Baron Global Durable Advantage ETF | Q3 2026

Baron Global Durable Advantage ETF (the Fund) lost 1.2% (NAV) during the third quarter, compared to the 1.6% gain for the MSCI ACWI Index (the Index), the Fund’s benchmark.

Year to date, the Fund gained 3.2%, compared to the 13.0% gain for the Index.

While a 1.6% gain for the Index may seem uneventful, a great deal was happening beneath the surface, including significant developments in AI, Fed policy, the bond market, and the energy market, along with the usual stream of posts on X and Truth Social.

At the start of the year, if someone had told an investor that instead of two to three Fed rate cuts, we’ll get a hike with another one expected by year end, that a war in Iran will start and the one between Russia and Ukraine will show no signs of slowing down, driving oil prices to around $100 per barrel, and that the 10-year Treasury yield will rise by around 100bps – that investor would probably sell everything and take a vacation and would be precisely wrong, missing the Index’s double-digit gain. Even perfect foresight isn’t enough to predict stock performance, which requires anticipating the marginal buy-side investor’s expectations - what is priced in and what isn’t and the weight or importance investors assign to each piece of information.

The third quarter began with a sell-off in AI built-out-related stocks, as several rumors, news reports, and events converged over a short period of time. These included the collapse of the Situational Awareness hedge fund that had large, leveraged bets on semiconductors and AI infrastructure stocks; rumors that Meta might rent out some of its AI compute (which bears interpreted as weakening internal demand for Meta’s AI); and data showing that open-source models were gaining market share from frontier model companies³. Falling token prices⁴ were attributed to greater competition between the frontier models and the open-source models rather than companies passing price reductions on to customers to stimulate demand. Rumors also suggested that Anthropic and OpenAI’s growth was decelerating as Anthropic’s annual recurring revenue (ARR)⁵ hit $65 billion in July, growing by “only” $18 billion in two months (they added a Texas Instruments in revenues between May and July!).

When it was all said and done, semiconductors, which had grown to 14.0% of the Index, dropped 10.3% in July, semiconductor materials & equipment dropped 25.3%, and electronic components declined 27.7%. First-half darlings such as Micron, SK hynix, Corning, and Lam Research declined anywhere between high 20s and mid-40s percent. AI-buildout related Industrials sub-industries including construction machinery & heavy transportation equipment and heavy electrical equipment also posted double-digit declines. AI heavy markets Taiwan and Korea dropped 5.4% and 17.1%, respectively. Despite these declines, the Index ended July flat, supported by strength in Energy (+12.3%), Financials (+6.4%), and the Magnificent Seven (+4.8%). Microsoft led the Magnificent Seven higher as it recovered alongside software, and Amazon rebounded as its cloud business continued to accelerate.

The AI-buildout sell-off ended abruptly in August, as hyperscalers, neoclouds, and semiconductor companies delivered strong earnings reports. Hyperscalers reported accelerating growth, with cloud revenue run-rate rising 50% year-on-year at a massive scale of $420 billion⁶ rising – not falling – prices, with shorter payback periods and higher ROIs. CoreWeave signed a deal to rent out its six-year-old Ampere GPUs through 2029, while Nebius disclosed it raised the prices of both old and new GPUs as demand continued to strengthen. September was more of the same. NVIDIA reported $96 billion in revenue, with growth accelerating to 106% year-on-year, with a broadening customer base, and a growing content per GW. They also guided to 70% revenue growth for next fiscal year, significantly above expectations telling investors that supply constraints prevented an even higher forecast! Broadcom reported similarly strong results with 86% year-on-year revenue growth, and guided their AI business to double next fiscal year and then double again the year after. And all along, GPU rental prices continued to rise even as token prices continue to fall, suggesting that demand for compute remains robust (Jevon’s paradox playing out)⁷.

As we explained in recent letters, we take a unique approach to ‘GARP’ or quality growth investing. Rather than trying to blend aggressive/early-stage growth companies with value stocks, we aim for the middle and invest only in the highest quality durable compounders. This approach is likely to lag when the Index is driven by either of the extremes, so our struggle to keep pace in the fourth year of a bull market is not terribly surprising. This year, this is also compounded by the widest outperformance of value stocks (as measured by Russell 1000 Value Index) compared to growth stocks (as measured by Russell 1000 Growth Index) since 2022. Over the long term, we believe quality wins – and that a portfolio of the highest quality global leaders, capable of compounding earnings for many years – will outperform. Periods of underperformance, such as this one, create opportunities to buy high-quality companies at a discount.

From a performance attribution standpoint, the Fund underperformed by 279bps in the quarter, driven by 186bps of unfavorable stock selection and 93bps due to sector allocation. Information Technology (IT) was the Fund’s worst sector, responsible for 165bps of underperformance. Not owning Microsoft and Apple accounted for 149bps of that, with the rest attributable to not owning any fast-growing software companies that have been some of the biggest winners this quarter, as their stocks continued recovering from the SaaSPocalypse of early 2026. Industrials was our second worst sector, responsible for another 65bps primarily because aerospace & defense holdings TransDigm and HEICO, saw their valuation multiples contract despite continued strong fundamental performance, as investors are increasingly concerned about the lingering effects of the higher energy prices. Not owning Energy stocks, by far the best sector in the Index this quarter (+14.7%), cost us an additional 46bps. On the other side of the ledger, Health Care was the Fund’s top sector, contributing 31bps to relative results, supported by the recovery in the leading life-sciences tools provider Thermo Fisher Scientific and the continued strength in the drug packaging provider Stevanato, since our purchase earlier this year. Avoiding Utilities and owning senior housing REIT Welltower (Real Estate), contributed 36bps combined to relative results.

From a stock-specific and an absolute performance basis, the Fund had 16 contributors and 26 detractors. NVIDIA, Meta, and CME Group each added at least 50bps, while Thermo Fisher Scientific and Amazon contributed over 30bps each. Gaming-focused advertising platform AppLovin was our largest detractor, costing 60bps, while ASML, TransDigm, and Brookfield detracted between 45 and 47bps each. The declines were all due to a contraction in their valuation multiples, even as fundamentals remain resilient.

We believe AI will transform all industries and businesses over time. At this stage, the biggest beneficiaries are companies that are involved in the AI buildout. In the Fund, we own NVIDIA, Broadcom, Taiwan Semiconductor, Monolithic Power Systems, Amphenol, ASML, Ajinomoto, Atlas Copco, Samsung, and Quanta Services. Next, we own companies that operate AI factories such as the cloud players Amazon and Alphabet; followed by companies that are already benefiting from AI in their core business where it has become good enough to create real world value at scale. Digital advertising is a prime example, as the core businesses of Meta and Google and the advertising segments of Amazon and MercadoLibre all posted strong growth. AppLovin also grew rapidly as improvements to its AI model enhanced ad performance over time.

We believe investors should be focused on the durability of AI-driven growth. Yet, it seems too often they are focused on trying to predict the next air pocket instead. Clearly, at this early stage of the AI S-curve, the range of outcomes for any particular month, quarter or year is wide and depends on a whole host of factors that are hard, if not impossible to predict. Unfortunately, this difficulty doesn’t deter investors who are myopically focused on figuring out the short-term dynamics in the market, from pricing of tokens, to spot prices of GPUs, to Anthropic and OpenAI’s monthly ARR numbers. Then they sell AI-related stocks when the data seems to fall short of “expectations.” Does anyone really believe that in 10 years, the ultimate success of AI will depend on whether Anthropic or OpenAI grew 10% faster or slower in July or August of 2026? As disruptive technologies climb the steep part of their S-curves, the likelihood that the marginal buy-side expectations rise above actual progress from time to time is high, which will lead to air pockets and sell-offs (also known as the technological hype cycle). We therefore believe investors should expect a choppy road ahead. We would be surprised otherwise.

We spend no time trying to predict air pockets. We believe that over the long term, our performance will reflect the compounding growth in the fundamentals of our businesses – therefore we continue to focus on the n – the durability of growth rather than the g, the growth rate, or the e, expectations. To find companies with a large n, we focus on businesses that are leaders in their industries, companies that are unlikely to be disrupted by new technologies or competitors. We seek companies that are adaptable to change, that solve critical problems for their customers. These qualities foster customer loyalty and pricing power, enabling these companies to earn high and durable returns on invested capital.

NVIDIA Corporation is a global leader in accelerated computing designing the semiconductors, software, networking, and systems used to build and deploy AI. Shares rose 14.3% during the quarter, gaining ground despite a broader sell-off in semiconductor stocks. NVIDIA reported another excellent quarter with revenue growth accelerating to over 100% year-on-year at a massive scale of $96 billion, with the company guiding to 70% revenue growth for next fiscal year, far ahead of analyst expectations. Notably, management characterized this outlook as supply-constrained, with customers’ own forecasts pointing to a growth rate of approximately 100% year-on-year. Demand has also broadened, with customers beyond the largest hyperscalers, from sovereign AI and neoclouds to enterprises, now accounting for nearly half of data center revenue and growing faster than hyperscalers (though hyperscalers also continue to grow rapidly). In addition, each new platform captures more revenue per gigawatt as NVIDIA sells CPUs, networking, and inference systems alongside its GPUs and as each generation provides a higher throughput of tokens per MW of power. We retain conviction in NVIDIA as a core long-term holding. We continue to view its rapid innovation velocity, full-stack platform, extreme co-design capabilities, software, eco-system and supply chain management, as durable advantages that support continued growth in earnings power over time as AI adoption diffuses across the economy.

Shares of Meta Platforms, Inc., the owner of Facebook, Instagram, WhatsApp, and Threads, contributed during the quarter, rising 28.8%. Second-quarter results showed the core ad engine is getting stronger: U.S. advertising revenue growth accelerated to 31% as new AI ranking and recommendation models lifted conversions, and Advantage+, its AI-driven ad suite, passed $75 billion in annual revenue run-rate. The bigger catalyst came in September with the launch of Muse, Meta's personal AI agent, which reached No. 1 on the U.S. App Store within days. At its conference, Meta Connect, the company introduced real-time voice, a Mac app with computer use, and commerce partners including Stripe, Shopify, PayPal, Walmart and Best Buy, so that Muse can complete purchases. This further strengthened Meta’s positioning and added new potential avenues for monetization, while also improving its contextual understanding of users, which should further advance Meta’s ability to match the right ad to the right user at the right time. Meta also brought Muse to its smart glasses and to Charm, a new handheld device. We believe current earnings understate Meta's earnings power as it invests ahead of revenue, and we retain strong conviction that its data, compute, distribution and founder leadership will make it a leader in consumer AI. We also believe AI will remain a tailwind for Meta’s core business, helping the company sustain a long duration of growth.

CME Group, Inc. operates the world’s largest and most diversified derivatives marketplace. Shares rose 19.4% during the quarter as global macroeconomic uncertainty and elevated market volatility drove record trading activity. Third quarter average daily volume reached an all-time high for the period of 29.4 million contracts, up 16% from a year earlier. Investor concerns about perpetual futures have eased as the products seem to appeal mainly to retail speculators and pose little competitive threat to the institutional-grade risk management tools CME provides. We continue to own the stock because we believe that CME has durable competitive advantages and is well positioned to benefit from rising adoption of exchange-traded derivatives and periodic volatility spikes.

AppLovin Corporation, an AI-driven advertising platform for mobile apps and e-commerce, detracted from performance during the quarter as shares declined 43.6%. While second quarter revenue grew 53% year-over-year to $1.92 billion and adjusted EBITDA grew 58% at an 84% margin, revenue fell slightly short of consensus expectations. Slower-than-expected improvements to its Axon ad model and delays involving its generative AI video creative tool, along with concerns over intensifying competition from Unity, and several analyst downgrades further pressured the stock. We believe the setback is timing related rather than a sign of a fundamental change in the model. AppLovin opened its self-serve Ads Manager to all advertisers in late June, with the third quarter representing the first full quarter of broad availability and guidance implying continued strong growth. Our conviction in AppLovin’s long-term opportunity remains intact, supported by the model’s performance in gaming, a significant upside optionality in e-commerce, and the company’s durable competitive moats as the leading gaming-focused advertising platform.

ASML Holding N.V. is a Dutch semiconductor equipment company that manufactures lithography machines used to print circuits onto silicon wafers and is the only provider of extreme ultraviolet (EUV) systems needed for the most advanced chips. Shares fell 8.8% during the quarter despite strong underlying business performance. Second quarter sales of €9.3 billion accelerated to 21% year-on-year growth, coming above expectations, while gross margins of 54% also beat guidance. Moreover, management raised its full-year outlook for the second time this year to revenues of €43-45 billion, and the company said it is already close to securing all the EUV orders it needs for 2027, supporting plans for meaningful capacity expansion. Still, shares were caught in the quarter’s broad de-rating of AI hardware and fell further in September when leading AI developers called for a more deliberate pace of frontier-model development, raising questions about how quickly AI spending will translate into chip-factory equipment orders. We retain conviction in ASML as a core long-term holding, viewing its EUV monopoly, with deep order visibility, and a growing installed-base business as durable advantages that support multi-year earnings power.

TransDigm Group Incorporated designs, manufactures, and supplies highly engineered aerospace components, systems, and subsystems used on nearly all commercial and military aircraft worldwide. Shares declined 18.7% as negative sentiment toward the aerospace aftermarket grew, with fuel prices remaining elevated due to the Iran war. We retain long-term conviction in the stock as the company remains a leader in an attractive industry, with secular growth tailwinds driven by expanding global access to travel; pricing power as aerospace after-market parts represent a small fraction of its customers’ cost basis and yet are critical; and robust long-term M&A opportunities in a fragmented industry. Moreover, TransDigm has de-rated to a below-peer multiple despite having what we believe is the industry’s strongest pricing engine, which should support above-peer growth at leading margins even if industry conditions soften. The company has also worked through recent company-specific destocking issues which should support volumes.

The Fund is constructed on a bottom-up basis with the quality of ideas and level of conviction playing the most significant role in determining the size of each investment. Sector and country weights tend to be an outcome of the portfolio construction process and are not meant to indicate a positive or a negative view.

As of September 30, 2026, the top 10 holdings represented 52.2% of the Fund’s net assets, and the top 20 represented 75.5%. We exited the quarter with 39 investments, down from 40 at the end of the second quarter.

IT and Financials represented 51.8% of the Fund, while Consumer Discretionary, Communication Services, Industrials, Health Care, and Real Estate represented another 45.4%, with the remaining 2.8% held in Consumer Staples (Ajinomoto) and cash.

^* Individual weights may not sum to the displayed total due to rounding.

During the third quarter, we initiated a new position in the leading Indian non-bank financial company, Bajaj Finance.

We also took advantage of stock price volatility in the leading derivatives marketplace, CME Group, to add to our position. We got the opportunity to add following the sell-off in the stock earlier in the summer, as a result of investor concerns over emerging competition from crypto-native “perpetual futures,” which we viewed were unjustified.

To finance these purchases, we exited three stub investments: LVMH, INNIO, and Mobility Global (the recent spin-off from S&P Global), which together accounted 0.67% of average assets in the period. We also slightly reduced our existing position in KKR.

During the third quarter, we initiated a new position in Bajaj Finance Limited. Bajaj is India’s largest non-bank financial company, with a loan book of approximately $60 billion spanning consumer durables financing, personal loans, small- and medium-sized enterprise loans, mortgages, and commercial lending, serving approximately 130 million customers across the country. We believe that Bajaj would benefit from a long duration of growth as India’s economy continues to evolve and progress, as its debt markets becomes more mature and as the company’s prudent, data-driven, and anti-cyclical risk-taking enables it to gain share in a growing market over many years while maintaining a conservative balance sheet.

India’s credit market is still at an early stage of development. According to the Reserve Bank of India, household debt is about 46% of GDP, well behind the U.S. at 70% (IMF) and major emerging economies such as China at roughly 59%, Malaysia at 70%, and Thailand at 87%. Even after compounding at over 30% annually for more than a decade, Bajaj’s loan book still represents less than 3% of India’s total credit market. In our view, Bajaj is well positioned to benefit from rising demand for consumer financial services, including mortgages, personal loans, and credit cards.

We believe Bajaj’s data analytics platform is a key competitive advantage. Built on over two decades of proprietary data from lending to first-time borrowers and cross-selling, it underpins strong risk-adjusted underwriting, servicing, and collecting, which drives its high returns on equity. We are encouraged by management’s focus on positioning Bajaj as a “FinAI” company, with AI deployed across underwriting, servicing, and collections to drive both increased operating efficiency as well as incremental loan growth via cross selling and better customer acquisition.

Bajaj also differentiates itself through a “risk-first” strategy, explicitly prioritizing its ambition to be India’s lowest-risk lender over chasing market share at any cost. The company maintains a forward-looking risk framework with dynamic underwriting standards, targeting early-stage delinquency thresholds at just 30% to 40% of broader industry levels. This conservative approach is evidenced by management’s willingness to prune segments, such as deliberately slowing micro, small and medium enterprises growth or existing small-ticket business loans, in order to maintain a resilient balance sheet with superior asset quality across cycles, and a consistent 20% return on equity (ROE). We expect Bajaj to compound earnings at attractive double-digit rates for years to come as the company gains market share in a growing industry, benefiting from secular growth tailwinds.

“The lesson. Stock prices don't always tell you how businesses are doing. They just tell you what you can buy and sell stock for at a given day and a given moment. Not always accurate. In fact, frequently inaccurate. Our business based upon figuring out what a business will be worth in five or 10 years. And buying at a big discount from that level. That's how come we've been so incredibly successful.”
– Ron Baron in an email to the firm’s research staff on October 8, 2026.

As we write this letter, the 10-year Treasury yield is hovering around 5.1%, after briefly rising above 5.3%, and stocks related to the AI buildout are selling-off again. The PHLX Semiconductor Sector Index^TM (SOX) ended the week of October 12 with its eighth consecutive daily decline, its longest losing streak since October 2018. The 15.7% drawdown⁸ has taken it back only to its mid-September levels. Renewed investor fears that the AI buildout is about to hit an air pocket are driving this fresh sell-off, reflected in widening credit default swap spreads (protection against default) and bond yields for companies involved in the buildout.

Will this also prove to be a short-lived correction like the one in July or will this prove to be the air pocket bears have been betting on? What if this is the air pocket? What would be the impact on the AI buildout if capital becomes scarcer and more costly? What would the impact be on our stocks in that scenario?

And so, while we find the near-term incredibly hard to predict, we offer several observations that might be helpful for the Fund’s investors:

• All else being equal, higher rates are a headwind to equities. Future cash flows are discounted to the present using a higher rate; required returns on projects rise as financing them is more costly; and the opportunity cost increases as a risk-free investment now yields higher returns.
• But because the intrinsic value of a business is determined by the spread between the Return on Invested Capital (ROIC) and the Cost of Capital, if the cost of capital rises, having a high and rising ROIC becomes that much more important.
• The Fund holds a collection of the highest quality businesses with high returns on invested capital – these businesses benefit from entrenched competitive positioning, they are resilient to disruptive change, they have pricing power and low financial leverage. We therefore expect their fundamentals (as measured by revenues, earnings or free cash flow) to be resilient in almost all scenarios. As of the end of the third quarter, the Fund’s ROE was 32.8%, compared to 20.7% for the Index. This despite having a significantly lower leverage than the Index (with Debt to Equity of 53% compared to 85.9% for the Index).
• An AI air pocket caused by supply constraints – i.e. slow data-center construction, delays in power availability, costly or unavailable capital, and so on – would serve as a self-correcting mechanism against the possibility of an over-build, reducing the risks of an eventual bubble. We believe that existing data centers with available power would likely become more valuable which should be a tailwind for our cloud providers Amazon, Tencent, and Alphabet as well as to Meta – which together account for 17.2% of the Fund. A large majority of the portfolio is also invested in companies whose stocks have derated as investors rotated into AI stocks. We expect these investments (think S&P Global, CME Group, MSCI, LPL, TransDigm, Hermes, etc.), to serve as a ballast for the portfolio if the reverse were to happen.
• A demand-driven air pocket would likely be more significant. But bear in mind that our businesses’ fundamentals have been accelerating while the Fund’s performance has lagged, making valuations increasingly more attractive. At the end of the third quarter, our companies’ weighted average multiple⁹ was 17.6% below their five-year average.

Each quarter, we break down the Fund’s performance into two components – fundamentals and valuation multiples. Comparing them can offer an insight into prospective stock returns. When fundamentals are revised higher, intrinsic values are expanding. That was the case, once again, in the third quarter even as valuation multiples have declined, suggesting investors are getting more valuable businesses at more attractive prices today, than three months ago.

The Fund’s weighted average multiple declined by 7.8% in the quarter, and it is now down 15.5% year to date. This means that over 100% of the Fund’s quarterly decline was due to multiple contraction (while fundamentals improved), and over 100% of the Fund’s gain year to date is attributable to fundamentals. We believe this bodes well for prospective returns. Weighted average 2026 revenue expectations rose 2.6% during the quarter and 10.9% year to date, while operating income expectations increased 3.5% and 14.4%, respectively¹⁰.

Our goal is to invest in companies with strong and durable competitive advantages, proven track records of successful capital allocation, high returns on invested capital, and high free-cash-flow generation. It is our belief that investing in great businesses at attractive valuations will enable us to earn excess risk-adjusted returns for our shareholders over the long term. We are optimistic about the prospects of the companies in which we are invested and continue to search for new ideas and investment opportunities.

We thank you for your trust and for being our partners on this journey.

Sincerely,