Recorded at the Exchange ETF Conference in Las Vegas, host Ryan Nauman welcomes Sal Esposito, Head of ETFs at Zacks Investment Management, to discuss why market leadership driven by mega-cap tech and AI is shifting back toward fundamentals. Esposito explains Zacks’ disciplined process focused on earnings, analyst estimate revisions, and balance sheets, calling 2026 a “prove it” year for AI as investors look under the hood for real results. They cover how Zacks applies its Zacks Indicator model across products, why active management can add value in small/mid caps and international equities, and how geopolitical uncertainty and interest-rate expectations can affect market breadth and international performance. Esposito also shares updates on Zacks’ growing ETF lineup, including international exposure.

Zephyr can help financial advisors locate the best ETF strategies for their clients. Learn more here.

Learn more about Zacks Investment Management here.

00:00 Welcome and Disclosures

00:38 Live From ETF Conference

01:37 Meet Sal Esposito

02:04 Zacks ETF Growth Story

03:05 AI Hype vs Fundamentals

04:30 Prove It Year for AI

08:05 Earnings Driven Process

10:42 International ETF Expansion

12:21 Small Mid Cap Active Edge

16:08 International Outlook 2026

19:37 Active Defense in Downturns

20:30 Where to Learn More

20:46 Closing and Subscribe

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Welcome to the Adjusted for Risk podcast.

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Join myself, Brian Namath, as I talk

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This podcast is for informational

purposes only and should not be

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relied on for investment decisions.

9

Welcome everyone to Zephyr's

Adjust for Risk podcast.

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We are recording on location at the

Exchange ETF Conference in Las Vegas.

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It's been a fantastic conference so far.

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A lot of great conversations,

and the next one is gonna be

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another great conversation.

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You know, equities have had a

great three-year run during the

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past, you know, three years.

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And during solid runs like this,

it can be easy to forget about

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fundamentals, especially when there

are investment themes like, like AI.

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Well, I have on the perfect guest on

to discuss why fundamentals will, uh,

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be back in the forefront for investing.

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But first, this episode is sponsored

by the award-winning Zephyr, which

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helps investment professionals

make more informed investment

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decisions on behalf of their clients.

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All right, enough from me.

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I've already talked enough.

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Let's, uh, bring on the star of the show.

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I'd like to give a warm

welcome to Sal Esposito.

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Sal is the head of ETFs at

Zacks Investment Management.

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Sal, thank you so much for coming on.

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I believe, Sal, this might

be your third time on.

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I think so, yeah.

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Thanks for having me on again.

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I, I, uh- I guess you like me.

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Yeah.

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Well, I, I'm m- usually more

worried about my guests liking

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me and wanting to come back on.

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So, uh, thank you.

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It's an honor to have you back on.

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Always love these conversations.

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Can you tell us a little bit more about

yourself and Zacks Investment Management?

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Yeah.

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Yeah, so I've been at Zacks

for a little more than four

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years now, which has flown by.

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I, my prior roles were at UBS,

so big firm to small firm.

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Uh, I've worked on building out our

ETF business since I've gotten here.

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You know, we started with one fund.

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We have four now.

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Uh, it's been a whirlwind.

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We have model products, model

portfolios, things that didn't

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exist before, they do now at Zacks.

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Uh, and we are committed

to growing this space.

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We will be launching two more ETFs in May.

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Fun.

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And then, uh, we, we certainly have some

more, uh, on the horizon for the year.

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So It's been a long road, but it's been

very, very, uh, rewarding, I think.

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And, and, and we're just kinda coming

into our own here in the ETF space.

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I love it.

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So maybe we'll have to get you

on later this year to talk about

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some of these new, uh, ETFs you're

about to launch and- Yeah, no

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talk about them.

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That'd be fun.

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That would be, that would be great.

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For sure.

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So, over the years, um, you know, or

recent years I should say, mega tech,

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AI-linked companies- Mm-hmm ... uh,

those stocks have driven markets.

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And I'm gonna age myself here, so,

you know, when I was starting in

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the industry, it was the dot com.

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And maybe I have PTSD or something, but

thinking back to the dot com era is like,

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everything with dot com went to the moon.

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Right.

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And now I kinda feel like, did

that just happen too with AI?

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Anything linked to AI, didn't care

about fundamentals, whether making

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money, there were earnings, any

revenue, it just went to the moon.

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And that can happen during

exuberance, times of exuberance.

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Do you think we're getting back to where

stock selection shouldn't just be about

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whether it's linked to AI, but more

about fundamentals and really focusing

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on, uh, the fundamentals of a company?

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Yeah, I mean, that's, that's

really part, one of our core

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principles at Zacks, right?

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We're looking at earnings, we're looking

at earnings estimate revisions by the

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analysts covering these companies, uh, and

we're looking at balance sheets, right?

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I- We, we can make the argument

all day long for that being

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a really important piece of

choosing any stock in a portfolio.

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So, you know, coming up here and

talking about AI, right, obviously

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there's a lot of, uh, dreams and

wishes, uh, that have kinda been

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promised over the last couple of years.

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I think this is kind of the year

where- We're at an inflection point.

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Uh, AI was once just became, uh, the

buzzword for any kind of earnings call.

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Uh, if you wanted to see your earnings

kinda, uh, and your, you know, your stock

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pop a little bit, you'd bring up AI in

your earnings call, and now I think,

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you know, it's like a prove it year.

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So we're in a year now where it's like,

okay, let's, let's look under the hood

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and see what actually is coming of this

AI investment in all these companies.

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I love that you- That's a great

way of putting it, a prove it year.

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All right, it's time to prove it.

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What, you know, prove

that you have earnings.

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And do you think a lot of that is

just because of the uncertainty

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in market now- markets now?

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Like, we've got the war, macro

uncertainty, a new Fed chairman.

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Uh, just all this stuff going.

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Do you think now, with uncertainty,

we gotta get back to fundamentals,

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and you gotta prove it now, you know?

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We're...

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A lot of uncertainty is out there.

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There's, there's certainly, uh, a

number of things, uh, right now that's

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affecting the short-term market, right?

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Iran being, the Iran

conflict being one of them.

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Uh, but the reality of the fact is,

is that, you know, if you stick to a

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specific, you know, investment process

like we do, when we're looking at

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these companies, and we're, we're,

we're targeting companies that we

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know are gonna be successful in the

long term, some of the short-term

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noise kinda gets moved out, right?

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Uh, AI, you know, from an AI perspective,

right, we, we definitely monitor

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companies, especially in our, uh,

large cap growth, uh, ETF growth, GROZ.

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You know, we do have

an, uh, an AI kind of...

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It's there's not a fa- like, an a-

factor in it, but we are looking at

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companies that, that are being affected

by AI or are using AI to kinda grow

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their, their, their balance sheets.

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So, um, it's, it's not quite, I would

say, like, part of the actual process,

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'cause it isn't, but it's really more

about understanding what's going on and

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that, you know, f- if our team needs to

make a qualitative decision, uh, in the

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short term to, you know, effectively,

you know, produce a better portfolio in

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the long term, they, they'll look at it.

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Sal, that's interest- So maybe not

companies that are specific, they're

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have a AI technology or AI product, but

just firms that are leveraging AI to be

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maybe more efficient in their processes.

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So those are attractive then.

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Yeah.

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Yeah.

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I mean, I think- You know, I'm sure

just like, just like myself, you've been

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playing around with a lot of these LLMs.

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Um, I certainly don't wanna be behind the

eight ball on, uh, on, on what's happening

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because things are moving so quickly.

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Uh, we're just trying to stay ahead

of, uh, in our processes, we're just

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trying to stay ahead of, you know,

what can be coming down the pipeline.

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Um, and just looking at the companies,

uh, s- from the AI view, like how

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is it affecting their business?

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Is it helping them?

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Is it hurting them?

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The- these things are, are good

to know and like can help us make

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better investment decisions in

the long run for, for that, for

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that specific portfolio, right?

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Yeah.

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But, you know, we're constantly

monitoring what's going on.

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But the reality is, is that we have

a specific process that we stick to

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in all of our strategies, and it's

based off of earnings and, and, you

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know, the, the Zacks Indicator model,

which looks at all the different,

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um, earnings estimate revisions.

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A- and we don't really deviate a ton

from that across all of our product sets.

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Sal, I- I'm really glad you brought

that up, talking about earnings.

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I feel as if that's really important, and

sometimes it gets lost when everyone's

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maybe investing in a hype, AI hype.

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Mm-hmm.

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Maybe they forget about

earnings and why important.

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Do you think earnings now...

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And also, why at Zacks do you focus

so much on earnings consistency?

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You just talked about you're

focusing on the long term.

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What's the importance there,

and why do you guys focus so

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much on earning consistency?

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Yeah, I mean, it comes from

our research company, right?

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We've been a research firm for

the better part of 50 years.

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Uh, Len Zacks, who started our

research, uh, Zacks Investment Research,

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coined the term EPS surprise, right?

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So I mean, it's kinda, it's pretty cool

to kind of be a part of a, a, a comp-

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a company that's kind of taken a stand

in, in, in this space for so long.

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And, and really, he created this Zacks

indicator ranking system that looks

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at these companies and their earnings

estimate revisions, and, and kinda looks

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at, like, four specific things, right?

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It's, it's agreement,

agreement of the analysts.

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It's the magnitude of the earnings,

uh, the earnings movements

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in their, in their revisions.

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It's the potential for upside,

and then it's also surprise.

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So there's four specific things we're

looking at that go into that ranking

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system, and that ranking is utilized, like

I said, in all of our products, right?

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We started our investment

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About 26 billion in assets across

SMAs, mutual funds, and you know, as

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of the last couple of years, ETFs.

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I love that.

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E- I often talk when I do a lot

of research, whether it's on SMAs,

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mutual funds, E- consistency of

philosophy- Mm-hmm ... strategy,

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and obviously returns.

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You want consistent returns.

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But how important that is.

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If you're gonna invest in a manager,

you wanna know Wha-- You know, that

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they are going to be consistent in

their investment- Mm-hmm ... philosophy,

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their strategy, regardless if

that is in favor or out of favor.

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Right.

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Regardless of what market cycle it is.

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And it just shows that you guys are very

consistent across all your products.

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Yeah.

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You know, if you're investing in, whether

it's small cap, mid cap, inter- whatever

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product it is, you're gonna get that same

methodology- Right ... across the board.

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Yeah, it's just, it's, it's a very

replicatable process that we, we,

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you know, we're finding that, um,

you know, obviously it's worked well

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in the SMA space for quite a while.

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You know, our ETF business is now growing

pretty- Mm ... pretty rapidly, I think.

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Um, and we are always looking for

interesting new potential ideas to launch

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as well, which kind of leads into, right,

obviously our international fund, which

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is QUIZ, Quiz, which is relatively new.

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It's about seven, I think eight months.

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Time- Wow ... is going by so quick.

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Um, so yeah, I mean, we were like, as

a, as a company, we, we kind of sat down

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and we were like, "What's the next step?"

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What's the next step for our firm?

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And it's like we've never covered

international stocks before.

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So that's something, you know, we knew

we could be good at because we've been

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doing it for so long on the domestic side.

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Yeah.

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And, and, and since we wanna own

the, the local shares, like you

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can't do local share SMAs, right?

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The- you're not gonna be able

to- Yeah ... buy something in

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Japan, uh, and hold it in an SMA.

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Yeah.

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You'd have to buy the ADR.

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Um, and that's really kinda the active

ETF space has, has given us that

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opportunity to kind of take that next

step to, to the international market.

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Yeah.

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So I'm gonna put a little plug in.

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You mentioned SMAs.

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You know, with the PSN, separately

managed account database,

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Zacks has a lot of great...

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It's like almost every

quarter I do PSN top guns.

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Zacks has a top performing SMAs out there

that's always, you know, they're always

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a top gun 'cause they're doing some

great work there on the SMAs, and then

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you just bring it forward to the ETFs.

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Yeah.

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I mean, obviously there's a little

bit of difference in, in obvious-

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you know, as you know, with ETFs,

a little bit of a different, uh,

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trading- Mm-hmm ... trading situation.

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But yeah, we try to, we try to keep a

consistent, like you said, consistent,

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uh, process across all of our strategies.

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I think that's fantastic.

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Let's talk about small mid caps.

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Mm-hmm.

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You know, we've experienced over the

past, I don't know, few months here,

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like we've talked a lot about AI

driving markets, but we've experienced

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now a breadth of leadership.

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Markets at leadership has expanded some.

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Mm-hmm.

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I th- it's good.

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Uh, helps with the health of the market.

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Do you think, you know, during this

period of uncertainty though, who

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knows how long market leadership,

do you think it'll benefit?

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Yeah, I mean, it's a good question.

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I think it's a question and, that

we've brought up on, you know,

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our minds multiple years in a row.

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We're kinda waiting for

something in the space.

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Mm-hmm.

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And I think obviously, um, interest

rates do play a role in that, right?

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So we don't necessarily know

what we're gonna get in the

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near term, in the short term.

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I think we're in the one, one cut

camp here, I think, as you talk to

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our chief markets sta- uh, strategist.

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I think right now we're in kinda

the one cut for the rest- Mm-hmm

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of the year camp.

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Uh, but that could change, right?

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With the new, with the new,

uh, Fed chair coming in.

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Uh, it could change rapidly, uh, depending

on how, you know, persuasive he is with,

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with the rest of the, uh, committee.

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Yeah.

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Um, so it's- And also with,

uh, the White House too.

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Yeah.

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Well, yeah, I mean, I'm

certain that's gonna be an, an

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immediate pressure, step back.

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The Fed chair is not controlling this.

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They're just the mouthpiece-

Yeah ... for the committee.

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So, you know, as much as you can

put who you want in there, it's

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certainly, you know, it's still

a group, group decision overall.

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So we don't necessarily know,

uh, how that's gonna play out.

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But then, you know, when you're

taking a look at small and mid

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caps, you still wanna be...

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And, and I'm gonna, you know, pound

the table on the earnings and kind of

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where, where, where we are, you still

wanna be invested in companies that

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actually perform on their balance sheets.

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Mm-hmm.

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Not the kind of shoot for the...

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Well, at least what we do, right?

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We're not investing in the shoot for

the moon unprofitable small caps- Mm-hmm

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out there, right?

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That's one of our main kind of arguments

against owning a benchmark versus owning

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our small and mid cap funds, SMIZ.

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It's more about understanding

what you're owning.

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And, and if you own the entire

benchmark, you have no control over

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what you're invested in- Mm ... aside

from what you're getting in a benchmark.

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We own about 8% of the Russell 2500.

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Right.

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Right?

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So think about 200 stocks versus

2,500 stocks, where we have a process

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that we know has, has a decent, um, a

decent track record of, of, of history.

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Yeah.

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And, and, and the process has been run

for, you know, 15 years, uh, behind

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the scenes before we launched the fund.

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Um, so it's something where we're

looking at companies that, that

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actually have tangible balance

sheet- and assets and balance sheets.

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Yeah.

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That's fantastic, Sal.

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And I...

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There is maybe some asset classes you

can get away with just doing a passive,

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passive approach, like maybe large blend.

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Yeah.

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Large.

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But- Yeah, I mean-

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small cap's one where you're

better off active, right?

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Be a little bit more selective.

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I like to make that argument.

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Um, I believe, and, and, and this is by

no means talking, you know, down on our

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GROZ and ZECP, which is our large core.

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Um, small and mid cap, international, and

then we don't cover it, but fixed income.

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I think three places where you can

actually have an active manager can really

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make some tangible strides in a portfolio.

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I...

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Sal, we agree on a lot of things,

but that one I really agree with you.

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Those, especially, like, fixed income.

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I just, that market, uh,

too much going on there.

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Let, you know, let

active management- Mm-hmm

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take its role.

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So you brought up international.

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Let's touch on it real quickly.

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International, especially

emerging markets, had a great run-

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Mm-hmm ... 2025 into this year.

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Outperformed.

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Finally, diversification now matters.

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Thanks to international.

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Do you think international maybe,

you know, again, uncertainty

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out there, has some more room to

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Do you think we're gonna see

some more outperformance there?

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Or do you think that maybe

run is over with a little bit?

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Yeah, I mean- I think that the--

what's going on in, in the Middle

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East mu- is affecting it, right?

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I think we were doing really well

this year on the international

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space versus domestic.

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And, um, you know, the, the, the

conflict has certainly kinda put

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a little bit of a pin in that,

depending on where you're investing.

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Mm-hmm.

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Uh, obviously, you know, Europe and Japan

probably getting some residual effects.

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I mean, everybody's gonna be

affected if, you know, oil prices

336

continue to climb in the short term.

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But the reality is, is that

you don't really kind of...

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Like we said, we're, we're investing

for more, more towards the longer term.

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I mean, we do in our QUZ fund, we do look

at momentum, so obviously it's playing a

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role in kind of what's going on right now.

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But we are still kind of overlaying

that four factor model that we use

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that looks at quality companies and,

you know, quality, you know, companies

343

with, with solid balance sheets.

344

Yeah.

345

I mean, I think we've done

decently well so far this year

346

still versus, like, the S&P.

347

I think we're up 2%.

348

I think the S&P is, like, down

2%, so a little bit better, right?

349

Yep.

350

I mean, so there's, there's obviously

an argument to be made there that

351

there's still some meat on the bone

on the international spot, uh, space.

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Uh, I just don't necessarily know the

sentiment for, you know, from an investor

353

or an advisor putting portfolios together

where, where that lies, and we like

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to kind of take a little bit more of

a- More conservative approach to even

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though we have international, right?

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We think we're good at our

p- process is good at it.

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We still are very much more, uh,

okay, like there's definitely more

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opportunity for growth in the l- like-

Yeah ... the long-term in the U...

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In the domestic space.

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So.

361

Yeah.

362

Yeah.

363

And, you know, it, it goes back to,

yes, uh, interna- the US supremacy

364

ended last year, and that's good for

diversification- Mm ... markets, but US

365

is still, you know, the primary market,

and the growth there, and, um, I agree.

366

Yeah.

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I agree.

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There's just more opportunities there.

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Even if valuations are high, uh, you know?

370

Right.

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Cheaper valuations overseas, there's

still stronger potential growth.

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Yeah.

373

I mean, if you look at, and

this is where, you know, we

374

talked about active management.

375

I really, you know, our QUIZ fund

l- has about 170 holdings in it

376

versus obviously the IFA is, is- Yeah

377

is much, much bigger.

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So it's still knowing what you own.

379

It's the same story as the small, small

caps and the mid cap spaces, right?

380

Where, where is your money being deployed

in, in these different investments

381

that you're using for your clients?

382

If it's a benchmark, then there's

things, there's things in there that

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once you kinda get under the hood

might not necessarily be great if

384

the market, you know, if we see this

volatility like we're seeing right now.

385

Yeah.

386

I- it's...

387

Active management provides a space

for potentially outperforming

388

more on the downside, right?

389

Yeah.

390

That's really the argument I think people

should really kinda think about, right?

391

It's like everybody look, looks great

when everybody's hitting home runs,

392

but then, you know, the reality is, is

it's like if, if you're, the market's

393

crushing it, no one's really upset.

394

It's when the market goes

down, people start calling,

395

clients start calling advisors.

396

They're like, "What's happening here?

397

Uh, what, what are we invested in?"

398

And if you're riding the wave

with the b- with the index, you

399

might not- You can't play defense.

400

You can't.

401

Yeah.

402

Yeah.

403

As an advisor, you really don't

really have kind of anything in

404

your tool bag to kinda combat that.

405

Yeah.

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Sal, always great chatting with you.

407

You always bring such great insight.

408

Really fun conversation.

409

I love it.

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W- it's been an honor.

411

Thank you.

412

Where can our, uh, audience

get more information about

413

Zach's Investment Management?

414

Yeah.

415

So you can visit our, our,

our website at zachsim.com,

416

or you can visit zachetsfs.com

417

to know more about the ETFs.

418

Love it.

419

Thank you.

420

Thank you, Ryan.

421

Thank you, Sal.

422

Thank you everyone for listening

to this episode of Zephyr's

423

Adjusted for Risk podcast.

424

You can watch all of our other episodes

on the Zephyr YouTube channel, Spotify.

425

Please be sure to like, subscribe to those

channels and give us a follow on LinkedIn.

426

Thank you very much, and have

a great rest of your week.