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

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and rebalanced twice a year, removing firms whose fundamental quality may have been eroded or whose share price no longer represents an attractive buy.

Covid-19 outperformance

B400’s last effective rebalance date was 23 March 2020 which was, coincidentally, also the day the US equity market hit its bottom following the sharp pandemic-induced decline in February and March.

The index has delivered on its objective since the last rebalance, recording a 56.5% return between 23 March and 18 September compared to 48.4% for the S&P 500, 53.9% for the S&P MidCap 400, and 51.1% for the broad market Russell 3000 Index.

Looking ahead, B400 will replace 180 companies, equivalent to a turnover ratio of 45% which is in line with the index’s historical average.

From a sector standpoint, although financials and technology stocks both reached B400’s 20% sector cap (80 companies) in March, only financials has maintained its ceiling in the current reconstitution, extending a streak that goes back to March 2014.

Exposure to technology stocks has been trimmed by four constituents with the sector continuing to be well represented at 19% on the index total. This allocation is overweight relative to B400’s historical average of 70 technology stocks.

Industrials, at 75 companies, continues to be B400’s third-largest sector and is also overweight by six constituents relative to its historical average of 69 stocks. According to MarketGrader, this underscores the ongoing strength B400 is finding in US manufacturing across industries with significant exposure to a rebounding US economy.

B400’s size make-up didn’t change much, although there was a slight shift out of larger capitalization companies in favour of smaller firms. Specifically, 45 companies with market caps above $20 billion were removed from the index, while only 33 firms from that size segment were added. Well-known mega-cap names exiting B400 include JPMorgan Chase, Visa, Mastercard, Intel, and Bank of America, while Procter & Gamble, Home Depot, Salesforce, Broadcom, and UPS have entered the index. Meanwhile, 109 companies with market caps below $10bn were removed and replaced by 117 companies from the same size category.

Carlos Diez, CEO and Founder of MarketGrader, commented, “Against a backdrop of investor angst about a decelerating global economy and rock-bottom interest rates, 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.

“This is particularly true among quality growth companies outside the mega-cap technology stocks that seem to dominate the market’s daily headlines. We believe the US economy will rebound strongly once it fully reopens and it resumes its high growth trajectory of recent years and in such an environment we expect companies that have flown under the radar in recent months to do better than many of the mega cap technology stocks that have dominated the market cap benchmarks.

“We assume not only that a stronger US economy will favor many cyclical sectors broadly but also that a change in market leadership might be in the cards given some of the valuations reached recently by the market’s highflyers.”