Up almost 8% over the past month, the Barron’s 400 ETF (NYSEArca: BFOR) is building momentum and could be a credible alternative for investors seeking alternatives to bland, cap-weighted broad market index funds.
BFOR tracks the Barron’s 400 Index (B400), which takes 400 stocks from the broader MarketGrader U.S. Coverage Universe by using a methodology that selects components based on the strength of their fundamentals in growth, valuation, profitability, and cash flow, and then screens components for certain criteria regarding concentration, market capitalization, and liquidity.
BFOR is classified as a mid-cap growth fund, a factor combination that’s historically potent, but one that also comes with elevated valuations. BFOR looks to access that growth before it becomes too pricey.
Mid-cap companies are slightly more diversified than their small-cap peers, which allows many mid-sized companies to generate more consistent revenue and cash flow, along with providing more stable stock prices. Additionally, they are not so big that their size would slow down growth.
Growth ETFs are usually heavily allocated to technology and consumer discretionary stocks and that is the case with BFOR allocating about 36% of its combined weight to those sectors. Due to a screening process that, as noted above, includes cash flow and profitability, BFOR dodges some of this year’s laggard sectors that are having cash flow problems, including energy and real estate.
Growth stocks are often associated with high-quality, prosperous companies whose earnings are expected to continue increasing at an above-average rate relative to the market. Growth stocks generally have high price-to-earnings (P/E) ratios and high price-to-book ratios. Still, data suggest the growth/value premium isn’t overly elevated relative to historical norms.
The mid-cap category has also outperformed their larger peers, but with lower volatility than small caps. Moreover, the returns of mid-cap stocks have also beaten those of small-cap stocks during the trailing three-, five-, and 10-year periods, with lower volatility.
Growth stocks may be seen as exorbitant and overvalued, causing some investors to favor value stocks, which are considered undervalued by the market. Value stocks tend to trade at a lower price relative to their fundamentals (including dividends, earnings, and sales). While they generally have solid fundamentals, value stocks may have lost popularity in the market and are considered bargain priced compared with their competitors.
Proving that growth is beating value in the mid-cap space, BFOR is outperforming the Russell Midcap Value Index by about 1,200 basis points this year.
Alternatives to BFOR in the mid-cap growth space include the iShares Russell Midcap Growth ETF (NYSEARCA: IWP), First Trust Mid Cap Growth AlphaDEX Fund (NasdaqGM: FNY) and the iShares Morningstar Mid Growth ETF(NYSEArca: JKH).
For more on cornerstone strategies, visit our ETF Building Blocks Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.