BlackRock Asset Management Canada Limited (iShares)

BlackRock Asset Management Canada Limited (iShares)

September 17, 2013 17:05 ET

BlackRock Canada Announces Changes to Forward-Using iShares® ETFs

Following the implementation of these changes, funds will re-open to accept new subscriptions

TORONTO, ONTARIO--(Marketwired - Sept. 17, 2013) -

Announcement relating to the following iShares Funds:

iShares Advantaged U.S. High Yield Bond Index Fund (CAD-Hedged) ("CHB")
iShares Advantaged Short Duration High Income Fund ("CSD")
iShares Advantaged Canadian Bond Index Fund ("CAB")
iShares Broad Commodity Index Fund (CAD-Hedged) ("CBR")
iShares Advantaged Convertible Bond Index Fund ("CVD")
iShares Global Monthly Advantaged Dividend Index Fund ("CYH")
iShares Managed Futures Index Fund ("CMF")

(collectively, the "Forward-using iShares ETFs")

BlackRock Asset Management Canada Limited ("BlackRock Canada"), an indirect, wholly-owned subsidiary of BlackRock, Inc. ("BlackRock"), announced changes today to seven forward-using Canadian iShares exchange-traded funds ("ETFs") in response to proposed new federal taxation rules first introduced in conjunction with the 2013 Federal Budget (the "Proposed Amendments").

If enacted as proposed, the Proposed Amendments, which were initially outlined on March 21, 2013 (the "Budget Date") by the Department of Finance (Canada) and subsequently released in the form of draft legislation on September 13, 2013, would eliminate the ability of investment funds to use forward agreements to convert fully-taxable ordinary income to capital gains ("character conversion transactions"). The Proposed Amendments generally apply to forward agreements entered into on or after the Budget Date, so that in certain circumstances (generally depending on the term and notional amount of the forward agreement), forward agreements that existed prior to the Budget Date, or replacements of such agreements that have a final settlement date that is before 2015, will be "grandfathered", meaning that the Proposed Amendments will not apply to them. The forward agreements (the "Legacy Forwards") of the Forward-using iShares ETFs that were in effect as of the Budget Date or, in the case of CYH, that replaced a forward agreement then in effect, are currently grandfathered. Accordingly, the new rules under the Proposed Amendments would not apply to the Forward-using iShares ETFs during the term of the Legacy Forwards, provided that the Legacy Forwards do not exceed certain prescribed growth limits.

As previously announced, as a result of the initial announcement, each of the Forward-using iShares ETFs has temporarily stopped accepting subscriptions, except in certain limited circumstances. The changes announced today, which we believe are in the best interests of the funds, will enable the Forward-using iShares ETFs (unless otherwise noted below) to resume operating as open-ended ETFs by accepting new subscriptions following their implementation while respecting the growth limits for forward agreements set out in the Proposed Amendments.

"BlackRock has reviewed its affected iShares product range over the past several months to ensure we deliver products that will continue to meet the needs of our clients and play a role in today's investment portfolios," says Mary Anne Wiley, Managing Director, Head of iShares, BlackRock Canada. "Decisions about our mix of products are based on a variety of factors including fit within an investment portfolio, operational structure and complexities and client demand."

The seven Forward-using iShares ETFs represent approximately 3% of assets under management out of iShares Canada's line-up of 90-plus ETFs. Overall, changes will be made to six of the seven Forward-using iShares ETFs: CHB, CSD, CAB, CBR, CVD and CYH, while CMF, the seventh affected fund, will be terminated. With respect to CHB and CSD, BlackRock Canada will change each fund's investment strategy to pursue a new interim hybrid investment strategy as further described below. For CBR, CAB and CVD, their respective Legacy Forwards will be terminated and each fund will change its investment strategy to transition to investing in a portfolio of directly-held securities. CYH's Legacy Forward expires in November 2013, in connection with which BlackRock Canada expects to change its investment strategy to invest in a portfolio of directly-held securities and to change the fund's index.

All changes described below are subject to receipt of any required regulatory or other approvals.

Summary of Proposed Changes

The Hybrid Investment Strategy

Each of CHB and CSD will implement a new interim investment strategy (the "Hybrid Strategy"), through which the funds will preserve their Legacy Forwards until their termination date, while permitting the funds to invest proceeds from the sale of new units in a portfolio of directly-held securities, in accordance with each fund's investment objective.

With the implementation of the Hybrid Strategy, unitholders will continue to benefit from the tax-advantaged (i.e., capital gain) character of that portion of each fund's distributions that are funded through the partial settlement of its Legacy Forward until it is terminated. Upon investing the proceeds from new subscriptions directly through the Hybrid Strategy, BlackRock Canada expects that these tax benefits will diminish over time as each fund accepts new subscriptions and the tax benefit is spread over the fund`s larger asset base. The portion of future distributions derived from each fund's direct investments is expected to be fully taxable as ordinary income (net of allowable expenses).

Following the expiry or earlier termination of each of CHB and CSD's Legacy Forward, BlackRock Canada expects that each fund will invest in a portfolio of directly-held securities in accordance with its investment objective and neither fund will engage in any further character conversion transactions.

iShares Advantaged U.S. High Yield Bond Index Fund (CAD-Hedged)

CHB will preserve its Legacy Forward until its scheduled expiry on January 9, 2015 or earlier termination and, until that time, will implement the Hybrid Strategy described above.

BlackRock Canada expects that CHB will be re-opened to new subscriptions during the fourth quarter of 2013 and will begin implementing the Hybrid Strategy at that time.

iShares Advantaged Short Duration High Income Fund

CSD will preserve its Legacy Forward in relation to the Canadian dollar-denominated classes of units (CSD and CSD.A) until its scheduled expiry on February 24, 2016 or earlier termination and, until that time, will implement the Hybrid Strategy described above.

In connection with implementing the Hybrid Strategy, the U.S. dollar-denominated common units of CSD ("CSD.U") and the U.S. dollar-denominated advisor class units of CSD ("CSD.V" and together with CSD.U, the "USD Units") will be terminated during the fourth quarter of 2013 and the proceeds received from the liquidation of the assets referable to each class of the USD Units, less all liabilities and obligations referable to each class, will be distributed to holders of the respective classes of the USD Units on or after the date of such termination. In addition, the USD Units will be de-listed from the Toronto Stock Exchange (the "TSX") and will no longer be offered and sold by CSD. The Legacy Forward (the "USD Forward") entered into by CSD and a Canadian chartered bank or an affiliate thereof in relation to the USD Units will also be terminated.

The termination of the USD Units will enable CSD to implement the Hybrid Strategy without the operational complexity of operating CSD with four classes of units denominated in two different currencies. Unitholders of CSD.U or CSD.V will be able to continue to access a short duration high yield strategy by purchasing units of CSD or CSD.A on the TSX.

The termination will involve a taxable disposition of USD Units by holders of such units. For unitholders who hold their USD Units as capital property, the disposition will generally result in a capital gain (or capital loss). The tax consequences to CSD and its unitholders of the settlement of the USD Forward is expected to be as described, with respect to CSD's forward agreements generally, in the current prospectus of CSD.

BlackRock Canada expects that CSD will be re-opened to new subscriptions during the fourth quarter of 2013 and will begin implementing the Hybrid Strategy at that time.

iShares Advantaged Canadian Bond Index Fund

iShares Broad Commodity Index Fund (CAD-Hedged)

iShares Advantaged Convertible Bond Index Fund

CAB, CBR and CVD expect to terminate their Legacy Forwards during the fourth quarter of 2013, in each case prior to their scheduled expiration dates. BlackRock Canada has decided to proceed with the early termination of these Legacy Forwards because it expects that going forward the economic value of the tax benefit of maintaining the Legacy Forward is minimal and, in some cases, non-existent once netted against the associated costs incurred by the fund (and, by extension, its unitholders) in maintaining such forwards. At this time, BlackRock Canada believes that the investment exposure provided by each of these funds continues to have merit and relevance to Canadian investors and, as such, the funds will be continued as long-only funds with portfolios of directly-held securities and will continue to be benchmarked to their current indices.

Unitholders of CAB, CBR and CVD are expected to continue to benefit from the tax-advantaged character of such funds' distributions that are funded through the termination and settlement of their Legacy Forwards. Following termination of the Legacy Forwards, distributions to unitholders will no longer have the tax-advantaged character derived through the use of their respective Legacy Forwards.

In connection with the termination of its Legacy Forward, each Forward-using iShares ETF will change its investment strategy such that it will invest directly in and hold the constituent securities of the applicable index in substantially the same proportion as they are reflected in the applicable index or invest directly in a manner that causes the Forward-using iShares ETF to replicate the performance of its current index. The current index for each Forward-using iShares ETF is set out in its prospectus.

iShares Global Monthly Advantaged Dividend Index Fund

CYH's Legacy Forward will expire on November 5, 2013. Unitholders of CYH are expected to continue to benefit from the tax-advantaged character of its distributions that are funded through the final settlement of its Legacy Forward.

In connection with the expiry or earlier termination of its Legacy Forward, CYH will change its investment strategy such that it will invest directly in and hold the constituent securities of the applicable index in substantially the same proportion as they are reflected in the applicable index or invest directly in a manner that causes CYH to replicate the performance of the applicable index.

In addition, in connection with the expiry or earlier termination of the Legacy Forward, BlackRock Canada expects to change CYH's index from the Zacks Global Multi-Asset Income Index (the "Current Index") to the Dow Jones Global Select Dividend Composite Index Canadian Dollar Hedged (the "New Index"). Both the Current Index and the New Index seek to provide exposure to a diversified representation of high-yielding global securities in similar industries and geographies and have a high degree of correlation historically.

iShares Managed Futures Index Fund

Managed Futures are a complex asset class that many investors perceive as risky. BlackRock Canada believes in providing products that will help investors build robust portfolios and achieve their investment goals. As such, BlackRock Canada has decided to terminate CMF and expects that this termination will occur in December 2013. The proceeds received from the liquidation of CMF's assets, less all liabilities and obligations of CMF will be distributed to unitholders on or shortly after the termination date.

"As part of our review process, we have decided to close the iShares Managed Futures Index Fund (CMF) as we have seen little long-term demand," said Wiley. "While ETF closures are infrequent, they are part of the natural cycle of innovation of an industry that continues to be embraced by investors."

The units of CMF will be delisted from the TSX in connection with the termination. Following the termination and distribution described above, CMF will be dissolved.

Tax Treatment of the Legacy Forwards

Certain considerations pertaining to the tax treatment of each of the Forward-using iShares ETFs and its forward agreement(s) are set out in the fund's prospectus. The early termination of a Legacy Forward, as described above in respect of certain Forward-using iShares ETFs, will have the effect of accelerating certain tax consequences described in the prospectus of each Forward-using iShares ETF. Unitholders should consult their own tax advisors about the consequences in their particular circumstances of the changes set out in this announcement.

About BlackRock

BlackRock is a leader in investment management, risk management and advisory services for institutional and retail clients worldwide. At June 30, 2013, BlackRock's AUM was US$3.857 trillion. BlackRock helps clients meet their goals and overcome challenges with a range of products that include separate accounts, mutual funds, iShares® (exchange-traded funds), and other pooled investment vehicles. BlackRock also offers risk management, advisory and enterprise investment system services to a broad base of institutional investors through BlackRock Solutions®. Headquartered in New York City, as of June 30, 2013, the firm has approximately 10,700 employees in 30 countries and a major presence in key global markets, including North and South America, Europe, Asia, Australia and the Middle East and Africa. For additional information, please visit the Company's website at www.blackrock.com.

About iShares ETFs

iShares is the global product leader in exchange traded funds with over 600 funds globally across equities, fixed income and commodities, which trade on 20 exchanges worldwide. The iShares Funds are bought and sold like common stocks on securities exchanges. The iShares Funds are attractive to many individual and institutional investors and financial intermediaries because of their relative low cost, tax efficiency and trading flexibility. Investors can purchase and sell shares through any brokerage firm, financial advisor, or online broker, and hold the funds in any type of brokerage account. The iShares customer base consists of the institutional segment of pension plans and fund managers, as well as the retail segment of financial advisors and high net worth individuals.

iShares® Funds are managed by BlackRock Asset Management Canada Limited. Commissions, management fees and expenses all may be associated with investing in iShares Funds. Please read the relevant prospectus before investing. The ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional.

© 2013 BlackRock Asset Management Canada Limited. All rights reserved. iSHARES® and BLACKROCK® are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. Used with permission.

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