Barron’s 400 ETF shifts towards large-caps in biggest rebalance ever

Sep 23rd, 2019 | 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 pivoted towards large-cap firms following the semi-annual reconstitution and rebalance of its underlying index.

Barron’s 400 ETF shifts towards large-caps in biggest rebalance ever

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 rebalancing, 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and rebalanced twice a year, removing firms whose fundamental quality may have been eroded or whose share price no longer represents an attractive buy.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, shifting markedly towards large-caps, substituting 55 mid-caps and 31 small-caps with 86 names over $10 billion in market cap. Over half the index’s 400 members are classified as large-cap, more than double the historical average.

Carlos Diez, CEO and Founder of MarketGrader, commented, “Though B400 trended further towards large-cap names, the index continues to behave more like a mid-cap exposure due to the equal-weighting of the index, which can provide valuable diversification when any particularly crowded market segment corrects.

“Further, B400’s GARP stock selection strategy has and will continue to identify mid-caps as the market’s ‘sweet spot’ for the consistent creation of economic value and generation of shareholder value over the long-term.”

Prominent large-cap additions include Visa, Home Depot, Verizon, Coca-Cola, UnitedHealth Group, and Merck. Notable large-cap deletions include Amazon.com, Cisco, Boeing, NextEra Energy, Dominion Energy, and ConocoPhillips.

On a sector basis, Consumer Staples and Health Care saw the biggest net gains in the number of constituents, adding 14 and six components, respectively. Despite these gains, with 22 total companies in the sector, or 5.5% of the portfolio, B400’s allocation to Consumer Staples sits just above its 10-year average of 5%, while Health Care remains below its 12% historical average allocation.

Financials and Industrials maintained the largest weighting in B400, with 80 companies, or 20% of the index each, the maximum sector allocation allowed according to B400’s rules-based methodology. The biggest net losers were Energy and Materials, which lost 16 and 5 constituents, respectively, and are now below their 10-year average membership levels.

Diez added, “Against a backdrop of investor angst about a decelerating global economy and an inverted yield curve, it is important to note that the methodology that unemotionally judges stocks based on company fundamentals and selects them to the Barron’s 400 Index continues to find ample opportunities for long-term capital appreciation among US equities.

“Financials and Industrials once again achieved the maximum allocation in B400, which is the eleventh and fourth consecutive rebalance period this has happened, respectively. Given the sensitivity of these two sectors to the economic cycle and to the performance of the US economy, we see this as an indicator of underlying economic strength despite the recent softening of headline GDP and ISM readings.”

In total, 209 companies were added to the index upon rebalancing, a turnover rate of 52.25%, well above B400’s historical membership rotation average of 42% and the largest change of members since the index’s inception in December 1997.

Diez said, “We expect B400’s recent turnover levels to revert to the mean over time as the gap between growth and value stocks narrows. Since the index’s methodology looks at both growth and value – along with quality – in evaluating and selecting constituents, anytime one of these factors gets too far ahead of the other, it’s inevitable that MarketGrader’s system will recognize this as an opportunity to be somewhat of a contrarian, providing investors with a smart way to diversify their exposure to popular benchmarks.”

A total of 45 companies have been members of the index for at least two consecutive years (four reconstitutions). Of this group, 11 constituents have been index members for at least five years.

The Barron’s 400 ETF comes with an expense ratio of 0.66%.

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