iSHARES® iBONDS® ETFs

iBonds ETFs pass through the underlying bonds’ income each month and pay a final distribution of all the matured bonds, at which point the ETF will delist from the exchange. The income distributions can vary as bonds are added or removed at different yield levels; however, the final payment tends to offset any changes in income. As monthly income distributions increase, final NAV payouts tend to decrease and vice versa.

An iBonds ETF provides cash flows similar to a portfolio of bonds. Like a ladder there is some variability in cash flows, but investors can observe the approximate average YTM of the underlying bond portfolio at the time of purchase.

iBonds ETFs invest in bonds scheduled to mature throughout the calendar year starting January 1^st. For the investment grade, high yield, treasury and TIPS iBonds ETFs, 12-6 months prior to maturity, the proceeds from coupons and maturities will be reinvested back into index eligible bonds. Beginning 6 months prior to maturity, these proceeds will be invested into cash equivalents. For the municipal iBonds ETF franchise, transition to cash equivalents begins 12 months prior to maturity. The underlying bond maturity schedule for the different series are as follows:

Investors will receive the final net asset value per share, which includes the proceeds from bond maturities and any undistributed interest.

The distribution, as reflected on Form 1099s to be received by shareholders, may have the following classifications:

• Liquidation Distribution – one form of a return of capital that is not taxable to the investor, but each investor needs to determine their cost basis to verify if they had a capital gain or loss.
• Exempt-Interest Dividend – not subject to income tax as long as the ETF had more than 50% assets invested in municipal bond investments. Municipal iBonds have paid tax exempt-interest dividends since inception.*
• Taxable Interest Dividend – subject to income tax. This is the classification of distribution the Corporate iBonds have paid since inception.*

While iBonds are designed to provide a similar experience to holding an individual cash bond, several factors may impact NAV total return on annualized basis relative an investors’ initial net acquisition yield:

• Reinvestment Risk- as is the case for an individual bond’s yield to maturity, an investor’s net acquisition yield assumes all future cash flows will be reinvested at the same yield. When interest rates go down, monthly distributions may be reinvested at lower yields relative to the initial net acquisition yield, which can cause a drag on performance. In the final 6 months before maturity (final 12 months for Muni iBonds) as maturing bonds transition into cash equivalents, if cash yields are different relative to when the investor purchases the iBond, then reinvestment risk may impact total returns. In the case of rising interest rates, reinvestment risk may positively impact total returns.
• Credit events- the corporate and municipal iBonds suites track investment grade indices. If a bond is downgraded from investment grade to high yield, the security may be removed from the index and may correspondingly leave the portfolio. If the bond is removed at a lower price than it originally entered the portfolio, it may negatively impact the NAV of the fund and could affect net acquisition yield targets.
• Realized Inflation- investors who hold the TIPS iBonds ETFs to maturity can earn approximately the real yield (net of fees) at the time of purchase, plus realized inflation. Future levels of inflation are unpredictable, so its improbable to forecast total realized returns of the TIPS iBonds ETFs.