The Barron’s 400 ETF (NYSEArca: BFOR) and its underlying benchmark, the widely observed Barron’s 400 Index (B400), underwent some notable changes at the most recent semi-annual rebalancing, revealing companies that have undergone shifts in their fundamental strengths.
The Barron’s 400 Index selects 400 stocks from the MarketGrader U.S. Coverage Universe by using a methodology that selects components based on the strength of their fundamentals in growth, value, profitability and cash flow and then screens components for certain criteria regarding concentration, market capitalization and liquidity.
The rules-based index was designed to provide investors a way to track some of the highest-performing U.S. companies based on the strength of their financial statements and the attractiveness of their share prices, according to a press release.
To maintain the index’s growth at a reasonable price investment philosophy, the index is reconstituted and rebalanced twice a year. The rebalancing act also reveals what companies have fallen behind, along with firms that are on the up-and-up.
For instance, prominent additions to the B400 include JPMorgan Chase (NYSE: JPM), Verizon Communications (NYSE: VZ), Altria Group (NYSE: MO) and United Parcel Service (NYSE: UPS). Moreover, among the 58 companies selected for the first time, standouts include GrubHub (NYSE: GRUB), LendingTree (NasdaqGS: TREE), Blue Nile (NasdaqGS: NILE) and the recently merged Walgreens Boots Alliance (NasdaqGS: WBA).
However, notable companies that were removed from the list include Microsoft (NasdaqGS: MSFT), Facebook (NasdaqGS: FB), Wal Mart (NYSE: WMT), Celgene (NasdaqGS: CELG) and 3M (NYSE: MMM).
After its recent change up, the underlying index now tilts toward small-caps, which suggests that companies with a focus on domestic U.S. growth and less exposure to overseas markets are fundamentally more attractive. The newly reconstituted B400 will have an average market capitalization of $18.3 billion, compared to $19.1 billion back in March.
“This drop was led by a significant increase in weight towards small-caps, categorized as companies with a market cap below $1 billion, from 16% (64 stocks) to 22% (88 stocks),” according to the fund provider.
Additionally, energy sector exposure has been cut by more than half from 9.25%, or 37 companies, to 4%, or 16 companies. The index also added five new energy names, including refiners and pipeline companies, which suggest that B400 still finds value in names in the sector but only in areas that aren’t at risk in light of the drop in fuel prices.
“Contrary to what many think given today’s slower growth environment, B400 shows U.S. companies with attractive fundamentals and growth prospects are still to be found,” Carlos Diez, CEO and Founder of MarketGrader, said in the press release. “Not surprisingly, the growth profile of current constituents is across the board better than for the previous selection class.”
Overall, the Barron’s 400 Index is bullish on the U.S. economy, with a heavy tilt toward financials and industrials at 20% each, followed by consumer discretionary 19.3% and technology 13.4%.
“With a laser focus on earnings, B400 continues to see the most opportunity in sectors reflecting the ongoing cyclical improvement in the U.S. economy, which is encouraging given recent market conditions,”Diez added.
For more information on ETF indices, visit our indexing category.
Max Chen contributed to this article.