Defiance ETFs: Investment Case for AUGR:Augmented & Virtual Reality

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Defiance ETFs: Investment Case for Augmented & Virtual RealityWe believe that the augmented reality (AR) and virtual reality (VR) market is at the cutting-edge of technological development in both hardware and software / applications. The market spans across industries as wide-ranging as gaming and healthcare to e-commerce, education and marketing, and is attracting extraordinary attention from investors and developers.1 Its diverse applications could transform the way people work, play and live globally.

Companies of all sizes, in varying lifecycle stages are contributing to the explosive growth of this industry. Cooperation between the supply and demand sides of the market (the hardware providers and the application developers) comprises a robust value and supply chain and contributes to the forecasted high growth rate of the AR and VR market. Some experts believe that, “augmented reality is going to change the way we use technology forever.”2

What is Augmented and Virtual Reality? Virtual reality immerses the user in a simulated environment, a computer-generated virtual experience, while augmented reality enhances your actual world with a digital interactive overlay in real-time. Mixed Reality (MR) combines VR with the real world by creating virtual objects that can interact with the actual environment. The common denominator is spatial - manipulating real-world environments, blending real and virtual or simply creating new ones.

AR & VR Applications • Education, Training & Work life – AR and VR-enhanced education; 3D simulations such as

virtual cadavers in anatomy training in universities or hospitals; knowledge-sharing and collaboration; manufacturing and civil engineering

• Medicine – Where millimeters count in surgery, surgeons will be using VR, with the help of 5G technology, to perform remote surgeries. Today, surgeons can use augmented reality to see an actual tumor live in 360 degrees before performing the first incision.3

1 From Q1 2017 through the end of Q1 2018, AR and VR startups raised more than $3.6 billion from venture capital-ists and corporations, which includes the top five global primary players in the AR and VR market. Source: Venture-beat, April 3, 2018, AR/VR market transition begins as startups raise record $3.6 billion.2 Source: Tim Cook, Apple’s CEO, during his Q4 2017 earnings call with analysts. Neither Tim Cook nor Apple are affiliated with or have endorsed the Fund.3 The VR healthcare market was valued at $525 million in 2012 and five years later, by 2017, it had grown to $976 million. Source: Statista 2018 Value of the virtual reality health care market in the U.S. from 2012 to 2017 (in million U.S. dollars) https://www.statista.com/statistics/740367/virtual-reality-health-care-market-growth/

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• Entertainment, Sports and Leisure – A VR headset will let you sit virtual courtside at the next Warriors game. Houzz, the online home furnishings site already uses AR to increase its sales conversion rates by 11 times through its ARKit App, which brings 500,000 objects to life through the user’s mobile phone.4 In 2016, Pokémon Go incited thousands of consumers to chase digital characters around the world with their smartphones.

• Military – Special forces soldiers train in a simulated enemy environment.

• Retail – AR and VR uptake in retail is predicted to have the largest compound annual growth rate (CAGR) at 119.3%.5

Technology companies driving the growth behind AR & VR Future projections see increased global activity in research & development, investment, and consumer applications.

Technology companies engaged in the research & development or commercialization of products and services related to augmented and virtual reality technology should also benefit. These include businesses involved in video gaming; artificial intelligence, including machine vision and natural language processing; graphic processing units; cloud computing infrastructure; mapping; displays including holographic and adaptive interfaces; and sensors.

Major companies have already embarked on their AR and VR strategies. The non-immersive product market has seen the biggest growth, with companies like Microsoft (HoloLens), Facebook (Oculus which also works on Samsung as Samsung Gear), HTC Corporation (Vive), Sony Corporation (Gear VR) and Google (Glass) which are the top five AR and VR vendors. A research report by Market Research Future (MRFR) published in 2018 stated that this market sector is expected to have the largest growth rate, at 82.4% for the forecasted period and until 2025.6

4 A new ARKit app from Houzz brings 500,000 objects to moveable life, Techcrunch at SF Disrupt 20175 “Worldwide Spending on Augmented and Virtual Reality to Achieve a Five-Year CAGR of 71.6% by 2022, According to IDC,” May 31, 2018, at https://www.idc.com/getdoc.jsp?containerId=prUS43860118. Note that retail is just one sector of the AR/VR market reflected in the index stock selection.6 “Global Augmented Reality and Virtual Reality Market Research Report: Forecast to 2025,” Market Research Future, 2018, p.36. Market projections are not representative of future fund growth. Past performance does not guarantee future results.

Digi-Capital™ AR Platform Waves

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The fully-immersive head mounted system, realized through Head Mounted Displays or VR headsets, has seen year upon year of consistent growth from $1.16 billion in 2013 to $7.77 billion in 2018, with a growth trajectory predicted to continue.7 Only Microsoft dominates the entire ecosystem by geographic coverage, product range and industry experience.8

By the Numbers: AR & VR Global ExpansionBased on an analysis of six key geographical markets, the MRFR report estimates that the global AR and VR market is expected to grow with a CAGR of 73.3% by the end of 2025.9 The key markets leading the anticipated growth are the US (78.3%), Europe (77.6%), Southeast Asia (74.3%) followed by Central and South America (73.7%), Japan (65.5%) and China (65%).

The United States is poised to dominate the AR and VR market according to the MRFR report, which envisages a US CAGR of 78.3% by the end of 2025.10 The growing demand for gaming and entertainment head mounted displays is fueling the growth of the AR and VR market in this region. According to International Data Corporation (IDC), the expected demand for AR and VR headsets is expected to reach a level of 68.9 million units sold by 2022 with a CAGR of 52.5%. This is the same level of growth that investors witnessed for the smartphone market from 2008-2012.

Applications in the consumer industry maintain its position as the largest projected source of spending on AR and VR products and services during the forecast period. Consumer spending is followed by the retail, discrete manufacturing, and transportation industries. VR gaming was the dominant source of spending in 2018, reaching around $7 billion; and AR and VR in retail is predicted to have the largest CAGR at 119.3%.

7 “Global Augmented Reality and Virtual Reality Market Research Report: Forecast to 2025,” Market Research Future, 2018, p.36. Market projections are not representative of future fund growth. Past performance does not guarantee future results.8 “Global Augmented Reality and Virtual Reality Market Research Report: Forecast to 2025,” Market Research Future, 2018, p.58. 9 “Global Augmented Reality and Virtual Reality Market Research Report: Forecast to 2025,” Market Research Future, 2018, p.12. Market projections are not representative of future fund growth. Past performance does not guarantee future results.10 “Global Augmented Reality and Virtual Reality Market Research Report: Forecast to 2025,” Market Research Future, 2018, p.12. Market projections are not representative of future fund growth. Past performance does not guarantee future results.

Global Augmented Reality and Virtual Reality Market Share (2013 vs 2017 vs 2025)

US Europe China Japan South East Asia Central and South America

2013 2017 2025

28.46% 31.91%

40.11%

16.47%18.18%

22.15%

35.78%32.05%

21.96%

9.37% 7.78% 5.37%

5.13% 5.25% 5.50%4.79% 4.83% 4.91%

Source: MRFR Analysis

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2019 Catalysts for GrowthMajor global companies have invested and are continuing to prioritize this market. For the first quarter of 2018, venture capital firms committed more than $750 million dollars to AR and VR startups. The Mixed Reality market of AR and VR is an entire ecosystem that spans legacy tech companies like Nvidia, Samsung, Sony, Facebook and Lenovo to software and application platform companies and startups like Blippar, Total Immersion, Mediatek and Pixelcase to Alibaba, which is one of the leading investors in MagicLeap.

Some of the biggest technology companies in the world have committed significant resources to this space, with Facebook rolling out their new Oculus quest headset, and Apple putting a huge emphasis on its AR capability with the new iPhones/iPads and the A12 Bionic Chip.11

There appears to be a strong supply and demand market from all parties in the ecosystem. High levels of technical complexity integrating high computing algorithms and artificial intelligence (AI), set the stage for new vendors in the supply chain. On the supplier side, because of the expansive scope of AR and VR applications across industries like retail, media and entertainment, suppliers are assisting companies in those specialized spaces which enables them to increase their market share. We see the strengths of the supply and demand market as important potential contributors to the forecasted high growth rate of the AR and VR.

The anticipated rollout of 5G should make augmented and virtual reality more accessible, and capable for the everyday user. With the increased bandwidth that 5G will provide, users will have lower latency, better interactivity, and expanded use cases for the technology. We believe that the select companies focusing on developing the underlying technology behind AR and VRare positioned to lead the way in global tech growth.

These developments together support the case for a remarkable year in the AR/VR market in 2019, with the potential for outstanding growth predicted for the next 7 years.12

11 Source: Qualcomm’s “VR and AR pushing connectivity limits,” October 2018.12 Data based on “Global Augmented Reality and Virtual Reality Market Research Report: Forecast to 2025,” Market Research Future, 2018.

2000’s–Present: The AR and VR Market

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The Fund is distributed by Quasar Distributors, LLC.Fund holdings and sectors are subject to change at any time and should not be considered recommendations to buy or sell any security. See the list of the fund’s top ten holdings as of 02/05/2019.

Percentage of Net Assets

3.00%

1.75%

1.69%

1.68%

1.65%

1.62%

1.62%

1.59%

1.59%

1.58%

Name

CLOUDERA INC

RENESAS ELECTRONIC

TERADATA CORP DEL

ALTERYX INC

HITACHI HIGH-TECH

LATTICE SEMICONDUCTOR CORP

SPLUNK INC

NIPPON TEL&TEL CP

ATOS SE

INTERNATIONAL BUSINESS MACHS COM

Potential Benefits of ETF Investing:The Defiance Future Technology ETF-AUGR:

• Is a low-cost* rules-based ETF providing exposure to a group of globally-listed stocks of companies engaged in the research & development or commercialization of products, and services related to augmented and virtual reality. (See our list of holdings).13

• Incorporates an equal weight methodology which offers investors more precise exposure, including to smaller companies with more potential for growth.

• Incorporates index components which are assigned an equal weight subject to a liquidity overlay – they are reviewed semi-annually for eligibility, and the weights are reset accordingly.

• Is a diversified basket of stocks that can potentially benefit from the expansion of the AR/VR market and the success of AR/VR-investing company stocks. Rather than buy one or two individual equities focused on this sector, investors can invest in a way that provides diversification while maintaining a targeted view for their portfolio.

• Is a cost-effective way to access this market at 0.40% gross expense ratio (see prospectus).

13 The possible applications of augmented and virtual reality are only in the exploration stages, and the possibility of returns is uncertain and may not be realized in the near future.

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AUGR

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About Defiance ETFs, LLCDefiance provides investors access to low-cost* ETFs tied to transformative trends, and disruptive sectors.

*A commission may apply when buying or selling an ETF.

The Funds’ investment objectives, risks, charges, and expenses must be considered carefully before investing. The prospectus contains this and other important information about the investment company. Please read it carefully before investing. A hard copy of the prospectus can be requested by calling 833.333.9383.

The possible applications of augmented and virtual reality are only in the exploration stages, and the possibility of returns is uncertain and may not be realized in the near future.

Fund holdings and sector allocations are subject to change at any time and should not be considered recommendations to buy or sell any security.

Investing involves risk. Principal loss is possible. As an ETF, the fund may trade at a premium or discount to NAV. Shares of any ETF are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. The Fund is not actively managed and would not sell a security due to current or projected under performance unless that security is removed from the Index or is required upon a reconstitution of the Index. A portfolio concentrated in a single industry or country, may be subject to a higher degree of risk. The value of stocks of information technology companies are particularly vulnerable to rapid changes in technology product cycles, rapid product obsolescence, government regulation and competition. The Fund is considered to be non-diversified, so it may invest more of its assets in the securities of a single issuer or a smaller number of issuers. Investments in foreign securities involve certain risks including risk of loss due to foreign currency fluctuations or to political or economic instability. This risk is magnified in emerging markets. Small and mid-cap companies are subject to greater and more unpredictable price changes than securities of large-cap companies.

Diversification does not assure a profit, nor does it protect against a loss in a declining market.

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