
services with client commissions (or soft dollars). There may be instances or situations in which such practices are subject to restrictions under applicable law. For example, the EUs Markets in Financial Instruments Directive II
(MiFID II) restricts EU domiciled investment advisers from receiving research and other materials that do not qualify as acceptable minor non-monetary benefits from broker-dealers unless the research or materials are paid for
by the investment advisers from their own resources or from research payment accounts funded by and with the agreement of their clients.
Accounts may differ with regard to whether and to what extent they pay for brokerage and research services through commissions and, subject to
applicable law, brokerage and research services may be used to service the Funds and any or all other Accounts throughout the Investment Adviser, including Accounts that do not pay commissions to the broker-dealer relating to the brokerage and
research service arrangements. As a result, brokerage and research services (including soft dollar benefits) may disproportionately benefit other Accounts relative to the Funds based on the relative amount of commissions paid by the Funds and in
particular those Accounts that do not pay for brokerage and research services or do so to a lesser extent, including in connection with the establishment of maximum budgets for research costs (and switching to execution-only pricing when maximums
are met). The Investment Adviser does not attempt to allocate soft dollar benefits proportionately among clients or to track the benefits of brokerage and research services to the commissions associated with a particular Account or group of
Accounts.
Aggregation of Orders by the Investment Adviser
The Investment Adviser follows policies and procedures pursuant to which it may (but is not required to) combine or aggregate purchase or sale
orders for the same security or other instrument for multiple Accounts (including Accounts in which Goldman Sachs or personnel of Goldman Sachs have an interest) (sometimes referred to as bunching), so that the orders can be executed at
the same time and block trade treatment of any such orders can be elected when available. The Investment Adviser aggregates orders when the Investment Adviser considers doing so to be operationally feasible and appropriate and in the interests of
its clients and may elect block trade treatment when available. In addition, under certain circumstances orders for the Funds may be aggregated with orders for Accounts that contain Goldman Sachs assets.
When a bunched order or block trade is completely filled, or if the order is only partially filled, at the end of the day, the Investment
Adviser generally will allocate the securities or other instruments purchased or the proceeds of any sale pro rata among the participating Accounts, based on the Funds relative sizes. If an order is filled at several different prices, through
multiple trades (whether at a particular broker-dealer or among multiple broker-dealers), generally all participating Accounts will receive the average price and pay the average commission, however, this may not always be the case (due to, e.g., odd
lots, rounding, market practice or constraints applicable to particular Accounts).
Although it may do so in certain circumstances, the
Investment Adviser does not always bunch or aggregate orders for different Funds, elect block trade treatment or net buy and sell orders for the same Fund, if portfolio management decisions relating to the orders are made by different portfolio
management teams or if different portfolio management processes are used for different account types, if bunching, aggregating, electing block trade treatment or netting is not appropriate or practicable from the Investment Advisers
operational or other perspective, or if doing so would not be appropriate in light of applicable regulatory considerations. For example, time zone differences, trading instructions, cash flows, separate trading desks or portfolio management
processes may, among other factors, result in separate, non-aggregated, non-netted executions, with orders in the same instrument being entered for different Accounts at different times or, in the case of netting, buy and sell trades for the same
instrument being entered for the same Account. The Investment Adviser may be able to negotiate a better price and lower commission rate on aggregated orders than on orders for Funds that are not aggregated, and incur lower transaction costs on
netted orders than orders that are not netted. The Investment Adviser is under no obligation or other duty to aggregate or net for particular orders. Where orders for a Fund are not aggregated with other orders, or not netted against orders for the
Fund or other
B-65
Accounts, the Fund will not benefit from a better price and lower commission rate or lower transaction cost that might have been available had the orders been aggregated or netted. Aggregation
and netting of orders may disproportionately benefit some Accounts relative to other Accounts, including a Fund, due to the relative amount of market savings obtained by the Accounts. The Investment Adviser may aggregate orders of Accounts that are
subject to MiFID II (MiFID II Advisory Accounts) with orders of Accounts not subject to MiFID II, including those that generate soft dollar commissions (including the Funds) and those that restrict the use of soft dollars. All Accounts
included in an aggregated order with MiFID II Advisory Accounts pay (or receive) the same average price for the security and the same execution costs (measured by rate). However, MiFID II Advisory Accounts included in an aggregated order may pay
commissions at execution-only rates below the total commission rates paid by Accounts included in the aggregated order that are not subject to MiFID II.
Affiliated Indexes
The Investment
Adviser and its affiliates may develop, own and operate stock market and other indexes (each, an Index) based on investment and trading strategies developed by the Investment Adviser or its affiliates (Investment Adviser
Strategies). The Investment Adviser may in the future enter into revenue sharing arrangements with third party co-developers of an Index pursuant to which the Investment Adviser receives a portion of the fees generated from licensing the right
to use the Index or components thereof to third parties. Some of the Funds seek to track the performance of the Indexes. The Investment Adviser may, from time to time, manage Accounts that invest in the Funds. In addition, the Investment Adviser
manages Accounts which track the same Indexes used by the Funds (except the Goldman Sachs Access Ultra Short Bond ETF) or which are based on the same, or substantially similar, Investment Adviser Strategies that are used in the operation of the
Indexes and the Funds. The operation of the Indexes, the Funds and the Accounts in this manner may give rise to potential conflicts of interest.
For example, Accounts that track the same Indexes used by the Funds may engage in purchases and sales of securities prior to when the Index
and the Funds engage in similar transactions because such Accounts may be managed and rebalanced on an ongoing basis, whereas the Funds portfolios are only rebalanced on a periodic basis corresponding with the rebalancing of the Index. These
differences may result in the Accounts having more favorable performance relative to that of the Index and the Funds or other Accounts that track the Index. Other potential conflicts include the potential for unauthorized access to Index
information, allowing Index changes that benefit the Investment Adviser or other Accounts and not the investors in the Funds, and the manipulation of Index pricing to present the performance of the Funds, or tracking ability, in a preferential
light.
The Investment Adviser has adopted policies and procedures that are designed to address potential conflicts that may arise in
connection with the Investment Advisers operation of the Indexes, the Funds and the Accounts. The Investment Adviser has established certain information barriers and other policies to address the sharing of information between different
businesses within the Investment Adviser, including with respect to personnel responsible for maintaining the Indexes and those involved in decision-making for the Funds. In addition, as described above in Code of Ethics and Personal
Trading, the Investment Adviser has adopted a Code of Ethics.
In addition, because knowledge of the Index constituents and/or their
weights in advance of public disclosure of such information may constitute material, non-public information, Solactive AG, as calculation agent, publishes index constituent data on its website on a daily basis reflecting a hypothetical indication of
the weighting and holdings of the Goldman Sachs ActiveBeta® Emerging Markets Equity Index, the Goldman Sachs ActiveBeta® Europe Equity
Index, the Goldman Sachs ActiveBeta® International Equity Index, the Goldman Sachs ActiveBeta® Japan Equity Index, the Goldman Sachs
ActiveBeta® U.S. Large Cap Equity Index and the Goldman Sachs ActiveBeta® U.S. Small Cap Equity Index. Such information is a
hypothetical indication of what the weightings and constituents would be if each Index were rebalanced on a daily basis and may differ substantially from the constituents at the next actual rebalance. Neither the Investment Adviser nor its
affiliates guarantees the quality, accuracy and/or the completeness of this information nor any data included therein. Such hypothetical information is for informative purposes only and does not reflect the constituents of the applicable Index.
To the extent it is intended that a Fund track an Index, the Fund may not match, and may vary substantially from, the Index for any period of
time. A Fund that tracks an Index may purchase, hold and sell securities at times when a non-Index fund would not do so. The Investment Adviser does not guarantee that any tracking error targets will be achieved. Funds tracking an Index may be
negatively impacted by any errors in the Index, either as a result of calculation errors, inaccurate data sources or otherwise. The Investment Adviser does not guarantee the timeliness, accuracy and/or completeness of an Index and the Investment
Adviser is not responsible for errors, omissions or interruptions in the Index (including when the Investment Adviser or an affiliate acts as the Index provider) or the calculation thereof (including when the Investment Adviser or an affiliate acts
as the calculation agent).
B-66
CREATIONS AND REDEMPTIONS
The Trust issues and sells shares of the Fund only in Creation Units on a continuous basis through the Distributor, without a sales load, at
the NAV next determined after receipt of an order in proper form as described in the Participant Agreement (as defined below), on any Business Day (as defined below). The following table sets forth the number of Shares of the Fund that constitute a
Creation Unit for the Fund:
|
|
|
|
|
Fund
|
|
Creation Unit Size
|
|
Goldman Sachs Hedge Industry VIP ETF
|
|
|
50,000
|
|
In its discretion, the Investment Adviser reserves the right to increase or decrease the number of the
Funds Shares that constitute a Creation Unit. The Board reserves the right to declare a split or a consolidation in the number of shares outstanding of the Fund, and to make a corresponding change in the number of shares constituting a
Creation Unit, in the event that the per share price in the secondary market rises (or declines) to an amount that falls outside the range deemed desirable by the Board.
A Business Day with respect to the Fund is each day the NYSE, the Exchange and the Trust are open, including any day that the Fund
is required to be open under Section 22(e) of the Act, which excludes weekends and the following holidays: New Years Day, Martin Luther King, Jr. Day, Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. Orders from large institutional investors who have entered into agreements with the Funds Distributor (Authorized Participants) to create or redeem Creation Units will only be accepted on a
Business Day.
The time at which transactions and shares are priced and the time by which orders must be received may be changed in case
of an emergency or if regular trading on the NYSE is stopped at a time other than its regularly scheduled closing time. The Trust reserves the right to reprocess creation and redemption transactions that were initially processed at a NAV other than
the Funds official closing NAV (as the same may be subsequently adjusted), and to recover amounts from (or distribute amounts to) Authorized Participants based on the official closing NAV. The Trust reserves the right to advance the time by
which creation and redemption orders must be received for same business day credit as otherwise permitted by the SEC.
Fund Deposit
The consideration for purchase of Creation Units generally consists of Deposit Securities and the Cash Component, or, as permitted or
required by the Fund, of cash. Together, the Deposit Securities and Cash Component constitute the Fund Deposit, which represents the minimum initial and subsequent investment amount for a Creation Unit of the Fund. The portfolio of
securities required may, in certain limited circumstances (such as in connection with pending changes to the Funds Index), be different than the portfolio of securities the Fund will deliver upon redemption of Fund shares.
The function of the Cash Component is to compensate for any differences between the NAV per Creation Unit and the Deposit Amount (as defined
below). The Cash Component would be an amount equal to the difference between the NAV of the shares (per Creation Unit) and the Deposit Amount, which is an amount equal to the market value of the Deposit Securities. If the Cash Component
is a positive number (the NAV per Creation Unit exceeds the Deposit Amount), the Authorized Participant will deliver the Cash Component. If the Cash Component is a negative number (the NAV per Creation Unit is less than the Deposit Amount), the
Authorized Participant will receive the Cash Component. Computation of the Cash Component excludes any stamp duty 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. The Cash Component may also include a Dividend Equivalent Payment, which enables the Fund to make a complete distribution of dividends on the next dividend payment date, and is an amount
equal, on a per Creation Unit basis, to the dividends on all the securities held by the Fund with ex-dividend dates within the accumulation period for such distribution (the Accumulation Period), net of expenses and liabilities for such
period, as if all of the securities had been held by the Trust for the entire Accumulation Period. The Accumulation Period begins on the ex-dividend date for the Fund and ends on the next ex-dividend date.
BNYM, through the National Securities Clearing Corporation (NSCC), makes available on each Business Day, prior to the opening of
business (subject to amendments) on the Exchange (currently 9:30 a.m., Eastern time), the identity and the required number of each Deposit Security and the amount of the Cash Component (or cash deposit) to be included in the current Fund Deposit
(based on information at the end of the previous Business Day).
The Deposit Securities and Cash Component are subject to any adjustments,
as described below, in order to effect purchases of Creation Units of that Fund until such time as the next-announced composition of the Deposit Securities and Cash Component is made available.
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With respect to the Fund, the composition of the Deposit Securities and the amount of the
Cash Component may also change in response to adjustments to the weighting or composition of the component securities of the Index.
The
Trust may require the substitution of an amount of cash (a cash-in-lieu amount) to replace any Deposit Security of that Fund that is a non-deliverable instrument. The amount of cash contributed will be equivalent to the price of the
instrument listed as a Deposit Security. The Trust reserves the right to permit or require the substitution of a cash-in-lieu amount to be added to replace any Deposit Security that is a TBA transaction, that may not be available in
sufficient quantity for delivery, that may not be eligible for trading by a Participating Party (defined below), that may not be permitted to be re-registered in the name of the Trust as a result of an in-kind creation order pursuant to local law or
market convention, or that may not be eligible for transfer through the systems of the Depository Trust Company (DTC) or the Clearing Process (as discussed below), or the Federal Reserve System for U.S. Treasury securities. The Trust
also reserves the right to permit or require a cash-in-lieu amount where the delivery of Deposit Securities by the Authorized Participant (as described below) would be restricted under the securities laws or where the delivery of Deposit
Securities from an investor to the Authorized Participant would result in the disposition of Deposit Securities by the Authorized Participant becoming restricted under the securities laws, and in certain other situations. The Trust may permit a
cash-in-lieu amount for any reason at the Trusts sole discretion but is not required to do so. With respect to the Fund, the adjustments to the proportions of Deposit Securities described above will reflect changes known to the
Investment Adviser on the date of announcement to be in effect by the time of delivery of the Fund Deposit, in the composition of the Index or resulting from stock splits and other corporate actions.
Procedures for Creating Creation Units
To be eligible to place orders with the Distributor and to create a Creation Unit of the Fund, an entity must be: (i) a
Participating Party, i.e. a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the NSCC (the Clearing Process), a clearing agency that is registered
with the SEC; or (ii) a participant of DTC (DTC Participant) and must have executed an agreement with the Distributor (and accepted by the Transfer Agent), with respect to creations and redemptions of Creation Units
(Participant Agreement) (discussed below). A Participating Party or DTC Participant who has executed a Participant Agreement is referred to as an Authorized Participant. All shares of the Fund, however created, will be
entered on the records of DTC in the name of its nominee for the account of a DTC Participant.
Except as described below, and in all
cases subject to the terms of the applicable Participant Agreement, all orders to create Creation Units of the Fund must be received by the Transfer Agent no later than the closing time of the regular trading session of the Exchange (Order
Cutoff Time) (ordinarily 4:00 p.m., Eastern time) in each case on the date such order is placed for creation of Creation Units to be effected based on the NAV of shares of the Fund as next determined after receipt of an order in proper form.
Orders requesting substitution of a cash-in-lieu amount or a cash deposit (collectively, Non-Standard Orders), must be received by the Transfer Agent no later than 3:00 p.m., Eastern time. On days when the Exchange closes
earlier than normal (such as the day before a holiday), the Fund requires standard orders to create Creation Units to be placed by the earlier closing time and Non-Standard Orders to create Creation Units must be received no later than one hour
prior to the earlier closing time. Notwithstanding the foregoing, the Trust may, but is not required to, permit Non-Standard Orders until 4:00 p.m., Eastern time, or until the market close (in the event the Exchange closes early). 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 through the Transfer Agents
electronic order system or by telephone or other transmission method acceptable to the Transfer Agent and approved by the Distributor pursuant to procedures set forth in the Participant Agreement. Economic or market disruptions or changes, or
telephone or other communication failure may impede the ability to reach the Transfer Agent, Distributor or an Authorized Participant.
All investor orders to create Creation Units shall be placed with an Authorized Participant in the form required by such Authorized
Participant. In addition, an Authorized Participant may request that an investor make certain representations or enter into agreements with respect to an order (to provide for payments of cash). Investors should be aware that their particular broker
may not have executed a Participant Agreement and, therefore, orders to create Creation Units of the Fund will have to be placed by the investors broker through an Authorized Participant. In such cases, there may be additional charges to such
investor. A limited number of broker-dealers are expected to execute a Participant Agreement and only a small number of such Authorized Participants are expected to have international capabilities.
Creation Units may be created in advance of the receipt by the Trust of all or a portion of the Fund Deposit. In such cases, the Authorized
Participant will remain liable for the full deposit of the missing portion(s) of the Fund Deposit and will be required to post collateral with the Trust consisting of cash at least equal to a percentage of the marked-to-market value of such missing portion(s) that is specified in the Participant Agreement. The Trust may use such collateral to buy the missing portion(s) of the
B-68
Fund Deposit at any time and will subject such Authorized Participant to liability for any shortfall between the cost to the Trust of purchasing such securities and the value of such collateral.
The Trust will have no liability for any such shortfall. The Trust will return any unused portion of the collateral to the Authorized Participant once the entire Fund Deposit has been properly received by the Transfer Agent and deposited into the
Trust.
Orders for Creation Units that are effected outside the Clearing Process are likely to require transmittal by the DTC Participant
earlier on the Transmittal Date than orders effected using the Clearing Process. Those persons placing orders outside the Clearing Process should ascertain the deadlines applicable to DTC and the Federal Reserve Bank wire system by contacting the
operations department of the broker or depository institution effectuating such transfer of Deposit Securities and Cash Component.
Orders
to create Creation Units of the Fund may be placed through the Clearing Process (see Placement of Creation Orders Using Clearing Process) or outside the Clearing Process (see Placement of Creation Orders Outside Clearing
Process).
Placement of Creation Orders Using Clearing Process
Fund Deposits created through the Clearing Process, if available, must be delivered through a Participating Party that has executed a
Participant Agreement.
The Participant Agreement authorizes the Transfer Agent to transmit to NSCC on behalf of the Participating Party
such trade instructions as are necessary to effect the Participating Partys creation order. Pursuant to such trade instructions from the Transfer Agent to NSCC, the Participating Party agrees to transfer the requisite Deposit Securities (or
contracts to purchase such Deposit Securities that are expected to be delivered in a regular way manner by the second (2nd) Business Day) and the Cash Component to the Trust, together with such additional information as may be
required by the Transfer Agent and the Distributor as set forth in the Participant Agreement. An order to create Creation Units of the Fund through the Clearing Process is deemed received by the Transfer Agent, and approved by the Distributor on the
Transmittal Date if (i) such order is received by the Transfer Agent not later than the Order Cutoff Time on such Transmittal Date and (ii) all other procedures set forth in the Participant Agreement are properly followed. All orders are
subject to acceptance by the Distributor.
Placement of Creation Orders Outside Clearing Process
Fund Deposits created outside the Clearing Process must be delivered through a DTC Participant that has executed a Participant Agreement. A DTC
Participant who wishes to place an order creating Creation Units of the Fund to be effected outside the Clearing Process need not be a Participating Party, but such orders must state that the DTC Participant is not using the Clearing Process and
that the creation of Creation Units will instead be effected through a transfer of securities and cash. The Fund Deposit transfer must be ordered by the DTC Participant in a timely fashion so as to ensure the delivery of the requisite number of
Deposit Securities through DTC to the account of the Trust no later than 11:00 a.m. Eastern time, on the next Business Day immediately following the Transmittal Date.
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. The cash equal to the Cash Component must be transferred directly to the Transfer Agent through the Federal Reserve wire system
in a timely manner so as to be received by the Transfer Agent no later than 2:00 p.m. Eastern time on the next Business Day immediately following the Transmittal Date. An order to create Creation Units of the Fund outside the Clearing Process is
deemed received by the Transfer Agent, and approved by the Distributor on the Transmittal Date if (i) such order is received by the Transfer Agent not later than the Order Cutoff Time on such Transmittal Date; and (ii) all other procedures
set forth in the Participant Agreement are properly followed. However, if the Transfer Agent does not receive both the requisite Deposit Securities and the Cash Component in a timely fashion on the next Business Day immediately following the
Transmittal Date, such order will be cancelled. Upon written notice to the Transfer Agent, such cancelled order may be resubmitted the following Business Day using the Fund Deposit as newly constituted to reflect the current NAV of the Fund. The
delivery of Creation Units so created will occur no later than the second (2nd) Business Day following the day on which the creation order is deemed received by the Transfer Agent and approved by the Distributor.
Additional transaction fees may be imposed with respect to transactions effected outside the Clearing Process (through a DTC participant) and
in circumstances in which any cash can be used in lieu of Deposit Securities to create Creation Units. (See Creation Transaction Fee section below.)
B-69
Acceptance of Creation Orders
The Trust and the Distributor reserve the absolute right to reject or revoke acceptance of a creation order transmitted to it in respect to the
Fund, for example if: (i) the order is not in proper form in accordance with 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 the Fund; (iii) acceptance of the Fund Deposit would have certain adverse tax consequences to the Fund; (iv) acceptance of the Fund Deposit would, in the opinion of counsel, be unlawful; (v) acceptance of the Fund Deposit
would otherwise, in the discretion of the Trust or the Investment Adviser, have an adverse effect on the Trust or the rights of beneficial owners of the Fund; or (vi) in the event that circumstances outside the control of the Trust, the
Transfer Agent, the Distributor or the Investment Adviser make it for all practical purposes impossible to process creation orders. Examples of such circumstances include acts of God; public service or utility problems such as fires, floods, extreme
weather conditions and power outages resulting in telephone, facsimile and computer failures; market conditions or activities causing trading halts; systems failures involving computer or other information systems affecting the Trust, the Investment
Adviser, the Distributor, DTC, the Clearing Process, Federal Reserve, the Transfer Agent or any other participant in the creation process, and other extraordinary events. The Distributor shall notify the Authorized Participant acting on behalf of
the creator of a Creation Unit of its rejection of the order of such person. Neither the Trust, the Transfer Agent, the Distributor nor the Investment Adviser are under any 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.
All questions as to
the number of shares of Deposit Securities and the validity, form, eligibility, and acceptance for deposit of any securities to be delivered and the amount and form of the Cash Component, as applicable, shall be determined by the Trust, and the
Trusts determination shall be final and binding.
Creation Transaction Fee
A fixed creation transaction fee payable to the Custodian is imposed on each creation transaction regardless of the number of Creation Units
purchased in the transaction, in the following amounts:
|
|
|
|
|
Fund
|
|
Creation Transaction Fee
|
|
Goldman Sachs Hedge Industry VIP ETF
|
|
$
|
250
|
|
In the case of cash creations or where the Trust permits or requires a creator to substitute cash in lieu of
depositing a portion of the Deposit Securities, the creator may be assessed an additional variable charge to compensate the Fund for the costs associated with purchasing the applicable securities. (See Fund Deposit section above.) As a
result, in order to seek to replicate the in-kind creation order process, the Trust expects to purchase, in the secondary market or otherwise gain exposure to, the portfolio securities that could have been delivered as a result of an in-kind
creation order pursuant to local law or market convention, or for other reasons (Market Purchases). In such cases where the Trust makes Market Purchases, the Authorized Participant will reimburse the Trust for, among other things, any
difference between the market value at which the securities and/or financial instruments were purchased by the Trust and the cash in lieu amount (which amount, at the Investment Advisers discretion, may be capped), applicable registration
fees, brokerage commissions and certain taxes. The Investment Adviser may adjust the transaction fee to the extent the composition of the creation securities changes or cash in lieu is added to the Cash Component to protect ongoing shareholders.
Creators of Creation Units are responsible for the costs of transferring the securities constituting the Deposit Securities to the account of the Trust. See Portfolio Transactions and Brokerage for additional information regarding
certain cash creation transactions. From time to time, all or a portion of the Funds fixed creation transaction fee may be waived at the sole discretion of the Investment Adviser, including in connection with an Authorized Participants
investment of seed capital in the Fund or where an Authorized Participant is engaged in certain customized creation and redemption basket activity that is designed to benefit the Fund by facilitating index tracking in a tax efficient manner
(i.e., to minimize the realization of capital gains).
Redemption of Creation Units
Shares may be redeemed only in Creation Units at their NAV next determined after receipt of a redemption request in proper form on a Business
Day and only through a Participating Party or DTC Participant who has executed a Participant Agreement. The Fund will not redeem Shares in amounts less than Creation Units (except the Fund may redeem Shares in amounts less than a Creation Unit in
the event the Fund is being liquidated). Beneficial owners must accumulate enough Shares in the secondary market to constitute a Creation Unit in order to have such Shares redeemed by the Trust. There can be no assurance, however, that there will be
sufficient liquidity in the public trading market at any time to permit assembly of a Creation Unit. Authorized Participants should expect to incur brokerage and other costs in connection with assembling a sufficient number of Shares to constitute a
redeemable Creation Unit. All redemptions are subject to the procedures contained in the applicable Participant Agreement.
B-70
With respect to the Fund, BNYM, through the NSCC, makes available immediately prior to the
opening of business on the Exchange (currently 9:30 a.m., Eastern time) on each Business Day, the identity of the Funds securities and/or an amount of cash that will be applicable (subject to possible amendment or correction) to redemption
requests received in proper form (as described below) on that day. All orders are subject to acceptance by the Distributor. The Funds securities received on redemption (Fund Securities) may include, with respect to the Fund,
securities in different proportions than securities of the Index or may include securities not currently represented in the Index. Fund Securities received on redemption may not be identical to Deposit Securities that are applicable to creations of
Creation Units.
Unless cash only redemptions are available or specified for the Fund, the redemption proceeds for a Creation Unit will
generally consist of Fund Securities as announced on the Business Day of the request for a redemption order received in proper form plus cash in an amount equal to the difference between the NAV of the Shares being redeemed, as next
determined after a receipt of a request in proper form, and the value of the Fund Securities, less the redemption transaction fee and variable fees described below. Notwithstanding the foregoing, the Trust will substitute a cash-in-lieu
amount to replace any Fund Security that is a non-deliverable instrument. The Trust may permit a cash-in-lieu amount for any reason at the Trusts sole discretion but is not required to do so. The amount of cash paid out in such
cases will be equivalent to the value of the instrument listed as a Fund Security. In the event that the Fund Securities have a value greater than the NAV of the Shares, a compensating cash payment equal to the difference is required to be made by
an Authorized Participant.
Redemptions of shares for Fund Securities will be subject to compliance with applicable U.S. federal and state
securities laws, and the Fund reserves 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. An Authorized Participant, or a beneficial owner of shares for which it is acting, subject to a legal restriction with respect to a particular security included in the redemption of a Creation Unit may be paid an equivalent amount
of cash. This would specifically prohibit delivery of Fund Securities that are not registered in reliance upon Rule 144A under the 1933 Act to a redeeming beneficial owner of shares that is not a qualified institutional buyer, as such
term is defined under Rule 144A of the 1933 Act. The Authorized Participant may request the redeeming beneficial owner of the shares to complete an order form or to enter into agreements with respect to such matters as compensating cash payment.
The right of redemption may be suspended or the date of payment postponed with respect to the Fund: (i) for any period during which
the NYSE is closed (other than customary weekend and holiday closings); (ii) for any period during which trading on the NYSE is suspended or restricted; (iii) for any period during which an emergency exists as a result of which disposal by
the Fund of securities it owns or determination of the Funds NAV is not reasonably practicable; or (iv) in such other circumstances as permitted by the SEC.
If the Trust determines, based on information available to the Trust when a redemption request is submitted by an Authorized Participant, that
(i) the short interest of the Fund in the marketplace is greater than or equal to 100% and (ii) the orders in the aggregate from all Authorized Participants redeeming Fund Shares on a Business Day represent 25% or more of the outstanding
Shares of the Fund, such Authorized Participant will be required to verify to the Trust the accuracy of its representations that are deemed to have been made by submitting a request for redemption. If, after receiving notice of the verification
requirement, the Authorized Participant does not verify the accuracy of its representations that are deemed to have been made by submitting a request for redemption in accordance with this requirement, its redemption request will be considered not
to have been received in proper form.
Redemption Transaction Fee
The basic redemption transaction fee is the same no matter how many Creation Units are being redeemed pursuant to any one redemption request,
in the following amounts:
|
|
|
|
|
Fund
|
|
Redemption Transaction Fee
|
|
Goldman Sachs Hedge Industry VIP ETF
|
|
$
|
250
|
|
An additional variable for cash redemptions or partial cash redemptions (when cash redemptions are permitted
or required for the Fund) may also be imposed to compensate the Fund for the costs associated with selling the applicable securities. As a result, in order to seek to replicate the in-kind redemption order process, the Trust expects to sell, in the
secondary market, the portfolio securities or settle any financial instruments that may not be permitted to be re-registered in the name of the Participating Party as a result of an in-kind redemption order pursuant to local law or market
convention, or for other reasons (Market Sales). In such cases where the Trust makes Market Sales, the Authorized Participant will reimburse the Trust for,
B-71
among other things, any difference between the market value at which the securities and/or financial instruments were sold or settled by the Trust and the cash in lieu amount (which amount, at
the Investment Advisers discretion, may be capped), applicable registration fees, brokerage commissions and certain taxes (Transaction Costs). The Investment Adviser may adjust the transaction fee to the extent the composition of
the redemption securities changes or cash in lieu is added to the Cash Component to protect ongoing shareholders. In no event will fees charged by the Fund in connection with a redemption exceed 2% of the value of each Creation Unit. Investors who
use the services of a broker or other such intermediary may be charged a fee for such services. See Portfolio Transactions and Brokerage for additional information regarding certain cash redemption transactions. To the extent the Fund
cannot recoup the amount of Transaction Costs incurred in connection with a redemption from the redeeming shareholder because of the 2% cap or otherwise, those Transaction Costs will be borne by the Funds remaining shareholders and negatively
affect the Funds performance. From time to time, all or a portion of the Funds basic redemption transaction fee may be waived at the sole discretion of the Investment Adviser, including in connection with an Authorized Participants
redemption of seed capital invested in the Fund or where an Authorized Participant is engaged in certain customized creation and redemption basket activity that is designed to benefit the Fund by facilitating index tracking in a tax efficient manner
(i.e., to minimize the realization of capital gains).
Placement of Redemption Orders Using Clearing Process
Orders to redeem Creation Units of the Fund through the Clearing Process, if available, must be delivered through a Participating Party that
has executed the Participant Agreement. An order to redeem Creation Units of the Fund using the Clearing Process is deemed received on the Transmittal Date if (i) such order is received by the Transfer Agent not later than 4:00 p.m. Eastern
time on such Transmittal Date; and (ii) all other procedures set forth in the Participant Agreement are properly followed; such order will be effected based on the NAV of the Fund as next determined. An order to redeem Creation Units of the
Fund using the Clearing Process made in proper form but received by the Fund after 4:00 p.m. Eastern time, will be deemed received on the next Business Day immediately following the Transmittal Date. The requisite Fund Securities (or contracts to
purchase the Fund Securities which are expected to be delivered in a regular way manner) and the applicable cash payment will be transferred by the second (2nd) Business Day following the date on which such request for redemption is
deemed received.
Placement of Redemption Orders Outside Clearing Process
Orders to redeem Creation Units of the Fund outside the Clearing Process must be delivered through a DTC Participant that has executed the
Participant Agreement. A DTC Participant who wishes to place an order for redemption of Creation Units of the Fund to be effected outside the Clearing Process need not be a Participating Party, but such orders must state that the DTC Participant is
not using the Clearing Process and that redemption of Creation Units of the Fund will instead be effected through transfer of Creation Units of the Fund directly through DTC. An order to redeem Creation Units of the Fund outside the Clearing Process
is deemed received by BNYM on the Transmittal Date if (i) such order is received by BNYM not later than 4:00 p.m. Eastern time on such Transmittal Date; (ii) such order is preceded or accompanied by the requisite number of Shares of
Creation Units specified in such order, which delivery must be made through DTC to BNYM no later than 11:00 a.m. Eastern time on such Transmittal Date; and (iii) all other procedures set forth in the Participant Agreement are properly followed.
After BNYM has deemed an order for redemption outside the Clearing Process received, BNYM will initiate procedures to transfer the
requisite Fund Securities (or contracts to purchase the Fund Securities) which are expected to be delivered within two Business Days and the cash redemption payment to the redeeming Beneficial Owner by the second Business Day following the
Transmittal Date on which such redemption order is deemed received by BNYM. Additional transaction fee may be imposed with respect to transactions effected outside the Clearing Process. (See Redemption Transaction Fee section above.)
B-72
BOOK ENTRY ONLY SYSTEM
DTC acts as securities depositary for the Shares. Shares of the Fund are represented by securities registered in the name of DTC or its
nominee and deposited with, or on behalf of, DTC. Certificates will not be issued for Shares.
DTC, a
limited-purpose trust company, was created to hold securities of the DTC Participants and to facilitate the clearance and settlement of securities transactions among the DTC Participants in such securities
through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the NYSE and the Financial
Industry Regulatory Authority (FINRA). Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either
directly or indirectly (the Indirect Participants).
Beneficial ownership of Shares is limited to DTC Participants, Indirect
Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in Shares (owners of such beneficial interests are referred to herein as Beneficial Owners) is shown on, and
the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and Beneficial Owners that are not DTC Participants).
Beneficial Owners will receive from or through the DTC Participant a written confirmation relating to their purchase of Shares.
Conveyance of all notices, statements and other communications to Beneficial Owners is effected as follows. Pursuant to the Depositary
Agreement between the Trust and DTC, DTC is required to make available to the Trust upon request and for a fee to be charged to the Trust a listing of the Shares holdings of each DTC Participant. The Trust shall inquire of each such DTC Participant
as to the number of Beneficial Owners holding Shares, directly or indirectly, through such DTC Participant. The Trust shall provide each such DTC Participant with copies of such notice, statement or other communication, in such form, number and at
such place as such DTC Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such Beneficial Owners. In addition, the Trust shall pay to each
such DTC Participant a fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements.
Share distributions shall be made to DTC or its nominee, Cede & Co., as the registered holder of all Shares. DTC or its nominee, upon
receipt of any such distributions, shall credit immediately DTC Participants accounts with payments in amounts proportionate to their respective beneficial interests in Shares as shown on the records of DTC or its nominee. Payments by DTC
Participants to Indirect Participants and Beneficial Owners of Shares held through such DTC Participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers in
bearer form or registered in a street name, and will be the responsibility of such DTC Participants.
The Trust has no
responsibility or liability for any aspects of the records relating to or notices to Beneficial Owners, or payments made on account of beneficial ownership interests in such Shares, or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants and the Indirect Participants and Beneficial Owners owning through such DTC
Participants.
DTC may determine to discontinue providing its service with respect to the Shares at any time by giving reasonable notice
to the Trust and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the Trust shall take action either to find a replacement for DTC to perform its functions at a comparable cost or, if such a
replacement is unavailable, to issue and deliver printed certificates representing ownership of Shares, unless the Trust makes other arrangements with respect thereto satisfactory to the Exchange.
Request for Multiple Copies of Shareholder Documents
To reduce expenses, it is intended that only one copy of the Funds Prospectus and each annual and semi-annual report, when available,
will be mailed to those addresses shared by two or more accounts. If you wish to receive individual copies of these documents, please contact the financial intermediary through which you hold your shares.
B-73
DISTRIBUTION AND SERVICE PLAN
The Board of Trustees of the Trust has adopted a distribution and service plan (Plan) pursuant to Rule 12b-1 under the Act. Under
the Plan, the Fund is authorized to pay distribution fees in connection with the sale and distribution of its Shares and pay service fees in connection with the provision of ongoing services to shareholders of the Fund and the maintenance of
shareholder accounts in an amount up to 0.25% of its average daily net assets each year.
No Rule 12b-1 fees are currently paid by the
Fund, and there are no current plans to impose these fees. However, in the event Rule 12b-1 fees are charged in the future, because these fees are paid out of the Funds assets on an ongoing basis, these fees will increase the cost of your
investment in the Fund. By purchasing Shares subject to distribution fees and service fees, you may pay more over time than you would by purchasing Shares with other types of sales charge arrangements. Long-term shareholders may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the rules of FINRA. The net income attributable to Shares will be reduced by the amount of distribution fees and service fees and other expenses of the Fund.
B-74
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Investment Adviser is responsible for decisions to buy and sell securities for the Fund, the selection of brokers and dealers to effect
the transactions and the negotiation of brokerage commissions, if any. Purchases and sales of securities may be executed internally by a broker-dealer, effected on an agency basis in a block transaction, or routed to competing market centers for
execution. The compensation paid to the broker for providing execution services generally is negotiated and reflected in either a commission or a net price. Executions provided on a net price basis, with dealers acting as principal for
their own accounts without a stated commission, usually include a profit to the dealer. In underwritten offerings, securities are purchased at a fixed price which includes an amount of compensation to the underwriter, generally referred to as the
underwriters concession or discount. On occasion, certain money market instruments may be purchased directly from an issuer, in which case no commissions or discounts are paid.
In placing orders for portfolio securities or other financial instruments of the Fund, the Investment Adviser is generally required to give
primary consideration to obtaining the most favorable execution and net price available. This means that the Investment Adviser will seek to execute each transaction at a price and commission, if any, which provides the most favorable total cost or
proceeds reasonably attainable in the circumstances. As permitted by Section 28(e) of the Securities Exchange Act of 1934 (Section 28(e)), the Fund may pay a broker which provides brokerage and research services to the Fund an
amount of disclosed commission in excess of the commission which another broker would have charged for effecting that transaction. Such practice is subject to a good faith determination that such commission is reasonable in light of the services
provided and to such policies as the Trustees may adopt from time to time. While the Investment Adviser generally seeks reasonably competitive spreads or commissions, the Fund will not necessarily be paying the lowest spread or commission available.
Within the framework of this policy, the Investment Adviser will consider research and investment services provided by brokers or dealers who effect or are parties to portfolio transactions of the Fund, the Investment Adviser and their affiliates,
or their other clients. Such research and investment services are those which brokerage houses customarily provide to institutional investors and include research reports on particular industries and companies; economic surveys and analyses;
recommendations as to specific securities; research products including quotation equipment and computer related programs; advice concerning the value of securities, the advisability of investing in, purchasing or selling securities and the
availability of securities or the purchasers or sellers of securities; analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy and performance of accounts; services relating to effecting
securities transactions and functions incidental thereto (such as clearance and settlement); and other lawful and appropriate assistance to the Investment Adviser in the performance of their decision-making responsibilities.
Such services are used by the Investment Adviser in connection with all of its investment activities, and some of such services obtained in
connection with the execution of transactions for the Fund may be used in managing other investment accounts. Conversely, brokers furnishing such services may be selected for the execution of transactions of such other accounts, whose aggregate
assets may be larger than those of the Fund, and the services furnished by such brokers may be used by the Investment Adviser in providing management services for the Trust. The Investment Adviser may also participate in so-called commission
sharing arrangements and client commission arrangements under which the Investment Adviser may execute transactions through a broker-dealer and request that the broker-dealer allocate a portion of the commissions or commission
credits to another firm that provides research to the Investment Adviser. The Investment Adviser excludes from use under these arrangements those products and services that are not fully eligible under applicable law and regulatory
interpretations even as to the portion that would be eligible if accounted for separately.
The research services received as part
of commission sharing and client commission arrangements will comply with Section 28(e) and may be subject to different legal requirements in the jurisdictions in which the Investment Adviser does business. Participating in commission sharing
and client commission arrangements may enable the Investment Adviser to consolidate payments for research through one or more channels using accumulated client commissions or credits from transactions executed through a particular broker-dealer to
obtain research provided by other firms. Such arrangements also help to ensure the continued receipt of research services while facilitating best execution in the trading process. The Investment Adviser believes such research services are useful in
its investment decision-making process by, among other things, ensuring access to a variety of high quality research, access to individual analysts and availability of resources that the Investment Adviser might not be provided access to absent such
arrangements.
On occasions when an Investment Adviser deems the purchase or sale of a security or other financial instruments to be in
the best interest of the Fund as well as its other customers (including any other fund or other investment company or advisory account for which such Investment Adviser acts as investment adviser or sub-investment adviser), the Investment Adviser,
to the extent permitted by applicable laws and regulations, may aggregate the securities to be sold or purchased for the Fund with those to be sold or purchased for such other customers in order to obtain the best net price and most favorable
execution under the
B-75
circumstances. In such event, allocation of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Investment Adviser in the manner it
considers to be equitable and consistent with its fiduciary obligations to the Fund and such other customers. In some instances, this procedure may adversely affect the price and size of the position obtainable for the Fund.
When creation or redemption transactions consist of cash, the transactions may require the Fund to contemporaneously transact with
broker-dealers for purchases of Deposit Securities or sales of Fund Securities (as defined above), as applicable. Depending on the timing of the transactions and certain other factors, such transactions may be placed with the purchasing or redeeming
Authorized Participant in its capacity as a broker-dealer or with its affiliated broker-dealer and conditioned upon an agreement with the Authorized Participant or its affiliated broker-dealer to transact at guaranteed prices in order to reduce
transaction costs incurred as a consequence of settling creation or redemption baskets in cash rather than in-kind.
Specifically,
following the Funds receipt of a creation or redemption order, to the extent such purchases or redemptions consist of a cash portion, the Fund may enter an order with the Authorized Participant or affiliated broker-dealer to purchase or sell
the Deposit Securities or Fund Securities, as applicable. Such Authorized Participant or its affiliated broker-dealer will be required to guarantee that the Fund will achieve execution of its order at a price at least as favorable to the Fund as the
Funds valuation of the Deposit Securities/Fund Securities used for purposes of calculating the NAV applied to the creation or redemption transaction giving rise to the order, which will depend on the results achieved by the executing firm and
will vary depending on market activity, timing and a variety of other factors.
An Authorized Participant is required to deposit an amount
with the Fund in order to ensure that the execution of the order on the terms noted above will be honored on orders arising from creation transactions executed by an Authorized Participant or its affiliate as broker-dealer. If the broker-dealer
executing the order achieves executions in market transactions at a price equal to or more favorable than the Funds valuation of the Deposit Securities, the Fund receives the benefit of the favorable executions and the deposit is returned to
the Authorized Participant. If, however, the broker-dealer executing the order is unable to achieve a price at least equal to the Funds valuation of the securities, the Fund retains the portion of the deposit equal to the full amount of the
execution shortfall (including any taxes, brokerage commissions or other costs) and may require the Authorized Participant to deposit any additional amount required to cover the full amount of the actual execution transaction.
An Authorized Participant agrees to pay the shortfall amount in order to ensure that a guarantee on execution will be honored for brokerage
orders arising from redemption transactions executed by an Authorized Participant or its affiliate as broker-dealer. If the broker-dealer executing the order achieves executions in market transactions at a price equal to or more favorable than the
Funds valuation of the Fund Securities, the Fund receives the benefit of the favorable executions. If, however, the broker-dealer is unable to achieve executions in market transactions at a price at least equal to the Funds valuation of
the securities, the Fund will be entitled to the portion of the offset equal to the full amount of the execution shortfall (including any taxes, brokerage commissions or other costs).
Commission rates in the U.S. are established pursuant to negotiations with the broker based on the quality and quantity of execution services
provided by the broker in the light of generally prevailing rates. The allocation of orders among brokers and the commission rates paid are reviewed periodically by the Trustees. The amount of brokerage commissions paid by the Fund may vary
substantially from year to year because of differences in shareholder purchase and redemption activity, portfolio turnover rates and other factors.
B-76
For the fiscal years ended August 31, 2019, August 31, 2018 August 31,
2017, the Fund paid brokerage commissions as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year ended
August 31, 2019
|
|
Total Brokerage
Commissions
Paid
|
|
|
Total Brokerage
Commissions Paid to
Goldman Sachs(1)
|
|
|
Total Amount of
Transactions on which
Commissions
Paid(2)
|
|
Hedge Industry VIP ETF
|
|
$
|
8,414
|
|
|
$
|
0 (0%)
|
|
|
$
|
175,337,939 (0%)
|
|
1
|
Percentages refer to percentage of total commissions paid to Goldman Sachs.
|
2
|
Percentages refer to percentage of total amount of transactions involving the payment of commissions effected
through Goldman Sachs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year ended
August 31, 2018
|
|
Total Brokerage
Commissions
Paid
|
|
|
Total Brokerage
Commissions Paid to
Goldman Sachs(1)
|
|
|
Total Amount of
Transactions on which
Commissions
Paid(2)
|
|
Hedge Industry VIP ETF
|
|
$
|
7,437
|
|
|
$
|
0 (0%)
|
|
|
$
|
196,717,336 (0%)
|
|
1
|
Percentages refer to percentage of total commissions paid to Goldman Sachs.
|
2
|
Percentages refer to percentage of total amount of transactions involving the payment of commissions effected
through Goldman Sachs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year ended
August 31, 2017
|
|
Total Brokerage
Commissions
Paid
|
|
|
Total Brokerage
Commissions Paid to
Goldman Sachs(1)
|
|
|
Total Amount of
Transactions on which
Commissions
Paid(2)
|
|
Hedge Industry VIP ETF
|
|
$
|
2,847
|
|
|
$
|
0 (0%)
|
|
|
$
|
67,465,128 (0%)
|
|
1
|
Percentages refer to percentage of total commissions paid to Goldman Sachs.
|
2
|
Percentages refer to percentage of total amount of transactions involving the payment of commissions effected
through Goldman Sachs.
|
Subject to the above considerations, the Investment Adviser may use Goldman Sachs or an
affiliate as a broker for the Fund. In order for Goldman Sachs or an affiliate, acting as agent, to effect securities or futures transactions for the Fund, the commissions, fees or other remuneration received by Goldman Sachs or an affiliate must be
reasonable and fair compared to the commissions, fees or other remuneration received by other brokers in connection with comparable transactions involving similar
B-77
securities or futures contracts. Furthermore, the Trustees, including a majority of the Independent Trustees, have adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to Goldman Sachs are consistent with the foregoing standard. Brokerage transactions with Goldman Sachs are also subject to such fiduciary standards as may be imposed upon Goldman Sachs by applicable law.
See Custodian, Sub-Custodians and Provider of Administrative Services for information regarding foreign exchange transaction
services and execution of trades in connection with certain creation and redemption transactions.
B-78
DETERMINATION OF NET ASSET VALUE
In accordance with procedures adopted by the Trustees, the NAV per share of the Funds Shares is calculated by the Funds provider
of administrative services by determining the value of the net assets attributed to the Fund and dividing by the number of outstanding shares of the Fund. All securities are generally valued on each Business Day as of the close of regular trading on
the NYSE (normally, but not always, 4:00 p.m. Eastern time), or such other times as the NYSE or the National Association of Securities Dealers Automated Quotations System (NASDAQ) market may officially close.
For the purpose of calculating the NAV per share of the Fund, investments are valued under valuation procedures established by the Trustees.
Portfolio securities of the Fund for which accurate market quotations are readily available are generally valued as follows: (i) equity securities listed on any U.S. or foreign stock exchange or on the NASDAQ will be valued at the last sale
price or the official closing price on the exchange or system in which they are principally traded on the valuation date. If there is no sale or official closing price on the valuation date, equity securities may be valued at the closing bid price
for long positions or the closing ask price for short positions at the time closest to, but no later than, the NAV calculation time. If the relevant exchange or system has not closed by the above mentioned time for determining the Funds NAV,
the securities will be valued at the last sale price or official closing price, or if not available at the bid price at the time the NAV is determined; (ii) over-the-counter equity securities not quoted on NASDAQ will be valued at the last sale
price on the valuation day or, if no sale occurs, at the last bid price for long positions or the last ask price for short positions at the time closest to, but no later than, the NAV calculation time; (iii) equity securities for which no
prices are obtained under sections (i) or (ii), including those for which a pricing service supplies no exchange quotation or a quotation that is believed by the Investment Adviser to not represent fair value, will be valued through the use of
broker quotes, if possible; (iv) fixed income securities will be valued via electronic feeds from independent pricing services to the administrator using evaluated prices provided by a recognized pricing service and dealer-supplied quotations.
Fixed income securities for which a pricing service either does not supply a quotation or supplies a quotation that is believed by the Investment Adviser to not represent fair value, will be valued through the use of broker quotes, if possible;
(v) fixed income securities for which accurate market quotations are not readily available will be valued by the Investment Adviser based on Board-approved fair valuation policies that incorporate matrix pricing or valuation models, which
utilize certain inputs and assumptions, including, but not limited to, yield or price with respect to comparable fixed income securities and various other factors; (vi) investments in open-end registered investment companies (excluding
investments in ETFs) and investments in private funds are valued based on the NAV of those registered investment companies or private funds (which may use fair value pricing as discussed in their prospectus or offering memorandum); (vii) spot
foreign exchange rates will be valued using a pricing service at the time closest to the time used for the index calculation of the Fund, and forward foreign currency contracts will be valued by adding forward points provided by an independent
pricing service to the spot foreign exchange rates and interpolating based upon maturity dates of each contract or by using outright forward rates, where available (if quotations are unavailable from a pricing service or, if the quotations by the
Investment Adviser are believed to be inaccurate, the contracts will be valued by calculating the mean between the last bid and ask quotations supplied by at least one dealer in such contracts); (viii) exchange-traded futures contracts will be
valued at the last published settlement price on the exchange where they are principally traded (or, if a sale occurs after the last published settlement price but before the NAV calculation time, at the last sale price at the time closest to, but
no later than, the NAV calculation time); (ix) exchange-traded options contracts with settlement prices will be valued at the last published settlement price on the exchange where they are principally traded (or, if a sale occurs after the last
published settlement price but before the NAV calculation time, at the last sale price at the time closest to, but no later than, the NAV calculation time); (x) exchange-traded options contracts without settlement prices will be valued at the
midpoint of the bid and ask prices on the exchange where they are principally traded (or, in the absence of two-way trading, at the last bid price for long positions and the last ask price for short positions at the time closest to, but no later
than, the NAV calculation time); (xi) over-the-counter derivatives, including, but not limited to, interest rate swaps, credit default swaps, total return index swaps, put/call option combos, total return basket swaps, index volatility and
foreign exchange (FX) variance swaps, will be valued at their fair market value as determined using counterparty supplied valuations, an independent pricing service or valuation models which use market data inputs supplied by an
independent pricing service; and (xii) all other instruments, including those for which a pricing service supplies no exchange quotation/price or a quotation that is believed by the Investment Adviser to be inaccurate, will be valued in
accordance with the valuation procedures approved by the Board of Trustees. Securities may also be valued at fair value in accordance with procedures approved by the Board of Trustees where the Funds provider of administrative services is
unable for other reasons to facilitate pricing of individual securities or calculate the Funds NAV, or if the Investment Adviser believes that such quotations do not accurately reflect fair value. Fair values determined in accordance with the
valuation procedures approved by the Board of Trustees may be based on subjective judgments and it is possible that the prices resulting from such valuation procedures may differ materially from the value realized on a sale.
The value of all assets and liabilities expressed in foreign currencies will be converted into U.S. dollar values at foreign currency exchange
rates generally determined as of 4:00 p.m. Greenwich Mean Time. If such quotations are not available, the rate of exchange will be determined in good faith under procedures established by the Board of Trustees.
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Generally, trading in securities on European, Asian and Far Eastern securities exchanges and
on over-the-counter markets in these regions is substantially completed at various times prior to the close of business on each Business Day in New York (i.e., a day on which the NYSE is open for trading). In addition, European, Asian or Far Eastern
securities trading generally or in a particular country or countries may not take place on all Business Days in New York. Furthermore, trading takes place in various foreign markets on days which are not Business Days in New York and days on which
the Funds NAV is not calculated. Such calculation does not take place contemporaneously with the determination of the prices of the majority of the portfolio securities used in such calculation.
The Investment Adviser, consistent with its procedures and applicable regulatory guidance, may (but need not) determine to make an adjustment
to the previous closing prices of either domestic or foreign securities in light of significant events, to reflect what it believes to be the fair value of the securities at the time of determining the Funds NAV. Significant events that could
affect a large number of securities in a particular market may include, but are not limited to: situations relating to one or more single issuers in a market sector; significant fluctuations in U.S. or foreign markets; market dislocations; market
disruptions or unscheduled market closings; equipment failures; natural or man-made disasters or acts of God; armed conflicts; governmental actions or other developments; as well as the same or similar events which may affect specific issuers or the
securities markets even though not tied directly to the securities markets. Other significant events that could relate to a single issuer may include, but are not limited to: corporate actions such as reorganizations, mergers and buy-outs; corporate
announcements, including those relating to earnings, products and regulatory news; significant litigation; ratings downgrades; bankruptcies; and trading limits or suspensions.
In general, fair value represents a good faith approximation of the current value of an asset and may be used when there is no public market
or possibly no market at all for an asset. A security that is fair valued may be valued at a price higher or lower than actual market quotations or the value determined by other funds using their own fair valuation procedures or by other investors.
The fair value of an asset may not be the price at which that asset is ultimately sold.
The proceeds received by the Fund and each other
series of the Trust from the issue or sale of its Shares, and all net investment income, realized and unrealized gain and proceeds thereof, subject only to the rights of creditors, will be specifically allocated to the Fund or particular series and
constitute the underlying assets of the Fund or series. The underlying assets of the Fund will be segregated on the books of account, and will be charged with the liabilities in respect of the Fund and with a share of the general liabilities of the
Trust. Expenses of the Trust with respect to the Fund and the other series of the Trust are generally allocated in proportion to the NAVs of the respective Fund except where allocations of expenses can otherwise be fairly made.
The Fund relies on various sources to calculate its NAV. The ability of the Funds provider of administrative services to calculate the
NAV per share of the Fund is subject to operational risks associated with processing or human errors, systems or technology failures, cyber attacks and errors caused by third party service providers, data sources, or trading counterparties. Such
failures may result in delays in the calculation of the Funds NAV and/or the inability to calculate NAV over extended time periods. The Fund may be unable to recover any losses associated with such failures. In addition, if the third-party
service providers and/or data sources upon which the Fund directly or indirectly relies to calculate its NAV or price individual securities are unavailable or otherwise unable to calculate the NAV correctly, it may be necessary for alternative
procedures to be utilized to price the securities at the time of determining the Funds NAV.
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SHARES OF THE TRUST
The Fund is a series of Goldman Sachs ETF Trust, a Delaware statutory trust formed on December 16, 2009.
The Trustees have authority under the Trusts Declaration of Trust to create and classify shares of beneficial interest in separate
series, without further action by shareholders. The Trustees also have authority to classify and reclassify any series of shares into one or more classes of shares. As of December 27, 2019, the Trustees have authorized the issuance of one class of
shares of the Fund (Shares). Additional series may be added in the future.
Each Share of the Fund represents a proportionate
interest in the assets belonging to the applicable class of the Fund and all expenses of the Fund are borne at the same rate by each class of shares. In addition, the fees and expenses set forth below for Shares may be subject to fee waivers or
reimbursements, as discussed more fully in the Funds Prospectus.
Certain aspects of the Shares may be altered after advance notice
to shareholders if it is deemed necessary in order to satisfy certain tax regulatory requirements.
When issued for the consideration
described in the Funds Prospectus, shares are fully paid and non-assessable. The Trustees may, however, cause shareholders, or shareholders of a particular series or class, to pay certain custodian, transfer agency, shareholder servicing or
similar charges by setting off the same against declared but unpaid dividends or by reducing share ownership (or by both means). In the event of liquidation, shareholders are entitled to share pro rata in the net assets of the Fund available for
distribution to such shareholders. All shares are freely transferable and have no preemptive, subscription or conversion rights. The Trustees may require Shareholders to redeem Shares for any reason under terms set by the Trustees.
The Act requires that where more than one series of shares exists, each series must be preferred over all other series in respect of assets
specifically allocated to such series. In addition, Rule 18f-2 under the Act provides that any matter required to be submitted by the provisions of the Act or applicable state law, or otherwise, to the holders of the outstanding voting securities of
an investment company such as the Trust shall not be deemed to have been effectively acted upon unless approved by the holders of a majority of the outstanding shares of each series affected by such matter. Rule 18f-2 further provides that a series
shall be deemed to be affected by a matter unless the interests of each series in the matter are substantially identical or the matter does not affect any interest of such series. However, Rule 18f-2 exempts the selection of independent public
accountants, the approval of principal distribution contracts and the election of trustees from the separate voting requirements of Rule 18f-2.
The Trust is not required to hold annual meetings of shareholders and does not intend to hold such meetings. In the event that a meeting of
shareholders is held, each Share of the Trust will be entitled, as determined by the Trustees without the vote or consent of the shareholders, either to one vote for each share or to one vote for each dollar of NAV represented by such share on all
matters presented to shareholders including the election of Trustees (this method of voting being referred to as dollar based voting). However, to the extent required by the Act or otherwise determined by the Trustees, series and classes
of the Trust will vote separately from each other. Shareholders of the Trust do not have cumulative voting rights in the election of Trustees. Meetings of shareholders of the Trust, or any series or class thereof, may be called by the Trustees,
certain officers or upon the written request of holders of 10% or more of the shares entitled to vote at such meetings. The Trustees will call a special meeting of shareholders for the purpose of electing Trustees, if, at any time, less than a
majority of Trustees holding office at the time were elected by shareholders. The shareholders of the Trust will have voting rights only with respect to the limited number of matters specified in the Declaration of Trust and such other matters as
the Trustees may determine or may be required by law.
The Declaration of Trust provides for indemnification of Trustees, officers,
employees and agents of the Trust unless the recipient is adjudicated (i) to be liable by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such persons office or
(ii) not to have acted in good faith in the reasonable belief that such persons actions were in the best interest of the Trust. The Declaration of Trust provides that, if any shareholder or former shareholder of any series is held
personally liable solely by reason of being or having been a shareholder and not because of the shareholders acts or omissions or for some other reason, the shareholder or former shareholder (or the shareholders heirs, executors,
administrators, legal representatives or general successors) shall be held harmless from and indemnified against all loss and expense arising from such liability. The Trust, acting on behalf of any affected series, must, upon request by such
shareholder, assume the defense of any claim made against such shareholder for any act or obligation of the series and satisfy any judgment thereon from the assets of the series.
The Declaration of Trust states that the Trust shall continue without limitation of time but, Trustees may without Shareholder approval
(i) sell and convey all or substantially all of the assets of the Trust or any affected Series to another trust, partnership, association, or corporation, or to a separate series of shares thereof, organized under the laws of any state, which
B-81
trust, partnership, association, or corporation is an open-end management investment company as defined in the Investment Company Act, or is a series thereof, for adequate consideration which may
include the assumption of all outstanding obligations, taxes, and other liabilities, accrued or contingent, of the Trust or any affected Series, and which may include shares of beneficial interest, stock, or other ownership interests of such trust,
partnership, association, or corporation or of a series thereof; or (ii) at any time, sell and convert into money all of the assets of the Trust or any affected series.
The Declaration of Trust authorizes the Trustees, without shareholder approval, to cause the Trust, or any series thereof, to merge,
reorganize or consolidate with any corporation, association, trust or other organization or sell or exchange all or substantially all of the property belonging to the Trust or any series thereof. In addition, the Trustees, without shareholder
approval, may adopt a master-feeder structure by investing all or a portion of the assets of a series of the Trust in the securities of another open-end investment company with substantially the same investment objective, restrictions and policies.
The Declaration of Trust permits the Trustees to amend the Declaration of Trust without a shareholder vote. However, shareholders of the
Trust have the right to vote on any amendment (i) that would adversely affect the voting rights of shareholders; (ii) that is required by law to be approved by shareholders; (iii) that would amend the provisions of the Declaration of
Trust regarding amendments and supplements thereto; or (iv) that the Trustees determine to submit to shareholders.
Shareholder and Trustee
Liability
Under Delaware Law, the shareholders of the Fund are not generally subject to liability for the debts or obligations of the
Trust. Similarly, Delaware law provides that a series of the Trust will not be liable for the debts or obligations of any other series of the Trust. However, no similar statutory or other authority limiting statutory trust shareholder liability
exists in other states. As a result, to the extent that a Delaware statutory trust or a shareholder is subject to the jurisdiction of courts of such other states, the courts may not apply Delaware law and may thereby subject the Delaware statutory
trust shareholders to liability. To guard against this risk, the Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of a series. Notice of such disclaimer will normally be given in each agreement,
obligation or instrument entered into or executed by a series of the Trust. The Declaration of Trust provides for indemnification by the relevant series for all loss suffered by a shareholder as a result of an obligation of the series. The
Declaration of Trust also provides that a series shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the series and satisfy any judgment thereon. In view of the above, the risk of personal
liability of shareholders of a Delaware statutory trust is remote.
In addition to the requirements under Delaware law, the Declaration of
Trust provides that shareholders of a series may bring a derivative action on behalf of the series only if the following conditions are met: (a) shareholders eligible to bring such derivative action under Delaware law who collectively hold at
least 10% of the outstanding shares of the series, or 10% of the outstanding shares of the class to which such action relates, shall join in the request for the Trustees to commence such action; and (b) the Trustees must be afforded a
reasonable amount of time to consider such shareholder request and to investigate the basis of such claim. The Trustees will be entitled to retain counsel or other advisers in considering the merits of the request and may require an undertaking by
the shareholders making such request to reimburse the series for the expense of any such advisers in the event that the Trustees determine not to bring such action.
The Declaration of Trust further provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law, but nothing
in the Declaration of Trust protects a Trustee against liability to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his or her
office.
B-82
TAXATION
The following are certain additional U.S. federal income tax considerations generally affecting the Fund and the purchase, ownership and
disposition of shares of the Fund that are not described in the Prospectus. The discussions below and in the Prospectus are only summaries and are not intended as substitutes for careful tax planning. They do not address special tax rules applicable
to certain classes of investors, such as tax-exempt entities, insurance companies and financial institutions. Each prospective shareholder is urged to consult his or her own tax adviser with respect to the specific federal, state, local and foreign
tax consequences of investing in the Fund. The summary is based on the laws in effect on December 27, 2019 which are subject to change. Future changes in tax laws may adversely impact the Fund and its shareholders.
Fund Taxation
The Fund is treated
as a separate taxable entity and has elected to be treated and intends to qualify for its taxable years as a regulated investment companies under Subchapter M of Subtitle A, Chapter 1, of the Code.
There are certain tax requirements that the Fund must follow if it is to avoid federal taxation. In its efforts to adhere to these
requirements, the Fund may have to limit its investment activities in some types of instruments. Qualification as a regulated investment company under the Code requires, among other things, that (i) the Fund derive at least 90% of its gross
income for each taxable year from dividends, interest, payments with respect to securities loans, gains from the sale or other disposition of stocks or securities or foreign currencies, net income from qualified publicly traded partnerships or other
income (including but not limited to gains from options, futures, and forward contracts) derived with respect to the Funds business of investing in stocks, securities or currencies (the 90% gross income test); and (ii) the
Fund diversify its holdings so that, in general, at the close of each quarter of its taxable year, (a) at least 50% of the fair market value of the Funds total (gross) assets is comprised of cash, cash items, U.S. Government Securities,
securities of other regulated investment companies and other securities limited in respect of any one issuer to an amount not greater in value than 5% of the value of the Funds total assets and to not more than 10% of the outstanding voting
securities of such issuer, and (b) not more than 25% of the value of its total (gross) assets is invested in the securities of any one issuer (other than U.S. Government Securities and securities of other regulated investment companies), two or
more issuers controlled by the Fund and engaged in the same, similar or related trades or businesses, or certain publicly traded partnerships.
For purposes of the 90% gross income test, income that the Fund earns from equity interests in certain entities that are not treated as
corporations or as qualified publicly traded partnerships for U.S. federal income tax purposes (e.g., partnerships or trusts) will generally have the same character for the Fund as in the hands of such an entity; consequently, the Fund may be
required to limit its equity investments in any such entities that earn fee income, rental income, or other nonqualifying income. In addition, future Treasury regulations could provide that qualifying income under the 90% gross income test will not
include gains from foreign currency transactions that are not directly related to the Funds principal business of investing in stock or securities or options and futures with respect to stock or securities. Using foreign currency positions or
entering into foreign currency options, futures and forward or swap contracts for purposes other than hedging currency risk with respect to securities in the Funds portfolio or anticipated to be acquired may not qualify as
directly-related under these tests.
If the Fund complies with the foregoing provisions, then in any taxable year in which the
Fund distributes, in compliance with the Codes timing and other requirements, an amount at least equal to the sum of 90% of its investment company taxable income (which includes dividends, taxable interest, taxable accrued original
issue discount and market discount income, income from securities lending, any net short-term capital gain in excess of net long-term capital loss, certain net realized foreign exchange gains and any other taxable income other than net capital
gain, as defined below, and is reduced by deductible expenses), plus 90% of the excess of its gross tax-exempt interest income (if any) over certain disallowed deductions, the Fund (but not its shareholders) will be relieved of federal income
tax on any income of the Fund, including long-term capital gains, distributed to shareholders. If, instead, the Fund retains any investment company taxable income or net capital gain (the excess of net long-term capital gain over net short-term
capital loss), it will be subject to a tax at regular corporate rates on the amount retained. Because there are some uncertainties regarding the computation of the amounts deemed distributed to Fund shareholders for these purposes including,
in particular, uncertainties regarding the portion, if any, of amounts paid in redemption of Fund shares that should be treated as such distributions there can be no assurance that the Fund will avoid corporate-level tax in each year.
The Fund generally intends to distribute for each taxable year to its shareholders all or substantially all of its investment company taxable
income, net capital gain and any tax-exempt interest. Exchange control or other foreign laws, regulations or practices may restrict repatriation of investment income, capital or the proceeds of securities sales by foreign investors and may therefore
make it more difficult for the Fund to satisfy the distribution requirements described above, as well as the excise tax
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distribution requirements described below. The Fund generally expects, however, to be able to obtain sufficient cash to satisfy those requirements, from new investors, the sale of securities or
other sources. If for any taxable year the Fund does not qualify as a regulated investment company, it will be taxed on all of its taxable income and net capital gain at corporate rates, and its distributions to shareholders will generally be
taxable as ordinary dividends to the extent of its current and accumulated earnings and profits.
If the Fund retains any net capital
gain, the Fund may designate the retained amount as undistributed capital gains in a notice to its shareholders who (1) if subject to U.S. federal income tax on long-term capital gains, will be required to include in income for federal income
tax purposes, as long-term capital gain, their shares of that undistributed amount, and (2) will be entitled to credit their proportionate shares of the tax paid by the Fund against their U.S. federal income tax liabilities, if any, and to
claim refunds to the extent the credit exceeds those liabilities. For U.S. federal income tax purposes, the tax basis of shares owned by a shareholder of the Fund will be increased by the amount of any such undistributed net capital gain included in
the shareholders gross income and decreased by the federal income tax paid by the Fund on that amount of net capital gain.
To avoid
a 4% federal excise tax, the Fund must generally distribute (or be deemed to have distributed) by December 31 of each calendar year an amount at least equal to the sum of 98% of its taxable ordinary income (taking into account certain deferrals
and elections) for the calendar year, 98.2% of the excess of its capital gains over its capital losses (generally computed on the basis of the one-year period ending on October 31 of such year), and all taxable ordinary income and the excess of
capital gains over capital losses for all previous years that were not distributed for those years and on which the Fund paid no federal income tax. For federal income tax purposes, dividends declared by the Fund in October, November or December to
shareholders of record on a specified date in such a month and paid during January of the following year are taxable to such shareholders, and deductible by the Fund, as if paid on December 31 of the year declared. The Fund anticipates that it
will generally make timely distributions of income and capital gains in compliance with these requirements so that it will generally not be required to pay the excise tax.
For federal income tax purposes, the Fund is generally permitted to carry forward a net capital loss in any taxable year to offset its own
capital gains, if any. These amounts are available to be carried forward to offset future capital gains to the extent permitted by the Code and applicable tax regulations. As of August 31, 2019, the Fund had capital loss carryforwards
approximating the amount indicated, expiring in the year indicated:
|
|
|
|
|
|
|
|
|
Fund
|
|
Capital Loss
Carryforward
|
|
|
Expiration
|
|
Goldman Sachs Hedge Industry VIP ETF
|
|
$
|
2,364,672
|
|
|
|
Perpetual Short-Term
|
|
Gains and losses on the sale, lapse, or other termination of options and futures contracts, options thereon
and certain forward contracts (except certain foreign currency options, forward contracts and futures contracts) will generally be treated as capital gains and losses. Certain of the futures contracts, forward contracts and options held by the Fund
will be required to be marked-to-market for federal tax purposes that is, treated as having been sold at their fair market value on the last day of the Funds taxable year (or, for excise tax purposes, on the last day of the
relevant period). These provisions may require the Fund to recognize income or gains without a concurrent receipt of cash. Any gain or loss recognized on actual or deemed sales of these futures contracts, forward contracts, or options will (except
for certain foreign currency options, forward contracts, and futures contracts) be treated as 60% long-term capital gain or loss and 40% short-term capital gain or loss. As a result of certain hedging transactions entered into by the Fund, it may be
required to defer the recognition of losses on futures contracts, forward contracts, and options or underlying securities or foreign currencies to the extent of any unrecognized gains on related positions held by the Fund, and the characterization
of gains or losses as long-term or short-term may be changed. The tax provisions described in this paragraph may affect the amount, timing and character of the Funds distributions to shareholders. The application of certain requirements for
qualification as a regulated investment company and the application of certain other tax rules may be unclear in some respects in connection with certain investment practices such as dollar rolls, or investments in certain derivatives, including
interest rate swaps, floors, caps and collars, currency swaps, total return swaps, mortgage swaps, index swaps, forward contracts and structured notes. As a result, the Fund may therefore be required to limit its investments in such transactions and
it is also possible that the IRS may not agree with the Funds tax treatment of such transactions. In addition, the tax treatment of derivatives, and certain other investments, may be affected by future legislation, Treasury Regulations and
guidance issued by the IRS that could affect the timing, character and amount of the Funds income and gains and distributions to shareholders. Certain tax elections may be available to the Fund to mitigate some of the unfavorable consequences
described in this paragraph.
Section 988 of the Code contains special tax rules applicable to certain foreign currency transactions
and instruments, which may affect the amount, timing and character of income, gain or loss recognized by the Fund. Under these rules, foreign exchange gain or loss realized with respect to foreign currencies and certain futures and options thereon,
foreign currency-denominated
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debt instruments, foreign currency forward contracts, and foreign currency-denominated payables and receivables will generally be treated as ordinary income or loss, although in some cases
elections may be available that would alter this treatment. If a net foreign exchange loss treated as ordinary loss under Section 988 of the Code were to exceed the Funds investment company taxable income (computed without regard to that
loss) for a taxable year, the resulting loss would not be deductible by the Fund or its shareholders in future years. Net loss, if any, from certain foreign currency transactions or instruments could exceed net investment income otherwise calculated
for accounting purposes, with the result being either no dividends being paid or a portion of the Funds dividends being treated as a return of capital for tax purposes, nontaxable to the extent of a shareholders tax basis in his shares
and, once such basis is exhausted, generally giving rise to capital gains.
The Funds investment, if any, in zero coupon securities,
deferred interest securities, certain structured securities or other securities bearing original issue discount or, if the Fund elects to include market discount in income currently, market discount, as well as any marked-to-market gain
from certain options, futures or forward contracts, as described above, will in many cases cause the Fund to realize income or gain before the receipt of cash payments with respect to these securities or contracts. For the Fund to obtain cash to
enable the Fund to distribute any such income or gain, to maintain its qualification as a regulated investment company and to avoid federal income and excise taxes, the Fund may be required to liquidate portfolio investments sooner than it might
otherwise have done.
Investments in lower-rated securities may present special tax issues for the Fund to the extent actual or
anticipated defaults may be more likely with respect to those kinds of securities. Tax rules are not entirely clear about issues such as when an investor in such securities may cease to accrue interest, original issue discount, or market discount;
when and to what extent deductions may be taken for bad debts or worthless securities; how payments received on obligations in default should be allocated between principal and income; and whether exchanges of debt obligations in a workout context
are taxable. These and other issues will generally need to be addressed by the Fund, in the event it invests in such securities, so as to seek to eliminate or to minimize any adverse tax consequences.
If the Fund acquires stock (including, under proposed regulations, an option to acquire stock such as is inherent in a convertible bond) in
certain foreign corporations that receive at least 75% of their annual gross income from passive sources (such as interest, dividends, rents, royalties or capital gain) or hold at least 50% of their assets in investments producing such passive
income (passive foreign investment companies), the Fund could be subject to federal income tax and additional interest charges on excess distributions received from such companies or gain from the sale of stock in such
companies, even if all income or gain actually received by the Fund is timely distributed to its shareholders. The Fund will not be able to pass through to its shareholders any credit or deduction for such a tax. In some cases, elections may be
available that will ameliorate these adverse tax consequences, but those elections will require the Fund to include each year certain amounts as income or gain (subject to the distribution requirements described above) without a concurrent receipt
of cash. The Fund may attempt to limit and/or to manage its holdings in passive foreign investment companies to minimize its tax liability or maximize its return from these investments.
If the Fund invests in certain real estate investment trusts (REITs) or in real estate mortgage investment conduit
(REMIC) residual interests, a portion of the Funds income may be classified as excess inclusion income. A shareholder that is otherwise not subject to tax may be taxable on their share of any such excess inclusion
income as unrelated business taxable income. In addition, tax may be imposed on the Fund on the portion of any excess inclusion income allocable to any shareholders that are classified as disqualified organizations.
Taxable U.S. Shareholders Distributions
For U.S. federal income tax purposes, distributions by the Fund, whether reinvested in additional shares or paid in cash, generally will be
taxable to shareholders who are subject to tax.
In general, distributions from investment company taxable income for the year will be
taxable as ordinary income. However, distributions to noncorporate shareholders attributable to dividends received by the Fund from U.S. and certain foreign corporations will generally be taxed at the long-term capital gain rate (described below),
as long as certain other requirements are met. For these lower rates to apply, the noncorporate shareholders must have owned their Fund shares for at least 61 days during the 121-day period beginning 60 days before the Funds ex-dividend date
and the Fund must also have owned the underlying stock for this same period beginning 60 days before the ex-dividend date for the stock. The amount of the Funds distributions that otherwise qualify for these lower rates may be reduced as a
result of the Funds securities lending activities, hedging activities or a high portfolio turnover rate.
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Distributions reported to shareholders as derived from the Funds dividend income, if
any, that would be eligible for the dividends received deduction if the Fund were not a regulated investment company may be eligible for the dividends received deduction for corporate shareholders. The dividends received deduction, if available, is
reduced to the extent the shares with respect to which the dividends are received are treated as debt-financed under federal income tax law and is eliminated if the shares are deemed to have been held for less than a minimum period, generally 46
days. The dividends received deduction also may be reduced as a result of the Funds hedging activities, securities lending activities or a high portfolio turnover rate. The dividend may, if it is treated as an extraordinary
dividend under the Code, reduce a shareholders tax basis in its shares of the Fund. Capital gain dividends (i.e., dividends from net capital gain), if reported as such to shareholders, will be taxed to shareholders as long-term
capital gain regardless of how long shares have been held by shareholders, but are not eligible for the dividends received deduction for corporations. The maximum individual rate applicable to long-term capital gains is generally either 15% or 20%,
depending on whether the individuals income exceeds certain threshold amounts. Distributions, if any, that are in excess of the Funds current and accumulated earnings and profits will first reduce a shareholders tax basis in his
shares and, after such basis is reduced to zero, will generally constitute capital gains to a shareholder who holds his shares as capital assets.
Under recent tax legislation, individuals and certain other noncorporate entities are generally eligible for a 20% deduction with respect to
ordinary dividends received from REITs (qualified REIT dividends) and certain taxable income from publicly traded partnerships. The IRS has recently issued proposed regulations permitting a RIC to pass through to its shareholders
qualified REIT dividends eligible for the 20% deduction. However, the proposed regulations do not provide a mechanism for a RIC to pass through to its shareholders income from publicly traded partnerships that would be eligible for such deduction.
Different tax treatment, including penalties on certain excess contributions and deferrals, certain pre-retirement and post-retirement
distributions and certain prohibited transactions, is accorded to accounts maintained as qualified retirement plans. Shareholders should consult their tax advisers for more information.
Taxable U.S. ShareholdersSale of Shares
When a shareholders shares are sold, redeemed or otherwise disposed of in a transaction that is treated as a sale for tax purposes, the
shareholder will generally recognize gain or loss equal to the difference between the shareholders adjusted tax basis in the shares and the cash, or fair market value of any property, received. (To aid in computing that tax basis, a
shareholder should generally retain its account statements for the period that it holds shares.) If the shareholder holds the shares as a capital asset at the time of sale, the character of the gain or loss should be capital, and treated as
long-term if the shareholders holding period is more than one year and short-term otherwise, subject to the rules below.
Certain
special tax rules may apply to a shareholders capital gains or losses on Fund shares. If a shareholder receives a capital gain dividend with respect to shares and such shares have a tax holding period of six months or less at the time of a
sale or redemption of such shares, then any loss the shareholder realizes on the sale or redemption will be treated as a long-term capital loss to the extent of such capital gain dividend. Additionally, any loss realized on a sale or redemption of
shares of the Fund may be disallowed under wash sale rules to the extent the shares disposed of are replaced with other shares of the same Fund within a period of 61 days beginning 30 days before and ending 30 days after the shares are
disposed of, such as pursuant to a dividend reinvestment in shares of the Fund. If disallowed, the loss will be reflected in an adjustment to the basis of the shares acquired. If the Fund redeems a shareholder in-kind rather than in cash, the
shareholder would realize the same gain or loss as if the shareholder had been redeemed in cash. Further, the shareholders basis in the securities received in the in-kind redemption would be the securities fair market value on the date
of the in-kind redemption.
Medicare Tax
An additional 3.8% Medicare tax is imposed on certain net investment income (including ordinary dividends and capital gain distributions
received from the Fund and net gains from redemptions or other taxable dispositions of Fund shares) of U.S. individuals, estates and trusts to the extent that such persons modified adjusted gross income (in the case of an
individual) or adjusted gross income (in the case of an estate or trust) exceeds certain threshold amounts.
Foreign Taxes
The Fund anticipates that it may be subject to foreign taxes on income (possibly including, in some cases, capital gains) from foreign
securities. Tax conventions between certain countries and the United States may reduce or eliminate those foreign taxes in some cases. If more than 50% of the Funds total assets at the close of a taxable year consists of stock or securities of
foreign corporations, or if at least 50% of the value of the Funds total assets at the close of each quarter of its taxable year is
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represented by interests in other regulated investment companies, the Fund may file an election with the IRS pursuant to which the shareholders of the Fund will be required (1) to report as
dividend income (in addition to taxable dividends actually received) their pro rata shares of foreign income taxes paid by the Fund that are treated as income taxes under U.S. tax regulations (which excludes, for example, stamp taxes, securities
transaction taxes, and similar taxes) even though not actually received by those shareholders, and (2) to treat those respective pro rata shares as foreign income taxes paid by them, which they can claim either as a foreign tax credit, subject
to applicable limitations, against their U.S. federal income tax liability or as an itemized deduction. (Shareholders who do not itemize deductions for federal income tax purposes will not, however, be able to deduct their pro rata portion of
foreign taxes paid by the Fund, although those shareholders will be required to include their share of such taxes in gross income if the foregoing election is made by the Fund.)
If a shareholder chooses to take credit for the foreign taxes deemed paid by such shareholder as a result of any such election by the Fund,
the amount of the credit that may be claimed in any year may not exceed the same proportion of the U.S. tax against which such credit is taken which the shareholders taxable income from foreign sources (but not in excess of the
shareholders entire taxable income) bears to his entire taxable income. For this purpose, distributions from long-term and short-term capital gains or foreign currency gains by the Fund will generally not be treated as income from foreign
sources. This foreign tax credit limitation may also be applied separately to certain specific categories of foreign-source income and the related foreign taxes. As a result of these rules, which have different effects depending upon each
shareholders particular tax situation, certain shareholders of the Fund may not be able to claim a credit for the full amount of their proportionate share of the foreign taxes paid by the Fund even if the election is made by the Fund.
Shareholders who are not liable for U.S. federal income taxes, including retirement plans, other tax-exempt shareholders and non-U.S.
shareholders, will ordinarily not benefit from the foregoing Fund election with respect to foreign taxes. Each year, if any, that the Fund files the election described above, shareholders will be notified of the amount of (1) each
shareholders pro rata share of qualified foreign taxes paid by the Fund and (2) the portion of Fund dividends that represents income from foreign sources. If the Fund cannot or does not make this election, it may deduct its foreign taxes
in computing the amount it is required to distribute.
Backup Withholding
Backup withholding may be required at a rate up to 24% with respect to distributions payable to shareholders who fail to provide their correct
taxpayer identification number or to make required certifications, or who have been notified by the IRS that they are subject to backup withholding. Corporate shareholders and certain other shareholders specified in the Code generally are exempt
from such backup withholding. Backup withholding is not an additional tax. Any amounts withheld may be credited against the shareholders U.S. federal tax liability.
Non-U.S. Shareholders
The
discussion above relates solely to U.S. federal income tax law as it applies to U.S. persons subject to tax under such law.
Except as discussed below, distributions to shareholders who, as to the United States, are not U.S. persons, (i.e., are
nonresident aliens, foreign corporations, fiduciaries of foreign trusts or estates or other non-U.S. investors) generally will be subject to U.S. federal withholding tax at the rate of 30% on distributions treated as ordinary income unless the tax
is reduced or eliminated pursuant to a tax treaty or the distributions are effectively connected with a U.S. trade or business of the shareholder; but distributions of net capital gain (the excess of any net long-term capital gains over any net
short-term capital losses) including amounts retained by the Fund which are designated as undistributed capital gains, to such a non-U.S. shareholder will not be subject to U.S. federal income or withholding tax unless the distributions are
effectively connected with the shareholders trade or business in the United States or, in the case of a shareholder who is a nonresident alien individual, the shareholder is present in the United States for 183 days or more during the taxable
year and certain other conditions are met. Non-U.S. shareholders may also be subject to U.S. federal withholding tax on deemed income resulting from any election by the Fund to treat qualified foreign taxes it pays as passed through to shareholders
(as described above), but may not be able to claim a U.S. tax credit or deduction with respect to such taxes.
Non-U.S. shareholders
generally are not subject to U.S. federal income tax withholding on certain distributions of interest income and/or short-term capital gains that are designated by the Fund. It is expected that the Fund will generally make designations of short-term
gains, to the extent permitted, but the Fund does not intend to make designations of any distributions attributable to interest income. Therefore, all distributions of interest income will be subject to withholding when paid to non-U.S. investors.
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Any capital gain realized by a non-U.S. shareholder upon a sale or redemption of shares of
the Fund will not be subject to U.S. federal income or withholding tax unless the gain is effectively connected with the shareholders trade or business in the U.S., or in the case of a shareholder who is a nonresident alien individual, the
shareholder is present in the U.S. for 183 days or more during the taxable year and certain other conditions are met.
Non-U.S. persons
who fail to furnish the proper IRS Form W-8 (i.e., W-8BEN, W-8BEN-E, W-8ECI, W-8IMY or W-8EXP), or an acceptable substitute, may be subject to backup withholding at a 24% rate on dividends (including capital gain dividends) and on the
proceeds of redemptions and exchanges. Also, non-U.S. shareholders of the Fund may be subject to U.S. estate tax with respect to their Fund shares.
Withholding of U.S. tax (at a 30% rate) is required with respect to payments of dividends made to certain non-U.S. entities that fail to
comply (or be deemed compliant) with extensive new reporting and withholding requirements designed to inform the U.S. Department of the Treasury of U.S.-owned foreign investment accounts. Shareholders may be requested to provide additional
information to enable the applicable withholding agent to determine whether withholding is required.
Each shareholder who is not a U.S.
person should consult his or her tax adviser regarding the U.S. and non-U.S. tax consequences of ownership of shares of, and receipt of distributions from, the Fund.
Creation Units
As a result of
U.S. federal income tax requirements, the Trust on behalf of the Fund, has the right to reject an order for a creation of shares if the creator (or group of creators) 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 Fund would have a basis in the Deposit Securities different from the market value of such securities on the date of deposit. The Trust also has the right to require information
necessary to determine beneficial share ownership for purposes of the 80% determination. See Creations and Redemptions.
State and Local
Taxes
The Fund may be subject to state or local taxes in jurisdictions in which the Fund is deemed to be doing business. In
addition, in those states or localities that impose income taxes, the treatment of the Fund and its shareholders under those jurisdictions tax laws may differ from the treatment under federal income tax laws, and investment in the Fund may
have tax consequences for shareholders that are different from those of a direct investment in the Funds portfolio securities. Shareholders should consult their own tax advisers concerning state and local tax matters.
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FINANCIAL STATEMENTS
The audited financial statements and related report of PricewaterhouseCoopers LLP, independent registered public accounting firm, contained in
the Funds Annual Report, are hereby incorporated herein by reference. The audited financial statements in the Funds Annual Report have been incorporated herein by reference in reliance upon such report given upon the authority of such
firm as experts in accounting and auditing. A copy of the Funds 2019 Annual Report may be obtained upon request and without charge by writing Goldman Sachs Funds, P.O. Box 06050, Chicago, Illinois 60606 or by calling Goldman Sachs &
Co. LLC, at the telephone number on the back cover of the Funds Prospectus. No other portions of the Funds Annual Report are incorporated herein by reference.
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PROXY VOTING
The Trust, on behalf of the Fund, has delegated the voting of portfolio securities to the Investment Adviser. For client accounts for which
the Investment Adviser has voting discretion, the Investment Adviser has adopted policies and procedures (the Proxy Voting Policy) for the voting of proxies. Under the Proxy Voting Policy, the Investment Advisers guiding principles
in performing proxy voting are to make decisions that favor proposals that in the Investment Advisers view tend to maximize a companys shareholder value and are not influenced by conflicts of interest. To implement these guiding
principles for investments in publicly-traded equities, the Investment Adviser has developed customized proxy voting guidelines (the Guidelines) that they generally apply when voting on behalf of client accounts. Attached as Appendix B
is a summary of the Guidelines. These Guidelines address a wide variety of individual topics, including, among other matters, shareholder voting rights, anti-takeover defenses, board structures, the election of directors, executive and director
compensation, reorganizations, mergers, issues of corporate social responsibility and various shareholder proposals. The Guidelines embody the positions and factors the Investment Adviser generally considers important in casting proxy votes.
The Proxy Voting Policy, including the Guidelines, is reviewed periodically to ensure that it continues to be consistent with the Investment
Advisers guiding principles.
The Investment Adviser has retained a third-party proxy voting service (Proxy Service),
currently Institutional Shareholder Services, to assist in the implementation and administration of certain proxy voting-related functions including, without limitation, operational, recordkeeping and reporting services. The Proxy Service also
prepares a written analysis and recommendation (a Recommendation) of each proxy vote that reflects the Proxy Services application of the Guidelines to particular proxy issues. While it is the Investment Advisers policy
generally to follow the Guidelines and Recommendations from the Proxy Service, the Investment Advisers portfolio management teams (Portfolio Management Teams) may on certain proxy votes seek approval to diverge from the Guidelines
or a Recommendation by following an override process. Such decisions are subject to a review and approval process, including a determination that the decision is not influenced by any conflict of interest. A Portfolio Management Team
that receives approval through the override process to cast a proxy vote that diverges from the Guidelines and/or a Recommendation may vote differently than other Portfolio Management Teams that did not seek to override that vote. In forming their
views on particular matters, the Portfolio Management Teams are also permitted to consider applicable regional rules and practices, including codes of conduct and other guides, regarding proxy voting, in addition to the Guidelines and
Recommendations. The Investment Adviser may hire other service providers to replace or supplement the Proxy Service with respect to any of the services the Investment Adviser currently receives from the Proxy Service.
GSAM conducts periodic due diligence meetings with the Proxy Service which include, but are not limited to, a review of the Proxy
Services general organizational structure, new developments with respect to research and technology, work flow improvements and internal due diligence with respect to conflicts of interest.
From time to time, the Investment Adviser may face regulatory, compliance, legal or logistical limits with respect to voting securities that
they may purchase or hold for client accounts, which can affect the Investment Advisers ability to vote such proxies, as well as the desirability of voting such proxies. Among other limits, federal, state and foreign regulatory restrictions or
company specific ownership limits, as well as legal matters related to consolidated groups, may restrict the total percentage of an issuers voting securities that the Investment Adviser can hold for clients and the nature of the Investment
Advisers voting in such securities. The Investment Advisers ability to vote proxies may also be affected by, among other things: (i) late receipt of meeting notices; (ii) requirements to vote proxies in person:
(iii) restrictions on a foreigners ability to exercise votes; (iv) potential difficulties in translating the proxy; (v) requirements to provide local agents with unrestricted powers of attorney to facilitate voting instructions;
and (vi) requirements that investors who exercise their voting rights surrender the right to dispose of their holdings for some specified period in proximity to the shareholder meeting.
The Investment Adviser has adopted policies and procedures designed to prevent conflicts of interest from influencing its proxy voting
decisions that the Investment Adviser makes on behalf of a client account. These policies and procedures include the Investment Advisers use of the Guidelines and Recommendations from the Proxy Service, the override approval process previously
discussed, and the establishment of information barriers between the Investment Adviser and other businesses within The Goldman Sachs Group, Inc. Notwithstanding such proxy voting policies and procedures, actual proxy voting decisions of the
Investment Adviser may have the effect of benefitting the interests of other clients or businesses of other divisions or units of Goldman Sachs and/or its affiliates.
Voting decisions with respect to fixed income securities and the securities of privately held issuers generally will be made by the
Funds managers based on their assessment of the particular transactions or other matters at issue.
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Information regarding how the Fund voted proxies relating to portfolio securities during the
most recent 12-month period ended June 30 will be available on or through the Funds website at www.gsam.com/content/gsam/us/en/advisors/resources/client-service/proxy-voting.html without charge and on the SECs website
at www.sec.gov.
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PAYMENTS TO OTHERS (INCLUDING INTERMEDIARIES)
The Investment Adviser, Distributor (upon direction of the Fund) and/or their affiliates may make payments to intermediaries from time to time
to promote the sale, distribution and/or servicing of shares of the Fund (each, an Intermediary). Certain payments (Additional Payments) are made out of the Investment Advisers, and/or its affiliates own assets
(which may come directly or indirectly from fees paid by the Fund), are not an additional charge to the Fund or its shareholders, and do not change the price paid by investors for the purchase of the Funds shares or the amount the Fund
receives as proceeds from such purchases. Although paid by the Investment Adviser, Distributor (upon direction of the Fund or the Investment Adviser), and/or their affiliates, the Additional Payments are in addition to the distribution and service
fees paid by the Fund to the Intermediaries as described in the Funds Prospectus and this SAI.
The Additional Payments are intended
to compensate Intermediaries for, among other things: marketing activities and presentations, educational training programs, the support or purchase of technology platforms/software and/or reporting systems. The Investment Adviser, Distributor (upon
direction of the Fund or the Investment Adviser) and/or their affiliates may also make payments to Intermediaries for certain printing, publishing and mailing costs associated with the Fund or materials relating to exchange-traded funds in general
and/or for the provision of analytical or other data to the Investment Adviser or its affiliates relating to sales of Fund shares. In addition, the Investment Adviser, Distributor (upon direction of the Fund or the Investment Adviser) and/or their
affiliates may make payments to Intermediaries that make Fund shares available to their clients or for otherwise promoting the Fund, including through provision of consultative services to the Investment Adviser or its affiliates relating to
marketing of the Fund and/or sale of Fund shares.
These Additional Payments may be significant to certain Intermediaries, and may be an
important factor in an Intermediarys willingness to support the sale of the Fund through its distribution system.
The Investment
Adviser and/or its affiliates may be motivated to make Additional Payments since they promote the sale of Fund shares to clients of Intermediaries and the retention of those investments by those clients. To the extent Intermediaries sell more shares
of the Fund or retain shares of the Fund in their clients accounts, the Investment Adviser benefits from the incremental management and other fees paid by the Fund with respect to those assets.
In addition, certain Intermediaries may have access to certain research and investment services from the Investment Adviser and/or its
affiliates. Such research and investment services (Additional Services) may include research reports; economic analysis; portfolio analysis, portfolio construction and similar tools and software; business planning services; certain
marketing and investor education materials and strategic asset allocation modeling. The Intermediary may not pay for these products or services or may only pay for a portion of these products or services. The cost of the Additional Services and the
particular services provided may vary from Intermediary to Intermediary.
The presence of these Additional Payments or Additional
Services, the varying fee structure and the basis on which an Intermediary compensates its registered representatives or salespersons may create an incentive for a particular Intermediary, registered representative or salesperson to highlight,
feature or recommend funds, including the Fund, or other investments based, at least in part, on the level of compensation paid. Additionally, if one fund sponsor makes greater distribution payments than another, an Intermediary may have an
incentive to recommend one fund complex over another. Similarly, if an Intermediary receives more distribution assistance for one share class versus another, that Intermediary may have an incentive to recommend that share class. Because
Intermediaries may be paid varying amounts per class for sub-transfer agency and related recordkeeping services, the service requirements of which also may vary by class, this may create an additional incentive for financial firms and their
financial advisors to favor one fund complex over another, or one fund class over another. You should consider whether such incentives exist when evaluating any recommendations from an Intermediary to purchase or sell Shares of the Fund.
Your Intermediary may charge you additional fees or commissions other than those disclosed in the Prospectus. Shareholders should contact
their Intermediary for more information about the Additional Payments or Additional Services they receive and any potential conflicts of interest, as well as for information regarding any fees and/or commissions it charges. For additional questions,
please contact Goldman Sachs Funds at 1-800-621-2550.
Not described above are other subsidiaries of Goldman Sachs who may receive revenue
from the Investment Adviser, Distributor and/or their affiliates through intra-company compensation arrangements and for financial, distribution, administrative and operational services.
Furthermore, the Investment Adviser and/or its affiliates may, to the extent permitted by applicable regulations, sponsor various trainings
and educational programs and reimburse investors for certain expenses incurred in connection with accessing the Fund through portal arrangements. The Investment Adviser and its affiliates may also pay for the travel expenses, meals,
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lodging and entertainment of Intermediaries and their salespersons and guests in connection with educational, sales and promotional programs subject to applicable FINRA regulations. Other
compensation may also be offered from time to time to the extent not prohibited by applicable federal or state laws or FINRA regulations. This compensation is not included in, and is made in addition to, the Additional Payments described above.
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OTHER INFORMATION
Portfolio Holdings Disclosure
The Trust
has adopted a policy regarding the disclosure of information about the Funds portfolio holdings. The policy provides that neither the Fund nor its Investment Adviser or any agent or employee thereof will disclose the Funds portfolio
holdings information to any person other than in accordance with the policy. The Board of Trustees of the Trust must approve all material amendments to this policy.
The Funds complete portfolio holdings are publicly disseminated each day the Fund is open for business through financial reporting and
news services, including the Funds publicly accessible Internet website (http://www.gsamfunds.com). In addition, a basket composition file, which includes the security names and share quantities to deliver in exchange for Fund shares, together
with estimates and actual cash components, is publicly disseminated daily prior to the opening of the Exchange via the NSCC.
Information
that is not publicly available as set forth above may be provided to third parties only if the third party recipients are required to keep all portfolio holdings information confidential and are prohibited from trading on the information they
receive. Disclosure to such third parties must be approved in advance by the Investment Advisers legal or compliance department.
Miscellaneous
The Prospectus and this SAI do not contain all the information included in the Registration Statement filed with the SEC under the
1933 Act with respect to the securities offered by the Prospectus. Certain portions of the Registration Statement have been omitted from the Prospectus and this SAI pursuant to the rules and regulations of the SEC. The Registration Statement
including the exhibits filed therewith may be examined at the office of the SEC in Washington, D.C.
Statements contained in the
Prospectus or in this SAI as to the contents of any contract or other document referred to are not necessarily complete, and, in each instance, reference is made to the copy of such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectus and this SAI form a part, each such statement being qualified in all respects by such reference.
Corporate Actions
From time to time, the issuer of a security held in the Funds portfolio may initiate a corporate action relating to that
security. Corporate actions relating to equity securities may include, among others, an offer to purchase new shares, or to tender existing shares, of that security at a certain price. Corporate actions relating to debt securities may include, among
others, an offer for early redemption of the debt security, or an offer to convert the debt security into stock. Certain corporate actions are voluntary, meaning that the Fund may only participate in the corporate action if it elects to do so in a
timely fashion. Participation in certain corporate actions may enhance the value of the Funds investment portfolio.
In cases where
the Fund or the Investment Adviser receives sufficient advance notice of a voluntary corporate action, the Investment Adviser will exercise its discretion, in good faith, to determine whether the Fund will participate in that corporate action. If
the Fund or the Investment Adviser does not receive sufficient advance notice of a voluntary corporate action, the Fund may not be able to timely elect to participate in that corporate action. Participation or lack of participation in a voluntary
corporate action may result in a negative impact on the value of the Funds investment portfolio.
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CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Although the Trust does not have information concerning the beneficial ownership of shares held in the names of DTC Participants, as of
November 29, 2019, the name and percentage ownership of each DTC Participant that owned of record 5% or more of the outstanding Shares of the Fund were as follows:
|
|
|
|
|
Name/Address
|
|
Percentage of Shares
|
|
National Financial Services LLC, 200 Liberty Street, New York, NY 10281
|
|
|
16.11
|
%
|
TD Ameritrade Clearing, Inc., 200 S 108th Ave, Omaha, NE 68154
|
|
|
13.66
|
%
|
Morgan Stanley Smith Barney LLC, 1 Harborside Financial Center, Plaza II, Jersey City, NJ
07311
|
|
|
12.57
|
%
|
LPL Financial Corporation, 4707 Executive Drive, San Diego, CA 92121-3091
|
|
|
9.78
|
%
|
Charles Schwab, 101 Montgomery Street, San Francisco, CA 94104
|
|
|
8.95
|
%
|
Merrill Lynch, Pierce, Fenner and Smith, Inc., 101 Hudson Street, Jersey City, NJ
07302-3997
|
|
|
8.57
|
%
|
UBS Financial Services, Inc., 1000 Harbor Blvd, Weehawken, NJ 07086-6790
|
|
|
6.62
|
%
|
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