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Why May Dual Class Shares Outperform? MSCI Answers

October 18, 2020

MSCI has an inherent interest in understanding how dual share class stocks perform. After all, they construct indices for which they may choose to include or not include such companies.

With several high-profile initial public offerings (IPOs) in recent years, MSCI examined the performance of dual share class companies as well as what may have driven that performance.[1] What did they find? And what implications could those findings have on the North Shore Dual Share Class ETF (DUAL)?

Dual Share Class Companies Outperformed

MSCI analyzed the performance of companies with unequal voting shares from November 2007 to August 2017.

Specifically, MSCI looked at the performance of their indices with and without dual share class companies. They found that indices which excluded companies with unequal voting shares underperformed those which included them by, on average, 0.30% per year.

Notably, in North America, that difference in performance was 4.5% per year.

What May Explain the Outperformance of Dual Share Class Companies?

MSCI found that stock-specific effect accounted for the majority of this outperformance.

Specifically, MSCI found that most of the outperformance was driven by the strong performance for technology stocks during the roughly ten-year period. Many of the companies that issued dual share companies were technology companies.

Additionally, on average, companies issuing dual class stocks had higher growth and profitability than the overall universe of equities.

All of these factors depict reasons why companies utilizing dual share class equity structures may be a worthwhile investment.

Now Can Investors Gain Access to Dual Share Class Companies?

The North Shore Dual Share Class ETF (DUAL)

The North Shore Dual Share Class ETF (DUAL) seeks to provide investment results that, before fees and expenses, correspond generally to the total return performance of the North Shore Dual Share Class Index. The index is designed to track the performance of dual-class companies incorporated in the United States.

DUAL may provide investors with an attractive vehicle to gain exposure to the potential benefits of dual share class companies.

[1] Melas, Dimitris, Putting the Spotlight on Spotify: Why Have Stocks with Unequal Voting Rights Outperformed? MSCI, 4/3/18

Exchange Traded Concepts, LLC serves as the investment advisor. The Fund is distributed by SEI Investments Distribution Co. (1 Freedom Valley Drive, Oaks, PA 19456), which is not affiliated with Exchange Traded Concepts, LLC, North Shore Indices, or any affiliates. Check the background of SIDCO on FINRA’s BrokerCheck.

Carefully consider the Fund’s investment objectives, risk factors, charges and expenses before investing. This and additional information can be found in the Fund’s full or summary prospectus, which may be obtained by visiting ( dualetf.com). Investors should read it carefully before investing or sending money.

Investing involves risk, including possible loss of principal. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles or from social, economic or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Narrowly focused investments, investments in smaller companies, and those in commodities typically exhibit higher volatility. Issuers in energy-related industries can be significantly affected by fluctuations in energy prices and supply and demand of energy fuels.

There is no guarantee the fund will achieve its stated objective. Indices are unmanaged and do not include the effect of fees. One cannot invest directly in an index. The fund is non-diversified.

Shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Market price returns are based upon the midpoint of the bid/ask spread at 4:00 PM Eastern time and do not represent the returns you would receive if you traded shares at other times. The first trading date is typically several days after the fund inception date. Therefore, NAV is used to calculate market returns prior to the first trade date because there is no bid/ask spread until the fund starts trading.

Dual Share Class Companies create unique risks. Dual Share Class Companies allow for a concentration of voting power in the hands of company insiders through a disproportionate allocation of voting rights among stockholders, which may negatively affect common stockholders in a variety of ways. For example, a company’s owners may use such power for personal benefit, while passing on financial risk to common stockholders. Further, Dual Share Class Companies allow entrenchment of management in the company, which may prevent common stockholders from being able to address issues relating to mismanagement of the company, such as share dilution, increased company debt, and financial underperformance relevant to the market. Investing only in a portfolio of Dual Share Class Companies may impact the Fund’s relative investment performance depending on whether such investments are in or out of favor in the market. A portfolio of Dual Share Class Companies may underperform a portfolio that includes companies with traditional ownership structures.