Zacks updates a July plan to turn two mutual funds into ETFs

Zacks Trust has filed a third amendment to its plan to turn two mutual funds into exchange-traded funds on or about Nov. 20. The original registration was filed on July 23, and shareholders are not being asked to vote.

This version, Pre-Effective Amendment No. 3, was filed with the Securities and Exchange Commission on Oct. 19. The SEC has not declared the registration effective, so the funds have not converted, and Nov. 20 is the date the trust expects for the conversion.

The funds are the Zacks All-Cap Core Fund, institutional shares CZOVX, and the Zacks Small-Cap Core Fund, institutional shares ZSCIX and investor shares ZSCCX. They would become the Zacks All-Cap Core ETF, ALLZ, and the Zacks Small-Cap Core ETF, ZCAP.

What would change for a holder

Each mutual fund would transfer its assets and liabilities to the matching ETF and take ETF shares in return. Those shares would go to holders, and only after that distribution would the mutual fund be liquidated.

The information statement says swapping the mutual fund shares for ETF shares is expected to be tax-free for U.S. holders. Cash paid in place of a fractional share would generally be taxable.

Holders would then buy and sell on Cboe BZX Exchange at the market price, through a broker that may charge a commission. They would no longer redeem with the fund for cash at the day's net asset value. The market price can sit above or below that value, and a trade can also cost the difference between what a buyer is bidding and what a seller is asking.

The filing's fee comparison shows a 2% charge on institutional shares redeemed within 30 days of purchase, and none on the proposed ETFs. The conversion itself would carry no sales load.

The cover says no action is required to effect the reorganization, and holders are not being asked for a proxy. A direct holder, who owns the shares with the fund rather than in a brokerage account, gets a separate instruction.

The shareholder letter says to transfer those shares to a broker or to redeem them, and to call 888-453-4003. It says that doing neither means the shares will be redeemed at net asset value right after the conversion. The information statement also says that, without a brokerage account, the ETF shares would be held by the transfer agent, Brown Brothers Harriman & Co., awaiting instructions.

Holders can still buy and redeem the mutual fund shares in the ordinary way through the last business day before the conversion.

Fees would fall before the waiver and after it

Zacks Investment Management, the adviser, recommended the conversions, and the trust's board approved them. The information statement's reason is cost.

Both the mutual funds and the proposed ETFs are shown with a fee waiver. The ETF columns are the filing's estimate of the new funds, not fees already being charged.

Management fees would fall from 0.80% on the all-cap fund and 0.90% on the small-cap fund to 0.44% on each ETF. After the waiver, the all-cap fund would go from 1.01% to 0.56%, a cut of 0.45 percentage points. The small-cap institutional class would go from 1.15% to 0.55%, a cut of 0.60 percentage points, and the investor class from 1.40% to 0.55%, a cut of 0.85 percentage points.

The investor class is the one that pays a 0.25% distribution fee. The proposed ETFs' table shows none, though the filing describes a plan that would let the board authorize up to 0.25% a year.

An Oct. 8 version of this registration had the all-cap ETF at a net 0.55% after a 0.45% waiver. This amendment puts that net at 0.56% after a 0.34% waiver, with the expenses before the waiver unchanged at 0.90%. The small-cap ETF's net stayed at 0.55%.

The proposed nets sit next to what Zacks already charges on ETFs it runs today. The Zacks Small/Mid Cap ETF, CSMIZ, had a net expense ratio of 0.55% as of Sept. 30, against a 0.60% gross ratio. The Zacks Earnings Consistent Portfolio ETF, AZECP, charged 0.55%, with no gap between net and gross, as of the same date.

ZCAP would match that 0.55% net. ALLZ would be 0.01 percentage point higher.

The filing says the objectives and strategies would carry over, and the same portfolio-management team is expected to stay. Mitch Zacks, president of the trust, manages both mutual funds.

The all-cap fund seeks capital appreciation first and dividend income second. The small-cap fund invests at least 80% of its net assets in small-cap stocks, using the Russell 2000 Index's size range when it buys.

A holder who stays would keep that portfolio, in a share that trades through the day at the lower fee in the table.