MARCH 31, ANNUAL REPORT

Transcription

1 MARCH 31, ANNUAL REPORT ishares Trust ishares U.S. Aerospace & Defense ETF ITA Cboe BZX 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 Cboe BZX 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 Cboe BZX 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 Cboe BZX

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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 General Information

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5 Management s Discussion of Fund Performance ishares TRUST U.S. EQUITY MARKET OVERVIEW U.S. stocks posted positive returns for the 12 months ended March 31, 2018 ( reporting period ). The Russell 3000 Index, a broad measure of U.S. equity market performance, returned 13.81% for the reporting period. For much of the reporting period, stocks steadily advanced as market volatility declined to a record low. The key driver of stocks was record corporate profit growth across virtually all sectors of the market. A strengthening U.S. economy, federal tax reform, deregulation, and a recovery in commodity prices all led to increases in corporate profits. There was also a significant international element to rising corporate profits, as the sectors that produced the largest gains in profitability (energy, materials, and information technology) were also those with the most significant exposure to global economic activity. The final nine months of 2017 featured the strongest three consecutive quarters of U.S. economic growth in more than 12 years. Key economic drivers during the reporting period included an increase in manufacturing activity and the lowest unemployment rate since December The strong job market contributed to wage increases and a related surge in consumer spending. Strong domestic demand led to the fastest growth in U.S. imports of foreign goods in more than seven years, underscoring the strength of the global economy. In December 2017, the U.S. government passed federal tax reform legislation that included a steep reduction in corporate tax rates and a modest decrease in individual tax rates. Lower corporate taxes translate directly into higher corporate profits. In addition, tax reform incentivized companies to repatriate cash held outside of the U.S., raising expectations for capital spending, acquisitions, dividends, stock repurchases, and, ultimately, economic growth. By January 2018, the major U.S. stock indexes reached all-time highs. However, late in the reporting period market volatility surged to its largest-ever, one-day increase and remained elevated, detracting from previous gains. The tax cuts raised concerns about higher federal budget deficits and rising inflation, which caused Treasury bond yields to rise to their highest level in four years in February In addition, investors grew concerned that the U.S. Federal Reserve Bank ( Fed ) might increase interest rates faster than previously expected. Higher interest rates typically increase the appeal of bonds as an alternative to stocks while also raising borrowing costs for companies and consumers, which can have a negative impact on corporate profits and economic growth. Another factor negatively affecting U.S. stocks late in the reporting period was the announcement of U.S. tariffs on steel and aluminum, as well as on a range of goods from China, leading to concerns about the possibility of a wider trade war and economic disruption. For the reporting period, large-capitalization stocks outperformed mid- and small-capitalization equities. In addition, growthoriented stocks outperformed value-oriented equities across all market capitalizations. Consequently, large-capitalization growth stocks were the strongest-performing segment of the market. These outcomes can be explained in part by the significant outperformance of a handful of large growth-oriented companies that benefited from an ongoing shift toward e-commerce, digital advertising, cloud computing, mobile devices, and streaming services. At the same time, the underperforming value-oriented stocks tended to be those with little or no exposure to these technological trends. They were also more domestically focused and therefore did not benefit from strong global growth. 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, 2018 Average Annual Total Returns Cumulative Total Returns NAV MARKET INDEX NAV MARKET INDEX 1 Year 34.40% 34.40% 34.93% 34.40% 34.40% 34.93% 5 Years 22.87% 22.87% 23.37% % % % 10 Years 14.26% 14.26% 14.72% % % % GROWTH OF $10,000 INVESTMENT (AT NET ASSET VALUE) $45,000 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $39,498 $37,942 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Fund Index Total returns presented represent performance as of March 29, 2018, the last day the Fund s listing exchange was open for trading during the reporting period. 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 (10/1/17) Actual Ending Account Value (3/31/18) Expenses Paid During Period a Shareholder Expenses Beginning Account Value (10/1/17) Hypothetical 5% Return Ending Account Value (3/31/18) Expenses Paid During Period a Annualized Expense Ratio $ 1, $ 1, $ 2.22 $ 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, 2018, the total return for the Fund was 34.40%, net of fees, while the total return for the Index was 34.93%. Increasing defense budgets and geopolitical tensions were the primary drivers of performance among aerospace and defense stocks during the reporting period, leading to earnings growth and improved profit margins. Spending legislation was passed near the end of the reporting period that included a significant increase in defense allocations and the elimination of statutory limits on defense spending. Rising defense expenditures were also expected in Asia, where investors anticipated that heightening tensions would lead to increased spending by countries in the region. Some of this additional spending is expected to go to U.S.-based defense contractors. In addition to the positive trends in defense spending, strong growth in the aerospace market contributed to the Index s performance for the reporting period. Continued growth in both passenger and freight traffic drove the increase in demand for aircraft. The worldwide commercial aircraft fleet grew by 4% in 2017, reaching its highest numbers ever. In addition, the order backlog grew to levels that will take nearly ten years to fulfill, ensuring a steady stream of revenue in the future. Although the environment was mostly positive for aerospace and defense stocks, the prospect of a trade war emerged late in the reporting period as a possible threat to the profitability of the industry. The imposition of tariffs on steel and aluminum by the U.S. administration initially caused concern among investors, but trade tensions subsided somewhat after a number of exemptions were made for allied nations. From an industry perspective, the aerospace and defense industry, which comprised 96% of the Index on average for the reporting period, was the largest contributor to the Index s return. Companies that provide information technology services and industrial machinery for the defense industry contributed fractionally to the Index s return for the reporting period. ALLOCATION BY SECTOR As of 3/31/18 Percentage of Sector Total Investments* Aerospace & Defense 97.10% Industrial Machinery 1.45 Leisure Products 1.45 TOTAL % TEN LARGEST FUND HOLDINGS As of 3/31/18 Percentage of Security Total Investments* Boeing Co. (The) 10.44% United Technologies Corp Lockheed Martin Corp Raytheon Co Northrop Grumman Corp General Dynamics Corp Rockwell Collins Inc Harris Corp L3 Technologies Inc TransDigm Group Inc TOTAL 58.35% * 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, 2018 Average Annual Total Returns Cumulative Total Returns NAV MARKET INDEX NAV MARKET INDEX 1 Year 29.39% 29.36% 30.03% 29.39% 29.36% 30.03% 5 Years 20.40% 20.39% 20.85% % % % 10 Years 7.45% 7.41% 7.78% % % % GROWTH OF $10,000 INVESTMENT (AT NET ASSET VALUE) $25,000 $20,000 $21,149 $20,506 $15,000 $10,000 $5,000 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Fund Index Total returns presented represent performance as of March 29, 2018, the last day the Fund s listing exchange was open for trading during the reporting period. 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 (10/1/17) Actual Ending Account Value (3/31/18) Expenses Paid During Period a Shareholder Expenses Beginning Account Value (10/1/17) Hypothetical 5% Return Ending Account Value (3/31/18) Expenses Paid During Period a Annualized Expense Ratio $ 1, $ 1, $ 2.26 $ 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, 2018, the total return for the Fund was 29.39%, net of fees, while the total return for the Index was 30.03%. Investment banks and brokerage companies contributed the most to the Index s return for the reporting period, benefiting from improving economic conditions, financial market strength, solid business confidence, and corporate tax reform. In particular, these factors benefited investment banks by supporting growth in merger and acquisition ( M&A ) activity and initial public offerings ( IPO ) during the reporting period. Total U.S. M&A volume grew by 67%, annualized, in the first quarter of 2018, representing the strongest first quarter on record, while U.S. IPO proceeds hit a three-year high in the same quarter. For some investment banks, however, a repatriation tax on foreign assets under the new corporate tax law resulted in a one-time charge, hurting stock price gains. Brokerage companies also benefited from the increased trading volume that accompanied rising stock market valuations during the reporting period. Additionally, a combination of rising interest rates and growth in client accounts provided a catalyst for the advance in brokerage stocks. Higher interest rates generated greater net interest income (the difference between the rate at which banks and brokers borrow money and the long-term rates at which they lend), while growth in client accounts increased the amount of interest-earning assets, resulting in a solid contribution to profits. For some brokerage companies, acquisitions of smaller brokerage companies helped boost asset levels. Financial exchanges and data companies were meaningful contributors to the Index s performance during the reporting period as well. Major securities exchanges benefited from strong trading volumes as equity markets continued to reach record levels. Merger activity among financial exchanges also supported the industry. ALLOCATION BY SECTOR As of 3/31/18 Percentage of Sector Total Investments* Investment Banking & Brokerage 71.01% Financial Exchanges & Data Asset Management & Custody Banks 1.20 TOTAL % TEN LARGEST FUND HOLDINGS As of 3/31/18 Percentage of Security Total Investments* Goldman Sachs Group Inc. (The) 10.12% Morgan Stanley 9.35 Charles Schwab Corp. (The) 8.63 CME Group Inc Intercontinental Exchange Inc TD Ameritrade Holding Corp E*TRADE Financial Corp Cboe Global Markets Inc Raymond James Financial Inc Nasdaq Inc TOTAL 65.92% * 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, 2018 Average Annual Total Returns Cumulative Total Returns NAV MARKET INDEX NAV MARKET INDEX 1 Year 17.40% 17.86% 17.78% 17.40% 17.86% 17.78% 5 Years 15.72% 15.79% 16.17% % % % 10 Years 13.07% 13.06% 13.51% % % % GROWTH OF $10,000 INVESTMENT (AT NET ASSET VALUE) $40,000 $35,000 $30,000 $35,515 $34,171 $25,000 $20,000 $15,000 $10,000 $5,000 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Fund Index Total returns presented represent performance as of March 29, 2018, the last day the Fund s listing exchange was open for trading during the reporting period. 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 (10/1/17) Actual Ending Account Value (3/31/18) Expenses Paid During Period a Shareholder Expenses Beginning Account Value (10/1/17) Hypothetical 5% Return Ending Account Value (3/31/18) Expenses Paid During Period a Annualized Expense Ratio $ 1, $ 1, $ 2.16 $ 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, 2018, the total return for the Fund was 17.40%, net of fees, while the total return for the Index was 17.78%. U.S. corporate tax reform benefited U.S. healthcare providers during the reporting period. The new tax regime lowered the corporate tax rate and encouraged corporations to repatriate capital held overseas at a favorable tax rate, creating opportunity for increased cash flow and acquisition activity in the healthcare sector. However, uncertainty regarding potentially disruptive competition across healthcare industries from outside the healthcare sector led to increased volatility late in the reporting period. In addition, healthcare stocks generally declined following President Trump s pledge to lower drug prices during his State of the Union address. Managed care companies contributed significantly to the Index s return during the reporting period. A slowdown in the growth of medical services costs benefited these companies, as did newly announced merger deals, which suggested the potential for consolidation across the healthcare sector. An aging population was also a catalyst: with more than 10,000 Americans aging into Medicare per day, the Medicare Advantage program offered by private companies represented a growth opportunity for managed care companies. Healthcare services companies contributed modestly to the Index s return for the reporting period. An unexpected two-year suspension of the excise tax on medical devices, originally enacted as a funding measure for the Affordable Care Act and scheduled to take effect in January 2018, contributed to the advance in healthcare services stocks. Healthcare facilities companies were also notable contributors to the Index s performance for the reporting period. An increase in outpatient and home care, in place of hospital stays, benefited companies offering outpatient, ambulatory, and rehabilitative care outside of traditional hospital settings. ALLOCATION BY SECTOR As of 3/31/18 Percentage of Sector Total Investments* Managed Health Care 49.56% Health Care Services Health Care Facilities Health Care Technology 4.18 Life Sciences Tools & Services 0.51 TOTAL % TEN LARGEST FUND HOLDINGS As of 3/31/18 Percentage of Security Total Investments* UnitedHealth Group Inc % Anthem Inc Aetna Inc Express Scripts Holding Co Humana Inc Cigna Corp HCA Healthcare Inc Centene Corp Laboratory Corp. of America Holdings 3.48 Quest Diagnostics Inc TOTAL 58.75% * 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, 2018 Average Annual Total Returns Cumulative Total Returns NAV MARKET INDEX NAV MARKET INDEX 1 Year 23.19% 23.97% 23.71% 23.19% 23.97% 23.71% 5 Years 10.81% 10.97% 11.31% 67.10% 68.28% 70.91% 10 Years 7.66% 7.73% 8.38% % % % GROWTH OF $10,000 INVESTMENT (AT NET ASSET VALUE) $25,000 $20,000 $22,362 $20,915 $15,000 $10,000 $5,000 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Fund Index Total returns presented represent performance as of March 29, 2018, the last day the Fund s listing exchange was open for trading during the reporting period. 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 (10/1/17) Actual Ending Account Value (3/31/18) Expenses Paid During Period a Shareholder Expenses Beginning Account Value (10/1/17) Hypothetical 5% Return Ending Account Value (3/31/18) Expenses Paid During Period a Annualized Expense Ratio $ 1, $ 1, $ 2.17 $ 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, 2018, the total return for the Fund was 23.19%, net of fees, while the total return for the Index was 23.71%. The homebuilding industry contributed the most to the Index s return for the reporting period, benefiting from continued strength in the U.S. housing market as new housing construction, residential building permits, and new home sales all rose to their highest levels in a decade. In addition, home prices rose by more than 6% in 2017, finishing the year less than 1% below the peak reached in July Reflecting the sharp increase in market interest rates in 2018, mortgage rates also rose sharply late in the reporting period but remained well below pre-financial crisis levels. The favorable environment for the homebuilding industry was reflected in a monthly homebuilder sentiment index, which reached its highest level since 1999 during the reporting period. Despite facing shortages of skilled labor and rising input costs, these companies have increased their cash flow generation due to reasonable debt levels, prudent capital allocation, and selective expansion of their land portfolios. A strengthening home construction market also benefited building products companies, which were meaningful contributors to the Index s return for the reporting period. Additionally, building products stocks advanced from expectations of increased demand from reconstruction efforts in areas damaged by an unusually destructive hurricane season in Home improvement retail companies were also significant contributors to the Index s return for the reporting period. In addition to benefiting from the housing market s strength, home improvement retailers provide products and services that tend to be more insulated from e-commerce competition than other retail industries. The only industry to detract from the Index s return during the reporting period was home furnishings, which detracted fractionally. Increased competition from online sellers and diversified retailers weighed on the home furnishings industry. ALLOCATION BY SECTOR As of 3/31/18 Percentage of Sector Total Investments* Homebuilding 64.95% Building Products Home Improvement Retail 9.62 Home Furnishings 3.62 Trading Companies & Distributors 2.41 Specialty Chemicals 2.31 Construction Materials 1.23 Forest Products 1.17 TOTAL % TEN LARGEST FUND HOLDINGS As of 3/31/18 Percentage of Security Total Investments* Lennar Corp. Class A 12.73% DR Horton Inc NVR Inc PulteGroup Inc Toll Brothers Inc Home Depot Inc. (The) 4.53 Lowe s Companies Inc TopBuild Corp Taylor Morrison Home Corp. Class A 2.41 TRI Pointe Group Inc TOTAL 59.45% * 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, 2018 Average Annual Total Returns Cumulative Total Returns NAV MARKET INDEX NAV MARKET INDEX 1 Year 8.93% 8.95% 9.29% 8.93% 8.95% 9.29% 5 Years 13.10% 13.10% 13.57% 85.04% 85.04% 88.97% 10 Years 6.14% 6.16% 6.60% 81.39% 81.81% 89.40% GROWTH OF $10,000 INVESTMENT (AT NET ASSET VALUE) $25,000 $20,000 $15,000 $18,940 $18,139 $10,000 $5,000 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Fund Index Total returns presented represent performance as of March 29, 2018, the last day the Fund s listing exchange was open for trading during the reporting period. 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 (10/1/17) Actual Ending Account Value (3/31/18) Expenses Paid During Period a Shareholder Expenses Beginning Account Value (10/1/17) Hypothetical 5% Return Ending Account Value (3/31/18) Expenses Paid During Period a Annualized Expense Ratio $ 1, $ 1, $ 2.12 $ 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, 2018, the total return for the Fund was 8.93%, net of fees, while the total return for the Index was 9.29%. Rising interest rates benefited insurance-related stocks during the reporting period, with the Fed increasing short-term interest rates three times. Higher interest rates generally enable insurers to earn higher investment income on the premiums they hold. Corporate tax reform, which resulted in the reduction in the corporate tax rate and repatriation of overseas capital at a reduced tax rate, contributed to insurance-related stocks by freeing up capital for acquisitions and other strategic initiatives. The most significant contribution to the Index s return during the reporting period came from the property and casualty insurance industry. The tax reform bill closed an important loophole under which non-u.s. insurers with U.S. subsidiaries had been able to move U.S.-generated profits abroad to avoid paying U.S. taxes. Closing the loophole created more equal tax treatment for U.S. insurers. However, property and casualty insurance companies paid an estimated $70 billion to $100 billion in claims as hurricanes Harvey, Irma, and Maria, as well as severe wildfires in California, made 2017 one of the costliest years in terms of catastrophic loss. The life and health insurance industry also contributed meaningfully to the Index s return for the reporting period. Rising interest rates benefited life insurance companies, which have dealt with years of operational pressure from tight interest rate spreads (the difference between interest earned and interest paid) in a low-interest-rate environment. For health insurance companies, a rise in membership, profit margins, and revenues offset uncertainty surrounding efforts to replace the Affordable Care Act, as well as higher operating and medical costs. ALLOCATION BY SECTOR As of 3/31/18 Percentage of Sector Total Investments* Property & Casualty Insurance 46.26% Life & Health Insurance Multi-line Insurance Insurance Brokers 3.18 Reinsurance 1.65 Other Diversified Financial Services 1.59 TOTAL % TEN LARGEST FUND HOLDINGS As of 3/31/18 Percentage of Security Total Investments* Chubb Ltd. 8.62% American International Group Inc MetLife Inc Prudential Financial Inc Travelers Companies Inc. (The) 5.50 Progressive Corp. (The) 5.24 Aflac Inc Allstate Corp. (The) 4.98 Hartford Financial Services Group Inc. (The) 2.92 Markel Corp TOTAL 54.74% * 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, 2018 Average Annual Total Returns Cumulative Total Returns NAV MARKET INDEX NAV MARKET INDEX 1 Year 22.48% 22.51% 23.03% 22.48% 22.51% 23.03% 5 Years 20.08% 20.08% 20.58% % % % 10 Years 13.03% 13.04% 13.56% % % % GROWTH OF $10,000 INVESTMENT (AT NET ASSET VALUE) $40,000 $35,000 $30,000 $35,656 $34,031 $25,000 $20,000 $15,000 $10,000 $5,000 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Fund Index Total returns presented represent performance as of March 29, 2018, the last day the Fund s listing exchange was open for trading during the reporting period. 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 (10/1/17) Actual Ending Account Value (3/31/18) Expenses Paid During Period a Shareholder Expenses Beginning Account Value (10/1/17) Hypothetical 5% Return Ending Account Value (3/31/18) 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

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, 2018, the total return for the Fund was 22.48%, net of fees, while the total return for the Index was 23.03%. Medical device stocks benefited from U.S. corporate tax reform and rising healthcare spending during the reporting period. Strategic acquisitions also benefited companies in the Index, allowing them to strengthen and diversify their product offerings. Increased demand for medical devices from outside the U.S., resulting from better access to healthcare in emerging markets and an aging population in developed countries, was another positive factor for U.S. medical device stocks. The healthcare equipment industry, which represented 88% of the Index on average for the reporting period, was the most significant contributor to the Index s return. Corporate tax reform which included lowering the corporate tax rate, allowed for full expensing of capital investment such as machinery and equipment, and provided a favorable tax rate at which corporations can repatriate capital held overseas was a key catalyst for growth. The new tax laws created opportunity for increased cash flow that in turn supported a rise in acquisition activity. The healthcare equipment industry also benefited from the two-year delay of an excise tax on medical devices. The tax, which was originally enacted as a funding measure for the Affordable Care Act and scheduled to go into effect late in the reporting period, was expected to have a significant negative impact on medical device companies. Suspension of the tax created opportunities for increased research and development, as well as capital investment. Life sciences tools and services companies also contributed meaningfully to the Index s return for the reporting period. Strength in the industry generally reflected acquisitions, new product launches, and an increasing international presence. ALLOCATION BY SECTOR As of 3/31/18 Percentage of Sector Total Investments* Health Care Equipment 88.10% Life Sciences Tools & Services Health Care Services 0.40 TOTAL % TEN LARGEST FUND HOLDINGS As of 3/31/18 Percentage of Security Total Investments* Medtronic PLC 8.43% Abbott Laboratories 8.18 Thermo Fisher Scientific Inc Danaher Corp Becton Dickinson and Co Stryker Corp Intuitive Surgical Inc Boston Scientific Corp Baxter International Inc Edwards Lifesciences Corp TOTAL 56.92% * Excludes money market funds. 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, 2018 Average Annual Total Returns Cumulative Total Returns NAV MARKET INDEX NAV MARKET INDEX 1 Year 5.09% 5.10% 5.52% 5.09% 5.10% 5.52% 5 Years (1.65)% (1.65)% (1.26)% (7.98)% (7.99)% (6.15)% 10 Years 0.08% 0.07% 0.49% 0.76% 0.73% 5.00% GROWTH OF $10,000 INVESTMENT (AT NET ASSET VALUE) $16,000 $14,000 $12,000 $10,000 $10,500 $10,076 $8,000 $6,000 $4,000 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Fund Index Total returns presented represent performance as of March 29, 2018, the last day the Fund s listing exchange was open for trading during the reporting period. 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 (10/1/17) Actual Ending Account Value (3/31/18) Expenses Paid During Period a Shareholder Expenses Beginning Account Value (10/1/17) Hypothetical 5% Return Ending Account Value (3/31/18) Expenses Paid During Period a Annualized Expense Ratio $ 1, $ 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, 2018, the total return for the Fund was 5.09%, net of fees, while the total return for the Index was 5.52%. Prices for oil and related energy products generally rose during the reporting period, contributing to higher corporate earnings for every industry represented in the Index. Both realized earnings and analysts estimates of future earnings growth improved significantly for U.S. energy stocks into the first quarter of Crude oil prices, while initially declining in price, ended the reporting period significantly higher. Gasoline and heating oil prices followed similar trajectories. Natural gas prices, however, experienced sharp swings before ultimately declining for the reporting period. Crude oil prices benefited from positive supply-and-demand conditions during the reporting period, with prices reaching a threeyear high above $70 per barrel in early 2018 as OPEC reiterated its intention to limit supply. Output was further limited by economic and political crises in Libya and Venezuela, where production hit a 28-year low in U.S. oil production and inventories declined in early 2018, at the same time global oil demand reached a record high. Solid global economic growth and a weaker U.S. dollar contributed to strong foreign demand for U.S. oil. Crude oil is priced in U.S. dollars, so a lower U.S. dollar means cheaper U.S. oil for foreign buyers. Oil and gas refining and marketing stocks contributed the most to the Index s performance for the reporting period, with refiners benefiting from the wide spread between the cost of crude oil and the price at which companies sell the refined output. Oil and gas exploration and production stocks detracted from the Index s performance for the reporting period, declining amid concerns that higher oil prices might lead U.S. and OPEC producers to increase output, leading to oversupply and lower prices. ALLOCATION BY SECTOR As of 3/31/18 Percentage of Sector Total Investments* Oil & Gas Exploration & Production 71.95% Oil & Gas Refining & Marketing Oil & Gas Storage & Transportation 3.50 TOTAL % TEN LARGEST FUND HOLDINGS As of 3/31/18 Percentage of Security Total Investments* ConocoPhillips 11.18% EOG Resources Inc Phillips Valero Energy Corp Marathon Petroleum Corp Anadarko Petroleum Corp Pioneer Natural Resources Co Concho Resources Inc Devon Energy Corp Noble Energy Inc TOTAL 59.30% * 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, 2018 Average Annual Total Returns Cumulative Total Returns NAV MARKET INDEX NAV MARKET INDEX 1 Year (20.19)% (20.20)% (20.23)% (20.19)% (20.20)% (20.23)% 5 Years (9.21)% (9.21)% (9.03)% (38.32)% (38.32)% (37.71)% 10 Years (5.10)% (5.10)% (4.86)% (40.77)% (40.72)% (39.25)% GROWTH OF $10,000 INVESTMENT (AT NET ASSET VALUE) $14,000 $12,000 $10,000 $8,000 $6,000 $6,075 $5,923 $4,000 $2,000 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Fund Index Total returns presented represent performance as of March 29, 2018, the last day the Fund s listing exchange was open for trading during the reporting period. 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 (10/1/17) Actual Ending Account Value (3/31/18) Expenses Paid During Period a Shareholder Expenses Beginning Account Value (10/1/17) Hypothetical 5% Return Ending Account Value (3/31/18) Expenses Paid During Period a Annualized Expense Ratio $ 1, $ $ 2.01 $ 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, 2018, the total return for the Fund was %, net of fees, while the total return for the Index was %. The decline in the Index s return for the reporting period occurred in spite of a recovery in oil prices and strong foreign demand for U.S. oil. Prices for crude oil were volatile but ultimately gained for the reporting period due to positive supply-and-demand conditions. OPEC reiterated its intention to limit supply, economic and political crises in Libya and Venezuela further constrained output, and U.S. oil production and inventories declined in early At the same time, global demand for U.S. oil reached a record high due to solid global economic growth and a weaker U.S. dollar. Crude oil is priced in U.S. dollars, so a lower U.S. dollar means cheaper U.S. oil for foreign buyers. Both realized corporate earnings and analysts estimates of future earnings growth improved significantly for U.S. energy stocks into the first quarter of Despite this positive environment, the oil and gas equipment and services and oil and gas drilling industries, representing 98% of the index on average during the reporting period, posted significant declines, reflecting continued margin pressure and disappointing capital spending in the energy sector. These companies depend on spending by oil producers and refiners for revenue. While capital expenditures recovered modestly in 2017 from very low levels, overall oil and gas investment was constrained by oil price volatility, cost cutting, technological advancements, and a focus on higher-quality, higher-yield projects. In addition, oil services companies granted concessions to oil producers in the wake of large oil price declines between 2014 and 2016 and have yet to recoup those cost breaks. Economic sanctions and unplanned disruption to oil production in Venezuela and other countries also detracted from oil and gas equipment and services stocks during the reporting period. ALLOCATION BY SECTOR As of 3/31/18 Percentage of Sector Total Investments* Oil & Gas Equipment & Services 79.00% Oil & Gas Drilling TOTAL % TEN LARGEST FUND HOLDINGS As of 3/31/18 Percentage of Security Total Investments* Schlumberger Ltd % Halliburton Co National Oilwell Varco Inc TechnipFMC PLC 5.86 Baker Hughes a GE Co Helmerich & Payne Inc Core Laboratories NV 3.43 Transocean Ltd Patterson-UTI Energy Inc Nabors Industries Ltd TOTAL 61.49% * 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, 2018 Average Annual Total Returns Cumulative Total Returns NAV MARKET INDEX NAV MARKET INDEX 1 Year (1.05)% (0.93)% (0.87)% (1.05)% (0.93)% (0.87)% 5 Years 10.42% 10.45% 10.74% 64.17% 64.34% 66.54% 10 Years 13.48% 13.49% 13.92% % % % GROWTH OF $10,000 INVESTMENT (AT NET ASSET VALUE) $45,000 $40,000 $35,000 $36,823 $35,407 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Fund Index Total returns presented represent performance as of March 29, 2018, the last day the Fund s listing exchange was open for trading during the reporting period. 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 (10/1/17) Actual Ending Account Value (3/31/18) Expenses Paid During Period a Shareholder Expenses Beginning Account Value (10/1/17) Hypothetical 5% Return Ending Account Value (3/31/18) Expenses Paid During Period a Annualized Expense Ratio $ 1, $ $ 2.04 $ 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, 2018, the total return for the Fund was -1.05%, net of fees, while the total return for the Index was -0.87%. The Index s performance reflected a volatile environment for pharmaceuticals stocks during the reporting period as the ongoing controversy regarding drug pricing continued to present a challenge for the industry. Escalating drug prices led to government investigation and consumer backlash, resulting in a lower rate of drug price increases during the reporting period. Other challenges included increased competition from generic drugs, biosimilars (biopharmaceutical drugs demonstrated to have active properties similar to drugs that have already been licensed), and President Trump s pledge in early 2018 to lower the price of prescription drugs. Uncertainty regarding potentially disruptive competition from outside the industry also contributed to volatility among pharmaceuticals stocks. Additionally, reliance on legacy products caused some larger pharmaceuticals companies to miss growth projections, detracting from the Index s return during the reporting period. The reliance resulted largely from a slowdown in acquisition activity in the previous reporting period and some setbacks in clinical trials for new medications. Despite the Index s overall decline, there were some positive developments for the pharmaceuticals industry during the reporting period. A marked increase in the number of U.S. Food and Drug Administration approvals in 2017, including a breakthrough approval of the first gene therapy, appeared to improve investor confidence in the industry. Corporate tax reform also benefited pharmaceuticals companies. By lowering the corporate tax rate and encouraging corporations to repatriate capital held overseas, the new tax laws created opportunity for increased cash flow and, in turn, contributed to a rise in acquisition activity. Other positive developments included an increase in new product launches and a move toward divesting of non-core business segments, which would enable pharmaceuticals companies to focus on key areas of expertise while using the proceeds to increase dividends and stock buybacks. ALLOCATION BY SECTOR As of 3/31/18 Percentage of Sector Total Investments* Pharmaceuticals 90.88% Biotechnology 9.12 TOTAL % TEN LARGEST FUND HOLDINGS As of 3/31/18 Percentage of Security Total Investments* Johnson & Johnson 10.42% Pfizer Inc Merck & Co. Inc Bristol-Myers Squibb Co Eli Lilly & Co Allergan PLC 5.66 Zoetis Inc Mylan NV 3.66 Perrigo Co. PLC 2.93 Jazz Pharmaceuticals PLC 2.79 TOTAL 59.06% * Excludes money market funds. M ANAGEMENT S D ISCUSSIONS OF F UND P ERFORMANCE 23