Filed Pursuant to Rule 497(c)
Registration Nos.: 333-66807
811-09093
E*TRADE FUNDS
E*TRADE PREMIER MONEY MARKET FUND
Prospectus dated March 29, 2000
This Prospectus concisely sets forth information about the E*TRADE Premier Money
Market 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 E*TRADE Funds.
Objectives, Goals and Principal Strategies.
The Fund's investment objective is to provide investors with a high level of
income, while preserving capital and liquidity. The Fund seeks to achieve its
investment objective by investing in a master portfolio, that, in turn, invests
in high quality, short-term investments.
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 will
redeem all of your shares in your Fund account. The Fund is a true no-load fund,
which means you pay no sales charges or 12b-1 fees. The minimum initial
investment in the Fund is $25,000 for regular accounts and $15,000 for IRA
accounts.
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.
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
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 March 29, 2000
<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, SELL AND EXCHANGE 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 a high level of income, while
preserving capital and liquidity.
Principal Strategies
The Fund seeks to achieve its investment objective by investing all of its
assets in the Money Market 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 investors with a high level of income,
while preserving capital and liquidity, by investing in high quality, short-term
investments. These securities include obligations of the U.S. Government, its
agencies and instrumentalities (including government-sponsored enterprises),
certificates of deposit and U.S. Treasury bills, high-quality debt obligations,
such as corporate debt, obligations of U.S. banks and repurchase agreements. The
Fund will invest solely in securities denominated U.S. dollars.
Principal Risks
There is no assurance that the Fund will achieve its investment objective. The
Master Portfolio's investments are expected to present minimal risks because of
their relatively short maturities and the high credit quality (financial
strength) of the issuers. The Master Portfolio seeks to maintain a portfolio of
investments that will permit shareholders to maintain a net asset value of $1.00
per share; however, there is no assurance that this will be achieved.
The Master Portfolio could lose money or underperform as a result of default.
Although the risk of default generally is considered unlikely, any default on
the part of a portfolio investment could cause the Fund's share price or yield
to fall.
An investment in the Fund is not a deposit of a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Although the Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the Fund.
Performance
This Fund is expected to commence operations in March 2000. Therefore, the
performance information (including annual total returns and average annual total
returns) for a full calendar year is not yet available.
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 under the Annual Fund Operating Expenses 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 None
Annual Fund Operating Expenses
(expenses that are deducted from Fund assets)*
Management Fees 0.12%**
Distribution (12b-1) Fees None
Other Expenses 0.35%
Administration 0.30%***
Trustee Expenses 0.05%****
Total Annual Fund Operating Expenses 0.47%
-----
Fee Waiver and/or Reimbursement (0.05%)*****
-------
Net Expenses 0.42%
* The cost reflects the expenses at both the Fund and the Master
Portfolio levels.
** Management fees include a fee equal to 0.10% of average 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 administration fee of 0.30% is payable by the Fund to E*TRADE Asset
Management, Inc., as the Fund's administrator.
**** The Fund bears its pro rata portion of the fees and expenses of the
Trustees of E*TRADE Funds who are not affiliated with E*TRADE and counsel,
if any, to the independent trustees.
***** The administration fee is waived and/or E*TRADE Asset Management, Inc.
will reimburse the Fund to the extent that the expenses and costs of the
Fund (including the current indirect expenses of the Master Portfolio)
would otherwise exceed 0.42%. This waiver and/or reimbursement agreement
has the same term as the administrative services agreement with E*TRADE
Asset Management, Inc., which has an initial term of two years commencing
on March 28, 2000 and terminating on March 28, 2002. The agreement is
renewable annually thereafter and is subject to termination on 60 days'
written notice by either party.
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 are not subject to the $15 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*
$44 $148
* Reflects costs at both the Fund and Master Portfolio levels.
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS
The Fund's investment objective is to provide investors with a high level of
income, while preserving capital and liquidity. Although there is no current
intention to do so, the Fund's investment objective may be changed without
shareholder approval.
The Master Portfolio seeks to provide investors with a high level of income,
while preserving capital and liquidity, by investing in high quality, short-term
investments. These securities include obligations of the U.S. Government, its
agencies and instrumentalities (including government-sponsored enterprises),
certificates of deposit and U.S. Treasury bills, high-quality debt obligations,
such as corporate debt, certain obligations of U.S. banks (including, but not
limited to, negotiable certificates of deposits, banker's acceptances and fixed
time deposits) and certain repurchase agreements (including, but not limited to,
government securities and mortgage-related securities). The Fund will invest
solely in securities denominated in U.S. dollars.
The Master Portfolio emphasizes safety of principal and high credit quality. In
particular, the internal investment policies of the Master Portfolio's
investment advisor, have always prohibited the purchase by the Master Portfolio
of many types of floating-rate instruments commonly referred to as derivatives
that are considered to be potentially volatile. The Master Portfolio may only
invest in floating-rate securities that bear interest at a rate that resets
quarterly or more frequently, and that resets based on changes in standard money
market rate indices such as U.S. Government Treasury bills, London Interbank
Offered Rate, the prime rate, published commercial paper rates, federal funds
rates, Public Securities Associates floaters or JJ Kenney index floaters.
The Master Portfolio must maintain a dollar-weighted average portfolio maturity
of no more than 90 days, and cannot invest in any security whose remaining
maturity is longer than 397 days (13 months). Any security that the Master
Portfolio purchases must present minimal credit risks and be of "high-quality,"
meaning, it must be rated in the top two rating categories by the requisite
nationally recognized short-term securities ratings organization or if unrated,
determined to be of comparable quality to such rated securities by the Master
Portfolio's investment advisor under guidelines adopted by the Master
Portfolio's board of trustees. The Master Portfolio and the Fund may not achieve
as high a level of current income as other mutual funds that do not limit their
investments to the high credit quality instruments in which the Master Portfolio
invests.
The Master Portfolio may invest up to 10% of its assets in illiquid securities.
Illiquid securities, which may include certain restricted securities, may be
difficult to sell promptly at an acceptable price. Certain restricted securities
may be subject to legal restrictions on resale. Delay or difficulty in selling
securities may result in a loss or be costly to the Master Portfolio.
The Fund and the Master Portfolio must comply with certain investment criteria
designed to provide liquidity and reduce risk to allow shareholders to maintain
a stable net asset value of $1.00 per share. The Master Portfolio seeks to
reduce risk by investing its assets in securities of various issuers. As such,
the Master Portfolio is considered diversified for purposes of the 1940 Act.
The Master Portfolio's investment advisor's maturity decisions will also effect
the yield, and in unusual circumstances potentially could affect the share price
of the Master Portfolio and the Fund. To the extent that the Master Portfolio's
investment advisor anticipates interest rate trends imprecisely, the Master
Portfolio's and the Fund's yields at times could lag those of other money market
funds.
If the Master Portfolio invests more than 25% of its total assets in bank
obligations, it may be subject to adverse developments in the banking industry
that may affect the value of the Master Portfolio's investments more than if the
Master Portfolio investments were not invested to such a degree in the banking
industry. Normally, the Master Portfolio intends to invest more than 25% of its
total assets in bank obligations.
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 the Fund's service providers, or persons with whom they deal, do not
properly process and calculate date-related information and data after January
1, 2000. This possibility is commonly known as the "Year 2000 Problem." The Year
2000 Problem could have an adverse impact into the Year 2000 or beyond.
Virtually all operations of the Fund are computer reliant. The investment
advisor, administrator, transfer agent and custodian have informed the Fund that
they have taken steps to address the Year 2000 Problem with regard to their
respective computer systems. The Fund also obtained assurances that comparable
steps are being taken by the Fund's other significant service providers. There
can be no assurance that the Fund's service providers are Year 2000 compliant.
The Master Portfolio's investment advisor and principal service providers have
also advised the Master Portfolio that they were working on any necessary
changes to their systems and that they expected their systems to be Year 2000
compliant. There can be no assurance that the Master Portfolio or the Master
Portfolio's service providers are Year 2000 compliant. In addition, because the
Year 2000 Problem affects virtually all organizations, the issuers in whose
securities the Master Portfolio invests and the economy as a whole also could be
adversely impacted by the Year 2000 Problem and cost of remediation. The extent
of such impact cannot be predicted.
FUND MANAGEMENT
Investment Advisor. Under an investment advisory agreement with the Fund,
E*TRADE Asset Management, Inc. ("Investment Advisor"), a registered investment
adviser, provides investment advisory services to the Fund. The Investment
Advisor is a wholly owned subsidiary of E*TRADE Group, Inc. and is located at
4500 Bohannon Drive, Menlo Park, CA 94025. The Investment Advisor commenced
operating in February 1999, and therefore, has limited experience as an
investment advisor. As of December 31, 1999, the Investment Advisor provided
investment advisory services for over $166 million in assets.
Subject to general supervision of the E*TRADE Funds' Board of Trustees (the
"Board") 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. 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 invested in the Master Portfolio, but
0.12% of the Fund's average daily net assets if the Fund's assets are not
invested in the Master Portfolio.
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) 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
November 30, 1999, Barclays Global Investors and its affiliates, including BGFA,
provided investment advisory services for over $738 billion of assets. BGFA
receives a monthly advisory fee from the Master Portfolio at an annual rate
equal to 0.10% of the Master Portfolio's average daily net assets. From time to
time, BGFA may waive such fees in whole or in part. Any such waiver will reduce
the expenses of the Master Portfolio, and accordingly, have a favorable impact
on its performance.
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 E*TRADE Funds, a Delaware business trust
organized in 1998. 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, in turn, seeks to provide investors with a high level of
income, while preserving capital and liquidity, by investment in high quality,
short-term investments. 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 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 complex nature of the
master/feeder structure, accounting and operational difficulties could occur.
For example, coordination of calculation of net asset value ("NAV") would be
affected at the master and/or feeder level.
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
determines that it is in the best interests of the Fund and its shareholders to
do so. Upon any such withdrawal, the Board 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 Investment Advisor 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 NAV next 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
outstanding shares of such Master Portfolio. The Master Portfolio's investments
are valued each day the NYSE is open for business.
The Master Portfolio values its portfolio instruments using the amortized cost
method. The amortized cost method involves valuing a security at its costs and
amortizing any discount or premium over the period until maturity, generally
without regard to the impact of fluctuating interest rates on the market value
of the security. The Master Portfolio's Board of Trustees believes this
valuation method accurately reflects fair value.
The amortized cost method of valuation seeks to maintain a stable net asset
value per share ("NAV") of $1.00, even where there are fluctuations in interest
rates that affect the value of portfolio instruments. Accordingly, this method
of valuation can in certain circumstances lead to a dilution of a shareholder's
interest.
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 exchanges 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, SELL AND EXCHANGE 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 have an E*TRADE Securities
account. In addition, the Fund requires you to consent to receive all
information about the Fund electronically. If you wish to rescind this consent,
the Fund will redeem your position in the Fund, unless a new class of shares of
the Fund has been formed for those shareholders who rescinded consent,
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.
In order to buy shares, you will need to: 1) open an E*TRADE Securities account;
2) deposit money in the account; and 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 (www.etrade.com). You will be subject to E*TRADE
Securities' general account requirements as described in E*TRADE Securities'
customer agreement.
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.
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., P.O. Box 8160, Boston, MA 02266-8160,
or if by overnight mail: 66 Brooks Drive, Braintree, MA 02184-8160.
Telephone. Request a new account kit by calling 1-800-786-2575. E*TRADE's
customer service is available 24 hours, seven days a week.
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., P.O. Box 8160, Boston,
MA 02266-8160, or if by overnight mail: E*TRADE Securities, Inc., 66 Brooks
Drive, Braintree, MA 02184-8160.
In Person. Investors may visit E*TRADE Securities' self-service center in
Menlo Park, 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.
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/Exchange Shares
Minimum Investment Requirements:
For your initial investment in the Fund $25,000
To buy additional shares of the Fund $1,000
Continuing minimum investment* $ 20,000
To invest in the Fund for your IRA, Roth IRA,
or one-person SEP account $ 15,000
To invest in the Fund for your Education IRA account $ 15,000
To invest in the Fund for your UGMA/UTMA account $ 15,000
To invest in the Fund for your SIMPLE, SEP-IRA,
Profit Sharing or Money Purchase Pension Plan,
or 401(a) account $ 15,000
* Your shares may be automatically redeemed, if, as a result of selling or
exchanging shares, you no longer meet the 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 $20,000.
After your account is established you may use the methods described below to
buy, sell or exchange shares. You can only sell funds that are held in your
E*TRADE Securities account; that means you cannot "short" shares of the Fund.
Whether you are investing in the Fund for the first time or adding to an
existing investment, you can only buy Fund shares on-line. Because the Fund's
NAV changes daily, your purchase price will be the next NAV determined after the
Fund receives and accepts your purchase order.
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. 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, sell or exchange 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.
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 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 request or exchange
request 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.
Exchange. You may exchange your shares of the Fund for shares of another E*TRADE
fund. An exchange is two transactions: a sale (or redemption) of shares of one
fund and the purchase of shares of a different fund with the redemption
proceeds. Exchange transactions generally may be effected on-line. If you are
unable to make an exchange on-line for any reason (for example, due to
Internet-related difficulties), exchanges by telephone will be made available.
After we receive your exchange request, the Fund's transfer agent will
simultaneously process exchange redemptions and exchange purchases at the share
prices next determined, as further explained under "Pricing of Fund Shares."
Shares still subject to a redemption fee of another E*TRADE fund will be
assessed that fee if exchanged.
You must meet the minimum investment requirements for the E*TRADE fund into
which you are exchanging or purchasing shares. The Fund reserves the right to
revise or terminate the exchange privilege, limit the amount of an exchange, or
reject an exchange at any time, without notice.
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 declare dividends daily and pay dividends from net
investment income monthly. The Fund does not expect to distribute any capital
gains. The Fund may make additional distributions if necessary.
Unless you choose otherwise, all your dividends 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 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 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.
The Fund will send you a tax report each year that will tell you which dividends
must be treated as ordinary income.
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 March 29, 2000
("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 notified when a prospectus,
prospectus update, 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
1-202-942-8090 for information about the operations of the public reference
room. Reports and other information about the Fund are also available on the
SEC's Internet site at http://www.sec.gov or copies can be obtained, upon
payment of a duplicating fee, by electronic request at the following e-mail
address: [email protected] or by writing the Public Reference Section of the
SEC, Washington, D.C. 20549-0102.
E*TRADE Securities, Inc.
4500 Bohannon Drive
Menlo Park, CA 94025
Telephone: (650) 331-6000
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 PREMIER MONEY MARKET FUND
March 29, 2000
This Statement of Additional Information ("SAI") is not a prospectus. This SAI
should be read together with the Prospectus for the E*TRADE Premier Money Market
Fund (the "Fund"), a separate series of E*TRADE Funds, dated March 29, 2000 (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) or call 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
INVESTMENT STRATEGIES AND RISKS..............................................3
FUND POLICIES...............................................................10
TRUSTEES AND OFFICERS.......................................................14
INVESTMENT MANAGEMENT.......................................................17
SERVICE PROVIDERS...........................................................19
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION..............................21
ORGANIZATION, DIVIDEND AND VOTING RIGHTS....................................22
SHAREHOLDER INFORMATION.....................................................23
TAXATION....................................................................24
UNDERWRITER.................................................................28
MASTER PORTFOLIO ORGANIZATION...............................................29
PERFORMANCE INFORMATION.....................................................29
APPENDIX....................................................................35
<PAGE>
FUND HISTORY
The E*TRADE Premier Money Market 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 an open-end, management investment company. The Fund
seeks to provide investors with a high level of income, while preserving capital
and liquidity. The Fund seeks to achieve its objective by investing in a master
portfolio that, in turn, invests in high quality, short-term investments. This
investment objective is not fundamental and therefore, can be changed without
approval of a majority (as defined in the Investment Company Act of 1940, as
amended, and the rules thereunder ("1940 Act")) of the Fund's outstanding voting
interests.
The Fund seeks to achieve its investment objective by investing substantially
all of its assets in the Money Market Master Portfolio (the "Master Portfolio"),
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.
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 of either
the Fund or the Master Portfolio unless otherwise noted.
Asset Backed Securities. The Master Portfolio may purchase asset-backed
securities, which are securities backed by installment contracts, credit-card
receivables or other assets. Asset-backed securities represent interests in
"pools" of assets in which payments of both interest and principal on the
securities are made monthly, thus in effect "passing through" monthly payments
made by the individual borrowers on the assets that underlie the securities, net
of any fees paid to the issuer or guarantor of the securities. The average life
of asset-backed securities varies with the maturities of the underlying
instruments and is likely to be substantially less than the original maturity of
the assets underlying the securities as a result of prepayments. For this and
other reasons, an asset-backed security's stated maturity may be shortened, and
the security's total return may be difficult to predict precisely. The Master
Portfolio may invest in such securities up to the limits prescribed by Rule 2a-7
and other provisions of the 1940 Act.
Bank Obligations. The Master Portfolio may invest in bank obligations
which include, but are not limited to, negotiable certificates of deposit
("CDs"), bankers' acceptances and fixed time deposits. The Master Portfolio also
may invest in high-quality short-term 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.
Fixed time deposits are obligations of U.S. banks, foreign branches of U.S.
banks of foreign banks which are payable at a stated maturity date and bear a
fixed rate of interest. Generally fixed time deposits may be withdrawn on demand
by the investor, but they may be subject to early withdrawal penalties which
vary depending upon market conditions and the remaining maturity of the
obligation. Although fixed time deposits do not have an established market,
there are no contractual restrictions on the Master Portfolio's right to
transfer a beneficial interest in the deposit to a third party. It is the policy
of the Master Portfolio not to invest in fixed time deposits subject to
withdrawal penalties, other than overnight deposits, or in repurchase agreements
with more than seven days to maturity or other illiquid securities, if more than
10% of the value of its net assets would be so invested.
Obligations of foreign banks and foreign branches of U.S. banks involve somewhat
different investment risks from those affecting domestic obligations, including
the possibilities that liquidity could be impaired because of future political
and economic developments, that the obligations may be less marketable than
comparable obligations of U.S. banks, that a foreign jurisdiction might impose
withholding taxes on interest income payable on those obligations, that foreign
deposits may be seized or nationalized, that foreign governmental restrictions
(such as foreign exchange controls) may be adopted which might adversely affect
the payment of principal and interest on those obligations and that the
selection of those obligations may be more difficult because there may be less
publicly available information concerning foreign banks or the accounting,
auditing and financial reporting standards, practices and requirements
applicable to foreign banks may differ from those applicable to U.S. banks. In
that connection, foreign banks are not subject to examination by any U.S.
Government agency or instrumentality.
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. BGFA 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.
BGFA 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.
Floating- and variable- rate obligations. The Master Portfolio may purchase
floating- and variable-rate obligations as described in the Prospectus. The
Master Portfolio may purchase floating- and variable-rate demand notes and
bonds, which are obligations ordinarily having stated maturities in excess of
thirteen months, but which permit the holder to demand payment of principal at
any time, or at specified intervals not exceeding thirteen months. Variable rate
demand notes include master demand notes that are obligations that permit the
Master Portfolio to invest fluctuating amounts, which may change daily without
penalty, pursuant to direct arrangements between the Master Portfolio, as
lender, and the borrower. The interest rates on these notes fluctuate from time
to time. The issuer of such obligations ordinarily has a corresponding right,
after a given period, to prepay in its discretion the outstanding principal
amount of the obligations plus accrued interest upon a specified number of days'
notice to the holders of such obligations. The interest rate on a floating-rate
demand obligation is based on a known lending rate, such as a bank's prime rate,
and is adjusted automatically each time such rate is adjusted. The interest rate
on a variable-rate demand obligation is adjusted automatically at specified
intervals. Frequently, such obligations are secured by letters of credit or
other credit support arrangements provided by banks. Because these obligations
are direct lending arrangements between the lender and borrower, it is not
contemplated that such instruments generally will be traded, and there generally
is no established secondary market for these obligations, although they are
redeemable at face value. Accordingly, where these obligations are not secured
by letters of credit or other credit support arrangements, the Master
Portfolio's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies and the Master Portfolio may invest in obligations which
are not so rated only if BGFA determines that at the time of investment the
obligations are of comparable quality to the other obligations in which the
Master Portfolio may invest. BGFA, on behalf of the Master Portfolio, considers
on an ongoing basis the creditworthiness of the issuers of the floating- and
variable-rate demand obligations in the Master Portfolio's portfolio. The Master
Portfolio will not invest more than 10% of the value of its total net assets in
floating- or variable-rate demand obligations whose demand feature is not
exercisable within seven days. Such obligations may be treated as liquid,
provided that an active secondary market exists.
Foreign Obligations. Investments in foreign obligations involve certain
considerations that are not typically associated with investing in domestic
obligations. There may be less publicly available information about a foreign
issuer than about a domestic issuer. Foreign issuers also are not generally
subject to uniform accounting, auditing and financial reporting standards or
governmental supervision comparable to those applicable to domestic issuers. In
addition, with respect to certain foreign countries, taxes may be withheld at
the source under foreign income tax laws, and there is a possibility of
expropriation or confiscatory taxation, political or social instability or
diplomatic developments that could adversely affect investments in, the
liquidity of, and the ability to enforce contractual obligations with respect
to, securities of issuers located in those countries.
Forward Commitments, When-Issued Purchases and Delayed-Delivery Transactions.
The Master Portfolio may purchase securities on a when-issued or forward
commitment (sometimes called a delayed-delivery) basis, which means that the
price is fixed at the time of commitment, but delivery and payment ordinarily
take place a number of days after the date of the commitment to purchase. The
Master Portfolio will make commitments to purchase such securities only with the
intention of actually acquiring the securities, but the Master Portfolio may
sell these securities before the settlement date if it is deemed advisable. The
Master Portfolio will not accrue income in respect of a security purchased on a
forward commitment basis prior to its stated delivery date.
Securities purchased on a when-issued or forward commitment basis and certain
other securities held in the Master Portfolio's investment portfolio are subject
to changes in value (both generally changing in the same way, i.e., appreciating
when interest rates decline and depreciating when interest rates rise) based
upon the public's perception of the creditworthiness of the issuer and changes,
real or anticipated, in the level of interest rates. Securities purchased on a
when-issued or forward commitment basis may expose the Master Portfolio to risk
because they may experience such fluctuations prior to their actual delivery.
Purchasing securities on a when-issued or forward commitment basis can involve
the additional risk that the yield available in the market when the delivery
takes place actually may be higher than that obtained in the transaction itself.
A segregated account of the Master Portfolio consisting of cash or U.S.
Government obligations or other high quality liquid debt securities at least
equal at all times to the amount of the when-issued or forward commitments will
be established and maintained at the Master Portfolio's custodian bank.
Purchasing securities on a forward commitment basis when the Master Portfolio is
fully or almost fully invested may result in greater potential fluctuation in
the value of the Master Portfolio's total net assets and its net asset value per
share. In addition, because the Master Portfolio will set aside cash and other
high quality liquid debt securities as described above, the liquidity of the
Master Portfolio's investment portfolio may decrease as the proportion of
securities in the Master Portfolio's portfolio purchased on a when-issued or
forward commitment basis increases.
The value of the securities underlying a when-issued purchase or a forward
commitment to purchase securities, and any subsequent fluctuations in their
value, is taken into account when determining the Master Portfolio's net asset
value starting on the day the Master Portfolio agrees to purchase the
securities. The Master Portfolio does not earn interest on the securities it has
committed to purchase until they are paid for and delivered on the settlement
date. When the Master Portfolio makes a forward commitment to sell securities it
owns, the proceeds to be received upon settlement are included in the Master
Portfolio's assets, and fluctuations in the value of the underlying securities
are not reflected in the Master Portfolio's net asset value as long as the
commitment remains in effect.
Illiquid Securities. The Master Portfolio may invest in securities not
registered under the Securities Act of 1933 (the "1933 Act") and other
securities subject to legal or other restrictions on resale. Because such
securities may be less liquid than other investments, they may be difficult to
sell promptly at an acceptable price. Delay or difficulty in selling securities
may result in a loss or be costly to the Master Portfolio.
Letters of Credit. Certain of the debt obligations, certificates of
participation, commercial paper and other short-term obligations which the
Master Portfolio is permitted to 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. Letter of credit-backed
investments must, in the opinion of BGFA, be of investment quality comparable to
other permitted investments of the Master Portfolio.
Loans of Portfolio Securities. The Master Portfolio may lend its securities to
brokers, dealers and financial institutions, provided (1) the loan is secured
continuously by collateral consisting of cash, U.S. Government securities or an
irrevocable letter of credit which is marked daily to ensure that each loan is
fully collateralized; (2) the Master Portfolio may at any time recall the loan
and obtain the return of the securities loaned within five business days; (3)
the Master Portfolio will receive any interest or dividends paid on the
securities loaned; and (4) the aggregate market value of securities loaned will
not at any time exceed on-third of the total assets of the Master Portfolio. The
Master Portfolio may earn income in connection with securities loans either
through the reinvestment of the cash collateral or the payment of fees by the
borrower. The Master Portfolio does not currently intend to lend its portfolio
securities.
Municipal Obligations. The Master Portfolio may invest in municipal obligations.
Municipal bonds generally have a maturity at the time of issuance of up to 40
years. Medium-term municipal notes are generally issued in anticipation of the
receipt of tax Master Portfolios, of the proceeds of bond placements, or of
other revenues. The ability of an issuer to make payments on notes is therefore
especially dependent on such tax receipts, proceeds from bond sales or other
revenues, as the case may be. Municipal commercial paper is a debt obligation
with a state maturity of 270 days or less that is issued to finance seasonal
working capital needs or as short-term financing in anticipation of longer-term
debt.
The Master Portfolio will invest in `high-quality' (as that term is defined in
Rule 2a-7 of the 1940 Act) long-term municipal bonds, municipal notes and
short-term commercial paper, with remaining maturities not exceeding 13 months.
Other Investment Companies. The Master Portfolio may invest in shares of other
open-end investment companies that invest exclusively in high-quality short-term
securities subject. The Master Portfolio may also purchase shares of exchange
listed closed-end Master Portfolios.
Participation Interests. The Fund may invest in participation interests in any
type of security in which the Fund may invest. A participation interest gives
the Fund an undivided interest in the underlying securities in the proportion
that the Fund's participation interest bears to the total principal amount of
the underlying securities.
Pass-Through Obligations. Certain of the debt obligations in which the Master
Portfolio may invest may be pass-through obligations that represent an ownership
interest in a pool of mortgages and the resultant cash flow from those
mortgages. Payments by homeowners on the loans in the pool flow through to
certificate holders in amounts sufficient to repay principal and to pay interest
at the pass-through rate. The stated maturities of pass-through obligations may
be shortened by unscheduled prepayments of principal on the underlying
mortgages. Therefore, it is not possible to predict accurately the average
maturity of a particular pass-through obligation. Variations in the maturities
of pass-through obligations will affect the yield of any Master Portfolio
investing in such obligations. Furthermore, as with any debt obligation,
fluctuations in interest rates will inversely affect the market value of
pass-through obligations.
Repurchase Agreements. The Master Portfolio may engage in a repurchase agreement
with respect to any security in which it is authorized to invest, although the
underlying security may mature in more than thirteen months. The Master
Portfolio may enter into repurchase agreements 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 that involves the acquisition
by the Master Portfolio of an underlying debt instrument, subject to the
seller's obligation to repurchase, and the Master Portfolio's obligation to
resell, the instrument at a fixed price usually not more than one week after its
purchase. Securities acquired as collateral by the Master Portfolio under a
repurchase agreement will be held in a segregated account at a bank. The Master
Portfolio may enter into repurchase agreements only with respect to securities
of the type in which it may invest, 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 resale price. BGFA monitors on
an ongoing basis the value of the collateral to assure that it always equals or
exceeds the repurchase price. Certain costs may be incurred by the Master
Portfolio in connection with the sale of the underlying securities if the seller
does not repurchase them in accordance with the repurchase agreement. In
addition, if bankruptcy proceedings are commenced with respect to the seller of
the securities, disposition of the securities by the Master Portfolio may be
delayed or limited. While it does not presently appear possible to eliminate all
risks from these transactions (particularly the possibility of a decline in the
market value of the underlying securities, as well as delay and costs to the
Master Portfolio in connection with insolvency proceedings), it is the policy of
the Master Portfolio to limit repurchase agreements to selected creditworthy
securities dealers or domestic banks or other recognized financial institutions.
The Master Portfolio considers on an ongoing basis the creditworthiness of the
institutions with which it enters into repurchase agreements. Repurchase
agreements are considered to be loans by the Master Portfolio under the 1940
Act.
Rule 144A. It is possible that unregistered securities, purchased by the Master
Portfolio in reliance upon Rule 144A under the 1933 Act, could have the effect
of increasing the level of the Master Portfolio's illiquidity to the extent that
qualified institutional buyers become, for a period, uninterested in purchasing
these securities.
Unrated Investments. The Master Portfolio may purchase instruments that are not
rated if, in the opinion of BGFA, such obligations are of investment quality
comparable to their rated investments that are permitted for purchase by the
Master Portfolio, if they are purchased in accordance with the Master
Portfolio's procedures adopted by the Trust's Board of Trustees in accordance
with Rule 2a-7 under the 1940 Act. Such procedures require approval or
ratification by the Master Portfolio's Board of Trustees of the purchase of
unrated securities. 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 an immediate sale of such
security by the Master Portfolio provided that, when a security ceases to be
rated, the Master Portfolio's Board of Trustees determines that such security
presents minimal credit risks and, provided further that, when a security rating
is downgraded below the eligible quality for investment or no longer presents
minimal credit risks, the Master Portfolio's Board of Trustees finds that the
sale of such security would not be in the Master Portfolio's interestholders'
best interests.
To the extent the ratings given by a nationally recognized statistical ratings
organization ("NRSRO") 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 the Prospectus and in this SAI. The ratings of NRSROs are more
fully described in the SAI Appendix.
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, its
agencies or instrumentalities. Payment of principal and interest on U.S.
Government obligations (i) may be backed by the full faith and credit of the
United States (as with U.S. Treasury obligations and GNMA certificates) or (ii)
may be backed solely by the issuing or guaranteeing agency or instrumentality
itself (as with FNMA notes). In the latter case, 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 where it is not
obligated to do so. 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.
Portfolio Turnover. Because the portfolio of the Master Portfolio consists of
securities with relatively short-term maturities, the Master Portfolio expects
to experience high portfolio turnover. A high portfolio turnover rate should not
adversely affect the Master Portfolio since portfolio transactions ordinarily
will be made directly with principals on a net basis and, consequently, the
Master Portfolio usually will not incur brokerage expenses or excessive
transaction costs.
FUND POLICIES
Fundamental Investment Restrictions
The following are the Fund's fundamental investment restrictions which 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. The Fund will be deemed to be in compliance with its
investment policies to the extent any master portfolio in which it invests has
substantially similar policies or has a portfolio in compliance with the Fund's
policies.
Unless indicated otherwise below, the Fund may not:
1. Purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and as a result
thereof, the value of the Fund's investments in that industry would equal or
exceed 25% or more of the current value of the Fund's total assets, provided
that this restriction does not limit the Fund's: (i) investments in securities
of other investment companies; (ii) investments in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities; and (iii)
investments in repurchase agreements; provided that the Fund reserves the right
to concentrate in the obligations of domestic banks (as such term is interpreted
by the Securities and Exchange Commission ("SEC") or its staff);
2. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Fund from
investing in securities or other instruments backed by real estate or securities
of companies engaged in the real estate business);
3. Purchase or sell commodities provided that (i) currency will not be deemed
to be a commodity for purposes of this restriction, (ii) this restriction does
not limit the purchase or sale of futures contracts, forward contracts or
options, and (iii) this restriction does not limit the purchase or sale of
securities or other instruments backed by commodities or the purchase or sale of
commodities acquired as a result of ownership of securities or other
instruments;
4. Underwrite securities of other issuers, except to the extent that the
purchase of permitted investments directly from the issuer thereof or from an
underwriter for an issuer and the later disposition of such securities in
accordance with the Fund's investment program may be deemed to be an
underwriting;
5. Borrow money, except to the extent permitted under the 1940 Act, including
the rules, regulations and any orders obtained thereunder;
6. Issue senior securities, except to the extent permitted under the 1940
Act, including the rules, regulations and any orders obtained thereunder;
7. Purchase securities of any issuer if, as a result, with respect to 75% of
the Fund's total assets, more than 5% of the value of its total assets would be
invested in the securities of any one issuer or the Fund's ownership would be
more than 10% of the outstanding voting securities of such issuer, provided that
this restriction does not limit a Fund's investments in securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, or
investments in securities of other investment companies; and
8. Make loans to other parties if, as a result, the aggregate value of such
loans would exceed one-third of the Fund's total assets. For the purposes of
this limitation, entering into repurchase agreements, lending securities and
acquiring any debt securities are not deemed to be the making of loans.
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.
1. The Fund may invest in shares of other open-end management investment
companies, subject to the limitations of Section 12(d)(1) of the 1940 Act. Under
the 1940 Act, the Fund's investment in such securities currently is limited,
subject to certain exceptions, to (i) 3% of the total voting stock of any one
investment company, (ii) 5% of the Fund's net assets with respect to any one
investment company, and (iii) 10% of the Fund's net assets in the aggregate.
Other investment companies in which the Fund invests can be expected to charges
fees for operating expenses, such as investment advisory and administration
fees, that would be in addition to those charged by the Fund;
2. The Fund may not invest more than 10% of its net assets in illiquid
securities. For this purpose, illiquid securities include, among others, (i)
securities that are illiquid by virtue of the absence of a readily available
market or legal or contractual restrictions on resale, (ii) fixed time deposits
that are subject to withdrawal penalties and that have maturities of more than
seven days, and (iii) repurchase agreements not terminable within seven days;
3. The Fund may lend securities from its portfolio to brokers, dealers and
financial institutions, in amounts not to exceed (in the aggregate) one-third of
the Fund's total assets. Any such loans of portfolio securities will be fully
collateralized based on values that are marked to market daily. The Fund will
not enter into any portfolio security lending arrangement having a duration of
longer than one year;
4. The Fund may not write, purchase or sell puts, calls, straddles, spreads,
warrants, options or any combination thereof, except that the Fund may purchase
securities with put rights in order to maintain liquidity;
5. The Fund may not purchase interests, leases, or limited partnership
interests in oil, gas, or other mineral exploration or development programs;
6. The Fund may not purchase securities on margin (except for short-term
credits necessary for the clearance of transactions and except for margin
payments in connection with options, futures and options on futures) or make
short sales of securities; and
7. The Fund may not make investments for the purpose of exercising control or
management.
The Fund may, notwithstanding any fundamental or non-fundamental policy or
restriction, invest all of its assets in the securities of a single open-end
management investment company with substantially similar investment objectives
and policies as the Fund or investment objectives and policies consistent with
those of 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. In the event the Master Portfolio seeks approval to change
any of the following fundamental investment restrictions and the Fund elects to
continue its investment in the Master Portfolio, the Fund shall take appropriate
action, as it deems necessary, to ensure that the Master Portfolio's fundamental
investment restrictions are in compliance with the Fund's policies.
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 will not
constitute a violation of such restriction.
The Master Portfolio may not:
1. Purchase the securities of issuers conducting their principal business
activity in the same industry if, immediately after the purchase and as a result
thereof, the value of the Master Portfolio's investments in that industry would
be 25% or more of the current value of the Master Portfolio's total assets,
provided that there is no limitation with respect to investments in (i)
obligations of the U.S. Government, its agencies or instrumentalities; and (ii)
obligations of banks, to the extent that the SEC, by rule or interpretation,
permits funds to reserve freedom to concentrate in such obligations;
2. Purchase or sell real estate or real estate limited partnerships (other
than securities secured by real estate or interests therein or securities issued
by companies that invest in real estate or interest therein);
3. Purchase commodities or commodity contracts (including futures contracts),
except that the Master Portfolio may purchase securities of an issuer which
invests or deals in commodities or commodity contracts;
4. Purchase interests, leases, or limited partnership interests in oil,
gas, or other mineral exploration or development programs;
5. Purchase securities on margin (except for short-term credits necessary for
the clearance of transactions and except for margin payments in connection with
options, futures and options on futures) or make short sales of securities;
6. Underwrite securities of other issuers, except to the extent that the
purchase of permitted investments directly from the issuer thereof or from an
underwriter for an issuer and the later disposition of such securities in
accordance with the Master Portfolio's investment program may be deemed to be an
underwriting;
7. Make investments for the purpose of exercising control or management;
8. Borrow money or issue senior securities as defined in the 1940 Act, except
that the Master Portfolio may borrow from banks up to 10% of the current value
of its net assets for temporary purposes only in order to meet redemptions, and
these borrowings may be secured by the pledge of up to 10% of the current value
of its net assets (but investments may not be purchased while any such
outstanding borrowing in excess of 5% of its net assets exists);
9. Write, purchase or sell puts, calls, straddles, spreads, warrants, options
or any combination thereof, except that the Master Portfolio may purchase
securities with put rights in order to maintain liquidity;
10. Purchase securities of any issuer (except securities issued or guaranteed
by the U.S. Government, its agencies and instrumentalities) if, as a result,
with respect to 75% of its total assets, more than 5% of the value of the Master
Portfolio's total assets would be invested in the securities of any one issuer
or, with respect to 100% of its total assets the Master Portfolio's ownership
would be more than 10% of the outstanding voting securities of such issuer; or
11. Make loans, except that the Master Portfolio may purchase or hold debt
instruments or lend its portfolio securities in accordance with its investment
policies, and may enter into repurchase agreements.
Non-Fundamental Operating Policies
The Master Portfolio is subject to the following non-fundamental 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.
1. The Master Portfolio may invest in shares of other open-end management
investment companies, subject to the limitations of Section 12(d)(1) of the 1940
Act. Under the 1940 Act, the Master Portfolio's investment in such securities
currently is limited, subject to certain exceptions, to (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. Other investment companies in
which the Master Portfolio invests can be expected to charges fees for operating
expenses, such as investment advisory and administration fees, that would be in
addition to those charged by the Master Portfolio;
2. The Master Portfolio may not invest more than 10% of its net assets in
illiquid securities. For this purpose, illiquid securities include, among
others, (i) securities that are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions on resale, (ii) fixed time
deposits that are subject to withdrawal penalties and that have maturities of
more than seven days, and (iii) repurchase agreements not terminable within
seven days; and
3. The Master Portfolio may lend securities from its portfolio to brokers,
dealers and financial institutions, in amounts not to exceed (in the aggregate)
one-third of the Master Portfolio's total assets. Any such loans of portfolio
securities will be 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.
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 with Principal Occupation(s) During
the Fund the Past 5 Years
- ------------------------------------------------------------------------------------
<S> <C> <C>
*Leonard C. Purkis (51) Trustee Mr. Purkis is chief financial
4500 Bohannon Drive, officer and executive vice
Menlo Park, CA 94025 president of finance and
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 (40)(1) Trustee Ms. Meyers is the Manager,
4500 Bohannon Drive, Chief Executive Officer, Chief
Menlo Park, CA 94025 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
4500 Bohannon Drive, Chief Executive Officer of
Menlo Park, CA 94025 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 (35) Trustee Mr. Grenadier is an Associate
4500 Bohannon Drive, Professor of Finance at the
Menlo Park, CA 94025 Graduate School of Business at
Stanford University, where he
has been employed as a
professor since 1992.
George J. Rebhan (65) Trustee Mr. Rebhan has been a Trustee
4500 Bohannon Drive, for the Trust For Investment
Menlo Park, CA 94025 Managers (investment company)
since August 30, 1999. Mr.
Rebhan retired in December
1993, and prior to that he was
President of Hotchkis and
Wiley Funds (investment
company) from 1985 to 1993.
*Amy J. Errett (42) President Ms. Errett joined E*TRADE
4500 Bohannon Drive, Asset Management in March
Menlo Park, CA 94025 2000. Prior to that, Ms.
Errett was Chairman, Chief
Executive Officer and founder
of Spectrem Group, a financial
services consulting firm, since
1990.
*W. David Moore (40) Vice President and Mr. Moore is Vice President of
4500 Bohannon Drive Secretary Operations, E*TRADE Asset
Menlo Park, CA 94025 Management, Inc. He joined
E*TRADE Securities, Inc. in
February 1999. Prior to that
Mr. Moore was a Sales
Consultant of BARRA Inc.
(investment analytics)
beginning in 1998. From 1995
to 1997, he was Client
Services Manager of Templeton
Europe (investment management).
<FN>
(1) Ms. Meyers may be considered an "interested person," but she is not an
"affiliated person," as that term is defined in the 1940 Act.
</FN>
</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 Trustees 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 from the Fund for the current fiscal
year ending December 31, 2000 and the total compensation received from the Trust
for the fiscal year ended December 31, 1999:
Estimated Compensation Table
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------
Total Compensation
Name of Person, Position Aggregate From Fund and Fund
Compensation from Complex Paid to
the Fund (1) Trustees (2)
- ------------------------------------------------------------------------------
<S> <C> <C>
Leonard C. Purkis, Trustee None None
Shelly J. Meyers, Trustee(3) $4,500 $22,500
Ashley T. Rabun, Trustee $4,500 $22,500
Steven Grenadier, Trustee $4,500 $22,500
George J. Rebhan, Trustee $4,500 None
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 from the Fund for service on the Board of
Trustees for the fiscal year ending December 31, 2000.
(2) The Fund Complex consists of eight series of the Trust, six of which began
operations in 1999.
(3) Ms. Meyers may be considered an "interested person," but she is not an
"affiliated person," as defined in the 1940 Act and is compensated by the
Trust for serving as Trustee.
</FN>
</TABLE>
Code of Ethics
Pursuant to Rule 17j-1 under the 1940 Act, E*TRADE Funds has adopted a code of
ethics. The Fund's investment advisor and principal underwriter have also
adopted codes of ethics under Rule 17j-1. Each code of ethics permits personal
trading by covered personnel, including securities that may be purchased or held
by the Fund, subject to certain reporting requirements and restrictions.
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 March 29, 2000, 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., the Fund's investment
advisor, is a Delaware corporation and is wholly owned by E*TRADE Group, Inc.
Its address is 4500 Bohannon Drive, Menlo Park, CA 94025.
INVESTMENT MANAGEMENT
Investment Advisor. 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 and is located at 4500 Bohannon Drive, Menlo Park,
CA 94025. The Investment Advisor commenced operating in February 1999 and,
therefore, has limited experience as an investment advisor. As of December 31,
1999, the Investment Advisor provided investment advisory services for over $166
million in assets.
Subject to the general supervision of the Trust's 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. 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 invested in the Master Portfolio, but 0.12% of the Fund's
average daily net assets if the Fund's assets are not invested in the Master
Portfolio.
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) and is located at 45 Fremont Street, San Francisco,
California 94105. BGFA has provided asset management, administration and
advisory services for over 25 years. As of November 30, 1999, BGFA and its
affiliates provided investment advisory services for over $738 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 (the "Advisory
Contract") with the Master Portfolio, BGFA provides investment advisory services
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 is entitled to receive monthly fees at the annual rate of
0.10% of the average daily net assets of the Master Portfolio as compensation
for its advisory services. From time to time, BGFA may waive such fees in whole
or in part. Any such waiver will reduce the expenses of the Master Portfolio,
and accordingly, have a favorable impact on its performance. This advisory fee
is an expense of the Master Portfolio borne proportionately by its
interestholders, including the Fund.
The Advisory Contract is subject to annual approval (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 without penalty and will terminate automatically if
assigned.
Purchase and sale orders for portfolio securities of the Master Portfolio may be
combined with those of other accounts that BGFA manages or advises, and for
which it has brokerage placement authority in the interest of seeking the most
favorable result. When BGFA determines that a particular security should be
bought or sold for the Master Portfolio and other accounts managed by BGFA, it
undertakes to allocate those transactions among the participants equally. 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., 4500 Bohannon Drive, Menlo
Park, CA 94025, is the Fund's principal underwriter. The underwriter is a wholly
owned subsidiary of E*TRADE Group, Inc.
Co-Administrators 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. Stephens and BGI provide
the Master Portfolio with administrative services, including: (i) general
supervision of the Master Portfolio's non-investment operations, and
coordination of the other services provided to the Master Portfolio; (ii)
compilation of information for 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 MIP's officers and Board. Stephens also furnishes office space and
certain facilities required for conducting the business of the Master Portfolio,
and compensates the MIP's trustees, officers and employees who are affiliated
with Stephens. In addition, Stephens and BGI will be responsible for paying all
expenses incurred by the Master Portfolio, other than the fees payable to BGFA.
Stephens and BGI are not entitled to compensation for providing administration
services to the Master Portfolio. BGI has delegated certain of its duties as
co-administrator to Investors Bank & Trust Company ("IBT"). IBT, as
sub-administrator is compensated by BGI for performing certain administrative
services.
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.
IBT currently acts as the Master Portfolio's custodian. IBT is not entitled to
receive compensation for its custodial services so long as it is entitled to
receive compensation for providing sub-administrative services to the Master
Portfolio.
Administrator of the Fund. E*TRADE Asset Management, the Fund's Investment
Advisor, also serves as the Fund's administrator. As the Fund's administrator,
E*TRADE Asset Management provides administrative services directly or through
sub-contracting, including: (i) coordinating the services performed by the
investment advisor, transfer and dividend disbursing agent, custodian,
sub-administrator, shareholder servicing agent, independent auditors and legal
counsel; (ii) preparing or supervising the preparation of periodic reports to
the Fund's shareholders; (iii) generally supervising regulatory compliance
matters, including the compilation of information for documents such as reports
to, and filings with, the SEC and other federal or state governmental agencies;
and (iv) monitoring and reviewing the Fund's contracted services and
expenditures. E*TRADE Asset Management also furnishes office space and certain
facilities required for conducting the business of the Fund. Pursuant to the
administrative services agreement with the Fund, E*TRADE Asset Management
receives an administration fee equal to 0.30% of the average daily net assets of
the Fund. This fee is waived and/or reimbursed under the administrative services
agreement to the extent the non-affiliated and independent trustees' fees and
expenses and fees and expenses of the independent trustees' counsel, if any,
equal or exceed 0.005% of the Fund's average daily net assets. (The
administrator currently also waives its fee with respect to those expenses of
less than 0.005%, as described below.) E*TRADE Asset Management is responsible
under the administrative services agreement for expenses otherwise payable by
the Fund other than investment advisory fees, legal fees related to litigation,
the administration fee, non-affiliated and independent trustee fees and
expenses, fees and expenses of independent trustees' counsel, if any, and the
expenses of any master fund in which the Fund may invest. The Fund's
administrator has agreed to waive its administration fee and/or reimburse the
Fund to the extent the expenses and costs of the Fund would otherwise exceed
0.32% average daily net assets of the Fund (which, together with current
expenses of the Master Portfolio, results in a total operating expense ratio
currently of 0.42%), and this agreement has the same term as the administrative
services agreement. The administrative services agreement is subject to annual
renewal after the first two years, subject to termination on 60 days' written
notice. The administrative services agreement terminates automatically if
assigned. E*TRADE Asset Management is not responsible for any fees or expenses
incurred at the master fund level.
Custodian, Fund Accounting Services Agent and Sub-administrator. Investors Bank
& Trust Company ("IBT"), 200 Clarendon Street, Boston, MA 02116, 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 IBT, the Trust and E*TRADE Asset Management, providing
management reporting and treasury administration and financial reporting 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.
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.
Retail Shareholder Servicing Agent. Under a Retail Shareholder Servicing
Agreement with E*TRADE Securities and E*TRADE Asset Management, E*TRADE
Securities, 4500 Bohannon Drive, Menlo Park, CA 94025, 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) providing to an approved
shareholder mailing agent for the purpose of providing certain Fund-related
materials the names and contact information of all shareholders; (ii) delivering
current Fund prospectuses, statements of additional information, annual and
other periodic reports upon shareholder requests; (iii) delivering statements to
shareholders on a monthly basis; (iv) producing and providing confirmation
statements reflecting purchases and redemptions; (v) answering shareholder
inquiries regarding, among other things, share prices, account balances,
dividend amounts and dividend payment dates; (vi) communicating purchase,
redemption and exchange orders reflecting orders received from shareholders;
(vii) preparing and filing with the appropriate governmental agencies returns
and reports required to be reported for dividends and other distributions made,
amounts withheld on dividends and other distributions and payments under
applicable federal and state laws, rules and regulations, and, as required,
gross proceeds of sales transactions; and (viii) 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
BGFA assumes general supervision over placing orders on behalf of the Master
Portfolio for the purchase or sale of portfolio securities. Allocation of
brokerage transactions, including their frequency, is made in the best judgment
of BGFA and in a manner deemed fair and reasonable to shareholders.
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.
BGFA may deal, trade and invest for its own account in the types of securities
in which the Master Portfolio may invest. BGFA has informed the Master Portfolio
that in making its investment decisions it does not obtain or use material
information in its possession.
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. The primary consideration is
prompt execution of orders at the most favorable net price. 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. All shares, when
issued, will be fully paid and non-assessable by the Trust. 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.
The Declaration of Trust further provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust
and that the Trustees will not be liable for any action or failure to act, but
nothing in the Declaration 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.
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 or jurisdictions. 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 or jurisdictions, 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 series of the Trust. 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.
The Fund only recently commenced operations. Like any venture, there can be no
assurance that the Fund as an enterprise will be successful or will continue to
operate indefinitely.
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.
The Fund values its portfolio instruments at amortized cost, which means they
are valued at their acquisition cost, as adjusted for amortization of premium or
discount, rather than at current market value. Calculations are made to compare
the value of the Fund's investments at amortized cost with market values. When
determining market values for portfolio securities, the Fund uses market quotes
if they are readily available. In cases where quotes are not readily available,
the Fund may value securities based on fair values developed using methods
approved by the Fund's Board of Trustees Fair values may be determined by using
actual quotations or estimates of market value, including pricing service
estimates of market values or values obtained from yield data relating to
classes of portfolio securities.
The amortized cost method of valuation seeks to maintain a stable net asset
value per share ("NAV") of $1.00, even where there are fluctuations in interest
rates that affect the value of portfolio instruments. Accordingly, this method
of valuation can in certain circumstances lead to a dilution of a shareholder's
interest.
If a deviation of 1/2 of 1% or more were to occur between the NAV calculated
using market values and the Fund's $1.00 NAV calculated using amortized cost or
if there were any other deviation that the Board of Trustees believed would
result in a material dilution to shareholders or purchasers, the Board of
Trustees would promptly consider what action, if any, should be initiated. If
the Fund's NAV calculated using market values declined, or were expected to
decline, below the Fund's $1.00 NAV calculated using amortized cost, the Board
of Trustees might temporarily reduce or suspend dividend payments in an effort
to maintain the fund's $1.00 NAV. As a result of such reduction or suspension of
dividends or other action by the Board of Trustees, an investor would receive
less income during a given period than if such a reduction or suspension had not
taken place. Such action could result in investors receiving no dividend for the
period during which they hold their shares and receiving, upon redemption, a
price per share lower than that which they paid. On the other hand, if the
Fund's NAV (calculated using market values) were to increase, or were
anticipated to increase above the Fund's $1.00 (calculated using amortized
cost), the Board of Trustees might supplement dividends in an effort to maintain
the Fund's $1.00 NAV. Net investment income for a Saturday, Sunday or holiday
will be declared as a dividend to investors of record on the previous business
day.
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., 4500 Bohannon Drive, Menlo
Park, CA 94025, 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, exchanging or selling shares of the Fund. The Distribution Agreement
further provides that the Distributor will bear any 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 Declaration 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 vote its shares of the
Master Portfolio in accordance with the requirements of applicable law. As a
result, the Fund may 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, or
to the extent permitted by law, the Fund does not seek voting instructions from
its shareholders, the Fund will vote such shares in the same proportion as the
shares for which the Fund does receive voting instructions or in the same
proportion as the other interestholders of the Master Portfolio. A proposal at
the Master Portfolio may pass even though the shareholders of the Fund vote
against the proposal.
For reasons such as a change in the Master Portfolio's investment objective,
among others, the Fund could terminate its investment in the Master Portfolio
and choose another master portfolio or decide to manage its assets directly. The
fees and expenses of the Fund and the Fund's returns could be affected by a
switch to another master portfolio or direct management of the Fund's assets.
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.
Current Yield. The current yield will be calculated based on a 7-day period, by
determining the net change, exclusive of capital changes and income other than
investment income, in the value of a hypothetical pre-existing account having a
balance of one shares at the beginning of the period, subtracting a hypothetical
charge reflecting deductions from shareholder accounts, and dividing the
difference by the value of the account at the beginning of the base period to
obtain the base period return, and then multiplying the base period return by
(365/7) with the resulting yield figure carried to at least the nearest
hundredth of one percent.
Effective Yield. The effective yield will be calculated, carried to the nearest
hundredth of one percent, by determining the net change, exclusive of capital
changes, in the value of a hypothetical pre-existing account having a balance of
one share at the beginning of the period, subtracting a hypothetical charge
reflecting deductions from shareholder accounts, and dividing the difference by
the value of the account at the beginning of the base period to obtain the base
period return, and then compounding the base period return by adding 1, raising
the sum to a power equal to 365 divided by 7, and subtracting 1 from the result,
according to the following formula:
Effective yield = [(Base period return + 1)365/7 ] -1
Tax Equivalent Current Yield Quotation. The tax equivalent current yield will be
calculated by dividing the portion of the Fund's current yield that is
tax-exempt by 1 minus a stated income tax rate and adding the quotient to that
portion, if any, of the Fund's yield that is not tax-exempt.
Tax Equivalent Effective Yield Quotation. The tax equivalent effective yield
will be calculated by dividing that portion of the Fund's effective yield that
is tax-exempt by 1 minus a stated income tax rate and adding the quotient to
that portion, if any, of the Fund's effective yield that is not tax-exempt.
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 would 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 would 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 other 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 the 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.
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.
<PAGE>
APPENDIX
Description of certain ratings assigned by Standard & Poor's Corporation
("S&P"), Moody's Investors Service, Inc. ("Moody's"), Fitch Investors Service,
Inc. ("Fitch"), Duff & Phelps, Inc. ("Duff") and IBCA Inc. and IBCA Limited
("IBCA"):
S&P
Bond Ratings
"AAA"
Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
"AA"
Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
"A"
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 obligations in higher rated
categories.
"BBB"
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 for bonds in higher rated categories.
"BB, B, CCC, CC or C"
Bonds rated "BB, B, CCC, CC or C" are 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.
"C1"
Bonds rated "C1" is reserved for income bonds on which no interest is
being paid.
"D"
Bonds rated "D" are in default and payment of interest and/or payment of
principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus (+) or
minus (-) sign designation, which is used to show relative standing within the
major rating categories, except in the AAA (Prime Grade) category.
Commercial Paper Rating
The designation A-1 by S&P indicates that the degree of safety regarding
timely payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus sign (+)
designation. Capacity for timely payment on issues with an A-2 designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
Moody's
Bond Ratings
"Aaa"
Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
"Aa"
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what generally are 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.
"A"
Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment sometime in the future.
"Baa"
Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
"Ba"
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
"B"
Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
"Caa"
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.
"Ca"
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.
"C"
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 the numerical modifiers "1", "2" and "3" to show relative
standing within the major rating categories, except in the "Aaa" category. The
modifier "1" indicates a ranking for the security in the higher end of a rating
category; the modifier "2" indicates a mid-range ranking; and the modifier "3"
indicates a ranking in the lower end of a rating category.
Commercial Paper Rating
The rating ("P-1") Prime-1 is the highest commercial paper rating assigned
by Moody's. Issuers of "P-1" paper must have a superior capacity for repayment
of short-term promissory obligations, and ordinarily will be evidenced by
leading market positions in well established industries, high rates of return on
funds employed, conservative capitalization structures with moderate reliance on
debt and ample asset protection, broad margins in earnings coverage of fixed
financial charges and high internal cash generation, and well established access
to a range of financial markets and assured sources of alternate liquidity.
Issuers (or relating supporting institutions) rated ("P-2") Prime-2 have a
strong capacity for repayment of short-term promissory obligations. This
ordinarily will be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Fitch
Bond Ratings
The ratings represent Fitch's assessment of the issuer's ability to meet
the obligations of a specific debt issue or class of debt. The ratings take into
consideration special features of the issue, its relationship to other
obligations of the issuer, the current financial condition and operative
performance of the issuer and of any guarantor, as well as the political and
economic environment that might affect the issuer's future financial strength
and credit quality.
"AAA"
Bonds rated "AAA" are considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events.
"AA"
Bonds rated "AA" are considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and repay principal is
very strong, although not quite as strong as bonds rated "AAA". Because bonds
rated in the "AAA" and "AA" categories are not significantly vulnerable to
foreseeable future developments, short- term debt of these issuers is generally
rated "F-1+".
"A"
Bonds rated "A" are considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay principal is considered
to be strong, but may be more vulnerable to adverse changes in economic
conditions and circumstances than bonds with higher ratings.
"BBB"
Bonds rated "BBB" are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have an adverse impact on these
bonds and, therefore, impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than for bonds with
higher ratings.
Plus (+) and minus (-) signs are used with a rating symbol to indicate the
relative position of a credit within the rating category.
Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
Although the credit analysis is similar to Fitch's bond rating analysis,
the short-term rating places greater emphasis than bond ratings on the existence
of liquidity necessary to meet the issuer's obligations in a timely manner.
"F-1+"
Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
"F-1"
Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues rated F-1+.
"F-2"
Good Credit Quality. Issues carrying this rating have a satisfactory
degree of assurance for timely payments, but the margin of safety is not as
great as the F-1+ and F-1 categories.
Duff
Bond Ratings
"AAA"
Bonds rated AAA are considered highest credit quality. The risk factors
are negligible, being only slightly more than for risk-free U.S. Treasury debt.
"AA"
Bonds rated AA are considered high credit quality. Protection factors are
strong. Risk is modest but may vary slightly from time to time because of
economic conditions.
"A"
Bonds rated A have protection factors which are average but adequate.
However, risk factors are more variable and greater in periods of economic
stress.
"BBB"
Bonds rated BBB are considered to have below average protection factors
but still considered sufficient for prudent investment. Considerable variability
in risk during economic cycles.
Plus (+) and minus (-) signs are used with a rating symbol (except AAA) to
indicate the relative position of a credit within the rating category.
Commercial Paper Rating
The rating "Duff-1" is the highest commercial paper rating assigned by
Duff. Paper rated Duff-1 is regarded as having very high certainty of timely
payment with excellent liquidity factors which are supported by ample asset
protection. Risk factors are minor. Paper rated "Duff-2" is regarded as having
good certainty of timely payment, good access to capital markets and sound
liquidity factors and company fundamentals. Risk factors are small.
IBCA
Bond and Long-Term Ratings
Obligations rated AAA by IBCA have the lowest expectation of investment
risk. Capacity for timely repayment of principal and interest is substantial,
such that adverse changes in business, economic or financial conditions are
unlikely to increase investment risk significantly. Obligations for which there
is a very low expectation of investment risk are rated AA by IBCA. Capacity for
timely repayment of principal and interest is substantial. Adverse changes in
business, economic or financial conditions may increase investment risk albeit
not very significantly.
Commercial Paper and Short-Term Ratings
The designation A1 by IBCA indicates that the obligation is supported by a
very strong capacity for timely repayment. Those obligations rated A1+ are
supported by the highest capacity for timely repayment. Obligations rated A2 are
supported by a strong capacity for timely repayment, although such capacity may
be susceptible to adverse changes in business, economic or financial conditions.
International and U.S. Bank Ratings
An IBCA bank rating represents IBCA's current assessment of the strength
of the bank and whether such bank would receive support should it experience
difficulties. In its assessment of a bank, IBCA uses a dual rating system
comprised of Legal Ratings and Individual Ratings. In addition, IBCA assigns
banks Long- and Short-Term Ratings as used in the corporate ratings discussed
above. Legal Ratings, which range in gradation from 1 through 5, address the
question of whether the bank would receive support provided by central banks or
shareholders if it experienced difficulties, and such ratings are considered by
IBCA to be a prime factor in its assessment of credit risk. Individual Ratings,
which range in gradations from A through E, represent IBCA's assessment of a
bank's economic merits and address the question of how the bank would be viewed
if it were entirely independent and could not rely on support from state
authorities or its owners.
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Telephone: (650) 331-6000
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