In the crowded exchange-traded fund (ETF) market, Alpha Blue Capital Management’s Small-Mid Cap Dynamic ETF (ticker: ABCS) offers advisors a distinct advantage through its strategic focus on small and mid-cap growth opportunities. By blending active oversight with smart beta methodology, ABCS seeks to unlock untapped alpha in a segment often overlooked yet ripe with potential, aiming to deliver a high-conviction, quality-driven approach tailored for advisors looking to enhance portfolio returns with differentiated exposure.
David Dabora, Founder, Managing Partner, and Portfolio Manager of Alpha Blue, spoke with The Wealth Advisor’s Scott Martin to discuss how ABCS stands out by targeting the bottom 30% of the market, focusing on small and mid-cap stocks with compelling valuations and growth opportunities. Dabora shares insights into the unique approach Alpha Blue takes with ABCS, blending active management with passive tools to enhance performance while mitigating some of the volatility traditionally associated with small-cap stocks.
Why Small- and Mid-Cap? Why Now?
Alpha Blue’s ABCS ETF is built on the belief that the small- and mid-cap segments offer unique potential for alpha, even in a market dominated by large-cap giants. While the S&P 500 has performed strongly in recent years, small- and mid-cap stocks remain an inefficient and less crowded space, ripe for active management and growth opportunities.
“The S&P 500 has produced attractive returns, so there’s been a shrinkage of the small-cap companies, Dabora notes, “but we have found that expanding that universe to small-mid allows for us to provide access to the bottom 30% of the market.” ABCS targets this segment, avoiding micro-caps, which Dabora describes as “a bit broken,” while maintaining the flexibility to invest in companies with market caps as low as $500 million.
With a focus on small- to mid-sized companies from $500 million to $50 billion in market cap, ABCS avoids the extremes of micro-cap volatility, maintaining a weighted average market cap of around $13 billion. This small-mid approach combines value and growth, creating a balanced portfolio with exposure to profitability and quality—key factors in Alpha Blue’s strategy.
By incorporating equity indexes tactically, ABCS seeks to capture this overlooked portion of the market, positioning advisors to harness long-term growth opportunities in a high-quality, actively managed portfolio.
“One of the things you’ll notice is that the fund will be very consistent,” Dabora says.
The Active-Passive Balance: A Hybrid Strategy
Unlike traditional small-cap funds that may lean fully into passive index investing, ABCS incorporates a blend of active stock selection and smart-beta passive ETFs. Dabora highlights that the “inefficiency” in the small- to mid-cap area provides an opportunity for active management to add alpha.
“You can get greater alpha in the small-mid strategy,” he notes. “So, many investors in the small and even the mid area are very focused tactically and even strategically.” This inefficiency, Dabora explains, means advisors can benefit from a strategy that combines a concentrated active approach with the benefits of passive elements to mitigate risk and enhance returns.
The choice to use passive elements within the fund’s structure also complements Alpha Blue’s active selection process. Dabora describes the strategic use of Vanguard’s CRSP index ETFs: “We think they’re better passive vehicles, and we’re using them tactically and strategically.” These ETFs allow the fund to benefit from efficient market exposure while Alpha Blue focuses on high-conviction stock picks, ensuring that ABCS is well-positioned to outperform traditional small- or mid-cap index funds.
Adding Alpha with Quality
For advisors, the appeal of ABCS lies in its robust approach to quality and profitability. Dabora notes that ABCS isn’t just about finding undervalued stocks; it’s about discovering companies with growth potential and strong fundamentals. “We’re value investors that love growth,” he states, underscoring Alpha Blue’s four-tier approach to stock selection that prioritizes value, growth, fundamentals, and quality.
ABCS focuses on selecting quality companies with sustainable cash flows, shareholder-friendly practices (such as dividends and buybacks), and a solid competitive advantage. Dabora acknowledges that the ETF is “bottom-up,” meaning every stock is chosen based on individual merits rather than sector performance.
“We’re not just down and out trying to find cheap value, but there is a time when the economy is moving into recession,” he explains, “there’s a time to buy the cheap value.”
Strategic Allocation: How Advisors Can Use ABCS
Advisors looking to diversify their clients’ equity portfolios may find ABCS an attractive core holding. The ETF provides an efficient entry point into the small-mid sector with its broad-based exposure and tactical adaptability. Dabora believes that advisors should consider overweighting this segment, even recommending a U.S. equity allocation north of 30% in small- to mid-caps.
Dabora points out that the allocation can complement passive indexing strategies, creating a “both-and” approach where advisors can balance low-cost indexing with higher alpha potential.
“It’s pretty easy to go out and buy the S&P 500 index ETF, and that’s the top 80% of the market,” he says, drawing a distinction between large-cap indexing and ABCS’s focus on the bottom 30%. This structure, he explains, gives ABCS room to capture inefficiencies and add value in a way that large-cap funds typically cannot. For those advisors who like to “tinker” and build a more customized portfolio, ABCS is highly adaptable.
“You can manage your own sleeve plus taking in some Alpha Blue, and that’s exciting,” Dabora adds. He encourages advisors to think of ABCS as both a core holding and a flexible component within a larger equity allocation, especially for clients with a higher risk tolerance.
The Tax Efficiency Edge
An added benefit of ABCS is its ETF wrapper, which brings tax efficiency to Alpha Blue’s active strategy. Having come from the institutional world, where many clients were tax-exempt, Dabora sees the tax advantages of the ETF structure as transformative.
“The ETF wrapper is tremendous for active managers the way we manage them actively with the broad diversification,” he says. ABCS can avoid most realized capital gains, a feature that is especially valuable for high-net-worth clients.
Dabora contrasts the tax-efficiency advantage of ETFs with mutual funds, which historically have had higher tax implications for shareholders. Now, with an ETF structure, Alpha Blue can pursue active management without the downside of heavy tax burdens—a clear benefit for advisors working with taxable accounts.
Small- and Mid-Cap Allocation: Not Just for Downturns
While small caps are often viewed as vulnerable in downturns, Dabora challenges this notion, viewing economic pullbacks as potential buying opportunities. He encourages advisors to consider this perspective, particularly as market dynamics shift: “You never know how the market reacts to the anticipation of recession.” He believes that by staying in the market, advisors can take advantage of undervalued opportunities that may arise during periods of volatility.
ABCS ETF’s structure, with both active and passive components, allows the fund to adapt to changing economic conditions while still aiming for consistent returns—a balanced approach is intended to provide long-term growth, even in the face of economic uncertainty.
“The nature of the stock market is there’s so many things going on that drive individual prices of the stocks, and so much of it is outside of the purview of the fundamental analyst or fundamental portfolio manager,” he notes. “But that doesn’t mean that that doesn’t create great opportunities. With both strategies that we’re having in terms of being able to use the passive element, we’re able to use that as a tool.”
ABCS As a Versatile Core Holding for Advisors
For advisors seeking to broaden their clients’ equity exposure, the ABCS ETF offers a unique value proposition. Combining active management with passive, smart-beta elements, the ETF targets the inefficiencies in the small- to mid-cap space to generate alpha. Alpha Blue’s commitment to the fund, along with Dabora’s experience and flexible approach, underscores the value of the ABCS ETF as a core holding within a well-rounded portfolio.
At its core, ABCS is an ETF that leverages the strengths of small- and mid-cap investments to provide advisors with a flexible, diversified, and potentially alpha-generating solution for their clients, offering a compelling, tax-efficient, and tactical opportunity in a largely underserved segment of the market.
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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.
