The Fund seeks to provide exposure to the share price return of the Underlying ETF up to an approximate upside limit (the “Approximate Cap”), while seeking to maximize the downside protection against Underlying ETF losses (the “Approximate Buffer”) over each annual Hedge Period (as defined below). Under normal market conditions, the Fund invests at least 80% of its net assets (plus any borrowings for investment purposes) in securities or other instruments that provide exposure to securities of large capitalization companies or that provide for the upside limit on gains or the downside protection against the losses of securities of large capitalization companies. For purposes of the Fund’s 80% policy, “large capitalization companies” are those within the range of capitalization of the Underlying ETF’s underlying index.
The Fund principally buys shares of the Underlying ETF and customized put options thereon and sells call options that reference the Underlying ETF. The options in which the Fund transacts (typically, equity or index exchange-traded options contracts) are referred to generally as Flexible Exchange Options “FLEX Options”). The Fund may transact in other listed options that reference the price performance of the Underlying ETF, the Underlying ETF’s underlying index, or other exchange-traded funds (“ETFs”) that track the Underlying ETF’s underlying index (collectively, “exchange-traded options”).
The Fund intends to maximize protection against loss through the Approximate Buffer while establishing a 2% minimum Approximate Cap as further described below. While the Fund typically seeks to provide against approximately 100% of Underlying ETF losses for each applicable Hedge Period, the Fund will reduce the Approximate Buffer below 100% to provide an Approximate Cap of at least 2% during each Hedge Period.
The Underlying ETF is an ETF that seeks to track the investment results of the S&P 500 Index (the “Underlying ETF’s Index”), which measures the performance of the large-capitalization sector of the U.S. equity market, as determined by S&P Dow Jones Indices, LLC (“SPDJI”). The securities in the Underlying ETF’s Index are weighted based on the float-adjusted market value of their outstanding shares. The Underlying ETF’s Index consists of securities from a broad range of industries. The components of the Underlying ETF’s Index are likely to change over time. BFA is the investment adviser to the Underlying ETF and receives a management fee from the Underlying ETF.
The Underlying ETF is managed using a representative sampling indexing strategy. “Representative sampling” is an indexing strategy that involves investing in a representative sample of securities that collectively has an investment profile similar to that of an applicable underlying index. The securities selected are
expected to have, in aggregate, investment characteristics (based on factors such as market capitalization and industry weightings), fundamental characteristics (such as return variability and yield) and liquidity measures similar to those of an applicable underlying index. The Underlying ETF may or may not hold all of the securities in the Underlying ETF’s Index, which may cause the performance of the Underlying ETF to diverge from that of the Underlying ETF's Index. Representative sampling may subject the Underlying ETF to “tracking error”, which is the divergence of the Underlying ETF’s performance from that of the Underlying ETF’s Index. This risk may be heightened during times of increased market volatility or other unusual market conditions. The prospectus and other reports of the Underlying ETF (Ticker: IVV) are available on the Securities and Exchange Commission’s website at www.sec.gov. Shares of the Underlying ETF are listed on NYSE Arca, Inc.
An options contract is an agreement between a buyer and seller that gives the purchaser of the option the right but not the obligation to buy (in the case of a call option) or sell (in the case of a put option) a particular financial instrument at a specified future date for an agreed upon price (commonly known as the “strike price”). If the Fund purchases a call option, the Fund pays a premium and receives the right, but not the obligation, to purchase shares of the Underlying ETF or other reference asset at a strike price by or on the expiration date. When the Fund purchases a put option, the Fund pays a premium and receives the right, but not the obligation, to sell shares of the Underlying ETF or other reference asset at a strike price by or on the expiration date. When the Fund writes (sells) a call option, the Fund receives a premium and gives the purchaser of the option the right to purchase from the Fund shares of the Underlying ETF or other reference asset at a strike price by or on the expiration date. If the Fund writes (sells) a put option, the Fund receives a premium and gives the purchaser of the option the right to sell to the Fund shares of the Underlying ETF or other reference asset at a strike price by or on expiration date.
FLEX Options provide investors with the ability to customize key option contract terms such as strike price, style and expiration date, while avoiding the counterparty risk exposure of over-the-counter derivatives. Like traditional exchange-traded options, FLEX Options are guaranteed for settlement by the Options Clearing Corporation (the “OCC”), a market clearinghouse that guarantees performance by counterparties to certain derivatives contracts by becoming the “buyer for every seller and the seller for every buyer”. The OCC may make adjustments to FLEX Options for certain significant events. The FLEX Options in which the Fund invests are European style, which are exercisable at the strike price only on the expiration date. The FLEX Options traded by the Fund are listed on an exchange, including the Chicago Board Options Exchange (“CBOE”).
Options positions are marked to market daily by the Fund. The value of the FLEX Options in which the Fund invests is affected by changes in the value and dividend rates of the securities held by the Underlying ETF, changes in interest rates, changes in the actual or perceived volatility of the Underlying ETF’s Index and the remaining time to such options’ expiration, as well as trading conditions in the options market. The Fund will typically trade options that expire at or around the end of each annual period or “Hedge Period” (October 1 through September 30), subject to the
annual rebalancing process described below. The Fund will be indefinitely offered and is not intended to terminate after one or more Hedge Periods.
For each Hedge Period, the Fund obtains exposure to the share price return of the Underlying ETF by purchasing shares of the Underlying ETF and futures that reference the price performance of the Underlying ETF’s Index, and creates the Approximate Buffer and Approximate Cap by trading a combination of put and call exchange-traded options. Specifically, the Fund typically creates the Approximate Buffer by buying a put option with the strike price approximately at-the-money relative to the Underlying ETF’s share price. The Fund simultaneously writes a call option with a higher strike price relative to the Underlying ETF’s share price to collect a premium that it uses to offset the premium paid to buy the put option. The call subjects the Fund to the Approximate Cap as it limits the Fund’s ability to realize any increase in the value of the Underlying ETF above the strike price. The Approximate Cap for each Hedge Period is based on the strike price of the capped call for that Hedge Period. The Fund's market value and Net Asset Value (“NAV”) may not correlate with the Underlying ETF and Underlying ETF's Index, especially during each Hedge Period. The strike prices for the capped calls will change for each Hedge Period depending on the prevailing market conditions and the cost of the put option for that Hedge Period, resulting in a different Approximate Cap for each Hedge Period.
The Fund will typically buy Underlying ETF shares and futures on the Underlying ETF’s Index and seek to enter into the combination of options transactions described above if there are any inflows, or creation transactions, during a Hedge Period. This will occur even in circumstances where the Fund would receive a negligible premium for writing an out-of-the-money call which may potentially give up more sizable returns to the extent that the option later becomes in the money. Because the Fund will effectively use distributions from the Underlying ETF to purchase the downside protection, the Fund’s performance is likely to be less than the Underlying ETF’s performance when (1) distributions are considered and (2) the Underlying ETF’s performance is positive.
In order to obtain economic exposure to the Underlying ETF, in lieu of purchasing Underlying ETF shares and futures on the Underlying ETF’s Index for a Hedge Period, the Fund may instead, among other things: purchase call options with a strike price that is very low (approximately 1% or less) relative to the Underlying ETF’s share price on the day of purchase (a “zero strike call”); purchase one or more other ETFs that seek to track the Underlying ETF’s Index; purchase equity securities (e.g., component securities of the Underlying ETF’s Index) in seeking to track the share price return of the Underlying ETF; or invest in U.S. treasuries, money market funds and/or other cash equivalents and purchase or sell a combination of call and put options that seek to synthesize the economic characteristics of the Underlying ETF. If the Fund invests in equity securities (other than the Underlying ETF), the Fund’s equity security investments will be primarily in common stocks of companies held by the Underlying ETF that BFA believes will provide a risk/ return profile similar to that of the Underlying ETF.
For the current Hedge Period of October 1 through September 30, the Approximate Cap is 107.91% prior to taking into account any fees
or expenses charged to or transaction costs incurred by the Fund or Underlying ETF. When the Fund’s annualized management fee of 0.50% of the Fund’s average daily net assets is taken into account, the Approximate Cap for the current Hedge Period is reduced to 107.41%. The returns that the Fund seeks to provide also do not include the costs associated with purchasing shares of the Fund.
The Approximate Buffer that the Fund typically seeks to provide is against approximately 100% of Underlying ETF losses for the applicable Hedge Period; however, there is no guarantee that the Approximate Buffer will succeed in providing the intended protection. The Approximate Buffer is provided prior to taking into account any fees or expenses charged to the Fund. These fees and any expenses will reduce the Approximate Buffer amount for Fund shareholders for a Hedge Period. When the Fund’s annual management fee equal to 0.50% of the Fund’s daily net assets is taken into account for a Hedge Period, the net Approximate Buffer for the Hedge Period is 99.5%. While the Fund typically seeks to provide against approximately 100% of Underlying ETF losses for the applicable Hedge Period and will maximize the Approximate Buffer, the Fund will reduce the Approximate Buffer, including below 100%, to provide an Approximate Cap of at least 2%. For example, if interest rates are low enough that providing against approximately 100% of Underlying ETF losses would result in an Approximate Cap of less than 2%, the Fund would decrease the protection such that the Approximate Cap is at least 2%. Information on the Approximate Cap and Approximate Buffer will be provided shortly before each Hedge Period.
The Approximate Buffer and Approximate Cap for a Hedge Period only apply to Fund shares held over the entire Hedge Period. An investor that purchases Fund shares after the beginning of the Hedge Period, or sells Fund shares before the end of a Hedge Period, may not fully realize the Approximate Buffer or Approximate Cap for the Hedge Period and may be exposed to greater risk of loss and less potential gain. This is because while the Approximate Cap and Approximate Buffer for the Hedge Period are fixed levels that are calculated in relation to the Underlying ETF price and the Fund's NAV at the start of each Hedge Period and generally remain constant throughout the Hedge Period, an investor purchasing Fund shares at market price during the Hedge Period likely purchased Fund shares at a price that is different from the Fund's NAV at the start of the Hedge Period (i.e., the NAV that the Approximate Cap and Approximate Buffer reference). For example, if an investor purchases Fund shares during a Hedge Period at a time when the Underlying ETF’s share price has increased from its price at the beginning of the Hedge Period, the investor’s upside limit may be lower than the Approximate Cap and the investor may experience losses prior to reaching the downside protection offered by the Approximate Buffer. Conversely, if an investor purchases Fund shares during a Hedge Period at a time when the Underlying ETF’s share price has decreased from its price at the beginning of the Hedge Period, the Fund may require a larger increase in the Underlying ETF’s share price before it reaches the Approximate Cap. The Approximate Cap and Approximate Buffer, and the Fund’s position relative to each, which are typically available on iShares.com daily, should be considered before investing in the Fund.
In periods of extreme market volatility, the Fund’s return may be subject to an upside limit significantly below the Approximate Cap
and downside protection significantly lower than the Approximate Buffer. An investor may lose their entire investment and an investment in the Fund is only appropriate for investors willing to bear those losses.
Following the close of business on the last day of each Hedge Period, the Fund will file a prospectus supplement that discloses the Fund’s Approximate Cap (gross and net of the unitary management fee) for the next Hedge Period. The Fund’s Approximate Cap (net of the unitary management fee) for the current Hedge Period, along with Fund’s position relative to the Approximate Buffer and Approximate Cap, will be available on the Fund’s website, www.iShares.com.
The Fund is classified as non-diversified under the Investment Company Act of 1940, as amended (the “1940 Act”).