Alpha Vee: Get Systematic Exposure To Smaller Stocks

(Alpha Vee) The term “SMID” is a contraction of “small and mid caps." The listed companies with small and medium-sized capitalizations.  There is no universal scale for classifying small and medium-sized capitalizations. In this case the Alpha Vee Top 5 Sector SMID Equity and Treasury Bond research model seek exposure to the $300M to $5B universe.

SMID caps are generally less covered by analysts, less liquid, and generally more volatile in the short and medium term than large caps. However, as they are less mature typically, SMID caps could offer more attractive earnings growth potential.

In addition, share price depends frequently on their own growth potential, SMID caps can be better shielded from macroeconomic risks provided they are not too exposed to the global market, that is, that their revenue is not generated abroad. For all these reasons SMID caps offer attractive advantages in terms of diversification for equity portfolios.

Risk Management is accomplished top down: Market Risk -> Sector Risk and finally Selection Risk.  The market risk management is accomplished by variable allocation to a bond index (iShares 7-10yr Treasury), based on a proprietary fundamental momentum signal of the U.S. equity market.  The index at any time can dynamically adjust to holding a single bond position (1 ETF), just an equity position (50 securities) or a combination of both (51 positions) based on the market signal.

The universe is segmented by sector.  Each sector is separately evaluated through a fundamental momentum metric that capture the fundamental factors specific to each individual sector. The Top 5 sectors most likely to accelerate are systematically chosen.

Equity selection is done though a combination factor based scores. The 50 stocks are chosen from the combined Top 5 sectors and weighted based on the sector weights. The market risk management is accomplished by dynamic allocation to a bond index (iShares 7-10yr Trsy / IEF), based on a proprietary fundamental signal of the U.S. equity markets. The index is rebalanced and reconstituted quarterly.

Want a closer look at the Alpha Vee SMID approach? The research process starts with a look at our snapshot of the firm's models.


More Articles