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
Quality Factors
to provide exposure to companies within the Nasdaq U.S.
• Return on Equity
Large–Mid Cap Index (NQUSBLM) that exhibit high degrees
• Earnings Smoothness
of pricing power. Firstly, the top 550 names by market
• Earnings Quality
capitalization are selected and then securities are screened
• Operating Margin Stability
by a series of quantitative and qualitative factors. The
• Earnings Dispersion
top ranked securities are then selected and a proprietary
• 12-Month Return Volatility
weighting methodology is applied.
Securities are ranked based on these 11 factors and the
In order to identify names that exhibit sustainable pricing
top 150 names are selected and equally divided into three
power, a variety of factors are examined to identify those
groups, containing 50 names each. The first group (top 50)
that can provide inflation protection, as well display
receives an aggregate weight of 50%; the second group (51 –
consistent sales growth and earnings quality.
100) receives an aggregate weight of 35%; and the last group
Inflation Factors
• 1-Year EPS Growth
(101 – 150) receives an aggregate weight of 15%. Every
security within the respective groups is equally weighted. The
index is evaluated annually in March.
• 3-Year EPS Growth
• Operating Margin
• 1-Year Operating Margin Growth
• 3-Year Sales Growth
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NASDAQ U.S. PRICE SETTERS INDEX
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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.
Sector Breakdown
30%
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
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NASDAQ U.S. PRICE SETTERS INDEX
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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
24.19
Return on Equity
24.16%
Return on Assets
7.76%
Debt to Equity
0.88
Cash to Debt
1.42
PERFORMANCE /
600
500
400
300
200
100
0
03/30/2001
03/30/2003
03/30/2005
NASDAQ U.S. PRICE SETTERS (TR)
03/30/2009
03/30/2009
NASDAQ U.S. LARGE/MID (TR) 03/30/2011
03/30/2013
S&P HIGH QUALITY (TR)
03/30/2015
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.
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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)
2007
16.7%
-7.2%
7.2%
5.5%
2008
-31.0%
-32.8%
-36.0%
-37.0%
2009
34.0%
25.5%
27.4%
26.5%
2010
17.9%
22.1%
16.4%
15.1%
2011
9.9%
6.6%
1.7%
2.1%
2012
16.9%
15.2%
16.2%
16.0%
2013
34.5%
32.4%
33.0%
32.4%
2014
13.7%
16.4%
13.0%
13.7%
2015
3.9%
1.9%
0.9%
1.4%
2016 YTD
-1.1%
3.0%
-1.9%
-1.6%
Excess Returns Table
Excess Returns
30%
20%
10%
0%
2007
2008
2009
2010
2011
2012
2013
2014
2015
YTD
-10%
NASDAQ PRICE SETTERS VS S&P HIGH QUALITY NASDAQ PRICE SETTERS VS NASDAQ US LARGE MID
NASDAQ PRICE SETTERS VS S&P 500
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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
1.55
1.45
1.35
1.25
1.15
0.95
12/29/2006
12/29/2007
RECESSION 12/29/2008
12/29/2009
12/29/2010
12/29/2011
NASDAQ PRICE SETTERS VS S&P HIGH QUALITY
12/29/2012
12/29/2013
12/29/2014
12/29/2015
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 2015. 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
2.5
2.0
1.5
1.0
0.5
0
-0.5
01/01/2002
01/01/2004
01/01/2006
01/01/2008
U.S. PERSONAL CONSUMPTION CORE PRICE INDEX (YOY)
BUSINESS.NASDAQ.COM/INDEXES
01/01/2010
01/01/2012
01/01/2014
NASDAQ U.S. PRICE SETTERS INDEX (YOY)
NASDAQ U.S. PRICE SETTERS INDEX
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5
When inflation and interest rates move higher, companies
NOTES /
with lower return on equity become less competitive. When
compared to both the S&P 500 and the S&P 500 High Quality
Data as of 3/7/2016 unless otherwise noted.
Index, the Nasdaq U.S. Price Setters Index displays a higher
*ROE data as of 12/31/15
return on equity over time.
Nasdaq Global Indexes, Factset, Bloomberg
Return on Equity
30%
MORE INFORMATION /
25%
20%
Licensing
Email: [email protected]
15%
Phone: +1 212 231 5836
10%
Sales
Email: [email protected]
5%
Phone: +1 212 231 5880 or +45 33 93 3366
0%
2011
2012
2013
2014
2015
NASDAQ U.S. PRICE SETTERS INDEX
S&P 500 S&P HIGH QUALITY INDEX
DISCLAIMER /
Nasdaq® is a registered trademark of Nasdaq, Inc. The
SUMMARY /
information contained above is provided for informational
and educational purposes only, and nothing contained
As history has proven, the financial markets experience some
herein should be construed as investment advice, either
turmoil every decade or so. With the Fed set to seemingly
on behalf of a particular security or an overall investment
raise rates, potential market inflation and general market
strategy. Neither Nasdaq, Inc. nor any of its affiliates
uncertainty, turn to Nasdaq for the newest offering in the
makes any recommendation to buy or sell any security or
quality space – the Nasdaq U.S. Price Setters Index. The index
any representation about the financial condition of any
holds a basket of 150 stocks across industries that exhibit
company. Statements regarding Nasdaq-listed companies
strong pricing power and have historically proven to combat
or Nasdaq proprietary indexes are not guarantees of future
inflation and performed well during times of heightened
performance. Actual results may differ materially from those
market stress. When in doubt, set the pace with Nasdaq U.S.
expressed or implied. Past performance is not indicative of
Price Setters.
future results. Investors should undertake their own due
diligence and carefully evaluate companies before investing.
ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY
ADVISED.
© Copyright 2016. 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. 0561-Q16