We have derived all information contained herein regarding the Fund from publicly available information. Such information reflects the policies of, and is subject to changes by The Select Sector
SPDR
®
Trust (the “Trust”) and SSgA, the investment adviser of the Fund. We have not undertaken an independent review or due diligence of any publicly available information regarding the Fund.
The Fund is one of the separate investment portfolios (each, a “Select Sector SPDR Fund”) that constitute the Trust.
Each Select Sector SPDR Fund is an “index fund” that invests in a particular sector or group of industries represented by a specified Select Sector Index. The companies included in each Select Sector Index are selected on the basis of general
industry classification from a universe of companies defined by the S&P 500
®
Index (“S&P 500”). The Select Sector Indices upon which the Select Sector Funds are based together comprise all of the companies in the S&P 500.
The Fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of publicly traded equity securities of companies in the Energy Select Sector Index (the “target index”). For more
information on the target index, see “The Energy Select Sector Index” below.
In seeking to track the performance of the target index, the Fund employs a replication strategy, which means that the
Fund typically invests in substantially all of the securities represented in the target index in approximately the same proportions as the target index. Under normal market conditions, the Fund generally invests substantially all, but at least
95%, of its total assets in the securities comprising the target index.
The target index includes companies from the following industries: oil, gas & consumable fuels; and energy equipment
& services. The target index is one of the Select Sector Indices developed and maintained in accordance with the following criteria: (1) each of the component securities in a Select Sector Index is a constituent company of the S&P 500
Index and (2) each Select Sector Index is calculated by Standard & Poor’s using a modified “market capitalization” methodology, which means that modifications may be made to the market capitalization weights of single stock concentrations
in order to conform to the requirements of the Internal Revenue Code of 1986, as amended.
As of September 30, 2018, ordinary operating expenses of the Fund are expected accrue at an annual rate of 0.13% of the
Fund’s average daily net asset value. Expenses of the Fund reduce the net value of the assets held by the Fund and, therefore, reduce the value of each share of the Fund.
As of September 30, 2018, the Fund’s five largest company holdings include: Exxon Mobil Corporation (22.99%), Chevron
Corporation (16.22%), ConocoPhilips (6.23%), EOG Resources Inc. (4.75%) and Occidental Petroleum Corporation (4.53%).
Information filed by the Trust with the SEC can be found by reference to its SEC file numbers: 333-57791 and 811-08837.
In addition, information about the Fund may be obtained from other sources, including, but not limited to, the fund
sponsor’s website. We are not incorporating by reference into this pricing supplement the website or any material it includes. Neither we nor the agent makes any representation that such publicly available information regarding the Fund is
accurate or complete.
The Energy Select Sector Index
We obtained all information contained herein regarding the Energy Select Sector Index including,
without limitation, its make-up, method of calculation and changes in its components, from publicly available information. That information reflects the policies of, and is subject to change by, S&P Dow Jones Indices LLC (“S&P Dow
Jones”), the index sponsor or BofA Merrill Lynch Research, as index compilation Agent (the “Index Compilation Agent”). S&P Dow Jones has no obligation to continue to publish, and may discontinue publication of, the Energy Select Sector
Index at any time. Neither we nor the agent has independently verified the accuracy or completeness of any information with respect to the Energy Select Sector Index in connection with the offer and sale of Securities.
The Energy Select Sector Index is a modified market capitalization-based index, intended to provide
investors with a way to track the movements of certain public companies that represent the energy sector of the S&P 500
®
Index. The Energy Select Sector Index includes companies in the following industries: energy equipment and
services; and oil, gas and consumable fuels. The Energy Select Sector Index is one of the Select Sector sub-indices of the S&P 500
®
Index, each of which we refer to as a “Select Sector Index.”
Construction and Maintenance of the Select Sector Indices
The Select Sector Indices are developed, maintained and calculated in accordance with the following
criteria:
Constituents
. Each of the component stocks in the Select Sector Indices (the “Component Stocks”) is a constituent company of the S&P 500
®
Index. Each stock in the S&P 500
®
Index is
allocated to one and only one of the Select Sector Indices. For a description of the selection criteria for the S&P 500
®
Index, see “—The S&P 500
®
Index” below.
Sector Classification
. S&P Dow Jones, in consultation with the Index Compilation Agent, assigns index constituents of the S&P 500
®
Index to a Select Sector Index based on that constituent’s
classification under the Global Industry Classification Standard (GICS). The sectors are defined as follows: Consumer Discretionary, Consumer Staples, Energy, Financial, Health Care, Industrials, Materials, Real Estate, Technology (combination
of Information Technology & Telecommunication Services sectors) and Utilities.
Calculation
. The Select Sector Indices are calculated by S&P Dow Jones using a modified “market capitalization” methodology subject to a capping methodology that implements Internal Revenue Code diversification
requirements that are applicable to exchange-traded funds, as described below. Other than this capping methodology, the Select Sector Indices are calculated and maintained on the same basis as the S&P 500
®
Index, which is
described under “—The S&P 500
®
Index” below.
Capping Methodology
.
For reweighting purposes, the Select Sector Indices are rebalanced quarterly after the close of business on the second to last calculation day of March, June, September and December using the following procedures:
|
|
(1)
|
The rebalancing reference date is two business days prior to the last business day of March, June, September and December.
|
(2)
|
With prices reflected on the rebalancing reference date, and membership, shares outstanding, and other metrics as of the
rebalancing effective date, each company is weighted using the modified market capitalization methodology. Modifications are made as described below.
|
(3)
|
The Select Sector Indices are first evaluated based on their companies’ modified market capitalization weights to ensure none of
the Select Sector Indices breach the maximum allowable limits defined in paragraphs 4 and 7 below. If a Select Sector Index breaches any of the allowable limits, the companies are reweighted based on their float-adjusted market
capitalization weights calculated using the prices as of the rebalancing reference date, and membership, shares outstanding and other metrics as of the rebalancing effective date.
|
(4)
|
If any company has a weight greater than 24%, that company has its float-adjusted market capitalization weight capped at 23%. The
cap is set to 23% to allow for a 2% buffer. This buffer is needed to ensure that no company exceeds 25% as of the quarter end diversification requirement date.
|
(5)
|
All excess weight is equally redistributed to all uncapped companies within the relevant Select Sector Capped Index.
|
(6)
|
After this redistribution, if the float-adjusted market capitalization weight of any other company then breaches 23%, the process
is repeated iteratively until no company breaches the 23% weight cap.
|
(7)
|
The sum of the companies with weight greater than 4.8% cannot exceed 50% of the total index weight. These caps are set to allow
for a buffer below the 5% limit.
|
(8)
|
If the rule in paragraph 7 is breached, all the companies are ranked in descending order of their float-adjusted market
capitalization weights and the first stock that causes the 50% limit to be breached is identified. The weight of this company is, then, reduced to 4.6%.
|
(9)
|
This excess weight is equally redistributed to all companies with weights below 4.6%. This process is repeated iteratively until
paragraph 7 is satisfied.
|
(10)
|
Index share amounts are assigned to each constituent to arrive at the weights calculated above. Since index shares are assigned
based on prices one business day prior to rebalancing, the actual weight of each constituent at the rebalancing differs somewhat from these weights due to market movements.
|
If necessary, the reweighting process may take place more than once prior to the close on the last business day of
March, June, September or December to ensure the Select Sector Indices conform to all diversification requirements.
The S&P 500
®
Index
The S&P 500
®
Index is published by S&P Dow Jones and is intended to provide an indication of the
pattern of common stock price movement in the large capitalization segment of the United States equity market. The S&P 500
®
Index covers approximately 80% of the United States equity market. As of the date hereof, to be added to
the S&P 500
®
Index, a company must have a market capitalization of $6.1 billion or more.
Composition of the S&P 500
®
Index
Changes to the S&P 500
®
Index are made on as needed basis, with no annual or
semi-annual reconstitution. Constituent changes are typically announced one to five days before they are scheduled to be implemented.
Additions to the S&P 500
®
Index
Additions to the S&P 500
®
Index are evaluated based on the following eligibility
criteria. These criteria are for additions to the S&P 500
®
Index, not for continued membership. A stock may be removed from the S&P 500
®
Index if it violates the addition criteria and if ongoing conditions warrant
its removal as described below under “—Removal from the S&P 500
®
Index.”
·
|
Market Capitalization.
The
unadjusted company market capitalization should be within the specified range applicable to the S&P 500
®
Index, as noted above. This range is reviewed from time to time to assure consistency with market conditions. For
spin-offs, membership eligibility is determined using when-issued prices, if available.
|
·
|
Liquidity.
Using composite
pricing and volume, the ratio of annual dollar value traded (defined as average closing price over the period multiplied by historical volume) to float-adjusted market capitalization should be at least 1.00, and the stock should trade
a minimum of 250,000 shares in each of the six months leading up to the evaluation date.
|
·
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Domicile.
The company should
be a U.S. company, meaning a company that has the following characteristics:
|
o
|
the company should file 10-K annual reports;
|
o
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the U.S. portion of fixed assets and revenues should constitute a plurality of the total, but need not exceed 50%. When these
factors are in conflict, assets determine plurality. Revenue determines plurality when there is incomplete asset information. If this criteria is not met or is ambiguous, S&P Dow Jones may still deem the company to be a U.S.
company for purposes of inclusion in the S&P 500
®
Index if its primary listing, headquarters and incorporation are all in the United States and/or “a domicile of convenience” (Bermuda, Channel Islands, Gibraltar,
islands in the Caribbean, Isle of Man, Luxembourg, Liberia or Panama); and
|
o
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the primary listing must be on an eligible U.S. exchange as described under “Eligible Securities” below.
|
In situations where the only factor suggesting that a company is not a U.S. company
is its tax registration in a “domicile of convenience” or another location chosen for tax-related reasons, S&P Dow Jones normally determines that the company is still a U.S. company. The final determination of domicile eligibility is made
by the S&P Dow Jones’s U.S. index committee.
·
|
Public Float.
There should be
a public float of at least 50% of the company’s stock.
|
·
|
Sector Classification.
The
company is evaluated for its contribution to sector balance maintenance, as measured by a comparison of each GICS
®
sector’s weight in the S&P 500
®
Index with its weight in the S&P Total Market Index, in
the relevant market capitalization range. The S&P Total Market Index is a float-adjusted, market-capitalization weighted index designed to track the broad equity market, including large-, mid-, small- and micro-cap stocks.
|
·
|
Financial Viability.
The sum
of the most recent four consecutive quarters’ Generally Accepted Accounting Principles (“GAAP”) earnings (net income excluding discontinued operations) should be positive as should the most recent quarter. For equity real estate
investment trusts (“REITs”), financial viability is based on GAAP earnings and/or Funds From Operations (“FFO”), if reported.
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·
|
Treatment of IPOs.
Initial
public offerings should be traded on an eligible exchange for at least 12 months before being considered for addition to the S&P 500
®
Index. Spin-offs or in-specie distributions from existing constituents do not need to
be seasoned for 12 months prior to their inclusion in the S&P 500
®
Index.
|
·
|
Eligible Securities.
Eligible securities are the common stock of U.S. companies with a primary listing on NYSE, NYSE Arca, NYSE American, Nasdaq Global Select Market, Nasdaq Select Market, Nasdaq Capital Market, Bats BZX, Bats BYX, Bats EDGA, Bats EDGX or
IEX exchanges. Ineligible exchanges include the OTC Bulletin Board and Pink Sheets. Eligible organizational structures and share types are corporations (including equity and mortgage REITS) and common stock (
i.e.
, shares). Ineligible organizational structures and share types include business development companies, limited partnerships, master limited
partnerships, limited liability companies, closed-end funds, exchange-traded funds, exchange-traded notes, royalty trusts, tracking stocks, preferred and convertible preferred stock, unit trusts, equity warrants, convertible bonds,
investment trusts, rights and American Depositary Receipts. In addition, as of July 31, 2017, the securities of companies with multiple share class structures (including companies with listed and unlisted share classes) are no longer
eligible to be added to the S&P 500
®
Index, but securities already included in the S&P 500
®
Index have been grandfathered and are not affected by this change.
|
Removal from the S&P 500
®
Index
Removals from the S&P 500
®
Index are evaluated based as follows:
·
|
Companies that are involved in mergers, acquisitions or significant restructuring such that they no longer meet inclusion
criteria:
|
o
|
Companies delisted as a result of merger, acquisition or other corporate action are removed at a time announced by S&P Dow
Jones, normally at the close of the last day of trading or expiration of a tender offer. Constituents that are halted from trading may be kept in the S&P 500
®
Index until trading resumes, at the discretion of S&P
Dow Jones. If a stock is moved to the pink sheets or the bulletin board, the stock is removed.
|
o
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Any company that is removed from the S&P 500
®
Index (including discretionary and bankruptcy/exchange delistings)
must wait a minimum of one year from its removal date before being reconsidered as a replacement candidate.
|
·
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Companies that substantially violate one or more of the addition criteria.
|
o
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S&P Dow Jones believes turnover in membership of the S&P 500
®
Index should be avoided when possible. At times
a stock included in the S&P 500
®
Index may appear to temporarily violate one or more of the addition criteria. However, the addition criteria are for addition to the S&P 500
®
Index, not for continued
membership. As a result, the S&P 500
®
Index constituent that appears to violate criteria for addition to the S&P 500
®
Index is not removed unless ongoing conditions warrant its removal. When a stock is
removed from the S&P 500
®
Index, S&P Dow Jones explains the basis for the removal.
|
Migration
Current constituents of a S&P Composite 1500
®
component index (which includes the
S&P 500
®
Index and other S&P indices) can be migrated from one S&P Composite 1500
®
component index to another without meeting the financial viability, public float and/or liquidity eligibility criteria if the
S&P Dow Jones’s U.S. index committee decides that such a move will enhance the representativeness of the relevant index as a market benchmark.
Companies that are spun-off from current index constituents do not need to meet the outside addition
criteria, but they should have a total market cap representative of the index to which they are being added.
Calculation of the S&P 500
®
Index
The S&P 500
®
Index is a float-adjusted market capitalization-weighted index. On any
given day, the value of the S&P 500
®
Index is the total float-adjusted market capitalization of the S&P 500
®
Index’s constituents
divided
by the S&P 500
®
Index’s divisor. The float-adjusted market capitalization reflects the price of each stock in the S&P 500
®
Index
multiplied
by the number of shares used in the S&P 500
®
Index’s value calculation.
Float
Adjustment.
Float adjustment means that the number of shares outstanding is reduced to exclude closely held shares from the calculation of the index value because such shares are not available to investors. The goal of float
adjustment is to distinguish between strategic (control) shareholders, whose holdings depend on concerns such as maintaining control rather than the economic fortunes of the company, and those holders whose investments depend on the stock’s
price and their evaluation of a company’s future prospects.
Generally, these “control holders” include officers and directors, private
equity, venture capital and special equity firms, other publicly traded companies that hold shares for control, strategic partners, holders of restricted shares, employee stock ownership plans, employee and family trusts, foundations
associated with the company, holders of unlisted share classes of stock or government entities at all levels (other than government retirement/pension funds) and any individual person who controls a 5% or greater stake in a company as
reported in regulatory filings. Shares that are not considered outstanding are also not included in the available float. These generally include treasury stock, stock options, equity participation units, warrants, preferred stock,
convertible stock and rights.
For each component, S&P Dow Jones calculates an Investable Weight Factor (“IWF”), which represents
the portion of the total shares outstanding that are considered part of the public float for purposes of the S&P 500
®
Index.
Divisor.
Continuity in index values of the S&P 500
®
Index is maintained by adjusting its divisor for all changes in its constituents’ share capital after its base date. This includes additions and deletions to the S&P 500
®
Index, rights issues, share buybacks and issuances and non-zero price spin-offs. The value of the S&P 500
®
Index’s divisor over time is, in effect, a chronological summary of all changes affecting the base capital of the S&P
500
®
Index. The divisor of the S&P 500
®
Index is adjusted such that the index value of the S&P 500
®
Index at an instant just prior to a change in base capital equals the index value of the S&P 500
®
Index at an instant immediately following that change.
Maintenance of the S&P 500
®
Index
Changes in response to corporate actions and market developments can be made at any time. Constituent
changes are typically announced one to five days before they are scheduled to be implemented.
Share Updates.
Changes in a
company’s
shares outstanding and IWF due to its acquisition of another public company are made as soon as reasonably possible. At S&P Dow Jones’ discretion, de minimis merger and acquisition share changes are accumulated
and implemented with the quarterly share rebalancing. All other changes of less than 5% are accumulated and made quarterly on the third Friday of March, June, September and December.
5% Rule.
Changes in a company’s total shares outstanding of 5% or more due to public offerings are made as soon as reasonably
possible. Other changes of 5% or
more
(for example, due to tender offers, Dutch auctions, voluntary exchange offers, company stock
repurchases, private placements, acquisitions of private companies or non-index companies that do not trade on a major exchange, redemptions, exercise of options, warrants, conversion of preferred stock, notes, debt, equity participations,
at-the-market stock offerings or other recapitalizations) are made weekly, and are announced on Fridays for implementation after the close of trading the following Friday (one week later). If an exchange holiday/closure falls on a Friday,
the weekly share change announcement will be made the day before the exchange holiday/closure, and the implementation date will remain after the close of trading the following Friday (
i.e.
, one week later).
If a 5% or more
share
change
causes a company’s IWF to change by five percentage points or more (for example from 0.80 to 0.85), the IWF is updated
at the same ti
m
e as the share change. IWF changes resulting from partial tender offers are considered on a case-by-case basis.
For weekly share
reviews
involving
companies
with multiple share classes, the 5% share change threshold is based on each individual share class rather than total company shares.
Share/IWF Freeze
. A share/IWF freeze period is implemented during each quarterly rebalancing. The freeze period begins after
the market close on the Tuesday preceding the second Friday of each rebalancing month (
i.e.
, March, June, September, and December) and ends after the market close on the third Friday of a rebalancing month. Pro-forma files are normally
released after the market close on the second Friday, one week prior to the rebalancing effective date. In September, preliminary share and float data are released on the first Friday of the month, but the share freeze period for September
will follow the same schedule as the other three quarterly share freeze periods. For illustration purposes, if rebalancing pro-forma files are scheduled to be released on Friday, March 13, the share/IWF freeze period will begin after the
close of trading on Tuesday, March 10 and will end after the close of trading the following Friday, March 20 (
i.e.
, the third Friday of the rebalancing month).
During the
share/IWF freeze period, shares and IWFs are not changed except for certain corporate action events (such as merger activity, stock splits, rights offerings). Share/IWF changes for index constituents resulting from secondary public offerings
that would otherwise be eligible for next day implementation are instead collected during the freeze period and added to the weekly share change announcement on the third Friday of the rebalancing month for implementation the following Friday
night. There is no weekly share change announcement on the
second
Friday of a rebalancing month.
Corporate Actions.
Corporate actions (such as stock splits, stock dividends, non-zero price spin-offs and rights offerings)
are applied after the close of trading
on
the day prior to the ex-date.
Other Adjustments.
In cases
where
there is no achievable market price for a stock being deleted, it can be removed at a zero or minimal price at the
S&P Dow Jones’s U.S. index committee
’s discretion.
The table below summarizes types of index maintenance adjustments and indicates whether or not a divisor adjustment is
required.
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Company added/deleted
|
Net change in market value determines divisor adjustment.
|
Yes
|
|
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Change in shares outstanding
|
Any combination of secondary issuance, share repurchase or buy back – share counts revised to reflect change.
|
Yes
|
|
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Stock split
|
Share count revised to reflect new count. Divisor adjustment is not required since the share count and price changes are offsetting.
|
No
|
|
|
|
Spin‑off
|
The spin-off is added to the S&P 500
®
Index on the ex-date at a price of zero.
|
No
|
|
|
|
Change in IWF
|
Increasing (decreasing) the IWF increases (decreases) the total market value of the S&P 500
®
Index. The divisor
change reflects the change in market value caused by the change to an IWF.
|
Yes
|
|
|
|
Special dividend
|
When a company pays a special dividend, the share price is assumed to drop by the amount of the dividend; the divisor adjustment
reflects this drop in index market value.
|
Yes
|
|
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Rights offering
|
Each shareholder receives the right to buy a proportional number of additional shares at a set (often discounted) price. The
calculation assumes that the offering is fully subscribed. Divisor adjustment reflects increase in market capitalization measured as the shares issued multiplied by the price paid.
|
Yes
|