This chart illustrates the performance of a hypothetical $10,000 investment made on April 20, 2015, and is not intended to imply any future performance. The returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the redemption of Fund shares. The chart assumes reinvestment of capital gains and dividends.
|
AlphaMark Actively Managed Small Cap ETF
Statement of Assets and Liabilities
March 31, 2020
|
|
ASSETS
|
|
|
|
|
|
Investments in securities, at value (Cost $20,244,983)
|
|
$
|
15,879,648
|
|
|
Dividends and interest receivable
|
|
|
4,360
|
|
|
Total assets
|
|
|
15,884,008
|
|
|
|
|
|
|
|
|
LIABILITIES
|
|
|
|
|
|
Management fees payable
|
|
|
12,925
|
|
|
Total liabilities
|
|
|
12,925
|
|
|
|
|
|
|
|
|
NET ASSETS
|
|
$
|
15,871,083
|
|
|
|
|
|
|
|
|
Net Assets Consist of:
|
|
|
|
|
|
Paid-in capital
|
|
$
|
23,557,667
|
|
|
Total distributable earnings (accumulated deficit)
|
|
|
(7,686,584
|
)
|
|
Net assets
|
|
$
|
15,871,083
|
|
|
|
|
|
|
|
|
Net Asset Value:
|
|
|
|
|
|
Net assets
|
|
$
|
15,871,083
|
|
|
Shares outstanding ^
|
|
|
900,000
|
|
|
Net asset value, offering and redemption price per share
|
|
$
|
17.63
|
|
|
^
|
No par value, unlimited number of shares authorized.
|
The accompanying notes are an integral part of these financial statements.
8
|
AlphaMark Actively Managed Small Cap ETF
Statement of Operations
For the Year Ended March 31, 2020
|
|
INCOME
|
|
|
|
|
|
Dividends
|
|
$
|
424,266
|
|
|
Interest
|
|
|
7,248
|
|
|
Total investment income
|
|
|
431,514
|
|
|
|
|
|
|
|
|
EXPENSES
|
|
|
|
|
|
Management fees
|
|
|
197,293
|
|
|
Total expenses
|
|
|
197,293
|
|
|
Net investment income (loss)
|
|
|
234,221
|
|
|
|
|
|
|
|
|
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
|
|
|
|
|
|
Net realized gain (loss) on investments
|
|
|
843,532
|
|
|
Change in unrealized appreciation (depreciation) on investments
|
|
|
(6,191,678
|
)
|
|
Net realized and unrealized gain (loss) on investments
|
|
|
(5,348,146
|
)
|
|
Net increase (decrease) in net assets resulting from operations
|
|
$
|
(5,113,925
|
)
|
The accompanying notes are an integral part of these financial statements.
9
|
AlphaMark Actively Managed Small Cap ETF
Statements of Changes in Net Assets
|
|
|
|
Year Ended
March 31, 2020
|
|
|
Year Ended
March 31, 2019
|
|
|
OPERATIONS
|
|
|
|
|
|
|
|
|
|
Net investment income (loss)
|
|
$
|
234,221
|
|
|
$
|
(45,222
|
)
|
|
Net realized gain (loss) on investments
|
|
|
843,532
|
|
|
|
675,566
|
|
|
Change in unrealized appreciation (depreciation) on investments
|
|
|
(6,191,678
|
)
|
|
|
(2,066,650
|
)
|
|
Net increase (decrease) in net assets resulting from operations
|
|
|
(5,113,925
|
)
|
|
|
(1,436,306
|
)
|
|
|
|
|
|
|
|
|
|
|
|
DISTRIBUTIONS TO SHAREHOLDERS
|
|
|
|
|
|
|
|
|
|
Net distributions to shareholders
|
|
|
(138,538
|
)
|
|
|
—
|
|
|
Total distributions to shareholders
|
|
|
(138,538
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
CAPITAL SHARE TRANSACTIONS
|
|
|
|
|
|
|
|
|
|
Proceeds from shares sold
|
|
|
—
|
|
|
|
—
|
|
|
Payments for shares redeemed
|
|
|
(2,337,395
|
)
|
|
|
(1,351,215
|
)
|
|
Net increase (decrease) in net assets derived from capital share transactions (a)
|
|
|
(2,337,395
|
)
|
|
|
(1,351,215
|
)
|
|
Net increase (decrease) in net assets
|
|
$
|
(7,589,858
|
)
|
|
$
|
(2,787,521
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET ASSETS
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
23,460,941
|
|
|
$
|
26,248,462
|
|
|
End of year
|
|
$
|
15,871,083
|
|
|
$
|
23,460,941
|
|
|
(a)
|
A summary of capital share transactions is as follows:
|
|
|
|
Year Ended
March 31, 2020
|
|
|
Year Ended
March 31, 2019
|
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Subscriptions
|
|
|
—
|
|
|
|
—
|
|
|
Redemptions
|
|
|
(100,000
|
)
|
|
|
(50,000
|
)
|
|
Net increase (decrease)
|
|
|
(100,000
|
)
|
|
|
(50,000
|
)
|
The accompanying notes are an integral part of these financial statements.
10
|
AlphaMark Actively Managed Small Cap ETF
Financial Highlights
For a capital share outstanding throughout the year/period
|
|
|
|
Year Ended
March 31,
2020
|
|
|
Year Ended
March 31,
2019
|
|
|
Year Ended
March 31,
2018
|
|
|
Year Ended
March 31,
2017
|
|
|
Period
Ended
March 31,
2016(1)
|
|
|
Net asset value, beginning of year/period
|
|
$
|
23.46
|
|
|
$
|
25.00
|
|
|
$
|
24.40
|
|
|
$
|
22.58
|
|
|
$
|
25.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM INVESTMENT OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income (loss) (2)
|
|
|
0.25
|
(3)
|
|
|
(0.04
|
)(3)
|
|
|
(0.14
|
)
|
|
|
(0.05
|
)
|
|
|
(0.08
|
)
|
|
Net realized and unrealized gain (loss) on investments
|
|
|
(5.93
|
)
|
|
|
(1.50
|
)
|
|
|
0.74
|
|
|
|
1.87
|
|
|
|
(2.34
|
)
|
|
Total from investment operations
|
|
|
(5.68
|
)
|
|
|
(1.54
|
)
|
|
|
0.60
|
|
|
|
1.82
|
|
|
|
(2.42
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISTRIBUTIONS TO SHAREHOLDERS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From net investment income
|
|
|
(0.15
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total distributions
|
|
|
(0.15
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset value, end of year/period
|
|
$
|
17.63
|
|
|
$
|
23.46
|
|
|
$
|
25.00
|
|
|
$
|
24.40
|
|
|
$
|
22.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total return
|
|
|
-24.37
|
%
|
|
|
-6.15
|
%
|
|
|
2.47
|
%
|
|
|
8.12
|
%
|
|
|
-9.66
|
%(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DATA:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets at end of year/period (000’s)
|
|
$
|
15,871
|
|
|
$
|
23,461
|
|
|
$
|
26,248
|
|
|
$
|
26,835
|
|
|
$
|
24,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RATIOS TO AVERAGE NET ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses to average net assets
|
|
|
0.90
|
%(5)
|
|
|
0.90
|
%(5)
|
|
|
0.90
|
%
|
|
|
0.90
|
%
|
|
|
0.90
|
%(6)
|
|
Net investment income (loss) to average net assets
|
|
|
1.07
|
%(3)
|
|
|
(0.18
|
)%(3)
|
|
|
(0.56
|
)%
|
|
|
(0.23
|
)%
|
|
|
(0.39
|
)%(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Portfolio turnover rate (7)
|
|
|
62
|
%
|
|
|
360
|
%
|
|
|
41
|
%
|
|
|
47
|
%
|
|
|
52
|
%(4)
|
|
(1)
|
Commencement of operations on April 20, 2015.
|
|
(2)
|
Calculated based on average shares outstanding during the year/period.
|
|
(3)
|
Recognition of net investment income by the Fund is affected by the timing of the declaration of dividends by the underlying investment companies in which the Fund invests. The ratio does not include net investment income of the underlying investment companies in which the Fund invests.
|
|
(4)
|
Not annualized.
|
|
(5)
|
Does not include expenses of the investment companies in which the Fund invests.
|
|
(6)
|
Annualized.
|
|
(7)
|
Excludes the impact of in-kind transactions.
|
The accompanying notes are an integral part of these financial statements.
11
AlphaMark Actively Managed Small Cap ETF
Notes to Financial Statements
March 31, 2020
NOTE 1 – ORGANIZATION
AlphaMark Actively Managed Small Cap ETF (the “Fund”) is a diversified series of ETF Series Solutions (“ESS” or the “Trust”), an open-end management investment company consisting of multiple investment series, organized as a Delaware statutory trust on February 9, 2012. The Trust is registered with the Securities and Exchange Commission (“SEC”) under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company and the offering of the Fund’s shares is registered under the Securities Act of 1933, as amended (the “Securities Act”). The investment objective of the Fund is to seek long-term growth of capital. The Fund commenced operations on April 20, 2015.
The end of the reporting period for the Fund is March 31, 2020, and the period covered by these Notes to Financial Statements is the fiscal year ended March 31, 2020 (the “current fiscal period”).
NOTE 2 – SIGNIFICANT ACCOUNTING POLICIES
The Fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 946 Financial Services – Investment Companies.
The following is a summary of significant accounting policies consistently followed by the Fund. These policies are in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
|
|
A.
|
Security Valuation. All equity securities, including domestic and foreign common stocks, preferred stocks, and exchange traded funds that are traded on a national securities exchange, except those listed on the Nasdaq Global Market®, Nasdaq Global Select Market® and the Nasdaq Capital Market® exchanges (collectively, “Nasdaq”) are valued at the last reported sale price on the exchange on which the security is principally traded. Securities traded on Nasdaq will be valued at the Nasdaq Official Closing Price (“NOCP”). If, on a particular day, an exchange-traded or Nasdaq security does not trade, then the mean between the most recent quoted bid and asked prices will be used. All equity securities that are not traded on a listed exchange are valued at the last sale price in the over-the-counter market. If a non-exchange traded security does not trade on a particular day, then the mean between the last quoted closing bid and asked price will be used. Prices denominated in foreign currencies are converted to U.S. dollar equivalents at the current exchange rate, which approximates fair value.
|
12
AlphaMark Actively Managed Small Cap ETF
NOTES TO FINANCIAL STATEMENTS
March 31, 2020 (Continued)
Investments in mutual funds, including money market funds, are valued at their net asset value (“NAV”) per share.
Securities for which quotations are not readily available are valued at their respective fair values in accordance with pricing procedures adopted by the Fund’s Board of Trustees (the “Board”). When a security is “fair valued,” consideration is given to the facts and circumstances relevant to the particular situation, including a review of various factors set forth in the pricing procedures adopted by the Board. The use of fair value pricing by the Fund may cause the NAV of its shares to differ significantly from the NAV that would be calculated without regard to such considerations.
As described above, the Fund utilizes various methods to measure the fair value of its investments on a recurring basis. U.S. GAAP establishes a hierarchy that prioritizes inputs to valuation methods. The three levels of inputs are:
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the Fund has the ability to access.
Level 2 – Observable inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These inputs may include quoted prices for the identical instrument on an inactive market, prices for similar instruments, interest rates, prepayment speeds, credit risk, yield curves, default rates and similar data.
Level 3 – Unobservable inputs for the asset or liability, to the extent relevant observable inputs are not available; representing the Fund’s own assumptions about the assumptions a market participant would use in valuing the asset or liability and would be based on the best information available.
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, whether the security is new and not yet established in the marketplace, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in Level 3.
13
AlphaMark Actively Managed Small Cap ETF
NOTES TO FINANCIAL STATEMENTS
March 31, 2020 (Continued)
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The following is a summary of the inputs used to value the Fund’s investments as of the end of the current fiscal period:
|
Assets^
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
Exchange Traded Funds
|
|
$
|
13,192,205
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13,192,205
|
|
|
Short-Term Investments
|
|
|
2,687,443
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,687,443
|
|
|
Total Investments in Securities
|
|
$
|
15,879,648
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,879,648
|
|
|
^
|
See Schedule of Investments for further disaggregation of investment categories.
|
During the current fiscal period, the Fund did not recognize any transfers to or from Level 3.
|
|
B.
|
Federal Income Taxes. The Fund’s policy is to comply with the requirements of Subchapter M of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies and to distribute substantially all net taxable investment income and net capital gains to shareholders. Therefore, no federal income tax provision is required. The Fund plans to file U.S. Federal and applicable state and local tax returns.
|
The Fund recognizes the tax benefits of uncertain tax positions only when the position is more likely than not to be sustained. Management has analyzed the Fund’s uncertain tax positions and concluded that no liability for unrecognized tax benefits should be recorded related to uncertain tax positions. Management is not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will change materially in the next 12 months. Income and capital gain distributions are determined in accordance with federal income tax regulations, which may differ from U.S. GAAP. The Fund recognizes interest and penalties, if any, related to unrecognized tax benefits on uncertain tax positions as income tax expense in the Statement of Operations. During the current fiscal period, the Fund did not incur any interest or penalties.
|
|
C.
|
Security Transactions and Investment Income. Investment securities transactions are accounted for on the trade date. Gains and losses realized on sales of securities are determined on a specific identification basis. Dividend
|
14
AlphaMark Actively Managed Small Cap ETF
NOTES TO FINANCIAL STATEMENTS
March 31, 2020 (Continued)
income is recorded on the ex-dividend date. Interest income is recorded on an accrual basis. Withholding taxes on foreign dividends, if any, have been provided for in accordance with the Fund’s understanding of the applicable tax rules and regulations.
|
|
D.
|
Distributions to Shareholders. Distributions to shareholders from net investment income and net realized gains on securities are declared and paid by the Fund at least annually. Distributions are recorded on the ex-dividend date.
|
|
|
E.
|
Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the current fiscal period. Actual results could differ from those estimates.
|
|
|
F.
|
Share Valuation. The NAV per share of the Fund is calculated by dividing the sum of the value of the securities held by the Fund, plus cash and other assets, minus all liabilities (including estimated accrued expenses) by the total number of shares outstanding of the Fund, rounded to the nearest cent. The Fund’s shares will not be priced on the days on which the New York Stock Exchange (“NYSE”) is closed for trading. The offering and redemption price per share for creation units of the Fund is equal to the Fund’s NAV per share.
|
|
|
G.
|
Guarantees and Indemnifications. In the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund’s maximum exposure under these arrangements is unknown as this would involve future claims that may be against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote.
|
|
|
H.
|
Reclassification of Capital Accounts. U.S. GAAP requires that certain components of net assets relating to permanent differences be reclassified between financial and tax reporting. These reclassifications have no effect on net assets or NAV per share.
|
The permanent differences primarily relate to redemptions in-kind. During the current fiscal period, the following table shows the reclassifications made:
|
Distributable Earnings
(Accumulated Deficit)
|
Paid-In
Capital
|
|
$(300,534)
|
$300,534
|
15
AlphaMark Actively Managed Small Cap ETF
NOTES TO FINANCIAL STATEMENTS
March 31, 2020 (Continued)
During the current fiscal period, the Fund realized $300,534 in net capital gains resulting from in-kind redemptions, in which shareholders exchanged Fund shares for securities held by the Fund rather than for cash. Because such gains are not taxable to the Fund, and are not distributed to shareholders, they have been reclassified from distributable earnings (accumulated deficit) to paid-in capital.
|
|
I.
|
Subsequent Events. In preparing these financial statements, management has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.
|
The recent global outbreak of COVID-19 has disrupted economic markets and the prolonged economic impact is uncertain. The operational and financial performance of the issuers of securities in which the Funds invest depends on future developments, including the duration and spread of the outbreak, and such uncertainty may in turn impact the value of the Fund’s investments.
There were no other events or transactions that occurred during the period subsequent to the end of the current fiscal period that materially impacted the amounts or disclosures in the Fund’s financial statements.
|
|
J.
|
New Accounting Pronouncements. In August 2018, FASB issued Accounting Standards Update 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The primary focus of ASU 2018-13 is to improve the effectiveness of the disclosure requirements for fair value measurements. The changes affect all companies that are required to include fair value measurement disclosures. In general, the amendments in ASU 2018-13 are effective for all entities for fiscal years and interim periods within those fiscal years, beginning after December 15, 2019. An entity is permitted to early adopt the removed or modified disclosures upon the issuance of ASU 2018-13 and may delay adoption of the additional disclosures, which are required for public companies only, until their effective date. Management has evaluated the impact of these changes and has adopted the disclosure framework.
|
NOTE 3 – COMMITMENTS AND OTHER RELATED PARTY TRANSACTIONS
AlphaMark Advisors, LLC (“the Adviser”), serves as the investment adviser to the Fund. Pursuant to an Investment Advisory Agreement (“Advisory Agreement”) between the Trust, on behalf of the Fund, and the Adviser, the Adviser provides investment advice to the Fund and oversees the day-to-day operations of the Fund, subject to the direction and control of the Board and the officers of the Trust. Under the Advisory Agreement, the Adviser also arranges for the transfer agency, custody, fund administration and accounting, and all other related services necessary for the
16
AlphaMark Actively Managed Small Cap ETF
NOTES TO FINANCIAL STATEMENTS
March 31, 2020 (Continued)
Fund to operate. Under the Advisory Agreement, the Advisor has agreed to pay all expenses of the Fund, except for: the fee paid to the Adviser pursuant to the Advisory Agreement, interest charges on any borrowings, taxes, brokerage commissions and other expenses incurred in placing orders for the purchase and sale of securities and other investment instruments, acquired fund fees and expenses, accrued deferred tax liability, extraordinary expenses, and distribution (12b-1) fees and expenses. For services provided to the Fund, the Fund pays the Adviser 0.90% at an annual rate based on the Fund’s average daily net assets.
U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services (“Fund Services” or “Administrator”), acts as the Fund’s Administrator and, in that capacity, performs various administrative and accounting services for the Fund. The Administrator prepares various federal and state regulatory filings, reports and returns for the Fund, including regulatory compliance monitoring and financial reporting; prepares reports and materials to be supplied to the Board; and monitors the activities of the Fund’s Custodian, transfer agent, and fund accountant. Fund Services also serves as the transfer agent and fund accountant to the Fund. U.S. Bank N.A. (the “Custodian”), an affiliate of Fund Services, serves as the Fund’s Custodian.
Quasar Distributors, LLC, (the “Distributor”) acts as the Fund’s principal underwriter in a continuous public offering of the Fund’s shares. Until March 31, 2020, the Distributor was an affiliate of the Administrator.
A Trustee and all officers of the Trust are affiliated with the Administrator, Distributor (until March 31, 2020), and Custodian.
NOTE 4 – PURCHASES AND SALES OF SECURITIES
During the current fiscal period, purchases and sales of securities by the Fund, excluding short-term securities and in-kind transactions, were $13,002,340 and $15,509,724, respectively.
During the current fiscal period, there were no purchases or sales of U.S. Government securities.
During the current fiscal period, in-kind transactions associated with redemptions were $2,332,063 and there were no creations.
17
AlphaMark Actively Managed Small Cap ETF
NOTES TO FINANCIAL STATEMENTS
March 31, 2020 (Continued)
NOTE 5 – INCOME TAX INFORMATION
The components of distributable earnings (accumulated deficit) and cost basis of investments for federal income tax purposes at March 31, 2020 were as follows:
|
Tax cost of investments
|
|
$
|
20,245,943
|
|
|
Gross tax unrealized appreciation
|
|
$
|
—
|
|
|
Gross tax unrealized depreciation
|
|
|
(4,366,295
|
)
|
|
Net tax unrealized appreciation (depreciation)
|
|
|
(4,366,295
|
)
|
|
Undistributed ordinary income
|
|
|
95,683
|
|
|
Undistributed long-term capital gains
|
|
|
—
|
|
|
Accumulated gain (loss)
|
|
|
95,683
|
|
|
Other accumulated gain (loss)
|
|
|
(3,415,972
|
)
|
|
Distributable earnings (accumulated deficit)
|
|
$
|
(7,686,584
|
)
|
The difference between the cost basis for financial statement and federal income tax purposes is due primarily to timing differences in recognizing wash sales.
A regulated investment company may elect for any taxable year to treat any portion of any qualified late year loss as arising on the first day of the next taxable year. Qualified late year losses are certain capital and ordinary losses which occur during the portion of the Fund’s taxable year subsequent to October 31 and December 31, respectively. For the taxable year ended March 31, 2020, the Fund did not elect to defer any post-October capital losses or late-year ordinary losses.
As of March 31, 2020, the Fund has a short-term capital loss carryforward of $3,415,972. This amount does not have an expiration date. During the year ended March 31, 2020, the Fund utilized $542,135 of its capital loss carryforward.
The tax character of distributions paid by the Fund during the fiscal year ended March 31, 2020, was $138,538 of ordinary income. No distributions were paid during the fiscal year ended March 31, 2019.
NOTE 6 – SHARE TRANSACTIONS
Shares of the Fund are listed and traded on The Nasdaq Stock Market, LLC. Market prices for the shares may be different from their NAV. The Fund issues and redeems shares on a continuous basis at NAV generally in blocks of 50,000 shares, called “Creation Units.” Creation Units are issued and redeemed principally in-kind for securities included in a specified universe. Once created, shares generally trade in the secondary market at market prices that change throughout the day. Except when aggregated in Creation Units, shares are not redeemable securities of the Fund. Creation Units may only be purchased or redeemed by certain financial institutions
18
AlphaMark Actively Managed Small Cap ETF
NOTES TO FINANCIAL STATEMENTS
March 31, 2020 (Continued)
(“Authorized Participants”). An Authorized Participant is either (i) a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of the National Securities Clearing Corporation or (ii) a Depository Trust Company participant and, in each case, must have executed a Participant Agreement with the Distributor. Most retail investors do not qualify as Authorized Participants nor have the resources to buy and sell whole Creation Units. Therefore, they are unable to purchase or redeem the shares directly from the Fund. Rather, most retail investors may purchase shares in the secondary market with the assistance of a broker and are subject to customary brokerage commissions or fees.
The Fund currently offers one class of shares, which has no front-end sales load, no deferred sales charges, and no redemption fee. A fixed transaction fee is imposed for the transfer and other transaction costs associated with the purchase or sale of Creation Units. The standard fixed transaction fee for the Fund is $250, payable to the Custodian. The fixed transaction fee may be waived on certain orders if the Fund’s Custodian has determined to waive some or all of the costs associated with the order or another party, such as the Adviser, has agreed to pay such fee. In addition, a variable fee may be charged on all cash transactions or substitutes for Creation Units of up to a maximum of 2% of the value of the Creation Units subject to the transaction. Variable fees received by the Fund, if any, are displayed in the capital shares transactions section of the Statements of Changes in Net Assets. The Fund may issue an unlimited number of shares of beneficial interest, with no par value. All shares of the Fund have equal rights and privileges.
NOTE 7 - PRINCIPAL RISK
The risks of investing in investment companies, such as the underlying ETFs, typically reflect the risks of the types of instruments in which the investment companies invest. By investing in another investment company, the Fund becomes a shareholder of that investment company and bears its proportionate share of the fees and expenses of the other investment company. The Fund may be subject to statutory limits with respect to the amount it can invest in other ETFs, which may adversely affect the Fund’s ability to achieve its investment objective. Investments in ETFs are also subject to the following risks: (i) the market price of an ETF’s shares may trade above or below their NAV; (ii) an active trading market for an ETF’s shares may not develop or be maintained; and (iii) trading of an ETF’s shares may be halted for a number of reasons.
19
AlphaMark Actively Managed Small Cap ETF
Report of Independent Registered Public Accounting Firm
To the Shareholders of AlphaMark Actively Managed Small Cap ETF and
Board of Trustees of ETF Series Solutions
TRUSTEES AND OFFICERS
(Unaudited) (Continued)
The Statement of Additional Information (“SAI”) includes additional information about the Trustees and is available without charge, upon request, by calling toll free (800) 617-0004, by accessing the SEC’s website at www.sec.gov, or by accessing the Fund’s website at www.alphamarkadvisors.com/etf/.
24
AlphaMark Actively Managed Small Cap ETF
Expense Example
For the Six-Months Ended March 31, 2020 (Unaudited)
As a shareholder of the Fund you incur two types of costs: (1) transaction costs, including brokerage commissions on purchases and sales of Fund shares, and (2) ongoing costs, including management fees and other Fund expenses. This example is intended to help you understand your ongoing costs (in dollars) of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire period as indicated in the following Expense Example Table.
Actual Expenses
The first line of the table provides information about actual account values based on actual returns and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then, multiply the result by the number in the first line under the heading entitled “Expenses Paid During the Period’’ to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The second line of the table provides information about hypothetical account values based on a hypothetical return and hypothetical expenses based on the Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as brokerage commissions paid on purchases and sales of Fund shares. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. If these transactional costs were included, your costs would have been higher.
|
|
Beginning
Account Value
October 1, 2019
|
Ending
Account Value
March 31, 2020
|
Expenses
Paid During
the Period(1)
|
|
Actual
|
$1,000.00
|
$ 765.60
|
$3.97
|
|
Hypothetical (5% annual return before expenses)
|
$1,000.00
|
$ 1,020.50
|
$4.55
|
|
(1)
|
The dollar amounts shown as expenses paid during the period are equal to the annualized expense ratio, 0.90%, multiplied by the average account value during the six-month period, multiplied by 183/366 to reflect the one-half year period.
|
25
AlphaMark Actively Managed Small Cap ETF
Approval of Advisory Agreement and Board Considerations
(Unaudited)
Pursuant to Section 15(c) of the Investment Company Act of 1940 (the “1940 Act”), at a meeting held on October 2-3, 2019 (the “Meeting”), the Board of Trustees (the “Board”) of ETF Series Solutions (the “Trust”) considered the approval of the continuation of the Investment Advisory Agreement (the “Advisory Agreement”) between AlphaMark Advisors, LLC (the “Adviser”) and the Trust on behalf of the AlphaMark Actively Managed Small Cap ETF (the “Fund” or “SMCP”).
Prior to the Meeting, the Board, including the Trustees who are not parties to the Agreement or “interested persons” of any party thereto, as defined in the 1940 Act (the “Independent Trustees”), reviewed written materials from the Adviser regarding, among other things: (i) the nature, extent, and quality of the services provided by the Adviser; (ii) the historical performance of the Fund; (iii) the cost and profits realized from providing such services, including any fall-out benefits enjoyed by the Adviser or its affiliates; (iv) comparative fee and expense data for the Fund; (v) the extent to which the advisory fee for the Fund reflects economies of scale shared with Fund shareholders; and (vi) other factors the Board deemed to be relevant.
Prior to the Meeting, representatives from the Adviser, along with other service providers of the Fund, presented additional oral and written information to help the Board evaluate the Adviser’s fees and other aspects of the Agreement. The Board then discussed the written materials that it had received, the Adviser’s oral presentation, and any other information that the Board received at the Meeting and deliberated on the approval of the Agreement in light of this information. In its deliberations, the Board did not identify any single piece of information discussed below that was all-important or controlling.
Approval of the Continuation of the Advisory Agreement
Nature, Extent, and Quality of Services Provided. The Trustees considered the scope of services provided under the Advisory Agreement, noting that the Adviser would continue to provide investment management services to SMCP. In considering the nature, extent, and quality of the services provided by the Adviser, the Board considered the quality of the Adviser’s compliance infrastructure and past reports from the Trust’s Chief Compliance Officer. The Board also considered its previous experience with the Adviser providing investment management services to SMCP. The Board noted that it had previously received a copy of the Adviser’s registration form (“Form ADV”), as well as the response of the Adviser to a detailed series of questions which included, among other things, information about the background and experience of the firm’s CCO.
26
AlphaMark Actively Managed Small Cap ETF
Approval of Advisory Agreement and Board Considerations
(Unaudited) (Continued)
The Board also considered other services currently provided by the Adviser to SMCP, such as monitoring adherence to SMCP’s investment restrictions, monitoring compliance with applicable securities regulations, and monitoring the extent to which SMCP achieved its investment objective.
Historical Performance. The Board noted that for the one-year, three-year, and since inception periods ended June 30, 2019 and August 31, 2019, SMCP had significantly underperformed its benchmark index, and for the one- and three-year periods ended June 30, 2019, the Fund had significantly underperformed the median for funds in the universe of Small Cap Growth ETFs as reported by Morningstar. However, the Board noted that the Adviser had requested, and the Board had approved, a change to SMCP’s principal investment strategy from mainly investing in individual equity securities of small cap companies to investing in other investment companies that principally invest in equity securities of small cap companies effective January 9, 2019. The Board noted that for the six-month period ended August 31, 2019, the Fund had slightly underperformed its benchmark, although such period was too short to judge how the Fund’s new strategy would perform over a full market cycle.
Cost of Services Provided and Economies of Scale. The Board compared SMCP’s expense ratio to those of the universe of the Small Growth ETFs as reported by Morningstar (the “Category Peer Group”). The Board noted that the expense ratio for the Fund was at the top of the range for funds in its Category Peer Group, although the Category Peer Group was primarily composed of significantly larger, lower cost, index-based ETFs, which may not allow for an apt comparison by which to judge the Fund’s expense ratio. The Board recognized that the only other actively-managed fund in the Category Peer Group had the same expense ratio as the Fund. The Board also noted that the Fund’s new fund-of-funds strategy would result in the Fund indirectly incurring acquired fund fees and expenses, which would make its prospectus expense ratio higher than the other funds in the Category Peer Group, none of which utilize a fund-of-funds strategy. However, the Board noted that, while the fund-of-funds strategy may increase the indirect expenses of the Fund, it also offers certain advantages, such as greater diversification and broader geographic exposure than the Fund might otherwise have, which had the potential to outperform the Fund’s peers in certain market conditions.
The Board took into consideration that the advisory fee for SMCP was a “unified fee,” meaning SMCP paid no expenses other than the advisory fee and certain other costs such as interest, brokerage, acquired fund fees and expenses, extraordinary expenses and, to the extent it is implemented, fees pursuant to a Distribution and/or Shareholder Servicing (12b-1) Plan. The Board noted that the Adviser continued to be responsible for compensating the Trust’s other service providers and paying
27
AlphaMark Actively Managed Small Cap ETF
Approval of Advisory Agreement and Board Considerations
(Unaudited) (Continued)
SMCP’s other expenses out of its own fee and resources. The Board also evaluated the compensation and benefits received by the Adviser from its relationship with SMCP, taking into account analyses of the Adviser’s profitability with respect to SMCP.
The Board expressed the view that it currently appeared that the Adviser might realize economies of scale in managing SMCP as the Fund’s assets grow. The Board noted that it intends to monitor fees as SMCP’s net assets grow and assess whether fee breakpoints may be warranted.
Conclusion. No single factor was determinative of the Board’s decision to approve the continuation of the Advisory Agreement; rather, the Board based its determination on the total mix of information available to it. Based on a consideration of all the factors in their totality, the Board, including a majority of the Independent Trustees, determined that the Advisory Agreement, including the compensation payable under the agreement, was fair and reasonable to the Fund. The Board, including a majority of the Independent Trustees, therefore determined that the approval of the continuation of the Advisory Agreement was in the best interests of the Fund and its shareholders.
28
AlphaMark Actively Managed Small Cap ETF
Federal Tax Information
(Unaudited)
For the fiscal year ended March 31, 2020, certain dividends paid by the Fund may be subject to a maximum rate of 23.8%, as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003. The percentage of dividends declared from ordinary income designated as qualified dividend income was 100.00%.
For corporate shareholders, the percent of ordinary income distributions qualifying for the corporate dividend received deduction for the fiscal year ended March 31, 2020 was 75.90%.
The percentage of taxable ordinary income distributions that are designated as short-term capital gain distributions under Internal Revenue Section 871(k)(2)(C) for the Fund was 0.00%.
Information About Portfolio Holdings
(Unaudited)
The Fund files its complete schedules of portfolio holdings for its first and third fiscal quarters with the SEC on Part F of Form N-PORT. The Fund’s Part F of Form N-PORT is available without charge, upon request, by calling toll-free at (800) 617-0004. Furthermore, you may obtain the Part F of Form N-PORT on the SEC’s website at www.sec.gov. The Fund’s portfolio holdings are posted on its website at www.alphamarkadvisors.com/etf/ daily.
Information About Proxy Voting
(Unaudited)
A description of the policies and procedures the Fund uses to determine how to vote proxies relating to portfolio securities is provided in the SAI. The SAI is available without charge, upon request, by calling toll-free at (800) 617-0004, by accessing the SEC’s website at www.sec.gov, or by accessing the Fund’s website at www.alphamarkadvisors.com/etf/.
Information regarding how the Fund voted proxies relating to portfolio securities during the twelve-months ending June 30 is available by calling toll-free at (800) 617-0004 or by accessing the SEC’s website at www.sec.gov.
Frequency Distribution of Premiums and Discounts
(Unaudited)
Information regarding how often shares of the Fund trade on an exchange at a price above (i.e., at a premium) or below (i.e., at a discount) the NAV of the Fund is available, without charge, on the Fund’s website at www.alphamarkadvisors.com/etf/.
29
Adviser
AlphaMark Advisors, LLC
810 Wright’s Summit Parkway, Suite 100
Fort Wright, Kentucky 41011
Distributor
Quasar Distributors, LLC
111 East Kilbourn Avenue, Suite 1250
Milwaukee, Wisconsin 53202
Custodian
U.S. Bank National Association
1555 North Rivercenter Drive, Suite 302
Milwaukee, Wisconsin 53212
Transfer Agent
U.S. Bancorp Fund Services, LLC
615 East Michigan Street
Milwaukee, Wisconsin 53202
Independent Registered Public Accounting Firm
Cohen & Company, Ltd.
342 North Water Street, Suite 830
Milwaukee, Wisconsin 53202
Legal Counsel
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Avenue, NW
Washington, DC 20004
AlphaMark Actively Managed Small Cap ETF
Symbol – SMCP
CUSIP – 26922A834