Registration Statement No. 333-239610
GS Finance Corp. may from time to time offer and sell notes, the payments and performance of which will be linked to the BlackRock® Dynamic Factor Index (the “index”). The index measures the extent to which the performance of the combination of an equity ETF basket composed of up to five equity ETFs, a fixed income ETF basket composed of up to three fixed income ETFs and a cash constituent (together with the ETFs, the underlying assets) outperforms the sum of the return on 3-month USD LIBOR plus an additional 0.65% per annum fee (accruing daily). The weights of the ETFs within the equity ETF basket are determined based on three common economic measures (factors) – “economic regime”, “value” and “momentum”, while the weights of the ETFs within the fixed income ETF basket are determined based on how medium-term interest rates are trending. The relative weights of the equity ETF basket, the fixed income ETF basket and the cash constituent that compose the index are determined based on measures of volatility using the past returns of the ETFs (i.e., the degree of variation in past returns given the various weightings of these components). The equity ETF basket rebalances monthly and the fixed income ETF basket rebalances on each index business day. Allocations of the index among the equity ETF basket, the fixed income ETF basket and the cash constituent are determined on each index business day with a goal of limiting volatility (i.e., the degree of variation in the past returns) to no more than 5%.
Because the index measures the performance of the selected underlying assets less the sum of the return on 3-month USD LIBOR plus 0.65% per annum (accruing daily), on any day such underlying assets must outperform the return on 3-month USD LIBOR plus 0.65% per annum for the index level to increase.
The accompanying prospectus and the accompanying prospectus supplement, each as may be amended from time to time, that form a part of Registration Statement No. 333-239610, describes some of the terms that may apply generally to the notes, including any notes you purchase. A separate pricing supplement, which we refer to as the applicable pricing supplement and, if specified in the applicable pricing supplement, a separate product supplement, which we refer to as the applicable product supplement, will describe additional terms that apply to your notes.
Your investment in the notes involves certain risks. See “Additional Risk Factors Specific to the Notes” beginning on page S-9 to read about investment risks relating to the notes.
Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this index supplement no. 5, the applicable pricing supplement, the applicable product supplement, if any, the accompanying prospectus supplement or the accompanying prospectus. Any representation to the contrary is a criminal offense.
The notes are not bank deposits and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency, nor are they obligations of, or guaranteed by, a bank.
GS Finance Corp. may use this index supplement in the initial sale of the notes. In addition, Goldman Sachs & Co. LLC (GS&Co.), or any other affiliate of GS Finance Corp., may use this index supplement in a market-making transaction in a note after its initial sale. Unless GS Finance Corp. or its agent informs the purchaser otherwise in the confirmation of sale, this index supplement is being used in a market-making transaction.
Determining Market Capitalization Size Segments for Each Market
Once a market investable equity universe is defined, it is segmented into the following size-based indices:
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Investable Market Index (Large Cap + Mid Cap + Small Cap)
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Standard Index (Large Cap + Mid Cap)
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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, the market coverage for a standard index is 85%. As of October 2019, the global minimum size range for a developed market investable market index is a full market capitalization of USD 290 million to USD 667 million.
Applying Index Continuity Rules for Standard Indices
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:
If after the application of the index construction methodology, a developed market standard index contains fewer than five securities or an emerging market standard index contains fewer than three securities, then the largest securities by free float-adjusted market capitalization are added to the index in order to reach the minimum number of required constituents.
At subsequent index reviews, if the minimum number of securities described above is not met, then after the market investable equity universe is identified, the securities are ranked by free float-adjusted market capitalization, however, in order to increase stability the free float-adjusted market capitalization of the existing index constituents (prior to review) is multiplied by 1.50, and securities are added until the desired minimum number of securities is reached.
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Classifying Securities under the Global Industry Classification Standard
All securities in the global investable equity universe are assigned to the industry that best describes their business activities. The Global Industry Classification Standard classification of each security is used by MSCI to construct additional indices.
Calculation Methodology for the MSCI USA Index
The performance of the MSCI USA Index is a free float weighted average of the US dollar values of its component securities, subject to the daily total return methodology (as described below).
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 the 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. If MSCI determines that another price is more appropriate based on the circumstances, an announcement would be sent to clients with the related information. Closing prices are converted into US dollars, as applicable, using the closing spot exchange rates calculated by WM/Reuters at 4:00 P.M. London Time.
Daily Total Return Methodology
The MSCI USA Index is a daily total return index. A daily total return index measures the market performance, including price performance and income from regular cash distributions. This income is reinvested in the MSCI USA Index and thus makes up part of the total index performance. MSCI’s daily total return methodology reinvests cash dividends in the MSCI USA Index the day the security is quoted ex-dividend, or on the ex-date (converted to US dollars, as applicable). Certain dividends, including special/extraordinary dividends and commemorative dividends, are reinvested in the MSCI USA Index 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 reinvested in the MSCI USA Index through a price adjustment on the ex-date. 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.
Notwithstanding the ETF’s investment objective, the return on your notes will not reflect any dividends paid on the ETF shares, on the securities purchased by the ETF or on the securities that comprise the MSCI USA Index.
Maintenance of the MSCI USA Index
In order to maintain the representativeness of the MSCI USA Index, structural changes may be made by adding or deleting component securities. Currently, such changes may generally only be made on four dates throughout the year: after the close of the last business day of each February, May, August and November.
The MSCI USA Index is maintained with the objective of reflecting, on a timely basis, the evolution of the underlying equity markets. In maintaining the MSCI USA Index, emphasis is also placed on its continuity, continuous investability of constituents 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. 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 USA Index 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 index 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 company’s 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 meeting at least two-thirds of 1.8 times one-half of the standard index interim size segment cut-off. Share conversions may also give rise to an early deletion. Changes in number of shares and foreign inclusion factors resulting from primary equity
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offerings representing at least 5% of the security’s pre-event number of shares are implemented as of the close of the first trading day of the new shares, if all necessary information is available at that time. Otherwise, the event is implemented as soon as practicable after the relevant information is made available. MSCI implements pending number of shares and/or free float updates simultaneously with the event, unless the change in number of shares is less than 1% on a post-event number of shares basis, in which case it will be implemented at a subsequent index review. Changes in the number of shares smaller than 5% are implemented at a subsequent index review. Secondary offerings/block sales with sizes representing at least 5% of the security’s pre-event number of shares are implemented at the time of the event. All changes resulting from corporate events are announced prior to their implementation, provided all necessary information on the event is available.
MSCI’s quarterly index review process is designed to ensure that the MSCI USA Index continues 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 the MSCI USA Index 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: corporate events that should have been implemented at the time of such event but could not be reflected immediately due to lack of publicly available details at the time of the event; exercise of IPO over-allotment options which result in an increase in free float; increases in foreign ownership limits; decreases in foreign ownership limits which did not require foreign investors to immediately sell shares in the market; re-estimates of free float figures resulting from the reclassification of shareholders from strategic to non-strategic, and vice versa; the end of lock-up periods or expiration of loyalty incentives for non-strategic shareholders; and conversion of a non-index constituent share class or an unlisted line of shares which has an impact on index constituents. However, no changes in foreign inclusion factors are implemented for any of the above events if the change in free float estimate is less than 1%, except in cases of correction. Small changes in the number of shares resulting from, for example, exercise of options or warrants and employee stock option plans, conversion of convertible bonds or other instruments (including periodic conversion of preferred stocks), conversion of a non-index constituent share class or an unlisted line of shares which has an impact on index constituents, periodical conversion of a share class into another share class, exercise of over-allotment options, periodic share buybacks, the cancellation of shares, acquisition for shares of non-listed companies or assets, or other events that could not be implemented on or near the effective dates where no price adjustment factor is necessary, are generally updated at the quarterly index review rather than at the time of the event. 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 the MSCI USA Index.
MSCI’s semi-annual index review is designed to systematically reassess the component securities of the MSCI USA Index. During each semi-annual index review, the universe of component securities is updated and the global minimum size range for the MSCI USA 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 MSCI USA Index. The following MSCI USA 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 MSCI USA Index at the time of the previous quarterly index review; the minimum size requirement for the MSCI USA 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 MSCI USA 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 (provided the change in free float is greater than 1%, except in cases of correction). During a semi-annual index review, component securities may be added or deleted from the MSCI USA 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.
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The results of the semi-annual index reviews are announced at least two weeks in advance of their effective implementation date as of the close of the last business day of May and November.
MSCI USA 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.
These guidelines and the policies implementing the guidelines are the responsibility of, and, ultimately, subject to adjustment by, MSCI.
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Historical Closing Prices of the ETF’s 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.
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 index 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 cash settlement 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 January 1, 2015 through June 12, 2020. 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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iShares® Edge MSCI USA Value Factor ETF
The shares of the iShares® Edge MSCI USA Value Factor 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 MSCI USA Enhanced Value Index (the “index”). Prior to September 1, 2015, the ETF tracked the MSCI USA Value Weighted Index.
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The ETF’s investment advisor is BlackRock Fund Advisors (“BFA”).
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The ETF’s shares trade on the Cboe BZX under the ticker symbol “VLUE”.
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The iShares® Trust’s SEC CIK Number is 0001100663.
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The ETF’s inception date was April 16, 2013.
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The ETF’s shares are issued or redeemed only in creation units of 50,000 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 paid a management fee from the ETF based on a percentage of the ETF’s average daily net assets, at the annual rate of 0.15%. BFA may from time to time voluntarily waive and/or reimburse fees or expenses in order to limit total annual ETF operating expenses (excluding acquired fund fees and expenses, if any). Any such voluntary waiver or reimbursement may be eliminated by BFA at any time. As of March 31, 2020, the aggregate expense ratio of the ETF was 0.15% 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 January 31, 2020) 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 us.ishares.com/product_info/fund/overview/VLUE.htm. We are not incorporating by reference the website, the sources listed above or any material they include in this index 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 ETF’s investment objective and the index may be changed without the approval of BFA’s 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.
iShares® Edge MSCI USA Value Factor ETF Top Ten Holdings as of June 12, 2020
ETF Stock Issuer
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Percentage (%)
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INTEL CORP
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9.56%
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AT&T INC
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8.57%
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INTERNATIONAL BUSINESS MACHINES CO
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3.59%
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MICRON TECHNOLOGY INC
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3.51%
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GENERAL MOTORS
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2.73%
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CITIGROUP INC
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2.58%
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PFIZER INC
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2.22%
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TARGET CORP
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1.83%
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CVS HEALTH CORP
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1.81%
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GILEAD SCIENCES INC
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1.61%
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Total
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38.01%
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iShares® Edge MSCI USA Value Factor ETF Weighting by Sector as of June 12, 2020*
Sector
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Percentage (%)
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Information Technology
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25.99%
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Health Care
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13.97%
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Communication
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10.98%
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Financials
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10.84%
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Industrials
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8.30%
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Consumer Staples
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6.74%
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Consumer Discretionary
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11.26%
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Utilities
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3.04%
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Real Estate
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3.17%
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Materials
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2.61%
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Energy
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2.77%
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Cash and/or Derivatives
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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.
Holdings with Weights Equal to or in Excess of 5% of the iShares® Edge MSCI USA Value Factor ETF as of June 12, 2020
Intel Corporation and AT&T Inc. are registered under the Exchange Act. Companies with securities registered under the Exchange Act are required to file financial and other information specified by the U.S. Securities and Exchange Commission (“SEC”) periodically. Information filed by these ETF stock issuers with the SEC electronically can be reviewed through a web site maintained by the SEC. The address of the SEC’s web site is sec.gov. Information filed with the SEC by each of the above-referenced ETF stock issuers under the Exchange Act can be located by referencing its SEC file number specified below.
The graphs below show the daily historical closing levels of Intel Corporation and AT&T Inc. from January 1, 2015 through June 12, 2020. We obtained the prices in the graphs below using data from Bloomberg Financial Services, without independent verification. We have taken the descriptions of the ETF stock issuers set forth below from publicly available information without independent verification.
According to publicly available information, Intel Corporation designs and manufactures technologies. Information filed with the SEC by the ETF stock issuer under the Exchange Act can be located by referencing its SEC file number 000-06217.
According to publicly available information, AT&T Inc. is a provider of telecommunications, media and technology services. Information filed with the SEC by the ETF stock issuer under the Exchange Act can be located by referencing its SEC file number 001-08610.
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Representative Sampling
BFA uses a representative sampling indexing strategy to manage the ETF. This strategy involves investing in a representative sample of securities that collectively has 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 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 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. Also, the ETF may lend securities representing up to one-third of the value of the ETF’s total assets (including the value of the collateral received).
Tracking Error
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 ETF’s portfolio and those included in the index, pricing differences, transaction costs incurred by the ETF, the ETF’s holding of uninvested cash, differences in timing of the accrual of or the valuation of dividends or interest, the requirements to maintain pass-through tax treatment, portfolio transactions carried out to minimize the distribution of capital gains to shareholders, changes to the index or the costs to the ETF 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 ETF’s tracking error will not exceed 5%. The ETF’s 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 May 31, 2020, iShares® reported the following average annual returns on the market price of the ETF’s shares and the MSCI USA Enhanced Value Index. The market price of the ETF’s 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, 0.22%; 3 years, 2.42%; 5 years, 4.17%; since inception, 7.73%; MSCI USA Enhanced Value Index: 1 year, 0.39%; 3 years, 2.59%; 5 years, 4.35%; since ETF inception, 7.90%.
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.
The MSCI USA Enhanced Value Index
The MSCI USA Enhanced Value Index is designed to measure the performance of securities in the MSCI USA Index that exhibit higher value characteristics relative to their peers within the corresponding Global Industry Classification Standard (GICS®) sector. The MSCI USA Index includes U.S. large- and mid-capitalization stocks, as defined by MSCI Inc. (“MSCI”). MSCI divides the companies included in the MSCI USA Enhanced Value Index into eleven GICS sectors: Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Real Estate and Utilities. For additional information about the MSCI USA Index, please see “iShares® Edge MSCI USA Momentum Factor ETF — The MSCI USA Index” above.
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The MSCI USA Enhanced Value Index is calculated, published and disseminated daily by MSCI through numerous data vendors, on the MSCI website and in real time on Bloomberg Financial Markets and Reuters Limited. The MSCI USA Enhanced Value Index was launched on December 12, 2014. Additional information about the MSCI USA Enhanced Value Index is available on the following website: msci.com/index-methodology. We are not incorporating by reference the website, the sources listed above or any material they include in this index supplement.
Construction of the MSCI USA Enhanced Value Index
To construct the MSCI USA Enhanced Value Index, MSCI selects a predetermined number of constituent securities from the MSCI USA Index based on a value weighting using the following fundamental values:
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forward price-to-earnings;
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price-to-book value; and
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enterprise value-to-cash flow from operations,
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(except companies in the Financials sector do not consider enterprise value-to-cash flow from operations and companies in the Real Estate sector are evaluated based on enterprise value-to-cash flow from operations alone). MSCI uses an algorithm to determine the number of constituent securities to be selected from the MSCI USA Index for inclusion in the MSCI USA Enhanced Value Index with an aim to maintain sufficient market capitalization and number of securities coverage. The number of components is evaluated semi-annually. MSCI assigns weights by multiplying a constituent security’s value score by its market capitalization. Weights in the MSCI USA Enhanced Value Index are next normalized so that sectors in the MSCI USA Enhanced Value Index represent the same relative weight as in the MSCI USA Index, thereby promoting sector neutrality.
Calculate the Z-Score for Each Variable
The z-score with respect to each of the variables for each security is calculated using the mean and standard deviation of the inverse of the corresponding variable. The z-score with respect to each individual variable is computed for each constituent security within the MSCI USA Index, and generally measures the extent to which an individual security is an outlier with respect to a particular variable compared to all of the constituent securities included in the MSCI USA Index, measured in terms of standard deviations. The variables used are as follows:
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forward price-to-earnings, price-to-book value and enterprise value-to-cash flow from operations for all securities except for those classified in “Financials” or “Real Estate” sectors;
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forward price-to-earnings and price-to-book value for all securities classified in the “Financials” sector; and
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enterprise value-to-cash flow from operations for all securities classified in the “Real Estate” sector.
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The latest available data at the time of rebalancing is used for the individual value descriptors.
Calculate the Sector Relative Value Z-Score
After calculating individual variable z-scores, a composite value z-score for each security is computed by taking the weighted average of individual variable z-scores for each security. Each individual variable z-score is assigned an equal weight (e.g., a 1/3 weight is assigned when 3 variables are used, a 1/2 weight when 2 variables are used (i.e., for Financial sector) and a weight of 1 when 1 variable is used (i.e., Real Estate sector)). However, no adjustment to the weights will be made to compensate for missing variables (e.g., for a non-Financial/non-Real Estate sector security, the weight of the remaining variable will remain 1/3 if the other 2 variables are not available).
A sector relative score is then derived from the composite value z-score. It is arrived at by standardizing the composite value z-score within each sector. A sector relative score above 3 is capped at 3 standard deviations and a sector relative score below -3 is floored at -3 standard deviations.
Calculate the Final Value Score
The final value score is computed from the sector relative z-score as follows:
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If the sector relative z-score is greater than or equal to 0, the “final value score” equals 1 plus the sector relative z-score; or
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(ii)
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If the sector relative z-score is less than 0, the “final value score” equals the quotient of (i) 1 divided by (ii) the difference of 1 minus the sector relative z-score
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Security Selection
In order to be selected for inclusion in the MSCI USA Enhanced Value Index, a constituent security’s final value score must rank among the highest final value scores in the MSCI USA Index. The number of securities targeted for inclusion in the MSCI USA Enhanced Value Index at initial construction and upon each rebalancing is then determined based on certain rules relating to free-float market capitalization (market price per share multiplied by the number of shares held by non-controlling interests) and numbers of constituent securities as described below.
Initial Construction. The number of securities targeted for inclusion in the MSCI USA Enhanced Value Index at initial construction (or on any semi-annual rebalancing when the initial construction methodology is required to be applied, as described below under the caption “—Rebalancing”) is determined by (i) ranking each constituent security in the MSCI USA Index according to its final value score (using such securities’ weights in the MSCI USA Index if multiple securities have the same score) and (ii) applying the following rules in order of priority:
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if the MSCI USA Index has 25 or fewer constituent securities on the relevant date, each constituent security in the MSCI USA Index is included as a constituent security in the MSCI USA Enhanced Value Index; or
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if 25 or fewer of the highest ranking MSCI USA Index constituent securities account for at least 30% of the MSCI USA Index’s free-float market capitalization, the target number of Value Index constituent securities will be 25, subject to the rounding rules; or
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if 25 of the highest ranking MSCI USA Index constituent securities do not account for at least 30% of the MSCI USA Index’s free-float market capitalization, but the top 10% of the highest ranking MSCI USA Index constituent securities do account for at least 30% of the MSCI USA Index’s free-float market capitalization, the number of constituent securities constituting the top 10% of the highest ranking MSCI USA Index constituent securities, after rounding, is the number of securities targeted for inclusion in the MSCI USA Enhanced Value Index; or
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if the number of top ranking MSCI USA Index constituent securities accounting for 30% of the MSCI USA Index’s free-float market capitalization, after rounding, account for less than 40% of the total number of MSCI USA Index constituent securities, such rounded number is the number of securities targeted for inclusion in the MSCI USA Enhanced Value Index; or
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if the number of top ranking MSCI USA Index constituent securities accounting for 30% of the MSCI USA Index’s free-float market capitalization, after rounding, account for 40% or more of the total number of MSCI USA Index constituent securities, eliminate each of the lowest ranking MSCI USA Index constituent securities from such rounded number until the number of those remaining account for 40% or less of the total number of MSCI USA Index constituent securities; and
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if the remaining MSCI USA Index constituent securities account for at least 20% of the MSCI USA Index’s free-float market capitalization, the number of such remaining MSCI USA Index constituent securities, after rounding, is the number of securities targeted for inclusion in the MSCI USA Enhanced Value Index; or
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|
o
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if the remaining MSCI USA Index constituent securities account for less than 20% of the MSCI USA Index’s free-float market capitalization, add back the next highest ranking MSCI USA Index constituent securities previously eliminated until the MSCI USA Enhanced Value Index’s constituent securities account for at least 20% of the MSCI USA Index’s public float and such number of MSCI USA Index constituent securities, after rounding, is the number of securities targeted for inclusion in the MSCI USA Enhanced Value Index.
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Where indicated above, the following rounding conventions apply:
•
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if the number of constituent securities is less than 100, round to the nearest 10 constituent securities;
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•
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if the number of constituent securities is greater than or equal to 100 but less than 300, round to the nearest 25 constituent securities; and
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•
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if the number of constituent securities is greater than or equal to 300, round to the nearest 50 constituent securities.
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Rebalancing. The target number of securities for inclusion in the MSCI USA Enhanced Value Index at each semi-annual rebalancing is determined by applying the following rules in order of priority:
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if the target number of MSCI USA Enhanced Value Index constituent securities on the immediately preceding rebalancing date or initial construction (following rebalancing or construction) exceeds the number of MSCI USA Index
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constituent securities on the rebalancing date, the initial construction methodology described above should be applied to determine the number of constituent securities to be included in the MSCI USA Enhanced Value Index; or
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•
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if the MSCI USA Index has 25 or fewer constituent securities on the rebalancing date, each constituent security in the MSCI USA Index is included as a constituent security in the MSCI USA Enhanced Value Index; or
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•
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if the number of constituent securities included in the MSCI USA Index on the immediately preceding rebalancing or initial construction date (following rebalancing or construction) is less than 25, repeat the initial construction process described above to determine the number of constituent securities to be included in the MSCI USA Enhanced Value Index; or
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•
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if the constituent securities of the MSCI USA Enhanced Value Index determined on the rebalancing or initial construction date (following rebalancing or construction) immediately preceding the semi-annual rebalancing date account for less than 10% of the MSCI USA Index’s free-float market capitalization on the current rebalancing date, repeat the initial construction process described above to determine the constituent securities to be included in the MSCI USA Enhanced Value Index; or
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•
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otherwise, the target number of MSCI USA Enhanced Value Index constituent securities will not change from the immediately preceding rebalancing or construction date (following rebalancing or construction).
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Weighting Scheme for the MSCI USA Enhanced Value Index
The securities selected above are assigned weights in proportion to their market capitalization weight in the MSCI USA Index and final value score. These weights are then updated to implement sector neutrality (i.e., the weight of each sector in the MSCI USA Enhanced Value Index is equated with the weight of that sector in the MSCI USA Index). This is done by normalizing the weights of the constituents within each sector to reflect the effective MSCI USA Index sector weight. The final security level inclusion factor is determined as the ratio of the final security level weight and the security level pro forma market capitalization weight in the MSCI USA Index.
Maintenance of the MSCI USA Enhanced Value Index
The MSCI USA Enhanced Value Index is rebalanced semi-annually and the changes from the rebalancing are made as of the close of the last business day of each May and November, to coincide with the semi-annual index reviews of the MSCI USA Index, using fundamental values from the end of April and October, respectively. The pro forma MSCI USA Enhanced Value Index is generally announced nine business days before the effective date.
Buffer Rules
To reduce index turnover and enhance index stability, buffer rules are applied to 50% of the fixed number of securities in the MSCI USA Enhanced Value Index. As a result, 50% of the positions in the rebalancing will be selected from among the highest ranking MSCI USA Index constituent securities without regard to whether they are currently included in the MSCI USA Enhanced Value Index and existing constituent securities of the MSCI USA Enhanced Value Index as of the rebalancing date (prior to effecting the rebalancing) will be given priority for the next 50% of constituent security positions. For example, if the fixed number of securities is 100, the buffers are applied between rank 51 and 150. If the target number of MSCI USA Enhanced Value Index constituent securities is not achieved after this step, the highest ranking remaining MSCI USA Index constituent securities are added until the target number is achieved.
Ongoing Event Related Changes
The general treatment of corporate events in the MSCI USA Enhanced Value Index aims to minimize turnover outside of index reviews. The methodology aims to appropriately represent an investor’s participation in an event based on relevant deal terms and pre-event weighting of the index constituents that are involved. Further, changes in index market capitalization that occur as a result of corporate event implementation will be offset by a corresponding change in the variable weighting factor of the constituent.
Additionally, if the frequency of index reviews in the MSCI USA Index is greater than the frequency of index reviews in the MSCI USA Enhanced Value Index, the changes made to the MSCI USA Index during intermediate index reviews will be neutralized in the MSCI USA Enhanced Value Index.
The following section briefly describes the treatment of common corporate events within the MSCI USA Enhanced Value Index.
No new securities will be added (except where noted below) to the MSCI USA Enhanced Value Index between index reviews. MSCI USA Index deletions will be reflected simultaneously.
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Event Type
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Event Details
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New additions to the MSCI USA Index
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A new security added to the MSCI USA Index (such as IPO and other early inclusions) will not be added to the MSCI USA Enhanced Value Index.
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Spin-Offs
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All securities created as a result of the spin-off of an existing MSCI USA Enhanced Value Index constituent will be added to the MSCI USA Enhanced Value Index at the time of event implementation. Reevaluation for continued inclusion in the MSCI USA Enhanced Value Index will occur at the subsequent index review.
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Merger/acquisition
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For mergers and acquisitions, the acquirer’s post event weight will account for the proportionate amount of shares involved in deal consideration, while cash proceeds will be invested across the MSCI USA Enhanced Value Index.
If an existing MSCI USA Enhanced Value Index constituent is acquired by a security that is not a constituent of the MSCI USA Enhanced Value Index, the existing constituent will be deleted from the MSCI USA Enhanced Value Index and the acquiring non-constituent will not be added to the MSCI USA Enhanced Value Index.
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Changes in security characteristics
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A security will continue to be a constituent of the MSCI USA Enhanced Value Index if there are changes in characteristics (country, sector, size segment, etc.). Reevaluation for continued inclusion in the MSCI USA Enhanced Value Index will occur at the subsequent index review.
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Historical Closing Prices of the ETF’s 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.
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 index 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 cash settlement 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 January 1, 2015 through June 12, 2020. We obtained the closing prices shown in the graph below from Bloomberg Financial Services without independent verification. In the graph, historical closing prices after the ETF began tracking the MSCI USA Enhanced Value Index on September 1, 2015 can be found to the right of the vertical solid line marker. Closing prices to the left of the vertical solid line marker reflect the ETF closing prices before the ETF began tracking the MSCI USA Enhanced Value Index on September 1, 2015.
“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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iShares® Edge MSCI USA Quality Factor ETF
The shares of the iShares® Edge MSCI USA Quality Factor 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 MSCI USA Sector Neutral Quality Index (the “index”). Prior to September 1, 2015, the ETF tracked the MSCI USA Quality Index.
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•
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The ETF’s investment advisor is BlackRock Fund Advisors (“BFA”).
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The ETF’s shares trade on the Cboe BZX under the ticker symbol “QUAL”.
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The iShares® Trust’s SEC CIK Number is 0001100663.
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•
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The ETF’s inception date was July 16, 2013.
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The ETF’s shares are issued or redeemed only in creation units of 50,000 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 paid a management fee from the ETF based on a percentage of the ETF’s average daily net assets, at the annual rate of 0.15%. BFA may from time to time voluntarily waive and/or reimburse fees or expenses in order to limit total annual ETF operating expenses (excluding acquired fund fees and expenses, if any). Any such voluntary waiver or reimbursement may be eliminated by BFA at any time. As of March 31, 2020, the aggregate expense ratio of the ETF was 0.15% 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 January 31, 2020) 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 us.ishares.com/product_info/fund/overview/QUAL.htm. We are not incorporating by reference the website, the sources listed above or any material they include in this index 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 ETF’s investment objective and the index may be changed without the approval of BFA’s 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.
iShares® Edge MSCI Quality Factor ETF Top Ten Holdings as of June 12, 2020
ETF Stock Issuer
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Percentage (%)
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COCA-COLA
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3.94%
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FACEBOOK CLASS A INC
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3.80%
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NIKE INC CLASS B
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3.74%
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APPLE INC
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3.63%
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MICROSOFT CORP
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3.43%
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JOHNSON & JOHNSON
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3.43%
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VISA INC CLASS A
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3.25%
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MASTERCARD INC CLASS A
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3.13%
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UNITEDHEALTH GROUP INC
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2.36%
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BOOKING HOLDINGS INC
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2.16%
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Total
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32.87%
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iShares® Edge MSCI Quality Factor ETF Weighting by Sector as of June 12, 2020*
Sector
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Percentage (%)
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Information Technology
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26.91%
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Health Care
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14.34%
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Financials
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9.96%
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Communication
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10.92%
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Consumer Discretionary
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11.04%
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Industrials
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7.98%
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Consumer Staples
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6.94%
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Utilities
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3.12%
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Real Estate
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3.16%
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Energy
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2.79%
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Materials
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2.46%
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Cash and/or Derivatives
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0.39%
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Total
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100.01%
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* Percentages may not sum to 100% due to rounding.
Representative Sampling
BFA uses a representative sampling indexing strategy to manage the ETF. This strategy involves investing in a representative sample of securities that collectively has 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 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 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. Also, the ETF may lend securities representing up to one-third of the value of the ETF’s total assets (including the value of the collateral received).
Tracking Error
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 ETF’s portfolio and those included in the index, pricing differences, transaction costs incurred by the ETF, the ETF’s holding of uninvested cash, differences in timing of the accrual of or the valuation of dividends or interest, the requirements to maintain pass-through tax treatment, portfolio transactions carried out to minimize the distribution of capital gains to shareholders, changes to the index or the costs to the ETF 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 ETF’s tracking error will not exceed 5%. The ETF’s 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 May 31, 2020, iShares® reported the following average annual returns on the market price of the ETF’s shares and the MSCI USA Sector Neutral Quality Index. The market price of the ETF’s 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, 14.00%; 3 years, 10.92%; 5 years, 10.26%; since inception, 11.84%; MSCI USA Sector Neutral Quality Index: 1 year, 14.27%; 3 years, 11.13%; 5 years, 10.45%; since ETF inception, 12.03%.
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.
The MSCI USA Sector Neutral Quality Index
The MSCI USA Sector Neutral Quality Index is designed to measure the performance of securities in the MSCI USA Index that exhibit stronger quality characteristics relative to their peers within the corresponding Global Industry Classification Standard (GICS®) sector. The MSCI USA Index includes U.S. large- and mid-capitalization stocks, as defined by MSCI Inc. (“MSCI”). MSCI divides the companies included in the MSCI USA Enhanced Value Index into eleven GICS sectors: Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials,
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Information Technology, Materials, Real Estate and Utilities. For additional information about the MSCI USA Index, please see “iShares® Edge MSCI USA Momentum Factor ETF — The MSCI USA Index” above.
The MSCI USA Sector Neutral Quality Index is calculated, published and disseminated daily by MSCI through numerous data vendors, on the MSCI website and in real time on Bloomberg Financial Markets and Reuters Limited. The MSCI USA Sector Neutral Quality Index was launched on December 12, 2014. Additional information about the MSCI USA Sector Neutral Quality Index is available on the following website: msci.com/index-methodology. We are not incorporating by reference the website, the sources listed above or any material they include in this index supplement.
Construction of the MSCI USA Sector Neutral Quality Index
To construct the MSCI USA Sector Neutral Quality Index, MSCI selects a predetermined number of constituent securities from the MSCI USA Index based on three main fundamental variables:
(i)
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high return on equity (defined as trailing 12 month earnings per share divided by book value per share),
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(ii)
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low earnings variability (defined as standard deviation of year-over-year earnings per share growth over the past five years), and
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(iii)
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low debt to equity (defined as total debt to book value).
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MSCI uses an algorithm to determine the number of constituent securities to be selected from the MSCI USA Index for inclusion in the MSCI USA Sector Neutral Quality Index with an aim to attain a high exposure to the quality factor while maintaining sufficient market capitalization and number of securities coverage. The number of components is evaluated semi-annually. MSCI assigns weights by multiplying a constituent security’s quality score by its market capitalization, as further adjusted to, among others, mitigate the impact of stock-specific risk. Weights in the MSCI USA Sector Neutral Quality Index are next normalized so that sectors in the MSCI USA Sector Neutral Quality Index represent the same relative weight as in the MSCI USA Index, thereby promoting sector neutrality. Additionally, each individual constituent security is capped at 5%.
Cap/Floor the Variable
As part of the standardization process, outlier fundamental variable values are capped/floored to ensure that the average values used to standardize the variables are less affected by extreme values. To do this, for a given variable, the values for all securities are first ranked in ascending order within the MSCI USA Index. Missing values are excluded from the ranking. Then, for securities that lie below the 5th percentile rank or above the 95th percentile rank, their value is set equal to the value of the 5th percentile ranked or 95th percentile ranked security, as applicable. This process is repeated for each of the three fundamental variables.
Calculate the Z-Scores
After capping/flooring the three fundamental variables within the MSCI USA Index, the z-score with respect to each of the three fundamental variables for each security is calculated using the mean and standard deviation of the relevant variable within the MSCI USA Index. The z-score for each individual security generally measures the extent to which an individual security is an outlier with respect to a particular variable compared to all of the constituent securities included in the MSCI USA Index, measured in terms of standard deviations, and is calculated as follows:
(i)
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with respect to return on equity, the “z-score” equals (i) (a) the capped/floored return on equity for such security minus (b) the mean of the capped/floored returns on equity for all of the securities in the MSCI USA Index divided by (ii) the standard deviation of the capped/floored returns on equity for the securities in the MSCI USA Index; and
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(ii)
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with respect to debt to equity and earnings variability, the “z-score” equals the negative (to ensure securities of companies with higher debt to equity or higher variable earnings are ranked lower) of (i) (a) the capped/floored debt to equity/earnings variability for such security minus (b) the mean of the capped/floored debt to equity/earnings variability for all of the securities in the MSCI USA Index divided by (ii) the standard deviation of the capped/floored debt to equity/earnings variability for the securities in the MSCI USA Index.
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Calculate the Quality Score
After standardizing each of the three variable values for each security and calculating z-scores with respect to each of the three fundamental variables, a “composite quality z-score” for each security is computed by averaging the z-scores of the
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three fundamental variables. Computation of the composite quality z-score also depends on the availability of fundamental variables, as described below.
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Case
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Detail
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Action
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Case 1
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return on equity is missing
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If return on equity is missing, composite quality z-score is not calculated and the security will not be part of the MSCI USA Sector Neutral Quality Index
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Case 2
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debt to equity is missing, but other two variables are available
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composite quality z-score is calculated using return on equity and earnings variability z-scores
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Case 3
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earnings variability is missing, but other two variables are available
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composite quality z-score is calculated using return on equity and debt to equity z-scores
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Case 4
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debt to equity and earnings variability are missing but return on equity is available
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composite quality z-score is not calculated and the security will not be part of the MSCI USA Sector Neutral Quality Index
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Case 5
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All three variables are missing
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Security will not be part of the MSCI USA Sector Neutral Quality Index
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The “quality score” is then computed from the composite quality z-score as follows:
(i)
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If the composite quality z-score is greater than 0, the quality score equals 1 plus the composite quality z-score; or
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(ii)
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If the composite quality z-score is less than 0, the quality score equals the quotient of (i) 1 divided by (ii) the difference of 1 minus the composite quality z-score
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Security Selection
In order to be selected for inclusion in the MSCI USA Sector Neutral Quality Index, a constituent security’s quality score must rank among the highest quality scores in the MSCI USA Index. The number of securities targeted for inclusion in the MSCI USA Sector Neutral Quality Index at initial construction and upon each rebalancing is then determined based on certain rules relating to free-float market capitalization (market price per share multiplied by the number of shares held by non-controlling interests) and numbers of constituent securities as described below.
Initial Construction. The number of securities targeted for inclusion in the MSCI USA Sector Neutral Quality Index at initial construction (or on any semi-annual rebalancing when the initial construction methodology is required to be applied, as described below under the caption “—Rebalancing”) is determined by (i) ranking each constituent security in the MSCI USA Index according to its quality score (using such securities’ weights in the MSCI USA Index if multiple securities have the same score) and (ii) applying the following rules in order of priority:
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if the MSCI USA Index has 25 or fewer constituent securities on the relevant date, each constituent security in the MSCI USA Index is included as a constituent security in the MSCI USA Sector Neutral Quality Index; or
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•
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if 25 or fewer of the highest ranking MSCI USA Index constituent securities account for at least 30% of the MSCI USA Index’s free-float market capitalization, the target number of Quality Index constituent securities will be 25, subject to the rounding rules; or
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•
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if 25 of the highest ranking MSCI USA Index constituent securities do not account for at least 30% of the MSCI USA Index’s free-float market capitalization, but the top 10% of the highest ranking MSCI USA Index constituent securities do account for at least 30% of the MSCI USA Index’s free-float market capitalization, the number of constituent securities constituting the top 10% of the highest ranking MSCI USA Index constituent securities, after rounding, is the number of securities targeted for inclusion in the MSCI USA Sector Neutral Quality Index; or
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•
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if the number of top ranking MSCI USA Index constituent securities accounting for 30% of the MSCI USA Index’s free-float market capitalization, after rounding, account for less than 40% of the total number of MSCI USA Index
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constituent securities, such rounded number is the number of securities targeted for inclusion in the MSCI USA Sector Neutral Quality Index; or
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•
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if the number of top ranking MSCI USA Index constituent securities accounting for 30% of the MSCI USA Index’s free-float market capitalization, after rounding, account for 40% or more of the total number of MSCI USA Index constituent securities, eliminate each of the lowest ranking MSCI USA Index constituent securities from such rounded number until the number of those remaining account for 40% or less of the total number of MSCI USA Index constituent securities; and
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o
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if the remaining MSCI USA Index constituent securities account for at least 20% of the MSCI USA Index’s free-float market capitalization, the number of such remaining MSCI USA Index constituent securities, after rounding, is the number of securities targeted for inclusion in the MSCI USA Sector Neutral Quality Index; or
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o
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if the remaining MSCI USA Index constituent securities account for less than 20% of the MSCI USA Index’s free-float market capitalization, add back the next highest ranking MSCI USA Index constituent securities previously eliminated until the MSCI USA Sector Neutral Quality Index’s constituent securities account for at least 20% of the MSCI USA Index’s public float and such number of MSCI USA Index constituent securities, after rounding, is the number of securities targeted for inclusion in the MSCI USA Sector Neutral Quality Index.
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Where indicated above, the following rounding conventions apply:
•
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if the number of constituent securities is less than 100, round to the nearest 10 constituent securities;
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•
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if the number of constituent securities is greater than or equal to 100 but less than 300, round to the nearest 25 constituent securities; and
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•
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if the number of constituent securities is greater than or equal to 300, round to the nearest 50 constituent securities.
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Rebalancing. The target number of securities for inclusion in the MSCI USA Sector Neutral Quality Index at each semi-annual rebalancing is determined by applying the following rules in order of priority:
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if the target number of MSCI USA Sector Neutral Quality Index constituent securities on the immediately preceding rebalancing date or initial construction (following rebalancing or construction) exceeds the number of MSCI USA Index constituent securities on the rebalancing date, the initial construction methodology described above should be applied to determine the number of constituent securities to be included in the MSCI USA Sector Neutral Quality Index; or
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•
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if the MSCI USA Index has 25 or fewer constituent securities on the rebalancing date, each constituent security in the MSCI USA Index is included as a constituent security in the MSCI USA Sector Neutral Quality Index; or
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•
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if the number of constituent securities included in the MSCI USA Index on the immediately preceding rebalancing or initial construction date (following rebalancing or construction) is less than 25, repeat the initial construction process described above to determine the number of constituent securities to be included in the MSCI USA Sector Neutral Quality Index; or
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•
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if the constituent securities of the MSCI USA Sector Neutral Quality Index determined on the rebalancing or initial construction date (following rebalancing or construction) immediately preceding the semi-annual rebalancing date account for less than 10% of the MSCI USA Index’s free-float market capitalization on the current rebalancing date, repeat the initial construction process described above to determine the constituent securities to be included in the MSCI USA Sector Neutral Quality Index; or
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•
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otherwise, the target number of MSCI USA Sector Neutral Quality Index constituent securities will not change from the immediately preceding rebalancing or construction date (following rebalancing or construction).
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Weighting Scheme
The securities selected in the previous step are assigned weights in proportion to their market capitalization weight in the MSCI USA Index and quality score. These weights are then updated to implement sector neutrality (i.e., the weight of each sector in the MSCI USA Sector Neutral Quality Index is equated with the weight of that sector in the MSCI USA Index). This is done by normalizing the weights of the constituents within each sector to reflect the effective MSCI USA Index sector weight. Additionally, each individual constituent security is capped at 5%.
Maintenance of the MSCI USA Sector Neutral Quality Index
The MSCI USA Sector Neutral Quality Index is rebalanced semi-annually and the changes from the rebalancing are made as of the close of the last business day of each May and November, to coincide with the semi-annual index reviews of the
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MSCI USA Index. The pro forma MSCI USA Sector Neutral Quality Index is generally announced nine business days before the effective date.
Buffer Rules
In selecting securities for inclusion in the MSCI USA Sector Neutral Quality Index on any rebalancing date, certain buffer rules are applied to maintain continuity and reduce turnover in constituent securities. Although 80% of the positions in the rebalancing will be selected from among the highest ranking MSCI USA Index constituent securities without regard to whether they are currently included in the MSCI USA Sector Neutral Quality Index, existing constituent securities of the MSCI USA Sector Neutral Quality Index as of the rebalancing date (prior to effecting the rebalancing) will be given priority for the next 20% of constituent security positions. If the target number of Quality Index constituent securities is not achieved after this step, the highest ranking remaining MSCI USA Index constituent securities are added until the target number is achieved.
Ongoing Event Related Changes
The general treatment of corporate events in the MSCI USA Sector Neutral Quality Index aims to minimize turnover outside of index reviews. The methodology aims to appropriately represent an investor’s participation in an event based on relevant deal terms and pre-event weighting of the index constituents that are involved. Further, changes in index market capitalization that occur as a result of corporate event implementation will be offset by a corresponding change in the variable weighting factor of the constituent.
Additionally, if the frequency of index reviews in the MSCI USA Index is greater than the frequency of index reviews in the MSCI USA Sector Neutral Quality Index, the changes made to the MSCI USA Index during intermediate index reviews will be neutralized in the MSCI USA Sector Neutral Quality Index.
The following section briefly describes the treatment of common corporate events within the MSCI USA Sector Neutral Quality Index.
No new securities will be added (except where noted below) to the MSCI USA Sector Neutral Quality Index between index reviews. MSCI USA Index deletions will be reflected simultaneously.
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Event Type
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Event Details
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New additions to the MSCI USA Index
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A new security added to the MSCI USA Index (such as IPO and other early inclusions) will not be added to the MSCI USA Sector Neutral Quality Index.
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Spin-Offs
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All securities created as a result of the spin-off of an existing MSCI USA Sector Neutral Quality Index constituent will be added to the MSCI USA Sector Neutral Quality Index at the time of event implementation. Reevaluation for continued inclusion in the MSCI USA Sector Neutral Quality Index will occur at the subsequent index review.
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Merger/acquisition
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For mergers and acquisitions, the acquirer’s post event weight will account for the proportionate amount of shares involved in deal consideration, while cash proceeds will be invested across the MSCI USA Sector Neutral Quality Index.
If an existing MSCI USA Sector Neutral Quality Index constituent is acquired by a security that is not a constituent of the MSCI USA Sector Neutral Quality Index, the existing constituent will be deleted from the MSCI USA Sector Neutral Quality Index and the acquiring non-constituent will not be added to the MSCI USA Sector Neutral Quality Index.
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Changes in security characteristics
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A security will continue to be a constituent of the MSCI USA Sector Neutral Quality Index if there are changes in characteristics (country, sector, size segment, etc.). Reevaluation for continued inclusion in the MSCI USA Sector Neutral Quality Index will occur at the subsequent index review.
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Historical Closing Prices of the ETF’s 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.
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 index 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 cash settlement 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 January 1, 2015 through June 12, 2020. We obtained the closing prices shown in the graph below from Bloomberg Financial Services without independent verification. In the graph, historical closing prices after the ETF began tracking the MSCI USA Sector Neutral Quality Index on September 1, 2015 can be found to the right of the vertical solid line marker. Closing prices to the left of the vertical solid line marker reflect the ETF closing prices before the ETF began tracking the MSCI USA Sector Neutral Quality Index on September 1, 2015.
“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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iShares® Edge MSCI USA Size Factor ETF
The shares of the iShares® Edge MSCI USA Size Factor 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 MSCI USA Low Size Index (the “index”). Prior to December 3, 2018, the ETF tracked the MSCI USA Risk Weighted Index. The inception date of the index was September 11, 2018.
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The ETF’s investment advisor is BlackRock Fund Advisors (“BFA”).
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The ETF’s shares trade on the NYSE Arca under the ticker symbol “SIZE”.
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The iShares® Trust’s SEC CIK Number is 0001100663.
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The ETF’s inception date was April 16, 2013.
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The ETF’s shares are issued or redeemed only in creation units of 50,000 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 paid a management fee from the ETF based on a percentage of the ETF’s average daily net assets, at the annual rate of 0.15%. BFA may from time to time voluntarily waive and/or reimburse fees or expenses in order to limit total annual ETF operating expenses (excluding acquired fund fees and expenses, if any). Any such voluntary waiver or reimbursement may be eliminated by BFA at any time. As of March 31, 2020, the aggregate expense ratio of the ETF was 0.15% 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 January 31, 2020) 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 us.ishares.com/product_info/fund/overview/SIZE.htm. We are not incorporating by reference the website, the sources listed above or any material they include in this index 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 ETF’s investment objective and the index may be changed without the approval of BFA’s 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.
iShares® Edge MSCI USA Size Factor ETF Top Ten Holdings as of June 12, 2020
ETF Stock Issuer
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Percentage (%)
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INVESCO LTD
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0.24%
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ROYAL CARIBBEAN CRUISES LTD
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0.23%
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CARNIVAL CORP
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0.23%
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DELTA AIR LINES INC
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0.22%
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VEREIT INC
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0.21%
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SYNCHRONY FINANCIAL
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0.21%
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BOEING
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0.21%
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DISCOVER FINANCIAL SERVICES
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0.21%
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TEXTRON INC
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0.21%
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ALLY FINANCIAL INC
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0.21%
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Total
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2.18%
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iShares® Edge MSCI USA Size Factor ETF Weighting by Sector as of June 12, 2020*
Sector
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Percentage (%)
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Information Technology
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16.79%
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Health Care
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11.85%
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Industrials
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13.64%
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Financials
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15.72%
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Consumer Discretionary
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9.81%
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Consumer Staples
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5.39%
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Real Estate
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6.87%
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Communication
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5.55%
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Utilities
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5.10%
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Materials
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5.38%
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Energy
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3.61%
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Cash and/or Derivatives
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0.29%
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Total
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100.00%
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* Percentages may not sum to 100% due to rounding.
Representative Sampling
BFA uses a representative sampling indexing strategy to manage the ETF. This strategy involves investing in a representative sample of securities that collectively has 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 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 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. Also, the ETF may lend securities representing up to one-third of the value of the ETF’s total assets (including the value of the collateral received).
Tracking Error
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 ETF’s portfolio and those included in the index, pricing differences, transaction costs incurred by the ETF, the ETF’s holding of uninvested cash, differences in timing of the accrual of or the valuation of dividends or interest, the requirements to maintain pass-through tax treatment, portfolio transactions carried out to minimize the distribution of capital gains to shareholders, changes to the index or the costs to the ETF 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 ETF’s tracking error will not exceed 5%. The ETF’s 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 May 31, 2020, iShares® reported the following average annual returns on the market price of the ETF’s shares and the MSCI USA Low Size Index. The market price of the ETF’s 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, 3.65%; 3 years, 5.84%; 5 years, 7.24%; since inception, 9.82%; MSCI USA Low Size Index: 1 year, 3.79%; 3 years, 6.01%; 5 years, 7.40%; since ETF inception, 9.99%.
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.
The MSCI USA Low Size Index
The MSCI USA Low Size Index is designed to emphasize the stock performance of small market-capitalization companies included in a traditional market capitalization weighted parent index, the MSCI USA Index. The MSCI USA Index includes U.S. large- and mid-capitalization stocks, as defined by MSCI, Inc. (“MSCI”). For additional information about the MSCI USA Index, please see “iShares® Edge MSCI USA Momentum Factor ETF — The MSCI USA Index” above.
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The MSCI USA Low Size Index is calculated, published and disseminated daily by MSCI through numerous data vendors, on the MSCI website and in real time on Bloomberg Financial Markets and Reuters Limited. The MSCI USA Low Size Index was launched on September 11, 2018. Additional information about the MSCI USA Low Size Index is available on the following website: msci.com/index-methodology. We are not incorporating by reference the website, the sources listed above or any material they include in this index supplement.
Construction of the MSCI USA Low Size Index
The MSCI USA Low Size Index is constructed by applying a mathematical formula at each rebalancing that reweights the components of its market capitalization-weighted MSCI USA Index, such that the representation of smaller capitalization companies is increased relative to larger capitalization companies (by assigning weights in the inverse proportion of natural logarithm of total issuer market capitalization of the constituents of the MSCI USA Index). In addition, at each rebalancing, MSCI calculates a “constraint factor” for each component. The constraint factor is the ratio of the component’s weight in the MSCI USA Low Size Index to that component’s weight in the MSCI USA Index. The constraint factor is held constant between each index review, except in the case of certain corporate events, as defined by MSCI. Changes in the relative weight of an individual component in the MSCI USA Index due to market appreciation/depreciation result in that component increasing/decreasing in weight in the MSCI USA Low Size Index to hold the constraint factor for that component constant between each rebalancing.
Maintenance of the MSCI USA Low Size Index
The MSCI USA Low Size Index is rebalanced semi-annually and the changes from the rebalancing are made as of the close of the last business day of each May and November, to coincide with the semi-annual index reviews of the MSCI USA Index. The pro forma MSCI USA Low Size Index is generally announced nine business days before the effective date.
Ongoing Event Related Changes
The general treatment of corporate events in the MSCI USA Low Size Index aims to minimize turnover outside of index reviews. The methodology aims to appropriately represent an investor’s participation in an event based on relevant deal terms and pre-event weighting of the index constituents that are involved. Further, changes in index market capitalization that occur as a result of corporate event implementation will be offset by a corresponding change in the variable weighting factor of the constituent.
Additionally, if the frequency of index reviews in the MSCI USA Index is greater than the frequency of index reviews in the MSCI USA Low Size Index, the changes made to the MSCI USA Index during intermediate index reviews will be neutralized in the MSCI USA Low Size Index.
The following section briefly describes the treatment of common corporate events within the MSCI USA Low Size Index.
No new securities will be added (except where noted below) to the MSCI USA Low Size Index between index reviews. MSCI USA Index deletions will be reflected simultaneously.
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Event Type
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Event Details
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New additions to the MSCI USA Index
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A new security added to the MSCI USA Index (such as IPO and other early inclusions) will be added to the MSCI USA Low Size Index at an estimated full market capitalization adjustment factor on the date of security inclusion.
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Spin-Offs
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All securities created as a result of the spin-off of an existing MSCI USA Low Size Index constituent will be added to the MSCI USA Low Size Index at the time of event implementation. Reevaluation for continued inclusion in the MSCI USA Low Size Index will occur at the subsequent index review.
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Merger/acquisition
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For mergers and acquisitions, the acquirer’s post event weight will account for the proportionate amount of shares involved in deal consideration, while cash proceeds will be invested across the MSCI USA Low Size Index.
If an existing MSCI USA Low Size Index constituent is acquired by a security that is not a constituent of the MSCI USA Low Size Index, the existing constituent will be deleted from the MSCI USA Low Size Index and the acquiring non-constituent will not be added to the MSCI USA Low Size Index.
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Changes in security characteristics
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A security will continue to be a constituent of the MSCI USA Low Size Index if there are changes in characteristics (country, sector, size segment, etc.). Reevaluation for continued inclusion in the MSCI USA Low Size Index will occur at the subsequent index review.
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Historical Closing Prices of the ETF’s 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.
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 index 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 cash settlement 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 January 1, 2015 through June 12, 2020. We obtained the closing prices shown in the graph below from Bloomberg Financial Services without independent verification. In the graph, historical closing prices after the ETF began tracking the MSCI USA Low Size Index on December 3, 2018 can be found to the right of the vertical solid line marker. Closing prices to the left of the vertical solid line marker reflect the ETF closing prices before the ETF began tracking the MSCI USA Low Size Index on December 3, 2018.
“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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iShares® Edge MSCI Min Vol USA ETF
The shares of the iShares® Edge MSCI Min Vol USA 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 MSCI USA Minimum Volatility Index (the “index”).
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The ETF’s investment advisor is BlackRock Fund Advisors (“BFA”).
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The ETF’s shares trade on the CBOE BZX under the ticker symbol “USMV”.
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The iShares® Trust’s SEC CIK Number is 0001100663.
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The ETF’s inception date was October 18, 2011.
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The ETF’s 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 paid a management fee from the ETF based on a percentage of the ETF’s average daily net assets, at the annual rate of 0.15%. BFA may from time to time voluntarily waive and/or reimburse fees or expenses in order to limit total annual ETF operating expenses (excluding acquired fund fees and expenses, if any). Any such voluntary waiver or reimbursement may be eliminated by BFA at any time. As of March 31, 2020, the aggregate expense ratio of the ETF was 0.15% 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 January 31, 2020) 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 us.ishares.com/product_info/fund/overview/USMV.htm. We are not incorporating by reference the website, the sources listed above or any material they include in this index 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 ETF’s investment objective and the index may be changed without the approval of BFA’s 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.
iShares® Edge MSCI Min Vol USA ETF Top Ten Holdings as of June 12, 2020
ETF Stock Issuer
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Percentage (%)
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NEXTERA ENERGY INC
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1.57%
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MCDONALDS CORP
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1.55%
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VERIZON COMMUNICATIONS INC
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1.53%
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T MOBILE US INC
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1.52%
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VISA INC CLASS A
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1.49%
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MICROSOFT CORP
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1.45%
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WASTE MANAGEMENT INC
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1.44%
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PEPSICO INC
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1.44%
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MERCK & CO INC
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1.42%
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REGENERON PHARMACEUTICALS INC
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1.40%
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Total
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14.81%
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iShares® Edge MSCI Min Vol USA ETF Weighting by Sector as of June 12, 2020*
Sector
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Percentage (%)
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Information Technology
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22.06%
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Financials
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11.74%
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Consumer Staples
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11.65%
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Health Care
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16.17%
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Utilities
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8.41%
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Consumer Discretionary
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6.81%
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Real Estate
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5.32%
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Industrials
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7.10%
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Communication
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6.54%
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Materials
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2.61%
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Energy
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1.15%
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Cash and/or Derivatives
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0.45%
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Total
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100.01%
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* Percentages may not sum to 100% due to rounding.
Representative Sampling
BFA uses a representative sampling indexing strategy to manage the ETF. This strategy involves investing in a representative sample of securities that collectively has 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 generally will invest at least 90% of its assets in the component securities of the index. The ETF may invest up to 10% 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. Also, the ETF may lend securities representing up to one-third of the value of the ETF’s total assets (including the value of the collateral received).
Tracking Error
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 ETF’s portfolio and those included in the index, pricing differences, transaction costs incurred by the ETF, the ETF’s holding of uninvested cash, differences in timing of the accrual of or the valuation of dividends or interest, the requirements to maintain pass-through tax treatment, portfolio transactions carried out to minimize the distribution of capital gains to shareholders, changes to the index or the costs to the ETF 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 ETF’s tracking error will not exceed 5%. The ETF’s 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 May 31, 2020, iShares® reported the following average annual returns on the market price of the ETF’s shares and the MSCI USA Minimum Volatility Index. The market price of the ETF’s 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, 6.47%; 3 years, 9.83%; 5 years, 10.50%; since inception, 13.11%; MSCI USA Minimum Volatility Index: 1 year, 6.70%; 3 years, 10.04%; 5 years, 10.70%; 10 years, 13.89%; since ETF inception, 13.30%.
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.
MSCI USA Minimum Volatility Index
The MSCI USA Minimum Volatility Index is designed to measure the performance of securities in the MSCI USA Index that, in the aggregate, have lower volatility relative to the large- and mid-cap U.S. equity market. The MSCI USA Index includes U.S. large- and mid-capitalization stocks, as defined by MSCI, Inc. (“MSCI”). For additional information about the MSCI USA Index, please see “iShares® Edge MSCI USA Momentum Factor ETF — The MSCI USA Index” above. MSCI divides the companies included in the MSCI USA Minimum Volatility Index into eleven GICS sectors: Communication
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Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Real Estate and Utilities.
The MSCI USA Minimum Volatility Index is calculated, published and disseminated daily by MSCI through numerous data vendors, on the MSCI website and in real time on Bloomberg Financial Markets and Reuters Limited. The MSCI USA Minimum Volatility Index was launched on June 2, 2008. Additional information about the MSCI USA Minimum Volatility Index is available on the following website: msci.com/index-methodology, which we are not incorporating by reference in this index supplement.
Construction of the MSCI USA Minimum Volatility Index
The MSCI USA Minimum Volatility Index seeks to optimize the MSCI USA Index, in U.S. dollars, for the lowest absolute risk within a given set of constraints: (i) minimum and maximum component weights, (ii) limitations on divergence in sector representation and non-volatility related factor exposures between the MSCI USA Minimum Volatility Index and the MSCI USA Index and (iii) turnover in the MSCI USA Minimum Volatility Index.
Details about the Barra multi-factor risk models are available at msci.com/portfolio-management, which we are not incorporating by reference in this index supplement
At each semi-annual index review, the following optimization constraints are employed, which aim to ensure replicability and investability while achieving the lowest volatility for a given set of constraints.
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The maximum weight of an index constituent will be restricted to the lower of 1.5% or 20 times the weight of the security in the MSCI USA Index.
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The minimum weight of an index constituent will be 0.05%.
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The sector weights of the MSCI USA Minimum Volatility Index will not deviate more than +/-5% from the sector weights of the MSCI USA Index. MSCI divides the companies included in the MSCI USA Minimum Volatility Index into eleven GICS sectors: Communication Services, Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Real Estate and Utilities.
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No constraint will be applied on the exposure of the MSCI USA Minimum Volatility Index to volatility-related risk index factors (beta volatility and residual volatility). Exposure to all other risk index factors will be restricted to +/-0.25 standard deviations relative to the MSCI USA Index.
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The one way turnover of the MSCI USA Minimum Volatility Index is constrained to a maximum of 10%.
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The MSCI USA Minimum Volatility Index is constructed using the Barra Optimizer in combination with the relevant Barra Equity Model. The optimization uses the MSCI USA Index as the universe of eligible securities and the specified optimization objective and constraints to determine the optimal MSCI USA Minimum Volatility Index. The Barra Optimizer determines the optimal solution, i.e. the portfolio with the lowest total risk, using an estimated security co-variance matrix under the applicable investment constraints. The MSCI USA Minimum Volatility Index seeks to have the lowest absolute volatility based on the set of constraints.
Optimization Settings
The MSCI USA Minimum MSCI USA Minimum Volatility Index is constructed using the Barra Optimizer in combination with the relevant Barra Equity Model. The following optimization settings are applied to construct the MSCI USA Minimum Volatility Index.
Specify “Initial Portfolio” and “Trade Universe” settings on the Barra Optimizer
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“Initial portfolio” is set as the current MSCI USA Minimum Volatility Index, using the constituent weights as of the close of the rebalancing date (before the rebalancing) updated for corporate actions up to the effective date of the rebalancing. When there is no current MSCI USA Minimum Volatility Index (for example, when no optimization has been applied to the MSCI USA Index yet), the initial portfolio is set to be to the MSCI USA Index.
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“Trade universe” is set to be the index constituents of the MSCI USA Index.
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Specify Risk Model
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The factor exposures for all the securities in the trade universe are set using the most recent monthly release of factor exposure data of the relevant Barra Equity Model.
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The common factor co-variances are set using the most recent monthly release of factor co-variance data of the relevant Barra Equity Model.
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The specific co-variances of all securities in the trade universe are set using the most recent monthly release of specific co-variances data of the relevant Barra Equity Model.
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Setup Utility function
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The optimization objective is to find a pro forma MSCI USA Minimum Volatility Index that minimizes the total risk of MSCI USA Index, as determined by the relevant Barra Equity Model. The risk aversion parameters used in the optimization are as follows:
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Common factor risk aversion = 0.0075
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Specific risk aversion = 0.075
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Setup Constraints for Initial Construction
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The maximum weight of an index constituent will be restricted to the lower of 1.5% or 20 times the weight of the security in the MSCI USA Index.
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The minimum weight of an index constituent will be 0.05%.
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The sector weights of the MSCI USA Minimum Volatility Index will not deviate more than +/-5% from the sector weights of the MSCI USA Index.
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No constraint will be applied on the exposure of the MSCI USA Minimum Volatility Index to the Beta and Residual Volatility risk index factors. Exposure to all other risk index factors will be restricted to +/-0.25 standard deviations relative to the MSCI USA Index.
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Additional Setup constraints for Semi-Annual Index Reviews
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The one way turnover of the MSCI USA Minimum Volatility Index is constrained to a maximum of 10%
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Handling Indefeasible Optimizations
During the semi-annual index review, in the event that there is no optimal solution that satisfies all the optimization constraints defined above, the following constraints will be relaxed, until an optimal solution is found:
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Relax the turnover constraint in steps of 5%, up to a maximum of 30%
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Relax the minimum weight constraint in steps of 0.01% up to a minimum of 0.01%.
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In the event that no optimal solution is found after the above constraints have been relaxed, the MSCI USA Minimum Volatility Index will not be rebalanced for that semi-annual index review.
Maintenance of the MSCI USA Minimum Volatility Index
The MSCI USA Minimum Volatility Index is rebalanced semi-annually and the changes from the rebalancing are made as of the close of the last business day of each May and November, to coincide with the semi-annual index reviews of the MSCI USA Index. The pro forma MSCI USA Minimum Volatility Index is generally announced nine business days before the effective date.
The security co-variance matrix used to determine the MSCI USA Minimum Volatility Index is maintained on a monthly basis. For the May and the November semi-annual MSCI USA Minimum Volatility Index reviews, the security covariance matrices as of the end of April and the end of October are used respectively.
At each rebalancing, a constraint factor is calculated for each constituent in the MSCI USA Minimum Volatility Index. The constraint factor is defined as the weight in the MSCI USA Minimum Volatility Index at the time of the rebalancing divided by the weight in the MSCI USA Index. The constraint factor as well as the constituents in the index remains constant between index reviews except in case of corporate events as described below.
Ongoing Event Related Changes
The general treatment of corporate events in the MSCI USA Minimum Volatility Index aims to minimize turnover outside of index reviews. The methodology aims to appropriately represent an investor’s participation in an event based on relevant deal terms and pre-event weighting of the index constituents that are involved. Further, changes in index market capitalization that occur as a result of corporate event implementation will be offset by a corresponding change in the variable weighting factor of the constituent.
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Additionally, if the frequency of index reviews in the MSCI USA Index is greater than the frequency of index reviews in the MSCI USA Minimum Volatility Index, the changes made to the MSCI USA Index during intermediate index reviews will be neutralized in the MSCI USA Minimum Volatility Index.
The following section briefly describes the treatment of common corporate events within the MSCI USA Minimum Volatility Index.
No new securities will be added (except where noted below) to the MSCI USA Minimum Volatility Index between index reviews. MSCI USA Index deletions will be reflected simultaneously.
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Event Type
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Event Details
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New additions to the MSCI USA Index
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A new security added to the MSCI USA Index (such as IPO and other early inclusions) will not be added to the index.
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Spin-Offs
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All securities created as a result of the spin-off of an existing MSCI USA Minimum Volatility Index constituent will be added to the MSCI USA Minimum Volatility Index at the time of event implementation. Reevaluation for continued inclusion in the MSCI USA Minimum Volatility Index will occur at the subsequent index review.
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Merger/acquisition
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For mergers and acquisitions, the acquirer’s post event weight will account for the proportionate amount of shares involved in deal consideration, while cash proceeds will be invested across the MSCI USA Minimum Volatility Index.
If an existing MSCI USA Minimum Volatility Index constituent is acquired by a security that is not a constituent of the MSCI USA Minimum Volatility Index, the existing constituent will be deleted from the MSCI USA Minimum Volatility Index and the acquiring non-constituent will not be added to the MSCI USA Minimum Volatility Index.
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Changes in security characteristics
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A security will continue to be a constituent of the MSCI USA Minimum Volatility Index if there are changes in characteristics (country, sector, size segment, etc.). Reevaluation for continued inclusion in the MSCI USA Minimum Volatility Index will occur at the subsequent index review.
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Historical Closing Prices of the ETF’s 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.
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 index 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 cash settlement 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 January 1, 2015 through June 12, 2020. 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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iShares ® 1-3 Year Treasury Bond ETF
The shares of the iShares® 1-3 Year Treasury 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 ICE U.S. Treasury 1-3 Year Bond Index (the “index”). Prior to April 1, 2016, the ETF tracked the Barclays U.S. 1-3 Year Treasury Bond Index.
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The ETF’s investment advisor is BlackRock Fund Advisors (“BFA”).
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The ETF’s shares trade on the NASDAQ under the ticker symbol “SHY”.
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The iShares® Trust’s SEC CIK Number is 0001100663.
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The ETF’s inception date was July 22, 2002.
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The ETF’s 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 paid a management fee from the ETF based on a percentage of the ETF’s average daily net assets, at an annual rate of 0.15%. BFA is responsible for substantially all expenses of the ETF, except interest expenses, taxes, brokerage expenses, future distribution fees or expenses and extraordinary expenses. As of March 31, 2020, the expense ratio of the ETF was 0.15% 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 29, 2020) 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 us.ishares.com/product_info/fund/overview/SHY.htm. We are not incorporating by reference the website, the sources listed above or any material they include in this index 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 ETF’s 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 ETF’s total assets (including the value of the collateral received).
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The ETF’s 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® 1-3 Year Treasury Bond ETF Top Ten Holdings as of June 12, 2020*
U.S. Treasury Bond
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Percentage (%)
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2.50% due 1/15/2022
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6.18%
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2.13% due 5/15/2022
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5.63%
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1.75% due 7/15/2022
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5.57%
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1.63% due 11/15/2022
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5.50%
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1.88% due 4/30/2022
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5.39%
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2.50% due 2/15/2022
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4.41%
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0.25% due 4/15/2023
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3.86%
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1.75% due 5/31/2022
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3.85%
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1.13% due 8/31/2021
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3.75%
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2.88% due 10/15/2021
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3.04%
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Total
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47.18%
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The following table displays additional information about the bonds held by the ETF and the annualized performance difference, in each case as of June 12, 2020*. We obtained the information in the table below from the iShares® website without independent verification.
Weighted average maturity
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1.91 years
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Weighted average coupon
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1.90%
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Effective duration
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1.87 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 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 June 12, 2020*, the ETF’s holdings were comprised of 80 U.S. Treasury bonds (97.92% of holdings) and cash and/or derivatives (2.08% of holdings). Of the ETF’s 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, Moody’s and Fitch ratings for a security.
*Prior to April 1, 2016, the ETF tracked the Barclays U.S. 1-3 Year Treasury Bond Index.
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 ETF’s portfolio and those included in the index, pricing differences, differences in transaction costs, the ETF holding uninvested cash, differences in timing of the accrual of or the valuation of distributions, the requirements to maintain pass-through tax treatment, portfolio transactions carried out to minimize the distribution of capital gains to shareholders, changes to the index or the costs to the ETF 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 ETF’s tracking error will not exceed 5%. The ETF’s 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 May 31, 2020, iShares® reported the following average annual returns on the market price of the ETF’s shares and the index. The market price of the ETF’s 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, 4.43%; 3 years, 2.52%; 5 years, 1.72%; 10 years, 1.24%; since inception, 2.14%; index: 1 year, 4.65%; 3 years, 2.67%; 5 years, 1.86%; 10 years, 1.39%; since ETF inception, 2.27%. Prior to April 1, 2016, the ETF tracked the Barclays U.S. 1-3 Year Treasury Bond Index.
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The ICE U.S. Treasury 1-3 Year Bond Index
The index is sponsored by ICE Data Indices, LLC (“IDI”). 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 or equal to one years and less than three years.
The ICE Data Indices, LLC Index Governance Committee (the “governance committee”) is responsible for governance and oversight of the index along with oversight of the ICE Data Index Services team (the “IDIS”), 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 IDIS is responsible for implementing the changes and notifying subscribers. Where a change is material, IDI will consult with stakeholders and subscribers in accordance with the IDI consultation process. For other changes, advance notice will be provided, where possible, to allow stakeholders and subscribers appropriate preparation to implement the change.
Eligibility Criteria and Inclusion Rules
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 or equal to one years and less than three 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 Calculation
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.
Index Maintenance
The index is rebalanced at each month end. The new index for the next month is available three days prior to month end and is intended to reflect the constituent changes from the prior rebalancing date based on index eligibility. 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. The index is rebalanced after the end of the last calendar day of each month. Pro forma files are provided from the fourth to last business day of the month through the last business day of the month with each day’s file reflecting the most current projected index holdings based on available data up to and including that date.
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.
Current Composition of the Index
As of June 12, 2020, the index’s holdings were comprised of 94 U.S. Treasury bonds. The following table displays additional information about the bonds held by the index as of June 12, 2020. We obtained the information in the table below from the ICE website without independent verification.
Weighted average maturity
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1.95 years
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Weighted average coupon
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1.79%
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Historical Closing Prices of the ETF’s 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.
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 index 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 cash settlement 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 January 1, 2015 through June 12, 2020. 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. 1-3 Year Treasury Bond Index.
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Hypothetical and Historical Closing Levels of the ICE U.S. Treasury 1-3 Year Bond Index
The closing level of the ICE U.S. Treasury 1-3 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 1-3 Year Bond Index during the period shown below is not an indication that the ICE U.S. Treasury 1-3 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 1-3 Year Bond Index as an indication of the future performance of the ICE U.S. Treasury 1-3 Year Bond Index or make any assumptions, based on the ICE U.S. Treasury 1-3 Year Bond Index’s historical or hypothetical performance, about the performance of the ETF. We cannot give you any assurance that the future performance of the ETF’s shares will be consistent with the historical or hypothetical performance of ICE U.S. Treasury 1-3 Year Bond Index.
The graph below shows the closing levels of the ICE U.S. Treasury 1-3 Year Bond Index from January 1, 2015 through June 12, 2020 (using hypothetical performance data and historical closing levels). Since the ICE U.S. Treasury 1-3 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 ICE’s 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 1-3 Year Bond Index on April 1, 2016.
“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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iShares® 7-10 Year Treasury Bond ETF
The shares of the iShares® 7-10 Year Treasury 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 ICE U.S. Treasury 7-10 Year Bond Index (the “index”). Prior to April 1, 2016, the ETF tracked the Barclays U.S. 7-10 Year Treasury Bond Index.
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The ETF’s investment advisor is BlackRock Fund Advisors (“BFA”).
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The ETF’s shares trade on the NASDAQ under the ticker symbol “IEF”.
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The iShares® Trust’s SEC CIK Number is 0001100663.
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The ETF’s inception date was July 22, 2002.
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The ETF’s 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 paid a management fee from the ETF based on a percentage of the ETF’s average daily net assets, at an annual rate of 0.15%. BFA is responsible for substantially all expenses of the ETF, except interest expenses, taxes, brokerage expenses, future distribution fees or expenses and extraordinary expenses. As of March 31, 2020, the expense ratio of the ETF was 0.15% 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 29, 2020) 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 us.ishares.com/product_info/fund/overview/IEF.htm. We are not incorporating by reference the website, the sources listed above or any material they include in this index 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 ETF’s 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 ETF’s total assets (including the value of the collateral received).
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The ETF’s 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® 7-10 Year Treasury Bond ETF Top Ten Holdings as of June 12, 2020*
U.S. Treasury Bond
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Percentage (%)
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3.13% due 11/15/2028
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14.03%
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1.50% due 2/15/2030
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13.49%
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2.63% due 2/15/2029
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13.10%
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2.88% due 5/15/2028
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12.76%
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2.88% due 8/15/2028
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12.26%
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2.38% due 5/15/2029
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11.62%
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2.75% due 2/15/2028
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11.36%
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1.63% due 8/15/2029
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4.04%
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2.25% due 8/15/2027
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3.33%
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2.25% due 11/15/2027
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2.92%
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Total
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98.91%
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The following table displays additional information about the bonds held by the ETF and the annualized performance difference, in each case as of June 12, 2020*. We obtained the information in the table below from the iShares® website without independent verification.
Weighted average maturity
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8.44 years
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Weighted average coupon
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2.51%
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Effective duration
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7.67 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 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 June 12, 2020*, the ETF’s holdings were comprised of 20 U.S. Treasury bonds (99.71% of holdings) and cash and/or derivatives 0.29% of holdings). Of the ETF’s 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, Moody’s and Fitch ratings for a security.
*Prior to April 1, 2016, the ETF tracked the Barclays U.S. 7-10 Year Treasury Bond Index.
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 ETF’s portfolio and those included in the index, pricing differences, differences in transaction costs, the ETF holding uninvested cash, differences in timing of the accrual of or the valuation of distributions, the requirements to maintain pass-through tax treatment, portfolio transactions carried out to minimize the distribution of capital gains to shareholders, changes to the index or the costs to the ETF 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 ETF’s tracking error will not exceed 5%. The ETF’s 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 May 31, 2020, iShares® reported the following average annual returns on the market price of the ETF’s shares and the index. The market price of the ETF’s 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, 13.95%; 3 years, 6.49%; 5 years, 4.66%; 10 years, 4.88%; since inception, 5.25%; index: 1 year, 14.25%; 3 years, 6.60%; 5 years, 4.72%; 10 years, 4.99%; since ETF inception, 5.31%. Prior to April 1, 2016, the ETF tracked the Barclays U.S. 7-10 Year Treasury Bond Index.
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The ICE U.S. Treasury 7-10 Year Bond Index
The index is sponsored by ICE Data Indices, LLC (“IDI”). 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 or equal to seven years and less than ten years.
The ICE Data Indices, LLC Index Governance Committee (the “governance committee”) is responsible for governance and oversight of the index along with oversight of the ICE Data Index Services team (the “IDIS”), 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 IDIS is responsible for implementing the changes and notifying subscribers. Where a change is material, IDI will consult with stakeholders and subscribers in accordance with the IDI consultation process. For other changes, advance notice will be provided, where possible, to allow stakeholders and subscribers appropriate preparation to implement the change.
Eligibility Criteria and Inclusion Rules
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 or equal to seven years and less than ten 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 Calculation
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.
Index Maintenance
The index is rebalanced at each month end. The new index for the next month is available three days prior to month end and is intended to reflect the constituent changes from the prior rebalancing date based on index eligibility. 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. The index is rebalanced after the end of the last calendar day of each month. Pro forma files are provided from the fourth to last business day of the month through the last business day of the month with each day’s file reflecting the most current projected index holdings based on available data up to and including that date.
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.
Current Composition of the Index
As of June 12, 2020, the index’s holdings were comprised of 19 U.S. Treasury bonds. The following table displays additional information about the bonds held by the index as of June 12, 2020. We obtained the information in the table below from the ICE website without independent verification.
Weighted average maturity
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8.47 years
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Weighted average coupon
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2.52%
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Historical Closing Prices of the ETF’s 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.
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 index 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 cash settlement 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 January 1, 2015 through June 12, 2020. 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. 7-10 Year Treasury Bond Index.
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Hypothetical and Historical Closing Levels of the ICE U.S. Treasury 7-10 Year Bond Index
The closing level of the ICE U.S. Treasury 7-10 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 7-10 Year Bond Index during the period shown below is not an indication that the ICE U.S. Treasury 7-10 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 7-10 Year Bond Index as an indication of the future performance of the ICE U.S. Treasury 7-10 Year Bond Index or make any assumptions, based on the ICE U.S. Treasury 7-10 Year Bond Index’s historical or hypothetical performance, about the performance of the ETF. We cannot give you any assurance that the future performance of the ETF’s shares will be consistent with the historical or hypothetical performance of ICE U.S. Treasury 7-10 Year Bond Index.
The graph below shows the closing levels of the ICE U.S. Treasury 7-10 Year Bond Index from January 1, 2015 through June 12, 2020 (using hypothetical performance data and historical closing levels). Since the ICE U.S. Treasury 7-10 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 ICE’s 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 7-10 Year Bond Index on April 1, 2016.
“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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iShares ® 20+ Year Treasury Bond ETF
The shares of the iShares® 20+ Year Treasury 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 ICE U.S. Treasury 20+ Year Bond Index (the “index”). Prior to April 1, 2016, the ETF tracked the Barclays U.S. 20+ Year Treasury Bond Index.
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The ETF’s investment advisor is BlackRock Fund Advisors (“BFA”).
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The ETF’s shares trade on the NASDAQ under the ticker symbol “TLT”.
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The iShares® Trust’s SEC CIK Number is 0001100663.
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The ETF’s inception date was July 22, 2002.
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The ETF’s 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 paid a management fee from the ETF based on a percentage of the ETF’s average daily net assets, at an annual rate of 0.15%. BFA is responsible for substantially all expenses of the ETF, except interest expenses, taxes, brokerage expenses, future distribution fees or expenses and extraordinary expenses. As of March 31, 2020, the expense ratio of the ETF was 0.15% 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 29, 2020) 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 us.ishares.com/product_info/fund/overview/TLT.htm. We are not incorporating by reference the website, the sources listed above or any material they include in this index 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 ETF’s 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 ETF’s total assets (including the value of the collateral received).
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The ETF’s 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® 20+ Year Treasury Bond ETF Top Ten Holdings as of June 12, 2020*
U.S. Treasury Bond
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Percentage (%)
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3.00% due 8/15/2048
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9.46%
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2.50% due 2/15/2046
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6.85%
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2.50% due 5/15/2046
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6.33%
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2.88% due 5/15/2043
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6.30%
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3.13% due 5/15/2048
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5.73%
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3.00% due 2/15/2049
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5.72%
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3.13% due 8/15/2044
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5.40%
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3.00% due 2/15/2048
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5.09%
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2.75% due 8/15/2047
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4.68%
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2.88% due 5/15/2049
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4.13%
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Total
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59.69%
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The following table displays additional information about the bonds held by the ETF and the annualized performance difference, in each case as of June 12, 2020*. We obtained the information in the table below from the iShares® website without independent verification.
Weighted average maturity
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25.91 years
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Weighted average coupon
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2.88%
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Effective duration
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19.01 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 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 June 12, 2020*, the ETF’s holdings were comprised of 44 U.S. Treasury bonds (99.43% of holdings) and cash and/or derivatives (0.57% of holdings). Of the ETF’s 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, Moody’s and Fitch ratings for a security.
*Prior to April 1, 2016, the ETF tracked the Barclays U.S. 20+ Year Treasury Bond Index.
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 ETF’s portfolio and those included in the index, pricing differences, differences in transaction costs, the ETF holding uninvested cash, differences in timing of the accrual of or the valuation of distributions, the requirements to maintain pass-through tax treatment, portfolio transactions carried out to minimize the distribution of capital gains to shareholders, changes to the index or the costs to the ETF 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 ETF’s tracking error will not exceed 5%. The ETF’s 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 May 31, 2020, iShares® reported the following average annual returns on the market price of the ETF’s shares and the index. The market price of the ETF’s 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, 26.60%; 3 years, 12.23%; 5 years, 8.52%; 10 years, 8.43%; since inception, 7.66%; index: 1 year, 27.34%; 3 years, 12.39%; 5 years, 8.56%; 10 years, 8.56%; since ETF inception, 7.78%. Prior to April 1, 2016, the ETF tracked the Barclays U.S. 20+ Year Treasury Bond Index.
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The ICE U.S. Treasury 20+ Year Bond Index
The index is sponsored by ICE Data Indices, LLC (“IDI”). 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 or equal to 20 years.
The ICE Data Indices, LLC Index Governance Committee (the “governance committee”) is responsible for governance and oversight of the index along with oversight of the ICE Data Index Services team (the “IDIS”), 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 IDIS is responsible for implementing the changes and notifying subscribers. Where a change is material, IDI will consult with stakeholders and subscribers in accordance with the IDI consultation process. For other changes, advance notice will be provided, where possible, to allow stakeholders and subscribers appropriate preparation to implement the change.
Eligibility Criteria and Inclusion Rules
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 or equal to 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 Calculation
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 and the weight for the constituent. Calculations are performed daily, using bid prices at 3 p.m. Eastern Time.
Index Maintenance
The index is rebalanced at each month end. The new index for the next month is available three days prior to month end and is intended to reflect the constituent changes from the prior rebalancing date based on index eligibility. 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. The index is rebalanced after the end of the last calendar day of each month. Pro forma files are provided from the fourth to last business day of the month through the last business day of the month with each day’s file reflecting the most current projected index holdings based on available data up to and including that date.
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.
Current Composition of the Index
As of June 12, 2020, the index’s holdings were comprised of 40 U.S. Treasury bonds. The following table displays additional information about the bonds held by the index as of June 12, 2020. We obtained the information in the table below from the ICE website without independent verification.
Weighted average maturity
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25.89 years
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Weighted average coupon
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2.92%
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Historical Closing Prices of the ETF’s 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.
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 index 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 cash settlement 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 January 1, 2015 through June 12, 2020. 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.
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Hypothetical and Historical Closing Levels of the ICE U.S. Treasury 20+ Year 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 Index’s historical or hypothetical performance, about the performance of the ETF. We cannot give you any assurance that the future performance of the ETF’s 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 January 1, 2015 through June 12, 2020 (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 ICE’s 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.
“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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THE NOTIONAL INTEREST RATE
The cash constituent reflects the notional return accruing to a hypothetical investor from an investment in a money market account denominated in U.S. dollars that accrues interest at a rate determined by reference to the notional interest rate, which is 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 “U.K. Regulators Will No Longer Persuade or Compel Banks to Submit Rates for Calculation of LIBOR After 2021; Interest Rate Benchmark May Be Discontinued” and “Additional Risk Factors Specific to Your Notes — Regulation and Reform of “Benchmarks”, Including LIBOR and Other Types of Benchmarks, May Cause such “Benchmarks” to Perform Differently Than in the Past, or to Disappear Entirely, or Have Other Consequences Which Cannot be Predicted” 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 rate.
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 January 1, 2015 through June 12, 2020. We obtained the 3-month USD LIBOR rates shown in the graph below from Reuters, without independent verification.
The notes are not sponsored, endorsed, sold or promoted by ICE Benchmark Administration and ICE Benchmark Administration makes no representation regarding the advisability of investing in the notes.
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