Many investors rely on a core portfolio built with large-cap stock and bond index funds to accomplish long-term objectives. However, a portfolio of big-name stocks and investment-grade bonds does not necessarily provide the comprehensive diversification that a size and style allocation offers.

This is why investors might want to consider adding small-cap stocks to an otherwise well-diversified portfolio. Small-cap stocks make sense for many investors for two important reasons. From a diversification perspective, small caps help spread (and lessen) overall portfolio risk. More importantly, small-cap stocks often outperform large-cap stocks – even in times of economic turbulence like those often experienced during election years.

Investors looking to add small caps to their portfolios might consider the AlphaMark Actively Managed Small Cap ETF (NASDAQ: SMCP). The ETF offers an opportunity to expand a passive core strategy in pursuit of additional alpha (i.e., higher returns). This is a primary reason to own an actively managed fund.

The AlphaMark Actively Managed Small Cap ETF owns many of the component companies of the Russell 2000 index, which is made up of domestic equity securities of small-cap companies. The fund’s managers, Michael Simon, CFA, CPA and Andrew Becker, use a proprietary methodology to identify companies that they see as the best risk/reward opportunities.

According to Michael Simon, AlphaMark’s President and Chief Investment Officer, the team is “looking for companies with a proven history of consistent growth, sustainable earnings momentum, and the ability to produce a reliable stream of cash flow during all economic cycles.” Simon notes that “when you own the whole index, you get everything – the good, the bad and the ugly. We eliminate most of the chaff because our selection and screening process starts with the top market cap stocks in the Russell 2000.”

These companies typically have stronger balance sheets and higher net operating margins than their peers. This universe of about 400 stocks then goes through AlphaMark’s internal stock screening process.

The fund managers follow a bottom-up investment approach when picking stocks within the identified universe – emphasizing individual stock analysis over macroeconomic factors. They employ a multi-tiered selection process to identify companies with reasonable debt-to-capital ratios, positive earnings momentum, reliable cash flows and a history of meaningful cash profits (EBITDA margins).

The fund seeks to own about 100 stocks, each representing about 1% of the portfolio when the investment is initiated. The objective is to buy appropriately priced stocks that create growth opportunities that the broader index may not be able to achieve.

Another advantage of AlphaMark’s Actively Managed Small Cap ETF is that it can underweight or overweight its allocation to the individual business sectors represented by the index. The fund owns each sector in the Russell 2000 and may allocate as little as 50% or as much as 150% of the index’s weighting to any given sector. “Our ability to underweight or overweight sector allocations lets us make high conviction investments in companies we consider to be the most promising opportunities without being constrained by how it’s represented in the index,” said Simon. He added, “We think this has benefited investors.”

The AlphaMark Actively Managed Small Cap ETF had significantly outperformed the Russell 2000 on a 1-year basis as of May 31, 2024, delivering a 30.31% return compared to the index’s 20.12%. Similar outperformance was achieved over the three-year period as well.

It should be noted that the ETF currently maintains a lower weighting on technology stocks than Russell 2000. The fund has benefitted from overweighting relative to the index in the energy, basic materials and financials sectors.

The fund’s top three holdings (all under 1.5% of the total portfolio) include precision optical manufacturer Fabrinet (NYSE: FN), cryptocurrency and blockchain ecosystem company Marathon Digital (NASDAQ: MARA) and measurement and inspection tool manufacturer Onto Innovation (NASDAQ: ONTO).

Furthermore, this actively managed ETF seeks to deliver higher returns without subjecting shareholders to high fees. The AlphaMark Actively Managed Small Cap ETF, with total assets of approximately $32 million as of May 23, has a 0.90% expense ratio.

For those seeking to create exposure to small-cap stocks or diversify their allocations to the asset class, the AlphaMark Actively Managed Small Cap ETF represents an option that could enhance overall portfolio diversification and potentially deliver incremental investment returns above what an indexed ETF might deliver. Visit https://alphamarkadvisors.com/etf/ for more information about the AlphaMark Actively Managed Small Cap ETF. Standardized fund performance can also be found through the link in addition to more information.

Past performance is not a guarantee of future results. The investment return and the principal value of an investment in the Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data cited. Current month end data is available at 859-957-1803.

Investing involves risk. Principal loss is possible. When the Fund invests in ADRs as a substitute for an investment directly in the Underlying Shares, the Fund is exposed to the risk that the ADRs may not provide a return that corresponds precisely with that of the Underlying Shares. The Fund is non-diversified, meaning it may concentrate its assets in fewer individual holdings than a diversified fund. Therefore, the Fund is more exposed to individual stock volatility than a diversified fund. A Fund that concentrates its investments in the securities of a particular sector area may be more volatile than a fund that invests in a broader range of industries. The Fund invests in foreign securities which involve political, economic and currency risks, greater volatility and differences in accounting methods. These risks are greater for investments in emerging markets. The Fund invests in smaller companies, which involve additional risks such as limited liquidity and greater volatility. REITs may have limited financial resources, may trade less frequently and in limited volume, and may be more volatile than other securities. Investing in investment companies, such as ETFs will subject the Fund to additional expenses of each investment company and risk of owning the underlying securities held by each. ETFs may trade at a premium or discount to their net asset value. ETFs are bought and sold at market price and not individually redeemed from the fund. Brokerage commissions will reduce returns.

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