Setting the Pace with Price Setters

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1 Tech / Trade / Intel / List APRIL 2016 Setting the Pace with Price Setters Nasdaq U.S. Price Setters Index TOM PSAROFAGIS / Product Development Specialist, Nasdaq Global Information Services BACKGROUND Selecting stocks with specific characteristics or factors may provide a way to potentially enhance a portfolio s return. At its core, the key to sustainable earnings growth stems from a company s ability to increase pricing power. In an environment of sluggish economic growth, companies that are capable of pushing up prices have advantages over others, who will potentially face margin challenges as costs continue to rise. The Nasdaq U.S. Price Setters Index identifies names that not only possess sustainable pricing power, but also display high quality financial metrics. INDEX METHODOLOGY / The Nasdaq U.S. Price Setters (NQPRCE) Index is designed to provide exposure to companies within the Nasdaq U.S. Large Mid Cap Index (NQUSBLM) that exhibit high degrees of pricing power. Firstly, the top 550 names by market capitalization are selected and then securities are screened by a series of quantitative and qualitative factors. The top ranked securities are then selected and a proprietary weighting methodology is applied. In order to identify names that exhibit sustainable pricing power, a variety of factors are examined to identify those that can provide inflation protection, as well display consistent sales growth and earnings quality. Inflation Factors 1-Year EPS Growth 3-Year EPS Growth Operating Margin 1-Year Operating Margin Growth 3-Year Sales Growth Quality Factors Return on Equity Earnings Smoothness Earnings Quality Operating Margin Stability Earnings Dispersion 12-Month Return Volatility Securities are ranked based on these 11 factors and the top 150 names are selected and equally divided into three groups, containing 50 names each. The first group (top 50) receives an aggregate weight of 50%; the second group (51 100) receives an aggregate weight of 35%; and the last group ( ) receives an aggregate weight of 15%. Every security within the respective groups is equally weighted. The index is evaluated annually in March. BUSINESS.NASDAQ.COM/INDEXES NASDAQ U.S. PRICE SETTERS INDEX / 1

2 INDEX COMPOSITION AND SECTOR BREAKDOWN / The final portfolio consists of 150 names across a broad range of sectors. The proprietary weighting methodology addresses the issue of concentration risk among any one particular security, while still delivering diversified sector exposure. Top 10 Holdings COMPANY NAME TICKER WEIGHT SKYWORKS SOLUTIONS SWKS 1.10% AFFILIATED MGRS GRP AMG 1.10% MOODY'S CORP MCO 1.04% TORCHMARK CP TMK 1.03% UNITED PARCEL SVC UPS 1.03% AMPHENOL CP APH 1.03% WATERS CP WAT 1.03% PUBLIC STG PSA 1.03% CINTAS CORP CTAS 1.02% COLGATE PALMOLIVE CL 1.02% As of market open on 3/21/2016 The current portfolio of securities is spread across several sectors, with Industrials and Consumer Goods as the largest sectors. See table below for additional sector weights. 30% Sector Breakdown 25% 20% 15% 10% 5% 0% Industrials Consumer Goods Health Care Consumer Services Financial Technology Basic Materials Utilities Oil & Gas As of market open on 3/21/2016 BUSINESS.NASDAQ.COM/INDEXES NASDAQ U.S. PRICE SETTERS INDEX / 2

3 The Index also has some specific financial metrics worth highlighting: As of 12/31/2015 Nasdaq U.S. Price Setters Index Price-to-Book Ratio 3.68 Price-to-Earnings Ratio Return on Equity 24.16% Return on Assets 7.76% Debt to Equity 0.88 Cash to Debt 1.42 PERFORMANCE / /30/ /30/ /30/ /30/ /30/ /30/ /30/ /30/2015 NASDAQ U.S. PRICE SETTERS (TR) NASDAQ U.S. LARGE/MID (TR) S&P HIGH QUALITY (TR) S&P 500 (TR) *The Nasdaq Price Setters Index went live on 1/19/2016. Back-tested data was used for dates prior Over the last 15 years, the Nasdaq U.S. Price Setters TR Index has outperformed its benchmark Nasdaq U.S. Large-Mid Cap Index by a significant margin as well as the S&P 500. In addition, when compared to an index of a similar strategy, the S&P 500 High Quality TR Index, the Nasdaq U.S. Price Setters also outperforms. The tables below highlight performance on an annual basis, as well as annual excess returns over the comparable indexes. BUSINESS.NASDAQ.COM/INDEXES NASDAQ U.S. PRICE SETTERS INDEX / 3

4 Annual Performance Table Nasdaq U.S. Price Setters (TR) S&P 500 High Quality (TR) Nasdaq U.S. Large/Mid (TR) S&P 500 (TR) % -7.2% 7.2% 5.5% % -32.8% -36.0% -37.0% % 25.5% 27.4% 26.5% % 22.1% 16.4% 15.1% % 6.6% 1.7% 2.1% % 15.2% 16.2% 16.0% % 32.4% 33.0% 32.4% % 16.4% 13.0% 13.7% % 1.9% 0.9% 1.4% 2016 YTD -1.1% 3.0% -1.9% -1.6% Excess Returns Table 30% Excess Returns 20% 10% 0% YTD -10% NASDAQ PRICE SETTERS VS S&P HIGH QUALITY NASDAQ PRICE SETTERS VS S&P 500 NASDAQ PRICE SETTERS VS NASDAQ US LARGE MID BUSINESS.NASDAQ.COM/INDEXES NASDAQ U.S. PRICE SETTERS INDEX / 4

5 QUALITY ACROSS MARKET CYCLES / Perhaps one of the strongest charactertics of the Nasdaq U.S. Price Setters Index is its ability to remain resilient and adapt to varying market cycles. The index displays steady outperformance over a several year span, but the index stands out from the crowd during times of market uncertainty. The chart below highlights relative performance of the Nasdaq U.S. Price Setters Index to both the S&P 500 High Quality Index and the Nasdaq U.S. Large-Mid Cap Index. In times of market uncertainty, investors have tended to flock to stocks that display higher quality financial metrics. In addition, names that are best able to sustain their pricing power during a recession are better positioned to weather any storm and have the potential for outperformance. During the last U.S. recession, the Nasdaq U.S. Price Setters index outperformed by an even greater margin Relative Performance /29/ /29/ /29/ /29/ /29/ /29/ /29/ /29/ /29/ /29/2015 RECESSION NASDAQ PRICE SETTERS VS S&P HIGH QUALITY NASDAQ PRICE SETTERS VS NASDAQ US LARGE/MID PRICE SETTERS AS AN INFLATION HEDGE / After years of perhaps the most accommodative monetary policy in history, the Federal Reserve raised its target funds rate by 25 basis points in December Looking forward, the path of future rate hikes will depend on the strength of economic data, possibly most importantly to the Fed-inflation. Fed policy makers want to be assured of a steady inflation gauge as an indication of economic health. The impact of inflation can have various effects across asset classes, but the Nasdaq U.S.Price Setters Index is positioned to withstand accelerating inflation. Names included in the index have attractive operating margins and thus, the flexibly to impose pricing power when compared to lower margin companies, especially in an environment of steadily rising inflation. The graph below highlights that during times of rising inflation, the Nasdaq U.S. Price setters Index displays strong performance characteristics.. Rolling Performance: Nasdaq U.S. Price Setters and Inflation /01/ /01/ /01/ /01/ /01/ /01/ /01/2014 U.S. PERSONAL CONSUMPTION CORE PRICE INDEX (YOY) NASDAQ U.S. PRICE SETTERS INDEX (YOY) BUSINESS.NASDAQ.COM/INDEXES NASDAQ U.S. PRICE SETTERS INDEX / 5

6 When inflation and interest rates move higher, companies with lower return on equity become less competitive. When compared to both the S&P 500 and the S&P 500 High Quality Index, the Nasdaq U.S. Price Setters Index displays a higher return on equity over time. NOTES / Data as of 3/7/2016 unless otherwise noted. *ROE data as of 12/31/15 Nasdaq Global Indexes, Factset, Bloomberg 30% Return on Equity 25% MORE INFORMATION / 20% 15% Licensing nasdaqlicensing@nasdaq.com Phone: % 5% Sales datasales@nasdaq.com Phone: or % NASDAQ U.S. PRICE SETTERS INDEX S&P 500 S&P HIGH QUALITY INDEX DISCLAIMER / SUMMARY / As history has proven, the financial markets experience some turmoil every decade or so. With the Fed set to seemingly raise rates, potential market inflation and general market uncertainty, turn to Nasdaq for the newest offering in the quality space the Nasdaq U.S. Price Setters Index. The index holds a basket of 150 stocks across industries that exhibit strong pricing power and have historically proven to combat inflation and performed well during times of heightened market stress. When in doubt, set the pace with Nasdaq U.S. Price Setters. Nasdaq is a registered trademark of Nasdaq, Inc. The information contained above is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. Neither Nasdaq, Inc. nor any of its affiliates makes any recommendation to buy or sell any security or any representation about the financial condition of any company. Statements regarding Nasdaq-listed companies or Nasdaq proprietary indexes are not guarantees of future performance. Actual results may differ materially from those expressed or implied. Past performance is not indicative of future results. Investors should undertake their own due diligence and carefully evaluate companies before investing. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED. Copyright All rights reserved. Nasdaq and the Nasdaq Stock Market are registered trademarks, or service marks, of Nasdaq, Inc. in the United Stated and other countries Q16