Carlos Diez, MarketGrader

Barron’s 400 rebalance swings towards large cap companies


The smart beta ETF Barron's 400 ETF (BFOR), which tracks the Barron’s 400 Index, has completed its semi-annual rebalance based on the reconstitution and equal weighting of its underlying benchmark.

The 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, B400 was jointly developed by the American financial magazine Barron’s and equity research and indexing firm MarketGrader.
 
Prominent large-cap additions to B400 in this rebalance include Visa, Home Depot, Verizon, Coca-Cola, UnitedHealth Group and Merck. Notable large-cap deletions include Amazon.com, Cisco, Boeing, NextEra Energy, Dominion Energy and ConocoPhillips (COP). Notable large-cap names among the 34 companies selected for the first time include Costco and PayPal, while some of the highest ranked stocks are Talos Energy, Intelligent Systems Corporation, German American Bancorp and Arena Pharmaceuticals.
 
On a sector basis, Consumer Staples and Health Care saw the biggest net gains in number of constituents, adding 14 and six components, respectively. Despite these gains, with 22 total companies in the sector, or 5.5 per cent of the portfolio, B400’s allocation to Consumer Staples sits just above its 10-year average of 5 per cent, while Health Care remains below its 12 per cent historical average allocation even after significant gains in recent B400 reconstitutions.
 
Financials and Industrials maintained the largest weighting in B400, with 80 companies, or 20 per cent of the Index each, the maximum sector allocation allowed according to B400’s rules-based methodology. The biggest net losers were Energy and Materials, which lost 16 and five constituents, respectively, and are now below their 10-year average membership levels.
 
Carlos Diez, CEO and Founder of MarketGrader says: “Against a backdrop of investor angst about a decelerating global economy and an inverted yield curve, 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. Financials and Industrials once again achieved the maximum allocation in B400, which is the 11th and 4th consecutive rebalance period this has happened, respectively. Given the sensitivity of these two sectors to the economic cycle and to the performance of the U.S. economy, we see this as an indicator of underlying economic strength despite the recent softening of headline GDP and ISM readings.”
 
From a size perspective, the newly reconstituted B400 shifted markedly towards large-caps, substituting 55 mid-caps and 31 small-caps with 86 names over USD10 billion in market cap. The aggregate market cap of all index constituents totals USD14.14 trillion, which represents approximately 35 per cent of the total free-float market cap of the US stock market.
 
With half of its 400 members classified as large-cap, more than double the historical average, B400 achieved an average market-cap of USD35.36 billion and a median market cap of USD9.93 billion, significantly larger than the March class. With only 33 constituents below USD1 billion in the new class, B400’s allocation to small-cap stocks reached another record low. B400’s constituents are equal weighted, each representing 0.25 per cent of the Index upon rebalance, eliminating the tendency in traditional market capitalization weighted indexes of the largest companies to disproportionately impact performance.
 
Diez says: “Though B400 trended further towards large-cap names, the Index continues to behave more like a mid-cap exposure due to the equal-weighting of the Index, which can provide valuable diversification when any particularly crowded market segment corrects. Further, B400’s GARP stock selection strategy has and will continue to identify mid-caps as the market’s ‘sweet spot’ for the consistent creation of economic value and generation of shareholder value over the long-term.”
 
In total, 209 companies were added to the Index upon the rebalance, a turnover rate of 52.25 per cent, well above B400’s historical membership rotation average of 42 per cent and the largest change of members since the December 1997 base date, as well as the highest rotation of constituents since BFOR’s 2013 inception.
 
“We expect B400’s recent turnover levels to revert to the mean over time as the gap between growth and value stocks narrows. Since the Index’s methodology looks at both growth and value—along with quality—in evaluating and selecting constituents, anytime one of these factors gets too far ahead of the other, it’s inevitable that MarketGrader’s system will recognize this as an opportunity to be somewhat of a contrarian, providing investors with a smart way to diversify their exposure to popular benchmarks,” Diez says.
 
The reconstitution has once again raised the fundamental health of the Index. This increase is a function of B400’s design, which selects the 400 highest scoring companies listed on US exchanges every six months. MarketGrader’s equity rating system assigns nearly all investable US stocks a grade on a scale of 0-100 based on a proprietary combination of 24 fundamental indicators across four 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.
 
45 companies have been members of the Index for at least two consecutive years (four reconstitutions). Of this group, 11 constituents have been B400 members for at least five years, including Biogen (BIIB), Five Below (FIVE), Trex (TREX), Ross Stores (ROST) and Apple (AAPL).

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