What is an ETF?

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What is an ETF?

Familiar ground…best of both worlds

Two great investment ideas brought together

Like a stock  Trading flexibility intraday on the exchange  Long or short  Options frequently available

Like a Mutual Fund

Stock

Like an index fund  Constructed to track benchmark indexes

Tradable during the day

 Low expense ratios  Low turnover

Diversified ETFs

What sets ETFs apart?  The creation / redemption process enables the unique benefits of ETFs such as liquid access and tax efficiency

Diversified funds that trade like stocks

With short sales, an investor faces the potential for unlimited losses as the security's price rises. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. Transactions in shares of the iShares Funds will result in brokerage commissions and will generate tax consequences. iShares Funds are obliged to distribute portfolio gains to shareholders. Diversification may not protect against market risk or loss of principal.

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The role of ETFs: uses and advantages

Exchange Traded Funds have become widely accepted investment vehicles and are used by both institutional and retail investors The ETF structure allows for efficient access to low-cost beta and other investment strategies

Typical applications of ETFs: Institutional Investors  Cash equitization  Low cost hedging tool  Expressing macro views

Key advantages of ETFs:

 Exposure to markets where investing institutions lack resources

 Trade daily on exchange  Intraday pricing  Transparent

Retail Investors

 Easy access

 Portfolio completion

 Diversified

 Asset allocation

 Can be more liquid than underlying assets

 Tactical investing among sectors

Diversification may not protect against market risk or loss of principal. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.

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Why do Financial Professionals use ETFs?

Return Return

Risk Risk Total Performance™

Costs (and Costs taxes) (and Taxes)

Seek to outperform other investments

Performance vs. active funds

Manage risk

Diversification Tradability and flexibility

Express a view

Spend less, save more

Cost effectiveness Tax efficiency

Transparency Past performance does not guarantee future results. Diversification may not protect against market risk. Transactions in shares of iShares funds may result in brokerage commissions.

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iShares ETFs and Mutual Funds: Key Differences

Criteria

iShares ETFs

Active Mutual Funds

Performance goal

Track a benchmark

Outperform a benchmark

Management

Passive

Active

Performance risks

 Performance may differ from benchmark.

 May not meet performance goal.

 Holdings not altered during rising / falling markets.

 May underperform due to manager’s holdings selection.

Buying / selling shares Intraday on exchanges

Once per day via fund company

Price to buy / sell

Current market price, which may differ from NAV

End-of-day NAV, less fees

Fees

Expense ratio + transaction / brokerage costs

Expense ratio + any sales loads / redemption fees

Tax impact1 of buyers / sellers

Shareholders only impacted by their own action

Shareholders may be impacted by all other shareholders’ actions

Holdings disclosure

Daily

Typically quarterly

* Both vehicles are obliged to distribute capital gains to all shareholders.

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Benefits of iShares ETFs

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Benefits of iShares ETFs

Transparency

 Investors can generally see the ETF composition at any given time

Liquidity

 ETFs offer two sources of liquidity 1. Traditional liquidity measured by secondary market trading volume 2. The liquidity of the underlying assets via the creation and redemption process

Diversification

 ETFs offer immediate exposure to a basket or group of securities for diversification through a single trade  Broad range of asset classes, including equities, bonds, commodities, investment themes, etc.

Flexibility

Costeffectiveness

Securities lending

 ETFs are listed on exchanges and can be traded at any time the market is open  Pricing is continuous throughout the day  ETFs offer a cost-effective route to diversified market exposure  Ability to estimate in advance the total cost of ownership using ETFs with far higher degree of certainty than with futures  ETFs are not subject to additional operational costs when managing risk, settlement and reporting that other derivative products require  ETF units and underlying assets can be lent out to potentially offset holding costs

There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. Diversification may not protect against market risk or loss. Buying and selling shares of iShares Funds will result in brokerage commissions. There is no guarantee that there will be borrower demand for shares of the iShares Funds, or that securities lending will generate any level of income. Distributions paid out of the Fund's net investment income, including income from securities lending, if any, are taxable to investors as ordinary income.

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Broker / Dealer primary ETF usage

AP/ETF desk

Sales trading / agency desks

Market making

Principal trading

Structured products

• Facilitate the C/R of ETF units by trading the underlying ETF basket and delivering to the ETF provider

• Recommend ETFs as a trade solution (e.g., other side of pair-trade, for quick tactical calls) and capture ETF trading flow

• Leverage proprietary capital, research and system resources to make profit by buying and selling ETFs intraday

• Take proprietary risk positions utilizing ETFs for specific exposures

• Develop customized and / or enhanced solutions for clients utilizing ETFs to leverage liquidity and enhance structured product flexibility

• Understand ETF trading and flows the consensus views in specific areas of the market

• Used to hedge inventory positions

• May also act on behalf of market makers who are not authorized to transact directly with the ETF provider

• Trade ETFs to take advantage of index arbitrage, volatility arbitrage or global macro events

• Use ETF as hedge for position

There can be no assurance that an active trading market for shares of an ETF will develop or be maintained.

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Familiar ground…best of both worlds Like a stock  Trading flexibility intraday on the exchange  Long or short  Options frequently available Like an index fund  Constructed to track benchmark indexes  Low expense ratios  Low turnover What sets ETFs apart?  The creation/redemption process distinguishes ETFs from mutual funds and closed-end funds  The creation/redemption process enables the unique benefits of ETFs such as liquid access and tax efficiency

With short sales, an investor faces the potential for unlimited losses as the security's price rises. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. Transactions in shares of the iShares Funds will result in brokerage commissions and will generate tax consequences. iShares Funds are obliged to distribute portfolio gains to shareholders.

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Different types of ETPs

Legal Structure Comments Open End Fund

Most common structure; may allow dividend re-investment, securities lending and optimization

Grantor Trust

Structure commonly used for concentrated, specialty exposures that don’t meet diversification requirements of open end funds

Unit Investment Trust

Early ETF structure; does not allow for portfolio optimization, securities lending or dividend re-investment

Underlying Assets Comments Index Securities

Securities held either as fully replicating index or optimized proxy

Swaps

Mostly used in levered or inverse funds and exotic exposures; also common in Europe

Futures

Futures contract or a basket of futures contracts held by the fund, most common for broad commodities

Physical Assets

Most common in metals ETPs

Notes

Exchange Traded Notes (ETNs) are debt obligations of the issuer to the holder

"ETP" (or exchange traded product) as referred to above means any portfolio exposure security that trades intraday on an exchange. ETPs include exchange traded funds (ETFs) registered with the SEC under the Investment Company Act of 1940 (open-end funds and unit investment trusts or UITs) and certain trusts, commodity pools and exchange traded notes (ETNs) registered with the SEC under the Securities Act of 1933.

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Mechanics of iShares ETFs

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How traditional mutual funds work

Buyers Mutual Fund

Stock Exchange

Sellers

Investors interact with the fund to buy or sell shares

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ETFs work differently than traditional mutual funds

Buyers Stock Exchange

Authorized participants

iShares

Sellers

Investors buy and sell on an exchange and are insulated from each other’s actions.

Authorized Participants are typically large institutional organizations, such as market makers, who are responsible for sourcing the underlying assets needed when creating units of an ETF/receiving underlying assets when redeeming units of an ETF.

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The innovative mechanism of iShares ETFs Creation and redemption

Cash

On Exchange ETF Liquidity

Two Sources of Liquidity

ETF

Market Maker / Authorized Participant1

Investor / Buyer

Brokerage Account

The creation / redemption process distinguishes ETFs from mutual funds and closed-end funds and enables the unique benefits of ETFs

Underlying Portfolio Liquidity

Deliver ETF Shares

In-kind delivery underlying portfolio basket2

iShares iShares ETFs

The creation / redemption process is the conductor of liquidity between ETFs and their underlying assets 1. Authorized Participants are typically large institutional organizations, such as market makers, who are responsible for sourcing the underlying assets needed when creating units of an ETF/receiving underlying assets when redeeming units of an ETF. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. 2. Must occur in creation/redemption unit standard sizes, generally in multiples of 50,000 shares.

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Key iShares ETF valuation terms Net Asset Value (NAV): End of day value for the fund  Based on previous day closing prices of underlying securities  Monitoring value of portfolio, used to assess long-term tracking error Indicative Optimized Portfolio Value (IOPV): Intraday, estimated value of the ETF’s underlying portfolio baskets  Based on recent trades and estimated value of securities  Does not include impact of transaction costs and risk estimates to acquire underlying securities Bid/Offer Price: Current value of ETF based on all public information  Based on best bid/ask spreads  Proxy for expected trade value because it includes estimates of transaction costs and risk of acquiring underlying securities

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Growth of Exchange Traded Funds (ETFs)

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Growth of exchange traded funds in the US Increasing adoption of exchange traded products (ETPs)1 2,500.00

10-year CAGR for US ETP assets is 24%2

$2,009 $1,701

2,000.00 $1,350

1,500.00 $1,012

$1,061

$789

1,000.00 $619

$542

$433

500.00 $70

$87

$106

$157

2001

2002

2003

$236

$311

2000

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Source: BlackRock, Bloomberg as of 12/31/14

iShares ETP AUM

Others

Notable statistics3  US ETP AUM has risen from $70.6 billion in 2000 to $2 trillion in 2014. US ETPs had ~$124 billion of inflows in 2014  iShares is the largest ETP provider in the US, with $763 billion of the $2 trillion in 2014, representing a 38% market share  ETFs represented ~25% of U.S. daily equity trading volume in 20143 1.

2.

3.

"ETP" (or exchange traded product) as referred to above means any portfolio exposure security that trades intraday on a US exchange. ETPs include exchange traded funds (ETFs) registered with the SEC under the Investment Company Act of 1940 (open-end funds and unit investment trusts or UITs) and certain trusts, commodity pools and exchange traded notes (ETNs) registered with the SEC under the Securities Act of 1933. Statistics as of 12/31/14 unless otherwise noted. 10-year CAGR as of December 31, 2014. ETP flows and assets are sourced using shares outstanding and net asset values from Bloomberg. Inflows for years prior to 2010 are sourced from Strategic Insights Simfund. Asset classifications are assigned by the BlackRock based on product definitions from provider websites and product prospectuses. Other static product information is obtained from provider websites , product prospectuses, provider press. The 10-year CAGR for Equity and Fixed Income ETPs are calculated by BlackRock. Source: NYSE Arcavision.

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Growth of exchange traded funds in the US Increasing adoption of exchange traded products (ETPs)1 $2,009

$2,500

$1,701

10-year CAGR for US ETP assets is 24%2 • 22% for Equity ETPs2

$2,000

AUM ($B)

• 43% for Fixed Income

$1,350

ETPs2 $1,012

$1,500

$1,061

$789

$1,000

$619 $542 $433

$500

$236 $70

$87

$106

2000

2001

2002

$311

$157

$2003

2004

2005 2006 2007 2008 2009 Equity Fixed Income Other

2010

2011

2012

2013

2014

Source: BlackRock, Bloomberg, ICI as of 12/31/14. “Other” category includes alternatives, commodities, currency, target date, asset allocation, and fund of funds.

Notable statistics3  US ETP AUM has risen from $70.6 billion in 2000 to $2 trillion in 2014. US ETPs had ~$124 billion of inflows in 2014  iShares is the largest ETP provider in the US, with $763 billion of the $2 trillion in 2014, representing a 38% market share  ETFs represented ~25% of U.S. daily equity trading volume in 20143 1.

2.

3.

"ETP" (or exchange traded product) as referred to above means any portfolio exposure security that trades intraday on a US exchange. ETPs include exchange traded funds (ETFs) registered with the SEC under the Investment Company Act of 1940 (open-end funds and unit investment trusts or UITs) and certain trusts, commodity pools and exchange traded notes (ETNs) registered with the SEC under the Securities Act of 1933. Statistics as of 12/31/14 unless otherwise noted. 10-year CAGR as of December 31, 2014. ETP flows and assets are sourced using shares outstanding and net asset values from Bloomberg. Inflows for years prior to 2010 are sourced from Strategic Insights Simfund. Asset classifications are assigned by the BlackRock based on product definitions from provider websites and product prospectuses. Other static product information is obtained from provider websites , product prospectuses, provider press. The 10-year CAGR for Equity and Fixed Income ETPs are calculated by BlackRock. Source: NYSE Arcavision.

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Growth has been steady in both ETFs and mutual funds  Since 2000, cumulative asset flow into US ETFs has been less than half that of traditional open-end mutual funds  A notable difference in the growth patterns is the negative flows in mutual fund assets during the financial crisis and a slight increase in ETFs – likely due to: • ETF liquidity in difficult-to-trade markets • Intraday trading of ETFs, which allows investors to react in real time • Ability to short ETFs

Cumulative Net Asset Flow Net Asset Flow ($bn)

$4,000,000 $3,381,878

$3,500,000 $3,000,000 $2,500,000 $2,000,000

$1,442,089

$1,500,000 $1,000,000 $500,000

US Mutual Funds

Jul-14

Jan-14

Jul-13

Jan-13

Jul-12

Jan-12

Jul-11

Jan-11

Jul-10

Jan-10

Jul-09

Jan-09

Jul-08

Jan-08

Jul-07

Jan-07

Jul-06

Jan-06

Jul-05

Jan-05

Jul-04

Jan-04

Jul-03

Jan-03

Jul-02

Jan-02

Jul-01

Jan-01

Jul-00

Jan-00

$0

US ETFs

There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. With short sales, an investor faces the potential for unlimited losses as the security’s price rises. January 200 to July 2014 Source: Morningstar, BlackRock as of July 31, 2014. Universe includes existing and closed US-domiciled, USD-denominated funds.

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ETF growth has outpaced indexed mutual funds  Comparing the growth in ETF net asset flow to indexed open-end mutual funds shows a very different story

Cumulative Net Asset Flow $1,600,000 $1,442,089

Net Asset Flow ($bn)

$1,400,000 $1,200,000 $1,000,000

$941,893

$800,000 $600,000 $400,000 $200,000

Indexed Mutual Funds

Jul-14

Jan-14

Jul-13

Jan-13

Jul-12

Jan-12

Jul-11

Jan-11

Jul-10

Jan-10

Jul-09

Jan-09

Jul-08

Jan-08

Jul-07

Jan-07

Jul-06

Jan-06

Jul-05

Jan-05

Jul-04

Jan-04

Jul-03

Jan-03

Jul-02

Jan-02

Jul-01

Jan-01

Jul-00

Jan-00

$0

US ETFs

January 200 to July 2014 Source: Morningstar, BlackRock as of July 31, 2014. Universe includes existing and closed US domiciled, USD denominated funds classified as “Indexed” by Morningstar (some ETFs are not in this category). ETF data excludes funds classified as “Actively Managed.”

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Growth of Fixed Income ETFs

US Fixed Income ETF AUM is Over $270B 300

Total AUM ($B)

International/EM

Assets have climbed 380% since 2008 as investor adoption has increased and existing users have broadened their usage

250

Municipals Mortgage

200

High Yield 150

Investment Grade Credit Govt/Credit

100

Inflation-Linked Government

50

Aggregate 0 2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

Jun-14

Other

 Fixed income ETF usage has grown significantly, solving many challenges of trading in the OTC market  Growth in fund size, breadth of bond market exposures, and liquidity have continued to drive increased adoption of ETFs  A wide cross section of investors, such as endowments and foundations, asset managers, insurance companies, and pension funds are now pioneering new investment approaches using ETFs

Source: BlackRock and Bloomberg as of 6/30/14.

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