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Barron’s 400 ETF completes semi-annual rebalance

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The Barron’s 400 ETF (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 and equal weighting 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.

Launched in 2007, B400 was jointly developed by Barron’s and MarketGrader, an independent equity research and indexing firm with a proprietary fundamental methodology. 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 Citigroup (C), Constellation Brands (STZ), Intercontinental Exchange (ICE), Microsoft (MSFT), Nvidia (NVDA), Qualcomm (QCOM) and Raytheon (RTN).

Among the 66 companies selected for the first time are AT&T (T), MSCI, Pinnacle Foods (PF), S&P Global (SPGI) and Shell Midstream Partners (SHLX).

Notable large-cap deletions include Berkshire Hathaway (BRK.B), Intel (INTC), Johnson & Johnson (J&J), Union Pacific (UNP), UnitedHealth Group (UNH) and Verizon Communications (VZ).

On a sector basis, materials had the biggest net gain in number of constituents, adding six components and resulting in a 4 per cent overall weight in the Index. Healthcare saw the second largest net gain, with three additions pushing the sector’s allocation to 12 per cent. Consumer discretionary had the biggest net loss – shedding six constituents – but at 18 per cent of B400’s overall composition, it remains the third most represented sector. For the third consecutive selection period, financials and industrials both reached the maximum sector allocation of 20 per cent of the index, or 80 companies.

Carlos Diez, CEO and founder of MarketGrader, says: “B400’s continued significant allocation towards companies in cyclical sectors speaks to the strength of the fundamentals underpinning the US economy. At the industry level, one theme that stands out with this reconstitution is homebuilding and construction. By our count, nearly one quarter of the constituents in the new B400 class are dependent on the housing market. With an index that chooses its members on the basis of their fundamentals and the attractiveness of their share price, this indicates the significant benefits the housing market is providing these companies, and hints at the opportunities for investors. Long a bellwether for economic activity, the string of good data coming out of the housing market recently, corroborated by the health of these B400 components, suggest doubts about the ability of the domestic economy to absorb further rate increases are overblown.”

From a size perspective, the newly reconstituted B400 saw large-cap stocks fall further out of favour, losing a quarter of their components to wind up with a 16.75 per cent allocation in the Index. The 22 outgoing large-caps resulted in the addition of 18 mid-cap stocks and four small-cap companies. With 244 constituents in the new B400 class, mid-caps comprise the majority of the index. Small-caps encompass 89 names for a 22.25 per cent allocation.

Diez says: “Once again, we saw B400’s composition shift smaller. Large-caps’ higher exposure to lower-growth overseas markets continues to contribute to their decline in the Index. MarketGrader’s fundamental GARP ratings find more favour currently with smaller companies that derive a higher proportion of their business domestically. This too is suggestive of the relative health of the US economy and the attractiveness of the domestic market as a location for investors seeking capital appreciation, particularly the mid-cap growth segment.”

The reconstitution has elevated the fundamental health of the index; the average MarketGrader score for B400 companies is now 67.81, compared to 66.5 for the March selection class. This increase is a function of B400’s design and has been witnessed with each successive B400 selection class. Deleted companies had an average score of 54.9, representative of their diminished appeal to B400’s rigorous selection parameters, while incoming selections had an average score of 66.1.

MarketGrader’s equity rating system assigns nearly all investable US stocks a grade on a scale of zero to 100 based on a proprietary combination of 24 fundamental indicators across four factors – 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.

In total, 172 companies were added to the index upon the rebalance, a turnover rate of 43 per cent, slightly above B400’s since inception average of 42 per cent.

Some 82 companies have been members of the index for at least two consecutive years (four reconstitutions). Of this group, 50 have been members for at least three years and 19 have been B400 members for at least five years, including Apple (AAPL), F5 Networks (FFIV), Home Depot (HD), Manhattan Associates (MANH), MasterCard (MA), Nike (NKE), Priceline Group (PCLN) and Tractor Supply Company (TSCO).

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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