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.