Many investors’ top goal is to beat the market, as represented by ultra-popular indexes like the Dow Jones Industrial Average (DIA - ETF report) or the S&P 500 (SPY - ETF report) . In order to help with this goal, a number of ETF issuers have come up with specialized products that either focus on industries or styles, or seek to apply restrictions or screens to broad market indexes, to include only the best stocks.
Barron’s, the popular financial magazine and website, is also looking to help investors to accomplish this difficult task, having released its ‘Barron’s 400 Index’ a few years ago. This benchmark has performed admirably against the likes of the S&P 500 and the DJIA, and the company has now decided to offer up this exposure to investors in ETF form as an investable product (read Active Large Cap ETFs: The Best of Both Worlds?).
The company will be partnering with ALPS in order to deliver the fund to investors, going up against a number of entrenched competitors in the process. The product may be able to compete though, assuming that its interesting methodology—described below-- can keep on delivering solid returns to investors, despite a relatively high cost:
Barron’s 400 ETF (BFOR - ETF report) in Focus
This new ETF looks to track the Barron’s 400 Index, a broad market benchmark that utilizes an equal weighting strategy. The product will charge investors 65 basis points a year in fees and rebalance on a twice-a-year basis.
The 400 stock index is built from the MarketGrader U.S. Coverage Universe which consists of several thousand securities. Companies in this universe are then graded and ranked, while firms that have a market cap below $3 billion or a minimum three-month average dollar-trading volume of $2 million or less are removed.
In terms of the factors that are used to narrow down the stock list, investors should note that about two dozen are looked at in total. These include factors in growth, value, profitability, and cash flow metrics, resulting in a single numerical score which ultimately determines which stocks are selected to the index.
How does it fit in a portfolio?
This ETF could be an interesting fit for investors who want a slightly more active approach, but want to stay invested in the broad markets. The product could also be an intriguing addition for those seeking an equal weight strategy that overlays an equal weight methodology, as this is relatively rare in the ETF world (see Try Value Investing with These Large Cap ETFs).
However, the ETF may not be appropriate for low-cost investors, as the fees on this product are a little steep when compared to other broad market funds. In fact, costs are roughly 10 times what investors see in SPY, so the new ALPS/Barron’s product will definitely have to clear an ‘alpha hurdle’ in order to draw in more investors.
Beyond the likes of SPY and DIA, there are a number of broad market funds that offer up a more fundamental approach to investing in stocks. There are a great deal of these ETFs though, as the space has attracted several issuers who have looked to generate some alpha and capture some market share in the segment.
In particular, there are three ETFs that stand out as potential competitors to the newly launched Barron’s ETF, all of which have a large cap focus. These include the PowerShares Dynamic Large Cap Value ETF (PWV - ETF report) which tracks various fundamentals in order to pick stocks, (SPHQ - ETF report) which looks at ‘high quality’ stocks, and then (RWL - ETF report) which weights by revenues as opposed to market capitalization levels (read Is This a Better Large Cap ETF?).
These three combine to posses about $1 billion in assets and are really only the surface of the extremely competitive space. So, it could be difficult for the Barron’s fund to differentiate itself and standout among such a rich number of formidable competitors.
The Barron’s 400 ETF offers up a new twist on broad stock market investing, combining fundamental factors with an equal weight strategy. However, the cost is a little steep, especially when compared to the cheap index funds out there, but also compared to many of the more ‘active’ products as well.
Given this, the near-term performance will likely be the main determinant for this ETF’s success or failure. Barron’s is a relatively well-known name, and the underlying index has shown some outperformance in the past, so if this can keep up, we could see some decent inflows. If performance flounders, however, then look for this ETF to struggle to gain assets and for investors to favor the ultra-cheap choices in the space instead.
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