The Barron's 400 ETF (NYSE Arca:BFOR), a smart beta exchange-traded fund that seeks to track the Barron’s 400 Index (B400), has completed its semi-annual rebalance based on the reconstitution and equal weighting of its underlying benchmark. The fundamentals-driven B400 was designed to give investors a means of tracking some of America’s highest-performing companies based on the strength of their financials and the attractiveness of their share prices. Launched in 2007 and approaching its 10th anniversary, B400 was jointly developed by Barron’s, America’s premier financial magazine, and MarketGrader, an independent equity research and indexing firm. In order to adhere to B400’s growth at a reasonable price (GARP) investment philosophy, the Index is reconstituted and rebalanced twice a year, ensuring B400 is composed of the top-ranked stocks from the universe of U.S. equities covered by MarketGrader regardless of sector or market capitalization.
Prominent large-cap additions to B400 include Adobe (ADBE), Carnival Corporation (CCL), Comcast (CMCSA), Johnson & Johnson (JNJ), Lowe’s (LOW) and Northrop Grumman (NOC). Among the 56 companies selected for the first time are Citizens Financial Group (CFG), Royal Caribbean Cruises (RCL), Shake Shack (SHAK) and Signet Jewelers Limited (SIG). Notable large-cap deletions include AT&T (T), Delta (DAL), General Motors (GM), United Parcel Service (UPS) and Walt Disney (DIS).
On a sector basis, Consumer Discretionary and Technology saw the biggest net gain in number of constituents, both adding 8 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 10 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.
Carlos Diez, CEO and Founder of MarketGrader said, “The new B400 class again reflects the continued fundamental strength underpinning U.S. 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 U.S. economy and reinforces many of the arguments made by the Fed last week in justifying its decision to continue normalizing short-term interest rates.”
From a size perspective, the newly reconstituted B400 reversed a recent trend of a decreasing large-cap allocation. Large-caps gained 19 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. Diez commented, “This selection class saw B400’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.”
The reconstitution has once again 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. This increase is a function of B400’s design, which selects the 400 highest scoring companies in the U.S. every six months. Deleted companies had an average score of 53.9 representative of their diminished appeal to B400’s rigorous selection parameters, while incoming selections had an average score of 64.9. MarketGrader’s equity rating system assigns nearly all investable U.S. stocks a grade on a scale of 0-100 based on a proprietary combination of 24 fundamental indicators across 4 categories of fundamental analysis – growth, value, profitability and cash flow – picking the top ranking companies for BFOR’s underlying Index after screening for size and sector diversification as well as liquidity.
In total, 165 companies were added to the Index upon the rebalance, a turnover rate of 41.25%, in line with B400’s historical turnover. 78 companies have been members of the Index for at least 2 consecutive years (4 reconstitutions). Of this group, 19 constituents have been B400 members for at least 5 years, including Apple (AAPL), Biogen (BIIB), Home Depot (HD), MarketAxess Holdings (MKTX), MasterCard (MA), Nike (NKE), O’Reilly Automotive (ORLY), Priceline Group (PCLN) and Ulta Beauty (ULTA).
B400’s constituents are equal weighted, each representing 0.25% of the Index upon rebalance, eliminating the tendency in traditional market capitalization weighted indexes of the largest companies to disproportionately impact performance.
For more information about the Barron’s 400 ETF (BFOR) please visit http://www.barrons400etf.com.
MarketGrader is a Miami-based provider of independent global equity research and indices that was founded on the belief that fundamental analysis and transparency are central to better investment decision-making. Formed in 1999, MarketGrader offers investors an online research service that aggregates financial data on publicly traded companies and analyzes them based on a proprietary quantitative methodology using 24 fundamental indicators across growth, value, profitability and cash flow. The company’s growth at a reasonable price (GARP) methodology is designed to identify consistent creators of economic value, as it believes such stocks are the best long-term generators of shareholder value. Since its first index was constructed in 2003, MarketGrader Indices have provided an alternative to traditional market capitalization weighted benchmarks, selecting constituents based on fundamentals rather than size. MarketGrader Indices cover Domestic, International and Global equities from a global universe of more than 35,000 companies in 93 countries, representing over $70 trillion in market capitalization. In 2007, MarketGrader created the Barron’s 400 Index in conjunction with Barron’s, America’s premier financial magazine. Follow us on Twitter @MarketGrader and connect with us on LinkedIn.
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