Sal Esposito

Own and build it from the ground up. So that's kind of how I ended up at Zaxx. And it's been 2 years. It's been a great 2 years. Definitely learned a lot. I think I became an ETF expert in like the 3 weeks. I think I knew a good amount about ETFs. But once you kind of get in this ETF world, you're kind of like... Now you're like, I don't really want to leave this world. I think we were really focused on SMAs and the SMA business at UBS. And then when I joined, became an ETF person, it's just now I don't see why anybody would use an SMA unless they were using an index-based tax-managed fund.

Yeah. once you get sucked in the universe of ETFs, you're just kind of in it and all in it. So I want to talk about your ETF lineup. I want to talk about Zaxx as a whole. But before we do that, what do you like to do when you're not working? Any hobbies? Yeah. So I'm a hockey player. I played hockey in college. I played hockey my entire life. I have a 2-year-old daughter who kind of takes up a lot of my time now. I'm going to have a son here in the next month. So kids have been the bane of my existence here for the last few years. I have a golden doodle who's 6 and only seems to be getting younger.

So having him with my toddler running around all day is probably... While working from home has been a fun adventure. And really, I also like to work out and keep my body moving at all times. So you and I have way more in common than... So we're both in the ETF space. We both played hockey all of our lives and in college. I had a daughter first and a son second and we have a golden doodle. Oh, man. That's a little weird. But yeah. Do you still play hockey at all? Because when I put the skates up, I was done. Yeah. So I am playing now. I actually... It's just for fun, really, because my one brother... My one brother played hockey. He didn't play in college, but he's still a fairly competitive hockey

Player. But my youngest brother never really played hockey. He was a football lacrosse guy. And he's playing now. So we play... All three of us play on the same men's league team. So it's really just kind of like a fun thing for me. But it's fun to watch my youngest brother kind of like... He thinks he can like... He's like, oh, if I just do this... I was like, you're never going to be like... Hockey is one of those sports where you got to commit your entire life to being better, to better and better. Because skating is... People don't realize that skating is... Every other sport, you're on your feet. Right. Yeah. It's a great sport. And I'm happy that I chose that. And it's fun. Like I said,

When I put them up, I put them up. And then I played maybe one adult league game and was like, is this really worth it? I don't want to get myself hurt. But it is a great sport. Well, that's... Yeah. Every game I go into it, I was like, all right, I'm just going to kind of... Now that I'm getting up there, 35, I don't want to... Got to stretch before I start skating, or else you never know what's going to happen. Right. Less beers, more stretching. Right. So let's talk about Zacks as a whole. What type of products and services across the gamut, other than just ETFs, does Zacks provide to clients? Yeah. so we actually... Our parent company is Zacks Investment Research. We started in 1978.

Len Zacks started the company. He has a PhD from MIT. He crafted this model where... That looks at earnings estimate revisions, sell-side earnings analyst and their earning surprises. Right. The foundation of it is the Zacks rank. Right. Zacks rank is kind of our research side of the business. And what we did in 92 is we started our investment management firm, which kind of takes the principles of our research, takes our research and kind of crafts strategies. So we started our investment management in 1992. We primarily built our business on SMAs, about $16 billion in assets as of January 1st.

Large majority of it is in our SMA business. We do have three mutual funds. And now we have two ETFs and growing. Yeah. So from looking at both of the ETFs in your lineup, there seems to be this theme of resilience in times of volatility. So why is managing risk and volatility so important? Meaning, what can minimizing volatility or standard deviation mean to an investor over the long term? Yeah. I think it's just positioning yourself for times of turmoil. And Zacks has built... We built our business on quality company names. If you hear our CEO talk about our portfolios, if you hear our client portfolio manager talk about our portfolios, everything revolves around quality and consistency of the companies that we're investing in. So we're not owning the entire market.

We're looking at a subspecies of companies that are quality, know how to manage their balance sheets, and know how to manage money and their bottom lines in times of turmoil. And that's where ZECP specifically, that's kind of what it's focused. That's the whole core competency of the fund. The SMIS portfolio is a little bit different. It's small and mid-caps. You have to be a little bit more nimble when it comes to names. Yeah. So let's talk about ZECP. You have two of them. We're going to talk about both. So ZECP is the earnings consistent portfolio. Can you talk about what the portfolio really is trying to accomplish at its highest level? Yeah. So really, first and foremost, it's meant to be a core piece of any portfolio. It's large-cap core. It's actively traded.

But it's really meant to sit at the core or heart of any client or advisor's portfolios that they put together. It's not going to give you those home runs. But really, what it's trying to do is put you in a number of company names that are consistent, quality, manage their balance sheets effectively throughout multiple market cycles and times of turmoil. So you don't have to worry about that volatility that we were talking about. It's keeping the volatility to a minimum. And it's about 50 to 65 names. So how is the fund screening for opportunities that are meeting this criteria of being fairly recession resilient? Yeah. So I can just explain the process from the top down.

Top 750 largest, most liquid names. That's the universe we're looking at. First piece of the screen, we're looking at a 15-year company operating history. The next piece of it, we're looking for consistent or growing earnings through that operating history and multiple market cycles. And the final piece of it is we're looking at sell-side analysts' earnings estimates for this year and next year. And what that leads to is that 50 to 65 name portfolio. Obviously, it's a quant qual. We run quantitative screens. And then our portfolio management team also looks at the portfolio outcome from the quant and effectively tweaks and makes daily oversight over it.

So what is so important about stability of historic and forecasted EPS? Why is that so important when screening and looking for a company? Yeah. I just think that... you can't ever predict the future, but you can certainly know a lot about a company by looking at its earnings per share and its balance sheet. there's a lot of companies out there that are trading, and we've seen it, this market is kind of abnormal, right? We have a lot of companies trading like, their PEs are a lot higher than they probably should be. And how many people are actually looking under the hood when they're putting their portfolios together, specific stocks, right?

You want to work with a manager that kind of does that, as their bread and butter. And that's kind of how, like I said, all of our portfolio, all of our portfolio construction and all of our SMAs and our funds kind of start with that quality piece. So when we put together these 50 or 60 names, how does the weighting decision happen when you start to put these holdings together inside the ETF portfolio? Are they market cap weighted? Are they based on rank? Or is it equal weight? How are you weighting it? Yeah. So they're fairly, we're trying to keep the correlation fairly close to, the S&P, right? If you look at the holdings, right, Apple obviously is the top holding because

It fits the criteria of the portfolio. It's a little underweight versus the S&P 500. Hence, that just kind of gives you an idea of how we position our names in our portfolios because we're not trying to kind of move with the markets, right? We're trying to stay close to the market, but we're also trying to make sure that the companies we're invested in aren't overly, we're not taking an overly big bet on them in case, the market does, that particular company doesn't, perform. Right. So how often then are you looking at a rebalance schedule? Is it an active portfolio where it can rebalance at any time? Or is there like a more consistent rebalance schedule?

Yeah. So it is actively managed. So we try to keep the portfolio turnover in this particular portfolio around 20% on an annual basis. I would say that we probably trade it every two weeks, if not two weeks, a month, like at the end of the month. Got it. So let's hit on SMIZ while we're here. SMIZ. So it's basically similar, I think, in wording, but the objective is different. So can you talk about the objective of SMIZ? Yeah. So our small and mid-cap ETF is kind of a little bit different in the fact that, we're not screening for earnings consistency, but we're still looking at earnings estimate revisions and market anomalies. Right. So small and mid-cap space, I think, provides a

Massive opportunity for active management in the fact that there are a lot of small cap companies that aren't profitable. There are a lot of small cap companies, mid-cap companies that are in the indexes that really are dragging them down. Right. obviously, this year with the MAG7, you can make the argument for large cap too. But with small and mid-cap companies, there's also a lot of opportunity for market anomalies. And I think since that's what Zax has focused on for the better part of 50 years across even just both our parent company and Zax Investment Management, it provides opportunities being in an ETF. Right. We do have SMAs that are similar.

We have a small and mid-cap SMA. We kind of got together, looked at our portfolios, kind of said, these are great portfolios. They have 100% turnover in them. A lot of advisor pushback on 100% turnover in a separately managed account. We came to the conclusion that ETFs, tax-efficient wrapper, can kind of turn over the portfolio as much as we want. we're not trading the trade, but we certainly, in the small and mid-cap space, the opportunities come fast and furious versus the large cap because they're not covered. They're not as covered. So what is the difference in the number of names in SMIS versus the other portfolio? So SMIS has about right now 198 names in it. So it's fairly, it's not concentrated,

Which really kind of puts you at a, I think, an advantage to, because you're not running into capacity constraints because some of these companies are small, right? I've worked in the past with funds that, run into that capacity constraint because they're investing in companies that really, can't, you're pushing them up asset class, a couple billion dollars pushes them up at different asset class. So there's not really any holdings in the portfolio that are above to 2.1%, right? So it's fairly evenly distributed. So let's talk, I want to talk about ZaxPlus. Can you just say what it is and then really how it works?

Yeah. So ZaxPlus is a model portfolio solution that actually takes ETFs and separately managed accounts and wraps them into one holistic solution for an advisor or a client, right? So think core ETFs make up the core of the portfolio. So most of the, active ETFs, since we have active ETFs that we offer, those are the core of the portfolio. So most of your trading is done inside of the ETFs, which right off the bat makes it tax efficient. We've created SMAs around these ETFs to kind of pair with them that give you access to single stock securities. So most, a lot of clients, a lot of advisors I talk to, clients still want to have that conversation around the water cooler with their friends about who they hold, what they hold. So that kind of solves that problem

Because you're getting that, you're getting that single stock security exposure. But the third piece of this is that they're model portfolios. So you can go up and down the risk spectrum. We have fixed income. We leverage third party bond ETFs for fixed income to give your client or, if you're an advisor, give you an opportunity to scale your business, but also for a little bit more sophisticated client who's looking for a little bit extra compared to just a run in the mill ETF model. Yeah, no, you and I were talking before we got on. I think it's a brilliant idea. So if I'm an advisor who wants to utilize Zax Plus, how do I go about not only finding information about it, but how do I actually utilize it and implement it? And how are the, SMAs

And the model portfolios delivered? Sure. Yeah. So, we're available at all, on Schwab, Schwab and Fidelity. We can definitely run portfolios through there. We can have a conversation. We are capable of doing model delivery as well for advisors. That's something we make ourselves available to. Because ultimately, the one piece of this that I didn't mention is that we aren't charging a strategist fee for these as well. So effectively, you're getting, a Zax UMA for no manager fee or no model strategist fee. So the capabilities of delivering the model is something we are capable of doing. And yeah, generally, we would run the discretion on the portfolios, as an SMA. But, we're happy to do a model delivery

As well. No, again, great idea. Last question I have on the... I think you just hit on this, but I want to just make it clear. So if you're wrapping your core ETF holdings, right? You're wrapping these tilted sleeves, I think is what you call them, around them. So are you actively managing the tilted sleeves or are those kind of passive in nature? Yeah. So the model... So we actually run this as two distinct products. So we have seven models that we've funded and composites running on them. And then we also have a custom solution where advisors can come to us and tell us, hey, we have a client or we have a subset of clients we want to create something for. Can you put something together for us? So we do have the custom capability as well.

And that kind of gives us right... That gives you a couple different avenues for an advisor. And I think that the way you want to think about these if you're a financial advisor is that I have model portfolios, ETF model portfolios that I'm kind of familiar with. I understand, right? I know how I'm scaling my business with them. This is almost... That's kind of why I call it plus. It's kind of taking a step to a little bit more sophistication for a client that might want to have exposure to single stock securities. And you don't have to go down the road of pulling in three or four different managers doing three or four different things, right? We are primarily a domestic equity shop.

Most of the tilts are run that have single stock exposures are domestic equity, right? Our international sleeve is a model comprised of third-party country-specific ETFs. So we know our bread and butter is domestic equities. And that's how we're running our SMA sleeves as well. And those... They're concentrated SMAs. So we're not giving you exposure to 700 names. The portfolios, the model portfolios range from about 47 holdings to 120. No. So last question here, if you're not using Zax Plus, right? And I'm an RIA. I've already have my model portfolio set. And you're just selling the opportunity to add ZECP or SMIS into a portfolio.

Where are you putting these in an overall model portfolio construction? I'd assume ZECP is probably aligned with large cap equity exposure. Yeah. I think that ZECP... And I've kind of... We're going to be coming up on a three-year track record here in August. I think the place for ZECP can coexist with a SPY. It's just giving you a little bit more of a hedge on the downside protection. I believe that the ETF itself has performed better when the market has been down. I'm by no means a bear. But certainly, I know the fund acts and is positioned better for the downside because of the quality names in the portfolio. So it could be a large cap sleeve or a core holding in someone's portfolio. But it can also coexist with an index-based ETF like a SPY and give you that a little bit of

A hedge on the downside. And would SMIS be a little bit different where you might just want to hold it as your mid-cap, small to mid-cap exposure instead of maybe pairing it against or pairing it with like a VO or a VB? Yeah. I think that... And I kind of say this a lot. I think that portfolio construction when it comes to small and mid-caps is a little bit... I think a lot of people don't really kind of go past the indexes when the reality of the fact is that's where the most opportunity for alpha exists is in small and mid-caps, right? The large cap space is covered to wazoo, right? There's so many analysts, but the anomalies occur in the small and mid-cap companies.

And having a portfolio that's active and a portfolio team that is looking at this daily and trading it throughout the year gives you a little bit more of an advantage versus just putting your clients in a small and mid-cap index-based fund. Well, Sal, I really appreciate you joining me today. But before I let you go, where can people learn more about you? Where can people learn more about Zaxx and ZaxxE. ZaxxE.com? Yeah. you can visit ZaxxE.com or reach out to ETFproducts at Zaxx.com. That's the best way to reach me and my team. We're happy to have a conversation. We have wholesalers located throughout the entire country as well. But if you reach out to our email address, ETFproducts at Zaxx.com, that would be the first place to start.

I will again, Sal. Thanks again for joining me. Thank you so much for having me. Thank you. Thank you.