Filed pursuant to Rule 497(c)
Registration Nos.: 333-66807
811-09093
E*TRADE FUNDS
E*TRADE S&P 500 INDEX FUND
Prospectus dated February 17, 1999
This Prospectus concisely sets forth information about the E*TRADE S&P 500 Index
Fund (the "Fund") that an investor needs to know before investing. Please read
this Prospectus carefully before investing, and keep it for future reference.
The Fund is a series of the E*TRADE Funds.
Objectives, Goals and Principal Strategies.
The Fund's investment objective is to provide investment results that attempt to
match the total return of the stocks making up the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500 Index"). The Fund seeks to achieve its
objective by investing in a master portfolio that, in turn, invests in stocks
and other assets and attempts to match the total return of the stocks making up
the S&P 500 Index.
Eligible Investors.
This Fund is designed and built specifically for on-line investors. In order to
be a shareholder of the Fund, you need to have an account with E*TRADE
Securities, Inc. ("E*TRADE Securities"). In addition, the Fund requires you to
consent to receive all information about the Fund electronically. If you wish to
rescind this consent or close your E*TRADE Securities account, the Fund would
require that you redeem all of your shares in your Fund account. The Fund is
designed for long-term investors and the value of the Fund's shares will
fluctuate over time. The Fund is a true no-load fund, which means you pay no
sales charges or 12b-1 fees.
About E*TRADE.
E*TRADE Group, Inc. ("E*TRADE") is the direct parent of E*TRADE Asset
Management, Inc., the Fund's investment advisor. E*TRADE, through its group
companies, is a leader in providing secure online investing services. E*TRADE's
focus on technology has enabled it to eliminate traditional barriers, creating
one of the most powerful and economical investing systems for the self-directed
investor. To give you ultimate convenience and control, E*TRADE offers
electronic access to your account virtually anywhere, at any time.
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.
Prospectus dated February 17, 1999
<PAGE>
TABLE OF CONTENTS
RISK/RETURN SUMMARY...........................................................3
FEES AND EXPENSES.............................................................4
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS............................5
YEAR 2000.....................................................................7
FUND MANAGEMENT...............................................................7
THE FUND'S STRUCTURE..........................................................8
PRICING OF FUND SHARES........................................................9
HOW TO BUY AND SELL SHARES....................................................9
DIVIDENDS AND OTHER DISTRIBUTIONS............................................14
TAX CONSEQUENCES.............................................................14
<PAGE>
RISK/RETURN SUMMARY
This is a summary. You should read this section along with the rest of this
Prospectus.
Investment Objectives/Goals
The Fund's investment objective is to provide investment results that attempt to
match the total return of the stocks making up the S&P 500 Index.
Principal Strategies
The Fund seeks to achieve its investment objective by investing all of its
assets in the S&P 500 Index Master Portfolio (the "Master Portfolio"), a series
of Master Investment Portfolio ("MIP"), a registered open-end management
investment company, rather than directly in a portfolio of securities. In turn,
the Master Portfolio seeks to provide investment results that correspond to the
total return performance of publicly traded common stocks in the aggregate, as
represented by the S&P 500 Index.* To do so, the Master Portfolio invests
substantially all of its assets in the same stocks and in substantially the same
percentages as the S&P 500 Index. The S&P 500 Index, a widely recognized
benchmark for U.S. stocks, currently represents about 75% of the market
capitalization of all publicly traded common stocks in the United States. The
S&P 500 Index includes 500 established companies representing different sectors
of the U.S. economy (including industrial, utilities, financial, and
transportation) selected by Standard & Poor's.
* "Standard & Poor's(R)," "S&P(R)" "S&P 500(R)", "Standard & Poor's 500(R)", and
"500" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed
for use by E*TRADE Asset Management, Inc. for use in connection with the Fund.
The Fund is not sponsored, endorsed, sold, or promoted by Standard & Poor's and
Standard & Poor's makes no representation regarding the advisability of
investing in the Fund.
Generally, the Master Portfolio attempts to be fully invested at all times in
securities comprising the S&P 500 Index and futures and options on stock index
futures, covered by liquid assets. The Master Portfolio also may invest up to
10% of its total assets in high-quality money market instruments to provide
liquidity.
Principal Risks
The stock market may rise and fall daily. The S&P 500 Index represents a
significant segment of the U.S. stock market. The S&P Index may also rise and
fall daily. As with any stock investment, the value of your investment in the
Fund will fluctuate, meaning you could lose money.
There is no assurance that the Fund will achieve its investment objective. The
S&P 500 Index may not appreciate, and could depreciate, during the time you are
invested in the Fund, even if you are a long-term investor.
The Fund cannot as a practical matter own all the stocks that make up the S&P
500 Index in perfect correlation to the S&P 500 Index itself. The use of futures
and options on futures is intended to help the Fund match the S&P 500 Index but
that may not be the result. The value of an investment in the Fund depends to a
great extent upon changes in market conditions. The Fund seeks to track the S&P
500 Index during down markets as well as during up markets. The Fund's returns
will be directly affected by the volatility of the stocks making up the S&P 500
Index. The Fund will also have exposure to the industries represented by those
stocks.
The S&P 500 Index primarily consists of large-cap stocks. As a result, whenever
these stocks perform worse than mid- or small-cap stocks, the Fund may
underperform funds that have exposure to those segments of the U.S. stock
market. Likewise, whenever large-cap U.S. stocks fall behind other types of
investments--bonds or foreign stocks, for instance--the Fund's performance also
will lag behind those investments. The companies in the S&P 500 Index are also
exposed to the global economy.
An investment in the Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Shares of the Fund involve investment risks, including the possible loss
of principal.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. The Fund is new, and therefore, has no historical expense
data. Thus, the numbers below are estimates.
Shareholder Fees
(fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed in Reinvested
Dividends and other Distributions None
Redemption Fee
(within 120 days of purchase) $24.95
Annual Fund Operating Expenses*
(expenses that are deducted from Fund assets)
Management Fees 0.07%**
Distribution (12b-1) Fees None
Other Expenses (Administration) 0.25%***
Total Annual Fund Operating Expenses 0.32%
* The cost reflects the expenses at both the Fund and the Master Portfolio
levels.
** Management fees include a fee equal to 0.05% of daily net assets payable at
the Master Portfolio level to its investment advisor and an investment advisory
fee equal to 0.02% payable by the Fund to its investment advisor. *** The
administrative fee is payable by the Fund to E*TRADE Asset Management, Inc. The
administrative fee is based on estimated amounts for the current fiscal year.
You should also know that the Fund does not charge investors any account
maintenance fees, account set-up fees, low balance fees, transaction fees or
customer service fees. E*TRADE Securities charges $20 for wire transfers out of
your E*TRADE Securities account. Also, transactions in Fund shares effected by
speaking with an E*TRADE Securities representative are subject to a $15 fee.
Transactions in Fund shares effected online or by touchtone telephone (when
available) are not subject to that fee. You will be responsible for opening and
maintaining an e-mail account and internet access at your own expense.
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 year* 3 years*
$33 $105
*Reflects costs at both the Fund and Master Portfolio levels.
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS
Under normal market conditions, the Master Portfolio invests at least 90% of its
assets in the stocks making up the S&P 500 Index. That portion of its assets is
not actively managed but simply tries to mimic the S&P 500 Index. The Master
Portfolio attempts to achieve, in both rising and falling markets, a correlation
of at least 95% between the capitalization-weighted total return of its assets
before expenses and the S&P 500 Index. 100% correlation would mean the total
return of the Master Portfolio's assets would increase and decrease exactly the
same as the S&P 500 Index. The Master Portfolio also purchases and sells futures
and options on stock index futures. The Master Portfolio also may invest up to
10% of its total assets in high-quality money market instruments to provide
liquidity.
Neither the Fund nor the Master Portfolio are managed according to traditional
methods of "active" investment management, which involve the buying and selling
of securities based upon economic, financial and market analysis and investment
judgment. Instead, the Fund and the Master Portfolio are managed by utilizing an
"indexing" investment approach to determine which securities are to be purchased
or sold to replicate, to the extent feasible, the investment characteristics of
the S&P 500 Index through computerized, quantitative techniques.
Many factors can affect stock market performance. Political and economic news
can influence marketwide trends; the outcome may be positive or negative,
short-term or long-term. Other factors may be ignored by the market as a whole
but may cause movements in the price of one company's stock or the stocks of one
or more industries (for example, rising oil prices may lead to a decline in
airline stocks).
Like all stock funds, the Fund's Net Asset Value ("NAV") will fluctuate with the
value of its assets. The assets held by the Fund will fluctuate based on market
and economic conditions, or other factors that affect particular companies or
industries. Since the investment characteristics and therefore, the investment
risks of the Fund correspond to those of the Master Portfolio, the following
discussion also includes a description of the risks associated with the
investments of the Master Portfolio. The Fund's performance will correspond
directly to the performance of the Master Portfolio.
The Fund's ability to match its investment performance to the investment
performance of the S&P 500 Index may be affected by, among other things: the
Fund and the Master Portfolio's expenses; the amount of cash and cash
equivalents held by the Master Portfolio's investment portfolio; the manner in
which the total return of the S&P 500 Index is calculated and the timing;
frequency and size of shareholder purchases; and redemptions of both the Fund
and the Master Portfolio. The Master Portfolio uses cash flows from shareholder
purchase and redemption activity to maintain, to the extent feasible, the
similarity of its portfolio to the securities comprising the S&P 500 Index.
As do many index funds, the Master Portfolio also may invest in futures and
options transactions and other derivative securities transactions to minimize
the gap in performance that naturally exists between any index fund and its
index. This gap will occur mainly because, unlike the index, the Master
Portfolio and the Fund incur expenses and must keep a portion of their assets in
cash for paying expenses and processing shareholders orders. By using futures,
the Master Portfolio potentially can offset the portion of the gap attributable
to their cash holdings. However, because some of the effect of expenses remains,
the Master Portfolio and the Fund's performance normally will be below that of
the S&P 500 Index. The Master Portfolio uses futures contracts to gain exposure
to the S&P 500 Index for its cash balances, which could cause the Fund to track
the S&P 500 Index less closely if the futures contracts do not perform as
expected.
The Master Portfolio also may invest up to 10% of its total assets in
high-quality money market instruments to provide liquidity. Among other
purposes, the Master Portfolio needs liquidity to pay redemptions and fees.
The Master Portfolio may also lend a portion of its securities to certain
financial institutions in order to earn income. These loans are fully
collateralized. However, if the institution defaults, the Master Portfolio's and
the Fund's performance could be reduced.
YEAR 2000
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by its investment advisor, the Fund's other service providers, or persons
with whom they deal, do not properly process and calculate date-related
information and data on and after January 1, 2000. This possibility is commonly
known as the "Year 2000 Problem." Virtually all operations of the Fund are
computer reliant. The investment advisor, administrator, transfer agent and
custodian have informed the Fund that they are actively taking steps to address
the Year 2000 Problem with regard to their respective computer systems. The Fund
is also taking measures to obtain assurances that comparable steps are being
taken by the Fund's other significant service providers. While there can be no
assurance that the Fund's service providers will be Year 2000 compliant, the
Fund's service providers expect that their plans to be compliant will be
achieved. The Master Portfolio's investment advisor and principal service
providers have also advised the Master Portfolio that they are working on any
necessary changes to their systems and that they expect their systems to be Year
2000 compliant in time. There can, of course, be no assurance of success by
either the Fund's or the Master Portfolio's service providers. In addition,
because the Year 2000 Problem affects virtually all organizations, the companies
or entities in which the Master Portfolio invests also could be adversely
impacted by the Year 2000 Problem. The extent of such impact cannot be
predicted.
FUND MANAGEMENT
Investment Advisors. Under an investment advisory agreement with the Fund,
E*TRADE Asset Management, Inc. ("Investment Advisor"), a registered investment
advisor, provides investment advisory services to the Fund. The Investment
Advisor is a wholly owned subsidiary of E*TRADE Group, Inc. and is located at
2400 Geng Road, Palo Alto, CA 94303. The Investment Advisor is newly formed and
therefore has no prior experience as an investment advisor.
Subject to general supervision of the E*TRADE Funds' Board of Trustees and in
accordance with the investment objective, policies and restrictions of the Fund,
the Investment Advisor provides the Fund with ongoing investment guidance,
policy direction and monitoring of the Master Portfolio. The Investment Advisor
may in the future manage cash and money market instruments for cash flow
purposes. The Investment Advisor has not previously had responsibility for
managing a mutual fund. For its advisory services, the Fund pays the Investment
Advisor an investment advisory fee at an annual rate equal to 0.02% of the
Fund's average daily net assets.
The Master Portfolio's investment advisor is Barclays Global Fund Advisors
("BGFA"). BGFA is a direct subsidiary of Barclays Global Investors, N.A. (which,
in turn, is an indirect subsidiary of Barclays Bank PLC ("Barclays")) and is
located at 45 Fremont Street, San Francisco, California 94105. BFGA has provided
asset management, administration and advisory services for over 25-years. As of
April 30, 1998, BGFA and its affiliates provided investment advisory services
for over $575 billion of assets. BGFA receives a fee from the Master Portfolio
at an annual rate equal to 0.05% of the Master Portfolio's average daily net
assets.
The Fund bears a pro rata portion of the investment advisory fees paid by the
Master Portfolio, as well as certain other fees paid by the Master Portfolio,
such as accounting, legal, and SEC registration fees.
THE FUND'S STRUCTURE
The Fund is a separate series of the E*TRADE Funds. The Fund is a feeder fund in
a master/feeder structure. Accordingly, the Fund invests all of its assets in
the Master Portfolio. The Master Portfolio seeks to provide investment results
that correspond to the total return performance of publicly traded common stocks
in the aggregate, as represented by the Standard & Poor's 500 Stock Index. In
addition to selling its shares to the Fund, the Master Portfolio has and may
continue to sell its shares to certain other mutual funds or other accredited
investors. The expenses and, correspondingly, the returns of other investment
options in the Master Portfolio may differ from those of the Fund.
The Fund's Board of Trustees (the "Board") believes that, as other investors
invest their assets in the Master Portfolio, certain economic efficiencies may
be realized with respect to the Master Portfolio. For example, fixed expenses
that otherwise would have been borne solely by the Fund (and the other existing
interestholders in the Master Portfolio) would be spread across a larger asset
base as more funds invest in the Master Portfolio. However, if a mutual fund or
other investor withdraws its investment from the Master Portfolio, the economic
efficiencies (e.g., spreading fixed expenses across a larger asset base) that
the Fund's Board believes should be available through investment in the Master
Portfolio may not be fully achieved or maintained. In addition, given the
relatively novel nature of the master/feeder structure, accounting and
operational difficulties could occur.
Fund shareholders may be asked to vote on matters concerning the Master
Portfolio.
The Fund may withdraw its investments in the Master Portfolio if the Board of
Trustees of the Fund determines that it is in the best interests of the Fund and
its shareholders to do so. Upon any such withdrawal, the Board of Trustees of
the Fund would consider what action might be taken, including the investment of
all the assets of the Fund in another pooled investment entity having the same
investment objective as the Fund, direct management of a portfolio by the
Adviser or the hiring of a sub-advisor to manage the Fund's assets.
Investment of the Fund's assets in the Master Portfolio is not a fundamental
policy of the Fund and a shareholder vote is not required for the Fund to
withdraw its investment from the Master Portfolio.
PRICING OF FUND SHARES
The Fund is a true no-load fund, which means you may buy or sell shares directly
at the net asset value ("NAV") determined after E*TRADE Securities receives your
request in proper form. If E*TRADE Securities receives such request prior to the
close of the New York Stock Exchange, Inc. ("NYSE") on a day on which the NYSE
is open, your share price will be the NAV determined that day. Shares will not
be priced on the days on which the NYSE is closed for trading.
The Fund's investment in the Master Portfolio is valued at the NAV of the Master
Portfolio's shares held by the Fund. The Master Portfolio calculates the NAV of
its shares on the same day and at the same time as the Fund. Net asset value per
share is computed by dividing the value of the Master Portfolio's net assets
(i.e., the value of its assets less liabilities) by the total number of shares
of such Master Portfolio outstanding. The Master Portfolio's investments are
valued each day the NYSE is open for business. The Master Portfolio's assets are
valued generally by using available market quotations or at fair value as
determined in good faith by the Board of Trustees of MIP.
The Fund's NAV per share is calculated by taking the value of the Fund's net
assets and dividing by the number of shares outstanding. Expenses are accrued
daily and applied when determining the NAV.
The NAV for the Fund is determined as of the close of trading on the floor of
the NYSE (generally 4:00 p.m., Eastern time), each day the NYSE is open. The
Fund reserves the right to change the time at which purchases and redemptions
are priced if the NYSE closes at a time other than 4:00 p.m. Eastern time or if
an emergency exists.
HOW TO BUY AND SELL SHARES
This Fund is designed and built specifically for on-line investors. In order to
become a shareholder of the Fund, you will need to open an E*TRADE Securities
account. In addition, the Fund requires shareholders to consent to receive all
information about the Fund electronically. If a shareholder wishes to rescind
this consent, the Fund would require the shareholder to redeem the position in
the Fund, unless a new class of shares of the Fund has been formed for those
shareholders reflecting the higher costs of paper-based information delivery.
Shareholders required to redeem their shares because they revoked their consent
to receive Fund information electronically may experience adverse tax
consequences.
E*TRADE Securities reserves the right to deliver paper-based documents in
certain circumstances, at no cost to the investor. Shareholder information
includes prospectuses, financial reports, confirmations and statements. If for
any reason you decide you no longer wish to receive shareholder information
electronically, you rescind the right to own shares and you must sell your
position.
In order to buy shares, you will need to 1) Open an E*TRADE Securities account
2) Deposit money in the account 3) Execute an order to buy shares.
Step 1: How to Open an E*TRADE Securities Account
To open an E*TRADE Securities account, you must complete the application
available through our Website. You will be subject to E*TRADE Securities'
general account requirements as described in E*TRADE Securities' customer
agreement.
Whether you are investing in the Fund for the first time or adding to an
existing investment, the Fund provides you with several methods to buy its
shares. Because the Fund's net asset value changes daily, your purchase price
will be the next net asset value determined after the Fund receives and accepts
your purchase order.
On-line. You can access E*TRADE Securities' online application through multiple
electronic gateways, including the internet, WebTV, Prodigy, AT&T Worldnet,
Microsoft Investor, by GO ETRADE on CompuServe, with the keyword ETRADE on
America Online and via personal digital assistant. For more information on how
to access E*TRADE Securities electronically, please refer to our online
assistant E*STATION at www.etrade.com available 24 hours a day or call
1-800-786-2575 between 5:00 a.m. and 6 p.m. (pacific time), Monday - Friday.
By Mail. You can request an application by visiting the "Open an Account" area
of our Website, or by calling 1-800-786-2575. Complete and sign the application.
Make your check or money order payable to E*TRADE Securities, Inc. Mail to
E*TRADE Securities, Inc., 2400 Geng Road, Palo Alto, CA 94303. Telephone.
Request a new account kit by calling 1-800-786-2575 between 5:00 a.m. and 6
p.m., Monday - Friday (pacific time). In Person. Stop by E*TRADE Securities'
customer service center in Palo Alto, California at the address on the back
cover page of this prospectus between 8:00 a.m. and 5:00 p.m. (pacific time).
Customer service will only accept checks or money orders made payable to E*TRADE
Securities, Inc.
STEP 2: Funding Your Account.
By check or money order. Make your check or money order payable to E*TRADE
Securities, Inc. and mail it to E*TRADE Securities, Inc., 2400 Geng Road, Palo
Alto, CA 94303.
Wire. Send wired funds to:
The Bank of New York
48 Wall Street
New York, NY 10286
ABA #021000018
FBO: E*TRADE Securities, Inc.
A/C #8900346256 for further credit to (your name and account number).
After your account is opened, E*TRADE Securities will contact you with an
account number so that you can immediately wire funds.
STEP 3: Execute an Order to Buy/Sell Shares
Minimum Investment Requirements:
For your initial investment in the Fund $1,000
To buy additional shares of the Fund $ 250
Continuing minimum investment* $1,000
To invest in the Fund for your IRA, Roth IRA,
or one-person SEP account $ 250
To invest in the Fund for your Education IRA account $ 250
To invest in the Fund for your UGMA/UTMA account $ 250
To invest in the Fund for your SIMPLE, SEP-IRA,
Profit Sharing or Money Purchase Pension Plan,
or 401(a) account $ 250
* Your shares may be automatically redeemed if, as a result of selling shares,
you no longer meet a Fund's minimum balance requirements. Before taking such
action, the Fund will provide you with written notice and at least 30 days to
buy more shares to bring your investment up to $1,000.
After your account is established you may use any of the methods described below
to buy or sell shares. You can only sell funds that are held in your E*TRADE
Securities account; that means you cannot "short" shares of the Fund.
You can access the money you have invested in the Fund at any time by selling
some or all of your shares back to the Fund. Please note that the Fund may
assess a $24.95 fee on redemptions of Fund shares held for less than 120 days.
As soon as E*TRADE Securities receives the shares or the proceeds from the Fund,
the transaction will appear in your account. This usually occurs the business
day following the transaction, but in any event, no later than three days
thereafter.
On-line. You can access E*TRADE Securities' secure trading pages at
www.etrade.com via the internet, WebTV, Prodigy, AT&T Worldnet, Microsoft
Investor, by GO ETRADE on CompuServe, with the keyword ETRADE on America Online
and via personal digital assistant. By clicking on one of several mutual fund
order buttons, you can quickly and easily place a buy or sell order for shares
in the Fund. You will be prompted to enter your trading password whenever you
perform a transaction so that we can be sure each buy or sell is secure. It is
for your own protection to make sure you or your co-account holder(s) are the
only people who can place orders in your E*TRADE account. When you buy shares,
you will be asked to: 1) affirm your consent to receive all Fund documentation
electronically, 2) provide an e-mail address and 3) affirm that you have read
the prospectus. The prospectus will be readily available for viewing and
printing on our Website.
Telephone. You can use TELE*MASTER to place orders. Call 1-800-STOCKS1 (1-800-
786-2571) for an additional $15 fee.
Our built-in verification system lets you double-check orders before they are
sent to the markets, and you can change or cancel any unfilled order subject to
prior execution.
If you are already a shareholder, you may also call 1-800-STOCKS5
(1-800-786-2575) to sell shares by phone through an E*TRADE Securities broker
for an additional $15 fee.
The Fund reserves the right to refuse a telephone redemption if it believes it
advisable to do so.
Investors will bear the risk of loss from fraudulent or unauthorized
instructions received over the telephone provided that the Fund reasonably
believes that such instructions are genuine. The Fund and its transfer agent
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. The Fund may incur liability if it does not follow these
procedures.
Due to increased telephone volume during periods of dramatic economic or market
changes, you may experience difficulty in implementing a broker-assisted
telephone redemption. In these situations, investors may want to consider
trading online by accessing our Website or use TELE*MASTER, E*TRADE Securities'
automated telephone system, to effect such a transaction by calling
1-800-STOCKS1 (1-800-786-2571).
Signature Guarantee. For your protection, certain requests may require a
signature guarantee.
A signature guarantee is designed to protect you and the Fund against fraudulent
transactions by unauthorized persons. In the following instances, the Fund will
require a signature guarantee for all authorized owners of an account:
1........ If you transfer the ownership of your account to another individual
or organization.
2........ When you submit a written redemption for more than $25,000.
3........ When you request that redemption proceeds be sent to a
different name or address than is registered on your account.
4........ If you add or change your name or add or remove an owner on your
account.
5........ If you add or change the beneficiary on your transfer-on-death
account.
For other registrations, access E*STATION through our Website or call
1-800-786-2575 for instructions.
You will have to wait to redeem your shares until the funds you use to buy them
have cleared (e.g., your check has cleared).
The right of redemption may be suspended during any period in which (i) trading
on the NYSE is restricted, as determined by the SEC, or the NYSE is closed for
other than weekends and holidays; (ii) the SEC has permitted such suspension by
order; or (iii) an emergency as determined by the SEC exists, making disposal of
portfolio securities or valuation of net assets of the Fund not reasonably
practicable.
Redemption Fee. The Fund can experience substantial price fluctuations and is
intended for long-term investors. Short-term "market timers" who engage in
frequent purchases and redemptions can disrupt the Fund's investment program and
create additional transaction costs that are borne by all shareholders. For
these reasons, the Fund may assess a $24.95 fee on redemptions of fund shares
held for less than 120 days.
Any redemption fees imposed will be paid to the Fund to help offset transaction
costs. The Fund will use the "first-in, first-out" (FIFO) method to determine
the 120-day holding period. Under this method, the date of the redemption will
be compared with the earliest purchase date of shares held in the account. If
this holding period is less than 120 days, the fee may be assessed. The fee may
apply to shares held through omnibus accounts or certain retirement plans.
Closing your account. If you close your E*TRADE Securities account, you will be
required to redeem your shares in your Fund account.
DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund intends to pay dividends from net investment income quarterly and
distribute capital gains, if any, annually. The Fund may make additional
distributions if necessary.
Unless you choose otherwise, all your dividends and capital gain distributions
will be automatically reinvested in additional Fund shares. Shares are purchased
at the net asset value determined on the payment date.
TAX CONSEQUENCES
The following information is meant as a general summary for U.S. taxpayers.
Please see the Fund's Statement of Additional Information for more information.
You should rely on your own tax advisor for advice about the particular federal,
state and local tax consequences to you of investing in the Fund.
The Fund generally will not have to pay income tax on amounts it distributes to
shareholders, although shareholders will be taxed on distributions they receive.
The Fund will distribute substantially all of its income and gains to its
shareholders every year. If the Fund declares a dividend in October, November or
December but pays it in January, you may be taxed on the dividend as if you
received it in the previous year.
You will generally be taxed on dividends you receive from the Fund, regardless
of whether they are paid to you in cash or are reinvested in additional Fund
shares. If the Fund designates a dividend as a capital gain distribution, you
will pay tax on that dividend at the long-term capital gains tax rate, no matter
how long you have held your Fund shares.
If you invest through a tax-deferred retirement account, such as an IRA, you
generally will not have to pay tax on dividends until they are distributed from
the account. These accounts are subject to complex tax rules, and you should
consult your tax advisor about investment through a tax-deferred account.
There may be tax consequences to you if you dispose of your Fund shares, for
example, through redemption, exchange or sale. You will generally have a capital
gain or loss from a disposition. The amount of the gain or loss and the rate of
tax will depend mainly upon how much you pay for the shares, how much you sell
them for, and how long you hold them.
The Fund will send you a tax report each year that will tell you which dividends
must be treated as ordinary income and which (if any) are long-term capital
gain.
As with all mutual funds, the Fund may be required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to you if you
fail to provide the Fund with your correct taxpayer identification number or to
make required certifications, or if you have been notified by the IRS that you
are subject to backup withholding. Backup withholding is not an additional tax,
but is a method in which the IRS ensures that it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S. federal income tax
liability.
<PAGE>
[Outside back cover page.]
The Statement of Additional Information for the Fund, dated February 17, 1999
("SAI"), contains further information about the Fund. The SAI is incorporated
into this Prospectus by reference (that means it is legally considered part of
this Prospectus). Additional information about the Fund's investments will be
available in the Fund's annual and semi-annual reports to shareholders. In the
Fund's annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
its fiscal year.
Additional information including the SAI and the most recent annual and
semi-annual reports (when available) may be obtained without charge, at our
Website (www.etrade.com). Shareholders will be alerted by e-mail when a
prospectus amendment, annual or semi-annual report is available. Shareholders
may also call the toll-free number listed below for additional information or
with any inquiries.
Further information about the Fund (including the SAI) can also be reviewed and
copied at the SEC's Public Reference Room in Washington, D.C. You may call
1-800-SEC-0330 for information about the operations of the public reference
room. Reports and other information about the Fund are also available on the
SEC's Website (http://www.sec.gov) or copies can be obtained, upon payment of a
duplicating fee, by writing the Public Reference Section of the SEC, Washington,
D.C. 20549-6009.
E*TRADE Securities, Inc.
2400 Geng Road
Palo Alto, CA 94303
Toll-Free: (800) 786-2575
http://www.etrade.com
Investment Company Act file No.: 811-09093
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
E*TRADE Funds
E*TRADE S&P 500 Index Fund
February 17, 1999
This Statement of Additional Information ("SAI") is not a prospectus. This SAI
should be read together with the Prospectus for the E*TRADE S&P 500 Index Fund
(the "Fund"), as a separate series of the E*TRADE Funds, dated February 17, 1999
(as amended from time to time).
To obtain a copy of the Fund's Prospectus and the Fund's most recent
shareholders report (when issued) free of charge, please access our Website
online (www.etrade.com) via e-mail or by calling our toll-free number at (800)
786-2575. Only customers of E*TRADE Securities, Inc. who consent to receive all
information about the Fund electronically may invest in the Fund.
<PAGE>
TABLE OF CONTENTS
Page
FUND HISTORY.................................................................3
THE FUND.....................................................................3
THE FUND'S INVESTMENT STRATEGIES AND RISKS...................................3
FUND POLICIES...............................................................12
TRUSTEES AND OFFICERS.......................................................16
INVESTMENT MANAGEMENT.......................................................20
SERVICE PROVIDERS...........................................................22
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION..............................24
ORGANIZATION, DIVIDEND AND VOTING RIGHTS....................................26
SHAREHOLDER INFORMATION.....................................................27
TAXATION....................................................................27
UNDERWRITER.................................................................31
MASTER PORTFOLIO ORGANIZATION...............................................31
PERFORMANCE INFORMATION.....................................................32
FINANCIAL STATEMENTS........................................................37
STANDARD & POOR'S...........................................................39
APPENDIX....................................................................41
<PAGE>
FUND HISTORY
The E*TRADE S&P 500 Index Fund (the "Fund") is a diversified series of E*TRADE
Funds (the "Trust"). The Trust is organized as a Delaware business trust and was
formed on November 4, 1998.
THE FUND
The Fund is classified as a diversified open-end, management investment company.
The Fund's investment objective is to provide investment results that attempt to
match the total return of the stocks making up the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500 Index"). The Fund seeks to achieve its
objective by investing in a master portfolio that, in turn, invests in stocks
and other assets and attempts to match the total return of the stocks making up
the S&P 500 Index. This investment objective is fundamental and therefore,
cannot be changed without approval of a majority (as defined in the 1940 Act, as
amended) of the Fund's outstanding voting interests.
To do so, the Fund intends to invest all of its assets in the S&P 500 Index
Master Portfolio (the "Master Portfolio"), which is a series of Master
Investment Portfolio ("MIP"), an open-end, management investment company.
However, this policy is not a fundamental policy of the Fund and a shareholder
vote is not required for the Fund to withdraw its investment from the Master
Portfolio. The Master Portfolio seeks to provide investment results that
correspond to the total return performance of publicly traded common stocks in
the aggregate, as represented by the Standard & Poor's 500 Stock Index.
INVESTMENT STRATEGIES AND RISKS
The following supplements the discussion in the Prospectus of the Master
Portfolio's investment strategies, policies and risks. These investment
strategies and policies may be changed without shareholder approval unless
otherwise noted.
Futures Contracts and Options Transactions. The Master Portfolio may use futures
as a substitute for a comparable market position in
the underlying securities.
Although the Master Portfolio intends to purchase or sell futures contracts only
if there is an active market for such contracts, no assurance can be given that
a liquid market will exist for any particular contract at any particular time.
Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contract prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the Master
Portfolio to substantial losses. If it is not possible, or if the Master
Portfolio determines not to close a futures position in anticipation of adverse
price movements, the Master Portfolio will be required to make daily cash
payments on variation margin.
The Master Portfolio may invest in stock index futures and options on stock
index futures as a substitute for a comparable market position in the underlying
securities. A stock index future obligates the seller to deliver (and the
purchaser to take), effectively, an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made. With respect to stock indices that are permitted investments, the Master
Portfolio intends to purchase and sell futures contracts on the stock index for
which it can obtain the best price with consideration also given to liquidity.
There can be no assurance that a liquid market will exist at the time when the
Master Portfolio seeks to close out a futures contract or a futures option
position. Lack of a liquid market may prevent liquidation of an unfavorable
position.
The Master Portfolio's futures transactions must constitute permissible
transactions pursuant to regulations promulgated by the Commodity Futures
Trading Commission ("CFTC"). In addition, the Master Portfolio may not engage in
futures transactions if the sum of the amount of initial margin deposits and
premiums paid for unexpired options on futures contracts, other than those
contracts entered into for bona fide hedging purposes, would exceed 5% of the
liquidation value of the Master Portfolio's assets, after taking into account
unrealized profits and unrealized losses on such contracts; provided, however,
that in the case of an option on a futures contract that is in-the-money at the
time of purchase, the in-the-money amount may be excluded in calculating the 5%
liquidation limit. Pursuant to regulations and/or published positions of the
SEC, the Master Portfolio may be required to segregate cash or high quality
money market instruments in connection with its futures transactions in an
amount generally equal to the entire value of the underlying security.
Future Developments. The Master Portfolio may take advantage of opportunities in
the area of options and futures contracts and options on futures contracts and
any other derivative investments which are not presently contemplated for use by
the Master Portfolio or which are not currently available but which may be
developed, to the extent such opportunities are both consistent with the Master
Portfolio's investment objective and legally permissible for the Master
Portfolio. Before entering into such transactions or making any such investment,
the Fund will provide appropriate disclosure in its prospectus.
Forward commitments, when-issued purchases and delayed-delivery transactions.
The Master Portfolio may purchase or sell securities on a when-issued or
delayed-delivery basis and make contracts to purchase or sell securities for a
fixed price at a future date beyond customary settlement time. Securities
purchased or sold on a when-issued, delayed-delivery or forward commitment basis
involve a risk of loss if the value of the security to be purchased declines, or
the value of the security to be sold increases, before the settlement date.
Although the Master Portfolio will generally purchase securities with the
intention of acquiring them, the Master Portfolio may dispose of securities
purchased on a when-issued, delayed-delivery or a forward commitment basis
before settlement when deemed appropriate by the adviser.
Certain of the securities in which the Master Portfolio may invest will be
purchased on a when-issued basis, in which case delivery and payment normally
take place within 45 days after the date of the commitment to purchase. The
Master Portfolio only will make commitments to purchase securities on a
when-issued basis with the intention of actually acquiring the securities, but
may sell them before the settlement date if it is deemed advisable. When-issued
securities are subject to market fluctuation, and no income accrues to the
purchaser during the period prior to issuance. The purchase price and the
interest rate that will be received on debt securities are fixed at the time the
purchaser enters into the commitment.
Purchasing a security on a when-issued basis can involve a risk that the market
price at the time of delivery may be lower than the agreed-upon purchase price,
in which case there could be an unrealized loss at the time of delivery. The
Master Portfolio currently does not intend on investing more than 5% of its
assets in when-issued securities during the coming year. The Master Portfolio
will establish a segregated account in which it will maintain cash or liquid
securities in an amount at least equal in value to the Master Portfolio's
commitments to purchase when-issued securities. If the value of these assets
declines, the Master Portfolio will place additional liquid assets in the
account on a daily basis so that the value of the assets in the account is equal
to the amount of such commitments.
Short-term instruments and temporary investments. The Master Portfolio may
invest in high-quality money market instruments on an ongoing basis to provide
liquidity or for temporary purposes when there is an unexpected level of
shareholder purchases or redemptions. The instruments in which the Master
Portfolio may invest include: (i) short-term obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities (including
government-sponsored enterprises); (ii) negotiable certificates of deposit
("CDs"), bankers' acceptances, fixed time deposits and other obligations of
domestic banks (including foreign branches) that have more than $1 billion in
total assets at the time of investment and that are members of the Federal
Reserve System or are examined by the Comptroller of the Currency or whose
deposits are insured by the FDIC; (iii) commercial paper rated at the date of
purchase "Prime-1" by Moody's or "A-1+" or "A-1" by S&P, or, if unrated, of
comparable quality as determined by Master Portfolio's investment advisor; (iv)
non-convertible corporate debt securities (e.g., bonds and debentures) with
remaining maturities at the date of purchase of not more than one year that are
rated at least "Aa" by Moody's or "AA" by S&P; (v) repurchase agreements; and
(vi) short-term, U.S. dollar-denominated obligations of foreign banks (including
U.S. branches) that, at the time of investment have more than $10 billion, or
the equivalent in other currencies, in total assets and in the opinion of the
Master Portfolio's investment advisor are of comparable quality to obligations
of U.S. banks which may be purchased by the Master Portfolio.
Bank Obligations. The Master Portfolio may invest in bank obligations, including
certificates of deposit, time deposits, bankers' acceptances and other
short-term obligations of domestic banks, foreign subsidiaries of domestic
banks, foreign branches of domestic banks, and domestic and foreign branches of
foreign banks, domestic savings and loan associations and other banking
institutions.
Certificates of deposit are negotiable certificates evidencing the obligation of
a bank to repay funds deposited with it for a specified period of time. Time
deposits are non-negotiable deposits maintained in a banking institution for a
specified period of time at a stated interest rate. Time deposits which may be
held by the Master Portfolio will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation. Bankers' acceptances are credit
instruments evidencing the obligation of a bank to pay a draft drawn on it by a
customer. These instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. The other
short-term obligations may include uninsured, direct obligations, bearing fixed,
floating- or variable-interest rates.
Commercial Paper and Short-Term Corporate Debt Instruments. The Master Portfolio
may invest in commercial paper (including variable amount master demand notes),
which consists of short-term, unsecured promissory notes issued by corporations
to finance short-term credit needs. Commercial paper is usually sold on a
discount basis and has a maturity at the time of issuance not exceeding nine
months. Variable amount master demand notes are demand obligations that permit
the investment of fluctuating amounts at varying market rates of interest
pursuant to arrangements between the issuer and a commercial bank acting as
agent for the payee of such notes whereby both parties have the right to vary
the amount of the outstanding indebtedness on the notes. The investment adviser
to the Master Portfolio monitors on an ongoing basis the ability of an issuer of
a demand instrument to pay principal and interest on demand.
The Master Portfolio also may invest in non-convertible corporate debt
securities (e.g., bonds and debentures) with not more than one year remaining to
maturity at the date of settlement. The Master Portfolio will invest only in
such corporate bonds and debentures that are rated at the time of purchase at
least "Aa" by Moody's or "AA" by S&P. Subsequent to its purchase by the Master
Portfolio, an issue of securities may cease to be rated or its rating may be
reduced below the minimum rating required for purchase by the Master Portfolio.
The investment adviser to the Master Portfolio will consider such an event in
determining whether the Master Portfolio should continue to hold the obligation.
To the extent the Master Portfolio continues to hold such obligations, it may be
subject to additional risk of default.
To the extent the ratings given by Moody's or S&P may change as a result of
changes in such organizations or their rating systems, the Master Portfolio will
attempt to use comparable ratings as standards for investments in accordance
with the investment policies contained in its Prospectus and in this SAI. The
ratings of Moody's and S&P and other nationally recognized statistical rating
organizations are more fully described in the attached Appendix.
Repurchase Agreements. The Master Portfolio may enter into a repurchase
agreement wherein the seller of a security to the Master Portfolio agrees to
repurchase that security from the Master Portfolio at a mutually-agreed upon
time and price. The period of maturity is usually quite short, often overnight
or a few days, although it may extend over a number of months. The Master
Portfolio may enter into repurchase agreements only with respect to securities
that could otherwise be purchased by the Master Portfolio, including government
securities and mortgage-related securities, regardless of their remaining
maturities, and requires that additional securities be deposited with the
custodian if the value of the securities purchased should decrease below the
repurchase price.
The Master Portfolio may incur a loss on a repurchase transaction if the seller
defaults and the value of the underlying collateral declines or is otherwise
limited or if receipt of the security or collateral is delayed. The Master
Portfolio's custodian has custody of, and holds in a segregated account,
securities acquired as collateral by the Master Portfolio under a repurchase
agreement. Repurchase agreements are considered loans by the Master Portfolio.
All repurchase transactions must be collateralized.
In an attempt to reduce the risk of incurring a loss on a repurchase agreement,
the Master Portfolio limits investments in repurchase agreements to selected
creditworthy securities dealers or domestic banks or other recognized financial
institutions. The Master Portfolio's advisor monitors on an ongoing basis the
value of the collateral to assure that it always equals or exceeds the
repurchase price.
Letters of Credit. Certain of the debt obligations (including municipal
securities, certificates of participation, commercial paper and other short-term
obligations) which the Master Portfolio may purchase may be backed by an
unconditional and irrevocable letter of credit of a bank, savings and loan
association or insurance company which assumes the obligation for payment of
principal and interest in the event of default by the issuer. Only banks,
savings and loan associations and insurance companies which, in the opinion the
investment advisor are of comparable quality to issuers of other permitted
investments of the Master Portfolio may be used for letter of credit-backed
investments.
Floating- and variable- rate obligations. The Master Portfolio may purchase debt
instruments with interest rates that are periodically adjusted at specified
intervals or whenever a benchmark rate or index changes. These adjustments
generally limit the increase or decrease in the amount of interest received on
the debt instruments. Floating- and variable-rate instruments are subject to
interest-rate risk and credit risk.
Loans of portfolio securities. The Master Portfolio may lend securities from its
portfolios to brokers, dealers and financial institutions (but not individuals)
in order to increase the return on its portfolio. The value of the loaned
securities may not exceed one-third of the Master Portfolio's total assets and
loans of portfolio securities are fully collateralized based on values that are
marked-to-market daily. The Master Portfolio will not enter into any portfolio
security lending arrangement having a duration of longer than one year. The
principal risk of portfolio lending is potential default or insolvency of the
borrower. In either of these cases, the Master Portfolio could experience delays
in recovering securities or collateral or could lose all or part of the value of
the loaned securities. The Master Portfolio may pay reasonable administrative
and custodial fees in connection with loans of portfolio securities and may pay
a portion of the interest or fee earned thereon to the borrower or a placing
broker.
In determining whether to lend a security to a particular broker, dealer or
financial institution, the Master Portfolio's investment advisor considers all
relevant facts and circumstances, including the size, creditworthiness and
reputation of the broker, dealer, or financial institution. Any loans of
portfolio securities are fully collateralized and marked to market daily. The
Master Portfolio will not enter into any portfolio security lending arrangement
having a duration of longer than one year. Any securities that the Master
Portfolio may receive as collateral will not become part of the Master
Portfolio's investment portfolio at the time of the loan and, in the event of a
default by the borrower, the Master Portfolio will, if permitted by law, dispose
of such collateral except for such part thereof that is a security in which the
Master Portfolio is permitted to invest. During the time securities are on loan,
the borrower will pay the Master Portfolio any accrued income on those
securities, and the Master Portfolio may invest the cash collateral and earn
income or receive an agreed upon fee from a borrower that has delivered
cash-equivalent collateral.
Investment company securities. The Master Portfolio may invest in securities
issued by other open-end management investment companies which principally
invest in securities of the type in which such Master Portfolio invests. Under
the 1940 Act, a Master Portfolio's investment in such securities currently is
limited to, subject to certain exceptions, (i) 3% of the total voting stock of
any one investment company, (ii) 5% of the Master Portfolio's net assets with
respect to any one investment company and (iii) 10% of the Master Portfolio's
net assets in the aggregate. Investments in the securities of other investment
companies generally will involve duplication of advisory fees and certain other
expenses. The Master Portfolio may also purchase shares of exchange-listed
closed-end funds.
Illiquid securities. To the extent that such investments are consistent with its
investment objective, the Master Portfolio may invest up to 15% of the value of
its net assets in securities as to which a liquid trading market does not exist.
Such securities may include securities that are not readily marketable, such as
privately issued securities and other securities that are subject to legal or
contractual restrictions on resale, floating- and variable-rate demand
obligations as to which the Master Portfolio cannot exercise a demand feature on
not more than seven days' notice and as to which there is no secondary market
and repurchase agreements providing for settlement more than seven days after
notice.
Foreign Securities. Since the stocks of some foreign issuers may be included in
the S&P 500 Index, the Master Portfolio's portfolio may contain securities of
such foreign issuers, as well as American Depositary Receipts and similar
instruments, which may subject the Master Portfolio to additional investment
risks with respect to those securities that are different in some respects from
those incurred by a fund which invests only in securities of domestic issuers.
Such risks include possible adverse political and economic developments, seizure
or nationalization of foreign deposits or adoption of governmental restrictions
which might adversely affect the value of the securities of a foreign issuer to
investors located outside the country of the issuer, whether from currency
blockage or otherwise.
American Depositary Receipts and Similar Instruments. To the extent necessary to
replicate the investment characteristics of the S&P 500 Index, the Master
Portfolio may invest in foreign securities through American Depositary Receipts
("ADRs") and similar instruments convertible into securities of foreign issuers.
These securities may not necessarily be denominated in the same currency as the
securities into which they may be converted. ADRs (sponsored or unsponsored) are
receipts typically issued by a U.S. bank or trust company and traded on a U.S.
Stock Exchange, that evidence ownership of underlying foreign securities.
Issuers of unsponsored ADRs are not contractually obligated to disclose material
information in the U.S. and, therefore, such information may not correlate to
the market value of the unsponsored ADR.
Obligations of Foreign Governments, Banks and Corporations. The Master Portfolio
may invest in U.S. dollar-denominated short-term obligations issued or
guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities that are determined by its
investment adviser to be of comparable quality to the other obligations in which
the Master Portfolio may invest.
To the extent that such investments are consistent with its investment
objective, the Master Portfolio may also invest in debt obligations of
supranational entities. Supranational entities include international
organizations designated or supported by governmental entities to promote
economic reconstruction or development and international banking institutions
and related government agencies. Examples include the International Bank for
Reconstruction and Development (the World Bank), the European Coal and Steel
Community, the Asian Development Bank and the InterAmerican Development Bank.
The percentage of the Master Portfolio's assets invested in obligations of
foreign governments and supranational entities will vary depending on the
relative yields of such securities, the economic and financial markets of the
countries in which the investments are made and the interest rate climate of
such countries.
The Master Portfolio may also invest a portion of its total assets in high
quality, short-term (one year or less) debt obligations of foreign branches of
U.S. banks or U.S. branches of foreign banks that are denominated in and pay
interest in U.S. dollars.
U.S. Government Obligations. The Master Portfolio may invest in various types of
U.S. Government obligations. U.S. Government obligations include securities
issued or guaranteed as to principal and interest by the U.S. Government and
supported by the full faith and credit of the U.S. Treasury. U.S. Treasury
obligations differ mainly in the length of their maturity. Treasury bills, the
most frequently issued marketable government securities, have a maturity of up
to one year and are issued on a discount basis. U.S. Government obligations also
include securities issued or guaranteed by federal agencies or
instrumentalities, including government-sponsored enterprises. Some obligations
of such agencies or instrumentalities of the U.S. Government are supported by
the full faith and credit of the United States or U.S. Treasury guarantees.
Other obligation of such agencies or instrumentalities of the U.S. Government
are supported by the right of the issuer or guarantor to borrow from the U.S.
Treasury. Others by the discretionary authority of the U.S. Government to
purchase certain obligations of the agency or instrumentality or only by the
credit of the agency or instrumentality issuing the obligation.
In the case of obligations not backed by the full faith and credit of the United
States, the investor must look principally to the agency or instrumentality
issuing or guaranteeing the obligation for ultimate repayment, which agency or
instrumentality may be privately owned. There can be no assurance that the U.S.
government would provide financial support to its agencies or instrumentalities
(including government-sponsored enterprises) where it is not obligated to do so.
In addition, U.S. government obligations are subject to fluctuations in market
value due to fluctuations in market interest rates. As a general matter, the
value of debt instruments, including U.S. government obligations, declines when
market interest rates increase and rises when market interest rates decrease.
Certain types of U.S. government obligations are subject to fluctuations in
yield or value due to their structure or contract terms.
Unrated, Downgraded and Below Investment Grade Investments. The Master Portfolio
may purchase instruments that are not rated if, in the opinion of its investment
advisor, such obligations are of investment quality comparable to other rated
investments that are permitted to be purchased by the Master Portfolio. After
purchase by the Master Portfolio, a security may cease to be rated or its rating
may be reduced below the minimum required for purchase by the Master Portfolio.
Neither event will require a sale of such security by the Master Portfolio
provided that the amount of such securities held by the Master Portfolio does
not exceed 5% of the Master Portfolio's net assets. To the extent the ratings
given by Moody's or S&P may change as a result of changes in such organizations
or their rating systems, the Master Portfolio will attempt to use comparable
ratings as standards for investments in accordance with the investment policies
contained in this SAI. The ratings of Moody's and S&P are more fully described
in the Appendix to this SAI.
Because the Master Portfolio is not required to sell downgraded securities, the
Master Portfolio could hold up to 5% of its net assets in debt securities rated
below "Baa" by Moody's or below "BBB" by S&P or in unrated, low quality (below
investment grade) securities. Although they may offer higher yields than do
higher rated securities, low rated, and unrated, low quality debt securities
generally involve greater volatility of price and risk of principal and income,
including the possibility of default by, or bankruptcy of, the issuers of the
securities. In addition, the markets in which low rated and unrated, low quality
debt are traded are more limited than those in which higher rated securities are
traded. The existence of limited markets for particular securities may diminish
the Master Portfolio's ability to sell the securities at fair value either to
meet redemption requests or to respond to changes in the economy or in the
financial markets and could adversely affect and cause fluctuations in the daily
net asset value of the Master Portfolio's shares.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated or unrated, low
quality debt securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated or unrated, low quality debt securities
may be more complex than for issuers of higher rated securities, and the ability
of the Master Portfolio to achieve its investment objective may, to the extent
it holds low rated or unrated low quality debt securities, be more dependent
upon such creditworthiness analysis than would be the case if the Master
Portfolio held exclusively higher rated or higher quality securities.
Low rated or unrated low quality debt securities may be more susceptible to real
or perceived adverse economic and competitive industry conditions than
investment grade securities. The prices of such debt securities have been found
to be less sensitive to interest rate changes than higher rated or higher
quality investments, but more sensitive to adverse economic downturns or
individual corporate developments. A projection of an economic downturn or of a
period of rising interest rates, for example, could cause a decline in low rated
or unrated, low quality debt securities prices because the advent of a recession
could dramatically lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of the
debt securities defaults, the Master Portfolio may incur additional expenses to
seek recovery.
Warrants. To the extent that such investments are consistent with its investment
objective, the Master Portfolio may invest up to 5% of its net assets in
warrants. Warrants represent rights to purchase securities at a specific price
valid for a specific period of time. The prices of warrants do not necessarily
correlate with the prices of the underlying securities. The Master Portfolio may
only purchase warrants on securities in which the Master Portfolio may invest
directly.
Portfolio Turnover Rate. The portfolio turnover rate for the Master Portfolio
generally is not expected to exceed 50%. This portfolio turnover rate will not
be a limiting factor when the investment advisor deems portfolio changes
appropriate.
FUND POLICIES
Fundamental Investment Restrictions
The following are the Fund's fundamental investment restrictions which, along
with the Fund's investment objective, cannot be changed without shareholder
approval by a vote of a majority of the outstanding shares of the Fund, as set
forth in the 1940 Act.
Unless noted otherwise, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in percentage resulting from a change
in the Fund's assets (i.e., due to cash inflows or redemptions) or in market
value of the investment or the Fund's assets will not constitute a violation of
that restriction.
Unless indicated otherwise below, the Fund:
1. may not invest more than 5% of its assets in the obligations of any single
issuer, except that up to 25% of the value of its total assets may be invested,
and securities issued or guaranteed by the U.S. government, or its agencies or
instrumentalities may be purchased, without regard to any such limitation;
2. may not with respect to 75% of its total assets, invest in a security if, as
a result of such investment, it would hold more than 10% (taken at the time of
such investment) of the outstanding securities of any one issuer;
3. may not issue senior securities, except as permitted under the 1940 Act;
4. may (1) borrow money from banks and (2) make other investments or engage in
other transactions permissible under the 1940 Act which may involve a borrowing,
provided that the combination of (1) and (2) shall not exceed 33 1/3% of the
value of the Fund's total assets (including the amount borrowed), less the
Fund's liabilities (other than borrowings), except that the Fund may borrow up
to an additional 5% of its total assets (not including the amount borrowed) from
a bank for temporary or emergency purposes (but not for leverage or the purchase
of investments). The Fund may also borrow money from other persons to the extent
permitted by applicable law;
5. may not act as an underwriter of another issuer's securities, except to the
extent that the Fund may be deemed to be an underwriter within the meaning of
the Securities Act of 1933, as amended, in connection with the disposition of
portfolio securities;
6. may not purchase the securities of any issuer if, as a result, more than 25%
of the Fund's total assets (taken at market value at the time of such
investment) would be invested in the securities of issuers in any particular
industry, except that this restriction does not apply to securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities (or
repurchase agreements thereto);
7. may not purchase or sell real estate, although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
which invest in real estate, or interests therein;
8. may not purchase or sell physical commodities or commodities contracts or
oil, gas or mineral programs. This restriction shall not prohibit the Fund,
subject to restrictions described in the Prospectus and elsewhere in this
Statement of Additional Information , from purchasing, selling or entering into
futures contracts, options on futures contracts and other derivative
instruments, subject to compliance with any applicable provisions of the federal
securities or commodities laws;
9. may not lend any funds or other assets, except that the Fund may, consistent
with its investment objective and policies: (a) invest in certain short-term or
temporary debt obligations, even though the purchase of such obligations may be
deemed to be the making of loans, (b) enter into repurchase agreements, and (c)
lend its portfolio securities in an amount not to exceed 33 1/3% of the Fund's
total assets, provided such loans are made in accordance with applicable
guidelines established by the Securities and Exchange Commission and the
directors of the Fund.
Non-Fundamental Operating Restrictions
The following are the Fund's non-fundamental operating restrictions, which may
be changed by the Fund's Board of Trustees without shareholder approval.
Unless indicated otherwise below, the Fund may not:
1. pledge, mortgage or hypothecate its assets, except to the extent necessary to
secure permitted borrowings and to the extent related to the purchase of
securities on a when-issued or forward commitment basis and the deposit of
assets in escrow in connection with writing covered put and call options and
collateral and initial or variation margin arrangements with respect to options,
forward contracts, futures contracts, including those relating to indexes, and
options on futures contracts or indexes;
2. purchase securities of other investment companies, except to the extent
permitted under the 1940 Act;
3. invest in illiquid securities if, as a result of such investment, more than
15% of its net assets would be invested in illiquid securities, or such other
amounts as may be permitted under the 1940 Act; and
4. may, notwithstanding any other fundamental investment policy or restriction,
invest all of its assets in the securities of a single open-end management
investment company with substantially the same fundamental investment objective,
policies, and restrictions as the Fund.
Master Portfolio: Fundamental Investment Restrictions
The Master Portfolio is subject to the following fundamental investment
restrictions which cannot be changed without approval by the holders of a
majority (as defined in the 1940 Act) of the Master Portfolio's outstanding
voting securities. If a percentage restriction is adhered to at the time of
investment, a later change in percentage resulting from a change in values or
assets except with respect to compliance with fundamental investment restriction
number 5, will not constitute a violation of such restriction.
The Master Portfolio may not:
1. invest more than 5% of its assets in the obligations of any single issuer,
except that up to 25% of the value of its total assets may be invested, and
securities issued or guaranteed by the U.S. government, or its agencies or
instrumentalities may be purchased, without regard to any such limitation;
2. hold more than 10% of the outstanding voting securities of any single issuer.
This investment restriction applies only with respect to 75% of its total
assets;
3. issue any senior security (as such term is defined in Section 18(f) of the
1940 Act), except to the extent the activities permitted in the Master
Portfolio's fundamental policies (4) and (8) and non-fundamental policies (2)
and (3), may be deemed to give rise to a senior security; and
4. borrow money, except to the extent permitted under the 1940 Act, provided
that the Master Portfolio currently intends to borrow only for temporary or
emergency (not leveraging) purposes, and may borrow up to one-third of the value
of its total assets (including the amount borrowed) valued at the lesser of cost
or market, less liabilities (not including the amount borrowed) at the time the
borrowing is made. While borrowings exceed 5% of the Master Portfolio's total
assets, the Master Portfolio will not make any new investments. For purposes of
this investment restriction, the Master Portfolio's entry into options, forward
contracts, futures contracts, including those relating to indexes, and options
on futures contracts or indexes shall not constitute borrowing to the extent
certain segregated accounts are established and maintained by the Master
Portfolio;
5. act as an underwriter of securities of other issuers, except to the extent
that the Master Portfolio may be deemed an underwriter under the Securities Act
of 1933, as amended, by virtue of disposing of portfolio securities;
6. invest 25% or more of its total assets in the securities of issuers in any
particular industry or group of closely related industries except that there
shall be no limitation with respect to investments in (i) obligations of the
U.S. government, its agencies or instrumentalities; or (ii) any industry in
which the S&P 500 Index becomes concentrated to the same degree during the same
period, the Master Portfolio will be concentrated as specified above only to the
extent the percentage of its assets invested in those categories of investments
is sufficiently larger than 25% or more of its total assets would be invested in
a single industry;
7. purchase, hold or deal in real estate, or oil, gas or other mineral leases or
exploration or development programs, but the Master Portfolio may purchase and
sell securities that are secured by real estate or issued by companies that
invest or deal in real estate;
8. invest in commodities, except that the Master Portfolio may purchase and sell
(i.e., write) options, forward contracts, futures contracts, including those
relating to indexes, and options on futures contracts or indexes;
9. make loans to others, except through the purchase of debt obligations and the
entry into repurchase agreements. However, the Master Portfolio may lend its
portfolio securities in an amount not to exceed one-third of the value of its
total assets. Any loans of portfolio securities will be made according to
guidelines established by the SEC and the Master Portfolio's Board of Trustees;
and
10. purchase securities on margin, but each Master Portfolio may make margin
deposits in connection with transactions in options, forward contracts, futures
contracts, including those related to indexes, and options on futures contracts
or indexes;
Non-Fundamental Operating Policies
The Master Portfolio is subject to the following non-fundamental operating
policies which may be changed by the Board of Trustees of the Master Portfolio
without the approval of the holders of the Master Portfolio's outstanding
securities.
The Master Portfolio may not:
1. invest in the securities of a company for the purpose of exercising
management or control, but the Master Portfolio will vote the securities it owns
in its portfolio as a shareholder in accordance with its views;
2. pledge, mortgage or hypothecate its assets, except to the extent necessary to
secure permitted borrowings and to the extent related to the purchase of
securities on a when-issued or forward commitment basis and the deposit of
assets in escrow in connection with writing covered put and call options and
collateral and initial or variation margin arrangements with respect to options,
forward contracts, futures contracts, including those relating to indexes, and
options on futures contracts or indexes;
3. purchase, sell or write puts, calls or combinations thereof, except as may be
described in the Master Portfolio's offering documents;
4. purchase securities of any company having less than three years' continuous
operations (including operations of any predecessors) unless the securities are
fully guaranteed or insured by the U.S. government, a state, commonwealth,
possession, territory, the District of Columbia or by an entity in existence at
least three years, or the securities are backed by the assets and revenues of
any of the foregoing if such purchase would cause the value of its investments
in all such companies to exceed 5% of the value of its total assets;
5. enter into repurchase agreements providing for settlement in more than seven
days after notice or purchase securities which are illiquid, if, in the
aggregate, more than 15% of the value of the Master Portfolio's net assets would
be so invested;
6. purchase securities of other investment companies, except to the extent
permitted under the 1940 Act; and
7. purchase or retain securities of any issuer if the officers or trustees of
the Master Portfolio or officers or trustees of any affiliated investment
companies or the investment advisor owning beneficially more than one-half of
one percent (0.5%) of the securities of the issuer together owned beneficially
more than 5% of such securities;
TRUSTEES AND OFFICERS
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities and the
conformity with Delaware Law and the stated policies of the Fund. The Board
elects the officers of the Trust who are responsible for administering the
Fund's day-to-day operations. Trustees and officers of the Fund, together with
information as to their principal business occupations during the last five
years, and other information are shown below. Each "interested or affiliated
person," as defined in the 1940 Act, is indicated by an asterisk (*):
<TABLE>
- ------------------------ --------------------- -----------------------------
<CAPTION>
Name, Address, and Age Position(s) Held Principal Occupation(s)
with the Fund During the Past 5 Years
- ------------------------ --------------------- -----------------------------
<S> <C> <C>
*Kathy Levinson (43) Trustee Ms. Levinson is executive vice president of
2400 Geng Road E*TRADE Group, Inc. and president and chief
Palo Alto, CA 94303 operating officer of E*TRADE Securities.
She joined the company in January 1996 after
serving as a consultant to E*TRADE during 1995.
Prior t that Ms. Levinston was senior vice
president of credit services for Schwab.
*Leonard C. Purkis(50) Trustee Mr. Purkis is chief financial officer and
2400 Geng Road executive vice president of finance and
Palo Alto, CA 94303 administration of E*TRADE Group, Inc. He
previously served as chief financial officer
for Iomega Corporation (Hardware
Manufacturer)from 1995 to 1998. Prior to
joining Iomega, he served in numerous senior
level domestic and international finance
positions for General Electric Co. and its
subsidiaries, culminating his career there as
senior vice president, finance, for GE Capital
Fleet Services (Financial Services.
Shelly J. Meyers (39) Trustee Ms. Meyers is the Manager, Chief Executive
Officer, Chief Financial Officer and
founder of Meyers Capital Management, a
registered investment adviser formed in
January 1996. She has also managed the
Meyers Pride Value Fund since June 1996.
Prior to that, she was employed by The
Boston Company Asset Management, Inc. as
Assistant Vice President of its
Institutional Asset Management group.
Ashley T. Rabun (47) Trustee Ms. Rabun is the Founder and Chief
Executive Officer of InvestorReach (which
is a consulting firm specializing in
marketing and distribution strategies for
financial services companies formed in
October 1996). From 1992 to 1996, she was
a partner and President of Nicholas
Applegate Mutual Funds, a division of
Nicholas Applegate Capital Management.
Steven Grenadier (34) Trustee Mr. Grenadier is an Associate Professor of
Finance at the Graduate School of Business
at Stanford University, where he has been
employed as a professor since 1992.
*Brian C. Murray (42) President Mr. Murray is President of E*TRADE Asset
2400 Geng Road Management, Inc. He joined E*TRADE
Palo Alto, CA 94303 Securities, Inc. in January 1998. Prior to
that Mr. Murray was Principal of Alameda
Counsulting (Financial Services Consulting)
and prior to that he was Director, Mutual
Fund Marketplace of Charles Schwab
Corporation (Financial Services).
*Joe N. Van Remortel (33) Vice Presidentd Mr. Van Remortel is Vice President of
2400 Geng Road and Secretary Operations, E*TRADE Asset Management, Inc.
Palo Alto, CA 94303 He joined E*TRADE Securities, Inc. in
September 1996. Prior to that Mr. Van
Remortel was Senior Consultant of KPMG Peat
Marwick and Associate of Analysis Group,
Inc. (management consulting).
</TABLE>
The Trust pays each non-affiliated Trustee a quarterly fee of $1,500 per Board
meeting for the Fund. In addition, the Trust reimburses each of the
non-affiliated Trustee for travel and other expenses incurred in connection with
attendance at such meetings. Other officers and Trustees of the Trust receive no
compensation or expense reimbursement. The following table provides an estimate
of each Trustee's compensation for the current fiscal year:
<TABLE>
Estimated Compensation Table
- ------------------- -------------------------- -----------------------------
<CAPTION>
Total Compensation
Name of Person, Aggregate From Fund and Fund
Position Compensation from Complex Paid to
the Fund Directors
Expected to be Paid to
Trustees (1)
- ------------------- -------------------------- -----------------------------
<S> <C> <C>
Kathy Levinson, None None
Trustee
Leonard C. Purkis, None None
Trustee
Shelly J. Meyers $6,000 $6,000
Ashley T. Rabun $6,000 $6,000
Steven Grenadier $6,000 $6,000
No Trustee will receive any benefits upon retirement. Thus, no pension or
retirement benefits have accrued as part of the Fund's expenses.
- ------------
<FN>
(1) This amount represents the estimated aggregate amount of compensation
paid to each non-affiliated Trustee for service on the Board of
Trustees for the fiscal year ending December 31, 1999.
</FN>
</TABLE>
Control Persons and Principal Holders of Securities
A shareholder that owns 25% or more of the Fund's voting securities is in
control of the Fund on matters submitted to a vote of shareholders. To satisfy
regulatory requirements, as of January 27, 1999, E*TRADE Asset Management, Inc.
owned 100% of the Fund's outstanding shares. There are no other shareholders
holding 25% or more. E*TRADE Asset Management, Inc. is a Delaware corporation
and is wholly owned by E*TRADE Group, Inc. Its address is 2400 Geng Road, Palo
Alto, CA 94303.
As of January 31, 1999, Softbank America Inc. owned 27.5% of the total
outstanding voting shares of E*TRADE Group, Inc. Softbank America, Inc. is a
Delaware corporation and is located 300 Delaware Ave., Suite 900, Wilmington,
Delaware 19801. It is a wholly owned subsidiary of Softbank Holding, Inc., also
a Delaware corporation, which, in turn, is a wholly owned subsidiary of
Softbank Corporation, a Japanese corporation.
INVESTMENT MANAGEMENT
Investment Advisors. Under an investment advisory agreement with the Fund,
E*TRADE Asset Management, Inc. ("Investment Advisor") provides investment
advisory services to the Fund. The Investment Advisor is a wholly owned
subsidiary of E*TRADE Group, Inc., a leader in providing secure online investing
services to the self-directed investor that offers electronic access to an
investor's account virtually anywhere, at any time.
Subject to general supervision of the E*TRADE Funds' Board of Trustees and in
accordance with the investment objective, policies and restrictions of the Fund,
the Investment Advisor provides the Fund with ongoing investment guidance,
policy direction and monitoring of the Master Portfolio. The Investment Advisor
may in the future manage cash and money market instruments for cash flow
purposes. The Investment Advisor has not previously had responsibility for
managing a mutual fund. For its advisory services, the Fund pays the Investment
Advisor an investment advisory fee at an annual rate equal to 0.02% of the
Fund's average daily net assets.
The Master Portfolio's Investment Advisor. The Master Portfolio's investment
advisor is Barclays Global Fund Advisors ("BGFA"). BGFA is a direct subsidiary
of Barclays Global Investors, N.A. (which, in turn, is an indirect subsidiary of
Barclays Bank PLC ("Barclays")) and is located at 45 Fremont Street, San
Francisco, California 94105. BFGA has provided assets management, administration
and advisory services for over 25 years. As of April 30, 1998, BGFA and its
affiliates provided investment advisory services for over $575 billion of
assets. Barclays Bank PLC has been involved in banking in the United Kingdom for
over 300 years. Pursuant to an Investment Advisory Contract dated January 1,
1996 (the "Advisory Contract") with the Master Portfolio, BGFA provides
investment guidance and policy direction in connection with the management of
the Master Portfolio's assets. Pursuant to the Advisory Contract, BGFA furnishes
to the Master Portfolio's Board of Trustees periodic reports on the investment
strategy and performance of the Master Portfolio. BGFA receives a fee from the
Master Portfolio at an annual rate equal to 0.05% of the Master Portfolio's
average daily net assets. This advisory fee is an expense of the Master
Portfolio borne proportionately by its interestholders, including the Fund.
The Advisory Contract for the Master Portfolio provides that if, in any fiscal
year, the total expenses of the Master Portfolio (excluding taxes, interest,
brokerage commissions and its extraordinary expenses but including the fees
provided for in the Advisory Contract) exceed the most restrictive expense
limitation applicable to the Master Portfolio imposed by the securities laws or
regulations of the states having jurisdiction over the Master Portfolio, BGFA
shall waive its fees under the Advisory Contract for the fiscal year to the
extent of the excess or reimburse the excess, but only to the extent of its
fees.
BGFA has agreed to provide to the Master Portfolio, among other things, money
market security and fixed-income research, analysis and statistical and economic
data and information concerning interest rate and security market trends,
portfolio composition, credit conditions and average maturities of the Master
Portfolio's investment portfolio.
The Advisory Contract will continue in effect for more than two years provided
the continuance is approved annually (i) by the holders of a majority of the
Master Portfolio's outstanding voting securities or by the Master Portfolio's
Board of Trustees and (ii) by a majority of the Trustees of the Master Portfolio
who are not parties to the Advisory Contract or affiliated of any such party.
The Advisory Contract may be terminated on 60 days' written notice by either
party and will terminate automatically if assigned.
Asset allocation and modeling strategies are employed by BGFA for other
investment companies and accounts advised or sub-advised by BGFA. If these
strategies indicate particular securities should be purchased or sold at the
same time by the Master Portfolio and one or more of these investment companies
or accounts, available investments or opportunities for sales will be allocated
equitably to each by BGFA. In some cases, these procedures may adversely affect
the size of the position obtained for or disposed of by the Master Portfolio or
the price paid or received by the Master Portfolio.
SERVICE PROVIDERS
Principal Underwriter. E*TRADE Securities, Inc., 2400 Geng Road, Palo Alto, CA
94303, is the Fund's principal underwriter. The underwriter is a wholly owned
subsidiary of E*TRADE Group, Inc.
Administrator and Placement Agent of the Master Portfolio. Stephens, Inc.
("Stephens"), and Barclays Global Investors, N.A. ("BGI") serve as
co-administrators on behalf of the Master Portfolio. Under the Co-Administration
Agreement between Stephens, BGI and the Master Portfolio, Stephens and BGI
provide as administrative services, among other things: (i) general supervision
of the operation of the Master Portfolio, including coordination of the services
performed by the investment advisor, transfer and dividend disbursing agent,
custodian, shareholder servicing agent(s), independent auditors and legal
counsel; (ii) general supervision of regulatory compliance matters, including
the compilation of information for documents such as reports to, and filings
with, the SEC and state securities commissions; and preparation of proxy
statements and shareholder reports for the Master Portfolio; and (iii) general
supervision relative to the compilation of data required for the preparation of
periodic reports distributed to the Master Portfolio's officers and Board.
Stephens also furnishes office space and certain facilities required for
conducting the business of the Master Portfolio together with those ordinary
clerical and bookkeeping services that are not furnished by BGFA. Stephens also
pays the compensation of the Master Portfolio's trustees, officers and employees
who are affiliated with Stephens. Furthermore, except as provided in the
advisory contract, Stephens and BGI bear substantially all costs of the Master
Portfolio and the Master Portfolio's operations. However, Stephens and BGI are
not required to bear any cost or expense which a majority of the non-affiliated
trustees of the Master Portfolio deem to be an extraordinary expense.
Stephens also acts as the placement agent of Master Portfolio's shares pursuant
to a Placement Agency Agreement (the "Placement Agency Agreement") with the
Master Portfolio.
Administrator of the Fund. E*TRADE Asset Management, Inc., the Fund's Investment
Advisor, also serves as the Fund's administrator. As the Fund's administrator,
E*TRADE Asset Management, Inc. provides administrative services directly or
through sub-contracting, including: (i) general supervision of the operation of
the Fund, including coordination of the services performed by the investment
advisor, transfer and dividend disbursing agent, custodian, sub-administrator,
shareholder servicing agent, independent auditors and legal counsel; (ii)
general supervision of regulatory compliance matters, including the compilation
of information for documents such as reports to, and filings with, the SEC and
state securities commissions; and (iii) periodic reviews of management reports
and financial reporting. E*TRADE Asset Management, Inc. also furnishes office
space and certain facilities required for conducting the business of the Fund.
Pursuant to an agreement with the Fund, E*TRADE Asset Management, Inc. receives
a fee equal to 0.25% of the average daily net assets of the Fund. E*TRADE Asset
Management, Inc. is responsible under that agreement for the expenses otherwise
payable by the Fund for transfer agency, dividend disbursing, custody, auditing
and legal fees, to the extent that those expenses would otherwise equal or
exceed 0.005% of the Fund's average daily net assets.
Custodian, Fund Accounting Services Agent and Sub-administrator. Investors Bank
& Trust Company ("IBT"), 200 Clarendon Street, Boston, MA 02111, serves as
custodian of the assets of the Fund and the Master Portfolio. As a result, IBT
has custody of all securities and cash of the Fund and the Master Portfolio,
delivers and receives payment for securities sold, receives and pays for
securities purchased, collects income from investments, and performs other
duties, all as directed by the officers of the Fund and the Master Portfolio.
The custodian has no responsibility for any of the investment policies or
decisions of the Fund and the Master Portfolio. IBT also acts as the Fund's
Accounting Services Agent. IBT also serves as the Fund's sub-administrator,
under an agreement among the Trust and E*TRADE Asset Management, Inc., providing
management reporting and treasury administration, financial reporting and board
and proxy material to Fund Management and the Fund's Board of Trustees and
preparing income tax provisions and tax returns. IBT is compensated for its
services by E*TRADE Asset Management, Inc.
Transfer Agent and Dividend Disbursing Agent. PFPC Inc., 400 Bellevue Parkway,
Wilmington, DE 19809, acts as transfer agent and dividend-disbursing agent for
the Fund.
Fund Shareholder Servicing Agent. Under a Shareholder Servicing Agreement with
E*TRADE Securities and E*TRADE Asset Management, Inc., E*TRADE Securities, 2400
Geng Road, Palo Alto, CA 94303, acts as shareholder servicing agent for the
Fund. As shareholder servicing agent, E*TRADE Securities provides personal
services to the Fund's shareholders and maintains the Fund's shareholder
accounts. Such services include, (i) answering shareholder inquiries regarding
account status and history, the manner in which purchases and redemptions of the
Fund's shares may be effected, and certain other matters pertaining to the Fund;
(ii) assisting shareholders in designating and changing dividend options,
account designations and addresses; (iii) providing necessary personnel and
facilities to coordinate the establishment and maintenance of shareholder
accounts and records with the Fund's transfer agent; (iv) transmitting
shareholders' purchase and redemption orders to the Fund's transfer agent; (v)
arranging for the wiring or other transfer of funds to and from shareholder
accounts in connection with shareholder orders to purchase or redeem shares of
the Fund; (vi) verifying purchase and redemption orders, transfers among and
changes in shareholder-designated accounts; (vii) informing the distributor of
the Fund of the gross amount of purchase and redemption orders for the Fund's
shares; (viii) provide certain printing and mailing services, such as printing
and mailing of shareholder account statements, checks, and tax forms; and (ix)
providing such other related services as the Fund or a shareholder may
reasonably request, to the extent permitted by applicable law.
Independent Accountants. Deloitte & Touche LLP, Suite 1500, 1000 Wilshire Blvd.,
Los Angeles, CA 90017-2472, acts as independent accountants for the Fund.
Legal Counsel. Dechert Price & Rhoads, 1775 Eye Street N.W., Washington, DC
20006-2401, acts as legal counsel for the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION
The Master Portfolio has no obligation to deal with any dealer or group of
dealers in the execution of transactions in portfolio securities. Subject to
policies established by the Master Portfolio's Board of Trustees, BGFA as
advisor, is responsible for the Master Portfolio's investment portfolio
decisions and the placing of portfolio transactions. In placing orders, it is
the policy of the Master Portfolio to obtain the best results taking into
account the broker/dealer's general execution and operational facilities, the
type of transaction involved and other factors such as the broker/dealer's risk
in positioning the securities involved. While BGFA generally seeks reasonably
competitive spreads or commissions, the Master Portfolio will not necessarily be
paying the lowest spread or commission available.
Purchase and sale orders of the securities held by the Master Portfolio may be
combined with those of other accounts that BGFA manages, and for which it has
brokerage placement authority, in the interest of seeking the most favorable
overall net results. When BGFA determines that a particular security should be
bought or sold for the Master Portfolio and other accounts managed by BGFA, BGFA
undertakes to allocate those transactions among the participants equitably.
Under the 1940 Act, persons affiliated with the Master Portfolio such as
Stephens, BGFA and their affiliates are prohibited from dealing with the Master
Portfolio as a principal in the purchase and sale of securities unless an
exemptive order allowing such transactions is obtained from the SEC or an
exemption is otherwise available.
Except in the case of equity securities purchased by the Master Portfolio,
purchases and sales of securities usually will be principal transactions.
Portfolio securities normally will be purchased or sold from or to dealers
serving as market makers for the securities at a net price. The Master Portfolio
also will purchase portfolio securities in underwritten offerings and may
purchase securities directly from the issuer. Generally, money market
securities, adjustable rate mortgage securities ("ARMS"), municipal obligations,
and collateralized mortgage obligations ("CMOs") are traded on a net basis and
do not involve brokerage commissions. The cost of executing the Master
Portfolio's investment portfolio securities transactions will consist primarily
of dealer spreads and underwriting commissions.
Purchases and sales of equity securities on a securities exchange are effected
through brokers who charge a negotiated commission for their services. Orders
may be directed to any broker including, to the extent and in the manner
permitted by applicable law, Stephens or BGI. In the over-the-counter market,
securities are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price that includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount.
In placing orders for portfolio securities of the Master Portfolio, BGFA is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that BGFA seeks to execute each transaction at a
price and commission, if any, that provide the most favorable total cost or
proceeds reasonably attainable in the circumstances. While BGFA generally seeks
reasonably competitive spreads or commissions, the Master Portfolio will not
necessarily be paying the lowest spread or commission available. In executing
portfolio transactions and selecting brokers or dealers, BGFA seeks to obtain
the best overall terms available for the Master Portfolio. In assessing the best
overall terms available for any transaction, BGFA considers factors deemed
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker or
dealer, and the reasonableness of the commission, if any, both for the specific
transaction and on a continuing basis. Rates 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 Master Portfolio's Board of Trustees.
Certain of the brokers or dealers with whom the Master Portfolio may transact
business offer commission rebates to the Master Portfolio. BGFA considers such
rebates in assessing the best overall terms available for any transaction. The
overall reasonableness of brokerage commissions paid is evaluated by BGFA based
upon its knowledge of available information as to the general level of
commission paid by other institutional investors for comparable services.
ORGANIZATION, DIVIDEND AND VOTING RIGHTS
The Fund is a diversified series of E*TRADE Funds (the "Trust"), an open-end
investment company, organized as a Delaware business trust on November 4, 1998.
The Trust may issue additional series and classes.
All shareholders may vote on each matter presented to shareholders. Fractional
shares have the same rights proportionately as do full shares. Shares of the
Trust have no preemptive, conversion, or subscription rights. If the Trust
issues additional series, each series of shares will be held separately by the
custodian, and in effect each series will be a separate fund.
All shares of the Trust have equal voting rights. Approval by the shareholders
of a fund is effective as to that fund whether or not sufficient votes are
received from the shareholders of the other investment portfolios to approve the
proposal as to those investment portfolios.
Generally, the Trust will not hold an annual meeting of shareholders unless
required by the 1940 Act. The Trust will hold a special meeting of its
shareholders for the purpose of voting on the question of removal of a Trustee
or Trustees if requested in writing by the holders of at least 10% of the
Trust's outstanding voting securities, and to assist in communicating with other
shareholders as required by Section 16(c) of the 1940 Act.
Each share of the Fund represents an equal proportional interest in the Fund and
is entitled to such dividends and distributions out of the income earned on the
assets belonging to the Fund as are declared in the discretion of the Trustees.
In the event of the liquidation or dissolution of the Trust, shareholders of a
Fund are entitled to receive the assets attributable to the Fund that are
available for distribution, and a distribution of any general assets not
attributable to a particular investment portfolio that are available for
distribution in such manner and on such basis as the Trustees in their sole
discretion may determine.
Shareholders are not entitled to any preemptive rights. All shares, when issued,
will be fully paid and non-assessable by the Trust.
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 business trust shareholder liability exists in other
states. As a result, to the extent that a Delaware business 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 business
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 Portfolio. Notice of such disclaimer will generally be given in
each agreement, obligation or instrument entered into or executed by a series or
the Trustees. The Declaration of Trust also provides for indemnification by the
relevant series for all losses suffered by a shareholder as a result of an
obligation of the series. In view of the above, the risk of personal liability
of shareholders of a Delaware business trust is remote.
SHAREHOLDER INFORMATION
Shares are sold through E*TRADE Securities.
Pricing of Fund Shares. The net asset value of the Fund will be determined as of
the close of trading on each day the New York Stock Exchange ("NYSE") is open
for trading. The NYSE is open for trading Monday through Friday except on
national holidays observed by the NYSE.
Telephone and Internet Redemption Privileges. The Fund employs reasonable
procedures to confirm that instructions communicated by telephone or the
Internet are genuine. The Fund may not be liable for losses due to unauthorized
or fraudulent instructions. Such procedures include but are not limited to
requiring a form of personal identification prior to acting on instructions
received by telephone or the Internet, providing written confirmations of such
transactions to the address of record, tape recording telephone instructions and
backing up Internet transactions.
Retirement Plans. You can find information about the retirement plans offered by
E*TRADE Securities by accessing our Website. You may fill out an IRA application
online or request our IRA application kit by mail.
TAXATION
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the Fund and the purchase, ownership, and disposition of Fund shares.
This discussion does not purport to be complete or to deal with all aspects of
federal income taxation that may be relevant to shareholders in light of their
particular circumstances. This discussion is based upon present provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be retroactive. Prospective
investors should consult their own tax advisors with regard to the federal tax
consequences of the purchase, ownership, or disposition of Fund shares, as well
as the tax consequences arising under the laws of any state, foreign country, or
other taxing jurisdiction.
Taxation of the Fund. The Fund intends to be taxed as a regulated investment
company under Subchapter M of the Code. Accordingly, the Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to certain securities loans, and
gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing in
such stock, securities or currencies; and (b) diversify its holdings so that, at
the end of each fiscal quarter, (i) at least 50% of the value of the Fund's
total assets is represented by cash and cash items, U.S. Government securities,
the securities of other regulated investment companies and other securities,
with such other securities limited, in respect of any one issuer, to an amount
not greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities and the securities of other regulated investment
companies).
As a regulated investment company, the Fund generally is not subject to U.S.
federal income tax on income and gains that it distributes to shareholders, if
at least 90% of the Fund's investment company taxable income (which includes,
among other items, dividends, interest and the excess of any net short-term
capital gains over net long-term capital losses) for the taxable year is
distributed. The Fund intends to distribute substantially all of such income.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax at the
Fund level. To avoid the tax, the Fund must distribute during each calendar year
an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for a one-year period generally ending on October 31 of
the calendar year, and (3) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, the Fund intends to make distributions in accordance with the
calendar year distribution requirement.
Distributions. Distributions of investment company taxable income (including net
short-term capital gains) are taxable to a U.S. shareholder as ordinary income,
whether paid in cash or shares. Dividends paid by the Fund to a corporate
shareholder, to the extent such dividends are attributable to dividends received
by the Fund from U.S. corporations, may, subject to limitation, be eligible for
the dividends received deduction. However, the alternative minimum tax
applicable to corporations may reduce the value of the dividends received
deduction. Distributions of net capital gains (the excess of net long-term
capital gains over net short-term capital losses) designated by the Fund as
capital gain dividends, whether paid in cash or reinvested in Fund shares, will
generally be taxable to shareholders as long-term capital gain, regardless of
how long a shareholder has held Fund shares.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received. A distribution will be treated as paid on December 31 of a calendar
year if it is declared by the Fund in October, November or December of that year
with a record date in such a month and paid by the Fund during January of the
following year. Such distributions will be taxable to shareholders in the
calendar year in which the distributions are declared, rather than the calendar
year in which the distributions are received.
If the net asset value of shares is reduced below a shareholder's cost as a
result of a distribution by the Fund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying shares of the Fund just
prior to a distribution. The price of shares purchased at this time will include
the amount of the forthcoming distribution, but the distribution will generally
be taxable to the shareholder.
Dispositions. Upon a redemption, sale or exchange of shares of the Fund, a
shareholder will realize a taxable gain or loss depending upon his or her basis
in the shares. A gain or loss will be treated as capital gain or loss if the
shares are capital assets in the shareholder's hands, and will be long-term
capital gain or loss if the shares are held for more than one year and
short-term capital gain or loss if the shares are held for not more than one
year. Any loss realized on a redemption, sale or exchange will be disallowed to
the extent the shares disposed of are replaced (including through reinvestment
of dividends) within a period of 61 days, beginning 30 days before and ending 30
days after the shares are disposed of. In such a case the basis of the shares
acquired will be adjusted to reflect the disallowed loss. If a shareholder holds
Fund shares for six months or less and during that period receives a
distribution taxable to the shareholder as long-term capital gain, any loss
realized on the sale of such shares during such six-month period would be a
long-term loss to the extent of such distribution.
Backup Withholding. The Fund generally will be required to withhold federal
income tax at a rate of 31% ("backup withholding") from dividends paid, capital
gain distributions, and redemption proceeds to shareholders if (1) the
shareholder fails to furnish the Fund with the shareholder's correct taxpayer
identification number or social security number, (2) the IRS notifies the
shareholder or the Fund that the shareholder has failed to report properly
certain interest and dividend income to the IRS and to respond to notices to
that effect, or (3) when required to do so, the shareholder fails to certify
that he or she is not subject to backup withholding.
Any amounts withheld may be credited against the shareholder's federal income
tax liability.
Other Taxation. Distributions may be subject to additional state, local and
foreign taxes, depending on each shareholder's particular situation.
Market Discount. If the Fund purchases a debt security at a price lower than the
stated redemption price of such debt security, the excess of the stated
redemption price over the purchase price is "market discount". If the amount of
market discount is more than a de minimis amount, a portion of such market
discount must be included as ordinary income (not capital gain) by the Fund in
each taxable year in which the Fund owns an interest in such debt security and
receives a principal payment on it. In particular, the Fund will be required to
allocate that principal payment first to the portion of the market discount on
the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for each
period is equal to the lesser of (i) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account) or (ii) the amount of the principal payment with
respect to such period. Generally, market discount accrues on a daily basis for
each day the debt security is held by the Fund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Fund, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest. Gain realized on the disposition of a market discount obligation
must be recognized as ordinary interest income (not capital gain) to the extent
of the "accrued market discount."
Original Issue Discount. Certain debt securities acquired by the Fund may be
treated as debt securities that were originally issued at a discount. Very
generally, original issue discount is defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash income on account of such discount is actually
received by the Fund, original issue discount that accrues on a debt security in
a given year generally is treated for federal income tax purposes as interest
and, therefore, such income would be subject to the distribution requirements
applicable to regulated investment companies. Some debt securities may be
purchased by the Fund at a discount that exceeds the original issue discount on
such debt securities, if any. This additional discount represents market
discount for federal income tax purposes (see above).
Options, Futures and Forward Contracts. Any regulated futures contracts and
certain options (namely, nonequity options and dealer equity options) in which
the Fund may invest may be "section 1256 contracts." Gains (or losses) on these
contracts generally are considered to be 60% long-term and 40% short-term
capital gains or losses. Also, section 1256 contracts held by the Fund at the
end of each taxable year (and on certain other dates prescribed in the Code) are
"marked to market" with the result that unrealized gains or losses are treated
as though they were realized.
Transactions in options, futures and forward contracts undertaken by the Fund
may result in "straddles" for federal income tax purposes. The straddle rules
may affect the character of gains (or losses) realized by the Fund, and losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized. In
addition, certain carrying charges (including interest expense) associated with
positions in a straddle may be required to be capitalized rather than deducted
currently. Certain elections that the Fund may make with respect to its straddle
positions may also affect the amount, character and timing of the recognition of
gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to the Fund are not entirely
clear. The straddle rules may increase the amount of short-term capital gain
realized by the Fund, which is taxed as ordinary income when distributed to
shareholders. Because application of the straddle rules may affect the character
of gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to a fund that did not engage
in such transactions.
Constructive Sales. Under certain circumstances, the Fund may recognize gain
from a constructive sale of an "appreciated financial position" it holds if it
enters into a short sale, forward contract or other transaction that
substantially reduces the risk of loss with respect to the appreciated position.
In that event, the Fund would be treated as if it had sold and immediately
repurchased the property and would be taxed on any gain (but not loss) from the
constructive sale. The character of gain from a constructive sale would depend
upon the Fund's holding period in the property. Loss from a constructive sale
would be recognized when the property was subsequently disposed of, and its
character would depend on the Fund's holding period and the application of
various loss deferral provisions of the Code. Constructive sale treatment does
not apply to transactions closed in the 90-day period ending with the 30th day
after the close of the taxable year, if certain conditions are met.
UNDERWRITER
Distribution of Securities. Under a Distribution Agreement with the Fund
("Distribution Agreement"), E*TRADE Securities Inc., 2400 Geng Road, Palo Alto,
CA 94303, acts as underwriter of the Fund's shares. The Fund pays no
compensation to E*TRADE Securities, Inc. for its distribution services. The
Distribution Agreement provides that the Distributor will use its best efforts
to distribute the Fund's shares.
The Fund is a no-load fund, therefore investors pay no sales charges when buying
or selling shares of the Fund. The Distribution Agreement further provides that
the Distributor will bear the additional costs of printing prospectuses and
shareholder reports which are used for selling purposes, as well as advertising
and any other costs attributable to the distribution of the Fund's shares. The
Distributor is a wholly owned subsidiary of E*TRADE Group, Inc. The Distribution
Agreement is subject to the same termination and renewal provisions as are
described above with respect to the Advisory Agreement.
MASTER PORTFOLIO ORGANIZATION
The Master Portfolio is a series of Master Investment Portfolio ("MIP"), an
open-end, series management investment company organized as Delaware business
trust. MIP was organized on October 21, 1993. In accordance with Delaware law
and in connection with the tax treatment sought by MIP, the Declaration of Trust
provides that its investors are personally responsible for Trust liabilities and
obligations, but only to the extent the Trust property is insufficient to
satisfy such liabilities and obligations. The Declaration of Trust also provides
that MIP must maintain appropriate insurance (for example, fidelity bonding and
errors and omissions insurance) for the protection of the Trust, its investors,
trustees, officers, employees and agents covering possible tort and other
liabilities, and that investors will be indemnified to the extent they are held
liable for a disproportionate share of MIP's obligations. Thus, the risk of an
investor incurring financial loss on account of investor liability is limited to
circumstances in which both inadequate insurance existed and MIP itself was
unable to meet its obligations.
The Declaration of Trust further provides that obligations of MIP are not
binding upon its trustees individually but only upon the property of MIP and
that the trustees will not be liable for any action or failure to act, but
nothing in the Declarations of Trust protects a trustee against any liability to
which the trustee would otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of the duties involved in the
conduct of the trustee's office.
The interests in the Master Portfolio have substantially identical voting and
other rights as those rights enumerated above for shares of the Fund. MIP is
generally not required to hold annual meetings, but is required by Section 16(c)
of the 1940 Act to hold a special meeting and assist investor communications
under certain circumstances. Whenever the Fund is requested to vote on a matter
with respect to the Master Portfolio, the Fund will hold a meeting of Fund
shareholders and will cast its votes as instructed by such shareholders.
In a situation where the Fund does not receive instruction from certain of its
shareholders on how to vote the corresponding shares of the Master Portfolio,
such Fund will vote such shares in the same proportion as the shares for which
the Fund does receive voting instructions.
PERFORMANCE INFORMATION
The Fund may advertise a variety of types of performance information as more
fully described below. The Fund's performance is historical and past performance
does not guarantee the future performance of the Fund. From time to time, the
Investment Advisor may agree to waive or reduce its management fee and/or to
reimburse certain operating expenses of the Fund. Waivers of management fees and
reimbursement of other expenses will have the effect of increasing the Fund's
performance.
Average Annual Total Return. The Fund's average annual total return quotation
will be computed in accordance with a standardized method prescribed by rules of
the SEC. The average annual total return for the Fund for a specific period is
calculated as follows:
P(1+T)(To the power of n) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the applicable period at the end of the period.
The calculation assumes that all income and capital gains dividends paid by the
Fund have been reinvested at net asset value on the reinvestment dates during
the period and all recurring fees charges to all shareholder accounts are
included.
Total Return. Calculation of the Fund's total return is not subject to a
standardized formula. Total return performance for a specific period will be
calculated by first taking an investment (assumed below to be $1,000) ("initial
investment") in the Fund's shares on the first day of the period and computing
the "ending value" of that investment at the end of the period. The total return
percentage is then determined by subtracting the initial investment from the
ending value and dividing the remainder by the initial investment and expressing
the result as a percentage. The calculation assumes that all income and capital
gains dividends paid by the Fund have been reinvested at net asset value of the
Fund on the reinvestment dates during the period. Total return may also be shown
as the increased dollar value of the hypothetical investment over the period.
Cumulative Total Return. Cumulative total return represents the simple change in
value of an investment over a stated period and may be quoted as a percentage or
as a dollar amount. Total returns and cumulative total returns may be broken
down into their components of income and capital (including capital gains and
changes in share price) in order to illustrate the relationship between these
factors and their contributions to total return.
Distribution Rate. The distribution rate for the Fund will be computed,
according to a non-standardized formula by dividing the total amount of actual
distributions per share paid by the Fund over a twelve month period by the
Fund's net asset value on the last day of the period. The distribution rate
differs from the Fund's yield because the distribution rate includes
distributions to shareholders from sources other than dividends and interest,
such as short-term capital gains. Therefore, the Fund's distribution rate may be
substantially different than its yield. Both the Fund's yield and distribution
rate will fluctuate.
Yield. The yield will be calculated based on a 30-day (or one-month) period,
computed by dividing the net investment income per share earned during the
period by the maximum offering price per share on the last day of the period and
annualizing the result, according to the following formula:
YIELD = 2[(a-b+1)(To the power of 6)-1],
cd
where:
a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends;
d = the maximum offering price per share on the last day of the period.
The net investment income of a Fund includes actual interest income, plus or
minus amortized purchase discount (which may include original issue discount) or
premium, less accrued expenses. Realized and unrealized gains and losses on
portfolio securities are not included in a Fund's net investment income.
Performance Comparisons:
Certificates of Deposit. Investors may want to compare the Fund's performance to
that of certificates of deposit offered by banks and other depositary
institutions. Certificates of deposit may offer fixed or variable interest rates
and principal is guaranteed and may be insured. Withdrawal of the deposits prior
to maturity normally will be subject to a penalty. Rates offered by banks and
other depositary institutions are subject to change at any time specified by the
issuing institution.
Money Market Funds. Investors may also want to compare performance of the Fund
to that of money market funds. Money market fund yields will fluctuate and
shares are not insured, but share values usually remain stable.
Lipper Analytical Services, Inc. ("Lipper") and Other Independent Ranking
Organizations. From time to time, in marketing and other fund literature, the
Fund's performance may be compared to the performance of other mutual funds in
general or to the performance of particular types of mutual funds with similar
investment goals, as tracked by independent organizations. Among these
organizations, Lipper, a widely used independent research firm which ranks
mutual funds by overall performance, investment objectives, and assets, may be
cited. Lipper performance figures are based on changes in net asset value, with
all income and capital gains dividends reinvested. Such calculations do not
include the effect of any sales charges imposed by other funds. The Fund may be
compared to Lipper's appropriate fund category, that is, by fund objective and
portfolio holdings. The Fund's performance may also be compared to the average
performance of its Lipper category.
Morningstar, Inc. The Fund's performance may also be compared to the performance
of other mutual funds by Morningstar, Inc., which rates funds on the basis of
historical risk and total return. Morningstar's ratings range from five stars
(highest) to one star (lowest) and represent Morningstar's assessment of the
historical risk level and total return of a fund as a weighted average for 3, 5,
and 10 year periods. Ratings are not absolute and do not represent future
results.
Independent Sources. Evaluations of fund performance made by independent sources
may also be used in advertisements concerning the Fund, including reprints of,
or selections from, editorials or articles about the Fund, especially those with
similar objectives. Sources for fund performance and articles about the Fund may
include publications such as Money, Forbes, Kiplinger's, Smart Money, Financial
World, Business Week, U.S. News and World Report, The Wall Street Journal,
Barron's, and a variety of investment newsletters.
Indices. The Fund may compare its performance to a wide variety of indices.
There are differences and similarities between the investments that a Fund
may purchase and the investments measured by the indices.
Historical Asset Class Returns. From time to time, marketing materials may
portray the historical returns of various asset classes. Such presentations will
typically compare the average annual rates of return of inflation, U.S. Treasury
bills, bonds, common stocks, and small stocks. There are important differences
between each of these investments that should be considered in viewing any such
comparison. The market value of stocks will fluctuate with market conditions,
and small-stock prices generally will fluctuate more than large-stock prices.
Stocks are generally more volatile than bonds. In return for this volatility,
stocks have generally performed better than bonds or cash over time. Bond prices
generally will fluctuate inversely with interest rates and other market
conditions, and the prices of bonds with longer maturities generally will
fluctuate more than those of shorter-maturity bonds. Interest rates for bonds
may be fixed at the time of issuance, and payment of principal and interest may
be guaranteed by the issuer and, in the case of U.S. Treasury obligations,
backed by the full faith and credit of the U.S. Treasury.
The historical S&P 500 data presented from time to time is not intended to
suggest that an investor would have achieved comparable results by investing in
any one equity security or in managed portfolios of equity securities, such as
the Fund, during the periods shown.
Portfolio Characteristics. In order to present a more complete picture of the
Fund's portfolio, marketing materials may include various actual or estimated
portfolio characteristics, including but not limited to median market
capitalizations, earnings per share, alphas, betas, price/earnings ratios,
returns on equity, dividend yields, capitalization ranges, growth rates,
price/book ratios, top holdings, sector breakdowns, asset allocations, quality
breakdowns, and breakdowns by geographic region.
Measures of Volatility and Relative Performance. Occasionally statistics may be
used to specify fund volatility or risk. The general premise is that greater
volatility connotes greater risk undertaken in achieving performance. Measures
of volatility or risk are generally used to compare the Fund's net asset value
or performance relative to a market index. One measure of volatility is beta.
Beta is the volatility of a fund relative to the total market as represented by
the Standard & Poor's 500 Stock Index. A beta of more than 1.00 indicates
volatility greater than the market, and a beta of less than 1.00 indicates
volatility less than the market. Another measure of volatility or risk is
standard deviation. Standard deviation is a statistical tool that measures the
degree to which a fund's performance has varied from its average performance
during a particular time period.
Standard deviation is calculated using the following formula:
Standard deviation = the square root of S(xi-xm)2
n-1
Where: S = "the sum of",
xi = each individual return during the time period,
xm = the average return over the time period, and
n = the number of individual returns during the time period.
statistics may also be used to discuss the Fund's relative performance. One such
measure is alpha. Alpha measures the actual return of a fund compared to the
expected return of a fund given its risk (as measured by beta). The expected
return is based on how the market as a whole performed, and how the particular
fund has historically performed against the market. Specifically, alpha is the
actual return less the expected return. The expected return is computed by
multiplying the advance or decline in a market representation by the Fund's
beta. A positive alpha quantifies the value that the fund manager has added, and
a negative alpha quantifies the value that the fund manager has lost. Other
measures of volatility and relative performance may be used as appropriate.
However, all such measures will fluctuate and do not represent future results.
Discussions of economic, social, and political conditions and their impact on
the Fund may be used in advertisements and sales materials. Such factors that
may impact the Fund include, but are not limited to, changes in interest rates,
political developments, the competitive environment, consumer behavior, industry
trends, technological advances, macroeconomic trends, and the supply and demand
of various financial instruments. In addition, marketing materials may cite the
portfolio management's views or interpretations of such factors.
Master Fund Performance. The Fund intends to disclose historical performance of
the Master Portfolio, including the average annual and cumulative returns
restated to reflect the expense ratio of the Fund. This information will be
included by amendment. Although the investments of the Master Portfolio will be
reflected in the Fund, the Fund is a distinct mutual fund and has different
fees, expenses and returns than the Master Portfolio itself. Historical
performance of substantially similar mutual funds is not indicative of future
performance of the Fund. Master Portfolio performance will be supplied by the
Master Portfolio.
FINANCIAL STATEMENTS
E*TRADE S&P 500 INDEX FUND
Statement of Assets and Liabilities
January 26, 1999
ASSETS:
Cash....................................................................$100,000
Total Assets............................................................ 100,000
LIABILITIES:
Total Liabilities....................................................... 0
NET ASSETS..............................................................$100,000
========
Net assets consist of:
Paid-in Capital.........................................................$100,000
NET ASSETS:.............................................................$100,000
========
Shares outstanding: 10,000
NET ASSET VALUE: $ 10.00
See Notes to Financial Statements
Note 1 - Organization and Summary of Significant Accounting Policies:
The E*TRADE S&P 500 Index Fund ("the Fund"), is a diversified open-end
management investment company registered under the Investment Company Act of
1940, as amended. The Fund is a separate series of E*TRADE Funds (the "Trust").
The Trust was established as a Delaware business Trust organized pursuant to a
Declaration of Trust on November 4, 1998. The Fund pursues its investment
objective by investing all of its investable assets in the S&P 500 Index Master
Portfolio (the "Portfolio"), which is a series of Master Investment Portfolio
("MIP"). The Portfolio has an investment objective and investment policies
consistent with the Fund. As of January 26, 1999, the Fund had no operations
other than organizational matters, including the issuance of seed money shares
to E*TRADE Asset Management, Inc.
Note 2 - Investment Adviser
E*TRADE Asset Management, Inc. (the "Investment Adviser") serves as the Fund's
investment adviser. For their services, the Investment Adviser is paid by the
Fund a fee at an annual rate of 0.02% of the Fund's average daily net assets.
Note 3 - Administrative and Shareholder Servicing Fees and Principal Underwriter
E*TRADE Asset Management, Inc. (the "Administrator") provides administrative
services to the Fund. Services provided by the Administrator include, but are
not limited to: managing the daily operations and business affairs of the Fund,
subject to the supervision of the Board of Trustees; overseeing the preparation
and maintenance of all documents and records required to be maintained by the
Fund; preparing or assisting in the preparation of regulatory filings,
prospectuses and shareholder reports; providing, at its own expense, the
services of its personnel to serve as officers of the Trust; and preparing and
disseminating material for meetings of the Board of Trustees and shareholders.
The Fund pays the Administrator a monthly fee calculated at an annual rate of
0.25% of the Fund's average daily net assets. The Administrator may not modify
or terminate these service agreements without the approval of the Board of
Trustees of the Fund.
E*TRADE Securities, Inc. serves as the shareholder servicing agent (the
"Shareholder Servicing Agent") for the Fund. The Shareholder Servicing Agent is
also responsible for maintaining the Fund's shareholder accounts. E*TRADE
Securities, Inc. also serves as the principal underwriter of the Fund.
Note 4 - Federal Taxes
The Fund has elected and intends to qualify each year as "regulated investment
company" under Subchapter M of the Internal Revenue Code. If so qualified, the
Fund will not be subject to federal income tax to the extent it distributes its
net income to shareholders.
To the Board of Trustees of E*TRADE Funds:
We have audited the accompanying statement of assets and liabilities of the
E*TRADE S&P 500 Index Fund (the "Fund") (one of a series constituting E*TRADE
Funds) as of January 26, 1999. This statement of asset and liabilities is the
responsibility of the Fund's management. Our responsibility is to express an
opinion on this financial statement.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statement referred to above present fairly, in
all material respects, the financial position of the E*TRADE S&P 500 Index
Fund, as of January 26, 1999 in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
January 27, 1999
Los Angeles, California
The Fund has elected and intends to qualify each year as a "regulated investment
company" under Subchapter M of the Internal Revenue Code. If so qualified, the
Fund will not be subject to federal income tax to the extent it distributes its
net income to shareholders.
Standard & Poor's
The Fund is not sponsored, endorsed sold or promoted by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no representation
or warranty, express or implied, to the owners of the Fund or any member of the
public regarding the advisability of investing in securities generally or in the
Fund particularly or the ability of the S&P 500 Index to track general stock
market performance. S&P's only relationship to E*TRADE Asset Management or the
Fund is the licensing of certain trademarks and trade names of S&P and of the
S&P 500 Index which is determined, composed and calculated by S&P without regard
to E*TRADE Asset Management or the Fund. S&P has no obligation to take the needs
of E*TRADE Asset Management, the Fund or the shareholders into consideration in
determining, composing or calculating the S&P 500 Index. S&P is not responsible
for and has not participated in the determination of the prices and amount of
the Fund or the timing of the issuance or sale of shares of the Fund or in the
determination or calculation of the equation by which the Fund is to be
converted into cash. S&P has no obligation or liability in connection with the
administration, marketing or trading of the Fund.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500 Index
or any data included therein and S&P shall have no liability for any errors,
omissions, or interruptions therein. S&P makes no warranty, express or implied,
as to results to be obtained by the Fund the shareholders, or any other person
or entity from the use of the S&P 500 Index or any data included therein. S&P
makes no express or implied warranties, and expressly disclaims all warranties
of merchantability or fitness for a particular purpose or use with respect to
the S&P 500 Index or any data included therein. Without limiting any of the
foregoing, in no event shall S&P have any liability for any special, punitive,
indirect, or consequential damages (including lost profits), even if notified of
the possibility of such damages.
<PAGE>
APPENDIX
DESCRIPTION OF COMMERCIAL PAPER RATINGS
A-1 and Prime-1 Commercial Paper Ratings
The rating A-1 (including A-1+) is the highest commercial paper rating assigned
by S&P. Commercial paper rated A-1 by S&P has the following characteristics:
o liquidity ratios are adequate to meet cash requirements;
o long-term senior debt is rated "A" or better;
o the issuer has access to at least two additional channels of
borrowing;
o basic earnings and cash flow have an upward trend with allowance made
for unusual circumstances;
o typically, the issuer's industry is well established and the issuer
has a strong position within the industry; and
o the reliability and quality of management are unquestioned.
Relative strength or weakness of the above factors determines whether the
issuer's commercial paper is rated A-1, A-2 or A-3. Issues rated A-1 that are
determined by S&P to have overwhelming safety characteristics are designated
A-1+.
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Among the factors considered by Moody's in assigning ratings are the following:
o evaluation of the management of the issuer;
o economic evaluation of the issuer's industry or industries and an
appraisal of speculative-type risks which may be inherent n certain
areas;
o evaluation of the issuer's products in relation to competition and
customer acceptance;
o liquidity;
o amount and quality of long-term debt;
o trend of earnings over a period of ten years;
o financial strength of parent company and the relationships which exist
with the issuer; and
o recognition by the management of obligations which may be present or
may arise as a result of public interest questions and preparations to
meet such obligations.
DESCRIPTION OF BOND RATINGS
Bonds are considered to be "investment grade" if they are in one of the top four
ratings.
S&P's ratings are as follows:
o Bonds rated AAA have the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
o Bonds rated AA have a very strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
o Bonds rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds
in higher rated categories.
o Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than in higher
rated categories.
o Debt rated BB, B, CCC, CC or C is regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the
obligation. While such debt will likely have some quality and
protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse debt conditions.
o The rating C1 is reserved for income bonds on which no interest is
being paid.
o Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
The ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories.
Moody's ratings are as follows:
o Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt-edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
o Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long
term risks appear somewhat larger than in Aaa securities.
o Bonds which are rated A possess many favorably investment attributes
and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate but
elements may be present which suggest a susceptibility to impairment
some time in the future.
o Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
o Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
o Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or
of maintenance of other terms of the contract over any long period of
time may be small.
o Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest. o Bonds which are rated Ca represent
obligations which are speculative to a high degree. Such issues are
often in default or have other marked shortcomings. o Bonds which are
rated C are the lowest class of bonds and issues so rated
can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies modifiers to each rating classification from Aa through B to
indicate relative ranking within its rating categories. The modifier "1"
indicates that a security ranks in the higher end of its rating category; the
modifier "2" indicates a mid-range ranking and the modifier "3" indicates that
the issue ranks in the lower end of its rating category.
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