Correspondence 0001387131-23-012350 from Virtus ETF Trust II (CIK 0001648403)
Virtus ETF Trust II (CIK 0001648403)
Date: Oct. 18, 2023 · CIK: 0001648403 · Accession: 0001387131-23-012350
AI Filing Summary & Sentiment
File numbers found in text: 333-206600, 811-23078
Letter
Via EDGAR Transmission Division of Investment Management 100 F Street, N.E. Washington, D.C. 20549 Re: Virtus ETF Trust II (the “Trust”) File Nos. 333-206600 and 811-23078
Dear Ms. Browning:
I am writing in response to comments you provided to me during a telephone conversation on September 26, 2023, to Post-Effective Amendment No. 82, Amendment No. 84, to the Trust’s Registration Statement (the “Amendment”), which was filed pursuant to Rule 485(a)(2) under the Securities Act of 1933 (the “Securities Act”) on August 11, 2023, to register shares of the Virtus Newfleet Short Duration Core Plus Bond ETF series of the Trust (the “Fund”). We will respond in the form of a Post-Effective Amendment filed pursuant to Rule 485(b) under the Securities Act prior to or upon the Fund’s effectiveness. I have reproduced your comments below, followed by our responses.
General Comments
1. We remind you that the Trust and its management are responsible for the accuracy and adequacy of the disclosures notwithstanding any review, comment to action or absence of action by the staff. Please ensure that all information in the Amendment that is currently incomplete and/or bracketed will be completed in the next filed Post-Effective Amendment pertaining to the Fund that is filed pursuant to Rule 485(b) under the Securities Act. Additionally, please file your response to the staff comments on EDGAR at least five days in advance of the Amendment’s effective date. Where a global comment is made in one location (e.g., summary section or the prospectus), it is applicable to all similar disclosure appearing elsewhere in the Amendment (e.g., statutory prospectus or the Statement of Additional Information (“SAI”)). Finally, if you respectfully determine to decline a comment, please provide the staff with a well-reasoned and detailed legal analysis as applicable in support of the Trust’s views as they apply to the specific facts and circumstances. Please cite to any legal authority that supports such views.
Philadelphia, PA ● Malvern, PA ● Cherry Hill, NJ ● Newark, NJ ● Wilmington, DE ● Washington, DC ● New York, NY ● Chicago, IL
A Pennsylvania Limited Liability Partnership
RESPONSE: The Trust acknowledges the staff’s comment and confirms that all information will be completed in the next Post-Effective Amendment pertaining to the Fund that is filed pursuant to Rule 485(b) under the Securities Act.
Prospectus Comments
RISK/RETURN SUMMARY INFORMATION
Fees and Expenses of the Fund
2. Please include a completed fee table and expense example in your response letter.
RESPONSE: The completed fee table and expense example for the Fund are included below:
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses that you may pay if you buy, hold and sell shares of the Fund (“Shares”). You may incur customary brokerage commissions, and may pay other fees to financial intermediaries, when buying or selling Shares of the Fund, which are not reflected in the table or example set forth below.
Shareholder Fees (fees paid directly from your investment): None
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment):
Management Fee1 0.40 %
Other Expenses2 0.00 %
Total Annual Fund Operating Expenses 0.40 %
Fee Waiver3
0.05 %
Total Annual Fund Operating Expenses After Fee Waiver
0.35 %
(1) The management fee is structured as a “unified fee,” out of which the Fund’s investment adviser, Virtus ETF Advisers LLC (the “Adviser”) pays all of the ordinary operating expenses of the Fund, except for the following expenses, each of which is paid by the Fund: the Fund’s management fee; payments under any 12b-1 plan; taxes and other governmental fees; brokerage fees, commissions and other transaction expenses; interest and other costs of borrowing; litigation or arbitration expenses; acquired fund fees and expenses; and extraordinary or other non-routine expenses of the Fund.
(2) “Other Expenses” are based on estimated amounts for the current fiscal year.
(3) The Adviser has contractually agreed to waive a portion of the Fund’s management fee equal to 0.05% of the Fund’s average daily net assets through November 30, 2025, which will have the effect of reducing the Fund’s expenses (the “Fee Waiver Agreement”). While the Adviser or the Fund may discontinue the Fee Waiver Agreement after the contractual period, it may only be terminated during its term by either party upon written notice; provided that such termination shall require the approval of the Fund’s Board of Trustees.
Example. This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and then sell 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 at current levels and that the Fee Waiver Agreement remains in place for the contractual period. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year
3 Years
$37 $121
3. Please bold the second sentence under “Fees and Expenses of the Fund,” which provides “You may incur customary brokerage commissions, and may pay other fees to financial intermediaries, when buying or selling Shares of the Fund, which are not reflected in the table or example set forth below.”
RESPONSE: The Trust will bold the referenced sentence, as reflected in response to Comment 2 above.
4. Please confirm supplementally to the staff that all fees incurred by the Fund that are excluded from the Fund’s unitary fee arrangement with the investment adviser will be appropriately reflected in the “Other Expenses” line item of the fee table.
RESPONSE: The Fund does not currently anticipate incurring any extraordinary expenses that may materially affect “Other Expenses” for the current fiscal year.
Principal Investment Strategy
5. The Fund’s investment objective provides that the Fund “seeks to provide a high level of total return, including a competitive level of current income, while limiting fluctuations in net asset value (‘NAV’).” Please explain the meaning of the phrase “competitive level of current income” in the Item 4 section of the prospectus.
RESPONSE: The Fund will revise its objective to remove the reference to “a competitive level of.”
6. The Fund’s name includes “Short Duration.” Accordingly, please add a definition of duration to the prospectus, along with a brief example. We note that similar disclosure is currently included in the Fund’s SAI and that such additional disclosure may be added to the Item 9 section of the prospectus.
RESPONSE: The Fund will revise the Item 9 disclosure of the prospectus to include the following information:
Duration measures the interest rate sensitivity of a fixed income security by assessing and weighting the present value of the security’s payment pattern. Generally, fixed income securities with longer effective durations are more responsive to interest rate fluctuations than those with shorter effective durations. For example, if interest rates rise by 1%, the value of securities having an effective duration of three years will generally decrease by approximately 3%.
7. The first paragraph of the “Principal Investment Strategy” section provides that the Fund’s sub-adviser “seeks current income with an emphasis on maintaining low volatility and overall short duration (within a range of 1-3 years) by investing primarily in higher quality, more liquid fixed income securities.” Please define in plain English the terms “high quality” and “more liquid” and also give the source of those definitions (e.g., from a credit quality rating service). Please also review other disclosures with respect to consistency and fulsomeness of disclosure with respect to applicable credit quality ratings. You also want to indicate whether each investment may be for the Fund’s 80% basket and, if the Fund has a 20% basket that may be used as part of its principal investment strategy, what investments will be included in that basket. Please relocate all non-principal disclosure to the SAI. Please see Items 4, 9 and 16 of Form N-1A.
RESPONSE: The Fund will revise the first two paragraphs of the “Principal Investment Strategy” section as noted below. In addition, the Trust acknowledges the staff’s comment and will review and revise the remainder of the prospectus disclosure as appropriate.
Newfleet Asset Management (“Newfleet”) a division of Virtus Fixed Income Advisers, LLC, the Fund’s sub-adviser, seeks current income with an emphasis on maintaining low volatility and overall short duration (within a range of 1-3 years) by investing primarily in higher quality investment grade, more liquid (i.e., highly traded) fixed income securities of U.S. issuers. Newfleet considers investment-grade securities to be those with credit ratings within the four highest rating categories of a nationally recognized statistical rating organization (“NRSRO”), or, if unrated, determined to be of comparable quality by Newfleet. Duration measures the interest rate sensitivity of a fixed income security by assessing and weighting the present value of the security’s payment pattern. Generally, the longer the maturity, the greater the duration and, therefore, the greater effect interest rate changes have on the price of the security. The Fund Newfleet seeks to achieve it’s the Fund’s objective by applying a time-tested approach (i.e., one based on its historical expertise) of active fixed-income sector rotation, extensive credit research and disciplined risk management designed to capitalize on opportunities across undervalued areas of the fixed income markets (also referred to as fixed income sectors).
Under normal circumstances, the Fund invests at least 80% of its net assets (plus the amount of any borrowings for investment purposes) in fixed income debt obligations. The fixed income debt obligations in which the Fund may invest include:
● U.S. corporate bonds. Securities rated investment-grade at the time of investment, which are securities with credit ratings within the four highest rating categories of a nationally recognized statistical rating organization, including short-term securities, or, if unrated, determined to be of comparable quality by Newfleet;
● Securities Treasury notes and bonds issued or guaranteed as to principal and interest by the U.S. Government, its agencies, authorities or instrumentalities;
● Collateralized mortgage obligations (“CMOs”), real estate mortgage investment conduits (“REMICs”), and other mMortgage-backed securities (“MBS”) or and asset backed securities (“ABS”), including those issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, as well as those issued by private issuers, which are not guaranteed as to principal and interest payments (also referred to as “non-agency” instruments). The ABS and MBS in which the Fund invests are generally purchased pursuant to Rule 144A under the Securities Act of 1933 and are therefore subject to certain resale restrictions.; and
● Debt securities Bonds issued by foreign issuers, including foreign governments and their political subdivisions and companies incorporated outside of the U.S. The Fund’s non-U.S. investments will primarily be denominated in U.S. dollars but may also be denominated in foreign currencies.
The foregoing investments will generally be rated investment grade by an NRSRO at the time of purchase, or, if unrated, determined to be of comparable quality by Newfleet. Any fixed income debt obligations in which the Fund invests that are rated below investment grade at the time of purchase (also known as “junk” bonds) will be limited to 20% of the Fund’s net assets. The Fund may continue to hold a fixed income debt obligation notwithstanding any change to its credit rating.
8. The first paragraph of the “Principal Investment Strategy” section provides that the Fund “seeks to achieve its objective by applying a time-tested approach of active sector rotation, extensive credit research and disciplined risk management designed to capitalize on opportunities across undervalued areas of the fixed income markets.” Using plain English, please briefly explain what is meant by “time-tested approach of active sector rotation” and add corresponding risk disclosure.
RESPONSE: The Fund will revise the referenced disclosure as noted above in response to Comment 7. In addition, the Trust refers the staff to “Management Risk,” which covers the risks applicable to Newfleet actively managing the Fund’s portfolio.
9. Please revise the second paragraph of the “Principal Investment Strategy” section to more clearly specify each type of fixed income debt obligation in which the Fund may use for its principal investment strategy and include corresponding risk disclosure.
RESPONSE: The Fund will revise the referenced disclosure as noted above in response to Comment 7. In addition, the Trust has reviewed its principal risk disclosure and believes it appropriately corresponds to its principal investment strategy disclosure.
10. Please revise the second paragraph of the “Principal Investment Strategy” section to more clearly specify the issuers of each type of fixed income debt obligation in which the Fund may invest. For example, while the second paragraph refers to securities issued by the U.S. Government, its agencies, authorities or instrumentalities, the Item 9 section refers to securities issued by exchange-traded funds (“ETFs”) and other registered investment companies.
RESPONSE: The Fund will revise the referenced disclosure as noted above in response to Comment 7. The reference to ETFs in the Item 9 section will be removed.
11. The “Principal Investment Strategy” disclosure suggests that the Fund will invest in securities rated within one of the four highest rating categories of a nationally recognized statistical rating organization; however, what will the Fund do if a security is downgraded after purchase? Please add disclosure to the “Principal Investment Strategy” section disclosing if the Fund will take act
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CORRESP
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filename1.htm
Stradley Ronon Stevens & Young, LLP
2005 Market Street
Suite 2600
Philadelphia, PA 19103
Telephone 215.564.8000
Fax 215.564.8120
www.stradley.com
Joel D Corriero
Partner
jcorriero@stradley.com
215.564.8528
October 18, 2023
Via EDGAR Transmission
Ms. Kim Browning
Division of Investment Management
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
Re: Virtus ETF Trust II (the “Trust”)
File Nos. 333-206600 and 811-23078
Dear Ms. Browning:
I am writing in response to
comments you provided to me during a telephone conversation on September 26, 2023, to Post-Effective Amendment No. 82, Amendment No. 84,
to the Trust’s Registration Statement (the “Amendment”), which was filed pursuant to Rule 485(a)(2) under the
Securities Act of 1933 (the “Securities Act”) on August 11, 2023, to register shares of the Virtus Newfleet Short Duration
Core Plus Bond ETF series of the Trust (the “Fund”). We will respond in the form of a Post-Effective Amendment filed
pursuant to Rule 485(b) under the Securities Act prior to or upon the Fund’s effectiveness. I have reproduced your comments below,
followed by our responses.
General Comments
1. We remind you that the Trust and its management are responsible for the accuracy and adequacy of the disclosures
notwithstanding any review, comment to action or absence of action by the staff. Please ensure that all information in the Amendment that
is currently incomplete and/or bracketed will be completed in the next filed Post-Effective Amendment pertaining to the Fund that is filed
pursuant to Rule 485(b) under the Securities Act. Additionally, please file your response to the staff comments on EDGAR at least five
days in advance of the Amendment’s effective date. Where a global comment is made in one location (e.g., summary section
or the prospectus), it is applicable to all similar disclosure appearing elsewhere in the Amendment (e.g., statutory prospectus
or the Statement of Additional Information (“SAI”)). Finally, if you respectfully determine to decline a comment, please
provide the staff with a well-reasoned and detailed legal analysis as applicable in support of the Trust’s views as they apply to
the specific facts and circumstances. Please cite to any legal authority that supports such views.
Philadelphia, PA ● Malvern, PA ●
Cherry Hill, NJ ● Newark, NJ ● Wilmington, DE ● Washington, DC ● New York, NY ● Chicago, IL
A Pennsylvania Limited Liability Partnership
RESPONSE: The Trust acknowledges
the staff’s comment and confirms that all information will be completed in the next Post-Effective Amendment pertaining to the Fund
that is filed pursuant to Rule 485(b) under the Securities Act.
Prospectus Comments
RISK/RETURN SUMMARY INFORMATION
Fees and Expenses of the Fund
2. Please include a completed fee table and expense example in your response letter.
RESPONSE: The completed fee
table and expense example for the Fund are included below:
FEES AND EXPENSES OF THE FUND
This table describes the fees and expenses
that you may pay if you buy, hold and sell shares of the Fund (“Shares”). You may incur customary brokerage commissions,
and may pay other fees to financial intermediaries, when buying or selling Shares of the Fund, which are not reflected in the table or
example set forth below.
Shareholder Fees (fees paid directly from your investment):
None
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment):
Management Fee1
0.40
%
Other Expenses2
0.00
%
Total Annual Fund Operating Expenses
0.40
%
Fee Waiver3
0.05
%
Total Annual Fund Operating Expenses After Fee Waiver
0.35
%
(1) The management fee is structured as a “unified fee,” out of which the Fund’s investment
adviser, Virtus ETF Advisers LLC (the “Adviser”) pays all of the ordinary operating expenses of the Fund, except for
the following expenses, each of which is paid by the Fund: the Fund’s management fee; payments under any 12b-1 plan; taxes and other
governmental fees; brokerage fees, commissions and other transaction expenses; interest and other costs of borrowing; litigation or arbitration
expenses; acquired fund fees and expenses; and extraordinary or other non-routine expenses of the Fund.
(2) “Other Expenses” are based on estimated amounts for the current fiscal year.
(3) The Adviser has contractually agreed to waive a portion of the Fund’s management fee equal to 0.05%
of the Fund’s average daily net assets through November 30, 2025, which will have the effect of reducing the Fund’s expenses
(the “Fee Waiver Agreement”). While the Adviser or the Fund may discontinue the Fee Waiver Agreement after the contractual
period, it may only be terminated during its term by either party upon written notice; provided that such termination shall require the
approval of the Fund’s Board of Trustees.
Example. This example is intended
to help you compare the cost of investing in the Fund with the cost of investing in other funds. The example assumes that you invest $10,000
in the Fund for the time periods indicated and then sell 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 at current levels and that the Fee Waiver
Agreement remains in place for the contractual period. Although your actual costs may be higher or lower, based on these assumptions your
costs would be:
2
1 Year
3 Years
$37
$121
3. Please bold the second sentence under “Fees and Expenses of the Fund,” which provides “You
may incur customary brokerage commissions, and may pay other fees to financial intermediaries, when buying or selling Shares of the Fund,
which are not reflected in the table or example set forth below.”
RESPONSE: The Trust will bold
the referenced sentence, as reflected in response to Comment 2 above.
4. Please confirm supplementally to the staff that all fees incurred by the Fund that are excluded from the
Fund’s unitary fee arrangement with the investment adviser will be appropriately reflected in the “Other Expenses” line
item of the fee table.
RESPONSE: The Fund does not
currently anticipate incurring any extraordinary expenses that may materially affect “Other Expenses” for the current fiscal
year.
Principal Investment Strategy
5. The Fund’s investment objective provides that the Fund “seeks to provide a high level of total
return, including a competitive level of current income, while limiting fluctuations in net asset value (‘NAV’).” Please
explain the meaning of the phrase “competitive level of current income” in the Item 4 section of the prospectus.
RESPONSE: The Fund will revise
its objective to remove the reference to “a competitive level of.”
6. The Fund’s name includes “Short Duration.” Accordingly, please add a definition of duration
to the prospectus, along with a brief example. We note that similar disclosure is currently included in the Fund’s SAI and that
such additional disclosure may be added to the Item 9 section of the prospectus.
RESPONSE: The Fund will revise
the Item 9 disclosure of the prospectus to include the following information:
Duration measures the interest rate sensitivity
of a fixed income security by assessing and weighting the present value of the security’s payment pattern. Generally, fixed income
securities with longer effective durations are more responsive to interest rate fluctuations than those with shorter effective durations.
For example, if interest rates rise by 1%, the value of securities having an effective duration of three years will generally decrease
by approximately 3%.
7. The first paragraph of the “Principal Investment Strategy” section provides that the Fund’s
sub-adviser “seeks current income with an emphasis on maintaining low volatility and overall short duration (within a range of 1-3
years) by investing primarily in higher quality, more liquid fixed income securities.” Please define in plain English the terms
“high quality” and “more liquid” and also give the source of those definitions (e.g., from a credit quality
rating service). Please also review other disclosures with respect to consistency and fulsomeness of disclosure with respect to applicable
credit quality ratings. You also want to indicate whether each investment may be for the Fund’s 80% basket and, if the Fund has
a 20% basket that may be used as part of its principal investment strategy, what investments will be included in that basket. Please relocate
all non-principal disclosure to the SAI. Please see Items 4, 9 and 16 of Form N-1A.
3
RESPONSE: The Fund will revise
the first two paragraphs of the “Principal Investment Strategy” section as noted below. In addition, the Trust acknowledges
the staff’s comment and will review and revise the remainder of the prospectus disclosure as appropriate.
Newfleet Asset Management
(“Newfleet”) a division of Virtus Fixed Income Advisers, LLC, the Fund’s sub-adviser, seeks current income
with an emphasis on maintaining low volatility and overall short duration (within a range of 1-3 years) by investing primarily in higher
quality investment grade, more liquid (i.e.,
highly traded) fixed income securities of U.S. issuers. Newfleet
considers investment-grade securities to be those with credit ratings within the four highest rating categories of a nationally
recognized statistical rating organization (“NRSRO”), or, if unrated, determined to be of comparable quality by
Newfleet. Duration measures the interest rate sensitivity of a fixed income security by
assessing and weighting the present value of the security’s payment pattern. Generally, the longer the maturity, the greater
the duration and, therefore, the greater effect interest rate changes have on the price of the security. The Fund Newfleet seeks
to achieve it’s the Fund’s objective
by applying a time-tested approach (i.e., one based on its historical expertise) of
active fixed-income sector rotation, extensive credit research and disciplined risk
management designed to capitalize on opportunities across undervalued areas of the fixed income markets
(also referred to as fixed income sectors).
Under normal circumstances, the Fund invests
at least 80% of its net assets (plus the amount of any borrowings for investment purposes) in fixed income debt obligations. The fixed
income debt obligations in which the Fund may invest include:
● U.S. corporate
bonds. Securities rated investment-grade at
the time of investment, which are securities with credit ratings within the four highest rating categories of a nationally
recognized statistical rating organization, including short-term securities, or, if unrated, determined to be of comparable quality
by Newfleet;
● Securities Treasury
notes and bonds issued or guaranteed as to principal and interest
by the U.S. Government, its agencies, authorities or instrumentalities;
● Collateralized mortgage
obligations (“CMOs”), real estate mortgage investment conduits (“REMICs”), and other
mMortgage-backed
securities (“MBS”) or and
asset backed securities (“ABS”), including those issued or
guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities, as
well as those issued by private issuers, which are not guaranteed as to principal and interest payments (also referred to as
“non-agency” instruments). The ABS and MBS in which the Fund invests are generally purchased pursuant to Rule
144A under the Securities Act of 1933 and are therefore subject to certain resale restrictions.;
and
● Debt securities Bonds issued
by foreign issuers, including foreign governments and their political subdivisions and companies
incorporated outside of the U.S. The Fund’s non-U.S. investments will primarily be
denominated in U.S. dollars but may also be denominated in foreign currencies.
4
The foregoing investments
will generally be rated investment grade by an NRSRO at the time of purchase, or, if unrated, determined to be of comparable quality by
Newfleet. Any fixed income debt obligations in which the Fund invests that are rated below investment grade at the time of purchase (also
known as “junk” bonds) will be limited to 20% of the Fund’s net assets. The Fund may continue to hold a fixed
income debt obligation notwithstanding any change to its credit rating.
8. The first paragraph of the “Principal Investment Strategy” section provides that the Fund
“seeks to achieve its objective by applying a time-tested approach of active sector rotation, extensive credit research and disciplined
risk management designed to capitalize on opportunities across undervalued areas of the fixed income markets.” Using plain English,
please briefly explain what is meant by “time-tested approach of active sector rotation” and add corresponding risk disclosure.
RESPONSE: The Fund will revise
the referenced disclosure as noted above in response to Comment 7. In addition, the Trust refers the staff to “Management Risk,”
which covers the risks applicable to Newfleet actively managing the Fund’s portfolio.
9. Please revise the second paragraph of the “Principal Investment Strategy” section to more
clearly specify each type of fixed income debt obligation in which the Fund may use for its principal investment strategy and include
corresponding risk disclosure.
RESPONSE: The Fund will revise
the referenced disclosure as noted above in response to Comment 7. In addition, the Trust has reviewed its principal risk disclosure and
believes it appropriately corresponds to its principal investment strategy disclosure.
10. Please revise the second paragraph of the “Principal Investment Strategy” section to more
clearly specify the issuers of each type of fixed income debt obligation in which the Fund may invest. For example, while the second paragraph
refers to securities issued by the U.S. Government, its agencies, authorities or instrumentalities, the Item 9 section refers to securities
issued by exchange-traded funds (“ETFs”) and other registered investment companies.
RESPONSE: The Fund will revise
the referenced disclosure as noted above in response to Comment 7. The reference to ETFs in the Item 9 section will be removed.
11. The “Principal Investment Strategy” disclosure suggests that the Fund will invest in securities
rated within one of the four highest rating categories of a nationally recognized statistical rating organization; however, what will
the Fund do if a security is downgraded after purchase? Please add disclosure to the “Principal Investment Strategy” section
disclosing if the Fund will take act