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Does the Rebalanced Barron 400 ETF Look Smarter?

The smart beta Barron's 400 ETF ( BFOR ) has made strategic shifts in its portfolio as part of the most recent semi-annual index rebalancing. The fund now seems to have superior fundamental attributes and be less susceptible to the current market turmoil due to increased weighting to the small cap stocks (read: 5 Smart Beta ETFs to Beat the Choppy Market ).

Background of BFOR

The ETF seeks to track the performance of the rules-based and fundamentals-driven Barron's 400 Index. The benchmark uses the MarketGrader's equity rating system to select America's highest-performing stocks based on the strength of their financial statements and the attractiveness of their share prices. Notably, MarketGrader's methodology assigns grades on a scale of 0-100 based on a proprietary combination of 24 fundamental indicators across growth, value, profitability and cash flow while it screens for size and sector diversification and liquidity.

This approach has made BFOR superior to many other ETFs in the space with attractive fundamentals and growth prospects. The fund has been consistently crushing the ultra-popular broad market funds - the SPDR S&P 500 ( SPY ) and SPDR Dow Jones Industrial Average ETF ( DIA ) - by wide margins. The fund gained nearly 23.3% since its June 2013 debut compared to gains of 20% for SPY and 8.9% for DIA. From the year-to-date look, the ETF is down 3.8%, which is better than the decline of 5.8% for SPY and 8.6% for DIA (read: 6 Exceptional ETFs Up Over 15% YTD ).

Despite the strong performance, the product has not been able to garner enough investor interest as depicted by its AUM of $196.1 million. One of the main reasons for the unpopularity might be its expense ratio of 0.65%, which is one of the highest in the multi-cap ETF space. Further, it has a hidden cost in the form of wide bid/ask spread that increases the total cost of trading as it trades in a light volume of about 18,000 shares a day on average.

Index Change and New Holdings

During rebalancing of the index, sector allocation to the most beaten down energy sector was trimmed by more than half from 9.25% to 4%. Now, financials and industrials remain the top two sectors at 20% each. They are closely followed by consumer discretionary (19.25%), technology (13.75%) and health care (10.25%).

In terms of security, 58 companies have found their way to the index and the ETF for the first time ever with the most notable names being GrubHub ( GRUB ), LendingTree ( TREE ), Blue Nile ( NILE ) and the recently merged Walgreens Boots Alliance ( WBA ). Some other big names that have been added to the holdings list are JPMorgan Chase ( JPM ), Verizon Communications ( VZ ), Altria Group ( MO ) and United Parcel Service ( UPS ). However, some marquee names such as Microsoft ( MSFT ), Facebook ( FB ), Wal-Mart ( WMT ), Celgene ( CELG ) and 3M ( MMM ) were booted from the portfolio.

With these changes, the index currently has a total market capitalization of $18.28 billion post-rebalance versus $19.07 billion in March. The drop came on the heels of increased focus toward small cap stocks from 16% to 22%. Exposure to large cap stocks decreased from 27.25% to 25.5% while mid cap stocks saw a decline from 56.25% share to 52.5% (read: Small-Cap Stocks, ETFs Beating Russell 2000 ).

The fund currently holds 401 securities in its basket that are widely spread with nearly 0.25% share each.

Bottom Line

Though the new holdings suggest a modest change in the fund's sector exposure, the reallocation to securities saw significant fluctuations in terms of market cap level. This is especially true as the tilt toward small caps suggests that BFOR will now be less exposed to the international markets, currently ruffled by China worries, a strong dollar and global slowdown concerns.

As a result, the new portfolio now reflects increasing fundamental attractiveness of companies that earn the lion's share of their profits in the U.S. The objective of the fund remains the same -- offering quality exposure to investors seeking to stay invested in the broad market. The high quality stocks seek safety and protection against volatility in turbulent times and thus, outperform in a crumbling market (see: all the Total U.S. Market ETFs here ).

Overall, the Barron's 400 Index and ETF seeks to take advantage of the improving U.S. economy with a heavy tilt toward the cyclical sectors and increased focus on small cap stocks.

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BARRONS-400 ETF (BFOR): ETF Research Reports

SPDR-SP 500 TR (SPY): ETF Research Reports

SPDR-DJ IND AVG (DIA): ETF Research Reports

GRUBHUB INC (GRUB): Free Stock Analysis Report

LENDINGTREE INC (TREE): Free Stock Analysis Report

BLUE NILE INC (NILE): Free Stock Analysis Report

WALGREENS BAI (WBA): Free Stock Analysis Report

JPMORGAN CHASE (JPM): Free Stock Analysis Report

VERIZON COMM (VZ): Free Stock Analysis Report

ALTRIA GROUP (MO): Free Stock Analysis Report

UTD PARCEL SRVC (UPS): Free Stock Analysis Report

FACEBOOK INC-A (FB): Free Stock Analysis Report

WAL-MART STORES (WMT): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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