Zacks Investment Management has launched its second actively managed ETF. The Zacks Small and Mid Cap ETF (SMIZ ) seeks to generate positive risk-adjusted returns by investing in small and mid-cap companies.
The fund uses quantitative screening and qualitative analysis to construct a portfolio of about 150-250 companies. Its holdings are seen as best meeting the criteria for providing risk-adjusted returns and diversification benefits to the Russell 2500.
Head of ETF Products Salvatore Esposito told VettaFi that SMIZ combines the investment strategies of two of the firm’s existing small- and mid-cap separately managed accounts. He clarified, however, that the ETF is neither a conversion nor a clone of these two strategies.
“The strategy is essentially a 50/50 blend of our small- and mid-cap products,” Esposito said. “We’re not chasing high earnings growth. We’re seeking more balanced risk-adjusted performance and diversification.”
A Quantitative and Qualitative Approach
With SMIZ, Zacks uses a proprietary multifactor review of constituents of the Russell 2000 and Russell Mid Cap Indexes. The fund’s managers conduct a daily review of all analyst and estimate revisions.
The factors focus on the percentage of earnings estimate revisions revised upward and the size of the earnings estimate revisions. They also consider where the most accurate or recent earnings estimates are in relation to consensus. The fund’s managers also take the magnitude and frequency of earnings surprises into account in their review.
According to Esposito, this allows the fund to generate alpha.
“There’s more surprise and more earnings estimate revisions with small- and mid-cap names because they have less analysts covering that space,” he said. “There’s more chance of choosing a company that can generate additional alpha than with large-caps.”
For the qualitative piece of the portfolio, the firm’s investment committee team then determines quarterly what the best allocation is to small- and mid-cap stocks.
SMIZ follows the launch of Zacks’ first ETF, the (ZECP ). The fund’s holdings exhibit a track record of moving through recessionary periods with little to minimal impact on aggregate earnings growth.
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