<PAGE>
iShares Trust
Statement of Additional Information
Dated May 12, 2000
(as revised December 15, 2000)
This Statement of Additional Information is not a Prospectus. It should be read
in conjunction with the Prospectus dated May 12, 2000 as revised on October 26,
2000 (the "Prospectus") for the iShares Trust (the "Trust"), as it may be
revised from time to time. Capitalized terms used herein that are not defined
have the same meaning as in the Prospectus, unless otherwise noted. A copy of
the Prospectus may be obtained without charge by writing to the Trust's
Distributor, SEI Investments Distribution Company, at 1 Freedom Valley Drive,
Oaks, PA 19456 or calling 1-800-iShares.
<PAGE>
Table of Contents
<TABLE>
<S> <C>
General Description of the Trust and its Funds............................ 1
Exchange Listing and Trading.............................................. 3
Investment Strategies and Risks........................................... 5
Lack of Diversification of Certain Funds.................................. 6
Loans of Portfolio Securities............................................. 7
Repurchase Agreements..................................................... 7
Reverse Repurchase Agreements............................................. 8
Currency Transactions..................................................... 8
Money Market Instruments.................................................. 9
Foreign Securities........................................................ 9
Investment Companies, REITs............................................... 9
Illiquid Securities....................................................... 10
Futures and Options....................................................... 10
Options on Futures Contracts.............................................. 10
Restrictions on the Use of Futures Contracts and Options on Futures Con-
tracts................................................................... 10
Swap Agreements........................................................... 11
Future Developments....................................................... 11
General Considerations and Risks.......................................... 11
Risks of Futures and Options Transactions................................. 12
Risks of Swap Agreements.................................................. 13
Construction and Maintenance Standards for the Underlying Indices......... 14
Index Dissemination....................................................... 14
The S&P Indices Generally................................................. 14
S&P 500 Index............................................................. 14
S&P 500/BARRA Growth Index................................................ 15
S&P 500/BARRA Value Index................................................. 15
S&P MidCap 400 Index...................................................... 16
S&P MidCap 400/BARRA Growth Index......................................... 16
S&P MidCap 400/BARRA Value Index.......................................... 16
S&P SmallCap 600 Index.................................................... 17
S&P SmallCap 600/BARRA Growth Index....................................... 17
S&P SmallCap 600/BARRA Value Index........................................ 17
S&P 100 Index............................................................. 18
S&P Europe 350 Index...................................................... 18
S&P/TSE 60 Index.......................................................... 18
The Dow Jones Indices Generally........................................... 19
Dow Jones U.S. Total Market Index......................................... 20
Dow Jones U.S. Basic Materials Sector Index............................... 20
Dow Jones U.S. Consumer Cyclical Sector Index............................. 20
Dow Jones U.S. Consumer Non-Cyclical Sector Index......................... 21
Dow Jones U.S. Energy Sector Index........................................ 21
Dow Jones U.S. Financial Sector Index..................................... 21
Dow Jones U.S. Healthcare Sector Index.................................... 22
Dow Jones U.S. Industrial Sector Index.................................... 22
Dow Jones U.S. Technology Sector Index.................................... 22
Dow Jones U.S. Telecommunications Sector Index............................ 23
Dow Jones U.S. Utilities Sector Index..................................... 23
Dow Jones U.S. Chemicals Index............................................ 24
Dow Jones U.S. Financial Services Index................................... 24
Dow Jones U.S. Internet Index............................................. 24
Dow Jones U.S. Real Estate Index.......................................... 25
</TABLE>
--------------------------------------------------------------------------------
page i
<PAGE>
<TABLE>
<S> <C>
The Russell Indices Generally............................................. 25
Russell 3000 Index........................................................ 26
Russell 3000 Growth Index................................................. 26
Russell 3000 Value Index.................................................. 26
Russell 2000 Index........................................................ 27
Russell 2000 Growth Index................................................. 27
Russell 2000 Value Index.................................................. 28
Russell 1000 Index........................................................ 28
Russell 1000 Growth Index................................................. 28
Russell 1000 Value Index.................................................. 29
Investment Limitations.................................................... 30
Continuous Offering....................................................... 32
Management................................................................ 33
Trustees and Officers..................................................... 33
Remuneration of Trustees and Officers..................................... 34
Investment Advisor........................................................ 34
Administrator, Custodian, Transfer Agent and Securities Lending Agent..... 36
Distributor............................................................... 37
Index Providers........................................................... 37
Brokerage Transactions.................................................... 38
Additional Information Concerning the Trust............................... 39
Capital Stock............................................................. 39
Book Entry Only System.................................................... 39
DTC Acts as Securities Depository for the iShares......................... 39
Creation and Redemption of Creation Unit Aggregations..................... 41
Creation.................................................................. 41
Fund Deposit.............................................................. 41
Procedures for Creation of Creation Unit Aggregations..................... 42
Placement of Creation Orders for Domestic Funds Using Clearing Process.... 43
Placement of Creation Orders for Domestic Funds Outside Clearing Process.. 43
Placement of Creation Orders for Foreign Funds............................ 44
Acceptance of Orders for Creation Unit Aggregations....................... 45
Creation Transaction Fee.................................................. 46
Redemption of iShares in Creation Unit Aggregations....................... 47
Redemption Transaction Fee................................................ 47
Placement of Redemption Orders for Domestic Funds Using Clearing Process.. 48
Placement of Redemption Orders for Domestic Funds Outside Clearing Proc-
ess...................................................................... 48
Placement of Redemption Orders for Foreign Funds.......................... 49
Foreign Market Hours...................................................... 51
Regular Holidays.......................................................... 53
Settlement Periods Greater than Seven Days in 2000........................ 56
Taxes..................................................................... 57
Federal Tax Treatment of Futures and Options Contracts.................... 58
Determination of NAV...................................................... 59
Dividends and Distributions............................................... 60
General Policies.......................................................... 60
Dividend Reinvestment Service............................................. 60
Performance and Other Information......................................... 61
Miscellaneous Information................................................. 63
Counsel................................................................... 63
Independent Auditors...................................................... 63
Financial Statements...................................................... 64
Report of Independent Accountants......................................... 64
</TABLE>
--------------------------------------------------------------------------------
iShares
page ii
<PAGE>
General Description of the Trust
and its Funds
The Trust currently consists of 36 investment portfolios (each a "Fund" and
collectively the "Funds"). The Trust was organized as a Delaware business trust
on December 16, 1999 and is authorized to have multiple series, or portfolios.
Each Fund in the Trust is an open-end management investment company, registered
under the Investment Company Act of 1940, as amended (the "1940 Act"). The
shares of each Fund are referred to herein as "iShares". The Funds offered by
the Trust are:
.iShares S&P 500 .iShares Dow Jones .iShares Russell 3000
Index Fund U.S. Total Market Index Fund
.iShares S&P Index Fund .iShares Russell 3000
500/BARRA Growth .iShares Dow Jones Growth Index Fund
Index Fund U.S. Basic Materials .iShares Russell 3000
.iShares S&P Sector Index Fund Value Index Fund
500/BARRA Value .iShares Dow Jones .iShares Russell 2000
Index Fund U.S. Consumer Index Fund
.iShares S&P MidCap Cyclical Sector .iShares Russell 2000
400 Index Fund Index Fund Growth Index Fund
.iShares S&P .iShares Dow Jones .iShares Russell 2000
MidCap400/BARRA U.S. Consumer Non- Value Index Fund
Growth Index Fund Cyclical Sector .iShares Russell 1000
.iShares S&P Index Fund Index Fund
MidCap400/BARRA .iShares Dow Jones .iShares Russell 1000
Value Index Fund U.S. Energy Sector Growth Index Fund
.iShares S&P SmallCap Index Fund .iShares Russell 1000
600 Index Fund .iShares Dow Jones Value Index Fund
.iShares S&P SmallCap U.S. Financial
600/BARRA Growth Sector Index Fund
Index Fund .iShares Dow Jones
.iShares S&P SmallCap U.S. Healthcare
600/BARRA Value Sector Index Fund
Index Fund .iShares Dow Jones
.iShares S&P 100 U.S. Industrial
Index Fund Sector Index Fund
.iShares S&P Europe .iShares Dow Jones
350 Index Fund U.S. Technology
.iShares S&P/TSE 60 Sector Index Fund
Index Fund .iShares Dow Jones
U.S.
Telecommunications
Sector Index Fund
.iShares Dow Jones
U.S. Utilities
Sector Index Fund
.iShares Dow Jones
U.S. Chemicals Index
Fund
.iShares Dow Jones
U.S. Financial
Services Index Fund
.iShares Dow Jones
U.S. Internet Index
Fund
.iShares Dow Jones
U.S. Real Estate
Index Fund
The investment objective of each Fund is to provide investment results that
correspond generally to the price and yield performance, before fees and
expenses, of a specified benchmark index (each an "Underlying Index")
representing publicly traded equity securities of companies in a particular
broad market, market segment, market sector or group of industries. Each Fund
is managed by Barclays Global Fund Advisors ("BGFA").
Each Fund offers and issues iShares at their net asset value ("NAV") only in
aggregations of a specified number of iShares (each a "Creation Unit" or a
"Creation Unit Aggregation"), generally in exchange for a basket of equity
securities included in its Underlying Index (the "Deposit Securities"),
together with the deposit of a specified cash payment (the "Cash Component").
The iShares described in this Prospectus are listed, except that the S&P 100
Fund is listed on the Chicago Board Options Exchange (the "CBOE"). The AMEX and
the CBOE each are referred to herein as a Listing Exchange on the American
Stock Exchange LLC (the "AMEX"). iShares will trade on a Listing Exchange at
market prices that may be below, at, or above NAV. iShares are redeemable only
in Creation Unit aggregations, and, generally, in exchange for portfolio
securities and a specified cash payment. Creation Units are aggregations of
50,000 iShares.
--------------------------------------------------------------------------------
page 1
<PAGE>
The Trust reserves the right to offer a "cash" option for creations and
redemptions of iShares although it has no current intention of doing so.
iShares may be issued in advance of receipt of Deposit Securities subject to
various conditions including a requirement to maintain on deposit with the
Trust cash at least equal to 125% of the market value of the missing Deposit
Securities. See the Creation and Redemption of Creation Unit Aggregations
section. In each instance of such cash creations or redemptions, transaction
fees may be imposed that will be higher than the transaction fees associated
with in-kind creations or redemptions. In all cases, such fees will be limited
in accordance with the requirements of the Securities and Exchange Commission
(the "SEC") applicable to management investment companies offering redeemable
securities.
--------------------------------------------------------------------------------
iShares
page 2
<PAGE>
Exchange Listing and Trading
A discussion of exchange listing and trading matters associated with an
investment in each Fund is contained in the Prospectus in the Overview and the
Shareholder Information sections. The discussion below supplements, and should
be read in conjunction with, such sections of the Prospectus.
There can be no assurance that the requirements of the listing Exchange
necessary to maintain the listing of iShares of any Fund will continue to be
met. Exchange may, but is not required to, remove the iShares of a Fund from
listing if (i) following the initial 12-month period beginning upon the
commencement of trading of a Fund, there are fewer than 50 beneficial owners of
the iShares of a Fund for 30 or more consecutive trading days; (ii) the value
of the Underlying Index on which such Fund is based is no longer calculated or
available; or (iii) such other event shall occur or condition exist that, in
the opinion of the listing Exchange, makes further dealings on the Exchange
inadvisable. The Exchange will remove the iShares of a Fund from listing and
trading upon termination of such Fund.
As in the case of other publicly-traded stocks traded, broker's commissions on
transactions will be based on negotiated commission rates at customary levels.
The following table sets forth the ratio of NAV to the Underlying Index's value
by Fund as of the date of this Statement of Additional Information.
<TABLE>
<CAPTION>
Ratio of
NAV/Index
Value by
iShares Index Fund Fund
------------------ ---------
<S> <C>
iShares S&P 500 Index Fund 1/10
iShares S&P 500/BARRA Growth Index Fund 1/10
iShares S&P 500/BARRA Value Index Fund 1/10
iShares S&P MidCap 400 Index Fund 1/5
iShares S&P MidCap 400/BARRA Growth Index Fund 1/2
iShares S&P MidCap 400/BARRA Value Index Fund 1/2
iShares S&P SmallCap 600 Index Fund 1/2
iShares S&P SmallCap 600/BARRA Growth Index Fund 1/2
iShares S&P SmallCap 600/BARRA Value Index Fund 1/2
iShares S&P 100 Index Fund 1/10
iShares S&P Europe 350 Index Fund 1/20
iShares S&P/TSE 60 Index Fund 1/10
iShares Dow Jones U.S. Total Market Index Fund 1/5
iShares Dow Jones U.S. Basic Materials Sector Index Fund 1/4
iShares Dow Jones U.S. Consumer Cyclical Sector Index Fund 1/5
iShares Dow Jones U.S. Consumer Non-Cyclical Sector Index Fund 1/5
iShares Dow Jones U.S. Energy Sector Index Fund 1/5
iShares Dow Jones U.S. Financial Sector Index Fund 1/5
iShares Dow Jones U.S. Healthcare Sector Index Fund 1/5
iShares Dow Jones U.S. Industrial Sector Index Fund 1/5
iShares Dow Jones U.S. Technology Sector Index Fund 1/10
iShares Dow Jones U.S. Telecommunications Sector Index Fund 1/5
iShares Dow Jones U.S. Utilities Sector Index Fund 1/2
iShares Dow Jones U.S. Chemicals Index Fund 1/4
iShares Dow Jones U.S. Financial Services Index Fund 1/5
iShares Dow Jones U.S. Internet Index Fund 1/4
iShares Dow Jones U.S. Real Estate Index Fund 1/2
</TABLE>
--------------------------------------------------------------------------------
page 3
<PAGE>
<TABLE>
<CAPTION>
Ratio of
NAV/Index
Value by
iShares Index Fund Fund
------------------ ---------
<S> <C>
iShares Russell 3000 Index Fund 1/10
iShares Russell 3000 Growth Index Fund 1/10
iShares Russell 3000 Value Index Fund 1/10
iShares Russell 2000 Index Fund 1/5
iShares Russell 2000 Growth Index Fund 1/5
iShares Russell 2000 Value Index Fund 1/5
iShares Russell 1000 Index Fund 1/10
iShares Russell 1000 Growth Index Fund 1/10
iShares Russell 1000 Value Index Fund 1/10
</TABLE>
The Trust reserves the right to adjust the stock prices of iShares in the
future to maintain convenient trading ranges for investors. Any adjustments
would be accomplished through stock splits or reverse stock splits, which would
have no effect on the net assets of the applicable Fund. However, the ratio of
a Fund's NAV to its Underlying Index would change in such instance.
--------------------------------------------------------------------------------
iShares
page 4
<PAGE>
Investment Strategies and Risks
Each Fund seeks to achieve its objective by investing in common stocks that
comprise the relevant Underlying Index. Each Fund operates as an index fund and
will not be actively managed. Adverse performance of a security in a Fund's
portfolio will ordinarily not result in the elimination of the security from a
Fund's portfolio.
Some Funds will engage in Replication, by which they hold substantially all of
the securities of the Underlying Index in approximately the same proportions as
reflected in the Underlying Index. Other Funds will engage in Representative
Sampling, which is investing in a representative sample of stocks in the
Underlying Index, selected by BGFA to have a similar investment profile as the
Underlying Index. Stocks selected have aggregate investment characteristics
(based on market capitalization and industry weightings), fundamental
characteristics (such as return variability, earnings valuation and yield) and
liquidity measures similar to those of the relevant Underlying Index. Funds
that use Representative Sampling generally do not hold all of the stocks that
are included in the relevant Underlying Index.
<TABLE>
<CAPTION>
Funds that Use Replication
--------------------------
<S> <C>
iShares S&P 500 Index Fund
iShares S&P 500/BARRA Growth
Index Fund
iShares S&P 500/BARRA Value
Index Fund
iShares S&P MidCap 400 Index Fund
iShares S&P MidCap 400/BARRA
Growth Index Fund
iShares S&P MidCap 400/BARRA Value
Index Fund
iShares S&P SmallCap 600 Index
Fund
iShares S&P SmallCap 600/BARRA
Growth Index Fund
iShares S&P SmallCap 600/BARRA
Value Index Fund
iShares S&P 100 Index Fund
iShares Dow Jones U.S. Total
Market Index Fund
iShares Russell 3000 Index Fund
iShares Russell 3000 Growth
Index Fund
iShares Russell 3000 Value Index
Fund
iShares Russell 2000 Index Fund
iShares Russell 2000 Growth
Index Fund
iShares Russell 2000 Value Index
Fund
iShares Russell 1000 Index Fund
iShares Russell 1000 Growth
Index Fund
iShares Russell 1000 Value Index
Fund
</TABLE>
<TABLE>
<CAPTION>
Funds that Use Representative
Sampling
-----------------------------
<S> <C>
iShares S&P Europe 350 Index Fund
iShares S&P/TSE 60 Index Fund
iShares Dow Jones U.S. Basic
Materials Sector Index Fund
iShares Dow Jones U.S. Consumer
Cyclical Sector Index Fund
iShares Dow Jones U.S. Consumer
Non-Cyclical Sector Index Fund
iShares Dow Jones U.S. Energy
Sector Index Fund
iShares Dow Jones U.S. Financial
Sector Index Fund
iShares Dow Jones U.S. Healthcare
Sector Index Fund
iShares Dow Jones U.S. Industrial
Sector Index Fund
iShares Dow Jones U.S. Technology
Sector Index Fund
iShares Dow Jones U.S.
Telecommunications Sector Index
Fund
iShares Dow Jones U.S. Utilities
Sector Index Fund
iShares Dow Jones U.S. Chemicals
Index Fund
iShares Dow Jones U.S. Financial
Services Index Fund
iShares Dow Jones U.S. Internet
Index Fund
iShares Dow Jones U.S. Real Estate
Index Fund
</TABLE>
--------------------------------------------------------------------------------
page 5
<PAGE>
At least 90% of each Fund's total assets will be invested in stocks in its
Underlying Index. A Fund may also invest up to 10% of its total assets in
futures, options and swap contracts (in each case related to the Underlying
Index and its component stocks), cash and cash equivalents, as well as in
stocks not included in its Underlying Index if BGFA determines this to be
appropriate in light of the Fund's investment objective and relevant investment
constraints. The following examples illustrate the circumstances in which a
Fund would hold stocks not included in its Underlying Index. First, in order to
reflect various corporate actions (such as mergers) and other changes in the
Fund's Underlying Index (reconstitutions), a Fund may hold stocks that are
announced as additions to the Underlying Index prior to their actual date of
inclusion in such index. Second, a Fund may hold stocks that have been recently
deleted from its Underlying Index due to various corporate action and
reconstitutions. Third, a Fund may invest in stocks outside the Underlying
Index when necessary to meet the diversification requirements of a regulated
investment company under the Internal Revenue Code (the "Code"). In such cases,
the stocks outside the Underlying Index will be stocks in the relevant market,
market segment, market sector or group of industries tracked by such Index.
Representative Sampling is used for those Funds where BGFA believes that
Replication is not the most effective means to track the Underlying Index. The
number of securities, liquidity of underlying securities, restrictions on the
ownership of securities, high transaction expenses and other trading costs, and
tax and other regulatory restrictions are among the factors which BGFA
considers. Although Representative Sampling has been an effective means of
approximating index performance in the past, it will not usually enable a Fund
to track the Underlying Index's performance with the accuracy achieved by
Replication. Each Fund will be reviewed regularly and adjusted, when necessary,
to correlate with the relevant Underlying Index.
Lack of Diversification of Certain Funds. The following table sets forth the
diversification status of each Fund.
<TABLE>
<CAPTION>
Diversified Funds Non-Diversified Funds
----------------- ---------------------
<S> <C>
iShares S&P 500 Index Fund iShares S&P 500/BARRA Growth Index Fund
iShares S&P 500/BARRA Value iShares S&P 100 Index Fund
Index Fund iShares S&P/TSE 60 Index Fund
iShares S&P MidCap 400 iShares Dow Jones U.S. Basic Materials Sector
Index Fund Index Fund
iShares S&P MidCap 400/BARRA iShares Dow Jones U.S. Consumer Cyclical
Growth Index Fund Sector Index Fund
iShares S&P MidCap 400/BARRA iShares Dow Jones U.S. Consumer Non-Cyclical
Value Index Fund Sector Index Fund
iShares S&P SmallCap 600 iShares Dow Jones U.S. Energy Sector Index
Index Fund Fund
iShares S&P SmallCap 600/BARRA iShares Dow Jones U.S. Financial Sector Index
Growth Index Fund Fund
iShares Dow Jones U.S. Healthcare Sector
iShares S&P SmallCap 600/BARRA Index Fund
Value Index Fund iShares Dow Jones U.S. Industrial Sector Index
iShares S&P Europe 350 Index Fund
Fund iShares Dow Jones U.S. Technology Sector
iShares Dow Jones U.S. Total Index Fund
Market Index Fund iShares Dow Jones U.S. Telecommunications
Sector
iShares Russell 3000 Index Fund Index Fund
iShares Russell 3000 Growth iShares Dow Jones U.S. Utilities Sector Index
Index Fund Fund
iShares Dow Jones U.S. Chemicals Index Fund
</TABLE>
--------------------------------------------------------------------------------
iShares
page 6
<PAGE>
<TABLE>
<CAPTION>
Diversified Funds Non-Diversified Funds
----------------- ---------------------
<S> <C>
iShares Russell 3000 Value iShares Dow Jones U.S. Financial Services
Index Fund Index Fund
iShares Russell 2000 Index Fund iShares Dow Jones U.S. Internet Index Fund
iShares Russell 2000 Growth iShares Dow Jones U.S. Real Estate Index Fund
Index Fund iShares Russell 1000 Growth Index Fund
iShares Russell 2000 Value
Index Fund
iShares Russell 1000 Index Fund
iShares Russell 1000 Value
Index Fund
</TABLE>
A "non-diversified" classification means that the Funds are not limited by the
1940 Act with regard to the percentage of their assets that may be invested in
the securities of a single issuer. A nondiversified Fund may also concentrate
its investments in a particular industry or group of industries, as noted in
the descriptions of each such Fund. The stocks of a particular issuer, or of
issuers in particular industries, may dominate the Underlying Index of such
Funds and, consequently, their investment portfolio. This may adversely affect
their performance or subject their iShares to greater price volatility than
that experienced by more diversified investment companies.
Each Fund, however (whether diversified or non-diversified), intends to
maintain the required level of diversification and otherwise conduct its
operations so as to qualify as a "regulated investment company" for purposes of
the Code, and to relieve the Fund of any liability for federal income tax to
the extent that its earnings are distributed to shareholders. Compliance with
the diversification requirements of the Code severely limits the investment
flexibility of certain Funds and makes it less likely that such Funds will meet
their investment objectives.
Loans of Portfolio Securities. Each Fund may lend its investment securities to
approved borrowers. Investors Bank and Trust serves as the lending agent for
the Funds and as such, shares in any net income earned by a Fund. Any gain or
loss on the market price of the securities loaned that might occur during the
term of the loan would be for the account of the relevant Fund. These loans
cannot exceed 30% of a Fund's total assets.
Approved borrowers are brokers, dealers, domestic and foreign banks, or other
financial institutions that meet credit or other requirements as established
by, and subject to, the review of the Trust's Board of Trustees (the "Board" or
the "Trustees"), so long as the terms, the structure and the aggregate amount
of such loans are not inconsistent with the 1940 Act and the rules and
regulations thereunder or interpretations of the SEC, which require that (i)
the borrowers pledge and maintain with the Fund collateral consisting of cash,
an irrevocable letter of credit issued by a bank, or securities issued or
guaranteed by the U.S. Government having a value at all times of not less than
100% of the value of the securities loaned (on a "mark-to-market" basis); (ii)
the loan be made subject to termination by a Fund at any time; and (iii) a Fund
receives reasonable interest on the loan. Securities lending procedures
approved by the Board will meet or exceed the requirements stated above and
promulgated under the 1940 Act. From time to time, each Fund may return a part
of the interest earned from the investment of collateral received from
securities loaned to the borrower and/or a third party that is unaffiliated
with the Fund and that is acting as a finder.
Repurchase Agreements. Each Fund may enter into repurchase agreements with
banks and securities dealers. Such transactions entail the purchase of
securities with a simultaneous commitment to resell the securities to the bank
or the dealer at an agreed-upon date and price, reflecting a market rate of
interest unrelated to the coupon rate or
--------------------------------------------------------------------------------
Investment Strategies and Risks
page 7
<PAGE>
maturity of the purchased securities. Should a Fund enter into a repurchase
agreement, each such Fund would maintain custody of the underlying securities
prior to their repurchase. Thus, the obligation of the bank or the dealer to
pay the repurchase price on the date agreed would be, in effect, secured by
such securities. If the value of such securities were less than the repurchase
price plus interest, the other party to the agreement would be required to
provide additional collateral so that at all times the collateral is at least
100% of the repurchase price plus accrued interest. Default by or bankruptcy of
a seller would expose each Fund to possible loss because of adverse market
action, expenses or delays in connection with the disposition of the underlying
obligations. The financial institutions with which each Fund may enter into
repurchase agreements will be banks and non-bank dealers of U.S. Government
Securities on the Federal Reserve Bank of New York's list of reporting dealers,
if such banks and non-bank dealers are deemed creditworthy by BGFA. BGFA will
continue to monitor creditworthiness of the seller under a repurchase
agreement, and will require the seller to maintain the value of the securities
subject to the agreement to equal at least 100% of the repurchase price
(including accrued interest). In addition, BGFA will require that the value of
this collateral, after transaction costs (including loss of interest)
reasonably expected to be incurred on a default, be equal to or greater than
100% of the repurchase price (including accrued premium) provided in the
repurchase agreement or the daily amortization of the difference between the
purchase price and the repurchase price specified in the repurchase agreement.
BGFA will mark-to-market daily the value of the securities. Under the 1940 Act,
repurchase agreements are considered loans.
Reverse Repurchase Agreements. Each Fund may enter into reverse repurchase
agreements, which involve the sale of securities with an agreement to
repurchase the securities at an agreed-upon price, date and interest payment
and have the characteristics of borrowing. The securities purchased with the
funds obtained from the agreement and securities collateralizing the agreement
will have maturity dates no later than the repayment date. Generally the effect
of such transactions is that the Fund can recover all or most of the cash
invested in the portfolio securities involved during the term of the reverse
repurchase agreement, while in many cases the Fund is able to keep some of the
interest income associated with those securities. Such transactions are only
advantageous if the Fund has an opportunity to earn a greater rate of interest
on the cash derived from these transactions than the interest cost of obtaining
the same amount of cash. Opportunities to realize earnings from the use of the
proceeds equal to or greater than the interest required to be paid may not
always be available and each Fund intends to use the reverse repurchase
technique only when BGFA believes it will be advantageous to the Fund. The use
of reverse repurchase agreements may exaggerate any interim increase or
decrease in the value of each Fund's assets. The custodian bank will maintain a
separate account for each Fund with securities having a value equal to or
greater than such commitments. Under the 1940 Act, reverse repurchase
agreements are considered loans.
Currency Transactions. No Fund expects to engage in currency transactions for
the purpose of hedging against declines in the value of the Fund's currency. A
Fund may enter into foreign currency forward and foreign currency futures
contracts to facilitate local securities settlements or to protect against
currency exposure in connection with its distributions to shareholders, but may
not enter into such contracts for speculative purposes.
A forward currency contract is an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. A currency futures contract is a contract involving an obligation to
deliver or acquire the specified amount of a specific currency, at a specified
price and at a specified future time. Futures contracts may be
--------------------------------------------------------------------------------
iShares
page 8
<PAGE>
settled on a net cash payment basis rather than by the sale and delivery of the
underlying currency.
Foreign exchange transactions involve a significant degree of risk and the
markets in which foreign exchange transactions are effected are highly
volatile, highly specialized and highly technical. Significant changes,
including changes in liquidity prices, can occur in such markets within very
short periods of time, often within minutes. Foreign exchange trading risks
include, but are not limited to, exchange rate risk, maturity gap, interest
rate risk, and potential interference by foreign governments through regulation
of local exchange markets, foreign investment or particular transactions in
foreign currency. If BGFA utilizes foreign exchange transactions at an
inappropriate time or judges market conditions, trends or correlations
incorrectly, foreign exchange transactions may not serve their intended purpose
of improving the correlation of a Fund's return with the performance of the
Underlying Index and may lower the Fund's return. The Fund could experience
losses if the value of its currency forwards, options and futures positions
were poorly correlated with its other investments or if it could not close out
its positions because of an illiquid market. In addition, each Fund could incur
transaction costs, including trading commissions, in connection with certain
foreign currency transactions.
Money Market Instruments. Each Fund may invest a portion of its assets in high-
quality money market instruments on an ongoing basis to provide liquidity. The
instruments in which the Fund may invest include: (i) short-term obligations
issued by the U.S. Government; (ii) negotiable certificates of deposit ("CDs"),
fixed time deposits and bankers' acceptances of U.S. and foreign banks and
similar institutions; (iii) commercial paper rated at the date of purchase
"Prime-1" by Moody's or "A-1+" or "A-1" by S&P or, if unrated, of comparable
quality is determined by BGFA; and (iv) repurchase agreements. CDs are short-
term negotiable obligations of commercial banks. Time deposits are non-
negotiable deposits maintained in banking institutions for specified periods of
time at stated interest rates. Banker's acceptances are time drafts drawn on
commercial banks by borrowers, usually in connection with international
transactions.
Foreign Securities. Each Fund may purchase publicly traded common stocks of
foreign corporations represented in the Underlying Indices. Each Fund's
investment in common stock of foreign corporations represented in the
Underlying Indices may also be in the form of American Depositary Receipts
("ADRs") and Global Depositary Receipts ("GDRs"). ADRs and GDRs are receipts,
typically issued by a bank or trust company, which evidence ownership of
underlying securities issued by a foreign corporation.
Investing in the securities of foreign companies involves special risks and
considerations not typically associated with investing in U.S. companies. These
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 foreign countries, and potential restrictions of the
flow of international capital. Foreign companies may be subject to less
governmental regulation than U.S. companies. Moreover, individual foreign
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.
Investment Companies, REITs. Each Fund may invest in the securities of other
investment companies (including money market funds) and real estate investment
trusts to the extent allowed by law. Under the 1940 Act, each Fund's investment
in investment companies is limited to, subject to certain exceptions, (i) 3% of
the total outstanding voting stock of any one investment company, (ii) 5% of
the Fund's total assets with respect to any one investment company and (iii)
10% of the Fund's total assets of investment companies in the aggregate.
--------------------------------------------------------------------------------
Investment Strategies and Risks
page 9
<PAGE>
Illiquid Securities. Each Fund may invest up to an aggregate amount of 15% of
its net assets in illiquid securities. Illiquid securities include securities
subject to contractual or other restrictions on resale and other instruments
that lack readily available markets.
Futures and Options. Each Fund may enter into U.S. or foreign futures
contracts, options and options on futures contracts. These futures contracts
and options will be used to simulate full investment in the respective
Underlying Index, to facilitate trading or to reduce transaction costs. Each
Fund will only enter into futures contracts and options on futures contracts
that are traded on a U.S. or foreign exchange. No Fund will use futures or
options for speculative purposes.
A call option gives a holder the right to purchase a specific security at a
specified price ("exercise price") within a specified period of time. A put
option gives a holder the right to sell a specific security at a specified
price within a specified period of time. The initial purchaser of a call option
pays the "writer" a premium, which is paid at the time of purchase and is
retained by the writer whether or not such option is exercised. Each Fund may
purchase put options to hedge its portfolio against the risk of a decline in
the market value of securities held and may purchase call options to hedge
against an increase in the price of securities it is committed to purchase.
Each Fund may write put and call options along with a long position in options
to increase its ability to hedge against a change in the market value of the
securities it holds or is committed to purchase.
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific instrument or index at a
specified future time and at a specified price. Stock index contracts are based
on indices that reflect the market value of common stock of the firms included
in the indices. Each Fund may enter into futures contracts to purchase security
indices when BGFA anticipates purchasing the underlying securities and believes
prices will rise before the purchase will be made. Assets committed to futures
contracts will be segregated by the custodian to the extent required by law.
Options on Futures Contracts. An option on a futures contract, as contrasted
with the direct investment in such a contract, gives the purchaser the right,
in return for the premium paid, to assume a position in the underlying futures
contract at a specified exercise price at any time prior to the expiration date
of the option. Upon exercise of an option, the delivery of the futures position
by the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account that
represents the amount by which the market price of the futures contract exceeds
(in the case of a call) or is less than (in the case of a put) the exercise
price of the option on the futures contract. The potential for loss related to
the purchase of an option on a futures contract is limited to the premium paid
for the option plus transaction costs. Because the value of the option is fixed
at the point of sale, there are no daily cash payments by the purchaser to
reflect changes in the value of the underlying contract; however, the value of
the option changes daily and that change would be reflected in the NAV of each
Fund. The potential for loss related to writing options is unlimited.
Each Fund may purchase and write put and call options on futures contracts that
are traded on a U.S. or foreign exchange as a hedge against changes in value of
its portfolio securities, or in anticipation of the purchase of securities, and
may enter into closing transactions with respect to such options to terminate
existing positions. There is no guarantee that such closing transactions can be
effected.
Restrictions on the Use of Futures Contracts and Options on Futures
Contracts. In view of the above considerations, each Fund will comply with the
following restriction when purchasing or selling futures. Aggregate initial
margin and premiums that are required to
--------------------------------------------------------------------------------
iShares
page 10
<PAGE>
establish positions other than those considered to be "bona fide hedging" by
the Commodity Futures Trading Commission (the "CFTC") will not exceed 5% of
each Fund's total market value after taking into account unrealized profits and
unrealized losses on any such contracts it has entered into. In addition, each
Fund will not purchase options to the extent that more than 5% of the value of
such Fund's total assets would be invested in premiums on open put option
positions.
Upon entering into a futures contract, a Fund will be required to deposit with
the broker an amount of cash or cash equivalents in the range of approximately
5% to 7% of the contract amount (this amount is subject to change by the
exchange on which the contract is traded). This amount, known as "initial
margin", is in the nature of a performance bond or good faith deposit on the
contract and is returned to each Fund upon termination of the futures contract,
assuming all contractual obligations have been satisfied. Subsequent payments,
known as "variation margin", to and from the broker will be made daily as the
price of the index underlying the futures contract fluctuates, making the long
and short positions in the futures contract more or less valuable, a process
known as "marking-to-market." At any time prior to expiration of a futures
contract, each Fund may elect to close the position by taking an opposite
position, which will operate to terminate the Fund's existing position in the
contract.
Swap Agreements. Swap agreements are contracts between parties in which one
party agrees to make periodic payments to the other party based on the change
in market value or level of a specified rate, index or asset. In return, the
other party agrees to make periodic payments to the first party based on the
return of a different specified rate, index or asset. Swap agreements will
usually be done on a net basis, the Fund receiving or paying, only the net
amount of the two payments. The net amount of the excess, if any, of a Fund's
obligations over its entitlements with respect to each swap is accrued on a
daily basis and an amount of cash or high liquid securities having an aggregate
value at least equal to the accrued excess is maintained in an account at the
Trust's custodian bank.
The use of interest-rate and index swaps is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio security transactions. These transactions generally do not
involve the delivery of securities or other underlying assets or principal.
Future Developments. The Board may, in the future, authorize each Fund to
invest in securities contracts and investments other than those listed in this
Statement of Additional Information and in the Prospectus, provided they are
consistent with each Fund's investment objective and do not violate any
investment restrictions or policies.
General Considerations and Risks. A discussion of the risks associated with an
investment in a Fund is contained in the Prospectus in the Principal Risk
Factors Common to All Funds and the Shareholder Information sections. The
discussion below supplements, and should be read in conjunction with, these
sections of the Prospectus.
An investment in a Fund should be made with an understanding that the value of
a Fund's portfolio securities may fluctuate in accordance with changes in the
financial condition of the issuers of the portfolio securities, the value of
common stocks in general and other factors that affect the market.
An investment in a Fund should also be made with an understanding of the risks
inherent in an investment in equity securities, including the risk that the
financial condition of issuers may become impaired or that the general
condition of the stock market may deteriorate (either of which may cause a
decrease in the value of the portfolio securities and thus in the value of
iShares). Common stocks are susceptible to general stock market
--------------------------------------------------------------------------------
Investment Strategies and Risks
page 11
<PAGE>
fluctuations and to volatile increases and decreases in value as market
confidence and perceptions of their issuers change. These investor perceptions
are based on various and unpredictable factors, including expectations
regarding government, economic, monetary and fiscal policies, inflation and
interest rates, economic expansion or contraction, and global or regional
political, economic or banking crises.
Holders of common stocks incur more risk than holders of preferred stocks and
debt obligations because common stockholders, as owners of the issuer, have
generally inferior rights to receive payments from the issuer in comparison
with the rights of creditors, or holders of debt obligations or preferred
stocks. Further, unlike debt securities which typically have a stated principal
amount payable at maturity (whose value, however, is subject to market
fluctuations prior thereto), or preferred stocks, which typically have a
liquidation preference and which may have stated optional or mandatory
redemption provisions, common stocks have neither a fixed principal amount nor
a maturity. Common stock values are subject to market fluctuations as long as
the common stock remains outstanding.
Although most of the securities in the Underlying Indices are listed on a
national securities exchange, the principal trading market for some may be in
the over-the-counter market. The existence of a liquid trading market for
certain securities may depend on whether dealers will make a market in such
securities. There can be no assurance that a market will be made or maintained
or that any such market will be or remain liquid. The price at which securities
may be sold and the value of a Fund's iShares will be adversely affected if
trading markets for a Fund's portfolio securities are limited or absent, or if
bid/ask spreads are wide.
Risks of Futures and Options Transactions. There are several risks accompanying
the utilization of futures contracts and options on futures contracts. First, a
position in futures contracts and options on futures contracts may be closed
only on the exchange on which the contract was made (or a linked exchange).
While each Fund plans to utilize futures contracts only if an active market
exists for such contracts, there is no guarantee that a liquid market will
exist for the contract at a specified time. Furthermore, because, by
definition, futures contracts project price levels in the future and not
current levels of valuation, market circumstances may result in a discrepancy
between the price of the stock index future and the movement in the underlying
Index. In the event of adverse price movements, a Fund would continue to be
required to make daily cash payments to maintain its required margin. In such
situations, if a Fund has insufficient cash, it may have to sell portfolio
securities to meet daily margin requirements at a time when it may be
disadvantageous to do so. In addition, a Fund may be required to deliver the
instruments underlying future contracts it has sold.
The risk of loss in trading futures contracts or uncovered call options in some
strategies (e.g., selling uncovered stock index futures contracts) is
potentially unlimited. The Funds do not plan to use futures and options
contracts in this way. The risk of a futures position may still be large as
traditionally measured due to the low margin deposits required. In many cases,
a relatively small price movement in a futures contract may result in immediate
and substantial loss or gain to the investor relative to the size of a required
margin deposit. The Funds, however, intend to utilize futures and options
contracts in a manner designed to limit their risk exposure to levels
comparable to direct investment in stocks.
Utilization of futures and options on futures by a Fund involves the risk of
imperfect or even negative correlation to the Underlying Index if the index
underlying the futures contract differs from the Underlying Index. There is
also the risk of loss by a Fund of margin deposits in the event of bankruptcy
of a broker with whom a Fund has an open
--------------------------------------------------------------------------------
iShares
page 12
<PAGE>
position in the futures contract or option. The purchase of put or call options
will be based upon predictions by BGFA as to anticipated trends, which
predictions could prove to be incorrect.
Because the futures market imposes less burdensome margin requirements than the
securities market, an increased amount of participation by speculators in the
futures market could result in price fluctuations. Certain financial futures
exchanges limit the amount of fluctuation permitted in futures contract prices
during a single trading day. The daily limit establishes the maximum amount by
which the price of a futures contract may vary either up or down from the
previous day's settlement price at the end of a trading session. Once the daily
limit has been reached in a particular type of contract, no trades may be made
on that day at a price beyond that limit. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures
positions and subjecting each Fund to substantial losses. In the event of
adverse price movements, each Fund would be required to make daily cash
payments of variation margin.
Although each Fund intends to enter into futures contracts only if there is an
active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time.
Risks of Swap Agreements. The risk of loss with respect to swaps generally is
limited to the net amount of payments that a Fund is contractually obligated to
make. Swap agreements are subject to the risk that the swap counterparty will
default on its obligations. If such a default occurs, a Fund will have
contractual remedies pursuant to the agreements related to the transaction.
However, such remedies may be subject to bankruptcy and insolvency laws which
could affect such Fund's rights as a creditor -- e.g. a Fund may not receive
the net amount of payments that it contractually is entitled to receive.
--------------------------------------------------------------------------------
Investment Strategies and Risks
page 13
<PAGE>
Construction and Maintenance Standards for the Underlying Indices
Index Dissemination. The AMEX intends to disseminate every fifteen seconds the
approximate value of the iShares of every Fund except of the iShares S&P Europe
350 Index Fund and the iShares S&P/TSE 60 Index Fund. Bloomberg will provide
approximate values for those Funds on a similar basis. This approximate value
should not be viewed as a "real-time" update of the NAV per iShare of any Fund,
because it may not be calculated in the same manner as the NAV, which is
computed once a day. The Funds are not involved in, or responsible for, the
calculation or dissemination of such amount and make no warranty as to its
accuracy.
Brief descriptions of the Underlying Indices on which the Funds are based and
the equity markets in which the Funds are invested are provided below.
The S&P Indices Generally.
Component Selection Criteria. The Standard & Poor's Index Committee is
responsible for the overall management of the S&P Indices. Companies selected
for the indices represent a broad range of industry segments within the U.S.
economy. The starting universe, all U.S. publicly traded companies, is screened
to eliminate ADRs, mutual funds, limited partnerships, royalty trusts, and
REITs. The following criteria are then analyzed to determine a company's
eligibility for inclusion in the indices. Ownership of a company's outstanding
common shares is carefully analyzed in order to screen out closely held
companies. The trading volume of a company's stock is analyzed to ensure ample
liquidity and efficient share pricing. Both the financial and operating
condition of a company are rigorously analyzed.
Issue Changes. A Company will be removed from the S&P Indices as a result of
mergers/acquisitions, bankruptcy, restructuring, or if it is no longer
representative of its industry group. A company is removed from the relevant
index as close as possible to the actual date on which the event occurred. A
company can be removed from an index because it no longer meets current
criteria for inclusion and/or is no longer representative of its industry
group. All replacement companies are selected based on the above component
section criteria.
Index Maintenance. Maintaining the S&P Indices includes monitoring and
completing the adjustments for company additions and deletions, share changes,
stock splits, stock dividends, and stock price adjustments due to restructuring
and spin-offs. Share changes of less than 5% are only updated on a quarterly
basis on the Friday near the end of the calendar quarter. The divisor is
adjusted for changes in company structure to leave the value of the S&P Indices
unaffected. All divisor adjustments are made after the close of trading and
after the calculation of the closing value of the S&P Indices.
Index Availability. The S&P Indices are calculated continuously and widely
disseminated to major data vendors.
S&P 500 Index
Number of Components: 500
Index Description. The Standard & Poor's 500 Index measures the performance of
the large-capitalization sector of the U.S. equity market. It serves as the
underlying index for the S&P 500/BARRA Growth and Value Index series. It is a
capitalization-weighted index
--------------------------------------------------------------------------------
iShares
page 14
<PAGE>
from a broad range of industries chosen for market size, liquidity, and
industry group representation. The component stocks are weighted according to
the total market value of their outstanding shares. The impact of a component's
price change is proportional to the issue's total market value, which is the
share price multiplied by the number of shares outstanding. These are summed
for all 500 stocks and divided by a predetermined base value. The base value
for the Index is adjusted to reflect changes in capitalization resulting from
mergers, acquisitions, stock rights, substitutions and other capital events.
The S&P 500 Index represents approximately 77% of the market capitalization of
listed U.S. equities. As of March 31, 2000, the ten largest companies in the
Index were Microsoft Corporation, Cisco Systems Inc., General Electric Company,
Intel Corporation, Exxon Mobil Corporation, Wal-Mart Stores, Inc., Oracle
Corporation, International Business Machines Corporation, Citigroup, Inc., and
Lucent Technologies Inc.
S&P 500/BARRA Growth Index
Number of Components: approximately 110
Index Description. The S&P 500/BARRA Growth Index measures the performance of
the large-capitalization growth sector of the U.S. equity market. It is a
subset of the S&P 500 Index and consists of those companies with the highest
price-to-book ratios within the S&P 500 Index representing approximately 50% of
the market capitalization of that index. It is a capitalization-weighted index
representing stocks from a broad range of industries. The component stocks are
weighted according to the total market value of their outstanding shares. The
impact of a component's price change is proportional to the issue's total
market value, which is the share price multiplied by the number of shares
outstanding. The base value for the S&P 500/BARRA Growth Index is adjusted to
reflect changes in capitalization resulting from mergers, acquisitions, stock
rights, substitutions and other capital events. The S&P 500/BARRA Growth Index
represents approximately 38% of the market capitalization of listed U.S.
equities. As of March 31, 2000, the ten largest companies in the Index were
Microsoft Corporation, Cisco Systems Inc., General Electric Company, Intel
Corporation, Wal-Mart Stores, Inc., Oracle Corporation, International Business
Machines Corporation, Lucent Technologies Inc., Nortel Networks Corporation and
America Online, Inc.
S&P 500/BARRA Value Index
Number of Components: approximately 390
Index Description. The S&P 500/BARRA Value Index measures the large-
capitalization value sector of the U.S. equity market. It is a subset of the
S&P 500 Index and consists of those companies with the lowest price-to-book
ratios within the S&P 500 Index representing approximately 50% of the market
capitalization of that index. It is a capitalization-weighted index
representing stocks from a broad range of industries. The component stocks are
weighted according to the total market value of their outstanding shares. The
impact of a component's price change is proportional to the issue's total
market value, which is the share price multiplied by the number of shares
outstanding. The base value for the S&P 500/BARRA Value Index is adjusted to
reflect changes in capitalization resulting from mergers, acquisitions, stock
rights, substitutions and other capital events. The S&P 500/BARRA Value Index
represents approximately 38% of the market capitalization of listed U.S.
equities. As of March 31, 2000, the ten largest companies in the Index were
Exxon Mobil Corporation, Citigroup, Inc., AT&T Corporation, American
International Group, Inc., Hewlett Packard Co., MCI Worldcom, Inc., Royal Dutch
Petroleum Co., Motorola Inc., Bell Atlantic Corporation and Morgan Stanley Dean
Witter Discover & Company.
--------------------------------------------------------------------------------
Construction and Maintenance Standards for the Underlying Indices
page 15
<PAGE>
S&P MidCap 400 Index
Number of Components: 400
Index Description. The S&P 400 MidCap Index measures the performance of the
mid-capitalization sector of the U.S. equity market. It serves as the
underlying index for the S&P 400/BARRA Growth and Value Index series. The
component stocks are weighted according to the total market value of their
outstanding shares. The impact of a component's price change is proportional to
the issue's total market value, which is the share price multiplied by the
number of shares outstanding. These are summed for all stocks and divided by a
predetermined base value. The base value for the Index is adjusted to reflect
changes in capitalization resulting from mergers, acquisitions, stock rights,
substitutions and other capital events. The Index is a benchmark for
performance measurement of the mid-capitalization segment of the U.S. equity
market. The S&P MidCap 400 Index represents approximately 6% of the market
capitalization of listed U.S. equities. As of March 31, 2000, the ten largest
companies in the Index were Veritas Software Corporation, Siebel Systems, Inc.,
Maxim Integrated Products, Inc., Altera Corporation, Linear Technology
Corporation, Vitesse Semiconductor Corporation, Medimmune Inc., Univision
Communications, Inc., Atmel Corporation and Intuit.
S&P MidCap 400/BARRA Growth Index
Number of Components: approximately 126
Index Description. The S&P MidCap 400/BARRA Growth Index measures the
performance of the mid-capitalization growth sector of the U.S. equity market.
It is a subset of the S&P 400 Index and consists of those companies with the
highest price-to-book ratios within the S&P 400 Index representing
approximately 50% of the market capitalization of that index. It is a
capitalization-weighted index representing stocks from a broad range of
industries. The component stocks are weighted according to the total market
value of their outstanding shares. The impact of a component's price change is
proportional to the issue's total market value, which is the share price
multiplied by the number of shares outstanding. The base value for the S&P
MidCap 400/BARRA Growth Index is adjusted to reflect changes in capitalization
resulting from mergers, acquisitions, stock rights, substitutions and other
capital events. The S&P MidCap 400/BARRA Growth Index represents approximately
3.25% of the market capitalization of listed U.S. equities. As of March 31,
2000, the ten largest companies in the Index were Veritas Software Corporation,
Siebel Systems Inc., Maxim Integrated Products, Inc., Altera Corporation,
Linear Technology Corporation, Vitesse Semiconductor Corporation, Medimmune
Inc., Univision Communications, Inc., Atmel Corporation and Intuit.
S&P MidCap 400/BARRA Value Index
Number of Components: approximately 274
Index Description. The S&P MidCap 400/BARRA Value Index measures the
performance of the mid-capitalization value sector of the U.S. equity market.
It is a subset of the S&P 400 Index and consists of those companies with the
lowest price-to-book ratios within the S&P 400 Index representing approximately
50% of the market capitalization of that index. It is a capitalization-weighted
index representing stocks from a broad range of industries. The component
stocks are weighted according to the total market value of their outstanding
shares. The impact of a component's price change is proportional to the issue's
total market value, which is the share price multiplied by the number of shares
outstanding. The base value for the S&P MidCap 400/BARRA Value Index is
adjusted to reflect changes in capitalization resulting from mergers,
acquisitions, stock rights, substitutions and other capital events. The S&P
MidCap 400/BARRA Value Index represents approximately 3.25% of the market
capitalization of listed U.S. equities. As of
--------------------------------------------------------------------------------
iShares
page 16
<PAGE>
March 31, 2000, the ten largest companies in the Index were Dynegy Inc.,
Montana Power Company, Telephone and Data Systems Inc., Weatherford
International Inc., Marshall & Ilsley Corporation, BJ Services Company, Noble
Drilling Corporation, Washington Post Company, Ensco International Inc. and
Sungard Data Systems Inc.
S&P SmallCap 600 Index
Number of Components: 600
Index Description. The S&P SmallCap 600 Index measures the performance of the
small-capitalization sector of the U.S. equity market. It serves as the
underlying index for the S&P 600/BARRA Growth and Value Index series. It is a
capitalization-weighted index from a broad range of industries chosen for
market size, liquidity, and industry group representation. The component stocks
are weighted according to the total market value of their outstanding shares.
The impact of a component's price change is proportional to the issue's total
market value, which is the share price multiplied by the number of shares
outstanding. These are summed for all stocks and divided by a predetermined
base value. The base value for the Index is adjusted to reflect changes in
capitalization resulting from mergers, acquisitions, stock rights,
substitutions and other capital events. The S&P 600 Index represents
approximately 2.5% of the market capitalization of listed U.S. equities. As of
March 31, 2000, the ten largest companies in the Index were Mercury Interactive
Corporation, MarchFirst Inc., IDEC Pharmaceuticals Corporation, Micrel Inc.,
U.S. TR Corporation, Lattice Semiconductor Corporation, Burr Brown Corporation,
C-Cube Microsystems, Inc., Kemet Corporation and Gentex Corporation.
S&P SmallCap 600/BARRA Growth Index
Number of Components: approximately 197
Index Description. The S&P SmallCap 600/BARRA Growth Index measures the
performance of the small-capitalization growth sector of the U.S. equity
market. It is a subset of the S&P 600 Index and consists of those companies
with the highest price-to-book ratios within the S&P 600 Index representing
approximately 50% of the market capitalization of that index. It is a
capitalization-weighted index representing stocks from a broad range of
industries. The component stocks are weighted according to the total market
value of their outstanding shares. The impact of a component's price change is
proportional to the issue's total market value, which is the share price
multiplied by the number of shares outstanding. The base value for the S&P
SmallCap 600/BARRA Growth Index is adjusted to reflect changes in
capitalization resulting from mergers, acquisitions, stock rights,
substitutions and other capital events. The S&P SmallCap 600/BARRA Growth Index
represents approximately 1.5% of the market capitalization of listed U.S.
equities. As of March 31, 2000, the ten largest companies in the Index were
Mercury Interactive Corporation, MarchFirst Corporation IDEC Pharmaceuticals
Corporation, Micrel Inc., U.S. TR Corporation, Lattice Semiconductor
Corporation, Burr Brown Corporation., C-Cube Microsystems, Inc., Kemet
Corporation and Gentex Corporation.
S&P SmallCap 600/BARRA Value Index
Number of Components: approximately 403
Index Description. The S&P SmallCap 600/BARRA Value Index measures the
performance of the small-capitalization value sector of the U.S. equity market.
It is a subset of the S&P 600 Index and consists of those companies with the
lowest price-to-book ratios within the S&P 600 Index representing approximately
50% of the market capitalization of that index. It is a capitalization-weighted
index representing stocks from a broad range of industries. The component
stocks are weighted according to the total market value of their outstanding
shares. The impact of a component's price change is proportional to the issue's
--------------------------------------------------------------------------------
Construction and Maintenance Standards for the Underlying Indices
page 17
<PAGE>
total market value, which is the share price multiplied by the number of shares
outstanding. The base value for the S&P MidCap 600/BARRA Value Index is
adjusted to reflect changes in capitalization resulting from mergers,
acquisitions, stock rights, substitutions and other capital events. The S&P
MidCap 600/BARRA Value Index represents approximately 1.5% of the market
capitalization of listed U.S. equities. As of March 31, 2000, the ten largest
companies in the Index were International Rectifier Corporation, Centura Banks
Inc., Radian Group, Inc. (formerly CMAC Investment Corporation), Zale
Corporation, Snyder Communications, Inc., Silicon VY Bancshares, S3 Inc.,
Stillwater Management Company, Universal Health Services Inc. and Newfield
Expl. Company.
S&P 100 Index
Number of Components: 100
Index Description. The S&P 100 Index measures the performance of the large
capitalization sector of the U.S. equity market. It is a subset of the S&P 500
Index. The Index is a capitalization-weighted index representing stocks from a
broad range of industries, chosen for market size, liquidity and industry group
representation. The S&P 100 Index is a widely tracked index for blue-chip
stocks. The S&P 100 serves as the basis for the S&P 100 options contract which
trades on the CBOE. The component stocks are weighted according to the total
market value of their outstanding shares. The impact of a component's price
change is proportional to the issue's total market value, which is the share
price times the number of shares outstanding. These are summed for all 100
stocks and divided by a predetermined base value. The base value of the Index
is adjusted to reflect changes in capitalization resulting from mergers,
acquisitions, stock rights, substitutions and other capital events. The S&P 100
Index represents approximately 40% of the market capitalization of listed U.S.
equities. As of June 30, 2000, the ten largest companies in the Index were
General Electric Company, Intel Corporation, Cisco Systems Inc., Microsoft
Corporation, Exxon Mobil Corporation, Wal Mart Stores Inc., Oracle Corporation,
CitiGroup Inc., Nortel Networks Corporation and International Business Machines
Corporation.
S&P Europe 350 Index
Number of Components: 350
Index Description. The Standard & Poor's Europe 350 Index measures the
performance of equities in the continental European region, made up of fifteen
markets: Austria, Belgium, Denmark, Finland, France, Germany, Ireland, Italy,
the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United
Kingdom. The index is a capitalization-weighted index of 350 stocks providing
geographic and economic diversity over S&P's ten market sectors, each chosen
for market size, liquidity, and industry group representation. The market
capitalization of index constituent companies is adjusted to reflect only those
shares, which are available to foreign investors. The base value for the Index
is adjusted to reflect changes in capitalization resulting from mergers,
acquisitions, stock rights, substitutions and other capital events. As of March
31, 2000, the ten largest companies in the Index were Vodafone AirTouch, Nokia
AB Oyj, BP Amoco, Ericsson B, British Telecommunications, Royal Dutch Petroleum
Company, Total Fina S.A., Glaxo Wellcome, HSBC Holdings and Novartis.
S&P/TSE 60 Index
Number of Components: 60
Index Description. The S&P/TSE 60 Index measures the performance of equities in
the Canadian marketplace. It is a capitalization-weighted index from a broad
range of
--------------------------------------------------------------------------------
iShares
page 18
<PAGE>
industries chosen for market size, liquidity, and industry group
representation. The market capitalization of index's constituent companies is
adjusted to reflect only those shares available for investment by the general
public. The impact of a component's price change is proportional to the issue's
total market value, which is the share price multiplied by the number of shares
outstanding. These are summed for all stocks and divided by a predetermined
base value. The base value for the index is adjusted to reflect changes in
capitalization resulting from mergers, acquisitions, stock rights,
substitutions and other capital events. As of March 31, 2000, the ten largest
companies in the Index were Nortel Networks Corporation, BCE, Inc., The Seagram
Company Ltd., Toronto-Dominion Bank, Royal Bank of Canada, Bombardier Inc.,
Canadian Imperial Bank of Commerce, Bank of Nova Scotia, Bank of Montreal and
Celestica.
The Dow Jones Indices Generally.
Component Selection Criteria. The Dow Jones Indices are reconstituted quarterly
to reflect changes in the marketplace. All companies listed on a U.S. exchange
or the NASDAQ are considered for inclusion in the indices with the following
rules and exceptions. Stocks must have a minimum trade history of 6 months on
the re-balancing date to be eligible for inclusion. All foreign issues
including ADRs and GDRs are eliminated from the universe, as well as all non-
common equity issues such as preferred stocks, convertible notes, warrants,
rights, closed-end funds, trust receipts, limited liabilities companies,
royalty trusts, units, limited partnerships, over-the-counter bulletin boards,
and pink sheet stocks. Also deleted from the universe are all companies that
are at least 75% owned by another company and stocks with more than 10 non-
trading days in a quarter. After component selection, stocks are weighted by
their available market capitalization, which is calculated by multiplying the
primary market closing price by the adjusted shares. The remaining universe is
ranked by decreasing total market capitalization with cumulative percentages
and broken into three groups. The Large Cap Index represents the top 70% of the
cumulative market value of the U.S. equity universe, the Mid Cap Index
represents the next 20% of the universe, and the Small Cap Index represents
half of the remaining 10% of the equity universe. Combined, the Total Market
Index represents 95% of the U.S. equity universe.
Issue Changes. Changes to the indices are reflective of changes made to each of
the sub-indices that it represents. Each index is reviewed and rebalanced
quarterly to maintain accurate representation of each segment. Securities that
leave the index between reconstitution dates are not replaced. Thus, the number
of securities in the indices over the quarter will fluctuate according to
corporate activity. When a stock is acquired, delisted, or moves to the pink
sheets or OTC bulletin boards, the stock is deleted from the index. The only
additions between quarterly re-balancing are as a result of spin-offs.
Index Maintenance. Maintaining the Dow Jones Indices includes monitoring and
completing the adjustments for the company additions and deletions, share
changes, stock splits, stock dividends, and stock price adjustments due to
restructuring and spin-offs. The divisor is adjusted for all changes in company
market value to leave the value of the relevant index unaffected. All divisor
adjustments are made after the close of trading and after the calculation of
the closing value of the applicable index. Each component is limited to a
maximum market capitalization of 25% of the index weight, and sum of the
weights of all issues greater than 5% of the index is limited to 50% of the
index total. If components fail either rule, their market capitalization will
be reduced to meet the set guidelines.
Index Availability. The Dow Jones Indices are calculated continuously and are
available from major data vendors.
--------------------------------------------------------------------------------
Construction and Maintenance Standards for the Underlying Indices
page 19
<PAGE>
Dow Jones U.S. Total Market Index
Number of Components: approximately 2,024
Index Description. The Dow Jones Total Market Index measures the performance of
the U.S. equity broad markets. It serves as the underlying index in the Dow
Jones U.S. Large Cap Index, Dow Jones U.S. Mid-Cap Index, Dow Jones U.S. Small-
Cap Index and the Dow Jones U.S. sector indices. The Dow Jones U.S. Total
Market Index is a capitalization-weighted index, so the impact of a component's
price change is proportional to the issue's total market value, which is the
share price times the number of shares outstanding. These are summed for all
component stocks and divided by a predetermined base value. The base value for
the Index is adjusted to reflect changes in capitalization resulting from
mergers, acquisitions, stock rights, substitutions and other capital events.
The Dow Jones U.S. Total Market Index represents 95% of the market
capitalization of listed U.S. equities. As of March 31, 2000, the ten largest
companies in the Index were Microsoft Corporation, Cisco Systems Inc., General
Electric Company, Intel Corporation, Exxon Mobil Corporation, Wal-Mart Stores,
Inc., Oracle Corporation, International Business Machines Corporation,
Citigroup, Inc. and Lucent Technologies Inc.
Dow Jones U.S. Basic Materials Sector Index
Number of Components: approximately 87
Index Description. The Dow Jones U.S. Basic Materials Sector Index measures the
performance of the basic materials economic sector of the U.S. equity market.
The index is a subset of the Dow Jones U.S. Total Market Index. The Dow Jones
U.S. Basic Materials Sector Index is capitalization-weighted and includes only
companies in the Basic Materials sector of the Dow Jones U.S. Total Market
Index. The component stocks are weighted according to the total market value of
their outstanding shares. The impact of a component's price change is
proportional to the issue's total market value, which is the share price
multiplied by the number of shares outstanding. These are summed for all
component stocks and divided by a predetermined base value. The base value for
the Index is adjusted to reflect changes in capitalization resulting from
mergers, acquisitions, stock rights, substitutions and other capital events.
The Dow Jones U.S. Basic Materials Sector Index represents approximately 2.5%
of the market capitalization of listed U.S. equities. As of March 31, 2000, the
ten largest companies in the Index were E. I. DuPont de Nemours and Company,
Alcoa, Inc., The Dow Chemical Company, International Paper Co., Weyerhaeuser
Company, Rohm & Haas Company, Union Carbide Corporation, Avery Dennison
Corporation, Georgia Pacific Corporation and Praxair Inc.
Dow Jones U.S. Consumer Cyclical Sector Index
Number of Components: approximately 343
Index Description. The Dow Jones U.S. Consumer Cyclical Sector Index measures
the performance of the consumer cyclical economic sector of the U.S. equity
market. The index is a subset of the Dow Jones U.S. Total Market Index. The Dow
Jones U.S. Consumer Cyclical Sector Index is capitalization-weighted and
includes only companies in the Consumer Cyclical sector of the Dow Jones U.S.
Total Market Index. The component stocks are weighted according to the total
market value of their outstanding shares. The impact of a component's price
change is proportional to the issue's total market value, which is the share
price multiplied by the number of shares outstanding. These are summed for all
component stocks and divided by a predetermined base value. The base value for
the Index is adjusted to reflect changes in capitalization resulting from
mergers, acquisitions, stock rights, substitutions and other capital events.
The Dow Jones U.S. Consumer Cyclical Sector Index represents approximately 13%
of the market capitalization of listed U.S. equities. As of March 31, 2000, the
ten largest companies in the Index were Wal-Mart
--------------------------------------------------------------------------------
iShares
page 20
<PAGE>
Stores, Inc., The Home Depot, Inc., Time Warner, Inc., The Walt Disney Company,
General Motors Corporation, Ford Motor Company, McDonald's Corporation,
MediaOne Group, Inc., CBS Corporation and Gap Inc.
Dow Jones U.S. Consumer Non-Cyclical Sector Index
Number of Components: approximately 148
Index Description. The Dow Jones U.S. Non-Cyclical Sector Index measures the
performance of the non-cyclical economic sector of the U.S. equity market. The
index is a subset of the Dow Jones U.S. Total Market Index. The Dow Jones U.S.
Non-Cyclical Sector Index is capitalization-weighted and includes only
companies in the Non-Cyclical sector of the Dow Jones U.S. Total Market Index.
The component stocks are weighted according to the total market value of their
outstanding shares. The impact of a component's price change is proportional to
the issue's total market value, which is the share price multiplied by the
number of shares outstanding. These are summed for all component stocks and
divided by a predetermined base value. The base value for the Index is adjusted
to reflect changes in capitalization resulting from mergers, acquisitions,
stock rights, substitutions and other capital events. The Dow Jones U.S. Non-
Cyclical Sector Index represents approximately 9% of the market capitalization
of listed U.S. equities. As of March 31, 2000, the ten largest companies in the
Index were America Online, Inc., The Coca-Cola Company, Yahoo! Inc., The
Procter & Gamble Company, Pepsico Inc., Philip Morris Companies, Inc., The
Gillette Company, Colgate-Palmolive Company, Kimberly-Clark Corporation and
Anheuser-Busch Companies, Inc.
Dow Jones U.S. Energy Sector Index
Number of Components: approximately 88
Index Description. The Dow Jones U.S. Energy Sector Index measures the
performance of the energy economic sector of the U.S. equity market. The Dow
Jones U.S. Energy Sector Index is a subset of the Dow Jones U.S. Total Market
Index. The component stocks are weighted according to the total market value of
their outstanding shares. The impact of a component's price change is
proportional to the issue's total market value, which is the share price
multiplied by the number of shares outstanding. These are summed for all
component stocks and divided by a predetermined base value. The base value for
the Index is adjusted to reflect changes in capitalization resulting from
mergers, acquisitions, stock rights, substitutions and other capital events.
The Dow Jones U.S. Energy Sector Index represents approximately 5% of the
market capitalization of listed U.S. equities. As of March 31, 2000, the ten
largest companies in the Index were Exxon Mobil Corporation, Chevron
Corporation, Schlumberger Limited, Texaco, Inc., Atlantic Richfield Co.,
Williams Companies Inc., Halliburton Company, Phillips Petroleum Co., Conoco
Inc. and Transocean Sedco Forex Inc.
Dow Jones U.S. Financial Sector Index
Number of Components: approximately 344
Index Description. The Dow Jones U.S. Financial Sector Index measures the
performance of the financial economic sector of the U.S. equity market. The
index is a subset of the Dow Jones U.S. Total Market Index. The Dow Jones U.S.
Financial Sector Index is capitalization-weighted and includes only companies
in the financial sector of the Dow Jones U.S. Total Market Index. The impact of
a component's price change is proportional to the issue's total market value,
which is the share price multiplied by the number of shares outstanding. These
are summed for all component stocks and divided by a predetermined base value.
The base value for the Index is adjusted to reflect changes in capitalization
resulting from mergers, acquisitions, stock rights, substitutions and other
capital events. The Dow Jones
--------------------------------------------------------------------------------
Construction and Maintenance Standards for the Underlying Indices
page 21
<PAGE>
U.S. Financial Sector Index represents approximately 16% of the market
capitalization of listed U.S. equities. As of March 31, 2000, the ten largest
companies in the Index were Citigroup, Inc., American International Group
(AIG), Morgan Stanley Dean Witter Discover & Co., Bank of America Corporation,
The Chase Manhattan Corporation, Wells Fargo & Co., American Express Co.,
Federal National Mtg. Association, Schwab Charles Corporation and Bank One
Corporation.
Dow Jones U.S. Healthcare Sector Index
Number of Components: approximately 171
Index Description. The Dow Jones U.S. Healthcare Sector Index measures the
performance of the Healthcare economic sector of the U.S. equity market. This
Dow Jones U.S. Healthcare Sector Index is a subset of the Dow Jones U.S. Total
Market Index. The Dow Jones U.S. Healthcare Sector Index is capitalization-
weighted and includes only companies in the Healthcare Sector of the Dow Jones
U.S. Total Market Index. The component stocks are weighted according to the
total market value of their outstanding shares. The impact of a component's
price change is proportional to the issue's total market value, which is the
share price multiplied by the number of shares outstanding. These are summed
for all component stocks and divided by a predetermined base value. The base
value for the Index is adjusted to reflect changes in capitalization resulting
from mergers, acquisitions, stock rights, substitutions and other capital
events. The Dow Jones U.S. Healthcare Sector Index represents approximately 10%
of the market capitalization of listed U.S. equities. As of March 31, 2000, the
ten largest companies in the Index were Merck & Co., Inc., Pfizer Inc.,
Bristol-Myers Squibb Co., Johnson & Johnson, Warner-Lambert Company, American
Home Products Corporation, Lilly Eli & Co., Amgen, Inc., Medtronic Inc. and
Abbott Labs.
Dow Jones U.S. Industrial Sector Index
Number of Components: approximately 382
Index Description. The Dow Jones U.S. Industrial Sector Index measures the
performance of the Industrial economic sector of the U.S. equity market. The
Dow Jones U.S. Industrial Index is a subset of the Dow Jones U.S. Total Market
Index. The Dow Jones U.S. Industrial Sector Index is capitalization-weighted
and includes only companies in the Industrial sector of the Dow Jones U.S.
Total Market Index. The component stocks are weighted according to the total
value of their outstanding shares. The impact of a component's price change is
proportional to the issue's total market value, which is the share price
multiplied by the number of shares outstanding. These are summed for all
component stocks and divided by a predetermined base value. The base value for
the Index is adjusted to reflect changes in capitalization resulting from
mergers, acquisitions, stock rights, substitutions and other capital events.
The Dow Jones U.S. Industrial Sector Index represents approximately 11% of the
market capitalization of listed U.S. equities. As of March 31, 2000, the ten
largest companies in the Index were General Electric Company, Tyco
International Ltd., JDS Uniphase Corporation, Corning Inc., Honeywell
International Inc., Boeing Co., Minnesota Mining & Manufacturing Company,
Automatic Data Processing, Electronic Data Systems and United Technologies
Corporation.
Dow Jones U.S. Technology Sector Index
Number of Components: approximately 319
Index Description. The Dow Jones U.S. Technology Sector Index measures the
performance of the Technology economic sector of the U.S. equity market. The
Dow Jones U.S. Technology Sector Index is a subset of the Dow Jones U.S. Total
Market Index. The Dow Jones U.S. Technology Index is capitalization-weighted
and includes only companies in the Technology sector of the Dow Jones U.S.
Total Market Index. The component stocks
--------------------------------------------------------------------------------
iShares
page 22
<PAGE>
are weighted according to the total market value of their outstanding shares.
The impact of a component's price change is proportional to the issue's total
market value, which is the share price multiplied by the number of shares
outstanding. These are summed for all component stocks and divided by a
predetermined base value. The base value for the Index is adjusted to reflect
changes in capitalization resulting from mergers, acquisitions, stock rights,
substitutions and other capital events. The Dow Jones U.S. Technology Sector
Index represents approximately 19% of the market capitalization of listed U.S.
equities. As of March 31, 2000, the ten largest companies in the Index were
Microsoft Corporation, Cisco Systems Inc., Intel Corporation, Oracle
Corporation, International Business Machines Corporation, Lucent Technologies
Inc., Sun Microsystems, Inc., Dell Computer Corporation, Hewlett-Packard
Company and Texas Instruments Inc.
Dow Jones U.S. Telecommunications Sector Index
Number of Components: approximately 54
Index Description. The Dow Jones U.S. Telecommunications Sector Index measures
the performance of the Telecommunications economic sector of the U.S. equity
market. The Dow Jones U.S. Telecommunications Sector Index is a subset of the
Dow Jones U.S. Total Market Index. The Dow Jones U.S. Telecommunications Sector
Index is capitalization-weighted and includes only companies in the
Telecommunications sector of the Dow Jones U.S. Total Market Index. The
component stocks are weighted according to the total market value of their
outstanding shares. The impact of a component's price change is proportional to
the issue's total market value, which is the share price multiplied by the
number of shares outstanding. These are summed for all component stocks and
divided by a predetermined base value. The base value for the Index is adjusted
to reflect changes in capitalization resulting from mergers, acquisitions,
stock rights, substitutions and other capital events. The Dow Jones U.S.
Telecommunications Sector Index represents approximately 7% of the market
capitalization of listed U.S. equities. As of March 31, 2000, the ten largest
companies in the Index were AT&T Corporation, SBC Communications, MCI Worldcom,
Inc., Bell Atlantic Corporation, BellSouth Corporation, GTE Corporation, Sprint
Corporation , Sprint Corporation (PCSA), Nextel Communications Inc., Sprint
Corporation (UT) and US West Inc.
Dow Jones U.S. Utilities Sector Index
Number of Components: approximately 88
Index Description. The Dow Jones U.S. Utilities Sector Index measures the
performance of the utilities economic sector of the U.S. equity market. The Dow
Jones U.S. Utilities Sector Index is a subset of the Dow Jones U.S. Total
Market Index. The Dow Jones U.S. Utilities Sector Index is capitalization-
weighted and includes only companies in the Utilities sector of the Dow Jones
U.S. Total Market Index. The component stocks are weighted according to the
total market value of their outstanding shares. The impact of a component's
price change is proportional to the issue's total market value, which is the
share price multiplied by the number of shares outstanding. These are summed
for all component stocks and divided by a predetermined base value. The base
value for the Index is adjusted to reflect changes in capitalization resulting
from mergers, acquisitions, stock rights, substitutions and other capital
events. The Dow Jones U.S. Utilities Sector Index represents approximately 2.5%
of the market capitalization of listed U.S. equities. As of March 31, 2000, the
ten largest companies in the Index were Enron Corporation, Duke Energy
Corporation, AES Corporation, Southern Company, Dominion Res. Inc., Dynegy
Inc., FPL Group Inc., Texas Utilities Company, PG&E Corporation and Unicom
Corporation.
--------------------------------------------------------------------------------
Construction and Maintenance Standards for the Underlying Indices
page 23
<PAGE>
Dow Jones U.S. Chemicals Index
Number of Components: approximately 43
Index Description. The Dow Jones U.S. Chemicals Index measures the performance
of the chemicals industry of the U.S. equity market. The index is a subset of
the Dow Jones U.S. Basic Materials Sector Index. The Dow Jones U.S. Chemical
Index is capitalization-weighted and includes only companies in the chemicals
industry of the Dow Jones U.S. Total Market Index. The component stocks are
weighted according to the total market value of their outstanding shares. The
impact of a component's price change is proportional to the issue's total
market value, which is the share price multiplied by the number of shares
outstanding. These are summed for all component stocks and divided by a
predetermined base value. The base value for the Index is adjusted to reflect
changes in capitalization resulting from mergers, acquisitions, stock rights,
substitutions and other capital events. The Dow Jones U.S. Chemicals Index
represents approximately 1.5% of the market capitalization of listed U.S.
equities. As of March 31, 2000, the ten largest companies in the Index were E.
I. DuPont de Nemours and Company, The Dow Chemical Company, Rohm & Haas
Company, Union Carbide Corporation, Avery Dennison Corporation, Praxair Inc.,
Air Products and Chemicals, Inc., Ecolab, Inc., Eastman Chemical Company and
Sigma-Aldrich Corporation.
Dow Jones U.S. Financial Services Index
Number of Components: approximately 204
Index Description. The Dow Jones U.S. Financial Services Index measures the
performance of the financial services industry segment of the U.S. equity
market. The index is a subset of the Dow Jones U.S. Financial Index. The Dow
Jones U.S. Financial Services Index is capitalization-weighted and includes
only companies in the Banks, Savings & Loans, Securities Brokerage and
Financial Services sectors of the Dow Jones U.S. Financial Index. The component
stocks are weighted according to the total market value of their outstanding
shares. The impact of a component's price change is proportional to the issue's
total market value, which is the share price multiplied by the number of shares
outstanding. These are summed for all component stocks and divided by a
predetermined base value. The base value for the Index is adjusted to reflect
changes in capitalization resulting from mergers, acquisitions, stock rights,
substitutions and other capital events. The Dow Jones U.S. Financial Services
Index represents approximately 12% of the market capitalization of listed U.S.
equities. As of March 31, 2000, the ten largest companies in the Index were
Citigroup, Inc., Morgan Stanley Dean Witter Discover & Co., Bank of America
Corporation, Chase Manhattan Corporation, Wells Fargo & Co., American Express
Company, Federal National Mtg. Assn., Schwab Charles Corporation, Bank One
Corporation and Merrill Lynch & Co. Inc.
Dow Jones U.S. Internet Index
Number of Components: approximately 40
Index Description. The Dow Jones U.S. Internet Index measures the performance
of the Internet industry of the U.S. equity market. It includes only companies
that generate the majority of their revenues from the Internet and it is
comprised of two sub-groups, Internet Commerce and Internet Services. The Index
is modified capitalization-weighted, restricting a stock's weighting to 10% of
its respective sub-group. The impact of a component's price change is
proportional to the issue's total market value in the index, which is the share
price times the number of shares. These are summed for all component stocks and
divided by a predetermined base value. The base value for the Index is adjusted
to reflect changes in capitalization resulting from mergers, acquisitions,
stock rights, substitutions and other capital events. The Index represents
approximately 1% of the market capitalization of listed
--------------------------------------------------------------------------------
iShares
page 24
<PAGE>
U.S. equities. As of March 31, 2000, the ten largest companies in the Index
were America Online, Inc., CMGI Inc., Exodus Communications, Inc., Internet
Capital Group Inc., Inktomi Corporation, Ariba Inc., 12 Technologies Inc.,
Verisign Inc., Akamai Technologies Inc. and InfospaceCom Inc.
Dow Jones U.S. Real Estate Index
Number of Components: approximately 78
Index Description. The Dow Jones U.S. Real Estate Index measures the
performance of the Real Estate industry of the U.S. equity market. The Dow
Jones U.S. Real Estate Index is a subset of the Dow Jones U.S. Financial Index.
The Dow Jones U.S. Real Estate Index is capitalization-weighted and includes
only companies in the Real Estate industry of the Dow Jones U.S. Financial
Index. The component stocks are weighted according to the total market value of
their outstanding shares. The impact of a component's price change is
proportional to the issue's total market value, which is the share price
multiplied by the number of shares outstanding. These are summed for all
component stocks and divided by a predetermined base value. The base value for
the Index is adjusted to reflect changes in capitalization resulting from
mergers, acquisitions, stock rights, substitutions and other capital events.
The Dow Jones U.S. Real Estate Index represents approximately 1% of the market
capitalization of listed U.S. equities. As of March 31, 2000, the ten largest
companies in the Index were Equity Office Properties Trust, Equity Residential
Properties Trust, Starwood Hotels & Resorts Worldwide, Inc., Simon Property
Group Inc., Homestore Com Inc., Prologis Trust, Spieker Properties, Inc.,
Vornado Realty Trust, Archstone Communications Trust and Public Storage, Inc.
The Russell Indices Generally.
Component Selection Criteria. The Russell Indices are reconstituted annually on
March 31, to reflect changes in the marketplace. The starting universe for the
Russell 3000 Index, all U.S. exchange and OTC listed companies, is ranked by
decreasing total market capitalization. The Russell 2000 Index and the Russell
1000 Index are subsets of the Russell 3000 Index. All companies listed on a
U.S. exchange or the OTC are considered for inclusion in the indices with the
following rules and exceptions. Stocks must trade at or above $1.00 on May 31
to be eligible for inclusion. Only one class of security is allowed into the
indices, however, special cases may exist if it is determined that each class
acts independent of the other. Stocks domiciled in other countries are
excluded. Also excluded are preferred and convertible preferred stock,
participating preferred stock, redeemable shares, warrants and rights, trust
receipts, royalty trusts, limited liability companies, OTC bulletin boards and
pink sheet stocks, mutual funds, limited partnerships, and foreign stocks.
After component selection, stocks are weighted by their available market
capitalization, which is calculated by multiplying the composite closing price
by the adjusted shares. The purpose of this adjustment is to exclude the
capitalization that is not available for purchase and is not part of the
investing opportunity set.
Issue Changes. Securities that leave the Russell Indices between reconstitution
dates are not replaced. Thus, the number of securities in the indices over the
year will fluctuate according to corporate activity. When a stock is acquired,
delisted, or moves to the pink sheets or OTC bulletin boards, the stock is
deleted from the relevant indices. When acquisitions or mergers take place, the
stock's capitalization moves to the acquiring stock, hence, mergers have no
effect on index total capitalization if the acquiring stock is part of the
index. The only additions between reconstitution dates are as a result of spin-
offs.
Index Maintenance. Maintaining the Russell Indices includes monitoring and
completing the adjustments for company additions and deletions, share changes,
stock splits, stock
--------------------------------------------------------------------------------
Construction and Maintenance Standards for the Underlying Indices
page 25
<PAGE>
dividends, and stock price adjustments due to restructuring and spin-offs. In
addition, significant float adjustments due to corporate actions are made
month-end. The divisor is adjusted for all changes in company market value to
leave the value of the indices unaffected. All divisor adjustments are made
after the close of trading and after the calculation of the closing value of
the Russell Indices.
Russell 3000 Index
Number of Components: approximately 2,769
Index Description. The Russell 3000 Index measures the performance of the U.S.
equity broad market. It serves as the underlying index for Russell 3000 Growth
and Value series and the Russell 1000 and Russell 2000 Indices, as well as each
respective Growth and Value series. It is a capitalization-weighted index of
the 3000 largest companies domiciled in the U.S. and its territories. Component
companies are adjusted for available float, weighted according to the market
value of their available outstanding shares. The impact of a component's price
change is proportional to the issue's total market value, which is the share
price multiplied by the number of shares outstanding. These are summed for all
component stocks and divided by a predetermined base value. The base value for
the Index is adjusted to reflect changes in capitalization resulting from
mergers, acquisitions, stock rights, substitutions and other capital events.
The Russell 3000 Index represents approximately 86% of the market
capitalization of listed U.S. equities. As of March 31, 2000, the ten largest
companies in the Index were Cisco Systems Inc., General Electric Company, Intel
Corporation, Microsoft Corporation, Exxon Mobil Corporation, International
Business Machines Corporation, Citigroup, Inc., Lucent Technologies Inc., AT&T
Corporation and Oracle Corporation.
Russell 3000 Growth Index
Number of Components: approximately 1,728
Index Description. The Russell 3000 Growth Index measures the growth sector of
the U.S. equity broad market. It is a subset of the Russell 3000 Index. It is
capitalization-weighted index and consisting of those Russell 3000 companies
with higher price-to-book ratios and higher forecasted growth and represents
approximately 50% of the total market capitalization of the Russell 3000 Index.
Component companies are adjusted for available float, weighted according to the
market value of their available outstanding shares. The impact of a component's
price change is proportional to the issue's total market value, which is the
share price multiplied by the number of shares outstanding. These are summed
for all component stocks and divided by a predetermined base value. The base
value for the Index is adjusted to reflect changes in capitalization resulting
from mergers, acquisitions, stock rights, substitutions and other capital
events. The Russell 3000 Growth Index represents approximately 43% of the
market capitalization of listed U.S. equities. As of March 31, 2000, the ten
largest companies in the Index were Cisco Systems Inc., General Electric
Company, Intel Corporation, Microsoft Corporation, Lucent Technologies Inc.,
International Business Machines Corporation, Oracle Corporation, Wal-Mart
Stores, Inc., America Online, Inc., and The Home Depot, Inc.
Russell 3000 Value Index
Number of Components: approximately 1,899
Index Description. The Russell 3000 Value Index measures the value sector of
the broad U.S. equity market. It is a subset of the Russell 3000 Index. It is a
capitalization-weighted index consisting of those Russell 3000 companies with
lower price-to-book ratios and lower forecasted growth and represents
approximately 50% of the total market capitalization of the Russell 3000 Index.
Component companies are adjusted for available
--------------------------------------------------------------------------------
iShares
page 26
<PAGE>
float, weighted according to the market value of their available outstanding
shares. The impact of a component's price change is proportional to the issue's
total market value, which is the share price multiplied by the number of shares
outstanding. These are summed for all component stocks and divided by a
predetermined base value. The base value for the Index is adjusted to reflect
changes in capitalization resulting from mergers, acquisitions, stock rights,
substitutions and other capital events. The Russell 3000 Value Index represents
approximately 43% of the market capitalization of listed U.S. equities. As of
March 31, 2000, the ten largest companies in the Index were Exxon Mobil
Corporation, Citigroup, Inc., AT&T Corp., American International Group, Inc.,
SBC Communications, Bell Atlantic Corporation, Morgan Stanley Dean Witter
Discover & Co., Bank of America Corporation, Bell South Corporation and Walt
Disney Co.
Russell 2000 Index
Number of Components: approximately 1,803
Index Description. The Russell 2000 Index measures the small-capitalization
sector of the U.S. equity market. It is a subset of the Russell 3000 Index and
serves as the underlying index for the Russell 2000 Growth and Value index
series. It is a capitalization-weighted index consisting of the 2000 smallest
companies in the Russell 3000 Index. Component companies are adjusted for
available float, weighted according to the market value of their available
outstanding shares. The impact of a component's price change is proportional to
the issue's total market value, which is the share price multiplied by the
number of shares outstanding. These are summed for all component stocks and
divided by a predetermined base value. The base value for the Index is adjusted
to reflect changes in capitalization resulting from mergers, acquisitions,
stock rights, substitutions and other capital events. The Russell 2000 Index
represents approximately 6% of the market capitalization of listed U.S.
equities. As of March 31, 2000, the ten largest companies in the Index were
BroadVision, Inc., Microstrategy Incorporated, Mercury Interactive Corporation,
Sandisk Corporation, Lam Research Corporation, Cypress Semiconductor
Corporation, VerticalNet Inc., Millenium Pharmaceuticals Inc., Amkor Technology
Inc. and PE Corporation--Celera Genomics Group.
Russell 2000 Growth Index
Number of Components: approximately 1,209
Index Description. The Russell 2000 Growth Index measures the small-
capitalization growth sector of the U.S. equity market. It is a subset of the
Russell 2000 Index. It is a capitalization-weighted index consisting of those
Russell 2000 companies with higher price-to-book ratios and higher forecasted
growth and represents approximately 50% of the total market capitalization of
the Russell 2000 Index. Component companies are adjusted for available float,
weighted according to the market value of their available outstanding shares.
The impact of a component's price change is proportional to the issue's total
market value, which is the share price multiplied by the number of shares
outstanding. These are summed for all component stocks and divided by a
predetermined base value. The base value for the Index is adjusted to reflect
changes in capitalization resulting from mergers, acquisitions, stock rights,
substitutions and other capital events. The Russell 2000 Growth Index
represents approximately 3% of the market capitalization of listed U.S.
equities. As of March 31, 2000, the ten largest companies in the Index were
BroadVision, Inc., Microstrategy Incorporated, Mercury Interactive Corporation,
Sandisk Corporation, VerticalNet Inc., Millennium Pharmaceuticals Inc.,
Informix Corporation, Advanced Fibre Communication, Amkor Technology Inc. and
DII Group.
--------------------------------------------------------------------------------
Construction and Maintenance Standards for the Underlying Indices
page 27
<PAGE>
Russell 2000 Value Index
Number of Components: approximately 1,182
Index Description. The Russell 2000 Value Index measures the small-
capitalization value sector of the U.S. equity market. It is a subset of the
Russell 2000 Index. It is a capitalization-weighted index consisting of those
Russell 2000 companies with lower price-to-book rations and lower forecasted
growth and represents approximately 50% of the total market capitalization of
the Russell 2000 Index. Component companies are adjusted for available float,
weighted according to the market value of their available outstanding shares.
The impact of a component's price change is proportional to the issue's total
market value, which is the share price multiplied by the number of shares
outstanding. These are summed for all component stocks and divided by a
predetermined base value. The base value for the Index is adjusted to reflect
changes in capitalization resulting from mergers, acquisitions, stock rights,
substitutions and other capital events. The Russell 2000 Value Index represents
approximately 3% of the market capitalization of listed U.S. equities. As of
March 31, 2000, the ten largest companies in the Index were PE Corporation-
Celera Genomics Group, Integrated Device Technology, Inc., Tektronix, Inc., MRV
Communications Inc., Cypress Semiconductor Corporation, Kemet Corporation,
Perkinelmer Inc., Quest Diagnostics Inc., Radian Group Inc. and Marine Drilling
Cos. Inc.
Russell 1000 Index
Number of Components: approximately 962
Index Description. The Russell 1000 Index measures the performance of the
large-capitalization sector of the U.S. equity market. It is a subset of the
Russell 3000 Index and serves as the underlying index for the Russell 1000
Growth and Value Indices, and the Russell Top 200 and MidCap series. It is a
capitalization-weighted index consisting of the 1000 largest 1000 companies in
the Russell 3000. Component companies are adjusted for available float,
weighted according to the market value of their available outstanding shares.
The impact of a component's price change is proportional to the issue's total
market value, which is the share price multiplied by the number of shares
outstanding. These are summed for all component stocks and divided by a
predetermined base value. The base value for the Index is adjusted to reflect
changes in capitalization resulting from mergers, acquisitions, stock rights,
substitutions and other capital events. The Russell 1000 Index represents
approximately 80% of the market capitalization of listed U.S. equities. As of
March 31, 2000, the ten largest companies in the Index were Cisco Systems Inc.,
General Electric Company, Intel Corporation, Microsoft Corporation, Exxon Mobil
Corporation, International Business Machines Corporation, Citigroup, Inc.,
Lucent Technologies Inc., AT&T Corporation and Oracle Corporation.
Russell 1000 Growth Index
Number of Components: approximately 519
Index Description. The Russell 1000 Growth Index measures the large-
capitalization growth sector of the U.S. equity market. It is a subset of the
Russell 1000 Index. It is a capitalization-weighted index consisting of those
Russell 1000 companies with higher price-to-book ratios and higher forecasted
growth and represents approximately 50% of the total market capitalization of
the Russell 1000 Index. Component companies are adjusted for available float,
weighted according to the market value of their available outstanding shares.
The impact of a component's price change is proportional to the issue's total
market value, which is the share price multiplied by the number of shares
outstanding. These are summed for all component stocks and divided by a
predetermined base value. The base value for the Index is adjusted to reflect
changes in capitalization resulting from mergers, acquisitions, stock rights,
substitutions and other capital events. The Russell
--------------------------------------------------------------------------------
iShares
page 28
<PAGE>
1000 Growth Index represents approximately 40% of the market capitalization of
listed U.S. equities. As of March 31, 2000, the ten largest companies in the
Index were Cisco Systems Inc., General Electric Company, Intel Corporation,
Microsoft Corporation, Lucent Technologies Inc., International Business
Machines Corporation, Oracle Corporation, Wal-Mart Stores, Inc., America
Online, Inc. and The Home Depot, Inc.
Russell 1000 Value Index
Number of Components: approximately 717
Index Description. The Russell 1000 Value Index measures the large-
capitalization value sector of the U.S. equity market. It is a subset of the
Russell 1000 Index. It is a capitalization-weighted index consisting of those
Russell 1000 companies with lower price-to-book ratios and lower forecasted
growth and represents approximately 50% of the total market capitalization of
the Russell 1000 Index. Component companies are adjusted for available float,
weighted according to the market value of their available outstanding shares.
The impact of a component's price change is proportional to the issue's total
market value, which is the share price multiplied by the number of shares
outstanding. These are summed for all component stocks and divided by a
predetermined base value. The base value for the Index is adjusted to reflect
changes in capitalization resulting from mergers, acquisitions, stock rights,
substitutions and other capital events. The Russell 1000 Value Index represents
approximately 40% of the market capitalization of listed U.S. equities. As of
March 31, 2000, the ten largest companies in the Index were Exxon Mobil
Corporation, Citigroup, Inc., AT&T Corporation, American International Group,
Inc. (AIG), SBC Communications Inc., Bell Atlantic Corporation, Morgan Stanley
Dean Witter Discover & Co., Bank of America Corporation, Bell South Corporation
and The Walt Disney Co.
--------------------------------------------------------------------------------
Construction and Maintenance Standards for the Underlying Indices
page 29
<PAGE>
Investment Limitations
The Board has adopted as fundamental policies each Fund's investment objectives
and investment restrictions, numbered one through six below. These restrictions
cannot be changed with respect to a Fund without the approval of the holders of
a majority of such Fund's outstanding voting securities. A vote of a majority
of the outstanding voting securities is defined in the 1940 Act as the lesser
of (a) 67% or more of the voting securities present at a fund meeting, if the
holders of more than 50% of the outstanding voting securities are present or
represented by proxy, or (b) more than 50% of outstanding voting securities.
No Fund will:
1. Concentrate its investments (i.e. hold 25% or more of its total assets in
the stocks of a particular industry or group of industries), except that a Fund
will concentrate to approximately the same extent that its Underlying Index
concentrates in the stocks of such particular industry or group of industries.
For purposes of this limitation, securities of the U.S. Government (including
its agencies and instrumentalities), repurchase agreements collateralized by
U.S. Government securities, and securities of state or municipal governments
and their political subdivisions are not considered to be issued by members of
any industry.
2. Borrow money, except that (i) each Fund may borrow from banks for temporary
or emergency (not leveraging) purposes, including the meeting of redemption
requests which might otherwise require the untimely disposition of securities,
and (ii) each Fund may, to the extent consistent with its investment policies,
enter into repurchase agreements, reverse repurchase agreements, forward roll
transactions and similar investment strategies and techniques. To the extent
that it engages in transactions described in (i) and (ii), each Fund will be
limited so that no more than 30% of the value of its total assets (including
the amount borrowed) valued at the time the borrowing is made, is derived from
such transactions.
3. Issue "senior securities" as defined in the 1940 Act and the rules,
regulations and orders thereunder, except as permitted under the 1940 Act and
the rules, regulations and orders thereunder.
4. Make loans. This restriction does not apply to: (i) the purchase of debt
obligations in which each Fund may invest consistent with its investment
objectives and policies; (ii) repurchase agreements and reverse repurchase
agreements; and (iii) loans of its portfolio securities, to the fullest extent
permitted under the 1940 Act.
5. Purchase or sell real estate, real estate mortgages, commodities or
commodity contracts, but this restriction shall not prevent each Fund from
trading in futures contracts and options on futures contracts (including
options on currencies to the extent consistent with each Fund's investment
objective and policies).
6. Engage in the business of underwriting securities issued by other persons,
except to the extent that each Fund may technically be deemed to be an
underwriter under the Securities Act of 1933, as amended (the "Securities
Act"), in disposing of portfolio securities.
In addition to the investment restrictions adopted as fundamental policies, set
forth above, each Fund will not invest in the securities of a company for the
purpose of exercising management or control or purchase or otherwise acquire
any illiquid security, except as
--------------------------------------------------------------------------------
iShares
page 30
<PAGE>
permitted under the 1940 Act, which currently permits up to 15% of each Fund's
net assets to be invested in illiquid securities.
For purposes of the percentage limitation on each Fund's investments in
illiquid securities, foreign equity securities, though not registered under the
Securities Act of 1933, are not deemed illiquid with respect to each Fund if
they are otherwise readily marketable. Such securities ordinarily are
considered to be "readily marketable" if they are traded on an exchange or
another organized market and are not legally restricted from sale by the Fund.
BGFA monitors the liquidity of restricted securities in each Fund's portfolio.
In reaching liquidity decisions, BGFA considers the following factors:
. The frequency of trades and quotes for the security;
. The number of dealers wishing to purchase or sell the security and the number
of other potential purchasers;
. Dealer undertakings to make a market in the security; and
. The nature of the security and the nature of the marketplace in which it
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of transfer).
If any percentage restriction described above is complied with at the time of
an investment, a later increase or decrease in percentage resulting from a
change in values of assets will not constitute a violation of such restriction.
--------------------------------------------------------------------------------
Investment Limitations
page 31
<PAGE>
Continuous Offering
The method by which Creation Unit Aggregations of iShares are created and
traded may raise certain issues under applicable securities laws. Because new
Creation Unit Aggregations of iShares are issued and sold by the Funds on an
ongoing basis, at any point a "distribution", as such term is used in the
Securities Act, may occur. 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 which could
render them statutory underwriters and subject them to the prospectus-delivery
requirement and liability provisions of the Securities Act.
For example, a broker-dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Unit Aggregations after placing an order with
the Distributor, breaks them down into constituent iShares, and sells such
iShares directly to customers, or if it chooses to couple the creation of a
supply of new iShares with an active selling effort involving solicitation of
secondary market demand for iShares. A determination of whether one is an
underwriter for purposes of the Securities Act must take into account all the
facts and circumstances pertaining to the activities of the broker-dealer or
its client in the particular case, and the examples mentioned above should not
be considered a complete description of all the activities that could lead to a
categorization as an underwriter.
Broker-dealer firms should also note that dealers who are not "underwriters"
but are effecting transactions in iShares, whether or not participating in the
distribution of iShares, are generally required to deliver a prospectus. This
is because the prospectus delivery exemption in Section 4(3) of the Securities
Act is not available in respect of such transactions as a result of Section
24(d) of the 1940 Act. Firms that incur a prospectus-delivery obligation with
respect to iShares are reminded that, under the Securities Act Rule 153, a
prospectus-delivery obligation under Section 5(b)(2) of the Securities Act owed
to an exchange member in connection with a sale on the Listing Exchange is
satisfied by the fact that the prospectus is available at the Listing Exchange
upon request. The prospectus delivery mechanism provided in Rule 153 is only
available with respect to transactions on an exchange.
--------------------------------------------------------------------------------
iShares
page 32
<PAGE>
Management
The following information supplements and should be read in conjunction with
the section in the Prospectus entitled Management.
Trustees and Officers. The Board has responsibility for the overall management
and operations of the Fund, including general supervision of the duties
performed by BGFA and other service providers. The Board currently consists of
four (4) Trustees. The Trustee denoted with an asterisk (*) is deemed to be an
"interested person" (as defined in the 1940 Act) of the Trust and the Funds.
<TABLE>
<CAPTION>
Principal occupations and affiliations
Name (age) Address Position during the past five years
------------------ -------- --------------------------------------
<S> <C> <C>
*Nathan Most (86) Trustee, President & Chairman of the Board,
PO Box 193 President, WEBS Index Fund, Inc. (Since 1996)
Burlingame, CA Treasurer, Consultant to Barclays Global
94011-0193 Principal Investors, American Stock Exchange and
Financial Officer the Hong Kong Stock Exchange
Formerly Senior Vice President
American Stock Exchange (New Product
Development) (1976-1996)
Formerly President and Chairman of the
Board, Pacific Commodities Exchange
(1973-1976)
Richard K. Lyons (39) Trustee Professor, University of California,
350 Barrows Hall Berkeley: Haas School of Business
Haas School of Business (Since 1993)
UC Berkeley Professor, Columbia University: School
Berkeley, CA 94720 of Business & School of International
Affairs (1987--1993)
Member, Council on Foreign Relations
Consultant: IMF World Bank, Federal
Reserve Bank, European Commission and
United Nations
Board of Directors: Matthews
International Funds
George G.C. Parker (60) Trustee Associate Dean for Academic Affairs,
Graduate School of Director of MBA Program, Professor,
Business, Stanford University: Graduate School
Stanford University of Business (Since 1988)
521 Memorial Way, Formerly, Director Executive
Room K301 Education, Stanford Business School
Stanford, CA 94305 (1979-1988)
Board of Directors: Affinity Group,
Bailard, Biehl and Kaiser, Inc.,
California Casualty Group of Insurance
Companies, Continental Airlines, Inc.,
Community First Financial Group,
Dresdner/RCM Mutual Funds, H. Warshow
& Sons, Inc.
</TABLE>
--------------------------------------------------------------------------------
page 33
<PAGE>
<TABLE>
<CAPTION>
Principal occupations and affiliations
Name (age) Address Position during the past five years
------------------ -------- --------------------------------------
<S> <C> <C>
Donna M. McCarthy (33) Assistant Director, (formerly Manager) Mutual
Investors Bank and Trust Treasurer Fund Administration, Investors Bank
Company and Trust Company Formerly, Manager,
200 Clarendon Street Business Assurance Group, Coopers &
Boston, MA 02116 Lybrand (1988-1994)
Jeffrey J. Gaboury (31) Assistant Manager, Mutual Fund Administration,
Investors Bank and Trust Treasurer Reporting and Compliance, Investors
Company Bank and Trust Company (since 1996)
200 Clarendon Street Formerly, Assistant Manager, Fund
Boston, MA 02116 Compliance, Scudder, Stevens & Clark
(1992-1996)
Susan C. Mosher (45) Secretary Director & Senior Counsel, Mutual
Investors Bank and Trust Fund Administration, Investors Bank
Company and Trust Company (since 1995)
200 Clarendon Street Formerly, Associate Counsel, 440
Boston, MA 02116 Financial Group (1992-1995)
Sandra I. Madden (33) Assistant Associate Counsel, Mutual Fund
Investors Bank and Trust Secretary Administration, Investors Bank and
Company Trust Company (since 1999)
200 Clarendon Street Formerly, Associate, Scudder Kemper
Boston, MA 02116 Investments, Inc. (1996-1999)
</TABLE>
* Mr. Most is deemed to be an "interested person" (as defined in the 1940 Act)
of the Trust and the Funds. He serves as Director to iShares, Inc., an
investment company with 23 investment portfolios also advised by BGFA, and
is a consultant to BGI.
Remuneration of Trustees and Officers. The Trust pays each Trustee an annual
fee of $50,000 plus a per meeting fee of $500 for meetings of the Board
attended by the Trustee. The Trust also reimburses each Trustee for travel and
other out-of-pocket expenses incurred by him/her in connection with attending
such meetings.
Assuming that four (4) regularly scheduled meetings and four (4) special
meetings of the Board are held annually, it is estimated that the compensation
paid to each Trustee during the calendar year ending December 31, 2000 will be:
<TABLE>
<CAPTION>
Pension or
Aggregate Retirement
Estimated Benefits Total Estimated
Compensation Accrued As Part Estimated Compensation
from the of Trust Annual Benefits from the Fund
Name of Trustee Trust Expenses Upon Retirement and Fund Complex*
--------------- ------------ --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Nathan Most $54,000 Not Applicable. Not Applicable. $123,500
Thomas E. Flanigan** $54,000 Not Applicable. Not Applicable. $ 54,000
Richard K. Lyons $54,000 Not Applicable. Not Applicable. $ 54,000
George G. C. Parker $54,000 Not Applicable. Not Applicable. $ 54,000
</TABLE>
* As of May 31, 2000, there were 59 investment companies in the BGFA Fund
Complex.
** Thomas E. Flanigan resigned from the Board of Trustees on November 17, 2000.
As of the date of this Prospectus, the Trust has been organized for less than
one full calendar year and therefore does not report the total remuneration for
the preceding fiscal year.
No Trustee or Officer is entitled to any pension or retirement benefits from
the Trust.
Investment Advisor. BGFA serves as investment advisor to each Fund pursuant to
an Investment Advisory Agreement between the Trust and BGFA. BGFA is a
California
--------------------------------------------------------------------------------
iShares
page 34
<PAGE>
corporation indirectly owned by Barclays Bank PLC and is registered as an
investment advisor under the Investment Advisers Act of 1940 (the "Advisers
Act"). Under the Investment Advisory Agreement, BGFA, subject to the
supervision of the Board and in conformity with the stated investment policies
of each Fund, manages and administers the Trust and the investment of each
Fund's assets. BGFA is responsible for placing purchase and sale orders and
providing continuous supervision of the investment portfolio of each Fund.
Under the Investment Advisory Agreement, BGFA is responsible for all expenses
of the Trust, including the cost of transfer agency, custody, fund
administration, legal, audit and other services, except interest, taxes,
brokerage commissions and other expenses connected with the execution of
portfolio transactions (which are included in NAV), distribution fees and
extraordinary expenses. For its investment management services to each Fund,
BGFA will be paid a management fee equal to each Fund's allocable portion of
the percentage listed below of such Fund's aggregate net assets.
<TABLE>
<CAPTION>
Management
iShares Index Fund Fee
------------------ ----------
<S> <C>
iShares S&P 500 Index Fund 0.09%
iShares S&P 500/BARRA Growth Index Fund 0.18%
iShares S&P 500/BARRA Value Index Fund 0.18%
iShares S&P MidCap 400 Index Fund 0.20%
iShares S&P MidCap 400/BARRA Growth Index Fund 0.25%
iShares S&P MidCap 400/BARRA Value Index Fund 0.25%
iShares S&P SmallCap 600 Index Fund 0.20%
iShares S&P SmallCap 600/BARRA Growth Index Fund 0.25%
iShares S&P SmallCap 600/BARRA Value Index Fund 0.25%
iShares S&P 100 Index Fund 0.20%
iShares S&P Europe 350 Index Fund 0.60%
iShares S&P/TSE 60 Index Fund 0.50%
iShares Dow Jones U.S. Total Market Index Fund 0.20%
iShares Dow Jones U.S. Basic Materials Sector Index Fund 0.60%
iShares Dow Jones U.S. Consumer Cyclical Sector Index Fund 0.60%
iShares Dow Jones U.S. Consumer Non-Cyclical Sector Index Fund 0.60%
iShares Dow Jones U.S. Energy Sector Index Fund 0.60%
iShares Dow Jones U.S. Financial Sector Index Fund 0.60%
iShares Dow Jones U.S. Healthcare Sector Index Fund 0.60%
iShares Dow Jones U.S. Industrial Sector Index Fund 0.60%
iShares Dow Jones U.S. Technology Sector Index Fund 0.60%
iShares Dow Jones U.S. Telecommunications Sector Index Fund 0.60%
iShares Dow Jones U.S. Utilities Sector Index Fund 0.60%
iShares Dow Jones U.S. Chemicals Index Fund 0.60%
iShares Dow Jones U.S. Financial Services Composite Index Fund 0.60%
iShares Dow Jones U.S. Internet Index Fund 0.60%
iShares Dow Jones U.S. Real Estate Index Fund 0.60%
iShares Russell 3000 Index Fund 0.20%
iShares Russell 3000 Growth Index Fund 0.25%
iShares Russell 3000 Value Index Fund 0.25%
iShares Russell 2000 Index Fund 0.20%
iShares Russell 2000 Growth Index Fund 0.25%
iShares Russell 2000 Value Index Fund 0.25%
iShares Russell 1000 Index Fund 0.15%
iShares Russell 1000 Growth Index Fund 0.20%
iShares Russell 1000 Value Index Fund 0.20%
</TABLE>
--------------------------------------------------------------------------------
Management
page 35
<PAGE>
The Investment Advisory Agreement with respect to each Fund continues in effect
for two years from its effective date, and thereafter is subject to annual
approval by (i) the Board or (ii) vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the Fund, provided that in either
event such continuance also is approved by a majority of the Board who are not
interested persons (as defined in the 1940 Act) of the Fund, by a vote cast in
person at a meeting called for the purpose of voting on such approval.
The Investment Advisory Agreement with respect to each Fund is terminable
without penalty, on 60-days notice, by the Board or by a vote of the holders of
a majority (as defined in the 1940 Act) of the applicable Fund's outstanding
voting securities. The Investment Advisory Agreement is also terminable upon 60
days notice by BGFA and will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
Current interpretations of federal banking laws and regulations (i) may
prohibit Barclays Bank PLC, Barclays Global Investors, N.A. ("BGI"), and BGFA
from controlling, or underwriting the iShares, but (ii) would not prohibit
Barclays Bank PLC or BGFA generally from acting as an investment adviser,
administrator, transfer agent, or custodian to the Funds or from purchasing
iShares as agent for and upon the order of a customer.
BGFA believes that it may perform advisory and related services for the Trust
without violating applicable banking laws or regulations. However, the legal
requirements and interpretations about the permissible activities of banks and
their affiliates may change in the future. These changes could prevent BGFA
from continuing to perform services for the Trust. If this happens, the Board
would consider selecting other qualified firms. Any new investment advisory
agreement would be subject to shareholder approval.
If current restrictions on bank activities with mutual funds were relaxed,
BGFA, or its affiliates, would consider performing additional services for the
Trust. BGFA cannot predict whether these changes will be enacted, or the terms
under which BGFA, or its affiliates, might offer to provide additional
services.
The Trust and BGFA have adopted Codes of Ethics under Rule 17j-1 of the 1940
Act. The Codes permit personnel subject to the Codes to invest in securities,
subject to certain limitations, including securities that may be purchased or
held by the Funds.
Administrator, Custodian, Transfer Agent and Securities Lending
Agent. Investors Bank & Trust Co. ("IBT") serves as Administrator, Custodian,
Transfer Agent and Securities Lending Agent for the Funds. Its principal
address is 200 Clarendon Street, Boston, MA 02111. Under the Administration
Agreement with the Trust, IBT provides necessary administrative and accounting
services for the maintenance and operations of the Trust and each Fund. In
addition, IBT makes available the office space, equipment, personnel and
facilities required to provide such services. Under the Custodian Agreement
with the Trust, IBT maintains in separate accounts cash, securities and other
assets of the Trust and each Fund, keeps all necessary accounts and records,
and provides other services. IBT is required, upon the order of the Trust, to
deliver securities held by IBT and to make payments for securities purchased by
the Trust for each Fund. Also, under a Delegation Agreement, IBT is authorized
to appoint certain foreign custodians or foreign custody managers for Fund
investments outside the United States. Pursuant to a Transfer Agency and
Service Agreement with the Trust, IBT acts as a transfer agent for each Fund's
authorized and issued shares of beneficial interest, and as dividend disbursing
agent of the Trust. Under a Securities Lending Agency Agreement with the Trust,
IBT acts as the Trust's agent for the purpose of lending Trust securities to
third parties. As compensation for the foregoing services, IBT receives certain
out-of-pocket costs, transaction fees, and asset-based fees which are accrued
daily and paid monthly.
--------------------------------------------------------------------------------
iShares
page 36
<PAGE>
Distributor. SEI Investments Distribution Company is the Distributor of
iShares. Its principal address is 1 Freedom Valley Drive, Oaks, PA 19456. The
Distributor has entered into a Distribution Agreement with the Trust pursuant
to which it distributes iShares of each Fund. The Distribution Agreement will
continue for two years from its effective date and is renewable annually
thereafter. iShares are continuously offered for sale by the Funds through the
Distributor only in Creation Unit Aggregations, as described in the Prospectus
and below under the heading Creation and Redemption of Creation Units
Aggregations. iShares in less than Creation Unit Aggregations are not
distributed by the Distributor. The Distributor will deliver the Prospectus
and, upon request, the Statement of Additional Information to persons
purchasing Creation Unit Aggregations and will maintain records of both orders
placed with it and confirmations of acceptance furnished by it. The Distributor
is a broker-dealer registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of the National Association of Securities Dealers,
Inc. ("NASD").
The Distribution Agreement for each Fund will provide that it may be terminated
at any time, without the payment of any penalty, on at least 60-days' written
notice to the other party (i) by vote of a majority of the Independent Trustees
or (ii) by vote of a majority of the outstanding voting securities (as defined
in the 1940 Act) of the relevant Fund. The Distribution Agreement will
terminate automatically in the event of its assignment (as defined in the 1940
Act).
The Distributor may also enter into agreements with securities dealers
("Soliciting Dealers") who will solicit purchases of Creation Unit Aggregations
of iShares. Such Soliciting Dealers may also be Participating Parties (as
defined below), DTC Participants (as defined below) and/or Investor Services
Organizations.
BGFA or BGI may, from time to time and from its own resources, pay, defray or
absorb costs relating to distribution, including payments out of its own
resources to the Distributor or to otherwise promote the sale of iShares.
Index Providers. Each Fund will be based upon a particular equity market index
compiled by one of three index providers: Standard & Poor's (a division of the
McGraw-Hill Companies), Frank Russell Company and Dow Jones & Company, Inc.,
none of which is affiliated with a Fund or with BGI or its affiliates. Each
Fund will be entitled to use the Underlying Index pursuant to a sub-licensing
agreement with BGI, which in turn has a licensing agreement with the relevant
index provider. BGI will provide the sub-licenses without charge to any Fund.
--------------------------------------------------------------------------------
Management
page 37
<PAGE>
Brokerage Transactions
The policy of the Trust regarding purchases and sales of securities is that
primary consideration will be given to obtaining the most favorable prices and
efficient executions of transactions. Consistent with this policy, when
securities transactions are effected on a stock exchange, the Trust's policy is
to pay commissions that are considered fair and reasonable without necessarily
determining that the lowest possible commissions are paid in all circumstances.
In seeking to determine the reasonableness of brokerage commissions paid in any
transaction, BGFA relies upon its experience and knowledge regarding
commissions generally charged by various brokers.
In seeking to implement the Trust's policies, BGFA effects transactions with
those brokers and dealers that BGFA believes provide the most favorable prices
and are capable of providing efficient executions. BGFA and its affiliates do
not participate in soft dollar transactions.
It is expected that the Trust may execute brokerage or other agency
transactions through affiliates that are registered broker-dealers, for
commissions, in conformity with the 1940 Act, the Exchange Act and rules
promulgated by the SEC. Under these provisions, affiliates of BGFA are
permitted to receive and retain compensation for effecting portfolio
transactions for the Trust on an exchange if a written contract is in effect
between the affiliate and the Trust expressly permitting the affiliate of BGFA
to receive and retain such compensation. These rules further require that the
commissions paid by the Trust for exchange transactions not exceed "usual and
customary" brokerage commissions. The rules define "usual and customary"
commissions to include amounts which are "reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time." The Trustees, including those who are not "interested persons" of the
Trust, have adopted procedures for evaluating the reasonableness of commissions
paid and will review these procedures periodically.
The Trust will not deal with affiliates in principal transactions unless
permitted by the applicable rule or regulation or by exemptive order.
BGFA assumes general supervision over placing orders on behalf of the Funds for
the purchase or sale of portfolio securities. If purchases or sales of
portfolio securities of the Funds and one or more other investment companies or
clients supervised by BGFA are considered at or about the same time,
transactions in such securities are allocated among the several investment
companies and clients in a manner deemed equitable to all by BGFA. In some
cases, this procedure could have a detrimental effect on the price or volume of
the security as far as the Funds are concerned. However, in other cases, it is
possible that the ability to participate in volume transactions and to
negotiate lower brokerage commissions will be beneficial to the Funds. The
primary consideration is prompt execution of orders at the most favorable net
price.
Portfolio turnover may vary from year to year, as well as within a year. High
turnover rates are likely to result in comparatively greater brokerage
expenses. The portfolio turnover rate for each Fund is expected to be under
50%. The overall reasonableness of brokerage commissions is evaluated by BGFA
based upon its knowledge of available information as to the general level of
commissions paid by the other institutional investors for comparable services.
--------------------------------------------------------------------------------
iShares
page 38
<PAGE>
Additional Information Concerning the Trust
Capital Stock. The Trust was established as a Delaware business trust on
December 16, 1999. The Trust currently is comprised of 36 Funds. Each Fund
issues shares of beneficial interest, with no par value. The Board may
designate additional Funds.
Each iShare issued by a Fund has a pro rata interest in the assets of the
corresponding Fund. iShares have no preemptive, exchange, subscription or
conversion rights and are freely transferable. Each iShare is entitled to
participate equally in dividends and distributions declared by the Board with
respect to the relevant Fund, and in the net distributable assets of such Fund
on liquidation.
Each iShare has one vote with respect to matters upon which a shareholder vote
is required consistent with the requirements of the 1940 Act and the rules
promulgated thereunder. iShares of all Funds vote together as a single class
except that, if the matter being voted on affects only a particular Fund, and,
if a matter affects a particular Fund differently from other Funds, that Fund
will vote separately on such matter.
Under Delaware law, the Trust is not required to hold an annual meeting of
shareholders unless required to do so under the 1940 Act. The policy of the
Trust is not to hold an annual meeting of shareholders unless required to do so
under the 1940 Act. All iShares (regardless of the Fund) have noncumulative
voting rights for the Board. Under Delaware law, Trustees of the Trust may be
removed by vote of the shareholders.
Following the creation of the initial Creation Unit Aggregation(s) of iShares
of a Fund and immediately prior to the commencement of trading in such Fund's
iShares, a holder of iShares may be a "control person" of the Fund, as defined
in the 1940 Act. A Fund cannot predict the length of time for which one or more
shareholders may remain a control person of the Fund.
The Trust does not have information concerning the beneficial ownership of
iShares held by any Depository Trust Company ("DTC") Participants (as defined
below).
Shareholders may make inquiries by writing to the Trust, c/o the Distributor,
SEI Investments Distribution Company, at 1 Freedom Valley Drive, Oaks, PA
19456.
Absent an applicable exemption or other relief from the SEC or its staff,
officers and Trustees of the Fund and beneficial owners of 10% of the iShares
of a Fund ("Insiders") may be subject to the insider reporting, short-swing
profit and short sale provisions of Section 16 of the Exchange Act and the
SEC's rules promulgated thereunder. Insiders should consult with their own
legal counsel concerning their obligations under Section 16 of the Exchange
Act.
Book Entry Only System. The following information supplements and should be
read in conjunction with the section in the Prospectus entitled Shareholder
Information.
DTC Acts as Securities Depository for the iShares. iShares of each Fund are
represented by securities registered in the name of DTC or its nominee and
deposited with, or on behalf of, DTC.
DTC, a limited-purpose trust company, was created to hold securities of its
participants (the "DTC Participants") and to facilitate the clearance and
settlement of securities transactions among the DTC Participants in such
securities through electronic book-entry
--------------------------------------------------------------------------------
page 39
<PAGE>
changes in accounts of the DTC Participants, thereby eliminating the need for
physical movement of securities' certificates. DTC Participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations, some of whom (and/or their representatives)
own DTC. More specifically, DTC is owned by a number of its DTC Participants
and by the New York Stock Exchange ("NYSE"), the AMEX and the NASD. Access to
the DTC system is also available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
DTC Participant, either directly or indirectly (the "Indirect Participants").
Beneficial ownership of iShares is limited to DTC Participants, Indirect
Participants and persons holding interests through DTC Participants and
Indirect Participants. Ownership of beneficial interests in iShares (owners of
such beneficial interests are referred to herein as "Beneficial Owners") is
shown on, and the transfer of ownership is effected only through, records
maintained by DTC (with respect to DTC Participants) and on the records of DTC
Participants (with respect to Indirect Participants and Beneficial Owners that
are not DTC Participants). Beneficial Owners will receive from or through the
DTC Participant a written confirmation relating to their purchase of iShares.
Conveyance of all notices, statements and other communications to Beneficial
Owners is effected as follows. Pursuant to the Depositary Agreement between the
Trust and DTC, DTC is required to make available to the Trust upon request and
for a fee to be charged to the Trust a listing of the iShares of each Fund held
by each DTC Participant. The Trust shall inquire of each such DTC Participant
as to the number of Beneficial Owners holding iShares, directly or indirectly,
through such DTC Participant. The Trust shall provide each such DTC Participant
with copies of such notice, statement or other communication, in such form,
number and at such place as such DTC Participant may reasonably request, in
order that such notice, statement or communication may be transmitted by such
DTC Participant, directly or indirectly, to such Beneficial Owners. In
addition, the Trust shall pay to each such DTC Participants a fair and
reasonable amount as reimbursement for the expenses attendant to such
transmittal, all subject to applicable statutory and regulatory requirements.
Share distributions shall be made to DTC or its nominee, Cede & Co., as the
registered holder of all iShares. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
iShares of each Fund as shown on the records of DTC or its nominee. Payments by
DTC Participants to Indirect Participants and Beneficial Owners of iShares held
through such DTC Participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts
of customers in bearer form or registered in a "street name", and will be the
responsibility of such DTC Participants.
The Trust has no responsibility or liability for any aspect of the records
relating to or notices to Beneficial Owners, or payments made on account of
beneficial ownership interests in such iShares, or for maintaining, supervising
or reviewing any records relating to such beneficial ownership interests, or
for any other aspect of the relationship between DTC and the DTC Participants
or the relationship between such DTC Participants and the Indirect Participants
and Beneficial Owners owning through such DTC Participants.
DTC may decide to discontinue providing its service with respect to iShares at
any time by giving reasonable notice to the Trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the Trust shall take action to find a replacement for DTC to
perform its functions at a comparable cost.
--------------------------------------------------------------------------------
iShares
page 40
<PAGE>
Creation and Redemption of Creation Unit Aggregations
Creation. The Trust issues and sells iShares of each Fund only in Creation Unit
Aggregations on a continuous basis through the Distributor, without a sales
load, at their NAVs next determined after receipt, on any Business Day (as
defined below), of an order in proper form.
A "Business Day" with respect to each Fund is any day on which the NYSE is open
for business. As of the date of the Prospectus, the NYSE observes the following
holidays: New Year's Day, Martin Luther King, Jr. Day, Washington's Birthday,
Good Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving
Day and Christmas Day.
Fund Deposit. The consideration for purchase of Creation Unit Aggregations of a
Fund generally consists of the in-kind deposit of a designated portfolio of
equity securities -- the "Deposit Securities" -- per each Creation Unit
Aggregation constituting a substantial replication, or a portfolio sampling
representation, of the stocks involved in the relevant Fund's Underlying Index
("Fund Securities") and an amount of cash -- the "Cash Component" -- computed
as described below. Together, the Deposit Securities and the Cash Component
constitute the "Fund Deposit", which represents the minimum initial and
subsequent investment amount for a Creation Unit Aggregation of any Fund.
The Cash Component is sometimes also referred to as the Balancing Amount. The
Cash Component serves the function of compensating for any differences between
the NAV per Creation Unit Aggregation and the Deposit Amount (as defined
below). The Cash Component is an amount equal to the difference between the NAV
of the iShares (per Creation Unit Aggregation) and the "Deposit Amount" -- an
amount equal to the market value of the Deposit Securities. If the Cash
Component is a positive number (i.e., the NAV per Creation Unit Aggregation
exceeds the Deposit Amount), the creator will deliver the Cash Component. If
the Cash Component is a negative number (i.e., the NAV per Creation Unit
Aggregation is less than the Deposit Amount), the creator will receive the
Cash Component.
BGFA, through the National Securities Clearing Corporation ("NSCC") (discussed
below), makes available on each Business Day, prior to the opening of business
on the NYSE (currently 9:30 a.m., Eastern time), the list of the names and the
required number of shares of each Deposit Security to be included in the
current Fund Deposit (based on information at the end of the previous Business
Day) for each such Fund.
Such Fund Deposit is applicable, subject to any adjustments as described below,
in order to effect creations of Creation Unit Aggregations of a given Fund
until such time as the next-announced composition of the Deposit Securities is
made available.
The identity and number of shares of the Deposit Securities required for a Fund
Deposit for each Fund changes as rebalancing adjustments and corporate action
events are reflected from time to time by BGFA with a view to the investment
objective of the relevant Fund. The composition of the Deposit Securities may
also change in response to adjustments to the weighting or composition of the
Component Stocks of the relevant Underlying Index. In addition, the Trust
reserves the right to permit or require the substitution of an amount of
cash -- i.e., a "cash in lieu" amount -- to be added to the Cash Component to
replace any Deposit Security that may not be available in sufficient quantity
for delivery or that may not be eligible for transfer through the systems of
DTC or the Clearing Process (discussed below). The adjustments described above
will reflect changes known to BGFA on the date of announcement to be in effect
by the time of delivery of the Fund Deposit, in the
--------------------------------------------------------------------------------
page 41
<PAGE>
composition of the Underlying Index being tracked by the relevant Fund or
resulting from certain corporate actions.
Procedures for Creation of Creation Unit Aggregations. To be eligible to place
orders with the Distributor and to create a Creation Unit Aggregation of a
Fund, an entity must be (i) a "Participating Party", i.e., a broker-dealer or
other participant in the clearing process through the Continuous Net Settlement
System of the NSCC (the "Clearing Process"), a clearing agency that is
registered with the SEC; or (ii) a DTC Participant (see the Book Entry Only
System section), and, in each case, must have executed an agreement with the
Distributor, with respect to creations and redemptions of Creation Unit
Aggregations ("Participant Agreement") (discussed below). A Participating Party
and DTC Participant are collectively referred to as an "Authorized
Participant". Investors should contact the Distributor for the names of
Authorized Participants that have signed a Participant Agreement. All iShares
of a Fund, however created, will be entered on the records of DTC in the name
of Cede & Co. for the account of a DTC Participant.
All orders to create iShares must be placed for one or more Creation Unit
Aggregations. Each Fund, except the iShares S&P 350 Europe Index Fund and
iShares S&P/TSE 60 Index Fund, is hereinafter referred to as a "Domestic Fund"
and each of the iShares S&P Europe 350 Index Fund and iShares S&P/TSE 60 Index
Fund is hereinafter referred to as a "Foreign Fund". Orders to create Creation
Unit Aggregations of the Foreign Funds cannot be placed through the Clearing
Process. All orders to create Creation Unit Aggregations, whether through the
Clearing Process (through a Participating Party) or outside the Clearing
Process (through a DTC Participant), must be received by the Distributor no
later than the closing time of the regular trading session on the NYSE
("Closing Time") (ordinarily 4:00 p.m., Eastern time) in each case on the date
such order is placed in order for creation of Creation Unit Aggregations to be
effected based on the NAV of iShares of each Fund as next determined on such
date after receipt of the order in proper form. The date on which an order to
create Creation Unit Aggregations (or an order to redeem Creation Unit
Aggregations, as discussed below) is placed is referred to as the "Transmittal
Date". Orders must be transmitted by an Authorized Participant by telephone or
other transmission method acceptable to the Distributor pursuant to procedures
set forth in the Participant Agreement, as described below (see the Placement
of Creation Orders for Domestic Funds Using Clearing Process, the Placement of
Creation Orders for Domestic Funds Outside Clearing Process and the Placement
of Creation Orders for Foreign Funds sections). Severe economic or market
disruptions or changes, or telephone or other communication failure may impede
the ability to reach the Distributor or an Authorized Participant.
All orders to create Creation Unit Aggregations shall be placed with an
Authorized Participant, as applicable, in the form required by such Authorized
Participant. In addition, the Authorized Participant may request the investor
to make certain representations or enter into agreements with respect to the
order, e.g., to provide for payments of cash, when required. Investors should
be aware that their particular broker may not have executed a Participant
Agreement and that, therefore, orders to create Creation Unit Aggregations of a
Fund have to be placed by the investor's broker through an Authorized
Participant that has executed a Participant Agreement. In such cases there may
be additional charges to such investor. At any given time, there may be only a
limited number of broker-dealers that have executed a Participant Agreement and
only a small number of such Authorized Participants may have international
capabilities.
Those placing orders for Creation Unit Aggregations of Domestic Funds through
the Clearing Process should afford sufficient time to permit proper submission
of the order to the Distributor prior to the Closing Time on the Transmittal
Date. Orders for Creation Unit Aggregations of Domestic Funds that are effected
outside the Clearing Process are likely to
--------------------------------------------------------------------------------
iShares
page 42
<PAGE>
require transmittal by the DTC Participant earlier on the Transmittal Date than
orders effected using the Clearing Process. Those persons placing orders
outside the Clearing Process should ascertain the deadlines applicable to DTC
and the Federal Reserve Bank wire system by contacting the operations
department of the broker or depository institution effectuating such transfer
of Deposit Securities and Cash Component.
Those placing orders for Creation Unit Aggregations of Foreign Funds should
ascertain the applicable deadline for cash transfers by contacting the
operations department of the broker or depositary institution making the
transfer of the Cash Component. This deadline is likely to be significantly
earlier than the closing time of the regular trading session on the NYSE.
Investors should be aware that the Authorized Participant may require orders
for Creation Units placed with it to be in the form required by the individual
Authorized Participant, which form may not be the same as the form of purchase
order specified by the Trust that the Authorized Participant must deliver to
the Distributor.
Placement of Creation Orders for Domestic Funds Using Clearing Process. The
Clearing Process is the process of creating or redeeming Creation Unit
Aggregations through the Clearing Process. Fund Deposits made through the
Clearing Process must be delivered through a Participating Party that has
executed a Participant Agreement. The Participant Agreement authorizes the
Distributor to transmit through IBT to NSCC, on behalf of the Participating
Party, such trade instructions as are necessary to effect the Participating
Party's creation order. Pursuant to such trade instructions to NSCC, the
Participating Party agrees to deliver the requisite Deposit Securities and the
Cash Component to the Trust, together with such additional information as may
be required by the Distributor. An order to create Creation Unit Aggregations
through the Clearing Process is deemed received by the Distributor on the
Transmittal Date if (i) such order is received by the Distributor not later
than the Closing Time on such Transmittal Date, and (ii) all other procedures
set forth in the Participant Agreement are properly followed.
Placement of Creation Orders for Domestic Funds Outside Clearing Process. Fund
Deposits made outside the Clearing Process must be delivered through a DTC
Participant that has executed a Participant Agreement preapproved by BGFA and
the Distributor. A DTC Participant who wishes to place an order creating
Creation Unit Aggregations to be effected outside the Clearing Process does not
need to be a Participating Party, but such orders must state that the DTC
Participant is not using the Clearing Process and that the creation of Creation
Unit Aggregations will instead be effected through a transfer of securities and
cash directly through DTC. The Fund Deposit transfer must be ordered by the DTC
Participant on the Transmittal Date in a timely fashion so as to ensure the
delivery of the requisite number of Deposit Securities through DTC to the
account of the Fund by no later than 11:00 a.m., Eastern time, of the second
Business Day immediately following the Transmittal Date.
All questions as to the number of Deposit Securities to be delivered, and the
validity, form and eligibility (including time of receipt) for the deposit of
any tendered securities, will be determined by the Trust, whose determination
shall be final and binding. The amount of cash equal to the Cash Component must
be transferred directly to IBT through the Federal Reserve Bank wire transfer
system in a timely manner so as to be received by IBT no later than 11:00 a.m.,
Eastern time, on the second Business Day immediately following such Transmittal
Date. An order to create Creation Unit Aggregations outside the Clearing
Process is deemed received by the Distributor on the Transmittal Date if (i)
such order is received by the Distributor not later than the Closing Time on
such Transmittal Date; and (ii) all other procedures set forth in the
Participant Agreement are properly followed. However, if IBT does not receive
both the required Deposit Securities and the Cash Component by 11:00 a.m. on
the second Business Day immediately following the Transmittal Date, such order
will be canceled. Upon written notice to the Distributor, such
--------------------------------------------------------------------------------
Creation and Redemption of Creation Unit Aggregations
page 43
<PAGE>
canceled order may be resubmitted the following Business Day using a Fund
Deposit as newly constituted to reflect the then current NAV of the Fund. The
delivery of Creation Unit Aggregations so created will occur no later than the
third (3rd) Business Day following the day on which the purchase order is
deemed received by the Distributor.
An additional charge of up to three (3) times the normal transaction fee (for a
total charge of up to four (4) times the normal transaction fee) may be imposed
with respect to transactions effected outside the Clearing Process (through a
DTC participant) and in the limited circumstances in which any cash can be used
in lieu of Deposit Securities to create Creation Units. This charge is subject
to a limit not to exceed 10/100 of 1% (10 basis points) of the value of one
Creation Unit as the time of creation.
Creation Unit Aggregations of Domestic Funds may be created in advance of
receipt by the Trust of all or a portion of the applicable Deposit Securities
as described below. In these circumstances, the initial deposit will have a
value greater than the NAV of the iShares on the date the order is placed in
proper form since, in addition to available Deposit Securities, cash must be
deposited in an amount equal to the sum of (i) the Cash Component, plus (ii)
125% of the market value of the undelivered Deposit Securities (the "Additional
Cash Deposit"). The order shall be deemed to be received on the Business Day on
which the order is placed provided that the order is placed in proper form
prior to 4:00 p.m., Eastern time, on such date and federal funds in the
appropriate amount are deposited with IBT by 11:00 a.m., Eastern time, the
following Business Day. If the order is not placed in proper form by 4:00 p.m.
or federal funds in the appropriate amount are not received by 11:00 a.m. the
next Business Day, then the order may be deemed to be rejected and the
Authorized Participant shall be liable to the Fund for losses, if any,
resulting therefrom. An additional amount of cash shall be required to be
deposited with the Trust, pending delivery of the missing Deposit Securities to
the extent necessary to maintain the Additional Cash Deposit with the Trust in
an amount at least equal to 125% of the daily marked to market value of the
missing Deposit Securities. To the extent that missing Deposit Securities are
not received by 11:00 a.m., Eastern time, on the third Business Day following
the day on which the purchase order is deemed received by the Distributor or in
the event a marked-to-market payment is not made within one Business Day
following notification by the Distributor that such a payment is required, the
Trust may use the cash on deposit to purchase the missing Deposit Securities.
Authorized Participants will be liable to the Trust for the costs incurred by
the Trust in connection with any such purchases. These costs will be deemed to
include the amount by which the actual purchase price of the Deposit Securities
exceeds the market value of such Deposit Securities on the day the purchase
order was deemed received by the Distributor plus the brokerage and related
transaction costs associated with such purchases. The Trust will return any
unused portion of the Additional Cash Deposit once all of the missing Deposit
Securities have been properly received by IBT or purchased by the Trust and
deposited into the Trust. In addition, a transaction fee, as listed below, will
be charged in all cases. The delivery of Creation Unit Aggregations so created
will occur no later than the third Business Day following the day on which the
purchase order is deemed received by the Distributor.
Placement of Creation Orders for Foreign Funds. Fund Deposits in connection
with the Foreign Funds will not be made either through the Clearing Process or
through DTC. Instead, to initiate an order for a Creation Unit Aggregation of a
particular Fund, the Authorized Participant must give notice to the Distributor
of its intent to submit such an order to purchase not later than 4:00 p.m.,
Eastern time on the relevant Business Day. The Distributor shall cause BGFA and
IBT to be informed of such advice. IBT will then provide such information to
the appropriate sub-custodian(s). For each Fund, IBT shall cause the sub-
custodian of the Funds to maintain an account into which the Authorized
Participant shall deliver, on behalf of itself or the party on whose behalf it
is acting, the securities included in the designated Fund Deposit (or the cash
value of all or part of such securities,
--------------------------------------------------------------------------------
iShares
page 44
<PAGE>
in the case of a permitted or required cash purchase or "cash in lieu" amount),
with any appropriate adjustments as advised by the Trust. Deposit Securities
must be delivered to an account maintained at the applicable local sub-
custodian(s). Following the notice of intention, an irrevocable order to
purchase Creation Unit Aggregations, in the form required by the Trust, must be
received by the Distributor from an Authorized Participant on its own or
another investor's behalf by the closing time of the regular trading session on
the NYSE (currently 4:00 p.m., Eastern time) on the relevant Business Day.
However when a relevant local market is closed due to local market holidays,
the local market settlement process will not commence until the end of the
local holiday period. Settlement must occur by 2:00 p.m., Eastern time, on the
contractual settlement date.
The Authorized Participant must also make available no later than 2:00 p.m.,
Eastern time, on the contractual settlement date, by means satisfactory to the
Trust, immediately-available or same-day funds estimated by the Trust to be
sufficient to pay the Cash Component next determined after acceptance of the
purchase order, together with the applicable purchase Transaction Fee. Any
excess funds will be returned following settlement of the issue of the Creation
Unit Aggregation.
To the extent contemplated by the applicable Participant Agreement, Creation
Unit Aggregations of Foreign Funds will be issued to such Authorized
Participant notwithstanding the fact that the corresponding Fund Deposits have
not been received in part or in whole, in reliance on the undertaking of the
Authorized Participant to deliver the missing Deposit Securities as soon as
possible, which undertaking shall be secured by such Authorized Participant's
delivery and maintenance of collateral consisting of cash in the form of U.S.
dollars in immediately available funds having a value (marked to market daily)
at least equal to 125% of the value of the missing Deposit Securities. Such
cash collateral must be delivered no later than 2:00 p.m., Eastern time, on the
contractual settlement date. The Participant Agreement will permit the Fund to
buy the missing Deposit Securities at any time and will subject the Authorized
Participant to liability for any shortfall between the cost to the Trust of
purchasing such securities and the value of the collateral.
Acceptance of Orders for Creation Unit Aggregations. The Trust reserves the
absolute right to reject a creation order transmitted to it by the Distributor
in respect of any Fund if: (i) the order is not in proper form; (ii) the
investor(s), upon obtaining the iShares ordered, would own 80% or more of the
currently outstanding shares of any Fund; (iii) the Deposit Securities
delivered are not as disseminated through the facilities of the Listing
Exchange for that date by IBT, as described above; (iv) acceptance of the
Deposit Securities would have certain adverse tax consequences to the Fund; (v)
acceptance of the Fund Deposit would, in the opinion of counsel, be unlawful;
(vi) acceptance of the Fund Deposit would otherwise, in the discretion of the
Trust or BGFA, have an adverse effect on the Trust or the rights of beneficial
owners; or (vii) in the event that circumstances outside the control of the
Trust, IBT, the Distributor and BGFA make it for all practical purposes
impossible to process creation orders. Examples of such circumstances include
acts of God; public service or utility problems such as fires, floods, extreme
weather conditions and power outages resulting in telephone, telecopy and
computer failures; market conditions or activities causing trading halts;
systems failures involving computer or other information systems affecting the
Trust, BGFA, the Distributor, DTC, NSCC, IBT or sub-custodian or any other
participant in the creation process, and similar extraordinary events. The
Distributor shall notify a prospective creator of a Creation Unit and/or the
Authorized Participant acting on behalf of the creator of a Creation Unit
Aggregation of its rejection of the order of such person. The Trust, IBT, a
sub-custodian and the Distributor are under no duty, however, to give
notification of any defects or irregularities in the delivery of Fund Deposits
nor shall any of them incur any liability for the failure to give any such
notification.
--------------------------------------------------------------------------------
Creation and Redemption of Creation Unit Aggregations
page 45
<PAGE>
All questions as to the number of shares of each security in the Deposit
Securities and the validity, form, eligibility, and acceptance for deposit of
any securities to be delivered shall be determined by the Trust, and the
Trust's determination shall be final and binding.
Creation Transaction Fee. A purchase transaction fee is imposed for the
transfer and other transaction costs of a Fund associated with the issuance of
Creation Units of iShares. The fee is a single charge and will be the same
regardless of the number of Creation Units purchased by an investor on the same
day. Purchasers of Creation Units of iShares for cash are required to pay an
additional variable charge to compensate for brokerage and market impact
expenses. Where the Trust permits an in-kind purchaser to substitute cash in
lieu of depositing a portion of the Deposit Securities, the purchaser will be
assessed the additional variable charge for cash purchases on the "cash in
lieu" portion of its investment. Purchasers of iShares in Creation Units are
responsible for the costs of transferring the securities constituting the
Deposit Securities to the account of the Trust. Investors are also responsible
for payment of the costs of transferring the Deposit Securities to the Trust.
Investors who use the services of a broker or other such intermediary may be
charged a fee for such services.
The following table sets forth the creation transaction fee for each of the
Funds.
<TABLE>
<CAPTION>
Maximum
Creation
Transaction
Name of Fund Amount Fee*
------------ ------- -----------
<S> <C> <C>
iShares S&P 500 Index Fund $ 2,000 $ 8,000
iShares S&P 500/BARRA Growth Index Fund $ 500 $ 2,000
iShares S&P 500/BARRA Value Index Fund $ 1,500 $ 6,000
iShares S&P MidCap 400 Index Fund $ 1,500 $ 6,000
iShares S&P MidCap 400/BARRA Growth Index Fund $ 500 $ 2,000
iShares S&P MidCap 400/BARRA Value Index Fund $ 1,250 $ 5,000
iShares S&P SmallCap 600 Index Fund $ 2,500 $10,000
iShares S&P SmallCap 600/BARRA Growth Index Fund $ 750 $ 3,000
iShares S&P SmallCap 600/BARRA Value Index Fund $ 1,750 $ 7,000
iShares S&P 100 Index Fund $ 500 $ 2,000
iShares S&P Europe 350 Index Fund $12,000 $48,000
iShares S&P/TSE 60 Index Fund $ 1,250 $ 5,000
iShares Dow Jones U.S. Total Market Index Fund $ 8,000 $32,000
iShares Dow Jones U.S. Basic Materials Sector Index Fund $ 500 $ 2,000
iShares Dow Jones U.S. Consumer Cyclical Sector Index Fund $ 1,500 $ 6,000
iShares Dow Jones U.S. Consumer Non-Cyclical Sector Index
Fund $ 500 $ 2,000
iShares Dow Jones U.S. Energy Sector Index Fund $ 500 $ 2,000
iShares Dow Jones U.S. Financial Sector Index Fund $ 1,500 $ 6,000
iShares Dow Jones U.S. Healthcare Sector Index Fund $ 750 $ 3,000
iShares Dow Jones U.S. Industrial Sector Index Fund $ 1,500 $ 6,000
iShares Dow Jones U.S. Technology Sector Index Fund $ 1,250 $ 5,000
iShares Dow Jones U.S. Telecommunications Sector Index
Fund $ 250 $ 1,000
iShares Dow Jones U.S. Utilities Sector Index Fund $ 500 $ 2,000
iShares Dow Jones U.S. Chemicals Index Fund $ 250 $ 1,000
iShares Dow Jones U.S. Financial Services Index Fund $ 1,000 $ 4,000
iShares Dow Jones U.S. Internet Index Fund $ 250 $ 1,000
iShares Dow Jones U.S. Real Estate Index Fund $ 500 $ 2,000
iShares Russell 3000 Index Fund $11,500 $46,000
iShares Russell 3000 Growth Index Fund $ 7,000 $28,000
iShares Russell 3000 Value Index Fund $ 8,000 $32,000
iShares Russell 2000 Index Fund $ 7,500 $30,000
iShares Russell 2000 Growth Index Fund $ 5,000 $20,000
</TABLE>
--------------------------------------------------------------------------------
iShares
page 46
<PAGE>
<TABLE>
<CAPTION>
Maximum
Creation
Transaction
Name of Fund Amount Fee*
------------ ------ -----------
<S> <C> <C>
iShares Russell 2000 Value Index Fund $5,000 $20,000
iShares Russell 1000 Index Fund $4,000 $16,000
iShares Russell 1000 Growth Index Fund $2,000 $ 8,000
iShares Russell 1000 Value Index Fund $3,000 $12,000
</TABLE>
* If a Creation Unit is purchased or redeemed outside the usual process through
the National Securities Clearing Corporation or for cash, a variable fee will
be charged of up to four times the Standard Creation or Redemption
Transaction Fee.
Redemption of iShares in Creation Units Aggregations. Shares may be redeemed
only in Creation Unit Aggregations at their NAV next determined after receipt
of a redemption request in proper form by the Fund through IBT and only on a
Business Day. A Fund will not redeem iShares in amounts less than Creation Unit
Aggregations. Beneficial Owners must accumulate enough iShares in the secondary
market to constitute a Creation Unit Aggregation in order to have such iShares
redeemed by the Trust. There can be no assurance, however, that there will be
sufficient liquidity in the public trading market at any time to permit
assembly of a Creation Unit Aggregation. Investors should expect to incur
brokerage and other costs in connection with assembling a sufficient number of
shares to constitute a redeemable Creation Unit Aggregation.
With respect to each Fund, BGFA, (i) through the NSCC for Domestic Funds, and
(ii) through the Distributor, makes available immediately prior to the opening
of business on the AMEX (currently 9:30 a.m., Eastern time) on each Business
Day, the identity of the Fund Securities that will be applicable (subject to
possible amendment or correction) to redemption requests received in proper
form (as described below) on that day. Fund Securities received on redemption
may not be identical to Deposit Securities that are applicable to creations of
Creation Unit Aggregations.
Unless cash redemptions are available or specified for a Fund, the redemption
proceeds for a Creation Unit Aggregation generally consist of Fund
Securities -- as announced on the Business Day of the request for redemption
received in proper form -- plus cash in an amount equal to the difference
between the NAV of the iShares being redeemed, as next determined after a
receipt of a request in proper form, and the value of the Fund Securities (the
"Cash Redemption Amount"), less a redemption transaction fee as listed below.
In the event that the Fund Securities have a value greater then the NAV of the
iShares, a compensating cash payment equal to the difference is required to be
made by or through an Authorized Participant by the redeeming shareholder.
The right of redemption may be suspended or the date of payment postponed with
respect to any Fund (i) for any period during which the NYSE is closed (other
than customary weekend and holiday closings); (ii) for any period during which
trading on the NYSE is suspended or restricted; (iii) for any period during
which an emergency exists as a result of which disposal of the iShares of a
Fund or determination of such Fund's NAV is not reasonably practicable; or (iv)
in such other circumstances as is permitted by the SEC.
Redemption Transaction Fee. A redemption transaction fee is imposed to offset
transfer and other transaction costs that may be incurred by the relevant Fund.
The fee is a single charge and will be the same regardless of the number of
Creation Units purchased by an investor on the same day. The redemption
transaction fees for redemptions in kind and for cash and the additional
variable charge for cash redemptions (when cash redemptions are available or
specified) are listed below. Investors will also bear the costs of transferring
the Fund Securities from the Trust to their account or on their order.
Investors who use the services of a broker or other such intermediary may be
charged a fee for such services.
--------------------------------------------------------------------------------
Creation and Redemption of Creation Unit Aggregations
page 47
<PAGE>
The following table sets forth the redemption transaction fee for each of the
Funds.
<TABLE>
<CAPTION>
Maximum
Redemption
Transaction
Name of Fund Amount Fee*
------------ ------- -----------
<S> <C> <C>
iShares S&P 500 Index Fund $ 2,000 $ 8,000
iShares S&P 500/BARRA Growth Index Fund $ 500 $ 2,000
iShares S&P 500/BARRA Value Index Fund $ 1,500 $ 6,000
iShares S&P MidCap 400 Index Fund $ 1,500 $ 6,000
iShares S&P MidCap 400/BARRA Growth Index Fund $ 500 $ 2,000
iShares S&P MidCap 400/BARRA Value Index Fund $ 1,250 $ 5,000
iShares S&P SmallCap 600 Index Fund $ 2,500 $10,000
iShares S&P SmallCap 600/BARRA Growth Index Fund $ 750 $ 3,000
iShares S&P SmallCap 600/BARRA Value Index Fund $ 1,750 $ 7,000
iShares S&P 100 Index Fund $ 500 $ 2,000
iShares S&P Europe 350 Index Fund $12,000 $48,000
iShares S&P/TSE 60 Index Fund $ 1,250 $ 5,000
iShares Dow Jones U.S. Total Market Index Fund $ 8,000 $32,000
iShares Dow Jones U.S. Basic Materials Sector Index Fund $ 500 $ 2,000
iShares Dow Jones U.S. Consumer Cyclical Sector Index Fund $ 1,500 $ 6,000
iShares Dow Jones U.S. Consumer Non-Cyclical Sector Index
Fund $ 500 $ 2,000
iShares Dow Jones U.S. Energy Sector Index Fund $ 500 $ 2,000
iShares Dow Jones U.S. Financial Sector Index Fund $ 1,500 $ 6,000
iShares Dow Jones U.S. Healthcare Sector Index Fund $ 750 $ 3,000
iShares Dow Jones U.S. Industrial Sector Index Fund $ 1,500 $ 6,000
iShares Dow Jones U.S. Technology Sector Index Fund $ 1,250 $ 5,000
iShares Dow Jones U.S. Telecommunications Sector Index
Fund $ 250 $ 1,000
iShares Dow Jones U.S. Utilities Sector Index Fund $ 500 $ 2,000
iShares Dow Jones U.S. Chemicals Index Fund $ 250 $ 1,000
iShares Dow Jones U.S. Financial Services Index Fund $ 1,000 $ 4,000
iShares Dow Jones U.S. Internet Index Fund $ 250 $ 1,000
iShares Dow Jones U.S. Real Estate Index Fund $ 500 $ 2,000
iShares Russell 3000 Index Fund $11,500 $46,000
iShares Russell 3000 Growth Index Fund $ 7,000 $28,000
iShares Russell 3000 Value Index Fund $ 8,000 $32,000
iShares Russell 2000 Index Fund $ 7,500 $30,000
iShares Russell 2000 Growth Index Fund $ 5,000 $20,000
iShares Russell 2000 Value Index Fund $ 5,000 $20,000
iShares Russell 1000 Index Fund $ 4,000 $16,000
iShares Russell 1000 Growth Index Fund $ 2,000 $ 8,000
iShares Russell 1000 Value Index Fund $ 3,000 $12,000
</TABLE>
* If a Creation Unit is purchased or redeemed outside the usual process through
the National Securities Clearing Corporation or for cash, a variable fee will
be charged of up to four times the Standard Creation or Redemption
Transaction Fee.
Placement of Redemption Orders for Domestic Funds Using Clearing
Process. Orders to redeem Creation Unit Aggregations of Domestic Funds through
the Clearing Process must be delivered through a Participating Party that has
executed the Participant Agreement. An order to redeem Creation Unit
Aggregations using the Clearing Process is deemed received by the Trust on the
Transmittal Date if (i) such order is received by IBT not later than 4:00 p.m.,
Eastern time, on such Transmittal Date, and (ii) all other procedures set forth
in the Participant Agreement are properly followed; such order will be effected
based on the NAV of the Fund as next determined. An order to redeem Creation
Unit Aggregations using the Clearing Process made in proper form but received
by the Trust after 4:00 p.m., Eastern time, will be deemed received on the next
Business Day immediately following the
--------------------------------------------------------------------------------
iShares
page 48
<PAGE>
Transmittal Date and will be effected at the NAV next determined on such
Business Day. The requisite Fund Securities and the Cash Redemption Amount will
be transferred by the third NSCC Business Day following the date on which such
request for redemption is deemed received.
Placement of Redemption Orders for Domestic Funds Outside Clearing
Process. Orders to redeem Creation Unit Aggregations of Domestic Funds outside
the Clearing Process must be delivered through a DTC Participant that has
executed the Participant Agreement. A DTC Participant who wishes to place an
order for redemption of Creation Unit Aggregations to be effected outside the
Clearing Process does not need to be a Participating Party, but such orders
must state that the DTC Participant is not using the Clearing Process and that
redemption of Creation Unit Aggregations will instead be effected through
transfer of iShares directly through DTC. An order to redeem Creation Unit
Aggregations outside the Clearing Process is deemed received by the Trust on
the Transmittal Date if (i) such order is received by IBT not later than 4:00
p.m., Eastern time, on such Transmittal Date; (ii) such order is accompanied or
followed by the requisite number of iShares of the Fund specified in such
order, which delivery must be made through DTC to IBT no later than 11:00 a.m.,
Eastern time, on the next Business Day immediately following such Transmittal
Date (the "DTC Cut-Off-Time"); and (iii) all other procedures set forth in the
Participant Agreement are properly followed. After the Trust has deemed an
order for redemption outside the Clearing Process received, the Trust will
initiate procedures to transfer the requisite Fund Securities which are
expected to be delivered within three Business Days and the Cash Redemption
Amount to the Authorized Participant on behalf of the redeeming Beneficial
Owner by the third Business Day following the Transmittal Date on which such
redemption order is deemed received by the Trust.
Placement of Redemption Orders for Foreign Funds. Orders to redeem Creation
Unit Aggregations of Foreign Funds must be delivered through an Authorized
Participant that has executed a Participant Agreement. Investors other than
Authorized Participants are responsible for making arrangements for a
redemption request to be made through an Authorized Participant. An order to
redeem Creation Unit Aggregations of Foreign Funds is deemed received by the
Trust on the Transmittal Date if (i) such order is received by IBT not later
than 4:00 p.m., Eastern time, on such Transmittal Date; (ii) such order is
accompanied or followed by the requisite number of iShares of the Fund
specified in such order, which delivery must be made through DTC to IBT no
later than the DTC Cut-Off time; and (iii) all other procedures set forth in
the Participant Agreement are properly followed. Deliveries of Fund Securities
to redeeming investors generally will be made within three Business Days. Due
to the schedule of holidays in certain countries, however, the delivery of in-
kind redemption proceeds for Foreign Funds may take longer than three Business
Days after the day on which the redemption request is received in proper form.
In such cases, the local market settlement procedures will not commence until
the end of the local holiday periods. See below for a list of the local
holidays in the foreign countries relevant to the Foreign Funds.
In connection with taking delivery of shares of Fund Securities upon redemption
of iShares of Foreign Funds, a redeeming Beneficial Owner or Authorized
Participant action on behalf of such Beneficial Owner must maintain appropriate
security arrangements with a qualified broker-dealer, bank or other custody
providers in each jurisdiction in which any of the Fund Securities are
customarily traded, to which account such Fund Securities will be delivered.
To the extent contemplated by an Authorized Participant's agreement, in the
event the Authorized Participant has submitted a redemption request in proper
form but is unable to transfer all or part of the Creation Unit Aggregation to
be redeemed to the Distributor, on behalf of the Fund, at or prior to the
closing time of the regular trading session on the NYSE on the date such
redemption request is submitted, the Distributor will nonetheless
--------------------------------------------------------------------------------
Creation and Redemption of Creation Unit Aggregations
page 49
<PAGE>
accept the redemption request in reliance on the undertaking by the Authorized
Participant to deliver the missing iShares as soon as possible, which
undertaking shall be secured by the Authorized Participant's delivery and
maintenance of collateral consisting of cash having a value (marked to market
daily) at least equal to 125% of the value of the missing iShares. The current
procedures for collateralization of missing iShares require, among other
things, that any cash collateral shall be in the form of U.S. dollars in
immediately-available funds and shall be held by IBT and marked to market
daily, and that the fees of IBT and any sub-custodians in respect of the
delivery, maintenance and redelivery of the cash collateral shall be payable by
the Authorized Participant. The Authorized Participant's agreement will permit
the Trust, on behalf of the affected Fund, to purchase the missing iShares or
acquire the Deposit Securities and the Cash Component underlying such shares at
any time and will subject the Authorized Participant to liability for any
shortfall between the cost to the Trust of purchasing such shares, Deposit
Securities or Cash Component and the value of the collateral.
The calculation of the value of the Fund Securities and the Cash Redemption
Amount to be delivered upon redemption will be made by IBT according to the
procedures set forth under Determination of NAV computed on the Business Day on
which a redemption order is deemed received by the Trust. Therefore, if a
redemption order in proper form is submitted to IBT by a DTC Participant not
later than Closing Time on the Transmittal Date, and the requisite number of
iShares of the relevant Fund are delivered to IBT prior to the DTC Cut-Off-
Time, then the value of the Fund Securities and the Cash Redemption Amount to
be delivered will be determined by IBT on such Transmittal Date. If, however, a
redemption order is submitted to IBT by a DTC Participant not later than the
Closing Time on the Transmittal Date but either (i) the requisite number of
iShares of the relevant Fund are not delivered by the DTC Cut-Off-Time, as
described above, on such Transmittal Date, or (ii) the redemption order is not
submitted in proper form, then the redemption order will not be deemed received
as of the Transmittal Date. In such case, the value of the Fund Securities and
the Cash Redemption Amount to be delivered will be computed on the Business Day
that such order is deemed received by the Trust, i.e., the Business Day on
which the iShares of the relevant Fund are delivered through DTC to IBT by the
DTC Cut-Off-Time on such Business Day pursuant to a properly submitted
redemption order.
If it is not possible to effect deliveries of the Fund Securities, the Trust
may in its discretion exercise its option to redeem such iShares in cash, and
the redeeming Beneficial Owner will be required to receive its redemption
proceeds in cash. In addition, an investor may request a redemption in cash
that the Fund may, in its sole discretion, permit. In either case, the investor
will receive a cash payment equal to the NAV of its iShares based on the NAV of
iShares of the relevant Fund next determined after the redemption request is
received in proper form (minus a redemption transaction fee and additional
charge for requested cash redemptions specified above, to offset the Trust's
brokerage and other transaction costs associated with the disposition of Fund
Securities). A Fund may also, in its sole discretion, upon request of a
shareholder, provide such redeemer a portfolio of securities that differs from
the exact composition of the Fund Securities but does not differ in NAV.
Redemptions of iShares for Fund Securities will be subject to compliance with
applicable federal and state securities laws and each Fund (whether or not it
otherwise permits cash redemptions) reserves the right to redeem Creation Unit
Aggregations for cash to the extent that the Trust could not lawfully deliver
specific Fund Securities upon redemptions or could not do so without first
registering the Fund Securities under such laws. An Authorized Participant or
an investor for which it is acting subject to a legal restriction with respect
to a particular stock included in the Fund Securities applicable to the
redemption of a Creation Unit Aggregation may be paid an equivalent amount of
cash. The Authorized Participant may request the redeeming Beneficial Owner of
the iShares to complete an order form or to enter into agreements with respect
to such matters as compensating cash payment.
--------------------------------------------------------------------------------
iShares
page 50
<PAGE>
Because the Portfolio Securities of a Foreign Fund may trade on the relevant
exchange(s) on days that the NYSE is closed or are otherwise not Business Days
for such Foreign Fund, stockholders may not be able to redeem their shares of
such Foreign Fund, or to purchase and sell iShares of such Foreign Fund on the
AMEX or the CBOE, on days when the NAV of such Foreign Fund could be
significantly affected by events in the relevant foreign markets.
Foreign Market Hours
<TABLE>
<S> <C>
Australia
Primary Exchange Trading Hours: Monday through Friday, 10:00 a.m. to 4:00
p.m.
Closing Single Price Auction: 4:00 p.m. to 4:05 p.m.
Late trading daily: 4:05 p.m. to 7:00 p.m.
Austria
Primary Exchange Trading Hours: Monday through Friday, 9:16 a.m. to 3:00 p.m.
Electronic Quote Delivery Service
(EQOS): 9:30 a.m. to 3:00 p.m. (Other trading)
Belgium
Primary Exchange Trading Hours: Monday through Friday, 10:00 a.m. to 4:45
p.m.
Brazil
Primary Exchange Trading Hours: Monday through Friday, 11:30 a.m. to 1:00
p.m.;
2:30 p.m. to 6:00 p.m.
Canada
Primary Exchange Trading Hours: Monday through Friday, 9:30 a.m. to 4:00 p.m.
Chile
Primary Exchange Trading Hours: Monday through Friday, 9:30 a.m. to 5:30 p.m.
Denmark
Primary Exchange Trading Hours: Monday through Friday, 9:00 a.m. to 5:00 p.m.
Finland
Primary Exchange Trading Hours: Monday through Friday 10:30 a.m. to 5:30 p.m.
Continuous trading (Preceded by
a 10 min pre-matching period)
France
Primary Exchange Trading Hours: Monday through Friday, 8:30 a.m. to 10:00
a.m.
(Pre-market) 10:00 a.m. to 5:05
p.m.
Germany
Primary Exchange Trading Hours: Monday through Friday, 8:30 a.m. to 5:00 p.m.
Greece
Primary Exchange Trading Hours: Monday through Friday, 10:45 a.m. to 1:30
p.m.
(Pre-trading 10:15 a.m. to 10:45 a.m.)
Hong Kong
Primary Exchange Trading Hours: Monday through Friday, 10:00 a.m. to 12:30
p.m./ 2:30 p.m. to 4:00 p.m.
Indonesia
Primary Exchange Trading Hours: Monday through Thursday, 9:30 a.m. to
12:00 p.m.; 1:30 p.m. to 4:00 p.m. Friday;
9:30 a.m. to 11:30 a.m. and 2:00 p.m. to 4:00
p.m.
Ireland
Primary Exchange Trading Hours: Monday through Friday, 8:30 a.m. to 5:30 p.m.
Italy
Primary Exchange Trading Hours: Monday through Friday, 8:00 a.m. to 9:30 a.m.
(Pre-open)/ 9:30-5:45 (Trading)
Japan
Primary Exchange Trading Hours: Monday through Friday, 9:30 a.m. to
11:00a.m./ 12:30 pm to 3:00 pm (Osaka has a
10 min pre & post session)
</TABLE>
--------------------------------------------------------------------------------
Creation and Redemption of Creation Unit Aggregations
page 51
<PAGE>
<TABLE>
<S> <C>
Mexico
Primary Exchange Trading Hours: Monday through Friday, 8:30 a.m. to 3:00 p.m.
Netherlands
Primary Exchange Trading Hours: Monday through Friday, 9:30 a.m. to 4:30 p.m.
New Zealand
Primary Exchange Trading Hours: Monday through Friday, 8:30 a.m. to 9:30 a.m.
(Pre-market)
9:30 a.m. to 3:30 p.m.
Norway
Primary Exchange Trading Hours: Monday through Friday, 10:00 a.m. to 4:00
p.m.
(with 1/2 hour, pre-market
matching session).
Philippines
Primary Exchange Trading Hours: Monday through Friday, 9:30 a.m. to 12:00
p.m.
There is a 10 minute extension at
the close.
Portugal
Primary Exchange Trading Hours: Monday through Friday, 8:30 a.m. to 4:30 p.m.
Singapore
Primary Exchange Trading Hours: Monday through Friday, 9:00 a.m. to 12:30
p.m./ 2:00 p.m. to 5:00 p.m.
South Africa
Primary Exchange Trading Hours: Monday through Friday, 9:30 a.m. to 1:00
p.m./ 2:00 p.m. to 4:30 p.m.
South Korea
Primary Exchange Trading Hours: Monday through Friday, 9:30 a.m. to 12:00
p.m./ 1:00 p.m. to 3:00 p.m. After-hours
session 3:10 p.m. to 3:40 p.m.
Spain
Primary Exchange Trading Hours: Monday through Friday, 9:00 a.m. to 10:00
a.m.
(Pre-opening) 10:00 a.m. to 5:00
p.m. (Trading)
Sweden
Primary Exchange Trading Hours: Monday through Friday, 10:00 a.m. to 5:00
p.m.
Switzerland
Primary Exchange Trading Hours: Monday through Friday, 9:00 a.m. to 5:00 p.m.
Taiwan
Primary Exchange Trading Hours: Monday through Friday, 9:00 a.m. to 12:00
p.m.
Saturday, 9:00 a.m. to 11:00 a.m.
(Closed 2nd & 4th Saturday of
each month)
Thailand
Primary Exchange Trading Hours: Monday through Friday, 10:00 a.m. to 12:30
p.m./ 2:30 p.m. to 4:30 p.m.
United Kingdom
Primary Exchange Trading Hours: Monday through Friday, 9:00 a.m. to 4:30 p.m.
United States
Primary Exchange Trading Hours: Monday through Friday, 9:00 a.m. to 4:00 p.m.
(NASDAQ) 9:30 a.m. to 4:00 p.m.
(NYSE)
Venezuela
Primary Exchange Trading Hours: Monday through Friday, 9:45 a.m. to 2:00 p.m.
</TABLE>
--------------------------------------------------------------------------------
iShares
page 52
<PAGE>
Regular Holidays. The dates in calendar year 2000 in which the regular holidays
affecting the relevant securities markets of the below listed countries are as
follows:
<TABLE>
<S> <C> <C>
Australia
January 3 April 24 August 7
January 26 April 25 December 25
April 21 June 12 December 26
Austria
January 6 June 12 December 8
April 21 June 22 December 24
April 24 August 15 December 25
May 1 October 26 December 29
June 1 November 1
Belgium
April 24 June 12 November 1
May 1 July 21 December 25
June 1 August 15 December 26
Brazil
March 6 May 1 October 12
March 7 June 22 November 2
April 21 September 7 November 15
December 25
Canada
January 3 July 3 October 9
April 21 August 7 December 25
May 22 September 4 December 26
Chile
April 21 August 15 October 12
May 1 September 4 November 1
June 22 September 18 December 8
June 28 September 19 December 25
Denmark
April 20 May 19 June 10
April 21 June 1 December 24
April 24 June 5 December 25
December 26
Finland
January 6 April 24 June 23
April 20 (early close) May 1 December 6
April 21 June 1 December 25
December 26
France
April 21 June 1 November 1
April 24 June 12 December 25
May 1 July 14 December 26
May 8 August 15
Germany
April 21 June 1 October 3
April 24 June 12 December 25
May 1 June 22 December 26
Greece
January 6 May 1 December 25
March 13 June 19 December 26
April 28 August 15
</TABLE>
--------------------------------------------------------------------------------
Creation and Redemption of Creation Unit Aggregations
page 53
<PAGE>
<TABLE>
<S> <C> <C>
Hong Kong
February 4 April 24 September 13
February 7 May 1 October 2
April 4 May 11 October 6
April 21 June 6 December 25
Indonesia
March 16 May 18 October 25
April 4 June 1 December 25
April 6 June 15 December 27
April 21 August 17 December 28
Ireland
January 3 April 24 August 7
March 17 May 1 October 30
April 21 June 5 December 25
December 26
Italy
April 24 August 15 December 8
May 1 November 1 December 25
December 26
Japan
January 3 May 3 September 15
January 10 May 4 October 9
February 11 May 5 November 3
March 20 July 20 November 23
Korea
January 3 May 1 August 15
February 4 May 5 September 11
March 1 May 11 September 12
April 5 June 6 September 13
April 13 July 17 October 3
December 25
Mexico
March 21 May 1 December 12
April 20 May 5 December 25
April 21 December 1
Netherlands
April 21 May 5 June 12
April 24 June 1 December 25
December 26
New Zealand
January 3 April 21 June 5
January 4 April 24 October 23
January 24 April 25 December 25
December 26
Norway
April 20 April 21 April 24
May 1 June 1 December 25
May 17 June 12 December 26
Philippines
February 25 May 1 November 2
April 20 June 12 November 30
April 21 November 1 December 25
</TABLE>
--------------------------------------------------------------------------------
iShares
page 54
<PAGE>
<TABLE>
<S> <C> <C>
Portugal
March 7 May 1 November 1
April 21 June 22 December 1
April 24 August 15 December 8
April 25 October 5 December 25
Singapore
February 7 May 1 October 26
March 16 May 18 December 25
April 21 August 9 December 27
South Africa
January 3 April 27 August 9
March 21 May 1 September 25
April 21 June 16 December 25
December 26
Spain
January 6 May 1 December 6
April 21 October 12 December 8
April 24 November 1 December 25
December 26
Sweden
January 6 May 1 June 23
April 21 June 1 December 25
April 24 June 12 December 26
Switzerland
January 3 May 1 August 1
April 21 June 1 December 25
April 24 June 12 December 26
Taiwan (includes Saturday Trading)
January 1 April 3 September 9
January 3 April 4 September 12
January 8 April 8 September 23
January 22 April 22 October 10
February 2 May 1 October 14
February 3 May 13 October 28
February 4 May 27 November 11
February 5 June 6 November 25
February 7 June 10 December 9
February 12 June 24 December 23
February 26 July 8 December 25
February 28 July 22
March 11 August 12
March 25 August 26
Thailand
January 3 May 1 October 23
February 21 May 5 December 5
April 6 May 17 December 11
April 13 July 17
April 14 August 14
United Kingdom
January 3 May 1 December 25
April 21 May 29 December 26
April 24 August 28
</TABLE>
--------------------------------------------------------------------------------
Creation and Redemption of Creation Unit Aggregations
page 55
<PAGE>
<TABLE>
<S> <C> <C>
United States
January 17 May 29 October 9
February 21 July 4 November 10
April 21 September 4 November 23
December 25
Venezuela
January 3 June 5 November 6
March 6 June 26 December 11
March 7 July 3 December 25
April 19 July 5
</TABLE>
Settlement Periods Greater than Seven Days for Year 2000
<TABLE>
<CAPTION>
# of
Settlement Trade Calendar
Country Period Date Settlement Days
------- -------------- -------- ---------- --------
<S> <C> <C> <C> <C>
Belgium Forward Market 12/11/00 12/27 16
Stocks:
<CAPTION>
End of a two
week period
<S> <C> <C> <C> <C>
Denmark T+3 4/17/00 4/25/00 8
France Last day 8/1/00 8/31/00 30
of acct
trading
month
Germany T+5 12/18/00 12/27/00 9
United Kingdom T+5 12/18/00 12/27/00 9
Italy T+5 12/18/00 12/27/00 9
Norway T+3 4/17/00 4/25/00 8
</TABLE>
--------------------------------------------------------------------------------
iShares
page 56
<PAGE>
Taxes
The following information also supplements and should be read in conjunction
with the section in the Prospectus entitled Taxes.
Each Fund intends to qualify for and to elect treatment as a separate Regulated
Investment Company ("RIC") under Subchapter M of the Internal Revenue Code (the
"Code"). To qualify for treatment as a RIC, a company must annually distribute
at least 90% of its net investment company taxable income (which includes
dividends, interest and net short-term capital gains) and meet several other
requirements. Among such other requirements are the following: (i) at least 90%
of the company's annual gross income must be derived from dividends, interest,
payments with respect to securities loans, gains from the sale or other
disposition of stock or securities or foreign currencies, or other income
(including gains from options, futures or forward contracts) derived with
respect to its business of investing in such stock, securities or currencies;
and (ii) at the close of each quarter of the company's taxable year, (a) at
least 50% of the market value of the company's total assets must be represented
by cash and cash items, U.S. government securities, securities of other
regulated investment companies and other securities, with such other securities
limited for purposes of this calculation in respect of any one issuer to an
amount not greater than 5% of the value of the company's assets and not greater
than 10% of the outstanding voting securities of such issuer, and (b) not more
than 25% of the value of its total assets may be invested in the securities of
any one issuer or of two or more issuers that are controlled by the company
(within the meaning of Section 851(b)(3)(B) of the Code) and that are engaged
in the same or similar trades or businesses or related trades or businesses
(other than U.S. government securities or the securities of other regulated
investment companies).
A Fund will be subject to a 4% excise tax on certain undistributed income if it
does not distribute to its shareholders in each calendar year at least 98% of
its ordinary income for the calendar year plus 98% of its capital gain net
income for the twelve months ended October 31 of such year. Each Fund intends
to declare and distribute dividends and distributions in the amounts and at the
times necessary to avoid the application of this 4% excise tax.
Each Fund, but in particular the iShares Europe 350 Index Fund and the iShares
S&P/TSE 60 Index Fund, may be subject to foreign income taxes withheld at
source. Each Fund that is permitted to do so will elect to "pass through" to
its investors the amount of foreign income taxes paid by the Fund provided that
the investor held the iShares of the Fund, and the Fund held the security, on
the dividend settlement date and for at least fourteen additional days
immediately before and/or thereafter, with the result that each investor will
(i) include in gross income, even though not actually received, the investor's
pro rata share of the Fund's foreign income taxes, and (ii) either deduct (in
calculating U.S. taxable income) or credit (in calculating U.S. federal income
tax) the investor's pro rata share of the Fund's foreign income taxes. A
foreign tax credit may not exceed the investor's U.S. federal income tax
otherwise payable with respect to the investor's foreign source income. For
this purpose, each shareholder must treat as foreign source gross income (i)
his proportionate share of foreign taxes paid by the Fund and (ii) the portion
of any dividend paid by the Fund that represents income derived from foreign
sources; the Fund's gain from the sale of securities will generally be treated
as U.S. source income. This foreign tax credit limitation is applied separately
to separate categories of income; dividends from the Fund will be treated as
"passive" or "financial services" income for this purpose. The effect of this
limitation may be to prevent investors from claiming as a credit the full
amount of their pro rata share of the Fund's foreign income taxes.
--------------------------------------------------------------------------------
page 57
<PAGE>
If any Fund owns shares in certain foreign investment entities, referred to as
"passive foreign investment companies", the Fund will be subject to one of the
following special tax regimes: (i) the Fund is liable for U.S. federal income
tax, and an additional charge in the nature of interest, on a portion of any
"excess distribution" from such foreign entity or any gain from the disposition
of such shares, even if the entire distribution or gain is paid out by the Fund
as a dividend to its shareholders; (ii) if the Fund were able and elected to
treat a passive foreign investment company as a "qualified electing fund", the
Fund would be required each year to include in income, and distribute to
shareholders in accordance with the distribution requirements set forth above,
the Fund's pro rata share of the ordinary earnings and net capital gains of the
passive foreign investment company, whether or not such earnings or gains are
distributed to the Fund; or (iii) the Fund may be entitled to mark-to-market
annually the shares of the passive foreign investment company, and, in such
event, would be required to distribute to shareholders any such mark-to-market
gains in accordance with the distribution requirements set forth above.
The Trust on behalf of each Fund has the right to reject an order for a
purchase of iShares if the purchaser (or group of purchasers) would, upon
obtaining the iShares so ordered, own 80% or more of the outstanding iShares of
a given Fund and if, pursuant to section 351 of the Code, that Fund would have
a basis in the securities different from the market value of such securities on
the date of deposit. The Trust also has the right to require information
necessary to determine beneficial share ownership for purposes of the 80%
determination.
The foregoing discussion is a summary only and is not intended as a substitute
for careful tax planning. Purchasers of iShares should consult their own tax
advisors as to the tax consequences of investing in such shares, including
under state, local and foreign tax laws. Finally, the foregoing discussion is
based on applicable provisions of the Code, regulations, judicial authority and
administrative interpretations in effect on the date hereof. Changes in
applicable authority could materially affect the conclusions discussed above,
and such changes often occur.
Federal Tax Treatment of Futures and Options Contracts. Each Fund is required,
for federal income tax purposes, to mark-to-market and recognize as income for
each taxable year its net unrealized gains and losses on certain futures and
options contracts as of the end of the year as well as those actually realized
during the year. Gain or loss from futures and options contracts on broad-based
indices required to be marked-to-market will be 60% long-term and 40% short-
term capital gain or loss. Application of this rule may alter the timing and
character of distributions to shareholders. A Fund may be required to defer the
recognition of losses on futures contracts, option contracts and swaps to the
extent of any unrecognized gains on offsetting positions held by the Fund.
In order for a Fund to continue to qualify for federal income tax treatment as
a RIC, at least 90% of its gross income for a taxable year must be derived from
qualifying income, i.e., dividends, interest, income derived from loans of
securities, gains from the sale of securities or of foreign currencies or other
income derived with respect to the Fund's business of investing in securities.
It is anticipated that any net gain realized from the closing out of futures or
options contracts will be considered qualifying income for purposes of the 90%
requirement.
Each Fund intends to distribute to shareholders annually any net capital gains
that have been recognized for federal income tax purposes (including unrealized
gains at the end of the Fund's fiscal year) on futures or options transactions.
Such distributions are combined with distributions of capital gains realized on
the Fund's other investments and shareholders are advised on the nature of the
distributions.
The foregoing is only a summary of certain material tax consequences affecting
each Fund and shareholders. Shareholders are advised to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in each Fund.
--------------------------------------------------------------------------------
iShares
page 58
<PAGE>
Determination of NAV
The following information supplements and should be read in conjunction with
the section in the Prospectus entitled Determining NAV.
The NAV per iShare of each Fund is computed by dividing the value of the net
assets of such Fund (i.e., the value of its total assets less total
liabilities) by the total number of iShares of such Fund outstanding, rounded
to the nearest cent. Expenses and fees, including without limitation, the
management, administration and distribution fees, are accrued daily and taken
into account for purposes of determining NAV. The NAV of per iShare for each
Fund is calculated by IBT and determined as of the close of the regular trading
session on the NYSE (ordinarily 4:00 p.m., Eastern time) on each day that such
exchange is open.
In computing a Fund's NAV, the Fund's securities holdings are valued based on
their last quoted current price. Price information on listed securities is
taken from the exchange where the security is primarily traded. Securities
regularly traded in an over-the-counter market are valued at the latest quoted
bid price in such market. Other portfolio securities and assets for which
market quotations are not readily available are valued based on fair value as
determined in good faith by BGFA in accordance with procedures adopted by
the Board.
--------------------------------------------------------------------------------
page 59
<PAGE>
Dividends and Distributions
The following information supplements and should be read in conjunction with
the section in the Prospectus entitled Shareholder Information.
General Policies. Dividends from net investment income, if any, are declared
and paid at least annually by each 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 certain Funds. The
Trust reserves the right to declare special distributions if, in its reasonable
discretion, such action is necessary or advisable to preserve the status of
each Fund as a RIC or to avoid imposition of income or excise taxes on
undistributed income.
Dividends and other distributions on iShares are distributed, as described
below, on a pro rata basis to Beneficial Owners of such iShares. Dividend
payments are made through DTC Participants and Indirect Participants to
Beneficial Owners then of record with proceeds received from the Funds.
Dividend Reinvestment Service. No 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 Funds 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 iShares of the same Fund purchased in the
secondary market.
--------------------------------------------------------------------------------
iShares
page 60
<PAGE>
Performance and Other Information
The performance of the Funds may be quoted in advertisements, sales literature
or reports to shareholders in terms of average annual total return and
cumulative total return.
Quotations of average annual total return are expressed in terms of the average
annual rate of return of a hypothetical investment in a Fund over periods of 1,
5 and 10 years (or the life of a Fund, if shorter). Such total return figures
will reflect the deduction of a proportional share of such Fund's expenses on
an annual basis, and will assume that all dividends and distributions are
reinvested when paid.
Average annual total return is calculated according to the following formula:
P(1 + T)/n/ = ERV (where P = a hypothetical initial payment of $1,000, T = the
average annual total return, n = the number of years and ERV = the ending
redeemable value of a hypothetical $1,000 payment made at the beginning of the
1, 5 or 10 year period or fractional portion).
Quotations of a cumulative total return will be calculated for any specified
period by assuming a hypothetical investment in a Fund on the date of the
commencement of the period and will assume that all dividends and distributions
are reinvested on ex date. However, currently the Trust does not make a
dividend reinvestment option available to shareholders of iShares and such
calculation is provided for informational purposes only. The net increase or
decrease in the value of the investment over the period will be divided by its
beginning value to arrive at cumulative total return. Total return calculated
in this manner will differ from the calculation of average annual total return
in that it will not be expressed in terms of an average rate of return.
Quotations of cumulative total return or average annual total return reflect
only the performance of a hypothetical investment in a Fund during the
particular time period on which the calculations are based. Such quotations for
a Fund will vary based on changes in market conditions and the level of such
Fund's expenses, and no reported performance figure should be considered an
indication of performance that may be expected in the future.
The cumulative and average total returns do not take into account federal or
state income taxes which may be payable; total returns would, of course, be
lower if such charges were taken into account.
Whenever the Trust calculates total return using the market values of iShares
as reported by the Listing Exchange, it will also calculate a similar total
return using the relevant Fund's NAV. The Trust may also provide reported
closing price data for iShares and calculations of any applicable premiums or
discounts against NAV on its website and in the Trust prospectuses and annual
reports.
A comparison of the quoted non-standard performance offered for various
investments is valid only if performance is calculated in the same manner.
Because there are different methods for calculating performance, investors
should consider the effects of the methods used to calculate performance when
comparing performance of a Fund with performance quoted with respect to other
investment companies or types of investments.
Because some or all of certain Fund's investments are denominated in foreign
currencies, the strength or weakness of the U.S. dollar as against these
currencies may account for part of such a Fund's investment performance.
Historical information on the value of the dollar versus foreign currencies may
be used from time to time in advertisements. Such historical information is not
indicative of future fluctuations in the value of the U.S. dollar against these
currencies. In addition, marketing materials may cite country and economic
--------------------------------------------------------------------------------
page 61
<PAGE>
statistics and historical stock market performance information for any of the
countries in which a Fund invests, including, but not limited to, the
following: population growth, gross domestic product, inflation rate, average
stock market price-earnings ratios and the total value of stock markets.
Sources for such statistics may include official publications of various
foreign governments and exchanges.
From time to time, in advertising and marketing literature, a Fund's
performance may be compared to the performance of broad groups of open-end and
closed-end investment companies with similar investment goals, as tracked by
independent organizations such as Investment Company Data, Inc., Lipper
Analytical Services, Inc., CDA Investment Technologies, Inc., Morningstar,
Inc., Value Line Mutual Fund Survey and other independent organizations. When
these organizations' tracking results are used, a Fund will be compared to the
appropriate fund category, that is, by fund objective and portfolio holdings,
or to the appropriate volatility grouping, where volatility is a measure of a
fund's risk.
In addition, in connection with the communication of its performance to current
or prospective shareholders, a Fund also may compare those figures to the
performance of certain unmanaged indices which may assume the reinvestment of
dividends or interest but generally do not reflect deductions for
administrative and management costs. Examples of such indices include, but are
not limited to the following:
. Dow Jones Industrial Average
. Consumer Price Index
. Standard & Poor's 500 Composite Stock Price Index (S&P 500)
. NASDAQ OTC Composite Index
. NASDAQ Industrials Index
. International Finance Corporation's (Global) Composite and (Investable)
Composite Indices
. Morgan Stanley Capital International Indices
. NASDAQ Composite Index
. Wilshire 5000 Stock Index
--------------------------------------------------------------------------------
iShares
page 62
<PAGE>
Miscellaneous Information
Counsel. Morgan, Lewis & Bockius, LLP, Washington, D.C., is counsel to the
Trust.
Independent Auditors. PricewaterhouseCoopers LLP, located at 333 Market Street,
San Francisco, CA 94105, serve as the independent auditors and accountants of
the Trust. They audit the Funds' financial statements and perform other related
audit services.
--------------------------------------------------------------------------------
page 63
<PAGE>
Financial Statements
Report of Independent Accountants
To the Shareholder and Board of Trustees
of iShares Russell 3000 Value Index Fund
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of the iShares Russell
3000 Value Index Fund at April 24, 2000, in conformity with accounting
principles generally accepted in the United States. This financial statement is
the responsibility of the Fund's management; our responsibility is to express
an opinion on this financial statement based on our audit. We conducted our
audit of this financial statement in accordance with auditing standards
generally accepted in the United States which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statement
is free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
Dated: April 24, 2000 /s/ PricewaterhouseCoopers LLP
-------------------------------------
PricewaterhouseCoopers LLP
<TABLE>
<S> <C>
ASSETS:
Cash................................................................... $100,000
Total Assets........................................................... 100,000
--------
LIABILITIES:
Total Liabilities...................................................... 0
--------
NET ASSETS............................................................. $100,000
========
Net assets consist of:
Paid-in Capital........................................................ $100,000
--------
NET ASSETS............................................................. $100,000
========
Shares outstanding..................................................... 10,000
========
NET ASSET VALUE........................................................ $ 10.00
========
</TABLE>
See Notes to Statement of Assets and Liabilities
NOTE 1: Organization
iShares Trust (the "Trust") is organized as a Delaware business trust pursuant
to a Declaration of Trust dated December 16, 1999, and has had no operations as
of the date hereof other than matters relating to its organization and
registration as an investment company under the Investment Company Act of 1940
and the Securities Act of 1933 and the sale and issuance of 10,000 shares of
beneficial interest of the iShares Russell 3000 Value Index Fund (the Fund), a
series of the Trust, to SEI Investments Distribution Co. (the "Distributor").
The Trust currently offers thirty five funds; the iShares S&P 500 Index Fund,
iShares S&P 500/BARRA Growth Index Fund, iShares S&P 500/BARRA Value Index
Fund, iShares S&P MidCap 400 Index Fund, iShares S&P MidCap 400/BARRA Growth
Index Fund, iShares S&P MidCap 400/BARRA Value Index Fund, iShares S&P SmallCap
600 Index
--------------------------------------------------------------------------------
iShares
page 64
<PAGE>
Fund, iShares S&P SmallCap 600/BARRA Growth Index Fund, iShares S&P SmallCap
600/BARRA Value Index Fund, iShares S&P Europe 350 Index Fund, iShares S&P/TSE
60 Index Fund, iShares Dow Jones U.S. Total Market Index Fund, iShares Dow
Jones U.S. Basic Materials Sector Index Fund, iShares Dow Jones U.S. Consumer
Cyclical Sector Index Fund, iShares Dow Jones U.S. Consumer Non-Cyclical Sector
Index Fund, iShares Dow Jones U.S. Energy Sector Index Fund, iShares Dow Jones
U.S. Financial Sector Index Fund, iShares Dow Jones U.S. Healthcare Sector
Index Fund, iShares Dow Jones U.S. Industrial Sector Index Fund, iShares Dow
Jones U.S. Technology Sector Index Fund, iShares Dow Jones U.S.
Telecommunications Sector Index Fund, iShares Dow Jones U.S. Utilities Sector
Index Fund, iShares Dow Jones U.S. Chemicals Index Fund, iShares Dow Jones U.S.
Financial Services Index Fund, iShares Dow Jones U.S. Internet Index Fund,
iShares Dow Jones U.S. Real Estate Index Fund, iShares Russell 3000 Index Fund,
iShares Russell 3000 Growth Index Fund, iShares Russell 3000 Value Index Fund,
iShares Russell 2000 Index Fund, iShares Russell 2000 Growth Index Fund,
iShares Russell 2000 Value Index Fund, iShares Russell 1000 Index Fund, iShares
Russell 1000 Growth Index Fund and iShares Russell 1000 Value Index Fund
(collectively the "Funds").
NOTE 2: Significant Accounting Policies
Use of Estimates--The preparation of this financial statement in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of this financial statement. Actual results could
differ from those estimates.
Federal Income Taxes--The Fund intends to qualify as a "regulated investment
company" under Subchapter M of the Internal Revenue Code. If so qualified, the
Fund will not be subject to federal income tax to the extent it distributes
substantially all of its net investment income and capital gains to
shareholders.
NOTE 3: Investment Advisory and Other Agreements
Barclays Global Fund Advisors ("BGFA") serves as investment advisor and
provides investment guidance and policy direction to the Fund. For its services
to the iShares Russell 3000 Value Index Fund, BGFA will receive an annual
Management Fee based on .25% of the Fund's average daily net assets. The
Management Fee covers all expenses of the Fund, including the cost of transfer
agency, custody, fund administration, legal, audit and other services, except
interest, taxes, brokerage commissions and other expenses connected with the
execution of portfolio transactions (which are included in NAV), distribution
fees and extraordinary expenses.
Investors Bank & Trust Company ("IBT") serves as Administrator, Custodian and
Transfer Agent for the Fund. As compensation for its services, IBT receives a
fee that is accrued daily and paid monthly, based on the Fund's average daily
net assets. This fee is included in the Management fee as defined above.
SEI Investments Distribution Co. serves as the Fund's underwriter and
Distributor of the shares of the Fund, pursuant to a Distribution Agreement.
The Distribution Agreement will continue for two years from its effective date
and is renewable thereafter. The Distributor will deliver the Prospectus and
Statement of Additional Information, if so requested, to persons purchasing
Creation Unit Aggregations and will maintain records of both orders placed with
it and confirmations of acceptance furnished by it. The Distributor is a
broker- dealer registered under the Securities Exchange Act of 1934 and a
member of the National Association of Securities Dealers, Inc. The Distributor
has no role in determining the investment policies of the Funds or determining
which securities are to be purchased or sold by the Fund.
Expenses related to the organization and initial registration of the Trust will
be borne by the BGFA.
--------------------------------------------------------------------------------
Financial Statements
page 65
