The following eligible ETFs are divided into an equity basket and a fixed-income basket:

Transcription

1 Index Methodology for the BlackRock BLD Clara Index The BlackRock Clara Index s desgned to provde exposure to a dversfed global equty portfolo whch targets volatlty at a predetermned level. The ndex uses a dynamc process whereby t s rebalanced each day to adjust allocatons between the equty and fxed ncome baskets. Usng hstorcal 20 and 40 day volatlty measures, ndex captal moves from the equty basket to the fxed ncome basket or back as hstorcal volatlty devates from the target. The ndex s constructed from Shares ETFs n an effort to enhance lqudty and nvestblty of the Index. I. Index Elgblty Crtera Ths Index s composed of cash and U.S. lsted Shares exchange-traded products (each an ETF and together, the ETFs ) that are managed, dstrbuted and/or sponsored by subsdares of BlackRock, Inc. The BlackRock Index Servces Governance Commttee (the Index Commttee ) s responsble for governance and oversght of the Index. The followng elgble ETFs are dvded nto an equty basket and a fxed-ncome basket: Equty Basket ETFs: IVV Shares Core S&P 500 ETF IWM Shares Russell 2000 ETF EEM Shares MSCI Emergng Markets ETF EFA Shares MSCI EAFE ETF Fxed Income Basket ETFs: IEF Shares 7-10 Year Treasury Bond ETF IEI Shares 3-7 Year Treasury Bond ETF SHY Shares 1-3 Year Treasury Bond ETF The ETFs are selected such that the ndex n aggregate s desgned to have broad and lqud global equty exposure along wth fxed-ncome exposure that s represented by hghly lqud US Treasury bonds to help manage the volatlty targetng. The lqudty requrements for the ETFs n the ndex are: 1. The ETF must have a tralng 12 month average daly volume of at least $10 mllon. 2. The ETF must track a transparent ndex. The ETF weghts wthn the equty and fxed ncome baskets reman constant throughout the year. The fxed-weghts wthn each basket are recalculated and set n January every year by BlackRock and based on the nvestment framework of ther Mult-Asset Strateges Models group. When establshng the nstrument weghts wthn the respectve basket, the followng nstruments are capped accordngly: IWM: Maxmum weght of 50% wthn the equty basket EFA: Maxmum weght of 50% wthn the equty basket EEM: Maxmum weght of 20% wthn the equty basket 1 FOR INSTITUTIONAL INVESTOR USE ONLY - NOT FOR PUBLIC DISTRIBUTION

2 Addtonally, should the nstrument weghts wthn the respectve basket change at rebalance, the change n weghts wll be lnearly mplemented over a 10 day perod 1 followng the effectve date of the change. II. Mantenance of the Index Index Incepton Dates, Base Market Values and Index Hstory The base date of the Index s November 30 th, 2007, when the base Index level was set to Lve calculaton of the Index commenced on January 19 th, 2018, the Index ncepton date. Hstorcal pre-ncepton ndex levels are avalable to qualfed nsttutonal nvestors and start from November 30 th, 2007 up to the ndex ncepton date. All nformaton presented pror to the Index ncepton date s pre-ncepton ndex performance. The prencepton calculatons are based on the same methodology as descrbed n Sectons III and IV of ths document. Calculaton and Dssemnaton of Index Values and Consttuent Holdngs ICE Data Servces s the calculaton agent and the Index values are calculated once every busness day after the close of U.S. exchanges. The ndex value s calculated usng the closng prces, sourced by ICE Data Servces drectly from the prmary lstng exchange of the respectve ETF, and ther weght n the ndex, as detaled n secton IV. The prmary lstng exchange for each ETF n the ndex s lsted below. ETF Symbol IVV IWM EEM EFA IEF IEI SHY Prmary Lstng Exchange NYSE Arca NYSE Arca NYSE Arca NYSE Arca Nasdaq Nasdaq Nasdaq Tradng Holdays The Index s currently comprsed of ETFs that are lsted on the NYSE Arca and Nasdaq exchanges. The holday schedules for NYSE Arca and Nasdaq are currently dentcal and therefore Index values are not calculated on tradng holdays that occur on those exchanges. Index Value Currences The Index value s calculated n U.S. dollars. Scheduled Reconsttuton Dates The Index consttuent weghts wthn ther respectve basket (equty or bond basket) are reset and announced anytme between the 15 th and 31 st of every January. These weghts are then held constant untl the next scheduled reconsttuton date consecutve tradng day perod 2 FOR INSTITUTIONAL INVESTOR USE ONLY - NOT FOR PUBLIC DISTRIBUTION

3 Scheduled Rebalancng Dates The Index s rebalanced daly at the close of each tradng day by adjustng the equty basket and bond basket weghts based on hstorcal volatlty. Delstng If any consttuent s delsted by ts prncpal exchange, the ETF wll be removed from the Index as soon as practcable wth a sutable replacement, based on elgblty crtera, beng approved by the Index Commttee after consderng stakeholder feedback. Exceptons wll be made on a case-by-case bass as determned by the Index Commttee. Dvdend/Dstrbuton Renvestment: Where total return calculatons are requred, dstrbutons are renvested n ther respectve component. ETF Share Splt Index shares are multpled by the splt factor. Prce s dvded by the splt factor. There s no dvsor adjustment. ETF Specal Dvdends the prce of the ETF wth the specal dvdend wll be reduced by the specal dvdend amount per share after the close of tradng on the day before the dvdend ex-ante date. If, on any Index calculaton day, the closng prce of any Index consttuent wth Index weght >0 s unavalable for any reason, ncludng unforeseen events such as weather condton, power falures or other events, the Index wll use the last offcal closng prce reported at the close of a busness day for that consttuent. Extraordnary Events Any matter arsng from extraordnary events wll be resolved at the dscreton of the Index Commttee. III. Steps n Index Constructon Wth the lst of elgble ndex consttuents set along wth the nstrument weghts wthn the equty and fxed ncome baskets, two portfolos are constructed from the baskets and cash (represented by 3 month US LIBOR); one based on 20 day volatlty and another based on 40 day volatlty where the volatltes are calculated usng total returns of the consttuent ETFs. Total returns are used to avod overstatng volatlty due to dstrbutons. 1. Calculate day-over-day total returns for each basket component. The day-over-day total returns assume renvestment of dstrbutons nto ther respectve component. 2 a. TR T = ( (Px T + Dstr T ) ) 1 (Px T 1 ) b. Equty Basket; EB; = IVV, IWM, EEM, EFA c. Bond Basket; BB; = IEF, IEI, SHY 2 Component total returns were ndexed n development of ndex; please see Appendx for detaled formula. Assumng the same ndex calculaton days, total returns usng ths formula and the one n the Appendx wll result n the same volatlty. 3 FOR INSTITUTIONAL INVESTOR USE ONLY - NOT FOR PUBLIC DISTRIBUTION

4 2. Calculate day-over-day total returns for the equty basket and bond basket. a. TR EB t,t = wgt IVV T (TR IVV t ) + wgt IWM T (TR IWM t ) + wgt EEM T (TR EEM t ) + wgt EFA T (TR EFA t ) b. TR BB t,t = wgt IEF T (TR IEF t ) + wgt IEI T (TR IEI t ) + wgt SHY T (TR SHY t ) T = Date for whch portfolo s constructed t = Generc hstorc date pror to date T; any date between day T 1 and T 40 Px T = prce of nstrument on day T Dstr T = total dstrbutons for nstrument on day T wgt T = predefned nstrument weght calculated by BlackRock whch s n effect as of day T TR t = Total return for nsturment on date t TR EB t,t, TR BB t,t = Total return for eqty basket (EB) and bond basket(bb) respectvely on generc hstorc day t wth nstrument weghts as of the current tme T. 3. Calculate 20 and 40 day volatltes for the equty basket and bond basket; volatltes are calculated assumng a 0 average daly return (zero mean). a. Square each day s basket total return b. Sum the squares for the last 20 days, 40 days. c. Calculate the 20 and 40 day volatlty. σ Basket 20,T = 252 T 1 (TR 20 t=t 20 t,t. σ Basket 40,T = 252 T 1 (TR 40 t=t 40 t,t Basket = Equty Basket or Bond Basket Basket ) 2 Basket ) 2 4. Calculate the covarance between the equty basket and bond basket over 40 days. Snce a mean of 0 (zero) s used, the calculaton s as follows: COV T EB,BB = T 1 t=t 40 (TR t,t 40 EB TR t,t BB ) 4 FOR INSTITUTIONAL INVESTOR USE ONLY - NOT FOR PUBLIC DISTRIBUTION

5 5. Calculate the correlaton between the equty basket and bond basket over 40 days. ρ = COV EB,BB ( σ 40 EB BB σ ) 6. Select the 20 or 40 day volatlty for the equty basket and bond basket based on whchever s hghest for the equty basket. The hgher volatlty s used as t wll result n lower equty weghts when ncorporated nto subsequent steps. a. σ EB = 20 or 40 day volatlty selected for equty basket, whchever s hgher b. σ BB = Correspondng bond basket volatlty 7. If the 20 day volatlty and 40 day volatlty of the equty basket are less than the portfolo target volatlty, the equty basket weght s automatcally set to 1 and the bond basket set to 0. The ndex constructon process then jumps to step Usng the correlaton, the selected basket volatlty (20 or 40 day) and the target volatlty as nputs, calculate the nputs for use n the quadratc formula to fnd the roots. a. The 40 day correlaton wll be used n both the 20 and 40 day volatlty nstances of the quadratc formula.. A = σ 2 EB + σ 2 BB 2ρσ EB σ BB. B = 2σ 2 BB + 2 ρσ EB σ BB. C = σ 2 2 BB σ Tgt v. Usng the nputs calculated n the prevous three steps, calculate solutons to the followng: B + B 2 4AC 2A B B 2 4AC 2A σ Tgt = Target volatlty; to be provded by BlackRock; currently set at 4.25% b. If there s one root n the nterval [0,1], that root wll be the weght of the equty basket. If there are two such roots, the larger of them wll be the weght of the equty basket. If there are no such roots, proceed to step 9. c. (1 - equty basket weght) wll be the bond basket weght. 9. If there s no root to the quadratc formula between 0 and 1 (.e. B 2 < 4AC ), an alternatve soluton for the equty basket weght s derved: 5 FOR INSTITUTIONAL INVESTOR USE ONLY - NOT FOR PUBLIC DISTRIBUTION

6 a. Step 1. Calculate the equty basket weght necessary to acheve the mnmum possble volatlty: σ 2 BB ρσ EB σ BB Mn Wgt EB = σ 2 EB + σ 2 BB 2ρσ EB σ BB. Calculate the portfolo volatlty usng the mnmum equty basket weght calculated n the prevous step; f Mn Wgt EB < 0 then overrde portfolo volatlty wth or some nvald value: σ expected = (Mn Wgt EB σ EB ) 2 + (Wgt BB σ BB ) σ EB σ BB Mn Wgt EB Wgt BB ρ Wgt BB = 1 Mn Wgt EB b. Step 2: Assume equty basket weght of 1 (100%); therefore: σ port = σ EB c. Step 3: Assume equty basket weght of 0; therefore: σ port = σ BB d. Step 4: Choose the equty basket weght that results n the lowest portfolo volatlty. Wgt BB wll then be equal to 1 Wgt EB. 10. When usng the alternatve soluton, a scalng factor s calculated and appled to the portfolo: a. SF = σ tgt σ expected σ tgt = Target volatlty establshed by BlackRock b. Multply the equty and bond basket weghts used n calculatng the volatlty of the portfolo for the alternatve soluton (step 8.d) by the scalng factor (SF). c. The remanng weght after the equty and bond baskets have been scaled down wll go nto cash. Cash s represented by 3 month US LIBOR. The full equaton utlzng the basket weghts and scalng factor to calculate the cash weght s as follows:. Cash Wgt = 1 (Wgt EB SF) (Wgt BB SF) 11. Usng the basket weghts as they are now calculated up to ths pont, a maxmum basket weght change constrant of +/- 3% s appled. a. If the basket weghts calculated up to ths pont for day T change more than +/- 3% from the prevous day, the change s capped at 3%. If Wgt EB,BB T Wgt EB,BB T 1 > 3% 6 FOR INSTITUTIONAL INVESTOR USE ONLY - NOT FOR PUBLIC DISTRIBUTION

7 then Wgt EB,BB T = Wgt EB,BB T 1 + 3% If Wgt EB,BB T Wgt EB,BB T 1 < ( 3%) then Wgt EB,BB T = Wgt EB,BB T 1 3% b. After applyng the 3% day-over-day maxmum basket weght-change cap, the cash weght may need to be adjusted to ensure cash, equty basket and bond basket sum to 1:. Cash Wgt T = 1 (Wgt T EB + Wgt T BB ) IV. Index Data and Calculaton The daly ndex s calculated based on the sum of the prce return for the equty basket and total return for the bond basket multpled by ther respectve weght n the Index portfolo plus the return of the cash component. 1. Calculate the one-day ndex component returns a. Calculate one-day prce return of each equty basket component PR T = ( (Px T ) ) 1 (Px T 1 ) c. Calculate one-day total return of each bond basket component TR T = ( (Px T + Dstr T ) ) 1 (Px T 1 ) d. Equty Basket; EB; = IVV, IWM, EEM, EFA e. Bond Basket; BB; = IEF, IEI, SHY 2. Calculate one-day returns for the equty basket and bond basket. a. Calculate one-day prce return for the equty basket PR EB T = wgt IVV T (PR IVV T ) + wgt IWM T (PR IWM T ) + wgt EEM T (PR EEM T ) + wgt EFA T (PR EFA T ) b. Calculate one-day total return for the bond basket TR BB T = wgt IEF T (TR IEF T ) + wgt IEI T (TR IEI T ) + wgt SHY T (TR SHY T ) T = Date for whch ndex value (Idx) s beng calculated 7 FOR INSTITUTIONAL INVESTOR USE ONLY - NOT FOR PUBLIC DISTRIBUTION

8 t = Date pror to date T Px T = prce of nstrument on day T wgt = predefned nstrument weght calculated by BlackRock whch s n effect as of day T. PR T TR T = Prce return for nstrument n equty basket (EB) on day T = Total return for nstrument n bond basket(bb) on day T 3. Utlzng the basket weghts establshed through the steps n secton III and the basket returns calculated prevously, the ndex value Idx T s calculated as follows: Idx T = Idx T 1 [(PR EB T Wgt EB T 1 ) + (TR BB T Wgt BB T 1 ) + (Cash Ret Wgt Cash T 1 )] Cash Ret = One day return on US 3 Month LIBOR 8 FOR INSTITUTIONAL INVESTOR USE ONLY - NOT FOR PUBLIC DISTRIBUTION

9 Appendx Followng are formulas to clarfy some of the ntermttent steps n calculaton of the ndex. I. Index Consttuent Total Return The hstorcal volatlty used n determnng the basket weghts n the ndex s ultmately based on the ndvdual ndex component hstorcal volatlty whch s n turn based on ndex component total returns. In development of the ndex, component prces were ndexed based on total returns. a. TR T = IdxPx T IdxPx T 1 b. IdxPx T = Accum Dstr T + Px T c. Accum Dstr T = Accum Dstr T 1 ( Px T + Dstr T ) + Dstr T Px T 1 Px T = Prce of nstrument on day T Dstr T = Dstrbuton of component on (gong ex on) day T II. Shares of Index Consttuent The quantty of shares the consttuent has n the ndex. It s calculated by multplyng the weght of the ndex consttuent wthn the ndex by the ndex market captalzaton (market cap, or MC) and then dvdng by the applcable consttuent s prce. a. Shs T = (Wgt T IdxMC T 1 ) Px T 1 b. IdxMC T 1 = Idxlvl T 1 10,000 Idxlvl T 1 = Index level on day T 1 9 FOR INSTITUTIONAL INVESTOR USE ONLY - NOT FOR PUBLIC DISTRIBUTION

10 Ths nformaton should not be reled upon as nvestment advce, research, or a recommendaton by BlackRock regardng () the underlyng funds, () the use or sutablty of the BlackRock BLD Clara Index or () any securty n partcular. Ths materal s strctly for llustratve and educatonal purposes and should not be construed as a recommendaton to purchase or sell, or an offer to sell or a solctaton of an offer to buy any product or securty. There s no guarantee that any strateges utlzng the ndex wll be effectve. Mult-asset ndces and dversfcaton do not promse any level of performance or guarantee aganst loss of prncpal. The BlackRock BLD Clara Index s mantaned by BlackRock Index Servces, LLC (the Index Provder ), a subsdary of BlackRock, Inc. (together, BlackRock ) that desgns, sponsors and publshes ndces for use n portfolo benchmarkng and portfolo management. THE INDEX AND THE INDEX DATA ARE PROVIDED AS-IS AND AS AVAILABLE. BlackRock DOES NOT GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE Index OR ANY DATA RELATED THERETO OR ANY COMMUNICATION WITH RESPECT THERETO, INCLUDING, ORAL, WRITTEN, or ELECTRONIC COMMUNICATIONS. BlackRock SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. BlackRock MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, TITLE, NON-INFRINGEMENT, OR AS TO RESULTS TO BE OBTAINED FROM THE USE OF THE Index OR WITH RESPECT TO ANY DATA contaned theren or RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL BlackRock BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING, WITHOUT LIMITATION, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF BlackRock has BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE BlackRock. All rghts reserved. BLD, Clara, Shares and BLACKROCK are regstered trademarks of BlackRock. All other marks are the property of ther respectve owners. 10 FOR INSTITUTIONAL INVESTOR USE ONLY - NOT FOR PUBLIC DISTRIBUTION