Barron’s 400 ETF increases large cap exposure following semi-annual review

Mar 24th, 2017 | By | Category: Equities

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

Barron’s 400 ETF increases large cap exposure following semi-annual review

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and rebalanced twice a year, removing firms whose fundamental quality may have been eroded or whose share price no longer represents an attractive buy.

Reversing a recent trend of decreasing large-cap allocations, the index gained 19 large cap companies for a total of 87 components, or 21.75% of the index, which came at the expense of mid- and small-caps, which lost 15 and 4 members, respectively.

Carlos Diez, CEO and Founder of MarketGrader said: “This selection class saw [the index’s] large-cap allocation return to its historical average after losing members in recent rebalances due to less attractive valuations, which had resulted, in part, from heavy investment flows to large-cap index funds prior to the November election. While the index still leans towards the mid-cap ‘sweet spot’ of the market, the increase in large-caps reflects the selective GARP opportunities that have opened up in the large company segment.”

On a sector basis, consumer discretionary and technology saw the biggest net gain in number of constituents, both adding eight components. Consumer discretionary now holds 80 companies, or 20% of the index, the maximum sector allocation allowed, joining financials in hitting its cap. Industrials, at a 19.25% allocation and technology, at 18.75%, round out the top four sectors.

Shedding ten constituents, health care had the biggest net loss, partly as a result of the erosion in fundamental health of companies in areas such as biotechnology and medical specialties.

Diez commented: “The new [index] class again reflects the continued fundamental strength underpinning US economic growth. The significant representation of consumer-oriented companies, domestic industrial firms and regional and midsized banks confirms recent signals about the strength of the US economy and reinforces many of the arguments made by the Fed last week in justifying its decision to continue normalizing short-term interest rates.”

Prominent large-cap additions following the review include Adobe, Carnival Corporation, Comcast, Johnson & Johnson, Lowe’s and Northrop Grumman. Notable large-cap deletions include AT&T, Delta, General Motors, United Parcel Service and Walt Disney.

The reconstitution has raised the fundamental health of the index. The average MarketGrader score for B400 companies is now 67.0, compared to 62.6 for the September selection class. Deleted companies had an average score of 53.9, representative of their diminished appeal, while incoming selections had an average score of 64.9.

In total, 165 companies were added to the Index upon the rebalance, a turnover rate of 41.25%, in line with historical turnover of approximately 42%. A total of 78 companies have been members of the index for at least two consecutive years (4 reconstitutions). Of this group, 19 constituents have been members for at least five years.

The ETF has a total expense ratio of 0.65%.

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