Asset Class
|
Percent of Index Business Days That Asset Class
Maximum Weight Restriction Reduced an Index
Underlying Asset Weighting or Prevented an Eligible
Underlying Asset From Becoming an Index Underlying
Asset Due to its Affect on Some or All of the Weight
Averaging Period With Respect to the Relevant Index
Business Day
|
Broad-Based Equities
|
3.22%
|
Fixed Income
|
25.66%
|
Emerging Markets
|
0.94%
|
Alternatives
|
21.62%
|
Commodities
|
0.94%
|
Inflation
|
36.60%
|
Cash Equivalent
|
20.56%
|
The following chart sets forth the percentage of index business days during the period from August 29, 2008 to October 12, 2018 on which the underlying
asset maximum weight restrictions reduced the weighting of the applicable index underlying assets due to its affect on some or all of the weight averaging period with respect to the relevant index business day.
These percentages are based on the historical index information and hypothetical index data previously supplied above. You should not take the historical information or hypothetical data as an indication of the future performance of the index.
Eligible Underlying Asset
|
Percent of Index Business Days That Underlying Asset
Maximum Weight Restriction Reduced an Index
Underlying Asset Weighting or Prevented an Eligible
Underlying Asset From Becoming an Index Underlying
Asset Due to its Affect on Some or All of the Weight
Averaging Period With Respect to the Relevant Index
Business Day
|
SPDR® S&P 500® ETF Trust
|
24.44%
|
iShares® MSCI EAFE ETF
|
10.75%
|
iShares® MSCI Japan ETF
|
9.45%
|
iShares® 20+ Year Treasury Bond ETF
|
23.93%
|
iShares® iBoxx $ Investment Grade Corporate Bond ETF
|
23.26%
|
iShares® iBoxx $ High Yield Corporate Bond ETF
|
20.16%
|
iShares® 7-10 Year Treasury Bond ETF
|
33.74%
|
iShares® MSCI Emerging Markets ETF
|
0.94%
|
iShares® U.S. Real Estate ETF
|
0.94%
|
iShares® U.S. Preferred Stock ETF
|
47.27%
|
iShares® Nasdaq Biotechnology ETF
|
25.46%
|
SPDR® S&P® Oil & Gas Exploration & Production ETF
|
0.00%
|
SPDR® Gold Trust
|
5.37%
|
iShares® TIPS Bond ETF
|
36.60%
|
Money Market Position
|
20.56%
|
The index ratably rebalanced some or all of the exposure to the index ETFs into the money market position on 22.87% of the total return index rebalancing days during the period from August 29, 2008 to October 12, 2018, based on the historical index information and hypothetical index data previously supplied above. Daily total
return index rebalancing occurs on some daily base index rebalancing days because daily base index rebalancing is based on realized volatility over the three realized volatility look-back periods (the prior six months, three months and one month
for the nine-month, six-month and three-month return look-back periods, respectively) and the daily total return index rebalancing mechanic is based on the realized volatility of the base index for the applicable volatility cap period, which is
the prior one month. You should not take the historical information or hypothetical data as an indication of the future performance of the index.
The following chart displays the percentage of index exposure to the index underlying assets during the period from August 29, 2008 to October 12,
2018 based on the historical index information and hypothetical index data previously supplied above. (In the chart, this historical information can be found to the right of the vertical solid line marker.) A percentage less than 100% means that
a daily total return index rebalancing has occurred, reducing exposure in the existing ETFs and increasing exposure to the money market position. You should not take the
historical information or hypothetical data as an indication of the future performance of the index.
Examples of Index Return Calculations
The following examples are provided to illustrate how the return on the index is calculated on an index business day given the key
assumptions specified below. The examples assume the specified index underlying assets specified below. The return of the index underlying assets will be calculated as the sum
of the products, as calculated for each index underlying asset, of the return for each index underlying asset multiplied by its weighting, expressed as a percentage. The examples are based on a range of final levels for the specified index underlying assets that are entirely hypothetical; no one can predict which eligible
underlying assets will be chosen as index underlying assets on any day, the weightings of the index underlying assets or what the returns will be for any index underlying assets. The actual performance of the index on any index business day may
bear little relation to the hypothetical examples shown below or to the historical index performance information and hypothetical performance data shown elsewhere in this prospectus supplement. These examples should not be taken as an indication
or prediction of future performance of the index and investment results. The numbers in the examples below have been rounded for ease for analysis.
Key Assumptions
|
|
Index underlying assets during hypothetical period and percentage weighting
|
EEM 20%
LQD 5%
IYR 20%
PFF 5%
Money Market Position 50%
|
Notional interest rate
|
6% per annum
|
Neither an index market disruption event nor a non-index business day occurs.
|
No change in or affecting any of the index underlying assets, index stocks or the policies of the applicable investment advisor or the
method by which the underlying indices are calculated.
|
No dividends are paid on any index ETF.
|
Example 1: Each index underlying asset appreciates. The sum of the weighted returns of each index underlying
asset is greater than the sum of the notional interest rate plus the accrued portion of the 0.65% per annum for the day. The volatility cap is never breached.
|
Column A
|
Column B
|
Column C
|
Column D
|
Column E
|
|
|
|
|
|
|
Index
Underlying Asset
(Ticker)
|
Hypothetical
Initial Level
|
Hypothetical
Final Level
|
Return of Index
Underlying
Asset (Column
B /
Column A)-1
|
Weighting
|
Column C x
Column D
|
EEM
|
100.000
|
100.500
|
0.500%
|
20.000%
|
0.100%
|
LQD
|
100.000
|
100.750
|
0.750%
|
5.000%
|
0.038%
|
IYR
|
100.000
|
101.000
|
1.000%
|
20.000%
|
0.200%
|
PFF
|
100.000
|
101.250
|
1.250%
|
5.000%
|
0.063%
|
Money Market Position
|
100.000
|
100.017
|
0.017%
|
50.000%
|
0.008%
|
|
|
|
|
|
|
|
|
|
|
Return of Index Underlying Assets:
|
0.408%
|
|
|
|
|
Return of Notional Cash Investment in the Notional Interest Rate:
|
0.017%
|
|
|
|
|
Accrued Portion of the 0.65% Per Annum:
|
0.002%
|
|
|
|
|
Index Return:
|
0.390%
|
In this example, the index underlying assets all had positive returns. The return of the index underlying assets prior to adjustment for the
notional interest rate and the accrued portion of the 0.65% per annum for the day equals 0.408% for the day and, once the notional interest rate for the day and accrued portion of the 0.65% per annum for the day are subtracted, the return of the
index for the day equals 0.390%.
Example 2: Each index underlying asset appreciates. The sum of the weighted returns of each index underlying
asset is less than the sum of the notional interest rate plus the accrued portion of the 0.65% per annum for the day. The volatility cap is never breached.
|
Column A
|
Column B
|
Column C
|
Column D
|
Column E
|
|
|
|
|
|
|
Index
Underlying Asset
(Ticker)
|
Hypothetical
Initial Level
|
Hypothetical
Final Level
|
Return of Index
Underlying
Asset (Column B /
Column A)-1
|
Weighting
|
Column C x
Column D
|
EEM
|
100.000
|
100.010
|
0.010%
|
20.000%
|
0.002%
|
LQD
|
100.000
|
100.010
|
0.010%
|
5.000%
|
0.001%
|
IYR
|
100.000
|
100.010
|
0.010%
|
20.000%
|
0.002%
|
PFF
|
100.000
|
100.010
|
0.010%
|
5.000%
|
0.001%
|
Money Market Position
|
100.000
|
100.017
|
0.017%
|
50.000%
|
0.008%
|
|
|
|
|
|
|
|
|
|
|
Return of Index Underlying Assets:
|
0.013%
|
|
|
|
|
Return of Notional Cash Investment in the Notional Interest Rate:
|
0.017%
|
|
|
|
|
Accrued Portion of the 0.65% Per Annum:
|
0.002%
|
|
|
|
|
Index Return:
|
-0.005%
|
In this example, the index underlying assets all had positive returns. The return of the index underlying assets prior to adjustment for the
notional interest rate equals 0.013% for the day and, since the sum of the notional interest rate plus the accrued portion of the 0.65% per annum for the day is greater than such return, once the notional interest rate for the day and accrued
portion of the 0.65% per annum for the day are subtracted, the return of the index for the day is negative and equals -0.005%.
Example 3: Each index underlying asset depreciates. The volatility cap is never breached.
|
Column A
|
Column B
|
Column C
|
Column D
|
Column E
|
|
|
|
|
|
|
Index
Underlying Asset
(Ticker)
|
Hypothetical
Initial Level
|
Hypothetical
Final Level
|
Return of Index
Underlying
Asset (Column B /
Column A)-1
|
Weighting
|
Column C x
Column D
|
EEM
|
100.000
|
99.500
|
-0.500%
|
20.000%
|
-0.100%
|
LQD
|
100.000
|
99.250
|
-0.750%
|
5.000%
|
-0.038%
|
IYR
|
100.000
|
99.000
|
-1.000%
|
20.000%
|
-0.200%
|
PFF
|
100.000
|
98.750
|
-1.250%
|
5.000%
|
-0.063%
|
Money Market Position
|
100.000
|
100.017
|
0.017%
|
50.000%
|
0.008%
|
|
|
|
|
|
|
|
|
|
|
Return of Index Underlying Assets:
|
-0.392%
|
|
|
|
|
Return of Notional Cash Investment in the Notional Interest Rate:
|
0.017%
|
|
|
|
|
Accrued Portion of the 0.65% Per Annum:
|
0.002%
|
|
|
|
|
Index Return:
|
-0.410%
|
In this example, the index underlying assets all had negative returns. The return of the index underlying assets prior to adjustment for the
notional interest rate and the accrued portion of the 0.65% per annum for the day equals -0.392% for the day and once the notional interest rate for the day and accrued portion of the 0.65% per annum for the day are subtracted the return of the
index for the day is further reduced and equals -0.410%.
Example 4: The index underlying assets have mixed returns. The volatility cap is never breached.
|
Column A
|
Column B
|
Column C
|
Column D
|
Column E
|
|
|
|
|
|
|
Index
Underlying Asset
(Ticker)
|
Hypothetical
Initial Level
|
Hypothetical
Final Level
|
Return of Index
Underlying
Asset (Column B /
Column A)-1
|
Weighting
|
Column C x
Column D
|
EEM
|
100.000
|
100.500
|
0.500%
|
20.000%
|
0.100%
|
LQD
|
100.000
|
100.750
|
0.750%
|
5.000%
|
0.038%
|
IYR
|
100.000
|
99.000
|
-1.000%
|
20.000%
|
-0.200%
|
PFF
|
100.000
|
98.750
|
-1.250%
|
5.000%
|
-0.063%
|
Money Market Position
|
100.000
|
100.017
|
0.017%
|
50.000%
|
0.008%
|
|
|
|
|
|
|
|
|
|
|
Return of Index Underlying Assets:
|
-0.117%
|
|
|
|
|
Return of Notional Cash Investment in the Notional Interest Rate:
|
0.017%
|
|
|
|
|
Accrued Portion of the 0.65% Per Annum:
|
0.002%
|
|
|
|
|
Index Return:
|
-0.135%
|
In this example, three of the index underlying assets had a negative return and two had positive returns. The return of the index underlying
assets prior to adjustment for the notional interest rate and the accrued portion of the 0.65% per annum for the day equals -0.117% for the day and, once the notional interest rate for the day and accrued portion of the 0.65% per annum for the
day are subtracted, the return of the index for the day is further reduced and equals -0.135%.
Example 5: As a result of daily total return index rebalancing, the index ratably rebalances into the money
market position on an index business day.
|
|
|
Column A
|
Column B
|
Column C
|
Column D
|
Column E
|
|
|
Index
Underlying
Asset
(Ticker)
|
Hypothetical
Initial Level
|
Hypothetical
Final Level
|
Return of Index
Underlying
Asset (Column
B /
Column A)-1
|
Weighting
|
Column C x
Column D
|
With Initial Exposure to the Money Market Position (prior to daily total return index rebalancing)
|
|
EEM
|
100.000
|
100.500
|
0.500%
|
20.000%
|
0.100%
|
|
LQD
|
100.000
|
100.750
|
0.750%
|
5.000%
|
0.038%
|
|
IYR
|
100.000
|
101.000
|
1.000%
|
20.000%
|
0.200%
|
|
|
PFF
|
100.000
|
101.250
|
1.250%
|
5.000%
|
0.063%
|
|
|
Money Market Position
|
100.000
|
100.017
|
0.017%
|
50.000%
|
0.008%
|
|
|
|
|
|
|
Return of Index Underlying Assets:
|
0.408%
|
|
|
|
|
|
|
Return of Notional Cash Investment in the Notional Interest Rate:
|
0.017%
|
|
|
|
|
|
|
Accrued Portion of the 0.65% Per Annum:
|
0.002%
|
|
|
|
|
|
|
Index Return:
|
0.390%
|
|
|
|
Column A
|
Column B
|
Column C
|
Column D
|
Column E
|
|
|
Index
Underlying
Asset
(Ticker)
|
Hypothetical
Initial Level
|
Hypothetical
Final Level
|
Return of Index
Underlying
Asset (Column
B /
Column A)-1
|
Weighting
|
Column C x
Column D
|
With Additional Exposure to the Money Market Position (after daily total return index rebalancing)
|
|
EEM
|
100.000
|
100.500
|
0.500%
|
16.000%
|
0.080%
|
|
LQD
|
100.000
|
100.750
|
0.750%
|
4.000%
|
0.030%
|
|
IYR
|
100.000
|
101.000
|
1.000%
|
16.000%
|
0.160%
|
|
|
PFF
|
100.000
|
101.250
|
1.250%
|
4.000%
|
0.050%
|
|
|
Money Market Position
|
100.000
|
100.017
|
0.017%
|
60.000%
|
0.010%
|
|
|
|
|
|
|
Return of Index Underlying Assets:
|
0.330%
|
|
|
|
|
|
|
Return of Notional Cash Investment in the Notional Interest Rate:
|
0.017%
|
|
|
|
|
|
|
Accrued Portion of the 0.65% Per Annum:
|
0.002%
|
|
|
|
|
|
|
Index Return:
|
0.312%
|
In this example, in order to highlight the effect of rebalancing into the money market position as a result of daily total return
index rebalancing, we have assumed that the realized volatility for the applicable cap period exceeds the volatility cap by 1.5%, thereby reducing the exposure to the base index (and, consequently, each index underlying asset) by 20%. We have
shown what the index underlying assets’ returns would have been for the index business day both without and with the daily total return index rebalancing. Since the returns on EEM, LQD, IYR and PFF were higher than the money market position, the
increased weighting to the money market position for the index business day caused the return of the index to be lower than it would have been without the daily total return index rebalancing feature.
|
We cannot predict which eligible underlying assets will be chosen as
index underlying assets on any day, the weights of the index underlying assets or what the final levels will be for any index underlying assets or the notional interest rate. The actual amount that you will receive maturity and the rate
of return on the offered notes will depend on the performance of the index which will be determined by the index underlying assets chosen and their
weightings.
|
|
THE ELIGIBLE UNDERLYING ASSETS
The defined terms provided in the description of each eligible underlying asset apply only in the description in which they are used. Unless
otherwise indicated, these definitions are not intended to be used in other sections of this prospectus supplement.
The eligible underlying asset descriptions below are provided in the following order:
ASSET CLASS
|
|
ELIGIBLE UNDERLYING ASSET
|
TICKER
|
Broad-Based Equities
|
|
SPDR® S&P 500® ETF Trust
|
SPY
|
|
iShares® MSCI EAFE ETF
|
EFA
|
|
iShares® MSCI Japan ETF
|
EWJ
|
Fixed Income
|
|
iShares® 20+ Year Treasury Bond ETF
|
TLT
|
|
iShares® iBoxx $ Investment Grade Corporate Bond ETF
|
LQD
|
|
iShares® iBoxx $ High Yield Corporate Bond ETF
|
HYG
|
|
iShares® 7-10 Year Treasury Bond ETF
|
IEF
|
Emerging Markets
|
|
iShares® MSCI Emerging Markets ETF
|
EEM
|
Alternatives
|
|
iShares® U.S. Real Estate ETF
|
IYR
|
|
iShares® U.S. Preferred Stock ETF
|
PFF
|
|
iShares® Nasdaq Biotechnology ETF
|
IBB
|
Commodities
|
|
SPDR® S&P® Oil & Gas Exploration & Production ETF
|
XOP
|
|
SPDR® Gold Trust
|
GLD
|
Inflation
|
|
iShares® TIPS Bond ETF
|
TIP
|
Cash Equivalent
|
|
Money Market Position
|
N/A
|
Some Common Concepts
Each of the eligible ETFs may be an exchange-traded fund, a unit investment trust, a commodity pool or another entity. Each
description of an eligible ETF provides information about the particular structure (type of entity) of that eligible ETF. Each of the eligible ETFs files information with the SEC. Information provided to or filed with the SEC can be inspected and
copied at the public reference facilities maintained by the SEC or through the SEC’s website at sec.gov. The descriptions below will provide the “CIK number” for each of the eligible ETFs, which is an identifying number that will assist you in
finding information about the eligible ETFs filed with the SEC.
Each of the eligible ETFs also has certain concepts in common with most or all of the other eligible ETFs. We have described some
of these common concepts below.
Investment Objective
The investment objective of most eligible ETFs is to achieve investment results that correspond generally to the price and yield
performance, before fees and expenses, of a particular index. That type of eligible ETF, sometimes called a “tracking ETF,” uses a passive or indexing approach to try to achieve the ETF’s investment objective. The investment advisor to the ETF
does not try to beat the index; the ETF tracks and does not seek temporary defensive positions when markets decline or appear overvalued. This means, among other things, that a tracking ETF typically will not sell a particular holding just
because it is performing poorly. Instead, the ETF seeks to track the index regardless of whether the index level is increasing or decreasing. The descriptions below will indicate the investment objective of each ETF and will indicate which index
a particular ETF tracks if it is a tracking ETF. The description also will state how much of the ETF’s assets generally will be invested in the securities in the index and what else the ETF may invest in. The descriptions also will state the
strategy the investment advisor uses to track the index.
The eligible ETFs that track an equity index seek to track the performance of the “total return” version of such index. A total return index
represents the total return earned in a portfolio that tracks the price return index and reinvests dividend income in the overall index, not in the specific stock paying the dividend. The difference between the price return calculation and the
total return calculation of an index is that, with respect to the price return calculation, changes in the index level reflect changes in stock prices, whereas with respect to the total return calculation of the index, changes in the index level
reflect both movements in stock prices and the reinvestment of dividend income. In addition, some of the eligible ETFs track an index that is calculated on a net daily total return basis, which tracks the price return index and
reinvests dividend income in the overall index, except that the dividend income is reinvested net of certain withholding taxes.
Notwithstanding an eligible ETF’s investment objective to track the performance of the total return version of an index, 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 index such ETF tracks. See “Additional Risk Factors Specific to Your Notes — You Have No Shareholder Rights or Rights to Receive Any Shares or Units of Any Eligible ETF, or Any Assets Held by Any Eligible ETF or
the Money Market Position” on page S-25 of this prospectus supplement.
Tracking Error
In the case of a tracking ETF, as described above, the difference between the performance of the ETF over a period of time and the
performance of the index over such period of time is called the “tracking error” over that period of time. This is typically measured as the difference between the ETF’s returns and the index returns over the same period of time. This is also
sometimes referred to as the “correlation” between the index and the tracking ETF. An index and ETF are perfectly correlated if the correlation is 1.00 (i.e., the
tracking error is 0.00%). Tracking errors can result for a variety of reasons, but one of the common reasons is that an index is a theoretical financial calculation of the performance of certain assets, but an eligible ETF holds an actual
investment portfolio. The descriptions below will discuss some of the additional reasons for tracking errors in the eligible ETFs. The eligible ETFs provide information about the performance of the index and the performance of the eligible ETF
for the same period. In some cases, the eligible ETFs assume reinvestment of share distributions when calculating the performance of the market price of the shares.
Creation Units
Prior to trading in the secondary market, shares of an eligible ETF are issued at net asset value to certain institutional
investors (typically market makers or other broker-dealers) only in large block-size units, known as creation units. As a practical matter, only institutions, market makers or large investors purchase or redeem creation units. Except when
aggregated in creation units (or upon the liquidation of the ETF), shares of an eligible ETF are not redeemable securities. The descriptions below will describe the size of the creation units for each eligible ETF. For most investors, the
important thing to know is that redemptions of creation units may cause temporary dislocations in tracking errors for tracking ETFs.
Investment Advisor
Each of the eligible ETFs has an investment advisor. Depending on the structure of the eligible ETF, there may be other key roles
with respect to that eligible ETF. Those roles and the entities that perform them will be described below.
Indicative Values, Net Asset Value and Share Prices
Each of the eligible ETFs calculates a net asset value, or NAV, at the end of each trading day. This value represents the value of
the eligible ETF’s assets less any applicable fees and expenses. The actual trading price of an eligible ETF’s shares or units in the secondary market generally differs (and may deviate significantly during periods of market volatility) from the
eligible ETF’s daily net asset value. This is because the trading price is affected by market forces such as supply and demand, economic conditions and other factors.
The eligible ETFs are required for regulatory reasons to disseminate an approximate net asset value, often called an “indicative value,” every
fifteen seconds throughout the trading day. These indicative values are disseminated by information providers or market data vendors. These approximate or indicative values should not be viewed as a “real-time” update of the net asset value of
the ETF, because the approximate value may not be calculated in the same manner as the net asset value, which is computed once a day. The approximate value is generally based on quotes and closing prices from the securities’ local market and may
not reflect events that occur subsequent to the local market’s close. In most cases, the approximate value is not calculated by the eligible ETF and may not be calculated using the same methodology. In any event, for purposes of your notes and
the index, the trading prices of the shares or units of the eligible ETFs included in the calculation of the index will be based on the trading prices alone and not the NAV or these approximate values.
SPDR® S&P 500® ETF Trust
The units of the SPDR® S&P 500® ETF Trust (the “units”) are issued by SPDR® S&P 500® ETF Trust (the “trust”), a unit investment trust that is a registered investment company.
● |
The trust is like a tracking ETF in that it seeks investment results which correspond generally to the price and yield performance, before fees and expenses, of the index.
|
● |
The index it tracks is the S&P 500® Index (the “index”).
|
● |
The trust does not have an investment advisor. Its investments are adjusted by the trustee.
|
● |
Trustee: State Street Global Advisors Trust Company.
|
● |
Trust sponsor: PDR Services, LLC.
|
● |
The units trade on the NYSE Arca under the ticker symbol “SPY”.
|
● |
The trust’s SEC CIK Number is 0000884394.
|
● |
The inception date for purposes of the units was January 22, 1993.
|
● |
The trust’s units are issued or redeemed only in creation units of 50,000 units.
|
We obtained the following fee information from the trust’s publicly available information without independent verification. The
Trustee is entitled to receive a fee for services performed for the trust corresponding to the net asset value of the trust, at an annual rate of 0.10% per annum for the first $499,999,999 of assets, 0.08% per annum for assets over $499,999,999
and up to $2,499,999,999 and 0.06% per annum for assets of $2,500,000,000 or more (in each case reduced or increased by an adjustment amount for transaction fees, creation and redemption expenses and interest earned on cash). As of September 30,
2018, the trust’s gross expense ratio is 0.0945% per annum. The trustee has agreed to waive a portion of its fee until February 1, 2018 to the extent operating expenses exceed 0.0945% after earnings credits are applied. After February 1, 2018,
the trustee may discontinue this fee waiver.
For additional information regarding SPDR® S&P
500® ETF Trust, please consult the reports (including the Semi-Annual Report to Shareholders on Form N30-D for the period ended March 31, 2018) and other information
the trust files with the SEC. Additional information regarding the trust, 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 SPDR® S&P 500® ETF Trust website at
spdrs.com/product/fund.seam?ticker=SPY. We are not incorporating by reference the website, the sources listed above or any material they include in this prospectus supplement.
Investment Objective and Strategy
The trust seeks investment results that, before expenses, correspond generally to the price and yield performance of the index. The
trust strives to achieve its investment objective by holding a portfolio of the common stocks that are included in the index, with the weight of each stock in the trust’s portfolio substantially corresponding to the weight of such stock in the
index. Although the trust may fail to own certain securities included in the index at any particular time, the trust generally will be substantially invested in index securities.
To maintain the correspondence between the composition and weightings of the common stocks that are actually held by the trust and
the common stocks that are included in the index, the trustee adjusts the trust portfolio from time to time to conform to periodic changes made by the index sponsor to the identity and/or relative weightings of the common stocks that are included
in the index. The trustee aggregates certain of these adjustments and makes changes to the trust’s portfolio at least monthly, or more frequently in the case of significant changes to the index. The trust does not hold or trade futures or swaps
and is not a commodity pool.
The following table displays the top ten holdings and weightings by industry sector of the trust and index. (Sector designations are determined by
the trust sponsor using criteria it has selected or developed. Index and trust 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 trusts with different sponsors may reflect differences in methodology as well as actual differences in the sector
composition of the indices or trusts.) We obtained the information in the tables below from the trust website without independent verification.
Top Ten Holdings of Trust and Index as of October 12, 2018
Trust Issuer
|
Percentage
of Trust (%)
|
Index Issuer
|
Percentage
of Index (%)
|
APPLE INC.
|
4.36%
|
APPLE INC.
|
4.36%
|
MICROSOFT CORPORATION
|
3.60%
|
MICROSOFT CORPORATION
|
3.60%
|
AMAZON.COM INC.
|
3.14%
|
AMAZON.COM INC.
|
3.14%
|
BERKSHIRE HATHAWAY INC. CLASS B
|
1.73%
|
BERKSHIRE HATHAWAY INC. CLASS B
|
1.73%
|
FACEBOOK INC. CLASS A
|
1.59%
|
FACEBOOK INC. CLASS A
|
1.59%
|
JPMORGAN CHASE & CO.
|
1.54%
|
JPMORGAN CHASE & CO.
|
1.54%
|
JOHNSON & JOHNSON
|
1.54%
|
JOHNSON & JOHNSON
|
1.54%
|
EXXON MOBIL CORPORATION
|
1.48%
|
EXXON MOBIL CORPORATION
|
1.48%
|
ALPHABET INC. CLASS C
|
1.46%
|
ALPHABET INC. CLASS C
|
1.46%
|
ALPHABET INC. CLASS A
|
1.43%
|
ALPHABET INC. CLASS A
|
1.43%
|
Weighting by Sector of Trust and Index as of October 12,
2018*ǂ
Sector
|
Percentage of Trust (%)
|
Percentage of Index (%)
|
|
|
|
Information Technology
|
20.83%
|
20.83%
|
Financials
|
13.44%
|
13.43%
|
Health Care
|
15.14%
|
15.14%
|
Consumer Discretionary
|
10.15%
|
10.15%
|
Consumer Staples
|
6.86%
|
6.86%
|
Industrials
|
9.66%
|
9.65%
|
Energy
|
6.07%
|
6.07%
|
Utilities
|
2.98%
|
3.00%
|
Real Estate
|
2.63%
|
2.64%
|
Materials
|
2.38%
|
2.39%
|
Communication Services
|
9.86%
|
9.86%
|
* Percentages may not sum to 100% due to rounding
ǂ The
Global Industry Classification Structure, which S&P Dow Jones Indices LLC utilizes to classify the constituents of the index,was updated in September 2018. Please see “ ― The S&P 500® Index” below for additional information about these updates.
Correlation
Although the trust intends to track the performance of the index as closely as possible, the trust’s return may not match or
achieve a high degree of correlation with the return of the index due to expenses and transaction costs incurred in adjusting the portfolio. In addition, it is possible that the trust may not always fully replicate the performance of the index
due to unavailability of certain index securities in the secondary market or due to other extraordinary circumstances (e.g., if trading in a security has been halted).
For the period ended September 30, 2018, the SPDR®
website gave the following performance figures for market price of a unit and the index: unit—1 year on an annualized basis, 17.77%; 3 years on an annualized basis, 17.16%; 5 years on an annualized basis, 13.79%; 10 years on an annualized basis,
11.83%; since inception on an annualized basis, 9.70%; index—1 year on an annualized basis, 17.91%; 3 years on an annualized basis, 17.31%; 5 years on an annualized basis, 13.95%; 10 years on an annualized basis, 11.97%; since inception on an
annualized basis, 9.84%.
Unit Dividends
Holders of units receive dividends on the last business day of each April, July, October and January in an amount corresponding to the amount of
any cash dividends declared on the common stocks held by the trust, net of the fees and expenses associated with the operation of the trust, and taxes, if applicable. Because of the fees and expenses, the dividend yield for units is ordinarily
less than the hypothetical dividend yield of the index. The unit dividends will be
reflected in the calculation of the index as described under “— Calculation of the Total Return of the Index” on page S-75 below.
The S&P 500® Index
The index includes a representative sample of 500 companies in leading industries of the U.S. economy. The 500 companies are not
the 500 largest companies listed on the NYSE and not all 500 companies are listed on the NYSE. S&P chooses companies for inclusion in the index with an aim of achieving a distribution by broad industry groupings that approximates the
distribution of these groupings in the common stock population of the U.S. equity market. Although the index contains 500 constituent companies, at any one time it may contain greater than 500 constituent trading lines since some companies
included in the index prior to July 31, 2017 may be represented by multiple share class lines in the index. The index is calculated, maintained and published by S&P Dow Jones Indices LLC (the “S&P”). In addition, information may be
obtained from other sources including, but not limited to, press releases, newspaper articles, other publicly available documents, and on the following websites: us.spindices.com/indices/equity/SP-500 and spdji.com. We are not incorporating by
reference the websites, the sources listed above or any material they include in this prospectus supplement.
S&P intends for the index to provide a performance benchmark for the large-cap U.S. equity markets. Constituent changes are
made on an as-needed basis and there is no schedule for constituent reviews. Constituent changes are generally announced one to five business days prior to the change. Relevant criteria for additions to the index that are employed by S&P
include: the company proposed for addition should have an unadjusted company market capitalization of $6.1 billion or more (for spin-offs, eligibility is determined using when-issued prices, if available); using composite pricing and volume, the
ratio of annual dollar value traded in the proposed constituent to float-adjusted market capitalization of that company should be 1.00 or greater and the stock should trade a minimum of 250,000 shares in each of the six months leading up to the
evaluation date; the company must be a U.S. company (characterized as a Form 10-K filer whose U.S. portion of fixed assets and revenues constitutes a plurality of the total and with a primary listing of the common stock on the NYSE, NYSE Arca,
NYSE American (formerly NYSE MKT), NASDAQ Global Select Market, NASDAQ Select Market, NASDAQ Capital Market, Bats BZX, Bats BYX, Bats EDGA, Bats EDGX or IEX (each, an “eligible exchange”)); the proposed constituent has a public float of 50% or
more of its stock; the inclusion of the company will contribute to sector balance in the index relative to sector balance in the market in the relevant market capitalization range; financial viability (the sum of the most recent four consecutive
quarters’ Generally Accepted Accounting Principles (GAAP) earnings (net income excluding discontinued operations) should be positive as should the most recent quarter); and, for IPOs, the company must be traded on an eligible exchange for at
least twelve months. In addition, constituents of the S&P MidCap 400® Index and the S&P SmallCap 600® Index can be added to the index without meeting the financial viability, public float and/or liquidity eligibility criteria if the S&P Index Committee decides that such an addition will enhance the
representativeness of the index as a market benchmark. Certain types of organizational structures and securities are always excluded, including business development companies (BDCs), limited partnerships, master limited partnerships, limited
liability companies (LLCs), OTC bulletin board issues, closed-end funds, ETFs, ETNs, royalty trusts, tracking stocks, preferred stock and convertible preferred stock, unit trusts, equity warrants, convertible bonds, investment trusts, rights and
American depositary receipts (ADRs). Stocks are deleted from index when they are involved in mergers, acquisitions or significant restructurings such that they no longer meet the inclusion criteria, and when they substantially violate one or more
of the addition criteria. Stocks that are delisted or moved to the pink sheets or the bulletin board are removed, and those that experience a trading halt may be retained or removed in S&P’s discretion. S&P evaluates additions and
deletions with a view to maintaining index continuity.
For constituents included in the index prior to July 31, 2017, all publicly listed multiple share class lines are included
separately in the index, subject to, in the case of any such share class line, that share class line satisfying the liquidity and float criteria discussed above and subject to certain exceptions. It is possible that one listed share class line
of a company may be included in the index while a second listed share class line of the same company is excluded. For companies that issue a second publicly traded share class to index share class holders, the newly issued share class line is
considered for inclusion if the event is mandatory and the market capitalization of the distributed class is not considered to be de minimis.
As of July 31, 2017, companies with multiple share class lines are no longer eligible for inclusion in the index. Constituents of the index prior
to July 31, 2015 with multiple share class lines will be grandfathered in and continue to be included in the index. If an index constituent reorganizes into a multiple share class line structure, that company will be reviewed for continued
inclusion in the index at the discretion of the S&P Index Committee.
S&P divides the 500 companies included in the index into eleven Global Industry Classification Sectors: Consumer Discretionary,
Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Real Estate, Telecommunication Services and Utilities. As of the close of business on September 21, 2018, S&P and MSCI, Inc. updated the Global
Industry Classification Sector structure. Among other things, the update broadened the Telecommunications Services sector and renamed it the Communication Services sector. The renamed sector includes the previously existing Telecommunication
Services Industry group, as well as the Media Industry group, which was moved from the Consumer Discretionary sector and renamed the Media & Entertainment Industry group. The Media & Entertainment Industry group contains three industries:
Media, Entertainment and Interactive Media & Services. The Media industry continues to consist of the Advertising, Broadcasting, Cable & Satellite and Publishing sub-industries. The Entertainment industry contains the Movies &
Entertainment sub-industry (which includes online entertainment streaming companies in addition to companies previously classified in such industry prior to September 21, 2018) and the Interactive Home Entertainment sub-industry (which includes
companies previously classified in the Home Entertainment Software sub-industry prior to September 21, 2018 (when the Home Entertainment Software sub-industry was a sub-industry in the Information Technology sector)), as well as producers of
interactive gaming products, including mobile gaming applications). The Interactive Media & Services industry and sub-industry includes companies engaged in content and information creation or distribution through proprietary platforms, where
revenues are derived primarily through pay-per-click advertisements, and includes search engines, social media and networking platforms, online classifieds and online review companies. The Global Industry Classification Sector structure changes
are effective for the S&P 500® Index as of the open of business on September 24, 2018 to coincide with the September 2018 quarterly rebalancing.
Calculation of the Total Return of the Index
The trust tracks the performance of the total return version of the index and the index is calculated using a base-weighted
aggregative methodology. The total return calculation begins with the price return of the index. The value of the price return index on any day for which an index value is published is determined by a fraction, the numerator of which is the
aggregate of the market price of each stock in the index times the number of shares of such stock included in the index, and the denominator of which is the divisor, which is described more fully below. The “market value” of any underlier stock
is the product of the market price per share of that stock times the number of the then-outstanding shares of such underlier stock that are then included in the index.
The index is also sometimes called a “base-weighted aggregative index” because of its use of a divisor. The “divisor” is a value
calculated by S&P that is intended to maintain conformity in index values over time and is adjusted for all changes in the underlier stocks’ share capital after the “base date” as described below. The level of the index reflects the total
market value of all underlier stocks relative to the index’s base date of 1941-43.
In addition, the index is float-adjusted, meaning that the share counts used in calculating the index reflect only those shares
available to investors rather than all of a company’s outstanding shares. S&P seeks to exclude shares held by certain shareholders concerned with the control of a company, a group that generally includes the following: officers and directors
and related individuals whose holdings are publicly disclosed, private equity, venture capital, special equity firms, publicly traded companies that hold shares for control in another company, strategic partners, holders of restricted shares,
employee stock ownership plans, employee and family trusts, foundations associated with the company, holders of unlisted share classes of stock, government entities at all levels (except government retirement or pension funds) and any individual
person listed as a 5% or greater shareholder in a company as reported in regulatory filings (collectively, “control holders”). To this end, S&P excludes all share-holdings (other than depositary banks, pension funds, mutual funds, exchange
traded fund providers, 401(k) plans of the company, government retirement and pension funds, investment funds of insurance companies, asset managers and investment funds, independent foundations, savings plans and investment plans) with a
position greater than 5% of the outstanding shares of a company from the float-adjusted share count to be used in index calculations.
The exclusion is accomplished by calculating an Investable Weight Factor (“IWF”) for each stock that is part of the numerator of
the float-adjusted index fraction described above:
IWF = (available float shares) / (total shares outstanding)
where available float shares is defined as total shares outstanding less shares held by control holders. In most cases, an IWF is
reported to the nearest one percentage point. For companies with multiple share class lines, a separate IWF is calculated for each share class line.
Once the price return index has been calculated, the total return index is calculated. First, the total daily dividend for each stock in the index
is calculated by multiplying the per share dividend by the number of shares included in the index. Then
the index dividend is calculated by aggregating the total daily dividends for each of the index stocks (which may be zero for some
stocks) and dividing by the divisor for that day. Next the daily total return of the index is calculated as a fraction minus 1, the numerator of which is the sum of
the index level plus the index dividend and the denominator of which is the index level on the previous day. Finally, the total return index for that day is calculated
as the product of the value of the total return index on the previous day times the sum of 1 plus the index daily total return for that day.
Maintenance of the Index
In order to keep the index comparable over time S&P engages in an index maintenance process. The maintenance process involves
changing the constituents as discussed above, and also involves maintaining quality assurance processes and procedures, adjusting the number of shares used to calculate the index, monitoring and completing the adjustments for company additions
and deletions, adjusting for stock splits and stock dividends and adjusting for other corporate actions. In addition to its daily governance of indices and maintenance of the index methodology, at least once within any 12 month period, the
S&P Index Committee reviews the index methodology to ensure the index continues to achieve the stated objective, and that the data and methodology remain effective. The S&P Index Committee may at times consult with investors, market
participants, security issuers included or potentially included in the index, or investment and financial experts.
Divisor Adjustments
The two types of adjustments primarily used by S&P are divisor adjustments and adjustments to the number of shares (including
float adjustments) used to calculate the index. Set forth below under “Adjustments for Corporate Actions” is a table of certain corporate events and their resulting effect on the divisor and the share count. If a corporate event requires an adjustment to the divisor, that event has the effect of altering the market value of the
affected underlier stock and consequently of altering the aggregate market value of the underlier stocks following the event. In order that the level of the index not be affected by the altered market value (which could be an increase or
decrease) of the affected underlier stock, S&P generally derives a new divisor by dividing the post-event market value of the underlier stocks by the pre-event index value, which has the effect of reducing the index’s post-event value to the
pre-event level.
Changes to the Number of Shares of a Constituent
The index maintenance process also involves tracking the changes in the number of shares included for each of the index companies.
The timing of adjustments to the number of shares depends on the type of event causing the change, and whether the change represents 5% or more of the total share count (for companies with multiple share class lines, the 5% threshold is based on
each individual share class line rather than total company shares). Changes as a result of mergers or acquisitions are implemented when the transaction occurs. At S&P’s discretion, however, de minimis merger and acquisition changes may be
accumulated and implemented with the updates made at the quarterly share updates as described below. Changes in a constituent’s total shares of 5% or more due to public offerings (which must be underwritten, have a publicly available prospectus
or prospectus summary filed with the Securities and Exchange Commission and include a public confirmation that the offering has been completed) are implemented as soon as reasonably possible. Other changes of 5% or more are made weekly and are
announced on Fridays for implementation after the close of trading on the following Friday. For changes of less than 5%, on the third Friday of the last month in each calendar quarter, S&P updates the share totals of companies in the index as
required by any changes in the number of shares outstanding. S&P implements a share / IWF freeze beginning after the market close on the Tuesday preceding the second Friday of each quarterly rebalancing month and ending after the market close
on the third Friday of the quarterly rebalancing month. During this frozen period, shares and IWFs are not changed except for certain corporate action events (merger activity, stock splits and rights offerings).
Adjustments for Corporate Actions
There is a large range of corporate actions that may affect companies included in the index. Certain corporate actions require
S&P to recalculate the share count or the float adjustment or to make an adjustment to the divisor to prevent the value of the index from changing as a result of the corporate action. This helps ensure that the movement of the index does not
reflect the corporate actions of individual companies in the index.
Spin-Offs
As a general policy, a spin-off security is added to the index at a zero price at the market close of the day before the ex-date (with no divisor
adjustment). The spin-off security will remain in the index if it meets all eligibility criteria. If the spin-off security is determined ineligible to remain in the index, it will generally be removed after at least one day of regular way
trading (with a divisor adjustment). If there is a gap between the ex-date and distribution date (or payable date), or if the
spin-off security does not trade regular way on the ex-date, the spin-off security is kept in the index until the spin-off security
begins trading regular way.
Corporate Action
|
|
Share Count Revision
Required?
|
|
Divisor Adjustment Required?
|
Stock split
|
|
Yes — share count is revised to reflect new count.
|
|
No — share count and price changes are off-setting
|
Change in shares outstanding (secondary issuance, share repurchase and/or share buy-back)
|
|
Yes — share count is revised to reflect new count.
|
|
Yes
|
Special dividends
|
|
No
|
|
Yes — calculation assumes that share price drops by the amount of the dividend; divisor adjustment reflects this
change in index market value
|
Change in IWF
|
|
No
|
|
Yes — divisor change reflects the change in market value caused by the change to an IWF
|
Company added to or deleted from the S&P 500® Index
|
|
No
|
|
Yes — divisor is adjusted by the net change in market value, calculated as the shares issued multiplied by the price
paid
|
Rights Offering
|
|
No
|
|
Yes — divisor adjustment reflects increase in market capitalization (calculation assumes that offering is fully subscribed)
|
Recalculation Policy
S&P reserves the right to recalculate and republish the index at its discretion in the event one of the following issues has
occurred: (1) incorrect or revised closing price of one or more constituent securities; (2) missed corporate event; (3) incorrect application of corporate action or index methodology; (4) late announcement of a corporate event; or (5) incorrect
calculation or data entry error. The decision to recalculate the index is made at the discretion of the index manager and/or index committee, as further discussed below. The potential market impact or disruption resulting from the potential
recalculation is considered when making any such decision. In the event of an incorrect closing price, a missed corporate event or a misapplied corporate action, a late announcement of a corporate event, or an incorrect calculation or data entry
error that is discovered within two trading days of its occurrence, the index manager may, at his or her discretion, recalculate the index without involving the index committee. In the event any such event is discovered beyond the two trading
day period, the index committee shall decide whether the index should be recalculated. In the event of an incorrect application of the methodology that results in the incorrect composition and/or weighting of index constituents, the index
committee shall determine whether or not to recalculate the index following specified guidelines. In the event that the index is recalculated, it shall be done within a reasonable timeframe following the detection and review of the issue.
Calculations and Pricing Disruptions
Closing levels for the index are calculated by S&P based on the closing price of the individual constituents of the index as set by their
primary exchange. Closing prices are received by S&P from one of its third party vendors and verified by comparing them with prices from an alternative vendor. The vendors receive the closing price from the primary exchanges. Real-time
intraday prices are calculated similarly without a second verification. Prices used for the calculation of real time index values are based on the “Consolidated Tape”. The Consolidated Tape is an aggregation of trades for each constituent over
all regional exchanges and trading venues and includes the primary exchange. If there is a failure or
interruption on one or more exchanges, real-time calculations will continue as long as the “Consolidated Tape” is operational.
If an interruption is not resolved prior to the market close, official closing prices will be determined by following the hierarchy
set out in NYSE Rule 123C. A notice is published on the S&P website at spdji.com indicating any changes to the prices used in index calculations. In extreme
circumstances, S&P may decide to delay index adjustments or not publish the index. Real-time indices are not restated.
Unexpected Exchange Closures
An unexpected market/exchange closure occurs when a market/exchange fully or partially fails to open or trading is temporarily
halted. This can apply to a single exchange or to a market as a whole, when all of the primary exchanges are closed and/or not trading. Unexpected market/exchange closures are usually due to unforeseen circumstances, such as natural disasters,
inclement weather, outages, or other events.
To a large degree, S&P is dependent on the exchanges to provide guidance in the event of an unexpected exchange closure.
S&P’s decision making is dependent on exchange guidance regarding pricing and mandatory corporate actions.
NYSE Rule 123C provides closing contingency procedures for determining an official closing price for listed securities if the
exchange is unable to conduct a closing transaction in one or more securities due to a system or technical issue.
3:00 PM ET is the deadline for an exchange to determine its plan of action regarding an outage scenario. As such, S&P also uses
3:00 PM ET as the cutoff.
If all major exchanges fail to open or unexpectedly halt trading intraday due to unforeseen circumstances, S&P will take the
following actions:
Market Disruption Prior to Open of Trading:
(i) |
If all exchanges indicate that trading will not open for a given day, S&P will treat the day as an unscheduled market holiday. The decision will be communicated to clients as
soon as possible through the normal channels. Indices containing multiple markets will be calculated as normal, provided that at least one market is open that day. Indices which only contain closed markets will not be calculated.
|
(ii) |
If exchanges indicate that trading, although delayed, will open for a given day, S&P will begin index calculation when the exchanges open.
|
Market Disruption Intraday:
(i) |
If exchanges indicate that trading will not resume for a given day, the index level will be calculated using prices determined by the exchanges based on NYSE Rule 123C. Intraday
index values will continue to use the last traded composite price until the primary exchange publishes official closing prices.
|
Historical Closing Prices of the Units
The closing price of the units 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 units are more or less likely to increase or decrease at any time during the life of your notes. The period shown
below will be approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from
the date hereof or otherwise).
You should not take the historical closing prices of the
units as an indication of the future performance of the units. We cannot give you any assurance that the future performance of the units 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 units. Before investing in the offered notes, you should consult publicly available information to determine the relevant
units closing prices between the date of this prospectus supplement and the date of your purchase of the offered notes. The actual performance of the units 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 units from November 12, 2008 through November 12, 2018. We obtained the
closing prices shown in the graph below from Bloomberg Financial Services without independent verification.
Historical Performance of SPDR® S&P 500® ETF Trust
“SPDR®” is a registered trademark of Standard & Poor's
Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC. The index is not sponsored, endorsed, sold or promoted
by S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates make any representation regarding the advisability of investing in
the index.
iShares® MSCI EAFE ETF
The shares of the iShares® MSCI EAFE ETF (the
“ETF”) are issued by iShares® Trust, a registered investment company.
● |
The ETF is a tracking ETF that seeks investment results which correspond generally to the price and yield performance, before fees and expenses, of the index.
|
● |
The index it tracks is the MSCI EAFE Index (the “index”).
|
● |
Investment Advisor: BlackRock Fund Advisors (“BFA”).
|
● |
The ETF’s shares trade on the NYSE Arca under the ticker symbol “EFA”.
|
● |
The iShares® Trust’s SEC CIK Number is 0001100663.
|
● |
The ETF’s inception date was August 14, 2001.
|
● |
The ETF’s shares are issued or redeemed only in creation units of 600,000 shares or multiples thereof.
|
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 the ETF’s allocable portion of an aggregate management fee based on the aggregate average daily net assets of the
ETF and a set of other specified iShares® funds (the “funds”) as follows: 0.35% per annum of the aggregate net assets of the funds less than or equal to $30.0
billion, plus 0.32% per annum of the aggregate net assets of the funds on amounts in excess of $30.0 billion, up to and including $60.0 billion, plus 0.28% per annum of the aggregate net assets of the funds on amounts in excess of $60.0 billion, up to and including $90.0 billion, plus 0.252% per annum of the aggregate net assets of the funds on amounts in excess of $90.0 billion, up to and including $120.0 billion, plus 0.227% per annum of the aggregate net assets of the funds on amounts in excess of $120.0 billion, up to and including $150.0 billion, plus
0.204% per annum of the aggregate net assets of the funds on amounts in excess of $150.00 billion. As of September 30, 2018, the aggregate expense ratio of the ETF was 0.32% 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 July 31, 2018) 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/EFA.htm. We are not incorporating by reference the website, the sources listed above or any
material they include in this prospectus supplement.
Investment Objective
The ETF seeks to 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® MSCI EAFE ETF Top Ten Holdings as of October 12, 2018
ETF Stock Issuer
|
Percentage (%)
|
NESTLE SA
|
1.81%
|
NOVARTIS AG
|
1.31%
|
ROCHE HOLDING PAR AG
|
1.22%
|
HSBC HOLDINGS PLC
|
1.21%
|
ROYAL DUTCH SHELL PLC CLASS A
|
1.10%
|
TOTAL SA
|
1.08%
|
BP PLC
|
1.07%
|
TOYOTA MOTOR CORP
|
0.98%
|
ROYAL DUTCH SHELL PLC CLASS B
|
0.90%
|
iShares® MSCI EAFE ETF Weighting by Sector as of October 12, 2018*ǂ
Sector
|
Percentage (%)
|
Financials
|
19.57%
|
Consumer Discretionary
|
10.77%
|
Industrials
|
14.23%
|
Consumer Staples
|
11.12%
|
Health Care
|
11.08%
|
Materials
|
7.95%
|
Information Technology
|
6.03%
|
Communication
|
5.42%
|
Energy
|
6.18%
|
Real Estate
|
3.35%
|
Utilities
|
3.28%
|
Cash and/or Derivatives
|
1.01%
|
Total
|
99.99%
|
* Percentages may not sum to 100% due to rounding.
ǂ The Global Industry Classification Structure, which MSCI utilizes to classify the constituents of the index, was updated in September 2018. Please see “ ― The MSCI® EAFE Index” below for additional
information about these updates.
iShares® MSCI EAFE ETF Weighting by Country as of October 12, 2018*
Country
|
Percentage (%)
|
Japan
|
24.69%
|
United Kingdom
|
17.22%
|
France
|
10.94%
|
Germany
|
9.31%
|
Switzerland
|
8.16%
|
Australia
|
6.69%
|
Hong Kong
|
3.45%
|
Netherlands
|
3.30%
|
Spain
|
2.96%
|
Sweden
|
2.65%
|
Italy
|
2.25%
|
Denmark
|
1.63%
|
Singapore
|
1.27%
|
Belgium
|
1.02%
|
Finland
|
1.02%
|
Cash and/or Derivatives
|
1.01%
|
Other
|
2.43%
|
Total
|
100.00%
|
* 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 invests at least 90% of its assets in the securities of the index and in depositary receipts representing securities of the
index. The ETF may invest the remainder of its assets in 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 (including differences between a security’s price at the local market close and the ETF’s valuation of a security at the time of calculation of the
ETF’s net asset value), differences in transaction costs, the ETF’s holding of uninvested cash, differences in timing of the accrual of or the valuation of dividends or interest, tax gains or losses, 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 September 30, 2018, 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, 2.34%; 3 years, 8.91%; 5 years, 4.26%; 10 years, 5.02%; since inception, 5.39%; index: 1 year, 2.74%; 3 years, 9.23%; 5 years, 4.42%; 10 years, 5.38%; since ETF
inception, 5.46%.
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® EAFE Index
The MSCI EAFE Index (the “index”) is a stock index calculated, published and disseminated daily by MSCI Inc. (“MSCI”) through
numerous data vendors, on the MSCI website and in real time on Bloomberg Financial Markets and Reuters Limited.
The index is a free float-adjusted market capitalization index and is one of the MSCI Global Investable Market Indices (the “MSCI
Indices”). The index is considered a “standard” index, which means it consists of all eligible large capitalization and mid-capitalization stocks, as determined by MSCI, in the relevant market. Additional information about the MSCI Indices is
available on the following website: msci.com/index-methodology. Daily closing price information for the index is available on the following website: msci.com. We are not incorporating by reference the website, the sources listed above or any
material they include in this prospectus supplement.
The index is intended to provide performance benchmarks for the developed equity markets in Australia, Austria, Belgium, Denmark,
Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom. The constituent stocks of the index are derived from the constituent
stocks in the 21 MSCI standard single country indices for the developed market countries listed above. The index is calculated in U.S. dollars on a total return net basis. The index was launched on December 31, 1969 at an initial value of 100.
MSCI divides the companies included in the index into eleven Global Industry Classification Sectors: Consumer Discretionary, Consumer Staples,
Energy, Financials, Health Care, Industrials, Information Technology, Materials, Real Estate, Telecommunication Services and Utilities. As of the close of business on September 21, 2018, MSCI and S&P Dow Jones Indices LLC updated the Global
Industry Classification Sector structure. Among other things, the update broadened the Telecommunications Services sector and renamed it the Communication Services sector. The renamed sector includes the previously existing Telecommunication
Services Industry group, as well as the Media Industry group, which was moved from the Consumer Discretionary sector and renamed the Media & Entertainment Industry group. The Media & Entertainment Industry group contains three industries:
Media, Entertainment and Interactive Media & Services. The Media industry continues to consist of the Advertising, Broadcasting, Cable & Satellite and Publishing sub-industries. The Entertainment industry contains the Movies &
Entertainment sub-industry (which includes online entertainment streaming companies in addition to companies previously classified in such industry prior to September 21, 2018) and the Interactive Home Entertainment sub-industry (which includes
companies previously classified in the Home Entertainment Software sub-industry prior to September 21, 2018 (when the Home Entertainment Software sub-industry was a sub-
industry in the Information Technology sector)), as well as producers of interactive gaming products, including mobile gaming
applications). The Interactive Media & Services industry and sub-industry includes companies engaged in content and information creation or distribution through proprietary platforms, where revenues are derived primarily through pay-per-click
advertisements, and includes search engines, social media and networking platforms, online classifieds and online review companies. The Global Classification Sector structure changes will be implemented in the MSCI EAFE Index in connection with
the November 2018 semi-annual index review.
Construction of the MSCI Indices
MSCI undertakes an index construction process, which involves: (i) defining the equity universe; (ii) determining the market
investable equity universe for each market; (iii) determining market capitalization size segments for each market; (iv) applying index continuity rules for the standard index; (v) creating style segments within each size segment within each
market; and (vi) classifying securities under the Global Industry Classification Standard. The index construction methodology differs in some cases depending on whether the relevant market is considered a developed market or an emerging market.
All of the MSCI Indices are standard indices, meaning that only securities that would qualify for inclusion in a large cap index or a mid cap index will be included as described below.
Defining the Equity Universe
Identifying Eligible Equity Securities: The equity
universe initially looks at securities listed in any of the countries in the MSCI Global Index series, which will be classified as either “developed markets” or “emerging markets”. All listed equity securities, including real estate investment
trusts and certain income trusts in Canada are eligible for inclusion in the equity universe. Limited partnerships, limited liability companies and business trusts, which are listed in the U.S. and are not structured to be taxed as limited
partnerships, are likewise eligible for inclusion in the equity universe. Conversely, mutual funds, exchange traded funds, equity derivatives and most investment trusts are not eligible for inclusion in the equity universe. Preferred shares that
exhibit characteristics of equity securities are eligible. Securities for which the Hong Kong Securities and Futures Commission has issued high shareholding concentration notices are not eligible.
Country Classification of Eligible Securities: Each
company and its securities (i.e., share classes) are classified in one and only one country, which allows for a distinctive sorting of each company by its respective country.
Determining the Market Investable Equity Universes
A market investable equity universe for a market is derived by (i) identifying eligible listings for each security in the equity
universe; and (ii) applying investability screens to individual companies and securities in the equity universe that are classified in that market. A market is generally equivalent to a single country. The global investable equity universe is the
aggregation of all market investable equity universes.
(i) Identifying Eligible Listings: A security may have a listing in the country where it is classified (a “local listing”) and/or
in a different country (a “foreign listing”). A security may be represented by either a local listing or a foreign listing (including a depositary receipt) in the global investable equity universe. A security may be represented by a foreign
listing only if the security is classified in a country that meets the foreign listing materiality requirement (as described below), and the security’s foreign listing is traded on an eligible stock exchange of a developed market country if the
security is classified in a developed market country or, if the security is classified in an emerging market country, an eligible stock exchange of a developed market country or an emerging market country.
In order for a country to meet the foreign listing materiality requirement, the following is determined: all securities represented
by a foreign listing that would be included in the country’s MSCI Country Investable Market Index if foreign listings were eligible from that country. The aggregate free-float adjusted market capitalization for all such securities should
represent at least (i) 5% of the free float-adjusted market capitalization of the relevant MSCI Country Investable Market Index and (ii) 0.05% of the free-float adjusted market capitalization of the MSCI ACWI Investable Market Index. If a country
does not meet the foreign listing materiality requirement, then securities in that country may not be represented by a foreign listing in the global investable equity universe.
(ii) Applying Investability Screens: The investability screens used to determine the investable equity universe in each market are:
Equity Universe Minimum Size Requirement: This investability screen
is applied at the company level. In order to be included in a market investable equity universe, a company must have the required minimum full market capitalization. The equity universe minimum size requirement applies to companies in all markets
and is derived as follows:
● |
First, the companies in the developed market equity universe are sorted in descending order of full market capitalization and the cumulative coverage of the free float-adjusted
market capitalization of the developed market equity universe is calculated for each company. Each company’s free float-adjusted market capitalization is represented by the aggregation of the free float-adjusted market capitalization
of the securities of that company in the equity universe.
|
● |
Second, when the cumulative free float-adjusted market capitalization coverage of 99% of the sorted equity universe is achieved, by adding each company’s free float-adjusted market
capitalization in descending order, the full market capitalization of the company that reaches the 99% threshold defines the equity universe minimum size requirement.
|
● |
The rank of this company by descending order of full market capitalization within the developed market equity universe is noted, and will be used in determining the equity universe
minimum size requirement at the next rebalance.
|
As of May 2017, the equity universe minimum size requirement was set at U.S. $236 million. Companies with a full market
capitalization below this level are not included in any market investable equity universe. The equity universe minimum size requirement is reviewed and, if necessary, revised at each semi-annual index review, as described below.
Equity Universe Minimum Free Float-Adjusted Market
Capitalization Requirement: This investability screen is applied at the individual security level. To be eligible for inclusion in a market investable equity universe, a security must have a free float-adjusted market capitalization
equal to or higher than 50% of the equity universe minimum size requirement.
Minimum Liquidity Requirement: This investability
screen is applied at the individual security level. To be eligible for inclusion in a market investable equity universe, a security must have at least one eligible listing that has adequate liquidity as measured by its 12-month and 3-month
annualized traded value ratio (“ATVR”) and 3-month frequency of trading. The ATVR attempts to mitigate the impact of extreme daily trading volumes and takes into account the free float-adjusted market capitalization of securities. A minimum
liquidity level of 20% of the 3-month ATVR and 90% of 3-month frequency of trading over the last 4 consecutive quarters, as well as 20% of the 12-month ATVR, are required for inclusion of a security in a market investable equity universe of a
developed market. A minimum liquidity level of 15% of the 3-month ATVR and 80% of 3-month frequency of trading over the last 4 consecutive quarters, as well as 15% of the 12-month ATVR, are required for inclusion of a security in a market
investable equity universe of an emerging market.
Only one listing per security may be included in the market investable equity universe. In instances where a security has two or
more eligible listings that meet the above liquidity requirements, then the following priority rules are used to determine which listing will be used for potential inclusion of the security in the market investable equity universe:
(1) |
Local listing (if the security has two or more local listings, then the listing with the highest 3-month ATVR will be used).
|
(2) |
Foreign listing in the same geographical region (MSCI classifies markets into three main geographical regions: EMEA, Asia Pacific and Americas. If the security has two or more
foreign listings in the same geographical region, then the listing with the highest 3-month ATVR will be used).
|
(3) |
Foreign listing in a different geographical region (if the security has two or more foreign listings in a different geographical region, then the listing with the highest 3-month
ATVR will be used).
|
Due to liquidity concerns relating to securities trading at very high stock prices, a security that is currently not a constituent
of a MSCI Global Investable Markets Index that is trading at a stock price above U.S. $10,000 will fail the liquidity screening and will not be included in any market investable equity universe.
Global Minimum Foreign Inclusion Factor Requirement: This
investability screen is applied at the individual security level. To determine the free float of a security, MSCI considers the proportion of shares of such security available for purchase in the public equity markets by international investors.
In practice, limitations on the investment opportunities for international investors include: strategic stakes in a company held by private or public shareholders whose investment objective indicates that the shares held are not likely to be
available in the market; limits on the proportion of a security’s share capital authorized for purchase by non-domestic investors; or other foreign investment restrictions which materially limit the ability of foreign investors to freely invest
in a particular equity market, sector or security.
MSCI will then derive a “foreign inclusion factor” for the company that reflects the proportion of shares outstanding that is
available for purchase in the public equity markets by international investors. MSCI will then “float-adjust” the weight of each constituent company in an index by the company’s foreign inclusion factor.
Once the free float factor has been determined for a security, the security’s total market capitalization is then adjusted by such free float
factor, resulting in the free float-adjusted market capitalization figure for the security.
Minimum Length of Trading Requirement: This investability screen is
applied at the individual security level. For an initial public offering to be eligible for inclusion in a market investable equity universe, the new issue must have started trading at least three months before the implementation of a semi-annual
index review. This requirement is applicable to small new issues in all markets. Large initial public offerings are not subject to the minimum length of trading requirement and may be included in a market investable equity universe and a standard
index, such as the MSCI Indices, outside of a quarterly or semi-annual index review.
Minimum Foreign Room Requirement: This investability
screen is applied at the individual security level. For a security that is subject to a foreign ownership limit to be eligible for inclusion in a market investable equity universe, the proportion of shares still available to foreign investors
relative to the maximum allowed (referred to as “foreign room”) must be at least 15%.
Defining Market Capitalization Size Segments for Each
Market
Once a market investable equity universe is defined, it is segmented into the following size-based indices:
● |
Investable Market Index (Large Cap + Mid Cap + Small Cap)
|
● |
Standard Index (Large Cap + Mid Cap)
|
Creating the size segment indices in each market involves the following steps: (i) defining the market coverage target range for
each size segment; (ii) determining the global minimum size range for each size segment; (iii) determining the market size−segment cutoffs and associated segment number of companies; (iv) assigning companies to the size segments; and (v) applying
final size-segment investability requirements. For developed market indices and emerging market indices, the market coverage for a standard index is 85% and 42.5% respectively. As of April 2017, the global minimum size range for a developed
market standard index is a full market capitalization of USD 2.75 billion to USD 6.32 billion, and the global minimum size range for an emerging market standard index is a full market capitalization of USD 1.37 billion to USD 3.16 billion.
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.
|
Creating Style Indices within Each Size Segment
All securities in the investable equity universe are classified into value or growth segments. The classification of a security
into the value or growth segment is used by MSCI to construct additional indices.
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 GICS® classification of each security is used by MSCI to construct additional indices.
Calculation Methodology for the MSCI Indices
The performance of each of the MSCI Indices is a free float weighted average of the U.S. dollar values of its component securities.
Prices used to calculate the component securities are the official exchange closing prices or prices accepted as such in the relevant market. In
the case of a market closure, or if a security does not trade on a specific day or during a specific period, MSCI carries forward the previous day’s price (or latest available closing price). In the event of a market outage resulting in any
component security price to be unavailable, MSCI will generally use the last reported price for such component security for the purpose of performance calculation unless MSCI determines that another price is more appropriate based on the
circumstances. Closing prices are converted into U.S. dollars, as applicable, using the closing spot exchange rates calculated by WM/Reuters at 4:00 P.M. London Time.
Companies may be listed simultaneously on more than one stock exchange in Japan. A company may apply for delisting from one stock
exchange while remaining listed on other stock exchanges. For such delisting, Japanese stock exchanges generally give notice one month prior to the expected last trading date of the security to be delisted. Should such delisting involve a change
in the primary exchange and/or trigger a change in the price source, MSCI will obtain the price of the security from the new primary exchange two weeks after an announcement of delisting from the stock exchange.
Net Daily Total Return Methodology
The MSCI Indices are net daily total return indices. A daily total return index measures the market performance, including price
performance and income from regular cash distributions, while a net daily total return index measures the price performance and income from dividends, net of certain withholding taxes. MSCI calculates withholding taxes using the highest
applicable withholding tax rate applicable to institutional investors. The current withholding tax rate used by MSCI to calculate the MSCI Japan Index is 15.315%. This net income is reinvested in the index and thus makes up part of the total
index performance. MSCI’s net daily total return methodology reinvests net cash dividends in indices the day the security is quoted ex-dividend, or on the ex-date (converted to U.S. dollars, as applicable). In the case of the MSCI Japan Index,
since many Japanese companies declare their dividends after the ex-date but make estimated dividends broadly available before the ex-date, an estimation of the dividend, or else the previous year dividend if no estimation is available, is
reinvested on the ex-date. Certain dividends, including special/extraordinary dividends and commemorative dividends, are reinvested in the indices if, a day prior to the ex-date, the dividend impact on price is less than 5%. If the impact is 5%
or more, the dividend will be reflected in the indices through a price adjustment. A specific price adjustment is always applied for stock dividends that are issued at no cost to the shareholders, an extraordinary capital repayment or a dividend
paid in the shares of another company. Cash payments related to corporate events, such as mergers and acquisitions, are considered on a case-by-case basis.
Maintenance of the MSCI Indices
In order to maintain the representativeness of the MSCI Indices, structural changes may be made by adding or deleting component
securities. Currently, such changes in the MSCI Indices may generally only be made on four dates throughout the year: after the close of the last business day of each February, May, August and November.
Each country index is maintained with the objective of reflecting, on a timely basis, the evolution of the underlying equity
markets. In maintaining each component country index, emphasis is also placed on its continuity, continuous investability of constituent and replicability of the index and on index stability and minimizing turnover.
MSCI classifies index maintenance in three broad categories. The first consists of ongoing event related changes, such as mergers
and acquisitions, which are generally implemented in the country indices in which they occur. The second category consists of quarterly index reviews, aimed at promptly reflecting other significant market events. The third category consists of
semi-annual index reviews that systematically re-assess the various dimensions of the equity universe.
Ongoing event-related changes to the MSCI Indices are the result of mergers, acquisitions, spin-offs, bankruptcies, reorganizations and other
similar corporate events. They can also result from capital reorganizations in the form of rights issues, stock bonus issues, public placements and other similar corporate actions that take place on a continuing basis. MSCI will remove from the
indices as soon as practicable securities of companies that file for bankruptcy or other protection from their creditors, that are suspended and for which a return to normal business activity and trading is unlikely in the near future; or that
fail stock exchange listing requirements with a delisting announcement. Securities may also be considered for early deletion in other significant cases, such as decreases in free float and foreign ownership limits, or when a constituent company
acquires or merges with a non-constituent company or spins-off another company. In practice, when a constituent company is involved in a corporate event which results in a significant decrease in the 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 is not at
least two-thirds of one-half of the standard index interim size segment cut-off. Share conversions may also give rise to an early
deletion. All changes resulting from corporate events are announced prior to their implementation, provided all necessary information on the event is available.
MSCI’s quarterly index review process is designed to ensure that the country indices continue to be an accurate reflection of
evolving equity markets. This goal is achieved by timely reflecting significant market driven changes that were not captured in each index at the time of their actual occurrence and that should not wait until the semi-annual index review due to
their importance. These quarterly index reviews may result in additions and deletions of component securities from a country index (or a security being removed from one country listing and represented by a different country listing) and changes
in “foreign inclusion factors” and in number of shares. Additions and deletions to component securities may result from: the addition of large companies that did not meet the minimum size criterion for inclusion at the time of their initial
public offering or secondary offering; the replacement of companies which are no longer suitable industry representatives; the deletion of securities whose overall free float has fallen to less than 15% and that do not meet specified criteria;
the deletion of securities that have become very small or illiquid; and the addition or deletion of securities as a result of other market events. Significant changes in free float estimates and corresponding changes in the foreign inclusion
factor for component securities may result from: block sales, block buys, secondary offerings and transactions made by way of immediate book-building that did not meet the requirements for implementation at the time of such event; 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; conversion of a non-index constituent share class or an unlisted line of shares which has
an impact on index constituents; and acquisition by shares of non-listed companies or assets. 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, conversion of convertible bonds or other instruments, conversion of a non-index constituent share class or an
unlisted line of shares which has an impact on index constituents, periodic conversion of a share class into another share class, exercise of over-allotment options, exercise of share buybacks, or the cancellation of shares, 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 each component country index.
MSCI’s semi-annual index review is designed to systematically reassess the component securities of the index. During each
semi-annual index review, the universe of component securities is updated and the global minimum size range for the index is recalculated, which is based on the full market capitalization and the cumulative free float-adjusted market
capitalization coverage of each security that is eligible to be included in the index. The following index maintenance activities, among others, are undertaken during each semi-annual index review: the list of countries in which securities may be
represented by foreign listings is reviewed; the component securities are updated by identifying new equity securities that were not part of the index at the time of the previous quarterly index review; the minimum size requirement for the index
is updated and new companies are evaluated relative to the new minimum size requirement; existing component securities that do not meet the minimum liquidity requirements of the index may be removed (or, with respect to any such security that has
other listings, a determination is made as to whether any such listing can be used to represent the security in the market investable universe); and changes in “foreign inclusion factors” are implemented (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 a country index for a range of reasons, including the reasons discussed with respect to component securities
changes during quarterly index reviews as discussed above. Foreign listings may become eligible to represent securities only from the countries that met the foreign listing materiality requirement during the previous semi-annual index review
(this requirement is applied only to countries that do not yet include foreign listed securities). Once a country meets the foreign listing materiality requirement at a given semi-annual index review, foreign listings will remain eligible for
such country even if the foreign listing materiality requirements are not met in the future.
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.
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.
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. The period shown
below will be approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from
the date hereof or otherwise).
You should not take the historical closing prices of the
shares as an indication of the future performance of the shares. We cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes on
the stated maturity date. Neither we nor any of our affiliates make any representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the relevant
ETF closing prices between the date of this prospectus supplement and the date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the 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 November 12, 2008 through November 12, 2018. We
obtained the closing prices shown in the graph below from Bloomberg Financial Services without independent verification.
Historical Performance of iShares® MSCI EAFE ETF
“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.
iShares® MSCI Japan ETF
The shares of the iShares® MSCI Japan ETF (the
“ETF”) are issued by iShares, Inc. (the “company”). The company was organized as a Maryland corporation on September 1, 1994 and is authorized to have multiple series or portfolios, of which the ETF is one.
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The ETF is a tracking ETF that seeks investment results which correspond generally to the price and yield performance, before fees and expenses, of the index.
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The index it tracks is the MSCI Japan Index (the “index”).
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Investment Advisor: BlackRock Fund Advisors (“BFA”).
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The ETF’s shares trade on the NYSE Arca under the ticker symbol “EWJ”.
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The company’s SEC CIK Number is 0000930667.
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The ETF’s inception date was March 12, 1996.
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The ETF’s shares are issued or redeemed only in creation units of 150,000 shares or multiples thereof.
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We obtained the following fee information from the iShares® website without independent verification. The investment advisor is entitled to receive a management fee from the fund corresponding to the ETF’s allocable portion of an aggregate management fee based on the aggregate average
daily net assets of the ETF and a set of other specified iShares® funds (the “funds”) as follows: 0.59% per annum of the aggregate net assets of the funds less than
or equal to $7.0 billion, plus 0.54% per annum of the aggregate net assets of the funds on amounts in excess of $7.0 billion, up to and including $11.0 billion, plus 0.49% per annum of the aggregate net assets of the funds on amounts in excess of
$11.0 billion, up to and including $24.0 billion, plus 0.44% per annum of the aggregate net assets of the funds on amounts in excess of $24.0 billion, up to and including $48.0 billion, plus 0.40% per annum of the aggregate net assets over $48.0
billion, up to and including $72.0 billion, plus 0.36% per annum of the aggregate net assets over $72.0 billion, up to and including $96.0 billion, plus 0.32% per annum of the aggregate net assets in excess of $96.0 billion. As of September 30,
2018, the aggregate expense ratio of the ETF was 0.49% per annum.
For additional information regarding the company or BFA, please consult the reports (including the Semi-Annual Report to
Shareholders on Form N-CSRS for the period ended February 28, 2018) and other information the company files with the SEC. In addition, information regarding the ETF, including its top portfolio holdings, may be obtained from other sources
including, but not limited to, press releases, newspaper articles, other publicly available documents and the iShares® website at
us.ishares.com/product_info/fund/overview/EWJ.htm. We are not incorporating by reference the website, the sources listed above or any material they include in this prospectus supplement.
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® MSCI Japan ETF Top Ten Holdings as of October 12, 2018
ETF Stock Issuer
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Percentage (%)
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TOYOTA MOTOR CORP
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3.94%
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SOFTBANK GROUP CORP
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2.18%
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MITSUBISHI UFJ FINANCIAL GROUP INC
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2.13%
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SONY CORP
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2.08%
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SUMITOMO MITSUI FINANCIAL GROUP IN
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1.57%
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KEYENCE CORP
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1.46%
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KDDI CORP
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1.37%
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HONDA MOTOR LTD
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1.32%
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MIZUHO FINANCIAL GROUP INC
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1.23%
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MITSUBISHI CORP
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1.21%
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Total
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18.49%
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iShares® MSCI Japan ETF Weighting by Sector as of October 12, 2018*ǂ
Sector
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Percentage (%)
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Consumer Discretionary
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18.47%
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Financials
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12.27%
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Industrials
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20.93%
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Information Technology
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10.11%
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Health Care
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8.12%
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Consumer Staples
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8.19%
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Materials
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5.88%
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Communication
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8.00%
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Real Estate
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3.81%
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Utilities
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1.88%
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Energy
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1.36%
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Cash and/or Derivatives
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0.99%
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Total
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100.01%
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* Percentages may not sum to 100% due to rounding.
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The Global Industry Classification Structure, which MSCI utilizes to classify the constituents of the index, was updated in September 2018. Please see “ ― The MSCI Japan Index” below for
additional information about these updates.
Representative Sampling
BFA uses a representative sampling indexing strategy to manage the ETF. For the ETF, this strategy involves investing in a
representative sample of securities that collectively have an investment profile similar to that of the index. The securities selected are expected to have, in the aggregate, investment characteristics (based on factors such as market
capitalization and industry weightings), fundamental characteristics (such as return variability and yield) and liquidity measures similar to those of the index.
The ETF will at all times invest at least 90% of its assets in the securities of the index and in depositary receipts representing
securities of the index. The ETF may invest the remainder of its assets in other securities, including securities not in the index, but which BFA believes will help the ETF track the index. The ETF may also invest its other assets in futures
contracts, options on futures contracts, other types of options and swaps related to the index, as well as cash and cash equivalents, including shares of money market funds advised by BFA or its affiliates. Also, the ETF may lend securities
representing up to one-third of the value of the 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 (including
differences between a security’s price at the local market close and the ETF’s valuation of a security at the time of calculation
of the ETF’s net asset value), differences in transaction costs, the ETF's holding of uninvested cash, differences in timing of the accrual of or the valuation of dividends or interest, tax gains or losses, 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 September 30, 2018, 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, 9.69%; 3 years, 11.44%; 5 years, 6.30%; 10 years, 5.16%; since inception, 1.10%; index: 1 year, 10.20%; 3 years, 12.13%; 5 years, 6.76%; 10 years, 5.96%; since ETF
inception, 1.69%.
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 Japan Index
The index is a stock index calculated, published and disseminated daily by MSCI Inc. (“MSCI”) through numerous data vendors, on the
MSCI website and in real time on Bloomberg Financial Markets and Reuters Limited.
The index is a free float-adjusted market capitalization index and is one of the MSCI Global Investable Market Indices (the “MSCI
Indices”). The index is categorized by MSCI as a developed market index and is considered a “standard” index, which means it consists of all eligible large capitalization and mid-capitalization stocks, as determined by MSCI, in the relevant
market. Additional information about the MSCI Indices is available on the following website: msci.com/index-methodology. Daily closing price information for the index is available on the following website: msci.com. We are not incorporating by
reference the website, the sources listed above or any material they include in this prospectus supplement.
The index is designed to measure the performance of the large- and mid-capitalization segments of Japan’s equity market. The 322
constituent stocks of the index (as of September 28, 2018) are selected from an eligible universe of equity securities listed on national Japanese stock exchanges including the First Section, Second Section and Mothers portion of the Tokyo Stock
Exchange, the TSE, JASDAQ and the First Section, Second Section and Centrex portion of the Nagoya Stock Exchange. The index is calculated in U.S. dollars on a total return net basis. The index was launched on December 31, 1969 at an initial value
of 100.
MSCI divides the companies included in the index into eleven Global Industry Classification Sectors: Financials, Consumer Discretionary,
Industrials, Information Technology, Consumer Staples, Materials, Real Estate, Health Care, Telecommunication Services, Utilities and Energy. As of the close of business on September 21, 2018, MSCI and S&P Dow Jones Indices LLC updated the
Global Industry Classification Sector structure. Among other things, the update broadened the Telecommunications Services sector and renamed it the Communication Services sector. The renamed sector includes the previously existing
Telecommunication Services Industry group, as well as the Media Industry group, which was moved from the Consumer Discretionary sector and renamed the Media & Entertainment Industry group. The Media & Entertainment Industry group contains
three industries: Media, Entertainment and Interactive Media & Services. The Media industry continues to consist of the Advertising, Broadcasting, Cable & Satellite and Publishing sub-industries. The Entertainment industry contains the
Movies & Entertainment sub-industry (which includes online entertainment streaming companies in addition to companies previously classified in such industry prior to September 21, 2018) and the Interactive Home Entertainment sub-industry
(which includes companies previously classified in the Home Entertainment Software sub-industry prior to September 21, 2018 (when the Home Entertainment Software sub-industry was a sub-industry in the Information Technology sector)), as well as
producers of interactive gaming products, including mobile gaming applications). The Interactive Media & Services industry and sub-industry includes companies engaged in content and information creation or distribution through proprietary
platforms, where revenues are derived primarily through pay-per-click advertisements, and includes search engines, social media and networking platforms, online classifieds and online review companies. The Global Classification Sector structure
changes will be implemented in the MSCI Japan Index in connection with the November 2018 semi-annual index review.
For additional information about the construction, calculation methodology and maintenance of the index, please see “iShares® MSCI EAFE
ETF — Construction of the MSCI Indices”, “iShares® MSCI EAFE ETF — Calculation Methodology for the MSCI Indices” and “iShares® MSCI EAFE ETF — Maintenance of the MSCI Indices”, respectively, on pages S-83, S-85 and S-86 of this prospectus
supplement, respectively.
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. The period shown
below will be approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from
the date hereof or otherwise).
You should not take the historical closing prices of the
shares as an indication of the future performance of the shares. We cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes on
the stated maturity date. Neither we nor any of our affiliates make any representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the relevant
ETF closing prices between the date of this prospectus supplement and the date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the 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 November 12, 2008 through November 12, 2018. The
daily historical closing prices in the graph below have been adjusted for a 1-for-4 reverse stock split that became effective before the market open on November 7, 2016. We obtained the closing prices shown in the graph below from Bloomberg
Financial Services without independent verification.
Historical Performance of iShares® MSCI Japan ETF
“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.
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 index.
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The index it currently tracks is 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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Investment Advisor: 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 September 30, 2018, 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 28, 2018) 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 prospectus supplement.
Investment Objective and Strategy
The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses,
of the index. The 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).
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 October 12, 2018*
U.S. Treasury Bond
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Percentage (%)
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2.50% due 2/15/2045
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9.22%
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2.50% due 2/15/2046
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7.55%
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3.00% due 11/15/2045
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6.74%
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3.13% due 8/15/2044
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6.59%
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2.88% due 5/15/2043
|
6.44%
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2.50% due 5/15/2046
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5.90%
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4.25% due 11/15/2040
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4.85%
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2.75% due 8/15/2047
|
4.63%
|
2.88% due 11/15/2046
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4.12%
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4.63% due 2/15/2040
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3.99%
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Total
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60.03%
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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 October 12, 2018*. We obtained the information in the table below from the iShares® website without independent verification.
Weighted average maturity
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25.56 years
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Weighted average coupon
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3.06%
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Effective duration
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17.19 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 October 12, 2018*, the ETF’s holdings were comprised of 31 U.S. Treasury bonds (99.92% of holdings) and cash and/or
derivatives (0.08% 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. 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, tax gains or losses, 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 September 30, 2018, 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, -3.55%; 3 years, 0.76%; 5 years, 4.70%; 10 years, 5.35%; since inception, 6.03%; index: 1 year, -3.49%; 3 years, 0.85%; 5 years, 4.78%; 10 years, 5.46%; since ETF
inception, 6.12%. Prior to April 1, 2016, the ETF tracked the Barclays U.S. 20+ Year Treasury Bond Index.
The 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 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 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. Any such change will be incorporated in the
index at the next month-end rebalancing and made effective from the first day of the following month.
Cash that has accrued intra-month from interest and principal payments earns no reinvestment return during the month. The
accumulated intra-month cash is removed from the index at month-end, which implies that it is reinvested pro rata across the entire index.
Current Composition of the Index
As of October 12, 2018, the index’s holdings were comprised of 39 U.S. Treasury bonds. The following table displays additional
information about the bonds held by the index as of October 12, 2018. We obtained the information in the table below from the ICE website without independent verification.
Weighted average maturity
|
25.84 years
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Weighted average coupon
|
3.17%
|
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. The period shown
below will be approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from
the date hereof or otherwise).
You should not take the historical closing prices of the
shares as an indication of the future performance of the shares. We cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes on
the stated maturity date. Neither we nor any of our affiliates make any representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the relevant
ETF closing prices between the date of this prospectus supplement and the date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the 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 November 12, 2008 through November 12, 2018. We
obtained the closing prices shown in the graph below from Bloomberg Financial Services without independent verification.
Historical Performance of iShares® 20+ Year Treasury Bond ETF
*Prior to April 1, 2016, the ETF tracked the Barclays U.S. 20+ Year Treasury Bond Index.
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 November 12, 2008 through November 12,
2018 (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.)
Historical Performance of ICE U.S. Treasury 20+ Year Bond Index
*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.
iShares® iBoxx $ Investment Grade Corporate Bond ETF
The shares of the iShares® iBoxx $ Investment
Grade Corporate Bond ETF (the “ETF”) are issued by iShares® Trust, a registered investment company.
● |
The ETF is a tracking ETF that seeks investment results which correspond generally to the price and yield performance, before fees and expenses, of the index.
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● |
The index it tracks is the Markit iBoxx® USD Liquid Investment Grade Index (the “index”).
|
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Investment Advisor: BlackRock Fund Advisors (“BFA”).
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The ETF’s shares trade on the NYSE Arca under the ticker symbol “LQD”.
|
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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.
|
We obtained the following fee information from the iShares® website without independent verification. The investment advisor is paid a management fee from the ETF calculated based on the aggregate average daily net assets of the ETF and a set of other specified iShares® funds (the “funds”). The management fee for the ETF equals the ratio of the ETF’s net assets over the aggregate net assets of the ETF multiplied by the amount calculated as follows: 0.1500% per annum of the average daily net assets of the combined funds less than or equal to $121.0 billion; plus 0.1425% per annum of the average daily net assets of the combined funds on amounts greater than $121.0 billion up to and including $181.0 billion; plus 0.1354% of the average daily net assets of the combined funds on amounts greater than $181.0 billion up to and including $231.0 billion; plus 0.1287% of the average daily net assets of the combined funds on amounts greater than $231.0 billion up to and including $281.0 billion; plus 0.1222%
of the average daily net assets of the combined funds on amounts greater than $281.0 billion. As of September 30, 2018, 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 28, 2018) 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/LQD.htm. We are not incorporating by reference the website, the sources
listed above or any material they include in this prospectus supplement.
Investment Objective and Strategy
The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses,
of the index. The 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® iBoxx $ Investment Grade Corporate Bond ETF Top Ten Holdings as of October 12, 2018
Corporate Bond Issuer
|
Percentage (%)
|
VERIZON COMMUNICATIONS INC 144A
|
0.56%
|
ANHEUSER-BUSCH INBEV FINANCE INC
|
0.45%
|
ANHEUSER-BUSCH INBEV FINANCE INC
|
0.43%
|
GE CAPITAL INTERNATIONAL FUNDING C
|
0.42%
|
CVS HEALTH CORP
|
0.33%
|
CVS HEALTH CORP
|
0.32%
|
GOLDMAN SACHS GROUP INC
|
0.24%
|
CVS HEALTH CORP
|
0.24%
|
ANHEUSER-BUSCH INBEV FINANCE INC
|
0.23%
|
CVS HEALTH CORP
|
0.23%
|
iShares® iBoxx $ Investment Grade Corporate Bond ETF Weighting by Sector
as of October 12, 2018*
Sector
|
Percentage (%)
|
Banking
|
27.89%
|
Consumer Non-Cyclical
|
18.87%
|
Communications
|
11.61%
|
Energy
|
9.78%
|
Technology
|
9.72%
|
Consumer Cyclical
|
7.32%
|
Capital Goods
|
3.64%
|
Basic Industry
|
1.74%
|
Insurance
|
3.98%
|
Electric
|
1.98%
|
Transportation
|
1.17%
|
Finance Companies
|
0.68%
|
REITs
|
0.44%
|
Owned No Guarantee
|
0.21%
|
Brokerage/Asset Managers/Exchanges
|
0.50%
|
Cash and/or Derivatives
|
0.10%
|
Financial Other
|
0.00%
|
Natural Gas
|
0.30%
|
Utility Other
|
0.06%
|
Total
|
99.99%
|
* Percentages may not sum to 100% due to rounding.
The following table displays additional information about the bonds held by the ETF, in each case as of October 12, 2018. We
obtained the information in the table below from the iShares® website without independent verification.
Weighted average maturity
|
12.66 years
|
Weighted average coupon
|
4.05%
|
Effective duration
|
8.36 years
|
Weighted average maturity is the length of time until the average security in the ETF will mature or be redeemed by its issuer.
Weighted average coupon is the average coupon rate of the underlying bonds in the ETF, weighted by the relative size in the ETF. Effective duration is a measure of the potential responsiveness of a bond or portfolio price to small parallel shifts
in interest rates, taking into account possible changes in expected bond cash flows due to small parallel shifts in interest rates.
Representative Sampling
Although the ETF seeks results that correspond generally to the performance of the index, the ETF uses a representative sampling
indexing strategy to attempt to track the performance of the index. For the ETF, this strategy involves investing in a representative sample of securities that collectively have an investment profile similar to that of the index, although the ETF
may or may not hold all of the securities in the index. The securities selected are expected to have, in the aggregate, investment characteristics (based on factors such as market capitalization and industry weightings), fundamental
characteristics (such as return variability, duration, maturity or credit ratings and yield) and liquidity measures similar to those of the index.
The ETF generally invests at least 90% of its assets in the component securities of the index and at least 95% of its assets in investment-grade
corporate bonds. However, the ETF may at times invest up to 20% of its assets in certain futures, options and swap contracts, cash and cash equivalents as well as bonds not included in the index but which BFA believes will help the ETF track the
index and which are either: (i) included in the Markit iBoxx USD Index (the broader index upon which the index is based); or (ii) new issues which BFA believes are or about to enter the index or the Markit
iBoxx USD Index. The ETF may invest up to 5% of its assets in repurchase agreements collateralized by U.S. government obligations
and in cash and cash equivalents, including shares of money market entering funds advised by BFA or its affiliates. The ETF may also 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 of the index may vary due to a variety of factors, including transaction costs, non-U.S. currency
valuations, asset valuations, corporate actions (such as mergers and spin-offs), timing variances and differences between the ETF’s portfolio and the index resulting from the ETF’s use of representative sampling or from legal restrictions (such
as diversification requirements) that apply to the ETF but not to the index.
Tracking error may occur because of differences between the securities held in the ETF’s portfolio and those included in the index,
pricing differences (including, as applicable, differences between a security’s price at the local market close and the ETF’s valuation of a security at the time of calculation of the ETF’s NAV), differences in transaction costs, the ETF holding
uninvested cash, differences in timing of the accrual of distributions, 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 strategy can be expected to produce a larger tracking error than would result if the ETF used
a replication indexing strategy in which an ETF invests in substantially all of the securities in the index in approximately the same proportions as in the index.
As of September 30, 2018, 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, -2.00%; 3 years, 3.01%; 5 years, 3.68%; 10 years, 6.84%; since inception, 5.18%; index: 1 year, -1.85%; 3 years, 3.28%; 5 years, 3.89%; 10 years, 6.76%; since ETF
inception, 5.44%.
Industry Concentration Policy
The ETF will concentrate its investments (i.e., hold
25% or more of its total assets) in a particular industry or group of industries to approximately the same extent that the index is concentrated in that industry or group of industries. For purposes of this limitation, securities of the U.S.
government (including its agencies and instrumentalities), repurchase agreements collateralized by U.S. government securities, and securities of state or municipal governments and their political subdivisions are not considered to be issued by
members of any industry.
The Index
The index is a bond index calculated, published and disseminated by the index sponsor, Markit Indices Limited (“Markit”). The index
is designed to provide a balanced representation of the U.S. dollar denominated liquid investment grade (as determined by Markit) corporate debt market. The index is market-value weighted, with an issuer weight cap of 3%, calculated as of the
last business day of each month using the end-of-month closing prices for each bond. The index is calculated as end-of-day and distributed once daily after 4 p.m. EST. The indices are calculated every day except on common U.S. bank holidays. In
addition, the indices are calculated with the previous trading day’s close on the last calendar day of each month if that day is not a trading day.
As of February 28, 2018, the index included approximately 1,823 bonds chosen according to the index rules described below.
Selection Criteria of the Index
The bonds in the index must meet all the criteria described below as of the close of business three business days prior to the
rebalancing date, and in each case provided that the relevant bond data can be verified, at Markit’s sole discretion, as of that cut-off date. The new index composition becomes effective on the first business day of the next month. Additionally,
the index rules and their application will be governed by two committees:
● |
Technical Committee: consists of representatives from market makers/banks and meets on a monthly basis in order to provide feedback and information into the monthly rebalancing
process and to monitor any market developments.
|
● |
Oversight Committee: consists of representatives from mostly the buy side and meets in order to discuss the decisions of the Technical Committee, the wider index rules and any market
developments which may warrant rule changes.
|
Bond Classification: Bonds must be USD denominated
corporate credit (i.e., debt instruments backed by corporate issuers that are not secured by specific assets) with clearance and settlement available through The
Depository Trust Company. Bonds must be publicly registered with the U.S. Securities and Exchange Commission or be Rule 144A offerings with registration rights. Debt issued by governments, sovereigns, quasi-sovereigns, and government-backed or
guaranteed entities is excluded. The issuer or, in the case of a finance subsidiary, the issuer’s guarantor, must be domiciled, incorporated and the country of risk must be in Andorra, Australia, Austria, Belgium, Bermuda, Canada, Cayman Islands,
Cyprus, Denmark, Faeroe Islands, Finland, France, Germany, Gibraltar, Greece, Hong Kong, Iceland, Ireland, Italy, Japan, Jersey, Liechtenstein, Luxembourg, Malta, Monaco, Netherlands, New Zealand, Norway, Portugal, San Marino, Singapore, Spain,
Sweden, Switzerland, United States or United Kingdom. A new country is added to the index if it is classified as a developed market on the “Markit Global Economic Development Classification.” A country is no longer eligible for the index if it is
classified as an emerging market based on the “Markit Global Economic Development Classification”. The “Markit Global Economic Development Classification” is updated once per year. The results are published at the end of July. The
inclusion/exclusion of a country becomes effective at the end of October. Each bond is assigned to one of the following six sectors: Consumer Goods, Consumer Services, Financials, Industrials & Materials, Telecommunication & Technology
and Utilities & Energy.
All bonds are classified based on the principal activities of the issuer, the main sources of the cash flows used to pay coupons
and redemptions, and a bond’s specific collateral type or legal provisions. Markit reviews bond classification regularly and makes necessary changes at the next rebalancing.
Bond Type: Only fixed rate bonds whose cash flow can
be determined in advance are eligible, including fixed coupon bonds, step-up bonds with coupon schedules known at issuance (or as functions of the issuer’s rating), bonds with sinking funds, amortizing bonds, medium term notes, Rule 144A
offerings with a registration right (only 144A bonds with a Regulation S version eligible for the Markit iBoxx® USD Benchmark Index), callable bonds and putable
bonds. Preferred shares, convertible bonds, subordinated bank or insurance debt with mandatory contingent conversion features or with any conversion options before the first call date, bonds with other equity features attached (e.g., options or
warrants), private placements, perpetual bonds, fixed-to-floater bonds, floating rate notes, pay-in kind bonds, zero coupon bonds, bonds with zero step-ups (“GAINS”), bonds with difference between accrual and coupon payment periods, and
monthly-paying bonds are excluded. Any bond subject to a firm call or tender offer, with the exception of exchange offers, in the month immediately following the rebalancing date will be excluded, provided that Markit is aware of such tender
offer or firm call.
For retail bonds and private placements, publicly available information is not always conclusive and the classification of a bond
as a retail bond or a private placement will be made at Markit’s discretion based on the information available at the time of the determination. In instances where a new bond type is not specifically excluded or included in the index according to
the published index rules, Markit will analyze the features of such securities in line with the principles set out in the index rules to make the determination as to whether the bond will be included.
Credit Rating: All bonds must have a Markit iBoxx
rating of investment grade. Ratings from each of the following three agencies are considered for the calculation of the Markit iBoxx Rating: Fitch Ratings, Moody’s Investor Service and S&P Global Ratings. Investment grade is defined as BBB-
or above from Fitch or S&P and Baa3 or above from Moody’s. If a bond is rated by more than one of the above agencies, then the Markit iBoxx rating is the average of the provided ratings. In the case of an ID change or exchange of a Rule
144A/Regulation S offering into a registered bond, the ratings from the Rule 144A/Regulation S offering are also used for the registered bond.
Time to Maturity: At the rebalancing day, all bonds
must have an expected remaining life of at least three years, and all newly included bonds must have an expected remaining life of at least three years and six months.
Amount Outstanding: The outstanding face value of a
bond must be at least $750 million as of the bond selection cut-off date, after taking into account buybacks or increases. The outstanding face value of all bonds denominated in USD in the broader Markit iBoxx USD Investment Grade Corporate Index
(excluding fixed-to-floater and perpetual bonds) from the issuer must be at least $2 billion as of the bond selection cut-off date.
Minimum Run: Any bond that enters the index must
remain in the index for a minimum of six months (provided that the bond is not downgraded to sub-investment grade, defaulted or fully redeemed in that period).
Lockout Period: A bond that drops out of the index
at re-balancing is excluded from re-entering the index for a three-month period.
Calculation of the Index
Bond Prices: All iBoxx indices are multi-source
priced. Prices for the bonds in the index are sourced from a number of representative sources. Pricing data is produced by experienced pricing analysts using established instrument evaluation models; non-transactional data such as observed bid
and ask prices may predominate for a given bond as the data is being scrutinized to reliably represent the interest measured. The pricing service may also decide to rely upon expert judgment in an active albeit low liquidity market or any other
circumstances, when observed bid and ask prices or transactions may not be consistently available each day.
Index Rebalancing: The index is rebalanced every
month on the last business day of the month after the close of business. Any inclusion after the index cut-off day (t-3) will not be considered in the re-balancing process, but will become effective at the end of the following month. New bonds
issued are taken into account if they are publicly known to settle through the last calendar day of the month and if their rating and amount outstanding has become known at least three trading days before the end of the month.
Three preview lists of eligible bonds are published on ten (t-10), five (t-5), and three (t-3) trading days before the end of the
month. Two business days before the end of each month, the rating and amount information for the constituents is updated and the list is adjusted for all rating and amount changes which are known to have taken place three business days before the
end of the month which could also result in exclusion of the bond. The rating and amount changes made two business days before the end of the month will not be considered for inclusion. Two business days before the end of the month the final
index membership list for the following month is published at the close of business.
Index Weights: The weight for each bond is
determined on the last business day of each month using the end-of-month market values and applying an issuer cap of 3%.
Index Data: New bonds are included in the index at
their respective ask prices when they enter the index family. In the event that no price can be established for a particular bond, the index continues to be calculated based on the last-available price.
Index Calculation: The components of the total
return are price changes, accrued interest, coupon payments, and reinvestment income on cash flows received during the composition month. Calculations are performed daily, using bid prices at approximately 4 p.m. Eastern Time.
Treatment of Special Intra-Month Events: Data for
the application of corporate actions in the index may not be fully or timely available at all times. In such cases, Markit will estimate the approximate value based on the available data at the time of calculation.
● |
Unscheduled Full Redemption: If a bond is fully redeemed intra-month, the redeemed bond is treated as cash based on the last consolidated price, the call price or repurchase price,
as applicable. In addition, the clean price of the bond is set to the redemption price, and the interest accrued until the redemption date is treated as an irregular coupon payment.
|
● |
Bonds Trading Flat of Accrued: If a bond is identified as trading flat of accrued, the accrued interest of the bonds is set to 0 in the total return index calculation and the bond is
excluded from the calculation of all bond and index analytical values.
|
● |
Multi-Coupon Bonds: For step-up bonds with a pre-defined coupon schedule, such schedule cannot change during the life of the bond and is used for all calculations. For event-driven
bonds whose coupon may change upon occurrence (or non-occurrence) of pre-specified events, the coupon schedule as of the calculation date is used.
|
Additional information about the iBoxx $ Liquid Investment Grade Index is available at markit.com/product/IBoxx and may also be obtained from other
sources including, but not limited to, press releases, newspaper articles and other publicly available documents. We are not incorporating by reference the website, the sources listed above or any material they include in this prospectus
supplement.
Historical Closing Prices of the 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. The period shown
below will be approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from
the date hereof or otherwise).
You should not take the historical closing prices of the
shares as an indication of the future performance of the shares. We cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes on
the stated maturity date. Neither we nor any of our affiliates make any representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the relevant
ETF closing prices between the date of this prospectus supplement and the date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the 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 November 12, 2008 through November 12, 2018. We
obtained the closing prices shown in the graph below from Bloomberg Financial Services without independent verification.
Historical Performance of iShares® iBoxx $ Investment Grade Corporate Bond ETF
“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.
iShares® iBoxx $ High Yield Corporate Bond ETF
The shares of the iShares® iBoxx $ High Yield
Corporate Bond ETF (the “ETF”) are issued by iShares® Trust, a registered investment company.
● |
The ETF is a tracking ETF that seeks investment results which correspond generally to the price and yield performance, before fees and expenses, of the index.
|
● |
The index it tracks is the Markit iBoxx® USD Liquid High Yield Index (the “index”).
|
● |
Investment Advisor: BlackRock Fund Advisors (“BFA”).
|
● |
The ETF’s shares trade on the NYSE Arca under the ticker symbol “HYG”.
|
● |
The iShares® Trust’s SEC CIK Number is 0001100663.
|
● |
The ETF’s inception date was April 4, 2007.
|
● |
The ETF’s shares are issued or redeemed only in creation units of 100,000 shares or multiples thereof.
|
We obtained the following fee information from the iShares® website without independent verification. The investment advisor is paid a management fee from the ETF corresponding to the ETF’s allocable portion of an aggregate management fee based on the aggregate average daily net assets
of the ETF and another specified iShares® fund (the “funds”) as follows: 0.5000% per annum of the average daily net assets of the combined funds less than or equal
to $19.0 billion, plus 0.4750% per annum of the average daily net assets of the combined funds on amounts greater than $19.0 billion up to $33.0 billion, plus 0.4513% per annum of the average daily net assets of the combined funds on amounts greater than $33.0 billion up to $47.0 billion, plus 0.4287% of the average daily net assets of the combined funds on amounts in excess of $47.0 billion. As of September 30, 2018, the expense ratio of the ETF was 0.49% per annum.
For additional information regarding iShares®
Trust or BFA, please consult the reports (including the Annual Report to Shareholders on Form N−CSR for the fiscal year ended February 28, 2018) 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/HYG.htm. We are not incorporating by reference the website, the sources
listed above or any material they include in this prospectus supplement.
Investment Objective and Strategy
The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses,
of the index. The 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® iBoxx $ High Yield Corporate Bond ETF Top Ten Holdings as of October 12, 2018
Corporate Bond Issuer
|
Percentage (%)
|
BLK CSH FND TREASURY SL AGENCY
|
0.71%
|
ALTICE FRANCE SA (FRANCE) 144A
|
0.61%
|
SPRINT CORP
|
0.53%
|
FIRST DATA CORPORATION 144A
|
0.46%
|
REYNOLDS GROUP ISSUER LLC
|
0.41%
|
BAUSCH HEALTH COMPANIES INC 144A
|
0.38%
|
CCO HOLDINGS LLC 144A
|
0.38%
|
BAUSCH HEALTH COMPANIES INC 144A
|
0.37%
|
CHS/COMMUNITY HEALTH SYSTEMS INC
|
0.36%
|
TENET HEALTHCARE CORPORATION
|
0.35%
|
Total
|
4.56%
|
iShares® iBoxx $ High Yield Corporate Bond ETF Weighting by Sector
as of October 12, 2018*
Sector
|
Percentage (%)
|
Communications
|
23.45%
|
Consumer Non-Cyclical
|
15.35%
|
Consumer Cyclical
|
12.02%
|
Energy
|
14.85%
|
Capital Goods
|
7.45%
|
Technology
|
7.84%
|
Basic Industry
|
4.37%
|
Finance Companies
|
3.65%
|
Electric
|
2.86%
|
Banking
|
1.29%
|
Transportation
|
1.08%
|
Cash and/or Derivatives
|
0.68%
|
Financial Other
|
0.93%
|
Insurance
|
1.82%
|
Industrial Other
|
0.66%
|
Reits
|
0.88%
|
Brokerage/Asset Managers/Exchanges
|
0.24%
|
Owned No Guarantee
|
0.58%
|
Total
|
100.00%
|
* Percentages may not sum to 100% due to rounding.
The following table displays additional information about the bonds held by the ETF, in each case as of October 12, 2018. We
obtained the information in the table below from the iShares® website without
independent verification.
Weighted average maturity
|
4.80 years
|
Weighted average coupon
|
6.18%
|
Effective duration
|
3.74 years
|
Weighted average maturity is the length of time until the average security in the ETF will mature or be redeemed by its issuer.
Weighted average coupon is the average coupon rate of the underlying bonds in the ETF, weighted by the relative size in the ETF. Effective duration is a measure of the responsiveness of a bond or portfolio price to small parallel shifts in
interest rates, taking into account possible changes in expected bond cash flows due to small parallel shifts in interest rates.
Representative Sampling
Although the ETF seeks results that correspond generally to the performance of the index, the ETF uses a representative sampling
indexing strategy to attempt to track the performance of the index. For the ETF, this strategy involves investing in a representative sample of securities that collectively have an investment profile similar to that of the index, although the ETF
may or may not hold all of the securities in the index. The securities selected are expected to have, in the aggregate, investment characteristics (based on factors such as market capitalization and industry weightings), fundamental
characteristics (such as return variability, duration, maturity or credit ratings and yield) and liquidity measures similar to those of the index.
The ETF generally invests at least 90% of its assets in the component securities of the index and may invest up to 10% of its assets in certain
futures, options and swaps contracts, cash and cash equivalents, including shares of money market funds affiliated with BFA, as well as in bonds not included in the index, but which BFA believes will help the ETF track the index. From time to
time when conditions warrant, however, the ETF may invest at least 80% of its assets in the component securities of the index and may invest up to 20% of its assets in certain futures, options and swap contracts, cash and cash equivalents,
including shares of BlackRock Cash Funds as well as securities not included in the index, but which BFA believes will help the ETF track the index. For example, the ETF may invest in securities not included in the
index in order to reflect prospective changes in the index. The ETF may also lend securities representing up to one-third of the
value of the ETF’s total assets (including the value of the collateral received).
Tracking Error
The performance of the ETF and of the index may vary due to a variety of factors, including transaction costs, non-U.S. currency
valuations, asset valuations, corporate actions (such as mergers and spin-offs), timing variances and differences between the ETF’s portfolio and the index resulting from the ETF’s use of representative sampling or from legal restrictions (such
as diversification requirements) that apply to the ETF but not to the index.
Tracking error may occur because of differences between the securities held in the ETF’s portfolio and those included in the index,
pricing differences (including, as applicable, differences between a security’s price at the local market close and the ETF’s valuation of a security at the time of calculation of the ETF’s NAV), differences in transaction costs, the ETF holding
uninvested cash, differences in timing of the accrual of or the valuation of distributions, 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. Tracking error risk may be heightened during times of increased market volatility or other unusual market conditions. BFA
expects that the ETF may experience higher tracking error than is typical for similar exchange-traded funds. BFA expects that, over time, the 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 September 30, 2018, 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 represents changes to the mid-point price and accounts for distributions from the ETF. The mid-point is the average of
the mid-point of the bid-ask prices at 4:00 p.m., Eastern time on the relevant date. ETF shares: 1 year, 2.47%; 3 years, 6.75%; 5 years, 4.30%; 10 years, 7.49%; since inception, 5.43%; index: 1 year, 2.94%; 3 years, 7.50%; 5 years, 4.79%; 10
years, 7.95%; since ETF inception, 5.93%.
Industry Concentration
The ETF will concentrate its investments (i.e., hold
25% or more of its total assets) in a particular industry or group of industries to approximately the same extent that the index is concentrated in that industry or group of industries. For purposes of this limitation, securities of the U.S.
government (including its agencies and instrumentalities), repurchase agreements collateralized by U.S. government securities, and securities of state or municipal governments and their political subdivisions are not considered to be issued by
members of any industry.
The Index
The index is a bond index calculated, published and disseminated by the index sponsor, Markit Indices Limited (“Markit”). The index
is designed to reflect the performance of U.S. dollar (“USD”) denominated high yield (as determined by Markit) corporate debt through a broad coverage of the USD high yield liquid bond universe. The index is market-value weighted, with an issuer
weight cap of 3%, calculated as of the last business day of each month using the end-of-month closing prices for each bond. The index is calculated as end-of-day and distributed once daily. The indices are calculated every day except on common
U.S. bank holidays. In addition, the indices are calculated with the previous trading day’s close on the last calendar day of each month if that day is not a trading day.
As of February 28, 2018, the index included approximately 983 bonds chosen according to the index rules described below.
Selection Criteria of the Index
The bonds in the index must meet all the criteria described below as of the close of business three business days prior to the
rebalancing date provided that the relevant bond data can be verified, at Markit’s sole discretion, as of that cut-off date. The new index composition becomes effective on the first business day of the next month. Additionally, the index rules
and their application will be governed by two committees:
● |
Technical Committee: consists of representatives from market makers/banks and meets on a monthly basis in order to provide feedback and information into the monthly rebalancing
process and to monitor any market developments.
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Oversight Committee: consists of representatives from mostly the buy side and meets in order to discuss the decisions of the Technical Committee, the wider index rules and any market
developments which may warrant rule changes.
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Bond Classification: Bonds must be USD denominated
corporate credit (i.e., debt instruments backed by corporate issuers that are not secured by specific assets). Debt issued by governments, sovereigns, quasi-sovereigns,
and government-backed or guaranteed entities is excluded. As of August 2012, the issuer or, in the case of a finance subsidiary, the issuer’s guarantor, must be domiciled, incorporated and the country of risk must be in Andorra, Australia,
Austria, Belgium, Bermuda, Canada, Cayman Islands, Cyprus, Denmark, Faeroe Islands, Finland, France, Germany, Gibraltar, Greece, Hong Kong, Iceland, Ireland, Italy, Japan, Jersey, Liechtenstein, Luxembourg, Malta, Monaco, the Netherlands, New
Zealand, Norway, Portugal, San Marino, Singapore, Spain, Sweden, Switzerland, the United States or the United Kingdom. A new country is added to the index if it is classified as a developed market according to “Markit’s Global Economic
Development Classification.” A country is no longer eligible for the index if it is classified as an emerging market based on “Markit’s Global Economic Development Classification.” The “Markit Global Economic Development Classification” is
updated once per year. The results are published at the end of July. The inclusion/exclusion of a country becomes effective at the end of October. Each bond is assigned to one of the following sectors: Oil & Gas, Basic Materials, Industrials,
Consumer Goods, Health Care, Consumer Services, Telecommunications, Technology, Utilities, Financials and Technology.
All bonds are classified based on the principal activities of the issuer, the main sources of the cash flows used to pay coupons
and redemptions, and a bond’s specific collateral type or legal provisions. Markit reviews bond classification regularly and makes necessary changes at the next rebalancing.
Bond Type: Only fixed rate bonds whose cash flow can
be determined in advance are eligible, including fixed coupon bonds, step-up bonds with coupon schedules known at issuance (or as functions of the issuer’s rating), bonds with sinking funds, amortizing bonds, medium term notes, Rule 144A
offerings, callable bonds and putable bonds. Preferred shares, convertible bonds, subordinated bank or insurance debt with mandatory contingent conversion features or with any conversion options before the first call date, bonds with other equity
features attached (e.g., options or warrants), private placements, perpetual bonds, floating rate notes, pay-in kind bonds, zero coupon bonds, bonds with zero step-ups (“GAINS”), bonds with difference between accrual and coupon payment periods,
monthly-paying bonds and Regulation S offerings are excluded. Any bond subject to a firm call or tender offer, with the exception of exchange offers in the month immediately following the rebalancing date will be excluded, provided that Markit is
aware of such tender offer or firm call.
For retail bonds and private placements, publicly available information is not always conclusive and the classification of a bond
as a retail bond or a private placement will be made at Markit’s discretion based on the information available at the time of the determination. In instances where a new bond type is not specifically excluded or included in the index according to
the published index rules, Markit will analyze the features of such securities in line with the principles set out in the index rules to make the determination as to whether the bond will be included.
Credit Rating: All bonds must have a rating of
sub-investment grade. Ratings from each of the following three agencies are considered: Fitch Ratings, Moody’s Investor Service and S&P Global Ratings. If more than one agency rates a given bond, those ratings are averaged. Sub-investment
grade is defined as BB+ or lower from Fitch or S&P and Ba1 or lower from Moody’s, but not in default. Bonds rated D by Fitch or S&P, or that have been subject to a default press release by Moody’s are excluded. An included bond
subsequently downgraded to D by Fitch or S&P or subject to a default press release by Moody’s (as of the bond selection cut-off date) will be excluded on the next rebalancing date. In case of an exchange of a 144A bond into a registered bond,
the ratings from the 144A bond are also used for the registered bond. After a bond has migrated into high yield from investment grade status, it must retain that status for three months before it can be included in the index.
Time to Maturity: At issuance, all bonds must have
an expected remaining life of 15 years or less. At the rebalancing day, all bonds must have an expected remaining life of at least one year and all newly included bonds must have an expected remaining life of at least one year and six months.
Amount Outstanding: The outstanding face value of a
bond must be at least $400 million as of the bond selection cut-off date, after taking into account buybacks or increases. The outstanding face value of all non-convertible bonds denominated in USD from the issuer must be at least $1 billion as
of the bond selection cut-off date.
Minimum Run: Any bond that enters the index must
remain in the index for a minimum of six months (provided that the bond is not upgraded to investment grade, defaulted or fully redeemed in that period).
Lockout Period: A bond that drops out of the index
at re-balancing is excluded from re-entering the index for a three-month period.
Calculation of the Index
Bond Prices: All iBoxx indices are multi-source
priced. Prices for the bonds in the index are sourced from a number of representative sources. Pricing data is produced by experienced pricing analysts using established instrument evaluation models; non-transactional data such as observed bid
and ask prices may predominate for a given bond as the data is being scrutinized to reliably represent the interest measured. The pricing service may also decide to rely upon expert judgment in an active albeit low liquidity market or any other
circumstances, when observed bid and ask prices or transactions may not be consistently available each day.
Index Rebalancing: The index is rebalanced every
month on the last business day of the month. Any inclusion after the index cut-off day (t-3) will not be considered in the re-balancing process, but will become effective at the end of the following month. New bonds issued are taken into account
if they are publicly known to settle through the last calendar day of the month and if their rating and amount outstanding has become known at least three trading days before the end of the month.
Three preview lists of eligible bonds are published on ten (t-10), five (t-5), and three (t-3) trading days before the end of the
month. Two business days before the end of each month, the rating and amount information for the constituents is updated and the list is adjusted for all rating and amount changes which are known to have taken place three business days before the
end of the month which could also result in exclusion of the bond. The rating and amount changes made two business days before the end of the month will not be considered for inclusion. Two business days before the end of the month the final
index membership list for the following month is published at the close of business.
Index Weights: The weight for each bond is
determined on the last business day of each month using the end-of-month market values and applying an issuer cap of 3%.
Index Calculation: The components of the total
return are price changes, accrued interest, coupon payments, and reinvestment income on cash flows received during the composition month. The calculation is based on bond pricing provided by independent bond pricing services. The cut-off time for
the bond pricing used in the index is 3 p.m. Eastern Time.
Treatment of Special Intra-Month Events: Data for the
application of corporate actions in the index may not be fully or timely available at all times. In such cases, Markit will estimate the approximate value based on the available data at the time of calculation.
● |
Unscheduled Full Redemption: If a bond is fully redeemed intra-month, the redeemed bond is treated as cash based on the last consolidated price, the call price or repurchase price,
as applicable. In addition, the clean price of the bond is set to the redemption price, and the interest accrued until the redemption date is treated as an irregular coupon payment.
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Bonds Trading Flat of Accrued: If a bond is identified as trading flat of accrued, the accrued interest of the bond is set to 0 in the total return index calculation and is excluded
from the calculation of all bond and index analytical values.
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Bonds will be considered trading flat of accrued in any of the following situations:
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■ |
Issuer has announced a failure to pay a coupon
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■ |
Issuer has announced an intention not to make a payment on an upcoming coupon (grace period)
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● |
Multi-Coupon Bonds: For step-up bonds with a pre-defined coupon schedule, such schedule cannot change during the life of the bond and is used for all calculations. For event-driven
bonds whose coupon may change upon occurrence (or non-occurrence) of pre-specified events, the coupon schedule as of the calculation date is used.
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Additional information about the Markit iBoxx $ Liquid High Yield Index is available at markit.com/product/IBoxx and may also be obtained from
other sources including, but not limited to, press releases, newspaper articles and other publicly available documents. We are not incorporating by reference the website, the sources listed above or any material they include in this prospectus
supplement.
Historical Closing Prices of the 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. The period shown
below will be approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from
the date hereof or otherwise).
You should not take the historical closing prices of the
shares as an indication of the future performance of the shares. We cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes on
the stated maturity date. Neither we nor any of our affiliates make any representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the relevant
ETF closing prices between the date of this prospectus supplement and the date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the 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 November 12, 2008 through November 12, 2018. We
obtained the closing prices shown in the graph below from Bloomberg Financial Services without independent verification.
Historical Performance of iShares® iBoxx $ High Yield Corporate Bond ETF
“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.
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 index.
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The index it currently tracks is 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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Investment Advisor: 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 September 30, 2018, 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 28, 2018) 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 prospectus supplement.
Investment Objective and Strategy
The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses,
of the index. The 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).
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 October 12, 2018*
U.S. Treasury Bond
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Percentage (%)
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2.38% due 5/15/2027
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20.61%
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2.25% due 8/15/2027
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14.57%
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2.25% due 2/15/2027
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13.75%
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1.63% due 5/15/2026
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13.73%
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1.63% due 2/15/2026
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9.30%
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2.00% due 11/15/2026
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8.81%
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2.75% due 2/15/2028
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5.61%
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2.88% due 5/15/2028
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5.27%
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2.25% due 11/15/2027
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3.31%
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1.50% due 8/15/2026
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2.77%
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Total
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97.73%
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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 October 12, 2018*. We obtained the information in the table below from the iShares® website without independent verification.
Weighted average maturity
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8.36 years
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Weighted average coupon
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2.15%
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Effective duration
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7.48 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 October 12, 2018*, the ETF’s holdings were comprised of 12 U.S. Treasury bonds (99.98% of holdings) and cash and/or
derivatives (0.02% 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, 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 September 30, 2018, 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, -3.06%; 3 years, -0.27%; 5 years, 1.75%; 10 years, 3.73%; since inception, 4.37%; index: 1 year, -3.00%; 3 years, -0.19%; 5 years, 1.83%; 10 years, 3.83%; since ETF
inception, 4.43%. Prior to April 1, 2016, the ETF tracked the Barclays U.S. 7-10 Year Treasury Bond Index.
The 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 seven years and less than or equal to 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 seven years and less than or equal to 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 on the last business day (a day that SIFMA declares the U.S. fixed income markets open) of each month. The
index composition for the next month is published three business days before the end of the prior month, which will include all eligible treasuries, including any new auctions or re-openings which are announced on or before the third business day
before the prior month end. Newly issued securities that are issued on or before the month-end rebalancing date that qualify for inclusion in the index will be included in the pro forma index with a price of $100 until replaced with an evaluated
price as soon as available after the auction day.
No adjustments are made for treasuries that become eligible or ineligible intra-month. Any such change will be incorporated in the
index at the next month-end rebalancing and made effective from the first day of the following month.
Cash that has accrued intra-month from interest and principal payments earns no reinvestment return during the month. The
accumulated intra-month cash is removed from the index at month-end, which implies that it is reinvested pro rata across the entire index.
Current Composition of the Index
As of October 12, 2018, 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 October 12, 2018. 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
|
Weighted average coupon
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2.41%
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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. The period shown
below will be approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from
the date hereof or otherwise).
You should not take the historical closing prices of the
shares as an indication of the future performance of the shares. We cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes on
the stated maturity date. Neither we nor any of our affiliates make any representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the relevant
ETF closing prices between the date of this prospectus supplement and the date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the 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 November 12, 2008 through November 12, 2018. We
obtained the closing prices shown in the graph below from Bloomberg Financial Services without independent verification.
Historical Performance of iShares® 7-10 Year Treasury Bond ETF
*Prior to April 1, 2016, the ETF tracked the Barclays U.S. 7-10 Year Treasury Bond Index.
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 November 12, 2008 through November 12,
2018 (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.)
Historical Performance of ICE U.S. Treasury 7-10 Year Bond Index
*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.
iShares® MSCI Emerging Markets ETF
The shares of the iShares® MSCI Emerging Markets ETF (the “ETF”) are issued by iShares, Inc. (the “company”). The Company was organized as a Maryland corporation on September 1, 1994 and is
authorized to have multiple series or portfolios, of which the ETF is one. On July 1, 2013, the iShares® MSCI Emerging Markets Index Fund changed its name to the
iShares® MSCI Emerging Markets ETF.
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The ETF is a tracking ETF that seeks investment results which correspond generally to the price and yield performance, before fees and expenses, of the index.
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● |
The index it tracks is the MSCI Emerging Markets Index (the “index”).
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● |
Investment Advisor: BlackRock Fund Advisors (“BFA”).
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● |
The ETF’s shares trade on the NYSE Arca under the ticker symbol “EEM”.
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● |
The company’s SEC CIK Number is 0000930667.
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● |
The ETF’s inception date was April 7, 2003.
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● |
The ETF’s shares are issued or redeemed only in creation units of 450,000 shares or multiples thereof.
|
The index was launched on December 31, 1987 with an initial level of 100.
We obtained the following fee information from the iShares® website without independent verification. The investment advisor is entitled to receive a management fee from the ETF based on the ETF’s allocable portion of an aggregate management fee based on the aggregate average daily net
assets of the ETF and a set of other specified iShares® funds (the “funds”) as follows: 0.75% per annum of the aggregate net assets of the funds less than or equal
to U.S. $14.0 billion, plus 0.68% per annum of the aggregate net assets of the funds on amounts in excess of U.S. $14.0 billion up to and including U.S. $28.0 billion,
plus 0.61% per annum of the aggregate net assets of the funds on amounts in excess of U.S. $28.0 billion up to and including U.S. $42.0 billion, plus 0.54% per annum of the aggregate net assets of the funds on amounts in excess of U.S. $42.0 billion up to and including U.S. $56.0 billion, plus 0.47% per annum of the aggregate net assets of the funds on amounts in excess of U.S. $56.0 billion up to and including U.S. $70.0 billion, plus 0.41% per annum of the aggregate net assets of the funds on amounts in excess of U.S. $70.0 billion up to and including U.S. $84.0 billion, plus 0.35% per annum of the aggregate net assets of the funds in excess of U.S. $84.0 billion. As of September 30, 2018, the aggregate expense ratio of the ETF was 0.69% per annum.
The investment advisory agreement of the ETF provides that BFA will pay all operating expenses of the ETF, except interest
expenses, taxes, brokerage expenses, future distribution fees or expenses, and extraordinary expenses. The ETF may also pay “Acquired Fund Fees and Expenses”. Acquired Fund Fees and Expenses reflect the ETF’s pro rata share of the fees and
expenses incurred by investing in other investment companies.
For additional information regarding the company or BFA, please consult the reports (including the Semi-Annual Report to
Shareholders on Form N-CSRS for the period ended February 28, 2018) and other information the company files with the SEC. In addition, information regarding the ETF, including its top portfolio holdings, may be obtained from other sources
including, but not limited to, press releases, newspaper articles, other publicly available documents and the iShares® website at
us.ishares.com/product_info/fund/overview/ EEM.htm. We are not incorporating by reference the website, the sources listed above or any material they include in this prospectus supplement.
Investment Objective
The ETF seeks to track the investment results, before fees and expenses, of the index. The ETF’s investment objective may be
changed without shareholder approval.
The following tables display the top holdings and weightings by industry sector of the ETF. (Sector designations are determined by the ETF sponsor
using criteria it has selected or developed. ETF advisors and index sponsors may use very different standards for determining sector designations. In addition, many companies operate in a number of sectors, but are listed in only one sector and
the basis on which that sector is selected may also differ. As a result, sector comparisons between ETFs or indices with different sponsors may reflect differences in methodology as well as actual differences in the sector composition of the
indices or ETFs.) We obtained the information in the tables below from the ETF website without independent verification.
iShares® MSCI Emerging Markets ETF Top Ten Holdings as of October 12, 2018
ETF Stock Issuer
|
Percentage (%)
|
TENCENT HOLDINGS LTD
|
4.31%
|
TAIWAN SEMICONDUCTOR MANUFACTURING
|
3.89%
|
SAMSUNG ELECTRONICS LTD
|
3.85%
|
ALIBABA GROUP HOLDING ADR REPRESEN
|
3.50%
|
NASPERS LTD
|
1.81%
|
CHINA CONSTRUCTION BANK CORP H
|
1.56%
|
CHINA MOBILE LTD
|
1.26%
|
BAIDU ADR REPTG INC CLASS A
|
1.17%
|
PING AN INSURANCE (GROUP) CO OF CH
|
1.00%
|
CIA VALE DO RIO DOCE SH
|
0.97%
|
Total
|
23.32%
|
iShares® MSCI Emerging Markets ETF Weighting by Sector as of October 12, 2018*ǂ
Sector
|
Percentage (%)
|
Financials
|
23.77%
|
Information Technology
|
15.23%
|
Consumer Discretionary
|
10.25%
|
Consumer Staples
|
6.56%
|
Energy
|
8.46%
|
Industrials
|
5.41%
|
Communication
|
13.96%
|
Materials
|
7.87%
|
Utilities
|
2.49%
|
Real Estate
|
2.74%
|
Health Care
|
2.97%
|
Cash and/or Derivatives
|
0.30%
|
Other
|
0.00%
|
Total
|
100.01%
|
* Percentages may not sum to 100% due to rounding.
ǂ
The Global Industry Classification Structure, which MSCI utilizes to classify the constituents of the index, was updated in September 2018. Please see “ ― The MSCI® Emerging Markets Index” below for additional information about these updates.
iShares® MSCI Emerging Markets ETF Weighting by Country as of October 12, 2018*
Country
|
Percentage (%)
|
China
|
30.16%
|
Korea (South)
|
14.47%
|
Taiwan
|
11.83%
|
India
|
8.49%
|
Brazil
|
7.26%
|
South Africa
|
6.09%
|
Russian Federation
|
3.77%
|
Mexico
|
3.20%
|
Thailand
|
2.51%
|
Malaysia
|
2.47%
|
Indonesia
|
1.93%
|
Poland
|
1.23%
|
Chile
|
1.11%
|
Qatar
|
1.01%
|
Cash and/or Derivatives
|
0.30%
|
Other
|
4.20%
|
Total
|
100.03%
|
* Percentages may not sum to 100% due to rounding.
Representative Sampling
BFA uses a representative sampling strategy to attempt to track the performance of the index. For the ETF, this strategy involves
investing in a representative sample of securities that collectively have an investment profile similar to that of the index. The securities selected are expected to have aggregate investment characteristics (based on factors such as market
capitalization and industry weightings), fundamental characteristics (such as return variability, earnings valuation and yield) and liquidity measures similar to those of the index.
The ETF generally invests at least 90% of its assets in the securities of the index and in depositary receipts representing
securities of the index. The ETF may invest the remainder of its assets in securities not included in the index, but which BFA believes will help the ETF track the index. The ETF may also invest its other assets in futures contracts, options and
swaps, as well as cash and cash equivalents, including shares of money market funds affiliated with BFA. Also, the ETF may lend securities representing up to one-third of the value of the ETF's total assets (including the value of the collateral
received). The ETF invests all of its assets that are invested in India in a wholly owned subsidiary located in the Republic of Mauritius. BFA also serves of the investment advisor of the subsidiary.
Tracking Error
The performance of the ETF and the index may vary due to a variety of factors, including differences between the ETF’s assets and
the index, pricing differences (including differences between a security’s price at the local market close and the ETF’s valuation of a security at the time of calculation of the ETF’s net asset value per share), differences in transaction costs,
the ETF’s holding of uninvested cash, differences in timing of the accrual of or the valuation of dividends or interest, tax gains or losses, 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 performance difference will not exceed 5%. The ETF’s use of a representative sampling strategy
can be expected to produce a greater tracking error over a period of time than would result if the ETF used an indexing strategy in which an exchange traded fund invests in substantially all of the securities in its index in approximately the
same proportions as in the index.
As of September 30, 2018, 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, -2.14%; 3 years, 11.60%; 5 years, 3.04%; 10 years, 4.26%; since inception, 10.88%; index: 1 year, -0.81%; 3 years, 12.36%; 5 years, 3.61%; 10 years, 5.40 %; since ETF
inception, 11.38%.
Industry Concentration Policy
The ETF will concentrate its investments (i.e., hold 25% or more of its total assets) in a particular industry or group of
industries to approximately the same extent that the index is concentrated in that industry or group of industries.
The MSCI® Emerging Markets Index
The MSCI Emerging Markets Index, (the “index”) is a stock index calculated, published and disseminated daily by MSCI Inc. (“MSCI”)
through numerous data vendors, on the MSCI website and in real time on Bloomberg Financial Markets and Reuters Limited.
The index is a free float-adjusted market capitalization index and is one of the MSCI Global Investable Market Indices (the “MSCI
Indices”), the methodology of which is described below. The index is considered a “standard” index, which means it consists of all eligible large capitalization and mid-capitalization stocks, as determined by MSCI, in the relevant emerging
markets. Additional information about the MSCI Indices is available on the following website: msci.com/index-methodology. Daily closing price information for the index is available on the following website: msci.com. We are not incorporating by
reference the website, the sources listed above or any material they include in this prospectus supplement.
The index is intended to provide performance benchmarks for the emerging equity markets in the Americas, Europe, the Middle East, Africa and Asia,
which are, as of the date of this prospectus supplement, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Qatar, Russia, South Africa, Taiwan,
Thailand, Turkey and the United Arab Emirates. The constituent stocks of the MSCI Emerging Markets Index are derived from the constituent stocks in the 24 MSCI standard single country indices for the
emerging market countries listed above. The index is calculated in U.S. dollars on a total return net basis. The index was launched
on December 31, 1987 at an initial value of 100.
As of the close on May 31, 2018, MSCI began a multi-step process to include, in the MSCI Emerging Markets Index, large cap China A
shares that are not in trading suspension. As part of the first step of the inclusion process, which resulted from the May 2018 quarterly index review, MSCI added such large cap China A shares to the MSCI Emerging Markets Index at 2.5% of their
foreign inclusion factor-adjusted market capitalization (as defined below). In connection with the August 2018 quarterly index review, MSCI implemented the second step of the inclusion process by increasing the foreign inclusion factor-adjusted
market capitalization of those existing China A share constituents from 2.5% to 5%. With the implementation of this second step, and the inclusion of additional China A shares in connection with the august 2018 quarterly index review, China A
shares were initially expected to represent approximately 0.75% of the MSCI Emerging Markets Index.
MSCI has announced that, beginning in June 2019, it expects to include the MSCI Saudi Arabia Index in the MSCI Emerging Markets
Index, representing on a pro forma basis a weight of approximately 2.6% of the MSCI Emerging Markets Index with 32 securities, following a two-step inclusion process. The first inclusion step is expected to coincide with the May 2019 semi-annual
review and the second inclusion step is expected to take place as part of the August 2019 quarterly index review. In addition, MSCI has announced the reclassification of the MSCI Argentina Index from a “frontier market” to an “emerging market”,
and the MSCI Argentina Index is expected to be included in the MSCI Emerging Markets Index coinciding with the May 2019 semi-annual index review. MSCI expects to continue to restrict the inclusion in the MSCI Argentina Index to only foreign
listings of Argentinian companies, such as American depositary receipts.
MSCI divides the companies included in the index into eleven Global Industry Classification Sectors: Financials, Consumer
Discretionary, Industrials, Information Technology, Consumer Staples, Materials, Real Estate, Health Care, Telecommunication Services, Utilities and Energy. As of the close of business on September 21, 2018, MSCI and S&P Dow Jones Indices LLC
updated the Global Industry Classification Sector structure. Among other things, the update broadened the Telecommunications Services sector and renamed it the Communication Services sector. The renamed sector includes the previously existing
Telecommunication Services Industry group, as well as the Media Industry group, which was moved from the Consumer Discretionary sector and renamed the Media & Entertainment Industry group. The Media & Entertainment Industry group contains
three industries: Media, Entertainment and Interactive Media & Services. The Media industry continues to consist of the Advertising, Broadcasting, Cable & Satellite and Publishing sub-industries. The Entertainment industry contains the
Movies & Entertainment sub-industry (which includes online entertainment streaming companies in addition to companies previously classified in such industry prior to September 21, 2018) and the Interactive Home Entertainment sub-industry
(which includes companies previously classified in the Home Entertainment Software sub-industry prior to September 21, 2018 (when the Home Entertainment Software sub-industry was a sub-industry in the Information Technology sector)), as well as
producers of interactive gaming products, including mobile gaming applications). The Interactive Media & Services industry and sub-industry includes companies engaged in content and information creation or distribution through proprietary
platforms, where revenues are derived primarily through pay-per-click advertisements, and includes search engines, social media and networking platforms, online classifieds and online review companies. The Global Classification Sector structure
changes will be implemented in the MSCI Emerging Markets Index in connection with the November 2018 semi-annual index review.
For additional information about the construction, calculation methodology and maintenance of the index, please see “iShares® MSCI EAFE ETF —
Construction of the MSCI Indices”, “iShares® MSCI EAFE ETF — Calculation Methodology for the MSCI Indices” and “iShares® MSCI EAFE ETF — Maintenance of the MSCI Indices”, respectively, on pages S-83, S-85 and S-86 of this prospectus supplement, respectively.
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. The period shown
below will be approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from
the date hereof or otherwise).
You should not take the historical closing prices of the
shares as an indication of the future performance of the shares. We cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes on
the stated maturity date. Neither we nor any of our affiliates make any representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the relevant
ETF closing prices between the date of this prospectus supplement and the date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the 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 November 12, 2008 through November 12, 2018. We
obtained the closing prices shown in the graph below from Bloomberg Financial Services without independent verification.
Historical Performance of iShares® MSCI Emerging Markets ETF
“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.
iShares® U.S. Real Estate ETF
The shares of the iShares® U.S. Real Estate ETF
(the “ETF”) are issued by iShares® Trust, a registered investment company.
● |
The ETF is a tracking ETF that seeks investment results which correspond generally to the price and yield performance, before fees and expenses, of the index.
|
● |
The index it tracks is the Dow Jones U.S. Real Estate IndexSM (the “index”).
|
● |
Investment Advisor: BlackRock Fund Advisors (“BFA”).
|
● |
The ETF’s shares trade on the NYSE Arca under the ticker symbol “IYR”.
|
● |
The ETF’s SEC CIK Number is 0001100663.
|
● |
The ETF’s inception date was June 12, 2000.
|
● |
The ETF’s shares are issued or redeemed only in creation units of 50,000 shares or multiples thereof.
|
We obtained the following fee information from the iShares® website without independent verification. The investment advisor is entitled to receive a management fee from the ETF corresponding to the ETF’s allocable portion of an aggregate management fee based on the aggregate average
daily net assets of the ETF and a set of other iShares® funds (the “funds”) as follows: 0.48% per annum of the aggregate net assets of the combined funds less than
or equal to $10.0 billion; plus 0.43% per annum of the aggregate net assets of the combined funds over $10.0 billion, up to and including $20.0 billion; plus 0.38% per annum of the aggregate net assets of the combined funds in excess of $20.0 billion, up to and including $30.0 billion; plus 0.34% per annum of the aggregate
net assets of the combined funds in excess of $30.0 billion, up to and including $40.0 billion; plus 0.33% per annum of the aggregate net assets of the combined funds
in excess of $40.0 billion, up to and including $50.0 billion; plus 0.31% per annum of the aggregate net assets of the combined funds in excess of $50.0 billion. As
of September 30, 2018, the expense ratio of the ETF was 0.43%.
For additional information regarding iShares®
Trust or BFA, please consult the reports (including the Annual Report to Shareholders on Form N-CSR for the fiscal year ended March 31, 2018) 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/IYR.htm?fundSearch=true&qt=IYR. We are not incorporating by reference the website, the
sources listed above or any material they include in this prospectus supplement.
Investment Objective
The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses,
of the index. The ETF’s investment objective and the index may be changed at any time, without the approval of BFA’s shareholders.
The following tables display the top holdings and weightings by industry sector of the ETF. (Sector designations are determined by the ETF sponsor
using criteria it has selected or developed. Index and ETF sponsors may use very different standards for determining sector designations. In addition, many companies operate in a number of sectors, but are listed in only one sector and the basis
on which that sector is selected may also differ. As a result, sector comparisons between indices or ETFs with different sponsors may reflect differences in methodology as well as actual differences in the sector composition of the indices or
ETFs.) We obtained the information in the tables below from the ETF’s website without independent verification.
iShares® U.S. Real Estate ETF Top Ten Holdings as of October 12, 2018
ETF Stock Issuer
|
Percentage (%)
|
AMERICAN TOWER REIT CORP
|
6.36%
|
SIMON PROPERTY GROUP REIT INC
|
5.37%
|
CROWN CASTLE INTERNATIONAL REIT CO
|
4.42%
|
PROLOGIS REIT INC
|
4.00%
|
EQUINIX REIT INC
|
3.20%
|
PUBLIC STORAGE REIT
|
2.99%
|
AVALONBAY COMMUNITIES REIT INC
|
2.42%
|
EQUITY RESIDENTIAL REIT
|
2.34%
|
WELLTOWER INC
|
2.33%
|
DIGITAL REALTY TRUST REIT INC TRUS
|
2.25%
|
Total
|
35.68%
|
iShares® U.S. Real Estate ETF by Sector as of October 12, 2018*
Sector
|
Percentage (%)
|
SPECIALIZED REITS
|
30.79%
|
RETAIL REITS
|
13.37%
|
RESIDENTIAL REITS
|
13.39%
|
OFFICE REITS
|
9.88%
|
HEALTH CARE REITS
|
8.85%
|
HOTEL & RESORT REITS
|
4.99%
|
MORTGAGE REITS
|
4.88%
|
DIVERSIFIED REITS
|
3.83%
|
INDUSTRIAL REITS
|
5.67%
|
REAL ESTATE SERVICES
|
2.08%
|
RESEARCH & CONSULTING SERVICES
|
1.43%
|
REAL ESTATE DEVELOPMENT
|
0.46%
|
CASH AND/OR DERIVATIVES
|
0.38%
|
Total
|
100.00%
|
* Percentages may not sum to 100% due to rounding.
Representative Sampling
The ETF uses a representative sampling indexing strategy to attempt to track the performance of the index before fees and expenses.
For the ETF, this strategy involves investing in a representative sample of securities that collectively have an investment profile similar to that of the index. The securities selected are expected to have aggregate investment characteristics
(based on factors such as market capitalization and industry weightings), fundamental characteristics (such as return variability and yield) and liquidity measures similar to those of the index. The ETF may or may not hold all of the securities
that are included in the index.
The ETF generally invests at least 90% of its assets in the securities of the index and in depositary receipts representing
securities thereof. The ETF may invest the remainder of its assets in securities not included in the index, but which BFA believes will help the ETF track the index. The ETF may also invest its other assets in certain futures, options and swaps
contracts, as well as cash and cash equivalents, including shares of money market funds advised by BFA or its affiliates.
Tracking Error
The performance of the ETF and of the index may vary due to a variety of factors, including differences between the securities and other
instruments held in the ETF’s portfolio and those included in the index, pricing differences, transaction costs, the ETF holding uninvested cash, differences in the timing of the accrual of dividends or interest, tax gains or losses, changes to
the index or the costs of complying with various new or existing regulatory requirements. Tracking error also may result because the ETF incurs fees and expenses, while the index does not. BFA expects that, over time, the 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 September 30, 2018, 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, 4.20%; 3 years, 8.45%; 5 years, 8.86%; 10 years, 6.96%; since inception, 9.55%; index: 1 year, 4.69%; 3 years, 8.94%; 5 years, 9.39%; 10 years, 7.46%; since ETF
inception, 10.03%.
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 in that industry or group of industries.
The Index
The index is a float-adjusted market capitalization total return index that is calculated, published and disseminated by the index
sponsor, S&P Dow Jones Indices (“Dow Jones”). It is a subset of the Dow Jones U.S. Index, and is designed to represent real estate investment trusts (“REITs”) and other companies that invest directly or indirectly in real estate through
development, management or ownership, including property agencies. Stocks are selected for the index if they are contained in the index universe and if, based on their revenues, they have been classified into the Real Estate Supersector (8600) as
defined by the proprietary classification system used by Dow Jones. Because the index is comprised primarily of REITs, the prices of the component stocks reflect changes in lease rates, vacancies, property development and transactions. The index
is calculated in U.S. dollars on a total return (gross) basis. As of September 28, 2018, the index had 118 constituents.
Current Composition of the Index
As of September 30, 2018, the top ten constituents of the index and their relative weights in the index were as follows: American
Tower Corp. A (6.38%), Simon Property Group A (5.39%), Crown Castle Intl Corp. (4.43%), ProLogis Inc. (4.01%), Equinix Inc. (3.21%), Public Storage (3.00%), AvalonBay Communities Inc. (2.43%), Equity Residential (2.35%), Welltower Inc. (2.33%)
and Digital Realty Trust Inc. (2.26%).
Calculation and Dissemination
The closing values of the index are calculated on a 24-hour day that ends at 5:30 p.m. New York time and, following the
determination of the previous day’s closing price, the index values for the current day are updated and disseminated on a real-time basis beginning at 5:30 p.m. whenever any of the exchanges represented in the index are open.
If trading in a stock is suspended while its market is open, the last traded price for that stock is used for all subsequent index
computations until trading resumes. If trading is suspended before the opening, the stock’s adjusted closing price from the previous day is used to calculate the index. Until a particular stock opens, its adjusted closing price from the previous
day is used in the index computation.
If a market is closed due to an exchange holiday, the previous adjusted closing price for each of its index underlying assets,
coupled with the most-recent intraday currency bid price, is used to determine the index’s current U.S. dollar value.
To be included in the index, a stock must be part of the index universe, defined as all stocks traded on major U.S. stock exchanges
minus any non-common issues and illiquid stocks. Index candidates must be common shares or other securities that have the characteristics of common equities. All classes of common shares, both fully and partially paid, are eligible.
Fixed-dividend shares and securities such as convertible notes, warrants, rights, mutual funds, unit investment trusts, closed-end fund shares, shares in limited partnerships and shares in business development companies (“BDCs”) are not eligible.
Temporary issues arising from corporate actions, such as “when-issued shares,” are considered on a case-by-case basis when necessary to maintain continuity in a company’s index membership. REITs, listed property trusts, and similar
real-property-owning pass-through structures taxed as REITs by their domiciles also are eligible.
Each stock must also meet two separate liquidity criteria to be considered eligible for inclusion in the index. Stocks must have a 12-month median
value traded ratio (MVTR) of at least 20% to be eligible, or at least 14% for current constituents to remain eligible. The MVTR for a stock is calculated by taking the median daily value traded amount for each of the 12 months preceding the
rebalancing reference date, multiplying the amount by the number of days that the stock traded during that month, and then dividing the result by its end-of-month float-adjusted market capitalization. The sum of the 12 monthly values is the MVTR
for such stock. If a stock has traded for less than 12 months, the average of the available
monthly values is taken and multiplied by 12 to obtain the MVTR. In addition, stock must have a 6-month median daily traded value
(MDVT) over the 6 months prior to the rebalancing reference date of at least $250,000 to be eligible, or at least $175,000 for current constituents to remain eligible. If a stock has traded for less than 6 months, the MDVT amount for as long as
the stock has been trading is used.
After determination of the index universe, the index universe is then sorted by float-adjusted market capitalization and stocks in
the top 95% of the index universe are categorized into 10 Industries, 19 Supersectors, 41 Sectors and 114 Subsectors as defined by a proprietary classification system used by Dow Jones. Segments are designed to capture the risk characteristics of
a specific market by grouping together constituents that respond in similar ways to economic, political and environmental factors.
The index level is calculated using a fraction, the numerator of which is the price of each stock in the index multiplied by the
number of shares used in the index calculation (total shares outstanding times the IWF), and summed across all the stocks in the index. The denominator is the index divisor.
The Index Divisor
To assure that the index’s value, or level, does not change when stocks are added or deleted, the divisor is adjusted to offset the
change in market value of the index. Thus, the divisor plays a critical role in the index’s ability to provide a continuous measure of market valuation when faced with changes to the stocks included in the index. In a similar manner, some
corporate actions that cause changes in the market value of the stocks in an index should not be reflected in the index level. Adjustments are made to the divisor to eliminate the impact of these corporate actions. Any change to the stocks in the
index that alters the total market value of the index while holding stock prices constant will require a divisor adjustment.
Divisor adjustments are made “after the close” meaning that after the close of trading the closing prices are used to calculate the
new divisor based on whatever changes are being made. It is, then, possible to provide two complete descriptions of the index – one as it existed at the close of trading and one as it will exist at the next opening of trading. If the same stock
prices are used to calculate the index level for these two descriptions, the index levels are the same.
With prices constant, any change that changes the total market value included in the index will require a divisor change. For
cataloging changes, it is useful to separate changes caused by the management of the index from those stemming from corporate actions of the constituent companies. Among those changes driven by index management are adding or deleting companies,
adjusting share counts and changes to IWFs and other factors affecting share counts or stock prices.
When a company is added to or deleted from the index, the net change in the market value of the index is calculated and this is
used to calculate the new divisor. The market values of stocks being added or deleted are based on the prices, shares outstanding, IWFs and any other share count adjustments.
There are a large range of different corporate actions ranging from routine share issuances or buy backs to unusual events like spin-offs or
mergers. These are listed on the table below with a description of the adjustments, if any.
Corporate Action
|
Effects
|
Divisor Adjustments?
|
Company added/deleted
|
Net change in market value determines the divisor adjustment.
|
Yes
|
Change in shares outstanding
|
Any combination of secondary issuance, share repurchase or buy back – share counts revised to reflect change.
|
Yes
|
Stock split
|
Share count revised to reflect new count. Divisor adjustment is not required since the share count and price changes are offsetting.
|
No
|
Spin-off
|
If the spun-off company is not being added to the index, the divisor adjustment reflects the decline in index market value (i.e., the value of the spun-off
unit).
|
Yes
|
Spin-off
|
Spun-off company added to the index, no company removed from the index.
|
No
|
Spin-off
|
Spun-off company added to the index, another company removed to keep number of names fixed. Divisor adjustment reflects deletion.
|
Yes
|
Change in IWF
|
Increasing (decreasing) the IWF increases (decreases) the total market value of the index. The divisor change reflects the change in market value caused by the
change to an IWF.
|
Yes
|
Special Dividend
|
When a company pays a special dividend the share price is assumed to drop by the amount of the dividend; the divisor adjustment reflects this drop in index
market value.
|
Yes
|
Rights offering
|
Each shareholder receives the right to buy a proportional number of additional shares at a set (often discounted) price. The calculation assumes that the
offering is fully subscribed. Divisor adjustment reflects increase in market cap measured as the shares issued multiplied by the price paid.
|
Yes
|
Annual Reconstitution, Quarterly Reviews and Index Maintenance
The index is reconstituted annually in September. The process includes the review of all stocks in their respective markets to
determine eligibility according to the existing criteria. The reference date for data used in the annual reconstitution is the last business day in July. In addition, the investable weight factor (“IWF”), for each stock is reviewed and updated as
needed. Changes are implemented at the opening of trading on the Monday following the third Friday of September. Changes in IWFs resulting from corporate actions which exceed 5% are implemented as soon as possible; changes of less than 5% are
implemented at the next annual review.
Generally, no companies are added to an index between annual reconstitutions except for initial public offerings and spinoffs. Any
exceptions to this rule are announced with ample lead time. Any stocks considered for addition at the quarterly rebalance must have a float market cap larger than the smallest stock included in the index at the time of the previous
reconstitution.
Changes in shares outstanding of less than 5% are accumulated and made quarterly in March, June, September and December. These
changes, as well as any weight adjustments, are implemented at the opening of trading on the Monday following the third Friday of the quarterly update month.
The indices are also reviewed on an ongoing basis to account for corporate actions such as mergers, acquisitions, takeovers,
delistings or bankruptcies. Changes to index composition and related weight adjustments are made as soon as they are effective. Corporate actions (such as stock splits, stock dividends, spin-offs and rights offerings) are applied after the close
of trading on the day prior to the ex-date. Share changes resulting from exchange offers are applied on the ex-date.
Initial public offerings and new listings on eligible exchanges are added to at the next quarterly update if the new listing occurs
on or before the final trading day of February, May, August or November and meets all other eligibility requirements. Spinoffs of index constituents are added to the index at a zero price at the market close on the day before the ex-date (with no
divisor adjustment). If a spun-off company is determined not to be eligible to remain in the index, it will be removed after at least one day of regular way trading (with a divisor adjustment). Spinoffs are assigned the same size and style as the
parent company at the time of the action. All spinoff sizes are evaluated at the next quarterly update.
Whenever possible, Dow Jones will announce changes in the index at least two business days prior to their implementation date.
If an index constituent is suspended by its primary market, it may be removed from the index at the discretion of the Index
Committee. When this occurs, S&P Dow Jones Indices will use the best-available alternate pricing source to determine the value at which the company should be removed from the index.
Float Adjustment
A company’s outstanding shares are adjusted to exclude shares held by certain shareholders concerned with the control of a company, a group that
generally includes the following: officers and directors, private equity, venture capital, special equity firms, publicly traded companies that hold shares in another company, strategic partners, holders of restricted shares, employee stock
ownership plans, employee and family trusts, foundations associated with the company, holders
of unlisted share classes of stock, government entities at all levels (except government retirement or pension funds) and any
individual person who controls a 5% or greater stake in a company as reported in regulatory filings. However, holdings by depositary banks, mutual funds, exchange-traded fund providers, asset managers, pension plans and other institutional
investors, even if greater than 5% of the outstanding shares of a company, are generally included in the float-adjusted share count to be used in the index calculations, as they are deemed to be acting as investors and not involved with control
of a company.
The index adjustment to reflect control holders is accomplished by calculating the IWF for each stock that is part of the numerator
of the float-adjusted index fraction described above:
IWF = (available float shares) / (total shares outstanding)
where available float shares are defined as total shares outstanding less shares held by control holders. In most cases, IWFs are
reported to the nearest one percentage point.
Historical Closing Prices of the 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. The period shown
below will be approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from
the date hereof or otherwise).
You should not take the historical closing prices of the
shares as an indication of the future performance of the shares. We cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes on
the stated maturity date. Neither we nor any of our affiliates make any representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the relevant
ETF closing prices between the date of this prospectus supplement and the date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the 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 November 12, 2008 through November 12, 2018. We obtained the
closing prices shown in the graph below from Bloomberg Financial Services without independent verification.
Historical Performance of iShares® U.S. Real Estate ETF
“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.
iShares® U.S. Preferred Stock ETF
The shares of the iShares® U.S. Preferred Stock
ETF (the “ETF”) are issued by iShares® Trust, a registered investment company.
● |
The ETF is a tracking ETF that seeks investment results which correspond generally to the price and yield performance, before fees and expenses, of the index.
|
● |
The index it tracks is the S&P U.S. Preferred Stock IndexTM (the “index”).
|
● |
Investment Advisor: BlackRock Fund Advisors (“BFA”).
|
● |
The ETF’s shares trade on the NASDAQ under the ticker symbol “PFF”.
|
● |
The iShares® Trust’s SEC CIK Number is 0001100663.
|
● |
The ETF’s inception date was March 26, 2007.
|
● |
The ETF’s shares are issued or redeemed only in creation units of 50,000 shares or multiples thereof.
|
We obtained the following fee information from the iShares® website without independent verification. The investment advisor is entitled to receive a management fee from the ETF based on the ETF’s allocable
portion of an aggregate management fee based on the aggregate average daily net assets of the ETF and a set of other specified iShares® funds (the “funds”) as
follows: 0.48% per annum of the average daily net assets of the funds less than or equal to $46.0 billion, plus 0.456% per annum of the average daily net assets of
the funds on amounts in excess of $46.0 billion, up to and including $81.0 billion, plus 0.4332% per annum of the average daily net assets of the funds on amounts in
excess of $81.0 billion, up to and including $111.0 billion, plus 0.4116% per annum of the average daily net assets of the funds on amounts in excess of $111.0
billion, up to and including $141.0 billion, plus 0.391% per annum of the average daily net assets of the funds on amounts in excess of $141.0 billion. As of
September 30, 2018, the average daily expense ratio of the ETF was 0.46% 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 March 31, 2018) 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/PFF.htm. We are not incorporating by reference the website, the sources listed above or any material they include
in this prospectus supplement.
Investment Objective
The ETF seeks to achieve a return that corresponds 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 shareholder approval.
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® U.S. Preferred Stock ETF Top Ten Holdings as of October 12, 2018
ETF Stock Issuer
|
Percentage (%)
|
BECTON DICKINSON AND COMPANY
|
2.21%
|
GMAC CAPITAL TRUST I
|
2.04%
|
BARCLAYS BANK PLC
|
1.99%
|
CITIGROUP CAPITAL XIII
|
1.77%
|
BLK CSH FND TREASURY SL AGENCY
|
1.32%
|
SEMPRA ENERGY
|
1.28%
|
CROWN CASTLE INTERNATIONAL CORP
|
1.22%
|
WELLS FARGO DEPOSITARY SHARES CO
|
1.21%
|
CITIGROUP DEPOSITORY INC
|
1.21%
|
PNC FINANCIAL SERVICES GROUP INC
|
1.18%
|
iShares® U.S. Preferred Stock ETF Weighting by Sector as of October 12, 2018*
Sector
|
Percentage (%)
|
Banks
|
34.89%
|
Diversified Financials
|
25.35%
|
Real Estate
|
13.87%
|
Insurance
|
10.19%
|
Telecommunications
|
0.80%
|
Utilities
|
3.16%
|
Energy
|
3.80%
|
Food Bevg Tobacco
|
1.82%
|
Capital Goods
|
1.03%
|
Commercial & Professional Services
|
0.29%
|
Transportation
|
0.75%
|
Tech Hardware & Equip
|
0.33%
|
Health Care Equipment & Services
|
2.21%
|
Media & Entertainment
|
0.14%
|
Cash and/or Derivatives
|
1.37%
|
Total
|
100.00%
|
* Percentages may not sum to 100% due to rounding.
iShares® U.S. Preferred Stock ETF Weighting by Country as of October 12, 2018*
Country
|
Percentage (%)
|
United States
|
90.09%
|
United Kingdom
|
4.18%
|
Netherlands
|
2.58%
|
Cash and/or Derivatives
|
1.37%
|
Other
|
1.78%
|
Total
|
100.00%
|
* Percentages may not sum to 100% due to rounding and the holding of cash and/or derivatives.
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. From time to time when conditions warrant, however, the ETF may invest at least 80% of its assets in the component securities of the index and may invest up to 20% of its assets in certain futures, options and swap contracts,
cash and cash equivalents, including shares of BlackRock Cash Funds, 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 or other instruments
held in the ETF’s portfolio and those included in the index, pricing differences, transaction costs, the ETF’s holding of uninvested cash, differences in timing of the accrual of dividends or interest, tax gains or losses, changes to the index or
the need to meet 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 September 30, 2018, 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, 1.12%; 3 years, 4.45%; 5 years, 5.71%; 10 years, 9.93%; since inception, 4.13%; index: 1 year, 1.57%; 3 years, 5.25%; 5 years, 6.42%; 10 years, 11.33%; since ETF
inception, 4.64%.
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 S&P U.S. Preferred Stock Index
The S&P U.S. Preferred Stock Index (Bloomberg ticker SPPREF) is managed by S&P Dow Jones Indices LLC (“S&P”) and is an
index that represents the U.S. preferred stock market and is calculated with a float-adjusted market capitalization scheme, subject to a single issuer weight cap of 10%. Preferred stocks are a class of capital stock that pays dividends at a
specified rate and has a preference over common stock in the payment of dividends and the liquidation of assets. In a float-adjusted market capitalization weighted index, constituents are weighted based on market capitalization, but the share
counts used in calculating the index reflect only those shares available to investors rather than all of a company’s outstanding shares. Float adjustment excludes shares that are closely held by control groups, other publicly traded companies or
government agencies. The S&P U.S. Preferred Stock Index is calculated, maintained and published by S&P and is part of the S&P Dow Jones Indices family of indices. Additional information is available on the following websites:
us.spindices.com/indices/ fixed-income/sp-us-preferred-stock-index and spdji.com/. We are not incorporating by reference the websites or any material they include in this prospectus supplement.
Eligibility for Inclusion in the Index
Selection for the index is comprised of U.S. traded preferred stocks that meet criteria relating to minimum size, liquidity,
exchange listing and time to maturity. Preferred stocks trading on the NYSE (including NYSE Arca and NYSE Amex), the NASDAQ Global Select Market, the NASDAQ Select Market and the NASDAQ Capital Market are eligible to be included in the index.
Over-the-counter bulletin board and unregistered securities are excluded. Preferred stocks issued by a company to meet its capital or financing requirements are eligible. These include floating, variable and fixed-rate preferreds, cumulative and
non-cumulative preferreds, preferred stocks with a callable or conversion feature and trust preferreds. Some trust preferreds issued by a company to meet its capital requirements carry a brand name or moniker, which are included. However,
structured products and brand name products issued by financial institutions that are packaged securities linked to indices, baskets of stocks or another company’s stock are excluded. Special ventures such as toll roads or dam operators may issue
preferred-like securities, which are also excluded.
The following preferred stocks are eligible to be in the index: preferred stocks that do not have a mandatory conversion or
scheduled maturity within the next 12 months; preferred stocks with market capitalization of greater than or equal to $100 million; preferred stocks that have traded more than 250,000 shares per month in each of the previous six months as of the
rebalancing reference date (as defined below) (issues with fewer than six months of trading history will be evaluated over the available period and may be included should size and available trading history infer the issue will satisfy this
requirement). Preferred stocks for which S&P cannot determine an indicated dividend yield are not eligible. There is no limit to the number of preferred stocks issued by a single company, however, a maximum weight of 10% is set per issuer.
All eligible securities for an issuer are included in the index, with the aggregate weight capped on a pro rata basis to a maximum of 10% of the index market capitalization.
Current components meeting the following criteria will continue to be eligible for inclusion in the index: current components with
market capitalization of greater than or equal to $75 million as of the rebalancing reference date (as defined below); current components that have traded more than 125,000 shares per month over each of the previous six months as of the
rebalancing reference date (however, no current component is removed from the index for violating this volume requirement during the first 12 months following its addition to the index).
Preferred stocks for which S&P cannot determine an indicated dividend yield as of the rebalancing reference date are not
eligible for inclusion in the index.
Current Composition of the Index
As of October 12, 2018, the index held stocks of companies in the following sub-industries (with their corresponding weights in the
fund): financials (71.45%), real estate (12.92%), utilities (4.02%), communication services (0.90%), energy (4.15%), health care (2.26%), industrials (2.00%), consumer staples (1.82%), information technology (0.32%) and consumer discretionary
(0.16%).
As of October 12, 2018, the top ten constituents of the index and their relative weights in the index were as follows: Becton
Dickinson & Co. Deposit Shs Repr 1/20th Cum Conv Pfd Registered Shs Series A (2.26%), GMAC CAP TR I GTD TR PFD-2 (2.10%), Barclays Bank Plc Adr Pfd Sr 5 (2.06%), Citigroup Cap XIII 7.875% TruPS (1.81%), Sempra Energy 6 % Cum Conv Red Pfd
Registered Shs 2017-15.01.21 Series A (1.32%), Wells Fargo & Co Dep Shs Ser 8% Ser 'J' (1.32%), Crown Castle International Corp Cum Conv Pfd Registered Shs Series A (1.26%), Citigroup Inc Deposit Shs Repr 1/1000th 6 7/8 % Non-Cum Perp Pfd Shs
Series K (1.23%), PNC Financial Services Group Inc DR (1.21%) and Hsbc Hldgs Plc Adr A 1/40Pf A (1.12%).
As of October 12, 2018, the countries of domicile included in the index and their relative weights were: United States (89.95%),
United Kingdom (4.11%), Netherlands (2.64%), Germany (1.67%), China (0.51%), Bermuda (0.48%), Greece (0.44%) and Norway (0.19%).
Calculation of the Total Return of the Index
The index uses a float-adjusted market capitalization weighting subject to a single issuer weight cap of 10%, meaning that the
share counts used in calculating the index reflect only those shares available to investors rather than all of a company’s outstanding shares. The constituents are weighted by float-adjusted market capitalization and at each rebalancing, all
eligible securities for an issuer are included in the index, with the issuer’s aggregate weight capped on a pro rata basis to a maximum of 10% of the index market capitalization.
The ETF tracks the performance of the “total return” version of the index. The total return calculation begins with the price
return of the index. The price return index value is derived from dividing the index market value by the index divisor.
The index market value is the sum of the product of the
number of then-outstanding index shares for each index constituent multiplied by the price of such constituent’s shares. The number of index shares for each
constituent is equal to the float-adjusted outstanding shares number for such constituent. In calculating the float adjustment, S&P seeks to exclude shares held by certain shareholders concerned with the control of a company, a group that
generally includes the following: officers and directors and related individuals whose holdings are publicly disclosed, private equity, venture capital, special equity firms, publicly traded companies that hold shares for control in another
company, strategic partners, holders of restricted shares, employee stock ownership plans, employee and family trusts, foundations associated with the company, holders of unlisted share classes of stock, government entities at all levels (except
government retirement or pension funds) and any individual person listed as a 5% or greater stakeholder in a company as reported in regulatory filings (collectively, “control holders”). To this end, S&P excludes all share-holdings (other than
depositary banks, pension funds, mutual funds, exchange traded fund providers, 401(k) plans of the company, government retirement and pension funds, investment funds of insurance companies, asset managers and investment funds, independent
foundations, savings plans and investment plans) with a position greater than 5% of the outstanding shares of a company from the float-adjusted share count to be used in index calculations.
The exclusion is accomplished by calculating an investable weight factor (IWF) for each stock that is part of the numerator of the
float-adjusted index fraction described above:
IWF = (available float shares)/(total shares outstanding)
where available float shares is defined as total shares outstanding less shares held by control holders. For companies with
multiple share class lines, a separate IWF is calculated for each share class line.
For issuers where the combined weight of all issues included in the index is greater than 10% of the index, such issuer’s combined
initial weight in the index (and therefore float-adjusted outstanding shares) will be adjusted to equal 10% of the index. All other issuer weights (and therefore float-adjusted outstanding shares) are increased proportionally.
The initial divisor was set to have a base index value of 1,000 on September 19, 2003 and has been adjusted from time to time, as
described below, to minimize distortions introduced by the addition and removal of constituents.
In order to maintain index series continuity, it is also necessary to adjust the divisor at each rebalancing. Therefore, the divisor (after
rebalancing) equals the index market value (after rebalancing) divided by the index value before rebalancing. The divisor keeps the index comparable over time and is one manipulation point for adjustments to the index, which we refer to as
maintenance of the index.
Once the price return index has been calculated, the total return index is calculated. First, the total daily dividend for each stock in the index
is calculated by multiplying the per share dividend by the number of shares included in the index. Dividends are reinvested in the index after the close on the ex-date for such dividend. Then the index dividend is calculated by aggregating the
total daily dividends for each of the index stocks (which may be zero for some stocks) and dividing by the divisor for that day. Next, the daily total return of the index is calculated as a fraction minus 1, the numerator of which is the sum of
the index level plus the index dividend and the denominator of which is the index level on the previous day. Finally, the total return index for that day is calculated as the product of the value of the total return index on the previous day
times the sum of 1 plus the index daily total return for that day.
Maintenance of the Index
The composition of the index is reviewed quarterly on each rebalancing date, which is the third Friday in January, April, July and
October. Rebalancing occurs after the close of the rebalancing date. The reference date for additions and deletions is five business days prior to the first Friday of the rebalancing month (the rebalancing reference date). Additions occur only at
the quarterly rebalancing. There are no intra-quarter additions. A constituent is deleted intra-quarter if it is called or undergoes mandatory conversion. Subject to market conditions, S&P will provide five days’ advance notice of a deletion.
Should an existing constituent delist during the five-day notification period, it is removed at the closing price from its last day of trading. The quarterly rebalancing also results in deletions, if one or more constituents no longer meets
continued eligibility requirements.
Adjustments are made to the index in the event of certain corporate actions relating to the stocks included in the index, such as rights offerings,
stock splits and delisting from the primary exchange, as specified below.
The table below summarizes the types of index maintenance adjustments:
Type of Corporate Action
|
Adjustment Factor
|
Divisor Adjustment Required
|
Shares called for cash or par value
|
If the issuer calls a constituent, it is removed from the index with a minimum of two days’ notice.
|
Yes
|
Shares called for conversion
or automatically converted
|
The constituent is removed from the index at the time of the conversion with a minimum of two days’ notice.
|
Yes
|
Delisting from primary exchange
|
The constituent is removed from the index with a minimum of two days’ notice. If no primary exchange price is available, it is removed at the OTC or pink sheet
price. If no OTC or pink sheet price is available, the security can be removed at a zero price at the discretion of the S&P Index Committee.
|
Yes
|
Special cash distribution
|
The price of the stock making the special payment is reduced by the per share special payment.
|
Yes
|
Rights offering on preferred
share class
|
The price is adjusted to the Price of Parent shares minus (Price of Rights shares/Rights Ratio).
|
Yes
|
Preferred Stock Split
|
Index Shares are multiplied by and the price is divided by the split factor.
|
No
|
Issuance of additional shares for the preferred share class in the index
|
None. Shares are revised semiannually.
|
No
|
Partial call for cash or par
value
|
On the redemption date, the constituent shares outstanding are reduced by the number of shares called and the constituent is adjusted to the call prices plus
accrued interest.
|
Yes
|
Recalculation Policy
S&P reserves the right to recalculate and republish the index at its discretion in the event one of the following issues has
occurred: (1) incorrect or revised closing price of one or more constituent securities; (2) missed corporate event; (3) incorrect application of corporate action or index methodology; (4) late announcement of a corporate event; or (5) incorrect
calculation or data entry error. The decision to recalculate the index is made at the discretion of the index manager and/or index committee, as further discussed below. The potential market impact or disruption resulting from the potential
recalculation is considered when making any such decision. In the event of an incorrect closing price, a missed corporate event or a misapplied corporate action, a late announcement of a corporate event, or an incorrect calculation or data entry
error that is discovered within two trading days of its occurrence, the index manager may, at his or her discretion, recalculate the index without involving the index committee. In the event any such event is discovered beyond the two trading
day period, the index committee shall decide whether the index should be recalculated. In the event of an incorrect application of the methodology that results in the incorrect composition and/or weighting of index constituents, the index
committee shall determine whether or not to recalculate the index following specified guidelines. In the event that the index is recalculated, it shall be done within a reasonable timeframe following the detection and review of the issue.
Calculations and Pricing Disruptions
Closing levels for the index are calculated by S&P based on the closing price of the individual constituents of the index as set by their
primary exchange. Closing prices are received by S&P from one of its third party vendors and verified by comparing them with prices from an alternative vendor. The vendors receive the closing price from the primary exchanges. Real-time
intraday prices are calculated similarly without a second verification. Prices used for the calculation of real time index values are based on the “Consolidated Tape”. The Consolidated Tape is an aggregation of trades for
each constituent over all regional exchanges and trading venues and includes the primary exchange. If there is a failure or
interruption on one or more exchanges, real-time calculations will continue as long as the “Consolidated Tape” is operational.
If an interruption is not resolved prior to the market close, official closing prices will be determined by following the
hierarchy set out in NYSE Rule 123C. A notice is published on the S&P website at spdji.com indicating any changes to the prices used in index calculations. In extreme circumstances, S&P may decide to delay index adjustments or not publish
the index. Real-time indices are not restated.
Unscheduled Exchange Closures
An unexpected market/exchange closure occurs when a market/exchange fully or partially fails to open or trading is temporarily
halted. This can apply to a single exchange or to a market as a whole, when all of the primary exchanges are closed and/or not trading. Unexpected market/exchange closures are usually due to unforeseen circumstances, such as natural disasters,
inclement weather, outages, or other events.
To a large degree, S&P is dependent on the exchanges to provide guidance in the event of an unexpected exchange closure.
S&P’s decision making is dependent on exchange guidance regarding pricing and mandatory corporate actions.
NYSE Rule 123C provides closing contingency procedures for determining an official closing price for listed securities if the
exchange is unable to conduct a closing transaction in one or more securities due to a system or technical issue.
3:00 PM ET is the deadline for an exchange to determine its plan of action regarding an outage scenario. As such, S&P also uses
3:00 PM ET as the cutoff.
If all major exchanges fail to open or unexpectedly halt trading intraday due to unforeseen circumstances, S&P will take the
following actions:
Market Disruption Prior to Open of Trading:
(i) |
If all exchanges indicate that trading will not open for a given day, S&P will treat the day as an unscheduled market holiday. The decision will be communicated to clients as
soon as possible through the normal channels. Indices containing multiple markets will be calculated as normal, provided that at least one market is open that day. Indices which only contain closed markets will not be calculated.
|
(ii) |
If exchanges indicate that trading, although delayed, will open for a given day, S&P will begin index calculation when the exchanges open.
|
Market Disruption Intraday:
(i) |
If exchanges indicate that trading will not resume for a given day, the index level will be calculated using prices determined by the exchanges based on NYSE Rule 123C. Intraday
index values will continue to use the last traded composite price until the primary exchange publishes official closing prices.
|
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. The period shown
below will be approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from
the date hereof or otherwise).
You should not take the historical closing prices of the
shares as an indication of the future performance of the shares. We cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes
on the stated maturity date. Neither we nor any of our affiliates make any representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the
relevant ETF closing prices between the date of this prospectus supplement and the date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the 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 November 12, 2008 through November 12, 2018. We
obtained the closing prices shown in the graph below from Bloomberg Financial Services without independent verification.
Historical Performance of iShares® U.S. Preferred Stock ETF
“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.
The iShares® Nasdaq Biotechnology ETF
The shares of the iShares® Nasdaq Biotechnology
ETF (the “ETF”) are issued by iShares, Inc. (the “company”). The company was organized as a Maryland corporation on September 1, 1994 and is authorized to have multiple series or portfolios, of which the ETF is one.
● |
The ETF is a tracking ETF that seeks investment results which correspond generally to the price and yield performance, before fees and expenses, of the index.
|
● |
The index it tracks is the NASDAQ Biotechnology Index (the “index”).
|
● |
Investment Advisor: BlackRock Fund Advisors (“BFA”).
|
● |
The ETF’s shares trade on the NASDAQ under the ticker symbol “IBB”.
|
● |
The company’s SEC CIK Number is 0000930667.
|
● |
The ETF’s inception date was February 5, 2001.
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● |
The ETF’s shares are issued or redeemed only in creation units of 50,000 shares or multiples thereof.
|
We obtained the following fee information from the iShares® website without independent verification. The investment advisor is entitled to receive a management fee from the fund corresponding to the ETF’s allocable portion of an aggregate management fee based on the aggregate average
daily net assets of the ETF and a set of other specified iShares® funds (the “funds”) as follows: 0.48% per annum of the aggregate net assets of the funds less than
or equal to $121 billion, plus 0.456% per annum of the aggregate net assets of the funds on amounts in excess of $121 billion, up to and including $181 billion, plus 0.4332% per annum of the aggregate net assets of the funds on amounts in excess of $181 billion, up to and including $231 billion, plus 0.4116% per annum of the aggregate net assets of the funds on amounts in excess of $231 billion, up to and including $281 billion, plus 0.3910% per annum of the aggregate net assets in excess of $281 billion. As of September 30, 2018, the expense ratio of the ETF was 0.47% per annum.
For additional information regarding the company or BFA, please consult the reports (including the Annual Report to Shareholders on
Form N-CSR for the fiscal year ended March 31, 2018) and other information the company files with the SEC. In addition, information regarding the ETF, including its top portfolio holdings, may be obtained from other sources including, but not
limited to, press releases, newspaper articles, other publicly available documents and the iShares® website at us.ishares.com/product_info/fund/overview/IBB.htm. We are not incorporating by reference the website, the sources listed above or any material they include in this prospectus supplement.
Investment Objective
The ETF seeks to 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® Nasdaq Biotechnology ETF Top Ten Holdings as of
October 12, 2018
ETF Stock Issuer
|
Percentage (%)
|
AMGEN INC
|
8.67%
|
GILEAD SCIENCES INC
|
8.53%
|
BIOGEN INC
|
8.22%
|
CELGENE CORP
|
7.35%
|
ILLUMINA INC
|
5.99%
|
VERTEX PHARMACEUTICALS INC
|
4.32%
|
REGENERON PHARMACEUTICALS INC
|
4.15%
|
ALEXION PHARMACEUTICALS INC
|
3.60%
|
BIOMARIN PHARMACEUTICAL INC
|
2.34%
|
MYLAN NV
|
2.19%
|
Total
|
55.36%
|
iShares® Nasdaq Biotechnology ETF Weighting by Sector as of
October 12, 2018*
Sector
|
Percentage (%)
|
Biotechnology
|
80.13%
|
Pharmaceuticals
|
10.10%
|
Life Sciences Tools & Services
|
8.93%
|
Health Care Technology
|
0.02%
|
Health Care Equipment
|
0.56%
|
Health Care Supplies
|
0.11%
|
Health Care Distributors
|
0.08%
|
Cash and/or Derivatives
|
0.08%
|
Total
|
100.01%
|
* Percentages may not sum to 100% due to rounding.
Representative Sampling
BFA uses a representative sampling indexing strategy to manage the ETF. For the ETF, this strategy involves investing in a
representative sample of securities that collectively have an investment profile similar to that of the index. The securities selected are expected to have, in the aggregate, investment characteristics (based on factors such as market
capitalization and industry weightings), fundamental characteristics (such as return variability and yield) and liquidity measures similar to those of the index.
The ETF generally invests at least 90% of its assets in the securities of the index and in depositary receipts representing
securities of the index. The ETF may invest the remainder of its assets in other securities, including securities not in the index, but which BFA believes will help the ETF track the index. The ETF may also invest its other assets in futures
contracts, options on futures contracts, other types of options and swaps related to the index, as well as cash and cash equivalents, including shares of money market funds advised by BFA or its affiliates. Also, the ETF may lend securities
representing up to one-third of the value of the 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 held in
the ETF’s portfolio and those included in the index, pricing differences (including, as applicable, differences between a security’s price at the local market close and the ETF’s value of a security at the time of calculation of the ETF’s net
asset value), differences in transaction costs, the ETF holding uninvested cash, differences in timing of the accrual of or the valuation of dividends or interest, tax gains or losses, 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 September 30, 2018, 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, 10.00%; 3 years, 6.74%; 5 years, 11.97%; 10 years, 16.52%; since inception, 7.79%; index: 1 year, 10.34%; 3 years, 7.05%; 5 years, 12.29%; 10 years, 16.80%; since ETF
inception, 8.13%.
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 NASDAQ Biotechnology Index
The NASDAQ Biotechnology Index® (the “index”) is designed to track
the performance of a set of securities listed on The NASDAQ Stock Market that are classified as either biotechnology or pharmaceutical according to the Industry Classification Benchmark (“ICB”). The index is calculated using a modified market
capitalization-weighted methodology.
The index is calculated, maintained and published by The NASDAQ OMX Group, Inc. (“index sponsor”). The base date for the index is
November 1, 1993, with a base value of 200.00, as adjusted. We have derived all information contained in this document regarding the index from publicly available information. Additional information about the index is available on the following
website: indexes.nasdaqomx.com/Index/Overview/NBI. We are not incorporating by reference the website or any material it includes in this prospectus supplement.
As of October 12, 2018, 86.35% of the securities included in the index were classified into the Biotechnology sector and 13.65% of
the securities included in the index were classified into the Pharmaceuticals sector. (Sector designations are determined by the index sponsor using criteria it has selected or developed. Index sponsors may use very different standards for
determining sector designations. In addition, many companies operate in a number of sectors, but are listed in only one sector and the basis on which that sector is selected may also differ. As a result, sector comparisons between indices with
different index sponsors may reflect differences in methodology as well as actual differences in the sector composition of the indices.)
The top ten constituent stocks of the index as of October 12, 2018, by weight, are: Amgen Inc. (8.68%), Gilead Sciences, Inc.
(8.54%), Biogen Inc. (8.22%), Celgene Corp. (7.36%), Illumina, Inc. (5.99%), Vertex Pharmaceuticals Inc. (4.32%), Regeneron Pharmaceuticals Inc. (4.15%), Alexion Pharmaceuticals Inc. (3.60%), BioMarin Pharmaceutical Inc. (2.34%) and Mylan NV
Ordinary Shares (2.20%).
Construction of the NASDAQ Biotechnology Index
The index is a modified market capitalization-weighted index. Index composition is reviewed on an annual basis in December. First,
the index sponsor determines which stocks meet the applicable eligibility criteria. The eligibility criteria is applied using market data through the end of October and is updated for total shares outstanding submitted in publicly filed documents
via EDGAR through the end of November to determine security market capitalization.
Eligibility Criteria for Inclusion in the Index
To be eligible for inclusion in the index, a security must meet the following criteria:
● |
the security’s U.S. listing must be exclusively listed on the NASDAQ Global Select Market or the NASDAQ Global Market (unless the stock was dually listed on another U.S. market prior
to January 1, 2004 and has continuously maintained such listing);
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the issuer of the security must be classified according to the Industry Classification Benchmark (ICB) as either biotechnology or pharmaceutical;
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● |
the security may not be issued by an issuer currently in bankruptcy proceedings;
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● |
the security must have a market capitalization of at least $200 million. Market capitalization is determined by multiplying a stock’s last sale price by its total number of shares
outstanding;
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● |
the security must have an average daily trading volume (“ADTV”) of at least 100,000 shares;
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● |
the issuer of the security may not have entered into a definitive agreement or other arrangement which would likely result in the security no longer being eligible for inclusion in
the index;
|
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the issuer of the security may not have annual financial statements with an audit opinion that is currently withdrawn. This will be determined based upon a security issuer’s public
filings with the SEC; and
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● |
the security must have “seasoned” on NASDAQ, NYSE or NYSE Amex. Generally, a company is considered to be seasoned if it has been listed on a market for at least three full months
(excluding the first month of initial listing) as of the last trading day in October.
|
Index eligibility is limited to specific security types only. The security types eligible for the index include common stocks,
ordinary shares, ADRs and shares of beneficial interest or limited partnership interests. For purposes of index eligibility criteria, if the security is a depositary receipt representing a security of a non-U.S. issuer, then references to the
“issuer” are references to the issuer of the underlying security.
All securities meeting the above criteria are included in the index. Generally, the list of additions and deletions is publicly announced via a
press release in the early part of December. Security additions and deletions are made effective after the close of trading on the third Friday in December. The final list of constituents included in the index, including any replacements made
during the annual review, is made effective after the close of trading on the third Friday in December. Generally, the list of annual additions and deletions as a result of the annual review is publicly announced by the index
sponsor via a press release in the early part of December, in conjunction with an announcement on the index sponsor’s website.
Calculation of the Total Return of the Index
The ETF tracks the performance of the “total return” version of the index. The index is a modified market capitalization-weighted
index. The value of the index equals the index market value divided by the index divisor. The overall index market value is the aggregate of each index security’s
market value, as may be adjusted for any corporate actions. An index security’s market value is determined by multiplying the last sale price by its index share weight, also known as “index shares”. In other words, the value of the index is equal
to (i) the sum of the products of (a) the index shares of each of the index securities
multiplied by (b) each such security’s last sale price (adjusted for corporate actions, if any), divided by (ii) the divisor of the index.
In calculating the index, the divisor serves the purpose of scaling the aggregate value of each index share weight multiplied by
such stock’s last sale price to a lower order of magnitude which is more desirable for index reporting purposes. The index divisor is calculated as the ratio of (i) the start of day market value of the index divided by (ii) the previous day index value.
The total return index reinvests cash dividends on the ex-date. The total return index was synchronized to the value of the price
return index at the close on September 24, 2003.
The index is calculated in U.S. dollars during the U.S. market trading day based on the last sale price and are disseminated once
per second from 09:30:01 until 17:16:00 ET. The closing value of the index may change up until 17:15:00 ET due to corrections to the last sale price of the index stocks. The official closing value of the index is ordinarily disseminated at
17:16:00 ET.
Index Maintenance
Changes to Index Constituents
Changes to the index constituents may be made during the annual evaluation. In addition, if at any time during the year other than
the annual evaluation it is determined that an index security no longer meets the index eligibility criteria, or is otherwise determined to have become ineligible for continued inclusion in the index, the security is removed from the index and
will not be replaced.
Ordinarily, a security will be removed from the index at its last sale price. The last sale price refers to the price at which a
security last traded during regular market hours as reported on such security’s index market, which may be the NASDAQ Official Closing Price (NOCP). The index market is the index eligible stock market for which the security’s prices are received
and used by the index sponsor for purposes of calculating the index.
If, however, at the time of its removal the security is halted from trading on its primary listing market and an official closing
price cannot readily be determined, the index security may, in the index sponsor’s discretion, be removed at a price of $0.00000001 (“zero price”). This zero price will be applied to the index security after the close of the market but prior to
the time the official closing value of the index is disseminated, which is ordinarily 17:16:00 ET.
Divisor Adjustments
Ordinarily, whenever there is a change in index shares, a change in an index security or a change to the price of an index security
due to certain corporate actions, including spin-offs, rights issuances or special cash dividends, the divisor is adjusted to ensure that there is no discontinuity in the value of the index which might otherwise be caused by any such change. All
changes are announced in advance and are reflected in the index prior to market open on the index effective date.
Quarterly Index Rebalancing
On a quarterly basis, the index is rebalanced such that the maximum weight of any index security does not exceed 8% and no more
than five securities are at that cap. The excess weight of any capped security is distributed proportionally across the remaining index securities. If after redistribution, any of the five highest ranked index securities are weighted below the 8%
cap, these securities are not capped. Next, any remaining index securities in excess of 4% are capped at 4% and the excess weight is redistributed proportionally across the remaining index securities. This process is repeated, if necessary, to
derive the final weights.
Finally, to complete the rebalancing process, once the final weighting percentages for each index security have been set, the modified market
capitalization weighting methodology is applied to the capitalization of each index security, using the
last sale price of the security at the close of trading on the last day in February, May, August and November and after applying
quarterly changes to the total shares outstanding. Index shares are then calculated by multiplying the weight of the security derived above by the new market value of the index, and dividing the modified market capitalization for each index
security by its corresponding last sale price. Changes to the index shares will be made effective after the close of trading on the third Friday in March, June, September and December.
Corporate Actions and Index Adjustments
Aside from changes resulting from quarterly rebalancing, intra-quarter changes in index shares can also result from a change in an
index security’s total shares outstanding that is greater than 10.0%. Changes in total shares outstanding are determined by an index stock issuer’s public filings with the SEC. Changes in the price and/or index shares driven by corporate events
such as stock dividends, stock splits and certain spin-offs and rights issuances are adjusted on the ex-date. If the change in total shares outstanding arising from other corporate actions is greater than or equal to 10.0%, the change is made as
soon as practicable. Otherwise, if the change in total shares outstanding is less than 10.0%, then all such changes are accumulated and made effective at one time on a quarterly basis after the close of trading on the third Friday in each of
March, June, September and December. The index shares are then adjusted by the same percentage amount by which the total shares outstanding have changed.
Special Cash Dividends. A dividend is considered
“special” if the information provided by the listing exchange in their announcement of the ex-date indicates that the dividend is special. Other nomenclature for a special dividend may include, but is not limited to, “extra”, “extraordinary”,
“non-recurring”, “one-time” and “unusual”. The price of the index stock in the index is adjusted for the amount of the special cash dividend.
As discussed above, ordinarily whenever there is a change in index shares, a change in an index security or a change to the price
of an index security due to spin-offs, rights issuances or special cash dividends, the divisor is adjusted.
Discretionary Adjustments
In addition to the above, the index sponsor may, from time to time, exercise reasonable discretion as it deems appropriate in order
to ensure index integrity.
Market Disruption Events
If trading in an index security is halted on its primary listing market, the most recent last sale price for that security is used
for all index computations until trading on such market resumes. Likewise, the most recent last sale price is used if trading in a security is halted on its primary listing market before the market is open.
Corrections and Calculations
The closing value of the index may change up until 17:15:00 ET due to corrections to the last sale price of the index securities. In the event that
a change has been made to the index intraday, the index sponsor will make an announcement describing such change. In the event an index calculation has been corrected retroactively, an announcement will be provided.
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. The period shown
below will be approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from
the date hereof or otherwise).
You should not take the historical closing prices of the
shares as an indication of the future performance of the shares. We cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes
on the stated maturity date. Neither we nor any of our affiliates make any representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the
relevant ETF closing prices between the date of this prospectus supplement and the date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the 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 November 12, 2008 through November 12, 2018. The
daily historical closing prices in the graph below have been adjusted for a 3-for-1 stock split that became effective after the market close on November 30, 2017. We obtained the closing prices shown in the graph below from Bloomberg Financial
Services without independent verification.
Historical Performance of iShares® Nasdaq Biotechnology ETF
“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.
The SPDR® S&P® Oil & Gas Exploration & Production ETF
The shares of the SPDR® S&P® Oil & Gas Exploration & Production ETF (the “ETF”) are issued by the SPDR®
Series Trust (the “trust”), a registered investment company.
● |
The ETF seeks investment results which correspond generally to the total return performance, before fees and expenses, of the index.
|
● |
The index it tracks is the S&P Oil & Gas Exploration & Production Index (the “index”).
|
● |
Investment Advisor: SSGA Funds Management, Inc. (“SSGA”).
|
● |
The ETF’s shares trade on the NYSE Arca under the ticker symbol “XOP”.
|
● |
The trust’s SEC CIK Number is 0001064642.
|
● |
The inception date was June 19, 2006.
|
● |
The ETF’s shares are issued or redeemed only in creation units of 50,000 shares or multiples thereof.
|
We obtained the following fee information from the SPDR®
website, without independent verification. SSGA is entitled to receive a management fee from the ETF based on a percentage of the ETF’s average daily net assets at an annual rate of 0.35% of the average daily net assets of the ETF. From time to
time, SSGA may waive all or a portion of its fee, although it does not currently intend to do so. SSGA pays all expenses of the ETF other than the management fee, brokerage expenses, taxes, interest, fees and expenses of the independent trustees
(including any trustee’s counsel fees), litigation expenses, acquired fund fees and expenses and other extraordinary expenses. As of September 30, 2018, the gross expense ratio of the ETF was 0.35% per annum.
For additional information regarding the trust or SSGA, please consult the reports (including the Annual Report to Shareholders on
Form N−CSR for the fiscal year ended June 30, 2018) and other information the trust files with the SEC. Information provided to or filed with the SEC can be inspected and copied at the public reference facilities maintained by the SEC or through
the SEC’s website at sec.gov. 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 SPDR® website at spdrs.com/product/fund.seam?ticker=XOP. We are not incorporating by reference the website, the sources listed above or any
material they include in this prospectus supplement.
Investment Objective and Strategy
The ETF seeks to provide investment results that correspond generally to the total return performance, before fees and expenses, of
the index. The ETF uses a representative sampling strategy to try to achieve its investment objective, which means that the ETF is not required to purchase all of the securities represented in the index. Instead, the ETF may purchase a subset of
the securities in the index in an effort to hold a portfolio of securities with generally the same risk and return characteristics of the index. Under normal market conditions, the ETF generally invests substantially all, but at least 80%, of its
total assets in the securities comprising the index. The ETF will provide shareholders with at least 60 days’ notice prior to any change in this 80% investment policy. In addition, the ETF may invest in equity securities not included in the
index, cash and cash equivalents or money market instruments, such as repurchase agreements and money market funds (including money market funds advised by SSGA).
In certain situations or market conditions, the ETF may temporarily depart from its normal investment policies and strategies
provided that the alternative is consistent with the ETF’s investment objective and is in the best interest of the ETF. For example, the ETF may make larger than normal investments in derivatives to maintain exposure to the index if it is unable
to invest directly in a component security.
The board may change the ETF’s investment strategy, index and other policies without shareholder approval. The board may also
change the ETF’s investment objective without shareholder approval.
The ETF’s Holdings and Industrial Sector Classifications
The ETF holds stocks of companies in the oil and gas exploration and production segment of the S&P Total Market Index. As of
October 12, 2018, the ETF held stocks of companies in the following sub-industries (with their corresponding weights in the ETF): oil & gas exploration & production (80.95%); oil & gas refining & marketing (13.78%) and integrated
oil & gas (5.27%).
As of October 12, 2018, the top ten constituents of the ETF and their relative weights in the ETF were as follows: Murphy Oil Corporation (2.05%),
Chesapeake Energy Corporation (1.97%), Denbury Resources Inc. (1.92%), Anadarko
Petroleum Corporation (1.90%), Noble Energy Inc. (1.90%), Southwestern Energy Company (1.90%), Concho Resources Inc. (1.89%),
Cabot Oil & Gas Corporation (1.89%), Range Resources Corporation (1.89%), and Callon Petroleum Company (1.88%).
Correlation
Although SSGA seeks to track the performance of the index (i.e., achieve a high degree of correlation with the index), the ETF’s
return may not match the return of the index. The ETF incurs a number of operating expenses not applicable to the index, and incurs costs in buying and selling securities. In addition, the ETF may not be fully invested at times, generally as a
result of cash flows into or out of the ETF or reserves of cash held by the ETF to meet redemptions. SSGA may attempt to replicate the index return by investing in fewer than all of the securities in the index, or in some securities not included
in the index, potentially increasing the risk of divergence between the ETF’s return and that of the index.
As of September 30, 2018, the SPDR® website gave
the following performance figures for the market value return of the ETF’s shares (which is based on the midpoint between the highest bid and the lowest offer on the exchange on which the shares of the ETF are listed for trading, as of the time
that the ETF's NAV is calculated, and is before tax) and the index return (in each case on an annualized basis):
Period
|
1 year
|
3 years
|
5 years
|
10 years
|
Since inception*
|
ETF's shares
|
27.86%
|
10.65%
|
-7.09%
|
0.62%
|
2.90%
|
Index
|
28.23%
|
10.89%
|
-7.01%
|
0.74%
|
3.07%
|
*June 19, 2006.
|
Industry Concentration Policy
The ETF’s assets will generally be concentrated in an industry or group of industries to the extent that the index concentrates in
a particular industry or group of industries. By focusing its investments in a particular industry or sector, financial, economic, business, and other developments affecting issuers in that industry, market, or economic sector will have a greater
effect on the ETF than if it had not focused its assets in that industry, market, or economic sector, which may increase the volatility of the ETF.
Share Prices and the Secondary Market
The trading prices of shares of the ETF will fluctuate continuously throughout trading hours based on market supply and demand
rather than the ETF’s net asset value, which is calculated at the end of each business day. The trading prices of the ETF’s shares may differ (and may deviate significantly during periods of market volatility) from the ETF’s daily net asset
value. The indicative optimized portfolio value (“IOPV”) of the shares of the ETF is disseminated every fifteen seconds throughout the trading day by NYSE Arca. The IOPV calculations are based on estimates of the value of the ETF’s net asset
value per share using market data converted into U.S. dollars at the current currency rates and is based on quotes and closing prices from the securities’ local market and may not reflect events that occur subsequent to the local market’s close.
Premiums and discounts between the IOPV and the market price may occur. This should not be viewed as a “real-time” update of the net asset value per share of the ETF, which is calculated only once a day. In addition, the issuance or redemption of
ETF shares to or from certain institutional investors, which are done only in large blocks of at least 50,000, may cause temporary dislocations in the market price of the shares.
The Underlying Index
The S&P Oil & Gas Exploration & Production Select Industry Index (Bloomberg ticker SPSIOPTR) is managed by S&P Dow Jones Indices
LLC (“S&P”) and is a modified equal-weighted index that is designed to measure the performance of stocks in the S&P Total Market Index that both (i) are classified under the Global Industry Classification Standard (“GICS®”) in the integrated oil & gas, oil & gas exploration & production and oil & gas refining & marketing sub-industries and (ii) satisfy certain
liquidity and market capitalization requirements. The S&P Total Market Index tracks all eligible U.S. common stocks listed on the NYSE, NYSE Arca, NYSE American (formerly NYSE MKT), NASDAQ Global Select Market, NASDAQ Select Market, NASDAQ
Capital Market, Bats BZX, Bats BYX, Bats EDGA, Bats EDGX and IEX. The index is one of the 21 sub-industry sector indices S&P maintains that are derived from a portion of the stocks comprising the S&P Total Market Index. An equal-weighted
index is one where every stock, or company, has the same weight in the index. As such, the index must be rebalanced from time to time to re-establish the proper weighting.
Eligibility for Inclusion in the Index
Selection for the index is based on a company’s GICS®
classification, as well as liquidity and market capitalization requirements. In addition, only U.S. companies are eligible for inclusion in the index. GICS®
classifications are determined by S&P using criteria it has selected or developed. Index and classification system sponsors may use very different standards for determining sector designations. In addition, many companies operate in a number
of sectors, but are listed only in one sector. As a result, sector comparisons between indices with different sponsors may reflect differences in methodology as well as actual differences in the sector composition of the indices.
To qualify for membership in the index, at each quarterly rebalancing a stock must satisfy the following criteria: (i) be a member
of the S&P Total Market Index; (ii) be assigned to the integrated oil & gas, oil & gas exploration & production or oil & gas refining and marketing sub-industry; and (iii) meet one of the following float-adjusted market
capitalization (FAMC) and float-adjusted liquidity ratio (FALR) requirements: (a) be a current constituent of the index and have a FAMC greater than or equal to $300 million and have a FALR greater than or equal to 50%; (b) have an FAMC greater
than or equal to $500 million and a FALR greater than or equal to 90%; or (c) have an FAMC greater than or equal to $400 million and a FALR greater than or equal to 150%. The FALR is defined as the dollar value traded over the previous 12 months
divided by the FAMC as of the index’s rebalancing reference date.
All stocks in the related GICS® sub-industries
satisfying the above requirements are included in the index and the total number of stocks in the index should be at least 35. If there are fewer than 35 stocks in the index, the market capitalization requirements may be relaxed to reach at least
22 stocks.
With respect to liquidity, the length of time to evaluate liquidity is reduced to the available trading period for companies that
recently became public or companies that were spun-off from other companies, the stocks of which therefore do not have 12 months of trading history.
Current Composition of the Index
As of October 12, 2018, the index held stocks of companies in the following sub-industries (with their corresponding weights in the
ETF): oil & gas exploration & production (80.95%), oil & gas refining & marketing (13.78%) and integrated oil & gas (5.27%).
As of October 12, 2018, the top ten constituents of the index and their relative weights in the index were as follows: Murphy Oil
Corporation (2.05%), Chesapeake Energy Corporation (1.97%), Denbury Resources Inc. (1.92%), Noble Energy Inc. (1.90%), Southwestern Energy Company (1.90%), Anadarko Petroleum Corporation (1.90%), Cabot Oil & Gas Corporation (1.89%), Range
Resources Corporation (1.89%), Concho Resources Inc. (1.89%) and Callon Petroleum Company (1.88%).
Calculation of the Total Return of the Index
The ETF tracks the performance of the “total return” version of the index. The total return calculation begins with the price
return of the index. The price return index is calculated as the index market value divided by the divisor. In an equal-weighted index like the index, the market capitalization of each stock used in the calculation of the index market value is
redefined so that each stock has an equal weight in the index on each rebalancing date. The adjusted market capitalization for each stock in the index is calculated as the product of the stock price, the number of shares outstanding, the stock’s
float factor and the adjustment factor.
A stock’s float factor refers to the number of shares outstanding that are available to investors. S&P indices exclude shares
closely held by control groups from the index calculation because such shares are not available to investors. For each stock, S&P calculates an Investable Weight Factor (IWF) which is the percentage of total shares outstanding that are
included in the index calculation.
The adjustment factor for each stock is assigned at each rebalancing date and is calculated by dividing a specific constant set for
the purpose of deriving the adjustment factor (often referred to as modified index shares) by the number of stocks in the index multiplied by the float adjusted market value of such stock on such rebalancing date.
Adjustments are also made to ensure that no stock in the index will have a weight that exceeds the value that can be traded in a single day for a
theoretical portfolio of $2 billion. Theoretical portfolio values are reviewed annually and any updates are made at the discretion of the index committee, as defined below. The maximum basket liquidity weight for each stock in the index will be
calculated using the ratio of its three-month median daily value traded to the theoretical portfolio value of $2 billion. Each stock’s weight in the index is then compared to its maximum basket liquidity weight and is set to the lesser of (1) its
maximum basket liquidity weight or (2) its initial equal weight. All excess weight is redistributed
across the index to the uncapped stocks. If necessary, a final adjustment is made to ensure that no stock in the index has a weight
greater than 4.5%. No further adjustments are made if the latter step would force the weight of those stocks limited to their maximum basket liquidity weight to exceed that weight. If the index contains exactly 22 stocks as of the rebalancing
effective date, the index will be equally weighted without basket liquidity constraints.
If a company has more than one share class line in the S&P Total Market Index, such company will be represented once by the
designated listing (generally the share class with both (i) the highest one-year trading liquidity as defined by median daily value traded and (ii) the largest FAMC). S&P reviews designated listings on an annual basis and any changes are
implemented after the close of the third Friday in September. The last trading day in July is used as the reference date for the liquidity and market capitalization data in such determination. Once a listed share class line is added to the index,
it may be retained in the index even though it may appear to violate certain constituent addition criteria. For companies that issue a second publicly traded share class to index share class holders, the newly issued share class line will be
considered for inclusion if the event is mandatory and the market capitalization of the distributed class is not considered to be de minimis.
The index is calculated by using the divisor methodology used in all S&P equity indices. The initial divisor was set to have a
base value of 1,000 on December 17, 1999. The index level is the index market value divided by the index divisor. In order to maintain index series continuity, it is also necessary to adjust the divisor at each rebalancing. Therefore, the divisor
(after rebalancing) equals the index market value (after rebalancing) divided by the index value before rebalancing. The divisor keeps the index comparable over time and is one manipulation point for adjustments to the index, which we refer to as
maintenance of the index.
Once the price return index has been calculated, the total return index is calculated. First, the total daily dividend for each
stock in the index is calculated by multiplying the per share dividend by the number of shares included in the index. Dividends are reinvested in the index after the close on the ex-date for such dividend. Then the index dividend is calculated by
aggregating the total daily dividends for each of the index stocks (which may be zero for some stocks) and dividing by the divisor for that day. Next, the daily total return of the index is calculated as a fraction minus 1, the numerator of which is the sum of the index level plus the index dividend and the denominator of
which is the index level on the previous day. Finally, the total return index for that day is calculated as the product of the value of the total return index on the
previous day times the sum of 1 plus the index daily total return for that day.
Maintenance of the Index
The composition of the index is reviewed quarterly. Rebalancing occurs after the closing of the relevant U.S. trading markets on
the third Friday of the month ending that quarter. The reference date for additions and deletions is after the closing of the last trading day of the previous month. Closing prices as of the second Friday of the last month of the quarter are used
for setting index weights. Existing stocks in the index are removed at the quarterly rebalancing if either their FAMC falls below $300 million or their FALR falls below 50%. A stock will also be deleted from the index if the S&P Total Market
Index deletes that stock. Stocks are added between rebalancings only if a company deletion causes the number of stocks in the index to fall below 22. The newly added stock will be added to the index at the weight of the deleted stock. If the
stock was deleted at $0.00, the newly added stock will be added at the deleted stock’s previous day’s closing value (or the most immediate prior business day that the deleted stock was not valued at $0.00) and an adjustment to the divisor will be
made (only in the case of stocks removed at $0.00). At the next rebalancing, the index will be rebalanced based on the eligibility requirements and equal-weight methodology discussed above.
In the case of GICS® changes, where a stock does
not belong to the oil & gas exploration & production sub-industry or another qualifying sub-industry after the classification change, it is removed from the index on the next rebalancing date. In the case of a spin-off, the spin-off
company will be added to the index at a zero price after the close of trading on the day before the ex-date. In general and subject to certain exceptions, both the parent company and spin-off companies will remain in the index until the next
index rebalancing. In the case of a merger involving two index constituents, the merged entity will remain in the index provided that it meets all general eligibility requirements. The merged entity will be added to the index at the weight of
the stock deemed to be the surviving stock in the transaction. The surviving stock will not experience a weight change and its subsequent weight will not be equal to that of the pre-merger weight of the merged entities.
Adjustments are made to the index in the event of certain corporate actions relating to the stocks included in the index, such as
spin-offs, rights offerings, stock splits and special dividends, as specified below.
The table below summarizes the types of index maintenance adjustments:
Type of Corporate Action
|
Adjustment Factor
|
Divisor Adjustment Required
|
Spin-Off
|
In general and subject to certain exceptions, both the parent stock and spin-off stocks will remain in the index until the next index
rebalancing, regardless of whether they conform to the theme of the index.
|
No
|
Rights Offering
|
Price is adjusted to equal (i) price of parent company minus (ii) price of rights subscription divided by the rights ratio. Index shares
change so that the company’s weight remains the same as its weight before the rights offering.
|
No
|
Stock split (e.g., 2-for-1), stock dividend or reverse stock split
|
Index shares multiplied by split factor (i.e., 2); stock price divided by split factor (i.e., 2).
|
No
|
Share issuance or share repurchase
|
None.
|
No
|
Special dividends
|
Price of the stock making the special dividend payment is reduced by the per share special dividend amount after the close of trading on the day before the
dividend ex-date.
|
Yes
|
Index Committee
The Americas Thematic and Strategy Index Committee (the “index committee”) maintains the index and consists of full-time
professional members of S&P staff. At regular meetings, the index committee reviews pending corporate actions that may affect index constituents, statistics comparing the composition of the indices to the market, companies that are being
considered as candidates for additions to the index and any significant market events. The index committee may also revise index policy, such as the rules for selecting constituents, the treatment of dividends, share counts or other matters.
Unexpected Exchange Closures
An unexpected market/exchange closure occurs when a market/exchange fully or partially fails to open or trading is temporarily
halted. This can apply to a single exchange or to a market as a whole, when all of the primary exchanges are closed and/or not trading. Unexpected market/exchange closures are usually due to unforeseen circumstances, such as natural disasters,
inclement weather, outages, or other events.
To a large degree, S&P is dependent on the exchanges to provide guidance in the event of an unexpected exchange closure.
S&P’s decision making is dependent on exchange guidance regarding pricing and mandatory corporate actions.
NYSE Rule 123C provides closing contingency procedures for determining an official closing price for listed securities if the
exchange is unable to conduct a closing transaction in one or more securities due to a system or technical issue.
3:00 PM ET is the deadline for an exchange to determine its plan of action regarding an outage scenario. As such, S&P also uses
3:00 PM ET as the cutoff.
If all major exchanges fail to open or unexpectedly halt trading intraday due to unforeseen circumstances, S&P will take the
following actions:
Market Disruption Prior to Open of Trading:
(i) |
If all exchanges indicate that trading will not open for a given day, S&P will treat the day as an unscheduled market holiday. The decision will be communicated to clients as
soon as possible through the normal channels. Indices containing multiple markets will be calculated as normal, provided that at least one market is open that day. Indices which only contain closed markets will not be calculated.
|
(ii) |
If exchanges indicate that trading, although delayed, will open for a given day, S&P will begin index calculation when the exchanges open.
|
Market Disruption Intraday:
(i) |
If exchanges indicate that trading will not resume for a given day, the index level will be calculated using prices determined by the exchanges based on NYSE Rule 123C. Intraday
index values will continue to use the last traded composite price until the primary exchange publishes official closing prices.
|
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. The period shown
below will be approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from
the date hereof or otherwise).
You should not take the historical closing prices of the
shares as an indication of the future performance of the shares. We cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes
on the stated maturity date. Neither we nor any of our affiliates make any representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the
relevant ETF closing prices between the date of this prospectus supplement and the date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the 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 November 12, 2008 through November 12, 2018. We
obtained the closing prices shown in the graph below from Bloomberg Financial Services without independent verification.
Historical Performance of SPDR® S&P® Oil and Gas Exploration & Production ETF
“SPDR®” is a registered trademark of Standard & Poor's
Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC. The offered notes are not sponsored, endorsed, sold or
promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates make any representation regarding the advisability of
investing in the offered notes.
SPDR® Gold Trust
The SPDR® Gold Trust (the “trust”) issues SPDR® Gold Shares, which represent units of fractional undivided beneficial interest in and ownership of the trust (the “shares”). The trust holds gold bars and intends for
its shares to reflect the performance of the price of gold bullion minus the trust’s expenses and fees. The shares trade under the ticker symbol “GLD” on the NYSE Arca.
We have derived all information regarding the trust and the shares contained in this prospectus supplement from publicly available
information without independent verification. For additional information regarding the trust, please consult the reports (including the annual report on Form 10-K for the fiscal year ended September 30, 2017) and other information the trust files
with the SEC. Information provided to or filed with the SEC can be inspected and copied at the public reference facilities maintained by the SEC or through the SEC’s website at sec.gov and can be located by reference to SEC CIK number 0001222333.
Additional information regarding the trust may be obtained from other sources including, but not limited to, press releases, newspaper articles, other publicly available documents, and the SPDR® Gold Shares website at spdrgoldshares.com. We are not incorporating by reference the website, the sources listed above or any material they include in this prospectus supplement.
The Trust
The SPDR® Gold Trust is an investment trust,
formed on November 12, 2004, that holds gold bars and is expected from time to time to issue blocks of 100,000 trust shares (called baskets) in exchange for deposits of gold and to distribute gold in connection with redemptions of baskets.
The trust’s sponsor is World Gold Trust Services, LLC, a Delaware limited liability company, which is wholly-owned by the World
Gold Council, a not-for-profit association registered under Swiss law. The sponsor established the trust and generally oversees the performance of the trustee and the trust’s principal service providers, but does not exercise day-to-day
oversight. The sponsor may remove the trustee and appoint a successor in certain circumstances.
The trustee is BNY Mellon Asset Servicing, a division of The Bank of New York Mellon. The trustee is generally responsible for the
day-to-day administration of the trust. This includes selling the trust’s gold as needed to pay the trust’s expenses (gold sales are expected to occur approximately monthly in the ordinary course), calculating the net asset value (“NAV”) of the
trust and the NAV per trust share, receiving and processing orders from authorized participants to create and redeem baskets and coordinating the processing of such orders with the custodian and The Depository Trust Company and monitoring the
custodian. The trustee determines the NAV of the trust on each day that the NYSE Arca is open for regular trading, at the earlier of (i) the afternoon session of the twice daily determination of the price of an ounce of gold through an auction by
the London Bullion Market Association (the “LBMA”), administered by the ICE Benchmark Administration, which starts at 3:00 PM London, England time (known as the “LBMA Gold Price PM”), or (ii) 12:00 PM New York time. The LBMA Gold Price is
determined by participants in a physically settled, electronic and tradable auction. The LBMA Gold Price replaced the previously established London PM Gold Fix on March 20, 2015. The NAV of the trust is the aggregate value of the trust’s assets
less its estimated accrued but unpaid liabilities (which include accrued expenses). In determining the trust’s NAV, the trustee values the gold held by the trust based on the LBMA Gold Price PM for an ounce of gold. The trustee also determines
the NAV per trust share.
The custodian is HSBC Bank plc. The custodian is responsible for the safekeeping of the trust’s gold bars transferred to it in
connection with the creation of baskets. The custodian also facilitates the transfer of gold in and out of the trust through gold accounts it maintains for authorized participants and the trust. The custodian is a market maker, clearer and
approved weigher under the rules of the LBMA.
Shareholders of the trust have no voting rights, except in limited circumstances. Shareholders holding at least 66 2/3% of the
shares outstanding may vote to remove the trustee. The trustee may terminate the trust upon the agreement of shareholders owning at least 66 2/3% of the outstanding shares. In addition, certain amendments to the trust indenture require 51% or
unanimous consent of the shareholders.
The trust is not registered as an investment company under the Investment Company Act of 1940 and is not required to register under that act. The
trust will not hold or trade in commodity futures contracts regulated by the Commodity Exchange Act of 1936 (the “CEA”), as administered by the Commodity Futures Trading Commission (the “CFTC”). The trust is not a commodity pool for purposes of
the CEA, and none of the sponsor, the trustee or the marketing agent, State Street Global Advisors Funds Distributors, LLC, is subject to regulation by the CFTC as a commodity pool operator or a commodity trading advisor in connection with the
shares.
Investment Objective
The investment objective of the trust is for the shares to reflect the performance of the price of gold bullion, less the trust’s
expenses. The sponsor believes that, for many investors, the shares represent a cost-effective investment in gold. The sponsor intends the shares to offer investors an opportunity to participate in the gold market through an investment in
securities without the logistics of buying, storing and insuring gold. The trust has no fixed termination date and will terminate upon the occurrence of a termination event listed in the trust indenture.
The trust indenture provides for distributions to shareholders in only two circumstances. First, if the trustee and the sponsor
determine that the trust’s cash account balance exceeds the anticipated expenses of the trust for the next 12 months and the excess amount is more than $0.01 per share outstanding, they shall direct the excess amount to be distributed to the
shareholders. Second, if the trust is terminated and liquidated, the trustee will distribute to the shareholders any amounts remaining after the satisfaction of all outstanding liabilities of the trust and the establishment of such reserves for
applicable taxes, other governmental charges and contingent or future liabilities as the trustee shall determine. Shareholders of record on the record date fixed by the trustee for a distribution will be entitled to receive their pro rata portion
of any distribution.
Creation and Redemption of the Shares of the Trust
The trust creates and redeems its shares from time to time, but only in one or more baskets (a basket equals a block of 100,000
trust shares). The creation and redemption of baskets requires the delivery to the trust or the distribution by the trust of the amount of gold and any cash represented by the baskets being created or redeemed, the amount of which is based on the
combined NAV of the number of trust shares included in the baskets being created or redeemed. The initial amount of gold required for deposit with the trust to create shares for the period from the formation of the trust to the first day of
trading of the trust shares on the NYSE was 10,000 ounces per basket. The number of ounces of gold required to create a basket or to be delivered upon the redemption of a basket gradually decreases over time, due to the accrual of the trust’s
expenses and the sale of the trust’s gold to pay the trust’s expenses. Baskets may be created or redeemed only by an authorized participant, which is a person who is a registered broker-dealer or other securities market participant such as a bank
or other financial institution which is not required to register as a broker-dealer to engage in securities transactions, is a participant in the Depository Trust Company system, has entered into an agreement with the sponsor and the trustee
which provides the procedures for the creation and redemption of baskets and for the delivery of the gold and any cash required for such creations and redemptions and has established an unallocated gold account with the custodian. Authorized
participants pay a transaction fee for each order to create or redeem baskets and may sell the shares included in the baskets they create to other investors.
Termination Events
The sponsor may, and it is anticipated that the sponsor will, direct the trustee to terminate and liquidate the trust at any time
if the NAV of the trust is less than $350 million (as adjusted over time for inflation). The sponsor may also direct the trustee to terminate the trust if the CFTC determines that the trust is a commodity pool under the CEA. The trustee may also
terminate the trust upon the agreement of trust shareholders owning at least 66⅔% of the outstanding trust shares.
In addition, the trustee will terminate and liquidate the trust if one of the following events occurs:
● |
The Depository Trust Company, the securities depository for the shares of the trust, is unwilling or unable to perform its functions under the trust indenture and no suitable
replacement is available;
|
● |
The shares of the trust are de-listed from the NYSE Arca and are not listed for trading on another U.S. national securities exchange or through the NASDAQ Stock Market within five
business days from the date the shares of the trust are de-listed;
|
● |
The NAV of the trust remains less than $50 million for a period of 50 consecutive business days;
|
● |
The sponsor resigns or is unable to perform its duties or becomes bankrupt or insolvent and the trustee has not appointed a successor and has not itself agreed to act as sponsor;
|
● |
The trustee resigns or is removed and no successor trustee is appointed within 60 days;
|
● |
The custodian resigns and no successor custodian is appointed within 60 days;
|
● |
The sale of all of the trust’s assets;
|
● |
The trust fails to qualify for treatment, or ceases to be treated, for U.S. federal income tax purposes, as a grantor trust; or
|
● |
The maximum period for which the trust is allowed to exist under New York law ends.
|
Upon the termination of the trust, the trustee will, within a reasonable time after the termination of the trust, sell the trust’s
gold bars and, after paying or making provision for the trust’s liabilities, distribute the proceeds to the shareholders of the trust.
Valuation of Gold and NAV
As of 3:00 PM London time on each day that the NYSE Arca is open for regular trading or, if no LBMA Gold Price PM is determined at
3:00 PM London time on such day or the LBMA Gold Price PM has not been announced by 12:00 PM New York time on such day, as of 12:00 PM New York time on such day, the trustee values the gold held by the trust and determines both the adjusted NAV
and the NAV of the trust. The trustee values the trust’s gold on the basis of that day’s LBMA Gold Price PM or, if no LBMA Gold Price PM is determined on such day or has not been announced by the valuation time, the next most recent LBMA Gold
Price (AM or PM) determined prior to that time is used, unless the trustee, in consultation with the sponsor, determines that such price is inappropriate as a basis for valuation. In the event the trustee and the sponsor determine that the LBMA
Gold Price PM or last prior LBMA Gold Price (AM or PM) is not an appropriate basis for valuation of the trust’s gold, they shall identify an alternative basis for such valuation to be employed by the trustee. Once the value of the gold has been
determined, the trustee subtracts all estimated accrued fees (other than the fees accruing for the evaluation day which are computed by reference to the adjusted NAV of the trust or the custody fees accruing for the evaluation day which are based
on the value of the gold held by the trust), expenses and other liabilities of the trust from the total value of the gold and all other assets of the trust (other than any amounts credited to the trust’s reserve account, if established). The
resulting figure is the adjusted NAV of the trust. The adjusted NAV of the trust is used to compute the fees of the sponsor, the trustee and the marketing agent. To determine the trust’s NAV, the trustee subtracts the amount of estimated accrued
fees accruing for the evaluation day which are computed by reference to the adjusted NAV of the trust and to the value of the gold held by the trust from the adjusted NAV of the trust. The resulting figure is the NAV of the trust. The trustee
also determines the NAV per trust share by dividing the NAV of the trust by the number of the trust shares outstanding as of the close of trading on NYSE Arca (which includes the net number of any trust shares created or redeemed on such
evaluation day).
The shares may trade at, above or below the NAV per share. The NAV per share fluctuates with changes in the market value of the
trust’s assets. The trading price of the shares fluctuates in accordance with changes in the NAV per share as well as market supply and demand.
Expenses and Fees
The trust’s only recurring fixed expense is the sponsor’s fees which accrue daily at an annual rate equal to 0.40% of the daily
NAV. In exchange for the sponsor’s fee, the sponsor has agreed to pay all ordinary fees and expenses of the trust (which include the fees and expenses of the trustee and the fees and expenses of the custodian for the custody of the trust’s gold
bars), the fees and expenses of the sponsor, certain taxes, the fees of the marketing agent, printing and mailing costs, legal and audit fees, registration fees, NYSE Arca listing fees and other marketing costs and expenses. In order to pay the
trust’s expenses, the trustee sells gold held by the trust on an as needed basis. Each sale of gold by the trust is a taxable event to shareholders of the trust.
Additionally, if the trust incurs unforeseen expenses that cause the total ordinary expenses of the trust to exceed 0.70% per year
of the daily adjusted NAV of the trust, the ordinary expenses will accrue at a rate greater than 0.40% per year of the daily adjusted NAV of the trust, even after the sponsor and the marketing agent have completely waived their combined fees of
0.30% per year of the daily adjusted NAV of the trust.
The trustee’s fee is payable monthly in arrears and is accrued daily at an annual rate equal to 0.02% of the adjusted NAV of the
trust, subject to a minimum fee of $500,000 and a maximum fee of $2,000,000 per year. The custodian’s fee is computed at an annual rate equal to 0.10% of the average daily aggregate value of the first 4.5 million ounces of gold held in the trust
and 0.06% of the average daily aggregate value of all gold held in the trust in excess of 4.5 million ounces.
Understanding the LBMA Gold Price
Although the market for physical gold is global, most over the counter market trades are cleared through London. In addition to
coordinating market activities, the LBMA acts as the principal point of contact between the market and its regulators. A primary function of the LBMA is its involvement in the promotion of refining standards by maintenance of the “London Good
Delivery Lists,” which are the lists of LBMA accredited melters and assayers of gold. The LBMA also coordinates market clearing and vaulting, promotes good trading practices and develops standard documentation.
ICE Benchmark Administration (“IBA”), on behalf of the LBMA, has assumed responsibility for establishing the LBMA Gold Price as of March 20, 2015.
In April 2017, the IBA introduced central clearing to the gold auction. Central clearing
removes the need for firms to have large bilateral credit lines in place with each other in order to become a direct participant.
This opens up the auction to a broader cross section of the market and also facilitates greater volume in the auction.
IBA operates electronic auctions for spot, unallocated Loco London gold (gold bullion that is physically held in London), providing
a market-based platform for buyers and sellers to trade. The auctions are run at 10:30am and 3:00pm London time. The final auction price is published to the market as LBMA Gold Price AM and LBMA Gold Price PM.
The price formation for the gold auction is in USD only. The final price is converted into the benchmark in other currencies
including: Australian Dollars; British Pounds, Canadian Dollars, Euros, Onshore and Offshore Yuan, Indian Rupees, Japanese Yen, Malaysian Ringgit, Russian Rubles, Singapore Dollars, South African Rand, Swiss Francs, New Taiwan Dollars, Thai Baht
and Turkish Lira. The benchmarks in other currencies are not tradeable directly through the auction.
The methodology is reviewed by the Precious Metals Oversight Committee as documented in its Terms of Reference. The frequency of
reviews is set by the Oversight Committee through its Calendar of Agenda Items.
The auctions run in rounds of 30 seconds. At the start of each round, IBA publishes a price for that round. Participants then have
30 seconds to enter, change or cancel their orders (how much gold they want to buy or sell at that price). At the end of each round, order entry is frozen and the system checks to see if the difference between buying and selling (the imbalance)
is within the imbalance threshold (normally 10,000 oz. for gold).
If the imbalance is outside of the threshold at the end of a round, then the auction is not balanced, the price is adjusted and a
new round starts. If the imbalance is within the threshold then the auction is finished and the price is set. Any imbalance is shared equally between all direct participants (even if they did not place orders or did not log in) and the net volume
for each participant trades at the final price. The final price is then published as the LBMA Gold Price in US Dollars and also converted into the benchmarks in other currencies using foreign exchange rates from when the final round ended.
The prices during the auction are determined by an algorithm that takes into account current market conditions and the activity in
the auction. Each auction is actively supervised by IBA staff.
If the IBA discovers an error during an auction round, the auction round could be stopped and restarted. If the IBA makes an error
in an auction which is discovered after an auction is finished, the auction could not be rerun, but the IBA could replace the published auction price with a No Publication. If a participant makes an error which is discovered after an auction is
finished, the auction could not be rerun. If fewer than three direct participants are present for the auction and the IBA therefore publishes a price without conducting an auction but the IBA publishes an incorrect price, the incorrect price
could be amended if the error were discovered within 30 minutes after publication. If the IBA publishes an incorrect non-USD price, the incorrect non-USD price could be amended if the error were discovered within 30 minutes after publication.
As of September 30, 2018, the SPDR® website reported the following
annual returns on the market price of the trust’s shares and the price of gold (determined by the London PM Fix through March 19, 2015). The market price returns shown account for changes in the mid-point of the bid and ask prices at the time
the NAV of the trust is calculated on the relevant date. Trust shares: 1 year, -7.25%; 3 years, 1.81%; 5 years, -2.53%; 10 years, 2.85%; since ETF inception, 6.88%; gold: 1 year, -7.47%; 3 years, 2.14%; 5 years, -2.19%; 10 years, 2.99%; since ETF
inception, 7.38%.
Historical Closing Prices of the Trust’s Shares
The closing price of shares of the trust has fluctuated in the past and may, in the future, experience significant fluctuations.
Any historical upward or downward trend in the closing price of the shares during the period shown below is not an indication that the shares are more or less likely to increase or decrease at any time during the life of your notes. The period
shown below will be approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years
from the date hereof or otherwise).
You should not take the historical closing prices of the
shares as an indication of the future performance of the shares. We cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes on
the stated maturity date. Neither we nor any of our affiliates make any representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the relevant
trust closing prices between the date of this prospectus supplement and the date of your purchase of the offered notes. The actual performance of the trust over the life of the offered notes, as well as the 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 trust from November 12, 2008 through November 12, 2018. We
obtained the closing prices shown in the graph below from Bloomberg Financial Services without independent verification.
Historical Performance of SPDR® Gold Trust
“SPDR®” is a registered trademark of Standard & Poor's
Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC. The index is not sponsored, endorsed, sold or promoted
by S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P or their respective affiliates make any representation regarding the advisability of investing in
the index.
iShares® TIPS Bond ETF
The shares of the iShares® TIPS Bond ETF (the
“ETF”) are issued by iShares® Trust, a registered investment company.
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The ETF is a tracking ETF that seeks investment results which correspond generally to the price and yield performance, before fees and expenses, of the index.
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The index it tracks is the Bloomberg Barclays U.S. Treasury Inflation Protected Securities (TIPS) Index (Series-L) (the “index”).
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Investment Advisor: BlackRock ETF Advisors (“BFA”).
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The ETF’s shares trade on the NYSE Arca under the ticker symbol “TIP”.
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The iShares® Trust’s SEC CIK Number is 0001100663.
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The ETF’s launch date was December 4, 2003.
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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 calculated based on the aggregate average daily net assets of the ETF and a set of other specified iShares® funds (the “funds”). The management fee for the ETF equals the ratio of the ETF’s net assets over the aggregate net assets of the ETF multiplied by the amount calculated as follows: 0.2000% per annum of the aggregate net assets less than or equal to $121.0 billion; plus 0.1900% per annum of the aggregate net assets over $121.0 billion up to and including $181.0 billion; plus 0.1805% per annum of the
aggregate net assets over $181.0 billion up to and including $231.0 billion; plus 0.1715% per annum of the aggregate net assets over $231.0 billion up to and
including $281.0 billion; plus 0.1630% per annum of the aggregate net assets in excess of $281.0 billion. As of September 30, 2018, the expense ratio of the ETF was
0.20% per annum.
For additional information regarding iShares®
Trust or BFA, please consult the reports (including the Semi-Annual Report to Shareholders on Form N−CSRS for the period ended April 30, 2018) 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/TIP.htm. We are not incorporating by reference the website, the sources listed above or any
material they include in this prospectus supplement.
Investment Objective and Strategy
The ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses,
of the index. The 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).
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® TIPS Bond ETF Top Ten Holdings as of October 12, 2018
Treasury Inflation-Protected Note
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Percentage (%)
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0.13% due 4/15/2021
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9.54%
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0.13% due 4/15/2020
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8.72%
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0.63% due 1/15/2026
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7.03%
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0.13% due 7/15/2024
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6.25%
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0.38% due 7/15/2025
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5.72%
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0.13% due 7/15/2026
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4.80%
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0.13% due 1/15/2023
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4.12%
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0.25% due 1/15/2025
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3.85%
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0.13% due 1/15/2022
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3.80%
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0.13% due 4/15/2019
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3.70%
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Total
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57.53%
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The following table displays additional information about the bonds held by the ETF as of October 12, 2018. We obtained the
information in the table below from the iShares® website without independent verification.
Weighted average maturity
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8.04 years
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Weighted average coupon
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0.62%
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Effective duration
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7.37 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. Real modified duration is a measure of the potential responsiveness of an inflation-linked bond or portfolio
price to small parallel shifts in real interest rates (as opposed to nominal interest rates).
As of October 12, 2018, the ETF’s holdings were comprised of 38 U.S. Treasury bonds (100.00% of holdings) and no cash and/or
derivatives (0.00% 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.
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, the ETF holding uninvested cash, differences in timing of the accrual of distributions, tax gains or losses, changes to the
index or the costs of complying with various new or existing regulatory requirements. Tracking error also may result because the ETF incurs fees and expenses, while the index does not. BFA expects that, over time, the 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 September 30, 2018, 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, 0.34%; 3 years, 1.91%; 5 years, 1.24%; 10 years, 3.16%; since inception, 3.77%; index: 1 year, 0.41%; 3 years, 2.04%; 5 years, 1.37%; 10 years, 3.32%; since ETF
inception, 3.92%.
The Index
The index is administered by Bloomberg Index Services Limited (the “index administrator”), which determines the composition and relative weightings
of the securities in the index and publishes information regarding its market value. The index measures the performance of the inflation-protected public obligations of the U.S. Treasury, commonly known
as “TIPS.” TIPS are securities issued by the U.S. Treasury that are designed to provide inflation protection to investors. TIPS are
income-generating instruments whose interest and principal payments are adjusted for inflation — a sustained increase in prices that erodes the purchasing power of money. The inflation adjustment, which is typically applied monthly to the
principal of the bond, follows a designated inflation index, the Consumer Price Index (the “CPI”), and TIPS’ principal payments are adjusted according to changes in the CPI. A fixed coupon rate is applied to the inflation-adjusted principal so
that as inflation rises, both the principal value and the interest payments increase. This can provide investors with a hedge against inflation, as it helps preserve the purchasing power of an investment. Because of this inflation adjustment
feature, inflation-protected bonds typically have lower yields than conventional fixed-rate bonds. The index is calculated in U.S. dollars on a total return (gross) basis.
The index includes all publicly-issued U.S. Treasury inflation-protected securities that have at least one year remaining to
maturity, are rated investment grade using the middle rating of Moody’s, S&P and Fitch, and have $500 million or more par amount outstanding. In determining index eligibility, Federal Reserve purchases and sales in open market operations of
U.S. Treasuries are deducted from the total amount outstanding using data made publicly available on the Federal Reserve Bank of New York website. New issuances bought at auction by the Federal Reserve do not enter the index, and net secondary
market purchases/sales are adjusted at each month-end with a one-month lag.
In addition, the securities must be denominated in U.S. dollars and bear interest at a fixed rate. The index does not include
certain issues, such as Treasury bills, bellwether securities, or coupon issues that have been stripped from bonds. The securities in the index are updated on the last calendar day of each month.
Rebalancing the Index. The index is rebalanced at
each month-end, and this represents the fixed set of bonds on which index returns are calculated for the ensuing month, which is referred to as the “returns universe”. While intra-month changes are not made to the returns universe, there is a
second universe of stocks kept for the index, the “projected universe”, where indicative intra-month changes to securities (credit rating change, sector reclassification, amount outstanding changes, corporate actions, ticker changes) are
reflected on a daily basis. These changes will affect the composition of the returns universe at month-end when the index is rebalanced, and the projected universe becomes the returns universe. Eligible securities issued, but not necessarily
settled, on or before the month-end rebalancing date qualify for immediate inclusion in the projected universe and inclusion in the returns universe the following month, so long as required security reference information and pricing are readily
available.
Intra-month cash flows. Intra-month cash flows from
interest and principal payments contribute to monthly index returns, but the cash itself does not generate its own partial month return. However, at each rebalancing, accumulated cash is stripped out of the index and is effectively reinvested
into the index for the following month, so that index results over two or more months reflect monthly compounding.
Calculation. The amount outstanding reported for the
TIPS is equal to the notional par value of each TIP. The notional amount is adjusted on a monthly basis in the projected universe for government purchases and sales for Federal Reserve SOMA account conducted in the previous month, and the
adjustments are reflected in the returns universe in the following month. When a new TIPS is issued or an existing issue is reopened, the initial par amount outstanding is reduced for any issuance bought by the Federal Reserve at auction.
The “index ratio” is used as a multiplier to adjust the nominal principal and coupon payments of the security, so that their real
values remain unchanged. The index ratio is generally the ratio of the CPI to the base CPI. Each security has its own unique base CPI, depending on when it was issued. Therefore, the index ratio differs for each bond.
The index ratio is used to calculate the inflated price and the inflated accrued interest of the securities held in the index. The
market value of the index is equal to (inflated price + inflated accrued interest) / 100) * amount outstanding.
Additional information regarding the index may be obtained from other sources including, but not limited to, press releases, newspaper articles,
other publicly available documents, and the US TIPS (Series-L) Index factsheet available at bloombergindices.com/bloomberg-barclays-indices-resources/. We are not incorporating by reference the website, the sources listed above or any material
they include in this prospectus supplement.
Historical Closing Prices of the 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. The period shown
below will be approximately ten years, but may be shorter if Bloomberg Financial Services does not provide historical closing prices for the entirety of such period (whether due to the applicable inception date occurring less than ten years from
the date hereof or otherwise).
You should not take the historical closing prices of the
shares as an indication of the future performance of the shares. We cannot give you any assurance that the future performance of the shares will result in your receiving an amount greater than the outstanding face amount of your notes
on the stated maturity date. Neither we nor any of our affiliates make any representation to you as to the performance of the shares. Before investing in the offered notes, you should consult publicly available information to determine the
relevant ETF closing prices between the date of this prospectus supplement and the date of your purchase of the offered notes. The actual performance of the ETF over the life of the offered notes, as well as the 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 November 12, 2008 through November 12, 2018. We
obtained the closing prices shown in the graph below from Bloomberg Financial Services without independent verification.
Historical Performance of iShares® TIPS Bond ETF
“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.
THE NOTIONAL INTEREST RATE
The money market position is included in the cash equivalent asset class and reflects the notional return accruing to a
hypothetical investor from an investment in a 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 November 12, 2008 through November 12, 2018.
We obtained the 3-month USD LIBOR rates shown in the graph below from Reuters, without independent verification.
Historical Performance of 3-month USD LIBOR
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.
SUPPLEMENTAL DISCUSSION OF FEDERAL INCOME TAX CONSEQUENCES
The following section supplements the discussion of U.S. federal income taxation in the accompanying prospectus.
The following section is the opinion of Sidley Austin llp, counsel to GS Finance Corp. and The Goldman Sachs Group, Inc. It applies to you only if you hold your notes as a capital asset for tax purposes. This section does not apply to you if you are a member of a
class of holders subject to special rules, such as:
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a dealer in securities or currencies;
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a trader in securities that elects to use a mark-to-market method of accounting for your securities holdings;
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a regulated investment company;
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a life insurance company;
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a tax-exempt organization;
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a person that owns the notes as a hedge or that is hedged against interest rate risks;
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a person that owns the notes as part of a straddle or conversion transaction for tax purposes; or
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a United States holder (as defined below) whose functional currency for tax purposes is not the U.S. dollar.
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This section is based on the U.S. Internal Revenue Code of 1986, as amended, its legislative history, existing
and proposed regulations under the Internal Revenue Code, published rulings and court decisions, all as currently in effect. These laws are subject to change, possibly on a retroactive basis.
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You should consult your tax advisor concerning the U.S. federal income tax and other tax consequences of your investment in
the notes, including the application of state, local or other tax laws and the possible effects of changes in federal or other tax laws.
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United States Holders
This subsection describes the tax consequences to a United States holder. You are a United States holder if you
are a beneficial owner of notes and you are:
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a citizen or resident of the United States;
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a domestic corporation;
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an estate whose income is subject to U.S. federal income tax regardless of its source; or
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a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial
decisions of the trust.
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If you are not a United States holder, this section does not apply to you and you should refer to “— United
States Alien Holders” below.
Your notes will be treated as debt instruments subject to special rules governing contingent payment debt
instruments for U.S. federal income tax purposes. Under those rules, the amount of interest you are required to take into account for each accrual period will be determined by constructing a projected payment schedule for your notes and applying
rules similar to those for accruing original issue discount on a hypothetical noncontingent debt instrument with that projected payment schedule. This method is applied by first determining the yield at which we would issue a noncontingent fixed
rate debt instrument with terms and conditions similar to your notes (the “comparable yield”) and then determining as of the issue date a payment schedule that would produce the comparable yield. These rules will generally have the effect of
requiring you to include amounts in income in respect of your notes over their term based on the comparable yield for the notes, even though you generally will not receive any payments from us until maturity.
It is not entirely clear how, under the rules governing contingent payment debt instruments, the maturity date for debt
instruments (such as your notes) that provide for the possibility of early redemption should be determined for purposes of computing the comparable yield and projected payment schedule. It would be reasonable, however, to compute the comparable
yield and projected payment schedule for your notes (and we intend to make the computation in such a manner) based on the assumption that your notes will remain outstanding until the stated maturity date.
We have determined that the comparable yield for the notes is equal to 4.29% per annum, compounded semi-annually
with a projected payment at maturity of $1,347.91 based on an investment of $1,000.
Based on this comparable yield, if you are an initial holder that holds a note until maturity and you pay your taxes on a
calendar year basis, we have determined that you would be required to report the following amounts as ordinary income, not taking into account any positive or negative adjustments you may be required to take into account based on the actual
payments on the notes, from the note each year:
Accrual Period
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Interest Deemed to
Accrue During Accrual
Period (per $1,000 note)
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Total Interest Deemed to
Have Accrued from
Original Issue Date (per
$1,000 note) as of End of
Accrual Period
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November 16, 2018 through December 31, 2018
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$5.25
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$5.25
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January 1, 2019 through December 31, 2019
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$43.58
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$48.83
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January 1, 2020 through December 31, 2020
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$45.48
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$94.31
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January 1, 2021 through December 31, 2021
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$47.46
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$141.77
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January 1, 2022 through December 31, 2022
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$49.51
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$191.28
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January 1, 2023 through December 31, 2023
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$51.65
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$242.93
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January 1, 2024 through December 31, 2024
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$53.90
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$296.83
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January 1, 2025 through November 28, 2025
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$51.08
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$347.91
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You are required to use the comparable yield and projected payment schedule that we compute in determining your
interest accruals in respect of your notes, unless you timely disclose and justify on your U.S. federal income tax return the use of a different comparable yield and projected payment schedule.
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The comparable yield and projected payment schedule are not provided to you for any purpose other than the determination of
your interest accruals in respect of your notes, and we make no representation regarding the amount of contingent payments with respect to your notes.
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If you purchase your notes at a price other than their adjusted issue price determined for tax purposes, you
must determine the extent to which the difference between the price you paid for your notes and their adjusted issue price is attributable to a change in expectations as to the projected payment schedule, a change in interest rates, or both, and
reasonably allocate the difference accordingly. The adjusted issue price of your notes will equal your notes’ original issue price plus any interest deemed to be accrued on your notes (under the rules governing contingent payment debt
instruments) as of the time you purchase your notes. The original issue price of your notes will be the first price at which a substantial amount of the notes is sold to persons other than bond houses, brokers or similar persons or organizations
acting in the capacity of underwriters, placement agents or wholesalers. Therefore, you may be required to make the adjustments described above even if you purchase your notes in the initial offering if you purchase your notes at a price other
than the issue price.
If the adjusted issue price of your notes is greater than the price you paid for your notes, you must make
positive adjustments increasing (i) the amount of interest that you would otherwise accrue and include in income each year, and (ii) the amount of ordinary income (or decreasing the amount of ordinary loss) recognized upon maturity by the amounts
allocated under the previous paragraph to each of interest and the projected payment schedule; if the adjusted issue price of your notes is less than the price you paid for your notes, you must make negative adjustments, decreasing (i) the amount
of interest that you must include in income each year, and (ii) the amount of ordinary income (or increasing the amount of ordinary loss) recognized upon maturity by the amounts allocated under the previous paragraph to each of interest and the
projected payment schedule. Adjustments allocated to the interest amount are not made until the date the daily portion of interest accrues.
Because any Form 1099-OID that you receive will not reflect the effects of positive or negative adjustments resulting from your
purchase of notes at a price other than the adjusted issue price determined for tax purposes, you are urged to consult with your tax advisor as to whether and how adjustments should be made to the amounts reported on any Form 1099-OID.
You will recognize income or loss upon the sale, exchange, redemption or maturity of your notes in an amount equal to the
difference, if any, between the cash amount you receive at such time and your adjusted basis in your notes. In general, your adjusted basis in your notes will equal the amount you paid for your notes, increased by the amount of interest you
previously accrued with respect to your notes (in accordance with the comparable yield and the projected payment schedule for your notes), and increased or decreased by the amount of any positive or negative adjustment, respectively, that you are
required to make if you purchase your notes at a price other than the adjusted issue price determined for tax purposes.
Any income you recognize upon the sale, exchange, redemption or maturity of your notes will be ordinary interest
income. Any loss you recognize at such time will be ordinary loss to the extent of interest you included as income in the current or previous taxable years in respect of your notes, and, thereafter, capital loss. If you are a noncorporate holder,
you would generally be able to use such ordinary loss to offset your income only in the taxable year in which you recognize the ordinary loss and would generally not be able to carry such ordinary loss forward or back to offset income in other
taxable years.
Pursuant to recently enacted legislation, for taxable years beginning after December 31, 2018, with respect to a debt instrument issued with original
issue discount, such as the notes, an accrual method taxpayer that reports revenues on an applicable financial statement generally must recognize income for U.S. federal income tax purposes no later than the taxable year in which such income is
taken into account as revenue in an applicable financial statement of the taxpayer. For this purpose, an “applicable financial statement” generally means a financial statement certified as having been prepared in accordance with generally
accepted accounting principles or that is made on the basis of international financial reporting standards and which is used by the taxpayer for various specified purposes. This rule could potentially require such a taxpayer to recognize income
for U.S. federal income tax purposes with respect to the notes prior to the time such income would be recognized pursuant to the rules described above. Potential investors in the notes should consult their tax advisors regarding the potential
applicability of these rules to their investment in the notes.
United States Alien Holders
If you are a United States alien holder, please see the discussion under “United States Taxation — Taxation of
Debt Securities — United States Alien Holders” in the accompanying prospectus for a description of the tax consequences relevant to you. You are a United States alien holder if you are the beneficial owner of the notes and are, for U.S. federal
income tax purposes:
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a nonresident alien individual;
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a foreign corporation; or
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an estate or trust that in either case is not subject to U.S. federal income tax on a net income basis on income or gain from the notes.
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The Treasury Department has issued regulations under which amounts paid or deemed paid on certain financial instruments (“871(m) financial
instruments”) that are treated as attributable to U.S.-source dividends could be treated, in whole or in part depending on the circumstances, as a “dividend equivalent” payment that is subject to tax at a rate of 30% (or a lower rate under an
applicable treaty), which in the case of amounts you receive upon the sale, exchange, redemption or maturity of your notes, could be collected via withholding. If these regulations were to apply to the notes, we may be required to withhold such
taxes if any U.S.-source dividends are paid on any ETFs included in the index during the term of the notes. We could also require you to make certifications (e.g., an applicable Internal Revenue Service Form W-8) prior to the maturity of the
notes in order to avoid or minimize withholding obligations, and we could withhold accordingly (subject to your potential right to claim a refund from the Internal Revenue Service) if such certifications were not received or were not
satisfactory. If withholding was required, we would not be required to pay any additional amounts with respect to amounts so withheld. These regulations generally will apply to 871(m) financial instruments (or a combination of financial
instruments treated as having been entered into in connection with each other) issued (or significantly modified and treated as retired and reissued) on or after January 1, 2021, but will also apply to certain 871(m) financial instruments (or a
combination of financial instruments treated as having been entered into in connection with each other) that have a delta (as defined in the applicable Treasury regulations) of one and are issued (or significantly modified and treated as retired
and reissued) on or after January 1, 2017. In addition, these regulations will not apply to financial instruments that reference a “qualified index” (as defined in the regulations). We have determined that, as of the issue date of your notes,
your notes will not be subject to withholding under these rules. In certain limited circumstances, however, you should be aware that it is possible for United States alien holders to be liable for tax under these rules with respect to a
combination of transactions treated as having been entered into in connection with each other even when no withholding is required. You should consult your tax advisor concerning these regulations, subsequent official guidance and regarding any
other possible alternative characterizations of your notes for U.S. federal income tax purposes.
Foreign Account Tax Compliance Act (FATCA) Withholding
Pursuant to Treasury regulations, Foreign Account Tax Compliance Act (FATCA) withholding (as described in “United States
Taxation—Taxation of Debt Securities—Foreign Account Tax Compliance Act (FATCA) Withholding” in the accompanying prospectus) will generally apply to obligations that are issued on or after July 1, 2014; therefore, the notes will generally be
subject to FATCA withholding. However, according to published guidance, the withholding tax described above will not apply to payments of gross proceeds from the sale, exchange, redemption or other disposition of the notes made before January 1,
2019.
EMPLOYEE RETIREMENT INCOME SECURITY ACT
This section is only relevant to you if you are an insurance company or the fiduciary of a
pension plan or an employee benefit plan (including a governmental plan, an IRA or a Keogh Plan) proposing to invest in the notes.
The U.S. Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and the U.S. Internal Revenue
Code of 1986, as amended (the “Code”), prohibit certain transactions (“prohibited transactions”) involving the assets of an employee benefit plan that is subject to the fiduciary responsibility provisions of ERISA or Section 4975 of the Code
(including individual retirement accounts, Keogh plans and other plans described in Section 4975(e)(1) of the Code) (a “Plan”) and certain persons who are “parties in interest” (within the meaning of ERISA) or “disqualified persons” (within the
meaning of the Code) with respect to the Plan; governmental plans may be subject to similar prohibitions unless an exemption applies to the transaction. The assets of a Plan may include assets held in the general account of an insurance company
that are deemed “plan assets” under ERISA or assets of certain investment vehicles in which the Plan invests. Each of The Goldman Sachs Group, Inc. and certain of its affiliates may be considered a “party in interest” or a “disqualified person”
with respect to many Plans, and, accordingly, prohibited transactions may arise if the notes are acquired by or on behalf of a Plan unless those notes are acquired and held pursuant to an available exemption. In general, available exemptions are:
transactions effected on behalf of that Plan by a “qualified professional asset manager” (prohibited transaction exemption 84-14) or an “in-house asset manager” (prohibited transaction exemption 96-23), transactions involving insurance company
general accounts (prohibited transaction exemption 95-60), transactions involving insurance company pooled separate accounts (prohibited transaction exemption 90‑1), transactions involving bank collective investment funds (prohibited transaction
exemption 91-38) and transactions with service providers under Section 408(b)(17) of ERISA and Section 4975(d)(20) of the Code where the Plan receives no less and pays no more than “adequate consideration” (within the meaning of Section
408(b)(17) of ERISA and Section 4975(f)(10) of the Code). The person making the decision on behalf of a Plan or a governmental plan shall be deemed, on behalf of itself and the plan, by purchasing and holding the notes, or exercising any rights
related thereto, to represent that (a) the plan will receive no less and pay no more than “adequate consideration” (within the meaning of Section 408(b)(17) of ERISA and Section 4975(f)(10) of the Code) in connection with the purchase and holding
of the notes, (b) none of the purchase, holding or disposition of the notes or the exercise of any rights related to the notes will result in a nonexempt prohibited transaction under ERISA or the Code (or, with respect to a governmental plan,
under any similar applicable law or regulation), and (c) neither The Goldman Sachs Group, Inc. nor any of its affiliates is a “fiduciary” (within the meaning of Section 3(21) of ERISA or, with respect to a governmental plan, under any similar
applicable law or regulation) with respect to the purchaser or holder in connection with such person’s acquisition, disposition or holding of the notes, or as a result of any exercise by The Goldman Sachs Group, Inc. or any of its affiliates of
any rights in connection with the notes, and neither The Goldman Sachs Group, Inc. nor any of its affiliates has provided investment advice in connection with such person’s acquisition, disposition or holding of the notes.
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If you are an insurance company or the fiduciary of a pension plan or an employee benefit plan (including
a government plan, an IRA or a Keogh plan) and propose to invest in the notes, you should consult your legal counsel.
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DEFAULT AMOUNT ON ACCELERATION
If an event of default
occurs and the maturity of your notes is accelerated, the company will pay the default amount in respect of the principal of your notes at the maturity, instead of the amount payable on the stated maturity date as described earlier. We describe
the default amount under “Terms and Conditions” above.
For the purpose of determining whether
the holders of our Series E medium-term notes, which include your notes, are entitled to take any action under the indenture, we will treat the outstanding face amount of your notes as the outstanding principal amount of that note. Although the
terms of the offered notes differ from those of the other Series E medium-term notes, holders of specified percentages in principal amount of all Series E medium-term notes, together in some cases with other series of our debt securities, will
be able to take action affecting all the Series E medium-term notes, including your notes, except with respect to certain Series E medium-term notes if the terms of such notes specify that the holders of specified percentages in principal
amount of all of such notes must also consent to such action. This action may involve changing some of the terms that apply to the Series E medium-term notes, accelerating the maturity of the Series E medium-term notes after a default or
waiving some of our obligations under the indenture. In addition, certain changes to the indenture and the notes that only affect certain debt securities may be made with the approval of holders of a majority in principal amount of such
affected debt securities. We discuss these matters in the accompanying prospectus under “Description of Debt Securities We May Offer — Default, Remedies and Waiver of Default” and “Description of Debt Securities We May Offer — Modification of
the Debt Indentures and Waiver of Covenants”.
SUPPLEMENTAL PLAN OF DISTRIBUTION
GS Finance Corp. has agreed to sell to GS&Co., and GS&Co. has agreed to purchase from GS Finance Corp.,
the aggregate face amount of the offered notes specified on the front cover of this prospectus supplement. GS&Co. proposes initially to offer the notes to the public at the original issue price set forth on the cover page of this prospectus
supplement, and to certain securities dealers at such price less a concession not in excess of 4.7% of the face amount.
In the future, GS&Co. or other affiliates of GS Finance Corp. may repurchase and resell the offered notes in
market-making transactions, with resales being made at prices related to prevailing market prices at the time of resale or at negotiated prices. GS Finance Corp. estimates that its share of the total offering expenses, excluding underwriting
discounts and commissions, will be approximately $20,000. For more information about the plan of distribution and possible market-making activities, see “Plan of Distribution” in the accompanying prospectus.
We will deliver the notes against payment therefor in New York, New York on November 16, 2018. Under Rule 15c6-1
of the Securities Exchange Act of 1934, trades in the secondary market generally are required to settle in two business days, unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade notes on any
date prior to two business days before delivery will be required to specify alternative settlement arrangements to prevent a failed settlement.
We have been advised by GS&Co. that it intends to make a market in the notes. However, neither GS&Co.
nor any of our other affiliates that makes a market is obligated to do so and any of them may stop doing so at any time without notice. No assurance can be given as to the liquidity or trading market for the notes.
Any notes which are the subject of the offering contemplated by this prospectus
supplement, the accompanying prospectus and the accompanying prospectus supplement may not be offered, sold or otherwise made available to any retail investor in the European Economic Area. Consequently no key information document required by
Regulation (EU) No 1286/2014 (the “PRIIPs Regulation”) for offering or selling the notes or otherwise making them available to retail investors in the EEA has been prepared and therefore offering or selling the notes or otherwise making them
available to any retail investor in the EEA may be unlawful under the PRIIPs Regulation. For the purposes of this provision:
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a) |
the expression “retail investor” means a person who is one (or more) of the following:
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(i) |
a retail client as defined in point (11) of Article 4(1) of Directive 2014/65/EU (as amended, “MiFID II”); or
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(ii) |
a customer within the meaning of Directive 2002/92/EC (as amended, the “Insurance Mediation Directive”), where that customer would not qualify as a
professional client as defined in point (10) of Article 4(1) of MiFID II; or
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(iii) |
not a qualified investor as defined in Directive 2003/71/EC (as amended, the “Prospectus Directive”); and
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b) |
the expression an “offer” includes the communication in any form and by any means of sufficient information on the terms of the offer and the notes to be
offered so as to enable an investor to decide to purchase or subscribe for the notes.
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In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive
(each, a “Relevant Member State”), GS&Co. has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”) it has not
made and will not make an offer of notes which are the subject of the offering contemplated by this prospectus supplement, the accompanying prospectus and the accompanying prospectus supplement to the public in that Relevant Member State except
that, with effect from and including the Relevant Implementation Date, an offer of such notes may be made to the public in that Relevant Member State:
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a) |
at any time to any legal entity which is a qualified investor as defined in the Prospectus Directive;
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b) |
at any time to fewer than 150 natural or legal persons (other than qualified investors as defined in the Prospectus Directive), subject to obtaining the prior consent of the relevant
dealer or dealers nominated by the issuer for any such offer; or
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c) |
at any time in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of notes referred to above shall require us or any dealer
to publish a prospectus pursuant to Article 3 of the Prospectus Directive.
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For the purposes of this provision, the expression an “offer of notes to the public” in relation to any notes in any Relevant
Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the notes to be offered so as to enable an investor to decide to purchase or subscribe for the notes, as the same may be
varied in that Member State by any measure implementing the Prospectus Directive in that Member State
and the expression “Prospectus Directive” means Directive 2003/71/EC (as amended, including by Directive 2010/73/EU), and includes
any relevant implementing measure in the Relevant Member State.
Any invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) in
connection with the issue or sale of the notes may only be communicated or caused to be communicated in circumstances in which Section 21(1) of the FSMA does not apply to GS Finance Corp. or The Goldman Sachs Group, Inc.
All applicable provisions of the FSMA must be complied with in respect to anything done by any person in
relation to the notes in, from or otherwise involving the United Kingdom.
The notes may not be offered or sold in Hong Kong by means of any document other than (i) to “professional
investors” as defined in the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) and any rules made thereunder, or (ii) in other circumstances which do not result in the document being a “prospectus” as defined in the Companies
(Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32 of the Laws of Hong Kong) or which do not constitute an offer to the public within the meaning of that Ordinance; and no advertisement, invitation or document relating to the notes may
be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere) which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if
permitted to do so under the securities laws of Hong Kong) other than with respect to the notes which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” as defined in the Securities and
Futures Ordinance and any rules made thereunder.
This prospectus supplement, along with the accompanying prospectus supplement and the accompanying prospectus
have not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus supplement, along with the accompanying prospectus supplement and the accompanying prospectus and any other document or material in
connection with the offer or sale, or invitation for subscription or purchase, of the notes may not be circulated or distributed, nor may the notes be offered or sold, or be made the subject of an invitation for subscription or purchase, whether
directly or indirectly, to persons in Singapore other than (i) to an institutional investor (as defined in Section 4A of the Securities and Futures Act, Chapter 289 of Singapore (the “SFA”)) under Section 274 of the SFA, (ii) to a relevant person
(as defined in Section 275(2) of the SFA) pursuant to Section 275(1) of the SFA, or any person pursuant to Section 275(1A) of the SFA, and in accordance with the conditions specified in Section 275 of the SFA or (iii) otherwise pursuant to, and
in accordance with the conditions of, any other applicable provision of the SFA, in each case subject to conditions set forth in the SFA.
Where the notes are subscribed or purchased under Section 275 of the SFA by a relevant person which is a
corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited
investor, the securities (as defined in Section 239(1) of the SFA) of that corporation shall not be transferable for six months after that corporation has acquired the notes under Section 275 of the SFA except: (1) to an institutional investor
under Section 274 of the SFA or to a relevant person (as defined in Section 275(2) of the SFA), (2) where such transfer arises from an offer in that corporation’s securities pursuant to Section 275(1A) of the SFA, (3) where no consideration is or
will be given for the transfer, (4) where the transfer is by operation of law, (5) as specified in Section 276(7) of the SFA, or (6) as specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures)
Regulations 2005 of Singapore (“Regulation 32”).
Where the notes are subscribed or purchased under Section 275 of the SFA by a relevant person which is a trust
(where the trustee is not an accredited investor (as defined in Section 4A of the SFA)) whose sole purpose is to hold investments and each beneficiary of the trust is an accredited investor, the beneficiaries’ rights and interest (howsoever
described) in that trust shall not be transferable for six months after that trust has acquired the notes under Section 275 of the SFA except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person (as defined in
Section 275(2) of the SFA), (2) where such transfer arises from an offer that is made on terms that such rights or interest are acquired at a consideration of not less than S$200,000 (or its equivalent in a foreign currency) for each transaction
(whether such amount is to be paid for in cash or by exchange of securities or other assets), (3) where no consideration is or will be given for the transfer, (4) where the transfer is by operation of law, (5) as specified in Section 276(7) of
the SFA, or (6) as specified in Regulation 32.
The notes have not been and will not be registered under the Financial Instruments and Exchange Act of Japan (Act No. 25 of
1948, as amended), or the FIEA. The notes may not be offered or sold, directly or indirectly, in Japan or to or for the benefit of any resident of Japan (including any person resident in Japan or any corporation or other entity organized under
the laws of Japan) or to others for reoffering or resale, directly or indirectly, in Japan or to or for the benefit of any resident of Japan, except pursuant to an exemption from the registration requirements of the FIEA and otherwise in
compliance with any relevant laws and regulations of Japan.
The notes are not offered, sold or advertised, directly or indirectly, in, into or from Switzerland on the basis
of a public offering and will not be listed on the SIX Swiss Exchange or any other offering or regulated trading facility in Switzerland. Accordingly, neither this prospectus supplement nor any accompanying prospectus supplement, prospectus or
other marketing material constitute a prospectus as defined in article 652a or article 1156 of the Swiss Code of Obligations or a listing prospectus as defined in article 32 of the Listing Rules of the SIX Swiss Exchange or any other regulated
trading facility in Switzerland. Any resales of the notes by the underwriters thereof may only be undertaken on a private basis to selected individual investors in compliance with Swiss law. This prospectus supplement and accompanying prospectus
and prospectus supplement may not be copied, reproduced, distributed or passed on to others or otherwise made available in Switzerland without our prior written consent. By accepting this prospectus supplement and accompanying prospectus and
prospectus supplement or by subscribing to the notes, investors are deemed to have acknowledged and agreed to abide by these restrictions. Investors are advised to consult with their financial, legal or tax advisers before investing in the notes.
The notes will not be listed on any securities exchange or interdealer quotation system.
GS&Co. is an affiliate of GS Finance Corp. and The Goldman Sachs Group, Inc. and, as such, will have a “conflict of
interest” in this offering of notes within the meaning of Financial Industry Regulatory Authority, Inc. (FINRA) Rule 5121. Consequently, this offering of notes will be conducted in compliance with the provisions of FINRA Rule 5121. GS&Co.
will not be permitted to sell notes in this offering to an account over which it exercises discretionary authority without the prior specific written approval of the account holder.
VALIDITY OF THE NOTES AND GUARANTEE
In the opinion of Sidley Austin llp, as counsel to GS Finance Corp. and
The Goldman Sachs Group, Inc., when the notes offered by this prospectus supplement have been executed and issued by GS Finance Corp., the related guarantee offered by this prospectus supplement has been executed and issued by The Goldman Sachs
Group, Inc., and such notes have been authenticated by the trustee pursuant to the indenture, and such notes and the guarantee have been delivered against payment as contemplated herein, (a) such notes will be valid and binding obligations of
GS Finance Corp., enforceable in accordance with their terms, subject to applicable bankruptcy, insolvency and similar laws affecting creditors' rights generally, concepts of reasonableness and equitable principles of general applicability
(including, without limitation, concepts of good faith, fair dealing and the lack of bad faith), provided that such counsel expresses no opinion as to the effect of fraudulent conveyance, fraudulent transfer or similar provision of applicable
law on the conclusions expressed above and (b) such related guarantee will be a valid and binding obligation of The Goldman Sachs Group, Inc., enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency and similar
laws affecting creditors' rights generally, concepts of reasonableness and equitable principles of general applicability (including, without limitation, concepts of good faith, fair dealing and the lack of bad faith), provided that such counsel
expresses no opinion as to the effect of fraudulent conveyance, fraudulent transfer or similar provision of applicable law on the conclusions expressed above. This opinion is given as of the date hereof and is limited to the laws of the State
of New York and the General Corporation Law of the State of Delaware as in effect on the date hereof. In addition, this opinion is subject to customary assumptions about the trustee’s authorization, execution and delivery of the indenture and
the genuineness of signatures and certain factual matters, all as stated in the letter of such counsel dated July 10, 2017, which has been filed as Exhibit 5.6 to the registration statement on Form S-3 filed with the Securities and Exchange
Commission by GS Finance Corp. and The Goldman Sachs Group, Inc. on July 10, 2017.
We have not authorized anyone to provide any information or to make any representations other than those contained or incorporated by
reference in this prospectus supplement, the accompanying prospectus supplement or the accompanying prospectus. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give
you. This prospectus supplement, the accompanying prospectus supplement and the accompanying prospectus is an offer to sell only the notes offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The
information contained in this prospectus supplement, the accompanying prospectus supplement and the accompanying prospectus is current only as of the respective dates of such documents.
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S-11
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S-15
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S-19
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S-42
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S-42
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S-43
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S-69
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S-156
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S-157
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S-161
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S-162
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S-163
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S-165
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S-166
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Prospectus Supplement dated July 10, 2017
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Use of Proceeds
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Description of Notes We May Offer
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Considerations Relating to Indexed Notes
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S-15
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United States Taxation
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S-18
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Employee Retirement Income Security Act
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S-19
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Supplemental Plan of Distribution
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S-20
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Validity of the Notes and Guarantees
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S-21
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Prospectus dated July 10, 2017
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Available Information
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Prospectus Summary
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Risks Relating to Regulatory Resolution Strategies and Long-Term Debt Requirements
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8
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Use of Proceeds
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11
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Description of Debt Securities We May Offer
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12
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Description of Warrants We May Offer
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45
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Description of Units We May Offer
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60
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GS Finance Corp.
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65
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Legal Ownership and Book-Entry Issuance
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67
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Considerations Relating to Floating Rate Debt Securities
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72
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Considerations Relating to Indexed Securities
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73
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Considerations Relating to Securities Denominated or Payable in or Linked to a Non-U.S. Dollar
Currency
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74
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United States Taxation
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77
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Plan of Distribution
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92
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Conflicts of Interest
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94
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Employee Retirement Income Security Act
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95
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Validity of the Securities and Guarantees
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95
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Experts
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96
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Review of Unaudited Condensed Consolidated Financial Statements by Independent Registered
Public Accounting Firm
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96
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Cautionary Statement Pursuant to the Private Securities Litigation Reform Act of 1995
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96
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$286,000
GS Finance Corp.
Autocallable GS Momentum Builder® Multi-
Asset 5S ER Index-Linked Notes due 2025
guaranteed by
The Goldman Sachs Group, Inc.
Goldman Sachs & Co. LLC