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AUGUST 31, 2022 |
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2022 Annual Report
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iShares, Inc.
· iShares MSCI Russia ETF | ERUS |
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Annual Report: |
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Financial Statements |
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iShares, Inc.
Global Market Overview
Global equity markets declined in U.S. dollar terms during the 12 months ended August 31, 2022 (“reporting period”). The MSCI ACWI, a broad global equity index that includes both developed and emerging markets, returned -15.88% in U.S. dollar terms for the reporting period.
For the first third of the reporting period, economic recovery supported stocks in most regions of the world. The global economy continued to rebound from the impact of restrictions imposed at the beginning of the coronavirus pandemic, as mitigation and adaptation allowed most economic activity to continue. However, substantial challenges emerged at the beginning of 2022 which negatively affected stock prices. Inflation rose significantly in many countries, reducing consumers’ purchasing power and leading many central banks to tighten monetary policy. Russia’s invasion of Ukraine presented a further challenge to the global economy, disrupting important commodities markets.
The U.S. economy grew briskly over the final half of 2021, powered primarily by consumer spending. Record-high personal savings rates allowed consumers to spend at an elevated level, releasing pent-up demand for goods and services. Growth subsequently stalled in the first half of 2022, and the economy contracted amid lower inventories and faltering business investment. Despite the economic downturn, unemployment declined substantially, falling to 3.7% in August 2022 while the number of long-term unemployed dropped below the pre-pandemic level. Although high inflation negatively impacted consumer sentiment, which declined significantly, consumer spending continued to grow.
Rising inflation led to a shift in policy from the U.S. Federal Reserve (“the Fed”). As the reporting period began, the Fed was using accommodative monetary policy to stimulate the economy. Short-term interest rates were kept at near-zero levels, and the Fed used bond-buying programs to stabilize debt markets. However, rising prices led the Fed to tighten monetary policy during the reporting period in an attempt to prevent runaway inflation. The Fed slowed and then ended its bond-buying activities, finally reversing course as it began to reduce its balance sheet in June 2022. In March 2022, the Fed began to raise short-term interest rates, followed by three more increases for a total increase of 225 basis points, the most rapid rise in decades. Interest rates rose significantly in response, leading to higher borrowing costs for businesses. In that environment, the U.S. dollar significantly appreciated relative to most foreign currencies.
Stocks declined in Europe in U.S. dollar terms as economic growth stalled and the euro declined sharply relative to the U.S. dollar. Significantly higher inflation and Russia’s invasion of Ukraine negatively impacted equities. Russia is an important trading partner with many European countries, and new sanctions imposed limits on certain types of trade with Russia. Investors became concerned that the sharp rise in energy prices during the reporting period would constrain economic growth, as Europe relies on imported energy for much of its industrial and heating needs. The European Central Bank (“ECB”) responded to elevated inflation by raising interest rates in July 2022, the first such increase in over a decade.
Despite relatively low inflation by global standards, Asia-Pacific stocks declined significantly in U.S. dollar terms. Chinese stocks faced significant headwinds amid regulatory interventions by the Chinese government and strict lockdowns following COVID-19 outbreaks. Japanese stocks also declined amid an economic contraction in the first quarter of 2022 and a sharp decline in the Japanese yen relative to the U.S. dollar. Emerging market stocks declined substantially, as higher interest rates and a strengthening U.S. dollar raised the cost of borrowing in many emerging economies.
M A R K E T O V E R V I E W |
3 |
Fund Summary as of August 31, 2022 | iShares® MSCI Russia ETF |
Investment Objective
The iShares MSCI Russia ETF (the “Fund”) seeks to track the investment results of an index composed of Russian equities, as represented by the MSCI Russia 25/50 Index (the “Index”). Effective June 1, 2022, the index was discontinued by the index provider, MSCI, Inc. Due to the discontinuation of the Fund’s underlying index and ongoing restrictions relating to Russian securities, the Fund will be unable to meet its investment objective. The Fund is in the process of liquidating its assets and winding up its business pursuant to a plan of liquidation.
Performance
Average Annual Total Returns | Cumulative Total Returns | |||||||||||||||||||||||||||
1 Year | 5 Years | 10 Years | 1 Year | 5 Years | 10 Years | |||||||||||||||||||||||
Fund NAV |
(99.85 | )% | (69.46 | )% | (45.36 | )% | (99.85 | )% | (99.73 | )% | (99.76 | )% | ||||||||||||||||
Fund Market(a) |
(81.42 | ) | (22.27 | ) | (12.32 | ) | (81.42 | ) | (67.86 | ) | (71.34 | ) | ||||||||||||||||
Index(b) |
(99.99 | ) | (91.92 | ) | (71.67 | ) | (99.99 | ) | (99.99 | ) | (99.99 | ) |
GROWTH OF $10,000 INVESTMENT
(AT NET ASSET VALUE)
(a) |
Effective March 4, 2022, the NYSE Arca, Inc. halted trading of the Fund and the Fund Market returns are as follows: 1 Year return, 5 Years return, and 10 Years return from September 1, 2021, September 1, 2017, and September 1, 2012, respectively through March 4, 2022. |
(b) |
Effective June 1, 2022, the Index was discontinued by the index provider, MSCI, Inc and the Index returns are as follows: 1 Year return, 5 Years return, and 10 Years return from September 1, 2021, September 1, 2017, and September 1, 2012, respectively through May 31, 2022. |
(c) |
Rounds to less than $1. |
Past performance is not an indication of future results. Performance results do not reflect the deduction of taxes that a shareholder would pay on fund distributions or on the redemption or sale of fund shares. See “About Fund Performance” for more information.
Expense Example
Actual | Hypothetical 5% Return | |||||||||||||||||||||||||||||||
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Beginning Account Value (03/01/22) |
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Ending Account Value (08/31/22) |
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Expenses Paid During the Period |
(a) |
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Beginning Account Value (03/01/22) |
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Ending Account Value (08/31/22) |
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Expenses Paid During the Period |
(a) |
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Annualized Expense Ratio |
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$ 1,000.00 | $ 8.70 | $ 0.00 | $ 1,000.00 | $ 1,025.20 | $ 0.00 | 0.00 | % |
(a) |
Expenses are equal to the annualized expense ratio, multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period shown). Other fees, such as brokerage commissions and other fees to financial intermediaries, may be paid which are not reflected in the tables and examples above. See “Disclosure of Expenses” for more information. Effective March 3, 2022, BlackRock Fund Advisors (“BFA”) implemented a voluntary waiver of its investment advisory fee for the Fund which was applied to management fees starting with February 1, 2022. |
4 |
2 0 2 2 I S H A R E S A N N U A L R E P O R T T O S H A R E H O L D E R S |
Fund Summary as of August 31, 2022 (continued) | iShares® MSCI Russia ETF |
Portfolio Management Commentary
The Index lost nearly all of its value in the wake of the international community’s response to Russia’s invasion of Ukraine. The invasion of Ukraine led many countries, particularly members of the North American Treaty Alliance (“NATO”), to impose heavy sanctions against Russian institutions, companies, individuals, and products, including gold and luxury goods. Many international companies subsequently suspended or ended operations in Russia. Select Russian banks were banned from a key international payments and settlements system and Russia’s overseas assets were frozen, including $630 billion in foreign currency reserves held by central banks. The U.S., the world’s largest exporter of oil and second largest exporter of natural gas, banned all Russian energy imports, whereas the E.U., which imports 40% of its natural gas from Russia, announced incremental moves away from its dependence on Russian energy. Sanctions substantially altered Russia’s economic structure, and the country’s economy fell into a deep recession.
The wide range of sanctions and other capital controls prevented BlackRock and other non-Russian investors from buying and selling Russian securities. On March 1, 2022, BlackRock suspended the creation of new shares for the Fund, while the NYSE Arca, Inc. halted trading on the Fund on March 4, 2022. After receiving Board and regulatory approval for liquidating the Fund, BlackRock began the liquidation process on August 17, 2022, by distributing a portion of the Fund’s current liquid assets to shareholders, less anticipated transaction costs. Refer to Notes to Financial Statements for additional information about the plan of liquidation.
Portfolio Information
TEN LARGEST HOLDINGS |
| |||
Security |
Percent of Net Assets |
|||
BlackRock Cash Funds: Treasury, SL Agency Shares |
88.7 | % | ||
Inter RAO UES PJSC |
4.6 | |||
Gazprom PJSC |
0.8 | |||
Surgutneftegas PJSC |
0.7 | |||
Surgutneftegas PJSC(Preferred) |
0.7 | |||
Sberbank of Russia PJSC |
0.6 | |||
VTB Bank PJSC |
0.3 | |||
Alrosa PJSC |
0.3 | |||
United Co. RUSAL International PJSC |
0.2 | |||
Moscow Exchange MICEX-RTS PJSC |
0.2 |
F U N D S U M M A R Y |
5 |
Past performance is not an indication of future results. Financial markets have experienced extreme volatility and trading in many instruments has been disrupted. These circumstances may continue for an extended period of time and may continue to affect adversely the value and liquidity of the Fund’s investments. As a result, current performance may be lower or higher than the performance data quoted. Performance data current to the most recent month-end is available at iShares.com. 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. Beginning August 10, 2020, the price used to calculate market return (“Market Price”) is the closing price. Prior to August 10, 2020, Market Price was determined using the midpoint between the highest bid and the lowest ask 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. Market and NAV returns assume that dividends and capital gain distributions have been reinvested at Market Price and NAV, respectively. The NYSE ARCA, Inc. halted trading of the Fund effective March 4, 2022, and delisted the Fund effective August 29, 2022.
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. Effective June 1, 2022, the index was discontinued by the index provider, MSCI, Inc.
Shareholders of the Fund may incur the following charges: (1) transactional expenses, including brokerage commissions on purchases and sales of fund shares and (2) ongoing expenses, including management fees and other fund expenses. The expense example shown (which is based on a hypothetical investment of $1,000 invested at the beginning of the period and held through the end of the period) is intended to assist shareholders both in calculating expenses based on an investment in the Fund and in comparing these expenses with similar costs of investing in other funds.
The expense example provides information about actual account values and actual expenses. Annualized expense ratios reflect contractual and voluntary fee waivers, if any. In order to estimate the expenses a shareholder paid during the period covered by this report, shareholders can divide their account value by $1,000 and then multiply the result by the number under the heading entitled “Expenses Paid During the Period.”
The expense example also provides information about hypothetical account values and hypothetical expenses based on a fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses. In order to assist shareholders in comparing the ongoing expenses of investing in the Fund and other funds, compare the 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds.
The expenses shown in the expense example are intended to highlight shareholders’ ongoing costs only and do not reflect any transactional expenses, such as brokerage commissions and other fees paid on purchases and sales of fund shares. Therefore, the hypothetical example is useful in comparing ongoing expenses only and will not help shareholders determine the relative total expenses of owning different funds. If these transactional expenses were included, shareholder expenses would have been higher.
6 |
2 0 2 2 I S H A R E S A N N U A L R E P O R T T O S H A R E H O L D E R S |
August 31, 2022 |
iShares® MSCI Russia ETF (Percentages shown are based on Net Assets) |
Security | Shares | Value | ||||||
Common Stocks |
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Banks — 0.9% | ||||||||
Sberbank of Russia PJSC(a)(b) |
18,835,860 | $ | 3,088 | |||||
TCS Group Holding PLC, GDR(a)(b) |
289,152 | 47 | ||||||
VTB Bank PJSC(a) |
8,307,845,016 | 1,362 | ||||||
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4,497 | ||||||||
Capital Markets — 0.2% | ||||||||
Moscow Exchange MICEX-RTS PJSC(a)(b) |
4,737,800 | 777 | ||||||
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Chemicals — 0.0% | ||||||||
PhosAgro PJSC(a) |
148,802 | 24 | ||||||
PhosAgro PJSC, New(a) |
2,875 | 29 | ||||||
PhosAgro PJSC, GDR(a) |
2 | — | ||||||
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53 | ||||||||
Electric Utilities — 4.6% | ||||||||
Inter RAO UES PJSC(a) |
136,938,300 | 22,449 | ||||||
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Food & Staples Retailing — 0.0% | ||||||||
Magnit PJSC, GDR(a) |
1 | — | ||||||
Magnit PJSC(a) |
198,139 | 33 | ||||||
X5 Retail Group NV, GDR(a) |
374,475 | 61 | ||||||
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94 | ||||||||
Interactive Media & Services — 0.0% | ||||||||
VK Co. Ltd.(a)(b) |
393,252 | 65 | ||||||
Yandex NV(a)(b) |
361,376 | 59 | ||||||
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124 | ||||||||
Internet & Direct Marketing Retail — 0.0% | ||||||||
Ozon Holdings PLC, ADR(a)(b) |
106,824 | 17 | ||||||
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Metals & Mining — 0.7% | ||||||||
Alrosa PJSC(a) |
7,486,250 | 1,227 | ||||||
MMC Norilsk Nickel PJSC(a) |
96,437 | 16 | ||||||
Novolipetsk Steel PJSC(a) |
4,388,590 | 719 | ||||||
Polymetal International PLC(a) |
834,056 | 137 | ||||||
Polyus PJSC(a) |
89,129 | 14 | ||||||
Severstal PAO(a) |
604,068 | 99 | ||||||
United Co. RUSAL International PJSC(a)(b) |
5,811,330 | 953 | ||||||
|
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3,165 | ||||||||
Oil, Gas & Consumable Fuels — 1.9% | ||||||||
Gazprom PJSC(a)(b) |
24,553,290 | 4,025 |
Security | Shares | Value | ||||||
Oil, Gas & Consumable Fuels (continued) | ||||||||
LUKOIL PJSC(a) |
856,438 | $ | 140 | |||||
Novatek PJSC(a) |
1,250,860 | 205 | ||||||
Rosneft Oil Co. PJSC(a) |
2,566,222 | 421 | ||||||
Surgutneftegas PJSC(a) |
21,799,946 | 3,574 | ||||||
Tatneft PJSC(a) |
3,516,781 | 577 | ||||||
|
|
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8,942 | ||||||||
Wireless Telecommunication Services — 0.1% | ||||||||
Mobile TeleSystems PJSC(a) |
2,776,444 | 455 | ||||||
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Total
Common Stocks — 8.4% |
|
40,573 | ||||||
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Preferred Stocks |
||||||||
Oil, Gas & Consumable Fuels — 0.7% | ||||||||
Surgutneftegas PJSC, Preference Shares, NVS(a) |
21,745,700 | 3,565 | ||||||
|
|
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Total
Preferred Stocks — 0.7% |
3,565 | |||||||
|
|
|||||||
Total
Long-Term Investments — 9.1% |
|
44,138 | ||||||
|
|
|||||||
Short-Term Securities |
||||||||
Money Market Funds — 88.7% | ||||||||
BlackRock Cash Funds: Treasury, SL Agency Shares, 2.07%(c)(d) |
430,000 | 430,000 | ||||||
|
|
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Total
Short-Term Securities — 88.7% |
430,000 | |||||||
|
|
|||||||
Total
Investments in Securities — 97.8% |
474,138 | |||||||
Other Assets Less Liabilities — 2.2% |
10,833 | |||||||
|
|
|||||||
Net Assets — 100.0% |
$ | 484,971 | ||||||
|
|
(a) |
Security is valued using significant unobservable inputs and is classified as Level 3 in the fair value hierarchy. |
(b) |
Non-income producing security. |
(c) |
Affiliate of the Fund. |
(d) |
Annualized 7-day yield as of period end. |
Affiliates
Investments in issuers considered to be affiliate(s) of the Fund during the year ended August 31, 2022 for purposes of Section 2(a)(3) of the Investment Company Act of 1940, as amended, were as follows:
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Affiliated Issuer |
Value at 08/31/21 |
Purchases at Cost |
Proceeds from Sale |
Net Realized Gain (Loss) |
Change in Unrealized Appreciation (Depreciation) |
Value at 08/31/22 |
Shares Held at 08/31/22 |
Income |
Capital Gain Distributions from Underlying Funds |
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BlackRock Cash Funds: Treasury, SL Agency Shares |
$ | 970,000 | $ | — | $ | (540,000 | )(e) | $ | — | $ | — | $ | 430,000 | 430,000 | $ | 4,361 | $ | — | ||||||||||||||||||
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(e) |
Represents net amount purchased (sold). |
S C H E D U L E O F I N V E S T M E N T S |
7 |
Schedule of Investments (continued) August 31, 2022 |
iShares® MSCI Russia ETF |
Derivative Financial Instruments Categorized by Risk Exposure
For the period ended August 31, 2022, the effect of derivative financial instruments in the Statement of Operations was as follows:
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Commodity Contracts |
Credit Contracts |
Equity Contracts |
Foreign Currency Exchange Contracts |
Interest Rate Contracts |
Other Contracts |
Total | ||||||||||||||||||||||
|
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Net Realized Gain (Loss) from |
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Futures contracts |
$ | — | $ | — | $ | (161,867 | ) | $ | — | $ | — | $ | — | $ | (161,867 | ) | ||||||||||||
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Net Change in Unrealized Appreciation (Depreciation) on |
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Futures contracts |
$ | — | $ | — | $ | 2,046 | $ | — | $ | — | $ | — | $ | 2,046 | ||||||||||||||
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Average Quarterly Balances of Outstanding Derivative Financial Instruments
|
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Futures contracts |
||||
Average notional value of contracts — long |
$ | 444,045 | ||
|
For more information about the Fund’s investment risks regarding derivative financial instruments, refer to the Notes to Financial Statements.
Fair Value Hierarchy as of Period End
Various inputs are used in determining the fair value of financial instruments. For a description of the input levels and information about the Fund’s policy regarding valuation of financial instruments, refer to the Notes to Financial Statements.
The following table summarizes the Fund’s financial instruments categorized in the fair value hierarchy. The breakdown of the Fund’s financial instruments into major categories is disclosed in the Schedule of Investments above.
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Level 1 | Level 2 | Level 3 | Total | |||||||||||||
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Investments |
||||||||||||||||
Assets |
||||||||||||||||
Common Stocks |
$ | — | $ | — | $ | 40,573 | $ | 40,573 | ||||||||
Preferred Stocks |
— | — | 3,565 | 3,565 | ||||||||||||
Money Market Funds |
430,000 | — | — | 430,000 | ||||||||||||
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|
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$ | 430,000 | $ | — | $ | 44,138 | $ | 474,138 | |||||||||
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|
A reconciliation of Level 3 financial instruments is presented when the Fund had a significant amount of Level 3 investments and derivative financial instruments at the beginning and/or end of the year in relation to net assets. The following table is a reconciliation of Level 3 investments for which significant unobservable inputs were used in determining fair value:
|
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Common Stocks |
Preferred Stocks |
Total | ||||||||||
|
||||||||||||
Assets: |
||||||||||||
Opening balance, as of August 31, 2021 |
$ | — | $ | — | $ | — | ||||||
Transfers into Level 3(a) |
525,814,204 | 11,100,930 | 536,915,134 | |||||||||
Transfers out of Level 3 |
— | — | — | |||||||||
Accrued discounts/premiums |
— | — | — | |||||||||
Net realized gain (loss) |
(1,077,438 | ) | (61,247 | ) | (1,138,685 | ) | ||||||
Net change in unrealized appreciation (depreciation)(b)(c) |
(581,094,125 | ) | (11,384,383 | ) | (592,478,508 | ) | ||||||
Purchases |
94,873,013 | 586,462 | 95,459,475 | |||||||||
Sales |
(38,475,081 | ) | (238,197 | ) | (38,713,278 | ) | ||||||
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Closing balance, as of August 31, 2022 |
$ | 40,573 | $ | 3,565 | $ | 44,138 | ||||||
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Net change in unrealized appreciation (depreciation) on investment still held at August 31, 2022 |
$ | (581,094,125 | ) | $ | (11,384,383 | ) | $ | (592,478,508 | ) | |||
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(a) |
As of August 31, 2021, local Russian equities were valued using a Systematic Fair Value Price, which resulted in these investments being classified as level 2. Additionally, as of August 31, 2021, Russian exposed ADR and GDR securities were valued using the exchange close price which resulted in these investments being classified as level 1. During the year, the Valuation Committee determined that the local Russian equities and Russian exposed ADR and GDR securities did not have a market for which the Fund could transact and deemed them illiquid. As of August 31, 2022, the securities are being fair valued at a nominal value using a discount rate of 99% or higher due to illiquidity and uncertainty measures which resulted in a transfer to level 3. |
(b) |
Included in the related net change in unrealized appreciation (depreciation) in the Statement of Operations. |
(c) |
Any difference between net change in unrealized appreciation (depreciation) and net change in unrealized appreciation (depreciation) on investments still held at August 31, 2022 is generally due to investments no longer held or categorized as Level 3 at period end. |
See notes to financial statements.
8 |
2 0 2 2 I S H A R E S A N N U A L R E P O R T T O S H A R E H O L D E R S |
Statement of Assets and Liabilities
August 31, 2022
iShares MSCI Russia ETF |
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|
||||
ASSETS |
| |||
Investments, at value — unaffiliated(a) |
$ | 44,138 | ||
Investments, at value — affiliated(b) |
430,000 | |||
Cash |
9,440 | |||
Foreign currency, at value(c) |
247 | |||
Receivables: |
||||
Dividends — affiliated |
1,146 | |||
|
|
|||
Total assets |
484,971 | |||
|
|
|||
NET ASSETS |
$ | 484,971 | ||
|
|
|||
NET ASSETS CONSIST OF |
||||
Paid-in capital |
$ | 615,262,124 | ||
Accumulated loss |
(614,777,153 | ) | ||
|
|
|||
NET ASSETS |
$ | 484,971 | ||
|
|
|||
NET ASSET VALUE |
||||
Shares outstanding |
13,750,000 | |||
|
|
|||
Net asset value |
$ | 0.04 | ||
|
|
|||
Shares authorized |
1 billion | |||
|
|
|||
Par value |
$ | 0.001 | ||
|
|
|||
(a) Investments, at cost — unaffiliated |
$ | 465,451,576 | ||
(b) Investments, at cost — affiliated |
$ | 430,000 | ||
(c) Foreign currency, at cost |
$ | 250 |
See notes to financial statements.
F I N A N C I A L S T A T E M E N T S |
9 |
Year Ended August 31, 2022
iShares MSCI Russia ETF |
||||
|
||||
INVESTMENT INCOME |
||||
Dividends — unaffiliated |
$ | 14,523,741 | ||
Dividends — affiliated |
4,361 | |||
Foreign taxes withheld |
(1,548,340 | ) | ||
|
|
|||
Total investment income |
12,979,762 | |||
|
|
|||
EXPENSES |
||||
Investment advisory fees |
1,652,948 | |||
Commitment fees |
2,777 | |||
Professional fees |
217 | |||
|
|
|||
Total expenses |
1,655,942 | |||
Less: |
||||
Investment advisory fees waived |
(221,404 | ) | ||
|
|
|||
Total expenses after fees waived |
1,434,538 | |||
|
|
|||
Net investment income |
11,545,224 | |||
|
|
|||
REALIZED AND UNREALIZED GAIN (LOSS) |
||||
Net realized gain (loss) from: |
||||
Investments — unaffiliated |
(954,200 | ) | ||
Futures contracts |
(161,867 | ) | ||
Foreign currency transactions |
(107,161 | ) | ||
|
|
|||
(1,223,228 | ) | |||
|
|
|||
Net change in unrealized appreciation (depreciation) on: |
||||
Investments — unaffiliated |
(606,317,001 | ) | ||
Futures contracts |
2,046 | |||
Foreign currency translations |
787 | |||
|
|
|||
(606,314,168 | ) | |||
|
|
|||
Net realized and unrealized loss |
(607,537,396 | ) | ||
|
|
|||
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS |
$ | (595,992,172 | ) | |
|
|
See notes to financial statements.
10 |
2 0 2 2 I S H A R E S A N N U A L R E P O R T T O S H A R E H O L D E R S |
Statements of Changes in Net Assets
iShares MSCI Russia ETF |
||||||||
|
|
|||||||
Year Ended 08/31/22 |
Year Ended 08/31/21 |
|||||||
|
||||||||
INCREASE (DECREASE) IN NET ASSETS |
||||||||
OPERATIONS |
||||||||
Net investment income |
$ | 11,545,224 | $ | 25,976,989 | ||||
Net realized loss |
(1,223,228 | ) | (4,659,173 | ) | ||||
Net change in unrealized appreciation (depreciation) |
(606,314,168 | ) | 133,025,100 | |||||
|
|
|
|
|||||
Net increase (decrease) in net assets resulting from operations |
(595,992,172 | ) | 154,342,916 | |||||
|
|
|
|
|||||
DISTRIBUTIONS TO SHAREHOLDERS(a) |
||||||||
From net investment income |
(22,039,990 | ) | (23,598,232 | ) | ||||
Liquidating distribution |
(450,000 | ) | — | |||||
|
|
|
|
|||||
Decrease in net assets resulting from distributions to shareholders |
(22,489,990 | ) | (23,598,232 | ) | ||||
|
|
|
|
|||||
CAPITAL SHARE TRANSACTIONS |
||||||||
Net increase (decrease) in net assets derived from capital share transactions |
32,469,779 | (11,450,216 | ) | |||||
|
|
|
|
|||||
NET ASSETS |
||||||||
Total increase (decrease) in net assets |
(586,012,383 | ) | 119,294,468 | |||||
Beginning of year |
586,497,354 | 467,202,886 | ||||||
|
|
|
|
|||||
End of year |
$ | 484,971 | $ | 586,497,354 | ||||
|
|
|
|
(a) |
Distributions for annual periods determined in accordance with U.S. federal income tax regulations. |
See notes to financial statements.
F I N A N C I A L S T A T E M E N T S |
11 |
Year Ended August 31, 2022
iShares MSCI Russia ETF |
||||||
|
||||||
CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES |
||||||
Net decrease in net assets resulting from operations |
|
$ | (595,992,172 | ) | ||
Adjustments to reconcile net decrease in net assets resulting from operations to net cash provided by operating activities: |
||||||
Proceeds from sales of long-term investments(a) |
42,214,850 | |||||
Purchases of long term investments(a) |
(48,835,714 | ) | ||||
Net proceeds from sales of short-term securities |
540,000 | |||||
Net realized (gain) loss on investments |
954,200 | |||||
Net change in unrealized (appreciation) depreciation on investments |
606,317,001 | |||||
(Increase) decrease in assets: |
||||||
Receivables: |
||||||
Dividends — unaffiliated |
21,123 | |||||
Dividends — affiliated |
(1,140 | ) | ||||
Variation margin on futures contracts |
12,350 | |||||
Increase (decrease) in liabilities: |
||||||
Payables: |
||||||
Investment advisory fees |
(279,278 | ) | ||||
|
|
|||||
Net cash provided by operating activities |
4,951,220 | |||||
|
|
|||||
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES |
||||||
Cash dividends paid to shareholders |
(22,489,990 | ) | ||||
Proceeds from issuance of capital shares(a) |
17,493,520 | |||||
|
|
|||||
Net cash used for financing activities |
(4,996,470 | ) | ||||
|
|
|||||
CASH AND FOREIGN CURRENCY |
||||||
Net decrease in restricted and unrestricted cash and foreign currency |
$ | (45,250 | ) | |||
Restricted and unrestricted cash at beginning of year |
54,937 | |||||
|
|
|||||
Restricted and unrestricted cash and foreign currency at end of year |
$ | 9,687 | ||||
|
|
|||||
RECONCILIATION OF RESTRICTED AND UNRESTRICTED CASH AND FOREIGN CURRENCY AT THE END OF YEAR TO THE STATEMENT OF ASSETS AND LIABILITIES | ||||||
Cash |
$ | 9,440 | ||||
Foreign currency, at value |
247 | |||||
|
|
|||||
$ | 9,687 | |||||
|
|
(a) |
Excludes in-kind transactions, if any. |
See notes to financial statements.
12 |
2 0 2 2 I S H A R E S A N N U A L R E P O R T T O S H A R E H O L D E R S |
(For a share outstanding throughout each period)
iShares MSCI Russia ETF | ||||||||||||||||||||||||||||||||||||||
|
|
|||||||||||||||||||||||||||||||||||||
Year Ended 08/31/22 |
Year Ended 08/31/21 |
Year Ended 08/31/20 |
Year Ended 08/31/19 |
Year Ended 08/31/18 |
||||||||||||||||||||||||||||||||||
|
||||||||||||||||||||||||||||||||||||||
Net asset value, beginning of year |
$ | 45.29 | $ | 34.87 | $ | 37.81 | $ | 32.47 | $ | 32.13 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Net investment income(a) |
0.86 | 2.05 | 1.87 | 2.33 | 1.21 | |||||||||||||||||||||||||||||||||
Net realized and unrealized gain (loss)(b) |
(44.38 | ) | 10.24 | (1.99 | ) | 5.04 | 0.22 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Net increase (decrease) from investment operations |
(43.52 | ) | 12.29 | (0.12 | ) | 7.37 | 1.43 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Distributions(c) |
||||||||||||||||||||||||||||||||||||||
From net investment income |
(1.70 | ) | (1.87 | ) | (2.82 | ) | (2.03 | ) | (1.09 | ) | ||||||||||||||||||||||||||||
Liquidating distribution |
(0.03 | ) | — | — | — | — | ||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Total distributions |
(1.73 | ) | (1.87 | ) | (2.82 | ) | (2.03 | ) | (1.09 | ) | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Net asset value, end of year |
$ | 0.04 | $ | 45.29 | $ | 34.87 | $ | 37.81 | $ | 32.47 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Total Return(d) |
||||||||||||||||||||||||||||||||||||||
Based on net asset value |
(99.85 | )% | 36.07 | % | (1.28 | )% | 23.64 | % | 4.37 | % | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Ratios to Average Net Assets(e) |
||||||||||||||||||||||||||||||||||||||
Total expenses |
0.58 | % | 0.57 | % | 0.59 | % | 0.59 | % | 0.59 | % | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Total expenses after fees waived(f) |
0.50 | % | 0.57 | % | 0.59 | % | 0.59 | % | 0.59 | % | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Net investment income |
4.01 | % | 5.26 | % | 4.97 | % | 6.60 | % | 3.50 | % | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Supplemental Data |
||||||||||||||||||||||||||||||||||||||
Net assets, end of year (000) |
$ | 485 | $ | 586,497 | $ | 467,203 | $ | 627,581 | $ | 478,860 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||||||||||
Portfolio turnover rate(g) |
7 | % | 25 | % | 30 | % | 18 | % | 32 | % | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
(a) |
Based on average shares outstanding. |
(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) |
Distributions for annual periods determined in accordance with U.S. federal income tax regulations. |
(d) |
Where applicable, assumes the reinvestment of distributions. |
(e) |
Excludes fees and expenses incurred indirectly as a result of investments in underlying funds. |
(f) |
Effective March 3, 2022, BFA implemented a voluntary waiver of it’s investment advisory fee for the Fund which was applied to management fees starting with February 1, 2022. |
(g) |
Portfolio turnover rate excludes in-kind transactions. |
See notes to financial statements.
F I N A N C I A L H I G H L I G H T S |
13 |
1. |
ORGANIZATION |
iShares, Inc. (the “Company”) is registered under the Investment Company Act of 1940, as amended (the “1940 Act”), as an open-end management investment company. The Company is organized as a Maryland corporation and is authorized to have multiple series or portfolios.
These financial statements relate only to the following fund (the “Fund”):
iShares ETF | Diversification Classification |
|||
MSCI Russia |
Non-diversified |
2. |
PLAN OF LIQUIDATION |
Russia’s large-scale invasion of Ukraine has created circumstances that have significantly impacted the Fund’s operations during the year ended August 31, 2022. The United States, and many other countries, imposed economic sanctions on certain Russian individuals and Russian corporate and banking entities, including banning Russia from global payment systems that facilitate cross-border payments. In response, the Russian government imposed capital controls to restrict movements of capital from entering and exiting the country and has closed trading sessions for local Russian equities to non-residents. In addition, trading of depository receipts for Russian-based companies halted on primary trading platforms subsequent to Russia’s invasion.
The consequences of Russia’s invasion and unprecedented market and policy responses of various governments and regulators precipitated the absence of a functioning or orderly market to facilitate the liquidation and repatriation of securities for any Russian-based company held by the Fund. As a result, the fair value of Russian securities and currency experienced significant declines.
Additionally, during the year ended August 31, 2022, the following events occurred: (i) the Fund suspended new creations of its shares; (ii) NYSE Arca, Inc. announced a trading halt of the Fund; (iii) BFA wrote down the value of all Russian equity securities to a nominal investment value; (iv) BFA implemented a voluntary waiver of its investment advisory fee for the Fund; (v) Russia signed into law a requirement of Russian issuers to terminate deposit agreements related to their depository receipt program, with holders receiving local shares of most Russian issuers in place of the depository receipts; (vi) the Fund was removed as a borrower from the line of credit facility as the trading halt by NYSE Arca, Inc. resulted in technical default under the Syndicated Credit Agreement; (vii) the Fund’s underlying index, the MSCI Russia 25/50 Index, was discontinued by the index provider, (viii) the Fund suspended redemptions pursuant to an order of the SEC; and (ix) NYSE Arca, Inc. delisted the Fund.
On June 15, 2022, the Board unanimously voted to close and liquidate the Fund, contingent on receiving any necessary relief from the SEC, due to the discontinuation of the MSCI Russia 25/50 Index and ongoing restrictions relating to Russian securities. On August 3, 2022, the SEC granted exemptive relief to the Fund permitting the Fund to suspend the right of redemption with respect to shares of the Fund.
BlackRock expects that the Fund will remain in existence until at least December 31, 2023, to allow the Fund to sell the securities and depositary receipts, if conditions permit. The Fund may be terminated at the discretion of the Fund’s Board upon the recommendation of BFA on or after December 31, 2023. If the Fund’s Russian securities and depositary receipts have not been sold or are unable to be converted as of the date the Fund is terminated, the Fund’s remaining portfolio assets will be permanently written off, in each case as determined by BFA and approved by the Board. The Fund may be terminated sooner if all of the Russian securities and depositary receipts have been sold before that date (or they cease to represent valid interests in their issuers). While the Fund is in the process of liquidating its portfolio, the Fund will hold cash and securities that may not be consistent with the Fund’s investment objective and prior investment strategies. As a result of the delisting by NYSE Arca, Inc. the Fund is no longer considered an exchange-traded fund.
On August 17, 2022, the Fund made an initial liquidating distribution to shareholders of available cash, less a reserve estimated to meet the Fund’s expected transaction costs associated with the liquidation.
3. |
SIGNIFICANT ACCOUNTING POLICIES |
The financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which may require management to make estimates and assumptions that affect the reported amounts of assets and liabilities in the financial statements, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations 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. Below is a summary of significant accounting policies:
Investment Transactions and Income Recognition: For financial reporting purposes, investment transactions are recorded on the dates the transactions are executed. Realized gains and losses on investment transactions are determined using the specific identification method. Dividend income and capital gain distributions, if any, are recorded on the ex-dividend date. Non-cash dividends, if any, are recorded on the ex-dividend date at fair value. Dividends from foreign securities where the ex-dividend date may have passed are subsequently recorded when the Fund is informed of the ex-dividend date. Under the applicable foreign tax laws, a withholding tax at various rates may be imposed on capital gains, dividends and interest.
Foreign Currency Translation: The Fund’s books and records are maintained in U.S. dollars. Securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars using prevailing market rates as quoted by one or more data service providers. Purchases and sales of investments are recorded at the rates
14 |
2 0 2 2 I S H A R E S A N N U A L R E P O R T T O S H A R E H O L D E R S |
Notes to Financial Statements (continued)
of exchange prevailing on the respective dates of such transactions. Generally, when the U.S. dollar rises in value against a foreign currency, the investments denominated in that currency will lose value; the opposite effect occurs if the U.S. dollar falls in relative value.
The Fund does not isolate the effect of fluctuations in foreign exchange rates from the effect of fluctuations in the market prices of investments for financial reporting purposes. Accordingly, the effects of changes in exchange rates on investments are not segregated in the Statement of Operations from the effects of changes in market prices of those investments, but are included as a component of net realized and unrealized gain (loss) from investments. The Fund reports realized currency gains (losses) on foreign currency related transactions as components of net realized gain (loss) for financial reporting purposes, whereas such components are generally treated as ordinary income for U.S. federal income tax purposes.
Foreign Taxes: The Fund may be subject to foreign taxes (a portion of which may be reclaimable) on income, stock dividends, capital gains on investments, or certain foreign currency transactions. All foreign taxes are recorded in accordance with the applicable foreign tax regulations and rates that exist in the foreign jurisdictions in which the Fund invests. These foreign taxes, if any, are paid by the Fund and are reflected in its Statement of Operations as follows: foreign taxes withheld at source are presented as a reduction of income, foreign taxes on securities lending income are presented as a reduction of securities lending income, foreign taxes on stock dividends are presented as “Other foreign taxes”, and foreign taxes on capital gains from sales of investments and foreign taxes on foreign currency transactions are included in their respective net realized gain (loss) categories. Foreign taxes payable or deferred as of August 31, 2022, if any, are disclosed in the Statement of Assets and Liabilities.
The Fund files withholding tax reclaims in certain jurisdictions to recover a portion of amounts previously withheld. The Fund may record a reclaim receivable based on collectability, which includes factors such as the jurisdiction’s applicable laws, payment history and market convention. The Statement of Operations includes tax reclaims recorded as well as professional and other fees, if any, associated with recovery of foreign withholding taxes.
Collateralization: If required by an exchange or counterparty agreement, the Fund may be required to deliver/deposit cash and/or securities to/with an exchange, or broker-dealer or custodian as collateral for certain investments.
In-kind Redemptions: For financial reporting purposes, in-kind redemptions are treated as sales of securities resulting in realized capital gains or losses to the Fund. Because such gains or losses are not taxable to the Fund and are not distributed to existing Fund shareholders, the gains or losses are reclassified from accumulated net realized gain (loss) to paid-in capital at the end of the Fund’s tax year. These reclassifications have no effect on net assets or net asset value (“NAV”) per share.
Distributions: Dividends and distributions paid by the Fund are recorded on the ex-dividend dates. Distributions are determined on a tax basis and may differ from net investment income and net realized capital gains for financial reporting purposes. Dividends and distributions are paid in U.S. dollars and cannot be automatically reinvested in additional shares of the Fund. The character and timing of distributions are determined in accordance with U.S. federal income tax regulations, which may differ from U.S. GAAP. On August 17, 2022, the Fund made an initial liquidating distribution to shareholders of available cash, less a reserve estimated to meet the fund’s expected transaction costs associated with the liquidation. Distribution is shown as a Liquidating Distribution on the Statements of Changes in Net Assets and the Financial Highlights.
Indemnifications: In the normal course of business, the Fund enters into contracts that contain a variety of representations that provide general indemnification. The Fund’s maximum exposure under these arrangements is unknown because it involves future potential claims against the Fund, which cannot be predicted with any certainty.
4. |
INVESTMENT VALUATION AND FAIR VALUE MEASUREMENTS |
Investment Valuation Policies: The Fund’s investments are valued at fair value (also referred to as “market value” within the financial statements) each day that the Fund’s listing exchange is open and, for financial reporting purposes, as of the report date. 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 Board of Directors of the Company (the “Board”) of the Fund has approved the designation of BFA, the Fund’s investment adviser, as the valuation designee for the Fund. The Fund determines the fair values of its financial instruments using various independent dealers or pricing services under BFA’s policies. If a security’s market price is not readily available or does not otherwise accurately represent the fair value of the security, the security will be valued in accordance with BFA’s policies and procedures as reflecting fair value. BFA has formed a committee (the “Valuation Committee”) to develop pricing policies and procedures and to oversee the pricing function for all financial instruments, with assistance from other BlackRock pricing committees.
Fair Value Inputs and Methodologies: The following methods and inputs are used to establish the fair value of the Fund’s assets and liabilities:
• |
Equity investments traded on a recognized securities exchange are valued at that day’s official closing price, as applicable, on the exchange where the stock is primarily traded. Equity investments traded on a recognized exchange for which there were no sales on that day are valued at the last traded price. |
• |
Investments in open-end U.S. mutual funds (including money market funds) are valued at that day’s published NAV. |
• |
Futures contracts are valued based on that day’s last reported settlement or trade price on the exchange where the contract is traded. |
Generally, trading in foreign instruments is substantially completed each day at various times prior to the close of trading on the New York Stock Exchange (“NYSE”). Each business day, the Fund uses current market factors supplied by independent pricing services to value certain foreign instruments (“Systematic Fair Value Price”). The Systematic Fair Value Price is designed to value such foreign securities at fair value as of the close of trading on the NYSE, which follows the close of the local markets.
If events (e.g., market volatility, company announcement, war or a natural disaster) occur that are expected to materially affect the value of such investment, or in the event that application of these methods of valuation results in a price for an investment that is deemed not to be representative of the market value of such investment, or if a price is not available, the investment will be valued by the Valuation Committee, in accordance with BFA’s policies and procedures as reflecting fair value (“Fair Valued
N O T E S T O F I N A N C I A L S T A T E M E N T S |
15 |
Notes to Financial Statements (continued)
Investments”). The fair valuation approaches that may generally be used by the Valuation Committee include market approach, income approach and cost approach. Valuation techniques such as discounted cash flow, use of market comparables and matrix pricing are types of valuation approaches and are typically used in determining fair value. When determining the price for Fair Valued Investments, the Valuation Committee seeks to determine the price that the Fund might reasonably expect to receive or pay from the current sale or purchase of that asset or liability in an arm’s-length transaction. Fair value determinations shall be based upon all available factors that the Valuation Committee deems relevant and consistent with the principles of fair value measurement.
Fair value pricing could result in a difference between the prices used to calculate a 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.
During the year, the Valuation Committee determined that the local Russian equities and Russian exposed ADR and GDR securities did not have a market for which the Fund could transact and deemed them illiquid. As of August 31, 2022, the securities are being fair valued at a nominal value using a discount of 99% or higher due to illiquidity and uncertainty measures.
Fair Value Hierarchy: Various inputs are used in determining the fair value of financial instruments. 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 price quotations in active markets/exchanges for identical assets or liabilities that the Fund has the ability to access; |
• |
Level 2 – Other observable inputs (including, but not limited to, quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market-corroborated inputs); and |
• |
Level 3 – Unobservable inputs based on the best information available in the circumstances, to the extent observable inputs are not available, (including the Valuation Committee’s assumptions used in determining the fair value of financial instruments). |
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 judgment 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. Investments classified within Level 3 have significant unobservable inputs used by the Valuation Committee in determining the price for Fair Valued Investments. Level 3 investments include equity or debt issued by privately held companies or funds that may not have a secondary market and/or may have a limited number of investors. The categorization of a value determined for financial instruments is based on the pricing transparency of the financial instruments and is not necessarily an indication of the risks associated with investing in those securities.
5. |
DERIVATIVE FINANCIAL INSTRUMENTS |
Futures Contracts: Futures contracts are purchased or sold to gain exposure to, or manage exposure to, changes in interest rates (interest rate risk) and changes in the value of equity securities (equity risk) or foreign currencies (foreign currency exchange rate risk).
Futures contracts are exchange-traded agreements between the Fund and a counterparty to buy or sell a specific quantity of an underlying instrument at a specified price and on a specified date. Depending on the terms of a contract, it is settled either through physical delivery of the underlying instrument on the settlement date or by payment of a cash amount on the settlement date. Upon entering into a futures contract, the Fund is required to deposit initial margin with the broker in the form of cash or securities in an amount that varies depending on a contract’s size and risk profile. The initial margin deposit must then be maintained at an established level over the life of the contract. Amounts pledged, which are considered restricted, are included in cash pledged for futures contracts in the Statement of Assets and Liabilities.
Securities deposited as initial margin are designated in the Schedule of Investments and cash deposited, if any, are shown as cash pledged for futures contracts in the Statement of Assets and Liabilities. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in market value of the contract (“variation margin”). Variation margin is recorded as unrealized appreciation (depreciation) and, if any, shown as variation margin receivable (or payable) on futures contracts in the Statement of Assets and Liabilities. When the contract is closed, a realized gain or loss is recorded in the Statement of Operations equal to the difference between the notional amount of the contract at the time it was opened and the notional amount at the time it was closed. The use of futures contracts involves the risk of an imperfect correlation in the movements in the price of futures contracts and interest rates, foreign currency exchange rates or underlying assets.
6. |
INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES |
Investment Advisory Fees: Pursuant to an Investment Advisory Agreement with the Company, BlackRock Fund Advisors (“BFA”) manages the investment of the Fund’s assets. BFA is a California corporation indirectly owned by BlackRock, Inc. (“BlackRock”). Under the Investment Advisory Agreement, BFA is responsible for substantially all expenses of the Fund, except (i) interest and taxes; (ii) brokerage commissions and other expenses connected with the execution of portfolio transactions; (iii) distribution fees; (iv) the advisory fee payable to BFA; and (v) litigation expenses and any extraordinary expenses (in each case as determined by a majority of the independent directors).
16 |
2 0 2 2 I S H A R E S A N N U A L R E P O R T T O S H A R E H O L D E R S |
Notes to Financial Statements (continued)
For its investment advisory services to the Fund, BFA is entitled to an annual investment advisory fee, accrued daily and paid monthly by the Fund, based on the Fund’s allocable portion of the aggregate of the average daily net assets of the Fund and certain other iShares funds, as follows:
Aggregate Average Daily Net Assets | Investment Advisory Fees | |||
First $2 billion |
0.7400 | % | ||
Over $2 billion, up to and including $4 billion |
0.6900 | |||
Over $4 billion, up to and including $8 billion |
0.6400 | |||
Over $8 billion, up to and including $16 billion |
0.5700 | |||
Over $16 billion, up to and including $24 billion |
0.5100 | |||
Over $24 billion, up to and including $32 billion |
0.4800 | |||
Over $32 billion, up to and including $40 billion |
0.4500 | |||
Over $40 billion |
0.4275 |
Expense Waivers: BFA implemented a voluntary waiver of its management fee for the Fund beginning on March 3, 2022, which was applied to management fees from February 1, 2022 to the present.
This amount is included in investment advisory fees waived in the Statement of Operations. For the year ended August 31, 2022, the amounts waived in investment advisory fees pursuant to this arrangement were as follows:
iShares ETF | Amounts Waived | |||
MSCI Russia |
$ | 221,404 |
Distributor: BlackRock Investments, LLC, an affiliate of BFA, is the distributor for the Fund. Pursuant to the distribution agreement, BFA is responsible for any fees or expenses for distribution services provided to the Fund.
Officers and Directors: Certain officers and/or directors of the Company are officers and/or directors of BlackRock or its affiliates.
Other Transactions: Cross trading is the buying or selling of portfolio securities between funds to which BFA (or an affiliate) serves as investment adviser. At its regularly scheduled quarterly meetings, the Board reviews such transactions as of the most recent calendar quarter for compliance with the requirements and restrictions set forth by Rule 17a-7.
For the year ended August 31, 2022, transactions executed by the Fund pursuant to Rule 17a-7 under the 1940 Act were as follows:
iShares ETF | Purchases | Sales |
Net Realized Gain (Loss) |
|||||||||
MSCI Russia |
$ | 2,217,982 | $ | 766,239 | $ | 218,151 |
The Fund may invest its positive cash balances in certain money market funds managed by BFA or an affiliate. The income earned on these temporary cash investments is shown as dividends – affiliated in the Statement of Operations.
7. |
PURCHASES AND SALES |
For the year ended August 31, 2022, purchases and sales of investments, excluding short-term securities and in-kind transactions, were as follows:
iShares ETF | Purchases | Sales | ||||||
MSCI Russia |
$ | 27,810,825 | $ | 20,618,897 |
For the year ended August 31, 2022, in-kind transactions were as follows:
iShares ETF |
In-kind Purchases |
In-kind Sales |
||||||
MSCI Russia |
$ | 14,976,259 | $ | — |
8. |
INCOME TAX INFORMATION |
The Fund is treated as an entity separate from the Company’s other funds for federal income tax purposes. It is the Fund’s policy to comply with the requirements of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies, and to distribute substantially all of its taxable income to its shareholders. Therefore, no U.S. federal income tax provision is required.
Management has analyzed tax laws and regulations and their application to the Fund as of August 31, 2022, inclusive of the open tax return years, and does not believe that there are any uncertain tax positions that require recognition of a tax liability in the Fund’s financial statements.
N O T E S T O F I N A N C I A L S T A T E M E N T S |
17 |
Notes to Financial Statements (continued)
U.S. GAAP requires that certain components of net assets be adjusted to reflect permanent differences between financial and tax reporting. These reclassifications have no effect on net assets or NAV per share. As of August 31, 2022, permanent differences attributable to distributions paid in excess of taxable income were reclassified to the following accounts:
iShares ETF | Paid-in Capital |
Accumulated Earnings (Loss) |
||||||
MSCI Russia |
$ (1,044,513 | ) | $1,044,513 |
The tax character of distributions paid was as follows:
|
||||||||
iShares ETF |
Year Ended 08/31/22 |
Year Ended 08/31/21 |
||||||
|
||||||||
MSCI Russia |
||||||||
Ordinary income |
$ | 22,039,990 | $ | 23,598,232 | ||||
Liquidating distribution |
450,000 | — | ||||||
|
|
|
|
|||||
$ | 22,489,990 | $ | 23,598,232 | |||||
|
|
|
|
As of August 31, 2022, the tax components of accumulated net earnings (losses) were as follows:
iShares ETF |
|
Non-expiring Capital Loss Carryforwards |
(a) |
|
Net Unrealized Gains (Losses) |
(b) |
|
Qualified Late-Year Losses |
(c) |
Total | ||||||
MSCI Russia |
$(122,219,861 | ) | $(491,879,111 | ) | $ (678,181 | ) | $(614,777,153 | ) |
(a) |
Amounts available to offset future realized capital gains. |
(b) |
The difference between book-basis and tax-basis unrealized gains (losses) was attributable primarily to the tax deferral of losses on wash sales. |
(c) |
The Fund has elected to defer certain qualified late-year losses and recognize such losses in the next taxable year. |
A fund may own shares in certain foreign investment entities, referred to, under U.S. tax law, as “passive foreign investment companies.” Such fund may elect to mark-to-market annually the shares of each passive foreign investment company and would be required to distribute to shareholders any such marked-to-market gains.
As of August 31, 2022, gross unrealized appreciation and depreciation based on cost of investments (including short positions and derivatives, if any) for U.S. federal income tax purposes were as follows:
iShares ETF | Tax Cost |
Gross Unrealized Appreciation |
Gross Unrealized Depreciation |
Net Unrealized Appreciation (Depreciation) |
||||||||||||
MSCI Russia |
$492,353,246 | $ — | $ (491,879,108 | ) | $(491,879,108 | ) |
9. |
LINE OF CREDIT |
The Fund, along with certain other iShares funds (“Participating Funds”), was a party to a $800 million credit agreement (“Syndicated Credit Agreement”) with a group of lenders. Effective April 21, 2022, the Fund was no longer a participating borrower under the Syndicated Credit Agreement. In light of market conditions involving the Fund and the ongoing issues related to Russia’s invasion of Ukraine, the Fund did not meet the requirements under the line of credit, and the banks terminated their commitment to make loans to the Fund. The terms of the Syndicated Credit Agreement included a commitment fee of 0.15% per annum on the unused portion of the credit agreement and interest at a rate equal to the higher of (a) the one-month LIBOR rate (not less than zero) plus 1.00% per annum or (b) the U.S. Federal Funds rate (not less than zero) plus 1.00% per annum on amounts borrowed. The commitment fee was generally allocated to each Participating Fund based on the lesser of a Participating Fund’s relative exposure to certain target markets or a Participating Fund’s maximum borrowing amount as set forth by the terms of the Syndicated Credit Agreement.
During the year ended August 31, 2022, the Fund did not borrow under the Syndicated Credit Agreement.
10. |
PRINCIPAL RISKS |
In the normal course of business, the Fund invests in securities or other instruments and may enter into certain transactions, and such activities subject the Fund to various risks, including, among others, fluctuations in the market (market risk) or failure of an issuer to meet all of its obligations. The value of securities or other instruments may also be affected by various factors, including, without limitation: (i) the general economy; (ii) the overall market as well as local, regional or global political and/or social instability; (iii) regulation, taxation or international tax treaties between various countries; or (iv) currency, interest rate or price fluctuations. Local, regional or global events such as war, acts of terrorism, the spread of infectious illness or other public health issues, recessions, or other events could have a significant impact on the Fund and its investments. The Fund’s prospectus provides details of the risks to which the Fund is subject.
18 |
2 0 2 2 I S H A R E S A N N U A L R E P O R T T O S H A R E H O L D E R S |
Notes to Financial Statements (continued)
BFA uses a “passive” or index approach to try to achieve the Fund’s investment objective following the securities included in its underlying index during upturns as well as downturns. BFA does not take steps to reduce market exposure or to lessen the effects of a declining market. Divergence from the underlying index and the composition of the portfolio is monitored by BFA.
Market Risk: An outbreak of respiratory disease caused by a novel coronavirus has developed into a global pandemic and has resulted in closing borders, quarantines, disruptions to supply chains and customer activity, as well as general concern and uncertainty. The impact of this pandemic, and other global health crises that may arise in the future, could affect the economies of many nations, individual companies and the market in general in ways that cannot necessarily be foreseen at the present time. This pandemic may result in substantial market volatility and may adversely impact the prices and liquidity of a fund’s investments. Although vaccines have been developed and approved for use by various governments, the duration of this pandemic and its effects cannot be determined with certainty.
Valuation Risk: The market values of equities, such as common stocks and preferred securities or equity related investments, such as futures and options, may decline due to general market conditions which are not specifically related to a particular company. They may also decline due to factors which affect a particular industry or industries. A fund may invest in illiquid investments. An illiquid investment is any investment that a fund reasonably expects cannot be sold or disposed of in current market conditions in seven calendar days or less without the sale or disposition significantly changing the market value of the investment. A fund may experience difficulty in selling illiquid investments in a timely manner at the price that it believes the investments are worth. Prices may fluctuate widely over short or extended periods in response to company, market or economic news. Markets also tend to move in cycles, with periods of rising and falling prices. This volatility may cause a fund’s NAV to experience significant increases or decreases over short periods of time. If there is a general decline in the securities and other markets, the NAV of a fund may lose value, regardless of the individual results of the securities and other instruments in which a fund invests.
The price the Fund could receive upon the sale of any particular portfolio investment may differ from the Fund’s valuation of the investment, particularly for securities that trade in thin or volatile markets or that are valued using a fair valuation technique or a price provided by an independent pricing service. Changes to significant unobservable inputs and assumptions (i.e., publicly traded company multiples, growth rate, time to exit) due to the lack of observable inputs.
Counterparty Credit Risk: The Fund may be exposed to counterparty credit risk, or the risk that an entity may fail to or be unable to perform on its commitments related to unsettled or open transactions, including making timely interest and/or principal payments or otherwise honoring its obligations. The Fund manages counterparty credit risk by entering into transactions only with counterparties that the Manager believes have the financial resources to honor their obligations and by monitoring the financial stability of those counterparties. Financial assets, which potentially expose the Fund to market, issuer and counterparty credit risks, consist principally of financial instruments and receivables due from counterparties. The extent of the Fund’s exposure to market, issuer and counterparty credit risks with respect to these financial assets is approximately their value recorded in the Statement of Assets and Liabilities, less any collateral held by the Fund.
A derivative contract may suffer a mark-to-market loss if the value of the contract decreases due to an unfavorable change in the market rates or values of the underlying instrument. Losses can also occur if the counterparty does not perform under the contract.
With exchange-traded futures, there is less counterparty credit risk to the Fund since the exchange or clearinghouse, as counterparty to such instruments, guarantees against a possible default. The clearinghouse stands between the buyer and the seller of the contract; therefore, credit risk is limited to failure of the clearinghouse. While offset rights may exist under applicable law, a fund does not have a contractual right of offset against a clearing broker or clearinghouse in the event of a default (including the bankruptcy or insolvency). Additionally, credit risk exists in exchange-traded futures with respect to initial and variation margin that is held in a clearing broker’s customer accounts. While clearing brokers are required to segregate customer margin from their own assets, in the event that a clearing broker becomes insolvent or goes into bankruptcy and at that time there is a shortfall in the aggregate amount of margin held by the clearing broker for all its clients, typically the shortfall would be allocated on a pro rata basis across all the clearing broker’s customers, potentially resulting in losses to the Fund.
Concentration Risk: A diversified portfolio, where this is appropriate and consistent with a fund’s objectives, minimizes the risk that a price change of a particular investment will have a material impact on the NAV of a fund. The investment concentrations within the Fund’s portfolio are disclosed in its Schedule of Investments.
The Fund invests a significant portion of its assets in issuers located in a single country or a limited number of countries. When a fund concentrates its investments in this manner, it assumes the risk that economic, regulatory, political and social conditions in that country or those countries may have a significant impact on the fund and could affect the income from, or the value or liquidity of, the Fund’s portfolio. Unanticipated or sudden political or social developments may cause uncertainty in the markets and as a result adversely affect the Fund’s investments. Foreign issuers may not be subject to the same uniform accounting, auditing and financial reporting standards and practices as used in the United States. Foreign securities markets may also be more volatile and less liquid than U.S. securities and may be less subject to governmental supervision not typically associated with investing in U.S. securities.
The Fund invests a significant portion of its assets in securities of issuers located in Europe or with significant exposure to European issuers or countries. The European financial markets have recently experienced volatility and adverse trends due to concerns about economic downturns in, or rising government debt levels of, several European countries as well as acts of war in the region. These events may spread to other countries in Europe and may affect the value and liquidity of certain of the Fund’s investments.
Responses to the financial problems by European governments, central banks and others, including austerity measures and reforms, may not work, may result in social unrest and may limit future growth and economic recovery or have other unintended consequences. Further defaults or restructurings by governments and others of their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. The United Kingdom has withdrawn from the European Union, and one or more other countries may withdraw from the European Union and/or abandon the Euro, the common currency of the European Union. The impact of these actions, especially if they occur in a disorderly fashion, is not clear but could be significant and far reaching. In addition, Russia launched a large-scale invasion of Ukraine on February 24, 2022. The extent and duration of the military action, resulting sanctions and resulting future market disruptions in the region are impossible to predict, but
N O T E S T O F I N A N C I A L S T A T E M E N T S |
19 |
Notes to Financial Statements (continued)
could be significant and have a severe adverse effect on the region, including significant negative impacts on the economy and the markets for certain securities and commodities, such as oil and natural gas, as well as other sectors.
The Fund invests a significant portion of its assets in securities of issuers located in Russia or with significant exposure to Russian issuers or countries. Russia launched a large-scale invasion of Ukraine on February 24, 2022. Governments in the U.S. and many other countries have imposed economic sanctions on certain Russian individuals and Russian corporate and banking entities. Jurisdictions have instituted broader sanctions on Russia, including banning Russia from global payments systems that facilitate cross-border payments. The extent and duration of the military action, resulting sanctions and resulting future market disruptions, including declines in Russia’s stock markets and the value of the ruble against the U.S. dollar, are impossible to predict, but could be significant. Any such disruptions caused by the Russian military action or any response to such activity from the international community may negatively impact Russia’s economy and Russian issuers of securities in which the Fund invests.
The Fund invests a significant portion of its assets in securities within a single or limited number of market sectors. When a fund concentrates its investments in this manner, it assumes the risk that economic, regulatory, political and social conditions affecting such sectors may have a significant impact on the fund and could affect the income from, or the value or liquidity of, the fund’s portfolio. Investment percentages in specific sectors are presented in the Schedule of Investments.
11. |
CAPITAL SHARE TRANSACTIONS |
Capital shares are issued and redeemed by the Fund only in aggregations of a specified number of shares or multiples thereof (“Creation Units”) at NAV. Except when aggregated in Creation Units, shares of the Fund are not redeemable.
Transactions in capital shares were as follows:
|
||||||||||||||||||||
iShares ETF | Year Ended 08/31/22 |
Year Ended 08/31/21 |
||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||
|
||||||||||||||||||||
MSCI Russia |
||||||||||||||||||||
Shares sold |
800,000 | $ | 32,469,779 | 900,000 | $ | 38,349,193 | ||||||||||||||
Shares redeemed |
— | — | (1,350,000 | ) | (49,799,409 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
800,000 | $ | 32,469,779 | (450,000 | ) | $ | (11,450,216 | ) | |||||||||||||
|
|
|
|
|
|
|
|
The consideration for the purchase of Creation Units of a fund in the Company generally consists of the in-kind deposit of a designated portfolio of securities and a specified amount of cash. Certain funds in the Company may be offered in Creation Units solely or partially for cash in U.S. dollars. Investors purchasing and redeeming Creation Units may pay a purchase transaction fee and a redemption transaction fee directly to State Street Bank and Trust Company, the Company’s administrator, to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units, including Creation Units for cash. Investors transacting in Creation Units for cash may also pay an additional variable charge to compensate the relevant fund for certain transaction costs (i.e., stamp taxes, taxes on currency or other financial transactions, and brokerage costs) and market impact expenses relating to investing in portfolio securities. Such variable charges, if any, are included in shares sold in the table above.
From time to time, settlement of securities related to in-kind contributions or in-kind redemptions may be delayed. In such cases, securities related to in-kind transactions are reflected as a receivable or a payable in the Statement of Assets and Liabilities.
12. |
SUBSEQUENT EVENTS |
Management has evaluated the impact of all subsequent events on the Fund through the date the financial statements were available to be issued and has determined that there were no subsequent events requiring adjustment or additional disclosure in the financial statements.
20 |
2 0 2 2 I S H A R E S A N N U A L R E P O R T T O S H A R E H O L D E R S |
Report of Independent Registered Public Accounting Firm
To the Board of Directors of
iShares, Inc. and Shareholders of iShares MSCI Russia ETF
Opinion on the Financial Statements
We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of iShares MSCI Russia ETF (one of the funds constituting iShares, Inc., referred to hereafter as the “Fund”) as of August 31, 2022, the related statements of operations and cash flows for the year ended August 31, 2022, the statements of changes in net assets for each of the two years in the period ended August 31, 2022, including the related notes, and the financial highlights for each of the five years in the period ended August 31, 2022 (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Fund as of August 31, 2022, the results of its operations and its cash flows for the year then ended, the changes in its net assets for each of the two years in the period ended August 31, 2022 and the financial highlights for each of the five years in the period ended August 31, 2022 in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Fund’s management. Our responsibility is to express an opinion on the Fund’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Fund in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of August 31, 2022 by correspondence with the custodian and transfer agent. We believe that our audits provide a reasonable basis for our opinion.
Emphasis of Matter
As discussed in Note 2 to the financial statements, on June 15, 2022, the Board unanimously voted to close and liquidate the Fund, contingent on receiving any necessary relief from the SEC, due to the discontinuation of the MSCI Russia 25/50 Index and ongoing restrictions relating to Russian securities. On August 3, 2022, the SEC granted exemptive relief to the Fund permitting the Fund to suspend the right of redemption with respect to shares of the Fund. The Fund may be terminated at the discretion of the Fund’s Board based on the facts and circumstances as discussed in Note 2.
/s/PricewaterhouseCoopers LLP |
Philadelphia, Pennsylvania |
October 24, 2022 |
We have served as the auditor of one or more BlackRock investment companies since 2000.
R E P O R T O F I N D E P E N D E N T R E G I S T E R E D P U B L I C A C C O U N T I N G F I R M |
21 |
Important Tax Information (unaudited)
The following amount, or maximum amount allowable by law, are hereby designated as qualified dividend income for individuals for the fiscal year ended August 31, 2022:
iShares ETF | Qualified Dividend Income |
|||
MSCI Russia |
$ | 14,166,644 |
The Fund intends to pass through to its shareholders the following amount, or maximum amount allowable by law, of foreign source income earned and foreign taxes paid for the fiscal year ended August 31, 2022:
iShares ETF | Foreign Source Income Earned |
Foreign Taxes Paid |
||||||
MSCI Russia |
$ | 14,523,745 | $ | 1,551,267 |
22 |
2 0 2 2 I S H A R E S A N N U A L R E P O R T T O S H A R E H O L D E R S |
Board Review and Approval of Investment Advisory Contract
iShares MSCI Russia ETF (the “Fund”)
Under Section 15(c) of the Investment Company Act of 1940 (the “1940 Act”), the Company’s Board of Directors (the “Board”), including a majority of Board Members who are not “interested persons” of the Company (as that term is defined in the 1940 Act) (the “Independent Board Members”), is required annually to consider and approve the Investment Advisory Agreement between the Company and BFA (the “Advisory Agreement”) on behalf of the Fund. The Board’s consideration entails a year-long process whereby the Board and its committees (composed solely of Independent Board Members) assess BlackRock’s services to the Fund, including investment management; fund accounting; administrative and shareholder services; oversight of the Fund’s service providers; risk management and oversight; legal and compliance services; and ability to meet applicable legal and regulatory requirements. The Independent Board Members requested, and BFA provided, such information as the Independent Board Members, with advice from independent counsel, deemed reasonably necessary to evaluate the Advisory Agreement. At meetings on May 3, 2022 and May 18, 2022, a committee composed of all of the Independent Board Members (the “15(c) Committee”), with independent counsel, met with management and reviewed and discussed information provided in response to initial requests of the 15(c) Committee and/or its independent counsel, and requested certain additional information, which management agreed to provide. At a meeting held on June 13-15, 2022, the Board, including the Independent Board Members, reviewed the additional information provided by management in response to these requests.
After extensive discussions and deliberations, the Board, including all of the Independent Board Members, approved the continuance of the Advisory Agreement for the Fund, based on a review of qualitative and quantitative information provided by BFA and their cumulative experience as Board Members. The Board noted its satisfaction with the extent and quality of information provided and its frequent interactions with management, as well as the detailed responses and other information provided by BFA. The Independent Board Members were advised by their independent counsel throughout the process, including about the legal standards applicable to their review. In approving the continuance of the Advisory Agreement for the Fund, the Board, including the Independent Board Members, considered various factors, including: (i) the expenses and performance of the Fund; (ii) the nature, extent and quality of the services provided by BFA; (iii) the costs of services provided to the Fund and profits realized by BFA and its affiliates; (iv) potential economies of scale and the sharing of related benefits; (v) the fees and services provided for other comparable funds/accounts managed by BFA and its affiliates; and (vi) other benefits to BFA and/or its affiliates. The material factors, none of which was controlling, and conclusions that formed the basis for the Board, including the Independent Board Members, to approve the continuance of the Advisory Agreement are discussed below.
Expenses and Performance of the Fund: The Board reviewed statistical information prepared by Broadridge Financial Solutions Inc. (“Broadridge”), an independent provider of investment company data, regarding the expense ratio components, including gross and net total expenses, fees and expenses of another fund in which the Fund invests (if applicable), and waivers/reimbursements (if applicable) of the Fund in comparison with the same information for other ETFs, objectively selected by Broadridge as comprising the Fund’s applicable expense peer group pursuant to Broadridge’s proprietary ETF methodology (the “Peer Group”). The Board was provided with a detailed description of the proprietary ETF methodology used by Broadridge to determine the Fund’s Peer Group. The Board noted that, due to the limitations in providing comparable funds in the Peer Group, the statistical information provided in Broadridge’s report may or may not provide meaningful direct comparisons to the Fund in all instances. The Board also noted that the investment advisory fee rate and overall expenses (net of waivers and reimbursements) for the Fund were higher than the median of the investment advisory fee rates and overall expenses (net of waivers and reimbursements) of the funds in its Peer Group, excluding iShares funds.
In addition, to the extent that any of the comparison funds included in the Peer Group, excluding iShares funds, track the same index as the Fund, Broadridge also provided, and the Board reviewed, a comparison of the Fund’s performance for the one-year, three-year, five-year, ten-year, and since inception periods, as applicable, and for the quarter ended December 31, 2021, to that of such relevant comparison fund(s) for the same periods. The Board noted that the Fund seeks to track its specified underlying index and that, during the year, the Board received periodic reports on the Fund’s short- and longer-term performance in comparison with its underlying index. Such periodic comparative performance information, including additional detailed information as requested by the Board, was also considered. The Board noted that the Fund generally performed in line with its underlying index over the relevant periods.
Based on this review, the other factors considered at the meeting, and their general knowledge of ETF pricing, the Board concluded that the investment advisory fee rate and expense level and the historical performance of the Fund supported the Board’s approval of the continuance of the Advisory Agreement for the coming year.
Nature, Extent and Quality of Services Provided: Based on management’s representations, including information about recent enhancements and initiatives with respect to the iShares business, including with respect to capital markets support and analysis, technology, portfolio management, product design and quality, compliance and risk management, global public policy and other services, the Board expected that there would be no diminution in the scope of services required of or provided by BFA under the Advisory Agreement for the coming year as compared with the scope of services provided by BFA during prior years. In reviewing the scope of these services, the Board considered BFA’s investment philosophy and experience, noting that BFA and its affiliates have committed significant resources over time, including during the past year, to support the iShares funds and their shareholders and have made significant investments into the iShares business. The Board also considered BFA’s compliance program and its compliance record with respect to the Fund. In that regard, the Board noted that BFA reports to the Board about portfolio management and compliance matters on a periodic basis in connection with regularly scheduled meetings of the Board, and on other occasions as necessary and appropriate, and has provided information and made relevant officers and other employees of BFA (and its affiliates) available as needed to provide further assistance with these matters. The Board also reviewed the background and experience of the persons responsible for the day-to-day management of the Fund, as well as the resources available to them in managing the Fund. In addition to the above considerations, the Board reviewed and considered detailed presentations regarding BFA’s investment performance, investment and risk management processes and strategies, provided at the May 3, 2022 meeting and throughout the year, and matters related to BFA’s portfolio compliance program.
Based on review of this information, and the performance information discussed above, the Board concluded that the nature, extent and quality of services provided to the Fund under the Advisory Agreement supported the Board’s approval of the continuance of the Advisory Agreement for the coming year.
Costs of Services Provided to the Fund and Profits Realized by BFA and its Affiliates: The Board reviewed information about the estimated profitability to BlackRock in managing the Fund, based on the fees payable to BFA and its affiliates (including fees under the Advisory Agreement), and other sources of revenue and expense to BFA
B O A R D R E V I E W A N D A P P R O V A L O F I N V E S T M E N T A D V I S O R Y C O N T R A C T |
23 |
Board Review and Approval of Investment Advisory Contract (continued)
and its affiliates from the Fund’s operations for the last calendar year. The Board reviewed BlackRock’s methodology for calculating estimated profitability of the iShares funds, noting that the 15(c) Committee and the Board had focused on the methodology and profitability presentation. The Board recognized that profitability may be affected by numerous factors, including, among other things, fee waivers by BFA, the types of funds managed, expense allocations and business mix. The Board thus recognized that calculating and comparing profitability at individual fund levels is challenging. The Board discussed with management the sources of direct and ancillary revenue, including the revenues to BTC, a BlackRock affiliate, from securities lending by the Fund. The Board also discussed BFA’s estimated profit margin as reflected in the Fund’s profitability analysis and reviewed information regarding potential economies of scale (as discussed below).
Based on this review, the Board concluded that the information considered with respect to the profits realized by BFA and its affiliates under the Advisory Agreement and from other relationships between the Fund and BFA and/or its affiliates, if any, as well as the other factors considered at the meeting, supported the Board’s approval of the continuance of the Advisory Agreement for the coming year.
Economies of Scale: The Board reviewed information and considered the extent to which economies of scale might be realized as the assets of the Fund increase, noting that the issue of potential economies of scale had been focused on by the 15(c) Committee and the Board during their meetings and addressed by management. The 15(c) Committee and the Board received information regarding BlackRock’s historical estimated profitability, including BFA’s and its affiliates’ estimated costs in providing services. The estimated cost information distinguished, among other things, between fixed and variable costs, and showed how the level and nature of fixed and variable costs may impact the existence or size of scale benefits, with the Board recognizing that potential economies of scale are difficult to measure. The 15(c) Committee and the Board reviewed information provided by BFA regarding the sharing of scale benefits with the iShares funds through various means, including, as applicable, through relatively low fee rates established at inception, breakpoints, waivers, or other fee reductions, as well as through additional investment in the iShares business and the provision of improved or additional infrastructure and services to the iShares funds and their shareholders. The Board noted that the Advisory Agreement for the Fund already provided for breakpoints in the Fund’s investment advisory fee rate as the assets of the Fund, on an aggregated basis with the assets of certain other iShares funds, increase. The Board noted that it would continue to assess the appropriateness of adding new or revised breakpoints in the future.
The Board concluded that this review of potential economies of scale and the sharing of related benefits, as well as the other factors considered at the meeting, supported the Board’s approval of the continuance of the Advisory Agreement for the coming year.
Fees and Services Provided for Other Comparable Funds/Accounts Managed by BFA and its Affiliates: The Board received and considered information regarding the investment advisory/management fee rates for other funds/accounts in the U.S. for which BFA (or its affiliates) provides investment advisory/management services, including open-end funds registered under the 1940 Act (including sub-advised funds), collective trust funds, and institutional separate accounts (collectively, the “Other Accounts”). The Board acknowledged BFA’s representation that the iShares funds are fundamentally different investment vehicles from the Other Accounts.
The Board received detailed information regarding how the Other Accounts generally differ from the Fund, including in terms of the types of services and generally more extensive services provided to the Fund, as well as other significant differences. In that regard, the Board considered that the pricing of services to institutional clients is typically based on a number of factors beyond the nature and extent of the specific services to be provided and often depends on the overall relationship between the client and its affiliates and the adviser and its affiliates. In addition, the Board considered the relative complexity and inherent risks and challenges of managing and providing other services to the Fund, as a publicly traded investment vehicle, as compared to the Other Accounts, particularly those that are institutional clients, in light of differing regulatory requirements and client-imposed mandates. The Board noted that BFA and its affiliates do not manage Other Accounts with substantially the same investment objective and strategy as the Fund and that track the same index as the Fund. The Board also acknowledged management’s assertion that, for certain iShares funds, and for client segmentation purposes, BlackRock has launched an iShares fund that may provide a similar investment exposure at a lower investment advisory fee rate.
The Board considered the “all-inclusive” nature of the Fund’s advisory fee structure, and the Fund’s expenses borne by BFA under this arrangement and noted that the investment advisory fee rate under the Advisory Agreement for the Fund was generally higher than the investment advisory/management fee rates for certain of the Other Accounts (particularly institutional clients) and concluded that the differences appeared to be consistent with the factors discussed.
Other Benefits to BFA and/or its Affiliates: The Board reviewed other benefits or ancillary revenue received by BFA and/or its affiliates in connection with the services provided to the Fund by BFA, both direct and indirect, including, but not limited to, payment of revenue to BTC, the Fund’s securities lending agent, for loaning portfolio securities (which was included in the profit margins reviewed by the Board pursuant to BFA’s estimated profitability methodology), payment of advisory fees or other fees to BFA (or its affiliates) in connection with any investments by the Fund in other funds for which BFA (or its affiliates) provides investment advisory services or other services, and BlackRock’s profile in the investment community. The Board also noted the revenue received by BFA and/or its affiliates pursuant to an agreement that permits a service provider to use certain portions of BlackRock’s technology platform to service accounts managed by BFA and/or its affiliates, including the iShares funds. The Board noted that BFA generally does not use soft dollars or consider the value of research or other services that may be provided to BFA (including its affiliates) in selecting brokers for portfolio transactions for the Fund. The Board concluded that any such ancillary benefits would not be disadvantageous to the Fund and thus would not alter the Board’s conclusion with respect to the appropriateness of approving the continuance of the Advisory Agreement for the coming year.
Conclusion: Based on a review of the factors described above, as well as such other factors as deemed appropriate by the Board, the Board, including all of the Independent Board Members, determined that the Fund’s investment advisory fee rate under the Advisory Agreement does not constitute a fee that is so disproportionately large as to bear no reasonable relationship to the services rendered and that could not have been the product of arm’s-length bargaining, and concluded to approve the continuance of the Advisory Agreement for the coming year.
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Supplemental Information (unaudited)
Section 19(a) Notices
The amounts and sources of distributions reported are estimates and are being provided pursuant to regulatory requirements and are not being provided for tax reporting purposes. The actual amounts and sources for tax reporting purposes will depend upon the Fund’s investment experience during the year and may be subject to changes based on tax regulations. Shareholders will receive a Form 1099-DIV each calendar year that will inform them how to report these distributions for federal income tax purposes.
August 31, 2022
Total Cumulative Distributions for the Fiscal Year |
% Breakdown of the Total Cumulative Distributions for the Fiscal Year |
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iShares ETF | Net Investment Income |
Net Realized Capital Gains |
Return of Capital |
Total Per Share |
Net Investment Income |
Net Realized Capital Gains |
Return of Capital |
Total Per Share |
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MSCI Russia(a) |
$ | 1.700486 | $ | — | $ | 0.032727 | $ | 1.733213 | 98 | % | — | % | 2 | % | 100 | % |
(a) |
The Fund estimates that it has distributed more than its net investment income and net realized capital gains; therefore, a portion of the distribution may be a return of capital. A return of capital may occur, for example, when some or all of the shareholder’s investment in the Fund is returned to the shareholder. A return of capital does not necessarily reflect the Fund’s investment performance and should not be confused with “yield” or “income”. When distributions exceed total return performance, the difference will incrementally reduce the Fund’s net asset value per share. |
Premium/Discount Information
Information on the Fund’s net asset value, market price, premiums and discounts, and bid-ask spreads can be found at iShares.com
S U P P L E M E N T A L I N F O R M A T I O N |
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Director and Officer Information (unaudited)
The Board of Directors has responsibility for the overall management and operations of the Funds, including general supervision of the duties performed by BFA and other service providers. Each Director serves until he or she resigns, is removed, dies, retires or becomes incapacitated. Each officer shall hold office until his or her successor is elected and qualifies or until his or her death, resignation or removal. Directors who are not “interested persons” (as defined in the 1940 Act) of the Company are referred to as independent directors (“Independent Directors”).
The registered investment companies advised by BFA or its affiliates (the “BlackRock-advised Funds”) are organized into one complex of open-end equity, multi-asset, index and money market funds and ETFs (the “BlackRock Multi-Asset Complex”), one complex of closed-end funds and open-end non-index fixed-income funds (including ETFs) (the “BlackRock Fixed-Income Complex”) and one complex of ETFs (“Exchange-Traded Fund Complex”) (each, a “BlackRock Fund Complex”). Each Fund is included in the Exchange-Traded Fund Complex. Each Director also serves as a Trustee of iShares Trust and a Trustee of iShares U.S. ETF Trust and, as a result, oversees all of the funds within the Exchange-Traded Fund Complex, which consists of 378 funds as of August 31, 2022. With the exception of Robert S. Kapito, Salim Ramji and Charles Park, the address of each Director and officer is c/o BlackRock, Inc., 400 Howard Street, San Francisco, CA 94105. The address of Mr. Kapito, Mr. Ramji and Mr. Park is c/o BlackRock, Inc., Park Avenue Plaza, 55 East 52nd Street, New York, NY 10055. The Board has designated John E. Kerrigan as its Independent Board Chair. Additional information about the Funds’ Directors and officers may be found in the Funds’ combined Statement of Additional Information, which is available without charge, upon request, by calling toll-free 1-800-iShares (1-800-474-2737).
Interested Directors | ||||||
Name (Age) | Position(s) |
Principal Occupation(s) During Past 5 Years |
Other Directorships Held by Director | |||
Robert S. Kapito(a) (65) | Director (since 2009). | President, BlackRock, Inc. (since 2006); Vice Chairman of BlackRock, Inc. and Head of BlackRock’s Portfolio Management Group (since its formation in 1998) and BlackRock, Inc.’s predecessor entities (since 1988); Trustee, University of Pennsylvania (since 2009); President of Board of Directors, Hope & Heroes Children’s Cancer Fund (since 2002). | Director of BlackRock, Inc. (since 2006); Trustee of iShares U.S. ETF Trust (since 2011); Trustee of iShares Trust (since 2009). | |||
Salim Ramji(b) (52) | Director (since 2019). | Senior Managing Director, BlackRock, Inc. (since 2014); Global Head of BlackRock’s ETF and Index Investments Business (since 2019); Head of BlackRock’s U.S. Wealth Advisory Business (2015-2019); Global Head of Corporate Strategy, BlackRock, Inc. (2014-2015); Senior Partner, McKinsey & Company (2010-2014). | Trustee of iShares U.S. ETF Trust (since 2019); Trustee of iShares Trust (since 2019). | |||
(a) Robert S. Kapito is deemed to be an “interested person” (as defined in the 1940 Act) of the Company due to his affiliations with BlackRock, Inc. and its affiliates. | ||||||
(b) Salim Ramji is deemed to be an “interested person” (as defined in the 1940 Act) of the Company due to his affiliations with BlackRock, Inc. and its affiliates. | ||||||
Independent Directors | ||||||
Name (Age) | Position(s) |
Principal Occupation(s) During Past 5 Years |
Other Directorships Held by Director | |||
John E. Kerrigan (67) | Director (since 2005); Independent Board Chair (since 2022). | Chief Investment Officer, Santa Clara University (since 2002). | Trustee of iShares U.S. ETF Trust (since 2011); Trustee of iShares Trust (since 2005); Independent Board Chair of iShares Trust and iShares U.S. ETF Trust (since 2022). | |||
Jane D. Carlin (66) | Director (since 2015); Risk Committee Chair (since 2016). | Consultant (since 2012); Member of the Audit Committee (2012-2018), Chair of the Nominating and Governance Committee (2017-2018) and Director of PHH Corporation (mortgage solutions) (2012-2018); Managing Director and Global Head of Financial Holding Company Governance & Assurance and the Global Head of Operational Risk Management of Morgan Stanley (2006-2012). | Trustee of iShares U.S. ETF Trust (since 2015); Trustee of iShares Trust (since 2015); Member of the Audit Committee (since 2016), Chair of the Audit Committee (since 2020) and Director of The Hanover Insurance Group, Inc. (since 2016). | |||
Richard L. Fagnani (67) | Director (since 2017); Audit Committee Chair (since 2019). | Partner, KPMG LLP (2002-2016). | Trustee of iShares U.S. ETF Trust (since 2017); Trustee of iShares Trust (since 2017). |
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Director and Officer Information (unaudited) (continued)
Independent Directors (continued) | ||||||
Name (Age) | Position(s) |
Principal Occupation(s) During Past 5 Years |
Other Directorships Held by Director | |||
Cecilia H. Herbert (73) | Director (since 2005); Nominating and Governance and Equity Plus Committee Chairs (since 2022). | Chair of the Finance Committee (since 2019) and Trustee and Member of the Finance, Audit and Quality Committees of Stanford Health Care (since 2016); Trustee of WNET, New York’s public media company (since 2011) and Member of the Audit Committee (since 2018) and Investment Committee (since 2011); Chair (1994-2005) and Member (since 1992) of the Investment Committee, Archdiocese of San Francisco; Trustee of Forward Funds (14 portfolios) (2009-2018); Trustee of Salient MF Trust (4 portfolios) (2015-2018); Director (1998-2013) and President (2007-2011) of the Board of Directors, Catholic Charities CYO; Trustee (2002-2011) and Chair of the Finance and Investment Committee (2006-2010) of the Thacher School; Director of the Senior Center of Jackson Hole (since 2020). | Trustee of iShares U.S. ETF Trust (since 2011); Trustee of iShares Trust (since 2005); Trustee of Thrivent Church Loan and Income Fund (since 2019). | |||
Drew E. Lawton (63) | Director (since 2017); 15(c) Committee Chair (since 2017). | Senior Managing Director of New York Life Insurance Company (2010-2015). | Trustee of iShares U.S. ETF Trust (since 2017); Trustee of iShares Trust (since 2017). | |||
John E. Martinez (61) | Director (since 2003); Securities Lending Committee Chair (since 2019). | Director of Real Estate Equity Exchange, Inc. (since 2005); Director of Cloudera Foundation (2017-2020); and Director of Reading Partners (2012-2016). | Trustee of iShares U.S. ETF Trust (since 2011); Trustee of iShares Trust (since 2003). | |||
Madhav V. Rajan (58) | Director (since 2011); Fixed Income Plus Committee Chair (since 2019). | Dean, and George Pratt Shultz Professor of Accounting, University of Chicago Booth School of Business (since 2017); Advisory Board Member (since 2016) and Director (since 2020) of C.M. Capital Corporation; Chair of the Board for the Center for Research in Security Prices, LLC (since 2020); Robert K. Jaedicke Professor of Accounting, Stanford University Graduate School of Business (2001-2017); Professor of Law (by courtesy), Stanford Law School (2005-2017); Senior Associate Dean for Academic Affairs and Head of MBA Program, Stanford University Graduate School of Business (2010-2016). | Trustee of iShares U.S. ETF Trust (since 2011); Trustee of iShares Trust (since 2011). | |||
Officers | ||||||
Name (Age) | Position(s) |
Principal Occupation(s) During Past 5 Years | ||||
Armando Senra (51) | President (since 2019). | Managing Director, BlackRock, Inc. (since 2007); Head of U.S., Canada and Latam iShares, BlackRock, Inc. (since 2019); Head of Latin America Region, BlackRock, Inc. (2006-2019); Managing Director, Bank of America Merrill Lynch (1994-2006). | ||||
Trent Walker (48) | Treasurer and Chief Financial Officer (since 2020). | Managing Director, BlackRock, Inc. (since September 2019); Chief Financial Officer of iShares Delaware Trust Sponsor LLC, BlackRock Funds, BlackRock Funds II, BlackRock Funds IV, BlackRock Funds V and BlackRock Funds VI (since 2021); Executive Vice President of PIMCO (2016-2019); Senior Vice President of PIMCO (2008-2015); Treasurer (2013-2019) and Assistant Treasurer (2007-2017) of PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series, PIMCO Equity Series VIT, PIMCO Managed Accounts Trust, 2 PIMCO-sponsored interval funds and 21 PIMCO-sponsored closed-end funds. | ||||
Charles Park (55) | Chief Compliance Officer (since 2006). | Chief Compliance Officer of BlackRock Advisors, LLC and the BlackRock-advised Funds in the BlackRock Multi-Asset Complex and the BlackRock Fixed-Income Complex (since 2014); Chief Compliance Officer of BFA (since 2006). | ||||
Marisa Rolland (42) | Secretary (since 2022). | Director, BlackRock, Inc. (since 2018); Vice President, BlackRock, Inc. (2010-2017). | ||||
Rachel Aguirre (40) | Executive Vice President (since 2022). | Managing Director, BlackRock, Inc. (since 2018); Director, BlackRock, Inc. (2009-2018); Head of U.S. iShares Product (since 2022); Head of EII U.S. Product Engineering (since 2021); Co-Head of EII’s Americas Portfolio Engineering (2020-2021); Head of Developed Markets Portfolio Engineering (2016-2019). | ||||
Jennifer Hsui (46) | Executive Vice President (since 2022). | Managing Director, BlackRock, Inc. (since 2009); Co-Head of Index Equity (since 2022). | ||||
James Mauro (51) | Executive Vice President (since 2022). | Managing Director, BlackRock, Inc. (since 2010); Head of Fixed Income Index Investments in the Americas and Head of San Francisco Core Portfolio Management (since 2020). |
D I R E C T O R A N D O F F I C E R I N F O R M A T I O N |
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Director and Officer Information (unaudited) (continued)
Effective March 18, 2022, Rachel Aguirre, Jennifer Hsui, and James Mauro have replaced Scott Radell, Alan Mason, and Marybeth Leithead as Executive Vice Presidents.
Effective June 15, 2022, Marisa Rolland replaced Deepa Damre Smith as Secretary.
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Electronic Delivery
Shareholders can sign up for e-mail notifications announcing that the shareholder report or prospectus has been posted on the iShares website at iShares.com. Once you have enrolled, you will no longer receive prospectuses and shareholder reports in the mail.
To enroll in electronic delivery:
• |
Go to icsdelivery.com. |
• |
If your brokerage firm is not listed, electronic delivery may not be available. Please contact your broker-dealer or financial advisor. |
Householding
Householding is an option available to certain fund investors. Householding is a method of delivery, based on the preference of the individual investor, in which a single copy of certain shareholder documents and Rule 30e-3 notices can be delivered to investors who share the same address, even if their accounts are registered under different names. Please contact your broker-dealer if you are interested in enrolling in householding and receiving a single copy of prospectuses and other shareholder documents, or if you are currently enrolled in householding and wish to change your householding status.
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the SEC for the first and third quarters of each fiscal year as an exhibit to its reports on Form N-PORT. The Fund’s Forms N-PORT are available on the SEC’s website at sec.gov. Additionally, the Fund makes its portfolio holdings for the first and third quarters of each fiscal year available at iShares.com/fundreports.
Availability of Proxy Voting Policies and Proxy Voting Records
A description of the policies and procedures that the iShares Funds use to determine how to vote proxies relating to portfolio securities and information about how the iShares Funds voted proxies relating to portfolio securities during the most recent twelve-month period ending June 30 is available without charge, upon request (1) by calling toll-free 1-800-474-2737; (2) on the iShares website at iShares.com; and (3) on the SEC website at sec.gov.
A description of the Company’s policies and procedures with respect to the disclosure of the Fund’s portfolio securities is available in the Fund Prospectus. The Fund discloses its portfolio holdings daily and provides information regarding its top holdings in Fund fact sheets at iShares.com.
G E N E R A L I N F O R M A T I O N |
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Glossary of Terms Used in this Report
Portfolio Abbreviations
ADR | American Depositary Receipt | |
GDR | Global Depositary Receipt | |
NVS | Non-Voting Shares | |
PJSC | Public Joint Stock Company |
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Want to know more?
iShares.com | 1-800-474-2737
This report is intended for the Fund’s shareholders. It may not be distributed to prospective investors unless it is preceded or accompanied by the current prospectus.
Investing involves risk, including possible loss of principal.
The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).
The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI Inc., nor does this company make any representation regarding the advisability of investing in the iShares Funds. BlackRock is not affiliated with the company listed above.
©2022 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc. or its subsidiaries. All other marks are the property of their respective owners.
iS-AR-821-0822
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