EA Bridgeway Blue Chip ETF: A Solid Low Fee Active ETF (BBLU) (2024)

Readers who have followed any of my previous ETF and closed-end fund analysis, including my most recent piece AGD: A High Fee Closed-End Fund To Avoid, know that I have a strong bias against high-fee products.

The reason for this is simple: the vast majority of actively managed funds have failed to outperform their passive benchmark over long periods of time. This is especially true of U.S. Large Cap equity funds.

According to Morningstar just 9.3%, 5.5%, and 2.1% of U.S. Large Blend, U.S. Large Value, and U.S. Large Growth funds respectively have outperformed their respective benchmarks over the past 15 years.

I do not believe that active managers are bad stock pickers. Rather, the reason that active funds have underperformed is that the fees charged by active managers represent a significant headwind to overcome. In fact, recent studies have suggested that active funds can beat passive benchmarks if fees are low enough.

The EA Bridgeway Blue Chip ETF (NYSEARCA:BBLU) stands out as an interesting product given the fact that it is actively managed and has a low expense ratio of just 0.15%. The fund has a solid investment management process and BBLU has delivered solid historical performance. For these reasons, I believe BBLU is an attractive way to get active large-cap equity exposure.

ETF Overview

BBLU is an actively managed fund that seeks to provide a long-term total return on capital primarily through capital appreciation, but also some income.

BBLU was formed on October 17, 2022, via a reorganization of a pre-existing mutual fund called the Bridgeway Blue Chip Fund.

Currently, BBLU has ~$127 million in net assets and has a four-person portfolio management team.

Investment Approach

As its name suggests, BBLU invests in blue chip stocks. The fund defines blue chip stocks as stocks issued by the top 150 U.S. companies by market capitalization. BBLU uses a model-driven statistical approach which is further outlined in the fund's summary prospectus:

The Sub-Adviser selects stocks within the blue-chip category using a model-driven statistical approach. The statistical approach was developed utilizing academic theory and incorporates logic, data, and evidence. Securities in the blue-chip category are selected by the proprietary model that primarily uses market capitalization ranking to establish a portfolio with reasonable industry diversification as determined by the Sub-Adviser and excluding any tobacco companies.

This process typically results in a portfolio of approximately 35 securities. At times, however, the Fund may hold more or fewer stocks as a result of corporate actions such as spin-offs or mergers and acquisitions. Although the Fund seeks investments across a number of sectors, from time to time, based on portfolio positioning, the Fund may have significant positions in particular sectors.

The Sub-Adviser's investment process incorporates material environmental, social, and governance ("ESG") information as a consideration in the ongoing assessment of all potential portfolio securities.

I view this approach as a solid way of picking stocks as the use of a statistical-based approach may remove certain human biases in the investment process.

Low Management Fee

BBLU charges an expense ratio of just 0.15%. This fee compares to an average expense ratio for actively managed equity mutual funds of ~0.66% and an average equity ETF expense ratio of ~0.16%.

In addition to having a low expense ratio, 50% of the revenue generated by the sub-advisor Bridgeway Capital Management, LLC is donated to non-profit organizations. This is a highly unusual structure and is very attractive for investors who want to do good things for the community while also generating solid investment returns.

Strong Historical Performance

As part of the reorganization from a mutual fund to an ETF, BBLU has adopted the historical performance record of its predecessor ETF.

As shown by the chart below, BBLU has a solid long-term performance track record. Since its inception, BBLU has delivered a total return of 8.2% compared to a total return of 7.89% delivered by the S&P 500. Additionally, BBLU has outperformed the S&P 500 on a trailing 1-year, 3-year, 5-year, and 10-year basis.

The solid record of consistent outperformance is impressive. I believe this solid track record highlights the advantages of the fund's statistical model driven investment approach.

In addition to having an impressive long-term performance track record, BBLU also has outperformed more recently. Since the reorganization into an ETF in October 2022, BBLU has delivered a total return of 34.2% compared to a total return of 27.2% delivered by the S&P 500.

High-Quality Blue Chip Holdings

Currently, BBLU holds 38 different stocks and is well diversified. The fund is fairly well diversified with the top 5 holdings accounting for ~ 20.5%.

The fund has a dividend yield of 1.55% and a weighted average forward P/E ratio of 16.2x. Comparably, the S&P 500 currently yields ~1.42% and trades at ~18.9x forward earnings.

In regard to sector exposure, BBLU is aligned fairly closely with large-cap market indexes. The fund's largest overweights are to the communication services and financial services sectors. The fund's largest underweights are to the technology and industrial sectors.

In terms of individual security selection, Microsoft (MSFT) and Apple (AAPL) are notable underweights. BBLU has a combined total exposure to these two stocks of ~8.2% compared to a combined exposure of 14.6% for these two stocks in the S&P 500.

BBLU is overweight slightly smaller mega-cap companies such as Visa (V), JPMorgan (JPM), and Meta Platforms (META) which account for ~11.7% of BBLU compared to ~4.1% of the S&P 500.

In terms of market capitalization, BBLU is 100% invested in large-cap equities and does not own any mid-cap or small-cap stocks. While the S&P 500 is also large-cap focused, it should be noted that the S&P 500 has ~ 17.4% exposure to mid-cap companies.

Key Risks To Consider

Perhaps the biggest risk to consider when contemplating an investment in BBLU is the possibility that mid-capitalization and small-capitalization companies outperform large capitalization companies going forward.

Large cap companies have outperformed small caps and mid-caps over the trailing 10-year, 5-year, 3-year, and 1-year periods. This move has been driven by strong earnings growth my leading mega caps such as MSFT, AAPL, META, and others.

However, BBLU actually represents an interesting way to get exposure to large-cap companies, as it is actually underweight the two largest cap companies in the world: MSFT and AAPL. This underweight is offset by overweights to small large-cap companies such as V, JPM, PG, and many others. For this reason, I believe BBLU still has the ability to post solid returns even if the largest handful of companies in the world do not outperform.

Additionally, investors can manage the capitalization risk by changing portfolio allocations. For example, an investor with a 100% position in the SPDR S&P 500 ETF Trust (SPY) could replace this allocation by moving 83% into BBLU and 17% into the SPDR S&P Midcap 400 ETF Trust (MDY). By making this allocation change, overall exposure to large-cap and mid-cap companies is maintained while still getting access to BBLU's active management for the large-cap part of the portfolio.

Conclusion

BBLU represents an attractive way for investors to access active management at a low fee. In addition to having a low expense ratio of 0.15%, BBLU has generated very strong historical returns and has consistently outperformed the S&P 500.

Despite being 100% focused on large-cap equities, BBLU is actually underweight the two largest capitalization companies in the world: MSFT and AAPL. For this reason, despite having significantly fewer holdings than the S&P 500 one could argue that BBLU is more diversified as it has less company-specific risk to these two companies.

I believe BBLU represents an excellent way for investors to gain exposure to large-cap companies. Thus, I am initiating the ETF with a buy rating.

Blue Chip Portfolios is an investment publication company founded and managed by Sam Pollack. He is a seasoned investor with 18 years of investing experience. Sam is a CFA Charterholder and received his MBA at NYU Stern. His experience includes working at PIMCO where he helped manage fundamental and systematic strategies across hedge fund and mutual fund portfolios, time spent working at Greenhill in the restructuring and financing advisory group, and internships during the early part of his career with Greycourt & Co and the U.S. Department of the Treasury.Blue Chip Portfolios is also the publisher of the Blue Chip Portfolio's Newsletter on Beehiiv