Once a market investable equity universe is defined, it is segmented into the following
size-based indices:
Creating the size segment indices in each market involves the following steps:
(i) defining the market coverage target range for each size segment; (ii) determining the global minimum size range for each size segment; (iii) determining the market size-segment cutoffs and associated segment number of companies;
(iv) assigning companies to the size segments; and (v) applying final size-segment investability requirements. For developed market indices and emerging market indices, the market coverage for a standard index is 85% and 42.5%
respectively. As of November 2015, the global minimum size range for a developed market standard index is a full market capitalization of USD 2.52 billion to USD 5.80 billion, and the global minimum size range for an emerging market standard index
is a full market capitalization of USD 1.26 billion to USD 2.90 billion.
In order to achieve index continuity, as well as provide some basic level of diversification within a market index, notwithstanding the effect of other
index construction rules, a minimum number of five constituents will be maintained for a developed market standard index and a minimum number of three constituents will be maintained for an emerging market standard index, and involves the following
steps:
All securities in the investable equity universe are classified into value or growth segments. The classification of a security into the value or growth
segment is used by MSCI to construct additional indices.
All securities in the global investable equity universe are assigned to the industry that best describes their business activities. The GICS
classification of each security is used by MSCI to construct additional indices.
The performance of each of the MSCI Indices is a free float weighted average of the U.S. dollar values of its component securities.
Prices used to calculate the component securities are the official exchange closing prices or prices accepted as such in the relevant market. In the case
of a market closure, or if a security does not trade on a specific day or during a specific period, MSCI carries forward the previous days price (or latest available closing price). In the event of a market outage resulting in any component
security price to be unavailable, MSCI will generally use the last reported price for such component security for the purpose of performance calculation unless MSCI determines that another price is more appropriate based on the circumstances.
Closing prices are converted into U.S. dollars, as applicable, using the closing exchange rates calculated by WM/Reuters at 4:00 P.M. London Time.
Companies may be listed simultaneously on more than one stock exchange in Japan. A company may apply for delisting from one stock exchange while
remaining listed on other stock exchanges. For such delisting, Japanese stock exchanges generally give notice one month prior to the expected last trading date of the security to be delisted. Should such delisting involve a change in the primary
exchange and/or trigger a change in the price source, MSCI will obtain the price of the security from the new primary exchange two weeks after an announcement of delisting from the stock exchange.
The MSCI Indices are net daily total return indices. A daily total return index measures the market performance, including price performance and income
from regular cash distributions, while a net daily total return index measures the price performance and income from dividends, net of certain withholding taxes. MSCI calculates withholding taxes using the highest applicable withholding tax rate
applicable to institutional investors. The current withholding tax rate used by MSCI to calculate the MSCI Japan Index is 15.315%. This net income is reinvested in the index and thus makes up part of the total index performance. MSCIs net
daily total return methodology reinvests net cash dividends in indices the day the security is quoted ex-dividend, or on the ex-date (converted to U.S. dollars, as applicable). In the case of the MSCI Japan Index, since many Japanese companies
declare their dividends after the ex-date but make estimated dividends broadly available before the ex-date, an estimation of the dividend, or else the previous year dividend if no estimation is available, is reinvested on the ex-date. Certain
dividends, including special/extraordinary dividends and commemorative dividends, are reinvested in the indices if, a day prior to the ex-date, the dividend impact on price is less than 5%. If the impact is 5% or more, the dividend will be reflected
in the indices through a price adjustment. A specific price adjustment is always applied for stock dividends that are issued at no cost to the shareholders, an extraordinary capital repayment or a dividend paid in the shares of another company. Cash
payments related to corporate events, such as mergers and acquisitions, are considered on a case-by-case basis.
In order to maintain the representativeness of the MSCI Indices, structural changes may be made by adding or deleting component securities.
Currently, such changes in the MSCI Indices may generally only be made on four dates throughout the year: after the close of the last scheduled business day of each February, May, August and November.
Each country index is maintained with the objective of reflecting, on a timely basis, the evolution of the underlying equity markets. In maintaining each
component country index, emphasis is also placed on its continuity, continuous investability of constituent and replicability of the index and on index stability and minimizing turnover.
MSCI classifies index maintenance in three broad categories. The first consists of ongoing event related changes, such as mergers and acquisitions, which
are generally implemented in the country indices in which they occur. The second category consists of quarterly index reviews, aimed at promptly reflecting other significant market events. The third category consists of semi-annual index reviews
that systematically re-assess the various dimensions of the equity universe.
Ongoing event-related changes to the MSCI Indices are the result of
mergers, acquisitions, spin-offs, bankruptcies, reorganizations and other similar corporate events. They can also result from capital reorganizations in the form of rights issues, stock bonus issues, public placements and other similar corporate
actions that take place on a continuing basis. MSCI will remove from the indices as soon as practicable securities of companies that file for bankruptcy or other protection from their creditors, that are suspended and for which a return to normal
business activity and trading is unlikely in the near future; or that fail stock exchange listing requirements with a delisting announcement. Securities may also be considered for early deletion in other significant cases, such as decreases in free
float and foreign ownership limits, or when a constituent company acquires or merges with a non-constituent company or spins-off another company. In practice, when a constituent company is involved in a corporate event which results in a significant
decrease in the companys free float adjusted market capitalization or the company decreases its foreign inclusion factor to below 0.15, the securities of that constituent company are considered for early deletion from the indices
simultaneously with the event unless, in either case, it is a standard index constituent with a minimum free float-adjusted market capitalization is not at least two-thirds of one-half of the standard index interim size segment cut-off. Share
conversions may also give rise to an early deletion. All changes resulting from corporate events are announced prior to their implementation in the indices, provided all necessary information on the event is available.
MSCIs quarterly index review process is designed to ensure that the country indices continue to be an accurate reflection of evolving equity
markets. This goal is achieved by timely reflecting significant market driven changes that were not captured in each index at the time of their actual occurrence and that should not wait until the semi-annual index review due to their importance.
These quarterly index reviews may result in additions and deletions of component securities from a country index (or a security being removed from one country listing and represented by a different country listing) and changes in foreign
inclusion factors and in number of shares. Additions and deletions to component securities may result from: the addition of large companies that did not meet the minimum size criterion for inclusion at the time of their initial public offering
or secondary offering; the replacement of companies which are no longer suitable industry representatives; the deletion of securities whose overall free float has fallen to less than 15% and that do not meet specified criteria; the deletion of
securities that have become very small or illiquid; and the addition or deletion of
securities as a result of other market events. Significant changes in free float estimates and corresponding changes in the foreign inclusion factor for component securities may result from:
large market transactions involving strategic shareholders that are publicly announced; secondary offerings that, given lack of sufficient notice or small size (less than 5% of the companys outstanding shares) were not reflected immediately;
increases in foreign ownership limits; decreases in foreign ownership limits which did not require foreign investors to immediately sell shares in the market; corrections resulting from the reclassification of shareholders from strategic to
non-strategic, and vice versa, and/or updates to the number of shares outstanding; updates to foreign inclusion factors following the public disclosure of new shareholder structures for companies involved in mergers, acquisitions or spin-offs, where
different from MSCIs pro forma free float estimate at the time of the event; conversions of exchangeable bonds and other similar securities into already existing share types; the end of lock-up periods or expiration of loyalty incentives for
non-strategic shareholders; and changes in the foreign inclusion factor as a result of other events of similar nature. Small changes in the number of shares resulting from, for example, exercise of options or warrants, conversion of convertible
bonds or other instruments or share buybacks, are generally updated at the quarterly index review rather than at the time of the change. The results of the quarterly index reviews are announced at least two weeks in advance of their effective
implementation dates as of the close of the last business day of February and August. MSCI has noted that consistency is a factor in maintaining each component country index.
MSCIs semi-annual index review is designed to systematically reassess the component securities of the index. During each semi-annual index review,
the universe of component securities is updated and the global minimum size range for the index is recalculated, which is based on the full market capitalization and the cumulative free float-adjusted market capitalization coverage of each security
that is eligible to be included in the index. The following index maintenance activities, among others, are undertaken during each semi-annual index review: the list of countries in which securities may be represented by foreign listings is
reviewed; the component securities are updated by identifying new equity securities that were not part of the index at the time of the previous quarterly index review; the minimum size requirement for the index is updated and new companies are
evaluated relative to the new minimum size requirement; existing component securities that do not meet the minimum liquidity requirements of the index may be removed (or, with respect to any such security that has other listings, a determination is
made as to whether any such listing can be used to represent the security in the market investable universe); and changes in foreign inclusion factors are implemented. During a semi-annual index review, component securities may be added
or deleted from a country index for a range of reasons, including the reasons discussed with respect to component securities changes during quarterly index reviews as discussed above. Foreign listings may become eligible to represent securities only
from the countries that met the foreign listing materiality requirement during the previous semi-annual index review (this requirement is applied only to countries that do not yet include foreign listed securities). Once a country meets the foreign
listing materiality requirement at a given semi-annual index review, foreign listings will remain eligible for such country even if the foreign listing materiality requirements are not met in the future.
Index maintenance also includes monitoring and completing adjustments for share changes, stock splits, stock dividends, and stock price adjustments due
to company restructurings or spin-offs.
Daily closing price information for the MSCI Indices is available on the following website:
http://www.msci.com. We are not incorporating by reference that website or any material it includes in this prospectus supplement.
The closing price of shares of the ETF has fluctuated in the past and may, in the future, experience
significant fluctuations. Any historical upward or downward trend in the closing price of the shares during the period shown below is not an indication that the shares are more or less likely to increase or decrease at any time during the life of
your notes. The period shown below will be approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring
less than ten years from the date hereof or otherwise).
The graph below shows the daily historical prices of the shares of the ETF from April 28, 2006 through
April 28, 2016. We obtained the closing prices shown in the graph below from Bloomberg Financial Services without independent verification.
For additional information regarding the company or BFA, please consult the reports (including the Semi-Annual Report to Shareholders on Form N-CSRS for
the period ended February 28, 2015) and other information the company files with the SEC. In addition, information regarding the ETF, including its top portfolio holdings, may be obtained from other sources including, but not limited to, press
releases, newspaper articles, other publicly available documents and the iShares
®
website at http://us.ishares.com/product_info/fund/overview/EWJ.htm. We are not incorporating by
reference the website, the sources listed above or any material they include in this prospectus supplement.
The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the index. The
ETFs investment objective and the index may be changed without the approval of BFAs shareholders.
The following table displays the top
holdings and weightings by industry sector of the ETF. (Sector designations are determined by the ETF sponsor using criteria it has selected or developed. Index and ETF sponsors may use very different standards for determining sector designations.
In addition, many companies operate in a number of sectors, but are listed in only one sector and the basis on which that sector is selected may also differ. As a result, sector comparisons between indices or ETFs with different sponsors may reflect
differences in methodology as well as actual differences in the sector composition of the indices or ETFs.) We obtained the information in the tables below from the ETF website without independent verification.
BFA uses a
representative sampling indexing strategy to manage the ETF. For the ETF, this strategy involves investing in a representative sample of securities that collectively have an investment profile similar to that of the index. The securities selected
are expected to have, in the aggregate, investment characteristics (based on factors such as market capitalization and industry weightings), fundamental characteristics (such as return variability and yield) and liquidity measures similar to those
of the index.
The ETF will at all times invest at least 90% of its assets in the securities of the index and in depositary receipts representing
securities of the index. The ETF may invest the remainder of its assets in other securities, including securities not in the index, but which BFA believes will help the ETF track the index. The ETF may also invest its other assets in futures
contracts, options on futures contracts, other types of options and swaps related to the index, as well as cash and cash equivalents, including shares of money market funds advised by BFA or its affiliates. Also, the ETF may lend securities
representing up to one-third of the value of the ETFs total assets (including the value of the collateral received).
The performance of the ETF and the index may vary due to a variety of factors, including differences between the securities and other instruments held in
the ETFs portfolio and those included in the index, pricing differences (including differences between a securitys price at the local market close and the ETFs valuation of a security at the time of calculation of the ETFs
net asset value), transaction costs, the ETF holding uninvested cash, differences in timing of the accrual of dividends or interest, tax gains or losses, changes to the index or the costs of complying with various new or existing regulatory
requirements. Tracking error also may result because the ETF incurs fees and expenses, while the index does not. BFA expects that, over time, the ETFs tracking error will not exceed 5%. The ETFs use of a representative sampling indexing
strategy can be expected to produce a larger tracking error than would result if the ETF used a replication indexing strategy in which an ETF invests in substantially all of the securities in its index in approximately the same proportions as in the
index.
As of March 31, 2016, iShares reported the following average annual returns on the market price of the
ETFs shares and the index. The market price of the ETFs shares takes into account distributions on the shares and the returns shown account for changes in the mid-point of the bid and ask prices at 4:00 p.m., Eastern time on the relevant
date. ETF shares: 1 year, -7.65%; 3 years, 3.16%; 5 years, 3.65%; 10 years, -0.93%; since inception, - 0.34%; index: 1 year,
-7.06%;
3 years, 3.82%; 5 years, 4.03%; 10 years, -0.42%; since ETF
inception, 0.29%.
The ETF will concentrate its investments (i.e., hold 25% or more of its total assets) in a particular industry or group of industries to approximately
the same extent that the index is concentrated.
The index is a stock index calculated, published and disseminated daily by MSCI Inc. (MSCI) through numerous data vendors, on the MSCI
website and in real time on Bloomberg Financial Markets and Reuters Limited.
The index is a free float-adjusted market capitalization index and is
one of the MSCI Global Investable Market Indices (the MSCI Indices), the methodology of which is described below. The index is categorized by MSCI as a developed market index and is considered a standard index, which means it
consists of all eligible large capitalization and mid-capitalization stocks, as determined by MSCI, in the relevant market. Additional information about the MSCI Indices is available on the following website: https://www.msci.com/index-methodology.
Daily closing price information for the index is available on the following website: http://www.mscibarra.com/products/indices/international_equity_indices/performance.html. We are not incorporating by reference the website, the sources listed above
or any material they include in this prospectus supplement.
The index is designed to measure the performance of the large- and mid-capitalization
segments of Japans equity market. The 318 constituent stocks of the index (as of April 7, 2016) are selected from an eligible universe of equity securities listed on national Japanese stock exchanges including the First Section, Second
Section and Mothers portion of the Tokyo Stock Exchange, the TSE, JASDAQ and the First Section, Second Section and Centrex portion of the Nagoya Stock Exchange. The index is calculated in U.S. dollars on a total return net basis. The index was
launched on December 31, 1969 at an initial value of 100.
MSCI divides the companies included in the index into ten Global Industry
Classification Sectors: Financials, Consumer Discretionary, Industrials, Information Technology, Consumer Staples, Materials, Health Care, Telecommunication Services, Utilities and Energy.
For additional information about the construction, calculation methodology and maintenance of the index, please see
iShares
®
MSCI EAFE ETF
Construction of the MSCI Indices,
iShares
®
MSCI EAFE ETF
Calculation
Methodology for the MSCI Indices and
iShares
®
MSCI EAFE ETF
Maintenance of the MSCI Indices, respectively, on pages S-80, S-83 and S-84 of this prospectus
supplement, respectively.
The closing price of shares of the ETF has fluctuated in the past and may, in the future, experience significant fluctuations. Any historical upward or
downward trend in the closing price of the shares during the period shown below is not an indication that the shares are more or less likely to increase or decrease at any time during the life of your notes. The period shown below will be
approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from the date hereof
or otherwise).
The graph below shows the daily historical prices of the shares of the ETF from April 28, 2006 through April 28, 2016. We obtained the closing
prices shown in the graph below from Bloomberg Financial Services without independent verification.
The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the index. The
ETFs investment objective and the index that the ETF tracks may be changed without shareholder approval.
BFA uses a representative sampling
indexing strategy to attempt to track the performance of the index. For the ETF, this strategy involves investing in a representative sample of securities that collectively have an investment profile similar to that of the index. The securities
selected are expected to have, in the aggregate, investment characteristics (based on factors such as market capitalization and industry weightings), fundamental characteristics (such as return variability, duration, maturity or credit ratings and
yield) and liquidity measures similar to those of the index. The ETF may or may not hold all of the securities in the index.
The ETF generally
invests at least 90% of its assets in the bonds in the index and at least 95% of its assets in U.S. government bonds. The ETF may invest up to 10% of its assets in U.S. government bonds not included in the index, but which BFA believes will help the
ETF track the index. The ETF may also invest up to 5% of its assets in repurchase agreements collateralized by U.S. government obligations and in cash and cash equivalents, including shares of money market funds advised by BFA or its affiliates. The
ETF may lend securities representing up to one-third of the value of the ETFs total assets (including the value of the collateral received).
The index is sponsored by
Interactive Data Pricing and Reference Data LLC. It is market value weighted and designed to measure the performance of U.S. dollar-denominated, fixed rate treasuries with a minimum term to maturity greater than 20 years.
The Interactive Data Index Governance Committee (the governance committee) is responsible for governance, accountability and oversight of the
index along with oversight of the Interactive Data ETF & Index Services team (the IDEIS), which has the daily responsibility for the operation of the index. The governance committee will approve any necessary changes to the
index methodology, and the IDEIS is responsible for implementing the changes and notifying
subscribers. Advance notice will be provided for methodology changes, where possible, and the amount of notice will be based upon the severity of the impact of the change to allow for comments
from subscribers and appropriate preparation to implement the change.
In order to be included in the index, a security must be a U.S. dollar denominated, fixed rate U.S. Treasury issued debt security (treasury)
with a minimum term to maturity greater than 20 years. Inflation-linked securities, floating rate notes, cash management and treasury bills and government agency debt, whether issued with or without a government guarantee, are excluded from the
index, as are zero coupon securities. The treasury is required to have a minimum amount outstanding of $300 million U.S. dollars. Amount outstanding is defined as the par amount outstanding of each treasury, inclusive of any announced auctions or
re-openings, less the par amount of that treasury held in the Federal Reserve System Open Market Account (SOMA) or bought at issuance (including by auction) by the Federal Reserve. Secondary market purchases by the Federal Reserve are
reflected in the index in the month following the purchase.
Index returns are calculated by aggregating the constituent level returns using market weights. The total market value of the index at any time is the
sum of the market value of each constituent plus any intra-month cash from coupon payments or principal repayments. Calculations are performed daily, using bid prices at 3 p.m. Eastern Time.
The index is rebalanced on
the last business day (a day that SIFMA declares the U.S. fixed income markets open) of each month. The index composition for the next month is published three business days before the end of the prior month, which will include all eligible
treasuries, including any new auctions or re-openings which are announced on or before the third business day before the prior month end. Newly issued securities that are issued on or before the month-end rebalancing date that qualify for inclusion
in the index will be included in the pro forma index with a price of $100 until replaced with an evaluated price as soon as available after the auction day.
No adjustments are made for treasuries that become eligible or ineligible intra-month. Any such change will be incorporated in the index at the next
month-end rebalancing and made effective from the first day of the following month.
Cash that has accrued intra-month from interest and principal
payments earns no reinvestment return during the month. The accumulated intra-month cash is removed from the index at month-end, which implies that it is reinvested pro rata across the entire index.
The following table displays additional information about the bonds held by the ETF and the annualized performance
difference, in each case as of April 15, 2016*. We obtained the information in the table below from the iShares
®
website without independent verification.
Weighted average maturity is the length of time until the average security in the ETF will mature or be redeemed by its
issuer. Weighted average coupon is the average coupon rate of the underlying bonds in the ETF, weighted by the relative size in the ETF. Effective duration is a measure of the potential responsiveness of a bond or portfolio price to small parallel
shifts in interest rates, taking into account the possible changes in expected bond cash flows due to small parallel shifts in interest rates.
As of
April 8, 2016*, the ETFs holdings were comprised of 32 U.S. Treasury bonds (99.02% of holdings) and cash and/or derivatives (0.98% of holdings). Of the ETFs U.S. Treasury bond holdings, all were AAA rated under the S&P major
rating category. The S&P major rating categories are derived from the S&P, Moodys and Fitch ratings for a security.
*Prior to
April 1, 2016, the ETF tracked the Barclays U.S. 20+ Year Treasury Bond Index.
The performance of the ETF and the index may vary due to a variety of factors, including differences between the securities held in the ETFs
portfolio and those included in the index, pricing differences, transaction costs, the ETF holding uninvested cash, differences in timing of the accrual of distributions, changes to the index or the costs of complying with new or existing regulatory
requirements. Tracking error also may result because the ETF incurs fees and expenses, while the index does not. BFA expects that, over time, the ETFs tracking error will not exceed 5%. The ETFs use of a representative sampling indexing
strategy can be expected to produce a larger tracking error than would result if the ETF used a replication indexing strategy in which an ETF invests in substantially all of the securities in its index in approximately the same proportions as in the
index.
As of March 31, 2016, iShares reported the following average annual returns on the market price of the ETFs shares and the index.
The market price of the ETFs shares takes into account distributions on the shares and the returns shown account for changes in the mid-point of the bid and ask prices at 4:00 p.m., Eastern time on the relevant date. ETF shares: 1 year, 2.42%;
3 years, 6.43%; 5 years, 10.42%; 10 years, 7.98%; since inception, 7.51%; index: 1 year, 2.46%;
3 years, 6.47%; 5 years, 10.50%; 10 years, 8.08%; since ETF inception, 7.61%. Prior to April 1, 2016, the ETF tracked the Barclays U.S. 20+ Year Treasury Bond Index.
The closing price of shares of the ETF has fluctuated in the past and may, in the future, experience significant fluctuations. Any historical upward or
downward trend in the closing price of the shares during the period shown below is not an indication that the shares are more or less likely to increase or decrease at any time during the life of your notes. The period shown below will be
approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from the date hereof
or otherwise).
The graph below shows the daily historical prices of the shares of the ETF from April 28, 2006 through April 28, 2016. We obtained the closing
prices shown in the graph below from Bloomberg Financial Services without independent verification.
*Prior to April 1, 2016, the ETF tracked the Barclays U.S. 20+ Year Treasury Bond Index.
The closing level of the ICE U.S. Treasury 20+ Year Bond Index has fluctuated in the past and may, in the future, experience significant
fluctuations. Any upward or downward trend in the historical or hypothetical closing level of the ICE U.S. Treasury 20+ Year Bond Index during the period shown below is not an indication that the ICE U.S. Treasury 20+ Year Bond Index is more or
less likely to increase or decrease at any time during the life of your notes.
You should not take the historical or hypothetical closing levels of
the ICE U.S. Treasury 20+ Year Bond Index as an indication of the future performance of the ICE U.S. Treasury 20+ Year Bond Index or make any assumptions, based on the ICE U.S. Treasury 20+ Year Bond Indexs historical or hypothetical
performance, about the performance of the ETF. We cannot give you any assurance that the future performance of the ETFs shares will be consistent with the historical or hypothetical performance of the ICE U.S. Treasury 20+ Year Bond Index.
The graph below shows the closing levels of the ICE U.S. Treasury 20+ Year Bond Index from April 28, 2006 through April 28, 2016 (using
hypothetical performance data and historical closing levels). Since the ICE U.S. Treasury 20+ Year Bond Index was launched on December 31, 2015 and has a limited operating history, the graph includes hypothetical performance data for the
underlier prior to its launch on December 31, 2015. The hypothetical performance data and
historical closing levels were obtained from ICEs website, without independent verification. (In the graph, historical closing levels can be found to the right of the vertical solid line
marker.)
*The ETF began tracking the ICE U.S. Treasury 20+ Year Bond Index on April 1, 2016.
The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the index. The
ETFs investment objective and the index may be changed without the approval of BFAs shareholders.
The following table displays the top
holdings and weightings by industry sector of the ETF. (Sector designations are determined by the ETF sponsor using criteria it has selected or developed. Index and ETF sponsors may use very different standards for determining sector designations.
In addition, many companies operate in a number of sectors, but are listed in only one sector and the basis on which that sector is selected may also differ. As a result, sector comparisons between indices or ETFs with different sponsors may reflect
differences in methodology as well as actual differences in the sector composition of the indices or ETFs.) We obtained the information in the tables below from the ETF website without independent verification.
|
|
|
Corporate Bond Issuer
|
|
Percentage (%)
|
ANHEUSER-BUSCH INBEV
FINANCE INC
|
|
0.55%
|
ANHEUSER-BUSCH INBEV FINANCE INC
|
|
0.47%
|
BLK CSH FND TREASURY SL AGENCY
|
|
0.41%
|
VERIZON COMMUNICATIONS INC
|
|
0.39%
|
GE CAPITAL INTERNATIONAL FUNDING C 144A
|
|
0.38%
|
VERIZON COMMUNICATIONS INC
|
|
0.32%
|
ANHEUSER-BUSCH INBEV FINANCE INC
|
|
0.29%
|
GOLDMAN SACHS GROUP INC/THE
|
|
0.28%
|
ANHEUSER-BUSCH INBEV FINANCE INC
|
|
0.27%
|
ANHEUSER-BUSCH INBEV FINANCE INC
|
|
0.26%
|
|
|
|
Total
|
|
3.62%
|
iShares
®
iBoxx $ Investment Grade Corporate Bond ETF
Weighting by Sector as of April 15, 2016*
|
|
|
Sector
|
|
Percentage (%)
|
Banking
|
|
26.76%
|
Consumer Non-Cyclical
|
|
17.60%
|
Communications
|
|
13.35%
|
Energy
|
|
9.80%
|
Technology
|
|
8.31%
|
Consumer Cyclical
|
|
8.07%
|
Capital Goods
|
|
4.07%
|
Basic Industry
|
|
3.18%
|
Insurance
|
|
3.58%
|
Electric
|
|
1.12%
|
Transportation
|
|
0.89%
|
Finance Companies
|
|
0.90%
|
REITs
|
|
0.67%
|
Owned No Guarantee
|
|
0.51%
|
Brokerage/Asset Managers/Exchanges
|
|
0.51%
|
Cash and/or Derivatives
|
|
0.61%
|
Natural Gas
|
|
0.07%
|
Utility Other
|
|
0.01%
|
|
|
|
Total
|
|
100.01%
|
* Percentages may not sum to 100% due to rounding.
|
The following table displays additional information about the bonds held by the ETF, in each case as of April 15,
2016. We obtained the information in the table below from the iShares
®
website without independent verification.
|
|
|
Weighted average maturity
|
|
12.47 years
|
|
|
Weighted average coupon
|
|
4.17%
|
|
|
Effective duration
|
|
8.33 years
|
S-97
Weighted average maturity is the length of time until the average security in the ETF will mature or be
redeemed by its issuer. Weighted average coupon is the average coupon rate of the underlying bonds in the ETF, weighted by the relative size in the ETF. Effective duration is a measure of the potential responsiveness of a bond or portfolio price to
small parallel shifts in interest rates, taking into account possible changes in expected bond cash flows due to small parallel shifts in interest rates.
Representative Sampling
Although the ETF seeks
results that correspond generally to the performance of the index, the ETF uses a representative sampling indexing strategy to attempt to track the performance of the index. For the ETF, this strategy involves investing in a representative sample of
securities that collectively have an investment profile similar to that of the index, although the ETF may or may not hold all of the securities in the index. The securities selected are expected to have, in the aggregate, investment characteristics
(based on factors such as market capitalization and industry weightings), fundamental characteristics (such as return variability, duration, maturity or credit ratings and yield) and liquidity measures similar to those of the index.
The ETF generally invests at least 90% of its assets in the securities of the index and at least 95% of its assets in investment-grade corporate bonds.
The ETF may invest up to 5% of its assets in repurchase agreements collateralized by U.S. government obligations and in cash and cash equivalents, including shares of money market funds advised by BFA or its affiliates. The ETF may also invest in
bonds not included in the index, but which BFA believes will help the ETF track the index. The ETF may also lend securities representing up to one-third of the value of the ETFs total assets (including the value of the collateral received).
Tracking Error
The performance of the ETF
and of the index may vary due to a variety of factors, including transaction costs, non-U.S. currency valuations, asset valuations, corporate actions (such as mergers and spin-offs), timing variances and differences between the ETFs portfolio
and the index resulting from the ETFs use of representative sampling or from legal restrictions (such as diversification requirements) that apply to the ETF but not to the index.
Tracking error may occur because of differences between the securities held in the ETFs portfolio and those included in the index, pricing
differences, transaction costs, the ETF holding uninvested cash, differences in timing of the accrual of distributions, changes to the index or the costs of complying with various new or existing regulatory requirements. Tracking error also may
result because the ETF incurs fees and expenses, while the index does not. BFA expects that, over time, the ETFs tracking error will not exceed 5%. The ETFs use of a representative sampling strategy can be expected to produce a larger
tracking error than would result if the ETF used a replication indexing strategy in which an ETF invests in substantially all of the securities in the index in approximately the same proportions as in the index.
As of March 31, 2016, iShares reported the following average annual returns on the market price of the ETFs shares and the index. The market
price of the ETFs shares takes into account distributions on the shares and the returns shown account for changes in the mid-point of the bid and ask prices at 4:00 p.m., Eastern time on the relevant date. ETF shares: 1 year, 1.01%; 3 years,
3.25%; 5 years, 5.79%; 10 years, 5.90%; since inception, 5.78%; index: 1 year, 1.32%; 3 years, 3.49%; 5 years, 5.95%; 10 years, 6.28%; since ETF inception, 6.04%.
Industry Concentration Policy
The ETF will
concentrate its investments (
i.e.
, hold 25% or more of its total assets) in a particular industry or group of industries to approximately the same extent that the index is concentrated in that industry or group of industries. For purposes of
this limitation, securities of the U.S. government (including its agencies and instrumentalities), repurchase agreements collateralized by U.S. government securities, and securities of state or municipal governments and their political subdivisions
are not considered to be issued by members of any industry.
The Index
The index is a bond index calculated, published and disseminated by the index sponsor, Markit Indices Limited (Markit). The index is designed
to provide a balanced representation of the U.S. dollar denominated liquid investment grade corporate debt market. The index is market-value weighted, with an issuer weight cap of 3%, calculated as of the last business day of each month using the
end-of-month closing prices for each bond. The index is calculated as end-of-day and distributed once daily after 4 p.m. EST. The indices are calculated every day except on common U.S. bank holidays. In addition, the indices are calculated with the
previous trading days close on the last calendar day of each month if that day is not a trading day.
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As of April 8, 2016, the index included approximately 1,546 bonds chosen according to the index rules
described below.
Selection Criteria of the Index
The bonds in the index must meet all the criteria described below as of the close of business three business days prior to the rebalancing date, and in
each case provided that the relevant bond data can be verified, at Markits sole discretion, as of that cut-off date. The new index composition becomes effective on the first business day of the next month. Additionally, the index rules and
their application will be governed by two committees:
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Technical Committee: consists of representatives from market makers/banks and meets on a monthly basis in order to provide feedback and information into the monthly rebalancing process and to monitor any market
developments.
|
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●
|
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Oversight Committee: consists of representatives from mostly the buy side and meets in order to discuss the decisions of the Technical Committee, the wider index rules and any market developments which may warrant rule
changes.
|
Bond Classification:
Bonds must be USD denominated corporate credit (
i.e.
, debt instruments backed by corporate
issuers that are not secured by specific assets) with clearance and settlement available through The Depository Trust Company. Bonds must be publicly registered with the U.S. Securities and Exchange Commission or be Rule 144A offerings with
registration rights. Debt issued by governments, sovereigns, quasi-sovereigns, and government-backed or guaranteed entities is excluded. As of August 2012, the issuer or, in the case of a finance subsidiary, the issuers guarantor, must be
domiciled, incorporated and the country of risk must be in Andorra, Australia, Austria, Belgium, Bermuda, Canada, Cayman Islands, Cyprus, Denmark, Faeroe Islands, Finland, France, Germany, Gibraltar, Greece, Hong Kong, Iceland, Ireland, Italy,
Japan, Jersey, Liechtenstein, Luxembourg, Malta, Monaco, Netherlands, New Zealand, Norway, Portugal, San Marino, Singapore, Spain, Sweden, Switzerland, United States or United Kingdom. A new country is added to the index if it is classified as a
developed market on the Markit Global Economic Development Classification. A country is no longer eligible for the index if it is classified as an emerging market based on the Markit Global Economic Development
Classification. The Markit Global Economic Development Classification is updated once per year. The results are published at the end of July. The inclusion/exclusion of a country becomes effective at the end of October. Each bond
is assigned to one of the following six sectors: Consumer Goods, Consumer Services, Financials, Industrials & Materials, Telecommunication & Technology and Utilities & Energy.
All bonds are classified based on the principal activities of the issuer, the main sources of the cash flows used to pay coupons and redemptions, and a
bonds specific collateral type or legal provisions. Markit reviews bond classification regularly and makes necessary changes at the next rebalancing.
Bond Type:
Only fixed rate bonds whose cash flow can be determined in advance are eligible, including fixed coupon bonds, step-up bonds with
coupon schedules known at issuance (or as functions of the issuers rating), bonds with sinking funds, amortizing bonds, medium term notes, Rule 144A offerings with a registration right (only 144A bonds with a Regulation S version eligible for
the Markit iBoxx
®
USD Benchmark Index), callable bonds and putable bonds. Preferred shares, convertible bonds, subordinated bank or insurance debt with mandatory contingent conversion features
or with any conversion options before the first call date, bonds with other equity features attached (e.g. options or warrants), private placements, perpetual bonds, fixed-to-floater bonds, floating rate notes, pay-in kind bonds, zero coupon bonds,
bonds with zero step-ups (GAINS), bonds with difference between accrual and coupon payment periods, and monthly-paying bonds are excluded. Any bond subject to a firm call or tender offer, with the exception of exchange offers, in the
month immediately following the rebalancing date will be excluded, provided that Markit is aware of such tender offer or firm call.
For retail bonds
and private placements, publicly available information is not always conclusive and the classification of a bond as a retail bond or a private placement will be made at Markits discretion based on the information available at the time of the
determination. In instances where a new bond type is not specifically excluded or included in the index according to the published index rules, Markit will analyze the features of such securities in line with the principles set out in the index
rules to make the determination as to whether the bond will be included.
Credit Rating:
All bonds must have a Markit iBoxx rating of
investment grade. Ratings from each of the following three agencies are considered for the calculation of the Markit iBoxx Rating: Fitch Ratings, Moodys Investor Service and Standard & Poors Rating Services. Investment grade is
defined as BBB- or above from Fitch or S&P and Baa3 or above from Moodys. If a bond is rated by more than one of the above agencies, then the Markit iBoxx rating is the average of
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the provided ratings. In the case of an ID change or exchange of a Rule 144A/Regulation S offering into a registered bond, the ratings from the Rule 144A/Regulation S offering are also used for
the registered bond.
Time to Maturity:
At the rebalancing day, all bonds must have an expected remaining life of at least three years, and
all newly included bonds must have an expected remaining life of at least three years and six months.
Amount Outstanding:
The outstanding
face value of a bond must be at least $750 million as of the bond selection cut-off date, after taking into account buybacks or increases. The outstanding face value of all bonds denominated in USD in the broader Markit iBoxx USD Investment Grade
Corporate Index (excluding fixed-to-floater and perpetual bonds) from the issuer must be at least $2 billion as of the bond selection cut-off date.
Minimum Run:
Any bond that enters the index must remain in the index for a minimum of six months (provided that the bond is not downgraded to
sub-investment grade, defaulted or fully redeemed in that period).
Lockout Period:
A bond that drops out of the index at re-balancing is
excluded from re-entering the index for a three-month period.
Calculation of the Index
Bond Prices:
All iBoxx indices are multi-source priced. Prices for the bonds in the index are sourced from a number of representative sources.
Pricing data is produced by experienced pricing analysts using established instrument evaluation models; non-transactional data such as observed bid and ask prices may predominate for a given bond as the data is being scrutinized to reliably
represent the interest measured. The pricing service may also decide to rely upon expert judgment in an active albeit low liquidity market or any other circumstances, when observed bid and ask prices or transactions may not be consistently available
each day.
Index Rebalancing:
The index is rebalanced every month on the last business day of the month after the close of business. Any
inclusion after the index cut-off day (t-3) will not be considered in the re-balancing process, but will become effective at the end of the following month. New bonds issued are taken into account if they are publicly known to settle through the
last calendar day of the month and if their rating and amount outstanding has become known at least three trading days before the end of the month.
Three preview lists of eligible bonds are published on ten (t-10), five (t-5), and three (t-3) trading days before the end of the month. Two business
days before the end of each month, the rating and amount information for the constituents is updated and the list is adjusted for all rating and amount changes which are known to have taken place three business days before the end of the month which
could also result in exclusion of the bond. The rating and amount changes made two business days before the end of the month will not be considered for inclusion. Two business days before the end of the month the final index membership list for the
following month is published at the close of business.
Index Weights:
The weight for each bond is determined on the last business day of each
month using the end-of-month market values and applying an issuer cap of 3%.
Index Data:
New bonds are included in the index at their
respective ask prices when they enter the index family. In the event that no price can be established for a particular bond, the index continues to be calculated based on the last-available price.
Index Calculation:
The components of the total return are price changes, accrued interest, coupon payments, and reinvestment income on cash flows
received during the composition month. Calculations are performed daily, using bid prices at approximately 4 p.m. Eastern Time.
Treatment of
Special Intra-Month Events:
Data for the application of corporate actions in the index may not be fully or timely available at all times. In such cases, Markit will estimate the approximate value based on the available data at the time of
calculation.
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Unscheduled Full Redemption: If a bond is fully redeemed intra-month, the redeemed bond is treated as cash based on the last consolidated price, the call price or repurchase price, as applicable. In addition, the clean
price of the bond is set to the redemption price, and the interest accrued until the redemption date is treated as an irregular coupon payment.
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Bonds Trading Flat of Accrued: If a bond is identified as trading flat of accrued, the accrued interest of the bonds is set to 0 in the total return index calculation and the bond is excluded from the calculation of all
bond and index analytical values.
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Multi-Coupon Bonds: For step-up bonds with a pre-defined coupon schedule, such schedule cannot change during the life of the bond and is used for all calculations. For event-driven bonds whose coupon may change upon
occurrence (or non-occurrence) of pre-specified events, the coupon schedule as of the calculation date is used.
|
Additional information
regarding the index may be obtained from other sources including, but not limited to, press releases, newspaper articles, other publicly available documents, the iBoxx $ Liquid Investment Grade Index factsheet at
http://www.markit.com/assets/en/docs/fact-sheets/MKT_iBoxx_USD_Liquid_Investment_Grade_Index_factsheet.pdf and the Markit iBoxx USD Liquid Investment Grade Index Guide at
https://content.markitcdn.com/corporate/Company/Files/DownloadFiles?CMSID=7c8b21e4d5ee4cbda0215f72fec5c25f. We are not incorporating by reference the website, the sources listed above or any material they include in this prospectus supplement.
Historical Closing Prices of the ETFs Shares
The closing price of shares of the ETF has fluctuated in the past and may, in the future, experience significant fluctuations. Any historical upward or
downward trend in the closing price of the shares during the period shown below is not an indication that the shares are more or less likely to increase or decrease at any time during the life of your notes. The period shown below will be
approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from the date hereof
or otherwise).
You should not take the historical closing prices of the shares as an indication of the future performance of the shares.
We
cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes on the stated maturity date. Neither we nor any of our affiliates make any
representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the relevant ETF closing prices between the date of this prospectus supplement and the
date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the payment amount at maturity may bear little relation to the historical prices shown below.
The graph below shows the daily historical prices of the shares of the ETF from April 28, 2006 through April 28, 2016. We obtained the closing
prices shown in the graph below from Bloomberg Financial Services without independent verification.
iShares
®
is a registered trademark of BlackRock
Institutional Trust Company, N.A. (BITC). The index is not sponsored, endorsed, sold, or promoted by BITC. BITC makes no representations or warranties to the owners of the index or any member of the public regarding the advisability of
investing in the index. BITC has no obligation or liability in connection with the operation, marketing, trading or sale of the index.
S-101
iShares
®
iBoxx $ High Yield Corporate Bond
ETF
The shares of the iShares
®
iBoxx $ High Yield Corporate Bond ETF (the
ETF) are issued by iShares
®
Trust, a registered investment company.
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The ETF is a tracking ETF that seeks investment results which correspond generally to the price and yield performance, before fees and expenses, of the index.
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The index it tracks is the Markit iBoxx
®
USD Liquid High Yield Index (the index).
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Investment Advisor: BlackRock Fund Advisors (BFA).
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The ETFs shares trade on the NYSE Arca under the ticker symbol HYG.
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The iShares
®
Trusts SEC CIK Number is 0001100663.
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The ETFs inception date was April 4, 2007.
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The ETFs shares are issued or redeemed only in creation units of 100,000 shares or multiples thereof.
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We obtained the following fee information from the iShares
®
website without independent
verification. The investment advisor is entitled to receive a management fee from the ETF corresponding to the ETFs allocable portion of an aggregate management fee based on the aggregate average daily net assets of the ETF and another
specified iShares
®
fund (the funds) as follows: 0.5000% per annum of the average daily net assets of the combined funds less than or equal to $19.0 billion,
plus
0.4750% per annum of the average daily net assets of the combined funds on amounts greater than $19.0 billion up to $33.0 billion,
plus
0.4513% per annum of the average daily net assets of the combined funds on amounts greater than
$33.0 billion up to $58.0 billion,
plus
0.4287% of the average daily net assets of the combined funds on amounts in excess of $58.0 billion. As of March 31, 2016, the expense ratio of the ETF was 0.50% per annum.
For additional information regarding iShares
®
Trust or BFA, please consult the reports
(including the Annual Report to Shareholders on Form N-CSR for the fiscal year ended February 28, 2015) and other information iShares
®
Trust files with the SEC. In addition, information
regarding the ETF, including its top portfolio holdings, may be obtained from other sources including, but not limited to, press releases, newspaper articles, other publicly available documents, and the iShares
®
website at http://us.ishares.com/product_info/fund/overview/HYG.htm. We are not incorporating by reference the website, the sources listed above or any material they include in this prospectus
supplement.
Investment Objective and Strategy
The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the index. The
ETFs investment objective and the index may be changed without the approval of BFAs shareholders. The following table displays the top holdings and weightings by industry sector of the ETF. (Sector designations are determined by the ETF
sponsor using criteria it has selected or developed. Index and ETF sponsors may use very different standards for determining sector designations. In addition, many companies operate in a number of sectors, but are listed in only one sector and the
basis on which that sector is selected may also differ. As a result, sector comparisons between indices or ETFs with different sponsors may reflect differences in methodology as well as actual differences in the sector composition of the indices or
ETFs.). We obtained the information in the tables below from the ETF website without independent verification.
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iShares
®
iBoxx $ High Yield Corporate Bond ETF
Top Ten Holdings as of April 15, 2016
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Corporate Bond Issuer
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|
Percentage (%)
|
BLK CSH FND TREASURY SL AGENCY
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0.63%
|
NUMERICABLE GROUP SA 144A
|
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0.47%
|
FRONTIER COMMUNICATIONS CORP 144A
|
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0.43%
|
FIRST DATA CORPORATION 144A
|
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0.42%
|
SPRINT CORP
|
|
0.41%
|
SPRINT NEXTEL CORPORATION 144A
|
|
0.41%
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HCA INC
|
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0.40%
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REYNOLDS GROUP ISSUER LLC
|
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0.40%
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ALTICE LUXEMBOURG SA 144A
|
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0.37%
|
CHS/COMMUNITY HEALTH SYSTEMS INC
|
|
0.36%
|
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Total
|
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4.30%
|
iShares
®
iBoxx $ High Yield Corporate Bond ETF Weighting by
Sector as of April 15, 2016*
|
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Sector
|
|
Percentage (%)
|
Communications
|
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25.44%
|
Consumer
Non-Cyclical
|
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14.59%
|
Consumer Cyclical
|
|
11.76%
|
Energy
|
|
10.59%
|
Capital Goods
|
|
7.63%
|
Technology
|
|
6.40%
|
Basic Industry
|
|
5.72%
|
Finance Companies
|
|
5.51%
|
Electric
|
|
3.94%
|
Banking
|
|
3.01%
|
Transportation
|
|
1.42%
|
Cash and/or
Derivatives
|
|
0.57%
|
Financial Other
|
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0.75%
|
Insurance
|
|
0.90%
|
Industrial Other
|
|
0.62%
|
Reits
|
|
0.57%
|
Brokerage/Asset
Managers/Exchanges
|
|
0.25%
|
Owned No Guarantee
|
|
0.32%
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Total
|
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99.99%
|
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* Percentages may not sum to 100% due to rounding.
|
The following table displays additional information about the bonds held by the ETF, in each case as of April 15,
2016. We obtained the information in the table below from the iShares
®
website without independent verification.
|
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Weighted average maturity
|
|
|
4.73 years
|
|
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|
Weighted average coupon
|
|
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6.39%
|
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Effective duration
|
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3.96 years
|
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Weighted average maturity is the length of time until the average security in the ETF will mature or be
redeemed by its issuer. Weighted average coupon is the average coupon rate of the underlying bonds in the ETF, weighted by the relative size in the ETF. Effective duration is a measure of the responsiveness of a bond or portfolio price to small
parallel shifts in interest rates, taking into account possible changes in expected bond cash flows due to small parallel shifts in interest rates.
Representative Sampling
Although the ETF seeks
results that correspond generally to the performance of the index, the ETF uses a representative sampling indexing strategy to attempt to track the performance of the index. For the ETF, this strategy involves investing in a representative sample of
securities that collectively have an investment profile similar to that of the index, although the ETF may or may not hold all of the securities in the index. The securities selected are expected to have, in the aggregate, investment characteristics
(based on factors such as market capitalization and industry weightings), fundamental characteristics (such as return variability, duration, maturity or credit ratings and yield) and liquidity measures similar to those of the index.
The ETF generally invests at least 90% of its assets in the component securities of the index and may invest up to 10% of its assets in certain futures,
options and swaps contracts, cash and cash equivalents, including shares of money market funds affiliated with BFA, as well as in bonds not included in the index, but which BFA believes will help the ETF track the index. From time to time when
conditions warrant, however, the ETF may invest at least 80% of its assets in the component securities of the index and may invest up to 20% of its assets in certain futures, options and swap contracts, cash and cash equivalants, including shares of
BlackRock Cash Funds as well as securities not included in the index, but which BFA believes will help the ETF track the index. For example, the ETF may invest in securities not included in the index in order to reflect prospective changes in the
index. The ETF may also lend securities representing up to one-third of the value of the ETFs total assets (including the value of the collateral received).
Tracking Error
The performance of the ETF and
of the index may vary due to a variety of factors, including transaction costs, non-U.S. currency valuations, asset valuations, corporate actions (such as mergers and spin-offs), timing variances and differences between the ETFs portfolio and
the index resulting from the ETFs use of representative sampling or from legal restrictions (such as diversification requirements) that apply to the ETF but not to the index.
Tracking error may occur because of differences between the securities held in the ETFs portfolio and those included in the index, pricing
differences, transaction costs, the ETF holding uninvested cash, differences in timing of the accrual of distributions, changes to the index or the costs of complying with various new or existing regulatory requirements. Tracking error also may
result because the ETF incurs fees and expenses, while the index does not. Tracking error risk may be heightened during times of increased market volatility or other unusual market conditions.
BFA expects that the ETF may experience higher
tracking error than is typical for similar exchange-traded funds.
BFA expects that, over time, the ETFs tracking error will not exceed 5%. The ETFs use of a representative sampling indexing strategy can be expected to produce a
larger tracking error than would result if the ETF used a replication indexing strategy in which an ETF invests in substantially all of the securities in its index in approximately the same proportions as in the index.
As of March 31, 2016, iShares reported the following average annual returns on the market price of the ETFs shares and the index. The market
price of the ETFs shares represents changes to the mid-point price and accounts for distributions from the ETF. The mid-point is the average of the mid-point of the bid-ask prices at 4:00 p.m., Eastern time on the relevant date. ETF shares: 1
year, -4.60%; 3 years, 0.86%; 5 years, 3.92%; since inception, 4.81%; index: 1
year, - 4.06%;
3 years, 1.30%; 5 years, 4.32%; since ETF inception, 5.28%.
Industry Concentration
The ETF will
concentrate its investments (
i.e.
, hold 25% or more of its total assets) in a particular industry or group of industries to approximately the same extent that the index is concentrated in that industry or group of industries. For purposes of
this limitation, securities of the U.S. government (including its agencies and instrumentalities), repurchase agreements collateralized by U.S. government securities, and securities of state or municipal governments and their political subdivisions
are not considered to be issued by members of any industry.
The Index
The index is a bond index calculated, published and disseminated by the index sponsor, Markit Indices Limited (Markit). The index is designed
to reflect the performance of U.S. dollar (USD) denominated high yield corporate debt
S-104
through a broad coverage of the USD high yield liquid bond universe. The index is market-value weighted, with an issuer weight cap of 3%, calculated as of the last business day of each month
using the end-of-month closing prices for each bond. The index is calculated as end-of-day and distributed once daily after 4 p.m. EST. The indices are calculated every day except on common U.S. bank holidays. In addition, the indices are calculated
with the previous trading days close on the last calendar day of each month if that day is not a trading day.
As of April 8, 2016, the
index included tracked approximately 995 bonds chosen according to the index rules described below.
Selection Criteria of the Index
The bonds in the index must meet all the criteria described below as of the close of business three business days prior to the rebalancing date provided
that the relevant bond data can be verified, at Markits sole discretion, as of that cut-off date. The new index composition becomes effective on the first business day of the next month. Additionally, the index rules and their application will
be governed by two committees:
|
●
|
|
Technical Committee: consists of representatives from market makers/banks and meets on a monthly basis in order to provide feedback and information into the monthly rebalancing process and to monitor any market
developments.
|
|
●
|
|
Oversight Committee: consists of representatives from mostly the buy side and meets in order to discuss the decisions of the Technical Committee, the wider index rules and any market developments which may warrant rule
changes.
|
Bond Classification:
Bonds must be USD denominated corporate credit (
i.e.
, debt instruments backed by corporate
issuers that are not secured by specific assets). Debt issued by governments, sovereigns, quasi-sovereigns, and government-backed or guaranteed entities is excluded. As of August 2012, the issuer or, in the case of a finance subsidiary, the
issuers guarantor, must be domiciled, incorporated and the country of risk must be in Andorra, Australia, Austria, Belgium, Bermuda, Canada, Cayman Islands, Cyprus, Denmark, Faeroe Islands, Finland, France, Germany, Gibraltar, Greece, Hong
Kong, Iceland, Ireland, Italy, Japan, Jersey, Liechtenstein, Luxembourg, Malta, Monaco, Netherlands, New Zealand, Norway, Portugal, San Marino, Singapore, Spain, Sweden, Switzerland, United States or United Kingdom. A new country is added to the
index if it is classified as a developed market according to Markits Global Economic Development Classification. A country is no longer eligible for the index if it is classified as an emerging market based on Markits
Global Economic Development Classification. The Markit Global Economic Development Classification is updated once per year. The results are published at the end of July. The inclusion/exclusion of a country becomes effective at the
end of October. Each bond is assigned to one of the following sectors: Oil & Gas, Basic Materials, Industrials, Consumer Goods, Health Care, Consumer Services, Telecommunications, Technology, Utilities, Financials and Technology.
All bonds are classified based on the principal activities of the issuer, the main sources of the cash flows used to pay coupons and redemptions, and a
bonds specific collateral type or legal provisions. Markit reviews bond classification regularly and makes necessary changes at the next rebalancing.
Bond Type:
Only fixed rate bonds whose cash flow can be determined in advance are eligible, including fixed coupon bonds, step-up bonds with
coupon schedules known at issuance (or as functions of the issuers rating), bonds with sinking funds, amortizing bonds, medium term notes, Rule 144A offerings, callable bonds and putable bonds. Preferred shares, convertible bonds, subordinated
bank or insurance debt with mandatory contingent conversion features or with any conversion options before the first call date, bonds with other equity features attached (e.g. options or warrants), private placements, perpetual bonds, floating rate
notes, pay-in kind bonds, zero coupon bonds, bonds with zero step-ups (GAINS), bonds with difference between accrual and coupon payment periods, monthly-paying bonds and Regulation S offerings are excluded. Any bond subject to a firm
call or tender offer, with the exception of exchange offers in the month immediately following the rebalancing date will be excluded, provided that Markit is aware of such tender offer or firm call.
For retail bonds and private placements, publicly available information is not always conclusive and the classification of a bond as a retail bond or a
private placement will be made at Markits discretion based on the information available at the time of the determination. In instances where a new bond type is not specifically excluded or included in the index according to the published index
rules, Markit will analyze the features of such securities in line with the principles set out in the index rules to make the determination as to whether the bond will be included.
Credit Rating:
All bonds must have a rating of sub-investment grade. Ratings from each of the following three agencies are considered: Fitch
Ratings, Moodys Investor Service and Standard & Poors Rating Services. If more than
S-105
one agency rates a given bond, those ratings are averaged. Sub-investment grade is defined as BB+ or lower from Fitch or S&P and Ba1 or lower from Moodys, but not in default. Bonds
rated D by Fitch or S&P, or that have been subject to a default press release by Moodys are excluded. An included bond subsequently downgraded to D by Fitch or S&P or subject to a default press release by Moodys (as of the bond
selection cut-off date) will be excluded on the next rebalancing date. In case of an exchange of a 144A bond into a registered bond, the ratings from the 144A bond are also used for the registered bond. After a bond has migrated into high yield from
investment grade status, it must retain that status for three months before it can be included in the index.
Time to Maturity:
At issuance,
all bonds must have an expected remaining life of 15 years or less. At the rebalancing day, all bonds must have an expected remaining life of at least one year and all newly included bonds must have an expected remaining life of at least one year
and six months.
Amount Outstanding:
The outstanding face value of a bond must be at least $400 million as of the bond selection cut-off date,
after taking into account buybacks or increases. The outstanding face value of all non-convertible bonds denominated in USD from the issuer must be at least $1 billion as of the bond selection cut-off date.
Minimum Run:
Any bond that enters the index must remain in the index for a minimum of six months (provided that the bond is not upgraded to
investment grade, defaulted or fully redeemed in that period).
Lockout Period:
A bond that drops out of the index at re-balancing is excluded
from re-entering the index for a three-month period.
Calculation of the Index
Bond Prices:
All iBoxx indices are multi-source priced. Prices for the bonds in the index are sourced from a number of representative sources.
Pricing data is produced by experienced pricing analysts using established instrument evaluation models; non-transactional data such as observed bid and ask prices may predominate for a given bond as the data is being scrutinized to reliably
represent the interest measured. The pricing service may also decide to rely upon expert judgment in an active albeit low liquidity market or any other circumstances, when observed bid and ask prices or transactions may not be consistently available
each day. In the event that no price can be established for a particular bond, the index continues to be calculated based on the last-available price.
Index Rebalancing:
The index is rebalanced every month on the last business day of the month after the close of business. Any inclusion after the
index cut-off day (t-3) will not be considered in the re-balancing process, but will become effective at the end of the following month. New bonds issued are taken into account if they are publicly known to settle through the last calendar day of
the month and if their rating and amount outstanding has become known at least three trading days before the end of the month.
Three preview lists
of eligible bonds are published on ten (t-10), five (t-5), and three (t-3) trading days before the end of the month. Two business days before the end of each month, the rating and amount information for the constituents is updated and the list is
adjusted for all rating and amount changes which are known to have taken place three business days before the end of the month which could also result in exclusion of the bond. The rating and amount changes made two business days before the end of
the month will not be considered for inclusion. Two business days before the end of the month the final index membership list for the following month is published at the close of business.
Index Weights:
The weight for each bond is determined on the last business day of each month using the end-of-month market values and applying an
issuer cap of 3%.
Index Calculation:
The components of the total return are price changes, accrued interest, coupon payments, and
reinvestment income on cash flows received during the composition month. The calculation is based on bond pricing provided by independent bond pricing services. The cut-off time for the bond pricing used in the index is 3 p.m. Eastern Time.
Treatment of Special Intra-Month Events:
Data for the application of corporate actions in the index may not be fully or timely available at all
times. In such cases, Markit will estimate the approximate value based on the available data at the time of calculation.
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Unscheduled Full Redemption: If a bond is fully redeemed intra-month, the redeemed bond is treated as cash based on the last consolidated price, the call price or repurchase price, as applicable. In addition, the clean
price of the bond is set to the redemption price, and the interest accrued until the redemption date is treated as an irregular coupon payment.
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S-106
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Bonds Trading Flat of Accrued: If a bond is identified as trading flat of accrued, the accrued interest of the bonds is set to 0 in the total return index calculation and the bond is excluded from the calculation of all
bond and index analytical values.
|
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●
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Multi-Coupon Bonds: For step-up bonds with a pre-defined coupon schedule, such schedule cannot change during the life of the bond and is used for all calculations. For event-driven bonds whose coupon may change upon
occurrence (or non-occurrence) of pre-specified events, the coupon schedule as of the calculation date is used.
|
Additional information
regarding the index may be obtained from other sources including, but not limited to, press releases, newspaper articles, other publicly available documents, the Markit iBoxx $ Liquid High Yield Index factsheet at
http://www.markit.com/assets/en/docs/fact-sheets/MKT_iBoxx_USD_Liquid_High_Yield_Index%20_factsheet.pdf and the Markit iBoxx USD Liquid HY Index Guide at
https://content.markitcdn.com/corporate/Company/Files/DownloadFiles?CMSID=ce06d37a5cf049be9b3dd44d2d1a7cd5. We are not incorporating by reference the website, the sources listed above or any material they include in this prospectus supplement.
Historical Closing Prices of the ETFs Shares
The closing price of shares of the ETF has fluctuated in the past and may, in the future, experience significant fluctuations. Any historical upward or
downward trend in the closing price of the shares during the period shown below is not an indication that the shares are more or less likely to increase or decrease at any time during the life of your notes. The period shown below will be
approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from the date hereof
or otherwise).
You should not take the historical closing prices of the shares as an indication of the future performance of the shares.
We
cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes on the stated maturity date. Neither we nor any of our affiliates make any
representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the relevant ETF closing prices between the date of this prospectus supplement and the
date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the payment amount at maturity may bear little relation to the historical prices shown below.
The graph below shows the daily historical prices of the shares of the ETF from May 22, 2007 through April 28, 2016. We obtained the closing
prices shown in the graph below from Bloomberg Financial Services without independent verification.
iShares
®
is a registered trademark of BlackRock
Institutional Trust Company, N.A. (BITC). The index is not sponsored, endorsed, sold, or promoted by BITC. BITC makes no representations or warranties to the owners of the index or any member of the public regarding the advisability of
investing in the index. BITC has no obligation or liability in connection with the operation, marketing, trading or sale of the index.
S-107
iShares
®
MSCI Emerging Markets ETF
The shares of the iShares
®
MSCI Emerging Markets ETF (the ETF) are
issued by iShares, Inc. (the company). The Company was organized as a Maryland corporation on September 1, 1994 and is authorized to have multiple series or portfolios, of which the ETF is one. On July 1, 2013, the iShares
®
MSCI Emerging Markets Index Fund changed its name to the iShares
®
MSCI Emerging Markets ETF.
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The ETF is a tracking ETF that seeks investment results which correspond generally to the price and yield performance, before fees and expenses, of the index.
|
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●
|
|
The index it tracks is the MSCI Emerging Markets Index (the index).
|
|
●
|
|
Investment Advisor: BlackRock Fund Advisors (BFA).
|
|
●
|
|
The ETFs shares trade on the NYSE Arca under the ticker symbol EEM.
|
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●
|
|
The companys SEC CIK Number is 0000930667.
|
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●
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|
The ETFs inception date was April 7, 2003.
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The ETFs shares are issued or redeemed only in creation units of 450,000 shares or multiples thereof.
|
The index was launched on December 31, 1987 with an initial level of 100.
We obtained the following fee information from the iShares
®
website without independent
verification. The investment advisor is entitled to receive a management fee from the ETF based on the ETFs allocable portion of an aggregate management fee based on the aggregate average daily net assets of the ETF and a set of other
specified iShares
®
funds (the funds) as follows: 0.75% per annum of the aggregate net assets of the funds less than or equal to U.S. $14.0 billion,
plus
0.68% per
annum of the aggregate net assets of the funds on amounts in excess of U.S. $14.0 billion up to and including U.S. $28.0 billion,
plus
0.61% per annum of the aggregate net assets of the funds on amounts in excess of U.S. $28.0 billion up
to and including U.S. $42.0 billion,
plus
0.54% per annum of the aggregate net assets of the funds on amounts in excess of U.S. $42.0 billion up to and including U.S. $56.0 billion,
plus
0.47% per annum of the aggregate net
assets of the funds on amounts in excess of U.S. $56.0 billion up to and including U.S. $70.0 billion,
plus
0.41% per annum of the aggregate net assets of the funds on amounts in excess of U.S. $70.0 billion up to and including U.S.
$84.0 billion,
plus
0.35% per annum of the aggregate net assets of the funds in excess of U.S. $84.0 billion. As of March 31, 2016, the aggregate expense ratio of the ETF was 0.69% per annum.
For additional information regarding the company or BFA, please consult the reports (including the Annual Report to Shareholders on Form N-CSR for the
fiscal year ended August 31, 2015) and other information the company files with the SEC. In addition, information regarding the ETF, including its top portfolio holdings, may be obtained from other sources including, but not limited to, press
releases, newspaper articles, other publicly available documents and the iShares
®
website at http://us.ishares.com/product_info/fund/overview/ EEM.htm. We are not incorporating by reference
the website, the sources listed above or any material they include in this prospectus supplement.
Investment Objective
The ETF seeks to track the investment results, before fees and expenses, of the index. The ETFs investment objective may be changed without
shareholder approval.
The following tables display the top holdings and weightings by industry sector of the ETF. (Sector designations are
determined by the ETF sponsor using criteria it has selected or developed. ETF advisors and index sponsors may use very different standards for determining sector designations. In addition, many companies operate in a number of sectors, but are
listed in only one sector and the basis on which that sector is selected may also differ. As a result, sector comparisons between ETFs or indices with different sponsors may reflect differences in methodology as well as actual differences in the
sector composition of the indices or ETFs.) We obtained the information in the tables below from the ETF website without independent verification.
S-108
iShares
®
MSCI Emerging Markets ETF Top
Ten Holdings as of April 15, 2016
|
|
|
ETF Stock Issuer
|
|
Percentage (%)
|
SAMSUNG ELECTRONICS LTD
|
|
3.39%
|
TAIWAN SEMICONDUCTOR MANUFACTURING
|
|
3.29%
|
TENCENT HOLDINGS LTD
|
|
2.98%
|
CHINA MOBILE LTD
|
|
1.93%
|
NASPERS LTD-N LTD
|
|
1.58%
|
CHINA CONSTRUCTION BANK CORP-H
|
|
1.49%
|
IND & COMM BK OF CHINA-H
|
|
1.12%
|
ALIBABA GROUP HOLDING ADR REPRESEN
|
|
1.06%
|
HON HAI PRECISION INDUSTRY LTD
|
|
1.00%
|
BANK OF CHINA LTD
|
|
0.90%
|
|
|
|
Total
|
|
18.74%
|
iShares
®
MSCI Emerging Markets ETF Weighting by Sector
as of April 15, 2016*
|
|
|
Sector
|
|
Percentage (%)
|
Financials
|
|
27.15%
|
Information Technology
|
|
20.48%
|
Consumer Discretionary
|
|
9.76%
|
Consumer Staples
|
|
7.99%
|
Energy
|
|
7.73%
|
Industrials
|
|
6.87%
|
Telecommunication Services
|
|
6.87%
|
Materials
|
|
6.88%
|
Utilities
|
|
2.87%
|
Health Care
|
|
2.45%
|
|
|
|
Total
|
|
99.05%
|
* Percentages may not sum to 100% due to rounding.
|
iShares
®
MSCI Emerging Markets ETF Weighting by Country
as of April 15, 2016*
|
|
|
Country
|
|
Percentage (%)
|
China
|
|
23.92%
|
Korea (South)
|
|
15.40%
|
Taiwan
|
|
12.00%
|
India
|
|
8.02%
|
Brazil
|
|
6.89%
|
South Africa
|
|
6.79%
|
Mexico
|
|
4.32%
|
Russian Federation
|
|
3.78%
|
Malaysia
|
|
3.46%
|
Indonesia
|
|
2.65%
|
Thailand
|
|
2.12%
|
Turkey
|
|
1.55%
|
Philippines
|
|
1.44%
|
Poland
|
|
1.30%
|
Chile
|
|
1.26%
|
Other
|
|
4.91%
|
|
|
|
Total
|
|
99.81%
|
* Percentages may not sum to 100% due to rounding.
|
S-109
Representative Sampling
BFA uses a representative sampling strategy to attempt to track the performance of the index. For the ETF, this strategy involves investing in a
representative sample of securities that collectively have an investment profile similar to that of the index. The securities selected are expected to have aggregate investment characteristics (based on factors such as market capitalization and
industry weightings), fundamental characteristics (such as return variability, earnings valuation and yield) and liquidity measures similar to those of the index.
The ETF generally invests at least 90% of its assets in the securities of the index and in depositary receipts representing securities of the index. The
ETF may invest the remainder of its assets in securities not included in the index, but which BFA believes will help the ETF track the index. The ETF may also invest its other assets in futures contracts, options and swaps, as well as cash and cash
equivalents, including shares of money market funds affiliated with BFA. Also, the ETF may lend securities representing up to one-third of the value of the ETFs total assets (including the value of the collateral received). The ETF invests all
of its assets that are invested in India in a wholly owned subsidiary located in the Republic of Mauritius. BFA also serves of the investment advisor of the subsidiary.
Tracking Error
The performance of the ETF and
the index may vary due to a variety of factors, including differences between the ETFs assets and the index, pricing differences (including differences between a securitys price at the local market close and the intrinsic value of a
security at the time of calculation of the ETFs net asset value per share), transaction costs, the ETFs holding of cash, differences in timing of the accrual of dividends and differences between the ETFs portfolio and the index
resulting from new or existing legal restrictions that apply to the ETF but not to the index or to investors using a representative sampling strategy in general. BFA expects that, over time, the ETFs performance difference will not exceed 5%.
The ETFs use of a representative sampling strategy can be expected to produce a greater tracking error over a period of time than would result if the ETF used an indexing strategy in which an exchange traded fund invests in substantially all
of the securities in its index in approximately the same proportions as in the index.
As of March 31, 2016, iShares reported the following
average annual returns on the market price of the ETFs shares and the index. The market price of the ETFs shares takes into account distributions on the shares and the returns shown account for changes in the mid-point of the bid and ask
prices at 4:00 p.m., Eastern time on the relevant date. ETF shares: 1 year, -12.72%; 3 years, -5.08%; 5 years, -4.83%; 10 years, 2.27%; since inception, 10.77%; index: 1 year,
-12.03%;
3
years, - 4.43%; 5 years, -4.13%; 10 years, 3.02%; since ETF inception, 11.23%.
Industry Concentration Policy
The ETF will concentrate its investments (i.e., hold 25% or more of its total assets) in a particular industry or group of industries to approximately
the same extent that the index is concentrated in that industry or group of industries.
The
MSCI
®
Emerging Markets Index
The MSCI Emerging Markets Index, (the index)
is a stock index calculated, published and disseminated daily by MSCI Inc. (MSCI) through numerous data vendors, on the MSCI website and in real time on Bloomberg Financial Markets and Reuters Limited.
The index is a free float-adjusted market capitalization index and is one of the MSCI Global Investable Market Indices (the MSCI Indices),
the methodology of which is described below. The index is considered a standard index, which means it consists of all eligible large capitalization and mid-capitalization stocks, as determined by MSCI, in the relevant emerging markets.
Additional information about the MSCI Indices is available on the following website: https://www.msci.com/index-methodology. Daily closing price information for the index is available on the following website:
http://www.mscibarra.com/products/indices/international_equity_indices/performance.html. We are not incorporating by reference the website, the sources listed above or any material they include in this prospectus supplement.
The index is intended to provide performance benchmarks for the emerging equity markets in the Americas, Europe, the Middle East, Africa and Asia, which
are, as of the date of this prospectus supplement, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan, Thailand, Turkey
and the United Arab Emirates. The constituent stocks of the MSCI Emerging Markets Index are derived from the constituent stocks in the 23 MSCI standard single country indices for the emerging market countries listed above. The index is calculated in
U.S. dollars on a total return net basis. The index was launched on December 31, 1987 at an initial value of 100.
S-110
For additional information about the construction, calculation methodology and maintenance of the index,
please see
iShares
®
MSCI EAFE ETF
Construction of the MSCI Indices,
iShares
®
MSCI EAFE ETF
Calculation Methodology for the MSCI Indices and
iShares
®
MSCI EAFE ETF
Maintenance of the MSCI Indices, respectively, on pages S-80, S-83 and S-84
of this prospectus supplement, respectively.
Historical Closing Prices of the ETFs Shares
The closing price of shares of the ETF has fluctuated in the past and may, in the future, experience significant fluctuations. Any historical upward or
downward trend in the closing price of the shares during the period shown below is not an indication that the shares are more or less likely to increase or decrease at any time during the life of your notes. The period shown below will be
approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from the date hereof
or otherwise).
You should not take the historical closing prices of the shares as an indication of the future performance of the shares.
We
cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes on the stated maturity date. Neither we nor any of our affiliates make any
representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the relevant ETF closing prices between the date of this prospectus supplement and the
date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the payment amount at maturity may bear little relation to the historical prices shown below.
The graph below shows the daily historical prices of the shares of the ETF from April 28, 2006 through April 28, 2016. We obtained the closing
prices shown in the graph below from Bloomberg Financial Services without independent verification.
iShares
®
is a registered trademark of BlackRock
Institutional Trust Company, N.A. (BITC). The index is not sponsored, endorsed, sold, or promoted by BITC. BITC makes no representations or warranties to the owners of the index or any member of the public regarding the advisability of
investing in the index. BITC has no obligation or liability in connection with the operation, marketing, trading or sale of the index.
S-111
iShares
®
J.P. Morgan USD Emerging Markets
Bond ETF
The shares of the iShares
®
J.P. Morgan USD Emerging Markets Bond ETF (the
ETF) are issued by iShares
®
Trust, a registered investment company.
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|
The ETF is a tracking ETF that seeks investment results which correspond generally to the price and yield performance, before fees and expenses, of the index.
|
|
●
|
|
The index it tracks is the J.P. Morgan EMBI
SM
Global Core Index (the index).
|
|
●
|
|
Investment Advisor: BlackRock Fund Advisors (BFA).
|
|
●
|
|
The ETFs shares trade on the NYSE Arca under the ticker symbol EMB.
|
|
●
|
|
The iShares
®
Trusts SEC CIK Number is 0001100663.
|
|
●
|
|
The ETFs inception date was December 17, 2007.
|
|
●
|
|
The ETFs shares are issued or redeemed only in creation units of 100,000 shares or multiples thereof.
|
We obtained the following fee information from the iShares
®
website without independent
verification. The investment advisor is entitled to receive a management fee from the ETF corresponding to the ETFs allocable portion of an aggregate management fee based on the aggregate average daily net assets of the ETF and another iShares
®
fund (the funds) as follows: 0.6000% of the average daily net assets of the combined funds less than or equal to $19 billion,
plus
0.5700% of the average daily net assets of
the combined funds over $19 billion, up to and including $33 billion,
plus
0.5415% of the average daily net assets of the combined funds over $33 billion, up to and including $58 billion,
plus
0.5145% of the average daily net assets of
the combined funds in excess of $58 billion. The investment advisor has contractually agreed to waive a portion of its management fees in order to limit the total annual operating expenses of the ETF to 0.40% through February 28, 2018. As of
March 31, 2016, the expense ratio of the ETF was 0.40% per annum.
For additional information regarding iShares
®
Trust or BFA, please consult the reports (including the Semi-Annual Report to Shareholders on Form N-CSRS for the period ended April 30, 2015) and other information iShares
®
Trust files with the SEC. In addition, information regarding the ETF, including its top portfolio holdings, may be obtained from other sources including, but not limited to, press releases,
newspaper articles, other publicly available documents, and the iShares
®
website at https://www.ishares.com/us/products/239572/ishares-jp-morgan-usd-emerging-markets-bond-etf. We are not
incorporating by reference the website, the sources listed above or any material they include in this prospectus supplement.
Investment Objective
and Strategy
The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses,
of the index. The ETFs investment objective and the index may be changed at any time, without the approval of BFAs shareholders.
The
following tables display the top bond holdings, holdings and weightings by country, and maturity breakdown of the ETF. We obtained the information in the tables below from the iShares
®
website
without independent verification.
S-112
iShares
®
J.P. Morgan USD Emerging
Markets Bond ETF Top Ten Holdings as of April 15, 2016
|
|
|
Bond Issuer
|
|
Percentage (%)
|
RUSSIAN (FEDERATION
OF)
|
|
1.71%
|
ARGENTINA (REPUBLIC
OF)
|
|
1.51%
|
POLAND (REPUBLIC
OF)
|
|
1.09%
|
HUNGARY (REPUBLIC
OF)
|
|
1.03%
|
ARGENTINA (REPUBLIC
OF)
|
|
1.03%
|
PERU (REPUBLIC
OF)
|
|
0.92%
|
URUGUAY (ORIENTAL REPUBLIC
OF)
|
|
0.87%
|
PETRONAS CAPITAL
LTD.
|
|
0.86%
|
PERU (REPUBLIC
OF)
|
|
0.86%
|
POLAND (REPUBLIC
OF)
|
|
0.80%
|
|
|
|
Total
|
|
10.68%
|
iShares
®
J.P. Morgan USD Emerging Markets Bond
ETF Top Ten Weightings by Country as of April 15, 2016
|
|
|
Country
|
|
Percentage (%)
|
Mexico
|
|
6.86%
|
Russian
Federation
|
|
5.40%
|
Indonesia
|
|
5.39%
|
Philippines
|
|
5.27%
|
Turkey
|
|
5.25%
|
Brazil
|
|
4.23%
|
China
|
|
4.06%
|
Colombia
|
|
3.86%
|
Hungary
|
|
3.80%
|
Poland
|
|
3.67%
|
|
|
|
Total
|
|
47.79%
|
iShares
®
J.P. Morgan USD Emerging Markets Bond
ETF Maturity Breakdown as of April 15, 2016
|
|
|
Maturity
|
|
Percentage (%)
|
2-3 years
|
|
4.00%
|
3-5 years
|
|
20.54%
|
5-7 years
|
|
15.85%
|
7-10 years
|
|
27.16%
|
10-15 years
|
|
9.25%
|
15-20 years
|
|
6.58%
|
20+ years
|
|
16.56%
|
|
|
|
Total
|
|
99.94%
|
S-113
The following table displays additional information about the bonds held by the ETF as of April 15,
2016. We obtained the information in the table below from the iShares
®
website without independent verification.
|
|
|
Weighted average maturity
|
|
11.23 years
|
|
|
Weighted average coupon
|
|
6.01%
|
|
|
Effective duration
|
|
7.17 years
|
Weighted average maturity is the length of time until the average security in the ETF will mature or be redeemed by its
issuer. Weighted average coupon is the average coupon rate of the underlying bonds in the ETF, weighted by the relative size in the ETF. Effective duration is a measure of the potential responsiveness of a bond or portfolio price to small parallel
shifts in interest rates, taking into account the possible changes in expected bond cash flows due to small parallel shifts in interest rates.
Representative Sampling
The ETF uses a
representative sampling indexing strategy to attempt to track the performance of the index. This strategy involves investing in a representative sample of securities that collectively have an investment profile similar to that of the index. The
securities selected are expected to have, in the aggregate, investment characteristics (based on factors such as market capitalization and industry weightings), fundamental characteristics (such as return variability, duration, maturity or credit
ratings and yield) and liquidity measures similar to those of the index. The ETF generally will invest at least 90% of its assets in the component securities of the index and may invest up to 10% of its assets in certain futures, options and swap
contracts, cash and cash equivalents, including money market funds advised by BFA or its affiliates, as well as in securities not included in the index, but which BFA believes will help the ETF track the index. From time to time when conditions
warrant, however, the ETF may invest at least 80% of its assets in the component securities of the index and may invest up to 20% of its assets in certain futures, options and swap contracts, cash and cash equivalents, including shares of money
market funds advised by BFA or its affiliates, as well as in securities not included in the index, but which BFA believes will help the ETF track the index.The ETF may lend securities representing up to one-third of the value of the ETFs total
assets (including the value of the collateral received).
Tracking Error
The performance of the ETF and of the index may vary due to a variety of factors, including transaction costs, non-U.S. currency valuations, asset
valuations, corporate actions (such as mergers and spin-offs), timing variances and differences between the ETFs portfolio and the index resulting from legal restrictions (such as diversification requirements) that apply to the ETF but not to
the index or to the use of a representative sampling strategy in general.
Tracking error also may occur because of differences between the
securities and other instruments held in the ETFs portfolio and those included in the index, pricing differences, transaction costs, the ETF holding uninvested cash, differences in timing of the accrual of distributions, tax gains and losses,
changes to the index or the costs of complying with various new or existing regulatory requirements. Tracking error also may result because the ETF incurs fees and expenses, while the index does not. BFA expects that, over time, the ETFs
tracking error will not exceed 5%. The ETFs use of a representative sampling indexing strategy can be expected to produce a larger tracking error than would result if the ETF used a replication indexing strategy in which an ETF invests in
substantially all of the securities in the index in approximately the same proportions as in the index.
As of March 31, 2016, iShares reported
the following average annual returns on the market price of the ETFs shares and the index. The market price of the ETFs shares takes into account distributions on the shares and the returns shown account for changes in the mid-point of
the bid and ask prices at 4:00 p.m., Eastern time on the relevant date. ETF shares: 1 year, 3.30%; 3 years, 2.53%; 5 years, 5.43%; since inception, 6.28%; index: 1 year, 4.02%; 3 years, 3.23%; 5 years, 6.31%; since ETF inception, 7.07%.
Industry Concentration Policy
The ETF will
concentrate its investments (
i.e.
, hold 25% or more of its total assets) in a particular industry or group of industries to approximately the same extent that the index is concentrated in that industry or group of industries. For purposes of
this limitation, securities of the U.S. government (including its agencies and instrumentalities), repurchase agreements collateralized by U.S. government securities, and securities of state or municipal governments and their political subdivisions
are not considered to be issued by members of any industry.
S-114
The Index
In preparing the description of the index, we have relied exclusively on information about the index contained in the funds
prospectus and other reports, including the Statement of Additional Information, the fund issuer files with the SEC. The fund issuer does not have an obligation to continually update information about the index. See Additional Risk
Factors Specific to Your Notes Limited or No Public Disclosure About an Underlying Index That an ETF Tracks May Result in the ETF Behaving in Unexpected Ways, Which Could Adversely Affect the Index Level on page S-29.
The index is a broad, diverse, market capitalization weighted index designed to measure the performance of U.S. dollar-denominated Brady bonds,
Eurobonds, traded loans and securities issued by sovereign and quasi-sovereign entities of emerging market countries. The index is calculated in U.S. dollars on a total return (gross) basis. Information about the index was obtained from the
ETFs prospectus and other reports, including the Statement of Additional Information, the ETF issuer files with the SEC without independent verification.
Quasi-sovereign entities are entities whose securities are either 100% owned by their respective governments or subject to a 100% guarantee that does not
rise to the level of constituting the full faith and credit by such governments. The methodology is designed to distribute the weight of each country within the index by limiting the weights of countries with higher debt outstanding and reallocating
this excess to countries with lower debt outstanding.
Index Methodology
In order for a bond to be considered as eligible for inclusion in the index, the bond must be issued by a country that is considered an emerging market.
To be considered an emerging market, a countrys gross net income (GNI) per capita must be below the index income ceiling (IIC) established by the index sponsor for three consecutive years to be eligible for inclusion.
The IIC is defined as the GNI per capital level that is adjusted every year by the growth rate of the World GNI per capita (calculated using the World Banks Atlas method for converting other currencies into U.S. dollars and using
the midyear population), which is published by the World Bank annually. Once the universe of emerging markets countries has been defined, the eligible securities from these countries must be selected for inclusion in the index.
Component Selection Criteria
To be eligible
for inclusion in the index, a security: (i) can be fixed or floating-rate; (ii) must be issued by sovereign and quasi-sovereign entities from index-eligible countries described above; (iii) must be denominated in U.S. dollars;
(iv) must have a current face amount outstanding of $1 billion or more; (v) must have at least 2.5 years until maturity to be eligible for inclusion and must have at least 2 years until maturity to remain in the index; (vi) must be
able to settle internationally through Euroclear or another institution domiciled outside the issuing country; and (vii) must be a security whose bid and offer prices are available on a daily and timely basis. Convertible bonds are excluded
from the index.
Index Maintenance
The
index is a broad, diverse market capitalization weighted index. The index is priced every business day of the year as defined by the U.S. bond market calendar. Index securities are priced using bid pricing each day. Security level pricing for the
index is sourced from a third party valuation vendor ensuring transparency and consistency. Daily indicative pricing for each security and FX rate is closely scrutinized and is reconciled using market movements and other pricing sources as guidance.
As necessary, an established alternative source will be used to maintain the integrity of the daily index calculation. On any given calculation day, if the primary source is unable to provide a quote, the sponsors index group reserves the
right to consider the use of an appropriate alternative source for the index inputs. If a permanent switch for the primary third party pricing source is necessary, clients will be notified in advance prior to any official switch.
The weight of each security in the index is determined by first starting with the face amount outstanding of all eligible securities and aggregating such
securities by country. The highest weighted countries are then constrained by capping the total weight within those countries. The result establishes new country weights which are then used to calculate the new eligible face amounts per security
within those countries. To calculate the final weights of each security in the index, the current days price is multiplied by each securitys adjusted face amount. The market capitalization for each security is then divided by the total
market capitalization for all securities in the index. The result represents the weight of the security expressed as a percentage of the index.
The
index is generally rebalanced on a monthly basis, on the last business day of the month. A new security that meets the index admission requirements is added to the index on the first month-end business date after its issuance,
S-115
provided its issue date falls before the 15th of the month. A new security whose settlement date falls on or after the 15th of the month is added to the index on the last business day of the next
month. There are two exceptions to this rule. The first exception applies to new securities that are released as part of a debt exchange program. For example, if a country exchanges a portion of its outstanding debt for a new issue after the 15th of
the month, at the month-end rebalancing date immediately following this event the amount of debt retired in this exchange would be removed from the index. The new security would then be added to the index. The second exception concerns Regulation S
securities. A security that is issued solely in reliance on Regulation S of the 1933 Act and not pursuant to Rule 144A will be ineligible for inclusion in the index until the expiration of the relevant Regulation S restricted period. The date at
which the restriction is lifted will effectively be the new issue date, at which point the 15th of the month rule will apply. In extreme cases, an intra-month rebalancing can occur when more than 2% of the market capitalization of the
EMBI Global Diversified Index is exchanged or more than 3% of the face amount of the EMBI Global Index is exchanged. If an announcement is made for a bond to be called, it is removed from the index on the month-end prior to its call date
on the basis of having less than 24 months remaining until maturity. However, if an announcement is not made in time for the bond to be removed from the index on the prior month-end, it will be removed the first month-end following the announcement,
unless the amount to be called triggers an intra-month rebalancing.
Historical Closing Prices of the ETFs Shares
The closing price of shares of the ETF has fluctuated in the past and may, in the future, experience significant fluctuations. Any historical upward or
downward trend in the closing price of the shares during the period shown below is not an indication that the shares are more or less likely to increase or decrease at any time during the life of your notes. The period shown below will be
approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from the date hereof
or otherwise).
You should not take the historical closing prices of the shares as an indication of the future performance of the shares.
We
cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes on the stated maturity date. Neither we nor any of our affiliates make any
representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the relevant ETF closing prices between the date of this prospectus supplement and the
date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the payment amount at maturity may bear little relation to the historical prices shown below.
The graph below shows the daily historical prices of the shares of the ETF from December 19, 2007 through April 28, 2016. We obtained the
closing prices shown in the graph below from Bloomberg Financial Services without independent verification.
iShares
®
is a registered trademark of BlackRock
Institutional Trust Company, N.A. (BITC). The index is not sponsored, endorsed, sold, or promoted by BITC. BITC makes no representations or warranties to the owners of the index or any member of the public regarding the advisability of
investing in the index. BITC has no obligation or liability in connection with the operation, marketing, trading or sale of the index.
S-116
iShares
®
U.S. Real Estate ETF
The shares of the iShares
®
U.S. Real Estate ETF (the ETF) are issued by iShares
®
Trust, a registered investment company.
|
●
|
|
The ETF is a tracking ETF that seeks investment results which correspond generally to the price and yield performance, before fees and expenses, of the index.
|
|
●
|
|
The index it tracks is the Dow Jones U.S. Real Estate Index
SM
(the index).
|
|
●
|
|
Investment Advisor: BlackRock Fund Advisors (BFA).
|
|
●
|
|
The ETFs shares trade on the NYSE Arca under the ticker symbol IYR.
|
|
●
|
|
The ETFs SEC CIK Number is 0001100663.
|
|
●
|
|
The ETFs inception date was June 12, 2000.
|
|
●
|
|
The ETFs shares are issued or redeemed only in creation units of 50,000 shares or multiples thereof.
|
We obtained the following fee information from the iShares
®
website without independent
verification. The investment advisor is entitled to receive a management fee from the ETF corresponding to the ETFs allocable portion of an aggregate management fee based on the aggregate average daily net assets of the ETF and a set of other
iShares
®
funds (the funds) as follows: 0.48% per annum of the aggregate net assets of the combined funds less than or equal to $10.0 billion;
plus
0.43% per annum
of the aggregate net assets of the combined funds over $10.0 billion, up to and including $20.0 billion;
plus
0.38% per annum of the aggregate net assets of the combined funds in excess of $20.0 billion, up to and including $30.0
billion; plus 0.34% per annum of the aggregate net assets of the combined funds in excess of $30.0 billion, up to and including $40.0 billion;
plus
0.33% per annum of the aggregate net assets of the combined funds in excess of $40.0
billion, up to and including $50.0 billion;
plus
0.31% per annum of the aggregate net assets of the combined funds in excess of $50.0 billion. As of March 31, 2016, the expense ratio of the ETF was 0.43%.
For additional information regarding iShares
®
Trust or BFA, please consult the reports
(including the Annual Report to Shareholders on Form N-CSR for the period ended April 30, 2015) and other information iShares
®
Trust files with the SEC. In addition, information
regarding the ETF, including its top portfolio holdings, may be obtained from other sources including, but not limited to, press releases, newspaper articles, other publicly available documents, and the iShares
®
website at http://us.ishares.com/product_info/fund/overview/IYR.htm?fundSearch=true&qt=IYR. We are not incorporating by reference the website, the sources listed above or any material they
include in this prospectus supplement.
Investment Objective
The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the index. The
ETFs investment objective and the index may be changed at any time, without the approval of BFAs shareholders.
The following tables
display the top holdings and weightings by industry sector of the ETF. (Sector designations are determined by the ETF sponsor using criteria it has selected or developed. Index and ETF sponsors may use very different standards for determining sector
designations. In addition, many companies operate in a number of sectors, but are listed in only one sector and the basis on which that sector is selected may also differ. As a result, sector comparisons between indices or ETFs with different
sponsors may reflect differences in methodology as well as actual differences in the sector composition of the indices or ETFs.) We obtained the information in the tables below from the ETFs website without independent verification.
S-117
iShares
®
U.S. Real Estate ETF Top Ten Holdings
as of April 15, 2016
|
|
|
ETF Stock Issuer
|
|
Percentage (%)
|
SIMON PROPERTY GROUP REIT
INC
|
|
7.28%
|
AMERICAN TOWER REIT
CORP
|
|
5.08%
|
PUBLIC STORAGE
REIT
|
|
4.47%
|
CROWN CASTLE INTERNATIONAL
REIT CO
|
|
3.30%
|
EQUITY RESIDENTIAL
REIT
|
|
2.93%
|
WEYERHAEUSER REIT
|
|
2.84%
|
AVALONBAY COMMUNITIES REIT
INC
|
|
2.81%
|
WELLTOWER INC
|
|
2.81%
|
PROLOGIS REIT INC
|
|
2.66%
|
EQUINIX REIT INC
|
|
2.53%
|
|
|
|
Total
|
|
36.71%
|
iShares
®
U.S. Real Estate ETF by Sector as of April 15,
2016*
|
|
|
Sector
|
|
Percentage (%)
|
SPECIALIZED REITS
|
|
26.60%
|
RETAIL REITS
|
|
20.09%
|
RESIDENTIAL REITS
|
|
13.35%
|
OFFICE REITS
|
|
10.03%
|
HEALTH CARE REITS
|
|
9.59%
|
HOTEL & RESORT
REITS
|
|
4.08%
|
MORTGAGE REITS
|
|
4.62%
|
DIVERSIFIED REITS
|
|
5.10%
|
INDUSTRIAL REITS
|
|
3.28%
|
REAL ESTATE
SERVICES
|
|
2.23%
|
REAL ESTATE
DEVELOPMENT
|
|
0.42%
|
DIVERSIFIED REAL ESTATE
ACTIVITIES
|
|
0.34%
|
CASH AND/OR
DERIVATIVES
|
|
0.27%
|
|
|
|
Total
|
|
100.00%
|
|
* Percentages may not sum to 100% due to rounding.
|
Representative Sampling
The ETF uses a representative sampling indexing strategy to attempt to track the performance of the index before fees and expenses. For the ETF, this
strategy involves investing in a representative sample of securities that collectively have an investment profile similar to that of the index. The securities selected are expected to have aggregate investment characteristics (based on factors such
as market capitalization and industry weightings), fundamental characteristics (such as return variability and yield) and liquidity measures similar to those of the index. The ETF may or may not hold all of the securities that are included in the
index.
The ETF generally invests at least 90% of its assets in the securities of the index and in depositary receipts representing securities
thereof. The ETF may invest the remainder of its assets in securities not included in the index, but which BFA believes will help the ETF track the index. The ETF may also invest its other assets in certain futures, options and swaps contracts, as
well as cash and cash equivalents, including shares of money market funds advised by BFA or its affiliates.
Tracking Error
The performance of the ETF and of the index may vary due to a variety of factors, including differences between the securities and other instruments held
in the ETFs portfolio and those included in the index, pricing differences, transaction costs, the ETF holding uninvested cash, differences in the timing of the accrual of dividends or interest, tax gains or
S-118
losses, changes to the index or the costs of complying with various new or existing regulatory requirements. Tracking error also may result because the ETF incurs fees and expenses, while the
index does not. BFA expects that, over time, the ETFs tracking error will not exceed 5%. The ETFs use of a representative sampling indexing strategy can be expected to produce a larger tracking error than would result if the ETF used a
replication indexing strategy in which an ETF invests in substantially all of the securities in its index in approximately the same proportions as in the index.
As of March 31, 2016, iShares reported the following average annual returns on the market price of the ETFs shares and the index. The market
price of the ETFs shares takes into account distributions on the shares and the returns shown account for changes in the mid-point of the bid and ask prices at 4:00 p.m., Eastern time on the relevant date. ETF shares: 1 year, 2.51%; 3 years,
8.07%; 5 years, 9.78%; 10 years, 4.98%; since inception, 10.26%; index: 1 year, 3.00%; 3 years, 8.66%; 5 years, 10.35%; 10 years, 5.33%; since ETF inception, 10.74%.
Industry Concentration Policy
The ETF will
concentrate its investments (i.e., hold 25% or more of its total assets) in a particular industry or group of industries to approximately the same extent that the index is concentrated in that industry or group of industries.
The Index
The index is a float-adjusted market
capitalization total return index that is calculated, published and disseminated by the index sponsor, S&P Dow Jones Indices (Dow Jones). It is a subset of the Dow Jones U.S. Index, and is designed to represent real estate investment
trusts (REITs) and other companies that invest directly or indirectly in real estate through development, management or ownership, including property agencies. Stocks are selected for the index if they are contained in the index universe
and if, based on their revenues, they have been classified into the Real Estate Supersector (8600) as defined by the proprietary classification system used by Dow Jones. Because the index is comprised primarily of REITs, the prices of the
component stocks reflect changes in lease rates, vacancies, property development and transactions. The index is calculated in U.S. dollars on a total return (gross) basis.
Calculation and Dissemination
The
closing values of the index are calculated on a 24-hour day that ends at 5:30 p.m. New York time and, following the determination of the previous days closing price, the index values for the current day are updated and disseminated on a
real-time basis beginning at 5:30 p.m. whenever any of the exchanges represented in the index are open.
If trading in a stock is suspended while its
market is open, the last traded price for that stock is used for all subsequent index computations until trading resumes. If trading is suspended before the opening, the stocks adjusted closing price from the previous day is used to calculate
the index. Until a particular stock opens, its adjusted closing price from the previous day is used in the index computation.
If a market is closed
due to an exchange holiday, the previous adjusted closing price for each of its index underlying assets, coupled with the most-recent intraday currency bid price, is used to determine the indexs current U.S. dollar value.
To be included in the index, a stock must be part of the index universe, defined as all stocks traded on major U.S. stock exchanges minus any non-common
issues and illiquid stocks. Index candidates must be common shares or other securities that have the characteristics of common equities. All classes of common shares, both fully and partially paid, are eligible. Fixed-dividend shares and securities
such as convertible notes, warrants, rights, mutual funds, unit investment trusts, closed-end fund shares, shares in limited partnerships and shares in business development companies (BDCs) are not eligible. Temporary issues arising from
corporate actions, such as when-issued shares, are considered on a case-by-case basis when necessary to maintain continuity in a companys index membership. REITs, listed property trusts, and similar real-property-owning
pass-through structures taxed as REITs by their domiciles also are eligible. Securities that have had more than ten non-trading days during the past quarter are excluded from the index universe.
After determination of the index universe, the index universe is then sorted by float-adjusted market capitalization and stocks in the top 95% of the
index universe are categorized into 10 Industries, 19 Supersectors, 41 Sectors and 114 Subsectors as defined by a proprietary classification system used by Dow Jones. Segments are designed to capture the risk characteristics of a specific market by
grouping together constituents that respond in similar ways to economic, political and environmental factors.
The index level is calculated using a
fraction, the numerator of which is the price of each stock in the index multiplied by the number of shares used in the index calculation (total shares outstanding times the IWF), and summed across all the stocks in the index. The denominator is the
index divisor.
S-119
The Index Divisor
To assure that the indexs value, or level, does not change when stocks are added or deleted, the divisor is adjusted to offset the change in market
value of the index. Thus, the divisor plays a critical role in the indexs ability to provide a continuous measure of market valuation when faced with changes to the stocks included in the index. In a similar manner, some corporate actions that
cause changes in the market value of the stocks in an index should not be reflected in the index level. Adjustments are made to the divisor to eliminate the impact of these corporate actions. Any change to the stocks in the index that alters the
total market value of the index while holding stock prices constant will require a divisor adjustment.
Divisor adjustments are made after the
close meaning that after the close of trading the closing prices are used to calculate the new divisor based on whatever changes are being made. It is, then, possible to provide two complete descriptions of the index one as it existed
at the close of trading and one as it will exist at the next opening of trading. If the same stock prices are used to calculate the index level for these two descriptions, the index levels are the same.
With prices constant, any change that changes the total market value included in the index will require a divisor change. For cataloging changes, it is
useful to separate changes caused by the management of the index from those stemming from corporate actions of the constituent companies. Among those changes driven by index management are adding or deleting companies, adjusting share counts and
changes to IWFs and other factors affecting share counts or stock prices.
When a company is added to or deleted from the index, the net change in
the market value of the index is calculated and this is used to calculate the new divisor. The market values of stocks being added or deleted are based on the prices, shares outstanding, IWFs and any other share count adjustments.
There are a large range of different corporate actions ranging from routine share issuances or buy backs to unusual events like spin-offs or mergers.
These are listed on the table below with a description of the adjustments, if any.
|
|
|
|
|
Corporate Action
|
|
Effects
|
|
Divisor Adjustments?
|
Company added/deleted
|
|
Net change in market value determines the divisor
adjustment.
|
|
Yes
|
Change in shares outstanding
|
|
Any combination of secondary issuance, share
repurchase or buy back share counts revised to reflect change.
|
|
Yes
|
Stock split
|
|
Share count revised to reflect new count. Divisor
adjustment is not required since the share count and price changes are offsetting.
|
|
No
|
Spin-off
|
|
If the spun-off company is not being added to the
index, the divisor adjustment reflects the decline in index market value (i.e., the value of the spun-off unit).
|
|
Yes
|
Spin-off
|
|
Spun-off company added to the index, no company
removed from the index.
|
|
No
|
Spin-off
|
|
Spun-off company added to the index, another
company removed to keep number of names fixed. Divisor adjustment reflects deletion.
|
|
Yes
|
S-120
|
|
|
|
|
Change in IWF
|
|
Increasing (decreasing) the IWF increases
(decreases) the total market value of the index. The divisor change reflects the change in market value caused by the change to an IWF.
|
|
Yes
|
Special Dividend
|
|
When a company pays a special dividend the share
price is assumed to drop by the amount of the dividend; the divisor adjustment reflects this drop in index market value.
|
|
Yes
|
Rights offering
|
|
Each shareholder receives the right to buy a
proportional number of additional shares at a set (often discounted) price. The calculation assumes that the offering is fully subscribed. Divisor adjustment reflects increase in market cap measured as the shares issued multiplied by the price
paid.
|
|
Yes
|
Annual Reconstitution, Quarterly Reviews and Index Maintenance
The index is reconstituted annually in September. The process includes the review of all stocks in their respective markets to determine eligibility
according to the existing criteria. In addition, the investable weight factor (IWF), for each stock is reviewed and updated as needed. Changes are implemented at the opening of trading on the Monday following the third Friday of
September. Changes in IWFs resulting from corporate actions which exceed 5% are implemented as soon as possible; changes of less than 5% are implemented at the next annual review.
Generally, no companies are added to an index between annual reconstitutions except for initial public offerings and spinoffs. Any exceptions to this
rule are announced with ample lead time. Any stocks considered for addition at the quarterly rebalance must have a float market cap larger than the smallest stock included in the index at the time of the previous reconstitution.
Changes in shares outstanding of less than 5% are accumulated and made quarterly in March, June, September and December . These changes, as well as any
weight adjustments, are implemented at the opening of trading on the Monday following the third Friday of the quarterly update month.
The indices
are also reviewed on an ongoing basis to account for corporate actions such as mergers, acquisitions, takeovers, delistings or bankruptcies. Changes to index composition and related weight adjustments are made as soon as they are effective.
Corporate actions (such as stock splits, stock dividends, spin-offs and rights offerings) are applied after the close of trading on the day prior to the ex-date. Share changes resulting from exchange offers are applied on the ex-date.
Initial public offerings and new listings on eligible exchanges are added to at the next quarterly update if the new listing occurs on or before the
final trading day of February, May, August or November and meets all other eligibility requirements. Spinoffs of index constituents are added to the index at the time of the spinoff, providing they meet index eligibility requirements. Spinoffs are
assigned the same size and style as the parent company at the time of the action. All spinoff sizes are evaluated at the next quarterly update.
Whenever possible, Dow Jones will announce changes in the index at least two business days prior to their implementation date.
If an index constituent is suspended by its primary market, it may be removed from the index at the discretion of the Index Committee. When this occurs,
S&P Dow Jones Indices will use the best-available alternate pricing source to determine the value at which the company should be removed from the index.
S-121
Float Adjustment
A companys outstanding shares are adjusted to exclude shares held by certain shareholders concerned with the control of a company, a group that
generally includes the following: officers and directors, private equity, venture capital, special equity firms, publicly traded companies that hold shares in another company, strategic partners, holders of restricted shares, employee stock
ownership plans, employee and family trusts, foundations associated with the company, holders of unlisted share classes of stock, government entities at all levels (except government retirement or pension funds) and any individual person who
controls a 5% or greater stake in a company as reported in regulatory filings. However, holdings by depositary banks, mutual funds, exchange-traded fund providers, asset managers, pension plans and other institutional investors, even if greater than
5% of the outstanding shares of a company, are generally included in the float-adjusted share count to be used in the index calculations, as they are deemed to be acting as investors and not involved with control of a company.
The index adjustment to reflect control holders is accomplished by calculating the IWF for each stock that is part of the numerator of the float-adjusted
index fraction described above:
IWF = (available float shares)/(total shares outstanding)
where available float shares are defined as total shares outstanding less shares held by control holders. In most cases, IWFs are reported to the nearest
one percentage point.
Historical Closing Prices of the ETFs Shares
The closing price of shares of the ETF has fluctuated in the past and may, in the future, experience significant fluctuations. Any historical upward or
downward trend in the closing price of the shares during the period shown below is not an indication that the shares are more or less likely to increase or decrease at any time during the life of your notes. The period shown below will be
approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from the date hereof
or otherwise).
You should not take the historical closing prices of the shares as an indication of the future performance of the shares.
We
cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes on the stated maturity date. Neither we nor any of our affiliates make any
representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the relevant ETF closing prices between the date of this prospectus supplement and the
date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the payment amount at maturity may bear little relation to the historical prices shown below.
The graph below shows the daily historical prices of the shares of the ETF from April 28, 2006 through April 28, 2016. We obtained the closing
prices shown in the graph below from Bloomberg Financial Services without independent verification.
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iShares
®
is a registered trademark of
BlackRock Institutional Trust Company, N.A. (BITC). The index is not sponsored, endorsed, sold, or promoted by BITC. BITC makes no representations or warranties to the owners of the index or any member of the public regarding the
advisability of investing in the index. BITC has no obligation or liability in connection with the operation, marketing, trading or sale of the index.
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Alerian MLP ETF
The shares of the Alerian MLP ETF (the ETF) are issued by ALPS ETF Trust (the trust), a registered investment company.
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●
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The ETF is a tracking ETF in that it seeks investment results which correspond generally to the price and yield performance, before fees and expenses, of the index.
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●
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|
The index it tracks is the Alerian MLP Infrastructure Index (the index), which is a subset of the Alerian MLP Index.
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The ETFs investment advisor is ALPS Advisors, Inc. (ALPS).
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●
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The ETFs shares trade on the NYSE Arca under the ticker symbol AMLP.
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●
|
|
The trusts SEC CIK Number is 0001414040.
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●
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|
The inception date of the ETF was August 25, 2010.
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●
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|
The ETFs shares are issued or redeemed only in creation units of 50,000 units.
|
We obtained the
following fee information from the ETFs website without independent verification. ALPS is entitled to receive a management fee from the ETF payable on a monthly basis at the annual rate (as of December 31, 2015) of 0.85% of the ETFs
average daily net assets. As further described below, the ETF also accrues deferred income tax expense that is estimated (as of December 31, 2015) to be 4.58% of the ETFs average daily net assets on an annual basis, which results in
estimated annual operating expenses of 5.43% of the ETFs average daily net assets.
For additional information regarding the trust and ALPS,
please consult the reports (including the Annual Report to Shareholders on Form N-CSR for the fiscal year ended November 30, 2015) and other information the trust files with the SEC. In addition, information regarding the ETF, including its top
portfolio holdings, may be obtained from other sources including, but not limited to, press releases, newspaper articles, other publicly available documents, at http://www.alerianetfs.com and http://www.alerianmlp.com. We are not incorporating by
reference the websites, the sources listed above or any material they include in this prospectus supplement.
Investment Objective and Strategy
The Alerian MLP ETF seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the
index. The ETFs investment objective may be changed by its board of trustees without shareholder approval. The ETF will normally invest at least 90% of its total assets in component securities (or depositary receipts based on such securities)
of the index. The ETF generally will invest in all of the securities that comprise the index in proportion to their weightings in the index; however, under various circumstances, it may not be possible or practicable to purchase all of the
securities in the index in those weightings. In addition, the ETF may not be fully invested at times as a result of cash flows into the ETF or reserves of cash held by the ETF to meet redemptions and expenses. In any of those circumstances, the ETF
may purchase a sample of the securities in the index or utilize various combinations of other available investment techniques in seeking performance which corresponds to the performance of the index. The ETF may invest its remaining assets in money
market instruments, including repurchase agreements or other ETFs which invest exclusively in money market instruments, convertible securities, structured notes (notes on which the amount of principal repayment and interest payments are based on the
movement of one or more specified factors, such as the movement of a particular stock or stock index), forward foreign currency exchange contracts and in swaps, options and futures contracts. Swaps, options and futures contracts (and convertible
securities and structured notes) may be used by the ETF in seeking performance that corresponds to the index, and in managing cash flows. The ETF will not invest in money market instruments as part of a temporary defensive strategy to protect
against potential stock market declines. ALPS anticipates that it may take approximately three business days (i.e., each day the NYSE Arca is open) for additions and deletions to the index to be reflected in the portfolio composition of the ETF.
About MLPs
Master limited partnerships
(MLPs) are partnerships that derive at least 90% of their income from activities that meet the requirements of the Internal Revenue Code of 1986 as amended (the tax code), including the transportation, storage and processing of minerals
and natural resources. By deriving their income from qualifying sources, the MLP does not pay
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entity level (corporate) tax. MLP interests trade on public securities exchanges such as the New York Stock Exchange and the NASDAQ Stock Market.
The ETFs Holdings
The following table
displays the top ten holdings of the ETF. We obtained the information in the tables below from the ETFs website without independent verification.
Alerian MLP ETF as of April 15, 2016
|
|
|
MLP Unit Issuer
|
|
Percentage(%)
|
Energy Transfer Partners
LP
|
|
11.25%
|
Enterprise Products
Partners LP
|
|
9.36%
|
Magellan Midstream
Partners LP
|
|
8.89%
|
Buckeye Partners
LP
|
|
7.94%
|
Plains All American
Pipeline LP
|
|
7.53%
|
MPLX LP
|
|
6.33%
|
Williams Partners
LP
|
|
5.55%
|
Sunoco Logistics Partners
LP
|
|
4.67%
|
ONEOK Partners LP
|
|
4.54%
|
Enbridge Energy Partners
LP
|
|
3.72%
|
|
|
|
Total
|
|
69.78%
|
Correlation
The performance of the ETF and the index may vary due to a variety of factors. Unlike many ETFs, the ETF expects to effect redemptions of creation units
for cash, rather than in-kind. The ETF may not be fully invested at times, either as a result of cash flows into the ETF or reserves of cash held by the ETF to meet redemptions and expenses. In addition, another significant factor is the ETFs
tax expense (as described in the next paragraph), as well as the ETFs operating expenses (including management fees) and costs the ETF incurs in buying and selling securities, especially when rebalancing the ETFs holdings to reflect
changes in the composition of the index.
Unlike most other investment companies, the ETF is not eligible to elect to be treated as a regulated
investment company for tax purposes because of its investments primarily in MLPs invested in energy assets. Thus, the ETF is obligated to pay applicable federal and state corporate income taxes on its taxable income. The amount of taxes paid by the
ETF will vary depending on the amount of income and gains derived from investments or sales of MLP interests and these taxes will reduce the return on an investment in the ETF. In addition, the ETF expects that a portion of the quarterly and other
distributions it receives from the MLPs it holds may be treated as a tax deferred return of capital, thus reducing the ETFs adjusted tax basis in the relevant MLP units. These reductions in the ETFs adjusted tax basis in the MLP units
will increase the amount of gain (or decrease the amount of loss) recognized by the ETF on a subsequent sale of the securities. The ETF will accrue deferred income taxes for any future tax liability associated with that portion of MLP distributions
considered to be a tax-deferred return of capital as well as capital appreciation of its investments. Upon the sale of an MLP unit, the ETF may be liable for previously deferred taxes. The index, however, is calculated without any deductions for
taxes. As a result, the ETFs after tax performance could differ significantly from the index even if the pretax performance of the ETF and the performance of the index are closely correlated.
For the period ended March 31, 2015, ALPS gave the following annualized performance figures for market price of an ETF share and the index:
ETF1 year, -27.74%; 3 years, -8.54%; since inception on August 25, 2010, 0.95%; index1 year, -32.11%; 3 years, -9.25%; since August 25, 2010, 3.94%. For the period ended March 31, 2016, ALPS gave the following cumulative
performance figures for market price of an ETF share and the index: ETFyear to date, -6.42%; since inception on August 25, 2010, 5.42%; indexyear to date, -5.65%; since inception on August 25, 2010, 24.17%.
The Index
The Alerian MLP Infrastructure Index
is currently comprised of 23 energy infrastructure MLPs. The MLPs in the index earn a majority of their revenues from transportation, storage and processing of energy commodities. The index constituents earn the majority of their cash flow from
midstream activities involving energy commodities. The index is calculated using a capped, float-adjusted, capitalization weighted methodology and is disseminated real-time on a price-
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return basis by the NYSE under the ticker AMZI and by other data vendors. The base date for the index is December 29, 1995, with a base value of 100. The index is sponsored and
maintained by Alerian and is calculated by Standard & Poors. Additional information about the index may be obtained from other sources including, but not limited to, press releases, newspaper articles, other publicly available
documents, and on the index sponsors website, www.alerian.com. We are not incorporating by reference the website, the sources listed above or any material they include in this prospectus supplement.
Index Constituents
The following criteria
must be met for a current constituent to be eligible to remain in the index or for a new constituent to be eligible for addition to the index:
|
1.
|
Is a publicly traded partnership or limited liability company;
|
|
2.
|
Earns the majority of its cash flow from qualifying midstream activities involving energy commodities (the following Energy MLP Classification Standard activities are considered qualifying: gathering &
processing, liquefaction, midstream services, pipeline transportation, rail terminaling and storage.);
|
|
3.
|
Represents the primary limited partner interests of a partnership or LLC that is an operating company (excluding, among others, the following types of securities: general partner interests, i-units, preferred units,
exchange-traded products, open-end funds, closed end funds and royalty trusts);
|
|
4.
|
Declared a distribution for the trailing two quarters;
|
|
5.
|
Has a median daily trading volume of at least $2.5 million for the six-month period preceding the data analysis date; and
|
|
6.
|
Has an adjusted market capitalization in the top 90% of total midstream energy MLP float-adjusted market capitalization.
|
The majority of pro forma cash flow for purposes of criteria 2 is calculated on a trailing four-quarter basis using a companys reported business
segments. Exceptions may be made on a case-by-case basis to accelerate the eligibility or ineligibility of companies that have been transformed by a recent acquisition. Cash flow from a partnerships general partner (GP) interest or
incentive distribution rights in another publicly traded partnership or LLC is zeroed for the purposes of this determination.
A non-constituent will
only be added to the index during the (a) quarterly rebalancing process if it meets all criteria or (b) special rebalancing process if it (i) is acquiring the constituent that is being removed and (ii) meets all criteria. A
constituent will remain in the index if it continues to meet the first five criteria and has an adjusted market capitalization greater than or equal to 80% of the adjusted market capitalization of the smallest company in the top 90% of the total
midstream energy MLP float-adjusted market capitalization. Constituents will only be removed from the index for failing to meet criteria during the quarterly rebalancing process. A non-constituent that has entered into a merger agreement to be
acquired is not eligible to be added to the index.
These criteria are reviewed regularly to ensure consistency with industry trends.
Calculation of and Adjustments to the Index
The index is calculated by S&P Dow Jones Indices using a float-adjusted, capitalization-weighted methodology. That means the level of an index
reflects the total market value of all the constituent MLP units relative to a particular base period. The index value at any time equals the aggregate value of the MLP units included in the index (adjusted for units outstanding and investable
weight factor, described below), divided by the divisor. The divisor is intended to ensure consistency over time relative to the base period. The divisor was initially equal to the index market capitalization on December 29, 1995 divided by
100, and is adjusted following each quarterly rebalancing to equal the post-rebalancing index market capitalization divided by the index value prior to the rebalancing. The index does not account for cash distributions as it is not a total
return index.
Units included in the calculation of units outstanding include, but are not limited to, common units, subordinated units,
special class units, and paid-in-kind units. Units excluded from the calculation of units outstanding are GP units, management incentive units, and tradable, non-common units.
The units outstanding number generally reflects that which is represented by the latest annual or quarterly report, unless otherwise indicated by a press
release or SEC document filed pursuant to a transaction. The following is a non-
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exhaustive list of qualifying transactions and the point at which they are reflected for index share calculation and constituent selection purposes in a securitys units outstanding.
|
|
|
Qualifying Transaction
|
|
When Reflected in Units
Outstanding
|
Follow-on public equity offerings
|
|
Time of pricing
|
Over-allotment option exercises
|
|
Earlier of time of press release or current report
|
Private investments in public equity (PIPEs)
|
|
Time of closing
|
Unit repurchases
|
|
Earlier of time of press release or current report
|
At-the-market equity offerings
|
|
As reported in periodic reports, prospectuses, or
proxies
|
Unless a lock-up period has been specified, common units issued in a PIPEs transaction are considered to be freely
tradable upon the earlier of (a) the effectiveness date of the accompanying SEC registration statement or (b) 180 days after the transaction close, pursuant to SEC Rule 144.
A securitys investable weight factor (IWF) is calculated as follows:
(Units outstanding Non-common units Unregistered common units Insider-owned common units) / Units outstanding.
Non-common units consist of tradable preferred stock, tradable institutional units (i-units), tradable rights, tradable warrants, tradable
shares, tradable subordinated units, and similar instruments that do not represent common units of the MLP. Unregistered common units are common units issued in PIPE transactions, which are not considered to be freely tradable until the expiration
of the lock-up period or, if no lock-up period is specified, the earlier of the effective date of any accompanying SEC registration statement or 180 days after the closing of the PIPES transaction. Insider-owned common units are those which are
included in Item 12 (Security Ownership of Certain Beneficial Owners and Management) of a constituents latest annual report or proxy statement and includes units owned by all directors and named executive officers, plus common
units owned by GPs and/or persons or entities with board representation. Other documents (e.g., press releases, 8-Ks and prospectus supplements) indicating changes to ownership by a GP are reflected immediately.
The GP adjustment is a percentage equal to 100% minus the GP percentage. For constituents with a non-economic GP or no GP at all, the GP percentage is
0%. For traditional MLPs, the index sponsor states that the GP percentage typically starts at 2%, but may fall if the GP does not participate in future offerings and is therefore its GP interest is diluted. The index sponsor will only update the GP
percentage upon the filing of the constituents annual reports indicating such a change.
The following documents are used to calculate units
outstanding and IWFs:
Press releases
Annual reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (10-K, 20-F)
Quarterly reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (10-Q, 6-K)
Certain registration statements pursuant to Rules 415 and 462 of the Securities Act of 1933 (S-1, S-3)
Prospectuses and prospectus supplements pursuant to Rule 424(b)
Proxy statements pursuant to Section 14(a) of the Securities Exchange Act of 1934 (DEF 14A)
Current reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (8-K, 6-K)
Schedules pursuant to the Securities Exchange Act of 1934 (13D, 13G), forms pursuant to Section 16(a) of the Securities Exchange Act of 1934, and
certain registration statements pursuant to the Securities Act of 1933 (S-8) are not used in the calculations.
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Index Rebalancing
Index rebalancings fall into two groups: quarterly rebalancings and special rebalancings. Quarterly rebalancings occur on the third Friday of each March,
June, September, and December, and are effective at the open of the next trading day. In the event that the major US exchanges are closed on the third Friday of March, June, September, or December, the rebalancing will take place after market close
on the immediately preceding trading day. Data relating to constituent eligibility, additions, and deletions are analyzed as of 4:00 p.m., Eastern Standard Time on the last trading day of February, May, August and November. Each constituents
index shares are then calculated according to the re-weighting process described below, and assigned after market close on the quarterly rebalancing date. Since index shares are assigned based on prices on the last trading day of February, May,
August and November, the weight of each constituent on the quarterly rebalancing date may differ from its target weight due to market movements.
After market close on the last trading day of February, May, August and November, the post-rebalancing constituents are weighted and ranked by
float-adjusted market capitalization. If the weight of the largest constituent exceeds 10.00%, it is assigned a weight of 10.00% and its excess weight is proportionately distributed to the remaining constituents. After this distribution, if the
weight of the next largest constituent exceeds 10.00%, it is assigned a weight of 10.00% and its excess weight is proportionately distributed to the remaining constituents. This process is repeated until none of the remaining constituents has a
weight that exceeds 10.00%.
Special rebalancings are triggered by corporate actions and will be implemented as practically as possible on a
case-by-case basis. Generally, in a merger between two or more index constituents, the special rebalancing will take place one trading day after the constituents issuance of a press release indicating all needed merger votes have passed. If
the stock is delisted before market open on the first trading day after all needed merger votes have passed, the delisted security will trade at the conversion price, including any cash consideration. Only the units outstanding and IWF of the
surviving constituents in a merger will be updated to reflect the latest information available. Index shares are then calculated to the weighting scheme above and assigned after market close on the rebalancing date.
Index Governance: An independent advisory board of MLP and energy infrastructure executives, legal partners, and other senior financial professionals
reviews all methodology modifications and constituent changes to ensure that they are made objectively and without bias. The board is comprised of a minimum of five members, all of whom must be independent.
Historical Closing Prices of the ETFs Shares
The closing price of shares of the ETF has fluctuated in the past and may, in the future, experience significant fluctuations. Any historical upward or
downward trend in the closing price of the shares during the period shown below is not an indication that the shares are more or less likely to increase or decrease at any time during the life of your notes. The period shown below will be
approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from the date hereof
or otherwise).
You should not take the historical closing prices of the shares as an indication of the future performance of the shares.
We
cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes on the stated maturity date. Neither we nor any of our affiliates make any
representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the relevant ETF closing prices between the date of this prospectus supplement and the
date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the payment amount at maturity may bear little relation to the historical prices shown below.
The graph below shows the daily historical prices of the shares of the ETF from August 25, 2010 through April 28, 2016. We obtained the closing
prices shown in the graph below from Bloomberg Financial Services without independent verification.
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The Index is not issued, sponsored, endorsed, sold or promoted by Alerian.
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PowerShares
®
Senior Loan Portfolio
The shares of the PowerShares
®
Senior Loan Portfolio (the ETF) are
issued by the PowerShares Exchange-Traded ETF Trust II (the trust), a registered investment company.
|
●
|
|
The ETF is a tracking ETF that seeks investment results which correspond generally to the price and yield performance, before fees and expenses, of the index.
|
|
●
|
|
The index it tracks is the S&P/LSTA U.S. Leveraged Loan 100 Index (the index).
|
|
●
|
|
Investment Advisor: Invesco PowerShares Capital Management LLC (Invesco PowerShares).
|
|
●
|
|
Investment Sub-Adviser: Invesco Senior Secured Management, Inc. (Invesco Senior Secured).
|
|
●
|
|
The ETFs shares trade on the NYSE Arca under the ticker symbol BKLN.
|
|
●
|
|
The trusts SEC CIK Number is 0001378872.
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●
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|
The ETFs inception date was March 3, 2011.
|
|
●
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|
The ETFs shares are issued or redeemed only in creation units of 100,000 shares.
|
We obtained the
following fee information from the PowerShares
®
website without independent verification. The investment advisor is entitled to receive a management fee from the ETF based on a percentage of
the ETFs value at an annual rate of 0.65%. The investment adviser has contractually agreed to waive fees and/or pay certain expenses of the ETF through at least February 2016. As of December 31, 2015, the ETFs annual operating
expenses were 0.66% of the ETFs value.
For additional information regarding the trust, Invesco PowerShares or Invesco Senior Secured, please
consult the reports (including the Semi-Annual Report to Shareholders on Form N-CSRS for the period ended April 30, 2015) and other information the trust files with the SEC. In addition, information regarding the ETF, including its top
portfolio holdings, may be obtained from other sources including, but not limited to, press releases, newspaper articles, other publicly available documents, and the PowerShares
®
website at
http://www.invescopowershares.com/seniorloans/. We are not incorporating by reference the website, the sources listed above or any material they include in this prospectus supplement.
Investment Objective and Strategy
The ETF
seeks to provide investment results that generally correspond, before fees and expenses, to the price and yield of the index, which the ETF believes is designed to track the market-weighted performance of the largest institutional leveraged loans
based on market weightings, spreads and interest payments. S&P Dow Jones Indices, LLC (S&P) compiles, maintains and calculates the index. For more information on the index, see The Index below.
The ETF utilizes a sampling methodology to seek to achieve its investment objective. For more information about the sampling methodology, see
Sampling below.
The ETF generally invests at least 80% of its net assets, plus any borrowings for investment purposes, in senior loans
that comprise the index. As defined by Invesco PowerShares and Invesco Senior Secured, senior loans include loans rated below investment grade quality or unrated but deemed to be of comparable quality (leveraged loans), bank loans and/or
floating rate loans. Lending institutions such as banks typically issue senior loans to corporations, partnerships and other entities (borrowers), often in connection with such borrowers recapitalizations, acquisitions, leveraged
buyouts and refinancings. These borrowers operate in a variety of industries and geographic regions, including foreign countries. Senior loans generally are structured and administered by a financial institution that serves as agent for the lenders.
The ETF generally purchases loans from banks and other financial institutions through assignments or participations. More specifically, the ETF may acquire a direct interest in a loan from the agent or another lender by assignment or an indirect
interest in a loan as a participation in another lenders portion of a loan. The ETF generally sells loans it holds by means of an assignment, but it also may sell participation interests in such loans to facilitate its ability to ETF
redemption requests. During the fiscal year ended October 31, 2014, the ETF did not purchase any interests in senior loans on a participation (indirect) basis.
The ETF invests in loans that are expected to be below investment grade quality and bear interest at a floating rate that periodically resets. The index
may include, and the ETF may acquire and retain, loans of borrowers that have filed for bankruptcy protection. Non-investment grade loans and bonds, and unrated loans and bonds of comparable credit quality
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are subject to the increased risk (as compared to investment grade debt) of a borrowers or issuers inability to meet principal and interest payment obligations.
The ETF may also invest up to 20% of its assets in other securities not included in the index, in money market instruments, including repurchase
agreements or other ETFs that invest exclusively in money market instruments (subject to applicable limitations under the Investment Company Act of 1940, as amended, or exemptions therefrom), convertible securities and structured notes (notes on
which the amount of principal repayment and interest payments is based on the movement of one or more specified factors, such as the movement of a particular security or securities index). Convertible securities and structured notes may be used by
the ETF in seeking performance that corresponds to the index and in managing cash flows. Invesco PowerShares anticipates that it may take approximately three business days for Invesco PowerShares to fully reflect the additions and deletions to the
index in the portfolio composition of the ETF.
The ETF has entered into a committed, unsecured line of credit with State Street Bank and Trust
Company that allows the ETF to borrow an amount up to 33
1
/
3
% of its assets for temporary or emergency purposes or to allow for an orderly
liquidation of securities to meet redemption requests. The ETF bears any interest expenses associated with the line of credit. Invesco PowerShares pays the set-up fees and the commitment fee for the line of credit based on the amount of the
commitment that has not been utilized.
The ETFs policy to invest 80% of its net assets in senior loans that comprise the index constitutes a
non-fundamental policy that the Board of Trustees of the trust may change at any time without shareholder approval, upon 60 days prior written notice to shareholders. The ETFs investment objective is a fundamental policy.
As of April 8, 2016, the ETF had 110 holdings. The following table displays the top ten holdings of the ETF. The weights below represent single loan
holding weights and not the aggregate holdings of each issuer held by the ETF (if more than one loan is held by the ETF). We obtained the information in the table below from the PowerShares
®
website without independent verification.
PowerShares
®
Senior Loan Portfolio Top Holdings
as of April 15, 2016
|
|
|
|
|
|
|
|
|
Company
|
|
Coupon
Rate
|
|
Maturity
Date
|
|
S&P/Moodys
Rating
|
|
Percentage of
Total Holdings
|
|
|
|
|
|
Fortescue Metal
|
|
4.25%
|
|
06/30/2019
|
|
BB+/Ba2
|
|
2.11%
|
|
|
|
|
|
ENERGY FUTURE INTERMEDIATE
|
|
4.25%
|
|
12/19/2016
|
|
BB/Ba3
|
|
2.08%
|
|
|
|
|
|
1011778 BC ULC FRN
|
|
3.75%
|
|
12/10/2021
|
|
B+/Ba3
|
|
2.06%
|
|
|
|
|
|
Texas Competitive Electric Hldgs Co.
|
|
4.91%
|
|
10/10/2017
|
|
NR/NR
|
|
2.04%
|
|
|
|
|
|
Avago Technologies Cayman Finance
|
|
4.25%
|
|
02/01/2023
|
|
BBB/Ba1
|
|
1.98%
|
|
|
|
|
|
PETSMART INC FRN
|
|
4.25%
|
|
03/11/2022
|
|
BB-/Ba3
|
|
1.95%
|
|
|
|
|
|
HILTON WORLDWID FRN
|
|
3.50%
|
|
10/26/2020
|
|
BBB-/Ba2
|
|
1.92%
|
|
|
|
|
|
VALEANT PHARMA FRN
|
|
5.00%
|
|
04/01/2022
|
|
BB/Ba2
|
|
1.89%
|
|
|
|
|
|
Albertsons LLC
|
|
5.50%
|
|
08/25/2021
|
|
BB/Ba3
|
|
1.81%
|
|
|
|
|
|
CSC Holdings, LLC
|
|
5.00%
|
|
10/09/2022
|
|
BB-/Ba1
|
|
1.80%
|
As of April 15, 2016, 86.91% of the ETFs holdings were loans, 7.17% of the ETFs holdings were cash and
equivalents and 5.92% of the ETFs holdings were high-yield securities. As of April 8, 2016, the ETFs loans had an average yield to maturity of 5.48%, an average years to maturity of 4.37 years, and a weighted average coupon of
4.94%. As of April 8, 2016, the average number of days until the floating rate coupons on the loans reset was 53.56 days. As of April 15, 2016, 4.36% of the ETFs loans had a maturity of up to one year, 54.71% had a maturity of
between one and five years, and 40.93% had a maturity of between five and ten years. No loan held by the ETF as of that date had a maturity of more than ten years.
S-131
PowerShares
®
Senior Loan Portfolio Credit Rating
Distribution as of April 15, 2016
|
|
|
|
|
|
|
Credit Rating
|
|
S&P
|
|
|
|
Moodys
|
|
|
|
|
BBB/Baa
|
|
15.00%
|
|
|
|
5.00%
|
|
|
|
|
BB/Ba
|
|
43.00%
|
|
|
|
49.00%
|
|
|
|
|
B/B
|
|
29.00%
|
|
|
|
35.00%
|
|
|
|
|
CCC/Caa
|
|
6.00%
|
|
|
|
3.00%
|
|
|
|
|
CC/Ca
|
|
0.00%
|
|
|
|
0.00%
|
|
|
|
|
Not Rated
|
|
6.00%
|
|
|
|
8.00%
|
|
* Percentages may not sum to 100% due to rounding.
|
No industry breakdown in respect of the ETFs holdings is available from the PowerShares
®
website. The industry breakdown in respect of the index is available under The Index below. Although the ETF tracks the index, the ETF may also invest up to 20% of its
assets in other securities not included in the index. Therefore, the industry breakdown in respect of the indexs holdings may not accurately represent the industry sector breakdown in respect of the ETFs holdings.
Sampling
The ETF uses a sampling approach to
achieve its investment objective. Sampling means that Invesco PowerShares and Invesco Senior Secured use a quantitative analysis to select securities from the index to obtain a representative sample of securities that have, in the aggregate,
investment characteristics similar to the index in terms of key risk factors, performance attributes and other characteristics. These attributes and other characteristics include duration, maturity, credit quality, yield and coupon. Invesco
PowerShares and Invesco Senior Secured generally expect the ETF, as it does currently, to hold less than the total number of loans in the index, but reserve the right to hold as many loans and other securities as they believe necessary to achieve
the ETFs investment objective. This may cause the ETF to not be as well correlated with the return of the index as would be the case if the ETF purchased all the loans in the index in the proportions represented in the index.
Correlation
Invesco PowerShares and Invesco
Senior Secured seek correlation over time of 0.95 or better between the ETFs performance and the performance of the index (a figure of 1.00 would represent perfect correlation). Another means of evaluating the relationship between the returns
of the ETF and index is to assess the tracking error between the two. Tracking error refers to the variation between the ETFs annual return and the return of the index, expressed in terms of standard deviation. The ETF seeks to
have a tracking error of less than 5%, measured on a monthly basis over a one-year period by taking the standard deviation of the difference in the ETFs return versus the indexs returns. Since the ETF uses an indexing approach to try to
achieve its investment objective, the ETF does not take temporary defensive positions during periods of adverse market, economic or other conditions. For the period ended March 31, 2016, the PowerShares website gave the following performance
figures for market price of a ETF share (based on the midpoint of the bid/ask spread at 4:00 p.m. ET) and the index: ETFyear to date, 2.55%; 1 year on an annualized basis, -1.74%; 3 years on an annualized basis, 0.75%; since inception on
March 3, 2011 on an annualized basis, 2.36%; indexyear to date, 2.49%; 1 year on an annualized basis, -2.13%; 3 years on an annualized basis, 1.16%; since the ETFs inception on March 3, 2011 on an annualized basis, 2.74%.
The Index
The S&P/LSTA U.S. Leveraged Loan
100 Index is a market value-weighted index designed to measure the performance of the largest facilities in the U.S. leveraged loan market based on market weightings, spreads and interest payments. The constituents of the index are drawn from a
universe of syndicated leveraged loans representing over 90% of the leveraged loan market. The index consists of 100 loan facilities drawn from a larger benchmarkthe S&P/LSTA (Loan Syndications and Trading Association) Leveraged Loan Index
(the leveraged loan index). The index is rules-based in order to allow for transparency; the S&P/LSTA U.S. Leveraged Loan 100 Index Committee (the index committee), however, reserves the right to exercise discretion when
necessary.
The index is reported by Bloomberg L.P. under the ticker symbol SPBDLL.
S-132
Eligibility Criteria
: All syndicated leveraged loans covered by the leveraged loan index are
eligible for inclusion in the index. Term loans from syndicated credits must meet the following criteria at issuance in order to be eligible for inclusion in the leveraged loan index: (1) senior secured; (2) minimum initial term of one
year; (3) minimum initial spread of 125 basis points over LIBOR; (4) denominated in U.S. dollars and (5) par amount outstanding of $50 million or greater. Only the 100 largest first-lien facilities from the leveraged loan index that
meet all eligibility requirements are considered for inclusion in the index. While the index covers all issuers regardless of origin, all facilities must be denominated in U.S. dollars. All constituents of the index must have a publicly assigned
CUSIP.
Index Calculation
: The index is a market value-weighted index. LSTA/LPC Mark-to-Market Pricing is used to price each loan in the
index. LSTA/LPC Mark-to-Market Pricing is based on bid/ask quotes gathered from dealers and is not based upon derived pricing models. The index uses the average bid for its market value calculation.
Each loan facilitys total return is calculated by aggregating the interest return, reflecting the return due to interest paid and accrued interest,
and price return, reflecting the gains or losses due to changes in end-of-day prices and principal prepayments.
The return of each loan facility is
weighted in the index based upon its market value outstanding, which reflects both the prior periods price as well as accrued interest. The overall index return is the composite of each component loan facilitys return multiplied by the
market value outstanding from the prior time period.
Calculation of Daily Index Returns and Daily Index Values
: The individual index loan
returns are aggregated to calculate returns for the index. Specifically, the total return for the index, on a given day, is equal to a weighted average of the returns of the index loans that constitute the indexwith the weight of each index
loan return being equal to the relative weight of that index loan in the index as of the previous calendar day (adjusted for principal pre-payments, etc.). The index return is therefore the
sum
of the result, for each index loan, of the
market value of the index loan at the beginning of that day
times
the total return for such index loan on such day
divided by
market value of such loan at the beginning of that day. Index values are calculated each day by applying the
current days index return to the previous days index value.
Calculation of Index Loan Market Values
: The market value for each
index loan is calculated as of the close on each calendar day. The market value of an index loan on a day is calculated as the
product
of the investable weight factor (used to adjust the par amount when a loan is capped (0
£
IWF
£
1.0) as described below)
times
the par amount
of index loan as of the last weekly rebalancing (as adjusted for principal pre-payments and similar events through that day)
times
a fraction, the numerator of which is the
sum
of the price of the index loan
plus
its accrued
interest (calculated on a 360-day basis) through that day and the denominator of which is 100.
If the calculation date is not a business day, the
market value is based on the price as of the immediate prior business day, plus interest accrued to the valuation date.
The investable weight factor
(IWF) is used to reduce the weight of a loan to less than 2% if the loan exceeds the maximum 2% weight in the index. At each weekly rebalancing, the loan weights are checked; if any loan exceeds 2%, its IWF is reduced until its weight is
1.90% and all the loans are reviewed for adjusted weights. If necessary, further IWF adjustments are made until no loan exceeds 2% weight.
Calculation of Relative Weights
: The relative weight of an index loan is defined as the market value of that loan
times
its investable
weight factor and expressed as a percentage of the aggregate market value of all index loans.
Calculation of Total Return
: Returns are
calculated for all index loans on every calendar day. The total return of an index loan is the
sum
of the interest return
plus
the market price return. Price return measures the return due to the change in the market price of the loan.
Interest return (or coupon return) includes the return due to the interest earned on that loan. The interest return for each index loan is calculated as the
product
of IWF for that index loan
times
its par amount
times
the
loans interest rate
divided by
360 and
divided by
that index loans market value at the beginning of that day. The index interest rate is determined by the weighted average spread to LIBOR over the rate as provided by Wall
Street Office
TM
. The price return of an index loan is calculated to give effect both to changes in the market price of the loan and any realized return due to receiving a principal repayment at
the redemption price (which could differ from par).
Index Maintenance
: The index is reviewed each week. Weekly index rebalancing maintenance
(additions, deletions, pay-downs, and other changes to the index) is based on data as of Friday (or the last business day of the week in the case of holidays) and is announced the following Thursday (or Wednesday in the case of a holiday) for
implementation on the following Friday. Announcements are made only if there are changes to the index. Highly probable weekly pay-downs
S-133
are estimated each Friday and enter the return universe at that time, until they are adjusted with actual data the following week. Publicly available information, up to and including each
Thursdays close, is considered in each weekly rebalancing.
Index changes published in the announcement generally will not be subject to
revision and will become effective on the date listed in the announcement.
Facilities are retired from the index when they are repaid or are no
longer priced by the LSTA/LPC Mark-to-Market Pricing.A complete review and rebalancing of all index constituents is completed on a semi-annual basis coinciding with the last weekly rebalance in June and December. Eligible loan facilities approved by
the index committee are added to the index during the semi-annual rebalancing, but eligible loan facilities are added to the index at the weekly review only if other facilities are repaid or otherwise drop out of the index, in order to maintain 100
index loans. Index additions are also reviewed weekly and are made according to par outstanding and overall liquidity. Liquidity is determined by the par outstanding and number of market bids available. Any loan facility that fails to meet any of
the eligibility criteria described above or that has a term to maturity less than or equal to 12 months plus one calendar day, as of the weekly rebalancing date, is not included in the index. Par amounts of index loans are adjusted on the weekly
rebalancing date to reflect any changes that have occurred since the previous rebalancing date, due to partial pre-payments, pay-downs, and similar events. Constituent facilities are capped at 2% of the index and drawn-down at the weekly rebalancing
through adjustment of the IWF as described above.
Cash Flows
: Interest payments are considered paid on a rolling 90-day basis from the date
each loan enters the index and are reinvested in the index, on a relative-weight basis, after 90 days. Pre-payments, pay-downs, and most other forms of cash flow (other than scheduled interest payments) are reconciled at the end of each week to be
considered part of that weeks total return.
Index Governance
: The index committee maintains the index. The index committee is comprised
of employees of S&P Dow Jones Indices and Leverage Commentary & Data. The index committee is chaired by the Managing Director and Index Committee Chairman at S&P Dow Jones Indices. Meetings are held annually and as needed. It is the
responsibility solely of the index committee to decide on all matters relating to methodology, maintenance, constituent selection and index procedures.
The index is calculated on all business days of the year following the SIFMA holiday schedule.
S&P/LSTA U.S. Leveraged Loan 100 Index: Top 10 Issuers By Weight as of April 15, 2016
The following table displays the top constituents of the index. We obtained the information in the table below from the index sponsors website
without independent verification.
|
|
|
|
|
|
|
|
|
Issuers
|
|
Index
Weight
|
|
|
|
|
|
|
|
|
Asurion Corporation
|
|
2.89%
|
|
|
|
|
|
|
|
|
Valeant Pharmaceuticals
|
|
2.82%
|
|
|
|
|
|
|
|
|
First Data Corp
|
|
2.75%
|
|
|
|
|
|
|
|
|
TXU Corp
|
|
2.44%
|
|
|
|
|
|
|
|
|
Fortescue Metals Group
|
|
1.94%
|
|
|
|
|
|
|
|
|
Avago Technologies
|
|
1.90%
|
|
|
|
|
|
|
|
|
Burger King Corp
|
|
1.89%
|
|
|
|
|
|
|
|
|
Dell International LLC
|
|
1.88%
|
|
|
|
|
|
|
|
|
Energy Future Intermediate Holding (EFIH)
|
|
1.87%
|
|
|
|
|
|
|
|
|
PetSmart Inc
|
|
1.86%
|
|
|
The following table displays the industry breakdown of the index. We obtained the information in the table below from the
index sponsors website without independent verification.
S-134
S&P/LSTA U.S. Leveraged Loan 100 Index: LCD Broad Industry Breakdown as of April 15, 2016
|
|
|
|
|
|
|
Industry
|
|
Index Weight
|
|
|
Building Materials
|
|
1.01%
|
|
|
Computers & Electronics
|
|
9.20%
|
|
|
Entertainment & Leisure
|
|
2.88%
|
|
|
Food & Beverage
|
|
4.47%
|
|
|
Forest Product
|
|
0.93%
|
|
|
Gaming & Hotel
|
|
8.80%
|
|
|
Healthcare
|
|
14.98%
|
|
|
Industrial
|
|
9.79%
|
|
|
Media
|
|
9.77%
|
|
|
Metals & Mining
|
|
3.02%
|
|
|
Oil & Gas
|
|
1.10%
|
|
|
Other
|
|
5.87%
|
|
|
Real Estate
|
|
1.61%
|
|
|
Services
|
|
20.42%
|
|
|
Telecom
|
|
6.15%
|
Additional information regarding the index may be obtained from other sources including, but not limited to, press
releases, newspaper articles, other publicly available documents, and the index sponsors website at http://us.spindices.com/indices/fixed-income/sp-lsta-us-leveraged-loan-100-index. We are not incorporating by reference the website, the
sources listed above or any material they include in this prospectus supplement.
Historical Closing Prices of the ETFs Shares
The closing price of shares of the ETF has fluctuated in the past and may, in the future, experience significant fluctuations. Any historical upward or
downward trend in the closing price of the shares during the period shown below is not an indication that the shares are more or less likely to increase or decrease at any time during the life of your notes. The period shown below will be
approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from the date hereof
or otherwise).
You should not take the historical closing prices of the shares as an indication of the future performance of the shares.
We
cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes on the stated maturity date. Neither we nor any of our affiliates make any
representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the relevant ETF closing prices between the date of this prospectus supplement and the
date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the payment amount at maturity may bear little relation to the historical prices shown below.
The graph below shows the daily historical prices of the shares of the ETF from March 3, 2011 through April 28, 2016. We obtained the closing
prices shown in the graph below from Bloomberg Financial Services without independent verification.
S-135
PowerShares
®
is a registered trademark of Invesco
PowerShares Capital Management LLC (Invesco PowerShares). Invesco PowerShares Capital Management LLC and Invesco Distributors, Inc. are indirect, wholly owned subsidiaries of Invesco Ltd. PowerShares
®
makes no representations or warranties to the owners of the index or any product linked to the Index or any member of the public regarding the advisability of investing in the Index or such
product. PowerShares
®
has no obligation or liability in connection with the operation, marketing, trading or sale of the index.
S-136
General Questions and Answers Regarding Commodity Eligible ETFs
What Is a Commodity Contract?
A
commodity contract is an agreement either to buy or sell a set amount of a physical commodity at a predetermined price and delivery period (which is generally referred to as a delivery month), or to make and receive a cash payment based
on changes in the price of the commodity. Generally speaking, the return on an investment in commodity contracts is correlated with, but different from, the return on buying and holding physical commodities. Each index currently tracked by a
commodity eligible ETF is comprised solely of commodity contracts on physical commodities traded on regulated futures trading facilities. However, it is possible that an index tracked by a commodity eligible ETF will in the future include swaps or
other derivatives that are cleared through a centralized clearing house.
Why Do the Commodity Eligible ETFs Track Commodity Contracts And Not
Physical Commodities?
While holding an inventory of physical commodities may have certain economic benefits (for example, a refinery could
use a reserve of crude oil for the continuation of its operations), it also poses administrative burdens and costs, including those arising from the need to store or transport physical commodities. These requirements and costs may prove unattractive
to investors who are interested solely in the price movement of commodities. Commodity contracts permit an investor to obtain exposure to the prices of commodities without directly incurring these requirements and costs. However, an investor in
commodity contracts, or in an index of commodity contracts, can be indirectly exposed to these costs, which may be reflected in the prices of the commodity contracts and therefore in the index level. In addition, the fact that commodity contracts
have publicly available prices allows calculation of an index based on these prices. The use of commodity contracts, therefore, allows the index sponsor to separate the exposure to price changes from the ownership of the underlying physical
commodity, and thus allow participation in the upside and downside movement of commodity prices independently of the physical commodity itself.
If the Price of the Underlying Physical Commodities Goes Up, Will the Level of the Related Eligible ETF, Therefore, Also Go Up?
Not necessarily, for two reasons:
First, the
commodity eligible ETFs track the commodity contract or contracts included in their respective index, rather than individual physical commodities themselves. Changes in the prices of commodity contracts should generally track changes in the prices
of the underlying physical commodities, but, as described above under Why Do the Commodity Eligible ETFs Track Commodity Contracts And Not Physical Commodities?, the prices of commodity contracts might from time to time move in ways or
to an extent that differ from movements in physical commodity prices. Therefore, you may observe prices of a particular commodity going up and the index level not changing in the same way.
Second, because commodity contracts have expiration dates i.e., dates upon which trading of the commodity contract ceases, there are certain
adjustments that need to be made to a commodity index in order to retain an investment position in the commodity contracts. These adjustments, which are described below and primarily include the mechanic of rolling, may have a positive
or negative effect on the level of the index. As a result, these adjustments may, in certain instances, cause a discrepancy between the performance of the index and the performance of the underlying commodity contracts.
What Does Rolling a Commodity Contract Mean?
Since any commodity contract has a predetermined expiration date on which trading of the commodity contract ceases, holding a commodity contract until
expiration will result in delivery of the underlying physical commodity or the requirement to make or receive a cash settlement. Rolling the commodity contracts, i.e., (i) selling near-dated (i.e., commodity contracts that are
nearing expiration) commodity contracts before they expire and (ii) buying longer-dated contracts (i.e., commodity contracts that have an expiration date further in the future), allows an investor to maintain an investment position in
commodities without receiving delivery of physical commodities or making or receiving a cash settlement.
Each index replicates an actual investment
in commodity contracts, and therefore takes into account the need to roll the commodity contracts included in such index, and reflects the effects of this rolling. Specifically, as a commodity contract included in an index approaches expiration,
such index is calculated as if the commodity contract in the first delivery month is sold and the proceeds of that sale are used to purchase a commodity contract of equivalent value in the next available delivery month. If the price of the second
commodity contract is lower than the price of the first commodity contract, the rolling process results in a greater quantity of the second commodity contract being acquired for the same value.
S-137
Conversely, if the price of the second commodity contract is higher than the price of the first contract,
the rolling process results in a smaller quantity of the second commodity contract being acquired for the same value.
What Do
Contango and Backwardation Mean?
When the price of a near-dated commodity contract is greater than that of a
longer-dated commodity contract, the market for such contracts is referred to as in backwardation. On the other hand, the market is referred to as in contango when the price of a near-dated commodity contract is less than
that of a longer-dated commodity contract. Rolling commodity contracts in a backwardated or contango market can affect the level of an index.
How Does Rolling Affect the Level of an Index Underlying a Commodity Eligible ETF?
Rolling can affect an index in the following two ways:
First, if, as described above under What Does Rolling a Commodity Contract Mean?, an index theoretically owns more commodity
contracts as a result of the rolling process (albeit at a lower price), the gain or loss on the new position for a given movement in the prices of the commodity contracts will be greater than if the index had owned the same number of commodity
contracts as before the rolling process. Conversely, if an index theoretically owns fewer commodity contracts as a result of the rolling process (albeit at a higher price), the gain or loss on the new position for a given movement in the prices of
the commodity contracts will be less than if such index had owned the same number of commodity contracts as before the rolling process. Therefore, these differentials in the quantities of contracts sold and purchased may have a positive or negative
effect on the level of such index (measured on the basis of its dollar value).
Second, an index theoretically sells a near-dated commodity contract
when it gets close to expiry and buys the longer-dated commodity contract. In a contango market, longer-dated commodity contracts are at higher prices than the near-dated commodity contracts. In the absence of significant market changes, the prices
of the longer-dated commodity contracts which such index theoretically buys and holds are expected to (but may not) decrease over time as they near expiry. This expected decrease in price of these longer-dated commodity contracts as they near expiry
can potentially cause the level of the index to decrease. However, there are a number of different factors affecting the index level. In a backwardated market, where the prices of near-dated commodity contracts are greater than the prices of
longer-dated commodity contracts, the price of longer-dated commodity contracts which an index theoretically buys and holds are expected to (but may not) increase as they near expiry.
Can We Assume Any of Such Factors Will Have a Direct Effect on the Level of a Commodity Eligible ETF?
These factors are interrelated in complex ways and affect the performance of the commodity contracts comprising the index and, therefore, may offset each
other in calculation of the level of a commodity eligible ETF. Therefore, you should not assume any one of these factors, the effect of rolling or any other factors (e.g., the positive price movement of any underlying physical commodity) will have a
direct and linear effect on the performance of the commodity contracts and the level of the commodity eligible ETFs at any given time.
The level of an eligible ETF, and therefore the level of the index, may decline even when one or more of such
factors are favorable, due to the reasons explained in this subsection entitled Questions and Answers.
S-138
PowerShares
®
DB Commodity Index Tracking
Fund
The PowerShares
®
DB Commodity Index Tracking Fund (the ETF) is
organized as a Delaware statutory trust. The ETF issues common units of beneficial interest (shares), which represent units of fractional undivided beneficial interest in and ownership of the ETF. The ETF trades exchange-traded futures
on the commodities comprising the DBIQ Optimum Yield Diversified Commodity Index Excess Return (the index) with a view to tracking the index over time. The index is intended to reflect the change in market value of the 14 specified
commodities included in the index. The commodities included in the index (each, an index commodity, and together, the index commodities) are light sweet crude oil (WTI), heating oil, RBOB (reformulated gasoline
blendstock for oxygen blending) gasoline, natural gas, Brent crude oil, gold, silver, aluminum, zinc, copper grade A, corn, wheat, soybeans, and sugar. The notional amounts of each index commodity included in the index are broadly in proportion to
the historical levels of the worlds production and stocks of the index commodities. The ETF also earns interest income from United States Treasury and other high credit quality short-term fixed income securities. The shares trade on the NYSE
Arca under the symbol DBC.
We obtained the following fee information from the
PowerShares
®
website without independent verification. The manage is entitled to receive a management fee based on the net asset value of the ETF, at an annualized rate of 0.85% of the net
asset value of ETF. This fee is payable by ETF monthly in arrears. The ETF also pays brokerage commissions and fees related to its trading activities, which are not expected to exceed 0.04% of the ETFs net asset value per annum. As of
December 31, 2015, the estimated expense ratio of the trust was 0.89% per annum.
We have derived all information regarding the ETF and the
shares contained in this prospectus supplement from publicly available information without independent verification. For additional information regarding the ETF, please consult the reports (including the annual report on Form 10-K for the fiscal
year ended December 31, 2015 and other information the ETF files with the SEC. Information provided to or filed with the SEC can be inspected and copied at the public reference facilities maintained by the SEC or through the SECs website
at www.sec.gov and can be located by reference to SEC CIK number 0001328237. Additional information regarding the ETF may be obtained from other sources including, but not limited to, press releases, newspaper articles, other publicly available
documents, and the PowerShares
®
website at http://invescopowershares.com/products/overview.aspx?ticker=dbc. We are not incorporating by reference the website, the sources listed above or any
material they include in this prospectus supplement.
ETF Structure
Wilmington Trust Company (the trustee), a Delaware trust company, is the sole trustee of the ETF. The trustee has delegated to the manager
certain of the power and authority to manage the business and affairs of the ETF and has only nominal duties and liabilities to the ETF. Invesco PowerShares Capital Management LLC serves as the manager (the manager) of the ETF. The
manager serves as both commodity pool operator and commodity trading advisor of the ETF.
The manager has been registered with the Commodity Futures
Trading Commission (CFTC) as a commodity pool operator since January 1, 2013 and as a commodity trading advisor since October 1, 2014 and has been a member of the National Futures Association (NFA) since
January 1, 2013. The manager is an affiliate of Invesco Ltd. The registration of the manager with the CFTC and its membership in the NFA must not be taken as an indication that either the CFTC or the NFA has recommended or approved the manager
or the ETF.
The shareholders take no part in the management or control, and have no voice in the operations or the business of the ETF.
Shareholders, may, however, remove and replace the manager as the manager of the ETF, and may amend the trust declaration, except in certain limited respects, by the affirmative vote of a majority of the outstanding shares then owned by shareholders
(as opposed to by the manager and its affiliates). The owners of a majority of the outstanding shares then owned by shareholders may also compel dissolution of the ETF.
Investment Objective
The ETF seeks to track
changes, whether positive or negative, in the level of the index, over time, plus the excess, if any, of the ETFs interest income from its holdings of United States Treasury and other high credit quality short-term fixed income securities over
the expenses of the ETF. The ETF is managed to maintain correspondence between the composition and weightings of the index commodities comprising the index and the investments of the ETF. The manager adjusts the portfolio from time-to-time to
conform to periodic changes in the identity and/or relative weighting of the index commodities. The manager aggregates certain of the adjustments and makes changes to the portfolio at least monthly or more frequently in the case of significant
changes to the index.
The value of the shares fluctuates in relation to changes in the value of the ETFs portfolio. The market price of the
shares may not be identical to the net asset value per share.
S-139
The CFTC and/or commodity exchanges, as applicable, impose speculative position limits on market
participants trading in certain commodities. If the manager determines in its commercially reasonable judgment that it has become impracticable or inefficient for any reason for the ETF to gain full or partial exposure to any index commodity by
investing in a specific futures contract that is a part of the index, the ETF may invest in a futures contract referencing the particular index commodity other than the specific contract that is a part of the index or, in the alternative, invest in
other futures contracts not based on the particular index commodity if, in the commercially reasonable judgment of the manager, such futures contracts tend to exhibit trading prices that correlate with a futures contract that is a part of the index.
Creation and Redemption of ETF Shares
The
ETF creates and redeems shares from time-to-time, but only in one or more baskets. A basket is a block of 200,000 shares. Except when aggregated in baskets, the shares are not redeemable securities. Baskets may be created or redeemed only by
authorized participants (typically large financial institutions). The shares are not redeemable except in baskets. On February 25, 2015, the managing owner of the ETF announced that it had temporarily suspended the ability of authorized
participants to purchase new creation baskets in the ETF in connection with the transition to the new managing owner of the ETF. Effective February 26, 2015, the managing owner has resumed accepting orders for authorized participants to
purchase new creation baskets in the ETF. The market value of the ETFs shares may be affected by the resumption of issuances of shares of the ETF, and the market value may be higher or lower than the intraday indicative value of the shares.
Fees and Expenses
The ETF pays the
manager a management fee, monthly in arrears, in an amount equal to 0.85% per annum of the daily net asset value of the ETF. The management fee is paid in consideration of the managers commodity futures trading advisory services. Expenses
incurred in connection with the continuous offering of shares of the ETF are paid by the manager. The manager will not allocate to the ETF the indirect expenses of the manager.
The ETF pays to the commodity broker all brokerage commissions, including applicable exchange fees and other transaction related fees and expenses
charged in connection with its trading activities. The manager does not expect brokerage commissions and fees to exceed 0.04% of the net asset value of the ETF in any year, although the actual amount of brokerage commissions and fees in any year or
any part of any year may be greater.
The manager pays all routine operational, administrative and other ordinary expenses of the ETF, generally, as
determined by the manager. The manager expects that all of the routine operational, administrative and other ordinary expenses of the ETF will be approximately 0.33% per annum of the ETFs net asset value. The ETF pays all its
extraordinary fees and expenses (as defined in the trust declaration) of the ETF generally, if any, as determined by the manager. Extraordinary fees and expenses are fees and expenses which are non-recurring and unusual in nature, such as legal
claims and liabilities and litigation costs or indemnification or other unanticipated expenses.
The management fee and the brokerage commissions and
fees of the ETF are paid first out of interest income from the ETFs holdings of U.S. Treasury bills and other high credit quality short-term fixed income securities on deposit with the commodity broker as margin or otherwise. The interest
income has historically been sufficient to cover the fees and expenses of the ETF. If, however, the interest income is not sufficient to cover the fees and expenses of the ETF during any period, the excess of the fees and expenses over the interest
income will be paid out of income from futures trading, if any, or from sales of the ETFs fixed income securities.
Correlation
The performance of the ETF and the index may vary due to, among other things, market disruptions affecting the commodity contracts, position limits on
the index commodity, the ETFs operating expenses (including management fees) and costs the ETF incurs in buying and selling the commodity contracts and other securities. The ETF seeks to track the excess return version of the index (ticker
DBLCDBCE). Because the ETF collateralizes its futures positions with positions in 3-month U.S. Treasuries, when providing performance data, PowerShares
®
displays the results of the
total return version of the index (ticker DBLCDBCT) for comparison.
For the period ended March 31, 2016, the PowerShares website
gave the following performance figures for market price of an ETF share (based on the midpoint of the bid/ask spread at 4 pm ET) and the total return version index: ETFyear to date, -0.52%; 1 year on an annualized basis, -22.13%; 3 years on an
annualized basis, -21.32%; 5 years on an annualized basis, -15.31%; since ETF inception on February 3, 2006 on an annualized basis, -5.23%; indexyear to date, -0.20%; 1 year on an annualized basis, -21.37%; 3 years on an annualized basis,
-20.14%; 5 years on an annualized basis, -14.30%; since ETF inception on an annualized basis, -4.05%.
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Termination Events
The ETF will dissolve at any time upon the happening of any of the following events:
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The filing of a certificate of dissolution or revocation of the managers charter (and the expiration of 90 days after the date of notice to the manager of revocation without a reinstatement of its charter) or upon
the withdrawal, removal, adjudication or admission of bankruptcy or insolvency of the manager, or an event of withdrawal unless (i) at the time there is at least one remaining manager and that remaining manager carries on the business of the
ETF or (ii) within 90 days of such event of withdrawal all the remaining shareholders agree in writing to continue the business of the ETF and to select, effective as of the date of such event, one or more successor managers. If the ETF is
terminated as the result of an event of withdrawal and a failure of all remaining shareholders to continue the business of the ETF and to appoint a successor managing owner as provided above within 120 days of such event of withdrawal, Shareholders
holding shares representing at least a majority (over 50%) of the net asset value (not including shares held by the manager and its affiliates) may elect to continue the business of the ETF by forming a new statutory trust, or reconstituted trust,
on the same terms and provisions as set forth in the trust declaration. Any such election must also provide for the election of a manager to the reconstituted trust. If such an election is made, all shareholders of the ETF shall be bound thereby and
continue as shareholders of the reconstituted trust.
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The occurrence of any event which would make unlawful the continued existence of the ETF.
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In the event of the suspension, revocation or termination of the managers registration as a commodity pool operator, or membership as a commodity pool operator with the NFA (if, in either case, such registration
is required at such time unless at the time there is at least one remaining managing owner whose registration or membership has not been suspended, revoked or terminated).
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The ETF becomes insolvent or bankrupt.
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The shareholders holding shares representing at least a majority (over 50%) of the net asset value (which excludes the shares of the manager) vote to dissolve the ETF, notice of which is sent to the manager not less
than ninety (90) business days prior to the effective date of termination.
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The determination of the manager that the aggregate net assets of the ETF in relation to the operating expenses of the ETF make it unreasonable or imprudent to continue the business of the ETF, or, in the exercise of
its reasonable discretion, the determination by the manager to dissolve the ETF because the aggregate net asset value of the ETF as of the close of business on any business day declines below $10 million.
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The ETF is required to be registered as an investment company under the Investment Company Act of 1940.
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DTC is unable or unwilling to continue to perform its functions, and a comparable replacement is unavailable.
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The Index
Overview
The ETF pursues its investment objective by investing in a portfolio of exchange-traded futures on the index commodities. The index commodities are light
sweet crude oil (WTI), heating oil, RBOB (reformulated gasoline blendstock for oxygen blending) gasoline, natural gas, Brent crude oil, gold, silver, aluminum, zinc, copper grade A, corn, wheat, soybeans, and sugar. The index is composed
of notional amounts of each of the index commodities. The notional amounts of each index commodity included in the index are broadly in proportion to the levels of the worlds production and supplies of the index commodities at the indexs
base date of September 3, 1997. The sponsor of the index is Deutsche Bank Securities Inc.
The index is calculated on an excess return, or
unfunded basis. The futures contract price for each index commodity will be the exchange closing prices for such index commodity on each weekday when banks in New York, New York are open, or index business days. If a weekday is not a trading day on
the relevant exchange for a particular commodity but is an index business day, the exchange closing price from the previous index business day will be used for each index commodity. The closing level of the index is calculated by the index sponsor
based on the closing price of the futures contracts for each of the index commodities and the notional amount of such index commodity. The composition of the index may be adjusted in the event that the index sponsor is not able to calculate the
closing prices of the index commodities.
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The index calculation is expressed as the weighted average return of the index commodities. The index is
re-weighted on an annual basis on the sixth index business day of each November, to ensure that each of the index commodities is weighted in the same proportion that such index commodities were weighted on September 3, 1997, which serves as the
base date for the index, on which date the closing level was 100. The following table reflects the index base weights of each index commodity on the base date:
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Index Commodity
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Index Base Weight
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Light Crude
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12.38%
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Heating Oil
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12.38%
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RBOB Gasoline
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12.38%
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Natural Gas
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5.50%
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Brent Crude
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12.38%
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Gold
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8.00%
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Silver
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2.00%
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Aluminum
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4.17%
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Zinc
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4.17%
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Copper Grade A
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4.17%
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Corn
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5.63%
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Wheat
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5.63%
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Soybeans
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5.63%
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Sugar
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5.63%
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Closing Level on Base Date:
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100.00%
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The index commodities are traded on the following futures exchanges:
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Exchange
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Commodities
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New York Mercantile Exchange
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Light Sweet Crude Oil (WTI), Heating Oil, RBOB Gasoline and Natural Gas
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ICE Futures Europe
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Brent Crude
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Commodity Exchange Inc., New York
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Gold and Silver
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The London Metal Exchange Limited
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Aluminum, Zinc and Copper Grade A
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Board of Trade of the City of Chicago Inc.
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Corn, Wheat and Soybeans
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ICE Futures U.S., Inc.
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Sugar
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The index includes provisions for the replacement of futures contracts as they approach maturity. This replacement takes
place over a period of time in order to lessen the impact on the market for the futures contracts being replaced. With respect to each index commodity, the ETF employs a rule-based approach when it rolls from one futures contract to
another. Rather than select a new futures contract based on a predetermined schedule (e.g., monthly), each index commodity rolls to the futures contract which generates the best possible implied roll yield (as determined by the index
sponsor). The futures contract with a delivery month within the next thirteen months which generates the best possible implied roll yield will be included in the index. As a result, each index commodity is able to potentially maximize the roll
benefits in backwardated markets and minimize the losses from rolling in contangoed markets.
Contract Selection
On the first New York business day of each month, each index commodity futures contract will be tested in order to determine whether to continue
including it in the index. If the index commodity futures contract requires delivery of the
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underlying commodity in the next month, known as the delivery month, a new index commodity futures contract will be selected for inclusion in the index. For each index commodity in the index, the
new index commodity futures contract selected will be the index commodity futures contract with the best possible implied roll yield (as determined by the index sponsor) based on the closing price for each eligible index commodity futures contract.
Eligible index commodity futures contracts are any index commodity futures contracts having a delivery month no sooner than the month after the delivery month of the index commodity futures contract currently in the index, and no later than the
thirteenth month after the testing date. For example, if the first New York business day is May 1, 2015 and the delivery month of an index commodity futures contract currently in the index is therefore June 2015, the delivery month of an
eligible new index commodity futures contract must be between July 2015 and July 2016. The implied roll yield is then calculated and the futures contract on the index commodity with the best possible implied roll yield is then selected. If two
futures contracts have the same implied roll yield, the futures contract with the minimum number of months prior to the delivery month is selected.
Monthly Index Roll Period
After the futures
contract selection, the monthly roll for each index commodity subject to a roll in that particular month unwinds the old futures contract and enters a position in the new futures contract. This takes place between the second and sixth index business
day of the month. On each day during the roll period, new notional holdings are calculated. The calculations for the old index commodities that are leaving the index and the new index commodities are then calculated. On all days that are not monthly
index roll days, the notional holding of each index commodity future remains constant.
Interruption of Index Calculation
Calculation of the index may not be possible or feasible under certain events or circumstances, including, without limitation, a systems failure, natural
or man-made disaster, act of God, armed conflict, act of terrorism, riot or labor disruption or any similar intervening circumstance, that is beyond the reasonable control of the index sponsor and that the index sponsor determines affects the index
or any index commodity. Upon the occurrence of such force majeure events, the index sponsor may, in its discretion, elect one (or more) of the following options:
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make such determinations and/or adjustments to the terms of the index as it considers appropriate to determine any closing level on any such appropriate index business day; and/or
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defer publication of the information relating to the index until the next index business day on which it determines that no force majeure event exists; and/or
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permanently cancel publication of the information relating to the index.
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Additionally, calculation of
the index may also be disrupted by an event that would require the index sponsor to calculate the closing price in respect of the relevant index commodity on an alternative basis were such event to occur or exist on a day that is a trading day for
such index commodity on the relevant exchange. If such an index disruption event in relation to an index commodity as described in the prior sentence occurs and continues for a period of five successive trading days for such index commodity on the
relevant exchange, the index sponsor will, in its discretion, either
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continue to calculate the relevant closing price for a further period of five successive trading days for such index commodity on the relevant exchange; or
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if such period extends beyond the five successive trading days, the index sponsor may elect to replace the exchange traded instrument with respect to a specific index commodity and shall make all necessary adjustments
to the methodology and calculation of the index as it deems appropriate.
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Historical Closing Prices of the ETFs Shares
The closing price of shares of the ETF has fluctuated in the past and may, in the future, experience significant fluctuations. Any historical upward or
downward trend in the closing price of the shares during the period shown below is not an indication that the shares are more or less likely to increase or decrease at any time during the life of your notes. The period shown below will be
approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from the date hereof
or otherwise).
You should not take the historical closing prices of the shares as an indication of the future performance of the shares.
We
cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes on the stated maturity date. Neither we nor any of our
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affiliates make any representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the relevant
ETF closing prices between the date of this prospectus supplement and the date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the payment amount at maturity may bear little
relation to the historical prices shown below.
The graph below shows the daily historical prices of the shares of the ETF from May 3, 2006
through April 28, 2016. We obtained the closing prices shown in the graph below from Bloomberg Financial Services without independent verification.
PowerShares
®
is a registered trademark of Invesco PowerShares
Capital Management LLC (Invesco PowerShares). Invesco PowerShares Capital Management LLC and Invesco Distributors, Inc. are indirect, wholly owned subsidiaries of Invesco Ltd.
PowerShares
®
makes no representations or warranties to the owners of the Index or any product linked to the Index or any member of the public regarding the advisability of investing in the
Index or such product. PowerShares
®
has no obligation or liability in connection with the operation, marketing, trading or sale of the Index.
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SPDR
®
Gold Trust
The SPDR
®
Gold Trust (the trust) issues SPDR
®
Gold Shares, which represent units of fractional undivided beneficial interest in and ownership of the trust (the shares). The trust holds gold bars and intends for its shares to
reflect the performance of the price of gold bullion minus the trusts expenses and fees. The shares trade under the ticker symbol GLD on the NYSE Arca.
We have derived all information regarding the trust and the shares contained in this prospectus supplement from publicly available information without
independent verification. For additional information regarding the trust, please consult the reports (including the annual report on Form 10-K for the fiscal year ended September 30, 2015) and other information the trust files with the SEC.
Information provided to or filed with the SEC can be inspected and copied at the public reference facilities maintained by the SEC or through the SECs website at www.sec.gov and can be located by reference to SEC CIK number 0001222333.
Additional information regarding the trust may be obtained from other sources including, but not limited to, press releases, newspaper articles, other publicly available documents, and the
SPDR
®
Gold Shares website at www.spdrgoldshares.com. We are not incorporating by reference the website, the sources listed above or any material they include in this prospectus supplement.
The Trust
The SPDR
®
Gold Trust is an investment trust, formed on November 12, 2004, that holds gold bars and is expected from time to time to issue blocks of 100,000 trust shares (called baskets) in exchange
for deposits of gold and to distribute gold in connection with redemptions of baskets.
The trusts sponsor is World Gold Trust Services, LLC, a
Delaware limited liability company, which is wholly-owned by the World Gold Council, a not-for-profit association registered under Swiss law. The sponsor established the trust and generally oversees the performance of the trustee and the
trusts principal service providers, but does not exercise day-to-day oversight. The sponsor may remove the trustee and appoint a successor in certain circumstances.
The trustee is BNY Mellon Asset Servicing, a division of The Bank of New York Mellon. The trustee is generally responsible for the day-to-day
administration of the trust. This includes selling the trusts gold as needed to pay the trusts expenses (gold sales are expected to occur approximately monthly in the ordinary course), calculating the net asset value (NAV) of
the trust and the NAV per trust share, receiving and processing orders from authorized participants to create and redeem baskets and coordinating the processing of such orders with the custodian and The Depository Trust Company and monitoring the
custodian. The trustee determines the NAV of the trust on each day that the NYSE Arca is open for regular trading, at the earlier of (i) the afternoon session of the twice daily determination of the price of an ounce of gold through an auction
by the London Bullion Market Association (the LBMA), administered by the ICE Benchmark Administration, which starts at 3:00 PM London, England time (known as the London Gold Price PM), or (ii) 12:00 PM New York time. The
London Gold Price is determined by participants in a physically settled, electronic and tradable auction. The London Gold Price replaced the previously established London PM Gold Fix on March 20, 2015. See Risk Factors Risks
related to SPDR
®
Gold Trust Calculation of the Value of Gold Using the London Gold Price PM Could Have an Adverse Effect on the Value of the SPDR
®
Gold Trust Shares. The NAV of the trust is the aggregate value of the trusts assets less its estimated accrued but unpaid liabilities (which include accrued expenses). In determining
the trusts NAV, the trustee values the gold held by the trust based on the London Gold Price PM for an ounce of gold. The trustee also determines the NAV per trust share.
The custodian is HSBC Bank plc. The custodian is responsible for the safekeeping of the trusts gold bars transferred to it in connection with the
creation of baskets. The custodian also facilitates the transfer of gold in and out of the trust through gold accounts it maintains for authorized participants and the trust. The custodian is a market maker, clearer and approved weigher under the
rules of the LBMA.
Shareholders of the trust have no voting rights, except in limited circumstances. Shareholders holding at least 66 2/3% of the
shares outstanding may vote to remove the trustee. The trustee may terminate the trust upon the agreement of shareholders owning at least 66 2/3% of the outstanding shares. In addition, certain amendments to the trust indenture require 51% or
unanimous consent of the shareholders.
The trust is not registered as an investment company under the Investment Company Act of 1940 and is not
required to register under that act. The trust will not hold or trade in commodity futures contracts regulated by the
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Commodity Exchange Act of 1936 (the CEA), as administered by the Commodity Futures Trading Commission (the
CFTC). The trust is not a commodity pool for purposes of the CEA, and none of the sponsor, the trustee or the marketing agent, State Street Global Markets, LLC, is subject to regulation by the CFTC as a commodity pool operator or a
commodity trading advisor in connection with the shares.
Investment Objective
The investment objective of the trust is for the shares to reflect the performance of the price of gold bullion, less the trusts expenses. The
sponsor believes that, for many investors, the shares represent a cost-effective investment in gold. The sponsor intends the shares to offer investors an opportunity to participate in the gold market through an investment in securities without the
logistics of buying, storing and insuring gold. The trust has no fixed termination date and will terminate upon the occurrence of a termination event listed in the trust indenture.
The trust indenture provides for distributions to shareholders in only two circumstances. First, if the trustee and the sponsor determine that the
trusts cash account balance exceeds the anticipated expenses of the trust for the next 12 months and the excess amount is more than $0.01 per share outstanding, they shall direct the excess amount to be distributed to the shareholders. Second,
if the trust is terminated and liquidated, the trustee will distribute to the shareholders any amounts remaining after the satisfaction of all outstanding liabilities of the trust and the establishment of such reserves for applicable taxes, other
governmental charges and contingent or future liabilities as the trustee shall determine. Shareholders of record on the record date fixed by the trustee for a distribution will be entitled to receive their pro rata portion of any distribution.
Creation and Redemption of the Shares of the Trust
The trust creates and redeems its shares from time to time, but only in one or more baskets (a basket equals a block of 100,000 trust shares). The
creation and redemption of baskets requires the delivery to the trust or the distribution by the trust of the amount of gold and any cash represented by the baskets being created or redeemed, the amount of which is based on the combined NAV of the
number of trust shares included in the baskets being created or redeemed. The initial amount of gold required for deposit with the trust to create shares for the period from the formation of the trust to the first day of trading of the trust shares
on the NYSE was 10,000 ounces per basket. The number of ounces of gold required to create a basket or to be delivered upon the redemption of a basket gradually decreases over time, due to the accrual of the trusts expenses and the sale of the
trusts gold to pay the trusts expenses. Baskets may be created or redeemed only by an authorized participant, which is a person who is a registered broker-dealer or other securities market participant such as a bank or other financial
institution which is not required to register as a broker-dealer to engage in securities transactions, is a participant in the Depository Trust Company system, has entered into an agreement with the sponsor and the trustee which provides the
procedures for the creation and redemption of baskets and for the delivery of the gold and any cash required for such creations and redemptions and has established an unallocated gold account with the custodian. Authorized participants pay a
transaction fee for each order to create or redeem baskets and may sell the shares included in the baskets they create to other investors.
Termination Events
The sponsor may, and it is
anticipated that the sponsor will, direct the trustee to terminate and liquidate the trust at any time if the NAV of the trust is less than $350 million (as adjusted over time for inflation). The sponsor may also direct the trustee to terminate the
trust if the CFTC determines that the trust is a commodity pool under the CEA. The trustee may also terminate the trust upon the agreement of trust shareholders owning at least 66
2
⁄
3
% of the outstanding trust shares.
In addition, the trustee will terminate and liquidate the trust if one of
the following events occurs:
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The Depository Trust Company, the securities depository for the shares of the trust, is unwilling or unable to perform its functions under the trust indenture and no suitable replacement is available;
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The shares of the trust are de-listed from the NYSE Arca and are not listed for trading on another U.S. national securities exchange or through the NASDAQ Stock Market within five business days from the date the shares
of the trust are de-listed;
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The NAV of the trust remains less than $50 million for a period of 50 consecutive business days;
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The sponsor resigns or is unable to perform its duties or becomes bankrupt or insolvent and the trustee has not appointed a successor and has not itself agreed to act as sponsor;
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The trustee resigns or is removed and no successor trustee is appointed within 60 days;
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The custodian resigns and no successor custodian is appointed within 60 days;
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The sale of all of the trusts assets;
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The trust fails to qualify for treatment, or ceases to be treated, for U.S. federal income tax purposes, as a grantor trust; or
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The maximum period for which the trust is allowed to exist under New York law ends.
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Upon the termination
of the trust, the trustee will, within a reasonable time after the termination of the trust, sell the trusts gold bars and, after paying or making provision for the trusts liabilities, distribute the proceeds to the shareholders of the
trust.
Valuation of Gold and NAV
As of
3:00 PM London time on each day that the NYSE Arca is open for regular trading or, if no London Gold Price PM is determined at 3:00 PM London time on such day or the London Gold Price PM has not been announced by 12:00 PM New York time on such day,
as of 12:00 PM New York time on such day, the trustee values the gold held by the trust and determines both the adjusted NAV and the NAV of the trust. The trustee values the trusts gold on the basis of that days London Gold Price PM or,
if no London Gold Price PM is determined on such day or has not been announced by the valuation time, the next most recent London Gold Price (AM or PM) determined prior to that time is used, unless the trustee, in consultation with the sponsor,
determines that such price is inappropriate as a basis for valuation. In the event the trustee and the sponsor determine that the London Gold Price PM or last prior London Gold Price (AM or PM) is not an appropriate basis for valuation of the
trusts gold, they shall identify an alternative basis for such valuation to be employed by the trustee. Once the value of the gold has been determined, the trustee subtracts all estimated accrued fees (other than the fees accruing for the
evaluation day which are computed by reference to the adjusted NAV of the trust or the custody fees accruing for the evaluation day which are based on the value of the gold held by the trust), expenses and other liabilities of the trust from the
total value of the gold and all other assets of the trust (other than any amounts credited to the trusts reserve account, if established). The resulting figure is the adjusted NAV of the trust. The adjusted NAV of the trust is used to compute
the fees of the sponsor, the trustee and the marketing agent. To determine the trusts NAV, the trustee subtracts the amount of estimated accrued fees accruing for the evaluation day which are computed by reference to the adjusted NAV of the
trust and to the value of the gold held by the trust from the adjusted NAV of the trust. The resulting figure is the NAV of the trust. The trustee also determines the NAV per trust share by dividing the NAV of the trust by the number of the trust
shares outstanding as of the close of trading on NYSE Arca (which includes the net number of any trust shares created or redeemed on such evaluation day).
The shares may trade at, above or below the NAV per share. The NAV per share fluctuates with changes in the market value of the trusts assets. The
trading price of the shares fluctuates in accordance with changes in the NAV per share as well as market supply and demand.
Expenses and Fees
Effective July 17, 2015, the trusts only recurring fixed expense is the sponsors fees which accrue daily at an annual rate
equal to 0.40% of the daily NAV, in exchange for the sponsor assuming the responsibility to pay all ordinary fees and expenses of the trust (which include the fees and expenses of the trustee and the fees and expenses of the custodian for the
custody of the trusts gold bars), the fees and expenses of the sponsor, certain taxes, the fees of the marketing agent, printing and mailing costs, legal and audit fees, registration fees, NYSE Arca listing fees and other marketing costs and
expenses. In order to pay the trusts expenses, the trustee sells gold held by the trust on an as needed basis. Each sale of gold by the trust is a taxable event to shareholders of the trust.
Additionally, if the trust incurs unforeseen expenses that cause the total ordinary expenses of the trust to exceed 0.70% per year of the daily
adjusted NAV of the trust, the ordinary expenses will accrue at a rate greater
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than 0.40% per year of the daily adjusted NAV of the trust, even after the sponsor and the marketing agent have
completely waived their combined fees of 0.30% per year of the daily adjusted NAV of the trust.
The trustees fee is payable monthly in
arrears and is accrued daily at an annual rate equal to 0.02% of the adjusted NAV of the trust, subject to a minimum fee of $500,000 and a maximum fee of $2,000,000 per year. The custodians fee is computed at an annual rate equal to 0.10% of
the average daily aggregate value of the first 4.5 million ounces of gold held in the trust and 0.06% of the average daily aggregate value of all gold held in the trust in excess of 4.5 million ounces.
Understanding the London Gold Price
Although
the market for physical gold is global, most over the counter market trades are cleared through London. In addition to coordinating market activities, the LBMA acts as the principal point of contact between the market and its regulators. A primary
function of the LBMA is its involvement in the promotion of refining standards by maintenance of the London Good Delivery Lists, which are the lists of LBMA accredited melters and assayers of gold. The LBMA also coordinates market
clearing and vaulting, promotes good trading practices and develops standard documentation.
ICE Benchmark Administration (IBA), on
behalf of the LBMA, has assumed responsibility for establishing the London Gold Price as of March 20, 2015. Under the administration of IBA, the goals of the methodology in respect of the London Gold Price are as follows:
independently administrated and tradable auction process,
electronic and physically settled auction,
aggregated and anonymous bids and offers published on-screen and in real-time, and
auction conducted in US Dollars.
The IBA
auction process is an electronic auction, with the imbalance calculated, and the price adjusted in rounds (30 seconds in duration). The auction will run twice daily at 10:30 a.m. and 3:00 p.m. (London time). The round duration will be assessed
regularly for suitability. If it is necessary to adjust the duration, this will be advised to all direct participants.
The process has an
independent chairperson, appointed by IBA to determine the price for each round and ensure that the price responds appropriately to market conditions.
The auction process is as follows:
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1.
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The chairperson will set the starting price and the price for each round in line with current market conditions and the activity in the auction.
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2.
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Participants enter buy / sell orders by volume (
i.e.
, number of ounces). The price discovery process is in USD but participants may, if they wish, request to settle in different currencies.
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3.
|
If the net volume of all participants fall within the pre-determined tolerance at the end of a round (the imbalance limit is currently set at 10,000 oz.), the auction will be complete, with all volume tradable at that
price.
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4.
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Netting of orders is processed automatically for participants with all house and client orders, plus any share of the imbalance, contributing to their final net volume. This net volume is then matched against other
participants to produce trades with immediate trade confirmations.
|
An auction can conclude with up to a 10,000 ounce difference
between the entered buying and selling interest. This is referred to as the imbalance. As reflected in step 4 above, to ensure fairness this imbalance is shared out among the direct participants equally, irrespective of whether they entered interest
into the auction or not. This is to ensure continuity of the existing process and ensure certainty of the imbalance for direct participants.
As of
March 31, 2016, the SPDR
®
website reported the following annual returns on the market price of the trusts shares and the price of gold (determined by the London PM Fix through
March 19, 2015). The market price returns shown account for changes in the mid-point of the bid and ask prices at the time the NAV of the trust is calculated on the relevant date. Trust shares: 1 year, 3.50%; 3 years, -8.67%; 5 years, -3.39%;
10 years,
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7.30%; since ETF inception, 8.86%; gold: 1 year, 4.21%; 3 years, -8.18%; 5 years, -2.98%; 10 years, 7.82%; since ETF inception, 9.47%.
Historical Closing Prices of the Trusts Shares
The closing price of shares of the trust has fluctuated in the past and may, in the future, experience significant fluctuations. Any historical upward or
downward trend in the closing price of the shares during the period shown below is not an indication that the shares are more or less likely to increase or decrease at any time during the life of your notes. The period shown below will be
approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from the date hereof
or otherwise).
You should not take the historical closing prices of the shares as an indication of the future performance of the shares.
We
cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes on the stated maturity date. Neither we nor any of our affiliates make any
representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the relevant trust closing prices between the date of this prospectus supplement and the
date of your purchase of the offered notes. The actual performance of the trust over the life of the offered notes, as well as the payment amount at maturity may bear little relation to the historical prices shown below.
The graph below shows the daily historical prices of the shares of the trust from April 28, 2006 through April 28, 2016. We obtained the
closing prices shown in the graph below from Bloomberg Financial Services without independent verification.
SPDR
®
is a registered trademark of
Standard & Poors Financial Services LLC (S&P) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones) and have been licensed for use by S&P Dow Jones Indices LLC. The
index is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates make any
representation regarding the advisability of investing in the index.
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iShares
®
TIPS Bond ETF
The shares of the iShares
®
TIPS Bond ETF (the ETF) are issued by iShares
®
Trust, a registered investment company.
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The ETF is a tracking ETF that seeks investment results which correspond generally to the price and yield performance, before fees and expenses, of the index.
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The index it tracks is the Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L) (the index).
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Investment Advisor: BlackRock ETF Advisors (BFA).
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The ETFs shares trade on the NYSE Arca under the ticker symbol TIP.
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The iShares
®
Trusts SEC CIK Number is 0001100663.
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The ETFs inception date was December 4, 2003.
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The ETFs shares are issued or redeemed only in creation units of 100,000 shares or multiples thereof.
|
We obtained the following fee information from the iShares
®
website without independent
verification. The investment advisor is entitled to receive a management fee from the ETF corresponding to the ETFs allocable portion of an aggregate management fee based on the aggregate average daily net assets of the ETF and a set of other
iShares
®
funds (the funds) as follows: 0.2000% per annum of the average daily net assets of the combined funds less than or equal to $121.0 billion;
plus
0.1900% per annum of the average daily net assets of the combined funds on amounts greater than $121.0 billion up to and including $181.0 billion;
plus
0.1805% per annum of the average daily net assets of the combined funds on
amounts greater than $181.0 billion up to and including $231.0 billion;
plus
0.1715% per annum of the average daily net assets of the combined funds on amounts greater than $231.0 billion up to and including $281.0 billion;
plus
0.1630% per annum of the average daily net assets of the combined funds on amounts greater than $281.0 billion. As of March 31, 2016, the expense ratio of the ETF was 0.20% per annum.
For additional information regarding iShares
®
Trust or BFA, please consult the reports
(including the Semi-Annual Report to Shareholders on Form N-CSRS for the period ended April 30, 2015) and other information iShares
®
Trust files with the SEC. In addition, information
regarding the ETF, including its top portfolio holdings, may be obtained from other sources including, but not limited to, press releases, newspaper articles, other publicly available documents, and the iShares
®
website at http://us.ishares.com/product_info/fund/overview/TIP.htm. We are not incorporating by reference the website, the sources listed above or any material they include in this prospectus
supplement.
Investment Objective and Strategy
The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the index. The
ETFs investment objective and the index that the ETF tracks may be changed without shareholder approval.
BFA uses a representative sampling
indexing strategy to attempt to track the performance of the index. For the ETF, this strategy involves investing in a representative sample of securities that collectively have an investment profile similar to that of the index. The securities
selected are expected to have, in the aggregate, investment characteristics (based on factors such as market capitalization and industry weightings), fundamental characteristics (such as return variability, duration, maturity or credit ratings and
yield) and liquidity measures similar to those of the index. The ETF may or may not hold all of the securities in the index.
The ETF generally
invests at least 90% of its assets in the bonds in the index and at least 95% of its assets in U.S. government bonds. The ETF may invest up to 10% of its assets in U.S. government bonds not included in the index, but which BFA believes will help the
ETF track the index. The ETF may also invest up to 5% of its assets in repurchase agreements collateralized by U.S. government obligations and in cash and cash equivalents, including shares of money market funds advised by BFA or its affiliates. The
ETF may lend securities representing up to one-third of the value of the ETFs total assets (including the value of the collateral received).
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The ETFs Holdings
The following table displays the top holdings of the ETF. We obtained the information in the tables below from the iShares
®
website without independent verification.
iShares
®
TIPS Bond ETF Top Ten Holdings as of April 15, 2016
|
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Treasury Inflation-Protected Note
|
|
Percentage (%)
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0.13% due 4/15/2018
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10.22%
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0.13% due 7/15/2024
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9.73%
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0.63% due 1/15/2024
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7.13%
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0.13% due 4/15/2019
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5.69%
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0.38% due 7/15/2023
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5.36%
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0.13% due 1/15/2023
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4.26%
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1.88% due 7/15/2019
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4.06%
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0.63% due 7/15/2021
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3.74%
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1.13% due 1/15/2021
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3.42%
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1.38% due 2/15/2044
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3.29%
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Total
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56.90%
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The following table displays additional information about the bonds held by the ETF as of April 15, 2016. We
obtained the information in the table below from the iShares
®
website without independent verification.
|
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Weighted average maturity
|
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8.47 years
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Weighted average coupon
|
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0.81%
|
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Effective duration
|
|
7.72 years
|
Weighted average maturity is the length of time until the average security in the ETF will mature or be redeemed by its
issuer. Weighted average coupon is the average coupon rate of the underlying bonds in the ETF, weighted by the relative size in the ETF. Effective duration is a measure of the potential responsiveness of a bond or portfolio price to small parallel
shifts in interest rates, taking into account the possible changes in expected bond cash flows due to small parallel shifts in interest rates. Real modified duration is a measure of the potential responsiveness of an inflation-linked bond or
portfolio price to small parallel shifts in real interest rates (as opposed to nominal interest rates).
As of April 8, 2016, the ETFs
holdings were comprised of 40 U.S. Treasury bonds (99.88% of holdings) and cash and/or derivatives (0.12% of holdings). Of the ETFs U.S. Treasury bond holdings, all were AAA rated under the S&P major rating category. The S&P major
rating categories are derived from the S&P, Moodys and Fitch ratings for a security.
Tracking Error
The performance of the ETF and the index may vary due to a variety of factors, including differences between the securities held in the ETFs
portfolio and those included in the index, pricing differences, transaction costs, the ETF holding uninvested cash, differences in timing of the accrual of distributions, changes to the index or the costs of complying with various new or existing
regulatory requirements. Tracking error also may result because the ETF incurs fees and expenses, while the index does not. BFA expects that, over time, the ETFs tracking error will not exceed 5%. The ETFs use of a representative
sampling indexing strategy can be expected to produce a larger tracking error than would result if the ETF used a replication indexing strategy in which an ETF invests in substantially all of the securities in its index in approximately the same
proportions as in the index.
As of March 31, 2016, iShares reported the following average annual returns on the market price of the ETFs
shares and the index. The market price of the ETFs shares takes into account distributions on the shares and the returns shown account for changes in the mid-point of the bid and ask prices at 4:00 p.m., Eastern time on the
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relevant date. ETF shares: 1 year, 1.25%; 3 years, -0.84%; 5 years, 2.87%; 10 years, 4.47%; since inception, 4.38%; index: 1 year, 1.51%; 3 years, -0.71%; 5 years, 3.02%; 10 years, 4.62%; since
ETF inception, 4.53%.
The Index
The index
is sponsored by Barclays Capital Inc. (Barclays), which determines the composition and relative weightings of the securities in the index and publishes information regarding its market value. The index measures the performance of the
inflation-protected public obligations of the U.S. Treasury, commonly known as TIPS. TIPS are securities issued by the U.S. Treasury that are designed to provide inflation protection to investors. TIPS are income-generating instruments
whose interest and principal payments are adjusted for inflation a sustained increase in prices that erodes the purchasing power of money. The inflation adjustment, which is typically applied monthly to the principal of the bond, follows a
designated inflation index, the Consumer Price Index (the CPI), and TIPS principal payments are adjusted according to changes in the CPI. A fixed coupon rate is applied to the inflation-adjusted principal so that as inflation
rises, both the principal value and the interest payments increase. This can provide investors with a hedge against inflation, as it helps preserve the purchasing power of an investment. Because of this inflation adjustment feature,
inflation-protected bonds typically have lower yields than conventional fixed-rate bonds. The index is calculated in U.S. dollars on a total return (gross) basis.
The index includes all publicly-issued U.S. Treasury inflation-protected securities that have at least one year remaining to maturity, are rated
investment grade (Baa3/BBB- or higher using the middle rating of Moodys, S&P and Fitch) and have $250 million or more of outstanding face value. In determining index eligibility, U.S. Treasuries held in the Federal Reserve system open
market account are deducted from the total amount outstanding. New issuances bought at auction by the Federal Reserve do not enter the index, and net secondary market purchases/sales are adjusted at each month-end with a one-month lag.
In addition, the securities must be denominated in U.S. dollars and bear interest at a fixed rate. The index does not include certain issues, such as
Treasury bills, bellwether securities, or coupon issues that have been stripped from bonds. The index is market capitalization weighted and includes all of the securities that meet the index criteria. The securities in the index are updated on the
last calendar day of each month.
Rebalancing the Index
. The index is rebalanced at each month-end, and this represents the fixed set of bonds
on which index returns are calculated for the ensuing month. During the month, indicative changes to securities (credit rating change, sector reclassification, amount outstanding changes, corporate actions, ticker changes) are reflected on a daily
basis. These changes will affect the composition of the bonds in the index at month-end, when the index is rebalanced. Eligible securities issued, but not necessarily settled, on or before the month-end rebalancing date qualify for inclusion in the
following months index if required security reference information and pricing are readily available.
Intra-month cash flows
.
Intra-month cash flows from interest and principal payments contribute to monthly index returns, but are not reinvested at any short-term reinvestment rate in between rebalance dates. However, at each rebalancing, cash is effectively reinvested into
the index for the following month, so that index results over two or more months reflect monthly compounding.
Calculation
. The amount
outstanding reported for the TIPS is equal to the notional par value of each TIP security available for purchase by the public as reported by the Treasury in the Treasury Quarterly Bulletin. This number is then adjusted (divided) by the compounded
rate of inflation since the date of issue (represented by the index ratio described below). The number is updated quarterly at the end of a month that the Treasury Quarterly Bulletin is released.
When a new TIPS is issued or an existing issue is reopened, its full amount outstanding is included in the index for returns purposes on the first day of
the following month. Once the new issuance or reopening is published in the Quarterly Treasury Bulletin, the amount is adjusted to reflect the amount outstanding net of holdings by the Treasury.
The index ratio is used as a multiplier to adjust the nominal principal and coupon payments of the security, so that their real values remain
unchanged. The calculation of the index ratio is as follows: index ratio = (reference CPI) / (base CPI). The base CPI is calculated by linearly interpolating between the two most recent CPI levels available as of the start of the month, assuming a
next calendar day settlement.
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The index ratio is used to calculate the inflated price and the inflated accrued interest of the bonds held
in the index. The inflated price is equal to the quoted (uninflated) price * index ratio. The inflated accrued interest is equal to
1
⁄
2
of the annual coupon
times (number of days accrued / number of days in coupon period) * par value * index ratio. The market value of the index is equal to (inflated price + inflated accrued interest) / 100) * amount outstanding.
Real yields on the bonds in the index are converted into nominal terms through the use of an assumed inflation rate. The assumed inflation rate is used
to project inflated cash flows for TIPS. The assumed inflation rate is based on breakeven inflation rates extracted from the inflation swaps market with adjustments for seasonality.
Additional information regarding the index may be obtained from other sources including, but not limited to, press releases, newspaper articles, other
publicly available documents, and the US TIPS (Series-L) Index factsheet available at https://ecommerce.barcap.com/indices/show?url=Home/Guides_and_Factsheets. We are not incorporating by reference the website, the sources listed above or any
material they include in this prospectus supplement.
Historical Closing Prices of the ETFs Shares
The closing price of shares of the ETF has fluctuated in the past and may, in the future, experience significant fluctuations. Any historical upward or
downward trend in the closing price of the shares during the period shown below is not an indication that the shares are more or less likely to increase or decrease at any time during the life of your notes. The period shown below will be
approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from the date hereof
or otherwise).
You should not take the historical closing prices of the shares as an indication of the future performance of the shares.
We
cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes on the stated maturity date. Neither we nor any of our affiliates make any
representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the relevant ETF closing prices between the date of this prospectus supplement and the
date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the payment amount at maturity may bear little relation to the historical prices shown below.
The graph below shows the daily historical prices of the shares of the ETF from April 28, 2006 through April 28, 2016. We obtained the closing
prices shown in the graph below from Bloomberg Financial Services without independent verification.
iShares
®
is a registered trademark of BlackRock
Institutional Trust Company, N.A. (BITC). The index is not sponsored, endorsed, sold, or promoted by BITC. BITC makes no representations or warranties to the owners of the index or any member of the public regarding the advisability of
investing in the index. BITC has no obligation or liability in connection with the operation, marketing, trading or sale of the index.
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Money Market Position
The money market position is included in the cash equivalent asset class and reflects the notional return accruing to a hypothetical investor from an
investment in a notional overnight money account denominated in U.S. dollars that accrues interest at a rate determined by reference to the overnight interest rate, which is the federal funds effective rate.
The table set forth below illustrates the historical levels of the federal funds effective rate for the period shown below. The level of the federal
funds effective rate has fluctuated in the past and may, in the future, experience significant fluctuations. Any historical upward or downward trend in the level of the federal funds effective rate during the period shown below is not an indication
that the level of the federal funds effective rate is more or less likely to increase or decrease at any time during the life of the notes.
You
should not take the historical level of the federal funds effective rate as an indication of future levels of the federal funds effective rate.
We cannot give you any assurance that the future levels of the federal funds effective rate will
result in your receiving a return on your notes that is greater than the return you would have realized if you invested in a debt security of comparable maturity that bears interest at a prevailing market rate.
In light of current market conditions, the trends reflected in the historical levels of the federal funds effective rate may be less likely to be
indicative of the levels of the federal funds effective rate during the term of the notes.
Neither we nor any of our affiliates make any
representation to you as to the performance of the federal funds effective rate. The actual levels of the federal funds effective rate may bear little relation to the historical levels of the federal funds effective rate shown below.
The graph below shows the daily historical levels of the federal funds effective rate from April 28, 2006 through April 28, 2016. We obtained
the federal funds effective rates shown in the graph below from Reuters, without independent verification.
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THE NOTIONAL INTEREST RATE
The graph below illustrates the historical levels of the 3-month USD LIBOR rate for the period shown below. The level of the 3-month USD LIBOR rate has
fluctuated in the past and may, in the future, experience significant fluctuations. Any historical upward or downward trend in the level of the 3-month USD LIBOR rate during the period shown below is not an indication that the level of the 3-month
USD LIBOR rate is more or less likely to increase or decrease at any time during the life of the notes. See Additional Risk Factors Specific to Your Notes Increased Regulatory Oversight and Changes in the Method Pursuant to Which the
LIBOR Rates Are Determined May Adversely Affect the Value of Your Notes for more information about 3-month USD LIBOR.
You should not take
the historical level of the 3-month USD LIBOR rate as an indication of future levels of the 3-month USD LIBOR rates.
We cannot give you any assurance that the future levels of the 3-month USD LIBOR rate will result in your receiving a return on
your notes that is greater than the return you would have realized if you invested in a debt security of comparable maturity that bears interest at a prevailing market rate and is not subject to a maximum interest rate.
In light of current market conditions, the trends reflected in the historical levels of the 3-month USD LIBOR rate may be less likely to be indicative of
the levels of the 3-month USD LIBOR rate during the term of the notes.
Neither we nor any of our affiliates make any representation to you as to the
performance of the 3-month USD LIBOR rate. The actual levels of the 3-month USD LIBOR rate during the term of the notes may bear little relation to the historical levels of the 3-month USD LIBOR rate shown below.
The graph below shows the daily historical levels of the 3-month USD LIBOR rate from April 28, 2006 through April 28, 2016. We obtained the
3-month USD LIBOR rates shown in the graph below from Reuters, without independent verification.
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