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Barron’s 400 ETF sees significant shift at 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, 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 financials and the attractiveness of their share prices. Launched in 2007, B400 was jointly developed by Barron’s, America’s premier financial magazine, and MarketGrader, an independent equity research and indexing firm. In order to adhere to 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 covered by MarketGrader’s research, regardless of sector or market capitalisation.

Prominent large-cap additions to B400 include1 Pfizer (PFE), Boeing (BA), PNC Financial Services Group (PNC), NextEra Energy (NEE), Norfolk Southern (NSC) and Kimberly-Clark (KMB). Notable large-cap deletions include Microsoft (MSFT), Johnson & Johnson (JNJ), JPMorgan Chase (JPM), Home Depot (HD) and Amgen (AMGN). Among the 54 companies selected for the first time, some of the highest ranked stocks2 are Liberty Oilfield Services (LBRT), ACCO Brands (ACCO), Live Oak Bancshares (LOB) and NV5 Global (NVEE).

On a sector basis, Energy, Industrials and Materials saw the biggest net gains in number of constituents, adding 12, 8 and 7 components, respectively. Financials and Industrials have the largest weighting in B400, with 80 companies, or 20 per cent of the Index, the maximum sector allocation allowed according to B400’s rules-based methodology. Despite losing 9 names, Technology is the third largest sector with 67 stocks, comprising 16.75 per cent of the Index. With 54 names and 13.5 per cent of the Index, the fourth largest sector, Consumer Discretionary continued to shed members, losing twelve stocks, the largest net loss in number of constituents.

Carlos Diez, CEO and Founder of MarketGrader, says: “From a sector standpoint, this selection period witnessed the continuation of some trends the Index has displayed over recent years, resulting in allocation levels not seen since the beginning or middle of the current bull market. Firstly, the decline in Consumer Discretionary and Health Care stocks brings their current weights in B400 to their lowest levels since March of 2009 and 2014, respectively, and well below their averages. Secondly, B400’s GARP stock selection methodology continues to gravitate towards Financials and Industrials, the former having hit the maximum allocation for seven consecutive rebalance periods and the latter showing significant strengthening in fundamentals. Lastly, the Index has found the most opportunities in Energy since September 2009; with 43 Energy constituents, B400 has more than tripled its allocation to the sector since selecting only 13 stocks two years ago.

“While there has been much discussion about historically high equity valuations and speculation as to the durability of a bull market, now past its ninth anniversary, B400’s ability to systematically scan the US equity universe for growth-oriented values is compelling in a market environment where price gains can be expected to result from healthy earnings growth driven by an expanding economy.”

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