Markets are dominated by large-cap equities, leaving financial advisors in search of differentiated exposure. An opportunity might be found in the Alpha Blue Capital US Small-Mid Cap Dynamic ETF (ticker: ABCS). Designed with a unique blend of active stock selection and passive exchange-traded fund (ETF) exposure, ABCS targets the bottom of the market—excluding microcaps—while leveraging the efficiency of the ETF wrapper to minimize realized gains.
The strategy combines active stock selection with tactical allocation to Vanguard ETFs, particularly the CRSP small- and mid-cap indices. This blend provides a strategic overlay that allows for flexibility and efficiency in managing portfolio risk and opportunity.
In an interview with The Wealth Advisor’s Scott Martin, David Dabora, Founder and Managing Partner at Alpha Blue, discussed the philosophy behind ABCS, its structural advantages, and how it might fit within a broader investment strategy.
A Focus on Small- and Mid-Cap Stocks
For investors primarily exposed to large-cap equities, ABCS presents a compelling opportunity to diversify. “We’re focused on the bottom 30% of the market,” Dabora explains, noting that many financial advisors and investors maintain an overweight position in large caps, particularly the S&P 500.
By focusing on small- and mid-cap companies, ABCS seeks to capitalize on market inefficiencies that are more pronounced in those spaces. “Our goal obviously is to beat the 2,500 index, a small-mid index,” Dabora says, adding that smaller companies often provide potential alpha opportunities not as readily available in larger markets.
The strategy might hold particular appeal for investors who recognize that tomorrow’s market leaders frequently emerge from the small- and mid-cap universe. While mega-cap tech companies dominate headlines, their growth started through smaller market cap stages. ABCS provides exposure to companies in these earlier growth phases, potentially capturing value before broader market recognition drives valuations higher. Additionally, the segment offers diversification benefits through reduced correlation with large-cap indices, particularly during market cycles when smaller companies demonstrate relative strength.
Quality Matters: A Selective Approach
While some small-cap indices are weighted heavily toward unprofitable companies, ABCS takes a different approach. Dabora explains that Alpha Blue establishes a market cap floor of $500 million for the strategy’s holdings, noting that while many smaller companies exist in the market, they often lack the quality metrics Alpha Blue requires. He points out a significant contrast with conventional indices—approximately 40% of Russell 2000 companies operate without profits, while ABCS aims to keep its unprofitable holdings below 10%.
The quality focus provides advisors with small-mid cap exposure without taking on the excessive risk represented by unprofitable companies that dominate some passive small-cap indices, striking a balance between growth potential and fundamental business quality.
Navigating Market Cycles with Tactical Adjustments
ABCS has the flexibility to adjust allocations based on economic conditions, a key differentiator for the strategy. This dynamic approach allows it to shift weightings between small- and mid-cap segments as market conditions evolve, rather than maintaining rigid allocations regardless of valuation or economic factors.
“The great thing about being exposed to the small space is we can also be tactically more driven toward small and value when the recession hits,” Dabora says.
He notes that ABCS’s focus on quality across its 100 stock positions gives it a strong chance to outperform. Currently, allocation is approximately 60% mid-cap and 40% small cap, with an emphasis on companies with stronger profitability and better balance sheets. Dabora adds that through its first year, the strategy has delivered lower volatility than its benchmark while seeking to generate alpha—a combination he describes as “a winning solution.”
The Active-Passive Hybrid Advantage
Unlike purely passive small-cap ETFs, ABCS balances active selection with systematic exposure to CRSP indices. “Relative to the 2,500 index, the active share is 80%,” Dabora explains. The combined methodology results in a portfolio with approximately 100 actively selected stocks complemented by exposure to about 1,700 holdings through Vanguard’s Crisp index ETFs. Despite incorporating passive elements, the strategy maintains a high active share.
The hybrid structure allows financial advisors to use ABCS as either a stand-alone small-mid core holding or as a satellite position within a larger portfolio. For advisors seeking to fine-tune their small- and mid-cap allocations, the strategy offers both comprehensive exposure and the flexibility to be combined with other strategies.
ABCS’s ETF wrapper enhances tax efficiency, making the strategy potentially attractive for taxable accounts. Additionally, its active component differentiates it from traditional passive index funds, offering advisors a more refined approach to small- and mid-cap exposure.
A Versatile Tool for Financial Advisors
For financial advisors, ABCS might serve as both a portfolio diversifier and an alpha-generation tool. “We could be a complete solution, or we could be part of a solution,” Dabora says. “That’s what sets this strategy apart.” The ability to adjust passive and active weightings offers flexibility, allowing advisors to tailor exposure based on client preferences and market conditions.
Moreover, ABCS provides transparency through its holdings and methodology, helping advisors make informed allocation decisions. “We’re out there as an active manager saying, ‘Hey, we like the CRSP indexes, we’re using them, and we’re not ashamed of that,’” Dabora emphasizes. “We think that’s an advantage.” By leveraging CRSP indexes as a foundation while applying active management, the fund benefits from a robust, data-driven framework while maintaining the flexibility to capitalize on market inefficiencies.
The fund’s straightforward yet sophisticated approach gives advisors a powerful option for clients seeking diversification beyond large-cap indices, with the potential for enhanced returns and lower volatility than traditional small-cap index funds offer.
A Long-Term Investment Philosophy
As financial advisors seek differentiated strategies to complement large-cap holdings, ABCS presents a compelling option. Combining the advantages of active management with systematic ETF exposure, the strategy provides a balanced approach to small- and mid-cap investing. With a focus on quality stocks and reasonable fees, ABCS stands out as a potential strategic portfolio addition for advisors aiming to enhance diversification and capture growth opportunities beyond the S&P 500.
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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.
