Barron’s 400 ETF increases energy exposure following index review

Sep 18th, 2017 | By | Category: Equities

The Barron’s 400 ETF (NYSE Arca: BFOR), a smart beta exchange-traded fund that tracks the Barron’s 400 Index, has significantly increased its exposure to the energy and consumer staples sectors of the US economy following the semi-annual reconstitution and rebalance of its underlying index.

Barron’s 400 ETF increases energy and consumer staples exposure following index rebalance

Carlos Diez, CEO and founder of MarketGrader.

Co-created by Barron’s, a leading US financial journal, and MarketGrader, an independent equity research and indexing firm, the index 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 across growth, value, profitability and cash flow, picking the top ranking companies after screening for size, sector diversification, and liquidity. The index’s constituents are equal weighted, each representing 0.25% upon rebalance, eliminating the tendency in traditional market capitalization weighted indices of the largest companies to disproportionately impact performance.

To maintain the growth at a reasonable price (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and rebalanced twice a year, removing firms whose fundamental quality may have been eroded or whose share price no longer represents an attractive buy.

Energy and consumer staples, two of the sectors with typically lower index representation, saw the biggest net gains in the number of constituents, adding 15 and 5 components, respectively. The index nearly doubled its allocation to the energy sector, now with 31 members, up from 16 following the March selection period.

Carlos Diez, CEO and founder of MarketGrader, commented: “Energy experienced the most significant resurgence in the number of members and as a proportion of the index’s portfolio that it has in years. This indicates that profits within the sector may be rebounding.”

The financials sector continues to have the largest weighting in the index, with 80 companies (20%), the maximum sector allocation allowed according to the underlying methodology. The second and third largest sectors are technology and industrials, with 76 and 72 stocks, respectively. With 66 names and 16.5% of the index, the fourth largest sector, consumer discretionary shed 14 stocks, the largest net loss in number of constituents.

Diex said: “The Barron’s 400 Index’s GARP stock selection methodology continues to gravitate towards financials. While the sector has generally enjoyed high representation in the index throughout the second longest bull market in history, this rebalance period saw particular breadth in fundamental strength for financials amongst the universe of US equities.

From a size perspective, the newly reconstituted index continued adding large-caps, though it was a marginal gain of only two companies relative to the jump seen in the March selection when 19 large-cap stocks were added. Large-caps currently occupy 22.25% of the index, while small-caps held steady at 21.25% and mid-caps fell slightly to 56.5%.

Diez commented: “Size movement amongst this selection class was minimal, which is unsurprising as the mid-cap segment of the market has typically represented the ‘sweet spot’ for B400, featuring relatively attractively valued companies with strong fundamentals and promising growth prospects.”

Prominent large-cap additions following the reconstitution include Marriot International, Las Vegas Sands, Dollar General, Dollar Tree and Take-Two Interactive Software. Notable large-cap deletions include Alphabet, Starbucks, Reynolds American, Carnival and Activision Blizzard.

The reconstitution has raised the fundamental health of the index. The average MarketGrader score for B400 companies is now 68.1, compared to 63.7 for the March selection class. Deleted companies had an average score of 55.4, representative of their diminished appeal, while incoming selections had an average score of 66.9.

In total, 157 companies were added to the index upon the rebalance, a turnover rate of 39%, below B400’s historical turnover average of 42%. A total of 81 companies have been members of the index for at least two consecutive years (four reconstitutions). Of this group, 21 constituents have been members for at least five years.

BFOR has a total expense ratio (TER) of 0.65%.

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