Baron First Principles ETF | Q3 2026

Baron First Principles ETF (the Fund) had a tough third quarter, declining 3.99% (NAV) and trailing the Russell 3000 Growth Index (the Benchmark), which increased 0.45%. The quarter was hurt by concerns about increased capital spending on chips for AI usage and whether companies would eventually see a return on those investments. As a result, Space Exploration Technologies Corp. (SpaceX) and Tesla, Inc. saw their shares decline in the quarter. In addition, continued concerns about higher interest rates and inflation, and their impact on consumer spending levels, hurt many of our consumer stocks. These included Birkenstock Holding plc, On Holding AG, Red Rock Resorts, Inc., and Hyatt Hotels Corporation.

These declines were partially offset by stronger performance in many of our software companies, whose fundamentals remained quite strong despite continued concerns that AI could disintermediate a meaningful part of their business. Quarterly stock strength was seen in companies such as Guidewire Software, Inc., Morningstar, Inc., and FactSet Research Systems Inc. These companies continue to grow at strong rates, adding new enterprises to their platforms with existing customers spending more on new products, as AI helps them innovate and introduce new tools that benefit their clients. Their clients rely on this software to operate their businesses and face very high switching costs, so none of these companies have experienced increasing churn rates. In fact, Guidewire indicated that its recent churn has been below historical trough levels despite the introduction of AI, a sign that its software is deeply embedded in customers’ workflows and that customers cannot operate without access to the platform.

Despite the year-to-date underperformance, we continue to see opportunities throughout the portfolio. We believe many of our holdings are being ignored by investors despite strong growth prospects and returns on invested capital. As a result, many are trading at trough multiples or even lower, which we believe is irrational given the growth and cash flow they are generating. Many of these management teams are implementing larger share buyback programs, and we believe some of our investments remain prime takeover candidates for private equity or strategic buyers, given their valuations and continued strong growth prospects.

Our portfolio companies continue to maintain strong balance sheets, with many operating below their targeted leverage levels, giving them the capacity to borrow and buy back more stock should they choose.

When we see these share purchases, it gives us further confidence in our investment theses for these growth businesses and reinforces our belief that valuations remain attractive. We continue to keep the portfolio focused while being cognizant that positions are appropriately sized for risk in this concentrated Fund.

We believe this combination of strong recurring revenue growth, well-positioned balance sheets, and attractive valuations offers multiple avenues for potential returns. As a result, we continue to view the portfolio as compelling, with a favorable risk/reward profile.

We also believe these businesses have strong competitive advantages, underpenetrated growth opportunities ahead of them, and robust balance sheets to finance that growth.

In the near term, we continue to believe that inflation will remain at or below its historical range of 3% to 4% annualized, with interest rates approximating the rate of inflation, as has generally been the case since World War II. We believe that is a favorable environment for businesses growing significantly faster than inflation and faster than the 5% nominal annualized growth rate of the U.S. economy last year, according to the Bureau of Economic Analysis.

We continue to believe the Fund should generate significant excess returns over time with less market risk. This is due to the portfolio being balanced across four groups of businesses:

• High-growth disruptive investments (56% of net assets) that can potentially generate revenue growth of 20% to 30%.
• Financials businesses (19%) that include data-driven providers of financial information with recurring revenue and earnings, given how embedded their products are in customers’ workflows.
• Core double-digit revenue growers (13%) that are more mature in their lifecycle and tend to generate earnings growth while using excess cash for dividend increases, share buybacks, and additional investment to accelerate growth further.
• Real, irreplaceable assets (10%) that trade at significant discounts to replacement cost and could attract private equity or strategic buyers.

* Individual weights may not sum to displayed total due to rounding.
Sources: Baron Capital, FTSE Russell, and FactSet PA.
Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk. Past performances is not a guarantee of future results.

Premium footwear brand Birkenstock declined 24.7% in the third quarter, detracting 65 bps from performance. Macroeconomic concerns and broader weakness across the footwear industry weighed on shares, with investors selling the category regardless of company-specific execution. Despite the share price decline, fundamentals remain strong. Fiscal third-quarter revenue rose 15% year-over-year in constant currency, with double-digit growth across every region and channel, and management raised its full-year revenue outlook. The company continues to expand its store base and direct-to-consumer business while managing wholesale supply to protect brand scarcity. We believe the market is mispricing Birkenstock and retain strong conviction in its durable brand equity and long-term earnings power.

Global sportswear brand On fell 16.4% in the third quarter and detracted 33 bps from performance. The decline was due to an increased promotional environment across the industry which hurt sales of its running sneakers specifically in wholesale stores as the company held back on sell-through to stores in order not to have to discount its product and hurt the brand. However, the company’s direct-to-consumer business remains quite strong and accelerated in the quarter to almost 35% growth. We believe this is a better indicator of the strength of the brand and a good forward indicator for its business. Management continues to expect to grow revenue at a high teens CAGR over the next three years through an increase in owned retail stores both domestically and abroad, which should help accelerate apparel sales, new sports such as soccer and golf, and innovation of existing franchises through its new LightSpray technology. We believe this could result in the company growing revenue at a 20% rate with earnings growing faster as margins expand. We believe the company’s recent $1 billion stock authorization combined with recent insider purchases by the two co-CEOs are good indicators that the stock remains attractive and the company has a long runway for growth.

Shares of Las Vegas Locals casino operator Red Rock Resorts decreased 23.5% in the third quarter and hurt performance by 72 bps as investors grew concerned that higher interest rates, inflation, and oil prices could slow market growth. However, despite ongoing construction disruption, the market continues to grow at a low-single-digit rate on an adjusted basis. Red Rock is gaining market share through ongoing property renovations while generating strong returns on invested capital. The company is deploying its significant cash flow into additional property investments to support future growth. Red Rock also maintains a strong balance sheet, which should improve further as new expansions come online through the remainder of 2026 and into 2027, supporting an acceleration in growth next year. The stock currently trades at a trough multiple, which we believe should expand as investors see growth reaccelerate.

These declines were partially offset by stronger performance in our recurring revenue software companies, whose businesses continued to grow in the quarter despite rising adoption of AI, as the technology is helping these companies accelerate growth instead of taking share from them.

Property and casualty (P&C) insurance software vendor Guidewire increased 15.9% in the third quarter and contributed 31 bps to performance. The company continues to win new insurance companies to its cloud platform after a multi-year transition period while churn rates are now below historically trough levels despite continued concerns about AI displacement. We believe that cloud will be the sole path forward, with annual recurring revenue (ARR) benefiting from new customer wins and migrations of the existing customer base to the company’s InsuranceSuite Cloud. We also expect the company to shift R&D resources to product development from infrastructure investment, which should help drive cross-sales into its sticky installed base and potentially accelerate ARR over time. We are encouraged by Guidewire’s subscription gross margin expansion, which improved by 600 bps in its most recently reported quarter. We believe Guidewire can become the critical software vendor for the global P&C insurance industry, capturing 30% to 50% of its $15 billion to $30 billion total addressable market while generating margins above 40%.

Shares of FactSet, a leading provider of investment management tools, increased 17.8% and helped performance by 47 bps in the quarter. The increase was due to subsiding industry-wide AI fears as the company continues to win large deals and upgrade existing customers with new AI products. This is giving the company enhanced pricing power and helping margins and cash flow while accelerating share buybacks. They had one of their best quarters of new sales ever and indicated they are benefiting from AI through revenue enhancements, pricing uptakes, and cost containments instead of being hurt by it. However, despite these strong results, the stock’s valuation continues to contract. While we believe it’s currently impossible to disprove the negative AI case, we believe the company’s moat around trust, brand, and distribution is deeper than most investors realize. FactSet is deeply embedded in customer workflows, making them a logical partner through which many customers will leverage AI in a highly regulated end-market. As a result, we believe their ability to both normalize and consolidate vast amounts of data is underappreciated. We retain our belief that FactSet is an attractive company due to its large addressable market, consistent execution on both new product development and financial results with robust free cash flow generation.

FIGS, Inc., a direct-to-consumer health care apparel brand, contributed to performance following a strong second quarter. Net revenue grew 28.8% year-over-year, driven by higher order volumes and average order value. Growth was broad-based, with scrubwear revenue up 26.5%, non-scrubwear up 40.3%, and international sales up 67%. Active customers increased 13% to approximately 3.1 million, while revenue per active customer reached a record high. Profitability also improved, with adjusted EBITDA margin expanding 570 bps to 18.6%, reflecting full-price selling, lower returns, and expense leverage. Management raised its full-year revenue growth outlook to approximately 20% from the 14% to 16% range. We retain strong conviction in FIGS' business model and the company's ability to gain market share in the attractive global health care apparel industry.

Shopify Inc., a leading commerce platform for merchants of all sizes, contributed to performance. Second-quarter results marked another quarter of exceptional execution, with gross merchandise volume (GMV) rising 32% year-over-year to $116 billion and revenue increasing 34%. This represented the fifth consecutive quarter of 30%-plus growth across GMV, revenue, gross profit, operating income, and free cash flow. Merchant solutions revenue grew 37% year-over-year on higher payments penetration, while operating income increased 68% and free cash flow margin expanded to 18% from 16%. Growth was broad-based across merchant sizes, geographies, and channels, with business-to-business GMV up 76% and offline GMV up 32%. Third-quarter guidance for low-30% revenue growth and further operating expense leverage exceeded expectations. We retain conviction in Shopify as a durable compounder and believe its two decades of proprietary merchant and buyer data position the company as a key beneficiary as commerce shifts toward AI-driven discovery and agentic checkout.

Shares of Morningstar, Inc., a leading provider of independent investment research, data, and analytics, contributed to performance during the quarter. The company's results were solid, with revenue and earnings exceeding expectations, organic revenue growth of 6.8%, and continued share repurchases. The larger driver of the outperformance was market-driven: the overhang that had weighed on the shares earlier in the year, reflecting concerns about the potential for AI to disrupt data and research businesses, eased over the quarter, and investors renewed their appreciation for the quality and durability of Morningstar's franchises. We continue to view Morningstar as a collection of high-quality, hard-to-replicate data businesses with durable growth, and we retain our conviction and remain long-term holders.

Space Exploration Technologies Corp. develops and launches advanced rockets, satellites, and spacecraft, with the long-term goal of making humanity multi-planetary. Shares rose as SpaceX reported its first public-company results, with revenue nearly doubling year-over-year and losses narrowing sharply on high incremental margins. Growth was driven by rapidly scaling, multibillion-dollar compute-hosting deals with AI leaders, including Anthropic and Google, alongside continued Starlink momentum. Management guided to a robust $100 billion annualized revenue run rate by year-end 2026 and up to five times more compute exiting 2027, well above Street expectations. SpaceX also closed its acquisition of Cursor, a premier enterprise AI-powered coding platform, accelerated product development with Grok Bot and more advanced Grok models, and progressed Starship toward full reusability. We believe these developments, alongside a faster-than-expected AI infrastructure buildout, uniquely position SpaceX at the center of the most important secular trends in AI and space.

Tesla, Inc. manufactures electric vehicles, solar products, and energy storage solutions and develops real-world AI technologies. Shares fell as record second-quarter revenue and deliveries were overshadowed by near-term profit pressure from increased investment in key opportunities across autonomy, robotics, and AI chips. As Tesla funds this ambitious multi-year investment cycle, investors are also seeking clearer evidence of robotaxi scaling. We see momentum across the business, with improving automotive demand and accelerating Full Self-Driving (FSD) adoption. The active base reached a record 1.48 million, up 56% year-over-year, with 55% of North American deliveries now including FSD. Unsupervised robotaxi miles are compounding rapidly, with an impeccable safety record across more than one million miles. Cybercab production is ramping, and given the importance of scaling robotaxis safely, we believe Tesla is right to take a deliberate approach to execution. The next-generation AI5 inference chip will also play a central role in the Optimus program. Together, these developments reinforce the robust long-term physical AI opportunity, despite a lengthy path to realizing it.

Global hotelier Hyatt Hotels Corporation detracted from performance as investors grew concerned that higher oil prices, interest rates, and inflation could pressure consumers and travel budgets. However, consumer spending remains resilient, particularly on travel and experiences. Hyatt continues to grow units at a mid-single-digit rate, while revenue per available room is accelerating from low- to mid-single-digit growth. We expect this to support margin and cash flow expansion, generating capital to reinvest in the business, pursue accretive tuck-in acquisitions, and increase share repurchases. Hyatt’s strong balance sheet provides additional flexibility to fund growth or allocate more capital to buybacks if management believes the stock price does not reflect its underlying value. The stock continues to trade at a significant discount to peers despite a similar mix of fee-for-service business. We believe this discount should narrow as investors see continued growth in the business.

We are steadfast in our commitment to long-term investing in competitively advantaged, growth businesses. We run a balanced portfolio of less correlated businesses in an effort to help reduce portfolio risk. We believe this portfolio strategy is an effective way to mitigate risk and increase the purchasing power of your savings. While there will always be market volatility, we believe we can reduce that volatility via this portfolio due to its balanced nature.

As of September 30, 2026, the Fund owned 21 investments. We believe these companies share several qualities: strong long-term sales growth and margins, and the potential to double earnings and cash flow over the next four to five years. Many generate recurring revenue with low churn, which gives them greater visibility into future growth and meaningful pricing power. Many are also reinvesting aggressively to accelerate growth further. That spending weighs on current margins, but we believe it should earn strong returns on invested capital and drive faster growth in the years ahead.

While focused, the Fund is diversified by sector. As of September 30, 2026, approximately 90% of net assets were invested in Communication Services, Consumer Discretionary, and Financials, each overweight by double-digit percentage points relative to the Benchmark. The Fund’s weightings differ significantly from those of the Benchmark, which is why its active share exceeds 96%. For example, the Fund is heavily weighted to Consumer Discretionary businesses, with 27.0% of its net assets in the sector versus 7.3% for the Benchmark. The Fund has no exposure to Energy, Materials, Consumer Staples, or Utilities. We believe companies in these sectors can be cyclical, tied to commodity prices, and/or have little if any competitive advantage. The Fund also has lower exposure to Health Care stocks, at 1.7% versus 6.4% for the Benchmark. The performance of many Health Care stocks can change quickly due to exogenous events or binary outcomes (e.g., biotechnology and pharmaceuticals), so we tend to limit exposure to these stocks in this focused portfolio. In Health Care, we invest in competitively advantaged companies that are leaders in their industries, such as IDEXX Laboratories, Inc., the leading provider of diagnostics to the veterinary industry. IDEXX has benefited from the increase in pet ownership during the COVID pandemic, especially as those pets age. The Fund is further diversified by investments in businesses at different stages of growth and development.

Disruptive Growth firms accounted for 56.2% of the Fund’s net assets. On current metrics, these businesses may appear expensive; however, we think they will continue to grow significantly and, if we are correct, they have the potential to generate exceptional returns over time. Examples of these companies include electric vehicle leader Tesla, Inc., commercial satellite and launch company, Space Exploration Technologies Corp., and audio streaming service provider Spotify Technology S.A. These companies all have large underpenetrated addressable markets and are well financed with significant equity stakes by these founder-led companies, giving us further conviction in our investment.

Financials investments accounted for 18.8% of the Fund’s net assets. These businesses generate strong recurring earnings through subscriptions and premiums that generate highly predictable earnings and cash flow. These businesses use cash flows to continue to invest in new products and services, while returning capital to shareholders through share buybacks and dividends. These companies include Arch Capital Group Ltd., FactSet Research Systems Inc., and MSCI Inc.

Core Growth investments, steady growers that continually invest in their businesses for growth and return excess cash-flow to shareholders, represented 13.5% of net assets. An example would be FIGS, Inc., one of the largest providers of scrubs and other attire to health care workers. The company continues to add new customers and increase the level of spending per customer as they add new articles of clothing and open new stores both domestically and abroad. This has allowed them to grow their addressable market and improve client retention and cash flow. FIGS continues to invest its cash flow in its business to accelerate growth further, which we believe should generate strong returns over time.

Companies that own what we believe are Real/Irreplaceable Assets represent 10.4% of net assets. Upscale lodging brand Hyatt Hotels Corporation and Red Rock Resorts, Inc., the largest player in the Las Vegas Locals casino gaming market, are examples of companies we believe possess meaningful brand equity and barriers to entry that equate to pricing power over time.

As of September 30, 2026, the Fund’s top 10 holdings represented 78.4% of net assets. We have a long history of investing in many of these businesses across the Firm and believe they continue to offer significant appreciation potential, although we cannot guarantee that will be the case.

The top five positions in the portfolio, Space Exploration Technologies Corp., Tesla, Inc., FIGS, Inc., MSCI Inc., and Shopify Inc., all have, in our view, significant competitive advantages due to strong brand awareness, technologically superior industry expertise, or exclusive data that is integral to their operations. We think these businesses cannot be easily duplicated and have large market opportunities to penetrate further, which enhances their potential for superior earnings growth and shareholder returns.

Thank you for investing in Baron First Principles ETF. We continue to work hard to justify your confidence and trust in our stewardship of your family’s hard-earned savings. We also continue to try to provide you with information we would like to have if our roles were reversed. This is so you can make an informed judgment about whether the Fund remains an appropriate investment for your family.

Sincerely,