Vest U.S. Large Cap 10% Buffer Strategies Fund

Options are unique investment tools that seek to provide a level of certainty, which is not possible with conventional investments. That’s because options have contractual features that provide a formulaic payment based on the performance of a reference financial asset, such as an index. The payment for options is dependent on the performance of the reference index being above or below a predetermined price (strike price) on a specific date in the future (exercise date).

There are two types of options: call options and put options.

A call option on an index gives the buyer the right to the upside of the index relative to a preset strike price on a specific expiry date in the future in exchange for an upfront payment (premium). The call option buyer pays the premium up front and acquires the right to the index’s price appreciation above the strike price. The call option seller, on the other hand, gives up the right to the index’s future price appreciation above the strike price in exchange for upfront premium income. The value of the payment delivered is proportional to the magnitude by which the index price is above the strike price. Effectively, call options allow investors to trade in the potential future upside of an index.

A put option on an index gives the option buyer the right to profit from the decline of the index relative to a preset strike price on a specific future date, in exchange for an upfront premium payment. A put option buyer pays an upfront premium in exchange for the right to profit from the index’s decline below the strike price. A put option seller, on the other hand gives up the right to profit from the index’s decline below the strike price in exchange for upfront premium income. Effectively, put options allow investors to trade in the potential future downside of an index.

The Buffer Strategy utilizes a combination of call and put options with an expiry of approximately one year overlaid on an exposure to the index or ETF. The overlay strategy has two components:

• Buffer component: The strategy includes buying a put spread on the index or ETF – a combination of buying a put option on the index or ETF with a strike price that is close to the level of the index or ETF, and selling a put option on the index or ETF with a strike price that is approximately 10% lower than the level of the index or ETF. The strategy must pay an upfront premium in exchange for the right to profit from the index’s decline between the level of the index or ETF and approximately 10% lower than the level of the index or ETF. This potential profit from the options overlay offsets the losses from the existing exposure to the index or ETF and is what creates the buffer range of the Buffer Strategy.
• Capped component: The strategy sells call options on the index or ETF to give up the right to the index or ETF’s future price appreciation above the strike price, in exchange for upfront premium income. This is what creates the capped return range of the Buffer Strategy. The strike price of the call options sold (and as a result the cap level) is set such that the premium paid for the buffer component of the strategy equals the premium collected for the capped component of the strategy.

Some structured notes and variable annuities provide targeted outcomes like the Buffer Strategy but may come with unique risks, including concentrated credit risks, lack of transparency and lack of liquidity. The Fund offers access to the Buffer Strategy in a potentially more transparent, more liquid and more familiar investment vehicle of a mutual fund. In addition, investing in a Buffer Strategy with a single maturity as is commonly done in structured notes or annuities comes with acute timing risks. The Fund follows a laddered portfolio approach, in an attempt to manage these timing risks.

The Buffer Strategy is designed for bear, range-bound or modest bull market environments. While the strategy may outperform the index or ETF in a bear market, it may still suffer absolute levels of loss. With the utilization of a laddered portfolio of Buffer Strategies, the Fund seeks to smooth market fluctuations.

While the strategy may outperform the index or ETF in a bear market, it may still suffer absolute levels of loss. The strategy may deliver capped returns during strong bull markets and as a result underperform relative to the index or ETF.

The Fund is designed to cushion against (or “buffer”) equity losses in down markets, while taking advantage of growth opportunities in up markets. It can fit in two places in an investor’s portfolio:

• Low Risk/Hedged Equity: A common way to reduce downside risk is to reduce allocation to equities; however, this creates the risk of missing out on potential upside. The Fund offers an alternative approach that seeks to deliver some benefits of upside from equities with reduced downside risk, allowing investors to stay persistently invested.
• Alternatives: The Fund’s risk/return characteristics provide lower downside risks through capping some upside, similar to alternative investments such as hedged funds. As a result, the Fund may be used as a potentially cost-competitive replacement to hedge funds.

Investing in a single Buffer Strategy with a one-year duration creates timing risk. A single Buffer Strategy would lock investors into one specific cap and buffer level for the entire year. This would prevent them from capitalizing on new upside cap or buffer levels over the course of the year. Moreover, it would expose investors to potentially greater losses and could limit upside participation when the index or ETF is far above the buffer range within the year.

As an example, if a fund invested in one single Buffer Strategy with a one-year duration, and the index or ETF appreciated close to the cap after the first six months:

• The entire investment would be at risk of losses from a drop in the levels of the index or ETF back to its starting value in the subsequent six months before the buffer would kick in, and
• The entire investment would be capped out and unable to participate in any future upside.

A laddered portfolio of Buffer Strategies seeks to manage timing risk and smooth market fluctuations.

The Fund invests in a laddered portfolio of 12 Buffer Strategies with maturities varying from one to 12 months. Each month, a Buffer Strategy matures and is rolled forward for another 12 months. This allows the buffer and cap levels to reset and stay current to the prevailing market conditions for a portion of the Fund’s investment, which can be an advantage in a rising or falling market environment.

In contrast, investing in a Buffer Strategy with a single maturity comes with acute timing risks. To learn more about these timing risks, see “Why doesn’t the Fund invest in one single Buffer Strategy, as is common with structured notes and annuities?”

The buffers and upside caps are set for each Buffer Strategy on the third Wednesday of each month. In the laddered portfolio, on the third Wednesday of each month, a maturing Buffer Strategy rolls off, and the proceeds are reinvested in a new Buffer Strategy with a maturity that extends to the third Wednesday of the month the following year. The buffer and upside caps set on such a day depend on the prices for the put and call options on that day, such that the premium to be paid for the 10% buffer is offset by the premium received from the opportunity cost of the capped upside.

The Fund’s distributions, if any, will be taxed as ordinary income or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account, in which case withdrawals will be taxed. Investors are urged to consult their own tax advisors to determine the tax consequences to them of investing in the Fund. To the extent consistent with the primary objectives and other strategies of the Fund, the Advisor intends to minimize taxes by harvesting capital losses to minimize current year capital gains. There is no assurance the Advisor can implement this tax strategy to reduce the tax burden for the shareholders.

The above material is not intended to be tax advice. The above tax consequences may vary by individual tax payer. Please consult your tax professional or financial advisor for more information regarding your specific situation.