Barron’s 400 ETF to increase tech exposure following index rebalance

Mar 21st, 2016 | By | Category: Equities

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The Barron’s 400 ETF (NYSE Arca: BFOR) is set to rebalance following a change in weightings of the Barron’s 400 Index (B400) after its semi-annual reconstitution. The index, co-created by Barron’s, a leading US-based financial magazine, and MarketGrader, an independent equity research and indexing firm, will now have an increased weighting towards technology, putting the sector into fourth place for exposure.

The index, which comprises 400 firms, saw technology stocks net the largest number of constituents, suggesting the sector’s fundamentals and current share prices represent an attractive buy to investors. The semi-annual reconstitution is done to ensure that companies whose fundamental quality may have been eroded, or whose share prices no longer represent an attractive buying opportunity, are removed.

Barron’s 400 ETF provides insight to US sector outperformers

The financials, industrials, consumer discretionary and technology sectors make up the four largest sector exposures in the Barron’s 400 ETF.

Other popular sectors were financials and industrials, with both maintaining their maximum allocations of 20%, or 80 companies (previously established during the September 2015 reconstitution). This was despite financials and industrials trading out of favour recently.

Carlos Diez, CEO and Founder of MarketGrader, explained that concerns about negative interest rates and financial repression led to selling in financials, while a perceived slowdown in US economic growth, which would also have ramifications for manufacturing and energy-related industries, has resulted in price decreases for industrials. “B400’s selections suggest both of these sectors are reporting better than expected numbers, particularly among smaller companies, and that the cyclical improvement in the US economy continues more broadly. Such a contrarian bet could bode well for B400 if and when both sectors make a comeback.”

MarketGrader’s proprietary equity rating system 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 and sector diversification as well as liquidity. B400’s constituents are equal weighted, each representing 0.25% of the index upon rebalance. This eliminates the tendency in traditional market capitalization weighted indices of the largest companies to disproportionately impact performance.

The consumer discretionary sector saw its allocation increase slightly, and now comprises 19.5% of the index. Diez added, “B400’s high weighting to consumer discretionary, which has been persistently at or near the maximum allocation over the past 5 years, underscores that the relative strength of the US consumer continues unabated.”

Energy and materials exposure was pared yet again, resulting in B400’s lowest combined allocation to the sectors since March 2003 and suggesting that, while value is abundant, growth is still distant.

From a size perspective, the newly reconstituted index increased its allocation to mid-caps at the expense of large-caps, which lost 13 names, and to a lesser degree small-caps, which lost 3 constituents. “B400’s continued decrease in allocation to large-caps reflects the diminished fundamental attractiveness and growth prospects for large companies with more exposure to economic softness abroad and the negative impacts of US dollar strength. Despite the dominance of large-caps in driving market returns in recent years, for B400, the mid-cap growth segment has long been the sweet spot in the market, with disciplined GARP selection amongst this segment driving significant long-term capital appreciation,” said Diez.

Prominent large-cap additions included American Airlines, Ford and Facebook. Amongst the 52 companies selected for the first time are AbbVie, General Motors, Hilton Worldwide, Level 3 Communications and United Continental. Notable large-cap deletions include American Express, Boeing, Chipotle Mexican Grill, PepsiCo and Starbucks.

The reconstitution has helped elevate the fundamental health of the index. The average MarketGrader score for companies within the index is now 67.8, compared to 63.6 for the September selection class. Outgoing companies had an average score of 54.2, representative of their diminished appeal.

In total, 155 companies were added to the index upon the rebalance, a turnover rate of 38.8%, below the index’s historical average of 41.8% since inception. A total of 93 companies have been members of the index for at least 2 consecutive years (4 reconstitutions). Of this group, 49 have been members for at least 3 years and 19 have been members for at least 5 years.

The Barron’s 400 ETF has a total expense ratio of 0.65%.

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