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Construction Rules for the
Morningstar® Exponential
Technologies IndexSM
Morningstar Methodology Paper
Version 1.0 – February 2014
©2014 Morningstar, Inc. All rights reserved. The information in this document is the property of Morningstar, Inc.
Reproduction or transcription by any means, in whole or in part, without the prior written consent of Morningstar, Inc., is
prohibited.
For Professional Use Only
Contents
General Index Characteristics
Overview
3
Inception Dates
3
Calculation and Dissemination of Index Values
3
Scheduled Reconstitution Dates
3
Index Constituents
Exponential Technology Scoring Process
4
Index Selection
5
Index Calculations
Basic Return Formula
6
Divisor Adjustments
6
Adjustments for Corporate Actions
7
Constituent Weight Calculation
7
Trading, Settlement, and Transaction Costs
7
Holiday Rules
7
Data Correction and Precision
Intraday Index Data Corrections
8
Index-Related Data and Divisor Corrections
8
Computational and Reporting Precision
8
Undocumented Events
8
Construction Rules for Morningstar Exponential Technologies Index | Decemberr2014
© 2014 Morningstar, Inc. All rights reserved. The information in this document is the property of Morningstar, Inc. Reproduction or transcription by any
means, in whole or part, without the prior written consent of Morningstar, Inc., is prohibited.
2
General Index Characteristics
Overview
The Morningstar Exponential Technologies Index is designed to provide exposure to
equities identified by Morningstar’s Equity Research team as positioned to experience
meaningful economic benefits as a user or producer of promising technologies.
Inception Dates
The index inception date is when the first back-tested index value was calculated. The
back-test calculations are based on the same methodology that was in effect when the
index was officially launched. The inception date of the Morningstar Exponential
Technologies Index is December. 20, 2013. Daily price, gross, and net return series are
available from this date forward. The base market value of the indexes at inception is set to
1,000.
The index commencement date is when the index is launched with live end-of-day or realtime calculations. The commencement date of the Morningstar Exponential Technologies
Index is February 6, 2015.
Calculation and Dissemination of Index Values
Price return index values are calculated and disseminated electronically at 15-second
intervals. End-of-day index values are available for total and net return variants. Daily and
monthly price, gross, and net return index values are distributed via various data channels
and are available on the Morningstar Indexes website:
www.corporate.morningstar.com/indexes.
Scheduled Reconstitution Dates
The index is reconstituted—i.e., the index membership is reset—and constituent weights
are adjusted annually. Adjustments are performed after the close of business on the third
Friday of December and are effective on the following Monday. If Monday is a holiday,
reconstitution occurs on the Tuesday immediately following.
The data used to reconstitute the index is as of the last business day of the month two
months before the effective date of the index reconstitution. For example, the December
reconstitution uses data as of the end of October to determine the equity universe,
Construction Rules for Morningstar Exponential Technologies Index | Decemberr2014
© 2014 Morningstar, Inc. All rights reserved. The information in this document is the property of Morningstar, Inc. Reproduction or transcription by any
means, in whole or part, without the prior written consent of Morningstar, Inc., is prohibited.
3
investable universe, and final index selection. This selection is subsequently adjusted for
corporate actions that occurred between the data cutoff date and the effective date.
Construction Rules for Morningstar Exponential Technologies Index | Decemberr2014
© 2014 Morningstar, Inc. All rights reserved. The information in this document is the property of Morningstar, Inc. Reproduction or transcription by any
means, in whole or part, without the prior written consent of Morningstar, Inc., is prohibited.
4
Index Constituents
Exponential Technology Scoring Process
Step 1: Managers from Morningstar’s global Equity Research team identify technology
themes with the potential to have significant economic benefits to producers and users. As
of September 30, 2014, nine current themes have been identified:
× Big Data and Analytics: Capabilities with data sets too large and complex to
manipulate or interrogate with standard methods or tools.
× Nanotechnology: The branch of technology that deals with dimensions and
tolerances of less than 100 nanometers, especially the manipulation of individual
atoms and molecules.
× Medicine and Neuroscience: Any or all of the sciences, such as neurochemistry
and experimental psychology, that deal with the structure or function of the nervous
system and brain.
× Networks and Computer Systems: A telecommunications network that allows
computers to exchange data. In computer networks, networked computing devices
pass data to each other along data connections.
× Energy and Environmental Systems: Exposure to alternate, renewable energy—
solar, wind, water, battery (positive or negative), and development or benefit of an
environmental management system (EMS).
× Robotics: The branch of technology that deals with the design, construction,
operation, and application of robots.
× 3-D Printing: A process for making a physical object from a three-dimensional digital
model, typically by laying down many successive thin layers of material.
× Bioinformatics: The science of collecting and analyzing complex biological data.
× Financial-Services Innovation: Search for and acknowledgement of nontraditional
emerging funding sources, platforms, currency, and stored and transferred value.
Construction Rules for Morningstar Exponential Technologies Index | Decemberr2014
© 2014 Morningstar, Inc. All rights reserved. The information in this document is the property of Morningstar, Inc. Reproduction or transcription by any
means, in whole or part, without the prior written consent of Morningstar, Inc., is prohibited.
5
Step 2: Morningstar’s Equity Research managers train analysts on the themes and scoring
framework. The analysts then score the companies in Morningstar’s global coverage from
0-2 on each theme.
 No or little exposure: 0
 Moderate exposure: 1
 Significant exposure: 2
Step 3: Managers in the Equity Research team calibrate scores across individual analysts,
sectors, and themes. Managers review the scores of 2 across each theme and collectively
select ”leaders” (whose scores are increased to 3 from 2). Leaders are defined as firms
expected to have significantly more exposure than other firms that scored 2. Each theme
may have between one and five leaders.
Step 4: Exponential technology scores and theme leaders are reviewed annually by the
Equity Research team before each reconstitution of the index.
Index Selection
Morningstar employs the following rules to select constituents for the Morningstar
Exponential Technologies Index.
At each reconstitution date, the equity universe and investable universe definitions are
based on the rules set forth in the construction rules for the Morningstar Global Equity
Indexes family. The Morningstar Exponential Technologies Index is derived from the parent
indexes referenced above. To qualify for the Morningstar Exponential Technologies Index,
securities must be covered by Morningstar’s Equity Research analysts.
Companies with average three-month trailing daily trading volume less than $2 million USD
or market capitalizations of $300 million USD or less are disqualified from the index.
Current index constituents are eliminated if they have average three-month trading volume
less than $1.5 million USD or market capitalization of $200 million USD or less.
Qualifying potential constituents are ranked in the order that emphasizes exposure to
exponential technology themes. The ranking criteria are given below by descending order
of absolute preference:
1)
2)
3)
4)
5)
Number of themes in which a constituent is a leader.
Number of themes in which a constituent scores 2.
Number of themes in which a constituent scores 1.
Current index constituents are given preference.
Market capitalization, preferring smaller over larger.
Companies ranked in the top 200 are selected for the index.
Construction Rules for Morningstar Exponential Technologies Index | Decemberr2014
© 2014 Morningstar, Inc. All rights reserved. The information in this document is the property of Morningstar, Inc. Reproduction or transcription by any
means, in whole or part, without the prior written consent of Morningstar, Inc., is prohibited.
6
Index Calculations
Basic Return Formula
Price returns, total and net returns of each index are calculated using Laspeyres’ formula.
The only difference is that the divisor Dt is different for the different index variants:
n
Index(t) 
(p
i(t)
i 1
n
 qi(t) )
C(t)(pi(0)  qi(0) )
 BaseIndexValue  (M(t) / B(t))  BaseIndexValue
i 1
The above formulas can be simplified as:
Where:
D(t)
N
pi(0)
qi(0)
pi(t)
qi(t)
C(t)
T
M(t)
B(t)
=
=
=
=
=
=
=
=
=
=
Index(t) 
M(t)
D(t)
divisor at time (t)=B(t)/Base Index Value
number of stocks in the index
closing price of stock i at the base date
constructed shares of company i at the base
price of stock i at time (t)
constructed shares of company i at time (t)
adjustment factor for the base date market capitalization
time the index is calculated
market capitalization of the index at time (t)
adjusted base date market capitalization of the index at time (t)
Divisor Adjustments
To avoid distortions caused by corporate actions that affect the share capital of index
constituents, the divisor of the index is adjusted accordingly. The following formula will be
used for divisor adjustments due to corporate action:
Construction Rules for Morningstar Exponential Technologies Index | Decemberr2014
© 2014 Morningstar, Inc. All rights reserved. The information in this document is the property of Morningstar, Inc. Reproduction or transcription by any
means, in whole or part, without the prior written consent of Morningstar, Inc., is prohibited.
7
n
Dt 1  Dt 
(p
i 1
i(t)
 qi(t) )   MC(t  1)
n
(p
i 1
i(t)
Where:
D(t)
D(t+1)
Pi(t)
qi(t)
=
=
=
=
∆MC(t+1)
=
 qi(t) )
divisor at time (t)
divisor at time (t+1)
stock price of company i at time (t)
number of shares of company i at time (t)
add difference in components’ new market capitalization and
adjusted market capitalization (calculated with adjusted
closing prices and shares effective at time t+1) and/or minus
market capitalization of companies to be deleted (calculated
with closing prices and shares at time t)
Note: If the current trading price of an issue is unavailable, the previous trading session’s
closing price is used. However, if the issue is affected by any corporate action that requires
an adjustment, then the adjusted price is used. Please refer to the parent rulebooks
regarding corporate actions.
Adjustments for Corporate Actions
The equity holdings that undergo corporate actions are subject to divisor adjustments
based on the rules set forth in the construction rules for the Morningstar Global Equity
Indexes family.
Constituent Weight Calculation
Each index constituent is equally weighted.
Trading, Settlement, and Transaction Costs
Trading and settlement of these securities follow local market conventions. The index does
not take transaction costs (bid-offer spreads) into account.
Holiday Rules
If the equity market for an included currency is closed for a holiday, then the previous day’s
security prices will be carried forward and adjusted to reflect the change in foreign
exchange rates for that day and then used to calculate the index values for that day.
Construction Rules for Morningstar Exponential Technologies Index | Decemberr2014
© 2014 Morningstar, Inc. All rights reserved. The information in this document is the property of Morningstar, Inc. Reproduction or transcription by any
means, in whole or part, without the prior written consent of Morningstar, Inc., is prohibited.
8
Data Correction and Precision
Intraday Index Data Corrections
Commercially reasonable efforts are made to ensure the correctness of data used in realtime index calculations. If incorrect price or corporate action data affects index daily highs
or lows, it is corrected retroactively as soon as feasible.
Index-Related Data and Divisor Corrections
Incorrect pricing and corporate action data for individual issues in the database will be
corrected upon detection. In addition, an incorrect divisor of an index, if discovered within
five business days of its occurrence, will always be fixed retroactively on the day it is
discovered to prevent an error from being carried forward. Commercially reasonable efforts
are made to correct an older error subject to its significance and feasibility.
Computational and Reporting Precision
All calculated and adjusted data are stored in real numbers. For reporting purposes, index
values are rounded to two decimal places and divisors are rounded to appropriate decimal
places. The actual number of shares is used to determine the number of shares
outstanding for the free float weighting.
Undocumented Events
Any matter arising from undocumented events will be resolved at the discretion of the
Morningstar Index Committee.
Construction Rules for Morningstar Exponential Technologies Index | Decemberr2014
© 2014 Morningstar, Inc. All rights reserved. The information in this document is the property of Morningstar, Inc. Reproduction or transcription by any
means, in whole or part, without the prior written consent of Morningstar, Inc., is prohibited.
9