Summary of the Morgan Stanley ETF-MAP 2 Index
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The Morgan Stanley ETF-MAP 2 Index
(the
“Index”
) has been developed by and is calculated, published and rebalanced by Morgan Stanley & Co.
LLC. ETF-MAP stands for “Exchange-Traded Fund – Multi-Asset Portfolio.” The Index employs a rules-based quantitative
strategy (the
“
Index Methodology
”
)
which uses modern portfolio theory principles and the related concept of efficient frontier to attempt to maximize returns for
a given level of risk. The Index is comprised of three sub-indices (each, a “
Sub-Index
” and together, the “
Sub-Indices
”).
The potential components of each Sub-Index consist of U.S.-listed exchange traded funds (“
ETFs
”), representing
U.S. and non-U.S. equities, fixed income securities, commodities and real estate, and the Morgan Stanley Two Year Treasury Index
(collectively, the
“
Index Components
”
).1
Each Sub-Index is calculated on an excess return basis, and therefore the respective level of each Sub-Index is determined by the
weighted return of the optimized portfolio of Index Components for such Sub-Index (each, an
“
Asset
Portfolio
”
) reduced by the return on an equivalent cash investment receiving
the Federal Funds rate. The level of the Index, which is published in respect of each day the New York Stock Exchange is open for
trading, tracks the average daily return of the Sub-Indices.
Each Sub-Index is rebalanced once per month
according to a pre-determined schedule (“
Monthly Rebalancing
”). Each Sub-Index is rebalanced using the same
methodology, but at different times of each month. The Monthly Rebalancing for each Sub-Index will occur over a period of several
trading days (each such trading day, a “
Rebalancing Date
”). During each Monthly Rebalancing for a Sub-Index,
the Index Methodology determines the optimal weightings of each component in the Asset Portfolio for such Sub-Index by analyzing
historical returns and volatility for each Index Component and the historical correlation between each pair of components. In particular,
the Index Methodology seeks to determine the Asset Portfolio for such Sub-Index that had the maximum historical return with
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5% annualized volatility during the prior
63-trading-day period. The exposure of each Sub-Index to each market sector and the weighting of each Index Component are subject
to limits as outlined below.
In addition, there is a
Daily Allocation
for each Sub-Index, based on a 5% volatility target (the “
Volatility Target
”), between its respective Asset
Portfolio and cash.2 Accordingly, the exposure of each Sub-Index to its respective Asset Portfolio will be monitored and adjusted
so that it generally equals the Volatility Target divided by the Realized Volatility (as defined below) of the Asset Portfolio
for the relevant Sub-Index. The amount of the reduction in the exposure to the Asset Portfolio for any Sub-Index will be allocated
to cash. For each Sub-Index, the sum of allocations to its respective Asset Portfolio and cash will not exceed 100%.
A servicing cost of 0.50% per annum, calculated
on a daily basis, is deducted when calculating the performance of the Index.
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1
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For
more information, see “Index Components” on page IS-17 of this index supplement.
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2
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Volatility
is a market standard statistical measure of the magnitude and frequency of price changes of a financial asset over a period of
time, used by the market to assess the riskiness of the asset. There is no guarantee that the Sub-Indices, and therefore the Index,
will achieve this Volatility Target level and the actual volatility of the Index shown in the retrospectively simulated historical
data has often exceeded 5%. In addition, as the Index is long-only and will not use leverage, it may not be possible to achieve
the Volatility Target during periods of very low volatility.
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Key features of the Index include:
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A rules-based, quantitative approach weights the Index
Components of the Sub-Indices to determine the Asset Portfolio for each Sub-Index with the maximum historical return with 5% volatility.
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Liquid, price-transparent Index Components comprised
of U.S.-listed ETFs, representing U.S. and non-U.S. equities, fixed income securities, commodities and real estate, and the Morgan
Stanley Two Year Treasury Index.
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A Daily Allocation in respect of each Sub-Index based
on a 5% Volatility Target attempts to reduce the impact of price fluctuations on the value of the Index and guard against market
volatility.
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Each Sub-Index level equals the weighted total return
of the respective Asset Portfolio, including reinvested
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dividends, less
the return on an equivalent cash investment receiving the Federal Funds rate, because each Sub-Index is an “excess return”
index.
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The level of the Index (the “
Index Level
”)
tracks the average daily return of the Sub-Indices.
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The Index Level is calculated daily by Morgan Stanley
& Co. LLC (the
“Calculation Agent”
) and published on Bloomberg.
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The Index is sponsored by Morgan Stanley & Co.
LLC (the
“Index Sponsor”
).
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Performance in the tables and graphs below is simulated
from December 31, 2002 until June 15, 2014 and actual from June 16, 2014 (the inception date of the Index) onward.
Simulated and Actual Index Performance
The inception date for the Index was June 16, 2014. The performance
of the Index prior to June 16, 2014 is a hypothetical retrospective simulation calculated by Morgan Stanley & Co. LLC, using
the same methodology as is currently employed for calculating the Index based on historical data. A retrospective simulation means
that no actual investment which allowed a tracking of the performance of the Index existed at any time during the period of the
retrospective simulation. In addition, the Morgan Stanley Two Year Treasury Index and certain ETFs included in the Index Components
existed for only a portion of the period for which Morgan Stanley & Co. LLC has calculated hypothetical retrospective values.
For any period during which data for the Morgan Stanley Two Year Treasury Index or one or more ETFs did not exist, the historical
simulation is based on (i) the value of the Morgan Stanley Two Year Treasury Index based on simulated historical performance and
(ii) the value of each ETF’s benchmark index less the relevant ETF’s current expense ratio. Therefore, information
of the Index prior to June 16, 2014 is hypothetical only and does not reflect actual historical performance.
Investors should be aware that no actual investment which
allowed a tracking of the performance of the Index was possible at any time prior to June 16, 2014. Such data must be considered
illustrative only.
You should not take the historical or hypothetical retrospective
values of the Index as an indication of its future performance.
Source:
Morgan Stanley.
Data
based on simulated returns from December 31, 2002 to June 15, 2014 and actual returns thereafter. See Page IS-6 “Use of
Simulated Returns”
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Index
Returns
1
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12/31/2002-
9/29/2017
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2003
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2004
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2005
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2006
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2007
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2008
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2009
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2010
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2011
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2012
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2013
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2014
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2015
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2016
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2017
2
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Returns
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6.5%
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18.8%
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7.0%
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3.0%
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7.5%
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3.7%
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0.8%
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11.0%
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11.1%
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10.8%
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5.4%
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5.5%
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6.8%
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-4.1%
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3.6%
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6.4%
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Volatility
(annualized)
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5.1%
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4.9%
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5.3%
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5.4%
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5.0%
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5.6%
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4.8%
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4.8%
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5.5%
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5.2%
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4.7%
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5.2%
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5.1%
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5.0%
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5.0%
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4.7%
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Returns/Volatility
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1.27
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3.81
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1.32
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0.55
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1.50
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0.66
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0.17
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2.31
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2.03
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2.09
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1.17
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1.06
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1.34
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-0.81
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0.72
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1.82
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1
Data
based on simulated returns from December 31, 2002 to June 15, 2014 and actual returns
thereafter.
1
All returns except year-to-date 2017 returns are annualized.
2
Year-to-date 2017 returns are not annualized.
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Use of Simulated Returns
Back-testing and other statistical analyses provided herein
use simulated analysis and hypothetical circumstances to estimate how the Index may have performed between December 31, 2002 and
June 15, 2014, prior to its actual existence. The results obtained from such “back-testing” should not be considered
indicative of the actual results that might be obtained from an investment in the Index. The actual performance of the Index may
vary significantly from the results obtained from back-testing. Unlike an actual performance record, simulated results are achieved
by means of the retroactive application of a back-tested model itself designed with the benefit of hindsight and knowledge of factors
that may have possibly affected its performance. Morgan Stanley provides no assurance or guarantee that securities linked
to the Index will operate or would have operated in the past in a manner consistent with these materials. The hypothetical historical
levels presented herein have not been verified by an independent third party, and such hypothetical historical levels have inherent
limitations. In addition, results obtained from back-testing include hypothetical results that do not reflect the reinvestment
of dividends and other earnings or the deduction of any expenses that an investor in any product, the return of which is linked
to the performance of the Index, would have paid or actually paid and do not account for all financial risk that may affect the
actual performance of any such investment. Alternative simulations, techniques, modeling or assumptions might produce significantly
different results and prove to be more appropriate. Actual results will vary, perhaps materially, from the simulated returns presented
in this index supplement.
Because the Morgan Stanley Two Year Treasury Index and certain ETFs
included in the Index Components existed for only a portion of the back-tested period, substitute data has been used for portions
of the simulation. Wherever data for the Morgan Stanley Two Year Treasury Index or one or more ETFs did not exist, the simulation
has included (i) the value of the Morgan Stanley Two Year Treasury Index based on simulated historical performance and (ii) the
value of each ETF’s benchmark index less the relevant current expense ratio. The purpose of this data substitution is to
replicate as nearly as possible the returns that would have been expected had the Morgan Stanley Two Year Treasury Index and the
ETF existed and, in the case of an ETF, tracked its relevant benchmark index.
Simulated and Actual Return, Risk and Allocation
Data
Morgan Stanley
ETF-MAP 2 Index vs. Major Benchmark Indices
Source:
Morgan Stanley
Data
based on simulated returns from December 31, 2002 to June 15, 2014 and actual returns thereafter. See Page IS-6 “Use of
Simulated Returns”.
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Index
Returns
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Morgan
Stanley ETF-MAP 2 Index
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S&P
500 Index (Excess Return)
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Barclays
Aggregate Index (Excess Return)
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MSCI
World Index (Excess Return)
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Dow
Jones-UBS Commodity Index (Excess Return)
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12
Month Return
1
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5.92%
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18.58%
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-0.98%
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18.29%
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-0.90%
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3
Year Return
2
(Annualized)
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2.67%
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10.24%
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2.25%
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7.80%
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-11.14%
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5
Year Return
3
(Annualized)
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3.59%
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13.87%
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1.76%
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11.32%
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-10.66%
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Full
Period Return
4
(Annualized)
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6.00%
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6.87%
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3.73%
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4.31%
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-7.19%
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Full
Period Volatility (Annualized)
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5.01%
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20.65%
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3.79%
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17.92%
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17.56%
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Full
Period Sharpe Ratio
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1.20
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0.33
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0.98
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0.24
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-0.41
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Maximum
Yearly Drawdown
5
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-9.8%
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-52.0%
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-5.7%
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-55.3%
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-57.1%
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Source:
Morgan Stanley
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1
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Returns
for the Index are from September 29, 2016 to September 29, 2017.
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2
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Returns
for the Index are from September 29, 2014 to September 29, 2017.
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3
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Returns
for the Index are from September 29, 2012 to September 29, 2017, including simulated
returns from September 29, 2012 to June 15, 2014 and actual returns thereafter.
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4
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Returns
for the Index are from September 29, 2010 to September 29, 2017, including simulated
returns from September 29, 2010 to June 15, 2014 and actual returns thereafter.
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Maximum
peak-to-trough decline over rolling 12-month periods.
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The chart below illustrates the Morgan Stanley ETF-MAP 2 Index
overall allocations among sectors and cash during the period December 31, 2002 through September 29, 2017.
Index
Quarterly Asset Allocations
Source:
Morgan Stanley
Data
based on simulated returns from May 3, 1999 to June 15, 2014 and actual returns thereafter. See Page IS-6 “Use of Simulated
Returns”.
The chart below illustrates the “Sharpe Ratio”,
based on annualized returns and annualized volatility, of the Index and each possible Index Component during the period December
31, 2002 to September 29, 2017. The Sharpe Ratio is generally defined as the excess of the return on an asset over a risk-free
return, reflecting the Federal Funds rate, divided by the volatility of the return on the asset. In general, a higher Sharpe Ratio
illustrates greater returns per each unit of risk assumed. In the chart, the Index is the only investment option whose Sharpe Ratio
is greater than one. There can be no guarantee that the returns, volatility or Sharpe Ratio of the Index or the Index Components
will continue to demonstrate the relationships demonstrated below, and in the future the Sharpe Ratio of any or all of the Index
Components may exceed the Sharpe Ratio of the Index.
Morgan Stanley
ETF-MAP 2 Index Sharpe Ratio vs. Individual Index Component Sharpe Ratio
Source:
Morgan Stanley
Data
based on simulated returns from December 31, 2002 to June 15, 2014 and actual returns thereafter. See Page IS-6 “Use of
Simulated Returns”.
Risk Factors
The following is a non-exhaustive list of
certain key risk factors related to the Index and for investors in securities linked to the Index. For further discussion of these
and other risks, you should read the relevant pricing supplement and prospectus or offering documents. You should also consult
with your investment, legal, tax, accounting and other advisors in connection with the Index and any instrument linked to the Index.
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Low Volatility in the Index Is Not Synonymous with
Low Risk in an Investment Linked to the Index
. For example, even if the volatility of the Index were to be in line with the
Volatility Target, the Index Level may decrease over time, which may result in a loss, and possibly a
significant
loss
, on an investment linked to the Index.
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The Level of the Index Can Go Down As Well As Up.
Please see “Simulated and Actual Index Performance” and “Simulated and Actual Return, Risk and Allocation
Data” above.
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Each Sub-Index’s Portfolio of Index Components
Is Varied and Represents a Number of Different Asset Classes in a Number of Different Sectors.
Prospective investors should
be experienced with respect to, and be able to evaluate and understand the risks of (either alone or with the investor’s
investment, legal, tax, accounting and other advisors), transactions in investments the values of which are derived from different
asset classes and sectors.
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Each Sub-Index, and therefore the Index, May at Any
Time Be Composed of a Very Limited Number of ETFs.
The components of each Sub-Index’s Asset Portfolio are varied and
will be selected from the Index Components according to the Index Methodology. Therefore, at any time, the Sub-Indices may be
composed of a very limited number of ETFs, and investors in instruments linked to the Index could be exposed to the risks associated
with a concentrated investment in that limited number of ETFs.
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The Value of the Index and Any Instrument Linked to
the Index May Increase or Decrease Due to a Number of Factors, Many of Which Are Beyond Our Control.
The nature and weighting
of the Index Components can vary significantly, and no assurance can be given as to the allocations of the Sub-Indices to any
Index Component at any time.
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While Each Sub-Index, and Therefore the Index, Has
a Volatility Target of 5%, There Can Be No Guarantee, Even If Each Sub-Index’s Allocation to its Respective Asset Portfolio
Is Adjusted As Frequently As Is Permitted (i.e., Daily), That the Realized Volatility of the Index Will Not be Less Than or Greater
Than 5%.
In fact, the historical volatility of the Index, based on simulated returns, has generally been between 4% and 6%.
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There Can Be No Assurance That the Actual Volatility
of the Index Will Be Lower Than the Volatility of Any or All of the Index Components.
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The Volatility Target Feature of the Index May Dampen
its Performance in Bullish Markets.
The Index is designed to achieve a Volatility Target of 5% regardless of the direction
of price movements in the market. Therefore, in bullish markets, if the Realized Volatility is higher than the Volatility Target,
the adjustments to the respective Asset Portfolios of the Sub-Indices through Monthly Rebalancing or Daily Allocation might dampen
the performance of the Index. The selection of the Index Components, as well as the Volatility Target feature, may cause the Index
to underperform one or more of the Index Components.
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The Future Performance of the Index May Bear Little
or No Relation to the Historical or Hypothetical Retrospective Performance of the Index.
Among other things, the trading prices
of the Index Components and the dividends paid on the Index Components will impact the level and the volatility of the Index.
It is impossible to predict whether the level of the Index will rise or fall.
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The Index Was Established on June 16, 2014 and Therefore
Has a Very Limited History.
The performances of the Index and some of the component data have been retrospectively simulated
for the period from December 31, 2002 to June 15, 2014. As such, performance for periods prior to the establishment of the Index
has been retrospectively simulated by Morgan Stanley & Co. LLC on a hypothetical basis. A retrospective simulation means that
no actual investment which allowed a tracking of the performance of the Index existed at any time during the period of the retrospective
simulation. The methodology and the Index used for the calculation and retrospective simulation of the Index has been developed
with the advantage of hindsight. In reality, it is not possible to
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invest with the advantage of hindsight
and therefore this historical performance is purely theoretical and may not be indicative of future performance. In addition, the
Morgan Stanley Two Year Treasury Index and certain ETFs included in the Index Components existed for only a portion of the period
for which Morgan Stanley & Co. LLC has calculated hypothetical retrospective values. For any period during which data for the
Morgan Stanley Two Year Treasury Index or one or more ETFs did not exist, the historical simulation is based on (i) the value of
the Morgan Stanley Two Year Treasury Index based on simulated historical performance and (ii) the value of each ETF’s benchmark
index less the relevant ETF’s current expense ratio. Investors should be aware that no actual investment which allowed a
tracking of the performance of the Index was possible at any time prior to June 16, 2014. Such data must be considered illustrative
only. The historical data may not reflect future performance and no assurance can be given as to the level of the Index at any
time.
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As the Index Is New and Has Very Limited Actual Historical
Performance, Any Investment in the Index May Involve Greater Risk Than an Investment in an Index With Longer Actual Historical
Performance and a Proven Track Record.
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The Index is Calculated on an Excess Return Basis
.
The level of the Index tracks the average daily return of the Sub-Indices. The level of each Sub-Index is calculated as the excess
of the weighted return of the Asset Portfolio for such Sub-Index over an equivalent cash investment receiving the Federal Funds
rate. As a result, the level of each Sub-Index, and therefore the level of the Index, reflects a deduction of the Federal Funds
rate that would apply to such a cash investment, and is less than the average return on the weighted Asset Portfolios of the Sub-Indices.
Changes in the Federal Funds rate will affect the value of the Index. In particular, an increase in the Federal Funds rate will
negatively affect the value of the Index.
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The Index Contains Embedded Costs.
As described
in more detail under “Index Rules” below, the Index contains an embedded servicing cost of 0.50% per annum, calculated
on a daily basis. Such cost is deducted when calculating the level of the Index and will thus reduce the return of the Index.
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An Investment in Instruments Linked to the Index Involves
Risks Associated with Emerging Markets
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Equities and
Bonds, Currency Exchange Rates and Commodities.
ETFs representing foreign equities (including emerging markets equities) can
constitute up to 70% of the Index. The Index can also consist of certain ETFs representing emerging markets bonds. Therefore,
an investment in instruments linked to the Index involves risks associated with the securities markets in those foreign markets
and emerging markets countries, including but not limited to risks of volatility in those markets, governmental intervention in
those markets and cross-shareholdings in companies in certain countries. The prices of securities issued in foreign markets may
be affected by political, economic, financial and social factors in those countries, or global regions, including changes in government,
economic and fiscal policies and currency exchange laws. In addition, because the price of an ETF representing foreign securities
is generally related to the U.S. dollar value of securities underlying the index tracked by such ETF, an investment in instruments
linked to the Index involves currency exchange rate risk with respect to each of the currencies in which such securities trade.
Exchange rate movements for a particular currency are volatile and are the result of numerous factors including the supply of,
and the demand for, those currencies, as well as relevant government policy, intervention or actions, but are also influenced
significantly from time to time by political or economic developments, and by macroeconomic factors and speculative actions related
to the relevant region.
In addition, potential Index components
also include ETFs representing commodities and thus investors in instruments linked to the Index are exposed to risks associated
with commodities. Investments linked to the prices of commodities are subject to sharp fluctuations in the prices of commodities
over short periods of time for a variety of factors, including: changes in supply and demand relationships; weather; climatic events;
the occurrence of natural disasters; wars; political and civil upheavals; acts of terrorism; trade, fiscal, monetary, and exchange
control programs; domestic and foreign political and economic events and policies; disease; pestilence; technological developments;
changes in interest rates; and trading activities in commodities and related contracts. These factors may affect the prices of
commodities and therefore the value of the Index and instruments linked to the Index, in varying and potentially inconsistent ways.
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The Morgan Stanley Two Year Treasury Index Can Produce
Negative Returns, Which May Have an Adverse Effect on the Level of the Respective Sub-Indices, and Consequently, the Level of
the Index
. The index methodology for the Morgan Stanley Two Year Treasury Index was developed
based on historical data and conditions, and there can be no assurances that the methodology can generate positive performance
in the future. Therefore, the past performance of the Morgan Stanley Two Year Treasury Index, whether actual or retrospectively
calculated, is not a reliable indication of future performance. Poor performance by the Morgan Stanley Two Year Treasury Index
will have a negative effect on the performance of the respective Sub-Indices, and consequently on the performance of the Index.
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Morgan Stanley & Co. LLC, Which Is a Subsidiary
of Morgan Stanley and an Affiliate of MSFL, Is Both the Calculation Agent and the Index Sponsor.
Morgan Stanley &
Co. LLC retains the final discretion as to the manner in which the Index is calculated and constructed. Morgan Stanley & Co.
LLC may change the methodology of the Index or discontinue the publication of the Index without prior notice and such changes
or discontinuance may affect the value of the Index. Morgan Stanley & Co.’s calculations and determinations in relation
to the Index shall be binding in the absence of manifest error. In performing its duties as the Calculation Agent and the Index
Sponsor, Morgan Stanley & Co. LLC may have interests adverse to the interests of an investor in an instrument linked to the
Index, which may affect the value of the Index.
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Adjustments to the Index Could Adversely Affect the
Value of Instruments Linked to the Index.
Morgan Stanley & Co. LLC, as the Calculation
Agent and the Index Sponsor, can add, delete and/or substitute the Index Components, and can make other methodological changes
required by certain events relating to the Index Components. Any of these actions could adversely affect the value of instruments
linked to the Index. Morgan Stanley & Co. LLC may also discontinue or suspend calculation or publication of the Index at any
time. Morgan Stanley & Co. LLC could have an economic interest that is different than that of investors in instruments linked
to the Index.
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Investing in Instruments Linked to the Index is not
Equivalent to Investing in the Index.
Investing in
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instruments linked to the Index is not equivalent to investing in the Index or its component ETFs or the
Morgan Stanley
Two Year Treasury Index
. Investors in instruments linked to the Index will not have voting rights
or rights to receive dividends or other distributions or any other right with respect to the component ETFs of the Index.
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Reliance on Information.
Unless otherwise stated,
all calculations are based on information obtained from various publicly-available sources. Morgan Stanley has relied on
these sources and not independently verified the information extracted from these sources. Morgan Stanley shall not be liable
in any way for any calculations it performs in reliance on such information. The information used to undertake the Monthly Rebalancings
for the Sub-Indices will be the most up-to-date information available.
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Research.
Morgan Stanley may issue research
reports on securities that are, or may become, constituents of an Index Component or an Index Component. These reports are entirely
independent of the Calculation Agent’s obligations hereunder. Morgan Stanley will be under no obligation to make any
adjustments to the Index or to reflect any change in outlook by Morgan Stanley Research.
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Conflicts of Interest.
Morgan Stanley, MSFL
and their affiliates may from time to time engage in transactions involving constituents of an Index Component or one of the Index
Components for their proprietary accounts and/or for accounts of their clients, may act as market-maker in such constituents and/or
be providing underwriting, banking, advisory or other services to the issuers of such constituents. Such activities may not be
for the benefit of the holders of investments related to the Index and may have a positive or negative effect on the value of
the constituents or Index Components and consequently on the value of the Index. In addition, Morgan Stanley, MSFL and their
affiliates may from time to time act in other capacities, such as the issuer of investments, advisor thereof, calculation agent
or index sponsor. Morgan Stanley, MSFL and their affiliates may also issue derivative instruments in respect of such constituents
or Index Components and the use of such derivatives may affect the value of the constituents or the Index Components and consequently
the value of the Index. In its role in relation to investments linked to the Index, Morgan Stanley, MSFL or their affiliates
may
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enter into hedging transactions
in respect of the constituents or Index Components or related instruments which may or may not affect the value of such constituents
or Index Components. In addition, the unwinding of such hedging transactions may also affect the value of such constituents or
Index Components, which may in turn affect the value of the Index. Such activities may present conflicts of interest which may
affect the level of the Index.
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The Index is the exclusive property of Morgan Stanley.
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“Morgan Stanley ETF-MAP 2 Index” is a Morgan Stanley
proprietary index. Any use of this Index or its name must be with the written consent of Morgan Stanley.
Investments in securities linked to the Index require investors
to assess several characteristics and risk factors that may not be present in other types of transactions. In reaching a determination
as to the appropriateness of any proposed transaction, you should undertake a thorough independent review of the legal, regulatory,
credit, tax, accounting and economic consequences of such transaction in relation to your particular circumstances. This index
supplement contains market data from various sources other than Morgan Stanley, MSFL and their affiliates, and, accordingly,
neither Morgan Stanley, MSFL nor any of their affiliates make any representation or warranty as to the market data’s
accuracy or completeness. All information is subject to change without notice. Morgan Stanley, MSFL and their affiliates may
make a market or deal as principal in securities referencing the Index or in options, futures or other derivatives based thereon.
Any historical composite performance records included in this index supplement are hypothetical and it should be noted that the
constituents have not traded together in the manner shown in the composite historical replication of the index included in this
index supplement. No representation is being made that the Index will achieve a composite performance record similar to that shown.
In fact, there are frequently sharp differences between a hypothetical historical composite performance record and the actual record
that the combination of those underlying elements subsequently achieved.
This material is not a product of Morgan Stanley Research
Departments. Investments in securities referencing the Index may involve a high degree of risk,
and may be appropriate investments
only for sophisticated investors who are capable of understanding and assuming the risks involved. Morgan Stanley and its
affiliates may have positions (long or short), effect transactions or make markets in securities or financial instruments mentioned
herein (or options with respect thereto), or provide advice or loans to, or participate in the underwriting or restructuring of
the obligations of, issuers mentioned herein. Morgan Stanley is a member of FINRA, NYSE, and SIPC. Clients should contact their
salespersons at, and execute transactions through, a Morgan Stanley entity qualified in their home jurisdiction unless governing
law permits otherwise.
iShares
®
is a registered mark of BlackRock Institutional
Trust Company, N.A. (“BTC”). The Index is not sponsored, endorsed, sold, or promoted by BTC. BTC makes no representations
or warranties to the owners of any investment linked to the Index or any member of the public regarding the advisability of investing
in any investment linked to the Index. BTC has no obligation or liability in connection with the operation, marketing, trading
or sale of any investment linked to the Index.
The Morgan Stanley Two Year Treasury Index has been developed
by Morgan Stanley & Co. LLC (the “Sponsor'') and will be calculated and rebalanced by Morgan Stanley & Co. LLC (acting
in such capacity as the ''Calculation Agent'').
The Morgan Stanley Two Year Treasury Index, including its name,
methodology and levels (the “Index Information”) is the exclusive property of the Sponsor. Unless specifically agreed
by the Sponsor, no third party is authorised to use the Index Information in any way. The Sponsor and its affiliates disclaim any
responsibility for any unauthorised use of the Index Information by any third party intending to promote, sponsor, endorse, market,
offer, sell, distribute or reference the Index Information or any product, service or contract relating or linked to or otherwise
referencing the Index Information.
“S&P
®
”, “S&P 500
®
”
and “SPDR
®
” are trademarks of Standard & Poor’s Financial Services LLC (“S&P”).
The Index is not sponsored, endorsed, sold, or promoted by S&P or the SPDR
®
Gold Trust (together, the “Trusts”).
S&P and the Trusts make no representations or warranties to the
owners of any investment linked to the Index or any member of
the public regarding the advisability of investing in any investment linked to the Index. S&P and the Trusts have no obligation
or liability in connection with the operation, marketing, trading or sale of any investment linked to the Index.
“PowerShares
®
” is a registered trademark
of Invesco PowerShares Capital Management LLC (“Invesco PowerShares”). The Index is not sponsored, endorsed, sold,
or promoted by Invesco PowerShares. Invesco PowerShares make no representations or warranties to the owners of any investment linked
to the Index or any member of the public regarding the advisability of investing in any investment linked to the Index. Invesco
PowerShares have no obligation or liability in connection with the operation, marketing, trading or sale of any investment linked
to the Index.
“Vanguard
®
” is a registered mark
of The Vanguard Group, Inc. (“Vanguard”). The Index is not sponsored, endorsed, sold, or promoted by Vanguard. Vanguard
makes no representations or warranties to the owners of any investment linked to the Index or any member of the public regarding
the advisability of investing in any investment linked to the Index. Vanguard has no obligation or liability in connection
with the operation, marketing, trading or sale of any investment linked to the Index.
Description of Index Methodology
This section outlines the key steps in
constructing the Index, including the timing and methodology of the Index calculation and adjustment. In general, the construction
of the Asset Portfolio for each Sub-Index is based on the principles of modern portfolio theory and the efficient frontier. The
fundamental premise of modern portfolio theory is that the weighting of assets in an investment portfolio should be based not only
on the individual risk and return characteristics of each asset but also on each asset’s relationship, in terms of correlation,
volatility and return, to the other portfolio components. The efficient frontier represents a set of portfolios constructed using
modern portfolio theory concepts, each of which has a different risk and return profile. An investor choosing a portfolio from
the “efficient frontier” should, the theory says, be maximizing returns for the chosen level of risk.
The Index Methodology is applied to the
Sub-Index scheduled for monthly rebalancing on the specific rebalancing date (the
“Rebalancing Selection Date
”)
to determine the Asset Portfolio for such Sub-Index that had the maximum historical return with 5% annualized volatility during
the prior 63-trading-day period (the “
Monthly Rebalancing
”). Beginning on the trading day after the Rebalancing
Selection Date and continuing for a period of several trading days (each such trading day, a “
Rebalancing Date
”),
the weight of each Index Component is adjusted from its prior level and the new Asset Portfolio for the applicable Sub-Index is
formed.
Inputs to the Index Methodology are price-transparent
and include the historical returns and historical volatilities of each Index Component as well as the historical correlations between
any two Index Components. All levels are calculated based on objective price inputs on an annualized basis over the preceding 63-trading-day
calculation window, with more recent data emphasized for volatility and correlation calculations. The Index Methodology also applies
pre-defined limits for Index Component weightings and sector exposures.
To calculate the Daily Allocation between
the Asset Portfolio and cash for each Sub-Index, on each business day the Calculation Agent determines the realized volatility
of the Asset Portfolio for each Sub-Index over a shorter-term and a longer-term period (the greater of which is the “
Realized
Volatility
”). If the Realized Volatility for a Sub-Index exceeds 5.5%, the allocation to the Asset Portfolio for such
Sub-Index will be decreased, with the objective of reducing Index volatility, and if the Realized Volatility is below 5%, the allocation
to the Asset Portfolio for such Sub-Index may be increased. In each case, the Asset Portfolio allocation for each Sub-Index will
generally equal the Volatility Target divided by its Realized Volatility, subject to a maximum of 100%. For example, if the Realized
Volatility of a Sub-Index is 7.5%, the allocation to the Asset Portfolio for such Sub-Index will equal the 5% Volatility Target
divided by its 7.5% Realized Volatility, or 66.67%. Volatility is a market standard statistical measure of the magnitude and frequency
of price changes of a financial asset over a period of time, used to express the riskiness of the asset. Note, however, that volatility
does not identify the direction of the asset’s price movement.
Because the Realized Volatility metric used
to determine exposure of each Sub-Index to its respective Asset Portfolio is the greater of shorter-term and longer-term volatility,
Realized Volatility for the Sub-Indices will increase more quickly when daily volatility increases, and Index exposure to the respective
Asset Portfolios will be correspondingly reduced. Conversely, Realized Volatility for the Sub-Indices will decrease more slowly
when daily volatility decreases, resulting in a more gradual increase in allocations to the respective Asset Portfolios.
The Daily Allocations with respect to the
Sub-Indices will only seek to adjust the volatility of the Index and will not attempt to optimize the asset allocations within
the respective Asset Portfolios. Because the Index will not use leverage it may not be possible to achieve the Volatility Target
of 5% during periods of very low volatility.
Index Rules
|
|
·
|
The maximum asset weightings on each Rebalancing Date for each market sector and for each Index Component within a given market
sector are specified in the table below.
|
|
|
·
|
Asset weightings will not be rebalanced between each respective Monthly Rebalancing for the Sub-Indices due to changes in market
value of Index Components.
|
|
|
·
|
If between Monthly Rebalancings the Realized Volatility of a Sub-Index exceeds 5.5% or falls below 5%, the allocation to the
Asset Portfolio for such Sub-Index may be adjusted pursuant to the Daily Allocation as described above.
|
|
|
·
|
The allocation to the Asset Portfolio for each Sub-Index will equal the Volatility Target divided by its observed historical
volatility, subject to a maximum of 100%.
|
|
|
·
|
The sum of allocations to the respective Asset Portfolio and cash will not exceed 100% for any Sub-Index. Because the Index
will not use leverage it may not be possible to achieve the Volatility Target of 5% during periods of very low volatility.
|
|
|
·
|
The level of the Index tracks the average daily returns of the Sub-Indices, which are calculated on an excess return basis.
Specifically, the level of each Sub-Index is determined by the weighted return of the Asset Portfolio for such Sub-Index reduced
by the return on an equivalent cash investment receiving the Federal Funds rate.
|
|
|
·
|
A servicing cost of 0.50% per annum, calculated on a daily basis, is deducted when calculating the Index Level.
|
Index Components
The potential Index Components that can be
included in the Sub-Indices, and therefore the Index, at any time and the maximum asset weightings on each Rebalancing Date for
each market sector and for each Index Component within a given market sector are specified in the table below.
|
SEctor
And
Maximum
Weight
|
Asset
Class
|
index
Components
|
MaxIMUM
ASSET Weight
|
|
Short-Term
Treasuries 100%
|
Short-Term
Treasuries
|
Morgan
Stanley Two Year Treasury Index
|
100%
|
|
Foreign
Equity 70%
|
Developed
Market Equities
|
iShares
MSCI EAFE Index Fund
|
35%
|
|
Emerging
Market Equities
|
Vanguard
FTSE Emerging Markets ETF
|
35%
|
|
Japan
Equities
|
iShares
MSCI Japan ETF
|
35%
|
|
US
Equity 50%
|
US
Large Cap Equities
|
SPDR
S&P 500 ETF Trust
|
50%
|
|
US
Low Volatility Equities
|
PowerShares
S&P 500 Low Volatility Portfolio
|
10%
|
|
Bonds
75%
|
Senior
Loan
|
PowerShares
Senior Loan Portfolio
|
10%
|
|
20+
Year Treasuries
|
iShares
Barclays 20+ Year Treasury Bond Fund
|
25%
|
|
7-10
Year Treasuries
|
iShares
Barclays 7-10 Year Treasury Bond Fund
|
25%
|
|
High
Yield Bonds
|
iShares
iBOXX High Yield Corporate Bond Fund
|
25%
|
|
Investment
Grade Corporate Bonds
|
iShares
iBOXX Investment Grade Corporate Bond Fund
|
10%
|
|
Emerging
Markets Bonds
|
iShares
JP Morgan USD Emerging Markets Bond Fund
|
15%
|
|
Alternative
Investments 50%
|
Gold
|
SPDR
Gold Trust
|
25%
|
|
Real Estate
|
iShares Dow Jones U.S. Real Estate Index Fund
|
25%
|
The Morgan Stanley Two Year Treasury Index is a rules-based
index that seeks to capture the yield from US Treasury notes with a maturity of between two years and two years and three months
by notionally purchasing futures contracts on US Treasury notes. The Morgan Stanley Two Year Treasury Index is published
on Bloomberg under the ticker symbol MSUST2TR <Index>.
©
2017 Morgan Stanley
