Barron’s 400 ETF pivots towards large-caps

Sep 25th, 2018 | By | Category: Equities

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The Barron’s 400 ETF (BFOR US), an NYSE Arca-listed ETF tracking the Barron’s 400 Index (B400), has increased its exposure to large-cap firms following the semi-annual reconstitution and rebalance of its underlying index.

Barron’s 400 ETF shrugs off global growth concerns by increasing large-cap exposure

Carlos Diez, CEO and Founder of MarketGrader.

Co-created by Barron’s, a prominent US financial journal, and MarketGrader, an independent equity research and indexing firm, the ETF 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.

The factors span growth, value, profitability and cash flow metrics picking the top ranking companies – in line with a ‘growth at a reasonable price’ (GARP) strategy – after screening for size, sector diversification, and liquidity.

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and rebalanced twice a year, removing firms whose fundamental quality may have been eroded or whose share price no longer represents an attractive buy.

The newly reconstituted index has traded up in size, replacing six mid-cap and four small-cap constituents with ten large-cap names to achieve an average market-cap of $19.6 billion. With only 64 constituents below $1 billion in the new class, the index’s allocation to small-cap stocks reached a record low in the history of the Index.

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

Prominent large-cap additions to the index include Visa, Intel, Lowe’s, Caterpillar, EOG Resources, CSX, and Synchrony Financial. Notable large-cap deletions include Verizon, Boeing, AbbVie, Walt Disney, Time Warner and Celgene.

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, with 80 companies, or 20% of the index, the maximum sector allocation allowed.

Tying for third largest sector weighting were Consumer Discretionary and Technology, the latter shedding a further four members, with 63 constituents each. Both remain below their 10-year average allocation in the index of 73 and 69 companies, respectively.

Diez added, “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% 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% 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.”

The reconstitution has once again raised the fundamental health of the index; the average MarketGrader score for B400 index companies is now 71, compared to 67 for the March 2018 selection class.

In total, 149 companies were added to the index upon the rebalance, a turnover rate of 37.25%, below the index’s historical turnover average of 41.7%.

A total of 67 companies have been members of the index for at least two consecutive years (four reconstitutions). Of this group, 14 constituents have been index members for at least five years.

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