Reality Shares Drone Index

Transcription

1 Reality Shares Drone Index 0

2 Table of Contents I. Introduction... 2 II. Index Description... 3 III. Index Methodology... 3 IV. Index Maintenance

3 Introduction This document summarizes the methodology and rules used to construct, calculate, rebalance and maintain the Reality Shares Drone Index. The Reality Shares Drone Index provides a benchmark for investors interested in tracking companies actively involved in drone technology and services. According to the Economic Impact of Unmanned Aircraft Systems Integration in the United States, there will be over 70,000 jobs created as a result of integration of drones. This will produce an economic impact of over $13.6 billion. The benefit is expected to grow through 2025 with more than 100,000 jobs and an economic impact of $82 billion. Unmanned aircraft is already being used in a variety of applications such as: Wildfire mapping; Recreation; Agricultural monitoring; Disaster management; Thermal infrared power line surveys; Law enforcement; Telecommunication; Weather monitoring; Aerial imaging/mapping; Television news coverage, sporting events, moviemaking; Environmental monitoring; Oil and gas exploration; and Freight transport The nationwide agricultural impact is an estimated $1,058,841,630 with about 11,094 new jobs. The total economic impact in public safety is approximately $45,378,927 with a total job creation of 475. The Drones Report found here ( states that the market for commercial/civilian drones will growth at a compounded annual growth rate (CAGR) of 19% between 2015 and 2020, compared with 5% growth on the military side. The companies in this index are those which work to develop, research or utilize drones as a major part of their business model. 2

4 Index Description The Reality Shares Drone Index has been created to provide investors with a product allowing them to quickly take advantage of both event-driven news and long term economic trends as the market for drone technology continues to evolve. Some features of the Index are The companies in the index are grouped in to 2 different categories Primary and Secondary. The overall weights for each category are capped based on the drone component in their business. Within each category, the Index components weights are determined by the Index Committee, based on their Drone Score. Index components are reviewed semi-annually for eligibility, and the weights are re-set accordingly. Introduction to the Reality Shares Drone Advisory Committee Recognizing the drone industry is in a nascent phase of development, Reality Shares has teamed with a group of industry professionals to form an Advisory Group to consult on industry and company actions relating to the evolution of the drone industry. The charter of this Advisory Group will be as follows: help identify potential index constituent stocks advise on industry trends identify developing themes research and report company specific actions Index Methodology Eligibility Criteria and Index Construction The companies satisfying the following criteria are included in the Reality Shares Drone Index The Index comprises companies related to drones, globally. The selected companies are categorized into PRIMARY and SECONDARY companies. - PRIMARY: o Companies involved in drone development, manufacturing and research. 3

5 PRIMARY companies selection process Reality Shares Research and the Advisory Committee identifies a potential list of drone manufacturing/development/research companies to arrive at a PRIMARY stock universe using various research sources such as: UAV Global database, FAA Approved Exemptions, Drone Life, Teal Group and Drone Center at Bard College. The list is run through Bloomberg and Capital IQ to ensure good standing and data transparency of the stocks. Select publicly listed companies from PRIMARY stocks universe Apply market cap filter of >USD 100 million as of rebalance date Index Group Review Final list of PRIMARY stocks - SECONDARY: o Companies that provide support and supply drone development o Suppliers of drone companies, where more than 10% of their business revenue comes from a pure play drone Company. We used the SPLC function in Bloomberg to find these companies. SECONDARY companies selection process Identify companies that provide support and supply drone development Apply SPLC function on pure play Drone companies. Select publicly listed companies with more than 10% of the revenue from a pure play Drone company Identify other companies that provide support and supply drone development 4

6 Apply market cap filter of >USD 100 million as of rebalance date Index Group Review Final list of SECONDARY stocks Base Date and Base Value The Reality Shares Drone Index was calculated with a base value of 100 as of December 31, The Index Currency is USD. Rebalancing and Reconstitution Frequency The Index constituents are selected twice each year during semi-annual reconstitution. The constituent stocks are selected as of the close of the third Friday of June and December. The index changes are incorporated for the opening of trading on the following business day. At the time of reconstitution the index portfolio weights of the individual stocks are rebalanced. The individual stock weights are decided by the Index Committee using a two-step process Step one Calculation of Drone Score A Drone Score would be assigned to each individual Index constituent stock by researching each individual stock. The Drone Score would be determined by: A. Estimated revenue attribution / contribution from the Drone industry B. Estimated % of the company s revenue generated from the Drone industry C. Primary or secondary tier D. Expected growth in contribution of the company to Drone industry The following conversion table is used to calculate the Drone Score 5

7 A B C D Revenue Contribution Component Score % of Total Revenue Component Score Tier Component Score Exp Growth Component Score 0 1m Primary 10 Pure Play 120 1m 5m Secondary 5 Very High 40 5m 10m High 10 10m 15m Medium 4 15m 25m Low 2 25m 35m 6 Very Low 1 35m 50m 7 50m 75m 8 75m 100m mm 10 The Drone score for a company is the sum of the individual component scores A:D Step two Calculation of indicative weights using Drone Score The Reality Shares Drone Index follows a weighting methodology based on Drone Score within each category of stocks. The category weight minimums are as follows - PRIMARY: 50% - SECONDARY: 5% The indicative starting weights on reconstitution date are calculated using Drone Score as follows. W, D /D W, =weight of constituent i in category c =weight allocated to category c =number of companies category c D =Drone Score of constituent i The sum of weights allocated to the two categories will be 100% 1 Weight limits No single constituent stock has a weight of more than 25% of the weight of the Index. Any excess weight will be redistributed equally among Index members. The five most heavily weighted component stocks will not exceed 60% of the weight of the Index. 6

8 The Index will not own more than 5% of any one company s equity. Number of constituents The number of constituents in the Reality Shares Drone Index are variable and dependent on the number of stocks which get selected based on the membership criteria. However, the Index will have no less than 20 component stocks, without regard to category. Index Calculation The Index level is calculated as follows Index Value Combined Market Value of Assigned Shares of Divisor All Components or I ( t ) n i 1 P t ) D x S ( t ) t ) I(t) = Index value at time (t) D(t) = Divisor at time (t) n = Number of stocks in the index t = The time the index is calculated P t) = Price of stock (i) at time (t) S t) = Number of assigned shares of stock (i) at time (t) The initial index divisor is determined using the following equation: D ( o) n i 1 P o) I ( o) x S o) I (o) = Base index value at base date D o = Initial divisor at base date n = Number of stocks in the index P o) = Closing price of stock (i) at base date S o) = Number of assigned shares of stock (i) at base date 7

9 Assigned shares are the number of shares needed for each component such that the component conforms to the weighting distribution established at rebalance. Changes to the index composition require divisor adjustments in order to retain index continuity before and after corporate actions. Divisor changes are made according to the following formula: D ( t 1) D ( t ) n P i 1 n i 1 t 1) P t ) x S x S t 1) t ) D (t+1) = Divisor after changes are made to the index P t+1) = Price of each stock after index changes S t+1) = Number of assigned shares of each stock after index changes D (t) = Divisor before changes are made to the index P t) = Price of each stock prior to index changes S t) = Number of assigned shares of each stock prior to index changes The total return index is calculated using the following basic equations: Calculate the total dividend paid on a given day and convert this figure into points of the price index using the following formula: Total Daily Dividend DV t) * S t ) DV t) = Dividend paid of stock (i) at time (t) S t) = Number of assigned shares of stock (i) at time (t) t = The time the index is calculated Convert Total Daily Dividend into index points by dividing Total Daily Dividend by the divisor for the price index using the following formula: Toal Daily Dividend Index Dividend D (t) D (t) = Price Index Divisor at time (t) Calculate the one day total return of the price index using the following formula: 8

10 Index Daily Total Return I (t) = Price Index level at time (t) I (t-1) = Price Index level at time (t-1) (t) I (t) Index Dividend ( t ) 1 I (t-1) Use Index Daily Total Return calculated in the prior step to determine the current day total return index level using the following formula: Total Return Index (t) Total Return Index * 1 Index Daily Total Return (t-1) Total Return Index (t) = Total Return Index level at time (t) Total Return Index (t-1) = Total Return Index level at time (t-1) (t) Index Maintenance Changes in constituents: The general treatment of additions and deletions aims at minimizing turnover in the Indexes. Additions New companies are considered for inclusion at semi-annual reconstituion periods Deletions In the event a company is delisted or acquired or goes bankrupt, the company is removed from the Reality Shares Drone Index. Stocks deleted between reconstitution dates are not replaced. Other corporate actions: Spin-offs, Rights Offerings, Stock Splits Stock prices and number of shares are adjusted. In the event a company is spun-off, the remaining companies will be evaluated for eligilibility and possible addition to the index. Special Cash Dividends The stock price is adjusted by subtracting the special dividend. Merger /Acquisition o Merger between two components (stock consideration): The target company is deleted. o Merger between two components (cash and stock consideration): The target company is deleted. o Merger between two components (cash consideration): The target company is deleted. o Merger between non-component and component: The target company is deleted. Index Committee 9

11 The Reality Shares Drone Index is maintained by the Reality Shares Index Committee. The committee meets quarterly and as necessary on an ad hoc basis to make all decisions regarding the Indexes. At each meeting, the Index Committee reviews corporate actions that may affect index constituents and any significant market events. In addition, the Index Committee may revise index policy covering rules for selecting companies, treatment of dividends, share counts or other matters, or override selected outcomes of such index policy on a case-by-case basis. 10