BlackRock Floating Rate Loan ETF
2023
Prospectus
Blackrock
ETF Trust II
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BlackRock
Floating Rate Loan ETF | BRLN | CBOE BZX |
The Securities and Exchange Commission (“SEC”) has
not approved or disapproved these securities or passed upon the adequacy of this
prospectus. Any representation to the contrary is a criminal offense.
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Not FDIC Insured • May Lose Value • No Bank
Guarantee |
Table
of Contents
BlackRock® is a registered trademark of
BlackRock Fund Advisors and its affiliates.
i
BLACKROCK
FLOATING RATE LOAN ETF
Ticker:
BRLN Stock
Exchange: CBOE BZX
Investment
Objective
The BlackRock Floating Rate
Loan ETF (the “Fund”) primarily seeks to provide high current income
and secondarily seeks to provide long-term capital
appreciation.
Fees
and Expenses
The
following table describes the fees and expenses that you will incur if you buy,
hold and sell shares of the Fund. The investment advisory agreement between
BlackRock ETF Trust II (the “Trust”) and BlackRock Fund Advisors (“BFA”) (the
“Investment Advisory Agreement”) provides that BFA will pay all operating
expenses of the Fund, except (i) the management fees, (ii) interest expenses,
(iii) taxes, (iv) expenses incurred with respect to the acquisition and
disposition of portfolio securities and the execution of portfolio transactions,
including brokerage commissions (other than any commitment fee relating to a
committed line of credit), (v) distribution fees or expenses, and (vi)
litigation expenses and any extraordinary expenses. The Fund may incur “Acquired
Fund Fees and Expenses.” Acquired Fund Fees and Expenses reflect the Fund’s pro
rata share of the fees and expenses incurred indirectly by the Fund as a result
of investing in other investment companies. The impact of Acquired Fund Fees and
Expenses is included in the total returns of the
Fund.
You
may also incur usual and customary brokerage commissions and other charges when
buying or selling shares of the Fund, which are not reflected in the Example
that follows:
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Annual Fund Operating Expenses (ongoing expenses that you pay each year as
a percentage of the value of
your investments) |
Management Fees1,2 |
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Distribution and Service (12b‑1) Fees |
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Other Expenses |
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Acquired Fund Fees and Expenses1,3 |
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Total Annual Fund Operating Expenses3 |
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Fee Waiver1,2 |
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Total Annual Fund Operating Expenses After Fee Waiver1,2 |
0.60% |
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None |
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None |
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0.02% |
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0.62% |
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(0.07)% |
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0.55% |
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1 |
As
described in the “Management” section of the Fund’s prospectus beginning
on page 26, BFA has contractually agreed to waive its management fees in
an amount equal to the Acquired Fund Fees and Expenses, if any,
attributable to investments by the Fund in other funds advised by BFA or
its affiliates through June 30,
2025. The agreement may be terminated upon 90 days’ notice
by a majority of the non-interested trustees of the Trust or by a vote of
a majority of the outstanding voting securities of the
Fund. |
|
2 |
As
described in the “Management” section of the Fund’s prospectus beginning
on page 26, BFA has contractually agreed to waive 0.05% of its management
fee through June 30,
2026. The agreement may be terminated upon 90 days’
notice by a majority of the non‑interested trustees of the Trust or by a
vote of a majority of the outstanding voting securities of the
Fund. |
|
3 |
The Total
Annual Fund Operating Expenses do not correlate to the ratio of expenses
to average net assets given in the Fund’s most recent annual report, which
do not include Acquired Fund Fees and
Expenses. |
Example. This Example is
intended to help you compare the cost of owning shares of the Fund with the cost
of investing in other funds. The Example assumes that you invest $10,000 in the
Fund for the time periods indicated and then sell all of your shares at the end
of those periods. The Example also assumes that your investment has a 5% return
each year and that the Fund’s operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions, your costs
would be:
Portfolio Turnover.
The Fund
may pay transaction costs, such as commissions, when it buys and sells
securities (or “turns over” its portfolio). A higher portfolio turnover rate may
indicate higher transaction costs and may result in higher taxes when Fund
shares are held in a taxable account. These costs, which are not reflected in
the Annual Fund Operating Expenses or in the Example, affect the
Fund’s
performance. During the most
recent fiscal year, the Fund’s portfolio turnover rate was 22% of the average value of its
portfolio.
Principal
Investment Strategies
The
Fund normally invests at least 80% of its assets in floating rate loans and
investments that are the
S-1
economic
equivalent of floating rate loans, which effectively enables the Fund to achieve
a floating rate of income. The Fund may also invest in other floating rate debt
instruments and investments that are the economic equivalent of floating rate
debt instruments. The Fund’s investments may include, but are not limited to,
any combination of the following: (i) senior secured floating rate loans or
debt; (ii) second lien or other subordinated or unsecured floating rate
loans or debt; and (iii) fixed-rate loans or debt with respect to which the
Fund has entered into derivative instruments to effectively convert the
fixed-rate interest payments into floating rate interest payments. The Fund may
also purchase and sell, without limitation, participations or assignments in
senior floating rate loans or second lien floating rate
loans.
For
purposes of the Fund’s investments, the term debt instruments includes
convertible or preferred securities.
The
Fund may invest in investments of any credit quality without limitation,
including investments rated below investment grade. The Fund anticipates that,
under current market conditions, a substantial portion of its portfolio will
consist of leveraged loans rated below investment grade and similar investments.
These investments are expected to exhibit credit risks similar to high yield
securities, which are commonly referred to as “junk
bonds.”
The
Fund may invest up to 20% of its assets in fixed-rate loans and fixed income
securities with respect to which the Fund has not entered into derivative
instruments to effectively convert the fixed-rate interest payments into
floating-rate interest payments. Such fixed-rate loans and fixed income
securities include, but are not limited to, senior loans, second lien loans,
corporate bonds, preferred securities, convertible securities, mezzanine
investments, collateralized loan obligations, structured products and U.S.
government debt securities.
The
Fund’s investments in any floating rate and fixed income instruments may be of
any duration or maturity. The Fund may invest in loans or debt of foreign
issuers, including issuers located in emerging markets, without limitation. The
Fund may also invest up to 15% of its net assets in illiquid investments. The
Fund intends to invest in certain high yield securities and exchange-traded
funds (“ETFs”) for liquidity purposes.
The
Fund may also invest in companies whose financial condition is uncertain, where
the borrower
has
defaulted in the payment of interest or principal or in the performance of its
covenants or agreements, or that may be involved in bankruptcy proceedings,
reorganizations or financial
restructurings.
The
Fund may invest up to 10% of its assets in common stocks or other equity
securities. In addition, the Fund may acquire and hold such securities (or
rights to acquire such securities) in unit offerings with fixed income
securities, in connection with an amendment, waiver, conversion or exchange of
fixed income securities, in connection with the bankruptcy or workout of a
distressed fixed income security, or upon the exercise of a right or warrant
obtained on account of a fixed income
security.
The
Fund may buy or sell options or futures on a security or an index of securities,
buy or sell options on futures or enter into credit default swaps and interest
rate or foreign currency transactions, including swaps and forward contracts
(collectively, commonly known as derivatives). The Fund may use derivatives for
hedging purposes, but is not required to, as well as to increase the total
return on its portfolio investments.
The
Fund is classified as non-diversified under the Investment Company Act of 1940,
as amended (the “Investment Company Act”).
Summary
of Principal Risks
As with any investment, you could lose all or part of your
investment in the Fund, and the Fund’s performance could trail that of other
investments. The Fund is subject to certain risks, including the
principal risks noted below, any of which may adversely affect the Fund’s net
asset value per share (“NAV”), trading price, yield, total return and ability to
meet its investment objective. Unlike many ETFs, the Fund is not an index-based
ETF. The relative significance of each risk factor below may change over time
and you should review each risk factor carefully.
Corporate Loans Risk
- Commercial banks and other financial institutions or
institutional investors make corporate loans to companies that need capital to
grow or restructure. Borrowers generally pay interest on corporate loans at
rates that change in response to changes in market interest rates such as the
London Interbank Offered Rate (“LIBOR”) or the prime rates of U.S. banks. As a
result, the value of corporate loan investments is generally less exposed to the
adverse effects of shifts in market interest rates than investments that pay a
fixed rate of interest. The market for corporate loans may be subject to
irregular
S-2
trading
activity and wide bid/ask spreads. In addition, transactions in corporate loans
may settle on a delayed basis. As a result, the proceeds from the sale of
corporate loans may not be readily available to make additional investments or
to meet the Fund’s redemption obligations. To the extent the extended settlement
process gives rise to short-term liquidity needs, the Fund may hold additional
cash, sell investments or temporarily borrow from banks and other lenders. The
corporate loans in which the Fund invests are usually rated below investment
grade.
Senior Loans
Risk. There is less readily available, reliable information about
most senior loans than is the case for many other types of
securities.
An
economic downturn generally leads to a higher non‑payment rate, and a senior
loan may lose significant value before a default occurs. Moreover, any specific
collateral used to secure a senior loan may decline in value or become illiquid,
which would adversely affect the senior loan’s
value.
No
active trading market may exist for certain senior loans, which may impair the
ability of the Fund to realize full value in the event of the need to sell a
senior loan and which may make it difficult to value senior
loans.
Although
senior loans in which the Fund will invest generally will be secured by specific
collateral, there can be no assurance that liquidation of such collateral would
satisfy the borrower’s obligation in the event of non‑payment of scheduled
interest or principal or that such collateral could be readily liquidated. To
the extent that a senior loan is collateralized by stock in the borrower or its
subsidiaries, such stock may lose all of its value in the event of the
bankruptcy of the borrower. Uncollateralized senior loans involve a greater risk
of loss. The senior loans in which the Fund invests are usually rated below
investment grade. Senior loans made in connection with highly leveraged
transactions are subject to greater risks than other senior loans. For example,
the risks of default or bankruptcy of the borrower or the risks that other
creditors of the borrower may seek to nullify or subordinate the Fund’s claims
on any collateral securing the loan are greater in highly leveraged
transactions.
Second Lien Loans
Risk. Second lien loans generally are subject to similar risks as
those associated with investments in senior loans. Because second lien loans are
subordinated or unsecured and thus lower in priority of payment to senior loans, they are
subject to the additional risk that the cash flow of
the
borrower and property securing the loan or debt, if any, may be insufficient to
meet scheduled payments after giving effect to the senior secured obligations of
the borrower.
High Yield Securities
Risk. Securities that are rated below investment-grade (commonly
referred to as “junk bonds,” which may include those bonds rated below “BBB‑” by
S&P Global Ratings and Fitch Inc. (“Fitch”), or “Baa3” by Moody’s Investors
Service, Inc. (“Moody’s”)), or are unrated, may be deemed speculative, may
involve greater levels of risk than higher-rated securities of similar maturity
and may be more likely to default.
Floating Rate
Securities Risk. Securities with floating or variable interest
rates can be less sensitive to interest rate changes than securities with fixed
interest rates, but may decline in value if their coupon rates do not reset as
high, or as quickly, as comparable market interest rates, and generally carry
lower yields than fixed securities of the same maturity. Although floating rate
securities are less sensitive to interest rate risk than fixed-rate securities,
they are subject to credit risk and default risk, which could impair their
value.
Credit
Risk. Debt issuers and other counterparties may be unable or
unwilling to make timely interest and/or principal payments when due or
otherwise honor their obligations. Changes in an issuer’s credit rating or the
market’s perception of an issuer’s creditworthiness may also adversely affect
the value of the Fund’s investment in that issuer. The degree of credit risk
depends on an issuer’s or counterparty’s financial condition and on the terms of
an obligation.
Income
Risk. Income risk is the risk that the Fund’s yield will vary
as short-term securities in its portfolio mature and the proceeds are
reinvested in securities with different interest
rates.
Interest Rate
Risk. During periods of very low or negative interest rates,
the Fund may be unable to maintain positive returns or pay dividends to Fund
shareholders. Very low or negative interest rates may magnify interest rate
risk. Changing interest rates, including rates that fall below zero, may have
unpredictable effects on markets, result in heightened market volatility and
detract from the Fund’s performance to the extent the Fund is exposed to such
interest rates. Additionally, under certain market conditions in which interest
rates are low and the market prices for portfolio securities have increased, the
Fund may have a very low or even negative yield. A low or negative yield would
cause the Fund to lose
S-3
money
in certain conditions and over certain time periods. An increase in interest rates will
generally cause the value of securities held by the Fund to decline, may
lead to heightened volatility in the fixed-income markets and may adversely
affect the liquidity of certain fixed-income investments, including those held
by the Fund. Because rates on certain floating rate debt securities typically
reset only periodically, changes in prevailing interest rates (and particularly
sudden and significant changes) can be expected to cause some fluctuations in
the net asset value of the Fund to the extent that it invests in floating rate
debt securities. The historically low interest rate environment in recent years
heightens the risks associated with rising interest
rates.
Call
Risk. During periods of falling interest rates, an issuer of
a callable bond held by the Fund may “call” or repay the security before its
stated maturity, and the Fund may have to reinvest the proceeds in securities
with lower yields, which would result in a decline in the Fund’s income, or in
securities with greater risks or with other less favorable
features.
Extension
Risk. During periods of rising interest rates, certain debt
obligations may be paid off substantially more slowly than originally
anticipated and the value of those securities may fall sharply, resulting in a
decline in the Fund’s income and potentially in the value of the Fund’s
investments.
Prepayment
Risk. When interest rates
fall, certain obligations will be paid off by the obligor more quickly than
originally anticipated, and the Fund may have to invest the proceeds in
securities with lower yields.
Asset
Class Risk. Securities and other
assets in the Fund’s portfolio may underperform in comparison to the general
financial markets, a particular financial market or other asset
classes.
Assets Under
Management (AUM) Risk. From time to time, an Authorized
Participant (as defined in the Creations and Redemptions section of this
prospectus (the “Prospectus”) a third-party investor, the Fund’s adviser or an
affiliate of the Fund’s adviser, or a fund may invest in the Fund and hold its
investment for a specific period of time in order to facilitate commencement of
the Fund’s operations or to allow the Fund to achieve size or scale. There can
be no assurance that any such entity would not redeem its investment or that the
size of the Fund would be maintained at such levels, which could negatively
impact the Fund.
Authorized
Participant Concentration Risk. Only an Authorized Participant (as
defined in the Creations and Redemptions section of this Prospectus) may engage
in creation or redemption transactions directly with the Fund, and none of those
Authorized Participants is obligated to engage in creation and/or redemption
transactions. The Fund has a limited number of institutions that may act as
Authorized Participants on an agency basis (i.e., on behalf of other market
participants). To the extent that Authorized Participants exit the business or
are unable to proceed with creation or redemption orders with respect to the
Fund and no other Authorized Participant is able to step forward to create or
redeem, Fund shares may be more likely to trade at a premium or discount to NAV
and possibly face trading halts or
delisting.
Collateralized Debt
Obligations Risk - In addition to the typical risks associated
with fixed-income securities and asset-backed securities, collateralized debt
obligations (“CDOs”) carry additional risks including, but not limited to:
(i) the possibility that distributions from collateral securities will not
be adequate to make interest or other payments; (ii) the risk that the
collateral may default or decline in value or be downgraded, if rated by a
nationally recognized statistical rating organization; (iii) the Fund may
invest in tranches of CDOs that are subordinate to other tranches; (iv) the
structure and complexity of the transaction and the legal documents could lead
to disputes among investors regarding the characterization of proceeds;
(v) the investment return achieved by the Fund could be significantly
different than those predicted by financial models; (vi) the lack of a
readily available secondary market for CDOs; (vii) the risk of forced “fire
sale” liquidation due to technical defaults such as coverage test failures; and
(viii) the CDO’s manager may perform
poorly.
Concentration
Risk. The Fund may be susceptible to an increased risk of
loss, including losses due to adverse events that affect the Fund’s investments
more than the market as a whole, to the extent that the Fund’s investments are
concentrated in the securities and/or other assets of a particular issuer or
issuers, country, group of countries, region, market, industry, group of
industries, sector, market segment or asset
class.
Convertible
Securities Risk. The market price of a convertible security
generally tends to behave like that of a regular debt security; that is, if
market interest rates rise, the value of a convertible
security
S-4
usually
falls. In addition, convertible securities are subject to the risk that the
issuer will not be able to pay interest, principal or dividends when due, and
their market value may change based on changes in the issuer’s credit rating or
the market’s perception of the issuer’s creditworthiness. Because a convertible
security derives a portion of its value from the common stock into which it may
be converted, a convertible security is also subject to the same types of market
and issuer risks that apply to the underlying common stock, including the
potential for increased volatility in the price of the convertible
security.
Cybersecurity
Risk. Failures or breaches of the electronic systems of the
Fund, the Fund’s adviser, distributor, and other service providers, market
makers, Authorized Participants or the issuers of securities in which the Fund
invests have the ability to cause disruptions, negatively impact the Fund’s
business operations and/or potentially result in financial losses to the Fund
and its shareholders. While the Fund has established business continuity plans
and risk management systems seeking to address system breaches or failures,
there are inherent limitations in such plans and systems. Furthermore, the
Fund cannot control the cybersecurity plans and systems of the Fund’s service
providers, market makers, Authorized Participants or issuers of securities in
which the Fund invests.
Distressed Securities
Risk. Distressed securities are speculative and involve
substantial risks in addition to the risks of investing in junk bonds. The Fund
will generally not receive interest payments on the distressed securities and
may incur costs to protect its investment. In addition, distressed securities
involve the substantial risk that principal will not be repaid. These securities
may present a substantial risk of default or may be in default at the time of
investment. The Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of principal of or interest on
its portfolio holdings. In any reorganization or liquidation proceeding relating
to a portfolio company, the Fund may lose its entire investment or may be
required to accept cash or securities with a value less than its original
investment. Distressed securities and any securities received in an exchange for
such securities may be subject to restrictions on
resale.
Dividend
Risk. Because certain of the corporate loans held by the Fund will
have floating or variable interest rates, the amounts of the Fund’s monthly
distributions to its stockholders are expected to vary with fluctuations in
market interest rates. Generally,
when
market interest rates fall, the amount of the distributions to stockholders will
likewise decrease.
Equity Securities
Risk. Stock markets are volatile. The price of equity securities
fluctuates based on changes in a company’s financial condition and overall
market and economic conditions.
Event
Risk. Event risk is the risk that corporate issuers may undergo
restructurings, such as mergers, leveraged buyouts, takeovers, or similar events
financed by increased debt. As a result of the added debt, the credit quality
and market value of a company’s bonds and/or other debt securities may decline
significantly.
Forward Foreign
Currency Exchange Contracts. Forward foreign currency exchange
transactions are over‑the‑counter (“OTC”) contracts to purchase or sell a
specified amount of a specified currency or multinational currency unit at a
price and future date set at the time of the contract. Forward foreign currency
exchange contracts do not eliminate fluctuations in the value of non‑U.S.
securities but rather allow the Fund to establish a fixed rate of exchange for a
future point in time. This strategy can have the effect of reducing returns and
minimizing opportunities for gain.
Futures Contract
Risk. Futures are standardized,
exchange-traded contracts that obligate a purchaser to take delivery, and a
seller to make delivery, of a specific amount of an asset at a specified future
date at a specified price. Unlike equities, which typically entitle the holder
to a continuing ownership stake in an issuer, futures contracts normally specify
a certain date for settlement in cash based on the level of the reference rate.
The primary risks associated with the use of futures contracts, or swaps or
other derivatives referencing futures contracts, are: (i) the imperfect
correlation between the change in market value of the instruments held by the
Fund and the price of the futures contract; (ii) possible lack of a
liquid secondary market for a futures contract and the resulting inability to
close a futures contract when desired; (iii) losses caused by unanticipated
market movements, which are potentially unlimited; (iv) BFA’s inability to
predict correctly the direction of prices and other economic factors; and
(v) the possibility that the counterparty will default in the performance
of its obligations.
Illiquid Investments
Risk. The Fund may not acquire any illiquid investment if,
immediately after the acquisition, the Fund would have invested more than 15% of
its net assets in illiquid investments. An illiquid
S-5
investment
is any investment that the Fund reasonably expects cannot be sold or disposed of
in current market conditions in seven calendar days or less without
significantly changing the market value of the investment. To the extent the
Fund holds illiquid investments, the illiquid investments may reduce the returns
of the Fund because the Fund may be unable to transact at advantageous times or
prices. In addition, if the Fund is limited in its ability to sell illiquid
investments during periods when shareholders are redeeming their shares, the
Fund will need to sell liquid securities to meet redemption requests and
illiquid securities will become a larger portion of the Fund’s holdings. During
periods of market volatility, liquidity in the market for the Fund’s shares may
be impacted by the liquidity in the market for the underlying securities or
instruments held by the Fund, which could lead to the Fund’s shares trading at a
premium or discount to the Fund’s NAV.
Infectious Illness
Risk. A widespread outbreak of an infectious illness, such as
the COVID-19 pandemic, may result in travel restrictions, disruption of
healthcare services, prolonged quarantines, cancellations, supply chain
disruptions, business closures, lower consumer demand, layoffs, ratings
downgrades, defaults and other significant economic, social and political
impacts. Markets may experience temporary closures, extreme volatility, severe
losses, reduced liquidity and increased trading costs. Such events may adversely
affect the Fund and its investments and may impact the Fund’s ability to
purchase or sell securities or cause increased premiums or discounts to the
Fund’s NAV. Despite the development of vaccines, the duration of the COVID-19
pandemic and its effects cannot be predicted with
certainty.
Investment in Other
Investment Companies Risk. As with other investments, investments
in other investment companies, including ETFs, are subject to market and
selection risk. In addition, if the Fund acquires shares of investment
companies, including ones affiliated with the Fund, shareholders bear both their
proportionate share of expenses in the Fund (including management and advisory
fees) and, indirectly, the expenses of the investment companies (to the extent
not offset by BFA through waivers). To the extent the Fund is held by another
fund, the ability of the Fund itself to hold other investment companies may be
limited.
Issuer
Risk. The performance of the Fund depends on the performance
of individual securities to which the Fund has exposure. The Fund may be
adversely affected if an issuer of underlying securities held by the Fund is
unable or unwilling to repay principal or
interest
when due. Changes in the financial condition or credit rating of an issuer of
those securities may cause the value of the securities to
decline.
Large Shareholder and
Large-Scale Redemption Risk. Certain shareholders, including an
Authorized Participant, a third-party investor, the Fund’s adviser or an
affiliate of the Fund’s adviser, a market maker, or another entity, may from
time to time own or manage a substantial amount of Fund shares, or may invest in
the Fund and hold their investment for a limited period of time. There can be no
assurance that any large shareholder or large group of shareholders would not
redeem their investment. Redemptions of a large number of Fund shares could
require the Fund to dispose of assets to meet the redemption requests, which can
accelerate the realization of taxable income and/or capital gains and cause the
Fund to make taxable distributions to its shareholders earlier than the Fund
otherwise would have. In addition, under certain circumstances, non‑redeeming
shareholders may be treated as receiving a disproportionately large taxable
distribution during or with respect to such year. In some circumstances, the
Fund may hold a relatively large proportion of its assets in cash in
anticipation of large redemptions, diluting its investment returns. These large
redemptions may also force the Fund to sell portfolio securities when it might
not otherwise do so, which may negatively impact the Fund’s NAV, increase the
Fund’s brokerage costs and/or have a material effect on the market price of the
Fund shares.
Leverage
Risk. Some transactions may give rise to a form of economic
leverage. These transactions may include, among others, derivatives, and may
expose the Fund to greater risk and increase its costs. The use of leverage may
cause the Fund to liquidate portfolio positions when it may not be advantageous
to do so to satisfy its obligations or to meet the applicable requirements of
the Investment Company Act and the rules thereunder. Increases and decreases in
the value of the Fund’s portfolio will be magnified when the Fund uses
leverage.
Management
Risk. The Fund is subject to management risk, which is the
that the investment process, techniques and risk analyses applied by BFA will
not produce the desired results, and that securities or other financial
instruments, selected by BFA may result in returns that are inconsistent with a
Fund’s investment objective. In addition, legislative, regulatory, or tax
developments may affect the investment techniques available to BFA in connection
with managing the Fund and may also adversely affect the ability of the Fund to
achieve its investment objective.
S-6
Market
Risk. The Fund could lose money over short periods due to
short-term market movements and over longer periods during more prolonged market
downturns. 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 and could
result in increased premiums or discounts to the Fund’s
NAV.
Market Trading
Risk. The Fund faces numerous market trading risks, including the
potential lack of an active market for Fund shares, losses from trading in
secondary markets, periods of high volatility and disruptions in the
creation/redemption process. Unlike some ETFs that track specific indexes, the
Fund does not seek to replicate the performance of a specified index.
Index-based ETFs have generally traded at prices that closely correspond to NAV
per share. Given the high level of transparency of the Fund’s holdings, BFA
believes that the trading experience of the Fund should be similar to that of
index-based ETFs. However, ETFs that do not seek to replicate the performance of
a specified index have a limited trading history and, therefore, there can be no
assurance as to whether, and/or the extent to which, the Fund’s shares will
trade at premiums or discounts to NAV. ANY OF THESE FACTORS, AMONG OTHERS, MAY
LEAD TO THE FUND’S SHARES TRADING AT A PREMIUM OR DISCOUNT TO
NAV.
Mezzanine Securities
Risk. Mezzanine securities carry the risk that the issuer will not
be able to meet its obligations and that the equity securities purchased with
the mezzanine investments may lose value.
Non-Diversification
Risk. The Fund is classified as “non-diversified.” This means
that, compared with other funds that are classified as “diversified,” the Fund
may invest a greater percentage of its assets in securities issued by or
representing a small number of issuers. As a result, the Fund’s performance may
depend on the performance of a small number of
issuers.
Options. An option is an agreement
that, for a premium payment or fee, gives the option holder (the purchaser) the
right but not the obligation to buy (a “call option”) or sell (a “put option”)
the underlying asset (or settle for cash in an amount based on an underlying
asset, rate, or index) at a specified price (the “exercise price”) during a
period of time or on a specified date. Investments in options are considered
speculative. When the Fund purchases an option, it may lose the total premium
paid for it if the price of the underlying security or other assets decreased,
remained the same or failed to increase to a level
at
or
beyond the exercise price (in the case of a call option) or increased, remained
the same or failed to decrease to a level at or below the exercise price (in the
case of a put option). If a put or call option purchased by the Fund were
permitted to expire without being sold or exercised, its premium would represent
a loss to the Fund. To the extent that the Fund writes or sells an option, if
the decline or increase in the underlying asset is significantly below or above
the exercise price of the written option, the Fund could experience a
substantial loss.
Non‑U.S. Issuers
Risk. Securities issued by non‑U.S.
issuers carry different risks from securities issued by U.S. issuers. These
risks include differences in accounting, auditing and financial reporting
standards, the possibility of expropriation or confiscatory taxation, adverse
changes in investment or exchange control regulations, political instability,
regulatory and economic differences, and potential restrictions on the flow of
international capital.
Preferred Securities
Risk. Preferred securities may pay fixed or adjustable rates of
return. Preferred securities are subject to issuer-specific and market risks
applicable generally to equity securities. In addition, a company’s preferred
securities generally pay dividends only after the company makes required
payments to holders of its bonds and other debt. For this reason, the value of
preferred securities will usually react more strongly than bonds and other debt
to actual or perceived changes in the company’s financial condition or
prospects. Preferred securities of smaller companies may be more vulnerable to
adverse developments than preferred securities of larger
companies.
Reference Rate
Replacement Risk. The Fund may be exposed to financial instruments
that recently transitioned from, or continue to be tied to, London Interbank
Offered Rate (“LIBOR”) to determine payment obligations, financing terms,
hedging strategies or investment value. The United Kingdom’s Financial Conduct
Authority, which regulates LIBOR, has ceased publishing all LIBOR settings. In
April 2023, however, the FCA announced that some USD LIBOR settings will
continue to be published under a synthetic methodology until September 30, 2024
for certain legacy contracts. The Secured Overnight Financing Rate (“SOFR”),
which is a broad measure of the cost of borrowing cash overnight collateralized
by U.S. Treasury securities in the repurchase agreement market, has been used
increasingly on a voluntary basis in new instruments and transactions. Under
U.S. regulations that implement a statutory
S-7
fallback
mechanism to replace LIBOR, benchmark rates based on SOFR have replaced LIBOR in
different categories of financial
contracts.
Neither
the effect of the LIBOR transition process nor its ultimate success can yet be
known. While some existing LIBOR-based instruments may contemplate a scenario
where LIBOR is no longer available by providing for an alternative rate-setting
methodology, there may be significant uncertainty regarding the effectiveness of
any such alternative methodologies to replicate LIBOR. Not all existing
LIBOR-based instruments may have alternative rate-setting provisions and there
remains uncertainty regarding the willingness and ability of issuers to add
alternative rate-setting provisions in certain existing instruments. Parties to
contracts, securities, or other instruments using LIBOR may disagree on
transition rates or the application of transition regulation, potentially
resulting in uncertainty of performance and the possibility of litigation. The
Fund may have instruments linked to other interbank offered rates that may also
cease to be published in the future.
Risk of Investing in
Emerging Markets.
Investments in emerging market issuers may be subject to a greater risk of loss
than investments in issuers located or operating in more developed markets.
Emerging markets may be more likely to experience inflation, social instability,
political turmoil or rapid changes in economic conditions than more developed
markets. Companies in many emerging markets are not subject to the same degree
of regulatory requirements, accounting standards or auditor oversight as
companies in more developed countries, and as a result, information about the
securities in which the Fund invests may be less reliable or complete. Emerging
markets often have less reliable securities valuations and greater risk
associated with custody of securities than developed markets. There may be
significant obstacles to obtaining information necessary for investigations into
or litigation against companies and shareholders may have limited legal
remedies. The Fund is not actively managed and does not select investments based
on investor protection considerations.
Risk of Investing in
the U.S. Certain changes in the U.S. economy, such as when
the U.S. economy weakens or when its financial markets decline, may have an
adverse effect on the securities to which the Fund has
exposure.
Risk of Swap
Agreements. A swap is a two‑party contract that generally
obligates each counterparty to exchange periodic payments based on
a
pre‑determined
underlying investment or notional amount and to exchange collateral to secure
the obligations of each counterparty. Swaps may be leveraged and are subject to
counterparty risk, credit risk and pricing risk. Swaps may be subject to
illiquidity risk, and it may not be possible for the Fund to liquidate a swap
position at an advantageous time or price, which may result in significant
losses. Certain standardized interest rate and credit default swaps are required
to be traded on an exchange or trading platform and centrally cleared. Most
other swaps are entered into a negotiated, bi‑lateral basis and traded in the
over‑the counter market. Swaps are subject to bi‑lateral variation margin. The
Fund is required by financial regulators to post initial margin in connection
with trading over-the-counter swaps. These requirements may raise the costs for
the Fund’s investment in swaps.
Small Fund
Risk. When the Fund’s size is small, the Fund may experience
low trading volume and wide bid/ask spreads. In addition, the Fund may face the
risk of being delisted if the Fund does not meet certain conditions of the
listing exchange. Any resulting liquidation of the Fund could cause the Fund to
incur elevated transaction costs for the Fund and negative tax consequences for
its shareholders.
Structured Securities
Risk — Because structured securities of the type in which the Fund
may invest typically involve no credit enhancement, their credit risk generally
will be equivalent to that of the underlying instruments, index or reference
obligation and will also be subject to counterparty risk. The Fund may have the
right to receive payments only from the structured security, and generally does
not have direct rights against the issuer or the entity that sold the assets to
be securitized. In addition to the general risks associated with debt securities
discussed herein, structured securities carry additional risks, including, but
not limited to: the possibility that distributions from collateral securities
will not be adequate to make interest or other payments; the quality of the
collateral may decline in value or default; and the possibility that the
structured securities are subordinate to other classes. The Fund is permitted to
invest in a class of structured securities that is either subordinated or
unsubordinated to the right of payment of another class. Subordinated structured
securities typically have higher yields and present greater risks than
unsubordinated structured securities. Structured securities are typically sold
in private placement transactions, and there currently is no active trading
market for structured securities. Structured securities are based upon the
movement of one or more factors, including currency exchange rates, interest
rates,
S-8
reference
bonds and stock indices, and changes in interest rates and impact of these
factors may cause significant price fluctuations. Additionally, changes in the
reference instrument or security may cause the interest rate on the structured
security to be reduced to zero. Certain issuers of such structured securities
may be deemed to be “investment companies” as defined in the Investment Company
Act. As a result, the Fund’s investment in such securities may be limited by
certain investment restrictions contained in the Investment Company
Act.
U.S. Government
Issuer Risk. Treasury obligations may differ in their interest
rates, maturities, times of issuance and other characteristics. Obligations of
U.S. Government agencies and authorities are supported by varying degrees of
credit but generally are not backed by the full faith and credit of the U.S.
Government. No assurance can be given that the U.S. Government will provide
financial support to its agencies and authorities if it is not obligated by law
to do so.
Valuation
Risk. The price the Fund could receive upon the sale of a security
or other asset may differ from the Fund’s valuation of the security or other
asset, particularly for securities or other assets that trade in low volume or
volatile markets or that are valued using a fair value methodology as a result
of trade suspensions or for other reasons. Because non-U.S. exchanges may be
open on days when the Fund does not price its shares, the value of the
securities or other assets in the Fund’s portfolio may change on days or during
time periods when shareholders will not be able to purchase or sell the Fund’s
shares.
Authorized
Participants who purchase or redeem Fund shares on days when the Fund is holding
fair-valued securities may receive fewer or more shares, or lower or higher
redemption proceeds, than they would have received had the Fund not fairvalued
securities or used a different valuation methodology. The Fund’s ability to
value investments may be impacted by technological issues or errors by pricing
services or other third-party service
providers.
Performance
Information
As of the date of this Prospectus, the Fund
has been in operation for less than one full calendar year and therefore does
not report its performance information. The Fund’s benchmark is
Morningstar LSTA Leverage Loan Index.
Management
Investment Adviser. BlackRock Fund Advisors.
Portfolio Managers. Mitchell Garfin, CFA, Carly Wilson, Abigail,
CFA and Tara Fitzpatrick (the “Portfolio Managers”) are jointly and primarily
responsible for the day‑to‑day management of the Fund. Mr. Garfin and Mses.
Wilson, Parzanese and Fitzpatrick have been Portfolio Managers of the Fund since
2022.
Purchase
and Sale of Fund Shares
The
Fund is an ETF. Individual shares of the Fund may only be bought and sold in the
secondary market through a broker-dealer. Because ETF shares trade at market
prices rather than at NAV, shares may trade at a price greater than NAV (a
premium) or less than NAV (a discount). An investor may incur costs attributable
to the difference between the highest price a buyer is willing to pay to
purchase shares of the Fund (bid) and the lowest price a seller is willing to
accept for shares of the Fund (ask) when buying or selling shares in the
secondary market (the “bid‑ask spread”).
Tax
Information
The
Fund intends to make distributions that may be taxable to your as ordinary
income or capital gains, unless you are investing through a tax‑deferred
arrangement such as a 401(k) plan or an individual retirement account (“IRA”),
in which case, your distributions generally will be taxable when withdrawn.
Payments
to Broker-Dealers and Other Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial
intermediary (such as a bank), BFA or other related companies may pay the
intermediary for marketing activities and presentations, educational training
programs, conferences, the development of technology platforms and reporting
systems or other services related to the sale or promotion of the Fund. These
payments may create a conflict of interest by influencing the broker-dealer or
other intermediary and your salesperson to recommend the Fund over another
investment. Ask your salesperson or visit your financial intermediary’s website
for more information.
S-9
More
Information About the Fund
This
Prospectus contains important information about investing in the Fund. Please
read this Prospectus carefully before you make any investment decisions.
Additional information regarding the Fund is available at www.blackrock.com.
The
Fund is an actively managed ETF and, thus, does not seek to replicate the
performance of a specified index. Accordingly, the management team has
discretion on a daily basis to manage the Fund’s portfolio in accordance with
the Fund’s investment objectives.
ETFs
are funds that trade like other publicly-traded securities. Similar to shares of
a mutual fund, each share of the Fund represents an ownership interest in an
underlying portfolio of securities and other instruments. Unlike shares of a
mutual fund, which can be bought and redeemed from the issuing fund by all
shareholders at a price based on NAV, shares of the Fund may be purchased or
redeemed directly from the Fund at NAV solely by Authorized Participants and
only in aggregations of a specified number of shares (“Creation Units”). Also
unlike shares of a mutual fund, shares of the Fund are listed on a national
securities exchange and trade in the secondary market at market prices that
change throughout the day.
The
Fund’s investment objectives are non‑fundamental policies and may be changed
without shareholder approval.
Additional Information on Principal Investment
Strategies. The Fund normally invests at least 80% of its assets in
floating rate loans and investments that are the economic equivalent of floating
rate loans, which effectively enables the Fund to achieve a floating rate of
income. The Fund may also invest in other floating rate debt instruments and
investments that are the economic equivalent of floating rate debt instruments.
The Fund’s investments may include, but are not limited to, any combination of
the following: (i) senior secured floating rate loans or debt;
(ii) second lien or other subordinated or unsecured floating rate loans or
debt; and (iii) fixed-rate loans or debt with respect to which the Fund has
entered into derivative instruments to effectively convert the fixed-rate
interest payments into floating rate interest payments. The 80% policy noted
above is a non‑fundamental policy of the Fund and may not be changed without 60
days’ prior notice to shareholders. The Fund may also purchase and sell, without
limitation, participations or assignments in senior floating rate loans or
second lien floating rate loans.
For
purposes of the Fund’s investments, the term debt instruments includes
convertible or preferred securities.
The
Fund may invest in investments of any credit quality without limitation,
including investments rated below investment grade. The Fund anticipates that,
under current market conditions, a substantial portion of its portfolio will
consist of leveraged loans rated below investment grade and similar investments.
These investments are expected to exhibit credit risks similar to high yield
securities, which are commonly referred to as “junk bonds.” Leveraged loans,
like junk bonds, are debt instruments rated lower than investment grade (below
the fourth highest rating category of the major rating agencies) or determined
by the management team to be of similar quality and generally pay more interest
than higher rated investments. The higher yield exhibited by leveraged loans and
junk bonds is an incentive to investors who otherwise may be hesitant to
purchase the debt of such a low‑rated issuer. Investment grade investments are
investments rated in the four highest categories by a least one of the major
rating agencies or determined by the management team to be of similar quality.
Generally, the higher the rating of an investment, the higher the likelihood
that interest and principal payments will be made on time.
The
Fund may invest up to 20% of its assets in fixed-rate loans fixed income
securities with respect to which the Fund has not entered into derivative
instruments to effectively convert the fixed-rate interest payments into
floating-rate interest payments. Such fixed-rate loans and fixed income
securities include, but are not limited to, senior loans, second lien loans,
corporate bonds, preferred securities, convertible securities, mezzanine
investments, collateralized loan obligations, structured products and U.S.
government debt securities.
The
Fund’s investments in any floating rate and fixed income instruments may be of
any duration or maturity. The Fund may invest in loans or debt of foreign
issuers, including issuers located in emerging markets, without limitation. The
Fund may also invest up to 15% of its net assets in illiquid investments. The
Fund intends to invest in certain high yield securities and ETFs for liquidity
purposes.
The
Fund may also invest in companies whose financial condition is uncertain, where
the borrower has defaulted in the payment of interest or principal or in the
performance of its covenants or agreements, or that may be involved in
bankruptcy proceedings, reorganizations or financial restructurings.
10
The
Fund may invest up to 10% of its assets in common stocks or other equity
securities. In addition, the Fund may acquire and hold such securities (or
rights to acquire such securities) in unit offerings with fixed income
securities, in connection with an amendment, waiver, conversion or exchange of
fixed income securities, in connection with the bankruptcy or workout of a
distressed fixed income security, or upon the exercise of a right or warrant
obtained on account of a fixed income security.
The
Fund may buy or sell options or futures on a security or an index of securities,
buy or sell options on futures or enter into credit default swaps and interest
rate or foreign currency transactions, including swaps and forward contracts
(collectively, commonly known as derivatives). The Fund may use derivatives for
hedging purposes, but is not required to, as well as to increase the total
return on its portfolio investments.
The
Fund is classified as non-diversified under the Investment Company Act.
Investment Process. BFA’s analysis will
include:
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• |
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credit
research on the issuers’ financial strength; |
|
• |
|
assessment
of the issuers’ ability to meet principal and interest payments;
|
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• |
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general
industry trends; |
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• |
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the
issuers’ managerial strength; |
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• |
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changing
financial conditions; |
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• |
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borrowing
requirements or debt maturity schedules; and |
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• |
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the
issuers’ responsiveness to changes in business conditions and interest
rates. |
BFA
will consider relative values among issuers based on anticipated cash flow,
interest or dividend coverage, asset coverage and earnings prospects. Using
these tools, BFA will seek to add consistent value and control performance
volatility consistent with the Fund’s investment objectives and policies. BFA
believes this strategy should enhance the Fund’s ability to achieve its
investment objectives.
BFA’s
analysis continues on an ongoing basis for any floating rate loan or debt or
other securities in which the Fund has invested. Although BFA uses due care in
making such analysis, there can be no assurance that such analysis will disclose
factors that may impair the value of the floating rate loan or debt.
Other Strategies. In addition to the principal
strategies discussed above, the Fund may also invest or engage in the following
investments/strategies:
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• |
|
Active and
Frequent Trading — The Fund may engage in active and
frequent trading of portfolio securities to achieve its primary investment
strategies. |
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• |
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Borrowing — The Fund may borrow up to
the limits set forth under the Investment Company Act of 1940, as amended
(the “Investment Company Act”), the rules and regulations thereunder and
any applicable exemptive relief. |
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• |
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Investment
Companies — The Fund has the ability to invest in other
investment companies, such as ETFs, unit investment trusts, and open‑end
and closed‑end funds. The Fund may invest in affiliated investment
companies, including affiliated money market funds and affiliated ETFs.
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• |
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Repurchase
Agreements — The Fund may seek to obtain market
exposure to the securities in which it primarily invests by entering into
a series of purchase and sale contracts or by using other investment
techniques such as repurchase agreements. Under a repurchase agreement,
the Fund buys a security at one price and simultaneously agrees to sell
that same security back to the seller at a higher price.
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• |
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Securities
Lending — The Fund may lend
securities with a value up to 33 1/3% of its total assets
to financial institutions that provide cash or securities issued or
guaranteed by the U.S. Government as collateral.
|
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• |
|
Short
Sales — The Fund may engage in short sales of
securities, either as a hedge against potential declines in value of a
portfolio security or to realize appreciation when a security that the
Fund does not own declines in value. The Fund will not make a short sale
if, after giving effect to such sale, the market value of all securities
sold short exceeds 10% of the value of its total assets. However, the Fund
may make short sales “against the box” without regard to this restriction.
In this type of short sale, at the time of the sale, the Fund owns or has
the immediate and unconditional right to acquire the identical security at
no additional cost. |
11
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• |
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Temporary
Defensive Strategies — For temporary defensive
purposes, for example, to respond to adverse market, economic, political
or other conditions, the Fund may depart from its principal investment
strategies and may restrict the markets in which it invests and may invest
without limitation in cash, cash equivalents, money market securities,
such as U.S. Treasury and agency obligations, other U.S. Government
securities, short-term debt obligations of corporate issuers, certificates
of deposit, bankers acceptances, commercial paper (short-term, unsecured,
negotiable promissory notes of a domestic or foreign issuer) or other high
quality fixed income securities. Temporary defensive positions may affect
the Fund’s ability to achieve its investment objective.
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• |
|
Warrants — A warrant gives the Fund
the right to buy stock. The warrant specifies the amount of underlying
stock, the purchase (or “exercise”) price and the date the warrant
expires. The Fund has no obligation to exercise the warrant and buy the
stock. A warrant has value only if the Fund is able to exercise it or sell
it before it expires. |
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• |
|
When-Issued and
Delayed Delivery Securities and Forward Commitments — The Fund may invest in
securities prior to their date of issue. The purchase or sale of
securities on a when-issued basis, on a delayed delivery basis or through
a forward commitment involves the purchase or sale of securities by the
Fund at an established price with payment and delivery taking place in the
future. The Fund enters into these transactions to obtain what is
considered an advantageous price to the Fund at the time of entering into
the transaction. |
A
Further Discussion of Principal Risks
The
Fund is subject to various risks, including the principal risks noted below, any
of which may adversely affect the Fund’s NAV, trading price, yield, total return
and ability to meet its investment objective. You could lose all or part of your
investment in the Fund, and the Fund could underperform other investments. The
order of the below risk factors does not indicate the significance of any
particular risk factor. The Fund discloses its portfolio holdings daily at
www.blackrock.com.
Asset Class Risk. The securities or other
assets in the Fund’s portfolio may underperform in comparison to other
securities or indexes that track other countries, groups of countries, regions,
industries, groups of industries, markets, market segments, asset classes or
sectors. Various types of securities, currencies and indexes may experience
cycles of outperformance and underperformance in comparison to the general
financial markets depending upon a number of factors including, among other
things, inflation, interest rates, productivity, global demand for local
products or resources, and regulation and governmental controls. This may cause
the Fund to underperform other investment vehicles that invest in different
asset classes.
Assets Under Management (AUM) Risk. From time
to time, an Authorized Participant, a third-party investor, the Fund’s adviser
or an affiliate of the Fund’s adviser, or a fund may invest in the Fund and hold
its investment for a specific period of time in order to facilitate commencement
of the Fund’s operations or to allow the Fund to achieve size or scale. There
can be no assurance that any such entity would not redeem its investment or that
the size of the Fund would be maintained at such levels, which could negatively
impact the Fund.
Authorized Participant Concentration Risk. Only
an Authorized Participant may engage in creation or redemption transactions
directly with the Fund, and none of those Authorized Participants is obligated
to engage in creation and/or redemption transactions. The Fund has a limited
number of institutions that may act as Authorized Participants on an agency
basis (i.e., on behalf of other market participants). To the extent that
Authorized Participants exit the business or are unable to proceed with creation
or redemption orders with respect to the Fund and no other Authorized
Participant is able to step forward to create or redeem Creation Units, Fund
shares may be more likely to trade at a premium or discount to NAV and possibly
face trading halts or delisting.
Call Risk. During periods of falling interest
rates, an issuer of a callable bond held by the Fund may “call” or repay the
security before its stated maturity, and the Fund may have to reinvest the
proceeds in securities with lower yields, which would result in a decline in the
Fund’s income, or in securities with greater risks or with other less favorable
features.
Collateralized Debt Obligations Risk. In
addition to the typical risks associated with fixed-income securities and
asset-backed securities, collateralized debt obligations (“CDOs”) carry
additional risks including, but not limited to: (i) the possibility that
distributions from collateral securities will not be adequate to make interest
or other payments; (ii) the risk that the collateral may default or decline
in value or be downgraded, if rated by a nationally recognized statistical
rating organization; (iii) the Fund may invest in tranches of CDOs that are
subordinate to other tranches;
12
(iv) the
structure and complexity of the transaction and the legal documents could lead
to disputes among investors regarding the characterization of proceeds;
(v) the investment return achieved by the Fund could be significantly
different than those predicted by financial models; (vi) the lack of a
readily available secondary market for CDOs; (vii) the risk of forced “fire
sale” liquidation due to technical defaults such as coverage test failures; and
(viii) the CDO’s manager may perform poorly.
Concentration Risk. The Fund may be
susceptible to an increased risk of loss, including losses due to adverse events
that affect the Fund’s investments more than the market as a whole, to the
extent that the Fund’s investments are concentrated in the securities and/or
other assets of a particular issuer or issuers, country, group of countries,
region, market, industry, group of industries, sector, market segment or asset class. The Fund may be more adversely
affected by the underperformance of those securities and/or other assets, may
experience increased price volatility and may be more susceptible to adverse
economic, market, political or regulatory occurrences affecting those securities
and/or other assets than a fund that does not concentrate its investments.
Convertible Securities Risk. The market price of a convertible
security generally tends to behave like that of a regular debt security; that
is, if market interest rates rise, the value of a convertible security usually
falls. In addition, convertible securities are subject to the risk that the
issuer will not be able to pay interest, principal or dividends when due, and
their market value may change based on changes in the issuer’s credit rating or
the market’s perception of the issuer’s creditworthiness. Because a convertible
security derives a portion of its value from the common stock into which it may
be converted, a convertible security is also subject to the same types of market
and issuer risks that apply to the underlying common stock, including the
potential for increased volatility in the price of the convertible security.
Corporate Loans Risk. Commercial banks and
other financial institutions or institutional investors make corporate loans to
companies that need capital to grow or restructure. Borrowers generally pay
interest on corporate loans at rates that change in response to changes in
market interest rates such as the Secured Overnight Financing Rate (“SOFR”) or
the prime rates of U.S. banks. As a result, the value of corporate loan
investments is generally less exposed to the adverse effects of shifts in market
interest rates than investments that pay a fixed rate of interest. However,
because the trading market for certain corporate loans may be less developed
than the secondary market for bonds and notes, the Fund may experience
difficulties in selling its corporate loans. Transactions in corporate loans may
settle on a delayed basis. As a result, the proceeds from the sale of corporate
loans may not be readily available to make additional investments or to meet the
Fund’s redemption obligations. To the extent the extended settlement process
gives rise to short-term liquidity needs, the Fund may hold additional cash,
sell investments or temporarily borrow from banks and other lenders. Leading
financial institutions often act as agent for a broader group of lenders,
generally referred to as a syndicate. The syndicate’s agent arranges the
corporate loans, holds collateral and accepts payments of principal and
interest. If the agent develops financial problems, the Fund may not recover its
investment or recovery may be delayed. By investing in a corporate loan, the
Fund may become a member of the syndicate.
The
market for corporate loans may be subject to irregular trading activity and wide
bid/ask spreads.
The
corporate loans in which the Fund invests are subject to the risk of loss of
principal and income. Although borrowers frequently provide collateral to secure
repayment of these obligations they do not always do so. If they do provide
collateral, the value of the collateral may not completely cover the borrower’s
obligations at the time of a default. If a borrower files for protection from
its creditors under the U.S. bankruptcy laws, these laws may limit the Fund’s
rights to its collateral. In addition, the value of collateral may erode during
a bankruptcy case. In the event of a bankruptcy, the holder of a corporate loan
may not recover its principal, may experience a long delay in recovering its
investment and may not receive interest during the delay.
Credit Risk. Debt issuers and other
counterparties may be unable or unwilling to make timely interest and/or
principal payments when due or otherwise honor their obligations. Changes in an
issuer’s credit rating or the market’s perception of an issuer’s
creditworthiness may also adversely affect the value of the Fund’s investment in
that issuer. The degree of credit risk depends on an issuer’s or counterparty’s
financial condition and on the terms of an obligation.
Cybersecurity Risk. The Fund, Authorized Participants,
service providers and the relevant listing exchange are susceptible to
operational, information security and related “cyber” risks both directly and
through their service providers. Similar types of cybersecurity risks are also
present for issuers of securities in which the Fund invests,
13
which
could result in material adverse consequences for such issuers and may cause the
Fund’s investment in such issuers to lose value. In general, cyber incidents can
result from deliberate attacks or unintentional events. Cyber incidents include,
but are not limited to, gaining unauthorized access to digital systems (e.g., through “hacking” or malicious software
coding) for purposes of misappropriating assets or sensitive information,
corrupting data, or causing operational disruption. Cyberattacks may also be
carried out in a manner that does not require gaining unauthorized access, such
as causing denial‑of service attacks on websites (i.e., efforts to make network services
unavailable to intended users). Geopolitical tensions may increase the scale and
sophistication of deliberate attacks, particularly those from nation-states or
from entities with nation-state backing.
Cybersecurity
failures by, or breaches of, the systems of the Fund’s adviser, distributor and
other service providers (including, but not limited to, index and benchmark
providers, fund accountants, custodians, transfer agents and administrators),
market makers, Authorized Participants, hedging counterparties to the Fund or
the issuers of securities in which the Fund invests, have the ability to cause
disruptions and impact business operations, potentially resulting in: financial
losses; interference with the Fund’s ability to calculate its NAV; disclosure of
confidential trading information; impediments to trading; submission of
erroneous trades or erroneous creation or redemption orders; the inability of
the Fund or its service providers to transact business; violations of applicable
privacy and other laws; regulatory fines, penalties, reputational damage,
reimbursement or other compensation costs; or additional compliance costs. In
addition, cyberattacks may render records of Fund assets and transactions,
shareholder ownership of Fund shares, and other data integral to the functioning
of the Fund inaccessible, inaccurate or incomplete. Substantial costs may be
incurred by the Fund in order to resolve or prevent cyber incidents in the
future. While the Fund has established business continuity plans in the event
of, and risk management systems to prevent, such cyber incidents, there are
inherent limitations in such plans and systems, including the possibility that
certain risks have not been identified, that prevention and remediation efforts
will not be successful or that cyberattacks will go undetected. Furthermore, the
Fund cannot control the cybersecurity plans and systems put in place by service
providers to the Fund, issuers in which the Fund invests, market makers or
Authorized Participants. The Fund and its shareholders could be negatively
impacted as a result.
Distressed Securities Risk. Distressed
securities are speculative and involve substantial risks in addition to the
risks of investing in junk bonds. The Fund will generally not receive interest
payments on the distressed securities and may incur costs to protect its
investment. In addition, distressed securities involve the substantial risk that
principal will not be repaid. These securities may present a substantial risk of
default or may be in default at the time of investment. The Fund may incur
additional expenses to the extent it is required to seek recovery upon a default
in the payment of principal of or interest on its portfolio company. In any
reorganization or liquidation proceeding relating to a portfolio holding, the
Fund may lose its entire investment or may be required to accept cash or
securities with a value less than its original investment. Distressed securities
and any securities received in an exchange for such securities may be subject to
restrictions on resale.
Dividend Risk.
Because certain of the corporate loans held by the Fund will have floating or
variable interest rates, the amounts of the Fund’s monthly distributions to its
stockholders are expected to vary with fluctuations in market interest rates.
Generally, when market interest rates fall, the amount of the distributions to
stockholders will likewise decrease.
Equity Securities Risk. Common and preferred
stocks represent equity ownership in a company. Stock markets are volatile. The
price of equity securities will fluctuate and can decline and reduce the value
of a portfolio investing in equities. The value of equity securities purchased
by the Fund could decline if the financial condition of the companies the Fund
invests in declines or if overall market and economic conditions deteriorate.
The value of equity securities may also decline due to factors that affect a
particular industry or industries, such as labor shortages or an increase in
production costs and competitive conditions within an industry. In addition, the
value may decline due to general market conditions that are not specifically
related to a company or industry, such as real or perceived adverse economic
conditions, changes in the general outlook for corporate earnings, changes in
inflation, interest or currency rates or generally adverse investor sentiment.
Event Risk. Event risk is the risk that
corporate issuers may undergo restructurings, such as mergers, leveraged
buyouts, takeovers, or similar events financed by increased debt. As a result of
the added debt, the credit quality and market value of a company’s bonds and/or
other debt securities may decline significantly.
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Extension Risk. During periods of rising interest rates,
certain debt obligations may be paid off substantially more slowly than
originally anticipated and the value of those securities may fall sharply,
resulting in a decline in the Fund’s income and potentially in the value of the
Fund’s investments.
Floating Rate Securities Risk.
Securities with floating or variable interest rates can be less sensitive to
interest rate changes than securities with fixed interest rates, but may decline
in value if their coupon rates do not reset as high, or as quickly, as
comparable market interest rates, and generally carry lower yields than fixed
securities of the same maturity. Although floating rate securities are less
sensitive to interest rate risk than fixed-rate securities, they are subject to
credit risk and default risk, which could impair their value.
Forward Foreign Currency Exchange
Contracts. Forward foreign currency exchange transactions are OTC
contracts to purchase or sell a specified amount of a specified currency or
multinational currency unit at a price and future date set at the time of the
contract. Forward foreign currency exchange contracts do not eliminate
fluctuations in the value of non‑U.S. securities but rather allow the Fund to
establish a fixed rate of exchange for a future point in time. This strategy can
have the effect of reducing returns and minimizing opportunities for gain.
Futures Contract Risk. Futures are
standardized, exchange-traded contracts that obligate a purchaser to take
delivery, and a seller to make delivery, of a specific amount of an asset at a
specified future date at a specified price. Unlike equities, which typically
entitle the holder to a continuing ownership stake in an issuer, futures
contracts normally specify a certain date for settlement in cash based on the
level of the reference rate. The primary risks associated with the use of
futures contracts, or swaps or other derivatives referencing futures contracts,
are: (i) the imperfect correlation between the change in market value of
the instruments or swaps or other derivatives referencing futures contracts held
by the Fund and the price of the futures contract; (ii) possible lack of a
liquid secondary market for a futures contract and the resulting inability to
close a futures contract when desired; (iii) losses caused by unanticipated
market movements, which are potentially unlimited; (iv) BFA’s inability to
predict correctly the direction of prices and other economic factors; and
(v) the possibility that the counterparty will default in the performance
of its obligations.
High Yield Securities Risk. Securities that are
rated below investment-grade (commonly referred to as “junk bonds,” which may
include those bonds rated below “BBB‑” by S&P Global Ratings and Fitch, or
below “Baa3” by Moody’s), or are unrated, may be deemed speculative, may involve
greater levels of risk than higher-rated securities of similar maturity and may
be more likely to default.
The
major risks of high yield securities investments include:
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High
yield securities may be issued by less creditworthy issuers. Issuers of
high yield securities may have a larger amount of outstanding debt
relative to their assets than issuers of investment-grade bonds. In the
event of an issuer’s bankruptcy, claims of other creditors may have
priority over the claims of high yield securities holders, leaving few or
no assets available to repay high yield securities holders.
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Prices
of high yield securities are subject to extreme price fluctuations.
Adverse changes in an issuer’s industry and general economic conditions
may have a greater impact on the prices of high yield securities than on
other higher rated fixed-income securities. The credit rating of a high
yield security does not necessarily address its market value risk. Ratings
and market value may change from time to time, positively or negatively,
to reflect new developments regarding the issuer.
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Issuers
of high yield securities may be unable to meet their interest or principal
payment obligations because of an economic downturn, specific issuer
developments, or the unavailability of additional financing.
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High
yield securities frequently have redemption features that permit an issuer
to repurchase the security from the Fund before it matures. If the issuer
redeems high yield securities held by the Fund, the Fund may have to
invest the proceeds in bonds with lower yields and may lose income.
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High
yield securities may be less liquid than higher rated fixed-income
securities, even under normal economic conditions. There are fewer dealers
in the high yield securities market, and there may be significant
differences in the prices quoted for high yield securities by the dealers.
Because high yield securities may be less liquid than higher rated
fixed-income securities, judgment may play a greater role in valuing
certain of the Fund’s securities than is the case with securities trading
in a more liquid market. |
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The
Fund may incur expenses to the extent necessary to seek recovery upon
default or to negotiate new terms with a defaulting issuer.
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Illiquid Investments Risk. The Fund may not
acquire any illiquid investment if, immediately after the acquisition, the Fund
would have invested more than 15% of its net assets in illiquid investments. An
illiquid investment is any investment that the Fund reasonably expects cannot be
sold or disposed of in current market conditions in seven calendar days or less
without significantly changing the market value of the investment. Liquid
investments may become illiquid after purchase by the Fund, particularly during
periods of market turmoil. There can be no assurance that a security or
instrument that is deemed to be liquid when purchased will continue to be liquid
for as long as it is held by the Fund, and any security or instrument held by
the Fund may be deemed an illiquid investment pursuant to the Fund’s liquidity
risk management program. To the extent the Fund holds illiquid investments, the
illiquid investments may reduce the returns of the Fund because the Fund may be
unable to transact at advantageous times or prices. An investment may be
illiquid due to, among other things, the reduced number and capacity of
traditional market participants to make a market in securities or instruments or
the lack of an active market for such securities or instruments. To the extent
that the Fund invests in securities or instruments with substantial market
and/or credit risk, the Fund will tend to have increased exposure to the risks
associated with illiquid investments. Illiquid investments may be harder to
value, especially in changing markets. If the Fund is forced to sell underlying
investments at reduced prices or under unfavorable conditions to meet redemption
requests or for other cash needs, the Fund may suffer a loss. This may be
magnified in a rising interest rate environment or other circumstances where
redemptions from the Fund may be greater than normal. Other market participants
may be attempting to liquidate holdings at the same time as the Fund, causing
increased supply of the Fund’s underlying investments in the market and
contributing to illiquid investments risk and downward pricing pressure. In
addition, if the Fund is limited in its ability to sell illiquid investments
during periods when shareholders are redeeming their shares, the Fund will need
to sell liquid securities to meet redemption requests and illiquid securities
will become a larger portion of the Fund’s holdings. During periods of market
volatility, liquidity in the market for the Fund’s shares may be impacted by the
liquidity in the market for the underlying securities or instruments held by the
Fund, which could lead to the Fund’s shares trading at a premium or discount to
the Fund’s NAV.
Income Risk. The Fund’s income may decline
due to a decline in inflation or deflation. If there is deflation, the principal
value of an inflation-linked security will be adjusted downward, and
consequently the interest payments (calculated with respect to a smaller
principal amount) will be reduced. If inflation is lower than expected during
the period the Fund holds an inflation-linked security, the Fund may earn less
on the security than on a conventional bond.
Infectious Illness Risk. A widespread outbreak
of an infectious illness, such as the COVID‑19 pandemic, may adversely affect
the economies of many nations and the global economy and may impact individual
issuers and capital markets in ways that cannot be foreseen. An infectious
illness outbreak may result in travel restrictions, closed international
borders, disruption of healthcare services, prolonged quarantines,
cancellations, supply chain disruptions, lower consumer demand, temporary and
permanent closures of businesses, layoffs, defaults and other significant
economic, social and political impacts, as well as general concern and
uncertainty.
An
infectious illness outbreak may result in extreme volatility, severe losses,
credit deterioration of issuers, and disruptions in markets, which could
adversely impact the Fund and its investments, including impairing any hedging
activity. Certain local markets may be subject to closures. Any suspension of
trading in markets in which the Fund invests will have an impact on the Fund and
its investments and will impact the Fund’s ability to purchase or sell
securities in such markets. Market or economic disruptions could result in
increased premiums or discounts to the Fund’s NAV. Additionally, an outbreak
could impair the operations of the Fund’s service providers, including BFA,
which could adversely impact the Fund.
Governmental
and quasi-governmental authorities and regulators throughout the world may
respond to an outbreak and any resulting economic disruptions with a variety of
fiscal and monetary policy changes, including direct capital infusions into
companies and other issuers, new monetary policy tools, and changes in interest
rates. A reversal of these policies, or the ineffectiveness of such policies, is
likely to increase market volatility, which could adversely affect the Fund’s
investments. An outbreak may exacerbate other pre‑existing political, social and
economic risks in certain countries or globally, which could adversely affect
the Fund and its investments and could result in increased premiums or discounts
to the Fund’s NAV.
Despite
the development of vaccines, the duration of the COVID‑19 pandemic and its
effects cannot be predicted with certainty.
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Interest Rate Risk. If interest rates
rise, the value of fixed-income securities or other instruments held by the Fund
would likely decrease. A measure investors commonly use to determine this price
sensitivity is called duration. Fixed-income securities with longer durations
tend to be more sensitive to interest rate changes, usually making their prices
more volatile than those of securities with shorter durations. For example, if a
bond has a duration of five years and interest rates rise, the price of the bond
will likely decline by a greater percentage than if the bond had a one year
duration. To the extent the Fund invests a substantial portion of its assets in
fixed-income securities with longer duration, rising interest rates may cause
the value of the Fund’s investments to decline significantly, which may
adversely affect the value of the Fund. An increase in interest rates may lead
to heightened volatility in the fixed-income markets and adversely affect
certain fixed-income investments, including those held by the Fund. Because
rates on certain floating rate debt securities typically reset only
periodically, changes in prevailing interest rates (and particularly sudden and
significant changes) can be expected to cause some fluctuations in the net asset
value of the Fund to the extent that it invests in floating rate debt
securities. In addition, decreases in fixed income dealer market-making capacity
may lead to lower trading volume, heightened volatility, wider bid‑ask spreads
and less transparent pricing in certain fixed-income markets.
The
historically low interest rate environment in recent years was created in part
by the world’s major central banks keeping their overnight policy interest rates
at, near or below zero percent and implementing monetary policy facilities, such
as asset purchase programs, to anchor longer-term interest rates below
historical levels. During periods of very low or negative interest rates, the
Fund may be unable to maintain positive returns or pay dividends to Fund
shareholders. Certain countries have recently experienced negative interest
rates on certain fixed-income instruments. Very low or negative interest rates
may magnify interest rate risk. Changing interest rates, including rates that
fall below zero, may have unpredictable effects on markets, result in heightened
market volatility and detract from the Fund’s performance to the extent the Fund
is exposed to such interest rates. Additionally, under certain market conditions
in which interest rates are set at low levels and the market prices of portfolio
securities have increased, the Fund may have a very low or even negative yield.
A low or negative yield would cause the Fund to lose money in certain conditions
and over certain time periods. Central banks may increase their short-term
policy rates or begin phasing out, or “tapering,” accommodative monetary policy
facilities in the future. The timing, coordination, magnitude and effect of such
policy changes on various markets are uncertain, and such changes in monetary
policy may adversely affect the value of the Fund’s investments.
Investment in Other Investment Companies Risk.
As with other investments, investments in other investment companies, including
ETFs, are subject to market and selection risk. In addition, if the Fund
acquires shares of investment companies, including ones affiliated with the
Fund, shareholders bear both their proportionate share of expenses in the Fund
(including management and advisory fees) and, indirectly, the expenses of the
investment companies (to the extent not offset by BFA through waivers). To the
extent the Fund is held by another fund, the ability of the Fund itself to hold
other investment companies may be limited.
Issuer Risk. The performance of the Fund depends on
the performance of individual securities to which the Fund has exposure. The
Fund may be adversely affected if an issuer of underlying securities held by the
Fund is unable or unwilling to repay principal or interest when due. Any issuer
of these securities may perform poorly, causing the value of its securities to
decline. Poor performance may be caused by poor management decisions,
competitive pressures, changes in technology, expiration of patent protection,
disruptions in supply, labor problems or shortages, corporate restructurings,
fraudulent disclosures, credit deterioration of the issuer or other factors.
Changes to the financial condition or credit rating of an issuer of those
securities may cause the value of the securities to decline. An issuer may also
be subject to risks associated with the countries, states and regions in which
the issuer resides, invests, sells products, or otherwise conducts operations.
Large Shareholder and Large-Scale Redemption
Risk. Certain shareholders,
including an Authorized Participant, a third-party investor, the Fund’s adviser
or an affiliate of the Fund’s adviser, a market maker, or another entity, may
from time to time own or manage a substantial amount of Fund shares or may
invest in the Fund and hold its investment for a limited period of time. These
shareholders may also pledge or loan Fund shares (to secure financing or
otherwise), which may result in the shares becoming concentrated in another
party. There can be no assurance that any large shareholder or large group of
shareholders would not redeem their investment or that the size of the Fund
would be maintained. Redemptions of a large number of Fund shares by these
shareholders may adversely affect the Fund’s liquidity and net assets. Because
the Fund generally redeems Creation Units solely for cash, these redemptions may
force the Fund to sell portfolio securities when it might not otherwise do so,
which may negatively impact the Fund’s NAV, have a material effect on the market
price of the shares and increase the Fund’s brokerage costs and/or accelerate
the realization of taxable income and/or gains and cause the Fund to make
taxable
17
distributions
to its shareholders earlier than the Fund otherwise would have. In addition,
under certain circumstances, non‑redeeming shareholders may be treated as
receiving a disproportionately large taxable distribution during or with respect
to such tax year. The Fund also may be required to sell its more liquid Fund
investments to meet a large redemption, in which case the Fund’s remaining
assets may be less liquid, more volatile, and more difficult to price. To the
extent these large shareholders transact in shares on the secondary market, such
transactions may account for a large percentage of the trading volume for the
shares of the Fund and may, therefore, have a material upward or downward effect
on the market price of the shares. In addition, large purchases of Fund shares
may adversely affect the Fund’s performance to the extent that the Fund is
delayed in investing new cash and is required to maintain a larger cash position
than it ordinarily would, diluting its investment returns.
Lender Liability Risk. A number of U.S.
judicial decisions have upheld judgments of borrowers against lending
institutions on the basis of various evolving legal theories, collectively
termed “lender liability.” Generally, lender liability is founded on the premise
that a lender has violated a duty (whether implied or contractual) of good
faith, commercial reasonableness and fair dealing, or a similar duty owed to the
borrower or has assumed an excessive degree of control over the borrower
resulting in the creation of a fiduciary duty owed to the borrower or its other
creditors or shareholders. Because of the nature of its investments, the Fund
may be subject to allegations of lender liability.
In
addition, under common law principles that in some cases form the basis for
lender liability claims, if a lender or bondholder (a) intentionally takes
an action that results in the undercapitalization of a borrower to the detriment
of other creditors of such borrower; (b) engages in other inequitable
conduct to the detriment of such other creditors; (c) engages in fraud with
respect to, or makes misrepresentations to, such other creditors or
(d) uses its influence as a stockholder to dominate or control a borrower
to the detriment of other creditors of such borrower, a court may elect to
subordinate the claim of the offending lender or bondholder to the claims of the
disadvantaged creditor or creditors, a remedy called “equitable subordination.”
Because
affiliates of, or persons related to, the Investment Adviser may hold equity or
other interests in obligors of a Fund, the Fund could be exposed to claims for
equitable subordination or lender liability or both based on such equity or
other holdings.
Leverage Risk. Some transactions may give rise
to a form of economic leverage. These transactions may include, among others,
derivatives, and may expose the Fund to greater risk and increase its costs. As
an open‑end investment company registered with the SEC, the Fund is subject to
the federal securities laws, including the Investment Company Act and the rules
thereunder. Under Rule 18f-4 under the Investment Company Act, among other
things, the Fund must either use derivatives in a limited manner or comply with
an outer limit on fund leverage risk based on value-at-risk. The use of leverage
may cause the Fund to liquidate portfolio positions when it may not be
advantageous to do so to satisfy its obligations or to meet the applicable
requirements of the Investment Company Act and the rules thereunder. Increases
and decreases in the value of the Fund’s portfolio will be magnified when the
Fund uses leverage.
Management Risk. The Fund is subject to management risk,
which is the risk that the investment process, techniques and analyses applied
by BFA will not produce the desired results, and those securities or other
financial instruments selected by BFA may result in returns that are
inconsistent with the Fund’s investment objective. In addition, legislative,
regulatory, or tax developments may affect the investment techniques available
to BFA in connection with managing the Fund and may also adversely affect the
ability of the Fund to achieve its investment objective.
Market Risk. The Fund could lose money over
short periods due to short-term market movements and over longer periods during
more prolonged market downturns. The value of a financial instrument or other
asset may decline due to changes in general market conditions, economic trends
or events that are not specifically related to the particular instrument or
asset, or factors that affect one or more issuers, counterparties, exchanges,
countries, regions, markets, industries, sectors or asset classes, as
applicable. Local, regional or global events such as war, acts of terrorism,
public health issues, recessions, the prospect or occurrence of a sovereign
default or other financial crisis, or other events could have a significant
impact on the Fund and its investments and could result in increased premiums or
discounts to the Fund’s NAV. Changes in market and economic conditions generally
do not have the same impact on all types of instruments and assets.
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Market
Trading Risk
Absence of Active Market. Although shares of
the Fund are listed for trading on one or more stock exchanges, there can be no
assurance that an active trading market for such shares will develop or be
maintained by market makers or Authorized Participants.
Risk of Secondary Listings. The Fund’s shares
may be listed or traded on U.S. and non‑U.S. stock exchanges other than the U.S.
stock exchange where the Fund’s primary listing is maintained, and may otherwise
be made available to non‑U.S. investors through funds or structured investment
vehicles similar to depositary receipts. There can be no assurance that the
Fund’s shares will continue to trade on any such stock exchange or in any market
or that the Fund’s shares will continue to meet the requirements for listing or
trading on any exchange or in any market. The Fund’s shares may be less actively
traded in certain markets than in others, and investors are subject to the
execution and settlement risks and market standards of the market where they or
their broker direct their trades for execution. Certain information available to
investors who trade Fund shares on a U.S. stock exchange during regular U.S.
market hours may not be available to investors who trade in other markets, which
may result in secondary market prices in such markets being less efficient.
Secondary Market Trading Risk. Shares of the
Fund may trade in the secondary market at times when the Fund does not accept
orders to purchase or redeem shares. At such times, shares may trade in the
secondary market with more significant premiums or discounts than might be
experienced at times when the Fund accepts purchase and redemption orders.
Secondary market trading in Fund shares may be halted by a stock exchange
because of market conditions or for other reasons. In addition, trading in Fund
shares on a stock exchange or in any market may be subject to trading halts
caused by extraordinary market volatility pursuant to “circuit breaker” rules on
the stock exchange or market.
Shares
of the Fund, similar to shares of other issuers listed on a stock exchange, may
be sold short and are therefore subject to the risk of increased volatility and
price decreases associated with short selling.
Shares of the Fund May Trade at Prices Other Than
NAV. Shares of the Fund trade on stock exchanges at prices at, above or
below the Fund’s most recent NAV. The NAV of the Fund is calculated at the end
of each business day and fluctuates with changes in the market value of the
Fund’s holdings. The trading price of the Fund’s shares fluctuates continuously
throughout trading hours based on both market supply of and demand for Fund
shares and the underlying value of the Fund’s portfolio holdings or NAV. As a
result, the trading prices of the Fund’s shares may deviate significantly from
NAV during periods of market volatility, including during periods of significant
redemption requests or other unusual market conditions. Unlike conventional ETFs, the Fund is not an
index fund and does not seek to replicate the performance of a specified index.
Index-based ETFs have generally traded at prices which closely correspond to
NAV. Given the high level of transparency of the Fund’s holdings, BFA believes
that the trading experience of the Fund should be similar to that of index-based
ETFs. However, ETFs that do not seek to replicate the performance of a specified
index have a limited trading history and, therefore, there can be no assurance
as to whether, and/or the extent to which, the Fund’s
shares will trade at premiums or discounts to NAV. ANY OF THESE FACTORS, AMONG OTHERS, MAY LEAD TO THE
FUND’S SHARES TRADING AT A PREMIUM OR DISCOUNT TO NAV. However, because shares can be created
and redeemed in Creation Units at NAV, BFA believes that large discounts or
premiums to the NAV of the Fund are not likely to be sustained over the long
term (unlike shares of many closed‑end funds, which frequently trade at
appreciable discounts from, and sometimes at premiums to, their NAVs). While the
creation/redemption feature is designed to make it more likely that the Fund’s
shares normally will trade on stock exchanges at prices close to the Fund’s next
calculated NAV, exchange prices are not expected to correlate exactly with the
Fund’s NAV due to timing reasons, supply and demand imbalances and other
factors. In addition, disruptions to creations and redemptions, including
disruptions at market makers, Authorized Participants, or market participants,
and during periods of significant market volatility, may result in trading
prices for shares of the Fund that differ significantly from its NAV. Authorized
Participants may be less willing to redeem Fund shares if there is a lack of an
active market for such shares or its underlying investments, which may
contribute to the Fund’s shares trading at a discount to NAV.
Costs of Buying or Selling Fund Shares. Buying
or selling Fund shares on an exchange involves two types of costs that apply to
all securities transactions. When buying or selling shares of the Fund through a
broker, you will likely incur a brokerage commission and other charges. In
addition, you may incur the cost of the “spread”; that is, the difference
between what investors are willing to pay for Fund shares (the “bid” price) and
the price at which they are willing to sell Fund shares (the “ask” price). The
spread, which varies over time for shares of the Fund based on
19
trading
volume and market liquidity, is generally narrower if the Fund has more trading
volume and market liquidity and wider if the Fund has less trading volume and
market liquidity. In addition, increased market volatility may cause wider
spreads. Because of the costs inherent in buying or selling Fund shares,
frequent trading may detract significantly from investment results and an
investment in Fund shares may not be advisable for investors who anticipate
regularly trading in Fund shares.
Mezzanine Securities Risk. Mezzanine securities
generally are rated below investment grade and frequently are unrated and
present many of the same risks as senior loans, second lien loans and
non‑investment grade bonds. However, unlike senior loans and second lien loans,
mezzanine securities are not a senior or secondary secured obligation of the
related borrower. They typically are the most subordinated debt obligation in an
issuer’s capital structure. Mezzanine securities also may often be unsecured.
Mezzanine securities therefore are subject to the additional risk that the cash
flow of the related borrower and the property securing the loan may be
insufficient to repay the scheduled obligation after giving effect to any senior
obligations of the related borrower. Mezzanine securities will be subject to
certain additional risks to the extent that such loans may not be protected by
financial covenants or limitations upon additional indebtedness. Investment in
mezzanine securities is a highly specialized investment practice that depends
more heavily on independent credit analysis than investments in other types of
debt obligations.
Non-Diversification Risk. The Fund is
classified as “non-diversified.” This means that, compared with other funds that
are classified as “diversified,” the Fund may invest a greater percentage of its
assets in securities issued by or representing a small number of issuers. As a
result, the Fund may be more susceptible to the risks associated with these
particular issuers or to a single economic, political or regulatory occurrence
affecting these issuers.
Non‑U.S. Issuers Risk. Securities issued by
non‑U.S. issuers have different risks from securities issued by
U.S. issuers. These risks include differences in accounting, auditing and
financial reporting standards, the possibility of expropriation or confiscatory
taxation, adverse changes in investment or exchange control regulations,
political instability which could affect U.S. investments in non‑U.S. countries,
uncertainties of transnational litigation, and potential restrictions on the
flow of international capital, including the possible seizure or nationalization
of the securities issued by non‑U.S. issuers held by the Fund. Non‑U.S. issuers
may be subject to less governmental regulation than U.S. issuers. Moreover,
individual non‑U.S. economies may differ favorably or unfavorably from the U.S.
economy in such respects as growth of gross domestic product, rate of inflation,
capital reinvestment, resource self-sufficiency and balance of payment
positions. Unfavorable political, economic or governmental developments in
non‑U.S. countries could affect the payment of a security’s principal and
interest. Securities issued by non‑U.S. issuers may also be less liquid than,
and more difficult to value than, securities of U.S. issuers. In addition, the
value of these securities may fluctuate due to changes in the exchange rate of
the issuer’s local currency against the U.S. dollar.
Options. An option is an agreement that,
for a premium payment or fee, gives the option holder (the purchaser) the right
but not the obligation to buy (a “call option”) or sell (a “put option”) the
underlying asset (or settle for cash in an amount based on an underlying asset,
rate, or index) at a specified price (the “exercise price”) during a period of
time or on a specified date. Investments in options are considered speculative.
When the Fund purchases an option, it may lose the total premium paid for it if
the price of the underlying security or other assets decreased, remained the
same or failed to increase to a level at or beyond the exercise price (in the
case of a call option) or increased, remained the same or failed to decrease to
a level at or below the exercise price (in the case of a put option). If a put
or call option purchased by the Fund were permitted to expire without being sold
or exercised, its premium would represent a loss to the Fund. To the extent that
the Fund writes or sells an option, if the decline or increase in the underlying
asset is significantly below or above the exercise price of the written option,
the Fund could experience a substantial loss.
Preferred Securities Risk. Preferred securities
may pay fixed or adjustable rates of return. Preferred securities are subject to
issuer-specific and market risks applicable generally to equity securities. In
addition, a company’s preferred securities generally pay dividends only after
the company makes required payments to holders of its bonds and other debt. For
this reason, the value of preferred securities will usually react more strongly
than bonds and other debt to actual or perceived changes in the company’s
financial condition or prospects. Preferred securities of smaller companies may
be more vulnerable to adverse developments than preferred securities of larger
companies.
Prepayment Risk. When interest rates fall,
certain obligations will be paid off by the obligor more quickly than originally
anticipated, and the Fund may have to invest the proceeds in securities with
lower yields.
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Reference Rate Replacement Risk. The Fund may
be exposed to financial instruments that recently transitioned from, or continue
to be tied to, London Interbank Offered Rate (“LIBOR”) to determine payment
obligations, financing terms, hedging strategies or investment value. The United
Kingdom’s Financial Conduct Authority, which regulates LIBOR, has ceased
publishing all LIBOR settings. In April 2023, however, the FCA announced that
some USD LIBOR settings will continue to be published under a synthetic
methodology until September 30, 2024 for certain legacy contracts. The Secured
Overnight Financing Rate (“SOFR”), which is a broad measure of the cost of
borrowing cash overnight collateralized by U.S. Treasury securities in the
repurchase agreement market, has been used increasingly on a voluntary basis in
new instruments and transactions. Under U.S. regulations that implement a
statutory fallback mechanism to replace LIBOR, benchmark rates based on SOFR
have replaced LIBOR in different categories of financial contracts.
Neither
the effect of the LIBOR transition process nor its ultimate success can yet be
known. While some existing LIBOR-based instruments may contemplate a scenario
where LIBOR is no longer available by providing for an alternative rate-setting
methodology, there may be significant uncertainty regarding the effectiveness of
any such alternative methodologies to replicate LIBOR. Not all existing
LIBOR-based instruments may have alternative rate-setting provisions and there
remains uncertainty regarding the willingness and ability of issuers to add
alternative rate-setting provisions in certain existing instruments. Parties to
contracts, securities, or other instruments using LIBOR may disagree on
transition rates or the application of transition regulation, potentially
resulting in uncertainty of performance and the possibility of litigation. The
Fund may have instruments linked to other interbank offered rates that may also
cease to be published in the future.
Risk of Investing in Emerging Markets.
Investments in emerging market issuers are subject to a greater risk of loss
than investments in issuers located or operating in more developed markets. This
is due to, among other things, the potential for greater market volatility,
lower trading volume, higher levels of inflation, social, political or economic
instability, greater risk of a market shutdown and more governmental limitations
on foreign investments in emerging market countries than are typically found in
more developed markets. Some countries in which the Fund may invest may
experience economic instability, including instability resulting from
substantial rates of inflation or significant devaluations of their currency, or
economic recessions, which would have a negative effect on the economies and
securities markets of their economies. Some of these countries may also impose
restrictions on the exchange or export of currency or adverse currency exchange
rates and may be characterized by a lack of available currency hedging
instruments. Disparities of wealth, the pace and success of democratization and
ethnic, religious and racial disaffection, among other factors, may exacerbate
social unrest, violence and labor unrest in some of the countries in which the
Fund may invest. Unanticipated or sudden political or social developments may
result in sudden and significant investment losses. Companies in many emerging
markets are not subject to the same degree of regulatory requirements,
accounting standards or auditor oversight as companies in more developed
countries, and as a result, information about the securities in which the Fund
invests may be less reliable or complete. Moreover, emerging markets often have
less reliable securities valuations and greater risks associated with custody of
securities than developed markets. There may be significant obstacles to
obtaining information necessary for investigations into or litigation against
companies and shareholders may have limited legal remedies. The Fund is not
actively managed and does not select investments based on investor protection
considerations.
In
addition, emerging markets often have greater risk of capital controls through
such measures as taxes or interest rate control than developed markets. Certain
emerging market countries may also lack the infrastructure necessary to attract
large amounts of foreign trade and investment. Local securities markets in
emerging market countries may trade a small number of securities and may be
unable to respond effectively to changes in trading volume, potentially making
prompt liquidation of holdings difficult or impossible at times. Settlement
procedures in emerging market countries are frequently less developed and
reliable than those in the U.S. (and other developed countries). In addition,
significant delays may occur in certain markets in registering the transfer of
securities. Settlement or registration problems may make it more difficult for
the Fund to value its portfolio securities and could have an adverse effect on
the Fund in seeking to achieve its investment objective.
Investing
in emerging market countries involves a higher risk of loss due to
expropriation, nationalization, confiscation of assets and property or the
imposition of restrictions on foreign investments and on repatriation of capital
invested by certain emerging market countries.
Risk of Investing in the U.S. A decrease
in imports or exports, changes in trade regulations, inflation and/or an
economic recession in the U.S. may have a material adverse effect on the U.S.
economy and the securities listed on U.S. exchanges. Proposed and adopted policy
and legislative changes in the U.S. are changing many aspects of
21
financial,
commercial, public health, environmental, and other regulation and may have a
significant effect on U.S. markets generally, as well as on the value of certain
securities. Governmental agencies project that the United States will continue
to maintain elevated public debt levels for the foreseeable future. Although
elevated debt levels do not necessarily indicate or cause economic problems,
elevated public debt service costs may constrain future economic growth.
The
U.S. has developed increasingly strained relations with a number of foreign
countries. If relations with certain countries deterioate, it could adversely
affect U.S. issuers as well as non‑U.S. issuers that rely on the U.S. for trade.
The U.S. has also experienced increased internal political discord, as well as
significant challenges in managing and containing the outbreak of COVID‑19. If
these trends were to continue, it may have an adverse impact on the U.S. economy
and the issuers in which the Fund invests.
Risk of Swap Agreements. Swaps can involve
greater risks than direct investment in securities because swaps may be
leveraged and are subject to counterparty risk (e.g., the risk of a counterparty
defaulting on the obligation or bankruptcy), credit risk and pricing risk (i.e.,
swaps may be difficult to value). Swaps may be subject to illiquidity risk, and
it may not be possible for the Fund to liquidate a swap position at an
advantageous time or price, which may result in significant losses. Certain
standardized interest rate and credit default swaps are required to be traded on
an exchange or trading platform and centrally cleared. Most other swaps are
entered into on a negotiated, bi‑lateral basis and traded in the
over‑the‑counter market. Swaps are subject to bi‑lateral variation margin. The
Fund is required by financial regulators to post initial margin in connection
with trading over-the-counter swaps. These requirements may raise the costs for
the Fund’s investment in swaps. Central clearing is expected to reduce
counterparty credit risk and increase liquidity, but central clearing does not
make swap transactions risk-free. All swaps require posting of collateral, which
may restrict the ability of the Fund to invest the assets in different ways and
which involve costs to the Fund. Swaps provide customized contractual terms,
which may not, in all cases, provide the hedging or other intended benefits.
Second Lien Loans Risk. Second lien loans
generally are subject to similar risks as those associated with investments in
senior loans. Because second lien loans are subordinated or unsecured and thus
lower in priority of payment to senior loans, they are subject to the additional
risk that the cash flow of the borrower and property securing the loan or debt,
if any, may be insufficient to meet scheduled payments after giving effect to
the senior secured obligations of the borrower. This risk is generally higher
for subordinated unsecured loans or debt, which are not backed by a security
interest in any specific collateral. Second lien loans generally have greater
price volatility and may be less liquid than senior loans.
There
is also a possibility that originators will not be able to sell participations
in second lien loans, which would create greater credit risk exposure for the
holders of such loans. Second lien loans share the same risks as other below
investment grade securities.
Senior Loans Risk. There is less readily
available, reliable information about most senior loans than is the case for
many other types of securities. In addition, there is no minimum rating or other
independent evaluation of a borrower or its securities limiting the Fund’s
investments, and BFA relies primarily on its own evaluation of a borrower’s
credit quality rather than on any available independent sources. As a result,
the Fund is particularly dependent on the analytical abilities of BFA.
An
economic downturn generally leads to a higher non‑payment rate, and a senior
loan may lose significant value before a default occurs. Moreover, any specific
collateral used to secure a senior loan may decline in value or become illiquid,
which would adversely affect the senior loan’s value.
No
active trading market may exist for certain senior loans, which may impair the
ability of the Fund to realize full value in the event of the need to sell a
senior loan and which may make it difficult to value senior loans. Adverse
market conditions may impair the liquidity of some actively traded senior loans.
To the extent that a secondary market does exist for certain senior loans, the
market may be subject to irregular trading activity, wide bid/ask spreads and
extended trade settlement periods. See “Illiquid Investments Risk.”
Although
senior loans in which the Fund will invest generally will be secured by specific
collateral, there can be no assurance that liquidation of such collateral would
satisfy the borrower’s obligation in the event of non‑payment of scheduled
interest or principal or that such collateral could be readily liquidated. In
the event of the bankruptcy of a borrower, the Fund could experience delays or
limitations with respect to its ability to realize the benefits of the
22
collateral
securing a senior loan. If the terms of a senior loan do not require the
borrower to pledge additional collateral in the event of a decline in the value
of the already pledged collateral, the Fund will be exposed to the risk that the
value of the collateral will not at all times equal or exceed the amount of the
borrower’s obligations under the senior loans. To the extent that a senior loan
is collateralized by stock in the borrower or its subsidiaries, such stock may
lose all of its value in the event of the bankruptcy of the borrower.
Uncollateralized senior loans involve a greater risk of loss. Some senior loans
are subject to the risk that a court, pursuant to fraudulent conveyance or other
similar laws, could subordinate the senior loans to presently existing or future
indebtedness of the borrower or take other action detrimental to lenders,
including the Fund. Such court action could under certain circumstances include
invalidation of senior loans.
If
a senior loan is acquired through an assignment, the Fund may not be able to
unilaterally enforce all rights and remedies under the loan and with regard to
any associated collateral. If a senior loan is acquired through a participation,
the Fund generally will have no right to enforce compliance by the borrower with
the terms of the loan agreement against the borrower, and the Fund may not
directly benefit from the collateral supporting the debt obligation in which it
has purchased the participation. As a result, the Fund will be exposed to the
credit risk of both the borrower and the institution selling the participation.
The
senior loans in which the Fund invests are usually rated below investment grade.
As a result, the risks associated with senior loans are similar to the risks of
below investment grade securities, although senior loans are typically senior
and secured in contrast to other below investment grade securities, which are
often subordinated and unsecured. See “High Yield Securities Risk.” The higher
standing of senior loans has historically resulted in generally higher
recoveries in the event of a corporate reorganization. In addition, because
their interest rates are typically adjusted for changes in short-term interest
rates, senior loans generally are subject to less interest rate risk than other
below investment grade securities, which are typically fixed rate.
Senior
loans made in connection with highly leveraged transactions are subject to
greater risks than other senior loans. For example, the risks of default or
bankruptcy of the borrower or the risks that other creditors of the borrower may
seek to nullify or subordinate the Fund’s claims on any collateral securing the
loan are greater in highly leveraged transactions.
Small Fund Risk. When the Fund’s size is small,
the Fund may experience low trading volume and wide bid/ask spreads. In
addition, the Fund may face the risk of being delisted if the Fund does not meet
certain conditions of the listing exchange. If the Fund were to be required to
delist from the listing exchange, the value of the Fund may rapidly decline and
performance may be negatively impacted. Any resulting liquidation of the Fund
could cause the Fund to incur elevated transaction costs for the Fund and
negative tax consequences for its shareholders.
Structured Securities Risk — Because structured
securities of the type in which the Fund may invest typically involve no credit
enhancement, their credit risk generally will be equivalent to that of the
underlying instruments, index or reference obligation and will also be subject
to counterparty risk. The Fund may have the right to receive payments only from
the structured security, and generally does not have direct rights against the
issuer or the entity that sold the assets to be securitized. In addition to the
general risks associated with debt securities discussed herein, structured
securities carry additional risks, including, but not limited to: the
possibility that distributions from collateral securities will not be adequate
to make interest or other payments; the quality of the collateral may decline in
value or default; and the possibility that the structured securities are
subordinate to other classes. The Fund is permitted to invest in a class of
structured securities that is either subordinated or unsubordinated to the right
of payment of another class. Subordinated structured securities typically have
higher yields and present greater risks than unsubordinated structured
securities. Structured securities are typically sold in private placement
transactions, and there currently is no active trading market for structured
securities. Structured securities are based upon the movement of one or more
factors, including currency exchange rates, interest rates, reference bonds and
stock indices, and changes in interest rates and impact of these factors may
cause significant price fluctuations. Additionally, changes in the reference
instrument or security may cause the interest rate on the structured security to
be reduced to zero. Certain issuers of such structured securities may be deemed
to be “investment companies” as defined in the Investment Company Act. As a
result, the Fund’s investment in such securities may be limited by certain
investment restrictions contained in the Investment Company Act.
U.S. Government Issuer Risk. Treasury
obligations may differ in their interest rates, maturities, times of issuance
and other characteristics. Obligations of U.S. Government agencies and
authorities are supported by varying degrees
23
of
credit but generally are not backed by the full faith and credit of the U.S.
Government. No assurance can be given that the U.S. Government will provide
financial support to its agencies and authorities if it is not obligated by law
to do so.
A
Further Discussion of Other Risks
The
Fund may also be subject to certain other risks associated with its investments
and investment strategies.
Borrowing Risk. Borrowing may exaggerate
changes in the NAV of Fund shares and in the return on the Fund’s portfolio.
Borrowing will cost the Fund interest expense and other fees. The costs of
borrowing may reduce the Fund’s return. Borrowing may also cause the Fund to
liquidate positions when it may not be advantageous to do so to satisfy its
obligations.
Expense Risk. Fund expenses are subject to a
variety of factors, including fluctuations in the Fund’s net assets.
Accordingly, actual expenses may be greater or less than those indicated. For
example, to the extent that the Fund’s net assets decrease due to market
declines or redemptions, the Fund’s expenses will increase as a percentage of
Fund net assets. During periods of high market volatility, these increases in
the Fund’s expense ratio could be significant.
High Portfolio Turnover Risk. The Fund may
engage in active and frequent trading of its portfolio securities. High
portfolio turnover (considered by the Fund to mean higher than 100% annually)
may result in increased transaction costs to the Fund, including brokerage
commissions, dealer mark‑ups and other transaction costs on the sale of the
securities and on reinvestment in other securities. The sale of the Fund’s
portfolio securities may result in the realization and/or distribution to
shareholders of higher capital gains or losses as compared to a fund with less
active trading policies, such as index ETFs. These effects of higher than normal
portfolio turnover may adversely affect Fund performance.
Operational Risk. The Fund is exposed to
operational risks arising from a number of factors, including, but not limited
to, human errors, processing and communication errors, errors of the Fund’s
service providers, counterparties or other third parties, failed or inadequate
internal or external processes, and technology or systems failures. The use of
certain investment strategies that involve manual or additional processing, such
as over-the-counter derivatives, increases these risks. While service providers
are required to have appropriate operational risk management policies and
procedures, their methods of operational risk management may differ from those
of the Fund in the setting of priorities, the personnel and resources available
or the effectiveness of relevant controls. The Fund and BFA seek to reduce these
operational risks through controls, procedures and oversight. However, it is not
possible to identify all of the operational risks that may affect the Fund or to
develop processes and controls that completely eliminate or mitigate the
occurrence or effects of such failures. The Fund, including its performance and
continued operation, and its shareholders could be negatively impacted as a
result.
Reliance on Advisor Risk. The Fund is dependent
upon services and resources provided by BFA, and therefore BFA’s parent,
BlackRock, Inc. BFA is not required to devote its full time to the business of
the Fund and there is no guarantee or requirement that any investment
professional or other employee of BFA will allocate a substantial portion of his
or her time to the Fund. The loss of, or changes in, BFA’s personnel could have
a negative effect on the performance or the continued operation of the Fund.
Repurchase Agreements and Purchase and Sale Contracts
Risk. If the other party to a repurchase agreement or purchase and sale
contract defaults on its obligation under the agreement, the Fund may suffer
delays and incur costs or lose money in exercising its rights under the
agreement. If the seller fails to repurchase the security in either situation
and the market value of the security declines, the Fund may lose money.
Securities Lending Risk. The Fund may
engage in securities lending. Securities lending involves the risk that the Fund
may lose money because the borrower of the loaned securities fails to return the
securities in a timely manner or at all. The Fund could also lose money in the
event of a decline in the value of collateral provided for loaned securities or
a decline in the value of any investments made with cash collateral. These
events could also trigger adverse tax consequences for the Fund. BlackRock
Institutional Trust Company, N.A. (“BTC”), the Fund’s securities lending
agent, will take into account the tax impact to shareholders of substitute
payments for dividends when managing the Fund’s securities lending program.
24
Short Sales Risk.
Because making short sales in securities that it does not own exposes the Fund
to the risks associated with those securities, such short sales involve
speculative exposure risk. The Fund will incur a loss as a result of a short
sale if the price of the security increases between the date of the short sale
and the date on which the Fund replaces the security sold short. The Fund will
realize a gain if the security declines in price between those dates. As a
result, if the Fund makes short sales in securities that increase in value, it
will likely underperform similar funds that do not make short sales in
securities they do not own. There can be no assurance that the Fund will be able
to close out a short sale position at any particular time or at an acceptable
price. Although the Fund’s gain is limited to the amount at which it sold a
security short, its potential loss is limited only by the maximum attainable
price of the security, less the price at which the security was sold. The Fund
may also pay transaction costs and borrowing fees in connection with short
sales.
Tax Risk. The Fund invests in derivatives.
The federal income tax treatment of a derivative may not be as favorable as a
direct investment in an underlying asset. Derivatives may produce taxable income
and taxable realized gain. Derivatives may adversely affect the timing,
character and amount of income the Fund realizes from its investments. As a
result, a larger portion of the Fund’s distributions may be treated as ordinary
income rather than as capital gains. In addition, certain derivatives are
subject to mark‑to‑market or straddle provisions of the Internal Revenue Code of
1986, as amended. If such provisions are applicable, there could be an increase
(or decrease) in the amount of taxable dividends paid by the Fund. Income from
swaps is generally taxable. In addition, the tax treatment of certain
derivatives, such as swaps, is unsettled and may be subject to future
legislation, regulation or administrative pronouncements issued by the U.S.
Internal Revenue Service (the “IRS”).
Valuation Risk. The price the Fund could
receive upon the sale of a security or other asset may differ from the Fund’s
valuation of the security or other asset, particularly for securities or other
assets that trade in low volume or volatile markets or that are valued using a
fair value methodology as a result of trade suspensions or for other reasons.
Because non‑U.S. exchanges may be open on days or during time periods when the
Fund does not price its shares, the value of the securities or other assets in
the Fund’s portfolio may change on days or during time periods when shareholders
will not be able to purchase or sell the Fund’s shares.
Authorized
Participants who purchase or redeem Fund shares on days when the Fund is holding
fair-valued securities may receive fewer or more shares, or lower or higher
redemption proceeds, than they would have received had the securities not been
fair valued or been valued using a different methodology. The ability to value
investments may be impacted by technological issues or errors by pricing
services or other third-party service providers.
Warrants Risk. If the price of the underlying
stock does not rise above the exercise price before the warrant expires, the
warrant generally expires without any value and the Fund will lose any amount it
paid for the warrant. Thus, investments in warrants may involve substantially
more risk than investments in common stock. Warrants may trade in the same
markets as their underlying stock; however, the price of the warrant does not
necessarily move with the price of the underlying stock.
When-Issued and Delayed Delivery Securities and
Forward Commitments Risk. When-issued and delayed delivery securities and
forward commitments involve the risk that the security the Fund buys will lose
value prior to its delivery. There also is the risk that the security will not
be issued or that the other party to the transaction will not meet its
obligation. If this occurs, the Fund may lose both the investment opportunity
for the assets it set aside to pay for the security and any gain in the
security’s price.
Portfolio
Holdings Information
A
description of the Trust’s policies and procedures with respect to the
disclosure of the Fund’s portfolio securities is available in the Fund’s
Statement of Additional Information (“SAI”). The Fund discloses its portfolio
holdings daily at www.blackrock.com. Fund fact sheets provide information
regarding the Fund’s top holdings and may be requested by calling
1‑800‑474‑2737.
Management
Investment Adviser. As investment adviser, BFA
has overall responsibility for the general management and administration of the
Fund. BFA provides an investment program for the Fund and manages the investment
of the Fund’s assets. In managing the Fund, BFA may draw upon the trading,
research and expertise of its asset management affiliates for portfolio
decisions and management with respect to portfolio securities. In seeking to
25
achieve
the Fund’s investment objectives, BFA uses teams of portfolio managers,
investment strategists and other investment specialists. This team approach
brings together many disciplines and leverages BFA’s extensive resources.
Pursuant
to the Investment Advisory Agreement between BFA and the Trust (entered into on
behalf of the Fund), BFA is responsible for substantially all expenses of the
Fund, except the management fees, interest expenses, taxes, expenses incurred
with respect to the acquisition and disposition of portfolio securities and the
execution of portfolio transactions, including brokerage commissions (other than
any commitment fee relating to a committed line of credit), distribution fees or
expenses, litigation expenses and any extraordinary expenses (as determined by a
majority of the Trustees who are not “interested persons” of the Trust).
For
its investment advisory services to the Fund, BFA will be paid a management fee
from the Fund, based on a percentage of the Fund’s average daily net assets, at
an annual rate of 0.60%.
BlackRock
has contractually agreed to waive 0.05% of the management fee through June 30,
2026. The agreement may be terminated upon 90 days’ notice by a majority of the
non‑interested trustees of the Trust or by a vote of a majority of the
outstanding voting securities of the Fund.
BFA
has contractually agreed to waive its management fees in an amount equal to the
Acquired Fund Fees and Expenses, if any, attributable to investments by the Fund
in other equity and fixed-income mutual funds and ETFs advised by BFA or its
affiliates through June 30, 2025. BFA has also contractually agreed to waive its
management fees by an amount equal to the Acquired Fund Fees and Expenses, if
any, attributable to investments by the Fund in money market funds advised by
BFA or its affiliates through June 30, 2025. The agreement (with respect to
either waiver) may be terminated upon 90 days’ notice by a majority of the
non-interested trustees of the Trust or by a vote of a majority of the
outstanding voting securities of the Fund.
BFA
may from time to time voluntarily waive and/or reimburse fees or expenses in
order to limit total annual fund operating expenses (excluding acquired fund
fees and expenses, if any). Any such voluntary waiver or reimbursement may be
eliminated by BFA at any time.
For
the fiscal year ended July 31, 2023, BFA received management fees, net of any
applicable waivers, at the annual rate of 0.53% of the Fund’s average daily net
assets.
BFA
is located at 400 Howard Street, San Francisco, CA 94105. It is an indirect
wholly-owned subsidiary of BlackRock, Inc. (“BlackRock”). As of October 31,
2023, BFA and its affiliates provided investment advisory services for assets in
excess of $9.101 trillion. BFA and its affiliates trade and invest for their own
accounts in the actual securities and types of securities in which the Fund may
also invest, which may affect the price of such securities.
A
discussion regarding the basis for the approval by the Board of the Investment
Advisory Agreement with BFA is available in the Fund’s annual report for the
period ending July 31, 2023.
From
time to time, a manager, analyst, or other employee of BlackRock or its
affiliates may express views regarding a particular asset class, company,
security, industry, or market sector. The views expressed by any such person are
the views of only that individual as of the time expressed and do not
necessarily represent the views of BlackRock or any other person within the
BlackRock organization. Any such views are subject to change at any time based
upon market or other conditions and BlackRock disclaims any responsibility to
update such views. These views may not be relied on as investment advice and,
because investment decisions for the Fund are based on numerous factors, may not
be relied on as an indication of trading intent on behalf of the Fund.
Portfolio Managers. Mitchell Garfin, CFA, Carly
Wilson, Abigail, CFA and Tara Fitzpatrick (the “Portfolio Managers”) are jointly
and primarily responsible for the day‑to‑day management of the Fund.
Mitchell,
CFA has been employed by BFA or its affiliates as a portfolio manager since
2005. Mr. Garfin has been with BlackRock since 1997. Mr. Garfin has been a
Portfolio Manager of the Fund since 2022.
Carly
Wilson has been employed by BFA or its affiliates as a portfolio manager since
2009. Ms. Wilson has been with BlackRock since 2004, including her years with
Lehman Brothers and R3 Capital Partners, which was acquired by BlackRock in
2009. Ms. Wilson has been a Portfolio Manager of the Fund since 2022.
26
Abigail,
CFA has been employed by BFA or its affiliates as a portfolio manager since
2017. Ms. Parzanese has been with BlackRock since 2016. Ms. Parzanese has been a
Portfolio Manager of the Fund since 2022.
Tara
Fitzpatrick has been employed by BFA or its affiliates as a portfolio manager
since 2019. Ms. Fitzpatrick has been with BlackRock since 2013. Ms. Fitzpatrick
has been a Portfolio Manager of the Fund since 2022.
The
Fund’s SAI provides additional information about the Portfolio Managers’
compensation, other accounts managed by the Portfolio Managers and the Portfolio
Managers’ ownership (if any) of shares in the Fund.
Administrator, Custodian and Transfer Agent.
State Street Bank and Trust Company (“State Street”) is the administrator,
custodian and transfer agent for the Fund.
Conflicts of Interest. The investment
activities of BFA and its affiliates (including BlackRock and its subsidiaries
(collectively, the “Affiliates”)), and their respective directors, officers or
employees, in the management of, or their interest in, their own accounts and
other accounts they manage, may present conflicts of interest that could
disadvantage the Fund and its shareholders. BFA and its Affiliates provide
investment management services to other funds and discretionary managed accounts
that may follow investment programs similar to that of the Fund. BFA and its
Affiliates are involved worldwide with a broad spectrum of financial services
and asset management activities and may engage in the ordinary course of
business in activities in which their interests or the interests of their
clients may conflict with those of the Fund. BFA or one or more Affiliates
act, or may act, as an investor, research provider, investment
manager, commodity pool operator, commodity trading advisor, financier,
underwriter, adviser, trader, lender, index provider, agent and/or principal,
and have other direct and indirect interests in securities, currencies,
commodities, derivatives and other instruments in which the Fund may directly or
indirectly invest. The Fund may invest in securities of, or engage in other
transactions with, companies with which an Affiliate has significant debt or
equity investments or other interests. The Fund may also invest in issuances
(such as structured notes) by entities for which an Affiliate provides and is
compensated for cash management services relating to the proceeds from the sale
of such issuances. The Fund also may invest in securities of, or engage in other
transactions with, companies for which an Affiliate provides or may in the
future provide research coverage. An Affiliate may have business relationships
with, and purchase or distribute or sell services or products from or to,
distributors, consultants or others who recommend the Fund or who engage in
transactions with or for the Fund, and may receive compensation for such
services. BFA or one or more Affiliates may engage in proprietary trading and
advise accounts and funds that have investment objectives similar to those of
the Fund and/or that engage in and compete for transactions in the same types of
securities, currencies and other instruments as the Fund. This may include
transactions in securities issued by other open‑end and closed‑end investment
companies (which may include investment companies that are affiliated with the
Fund and BFA, to the extent permitted under the 1940 Act. The trading activities
of BFA and these Affiliates are carried out without reference to positions held
directly or indirectly by the Fund and may result in BFA or an Affiliate having
positions in certain securities that are senior or junior to, or have interests
different from or adverse to, the securities that are owned by the Fund.
Neither
BlackRock nor any Affiliate is under any obligation to share any investment
opportunity, idea or strategy with the Fund. As a result, an Affiliate may
compete with the Fund for appropriate investment opportunities. The results of
the Fund’s investment activities, therefore, may differ from those of an
Affiliate and of other accounts managed by BlackRock or an Affiliate, and it is
possible that the Fund could sustain losses during periods in which one or more
Affiliates and other accounts achieve profits on their trading for proprietary
or other accounts. The opposite result is also possible.
In
addition, the Fund may, from time to time, enter into transactions in which BFA
or an Affiliate or its or their
directors, officers or employees or other clients have an adverse interest.
Furthermore, transactions undertaken by clients advised or managed by BFA or its
Affiliates may adversely impact the Fund. Transactions by one or more clients or
by BFA or its Affiliates or their directors, officers or employees, may have the
effect of diluting or otherwise disadvantaging the values, prices or investment
strategies of the Fund.
The
Fund’s activities may be limited because of regulatory restrictions applicable
to BFA or one or more Affiliates and/or their internal policies designed to
comply with such restrictions.
Under
a securities lending program approved by the Board, the Fund has retained
BlackRock Institutional Trust Company, N.A., an Affiliate of BFA, to serve as
the securities lending agent for the Fund to the extent that the Fund
participates in the securities lending program. For these services, the
securities lending agent will receive a fee from
27
the
Fund, including a fee based on the returns earned on the Fund’s investment of
the cash received as collateral for the loaned securities. In addition, one or
more Affiliates may be among the entities to which the Fund may lend its
portfolio securities under the securities lending program.
It
is also possible that, from time to time, BFA and/or its advisory clients
(including other funds and separately managed accounts) may, subject to
compliance with applicable law, purchase and hold shares of the Fund. The price,
availability, liquidity, and (in some cases) expense ratio of the Fund may be
impacted by purchases and sales of the Fund by BFA and/or its advisory clients.
The
activities of BFA and its Affiliates and their respective directors, officers or
employees, may give rise to other conflicts of interest that could disadvantage
the Fund and its shareholders. BFA has adopted policies and procedures designed
to address these potential conflicts of interest. See the SAI for further
information.
Shareholder
Information
Additional shareholder information, including how to
buy and sell shares of the Fund, is available free of charge by calling
toll-free: 1‑800‑474‑2737 or visiting our website at www.blackrock.com.
Buying and Selling Shares. Shares of the Fund
may be acquired or redeemed directly from the Fund only in Creation Units or
multiples thereof, as discussed in the Creations and Redemptions section of this
Prospectus. Only an Authorized Participant may engage in creation or redemption
transactions directly with the Fund. Once created, shares of the Fund generally
trade in the secondary market in amounts less than a Creation Unit.
Shares
of the Fund are listed on a national securities exchange for trading during the
trading day. Shares can be bought and sold throughout the trading day like
shares of other publicly-traded companies. The Trust does not impose any minimum
investment for shares of the Fund purchased on an exchange or otherwise in the
secondary market. The Fund’s shares trade under the ticker symbol “BRLN.”
Buying
or selling Fund shares on an exchange or other secondary market involves two
types of costs that may apply to all securities transactions. When buying or
selling shares of the Fund through a broker, you may incur a brokerage
commission and other charges. The commission is frequently a fixed amount and
may be a significant proportional cost for investors seeking to buy or sell
small amounts of shares. In addition, you may incur the cost of the “spread,”
that is, any difference between the bid price and the ask price. The spread
varies over time for shares of the Fund based on the Fund’s trading volume and
market liquidity, and is generally lower if the Fund has high trading volume and
market liquidity, and higher if the Fund has little trading volume and market
liquidity (which is often the case for funds that are newly launched or small in
size). The Fund’s spread may also be impacted by the liquidity or illiquidity of
the underlying securities held by the Fund, particularly for newly launched or
smaller funds or in instances of significant volatility of the underlying
securities.
The
Fund does not impose restrictions on the frequency of purchases and redemptions
of Fund shares directly with the Fund. The Board determined not to adopt
policies and procedures designed to prevent or monitor for frequent purchases
and redemptions of Fund shares because the Fund generally sells and redeems its
shares directly through transactions that are in-kind and/or cash, with a
deadline for placing cash-related transactions no later than the close of the
primary markets for the Fund’s portfolio securities. However, the Fund has taken
certain measures (e.g., imposing transaction fees on purchases and
redemptions of Creation Units and reserving the right to reject purchases of
Creation Units under certain circumstances) to minimize the potential
consequences of frequent cash purchases and redemptions by Authorized
Participants, such as disruption of portfolio management, dilution to the Fund,
and/or increased transaction costs. Further, the vast majority of trading in
Fund shares occurs on the secondary market, which does not involve the Fund
directly, and such trading is unlikely to cause many of the harmful effects of
frequent cash purchases or redemptions of Fund shares.
The
national securities exchange on which the Fund’s shares are listed is open for
trading Monday through Friday and is closed on weekends and the following
holidays (or the days on which they are observed): New Year’s Day, Martin Luther
King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Juneteenth,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Fund’s
listing exchange is CBOE BZX.
28
Section
12(d)(1) of the 1940 Act generally restricts investments by investment
companies, including foreign and unregistered investment companies, in the
securities of other investment companies. For example, a registered investment
company (the “Acquired Fund”), such as the Fund, may not knowingly sell or
otherwise dispose of any security issued by the Acquired Fund to any investment
company (the “Acquiring Fund”) or any company or companies controlled by the
Acquiring Fund if, immediately after such sale or disposition: (i) more than 3%
of the total outstanding voting stock of the Acquired Fund is owned by the
Acquiring Fund and any company or companies controlled by the Acquiring Fund, or
(ii) more than 10% of the total outstanding voting stock of the Acquired Fund is
owned by the Acquiring Fund and other investment companies and companies
controlled by them. Although SEC rules may permit registered investment
companies and unit investment trusts (“Investing Funds”) that enter into an
investment agreement with the Trust to invest in the Fund beyond the limits set
forth in Section 12(d)(1) of the 1940 Act subject to certain terms and
conditions, the Fund does not permit such investments. Accordingly, Investing
Funds must adhere to the limits set forth in Section 12(d)(1) of the 1940 Act
when investing in the Fund. Foreign investment companies are permitted to invest
in the Fund only up to the limits set forth in Section 12(d)(1), subject to any
applicable SEC no-action relief.
Book Entry. Shares of the Fund are held in
book-entry form, which means that no stock certificates are issued. The
Depository Trust Company (“DTC”) or its nominee is the record owner of, and
holds legal title to, all outstanding shares of the Fund.
Investors
owning shares of the Fund are beneficial owners as shown on the records of DTC
or its participants. DTC serves as the securities depository for shares of the
Fund. DTC participants include securities brokers and dealers, banks, trust
companies, clearing corporations and other institutions that directly or
indirectly maintain a custodial relationship with DTC. As a beneficial owner of
shares, you are not entitled to receive physical delivery of stock certificates
or to have shares registered in your name, and you are not considered a
registered owner of shares. Therefore, to exercise any right as an owner of
shares, you must rely upon the procedures of DTC and its participants. These
procedures are the same as those that apply to any other securities that you
hold in book-entry or “street name” form.
Share Prices. The trading prices of the Fund’s
shares in the secondary market generally differ from the Fund’s daily NAV and
are affected by market forces such as the supply of and demand for ETF shares
and underlying securities held by the Fund, economic conditions and other
factors.
Determination of Net Asset Value. The NAV of
the Fund normally is determined once daily Monday through Friday, generally as
of the close of regular trading hours of the New York Stock Exchange (“NYSE”)
(normally 4:00 p.m., Eastern time) on each day that the NYSE is open for
trading, based on prices at the time of closing, provided that (i) any Fund
assets or liabilities denominated in currencies other than the U.S. dollar are
translated into U.S. dollars at the prevailing market rates on the date of
valuation as quoted by one or more data service providers and (ii) U.S.
fixed-income assets may be valued as of the announced closing time for trading
in fixed-income instruments in a particular market or exchange. The NAV of the
Fund is calculated by dividing the value of the net assets of the Fund (i.e.,
the value of its total assets less total liabilities) by the total number of
outstanding shares of the Fund, generally rounded to the nearest cent.
The
value of the securities and other assets and liabilities held by the Fund is
determined pursuant to BFA’s valuation policies and procedures. BFA has been
designated by the Board as the valuation designee for the Fund pursuant to Rule
2a-5 under the Investment Company Act of 1940, as amended.
The
Fund values fixed-income portfolio securities using last available bid prices or
current market quotations provided by dealers or prices (including evaluated
prices) supplied by the Fund’s approved independent third-party pricing
services, each in accordance with valuation policies and procedures approved by
the Board. Pricing services may use matrix pricing or valuation models that
utilize certain inputs and assumptions to derive values. Pricing services
generally value fixed-income securities assuming orderly transactions of an
institutional round lot size, but the Fund may hold or transact in such
securities in smaller odd lot sizes. Odd lots often trade at lower prices than
institutional round lots. An amortized cost method of valuation may be used with
respect to debt obligations with sixty days or less remaining to maturity unless
BFA determines in good faith that such method does not represent fair value.
Generally,
trading in non‑U.S. securities, U.S. government securities, money market
instruments and certain fixed-income securities is substantially completed each
day at various times prior to the close of regular trading hours on the NYSE.
The values of such securities used in computing the NAV of the Fund are
determined as of such times.
29
When
market quotations are not readily available or are believed by BFA to be
unreliable, BFA will fair value the Fund’s investments in accordance with its
policies and procedures. BFA may conclude that a market quotation is not readily
available or is unreliable if a security or other asset or liability does not
have a price source due to its lack of trading or other reasons, if a market
quotation differs significantly from recent price quotations or otherwise no
longer appears to reflect fair value, where the security or other asset or
liability is thinly traded, when there is a significant event subsequent to the
most recent market quotation, or if the trading market on which a security is
listed is suspended or closed and no appropriate alternative trading market is
available. A “significant event” is deemed to occur if BFA determines, in its
reasonable business judgment prior to or at the time of pricing the Fund’s
assets or liabilities, that the event is likely to cause a material change to
the last exchange closing price or closing market price of one or more assets
held by, or liabilities of, the Fund.
Fair
value represents a good faith approximation of the value of an asset or
liability. The fair value of an asset or liability held by the Fund is the
amount the Fund might reasonably expect to receive from the current sale of that
asset or the cost to extinguish that liability in an arm’s‑length transaction.
Valuing the Fund’s investments using fair value pricing will result in prices
that may differ from current market valuations and that may not be the prices at
which those investments could have been sold during the period in which the
particular fair values were used.
Dividends
and Distributions
General Policies. Dividends from net
investment income, if any, generally are declared and paid at least once a year
by the Fund. Distributions of net realized securities gains, if any, generally
are declared and paid once a year, but the Trust may make distributions on a
more frequent basis for the Fund. The Trust reserves the right to declare
special distributions if, in its reasonable discretion, such action is necessary
or advisable to preserve its status as a regulated investment company or to
avoid imposition of income or excise taxes on undistributed income or realized
gains.
Dividends
and other distributions on shares of the Fund are distributed on a pro rata basis to beneficial owners of such
shares. Dividend payments are made through DTC participants and indirect
participants to beneficial owners then of record with proceeds received from the
Fund.
Dividend Reinvestment Service. No dividend
reinvestment service is provided by the Trust. Broker-dealers may make available
the DTC book-entry Dividend Reinvestment Service for use by beneficial owners of
the Fund for reinvestment of their dividend distributions. Beneficial owners
should contact their broker to determine the availability and costs of the
service and the details of participation therein. Brokers may require beneficial
owners to adhere to specific procedures and timetables. If this service is
available and used, dividend distributions of both income and realized gains
will be automatically reinvested in additional whole shares of the Fund
purchased in the secondary market.
Taxes. As with any investment, you should
consider how your investment in shares of the Fund will be taxed. The tax
information in this Prospectus is provided as general information, based on
current law. There is no guarantee that shares of the Fund will receive certain
regulatory or accounting treatment. You should consult your own tax professional
about the tax consequences of an investment in shares of the Fund.
Unless
your investment in Fund shares is made through a tax‑exempt entity or
tax‑deferred retirement account, such as an IRA, in which case your
distributions generally will be taxable when withdrawn, you need to be aware of
the possible tax consequences when the Fund makes distributions or you sell Fund
shares.
Taxes on Distributions. Distributions from the
Fund’s net investment income, including distributions of income from securities
lending and distributions out of the Fund’s net short-term capital gains, if
any, are taxable to you as ordinary income. The Fund’s distributions of net
long-term capital gains, if any, in excess of net short-term capital losses are
taxable as long-term capital gains, regardless of how long you have held the
shares. Long-term capital gains are eligible for taxation at a maximum rate of
15% or 20% for non‑corporate shareholders, depending on whether their income
exceeds certain threshold amounts. Distributions from the Fund are subject to a
3.8% U.S. federal Medicare contribution tax on “net investment income,” for
individuals with incomes exceeding $200,000 ($250,000 if married and filing
jointly) and of estates and trusts. In general, your distributions are subject
to U.S. federal income tax for the year when they are paid. Certain
distributions paid in January, however, may be treated as paid on
December 31 of the prior year.
You
may lose the ability to use foreign tax credits passed through by the Fund if
your Fund shares are loaned out pursuant to a securities lending agreement.
30
If
the Fund’s distributions exceed current and accumulated earnings and profits,
all or a portion of the distributions made in the taxable year may be
recharacterized as a return of capital to shareholders. Distributions in excess
of the Fund’s minimum distribution requirements, but not in excess of the Fund’s
earnings and profits, will be taxable to shareholders and will not constitute
nontaxable returns of capital. A return of capital distribution generally will
not be taxable but will reduce the shareholder’s cost basis and will result in a
higher capital gain or lower capital loss when those shares on which the
distribution was received are sold. Once a shareholder’s cost basis is reduced
to zero, further distributions will be treated as capital gain, if the
shareholder holds shares of the Fund as capital assets.
Dividends,
interest and capital gains earned by the Fund with respect to securities issued
by non‑U.S. issuers may give rise to withholding, capital gains and other taxes
imposed by non‑U.S. countries. Tax conventions between certain countries and the
U.S. may reduce or eliminate such taxes. If more than 50% of the total assets of
the Fund at the close of a year consists of non‑U.S. stocks or securities
(generally, for this purpose, depositary receipts, no matter where traded, of
non‑U.S. companies are treated as “non‑U.S.”), generally the Fund may “pass
through” to you certain non‑U.S. income taxes (including withholding taxes) paid
by the Fund. This means that you would be considered to have received as an
additional dividend your share of such non‑U.S. taxes, but you may be entitled
to either a corresponding tax deduction in calculating your taxable income, or,
subject to certain limitations, a credit in calculating your U.S. federal income
tax.
For
purposes of foreign tax credits for U.S. shareholders of the Fund, foreign
capital gains taxes may not produce associated foreign source income, limiting
the availability of such credits for U.S. persons.
If
you are neither a resident nor a citizen of the U.S. or if you are a non‑U.S.
entity (other than a pass-through entity to the extent owned by U.S. persons),
the Fund’s ordinary income dividends (which include distributions of net
short-term capital gains) will generally be subject to a 30% U.S. withholding
tax, unless a lower treaty rate applies, provided that withholding tax will
generally not apply to any gain or income realized by a non‑U.S. shareholder in
respect of any distributions of net tax‑exempt income or long-term capital gains
or upon the sale or other disposition of shares of the Fund.
Separately,
a 30% withholding tax is currently imposed on U.S.-source dividends, interest
and other income items paid to (i) foreign financial institutions,
including non‑U.S. investment funds, unless they agree to collect and disclose
to the IRS information regarding their direct and indirect U.S. account holders
and (ii) certain other foreign entities, unless they certify certain
information regarding their direct and indirect U.S. owners. To avoid
withholding, foreign financial institutions will need to (i) enter into
agreements with the IRS that state that they will provide the IRS information,
including the names, addresses and taxpayer identification numbers of direct and
indirect U.S. account holders, comply with due diligence procedures with respect
to the identification of U.S. accounts, report to the IRS certain information
with respect to U.S. accounts maintained, agree to withhold tax on certain
payments made to non‑compliant foreign financial institutions or to account
holders who fail to provide the required information, and determine certain
other information concerning their account holders, or (ii) in the event
that an applicable intergovernmental agreement and implementing legislation are
adopted, provide local revenue authorities with similar account holder
information. Other foreign entities may need to report the name, address, and
taxpayer identification number of each substantial U.S. owner or provide
certifications of no substantial U.S. ownership unless certain exceptions apply.
If
you are a resident or a citizen of the U.S., by law, backup withholding at a 24%
rate will apply to your distributions and proceeds if you have not provided a
taxpayer identification number or social security number and made other required
certifications.
Taxes When Shares are Sold. Currently, any
capital gain or loss realized upon a sale of Fund shares is generally treated as
a long-term gain or loss if the shares have been held for more than one year.
Any capital gain or loss realized upon a sale of Fund shares held for one year
or less is generally treated as short-term gain or loss, except that any capital
loss on the sale of shares held for six months or less is treated as long-term
capital loss to the extent that capital gain dividends were paid with respect to
such shares. Any such capital gains, including from sales of Fund shares or from
capital gain dividends, are included in “net investment income” for purposes of
the 3.8% U.S. federal Medicare contribution tax mentioned above.
The foregoing discussion summarizes some of the
consequences under current U.S. federal tax law of an investment in the Fund. It
is not a substitute for personal tax advice. You may also be subject to state
and local taxation on Fund distributions and sales of shares. Consult your
personal tax advisor about the potential tax consequences of an investment in
shares of the Fund under all applicable tax laws.
31
Creations and Redemptions. Prior to trading in
the secondary market, shares of the Fund are “created” at NAV by market makers,
large investors and institutions only in block‑size Creation Units or multiples
thereof. Each “creator” or authorized participant (an “Authorized Participant”)
has entered into an agreement with the Distributor. An Authorized Participant is
a member or participant of a clearing agency registered with the SEC, which has
a written agreement with the Fund or one of its service providers that allows
such member or participant to place orders for the purchase and redemption of
Creation Units.
These
transactions are usually in exchange for cash.
A
creation transaction, which is subject to acceptance by the Distributor and the
Fund, generally takes place when an Authorized Participant deposits into the
Fund a specified amount of cash and/or a designated portfolio of securities
(including any portion of such securities for which cash may be substituted) in
exchange for a specified number of Creation Units. Similarly, shares can be
redeemed only in Creation Units, generally for a specified amount of cash and/or
a designated portfolio of securities (including any portion of such securities
for which cash may be substituted). Except when aggregated in Creation Units,
shares are not redeemable by the Fund. Creation and redemption baskets may
differ and the Fund will accept “custom baskets.” More information regarding
custom baskets is contained in the Fund’s SAI.
The
prices at which creations and redemptions occur are based on the next
calculation of NAV after a creation or redemption order is received in an
acceptable form under the authorized participant agreement.
Only
an Authorized Participant may create or redeem Creation Units with the Fund.
Authorized Participants may create or redeem Creation Units for their own
accounts or for customers, including, without limitation, affiliates of the
Fund.
In
the event of a system failure or other interruption, including disruptions at
market makers or Authorized Participants, orders to purchase or redeem Creation
Units either may not be executed according to the Fund’s instructions or may not
be executed at all, or the Fund may not be able to place or change orders.
To
the extent the Fund engages in in‑kind transactions, the Fund intends to comply
with the U.S. federal securities laws in accepting securities for deposit and
satisfying redemptions with redemption securities by, among other means,
assuring that any securities accepted for deposit and any securities used to
satisfy redemption requests will be sold in transactions that would be exempt
from registration under the 1933 Act. Further, an Authorized Participant that is
not a “qualified institutional buyer,” as such term is defined in Rule 144A
under the 1933 Act, will not be able to receive restricted securities eligible
for resale under Rule 144A.
Creations
and redemptions must be made through a firm that is either a member of the
Continuous Net Settlement System of the National Securities Clearing Corporation
or a DTC participant that has executed an agreement with the Distributor with
respect to creations and redemptions of Creation Unit aggregations. Information
about the procedures regarding creation and redemption of Creation Units
(including the cut‑off times for receipt of creation and redemption orders) is
included in the Fund’s SAI.
Because
new shares may be created and issued on an ongoing basis, at any point during
the life of the Fund a “distribution,” as such term is used in the 1933 Act, may
be occurring. Broker-dealers and other persons are cautioned that some
activities on their part may, depending on the circumstances, result in their
being deemed participants in a distribution in a manner that could render them
statutory underwriters subject to the prospectus delivery and liability
provisions of the 1933 Act. Any determination of whether one is an underwriter
must take into account all the relevant facts and circumstances of each
particular case.
Broker-dealers
should also note that dealers who are not “underwriters” but are participating
in a distribution (as contrasted to ordinary secondary transactions), and thus
dealing with shares that are part of an “unsold allotment” within the meaning of
Section 4(a)(3)(C) of the 1933 Act, would be unable to take advantage of
the prospectus delivery exemption provided by Section 4(a)(3) of the 1933
Act. For delivery of prospectuses to exchange members, the prospectus delivery
mechanism of Rule 153 under the 1933 Act is available only with respect to
transactions on a national securities exchange.
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 can be
32
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.
Distribution
The
Distributor or its agent distributes Creation Units for the Fund on an agency
basis. The Distributor does not maintain a secondary market in shares of the
Fund. The Distributor has no role in determining the policies of the Fund or the
securities that are purchased or sold by the Fund. The Distributor’s principal
address is 1 University Square Drive, Princeton, NJ 08540.
BFA
or its affiliates make payments to broker-dealers, registered investment
advisers, banks or other intermediaries (together, “intermediaries”) related to
marketing activities and presentations, educational training programs,
conferences, the development of technology platforms and reporting systems, data
provision services, or their making shares of the Fund and certain other
BFA‑advised ETFs available to their customers generally and in certain
investment programs. Such payments, which may be significant to the
intermediary, are not made by the Fund. Rather, such payments are made by BFA or
its affiliates from their own resources, which come directly or indirectly in
part from fees paid by the BFA‑advised ETFs. Payments of this type are sometimes
referred to as revenue-sharing payments. A financial intermediary may make
decisions about which investment options it recommends or makes available, or
the level of services provided, to its customers based on the payments or other
financial incentives it is eligible to receive. Therefore, such payments or
other financial incentives offered or made to an intermediary create conflicts
of interest between the intermediary and its customers and may cause the
intermediary to recommend the Fund or other BFA‑advised ETFs over another
investment. More information regarding these payments is contained in the Fund’s
SAI. Please contact your salesperson or other
investment professional for more information regarding any such payments his or
her firm may receive from BFA or its affiliates.
33
Financial
Highlights
The
financial highlights table is intended to help investors understand the Fund’s
financial performance since inception. Certain information reflects financial
results for a single share of the Fund. The total returns in the table represent
the rate that an investor would have earned (or lost) on an investment in the
Fund, assuming reinvestment of all dividends and distributions. This information
has been audited by PricewaterhouseCoopers LLP, whose report is included, along
with the Fund’s financial statements, in the Fund’s Annual Report (available
upon request).
|
|
|
|
|
|
|
BlackRock Floating Rate Loan ETF |
|
(For a
share outstanding throughout the period) |
|
Period From 10/04/22(a) to 07/31/23 |
|
Net
asset value, beginning of period |
|
$ |
50.37 |
|
Net
investment income(b) |
|
|
3.47 |
|
Net
realized and unrealized gain(c) |
|
|
1.25 |
|
Net
increase from investment operations |
|
|
4.72 |
|
Distributions
from net investment income(d) |
|
|
(3.08 |
) |
Net
asset value, end of period |
|
$ |
52.01 |
|
Total
Return(e) |
|
|
|
|
Based
on net asset value |
|
|
9.62 |
%(f) |
Ratios
to Average Net Assets(g) |
|
|
|
|
Total
expenses |
|
|
0.61 |
%(h) |
Total
expenses after fees waived |
|
|
0.54 |
%(h) |
Net
investment income |
|
|
8.25 |
%(h) |
Supplemental
Data |
|
|
|
|
Net
assets, end of period (000) |
|
$ |
20,803 |
|
Portfolio
turnover rate(i) |
|
|
22 |
% |
(a) Commencement of
operations.
(b) Based on average
shares outstanding.
(c) 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.
(d) Distributions for
annual periods determined in accordance with U.S. federal income tax
regulations.
(e) Where applicable,
assumes the reinvestment of distributions.
(f) Not
annualized.
(g) Excludes fees and
expenses incurred indirectly as a result of investments in underlying
funds.
(h) Annualized.
(i) Portfolio turnover
rate excludes in-kind transactions. |
|
34
Disclaimers
Shares
of the Fund are not sponsored, endorsed or promoted by Cboe BZX. Cboe BZX makes
no representation or warranty, express or implied, to the owners of shares of
the Fund or any member of the public regarding the ability of the Fund to
achieve its investment objectives. Cboe BZX is not responsible for, nor has it
participated in, the determination of the Fund’s investments, nor in the
determination of the timing of, prices of, or quantities of shares of the Fund
to be issued, nor in the determination or calculation of the equation by which
shares are redeemable. Cboe BZX has no obligation or liability to owners of the
shares of the Fund in connection with the administration, marketing or trading
of shares of the Fund.
Without
limiting any of the foregoing, in no event shall Cboe BZX have any liability for
any direct, indirect, special, punitive, consequential or any other damages
(including lost profits) even if notified of the possibility of such damages.
35
Want
to know more?
www.blackrock.com | 1‑800‑474‑2737
Copies
of the Prospectus, SAI and other information can be found on our website at
www.blackrock.com. For more information about the Fund, you may request a copy
of the SAI. The SAI provides detailed information about the Fund and is
incorporated by reference into this Prospectus. This means that the SAI, for
legal purposes, is a part of this Prospectus.
If
you have any questions about the Trust or shares of the Fund or you wish to
obtain the SAI free of charge, please:
|
|
|
Call: |
|
1‑800‑474‑2737 (toll free) |
Write: |
|
c/o BlackRock Investments, LLC |
|
|
1 University Square Drive, Princeton, NJ
08540 |
Reports
and other information about the Fund are available on the EDGAR database on the
SEC’s website at www.sec.gov, and copies of this information may be obtained,
after paying a duplicating fee, by electronic request at the following e‑mail
address:
[email protected].
No person is authorized to give any information or to
make any representations about the Fund and its shares not contained in this
Prospectus and you should not rely on any other information. Read and keep this
Prospectus for future reference.
Investment
Company Act File No.: 811‑23511
PRO-FRL-1123