The Barron’s 400 Index closed a solid third quarter on Monday, September 30, gaining 9.87% for the period, handily surpassing the performance of the overall U.S. stock market, as measured by the Dow Jones U.S. Total Stock Market Index, which gained 5.65%. For the year, also through Monday’s close, B400 was up 27.63%, beating the overall market benchmark’s 19.44%, an outperformance of more than 800 basis points. The table below compares B400’s third quarter performance against other broad or widely followed U.S. benchmarks. The furthest right column on the table displays each benchmark’s performance relative to B400, year to date, through the end of the quarter.
| Index | Q3 2013 | YTD | B400 YTD Comparison (bps) |
| Barron’s 400 | 9.87 | 27.63 | – |
| Dow Jones U.S. Total Stock Market | 5.65 | 19.44 | -819 bps |
| Dow Jones Industrial Average | 1.48 | 15.46 | -1,217 bps |
| S&P 500 Index | 4.69 | 17.91 | -972 bps |
| Nasdaq Composite | 10.82 | 24.90 | -273 bps |
| Russell 3000 | 5.83 | 19.52 | -811 bps |
Performance numbers are price returns through Sept. 30, 2013. Source: The Wall Street Journal.
A Closer Look at B400’s Financial Sector Stocks
As we mentioned in last week’s newsletter highlighting the major changes to B400 following its semi-annual rebalance, which became effective on September 20, financials had the biggest gain among all sectors represented in the index with a net gain of 18 companies, or 4.5 percentage points. This makes it the second largest sector in the index, with 18.25% of all selections, behind consumer discretionary, which accounts for 20% of all selections, the maximum allowed by index rules. A closer look at some of the underlying fundamentals among B400 financials is useful in understanding why B400 increased the allocation to the sector, particularly when comparing these stocks against the overall index. While the table below illustrates a few average fundamental metrics for all 73 financials compared to all 400 companies in the index, a few data points are worth highlighting. First, financials look cheaper as a group than the actual index, with an average 12-month trailing P/E of 16.1 and a forward P/E of 14.1 compared to B400’s 21.6 and 17.9, respectively. Second, two metrics where you would expect the financial sub-set to have better numbers than the overall index, came in as expected: price to book ratio averaged 4.1 vs. 6.3 for B400 and average dividend yield was 2.14 compared to 1.42 for the overall index. Understandable given that financials typically trade closer to book value and tend to be steadier dividend payers than companies in most other sectors. Lastly, despite having a slightly lower average market cap ($16.9 billion) than B400 ($17.8 billion), the financial selections in the index tend to be less volatile, as measured by their average beta to the S&P 500 of 1.09 compared to B400’s beta to SPX of 1.15. All values mentioned above and displayed below are, by the way, based on the day the new B400 selection was made on September 17.
| Average | B400 Financials | B400 Overall |
| EPS 3Yr Chg. | 24.8 | 33.1 |
| Trailing P/E | 16.1 | 21.6 |
| Forward PE | 14.1 | 17.9 |
| Earnings Yield | 12.3 | 7.2 |
| Price/Book | 4.1 | 6.3 |
| ROE | 22.3 | 36.0 |
| Op. Margin | 38.4 | 22.8 |
| Dividend Yield | 2.14 | 1.42 |
| Market Cap | $16.9 B | $17.8 B |
| Beta to SPX | 1.09 | 1.15 |
Also upon closer inspection, investors will notice that many of the financials found in B400 are very different from those found in the broad market benchmarks, particularly those indexes with a large cap bent. Below we have broken down the 12 sub-industries represented in B400’s financial sector. Those who want to take a close look at the actual companies themselves may do so by visiting our B400 Breakdown page (click here).
| Financial Sub-Industry | Representation in B400 |
| Regional Banks | 5.00% |
| Finance/Rental/Leasing | 3.25% |
| Investment Managers | 3.00% |
| Financial Publishing/Services | 1.25% |
| Investment Banks/Brokers | 1.00% |
| Major Banks | 0.75% |
| Property/Casualty Insurance | 0.75% |
| Life/Health Insurance | 0.75% |
| Specialty Insurance | 0.75% |
| Insurance Brokers/Services | 0.75% |
| Savings Banks | 0.50% |
| Financial Conglomerates | 0.50% |
Barron’s 400 ETF Milestone
Congratulations are in order to the Barron’s 400 ETF (NYSE Arca: BFOR), which is part of the ALPS ETF Trust and follows, of course, our B400, for crossing the $100 million mark in assets under management last week. Pretty remarkable if we may say so, considering the fund was launched less than four months ago during the beginning of the summer, a typically slow season for asset gathering and product launches. Not to mention all the taper talk and the looming (now real) brouhaha over our nation’s budget and the increase in the debt ceiling. Investors interested in learning more about BFOR may visit the fund’s web site at www.barrons400etf.com.
