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Barron’s 400 ETF completes semi-annual rebalance

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The Barron's 400 ETF (NYSE Arca:BFOR), a smart beta exchange-traded fund that seeks to track the Barron’s 400 Index (B400), has completed its semi-annual rebalance based on the reconstitution of its underlying benchmark. 

The rules-based and fundamentals-driven B400 was designed to give investors a means of tracking some of America’s highest-performing companies based on the strength of their financial statements and the attractiveness of their share prices. B400 was jointly developed by Barron’s, America’s premier financial magazine, and MarketGrader, an independent equity research and indexing firm with a proprietary fundamental methodology, and launched in 2007. To maintain B400’s growth at a reasonable price (GARP) investment philosophy, the Index is reconstituted and rebalanced twice a year, ensuring B400 is composed of the top-ranked stocks from the universe of US equities regardless of sector or market capitalisation.

Prominent large-cap additions to B400 include American Airlines (AAL), Ford (F) and Facebook (FB). Amongst the 52 companies selected for the first time are AbbVie (ABBV), General Motors (GM), Hilton Worldwide (HTL), Level 3 Communications (LVLT) and United Continental (UAL). Notable large-cap deletions include American Express (AXP), Boeing (BA), Chipotle Mexican Grill (CMG), PepsiCo Inc. (PEP) and Starbucks (SBUX).

On a sector basis, Technology had the biggest net gain in number of constituents, making it the fourth largest sector in B400. Carlos Diez, CEO and Founder of MarketGrader, says: “B400’s increased weighting towards Technology indicates valuations for select high-performing companies in the sector have become more attractive since the September selection process.”

Financials and Industrials both reached the maximum sector allocation of 20 per cent of the Index, or 80 companies, as they both did in September. Diez continues: “These allocations are notable since both sectors have traded out of favour recently. Concerns about negative interest rates and financial repression have led to selling in Financials, while a perceived slowdown in US economic growth, which would also have ramifications for manufacturing and Energy-related industries, has resulted in price decreases for Industrials. B400’s selections suggest both of these sectors are reporting better than expected numbers, particularly among smaller companies, and that the cyclical improvement in the US economy continues more broadly. Such a contrarian bet could bode well for B400 if and when both sectors make a comeback.”

Consumer Discretionary saw its allocation increase slightly, comprising 19.5 per cent of the Index. Diez adds: “B400’s high weighting to Consumer Discretionary, which has been persistently at or near the maximum allocation over the past 5 years, underscores that the relative strength of the US consumer continues unabated.”

Energy and Materials exposure was pared yet again, resulting in B400’s lowest combined allocation to the sectors since March 2003 and suggesting that, while value is abundant, growth is still distant.

From a size perspective, the newly reconstituted B400 increased allocation to mid-caps at the expense of large-caps, which lost 13 names, and to a lesser degree small-caps, which lost 3 constituents. Diez says: “B400’s continued decrease in allocation to large-caps reflects the diminished fundamental attractiveness and growth prospects for large companies with more exposure to economic softness abroad and the negative impacts of US dollar strength. Despite the dominance of large-caps in driving market returns in recent years, for B400, the mid-cap growth segment has long been the sweet spot in the market, with disciplined GARP selection amongst this segment driving significant long-term capital appreciation.”

The reconstitution has elevated the fundamental health of the Index; the average MarketGrader score for B400 companies is now 67.81, compared to 63.6 for the September selection class. This increase is a function of B400’s design and has been witnessed with each successive B400 selection class. Outgoing companies had an average score of 54.2, representative of their diminished appeal to B400’s rigorous selection parameters. MarketGrader’s equity rating system assigns nearly all investable US stocks a grade on a scale of 0-100 based on a proprietary combination of 24 fundamental indicators across growth, value, profitability and cash flow, picking the top ranking companies for BFOR’s underlying Index after screening for size and sector diversification as well as liquidity.

Diez adds: “With investor sentiment recently buoyed by stronger than anticipated domestic economic data, the pervasive gloom in the markets has started to lift. When looking at both growth and value, which B400 does, recent selling pressure has resulted in some good values that maintain healthy balance sheets and growth prospects. The elite members of the Barron’s 400 Index show that attractively priced growth is alive and well in the US stock market, you just have to know where to look.”

In total, 155 companies were added to the Index upon the rebalance, a turnover rate of 38.75 per cent, below B400’s historical average of 41.83 per cent since inception. 93 companies have been members of the Index for at least 2 consecutive years (4 reconstitutions). Of this group, 49 have been members for at least 3 years and 19 have been B400 members for at least 5 years.

B400’s constituents are equal weighted, each representing 0.25 per cent of the Index upon rebalance, eliminating the tendency in traditional market capitalisation weighted indexes of the largest companies to disproportionately impact performance.

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