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| Quarter | Letter Date | Fund Name | QTD | YTD | Tickers | Themes | Quick Take |
|---|---|---|---|---|---|---|---|
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"Depressed valuation multiples across mission-critical software, consumer franchises, and physical assets ignore durable unit economics, robust pricing power, and aggressive corporate share repurchases."
Baron First Principles ETF posted a net decline of 3.99% for the third quarter of 2026, lagging the Russell 3000 Growth Index benchmark return of 0.45%, and bringing year-to-date performance to -6.01% net of fees. The portfolio experienced broad-based pressure within capital-intensive disruptive technology and rate-sensitive consumer categories. Declines were primarily led by market concerns surrounding massive artificial intelligence infrastructure capital expenditures at Tesla and private holding Space Exploration Technologies Corp. (SpaceX), alongside macroeconomic headwinds from elevated interest rates and persistent inflation that pressured premium footwear, lodging, and gaming allocations. Cash and equivalents were maintained at 1.1% of net assets, preserving near-full investment across 21 concentrated holdings. The investment team maintains that macroeconomic inflation will track near its historical 3% to 4% annualized range, with benchmark interest rates matching inflation. This backdrop is anticipated to favor businesses compounding top-line growth at rates exceeding nominal gross domestic product. Strategic exposure is organized across four distinct categories: high-growth disruptive investments (56.2% of net assets), data-driven recurring financial platforms (18.8%), mature double-digit core growth compounders (13.5%), and irreplaceable physical assets trading at steep discounts to replacement cost (10.4%). The fund remains structurally overweight Consumer Discretionary at 27.0%, Communication Services, and Financials, while holding zero exposure to cyclical, commodity-sensitive energy, materials, utilities, or consumer staples. Negative quarterly performance was partially counterbalanced by resilient cloud software and financial data platforms benefiting from AI integration rather than suffering disintermediation. Key positive contributors included healthcare apparel leader FIGS, e-commerce platform Shopify, investment intelligence provider Morningstar, and workflow data engine FactSet Research Systems. Management emphasizes that several top holdings trade at cyclical trough valuation multiples despite generating expanding free cash flow, prompting extensive corporate share buyback activity and establishing potential strategic acquisition appeal.
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