MARCH 31, ANNUAL REPORT

Transcription

1 MARCH 31, ANNUAL REPORT ishares Trust ishares U.S. Aerospace & Defense ETF ITA NYSE Arca ishares U.S. Broker-Dealers & Securities Exchanges ETF IAI NYSE Arca ishares U.S. Healthcare Providers ETF IHF NYSE Arca ishares U.S. Home Construction ETF ITB NYSE Arca ishares U.S. Insurance ETF IAK NYSE Arca ishares U.S. Medical Devices ETF IHI NYSE Arca ishares U.S. Oil & Gas Exploration & Production ETF IEO NYSE Arca ishares U.S. Oil Equipment & Services ETF IEZ NYSE Arca ishares U.S. Pharmaceuticals ETF IHE NYSE Arca ishares U.S. Real Estate ETF IYR NYSE Arca ishares U.S. Regional Banks ETF IAT NYSE Arca ishares U.S. Telecommunications ETF IYZ NYSE Arca

2

3 Table of Contents Management s Discussions of Fund Performance... 5 About Fund Performance Shareholder Expenses Schedules of Investments ishares U.S. Aerospace & Defense ETF ishares U.S. Broker-Dealers & Securities Exchanges ETF ishares U.S. Healthcare Providers ETF ishares U.S. Home Construction ETF ishares U.S. Insurance ETF ishares U.S. Medical Devices ETF ishares U.S. Oil & Gas Exploration & Production ETF ishares U.S. Oil Equipment & Services ETF ishares U.S. Pharmaceuticals ETF ishares U.S. Real Estate ETF ishares U.S. Regional Banks ETF ishares U.S. Telecommunications ETF Financial Statements Financial Highlights Notes to Financial Statements Report of Independent Registered Public Accounting Firm Tax Information Supplemental Information Trustee and Officer Information

4 THIS PAGE INTENTIONALLY LEFT BLANK.

5 Management s Discussion of Fund Performance U.S. EQUITY MARKET OVERVIEW U.S. stocks generated strong returns for the 12 months ended March 31, 2017 (the reporting period ). The Russell 3000 Index, a broad measure of U.S. equity market performance, returned 18.07% for the reporting period. Stocks were flat to slightly higher for the first seven months of the reporting period as the U.S. economy appeared to lose momentum. The economy was sluggish in the first half of 2016, and although it rebounded in the third quarter of 2016, it slowed again in the final quarter of For all of 2016, the U.S. economy grew by just 2.0%, its slowest calendar-year growth rate since Job growth remained robust as the unemployment rate stayed at or under 5%, and retail sales grew by more than 5% during the reporting period. However, other segments of the economy continued to struggle for example, industrial production remained muted, and business productivity was largely unchanged in Geopolitical conflicts and global unrest contributed to increased stock market volatility during the summer of In particular, equity investors reacted sharply to the affirmative vote on the U.K. Brexit referendum to leave the European Union, terrorist attacks in France, and an attempted coup in Turkey. After a modest overall gain through the first seven months of the reporting period, stocks achieved strong returns following the U.S. presidential election in November The new administration was expected to enact pro-business fiscal policies including lower taxes, decreased regulation, and increased fiscal spending aimed at stimulating economic growth. These expectations drove a strong equity market rally that extended through the end of the reporting period. The market remained on an upward trajectory despite two short-term interest rate increases by the U.S. Federal Reserve Bank (the Fed ) late in the reporting period. Uneven economic data kept the Fed on hold for most of the reporting period, but improving growth in the third quarter of 2016 led the Fed to raise its short-term interest rate target in December The Fed acted again in March 2017, partly in response to the highest year-over-year inflation rate in five years. The two Fed interest rate increases raised the federal funds interest rate target to a range of 0.75%-1.00%. For the reporting period, small-capitalization stocks generated the best returns, outpacing mid- and large-capitalization stocks. Value stocks fared better than growth-oriented stocks across all market capitalizations, although growth stocks outperformed value stocks over the final three months of the reporting period as investors grew more confident about the prospects for a stronger economy. In terms of sector performance, the reporting period had two distinct phases. Initially, defensive sectors of the market such as real estate, utilities, consumer staples, and telecommunication services remained the top performers. These stocks led the market s advance in 2015 and the first half of 2016 as investors flocked to sectors with relatively high dividend yields in a low interest rate environment. However, after the presidential election in November 2016, investors moved into more economically sensitive sectors of the market, including financials, information technology, materials, and industrials. As a result, these sectors were the leading performers for the full reporting period, while the more defensive segments of the market lagged. In particular, real estate was the only sector of the market to decline for the reporting period. M ANAGEMENT S D ISCUSSIONS OF F UND P ERFORMANCE 5

6 Management s Discussion of Fund Performance ishares U.S. AEROSPACE & DEFENSE ETF Performance as of March 31, 2017 Average Annual Total Returns Cumulative Total Returns NAV MARKET INDEX NAV MARKET INDEX 1 Year 28.70% 28.64% 29.24% 28.70% 28.64% 29.24% 5 Years 18.89% 18.88% 19.36% % % % 10 Years 11.48% 11.49% 11.94% % % % GROWTH OF $10,000 INVESTMENT (AT NET ASSET VALUE) $34,000 $30,000 $26,000 $30,885 $29,652 $22,000 $18,000 $14,000 $10,000 $6,000 $2,000 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Fund Index Past performance is no guarantee of future results. Performance results do not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption or sale of fund shares. See About Fund Performance on page 30 for more information. Beginning Account Value (10/1/16) Actual Ending Account Value (3/31/17) Expenses Paid During Period a Shareholder Expenses Beginning Account Value (10/1/16) Hypothetical 5% Return Ending Account Value (3/31/17) Expenses Paid During Period a Annualized Expense Ratio $ 1, $ 1, $ 2.37 $ 1, $ 1, $ % a Expenses are calculated using the Fund s annualized expense ratio (as disclosed in the table), multiplied by the average account value for the period, multiplied by the number of days in the period (182 days) and divided by the number of days in the year (365 days). See Shareholder Expenses on page 30 for more information ishares A NNUAL R EPORT TO S HAREHOLDERS

7 Management s Discussion of Fund Performance (Continued) ishares U.S. AEROSPACE & DEFENSE ETF The ishares U.S. Aerospace & Defense ETF (the Fund ) seeks to track the investment results of an index composed of U.S. equities in the aerospace and defense sector, as represented by the Dow Jones U.S. Select Aerospace & Defense Index TM (the Index ). The Fund invests in a representative sample of securities included in the Index that collectively has an investment profile similar to the Index. Due to the use of representative sampling, the Fund may or may not hold all of the securities that are included in the Index. For the 12-month reporting period ended March 31, 2017, the total return for the Fund was 28.70%, net of fees, while the total return for the Index was 29.24%. As represented by the Index, U.S. aerospace and defense stocks delivered strong gains for the reporting period, outperforming the broader U.S. equity market. After moving gradually higher for most of the reporting period, the Index soared following Donald Trump s victory in the U.S. presidential election. Due to his campaign pledge to boost defense spending, Trump s win spurred investor optimism about the prospects for the aerospace and defense industry. Stocks in the Index leveled off late in the reporting period as the broader stock market took a breather after the sharp post-election rally. In addition to the election, other factors helping to push the Index higher included increased spending on advanced military weapons to counter terrorist threats in the Middle East, growing international markets for defense equipment, and rising demand for fuel-efficient aircraft. Increased orders for non-defense aircraft also helped aerospace and defense stocks during the reporting period. Looking at industries, aerospace and defense, which constituted more than 95% of the Index on average during the reporting period, contributed the most to the Index s performance. The industrial machinery industry also contributed positively to the Index s results for the reporting period. The small portion of the Index represented by firearms manufacturers, which are categorized in the leisure products industry, detracted from the Index s performance for the reporting period, as did airport services stocks. ALLOCATION BY SECTOR As of 3/31/17 Percentage of Sector Total Investments* Aerospace & Defense 95.87% Leisure Products 1.87 Industrial Machinery 1.43 IT Consulting & Other Services 0.83 TOTAL % TEN LARGEST FUND HOLDINGS As of 3/31/17 Percentage of Security Total Investments* Boeing Co. (The) 9.32% United Technologies Corp Lockheed Martin Corp General Dynamics Corp Raytheon Co Northrop Grumman Corp Textron Inc L3 Technologies Inc Rockwell Collins Inc Arconic Inc TOTAL 57.49% * Excludes money market funds. M ANAGEMENT S D ISCUSSIONS OF F UND P ERFORMANCE 7

8 Management s Discussion of Fund Performance ishares U.S. BROKER-DEALERS & SECURITIES EXCHANGES ETF Performance as of March 31, 2017 Average Annual Total Returns Cumulative Total Returns NAV MARKET INDEX NAV MARKET INDEX 1 Year 39.27% 39.23% 39.91% 39.27% 39.23% 39.91% 5 Years 17.20% 17.16% 17.56% % % % 10 Years 1.19% 1.19% 1.46% 12.58% 12.57% 15.65% GROWTH OF $10,000 INVESTMENT (AT NET ASSET VALUE) $12,000 $10,000 $11,565 $11,258 $8,000 $6,000 $4,000 $2,000 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Fund Index Certain sectors and markets performed exceptionally well based on market conditions during the one-year period. Achieving such exceptional returns involves the risk of volatility and investors should not expect that such exceptional returns will be repeated. Past performance is no guarantee of future results. Performance results do not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption or sale of fund shares. See About Fund Performance on page 30 for more information. Beginning Account Value (10/1/16) Actual Ending Account Value (3/31/17) Expenses Paid During Period a Shareholder Expenses Beginning Account Value (10/1/16) Hypothetical 5% Return Ending Account Value (3/31/17) Expenses Paid During Period a Annualized Expense Ratio $ 1, $ 1, $ 2.47 $ 1, $ 1, $ % a Expenses are calculated using the Fund s annualized expense ratio (as disclosed in the table), multiplied by the average account value for the period, multiplied by the number of days in the period (182 days) and divided by the number of days in the year (365 days). See Shareholder Expenses on page 30 for more information ishares A NNUAL R EPORT TO S HAREHOLDERS

9 Management s Discussion of Fund Performance (Continued) ishares U.S. BROKER-DEALERS & SECURITIES EXCHANGES ETF The ishares U.S. Broker-Dealers & Securities Exchanges ETF (the Fund ) seeks to track the investment results of an index composed of U.S. equities in the investment services sector, as represented by the Dow Jones U.S. Select Investment Services Index TM (the Index ). The Fund invests in a representative sample of securities included in the Index that collectively has an investment profile similar to the Index. Due to the use of representative sampling, the Fund may or may not hold all of the securities that are included in the Index. For the 12-month reporting period ended March 31, 2017, the total return for the Fund was 39.27%, net of fees, while the total return for the Index was 39.91%. As represented by the Index, U.S. investment services stocks delivered a strong return for the reporting period, outpacing most other subsectors of the U.S. economy. Investment banks and brokerage companies, the largest weight in the Index at an average of 71%, were the most significant contributors to performance during the reporting period. The rise in stock prices of investment banks and brokerage companies was largely driven by increasing revenues from trading activity. Trading volumes surged late in the reporting period following the U.S. presidential election, rising on expectations that the new administration s proposed regulatory and corporate tax reforms would be beneficial to the investment services industry. Debt and equity underwriting activity increased during the reporting period on record-setting levels of initial public offerings ( IPOs ), new debt issuance, and merger and acquisition ( M&A ) activity. Global IPOs in the first quarter of 2017 were off to a brisk start. New debt issuance also began 2017 at a record pace. Global M&A reached a six-year high at the end of January 2017 as M&A activity worldwide totaled approximately $258 billion, up 38% from January Financial exchanges and data companies, which accounted for 19% of the Index on average during the reporting period, also made a solid contribution to the Index s performance. This segment, which is comprised of the major U.S. securities exchanges, benefited from rising trading volumes and revenues, which increased during the reporting period as optimistic investors drove the major equity indexes to record high levels. ALLOCATION BY SECTOR As of 3/31/17 Percentage of Sector Total Investments* Investment Banking & Brokerage 71.26% Financial Exchanges & Data Asset Management & Custody Banks 1.40 TOTAL % TEN LARGEST FUND HOLDINGS As of 3/31/17 Percentage of Security Total Investments* Goldman Sachs Group Inc. (The) 10.43% Morgan Stanley 9.14 Charles Schwab Corp. (The) 8.61 CME Group Inc Intercontinental Exchange Inc E*TRADE Financial Corp TD Ameritrade Holding Corp Raymond James Financial Inc CBOE Holdings Inc Nasdaq Inc TOTAL 64.76% * Excludes money market funds. M ANAGEMENT S D ISCUSSIONS OF F UND P ERFORMANCE 9

10 Management s Discussion of Fund Performance ishares U.S. HEALTHCARE PROVIDERS ETF Performance as of March 31, 2017 Average Annual Total Returns Cumulative Total Returns NAV MARKET INDEX NAV MARKET INDEX 1 Year 10.23% 10.14% 10.64% 10.23% 10.14% 10.64% 5 Years 15.33% 15.31% 15.73% % % % 10 Years 9.31% 9.31% 9.73% % % % GROWTH OF $10,000 INVESTMENT (AT NET ASSET VALUE) $30,000 $26,000 $22,000 $25,297 $24,351 $18,000 $14,000 $10,000 $6,000 $2,000 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Fund Index Past performance is no guarantee of future results. Performance results do not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption or sale of fund shares. See About Fund Performance on page 30 for more information. Beginning Account Value (10/1/16) Actual Ending Account Value (3/31/17) Expenses Paid During Period a Shareholder Expenses Beginning Account Value (10/1/16) Hypothetical 5% Return Ending Account Value (3/31/17) Expenses Paid During Period a Annualized Expense Ratio $ 1, $ 1, $ 2.28 $ 1, $ 1, $ % a Expenses are calculated using the Fund s annualized expense ratio (as disclosed in the table), multiplied by the average account value for the period, multiplied by the number of days in the period (182 days) and divided by the number of days in the year (365 days). See Shareholder Expenses on page 30 for more information ishares A NNUAL R EPORT TO S HAREHOLDERS

11 Management s Discussion of Fund Performance (Continued) ishares U.S. HEALTHCARE PROVIDERS ETF The ishares U.S. Healthcare Providers ETF (the Fund ) seeks to track the investment results of an index composed of U.S. equities in the healthcare providers sector, as represented by the Dow Jones U.S. Select Health Care Providers Index TM (the Index ). The Fund invests in a representative sample of securities included in the Index that collectively has an investment profile similar to the Index. Due to the use of representative sampling, the Fund may or may not hold all of the securities that are included in the Index. For the 12-month reporting period ended March 31, 2017, the total return for the Fund was 10.23%, net of fees, while the total return for the Index was 10.64%. As represented by the Index, U.S. healthcare providers posted positive results during the reporting period but underperformed the broad U.S. equity market. The overall healthcare sector posted gains during the reporting period, reflecting solid earnings and optimism for growth. Managed healthcare stocks, which represented more than 45% of the Index on average during the reporting period, generated strong performance overall. Several U.S. managed healthcare providers enjoyed improved financial performance during the reporting period. The healthcare services segment also contributed to the Index s performance during the reporting period as several companies generated higher revenues. Healthcare facilities companies faced significant challenges and fell in value, which detracted from the Index s results during the reporting period. Hospitals struggled amid uncertainty about potential healthcare reform, including repealing or replacing the Affordable Care Act. Over the past several years, revenues for hospitals have generally declined, partly due to the Affordable Care Act s expansion of Medicare, which offers significantly lower reimbursement rates than private insurance. Higher costs and declining revenues have forced many hospitals to reduce operations or close, leading to a decline in the number of registered hospitals in the U.S. over the past 20 years, despite a higher population. The number of hospital beds in the U.S. has also fallen over the past several years. Additionally, costs for hospitals have continued to rise, and higher interest rates threaten to increase their debt burdens. ALLOCATION BY SECTOR As of 3/31/17 Percentage of Sector Total Investments* Managed Health Care 47.64% Health Care Services Health Care Facilities Health Care Technology 2.39 Diversified Support Services 1.49 Life Sciences Tools & Services 1.47 Health Care Distributors 0.64 TOTAL % TEN LARGEST FUND HOLDINGS As of 3/31/17 Percentage of Security Total Investments* UnitedHealth Group Inc % Aetna Inc Anthem Inc Express Scripts Holding Co Cigna Corp Humana Inc HCA Holdings Inc Laboratory Corp. of America Holdings 3.56 Quest Diagnostics Inc Centene Corp TOTAL 59.40% * Excludes money market funds. M ANAGEMENT S D ISCUSSIONS OF F UND P ERFORMANCE 11

12 Management s Discussion of Fund Performance ishares U.S. HOME CONSTRUCTION ETF Performance as of March 31, 2017 Average Annual Total Returns Cumulative Total Returns NAV MARKET INDEX NAV MARKET INDEX 1 Year 18.50% 18.58% 19.02% 18.50% 18.58% 19.02% 5 Years 17.25% 17.24% 17.78% % % % 10 Years 0.09% 0.10% 0.83% 0.89% 0.95% 8.62% GROWTH OF $10,000 INVESTMENT (AT NET ASSET VALUE) $13,000 $10,000 $10,862 $10,089 $7,000 $4,000 $1,000 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Fund Index Past performance is no guarantee of future results. Performance results do not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption or sale of fund shares. See About Fund Performance on page 30 for more information. Beginning Account Value (10/1/16) Actual Ending Account Value (3/31/17) Expenses Paid During Period a Shareholder Expenses Beginning Account Value (10/1/16) Hypothetical 5% Return Ending Account Value (3/31/17) Expenses Paid During Period a Annualized Expense Ratio $ 1, $ 1, $ 2.37 $ 1, $ 1, $ % a Expenses are calculated using the Fund s annualized expense ratio (as disclosed in the table), multiplied by the average account value for the period, multiplied by the number of days in the period (182 days) and divided by the number of days in the year (365 days). See Shareholder Expenses on page 30 for more information ishares A NNUAL R EPORT TO S HAREHOLDERS

13 Management s Discussion of Fund Performance (Continued) ishares U.S. HOME CONSTRUCTION ETF The ishares U.S. Home Construction ETF (the Fund ) seeks to track the investment results of an index composed of U.S. equities in the home construction sector, as represented by the Dow Jones U.S. Select Home Construction Index TM (the Index ). The Fund invests in a representative sample of securities included in the Index that collectively has an investment profile similar to the Index. Due to the use of representative sampling, the Fund may or may not hold all of the securities that are included in the Index. For the 12-month reporting period ended March 31, 2017, the total return for the Fund was 18.50%, net of fees, while the total return for the Index was 19.02%. The Index generated strong returns for the reporting period and outperformed the broad U.S. equity market. Home construction stocks benefited from continued strength in the U.S. housing market during the reporting period as mortgage interest rates generally remained near historically low levels. New home sales increased by nearly 12% in 2016, the most since the peak of the last housing boom in Residential building permits and housing starts rose by 1% and 6%, respectively, reaching their highest levels since New home sales and construction continued to expand at a healthy pace in early The homebuilding industry, which made up more than 64% of the Index on average during the reporting period, contributed the most to the Index s performance. The bulk of the rally in homebuilding stocks occurred in early 2017 as monthly homebuilder sentiment reached its highest level in 12 years. Homebuilders expressed increased confidence in the wake of beneficial regulatory reform from the new U.S. presidential administration. Homebuilding stocks rallied despite a number of challenges, including rising materials costs, a shortage of properties available for development, and a continued labor shortage. Building products companies, the second-largest industry weight in the Index, also posted healthy gains during the reporting period, benefiting from the growth in new home construction. Home furnishing manufacturers also benefited from a rise in new home sales, while a steady increase in remodeling and upgrading existing homes provided a boost to home improvement retailers. ALLOCATION BY SECTOR As of 3/31/17 Percentage of Sector Total Investments* Homebuilding 65.07% Building Products Home Improvement Retail 9.01 Home Furnishings 4.14 Trading Companies & Distributors 2.41 Specialty Chemicals 2.27 Construction Materials 1.27 Forest Products 1.23 TOTAL % TEN LARGEST FUND HOLDINGS As of 3/31/17 Percentage of Security Total Investments* DR Horton Inc % Lennar Corp. Class A NVR Inc PulteGroup Inc Toll Brothers Inc Home Depot Inc. (The) 4.33 CalAtlantic Group Inc Lowe s Companies Inc TRI Pointe Group Inc Sherwin-Williams Co. (The) 2.27 TOTAL 59.90% * Excludes money market funds. M ANAGEMENT S D ISCUSSIONS OF F UND P ERFORMANCE 13

14 Management s Discussion of Fund Performance ishares U.S. INSURANCE ETF Performance as of March 31, 2017 Average Annual Total Returns Cumulative Total Returns NAV MARKET INDEX NAV MARKET INDEX 1 Year 23.25% 23.21% 23.83% 23.25% 23.21% 23.83% 5 Years 15.47% 15.46% 16.00% % % % 10 Years 3.00% 3.01% 3.46% 34.40% 34.54% 40.47% GROWTH OF $10,000 INVESTMENT (AT NET ASSET VALUE) $16,000 $14,000 $12,000 $14,047 $13,440 $10,000 $8,000 $6,000 $4,000 $2,000 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Fund Index Past performance is no guarantee of future results. Performance results do not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption or sale of fund shares. See About Fund Performance on page 30 for more information. Beginning Account Value (10/1/16) Actual Ending Account Value (3/31/17) Expenses Paid During Period a Shareholder Expenses Beginning Account Value (10/1/16) Hypothetical 5% Return Ending Account Value (3/31/17) Expenses Paid During Period a Annualized Expense Ratio $ 1, $ 1, $ 2.36 $ 1, $ 1, $ % a Expenses are calculated using the Fund s annualized expense ratio (as disclosed in the table), multiplied by the average account value for the period, multiplied by the number of days in the period (182 days) and divided by the number of days in the year (365 days). See Shareholder Expenses on page 30 for more information ishares A NNUAL R EPORT TO S HAREHOLDERS

15 Management s Discussion of Fund Performance (Continued) ishares U.S. INSURANCE ETF The ishares U.S. Insurance ETF (the Fund ) seeks to track the investment results of an index composed of U.S. equities in the insurance sector, as represented by the Dow Jones U.S. Select Insurance Index TM (the Index ). The Fund invests in a representative sample of securities included in the Index that collectively has an investment profile similar to the Index. Due to the use of representative sampling, the Fund may or may not hold all of the securities that are included in the Index. For the 12-month reporting period ended March 31, 2017, the total return for the Fund was 23.25%, net of fees, while the total return for the Index was 23.83%. As represented by the Index, U.S. insurance-related stocks posted a strong advance for the reporting period, outperforming the broader domestic equity market. Insurance-related stocks performed well in large part because the Fed made two increases to short-term interest rates during the reporting period, and rising interest rates tend to help insurers generate higher investment income. Insurance-related stocks also appreciated in anticipation of the deregulatory policy proposals of a new administration in Washington, D.C. Life and health insurers, which accounted for 31% of the Index on average during the reporting period, were the largest contributors to performance. Life insurance stocks performed well in the wake of the U.S. presidential election in late 2016, which generated optimism about the incoming administration s pro-business and pro-growth policy proposals. Similarly, health insurance stocks trended upward late in the reporting period in anticipation of the repeal of the Affordable Care Act, but fell back after Congress failed to introduce a replacement bill. Property and casualty insurers, the largest weight in the Index on average during the reporting period, also delivered solid performance as rising interest rates were seen as improving the industry s growth prospects. Multi-line insurers achieved positive but more muted results during the reporting period. ALLOCATION BY SECTOR As of 3/31/17 Percentage of Sector Total Investments* Property & Casualty Insurance 44.43% Life & Health Insurance Multi-line Insurance Insurance Brokers 2.52 Other Diversified Financial Services 1.22 Reinsurance 1.19 TOTAL % TEN LARGEST FUND HOLDINGS As of 3/31/17 Percentage of Security Total Investments* Chubb Ltd % American International Group Inc MetLife Inc Prudential Financial Inc Travelers Companies Inc. (The) 5.65 Allstate Corp. (The) 4.99 Aflac Inc Progressive Corp. (The) 3.82 Hartford Financial Services Group Inc. (The) 3.02 Principal Financial Group Inc TOTAL 62.81% * Excludes money market funds. M ANAGEMENT S D ISCUSSIONS OF F UND P ERFORMANCE 15

16 Management s Discussion of Fund Performance ishares U.S. MEDICAL DEVICES ETF Performance as of March 31, 2017 Average Annual Total Returns Cumulative Total Returns NAV MARKET INDEX NAV MARKET INDEX 1 Year 24.36% 24.34% 24.89% 24.36% 24.34% 24.89% 5 Years 18.25% 18.24% 18.74% % % % 10 Years 11.64% 11.64% 12.15% % % % GROWTH OF $10,000 INVESTMENT (AT NET ASSET VALUE) $35,000 $30,000 $31,488 $30,077 $25,000 $20,000 $15,000 $10,000 $5,000 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Fund Index Past performance is no guarantee of future results. Performance results do not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption or sale of fund shares. See About Fund Performance on page 30 for more information. Beginning Account Value (10/1/16) Actual Ending Account Value (3/31/17) Expenses Paid During Period a Shareholder Expenses Beginning Account Value (10/1/16) Hypothetical 5% Return Ending Account Value (3/31/17) Expenses Paid During Period a Annualized Expense Ratio $ 1, $ 1, $ 2.24 $ 1, $ 1, $ % a Expenses are calculated using the Fund s annualized expense ratio (as disclosed in the table), multiplied by the average account value for the period, multiplied by the number of days in the period (182 days) and divided by the number of days in the year (365 days). See Shareholder Expenses on page 30 for more information ishares A NNUAL R EPORT TO S HAREHOLDERS

17 Management s Discussion of Fund Performance (Continued) ishares U.S. MEDICAL DEVICES ETF The ishares U.S. Medical Devices ETF (the Fund ) seeks to track the investment results of an index composed of U.S. equities in the medical devices sector, as represented by the Dow Jones U.S. Select Medical Equipment Index TM (the Index ). The Fund invests in a representative sample of securities included in the Index that collectively has an investment profile similar to the Index. Due to the use of representative sampling, the Fund may or may not hold all of the securities that are included in the Index. For the 12-month reporting period ended March 31, 2017, the total return for the Fund was 24.36%, net of fees, while the total return for the Index was 24.89%. As represented by the Index, U.S. medical devices stocks produced positive results during the reporting period, significantly outpacing the broader equity market and the overall healthcare sector. The U.S. medical devices industry benefited from an aging population, increased demand, and a number of ongoing acquisitions in the industry. U.S. medical devices stocks endured significant volatility during the reporting period, rising early in the period and then retreating in the months leading up to the U.S. presidential election in November 2016 as investors grew concerned about potential new regulations. Following the election, the Index rallied amid investor optimism that the new administration would not pursue significant regulatory changes. The rally was short-lived, however, as uncertainty surrounding the Affordable Care Act put downward pressure on the entire healthcare sector, including medical devices stocks. Through the first three months of 2017, however, medical devices stocks generally rebounded as new products, favorable financial results, and continued strong performance from existing products supported the sector. The healthcare equipment segment comprised more than 85% of the Index on average during the reporting period and was the largest contributor to the Index s return. The life sciences tools and services segment also contributed to the Index s performance during the reporting period. The healthcare supplies and healthcare technology segments performed strongly; however, they each represented less than 1% of the Index on average during the reporting period and contributed only slightly to the Index s performance ALLOCATION BY SECTOR As of 3/31/17 Percentage of Sector Total Investments* Health Care Equipment 87.34% Life Sciences Tools & Services Other** 1.44 TOTAL % TEN LARGEST FUND HOLDINGS As of 3/31/17 Percentage of Security Total Investments* Medtronic PLC 11.05% Abbott Laboratories 8.51 Thermo Fisher Scientific Inc Danaher Corp Stryker Corp Becton Dickinson and Co Boston Scientific Corp Intuitive Surgical Inc Baxter International Inc Zimmer Biomet Holdings Inc * Excludes money market funds. ** Other includes sectors and/or investment types which individually represent less than 1% of total investments. TOTAL 60.50% M ANAGEMENT S D ISCUSSIONS OF F UND P ERFORMANCE 17

18 Management s Discussion of Fund Performance ishares U.S. OIL & GAS EXPLORATION & PRODUCTION ETF Performance as of March 31, 2017 Average Annual Total Returns Cumulative Total Returns NAV MARKET INDEX NAV MARKET INDEX 1 Year 18.88% 18.84% 19.52% 18.88% 18.84% 19.52% 5 Years (0.31)% (0.32)% 0.08% (1.55)% (1.59)% 0.41% 10 Years 2.47% 2.47% 2.90% 27.68% 27.66% 33.05% GROWTH OF $10,000 INVESTMENT (AT NET ASSET VALUE) $22,000 $19,000 $16,000 $13,000 $13,305 $12,768 $10,000 $7,000 $4,000 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Fund Index Past performance is no guarantee of future results. Performance results do not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption or sale of fund shares. See About Fund Performance on page 30 for more information. Beginning Account Value (10/1/16) Actual Ending Account Value (3/31/17) Expenses Paid During Period a Shareholder Expenses Beginning Account Value (10/1/16) Hypothetical 5% Return Ending Account Value (3/31/17) Expenses Paid During Period a Annualized Expense Ratio $ 1, $ $ 2.19 $ 1, $ 1, $ % a Expenses are calculated using the Fund s annualized expense ratio (as disclosed in the table), multiplied by the average account value for the period, multiplied by the number of days in the period (182 days) and divided by the number of days in the year (365 days). See Shareholder Expenses on page 30 for more information ishares A NNUAL R EPORT TO S HAREHOLDERS

19 Management s Discussion of Fund Performance (Continued) ishares U.S. OIL & GAS EXPLORATION & PRODUCTION ETF The ishares U.S. Oil & Gas Exploration & Production ETF (the Fund ) seeks to track the investment results of an index composed of U.S. equities in the oil and gas exploration and production sector, as represented by the Dow Jones U.S. Select Oil Exploration & Production Index TM (the Index ). The Fund invests in a representative sample of securities included in the Index that collectively has an investment profile similar to the Index. Due to the use of representative sampling, the Fund may or may not hold all of the securities that are included in the Index. For the 12-month reporting period ended March 31, 2017, the total return for the Fund was 18.88%, net of fees, while the total return for the Index was 19.52%. As represented by the Index, oil and gas exploration and production stocks performed well, benefiting from a rebound in energy commodity prices during the reporting period. After falling from a price above $100 per barrel in mid-2014 to below $27 per barrel in February, 2016, oil prices recovered steadily over the course of the reporting period, finishing above $50 per barrel. Similarly, natural gas prices fell to a 17-year low in March 2016, and then rallied through the end of 2016, before giving back some of those gains in early Better supply and demand dynamics drove the improvement in markets for crude oil, natural gas, and related commodities, including stable to improving growth in China, Europe, and Japan. Energy consumption rose during 2016 in the United States, the largest energy consumer in the world after China, while production fell for the first time in six years. Many small independent North American energy producers filed for bankruptcy in 2016, further constraining supply, while the Organization of Petroleum Exporting Countries and Russia announced coordinated production cuts. Higher prices contribute to greater revenues and profits for energy producers, which enables them to finance their investment in plants, equipment, and exploration. Leading U.S. exploration and production companies announced a surge in capital expenditures and planned production increases for However, the comparatively low energy prices of recent years have resulted in a change in investment priorities, with companies emphasizing high-quality assets they believe can succeed even in challenging market conditions. ALLOCATION BY SECTOR As of 3/31/17 Percentage of Sector Total Investments* Oil & Gas Exploration & Production 75.35% Oil & Gas Refining & Marketing Oil & Gas Storage & Transportation 4.09 TOTAL % TEN LARGEST FUND HOLDINGS As of 3/31/17 Percentage of Security Total Investments* ConocoPhillips 11.00% EOG Resources Inc Phillips Anadarko Petroleum Corp Pioneer Natural Resources Co Valero Energy Corp Marathon Petroleum Corp Devon Energy Corp Apache Corp Concho Resources Inc TOTAL 60.01% * Excludes money market funds. M ANAGEMENT S D ISCUSSIONS OF F UND P ERFORMANCE 19

20 Management s Discussion of Fund Performance ishares U.S. OIL EQUIPMENT & SERVICES ETF Performance as of March 31, 2017 Average Annual Total Returns Cumulative Total Returns NAV MARKET INDEX NAV MARKET INDEX 1 Year 18.88% 18.91% 19.35% 18.88% 18.91% 19.35% 5 Years (3.56)% (3.56)% (3.29)% (16.57)% (16.57)% (15.42)% 10 Years (0.51)% (0.51)% (0.23)% (5.01)% (5.02)% (2.25)% GROWTH OF $10,000 INVESTMENT (AT NET ASSET VALUE) $19,000 $16,000 $13,000 $10,000 $9,775 $9,499 $7,000 $4,000 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Fund Index Past performance is no guarantee of future results. Performance results do not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption or sale of fund shares. See About Fund Performance on page 30 for more information. Beginning Account Value (10/1/16) Actual Ending Account Value (3/31/17) Expenses Paid During Period a Shareholder Expenses Beginning Account Value (10/1/16) Hypothetical 5% Return Ending Account Value (3/31/17) Expenses Paid During Period a Annualized Expense Ratio $ 1, $ 1, $ 2.27 $ 1, $ 1, $ % a Expenses are calculated using the Fund s annualized expense ratio (as disclosed in the table), multiplied by the average account value for the period, multiplied by the number of days in the period (182 days) and divided by the number of days in the year (365 days). See Shareholder Expenses on page 30 for more information ishares A NNUAL R EPORT TO S HAREHOLDERS

21 Management s Discussion of Fund Performance (Continued) ishares U.S. OIL EQUIPMENT & SERVICES ETF The ishares U.S. Oil Equipment & Services ETF (the Fund ) seeks to track the investment results of an index composed of U.S. equities in the oil equipment and services sector, as represented by the Dow Jones U.S. Select Oil Equipment & Services Index TM (the Index ). The Fund invests in a representative sample of securities included in the Index that collectively has an investment profile similar to the Index. Due to the use of representative sampling, the Fund may or may not hold all of the securities that are included in the Index. For the 12-month reporting period ended March 31, 2017, the total return for the Fund was 18.88%, net of fees, while the total return for the Index was 19.35%. As represented by the Index, oil and gas equipment and services stocks performed well, benefiting from a rebound in energy commodity prices during the reporting period. After falling from a price above $100 per barrel in mid-2014 to below $27 per barrel in February, 2016, oil prices recovered steadily over the course of the reporting period, finishing above $50 per barrel. Similarly, natural gas prices fell to a 17-year low in March 2016, and then rallied through the end of 2016, before giving back some of those gains in early Better supply and demand dynamics drove the improvement in markets for crude oil, natural gas, and related commodities, including stable to improving growth in China, Europe, and Japan. Energy consumption rose during 2016 in the United States, the largest energy consumer in the world after China, while production fell for the first time in six years. Production cuts announced by the Organization of Petroleum Exporting Countries and Russia further constrained oil supply. Higher prices contribute to greater revenues and profits for energy producers, which enables them to finance their investment in plants, equipment, and exploration. Capital expenditures by U.S. oil producers swung into positive territory in the fourth quarter of 2016 after contracting for much of the previous two years. Those conditions benefited oil and gas equipment and services companies which accounted for almost 80% of the Index on average during the reporting period and oil and gas drilling companies which comprised about 20% of the Index on average. ALLOCATION BY SECTOR As of 3/31/17 Percentage of Sector Total Investments* Oil & Gas Equipment & Services 77.56% Oil & Gas Drilling Industrial Machinery 1.29 TOTAL % TEN LARGEST FUND HOLDINGS As of 3/31/17 Percentage of Security Total Investments* Schlumberger Ltd % Halliburton Co Baker Hughes Inc National Oilwell Varco Inc TechnipFMC PLC 5.62 Helmerich & Payne Inc Weatherford International PLC 3.54 Core Laboratories NV 3.12 Transocean Ltd Patterson-UTI Energy Inc TOTAL 60.78% * Excludes money market funds. M ANAGEMENT S D ISCUSSIONS OF F UND P ERFORMANCE 21

22 Management s Discussion of Fund Performance ishares U.S. PHARMACEUTICALS ETF Performance as of March 31, 2017 Average Annual Total Returns Cumulative Total Returns NAV MARKET INDEX NAV MARKET INDEX 1 Year 11.19% 11.22% 11.56% 11.19% 11.22% 11.56% 5 Years 14.30% 14.31% 14.67% 95.11% 95.13% 98.27% 10 Years 12.47% 12.48% 12.94% % % % GROWTH OF $10,000 INVESTMENT (AT NET ASSET VALUE) $45,000 $40,000 $35,000 $30,000 $33,779 $32,380 $25,000 $20,000 $15,000 $10,000 $5,000 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Fund Index Past performance is no guarantee of future results. Performance results do not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption or sale of fund shares. See About Fund Performance on page 30 for more information. Beginning Account Value (10/1/16) Actual Ending Account Value (3/31/17) Expenses Paid During Period a Shareholder Expenses Beginning Account Value (10/1/16) Hypothetical 5% Return Ending Account Value (3/31/17) Expenses Paid During Period a Annualized Expense Ratio $ 1, $ 1, $ 2.21 $ 1, $ 1, $ % a Expenses are calculated using the Fund s annualized expense ratio (as disclosed in the table), multiplied by the average account value for the period, multiplied by the number of days in the period (182 days) and divided by the number of days in the year (365 days). See Shareholder Expenses on page 30 for more information ishares A NNUAL R EPORT TO S HAREHOLDERS

23 Management s Discussion of Fund Performance (Continued) ishares U.S. PHARMACEUTICALS ETF The ishares U.S. Pharmaceuticals ETF (the Fund ) seeks to track the investment results of an index composed of U.S. equities in the pharmaceuticals sector, as represented by the Dow Jones U.S. Select Pharmaceuticals Index TM (the Index ). The Fund invests in a representative sample of securities included in the Index that collectively has an investment profile similar to the Index. Due to the use of representative sampling, the Fund may or may not hold all of the securities that are included in the Index. For the 12-month reporting period ended March 31, 2017, the total return for the Fund was 11.19%, net of fees, while the total return for the Index was 11.56%. As represented by the Index, U.S. pharmaceuticals stocks posted positive results during the reporting period but underperformed the broad U.S. stock market. In 2016, the healthcare sector faced increased scrutiny over rising drug prices, leading to bouts of volatility for U.S. pharmaceuticals stocks. The Index rose early in the reporting period and then retreated in the months leading up to the U.S. presidential election in November Following the election, U.S. pharmaceuticals stocks rallied amid investor optimism that the new administration would not pursue significant regulation. The rally was short-lived, however, as continued questions about drug prices, fewer drug approvals, and several prominent drug study failures put downward pressure on the pharmaceutical industry. Other factors that weighed on the industry included a more competitive environment and slower-than-expected rollouts of new products. Through the first three months of 2017, U.S. pharmaceuticals stocks generally rebounded as the sector showed signs of recovery. New products, favorable financial results, and continued strong performance from existing products supported the industry. Recent drug approvals and investor optimism about potential tax reform and cash repatriation also helped push pharmaceuticals stocks higher. In addition, many observers expect merger and acquisition activity to accelerate in 2017, particularly if tax reform and cash repatriation efforts by the new administration succeed. In contrast, ongoing challenges include concerns about drug pricing, which are likely to persist in ALLOCATION BY SECTOR As of 3/31/17 Percentage of Sector Total Investments* Pharmaceuticals 89.53% Biotechnology TOTAL % TEN LARGEST FUND HOLDINGS As of 3/31/17 Percentage of Security Total Investments* Johnson & Johnson 9.99% Pfizer Inc Merck & Co. Inc Bristol-Myers Squibb Co Eli Lilly & Co Allergan PLC 6.02 Zoetis Inc Mylan NV 3.33 Jazz Pharmaceuticals PLC 2.93 Perrigo Co. PLC 2.75 TOTAL 57.45% * Excludes money market funds. M ANAGEMENT S D ISCUSSIONS OF F UND P ERFORMANCE 23

24 Management s Discussion of Fund Performance ishares U.S. REAL ESTATE ETF Performance as of March 31, 2017 Average Annual Total Returns Cumulative Total Returns NAV MARKET INDEX NAV MARKET INDEX 1 Year 5.03% 4.99% 5.58% 5.03% 4.99% 5.58% 5 Years 8.95% 8.95% 9.53% 53.48% 53.48% 57.63% 10 Years 3.49% 3.50% 3.94% 40.88% 41.06% 47.22% GROWTH OF $10,000 INVESTMENT (AT NET ASSET VALUE) $16,000 $14,000 $14,722 $14,088 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Fund Index Past performance is no guarantee of future results. Performance results do not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption or sale of fund shares. See About Fund Performance on page 30 for more information. Beginning Account Value (10/1/16) Actual Ending Account Value (3/31/17) Expenses Paid During Period a Shareholder Expenses Beginning Account Value (10/1/16) Hypothetical 5% Return Ending Account Value (3/31/17) Expenses Paid During Period a Annualized Expense Ratio $ 1, $ $ 2.19 $ 1, $ 1, $ % a Expenses are calculated using the Fund s annualized expense ratio (as disclosed in the table), multiplied by the average account value for the period, multiplied by the number of days in the period (182 days) and divided by the number of days in the year (365 days). See Shareholder Expenses on page 30 for more information ishares A NNUAL R EPORT TO S HAREHOLDERS

25 Management s Discussion of Fund Performance (Continued) ishares U.S. REAL ESTATE ETF The ishares U.S. Real Estate ETF (the Fund ) seeks to track the investment results of an index composed of U.S. equities in the real estate sector, as represented by the Dow Jones U.S. Real Estate Index TM (the Index ). The Fund invests in a representative sample of securities included in the Index that collectively has an investment profile similar to the Index. Due to the use of representative sampling, the Fund may or may not hold all of the securities that are included in the Index. For the 12-month reporting period ended March 31, 2017, the total return for the Fund was 5.03%, net of fees, while the total return for the Index was 5.58%. As represented by the Index, U.S. real estate investment trusts ( REITs ) advanced for the reporting period but trailed the performance of the broad U.S. equity market. Publicly traded real estate stocks often fluctuate in response to changes in interest rates, which affect both their borrowing costs and the attractiveness of their dividend yields. The Index rallied early in the reporting period as the Fed held short-term interest rates steady. However, the Index reversed course in the second half of 2016, declining amid investor concerns about rising interest rates. Most notably, the Fed raised its short-term interest rate target in December, and the newly elected presidential administration was expected to implement progrowth fiscal policies that could lead to higher interest rates. Despite these concerns, the Index rebounded in early 2017 thanks to improving earnings for many REITs and increased optimism about the U.S. economy. From a sector perspective, specialized REITs the largest industry weight in the Index contributed the most to performance for the reporting period. This industry covers a wide variety of REITs, but the most significant contributors to the Index s performance within the industry were wireless tower REITs and data center REITs. Mortgage and office REITs were also leading contributors to performance during the reporting period. The only portion of the Index to decline for the reporting period was retail REITs, which faced a challenging market environment as increasing e-commerce sales led to store closures among a number of brick-and-mortar retailers. ALLOCATION BY SECTOR As of 3/31/17 Percentage of Sector Total Investments* Specialized REITs 28.75% Retail REITs Residential REITs Office REITs Health Care REITs 9.84 Diversified REITs 5.01 Industrial REITs 4.75 Mortgage REITs 4.55 Hotel & Resort REITs 4.42 Real Estate Services 2.01 Other** 0.77 TOTAL % TEN LARGEST FUND HOLDINGS As of 3/31/17 Percentage of Security Total Investments* Simon Property Group Inc. 5.58% American Tower Corp Crown Castle International Corp Public Storage 3.32 Equinix Inc Prologis Inc Welltower Inc Weyerhaeuser Co AvalonBay Communities Inc Ventas Inc TOTAL 33.67% * Excludes money market funds. ** Other includes sectors and/or investment types which individually represent less than 1% of total investments. M ANAGEMENT S D ISCUSSIONS OF F UND P ERFORMANCE 25