Daily ETF Watch: New Active Small Cap Fund

According to a recent filing, AlphaMark Advisors, an investment advisory firm based in Kentucky, is planning an actively managed small-cap growth ETF that will be launched via ETF Series Solutions’ exemptive relief.

The AlphaMark Actively Managed Small Cap ETF (SMCP) will be able to invest in U.S.-listed securities, including American depositary receipts, that are less than $5 billion in market capitalization; however, the fund is expected to target the smallest of the small-caps, specifically those between $150 million and $2 billion in market capitalization. It can invest up to 30 percent of its portfolio in ADRs, the prospectus said.

AlphaMark will take a “bottom up” approach to target stocks exhibiting consistent growth, earnings and cash flow to arrive at a universe of roughly 150 stocks. The fund managers will then use fundamental analysis to select a portfolio of 25-40 stocks based on return on equity, cash flows relative to capital spending, operating margin relative to the price/sales ratio, and reviews of financial statements, enterprise value and management.

The prospectus notes that the fund may also invest in small-cap ETFs for the sake of market exposure, and during periods when the managers believe that the stocks targeted via their analysis are unlikely to outperform the small-cap segment of the U.S. market.

The fund could exit positions if there are material changes in the company or in the industry the company operates in, or a drop-off in earnings momentum. The ETF could also sell out of an individual security if its portion of the portfolio has grown too large or if its price has become significantly overvalued.

There are no other actively managed ETFs specifically targeting the small-cap growth space, and the largest index-based fund in the space, the iShares Russell 2000 Growth ETF (IWO | A-84), has $6.8 billion in assets under management. The average market capitalization of its components is $2.2 billion, just above the upper end of the range targeted by the planned AlphaMark ETF.

The filing did not include an expense ratio, but it did note that the fund is slated to list on the Nasdaq stock market.