Correspondence 0001999371-24-009106 from Tidal Trust III (CIK 0001722388)
Tidal Trust III (CIK 0001722388)
Date: July 26, 2024 · CIK: 0001722388 · Accession: 0001999371-24-009106
AI Filing Summary & Sentiment
File numbers found in text: 333-221764, 811-23312
Letter
VIA EDGAR TRANSMISSION Division of Investment Management Washington, DC 20549 Re: Tidal Trust III (the “Trust”) Post-Effective Amendment No. 39 to the Trust’s Registration Statement on Form N-1A (the “Amendment”) File Nos. 811-23312; 333-221764
Dear Ms. Rossotto:
This correspondence responds to comments the Trust received from the staff of the U.S. Securities and Exchange Commission (the “Staff” or the “Commission”) on July 5, 2024, with respect to the Registration Statement and the Trust’s proposed new series, the TradersAI Large Cap Equity & Cash ETF (the “Fund”). For your convenience, the comments have been reproduced with responses following each comment. Capitalized terms not otherwise defined have the same meaning as in the Registration Statement.
PROSPECTUS
Fees and Expenses
1. Please supplementally provide the Staff with a completed Fee Table pre-effectively. If Fund’s investments in other ETFs will result in expenses of greater than one basis point, include a line item for AFFE.
Response: The Fund’s completed Fees and Expenses table and Expense Example are as shown in the attached Appendix A. The Trust has determined not to list AFFE as a separate line item, as these fees are expected to be less than one basis point during the Fund’s first year.
Principal Investment Strategies
2. In general, the Staff found it difficult to understand the Fund’s strategy. Please review and revise the Fund’s entire principal investment strategy, using plain English principals. In particular, explain the purpose of each of the Fund’s investments. Why is the Fund investing in e-mini futures, options and cash to achieve the objective of total return? How does the Fund use its investments to seek capital gains? How does it obtain income?
Response: The Trust confirms that the Fund’s principal investment strategies have been rewritten using plain English principals, and that the foregoing questions have been responded to in the disclosures.
3. Please describe the data the proprietary models use when analyzing potential investments. In particular, how do the models use that data to actively exploit market opportunities?
Response: The Trust confirms that the Prospectus has been revised to add a description of the data the models use. The Trust also notes that, in response to other Staff comments, the reference to “exploiting market opportunities” has been revised to more accurately state that the Fund seeks to “actively exploit intraday price movements.”
4. In the context of the following statement, please explain what “correlated with” means in the context of the following: “ . . . the Fund may invest in options on futures correlated with the Index. . . .”
Response: In response to Comment 2 (to redraft the Fund’s principal investment strategies), the reference to “correlated with” has replaced with the phrase “based upon.”
5. Please clarify what “market opportunities” are being referred to. Also, clarify how the model identifies them in an actionable way, and how the Fund’s investments in futures and ETFs tied to the S&P 500 enable the Fund to take advantage of them.
Response: The Trust respectfully notes that, in response to Comment 2, the reference to “market opportunities” has been revised to reference “intraday price movements.”
6. The algorithms are described as having an “aggressive nature.” Please clarify what the term “aggressive” mean. If this is a way of saying the Fund will use futures for leverage, then that should be stated directly.
Response: The Trust respectfully notes that, in response to Comment 2, the reference to “aggressive” has been revised to reference the Fund’s short-term trading strategy. The Trust respectfully notes that, as stated in the Fund’s Item 9 disclosure, the Fund does not intend to use leverage as part of its principal investment strategies.
7. The strategy indicates that the algorithms are highly responsive to changes in market conditions. Please clarify what the reference to “market conditions” means and describe what “highly responsive” means.
Response: The Trust respectfully notes that, in response to Comment 2, the foregoing terms have been removed from the Fund’s investment strategy disclosure.
8. Please clarify what the phrase “maximize profit over brief periods” means.
Response: The Trust respectfully notes that, in response to Comment 2, the foregoing terms have been removed from the Fund’s investment strategy disclosure.
9. Explain more clearly the economics associated with the futures contracts you intend to use as a part of the Fund’s strategy, as well as the impact the futures will have on the Fund if the S&P goes up or down. Revise to more fully explain the roll of leverage in the strategy.
Response: The Trust confirms that a description has been added to Item 9 of the Prospectus explaining the foregoing. In addition, the Trust respectfully notes that, as stated in the Fund’s Item 9 disclosure, the Fund does not intend to use leverage as part of its principal investment strategies.
10. We note the statement that a key aspect of the strategy is the use of “e-mini futures.” Revise to disclose to the extent that the Fund will be leveraged, and the circumstances and factors it will consider when deciding whether to lever and how much leverage to take on. Please ensure that your risk disclosure appropriately addresses the risks associated with leverage.
Response: The Trust respectfully notes that, as stated in the Fund’s Item 9 disclosure, the Fund does not intend to use leverage as part of its principal investment strategies. Therefore, the Trust respectfully declines to implement the proposed changes.
11. Please clarify the types of positions that the Fund will close out each day. Will the hold some positions longer? Clarify in the disclosure.
Response: The Trust confirms that the Prospectus has been revised to reflect the foregoing.
12. The strategy notes that “ . . . the Fund aims to profit from market volatility and directional trends even within a single trading session if and when deemed appropriate by the proprietary models.” How does the model decide what is “appropriate.”? With a view to risk disclosure please tell us when the model was created, how it was validated, and the processes in place to ensure its continued validity.
Response: The Trust respectfully notes that, in response to Comment 2, the foregoing terms have been removed from the Fund’s investment strategy disclosure. In addition, the Prospectus has been revised to clarify that the Fund’s portfolio managers make all investment decisions for the Fund.
The Sub-Adviser provided the following information: The models used by the Sub-Adviser were originally developed in 2009 by the Fund’s Portfolio Manager, Dr. Margam. Since then, he has continuously maintained and updated these models. Dr. Margam regularly tests and validates the models in-house to ensure they are appropriately modified and updated to suit the latest market conditions.
13. The Staff notes the statement that the Fund may experience a high portfolio turnover rate. Please review this disclosure for accuracy, and revise as appropriate.
Response: The Trust confirms that the Prospectus has been revised to clarify that the Fund will experience a high portfolio turnover rate.
14. With respect to the statement indicating that the Fund’s aggressive investment strategy will cause the Fund to take “a relatively higher degree of risk” – please clarify how the Fund will take on more risk (in the strategy and in risk disclosures).
Response: The Trust respectfully notes that, in response to Comment 2, the foregoing terms have been removed from the Fund’s investment strategy disclosure.
15. Given the statement that trades may be “executed and concluded within a short time frame, ranging from minutes to a couple of hours . . .” please review the following statement for accuracy: “All trading signals are generated by the Sub-Adviser’s proprietary models and undergo thorough vetting, with each signal reviewed by a human trader on the Sub-Adviser’s team.”
Response: The Trust confirms that the Fund’s portfolio managers make the final determinations with respect to all trade decisions. The language in question has been revised to more clearly explain the Sub-Adviser’s trading process.
16. Please revise the Fund’s 80% test to read as follows: Under normal circumstances, the Fund will invest at least 80% of its net assets, plus borrowings for investment purposes, in large cap equities or investments with similar characteristics, or cash.
Response: The Trust confirms that the Fund’s 80% policy has been revised to read as follows:
“Under normal circumstances, the Fund will invest at least 80% of its net assets, plus borrowings for investment purposes, in large cap equities or investments with similar characteristics, or cash and cash equivalents.”
Principal Investment Risks
17. For Aggressive trading risk, please confirm the accuracy of the following statement: “The Fund's aggressive intra-day trading strategy can significantly impact the market prices of securities it trades . . .” In addition, please elaborate on the risks of the Fund’s investments and process, including risks associated with intraday trading, including not closing out trades, trends reversing, etc. And how these risks are compounded using derivatives. In addition, please review the accuracy of the appropriateness of the following: “These trading strategies are associated with systemic risks within the interconnected financial markets, which may result in broader market disruptions.” The Staff notes the statement, “the Fund's reliance on technology is paramount.” Please include technology risk as a separate risk.
Response: The Trust confirms that the aggressive trading risk disclosure has been revised and tailored to the Fund’s strategy. In addition, the name of the risk has been revised to “Intraday Trading Strategy Risks.” The Trust respectfully notes that the aforementioned reference to technology was in relation to the Fund’s investment models. The Trust confirms that its models and data risk disclosure has been bolstered to included relevant risks posed by technology.
18. Consider including as a risk, the Fund’s ability to comply with the liquidity rule.
Response: As noted above, the Fund will not use derivatives for leveraging purposes, as a result the Fund believes that the Fund’s ability to comply with the liquidity rule is not a principal risk. Therefore, the Fund respectfully declines to add such risk disclosure.
19. For equity risk, please clarify how the Fund obtains equity exposure. In addition, please review the risk disclosure for relevancy given the Fund’s investment strategy (e.g., it will not invest directly in common stocks).
Response: The Trust confirms that the equity risk disclosure has been revised to address the foregoing concerns.
20. For ETF Risks, the Staff notes that Cash Redemption risks are disclosed. Please clarify whether this risk relates to the Fund, and not all ETFs.
Response: The Trust confirms that the Cash Redemption risk disclosure has been clarified to reflect that such risk relates to the Fund, rather than ETFs generally.
21. Please make the high portfolio turnover risk disclosure more definitive.
Response: The Trust confirms that the high portfolio turnover risk has been made more definitive.
Item
22. Please consider elaborating on the Fund’s strategy here.
Response: The Trust confirms that more information about the Fund’s strategy has been included in Item 9.
23. Please explain to the Staff supplementally the statement that the Fund does not intent to use leverage given its reliance on futures.
Response: The Sub-Adviser has indicated that the Fund uses S&P 500 Index Futures for the following reasons:
● Overnight Liquidity: E-mini futures typically trade from Sunday at 6:00 p.m. ET to Friday at 5:00 p.m. ET, with a daily break from 5:00 p.m. ET to 6:00 p.m. ET. This means that e-mini futures are traded both during and outside of regular stock market hours. The extended trading hours allow the Sub-Adviser to manage the Fund’s positions more effectively in response to overnight market changes. This is the primary reason the Fund uses futures, even though it does not take advantage of the leverage that futures inherently offer.
● High
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CORRESP
1
filename1.htm
Tidal
Trust III
234
West Florida Street, Suite 203
Milwaukee,
Wisconsin 53204
July
26, 2024
VIA
EDGAR TRANSMISSION
Karen
Rossotto
U.S.
Securities and Exchange Commission
Division
of Investment Management
100
F Street NE
Washington,
DC 20549
Re: Tidal
Trust III (the “Trust”)
Post-Effective
Amendment No. 39 to the Trust’s Registration Statement on Form N-1A (the “Amendment”)
File
Nos. 811-23312; 333-221764
Dear
Ms. Rossotto:
This
correspondence responds to comments the Trust received from the staff of the U.S. Securities and Exchange Commission (the “Staff”
or the “Commission”) on July 5, 2024, with respect to the Registration Statement and the Trust’s proposed new series,
the TradersAI Large Cap Equity & Cash ETF (the “Fund”). For your convenience, the comments have been reproduced with
responses following each comment. Capitalized terms not otherwise defined have the same meaning as in the Registration Statement.
PROSPECTUS
Fees
and Expenses
1. Please
supplementally provide the Staff with a completed Fee Table pre-effectively. If Fund’s
investments in other ETFs will result in expenses of greater than one basis point, include
a line item for AFFE.
Response:
The Fund’s completed Fees and Expenses table and Expense Example are as shown in the attached Appendix A. The Trust has determined
not to list AFFE as a separate line item, as these fees are expected to be less than one basis point during the Fund’s first year.
Principal
Investment Strategies
2. In
general, the Staff found it difficult to understand the Fund’s strategy. Please review
and revise the Fund’s entire principal investment strategy, using plain English principals.
In particular, explain the purpose of each of the Fund’s investments. Why is the Fund
investing in e-mini futures, options and cash to achieve the objective of total return? How
does the Fund use its investments to seek capital gains? How does it obtain income?
Response:
The Trust confirms that the Fund’s principal investment strategies have been rewritten using plain English principals, and that
the foregoing questions have been responded to in the disclosures.
3. Please
describe the data the proprietary models use when analyzing potential investments. In particular,
how do the models use that data to actively exploit market opportunities?
Response:
The Trust confirms that the Prospectus has been revised to add a description of the data the models use. The Trust also notes that, in
response to other Staff comments, the reference to “exploiting market opportunities” has been revised to more accurately
state that the Fund seeks to “actively exploit intraday price movements.”
4. In
the context of the following statement, please explain what “correlated with”
means in the context of the following: “ . . . the Fund may invest in options on futures
correlated with the Index. . . .”
Response:
In response to Comment 2 (to redraft the Fund’s principal investment strategies), the reference to “correlated with”
has replaced with the phrase “based upon.”
5. Please
clarify what “market opportunities” are being referred to. Also, clarify how
the model identifies them in an actionable way, and how the Fund’s investments in futures
and ETFs tied to the S&P 500 enable the Fund to take advantage of them.
Response:
The Trust respectfully notes that, in response to Comment 2, the reference to “market opportunities” has been revised to
reference “intraday price movements.”
6. The
algorithms are described as having an “aggressive nature.” Please clarify what
the term “aggressive” mean. If this is a way of saying the Fund will use futures
for leverage, then that should be stated directly.
Response:
The Trust respectfully notes that, in response to Comment 2, the reference to “aggressive” has been revised to reference
the Fund’s short-term trading strategy. The Trust respectfully notes that, as stated in the Fund’s Item 9 disclosure, the
Fund does not intend to use leverage as part of its principal investment strategies.
7. The
strategy indicates that the algorithms are highly responsive to changes in market conditions.
Please clarify what the reference to “market conditions” means and describe what
“highly responsive” means.
Response:
The Trust respectfully notes that, in response to Comment 2, the foregoing terms have been removed from the Fund’s investment strategy
disclosure.
8. Please
clarify what the phrase “maximize profit over brief periods” means.
Response:
The Trust respectfully notes that, in response to Comment 2, the foregoing terms have been removed from the Fund’s investment strategy
disclosure.
9. Explain
more clearly the economics associated with the futures contracts you intend to use as a part
of the Fund’s strategy, as well as the impact the futures will have on the Fund if
the S&P goes up or down. Revise to more fully explain the roll of leverage in the strategy.
Response:
The Trust confirms that a description has been added to Item 9 of the Prospectus explaining the foregoing. In addition, the Trust respectfully
notes that, as stated in the Fund’s Item 9 disclosure, the Fund does not intend to use leverage as part of its principal investment
strategies.
10. We
note the statement that a key aspect of the strategy is the use of “e-mini futures.”
Revise to disclose to the extent that the Fund will be leveraged, and the circumstances and
factors it will consider when deciding whether to lever and how much leverage to take on.
Please ensure that your risk disclosure appropriately addresses the risks associated with
leverage.
Response:
The Trust respectfully notes that, as stated in the Fund’s Item 9 disclosure, the Fund does not intend to use leverage as part
of its principal investment strategies. Therefore, the Trust respectfully declines to implement the proposed changes.
11. Please
clarify the types of positions that the Fund will close out each day. Will the hold some
positions longer? Clarify in the disclosure.
Response:
The Trust confirms that the Prospectus has been revised to reflect the foregoing.
12. The
strategy notes that “ . . . the Fund aims to profit from market volatility and directional
trends even within a single trading session if and when deemed appropriate by the proprietary
models.” How does the model decide what is “appropriate.”? With a view
to risk disclosure please tell us when the model was created, how it was validated, and the
processes in place to ensure its continued validity.
Response:
The Trust respectfully notes that, in response to Comment 2, the foregoing terms have been removed from the Fund’s investment strategy
disclosure. In addition, the Prospectus has been revised to clarify that the Fund’s portfolio managers make all investment decisions
for the Fund.
The
Sub-Adviser provided the following information: The models used by the Sub-Adviser were originally developed in 2009 by the Fund’s
Portfolio Manager, Dr. Margam. Since then, he has continuously maintained and updated these models. Dr. Margam regularly tests and validates
the models in-house to ensure they are appropriately modified and updated to suit the latest market conditions.
13. The
Staff notes the statement that the Fund may experience a high portfolio turnover rate. Please
review this disclosure for accuracy, and revise as appropriate.
Response:
The Trust confirms that the Prospectus has been revised to clarify that the Fund will experience a high portfolio turnover rate.
14. With
respect to the statement indicating that the Fund’s aggressive investment strategy
will cause the Fund to take “a relatively higher degree of risk” – please
clarify how the Fund will take on more risk (in the strategy and in risk disclosures).
Response:
The Trust respectfully notes that, in response to Comment 2, the foregoing terms have been removed from the Fund’s investment strategy
disclosure.
15. Given
the statement that trades may be “executed and concluded within a short time frame,
ranging from minutes to a couple of hours . . .” please review the following statement
for accuracy: “All trading signals are generated by the Sub-Adviser’s proprietary
models and undergo thorough vetting, with each signal reviewed by a human trader on the Sub-Adviser’s
team.”
Response:
The Trust confirms that the Fund’s portfolio managers make the final determinations with respect to all trade decisions. The language
in question has been revised to more clearly explain the Sub-Adviser’s trading process.
16. Please
revise the Fund’s 80% test to read as follows: Under normal circumstances, the Fund
will invest at least 80% of its net assets, plus borrowings for investment purposes, in large
cap equities or investments with similar characteristics, or cash.
Response:
The Trust confirms that the Fund’s 80% policy has been revised to read as follows:
“Under
normal circumstances, the Fund will invest at least 80% of its net assets, plus borrowings for investment purposes, in large cap equities
or investments with similar characteristics, or cash and cash equivalents.”
Principal
Investment Risks
17. For
Aggressive trading risk, please confirm the accuracy of the following statement: “The
Fund's aggressive intra-day trading strategy can significantly impact the market prices of
securities it trades . . .” In addition, please elaborate on the risks of the Fund’s
investments and process, including risks associated with intraday trading, including not
closing out trades, trends reversing, etc. And how these risks are compounded using derivatives.
In addition, please review the accuracy of the appropriateness of the following: “These
trading strategies are associated with systemic risks within the interconnected financial
markets, which may result in broader market disruptions.” The Staff notes the statement,
“the Fund's reliance on technology is paramount.” Please include technology risk
as a separate risk.
Response:
The Trust confirms that the aggressive trading risk disclosure has been revised and tailored to the Fund’s strategy. In addition,
the name of the risk has been revised to “Intraday Trading Strategy Risks.” The Trust respectfully notes that the aforementioned
reference to technology was in relation to the Fund’s investment models. The Trust confirms that its models and data risk disclosure
has been bolstered to included relevant risks posed by technology.
18. Consider
including as a risk, the Fund’s ability to comply with the liquidity rule.
Response:
As noted above, the Fund will not use derivatives for leveraging purposes, as a result the Fund believes that the Fund’s ability
to comply with the liquidity rule is not a principal risk. Therefore, the Fund respectfully declines to add such risk disclosure.
19. For
equity risk, please clarify how the Fund obtains equity exposure. In addition, please review
the risk disclosure for relevancy given the Fund’s investment strategy (e.g., it will
not invest directly in common stocks).
Response:
The Trust confirms that the equity risk disclosure has been revised to address the foregoing concerns.
20. For
ETF Risks, the Staff notes that Cash Redemption risks are disclosed. Please clarify whether
this risk relates to the Fund, and not all ETFs.
Response:
The Trust confirms that the Cash Redemption risk disclosure has been clarified to reflect that such risk relates to the Fund, rather
than ETFs generally.
21. Please
make the high portfolio turnover risk disclosure more definitive.
Response:
The Trust confirms that the high portfolio turnover risk has been made more definitive.
Item
9
22. Please
consider elaborating on the Fund’s strategy here.
Response:
The Trust confirms that more information about the Fund’s strategy has been included in Item 9.
23. Please
explain to the Staff supplementally the statement that the Fund does not intent to use leverage
given its reliance on futures.
Response:
The Sub-Adviser has indicated that the Fund uses S&P 500 Index Futures for the following reasons:
● Overnight
Liquidity: E-mini futures typically trade from Sunday at 6:00 p.m. ET to Friday at 5:00
p.m. ET, with a daily break from 5:00 p.m. ET to 6:00 p.m. ET. This means that e-mini futures
are traded both during and outside of regular stock market hours. The extended trading hours
allow the Sub-Adviser to manage the Fund’s positions more effectively in response to
overnight market changes. This is the primary reason the Fund uses futures, even though it
does not take advantage of the leverage that futures inherently offer.
● High