Sal Esposito

Sal Esposito handles distribution for Zacks Investment Management, which is part of the broader Zacks ecosystem founded by Len Zacks (PhD from MIT) in 1978. Before joining Zacks, Sal spent years at UBS where he started as a client service associate, worked his way through fixed income sales and trading, helped build the firm's robo-advisor offering, and eventually became a portfolio consultant helping advisors construct portfolios across separately managed accounts, mutual funds, and ETFs. He left UBS to build the ETF distribution channel at Zacks from the ground up.

On this episode, recorded live at the Exchange ETF conference, Sal talks with Brad about two Zacks ETFs: ZECP (Earnings Consistent Portfolio) and SMIZ (Small MidCap Core ETF), along with a unique advisor service called Zacks Plus.

The Zacks Rank Foundation

Everything at Zacks starts with the Zacks Rank, a model created by Len Zacks that focuses on earnings estimate revisions and earnings surprises from sell-side analysts. The underlying research from his MIT thesis showed that stocks with positive earnings estimate revisions tend to outperform, and this insight has been the foundation of both the research business (which sells data and ratings to investors) and the investment management business (which launched in 1992 and now manages about $16 billion in assets). The majority of that $16 billion sits in SMAs, with three mutual funds and a growing ETF lineup.

Sal emphasizes that quality and consistency are the common threads across everything Zacks does. Their investment philosophy centers on owning companies that manage their balance sheets effectively through multiple market cycles, rather than chasing momentum or trying to time the market.

ZECP: The Earnings Consistent Portfolio

ZECP is designed to be a core large cap equity holding. The screening process starts with the top 750 largest, most liquid US stocks. First filter: a 15-year company operating history. Second: consistent or growing earnings through that operating history across multiple market cycles. Third: positive sell-side analyst earnings estimates for the current year and next year. What comes out the other end is a portfolio of 50-65 names that have demonstrated the ability to grow earnings reliably through good times and bad.

The fund is actively managed with a quant-qual blend. Quantitative screens generate the initial portfolio, then the portfolio management team provides daily oversight and makes adjustments. Turnover runs about 20% annually, with trading typically happening every two weeks or at month-end. Position weighting tries to stay fairly close to the S&P 500 in correlation while slightly underweighting the largest names. Apple, for example, is the top holding but at a slightly lower weight than in the S&P, reflecting Zacks' conviction-based approach to avoiding outsized bets on any single company.

SMIZ: Small and MidCap Active Management

SMIZ takes a different approach from ZECP. Rather than screening for earnings consistency (which is harder to find in smaller companies), SMIZ focuses on earnings estimate revisions and market anomalies in the small and mid-cap space. Sal makes the case that this is where active management adds the most value because smaller companies have significantly less analyst coverage, creating more mispricing opportunities.

The portfolio holds roughly 198 names, much broader than ZECP, which helps manage the capacity constraints inherent in small-cap investing. Turnover is significantly higher, around 100% annually, which was one of the reasons Zacks chose the ETF wrapper. Their existing small-mid cap SMAs had similar turnover, but advisors pushed back on 100% turnover in a taxable account. The ETF's tax-efficient structure solves that problem by allowing in-kind creation and redemption, making the higher turnover tax-invisible to shareholders. Sal positions SMIZ as an opportunity for advisors who want active management in the small and mid-cap space without the tax drag that historically came with it.

Zacks Plus: The Advisor Toolkit

Beyond the ETFs, Sal highlights Zacks Plus, a service designed specifically for financial advisors. It provides access to Zacks' research, stock screening tools, and model portfolios, along with the ability to generate client-facing reports branded with the advisor's logo. The idea is to give advisors institutional-grade research tools at a price point that works for an independent practice. Sal notes that this offering has been particularly popular with advisors who run their own models and want a data edge for stock selection but don't want to outsource their entire investment process.

Key Takeaways

• Zacks Investment Management manages about $16 billion, with the majority in SMAs. The research side of the business was founded in 1978 by Len Zacks (MIT PhD) around earnings estimate revision analysis.
• ZECP screens the top 750 US stocks for 15 years of operating history, consistent earnings growth through multiple cycles, and positive forward earnings estimates, producing a 50-65 name portfolio with about 20% annual turnover.
• SMIZ holds roughly 198 small and mid-cap names with about 100% annual turnover. The ETF structure was chosen specifically because advisors pushed back on that turnover level in taxable SMAs.
• Sal left UBS, where he helped build their robo-advisor and worked as a portfolio consultant, to build Zacks' ETF distribution from scratch at a 100-person firm.
• Zacks Plus provides advisors with institutional-grade research tools, stock screening, and client-facing branded reports to support their own investment process.

Listen to the full conversation on Spotify, Apple Podcasts, or YouTube.