As part of our ongoing coverage of innovation in the exchange-traded fund (ETF) space, Wealth Advisor Managing Editor Scott Martin recently interviewed David M. Dabora, Founder, Managing Partner, and Portfolio Manager at Alpha Blue Capital Management, to discuss the ABCS ETF.
Dabora, with nearly 30 years of experience managing small to mid-cap stocks, explains the core philosophy and strategy behind ABCS. The fund combines active stock picking with thoughtful portfolio construction, using Vanguard CRSP equity ETFs for both tactical and strategic purposes. This approach aims to attract taxable individual accounts, family offices, and institutions.
Dabora emphasizes the importance of a tactical approach in managing small and mid-cap stocks. He notes that the number of investable stocks has decreased over the past 20 years, reducing opportunities in the micro-cap area.
Despite the market focus on large-cap stocks, some mid-cap stocks have also increased in value. The ABCS fund targets the lower 30% of the market, combining passive elements with active strategy to add alpha.1
This strategy aims to provide better consistency and a broader allocation to the market’s lower segment. With a portfolio of 100 stocks and four Vanguard passive CRSP equity index ETFs,2 the fund offers exposure to nearly 1,500 stocks on a look-through basis.
The ABCS fund is benchmarked against the Bloomberg US 2500 Index,3 but Alpha Blue Capital also shows performance of the 2500 index, the mid index, and the S&P 500 index. Advisors can follow the fund’s performance and characteristics through these benchmarks.
The fund’s weighted-average market cap is more than $10 billion, Dabora adds, which demonstrates the quality and stability of the companies included. This contrasts with the S&P 500’s weighted-average market cap of $700 billion to $800 billion, indicating that the ABCS fund targets high-quality companies that are underrepresented in many portfolios.
Dabora acknowledges the significant effort and resources required to manage this fund. However, he believes in the process of screening the universe and identifying attributes such as value, growth, sound fundamentals, quality, and business momentum. These attributes have historically added alpha over time, and Dabora is confident that the strategy will continue to do so.
Noting the growing market for direct indexing, which is on its way to reaching $1 trillion, and the ongoing appeal of ETFs and mutual funds, Dabora highlights the ABCS funds’ positioning to capture the best of both those worlds, aiming to provide alpha, diversification, and targeted valuation within the small- to mid-cap space—all with a fee structure that is attractive even compared to direct indexing.
He emphasizes the flexibility and additional expertise that the ABCS fund is designed to bring to a portfolio, noting that integrating this fund can be especially beneficial when individual stocks need more time to mature. The small-cap story often involves stocks that require patience and careful management, and the ABCS fund aims to address this need effectively.
Those who favor active management in the small- and mid-cap space will find value in the ABCS strategy, he believes. The fund addresses market inefficiencies and aims to add alpha. For investors who prefer a concentrated strategy, the ABCS fund covers the entire bottom 30% of the market while still allowing room to accommodate individual preferences. ABCS provides flexibility for both passive investors and those looking to tilt their portfolios toward growth or value by using the Vanguard ETFs included in the fund.
Alpha Blue Capital’s family office connection is another feature that Dabora highlights. While many family offices are moving toward private equity, his team remains committed to public equities. The ABCS strategy reflects a subset of their broader family office hedge fund strategy, which spans the full spectrum and international exposure.
This long-term, generational approach underscores their confidence in the public markets and the specific strategy of the ABCS fund. The ETF’s strategy is built to last, with significant expertise applied throughout economic cycles.
Dabora stresses that Alpha Blue Capital’s commitment to the ABCS strategy is strong, with ongoing capital investment and dedicated management. He contrasts this approach with the public market trend where few portfolio managers have significant assets in their own funds.
For advisors interested in ABCS, he suggests considering a range of 5% to 10% equity exposure as a starting point. As advisors become more comfortable with the strategy and see its results, this allocation could increase to 30% or more. He points out that the ABCS fund complements existing small- and mid-cap ETFs, even those not from Vanguard. The strategy integrates well with various indexes, making it a versatile addition to a portfolio.
The ABCS fund is built to last and designed to adapt to market changes. With a minimum market cap of $500 million for liquidity and the capacity to manage well more than $1 billion, the strategy is scalable and poised for growth.
The fund’s unique combination of active and passive strategies, its focus on the lower 30% of the market, and its approach to diversification make it a compelling option for those looking to enhance their portfolios. Dabora’s extensive experience and the tactical approach of the fund are key factors that contribute to its appeal.
With a focus on adding alpha, providing diversification, and leveraging tactical expertise, the ABCS ETF stands out as a valuable tool in the small- to mid-cap market. By integrating the ABCS fund into their portfolios, advisors can offer their clients a robust investment option that addresses the challenges and opportunities within that space.
The fund’s approach to managing risk and capturing growth potential aligns well with the goals of many investors seeking to optimize their returns while maintaining a diversified portfolio. By focusing on active stock-picking, tactical portfolio management, and leveraging Vanguard CRSP equity ETFs, the fund provides a comprehensive investment solution for achieving alpha and diversification.
1 Alpha: A measure of performance on a risk-adjusted basis. Alpha takes the volatility (price risk) of a fund and compares its risk-adjusted performance to a benchmark index. The excess return of the fund relative to the return of the benchmark is a fund’s alpha.
2 The CRSP Mid Cap Index targets U.S. companies that fall between the top 70%-85% of investable market capitalization.
3 The Bloomberg US 2500 Index is a float market-cap-weighted benchmark of the lower 2500 in capitalization of the Bloomberg US 3000 Index (B3000).
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Additional Resources
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Disclosures
The fund’s investment objectives, risks, charges and expenses must be considered carefully before investing. The statutory prospectus and prospectus contain this and other important information about the investment company, and it may be obtained by calling 215-882-9983 or visiting https://alphabluecapitalabcs.com. Read it carefully before investing.
Investments involve risk. Principal loss is possible. The Fund is actively-managed and is subject to the risk that the strategy may not produce the intended results. The Fund is new and has a limited operating history to evaluate.
Growth-Style Investing Risk. Stocks of companies the Sub-Adviser believes are fast-growing may trade at a higher multiple of current earnings than other stocks. If the Sub-Adviser’s assessment of a company’s prospects for earnings growth, or how other investors will value the company’s earnings growth, is incorrect, the price of the stock may fall or may never reach the value the Sub-Adviser has placed on it. Value-Style Investing Risk. Value stocks can perform differently from the market as a whole and from other types of stocks. Value stocks may be purchased based upon the Sub-Adviser’s belief that the stock may be out of favor. Value investing seeks to identify stocks that have depressed valuations, based upon a number of factors which are thought to be temporary in nature, and to sell them at superior profits should their prices rise in response to resolution of the issues which caused the valuation of the stock to be depressed. Foreign Securities Risk. Investments in non-U.S. securities involve risks that may not be present with investments in U.S. securities. For example, investments in non-U.S. securities may be subject to risk of loss due to foreign currency fluctuations or to political or economic instability. Non-Diversification Risk. Because the Fund is non-diversified, it may be more sensitive to economic, business, political or other changes affecting individual issuers or investments than a diversified fund, which may result in greater fluctuation in the value of the Fund’s Shares and greater risk of loss. Business Development Company (BDC) Risk. BDCs generally invest in less mature U.S. private companies or thinly traded U.S. public companies which involve greater risk than well-established publicly traded companies. Real Estate Investment Risk. The Fund’s investments in real estate companies and companies related to the real estate industry subject the Fund to risks associated with the direct ownership of real estate securities. New Fund Risk. The Fund is a recently organized management investment company with no operating history. As a result, prospective investors have no track record or history on which to base their investment decision. There can be no assurance that the Fund will grow to or maintain an economically viable size. Small-Capitalization Companies Risk. Investing in securities of small-capitalization companies involves greater risk than customarily is associated with investing in larger, more established companies.
ETFs may trade at a premium or discount to their net asset value. Redemptions are limited and often brokerage commissions are charged on each trade which may reduce returns.
The fund may invest in medium-capitalization companies which may be subject to greater risks than large company stocks due to limited resources and inventory as well as more sensitivity to adverse market conditions.
The Fund is distributed by Quasar Distributors, LLC. The Fund investment advisor is Empowered Funds, LLC, which is doing business as EA Advisers. The Fund’s sub-advisor is Alpha Blue Capital Management LP.
