Credit: Shutterstock photoAs sectors and market categories begin to diverge, an actively managed small-cap exchange traded fund could focus on potential alpha generating opportunities ahead.
On the upcoming webcast this Tuesday, Active & Passive in a Simple Small-Cap ETF Discipline , Michael Simon, Founder, President and Chief Investment Officer of AlphaMark, will discuss ways to tap into potential opportunities through the small-cap segment of the market.
Actively managed small-cap managers have more consistently outperformed their benchmarks over the years. For instance, over the first quarter, 80% of active core small-cap funds beat their benchmark and 68% of value managers outperformed, CNBC reported.
"With high quality continuing to outperform year-to-date, small cap active managers have benefited given their high quality bias - the opposite of large-cap managers," Savita Subramanian BofAML's equity and quant strategist said in a note.
For example, as of 03/31/2016, the AlphaMark Actively Managed Small Cap ETF (NasdaqGM: SMCP ) rose 1.3% year-to-date while the Russell 2000 Index dipped 0.2%.
SMCP filled a hole in the AlphaMark fund line up after the firm terminated the AlphaMark Small Cap Growth Fund (AMSCX) back in April 2015.
The active small-cap ETF focuses on companies with a market-cap of between $150 million and $2 billion. While the main focus of the ETF is U.S. small-caps, SMCP can also hold up to 30% of net assets in foreign small-cap equity securities traded on a U.S. exchange as ADRs.
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Currently, SMCP includes about a 90.4% weight in North American equities, along with 2.6% in emerging Africa/Middle East and 7.0% emerging Asia.
The small-cap growth strategy also implements a number of factors when selecting component holdings. Once SMCP has achieved alpha, the strategy may revert back to the Russell 2000. If the portfolio outperforms the benchmark index by 5%, the portfolio will go back to its starting universe of Russell 2000 stocks. Then a phantom portfolio will be created from the ETF's positions and managed the same way as a live portfolio, including buys and sells. Because SMCP is a concentrated fund with high beta stocks, invariably the phantom portfolio's outperformance will revert to the mean. At this point the Russell 2000 Index inside of SMCP will be sold and the phantom portfolio will be bought back into SMCP thereby creating another alpha-generating opportunity.
Components are selected based on reliable cash flow streams and are priced at a level that provides growth opportunity. The initial screen will whittle down the universe of small-cap growth to about 150 stocks and then implement further screens, including market return on equity, sufficiency of cash flow to cover capital spending, operating margin relative to price-to-sales, financial statement review with a focus on true equity value, and enterprise value review and management review, which include factors like insider trading, stock option distributions and share buybacks.
AlphaMark Actively Managed Small Cap ETF
Financial advisors who are interested in learning more about small-cap weighted strategies can register for the Tuesday, April 19 webcast here .
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
This article was provided by our partner Tom Lydon of etftrends.com.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
