Newly launched Barron’s 400 ETF offers smart beta access to US stocks

Jun 5th, 2013 | By | Category: Equities

With most mainstream markets and indices tracked by multiple exchange-traded funds (ETFs), ETF providers are increasingly having to find an edge to help their new funds stand out. Sometimes this edge comes via a niche focus, as demonstrated by Deutsche Bank’s recent launch of regulated utilities and municipal infrastructure revenue bond ETFs, or in the guise of an alternative, next-generation index – what many industry participants are calling ‘smart beta’.

Newly launched Barron’s 400 ETF offers smart beta access to US stocks

The Barron’s 400 Index was introduced in September 2007 by Barron’s, one of the US’s premier financial magazines.

The newly launched Barron’s 400 ETF (BFOR) fits nicely into this latter category. Listed on the NYSE Arca, the fund is based on the Barron’s 400 Index (or B400), a rules-based index tracking the performance of 400 US companies with strong fundamentals.

The methodology behind the index, which takes into account fundamentals such as growth, value, profitability and cash flow, was jointly developed by Barron’s, one of the US’s premier financial magazines, and MarketGrader, a stock research company.

“All index components are selected on the basis of their fundamental strength,” said Carlos Diez, President of MarketGrader. “The Barron’s 400 Index is built from the ‘bottom-up’ using a methodology that is quite different from most traditional market benchmarks.”

So how does the index work? First, the entire universe of possible stocks, which is essentially the Dow Jones US Total Stock Market Index, is graded on the basis of fundamental strength. This grade is based on 24 fundamental indicators across growth, value profitability and cash flow, each measured by six unique factors, in many cases industry or sector-specific indicators. The result from all 24 indicators is a single numerical score ranging from zero to 100, the top ranked of which ultimately determine the stocks selected for the Barron’s 400.

Then, once all stocks in the universe are graded and ranked, a series of screens is applied to ensure the index is diversified and that its underlying components have sufficient liquidity. The number of entries from any single sector is capped at 80, or 20% of the index, while REITs are altogether ineligible. All stocks must have a minimum float-adjusted market cap of $250 million while at least 25% of the components must have a market cap of $3 billion. And to ensure liquidity, all stocks must have a minimum three-month average dollar-trading volume of $2 million.

Finally, the surviving top 400 stocks are then equally weighted. This prevents a small minority of huge companies from steering the index, while giving smaller issues equal opportunity to contribute to the index’s overall performance. By definition, each stock represents, after each selection, 0.25% of the overall index. It is rebalanced semi-annually, in March and September, and independently calculated by NYSE Euronext.

The performance of the index, which was introduced by Barron’s in September 2007, has been strong, outperforming the Dow Jones US Total Stock Market Index on an annualised basis over three, five and ten years (partly based on back-dated data).

The ETF has been launched under the ALPS ETF Trust and comes with total annual fund operating expenses 0.65%.

In terms of rival funds, competition is likely to come from First Trust via the First Trust Multi Cap Value AlphaDEX ETF (FAB) and First Trust Multi Cap Growth AlphaDEX ETF (FAD); from Invesco PowerShares via the PowerShares FTSE RAFI US 1500 Small-Mid Portfolio ETF (PRFX) and PowerShares FTSE RAFI US 1000 Portfolio ETF (PRF); and from iShares via the recently launched actively managed iShares Enhanced US Large Cap ETF (IELG) and iShares Enhanced US Small-Cap ETF (IESM), all US listed.

UK and European investors have fewer locally listed options but they could consider the PowerShares FTSE RAFI US 1000 ETF (PSRF) or the First Trust US Large Cap Core AlphaDEX UCITS ETF (FEX).

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