Domestic

Small cap and growth outperformance: Despite stronger performance in small cap funds, flows were dominated by large cap ETFs with $2.4 billion of inflows in June. The most popular fund was the iShares S&P 500 Index Fund (IVV) with $648 million of net inflows for the month. The cheaper relative fundamental valuation of large cap stocks as compared with small cap stocks attracted investors’ interest. Growth funds outperformed value funds in June as economic data showed improvements, with an unexpected increase of 1.8%, versus a 0.9% drop expected in May for durable good orders, which measure consumer spending on long-term purchases and provide an early indicator that companies are gaining confidence that the recession is easing. The iShares Russell 2000 Growth Index Fund (IWO), which tracks the small cap growth market, had a monthly return of 3.26% in June. (For standardized returns, please see pages 5 and 6 of this report. Certain sectors and markets may perform exceptionally well based on current market conditions and iShares funds can benefit from that performance. Achieving such exceptional returns involves the risk of volatility and investors should not expect that such results will be repeated.)

Biotech shined as defensive stocks captured the lead: After lagging the broader markets this year, biotechnology was the top performer in June with the iShares Nasdaq Biotechnology Index Fund (IBB) returning 7.1%. Drug approvals, vaccine sales for swine flu and hopes for the healthcare reforms resolution drove the performance for the month. (For standardized returns, please see pages 5 and 6 of this report. Certain sectors and markets may perform exceptionally well based on current market conditions and iShares funds can benefit from that performance. Achieving such exceptional returns involves the risk of volatility and investors should not expect that such results will be repeated.)

International

Chinese stimulus packages begin to take hold: Chinese equities gained in the month, driven by optimism that the CNY4 trillion (US$586 billion) stimulus package was beginning to restore the world’s third-largest economy. Chinese manufacturing expanded for a third month while inflation remained low, making it easier for banks to lend money and bolster consumption. The iShares FTSE/Xinhua China 25 Index Fund (FXI) reflected this sentiment, returning 4.63% for the month, and gathering US$254 million in assets. (For standardized returns, please see pages 5 and 6 of this report. Certain sectors and markets may perform exceptionally well based on current market conditions and iShares funds can benefit from that performance. Achieving such exceptional returns involves the risk of volatility and investors should not expect that such results will be repeated.)

Fixed Income

US Treasury yields rose modestly across most segments of the yield curve in June with moderate volatility experienced during the month. The yield on the 10-year U.S. Treasury reached 4% on June 11 and subsequently declined to close the month at 3.5%. Since December, however, yields are up sharply reflecting both record supply and investors’ diminished appetite for high quality securities. The yield on the 30-year U.S. Treasury has risen by 165 basis points, resulting in a -23.5% total return for the long bond on a year-to-date basis. The YTD return of the iShares Barclays 20+YearTreasury Bond Fund (TLT) is -19.25%. (For standardized returns, please see pages 5 and 6 of this report. Certain sectors and markets may perform exceptionally well based on current market conditions and iShares funds can benefit from that performance. Achieving such exceptional returns involves the risk of volatility and investors should not expect that such results will be repeated.)

Investors’ appetite for risk remained in full force in June and was most evident in the continued rally of corporate credit, particularly in lower quality securities. Investment grade credit spreads have retraced roughly all of their post-September 2008 widening. The iBoxx $ High Yield Corporate Bond Index posted a total return of 2.85% for June and 21.65% for 2009, while the iBoxx $ Liquid Investment Grade Index returned 2.96% in June and is up 3.57% for the year. As a result, the iShares iBoxx $ High Yield Bond Fund (HYG) and the iShares iBoxx $ Liquid Investment Grade Corporate Bond Fund (LQD) were the top iShares fixed income performers in June.

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