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Barron’s 400 ETF completes semi-annual rebalance


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 and equal weighting of its underlying benchmark.

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 Visa (V), Intel (INTC), Lowe’s (LOW), Caterpillar (CAT), EOG Resources (EOG), CSX (CSX) and Synchrony Financial (SYF). Notable large-cap deletions include2 Verizon (VZ), Boeing (BA), AbbVie (ABBV), Walt Disney (DIS), Time Warner (TWX) and Celgene (CELG). Among the 42 companies selected for the first time, some of the highest ranked stocks3 are Nektar Therapeutics (NKTR), Cactus (WHD), Broadcom (AVGO), Bank OZK (OZK), Qurate Retail (QRTEA) and First Commonwealth Financial (FCF).

On a sector basis, Consumer Discretionary, Energy, and Materials saw the biggest net gains in number of constituents, adding nine, four and three components, respectively. Financials and Industrials maintained 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. Tying for third largest sector weighting were Consumer Discretionary and Technology, the latter shedding a further 4 members, with 63 constituents each. Both remain below their 10-year average allocation in B400 of 73 and 69 companies, respectively.

Carlos Diez, CEO and Founder of MarketGrader says: “From a sector standpoint, the reconstituted Barron’s 400 Index reflects the strength of the US economy, particularly among names most dependent on domestic earnings growth. Case in point, this is the ninth consecutive selection period that Financials reached the 20 per cent maximum allocation permitted in B400, with most names in the sector in the mid-cap range and in industries such as Regional Banks.”

“This run of overweighting to its 10-year average allocation of 14 per cent also stands in stark contrast to the sector’s nadir in March 2009, when B400 selected only 20 Financials to its roster a week after the bear market reached bottom. The continued robustness of manufacturing in the US has also been captured in the latest rebalance; it is the fifth in the last seven B400 semi-annual periods in which Industrials hit the sector limit. Lastly, B400’s methodology continues to find plenty of growth at a reasonable price in the rebounding Energy sector, which achieved its largest allocation in B400 since March 2009 and is now overweight to its 10-year average allocation.”

From a size perspective, the newly reconstituted B400 again traded up, replacing six mid-cap and four small-cap constituents with 10 large-cap names to achieve an average market-cap of USD19.6 billion. With only 64 constituents below USD1 billion in the new class, B400’s allocation to small-cap stocks reached a record low in the history of the Index. 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.

Diez adds: “While tariff and trade war-related economic issues and worries about record market highs dominate headlines, the fundamental picture of domestic stocks’ balance sheets remains strong, especially for an Index that identifies quality companies that can generate attractive growth without overpaying for it. Though B400 finds the market’s sweet spot in mid-cap names, the Index selectively cut its allocation to small-caps in favour of large-caps again, suggesting concerns about a slowdown in global growth are not reflected on large companies’ balance sheets in a systematic fashion.”

The reconstitution has once again raised the fundamental health of the Index; the average MarketGrader score for B400 companies is now 71, compared to 67 for the March selection class. This increase is a function of B400’s design, which selects the 400 highest scoring companies listed on US exchanges every six months. 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 4 categories of fundamental analysis – 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, 149 companies were added to the Index upon the rebalance, a turnover rate of 37.25 per cent, below B400’s historical turnover average of 41.7 per cent. 67 companies have been members of the Index for at least 2 consecutive years (four reconstitutions). Of this group, 14 constituents have been B400 members for at least 5 years, including Ulta Beauty (ULTA), Apple (AAPL), TJX Companies (TJX), Credit Acceptance Corporation (CACC) and Grand Canyon Education (LOPE) 4.

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