Small- and mid-cap stocks offer a frequently overlooked opportunity for advisors seeking new strategies and opportunities in exchange-traded funds (ETFs). A notable example is the Alpha Blue Capital US Small-Mid Cap Dynamic ETF (ticker: ABCS), a pioneering equity fund that integrates an iterative fundamental selection process with the flexibility of investing in small- and mid-cap passive equity index ETFs.
David Dabora, Alpha Blue Capital’s Founder, Managing Partner, and Portfolio Manager, has developed his strategy over more than 30 years. As he explained to Wealth Advisor Managing Editor Scott Martin in a recent interview, ABCS seeks to achieve long-term capital appreciation by uncovering undervalued small- and mid-cap companies that larger institutional investors often miss.
Dabora emphasizes a dual approach in his investment strategy, combining passive and active management. Approximately 35% of the portfolio is allocated to passive investments through Vanguard passive index ETFs. These funds provide broad exposure to the small- and mid-cap market, leveraging the efficient methodologies of Vanguard’s CRSP indexes.1 The remaining 65% of the portfolio is actively managed, focusing on individual stocks that meet specific criteria.
The core of Alpha Blue Capital’s ABCS strategy involves meticulous screening and analysis. With a universe of about 2,500 companies in the small- and mid-cap space, the goal is to identify the top 5% that show potential for significant growth. Dabora and his team screen for value, fundamentals, quality, and positive business momentum. This comprehensive process involves detailed fundamental analysis, including reading financial reports and assessing the intrinsic value of each company.
Dabora’s approach to portfolio management is both dynamic and disciplined. Positions are weighted based on their upside potential and associated risk, with a constant focus on maintaining attractive portfolio characteristics. Stocks are trimmed or sold outright as they approach their target prices, ensuring that the portfolio remains balanced and aligned with its objectives.
One of the key advantages of the ETF structure, according to Dabora, is its tax efficiency. Despite moderate turnover of 30–40% per year, the ETF wrapper seeks to minimize realized gains, making ABCS a tax-optimized option for advisors. This construction allows Alpha Blue to offer its strategy at a competitive expense ratio of 42 basis points, which includes a management fee of 40 basis points.
Dabora has chosen to leverage Vanguard passive index ETFs for the passive portion of the portfolio. These ETFs, based on the CRSP indexes, are known for their efficiency and cost-effectiveness. For example, the Vanguard Mid-Cap ETF2 includes approximately 1,400 stocks and uses a rebalancing methodology that has historically outperformed comparable iShares Russell indexes.
The active share of the ABCS strategy is 80% compared to the Russell 2500 index and 85% compared to the S&P 500. This high level of active management is designed to capture alpha3 by identifying undervalued small- and mid-cap stocks. Year to date, the portfolio has performed well, reflecting the strength and quality of the selected stocks.
The current market environment presents both challenges and opportunities for small- and mid-cap investors. While the broader market, particularly large-cap stocks driven by growth related to artificial intelligence (AI), has seen significant gains, small-cap stocks have lagged. Dabora acknowledges the abnormal market dynamics but remains optimistic about the long-term potential of small- and mid-cap names. Historical valuation differences suggest that small-cap stocks are poised for a comeback, especially as the market cycle evolves.
He is cautious about the impact of AI on small- and mid-cap companies. The technology can be transformative, but its benefits for companies outside major AI players such as Nvidia and Microsoft are yet to be fully realized. Alpha Blue Capital’s strategy involves waiting for concrete evidence of AI’s impact before making speculative investments in this area. Dabora’s focus remains on identifying companies with solid fundamentals and growth potential.
For advisors and broker-dealers, the ABCS ETF offers a compelling opportunity to diversify beyond the S&P 500. Many investors are currently overweight in large-cap stocks, driven by the exceptional performance of a few key companies. By allocating a portion of their portfolios to the bottom 30% of the market, advisors can provide exposure to undervalued companies with significant growth potential.
Dabora emphasizes the importance of a balanced approach, combining passive exposure with active stock selection. This strategy not only provides broad market exposure but also enhances returns through targeted investments in undervalued companies. The result is a portfolio that is both diversified and poised for growth, targeting attractive returns with managed risk.
ETF innovation continues to evolve, offering new opportunities for advisors and their clients. Alpha Blue Capital’s small- and mid-cap strategy exemplifies the potential of combining passive and active management to uncover value in overlooked segments of the market. With a disciplined approach to screening, risk management, and portfolio construction, the ABCS ETF provides a compelling option for advisors and broker-dealers looking to diversify their clients’ portfolios and capture alpha in the small- and mid-cap space.
1 The CRSP model is a strategic, globally diversified series of multi-asset portfolios from Vanguard Advisors that aims to provide investors with long-term financial growth. The model uses a building block approach to market coverage, with the goal of reducing costs and trading through a minimum number of holdings. The CRSP series also seeks to provide greater transparency to underlying exposures. The CRSP Mid Cap Index targets U.S. companies that fall between the top 70%-85% of investable market capitalization.
2 The Vanguard Mid-Cap ETF seeks to track the performance of the CRSP US Mid Cap Index, which measures the investment return of mid-capitalization stocks; provides a convenient way to match the performance of a diversified group of medium-size companies; and follows a passively managed, full-replication approach.
3 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.
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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.
