Registration Nos. 333-66807
811-09093
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 12, 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. 22 /X/
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and/or
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 25 /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
Amy Errett
E*TRADE Funds
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. Amy Errett
Dechert Price & Rhoads E*TRADE Funds
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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on (date) pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(1)
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X 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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<PAGE>
E*TRADE FUNDS
E*TRADE RUSSELL 2000 INDEX FUND
Prospectus dated January __, 2001
This Prospectus concisely sets forth information about the E*TRADE Russell 2000
Index Fund ("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 match as
closely as practicable, before fees and expenses, the performance of the Russell
2000 IndexSM. 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 securities comprising the Russell 2000 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 January __, 2001
<PAGE>
TABLE OF CONTENTS
RISK/RETURN SUMMARY..........................................................3
FEES AND EXPENSES............................................................4
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS...........................6
FUND MANAGEMENT..............................................................7
THE FUND'S STRUCTURE.........................................................8
PRICING OF FUND SHARES.......................................................9
HOW TO BUY, SELL AND EXCHANGE SHARES.........................................9
DIVIDENDS AND OTHER DISTRIBUTIONS...........................................14
TAX CONSEQUENCES............................................................14
<PAGE>
RISK/RETURN SUMMARY
This is a summary. You should read this section along with the rest of this
Prospectus.
Investment Objectives/Goals
The Fund's investment objective is to provide investment results that match as
closely as practicable, before fees and expenses, the performance of the Russell
2000 Index.*
Principal Strategies
The Fund seeks to achieve its investment objective by investing all of its
assets in the Russell 2000 Index Master Portfolio ("Master Portfolio"), a series
a 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 the
small-capitalization sector of the U.S. stock market by investing in a
representative sample of those securities comprising the Russell 2000 Index.
The Russell 2000 Index measures the performance of the small-capitalization
sector of the U.S. equity market. The Russell 2000 Index is a
capitalization-weighted index and a subset consisting of approximately the 2,000
smallest companies of the Russell 3000 Index. The Russell 3000 Index consists of
the 3,000 largest companies domiciled in the U.S. and its territories and
represents approximately 98% of the investable U.S. public equity market. The
Russell 2000 Index represents approximately 8% of the total market
capitalization of the Russell 3000 Index. As of the most recent reconstitution
of the index, the average market capitalization of the Russell 2000 Index was
approximately $580 million and the largest company in the index had an
approximate market capitalization of $1.5 billion.
Generally, the Master Portfolio attempts to be fully invested at all times in
securities comprising the Russell 2000 Index. The Master Portfolio also may
invest up to 10% of its total assets in futures and options and other derivative
securities transactions. The Master Portfolio may also invest in debt securities
and up to 10% of its total assets in high-quality money market instruments to
provide liquidity for redemptions.
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* Frank Russell Company does not sponsor the Fund nor is it affiliated in any
way with E*TRADE Asset Management or the Fund. Frank Russell Company" and
"Russell 2000 Index" are service marks of the Frank Russell Company and have
been licensed for use for certain purposes by E*TRADE Asset Management, Inc.
The Fund is not sponsored, endorsed, sold or promoted by Frank Russell
Company, and Frank Russell Company makes no representation or warranty,
express or implied, regarding the advisability of investing in the Fund.
Please see the Statement of Additional Information.
<PAGE>
Principal Risks
Stocks may rise and fall daily. The Russell 2000 Index represents the
small-capitalization segment of the U.S. stock market. The Russell 2000 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 in small-capitalization securities.
This means the Fund's returns can be particularly affected by the risks of
investing in small-capitalization companies. Small-cap companies tend to: be
less financially secure than large-capitalization companies; have less diverse
product lines; be more susceptible to adverse developments concerning their
products; be more thinly traded; have less liquidity, and have greater
volatility in the price of their securities.
There is no assurance that the Fund will achieve its investment objective. The
Russell 2000 Index may not appreciate, and could depreciate, while you are
invested in the Fund, even if you are a long-term investor.
The Fund cannot as a practical matter own all the stocks that comprise the
Russell 2000 Index in perfect correlation to the Russell 2000 Index itself. The
use of futures and options on futures is intended to help the Fund better match
the Russell 2000 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 Russell 2000 Index during down markets
as well as during up markets. The Fund's returns will be directly affected by
the volatility of the stocks comprising the Russell 2000 Index.
In seeking to follow the Russell 2000 Index, the Fund will be limited as to its
investments in other segments, e.g., large-cap companies, of the stock market.
As a result, whenever the small-cap stock market performs worse than other
segments, the Fund may underperform funds that have exposure to those segments
of the market. Likewise, whenever small-cap stocks fall behind other types of
investments--bonds, 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 is expected to commence operations in January 2001. Therefore, the
performance information (including annual total returns and average annual total
returns) for a full calendar year is not yet available.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund. The Fund is new, and therefore, has no historical expense
data. Thus, the numbers under the Annual Fund Operating Expenses below are
estimates.
Shareholder Fees
(fees paid directly from your investment)
Maximum Sales Charge (Load) Imposed on Purchases None
Maximum Deferred Sales Charge (Load) None
Maximum Sales Charge (Load) Imposed in Reinvested
Dividends and other Distributions None
Redemption Fee (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 0.12%**
Distribution (12b-1) Fees None
Other Expenses (Administration) 0.53%***
Total Annual Fund Operating Expenses 0.65%
* The cost reflects the expenses at both the Fund and the Master Portfolio
levels.
** Management fees include a fee equal to 0.10% 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 its administrator, E*TRADE
Asset Management, Inc.
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*
$68 $214
*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 match as
closely as practicable, before fees and expenses, the performance of the Russell
2000 Index. Although there is no current intention to do so, the Fund's
investment objective may be changed without shareholder approval.
Under normal market conditions, the Master Portfolio invests at least 90% of its
total assets in the stocks of companies comprising the Russell 2000 Index. That
portion of its assets is not actively managed but simply tries to match, before
fees and expenses, the total return of the Russell 2000 Index. The Master
Portfolio attempts to achieve, in both rising and falling markets, a correlation
of approximately 95% between the capitalization-weighted total return of its
assets, before fees and expenses, and the Russell 2000 Index. A 100% correlation
would mean the total return of the Fund's assets would increase and decrease
exactly the same as the Russell 2000 Index.
The Master Portfolio may invest up to 10% of its total assets in futures and
options and other derivative securities transactions and may lend its portfolio
securities. The Master Portfolio may also invest in debt securities and up to
10% of its total assets in high-quality money market instruments to provide
liquidity to pay redemptions and fees, among other reasons. The Master Portfolio
also may 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.
The Russell 2000 Index measures the performance of the small-capitalization
sector of the U.S. public equity market. The Russell 2000 Index is a
capitalization-weighted index and is a subset consisting of approximately the
2,000 smallest companies of the Russell 3000 Index. Component companies in the
index are adjusted for available float and weighted according to the market
value of their available outstanding shares. The composition of the Russell 2000
Index is adjusted to reflect changes in capitalization resulting from mergers,
acquisitions, stock rights, substitutions and other capital events. As of March
31, 2000, the ten largest companies in the Index were BroadVision, Inc.,
Microstrategy Incorporated, Mercury Interactive Corporation, Sandisk
Corporation, Lam Research Corporation, Cypress Semiconductor Corporation,
VerticalNet Inc., Millenium Pharmaceuticals, Inc., Amkor Technology Inc. and PE
Corporation - Celera Genomics Group.
Neither the Master Portfolio nor the Fund 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 Master Portfolio and the Fund are managed by utilizing an
"indexing" investment approach to determine which securities are to be purchased
or sold to match, to the extent feasible, and before fees and expenses, the
investment characteristics of the Russell 2000 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
industry sectors.
The Fund's ability to match its investment performance to the investment
performance of the Russell 2000 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 Russell 2000 Index is calculated; the timing,
frequency and size of shareholder purchases and redemptions of the Fund and the
Master Portfolio; and the weighting of a particular stock in the Russell 2000
Index. 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 stocks comprising the Russell 2000 Index.
As do many index funds, the Master Portfolio also may invest in futures and
options transactions and other derivative securities transactions to help
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 Fund and
the Master Portfolio 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 a portion of the gap attributable to
its 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
Russell 2000 Index. The Master Portfolio uses futures contracts to gain exposure
to the Russell 2000 Index for its cash balances, which could cause the Fund to
track the Russell 2000 Index less closely if the futures contracts do not
perform as expected.
The Master Portfolio may also invest 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 Master Portfolio 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 Master Portfolio invests.
FUND MANAGEMENT
Investment Advisor. Under an investment advisory agreement ("Investment Advisory
Agreement") with the Fund, E*TRADE Asset Management, Inc. ("Investment
Advisor"), a registered investment advisor, provides investment advisory
services to the Fund. The Investment Advisor is a wholly owned subsidiary of
E*TRADE Group, Inc. and is located at 4500 Bohannon Drive, Menlo Park, CA 94025.
The Investment Advisor commenced operating in February 1999. As of December __,
2000, the Investment Advisor provided investment advisory services for over
$____ million in assets.
Subject to general supervision of the E*TRADE Funds' Board of Trustees ("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 Fund pursuant to the Investment
Advisory Agreement. 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 __, 2000, Barclays Global Investors and its affiliates, including BGFA,
provided investment advisory services for over $___ billion of assets. BGFA
receives a monthly advisory fee from the Master Portfolio at an annual rate
equal to 0.10% of the Master Portfolio's average daily net assets. From time to
time, BGFA may waive such fees in whole or in part. Any such waiver will reduce
the expenses of the Master Portfolio, and accordingly, have a favorable impact
on its performance.
The Fund bears a pro rata portion of the investment advisory fees paid by the
Master Portfolio, as well as certain other fees paid by the Master Portfolio,
such as accounting, administration, 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 total return of the stocks comprising
the Russell 2000 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. However, shares
held by qualified employee benefit plans may be held directly with E*TRADE
Funds. 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, statements of additional information, 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: E*TRADE Securities, Inc., 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 $ 250
IRA, or one-person SEP account
To invest in the Fund for your Education $ 250
IRA account
To invest in the Fund for your UGMA/UTMA $ 250
account
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 the Fund's minimum balance requirements.
Before taking such action, the Fund will provide you with written notice and at
least 30 days to buy more shares to bring your investment up to $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.
If you are investing in the Fund for the first time, you can only buy Fund
shares on-line. Because the Fund's NAV changes daily, your purchase price will
be the next NAV determined after the Fund receives and accepts your purchase
order.
You can access the money you have invested in the Fund at any time by selling
some or all of your shares back to the Fund. Please note that the Fund will
assess a 1.00% fee on redemptions of Fund shares redeemed within four months of
purchase. 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 available for viewing and
printing on our Website.
No information provided on the Website is incorporated by reference into this
Prospectus, unless specifically noted in this Prospectus.
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 will
assess a 1.00% fee on redemptions of Fund shares redeemed within four months of
purchase.
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.
FRANK RUSSELL COMPANY
"Frank Russell Company" and "Russell 2000 Index" are service marks of Frank
Russell Company. Frank Russell Company has no relationship to the Fund, other
than the licensing of the Russell 2000 Index and its service marks for use in
connection with the Fund.
<PAGE>
[Outside back cover page.]
The Statement of Additional Information for the Fund, dated January __, 2001
("SAI"), contains further information about the Fund. The SAI is incorporated
into this Prospectus by reference (that means it is legally considered part of
this Prospectus). Additional information about the Fund's investments will be
available in the Fund's annual and semi-annual reports to shareholders. In the
Fund's annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
its fiscal year.
The SAI and the most recent annual and semi-annual reports (when available), may
be obtained without charge at our Website (www.etrade.com). Information on the
Website is not incorporated by reference into this Prospectus unless
specifically noted. Shareholders will be notified when a prospectus, prospectus
update, amendment, annual or semi-annual report is available. Shareholders may
also call the toll-free number listed below for additional information or with
any inquiries.
Further information about the Fund (including the SAI) can also be reviewed and
copied at the SEC's Public Reference Room in Washington, D.C. You may call
1-202-942-8090 for information about the operations of the public reference
room. Reports and other information about the Fund are also available on the
SEC's Internet site at http://www.sec.gov or copies can be obtained, upon
payment of a duplicating fee, by electronic request at the following e-mail
address: [email protected] or by writing the Public Reference Section of the
SEC, Washington, D.C. 20549-0102.
E*TRADE Securities, Inc.
4500 Bohannon Drive
Menlo Park, CA 94025
Telephone: (650) 331-6000
Toll-Free: (800) 786-2575
http://www.etrade.com
Investment Company Act No.: 811-09093
<PAGE>
E*TRADE Funds
E*TRADE RUSSELL 2000 INDEX FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY __, 2001
This Statement of Additional Information ("SAI") is not a prospectus and should
be read together with the Prospectus dated January __, 2001 (as amended from
time to time) for the E*TRADE Russell 2000 Index Fund ("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 (when available) please access our Website online
(www.etrade.com) or call our toll-free number at (800) 786-2575. Other
information on the Website is not incorporated by reference into this SAI. 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......................................................20
SERVICE PROVIDERS..........................................................21
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION.............................23
ORGANIZATION, DIVIDEND AND VOTING RIGHTS...................................24
SHAREHOLDER INFORMATION....................................................25
TAXATION...................................................................26
UNDERWRITER................................................................31
MASTER PORTFOLIO ORGANIZATION..............................................31
PERFORMANCE INFORMATION....................................................32
FRANK RUSSELL COMPANY......................................................36
APPENDIX...................................................................37
<PAGE>
FUND HISTORY
The E*TRADE Russell 2000 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 an open-end, management investment company. The Fund's
investment objective is to provide investment results that match as closely as
practicable, before fees and expenses, the performance of the Russell 2000
IndexSM. This investment objective is not fundamental and therefore can be
changed without approval of a majority (as defined in the Investment Company Act
of 1940, as amended, and the rules thereunder, ("1940 Act")) of the Fund's
outstanding voting interests. The Fund seeks to achieve its objective by
investing in a master portfolio that, in turn, invests in a representative
sample of those securities comprising the Russell 2000 Index.
To achieve its investment objective, the Fund intends to invest all of its
assets in the Russell 2000 Index Master Portfolio ("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 total return performance of the small-capitalization sector of the
U.S. stock market by investing in a representative sample of securities
comprising the Russell 2000 Index.
INVESTMENT STRATEGIES AND RISKS
The following supplements the discussion in the Prospectus of the Master
Portfolio 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.
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
portfolios 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, 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
Russell 2000 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 Russell 2000 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.
FUND POLICIES
Fundamental Investment Restrictions
The following are the Fund's fundamental investment restrictions which cannot be
changed without shareholder approval by a vote of a majority of the outstanding
shares of the Fund, as set forth in the 1940 Act.
Unless noted otherwise, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in percentage resulting from a change
in the Fund's assets (i.e., due to cash inflows or redemptions) or in market
value of the investment or the Fund's assets will not constitute a violation of
that restriction.
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 issue senior securities, except as permitted under the 1940 Act and
as interpreted and modified by regulatory authority having jurisdiction, from
time to time;
3. may not borrow money, except as permitted under the 1940 Act and as
interpreted and modified by regulatory authority having jurisdiction, from time
to time;
4. may not engage in the business of underwriting securities issued by others,
except to the extent that the Fund may be deemed to be an underwriter in
connection with the disposition of portfolio securities;
5. may not concentrate its investments in a particular industry, as that term is
used in the 1940 Act and as interpreted or modified by regulatory authority
having jurisdiction, from time to time except that there shall be no limitation
with respect to investments in (i) obligations of the U.S. Government, its
agencies or instrumentalities (or repurchase agreements thereto); or (ii) any
particular industry or group of closely related industries to the extent that
the companies whose stocks comprise the Russell 2000 Index, another index that
it is the objective of the Fund to track, before fees and expenses, belong to a
particular industry or group of closely related industries;
6. may not purchase or sell real estate, which term does not include securities
of companies which deal in real estate or mortgages or investments secured by
real estate or interests therein, except that the Fund reserves freedom of
action to hold and to sell real estate acquired as a result of the Fund's
ownership of securities;
7. may not purchase physical commodities or contracts relating to physical
commodities; and
8. may not make loans, except as permitted under the 1940 Act and as interpreted
or modified by regulatory authority having jurisdiction, from time to time.
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:
1. may not 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. may not purchase securities of other investment companies, except to the
extent permitted under the 1940 Act;
3. may not 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 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 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.
1. The Master Portfolio may not purchase the securities of issuers conducting
their principal business activity in the same industry if, immediately after the
purchase and as a result thereof, the value of a Master Portfolio's investments
in that industry would equal or exceed 25% of the current value of the Master
Portfolio's total assets, provided that this restriction does not limit the
Master Portfolio's: (i) investments in securities of other investment companies,
(ii) investments in securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, or (iii) investments in repurchase agreements,
and provided further that the Master Portfolio reserves the right to concentrate
in any industry in which the Russell 2000 Index becomes concentrated to the same
degree during the same period.
2. The Master Portfolio may not purchase securities of any issuer if, as a
result, with respect to 75% of the Master Portfolio's total assets, more than 5%
of the value of its total assets would be invested in the securities of any one
issuer or the Master Portfolio's ownership would be more than 10% of the
outstanding voting securities of such issuer, provided that this restriction
does not limit the Master Portfolio's investments in securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities, or
investments in securities of other investment companies.
3. The Master Portfolio may not borrow money, except to the extent permitted
under the 1940 Act, including the rules, regulations and any orders obtained
thereunder.
4. The Master Portfolio may not issue senior securities, except to the extent
permitted under the 1940 Act, including the rules, regulations and any orders
obtained thereunder.
5. The Master Portfolio may not make loans to other parties if, as a result, the
aggregate value of such loans would exceed one-third of the Master Portfolio's
total assets. For the purposes of this limitation, entering into repurchase
agreements, lending securities and acquiring any debt securities are not deemed
to be the making of loans.
6. The Master Portfolio may not underwrite securities of other issuers, except
to the extent that the purchase of permitted investments directly from the
issuer thereof or from an underwriter for an issuer and the later disposition of
such securities in accordance with the Master Portfolio's investment program may
be deemed to be an underwriting.
7. The Master Portfolio may not purchase or sell real estate unless acquired as
a result of ownership of securities or other instruments (but this shall not
prevent the Master Portfolio from investing in securities or other instruments
backed by real estate or securities of companies engaged in the real estate
business).
8. The Master Portfolio may not purchase or sell commodities, provided that (i)
currency will not be deemed to be a commodity for purposes of this restriction,
(ii) this restriction does not limit the purchase or sale of futures contracts,
forward contracts or options, and (iii) this restriction does not limit the
purchase or sale of securities or other instruments backed by commodities or the
purchase or sale of commodities acquired as a result of ownership of securities
or other instruments.
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. The Master Portfolio's investment objective may also be
changed by its Board of Trustees 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 (*):
Name, Address, Position(s) Held Principal Occupation(s) During the Past
and Age with the Fund 5 Years
----------------------------------------
*Leonard C. Purkis(51) Trustee Mr. Purkis is chief financial officer
and executive vice 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, Chief
4500 Bohannon Drive, Executive Officer, Chief Financial
Menlo Park, CA 94025 Officer and founder of Meyers Capital
Management, a registered investment
adviser formed in January 1996. She has
also managed the Meyers Pride Value Fund
since June 1996. Prior to that, she was
employed by The Boston Company Asset
Management, Inc. as Assistant Vice
President of its Institutional Asset
Management group.
Ashley T. Rabun (47) Trustee Ms. Rabun is the Founder and Chief 4500
4500 Bohannon Drive, Bohannon Drive, Menlo Park, CA Executive
Menlo Park, CA 94025 Officer of InvestorReach (which 94025 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 Professor
4500 Bohannon Drive, of Finance at the Graduate School of
Menlo Park, CA 94025 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 for the
4500 Bohannon Drive, Trust 4500 Bohannon Drive, Menlo Park,
Menlo Park, CA 94025 CA For Investment Managers (investment
94025 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 E*TRADE Asset
4500 Bohannon Drive, Management, Inc. She joined E*TRADE
Menlo Park, CA 94025 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.
*Liat Rorer (40) Vice President Ms. Rorer is Vice President of
4500 Bohannon Drive, Operations E*TRADE Asset Management,
Menlo Park, CA 94025 Inc. She joined E*TRADE Securities, Inc.
in 1999. Prior to that Ms. Rorer worked
as a senior consultant for the Spectrem
Group, (financial services consulting)
beginning in 1998. From 1996 to 1998,
she was a marketing Vice President for
Charles Schwab's Retirement Plan
Services, and prior to that she held
positions in Fidelity's Retail Services,
Legal and Institutional Services
Departments.
*Dianne Dubois (40) Vice President Ms. Dubois is Vice President and
4500 Bohannon Drive and Treasurer Treasurer of E*TRADE Asset Management.
Menlo Park, CA 94025 Ms. Dubois joined E*TRADE in January
2000. From 1998 to 1999, she served as a
Vice President of Finance at PIMCO
Advisors L.P.; and prior to that she
held senior financial planning positions
at Wellpoint Health Networks, and the
Disney Corporation.
*Ulla Tarstrup (33) Vice President Ms. Tarstrup joined E*TRADE in August
4500 Bohannon Drive 1998. Prior to that, she worked in
Menlo Park, CA 94025 Franklin Resources' legal and
administration department from 1994 to
1998.
*Jay Gould (45) Secretary Gould is Secretary of E*TRADE Asset 4500
4500 Bohannon Drive Bohannon Drive Management. From February
Menlo Park, CA 94025 to December Menlo Park, CA 94025 1999,
he served as a Vice President at
Transamerica and prior to that he worked
at Bank of America (banking and
financial services) from 1994.
(1) Ms. Meyers may be considered an "interested person," but she is not an
"affiliated person," as defined in the 1940 Act.
Beginning July 1, 2000, each non-affiliated Trustee, received from the Trust an
annual fee (payable quarterly) of $18,000 plus an additional fee of: (i) $4,500
for each regularly scheduled or special Board meeting attended; and (ii) $2,000
for each Audit Committee meeting attended. Previously, the Trust paid each
non-affiliated Trustee a fee of $1,500 per Board meeting for the Fund. It is
estimated that the new compensation schedule will result in lower compensation
per Trustee than that which would have been paid under the prior compensation
schedule. 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 received from the Trust 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
------------------------ ---------------------- ---------------------------
Name of Person, Position Aggregate Total Compensation from the
Compensation from Trust Paid to Trustees 2
the Trust 1
------------------------ ---------------------- ---------------------------
Leonard C. Purkis, Trustee None None
Shelly J. Meyers, Trustee 3 $48,000 $22,500
Ashley T. Rabun, Trustee $57,000 $22,500
Steven Grenadier, Trustee $57,000 $22,500
George J. Rebhan, Trustee $57,000 -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 by the Trust to each non-affiliated Trustee for service on the Board
of Trustees for the fiscal year ending December 31, 2000. The estimate is
based on the prior compensation schedule in effect until July 1, 2000 and
the current compensation schedule thereafter, both of which are described
above.
(2) This amount represents the actual amount paid in 1999. The Trust consists
of ten series, eight of which were in operations in 2000. There are no
other funds in the Fund Complex.
(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, subadvisor and
principal underwriter have also adopted codes of ethics under Rule 17j-1. Each
code of ethics permits personal trading by covered personnel, including
securities that may be purchased or held by the Fund, subject to certain
reporting requirements and restrictions.
Control Persons and Principal Holders of Securities
A Shareholder that owns 25% or more of the Fund's voting securities is in
control of the Fund on matters submitted to a vote of shareholders. To satisfy
regulatory requirements and for compliance purposes, as of January ___, 2001,
E*TRADE Asset Management, Inc. owned 100% of the Fund's outstanding shares.
There are no other shareholders holding 25% or more. E*TRADE Asset Management,
Inc., the Fund's investment advisor, is a Delaware corporation and is wholly
owned by E*TRADE Group, Inc. Its address is 4500 Bohannon Drive, Menlo Park, CA
94025.
INVESTMENT MANAGEMENT
Investment Advisor. Under an investment advisory agreement with the Fund,
E*TRADE Asset Management, Inc. ("Investment Advisor") provides investment
advisory services to the Fund. The Investment Advisor is a wholly owned
subsidiary of E*TRADE Group, and is located at 4500 Bohannon Drive, Menlo Park,
CA 94025. The Investment Advisor commenced operating in February 1999. As of
December ___, 2000, the Investment Advisor provided investment advisory services
for over $___ 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 0.12% of that portion
of the Fund's assets not invested in a master portfolio.
The Master Portfolio's Investment Advisor. The Master Portfolio's investment
advisor is Barclays Global Fund Advisors ("BGFA"). BGFA is a direct subsidiary
of Barclays Global Investors, N.A. (which, in turn, is an indirect subsidiary of
Barclays Bank PLC) and is located at 45 Fremont Street, San Francisco,
California 94105. BGFA has provided asset management, administration and
advisory services for over 25 years. As of December __, 2000, Barclays Global
Investors and its affiliates, including BGFA, provided investment advisory
services for over $___ 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 0.10% of the Master Portfolio's average daily net assets. From time to time,
BGFA may waive such fees in whole or in part. Any such waiver will reduce the
expenses of the Master Portfolio, and accordingly, have a favorable impact on
its performance. 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
account 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 an
administrative services agreement with the Fund, E*TRADE Asset Management
receives a fee equal to 0.53% of the average daily net assets of the Fund.
E*TRADE Asset Management is responsible under that agreement for all expenses
otherwise payable by the Fund, other than the advisory fees, E*TRADE Asset
Management's compensation pursuant to the administrative services agreement and
any expenses of any "master" fund in which the Fund invests.
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 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 and Fund Assets. 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.
Investments are valued at the last reported sale price on the primary securities
exchange or national securities market on which such securities are traded. If
there is no sale that day then the value will be based on the most recent bid
prices. Other securities that are traded on the OTC markets are priced using
NASDAQ (National Association of Securities Dealers Automated Quotations), which
provides information on bid and asked prices quoted by major dealers in such
stocks at a price that is the mean between the closing bid and asked prices.
When market quotations are not readily available, securities and other assets
are valued at fair value as determined in good faith under procedures
established by and under the general supervision and responsibility of the
Fund's Board. Puts, calls and futures contracts purchased and held by the Fund
are valued at the close of the securities or commodities exchanges on which they
are traded. Redeemable securities purchased by the Fund issued by a registered
open-end investment company are valued at their net asset value per share.
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 Russell 2000 Index may be used to promote the Fund. The
historical Russell 2000 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.
FRANK RUSSELL COMPANY
"Frank Russell Company" and "Russell 2000 Index" are service marks of Frank
Russell Company. Frank Russell Company has no relationship to the Fund, other
than the licensing of the Russell 2000 Index and its service marks for use in
connection with the Fund.
<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.
<PAGE>
"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
(a)(iii) Amendment No. 1 to the Trust Instrument.12
(b) By-laws.2
(b)(i) Amendment No. 1 to the By-laws.12
(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
(d)(xi) Form of Amendment No. 2 to the Amended and Restated Investment
Advisory Agreement between E*TRADE Asset Management, Inc. and the
Registrant with respect to the E*TRADE Russell 2000 Index Fund.12
(d)(xii) Form of Investment Advisory Agreement between E*TRADE Asset
Management, Inc. and the Registrant with respect to the E*TRADE
Financial Sector Index Fund.12
(d)(xiii) Form of Investment Subadvisory Agreement among E*TRADE Asset
Management, Inc., Barclays Global Fund Advisors and the Registrant
with respect to the E*TRADE Financial Sector Index Fund.12
(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 of 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
(e)(iv) Form of Amendment No. 2 to the Underwriting Agreement between
E*TRADE Securities, Inc. and the Registrant 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, E*TRADE E-Commerce Index Fund, E*TRADE Global Titans
Index Fund and E*TRADE Premier Money Market Fund.12
(e)(v) Form of Amendment No. 3 to the Underwriting Agreement between
E*TRADE Securities, Inc. and the Registrant with respect to E*TRADE
Russell 2000 Index Fund and E*TRADE Financial Sector Index Fund.12
(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
(g)(vi) Form of Amended Exhibit A to the Custodian Services Agreement
between Registrant and PFPC Trust Company with respect to the
E*TRADE Financial Sector Index Fund.12
(g)(vii) Form of Amendment No. 3 to the Custodian Agreement between the
Registrant and Investors Bank & Trust Company with respect to
E*TRADE Russell 2000 Index Fund.12
(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)(1)(v) Form of Amendment No. 2 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 Russell 2000
Index Fund.12
(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.11
(h)(2)(viii)Form of Second 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, E*TRADE E-Commerce Index Fund,
E*TRADE Global Titans Index Fund and E*TRADE Premier Money Market
Fund.12
(h)(2)(ix) Form of Amendment No. 1 to the Second Amended and Restated
Administrative Services Agreement between the Registrant and E*TRADE
Asset Management, Inc. with respect to the E*TRADE Russell 2000
Index Fund and E*TRADE Financial Sector Index Fund.12
(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)(3)(iv) Form of Amendment No. 3 to the Sub-Administration Agreement among
E*TRADE Asset Management, Inc., the Registrant and Investors Bank &
Trust Company with respect to the E*TRADE Russell 2000 Index Fund.12
(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)(4)(iii) 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 Financial Sector Index Fund.12
(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)(5)(iv) Form of Amended Exhibit A to the Transfer Agency Services Agreement
between PFPC, Inc. and the Registrant with respect to the E*TRADE
Russell 2000 Index Fund and E*TRADE Financial Sector Index Fund.12
(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)(6)(iv) Form of Amendment No. 3 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 Russell 2000 Index Fund
and E*TRADE Financial Sector Index Fund.12
(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
(h)(7)(ii) Form of Amended Exhibit A to the State Securities Compliance
Services Agreement between E*TRADE Funds and PFPC, Inc. with respect
to E*TRADE Russell 2000 Index Fund and E*TRADE Financial Sector
Index Fund.12
(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 28, 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.11
(i)(8) Opinion and Consent of Dechert Price & Rhoads, dated April 28, 2000
with respect to the E*TRADE Technology Index Fund and the E*TRADE
E-Commerce Index Fund.11
(i)(9) Opinion and Consent of Dechert Price & Rhoads, dated _________ with
respect to the E*TRADE Russell 2000 Index Fund and the E*TRADE
Financial Sector Index Fund.13
(j) Consent of Deloitte & Touche LLP: Not Applicable
(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.12
(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
***** Power of Attorney for the Registrant on behalf of Dianne Dubois.12
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.
11 Incorporated by reference from the Registrant's Post-Effective Amendment No.
19 to the Registration Statement on Form N-1A filed with the SEC on April 28,
2000.
12 Incorporated by reference from the Registrant's Post-Effective Amendment No.
21 to the Registration Statement on Form N-1A filed with the SEC on October 12,
2000.
13 To be filed by amendment.
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, E*TRADE Bank 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:
Directors and Officers of Title/Status with Other Business
Investment Adviser Investment Adviser Connections
-------------------------- ------------------ ------------------------
Amy J. Errett President Chief Asset Gathering
Officer, E*TRADE Group,
Inc. Formerly Chairman
and CEO of Spectrem
Group from 1990 to 2000.
Dianne Dubois Vice President and Treasurer Vice President, E*TRADE
Securities, Inc.
Formerly Vice President
of PIMCO Advisors L.P.
from 1998 to 1999.
Liat Rorer Vice President Vice President E*TRADE
Securities, Inc.
Formerly Senior
Consultant at Spectrem
Group from 1998 to 2000.
Mindy Posoff Vice President Vice President, E*TRADE
Securities, Inc.
Formerly with Credit
Suisse First Boston
from 1986 to 1999.
Jay Gould Secretary Assistant General
Counsel, E*TRADE Group,
Inc. Formerly Vice
President of
Transamerica from
February 1999 to
December 1999, and
Senior Associate, Bank
of America from 1994 to
January 1999.
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, E*TRADE Global Titans
Index Fund and E*TRADE Financial Sector 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 BGFA
Chairman and Director and Chief Executive Officer of BGI, 45 Fremont
Street, San Francisco, CA 94105
Geoffrey Fletcher, Chief Financial Officer of BGFA and BGI since
Chief Financial Officer 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
---------------------- --------------------- ---------------------
Jarrett Lilian Director and President None
Charles Nalbone Director and Vice President None
Susan T. White Director None
Connie M. Dotson Corporate Secretary None
* 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, E*TRADE Premier Money Market Fund and E*TRADE Russell
2000 Index 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, E*TRADE Global Titans Index Fund and E*TRADE
Financial Sector Index Fund is located at 8800 Tinicum Blvd., Philadelphia, PA
19153; 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, E*TRADE Global Titans Index Fund and E*TRADE
Financial Sector 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 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 Washington in the
District of Columbia on the 12th day of October, 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
/s/
------------------------
Dianne Dubois Vice President & October 12, 2000
Treasurer
(Principal Financial and
Accounting Officer)
*
------------------------
Amy J. Errett President (Principal October 12, 2000
Executive Officer)
* Trustee October 12, 2000
------------------------
Leonard C. Purkis
------------------------
Shelly J. Meyers Trustee October 12, 2000
*
------------------------
Ashley T. Rabun Trustee October 12, 2000
*
------------------------
Steven Grenadier Trustee October 12, 2000
------------------------
George J. Rebhan Trustee October 12, 2000
*By /s/
--------------------
David A. Vaughan
Attorney-In-Fact
