Registration Nos. 333-66807
811-09093
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 15, 2000
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE /X/
SECURITIES ACT OF 1933
Pre-Effective Amendment No. / /
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Post-Effective Amendment No. 25 /X/
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and/or
REGISTRATION STATEMENT UNDER THE /X/
INVESTMENT COMPANY ACT OF 1940
Amendment No. 28 /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 ASSET ALLOCATION FUND
Prospectus dated March __, 2001
The information in this Prospectus is not complete and may be changed. E*TRADE
Funds may not sell these securities until the registration statement filed with
the Securities and Exchange Commission is effective. This Prospectus is not an
offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
This Prospectus concisely sets forth information about the E*TRADE Asset
Allocation 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 seek both capital growth and income. The
Fund seeks to achieve its objective by investing mainly in a combination of
other underlying E*TRADE Funds representing a mix of asset classes, including
stock, bond and cash investments. Each underlying E*TRADE Fund pursues a
different investment goal.
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 March __, 2001
<PAGE>
TABLE OF CONTENTS
RISK/RETURN SUMMARY....................................................3
FEES AND EXPENSES......................................................7
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS.....................8
FUND MANAGEMENT........................................................9
PRICING OF FUND SHARES................................................10
HOW TO BUY, SELL AND EXCHANGE SHARES..................................11
DIVIDENDS AND OTHER DISTRIBUTIONS.....................................15
TAX CONSEQUENCES......................................................15
<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 seek both capital growth and income.
Principal Strategies
The Fund is structured as a "fund of funds" and seeks to achieve its objective
by investing mainly in a combination of other underlying E*TRADE Funds
("Underlying Funds") representing a mix of asset classes, including stock, bond
and cash investments. Each of the current Underlying Funds is a feeder fund in a
master-feeder arrangement. This means each Underlying Fund invests all of its
assets in a master portfolio with substantially similar investment objectives,
policies and restrictions as the corresponding Underlying Fund.
The Underlying Funds each pursue a different investment goal and currently
consist of four index funds ("Underlying Index Funds") and a money market fund.
The Underlying Index Funds invest in the securities included in the respective
index they are tracking, and give each security the same weight given by the
index. Each of the Underlying Funds focuses on a different asset class or
segment.
Below are the current Underlying Funds for this Fund and their investment
objectives listed according to their corresponding category in the Fund's asset
allocation:
Allocation Fund/Investment Objective
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Large-Cap Stock E*TRADE S&P 500 Index Fund--seeks to provide
investment results that attempt to match the total return of
the stocks making up the S&P 500 Index.*
Small-Cap Stock E*TRADE Russell 2000 Index Fund--seeks to provide
investment results that match as closely as practicable,
before fees and expenses, the performance of the Russell
2000 Index.*
International Stock E*TRADE International Index Fund--seeks to match as closely
as practicable, before fees and expenses, the performance
of an international portfolio of common stocks represented
by the EAFE Free Index.*
Bond E*TRADE Bond Index Fund--seeks to provide investment results
that correspond to the total return performance of
fixed-income securities in the aggregate, as represented by
the Lehman Brothers Government/Corporate Bond Index.*
Money Market E*TRADE Premier Money Market Index Fund--seeks to
provide investors a high level of income, while preserving
capital and liquidity.
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* The service providers of each respective index do not sponsor nor are they
affiliated in any way with this Fund or any of the E*TRADE Underlying Funds.
Each index name is a trademark of the respective index owner. Neither the
Fund nor any other Underlying Fund are sponsored, endorsed, sold, or promoted
by the index owners and neither the owners of the index nor the index make
any representation or warranty, express or implied, regarding the
advisability of investing in the Fund or the Underlying Funds.
<PAGE>
The Fund's Sub-advisor monitors the Fund's holdings and cash flow and manages
each of these as needed in order to maintain the Fund's target allocation. In
seeking to enhance after-tax performance and minimize transaction costs, the
Fund may have modest deviations from the target allocation for certain periods
of time.
Asset allocation is a strategy of investing specific percentages of a fund in
various asset classes. The Fund's allocation is weighted toward stock
investments while including substantial bond investments intended to add income
and reduce volatility. The Fund typically does not change its asset allocations
for purposes of investment strategy and seeks to remain close to the target
allocations of 55% stocks, 43% bonds and 2% cash. As shown below, the stock
allocation is further divided into three segments: 31% of assets for large-cap,
20% for international and 4% for small-cap.
Target Range
------ -----
S&P 500 Index Fund 31% 21-41%
International Index Fund 20% 15-25%
Russell 2000 Index Fund 4% 0-9%
Bond Index Fund 43% 33-53%
Premier Money Market Fund 2% 0-7%
Principal Risks
Stocks and bonds may rise and fall daily. The securities in the combined various
indices, in which the Underlying Index Funds invest, represent a significant
portion of the financial economic sector of the U.S. equity and fixed income
market. International investments have additional and different risks. Each
index may also rise and fall daily and perform differently than the broader
market. As with any investment, the value of your investment in the Fund will
fluctuate, meaning you could lose money.
There is no assurance that the Fund will achieve its investment objective. Each
index may not appreciate, and could depreciate, while you are invested in the
Fund, even if you are a long-term investor.
The Fund asset and stock allocations can have a substantial effect on
performance. The risks and returns of different classes of assets and different
segments of the stock market can vary over the long term and the short term.
Because the Fund intends to maintain substantial exposure to stocks as well as
bonds, the Fund will be hurt by poor performance in either market. The Fund's
investment performance depends on how its assets are allocated and reallocated
between the Underlying Funds according to the Advisor's income allocation
targets and ranges. There is no assurance that the Advisor will not make less
than optimal or poor allocation decisions. It is possible that the Advisor will
focus on an Underlying Fund that performs poorly or underperforms other
Underlying Funds under various market conditions.
The E*TRADE S&P 500 Index Fund, E*TRADE Russell 2000 Index Fund and E*TRADE
International Index Fund each invest substantially all of their assets in
large-capitalization, small-capitalization and foreign securities, respectively.
Many factors can affect stock market performance. Political and economic news
can influence marketwide trends; the outcome may be positive or negative,
short-term or long-term. Other factors may be ignored by the market as a whole
but may cause movements in the price of one company's stock or the stocks of one
or more industries (for example, rising oil prices may lead to a decline in
airline stocks).
In addition to the general stock market risks assumed by the Underlying Funds
held in this Fund, as discussed above, certain underlying holdings carry
additional risks. The Fund may face particular risk with respect to its exposure
to small-capitalization companies and foreign securities investments. The Fund's
returns can be affected by the risks of investing in small-capitalization
companies, which 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.
The Fund can be affected by the risks of foreign investing, which include:
changes in currency exchange rates and the costs of converting currencies;
foreign government controls on foreign investment; repatriation of capital,
currency and exchange; foreign taxes; inadequate supervision and regulation of
some foreign markets; volatility from lack of liquidity; different settlement
practices or delayed settlements in some markets; difficulty in obtaining
complete and accurate information about foreign companies; less strict
accounting, auditing and financial reporting standards than those in the U.S.;
political, economic and social instability; and difficulty enforcing legal
rights outside the United States.
The E*TRADE Bond Index Fund invests substantially all of its investments
primarily in debt securities, which are subject to credit and interest rate
risk. Credit risk is the risk that issuers of the debt securities in which the
E*TRADE Bond Index Fund invests may default on the payment of principal and/or
interest. Interest rate risk is the risk that increases in market interest rates
may adversely affect the value of the debt securities in which the E*TRADE Bond
Index Fund invests. The value of the debt securities generally changes inversely
to market interest rates. Debt securities with longer maturities, which tend to
produce higher yields, are subject to potentially greater capital appreciation
and depreciation than obligations with shorter maturities.
The E*TRADE Premier Money Market Fund invests in high quality, short-term
investments that include obligations of the U.S. Government, its agencies and
instrumentalities, certificates of deposit and U.S. Treasury bills, high-quality
debt obligations, such as corporate debt, obligations of U.S. banks and
repurchase agreements. These investments are expected to present minimal risks
because of their relatively short maturities and high credit quality (financial
strength) of the issuers. Although default is unlikely, the E*TRADE Premier
Money Market Fund could underperform as a result of default. The E*TRADE Premier
Money Market Fund seeks to maintain a net asset value of $1.00 per share;
however, there is no assurance that this will be achieved.
Many of the risks of this Fund are associated with index funds. The Underlying
Index Funds that are index funds cannot as a practical matter own all of the
stocks that comprise each index in perfect correlation to that particular index
itself. The value of an investment in the Fund depends to a great extent upon
changes in market conditions. Each of the Underlying Index Funds seeks to track
its respective index during down markets as well as during up markets. The
Fund's returns will be directly affected by the volatility of the securities
comprising each Underlying Index Fund's index.
In seeking to allocate to a particular Underlying Fund that represents a
particular market segment (e.g., small-cap companies), 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 one particular segment of the market performs
worse than other segments, the Fund may underperform funds that have greater
exposure to those other segments of the market. Likewise, whenever this
particular segment of the market falls behind other types of investments--bonds,
for instance--the Fund's performance also will lag behind those investments.
The group of E*TRADE underlying funds and the allocations among those funds may
be changed from time to time.
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 March 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 will indirectly bear a pro-rata share of the
expenses of the Underlying Funds. The expense ratios of the Underlying Funds
reflect the fees and expenses at both the level of the Underlying Funds and
their corresponding master portfolios. Fees and expenses of the Underlying Funds
are reflected in those funds' performance, and thus will be reflected indirectly
in the Fund's performance. These fees and expenses are approximately 0.41% of
the Fund's average net assets based on current investments, and may fluctuate.
The expense ratios of the Underlying Funds currently range from 0.32% to 65%.
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 0.10%
Distribution (12b-1) Fees None
Other Expenses* 0.93%
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Total Annual Fund Operating Expenses 1.03%
Fee Waiver and/or Expense Reimbursement (0.53)%
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Net Expenses** 0.50%
* "Other Expenses" are based on estimated amounts for the current fiscal year
of the Fund.
** The fee table reflects contractual arrangements between E*TRADE Asset
Management and the Fund to limit "Other Expenses" on an annualized basis
through May 1, 2002.
The fees and expenses of the Fund are in addition to those of the Underlying
Funds. 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
$52 $223
INVESTMENT OBJECTIVE, STRATEGIES AND RELATED RISKS
The Fund's investment objective is to seek both capital growth and income.
Although there is no current intention to do so, the Fund's investment objective
may be changed without shareholder approval.
Each of the current Underlying Funds is a feeder fund in a master feeder
arrangement. This means each Underlying Fund invests all of its assets in a
master portfolio with substantially similar investment objectives, policies and
restrictions as the corresponding Underlying Fund.
Under normal market conditions, the Fund expects to invests approximately 43% of
its assets in the E*TRADE Bond Index Fund, 31% in the E*TRADE S&P 500 Index
Fund, 20% in the E*TRADE International Index Fund, and 4% in the E*TRADE Russell
2000 Index Fund. Each of these Underlying Index Funds invests at least 90% of
its total assets in the stocks of companies that comprise its respective index.
That portion of its assets is not actively managed but simply tries to match,
before fees and expenses, the total return of the respective index. Each
Underlying Index Fund 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 respective index. A 100%
correlation would mean the total return of the Underlying Index Fund's assets
would increase and decrease exactly the same as the respective index. The Fund
will also invest approximately 2% of its total assets in the E*TRADE Premier
Money Market Fund to provide liquidity for purposes such as to pay redemptions
and fees.
The Underlying Index Funds are not 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 Underlying Index Funds are managed by utilizing an
"indexing" investment approach to determine which securities are to be purchased
or sold to replicate, to the extent feasible and before fees and expenses, the
investment characteristics of the respective index.
Like all funds, the Fund's net asset value ("NAV") will fluctuate with the value
of its assets. The assets held by the Fund will fluctuate based on market and
economic conditions, or other factors that affect particular companies or
industry sectors.
The Underlying Index Funds' ability to match their investment performance to the
investment performance of the respective index may be affected by, among other
things: the Underlying Index Fund's expenses; the amount of cash and cash
equivalents held by the Underlying Index Fund's investment portfolio; the manner
in which the total return of the respective index is calculated; the timing,
frequency and size of shareholder purchases and redemptions of the Underlying
Index Fund, and the weighting of a particular stock in the respective index.
As do many index funds, the Underlying Index Funds 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 an index, the Underlying
Index Funds incur expenses and must keep a portion of their assets in cash for
paying expenses and processing shareholder orders. By using futures, the
Underlying Index Funds potentially can offset a portion of the gap attributable
to their cash holdings. However, because some of the effect of expenses remains,
the Underlying Index Funds' performance normally will be below that of the
respective index. The Underlying Index Funds use futures contracts to gain
exposure to the respective index for their cash balances, which could cause each
Underlying Index Fund to track the respective index less closely if the futures
contracts do not perform as expected.
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 adviser, provides investment advisory
services to the Fund. The Investment Advisor also serves as the investment
advisor to each of the Underlying Funds. 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 1, 2000, the Investment Advisor provided investment
advisory services for over $415 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 0.10% of the
Fund's average daily net assets.
The Investment Advisor and the Trust are seeking an exemptive order from the SEC
that will permit the Investment Advisor, subject to approval by the Board, to
retain sub-advisors that are unaffiliated with the Investment Advisor without
approval by the Fund's shareholders. The Investment Advisor, subject to Board
oversight, will continue to have the ultimate responsibility for the investment
performance of the Fund due to its responsibility to oversee sub-advisors and
recommend their hiring, termination, and replacement. If granted, such relief
would require shareholder notification in the event of any change in
sub-advisers. There is no assurance the exemptive order will be granted.
The Investment Advisor has entered into a sub-advisory agreement ("Sub-advisory
Agreement") with Barclays Global Fund Advisors ("BGFA") to delegate the
day-to-day discretionary management of the Fund's assets. 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 September 30, 2000 Barclays
Global Investors and its affiliates, including BGFA, provided investment
advisory services for over $831.9 billion of assets. The Investment Advisor pays
BGFA a fee out of its investment advisory fee at an annual rate equal to 0.05%
of the Fund's average daily net assets. BGFA is not compensated directly by the
Fund. The Sub-advisory Agreement may be terminated by the Board.
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 "fund of funds," which means it pursues its
investment objective by investing in other E*TRADE Funds (the "Underlying
Funds") rather than individual stocks or bonds. The Fund charges for its own
direct expenses, in addition to bearing a proportionate share of the expenses
charged by the Underlying Funds in which the Fund invests.
Each current Underlying Fund is a feeder fund in a master/feeder structure.
Accordingly, each Underlying Fund invests all of its assets in a master
portfolio. In addition to selling its shares to the Underlying 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
corresponding Underlying Fund.
Each Underlying Fund bears a pro rata portion of the investment advisory fees
paid by its master portfolio, as well as certain other fees paid by the master
portfolio, such as accounting, administration, legal, and SEC registration fees.
As a result, the Fund also indirectly bears these fees and expenses.
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. The Fund's investments are
valued each day the NYSE is open for business as of the close of trading on the
floor of the NYSE (generally 4:00 p.m., Eastern time). The Fund's investments in
the Underlying Funds are determined by the NAVs reported by each Underlying
Fund. The Fund reserves the right to change the time at which purchases and
redemptions are priced if the NYSE closes at a time other than 4:00 p.m. Eastern
time or if an emergency exists. Shares will not be priced on the days on which
the NYSE is closed for trading.
Net asset value per share is computed by dividing the value of the Fund's net
assets (i.e., the value of its assets less liabilities) by the total number of
shares of the Fund outstanding. The Fund's assets, other than its investments in
the Underlying Funds, and the Underlying Funds' assets are valued generally by
using available market quotations or at fair value as determined in good faith
by the Board. The portfolio instruments of the Fund's underlying money market
fund, the Premier Money Market Fund, are valued using the amortized cost method.
Expenses are accrued daily and applied when determining the NAV.
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 $ 2,500
To buy additional shares of the Fund $ 100
Continuing minimum investment* $ 1,000
To invest in the Fund for your IRA, Roth IRA,
or one-person SEP account $ 1,000
To invest in the Fund for your Education IRA account $ 500
To invest in the Fund for your UGMA/UTMA account $ 1,000
To invest in the Fund for your SIMPLE, SEP-IRA,
Profit Sharing or Money Purchase
Pension Plan,
or 401(a) account $ 1,000
* Your shares may be automatically redeemed if, as a result of selling or
exchanging shares, you no longer meet the Fund's minimum balance requirements.
Before taking such action, the Fund will provide you with written notice and at
least 30 days to buy more shares to bring your investment up to $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 E*TRADE Funds 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
buy or 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. The redemption fee may also be assessed on involuntary redemptions
effected by the Fund. The redemption fee will be waived for 401(k) plans.
Any redemption fees imposed will be paid to the Fund. 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's use of a fund of funds structure could affect the amount, timing and
character of distributions to shareholders, and may therefore increase the
amount of taxes payable by shareholders.
The Fund will distribute substantially all of its income and gains to its
shareholders every year. If the Fund declares a dividend in October, November or
December but pays it in January, you may be taxed on the dividend as if you
received it in the previous year.
You will generally be taxed on dividends you receive from the Fund, regardless
of whether they are paid to you in cash or are reinvested in additional Fund
shares. If the Fund designates a dividend as a capital gain distribution, (e.g.,
when the Fund has a gain from the sale of an asset the Fund held for more than
12 months), you will pay tax on that dividend at the long-term capital gains tax
rate, no matter how long you have held your Fund shares.
If you invest through a tax-deferred retirement account, such as an IRA, you
generally will not have to pay tax on dividends until they are distributed from
the account. These accounts are subject to complex tax rules, and you should
consult your tax advisor about investment through a tax-deferred account.
There may be tax consequences to you if you dispose of your Fund shares, for
example, through redemption, exchange or sale. You will generally have a capital
gain or loss from a disposition. The amount of the gain or loss and the rate of
tax will depend mainly upon how much you pay for the shares, how much you sell
them for, and how long you hold them. For example, if you sold at a gain Fund
shares that you had held for more than one year as a capital asset, then your
gain would be taxed at the long-term capital gains tax rate.
The Fund will send you a tax report each year that will tell you which dividends
must be treated as ordinary income and which (if any) are long-term capital
gain.
As with all mutual funds, the Fund may be required to withhold U.S. federal
income tax at the rate of 31% of all taxable distributions payable to you if you
fail to provide the Fund with your correct taxpayer identification number or to
make required certifications, or if you have been notified by the IRS that you
are subject to backup withholding. Backup withholding is not an additional tax,
but is a method in which the IRS ensures that it will collect taxes otherwise
due. Any amounts withheld may be credited against your U.S. federal income tax
liability.
<PAGE>
[Outside back cover page.]
The Statement of Additional Information for the Fund, dated March __, 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
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 ASSET ALLOCATION FUND
Statement of Additional Information
Dated March __, 2001
The information in this Statement of Additional Information is not complete and
may be changed. E*TRADE Funds may not sell these securities until the
registration statement filed with the Securities and Exchange Commission is
effective. This Statement of Additional Information is not an offer to sell
these securities and is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
This SAI is not a prospectus and should be read together with the Prospectus
dated March __, 2000, (as amended from time to time) for the E*TRADE Asset
Allocation Fund ("Fund"), a separate series of E*TRADE Funds.
To obtain a copy of the Fund's Prospectus and the Fund's most recent
shareholders report (when issued) free of charge, please access our Website
online (www.etrade.com) or call our toll-free number at (800) 786-2575.
Information on the Website is not incorporated by reference into this SAI unless
specifically noted. 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...............................................................14
TRUSTEES AND OFFICERS.......................................................15
INVESTMENT MANAGEMENT.......................................................19
SERVICE PROVIDERS...........................................................20
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION..............................22
ORGANIZATION, DIVIDEND AND VOTING RIGHTS....................................23
SHAREHOLDER INFORMATION.....................................................24
TAXATION....................................................................25
UNDERWRITER.................................................................31
PERFORMANCE INFORMATION.....................................................31
STANDARD & POOR'S...........................................................35
EAFE FREE INDEX.............................................................36
FRANK RUSSELL COMPANY.......................................................37
BOND INDEX..................................................................37
APPENDIX....................................................................38
<PAGE>
FUND HISTORY
The E*TRADE Asset Allocation 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, diversified management investment
company. The Fund's investment objective is to seek both capital growth and
income. The Fund seeks to achieve its objective by investing mainly in a
combination of other underlying E*TRADE Funds ("Underlying Funds") representing
a mix of asset classes, including stock, bond and cash investments. ("Underlying
Funds"). 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.
INVESTMENT STRATEGIES AND RISKS
The following supplements the discussion in the Prospectus of the Fund's
investment strategies, policies and risks. Further information on these
investment strategies and risks can be found under "Investment Strategies and
Risks" in the SAI of each of the Underlying Funds.
These investment strategies and policies may be changed without shareholder
approval unless otherwise noted.
Mutual Funds. The Fund will invest substantially all of its assets in the
E*TRADE S&P 500 Index Fund, E*TRADE Russell 2000 Index Fund, E*TRADE
International Index Fund, E*TRADE Bond Index Fund, and E*TRADE Premier Money
Market Fund. These Underlying Funds are registered investment companies, which
may issue and redeem their shares on a continuous basis (open-end mutual funds).
Mutual funds generally offer investors the advantages of diversification and
professional investment management, by combining shareholders' money and
investing it in various types of securities, such as stocks, bonds and money
market securities. Mutual funds also make various investments and use certain
techniques in order to enhance their performance. These may include entering
into delayed-delivery and when-issued securities transactions or swap
agreements; buying and selling futures contracts, illiquid and restricted
securities and repurchase agreements and borrowing or lending money and/or
portfolio securities. The risks of investing in mutual funds generally reflect
the risks of the securities in which the mutual funds invest and the investment
techniques they may employ. Also, mutual funds charge fees and incur operating
expenses. These fees and expenses are in addition to those of the Fund.
Master-Feeder Funds. Each Underlying Fund is a feeder fund in a master/feeder
structure. This means each Underlying Fund invests all of its assets in a master
portfolio with substantially similar investment objectives, policies and
restrictions as the corresponding Underlying Fund. In addition to selling its
shares to the corresponding Underlying 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 corresponding
Underlying Fund.
The Underlying Funds' Board believes that, as other investors invest their
assets in an Underlying Fund and the master portfolio in which the Underlying
Fund invests, certain economic efficiencies may be realized with respect to
those funds. For example, fixed expenses that otherwise would have been borne
solely by the corresponding Underlying Fund or the master portfolio (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
or Underlying Fund, the economic efficiencies (e.g., spreading fixed expenses
across a larger asset base) that the Underlying Fund's Board believes should be
available through investment in the Underlying Fund, and in turn, 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.
Each Underlying Fund may withdraw its investments in its master portfolio if the
Board determines that it is in the best interests of the Underlying 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
Underlying Fund in another pooled investment entity having the same investment
objective as the Underlying Fund, direct management of a portfolio by the
Investment Advisor or the hiring of a sub-advisor to manage the Underlying
Fund's assets.
Investment of each Underlying Fund's assets in its corresponding master
portfolio is not a fundamental policy of any Underlying Fund and a shareholder
vote is not required for any Underlying Fund to withdraw its investment from its
corresponding master portfolio.
Index Funds. The Fund invests more than 90% of its assets in four of the
Underlying Funds that are index funds ("Underlying Index Funds"). The net asset
value of index funds may be disproportionately affected by, among other things,
the following risks: short- and long-term changes in the characteristics of the
companies whose securities make up the index; index rebalancing; modifications
in the criteria for companies selected to make up the index; suspension or
termination of the operation of the index; and the activities of issuers whose
market capitalization represents a disproportionate amount of the total market
capitalization of the index.
Index Changes. The stocks comprising the various indices in which the Underlying
Index Funds invest are changed from time to time. Announcements of those changes
and related market activity may result in reduced returns or volatility for the
Fund.
Asset Backed Securities. The E*TRADE Premier Money Market Fund may purchase
asset-backed securities, which are securities backed by installment contracts,
credit-card receivables or other assets. Asset-backed securities represent
interests in "pools" of assets in which payments of both interest and principal
on the securities are made monthly, thus in effect "passing through" monthly
payments made by the individual borrowers on the assets that underlie the
securities, net of any fees paid to the issuer or guarantor of the securities.
The average life of asset-backed securities varies with the maturities of the
underlying instruments and is likely to be substantially less than the original
maturity of the assets underlying the securities as a result of prepayments. For
this and other reasons, an asset-backed security's stated maturity may be
shortened, and the security's total return may be difficult to predict
precisely. The E*TRADE Premier Money Market Fund may invest in such securities
up to the limits prescribed by Rule 2a-7 and other provisions of the 1940 Act.
Bank Obligations. The Underlying Funds 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 Underlying Funds 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.
Borrowing Money. The Fund and the Underlying Funds are permitted to borrow to
the extent permitted under the 1940 Act. However, each currently intends to
borrow money only for temporary or emergency (not leveraging) purposes, and may
borrow up to one-third of the value of their 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 Fund or Underlying Funds' total assets,
respectively, neither the Fund nor the Underlying Funds as applicable will make
any new investments.
Commercial Paper and Short-Term Corporate Debt Instruments. The Underlying Funds
may invest in commercial paper (including variable amount master demand notes),
which consists of short-term, unsecured promissory notes issued by corporations
to finance short-term credit needs. Commercial paper is usually sold on a
discount basis and has a maturity at the time of issuance not exceeding nine
months. Variable amount master demand notes are demand obligations that permit
the investment of fluctuating amounts at varying market rates of interest
pursuant to arrangements between the issuer and a commercial bank acting as
agent for the payee of such notes whereby both parties have the right to vary
the amount of the outstanding indebtedness on the notes. The investment adviser
to the Underlying Funds monitors on an ongoing basis the ability of an issuer of
a demand instrument to pay principal and interest on demand.
The Underlying Funds 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 Fund 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 Fund, an issue of
securities may cease to be rated or its rating may be reduced below the minimum
rating required for purchase by the Fund. The investment adviser to the Fund
will consider such an event in determining whether the Fund should continue to
hold the obligation. To the extent the Fund continues to hold such obligations,
it may be subject to additional risk of default.
To the extent the ratings given by Moody's or S&P may change as a result of
changes in such organizations or their rating systems, the Fund will attempt to
use comparable ratings as standards for investments in accordance with the
investment policies contained in its Prospectus and in this SAI. The ratings of
Moody's and S&P and other nationally recognized statistical rating organizations
are more fully described in the attached Appendix.
Debt Instruments. The Underlying Index Funds 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 Underlying Index Funds invest 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 Underlying Funds invest.
Floating- and variable- rate obligations. The Underlying Funds may purchase debt
instruments with interest rates that are periodically adjusted at specified
intervals or whenever a benchmark rate or index changes. These adjustments
generally limit the increase or decrease in the amount of interest received on
the debt instruments. Floating- and variable-rate instruments are subject to
interest-rate risk and credit risk.
Foreign Obligations. Investments in foreign obligations involve certain
considerations that are not typically associated with investing in domestic
obligations. There may be less publicly available information about a foreign
issuer than about a domestic issuer. Foreign issuers also are not generally
subject to uniform accounting, auditing and financial reporting standards or
governmental supervision comparable to those applicable to domestic issuers. In
addition, with respect to certain foreign countries, taxes may be withheld at
the source under foreign income tax laws, and there is a possibility of
expropriation or confiscatory taxation, political or social instability or
diplomatic developments that could adversely affect investments in, the
liquidity of, and the ability to enforce contractual obligations with respect
to, securities of issuers located in those countries.
Foreign Securities. The foreign securities in which the Underlying Index Funds
may invest include common stocks, preferred stocks, warrants, convertible
securities and other securities of issuers organized under the laws of countries
other than the United States. Such securities also include equity interests in
foreign investment funds or trusts, real estate investment trust securities and
any other equity or equity-related investment whether denominated in foreign
currencies or U.S. dollars.
Investments in foreign obligations involve certain considerations that are not
typically associated with investing in domestic securities. There may be less
publicly available information about a foreign issuer than about a domestic
issuer. Foreign issuers also are not generally subject to the same accounting,
auditing and financial reporting standards or governmental supervision as
domestic issuers. In addition, with respect to certain foreign countries, taxes
may be withheld at the source under foreign tax laws, and there is a possibility
of expropriation or confiscatory taxation, political, social and monetary
instability or diplomatic developments that could adversely affect investments
in, the liquidity of, and the ability to enforce contractual obligations with
respect to, securities of issuers located in those countries. Generally,
multinational companies may be more susceptible to effects caused by changes in
the economic climate and overall market volatility.
Forward Commitments, When-Issued Purchases and Delayed-Delivery Transactions.
The Underlying Funds 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 Underlying Funds will generally purchase securities with the
intention of acquiring them, the Underlying Funds may dispose of securities
purchased on a when-issued, delayed-delivery or a forward commitment basis
before settlement when deemed appropriate.
Certain of the securities in which the Underlying Funds may invest will be
purchased on a when-issued basis, in which case delivery and payment normally
take place within 45 days after the date of the commitment to purchase. The
Underlying Funds only will make commitments to purchase securities on a
when-issued basis with the intention of actually acquiring the securities, but
may sell them before the settlement date if it is deemed advisable. When-issued
securities are subject to market fluctuation, and no income accrues to the
purchaser during the period prior to issuance. The purchase price and the
interest rate that will be received on debt securities are fixed at the time the
purchaser enters into the commitment.
Purchasing a security on a when-issued basis can involve a risk that the market
price at the time of delivery may be lower than the agreed-upon purchase price,
in which case there could be an unrealized loss at the time of delivery. The
Underlying Funds currently do not intend on investing more than 5% of their
assets in when-issued securities during the coming year. The Underlying Funds
will establish a segregated account in which it will maintain cash or liquid
securities in an amount at least equal in value to the Underlying Funds'
commitments to purchase when-issued securities. If the value of these assets
declines, the Underlying Funds will place additional liquid assets in the
account on a daily basis so that the value of the assets in the account is equal
to the amount of such commitments.
Futures Contracts and Options Transactions. The Underlying Index Funds may use
futures as a substitute for a comparable market position in the underlying
securities.
Although the Underlying Index Funds intend 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
Underlying Index Funds to substantial losses. If it is not possible, or if the
Underlying Index Fund determines not to close a futures position in anticipation
of adverse price movements, the Underlying Index Fund will be required to make
daily cash payments on variation margin.
The Underlying Index Funds may invest in stock index futures and options on
stock index futures as a substitute for a comparable market position in the
underlying securities. A stock index future obligates the seller to deliver (and
the purchaser to take), effectively, an amount of cash equal to a specific
dollar amount times the difference between the value of a specific stock index
on or before the close of the last trading day of the contract and the price at
which the agreement is made. No physical delivery of the underlying stocks in
the index is made. With respect to stock indices that are permitted investments,
the Underlying Index Funds intend to purchase and sell futures contracts on the
stock index for which they 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 Underlying Index Funds seek to close out a futures contract or
a futures option position. Lack of a liquid market may prevent liquidation of an
unfavorable position.
The Underlying Index Funds' futures transactions must constitute permissible
transactions pursuant to regulations promulgated by the Commodity Futures
Trading Commission ("CFTC"). In addition, the Underlying Index Funds may not
engage in futures transactions if the sum of the amount of initial margin
deposits and premiums paid for unexpired futures contracts, other than those
contracts entered into for bona fide hedging purposes, would exceed 5% of the
liquidation value of the Underlying Index Funds' 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 or published
positions of the SEC, the Underlying Index Funds may be required to segregate
liquid portfolio securities, including cash, in connection with its futures
transactions in an amount generally equal to the entire value of the underlying
security.
Future Developments. The Underlying Index Funds may take advantage of
opportunities in the area of options and futures contracts and options on
futures contracts and any other derivative investments which are not presently
contemplated for use by the Underlying Index Funds or which are not currently
available but which may be developed, to the extent such opportunities are both
consistent with the Underlying Index Funds' investment objectives and legally
permissible for the Underlying Index Funds.
Illiquid securities. To the extent that such investments are consistent with its
investment objective, the Underlying Funds may invest up to 15% of the value of
their 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 Underlying Funds 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.
Interest-Rate and Index Swaps. The Underlying Index Funds may enter into
interest-rate and index swaps in pursuit of its investment objectives.
Interest-rate swaps involve the exchange by the Underlying Index Funds with
another party of their respective commitments to pay or receive interest (for
example, an exchange of floating-rate payments or fixed-rate payments). Index
swaps involve the exchange by the Underlying Index Fund with another party of
cash flows based upon the performance of an index of securities or a portion of
an index of securities that usually include dividends or income. In each case,
the exchange commitments can involve payments to be made in the same currency or
in different currencies. The Underlying Index Funds will usually enter into
swaps on a net basis. In so doing, the two payment streams are netted out, with
the Underlying Index Funds receiving or paying, as the case may be, only the net
amount of the two payments. If the Underlying Index Funds enters into a swap, it
will maintain a segregated account on a gross basis, unless the contract
provides for a segregated account on a net basis. If there is a default by the
other party to such a transaction, the Underlying Index Funds will have
contractual remedies pursuant to the agreements related to the transaction.
The use of interest-rate and index swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio security transactions. There is no limit, except as provided
below in the Underlying Index Funds' policies and restrictions, on the amount of
swap transactions that may be entered into by the Underlying Index Funds. These
transactions generally do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
swaps generally is limited to the net amount of payments that the Underlying
Index Funds are contractually obligated to make. There is also a risk of a
default by the other party to a swap, in which case the Underlying Index Funds
may not receive the net amount of payments that they contractually are entitled
to receive.
Letters of Credit. Certain of the debt obligations, certificates of
participation, commercial paper and other short-term obligations which the
E*TRADE Premier Money Market Fund is permitted to purchase may be backed by an
unconditional and irrevocable letter of credit of a bank, savings and loan
association or insurance company which assumes the obligation for payment of
principal and interest in the event of default by the issuer. Letter of
credit-backed investments must be of investment quality comparable to other
permitted investments of the E*TRADE Premier Money Market Fund.
Loans of portfolio securities. The Fund and the Underlying Funds may lend
securities from their portfolios to brokers, dealers and financial institutions
(but not individuals) in order to increase the return on its portfolio. The
value of the loaned securities may not exceed one-third of the Fund or
Underlying Funds' total assets and loans of portfolio securities are fully
collateralized based on values that are marked-to-market daily. The Fund and the
Underlying Funds will not enter into any portfolio security lending arrangement
having a duration of longer than one year. The principal risk of portfolio
lending is potential default or insolvency of the borrower. In either of these
cases, the Fund could experience delays in recovering securities or collateral
or could lose all or part of the value of the loaned securities. The Fund and
the Underlying Funds may pay reasonable administrative and custodial fees in
connection with loans of portfolio securities and may pay a portion of the
interest or fee earned thereon to the borrower or a placing broker.
In determining whether to lend a security to a particular broker, dealer or
financial institution, the Fund's investment advisor considers all relevant
facts and circumstances, including the size, creditworthiness and reputation of
the broker, dealer, or financial institution. Any loans of portfolio securities
are fully collateralized and marked to market daily. The Fund and the Underlying
Funds will not enter into any portfolio security lending arrangement having a
duration of longer than one year. Any securities that the Fund and the
Underlying Funds may receive as collateral will not become part of the Fund and
the Underlying Funds' investment portfolio at the time of the loan and, in the
event of a default by the borrower, the Fund and the Underlying Funds will, if
permitted by law, dispose of such collateral except for such part thereof that
is a security in which the Fund and the Underlying Funds is permitted to invest.
During the time securities are on loan, the borrower will pay the Fund and the
Underlying Funds any accrued income on those securities, and the Fund and the
Underlying Funds may invest the cash collateral and earn income or receive an
agreed upon fee from a borrower that has delivered cash-equivalent collateral.
Municipal Obligations. The E*TRADE Premier Money Market Fund may invest in
municipal obligations. Municipal bonds generally have a maturity at the time of
issuance of up to 40 years. Medium-term municipal notes are generally issued in
anticipation of the receipt of tax receipts, of the proceeds of bond placements,
or of other revenues. The ability of an issuer to make payments on notes is
therefore especially dependent on such tax receipts, proceeds from bond sales or
other revenues, as the case may be. Municipal commercial paper is a debt
obligation with a state maturity of 270 days or less that is issued to finance
seasonal working capital needs or as short-term financing in anticipation of
longer-term debt.
The E*TRADE Premier Money Market Fund will invest in `high-quality' (as that
term is defined in Rule 2a-7 of the 1940 Act) long-term municipal bonds,
municipal notes and short-term commercial paper, with remaining maturities not
exceeding 13 months.
Obligations of Foreign Governments, Banks and Corporations. The Underlying Funds
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 Fund may invest.
To the extent that such investments are consistent with their respective
investment objectives, the Underlying Funds 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 Underlying Funds' 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 Underlying Funds may also invest a portion of their 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.
Participation Interests. The E*TRADE Premier Money Market Fund may invest in
participation interests of any type of security in which it may invest. A
participation interest gives it an undivided interest in the underlying
securities in the proportion that its participation interest bears to the total
principal amount of the underlying securities.
Pass-Through Obligations. Certain of the debt obligations in which the E*TRADE
Premier Money Market Fund may invest may be pass-through obligations that
represent an ownership interest in a pool of mortgages and the resultant cash
flow from those mortgages. Payments by homeowners on the loans in the pool flow
through to certificate holders in amounts sufficient to repay principal and to
pay interest at the pass-through rate. The stated maturities of pass-through
obligations may be shortened by unscheduled prepayments of principal on the
underlying mortgages. Therefore, it is not possible to predict accurately the
average maturity of a particular pass-through obligation. Variations in the
maturities of pass-through obligations will affect the yield of the E*TRADE
Premier Money Market Fund to the extent it invests in such obligations.
Furthermore, as with any debt obligation, fluctuations in interest rates will
inversely affect the market value of pass-through obligations.
Repurchase Agreements. The Underlying Funds may enter into a repurchase
agreement wherein the seller of a security to the Underlying Fund agrees to
repurchase that security from the Underlying Fund at a mutually-agreed upon time
and price. The period of maturity is usually quite short, often overnight or a
few days, although it may extend over a number of months. The Underlying Funds
may enter into repurchase agreements only with respect to securities that could
otherwise be purchased by the Underlying Funds, 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 Underlying Funds may incur a loss on a repurchase transaction if the seller
defaults and the value of the underlying collateral declines or is otherwise
limited or if receipt of the security or collateral is delayed. The Underlying
Funds' custodian has custody of, and holds in a segregated account, securities
acquired as collateral by the Underlying Funds under a repurchase agreement.
Repurchase agreements are considered loans by the Underlying Funds. All
repurchase transactions must be collateralized.
In an attempt to reduce the risk of incurring a loss on a repurchase agreement,
the Underlying Funds limit investments in repurchase agreements to selected
creditworthy securities dealers or domestic banks or other recognized financial
institutions. The Underlying Funds' advisor monitors on an ongoing basis the
value of the collateral to assure that it always equals or exceeds the
repurchase price.
Rule 144A. It is possible that unregistered securities, purchased by the E*TRADE
Premier Money Market Fund in reliance upon Rule 144A under the 1933 Act, could
have the effect of increasing the level of the E*TRADE Premier Money Market
Fund's illiquidity to the extent that qualified institutional buyers become, for
a period, uninterested in purchasing these securities.
Securities Related Businesses. The 1940 Act limits the ability of the Underlying
Funds to invest in securities issued by companies deriving more than 15% of
their gross revenues from securities related activities ("financial companies").
If the indices in which the Underlying Index Funds invest provide a higher
concentration in one or more financial companies, the Underlying Index Funds may
experience increased tracking error due to the limitations on investments in
such companies.
Short-term instruments and temporary investments. The Fund and the Underlying
Funds 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 Fund and the Underlying Funds 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 the Fund's sub-advisor; (iv) non-convertible corporate debt securities (e.g.,
bonds and debentures) with remaining maturities at the date of purchase of not
more than one year that are rated at least "Aa" by Moody's or "AA" by S&P; (v)
repurchase agreements; and (vi) short-term, U.S. dollar-denominated obligations
of foreign banks (including U.S. branches) that, at the time of investment have
more than $10 billion, or the equivalent in other currencies, in total assets
and in the opinion of the Fund's sub-advisor are of comparable quality to
obligations of U.S. banks which may be purchased by the Fund and the Underlying
Funds.
Unrated, Downgraded and Below Investment Grade Investments. The Underlying Funds
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 Underlying Funds. After
purchase by the Underlying Funds, a security may cease to be rated or its rating
may be reduced below the minimum required for purchase by the Underlying Funds.
Neither event will require a sale of such security by the Underlying Funds
provided that the amount of such securities held by the Underlying Funds does
not exceed 5% of the Underlying Funds' 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 Underlying Funds 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 Underlying Funds are not required to sell downgraded securities, the
Underlying Funds could hold up to 5% of their 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 Underlying Funds' 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 Underlying Funds' 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 an Underlying Fund 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 Underlying Fund
held exclusively higher rated or higher quality securities.
Low rated or unrated low quality debt securities may be more susceptible to real
or perceived adverse economic and competitive industry conditions than
investment grade securities. The prices of such debt securities have been found
to be less sensitive to interest rate changes than higher rated or higher
quality investments, but more sensitive to adverse economic downturns or
individual corporate developments. A projection of an economic downturn or of a
period of rising interest rates, for example, could cause a decline in low rated
or unrated, low quality debt securities prices because the advent of a recession
could dramatically lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of the
debt securities defaults, the Fund may incur additional expenses to seek
recovery.
U.S. Government Obligations. The Fund and the Underlying Funds may invest in
various types of U.S. Government obligations. U.S. Government obligations
include securities issued or guaranteed as to principal and interest by the U.S.
Government and supported by the full faith and credit of the U.S. Treasury. U.S.
Government obligations differ mainly in the length of their maturity. Treasury
bills, the most frequently issued marketable government securities, have a
maturity of up to one year and are issued on a discount basis. U.S. Government
obligations also include securities issued or guaranteed by federal agencies or
instrumentalities, including government-sponsored enterprises. Some obligations
of such agencies or instrumentalities of the U.S. Government are supported by
the full faith and credit of the United States or U.S. Treasury guarantees.
Other obligations of such agencies or instrumentalities of the U.S. Government
are supported by the right of the issuer or guarantor to borrow from the U.S.
Treasury. Others are supported by the discretionary authority of the U.S.
Government to purchase certain obligations of the agency or instrumentality or
only by the credit of the agency or instrumentality issuing the obligation.
In the case of obligations not backed by the full faith and credit of the United
States, the investor must look principally to the agency or instrumentality
issuing or guaranteeing the obligation for ultimate repayment, which agency or
instrumentality may be privately owned. There can be no assurance that the U.S.
Government would provide financial support to its agencies or instrumentalities
(including government-sponsored enterprises) where it is not obligated to do so.
In addition, U.S. Government obligations are subject to fluctuations in market
value due to fluctuations in market interest rates. As a general matter, the
value of debt instruments, including U.S. Government obligations, declines when
market interest rates increase and rises when market interest rates decrease.
Certain types of U.S. Government obligations are subject to fluctuations in
yield or value due to their structure or contract terms.
Temporary Defensive Positions. When adverse market, financial or political
conditions warrant, the Fund may increase its investments in Government
securities and short-term paper for temporary or defensive purposes. Such
investment strategies are inconsistent with the Fund's investment objective and
could result in the Fund not achieving its investment objective.
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. shall be a "diversified company" as that term is defined in the 1940 Act;
2. may not issue senior securities, except as permitted under the 1940 Act and
as interpreted and modified by any 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 any 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) and; (ii)
investments in other registered open-end investment companies;
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 any 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 purchase securities of other investment companies as 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 as the Fund.
TRUSTEES AND OFFICERS
The Board has the responsibility for the overall management of the Fund,
including general supervision and review of its investment activities and the
conformity with Delaware Law and the stated policies of the Fund. The Board
elects the officers of the Trust who are responsible for administering the
Fund's day-to-day operations. Trustees and officers of the Fund, together with
information as to their principal business occupations during the last five
years, and other information are shown below. Each "interested or affiliated
person," as defined in the 1940 Act, is indicated by an asterisk (*):
<TABLE>
-----------------------------------------------------------------------------------
<CAPTION>
Position(s)
Name, Address, and Age Held with the Principal Occupation(s) During the Past
Fund 5 Years
-----------------------------------------------------------------------------------
<S> <C> <C>
*Leonard C. Purkis (51) Trustee Mr. Purkis is chief financial officer
4500 Bohannon Drive, and executive vice president of finance
Menlo Park, CA 94025 and administration of E*TRADE Group,
Inc. Mr. Purkis also serves on the
board of directors of E*TRADE Bank. 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 Sector).
*Shelly J. Meyers (41) Trustee Ms. Meyers is the Manager, Chief
(1) 4500 Bohannon Drive, Executive Officer, Chief Financial
Menlo Park, CA 94025 Officer and founder of Meyers Capital
Management LLC, a registered investment
adviser formed in January 1996. She
also serves on the board of directors
of Meyers Investment Trust (investment
company) and Meyers Capital Management
LLC. 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 Bohannon Drive, Executive Officer of InvestorReach (a
Menlo Park, CA 94025 consulting firm specializing in
marketing and distribution strategies
for financial services companies) which
was formed in October 1996. She has
been a trustee of the Zero Gravity
Mutual Fund since January 2000 and of
the Trust For Investment Managers
(investment Company) since December
1999. From 1992 to 1996, she was a
partner and director 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 (66) Trustee Mr. Rebhan has been a trustee for the
4500 Bohannon Drive, Trust For Investment Managers
Menlo Park, CA 94025 (investment company) since August 30,
1999. Mr. Rebhan retired in December
1993, and prior to that he was
President of Hotchkis and Wiley Funds
(investment company) from 1985 to 1993.
*Amy J. Errett (42) President Ms. Errett is President of E*TRADE
4500 Bohannon Drive, Asset Management, Inc. She joined
Menlo Park, CA 94025 E*TRADE Asset Management, Inc. in
March 2000. Prior to that, Ms. Errett
was Chairman, Chief Executive Officer,
and founder of Spectrem Group
(financial services consulting firm)
since 1990.
*Liat Rorer (40) Vice President Ms. Rorer is Vice President of
4500 Bohannon Drive, Operations and a director of E*TRADE
Menlo Park, CA 94025 Asset Management, Inc. which she
joined in 1999. She is also a Vice
President of E*TRADE's Asset Gathering
group. Prior to that Ms. Rorer worked
as a senior consultant for the Spectrem
Group, (financial services consulting
firm) 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 and Treasurer of E*TRADE Asset
Menlo Park, CA 94025 Management. 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 Mr. Gould is Secretary of E*TRADE
4500 Bohannon Drive Asset Management. From February to
Menlo Park, CA 94025 December 1999, he served as the
Vice President of Transamerica and
prior to that he worked at Bank of
America (banking and financial
services) from 1994.
<FN>
------------
(1) Ms. Meyers may be considered an "interested person," but she is not an
"affiliated person", as defined in the 1940 Act.
</FN>
</TABLE>
Each non-affiliated Trustee will receive 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. 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, 2001 and the total compensation received
from the Trust for the fiscal year ended December 31, 2000:
Compensation Table
------------------------------------------------------------------------------
Name of Person, Position Aggregate Compensation Total Compensation
from the Trust1 from the Trust Paid
to Trustees 2
------------------------------------------------------------------------------
Leonard C. Purkis, Trustee None None
Shelly J. Meyers, Trustee3 $______ $48,000
Ashley T. Rabun, Trustee $______ $57,000
Steven Grenadier, Trustee $______ $57,000
George J. Rebhan, Trustee $______ $57,000
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, 2001.
(2) This amount represents the actual amount paid in 2000. The amount is based
on a prior compensation schedule in effect until July 1, 2000 and the
current compensation schedule thereafter, as described above. The Trust
consists of eleven series. 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, each of the E*TRADE Funds has adopted
a code of ethics. The Fund's investment advisor, sub-advisor, and principal
underwriter have also adopted codes of ethics under Rule 17j-1. Each code of
ethics permits personal trading by covered personnel, including securities that
may be purchased or held by the Fund, subject to certain reporting requirements
and restrictions.
Control Persons and Principal Holders of Securities
A shareholder that owns 25% or more of the Fund's voting securities is deemed to
control the Fund on matters submitted to a vote of shareholders. To satisfy
regulatory requirements and for compliance purposes, as of March 1, 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. 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 ("Investment Advisory
Agreement") with the Fund, E*TRADE Asset Management, Inc. ("E*TRADE Asset
Management" or "Investment Advisor"), a registered investment adviser, provides
investment advisory services to the Fund. The Investment Advisor also serves as
the investment advisor to each of the Underlying Funds. 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 1, 2000, the Investment Advisor provided
investment advisory services for over $415 million in assets.
Subject to the general supervision of the E*TRADE Funds' Trust's Board of
Trustees and in accordance with the investment objective, policies and
restrictions of the Fund, the Investment Advisor provides the Fund with ongoing
investment management guidance, policy direction and monitoring of the Fund and
any sub-advisors pursuant to an investment advisory agreement. For its advisory
services, the Fund pays the Investment Advisor an investment advisory fee at an
annual rate equal to 0.10% of the Fund's average daily net assets. The
Investment Advisor retains a portion of that fee not paid to BGFA, as described
below.
The Investment Advisor and the Trust are seeking an exemptive order from the SEC
that will permit the Investment Advisor, subject to approval by the Board, to
retain sub-advisors that are unaffiliated with the Investment Advisor without
approval by the Fund's shareholders. The Investment Advisor, subject to Board
oversight, has the ultimate responsibility for the investment performance of the
Fund due to its responsibility to oversee Sub-advisors and recommend their
hiring, termination, and replacement. If granted, such relief would require
shareholder notification in the event of any change in sub-advisers. There is no
assurance the exemptive order will be granted.
Sub-Advisor to the Fund. The Investment Advisor has entered into a sub-advisory
agreement ("Sub-Advisory Agreement") with 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. Barclays Global Investors has
provided asset management, administration and advisory services for over 25
years. As of September 30, 2000 Barclays Global Investors and its affiliates,
including BGFA, provided investment advisory services for over $831.9 billion of
assets.
Under the Sub-Advisory Agreement, BGFA is responsible for the day-to-day
management of the Fund's assets pursuant to the Fund's investment objective and
restrictions. For its services, BGFA receives a fee from the Investment Advisor
at an annual rate equal to 0.05% of the Fund's average daily net assets. The
Sub-Advisory Agreement is subject to the same Board of Trustees' approval,
oversight and renewal as the Investment Advisory Agreement.
Both the Investment Advisory Agreement and the Sub-Advisory Agreement will
continue in effect for more than two years provided the continuance is approved
annually (i) by the holders of a majority of the Fund's outstanding voting
securities or by the Fund's Board of Trustees and (ii) by a majority of the
Trustees of the Fund who are not parties to the Investment Advisory Agreement or
the Sub-Advisory Agreement or interested persons of any such party. Both the
Investment Advisory Agreement and the Sub-Advisory Agreement may be terminated
on 60 days' written notice any such party and will terminate automatically if
assigned.
Asset allocation, index and modeling strategies are employed by BGFA for other
investment companies and accounts advised or sub-advised by BGFA. If these
strategies indicate particular securities should be purchased or sold at the
same time by the Fund and one or more of these investment companies or accounts,
available investments or opportunities for sales will be allocated equitably to
each by BGFA. In some cases, these procedures may adversely affect the size of
the position obtained for or disposed of by the Fund or the price paid or
received by the Fund.
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.
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 0.25% of the average daily net assets of the Fund.
Expense Limitation Agreement. In the interest of limiting expenses of the Fund
through May 1, 2002, E*TRADE Asset Management has entered into an expense
limitation agreement with the Fund ("Expense Limitation Agreement"). Pursuant to
that Expense Limitation Agreement, E*TRADE Asset Management has agreed to waive
or limit its fees and assume other expenses so that the total operating expenses
of the Fund other than interest, taxes, brokerage commissions, other
expenditures which are capitalized in accordance with generally accepted
accounting principles and other extraordinary expenses not incurred in the
ordinary course of the Fund's business are limited to 0.50% of the Fund's daily
net assets.
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. As a result, IBT has custody of all
securities and cash of the Fund, 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. The custodian has no responsibility for any of the investment policies or
decisions of the Fund. 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.
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. Deloitte &
Touche LLP is responsible for auditing the annual financial statements of the
Fund.
Legal Counsel. Dechert Price & Rhoads, 1775 Eye Street N.W., Washington, DC
20006-2401, acts as legal counsel for the Fund.
PORTFOLIO TRANSACTIONS AND BROKERAGE SELECTION
The Fund has no obligation to deal with any dealer or group of dealers in the
execution of transactions in portfolio securities. Pursuant to the Sub-Advisory
Agreement and subject to policies as may be established by the Fund's Board of
Trustees, BGFA, as sub-advisor, is responsible for the Fund's investment
portfolio decisions and the placing of portfolio transactions. In placing
orders, it is the policy of the Fund to obtain the best results taking into
account the broker/dealer's general execution and operational facilities, the
type of transaction involved and other factors such as the broker/dealer's risk
in positioning the securities involved. While BGFA generally seeks reasonably
competitive spreads or commissions, the Fund will not necessarily be paying the
lowest spread or commission available.
Purchase and sale orders of the securities held by the Fund may be combined with
those of other accounts that BGFA manages, and for which they have 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 Fund and other accounts managed by BGFA, BGFA undertakes to
allocate those transactions among the participants equitably.
Under the 1940 Act, persons affiliated with the Fund, BGFA and their affiliates
are prohibited from dealing with the Fund as a principal in the purchase and
sale of securities unless an exemptive order allowing such transactions is
obtained from the SEC or an exemption is otherwise available.
Except in the case of equity securities purchased by the Fund, purchases and
sales of securities usually will be principal transactions. Portfolio securities
normally will be purchased or sold from or to dealers serving as market makers
for the securities at a net price. The Fund also will purchase portfolio
securities in underwritten offerings and may purchase securities directly from
the issuer. Generally, money market securities, adjustable rate mortgage
securities ("ARMS"), municipal obligations, and collateralized mortgage
obligations ("CMOs") are traded on a net basis and do not involve brokerage
commissions. The cost of executing the Fund's investment portfolio securities
transactions will consist primarily of dealer spreads and underwriting
commissions. Commissions paid by the Fund may have the effect of reducing the
total returns of the Fund.
Purchases and sales of equity securities on a securities exchange are effected
through brokers who charge a negotiated commission for their services. Orders
may be directed to any broker including, to the extent and in the manner
permitted by applicable law, affiliates of BGFA or Barclays. In the
over-the-counter market, securities are generally traded on a "net" basis with
dealers acting as principal for their own accounts without a stated commission,
although the price of the security usually includes a profit to the dealer. In
underwritten offerings, securities are purchased at a fixed price that includes
an amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount.
In placing orders for portfolio securities of the Fund, BGFA is required to give
primary consideration to obtaining the most favorable price and efficient
execution. This means that BGFA seeks to execute each transaction at a price and
commission, if any, that provide the most favorable total cost or proceeds
reasonably attainable in the circumstances. While BGFA generally seeks
reasonably competitive spreads or commissions, the Fund will not necessarily be
paying the lowest spread or commission available. In executing portfolio
transactions and selecting brokers or dealers, BGFA seeks to obtain the best
overall terms available for the Fund. In assessing the best overall terms
available for any transaction, BGFA considers factors deemed relevant, including
the breadth of the market in the security, the price of the security, the
financial condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. Rates are established pursuant to negotiations with the
broker based on the quality and quantity of execution services provided by the
broker in the light of generally prevailing rates. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Fund's Board.
Certain of the brokers or dealers with whom the Fund may transact business offer
commission rebates to the Fund. 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 Fund's investments in the Underlying Funds are
determined by the NAVs reported by each Underlying Fund. 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.
The E*TRADE Premier Money Market Fund values its portfolio instruments at
amortized cost, which means they are valued at their acquisition cost, as
adjusted for amortization of premium or discount, rather than at current market
value. Calculations are made to compare the value of the its investments at
amortized cost with market values. When determining market values for portfolio
securities, the it uses market quotes if they are readily available. In cases
where quotes are not readily available, the it may value securities based on
fair values developed using methods approved by the its Board of Trustees. Fair
values may be determined by using actual quotations or estimates of market
value, including pricing service estimates of market values or values obtained
from yield data relating to classes of portfolio securities.
The amortized cost method of valuation seeks to maintain a stable net asset
value per share ("NAV") of $1.00, even where there are fluctuations in interest
rates that affect the value of portfolio instruments. Accordingly, this method
of valuation can in certain circumstances lead to a dilution of a shareholder's
interest.
If a deviation of 1/2 of 1% or more were to occur between the NAV calculated
using market values and the E*TRADE Premier Money Market Fund's $1.00 NAV
calculated using amortized cost or if there were any other deviation that the
Board of Trustees believed would result in a material dilution to shareholders
or purchasers, the Board of Trustees would promptly consider what action, if
any, should be initiated. If the E*TRADE Premier Money Market Fund's NAV
calculated using market values declined, or were expected to decline, below the
E*TRADE Premier Money Market Fund's $1.00 NAV calculated using amortized cost,
the Board of Trustees might temporarily reduce or suspend dividend payments of
that fund in an effort to maintain the fund's $1.00 NAV. As a result of such
reduction or suspension of dividends or other action by the Board of Trustees,
direct or indirect (such as the Fund's shareholders) investors in the E*TRADE
Premier Money Market Fund would receive less income during a given period than
if such a reduction or suspension had not taken place. Such action could result
in investors in the E*TRADE Premier Money Market Fund receiving no dividend for
the period during which they hold their shares and receiving, upon redemption, a
price per share lower than that which they paid. On the other hand, if the
E*TRADE Premier Money Market Fund's NAV (calculated using market values) were to
increase, or were anticipated to increase above the E*TRADE Premier Money Market
Fund's $1.00 NAV (calculated using amortized cost), the Board of Trustees might
supplement dividends in an effort to maintain the Underlying Fund's $1.00 NAV.
Net investment income for a Saturday, Sunday or holiday will be declared as a
dividend to investors of record on the previous business day.
Telephone and Internet Redemption Privileges. The Fund employs reasonable
procedures to confirm that instructions communicated by telephone or the
Internet are genuine. The Fund may not be liable for losses due to unauthorized
or fraudulent instructions. Such procedures include but are not limited to
requiring a form of personal identification prior to acting on instructions
received by telephone or the Internet, providing written confirmations of such
transactions to the address of record, tape recording telephone instructions and
backing up Internet transactions.
Retirement Plans. You can find information about the retirement plans offered by
E*TRADE Securities by accessing our Website. You may fill out an IRA application
online or request our IRA application kit by mail.
TAXATION
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the Fund and the purchase, ownership, and disposition of Fund shares.
This discussion does not purport to be complete or to deal with all aspects of
federal income taxation that may be relevant to shareholders in light of their
particular circumstances. This discussion is based upon present provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), the regulations
promulgated thereunder, and judicial and administrative ruling authorities, all
of which are subject to change, which change may be retroactive. Prospective
investors should consult their own tax advisors with regard to the federal tax
consequences of the purchase, ownership, or disposition of Fund shares, as well
as the tax consequences arising under the laws of any state, foreign country, or
other taxing jurisdiction.
Taxation of the Fund. The Fund intends to be taxed as a regulated investment
company under Subchapter M of the Code. Accordingly, the Fund must, among other
things, (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to certain securities loans, and
gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing in
such stock, securities or currencies; and (b) diversify its holdings so that, at
the end of each fiscal quarter, (i) at least 50% of the value of the Fund's
total assets is represented by cash and cash items, U.S. Government securities,
the securities of other regulated investment companies and other securities,
with such other securities limited, in respect of any one issuer, to an amount
not greater than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its total assets is invested in the securities of any one issuer (other
than U.S. Government securities and the securities of other regulated investment
companies).
As a regulated investment company, the Fund generally is not subject to U.S.
federal income tax on income and gains that it distributes to shareholders, if
at least 90% of the Fund's investment company taxable income (which includes,
among other items, dividends, interest and the excess of any net short-term
capital gains over net long-term capital losses) for the taxable year is
distributed. The Fund intends to distribute substantially all of such income.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax at the
Fund level. To avoid the tax, the Fund must distribute during each calendar year
an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for a one-year period generally ending on October 31 of
the calendar year, and (3) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, the Fund intends to make distributions in accordance with the
calendar year distribution requirement.
Distributions. Distributions of investment company taxable income (including net
short-term capital gains) are taxable to a U.S. shareholder as ordinary income,
whether paid in cash or shares. Dividends paid by the Fund to a corporate
shareholder, to the extent such dividends are attributable to dividends received
by the Fund from U.S. corporations, may, subject to limitation, be eligible for
the dividends received deduction. However, the alternative minimum tax
applicable to corporations may reduce the value of the dividends received
deduction. Distributions of net capital gains (the excess of net long-term
capital gains over net short-term capital losses) designated by the Fund as
capital gain dividends, whether paid in cash or reinvested in Fund shares, will
generally be taxable to shareholders as long-term capital gain, regardless of
how long a shareholder has held Fund shares.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received. A distribution will be treated as paid on December 31 of a calendar
year if it is declared by the Fund in October, November or December of that year
with a record date in such a month and paid by the Fund during January of the
following year. Such distributions will be taxable to shareholders in the
calendar year in which the distributions are declared, rather than the calendar
year in which the distributions are received.
If the net asset value of shares is reduced below a shareholder's cost as a
result of a distribution by the Fund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying shares of the Fund just
prior to a distribution. The price of shares purchased at this time will include
the amount of the forthcoming distribution, but the distribution will generally
be taxable to the shareholder.
The Fund will not be able to offset gains realized by one Underlying Fund
against losses realized by another Underlying Fund. The Fund's use of the
fund-of-funds structure could therefore affect the amount, timing and character
of distribution to shareholders.
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.
Although the Fund may itself be entitled to a deduction for such taxes paid by
an Underlying Fund in which the Fund invests, the Fund will not be able to pass
any such credit or deduction through to its own shareholders.
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.
Depending on the Fund's percentage ownership in an Underlying Fund both before
and after a redemption, the Fund's redemption of shares of such Underlying Fund
may cause the Fund to be treated as not receiving capital gain income on the
amount by which the distribution exceeds the Fund's tax basis in the shares of
the Underlying Fund, but instead to be treated as receiving a dividend taxable
as ordinary income on the full amount of the distribution. This could cause
shareholders of the Fund to recognize higher amounts of ordinary income than if
the shareholders had held the shares of the Underlying Funds directly.
Equalization. The Funds may use the so-called "tax equalization method" to
allocate a portion of earnings and profits to redemption proceeds. This method
is intended to permit the Fund to achieve more balanced distributions for both
continuing and departing shareholders. Continuing shareholders should realize
tax savings or deferrals through this method, and departing shareholders will
not have their tax obligations changed. Although using this method will not
affect the Fund's total returns, it may reduce the amount that otherwise would
be distributable to continuing shareholders by reducing the effect of
redemptions on dividend and distribution amounts.
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 Underlying Funds 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
Underlying Funds 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
Underlying Funds may result in "straddles" for federal income tax purposes. The
straddle rules may affect the character of gains (or losses) realized by the
Underlying Funds , and losses realized by the Underlying Funds 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 Underlying Funds may make with respect to their 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 Underlying Funds are
not entirely clear. The straddle rules may increase the amount of short-term
capital gain realized by the Underlying Funds, which is taxed as ordinary income
when distributed to the Underlying Funds. 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 the Fund 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 Underlying Funds may
recognize gain from a constructive sale of an "appreciated financial position"
it holds if they enter 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 Underlying Funds would be treated as if they 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 Underlying Funds' 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 Underlying
Funds' 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 Underlying Funds 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 Underlying
Funds receives a so-called "excess distribution" with respect to PFIC stock, the
Underlying Funds themselves may be subject to a tax on a portion of the excess
distribution, whether or not the corresponding income is distributed by the
Underlying Funds to shareholders. In general, under the PFIC rules, an excess
distribution is treated as having been realized ratably over the period during
which the Underlying Funds held the PFIC shares. The Underlying Funds will
themselves be subject to tax on the portion, if any, of an excess distribution
that is so allocated to prior Underlying Funds 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 Underlying Funds may be eligible to elect alternative tax treatment with
respect to PFIC shares. Under an election that currently is available in some
circumstances, the Underlying Funds 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 Underlying Funds' 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 for the continuous offering 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.
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 each index for the Underlying Funds Index may be used to
promote the Fund. The historical 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.
STANDARD & POOR'S
The E*TRADE S&P 500 Index Fund relies on a license related to the S&P 500 Index.
In the absence of the license, the E*TRADE S&P 500 Index Fund and the Fund may
not be able to pursue their investment objectives. Although not currently
anticipated, the license can be terminated.
The E*TRADE S&P 500 Index Fund and the Fund are not sponsored, endorsed, sold or
promoted by Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
("S&P"). S&P makes no representation or warranty, express or implied, to the
owners of either the E*TRADE S&P 500 Index Fund, the Fund or any member of the
public regarding the advisability of investing in securities generally or in the
E*TRADE S&P 500 Index Fund or the Fund particularly or the ability of the S&P
500 Index to track general stock market performance. S&P's only relationship to
E*TRADE Asset Management, the E*TRADE S&P 500 Index Fund or the Fund is the
licensing of certain trademarks and trade names of S&P and of the S&P 500 Index
which is determined, composed and calculated by S&P without regard to E*TRADE
Asset Management, E*TRADE S&P 500 Index Fund or the Fund. S&P has no obligation
to take the needs of E*TRADE Asset Management, E*TRADE S&P 500 Index Fund, the
Fund or the shareholders into consideration in determining, composing or
calculating the S&P 500 Index. S&P is not responsible for and has not
participated in the determination of the prices and amount of the E*TRADE S&P
500 Index Fund or the Fund or the timing of the issuance or sale of shares of
the E*TRADE S&P 500 Index Fund or the Fund or in the determination or
calculation of the equation by which the E*TRADE S&P 500 Index Fund or the Fund
is to be converted into cash. S&P has no obligation or liability in connection
with the administration, marketing or trading of the E*TRADE S&P 500 Index Fund
or the Fund.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500 Index
or any data included therein and S&P shall have no liability for any errors,
omissions, or interruptions therein. S&P makes no warranty, express or implied,
as to results to be obtained by the E*TRADE S&P 500 Index Fund, the Fund or the
shareholders, or any other person or entity from the use of the S&P 500 Index or
any data included therein. S&P makes no express or implied warranties, and
expressly disclaims all warranties of merchantability or fitness for a
particular purpose or use with respect to the S&P 500 Index or any data included
therein. Without limiting any of the foregoing, in no event shall S&P have any
liability for any special, punitive, indirect, or consequential damages
(including lost profits), even if notified of the possibility of such damages.
EAFE FREE INDEX
In the absence of permission to use the EAFE Free Index, the E*TRADE
International Index Fund may not be able to pursue their investment objectives.
The E*TRADE International Index Fund and the Fund are not sponsored, endorsed,
sold or promoted by Morgan Stanley Capital International Inc. ("MSCI") or any
affiliate of MSCI. Neither MSCI nor any other party makes any representation or
warranty, express or implied, to the owners of the E*TRADE International Index
Fund, the Fund or any member of the public regarding the advisability of
investing in securities generally or in the E*TRADE International Index Fund or
the Fund particularly or the ability of the EAFE Free Index to track general
stock market performance. MSCI is the licensor of certain trademarks, service
marks and trade names of MSCI and of the EAFE Free Index which is determined,
composed and calculated by MSCI without regard to the E*TRADE International
Index Fund, the Fund or E*TRADE Asset Management, Inc. MSCI has no obligation to
take the needs of the E*TRADE International Index Fund, the Fund, E*TRADE Asset
Management, Inc. or the shareholders into consideration in determining,
composing or calculating the EAFE Free Index. MSCI is not responsible for and
has not participated in the determination of the timing of, prices at, or
quantities of the E*TRADE International Index Fund and the Fund to be issued or
in the determination or calculation of the equation by which the E*TRADE
International Index Fund and the Fund's shares are redeemable for cash. Neither
MSCI nor any other party has any obligation or liability to shareholders in
connection with the administration, marketing or trading of the E*TRADE
International Index Fund and the Fund.
Although MSCI shall obtain information for inclusion in or for use in the
calculation of the EAFE Free Index from sources which MSCI considers reliable,
neither MSCI nor any other party guarantees the accuracy and/or the completeness
of the EAFE Free Index or any data included therein. Neither MSCI nor any other
party makes any warranty, express or implied as to results to be obtained by
E*TRADE Asset Management, Inc., E*TRADE International Index Fund, the Fund, the
shareholders or any other person or entity from the use of the EAFE Free Index
or any data included therein. Neither MSCI nor any other party makes any express
or implied warranties, and MSCI hereby expressly disclaims all warranties of
merchantability or fitness for a particular purpose with respect to the EAFE
Free Index or any data included therein. Without limiting any of the foregoing,
in no event shall MSCI or any other party have any liability for any direct,
indirect, special, punitive, consequential or any other damages (including lost
profits) even if notified of the possibility of such damages.
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 E*TRADE
Russell 2000 Index Fund or the Fund, other than the licensing of the Russell
2000 Index and its service marks for use in connection with the E*TRADE Russell
2000 Index Fund and the Fund.
BOND INDEX
Lehman Brothers ("Lehman") does not sponsor the E*TRADE Bond Index Fund or the
Fund, nor is it affiliated in any way with E*TRADE Bond Index Fund, the Fund, or
their investment advisor. "Lehman Brothers Government/Corporate Bond Index(R)"
is a trademark of Lehman. The E*TRADE Bond Index Fund and the Fund are not
sponsored, endorsed, sold, or promoted by Lehman, and neither Lehman nor the
Bond Index makes any representation or warranty, express or implied, regarding
the advisability of investing in the E*TRADE Bond Index Fund or 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.
"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
(d)(xiv) Form of Investment Advisory Agreement between E*TRADE Asset
Management, Inc. and the Registrant with respect to the E*TRADE
Asset Allocation Fund.15
(d)(xv) Form of Investment Subadvisory Agreement among E*TRADE Asset
Management, Inc., Barclays Global Fund Advisors and the Registrant
with respect to the E*TRADE Asset Allocation Fund.15
(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 Amended and Restated 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 Amended and Restated 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 Amended and Restated 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
(e)(vi) Form of Amendment No. 4 to the Amended and Restated Underwriting
Agreement between E*TRADE Securities, Inc. and the Registrant with
respect to E*TRADE Asset Allocation Fund.15
(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 Amendment No. 3 to the Custodian Agreement between the
Registrant and Investors Bank & Trust Company with respect to
E*TRADE Technology Index Fund, E*TRADE E-Commerce Index Fund,
E*TRADE Global Titans Index Fund, E*TRADE Financial Sector Index
Fund, E*TRADE Russell 2000 Index Fund and E*TRADE Asset Allocation
Fund.15
(g)(v) 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)(vi) 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.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)(2)(x) Form of Amendment No. 2 to the Second Amended and Restated
Administrative Services Agreement between the Registrant and E*TRADE
Asset Management, Inc. with respect to E*TRADE Asset Allocation
Fund.15
(h)(2)(xi) Form of Expense Limitation Agreement between the Registrant and
E*TRADE Asset Management, Inc with respect to E*TRADE Asset
Allocation Fund.15
(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 Technology Index Fund,
E*TRADE E-Commerce Index Fund, E*TRADE Global Titans Index Fund,
E*TRADE Financial Sector Index Fund, E*TRADE Russell 2000 Index Fund
and E*TRADE Asset Allocation Fund.15
(h)(4) Form of Sub-Administration and Accounting Services Agreement between
E*TRADE Funds and PFPC, Inc. with respect to the E*TRADE Technology
Index Fund.3
(h)(4)(i) Exhibit A to the Sub-Administration and Accounting Services
Agreement between E*TRADE Funds and PFPC, Inc. with respect to the
E*TRADE E-Commerce Index Fund.5
(h)(4)(ii) Form of Amended Exhibit A to the Sub-Administration and Accounting
Services Agreement between E*TRADE Funds and PFPC, Inc. with respect
to the E*TRADE Global Titans Index Fund.7
(h)(5)(i) Form of Transfer Agency Services Agreement between PFPC, Inc. and
the Registrant with respect to the E*TRADE S&P 500 Index Fund.2
(h)(5)(ii) Form of Amended Exhibit A to the Transfer Agency Services Agreement
between PFPC, Inc. and the Registrant with respect to the E*TRADE
Extended Market Index Fund, E*TRADE Bond Index Fund, E*TRADE
Technology Index Fund, E*TRADE International Index Fund, and E*TRADE
E-Commerce Index Fund.3
(h)(5)(iii) Form of Amended Exhibit A to the Transfer Agency Services Agreement
between PFPC, Inc. and the Registrant with respect to the E*TRADE
Global Titans Index Fund and E*TRADE Premier Money Market Fund.7
(h)(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)(5)(v) Form of Amended Exhibit A to the Transfer Agency Services Agreement
between PFPC, Inc. and the Registrant with respect to the E*TRADE
Asset Allocation Fund.15
(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)(6)(v) Form of Amendment No. 4 to the Retail Shareholder Services Agreement
among E*TRADE Securities, Inc., the Registrant and E*TRADE Asset
Management, Inc. with respect to E*TRADE Asset Allocation Fund.15
(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
(h)(7)(iii) Form of Amended Exhibit A to the State Securities Compliance
Services Agreement between E*TRADE Funds and PFPC, Inc. with respect
to E*TRADE Asset Allocation Fund.15
(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 December 5,
2000 with respect to the E*TRADE Financial Sector Index Fund.13
(i)(10) Opinion and Consent of Dechert Price & Rhoads, dated December 5,
2000 with respect to the E*TRADE Russell 2000 Index Fund.14
(i)(11) Opinion and Consent of Dechert Price & Rhoads with respect to the
E*TRADE Asset Allocation Fund.15
(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 Incorporated by reference from the Registrant's Post-Effective Amendment No.
23 to the Registration Statement on Form N-1A filed with the SEC on December 5,
2000.
14 Incorporated by reference from the Registrant's Post-Effective Amendment No.
24 to the Registration Statement on Form N-1A filed with the SEC on December 5,
2000.
15 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 Vice President, E*TRADE
and Treasurer Securities, Inc.
Formerly Vice President
of PIMCO Advisors L.P.
from 1998 to 1999.
Liat Rorer Vice President Vice President, Asset
Gathering, E*TRADE
Group. 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, E*TRADE Financial Sector Index Fund, and E*TRADE Asset Allocation
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
of Director and Director BGI, 45 Fremont
Street, San Francisco, CA 94105
Lawrence G. Tint, Chairman of the Board of
Chairman and Director Directors of BGFA and Chief
Executive Officer of BGI, 45
Fremont Street, San Francisco,
CA 94105
Geoffrey Fletcher, Chief Financial Officer of BGFA
Chief Financial Officer and BGI since May 1997, 45
Fremont Street, San Francisco,
CA 94150 Managing Director
and Principal Accounting
Officer at Bankers Trust
Company from 1988 - 1997, 505
Market Street, San Francisco, CA
94111
Item 27. Principal Underwriters
(a) E*TRADE Securities, Inc. ("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
Technology Index Fund, E*TRADE International Index Fund, E*TRADE E-Commerce
Index Fund, E*TRADE Global Titans Index Fund, E*TRADE Premier Money Market Fund,
E*TRADE Russell 2000 Index Fund, E*TRADE Financial Sector Index Fund, and
E*TRADE Asset Allocation 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; and
(4) 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, E*TRADE
Financial Sector Index Fund and E*TRADE Asset Allocation 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 15th day of December, 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
--------- ----- ----
* Vice President & December 15, 2000
------------------ Treasurer
Dianne Dubois (Principal Financial and
Accounting Officer)
* President (Principal December 15, 2000
------------------ Executive Officer)
Amy J. Errett
* Trustee December 15, 2000
------------------
Leonard C. Purkis
* Trustee December 15, 2000
------------------
Shelly J. Meyers
* Trustee December 15, 2000
------------------
Ashley T. Rabun
* Trustee December 15, 2000
------------------
Steven Grenadier
* Trustee December 15, 2000
------------------
George J. Rebhan
*By /s/
---------------
David A. Vaughan
Attorney-In-Fact
