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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. 

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 include Amazon.com (AMZN), Johnson & Johnson (JNJ), Alphabet (GOOGL), Bank of America (BAC), Bristol-Meyers Squibb (BMY), Lockheed Martin (LMT), and Charles Schwab (SCHW). Notable large-cap deletions include Pfizer (PFE), Comcast (CMCSA), Starbucks (SBUX), Lowe’s (LOW), United Parcel Service (UPS) and Southwest Airlines (LUV). Among the 30 companies selected for the first time, some of the highest ranked stocks are Solaris Oilfield Infrastructure (SOI), SIGA Technologies (SIGA), Bryn Mawr Bank (BMTC), GrafTech International (EAF), Hubbell Incorporated (HUBB) and LPL Financial (LPLA).

On a sector basis, Health Care and Technology saw the biggest net gains in number of constituents, adding 11 and 7 components, respectively. Despite these gains, B400’s allocation to Health Care remains below its 10-year average of 12 per cent, while Technology, currently the third largest sector in the Index, is just a half point above its historical average of 17 per cent. 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. The biggest net losers were Consumer Discretionary and Materials, which both lost 5 constituents. B400 continues to pare exposure to the Consumer Discretionary sector; with 58 members and a 14.5 per cent weighting, it remains below its 10-year average of 73 constituents or an 18 per cent allocation. 

Carlos Diez, CEO and Founder of MarketGrader, says” “From a sector standpoint, the continued strength of Financials is remarkable. The sector reached its 20 per cent cap for the tenth straight rebalance, or 5 full years, which is the longest such stretch on record across all sectors in the history of B400. More broadly, this reflects the ongoing fundamental health of the US economy as we approach the tenth anniversary of the current economic expansion. Another notable point is the near doubling of US steel companies in B400, even though the allocation to Materials decreased overall. This suggests B400’s rules-based stock selection methodology is identifying some pockets of opportunity within the domestic steel industry as the effects of US tariffs on imported metal take hold.”

From a size perspective, the newly reconstituted B400 replaced 2 large-caps and 1 small-cap with three mid-cap names to achieve an average market-cap of USD23.6 billion and a median market cap of USD3.7 billion. Though size changes were marginal, B400 continues its overweight to large-caps (>USD10 billion) relative to its historical average, while underweighting small caps. With only 63 constituents below USD1 billion in the new class, B400’s allocation to small-cap stocks reached another record low. 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. 

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 outgoing September 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, 196 companies were added to the Index upon the rebalance, a turnover rate of 49 per cent, well above B400’s historical turnover average of 41.8 per cent and the largest rotation of members in eleven years, since the March 2008 rebalance as well as the highest turnover since BFOR’s 2013 inception. Diez pointed to 2018’s market turbulence, says: “Much of the historically high turnover likely has to do with the significant market drawdown that occurred in the last months of 2018. The bigger the market dislocation, the greater the chances for changes to company valuations and thus the greater the changes to a company’s overall MarketGrader ranking, which results in more variation than usual as B400 uncovers the most attractive GARP buys.”

A total of 62 companies have been members of the Index for at least two consecutive years ( four reconstitutions). Of this group, 14 constituents have been B400 members for at least five years, including Magellan Midstream Partners (MMP), Biogen (BIIB), Ulta Beauty (ULTA,), TJX Companies (TJX) and Apple (AAPL). 

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