tv - dividend indexes rulebook

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Guide to the

Transparent Value Dividend IndexesSM

Guide to the Transparent Value Dividend IndexesSM

2.

01. Introduction ....................................3

02. Index Attributes ..............................32.1 Base Dates and Values ...................................32.2 Index Calculation .............................................3 2.2.1 Index Formula.........................................3 2.2.2 Input Data...............................................3 2.2.3 Stock Prices............................................3 2.2.4 Computational Precision..........................3 2.2.5 Dissemination..........................................3

03. Index Construction Methodology ..33.1 Index Universe ................................................33.2 Stock Selection ...............................................43.3 Weighting ........................................................4

04. Ongoing Review ............................44.1 Shares and Float .............................................44.2 Selection Lists .................................................44.3 Ongoing Maintenance Due to Corporate Actions ...........................................4 4.3.1 Spinoffs ..................................................4 4.3.2 Adjustments for Corporate Actions ........4 4.3.3 Dividend Change ....................................44.4 Composition Reviews ......................................4

05. Calculations and Adjustments .......55.1 Index Formula .................................................5

06. Data Correction Policy ...................56.1 Intraday Corrections ........................................56.2 Index-Related Data and Divisor Corrections ....6

07. Methodology Changes ...................6

Contents


3.

01. Introduction The Transparent Value Dividend IndexesSM are part of the Transparent

Value IndexSM family—a series of quantitative strategy indexes

offered by Transparent Value LLC® using rules-based published

analytics. The Transparent Value IndexesSM are designed to measure

the performance of investment strategies based on the criteria

established by Transparent Value LLC for the valuation of publicly

traded companies. The Transparent Value index methodology

aims to address two questions: (1) What is the Required Business

Performance (RBP®) needed to sustain the company’s stock price,

and (2) What is the probability that management will deliver this

performance?

Transparent Value Dividend IndexSM family currently includes the

indexes listed below. This rulebook describes the methodology for

these indexesSM.

— The Transparent Value Dividend IndexSM consists of 100

top-ranked stocks, selected based on yield and highest

RBP® probability.

— The Transparent Value Dividend 50 IndexSM consists of

50 top-ranked stocks, selected based on yield and highest

RBP® probability.

— The Transparent Value Dividend 30 IndexSM consists of

30 top-ranked stocks, selected based on yield and highest

RBP® probability.

02. Index Attributes2.1 Base Dates and Base Values

The Transparent Value Dividend IndexSM has a base date of

December 31, 1998 and a base value of 1000.

2.2 Index Calculation

2.2.1 Index Formula

The Transparent Value Dividend IndexesSM are calculated using

a Laspeyres formula. A detailed explanation of the formula is

provided in section 5.1 – Index Formula.

2.2.2 Input Data

— Real-time prices are provided by Reuters.

— Corporate actions are researched by S&P Dow Jones

Indicesstaffusingnewsservices,regulatoryfilingsand

information provided by the companies themselves.

2.2.3 Stock Prices

Intraday index values for the Transparent Value Dividend IndexesSM

are computed using each security’s last-traded price on its primary

exchange. End-of-day index values are calculated using each

component’s primary-exchange closing price. If trading in a stock is

suspended while the market is open, the last-traded price for that

stock is used for all subsequent index computations until trading

resumes. If trading is suspended before the opening, the stock’s last

adjusted closing price is used to calculate the index. The adjusted

closingpricereflectstheex-distributioneffectsonashare’spriceof

corporate actions such as spinoffs, stock splits or returns of capital

implemented after the close of trading on their ex-dates.

2.2.4 Computational Precision

Index values are available with six decimal precision (note:

index values displayed by vendors are rounded to two decimal

places). Index divisors are available with up to ten decimal

places. Additional precision for index levels and divisors may be

maintained internally for index adjustment purposes. Any values

derived by the index calculation engine from a corporate action

used for the divisor adjustments and index computations are

rounded to six decimal places.

2.2.5 Dissemination

The price-return version of the Transparent Value Dividend

IndexesSM are disseminated via data vendors every 15 seconds

during U.S. stock exchange trading hours while the total return

version is disseminated as a summary only value at the end

of each trading day. Index licensees also may access data

on index values and index constituents through end-of-day

dissemination via the S&P Dow Jones Indices FTP site. For a

list of indexes and vendor code please visit the link below and

select indexes for more information www.rbpinstitute.com

03. Index Construction Methodology3.1 Index Universe

The selection universe for the Transparent Value Dividend

IndexesSM includes dividend paying stocks in the Dow Jones

U.S. Large-Cap Total Stock Market IndexSM and the Dow Jones

U.S. Mid-Cap Total Stock Market IndexSM that pass the liquidity

screens at quarterly review. For information on the creation and

maintenance of these indexes, please see the Guide to the Dow

Jones U.S. Total Stock Market IndexesSM, available on the Dow

Jones Indexes Web site at www.djindexes.com/totalstockmarket.


4.

3.2 Stock Selection

Stocks are selected for the Transparent Value Dividend IndexesSM

based on the following steps:

1. For a stock to be eligible for selection to the index, it

must pass the following screens:

— Stocks require an RBP® probability.

—Stockswithfreefloatoflessthan50%are

deemed ineligible.

— Stocks with a price of $3 or less for two consecutive

quarters are deemed ineligible.

— Stocks with a six-month average daily trading volume

of less than 250,000 shares for two consecutive

quarters are deemed ineligible.*

* Prior to March 2011, the liquidity screen was based on a six-

month average daily trading volume of less than 100,000 shares

for two consecutive quarters.

2. Stocks that pass these screens are eligible for selection

based on the following steps:

a. Select all dividend paying stocks that have paid a

dividend in each of the prior three quarters.

b.Selectthetop90%ofcompaniesbyhighest

indicated yield.

c. Top 100 companies by RBP® probability are

selected to the Transparent Value Dividend IndexSM.

— Top 50 companies by RBP® probability are selected

to the Transparent Value Dividend 50 IndexSM.

— Top 30 companies by RBP® probability are selected to

the Transparent Value Dividend 30 IndexSM.

To limit unnecessary turnover, a 10-stock buffer is used. Current

stocks ranked 110 or higher remain in the Transparent Value

Dividend IndexSM. Components ranked 111th or lower are

replaced by the highest-ranking noncomponent stocks until the

index has 100 members.

3.3 Weighting

Stocks are weighted within the Transparent Value Dividend

IndexesSM by dividend yield. Weights of individual securities are

cappedat3%fortheTransparentValueDividendIndexSM. Weights

ofindividualsecuritiesarecappedat5%fortheTransparentValue

Dividend 50 IndexSM. Weights of individual securities are capped at

10%fortheTransparentValueDividend30IndexSM.

04. Ongoing Review4.1 Shares and Float

Because the Transparent Value Dividend IndexesSM are weighted

bydividendyield,floatfactorsandsharesoutstandingchangesdo

not affect the calculation of the indexes. Stock offerings and stock

buybacks also do not affect the indexes. At each quarterly index

rebalancing each component is weighted according to dividend

yield. A dollar amount is invested in each security according to

itsweight,resultinginafixednumberofsharesoutstandingof

each stock in the index. Shares outstanding totals for individual

companies are not rounded to whole numbers, but are carried as

full and fractional shares.

4.2 Selection Lists

Any component removed from the Dow Jones U.S. Large-Cap

Total Stock Market IndexSM and the Dow Jones U.S. Mid-Cap

Total Stock Market IndexSM will be removed from the Transparent

Value Dividend IndexesSM at the same time it is removed from

the Dow Jones U.S. Total Stock Market IndexesSM. Selection lists

are updated monthly for each of the Transparent Value Dividend

IndexesSM. If a company is removed from one of the indexes, it

will be replaced by the noncomponent with the highest probability

on the selection list. The replacement company will be added to

the index at the same weight as the stock it replaces. The new

component’sweightwillberebalancedtoreflecttheindicated

dividend yield at the next quarterly index review.

4.3 Ongoing Maintenance Due to Corporate Actions

4.3.1 Spinoffs

If an index constituent splits or spins off a portion of its business to

form one or more new companies, all of the companies involved in

the spinoff will be immediately evaluated for the Transparent Value

Dividend IndexesSM, as long as they qualify for membership in the

Dow Jones U.S. Large-Cap Total Stock Market IndexSM or the

Dow Jones U.S. Mid-Cap Total Stock Market IndexSM. However,

because the Transparent Value Dividend IndexesSMmusthavefixed

components at all times, only one of the companies involved in the

spinoff may remain in the index. Due to minimal dividend history

for spinoff companies, in almost all cases, the parent will remain in

the index. Proceeds from the sale of the removed company will be

reinvested in shares of the surviving index component, keeping the

component’s weight unchanged in the index.

4.3.2 Adjustments for Corporate Actions

All price adjustments due to corporate actions are applied in


5.

accordance with the Dow Jones U.S. Total Stock Market IndexSM.

The complete description of these adjustments can be found in

the rulebook to the Dow Jones U.S. Total Stock Market IndexesSM.

Replacements are made when a component is deleted due to

mergers, takeovers or bankruptcies.

4.3.3 Dividend Change

If a component reduces or eliminates its dividend payment, it will

remain in the index until the next quarterly review.

4.4 Composition ReviewsThe index composition is reviewed on a quarterly basis. For

each composition review, Transparent Value takes a snapshot

of the common stock components of the Dow Jones U.S.

Large-Cap Total Stock Market IndexSM and the Dow Jones U.S.

Mid-Cap Total Stock Market IndexSMonthefirstbusinessday

of March, June, September, and December. Transparent Value

calculates Required Business Performance® and the probability

weights for each company. Dow Jones Indexes then ranks

the companies based on their indicated yield. (Please refer to

section 3.1 for Index Construction)

For each index, the components are rebalanced on a quarterly

basis and changes are implemented after the close of trading

on the third Friday of March, June, September and December.

All review changes, including additions, deletions and new

componentweightsareannouncedfivebusinessdayspriortothe

third Friday of March, June, September and December. Between

review periods, a component’s actual weight in the index is

determined by its market performance.

05. Calculations and Adjustments5.1 Index Formula

The indexes are calculated using a Laspeyres formula.

The indexes are computed as follows:

Theabove-mentionedformulacanbesimplifiedas:

Divisor is calculated as:

n = the number of stocks in the index.

pi,t = the close price of stock l at time (t).

P1,0 = the close price of the stock l at the base date.

qi,t = the number of shares held for component i at time (t).

qi,0 = the number of shares held for component i at the base date.

Ct = the adjustment factor for the base date market capitalization.

Mt = the market capitalization of the index at time (t).

Bt = the adjusted base date market capitalization of the index at

time (t).

On the rebalance date, the index shares for each constituent are

recalculated so that every component would be dividend yield

weighted within the index portfolio. The following formula is used to

calculate index shares on rebalance date:

Divisor Adjustment

The following formula will be used for divisor adjustment:

Dt = Divisor at time (t)

Dt+1 = Divisor at time (t+1)

Pi,t = stock close price of component i at time (t).

qi,t = stock close price of component i at time (t).

MCt+1 = add new components’ market capitalization and

adjusted market capitalization.

06. Data Correction PolicyTo maintain a high standard of data integrity, a series of procedures

have been implemented to ensure accuracy, timeliness and

consistency of calculated index values. Input prices are monitored

using a variety of computerized range-check warning systems for

bothticker-plantandreal-timeindexsystems..Variousverification

and audit tasks are performed to ensure the quality of the real-time

data feeds and related market data.

While efforts are made to ensure the accuracy of the information

used for the index calculation, an index error may occur due to

incorrect or missing data, including trading prices, exchange rates,

shares outstanding and corporate actions, due to operational errors

or other reasons.

6.1 Intraday Corrections

Corrections will be made for inaccurate prices and incorrect

or missing corporate actions as soon as reasonably possible

t+1


6.

after detection. Since the indexes are calculated on a real-time

basis,anincorrectindexvaluetickwillnotbefixedretroactively.

Incorrect daily high/low index values will be corrected as soon

as reasonably practicable.

6.2 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

divisorofanindex,ifdiscoveredwithinfivedaysofitsoccurrence,

willalwaysbefixedonthedayitisdiscoveredtopreventanerror

from being carried forward. If a divisor error is discovered more

thanfivedaysafteroccurrence,anyadjustmentwilldependupon

howsignificanttheerroris,howfarbacktheerroroccurredandthe

feasibility of performing the adjustment.

07. Methodology ChangesTransparent Value, L.L.C. reserves the right to modify the index

methodology at any time.

For more information on the Transparent Value IndexesSM, email [email protected] or call 1-855-883-8637. Learn more at www.rbpinstitute.com or visit the Transparent Value website at www.transparentvalue.com.


PERFORMANCE DISCLOSURE

The Transparent Value Dividend Index (the “Index”) was first calculated on January 21, 2011, at the market close. “Transparent Value Dividend 50 Index (the “Index”) was first calculated on March 13, 2012, at the market close. The “Transparent Value Dividend 30 Index (the “Index”) was first calculated on March 7, 2012, at the market close. All information presented prior to this date is back-tested. Back-tested performance is not actual performance, but is hypothetical. The back-test calculations are based on the same methodology that was in effect when the index was officially launched. Complete index methodology details are available at www.rbpinstitute.com.

Past performance of the Index is not an indication of future results. Prospective application of the methodology used to construct the Index may not result in performance commensurate with the back-test returns shown. The back-test period does not necessarily correspond to the entire available history of the Index. Please refer to the methodology paper for the Index, available at www.rbpinstitute.com for more details about the index, including the manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all index calculations. It is not possible to invest directly in an Index.

Another limitation of back-tested hypothetical information is that generally the back-tested calculation is prepared with the benefit of hindsight. Back-tested data reflect the application of the index methodology and selection of index constituents in hindsight. No hypothetical record can completely account for the impact of financial risk in actual trading. For example, there are numerous factors related to the equities (or fixed income, or commodities) markets in general which cannot be, and have not been accounted for in the preparation of the index information set forth, all of which can affect actual performance.

The Index returns shown do not represent the results of actual trading of investible assets/securities. S&P Dow Jones Indices LLC maintains the Index and calculates the Index levels and performance shown or discussed, but does not manage actual assets. Index returns do not reflect payment of any sales charges or fees an investor may pay to purchase the securities underlying the Index or investment funds that are intended to track the performance of the Index. The imposition of these fees and charges would cause actual and back-tested performance of the securities/fund to be lower than the Index performance shown. As a simple example, if an index returned 10% on a US $100,000 investment for a 12-month period (or US$ 10,000) and an actual asset-based fee of 1.5% was imposed at the end of the period on the investment plus accrued interest (or US$ 1,650), the net return would be 8.35% (or US$ 8,350) for the year. Over 3 years, an annual 1.5% fee taken at year end with an assumed 10% return per year would result in a cumulative gross return of 33.10%, a total fee of US$ 5,375, and a cumulative net return of 27.2% (or US$ 27,200).

DISCLAIMER

“Transparent Value Dividend Index”, “Transparent Value Dividend 50 Index”, and the “Transparent Value Dividend 30 Index” are the properties of Transparent Value, LLC, which has contracted with S&P Dow Jones Indices LLC or its affiliate (“S&PDJI”) to maintain and calculate the Index. The “Dow Jones U.S. Large-Cap Total Stock Market Index” and the Dow Jones Mid-Cap Market Index are the properties of S&PDJI and/or their third party licensors and has been licensed by S&PDJI for use by Transparent Value, LLC in connection with the Index. S&PDJI shall have no liability for any errors or omissions in calculating the Index.

An index is unmanaged, not subject to fees and not available for direct investment.

Transparent Value®, RBP®, Required Business Performance®, and the Transparent Value logo are registered trademarks of Transparent Value, LLC or one of its subsidiaries. “See the market clearly” is a trademark of Transparent Value, LLC and its affiliates. Other featured words or symbols used to identify the source of goods and services may be the trademarks of their respective owners. No claim is made that RBP can, in and of itself, be used to determine which securities to buy or sell, or when to buy or sell them. Transparent Value, LLC (“Transparent Value”) is a subsidiary of Guggenheim Partners, LLC.

This material is intended to inform you of products and services offered by Transparent Value and not an offer to buy or sell, or a solicitation of an offer to buy or sell, any security or fund interest.

No assurance can be given that the investment objectives described herein will be achieved. The views expressed in this presentation are the views of Transparent Value and are subject to change without notice based on market and other conditions. The opinions expressed may differ from those of other entities affiliated with Transparent Value that use different investment philosophies. The views and strategies described herein may not be suitable for all investors. This material is distributed with the understanding that it is not rendering accounting, legal or tax advice. Please consult your legal or tax advisor concerning such matters.

Indices do not represent actual trading. Accordingly, these models should not be relied upon to make predictions of actual future account performance. Transparent Value has no obligation to provide recipients hereof with updates or changes to such data. Past performance of indices of asset classes does not represent actual returns or volatility of actual accounts or investment managers, and should not be viewed as indicative of future results. Returns are unaudited. Results do not reflect the investment of dividends or other earnings. The figures for the index do not reflect the reinvestment of dividends and do not reflect the deduction of fees or expenses which would reduce returns. Investors cannot invest direct in the index.

Redistribution, reproduction and/or photocopying in whole or in part are prohibited without written permission.

Contact Us

Transparent Value, LLC 330 Madison Avenue, 10th Floor, New York, NY 10017Phone: 1-888-727-6885 Website: www.transparentvalue.com

© 2014 Transparent Value, LLC. All rights reserved. No part of this document may be circulated, quoted or reproduced for distribution without prior written approval from Transparent Value, LLC. RULE-RBP-DIV-041911

tv - dividend indexes rulebook

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