Registration Nos. 333-66807
811-09093
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 28, 2000
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. / /
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Post-Effective Amendment No. 19 /X/
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and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 22 /X/
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(Check appropriate box or boxes)
E*TRADE FUNDS
(Exact name of Registrant as specified in charter)
4500 Bohannon Drive
Menlo Park, CA 94025
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (650) 331-6000
Kathy Levinson
E*TRADE Securities, Inc.
4500 Bohannon Drive
Menlo Park, CA 94025
(Name and address of agent for service)
Please send copies of all communications to:
David A. Vaughan, Esq. Kathy Levinson
Dechert Price & Rhoads E*TRADE Securities, Inc.
1775 Eye Street, NW 4500 Bohannon Drive
Washington, DC 20006 Menlo Park, CA 94025
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement.
It is proposed that this filing will become effective (check appropriate box):
Immediately upon filing pursuant to paragraph (b)
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X on May 1, 2000 pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph (a)(2) of Rule 485
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If appropriate, check the following box:
This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
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E*TRADE FUNDS
E*TRADE S&P 500 INDEX FUND
Prospectus dated May 1, 2000
This Prospectus concisely sets forth information about the E*TRADE S&P 500 Index
Fund (the "Fund") that an investor needs to know before investing. Please read
this Prospectus carefully before investing, and keep it for future reference.
The Fund is a series of E*TRADE Funds.
Objectives, Goals and Principal Strategies.
The Fund's investment objective is to provide investment results that attempt to
match the total return of the stocks making up the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500 Index"). The Fund seeks to achieve its
objective by investing in a master portfolio that, in turn, invests in stocks
and other assets and attempts to match the total return of the stocks making up
the S&P 500 Index.
Eligible Investors.
This Fund is designed and built specifically for on-line investors. In order to
be a shareholder of the Fund, you need to have an account with E*TRADE
Securities, Inc. ("E*TRADE Securities"). In addition, the Fund requires you to
consent to receive all information about the Fund electronically. If you wish to
rescind this consent or close your E*TRADE Securities account, the Fund will
redeem all of your shares in your Fund account. The Fund is designed for
long-term investors and the value of the Fund's shares will fluctuate over time.
The Fund is a true no-load fund, which means you pay no sales charges or 12b-1
fees.
About E*TRADE.
E*TRADE Group, Inc. ("E*TRADE") is the direct parent of E*TRADE Asset
Management, Inc., the Fund's investment advisor. E*TRADE, through its group
companies, is a leader in providing secure online investing services. E*TRADE's
focus on technology has enabled it to eliminate traditional barriers, creating
one of the most powerful and economical investing systems for the self-directed
investor. To give you ultimate convenience and control, E*TRADE offers
electronic access to your account virtually anywhere, at any time.
An investment in the Fund is:
o not insured by the Federal Deposit Insurance Corporation;
o not a deposit or other obligation of, or guaranteed by, E*TRADE Bank and
its affiliates; and
o subject to investment risks, including loss of principal.
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 May 1, 2000
<PAGE>
TABLE OF CONTENTS
RISK/RETURN SUMMARY....................................................4
FEES AND EXPENSES......................................................5
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS.....................7
FUND MANAGEMENT........................................................9
THE FUND'S STRUCTURE..................................................10
PRICING OF FUND SHARES................................................11
HOW TO BUY, SELL AND EXCHANGE SHARES..................................11
DIVIDENDS AND OTHER DISTRIBUTIONS.....................................16
TAX CONSEQUENCES......................................................16
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RISK/RETURN SUMMARY
This is a summary. You should read this section along with the rest of this
Prospectus.
Investment Objectives/Goals
The Fund's investment objective is to provide investment results that attempt to
match the total return of the stocks making up the S&P 500 Index.
Principal Strategies
The Fund seeks to achieve its investment objective by investing all of its
assets in the S&P 500 Index Master Portfolio ("Master Portfolio"), a series of
Master Investment Portfolio ("MIP"), a registered open-end management investment
company, rather than directly in a portfolio of securities. In turn, the Master
Portfolio seeks to provide investment results that correspond to the total
return performance of publicly traded common stocks in the aggregate, as
represented by the S&P 500 Index.* To do so, the Master Portfolio invests
substantially all of its assets in the same stocks and in substantially the same
percentages as the S&P 500 Index. The S&P 500 Index, a widely recognized
benchmark for U.S. stocks, currently represents about 75% of the market
capitalization of all publicly traded common stocks in the United States. The
S&P 500 Index includes 500 established companies representing different sectors
of the U.S. economy (including industrial, utilities, financial, and
transportation) selected by Standard & Poor's.
Generally, the Master Portfolio attempts to be fully invested at all times in
securities comprising the S&P 500 Index and futures and options on stock index
futures, covered by liquid assets. The Master Portfolio also may invest up to
10% of its total assets in high-quality money market instruments to provide
liquidity.
Principal Risks
The stock market may rise and fall daily. The S&P 500 Index represents a
significant segment of the U.S. stock market. The S&P Index may also rise and
fall daily. As with any stock investment, the value of your investment in the
Fund will fluctuate, meaning you could lose money.
There is no assurance that the Fund will achieve its investment objective. The
Fund incurs expenses not reflected in the S&P 500 Index returns. The S&P 500
Index may not appreciate, and could depreciate, during the time you are invested
in the Fund, even if you are a long-term investor.
* "Standard & Poor's(TM)," "S&P(TM)" "S&P 500(TM)", "Standard & Poor's 500(R)",
and "500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use by E*TRADE Asset Management, Inc. for use in connection with
the Fund. The Fund is not sponsored, endorsed, sold, or promoted by Standard &
Poor's and Standard & Poor's makes no representation regarding the advisability
of investing in the Fund. See the Statement of Additional Information.
The Fund cannot as a practical matter own all the stocks that make up the S&P
500 Index in perfect correlation to the S&P 500 Index itself. The use of futures
and options on futures is intended to help the Fund match the S&P 500 Index but
that may not be the result. The value of an investment in the Fund depends to a
great extent upon changes in market conditions. The Fund seeks to track the S&P
500 Index during down markets as well as during up markets. The Fund's returns
will be directly affected by the volatility of the stocks making up the S&P 500
Index. The Fund will also have exposure to the industries represented by those
stocks.
The S&P 500 Index primarily consists of large-cap stocks. As a result, whenever
these stocks perform worse than mid- or small-cap stocks, the Fund may
underperform funds that have exposure to those segments of the U.S. stock
market. Likewise, whenever large-cap U.S. stocks fall behind other types of
investments--bonds or foreign stocks, for instance--the Fund's performance also
will lag behind those investments. The companies in the S&P 500 Index are also
exposed to the global economy.
An investment in the Fund is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Shares of the Fund involve investment risks, including the possible loss
of principal.
Performance
This Fund commenced operations on February 17, 1999. 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.
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 (as a percentage of redemption 1.00%*
proceeds, payable only if shares are redeemed within
four months of purchase)
Annual Fund Operating Expenses**
(expenses that are deducted from Fund assets)
Management Fees 0.07%***
Distribution (12b-1) Fees None
Other Expenses 0.30%
Administration 0.25****
Trustee Expenses 0.05%*****
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Total Annual Fund Operating Expenses 0.37%
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Fee Waiver and/or Reimbursement (0.05%)******
Net Expenses 0.32%
* Effective for redemptions after September 30, 2000. For Fund shares redeemed
before October 1, 2000 and within four months from the date of purchase, the
redemption fee is 0.50%.
** The cost reflects the expenses at both the Fund and the Master Portfolio
levels.
*** Management fees include a fee equal to 0.05% of daily net assets payable at
the Master Portfolio level to its investment advisor and an investment advisory
fee equal to 0.02% payable by the Fund to its investment advisor.
**** The administration fee is payable by the Fund to E*TRADE Asset Management,
Inc., its 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 0.32%. 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 February 3, 1999 and
terminating on February 3, 2001. 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 that fee. You
will be responsible for opening and maintaining an e-mail account and internet
access at your own expense.
Example
This Example is intended to help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds.
The Example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
1 year* 3 years* 5 years* 10 years*
$34 $111 $202 $470
*Reflects costs at both the Fund and Master Portfolio levels.
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS
The Fund's investment objective is to provide investment results that attempt to
match the total return of the stocks making up the S&P 500 Index.
Under normal market conditions, the Master Portfolio invests at least 90% of its
assets in the stocks making up the S&P 500 Index. That portion of its assets is
not actively managed but simply tries to mimic the S&P 500 Index. The Master
Portfolio attempts to achieve, in both rising and falling markets, a correlation
of at least 95% between the capitalization-weighted total return of its net
assets before expenses and the S&P 500 Index. A 100% correlation would mean the
total return of the Master Portfolio's assets would increase and decrease
exactly the same as the S&P 500 Index. The Master Portfolio also purchases and
sells futures and options on stock index futures. The Master Portfolio also may
invest up to 10% of its total assets in high-quality money market instruments to
provide liquidity.
Neither the Fund nor the Master Portfolio are managed according to traditional
methods of "active" investment management, which involve the buying and selling
of securities based upon economic, financial and market analysis and investment
judgment. Instead, the Fund and the Master Portfolio are managed by utilizing an
"indexing" investment approach to determine which securities are to be purchased
or sold to replicate, to the extent feasible, the investment characteristics of
the S&P 500 Index through computerized, quantitative techniques. The sampling
techniques utilized by the Master Portfolio are expected to an effective means
of substantially duplicating the investment performance of the S&P 500 Index.
However, the Master Portfolio is not expected to track the S&P 500 Index with
the same degree of accuracy that complete replication of the S&P 500 Index would
have provided. Over time, the portfolio composition of the Master Portfolio may
be altered (or "rebalanced") to reflect changes in the characteristics of the
S&P 500 Index.
Many factors can affect stock market performance. Political and economic news
can influence marketwide trends; the outcome may be positive or negative,
short-term or long-term. Other factors may be ignored by the market as a whole
but may cause movements in the price of one company's stock or the stocks of one
or more industries (for example, rising oil prices may lead to a decline in
airline stocks).
Like all stock funds, the Fund's Net Asset Value ("NAV") will fluctuate with the
value of its assets. The assets held by the Fund will fluctuate based on market
and economic conditions, or other factors that affect particular companies or
industries. The recent growth rate in the stock market has helped produce
short-term positive returns that are not typical and may not continue in the
future. Because of ongoing market volatility, the Fund's performance may be
subject to substantial short-term changes.
Since the investment characteristics and therefore, the investment risks of the
Fund correspond to those of the Master Portfolio, the following discussion also
includes a description of the risks associated with the investments of the
Master Portfolio. The Fund's performance will correspond directly to the
performance of the Master Portfolio.
The Fund's ability to match its investment performance to the investment
performance of the S&P 500 Index may be affected by, among other things: the
Fund and the Master Portfolio's expenses; the amount of cash and cash
equivalents held by the Master Portfolio's investment portfolio; the manner in
which the total return of the S&P 500 Index is calculated and the timing;
frequency and size of shareholder purchases; and redemptions of both the Fund
and the Master Portfolio. The Master Portfolio uses cash flows from shareholder
purchase and redemption activity to maintain, to the extent feasible, the
similarity of its portfolio to the securities comprising the S&P 500 Index.
The investments of the Master Portfolio are subject to equity market risk.
Equity market risk is the possibility that common stock prices will fluctuate or
decline over short or even extended periods. The U.S. stock market tends to be
cyclical, with periods when stock prices generally rise and periods when prices
generally decline.
As do many index funds, the Master Portfolio also may invest in futures and
options transactions and other derivative securities transactions to minimize
the gap in performance that naturally exists between any index fund and its
index. This gap will occur mainly because, unlike the index, the Master
Portfolio and the Fund incur expenses and must keep a portion of their assets in
cash for paying expenses and processing shareholder orders. By using futures,
the Master Portfolio potentially can offset the portion of the gap attributable
to their cash holdings. However, because some of the effect of expenses remains,
the Master Portfolio and the Fund's performance normally will be below that of
the S&P 500 Index. The Master Portfolio uses futures contracts to gain exposure
to the S&P 500 Index for its cash balances, which could cause the Fund to track
the S&P 500 Index less closely if the futures contracts do not perform as
expected.
During those periods in which a higher percentage of the Master Portfolio's
assets are invested in long-term bonds, the Master Portfolio's exposure to
interest-rate risk will be greater because the longer maturity of such
securities means they are generally more sensitive to changes in market interest
rates than short-term securities.
Asset allocation and modeling strategies are employed by the Master Portfolio's
investment advisor for other investment companies and accounts advised or
sub-advised by it. If these strategies indicate particular securities should be
purchased or sold, at the same time, by the Master Portfolio and one or more of
these investment companies or accounts, available investments or opportunities
for sales will be allocated equitably to each by the Master Portfolio's
investment adviser. In some cases, this procedure 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.
The Master Portfolio also may invest up to 10% of its total assets in
high-quality money market instruments to provide liquidity. Among other
purposes, the Master Portfolio needs liquidity to pay redemptions and fees.
The Master Portfolio may also lend a portion of its securities to certain
financial institutions in order to earn income. These loans are fully
collateralized. However, if the institution defaults, the Master Portfolio's and
the Fund's performance could be reduced.
The recent growth rate in the stock market has helped produce short-term returns
that are not typical historically and may not continue in the future. Because of
ongoing market volatility, the Fund's performance may be subject to substantial
short-term changes.
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 March 31, 2000, the Investment Advisor provided
investment advisory services for over $277 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.
The Master Portfolio's investment advisor is Barclays Global Fund Advisors
("BGFA"). BGFA is a wholly owned 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
December 31, 1999, Barclays Global Investors and its affiliates, including BGFA,
provided investment advisory services for over $783 billion of assets. BGFA
receives a fee from the Master Portfolio at an annual rate equal to 0.05% of the
Master Portfolio's average daily net assets. 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 seeks to provide investment results that correspond to the
total return performance of publicly traded common stocks in the aggregate, as
represented by the Standard & Poor's 500 Stock Index. In addition to selling its
shares to the Fund, the Master Portfolio has and may continue to sell its shares
to certain other mutual funds or other accredited investors. The expenses and,
correspondingly, the returns of other investment options in the Master Portfolio
may differ from those of the Fund.
The Fund's Board 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's assets
are valued generally by using available market quotations or at fair value as
determined in good faith by the Board of Trustees of MIP.
The Fund's NAV per share is calculated by taking the value of the Fund's net
assets and dividing by the number of shares outstanding. Expenses are accrued
daily and applied when determining the NAV.
The NAV for the Fund is determined as of the close of trading on the floor of
the NYSE (generally 4:00 p.m., Eastern time), each day the NYSE is open. The
Fund reserves the right to change the time at which purchases, redemptions 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. All shares must be held in an E*TRADE Securities account and cannot be
transferred to the account of any other financial institution. 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, proxies, 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 $1,000
To buy additional shares of the Fund $ 250
Continuing minimum investment* $1,000
To invest in the Fund for your IRA, Roth IRA,
or one-person SEP account $ 250
To invest in the Fund for your Education IRA account $ 250
To invest in the Fund for your UGMA/UTMA account $ 250
To invest in the Fund for your SIMPLE, SEP-IRA,
Profit Sharing or Money Purchase Pension Plan,
or 401(a) account $ 250
* Your shares may be automatically redeemed if, as a result of selling or
exchanging shares, you no longer meet a Fund's minimum balance requirements.
Before taking such action, the Fund will provide you with written notice and at
least 30 days to buy more shares to bring your investment up to $1,000.
After your account is established you may use 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 generally 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. Please note that the fee the Fund
assesses on redemptions of Fund shares redeemed after September 30, 2000, and
held for less than four months is 1.00%. Redemptions of shares redeemed prior to
October 1, 2000 and purchased after January 21, 2000 and held for less than four
months are subject to a 0.50% redemption fee. The redemption fee for shares
purchased on or before January 21, 2000 is $24.95. 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 if it
believes it advisable to do so.
Investors will bear the risk of loss from fraudulent or unauthorized
instructions received over the telephone provided that the Fund reasonably
believes that such instructions are genuine. The Fund and its transfer agent
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. The Fund may incur liability if it does not follow these
procedures.
Due to increased telephone volume during periods of dramatic economic or market
changes, you may experience difficulty in implementing a broker-assisted
telephone redemption. In these situations, investors may want to consider
trading online by accessing our Website or use TELE*MASTER, E*TRADE Securities'
automated telephone system, to effect such a transaction by calling
1-800-STOCKS1 (1-800-786-2571).
Signature Guarantee. For your protection, certain requests may require a
signature guarantee.
A signature guarantee is designed to protect you and the Fund against fraudulent
transactions by unauthorized persons. In the following instances, the Fund will
require a signature guarantee for all authorized owners of an account:
1. If you transfer the ownership of your account to another individual or
organization.
2. When you submit a written redemption for more than $25,000.
3. When you request that redemption proceeds be sent to a different name or
address than is registered on your account.
4. If you add or change your name or add or remove an owner on your account.
5. If you add or change the beneficiary on your transfer-on-death account.
For other registrations, access E*STATION through our Website or call
1-800-786-2575 for instructions.
You will have to wait to redeem your shares until the funds you use to buy them
have cleared (e.g., your check has cleared).
The right of redemption may be suspended during any period in which (i) trading
on the NYSE is restricted, as determined by the SEC, or the NYSE is closed for
other than weekends and holidays; (ii) the SEC has permitted such suspension by
order; or (iii) an emergency as determined by the SEC exists, making disposal of
portfolio securities or valuation of net assets of the Fund not reasonably
practicable.
Redemption Fee. The Fund can experience substantial price fluctuations and is
intended for long-term investors. Short-term "market timers" who engage in
frequent purchases, redemptions or exchanges can disrupt the Fund's investment
program and increase costs. To discourage short-term trading, the Fund assesses
a redemption fee on shares held less than four months. The redemption fee of the
Fund will increase to 1.00% for shares which are redeemed after October 1, 2000,
and which have been held for less than four months from the date of purchase.
The redemption fee for shares purchased on or before January 21, 2000 is $24.95.
For Fund shares purchased after January 21, 2000, but prior to June 30, 2000,
the Fund assesses a 0.50% fee on redemptions of Fund shares held for less than
four months.
Any redemption fees imposed will be paid to the Fund to help offset transaction
costs. The Fund will use the "first-in, first-out" (FIFO) method to determine
the four month holding period. Under this method, the date of the redemption
will be compared with the earliest purchase date of shares held in the account.
If this holding period is less than four months, the fee will be assessed. The
fee may apply to shares held through omnibus accounts or certain retirement
plans.
The Fund may waive the redemption fee from time to time in its sole discretion.
The Fund may also change the redemption fee and the period it applies for shares
to be issued in the future.
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 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 pay dividends from net investment income quarterly and
distribute capital gains, if any, annually. The Fund may make additional
distributions if necessary.
Unless you choose otherwise, all your dividends and capital gain distributions
will be automatically reinvested in additional Fund shares. Shares are purchased
at the net asset value determined on the payment date.
TAX CONSEQUENCES
The Fund's total returns do not show the effects of income taxes on an
individual's investment.
The following information is meant as a general summary for U.S. taxpayers.
Please see the Fund's Statement of Additional Information for more information.
You should rely on your own tax advisor for advice about the particular federal,
state and local tax consequences to you of investing in the Fund.
The Fund generally will not have to pay income tax on amounts it distributes to
shareholders, although shareholders will be taxed on distributions they receive.
The Fund will distribute substantially all of its income and gains to its
shareholders every year. If the Fund declares a dividend in October, November or
December but pays it in January, you may be taxed on the dividend as if you
received it in the previous year.
You will generally be taxed on dividends you receive from the Fund, regardless
of whether they are paid to you in cash or are reinvested in additional Fund
shares. If the Fund designates a dividend as a capital gain distribution, (e.g.,
when the Fund has a gain from the sale of an asset the Fund held for more than
12 months), you will pay tax on that dividend at the long-term capital gains tax
rate, no matter how long you have held your Fund shares.
If you invest through a tax-deferred retirement account, such as an IRA, you
generally will not have to pay tax on dividends until they are distributed from
the account. These accounts are subject to complex tax rules, and you should
consult your tax advisor about investment through a tax-deferred account.
There may be tax consequences to you if you dispose of your Fund shares, for
example, through redemption, exchange or sale. You will generally have a capital
gain or loss from a disposition. The amount of the gain or loss and the rate of
tax will depend mainly upon how much you pay for the shares, how much you sell
them for, and how long you hold them. For example, if you sold at a gain Fund
shares that you had held for more than one year as a capital asset, then your
gain would be taxed at the long-term capital gains tax rate.
The Fund will send you a tax report each year that will tell you which dividends
must be treated as ordinary income and which (if any) are long-term capital
gain.
As with all mutual funds, the Fund may be required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to you if you
fail to provide the Fund with your correct taxpayer identification number or to
make required certifications, or if you have been notified by the IRS that you
are subject to backup withholding. Backup withholding is not an additional tax,
but is a method in which the IRS ensures that it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S. federal income tax
liability.
<PAGE>
[Outside back cover page.]
The Statement of Additional Information for the Fund, dated May 1, 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 which are
also incorporated into this Prospectus by reference. 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 semi-annual report
to shareholders, dated June 30, 1999, and annual report dated February 29, 2000
and incorporated herein by reference 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
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 (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 S&P 500 INDEX FUND
May 1, 2000
This Statement of Additional Information ("SAI") is not a prospectus and should
be read together with the Prospectus dated May 1, 2000 (as amended from time to
time) for the E*TRADE S&P 500 Index Fund (the "Fund"), a separate series of
E*TRADE Funds. Unless otherwise defined herein, capitalized terms have the
meanings given to them in the Fund's Prospectus.
To obtain a free copy of the Fund's Prospectus and the Fund's most recent
semi-annual report to shareholders, dated June 30, 1999, and annual report dated
February 29, 2000 and incorporated herein by reference, 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...............................................................11
TRUSTEES AND OFFICERS.......................................................15
INVESTMENT MANAGEMENT.......................................................19
SERVICE PROVIDERS...........................................................20
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION..............................22
ORGANIZATION, DIVIDEND AND VOTING RIGHTS....................................24
SHAREHOLDER INFORMATION.....................................................25
TAXATION....................................................................26
UNDERWRITER.................................................................29
MASTER PORTFOLIO ORGANIZATION...............................................30
PERFORMANCE INFORMATION.....................................................30
FINANCIAL STATEMENTS........................................................35
STANDARD & POOR'S...........................................................38
APPENDIX....................................................................39
<PAGE>
FUND HISTORY
The E*TRADE S&P 500 Index Fund (the "Fund") is a diversified series of E*TRADE
Funds (the "Trust"). The Trust is organized as a Delaware business trust and was
formed on November 4, 1998.
THE FUND
The Fund is classified as a diversified open-end, management investment company.
The Fund's investment objective is to provide investment results that attempt to
match the total return of the stocks making up the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500 Index"). This investment objective is
fundamental and therefore, cannot be changed without approval of a majority (as
defined in the Investment Company Act of 1940, as amended ("1940 Act")) of the
Fund's outstanding voting interests. The Fund seeks to achieve its objective by
investing in a master portfolio that, in turn, invests in stocks and other
assets and attempts to match the total return of the stocks making up the S&P
500 Index.
To achieve its investment objective, the Fund intends to invest all of its
assets in the S&P 500 Index 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.
The Master Portfolio seeks to provide investment results that correspond to the
total return performance of publicly traded common stocks in the aggregate, as
represented by the S&P 500 Index.
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.
Index Funds. The net asset value of index funds and funds which are not actively
managed, such as the Fund, may be disproportionately affected by the following
risks: short and long-term changes in the characteristics of the companies whose
securities make up the index; modifications in the criteria for companies
selected to make up the index; suspension or termination of the operation of the
index; and the activities of issuers whose market capitalization represents a
disproportionate amount of the total market capitalization of the index.
Futures Contracts and Options Transactions. The Master Portfolio may use futures
as a substitute for a comparable market position in the underlying securities.
A futures contract is an agreement between two parties, a buyer and a seller, to
exchange a particular commodity or financial statement at a specific price on a
specific date in the future. An option transaction generally involves a right,
which may or may not be exercised, to buy or sell a commodity or financial
instrument at a particular price on a specified future date. Futures contracts
and options are standardized and traded on exchanges, where the exchange serves
as the ultimate counterparty for all contracts. Consequently, the primary credit
risk on futures contracts is the creditworthiness of the exchange. Futures
contracts are subject to market risk (i.e., exposure to adverse price changes).
Although the Master Portfolio intends to purchase or sell futures contracts only
if there is an active market for such contracts, no assurance can be given that
a liquid market will exist for any particular contract at any particular time.
Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contract prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the Master
Portfolio to substantial losses. If it is not possible, or if the Master
Portfolio determines not to close a futures position in anticipation of adverse
price movements, the Master Portfolio will be required to make daily cash
payments on variation margin.
The Master Portfolio may invest in stock index futures and options on stock
index futures as a substitute for a comparable market position in the underlying
securities. A stock index future obligates the seller to deliver (and the
purchaser to take), effectively, an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made. With respect to stock indices that are permitted investments, the Master
Portfolio intends to purchase and sell futures contracts on the stock index for
which it can obtain the best price with consideration also given to liquidity.
There can be no assurance that a liquid market will exist at the time when the
Master Portfolio seeks to close out a futures contract or a futures option
position. Lack of a liquid market may prevent liquidation of an unfavorable
position.
The Master Portfolio's futures transactions must constitute permissible
transactions pursuant to regulations promulgated by the Commodity Futures
Trading Commission ("CFTC"). In addition, the Master Portfolio may not engage in
futures transactions if the sum of the amount of initial margin deposits and
premiums paid for unexpired futures, other than those contracts entered into for
bona fide hedging purposes, would exceed 5% of the liquidation value of the
Master Portfolio's assets, after taking into account unrealized profits and
unrealized losses on such contracts; provided, however, that in the case of an
option on a futures contract that is in-the-money at the time of purchase, the
in-the-money amount may be excluded in calculating the 5% liquidation limit.
Pursuant to regulations and/or published positions of the SEC, the Master
Portfolio may be required to segregate cash or high quality money market
instruments in connection with its futures transactions in an amount generally
equal to the entire value of the underlying security.
Forward commitments when-issued purchases and delayed-delivery transactions. The
Master Portfolio may purchase or sell securities on a when-issued or
delayed-delivery basis and make contracts to purchase or sell securities for a
fixed price at a future date beyond customary settlement time. Securities
purchased or sold on a when-issued, delayed-delivery or forward commitment basis
involve a risk of loss if the value of the security to be purchased declines, or
the value of the security to be sold increases, before the settlement date.
Although the Master Portfolio will generally purchase securities with the
intention of acquiring them, the Master Portfolio may dispose of securities
purchased on a when-issued, delayed-delivery or a forward commitment basis
before settlement when deemed appropriate by the adviser.
Short-term instruments and temporary investments. The Master Portfolio may
invest in high-quality money market instruments on an ongoing basis to provide
liquidity or for temporary purposes when there is an unexpected level of
shareholder purchases or redemptions or when "defensive" strategies are
appropriate. The instruments in which the Master Portfolio may invest include:
(i) short-term obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities (including government-sponsored enterprises); (ii)
negotiable certificates of deposit ("CDs"), bankers' acceptances, fixed time
deposits and other obligations of domestic banks (including foreign branches)
that have more than $1 billion in total assets at the time of investment and
that are members of the Federal Reserve System or are examined by the
Comptroller of the Currency or whose deposits are insured by the FDIC; (iii)
commercial paper rated at the date of purchase "Prime-1" by Moody's or "A-1+" or
"A-1" by S&P, or, if unrated, of comparable quality as determined by BGFA; (iv)
non-convertible corporate debt securities (e.g., bonds and debentures) with
remaining maturities at the date of purchase of not more than one year that are
rated at least "Aa" by Moody's or "AA" by S&P; (v) repurchase agreements; and
(vi) short-term, U.S. dollar-denominated obligations of foreign banks (including
U.S. branches) that, at the time of investment have more than $10 billion, or
the equivalent in other currencies, in total assets and in the opinion of BGFA
are of comparable quality to obligations of U.S. banks which may be purchased by
the Master Portfolio.
Bank Obligations. The Master Portfolio may invest in bank obligations, including
certificates of deposit, time deposits, bankers' acceptances and other
short-term obligations of domestic banks, foreign subsidiaries of domestic
banks, foreign branches of domestic banks, and domestic and foreign branches of
foreign banks, domestic savings and loan associations and other banking
institutions.
Certificates of deposit are negotiable certificates evidencing the obligation of
a bank to repay funds deposited with it for a specified period of time. Time
deposits are non-negotiable deposits maintained in a banking institution for a
specified period of time at a stated interest rate. Time deposits which may be
held by the Master Portfolio will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation. Bankers' acceptances are credit
instruments evidencing the obligation of a bank to pay a draft drawn on it by a
customer. These instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. The other
short-term obligations may include uninsured, direct obligations, bearing fixed,
floating- or variable-interest rates.
Commercial Paper and Short-Term Corporate Debt Instruments. The Master Portfolio
may invest in commercial paper (including variable amount master demand notes),
which consists of short-term, unsecured promissory notes issued by corporations
to finance short-term credit needs. Commercial paper is usually sold on a
discount basis and has a maturity at the time of issuance not exceeding nine
months. Variable amount master demand notes are demand obligations that permit
the investment of fluctuating amounts at varying market rates of interest
pursuant to arrangements between the issuer and a commercial bank acting as
agent for the payee of such notes whereby both parties have the right to vary
the amount of the outstanding indebtedness on the notes. 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. The ratings of Moody's and S&P and other nationally recognized
statistical rating organizations are more fully described in the attached
Appendix.
Repurchase Agreements. The Master Portfolio may 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. The Master Portfolio's custodian has custody of, and holds in a
segregated account, securities acquired as collateral by the Master Portfolio
under a repurchase agreement. Repurchase agreements are considered by the staff
of the SEC to be loans by the Master Portfolio. The Master Portfolio may enter
into repurchase agreements only with respect to securities that could otherwise
be purchased by the Master Portfolio, including government securities and
mortgage-related securities, regardless of their remaining maturities, and
requires that additional securities be deposited with the custodian if the value
of the securities purchased should decrease below the repurchase price. The
Master Portfolio's advisor 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 Investment Company Act.
Floating- and variable-rate obligations. The Master Portfolio may purchase
floating- and variable-rate obligations. 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 the Master Portfolio's advisor determines that at the
time of investment the obligations are of comparable quality to the other
obligations in which the Master Portfolio may invest. The investment advisor 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 Securities. The Master Portfolio may invest in the securities of foreign
issuers. Investing in the securities of issuers in any foreign country,
including American Depository Receipts ("ADRs") and European Depository Receipts
("EDRs") and similar securities, involves special risks and considerations not
typically associated with investing in U.S. companies. There include difference
in accounting, auditing and financial reporting standards; generally higher
commission rates on foreign portfolio transactions; the possibility of
nationalization, expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country); and political, social and monetary
or diplomatic developments that could affect U.S. investments in foreign
countries. Additionally, dispositions of foreign securities and dividends and
interest payable on those securities may be subject to foreign taxes, including
withholding taxes. Foreign securities often trade with less frequency and volume
than domestic securities and, therefore, may exhibit greater price volatility.
Additional costs associated with an investment in foreign securities may include
higher custodial fees than apply to domestic custodial arrangements and
transaction costs of foreign currency conversions. Changes in foreign exchange
rates also will affect the value of securities denominated or quoted in
currencies other than the U.S. dollar. The Master Portfolio's performance may be
affected either unfavorably or favorably by fluctuations in the relative rates
of exchange between the currencies of different nations, by exchange control
regulations and by indigenous economic and political developments.
Loans of portfolio securities. The Master Portfolio may lend securities from its
portfolio to brokers, dealers and financial institutions (but not individuals)
if cash, U.S. Government securities or other high quality debt obligations equal
to at least 100% of the current market value of the securities loaned (including
accrued interest thereon) plus the interest payable to the Master Portfolio with
respect to the loan is maintained with the Master Portfolio. In determining
whether or not to lend a security to a particular broker, dealer or financial
institution, the Master Portfolio's investment advisor considers all relevant
facts and circumstances, including the size, creditworthiness and reputation of
the broker, dealer, or financial institution. Any loans of portfolio securities
are fully collateralized based on values that are marked to market daily. The
Master Portfolio does not enter into any portfolio security lending arrangement
having a duration of longer than one year. Any securities that the Master
Portfolio may receive as collateral will not become part of the Master
Portfolio's investment portfolio at the time of the loan and, in the event of a
default by the borrower, the Master Portfolio will, if permitted by law, dispose
of such collateral except for such part thereof that is a security in which the
Master Portfolio is permitted to invest. During the time securities are on loan,
the borrower will pay the Master Portfolio any accrued income on those
securities, and the Master Portfolio may invest the cash collateral and earn
income or receive an agreed-upon fee from a borrower that has delivered
cash-equivalent collateral. The Master Portfolio will not lend securities having
a value that exceeds one-third of the current value of the Master Portfolio's
total assets. Loans of securities by the Master Portfolio are subject to
termination at the Master Portfolio's or the borrower's option.
The principal risk of lending is potential default or insolvency of the
borrower. In either of these cases, the Master Portfolio could experience delays
in recovering securities or collateral or could lose all or part of the value of
the loaned securities. The Master Portfolio may pay reasonable administrative
and custodial fees in connection with loans of portfolio securities and may pay
a portion of the interest or fee earned thereon to the borrower or a placing
broker. Borrowers and placing brokers are not permitted to be affiliated,
directly or indirectly, with the Master Portfolio, its investment advisor or
Stephens, Inc.
Investment company securities. The Master Portfolio may invest in securities
issued by other open-end management investment companies which principally
invest in securities of the type in which the Master Portfolio invests. Under
the 1940 Act, the Master Portfolio's investment in such securities currently is
limited to, subject to certain exceptions, (i) 3% of the total voting stock of
any one investment company, (ii) 5% of the Master Portfolio's net assets with
respect to any one investment company and (iii) 10% of the Master Portfolio's
net assets in the aggregate. Investments in the securities of other investment
companies generally will involve duplication of advisory fees and certain other
expenses. The Master Portfolio may also purchase shares of exchange-listed
closed-end funds.
Illiquid securities. To the extent that such investments are consistent with its
investment objective, the Master Portfolio may invest up to 15% of the value of
its net assets in securities as to which a liquid trading market does not exist.
Such securities may include securities that are not readily marketable, such as
privately issued securities and other securities that are subject to legal or
contractual restrictions on resale, floating- and variable-rate demand
obligations as to which the Master Portfolio cannot exercise a demand feature on
not more than seven days' notice and as to which there is no secondary market
and repurchase agreements providing for settlement more than seven days after
notice.
Obligations of Foreign Governments, Banks and Corporations. The Master Portfolio
may invest in U.S. dollar-denominated short-term obligations issued or
guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities that are determined by its
investment adviser to be of comparable quality to the other obligations in which
the Master Portfolio may invest.
To the extent that such investments are consistent with its investment
objective, the Master Portfolio may also invest in debt obligations of
supranational entities. Supranational entities include international
organizations designated or supported by governmental entities to promote
economic reconstruction or development and international banking institutions
and related government agencies. Examples include the International Bank for
Reconstruction and Development (the World Bank), the European Coal and Steel
Community, the Asian Development Bank and the InterAmerican Development Bank.
The percentage of the Master Portfolio's assets invested in obligations of
foreign governments and supranational entities will vary depending on the
relative yields of such securities, the economic and financial markets of the
countries in which the investments are made and the interest rate climate of
such countries.
The Master Portfolio may also invest a portion of its total assets in high
quality, short-term (one year or less) debt obligations of foreign branches of
U.S. banks or U.S. branches of foreign banks that are denominated in and pay
interest in U.S. dollars.
U.S. Government Obligations. The Master Portfolio may invest in various types of
U.S. Government obligations. U.S. Government obligations include securities
issued or guaranteed as to principal and interest by the U.S. Government, 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.
Unrated, Downgraded and Below Investment Grade Investments. The Master Portfolio
may purchase instruments that are not rated if, in the opinion of its investment
advisor, such obligations are of investment quality comparable to other rated
investments that are permitted to be purchased by the Master Portfolio. After
purchase by the Master Portfolio, a security may cease to be rated or its rating
may be reduced below the minimum required for purchase by the Master Portfolio.
Neither event will require a sale of such security by the Master Portfolio
provided that the amount of such securities held by the Master Portfolio does
not exceed 5% of the Master Portfolio's net assets. To the extent the ratings
given by Moody's or S&P may change as a result of changes in such organizations
or their rating systems, the Master Portfolio will attempt to use comparable
ratings as standards for investments in accordance with the investment policies
contained in this SAI. The ratings of Moody's and S&P are more fully described
in the Appendix to this SAI.
Because the Master Portfolio is not required to sell downgraded securities, the
Master Portfolio could hold up to 5% of its net assets in debt securities rated
below "Baa" by Moody's or below "BBB" by S&P or in unrated, low quality (below
investment grade) securities. Although they may offer higher yields than do
higher rated securities, low rated, and unrated, low quality debt securities
generally involve greater volatility of price and risk of principal and income,
including the possibility of default by, or bankruptcy of, the issuers of the
securities. In addition, the markets in which low rated and unrated, low quality
debt are traded are more limited than those in which higher rated securities are
traded. The existence of limited markets for particular securities may diminish
the Master Portfolio's ability to sell the securities at fair value either to
meet redemption requests or to respond to changes in the economy or in the
financial markets and could adversely affect and cause fluctuations in the daily
net asset value of the Master Portfolio's shares.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of low rated or unrated, low
quality debt securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated or unrated, low quality debt securities
may be more complex than for issuers of higher rated securities, and the ability
of the Master Portfolio to achieve its investment objective may, to the extent
it holds low rated or unrated low quality debt securities, be more dependent
upon such creditworthiness analysis than would be the case if the Master
Portfolio held exclusively higher rated or higher quality securities.
Borrowing Money. As a fundamental policy, the Master Portfolio is permitted to
borrow to the extent permitted under the 1940 Act. However, the Master Portfolio
currently intends to borrow money only for temporary or emergency (not
leveraging) purposes, and may borrow up to one-third of the value of its total
assets (including the amount borrowed) valued at the lesser of cost or market,
less liabilities (not including the amount borrowed) at the time the borrowing
is made. While borrowings exceed 5% of the Master Portfolio's total assets, the
Master Portfolio will not make any new investments.
Securities Related Businesses. The 1940 Act limits the ability of the Fund to
invest in securities issued by companies deriving more than 15% of their gross
revenues from securities related activities ("financial companies"). If the S&P
500 Index provides a higher concentration in one or more financial companies,
the Fund may experience increased tracking error due to the limitations on
investments in such companies.
Portfolio Turnover Rate. The portfolio turnover rate for the Master Portfolio
generally is not expected to exceed 50%. This portfolio turnover rate will not
be a limiting factor when the investment advisor deems portfolio changes
appropriate.
Index Changes. The stocks comprising the S&P 500 Index are changed from time to
time. Announcements of those changes and related market activity may result in
reduced returns or volatility for the Fund.
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 Fund's
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 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'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.
In addition, many foreign countries were less prepared than the United States to
properly process and calculate information related to dates from and after
January 1, 2000, which could result in difficulty pricing foreign investments
and failure by foreign issuers to pay timely dividends, interest or principal.
All of these factors can make foreign investments especially those in emerging
markets, more volatile and potentially less liquid than U.S. investments. The
extent of such impact cannot be predicted.
FUND POLICIES
Fundamental Investment Restrictions
The following are the Fund's fundamental investment restrictions which, along
with the Fund's investment objective, cannot be changed without shareholder
approval by a vote of a majority of the outstanding shares of the Fund, as set
forth in the 1940 Act.
Unless noted otherwise, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in percentage resulting from a change
in the Fund's assets (i.e., due to cash inflows or redemptions) or in market
value of the investment or the Fund's assets will not constitute a violation of
that restriction. 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:
1. may not invest more than 5% of its assets in the obligations of any single
issuer, except that up to 25% of the value of its total assets may be
invested, and securities issued or guaranteed by the U.S. government, or
its agencies or instrumentalities may be purchased, without regard to any
such limitation;
2. may not with respect to 75% of its total assets, invest in a security if,
as a result of such investment, it would hold more than 10% (taken at the
time of such investment) of the outstanding securities of any one issuer;
3. may not issue senior securities, except as permitted under the 1940 Act;
4. may (1) borrow money from banks and (2) make other investments or engage
in other transactions permissible under the 1940 Act which may involve a
borrowing, provided that the combination of (1) and (2) shall not exceed
33 1/3% of the value of the Fund's total assets (including the amount
borrowed), less the Fund's liabilities (other than borrowings), except
that the Fund may borrow up to an additional 5% of its total assets (not
including the amount borrowed) from a bank for temporary or emergency
purposes (but not for leverage or the purchase of investments). The Fund
may also borrow money from other persons to the extent permitted by
applicable law;
5. may not act as an underwriter of another issuer's securities, except to
the extent that the Fund may be deemed to be an underwriter within the
meaning of the Securities Act of 1933, as amended, in connection with the
disposition of portfolio securities;
6. may not purchase the securities of any issuer if, as a result, more than
25% of the Fund's total assets (taken at market value at the time of such
investment) would be invested in the securities of issuers in any
particular industry, except that this restriction does not apply to
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities (or repurchase agreements thereto);
7. may not purchase or sell real estate, although it may purchase securities
secured by real estate or interests therein, or securities issued by
companies which invest in real estate, or interests therein;
8. may not purchase or sell physical commodities or commodities contracts or
oil, gas or mineral programs. This restriction shall not prohibit the
Fund, subject to restrictions described in the Prospectus and elsewhere in
this Statement of Additional Information, from purchasing, selling or
entering into futures contracts, options on futures contracts and other
derivative instruments, subject to compliance with any applicable
provisions of the federal securities or commodities laws;
9. may not lend any funds or other assets, except that the Fund may,
consistent with its investment objective and policies: (a) invest in
certain short-term or temporary debt obligations, even though the purchase
of such obligations may be deemed to be the making of loans, (b) enter
into repurchase agreements, and (c) lend its portfolio securities in an
amount not to exceed 33 1/3% of the Fund's total assets, provided such
loans are made in accordance with applicable guidelines established by the
Securities and Exchange Commission and the directors of the Fund.
Non-Fundamental Operating Restrictions
The following are the Fund's non-fundamental operating restrictions, which may
be changed by the Fund's Board of Trustees without shareholder approval.
Unless indicated otherwise below, the Fund may not:
1. pledge, mortgage or hypothecate its assets, except to the extent necessary
to secure permitted borrowings and to the extent related to the purchase
of securities on a when-issued or forward commitment basis and the deposit
of assets in escrow in connection with writing covered put and call
options and collateral and initial or variation margin arrangements with
respect to options, forward contracts, futures contracts, including those
relating to indexes, and options on futures contracts or indexes;
2. purchase securities of other investment companies, except to the extent
permitted under the 1940 Act;
3. invest in illiquid securities if, as a result of such investment, more
than 15% of its net assets would be invested in illiquid securities, or
such other amounts as may be permitted under the 1940 Act; and
4. may, notwithstanding any other fundamental or non-fundamental investment
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. The fundamental investment
objective, policies and restrictions of the Master Portfolio listed below
are deemed to be substantially the same as 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. If a percentage restriction is adhered to at the time of
investment, a later change in percentage resulting from a change in values or
assets (except with respect to compliance with fundamental investment
restriction number 5), will not constitute a violation of such restriction.
The Master Portfolio may not:
1. invest more than 5% of its assets in the obligations of any single issuer,
except that up to 25% of the value of its total assets may be invested,
and securities issued or guaranteed by the U.S. Government, or its
agencies or instrumentalities may be purchased, without regard to any such
limitation;
2. hold more than 10% of the outstanding voting securities of any single
issuer. This investment restriction applies only with respect to 75% of
its total assets;
3. issue any senior security (as such term is defined in Section 18(f) of the
1940 Act), except to the extent the activities permitted in the Master
Portfolio's fundamental policies (4) and (8) may be deemed to give rise to
a senior security;
4. borrow money, except to the extent permitted under the 1940 Act, except
that the Master Portfolio may borrow up to 20% 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 20% of the current
value of its net assets (but investments may not be purchased while any
such outstanding borrowing in excess of 5% of the Master Portfolio's net
assets exists). For purposes of this investment restriction, the Master
Portfolio's entry into options, forward contracts, futures contracts,
including those relating to indexes, and options on futures contracts or
indexes shall not constitute borrowing to the extent certain segregated
accounts are established and maintained by the Master Portfolio;
5. act as an underwriter of securities of other issuers, except to the extent
that the Master Portfolio may be deemed an underwriter under the
Securities Act of 1933, as amended, by virtue of disposing of portfolio
securities;
6. invest 25% or more of its total assets in the securities of issuers in any
particular industry or group of closely related industries except that
there shall be no limitation with respect to investments in (i)
obligations of the U.S. Government, its agencies or instrumentalities; or
(ii) any industry in which the S&P 500 Index becomes concentrated to the
same degree during the same period, the Master Portfolio will be
concentrated as specified above only to the extent the percentage of its
assets invested in those categories of investments is sufficiently larger
than 25% or more of its total assets would be invested in a single
industry;
7. purchase, hold or deal in real estate, or oil, gas or other mineral leases
or exploration or development programs, but the Master Portfolio may
purchase and sell securities that are secured by real estate or issued by
companies that invest or deal in real estate;
8. invest in commodities, except that the Master Portfolio may purchase and
sell (i.e., write) options, forward contracts, futures contracts,
including those relating to indexes, and options on futures contracts or
indexes;
9. make loans to others, except through the purchase of debt obligations and
the entry into repurchase agreements. However, the Master Portfolio may
lend its portfolio securities in an amount not to exceed one-third of the
value of its total assets. Any loans of portfolio securities will be made
according to guidelines established by the SEC and the Master Portfolio's
Board of Trustees; and
10. purchase securities on margin, but the Master Portfolio may make margin
deposits in connection with transactions in options, forward contracts,
futures contracts, including those related to indexes, and options on
futures contracts or indexes;
Non-Fundamental Operating Policies
The Master Portfolio is subject to the following non-fundamental policies which
may be changed by a vote of the majority of 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 charge 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 15% 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 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, Treasurer 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
4500 Bohannon Drive, and Chief Executive Officer
Menlo Park, CA 94025 of InvestorReach (which is a
consulting firm specializing in
marketing and distribution
strategies for financial
services companies formed in
October 1996). From 1992 to
1996, she was a partner and
President of Nicholas Applegate
Mutual Funds, a division of
Nicholas Applegate Capital
Management.
Steven Grenadier (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 is President of
4500 Bohannon Drive, E*TRADE Asset Management. She
Menlo Park, CA 94025 joined E*TRADE Asset
Management in March 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), and prior to that
he was an Assistant Vice
President of Maryland National
Bank.
<FN>
- --------------
(1) Ms. Meyers may be considered an "interested person," but she is not an
"affiliated person," as 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:
Compensation Table
- ---------------------------------------------------------------
Total Compensation
Name of Person, Aggregate From Fund and Fund
Position Compensation from Complex Paid to
the Fund (1) Trustees(2)
- ---------------------------------------------------------------
Leonard C. Purkis, None None
Trustee
Shelly J. Meyers (3) $7,500 $22,500
Ashley T. Rabun $7,500 $22,500
Steven Grenadier $7,500 $22,500
George J. Rebhan $7,500 None
No Trustee will receive any benefits upon retirement. Thus, no pension or
retirement benefits have accrued as part of the Fund's expenses.
- ------------------
(1) This amount represents the estimated aggregate amount of compensation paid
to each non-affiliated Trustee for service on the Board of Trustees for
the fiscal year ending December 31, 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.
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
As of April 3, 2000, no shareholder owned more than 5% of the Fund's outstanding
equity securities. 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.
As of the date of this SAI, the Trustees and Officers of the Fund as a group
owned less than 1% of the Fund's equity securities.
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 March 31,
2000, the Investment Advisor provided investment advisory services for over $277
million in assets.
Subject to the general supervision of the E*TRADE Funds' Board of Trustees and
in accordance with the investment objective, policies and restrictions of the
Fund, the Investment Advisor provides the Fund with ongoing investment guidance,
policy direction and monitoring of the Master Portfolio. The Investment Advisor
may in the future manage cash and money market instruments for cash flow
purposes. For its advisory services, the Fund currently 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 a master portfolio. To the extent
the Fund has assets that are not invested in a master portfolio in the future,
the Fund would pay the Investment Advisor an investment advisory fee at an
annual rate equal to 0.07% of that portion of the Fund's assets not invested in
a master portfolio. The Fund paid the Investment Advisor approximately $4,745
for its investment advisory services to the Fund in 1999.
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 December 31, 1999, Barclays Global
Investors and its affiliates, including BGFA, provided investment advisory
services for over $783 billion of assets. Pursuant to an Investment Advisory
Contract (the "Advisory Contract") with the Master Portfolio BGFA provides the
Master Portfolio with investment guidance and policy direction in connection
with the daily portfolio management of the Master Portfolio, subject to the
supervision of the Master Portfolio's Board of Trustees and in conformity with
Delaware law and the stated policies of the Master Portfolio. Pursuant to the
Advisory Contract, BGFA furnishes to the Master Portfolio's Board of Trustees
periodic reports on the investment strategy and performance of the Master
Portfolio. BGFA receives a monthly fee from the Master Portfolio at an annual
rate equal to 0.05% of the Master Portfolio's average daily net assets. This
advisory fee is an expense of the Master Portfolio borne proportionately by its
interestholders, including the Fund.
The Advisory Contract is subject to approval annually (i) by the holders of a
majority of the Master Portfolio's outstanding voting securities or by the
Master Portfolio's Board of Trustees and (ii) by a majority of the Trustees of
the Master Portfolio who are not parties to the Advisory Contract or affiliated
of any such party. The Advisory Contract may be terminated on 60 days' written
notice by either party 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 overall net result. When BGFA, subject to the supervision of, and the
overall authority of the Master Portfolio's Board of Trustees; 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 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 inside information in its possession.
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. Furthermore, except as provided in the advisory contract,
Stephens and BGI bear substantially all the costs of the Master Portfolio and
the Master Portfolio's operations. 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. Investors Bank & Trust Company, as sub-administrator, is
compensated by BGI for performing certain administration 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.
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 0.25% 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 trustee 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
0.27% of the 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 0.32%), and this agreement has the same term as the administrative
services agreement. The administrative services agreement is subject to annual
review after the first two years, subject to termination on 60 days' written
notice. The administrative service agreement terminates automatically if
assigned. The Fund paid the Administrator approximately $59,316 for its services
to the Fund in 1999 under the administrative services agreement. 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. IBT acts as the Master Portfolio's transfer agent and
dividend-disbursing agent.
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, 350 South Grand Avenue, Los
Angeles, CA 90071-3462, 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.
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.
Brokers are also selected because of their ability to handle special executions
such as are involved in large block trades or broad distributions, provided the
primary consideration is met. Portfolio turnover may vary from year to year, as
well as within a year. High turnover rates over 100% are likely to result in
comparatively greater brokerage expenses.
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. Assets in which the Fund invests may
trade and fluctuate in value after the close and before the opening of the NYSE.
Telephone and Internet Redemption Privileges. The Fund employs reasonable
procedures to confirm that instructions communicated by telephone or the
Internet are genuine. The Fund may not be liable for losses due to unauthorized
or fraudulent instructions. Such procedures include but are not limited to
requiring a form of personal identification prior to acting on instructions
received by telephone or the Internet, providing written confirmations of such
transactions to the address of record, tape recording telephone instructions and
backing up Internet transactions.
Redemption In-Kind. The Fund has elected to be governed by Rule 18f-1 under the
1940 Act pursuant to which it is obligated to redeem shares solely in cash up to
the lesser of $250,000 or 1% of the net asset value of the Fund during any
90-day period for any one shareholder. Redemptions in excess of these amounts
will normally be paid in cash, but may be paid wholly or partly by a
distribution in kind of securities. If a redemption is made in-kind, the
redeeming shareholder would bear any transaction costs incurred in selling the
securities received.
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.
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 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.
Historic data on the S&P 500 Index may be used to promote the Fund. The
historical S&P 500 Index data presented from time to time is not intended to
suggest that an investor would have achieved comparable results by investing in
any one equity security or in managed portfolios of equity securities, such as
the Fund, during the periods shown.
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.
The Fund has elected and intends to qualify each year as a "regulated investment
company" under Subchapter M of the Internal Revenue Code. If so qualified, the
Fund will not be subject to federal income tax to the extent it distributes its
net income to shareholders.
Standard & Poor's
The Fund relies on a license related to the S&P 500 Index. In the absence of the
license, the Fund may not be able to pursue its investment objective. Although
not currently anticipated, the license can be terminated.
The Fund is not sponsored, endorsed, sold or promoted by Standard & Poor's, a
division of The McGraw-Hill Companies, Inc. ("S&P"). S&P makes no representation
or warranty, express or implied, to the owners of the Fund or any member of the
public regarding the advisability of investing in securities generally or in the
Fund particularly or the ability of the S&P 500 Index to track general stock
market performance. S&P's only relationship to E*TRADE Asset Management or the
Fund is the licensing of certain trademarks and trade names of S&P and of the
S&P 500 Index which is determined, composed and calculated by S&P without regard
to E*TRADE Asset Management or the Fund. S&P has no obligation to take the needs
of E*TRADE Asset Management, the Fund or the shareholders into consideration in
determining, composing or calculating the S&P 500 Index. S&P is not responsible
for and has not participated in the determination of the prices and amount of
the Fund or the timing of the issuance or sale of shares of the Fund or in the
determination or calculation of the equation by which the Fund is to be
converted into cash. S&P has no obligation or liability in connection with the
administration, marketing or trading of the Fund.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500 Index
or any data included therein and S&P shall have no liability for any errors,
omissions, or interruptions therein. S&P makes no warranty, express or implied,
as to results to be obtained by the Fund the shareholders, or any other person
or entity from the use of the S&P 500 Index or any data included therein. S&P
makes no express or implied warranties, and expressly disclaims all warranties
of merchantability or fitness for a particular purpose or use with respect to
the S&P 500 Index or any data included therein. Without limiting any of the
foregoing, in no event shall S&P have any liability for any special, punitive,
indirect, or consequential damages (including lost profits), even if notified of
the possibility of such damages.
<PAGE>
APPENDIX
Description of 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.
<PAGE>
4500 Bohannon Drive
Menlo Park, CA 94025
Telephone: (650) 331-6000
Toll-Free: (800) 786-2575
Internet: http://www.etrade.com
<PAGE>
E*TRADE FUNDS
E*TRADE EXTENDED MARKET INDEX FUND
Prospectus dated May 1, 2000
This Prospectus concisely sets forth information about the E*TRADE Extended
Market Index Fund (the "Fund") that an investor needs to know before investing.
Please read this Prospectus carefully before investing, and keep it for future
reference. The Fund is a series of E*TRADE Funds.
Objectives, Goals and Principal Strategies.
The investment objective of the Fund is to match as closely as practicable,
before fees and expenses, the performance of the Wilshire 4500 Equity Index,
commonly known as the Extended Market Index. The Fund seeks to achieve its
objective by investing in a master portfolio. The Master Portfolio, in turn,
invests in a representative sample of those U.S. securities that comprise the
Wilshire 4500 Index and are selected in accordance with their capitalization,
industry sector and valuation, among other factors.
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 designed for
long-term investors and the value of the Fund's shares will fluctuate over time.
The Fund is a true no-load fund, which means you pay no sales charges or 12b-1
fees.
About E*TRADE.
E*TRADE Group, Inc. ("E*TRADE") is the direct parent of E*TRADE Asset
Management, Inc., the Fund's investment advisor. E*TRADE, through its group
companies, is a leader in providing secure online investing services. E*TRADE's
focus on technology has enabled it to eliminate traditional barriers, creating
one of the most powerful and economical investing systems for the self-directed
investor. To give you ultimate convenience and control, E*TRADE offers
electronic access to your account virtually anywhere, at any time.
An investment in the Fund is:
o not insured by the Federal Deposit Insurance Corporation;
o not a deposit or other obligation of, or guaranteed by, E*TRADE Bank and
its affiliates; and
o subject to investment risks, including loss of principal.
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 May 1, 2000
<PAGE>
TABLE OF CONTENTS
RISK/RETURN SUMMARY....................................................4
FEES AND EXPENSES......................................................5
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS.....................7
FUND MANAGEMENT........................................................9
THE FUND'S STRUCTURE..................................................10
PRICING OF FUND SHARES................................................10
HOW TO BUY, SELL AND EXCHANGE SHARES..................................11
DIVIDENDS AND OTHER DISTRIBUTIONS.....................................17
TAX CONSEQUENCES......................................................17
<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 match as closely as practicable, before
fees and expenses, the performance of the Wilshire 4500 Index.
Principal Strategies
The Fund seeks to achieve its investment objective by investing all of its
assets in the Extended Index Master Portfolio ("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 a portfolio that approximates the investment
characteristics and performance of the Wilshire 4500 Index.
The Wilshire 4500 Index is composed of over 6,500 equity securities of issuers
headquartered in the United States. The Wilshire 4500 Index is almost entirely
comprised of common stocks listed on the New York Stock Exchange, American Stock
Exchange or Nasdaq Stock Market, excluding the 500 largest capitalization
stocks. Many of the companies whose securities comprise the Wilshire 4500 Index
are small- to medium-capitalization companies. The weightings of stocks in the
Wilshire 4500 Index are based on each stock's relative total market
capitalization; that is, its market price per share times the number of shares
outstanding. The Master Portfolio invests in a representative sample of these
securities. The Master Portfolio selects securities for investment in accordance
with their capitalization, industry sector and valuation, among other factors.
The Master Portfolio attempts to be fully invested at all times in securities
comprising the Wilshire 4500 Index. It also may invest up to 10% of its assets
in futures contracts and options on futures contracts, which may be considered
derivatives, and high-quality money market instruments to provide liquidity. The
Master Portfolio may also invest up to 15% of the value of its net assets in
illiquid securities, including repurchase agreements providing for settlement in
more than seven days.
Principal Risks
The stock market may rise and fall daily. The Wilshire 4500 Index represents a
significant segment of the U.S. stock market. The Wilshire 4500 Index may also
rise and fall daily. As with any stock investment, the value of your investment
in the Fund will fluctuate, meaning you could lose money.
* Wilshire Associates, Inc. ("Wilshire Associates") does not sponsor the Fund or
the Master Portfolio, nor is it affiliated in any way with the Fund or the
Master Portfolio or their respective investment advisors. "Wilshire 4500 Equity
Index(R)," "Wilshire 4500 Index(R)," and "Wilshire 4500(R)," are trademarks of
Wilshire Associates Incorporated and have been licensed for use by E*TRADE Asset
Management, Inc. The Fund and the Master Portfolio are not sponsored, endorsed,
sold, or promoted by Wilshire Associates, and neither Wilshire Associates nor
the Wilshire 4500 Index makes any representation or warranty, express or
implied, regarding the advisability of investing in the Fund or the Master
Portfolio.
There is no assurance that the Fund will achieve its investment objective. The
Wilshire 4500 Index may not appreciate, and could depreciate, during the time
you are invested in the Fund, even if you are a long-term investor.
The Fund cannot as a practical matter own all the equity securities that make up
the Wilshire 4500 Index in perfect correlation to the Wilshire 4500 Index
itself. The use of futures and options on futures contracts is intended to help
the Fund match the Wilshire 4500 Index but that may not be the result. The value
of an investment in the Fund depends to a great extent upon changes in market
conditions. The Fund seeks to track the Wilshire 4500 Index during down markets
as well as during up markets. The Fund's returns will be directly affected by
the volatility of the equity securities making up the Wilshire 4500 Index. The
Fund will also have exposure to the industries represented by those equity
securities.
Small- to medium-capitalization companies are more susceptible to market
fluctuations than securities of larger capitalization companies. As a result,
whenever these stocks perform worse than large-capitalization stocks, the Fund
may underperform funds that have exposure to larger capitalization segments of
the U.S. stock market. Likewise, whenever small to medium-capitalization U.S.
stocks fall behind other types of investments--bonds or foreign stocks, for
instance--the Fund's performance also will lag behind those investments. The
companies in the Wilshire 4500 Index are also exposed to the global economy.
An investment in the Fund is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Shares of the Fund involve investment risks, including the possible loss
of principal.
Performance
This Fund commenced operations on August 13, 1999. 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 limited historical
expense data.
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 (as a percentage of redemption
proceeds, payable only if shares are redeemed within 1.00%*
four months of purchase)
Annual Fund Operating Expenses**
(expenses that are deducted from Fund assets)
Management Fees 0.10%***
Distribution (12b-1) Fees None
Other Expenses 0.48%
Administration 0.28%****
Trustee Expenses 0.20%*****
----------
Total Annual Fund Operating Expenses 0.58%
------
Fee Waiver and/or Reimbursement (0.20%)******
Net Expenses 0.38%
* Effective for redemptions after September 30, 2000. For Shares redeemed before
October 1, 2000 and within four months from the date of purchase, the redemption
fee is 0.50%.
** The cost reflects the expenses at both the Fund and the Master Portfolio
levels. Effective February 22, 2001, fees at the Master Portfolio level will
increase by up to 0.01% to reflect custodial fees paid by the Master Portfolio.
The Fund's total annual fund operating expenses will increase to reflect the
change at the Master Portfolio level, but the increase is not presented in the
fee table at this time.
*** Management fees include a fee equal to 0.08% of daily net assets payable at
the Master Portfolio level to its investment advisor and an investment advisory
fee equal to 0.02% payable by the Fund to its investment advisor.
**** The administration fees include a fee equal to 0.02% of daily net assets
payable at the Master Portfolio level to its co-administrators and a fee equal
to 0.26% payable by the Fund to its administrator, E*TRADE Asset Management,
Inc.
*****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 table reflects an estimate for the current
year.
******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 0.38%. 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 August 12, 1999 and
terminating on August 12, 2001. 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*
$40 $148
*Reflects costs at both the Fund and Master Portfolio levels.
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS
The Fund's investment objective is to match as closely as practicable, before
fees and expenses, the performance of the Extended Market Index.
Under normal market conditions, the Master Portfolio invests at least 90% of the
value of its total assets in the securities comprising the Wilshire 4500 Index.
That portion of its assets is not actively managed but is designed to
substantially duplicate the investment performance of the Wilshire 4500 Index.
As investment advisor to the Master Portfolio, Barclays Global Fund Advisors
("BGFA") regularly monitors the Master Portfolio's correlation to the Wilshire
4500 Index and adjusts the Master Portfolio's portfolio to the extent necessary.
At times, the portfolio composition of the Master Portfolio may be altered (or
"rebalanced") to reflect changes in the characteristics of the Wilshire 4500
Index. Inclusion of a security in the Wilshire 4500 Index in no way implies an
opinion by Wilshire Associates as to its attractiveness as an investment.
The Master Portfolio also may enter into transactions in futures contracts and
options on futures contracts, each of which involves risks. The futures
contracts and options on futures contracts that the Master Portfolio may
purchase may be considered derivatives. Derivatives are financial instruments
whose values are derived, at least in part, from the prices of other securities
or specified assets, indices, or rates. The Master Portfolio intends to use
futures contracts and options as part of its short-term liquidity holdings
and/or comparable market positions in the underlying securities. Some
derivatives may be more sensitive than direct securities to changes in interest
rates or sudden market moves. Some derivatives also may be susceptible to
fluctuations in yield or value due to their structure or contract terms.
The Master Portfolio also uses these derivatives to minimize the gap in
performance that naturally exists between any index fund and its index. This gap
will occur mainly because, unlike the Wilshire 4500 Index, the Master Portfolio
and the Fund incur expenses and must keep a portion of their assets in cash for
paying expenses and processing shareholder redemptions. By using futures, the
Master Portfolio potentially can offset the portion of the gap attributable to
their cash holdings. However, because some of the effect of expenses remains,
the Master Portfolio and the Fund's performance normally will be below that of
the Wilshire 4500 Index. The Master Portfolio also uses futures contracts to
gain exposure to the Wilshire 4500 Index for its cash balances, which could
cause the Fund to track the Wilshire 4500 Index less closely if the futures
contracts do not perform as expected.
Like all equity funds, the Fund's Net Asset Value ("NAV") will fluctuate with
the value of its assets. The assets held by the Fund will fluctuate based on
market and economic conditions, or other factors that affect particular
companies or industries.
Since the investment characteristics and therefore, the investment risks of the
Fund, correspond to those of the Master Portfolio, the following discussion also
includes a description of the risks associated with the investments of the
Master Portfolio. The Fund's performance before Fund-level fees will correspond
directly to the performance of the Master Portfolio.
Neither the Fund nor the Master Portfolio are managed according to traditional
methods of "active" investment management, which involve the buying and selling
of securities based upon economic, financial and market analysis and investment
judgment. Instead, the Fund and the Master Portfolio are managed by utilizing an
"indexing" investment approach to determine which securities are to be purchased
or sold to replicate, to the extent feasible, the investment characteristics of
the Wilshire 4500 Index through computerized, quantitative techniques.
The Fund's ability to match its investment performance to the investment
performance of the Wilshire 4500 Index may be affected by, among other things:
the Fund and the Master Portfolio's expenses; the amount of cash and cash
equivalents held by the Master Portfolio; the manner in which the total return
of the Wilshire 4500 Index is calculated; the size of the Master Portfolio's
investment portfolio; the Master Portfolio's use of futures and options
transactions and other derivative securities transactions; Master Portfolio's
lending of its portfolio securities; and the timing, frequency and size of
shareholder purchases and redemptions of both the Fund and the Master Portfolio.
The Master Portfolio uses cash flows from shareholder purchase and redemption
activity to maintain, to the extent feasible, the similarity of its
capitalization range and returns to those of the securities comprising the
Wilshire 4500 Index.
Many factors can affect stock market performance. Political and economic news
can influence marketwide trends; the outcome may be positive or negative,
short-term or long-term. Other factors may be ignored by the market as a whole
but may cause movements in the price of one company's stock or the stocks of one
or more industries (for example, rising oil prices may lead to a decline in
airline stocks).
The recent growth rate in the stock market has helped produce short-term
positive returns that are not typical historically and may not continue in the
future. Because of ongoing market volatility, the Fund's performance may be
subject to substantial short-term changes.
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 March 31, 2000, the Investment Advisor provided
investment advisory services for over $277 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.
The Master Portfolio's investment advisor is Barclays Global Fund Advisors
("BGFA"). BGFA is a wholly owned 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
December 31, 1999, Barclays Global Investors and its affiliates, including BGFA,
provided investment advisory services for over $783 billion of assets. BGFA
receives a monthly advisory fee from the Master Portfolio at an annual rate
equal to 0.08% 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 administration, 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 seeks to provide investment results that match as closely as
practicable, before fees and expenses, the performance of the Wilshire 4500
Index. In addition to selling its shares to the Fund, the Master Portfolio has
and may continue to sell its shares to certain other mutual funds or other
accredited investors. The expenses and, correspondingly, the returns of other
investment options in the Master Portfolio may differ from those of the Fund.
The Fund's Board 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's assets
are valued generally by using available market quotations or at fair value as
determined in good faith by the Board of Trustees of MIP.
The Fund's NAV per share is calculated by taking the value of the Fund's net
assets and dividing by the number of shares outstanding. Expenses are accrued
daily and applied when determining the NAV.
The NAV for the Fund is determined as of the close of trading on the floor of
the NYSE (generally 4:00 p.m., Eastern time), each day the NYSE is open. The
Fund reserves the right to change the time at which purchases, redemptions 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. All shares must be held in an E*TRADE Securities account and cannot be
transferred to the account of any other financial institution. 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, proxies, 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 $1,000
To buy additional shares of the Fund $ 250
Continuing minimum investment* $1,000
To invest in the Fund for your IRA, Roth IRA,
or one-person SEP account $ 250
To invest in the Fund for your Education IRA account $ 250
To invest in the Fund for your UGMA/UTMA account $ 250
To invest in the Fund for your SIMPLE, SEP-IRA,
Profit Sharing or Money Purchase Pension Plan,
or 401(a) account $ 250
* Your shares may be automatically redeemed if, as a result of selling or
exchanging shares, you no longer meet a Fund's minimum balance requirements.
Before taking such action, the Fund will provide you with written notice and at
least 30 days to buy more shares to bring your investment up to $1,000.
After your account is established you may use 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 generally 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. Please note that the fee the Fund
assesses on redemptions of Fund shares redeemed after September 30, 2000, and
held for less than four months is 1.00%. Redemptions of shares redeemed prior to
October 1, 2000 and held for less than four months are subject to a 0.50%
redemption fee. 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 if it
believes it advisable to do so.
Investors will bear the risk of loss from fraudulent or unauthorized
instructions received over the telephone provided that the Fund reasonably
believes that such instructions are genuine. The Fund and its transfer agent
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. The Fund may incur liability if it does not follow these
procedures.
Due to increased telephone volume during periods of dramatic economic or market
changes, you may experience difficulty in implementing a broker-assisted
telephone redemption. In these situations, investors may want to consider
trading online by accessing our Website or use TELE*MASTER, E*TRADE Securities'
automated telephone system, to effect such a transaction by calling
1-800-STOCKS1 (1-800-786-2571).
Signature Guarantee. For your protection, certain requests may require a
signature guarantee.
A signature guarantee is designed to protect you and the Fund against fraudulent
transactions by unauthorized persons. In the following instances, the Fund will
require a signature guarantee for all authorized owners of an account:
1. If you transfer the ownership of your account to another individual or
organization.
2. When you submit a written redemption for more than $25,000.
3. When you request that redemption proceeds be sent to a different name or
address than is registered on your account.
4. If you add or change your name or add or remove an owner on your account.
5. If you add or change the beneficiary on your transfer-on-death account.
For other registrations, access E*STATION through our Website or call
1-800-786-2575 for instructions.
You will have to wait to redeem your shares until the funds you use to buy them
have cleared (e.g., your check has cleared).
The right of redemption may be suspended during any period in which (i) trading
on the NYSE is restricted, as determined by the SEC, or the NYSE is closed for
other than weekends and holidays; (ii) the SEC has permitted such suspension by
order; or (iii) an emergency as determined by the SEC exists, making disposal of
portfolio securities or valuation of net assets of the Fund not reasonably
practicable.
Redemption Fee. The Fund can experience substantial price fluctuations and is
intended for long-term investors. Short-term "market timers" who engage in
frequent purchases, redemptions or exchanges can disrupt the Fund's investment
program and increase costs. To discourage short-term trading, the Fund assesses
a redemption fee on shares held for less than four months. The redemption fee of
the Fund will increase to 1.00% for shares which are redeemed after October 1,
2000, and which have been held for less than four months from the date of
purchase. Before October 1, the fee is 0.50%.
Any redemption fees imposed will be paid to the Fund to help offset transaction
costs. The Fund will use the "first-in, first-out" (FIFO) method to determine
the four month holding period. Under this method, the date of the redemption
will be compared with the earliest purchase date of shares held in the account.
If this holding period is less than four months, the fee will be assessed. The
fee may apply to shares held through omnibus accounts or certain retirement
plans.
The Fund may waive the redemption fee from time to time in its sole discretion.
The Fund may also change the redemption fee and the period it applies for shares
to be issued in the future.
Redemption In-Kind. The Fund reserves the right to honor any request for
redemption or repurchases by making payment in whole or in part in readily
marketable securities ("redemption in-kind"). These securities will be chosen by
the Fund and valued as they are for purposes of computing the Fund's NAV. You
may incur transaction expenses in converting these securities to cash.
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 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 pay dividends from net investment income quarterly and
distribute capital gains, if any, annually. The Fund may make additional
distributions if necessary.
Unless you choose otherwise, all your dividends and capital gain distributions
will be automatically reinvested in additional Fund shares. Shares are purchased
at the net asset value determined on the payment date.
TAX CONSEQUENCES
The Fund's total returns do not show the effects of income taxes on an
individual's investment.
The following information is meant as a general summary for U.S. taxpayers.
Please see the Fund's Statement of Additional Information for more information.
You should rely on your own tax advisor for advice about the particular federal,
state and local tax consequences to you of investing in the Fund.
The Fund generally will not have to pay income tax on amounts it distributes to
shareholders, although shareholders will be taxed on distributions they receive.
The Fund will distribute substantially all of its income and gains to its
shareholders every year. If the Fund declares a dividend in October, November or
December but pays it in January, you may be taxed on the dividend as if you
received it in the previous year.
You will generally be taxed on dividends you receive from the Fund, regardless
of whether they are paid to you in cash or are reinvested in additional Fund
shares. If the Fund designates a dividend as a capital gain distribution, (e.g.,
when the Fund has a gain from the sale of an asset the Fund held for more than
12 months), you will pay tax on that dividend at the long-term capital gains tax
rate, no matter how long you have held your Fund shares.
If you invest through a tax-deferred retirement account, such as an IRA, you
generally will not have to pay tax on dividends until they are distributed from
the account. These accounts are subject to complex tax rules, and you should
consult your tax advisor about investment through a tax-deferred account.
There may be tax consequences to you if you dispose of your Fund shares, for
example, through redemption, exchange or sale. You will generally have a capital
gain or loss from a disposition. The amount of the gain or loss and the rate of
tax will depend mainly upon how much you pay for the shares, how much you sell
them for, and how long you hold them. For example, if you sold at a gain Fund
shares that you had held for more than one year as a capital asset, then your
gain would be taxed at the long-term capital gains tax rate.
The Fund will send you a tax report each year that will tell you which dividends
must be treated as ordinary income and which (if any) are long-term capital
gain.
As with all mutual funds, the Fund may be required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to you if you
fail to provide the Fund with your correct taxpayer identification number or to
make required certifications, or if you have been notified by the IRS that you
are subject to backup withholding. Backup withholding is not an additional tax,
but is a method in which the IRS ensures that it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S. federal income tax
liability.
<PAGE>
[Outside back cover page.]
The Statement of Additional Information for the Fund, dated May 1, 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 which are
also incorporated into this Prospectus by reference. In the Fund's next 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 report
(dated February 29, 2000 and incorporated herein by reference) 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
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 (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 EXTENDED MARKET INDEX FUND
May 1, 2000
This Statement of Additional Information ("SAI") is not a prospectus and should
be read together with the Prospectus dated May 1, 2000 (as amended from time to
time) for the E*TRADE Extended Market Index Fund (the "Fund"), a separate series
of E*TRADE Funds. Unless otherwise defined herein, capitalized terms have the
meanings given to them in the Fund's Prospectus.
To obtain a free copy of the Fund's Prospectus and the Fund's most recent
shareholders report dated February 29, 2000 and incorporated herein by
reference, 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...............................................................13
TRUSTEES AND OFFICERS.......................................................17
INVESTMENT MANAGEMENT.......................................................21
SERVICE PROVIDERS...........................................................23
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION..............................25
ORGANIZATION, DIVIDEND AND VOTING RIGHTS....................................26
SHAREHOLDER INFORMATION.....................................................27
TAXATION....................................................................28
UNDERWRITER.................................................................31
MASTER PORTFOLIO ORGANIZATION...............................................32
PERFORMANCE INFORMATION.....................................................33
APPENDIX....................................................................39
<PAGE>
FUND HISTORY
The E*TRADE Extended Market Index Fund (the "Fund") is a diversified series of
E*TRADE Funds (the "Trust"). The Trust is organized as a Delaware business trust
and was formed on November 4, 1998.
THE FUND
The Fund is classified as a diversified open-end, management investment company.
The Fund's investment objective is to match as closely as practicable, before
fees and expenses, the performance of the Wilshire 4500 Equity Index (the
"Wilshire 4500 Index"), commonly known as the Extended Market Index. This
investment objective is fundamental and therefore, cannot be changed without
approval of a majority (as defined in the Investment Company Act of 1940 Act, as
amended ("1940 Act")) of the Fund's outstanding voting interests. The Fund seeks
to achieve its objective by investing in a master portfolio that in turn,
invests in a representative sample of those U.S. securities that comprise the
Wilshire 4500 Index and are selected in accordance with their capitalization,
industry sector and valuation, among other factors.
To achieve its investment objective, the Fund intends to invest all of its
assets in the Extended Index 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.
The Master Portfolio seeks to match as closely as practicable, before fees and
expenses, the performance of the Wilshire 4500 Index.
INVESTMENT STRATEGIES AND RISKS
The following supplements the discussion in the Prospectus of the Master
Portfolio's investment strategies, policies and risks. These investment
strategies and policies may be changed without shareholder approval of either
the Fund or the Master Portfolio unless otherwise noted.
Index Funds. The net asset value of index funds and funds which are not actively
managed, such as the Fund, may be disproportionately affected by the following
risks: short- and long-term changes in the characteristics of the companies
whose securities make up the index; modifications in the criteria for companies
selected to make up the index; suspension or termination of the operation of the
index; and the activities of issuers whose market capitalization represents a
disproportionate amount of the total market capitalization of the index.
Futures Contracts and Options Transactions. The Master Portfolio may use
futures as a substitute for a comparable market position in the underlying
securities.
A futures contract is an agreement between two parties, a buyer and a seller, to
exchange a particular commodity or financial instrument at a specific price on a
specific date in the future. An option transaction generally involves a right,
which may or may not be exercised, to buy or sell a commodity or financial
instrument at a particular price on a specified future date. Futures contracts
and options are standardized and traded on exchanges, where the exchange serves
as the ultimate counterparty for all contracts. Consequently, the primary credit
risk on futures contracts is the creditworthiness of the exchange. Futures
contracts are subject to market risk (i.e., exposure to adverse price changes).
The Master Portfolio may enter into futures contracts and may purchase and write
options thereon. Upon exercise of an option on a futures contract, the writer of
the option delivers to the holder of the option the futures position and the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the futures contract. The potential loss related to the purchase of options
on futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the time of
sale, there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of the Master Portfolio.
Although the Master Portfolio intends to purchase or sell futures contracts only
if there is an active market for such contracts, no assurance can be given that
a liquid market will exist for any particular contract at any particular time.
Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contract prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the Master
Portfolio to substantial losses. If it is not possible, or if the Master
Portfolio determines not to close a futures position in anticipation of adverse
price movements, the Master Portfolio will be required to make daily cash
payments on variation margin.
The Master Portfolio's futures transactions must constitute permissible
transactions pursuant to regulations promulgated by the Commodity Futures
Trading Commission ("CFTC"). In addition, the Master Portfolio may not engage in
futures transactions if the sum of the amount of initial margin deposits and
premiums paid for unexpired futures contracts, other than those contracts
entered into for bona fide hedging purposes, would exceed 5% of the liquidation
value of the Master Portfolio's assets, after taking into account unrealized
profits and unrealized losses on such contracts; provided, however, that in the
case of an option on a futures contract that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%
liquidation limit. Pursuant to regulations and/or published positions of the
SEC, the Master Portfolio may be required to segregate cash or high quality
money market instruments in connection with its futures transactions in an
amount generally equal to the entire value of the underlying security.
Future Developments. The Master Portfolio may take advantage of opportunities in
the area of options and futures contracts and options on futures contracts and
any other derivative investments which are not presently contemplated for use by
the Master Portfolio or which are not currently available but which may be
developed, to the extent such opportunities are both consistent with the Master
Portfolio's investment objective and legally permissible for the Master
Portfolio. Before entering into such transactions or making any such investment,
the Master Portfolio will provide appropriate disclosure in its prospectus.
Stock Index Futures and Options on Stock Index Futures. The Master Portfolio may
invest in stock index futures and options on stock index futures as a substitute
for a comparable market position in the underlying securities. A stock index
future obligates the seller to deliver (and the purchaser to take), effectively,
an amount of cash equal to a specific dollar amount times the difference between
the value of a specific stock index on or before the close of the last trading
day of the contract and the price at which the agreement is made. No physical
delivery of the underlying stocks in the index is made. With respect to stock
indices that are permitted investments, the Master Portfolio intends to purchase
and sell futures contracts on the stock index for which it can obtain the best
price with consideration also given to liquidity. There can be no assurance that
a liquid market will exist at the time when the Master Portfolio seeks to close
out a futures contract or a futures option position. Lack of a liquid market may
prevent liquidation of an unfavorable position.
Index Swaps. The Master Portfolio may enter into index swaps in pursuit of its
investment objective. Index swaps involve the exchange by the Master Portfolio
with another party of cash flows based upon the performance of an index of
securities or a portion of an index of securities that usually include dividends
or income. In each case, the exchange commitments can involve payments to be
made in the same currency or in different currencies. The Master Portfolio will
usually enter into swaps on a net basis. In so doing, the two payment streams
are netted out, with the Master Portfolio receiving or paying, as the case may
be, only the net amount of the two payments. If the Master Portfolio enters into
a swap, it will maintain a segregated account on a gross basis, unless the
contract provides for a segregated account on a net basis. If there is a default
by the other party to such a transaction, the Master Portfolio will have
contractual remedies pursuant to the agreements related to the transaction.
The use of index swaps is a highly specialized activity which involves
investment techniques and risks different from those associated with ordinary
portfolio security transactions. There is no limit, except as provided below, on
the amount of swap transactions that may be entered into by the Master
Portfolio. These transactions generally do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to swaps generally is limited to the net amount of payments
that the Master Portfolio is contractually obligated to make. There is also a
risk of a default by the other party to a swap, in which case the Master
Portfolio may not receive the net amount of payments that the Master Portfolio
contractually is entitled to receive.
Forward commitments, when-issued purchases and delayed-delivery transactions.
The Master Portfolio may purchase or sell securities on a when-issued or
delayed-delivery basis and make contracts to purchase or sell securities for a
fixed price at a future date beyond customary settlement time. Securities
purchased or sold on a when-issued, delayed-delivery or forward commitment basis
involve a risk of loss if the value of the security to be purchased declines, or
the value of the security to be sold increases, before the settlement date.
Although the Master Portfolio will generally purchase securities with the
intention of acquiring them, the Master Portfolio may dispose of securities
purchased on a when-issued, delayed-delivery or a forward commitment basis
before settlement when deemed appropriate by the Master Portfolio's advisor.
Short-term instruments and temporary investments. The Master Portfolio may
invest in high-quality money market instruments on an ongoing basis to provide
liquidity or for temporary purposes when there is an unexpected level of
shareholder purchases or redemptions or when "defensive" strategies are
appropriate. The instruments in which the Master Portfolio may invest include:
(i) short-term obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities (including government-sponsored enterprises); (ii)
negotiable certificates of deposit ("CDs"), bankers' acceptances, fixed time
deposits and other obligations of domestic banks (including foreign branches)
that have more than $1 billion in total assets at the time of investment and
that are members of the Federal Reserve System or are examined by the
Comptroller of the Currency or whose deposits are insured by the FDIC; (iii)
commercial paper rated at the date of purchase "Prime-1" by Moody's or "A-1+" or
"A-1" by S&P, or, if unrated, of comparable quality as determined by BGFA; (iv)
non-convertible corporate debt securities (e.g., bonds and debentures) with
remaining maturities at the date of purchase of not more than one year that are
rated at least "Aa" by Moody's or "AA" by S&P; (v) repurchase agreements; and
(vi) short-term, U.S. dollar-denominated obligations of foreign banks (including
U.S. branches) that, at the time of investment have more than $10 billion, or
the equivalent in other currencies, in total assets and in the opinion of BGFA
are of comparable quality to obligations of U.S. banks which may be purchased by
the Master Portfolio.
Bank Obligations. The Master Portfolio may invest in bank obligations, including
certificates of deposit, time deposits, bankers' acceptances and other
short-term obligations of domestic banks, foreign subsidiaries of domestic
banks, foreign branches of domestic banks, and domestic and foreign branches of
foreign banks, domestic savings and loan associations and other banking
institutions.
Certificates of deposit are negotiable certificates evidencing the obligation of
a bank to repay funds deposited with it for a specified period of time. Time
deposits are non-negotiable deposits maintained in a banking institution for a
specified period of time at a stated interest rate. Time deposits which may be
held by the Master Portfolio will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation. Bankers' acceptances are credit
instruments evidencing the obligation of a bank to pay a draft drawn on it by a
customer. These instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. The other
short-term obligations may include uninsured, direct obligations, bearing fixed,
floating- or variable-interest rates.
Domestic commercial banks organized under Federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System and to have their deposits insured by the Federal
Deposit Insurance Corporation (the "FDIC"). Domestic banks organized under state
law are supervised and examined by state banking authorities but are members of
the Federal Reserve System only if they elect to join. In addition, state banks
whose certificates of deposit ("CDs") may be purchased by the Master Portfolio
are insured by the FDIC (although such insurance may not be of material benefit
to the Master Portfolio, depending on the principal amount of the CDs of each
bank held by the Master Portfolio) and are subject to Federal examination and to
a substantial body of Federal law and regulation. As a result of Federal or
state laws and regulations, domestic branches of domestic banks whose CDs may be
purchased by the Master Portfolio generally are required, among other things, to
maintain specified levels of reserves, are limited in the amounts which they can
loan to a single borrower and are subject to other regulation designed to
promote financial soundness. However, not all of such laws and regulations apply
to the foreign branches of domestic banks.
Obligations of foreign branches of domestic banks, foreign subsidiaries of
domestic banks and domestic and foreign branches of foreign banks, such as CDs
and time deposits ("TDs"), may be general obligations of the parent banks in
addition to the issuing branch, or may be limited by the terms of a specific
obligation and governmental regulation. Such obligations are subject to
different risks than are those of domestic banks. These risks include foreign
economic and political developments, foreign governmental restrictions that may
adversely affect payment of principal and interest on the obligations, foreign
exchange controls and foreign withholding and other taxes on interest income.
These foreign branches and subsidiaries are not necessarily subject to the same
or similar regulatory requirements that apply to domestic banks, such as
mandatory reserve requirements, loan limitations, and accounting, auditing and
financial record keeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank or about a foreign
bank than about a domestic bank.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation or by Federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may be subject to reserve requirements imposed by the Federal Reserve
System or by the state in which the branch is located if the branch is licensed
in that state.
In addition, Federal branches licensed by the Comptroller of the Currency and
branches licensed by certain states ("State Branches") may be required to: (1)
pledge to the regulator, by depositing assets with a designated bank within the
state, a certain percentage of their assets as fixed from time to time by the
appropriate regulatory authority; and (2) maintain assets within the state in an
amount equal to a specified percentage of the aggregate amount of liabilities of
the foreign bank payable at or through all of its agencies or branches within
the state. The deposits of Federal and State Branches generally must be insured
by the FDIC if such branches take deposits of less than $100,000.
In view of the foregoing factors associated with the purchase of CDs and TDs
issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, by foreign branches of foreign banks or by domestic branches of
foreign banks, the Master Portfolio's Advisor carefully evaluates such
investments on a case-by-case basis.
The Master Portfolio may purchase CDs issued by banks, savings and loan
associations and similar thrift institutions with less than $1 billion in
assets, which are members of the FDIC, provided such Master Portfolio purchases
any such CD in a principal amount of not more than $100,000, which amount would
be fully insured by the Bank Insurance Fund or the Savings Association Insurance
Fund administered by the FDIC. Interest payments on such a CD are not insured by
the FDIC. The Master Portfolio will not own more than one such CD per such
issuer.
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.
To the extent the ratings given by Moody's or S&P may change as a result of
changes in such organizations or their rating systems, the Master Portfolio will
attempt to use comparable ratings as standards for investments in accordance
with the investment policies contained in its Prospectus and in this SAI. The
ratings of Moody's and S&P and other nationally recognized statistical rating
organizations are more fully described in the attached Appendix.
Repurchase Agreements. The Master Portfolio may enter into a repurchase
agreement wherein the seller of a security to the Master Portfolio agrees to
repurchase that security from the Master Portfolio at a mutually-agreed upon
time and price. The period of maturity is usually quite short, often overnight
or a few days, although it may extend over a number of months. The Master
Portfolio may enter into repurchase agreements only with respect to securities
that could otherwise be purchased by the Master Portfolio, and all repurchase
transactions must be collateralized.
The Master Portfolio may incur a loss on a repurchase transaction if the seller
defaults and the value of the underlying collateral declines or is otherwise
limited or if receipt of the security or collateral is delayed. The Master
Portfolio may participate in pooled repurchase agreement transactions with other
funds advised by its investment advisor.
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. The Master Portfolio's custodian has custody of, and holds in a
segregated account, securities acquired as collateral by the Master Portfolio
under a repurchase agreement. Repurchase agreements are considered by the staff
of the SEC to be loans by the Master Portfolio. 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 the repurchase 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.
Floating- and variable- rate obligations. The Master Portfolio may purchase debt
instruments with interest rates that are periodically adjusted at specified
intervals or whenever a benchmark rate or index changes. These adjustments
generally limit the increase or decrease in the amount of interest received on
the debt instruments. Floating- and variable-rate instruments are subject to
interest - rate risk and credit risk.
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 the Master Portfolio's investment advisor determines
that at the time of investment the obligations are of comparable quality to the
other obligations in which the Master Portfolio may invest. The Master
Portfolio's investment advisor 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.
Loans of portfolio securities. The Master Portfolio may lend securities from its
portfolio to brokers, dealers and financial institutions (but not individuals)
if cash, U.S. Government securities or other high quality debt obligations equal
to at least 100% of the current market value of the securities loaned (including
accrued interest thereon) plus the interest payable to the Master Portfolio with
respect to the loan is maintained with the Master Portfolio. In determining
whether or not to lend a security to a particular broker, dealer or financial
institution, the Master Portfolio's investment advisor considers all relevant
facts and circumstances, including the size, creditworthiness and reputation of
the broker, dealer, or financial institution. Any loans of portfolio securities
are fully collateralized based on values that are marked to market daily. The
Master Portfolio does not enter into any portfolio security lending arrangement
having a duration of longer than one year. Any securities that the Master
Portfolio may receive as collateral will not become part of the Master
Portfolio's investment portfolio at the time of the loan and, in the event of a
default by the borrower, the Master Portfolio will, if permitted by law, dispose
of such collateral except for such part thereof that is a security in which the
Master Portfolio is permitted to invest. During the time securities are on loan,
the borrower will pay the Master Portfolio any accrued income on those
securities, and the Master Portfolio may invest the cash collateral and earn
income or receive an agreed-upon fee from a borrower that has delivered
cash-equivalent collateral. The Master Portfolio will not lend securities having
a value that exceeds one-third of the current value of the Master Portfolio's
total assets. Loans of securities by the Master Portfolio are subject to
termination at the Master Portfolio's or the borrower's option.
The principal risk of lending is potential default or insolvency of the
borrower. In either of these cases, the Master Portfolio could experience delays
in recovering securities or collateral or could lose all or part of the value of
the loaned securities. The Master Portfolio may pay reasonable administrative
and custodial fees in connection with loans of portfolio securities and may pay
a portion of the interest or fee earned thereon to the borrower or a placing
broker. Borrowers and placing brokers are not permitted to be affiliated,
directly or indirectly, with the Master Portfolio, its investment advisor or
Stephens, Inc.
Initial Public Offerings. Although it is not a principal investment strategy of
the Master Portfolio, the Master Portfolio may purchase shares issued in initial
public offerings ("IPOs") in anticipation of such shares becoming part of the
Wilshire 4500 Index. Although companies can be any age or size at the time of
their IPOs, they are often smaller and have a limited operating history, which
involve a greater potential for the value of their securities to be impaired
following the IPO. In addition, market psychology prevailing at the time of an
IPO can have a substantial and unpredictable effect on the price of an IPO
security, causing the price of a company's securities to be particularly
volatile at the time of its IPO and for a period thereafter. Because of the
nature of IPOs and the fact that such securities may not be part of the Wilshire
4500 Index at the time of the Master Portfolio's purchase, the Master
Portfolio's investments in IPOs may cause the Master Portfolio to track the
Wilshire 4500 Index less closely and may cause the Master Portfolio's, and
accordingly the Fund's, performance to track less closely that of the Wilshire
4500 Index.
Investment company securities. The Master Portfolio may invest in securities
issued by other open-end management investment companies to the extent permitted
under the 1940 Act. Under the 1940 Act, a Master Portfolio's investment in such
securities currently is limited to, subject to certain exceptions, (i) 3% of the
total voting stock of any one investment company, (ii) 5% of the Master
Portfolio's net assets with respect to any one investment company and (iii) 10%
of the Master Portfolio's net assets in the aggregate. Investments in the
securities of other investment companies generally will involve duplication of
advisory fees and certain other expenses. The Master Portfolio may also purchase
shares of exchange-listed closed-end funds.
Illiquid securities. To the extent that such investments are consistent with its
investment objective, the Master Portfolio may invest up to 15% of the value of
its net assets in securities as to which a liquid trading market does not exist.
Such securities may include securities that are not readily marketable, such as
privately issued securities and other securities that are subject to legal or
contractual restrictions on resale, floating- and variable-rate demand
obligations as to which the Master Portfolio cannot exercise a demand feature on
not more than seven days' notice and as to which there is no secondary market
and repurchase agreements providing for settlement more than seven days after
notice.
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.
Borrowing Money. As a fundamental policy, the Master Portfolio is permitted to
borrow the extent permitted under the 1940 Act. However, the Master Portfolio
currently intends to borrow money only for temporary or emergency (not
leveraging) purposes, and may borrow up to one-third of the value of its total
assets (including the amount borrowed) valued at the lesser of cost or market,
less liabilities (not including the amount borrowed) at the time the borrowing
is made.
Securities Related Businesses. The 1940 Act limits the ability of the Fund to
invest in securities issued by companies deriving more than 15% of their gross
revenues from securities related activities ("financial companies"). If the
Wilshire 4500 Index provides a higher concentration in one or more financial
companies, the Fund may experience increased tracking error due to the
limitations on investments in such companies.
Portfolio Turnover Rate. The portfolio turnover rate for the Master Portfolio
generally is not expected to exceed 50%. This portfolio turnover rate will not
be a limiting factor when the investment advisor to the Master Portfolio or the
Fund's investment advisor deems portfolio changes appropriate.
Index Changes. The stocks comprising the Wilshire 4500 Index are changed from
time to time. Announcements of those changes and related market activity may
result in reduced returns or volatility for the Fund.
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 on
and 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 actively 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 complaint. 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 costs of
remediation. The extent of such impact cannot be predicted.
FUND POLICIES
Fundamental Investment Restrictions
The following are the Fund's fundamental investment restrictions which, along
with the Fund's investment objective, cannot be changed without shareholder
approval by a vote of a majority of the outstanding shares of the Fund, as set
forth in the 1940 Act.
Unless noted otherwise, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in percentage resulting from a change
in the Fund's assets (i.e., due to cash inflows or redemptions) or in market
value of the investment or the Fund's assets will not constitute a violation of
that restriction. 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:
1. may not invest more than 5% of its assets in the obligations of any single
issuer, except that up to 25% of the value of its total assets may be
invested, and securities issued or guaranteed by the U.S. government, or
its agencies or instrumentalities may be purchased, without regard to any
such limitation;
2. may not with respect to 75% of its total assets, invest in a security if,
as a result of such investment, it would hold more than 10% (taken at the
time of such investment) of the outstanding securities of any one issuer;
3. may not issue senior securities, except as permitted under the 1940 Act;
4. may not borrow money, except to the extent permitted under the 1940 Act,
provided that the Master Portfolio may borrow up to 20% 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
20% of the current value of its net assets. For purposes of this
investment restriction, the Master Portfolio's entry into options, forward
contracts, futures contracts, including those relating to indexes, and
options on futures contracts or indexes shall not constitute borrowing to
the extent certain segregated accounts are established and maintained by
the Master Portfolio;
5. may not act as an underwriter of another issuer's securities, except to
the extent that the Fund may be deemed to be an underwriter within the
meaning of the Securities Act of 1933, as amended, in connection with the
disposition of portfolio securities;
6. may not purchase the securities of any issuer if, as a result, more than
25% of the Fund's total assets (taken at market value at the time of such
investment) would be invested in the securities of issuers in any
particular industry, except that this restriction does not apply to (i)
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities (or repurchase agreements thereto); and (ii) any
industry in which the Wilshire 4500 Index becomes concentrated to the same
degree during the same period, the Master Portfolio will be concentrated
as specified above only to the extent the percentage of its assets
invested in those categories of investments is sufficiently large that 25%
or more of its total assets would be invested in a single industry;
7. may not purchase or sell real estate, although it may purchase securities
secured by real estate or interests therein, or securities issued by
companies which invest in real estate, or interests therein;
8. may not purchase or sell physical commodities or commodities contracts or
oil, gas or mineral programs. This restriction shall not prohibit the
Fund, subject to restrictions described in the Prospectus and elsewhere in
this Statement of Additional Information, from purchasing, selling or
entering into futures contracts, options on futures contracts and other
derivative instruments, subject to compliance with any applicable
provisions of the federal securities or commodities laws; and
9. may not lend any funds or other assets, except that the Fund may,
consistent with its investment objective and policies: (a) invest in
certain short-term or temporary debt obligations, even though the purchase
of such obligations may be deemed to be the making of loans, (b) enter
into repurchase agreements, and (c) lend its portfolio securities in an
amount not to exceed 33 1/3% of the Fund's total assets, provided such
loans are made in accordance with applicable guidelines established by the
Securities and Exchange Commission and the directors of the Fund.
Non-Fundamental Operating Restrictions
The following are the Fund's non-fundamental operating restrictions, which may
be changed by the Fund's Board of Trustees without shareholder approval.
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 charge fees for operating expenses, such as
investment advisory and administrative fees, that would be in addition to
those charged by the Fund.
2. The Fund may not invest more than 15% of the Fund's net assets in illiquid
securities. For this purpose, illiquid securities include, among others,
(a) securities that are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions on resale, (b) fixed
time deposits that are subject to withdrawal penalties and that have
maturities of more than seven days, and (c) 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.
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. If a percentage restriction is adhered to at the time of
investment, a later change in percentage resulting from a change in values or
assets except with respect to compliance with fundamental investment restriction
number 5, will not constitute a violation of such restriction.
The Master Portfolio may not:
1. invest more than 5% of its assets in the obligations of any single issuer,
except that up to 25% of the value of its total assets may be invested,
and securities issued or guaranteed by the U.S. Government, or its
agencies or instrumentalities may be purchased, without regard to any such
limitation;
2. hold more than 10% of the outstanding voting securities of any single
issuer. This investment restriction applies only with respect to 75% of
its total assets;
3. issue any senior security (as such term is defined in Section 18(f) of the
1940 Act), except to the extent the activities permitted in the Master
Portfolio's fundamental policies (4) and (8), may be deemed to give rise
to a senior security;
4. borrow money, except to the extent permitted under the 1940 Act, provided
that the Master Portfolio may borrow up to 20% 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 20% of the current
value of its net assets. For purposes of this investment restriction, the
Master Portfolio's entry into options, forward contracts, futures
contracts, including those relating to indexes, and options on futures
contracts or indexes shall not constitute borrowing to the extent certain
segregated accounts are established and maintained by the Master
Portfolio;
5. act as an underwriter of securities of other issuers, except to the extent
that the Master Portfolio may be deemed an underwriter under the
Securities Act of 1933, as amended, by virtue of disposing of portfolio
securities;
6. invest 25% or more of its total assets in the securities of issuers in any
particular industry or group of closely related industries except that
there shall be no limitation with respect to investments in (i)
obligations of the U.S. Government, its agencies or instrumentalities; or
(ii) any industry in which the Wilshire 4500 Index becomes concentrated to
the same degree during the same period, the Master Portfolio will be
concentrated as specified above only to the extent the percentage of its
assets invested in those categories of investments is sufficiently larger
than 25% or more of its total assets would be invested in a single
industry;
7. purchase, hold or deal in real estate, or oil, gas or other mineral leases
or exploration or development programs, but the Master Portfolio may
purchase and sell securities that are secured by real estate or issued by
companies that invest or deal in real estate;
8. invest in commodities, except that the Master Portfolio may purchase and
sell (i.e., write) options, forward contracts, futures contracts,
including those relating to indexes, and options on futures contracts or
indexes; and
9. make loans to others, except through the purchase of debt obligations and
the entry into repurchase agreements. However, the Master Portfolio may
lend its portfolio securities in an amount not to exceed one-third of the
value of its total assets. Any loans of portfolio securities will be made
according to guidelines established by the SEC and the Master Portfolio's
Board of Trustees.
Non-Fundamental Operating Policies
The Master Portfolio has adopted the following investment restrictions as
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 charge fees for operating expenses, such as
investment advisory and administrative fees, that would be in addition to
those charged by the Master Portfolio.
2. The Master Portfolio may not invest more than 15% of the Master
Portfolio's net assets in illiquid securities. For this purpose, illiquid
securities include, among others, (a) securities that are illiquid by
virtue of the absence of a readily available market or legal or
contractual restrictions on resale, (b) fixed time deposits that are
subject to withdrawal penalties and that have maturities of more than
seven days, and (c) repurchase agreements not terminable within seven
days.
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, Treasurer 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 is President of
4500 Bohannon Drive, E*TRADE Asset Management,
Menlo Park, CA 94025 Inc. She joined E*TRADE Asset
Management, Inc. in March 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), and prior to that
he was an Assistant Vice
President of Maryland National
Bank.
<FN>
- -----------------------
(1) Ms. Meyers may be considered an "interested person," but she is not an
"affiliated person," as 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:
Compensation Table
- ---------------------------------------------------------------
Total Compensation
Name of Person, Aggregate From Fund and Fund
Position Compensation from Complex Paid to
the Fund (1) Trustees (2)
- ---------------------------------------------------------------
Leonard C. Purkis, None None
Trustee
Shelly J. Meyers (3) $7,500 $22,500
Ashley T. Rabun $7,500 $22,500
Steven Grenadier $7,500 $22,500
George J. Rebhan $7,500 - 0 -
No Trustee will receive any benefits upon retirement. Thus, no pension or
retirement benefits have accrued as part of the Fund's expenses.
- --------------------
(1) This amount represents the estimated aggregate amount of compensation paid
to each non-affiliated Trustee for service on the Board of Trustees for
the fiscal year ending December 31, 2000.
(2) The Fund complex consists of eight series of the Trust, six each 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.
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
As of April 3, 2000, no shareholder owned more than 5% of the Fund's outstanding
equity securities. 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.
As of the date of this SAI, the Trustees and Officers of the Fund as a group
owned less than 1% of the Fund's equity securities.
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 March 31,
2000, the Investment Advisor provided investment advisory services for over $277
million in assets.
Subject to the general supervision of the E*TRADE Funds' Board of Trustees and
in accordance with the investment objective, policies and restrictions of the
Fund, the Investment Advisor provides the Fund with ongoing investment guidance,
policy direction and monitoring of the Master Portfolio. The Investment Advisor
may in the future manage cash and money market instruments for cash flow
purposes. For its advisory services, the Fund currently pays the Investment
Advisor an investment advisory fee at an annual rate equal to 0.02% of the
Fund's average daily net assets. To the extent the Fund has assets that are not
invested in a master portfolio in the future, the Fund would pay the Investment
Advisor an investment advisory fee at annual rate equal to 0.08% of that portion
of the Fund's assets not invested in a master portfolio. The Fund paid the
Investment Advisor approximately $144 for its investment advisory services to
the Fund in 1999.
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 December 31, 1999, Barclays Global
Investors and its affiliates, including BGFA, provided investment advisory
services for over $783 billion of assets. Pursuant to an Investment Advisory
Contract (the "Advisory Contract") with the Master Portfolio, BGFA provides the
Master Portfolio with investment guidance and policy direction in connection
with the daily portfolio management of the Master Portfolio, subject to the
supervision of the Master Portfolio's Board of Trustees and in conformity with
Delaware law and the stated policies of the Master Portfolio. Pursuant to the
Advisory Contract, BGFA furnishes to the Master Portfolio's Board of Trustees
periodic reports on the investment strategy and performance of the Master
Portfolio. BGFA receives a fee from the Master Portfolio at an annual rate equal
to 0.08% 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. This advisory fee is an expense of the Master Portfolio borne
proportionately by its interestholders, including the Fund.
The Advisory Contract will continue in effect for more than two years provided
the continuance is approved annually (i) by the holders of a majority of the
Master Portfolio's outstanding voting securities or by the Master Portfolio's
Board of Trustees and (ii) by a majority of the Trustees of the Master Portfolio
who are not parties to the Advisory Contract or affiliated of any such party.
The Advisory Contract may be terminated on 60 days' written notice by either
party 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 overall net results. When BGFA, subject to the supervision of, and the
overall authority of the Master Portfolio's Board of Trustees, 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 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 inside information in its possession.
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
and other than custodial fees of up to 0.01% payable after the first two years
of the Master Portfolio's operations. Stephens and BGI are entitled to receive a
monthly fee, in the aggregate, at an annual rate of 0.02% of the average daily
net assets of the Master Portfolio for providing administrative services and
assuming expenses.
Stephens also acts as the placement agent of Master Portfolio's shares pursuant
to a Placement Agency Agreement (the "Placement Agency Agreement") with the
Master Portfolio.
Administrator of the Fund. E*TRADE Asset Management, 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 0.26% 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
0.28% of the 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 0.38%), 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.
The Fund paid the Administrator approximately $1,929 for its services to the
Fund in 1999 under the administrative services agreement. 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.
During the first two years of the Master Portfolio's operations, IBT, as the
Master Portfolio's custodian, will be entitled to receive compensation for its
custodial services from Stephens and BGI, the co-administrators of the Master
Portfolio's. Thereafter, IBT will be entitled to receive custodial fees of up to
0.01% from the Master Portfolio.
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, 350 South Grand Avenue, Los
Angeles, CA 90071-3462, 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. Assets in which the Fund invests may
trade and fluctuate in value after the close and before the opening of the NYSE.
Telephone and Internet Redemption Privileges. The Fund employs reasonable
procedures to confirm that instructions communicated by telephone or the
Internet are genuine. The Fund may not be liable for losses due to unauthorized
or fraudulent instructions. Such procedures include but are not limited to
requiring a form of personal identification prior to acting on instructions
received by telephone or the Internet, providing written confirmations of such
transactions to the address of record, tape recording telephone instructions and
backing up Internet transactions.
Retirement Plans. You can find information about the retirement plans offered by
E*TRADE Securities by accessing our Website. You may fill out an IRA application
online or request our IRA application kit by mail.
TAXATION
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the Fund and the purchase, ownership, and disposition of Fund shares.
This discussion does not purport to be complete or to deal with all aspects of
federal income taxation that may be relevant to shareholders in light of their
particular circumstances. This discussion is based upon present provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be retroactive. Prospective
investors should consult their own tax advisors with regard to the federal tax
consequences of the purchase, ownership, or disposition of Fund shares, as well
as the tax consequences arising under the laws of any state, foreign country, or
other taxing jurisdiction.
Taxation of the Fund. The Fund intends to be taxed as a regulated investment
company under Subchapter M of the Code. Accordingly, the Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to certain securities loans, and
gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing in
such stock, securities or currencies; and (b) diversify its holdings so that, at
the end of each fiscal quarter, (i) at least 50% of the value of the Fund's
total assets is represented by cash and cash items, U.S. Government securities,
the securities of other regulated investment companies and other securities,
with such other securities limited, in respect of any one issuer, to an amount
not greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities and the securities of other regulated investment
companies).
As a regulated investment company, the Fund generally is not subject to U.S.
federal income tax on income and gains that it distributes to shareholders, if
at least 90% of the Fund's investment company taxable income (which includes,
among other items, dividends, interest and the excess of any net short-term
capital gains over net long-term capital losses) for the taxable year is
distributed. The Fund intends to distribute substantially all of such income.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax at the
Fund level. To avoid the tax, the Fund must distribute during each calendar year
an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for a one-year period generally ending on October 31 of
the calendar year, and (3) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, the Fund intends to make distributions in accordance with the
calendar year distribution requirement.
Distributions. Distributions of investment company taxable income (including net
short-term capital gains) are taxable to a U.S. shareholder as ordinary income,
whether paid in cash or shares. Dividends paid by the Fund to a corporate
shareholder, to the extent such dividends are attributable to dividends received
by the Fund from U.S. corporations, may, subject to limitation, be eligible for
the dividends received deduction. However, the alternative minimum tax
applicable to corporations may reduce the value of the dividends received
deduction. Distributions of net capital gains (the excess of net long-term
capital gains over net short-term capital losses) designated by the Fund as
capital gain dividends, whether paid in cash or reinvested in Fund shares, will
generally be taxable to shareholders as long-term capital gain, regardless of
how long a shareholder has held Fund shares.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received. A distribution will be treated as paid on December 31 of a calendar
year if it is declared by the Fund in October, November or December of that year
with a record date in such a month and paid by the Fund during January of the
following year. Such distributions will be taxable to shareholders in the
calendar year in which the distributions are declared, rather than the calendar
year in which the distributions are received.
If the net asset value of shares is reduced below a shareholder's cost as a
result of a distribution by the Fund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying shares of the Fund just
prior to a distribution. The price of shares purchased at this time will include
the amount of the forthcoming distribution, but the distribution will generally
be taxable to the shareholder.
Dispositions. Upon a redemption, sale or exchange of shares of the Fund, a
shareholder will realize a taxable gain or loss depending upon his or her basis
in the shares. A gain or loss will be treated as capital gain or loss if the
shares are capital assets in the shareholder's hands, and will be long-term
capital gain or loss if the shares are held for more than one year and
short-term capital gain or loss if the shares are held for not more than one
year. Any loss realized on a redemption, sale or exchange will be disallowed to
the extent the shares disposed of are replaced (including through reinvestment
of dividends) within a period of 61 days, beginning 30 days before and ending 30
days after the shares are disposed of. In such a case the basis of the shares
acquired will be adjusted to reflect the disallowed loss. If a shareholder holds
Fund shares for six months or less and during that period receives a
distribution taxable to the shareholder as long-term capital gain, any loss
realized on the sale of such shares during such six-month period would be a
long-term loss to the extent of such distribution.
Backup Withholding. The Fund generally will be required to withhold federal
income tax at a rate of 31% ("backup withholding") from dividends paid, capital
gain distributions, and redemption proceeds to shareholders if (1) the
shareholder fails to furnish the Fund with the shareholder's correct taxpayer
identification number or social security number, (2) the IRS notifies the
shareholder or the Fund that the shareholder has failed to report properly
certain interest and dividend income to the IRS and to respond to notices to
that effect, or (3) when required to do so, the shareholder fails to certify
that he or she is not subject to backup withholding. Any amounts withheld may be
credited against the shareholder's federal income tax liability.
Other Taxation. Distributions may be subject to additional state, local and
foreign taxes, depending on each shareholder's particular situation.
Market Discount. If the Fund purchases a debt security at a price lower than the
stated redemption price of such debt security, the excess of the stated
redemption price over the purchase price is "market discount". If the amount of
market discount is more than a de minimis amount, a portion of such market
discount must be included as ordinary income (not capital gain) by the Fund in
each taxable year in which the Fund owns an interest in such debt security and
receives a principal payment on it. In particular, the Fund will be required to
allocate that principal payment first to the portion of the market discount on
the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for each
period is equal to the lesser of (i) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account) or (ii) the amount of the principal payment with
respect to such period. Generally, market discount accrues on a daily basis for
each day the debt security is held by the Fund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Fund, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest. Gain realized on the disposition of a market discount obligation
must be recognized as ordinary interest income (not capital gain) to the extent
of the "accrued market discount."
Original Issue Discount. Certain debt securities acquired by the Fund may be
treated as debt securities that were originally issued at a discount. Very
generally, original issue discount is defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash income on account of such discount is actually
received by the Fund, original issue discount that accrues on a debt security in
a given year generally is treated for federal income tax purposes as interest
and, therefore, such income would be subject to the distribution requirements
applicable to regulated investment companies. Some debt securities may be
purchased by the Fund at a discount that exceeds the original issue discount on
such debt securities, if any. This additional discount represents market
discount for federal income tax purposes (see above).
Options, Futures and Forward Contracts. Any regulated futures contracts and
certain options (namely, nonequity options and dealer equity options) in which
the Fund may invest may be "section 1256 contracts." Gains (or losses) on these
contracts generally are considered to be 60% long-term and 40% short-term
capital gains or losses. Also, section 1256 contracts held by the Fund at the
end of each taxable year (and on certain other dates prescribed in the Code) are
"marked to market" with the result that unrealized gains or losses are treated
as though they were realized.
Transactions in options, futures and forward contracts undertaken by the Fund
may result in "straddles" for federal income tax purposes. The straddle rules
may affect the character of gains (or losses) realized by the Fund, and losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized. In
addition, certain carrying charges (including interest expense) associated with
positions in a straddle may be required to be capitalized rather than deducted
currently. Certain elections that the Fund may make with respect to its straddle
positions may also affect the amount, character and timing of the recognition of
gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to the Fund are not entirely
clear. The straddle rules may increase the amount of short-term capital gain
realized by the Fund, which is taxed as ordinary income when distributed to
shareholders. Because application of the straddle rules may affect the character
of gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to a fund that did not engage
in such transactions.
Constructive Sales. Under certain circumstances, the Fund may recognize gain
from a constructive sale of an "appreciated financial position" it holds if it
enters into a short sale, forward contract or other transaction that
substantially reduces the risk of loss with respect to the appreciated position.
In that event, the Fund would be treated as if it had sold and immediately
repurchased the property and would be taxed on any gain (but not loss) from the
constructive sale. The character of gain from a constructive sale would depend
upon the Fund's holding period in the property. Loss from a constructive sale
would be recognized when the property was subsequently disposed of, and its
character would depend on the Fund's holding period and the application of
various loss deferral provisions of the Code. Constructive sale treatment does
not apply to transactions closed in the 90-day period ending with the 30th day
after the close of the taxable year, if certain conditions are met.
UNDERWRITER
Distribution of Securities. Under a Distribution Agreement with the Fund
("Distribution Agreement"), E*TRADE Securities Inc., 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.
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 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.
Historic data on the Wilshire 4500 may be used to promote the Fund. The
historical Wilshire 4500 data presented from time to time is not intended to
suggest that an investor would have achieved comparable results by investing in
any one equity security or in managed portfolios of equity securities, such as
the Fund, during the periods shown.
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 Wilshire 4500 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>
Wilshire 4500 Index
The Fund relies on a license related to the Wilshire 4500 Index. In the absence
of the license, the Fund may not be able to pursue its investment objective.
Although not currently anticipated, the license can be terminated.
The Fund is not sponsored, endorsed, sold or promoted by Wilshire Associates
Incorporated ("Wilshire"). Wilshire makes no representation or warranty, express
or implied, to the owners of the Fund or any member of the public regarding the
advisability of investing in securities generally or in the Fund particularly or
the ability of the Wilshire 4500 Equity Index to track general stock market
performance. Wilshire's only relationship to E*TRADE Asset Management or the
Fund is the licensing of certain trademarks and trade names of Wilshire. The
Wilshire 4500 Equity Index is composed and calculated by Wilshire without regard
to E*TRADE Asset Management or the Fund. Wilshire has no obligation to take the
needs of the E*TRADE Asset Management, the Fund, or the Shareholders into
consideration in determining, composing or calculating the Wilshire 4500 Equity
Index.
Wilshire does not guarantee the accuracy and/or the completeness of the Wilshire
4500 Equity Index or any data included therein and Wilshire shall have no
liability for any errors, omissions, or interruptions therein. Wilshire makes no
warranty, express or implied, as to results to be obtained by E*TRADE Asset
Management, the Fund, the shareholders, or any other person or entity from the
use of the Wilshire 4500 Equity Index or any data included therein. Wilshire
makes no express or implied warranties, and expressly disclaims all warranties
of merchantability or fitness for a particular purpose or use with respect to
the Wilshire 4500 Equity Index or any data included therein. Without limiting
any of the foregoing, in no event shall Wilshire have any liability for any
special, punitive, indirect, or consequential damages (including lost profits),
even if notified of the possibility of such damages.
<PAGE>
APPENDIX
Description of 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.
<PAGE>
4500 Bohannon Drive
Menlo Park, CA 94025
Telephone: (650) 331-6000
Toll-Free: (800) 786-2575
Internet: http://www.etrade.com
<PAGE>
E*TRADE FUNDS
E*TRADE BOND INDEX FUND
Prospectus dated May 1, 2000
This Prospectus concisely sets forth information about the E*TRADE Bond Index
Fund (the "Fund") that an investor needs to know before investing. Please read
this Prospectus carefully before investing, and keep it for future reference.
The Fund is a series of E*TRADE Funds.
Objectives, Goals and Principal Strategies.
The Fund's investment objective is to provide investment results that
correspond, before fees and expenses, to the total return performance of
fixed-income securities in the aggregate, as represented by the Lehman Brothers
Government/Corporate Bond Index (the "Bond Index"). The Fund seeks to achieve
its objective by investing in a master portfolio. The Master Portfolio, in turn,
invests in a representative sample of the securities that comprise the Bond
Index and in proportions that match their index weights.
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 designed for
long-term investors and the value of the Fund's shares will fluctuate over time.
The Fund is a true no-load fund, which means you pay no sales charges or 12b-1
fees.
About E*TRADE.
E*TRADE Group, Inc. ("E*TRADE") is the direct parent of E*TRADE Asset
Management, Inc., the Fund's investment advisor. E*TRADE, through its group
companies, is a leader in providing secure online investing services. E*TRADE's
focus on technology has enabled it to eliminate traditional barriers, creating
one of the most powerful and economical investing systems for the self-directed
investor. To give you ultimate convenience and control, E*TRADE offers
electronic access to your account virtually anywhere, at any time.
An investment in the Fund is:
o not insured by the Federal Deposit Insurance Corporation;
o not a deposit or other obligation of, or guaranteed by, E*TRADE Bank and
its affiliates; and
o subject to investment risks, including loss of principal.
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 May 1, 2000
<PAGE>
TABLE OF CONTENTS
RISK/RETURN SUMMARY....................................................4
FEES AND EXPENSES......................................................6
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS.....................7
FUND MANAGEMENT........................................................9
THE FUND'S STRUCTURE..................................................10
PRICING OF FUND SHARES................................................11
HOW TO BUY, SELL AND EXCHANGE SHARES..................................11
DIVIDENDS AND OTHER DISTRIBUTIONS.....................................16
TAX CONSEQUENCES......................................................16
<PAGE>
RISK/RETURN SUMMARY
This is a summary. You should read this section along with the rest of this
Prospectus.
Investment Objectives/Goals
The Fund's investment objective is to provide investment results that correspond
to the total return performance of fixed-income securities in the aggregate, as
represented by the Bond Index.
Principal Strategies
The Fund seeks to achieve its investment objective by investing all of its
assets in the Bond Index Master Portfolio ("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 replicate the total return performance of the Bond Index.*
The Bond Index includes approximately 5000 fixed-income securities, including
U.S. Government securities and investment grade corporate bonds, each with an
outstanding market value of at least $25 million and remaining maturity of
greater than one year. The Master Portfolio invests in a sample of these
securities and invests at least 65% of its total assets in bonds and debentures.
The Master Portfolio selects securities for investment based on a number of
factors, including the relative proportion of such securities in the Bond Index;
credit quality; issuer sector; maturity structure; coupon rates; and
callability, among other factors.
Although the Master Portfolio attempts to be fully invested at all times in
securities comprising the Bond Index, the Master Portfolio may also invest up to
10% of its total assets in high-quality money market instruments to provide
liquidity. In seeking to replicate the performance of the Bond Index, the Master
Portfolio also may engage in futures and options and other derivatives
securities transactions and lend its portfolio securities, each of which
involves risk.
*Lehman Brothers ("Lehman") does not sponsor the Fund or the Master Portfolio,
nor is it affiliated in any way with the Fund or the Master Portfolio or their
respective investment advisors. "Lehman Brothers Government/Corporate Bond
Index(R)" is a trademark of Lehman. The Fund and the Master Portfolio are not
sponsored, endorsed, sold, or promoted by Lehman, and neither Lehman nor the
Bond Index makes any representation or warranty, express or implied, regarding
the advisability of investing in the Fund or the Master Portfolio.
Principal Risks
The Fund invests primarily in debt securities, which are subject to credit and
interest rate risk. Credit risk is the risk that issuers of the debt securities
in which the Fund invests may default on the payment of principal and/or
interest. Interest rate risk is the risk that increases in market interest rates
may adversely affect the value of the debt securities in which the Fund invests.
The value of the debt securities generally changes inversely to market interest
rates. Debt securities with longer maturities, which tend to produce higher
yields, are subject to potentially greater capital appreciation and depreciation
than obligations with shorter maturities. The Bond Index may also rise and fall
daily. Changes in the financial strength of an issuer or changes in the ratings
of any particular security may also affect the value of these investments. The
value of individual bonds may fall with the decline in a borrower's real or
apparent ability to meet its financial obligations. As with any investment, the
value of your investment in the Fund will fluctuate, meaning you could lose
money.
There is no assurance that the Fund will achieve its investment objective. The
Bond Index may not appreciate, and could depreciate, during the time you are
invested in the Fund, even if you are a long-term investor.
Although some of the Fund's portfolio securities are guaranteed by the U.S.
Government, its agencies or instrumentalities, such securities are subject to
interest rate risk and the market value of these securities, upon which the
Fund's daily net asset value is based, will fluctuate. No assurance can be given
that the U.S. Government would provide financial support to its agencies or
instrumentalities where it is not obligated to do so.
The Fund cannot as a practical matter own all the securities that make up the
Bond Index in perfect correlation to the Bond Index itself. The bonds that the
Master Portfolio's investment advisor selects may not match the performance of
the Bond Index. The use of futures and options and other derivative securities
is intended to help the Fund match the Bond Index but that may not be the
result. The value of an investment in the Fund depends to a great extent upon
changes in market conditions. The prices of bonds may fall in response to
economic events or trends. The Fund seeks to track the Bond Index during down
markets as well as during up markets. The Fund's returns will be directly
affected by the volatility of the securities making up the Bond Index.
Requirements for large cash balances may also exert a drag on overall Fund
performance.
The Bond Index primarily consists of fixed-income securities. As a result,
whenever these securities perform worse than equity securities, the Fund may
underperform funds that have exposure to the stock market. Likewise, whenever
bonds fall behind other types of investments--U.S. stocks or foreign stocks, for
instance--the Fund's performance also will lag behind those investments.
An investment in the Fund is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Shares of the Fund involve investment risks, including the possible loss
of principal.
Performance
This Fund commenced operations on August 13, 1999. 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.
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 (as a percentage of redemption 1.00.%*
proceeds, payable only if shares are redeemed within
four months of purchase)
Annual Fund Operating Expenses**
(expenses that are deducted from Fund assets)
Management Fees 0.10%***
Distribution (12b-1) Fees None
Other Expenses 0.50%
Administration 0.25%****
Trustee Expenses 0.25%*****
----------
Total Annual Fund Operating Expenses 0.60%
-----
Fee Waiver and/or Reimbursement (0.25%)******
Net Expenses 0.35%
* Effective for redemptions after September 30, 2000. For Shares redeemed before
October 1, 2000 and within four months from the date of purchase, the redemption
fee is 0.50%.
** The cost reflects the expenses at both the Fund and the Master Portfolio
levels.
*** Management fees include a fee equal to 0.08% of daily net assets payable at
the Master Portfolio level to its investment advisor and an investment advisory
fee equal to 0.02% payable by the Fund to its investment advisor.
**** The administration fee is payable by the Fund to E*TRADE Asset Management,
Inc., its 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 table reflects an estimate for the current
fiscal year.
****** 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 0.35%. 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 August 12, 1999 and
terminating on August 12, 2001. 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*
$37 $144
*Reflects costs at both the Fund and Master Portfolio levels.
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS
The Fund's investment objective is to provide investment results that
correspond, before fees and expenses, to the total return performance of
fixed-income securities in the aggregate, as represented by the Bond Index.
Under normal market conditions, the Master Portfolio invests at least 90% of the
value of its total assets in the securities making up the Bond Index. That
portion of its assets is not actively managed but is designed to substantially
replicate, to the extent feasible, the investment characteristics of the Bond
Index. Inclusion of a security in the Bond Index in no way implies an opinion by
the Bond Index's sponsor as to its attractiveness as an investment. As
investment advisor to the Master Portfolio, Barclays Global Fund Advisors
("BGFA") regularly monitors the Master Portfolio's correlation to the Bond Index
and adjusts the Master Portfolio's portfolio to the extent necessary to achieve,
in both rising and falling markets, a correlation of at least 95% between the
capitalization-weighted total return of its assets before expenses and the Bond
Index. A 100% correlation would mean the total return of the Master Portfolio's
net assets would increase and decrease exactly the same as the Bond Index.
Master Portfolio also may engage in futures and options transactions and other
derivative securities transactions and may lend its portfolio securities, each
of which involves risk. The Master Portfolio also may invest up to 10% of its
total assets in high-quality money market instruments to provide liquidity.
Like all funds, the Fund's Net Asset Value ("NAV") will fluctuate with the value
of its assets. The assets held by the Fund will fluctuate based on market and
economic conditions, or other factors that affect particular securities. Since
the investment characteristics and therefore, the investment risks of the Fund
correspond to those of the Master Portfolio, the following discussion also
includes a description of the risks associated with the investments of the
Master Portfolio. The Fund's performance before Fund-level fees will correspond
directly to the performance of the Master Portfolio.
Neither the Fund nor the Master Portfolio are managed according to traditional
methods of "active" investment management, which involve the buying and selling
of securities based upon economic, financial and market analysis and investment
judgment. Instead, the Fund and the Master Portfolio are managed by utilizing an
"indexing" investment approach to determine which securities are to be purchased
or sold to replicate, to the extent feasible, the investment characteristics of
the Bond Index through computerized quantitative techniques.
The Fund's ability to match its investment performance to the investment
performance of the Bond Index may be affected by, among other things: the Fund
and the Master Portfolio's expenses; the amount of cash and cash equivalents
held by the Master Portfolio's investment portfolio; the manner in which the
total return of the Bond Index is calculated; the size of the Master Portfolio's
investment portfolio; the Master Portfolio's use of futures and options
transactions and other derivative securities transactions; the Master
Portfolio's lending of its portfolio securities; and the timing; frequency and
size of shareholder purchases; and redemptions of both the Fund and the Master
Portfolio. The Master Portfolio uses cash flows from shareholder purchases and
redemption activity to maintain, to the extent feasible, the similarity of its
portfolio to the securities comprising the Bond Index.
As do many index funds, the Master Portfolio also may invest in futures and
options transactions and other derivative securities transactions to minimize
the gap in performance that naturally exists between any index fund and its
index. This gap will occur mainly because, unlike the Bond Index, the Master
Portfolio and the Fund incur expenses and must keep a portion of their assets in
cash for paying expenses and processing shareholders orders. By using futures,
the Master Portfolio potentially can offset the portion of the gap attributable
to their cash holdings. However, because some of the effect of expenses remains,
the Master Portfolio and the Fund's performance normally will be below that of
the Bond Index. The Master Portfolio also uses some derivatives to gain exposure
to the Bond Index for its cash balances, which could cause the Fund to track the
Bond Index less closely if the derivatives do not perform as expected.
The Master Portfolio also may invest in the securities of foreign issuers,
including American Depository Receipts and European Depository Receipts and
similar securities, which involve special risks and considerations not typically
associated with investing in U.S. companies. These include differences in
accounting, auditing and financial reporting standards; generally higher
commission rates on foreign portfolio transactions; the possibility of
nationalization, expropriation or confiscatory taxation; adverse changes in
investment or exchange control regulations (which may include suspension of the
ability to transfer currency from a country); and political, social and monetary
or diplomatic developments that could affect U.S. investments in foreign
countries. Additionally, dispositions of foreign securities and dividends and
interest payable on those securities may be subject to foreign taxes, including
withholding taxes. Foreign securities often trade with less frequency and volume
than domestic securities and, therefore, may exhibit greater price volatility.
During those periods in which a higher percentage of the Master Portfolio's
assets are invested in long-term bonds, the Master Portfolio's exposure to
interest-rate risk will be greater because the longer maturity of such
securities means they are generally more sensitive to changes in market interest
rates than the short-term securities.
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 March 31, 2000, the Investment Advisor provided
investment advisory services for over $277 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.
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
December 31, 1999, Barclays Global Investors and its affiliates, including BGFA,
provided investment advisory services for over $783 billion of assets. BGFA
receives a monthly advisory fee from the Master Portfolio at an annual rate
equal to 0.08% 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.
BGFA may deal, trade and invest for its own account in the type 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
inside information in its possession.
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 seeks to provide investment results that correspond to the
total return performance of fixed-income securities in the aggregate, as
represented by the Bond Index. In addition to selling its shares to the Fund,
the Master Portfolio has and may continue to sell its shares to certain other
mutual funds or other accredited investors. The expenses and, correspondingly,
the returns of other investment options in the Master Portfolio may differ from
those of the Fund.
The Fund's Board 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's assets
are valued generally by using available market quotations or at fair value as
determined in good faith by the Board of Trustees of MIP.
The Fund's NAV per share is calculated by taking the value of the Fund's net
assets and dividing by the number of shares outstanding. Expenses are accrued
daily and applied when determining the NAV.
The NAV for the Fund is determined as of the close of trading on the floor of
the NYSE (generally 4:00 p.m., Eastern time), each day the NYSE is open. The
Fund reserves the right to change the time at which purchases, redemptions 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. All shares must be held in an E*TRADE Securities account and cannot be
transferred to the account of any other financial institution. 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, proxies, 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 $1,000
To buy additional shares of the Fund $ 250
Continuing minimum investment* $1,000
To invest in the Fund for your IRA, Roth IRA,
or one-person SEP account $ 250
To invest in the Fund for your Education IRA account $ 250
To invest in the Fund for your UGMA/UTMA account $ 250
To invest in the Fund for your SIMPLE, SEP-IRA,
Profit Sharing or Money Purchase Pension Plan,
or 401(a) account $ 250
* Your shares may be automatically redeemed if, as a result of selling or
exchanging shares, you no longer meet a Fund's minimum balance requirements.
Before taking such action, the Fund will provide you with written notice and at
least 30 days to buy more shares to bring your investment up to $1,000.
After your account is established you may use 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 generally 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. Please note that the fee the Fund
assesses on redemptions of Fund shares redeemed after September 30, 2000, and
held for less than four months is 1.00%. Redemptions of shares redeemed prior to
October 1, 2000, and held for less than four months are subject to a 0.50%
redemption fee. 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 if it
believes it advisable to do so.
Investors will bear the risk of loss from fraudulent or unauthorized
instructions received over the telephone provided that the Fund reasonably
believes that such instructions are genuine. The Fund and its transfer agent
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. The Fund may incur liability if it does not follow these
procedures.
Due to increased telephone volume during periods of dramatic economic or market
changes, you may experience difficulty in implementing a broker-assisted
telephone redemption. In these situations, investors may want to consider
trading online by accessing our Website or use TELE*MASTER, E*TRADE Securities'
automated telephone system, to effect such a transaction by calling
1-800-STOCKS1 (1-800-786-2571).
Signature Guarantee. For your protection, certain requests may require a
signature guarantee.
A signature guarantee is designed to protect you and the Fund against fraudulent
transactions by unauthorized persons. In the following instances, the Fund will
require a signature guarantee for all authorized owners of an account:
1. If you transfer the ownership of your account to another individual or
organization.
2. When you submit a written redemption for more than $25,000.
3. When you request that redemption proceeds be sent to a different name or
address than is registered on your account.
4. If you add or change your name or add or remove an owner on your account.
5. If you add or change the beneficiary on your transfer-on-death account.
For other registrations, access E*STATION through our Website or call
1-800-786-2575 for instructions.
You will have to wait to redeem your shares until the funds you use to buy them
have cleared (e.g., your check has cleared).
The right of redemption may be suspended during any period in which (i) trading
on the NYSE is restricted, as determined by the SEC, or the NYSE is closed for
other than weekends and holidays; (ii) the SEC has permitted such suspension by
order; or (iii) an emergency as determined by the SEC exists, making disposal of
portfolio securities or valuation of net assets of the Fund not reasonably
practicable.
Redemption Fee. The Fund can experience substantial price fluctuations and is
intended for long-term investors. Short-term "market timers" who engage in
frequent purchases, redemptions or exchanges can disrupt the Fund's investment
program and increase costs. To discourage short-term trading, the Fund assesses
a redemption fee on shares held for less than four months. The redemption fee of
the Fund will increase to 1.00% for shares which are redeemed after September
30, 2000 and which have been held for less than four months from the date of
purchase. Before October 1, 2000 the fee is 0.50%.
Any redemption fees imposed will be paid to the Fund to help offset transaction
costs. The Fund will use the "first-in, first-out" (FIFO) method to determine
the four month holding period. Under this method, the date of the redemption
will be compared with the earliest purchase date of shares held in the account.
If this holding period is less than four months, the fee will be assessed. The
fee may apply to shares held through omnibus accounts or certain retirement
plans.
The Fund may waive the redemption fee from time to time in its sole discretion.
The Fund may also change the redemption fee and the period it applies for shares
to be issued in the future.
Redemption In-Kind. The Fund reserves the right to honor any request for
redemption or repurchases by making payment in whole or in part in readily
marketable securities ("redemption in-kind"). These securities will be chosen by
the Fund and valued as they are for purposes of computing the Fund's NAV. You
may incur transaction expenses in converting these securities to cash.
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 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 pay dividends from net investment income quarterly and
distribute capital gains, if any, annually. The Fund may make additional
distributions if necessary.
Unless you choose otherwise, all your dividends and capital gain distributions
will be automatically reinvested in additional Fund shares. Shares are purchased
at the net asset value determined on the payment date.
TAX CONSEQUENCES
The Fund's total returns do not show the effects of income taxes on an
individual's investment.
The following information is meant as a general summary for U.S. taxpayers.
Please see the Fund's Statement of Additional Information for more information.
You should rely on your own tax advisor for advice about the particular federal,
state and local tax consequences to you of investing in the Fund.
The Fund generally will not have to pay income tax on amounts it distributes to
shareholders, although shareholders will be taxed on distributions they receive.
The Fund will distribute substantially all of its income and gains to its
shareholders every year. If the Fund declares a dividend in October, November or
December but pays it in January, you may be taxed on the dividend as if you
received it in the previous year.
You will generally be taxed on dividends you receive from the Fund, regardless
of whether they are paid to you in cash or are reinvested in additional Fund
shares. If the Fund designates a dividend as a capital gain distribution, (e.g.,
when the Fund has a gain from the sale of an asset the Fund held for more than
12 months), you will pay tax on that dividend at the long-term capital gains tax
rate, no matter how long you have held your Fund shares.
If you invest through a tax-deferred retirement account, such as an IRA, you
generally will not have to pay tax on dividends until they are distributed from
the account. These accounts are subject to complex tax rules, and you should
consult your tax advisor about investment through a tax-deferred account.
There may be tax consequences to you if you dispose of your Fund shares, for
example, through redemption, exchange or sale. You will generally have a capital
gain or loss from a disposition. The amount of the gain or loss and the rate of
tax will depend mainly upon how much you pay for the shares, how much you sell
them for, and how long you hold them. For example, if you sold at a gain Fund
shares that you had held for more than one year as a capital asset, then your
gain would be taxed at the long-term capital gains tax rate.
The Fund will send you a tax report each year that will tell you which dividends
must be treated as ordinary income and which (if any) are long-term capital
gain.
As with all mutual funds, the Fund may be required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to you if you
fail to provide the Fund with your correct taxpayer identification number or to
make required certifications, or if you have been notified by the IRS that you
are subject to backup withholding. Backup withholding is not an additional tax,
but is a method in which the IRS ensures that it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S. federal income tax
liability.
<PAGE>
[Outside back cover page.]
The Statement of Additional Information for the Fund, dated May 1, 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 which are
also incorporated into this Prospectus by reference. In the Fund's next 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 report
(dated February 29, 2000 and incorporated herein by reference) 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
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 (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 BOND INDEX FUND
May 1, 2000
This Statement of Additional Information ("SAI") is not a prospectus and should
be read together with the Prospectus dated May 1, 2000 (as amended from time to
time) for the E*TRADE Bond Index Fund (the "Fund"), a separate series of E*TRADE
Funds. Unless otherwise defined herein, capitalized terms have the meanings
given to them in the Fund's Prospectus.
To obtain a free copy of the Fund's Prospectus and the Fund's most recent
shareholders report dated February 29, 2000 and incorporated herein by
reference, 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.........................................................11
TRUSTEES AND OFFICERS.................................................16
INVESTMENT MANAGEMENT.................................................20
SERVICE PROVIDERS.....................................................21
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION........................24
ORGANIZATION, DIVIDEND AND VOTING RIGHTS..............................25
SHAREHOLDER INFORMATION...............................................26
TAXATION..............................................................27
UNDERWRITER...........................................................30
MASTER PORTFOLIO ORGANIZATION.........................................31
PERFORMANCE INFORMATION...............................................32
APPENDIX..............................................................37
<PAGE>
FUND HISTORY
The E*TRADE Bond Index Fund (the "Fund") is a diversified series of E*TRADE
Funds (the "Trust"). The Trust is organized as a Delaware business trust and was
formed on November 4, 1998.
THE FUND
The Fund is classified as a diversified open-end, management investment company.
The Fund's investment objective is to provide investment results that
correspond, before fees and expenses, to the total return performance of
fixed-income securities in the aggregate, as represented by the Lehman Brothers
Government/Corporate Bond Index. This investment objective is fundamental and
therefore, cannot be changed without approval of a majority (as defined in the
Investment Company Act of 1940, as amended ("1940 Act")) of the Fund's
outstanding voting interests.
To achieve its investment objective, the Fund intends to invest all of its
assets in the Bond Index 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.
The Master Portfolio seeks to provide investment results that correspond to the
total return performance of fixed-income securities in the aggregate, as
represented by the Lehman Brothers/Corporate Bond Index. The Master Portfolio
seeks to achieve its investment objective by investing in a representative
sample of the securities that comprise the Bond Index and in proportions that
match their index weights.
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.
Index Funds. The net asset value of index funds and funds which are not actively
managed, such as the Fund, may be disproportionately affected by the following
risks: short- and long-term changes in the characteristics of the companies
whose securities make up the index; modifications in the criteria for companies
selected to make up the index; suspension or termination of the operation of the
index; and the activities of issuers whose market capitalization represents a
disproportionate amount of the total market capitalization of the index.
Futures Contracts and Options Transactions. The Master Portfolio may use futures
as a substitute for a comparable market position in the underlying securities.
A futures contract is an agreement between two parties, a buyer and a seller, to
exchange a particular commodity or financial instrument at a specific price on a
specific date in the future. An option transaction generally involves a right,
which may or may not be exercised, to buy or sell a commodity or financial
instrument at a particular price on a specified future date. Futures contracts
and options are standardized and traded on exchanges, where the exchange serves
as the ultimate counterparty for all contracts. Consequently, the primary credit
risk on futures contracts is the creditworthiness of the exchange. Futures
contracts are subject to market risk (i.e., exposure to adverse price changes).
The Master Portfolio may enter into futures contracts and may purchase and write
options thereon. Upon exercise of an option on a futures contract, the writer of
the option delivers to the holder of the option the futures position and the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the futures contract. The potential loss related to the purchase of options
on futures contracts is limited to the premium paid for the option (plus
transaction costs). Because the value of the option is fixed at the time of
sale, there are no daily cash payments to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and that
change would be reflected in the net asset value of the Master Portfolio.
Although the Master Portfolio intends to purchase or sell futures contracts only
if there is an active market for such contracts, no assurance can be given that
a liquid market will exist for any particular contract at any particular time.
Many futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. Once the daily
limit has been reached in a particular contract, no trades may be made that day
at a price beyond that limit or trading may be suspended for specified periods
during the trading day. Futures contract prices could move to the limit for
several consecutive trading days with little or no trading, thereby preventing
prompt liquidation of futures positions and potentially subjecting the Master
Portfolio to substantial losses. If it is not possible, or if the Master
Portfolio determines not to close a futures position in anticipation of adverse
price movements, the Master Portfolio will be required to make daily cash
payments on variation margin.
The Master Portfolio's futures transactions must constitute permissible
transactions pursuant to regulations promulgated by the Commodity Futures
Trading Commission ("CFTC"). In addition, the Master Portfolio may not engage in
futures transactions if the sum of the amount of initial margin deposits and
premiums paid for unexpired contracts on futures, other than those contracts
entered into for bona fide hedging purposes, would exceed 5% of the liquidation
value of the Master Portfolio's assets, after taking into account unrealized
profits and unrealized losses on such contracts; provided, however, that in the
case of an option on a futures contract that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%
liquidation limit. Pursuant to regulations and/or published positions of the
SEC, the Master Portfolio may be required to segregate cash or high quality
money market instruments in connection with its futures transactions in an
amount generally equal to the entire value of the underlying security.
Interest-Rate Futures Contracts and Options on Interest-Rate Futures Contracts.
The Master Portfolio may invest in interest-rate futures contracts and options
on interest-rate futures contracts as a substitute for a comparable market
position in the underlying securities. The Master Portfolio may also sell
options on interest-rate futures contracts as part of closing purchase
transactions to terminate their options positions. No assurance can be given
that such closing transactions can be effected or the degree of correlation
between price movements in the options on interest rate futures or price
movements in the Master Portfolio's securities which are the subject of the
transaction.
Interest-Rate and Index Swaps. The Master Portfolio may enter into interest-rate
and index swaps in pursuit of its investment objectives. Interest-rate swaps
involve the exchange by the Master Portfolio with another party of their
respective commitments to pay or receive interest (for example, an exchange of
floating-rate payments or fixed-rate payments). Index swaps involve the exchange
by the Master Portfolio with another party of cash flows based upon the
performance of an index of securities or a portion of an index of securities
that usually include dividends or income. In each case, the exchange commitments
can involve payments to be made in the same currency or in different currencies.
The Master Portfolio will usually enter into swaps on a net basis. In so doing,
the two payment streams are netted out, with the Master Portfolio receiving or
paying, as the case may be, only the net amount of the two payments. If the
Master Portfolio enters into a swap, it will maintain a segregated account on a
gross basis, unless the contract provides for a segregated account on a net
basis. If there is a default by the other party to such a transaction, the
Master Portfolio will have contractual remedies pursuant to the agreements
related to the transaction.
The use of interest-rate and index swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio security transactions. There is no limit, except as provided
below in the Master Portfolio's policies and restrictions, on the amount of swap
transactions that may be entered into by the Master Portfolio. These
transactions generally do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
swaps generally is limited to the net amount of payments that the Master
Portfolio is contractually obligated to make. There is also a risk of a default
by the other party to a swap, in which case the Master Portfolio may not receive
the net amount of payments that a Master Portfolio contractually is entitled to
receive.
Forward commitments, when-issued purchases and delayed-delivery transactions.
The Master Portfolio may purchase or sell securities on a when-issued or
delayed-delivery basis and make contracts to purchase or sell securities for a
fixed price at a future date beyond customary settlement time. Securities
purchased or sold on a when-issued, delayed-delivery or forward commitment basis
involve a risk of loss if the value of the security to be purchased declines, or
the value of the security to be sold increases, before the settlement date.
Although the Master Portfolio will generally purchase securities with the
intention of acquiring them, the Master Portfolio may dispose of securities
purchased on a when-issued, delayed-delivery or a forward commitment basis
before settlement when deemed appropriate by the adviser.
Borrowing Money. As a fundamental policy, the Master Portfolio is permitted to
borrow to the extent permitted under the 1940 Act. However, the Master Portfolio
currently intends to borrow money only for temporary or emergency (not
leveraging) purposes, and may borrow up to one-third of the value of its total
assets including the amount borrowed) valued at the lesser of cost or market,
less liabilities (not including the amount borrowed) at the time the borrowing
is made. While borrowings exceed 5% of the Master Portfolio's total assets, the
Master Portfolio will not make any new investments.
Short-term instruments and temporary investments. The Master Portfolio may
invest in high-quality money market instruments on an ongoing basis to provide
liquidity or for temporary purposes when there is an unexpected level of
shareholder purchases or redemptions. The instruments in which the Master
Portfolio may invest include: (i) short-term obligations issued or guaranteed by
the U.S. Government, its agencies or instrumentalities (including
government-sponsored enterprises); (ii) negotiable certificates of deposit
("CDs"), bankers' acceptances, fixed time deposits and other obligations of
domestic banks (including foreign branches) that have more than $1 billion in
total assets at the time of investment and that are members of the Federal
Reserve System or are examined by the Comptroller of the Currency or whose
deposits are insured by the FDIC; (iii) commercial paper rated at the date of
purchase "Prime-1" by Moody's or "A-1+" or "A-1" by S&P, or, if unrated, of
comparable quality as determined by BGFA; (iv) non-convertible corporate debt
securities (e.g., bonds and debentures) with remaining maturities at the date of
purchase of not more than one year that are rated at least "Aa" by Moody's or
"AA" by S&P; (v) repurchase agreements; and (vi) short-term, U.S.
dollar-denominated obligations of foreign banks (including U.S. branches) that,
at the time of investment have more than $10 billion, or the equivalent in other
currencies, in total assets and in the opinion of BGFA are of comparable quality
to obligations of U.S. banks which may be purchased by the Master Portfolio.
Bank Obligations. The Master Portfolio may invest in bank obligations, including
certificates of deposit, time deposits, bankers' acceptances and other
short-term obligations of domestic banks, foreign subsidiaries of domestic
banks, foreign branches of domestic banks, and domestic and foreign branches of
foreign banks, domestic savings and loan associations and other banking
institutions.
Certificates of deposit are negotiable certificates evidencing the obligation of
a bank to repay funds deposited with it for a specified period of time. Time
deposits are non-negotiable deposits maintained in a banking institution for a
specified period of time at a stated interest rate. Time deposits which may be
held by the Master Portfolio will not benefit from insurance from the Bank
Insurance Fund or the Savings Association Insurance Fund administered by the
Federal Deposit Insurance Corporation. Bankers' acceptances are credit
instruments evidencing the obligation of a bank to pay a draft drawn on it by a
customer. These instruments reflect the obligation both of the bank and of the
drawer to pay the face amount of the instrument upon maturity. The other
short-term obligations may include uninsured, direct obligations, bearing fixed,
floating- or variable-interest rates.
Commercial Paper and Short-Term Corporate Debt Instruments. The Master Portfolio
may invest in commercial paper (including variable amount master demand notes),
which consists of short-term, unsecured promissory notes issued by corporations
to finance short-term credit needs. Commercial paper is usually sold on a
discount basis and has a maturity at the time of issuance not exceeding nine
months. Variable amount master demand notes are demand obligations that permit
the investment of fluctuating amounts at varying market rates of interest
pursuant to arrangements between the issuer and a commercial bank acting as
agent for the payee of such notes whereby both parties have the right to vary
the amount of the outstanding indebtedness on the notes. 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.
The ratings of Moody's and S&P and other nationally recognized statistical
rating organizations are more fully described in the attached Appendix.
Repurchase Agreements. The Master Portfolio may 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. The Master Portfolio's custodian has custody of, and holds in a
segregated account, securities acquired as collateral by the Master Portfolio
under a repurchase agreement. Repurchase agreements are considered by the staff
of the SEC to be loans by the Master Portfolio. The Master Portfolio may enter
into repurchase agreements only with respect to securities that could otherwise
be purchased by the Master Portfolio, including government securities and
mortgage-related securities, regardless of their remaining maturities, and
requires that additional securities be deposited with the custodian if the value
of the securities purchased should decrease below the repurchase price. The
Master Portfolio's investment advisor monitors on an on-going 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 loans by the Master Portfolio under the 1940 Act.
Floating- and variable- rate obligations. The Master Portfolio may purchase
floating- and variable-rate obligations. 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 its investment advisor determines that at the time of
investment the obligations are of comparable quality to the other obligations in
which the Master Portfolio may invest. The Master Portfolio's investment advisor
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.
Loans of portfolio securities. The Master Portfolio may lend securities from its
portfolio to brokers, dealers and financial institutions (but not individuals)
if cash, U.S. Government securities or other high quality debt obligations equal
to at least 100% of the current market value of the securities loaned (including
accrued interest thereon) plus the interest payable to the Master Portfolio with
respect to the loan is maintained with the Master Portfolio. In determining
whether or not to lend a security to a particular broker, dealer or financial
institution, the Master Portfolio's investment advisor considers all relevant
facts and circumstances, including the size, creditworthiness and reputation of
the broker, dealer, or financial institution. Any loans of portfolio securities
are fully collateralized based on values that are marked to market daily. The
Master Portfolio does not enter into any portfolio security lending arrangement
having a duration of longer than one year. Any securities that the Master
Portfolio may receive as collateral will not become part of the Master
Portfolio's investment portfolio at the time of the loan and, in the event of a
default by the borrower, the Master Portfolio will, if permitted by law, dispose
of such collateral except for such part thereof that is a security in which the
Master Portfolio is permitted to invest. During the time securities are on loan,
the borrower will pay the Master Portfolio any accrued income on those
securities, and the Master Portfolio may invest the cash collateral and earn
income or receive an agreed-upon fee from a borrower that has delivered
cash-equivalent collateral. The Master Portfolio will not lend securities having
a value that exceeds one-third of the current value of the Master Portfolio's
total assets. Loans of securities by the Master Portfolio are subject to
termination at the Master Portfolio's or the borrower's option.
The principal risk of lending is potential default or insolvency of the
borrower. In either of these cases, the Master Portfolio could experience delays
in recovering securities or collateral or could lose all or part of the value of
the loaned securities. The Master Portfolio may pay reasonable administrative
and custodial fees in connection with loans of portfolio securities and may pay
a portion of the interest or fee earned thereon to the borrower or a placing
broker. Borrowers and placing brokers are not permitted to be affiliated,
directly or indirectly, with the Master Portfolio, its investment advisor or
Stephens, Inc.
Investment company securities. The Master Portfolio may invest in securities
issued by other open-end management investment companies which principally
invest in securities of the type in which such Master Portfolio invests. Under
the 1940 Act, a Master Portfolio's investment in such securities currently is
limited to, subject to certain exceptions, (i) 3% of the total voting stock of
any one investment company, (ii) 5% of the Master Portfolio's net assets with
respect to any one investment company and (iii) 10% of the Master Portfolio's
net assets in the aggregate. Investments in the securities of other investment
companies generally will involve duplication of advisory fees and certain other
expenses. The Master Portfolio may also purchase shares of exchange-listed
closed-end funds.
Illiquid securities. To the extent that such investments are consistent with its
investment objective, the Master Portfolio may invest up to 15% of the value of
its net assets in securities as to which a liquid trading market does not exist.
Such securities may include securities that are not readily marketable, such as
privately issued securities and other securities that are subject to legal or
contractual restrictions on resale, floating- and variable-rate demand
obligations as to which the Master Portfolio cannot exercise a demand feature on
not more than seven days' notice and as to which there is no secondary market
and repurchase agreements providing for settlement more than seven days after
notice.
Obligations of Foreign Governments, Banks and Corporations. The Master Portfolio
may invest in U.S. dollar-denominated short-term obligations issued or
guaranteed by one or more foreign governments or any of their political
subdivisions, agencies or instrumentalities that are determined by its
investment advisor to be of comparable quality to the other obligations in which
the Master Portfolio may invest.
The Master Portfolio may also invest in debt obligations of supranational
entities. Supranational entities include international organizations designated
or supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank. The percentage of the
Master Portfolio's assets invested in obligations of foreign governments and
supranational entities will vary depending on the relative yields of such
securities, the economic and financial markets of the countries in which the
investments are made and the interest rate climate of such countries.
The Master Portfolio may also invest a portion of its total assets in high
quality, short-term (one year or less) debt obligations of foreign branches of
U.S. banks or U.S. branches of foreign banks that are denominated in and pay
interest in U.S. dollars.
Additional costs associated with an investment in foreign securities may include
higher custodial fees than apply to domestic custodial arrangements and
transaction costs of foreign currency conversions. Changes in foreign exchanges
rates will also affect the value of securities denominated in currencies other
than the U.S. dollar. The Master Portfolio's performance may be affected either
favorably or unfavorably by fluctuations in the relative rates of exchange
between the currencies of different nations, by exchange control regulations and
by indigenous economic and political developments. In addition, many foreign
countries are less prepared than the United States to properly process and
calculate information related to dates from and after January 1, 2000, which
could result in difficulty pricing foreign investments and failure by foreign
issuers to pay timely dividends, interest or principal. All of these factors can
make foreign investments, especially those in emerging markets, more volatile
and potentially less liquid than U.S. investments. The extent of such impact
cannot be predicted.
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.
Securities Related Businesses. The 1940 Act limits the ability of the Fund to
invest in securities issued by companies deriving more than 15% of their gross
revenues from securities related activities ("financial companies"). If the Bond
Index provides a higher concentration in one or more financial companies, the
Fund may experience increased tracking error due to the limitations on
investments in such companies.
Portfolio Turnover Rate. The portfolio turnover rate for the Master Portfolio
generally is not expected to exceed 50%. This portfolio turnover rate will not
be a limiting factor when the investment advisor deems portfolio changes
appropriate.
Index Changes. The debt securities comprising the Bond Index are changed from
time to time. Announcements of those changes and related market activity may
result in reduced returns or volatility for the Fund.
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 or subadvisor, 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 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 complaint. 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 POLICIES
Fundamental Investment Restrictions
The following are the Fund's fundamental investment restrictions which, along
with the Fund's investment objective, cannot be changed without shareholder
approval by a vote of a majority of the outstanding shares of the Fund, as set
forth in the 1940 Act.
Unless noted otherwise, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in percentage resulting from a change
in the Fund's assets (i.e., due to cash inflows or redemptions) or in market
value of the investment or the Fund's assets will not constitute a violation of
that restriction. 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:
1. may not invest more than 5% of its assets in the obligations of any single
issuer, except that up to 25% of the value of its total assets may be
invested, and securities issued or guaranteed by the U.S. government, or
its agencies or instrumentalities may be purchased, without regard to any
such limitation;
2. may not with respect to 75% of its total assets, invest in a security if,
as a result of such investment, it would hold more than 10% (taken at the
time of such investment) of the outstanding securities of any one issuer;
3. may not issue senior securities, except as permitted under the 1940 Act;
4. may not borrow money, except to the extent permitted under the 1940 Act,
provided that the Fund 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). For purposes of this investment restriction, the Fund's
entry into options, forward contracts, futures contracts, including those
relating to indexes, and options on futures contracts or indexes shall not
constitute borrowing to the extent certain segregated accounts are
established and maintained by the Fund;
5. may not act as an underwriter of securities of other issuers, except to
the extent that the Fund may be deemed to be an underwriter within the
meaning of the Securities Act of 1933, as amended, in connection with the
disposition of portfolio securities;
6. may make loans to others, except through the purchase of debt obligations
and the entry into repurchase agreements. However, the Fund may not lend
its portfolio securities in an amount not to exceed one-third of the value
of its total assets. Any loans of portfolio securities will be made
according to guidelines established by the SEC and the Fund's Board of
Trustees;
7. may not invest 25% or more of its total assets in the securities of
issuers in any particular industry or group of closely related industries
except that there shall be no limitation with respect to investments in
(i) obligations of the U.S. Government, its agencies or instrumentalities;
(ii) any industry in which the Lehman Brothers Government/Corporate Bond
Index becomes concentrated to the same degree during the same period. The
Fund will be concentrated as specified above only to the extent the
percentage of its assets invested in those categories of investments is
sufficiently large that 25% or more of its total assets would be invested
in a single industry;
8. may not purchase, hold or deal in real estate, or oil, gas or other
mineral leases or exploration or development programs, but the Fund may
purchase and sell securities secured by real estate or interests therein,
or securities issued by companies which invest in real estate, or
interests therein; and
9. may not invest in commodities, except that the Fund may purchase and sell
(i.e., write) options, forward contracts, futures contracts, including
those relating to indexes, and options on futures contracts or indexes.
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
invest can be expected to charge fees for operating expenses, such as
investment advisory and administrative fees, that would be in addition to
those charged by the Fund.
2. The Fund may not invest more than 15% of its net assets in illiquid
securities. For this purpose, illiquid securities include, among others,
(a) securities that are illiquid by virtue of the absence of a readily
available market or legal or contractual restrictions on resale, (b) fixed
time deposits that are subject to withdrawal penalties and that have
maturities of more than seven days, and (c) 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.
The Fund may, notwithstanding any other fundamental or non-fundamental
investment 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. If a percentage restriction is adhered to at the time of
investment, a later change in percentage resulting from a change in values or
assets except with respect to compliance with fundamental investment restriction
number (5), will not constitute a violation of such restriction.
The Master Portfolio may not:
1. invest more than 5% of its assets in the obligations of any single issuer,
except that up to 25% of the value of its total assets may be invested,
and securities issued or guaranteed by the U.S. Government, or its
agencies or instrumentalities may be purchased, without regard to any such
limitation;
2. hold more than 10% of the outstanding voting securities of any single
issuer. This investment restriction applies only with respect to 75% of
its total assets;
3. invest in commodities, except that the Master Portfolio may purchase and
sell (i.e. write) options, forward contracts, futures contracts, including
those relating to indices, and options on futures contracts or indices;
4. purchase, hold or deal in real estate, or oil, gas or other mineral leases
or exploration or development programs, but the Master Portfolio may
purchase and sell securities that are secured by real estate or issued by
companies that invest or deal in real estate;
5. borrow money, except to the extent permitted under the 1940 Act, provided
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). For purposes of this investment restriction, the Master
Portfolio's entry into options, forward contracts, futures contracts,
including those relating to indexes, and options on futures contracts or
indexes shall not constitute borrowing to the extent certain segregated
accounts are established and maintained by the Master Portfolio;
6. make loans to others, except through the purchase of debt obligations and
the entry into repurchase agreements. However, the Master Portfolio may
lend its portfolio securities in an amount not to exceed one-third of the
value of its total assets. Any loans of portfolio securities will be made
according to guidelines established by the SEC and the Master Portfolio's
Board of Trustees;
7. act as an underwriter of securities of other issuers, except to the extent
that the Master Portfolio may be deemed an underwriter under the
Securities Act of 1933, as amended, by virtue of disposing of portfolio
securities;
8. invest 25% or more of its total assets in the securities of issuers in any
particular industry or group of closely related industries except that
there shall be no limitation with respect to investments in (i)
obligations of the U.S. Government, its agencies or instrumentalities;
(ii) any industry in which the Lehman Brothers Government/Corporate Bond
Index becomes concentrated to the same degree during the same period. The
Master Portfolio will be concentrated as specified above only to the
extent the percentage of its assets invested in those categories of
investments is sufficiently large that 25% or more of its total assets
would be invested in a single industry;
9. issue any senior security (as such term is defined in Section 18(f) of the
1940 Act), except to the extent the activities permitted in the Master
Portfolio's fundamental policies numbers (3) and (5), may be deemed to
give rise to a senior security; and
10. purchase securities on margin, but each Master Portfolio may make margin
deposits in connection with transactions in options, forward contracts,
futures contracts, including those related to indexes, and options on
futures contracts or indexes.
Non-Fundamental Operating Policies
The Master Portfolio has adopted the following investment restrictions as
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 charge fees for operating expenses, such as
investment advisory and administrative fees, that would be in addition to
those charged by the Master Portfolio.
2. The Master Portfolio may not invest more than 15% of its net assets in
illiquid securities. For this purpose, illiquid securities include, among
others, (a) securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restrictions on resale,
(b) fixed time deposits that are subject to withdrawal penalties and that
have maturities of more than seven days, and (c) repurchase agreements not
terminable within seven days.
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, Treasurer 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 is President of
4500 Bohannon Drive, E*TRADE Asset Management,
Menlo Park, CA 94025 Inc. She joined E*TRADE Asset
Management, Inc. in March
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), and prior to that
he was an Assistant Vice
President of Maryland National
Bank.
<FN>
(1) Ms. Meyers may be considered an "interested person," but she is not an
"affiliated person," as defined in the 1940 Act.
</FN>
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:
</TABLE>
<PAGE>
Compensation Table
<TABLE>
- --------------------------------------------------------------------------
<CAPTION>
Total Compensation
Name of Person, Position Aggregate Compensation From Fund and Fund
from the Fund (1) Complex Paid to
Trustees(2)
- --------------------------------------------------------------------------
<S> <C> <C>
Leonard C. Purkis, None None
Trustee
Shelly J. Meyers (3) $7,500 $22,500
Ashley T. Rabun $7,500 $22,500
Steven Grenadier $7,500 $22,500
George J. Rebhan $7,500 - 0 -
No Trustee will receive any benefits upon retirement. Thus, no pension or
retirement benefits have accrued as part of the Fund's expenses.
<FN>
- ------------
(1) This amount represents the estimated aggregate amount of compensation paid
to each non-affiliated Trustee for service on the Board of Trustees for
the fiscal year ending December 31, 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
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.
As of April 3, 2000, the following persons beneficially owned 5% or more of the
Fund's outstanding equity securities:
Shares
Beneficially
Name Owned Percent of Fund
- ---- ----- ---------------
J. Sweemer 15,167.00 5.6%
Princeton, NJ
P. Leiber 21,322.00 7.9%
Eldorado Hills, CA
As of the date of this SAI, the Trustees and Officers of the Fund as a group
owned less than 1% of the Fund's equity securities.
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 March 31,
2000, the Investment Advisor provided investment advisory services for over $277
million in assets.
Subject to the general supervision of the E*TRADE Funds' Board of Trustees and
in accordance with the investment objective, policies and restrictions of the
Fund, the Investment Advisor provides the Fund with ongoing investment guidance,
policy direction and monitoring of the Master Portfolio. The Investment Advisor
may in the future manage cash and money market instruments for cash flow
purposes. For its advisory services, the Fund currently 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 a master portfolio. To the extent
the Fund has assets that are not invested in a master portfolio in the future,
the Fund would pay the Investment Advisor an investment advisory fee at an
annual rate equal to 0.08% of that portion of the Fund's assets not invested in
a master portfolio. The Fund paid the Investment Advisor approximately $92 for
its investment advisory services to the Fund in 1999.
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 December 31, 1999, Barclays Global
Investors and its affiliates, including BGFA, provided investment advisory
services for over $783 billion of assets. Pursuant to an Investment Advisory
Contract (the "Advisory Contract") with the Master Portfolio, BGFA provides the
Master Portfolio with investment guidance and policy direction in connection
with the daily portfolio management of the Master Portfolio, subject to the
supervision of the Master Portfolio's Board of Trustees and in conformity with
Delaware law and the stated policies of the Master Portfolio. Pursuant to the
Advisory Contract, BGFA furnishes to the Master Portfolio's Board of Trustees
periodic reports on the investment strategy and performance of the Master
Portfolio. BGFA receives a monthly fee from the Master Portfolio at an annual
rate equal to 0.08% 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. This advisory fee is an expense of the Master
Portfolio borne proportionately by its interestholders, including the Fund.
The Advisory Contract will continue in effect for more than two years provided
the continuance is approved annually (i) by the holders of a majority of the
Master Portfolio's outstanding voting securities or by the Master Portfolio's
Board of Trustees and (ii) by a majority of the Trustees of the Master Portfolio
who are not parties to the Advisory Contract or affiliated of any such party.
The Advisory Contract may be terminated on 60 days' written notice by either
party 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 overall net results. When BGFA, subject to the supervision of, and the
overall authority of the Master Portfolio's Board of Trustees, 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 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 inside information in its possession.
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. Furthermore, except as provided in the advisory contract,
Stephens and BGI bear substantially all costs of the Master Portfolio and the
Master Portfolio's operations. Stephens and BGI are not entitled to compensation
for providing administrative services to the Master Portfolio. BGI has delegated
certain of its duties as co-administrator to Investors Bank & Trust Company.
Stephens also acts as the placement agent of Master Portfolio's shares pursuant
to a Placement Agency Agreement (the "Placement Agency Agreement") with the
Master Portfolio.
Administrator of the Fund. E*TRADE Asset Management, 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 0.25% 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
0.27% of the 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 0.35%), and this agreement has the same term as the administrative
service 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.
The Fund paid the Administrator approximately $1,249 for its services to the
Fund in 1999 under the administrative services agreement.
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. IBT acts as the Master Portfolio's transfer agent and
dividend-disbursing agent.
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, 350 South Grand Avenue, Los
Angeles, CA 90071-3462, 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.
Purchases and sales of portfolio securities for the Master Portfolio usually are
principal transactions. Portfolio securities ordinarily are purchased directly
from the issuer or from an underwriter or market maker. Usually no brokerage
commissions are paid by the Master Portfolio for such purchases and sales. The
prices paid to the underwriters of newly-issued securities usually include a
concession paid by the issuer to the underwriter, and purchases of securities
from market makers may include the spread between the bid and asked price.
Asset allocation and modeling strategies are employed by the Master Portfolio's
investment advisor for the investment companies and accounts advised or
sub-advised by it. If these strategies indicate particular securities should be
purchased or sold, at the same time, by the Master Portfolio and one or more of
these investment companies or accounts, available investments or opportunities
for sales will be allocated equitably to each by the Master Portfolio's
investment adviser. In some cases, this procedure 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.
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. Assets in which the Fund invests may
trade and fluctuate in value after the close and before the opening of the NYSE.
Telephone and Internet Redemption Privileges. The Fund employs reasonable
procedures to confirm that instructions communicated by telephone or the
Internet are genuine. The Fund may not be liable for losses due to unauthorized
or fraudulent instructions. Such procedures include but are not limited to
requiring a form of personal identification prior to acting on instructions
received by telephone or the Internet, providing written confirmations of such
transactions to the address of record, tape recording telephone instructions and
backing up Internet transactions.
Retirement Plans. You can find information about the retirement plans offered by
E*TRADE Securities by accessing our Website. You may fill out an IRA application
online or request our IRA application kit by mail.
TAXATION
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the Fund and the purchase, ownership, and disposition of Fund shares.
This discussion does not purport to be complete or to deal with all aspects of
federal income taxation that may be relevant to shareholders in light of their
particular circumstances. This discussion is based upon present provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be retroactive. Prospective
investors should consult their own tax advisors with regard to the federal tax
consequences of the purchase, ownership, or disposition of Fund shares, as well
as the tax consequences arising under the laws of any state, foreign country, or
other taxing jurisdiction.
Taxation of the Fund. The Fund intends to be taxed as a regulated investment
company under Subchapter M of the Code. Accordingly, the Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to certain securities loans, and
gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing in
such stock, securities or currencies; and (b) diversify its holdings so that, at
the end of each fiscal quarter, (i) at least 50% of the value of the Fund's
total assets is represented by cash and cash items, U.S. Government securities,
the securities of other regulated investment companies and other securities,
with such other securities limited, in respect of any one issuer, to an amount
not greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities and the securities of other regulated investment
companies).
As a regulated investment company, the Fund generally is not subject to U.S.
federal income tax on income and gains that it distributes to shareholders, if
at least 90% of the Fund's investment company taxable income (which includes,
among other items, dividends, interest and the excess of any net short-term
capital gains over net long-term capital losses) for the taxable year is
distributed. The Fund intends to distribute substantially all of such income.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax at the
Fund level. To avoid the tax, the Fund must distribute during each calendar year
an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for a one-year period generally ending on October 31 of
the calendar year, and (3) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, the Fund intends to make distributions in accordance with the
calendar year distribution requirement.
Distributions. Distributions of investment company taxable income (including net
short-term capital gains) are taxable to a U.S. shareholder as ordinary income,
whether paid in cash or shares. Dividends paid by the Fund to a corporate
shareholder, to the extent such dividends are attributable to dividends received
by the Fund from U.S. corporations, may, subject to limitation, be eligible for
the dividends received deduction. However, the alternative minimum tax
applicable to corporations may reduce the value of the dividends received
deduction. Distributions of net capital gains (the excess of net long-term
capital gains over net short-term capital losses) designated by the Fund as
capital gain dividends, whether paid in cash or reinvested in Fund shares, will
generally be taxable to shareholders as long-term capital gain, regardless of
how long a shareholder has held Fund shares.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received. A distribution will be treated as paid on December 31 of a calendar
year if it is declared by the Fund in October, November or December of that year
with a record date in such a month and paid by the Fund during January of the
following year. Such distributions will be taxable to shareholders in the
calendar year in which the distributions are declared, rather than the calendar
year in which the distributions are received.
If the net asset value of shares is reduced below a shareholder's cost as a
result of a distribution by the Fund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying shares of the Fund just
prior to a distribution. The price of shares purchased at this time will include
the amount of the forthcoming distribution, but the distribution will generally
be taxable to the shareholder.
Dispositions. Upon a redemption, sale or exchange of shares of the Fund, a
shareholder will realize a taxable gain or loss depending upon his or her basis
in the shares. A gain or loss will be treated as capital gain or loss if the
shares are capital assets in the shareholder's hands, and will be long-term
capital gain or loss if the shares are held for more than one year and
short-term capital gain or loss if the shares are held for not more than one
year. Any loss realized on a redemption, sale or exchange will be disallowed to
the extent the shares disposed of are replaced (including through reinvestment
of dividends) within a period of 61 days, beginning 30 days before and ending 30
days after the shares are disposed of. In such a case the basis of the shares
acquired will be adjusted to reflect the disallowed loss. If a shareholder holds
Fund shares for six months or less and during that period receives a
distribution taxable to the shareholder as long-term capital gain, any loss
realized on the sale of such shares during such six-month period would be a
long-term loss to the extent of such distribution.
Backup Withholding. The Fund generally will be required to withhold federal
income tax at a rate of 31% ("backup withholding") from dividends paid, capital
gain distributions, and redemption proceeds to shareholders if (1) the
shareholder fails to furnish the Fund with the shareholder's correct taxpayer
identification number or social security number, (2) the IRS notifies the
shareholder or the Fund that the shareholder has failed to report properly
certain interest and dividend income to the IRS and to respond to notices to
that effect, or (3) when required to do so, the shareholder fails to certify
that he or she is not subject to backup withholding. Any amounts withheld may be
credited against the shareholder's federal income tax liability.
Other Taxation. Distributions may be subject to additional state, local and
foreign taxes, depending on each shareholder's particular situation.
Market Discount. If the Fund purchases a debt security at a price lower than the
stated redemption price of such debt security, the excess of the stated
redemption price over the purchase price is "market discount". If the amount of
market discount is more than a de minimis amount, a portion of such market
discount must be included as ordinary income (not capital gain) by the Fund in
each taxable year in which the Fund owns an interest in such debt security and
receives a principal payment on it. In particular, the Fund will be required to
allocate that principal payment first to the portion of the market discount on
the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for each
period is equal to the lesser of (i) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account) or (ii) the amount of the principal payment with
respect to such period. Generally, market discount accrues on a daily basis for
each day the debt security is held by the Fund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Fund, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest. Gain realized on the disposition of a market discount obligation
must be recognized as ordinary interest income (not capital gain) to the extent
of the "accrued market discount."
Original Issue Discount. Certain debt securities acquired by the Fund may be
treated as debt securities that were originally issued at a discount. Very
generally, original issue discount is defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash income on account of such discount is actually
received by the Fund, original issue discount that accrues on a debt security in
a given year generally is treated for federal income tax purposes as interest
and, therefore, such income would be subject to the distribution requirements
applicable to regulated investment companies. Some debt securities may be
purchased by the Fund at a discount that exceeds the original issue discount on
such debt securities, if any. This additional discount represents market
discount for federal income tax purposes (see above).
Options, Futures and Forward Contracts. Any regulated futures contracts and
certain options (namely, nonequity options and dealer equity options) in which
the Fund may invest may be "section 1256 contracts." Gains (or losses) on these
contracts generally are considered to be 60% long-term and 40% short-term
capital gains or losses. Also, section 1256 contracts held by the Fund at the
end of each taxable year (and on certain other dates prescribed in the Code) are
"marked to market" with the result that unrealized gains or losses are treated
as though they were realized.
Transactions in options, futures and forward contracts undertaken by the Fund
may result in "straddles" for federal income tax purposes. The straddle rules
may affect the character of gains (or losses) realized by the Fund, and losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized. In
addition, certain carrying charges (including interest expense) associated with
positions in a straddle may be required to be capitalized rather than deducted
currently. Certain elections that the Fund may make with respect to its straddle
positions may also affect the amount, character and timing of the recognition of
gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to the Fund are not entirely
clear. The straddle rules may increase the amount of short-term capital gain
realized by the Fund, which is taxed as ordinary income when distributed to
shareholders. Because application of the straddle rules may affect the character
of gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to a fund that did not engage
in such transactions.
Constructive Sales. Under certain circumstances, the Fund may recognize gain
from a constructive sale of an "appreciated financial position" it holds if it
enters into a short sale, forward contract or other transaction that
substantially reduces the risk of loss with respect to the appreciated position.
In that event, the Fund would be treated as if it had sold and immediately
repurchased the property and would be taxed on any gain (but not loss) from the
constructive sale. The character of gain from a constructive sale would depend
upon the Fund's holding period in the property. Loss from a constructive sale
would be recognized when the property was subsequently disposed of, and its
character would depend on the Fund's holding period and the application of
various loss deferral provisions of the Code. Constructive sale treatment does
not apply to transactions closed in the 90-day period ending with the 30th day
after the close of the taxable year, if certain conditions are met.
UNDERWRITER
Distribution of Securities. Under a Distribution Agreement with the Fund
("Distribution Agreement"), E*TRADE Securities Inc., 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.
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 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.
Historic data on the Bond Index may be used to promote the Fund. The historical
Bond Index data presented from time to time is not intended to suggest that an
investor would have achieved comparable results by investing in any one debt
security or in managed portfolios of debt securities, such as the Fund, during
the periods shown.
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.
<PAGE>
4500 Bohannon Drive
Menlo Park, CA 94025
Telephone: (650) 331-6000
Toll-Free: (800) 786-2575
Internet: http://www.etrade.com
<PAGE>
E*TRADE FUNDS
E*TRADE INTERNATIONAL INDEX FUND
Prospectus dated May 1, 2000
This Prospectus concisely sets forth information about the E*TRADE International
Index Fund (the "Fund") that an investor needs to know before investing. Please
read this Prospectus carefully before investing, and keep it for future
reference. The Fund is a series of E*TRADE Funds.
Objectives, Goals and Principal Strategies.
The investment objective of the Fund is to match as closely as practicable,
before fees and expenses, the performance of an international portfolio of
common stocks represented by the Morgan Stanley Capital International Europe,
Australasia, and Far East Free Index (the "EAFE Free Index" or the "Index"). The
Fund seeks to achieve its objective by investing in a master portfolio. The
Master Portfolio, in turn, seeks to match the total return performance of
foreign stock markets by investing in a representative sample of common stocks
that comprise the EAFE Free Index.
Eligible Investors.
This Fund is designed and built specifically for on-line investors. In order to
be a shareholder of the Fund, you need to have an account with E*TRADE
Securities, Inc. ("E*TRADE Securities"). In addition, the Fund requires you to
consent to receive all information about the Fund electronically. If you wish to
rescind this consent or close your E*TRADE Securities account, the Fund will
redeem all of your shares in your Fund account. The Fund is designed for
long-term investors and the value of the Fund's shares will fluctuate over time.
The Fund is a true no-load fund, which means you pay no sales charges or 12b-1
fees.
About E*TRADE.
E*TRADE Group, Inc. ("E*TRADE") is the direct parent of E*TRADE Asset
Management, Inc., the Fund's investment advisor. E*TRADE, through its group
companies, is a leader in providing secure online investing services. E*TRADE's
focus on technology has enabled it to eliminate traditional barriers, creating
one of the most powerful and economical investing systems for the self-directed
investor. To give you ultimate convenience and control, E*TRADE offers
electronic access to your account virtually anywhere, at any time.
An investment in the Fund is:
o not insured by the Federal Deposit Insurance Corporation;
o not a deposit or other obligation of, or guaranteed by, E*TRADE Bank and
its affiliates; and
o subject to investment risks, including loss of principal.
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 May 1, 2000
<PAGE>
TABLE OF CONTENTS
RISK/RETURN SUMMARY....................................................4
FEES AND EXPENSES......................................................6
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS.....................7
FUND MANAGEMENT........................................................9
THE FUND'S STRUCTURE..................................................10
PRICING OF FUND SHARES................................................10
HOW TO BUY, SELL AND EXCHANGE SHARES..................................11
DIVIDENDS AND OTHER DISTRIBUTIONS.....................................16
TAX CONSEQUENCES......................................................16
<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 match as closely as practicable, before
fees and expenses, the performance of an international portfolio of common
stocks represented by the EAFE Free Index.*
Principal Strategies
The Fund seeks to achieve its investment objective by investing all of its
assets in the International Index Master Portfolio ("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 match the total return performance of foreign
stock markets by investing in a representative sample of common stocks that
comprise the EAFE Free Index.
The EAFE Free Index is intended to represent broadly the performance of foreign
stock markets. The Master Portfolio selects a sampling of securities in the
Index for investments in accordance with their capitalization, industry sector
and valuation, among other factors. The Index is a capitalization-weighted index
and consists of approximately 1100 securities listed on the stock exchanges of
developed markets of countries in Europe (Austria, Belgium, Denmark, Finland,
France, Germany, Ireland, Italy, the Netherlands, Norway, Portugal, Spain,
Sweden, Switzerland and the United Kingdom), Australia, New Zealand, Hong Kong,
Japan, Malaysia, and Singapore. The EAFE Free Index may also include
smaller-capitalization companies.
The Master Portfolio attempts to be fully invested at all times, and under
normal market conditions will have at least 90% of its total assets invested, in
securities comprising the EAFE Free Index. In seeking to match the performance
of the EAFE Free Index, the Master Portfolio may also engage in futures and
options transactions and options on futures contracts.
- ----------------
* The EAFE Index is the exclusive property of Morgan Stanley Capital
International Inc. ("MSCI"). Morgan Stanley Capital International is a service
mark of MSCI. MSCI does not sponsor the Fund, nor is it affiliated in any way
with the E*TRADE Group, Inc. "Morgan Stanley Capital International Europe,
Australasia, Far East Free Index(R)", "EAFE Free Index(R)", and "EAFE(R)" are
trademarks of MSCI. The Fund is not sponsored, endorsed, sold, or promoted by
the EAFE Free Index or MSCI and neither the EAFE Free Index nor MSCI make any
representation or warranty, express or implied, regarding the advisability of
investing in the Fund.
<PAGE>
Principal Risks
The international stock markets may rise and fall daily. The EAFE Free Index
represents a significant portion of foreign markets. Thus, the EAFE Free Index
may also rise and fall daily. As with any stock investment, the value of your
investment in the Fund will fluctuate, meaning you could lose money.
The Master Portfolio invests substantially all of its assets in foreign
securities. This means the Fund can be affected by the risks of foreign
investing, including: changes in currency exchange rates and the costs of
converting currencies; foreign government controls on foreign investment;
repatriation of capital, currency and exchange; foreign taxes; inadequate
supervision and regulation of some foreign markets; volatility from lack of
liquidity; different settlement practices or delayed settlements in some
markets; difficulty in obtaining complete and accurate information about foreign
companies; less strict accounting, auditing and financial reporting standards
than those in the U.S.; political, economic and social instability; and
difficulty enforcing legal rights outside the United States.
Foreign securities are also subject to the risks associated with the value of
foreign currencies. A decline in the value of a foreign currency relative to the
U.S. dollar reduces the U.S. dollar value of securities denominated in that
currency.
To the extent the EAFE Free Index consists of securities of small to medium
sized companies, the value of these securities can be more volatile than that of
larger issuers and can react differently to issuer, political, market and
economic developments than the market as a whole and other types of stocks.
Smaller issuers can be lesser-known, have more limited product lines, markets
and financial resources.
There is no assurance that the Fund will achieve its investment objective. The
EAFE Free Index may not appreciate, and could depreciate, during the time you
are invested in the Fund, even if you are a long-term investor.
The Master Portfolio cannot as a practical matter own all the stocks that make
up the EAFE Free Index in perfect correlation to the Index itself. The use of
futures and options on futures contracts is intended to help the Master
Portfolio match the Index but that may not be the result. In seeking its
objective, the Master Portfolio may also engage in other derivative securities
transactions and lend securities in its Portfolio. Some derivatives may be more
sensitive than direct securities to changes in interest rates, or sudden market
moves. Some derivatives also may be more susceptible to fluctuations in yield or
value due to their structure or contract terms. The value of an investment in
the Fund depends to a great extent upon changes in market conditions. The Fund
seeks to track the Index during down markets as well as during up markets. The
Fund's returns will be directly affected by the volatility of the stocks making
up the Index. The Fund will also have exposure to the industries represented by
those stocks.
An investment in the Fund is not a deposit in a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency. Shares of the Fund involve investment risks, including the possible loss
of principal.
Performance
This Fund commenced operations on October 22, 1999. 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 limited historical
expense data.
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 (as a percentage of redemption
proceeds, payable only if shares are redeemed 1.00%*
within four months of purchase)
Annual Fund Operating Expenses**
(expenses that are deducted from Fund assets)
Management Fees 0.17%***
Distribution (12b-1) Fees None
Other Expenses 0.57%
Administration 0.38%****
Trustee Expenses 0.19%*****
----------
Total Annual Fund Operating Expenses 0.74%
-----
Fee Waiver and/or Reimbursement (0.19%)******
Net Expenses 0.55%
* Effective for redemptions after September 30, 2000. For Shares redeemed before
October 1, 2000 and within four months from the date of purchase, the redemption
fee is 0.50%.
** The cost reflects the expenses at both the Fund and the Master Portfolio
levels.
*** Management fees include a fee equal to 0.15% of daily net assets payable at
the Master Portfolio level to its investment advisor, as well as an investment
advisory fee equal to 0.02% payable by the Fund to its investment advisor.
**** The administration fees include a fee equal to 0.10% of daily net assets
payable at the Master Portfolio level to its co-administrators, and a fee equal
to 0.28% payable by the Fund to its administrator, E*TRADE Asset Management,
Inc.
*****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 table reflects an estimate for the current
year.
******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 0.55%. 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 October 19, 1999 and
terminating on October 19, 2001. 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*
$58 $203
*Reflects costs at both the Fund and Master Portfolio levels.
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS
The Fund's investment objective is to match as closely as practicable, before
fees and expenses, the performance of an international portfolio of common
stocks represented by the Index.
The Master Portfolio's investment objective is to match as closely as
practicable, before fees and expenses, the performance of an international
portfolio of common stocks represented by the EAFE Free Index. Under normal
market conditions, the Master Portfolio invests at least 90% of its total assets
in a representative sample of the securities comprising the EAFE Free Index.
That portion of its assets is not actively managed but is designed to
substantially duplicate the investment performance of the Index. The Master
Portfolio attempts to achieve, in both rising and falling markets, a correlation
of at least 95% between the total return of its net assets before expenses and
the total return of the EAFE Free Index. A 100% correlation would mean the total
return of the Master Portfolio's assets would increase and decrease exactly the
same as the Index. As investment advisor to the Master Portfolio, Barclays
Global Fund Advisors ("BGFA") regularly monitors the Master Portfolio's
correlation to the Index and adjusts the Master Portfolio's portfolio to the
extent necessary. At times, the portfolio composition of the Master Portfolio
may be altered (or "rebalanced") to reflect changes in the characteristics of
the Index.
Like all stock funds, the Fund's Net Asset Value ("NAV") will fluctuate with the
value of its assets. The assets held by the Fund will fluctuate based on market
and economic conditions, or other factors that affect particular companies or
industries.
Since the investment characteristics and therefore, the investment risks of the
Fund correspond to those of the Master Portfolio, the following discussion also
includes a description of the risks associated with the investments of the
Master Portfolio. The Fund's performance will correspond directly to the
performance of the Master Portfolio.
In seeking to match the performance of the EAFE Free Index, the Master Portfolio
also may engage in futures and options transactions and other derivative
securities transactions and lend its portfolio securities, each of which
involves risk.
The Master Portfolio may also invest up to 10% of its total assets in
high-quality money market instruments to provide liquidity for purposes such as
payment of redemption requests and fees. The Master Portfolio may also invest up
to 15% of its net assets in illiquid securities including repurchase agreements
providing for settlement in more than seven days.
Neither the Fund nor the Master Portfolio are managed according to traditional
methods of "active" investment management, which involve the buying and selling
of securities based upon economic, financial and market analysis and investment
judgment. The Master Portfolio may use statistical sampling techniques to
attempt to replicate the returns of the EAFE Free Index using a smaller number
of securities. Statistical sampling techniques attempt to match the investment
characteristics of the Index and the Master Portfolio by taking into account
such factors as capitalization, industry exposures, dividend yield,
price/earnings ratio, price/book ratio, earnings growth, country weightings and
the effect of foreign taxes. The sampling techniques utilized by the Master
Portfolio are designed to allow the Master Portfolio to substantially duplicate
the investment performance of the EAFE Free Index. However, the Master Portfolio
is not expected to track the EAFE Free Index with the same degree of accuracy
that complete replication of such Index would provide.
The Fund's ability to match its investment performance to the investment
performance of the EAFE Free Index may be affected by, among other things: the
Fund and the Master Portfolio's expenses; the amount of cash and cash
equivalents held by the Master Portfolio's investment portfolio; the manner in
which the total return of the Index is calculated, the size of the Master
Portfolio and the Fund's investment portfolios; and the timing, frequency and
size of shareholder purchases, and redemptions of both the Fund and the Master
Portfolio. The Master Portfolio uses cash flows from shareholder purchase and
redemption activity to maintain, to the extent feasible, the similarity of its
capitalization range and returns to those of the securities comprising the
Index.
As do many index funds, the Master Portfolio also may engage in futures and
options transactions as well as other derivative securities transactions to
minimize the gap in performance that naturally exists between any index fund and
its index. This gap will occur mainly because, unlike the Index, the Master
Portfolio and the Fund incur expenses and cannot be fully invested in order to
maintain cash reserves for paying expenses and processing shareholders orders.
By using futures, the Master Portfolio potentially can offset the portion of the
gap attributable to their cash holdings. However, because some of the effect of
expenses remains, the Master Portfolio and the Fund's performance normally will
be below that of the EAFE Free Index.
Temporary Investments for Liquidity Purposes. In response to market, economic or
other conditions, such as an unexpected level of shareholder purchases or
redemptions, the Master Portfolio may temporarily use such different investment
strategy as high quality money market instruments for defensive purposes. If the
Master Portfolio does so, different factors could affect the Fund's performance
and the Fund may not achieve its investment objective.
The recent growth rate in the stock market has helped produce short-term
positive returns that are not typical historically and may not continue in the
future. Because of ongoing market volatility, the Fund's performance may be
subject to substantial short-term changes.
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 March 31, 2000, the Investment Advisor provided
investment advisory services for over $277 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.
The Master Portfolio's investment advisor is Barclays Global Fund Advisors
("BGFA"). BGFA is a wholly owned 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
December 31, 1999, Barclays Global Investors and its affiliates, including BGFA,
provided investment advisory services for over $783 billion of assets. BGFA
receives a monthly advisory fee from the Master Portfolio at an annual rate
equal to 0.15% of the first $1 billion, and 0.10% thereafter 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.
BGFA may deal, trade and invest for its own account in the types of securities
in which the Master Portfolio may invest. BGFA had informed the Master Portfolio
that in making its investment decisions it does not obtain or use material
inside information in its possession.
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 administration, 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 seeks to provide investment results that match as closely as
practicable, before fees and expenses, the performance of the EAFE Free Index.
In addition to selling its shares to the Fund, the Master Portfolio has and may
continue to sell its shares to certain other mutual funds or other accredited
investors. The expenses and, correspondingly, the returns of other investment
options in the Master Portfolio may differ from those of the Fund.
The Fund's Board 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 prices reported on stock exchanges and securities markets around the world
are usually used to value securities in the Master Portfolio. If prices are not
readily available, the price of a security will be based on its fair market
value determined in good faith by the Master Portfolio pursuant to guidelines
approved by the MIP's Board of Trustees. International markets may be open on
days when U.S. markets are closed, and the value of foreign securities owned by
the Master Portfolio could change on days when shares of the Fund may not be
purchased, redeemed or exchanged.
The Fund's NAV per share is calculated by taking the value of the Fund's net
assets and dividing by the number of shares outstanding. Expenses are accrued
daily and applied when determining the NAV.
The NAV for the Fund is determined as of the close of trading on the floor of
the NYSE (generally 4:00 p.m., Eastern time), each day the NYSE is open. The
Fund reserves the right to change the time at which purchases, redemptions 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. All shares must be held in an E*TRADE Securities account and cannot be
transferred to the account of any other financial institution. 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, proxies, 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 $1,000
To buy additional shares of the Fund $ 250
Continuing minimum investment* $1,000
To invest in the Fund for your IRA, Roth IRA,
or one-person SEP account $ 250
To invest in the Fund for your Education IRA account $ 250
To invest in the Fund for your UGMA/UTMA account $ 250
To invest in the Fund for your SIMPLE, SEP-IRA,
Profit Sharing or Money Purchase Pension Plan,
or 401(a) account $ 250
* Your shares may be automatically redeemed if, as a result of selling or
exchanging shares, you no longer meet a Fund's minimum balance requirements.
Before taking such action, the Fund will provide you with written notice and at
least 30 days to buy more shares to bring your investment up to $1,000.
After your account is established you may use 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 generally 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. Please note that the fee the Fund
may assess on redemptions of Fund shares redeemed after September 30, 2000, and
held for less than four months is 1.00%. Redemption shares redeemed prior to
October 1, 2000 and held for less than four months are subject to a 0.50%
redemption fee. 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 if it
believes it advisable to do so.
Investors will bear the risk of loss from fraudulent or unauthorized
instructions received over the telephone provided that the Fund reasonably
believes that such instructions are genuine. The Fund and its transfer agent
employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. The Fund may incur liability if it does not follow these
procedures.
Due to increased telephone volume during periods of dramatic economic or market
changes, you may experience difficulty in implementing a broker-assisted
telephone redemption. In these situations, investors may want to consider
trading online by accessing our Website or use TELE*MASTER, E*TRADE Securities'
automated telephone system, to effect such a transaction by calling
1-800-STOCKS1 (1-800-786-2571).
Signature Guarantee. For your protection, certain requests may require a
signature guarantee.
A signature guarantee is designed to protect you and the Fund against fraudulent
transactions by unauthorized persons. In the following instances, the Fund will
require a signature guarantee for all authorized owners of an account:
1. If you transfer the ownership of your account to another individual or
organization.
2. When you submit a written redemption for more than $25,000.
3. When you request that redemption proceeds be sent to a different name or
address than is registered on your account.
4. If you add or change your name or add or remove an owner on your account.
5. If you add or change the beneficiary on your transfer-on-death account.
For other registrations, access E*STATION through our Website or call
1-800-786-2575 for instructions.
You will have to wait to redeem your shares until the funds you use to buy them
have cleared (e.g., your check has cleared).
The right of redemption may be suspended during any period in which (i) trading
on the NYSE is restricted, as determined by the SEC, or the NYSE is closed for
other than weekends and holidays; (ii) the SEC has permitted such suspension by
order; or (iii) an emergency as determined by the SEC exists, making disposal of
portfolio securities or valuation of net assets of the Fund not reasonably
practicable.
Redemption Fee. The Fund can experience substantial price fluctuations and is
intended for long-term investors. Short-term "market timers" who engage in
frequent purchases, redemptions or exchanges can disrupt the Fund's investment
program and increase costs. To discourage short-term trading, the Fund assesses
a redemption fee on shares held for less than four months. The redemption fee of
the Fund will increase to 1.00% for shares which are redeemed after September
30, 2000 and which have been held for less than four months from the date of
purchase. Before October 1, 2000 the fee is 0.50%.
Any redemption fees imposed will be paid to the Fund to help offset transaction
costs. The Fund will use the "first-in, first-out" (FIFO) method to determine
the four month holding period. Under this method, the date of the redemption
will be compared with the earliest purchase date of shares held in the account.
If this holding period is less than four months, the fee will be assessed. The
fee may apply to shares held through omnibus accounts or certain retirement
plans.
The Fund may waive the redemption fee from time to time in its sole discretion.
The Fund may also change the redemption fee and the period it applies for shares
to be issued in the future.
Redemption In-Kind. The Fund reserves the right to honor any request for
redemption or repurchases by making payment in whole or in part in readily
marketable securities ("redemption in-kind"). These securities will be chosen by
the Fund and valued as they are for purposes of computing the Fund's NAV. You
may incur transaction expenses in converting these securities to cash.
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 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 pay dividends from net investment income quarterly and
distribute capital gains, if any, annually. The Fund may make additional
distributions if necessary.
Unless you choose otherwise, all your dividends and capital gain distributions
will be automatically reinvested in additional Fund shares. Shares are purchased
at the net asset value determined on the payment date.
TAX CONSEQUENCES
The Fund's total returns do not show the effects of income taxes on an
individual's investment.
The following information is meant as a general summary for U.S. taxpayers.
Please see the Fund's Statement of Additional Information for more information.
You should rely on your own tax advisor for advice about the particular federal,
state and local tax consequences to you of investing in the Fund.
The Fund generally will not have to pay income tax on amounts it distributes to
shareholders, although shareholders will be taxed on distributions they receive.
The Fund will distribute substantially all of its income and gains to its
shareholders every year. If the Fund declares a dividend in October, November or
December but pays it in January, you may be taxed on the dividend as if you
received it in the previous year.
You will generally be taxed on dividends you receive from the Fund, regardless
of whether they are paid to you in cash or are reinvested in additional Fund
shares. If the Fund designates a dividend as a capital gain distribution, (e.g.,
when the Fund has a gain from the sale of an asset the Fund held for more than
12 months), you will pay tax on that dividend at the long-term capital gains tax
rate, no matter how long you have held your Fund shares.
If you invest through a tax-deferred retirement account, such as an IRA, you
generally will not have to pay tax on dividends until they are distributed from
the account. These accounts are subject to complex tax rules, and you should
consult your tax advisor about investment through a tax-deferred account.
There may be tax consequences to you if you dispose of your Fund shares, for
example, through redemption, exchange or sale. You will generally have a capital
gain or loss from a disposition. The amount of the gain or loss and the rate of
tax will depend mainly upon how much you pay for the shares, how much you sell
them for, and how long you hold them. For example, if you sold at a gain Fund
shares that you had held for more than one year as a capital asset, then your
gain would be taxed at the long-term capital gains tax rate.
The Fund will send you a tax report each year that will tell you which dividends
must be treated as ordinary income and which (if any) are long-term capital
gain.
As with all mutual funds, the Fund may be required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to you if you
fail to provide the Fund with your correct taxpayer identification number or to
make required certifications, or if you have been notified by the IRS that you
are subject to backup withholding. Backup withholding is not an additional tax,
but is a method in which the IRS ensures that it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S. federal income tax
liability.
<PAGE>
[Outside back cover page.]
The Statement of Additional Information for the Fund, dated May 1, 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 which are
also incorporated into this Prospectus by reference. In the Fund's next 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 report
(dated February 29, 2000 and incorporated herein by reference) 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
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 (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 INTERNATIONAL INDEX FUND
May 1, 2000
This Statement of Additional Information ("SAI") is not a prospectus and should
be read together with the Prospectus dated May 1, 2000 (as amended from time to
time) for the E*TRADE International Index Fund (the "Fund"), a separate series
of E*TRADE Funds. Unless otherwise defined herein, capitalized terms have the
meanings given to them in the Fund's Prospectus.
To obtain a free copy of the Fund's Prospectus and the Fund's most recent
shareholders report dated February 29, 2000 and incorporated herein by
reference, 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.........................................................18
TRUSTEES AND OFFICERS.................................................22
INVESTMENT MANAGEMENT.................................................26
SERVICE PROVIDERS.....................................................27
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION........................30
ORGANIZATION, DIVIDEND AND VOTING RIGHTS..............................30
SHAREHOLDER INFORMATION...............................................32
TAXATION..............................................................32
UNDERWRITER...........................................................37
MASTER PORTFOLIO ORGANIZATION.........................................38
PERFORMANCE INFORMATION...............................................39
APPENDIX..............................................................44
<PAGE>
FUND HISTORY
The E*TRADE International Index Fund (the "Fund") is a diversified series of
E*TRADE Funds (the "Trust"). The Trust is organized as a Delaware business trust
and was formed on November 4, 1998.
THE FUND
The Fund is classified as a diversified open-end, management investment company.
The Fund's investment objective is to match as closely as practicable, before
fees and expenses, the performance of an international portfolio of common
stocks represented by the Morgan Stanley Capital International Europe,
Australasia, and Far East Free Index (the "EAFE Free Index") This investment
objective is fundamental and therefore, cannot be changed without approval of a
majority (as defined in the Investment Company Act of 1940, as amended ("1940
Act")) of the Fund's outstanding voting interests.
To achieve its investment objective, the Fund intends to invest all of its
assets in the International Index 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.
The Master Portfolio seeks to match as closely as practicable, before fees and
expenses, the performance of an international portfolio of common stocks
represented by the EAFE Free Index.
INVESTMENT STRATEGIES AND RISKS
The following supplements the discussion in the Prospectus of the Master
Portfolio's investment strategies, policies and risks. These investment
strategies and policies may be changed without shareholder approval of either
the Fund or the Master Portfolio unless otherwise noted.
Index Funds. The net asset value of index funds and funds which are not actively
managed, such as the Fund, may be disproportionately affected by the following
risks: short- and long-term changes in the characteristics of the companies
whose securities make up the index; modifications in the criteria for companies
selected to make up the index; suspension or termination of the operation of the
index; and the activities of issuers whose market capitalization represents a
disproportionate amount of the total market capitalization of the index.
Floating- and Variable-Rate Obligations. 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 Currency Futures Contracts. In General. A foreign currency futures
contract is an agreement between two parties for the future delivery of a
specified currency at a specified time and at a specified price. A "sale" of a
futures contract means the contractual obligation to deliver the currency at a
specified price on a specified date, or to make the cash settlement called for
by the contract. Futures contracts have been designed by exchanges which have
been designated "contract markets" by the Commodity Futures Trading Commission
("CFTC") and must be executed through a brokerage firm, known as a futures
commission merchant, which is a member of the relevant contract market. Futures
contracts trade on these markets, and the exchanges, through their clearing
organizations, guarantee that the contracts will be performed as between the
clearing members of the exchange.
While futures contracts based on currencies do provide for the delivery and
acceptance of a particular currency, such deliveries and acceptances are very
seldom made. Generally, a futures contract is terminated by entering into an
offsetting transaction. The Master Portfolio will incur brokerage fees when it
purchases and sells futures contracts. At the time such a purchase or sale is
made, the Master Portfolio must provide cash or money market securities as a
deposit known as "margin." The initial deposit required will vary, but may be as
low as 2% or less of a contract's face value. Daily thereafter, the futures
contract is valued through a process known as "marking to market," and the
Master Portfolio may receive or be required to pay "variation margin" as the
futures contract becomes more or less valuable.
Purchase and Sale of Currency Futures Contracts. In order to hedge its portfolio
and to protect it against possible variations in foreign exchange rates pending
the settlement of securities transactions, the Master Portfolio may buy or sell
currency futures contracts. If a fall in exchange rates for a particular
currency is anticipated, the Master Portfolio may sell a currency futures
contract as a hedge. If it is anticipated that exchange rates will rise, the
Master Portfolio may purchase a currency futures contract to protect against an
increase in the price of securities denominated in a particular currency the
Master Portfolio intends to purchase. These futures contracts will be used only
as a hedge against anticipated currency rate changes.
A currency futures contract sale creates an obligation by the Master Portfolio,
as seller, to deliver the amount of currency called for in the contract at a
specified futures time for a special price. A currency futures contract purchase
creates an obligation by the Master Portfolio, as purchaser, to take delivery of
an amount of currency at a specified future time at a specified price. Although
the terms of currency futures contracts specify actual delivery or receipt, in
most instances the contracts are closed out before the settlement date without
the making or taking of delivery of the currency. Closing out of a currency
futures contract is effected by entering into an offsetting purchase or sale
transaction.
In connection with transactions in foreign currency futures, the Master
Portfolio will be required to deposit as "initial margin" an amount of cash or
short-term government securities equal to from 5% to 8% of the contract amount.
Thereafter, subsequent payments (referred to as "variation margin") are made to
and from the broker to reflect changes in the value of the futures contract.
Risk Factors Associated with Futures Transactions. The Master Portfolio may
enter into transactions in futures contracts and options on futures contracts,
each of which involves risk. The futures contracts and options on futures
contracts that the Master Portfolio may purchase may be considered derivatives.
Derivatives are financial instruments whose values are derived, at least in part
from the prices of other securities or specified assets, indices or rates. The
Master Portfolio intends to use future contracts and options as part of its
short-term liquidity holdings an/or substitutes for comparable market positions
in the underlying securities. The effective use of futures strategies depends
on, among other things, the Master Portfolio's ability to terminate futures
positions at times when BGFA deems it desirable to do so. Although the Master
Portfolio will not enter into a futures position unless BGFA believes that a
liquid secondary market exists for such future, there is no assurance that the
Master Portfolio will be able to effect closing transactions at any particular
time or at an acceptable price. The Master Portfolio generally expects that its
futures transactions will be conducted on recognized U.S. and foreign securities
and commodity exchanges.
Futures markets can be highly volatile and transactions of this type carry a
high risk of loss. Moreover, a relatively small adverse market movement with
respect to these transactions may result not only in loss of the original
investment but also in unquantifiable further loss exceeding any margin
deposited.
The use of futures involves the risk of imperfect correlation between movements
in futures prices and movements in the price of currencies which are the subject
of the hedge. The successful use of futures strategies also depends on the
ability of BGFA to correctly forecast interest rate movements, currency rate
movements and general stock market price movements.
In addition to the foregoing risk factors, the following sets forth certain
information regarding the potential risks associated with the Master Portfolio's
futures transactions.
Risk of Imperfect Correlation. The Master Portfolio's ability effectively to
hedge currency risk through transactions in foreign currency futures depends on
the degree to which movements in the value of the currency underlying such
hedging instrument correlate with movements in the value of the relevant
securities held by the Master Portfolio. If the values of the securities being
hedged do not move in the same amount or direction as the underlying currency,
the hedging strategy for the Master Portfolio might not be successful and the
Master Portfolio could sustain losses on its hedging transactions which would
not be offset by gains on its portfolio. It is also possible that there may be a
negative correlation between the currency underlying a futures contract and the
portfolio securities being hedged, which could result in losses both on the
hedging transaction and the portfolio securities. In such instances, the Master
Portfolio's overall return could be less than if the hedging transactions had
not been undertaken.
Under certain extreme market conditions, it is possible that the Master
Portfolio will not be able to establish hedging positions, or that any hedging
strategy adopted will be insufficient to completely protect the Master
Portfolio.
The Master Portfolio will purchase or sell futures contracts only if, in BGFA's
judgment, there is expected to be a sufficient degree of correlation between
movements in the value of such instruments and changes in the value of the
relevant portion of the Master Portfolio's portfolio for the hedge to be
effective. There can be no assurance that BGFA's judgment will be accurate.
Potential Lack of a Liquid Secondary Market. The ordinary spreads between prices
in the cash and futures markets, due to differences in the natures of those
markets, are subject to distortions. First, all participants in the futures
market are subject to initial deposit and variation margin requirements. This
could require the Master Portfolio to post additional cash or cash equivalents
as the value of the position fluctuates. Further, rather than meeting additional
variation margin requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between the
cash and futures markets. Second, the liquidity of the futures market may be
lacking. Prior to exercise or expiration, a futures position may be terminated
only by entering into a closing purchase or sale transaction, which requires a
secondary market on the exchange on which the position was originally
established. While the Master Portfolio will establish a futures position only
if there appears to be a liquid secondary market therefor, there can be no
assurance that such a market will exist for any particular futures contract at
any specific time. In such event, it may not be possible to close out a position
held by the Master Portfolio, which could require the Master Portfolio to
purchase or sell the instrument underlying the position, make or receive a cash
settlement, or meet ongoing variation margin requirements. The inability to
close out futures positions also could have an adverse impact on the Master
Portfolio's ability effectively to hedge its securities, or the relevant portion
thereof.
The liquidity of a secondary market in a futures contract may be adversely
affected by "daily price fluctuation limits" established by the exchanges, which
limit the amount of fluctuation in the price of a contract during a single
trading day and prohibit trading beyond such limits once they have been reached.
The trading of futures contracts also is subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of the brokerage firm or clearing house or other
disruptions of normal trading activity, which could at times make it difficult
or impossible to liquidate existing positions or to recover excess variation
margin payments.
Trading and Position Limits. Each contract market on which futures contracts are
traded has established a number of limitations governing the maximum number of
positions which may be held by a trader, whether acting alone or in concert with
others. "Shares" means the equal proportionate transferable units of interest
into which the beneficial interest of each Series or Class is divided from time
to time (including whole Shares and fractions of Shares). BGFA does not believe
that these trading and position limits will have an adverse impact on the
hedging strategies regarding the Master Portfolio's investments.
Regulations on the Use of Futures Contracts. Regulations of the CFTC require
that the Master Portfolio enter into transactions in futures contracts for
hedging purposes only, in order to assure that it is not deemed to be a
"commodity pool" under such regulations. In particular, CFTC regulations require
that all short futures positions be entered into for the purpose of hedging the
value of investment securities held by the Master Portfolio, and that all long
futures positions either constitute bona fide hedging transactions, as defined
in such regulations, or have a total value not in excess of an amount determined
by reference to certain cash and securities positions maintained for the Master
Portfolio, and accrued profits on such positions. In addition, the Master
Portfolio may not purchase or sell such instruments if, immediately thereafter,
the sum of the amount of initial margin deposits on its existing futures
positions and premiums paid for options on futures contracts would exceed 5% of
the market value of the Master Portfolio's total assets.
When the Master Portfolio purchases a futures contract, an amount of cash or
cash equivalents or high quality debt securities will be segregated with the
Master Portfolio's custodian so that the amount so segregated, plus the initial
deposit and variation margin held in the account of its broker, will at all
times equal the value of the futures contract, thereby insuring that the use of
such futures is unleveraged.
The Master Portfolio's ability to engage in the hedging transactions described
herein may be limited by the policies and concerns of various Federal and state
regulatory agencies. Such policies may be changed by vote of the Master
Portfolio's Board of Trustees.
BGFA uses a variety of internal risk management procedures to ensure that
derivatives use is consistent with the Master Portfolio's investment objective,
does not expose the Master Portfolio to undue risk and is closely monitored.
These procedures include providing periodic reports to the Board of Trustees
concerning the use of derivatives.
Foreign Obligations and Securities. The foreign securities in which the Master
Portfolio may invest include common stocks, preferred stocks, warrants,
convertible securities and other securities of issuers organized under the laws
of countries other than the United States. Such securities also include equity
interests in foreign investment funds or trusts, real estate investment trust
securities and any other equity or equity-related investment whether denominated
in foreign currencies or U.S. dollars.
The Master Portfolio may invest in foreign securities through American
Depositary Receipts ("ADRs"), Canadian Depositary Receipts ("CDRs"), European
Depositary Receipts ("EDRs"), International Depositary Receipts ("IDRs") and
Global Depositary Receipts ("GDRs") or other similar securities convertible into
securities of foreign issuers. These securities may not necessarily be
denominated in the same currency as the securities into which they may be
converted. ADRs (sponsored or unsponsored) are receipts typically issued by a
U.S. bank or trust company and traded on a U.S. stock exchange, and CDRs are
receipts typically issued by a Canadian bank or trust company that evidence
ownership of underlying foreign securities. Issuers of unsponsored ADRs are not
contractually obligated to disclose material information in the U.S. and,
therefore, such information may not correlate to the market value of the
unsponsored ADR. EDRs and IDRs are receipts typically issued by European banks
and trust companies, and GDRs are receipts issued by either a U.S. or non-U.S.
banking institution, that evidence ownership of the underlying foreign
securities. Generally, ADRs in registered form are designed for use in U.S.
securities markets and EDRs and IDRs in bearer form are designed primarily for
use in Europe.
For temporary defensive purposes, the Master Portfolio may invest in fixed
income securities of non-U.S. governmental and private issuers. Such investments
may include bonds, notes, debentures and other similar debt securities,
including convertible securities.
Investments in foreign obligations involve certain considerations that are not
typically associated with investing in domestic securities. There may be less
publicly available information about a foreign issuer than about a domestic
issuer. Foreign issuers also are not generally subject to the same accounting,
auditing and financial reporting standards or governmental supervision as
domestic issuers. In addition, with respect to certain foreign countries, taxes
may be withheld at the source under foreign tax laws, and there is a possibility
of expropriation or confiscatory taxation, political, social and monetary
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.
From time to time, investments in other investment companies may be the most
effective available means by which the Master Portfolio may invest in securities
of issuers in certain countries. Investment in such investment companies may
involve the payment of management expenses and, in connection with some
purchases, sales loads, and payment of substantial premiums above the value of
such companies' portfolio securities. At the same time, the Master Portfolio
would continue to pay its own management fees and other expenses.
Investment income on certain foreign securities in which the Master Portfolio
may invest may be subject to foreign withholding or other taxes that could
reduce the return on these securities. Tax treaties between the United States
and foreign countries, however, may reduce or eliminate the amount of foreign
taxes to which the Master Portfolio would be subject.
The Master Portfolio's investments in foreign securities involve currency risks.
The U.S. dollar value of a foreign security tends to decrease when the value of
the U.S. dollar rises against the foreign currency in which the security is
denominated, and tends to increase when the value of the U.S. dollar falls
against such currency. To attempt to minimize risks to the Master Portfolio from
adverse changes in the relationship between the U.S. dollar and foreign
currencies, the Master Portfolio may engage in foreign currency transactions on
a spot (i.e., cash) basis and may purchase or sell forward foreign currency
exchange contracts ("forward contracts"). The Master Portfolio may also purchase
and sell foreign currency futures contracts (see "Purchase and Sale of Currency
Futures Contracts"). A forward contract is an obligation to purchase or sell a
specific currency for an agreed price at a future date that is individually
negotiated and privately traded by currency traders and their customers.
Forward contracts establish an exchange rate at a future date. These contracts
are transferable in the interbank market conducted directly between currency
traders (usually large commercial banks) and their customers. A forward contract
generally has no deposit requirement, and is traded at a net price without
commission. The Master Portfolio will direct its custodian, to the extent
required by applicable regulations, to segregate high grade liquid assets in an
amount at least equal to its obligations under each forward contract. Neither
spot transactions nor forward contracts eliminate fluctuations in the prices of
the Master Portfolio's portfolio securities or in foreign exchange rates, or
prevent loss if the prices of these securities should decline.
The Master Portfolio may enter into a forward contract, for example, when it
enters into a contract for the purchase or sale of a security denominated in a
foreign currency in order to "lock in" the U.S. dollar price of the security (a
"transaction hedge"). In addition, when BGFA believes that a foreign currency
may suffer a substantial decline against the U.S. dollar, it may enter into a
forward sale contract to sell an amount of that foreign currency approximating
the value of some or all of the Master Portfolio's securities denominated in
such foreign currency, or when BGFA believes that the U.S. dollar may suffer a
substantial decline against the foreign currency, it may enter into a forward
purchase contract to buy that foreign currency for a fixed dollar amount (a
"position hedge").
The Master Portfolio may, in the alternative, enter into a forward contract to
sell a different foreign currency for a fixed U.S. dollar amount where BGFA
believes that the U.S. dollar value of the currency to be sold pursuant to the
forward contract will fall whenever there is a decline in the U.S. dollar value
of the currency in which the portfolio securities are denominated (a
"cross-hedge").
Foreign currency hedging transactions are an attempt to protect the Master
Portfolio against changes in foreign currency exchange rates between the trade
and settlement dates of specific securities transactions or changes in foreign
currency exchange rates that would adversely affect a portfolio position or an
anticipated portfolio position. Although these transactions tend to minimize the
risk of loss due to a decline in the value of the hedged currency, at the same
time they tend to limit any potential gain that might be realized should the
value of the hedged currency increase. The precise matching of the forward
contract amount and the value of the securities involved will not generally be
possible because the future value of these securities in foreign currencies will
change as a consequence of market movements in the value of those securities
between the date the forward contract is entered into and date it matures.
The Master Portfolio's custodian will, to the extent required by applicable
regulations, segregate cash, U.S. Government securities or other high-quality
debt securities having a value equal to the aggregate amount of the Master
Portfolio's commitments under forward contracts entered into with respect to
position hedges and cross-hedges. If the value of the segregated securities
declines, additional cash or securities will be segregated on a daily basis so
that the value of the segregated securities will equal the amount of the Master
Portfolio's commitments with respect to such contracts.
The cost to the Master Portfolio of engaging in currency transactions varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because transactions in currency
exchange usually are conducted on a principal basis, no fees or commissions are
involved. BGFA considers on an ongoing basis the creditworthiness of the
institutions with which the Master Portfolio enters into foreign currency
transactions. The use of forward currency exchange contracts does not eliminate
fluctuations in the underlying prices of the securities, but it does establish a
rate of exchange that can be achieved in the future. If a devaluation generally
is anticipated, the Master Portfolio may not be able to contract to sell the
currency at a price above the devaluation level it anticipates.
Forward Commitments, When-Issued Purchases and Delayed-Delivery Transactions.
The Master Portfolio may purchase or sell securities on a when-issued or
delayed-delivery basis and make contracts to purchase or sell securities for a
fixed price at a future date beyond customary settlement time. Securities
purchased or sold on a when-issued, delayed-delivery or forward commitment basis
involve a risk of loss if the value of the security to be purchased declines, or
the value of the security to be sold increases, before the settlement date.
Although the Master Portfolio will generally purchase securities with the
intention of acquiring them, the Master Portfolio may dispose of securities
purchased on a when-issued, delayed-delivery or a forward commitment basis
before settlement when deemed appropriate by the adviser. 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.
The Master Portfolio will segregate cash, U.S. Government obligations or other
high-quality debt instruments in an amount at least equal in value to the Master
Portfolio's commitments to purchase when-issued securities. If the value of
these assets declines, the Master Portfolio will segregate additional liquid
assets on a daily basis so that the value of the segregated assets is equal to
the amount of such commitments.
Future Developments. The Master Portfolio may take advantage of opportunities in
the area of options and futures contracts and options on futures contracts and
any other derivative investments which are not presently contemplated for use by
the Master Portfolio or which are not currently available but which may be
developed, to the extent such opportunities are both consistent with the Master
Portfolio's investment objective and legally permissible for the Master
Portfolio. Before entering into such transactions or making any such investment,
the Master Portfolio will provide appropriate disclosure in its prospectus.
Hedging and Related Strategies. The Master Portfolio may attempt to protect the
U.S. dollar equivalent value of one or more of its investments (hedge) by
purchasing and selling foreign currency futures contracts and by purchasing and
selling currencies on a spot (i.e., cash) or forward basis. Foreign currency
futures contracts are bilateral agreements pursuant to which one party agrees to
make, and the other party agrees to accept, delivery of a specified type of
currency at a specified future time and at a specified price. Although such
futures contracts by their terms call for actual delivery or acceptance of
currency, in most cases the contracts are closed out before the settlement date
without the making or taking of delivery. A forward currency contract involves
an obligation to purchase or sell a specific currency at a specified future
date, which may be any fixed number of days from the contract date agreed upon
by the parties, at a price set at the time the contract is entered into.
The Master Portfolio may enter into forward currency contracts for the purchase
or sale of a specified currency at a specified future date either with respect
to specific transactions or with respect to portfolio positions. For example,
the Master Portfolio may enter into a forward currency contract to sell an
amount of a foreign currency approximating the value of some or all of the
Master Portfolio's securities denominated in such currency. The Master Portfolio
may use forward contracts in one currency or a basket of currencies to hedge
against fluctuations in the value of another currency when BGFA anticipates
there will be a correlation between the two and may use forward currency
contracts to shift the Master Portfolio's exposure to foreign currency
fluctuations from one country to another. The purpose of entering into these
contracts is to minimize the risk to the Master Portfolio from adverse changes
in the relationship between the U.S. dollar and foreign currencies.
BGFA might not employ any of the strategies described above, and there can be no
assurance that any strategy used will succeed. If BGFA incorrectly forecasts
exchange rates, market values or other economic factors in utilizing a strategy
for the Master Portfolio, the Master Portfolio might have been in a better
position had it not hedged at all. The use of these strategies involves certain
special risks, including (1) the fact that skills needed to use hedging
instruments are different from those needed to select the Master Portfolio's
securities, (2) possible imperfect correlation, or even no correlation, between
price movements of hedging instruments and price movements of the investments
being hedged, (3) the fact that, while hedging strategies can reduce the risk of
loss, they can also reduce the opportunity for gain, or even result in losses,
by offsetting favorable price movements in hedged investments and (4) the
possible inability of the Master Portfolio to purchase or sell a portfolio
security at a time that otherwise would be favorable for it to do so, or the
possible need for the Master Portfolio to sell a portfolio security at a
disadvantageous time, due to the need for the Master Portfolio to maintain
"cover" or to segregate securities in connection with hedging transactions and
the possible inability of the Master Portfolio to close out or to liquidate its
hedged position.
New financial products and risk management techniques continue to be developed.
The Master Portfolio may use these instruments and techniques to the extent
consistent with its investment objectives and regulatory and tax considerations.
Illiquid Securities. The Master Portfolio may invest up to 15% of the value of
its net assets in securities as to which a liquid trading market does not exist,
provided such investments are consistent with its investment objective. Such
securities may include securities that are not readily marketable, such as
privately issued securities and other securities that are subject to legal or
contractual restrictions on resale, floating- and variable-rate demand
obligations as to which the Master Portfolio cannot exercise a demand feature on
not more than seven days' notice and as to which there is no secondary market
and repurchase agreements providing for settlement more than seven days after
notice.
Investment Company Securities. The Master Portfolio may invest in securities
issued by other open-end, management investment companies to the extent
permitted under the 1940 Act. As a general matter, under the 1940 Act,
investment in such securities is limited 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 with respect to all such companies in the aggregate. Investments in
the securities of other investment companies generally will involve duplication
of advisory fees and certain other expenses. The Master Portfolio may also
purchase interests of exchange-listed closed-end funds to the extent permitted
under the 1940 Act.
Loans of Portfolio Securities. The Master Portfolio may lend securities from its
portfolio to brokers, dealers and financial institutions (but not individuals)
if cash, U.S. Government securities or other high quality debt obligations equal
to at least 100% of the current market value of the securities loaned (including
accrued interest thereon) plus the interest payable to such Master Portfolio
with respect to the loan is maintained with the Master Portfolio. In determining
whether or not to lend a security to a particular broker, dealer or financial
institution, the BGFA considers all relevant facts and circumstances, including
the size, creditworthiness and reputation of the broker, dealer, or financial
institution. Any loans of portfolio securities are fully collateralized based on
values that are marked to market daily. The Master Portfolio does not enter into
any portfolio security lending arrangements having a duration longer than one
year. Any securities that the Master Portfolio receives as collateral do not
become part of its portfolio at the time of the loan and, in the event of a
default by the borrower, the Master Portfolio will, if permitted by law, dispose
of such collateral except for such part thereof that is a security in which the
Master Portfolio is permitted to invest. During the time securities are on loan,
the borrower will pay the Master Portfolio any accrued income on those
securities, and the Master Portfolio may invest the cash collateral and earn
income or receive an agreed-upon fee from a borrower that has delivered cash-
equivalent collateral. The Master Portfolio will not lend securities having a
value that exceeds one-third of the current value of their respective total
assets. Loans of securities by the Master Portfolio are subject to termination
at the Master Portfolio's or the borrower's option.
The principal risk of portfolio lending is potential default or insolvency of
the borrower. In either of these cases, the Master Portfolio could experience
delays in recovering securities or collateral or could lose all or part of the
value of the loaned securities. The Master Portfolio may pay reasonable
administrative and custodial fees in connection with a securities loan and may
pay a negotiated portion of the interest or fee earned with respect to the
collateral to the borrower or the placing broker. Borrowers and placing brokers
are not permitted to be affiliated, directly or indirectly, with the Master
Portfolio, BGFA or Stephens Inc., one of the Master Portfolio's
co-administrators.
Privately Issued Securities. The Master Portfolio may invest in privately issued
securities, including those which may be resold only in accordance with Rule
144A ("Rule 144A Securities") under the Securities Act of 1933, as amended (the
"1933 Act"). Rule 144A Securities are restricted securities that are not
publicly traded. Accordingly, the liquidity of the market for specific Rule 144A
Securities may vary. Delay or difficulty in selling such securities may result
in a loss to the Master Portfolio. Privately issued or Rule 144A securities that
are determined by BGFA to be "illiquid" are subject to the Master Portfolio's
policy of not investing more than 15% of its net assets in illiquid securities.
BGFA, under guidelines approved by Board of Trustees of MIP, will evaluate the
liquidity characteristics of each Rule 144A Security proposed for purchase by
the Master Portfolio on a case-by-case basis and will consider the following
factors, among others, in their evaluation: (1) the frequency of trades and
quotes for the Rule 144A Security; (2) the number of dealers willing to purchase
or sell the Rule 144A Security and the number of other potential purchasers; (3)
dealer undertakings to make a market in the Rule 144A Security; and (4) the
nature of the Rule 144A Security and the nature of the marketplace trades (e.g.,
the time needed to dispose of the Rule 144A Security, the method of soliciting
offers and the mechanics of transfer).
Short-Term Instruments and Temporary Investments. The Master Portfolio may
invest in high-quality money market instruments on an ongoing basis to provide
liquidity, for temporary purposes when there is an unexpected level of
interestholder purchases or redemptions or when "defensive" strategies are
appropriate. The instruments in which the Master Portfolio may invest include:
(i) short-term obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities (including government-sponsored enterprises); (ii)
negotiable certificates of deposit ("CDs"), bankers' acceptances, fixed time
deposits and other obligations of domestic banks (including foreign branches)
that have more than $1 billion in total assets at the time of investment and
that are members of the Federal Reserve System or are examined by the
Comptroller of the Currency or whose deposits are insured by the FDIC; (iii)
commercial paper rated at the date of purchase "Prime-1" by Moody's or "A-1+" or
"A-1" by S&P, or, if unrated, of comparable quality as determined by BGFA; (iv)
non-convertible corporate debt securities (e.g., bonds and debentures) with
remaining maturities at the date of purchase of not more than one year that are
rated at least "Aa" by Moody's or "AA" by S&P; (v) repurchase agreements; and
(vi) short-term, U.S. dollar-denominated obligations of foreign banks (including
U.S. branches) that, at the time of investment have more than $10 billion, or
the equivalent in other currencies, in total assets and in the opinion of BGFA
are of comparable quality to obligations of U.S. banks which may be purchased by
the Master Portfolio.
Bank Obligations. The Master Portfolio may invest in bank obligations, including
certificates of deposit, time deposits, bankers' acceptances and other
short-term obligations of domestic banks, foreign subsidiaries of domestic
banks, foreign branches of domestic banks, and domestic and foreign branches of
foreign banks, domestic savings and loan associations and other banking
institutions. Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period of
time. Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time at a stated interest rate. Time
deposits which may be held by the Master Portfolio will not benefit from
insurance from the Bank Insurance Fund or the Savings Association Insurance Fund
administered by the Federal Deposit Insurance Corporation. Bankers' acceptances
are credit instruments evidencing the obligation of a bank to pay a draft drawn
on it by a customer. These instruments reflect the obligation both of the bank
and of the drawer to pay the face amount of the instrument upon maturity. The
other short-term obligations may include uninsured, direct obligations, bearing
fixed, floating- or variable-interest rates.
Domestic commercial banks organized under Federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System and to have their deposits insured by the Federal
Deposit Insurance Corporation (the "FDIC"). Domestic banks organized under state
law are supervised and examined by state banking authorities but are members of
the Federal Reserve System only if they elect to join. In addition, state banks
whose certificates of deposit ("CDs") may be purchased by the Master Portfolio
are insured by the FDIC (although such insurance may not be of material benefit
to the Master Portfolio, depending on the principal amount of the CDs of each
bank held by the Master Portfolio) and are subject to Federal examination and to
a substantial body of Federal law and regulation. As a result of Federal or
state laws and regulations, domestic branches of domestic banks whose CDs may be
purchased by the Master Portfolio generally are required, among other things, to
maintain specified levels of reserves, are limited in the amounts which they can
loan to a single borrower and are subject to other regulation designed to
promote financial soundness. However, not all of such laws and regulations apply
to the foreign branches of domestic banks.
Obligations of foreign branches of domestic banks, foreign subsidiaries of
domestic banks and domestic and foreign branches of foreign banks, such as CDs
and time deposits ("TDs"), may be general obligations of the parent banks in
addition to the issuing branch, or may be limited by the terms of a specific
obligation and governmental regulation. Such obligations are subject to
different risks than are those of domestic banks. These risks include foreign
economic and political developments, foreign governmental restrictions that may
adversely affect payment of principal and interest on the obligations, foreign
exchange controls and foreign withholding and other taxes on interest income.
These foreign branches and subsidiaries are not necessarily subject to the same
or similar regulatory requirements that apply to domestic banks, such as
mandatory reserve requirements, loan limitations, and accounting, auditing and
financial record keeping requirements. In addition, less information may be
publicly available about a foreign branch of a domestic bank or about a foreign
bank than about a domestic bank.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation or by Federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may be subject to reserve requirements imposed by the Federal Reserve
System or by the state in which the branch is located if the branch is licensed
in that state.
In addition, Federal branches licensed by the Comptroller of the Currency and
branches licensed by certain states ("State Branches") may be required to: (1)
pledge to the regulator, by depositing assets with a designated bank within the
state, a certain percentage of their assets as fixed from time to time by the
appropriate regulatory authority; and (2) maintain assets within the state in an
amount equal to a specified percentage of the aggregate amount of liabilities of
the foreign bank payable at or through all of its agencies or branches within
the state. The deposits of Federal and State Branches generally must be insured
by the FDIC if such branches take deposits of less than $100,000.
In view of the foregoing factors associated with the purchase of CDs and TDs
issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, by foreign branches of foreign banks or by domestic branches of
foreign banks, BGFA carefully evaluates such investments on a case-by-case
basis.
The Master Portfolio may purchase CDs issued by banks, savings and loan
associations and similar thrift institutions with less than $1 billion in
assets, which are members of the FDIC, provided such Master Portfolio purchases
any such CD in a principal amount of not more than $100,000, which amount would
be fully insured by the Bank Insurance Fund or the Savings Association Insurance
Fund administered by the FDIC. Interest payments on such a CD are not insured by
the FDIC. No Master Portfolio will own more than one such CD per such issuer.
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.
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.
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. The Master Portfolio's custodian has custody of, and holds in a
segregated account, securities acquired as collateral by the Master Portfolio
under a repurchase agreement. Repurchase agreements are considered by the staff
of the SEC to be loans by the Master Portfolio. 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 a Master Portfolio under the 1940 Act.
Small Companies. The EAFE Free Index may include issuers with a smaller market
capitalization. The value of securities of smaller, less well-known issuers can
be more volatile than that of larger issuers and can react differently to
issuer, political, market and economic developments than the market as a whole
and other types of stocks. Smaller issuers can have more limited product lines,
markets and financial resources.
Securities Related Businesses. The 1940 Act limits the ability of the Fund to
invest in securities issued by companies deriving more than 15% of their gross
revenues from securities related activities ("financial companies"). If the EAFE
Free Index provides a higher concentration in one or more financial companies,
the Fund may experience increased tracking error due to the limitations on
investments in such companies.
Portfolio Turnover Rate. The portfolio turnover rate for the Master Portfolio
generally is not expected to exceed 50%. This portfolio turnover rate will not
be a limiting factor when the investment advisor to the Master Portfolio or the
Fund's investment advisor deems portfolio changes appropriate.
Index Changes. The stocks comprising the EAFE Free Index are changed from time
to time. Announcements of those changes and related market activity may result
in reduced returns or volatility for the Fund.
Year 2000. Like other mutual funds, financial and business organizations and
individuals around the world, the Fund could be adversely affected if the
computer systems used by its investment advisor, the Fund's other service
providers, or persons with whom they deal, do not properly process and calculate
date-related information and data 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 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 also advised the Master Portfolio that they were
working on any necessary changes to their systems and that they also expected
their systems to be Year 2000 complaint. There can be no assurance that 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 can not be predicted.
In addition, many foreign countries are less prepared than the United States to
properly process and calculate information related to dates from and after
January 1, 2000, which could result in difficulty pricing foreign investments
and failure by foreign issuers to pay timely dividends, interest or principal.
All of these factors can make foreign investments, especially those in emerging
markets, more volatile and potentially less liquid than U.S. investments. The
extent of such impact cannot be predicted.
FUND POLICIES
Fundamental Investment Restrictions
The following are the Fund's fundamental investment restrictions which, along
with the Fund's investment objective, cannot be changed without shareholder
approval by a vote of a majority of the outstanding shares of the Fund, as set
forth in the 1940 Act.
Unless noted otherwise, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in percentage resulting from a change
in the Fund's assets (i.e., due to cash inflows or redemptions) or in market
value of the investment or the Fund's assets will not constitute a violation of
that restriction (with the exception of the restriction on illiquid securities).
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. invest more than 5% of its assets in the obligations of any single issuer,
except that up to 25% of the value of its total assets may be invested,
and securities issued or guaranteed by the U.S. Government, or its
agencies or instrumentalities may be purchased, without regard to any such
limitation. This limitation does not apply to foreign currency
transactions including, without limitation, forward currency contracts;
2. hold more than 10% of the outstanding voting securities of any single
issuer. This Investment Restriction applies only with respect to 75% of
its total assets;
3. invest in commodities, except that the Fund may purchase and sell (i.e.,
write) options, forward contracts, futures contracts, including those
relating to indexes, and options on futures contracts or indices;
4. purchase, hold or deal in real estate, or oil, gas or other mineral leases
or exploration or development programs, but the Fund may purchase and sell
securities that are secured by real estate or issued by companies that
invest or deal in real estate;
5. borrow money, except to the extent permitted under the 1940 Act, provided
that the Fund may borrow up to 20% 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 20% of the current value
of its net assets. For purposes of this investment restriction, the Fund's
entry into options, forward contracts, futures contracts, including those
relating to indices, and options on futures contracts or indices shall not
constitute borrowing to the extent certain segregated accounts are
established and maintained by the Fund.
6. make loans to others, except through the purchase of debt obligations and
the entry into repurchase agreements. However, the Fund may lend its
portfolio securities in an amount not to exceed one-third of the value of
its total assets. Any loans of portfolio securities will be made according
to guidelines established by the SEC and the Fund's Board of Trustees;
7. act as an underwriter of securities of other issuers, except to the extent
the Fund may be deemed an underwriter under the 1933 Act by virtue of
disposing of portfolio securities;
8. invest 25% or more of its total assets in the securities of issuers in any
particular industry or group of closely related industries except that
there shall be no limitation with respect to investments in (i)
obligations of the U.S. Government, its agencies or instrumentalities;
(ii) any particular industry or group of closely related industries to the
extent which companies whose stocks comprise the EAFE Free Index belong to
a particular industry or group of closely related industries to the same
degree during the same period. The Fund will be concentrated as specified
above only to the extent the percentage of its assets invested in those
categories of investments is sufficiently large that 25% or more of its
total assets would be invested in a single industry); and
9. issue any senior security (as such term is defined in Section 18(f) of the
1940 Act), except to the extent the activities permitted in Investment
Restriction Nos. 3 and 5 may be deemed to give rise to a senior security.
Non-Fundamental Operating Restrictions
The following are the Fund's non-fundamental operating restrictions, which may
be changed by the Fund's Board of Trustees without shareholder approval.
Unless indicated otherwise below, the Fund may:
1. 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 charge fees for operating expenses, such as investment
advisory and administration fees, that would be in addition to those
charged by the Fund.
2. not invest more than 15% of its net assets in illiquid securities. For
this purpose, illiquid securities include, among others, (a) securities
that are illiquid by virtue of the absence of a readily available market
or legal or contractual restrictions on resale, (b) fixed time deposits
that are subject to withdrawal penalties and that have maturities of more
than seven days, and (c) repurchase agreements not terminable within seven
days; and
3. 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. notwithstanding any other fundamental or non-fundamental investment policy
or restriction, invest all of its assets in the securities of a single
open-end management investment company with substantially similar
fundamental investment objectives and policies as the Fund or investment
objectives and policies consistent with those of the Fund, except that it
may invest a portion of its assets in a money market fund for cash
management purposes.
MASTER PORTFOLIO POLICIES
Fundamental Investment Restrictions
The Master Portfolio is subject to the following fundamental investment
restrictions which cannot be changed without approval by the holders of a
majority (as defined in the 1940 Act) of the Master Portfolio's outstanding
voting securities. If a percentage restriction is adhered to at the time of
investment, a later change in percentage resulting from a change in values or
assets will not constitute a violation of that restriction.
The Master Portfolio may not:
1. invest more than 5% of its assets in the obligations of any single issuer,
except that up to 25% of the value of its total assets may be invested,
and securities issued or guaranteed by the U.S. Government, or its
agencies or instrumentalities may be purchased, without regard to any such
limitation. This limitation does not apply to foreign currency
transactions including, without limitation, forward currency contracts;
2. hold more than 10% of the outstanding voting securities of any single
issuer. This Investment Restriction applies only with respect to 75% of
its total assets;
3. invest in commodities, except that the Master Portfolio may purchase and
sell (i.e., write) options, forward contracts, futures contracts,
including those relating to indexes, and options on futures contracts or
indices;
4. purchase, hold or deal in real estate, or oil, gas or other mineral leases
or exploration or development programs, but the Master Portfolio may
purchase and sell securities that are secured by real estate or issued by
companies that invest or deal in real estate;
5. borrow money, except to the extent permitted under the 1940 Act, provided
that the Master Portfolio may borrow up to 20% 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 20% of the current
value of its net assets. For purposes of this investment restriction, the
Master Portfolio's entry into options, forward contracts, futures
contracts, including those relating to indices, and options on futures
contracts or indices shall not constitute borrowing to the extent certain
segregated accounts are established and maintained by the Master
Portfolio;
6. make loans to others, except through the purchase of debt obligations and
the entry into repurchase agreements. However, the Master Portfolio may
lend its portfolio securities in an amount not to exceed one-third of the
value of its total assets. Any loans of portfolio securities will be made
according to guidelines established by the SEC and the Master Portfolio's
Board of Trustees;
7. act as an underwriter of securities of other issuers, except to the extent
the Master Portfolio may be deemed an underwriter under the 1933 Act by
virtue of disposing of portfolio securities;
8. invest 25% or more of its total assets in the securities of issuers in any
particular industry or group of closely related industries and except that
there shall be no limitation with respect to investments in (i)
obligations of the U.S. Government, its agencies or instrumentalities;
(ii) any industry in which the EAFE Free Index becomes concentrated to the
same degree during the same period, the Master Portfolio will be
concentrated as specified above only to the extent the percentage of its
assets invested in those categories of investments is sufficiently large
that 25% or more of its total assets would be invested in a single
industry);and
9. issue any senior security (as such term is defined in Section 18(f) of the
1940 Act), except to the extent the activities permitted in Investment
Restriction Nos. 3 and 5 may be deemed to give rise to a senior security.
Non-Fundamental Operating Policies
The Master Portfolio has adopted the following investment restrictions as
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 charge 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 15% of its net assets in
illiquid securities. For this purpose, illiquid securities include, among
others, (a) securities that are illiquid by virtue of the absence of a
readily available market or legal or contractual restrictions on resale,
(b) fixed time deposits that are subject to withdrawal penalties and that
have maturities of more than seven days, and (c) repurchase agreements not
terminable within seven days.
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, Treasurer 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 is President of
4500 Bohannon Drive E*TRADE Asset Management,
Menlo Park, CA 94025 Inc. She joined E*TRADE Asset
Management, Inc. in March 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), and prior to that
he was an Assistant Vice
President of Maryland National
Bank.
<FN>
- -----------------------
(1) Ms. Meyers may be considered an "interested person," but she is not an
"affiliated person," as defined in the 1940 Act.
</FN>
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:
</TABLE>
Compensation Table
<TABLE>
- --------------------------------------------------------------------------
<CAPTION>
Name of Person, Aggregate Total Compensation From Fund
Position Compensation from and Fund Complex Paid to
the Fund (1) Trustees (2)
- --------------------------------------------------------------------------
<S> <C> <C>
Leonard C. Purkis, None None
Trustee
Shelly J. Meyers (3) $7,500 $22,500
Ashley T. Rabun $7,500 $22,500
Steven Grenadier $7,500 $22,500
George J. Rebhan $7,500 - 0 -
No Trustee will receive any benefits upon retirement. Thus, no pension or
retirement benefits have accrued as part of the Fund's expenses.
<FN>
- -------------------
(1) This amount represents the estimated aggregate amount of compensation paid
to each non-affiliated Trustee for service on the Board of Trustees for
the fiscal year ending December 31, 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
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.
As of April 3, 2000, the following persons beneficially owned 5% or more of the
Fund's outstanding equity securities:
Shares
Beneficially
Name Owned Percent of Fund
---- ----- ---------------
P. Reiman 186, 357.00 23.2%
Woodside, CA
As of the date of this SAI, the Trustees and Officers of the Fund as a group
owned less than 1% of the Fund's equity securities.
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 March 31,
2000, the Investment Advisor provided investment advisory services for over $277
million in assets.
Subject to the general supervision of the E*TRADE Funds' Board of Trustees and
in accordance with the investment objective, policies and restrictions of the
Fund, the Investment Advisor provides the Fund with ongoing investment guidance,
policy direction and monitoring of the Master Portfolio. The Investment Advisor
may in the future manage cash and money market instruments for cash flow
purposes. For its advisory services, the Fund currently 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 a master portfolio. To the extent
the Fund has assets that are not invested in a master portfolio in the future,
the Fund would pay the Investment Advisor an investment advisory fee at annual
rate equal to 0.08% of that portion of the Fund's assets not invested in a
master portfolio. The Fund paid the Investment Advisor approximately $101 for
its investment advisory services to the Fund in 1999.
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 December 31, 1999, Barclays Global
Investors and its affiliates, including BGFA, provided investment advisory
services for over $783 billion of assets. Pursuant to an Investment Advisory
Contract (the "Advisory Contract") with the Master Portfolio, BGFA provides
investment advisory services in connection with the daily management of the
Master Portfolio's assets, subject to the supervision of the Master Portfolio's
Board of Trustees and in conformity with Delaware law and the stated policies of
the Master Portfolio. BGFA receives a monthly advisory fee from the Master
Portfolio at an annual rate equal to 0.15% of the first $1 billion, and 0.10%
thereafter 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. This advisory fee is an expense of the Master Portfolio
borne proportionately by its interestholders, including the Fund.
The Advisory Contract will continue in effect for more than two years provided
the continuance is approved annually (i) by the holders of a majority of the
Master Portfolio's outstanding voting securities or by the Master Portfolio's
Board of Trustees and (ii) by a majority of the Trustees of the Master Portfolio
who are not parties to the Advisory Contract or affiliated of any such party.
The Advisory Contract may be terminated on 60 days' written notice by either
party 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 overall net result. When BGFA, subject to the supervision of, and the
overall authority of the Master Portfolio's Board of Trustees, 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 equitably. 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.
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
inside information in its possession.
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 entitled to receive a monthly fee, in the aggregate, at an
annual rate of 0.10% of the first $1 billion, and 0.07% thereafter, of the
average daily net assets of the Master Portfolio for providing administrative
services and assuming expenses. 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. Stephens does not receive compensation for acting as placement
agent for 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 0.28% 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
0.30% of the 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 0.55%) and this agreement has the same terms 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. The Fund paid the Administrator approximately $1,445 for its services
to the Fund in 1999 under the administrative services agreement. 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, 350 South Grand Avenue, Los
Angeles, CA 90071-3462, 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
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 interestholders. 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.
Brokers are also selected because of their ability to handle special executions
such as are involved in large block trades or broad distributions, providing the
primary consideration is met. Higher turnover rates over 100% are likely to
result in comparatively greater brokerage expenses.
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. Assets in which the Fund invests may
trade and fluctuate in value after the close and before the opening of the NYSE.
Telephone and Internet Redemption Privileges. The Fund employs reasonable
procedures to confirm that instructions communicated by telephone or the
Internet are genuine. The Fund may not be liable for losses due to unauthorized
or fraudulent instructions. Such procedures include but are not limited to
requiring a form of personal identification prior to acting on instructions
received by telephone or the Internet, providing written confirmations of such
transactions to the address of record, tape recording telephone instructions and
backing up Internet transactions.
Retirement Plans. You can find information about the retirement plans offered by
E*TRADE Securities by accessing our Website. You may fill out an IRA application
online or request our IRA application kit by mail.
TAXATION
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the Fund and the purchase, ownership, and disposition of Fund shares.
This discussion does not purport to be complete or to deal with all aspects of
federal income taxation that may be relevant to shareholders in light of their
particular circumstances. This discussion is based upon present provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be retroactive. Prospective
investors should consult their own tax advisors with regard to the federal tax
consequences of the purchase, ownership, or disposition of Fund shares, as well
as the tax consequences arising under the laws of any state, foreign country, or
other taxing jurisdiction.
Taxation of the Fund. The Fund intends to be taxed as a regulated investment
company under Subchapter M of the Code. Accordingly, the Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to certain securities loans, and
gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing in
such stock, securities or currencies; and (b) diversify its holdings so that, at
the end of each fiscal quarter, (i) at least 50% of the value of the Fund's
total assets is represented by cash and cash items, U.S. Government securities,
the securities of other regulated investment companies and other securities,
with such other securities limited, in respect of any one issuer, to an amount
not greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities and the securities of other regulated investment
companies).
As a regulated investment company, the Fund generally is not subject to U.S.
federal income tax on income and gains that it distributes to shareholders, if
at least 90% of the Fund's investment company taxable income (which includes,
among other items, dividends, interest and the excess of any net short-term
capital gains over net long-term capital losses) for the taxable year is
distributed. The Fund intends to distribute substantially all of such income.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax at the
Fund level. To avoid the tax, the Fund must distribute during each calendar year
an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for a one-year period generally ending on October 31 of
the calendar year, and (3) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, the Fund intends to make distributions in accordance with the
calendar year distribution requirement.
Distributions. Distributions of investment company taxable income (including net
short-term capital gains) are taxable to a U.S. shareholder as ordinary income,
whether paid in cash or shares. Dividends paid by the Fund to a corporate
shareholder, to the extent such dividends are attributable to dividends received
by the Fund from U.S. corporations, may, subject to limitation, be eligible for
the dividends received deduction. However, the alternative minimum tax
applicable to corporations may reduce the value of the dividends received
deduction. Distributions of net capital gains (the excess of net long-term
capital gains over net short-term capital losses) designated by the Fund as
capital gain dividends, whether paid in cash or reinvested in Fund shares, will
generally be taxable to shareholders as long-term capital gain, regardless of
how long a shareholder has held Fund shares.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received. A distribution will be treated as paid on December 31 of a calendar
year if it is declared by the Fund in October, November or December of that year
with a record date in such a month and paid by the Fund during January of the
following year. Such distributions will be taxable to shareholders in the
calendar year in which the distributions are declared, rather than the calendar
year in which the distributions are received.
If the net asset value of shares is reduced below a shareholder's cost as a
result of a distribution by the Fund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying shares of the Fund just
prior to a distribution. The price of shares purchased at this time will include
the amount of the forthcoming distribution, but the distribution will generally
be taxable to the shareholder.
Foreign Taxes. The Fund may be subject to certain taxes imposed by the countries
in which it invests or operates. If the Fund qualifies as a regulated investment
company and if more than 50% of the value of the Fund's total assets at the
close of any taxable year consists of stocks or securities of foreign
corporations, the Fund may elect, for U.S. federal income tax purposes, to treat
any foreign taxes paid by the Fund that qualify as income or similar taxes under
U.S. income tax principles as having been paid by the Fund's shareholders. For
any year for which the Fund makes such an election, each shareholder will be
required to include in its gross income an amount equal to its allocable share
of such taxes paid by the Fund and the shareholders will be entitled, subject to
certain limitations, to credit their portions of these amounts against their
U.S. federal income tax liability, if any, or to deduct their portions from
their U.S. taxable income, if any. No deduction for foreign taxes may be claimed
by individuals who do not itemize deductions. In any year in which it elects to
"pass through" foreign taxes to shareholders, the Fund will notify shareholders
within 60 days after the close of the Fund's taxable year of the amount of such
taxes and the sources of its income.
Generally, a credit for foreign taxes paid or accrued is subject to the
limitation that it may not exceed the shareholder's U.S. tax attributable to his
or her total foreign source taxable income. For this purpose, the source of the
Fund's income flows through to its shareholders. With respect to the Fund, gains
from the sale of securities may have to be treated as derived from U.S. sources
and certain currency fluctuation gains, including Section 988 gains (defined
below), may have to be treated as derived from U.S. sources. The limitation of
the foreign tax credit is applied separately to foreign source passive income,
including foreign source passive income received from the Fund. Shareholders may
be unable to claim a credit for the full amount of their proportionate share of
the foreign taxes paid by the Fund. The foreign tax credit can be applied to
offset no more than 90% of the alternative minimum tax imposed on corporations
and individuals.
The foregoing is only a general description of the foreign tax credit. Because
application of the credit depends on the particular circumstances of each
shareholder, shareholders are advised to consult their own tax advisers.
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.
Section 988 Gains or Losses. Gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of some investments, including debt securities and
certain forward contracts denominated in a foreign currency, gains or losses
attributable to fluctuations in the value of the foreign currency between the
acquisition and disposition of the position also are treated as ordinary gain or
loss. These gains and losses, referred to under the Code as "section 988" gains
or losses, increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to its shareholders as ordinary
income. If section 988 losses exceed other investment company taxable income
during a taxable year, the Fund would not be able to make any ordinary dividend
distributions, or distributions made before the losses were realized would be
recharacterized as a return of capital to shareholders, rather than as an
ordinary dividend, reducing each shareholder's basis in his or her Fund shares.
Passive Foreign Investment Companies. The Fund may invest in shares of foreign
corporations that may be classified under the Code as passive foreign investment
companies ("PFICs"). In general, a foreign corporation is classified as a PFIC
if at least one-half of its assets constitute investment-type assets, or 75% or
more of its gross income is investment-type income. If the Fund receives a
so-called "excess distribution" with respect to PFIC stock, the Fund itself may
be subject to a tax on a portion of the excess distribution, whether or not the
corresponding income is distributed by the Fund to shareholders. In general,
under the PFIC rules, an excess distribution is treated as having been realized
ratably over the period during which the Fund held the PFIC shares. The Fund
will itself be subject to tax on the portion, if any, of an excess distribution
that is so allocated to prior Fund taxable years and an interest factor will be
added to the tax, as if the tax had been payable in such prior taxable years.
Certain distributions from a PFIC as well as gain from the sale of PFIC shares
are treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
The Fund may be eligible to elect alternative tax treatment with respect to PFIC
shares. Under an election that currently is available in some circumstances, the
Fund would be required to include in its gross income its share of the earnings
of a PFIC on a current basis, regardless of whether distributions were received
from the PFIC in a given year. If this election were made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. In addition, another election would involve marking to market the Fund's
PFIC shares at the end of each taxable year, with the result that unrealized
gains would be treated as though they were realized and reported as ordinary
income. Any mark-to-market losses and any loss from an actual disposition of
PFIC shares would be deductible as ordinary losses to the extent of any net
mark-to-market gains included in income in prior years.
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.
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 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.
Historic data on the EAFE Free Index may be used to promote the Fund. The
historical EAFE Free Index data presented from time to time is not intended to
suggest that an investor would have achieved comparable results by investing in
any one equity security or in managed portfolios of equity securities, such as
the Fund, during the periods shown.
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 EAFE Free 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.
EAFE Free Index
In the absence of permission to use the EAFE Free Index, the Fund may not be
able to pursue its investment objective.
The Fund is not sponsored, endorsed, sold or promoted by Morgan Stanley Capital
International Inc. ("MSCI") or any affiliate of MSCI. Neither MSCI nor any other
party makes any representation or warranty, express or implied, to the owners of
the Fund or any member of the public regarding the advisability of investing in
securities generally or in the Fund particularly or the ability of the EAFE Free
Index to track general stock market performance. MSCI is the licensor of certain
trademarks, service marks and trade names of MSCI and of the EAFE Free Index
which is determined, composed and calculated by MSCI without regard to the Fund
or E*TRADE Asset Management, Inc. MSCI has no obligation to take the needs of
the Fund, E*TRADE Asset Management, Inc. or the Shareholders into consideration
in determining, composing or calculating the EAFE Free Index. MSCI is not
responsible for and has not participated in the determination of the timing of,
prices at, or quantities of the Fund to be issued or in the determination or
calculation of the equation by which the Fund's shares are redeemable for cash.
Neither MSCI nor any other party has any obligation or liability to Shareholders
in connection with the administration, marketing or trading of the Fund.
Although MSCI shall obtain information for inclusion in or for use in the
calculation of the EAFE Free Index from sources which MSCI considers reliable,
neither MSCI nor any other party guarantees the accuracy and/or the completeness
of the EAFE Free Index or any data included therein. Neither MSCI nor any other
party makes any warranty, express or implied as to results to be obtained by
E*TRADE Asset Management, Inc., the Fund, the Shareholders or any other person
or entity from the use of the EAFE Free Index or any data included therein.
Neither MSCI nor any other party makes any express or implied warranties, and
MSCI hereby expressly disclaims all warranties of merchantability or fitness for
a particular purpose with respect to the EAFE Free Index or any data included
therein. Without limiting any of the foregoing, in no event shall MSCI or any
other party have any liability for any direct, indirect, special, punitive,
consequential or any other damages (including lost profits) even if notified of
the possibility of such damages.
<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.
<PAGE>
4500 Bohannon Drive
Menlo Park, CA 94025
Telephone: (650) 331-6000
Toll-Free: (800) 786-2575
Internet: http://www.etrade.com
<PAGE>
PART C:
OTHER INFORMATION
Item 23. Exhibits
(a)(i) Certificate of Trust.1
(a)(ii) Trust Instrument.1
(b) By-laws.2
(c) Certificates for Shares will not be issued. Articles II, VII, IX and
X of the Trust Instrument, previously filed as exhibit (a)(ii),
define the rights of holders of the Shares.1
(d)(i) Form of Investment Advisory Agreement between E*TRADE Asset
Management, Inc. and the Registrant with respect to the E*TRADE S&P
500 Index Fund.2
(d)(ii) Form of Amended and Restated Investment Advisory Agreement between
E*TRADE Asset Management, Inc. and the Registrant with respect to
the E*TRADE S&P 500 Index Fund, E*TRADE Extended Market Index Fund,
E*TRADE Bond Index Fund, and E*TRADE International Index Fund.3
(d)(iii) Form of Amendment No. 1 to Amended and Restated Investment Advisory
Agreement between E*TRADE Asset Management, Inc. and the Registrant
with respect to the E*TRADE International Index Fund.7
(d)(iv) Form of Investment Advisory Agreement between E*TRADE Asset
Management, Inc. and the Registrant with respect to the E*TRADE
Technology Index Fund.3
(d)(v) Form of Investment Subadvisory Agreement among E*TRADE Asset
Management, Inc., Barclays Global Fund Advisors and the Registrant
with respect to the E*TRADE Technology Index Fund.3
(d)(vi) Form of Investment Advisory Agreement between E*TRADE Asset
Management, Inc. and the Registrant with respect to the E*TRADE
E-Commerce Index Fund.5
(d)(vii) Form of Investment Subadvisory Agreement among E*TRADE Asset
Management, Inc., Barclays Global Fund Advisors and the Registrant
with respect to the E*TRADE E-Commerce Index Fund.5
(d)(viii) Form of Investment Advisory Agreement between E*TRADE Asset
Management, Inc. and the Registrant with respect to the E*TRADE
Global Titans Index Fund.7
(d)(ix) Form of Investment Subadvisory Agreement among E*TRADE Asset
Management, Inc., Barclays Global Fund Advisors and the Registrant
with respect to the E*TRADE Global Titans Index Fund.7
(d)(x) Form of Investment Advisory Agreement between E*TRADE Asset
Management, Inc. and the Registrant with respect to the E*TRADE
Premier Money Market Fund.7
(e)(i) Form of Underwriting Agreement between E*TRADE Securities, Inc. and
the Registrant with respect to the E*TRADE S&P 500 Index Fund.2
(e)(ii) Amended and Restated Underwriting Agreement between E*TRADE
Securities, Inc. and the Registrant with respect to E*TRADE Extended
Market Index Fund, E*TRADE Bond Index Fund, E*TRADE Technology Index
Fund, E*TRADE International Index Fund, and E*TRADE E-Commerce Index
Fund.3
(e)(iii) Form Amendment No. 1 to the Underwriting Agreement between E*TRADE
Securities, Inc. and the Registrant with respect to E*TRADE Global
Titans Index Fund and E*TRADE Premier Money Fund.7
(f) Bonus or Profit Sharing Contracts: Not applicable.
(g)(i) Form of Custodian Agreement between the Registrant and Investors
Bank & Trust Company with respect to the E*TRADE S&P 500 Index
Fund.2
(g)(ii) Form of Amendment No. 1 to the Custodian Agreement between the
Registrant and Investors Bank & Trust Company with respect to
E*TRADE Extended Market Index Fund, E*TRADE Bond Index Fund, and
E*TRADE International Index Fund.3
(g)(iii) Form of Amendment No. 2 to the Custodian Agreement between the
Registrant and Investors Bank & Trust Company with respect to
E*TRADE Premier Money Market Fund.7
(g)(iv) Form of Custodian Services Agreement between Registrant and PFPC
Trust Company with respect to the E*TRADE Technology Index Fund and
E*TRADE E-Commerce Index Fund.3
(g)(v) Form of Amended Exhibit A to the Custodian Services Agreement
between Registrant and PFPC Trust Company with respect to the
E*TRADE Global Titans Index Fund.7
(h)(1)(i) Form of Third Party Feeder Fund Agreement among the Registrant,
E*TRADE Securities, Inc. and Master Investment Portfolio with
respect to the E*TRADE S&P 500 Index Fund.2
(h)(1)(ii) Form of Third Party Feeder Fund Agreement among the Registrant,
E*TRADE Securities, Inc. and Master Investment Portfolio with
respect to the E*TRADE S&P 500 Index Fund, E*TRADE Extended Market
Index Fund, and E*TRADE Bond Index Fund.3
(h)(1)(iii) Form of Amended and Restated to the Third Party Feeder Fund
Agreement among the Registrant, E*TRADE Securities, Inc. and Master
Investment Portfolio with respect to the E*TRADE S&P 500 Index Fund,
E*TRADE Extended Market Index Fund, E*TRADE Bond Index Fund, and
E*TRADE International Index Fund.7
(h)(1)(iv) Form of Amendment No. 1 to the Amended and Restated Third Party
Feeder Agreement among the Registrant, E*TRADE Securities Inc., and
Master Investment Portfolio with respect to E*TRADE Premier Money
Market Fund.7
(h)(2)(i) Form of Administrative Services Agreement between the Registrant and
E*TRADE Asset Management, Inc. with respect to the E*TRADE S&P 500
Index Fund.2
(h)(2)(ii) Form of Amendment No. 1 to the Administrative Services Agreement
between the Registrant and E*TRADE Asset Management, Inc. with
respect to the E*TRADE Extended Market Index Fund, E*TRADE Bond
Index Fund, E*TRADE Technology Index Fund, E*TRADE International
Index Fund, and E*TRADE E-Commerce Index Fund.3
(h)(2)(iii) Form of the Amended and Restated Administrative Services Agreement
between the Registrant and E*TRADE Asset Management, Inc. with
respect to the E*TRADE Extended Market Index Fund, E*TRADE Bond
Index Fund, E*TRADE Technology Index Fund, E*TRADE International
Index Fund, E*TRADE E-Commerce Index Fund.7
(h)(2)(iv) Form of Amendment No. 1 to the Amended and Restated Administrative
Services Agreement between the Registrant and E*TRADE Asset
Management, Inc. with respect to the E*TRADE Global Titans Index
Fund and E*TRADE Premier Money Market Fund.7
(h)(2)(v) Form of Waiver and Modification to the Amended and Restated
Administrative Services Agreement between the Registrant and E*TRADE
Asset Management, Inc with respect to E*TRADE Global Titans Index
Fund.9
(h)(2)(vi) Form of Amended Exhibit A to the Waiver and Modification to the
Amended and Restated Administrative Services Agreement between the
Registrant and E*TRADE Asset Management, Inc. with respect to
E*TRADE Premier Money Market Fund.10
(h)(2)(vii) Form of Amended Exhibit A to the Waiver and Modification to the
Amended and Restated Administrative Services Agreement between the
Registrant and E*TRADE Asset Management, Inc. with respect to
E*TRADE S&P 500 Index Fund, E*TRADE Extended Market Index Fund,
E*TRADE Bond Index Fund, E*TRADE Technology Index Fund, E*TRADE
International Index Fund, and E*TRADE E-Commerce Index Fund.
(h)(3)(i) Form of Sub-Administration Agreement among E*TRADE Asset Management,
Inc., the Registrant and Investors Bank & Trust Company with respect
to the E*TRADE S&P 500 Index Fund.4
(h)(3)(ii) Form of Amendment No. 1 to the Sub-Administration Agreement among
E*TRADE Asset Management, Inc., the Registrant and Investors Bank &
Trust Company with respect to the E*TRADE Extended Market Index
Fund, E*TRADE Bond Index Fund and E*TRADE International Index Fund.3
(h)(3)(iii) Form of Amendment No. 2 to the Sub-Administration Agreement among
E*TRADE Asset Management, Inc., the Registrant and Investors Bank &
Trust Company with respect to the E*TRADE Premier Money Market
Fund.7
(h)(4) Form of Sub-Administration and Accounting Services Agreement between
E*TRADE Funds and PFPC, Inc. with respect to the E*TRADE Technology
Index Fund.3
(h)(4)(i) Exhibit A to the Sub-Administration and Accounting Services
Agreement between E*TRADE Funds and PFPC, Inc. with respect to the
E*TRADE E-Commerce Index Fund.5
(h)(4)(ii) Form of Amended Exhibit A to the Sub-Administration and Accounting
Services Agreement between E*TRADE Funds and PFPC, Inc. with respect
to the E*TRADE Global Titans Index Fund.7
(h)(5)(i) Form of Transfer Agency Services Agreement between PFPC, Inc. and
the Registrant with respect to the E*TRADE S&P 500 Index Fund.2
(h)(5)(ii) Form of Amended Exhibit A to the Transfer Agency Services Agreement
between PFPC, Inc. and the Registrant with respect to the E*TRADE
Extended Market Index Fund, E*TRADE Bond Index Fund, E*TRADE
Technology Index Fund, E*TRADE International Index Fund, and E*TRADE
E-Commerce Index Fund.3
(h)(5)(iii) Form of Amended Exhibit A to the Transfer Agency Services Agreement
between PFPC, Inc. and the Registrant with respect to the E*TRADE
Global Titans Index Fund and E*TRADE Premier Money Market Fund.7
(h)(6)(i) Form of Retail Shareholder Services Agreement among E*TRADE
Securities, Inc., the Registrant and E*TRADE Asset Management, Inc.
with respect to the E*TRADE S&P 500 Index Fund.4
(h)(6)(ii) Form of Amendment No. 1 to the Retail Shareholder Services Agreement
among E*TRADE Securities, Inc., the Registrant and E*TRADE Asset
Management, Inc. with respect to the E*TRADE Extended Market Index
Fund, E*TRADE Bond Index Fund, E*TRADE Technology Index Fund,
E*TRADE International Index Fund, and E*TRADE E-Commerce Index
Fund.3
(h)(6)(iii) Form of Amendment No. 2 to the Retail Shareholder Services Agreement
among E*TRADE Securities, Inc., the Registrant and E*TRADE Asset
Management, Inc. with respect to the E*TRADE Global Titans Index
Fund and E*TRADE Premier Money Market Fund.7
(h)(7) State Securities Compliance Services Agreement between E*TRADE Funds
and PFPC, Inc. with respect to S&P 500 Index Fund, E*TRADE Extended
Market Index Fund, E*TRADE Bond Index Fund, E*TRADE Technology Index
Fund, E*TRADE International Index Fund, and E*TRADE E-Commerce Index
Fund.3
(h)(7)(i) Form of Amended Exhibit A to the State Securities Compliance
Services Agreement between E*TRADE Funds and PFPC, Inc. with respect
to E*TRADE Global Titans Index Fund and E*TRADE Premier Money Market
Fund.7
(i)(1) Opinion and Consent of Dechert Price & Rhoads with respect to the
E*TRADE S&P 500 Index Fund.2
(i)(2) Opinion and Consent of Dechert Price & Rhoads with respect to the
E*TRADE Extended Market Index Fund, E*TRADE Bond Index Fund and
E*TRADE Technology Index Fund.3
(i)(3) Opinion and Consent of Dechert Price & Rhoads with respect to the
E*TRADE E-Commerce Index Fund.5
(i)(4) Opinion and Consent of Dechert Price & Rhoads with respect to the
E*TRADE International Index Fund.6
(i)(5) Opinion and Consent of Dechert Price & Rhoads with respect to the
E*TRADE Premier Money Market Fund.7
(i)(6) Opinion and Consent of Dechert Price & Rhoads with respect to the
E*TRADE Global Titans Index Fund.8
(i)(7) Opinion and Consent of Dechert Price & Rhoads, dated April 27, 2000
with respect to the E*TRADE S&P 500 Index Fund, the E*TRADE Extended
Market Index Fund, the E*TRADE Bond Index Fund and the E*TRADE
International Index Fund.
(j) Consent of Deloitte & Touche LLP.
(k) Omitted Financial Statements: Not applicable.
(l) Form of Subscription Letter Agreements between E*TRADE Asset
Management, Inc. and the Registrant.2
(m) Rule 12b-1 Plan: Not applicable.
(n) Rule 18f-3 Plan: Not applicable.
(p)(1) Form of Code of Ethics of the Registrant.10
(p)(2) Form of Code of Ethics of E*TRADE Asset Management, Inc.10
(p)(3) Form of Code of Ethics of E*TRADE Securities, Inc.10
(p)(4) Form of Code of Ethics of the Master Investment Portfolio.10
(p)(5) Form of Code of Ethics of Barclays Global Funds Advisors.10
(p)(6) Form of Code of Ethics for Stephens, Inc.10
* Form of Power of Attorney for the Registrant.7
** Form of Power of Attorney for the Master Investment Portfolio.2
** Form of Power of Attorney for the Master Investment Portfolio on behalf of
Leo Soong.10
*** Power of Attorney and Secretary's Certificate of Registrant for signature
on behalf of Registrant.4
**** Power of Attorney for the Registrant on behalf of Amy J. Errett.10
- -----------------
1 Incorporated by reference from the Registrant's Initial Registration
Statement on Form N-1A filed with the Securities and Exchange Commission
("SEC") on November 5, 1998.
2 Incorporated by reference from the Registrant's Pre-effective Amendment
No. 2 to the Registration Statement on Form N-1A filed with the SEC on
January 28, 1999.
3 Incorporated by reference from the Registrant's Post-Effective Amendment
No. 4 to the Registration Statement on Form N-1A filed with the SEC on
August 11, 1999.
4 Incorporated by reference from the Registrant's Post-Effective Amendment
No. 7 to the Registration Statement on Form N-1A filed with the SEC on
October 8, 1999.
5 Incorporated by reference from the Registrant's Post-Effective Amendment
No. 9 to the Registration Statement on Form N-1A filed with the SEC on
October 20, 1999.
6 Incorporated by reference from the Registrant's Post-Effective Amendment
No. 10 to the Registration Statement on Form N-1A filed with the SEC on
October 20, 1999.
7 Incorporated by reference from the Registrant's Post-Effective Amendment
No. 15 to the Registration Statement on Form N-1A filed with the SEC on
February 3, 2000.
8 Incorporated by reference from the Registrant's Post-Effective Amendment
No. 16 to the Registration Statement on Form N-1A filed with the SEC on
February 3, 2000.
9 Incorporated by reference from the Registrant's Post-Effective Amendment
No. 17 to the Registration Statement on Form N-1A filed with the SEC on
February 16, 2000.
10 Incorporated by reference from the Registrant's Post-Effective Amendment
No. 18 to the Registration Statement on Form N-1A filed with the SEC on
March 27, 2000.
Item 24. Persons Controlled by or Under Common Control With Registrant
E*TRADE Asset Management, Inc. ("E*TRADE Asset Management") (a Delaware
corporation), may own more than 25% of one or more series of the Registrant, as
described in the Statement of Additional Information, and thus may be deemed to
control that series. E*TRADE Asset Management is a wholly owned subsidiary of
E*TRADE Group, Inc. ("E*TRADE Group") (a Delaware corporation). Other companies
of which E*TRADE Group owns greater than 25% include: E*TRADE Securities, Inc.,
Clearstation, Inc. Sharedata, Inc., Confluent, Inc., OptionsLink, TIR (Holdings)
Limited, Telebanc Financial Corporation and E*Offering Corp.
Item 25. Indemnification
Reference is made to Article X of the Registrant's Trust Instrument.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act") may be permitted to trustees,
officers and controlling persons of the Registrant by the Registrant pursuant to
the Declaration of Trust or otherwise, the Registrant is aware that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act and, therefore, is
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by trustees, officers or controlling persons of the Registrant in
connection with the successful defense of any act, suit or proceeding) is
asserted by such trustees, officers or controlling persons in connection with
the shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issues.
Item 26. Business and Other Connections of Investment Adviser
E*TRADE Asset Management, Inc. (the "Investment Advisor") is a Delaware
corporation that offers investment advisory services. The Investment Advisor's
offices are located at 4500 Bohannon Drive, Menlo Park, CA 94025. The directors
and officers of the Investment Advisor and their business and other connections
are as follows:
<TABLE>
<CAPTION>
Directors and Officers of Title/Status with Other Business
Investment Adviser Investment Adviser Connections
- -------------------------- ------------------ ------------------------
<S> <C> <C>
Kathy Levinson Director Director, President and
Chief Operating
Officer, E*TRADE
Securities, Inc. and
Executive Vice
President, Operations
and Customer Operations
Officer, E*TRADE Group,
Inc. 1997-98
Connie M. Dotson Director, Secretary and Corporate Secretary and
Treasurer Senior Vice President,
E*TRADE Securities, Inc.
Amy J. Errett President Chief Asset Gathering
Officer, E*TRADE Group,
Inc.
Jerry D. Gramaglia Director Senior Vice President,
E*TRADE Group, Inc.,
1998; Vice President,
Sprint Corp., 1997-98
W. David Moore Vice President Sr. Manager - Third
and Secretary Party Funds, E*TRADE
Securities Inc.,
February 1999-December
1999
</TABLE>
Barclays Global Fund Advisors ("BGFA"), a wholly owned subsidiary of
Barclays Global Investors, N.A. ("BGI"), is the sub-advisor for the E*TRADE
Technology Index Fund, E*TRADE E-Commerce Index Fund and E*TRADE Global Titans
Index Fund. BGFA is a registered investment adviser to certain open-end,
management investment companies and various other institutional investors. The
directors and officers of the sub-advisor and their business and other
connections are as follows:
Name and Position at BGFA Other Business Connections
- -------------------------- ---------------------------
Patricia Dunn, Director of BGFA and Co-Chairman and
Director Director of BGI, 45 Fremont Street,
San Francisco, CA 94105
Lawrence G. Tint, Chairman of the Board of Directors of
Chairman and Director BGFA and Chief Executive Officer of BGI,
45 Fremont Street, San Francisco, CA
94105
Geoffrey Fletcher, Chief Financial Officer of BGFA and BGI
Chief Financial Officer since May 1997, 45 Fremont Street, San
Francisco, CA 94150 Managing Director
and Principal Accounting Officer at
Bankers Trust Company from 1988 - 1997,
505 Market Street, San Francisco, CA
94111
Item 27. Principal Underwriters
(a) E*TRADE Securities, Inc. (the "Distributor") serves as Distributor of
Shares of the Trust. The Distributor is a wholly owned subsidiary of
E*TRADE Group, Inc.
(b) The officers and directors of E*TRADE Securities, Inc. are:
Name and Principal Positions and Offices Positions and Offices
Business Address* with Underwriter with Registrant
------------------ --------------------- ---------------------
Kathy Levinson Director, President and Chief None
Operating Officer
Stephen C. Richards Director and Senior Vice None
President
Steve Hetlinger Director and Vice President None
Connie M. Dotson Corporate Secretary and None
Senior Vice President
* The business address of all officers of the Distributor is 4500 Bohannon
Drive, Menlo Park, CA 94025.
Item 28. Location of Accounts and Records
The account books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and
the Rules thereunder will be maintained in the physical possession of:
(1) E*TRADE Asset Management, Inc., the Registrant's investment
advisor, is located at 4500 Bohannon Drive, Menlo Park, CA 94025;
(2) Investors Bank & Trust Company, the Registrant's custodian, accounting
services agent and sub-administrator with respect to the E*TRADE S&P 500 Index
Fund, E*TRADE Extended Market Index Fund, E*TRADE Bond Index Fund, E*TRADE
International Index Fund and E*TRADE Premier Money Market Fund, is located at
200 Clarendon Street, Boston, MA 02111;
(3) PFPC Inc., the Registrant's transfer agent and dividend disbursing
agent, is located at 400 Bellevue Parkway, Wilmington, DE 19809;
(4) PFPC Trust Company, the Registrant's custodian, accounting services
agent and sub-administrator with respect to the E*TRADE Technology Index Fund,
E*TRADE E-Commerce Index Fund and E*TRADE Global Titans Index Fund, is located
at 400 Bellevue Parkway, Wilmington, DE 19809; and
(5) Barclays Global Fund Advisors, the Master Portfolio's investment
advisor and sub-advisor with respect to the E*TRADE Technology Index Fund,
E*TRADE E-Commerce Index Fund and E*TRADE Global Titans Index Fund, is located
at 45 Fremont Street, San Francisco, CA 94105.
Item 29. Management Services
Not applicable
Item 30. Undertakings
Not applicable
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, and the Investment
Company Act of 1940, as amended, the Registrant certifies that it meets all of
the requirements for effectiveness of this post-effective amendment to its
Registration Statement under Rule 485(b) pursuant to the Securities Act and has
duly caused this post-effective amendment to its Registration Statement to be
signed on its behalf by the undersigned, duly authorized, in the City of Menlo
Park in the State of California on the 27th day of April, 2000.
E*TRADE FUNDS (Registrant)
By: *
---------------------------
Name: Amy J. Errett
Title: President
Pursuant to the requirements of the Securities Act, this registration
statement has been signed by the following persons in the capacities and on the
dates indicated:
Signature Title Date
*
- ------------------------
Leonard C. Purkis Trustee and Treasurer April 27, 2000
(Principal Financial and
Accounting Officer)
*
- ------------------------
Amy J. Errett President (Principal April 27, 2000
Executive Officer)
*
- ------------------------
Shelly J. Meyers Trustee April 27, 2000
*
- ------------------------
Ashley T. Rabun Trustee April 27, 2000
*
- ------------------------
Steven Grenadier Trustee April 27, 2000
*
- ------------------------
George J. Rebhan Trustee April 27, 2000
*By /s/
---------------------
David A. Vaughan
Attorney-In-Fact
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act of 1940, the Master Investment Portfolio certifies that it meets all
of the requirements for effectiveness of this post-effective amendment to
E*TRADE Funds' Registration Statement pursuant to Rule 485(b) under the
Securities Act and has duly caused this Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A of E*TRADE Funds with respect to the E*TRADE
S&P 500 Index Fund, E*TRADE International Index Fund, E*TRADE Extended Market
Index Fund, and E*TRADE Bond Index Fund, to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of Little Rock, and State of
Arkansas on the 27th day of April, 2000.
MASTER INVESTMENT PORTFOLIO
S&P 500 Index Master Portfolio
International Index Master Portfolio
Extended Index Master Portfolio
Bond Index Master Portfolio
By: /s/
---------------------------
Richard H. Blank, Jr.
Secretary and Treasurer
(and Principal Financial
Officer)
Pursuant to the requirements of the Securities Act, this Post-Effective
Amendment No. 19 to the Registration Statement on Form N-1A of E*TRADE Funds
with respect to the E*TRADE S&P 500 Index Fund, E*TRADE International Index
Fund, E*TRADE Extended Market Index Fund and E*TRADE Bond Index Fund has been
signed below by the following persons in the capacities and on the date
indicated:
Name Title Date
---- ----- ----
* Chairman, President April 27, 2000
- -------------------------- (Principal Executive
R. Greg Feltus Officer) and Trustee
/s/ Secretary and Treasurer April 27, 2000
- --------------------------- (Principal Financial
Richard H. Blank, Jr. Officer)
- -------------------------- Trustee April 27, 2000
Leo Soong
* April 27, 2000
- -------------------------- Trustee
Jack S. Euphrat
*
- -------------------------- Trustee April 27, 2000
W. Rodney Hughes
*By: /s/
--------------------------
Richard H. Blank, Jr.
* As Attorney-in-Fact pursuant to powers of attorney as previously filed.
<PAGE>
EXHIBIT LIST
Exhibit
No. DESCRIPTION
(h)(2)(vii) Form of Amended Exhibit A to the Waiver and Modification to the
Amended and Restated Administrative Services Agreement between the
Registrant and E*TRADE Asset Management, Inc. with respect to
E*TRADE S&P 500 Index Fund, E*TRADE Extended Market Index Fund,
E*TRADE Bond Index Fund, E*TRADE Technology Index Fund, E*TRADE
International Index Fund, and E*TRADE E-Commerce Index Fund.
(i)(7) Opinion and Consent of Dechert Price & Rhoads, dated April 27, 2000
with respect to the E*TRADE S&P 500 Index Fund, the E*TRADE Extended
Market Index Fund, the E*TRADE Bond Index Fund and the E*TRADE
International Index Fund.
(j) Consent of Deloitte & Touche LLP.
FORM OF
AMENDED EXHIBIT A
THIS Exhibit A, amended as of _________ ___, 2000 is Exhibit A to that
Waiver and Modification to the Amended and Restated Administrative Services
Agreement dated _________ ___, 2000, between the Registrant and E*TRADE Asset
Management, Inc.
PORTFOLIOS EXPENSE
E*TRADE Global Titans Index Fund 0.60%
E*TRADE Premier Money Market Fund 0.32%
E*TRADE S&P 500 Index Fund 0.27%
E*TRADE Extended Market Index Fund 0.28%
E*TRADE Bond Index Fund 0.27%
E*TRADE Technology Index Fund 0.85%
E*TRADE International Index Fund 0.30%
E*TRADE E-Commerce Index Fund 0.95%
E*TRADE Funds
By: ____________________
Title: ___________________
ACCEPTED AND AGREED:
E*TRADE Asset Management, Inc.
By: _____________________
Title: ___________________
Dechert Price & Rhoads
1775 Eye Street, N.W.
Washington, D.C. 20006-2401
Telephone: 202-261-3300
April 27, 2000
E*TRADE Funds
4500 Bohannon Drive
Menlo Park, CA 94025
Re: E*TRADE Funds
Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A
(Registration Nos.: 333-66807, 811-09093)
Dear Sirs:
We have acted as counsel for E*TRADE Funds (the "Fund"), a business trust
organized and validly existing under the laws of the State of Delaware, in
connection with the above-referenced Registration Statement relating to the
issuance and sale by the Fund of an indefinite amount of authorized shares of
beneficial interest under the Securities Act of 1933, as amended and under the
Investment Company Act of 1940, as amended. We have examined such governmental
and corporate certificates and records as we deemed necessary to render this
opinion and we are familiar with the Fund's Certificate of Trust, Trust
Instrument and its Bylaws.
Based upon the foregoing, we are of the opinion that the shares proposed
to be sold pursuant to the Fund's Post-Effective Amendment No. 19 Registration
Statement, when paid for as contemplated in the Fund's Registration Statement,
will be legally and validly issued, fully paid and non-assessable. We hereby
consent to the filing of this opinion as an exhibit to Post-Effective Amendment
No. 19 to the Fund's Registration Statement on Form N-1A, to be filed with the
Securities and Exchange Commission, and to the use of our name in the Fund's
Statement of Additional Information of the Fund's Registration Statement to be
dated as of May 1, 2000, and in any revised or amended versions thereof under
the caption "Legal Counsel." In giving such consent, however, we do not admit
that we are within the category of persons whose consent is required by Section
7 of the Securities Act of 1933, as amended, and the rules and regulations
thereunder.
Very truly yours,
INDEPENDENT AUDITORS' CONSENT
E*TRADE Funds:
We consent to the incorporation by reference in this Post-Effective Amendment
No. 19 to Registration Statement No. 333-66807 on Form N-1A of our report dated
February 23, 2000 appearing in the Annual Reports of the E*TRADE Extended Market
Index Fund as of December 31, 1999 and for the period from August 13, 1999
(commencement of operations) through December 31, 1999, E*TRADE S&P 500 Index
Fund as of December 31, 1999 and for the period from February 17, 1999
(commencement of operations) through December 31, 1999, E*TRADE Bond Index Fund
as of December 31, 1999 and for the period from August 13, 1999 (commencement of
operations) through December 31, 1999, and E*TRADE International Index Fund as
of December 31, 1999 and for the period from October 22, 1999 (commencement of
operations) through December 31, 1999 and to the reference to us under the
heading "Independent Accountants" in the Statement of Additional Information,
which is part of this Registration Statement.
/S/ Deloitte & Touche LLP
Los Angeles, California
April 27, 2000
