Barron’s 400 ETF increases large-cap exposure

Mar 20th, 2018 | By | Category: Equities

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The Barron’s 400 ETF (BFOR US), a smart beta ETF tracking the Barron’s 400 Index (B400), has increased its allocation to large-cap companies following the semi-annual reconstitution and rebalance of its underlying index.

Carlos Diez, CEO and founder of MarketGrader

Carlos Diez, CEO and founder of MarketGrader.

Co-created by Barron’s, a leading US financial journal, and MarketGrader, an independent equity research and indexing firm, the index tracks the performance of 400 US companies selected based on the strength of their financial statements and the attractiveness of their share prices.

The engine behind the index’s methodology is MarketGrader’s proprietary equity rating system, which assigns nearly all investable US stocks a grade on a scale of 0-100 based on a combination of 24 fundamental indicators across growth, value, profitability and cash flow, picking the top ranking companies after screening for size, sector diversification, and liquidity.

The index’s constituents are equal weighted, each representing 0.25% upon rebalance, eliminating the tendency in traditional market capitalization weighted indices of the largest companies to disproportionately impact performance.

To maintain the growth at a reasonable price (GARP) investment philosophy, the index is reconstituted and rebalanced twice a year, removing firms whose fundamental quality may have been eroded or whose share price no longer represents an attractive buy.

Carlos Diez, CEO and founder of MarketGrader, commented, “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.”

Having replaced 17 small-cap constituents with all large-cap names, the newly reconstituted B400 now contains 106 large-cap stocks, the heaviest weighting towards the top end of the capitalization segment since the September 2014 selection.

Prominent large-cap additions following the review include Pfizer, Boeing, PNC Financial Services, NextEra Energy, Norfolk Southern and Kimberly-Clark. Notable large-cap deletions include Microsoft, Johnson & Johnson, JPMorgan Chase, Home Depot, and Amgen.

With only 68 constituents, small-caps now have the smallest representation in the index since March 2014.

Mid-caps, the segment where B400 traditionally finds the bulk of opportunities, were unchanged with 226 total stocks.

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% of the Index, the maximum sector allocation allowed according to B400’s rules-based methodology.

Despite losing nine names, technology is the third largest sector with 67 stocks, comprising 16.75% of the index total. With 54 names and 13.5% of the index, the fourth largest sector, consumer discretionary continued to shed members, losing twelve stocks, the largest net loss in number of constituents.

Diez said, “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 constituents, B400 has more than tripled its allocation to the sector since selecting only 13 stocks two years ago.”

The reconstitution has once again raised the fundamental health of the index; the average MarketGrader score for B400 companies is now 67.8, compared to 61.8 for the March 2017 selection class.

In total, 183 companies were added to the index upon the rebalance, a turnover rate of 45.75%, which is above B400’s historical turnover average of 41.92% and the highest rate of change since the March 2008 rebalance. A total of 67 companies have been members of the index for at least two consecutive years (four reconstitutions). Of this group, 16 constituents have been B400 members for at least five years.

The ETF has a total expense ratio of 0.65%.

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