Index Mathematics

Methodology

May 2021
S&P Dow Jones Indices: Index Methodology
Table of Contents
Introduction 4
Different Varieties of Indices 4
The Index Divisor 5
Supporting Documents 5
Capitalization Weighted Indices 6
Definition 6
Adjustments to Share Counts 6
Divisor Adjustments 7
Necessary Divisor Adjustments 8
Capped Market Capitalization Indices 10
Definition 10
Corporate Actions and Index Adjustments 11
Different Capping Methods 11
Non-Market Capitalization Weighted Indices 13
Definition 13
Corporate Actions and Index Adjustments 14
Price Weighted Indices 15
Definition 15
Equal Weighted Indices 16
Definition 16
Modified Equal Weighted Indices 17
Corporate Actions and Index Adjustments 17
Multi-Day Rebalancing 18
Exchange Holidays 18
Freeze Date 19
Total Return Calculations 21
Net Total Return Calculations 22
Franking Credit Adjusted Total Return Indices 23

S&P Dow Jones Indices: Index Mathematics Methodology 1

Currency and Currency Hedged Indices 24
Return Definitions 24
The Hedge Ratio 25
Calculating a Currency-Hedged Index 25
Currency Hedging Outcomes 26
Index Computation 26
Dynamic Hedged Return Indices 28
Currency Hedged Excess Return Indices 29
Quanto Currency Adjusted Index 30
Domestic Currency Return Index Calculation 32
Background 32
Equivalence of DCR and Divisor Calculations 32
DCR Calculation 33
Essential Adjustments 33
Risk Control Indices 34
Dynamic Rebalancing Risk Control Index 36
Capped Equity Weight Change 37
Excess Return Indices 37
Exponentially-Weighted Volatility 38
Exponentially-Weighted Volatility Based on Current Allocations 39
Simple-Weighted Volatility 40
Futures-Based Risk Control Indices 41
Exponentially-Weighted Volatility for Futures-Based Risk Control Indices 42
Dynamic Volatility Risk Control Indices 42
Variance Based Risk Control Indices 42
Risk Control 2.0 Indices 43
Constituent Weighting 43
Risk Control 2.0 with Minimum Variance 45
Equity with Futures Leverage Risk Control Indices 46
Weighted Return Indices 47

S&P Dow Jones Indices: Index Mathematics Methodology 2

Leveraged and Inverse Indices 49
Leveraged Indices for Equities 49
Leveraged Indices without Borrowing Costs for Equities 50
Inverse Indices for Equities 50
Inverse Indices without Borrowing Costs for Equities 51
Leveraged and Inverse Indices for Futures 51
Daily Rebalanced Leverage or Inverse Futures Indices 51
Periodically Rebalanced Leverage or Inverse Futures Indices 52
Fee Indices/Decrement Indices 53
Capped Return Indices 56
Dividend Point Indices 57
Alternative Pricing 58
Special Opening Quotation (SOQ) 58
Fair Value Indices 59
Volume-Weighted Average Price (VWAP) 59
Time-Weighted Average Price (TWAP) 59
Negative/Zero Index Levels 60
Index Turnover 61
End-of-Month Global Fundamental Data 62
Monthly Files 62
About the Data 62
Output Files 63
Fundamental Data Points 63
Calculations 64
S&P Dow Jones Indices’ Contact Information 68
Client Services 68
Disclaimer 69

S&P Dow Jones Indices: Index Mathematics Methodology 3

Introduction
This document covers the mathematics of equity index calculations and assumes some acquaintance
with mathematical notation and simple operations. The calculations are presented principally as
equations, which have largely been excluded from the individual index methodologies, with examples or
tables of results to demonstrate the calculations.

Different Varieties of Indices

S&P Dow Jones Indices’ index calculation and corporate action treatments vary according to the
categorization of the indices. At a broad level, indices are defined into two categorizations; Market
Capitalization Weighted and Non-Market Capitalization Weighted Indices.

A majority of S&P Dow Jones Indices’ equity indices are market capitalization weighted and float-
adjusted, where each stock’s weight in the index is proportional to its float-adjusted market value. S&P
Dow Jones Indices also offers capped versions of a market capitalization weighted index where single
index constituents or defined groups of index constituents, such as sector or geographical groups, are
confined to a maximum weight.

Non-market capitalization weighted indices include those that are not weighted by float-adjusted market
capitalization and generally are not affected by notional market capitalization changes resulting from
corporate events. Examples include indices that apply equal weighting, factor weighting such as dividend
yield or volatility, strategic tilts, thematic weighting or other alternative weighting schemes.

S&P Dow Jones Indices offers a variety indices and index attribute data calculated according to various
methodologies which are covered in this document:
• Market Capitalization Indices:
o Market-capitalization indices – where constituent weights are determined by float-
adjusted market capitalization.
o Capped market-capitalization indices − where single index constituents or defined groups
of index constituents, such as sector or geographical groups, are confined to a maximum
index weight.
• Non-Market Capitalization Indices:
o Price weighted indices − where constituent weights are determined solely by the prices of
the constituent stocks in the index.
o Equal weighted indices − where each stock is weighted equally in the index.
• Derived Indices:
o Total return indices − index level reflect both movements in stock prices and the
reinvestment of dividend income.
o Leveraged and inverse indices − which return positive or negative multiples of their
respective underlying indices.
o Weighted return indices − commonly known as index of indices, where each underlying
index is a component with an assigned weight to calculate the overall index of indices
level.
o Indices that operate on an index as a whole rather than on the individual stocks − these
include calculations of various total return methodologies and index fundamentals.

S&P Dow Jones Indices: Index Mathematics Methodology 4

 o Dividend Point indices − which track the total dividend payments of index constituents.
o Risk control, excess return, currency, currency hedged, domestic currency return, special
opening quotation, turnover and fundamental data calculations.

The Index Divisor

The purpose of the index divisor is to maintain the continuity of an index level following the
implementation of corporate actions, index rebalancing events, or other non-market driven actions.

The simplest capitalization weighted index can be thought of as a portfolio consisting of all available
shares of the stocks in the index. While one might track this portfolio’s value in dollar terms, it would
probably be an unwieldy number – for example, the S&P 500 float-adjusted market value is a figure in the
trillions of dollars. Rather than deal with ten or more digits, the figure is scaled to a more easily handled
number (e.g. 2000). Dividing the portfolio market value by a factor, usually called the divisor, does the
scaling.

An index is not exactly the same as a portfolio. For instance, when a stock is added to or deleted from an
index, the index level should not jump up or drop down; while a portfolio’s value would usually change as
stocks are swapped in and out. To assure that the index’s value, or level, does not change when stocks
are added or deleted, the divisor is adjusted to offset the change in market value of the index. Thus, the
divisor plays a critical role in the index’s ability to provide a continuous measure of market valuation when
faced with changes to the stocks included in the index. In a similar manner, some corporate actions that
cause changes in the market value of the stocks in an index should not be reflected in the index level.
Adjustments are made to the divisor to eliminate the impact of these corporate actions on the index value.

Supporting Documents

This methodology is meant to be read in conjunction with supporting documents providing greater detail
with respect to the policies, procedures and calculations described herein. References throughout the
methodology direct the reader to the relevant supporting document for further information on a specific
topic. The list of the main supplemental documents for this methodology and the hyperlinks to those
documents is as follows:

Supporting Document URL

S&P Dow Jones Indices’ Equity Indices Policies &
Equity Indices Policies & Practices
Practices Methodology
S&P Dow Jones Indices’ Float Adjustment
Float Adjustment Methodology
Methodology

S&P Dow Jones Indices: Index Mathematics Methodology 5

Capitalization Weighted Indices
Many of S&P Dow Jones Indices’ equity indices are capitalization-weighted indices. Sometimes these are
called value-weighted or market cap weighted instead of capitalization weighted. Examples include the
S&P 500, the S&P Global 1200 and the S&P BMI indices.

In the discussion below most of the examples refer to the S&P 500 but apply equally to a long list of S&P
Dow Jones Indices’ cap-weighted indices.

Definition

The formula to calculate the S&P 500 is:

 Pi  Qi
Index Level = i (1)
Divisor

The numerator on the right hand side is the price of each stock in the index multiplied by the number of
shares used in the index calculation. This is summed across all the stocks in the index. The denominator
is the divisor. If the sum in the numerator is US$ 20 trillion and the divisor is US$ 10 billion, the index level
would be 2000.

This index formula is sometimes called a “base-weighted aggregative” method.1 The formula is created by
a modification of a LasPeyres index, which uses base period quantities (share counts) to calculate the
price change. A LasPeyres index would be:

 Pi,1  Qi,o
Index = i (2)
 Pi,0  Qi,o
i

In the modification to (2), the quantity measure in the numerator, Q 0, is replaced by Q1, so the numerator
becomes a measure of the current market value, and the product in the denominator is replaced by the
divisor which both represents the initial market value and sets the base value for the index. The result of
these modifications is equation (1) above.

Adjustments to Share Counts

S&P Dow Jones Indices’ market cap-weighted indices are float-adjusted – the number of shares
outstanding is reduced to exclude closely held shares from the index calculation because such shares are
not available to investors. S&P Dow Jones Indices’ rules for float adjustment are described in more detail
in S&P Dow Jones Indices’ Float Adjustment Methodology or in some of the individual index methodology
documents. As discussed there, for each stock S&P Dow Jones Indices calculates an Investable Weight
Factor (IWF) which is the percentage of total shares outstanding that are included in the index calculation.

1
This term is used in one of the earlier and more complete descriptions of S&P Dow Jones Indices’ index calculations in Alfred
Cowles, Common Stock Indices, Principia Press for the Cowles Commission of Research in Economics, 1939. The book refers to
the “Standard Statistics Company Formula;” S&P was formed by the merger of Standard Statistics Corporation and Poor’s
Publishing in 1941.

S&P Dow Jones Indices: Index Mathematics Methodology 6

When the index is calculated using equation (1), the variable Qi is replaced by the product of outstanding
shares and the IWF:

Qi = IWFi  Total Shares i (3)

At times there are other adjustments made to the share count to reflect foreign ownership restrictions or
to adjust the weight of a stock in an index. These are combined into a single multiplier in place of the IWF
in equation (3). In combining restrictions it is important to avoid unwanted double counting. Let FA
represent the fraction of shares eliminated due to float adjustment, FR represent the fraction of shares
excluded for foreign ownership restrictions and IS represent the fraction of total shares to be excluded
based on the combination of FA and FR.

If FA > FR then IS = 1- FA

If FA < FR then IS = 1-FR

and equation (3) can be written as:

Qi = ISi  Total Shares i

Note that any time the share count or the IWF is changed, it will be necessary to adjust the index divisor
to keep the level of the index unchanged.

Divisor Adjustments

The key to index maintenance is the adjustment of the divisor. Index maintenance – reflecting changes in
shares outstanding, corporate actions, addition or deletion of stocks to the index – should not change the
level of the index. If the S&P 500 closes at 2000 and one stock is replaced by another, after the market
close, the index should open at 2000 the next morning if all of the opening prices are the same as the
previous day’s closing prices. This is accomplished with an adjustment to the divisor.

Any change to the stocks in the index that alters the total market value of the index while holding stock
prices constant will require a divisor adjustment. This section explains how the divisor adjustment is made
given the change in total market value. The next section discusses what index changes and corporate
actions lead to changes in total market value and the divisor.

Equation (1) is expanded to show the stock being removed, stock r, separately from the stocks that will
remain in the index:

(  Pi  Qi ) + Pr Qr
Index Level t −1 = i (4)
Divisort −1

Note that the index level and the divisor are now labeled for the time period t-1 and, to simplify this
example, that we are ignoring any possible IWF and adjustments to share counts. After stock r is
replaced with stock s, the equation will read:

(  Pi  Qi ) + PsQs
Index Level t = i (5)
Divisort

In equations (4) and (5) t-1 is the moment right before company r is removed from and s is added to the
index; t is the moment right after the event. By design, Index Levelt-1 is equal to Index Levelt. Combining
(4) and (5) and re-arranging, the adjustment to the Divisor can be determined from the index market value
before and after the change:

S&P Dow Jones Indices: Index Mathematics Methodology 7

 (  Pi  Qi ) + Pr Qr (  Pi  Qi ) + PsQs
i = Index Level = i
Divisort −1 Divisort

Let the numerator of the left hand fraction be called MVt-l, for the index market value at (t-1), and the
numerator of the right hand fraction be called MVt, for the index market value at time t. Now, MVt-1, MVt
and Divisort-1 are all known quantities. Given these, it is easy to determine the new divisor that will keep
the index level constant when stock r is replaced by stock s:

MVt
Divisort = (Divisort −1)  (6)
MVt −1

As discussed below, various index adjustments result in changes to the index market value. When these
adjustments occur, the divisor is adjusted as shown in equation (6).

In some implementations, including the computer programs used in S&P Dow Jones Indices’ index
calculations, the divisor adjustment is calculated in a slightly different, but equivalent, format where the
divisor change is calculated by addition rather than multiplication. This alternative format is defined here.
Rearranging equation (1) and using the term MV (market value) to replace the summation gives:

MV
Divisor =
Index Level

When stocks are added to or deleted from an index there is an increase or decrease in the index’s market
value. This increase or decrease is the market value of the stocks being added less the market value of
those stocks deleted; define CMV as the Change in Market Value. Recalling that the index level does not
change, the new divisor is defined as:

MV + CMV
DivisorNew =
Index Level

or

MV CMV
DivisorNew = +
IndexLevel IndexLevel

However, the first term on the right hand side is simply the Divisor value before the addition or deletion of
the stocks. This yields:

CMV
DivisorNew = DivisorOld + (7)
IndexLevel

Note that this form is more versatile for computer implementations. With this additive form, the second
term (CMV/Index Level) can be calculated for each stock or other adjustment independently and then all
the adjustments can be combined into one change to the Divisor.

Necessary Divisor Adjustments

Divisor adjustments are made “after the close” meaning that after the close of trading the closing prices
are used to calculate the new divisor based on whatever changes are being made. It is, then, possible to
provide two complete descriptions of the index – one as it existed at the close of trading and one as it will
exist at the next opening of trading. If the same stock prices are used to calculate the index level for these
two descriptions, the index levels are the same.

S&P Dow Jones Indices: Index Mathematics Methodology 8

With prices constant, any change that changes the total market value included in the index will require a
divisor change. For cataloging changes, it is useful to separate changes caused by the management of
the index from those stemming from corporate actions of the constituent companies. Among those
changes driven by index management are adding or deleting companies, adjusting share counts and
changes to IWFs and other factors affecting share counts.

Index Management Related Changes. When a company is added to or deleted from the index, the net
change in the market value of the index is calculated and this is used to calculate the new divisor. The
market values of stocks being added or deleted are based on the prices, shares outstanding, IWFs and
any other share count adjustments. Specifically, if a company being added has a total market cap of US$
1 billion, an IWF of 85% and, therefore, a float-adjusted market cap of US$ 850 million, the market value
for the added company used is US$ 850 million. The calculations would be based on either equation (6)
or equation (7) above.

For most S&P Dow Jones Indices equity indices, IWFs and share counts updates are applied throughout
the year based on rules defined in the methodology. Typically small changes in shares outstanding are
reflected in indices once a quarter to avoid excessive changes to an index. The revisions to the divisor
resulting from these are calculated and a new divisor is determined. Equation (7) shows how the impact
of a series of share count changes can be combined to determine the new divisor.

Corporate Action Related Changes.

For information on the treatment of corporate actions, please refer to S&P Dow Jones Indices’ Equity
Indices Policies & Practices document. For more information on the specific treatment within an index
family, please refer to that index methodology.

S&P Dow Jones Indices: Index Mathematics Methodology 9

Capped Market Capitalization Indices
Definition

A capped market capitalization weighted index (also referred to as a capped market cap index, capped
index or capped weighted index) is one where single index constituents or defined groups of index
constituents are confined to a maximum weight and the excess weight is distributed proportionately
among the remaining index constituents. As stock prices move, the weights will shift and the modified
weights will change. Therefore, a capped market cap weighted index must be rebalanced from time to
time to re-establish the proper weighting. The methodology for capped indices follows an identical
approach to market cap weighted indices except that the indices apply an additional weight factor, or
“AWF”, to adjust the float-adjusted market capitalization to a value such that the index weight constraints
are satisfied. For capped indices, no AWF change is made due to corporate actions between
rebalancings except for daily capped indices where the corporate action may trigger a capping.
Therefore, the weights of stocks in the index as well as the index divisor will change due to notional
market capitalization changes resulting from corporate events.

The overall approach to calculate capped market cap weighted indices is the same as in the pure market-
cap weighted indices; however, the constituents’ market values are re-defined to be values that will meet
the particular capping rules of the index in question.

Index Market Value

Index Level = (1)
Divisor

and

𝐼𝑛𝑑𝑒𝑥𝑀𝑎𝑟𝑘𝑒𝑡𝑉𝑎𝑙𝑢𝑒 = ∑ 𝑃𝑖 ∗ 𝑆ℎ𝑎𝑟𝑒𝑠𝑖 ∗ 𝐼𝑊𝐹𝑖 ∗ 𝐹𝑥𝑅𝑎𝑡𝑒𝑖

𝑖

To calculate a capped market cap index, the market capitalization for each stock used in the calculation
of the index is redefined so that each index constituent has the appropriate weight in the index at each
rebalancing date.

In addition to being the product of the stock price, the stock’s shares outstanding, and the stock’s float
factor (IWF), as written above – and the exchange rate when applicable – a new adjustment factor is also
introduced in the market capitalization calculation to establish the appropriate weighting.

AdjustedStock Mark et Valuei = Pi  Shares i  IWFi  FxRatei  AWFi

where AWFi is the adjustment factor of stock i assigned at each index rebalancing date, t, which adjusts
the market capitalization for all index constituents to achieve the user-defined weight, while maintaining
the total market value of the overall index.

The AWF for each index constituent, i, on rebalancing date, t, is calculated by:

CWi , t
AWFi , t =
Wi , t

S&P Dow Jones Indices: Index Mathematics Methodology 10

where Wi,t is the uncapped weight of stock i on rebalancing date t based on the float-adjusted market
capitalization of all index constituents; and CWi,t is the capped weight of stock i on rebalancing date t as
determined by the capping rule of the index in question and the process for determining capped weights
as described in Different Capping Methods below.

The index divisor is defined based on the index level and market value from equation (1). The index level
is not altered by index rebalancings. However, since prices and outstanding shares will have changed
since the last rebalancing, the divisor will change at the rebalancing.

So:
(Index Mark et Value) after rebalancing
(Divisor) after rebalancing =
(Index Value) before rebalancing
where:

Index Market Value = Pi  Sharesi  IWFi  FxRatei  AWFi

i

Corporate Actions and Index Adjustments

All corporate actions for capped indices affect the index in the same manner as in market capitalization
weighted indices.

For more information on the treatment of corporate actions, please refer to S&P Dow Jones Indices’
Equity Indices Policies & Practices document.

Different Capping Methods

Capped indices arise due to the need for benchmarks which comply with diversification rules. Capping
may apply to single stock concentration limits or concentration limits on a defined group of stocks. At
times, companies may also be represented in an index by multiple share class lines. In these instances,
maximum weight capping will be based on company float-adjusted market capitalization, with the weight
of multiple class companies allocated proportionally to each share class line based on its float-adjusted
market capitalization as of the rebalancing reference date. Some common, but not an exhaustive list of,
examples of the standard S&P Dow Jones Indices methodologies for determining the weights of capped
indices using the most popular capping methods are described below.

Single Company Capping. In a single company capping methodology, no company in an index is

allowed to breach a certain pre-determined weight as of each rebalancing period. The procedure for
assigning capped weights to each company at each rebalancing is as follows:
1. With data reflected on the rebalancing reference date, each company is weighted by float-
adjusted market capitalization.
2. If any company has a weight greater than X% (where X% is the maximum weight allowed in the
index), that company has its weight capped at X%.
3. All excess weight is proportionally redistributed to all uncapped companies within the index.
4. After this redistribution, if the weight of any other company(s) then breaches X%, the process is
repeated iteratively until no companies breach the X% weight cap.

Single Company and Concentration Limit Capping. In a single company and concentration limit
capping methodology, no company in an index is allowed to breach a certain pre-determined weight and
all companies with a weight greater than a certain amount are not allowed, as a group, to exceed a pre-
determined total weight. One example of this is 4.5%/22.5%/45% capping (B/A/C in the following
example). No single company is allowed to exceed 22.5% of the index and all companies with a weight
greater than 4.5% of the index cannot exceed, as a group, 45% of the index.

S&P Dow Jones Indices: Index Mathematics Methodology 11

Method 1:
The procedure for assigning capped weights to each company at each rebalancing is as follows:
1. With data reflected on the rebalancing reference date, each company is weighted by float-
adjusted market capitalization.
2. If any company has a weight greater than A% (where A% is the maximum weight allowed in the
index), that company has its weight capped at A%.
3. All excess weight is proportionally redistributed to all uncapped companies within the index.
4. After this redistribution, if the weight of any other company(s) then breaches A%, the process is
repeated iteratively until no companies breach the A% weight cap.
5. The sum of the companies with weight greater than B% cannot exceed C% of the total weight.
6. If the rule in step 5 is breached, all the companies are ranked in descending order of their weights
and the company with the lowest weight that causes the C% limit to be breached is identified. The
weight of this company is, then, reduced either until the rule in step 5 is satisfied or it reaches
B%.
7. This excess weight is proportionally redistributed to all companies with weights below B%. Any
stock that receives weight cannot breach the B% cap. This process is repeated iteratively until
step 5 is satisfied or until all stocks are greater than or equal to B%.
8. If the rule in step 5 is still breached and all stocks are greater than or equal to B%, the company
with the lowest weight that causes the C% limit to be breached is identified. The weight of this
company is, then, reduced either until the rule in step 5 is satisfied or it reaches B%.
9. This excess weight is proportionally redistributed to all companies with weights greater than B%.
Any stock that receives weight cannot breach the A% stock cap. This process is repeated
iteratively until step 5 is satisfied.

For indices that use capping rules across more than one attribute, S&P Dow Jones Indices will utilize an
optimization program to satisfy the capping rules. The stated objective for the optimization will be to
minimize the difference between the pre-capped weights of the stocks in the index and the final capped
weights. This is done by using an optimization procedure that chooses final weights in such a way to
minimize the sum of the squared difference of capped weight and uncapped weight, divided by uncapped
weight for each stock.

Method 2:
A second method of single company and concentration limit capping utilized by S&P Dow Jones Indices
for assigning capped weights to each company at each rebalancing is as follows:
1. With data reflected on the rebalancing reference date, each company is weighted by float-
adjusted market capitalization.
2. If either of the defined single company or concentration index weight limits are breached, the
float-adjusted market capitalization of all components are raised to a power such that:
𝐼𝑛𝑑𝑒𝑥 𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝𝑡 = 𝑊𝑡1−0.01𝑛
where:
Wt = Float-adjusted market capitalization of component t.
n = Number of capping iterations.
3. This process is repeated iteratively until the first iteration where the capping constraints are
satisfied.

S&P Dow Jones Indices: Index Mathematics Methodology 12

Non-Market Capitalization Weighted Indices
Definition

A non-market capitalization weighted index (also referred to as a non-market cap or modified market cap
index) is one where index constituents have a user-defined weight in the index. Between index
rebalancings, most corporate actions generally have no effect on index weights, as they are fixed through
the processes defined below. As stock prices move, the weights will shift and the modified weights will
change. Therefore, a non-market cap weighted index must be rebalanced from time to time to re-
establish the proper weighting.

The overall approach to calculate non-market cap weighted indices is the same as in the cap-weighted
indices; however, the constituents’ market values are set to a value to achieve a specific weight at each
rebalancing that is divergent from a purely free-float-adjusted market capitalization weighting. Recall two
basic formulae:

Index Market Value

Index Level = (1)
Divisor

and

𝐼𝑛𝑑𝑒𝑥𝑀𝑎𝑟𝑘𝑒𝑡𝑉𝑎𝑙𝑢𝑒 = ∑ 𝑃𝑖 ∗ 𝑆ℎ𝑎𝑟𝑒𝑠𝑖 ∗ 𝐼𝑊𝐹𝑖 ∗ 𝐹𝑥𝑅𝑎𝑡𝑒𝑖

𝑖

To calculate a non-market cap weighted index, the market capitalization for each stock used in the
calculation of the index is redefined so that each index constituent has the appropriate user-defined
weight in the index at each rebalancing date.

In addition to being the product of the stock price, the stock’s shares outstanding, and the stock’s float
factor (IWF), as written above – and the exchange rate when applicable – a new adjustment factor is also
introduced in the market capitalization calculation to establish the appropriate weighting.

AdjustedStock Mark et Valuei = Pi  Shares i  IWFi  FxRatei  AWFi

where AWFi is the adjustment factor of stock i assigned at each index rebalancing date, t, which adjusts
the market capitalization for all index constituents to achieve the user-defined weight, while maintaining
the total market value of the overall index.

The AWF for each index constituent, i, on rebalancing date, t, is calculated by:

Z
AWFi , t = * Wi , t (2)
FloatAdjustedMark etValuei , t

where Z is an index specific constant set for the purpose of deriving the AWF and, therefore, each stock’s
share count used in the index calculation (often referred to as modified index shares). Wi,t is the user-
defined weight of stock i on rebalancing date t.

The index divisor is defined based on the index level and market value from equation (1). The index level
is not altered by index rebalancings. However, since prices and outstanding shares will have changed
since the last rebalancing, the divisor will change at the rebalancing.

S&P Dow Jones Indices: Index Mathematics Methodology 13

So:
(Index Mark et Value) after rebalancing
(Divisor) after rebalancing =
(Index Value) before rebalancing
where:

Index Market Value = Pi  Sharesi  IWFi  FxRatei  AWFi

i

Corporate Actions and Index Adjustments

For information on the treatment of corporate actions, please refer to S&P Dow Jones Indices’ Equity
Indices Policies & Practices document. For more information on the specific treatment within an index
family, please refer to that index methodology.

S&P Dow Jones Indices: Index Mathematics Methodology 14

Price Weighted Indices
Definition

In a price weighted index, such as the Dow Jones Industrial Average, constituent weights are determined
solely by the prices of the constituent stocks. Shares outstanding are set to a uniform number throughout
the index. Indices using this methodology will adjust the index divisor for any price impacting corporate
action on one of its member stocks; this includes price adjustments, special dividends, stock splits and
rights offerings. The index divisor will also adjust in the event of an addition to or deletion from the index.

All other index calculation details follow the standard divisor based calculation methodology detailed in
the previous Capitalization Weighted Indices section.

For information on the treatment of corporate actions, please refer to S&P Dow Jones Indices’ Equity
Indices Policies & Practices Methodology.

S&P Dow Jones Indices: Index Mathematics Methodology 15

Equal Weighted Indices
Definition

An equal weighted index is one where every stock, or company, has the same weight in the index, and a
portfolio that tracks the index will invest an equal dollar amount in each applicable instrument. As stock
prices move, the weights will shift and exact equality will be lost. Therefore, an equal weighted index must
be rebalanced from time to time to re-establish the proper weighting.2

The overall approach to calculate equal weighted indices is the same as in the cap-weighted indices;
however, the constituents’ market values are re-defined to be values that will achieve equal weighting at
each rebalancing. Recall two basic formulae:

Index Market Value

Index Level = (1)
Divisor

and

𝐼𝑛𝑑𝑒𝑥𝑀𝑎𝑟𝑘𝑒𝑡𝑉𝑎𝑙𝑢𝑒 = ∑𝑖 𝑃𝑖 ∗ 𝑆ℎ𝑎𝑟𝑒𝑠𝑖 ∗ 𝐼𝑊𝐹𝑖 ∗ 𝐹𝑥𝑅𝑎𝑡𝑒𝑖

To calculate an equal weighted index, the market capitalization for each stock used in the calculation of
the index is redefined so that each index constituent has an equal weight in the index at each rebalancing
date. In addition to being the product of the stock price, the stock’s shares outstanding, and the stock’s
float factor (IWF), as written above – and the exchange rate when applicable – a new adjustment factor is
also introduced in the market capitalization calculation to establish equal weighting.

𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑𝑆𝑡𝑜𝑐𝑘𝑀𝑎𝑟𝑘𝑒𝑡𝑉𝑎𝑙𝑢𝑒𝑖 = 𝑃𝑖 ∗ 𝑆ℎ𝑎𝑟𝑒𝑠𝑖 ∗ 𝐼𝑊𝐹𝑖 ∗ 𝐹𝑥𝑅𝑎𝑡𝑒𝑖 ∗ 𝐴𝑊𝐹𝑖 (2)

where AWFi (Additional Weight Factor) is the adjustment factor of stock i assigned at each index
rebalancing date, t, which makes all index constituents modified market capitalization equal (and,
therefore, equal weight), while maintaining the total market value of the overall index. The AWF for each
index constituent, i, at rebalancing date, t, is calculated by:

Z
AWFi , t = (3)
N * FloatAdjustedMark etValuei , t

where N is the number of stocks in the index and Z is an index specific constant set for the purpose of
deriving the AWF and, therefore, each stock’s share count used in the index calculation (often referred to
as modified index shares).

The index divisor is defined based on the index level and market value from equation (1). The index level
is not altered by index rebalancings. However, since prices and outstanding shares will have changed
since the last rebalancing, the divisor will change at the rebalancing.

2
In contrast, a cap-weighted index requires no rebalancing as long as there aren’t any changes to share counts, IWFs, returns of
capital, or stocks added or deleted.

S&P Dow Jones Indices: Index Mathematics Methodology 16

So:
(Index Mark et Value) after rebalancing
(Divisor) after rebalancing =
(Index Value) before rebalancing
where:

Index Market Value = Pi  Sharesi  IWFi  FxRatei  AWFi

i

Modified Equal Weighted Indices

There are some equal weighted indices that place further restrictions on stocks included in the index. An
example restriction might be a cap on the weight allocated to one sector or a cap on the weight of a single
country or region in the index. The rules could also stipulate a maximum weight for a stock if the index
applies additional liquidity factors (e.g. basket liquidity) when determining the index weights. In any of
these situations, if a cap is applied to satisfy the restrictions, the excess weight leftover by the cap would
be distributed equally amongst the uncapped companies.

Corporate Actions and Index Adjustments

For more information on the treatment of corporate actions, please refer to S&P Dow Jones Indices’
Equity Indices Policies & Practices document. For more information on the specific treatment within an
index family, please refer to that index methodology.

S&P Dow Jones Indices: Index Mathematics Methodology 17

Multi-Day Rebalancing
A multi-day rebalancing allows indices to transition from the current index constituent weights to a set of target
weights over a pre-determined number of days. The weight increments/decrements from day to day within the
rebalancing period (i.e. smoothed weights) will be equal in size unless the exchange for a security is closed while
it is still an index business day. Day 1 of the rebalancing period will be the standard effective rebalancing date as
stated in the index methodology.

The formula to calculate the smoothed weight for each stock is:

(𝑡𝑎𝑟𝑔𝑒𝑡 𝑤𝑒𝑖𝑔ℎ𝑡𝑟,𝑖 − 𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑤𝑒𝑖𝑔ℎ𝑡𝑟,𝑖 )

𝑠𝑚𝑜𝑜𝑡ℎ𝑒𝑑 𝑤𝑒𝑖𝑔ℎ𝑡𝑡,𝑖 = ( × 𝑛𝑢𝑚𝑏𝑒𝑟 𝑟𝑒𝑏𝑎𝑙𝑎𝑛𝑐𝑖𝑛𝑔 𝑑𝑎𝑦𝑡 ) + 𝑟𝑒𝑓𝑒𝑟𝑒𝑛𝑐𝑒 𝑤𝑒𝑖𝑔ℎ𝑡𝑟,𝑖
𝑟𝑒𝑏𝑎𝑙𝑎𝑛𝑐𝑖𝑛𝑔 𝑙𝑒𝑛𝑔𝑡ℎ

where:
smoothed weightt,i = The weight for stock i on day t.
target weighti,r = The weight of stock i that corresponds to the weighting determined by
rebalancing r. If stock i is dropping out of the index due to the
selection criteria during rebalancing r then target weighti,r is 0.
reference weighti,r = The weight for stock i for the reference date for rebalancing r. If stock i
is not part of the composition of the index on the reference date then
reference weighti,r is 0.
rebalancing length = The number of days in a multi-day rebalancing. This number is
variable, and is defined by the index methodology.
number rebalancing dayt = The number of rebalancing days on day t from 1 to rebalancing length.

After the set of smoothed weights for each stock on each rebalancing date is calculated, index shares are
set for each stock by utilizing a standard AWF calculation that accounts for forward looking corporate
actions throughout the rebalancing period:
(𝑠𝑚𝑜𝑜𝑡ℎ𝑒𝑑 𝑤𝑒𝑖𝑔ℎ𝑡𝑡,𝑖 ∗𝑧 𝑓𝑎𝑐𝑡𝑜𝑟)
𝐴𝑊𝐹 𝑖,𝑡 =
(𝑠𝑡𝑜𝑐𝑘 𝑝𝑟𝑖𝑐𝑒𝑟,𝑖 ∗𝑓𝑥 𝑟𝑎𝑡𝑒𝑟,𝑖 ∗𝑠ℎ𝑎𝑟𝑒𝑠 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔𝑡,𝑖 ∗𝐼𝑊𝐹𝑟,𝑖 ∗𝑃𝑟𝑖𝑐𝑒 𝐴𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡 𝐹𝑎𝑐𝑡𝑜𝑟)

The 𝑃𝑟𝑖𝑐𝑒 𝐴𝑑𝑗𝑢𝑠𝑡𝑚𝑒𝑛𝑡 𝐹𝑎𝑐𝑡𝑜𝑟𝑡,𝑖 will account for any corporate actions for 𝑠𝑡𝑜𝑐𝑘𝑖 between the reference
date and the rebalance date in question. For example, if there is a 2 for 1 stock split on rebalance day 3
of a 5 day rebalancing period, the AWF calculated for the stock on the reference date will use an
adjustment factor of .5. The AWF calculated for days 1 and 2 of the rebalance will use an adjustment
factor of 1.

Day to day calculation of multi-day rebalancings will be conducted using the standard calculation
methodology for weighted indices.

Index shares and AWFs will remain static at their originally announced values throughout the pro-forma
period unless there are corporate actions announced after the pro-forma date and effective prior to the
end of the rebalancing period.

Exchange Holidays

Except for the first and penultimate days of the rebalancing period, exchange holidays occurring during
the rebalancing period that do NOT result in an index closure will adjust the individual smoothed weights

S&P Dow Jones Indices: Index Mathematics Methodology 18

of each individual security on holiday. Stocks on holiday on day t will have their smoothed weight frozen
on day t+1. On the first day, stocks will always carry the first smoothed weight of the rebalancing period. If
there is a holiday on the penultimate day of the rebalancing, impacted stocks will smooth to their target
weight a day early and carry that weight over to the final day unless they are being removed from the
index. In the case of a stock removal with an exchange holiday on the penultimate day of the rebalancing
period, the stock weight will be smoothed over the remaining trading days. Similarly, if there are multiple
exchange holidays towards the close of the rebalancing period, the smoothing period will be further
condensed to the remaining trading days within the rebalancing period. If an exchange holiday is
announced after the reference date or there is an unexpected exchange closure, the glide path will be re-
established for the remaining days according to examples 2 and 3 below.

Please see the examples below. All weights in the example are as of the open on the effective date.

Example 1:

Index Weight on Reference Date = 1.2%; Target weight = 1.7%; No. of Rebalancing Days = 5; Weight
Delta = 0.5%; Daily Increment = 0.1%; Day 2 is an exchange holiday.
1. Day 1 weight = 1.2%+0.1%*1 = 1.3%
2. Day 2 weight = 1.2%+0.1%*2 = 1.4%
3. Day 3 weight = Day 2 weight
4. Day 4 weight = 1.2%+0.1%*4 = 1.6%
5. Day 5 weight = 1.2%+0.1%*5 = 1.7%

Example 2:

Index Weight on Reference Date = 1.2%; Target weight = 1.7%; No. of Rebalance Days = 5; Weight Delta
= 0.5%; Daily Increment = 0.1%; Day 4 is an exchange holiday.
1. Day 1 weight = 1.2%+0.1%*1 = 1.3%
2. Day 2 weight = 1.2%+0.1%*2 = 1.4%
3. Day 3 weight = 1.2%+0.1%*3 = 1.5%
4. Day 4 weight = 1.2%+0.1%*5 = 1.7%
5. Day 5 weight = Day 4 weight

Example 3:

Index Weight on Reference Date = 1.2%; Target weight = 0.0% (stock removal); No. of Rebalance Days =
5; Weight Delta = -1.2%; Daily Increment = -0.3%; Day 4 is an exchange holiday.
1. Day 1 weight = 1.2%-0.3%*1 = 0.9%
2. Day 2 weight = 1.2%-0.3%*2 = 0.6%
3. Day 3 weight = 1.2%-0.3%*3 = 0.3%
4. Day 4 weight = 1.2%-0.3%*4 = 0.0% = Removed from index
5. Day 5 weight = Removed from index

Freeze Date

A multi-day rebalancing process may be put on hold on any given day by utilizing a Freeze Date. On a
freeze date, the target weights for a given day in the rebalancing period are carried over from the
previous day. If a freeze date occurs, the rebalancing period is extended by the total number of freeze

S&P Dow Jones Indices: Index Mathematics Methodology 19

dates during the rebalancing period. A freeze date will not increase the rebalance length, it will only move
the rebalancing end date.

Multi-day rebalancing capabilities are compatible with standard weighted and equal weighted
methodologies.

S&P Dow Jones Indices: Index Mathematics Methodology 20

Total Return Calculations
The preceding discussions were related to price indices where changes in the index level reflect changes
in stock prices. In a total return index changes in the index level reflect both movements in stock prices
and the reinvestment of dividend income. A total return index represents the total return earned in a
portfolio that tracks the underlying price index and reinvests dividend income in the overall index, not in
the specific stock paying the dividend.

The total return construction differs from the price index and builds the index from the price index and
daily total dividend returns. The first step is to calculate the total dividend paid on a given day and convert
this figure into points of the price index:

TotalDailyDividend =  Dividend i  Sharesi (1)

i

Where Dividend is the dividend per share paid for stock i and Shares are the index specific shares. This
is done for each trading day. Dividendi is generally zero except for four times a year when it goes ex-
dividend for the quarterly dividend payment.3 Stocks may also issue dividends on a monthly, semi-annual
or annual basis. Some stocks do not pay a dividend and Dividend is always zero. TotalDailyDividend is
measured in dollars. This is converted to index points by dividing by the divisor for the underlying price
index:

TotalDailyDividend
IndexDivid end = (2)
Divisor

The next step is to apply the usual definition of a total return from a financial instrument to the price index.
Equation (1) gives the definition, and equation (2) applies it to the index:

P + Dt
TotalReturn = ( t ) −1
Pt −1

and
IndexLevel t + IndexDivid end t
DTRt = ( − 1)
IndexLevel t −1

where the TotalReturn and the daily total return for the index (DTR) is stated as a decimal. The DTR is
used to update the total return index from one day to the next:

Total Return Index t = (Total Return Index t −1)  (1 + DTRt )

3
Dividendi can be negative if a dividend correction is applied to a particular stock. In such cases, a total return can have a value
lower than the price return. For more information on dividend corrections please refer to S&P Dow Jones Indices’ Equity Indices
Policies & Practices Methodology.

S&P Dow Jones Indices: Index Mathematics Methodology 21

Net Total Return Calculations
To account for tax withheld from dividends, a net total return calculation is used. The calculation is
identical to the calculations detailed in the previous Total Return section, except each dividend is adjusted
to account for the tax taken out of the payment.

Inserting the withholding rate into the calculation at the first step is all that needs to be done − the
calculation can follow identically from that point forward:

TotalDailyDividend =  Dividend i  Sharesi  (1 − WithholdingRatei )

i

The tax rates used for S&P Dow Jones Indices’ global indices are from the perspective of a Luxembourg
investor. However, in domestic index families, tax rates from the perspective of a domestic investor will be
applied.

S&P Dow Jones Indices: Index Mathematics Methodology 22

Franking Credit Adjusted Total Return Indices
Additional total return indices are available for a number of S&P/ASX Indices that adjust for the tax effect
of franking credits attached to cash dividends. The indices utilize tax rates relevant to two segments of
investors: one version incorporates a 0% tax rate relevant for tax-exempt investors and a second version
uses a 15% tax rate relevant for superannuation funds. The franking credits attached to both regular and
special cash dividends are included in the respective calculations.

To calculate the gross dividend points reinvested in the Franking Credit Adjusted Total Return Indices:

Grossed-up Dividend = [As Reported Dividend * (1 – % Franked) + (As Reported Dividend *

% Franked / (1 – Company Tax Rate))]

The Net Tax Effect of the franking credit is then calculated based on the investor tax rate (i.e. 0% for tax-
exempt investors and 15% for superannuation funds).

Net Tax Effect = [Grossed-up Dividend * (1 – Investor Tax Rate)] – As Reported Dividend

The Net Tax Effect of each dividend is then multiplied by the index shares of that company to calculate
the gross dividend market capitalization.

Gross Dividend Market Cap = Net Tax Effect * Index Shares

These are then summed for all dividends going ex on that date and converted to dividend points by
dividing by the index divisor

Gross Dividend Points = Sum of Gross Dividend Market Caps / Index Divisor

Franking Credit Adjusted Annual Total Return Indices. This index series accrues a pool of gross
dividend points on a daily basis and reinvests them across the index annually after the end of the financial
year. Reinvestment occurs at market close on the first trading day after June 30th. The gross dividend
points are derived by taking the value of the gross dividend market capitalization (less the as reported
dividend market capitalization) and dividing it by the index divisor effective on the ex-date of the
respective dividend.

Franking Credit Adjusted Daily Total Return Indices. Rather than allowing a separate accrual of gross
dividend points, this index series reinvests the gross dividend amount across the index at the close of the
ex-date on a daily basis.

S&P Dow Jones Indices: Index Mathematics Methodology 23

Currency and Currency Hedged Indices
A currency-hedged index is designed to represent returns for those global index investment strategies
that involve hedging currency risk, but not the underlying constituent risk. 4

Investors employing a currency-hedged strategy seek to eliminate the risk of currency fluctuations and
are willing to sacrifice potential currency gains. By selling foreign exchange forward contracts, global
investors are able to lock in current exchange forward rates and manage their currency risk. Profits
(losses) from the forward contracts are offset by losses (profits) in the value of the currency, thereby
negating exposure to the currency.

Return Definitions

S&P Dow Jones Indices’ standard currency hedged indices are calculated by hedging beginning-of-period
balances using rolling one-month forward contracts. The amount hedged is adjusted on a monthly basis.

Returns are defined as follows:

Currency Return =  End Spot Rate  −1

 Beginning Spot Rate 

Unhedged Return = (1 + Local Total Return ) * (1 + Currency Return ) − 1

Currency Return on Unhedged Local Total Return = (Currency Return ) * (1 + Local Total Return )

Forward Return =  Beginning one - month Forward Rate  −1

 Beginning Spot Rate 

Hedge Return = HedgeRatio  (Forward Re turn − Currency Re turn )

Hedged Index Return = Local Total Return + Currency Return on Unhedged Local Total Return +
Hedge Return

Hedged Index Level = Beginning Hedged Index Level * (1 + Hedged Index Return)

To facilitate index replication, S&P Dow Jones Indices determines the amount of foreign exchange
forward contracts sold using an index rebalance reference date.5 On the index reference date, which
occurs on the business day prior to the end of the month, the rebalance forward amounts and currency
weights are determined. As a result of the forward amounts and currency weights determination occurring
one business day prior to the month end rebalance, an adjustment factor is utilized in the calculation of
the hedge return to account for the performance of the S&P Dow Jones Indices Currency-Hedged Index
on the last business day of the month. Please refer to the index computation section for further details.

S&P Dow Jones Indices also offers daily currency hedged indices for clients who require benchmarks
with more frequent currency hedging. The daily currency hedged indices differ from the standard currency

4
By currency risk, we simply mean the risk attributable to the security trading in a currency different from the investor’s home
currency. This definition does not incorporate risks that exchange rate changes can have on an underlying security’s price
performance.
5
Prior to March 1, 2015 S&P Dow Jones Indices’ Currency-Hedged Indices utilized the month-end for both index reference and
index rebalance date.

S&P Dow Jones Indices: Index Mathematics Methodology 24

hedged indices by adjusting the amount of the forward contracts that mature at the end of month, on a
daily basis, according to the performance of the underlying index. This further reduces the currency risk
from under-hedging or over-hedging resulting from index movement between two monthly rolling periods.

Details of the formulae used in computing S&P Dow Jones Indices’ currency-hedged indices are below.

The Hedge Ratio

The hedge ratio is simply the proportion of the portfolio’s currency exposure that is hedged.
• Standard Currency-Hedged Index. In a standard currency-hedged index, we simply wish to
eliminate the currency risk of the portfolio. Therefore, the hedge ratio used is 100%.
• No Hedging. An investor who expects upside potential for the local currency of the index
portfolio versus the home currency, or does not wish to eliminate the currency risk of the portfolio,
will use an unhedged index. In this case, the hedge ratio is 0, and the index simply becomes the
standard index calculated in the investor’s home currency. Such indices are available in major
currencies as standard indices for many of S&P Dow Jones Indices’ indices.
In contrast to a 100% currency-hedged standard index, which seeks to eliminate currency risk
and has passive equity exposure, over- or under-hedged portfolios seek to take active currency
risks to varying degrees based on the portfolio manager’s view of future currency movements.
• Over Hedging. An investor who expects significant upside potential for the home currency
versus the local currency of the index portfolio might choose to double the currency exposure. In
this case, the hedge ratio will be 200%.
• Under Hedging. An investor who expects some upside potential for the local currency of the
index portfolio versus the home currency, but wishes to eliminate some of the currency risk, might
choose to have half the currency exposure hedged using a 50% hedge ratio.

S&P Dow Jones Indices calculates indices with hedge ratios different from 100% as custom indices.

Calculating a Currency-Hedged Index

Using the returns definitions on prior pages, the Hedged Index Return can be expressed as:

Hedged Index Return = Local Total Return + Currency Return*(1 + Local Total Return) + Hedge
Return

Rearranging yields:

Hedged Index Return = (1 + Local Return) * (1 + Currency Return) -1 + Hedge Return

Again, using the returns definitions on prior pages with a hedge ratio of 1 (100%), the expression yields:

Hedged Index Return = Unhedged Index Return + Hedge Return

Hedged Index Return = Unhedged Index Return + Forward Return - Currency Return

This equation is more intuitive since when you do a 100% currency hedge of a portfolio, the investor
sacrifices the gains (or losses) on currency in return for gains (or losses) in a forward contract.

From the equation above, we can see that the volatility of the hedged index is a function of the volatility of
the unhedged index return, the forward return, and the currency return, and their pair-wise correlations.

S&P Dow Jones Indices: Index Mathematics Methodology 25

These variables will determine whether the hedged index return series’ volatility is greater than, equal to,
or less than the volatility of the unhedged index return series.

Currency Hedging Outcomes

The results of a currency-hedged index strategy versus that of an unhedged strategy vary depending
upon the movement of the exchange rate between the local currency and home currency of the investor.

S&P Dow Jones Indices’ standard currency hedging process involves eliminating currency exposure
using a hedge ratio of 1 (100%).
1. The currency-hedged index does not necessarily give a return exactly equal to the return of the
index available to local market investor. This is because there are two additional returns −
currency return on the local total return and hedge return. These two variables usually add to a
non-zero value because the monthly rolling of forward contracts does not result in a perfect
hedge. Further, the local total return between two readjustment periods remains unhedged.
However, hedging does ensure that these two returns remain fairly close.
2. The results of a currency-hedged index strategy versus that of an unhedged strategy varies
depending upon the movement of the exchange rate between the local currency and home
currency of the investor. For example, a depreciating euro in 1999 resulted in an unhedged S&P
500 return of 40.0% for European investors, while those European investors who hedged their
U.S. dollar exposure experienced a return of 17.3%. Conversely, in 2003 an appreciating euro in
2003 resulted in an unhedged S&P 500 return of 5.1% for European investors, while those
European investors who hedged their U.S. dollar exposure experienced a return of 27.3%.

Index Computation

Monthly Return Series (For Monthly Currency Hedged Indices)

m = The month in the calculation, represented as 0, 1, 2, etc..
SPI_EHm = The S&P Dow Jones Indices Currency-Hedged Index level at the end of month m
SPI_EHm-1 = The S&P Dow Jones Indices Currency-Hedged Index level at the end of the prior
month
SPI_EHmr-1 = The S&P Dow Jones Indices Currency-Hedged Index level at the end of the prior
month index reference date. S&P Dow Jones Indices’ standard index reference date
for hedged indices is one business day prior to the month-end rebalance date.
SPI_MAF = Monthly Index Adjustment Factor to account for the performance of the S&P Dow
Jones Indices Currency-Hedged Index between the index reference and month end
rebalance dates. It is calculated as the ratio of the S&P Dow Jones Indices Currency-
Hedged Index level on the reference date and the S&P Dow Jones Indices Currency-
Hedged Index level at the end of the month.
 SPI _ EHmr −1 
SPI _ MAF =  

 SPI _ EHm −1 
SPI_Em = The S&P Dow Jones Indices Index level, in foreign currency, at the end of month m
SPI_Em-1 = The S&P Dow Jones Indices Index level, in foreign currency, at the end of the prior
month
SPI_ELm-1 = The S&P Dow Jones Indices Index level, in local currency, at the end of the prior
month, m-1
HRm = The hedge return (%) over month m
Sm = The spot rate in foreign currency per local currency (FC/LC), at the end of month m

S&P Dow Jones Indices: Index Mathematics Methodology 26

 Smr = The spot rate in foreign currency per local currency (FC/LC) on the index reference
date for month m
Fm = The first front-month forward rate in foreign currency per local currency (FC/LC), at the
end of month m

For the end of month m = 1,

 SPI _ E1 
SPI _ EH1 = SPI _ EH0 *  + HR1 
 SPI _ E 0 

For the end of month m,

 SPI _ E m 
SPI _ EHm = SPI _ EHm −1 *  + HR m 
 SPI _ E m −1 

The hedge return for monthly currency hedged indices is:

 F Sm 
HR m =  m −1 −  * SPI _ MAF
 Smr −1 Smr −1 

Daily Return Series (For Monthly Currency Hedged Indices and Daily Currency Hedged Indices)

The daily return series are computed by interpolating between the spot price and the forward price.

For each month m, there are d = 1, 2, 3…D calendar days.

md is day d for month m, m0 is the last business day of the month m-1 and mr0 is the index reference day
of the month m-1.

F_Imd = The interpolated forward rate as of day d of month m

AFmd = The adjustment factor for daily hedged indices as of day d of month m

D−d 
F _ Imd = Smd +   * (Fmd − Smd )
 D 

SPI _ ELmd −1
AFmd =
SPI _ ELm0
For the day d of month m,

 SPI _ Emd 
SPI _ EHmd = SPI _ EHm0 *  + HRmd 

 SPI _ Em0 

The hedge return for monthly currency hedged indices is:

 F F _ Imd 
HRmd =  m0 −  * SPI _ MAF

 Smr 0 Smr 0 

S&P Dow Jones Indices: Index Mathematics Methodology 27

The hedge return for daily currency hedged indices is calculated as follows:

When day d is the first business day of month m,

𝐹𝑚0 𝐹_𝐼𝑚𝑑
𝐻𝑅𝑚𝑑 = 𝐴𝐹𝑚𝑑 ∗ ( − )
𝑆𝑚𝑟0 𝑆𝑚𝑟0

When day d is not the first business day of month m,

𝐹_𝐼𝑚𝑑−1 𝐹_𝐼𝑚𝑑
𝐻𝑅𝑚𝑑 = 𝐴𝐹𝑚𝑑 ∗ ( − ) + 𝐻𝑅𝑚𝑑−1
𝑆𝑚𝑟0 𝑆𝑚𝑟0

Dynamic Hedged Return Indices

Dynamic hedged return indices are rebalanced at a minimum on a monthly basis as per the monthly
series described above, but include a mechanism to ensure that the index does not become over-hedged
or under-hedged beyond a certain percentage threshold. This is measured by taking the percent change
of the current value of the hedged index versus the value of the hedged index on the previous reference
date. If that percentage threshold is crossed during the month an intra-month adjustment is triggered. If
triggered, the hedge is reset to the value of the hedged index on the day the threshold is breached,
effective after the close on the following business day, using the current interpolated value of the forward
expiring at the end of the month. Thus the formulas for dynamic hedged indices become:

𝑆𝑃𝐼_𝐸𝐻𝒅 = The S&P Dow Jones Indices Currency-Hedged Index level as of day d
𝑆𝑃𝐼_𝐸𝐻𝑟𝑏 = The S&P Dow Jones Indices Currency-Hedged Index level at the prior
rebalancing date
𝑆𝑃𝐼_𝐸𝐻𝑟𝑓 = The S&P Dow Jones Indices Currency-Hedged Index level on the prior
reference day. S&P Dow Jones Indices’ standard index reference date for
hedged indices is one day prior to the rebalancing date.
𝑆𝑃𝐼_𝐴𝐹 = Index Adjustment Factor to account for the performance of the S&P Dow Jones
Indices Currency-Hedged Index between the index reference date and
rebalance date. It is calculated as the ratio of the S&P Dow Jones Indices
Currency-Hedged Index level on the reference date and the S&P Dow Jones
Indices Currency-Hedged Index level at the rebalancing date.
𝑆𝑃𝐼_𝐸𝒅 = The S&P Dow Jones Indices Index level, in foreign currency, as of date d
𝑆𝑃𝐼_𝐸𝒓𝒃 = The S&P Dow Jones Indices Index level, in foreign currency, at the prior
rebalancing date
𝐻𝑅𝑑 = The hedge return (%) as of day d since the prior rebalancing date
𝑆𝑑 = The spot rate in foreign currency per local currency (FC/LC) as of date d
𝑆𝑟𝑓 = The spot rate in foreign currency per local currency (FC/LC) as of the prior
index reference date
𝐹𝑑 = The forward rate in foreign currency per local currency (FC/LC), as of day d
𝐹_𝐼𝑑 = The interpolated forward rate as of day d
𝐹_𝐼𝑟𝑏 = The interpolated forward rate as on prior rebalancing date

S&P Dow Jones Indices: Index Mathematics Methodology 28

The formula for determining if an intra-month rebalancing is triggered is:

𝐼𝑓 (𝑎𝑏𝑠((𝑆𝑃𝐼_𝐸𝐻𝒅 /𝑆𝑃𝐼_𝐸𝐻𝑟𝑓 ) − 1)) > 𝑇𝐻

Where:
TH = Percentage threshold for the index

Then a rebalancing is triggered.

The interpolated forward rate as of day d is calculated as:

𝐷𝑎𝑦𝑠(𝑑,𝑛𝑟𝑏)
𝐹_𝐼𝑑 = 𝑆𝑑 + (𝐹𝑑 − 𝑆𝑑 ) ∗ ( )
𝐷𝑎𝑦𝑠(𝑑,𝑒𝑥𝑝)

Where,
𝐷𝑎𝑦𝑠(𝑑, 𝑛𝑟𝑏) = Days between date d and next scheduled rebalancing date
𝐷𝑎𝑦𝑠(𝑑, 𝑒𝑥𝑝) = Days between date d and expiry date of the forward rate used

Whenever applicable a standard FX market settlement conventions are applied to both the Spot Rate and
Forward Rate to determine the exact settlement dates to be used in the interpolation.

The hedge return for dynamic currency hedged indices is:

𝐹_𝐼𝑟𝑏 𝐹_𝐼𝑑
𝐻𝑅𝑑 = ( − ) ∗ 𝑆𝑃𝐼_𝐴𝐹
𝑆𝑟𝑓 𝑆𝑟𝑓

For index value on day d is:

𝑆𝑃𝐼_𝐸𝒅
𝑆𝑃𝐼_𝐸𝐻𝒅 = 𝑆𝑃𝐼_𝐸𝐻𝑟𝑏 ∗ ( + 𝑯𝑹𝒅 )
𝑆𝑃𝐼_𝐸𝒓𝒃

Currency Hedged Excess Return Indices

Since an excess return index calculates the return on an investment in an index where the investment
was made through the use of borrowed funds, currency risk can be hedged by borrowing funds in the
currency of the investment. In this scenario the initial value of the index at each hedge period will not be
affected by currency returns, but the amount gained or lost during the period will be affected by returns in
the currency.

When the gain and loss at each hedge period is not hedged, returns are defined as follows:

𝐻𝑒𝑑𝑔𝑒𝑑 𝐸𝑥𝑐𝑒𝑠𝑠 𝑅𝑒𝑡𝑢𝑟𝑛 = 𝐿𝑜𝑐𝑎𝑙 𝐸𝑥𝑐𝑒𝑠𝑠 𝑅𝑒𝑡𝑢𝑟𝑛 + 𝐶𝑢𝑟𝑟𝑒𝑛𝑐𝑦 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑈𝑛ℎ𝑒𝑑𝑔𝑒𝑑 𝐿𝑜𝑐𝑎𝑙 𝐸𝑥𝑐𝑒𝑠𝑠 𝑅𝑒𝑡𝑢𝑟𝑛

When the gain and loss at each hedge period is hedged, returns are defined as follows:

𝐻𝑒𝑑𝑔𝑒𝑑 𝐸𝑥𝑐𝑒𝑠𝑠 𝑅𝑒𝑡𝑢𝑟𝑛

= 𝐿𝑜𝑐𝑎𝑙 𝐸𝑥𝑐𝑒𝑠𝑠 𝑅𝑒𝑡𝑢𝑟𝑛 + 𝐶𝑢𝑟𝑟𝑒𝑛𝑐𝑦 𝑅𝑒𝑡𝑢𝑟𝑛 𝑜𝑛 𝑈𝑛ℎ𝑒𝑑𝑔𝑒𝑑 𝐿𝑜𝑐𝑎𝑙 𝐸𝑥𝑐𝑒𝑠𝑠 𝑅𝑒𝑡𝑢𝑟𝑛 + 𝐻𝑒𝑑𝑔𝑒 𝑅𝑒𝑡𝑢𝑟𝑛

For non-convertible currencies, currency return on unhedged local excess return is calculated using the
current forward rate based on first front-week forward contract rather than a spot rate for some cases. In
this case, the returns of daily currency hedged excess return indices are calculated as follows (note that
currency rates are quoted in local currency per foreign currency in the case of non-convertible
currencies):

S&P Dow Jones Indices: Index Mathematics Methodology 29

 𝐹_𝑤𝑒𝑒𝑘𝑁𝐶
𝑚0
𝐻𝑒𝑑𝑔𝑒𝑑 𝐸𝑥𝑐𝑒𝑠𝑠 𝑅𝑒𝑡𝑢𝑟𝑛 = 𝐿𝑜𝑐𝑎𝑙 𝐸𝑥𝑐𝑒𝑠𝑠 𝑅𝑒𝑡𝑢𝑟𝑛 + (𝐿𝑜𝑐𝑎𝑙 𝐸𝑥𝑐𝑒𝑠𝑠 𝑅𝑒𝑡𝑢𝑟𝑛 ∗ ) + 𝐻𝑒𝑑𝑔𝑒 𝑅𝑒𝑡𝑢𝑟𝑛
𝐹_𝑤𝑒𝑒𝑘𝑁𝐶
𝑚𝑑

The hedged return for daily currency hedged excess return indices is calculated as follows:

When day d is the first business day of month m,

𝐻𝑅𝑚𝑑 = 0

When day d is not the first business day of month m,

𝑁𝐶 𝑁𝐶
𝐹_𝑤𝑒𝑒𝑘𝑚0 𝐹_𝑤𝑒𝑒𝑘𝑚0
𝐻𝑅𝑚𝑑 = 𝐴𝐹_𝐸𝑅𝑚𝑑 ∗ ( 𝑁𝐶 − 𝑁𝐶 ) + 𝐻𝑅𝑚𝑑−1
𝐹_𝐼𝑚𝑑−1 𝐹_𝐼𝑚𝑑

where
𝑁𝐶
𝐹_𝑤𝑒𝑒𝑘𝑚𝑑 = The first front-week forward rate in local currency per foreign currency (LC/FC) as of
day d of month m
𝑁𝐶
𝐹_𝑤𝑒𝑒𝑘𝑚0 = The first front-week forward rate in local currency per foreign currency (LC/FC), at the
end of prior month, m-1
𝑁𝐶
𝐹_𝐼𝑚𝑑 = The interpolated forward rate in local currency per foreign currency (LC/FC), as of
day d of month m
𝑁𝐶 𝑁𝐶 𝐷−𝑑 𝑁𝐶 𝑁𝐶
𝐹_𝐼𝑚𝑑 = 𝑆𝑚𝑑 +( ) ∗ (𝐹𝑚𝑑 − 𝑆𝑚𝑑 )
𝐷
𝑁𝐶
𝑆𝑚𝑑 = The spot rate in local currency per foreign currency (LC/FC), as of day d of month
m
𝑁𝐶
𝐹𝑚𝑑 = The first front-month forward rate in local currency per foreign currency (LC/FC), as
of day d of month m
D = number of business days in month m

AF_ERmd = The adjustment factor for daily currency hedged excess return indices as of day d of
month m
𝑆𝑃𝐸𝑅𝐼_𝐸𝐿𝑚𝑑−1
𝐴𝐹_𝐸𝑅𝑚𝑑 = ⁄𝑆𝑃𝐸𝑅𝐼_𝐸𝐿 − 1
𝑚0

where:
SPERI_ELmd = The S&P Dow Jones Excess Return Index level, in local currency, as of
day d of month m
SPERI_ELm0 = The S&P Dow Jones Excess Return Index level, in local currency, at the
end of the prior month, m-1

Quanto Currency Adjusted Index

A quanto currency adjusted index represents the return of an underlying index from the perspective of a
foreign party, and incorporates the respective currency pair return with the underlying index return. It
differs from simply expressing an index in foreign currency because it represents borrowing in the index
currency to fund an investment in assets represented by the index.

For example, suppose a U.S. investor does the following on a daily basis:
1. Borrow 100 GBP in London, secured by the equivalent amount of USD in a U.S. bank
2. Invest 100 GBP in U.K. index stocks in proportion to their index weights

S&P Dow Jones Indices: Index Mathematics Methodology 30

The investor would generate profit or loss equal to the U.K. index return. They would also earn the
combined index return and the currency pair return on the profit/loss. The combined index/currency return
would not be earned on their principal because the U.K. assets can be sold to satisfy the U.K. loan and
close the position.

Arithmetically, a quanto currency adjusted index can be represented as follows:

SPI_E(t + 1) SPI_E(t + 1) S (t + 1)
SPI_QA(t + 1) = SPI_QA(t) × ( +( − 1) × ( − 1) )
SPI_E(t) SPI_E(t − n) S (t)

where:
𝑆𝑃𝐼_𝑄𝐴(𝑡 + 1) = Quanto Currency-Adjusted Index level, as of day (t+1)
𝑆𝑃𝐼_𝑄𝐴(𝑡) = Quanto Currency-Adjusted Index level, as of day (t)
𝑆𝑃𝐼_𝐸(𝑡 + 1) = Underlying Index level, as of day (t+1)
𝑆𝑃𝐼_𝐸(𝑡) = Underlying Index level, as of day (t)
𝑆𝑃𝐼_𝐸(𝑡 − 𝑛) = Underlying Index level, as of day (t-n), where n = (0 or 1), corresponding to the
difference in trading days between the foreign party and the underlying index 6
𝑆(𝑡 + 1) = Spot rate for the currency pair as of date (t+1)
𝑆(𝑡) = Spot rate for the currency pair as of date (t)

The index returns can also be expressed as:

Quanto Currency Adjusted Index Returns = Index Returns + (Index Returns′ ) × (𝐶𝑢𝑟𝑟𝑒𝑛𝑐𝑡 𝑅𝑒𝑡𝑢𝑟𝑛𝑠)

Negative/Zero Index Levels. For more information regarding the possibility of negative or zero index
levels, refer to the Negative/Zero Index Levels section.

6
For example, for foreign parties in an Asia-Pacific timezone employing such a strategy to acquire U.S. assets, n=1 to account for
the trading day difference between the party and the index.

S&P Dow Jones Indices: Index Mathematics Methodology 31

Domestic Currency Return Index Calculation
Background

Domestic Currency Return (DCR) calculations are used to calculate the return of an index without taking
any exchange rate movements into account. This may be done as a way to perform an attribution on an
index containing constituents which do not all trade in the same currency. By comparing the performance
of the float-adjusted market capitalization weighted index against the performance of the same index
calculated using DCR one can derive the performance due to the exchange rate movements.

In DCR one calculates the period-to-period percentage change of the index from the weighted percentage
change of each security’s local price and then constructs the index levels from the percentage changes.
This is in contrast to a divisor-based index where the process is reversed: the index level is calculated as
total market value divided by the divisor and the period-to-period percentage change is calculated from
the index levels. Both approaches require an initial base period or divisor value for normalization. For an
index where all of the constituents trade in the same currency both approaches give the same results.

In the DCR calculation, we calculate the percentage change in each security price, weight the percentage
changes by the security’s weight in the index at the start of the period, and then combine the weighted
price changes to calculate the index price change for the time period. The change in the index is, then,
applied to the index level in the previous period to determine the current period index level.

Equivalence of DCR and Divisor Calculations

The equivalence of the two approaches – DCR and divisor based – can be understood in two ways. First,
except for the initial base value of an index, it can be defined by either the index levels or the percentage
change from one period to the next. If we defined an index by a time series of index levels (100, 101.2,
103, 105…) we can derive the period to period changes (1.2%, 1.78%, 1.94%...). Given these changes
and assuming the index base is a value of 100 allows us to calculate the index levels. Except for the
base, the two series are equivalent. DCR calculates the changes; the divisor approach calculates the
levels.

This can be shown mathematically:

The divisor calculation approach defines an index as:

Since the initial divisor is defined by the base value and date of the index, we can replace it with the value
of the index market cap at time t=0:

S&P Dow Jones Indices: Index Mathematics Methodology 32

Now we can multiply and divide the term in the summation in the numerator by the price at time t=0
without changing its value.

If we look at the term in the numerator for a single stock in the index (i.e. no summation, as there is only
one stock) and rearrange we get:

(1)

which is equivalent to the relative price performance for each stock multiplied by its weight in the index.
When this is combined across all constituent stocks, the result is the price performance for the index.

The DCR approach uses the summation of equation (1) across all the stocks in the index to calculate the
daily price performance of the index. Once the daily index performance is calculated, the index level can
be updated from the previous day’s index level.

DCR Calculation

where:
Indext = Index level at date t
Pt = Security price at the close of date t
weightt = Security weight in the index at close of date t

and

where:
Si,t-1 = Shares of stock i
FXi,t-1 = Exchange rate of stock i for currency conversion

Essential Adjustments

The share count (Si,t-1) includes the adjustment for float by multiplying by the investable weight factor
(IWF) and for index weight by multiplying by the additional weight factor (AWF) where necessary. Further,
when an adjustment to shares is made due to a secondary offering, share buyback or any other corporate
action, this adjustment must be included in Si,t-1 if the adjusted share count takes effect on date t. A price
adjustment due to a corporate action which takes effect on date t should be reflected in Pi,t-1.

S&P Dow Jones Indices: Index Mathematics Methodology 33

Risk Control Indices
S&P Dow Jones Indices’ Risk Control Indices are designed to track the return of a strategy that applies
dynamic exposure to an underlying index in an attempt to control the level of volatility.

The index includes a leverage factor that changes based on realized historical volatility. If realized
volatility exceeds the target level of volatility, the leverage factor will be less than one; if realized volatility
is lower than the target level, the leverage factor may be greater than one, assuming the index allows for
a leverage factor of greater than one. A given Risk Control Index may have a maximum leverage factor
that cannot be exceeded. There are no guarantees that the index shall achieve its stated targets.

The return of the index consists of two components: (1) the return on the position in the underlying index
and (2) the interest cost or gain, depending upon whether the position is leveraged or deleveraged.

A leverage factor greater than one represents a leveraged position, a leverage factor equal to one
represents an unleveraged position, and a leverage factor less than one represents a deleveraged
position. The leverage factor may change periodically, on a set schedule, or may change when volatility
exceeds or falls below predetermined volatility thresholds.

For equity indices, the leverage factor will not change at the close of any index calculation day in which
stocks representing 15% or more of the total weight of the underlying index are not trading due to an
exchange holiday. At each underlying index’s rebalancing, and using each stock’s weight at that time, a
forward looking calendar of such dates is determined and posted on S&P Dow Jones Indices’ Web site at
www.spdji.com.

The formula for calculating the Risk Control Index is as follows:

Risk Control Index Return t =

(1)
 Underlying Index t   t 
K rb * 
 Underlying Index rb
− 1 + (1 − K rb ) * 
 i = rb +1

(1 + InterestRatei −1 * Di −1,i / 360 ) − 1


The Risk Control Index Value at time t can, then, be calculated as:

Risk ControlIndexValuet =
(2)
(Risk ControlIndex Valuerb ) * (1 + Risk ControlIndex Returnt )

Substituting equation (1) into (2) and expanding yields:

Risk Control Index Valuet =

Risk Control Index Valuerb *

   t  (3)
 Underlying Index t 
1 + K
  rb
* 
 Underlying Index rb
− 1 + (1 − K rb ) * 

 (1 + InterestRatei −1 * Di − 1, i / 360 ) − 1  
i = rb +1   
  

S&P Dow Jones Indices: Index Mathematics Methodology 34

Excess Return versions of Risk Control Indices are calculated as follow:

Risk Control ER Index Valuet =

𝑅𝑖𝑠𝑘𝐶𝑜𝑛𝑡𝑟𝑜𝑙 𝐸𝑅 𝐼𝑛𝑑𝑒𝑥 𝑉𝑎𝑙𝑢𝑒𝑟𝑏 ∗

𝑡
𝑈𝑛𝑑𝑒𝑟𝑙𝑦𝑖𝑛𝑔𝐼𝑛𝑑𝑒𝑥𝑡 𝐷𝑖−1,𝑖
[1 + [𝐾𝑟𝑏 ∗ ( − 1) − 𝐾𝑟𝑏 ∗ [ ∏ (1 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝑅𝑎𝑡𝑒𝑡−1 ∗ ) − 1]]]
𝑈𝑛𝑑𝑒𝑟𝑙𝑦𝑖𝑛𝑔𝐼𝑛𝑑𝑒𝑥𝑡−1 360
𝑖=𝑟𝑏+1

where:
UnderlyingIndext = The level of the underlying index on day t
UnderlyingIndexrb = The level of the underlying index as of the previous rebalancing date
rb = The last index rebalancing date7
Krb = The leverage factor set at the last rebalancing date, calculated as:
Min(Max K, Target Volatility/Realized Volatilityrb-d)
Max K = The maximum leverage factor allowed in the index
d = The number of days between when volatility is observed and the rebalancing
date (e.g. if d = 2, the historical volatility of the underlying index as of the
close two days prior to the rebalancing date will be used to calculate the
leverage factor Krb)
Target Volatility = The target level of volatility set for the index
Realized Volatilityrb-d = The historical realized volatility of the underlying index as of the close of d
trading days prior to the previous rebalancing date, rb, where a trading day is
defined as a day on which the underlying index is calculated
Interest Ratei-1 = The interest rate set for the index8

For indices that replicate a rolling investment in a three-month interest rate the above formula is altered
to:
Risk Control Index Valuerb *
Risk Control Index Valuet =    t 
 Underlying Index t 
1 + K
  rb
* 
 Underlying Index rb
− 1 + (1 − K rb ) * 

 (1 + InterestRatei −1) − 1  
i = rb +1   
  

where:
1
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝑅𝑎𝑡𝑒𝑖−1 = (𝐷𝑖−1,𝑡 ∗ 𝐼𝑅3𝑀𝑖−1 − (𝐼𝑅3𝑀𝑖−1 − 𝐼𝑅3𝑀𝑖−2 − 𝐷𝑖−1,𝑡 ∗ (𝐼𝑅3𝑀𝑖−1 − 𝐼𝑅2𝑀𝑖−1 ) ∗ ( )) ∗ 90)/360
30

where:
Di-1, t = The number of calendar days between day i-1 and day t
IR3Mi-1 = Three-month interest rate on day i-1
IR2M i-1 = Two-month interest rate on day i-19

For indices that are rebalanced daily, the leverage factor is not recalculated at the close of any index
calculation day when stocks representing 15% or more of the total weight of the underlying index are not
trading due to an exchange holiday. If rb is a holiday, then Krb is calculated as follows:

7
The inception date of each risk control index is considered the first rebalancing date of that index.
8
The interest rate may be an overnight rate, such as LIBOR or EONIA, or a daily valuation of a rolling investment in a three-month
interest rate, or zero. A 360-day year is assumed for the interest calculations in accordance with U.S. banking practices.
9
Effective 12/03/2018, the interest rate for EUR-based Risk Control indices is a one-month rate instead of a two-month rate.
Therefore, those indices’ interest rate is depicted as: IR2M i-1 = One-month interest rate on day i-1.

S&P Dow Jones Indices: Index Mathematics Methodology 35

  Underlying Index rb   Risk ContorlIndexValuerb 
K rb = K rb −1 *   /
 


 Underlying Index rb −1   Risk controlIndexValuerb −1 

This shows what the effect will be on rb, given that no adjustment of positions is allowed to occur on such
days. The leverage factor will adjust solely to account for market movements on that day.

For periodically rebalanced risk control indices, Krb is calculated at each rebalancing and held constant
until the next rebalancing.

For large position moves, some investors like to rebalance risk control indices intra-period, when the
periodicity is longer than daily. This feature is incorporated in the risk-control framework by introducing a
barrier, Kb, on the leverage factor. Intra-period rebalancing is allowed only if the absolute change of the
equity leverage factor Kt, at time t, is larger than the barrier Kb from the value at the last rebalancing date.

The equity leverage factor Kt is calculated as:

Kt = Min(Max K, Target Volatility/Realized Volatilityt-d)

If no barrier is provided for the index, then intra-period rebalancing is not allowed.

Dynamic Rebalancing Risk Control Index

The index calculates the theoretical leverage factor on daily basis. If the difference between the
theoretical leverage factor and the leverage factor on the last rebalancing date is less than the Minimum
Daily Allocation Change, the index will not rebalance.

The theoretical leverage factor is determined as:

𝑡ℎ𝐾𝑡 = the theoretical leverage factor on day t, calculated daily as:
𝑇𝑎𝑟𝑔𝑒𝑡 𝑉𝑜𝑙𝑎𝑖𝑙𝑖𝑡𝑦
𝑡ℎ𝐾𝑡 = 𝑀𝑖𝑛(𝑀𝑎𝑥 𝐾, )
𝑅𝑒𝑎𝑙𝑖𝑧𝑒𝑑 𝑉𝑜𝑙𝑎𝑡𝑖𝑙𝑖𝑡𝑦𝑡−𝑑
where:
d = Lag to Rebalancing Date, defined as the number of days between when volatility is observed and
the date which the theoretical leverage factor is calculated for (e.g. if d = 2, the historical volatility
of the underlying index as of the close two days prior to the date which the theoretical leverage
factor is calculated for will be used to calculate the leverage factor thKt)

The trade decision is based on the difference between the theoretical leverage factor and the leverage
factor on the last rebalancing date:
If |𝑡ℎ𝐾𝑡 − 𝐾𝑡−1 | > 𝜃,

Then
t is a rebalancing day, and
𝐾𝑡 = 𝑡ℎ𝐾𝑡
Else
t is not a rebalancing day
𝐾𝑡 = 𝐾𝑡−1

where:
𝜃 = Minimum Daily Allocation Change
𝐾𝑡 = the actual leverage factor on day t

S&P Dow Jones Indices: Index Mathematics Methodology 36

Dynamic rebalancing can be combined with monthly rebalancing. In this case, besides intra-monthly
rebalancing triggered by breach of Minimum Daily Allocation Change, the risk control index rebalances
after the close of the last business day of the month.

Capped Equity Weight Change

For daily rebalanced or dynamic rebalanced risk control indices, some investors like to control for
excessive position change. This feature is incorporated in the risk-control framework by introducing a
Maximum Daily Allocation Change , 𝜃̅.

The theoretical leverage factor is determined in the same way as in a Dynamic Rebalanced Risk Control
Index. The trade decision is based on the difference between the theoretical leverage factor and the
leverage factor on the last rebalancing date:
If |𝑡ℎ𝐾𝑡 − 𝐾𝑡−1 | > 𝜃,

Then:
t is a rebalancing day, and
𝑀𝑖𝑛(𝐾𝑡−1 + 𝜃̅ , 𝑡ℎ𝐾𝑡 ), 𝑖𝑓 𝑡ℎ𝐾𝑡 − 𝐾𝑡−1 > 0
𝐾𝑡 = {
𝑀𝑎𝑥(𝐾𝑡−1 − 𝜃̅ , 𝑡ℎ𝐾𝑡 ), 𝑖𝑓 𝑡ℎ𝐾𝑡 − 𝐾𝑡−1 ≤ 0
Else
t is not a rebalancing day
𝐾𝑡 = 𝐾𝑡−1

where:
𝜃 = Minimum Daily Allocation Change (𝜃 >0 for dynamic rebalanced risk control indices, and 𝜃 =
0 for daily rebalanced risk control indices).
𝜃̅ = Maximum Daily Allocation Change
𝐾𝑡 = the actual leverage factor on day t

Dynamic rebalancing can be combined with monthly rebalancing. In this case, besides intra-monthly
rebalancing triggered by breach of Minimum Daily Allocation Change, the risk control index rebalances
after the close of the last business day of the month.

Excess Return Indices

S&P Dow Jones Indices’ Excess Return Indices are designed to track an unfunded investment in an
underlying index. In other words, an excess return index calculates the return on an investment in an
index where the investment was made through the use of borrowed funds. Thus the return of an excess
return index will be equal to that of the underlying index less the associated borrowing costs. Most S&P
Dow Jones Indices calculate an excess return index level to mirror an unfunded position.

The formula for calculating the Excess Return Index is as follows:

 Underlying Index t   Borrowing Rate 

ExcessReturn =  − 1 −    Dt ,t −1 (4)
 Underlying Index t −1   360 

The Excess Return Index Value at time t can be calculated as:

ExcessReturn IndexValue t = (ExcessReturn Index Valuet −1 )  (1 + Excess Return ) (5)

Substituting (4) into (5) and expanding the right hand side of (5) yields:

S&P Dow Jones Indices: Index Mathematics Methodology 37

 ExcessReturn IndexValue t =
  Underlying Index t   Borrowing Rate  
ExcessReturn IndexValue t −1 * 1 +  − 1 −    Dt ,t −1  
  Underlying Index t −1   360   

where:
Borrowing Rate = The investment funds borrowing rates, which will differ for each excess
return index10
Dt, t-1 = The number of calendar days between date t and t-1

Exponentially-Weighted Volatility

The realized volatility is calculated as the maximum of two exponentially weighted moving averages, one
measuring short-term and one measuring long-term volatility.

RealizedVolatilityt = Max (RealizedVolatilityS,t , RealizedVolatilityL,t )

where:
S,t = The short-term volatility measure at time t, calculated as:
(6)

252
RealizedVolatilityS,t =  VarianceS,t
n
for t  T0
2
  Underlying Index t 
VarianceS,t = S  VarianceS,t −1 + (1 − S )  ln 

  Underlying Index t − n 
for t = T0
T0 2
S,i ,m   Underlying Index i 
VarianceS,T0 =   ln
WeightingFactorS   Underlying Index i − n



i = m +1

L,t = The long-term volatility measure at time t, calculated as:

(7)

252
RealizedVolatilityL,t =  VarianceL,t
n
for t  T0
2
  Underlying Index t 
VarianceL,t = L  VarianceL,t −1 + (1 − L )  ln 

  Underlying Index t − n 
for t = T0
T0 2
 L,i ,m   Underlying Index i 
VarianceL,T0 =   ln
WeightingFactorL   Underlying Index i − n



i = m +1

10
Generally an overnight rate, such as overnight LIBOR in the U.S. or EONIA in Europe, will be used. However, in some cases
other interest rates may be used. A 360-day year is assumed for the interest calculations in accordance with U.S. banking
practices.

S&P Dow Jones Indices: Index Mathematics Methodology 38

where:
T0 = The start date for a given risk control index
n = the number of days inherent in the return calculation used for determining volatility11
m = the Nth trading date prior to T0
N = the number of trading days observed for calculating the initial variance as of the start date
of the index
S = The short-term decay factor used for exponential weighting 12

L = The long-term decay factor used for exponential weighting10

S,m,i = Weight of date t in the short-term volatility calculation, as calculated based on the following
formula:
N + m −i
S,t = (1 − S ) * S

T0
WeightingFactorS = S,i,m
i = m +1

L,m,i = Weight of date t in the long-term volatility calculation, as calculated based on the following
formula:
N + m −i
L,t = (1 − L ) * L

T0
WeightingFactorL = L,i,m
i = m +1

The interest rate, maximum leverage, target volatility and the lambda decay factors are defined in relation
to each index and are generally held constant throughout the life of the index. The leverage position
changes at each rebalancing based on changes in realized volatility. There is a two-day lag between the
calculation of the leverage factor, based on the ratio of target volatility to realized volatility, and the
implementation of that leverage factor in the index.

The above formulae can be used for simpler models by the appropriate choice of parameters. For
example, if the short-term and long-term decay factors, S and L are set to the same value (e.g. 5%)
than there are no separate considerations for short-term and long-term volatility.

Exponentially-Weighted Volatility Based on Current Allocations

The index calculations are the same as described in the Exponentially Weighted Volatility section above,
except that realized volatility is calculated using the returns derived from the levels of hypothetical
underlying index based on the current allocations within the underlying index and historical returns of
those constituents, rather than the historical levels of the underlying index.

Underlying Indext = Hypothetical underlying index level on day t, calculated as

𝐾

𝑈𝑛𝑑𝑒𝑟𝑙𝑦𝑖𝑛𝑔 𝐼𝑛𝑑𝑒𝑥𝑡 = 𝑈𝑛𝑑𝑒𝑟𝑙𝑦𝑖𝑛𝑔 𝐼𝑛𝑑𝑒𝑥𝑡−1 ∗ (1 + ∑ 𝑤𝑖 ∗ 𝑟𝑖,𝑡 )

𝑖=𝑖

11
If n = 1 daily returns are used, while if n = 2 two day returns are used, and so forth.
12
The decay factor is a number greater than zero and less than one that determines the weight of each daily return in the
calculation of historical variance.

S&P Dow Jones Indices: Index Mathematics Methodology 39

 where:
K = number of constituents in current underlying index as of day t
ri,t = return of the i-th constituent in the underlying index on day t
wi = weight of the i-th constituent in current underlying index

Simple-Weighted Volatility

The realized volatility is calculated as the maximum of two simple-weighted moving averages, one
measuring short-term volatility and one measuring long-term volatility.

RealizedVolatilityt = Max (RealizedVolatilityS,t ,RealizedVolatilityL,t )

where:
S,t = The short-term volatility measure at time t, calculated as:

252
RealizedVolatilityS,t =  VarianceS,t
n

t 2
 Underlying Index i 
VarianceS,t = 1/ NS *  ln 
i =t −Ns +1  
Underlying Index i −n

L,t = The long-term volatility measure at time t, calculated as:

252
RealizedVolatilityL,t =  VarianceL,t
n

t 2
 Underlying Index i 
VarianceL,t = 1/ NL *  ln 
i =t −Nl +1  
Underlying Index i −n

where:
n = The number of days inherent in the return calculation used for determining volatility 13
NS = The number of trading days observed for calculating variance for the short-term volatility
measure
NL = The number of trading days observed for calculating variance for the long-term volatility
measure
Underlying Indext is defined as in the “Exponentially-Weighted Average Volatility” section.

13
If n = 1 daily returns are used, while if n = 2 two day returns are used, and so forth.

S&P Dow Jones Indices: Index Mathematics Methodology 40

Futures-Based Risk Control Indices

When the underlying index is based on futures contracts, most of the Risk Control methodology follows
the details on the prior six pages. However, there are some differences as detailed below, particularly as
it relates to the cash component of the index.

For such an index, it includes a leverage factor that changes based on realized historical volatility. If
realized volatility exceeds the target level of volatility, the leverage factor will be less than one; if realized
volatility is lower than the target level, the leverage factor may be greater than one. A given risk control
index may have a maximum leverage factor that cannot be exceeded.

For equity risk control indices, the return consists of two components: (1) the return on the position in the
underlying S&P Dow Jones Indices index and (2) the interest cost or gain, depending upon whether the
position is leveraged or deleveraged. For futures-based risk control indices, there is no borrowing or
lending to achieve investment objectives in the underlying index. Therefore, the cash component of the
Index does not exist.

Again, a leverage factor greater than one represents a leveraged position, a leverage factor equal to one
represents an unleveraged position, and a leverage factor less than one represents a deleveraged
position. The leverage factor may change at regular intervals, in response to changes in realized
historical volatility, or when the expected volatility exceeds or falls below predetermined volatility
thresholds, if such thresholds were in place.

The formula for calculating the Risk Control Excess Return Index largely follows that detailed beginning
with equation (1). However, since there is no funding for such indices (as opposed to the case with equity
excess return indices, where it is assumed the initial investment is borrowed and excess cash is
invested), the interest rate used in the calculation is eliminated:

 Underlying Indext 
Risk Control Excess Return Index Returnt = K rb *  − 1 (8)
 Underlying Index rb 

The Risk Control Excess Return Index Value at time t can, then, be calculated as:
Risk ControlExcessReturnIndexVa luet =
(Risk ControlExcessReturnIndex Valuerb ) * (1 + Risk ControlExcessReturnIndex Returnt )

The formula for calculating the Risk Control Total Return Index, which includes interest earned on
Treasury Bills, is as follows:
Risk Control Total Return Index Return t =
 Underlying Index t   t 

(9)
K rb *  − 1 +  (1 + InterestRatei −1 * Di −1,i / 360 ) − 1
 Underlying Index rb  i =rb +1 

The Risk Control Total Return Index Value at time t can, then, be calculated as:
Risk ControlTotalReturnIndexVal uet =
(10)
(Risk ControlTotalReturnIndex Valuerb ) * (1 + Risk ControlTotalReturnIndex Return t )

Substituting equation (9) into (10) and expanding yields:

Risk Control Total Return Index Valuet =

S&P Dow Jones Indices: Index Mathematics Methodology 41

 Risk Control Index Valuerb *
   Underlying Indext   t  (11)
1 + K
  rb
* 
 Underlying Index rb
− 1 +   (1 + InterestRatei −1 * Di − 1, i / 360 ) − 1  
 i = rb +1   
  

where all variables in equations (8)-(11) are the same as those defined for (1)-(3) except:
Interest Ratei-1 = The interest rate set for the index14

Exponentially-Weighted Volatility for Futures-Based Risk Control Indices

Please refer to the Risk Control 2.0 Indices section of this document for information on Exponentially-
Weighted Volatility. However, for futures-based risk control indices there is a three (3)-day lag between
the calculation of the leverage factor, based on the ratio of target volatility to realized volatility, and the
implementation of that leverage factor in the index.

Dynamic Volatility Risk Control Indices

In dynamic volatility risk control indices, the volatility target is not set as a definition of the index. Rather it
is set at various levels based on the moving average of VIX computed over a predetermined number of
days (e.g. 30-day moving average).

Variance Based Risk Control Indices

In variance-based risk control indices, a target level of variance is set rather than a target volatility level.
This allows for faster leveraging or deleveraging of allocations based on changes in volatility or variance
in the market. For these indices:

Krb = Min(Max K, Target Variance/Realized Variancerb-d)

where variance is defined as per above.

All other index calculations remain the same.

14
In accordance with the S&P GSCI approach, the interest rate for these indices is the 91-day U.S. Treasury rate. A 360-day year is
assumed for the interest calculations in accordance with U.S. banking practices.

S&P Dow Jones Indices: Index Mathematics Methodology 42

Risk Control 2.0 Indices
S&P Dow Jones Indices’ Risk Control 2.0 Indices are Risk Control indices, where the cash portion of the
investment in the standard Risk Control strategy is replaced with a liquid bond index.

The index portfolio consists of two assets, the index for a risky asset A, with weight W, and the
corresponding bond index B, with weight of (1-W). Weight W lies between 0 and 100%. There is no
shorting or leverage allowed in the strategy.

Constituent Weighting

The formula to assign weights to the underlying indices is determined by the following:

W 2 *  A2 + (1 − W )2 *  B2 + 2 * W * (1 − W ) *  *  A *  B = Target
2
(1)

where:
W = The weight of the risky asset A
A = The volatility of the risky asset A

B = The volatility of the bond index B

 = The correlation of Index A and B

σ Target = The target volatility

The calculation of volatility and correlation follows the same procedure and conventions as outlined in the
prior section for the standard Risk Control strategy.

The quadratic equation above has two solutions to the weight allocated the index A:

W1 = (−b + b 2 − 4a * c ) / 2a

W 2 = (−b − b 2 − 4a * c ) / 2a (2)

where:
a = A
2
+  B2 − 2 *  *  A *  B

b = 2   A  B − 2 B2

c =  B2 − Target
2

The fallback mechanism for the solutions of weight W:

1. If none of the solutions in equation (2) above falls between 0 and 100%, then the strategy falls
back to standard Risk Control, where the maximum leverage is capped at 100%.
2. If both solutions to the equation (2) are valid weights that are greater than 0, then the larger of the
two, max(W1, W2), becomes the weight of the risky asset A where the maximum leverage is
capped at the level defined by the indices risk control parameters.

S&P Dow Jones Indices: Index Mathematics Methodology 43

The final weights of the underlying assets are determined using the following steps:

Step 1: Determine the weights under the short term parameters

a) Determine the short-term variance for assets A and B using the short term exponential parameter
with the same formulae as described in equation (6) under the section Risk Control Indices, with
the returns for assets A and B used in determining the short-term variance for assets A and B.
b) Determine the short-term covariance for assets A and B using similar formulae as described for
short-term covariance calculations in equation (6) under the section Risk Control Indices, but
replacing the squared equity returns with the product of the returns of risky assets A and B.
c) Determine the short-term volatility measure for the risky assets A and B from their respective
variance measures in the same manner as described in equation (6) under the section Risk
Control Indices.
d) Determine the short-term correlation of A and B from the short-term covariance and the short-
term volatility measures.
e) Determine the possible levels for the weights for A and B using equations (1) and (2) above.

Step 2: Determine the weights under the long term parameters

Repeat (a) to (e) in Step 1 above with long-term parameters as described in equation (7) under the
section Risk-Control Indices.

Step 3: Determine the final weight W.

The weight for risky asset A is set equal to the lower of the weight of A as determined in Step 1 and Step
2.

The excess return of the Risk Control 2.0 Indices is calculated as:

Risk Control2.0ExcessReturn t =W * Index A ExcessReturn + (1 − W) * Index B ExcessReturn

and the Risk Control 2.0 Index value is:

RiskControl2.0IndexValuet =RiskControl2.0IndexValuerb * (1 + RiskControl2.0ExcessReturnt )

where:
Risk Control2.0IndexV aluerb = The value of the index at the last rebalancing

Risk Control 2.0 total return indices are calculated in a similar way, where the total return is a weighted
sum of total returns of the underlying indices.

Risk Control 2.0 is an extension of standard Risk Control described in detail in the previous section. The
parameters used in Risk Control 2.0 follow exactly the way they are calculated in the standard Risk
Control methodology.

S&P Dow Jones Indices: Index Mathematics Methodology 44

Risk Control 2.0 with Minimum Variance

In Risk Control 2.0 indices with minimum variance, when the quadratic equation (1) has no real solution
for 𝑊𝐴 and 𝑊𝐵 , the fallback mechanism does not switch to standard Risk Control.

𝑊𝐴2 ∗ 𝜎𝐴2 + 𝑊𝐵2 ∗ 𝜎𝐵2 + 2 ∗ 𝑊𝐴 ∗ 𝑊𝐵 ∗ 𝜌 ∗ 𝜎𝐴 ∗ 𝜎𝐵 = 𝜎𝑇𝑎𝑟𝑔𝑒𝑡

2
(1)

where,
𝑊𝐴 + 𝑊𝐵 = 1 (2)

Instead, the strategy finds the portfolio with minimum variance and then rescales the weight of the risky
asset A and risky asset B to reach the target volatility. The remaining weight is allocated to cash in order
that total asset weights sum 100%.

If using (1) and (2) for a given asset weight 𝑥 with standard deviation 𝜎𝐴 , the portfolio variance is defined
as a function of 𝑥 as the following:
𝑓(𝑥) = 𝑥 2 ∗ 𝜎𝐴2 + (1 − 𝑥)2 ∗ 𝜎𝐵2 + 2 ∗ 𝑥 ∗ (1 − 𝑥) ∗ 𝜌 ∗ 𝜎𝐴 ∗ 𝜎𝐵 Calculating the first the derivative of (3)
results in:
𝑑𝑓
= 2 ∗ 𝑥 ∗ (𝜎𝐴2 + 𝜎𝐵2 − 2 ∗ 𝜌 ∗ 𝜎𝐴 ∗ 𝜎𝐵 ) + 2 ∗ 𝜌 ∗ 𝜎𝐴 ∗ 𝜎𝐵 − 2 ∗ 𝜎𝐵2
𝑑𝑥

Equating the first derivative to zero results in:

𝜎𝐵2 − 𝜌 ∗ 𝜎𝐴 ∗ 𝜎𝐵
𝑥∗ =
𝜎𝐴2 + 𝜎𝐵2 − 2 ∗ 𝜌 ∗ 𝜎𝐴 ∗ 𝜎𝐵

Deriving again, the second derivative is always positive and hence, the asset weight 𝑥 ∗ is a local
minimum.
𝑑2𝑓
= 2 ∗ (𝜎𝐴2 + 𝜎𝐵2 − 2 ∗ 𝜌 ∗ 𝜎𝐴 ∗ 𝜎𝐵 ) ≥ 2 ∗ (𝜎𝐴 − 𝜎𝐵 )2 ≥ 0
𝑑𝑥 2

Moreover, given that function (3) is convex over [0,1], 𝑥 ∗ is also a global minimum. Therefore, the asset
weights of the minimum variance portfolio for two risky assets A and B are:
2
𝜎𝐵 −𝜌∗𝜎𝐴 ∗𝜎𝐵
𝑊𝐴𝑀𝑖𝑛 = 2 2 −2∗𝜌∗𝜎 ∗𝜎 (4)
𝜎𝐴 +𝜎𝐵 𝐴 𝐵

𝑊𝐵𝑀𝑖𝑛 = 1 − 𝑊𝐴𝑀𝑖𝑛 (5)

However, given that equation (1) had no real solution, the portfolio volatility 𝜎𝑀𝑖𝑛𝑖𝑚𝑢𝑚 using weights (4)
and (5) is greater that the target volatility. Therefore, (4) and (5) must be rescaled to reach the target
volatility by a scalar 𝜃 as follows:
𝜎𝑇𝑎𝑟𝑔𝑒𝑡
𝜃= (6)
𝜎𝑀𝑖𝑛𝑖𝑚𝑢𝑚

Then the portfolio asset weights are:

𝑊𝐴 = 𝜃 ∗ 𝑊𝐴𝑀𝑖𝑛
𝑊𝐵 = 𝜃 ∗ 𝑊𝐵𝑀𝑖𝑛

Given that 𝜃 < 1, the remaining portfolio weight is allocated to cash to get 100% allocation:
𝑊𝐶 = 1 − 𝑊𝐴 − 𝑊𝐵

S&P Dow Jones Indices: Index Mathematics Methodology 45

Equity with Futures Leverage Risk Control
Indices
S&P Dow Jones Indices’ Equity with Futures Leverage Risk Control Indices measure the performance of
a strategy that combines constant representation of the underlying index with a dynamic weighting to the
corresponding Futures Excess Return Index in order to target a specific level of volatility. When the
underlying index volatility decreases below the target, futures are added to the risk control index to
increase the market exposure and vice versa.

The index includes a leverage factor that represents the target exposure to the underlying index as a
result of both the equity and futures positions. Since representation of the equity position remains
constant at 100%, the resultant dynamic weighting to the futures index equals the leverage factor minus
100%.

The return of the index consists of two components: (1) the return in the underlying index and (2) the
return of a dynamic long or short position in the corresponding Futures Excess Return Index, depending
on whether the index is leveraging or deleveraging in an attempt to achieve the target volatility.

The formula for calculating the Equity with Futures Leverage Risk Control Index Return is as follows:

𝐸𝑞𝑢𝑖𝑡𝑦 𝑤𝑖𝑡ℎ 𝐹𝑢𝑡𝑢𝑟𝑒𝑠 𝐿𝑒𝑣𝑒𝑟𝑎𝑔𝑒 𝑅𝑖𝑠𝑘 𝐶𝑜𝑛𝑡𝑟𝑜𝑙 𝐼𝑛𝑑𝑒𝑥 𝑅𝑒𝑡𝑢𝑟𝑛𝑡 =

𝑈𝑛𝑑𝑒𝑟𝑙𝑦𝑖𝑛𝑔𝐼𝑛𝑑𝑒𝑥𝑡 𝐹𝑢𝑡𝑢𝑟𝑒𝑠𝐸𝑅𝐼𝑛𝑑𝑒𝑥𝑡
( − 1) + (𝐾𝑟𝑏 − 100%) ∗ ( − 1)
𝑈𝑛𝑑𝑒𝑟𝑙𝑦𝑖𝑛𝑔𝐼𝑛𝑑𝑒𝑥𝑟𝑏 𝐹𝑢𝑡𝑢𝑟𝑒𝑠𝐸𝑅𝐼𝑛𝑑𝑒𝑥𝑟𝑏

where:
𝐹𝑢𝑡𝑢𝑟𝑒𝑠𝐸𝑅𝐼𝑛𝑑𝑒𝑥𝑡 = The level of the Futures Excess Return Index on day t
𝐹𝑢𝑡𝑢𝑟𝑒𝑠𝐸𝑅𝐼𝑛𝑑𝑒𝑥𝑟𝑏 = The level of the Futures Excess Return Index as of the
last rebalancing date

The leverage factor, Krb, changes based on a 20 trading-day realized historical volatility of the underlying
index. For details on the calculation of the historical volatility please see formulae as described for short-
term, simple-weighted realized volatility under the section Risk Control Indices.

All other parameters are as described in the standard Risk Control Indices section of this document.

S&P Dow Jones Indices: Index Mathematics Methodology 46

Weighted Return Indices
S&P Dow Jones Indices’ Weighted Return Indices combine the returns of two or more underlying indices
using a specified set of weighting rules to create a new unique index return series. An index that uses the
Weighted Return methodology might also be referred to as an “Index of Indices.” Weighted Return indices
may include a cash component which for the purposes of these indices is treated as an underlying index.
S&P Dow Jones Indices offers both daily and periodic rebalance approaches for weighted return indices.

Based on the specification in the individual index methodologies, weighted return indices will be
calculated using one of the below formulas:

Daily Rebalancing:

𝑁 𝐶𝑜𝑚𝑝𝑜𝑛𝑒𝑛𝑡𝐼𝑛𝑑𝑒𝑥𝑖,𝑡
𝐼𝑛𝑑𝑒𝑥𝑡 = 𝐼𝑛𝑑𝑒𝑥𝑡−1 × (1 + ∑ (𝑤𝑒𝑖𝑔ℎ𝑡𝑖,𝑡 × ( − 1)) + 𝐶𝑎𝑠ℎ𝑊𝑒𝑖𝑔ℎ𝑡𝑡 × 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝑅𝑒𝑡𝑢𝑟𝑛𝑡 )
𝑖=1 𝐶𝑜𝑚𝑝𝑜𝑛𝑒𝑛𝑡𝐼𝑛𝑑𝑒𝑥𝑖,𝑡−1

Periodic Rebalancing, accruing interest:

𝑁 𝐶𝑜𝑚𝑝𝑜𝑛𝑒𝑛𝑡𝐼𝑛𝑑𝑒𝑥𝑖,𝑡
𝐼𝑛𝑑𝑒𝑥𝑡 = 𝐼𝑛𝑑𝑒𝑥𝑟 × (1 + ∑ (𝑤𝑒𝑖𝑔ℎ𝑡𝑖,𝑟 × ( − 1))
𝑖=1 𝐶𝑜𝑚𝑝𝑜𝑛𝑒𝑛𝑡𝐼𝑛𝑑𝑒𝑥𝑖,𝑟

𝑡
+ 𝐶𝑎𝑠ℎ𝑊𝑒𝑖𝑔ℎ𝑡𝑟 × (∏ (1 + 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝑅𝑒𝑡𝑢𝑟𝑛𝑑 ) − 1))
𝑑=𝑟+1

Interest Return Options:

𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝑅𝑎𝑡𝑒𝑡−1
× 𝐴𝐶𝑇(𝑡, 𝑡 − 1), 𝑓𝑜𝑟 𝑠𝑖𝑚𝑝𝑙𝑒 𝑑𝑎𝑖𝑙𝑦 𝑎𝑐𝑐𝑟𝑢𝑎𝑙
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑖𝑛𝑔𝐷𝑎𝑦𝑠
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝑅𝑎𝑡𝑒𝑡−1 𝐴𝐶𝑇(𝑡,𝑡−1)
((1 + ) − 1) , 𝑓𝑜𝑟 𝑎𝑐𝑐𝑟𝑢𝑎𝑙 𝑐𝑜𝑚𝑝𝑜𝑢𝑛𝑑𝑖𝑛𝑔 𝑜𝑣𝑒𝑟 𝑎𝑛 𝑖𝑛𝑑𝑒𝑥 𝑛𝑜𝑛𝑐𝑎𝑙𝑐 𝑑𝑎𝑦
𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑖𝑛𝑔𝐷𝑎𝑦𝑠
𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡𝑅𝑒𝑡𝑢𝑟𝑛𝑡 =
𝐴𝐶𝑇(𝑡,𝑡−1)
91
1
( ) − 1, 𝑓𝑜𝑟 3 𝑚𝑜𝑛𝑡ℎ 𝑇𝐵𝑖𝑙𝑙 𝑎𝑐𝑐𝑟𝑢𝑎𝑙
91
(1 − × 𝑇𝐵𝑖𝑙𝑙𝑡−1 )
{ 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑖𝑛𝑔𝐷𝑎𝑦𝑠
where:
Indext = the value of the top level index on day t
Indexr = the value of the top level index at the previous rebalancing date r15
weighti,t = the weight of component index i on day t
weighti,r = the weight of component index i on the previous rebalancing date r
ComponentIndexi,t = the value of the component index i on day t
ComponentIndexi,r = the value of the component index i on the previous rebalancing date r16
N = the number of component indices within the top level index

15
Note that the value is as of the close of the rebalancing date.
16
Note that the value is as of the close of the previous rebalancing date.

S&P Dow Jones Indices: Index Mathematics Methodology 47

 CashWeightt = the weight of the cash component on day t
CashWeightr = the weight of the cash component on the previous rebalancing date r
InterestReturnt = the return from the interest rate (see Interest Return Options above)
InterestReturnt - 1 = the interest rate from the previous calculation date t -117
Accounting Days = the day count convention for InterestRatet-1. Days counts are typically 252, 360,
or 365.
ACT(t, t - 1) = the calendar day between calculation day t -1 and calculation day t, expressed
as the day (t) – (t – 1)
TBillt – 1 = the three month (3M) TBill rate published weekly by treasurydirect.gov

17
Note that this can also be a flat rate.

S&P Dow Jones Indices: Index Mathematics Methodology 48

Leveraged and Inverse Indices
Leveraged Indices for Equities

S&P Dow Jones Indices’ Leveraged Indices are designed to generate a multiple of the return of the
underlying index in situations where the investor borrows funds to generate index exposure beyond
his/her cash position. The approach is to first calculate the underlying index, then calculate the daily
returns for the leveraged index and, finally, to calculate the current value of the leveraged index by
incrementing the previous value by the daily return. There is no change to the calculation of the
underlying index.

The daily return for the leveraged index consists of two components: (1) the return on the total position in
the underlying index less (2) the borrowing costs for the leverage.

The formula for calculating the Leveraged Index is as follows:

 Underlying Index t   Borrowing Rate 

Leveraged Index Re turn = K   − 1 − (K − 1)     Dt ,t −1 (1)
 Underlying Index t −1   360 

In equation (1) the borrowing rate is applied to the leveraged index value because this represents the
funds being borrowed. Given this, the Leveraged Index Value at time t can be calculated as:

Leveraged IndexValuet = (Leveraged Index Valuet −1)  (1 + Leveraged Index Return ) (2)

Substituting (1) into (2) and expanding the right hand side of (2) yields:

Leveraged IndexValue t =
   Underlying Index 
Leveraged IndexValue t −1 * 1 + K *  t − 1 − (K − 1) *  Borrowing Rate   D
   t ,t −1 
   Underlying Index t −1   360   
(3)
where:

K (K  1) = Leverage Ratio
• K = 1, no leverage
• K = 2, Exposure = 200%
• K = 3, Exposure = 300%
Borrowing Rate = Overnight LIBOR in the U.S. or EONIA in Europe are two common examples
Dt, t-1 = the number of calendar days between date t and t-1

In the absence of leverage (K=1),

 Underlying Index t 
Leveraged Index Valuet = Leveraged Index Valuet −1 *  
 Underlying Index t −1 

The leverage position is rebalanced daily. This is consistent with the payoff from futures based
replication.

S&P Dow Jones Indices: Index Mathematics Methodology 49

Leveraged Indices without Borrowing Costs for Equities

In some cases, leveraged indices that do not account for costs incurred to finance the associated
leverage are calculated. For these indices, the borrowing rate in formulas (1) and (3) is set to zero and
the calculation follows as above.

Inverse Indices for Equities

S&P Dow Jones Indices’ Inverse indices are designed to provide the inverse performance of the
underlying index; this represents a short position in the underlying index. The calculation follows the same
general approach as the leveraged index with certain adjustments: First, the return on the underlying
index is reversed. Second, while the costs of borrowing the securities are not included, there is an
adjustment to reflect the interest earned on both the initial investment and the proceeds from selling short
the securities in the underlying index. These assumptions reflect normal industry practice. 18

The general formula for the return to the inverse index is

 Underlying Index t 
Inverse Index Re turn = −K   − 1
 Underlying Index t −1  (4)
 Lending Rate 
+ (K + 1)   Dt ,t −1
 360 
Where the first right hand side term represents the return on the underlying index and the second right
hand side term represents the interest earned on the initial investment and the shorting proceeds.

Expanding this as done above for the leveraged index yields:

InverseIndexValuet =
   Underlying Index 
Inverse IndexValuet −1 * 1 − K *  t − 1 − (K + 1) *  LendingRat e   D
   t ,t −1 
   Underlying Index t −1   360   
(5)
where:

K (K  1) = Leverage Ratio
• K = 1, Exposure = -100%
• K = 2, Exposure = -200%
• K = 3, Exposure = -300%
Lending Rate = Overnight LIBOR in the U.S. or EONIA in Europe are two common examples
Dt, t-1 = the number of calendar days between date t and t-1

In the absence of leverage (K =1),

InverseIndexValuet =
  Underlying Index 
Inverse IndexValuet −1 * 1 −  t − 1 − (2) *  LendingRat e   D
   t ,t −1 
  Underlying Index t −1   360   

The inverse position is rebalanced daily. This is consistent with the payoff from futures based replication.

18
Straightforward adjustments can be made to either to include the costs of borrowing securities or to exclude the interest earned
on the shorting proceeds and the initial investment.

S&P Dow Jones Indices: Index Mathematics Methodology 50

Inverse Indices without Borrowing Costs for Equities

In some cases, inverse indices that do not account for any interest earned are calculated. For these
indices, the lending rate in formulas (4) and (5) is set to zero and the calculation follows as above.

Leveraged and Inverse Indices for Futures

S&P Dow Jones Indices’ futures-based Leveraged Indices are designed to generate a multiple of the
return of the underlying futures index in situations where the investor borrows funds to generate index
exposure beyond his/her cash position.

S&P Dow Jones Indices’ futures-based Inverse indices are designed to provide the inverse performance
of the underlying futures index; this represents a short position in the underlying index.

The approach is to first calculate the underlying index, then calculate the daily returns for the leveraged or
inverse index. There is no change to the calculation of the underlying futures index.

The leveraged or inverse index may be rebalanced daily or periodically.

Daily Rebalanced Leverage or Inverse Futures Indices

If the S&P Dow Jones Indices futures-based leveraged or inverse index is rebalanced daily, the index
excess return is the multiple of the underlying index’s excess return and calculated as follows:

   Underlying IndexERt 

IndexERt = IndexERt −1  1 +  K *  − 1  
   Underlying IndexERt −1

  
 
where:
K (K ≠ 0) = Leverage/Inverse Ratio
• K = 1, no leverage
• K = 2, leverage exposure = 200%
• K = 3, leverage exposure = 300%
• K = -1, inverse exposure = -100%

A total return version of each of the indices is calculated, which includes interest accrual on the notional
value of the index based on a specified interest rate (e.g. 91-day U.S. Treasury rate), as follows:

  IndexERt  
IndexTRt = IndexTRt −1     + TBRt  (6)
 IndexER 
 t −1  
where:
IndexTRt-1 = The Index Total Return on the preceding business day
TBRt = Treasury Bill Return, as determined by the following formula:
Deltat
  91
 1 
TBRt =   −1 (7)
1 − 91
* TBARt −1 
 360 

Deltat = The number of calendar days between the current and previous business days

S&P Dow Jones Indices: Index Mathematics Methodology 51

 TBARt-1 = The most recent weekly high discount rate for 91-day U.S. Treasury bills effective on
the preceding business day19

Periodically Rebalanced Leverage or Inverse Futures Indices

If the S&P Dow Jones Indices futures-based leveraged or inverse index is rebalanced periodically (e.g.
weekly, monthly, or quarterly), the index excess return is the multiple of the underlying index excess
return since last rebalancing business day and shall be calculated as follows:

   Underlying IndexERt  
IndexERt = IndexERt _ LR  1 +  K * − 1  
   Underlying IndexERt _ LR  
    

where:
IndexERt_LR = The Index Excess Return on the last rebalancing business day, t_LR
UnderlyingIndexERt_LR = The Underlying Index Excess Return value on the last rebalancing
business day, t_LR
t_LR = The last rebalancing business day
K (K ≠ 0) = Leverage / Inverse Ratio
• K = 1, no leverage
• K = 2, leverage exposure = 200%
• K = 3, leverage exposure = 300%
• K = -1, inverse exposure = -100%

A total return version of each of the indices is calculated, which includes interest accrual on the notional
value of the index based on the 91-day U.S. Treasury rate. The formulae are the same as (6) and (7)
above.

Negative Index Levels. For more information regarding the possibility of negative or zero index levels,
refer to Negative/Zero Index Levels section later in this document.

19
Generally the rates are announced by the U.S. Treasury on each Monday. On Mondays that are bank holidays, Friday’s rates
apply.

S&P Dow Jones Indices: Index Mathematics Methodology 52

Fee Indices/Decrement Indices
S&P Dow Jones Indices calculates fee indices that are meant to alter the index value of a given
underlying index according to a fixed percentage rate or fixed index points that is applied on a daily basis.
This alteration can be either positive or negative, but in most cases the fee index level is lower than the
underlying index level. Fee indices are often also described as Decrement Indices. Decrement Indices
measure the performance of an underlying index with a reduction to the return of the index representing a
fixed, pre-determined synthetic dividend amount.

Fee indices can be calculated in a number of ways. The fee can be applied to the index after the return of
the underlying index is calculated, or it can be applied along with the return of the underlying index. The
different calculations are as follows:

Fixed Percentage Fee Reduction. A fixed percentage fee reduction multiplies the index level by a daily
portion of an annual fee with no regard for day counts. The formula is as follows:

𝑃𝑎𝑟𝑒𝑛𝑡𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡 𝐹𝑒𝑒
𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡 = 𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡−1 × × (1 − )
𝑃𝑎𝑟𝑒𝑛𝑡𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡−1 𝑁

where:
IndexValuet = The fee reduced index value on day t
IndexValuet-1 = The fee reduced index value on day t-1
ParentIndexValuet = The index value of the parent index without fees on day t
ParentIndexValuet-1 = The index value of the parent index without fees on day t-1
Fee = The annual fee percentage
N = The number of days in a year

Standard Fee Reduction from the Base Date. A standard fee reduction from the base date multiplies
the index level by a pro-rated fee accounting for time since the base date. The formula is as follows:

𝑃𝑎𝑟𝑒𝑛𝑡𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡 𝐹𝑒𝑒
𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡 = 𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒0 × × (1 − × 𝐴𝐶𝑇(𝑡, 𝑡0 ))
𝑃𝑎𝑟𝑒𝑛𝑡𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒0 𝑁

where:
IndexValuet = The fee reduced index value on day t
IndexValue0 = The fee reduced index value on the base date
ParentIndexValuet = The index value of the parent index without fees on day t
ParentIndexValue0 = The index value of the parent index without fees on the base date
Fee = The annual fee percentage
N = The number of days in a year
ACT(t,t0) = The actual calendar days between day t (exclusive) and the base date
(inclusive)

S&P Dow Jones Indices: Index Mathematics Methodology 53

Standard Fee Reduction. A standard fee reduction multiplies the index level by a daily fee pro-rated to
account for non-calculation days (including weekends and holidays). The formula is as follows:

𝑃𝑎𝑟𝑒𝑛𝑡𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡 𝐹𝑒𝑒
𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡 = 𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡−1 × × (1 − × 𝐴𝐶𝑇(𝑡, 𝑡 − 1))
𝑃𝑎𝑟𝑒𝑛𝑡𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡−1 𝑁

where:
IndexValuet = The fee reduced index value on day t
IndexValuet-1 = The fee reduced index value on day t-1
ParentIndexValuet = The index value of the parent index without fees on day t
ParentIndexValuet-1 = The index value of the parent index without fees on day t-1
Fee = The annual fee percentage
N = The number of days in a year
ACT(t,t-1) = The actual calendar days between day t (exclusive) and day t-1 (inclusive)

Exponentially Compounding Fee Reduction. An exponentially compounding fee reduction multiplies

the index level by a daily fee exponentially pro-rated to account for non-calculation days (including
weekends and holidays). The formula is as follows:

𝑃𝑎𝑟𝑒𝑛𝑡𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡 𝐹𝑒𝑒 𝐴𝐶𝑇(𝑡,𝑡−1)

𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡 = 𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡−1 × × ((1 − ) )
𝑃𝑎𝑟𝑒𝑛𝑡𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡−1 𝑁

where:
IndexValuet = The fee reduced index value on day t
IndexValuet-1 = The fee reduced index value on day t-1
ParentIndexValuet = The index value of the parent index without fees on day t
ParentIndexValuet-1 = The index value of the parent index without fees on day t-1
Fee = The annual fee percentage
N = The number of days in a year
ACT(t,t-1) = The actual calendar days between day t (exclusive) and day t-1 (inclusive)

Standard Synthetic Dividend. A standard synthetic dividend multiplies the parent index level by an
exponentially pro-rated fee accounting for time since the base date. This fee reduction is a function of the
parent index value and necessarily requires the same base value. The formula is as follows:

𝐹𝑒𝑒 𝐴𝐶𝑇(𝑡,𝑡0)
𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡 = 𝑃𝑎𝑟𝑒𝑛𝑡𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡 × ((1 − ) )
𝑁

where:
IndexValuet = The fee reduced index value on day t
ParentIndexValuet = The index value of the parent index without fees on day t
Fee = The annual fee percentage
N = The number of days in a year
ACT(t,t0) = The actual calendar days between day t (exclusive) and the base date
(inclusive)

S&P Dow Jones Indices: Index Mathematics Methodology 54

Standard Fee Subtracted from Return. The standard fee subtracted from return is a fee reduction that
subtracts the fee from the return instead of multiplying the accumulated index level by (1 − Fee). The
formula is as follows:

𝑃𝑎𝑟𝑒𝑛𝑡𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡 𝐹𝑒𝑒
𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡 = 𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡−1 × ( − × 𝐴𝐶𝑇(𝑡, 𝑡 − 1))
𝑃𝑎𝑟𝑒𝑛𝑡𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡−1 𝑁

where:
IndexValuet = The fee reduced index value on day t
IndexValuet-1 = The fee reduced index value on day t-1
ParentIndexValuet = The index value of the parent index without fees on day t
ParentIndexValuet-1 = The index value of the parent index without fees on day t-1
Fee = The annual fee percentage
N = The number of days in a year
ACT(t,t-1) = The actual calendar days between day t (exclusive) and day t-1 (inclusive)

Fixed Index Point Subtracted from Return. The fixed index point subtracted from return is a fee
reduction that subtracts the fee represented as a constant number of index points. The formula is as
follows:

𝑃𝑎𝑟𝑒𝑛𝑡𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡 𝐹𝑒𝑒
𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡 = 𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡−1 × − × 𝐴𝐶𝑇(𝑡, 𝑡 − 1) × 𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒0
𝑃𝑎𝑟𝑒𝑛𝑡𝐼𝑛𝑑𝑒𝑥𝑉𝑎𝑙𝑢𝑒𝑡−1 𝑁

where:
IndexValuet = The fee reduced index value on day t
IndexValuet-1 = The fee reduced index value on day t-1
ParentIndexValuet = The index value of the parent index without fees on day t
ParentIndexValuet-1 = The index value of the parent index without fees on day t-1
Fee = Percentage of fee reduced index base value corresponding to specified
number of index points
N = The number of days in a year
ACT(t,t-1) = The actual calendar days between day t (exclusive) and day t-1 (inclusive)
IndexValue0 = The fee reduced index value on the base date

Negative/Zero Index Levels. For more information regarding the possibility of negative or zero index
levels, please refer to the Negative/Zero Index Levels section.

S&P Dow Jones Indices: Index Mathematics Methodology 55

Capped Return Indices
In a capped return index, the index return from the prior rebalancing is capped at a pre-defined level. The
overall approach is to first calculate an uncapped index and then compare its return-since-last-
rebalancing-day with the return cap. The capped index return takes the smaller value of these two. The
approach can be expressed mathematically as:
𝑈𝑛𝑐𝑎𝑝𝑝𝑒𝑑 𝐼𝑛𝑑𝑒𝑥 𝐿𝑒𝑣𝑒𝑙𝑡
𝐼𝑛𝑑𝑒𝑥 𝐿𝑒𝑣𝑒𝑙𝑡 = 𝐼𝑛𝑑𝑒𝑥 𝐿𝑒𝑣𝑒𝑙𝐿𝑅 ∗ (1 + min (𝑅𝑒𝑡𝑢𝑟𝑛𝐶𝑎𝑝, ))
𝑈𝑛𝑐𝑎𝑝𝑝𝑒𝑑 𝐼𝑛𝑑𝑒𝑥 𝐿𝑒𝑣𝑒𝑙𝐿𝑅

where:
index levelt = Index level at date t
index levelLR = Index level at the last rebalancing business day
ReturnCap = Cap on the index return between rebalance dates

S&P Dow Jones Indices: Index Mathematics Methodology 56

Dividend Point Indices
S&P Dow Jones Indices’ Dividend Point Indices are designed to track the total dividend payments from
the constituents of an underlying index. The level of the index is based on a running total of dividends of
the constituents of the underlying index. Some indices reset to zero on a periodic basis, generally
quarterly or annually. Thus, the index measures the total dividends paid in the underlying index since the
previous rebalancing date, or the base date for indices that do not reset on a periodic basis. For quarterly
indices, the index resets to zero after the close on the third Friday of the last month of the quarter, to
coincide with futures and options expiration. For annual indices, the index resets to zero after the close on
the third Friday of December, to coincide with futures and options expiration.

The formula for calculating the dividend point index on any date, t, for a given underlying index, x, is:

t
DividendIn dex t , x =  IDi ,x
i = r +1

where:
IDi,x = The index dividend of the underlying index x on day i.
t = The current date.
r+1 = The trading date immediately following the reset date of the index (or base date if the index
does not reset periodically).

The index dividend (ID) of the underlying index is calculated on any given day as the total dividend value
for all constituents of the index divided by the index divisor. The total dividend value is calculated as the
sum of dividends per share multiplied by index shares outstanding for all constituents of the index which
have a dividend going ex on the date in question. For more detail concerning the calculation of index
dividends please refer to the Total Return Calculations section of this methodology.

S&P Dow Jones Indices: Index Mathematics Methodology 57

Alternative Pricing
S&P DJI Indices uses alternative pricing for the calculation and publication of certain indices and data
points. Alternative pricing is applied to indices using the approaches outlined below. Details of the pricing
type and application of the pricing for index calculation purposes is indicated in the specific index
methodology.
1. Official Calculation: The daily official index calculation always leverages the alternative price
methodology.
2. Hybrid Calculation: The alternative price is used in certain instances when calculating the official
index value (e.g. VWAP pricing used for official daily index calculation on the rebalance
implementation while the official close is used for all non-rebalance date calculations)
3. Supplementary Calculation: A supplementary calculation of the index is performed with the
alternative price and is published alongside the official closing calculation (e.g. Special Open
Quotation).

Alternative pricing may be captured through vendors or calculated internally by S&P DJI. The formulas
defined in this section are specific to internally calculated alternative pricing. This approach is more
commonly applied to derivative based indices calculated by S&P DJI. S&P DJI leverages exchange
provided prices for official end-of-day index calculations. For each exchange, S&P Dow Jones Indices will
use the relevant price (e.g. last trade, auction, VWAP, official close) as defined in the S&P Dow Jones
Indices' Global Equity Close Prices guide available on https://us.spindices.com/.

Special Opening Quotation (SOQ)

The special opening quotation (“SOQ”) is calculated using the same methodology as the underlying index
except that the price used for each index constituent is the open price at which the security first trades
upon the opening of the exchange on a given trading day. SOQ is calculated using only the opening
prices from the primary exchange, which occur at various times, of all stocks in the index and may occur
at any point during the day. For any stock that has not traded during the regular trading session, the
previous day's closing price is used for the SOQ index calculation. SOQ may be higher than the high,
lower than the low and different from the open, as the SOQ is a special calculation with a specific set of
parameters. The open, high, low and close values are continuous calculations, while the SOQ waits until
all stocks in the index are open.
• U.S. Markets. In the case of a market disruption and if the exchange is unable to provide official
opening prices, the official closing prices utilized are determined based on SEC Rule 123C as
outlined in the Unexpected Exchange Closures chapter of S&P Dow Jones Indices’ Equity Indices
Policies and Practices document.
• Non-U.S. Markets. In the case of a market disruption and if the exchange is unable to provide
official opening prices, the official closing prices are utilized. If the exchange is unable to provide
official opening or closing prices, the previous closing price adjusted for corporate actions is used
in the calculation of the SOQ.

For M&A target stocks that are suspended or halted from trading on an exchange but are still in indices,
S&P Dow Jones Indices will synthetically derive an SOQ for the suspended security using the deal ratio
terms and the opening price of the acquiring company if the acquirer is issuing stock as part of the
merger. If the acquirer is paying cash only, the lower of the previous official close price and the cash
amount are used in the calculation of the SOQ. Similarly, S&P DJI will synthetically derive an SOQ for
spun-off stocks that have not yet begun trading.

S&P Dow Jones Indices: Index Mathematics Methodology 58

Fair Value Indices

Fair Value indices are designed to provide an updated valuation for indices that have ceased calculating
earlier in a given day. The indices are calculated using fair value adjustment factors applied on a stock by
stock basis to each stock in the index. The factors are provided by a pricing service which calculates fair
value adjustments. There may be multiple fair value indices for a given underlying index, due to the use of
different pricing services for each particular index. S&P Dow Jones currently has indices using ICE Data
Services (ICE) and Virtu Financial, Inc. (formerly provided by ITG).

For all stocks in the index the constituents, prices and index shares effective as of the following trading
date (i.e. the adjusted close data for today) of the relevant underlying index are taken. The price for each
stock is multiplied by the fair value adjustment for that stock to arrive at a fair value price. The index is
then calculated in the same fashion as the underlying index, using the same index shares and index
divisor as the underlying index. Note that the value of a fair value index on a given day, unlike other
indices, is not dependent on the value of that fair value index on the prior day. Rather it is only
dependent on the value of the relevant underlying index and on today’s fair value adjustments.

Volume-Weighted Average Price (VWAP)

Some indices will use VWAP in a specified time window, instead of reported closing values.

Volume Weighted Pricing uses a weighted average price instead of a single closing value. Prices with
bigger trading volumes are assigned higher weights. VWAP is calculated by multiplying the price of trades
by their volume, summing that for the applicable time window, and then dividing by the total volume of
trades within that time window, as calculated below:

∑𝑁
𝑗=1 𝑇𝑟𝑎𝑑𝑒𝑉𝑜𝑙𝑢𝑚𝑒𝑖,𝑗 × 𝑇𝑟𝑎𝑑𝑒𝑃𝑟𝑖𝑐𝑒𝑖,𝑗
𝑉𝑊𝐴𝑃𝑖,𝑡 =
∑𝑁
𝑗=1 𝑇𝑟𝑎𝑑𝑒𝑉𝑜𝑙𝑢𝑚𝑒𝑖,𝑗

where:
VWAPi,t = the VWAP for security i on day t over the VWAP observation window
N = the number of trades in the VWAP observation window
TradeVolumei.j = the volume of trade j
TradePricei,j = the price of trade j

Time-Weighted Average Price (TWAP)

TWAP indicates the Average Price, or Bid Price or Ask Price, that a security is traded at during a
specified time window, rather than its end of day price.

TWAP is calculated by taking a simple average of various snapshots of the price throughout the time
window, written formulaically below:

∑𝑁
𝑗=1 𝑇𝑟𝑎𝑑𝑒𝑃𝑟𝑖𝑐𝑒𝑖,𝑗
𝑇𝑊𝐴𝑃𝑖,𝑡 =
𝑁

where:
TWAPi,t = the TWAP for security i on day t over the TWAP observation window
N = the number of trades in the TWAP observation window
TradePricei,j = the price of trade j

S&P Dow Jones Indices: Index Mathematics Methodology 59

Negative/Zero Index Levels
A negative index level is possible for certain types of indices including hedged, decrement, leveraged,
and inverse indices, particularly for inverse indices that apply leverage.
• For indices calculated in real-time, in the event an intraday index calculation results in a zero or
negative value, S&P DJI will publish the zero or negative value as calculated.
• In the event an end-of-day index calculation results in a zero or negative value, S&P DJI will
publish an official closing index value of zero on that day. Index levels will only be assessed after
the close of trading for purposes of this determination and will not take into consideration intraday
levels for those indices calculated in real-time.

Any index assigned a level of zero will be reviewed by the Index Committee to determine if the index will
be discontinued or the index will be restarted with a new base value. In the event the index is restarted,
S&P DJI will announce such action and will treat these indices as two separate series. Until the Index
Committee has made this determination, the index level will continue to be published with a value of zero.

S&P Dow Jones Indices: Index Mathematics Methodology 60

Index Turnover
Index turnover is a measure of weight changes to an index resulting from corporate events or rebalancing
of an index. Weight changes resulting from market value changes due to market driven price increases or
decreases are not accounted for in an index turnover calculation. All turnover figures provided by S&P
Dow Jones Indices are one-way turnover figures. One-way turnover only views turnover from the
perspective of either buying or selling assets. One-way turnover is therefore limited to a maximum amount
of 100% which would be equivalent to the deletion of all current index constituents or the addition of all
new constituents. To differentiate between a one-way and two-way turnover approach, a two-way
turnover approach would reflect both the buying and selling of assets. Two-way index turnover would be
200% in the above scenario. A formula of index turnover is provided below. All turnover calculations are
provided by S&P Dow Jones Indices upon request.

∑𝑖 𝐶𝑜𝑛𝑠𝑡𝑖𝑡𝑢𝑒𝑛𝑡 𝑊𝑒𝑖𝑔ℎ𝑡 𝐶ℎ𝑎𝑛𝑔𝑒

𝐼𝑛𝑑𝑒𝑥 𝑇𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
2
𝐶𝑜𝑛𝑠𝑡𝑖𝑡𝑢𝑒𝑛𝑡 𝑊𝑒𝑖𝑔ℎ𝑡 𝐶ℎ𝑎𝑛𝑔𝑒 = |𝐶𝑜𝑛𝑠𝑡𝑖𝑡𝑢𝑒𝑛𝑡 𝑊𝑒𝑖𝑔ℎ𝑡 𝐶𝐿𝑆 − 𝐶𝑜𝑛𝑠𝑡𝑖𝑡𝑢𝑒𝑛𝑡 𝑊𝑒𝑖𝑔ℎ𝑡 𝐴𝐷𝐽|

where:
Constituent Weight CLS = Weight of constituent as of the close of business on day T.
Constituent Weight ADJ = Weight of constituent prior to the open on day T+1. This weight will reflect
any adjustments due to corporate events or rebalancing. If the index had
no corporate events or rebalancing, the Constituent Weight CLS will be
equal to Constituent Weight ADJ.

S&P Dow Jones Indices: Index Mathematics Methodology 61

End-of-Month Global Fundamental Data
The purpose of this section is to give an overview of the End-of-Month (“EOM”) Global Fundamental Data
filings. This section outlines the file types along with their descriptions, general data information, and
formulas used to calculate the ratios present in these data files. EOM fundamentals do not include the
U.S. Fundamental Data Package.

Global EOM Fundamental Data is disseminated via the following files:

Frequency File Type File Name File Name Extension

Monthly Index Level yyyyMMdd_SPTOURUP_EOM.SDL .SDL
Monthly Constituent Level yyyyMMdd_SPTOURUP_EOM.SDC .SDC

Monthly Files

File Extensions. The following table details the file extensions:

File Extension Description

EOM.SDL End-of-Month S&P Dow Jones Indices Index Level Files
EOM.SDC End-of-Month S&P Dow Jones Indices Constituent Level Files

File Delivery. Monthly files are delivered to clients by the third business day of the following month. For
example, the file 20171031_SPTOURUP_EOM.SDL is delivered to clients no later than November 3,
2017. Files are generated for the last trading day of the month. Therefore, the file name reflects the last
trading day (e.g. October 31, 2017) as shown above.

The EOM.SDL file format details are available in the UFF 2.0 Specifications document available here.

About the Data

For calculation of the Global EOM Fundamental Data values, S&P Dow Jones Indices obtains raw data
from multiple vendors as of the 25th of every month. The raw data is then validated and used in the
calculation of the ratios listed below.

S&P Dow Jones Indices has 10 Index Level Ratios which are reflected in EOM.SDL files:

Ratio20 Description Period

FY0 P/E Latest reported fiscal year’s price-to-earnings ratio Latest reported fiscal year
Latest reported fiscal year +
1 YR FWD P/E One year forward (estimated) price-to-earnings ratio
one year
Latest reported fiscal year +
2 YR FWD P/E Two year forward (estimated) price-to-earnings ratio
two years
12 MO TRAILING P/E 12-month trailing price-to-earnings ratio 12-month trailing
P/BV Latest reported fiscal year’s price-to-book value ratio Latest reported fiscal year
P/CF Latest reported fiscal year’s price-to-cash flow ratio Latest reported fiscal year
P/S Latest reported fiscal year’s price-to-sales ratio Latest reported fiscal year
ROE Latest reported fiscal year’s return on equity Latest reported fiscal year
DIV YLD Dividend yield using reported dividend As per latest reported
IND YLD Indicated yield using forward looking dividend As per latest reported

20
Name as per file.

S&P Dow Jones Indices: Index Mathematics Methodology 62

S&P Dow Jones Indices has five Constituent Level Ratios which are reflected in EOM.SDC files:

Ratio21 Description Period

PRICE-EARNINGS
12-month trailing price-to-earnings ratio 12-month trailing
RATIO (P/E)
PRICE-BOOK VALUE
Latest reported fiscal year’s price-to-book value ratio Latest reported fiscal year
RATIO (P/BV)
P/CF Latest reported fiscal year’s price-to-cash flow ratio Latest reported fiscal year
PRICE/SALES Latest reported fiscal year’s price-to-sales ratio Latest reported fiscal year
IND YLD Indicated yield using forward looking dividend As per latest reported

Output Files

The file naming convention, templates, and field specifications are described below.

There are five EOM file templates included in the Global Fundamental Data Package:
• EOM.SDL – End-of-month index level file
• EOM.SDC – End-of-month constituent level file
o NC_EOM.SDC – End-of-month Constituent file (No Cusip)
o NS_EOM.SDC – End-of-month Constituent file (No Sedol)
o NCS_EOM.SDC – End-of-month Constituent file (No Cusip or Sedol)

Fundamental Data Points

Underlying data point values used for fundamental index level ratio calculations are described below: 22
1. Basic EPS − Continuing Operations (FY0). This is a given company’s basic earnings-per-
share excluding extra items for the latest reported fiscal year and is calculated as:
Basic EPS – Continuing Operations (FY0) = (Net Income − Preferred Dividend and Other
Adjustments − Earnings of Discontinued Operations − Extraordinary Item & Accounting
Change) / Weighted Average Basic Shares Outstanding
2. Basic Weighted Average Shares Outstanding (FY0). This is a given company’s basic
weighted average shares outstanding for the latest reported fiscal year.
3. Estimate EPS (FY1). This is a given company’s one year forward estimated earnings-per-share
and represents the aggregated mean of all latest reported fiscal year plus one year estimates
provided by third-party vendor analysts.
4. Estimate EPS (FY2). This is a given company’s two year forward estimated earnings-per-share
and represents the aggregated mean of all latest reported fiscal year plus two year estimates
provided by third-party vendor analysts.
5. Basic EPS − Continuing Operations (LTM). This is a given company’s basic earnings-per-
share excluding extra items over the last 12 months and is calculated as:
Basic EPS – Continuing Operations (LTM) = (Net Income − Preferred Dividend and Other
Adjustments − Earnings of Discontinued Operations − Extraordinary Item & Accounting
Change) / Weighted Average Basic Shares Outstanding
6. Basic Weighted Average Shares Outstanding (LTM). This is a given company’s basic
weighted average shares outstanding over the last 12 months.

21
Name as per file.
22
All stocks with ADRs are adjusted per the depository receipt ratio except for EPS and Dividend data points.

S&P Dow Jones Indices: Index Mathematics Methodology 63

 7. Total Common Equity (FY0). This is a given company’s total common equity for the latest
reported fiscal year and is calculated as:
Total Common Equity (FY0) = Common Stock & APIC + Retained Earnings + Treasury Stock
& Other.
8. Cash from Operations (FY0). This is the given company’s cash from operations for the latest
reported fiscal year and is calculated as:
Cash from Operations (FY0) = Net Income + Depreciation and Amortization, Total +
Amortization of Deferred Charges, Total − (CF) + Other Non-
Cash Items, Total + Change in Net Operating Assets
9. Total Revenue (FY0). This is the given company’s total revenue for the latest reported fiscal
year and is calculated as:
Total Revenue (FY0) = Revenue + Other Revenue
10. Shares Outstanding. This is the given company’s shares outstanding and provides total
company level shares, as reported by stock exchanges, company press releases, and financial
documents. Treasury shares are excluded and the number is adjusted for corporate actions such
as splits, merger related share issuances, rights offerings, etc.
11. Indicated Annualized Dividend. This is the given company’s latest annualized dividend per
share. It is a forward looking number and is calculated by multiplying the latest dividend paid per
share by the number of dividend payments per year.

Calculations

Monthly calculation of the fundamental data for a given index is done as of the last calendar day of the
month.23

Terminology. Various terms are used in the calculations below and are defined as follows:
• AWF. The Additional Weight Factor (AWF) is the adjustment factor of a stock assigned at each
index rebalancing date which adjusts the market capitalization for all index constituents to
achieve the user-defined weight, while maintaining the total market value of the overall index.
• IWF. A stock’s Investable Weight Factor (IWF) is based on its free float. Free float can be
defined as the percentage of each company’s shares that are freely available for trading in the
market. For further details, please refer to S&P Dow Jones Indices’ Float Adjustment
Methodology.
• SO. The shares outstanding of a company.
• Style. For details, please refer to the S&P U.S. Style Indices Methodology available here.

Index Level Ratios. The formulas below are used to calculate index level ratios: 24

1. FY0 P/E
𝐵𝑎𝑠𝑖𝑐 𝐸𝑃𝑆 𝐸𝑥𝑐𝑙 (𝐹𝑌0) ∗ 𝐵𝑎𝑠𝑖𝑐 𝑊𝑒𝑖𝑔ℎ𝑡 𝐴𝑣𝑔 𝑆𝑂 (𝐹𝑌0) ∗ 𝑀𝑢𝑙𝑡𝑖𝑐𝑙𝑎𝑠𝑠 𝑓𝑎𝑐𝑡𝑜𝑟 ∗ 1000000
𝑁𝑜𝑟𝑚𝑎𝑙𝑖𝑧𝑒𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 =
𝑆&𝑃 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 𝑉𝑎𝑙𝑢𝑒 = 𝑁𝑜𝑟𝑚𝑎𝑙𝑖𝑧𝑒𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 ∗ 𝑆𝑂 ∗ 𝐼𝑊𝐹 ∗ 𝐹𝑋𝑅𝑎𝑡𝑒 ∗ 𝐴𝑊𝐹 ∗ 𝑆𝑡𝑦𝑙𝑒

23
The calculation of fundamental ratios is done based on the index’s current composition as of the date of the fundamental ratio
calculation.
24
With the exception of Dividend Yield and Indicated Dividend Yield, any stock which does not have an underlying value is excluded
from the index level calculation.

S&P Dow Jones Indices: Index Mathematics Methodology 64

 ∑𝑖 𝐼𝑛𝑑𝑒𝑥 𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝
𝐼𝑛𝑑𝑒𝑥 𝑃𝑟𝑖𝑐𝑒 𝑡𝑜 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 =
∑𝑖 𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 𝑉𝑎𝑙𝑢𝑒

2. 1 YR FWRD P/E

𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒 𝐸𝑃𝑆 𝐹𝑌1 ∗ 𝑆ℎ𝑎𝑟𝑒𝑠𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 ∗ 1000000

𝑁𝑜𝑟𝑚𝑎𝑙𝑖𝑧𝑒𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 =
𝑆&𝑃 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 𝑉𝑎𝑙𝑢𝑒 = 𝑁𝑜𝑟𝑚𝑎𝑙𝑖𝑧𝑒𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 ∗ 𝑆𝑂 ∗ 𝐼𝑊𝐹 ∗ 𝐹𝑋𝑅𝑎𝑡𝑒 ∗ 𝐴𝑊𝐹 ∗ 𝑆𝑡𝑦𝑙𝑒

∑𝑖 𝐼𝑛𝑑𝑒𝑥 𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝

𝐼𝑛𝑑𝑒𝑥 1𝑦𝑟 𝐹𝑤𝑟𝑑 𝑃𝑟𝑖𝑐𝑒 𝑡𝑜 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 =
∑𝑖 𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 𝑉𝑎𝑙𝑢𝑒

3. 2 YR FWRD P/E

𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒 𝐸𝑃𝑆 𝐹𝑌2 ∗ 𝑆ℎ𝑎𝑟𝑒𝑠𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 ∗ 1000000

𝑁𝑜𝑟𝑚𝑎𝑙𝑖𝑧𝑒𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 =
𝑆&𝑃 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 𝑉𝑎𝑙𝑢𝑒 = 𝑁𝑜𝑟𝑚𝑎𝑙𝑖𝑧𝑒𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 ∗ 𝑆𝑂 ∗ 𝐼𝑊𝐹 ∗ 𝐹𝑋𝑅𝑎𝑡𝑒 ∗ 𝐴𝑊𝐹 ∗ 𝑆𝑡𝑦𝑙𝑒

∑𝑖 𝐼𝑛𝑑𝑒𝑥 𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝

𝐼𝑛𝑑𝑒𝑥 2𝑦𝑟 𝐹𝑤𝑟𝑑 𝑃𝑟𝑖𝑐𝑒 𝑡𝑜 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 =
∑𝑖 𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 𝑉𝑎𝑙𝑢𝑒

4. 12 Month Trailing P/E

𝐵𝑎𝑠𝑖𝑐 𝐸𝑃𝑆 𝐸𝑥𝑐𝑙 (𝐿𝑇𝑀) ∗ 𝐵𝑎𝑠𝑖𝑐 𝑊𝑒𝑖𝑔ℎ𝑡 𝐴𝑣𝑔 𝑆𝑂 (𝐿𝑇𝑀) ∗ 𝑀𝑢𝑙𝑡𝑖𝑐𝑙𝑎𝑠𝑠 𝑓𝑎𝑐𝑡𝑜𝑟 ∗ 1000000
𝑁𝑜𝑟𝑚𝑎𝑙𝑖𝑧𝑒𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 =
𝑆&𝑃 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 𝑉𝑎𝑙𝑢𝑒 = 𝑁𝑜𝑟𝑚𝑎𝑙𝑖𝑧𝑒𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 ∗ 𝑆𝑂 ∗ 𝐼𝑊𝐹 ∗ 𝐹𝑋𝑅𝑎𝑡𝑒 ∗ 𝐴𝑊𝐹 ∗ 𝑆𝑡𝑦𝑙𝑒

∑𝑖 𝐼𝑛𝑑𝑒𝑥 𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝

𝐼𝑛𝑑𝑒𝑥 12 𝑀𝑜𝑛𝑡ℎ 𝑡𝑟𝑎𝑖𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 𝑡𝑜 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 =
∑𝑖 𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 Value

5. Price-Book Value (FY0)

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 (𝐹𝑌0) ∗ 𝑀𝑢𝑙𝑡𝑖𝑐𝑙𝑎𝑠𝑠 𝑓𝑎𝑐𝑡𝑜𝑟 ∗ 1000000

𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 =
𝑆&𝑃 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 𝑉𝑎𝑙𝑢𝑒 = 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 ∗ 𝑆𝑂 ∗ 𝐼𝑊𝐹 ∗ 𝐹𝑋𝑅𝑎𝑡𝑒 ∗ 𝐴𝑊𝐹 ∗ 𝑆𝑡𝑦𝑙𝑒

∑𝑖 𝐼𝑛𝑑𝑒𝑥 𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝

𝐼𝑛𝑑𝑒𝑥 𝑃𝑟𝑖𝑐𝑒 𝑡𝑜 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 =
∑𝑖 𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 𝑉𝑎𝑙𝑢𝑒

6. Price-Cash Flow (FY0)

𝐶𝑎𝑠ℎ 𝑓𝑟𝑜𝑚 𝑂𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 (𝐹𝑌0) ∗ 𝑀𝑢𝑙𝑡𝑖𝑐𝑙𝑎𝑠𝑠 𝑓𝑎𝑐𝑡𝑜𝑟 ∗ 1000000

𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 =
𝑆&𝑃 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 𝑉𝑎𝑙𝑢𝑒 = 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 ∗ 𝑆𝑂 ∗ 𝐼𝑊𝐹 ∗ 𝐹𝑋𝑅𝑎𝑡𝑒 ∗ 𝐴𝑊𝐹 ∗ 𝑆𝑡𝑦𝑙𝑒

∑𝑖 𝐼𝑛𝑑𝑒𝑥 𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝

𝐼𝑛𝑑𝑒𝑥 𝑃𝑟𝑖𝑐𝑒 𝑡𝑜 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 =
∑𝑖 𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 𝑉𝑎𝑙𝑢𝑒

S&P Dow Jones Indices: Index Mathematics Methodology 65

 7. Price to Sales (FY0)

𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 (𝐹𝑌0) ∗ 𝑀𝑢𝑙𝑡𝑖𝑐𝑙𝑎𝑠𝑠 𝑓𝑎𝑐𝑡𝑜𝑟 ∗ 1000000

𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 =
𝑆&𝑃 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 𝑉𝑎𝑙𝑢𝑒 = 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 ∗ 𝑆𝑂 ∗ 𝐼𝑊𝐹 ∗ 𝐹𝑋𝑅𝑎𝑡𝑒 ∗ 𝐴𝑊𝐹 ∗ 𝑆𝑡𝑦𝑙𝑒

∑𝑖 𝐼𝑛𝑑𝑒𝑥 𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝

𝐼𝑛𝑑𝑒𝑥 𝑃𝑟𝑖𝑐𝑒 𝑡𝑜 𝑆𝑎𝑙𝑒𝑠 =
∑𝑖 𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 𝑉𝑎𝑙𝑢𝑒

8. Return on Equity
𝐵𝑎𝑠𝑖𝑐 𝐸𝑃𝑆 𝐸𝑥𝑐𝑙 (𝐹𝑌0) ∗ 𝐵𝑎𝑠𝑖𝑐 𝑊𝑒𝑖𝑔ℎ𝑡 𝐴𝑣𝑔 𝑆𝑂 (𝐹𝑌0) ∗ 𝑀𝑢𝑙𝑡𝑖𝑐𝑙𝑎𝑠𝑠 𝑓𝑎𝑐𝑡𝑜𝑟 ∗ 1000000
𝑁𝑜𝑟𝑚𝑎𝑙𝑖𝑧𝑒𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 =
𝑆&𝑃 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠 = 𝑁𝑜𝑟𝑚𝑎𝑙𝑖𝑧𝑒𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 ∗ 𝑆𝑂 ∗ 𝐼𝑊𝐹 ∗ 𝐹𝑋𝑅𝑎𝑡𝑒 ∗ 𝐴𝑊𝐹 ∗ 𝑆𝑡𝑦𝑙𝑒

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦 (𝐹𝑌0) ∗ 𝑀𝑢𝑙𝑡𝑖𝑐𝑙𝑎𝑠𝑠 𝑓𝑎𝑐𝑡𝑜𝑟 ∗ 1000000

𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 =
𝑆&𝑃 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 = 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 ∗ 𝑆𝑂 ∗ 𝐼𝑊𝐹 ∗ 𝐹𝑋𝑅𝑎𝑡𝑒 ∗ 𝐴𝑊𝐹 ∗ 𝑆𝑡𝑦𝑙𝑒

∑𝑖 𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐸𝑎𝑟𝑛𝑖𝑛𝑔𝑠

𝐼𝑛𝑑𝑒𝑥 𝑅𝑂𝐸 =
∑𝑖 𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒

9. Dividend Yield

𝐼𝑛𝑑𝑒𝑥 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 = ∑(𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑜𝑓 𝑎 𝑠𝑡𝑜𝑐𝑘 ∗ 𝐼𝑛𝑑𝑒𝑥 𝑆ℎ𝑎𝑟𝑒𝑠 𝑜𝑓 𝑎 𝑠𝑡𝑜𝑐𝑘)

𝑖

𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 𝑉𝑎𝑙𝑢𝑒 = 𝑇ℎ𝑒 𝑐𝑙𝑜𝑠𝑖𝑛𝑔 𝑖𝑛𝑑𝑒𝑥 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑎 𝑔𝑖𝑣𝑒𝑛 𝑠𝑡𝑜𝑐𝑘

𝑇𝑜𝑡𝑎𝑙 𝐼𝑛𝑑𝑒𝑥 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑

𝐷𝐼𝑉 𝑌𝐿𝐷 = 𝑋 100
𝑃𝑟𝑖𝑐𝑒 𝐼𝑛𝑑𝑒𝑥 𝑉𝑎𝑙𝑢𝑒
10. Indicated Yield (IND YLD)

𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 = 𝐼𝑛𝑑𝑖𝑐𝑎𝑡𝑒𝑑 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 ∗ 𝑆𝑂 ∗ 𝐼𝑊𝐹 ∗ 𝐹𝑋𝑅𝑎𝑡𝑒 ∗ 𝐴𝑊𝐹 ∗ 𝑆𝑡𝑦𝑙𝑒

∑𝑖 𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 ∗ 𝐷𝑖𝑙𝑢𝑡𝑖𝑜𝑛 𝐹𝑎𝑐𝑡𝑜𝑟

𝐼𝑛𝑑𝑒𝑥 𝐼𝑛𝑑𝑖𝑐𝑎𝑡𝑒𝑑 𝑌𝑖𝑒𝑙𝑑 = ( ) ∗ 100
∑𝑖 𝐼𝑛𝑑𝑒𝑥 𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝

Constituent Level Ratios. The formulas below are used to calculate constituent level ratios:

1. Price-Earnings Ratio (P/E)

𝑁𝑜𝑟𝑚𝑎𝑙𝑖𝑧𝑒𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 𝐼𝑡𝑒𝑚 =

𝐵𝑎𝑠𝑖𝑐 𝐸𝑃𝑆 𝐸𝑥𝑐𝑙 (𝐿𝑇𝑀) ∗ 𝐵𝑎𝑠𝑖𝑐 𝑊𝑒𝑖𝑔ℎ𝑡 𝐴𝑣𝑔 𝑆𝑂 (𝐿𝑇𝑀) ∗ 𝑀𝑢𝑙𝑡𝑖𝑐𝑙𝑎𝑠𝑠 𝑓𝑎𝑐𝑡𝑜𝑟 ∗ 1000000
𝑆&𝑃 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

𝐶𝑙𝑜𝑠𝑒 𝑃𝑟𝑖𝑐𝑒
𝑃/𝐸 =
𝑁𝑜𝑟𝑚𝑎𝑙𝑖𝑧𝑒𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 𝐼𝑡𝑒𝑚 𝑉𝑎𝑙𝑢𝑒

S&P Dow Jones Indices: Index Mathematics Methodology 66

 2. Price-Book Value Ratio (P/BV)

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑚𝑚𝑜𝑛 𝐸𝑞𝑢𝑖𝑡𝑦(𝐹𝑌0) ∗ 𝑀𝑢𝑙𝑡𝑖𝑐𝑙𝑎𝑠𝑠 𝑓𝑎𝑐𝑡𝑜𝑟 ∗ 1000000

𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 𝐼𝑡𝑒𝑚 𝑉𝑎𝑙𝑢𝑒 =
𝑆&𝑃 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 𝐼𝑡𝑒𝑚 = 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 𝐼𝑡𝑒𝑚 𝑉𝑎𝑙𝑢𝑒 ∗ 𝑆𝑂 ∗ 𝐼𝑊𝐹 ∗ 𝐹𝑋𝑅𝑎𝑡𝑒 ∗ 𝐴𝑊𝐹 ∗ 𝑆𝑡𝑦𝑙𝑒

𝐶𝑜𝑛𝑠𝑡𝑖𝑡𝑢𝑒𝑛𝑡 𝐼𝑛𝑑𝑒𝑥 𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝

𝑃𝑟𝑖𝑐𝑒 𝑡𝑜 𝐵𝑜𝑜𝑘 𝑉𝑎𝑙𝑢𝑒 =
𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 𝐼𝑡𝑒𝑚 𝑉𝑎𝑙𝑢𝑒

3. Price-Cash Flow (P/CF)

𝐶𝑎𝑠ℎ 𝑓𝑟𝑜𝑚 𝑜𝑝𝑒𝑟𝑎𝑡𝑖𝑜𝑛𝑠 (𝐹𝑌0) ∗ 𝑀𝑢𝑙𝑡𝑖𝑐𝑙𝑎𝑠𝑠 𝑓𝑎𝑐𝑡𝑜𝑟 ∗ 1000000

𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 𝐼𝑡𝑒𝑚 𝑉𝑎𝑙𝑢𝑒 =
𝑆&𝑃 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 𝐼𝑡𝑒𝑚 = 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 𝐼𝑡𝑒𝑚 𝑉𝑎𝑙𝑢𝑒 ∗ 𝑆𝑂 ∗ 𝐼𝑊𝐹 ∗ 𝐹𝑋𝑅𝑎𝑡𝑒 ∗ 𝐴𝑊𝐹 ∗ 𝑆𝑡𝑦𝑙𝑒

𝐶𝑜𝑛𝑠𝑡𝑖𝑡𝑢𝑒𝑛𝑡 𝐼𝑛𝑑𝑒𝑥 𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝

𝑃𝑟𝑖𝑐𝑒 𝑡𝑜 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 =
𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 𝐼𝑡𝑒𝑚 𝑉𝑎𝑙𝑢𝑒

4. Indicated Yield (IND YLD)

𝐼𝑛𝑑𝑖𝑐𝑎𝑡𝑒𝑑 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 ∗ 𝐷𝑖𝑙𝑢𝑡𝑖𝑜𝑛 𝐹𝑎𝑐𝑡𝑜𝑟

𝐼𝑛𝑑 𝑌𝑙𝑑 = ( ) ∗ 100
𝐶𝑙𝑜𝑠𝑒 𝑃𝑟𝑖𝑐𝑒
5. Price to Sales

𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 (𝐹𝑌0) ∗ 𝑀𝑢𝑙𝑡𝑖𝑐𝑙𝑎𝑠𝑠 𝑓𝑎𝑐𝑡𝑜𝑟 ∗ 1000000

𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 𝐼𝑡𝑒𝑚 𝑉𝑎𝑙𝑢𝑒 =
𝑆&𝑃 𝑆ℎ𝑎𝑟𝑒𝑠 𝑂𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔

𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 𝐼𝑡𝑒𝑚 = 𝑃𝑒𝑟 𝑆ℎ𝑎𝑟𝑒 𝐷𝑎𝑡𝑎 𝐼𝑡𝑒𝑚 𝑉𝑎𝑙𝑢𝑒 ∗ 𝑆𝑂 ∗ 𝐼𝑊𝐹 ∗ 𝐹𝑋𝑅𝑎𝑡𝑒 ∗ 𝐴𝑊𝐹 ∗ 𝑆𝑡𝑦𝑙𝑒

𝐶𝑜𝑛𝑠𝑡𝑖𝑡𝑢𝑒𝑛𝑡 𝐼𝑛𝑑𝑒𝑥 𝑀𝑎𝑟𝑘𝑒𝑡 𝐶𝑎𝑝

𝑃𝑟𝑖𝑐𝑒 𝑡𝑜 𝑆𝑎𝑙𝑒𝑠 =
𝐹𝑙𝑜𝑎𝑡 𝐴𝑑𝑗𝑢𝑠𝑡𝑒𝑑 𝐷𝑎𝑡𝑎 𝐼𝑡𝑒𝑚 𝑉𝑎𝑙𝑢𝑒

Note: Company level data received from vendors is proportionally assigned to each class of stock. For
example, Altice SA has two classes of stock (Altice SA A and Altice SA B). In order to proportionally
assign company level data to each of these two stock classes, a multiclass factor is used and is
determined as follows:

𝑆ℎ𝑎𝑟𝑒𝑠 𝑜𝑓 𝑠𝑡𝑜𝑐𝑘 𝐴
𝑀𝑢𝑙𝑡𝑖𝑐𝑙𝑎𝑠𝑠 𝑓𝑎𝑐𝑡𝑜𝑟 𝑜𝑓 𝑆𝑡𝑜𝑐𝑘 𝐴 =
∑𝑖 𝑆ℎ𝑎𝑟𝑒𝑠 𝑜𝑓 𝑠𝑡𝑜𝑐𝑘𝑠 𝐴 𝑎𝑛𝑑 𝐵

𝑆ℎ𝑎𝑟𝑒𝑠 𝑜𝑓 𝑠𝑡𝑜𝑐𝑘 𝐵
𝑀𝑢𝑙𝑡𝑖𝑐𝑙𝑎𝑠𝑠 𝑓𝑎𝑐𝑡𝑜𝑟 𝑜𝑓 𝑆𝑡𝑜𝑐𝑘 𝐵 =
∑𝑖 𝑆ℎ𝑎𝑟𝑒𝑠 𝑜𝑓 𝑠𝑡𝑜𝑐𝑘𝑠 𝐴 𝑎𝑛𝑑 𝐵

S&P Dow Jones Indices: Index Mathematics Methodology 67

S&P Dow Jones Indices’ Contact Information
Client Services

[email protected]

S&P Dow Jones Indices: Index Mathematics Methodology 68

Disclaimer
© 2021 S&P Dow Jones Indices. All rights reserved. S&P, S&P 500, S&P 500 LOW VOLATILITY INDEX,
S&P 100, S&P COMPOSITE 1500, S&P 400, S&P MIDCAP 400, S&P 600, S&P SMALLCAP 600, S&P
GIVI, GLOBAL TITANS, DIVIDEND ARISTOCRATS, S&P TARGET DATE INDICES, S&P PRISM, S&P
STRIDE, GICS, SPIVA, SPDR and INDEXOLOGY are registered trademarks of S&P Global, Inc. (“S&P
Global”) or its affiliates. DOW JONES, DJ, DJIA, THE DOW and DOW JONES INDUSTRIAL AVERAGE
are registered trademarks of Dow Jones Trademark Holdings LLC (“Dow Jones”). These trademarks
together with others have been licensed to S&P Dow Jones Indices LLC. Redistribution or reproduction in
whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. This document
does not constitute an offer of services in jurisdictions where S&P Dow Jones Indices LLC, S&P Global,
Dow Jones or their respective affiliates (collectively “S&P Dow Jones Indices”) do not have the necessary
licenses. Except for certain custom index calculation services, all information provided by S&P Dow Jones
Indices is impersonal and not tailored to the needs of any person, entity or group of persons. S&P Dow
Jones Indices receives compensation in connection with licensing its indices to third parties and providing
custom calculation services. Past performance of an index is not an indication or guarantee of future
results.

It is not possible to invest directly in an index. Exposure to an asset class represented by an index may
be available through investable instruments based on that index. S&P Dow Jones Indices does not
sponsor, endorse, sell, promote or manage any investment fund or other investment vehicle that is
offered by third parties and that seeks to provide an investment return based on the performance of any
index. S&P Dow Jones Indices makes no assurance that investment products based on the index will
accurately track index performance or provide positive investment returns. S&P Dow Jones Indices LLC is
not an investment advisor, and S&P Dow Jones Indices makes no representation regarding the
advisability of investing in any such investment fund or other investment vehicle. A decision to invest in
any such investment fund or other investment vehicle should not be made in reliance on any of the
statements set forth in this document. Prospective investors are advised to make an investment in any
such fund or other vehicle only after carefully considering the risks associated with investing in such
funds, as detailed in an offering memorandum or similar document that is prepared by or on behalf of the
issuer of the investment fund or other investment product or vehicle. S&P Dow Jones Indices LLC is not a
tax advisor. A tax advisor should be consulted to evaluate the impact of any tax-exempt securities on
portfolios and the tax consequences of making any particular investment decision. Inclusion of a security
within an index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold such security,
nor is it considered to be investment advice.

These materials have been prepared solely for informational purposes based upon information generally
available to the public and from sources believed to be reliable. No content contained in these materials
(including index data, ratings, credit-related analyses and data, research, valuations, model, software or
other application or output therefrom) or any part thereof (“Content”) may be modified, reverse-
engineered, reproduced or distributed in any form or by any means, or stored in a database or retrieval
system, without the prior written permission of S&P Dow Jones Indices. The Content shall not be used for
any unlawful or unauthorized purposes. S&P Dow Jones Indices and its third-party data providers and
licensors (collectively “S&P Dow Jones Indices Parties”) do not guarantee the accuracy, completeness,
timeliness or availability of the Content. S&P Dow Jones Indices Parties are not responsible for any errors
or omissions, regardless of the cause, for the results obtained from the use of the Content. THE
CONTENT IS PROVIDED ON AN “AS IS” BASIS. S&P DOW JONES INDICES PARTIES DISCLAIM
ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE,
FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S
FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY
SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Dow Jones Indices Parties be

S&P Dow Jones Indices: Index Mathematics Methodology 69

liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or
consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income
or lost profits and opportunity costs) in connection with any use of the Content even if advised of the
possibility of such damages.

S&P Global keeps certain activities of its various divisions and business units separate from each other in
order to preserve the independence and objectivity of their respective activities. As a result, certain
divisions and business units of S&P Global may have information that is not available to other business
units. S&P Global has established policies and procedures to maintain the confidentiality of certain non-
public information received in connection with each analytical process.

In addition, S&P Dow Jones Indices provides a wide range of services to, or relating to, many
organizations, including issuers of securities, investment advisers, broker-dealers, investment banks,
other financial institutions and financial intermediaries, and accordingly may receive fees or other
economic benefits from those organizations, including organizations whose securities or services they
may recommend, rate, include in model portfolios, evaluate or otherwise address.

S&P Dow Jones Indices: Index Mathematics Methodology 70