SELECTION CRITERIA
The S&P Foundation Strategy is based upon the following strategies and is approximately weighted, as of five business days before the initial date of deposit (the “Inception Date”) as follows:
- S&P Large-Cap Cornerstone Strategy: 50%
- S&P Mid-Cap Cornerstone Strategy: 15%
- S&P Small-Cap Cornerstone Strategy: 15%
- S&P International Cornerstone Strategy: 20%
The final portfolio contains approximately 210 stocks, based upon the individual portfolio strategies described below.
S&P Large-Cap Cornerstone Strategy Selection Criteria
S&P Large-Cap Cornerstone Strategy is based on the following screens and is approximately equally-weighted as of the Inception Date. The screening process will be run approximately five business days before the Inception Date. This strategy yields 60 stocks based upon the three individual portfolio strategies described below.
Strategy 1
- The starting universe includes all of the companies included in the S&P 500 that fall above the 52nd percentile of market capitalization.
- A Quality Screen is applied to eliminate stocks with a Standard & Poor’s Quality Ranking (“S&P Quality Ranking”) below B-.
The S&P Quality Ranking is an assessment of the past performance of a stock’s earnings and dividends over the most recent ten fiscal years. Growth and stability of earnings and dividends are key elements in establishing S&P Quality Rankings for common stocks.
- Select the 100 stocks with the highest equal-weighted combined rank based on free cash flow-to-price and sales-to-price ratios.
Free cash flow-to-price is calculated by dividing free cash flow by market capitalization. Sales-to-price is calculated by dividing sales by market capitalization. Free cash flow (“FCF”) is calculated by subtracting four-quarter trailing operating cash flows by four-quarter trailing capital expenditures. Sales are calculated as four-quarter trailing sales.
- For the final portfolio, select the 20 stocks with the highest price momentum.
Price momentum is calculated as follows: calculate the 12-month percentage price change by skipping the most recent month. Subtract from it the most recent 1-month percentage price change.
* S&P 500 Index
Standard and Poor's S&P 500 Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Strategy 2
- The starting universe includes all of the companies included in the S&P 500 that fall above the 52nd percentile of market capitalization.
- A Quality Screen is applied to eliminate stocks with S&P Quality Rankings below B-.
- Select the 100 stocks with the highest return on invested capital. Return on invested capital is defined as four-quarter trailing operating income divided by invested capital. Invested capital is calculated as long-term debt plus preferred stock plus minority interests plus common equity.
- For the final portfolio, select the 20 stocks with the lowest price-to-book ratio. Price-to-book ratio is calculated as market capitalization divided by common equity.
Strategy 3
- The starting universe includes all of the companies included in the S&P 500 that fall above the 52nd percentile of market capitalization.
- Select the five Global Industry Classification Standard (“GICS”) sectors with the lowest downward momentum.
Downward momentum is defined as the average of monthly returns in down markets. Down markets are months when the S&P 500 Index had a negative return. Downward momentum is calculated from December 1970 through the latest month a return for the S&P 500 Index is available.
- A Quality Screen is applied to eliminate stocks with S&P Quality Rankings below B-.
- Select the 20 stocks with the highest sector de-medianed free cash flow yield.If the stock is classified in the utilities or telecommunication Services sector, EBITDA-to-EV (four-quarter trailing operating income after depreciation divided by enterprise value) will be used in place of the FCF yield. Enterprise value is defined as market capitalization plus total debt minus cash.
FCF yield is calculated by dividing FCF by market capitalization. The de-medianed FCF yield is calculated by subtracting from each stock’s FCF yield the sector FCF yield median value. For telecommunication services and utilities sector stocks, the de-medianed EBITDA-to-EV ratio is calculated by subtracting from each stock’s EBITDA-to-EV ratio the sector EBITDA-to-EV ratio median value.
In constructing of the final portfolio, if the number of stocks in any one single industry is greater than 20% of the total, the portfolio will be adjusted by reducing the number of the stocks in the overweighted industry(s) to bring the weighting of such industry to 20%. The adjustment will consist of excluding from the overweighted industry(s) the stocks with the highest price-to-book ratio and by replacing them with the stocks with the lowest price-to-book ratio based on rerunning the screens for Strategy 1 and Strategy-2 using the 450 stocks that were not originally selected.
S&P Mid-Cap Cornerstone Strategy Selection Criteria
S&P Mid-Cap Cornerstone Strategy is based on the following screens and is approximately equally-weighted as of the Inception Date. The screening process will be run approximately five business days before the Inception Date. This strategy yields 60 stocks based upon the three individual portfolio strategies described below.
Strategy 1
- The starting universe includes all of the companies included in the S&P 400* that fall above the 17.5th percentile of market capitalization.
- Eliminate all stocks belonging to the financial sector.
- Select the 50 stocks with the highest sector de-medianed Cash Flow Return on Investment (“CFROI”).
CFROI is four-quarter trailing operating cash flow divided by net operating assets. Net operating assets is calculated as common equity plus total debt minus cash. The de-medianed CFROI ratio is calculated by subtracting from each stock’s CFROI ratio the sector CFROI median value.
- Select the 30 stocks with the highest sector de-medianed EBITDA-to-EV ratio. EBITDA-to-EV ratio is four-quarter trailing operating income before depreciation divided by enterprise value. Enterprise value is defined as market capitalization plus total debt minus cash. The demedianed EBITDA-to-EV ratio is calculated by subtracting from each stock’s EBITDA-to-EV ratio the sector EBITDA-to-EV median value.
- For the final portfolio, select the 20 stocks with the highest sector demedianed price momentum. Price momentum is calculated as follows: calculate the 12-month percentage price change by skipping the most recent month. Subtract from it the most recent one-month percentage price change. The de-medianed price momentum is calculated by subtracting from each stock’s price momentum the sector price momentum median value.
* S&P Mid-Cap 400 Index
Standard and Poor’s Mid-Cap 400 Index is a capitalization-weighted index which measures the performance of the mid-range sector of the U.S. stock market. The index was developed with a base level of 100 as of December 31, 1990.
Strategy 2
- The starting universe includes all of the companies included in the S&P 400 that fall above the 17.5th percentile of market capitalization.
- Select the 100 stocks with the highest sector de-medianed FCF yield. If the stock is classified in the financials sector, earnings yield will be used in place of the FCF yield. Earnings yield is four-quarter trailing income before extraordinary items divided by market capitalization.
For financials sector stocks, the de-medianed earnings yield is calculated by subtracting from each stock’s earnings yield the sector earnings yield median value.
- Select the 30 stocks with the highest sector de-medianed projected long-term growth of earnings per share (“EPS”).
The projected long-term growth of EPS is the Institutional Brokers’ Estimate System consensus estimate of long-term growth of earnings. The de-medianed projected long-term growth of EPS (“LTG”) is calculated by subtracting from each stock’s LTG the GICS industry LTG median value.
- For the final portfolio, select the 20 stocks with the lowest sector demedianed net operating assets-to-total assets ratio (“NOA”). Net operating assets are calculated as common equity plus total debt minus cash. The demedianed NOA is calculated by subtracting from each stock’s NOA the sector NOA median value.
Strategy 3
- The starting universe includes all of the companies included in the S&P 400 that fall above the 17.5th percentile of market capitalization.
- Select the five GICS sectors with the lowest downward momentum.
- Exclude stocks with S&P Quality Rankings below B-.
- Select the 20 stocks with the highest sector de-medianed free cash flow yield. If the stock is classified in the utilities or telecommunication services sector, EBITDA-to-EV (four-quarter trailing operating income after depreciation divided by enterprise value) will be used in place of the FCF yield. Enterprise value is defined as market capitalization plus total debt minus cash. For telecommunication services and utilities sector stocks, the de-medianed EBITDA-to-EV ratio is calculated by subtracting from each stock’s EBITDA-to-EV ratio the sector EBITDA-to-EV ratio median value.
In constructing the final portfolio, if the number of stocks in any one single industry is greater than 20% of the total number of stocks, the portfolio will be adjusted by reducing the number of the stocks in the overweighted industry(s) to bring the weighting of such industry to 20%. The adjustment will consist of excluding from the overweighted industry(s) the stocks with the highest price-to-book ratio and by replacing them with the stocks with the lowest price-to-book based on rerunning the screens for Strategy 1 and Strategy 2 using the 340 stocks that were not originally selected. Price-to-book ratio is calculated as market capitalization divided by common equity.
S&P Small-Cap Cornerstone Strategy Selection Criteria
The S&P Small-Cap Cornerstone Strategy is based on the following screens and is approximately equally-weighted as of the Inception Date. The screening process will be run approximately five business days before the Inception Date. This strategy yields 60 stocks based upon the three individual portfolio strategies described below.
Strategy 1
- The starting universe includes all of the companies included in the S&P 600* that fall above the 8.5th percentile of market capitalization.
- A Quality Screen is applied to eliminate stocks with a S&P Quality Ranking below B-.
- For the final portfolio, select the 20 stocks with the greatest percentage decrease in their shares outstanding over the last four quarters. If the number of stocks with a percentage decrease in shares outstanding is less than 20, select stocks that had the greatest percentage decrease in shares outstanding followed by stocks that had the smallest percentage increase in shares outstanding for a total of 16 stocks. If there were no stocks with a percentage decrease in shares outstanding, then select the 20 stocks with the smallest percentage increase in shares outstanding.
* S&P 600 Small-Cap Index
The Standard & Poor’s Small-Cap 600 Index is a capitalization-weighted index that measures the performance of selected U.S. stocks with a small market capitalization. The index was developed with a base value of 100 as of December 31, 1993.
Strategy 2
- The starting universe includes all of the companies included in the S&P 600 that fall above the 8.5th percentile of market capitalization.
- Eliminate all stocks belonging to the financial sector.
- Select the 100 stocks with the highest sector de-medianed CFROI.
- Select the 30 stocks with the highest sector de-medianed EBITDA-to-EV ratio. EBITDA-to-EV ratio is four-quarter trailing operating income before depreciation divided by enterprise value. Enterprise value is defined as market capitalization plus total debt minus cash. The de-medianed EBITD-to-EV ratio is calculated by subtracting from each stock’s EBITDA-to-EV ratio the sector EBITDA-to-EV median value.
- For the final portfolio, select the 20 stocks with the highest sector demedianed price momentum.
The de-medianed price momentum is calculated by subtracting from each stock’s price momentum the sector price momentum median value.
Strategy 3
- The starting universe includes all of the companies included in the S&P 600 that fall above the 8.5th percentile of market capitalization.
- Select the five GICS sectors with the lowest downward momentum.
- For the final portfolio, select the 20 stocks with the highest sector demedianed FCF yield. If the stock is classified in the utilities or telecommunication services sector, EBITDA-to-EV (four-quarter trailing operating income before depreciation divided by enterprise value) will be used in place of the FCF yield. Enterprise value is defined as market capitalization plus total debt minus cash.
For telecommunication services and utilities sector stocks, the de-medianed EBITDA-to-EV ratio is calculated by subtracting from each stock’s EBITDA-to-EV ratio the sector EBITDA-to-EV ratio median value.
In constructing the final portfolio, if the number of stocks in any one single industry is greater than 20% of the total number of stocks, the portfolio will be adjusted by reducing the number of the stocks in the overweighted industry(s) to bring the weighting of such industry to 20%. The adjustment will consist of excluding from the overweighted industry(s) the stocks with the highest price-to-book ratio and by replacing them with the stocks with the lowest price-to-book ratio based on re-running the screens for Strategy 1 and Strategy 2 using the 540 stocks that were not originally selected. Price-to-book ratio is calculated as market capitalization divided by common equity.
S&P’s International Cornerstone Selection Criteria
The S&P International Cornerstone Strategy is based on the following screens and is approximately equally-weighted as of the Inception Date. The screening process will be run approximately five business days before the Inception Date. This strategy yields 30 stocks, based upon the two individual portfolio strategies described below.
Strategy 1
- The starting universe includes all of the companies included in the S&P’s Compustat database classified as ADRs that fall above the 31.2nd percentile of market capitalization.
- Exclude ADRs with S&P STARS rankings below 3.
- Select only ADRs that are covered by at least 3 analysts.
- Select the 15 ADRs with the greatest sector de-medianed forward earnings yield.
Under S&P’s proprietary STARS (Stock Appreciation Ranking System), S&P equity analysts rank stocks and ADRs according to their individual forecast of a stock’s or ADR’s future total return potential versus the expected total return of a relevant benchmark (S&P 500 for the United States), based on a 12-month time horizon. The STARS Ranking is based on a 5-point scale with “1” being the lowest and “5” being the highest ranking.
Strategy 2
- The starting universe includes all of the companies included in the S&P’s Compustat database classified as ADRs that fall above the 31.2nd percentile of market capitalization.
- Exclude ADRs with S&P Fair Value rankings below 3.
- Exclude 15 stocks selected from Strategy 1.
- Select the 50 ADRs with the greatest sector-de-medianed annual dividend yield.
- Select the 15 ADRs with the greatest price momentum.
The S&P Fair Value rank calculates a stock’s or ADR’s weekly Fair Value - the price at which a stock or ADR should theoretically trade at current market levels based on fundamental data such as corporate earnings and growth potential, price-to-book value, return on equity, and current yield relative to the S&P 500. Stocks and ADRs are then assigned a ranking from 5, indicating that the current price is significantly undervalued relative to the S&P Fair Value Universe, to 1, indicating that the current price is substantially overvalued relative to the S&P Fair Value Universe.
Standard & Poor’s Investment Advisory Services LLC
In 1995, Standard & Poor’s Investment Advisory Services LLC was established as a wholly owned subsidiary of The McGraw-Hill Companies, Inc. for the express purpose of providing investment advice to the financial community. SPIAS’ clients have included brokerage firms, mutual funds, insurance companies, retirement plans, financial planners and other financial services professionals. In addition to receiving a portfolio consulting fee, the Trust pays SPIAS a licensing fee for the use of intellectual property owned by The McGraw-Hill Companies, Inc.
RISKS AND OTHER CONSIDERATIONS
As with all investments, you may lose some or all of your investment in the Trust. No assurance can be given that the Trust’s investment objective will be achieved. The Trust also might not perform as well as you expect. This can happen for reasons such as these:
- Securities prices can be volatile. The value of your investment may fall over time. Market value fluctuates in response to various factors. These can include stock market movements, purchases or sales of securities by the Trust, government policies, litigation, and changes in interest rates, inflation, the financial condition of the securities’ issuer or even perceptions of the issuer. Units of the Trust are not deposits of any bank and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
- Due to the current state of the economy, the value of the securities held by the Trust may be subject to steep declines or increased volatility due to changes in performance or perception of the issuers. In the last year, economic activity has declined across all sectors of the economy, and the United States is experiencing increased unemployment. The current economic crisis has affected the global economy with European and Asian markets also suffering historic losses. Extraordinary steps have been taken by the governments of several leading economic countries to combat the economic crisis; however, the impact of these measures is not yet known and cannot be predicted.
- The Sponsor applied the strategy which makes up the Trust portfolio at a particular time. If additional units of the Trust are created after the Inception Date, the Sponsor will typically only deposit the securities currently included in the portfolio. This is true even if a later application of the strategy would have resulted in the selection of different securities. Because the Trust is unmanaged, the Trustee will not buy or sell securities in the event the Trust’s portfolio and its investment strategy are not achieving the desired results.
- The Trust invests in stocks issued by small-capitalization and mid-capitalization companies. These stocks customarily involve more investment risk than stocks of larger capitalization companies. Small-capitalization and mid-capitalization companies may have limited product lines, markets or financial resources and may be more vulnerable to adverse general market or economic developments.
- The Trust invests in ADRs and U.S.- listed foreign securities. The Trust’s investment in ADRs and U.S.-listed foreign securities presents additional risk. ADRs are issued by a bank or trust company to evidence ownership of underlying securities issued by foreign corporations. Securities of foreign issuers present risks beyond those of domestic securities. More specifically, foreign risk is the risk that foreign securities will be more volatile than U.S. securities due to such factors as adverse economic, currency, political, social or regulatory developments in a country, including government seizure of assets, excessive taxation, limitations on the use or transfer of assets, the lack of liquidity or regulatory controls with respect to certain industries or differing legal and/or accounting standards.
- The Trust includes securities issued by companies headquartered or incorporated in countries considered to be emerging markets. Emerging markets are generally defined as countries with low per capita income in the initial stages of their industrial cycles. Risks of investing in developing or emerging countries include the possibility of investment and trading limitations, liquidity concerns, delays and disruptions in settlement transactions, political uncertainties and dependence on international trade and development assistance. Companies headquartered in emerging market countries may be exposed to greater volatility and market risk.
- The Trust includes securities of companies in the consumer products sectors. General risks of companies in the consumer products sectors include cyclicality of revenues and earnings, economic recession, currency fluctuations, changing consumer tastes, extensive competition, product liability litigation and increased government regulation. A weak economy and its effect on consumer spending would adversely affect consumer products companies.
- Share prices or dividend rates on the securities in the Trust may decline during the life of the Trust. There is no guarantee that the issuers of the securities will declare dividends in the future and, if declared, whether they will remain at current levels or increase over time.
- Inflation may lead to a decrease in the value of assets or income from investments.
- The Sponsor does not actively manage the portfolio. The Trust will generally hold, and may continue to buy, the same securities even though a security’s outlook, market value or yield may have changed.
Please see the Trust prospectus for more complete risk information.
Unit Investment Trusts (“UITs”) are fixed and not actively managed. An investment in this fixed portfolio should be made with an understanding of the risks involved with owning various types of investments. Industry predictions may not materialize and securities selected for the Trust may not participate in overall industry growth, if any. Units, when redeemed, may be worth more or less than their original purchase price.
This UIT is part of a long-term strategy. Consult an attorney or tax advisor regarding tax consequences associated with an investment from one series to the next, if available. Investors should consult their tax advisor to determine tax consequences associated with the purchase or sale of units. Guggenheim Funds Distributors, Inc. does not offer tax advice.