Growth remains one of the hottest investment factors this year, but investors need to be sure they’re not paying too much just to access growth. Said another way, growth at a reasonable price (GARP) should be a priority.
The Barron’s 400 ETF (NYSEArca: BFOR) is an ETF that’s built on GARP principles and it’s soaring as highlighted by a 15.43% gain over the past month.
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.
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. To maintain the index’s growth at a reasonable price, 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.
Banking on BFOR
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. Conversely, the fund allocates 20% of its weight to the technology sector, a primary driver of quality and out-performance this year.
BFOR is categorized as a mid-cap growth fund, a spectrum in which the fund excels.
“Mid-growth funds invest in stocks medium-sized companies that are projected to grow faster than other mid-cap stocks,” according to Morningstar. “The market capitalization range for U.S. mid-caps typically falls between $1 billion and $8 billion and represents 20% of the total capitalization of the U.S. equity market. Growth is defined based on fast growth (high growth rates for earnings, sales, book value, and cash flow) and high valuations (high price ratios and low dividend yields).”
Over the past year, three years and five years, BFOR’s return ranks in its category are 94%, 97%, and 93%, respectively, according to Morningstar data. That data set indicates only a scant percentage of BFOR rivals come anywhere close to competing with the fund based on those metrics.
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).
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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.