OCTOBER 31, ANNUAL REPORT. ishares Trust ishares J.P. Morgan USD Emerging Markets Bond ETF EMB NASDAQ

Transcription

1 OCTOBER 31, ANNUAL REPORT ishares Trust ishares J.P. Morgan USD Emerging Markets Bond ETF EMB NASDAQ

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3 Table of Contents Management s Discussion of Fund Performance... 5 About Fund Performance... 8 Shareholder Expenses... 8 Schedule of Investments... 9 Financial Statements Financial Highlights Notes to Financial Statements Report of Independent Registered Public Accounting Firm Tax Information Board Review and Approval of Investment Advisory Contract Supplemental Information Trustee and Officer Information... 40

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5 Management s Discussion of Fund Performance GLOBAL BOND MARKET OVERVIEW Global investment-grade bonds posted modestly positive returns for the 12 months ended October 31, 2017 ( reporting period ), reflecting improving economic growth and rising interest rates in virtually all major bond markets. The Bloomberg Barclays Global Aggregate Index, a broad measure of global bond market performance, returned 1.18% in U.S. dollar terms for the reporting period. Regionally, European bond markets posted the strongest returns among developed markets for the reporting period. European corporate bonds performed particularly well, benefiting from better economic conditions and stronger corporate earnings throughout Europe. The Eurozone economy expanded for the 12 months ended September 2017, its fastest growth rate in more than six years, and the jobless rate in September 2017 was the lowest since February The European Central Bank ( ECB ) elected to keep interest rates at historically low levels throughout the reporting period, though the ECB announced late in the reporting period that it plans to taper its quantitative easing program beginning in Currency fluctuations also contributed meaningfully to European bond performance in U.S. dollar terms as the euro appreciated by approximately 6% against the U.S. dollar during the reporting period. In the U.S. bond market, economically sensitive corporate bonds performed well during the reporting period, benefiting from improving growth, healthy corporate profits, and strong investor demand for their comparatively higher yields. In contrast, U.S. Treasury securities declined and were the weakest performers among the broad market segments. The poor performance of U.S. Treasury bonds reflected concerns about the expected effect of the new presidential administration s proposed tax cuts and fiscal stimulus policies. In addition, the U.S. Federal Reserve Bank ( Fed ) increased short-term interest rates by a quarter percentage point three times during the reporting period, from 0.5% to 1.25%, which contributed to higher short-term U.S. Treasury yields. The Fed also started reducing the amount of U.S. Treasury bonds and mortgage-backed securities on its balance sheet in October These actions were made possible by improvement in the U.S. economy, led by strength in the job market, where the unemployment rate reached its lowest level in more than 16 years. Bond markets in the Asia-Pacific region rose modestly in U.S. dollar terms for the reporting period, reflecting modest economic growth, low inflation, and accommodative monetary policies in many countries. In fundamental terms, however, conditions were generally supportive of Japanese bond performance, as Japanese economic growth was 1.4% for the year ended in June, while consumer prices rose just 0.7% for the 12 months ended in September In that environment, the Bank of Japan maintained its economic stimulus measures, targeting negative short-term interest rates and zero percent yields on longer-term bonds. However, Japanese bond market performance was hindered by a decline in the Japanese yen, which depreciated by approximately 8% against the U.S. dollar. The performance of inflation-linked securities during the reporting period was also noteworthy. U.S. Treasury inflation-indexed bonds declined as interest rates rose and inflation was generally modest the U.S. consumer price index rose 2.2% for the 12 months ended September 2017, well below the long-term historical average. In contrast, European government inflation-linked bonds were among the strongest performers in global bond markets for the reporting period. This reflected a surge in U.K. inflation, where consumer prices rose at their fastest rate in more than five years. M ANAGEMENT S D ISCUSSION OF F UND P ERFORMANCE 5

6 Management s Discussion of Fund Performance Performance as of October 31, 2017 Average Annual Total Returns Cumulative Total Returns NAV MARKET INDEX NAV MARKET INDEX 1 Year 5.74% 6.05% 6.26% 5.74% 6.05% 6.26% 5 Years 3.85% 3.76% 4.58% 20.77% 20.28% 25.08% Since Inception 6.60% 6.60% 7.37% 87.97% 88.01% % GROWTH OF $10,000 INVESTMENT (SINCE INCEPTION AT NET ASSET VALUE) $25,000 $20,000 $20,179 $18,797 $15,000 $10,000 $5,000 Oct 08 Oct 09 Oct 10 Oct 11 Oct 12 Oct 13 Oct 14 Oct 15 Oct 16 Oct 17 Fund Index The inception date of the Fund was 12/17/07. The first day of secondary market trading was 12/19/07. 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 8 for more information. Beginning Account Value (5/1/17) Actual Ending Account Value (10/31/17) Expenses Paid During Period a Shareholder Expenses Beginning Account Value (5/1/17) Hypothetical 5% Return Ending Account Value (10/31/17) Expenses Paid During Period a Annualized Expense Ratio $ 1, $ 1, $ 2.05 $ 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 (184 days) and divided by the number of days in the year (365 days). See Shareholder Expenses on page 8 for more information ishares A NNUAL R EPORT TO S HAREHOLDERS

7 Management s Discussion of Fund Performance (Continued) The ishares J.P. Morgan USD Emerging Markets Bond ETF (the Fund ) seeks to track the investment results of an index composed of U.S. dollar-denominated, emerging market bonds, as represented by the J.P. Morgan EMBI Global Core Index (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 October 31, 2017, the total return for the Fund was 5.74%, net of fees, while the total return for the Index was 6.26%. The Index s Latin American bonds made the most significant contribution to its return for the reporting period, led by Argentina, Mexico, and Brazil. Argentina s president, Mauricio Macri, made strides in his dual pledge to reduce inflation and stimulate economic growth during the reporting period. Having emerged from default in the previous reporting period, Argentina issued a 100-year bond yielding 7.9%, which was met with strong demand in an environment of low global bond yields. In Mexico, the U.S. presidential election and Donald Trump s proposed trade policies initially drove Mexican bond yields up and the Mexican peso down, but slow progress and softer trade rhetoric alleviated concerns and helped Mexican bonds rebound for the reporting period. Brazilian bonds benefited from a declining inflation rate and the anticipation of future central bank interest rate cuts, despite concerns surrounding political crises. European bonds also contributed meaningfully to the Index s performance for the reporting period, led by Ukraine. The country s first sovereign bond issue since restructuring its debt in 2015 attracted strong demand, benefiting from continued investor appetite for yield. Russian Federation bonds also added to the Index s return. Bonds from the Middle East and Asia were noteworthy contributors to the Index s performance for the reporting period as well, driven by Kazakhstan and Indonesia. Africa s contribution to the Index s return was led by Zambia. In terms of maturity, the longest-term bonds made the most significant contribution to the Index s return for the reporting period, reflecting investors search for higher yields in a low-yield environment. Declining interest rates in selected emerging markets also contributed to the performance of longer-term bonds. ALLOCATION BY CREDIT QUALITY As of 10/31/17 Moody s Credit Rating 1 Percentage of Total Investments 2 Aa 0.66% A Baa Ba B Caa 4.31 Not Rated 7.89 TOTAL % Country TEN LARGEST COUNTRIES As of 10/31/17 Percentage of Total Investments 2 Mexico 6.17% Indonesia 4.96 Russia 4.36 Turkey 4.34 China 4.00 Argentina 3.99 Philippines 3.98 Brazil 3.87 Colombia 3.54 Peru 3.28 TOTAL 42.49% 1 Credit quality ratings shown reflect the ratings assigned by Moody s Investors Service ( Moody s ), a widely used independent, nationally recognized statistical rating organization. Moody s credit ratings are opinions of the credit quality of individual obligations or of an issuer s general creditworthiness. Investment grade ratings are credit ratings of Baa or higher. Below investment grade ratings are credit ratings of Ba or lower. Unrated investments do not necessarily indicate low credit quality. Credit quality ratings are subject to change. 2 Excludes money market funds. M ANAGEMENT S D ISCUSSION OF F UND P ERFORMANCE 7

8 About Fund Performance Past performance is no guarantee of future results. Current performance may be lower or higher than the performance data quoted. Performance data current to the most recent month-end is available at Performance results assume reinvestment of all dividends and capital gain distributions and do not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption or sale of fund shares. The investment return and principal value of shares will vary with changes in market conditions. Shares may be worth more or less than their original cost when they are redeemed or sold in the market. Performance for certain funds may reflect a waiver of a portion of investment advisory fees. Without such a waiver, performance would have been lower. Net asset value or NAV is the value of one share of a fund as calculated in accordance with the standard formula for valuing mutual fund shares. The price used to calculate market return ( Market Price ) is determined by using the midpoint between the highest bid and the lowest offer on the primary stock exchange on which shares of a fund are listed for trading, as of the time that such fund s NAV is calculated. Certain funds may have a NAV which is determined prior to the opening of regular trading on its listed exchange and their market returns are calculated using the midpoint of the bid/ask spread as of the opening of regular trading on the exchange. Market and NAV returns assume that dividends and capital gain distributions have been reinvested at Market Price and NAV, respectively. An index is a statistical composite that tracks a specified financial market or sector. Unlike a fund, an index does not actually hold a portfolio of securities and therefore does not incur the expenses incurred by a fund. These expenses negatively impact fund performance. Also, market returns do not include brokerage commissions that may be payable on secondary market transactions. If brokerage commissions were included, market returns would be lower. Shareholder Expenses As a shareholder of the Fund, you incur two types of costs: (1) transaction costs, including brokerage commissions on purchases and sales of fund shares and (2) ongoing costs, including management fees and other fund expenses. The expense example, which is based on an investment of $1,000 invested on May 1, 2017 and held through October 31, 2017, is intended to help you understand your ongoing costs (in dollars and cents) of investing in the Fund and to compare these costs with the ongoing costs of investing in other funds. Actual Expenses The table provides information about actual account values and actual expenses. Annualized expense ratios reflect contractual and voluntary fee waivers, if any. To estimate the expenses that you paid on your account over the period, simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number under the heading entitled Expenses Paid During Period. Hypothetical Example for Comparison Purposes The table also provides information about hypothetical account values and hypothetical expenses based on the Fund s actual expense ratio and an assumed rate of return of 5% per year before expenses. You may use this information to compare the ongoing costs of investing in your Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as brokerage commissions paid on purchases and sales of fund shares. Therefore, the hypothetical examples are useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. In addition, if these transactional costs were included, your costs would have been higher ishares A NNUAL R EPORT TO S HAREHOLDERS

9 Schedule of Investments October 31, 2017 Security Principal (000s) CORPORATE BONDS & NOTES a 16.22% Value AZERBAIJAN 0.52% Southern Gas Corridor CJSC 6.88%, 03/24/26 b $ 54,900 $ 62,075,430 62,075,430 CHILE 1.05% Corp. Nacional del Cobre de Chile 3.63%, 08/01/27 (Call 05/01/27) b 33,500 33,709, %, 09/16/25 b 44,034 47,369, %, 08/01/47 (Call 02/01/47) b 41,700 43,972, ,051,614 CHINA 3.47% Amber Circle Funding Ltd. 3.25%, 12/04/22 b 10,659 10,838,807 China Development Bank 2.13%, 06/01/21 b 9,644 9,468, %, 10/09/20 b 24,239 24,182, %, 01/24/22 b 13,850 13,804,295 China Development Bank Corp./ Hong Kong FRN, (3 mo. LIBOR US %) 2.02%, 03/06/22 b,c 13,800 13,801,670 China Great Wall International Holdings III Ltd. 3.13%, 08/31/22 b 8,800 8,795,778 CNAC HK Finbridge Co. Ltd. 3.50%, 07/19/22 b 18,000 18,088, %, 07/19/27 b 14,500 14,806,871 CNOOC Curtis Funding No. 1 Pty Ltd. 4.50%, 10/03/23 b 13,671 14,797,860 Sinochem Overseas Capital Co. Ltd. 4.50%, 11/12/20 b 15,293 16,172,347 Sinopec Group Overseas Development 2012 Ltd. 3.90%, 05/17/22 b 16,002 16,761, %, 05/17/42 b 12,609 14,289,376 Sinopec Group Overseas Development 2013 Ltd. 4.38%, 10/17/23 b 21,025 22,697,644 Security Principal (000s) Value Sinopec Group Overseas Development 2014 Ltd. 4.38%, 04/10/24 b $ 21,311 $ 22,938,052 Sinopec Group Overseas Development 2015 Ltd. 2.50%, 04/28/20 b 32,482 32,531, %, 04/28/25 b 23,447 23,511,737 Sinopec Group Overseas Development 2016 Ltd. 2.00%, 09/29/21 b 15,650 15,274,068 Sinopec Group Overseas Development 2017 Ltd. 2.38%, 04/12/20 b 6,300 6,292, %, 04/12/22 b 10,600 10,696, %, 04/12/27 b 18,700 19,175,167 State Grid Overseas Investment 2013 Ltd. 3.13%, 05/22/23 b 10,885 11,009,274 State Grid Overseas Investment 2014 Ltd. 4.13%, 05/07/24 b 18,984 20,251,448 State Grid Overseas Investment 2016 Ltd. 2.75%, 05/04/22 b 9,700 9,730, %, 05/04/27 b 32,428 33,154,428 Three Gorges Finance I Cayman Islands Ltd. 3.15%, 06/02/26 b 11,234 11,145, ,215,371 INDONESIA 1.10% Majapahit Holding BV 7.75%, 01/20/20 b 4,474 4,944,486 Pelabuhan Indonesia II PT 4.25%, 05/05/25 b 9,900 10,257,737 Pertamina Persero PT 4.30%, 05/20/23 b 12,642 13,353, %, 05/03/22 b 9,844 10,569, %, 05/23/21 b 7,927 8,549, %, 05/20/43 b 13,021 14,255, %, 05/03/42 b 13,630 15,597, %, 05/30/44 b 13,555 16,361,292 Perusahaan Listrik Negara PT 4.13%, 05/15/27 b 16,050 16,175,342 S CHEDULE OF I NVESTMENTS 9

10 Schedule of Investments (Continued) October 31, 2017 Security Principal (000s) Value 5.25%, 10/24/42 b $ 10,960 $ 11,526, %, 11/22/21 b 8,880 9,701, ,291,540 KAZAKHSTAN 1.58% Development Bank of Kazakhstan JSC 4.13%, 12/10/22 b 29,637 30,118,601 Kazakhstan Temir Zholy Finance BV 6.95%, 07/10/42 b 28,055 31,421,600 KazMunayGas National Co. JSC 4.75%, 04/19/27 b 22,600 23,114, %, 04/19/47 b 34,976 35,217, %, 04/09/21 b 29,066 31,782, %, 05/05/20 b 33,137 36,119, ,774,420 MALAYSIA 1.31% Petronas Capital Ltd. 3.50%, 03/18/25 b 30,454 31,516, %, 03/18/45 b 41,711 46,510, %, 05/22/22 b 34,283 41,936,783 Petronas Global Sukuk Ltd. 2.71%, 03/18/20 b 35,995 36,264, ,228,885 MEXICO 3.52% Banco Nacional de Comercio Exterior SNC/Cayman Islands 4.38%, 10/14/25 b 9,524 9,857,340 Comision Federal de Electricidad 4.75%, 02/23/27 b 7,800 8,170, %, 05/26/21 b 6,786 7,193, %, 01/15/24 b 9,600 10,260,000 Mexico City Airport Trust 3.88%, 04/30/28 b , %, 04/30/28 (Call 01/30/28) d 4,805 4,705, %, 10/31/26 (Call 07/31/26) b 8,600 8,772, %, 10/31/46 (Call 04/30/46) b 8,250 8,167, %, 07/31/47 b 5,700 5,652, %, 07/31/47 (Call 01/31/47) d 14,275 14,155,325 Security Principal (000s) Value Petroleos Mexicanos 3.50%, 07/23/20 $ 8,911 $ 9,061, %, 01/30/23 15,637 15,266, %, 01/15/25 9,018 8,969, %, 01/23/26 15,016 14,828, %, 09/21/23 16,618 17,000, %, 01/24/22 13,101 13,625, %, 01/18/24 14,609 14,969, %, 03/13/22 b 5,568 5,907, %, 01/21/21 15,691 16,671, %, 06/27/44 18,770 16,909, %, 01/23/46 22,016 19,960, %, 03/05/20 5,100 5,439, %, 02/04/21 8,529 9,279, %, 01/23/45 19,519 19,418, %, 03/13/27 b 34,432 37,553, %, 06/02/41 20,959 21,220, %, 06/15/35 18,645 19,664, %, 09/21/47 41,998 43,287, %, 08/04/26 24,551 27,583,048 FRN, (3 mo. LIBOR US %) 4.97%, 03/11/22 b,c 5,540 6,038, ,784,975 OMAN 0.70% Lamar Funding Ltd. 3.96%, 05/07/25 b 26,871 25,157,974 Oman Sovereign Sukuk SAOC 4.40%, 06/01/24 b 58,027 58,058,037 83,216,011 PERU 0.45% Petroleos del Peru SA 4.75%, 06/19/32 b 21,200 21,687, %, 06/19/47 b 30,770 32,380,723 54,068,670 PHILIPPINES 0.23% Power Sector Assets & Liabilities Management Corp. 7.39%, 12/02/24 b 21,567 27,703,027 27,703,027 RUSSIA 0.68% Russian Railways via RZD Capital PLC 5.70%, 04/05/22 b 16,699 18,118, ishares A NNUAL R EPORT TO S HAREHOLDERS

11 Schedule of Investments (Continued) October 31, 2017 Security Principal (000s) Value Vnesheconombank Via VEB Finance PLC 5.94%, 11/21/23 b $ 18,800 $ 20,374, %, 07/05/22 b 9,700 10,561, %, 11/22/25 b 13,558 15,388, %, 07/09/20 b 14,878 16,105,435 80,548,040 SOUTH AFRICA 0.85% Eskom Holdings SOC Ltd. 5.75%, 01/26/21 b 37,469 37,843, %, 08/06/23 b 15,193 15,534, %, 02/11/25 b 26,982 27,622,822 Transnet SOC Ltd. 4.00%, 07/26/22 b 21,291 20,780, ,781,371 VENEZUELA 0.76% Petroleos de Venezuela SA 5.38%, 04/12/27 b 34,276 9,820, %, 04/12/37 b 14,173 4,074, %, 05/16/24 b 35,646 10,069, %, 11/15/26 b 45,819 12,600, %, 10/27/20 b 23,804 19,674, %, 11/17/21 b 23,986 10,523, %, 05/17/35 b 28,988 10,435, %, 02/17/22 b 30,902 13,936,802 91,135,662 TOTAL CORPORATE BONDS & NOTES (Cost: $1,943,051,756) 1,934,875,016 FOREIGN GOVERNMENT OBLIGATIONS a 81.83% ANGOLA 0.37% Angolan Government 9.50%, 11/12/25 b 41,022 44,611,425 44,611,425 ARGENTINA 3.91% Argentine Republic Government 2.50%, 12/31/38 e 61,497 44,124, %, 01/26/22 36,816 38,656, %, 07/06/28 12,508 13,277, %, 04/22/21 58,486 63,837,469 Security Principal (000s) Value 6.88%, 01/26/27 $ 41,647 $ 45,416, %, 07/06/36 17,497 18,818, %, 06/28/17 b 36,695 37,634, %, 04/22/26 75,069 84,827, %, 04/22/46 31,654 35,499, %, 12/31/33 20,265 23,228, %, 12/31/33 52,393 61,089, ,411,251 AZERBAIJAN 0.74% Republic of Azerbaijan 3.50%, 09/01/32 b 25,200 21,737, %, 03/18/24 b 37,944 38,987,460 State Oil Co. of the Azerbaijan Republic 4.75%, 03/13/23 b 27,399 27,494,760 88,220,055 BOLIVIA 0.23% Bolivian Government 4.50%, 03/20/28 b 27,913 27,075,610 27,075,610 BRAZIL 3.80% Banco Nacional de Desenvolvimento Economico e Social 4.75%, 05/09/24 b 13,728 13,879, %, 09/26/23 b 15,847 17,134,569 Brazil Minas SPE via State of Minas Gerais 5.33%, 02/15/28 b 17,681 17,946,215 Brazilian Government 2.63%, 01/05/23 32,159 31,113, %, 01/07/25 58,230 59,249, %, 01/13/28 (Call 10/13/27) 15,100 15,002, %, 01/22/21 39,890 42,632, %, 01/27/45 44,849 41,731, %, 01/07/41 41,271 41,951, %, 02/21/47 16,674 16,957, %, 04/07/26 41,688 46,325, %, 01/20/37 32,885 39,297,575 S CHEDULE OF I NVESTMENTS 11

12 Schedule of Investments (Continued) October 31, 2017 Security Principal (000s) Value 8.25%, 01/20/34 $ 21,026 $ 27,412, %, 04/15/24 14,781 18,919, %, 05/15/27 16,270 23,469, ,025,163 CHILE 0.65% Chile Government 3.13%, 01/21/26 33,427 34,262, %, 06/21/47 42,800 43,444,095 77,706,770 CHINA 0.45% Export-Import Bank of China (The) 2.00%, 04/26/21 b 10,402 10,188, %, 03/14/22 b 17,250 17,207, %, 04/26/26 b 11,778 11,541, %, 07/31/24 b 14,237 14,794,322 53,731,682 COLOMBIA 3.47% Colombia Government 2.63%, 03/15/23 (Call 12/15/22) 17,930 17,580, %, 04/25/27 (Call 01/25/27) 49,061 49,478, %, 02/26/24 (Call 11/26/23) 38,933 40,490, %, 07/12/21 29,938 31,734, %, 01/28/26 (Call 10/28/25) 26,940 28,664, %, 06/15/45 (Call 12/15/44) 71,702 73,781, %, 02/26/44 (Call 08/26/43) 44,811 49,964, %, 01/18/41 44,689 52,576, %, 09/18/37 31,843 41,992, %, 05/21/24 21,560 27,435, ,697,431 COSTA RICA 0.66% Costa Rica Government 4.25%, 01/26/23 b 24,794 24,453, %, 04/04/44 b 27,430 28,561,487 Principal Security (000s) Value 7.16%, 03/12/45 b $ 24,660 $ 26,201,250 79,215,820 CROATIA 1.55% Croatia Government 5.50%, 04/04/23 b 40,767 44,996, %, 01/26/24 b 49,202 55,967, %, 03/24/21 b 42,719 47,097, %, 07/14/20 b , %, 07/14/20 b 33,502 36,642, ,360,611 DOMINICAN REPUBLIC 2.71% Dominican Republic 5.50%, 01/27/25 b 37,938 40,119, %, 04/18/24 b 28,678 31,187, %, 01/25/27 b 43,525 46,789, %, 01/27/45 b 57,575 64,052, %, 01/29/26 b 41,980 47,962, %, 04/30/44 b 41,268 48,954, %, 05/06/21 b 39,600 43,708, ,773,137 ECUADOR 2.32% Ecuador Government 7.95%, 06/20/24 b 49,884 50,320, %, 06/02/23 b 27,520 28,905, %, 10/23/27 d 10,130 10,342, %, 06/02/27 b 32,700 35,069, %, 12/13/26 b 46,787 50,412, %, 03/24/20 b 37,572 40,765, %, 03/28/22 b 53,414 60,424, ,241,107 EGYPT 2.31% Egypt Government 5.75%, 04/29/20 b 32,489 33,707, %, 06/11/25 b 39,263 40,097, %, 01/31/22 b 56,545 59,018, %, 01/31/27 b 56,905 62,951, %, 01/31/47 b 71,177 80,341, ,115, ishares A NNUAL R EPORT TO S HAREHOLDERS

13 Schedule of Investments (Continued) October 31, 2017 Security Principal (000s) Value EL SALVADOR 0.25% El Salvador Government 7.65%, 06/15/35 b $ 28,932 $ 30,089,280 30,089,280 ETHIOPIA 0.22% Ethiopia 6.63%, 12/11/24 b 25,012 25,762,360 25,762,360 GABON 0.32% Gabon Government 6.38%, 12/12/24 b 39,341 38,505,004 38,505,004 GHANA 0.47% Ghana Government 7.88%, 08/07/23 b 26,638 28,769, %, 01/18/26 b 25,012 27,106,755 55,875,887 HUNGARY 3.12% Hungary Government 5.38%, 02/21/23 55,506 62,097, %, 03/25/24 44,050 50,051, %, 11/22/23 59,620 68,563, %, 01/29/20 50,665 54,908, %, 03/29/21 73,322 81,937, %, 03/29/41 35,476 54,633, ,190,719 INDIA 0.24% Export-Import Bank of India 3.38%, 08/05/26 b 28,630 28,319,814 28,319,814 INDONESIA 3.76% Indonesia Government 3.38%, 04/15/23 b 16,165 16,407, %, 04/25/22 b 17,423 18,073, %, 07/18/27 b 8,200 8,445, %, 01/15/25 b 21,444 22,432, %, 01/08/27 b 20,239 21,438,566 Security Principal (000s) Value 4.63%, 04/15/43 b $ 10,812 $ 11,194, %, 01/08/26 b 20,319 22,107, %, 07/18/47 b 12,300 13,004, %, 05/05/21 b 4,990 5,360, %, 05/05/21 b 16,097 17,292, %, 01/15/45 b 13,514 14,950, %, 01/17/42 b 20,400 22,794, %, 01/08/47 b 8,607 9,692, %, 10/17/23 b 10,290 11,589, %, 03/13/20 b 13,492 14,621, %, 01/15/24 b 19,486 22,358, %, 01/08/46 b 11,055 13,653, %, 02/17/37 b 16,211 20,807, %, 01/15/44 b 18,016 24,130, %, 01/17/38 b 17,756 25,291, %, 10/12/35 b 17,894 26,700,530 Perusahaan Penerbit SBSN Indonesia III 3.30%, 11/21/22 b 6,671 6,771, %, 03/29/22 b 11,400 11,613, %, 03/29/27 b 21,800 22,424, %, 05/28/25 b 17,249 18,017, %, 09/10/24 b 9,360 9,867, %, 03/29/26 b 16,800 17,783, ,825,674 IRAQ 0.81% Iraq 5.80%, 01/15/28 (Call 12/17/17) b 73,445 69,221, %, 03/09/23 b 27,500 27,603,456 96,825,369 IVORY COAST 0.93% Ivory Coast Government 5.75%, 12/31/32 (Call 12/31/17) b,e 46,356 45,602, %, 06/15/33 b 37,066 36,630, %, 03/03/28 b 27,857 28,901, ,134,961 JAMAICA 1.10% Jamaica Government 6.75%, 04/28/28 52,962 61,303,515 S CHEDULE OF I NVESTMENTS 13

14 Schedule of Investments (Continued) October 31, 2017 Security Principal (000s) Value 7.88%, 07/28/45 $ 26,976 $ 33,509, %, 03/15/39 28,877 35,915, ,728,767 JORDAN 0.72% Jordan Government 5.75%, 01/31/27 b 24,261 24,230, %, 01/29/26 b 26,219 27,149, %, 10/10/47 d 32,650 34,201,801 85,581,698 KAZAKHSTAN 1.52% Kazakhstan Government 3.88%, 10/14/24 b 37,721 38,946, %, 10/14/44 b 23,430 24,279, %, 07/21/25 b 62,101 69,009, %, 07/21/45 b 39,501 49,475, ,711,009 KENYA 0.44% Kenya Government 6.88%, 06/24/24 b 50,415 52,368,581 52,368,581 LEBANON 2.75% Lebanon Government 6.00%, 01/27/23 b 34,640 33,687, %, 10/04/22 b 39,353 38,811, %, 03/09/20 34,212 34,682, %, 11/27/26 b 40,375 38,860, %, 11/27/26 b , %, 02/26/30 b 36,289 34,066, %, 11/29/27 b 30,253 29,118, %, 03/23/27 b 29,327 28,630, %, 03/23/32 b 32,720 31,188, %, 04/12/21 b 54,646 57,924, ,741,317 LITHUANIA 1.23% Lithuania Government 6.13%, 03/09/21 b 37,175 41,589, %, 02/01/22 b 36,964 43,201,675 Principal Security (000s) Value 7.38%, 02/11/20 b $ 55,662 $ 62,132, ,923,914 MALAYSIA 1.12% 1MDB Global Investments Ltd. 4.40%, 03/09/23 b 84,400 80,813,000 Malaysia Sovereign Sukuk Bhd 3.04%, 04/22/25 b 24,568 24,838,813 Malaysia Sukuk Global Bhd 3.18%, 04/27/26 b 27,906 28,475, ,127,347 MEXICO 2.54% Mexico Government 3.50%, 01/21/21 7,078 7,382, %, 01/30/25 18,931 19,167, %, 03/15/22 18,688 19,463, %, 10/02/23 25,170 26,365, %, 01/21/26 15,645 16,302, %, 03/28/27 25,305 26,304, %, 01/15/47 14,120 13,290, %, 01/23/46 15,792 15,397, %, 02/10/48 8,400 8,215, %, 03/08/44 29,504 29,415, %, 01/15/20 14,210 15,222, %, 01/21/45 17,969 20,080, %, 10/12/10 21,852 22,835, %, 01/11/40 25,296 29,583, %, 09/27/34 15,940 20,682, %, 08/15/31 8,517 12,743, ,451,873 MONGOLIA 0.22% Mongolia Government 5.13%, 12/05/22 b 26,184 25,987,620 25,987,620 MOROCCO 0.33% Morocco Government 4.25%, 12/11/22 b 37,280 39,144,000 39,144, ishares A NNUAL R EPORT TO S HAREHOLDERS

15 Schedule of Investments (Continued) October 31, 2017 Security Principal (000s) Value Security Principal (000s) Value NIGERIA 0.40% Nigeria Government 7.88%, 02/16/32 b $ 43,171 $ 47,326,209 47,326,209 OMAN 2.03% Oman Government 3.63%, 06/15/21 b 37,168 37,391, %, 03/08/22 b 26,972 27,214, %, 06/15/26 b 66,752 65,817, %, 03/08/27 b 56,309 57,773, %, 03/08/47 b 52,581 54,132, ,328,401 PAKISTAN 0.61% Pakistan Government 8.25%, 04/15/24 b 25,925 28,865,673 Second Pakistan International Sukuk Co.Ltd./The 6.75%, 12/03/19 b 5,552 5,781,020 Third Pakistan International Sukuk Co. Ltd. (The) 5.50%, 10/13/21 b 37,250 37,901,875 72,548,568 PANAMA 2.06% Panama Government 3.75%, 03/16/25 (Call 12/16/24) 35,247 36,744, %, 03/17/28 (Call 12/17/27) 36,233 37,818, %, 09/22/24 (Call 06/22/24) 26,969 28,654, %, 05/15/47 34,450 36,458, %, 01/30/20 29,913 32,021, %, 01/26/36 56,340 74,439, ,137,492 PARAGUAY 0.26% Paraguay Government 6.10%, 08/11/44 b 26,818 30,572,520 30,572,520 PERU 2.76% Peruvian Government 4.13%, 08/25/27 $ 41,210 $ 45,073, %, 11/18/50 65,500 82,595, %, 03/14/37 36,091 48,506, %, 07/21/25 43,627 56,998, %, 11/21/33 60,897 96,156, ,330,280 PHILIPPINES 3.67% Philippine Government 3.70%, 03/01/41 34,571 34,354, %, 02/02/42 36,830 36,589, %, 01/20/40 33,532 34,589, %, 01/15/21 29,768 31,442, %, 01/21/24 26,838 29,344, %, 01/13/37 22,942 27,019, %, 03/30/26 19,553 23,231, %, 01/15/32 18,870 24,617, %, 10/23/34 34,741 46,470, %, 01/14/31 33,258 47,750, %, 02/02/30 35,606 56,384, %, 03/16/25 29,961 45,620, ,417,459 POLAND 2.63% Republic of Poland Government 3.00%, 03/17/23 55,195 56,367, %, 04/06/26 46,353 47,395, %, 01/22/24 51,546 55,218, %, 03/23/22 81,661 89,827, %, 04/21/21 59,378 64,870, ,680,054 ROMANIA 1.53% Romanian Government 4.38%, 08/22/23 b 42,214 45,116, %, 01/22/24 b 31,106 34,177, %, 01/22/44 b 23,842 30,279, %, 02/07/22 b 63,283 73,091, ,665,135 S CHEDULE OF I NVESTMENTS 15

16 Schedule of Investments (Continued) October 31, 2017 Security Principal (000s) Value Security Principal (000s) Value RUSSIA 3.60% Russian Foreign Bond-Eurobond 4.25%, 06/23/27 b $ 26,800 $ 27,315, %, 04/04/22 b 13,800 14,697, %, 05/27/26 b 41,600 43,846, %, 09/16/23 b 35,200 38,324, %, 04/29/20 b 35,600 37,602, %, 06/23/47 b 46,200 47,362, %, 04/04/42 b 42,800 47,229, %, 09/16/43 b 16,000 18,260, %, 03/31/30 b,e 84,520 99,416, %, 06/24/28 b 31,760 55,659, ,713,946 SENEGAL 0.26% Senegal Government 6.25%, 05/23/33 b 30,066 31,101,563 31,101,563 SERBIA 0.88% Serbia 4.88%, 02/25/20 b 37,161 38,736, %, 09/28/21 b 57,764 66,428, ,165,598 SLOVAKIA 0.35% Slovakia Government 4.38%, 05/21/22 b 39,039 42,259,717 42,259,717 SOUTH AFRICA 2.29% Republic of South Africa Government 4.30%, 10/12/28 44,588 41,132, %, 01/17/24 29,223 29,588, %, 09/27/27 15,175 14,811, %, 04/14/26 24,750 24,564, %, 10/12/46 25,079 22,257, %, 07/24/44 23,223 21,829, %, 03/09/20 30,114 31,770, %, 09/27/47 22,085 21,208, %, 05/30/22 20,467 22,334, %, 09/16/25 40,763 43,412, ,910,312 SRI LANKA 1.71% Sri Lanka Government 5.88%, 07/25/22 b $ 28,324 $ 30,235, %, 05/11/27 b 36,900 39,168, %, 10/04/20 b 23,331 24,905, %, 07/27/21 b 25,347 27,343, %, 07/18/26 b 32,614 36,149, %, 11/03/25 b 41,361 45,918, ,720,364 TRINIDAD AND TOBAGO 0.26% Trinidad & Tobago Government 4.50%, 08/04/26 b 30,762 31,031,167 31,031,167 TUNISIA 0.20% Banque Centrale de Tunisie 5.75%, 01/30/25 b 24,618 24,494,910 24,494,910 TURKEY 4.26% Hazine Mustesarligi Varlik Kiralama AS 4.25%, 06/08/21 b 9,528 9,611, %, 11/25/24 b 10,200 9,996, %, 04/06/23 b 11,010 11,216,438 Turkey Government 3.25%, 03/23/23 18,326 17,295, %, 04/14/26 11,511 10,863, %, 10/09/26 31,917 31,158, %, 04/16/43 32,172 27,748, %, 03/25/22 16,326 16,938, %, 03/30/21 25,374 26,769, %, 03/22/24 29,363 30,977, %, 05/11/47 28,280 26,975, %, 03/25/27 32,924 34,693, %, 01/14/41 28,306 28,306, %, 09/26/22 23,284 25,321, %, 02/17/45 31,485 33,610, %, 05/30/40 22,618 24,597, %, 03/17/36 29,326 32,258, %, 06/05/20 10,532 11,400, ishares A NNUAL R EPORT TO S HAREHOLDERS

17 Schedule of Investments (Continued) October 31, 2017 Security Principal (000s) Value 7.25%, 03/05/38 $ 10,377 $ 11,933, %, 02/05/25 33,577 38,571, %, 02/14/34 17,287 21,090, %, 01/15/30 17,049 26,511, ,845,358 UKRAINE 3.02% Ukraine Government 7.38%, 09/25/32 d 66,040 65,202, %, 09/01/20 b 34,846 37,110, %, 09/01/21 b 35,259 37,594, %, 09/01/22 b 29,428 31,458, %, 09/01/22 b , %, 09/01/23 b 34,157 36,291, %, 09/01/24 b 37,106 38,868, %, 09/01/25 b 31,239 32,488, %, 09/01/26 b 38,131 39,274, %, 09/01/27 b 40,884 42,110, ,668,188 URUGUAY 2.21% Uruguay Government 4.38%, 10/27/27 54,032 58,354, %, 10/27/27 3,425 3,699, %, 08/14/24 42,736 46,795, %, 06/18/50 104, ,178, %, 03/21/36 30,108 42,452, ,479,668 VENEZUELA 0.79% Venezuela Government 6.00%, 12/09/20 b 15,225 5,937, %, 03/31/38 b 14,668 4,693, %, 04/21/25 b 17,093 5,598, %, 10/13/24 b 25,594 8,509, %, 05/07/23 b 19,635 6,626, %, 09/15/27 28,701 10,547, %, 05/07/28 b 23,502 7,755, %, 01/13/34 19,224 6,488, %, 10/21/26 b 28,749 11,715, %, 08/05/31 b 34,433 13,738, %, 08/23/22 b 29,007 12,658,616 94,270,258 Security Principal or Shares (000s) Value VIETNAM 0.24% Vietnam Government 4.80%, 11/19/24 b $ 26,812 $ 28,729,058 28,729,058 ZAMBIA 0.55% Zambia Government 8.50%, 04/14/24 b 31,655 33,870, %, 07/30/27 b 28,849 31,373,287 65,244,137 TOTAL FOREIGN GOVERNMENT OBLIGATIONS (Cost: $9,703,923,074) 9,761,121,333 SHORT-TERM INVESTMENTS 0.32% MONEY MARKET FUNDS 0.32% BlackRock Cash Funds: Treasury, SL Agency Shares 1.00% f,g 37,553 37,553,049 37,553,049 TOTAL SHORT-TERM INVESTMENTS (Cost: $37,553,049) 37,553,049 TOTAL INVESTMENTS IN SECURITIES 98.37% (Cost: $11,684,527,879) h 11,733,549,398 Other Assets, Less Liabilities 1.63% 194,660,374 NET ASSETS % $11,928,209,772 FRN Floating Rate Note a Investments are denominated in U.S. dollars. b This security may be resold to qualified foreign investors and foreign institutional buyers under Regulation S of the Securities Act of c Floating rate security. Rate shown is the rate in effect as of period end. d This security may be resold to qualified institutional buyers under Rule 144A of the Securities Act of e Step coupon security. Coupon rate will either increase (step-up bond) or decrease (step-down bond) at regular intervals until maturity. Interest rate shown reflects the rate currently in effect. f Affiliated issuer. See Schedule 1. g The rate quoted is the annualized seven-day yield of the fund at period end. h The cost of investments (including short positions and derivatives, if any) for federal income tax purposes was $11,722,447,160. Net unrealized appreciation was $11,102,238, of which $207,982,724 represented gross unrealized appreciation on investments and $196,880,486 represented gross unrealized depreciation on investments. S CHEDULE OF I NVESTMENTS 17

18 Schedule of Investments (Continued) October 31, 2017 Schedule 1 Affiliates (Note 2) Investments in issuers considered to be affiliates of the Fund during the year ended October 31, 2017, for purposes of Section 2(a)(3) of the 1940 Act, and/or related parties of the Fund were as follows: Affiliated issuer BlackRock Cash Funds: Treasury, SL Agency Shares Shares held at 10/31/16 (000s) Shares purchased (000s) Shares sold (000s) Shares held at 10/31/17 (000s) Value at 10/31/17 Net realized gain (loss) a Change in unrealized appreciation (depreciation) Income 27,984 9,569 b 37,553 $37,553,049 $ 2,882 $ $289,838 a b Includes realized capital gain distributions from an affiliated fund, if any. Net of shares purchased and sold. Schedule 2 Fair Value Measurements Various inputs are used in determining the fair value of financial instruments. For description of the input levels and information about the Fund s policy regarding valuation of financial instruments, see Note 1. The following table summarizes the value of the Fund s investments according to the fair value hierarchy as of October 31, The breakdown of the Fund s investments into major categories is disclosed in the schedule of investments above. Level 1 Level 2 Level 3 Total Investments: Assets: Corporate bonds & notes $ $ 1,934,875,016 $ $ 1,934,875,016 Foreign government obligations 9,761,121,333 9,761,121,333 Money market funds 37,553,049 37,553,049 Total $37,553,049 $11,695,996,349 $ $11,733,549,398 See notes to financial statements ishares A NNUAL R EPORT TO S HAREHOLDERS

19 Statement of Assets and Liabilities October 31, 2017 ASSETS Investments in securities, at cost: Unaffiliated $11,646,974,830 Affiliated (Note 2) 37,553,049 Total cost of investments in securities $11,684,527,879 Investments in securities, at fair value (Note 1): Unaffiliated $11,695,996,349 Affiliated (Note 2) 37,553,049 Cash 1,281,399 Receivables: Investment securities sold 98,819,189 Due from custodian (Note 4) 104,825,129 Dividends and interest 167,907,996 Capital shares sold 2,113,374 Total Assets 12,108,496,485 LIABILITIES Payables: Investment securities purchased 174,408,786 Capital shares redeemed 28 Securities related to in-kind transactions (Note 4) 1,975,700 Investment advisory fees (Note 2) 3,902,199 Total Liabilities 180,286,713 NET ASSETS $11,928,209,772 Net assets consist of: Paid-in capital $12,021,058,331 Undistributed net investment income 37,564,496 Accumulated net realized loss (179,434,574) Net unrealized appreciation 49,021,519 NET ASSETS $11,928,209,772 Shares outstanding a 102,900,000 Net asset value per share $ a No par value, unlimited number of shares authorized. See notes to financial statements. F INANCIAL S TATEMENTS 19

20 Statement of Operations Year ended October 31, 2017 NET INVESTMENT INCOME Dividends affiliated (Note 2) $ 289,838 Interest unaffiliated 527,920,886 Total investment income 528,210,724 EXPENSES Investment advisory fees (Note 2) 55,642,249 Proxy fees 234,693 Total expenses 55,876,942 Less investment advisory fees waived (Note 2) (14,533,486) Net expenses 41,343,456 Net investment income 486,867,268 NET REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) from: Investments unaffiliated (64,159,637) In-kind redemptions unaffiliated 120,305,785 Realized gain distributions from affiliated funds 2,882 Net realized gain 56,149,030 Net change in unrealized appreciation/depreciation on: Investments unaffiliated 11,132,447 Net change in unrealized appreciation/depreciation 11,132,447 Net realized and unrealized gain 67,281,477 NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $554,148,745 See notes to financial statements ishares A NNUAL R EPORT TO S HAREHOLDERS

21 Statements of Changes in Net Assets Year ended October 31, 2017 Year ended October 31, 2016 INCREASE (DECREASE) IN NET ASSETS OPERATIONS: Net investment income $ 486,867,268 $ 316,108,337 Net realized gain 56,149,030 80,938,376 Net change in unrealized appreciation/depreciation 11,132, ,360,546 Net increase in net assets resulting from operations 554,148, ,407,259 DISTRIBUTIONS TO SHAREHOLDERS: From net investment income (472,368,085) (321,652,097) Total distributions to shareholders (472,368,085) (321,652,097) CAPITAL SHARE TRANSACTIONS: Proceeds from shares sold 9,694,660,077 9,405,191,061 Cost of shares redeemed (7,497,526,529) (4,551,094,063) Net increase in net assets from capital share transactions 2,197,133,548 4,854,096,998 INCREASE IN NET ASSETS 2,278,914,208 5,184,852,160 NET ASSETS Beginning of year 9,649,295,564 4,464,443,404 End of year $11,928,209,772 $ 9,649,295,564 Undistributed net investment income included in net assets at end of year $ 37,564,496 $ 23,062,495 SHARES ISSUED AND REDEEMED Shares sold 85,200,000 84,000,000 Shares redeemed (66,400,000) (41,100,000) Net increase in shares outstanding 18,800,000 42,900,000 See notes to financial statements. F INANCIAL S TATEMENTS 21

22 Financial Highlights (For a share outstanding throughout each period) Year ended Oct. 31, 2017 Year ended Oct. 31, 2016 Year ended Oct. 31, 2015 Year ended Oct. 31, 2014 Year ended Oct. 31, 2013 Net asset value, beginning of year $ $ $ $ $ Income from investment operations: Net investment income a Net realized and unrealized gain (loss) b (5.75) 3.17 (9.77) Total from investment operations (0.67) 8.03 (4.77) Less distributions from: Net investment income (5.17) (5.58) (5.12) (4.84) (5.08) Total distributions (5.17) (5.58) (5.12) (4.84) (5.08) Net asset value, end of year $ $ $ $ $ Total return 5.74% 11.35% (0.55)% 7.45% (4.01)% Ratios/Supplemental data: Net assets, end of year (000s) $11,928,210 $9,649,296 $4,464,443 $5,147,968 $3,850,273 Ratio of expenses to average net assets 0.40% 0.40% 0.40% 0.59% 0.60% Ratio of expenses to average net assets prior to waived fees 0.54% 0.59% 0.60% 0.60% n/a Ratio of net investment income to average net assets 4.69% 4.81% 4.61% 4.35% 4.30% Portfolio turnover rate c 26% 32% 24% 52% 32% a Based on average shares outstanding throughout each period. b The amounts reported for a share outstanding may not accord with the change in aggregate gains and losses in securities for the fiscal period due to the timing of capital share transactions in relation to the fluctuating market values of the Fund s underlying securities. c Portfolio turnover rates exclude portfolio securities received or delivered as a result of processing capital share transactions in Creation Units. See notes to financial statements ishares A NNUAL R EPORT TO S HAREHOLDERS

23 Notes to Financial Statements ishares Trust (the Trust ) is registered under the Investment Company Act of 1940, as amended (the 1940 Act ), as an open-end management investment company. The Trust was established as a Delaware statutory trust pursuant to an Agreement and Declaration of Trust dated December 16, These financial statements relate only to the following fund (the Fund ): ishares ETF J.P. Morgan USD Emerging Markets Bond Diversification Classification Non-diversified The investment objective of the Fund is to seek investment results that correspond generally to the price and yield performance, before fees and expenses, of its underlying index. The investment adviser uses a passive or index approach to try to achieve the Fund s investment objective. Pursuant to the Trust s organizational documents, the Fund s officers and trustees are indemnified against certain liabilities that may arise out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund s maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. 1. SIGNIFICANT ACCOUNTING POLICIES The following significant accounting policies are consistently followed by the Fund in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America ( U.S. GAAP ). The preparation of financial statements in conformity with U.S. GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The Fund is considered an investment company under U.S. GAAP and follows the accounting and reporting guidance applicable to investment companies. SECURITY VALUATION The Fund s investments are valued at fair value each day that the Fund s listing exchange is open and, for financial reporting purposes, as of the report date should the reporting period end on a day that the Fund s listing exchange is not open. U.S. GAAP defines fair value as the price a fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. The BlackRock Global Valuation Methodologies Committee (the Global Valuation Committee ) provides oversight of the valuation of investments for the Fund. The investments of the Fund are valued pursuant to policies and procedures developed by the Global Valuation Committee and approved by the Board of Trustees of the Trust (the Board ). Fixed income investments are valued using the last available bid price or current market quotations provided by dealers or prices (including evaluated prices) supplied by approved independent third-party pricing services. The pricing services may use matrix pricing or valuation models that utilize certain inputs and assumptions to derive values, including transaction data, credit quality information, perceived market movements, news, and other relevant information and by other methods, which may include consideration of: yields or prices of securities of comparable quality, coupon, maturity and type; indications as to values from dealers; general market conditions; and/or other factors and assumptions. Pricing services generally value fixed income securities assuming orderly transactions of an institutional round lot size, but a fund may hold or transact in such securities in smaller odd lot sizes. Odd lots may trade at lower prices than institutional round lots. Open-end U.S. mutual funds (including money market funds) are valued at that day s published net asset value ( NAV ). N OTES TO F INANCIAL S TATEMENTS 23

24 Notes to Financial Statements (Continued) In the event that application of these methods of valuation results in a price for an investment which is deemed not to be representative of the fair value of such investment or if a price is not available, the investment will be valued by the Global Valuation Committee, in accordance with policies approved by the Board. The fair valuation approaches that may be utilized by the Global Valuation Committee to determine fair value include market approach, income approach and the cost approach. The valuation techniques used under these approaches take into consideration inputs that include but are not limited to (i) attributes specific to the investment; (ii) the principal market for the investment; (iii) the customary participants in the principal market for the investment; (iv) data assumptions by market participants for the investment, if reasonably available; (v) quoted prices for similar investments in active markets; and (vi) other inputs, such as future cash flows, interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and/or default rates. Valuations based on such inputs are reported to the Board on a quarterly basis. The Global Valuation Committee employs various methods for calibrating valuation approaches for investments where an active market does not exist, including regular due diligence of the Trust s pricing vendors, a regular review of key inputs and assumptions, transactional back-testing or disposition analysis to compare unrealized gains and losses to realized gains and losses, reviews of missing or stale prices, reviews of large movements in market values, and reviews of market related activity. Fair value pricing could result in a difference between the prices used to calculate the Fund s NAV and the prices used by the Fund s underlying index, which in turn could result in a difference between the Fund s performance and the performance of the Fund s underlying index. Various inputs are used in determining the fair value of financial instruments. Inputs may be based on independent market data ( observable inputs ) or they may be internally developed ( unobservable inputs ). These inputs to valuation techniques are categorized into a fair value hierarchy consisting of three broad levels for financial reporting purposes as follows: Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities; Level 2 Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not considered to be active, inputs other than quoted prices that are observable for the asset or liability (such as exchange rates, financing terms, interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market-corroborated inputs; and Level 3 Unobservable inputs for the asset or liability based on the best information available in the circumstances, to the extent observable inputs are not available, including the Global Valuation Committee s assumptions used in determining the fair value of investments. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Accordingly, the degree of judgement exercised in determining fair value is greatest for instruments categorized in Level 3. The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the fair value hierarchy classification is determined based on the lowest level input that is significant to the fair value measurement in its entirety. The fair value hierarchy for the Fund s investments is included in its schedule of investments. Changes in valuation techniques may result in transfers in or out of an assigned level within the fair value hierarchy. In accordance with the Trust s policy, transfers between different levels of the fair value hierarchy are deemed to have occurred as of the beginning of the reporting period. The categorization of values determined for financial instruments are based on the pricing transparency of the financial instruments and are not necessarily an indication of the risks associated with investing in those securities ishares A NNUAL R EPORT TO S HAREHOLDERS