Vince Chen CBOE Interview: Small Cap Investing with Abacus FCF Small Cap Leaders ETF (ABLS) - Avoiding Zombie Companies

In this CBOE “3 Questions in 3 Minutes” interview, portfolio manager Vince Chen discusses critical issues in traditional small cap investing and introduces the Abacus FCF Small Cap Leaders ETF (ABLS). Chen addresses the profitability crisis affecting broad small cap indices.

The Small Cap Profitability Challenge

Chen highlights a significant issue with the Russell 2000 Index: “As of the end of 2024 in Russell 2000 Index, over 40% of companies are unprofitable in terms of net income.” He further notes that “About 25% of companies are considered ‘zombie’: which operating income for last year is not enough to cover debt interest payments.”

Despite these challenges, Chen recognizes the underlying opportunity in small caps, noting their historical superior returns relative to large caps and diversification benefits.

The ABLS Approach

Chen explains ABLS’s methodology: “Abacus FCF Small Cap Leaders ETF (ABLS) tackles this challenge head-on. We believe in the power of small caps, but only when you focus on the profitable ones.”

The strategy uses rigorous FCF-ROIC screening: “ABLS invests exclusively in the most profitable small-cap companies, rigorously screened for their Free Cash Flow Return on Invested Capital.”

Chen details the selection model: “Our proprietary Abacus FCF Leaders Model incorporates four key alpha drivers: Prudent Capex, Low Accruals, High Cash Flow Margins, and Strong Asset Turnover.”

Implementation and Applications

ABLS delivers a concentrated portfolio of 50 profitable US small-cap companies selected through the FCF Leaders Model.

For financial advisors, Chen notes that ABLS “offers a rules-based approach to access small-cap exposure, while mitigating the undesirable risks from zombie” companies.

For institutional investors, the strategy provides “a targeted, repeatable strategy that complements existing large cap equity allocations for diversification and growth.”

Chen’s CBOE interview demonstrates his systematic approach to small cap investing, focusing on profitable companies while avoiding the risks associated with unprofitable or financially distressed small cap companies.