Index Rules

The MarketGrader Index is an equal-weighted price index. Equal weighted means that all 40 selections are assigned the same weight (same dollar value) at the beginning of each quarter in which the index is rebalanced. A price index only takes into account the increases or decreases in the prices of the index components when calculating performance; it does not take into account the reinvestment of dividends.

The index is rebalanced quarterly (not calendar quarters) in order to ensure only the best companies remain in the portfolio. Rebalancings take place on the third week of February, May, August and November, time at which the majority of companies in our system have reported their latest quarterly results. Not all companies are replaced every quarter; the portfolio's historical average quarterly turnover (the number of stocks replaced every quarter) is about 50%. However, if a company maintains high enough grades to remain among the top forty and meets all other index criteria, there is no limit to the amount of time it can spend on the index.

A few additional rules ensure the index is structured as a sound portfolio, diversified across market capitalizations and across industries:

• All stocks must have a market capitalization above $100 million
• At least 10 stocks must have a market capitalization above $10 billion
• No more than 10 stocks may have a market capitalization below $1 billion
• All stocks must have at least a three month average daily traded value of $2 million
• No more than 30% of the selections may belong to the same economic sector
• No more than 15% of the selections may belong to the same sub-industry
• All selections must have met their most recent earnings consensus estimate
• No REITs or Utilities are selected to the index