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Quarter	Letter Date	Fund Name	QTD	YTD	Tickers	Themes	Quick Take

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Baron First Principles ETF 2026 Q2 Investor Letter | Buyside Digest

Back to Fund Profile (Baron First Principles ETF)

Primary Source Intelligence • Q2 2026 Letter Analysis

Baron First Principles ETF Quarterly Analysis

Buyside Digest is not affiliated with, and does not endorse, Baron First Principles ETF. This analysis is provided for institutional research purposes only and is not investment advice.

Fund Returns

QTD+7.01%

YTD-2.1%

Annualized-9.19%

Positioning StanceBULLISH

Market CapAll Cap

Digest Analysis

Quick Take

"Depressed valuations across high-retention software and data platforms offer compelling entry points as accelerating corporate share buybacks and robust recurring pricing power decouple resilient fundamental earnings growth from market-wide artificial intelligence disruption."

Executive Summary

Baron First Principles ETF generated a net of fees return of 7.01% in the second quarter of 2026, rebounding from a slow start to the year but trailing the Russell 3000 Growth Index benchmark gain of 17.05%. Year-to-date, the fund has returned -2.10% net of fees compared to 5.88% for the benchmark. Relative quarterly performance was challenged by broader market anxieties regarding potential generative artificial intelligence disruption across subscription software and information services holdings, alongside an underexposure to surging data center and hardware infrastructure names. Cash and cash equivalents stood at 0.1% of net assets, leaving the portfolio near fully invested without reported financial leverage at the fund level. The investment team's macroeconomic outlook projects annualized inflation to settle near historical 3% to 4% levels, with interest rates closely approximating inflation. The managers anticipate that lower interest rates over the next 12 to 18 months will spur strategic acquisitions and public-to-private transactions backed by sideline private equity dry powder. Portfolio exposure remains organized around secular growth categories: disruptive growth businesses representing 50.6% of net assets, financial data and platforms at 18.8%, core growth compounders at 16.7%, and real or irreplaceable physical assets accounting for 13.8%. Portfolio activity reflected opportunistic buying in high-quality software, information services, and consumer franchises as several holdings initiated or accelerated share repurchases. The fund fully exited its position in syndicated research provider Gartner due to moderating fundamental top-line expansion. Key individual contributors included Space Exploration Technologies Corp. following its successful initial public offering, Tesla, and Hyatt Hotels Corporation, while Guidewire Software, FIGS, and Gartner served as primary performance detractors during the quarter.

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Institutional Meta Strategy

Meta Strategy Gauges

Algorithmic conviction, macroeconomic posture, and risk appetite signals extracted from this quarterly letter with qualitative explanations.

Signal Matrix

Market Conviction

88%

CautiousHigh

High Conviction (88%)

A high conviction score is demonstrated by an exceptionally concentrated portfolio where the top 10 holdings account for 72.7% of net assets across only 24 total investments. The management team holds outsized high-conviction positions such as SpaceX at 32.2% and Tesla at 12.4%, while actively scaling depressed positions across core compounders.

Growth Outlook

78%

BearishBullish

Bullish (78%)

The managers present a distinctly constructive market outlook, anticipating that historic inflation levels below 4% and declining interest rates will create an ideal operating environment for high-growth businesses. They view current equity market skepticism regarding enterprise software and data platforms as an attractive cyclical disconnect rather than a structural impairment.

Risk Appetite

82%

DefensiveAggressive

Aggressive (82%)

Risk appetite remains aggressive, with cash held at a negligible 0.1% of net assets and over 50% of the portfolio invested in high-beta disruptive growth assets. The fund maintains high single-stock concentration and zero hedging instruments or defensive sector exposure.

Capital Deployment

65%

De-riskingDeploying

Net Neutral (65%)

Capital deployment sits moderately positive as cash reserves remain effectively zero and the managers selectively added capital to high-conviction holdings during the sell-off. Total net deployment was balanced by the complete divestment of Gartner and valuation-driven portfolio rebalancing.

Forward Guidance

78%

CautiousExpansionary

Expansionary (78%)

Forward guidance indicates an active deployment bias focused on increasing position sizes in information services, consumer, and software compounders where valuations remain historically depressed. Management explicitly notes expanding several holdings following recent accelerated corporate share repurchases.

Language Signal

80%

BearishBullish

Bullish (80%)

The letter's language is heavily dominated by directional bullish terminology, emphasizing terms like pricing power, cash flow, significant upside, market mispricing, and high returns on invested capital. Bearish phrasing is largely limited to describing transient market fears and unjustified factor sell-offs.

Perceived Risk

42%

Low RiskElevated

Moderate Risk (42%)

Perceived macro risk is moderate, as management views broader market concerns over inflation, Middle East conflicts, and interest rates as largely dissipating or manageable. The primary highlighted risk is factor-driven valuation compression stemming from premature artificial intelligence disruption fears rather than fundamental operational deterioration.

Opportunity Density

75%

ScarceAbundant

Abundant (75%)

Opportunity density is perceived as selective but highly rich within the fund's core growth universe, as market overreactions to artificial intelligence have generated deeply discounted valuation multiples across high-retention software and data platforms. The managers highlight multiple avenues of return across their pipeline of 24 holdings.

Time Horizon

82%

Short-TermLong-Term

Decade+ (82%)

Management emphasizes a multi-year horizon focused on businesses capable of doubling earnings and free cash flow over a four-to-five-year timeframe. The fund's willingness to absorb short-term factor volatility and multiple compression reinforces an institutional long-duration posture.