technologies and that Product X is an "innovator" on the Adoption Curve, earning an innovation score of 3, and Product Y is an "early adopter," earning an innovation score of 2. Each products' revenues are multiplied by their respective innovation scores to determine their product scores. Product X's resulting product score is 2.15 (71.7% times 3), and Product Y's resulting product score is 0.57 (28.3% times 2). Company A's resulting aggregate score is 2.72, resulting in a Tier 1 designation.
Once Morningstar calculates each constituent's aggregate score, Morningstar designates each constituent as either Tier 1 or Tier 2 based on their aggregate score. Tier 1 issuers are those with an aggregate score of 1.5 or higher. Tier 2 issuers are those with an aggregate score of less than 1.5. All Tier 1 constituents are selected for the Underlying Index. Morningstar ranks Tier 2 issuers with preference given to issuers with a higher aggregate score over a lower aggregate score, then a smaller market capitalization over a larger market capitalization. If there are fewer than 50 Tier 1 constituents, the shortfall is filled with Tier 2 constituents, and the Underlying Index is capped at 50 constituents.
Constituents are float market capitalization-weighted with a 6% cap for individual stocks and each industry is capped at 15%. Additionally, individual constituents with weights of 4.5% or greater in aggregate cannot compose more than 45% of the Underlying Index. The Underlying Index is reconstituted annually each December and rebalanced quarterly. The Index Provider does not require that each of the eight sustainable themes be
included in the Underlying Index, nor does it require the inclusion of a minimum number of Tier 1 constituents. In addition, constituents may operate business lines that generate revenues in industries in addition to those related to breakthrough innovations and new technologies and may be associated with multiple industries or sectors.
The Underlying Index includes small-, mid- and large-capitalization companies and may change over time. As of February 10, 2023, a significant portion of the Underlying Index is represented by securities of companies in the consumer cyclical, industrials and technology industries or sectors. As of February 10, 2023, the Underlying Index consisted of securities from the following countries: Belgium, Canada, China, Denmark, Germany, Japan, Netherlands, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, the United Kingdom (the "U.K.") and the U.S.
BFA uses a "passive" or indexing approach to try to achieve the Fund's investment objective. Unlike many investment companies, the Fund does not try to "beat" the index it tracks and does not seek temporary defensive positions when markets decline or appear overvalued.
Indexing may eliminate the chance that the Fund will substantially outperform the Underlying Index but also may reduce some of the risks of active management, such as poor security selection. Indexing seeks to achieve lower costs and better after-tax performance by aiming to keep portfolio turnover low in comparison to actively managed investment companies.
BFA uses a representative sampling indexing strategy to manage the Fund.