Index Construction

  1. Potential Index constituents include stocks trading on major exchanges of U.S. or other countries. OTC stocks are ineligible. Stocks listed on local exchanges in certain non-U.S. markets that have difficult trading requirements or regulatory regimes are ineligible.
  2. Possible Index constituents must have a market capitalization of more than US$200 million and have a three-month average daily trading value greater than US$400,000. Out of more than 400 publically listed water companies worldwide, currently approximately 95 companies meet the water content and trading criteria to be considered as possible Index constituents.1
  3. Selected issues are placed in a Water Utilities segment, which includes Water Networks, and a Water Industrials segment, comprised of Water Utility Line Construction, Implement and Irrigation Equipment, Water Purification Equipment, and Water Treatment Chemicals.
  4. Select 50% of the issues in the Water Utility segment and 50% in the Water Industrials segment with the best ranking using a proprietary three-factor model score specific to each segment.
  5. Assign approximately 35% of the total weight of the portfolio to the Water Utilities segment and 65% to the Water Industrials segment, with individual position weights determined by dividend yield.
  6. The index is to be reconstituted and rebalanced once a quarter.

Water Utilities Three-Factors

Price/Earnings Ratio (P/E): A widely used stock evaluation ratio that relates a company's share price to its per-share earnings, P/E is a value factor that compares relative valuation to other companies in the universe. Application - Water utilities tend to be defensive by nature, and those that exhibit better valuation through an attractive P/E ratio in an already defensive industry have historically displayed better future stock performance. Stocks that have a lower P/E relative to others in the universe are awarded a higher score, which leads to a higher probability of inclusion in the Index.

EV/EBITDA: This measure is important to utilities because it takes into account the debt and equity of the company, which is again an important metric in a defensive industry. Application - Stocks that have a lower EV/EBITDA relative to others in the universe are awarded a higher score, which leads to a higher probability of inclusion in the Index.

ROE: Return on equity is the amount of net income returned as a percentage of shareholders equity. Application - Water utilities as part of their regulatory framework within the jurisdictions that they serve are awarded allowable ROEs due to their monopolistic nature. Actual ROEs vary from allowable ROEs due to operational efficiencies and regulatory environments that they operate in. Stocks that have a higher ROE relative to others in the universe are awarded a higher score, which leads to a higher probability of inclusion in the Index.

Water Industrials Three-Factors

Price/Earnings Ratio (P/E): A widely used stock evaluation ratio that relates a company's share price to its per-share earnings, P/E is a value factor that compares relative valuation to other companies in the universe. Application - Water industrials tend to be defensive by nature, and those that exhibit better valuation through an attractive P/E ratio in an already defensive industry have historically displayed better future stock performance. Stocks that have a lower P/E relative to others in the universe are awarded a higher score, which leads to a higher probability of inclusion in the Index.

GM: Gross Margin compares profitability to others in the universe, and has historically been a powerful predictor of future growth as well as of earnings, free cash flow, and payouts. Application - Adding profitability factors on top of value factors such as P/E [can help] reduce overall volatility, and water industrials like other general industrial stocks tend to produce better long-term results if the company operates more efficiently and profitably. Stocks that have a higher Gross Margin relative to others in the universe are awarded a higher score, which leads to a higher probability of inclusion in the Index.

ROIC: A calculation used to assess a company's efficiency at allocating the capital under its control to profitable investments. Application - Water industrials like other general industrial stocks tend to produce better long-term results if the company allocates their capital in an efficient and profitable manner. Stocks that have a higher ROIC relative to others in the universe are awarded a higher score, which leads to a higher probability of inclusion in the Index.

Correlation: a statistical measure of how two securities move in relation to each other. In this case it is Summit Zacks Global Water Index vs. S&P 500.

Dividend Yield: A financial ratio that indicates how much a company pays out in dividends each year relative to its share price. Dividend yield is represented as a percentage and can be calculated by dividing the dollar value of dividends paid in a given year per share of stock held by the dollar value of one share of stock.

1 as of 01/01/2016