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Net
realized and unrealized gain (loss) on investments, futures contracts, and options contracts(c)
(14.92)
28.89
Total
from investment operations
(15.06)
28.90
LESS
DISTRIBUTIONS FROM:
Net
investment income
(3.13)
—
Total
distributions
(3.13)
—
Net
asset value, end of period
$25.71
$43.90
Total
return at net asset value(d)
−36.05%
192.66%
Total
return at market value(d)
−36.11%
192.67%
SUPPLEMENTAL
DATA AND RATIOS:
Ratio
of expenses to average net assets
1.85%
1.85%
Ratio
of net investment income (loss) to average net assets(e)
(0.72)%
0.09%
Portfolio
turnover rate(d)
0%
0%
(a)
Inception date of
the Fund was June 26, 2023.
(b)
Net investment income
per share has been calculated based on average shares outstanding during the period.
(c)
Realized and unrealized
gains and losses per share in the caption are balancing amounts necessary to reconcile the change in net asset value per share for the
years, and may not reconcile with the aggregate gains and losses in the Statement of Operations due to share transactions for the year.
(d)
Not annualized.
(e)
Annualized.
The
accompanying notes are an integral part of these financial statements.
Net
realized and unrealized loss on investments and futures contracts(c)
(9.42)
Total
from investment operations
(9.42)
LESS
DISTRIBUTIONS FROM:
Net
investment income
(0.01)
Total
distributions
(0.01)
Net
asset value, end of period
$5.57
Total
return at net asset value(d)
−63.28%
Total
return at market value(d)
−63.3%
SUPPLEMENTAL
DATA AND RATIOS:
Ratio
of expenses to average net assets:
Before
expense reimbursement/recoupment(e)
1.85%
After
expense reimbursement/recoupment(e)
0.94%
Ratio
of net investment income to average net assets(e)
0.09%
Portfolio
turnover rate(d)
0%
(a)
Inception date of
the Fund was June 3, 2024.
(b)
Net investment income
per share has been calculated based on average shares outstanding during the period.
(c)
Realized and unrealized
gains and losses per share in the caption are balancing amounts necessary to reconcile the change in net asset value per share for the
years, and may not reconcile with the aggregate gains and losses in the Statement of Operations due to share transactions for the year.
(d)
Not annualized.
(e)
Annualized.
The
accompanying notes are an integral part of these financial statements.
The
Volatility Shares ETF Trust (the “Trust”) is a Delaware statutory trust formed on August 20, 2021 and is registered with
the Securities and Exchange Commission (“SEC”) as an open-end management investment company under the Investment Company Act of 1940,
as amended (the “1940 Act”). The Trust is a registered investment company that has two separate series (each, a “Fund”
and together the “Funds:
-1x
Short VIX Mid-Term Futures Strategy ETF (Consolidated)
2x
Bitcoin Strategy ETF (Consolidated)
2x
Ether ETF (Consolidated)
The
Trust has evaluated the structure, objective and activities of the Funds and determined that they meet the characteristics of an investment
company. As such, these financial statements have applied the guidance as set forth in the Accounting Standards Codifications (“ASC”)
946, Financial Services-Investment Companies.
Volatility
Shares LLC, (“Volatility”) a Delaware limited liability company, serves as the Trust’s adviser pursuant to an investment
management agreement (the “Investment Advisory Agreement”) and is registered with the U.S. Securities and Exchange Commission.
The Adviser was formed for the purpose of sponsoring volatility-linked exchange-traded funds.
The
-1x Short VIX Mid-Term Futures Strategy ETF (Consolidated) or (“ZIVB”) is an actively managed exchange-traded fund (“ETF”)
that seeks daily investment results, before fees and expenses, that correspond to 1x the return of the S&P 500 VIX Mid-Term Futures
Inverse Daily Index (the “ZIVB Index”) for a single day, not for any other period. ZIVB seeks to achieve its investment
objective by investing its assets in futures contracts based on the Chicago Board Options Exchange, Incorporated (“CBOE”)
Volatility Index (the “VIX”) (“VIX Futures Contracts”), that comprise the ZIVB Index and other “Financial
Instruments” (as defined below). The Fund will invest in VIX Futures Contracts via a wholly owned subsidiary of the Fund organized
under the laws of the Cayman Islands (the “Subsidiary”). Under normal market conditions, the Subsidiary’s portfolio
will comprise short positions on fourth-, fifth-, sixth- and seventh month VIX Futures Contracts that comprise the Index.
The
2x Bitcoin Strategy ETF (Consolidated) or (“BITX”) is an actively managed ETF that seeks daily investment results, before
fees and expenses, that correspond to two times (2x) the return of bitcoin for a single day, not for any other period. BITX seeks
to achieve its investment objective by investing its assets principally in cash settled bitcoin futures contracts that trade only on an
exchange registered with the Commodity Futures Trading Commission, which currently is the Chicago Mercantile Exchange (“CME”)
(“Bitcoin Futures Contracts”), and cash, cash-like instruments or high-quality securities that serve as collateral to the
Fund’s investments in Bitcoin Futures Contracts (“Collateral Investments”). The Fund also may invest in: reverse repurchase
agreement transactions; shares of other investment companies registered under the Investment Company Act of 1940 (the “1940 Act”)
that invest in similar securities and assets to those in which the Fund may invest. (“Other Investment Companies”); exchange
traded options on Other Investment Companies; shares of other Bitcoin-linked exchange traded investment products not registered under
the 1940 Act (“Bitcoin-Linked ETPs”); and swap agreement transactions that reference Other Investment Companies, bitcoin,
Bitcoin-Linked ETPs, Bitcoin Futures Contracts, or bitcoin-related indexes. The Fund does not invest directly in bitcoin. Instead, the
Fund seeks to benefit from increases in the price of Bitcoin Futures Contracts for a single day.
The
2x Ether ETF (Consolidated) or (“ETHU”) is an actively managed ETF that seeks daily investment results, before fees and expenses,
that correspond to two times (2x) the return of ether for a single day, not for any other period. ETHU seeks to achieve its investment
objective by investing its assets principally in cash-settled ether futures contracts that trade only on an exchange registered with the
Commodity Futures Trading Commission, which currently is the Chicago Mercantile Exchange (“CME) (“Ether Futures Contracts”),
and cash, cash-like instruments or high-quality securities that serve as collateral to the Fund’s investments in Ether Futures Contracts
(“Collateral Investments”). The Fund also may invest in: reverse repurchase agreement transactions; shares of other investment
companies registered under the Investment Company Act of 1940 (the “1940 Act”) that invest in similar securities and assets
to those in which the Fund may invest. (“Other Investment Companies”); exchange traded options on Other Investment Companies;
and swap agreement transactions that reference Other Investment Companies, ether, Ether Futures Contracts, or ether-related indexes (together
with Ether Futures Contracts, “Ether-Linked Investments”). The Fund does not invest directly in ether. Instead, the Fund seeks
to benefit from increases in the price of Ether Futures Contracts, or ether-related indexes (together with Ether Futures Contracts, “Ether-Linked
Investments”).
The
following is a summary of significant accounting policies consistently followed by the Funds in the preparation of their financial statements.
These policies are in conformity with U.S. generally accepted accounting principles (“GAAP”).
(a)
Investment
Valuation – The Net Asset Value (“NAV”) per share of each Fund is determined daily, as of the close of regular
trading on the NYSE Arca (normally at 4:00 p.m. Eastern time (“Valuation Time”)), each day the NYSE is open for
business. A security listed or traded on an exchange, domestic or foreign, is valued at its last sales price on the principal exchange
on which it is traded prior to the time when assets are valued. If no sale is reported at that time, the mean of the last bid and asked
prices is used. Securities primarily traded on the NASDAQR Global Market (“NASDAQ”) for which market quotations are readily
available are valued using the NASDAQR Official Closing Price (“NOCP”) provided by NASDAQ each business day. Over the
counter (“OTC”) securities held by a Fund are valued at the last sales price or, if no sales price is reported, the mean of
the last bid and asked price is used. The portfolio securities of a Fund that are listed on national exchanges are valued at the last
sales price of such securities or if no sales price is reported, the mean of the last bid and asked price is used. Swap contracts are
valued using the closing price of the underlying reference entity or the closing value of the underlying reference index. The Funds valued
their investments in money market funds based on their daily net asset values. If the settlement price established by the exchange reflects
trading after the Valuation Time, then the last sales price prior to Valuation Time will be used. Securities and swap contracts are fair
valued as determined by the Volatility under the supervision of the Board of Trustees (the “Board”) in the following scenarios:
a) reliable market quotations are not readily available; b) the Funds’ pricing service does not provide a valuation for such securities;
c) the Funds’ pricing service provides a valuation that in the judgment of the Volatility does not represent fair value; or d) the
Fund or Volatility believes the market price is stale.
Short-term
investments are valued at amortized cost which approximates fair value for daily NAV purposes. For financial reporting purposes, short-term
investments are valued at their market price using information provided by a third-party pricing service or market quotations. In each
of these situations, valuations are typically categorized as Level I in the fair value hierarchy.
The
Funds’ investments will be valued daily at market value or, in the absence of market value with respect to any investment, at fair
value in accordance with valuation procedures adopted by the Board and in accordance with the 1940 Act. Market value prices represent
last sale or official closing prices from a national or foreign exchange (i.e., a regulated market) and are primarily obtained from third-party
pricing services.
Futures
contracts shall be valued by using readily available market quotations provided by a Pricing Service. Futures contracts are generally
valued at the last reported settlement price on the exchange or OTC market on which they principally trade. If the settlement price is
not available, then futures contracts shall be valued at the last traded price. Options traded on an exchange are generally valued at
the last reported settlement price on the exchange or OTC market on which they principally trade. If the settlement price is not available,
then options shall be valued at the mean price. Derivatives valued in Foreign currencies shall be translated to U.S. dollars using current
exchange rates provided by a Pricing Service. Prices for other derivatives for which no exchange price is available will be provided by
a Pricing Service, a Valuation Vendor or a broker quote.
In
certain circumstances (e.g., if the Sponsor believes market quotations do not accurately reflect the fair value of a Fund’s investment,
or a trading halt closes an exchange or market early), the Sponsor may, in its sole discretion, choose to determine a fair value price
as the basis for determining the market value of such investment for such day. Such fair value prices would generally be determined
based on available inputs about the current value of the underlying VIX futures contract and would be based on principles that the
Sponsor deems fair and equitable.
The
Funds may use a variety of money market instruments. Money market instruments generally will be valued using market prices or at amortized
cost.
Fair
value pricing may require subjective determinations about the value of an investment. While the Funds’ policies are intended to
result in a calculation of its respective Fund’s NAV that fairly reflects investment
values
as of the time of pricing, such Fund cannot ensure that fair values determined by the Sponsor or persons acting at their direction would
accurately reflect the price that a Fund could obtain for an investment if it were to dispose of that investment as of the time of pricing
(for instance, in a forced or distressed sale). The prices used by such Fund may differ from the value that would be realized if the investments
were sold, and the differences could be material to the financial statements.
(b)
Futures Contracts –
Each Fund may purchase and sell futures contracts. A Fund may use futures contracts to gain exposure to, or hedge against, changes in
the values of commodities, equities, interest rates or foreign currencies. Upon entering into a contract, the Fund deposits and maintains
as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund
agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or
payments are known as “variation margin” and are recorded by the Fund as unrealized gains and losses. When the contract is
closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and
the value at the time it was closed. As collateral for futures contracts, the Fund is required under the 1940 Act to maintain assets consisting
of cash, cash equivalents or liquid securities. This collateral is required to be adjusted daily to reflect the market value of the purchase
obligation for long futures contracts or the market value of the instrument underlying the contract, but not less than the market price
at which the futures contract was established, for short futures contracts. The Funds were invested in futures contracts as of the period
ended August 31, 2024.
(c)
Risks of Futures
Contracts, Options on Futures Contracts and Short Positions – The risks inherent in the use of options, futures contracts,
options on futures contracts and short positions include 1) adverse changes in the fair value of such instruments; 2) imperfect correlation
between the price of options and futures contracts and options thereon and movements in the price of the underlying securities, index
or futures contracts; 3) the possible absence of a liquid secondary market for any particular instrument at any time; 4) the possible
need to defer closing out certain positions to avoid adverse tax consequences; and 5) the possible non-performance by the counterparty
under the terms of the contract. The Funds designate cash, cash equivalents and liquid securities as collateral for written options, futures
contracts, options on futures contracts and short positions. The Funds were not invested in any type of options during the period ended
August 31, 2024.
(d)
Risks of Investing
in Foreign Securities – Investments in foreign securities involve greater risks than investing in domestic securities.
As a result, the Funds’ returns and net asset values may be affected to a large degree by fluctuations in currency exchange rates,
political, diplomatic, or economic conditions and regulatory requirements in other countries. The laws, accounting and financial reporting
standards in foreign countries may require less disclosure than required in the U.S., and therefore there may be less public information
available about foreign companies. Investments in foreign emerging markets present a greater risk than investing in foreign issuers in
general. The risk of political or social upheaval is greater in emerging markets. In addition, there may be risks of an economy’s
dependence on revenues from particular commodities, currency transfer restrictions, a limited number of potential buyers for such securities
and delays and disruption in securities settlement procedures.
(e)
Foreign Currency
Translation – The accounting records of the Funds are maintained in U.S. dollars. The fair value of foreign securities,
currency holdings, and other assets and liabilities is recorded in the books and records of the Funds after translation to U.S. dollars
based on the exchange rates on that day. The cost of each security is determined using historical exchange rates. Income and withholding
taxes are translated at prevailing exchange rates when earned or incurred. The Funds do not isolate that portion of realized or unrealized
gains or losses resulting from changes in the foreign exchange rate on investments from fluctuations arising from changes in the market
prices of the securities. Such gains and losses are included with the net realized and unrealized gain or loss on investments. Net realized
gains and losses on foreign currency transactions represent net realized exchange gains or losses on disposition of foreign currencies,
currency gains and losses realized between the trade and settlement dates on securities transactions and the difference between the amount
of investment income and foreign withholding taxes recorded on the Fund’s books and the U.S. dollar equivalent amounts actually
received or paid. Net unrealized appreciation and depreciation of assets and liabilities in foreign currencies arise from changes in the
value of assets and liabilities other than investments at the period end, resulting from changes in the exchange rate.
Basis for
Consolidation – The -1x Short VIX Mid-Term Futures ETF Cayman Ltd, 2x Bitcoin Strategy ETF Cayman Ltd., and 2x
Ether ETF Cayman Ltd., which is organized under the laws of the Cayman Islands, are wholly owned, and controlled by the -1x Short VIX
Mid-Term Futures Strategy ETF (Consolidated), the 2x Bitcoin Strategy ETF (Consolidated), and the 2x Ether ETF (Consolidated). The -1x
Short VIX Mid Term Futures ETF Cayman Ltd, 2x Bitcoin Strategy ETF Cayman Ltd., and 2x Ether ETF Cayman Ltd., acts as an investment
vehicle to facilitate entering into certain investments for the -1x Short VIX Mid-Term Futures Strategy ETF (Consolidated), the 2x
Bitcoin Strategy ETF (Consolidated), and the 2x Ether ETF (Consolidated) consistent with the Fund’s investment objectives and policies
specified in its prospectus and statement of additional information and within the limitation of the U.S. federal tax requirements
applicable to regulated investment companies. As of August 31, 2024, the net assets of the -1x Short VIX Mid-Term Futures Strategy
ETF (Consolidated), the 2x Bitcoin Strategy ETF (Consolidated), and the 2x Ether ETF (Consolidated) were $11,152,755, $1,444,200,839,
and $106,571,505, of which $2,363,390, $761,994,759, and $62,381,110, or approximately 21%, 53%, and 59% respectively, represented the
-1x Short VIX Mid-Term Futures Strategy ETF (Consolidated), 2x Bitcoin Strategy ETF (Consolidated), and 2x Ether ETF (Consolidated)
ownership of all issued shares and voting rights of the -1x Short VIX Mid Term Futures ETF Cayman Ltd, 2x Bitcoin Strategy ETF Cayman
Ltd, and 2x Ether ETF Cayman Ltd. All intercompany balances, revenues and expenses have been eliminated in consolidation.
(g)
Risks of Investing
Commodity-Linked Derivatives – The -1x Short VIX Mid-Term Futures Strategy ETF (Consolidated), the 2x Bitcoin Strategy
ETF (Consolidated), 2x Ether ETF (Consolidated) through its investment in its respective subsidiary, may hold commodity-linked derivatives.
Commodity-linked derivatives provide exposure, which may include long and/or short exposure, to the investment returns of physical commodities
that trade in the commodities markets without investing directly in physical commodities. The value of a commodity-linked derivative investment
typically is based upon the price movements of a physical commodity (such as heating oil, precious metals, livestock, or agricultural
products), a commodity futures contract or commodity index, or some other readily measurable economic variable. The value of commodity-linked
derivative instruments may be affected by changes in overall market movements, volatility of the underlying benchmark, changes in interest
rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs,
and international economic, political, and regulatory developments. The value of commodity-linked derivatives will rise or fall in response
to changes in the underlying commodity or related index. Investments in commodity-linked derivatives may be subject to greater volatility
than non-derivative based investments. A highly liquid secondary market may not exist for certain commodity-linked derivatives, and there
can be no assurance that one will develop. The -1x Short VIX Mid-Term Futures Strategy ETF (Consolidated), the 2x Bitcoin Strategy
ETF (Consolidated), and the 2x Ether ETF (Consolidated) held commodity-linked derivatives during the period ended August 31, 2024.
(h)
Security Transactions
– Investment transactions are recorded on the trade date. The Funds determine the gain or loss realized from investment transactions
by comparing the identified cost, which is the same basis used for U.S. Federal income tax purposes, with the net sales proceeds.
Investment
transactions are recorded on the trade date. All such transactions are recorded on the identified cost basis and marked to market daily.
Unrealized appreciation (depreciation) on open contracts is reflected in the Statements of Financial Condition and changes in the unrealized
appreciation (depreciation) between periods are reflected in the Statements of Operations.
Interest
income is recognized on an accrual basis and includes, where applicable, the amortization of premium or discount, and is reflected as
Interest Income in the Statement of Operations.
(i)
Federal Income
Taxes – Each Fund intends to make the requisite distributions of income and capital gains to comply with the requirements
of Subchapter M of the Internal Revenue Code of 1986, as amended, necessary to qualify as a regulated investment company. Therefore, no
provision for U.S. Federal income tax has been made by the Funds. The Funds may be subject to a nondeductible 4% U.S. excise
tax calculated as a percentage of certain undistributed amounts of net investment income and net capital gains. No Funds paid this excise
tax during the period ended August 31, 2024.
Income and
Expenses – Interest income, including amortization of premiums and discounts, is recognized on an accrual basis. Distributions
are recorded on the ex-dividend date. The Funds are charged for those expenses that are directly attributable to each series, such as
advisory fees. Expenses that are not directly attributable to a series are generally allocated among the Trust’s series in proportion
to their respective average daily net assets. Expenses are charged to the Funds daily. Expenses are computed based on each Fund’s
respective average daily net assets. For additional discussion on expenses, refer to Note 6.
(k)
Distributions
to Shareholders – Each Fund pays dividends from net investment income and distributes net realized capital gains, if
any, at least annually. Income and capital gain distributions are determined in accordance with U.S. Federal income tax regulations,
which may differ from GAAP. Certain Funds also utilize earnings and profits distributed to shareholders on redemptions of shares
as part of the dividends paid deduction. Distributions to shareholders are recorded on the ex-dividend date.
(l)
Guarantees
and Indemnifications – In the ordinary course of business, the Funds enter into contracts that contain a variety of
indemnification provisions pursuant to which the Funds agree to indemnify third parties upon the occurrence of specified events. The Funds’
maximum exposure relating to these indemnification agreements is unknown. However, the Funds have not had prior claims or losses in connection
with these provisions and believe the risk of loss is remote.
(m)
Use of Estimates –
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The
preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
In
the normal course of business, the Trust enters into contracts that contain a variety of representations which provide general indemnifications.
The Trust’s maximum exposure under these arrangements cannot be known; however, the Trust expects any risk of loss to be remote.
3.
INCOME TAX AND DISTRIBUTION INFORMATION
At
February 29, 2024, the components of accumulated earnings (losses) on a tax basis were as follows:
1x Short VIX
Mid-Term
Futures ETF
2x Bitcoin
Strategy
ETF
2x Ether
ETF(a)
Tax
cost
$3,926,077
$419,970,691
$ —
Gross
unrealized appreciation
$—
$—
$—
Gross
unrealized depreciation
—
—
—
Net
unrealized appreciation
—
—
—
Undistributed
ordinary income
877,608
278,010,794
—
Undistributed
long-term capital gain
—
—
—
Distributable
earnings
877,608
278,010,794
—
Other
accumulated losses
—
—
—
Total
distributable earnings
$877,608
$278,010,794
$—
(a)
Inception date of the Fund was June 3, 2024.
To
the extent the Funds realize future net capital gains, taxable distributions will be reduced by any unused capital loss carryforwards
as permitted by the Internal Revenue Code. At February 29, 2024, the Funds did not have any capital loss carryforwards nor did they
defer any post-October losses.
The
Fund’s distributions are generally taxable. Ordinary income distributions are generally taxed at your ordinary tax rate; however,
certain ordinary income distributions received from the Fund may be taxed at the capital gains tax rates. In addition, the Fund may make
distributions that represent a return of capital for tax purposes and will generally not be taxable to the shareholder.
The
Funds also expect to gain exposure to select indexes by investing a portion of their respective assets in wholly owned subsidiaries of
the Funds. In order to qualify as a regulated investment company for purposes of federal income tax treatment under the Internal Revenue
Code of 1986, each Fund will have to reduce its exposure to its Subsidiary on or around the end of each Funds’ fiscal quarter ends.
Distributions
made by the Funds will generally be taxable as ordinary income, returns of capital, or capital gains. A sale of Shares may result in capital
gain or loss.
Furthermore,
both Funds seek to achieve their intended exposure to selected indexes by investing a portion of their net assets in their own respective
subsidiary of the Fund, organized under the laws of the Cayman Islands.
The
tax character of distributions paid during the period ended August 31, 2024, are presented in the following table. The tax character
of distributions to shareholders made during the periods may differ from their ultimate characterization for U.S. Federal income
tax purposes.
Period Ended
August 31,
2024
Distributions
Paid From:
Ordinary
Income
Long Term
Capital
Gains
Return of
Capital
-1x
Short VIX Mid-Term Futures Strategy ETF (Consolidated)(1)
$906,950
$ —
$ —
2x
Bitcoin Strategy ETF (Consolidated)(2)
139,273,953
—
—
2x
Ether ETF (Consolidated)(3)
170,096
—
—
Period Ended
February
29, 2024
Distributions
Paid From:
Ordinary
Income
Long Term
Capital
Gains
Return of
Capital
-1x
Short VIX Mid-Term Futures Strategy ETF (Consolidated)(1)
$ 221,043
$ —
$ —
2x
Bitcoin Strategy ETF (Consolidated)(2)
—
—
—
(1)
Commenced operations
April 19, 2023.
(2)
Commenced operations
June 27, 2023.
(3)
Commenced operations
June 4, 2024.
The
Funds follow authoritative financial reporting rules regarding recognition and measurement of tax positions taken or expected to be taken
on a tax return. Management has reviewed all open tax years and concluded that there is no effect to the Funds’ financial positions
or results of operations and no tax liability was required to be recorded resulting from unrecognized tax benefits relating to uncertain
income tax position taken or expected to be taken on a tax return. The Funds recognize interest and penalties, if any, related to unrecognized
tax benefits as income tax expense in the Statements of Operations. During this period, the Funds did not incur any interest or penalties.
Open tax years are those years that are open for examination by the relevant income taxing authority. As of August 31,
2024, open U.S. Federal and state income tax years include the tax year ended August 31, 2024. The Funds have no examinations
in progress. The Funds are also not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized
tax expense will significantly change in the next twelve months.
4.
CREATION AND REDEMPTION TRANSACTIONS AND TRANSACTION FEES
Each
Fund issues and redeems shares on a continuous basis at NAV only in large blocks of shares called “Creation Units.” The number
of shares in a Creation Unit for each respective Fund is as follows:
Number of
shares
per creation
Unit
-1x
Short VIX Mid-Term Futures Strategy ETF (Consolidated)
10,000
shares
2x
Bitcoin Strategy ETF (Consolidated)
10,000
shares
2x
Ether ETF (Consolidated)
10,000
shares
Creation
Units of the Funds are issued and redeemed in cash and/or in-kind for securities included in the relevant underlying index. Investors
such as market makers, large investors and institutions who wish to deal in Creation Units directly with a Fund must have entered
into an authorized participant agreement with the principal underwriter and the transfer agent, or purchase through a dealer that has
entered into such an agreement. Transactions in shares for each Fund include both cash and in-kind transactions and are disclosed in detail
in the Statements of Changes in Net Assets.
Transaction
fees are imposed to cover the costs associated with the issuance and redemption of Creation Units. There is a fixed and a variable component
to the total transaction fee. A fixed transaction fee is paid to the transfer agent and is applicable to each creation or redemption transaction,
regardless of the number of Creation Units purchased or redeemed. In addition, a variable transaction fee equal to a percentage of
the value of each Creation Unit purchased or redeemed is applicable to each creation or redemption transaction and is paid to the Fund.
Not all Funds will have a transaction fee associated with capital share activity for the year. Transaction fees received by each Fund
are presented in the Capital Share Transaction section of the Statements of Changes in Net Assets.
5.
INVESTMENT TRANSACTIONS
The
table below presents each Fund’s investment transactions during the period ended August 31, 2024. Purchases represent the aggregate
purchases of investments excluding the cost of in-kind purchases, short-term investment purchases, swaps, and futures contracts. Sales
represent the aggregate sales of investments excluding proceeds from in-kind sales, short-term investments, swaps, and futures contracts.
Purchases in-kind are the aggregate of all in-kind purchases and sales in-kind are the aggregate of all proceeds from in-kind sales. The
transactions for each of these categories are as follows:
Purchase
Sales
Purchase
In-Kind
Sales
In-Kind
-1x
Short VIX Mid-Term Futures Strategy ETF (Consolidated)
$ —
$ —
$ —
$ —
2x
Bitcoin Strategy ETF (Consolidated)
—
—
—
—
2x
Ether ETF (Consolidated)
—
—
—
—
There
were no purchases or sales of long-term U.S. Government securities in the Funds during the period ended August 31, 2024.
6.
INVESTMENT ADVISORY AND OTHER AGREEMENTS
Management
Fee
-1x
Short VIX Mid-Term Futures Strategy ETF (Consolidated) pays the Sponsor a management fee (the “Management Fee”), monthly
in arrears, in an amount equal to 1.35% per annum of its average daily net assets. 2x Bitcoin Strategy ETF (Consolidated) pays the
Sponsor a Management Fee, monthly in arrears, in an amount equal to 1.85% per annum of its average daily net assets. 2x Ether ETF (Consolidated)
pays the Sponsor a Management Fee, monthly in arrears, in an amount equal to 1.85% per annum of its average daily net assets. Pursuant
to a separate contractual arrangement, the Sponsor has contracted, through June 4, 2025, to waive its fees and/or pay 2x Ether ETF’s
expenses so that the Fund’s annual net operating expenses (excluding any interest, taxes, brokerage fees and commissions, acquired
fund fees and expenses, and extraordinary expenses) do not exceed 0.94%. “Average daily net assets” is calculated by dividing
the month-end net assets of each Fund by the number of calendar days in such month.
No
other Management Fee is paid by the Funds. The Management Fee is paid in consideration of the Sponsor’s trading advisory services
and the other services provided to the Fund that the Sponsor pays directly.
Pursuant
to the Sponsor Agreement between Sponsor and the Trust, on behalf of the Funds, the Sponsor oversees and pays Penserra Capital Management
LLC (“Commodity Sub-Adviser”) for its services as Commodity Sub-Adviser. The Sponsor pays the Commodity Sub-Adviser an annual
percentage rate fee based on each Fund’s average daily net assets (total assets of the Fund, minus the sum of its accrued liabilities).
The fee rates are 0.13% for -1x Short VIX Mid-Term Futures Strategy ETF, 0.20% for 2x Bitcoin Strategy ETF, and 0.13% for 2x Ether ETF,
with an annual minimum of $35,000 charged to the 2x Ether ETF. The Funds do not directly pay the Commodity Sub-Adviser.
Non-Recurring
Fees and Expenses
Each
Fund pays all its non-recurring and unusual fees and expenses, if any, as determined by the Sponsor. Non-recurring and unusual fees and
expenses are fees and expenses that are unexpected or unusual in nature, such as legal claims and liabilities, litigation costs or indemnification
or other material expenses which are not currently anticipated obligations of the Funds.
The
Administrator, Transfer Agent, and Custodian
U.S. Bancorp
Fund Services, LLC, doing business as U.S. Bank Global Fund Services (“Fund Services”), an indirect subsidiary of U.S. Bancorp,
serves as the Fund’s fund accountant, administrator, and transfer agent pursuant to certain fund accounting servicing, fund administration
servicing and transfer agent servicing agreements. U.S. Bank National Association, a subsidiary of U.S. Bancorp and parent company
of Fund Services, intends to serve as the Fund’s custodian pursuant to a custody agreement.
The
Marketing Agent
Foreside
Fund Services, LLC (the “Marketing Agent”) serves as the Marketing Agent of the Funds. Its principal duties are: (i) to
work with the Transfer Agent to review and approve orders placed by Authorized Participants and transmitted to the Transfer Agent; (ii) maintain
copies of confirmations of Creation Unit creation and redemption order acceptances; (iii) maintain telephonic, facsimile and/or access
to direct computer communications links with the Transfer Agent; and (iv) review and approve, prior to use, all Trust marketing materials
for compliance with applicable SEC and FINRA advertising rules.
The
Marketing Agent retains all marketing materials separately for the Funds, at their offices located at Three Canal Plaza, Suite 100 Portland,
Maine 04101.
7.
FAIR VALUE MEASUREMENTS
The
Funds disclose the fair value of their investments in a hierarchy that prioritizes the inputs to valuation techniques used to measure
fair value. The disclosure requirements establish a fair value hierarchy that distinguishes between: (1) market participant assumptions
developed based on market data obtained from sources independent of the Funds (observable inputs); and (2) the Funds’ own assumptions
about market participant assumptions developed based on the best information available under the circumstances (unobservable inputs).
The three levels defined by the disclosure requirements hierarchy are as follows:
Level I –
Quoted prices (unadjusted) in active markets
for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level II –
Inputs other than quoted prices included within
Level I that are observable for the asset or liability, either directly or indirectly. Level II assets include the following:
quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets
that are not active, inputs other than quoted prices that are observable for the asset or liability, and inputs that are derived principally
from or corroborated by observable market data by correlation or other means (market-corroborated inputs).
Level III –
Unobservable pricing input at the measurement
date for the asset or liability. Unobservable inputs shall be used to measure fair value to the extent that observable inputs are not
available.
In
some instances, the inputs used to measure fair value might fall in different levels of the fair value hierarchy. The level in the fair
value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest input level that is significant
to the fair value measurement in its entirety.
Fair
value measurements also require additional disclosure when the volume and level of activity for the asset or liability have significantly
decreased, as well as when circumstances indicate that a transaction is not orderly.
The
following tables summarize the valuation of investments on August 31, 2024 using the fair value hierarchy:
-1x
Short VIX Mid-Term Futures Strategy ETF (Consolidated)
Level 1
Level 2
Level 3
Total
Investments:
Money
Market Funds
$8,776,478
$—
$ —
$8,776,478
Total
Investments
$8,776,478
$—
$—
$8,776,478
Other
Financial Instruments*:
Futures
Contracts
$577,821
$—
$—
$577,821
Total
Other Financial Instruments
$577,821
$—
$—
$577,821
*
The fair value of the Fund’s investment represents
the net unrealized appreciation (depreciation) as of August 31, 2024.
Refer
to the Schedule of Investments for further disaggregation of investment categories.
2x
Bitcoin Strategy ETF (Consolidated)
Level 1
Level 2
Level 3
Total
Assets:
Investments:
Money
Market Funds
$665,153,570
$—
$ —
$665,153,570
Total
Investments
$665,153,570
$—
$—
$665,153,570
Liabilities:
Investments:
Reverse
Repurchase Agreements
$—
$(2,961,090,000)
—
$(2,961,090,000)
Total
Investments
$—
$(2,961,090,000)
$—
$(2,961,090,000)
Other
Financial Instruments*:
Futures
Contracts
$(119,286,940)
$—
$—
$(119,286,940)
Total
Other Financial Instruments
$(119,286,940)
$—
$—
$(119,286,940)
*
The fair value of the Fund’s investment represents
the net unrealized appreciation (depreciation) as of August 31, 2024.
Refer
to the Schedule of Investments for further disaggregation of investment categories.
The fair value of the Fund’s investment represents
the net unrealized appreciation (depreciation) as of August 31, 2024.
Refer
to the Schedule of Investments for further disaggregation of investment categories.
The
inputs or methodology used for valuing investments are not necessarily an indication of the risk associated with investing in those securities.
The
Funds also follow authoritative accounting standards, which require additional disclosure regarding fair value measurements. Specifically,
these standards require reporting entities to disclose a) the input and valuation techniques used to measure fair value for both recurring
and nonrecurring fair value measurements, for Level 2 or Level 3 positions, b) transfers between all levels (including Level 1
and Level 2) on a gross basis (i.e. transfers out must be disclosed separately from transfers in) as well as the reason(s) for
the transfers and c) purchases and sales on a gross basis in the Level 3 roll forward rather than as one net number. Additionally,
reporting entities are required to disclose quantitative information about unobservable inputs used in the fair value measurements categorized
within Level 3 of the fair value hierarchy.
8.
VALUATION OF DERIVATIVE INSTRUMENTS
The
Funds follow authoritative standards of accounting for derivative instruments, which establish disclosure requirements for derivative
instruments. These standards improve financial reporting for derivative instruments by requiring enhanced disclosures that enable investors
to understand how and why a fund uses derivative instruments, how derivative instruments are accounted for and how derivative instruments
affect a fund’s financial position and results of operations.
Certain
Funds use derivative instruments as part of their principal investment strategy to achieve their investment objective. For additional
discussion on the risks associated with derivative instruments refer to Note 2. As of August 31, 2024, certain Funds were invested
in futures contracts. On August 31, 2024, the fair values of derivative instruments, by primary risk, were as follows:
Fair
Values of Derivative Instruments as of August 31, 2024
Derivatives
Not Accounted
for
as Hedging Instruments
Fund
Asset Derivatives
Liability
Derivatives
Statements
of
Financial
Condition
Location
Unrealized
Appreciation
Statements
of
Financial
Condition
Location
Unrealized
Depreciation
VIX
Futures Contracts
-1x
Short VIX Mid-Term Futures Strategy ETF (Consolidated)
$577,821
$—
Bitcoin
Futures Contracts
2x
Bitcoin Strategy ETF (Consolidated)
—
(119,286,940)
Ether
Futures Contracts
2x
Ether ETF (Consolidated)
—
(11,164,845)
Total
Trust
$577,821
$(130,451,785)
*
Includes cumulative appreciation (depreciation)
of futures contracts as reported in the Schedule of Investments. Only current day’s variation margin is reported within the Statements
of Financial Condition in receivable/payable on open futures.
Transactions
in derivative instruments during the period ended August 31, 2024, by primary risk, were as follows:
The
Effect of Derivative Instruments on the Statement of Operations
For
the Period Ended August 31, 2024
Derivatives
Not Accounted
for
as Hedging Instruments
Location
of Gain (Loss) on
Derivatives
Recognized in Income
Fund
Realized
Gain
(Loss) on
Derivatives
Recognized
in Income
August 31,
2024
Change in
Unrealized
Appreciation
(Depreciation)
on Derivatives
Recognized
in Income
August 31,
2024
VIX
Futures Contracts
Net
realized gain (loss) on futures contracts/changes in unrealized appreciation (depreciation) on futures contracts
-1x
Short VIX Mid-Term Futures Strategy ETF (Consolidated)
$(565,997)
$454,928
Bitcoin
Futures Contracts
Net
realized gain (loss) on futures contracts/changes in unrealized appreciation (depreciation) on futures contracts
2x
Bitcoin Strategy ETF (Consolidated)
(528,408,825)
(184,027,915)
Bitcoin
Options Contracts
Net
realized gain (loss) on futures contracts/changes in unrealized appreciation (depreciation) on options contracts
2x
Bitcoin Strategy ETF (Consolidated)
(38,676,549)
—
Ether
Futures Contracts
Net
realized gain (loss) on futures contracts/changes in unrealized appreciation (depreciation) on futures contracts
2x
Ether ETF (Consolidated)
(59,432,947)
(11,164,845)
Total
Trust
$(625,895,981)
$(194,737,832)
*
Includes cumulative appreciation (depreciation)
of futures contracts as reported in the Schedule of Investments. Only current day’s variation margin is reported within the Statements
of Financial Condition in receivable/payable on open futures.
For
the period ended August 31, 2024, the volume of the derivatives held by the Funds was as follows:
Funds
Quarterly
Average Gross
Notional
Amounts
Short Future
Contracts
Long Future
Contracts
-1x
Short VIX Mid-Term Futures Strategy ETF (Consolidated)
$(23,163,925)
$—
2x
Bitcoin Strategy ETF (Consolidated)
—
8,890,553,138
2x
Ether ETF (Consolidated)
—
273,536,750
Funds
Quarterly
Average Gross
Notional
Amounts(a)
Written Options
Contracts
Purchased
Options
Contracts
-1x
Short VIX Mid-Term Futures Strategy ETF (Consolidated)
$ —
$ —
2x
Bitcoin Strategy ETF (Consolidated)
—
—
2x
Ether ETF (Consolidated)(b)
—
—
(a)
Option positions were held throughout the period,
however none were held on month end reporting dates; resulting in an average notional value calculation of zero for each of the funds.
The
Funds utilize this volume of derivatives in order to meet the investment objectives of each respective Fund.
9.
PRINCIPAL RISKS
Correlation
and Compounding Risk
The
Funds do not seek to achieve their stated investment objective over a period of time greater than a single day (as measured from
NAV calculation time to NAV calculation time). The return of a Fund for a period longer than a single day is the result of its return
for each day compounded over the period and usually will differ in amount and possibly even direction from the inverse (-1x) or two
times (2x) the return of the Fund’s benchmark for the period. A Fund will lose money if its benchmark performance is flat over
time, and it is possible for a Fund to lose money over time even if the performance of its benchmark increases in the case of ZIVB (or
decreases in the case of BITX and ETHU), as a result of daily rebalancing, the benchmark’s volatility, compounding, and other factors.
Compounding is the cumulative effect of applying investment gains and losses and income to the principal amount invested over time. Gains
or losses experienced over a given period will increase or reduce the principal amount invested from which the subsequent period’s
returns are calculated. The effects of compounding will likely cause the performance of a Fund to differ from the Fund’s stated
multiple times the return of its benchmark for the same period. The effect of compounding becomes more pronounced as benchmark volatility
and holding period increase. The impact of compounding will impact each shareholder differently depending on the period of time an investment
in a Fund is held and the volatility of the benchmark during the holding period of an investment in the Fund. Longer holding periods,
higher benchmark volatility, inverse exposure, and greater leverage each affect the impact of compounding on a Fund’s returns. Daily
compounding of a Fund’s investment returns can dramatically and adversely affect its longer-term performance during periods of high
volatility. Volatility may be at least as important to a Fund’s return for a period as the return of the Fund’s underlying
benchmark.
Each
Fund uses leverage and should produce daily returns that are more volatile than that of its benchmark. For example, the daily return of
BITX and ETHU should be approximately two times as volatile on a daily basis as is the return of a fund with an objective of matching
the same benchmark. The daily return of ZIVB is designed to return the inverse (-1x) of the return that would be expected of a fund with
an objective of matching the same benchmark. The Funds are not appropriate for all investors and present significant risks not applicable
to other types of funds. The Funds use leverage and are riskier than similarly benchmarked exchange-traded funds that do not use leverage.
An investor should only consider an investment in a Fund if he or she understands the consequences of seeking daily leveraged or daily
inverse investment results. Shareholders who invest in the Funds should actively manage and monitor their investments, as frequently as
daily.
While
the Funds seek to meet their investment objectives, there is no guarantee they will do so. Factors that may affect a Fund’s ability
to meet its investment objective include: (1) the Sponsor’s ability to purchase and sell Financial Instruments in a manner
that correlates to a Fund’s objective; (2) an imperfect correlation between the performance of Financial Instruments held by
a Fund and the performance of the applicable benchmark; (3) bid-ask spreads on such Financial Instruments; (4) fees, expenses,
transaction costs, financing costs associated with the use of Financial Instruments and commission costs; (5) holding or trading
instruments in a market that has become illiquid or disrupted; (6) a Fund’s Share prices being rounded to the nearest cent
and/or valuation methodology; (7) changes to a benchmark Index that are not disseminated in advance; (8) the need to conform
a Fund’s portfolio holdings to comply with investment restrictions or policies or regulatory or tax law requirements; (9) early
and unanticipated closings of the markets on which the holdings of a Fund trade, resulting in the inability of the Fund to execute intended
portfolio transactions; (10) accounting standards; and (11) differences caused by a Fund obtaining exposure to only a representative
sample of the components of a benchmark, over weighting or under weighting certain components of a benchmark or obtaining exposure to
assets that are not included in a benchmark.
A
number of factors may affect a Fund’s ability to achieve a high degree of correlation with its benchmark, and there can be no guarantee
that a Fund will achieve a high degree of correlation. Failure to achieve a high degree of correlation may prevent a Fund from achieving
its investment objective. In order to achieve a high degree of correlation with their underlying benchmarks, the Funds seek to rebalance
their portfolios daily to keep exposure consistent with their investment objectives. Being materially under- or over-exposed to the benchmark
may prevent such Funds from achieving a high degree of correlation with such benchmark. Market disruptions or closure, large amounts of
assets into or out of the Funds, regulatory restrictions, extreme market volatility, and other factors will adversely affect such Funds’
ability to adjust exposure to requisite levels. The target amount of portfolio exposure is impacted dynamically by the
benchmarks’
movements during each day. Other things being equal, more significant movement in the value of its benchmark up or down will require
more significant adjustments to a Fund’s portfolio. Because of this, it is unlikely that the Funds will be perfectly exposed (i.e.,
-1x, 2x, as applicable) to its benchmark at the end of each day, and the likelihood of being materially under- or over-exposed is
higher on days when the benchmark levels are volatile near the close of the trading day.
Each
Fund seeks to rebalance its portfolio on a daily basis. The time and manner in which a Fund rebalances its portfolio may vary from day
to day depending upon market conditions and other circumstances at the discretion of the Sponsor. Unlike other funds that do not
rebalance their portfolios as frequently, each Fund may be subject to increased trading costs associated with daily portfolio rebalancing
to maintain appropriate exposure to the underlying benchmarks.
Counterparty
Risk
Each
Fund may use derivatives such as swap agreements and forward contracts (collectively referred to herein as “derivatives”)
in the manner described herein to achieve their respective investment objectives. The use of derivatives by a Fund exposes the Fund to
counterparty risks.
Regulatory
Treatment
Derivatives
are generally traded in OTC markets and have only recently become subject to comprehensive regulation in the United States. Cash-
settled forwards are generally regulated as “swaps,” whereas physically settled forwards are generally not subject to regulation
(in the case of commodities other than currencies) or subject to the federal securities laws (in the case of securities). Title VII
of the Dodd-Frank Act (“Title VII”) created a regulatory regime for derivatives, with the CFTC responsible for the regulation
of swaps and the SEC responsible for the regulation of “security-based swaps.” The SEC requirements have largely yet to be
made effective, but the CFTC requirements are largely in place. The CFTC requirements have included rules for some of the types of transactions
in which the Funds will engage, including mandatory clearing and exchange trading, reporting, and margin for OTC swaps. Title VII
also created new categories of regulated market participants, such as “swap dealers,” “security- based swap dealers,”
“major swap participants,” and “major security-based swap participants” who are, or will be, subject to significant
new capital, registration, recordkeeping, reporting, disclosure, business conduct and other regulatory requirements. The regulatory requirements
under Title VII continue to be developed and there may be further modifications that could materially and adversely impact the Funds,
the markets in which a Fund trades and the counterparties with which the Fund engages in transactions.
As
noted, the CFTC rules may not apply to all the swap agreements and forward contracts entered by the Funds. Investors, therefore, may not
receive the protection of CFTC regulation or the statutory scheme of the Commodity Exchange Act (the “CEA”) in connection
with each Fund’s swap agreements or forward contracts. The lack of regulation in these markets could expose investors to significant
losses under certain circumstances, including in the event of trading abuses or financial failure by participants.
Counterparty
Credit Risk
The
Funds will be subject to the credit risk of the counterparties to the derivatives. In the case of cleared derivatives, the Funds will
have credit risk to the clearing corporation in a similar manner as the Funds would for futures contracts. In the case of OTC derivatives,
the Funds will be subject to the credit risk of the counterparty to the transaction — typically a single bank or financial
institution. As a result, a Fund is subject to increased credit risk with respect to the amount it expects to receive from counterparties
to OTC derivatives entered as part of that Fund’s principal investment strategy. If a counterparty becomes bankrupt or otherwise
fails to perform its obligations due to financial difficulties, a Fund could suffer significant losses on these contracts and the value
of an investor’s investment in a Fund may decline.
The
Funds have sought to mitigate these risks by generally requiring that the counterparties for each Fund agree to post collateral for the
benefit of the Fund, marked to market daily, subject to certain minimum thresholds. However, there are no limitations on the percentage
of assets each Fund may invest in swap agreements or forward contracts with a particular counterparty. To the extent any such collateral
is insufficient or there are delays in accessing the collateral,
the
Funds will be exposed to counterparty risk as described above, including possible delays in recovering amounts because of bankruptcy proceedings.
The Funds typically enter into transactions only with major global financial institutions.
OTC
derivatives of the type that may be utilized by the Funds are generally less liquid than futures contracts because they are not traded
on an exchange, do not have uniform terms and conditions, and are generally entered into based upon the creditworthiness of the parties
and the availability of credit support, such as collateral, and in general, are not transferable without the consent of the counterparty.
These agreements contain various conditions, events of default, termination events, covenants, and representations. The triggering of
certain events or the default on certain terms of the agreement could allow a party to terminate a transaction under the agreement and
request immediate payment in an amount equal to the net positions owed to the party under the agreement. For example, if the level of
the Fund’s benchmark has a dramatic intraday move that would cause a material decline in the Fund’s NAV, the terms of the
swap may permit the counterparty to immediately close out the transaction with the Fund. In that event, it may not be possible for the
Fund to enter into another swap or to invest in other Financial Instruments necessary to achieve the desired exposure consistent with
the Fund’s objective. This, in turn, may prevent the Fund from achieving its investment objective, particularly if the level of
the Fund’s benchmark reverses all or part of its intraday move by the end of the day.
In
addition, cleared derivatives benefit from daily marking-to-market and settlement, and segregation and minimum capital requirements applicable
to intermediaries. To the extent the Fund enters into cleared swap transactions, the Fund will deposit collateral with a FCM in cleared
swaps customer accounts, which are required by CFTC regulations to be separate from its proprietary collateral posted for cleared swaps
transactions. Cleared swap customer collateral is subject to regulations that closely parallel the regulations governing customer segregated
funds for futures transactions but provide certain additional protections to cleared swaps collateral in the event of a clearing broker
or clearing broker customer default. For example, in the event of a default of both the clearing broker and a customer of the clearing
broker, a clearing house is only permitted to access the cleared swaps collateral in the legally separate (but operationally comingled)
account of the defaulting cleared swap customer of the clearing broker, as opposed to the treatment of customer segregated funds, under
which the clearing house may access all of the commingled customer segregated funds of a defaulting clearing broker. Derivatives entered
into directly between two counterparties do not necessarily benefit from such protections, particularly if entered into with an entity
that is not registered as a “swap dealer” with the CFTC. This exposes the Funds to the risk that a counterparty will
not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not
bona fide) or because of a credit or liquidity problem, thus causing the Funds to suffer a loss.
The
Sponsor regularly reviews the performance of its counterparties for, among other things, creditworthiness, and execution quality. In addition,
the Sponsor periodically considers the addition of new counterparties and the counterparties used by a Fund may change at any time. Each day,
the Funds disclose their portfolio holdings as of the prior Business Day. Each Fund’s portfolio holdings identifies its counterparties,
as applicable. This portfolio holdings information may be accessed through the web on the Sponsor’s website at www.volatilityshares.com.
Each
counterparty and/or any of its affiliates may be an Authorized Participant or shareholder of a Fund, subject to applicable law.
The
counterparty risk for cleared derivatives transactions is generally lower than for OTC derivatives. Once a transaction is cleared, the
clearing organization is substituted and is a Fund’s counterparty on the derivative. The clearing organization guarantees the performance
of the other side of the derivative. Nevertheless, some risk remains, as there is no assurance that the clearing organization, or its
members, will satisfy its obligations to a Fund.
Leverage
Risk
The
Funds may utilize leverage in seeking to achieve their respective investment objectives and will lose more money in market environments
adverse to their respective daily investment objectives than funds that do not employ leverage. The use of leveraged and/or inverse leveraged
positions increases the risk of total loss of an investor’s investment, even over periods as short as a single day.
For
example, because BITX includes a two times (2x) multiplier, a single-day movement in the relevant benchmark approaching 50% at any point
in the day could result in the total loss or almost total loss of an investor’s investment if that movement is contrary to
the investment objective of the Fund in which an investor has invested, even
if
such Fund’s benchmark subsequently moves in an opposite direction, eliminating all or a portion of the movement. This would be the
case with downward single-day or intraday movements in the underlying benchmark of a Fund or upward single-day or intraday movements in
the benchmark of a Fund, even if the underlying benchmark maintains a level greater than zero at all times.
Liquidity
Risk
Financial
Instruments cannot always be liquidated at the desired price. It is difficult to execute a trade at a specific price when there is a relatively
small volume of buy and sell orders in a market. A market disruption can also make it difficult to liquidate a position, find a swap,
or forward contract counterparty at a reasonable cost. Market illiquidity may cause losses for the Funds. The large size of the positions
which the Funds may acquire increases the risk of illiquidity by both making their positions more difficult to liquidate and increasing
the losses incurred while trying to do so. Any type of disruption or illiquidity will potentially be exacerbated because the Funds will
typically invest in Financial Instruments related to one benchmark, which in many cases is highly concentrated.
“Contango”
and “Backwardation” Risk
The
Funds typically hold futures contracts. As the futures contracts near expiration, they are generally replaced by contracts that have a
later expiration. Thus, for example, a contract purchased and held in November 2019 may specify a January 2020 expiration. As
that contract nears expiration, it may be replaced by selling the January 2020 contract and purchasing the contract expiring in March 2020.
This process is referred to as “rolling.” Rolling may have a positive or negative impact on performance. For example, historically,
the prices of certain types of futures contracts have frequently been higher for contracts with shorter-term expirations than for contracts
with longer-term expirations, which is referred to as “backwardation.” In these circumstances, absent other factors, the sale
of the January 2020 contract would take place at a price that is higher than the price at which the March 2020 contract is purchased,
thereby creating a gain in connection with rolling. While certain types of futures contracts have historically exhibited consistent periods
of backwardation, backwardation will likely not always exist in these markets.
Since
the introduction of VIX futures contracts, there have frequently been periods where VIX futures prices reflect higher expected
volatility levels further out in time. This can result in a loss from “rolling” the VIX futures to maintain the constant
weighted average maturity of the applicable Fund benchmark. Losses from exchanging a lower priced VIX future for a higher priced
longer-term future in the rolling process could adversely affect the value of a Fund and, accordingly, decrease the return of a Fund.
Natural
Disaster/Epidemic Risk
Natural
or environmental disasters, such as earthquakes, fires, floods, hurricanes, tsunamis and other severe weather-related phenomena generally,
and widespread disease, including pandemics and epidemics (for example, the novel coronavirus COVID-19), have been and can be highly disruptive
to economies and markets and have recently led, and may continue to lead, to increased market volatility and significant market losses.
Such natural disaster and health crises could exacerbate political, social, and economic risks previously mentioned, and result in significant
breakdowns, delays, shutdowns, social isolation, and other disruptions to important global, local, and regional supply chains affected,
with potential corresponding results on the operating performance of the Funds and their investments. A climate of uncertainty and panic,
including the contagion of infectious viruses or diseases, may adversely affect global, regional, and local economies and reduce the availability
of potential investment opportunities, and increases the difficulty of performing due diligence and modeling market conditions, potentially
reducing the accuracy of financial projections. Under these circumstances, the Funds may have difficulty achieving their investment objectives
which may adversely impact performance. Further, such events can be highly disruptive to economies and markets, significantly disrupt
the operations of individual companies (including, but not limited to, the Funds’ Sponsor and third party service providers), sectors,
industries, markets, securities and commodity exchanges, currencies, interest and inflation rates, credit ratings, investor sentiment,
and other factors affecting the value of the Funds’ investments. These factors can cause substantial market volatility, exchange
trading suspensions and closures and can impact the ability of the Funds to complete redemptions and otherwise affect Fund performance
and Fund trading in the secondary market. A widespread crisis may also affect the global economy in ways that cannot necessarily be foreseen
at the current time. How long such events will last and whether they will continue or recur cannot be predicted. Impacts from these events
could have significant impact on a Fund’s performance, resulting in losses to your investment.
Risk
that Current Assumptions and Expectations Could Become Outdated as a Result of Global Economic Shocks
The
onset of the novel coronavirus (COVID-19) has caused significant shocks to global financial markets and economies, with many governments
taking extreme actions to slow and contain the spread of COVID-19. These actions have had, and likely will continue to have, a severe
economic impact on global economies as economic activity in some instances has essentially ceased. Financial markets across the globe
are experiencing severe distress at least equal to what was experienced during the global financial crisis in 2008. In March 2020,
U.S. equity markets entered a bear market in the fastest such move in the history of U.S. financial markets. Contemporaneous
with the onset of the COVID-19 pandemic in the US, oil experienced shocks to supply and demand, impacting the price and volatility of
oil. The global economic shocks being experienced as of the date hereof may cause the underlying assumptions and expectations of the Funds
to become outdated quickly or inaccurate, resulting in significant losses.
10.
SUBSEQUENT EVENTS
For
-1x Short VIX Mid-Term Futures ETF the following distributions were paid: on September 25, 2024 an income dividend of $0.4850 was
declared payable on September 27, 2024 to shareholders of record on September 26, 2024. For 2x Ether ETF, the following distributions
were paid: on September 25, 2024 an income dividend of $0.0040 was declared payable on September 27, 2024 to shareholders of
record on September 26, 2024.
Management
has evaluated the possibility of subsequent events existing in the Trust’s and the Funds’ financial statements through the
date the financial statements were issued. Management has determined that there are no material events that would require disclosure in
the Trust’s or the Funds’ financial statements through this date, except as noted above.
11.
BASIS FOR APPROVAL OF INVESTMENT ADVISORY CONTRACT
The
Board of Trustees of Volatility Shares Trust (the “Trust”), including the Independent Trustees, approved the Investment Management
Agreement (the “Advisory Agreement”) with Volatility Shares LLC (the “Advisor”), on behalf of 2x Ether Strategy
ETF (the “Fund”), and the Sub-Advisory Agreement (the “Sub-Advisory Agreement” and together with the Advisory
Agreement, the “Agreements”) between the Advisor and Penserra Capital Management LLC (the “Sub-Advisor”), at a
meeting held on May 8, 2024. The Board determined that the Agreements are in the best interests of the Fund in light of the nature, extent
and quality of the services expected to be provided and such other matters as the Board considered to be relevant in the exercise of its
business judgment.
To
reach this determination, the Board considered its duties under the Investment Company Act of 1940, as amended (the “1940 Act”),
as well as under the general principles of state law, in reviewing and approving advisory contracts; the requirements of the 1940 Act
in such matters; the fiduciary duty of investment advisors with respect to advisory agreements and compensation; the standards used by
courts in determining whether investment company boards have fulfilled their duties; and the factors to be considered by the Board in
voting on such agreements. To assist the Board in its evaluation of the Agreements for the Fund, the Advisor and the Sub-Advisor provided
materials and information that, among other things, outlined: the services to be provided by the Advisor and the Sub-Advisor to the Fund
(including the relevant personnel responsible for these services and their experience); the proposed unitary fee rate payable by the Fund
as compared to fees charged to a peer group of funds (the “Expense Group”) assembled by the Advisor; the proposed sub-advisory
fee rate; the estimated expense ratio of the Fund as compared to expense the arrangements between the Trust and the Advisor and between
the Advisor and the Sub-Advisor are reasonable business arrangements from the Fund’s perspective.
In
evaluating whether to approve the Agreements for the Fund, the Board considered the nature, extent and quality of the services to be provided
by the Advisor and the Sub-Advisor under the Agreements. With respect to the Advisory Agreement, the Board considered that the Advisor
will be responsible for the overall management and administration of the Fund and reviewed the services to be provided by the Advisor
to the Fund, including the oversight of the Sub-Advisor, as well as the background and experience of the persons responsible for such
services. The Board considered that the Fund will be an actively-managed ETF and will employ an advisor/sub-advisor management structure.
With respect to the Sub-Advisory Agreement, the Board considered the services that the Sub-Advisor will provide to the Fund and noted
the background and experience of the Sub-Advisor’s portfolio management team. Because the Fund had yet to commence investment operations,
the Board could not consider the historical investment performance of the Fund. In light of the information presented and the considerations
made, the Board concluded that the nature, extent and quality of the services to be provided to the Fund by the Advisor and the Sub-Advisor
under the Agreements are expected to be satisfactory.
The
Board considered the proposed unitary fee rate payable by the Fund under
the Advisory Agreement for the services to be provided. The Board noted that, under the unitary fee arrangement, the Fund would pay the
Advisor a unitary fee equal to an annual rate of 1.85% of its average daily net assets. The Board considered that, from the unitary fee
for the Fund, the Advisor would pay the Sub-Advisor a sub-advisory fee. The Board noted that the Advisor would be responsible for the
Fund’s expenses, including the cost of transfer agency, custody, fund administration, legal, audit and other services and license
fees, if any, but excluding the fee payment under the Advisory Agreement and interest, taxes, acquired fund fees and expenses, if any,
brokerage commissions and other expenses connected with the execution of portfolio transactions (including any net account or similar
fees charged by futures commission merchants), distribution and service fees pursuant to a Rule 12b-1 plan, if any, and extraordinary
expenses, if any. The Board considered that the Advisor would contractually agree to waive a portion of its advisory fee in an amount
equal to 0.91% of the Fund’s average daily net assets for at least a one year period beginning upon the effectiveness of the Fund’s
registration statement. The Board received and reviewed information showing the fee rates and expense ratios of the peer funds in the
Expense Group. Because the Fund will pay a unitary fee, the Board determined that expense ratios were the most relevant comparative data
point. Based on the information provided, the Board noted that the unitary fee rate for the Fund was above the median total net expense
ratio of the peer funds in the Expense Group; however, the Board noted that the fee waiver would decrease the Fund’s net expense
ratio below the median expense ratio of the Expense Group. With respect to the Expense Group, the Board discussed with the Advisor how
the Expense Group was assembled and how the Fund compared and differed from the peer funds. The Board took this information into account
in considering the peer data. The Advisor also discussed with the Board unique aspects of managing a levered Ether product that create
additional work and risks for the Advisor, including that the Fund will require more trading and investing services, the Fund will carry
greater litigation risk and the Fund is expected to experience more assets under management volatility. The Advisor also discussed general
pricing considerations for levered funds, noting that levered funds are often priced one and one-half to two times higher than comparable
unlevered funds. The Board noted that two comparable levered Bitcoin ETFs (including one overseen by the Board) currently charge the same
unitary fee as the Fund and other comparable unlevered Bitcoin ETFs currently charge a unitary fee of 0.95%. In light of the information
considered and the nature, extent and quality of the services expected to be provided to the Fund under the Agreements, the Board determined
that the proposed unitary fee, including the sub-advisory fee to be paid by the Advisor to the Sub-Advisor from the unitary fee, was fair
and reasonable.
The
Board noted that the proposed unitary fee for the Fund was not structured to pass on to shareholders the benefits of any economies of
scale as the Fund’s assets grow. The Board noted that any reduction in fixed costs associated with the management of the Fund would
benefit the Advisor, but that the unitary fee structure provides a level of certainty in expenses for the Fund. The Board reviewed financial
information provided by the Advisor. The Board took into consideration the types of costs to be borne by the Advisor in connection with
its services to be performed for the Fund under the Advisory Agreement. The Board considered the Advisor’s estimate of the profits
that it would generate from managing the Fund at various asset levels. The Board noted the inherent limitations in the analysis and concluded
that, based upon the information provided, any profits that may be realized by the Advisor in connection with the management of the Fund
were not expected to be unreasonable. The Board reviewed financial information provided by the Sub-Advisor. The Board considered that
the Sub-Advisor would be paid by the Advisor from the Fund’s unitary fee and its understanding that the sub-advisory fee rate was
the product of an arm’s length negotiation. In addition, the Board considered other potential benefits described by the Advisor
that may be realized from its relationship with the Fund, including that the Advisor may potentially increase its market visibility because
of its relationship to the Fund. The Board also considered other potential benefits to the Sub-Advisor that may be realized from its relationship
with the Fund. The Board concluded that the character and amount of other potential benefits to the Advisor and the Sub-Advisor were not
unreasonable.
Based
on all of the information considered and the conclusions reached, the Board, including the Independent Trustees, determined that the terms
of the Agreements are fair and reasonable and that the approval of the Agreements is in the best interests of the Fund. No single factor
was determinative in the Board’s analysis.
The
business affairs of the Funds are managed by or under the direction of the Board of Trustees. Information pertaining to the Trustees and
Officers of the Funds is set below. The report includes additional information about the Funds’ Trustees and Officers and is available
without charge, upon request by calling (866) 261-0273.
Name,
Address
and
Year
of
Birth
Position
and
Offices
with Trust
Term of
Office and
Year First
Elected
or
Appointed
Principal
Occupations
during Past
5 Years
Number of
Portfolios
in the
Volatility
Shares
Fund
Complex
Overseen
by Trustee
Other
Trusteeships
or
Directorships
Held by
Trustee
during
the Past
5 Years
Independent Trustees
Stephen
Yu
2000
PGA Blvd, Suite 4440, Palm Beach Gardens, FL 33408
2000
PGA Blvd, Suite 4440 Palm Beach Gardens, FL 33408
Year
of Birth: 1986
Interested
Trustee, President, and Chief Executive Officer (Principal Executive Officer)
•
Indefinite Term
•
Since Inception
President
of Volatility Shares LLC (2018 – Present); Managing Partner of Invest in Vol LLC (2017 – 2023)
3
None
Chang
Kim
2000
PGA Blvd, Suite 4440 Palm Beach Gardens, FL 33408
Year
of Birth: 1984
Chief
Compliance Officer, Treasurer (Principal Financial Officer and Principal Accounting Officer) and AML Compliance Officer
•
Indefinite Term
•
Since Inception
Chief
Operating Officer of Volatility Shares LLC (2022 – Present); Chief Operating Officer of Invest in Vol LLC (2022 – 2023); CEO
of The Library Shop, Inc. (2021 – 2021); Portfolio Manager and COO at Global X Management Company LLC (2009 – 2020)
N/A
None
Stuart
Barton
2000
PGA Blvd, Suite 4440 Palm Beach Gardens, FL 33408
Year
of Birth: 1973
Vice
President and Secretary
•
Indefinite Term
•
Since Inception
Chief
Investment Officer of Volatility Shares LLC (2018 – Present); Managing Partner of Invest in Vol LLC (2017 – 2023)
2000
PGA Blvd, Suite 4440 Palm Beach Gardens, FL 33408
www.volatilityshares.com
INVESTMENT
ADVISERS
Volatility
Shares LLC
2000
PGA Blvd, Suite 4440,
Palm
Beach Gardens,
Florida
33408.
INVESTMENT
SUB-ADVISER
Penserra
Capital Management LLC
4
Orinda Way, Suite 100-A,
Orinda,
California 94563
ADMINISTRATOR,
FUND ACCOUNTANT AND TRANSFER AGENT
U.S. Bancorp
Fund Services, LLC
P.O. Box
1993
Milwaukee,
WI 53201-1993
CUSTODIAN
U.S. Bank,
N.A.
Custody
Operations
1555
River Center Drive, Suite 302
Milwaukee,
WI 53212
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Tait,
Weller & Baker LLP
50
South 16th Street, Suite 2900
Philadelphia,
PA 19102
DISTRIBUTOR
Foreside
Fund Services, LLC
Three
Canal Plaza, Suite 100,
Portland,
ME 04101
www.foreside.com
The Trust’s
Proxy Voting Policies are available
without charge
by calling 1-(866) 261-0273, or by
accessing the
SEC’s website, at www.sec.gov.
The actual voting
records relating to portfolio
securities during
the most recent period ended
June 30
is available without charge by calling
1-(866) 261-0273
or by accessing the SEC’s website
at www.sec.gov.
The Trust files
complete schedule of portfolio
holdings with
the SEC for its first and third fiscal
quarters on Part F
of Form N-PORT. The Funds’ Part F
of Form N-PORT
is available on the SEC’s website at
www.sec.gov.
This report has
been prepared for shareholders and
may be distributed
to others only if preceded or
accompanied by
a current prospectus.
(b) Financial Highlights are included within the financial
statements filed under Item 7(a) of this Form.
Item 8.
Changes in and Disagreements with Accountants for Open-End Investment Companies.
There were no changes in or disagreements with accountants during the period
covered by this report.
Item 9.
Proxy Disclosure for Open-End Investment Companies.
There were no matters submitted to a vote of shareholders during the period
covered by this report.
Item 10.
Remuneration Paid to Directors, Officers, and Others of Open-End Investment Companies.
All fund expenses, including Trustee compensation, are paid by the Investment
Adviser pursuant to the Investment Advisory Agreement. Additional information related to those fees is available in the Fund’s Statement
of Additional Information.
Item 11.
Statement Regarding Basis for Approval of Investment Advisory Contract.
See Item 7(a).
Item 12.
Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable to open-end investment companies.
Item 13. Portfolio Managers
of Closed-End Management Investment Companies.
Not applicable to open-end investment companies.
Item 14.
Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable to open-end investment companies.
Item 15. Submission of Matters
to a Vote of Security Holders.
There have been no material changes to the procedures by which shareholders
may recommend nominees to the registrant’s board of Trustees.
Item 16. Controls and Procedures.
(a)
The Registrant’s Principal Executive Officer and Principal Financial Officer have
reviewed the Registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940
(the “Act”)) as of a date within 90 days of the filing of this report, as required by Rule 30a-3(b) under the Act and Rules
13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934. Based on their review, such officers have concluded that the disclosure
controls and procedures are effective in ensuring that information required to be disclosed in this report is appropriately recorded,
processed, summarized and reported and made known to them by others within the Registrant and by the Registrant’s service provider.
(b)
There were no changes in the Registrant’s internal control over financial reporting
(as defined in Rule 30a-3(d) under the Act) that occurred during the period covered by this report that have materially affected, or are
reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
Item 17. Disclosure of Securities
Lending Activities for Closed-End Management Investment Companies
Not applicable to open-end investment companies.
Item 18. Recovery of Erroneously
Awarded Compensation.
(a) Not Applicable
(b) Not Applicable
Item 19. Exhibits.
(a)
(1) Any code of ethics or amendment thereto, that is the subject of the disclosure
required by Item 2, to the extent that the registrant intends to satisfy Item 2 requirements through filing an exhibit. Not applicable.
(2) Any policy required by the listing standards adopted pursuant
to Rule 10D-1 under the Exchange Act (17 CFR 240.10D-1) by the registered national securities exchange or registered national securities
association upon which the registrant’s securities are listed. Not applicable.
(4) Any written solicitation to purchase securities under Rule
23c-1 under the Act sent or given during the period covered by the report by or on behalf of the registrant to 10 or more persons. Not
applicable to open-end investment companies.
(5) Change in the registrant’s
independent public accountant. Provide the information called for by Item 4 of Form 8-K under the Exchange Act (17 CFR 249.308). Unless
otherwise specified by Item 4, or related to and necessary for a complete understanding of information not previously disclosed, the information
should relate to events occurring during the reporting period. Not applicable to open-end investment companies and ETFs.
Pursuant to the requirements of the Securities Exchange
Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
(Registrant)
Volatility Shares Trust
By (Signature and Title)
/s/ Justin Young
Justin Young, Principal Executive Officer
(Principal Executive Officer)
Date
11/29/2024
Pursuant to the requirements of the Securities Exchange
Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
By (Signature and Title)
/s/ Justin Young
Justin Young, Principal Executive Officer
(Principal Executive Officer)
Date
11/29/2024
By (Signature and Title)
/s/ Chang Kim
Chang Kim, Principal Financial Officer
(Principal Financial Officer)
