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GARD – Fund Strategy

Reality Shares DIVCON Dividend Guard ETF

Investment Objective Fund Strategy Fund Characteristics Fund Risks
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Fund Strategy

The Fund seeks to reduce the impact of declining markets on Fund performance by dynamically adjusting its market exposure based on the strength of the market as determined by Reality Shares’ Guard Indicator, a quantitative tool that gauges market strength by comparing technical trends in market price and volatility to historical averages. When the Guard Indicator signals a strong market, the Fund invests 100% of its portfolio in the large-cap U.S. companies with the highest probability of increasing their dividends within a year, based on their DIVCON dividend health scores. When the Guard Indicator signals a weak market, that long stock weight is reduced to 50%, and the remaining 50% of the portfolio is allocated to a short stock position in the large-cap U.S. companies with the highest probability of cutting their dividends within a year.

The Fund’s Benchmark Index is designed to capitalize on the theory that, over time, companies that consistently grow their dividends tend to have investment returns above the overall market and companies that cut their dividends tend to have investment returns below the overall market. The Benchmark Index is designed to select the companies for a long position that have the highest probability of increasing their dividend in a 12-month period and select the companies for a short position that have the highest probability of decreasing their dividend in a 12-month period. These probabilities are determined by Reality Shares’ DIVCON Scoring system, which is a proprietary, rules-based scoring and weighting methodology, and are expressed as a DIVCON Score and DIVCON Rating for each company.

The DIVCON Scoring system begins by identifying the 500 largest U.S. companies based on market capitalization as of the Benchmark Index reconstitution date and then narrows this universe to those companies that paid an ordinary dividend and announced a future dividend payment during the 12 months preceding such date. The DIVCON Scoring system analyzes quantitative factors that Reality Shares has determined to be correlated to a company’s likelihood to increase or decrease future dividends, and weights each factor based on its effectiveness in predicting dividend changes to produce a company’s DIVCON Score. After a DIVCON Score is calculated for each company, it is assigned a rating from 1 to 5 according to the DIVCON Rating system. Companies in the DIVCON 1 category are those determined most likely to decrease their dividend in the next twelve months. Companies in the DIVCON 5 category are those determined most likely to increase their dividend in the next twelve months.

The Benchmark Index uses a proprietary, rules-based methodology to direct its exposure to two possible positions: (i) 100% exposure to a Long Portfolio or (ii) 50% exposure to a Long Portfolio and 50% exposure to a Short Portfolio. The Long Portfolio consists of all DIVCON 5 stocks or the 30 stocks with the highest DIVCON Scores, whichever is greater. All stocks in the Long Portfolio are reflected as long positions in such stocks. The value of the Long Portfolio reflected in the Benchmark Index is expected to increase if the prices of stocks included in the Long Portfolio increase. The Short Portfolio consists of all DIVCON 1 stocks or the 10 stocks with the lowest DIVCON Scores, whichever is greater. All stocks in the Short Portfolio are reflected as short positions in such stocks. The value of the Short Portfolio reflected in the Benchmark Index is expected to increase if the prices of stocks included in the Short Portfolio decrease. Companies are weighted in each Portfolio based on their DIVCON Scores. Companies with higher DIVCON Scores are weighted more heavily in the Long Portfolio, and companies with lower DIVCON Scores are weighted more heavily in the Short Portfolio.

Whether the Benchmark Index directs 100% exposure to the Long Portfolio or 50% exposure to the Long Portfolio and 50% exposure to the Short Portfolio depends on whether its proprietary Guard Indicator is triggered. The Guard Indicator is a measure of overall market strength and momentum, which is determined by calculating the strength of each of the 10 sectors represented in the Benchmark Index. The strength of each sector is measured by calculating the relationship between short-term and long-term trends in both market price and volatility for that sector. The strength of each sector is measured as of the close of trading on the New York Stock Exchange each day (typically 4:00 p.m. Eastern time). If 8 or more sectors indicate strength, then effective the next business day, the exposure of the Benchmark Index will be 100% to the Long Portfolio. If 7 or fewer sectors indicate strength, then the Guard Indicator is triggered, and effective the next business day, the Benchmark Index directs 50% exposure to the Long Portfolio and 50% exposure to the Short Portfolio. Once the Guard Indicator is triggered, the Benchmark Index will continue to be exposed 50% to the Long Portfolio and 50% to the Short Portfolio until the next business day that 8 or more sectors indicate strength. Effective the following business day, the exposure of the Benchmark Index will be 100% to the Long Portfolio.

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