Newcomer Launches ‘Target Drawdown’ Family

The new funds allow investors to manage risk to their own particular comfort levels. 

Today, the Cabana Group rolled out a family of five multi-asset risk management ETFs using the exemptive relief of Exchange Listed Funds Trust. The five funds are all repackaged strategies that the firm has run for years as a family of separately managed accounts known as the Target Drawdown Professional Series. The ETFs include the following names, tickers and expense ratios:

• Cabana Target Drawdown 5 ETF (TDSA), 0.67%
• Cabana Target Drawdown 7 ETF (TDSB), 0.68%
• Cabana Target Drawdown 10 ETF (TDSC), 0.69%
• Cabana Target Drawdown 13 ETF (TDSD), 0.68%
• Cabana Target Drawdown 16 ETF (TDSE), 0.69%

The funds all list on the NYSE Arca.

“What we’ve experienced this year underscores the necessity of proper hedging, transparency, and risk mitigation as key parts of investor portfolios. It also makes clear the need to ensure that any strategy being put to use has a ‘real world’ track record and is backed by an experienced team that has lived and worked through times of significant market turbulence,” said Cabana Group CEO Chadd Mason.

At a time when defined outcome ETFs based on portfolios of flexible exchange (FLEX) options are increasingly popular, these funds could be a welcome alternative take on risk management.

“Our strategies never use derivatives and never get ‘out of the market.’ When investors use derivatives, it is inevitable they will see slippage and erosion in alpha. Instead, we use asset class ETFs to express our views on those parts of the market that are going into or coming out of favor,” Mason said.

The funds have been seeded with a record-breaking $1 billion across the five ETF complex, giving them a definite advantage in the market.

The Strategies
The new products are all actively managed ETFs-of-ETFs that target a maximum drawdown percentage, which is listed in each fund’s name. The target drawdown percentages range from 5% to 16% from peak to trough. The ETFs can allocate among equities, fixed income securities, real estate, currencies and commodities, and they do this with an eye to limiting volatility and reducing correlations, the prospectus says.

“We really build portfolios backwards,” Mason said. He notes that the firm was mainly founded by former lawyers rather than financial professionals. “I started out as my own client,” he said.

“I was most concerned, not with how much money I could make, but rather how much money might I be expected to lose when things turn ugly. Inevitably, things turn ugly,” Mason added. He wanted to make sure he avoided any losses severe enough that they could cause him to do something “stupid” like exit the market entirely, he says.

Mason believes there are two keys to successful investing: 1) Avoid large losses and 2) stay invested. The funds are designed to match varying levels of risk tolerance. The problem with the way many investment professionals assess client risk tolerance is that, “no one really knows what ‘moderately aggressive’ means,” he said.

The Cabana approach relies on repeating business cycles. “The repeating business cycle is a certainty,” Mason said. The firm uses its Cyclical Asset Reallocation Algorithm (CARA) to figure out how the stages of the economic cycle are progressing and to identify what the attractive asset classes are.

“There’s building blocks that really define the economic cycle. The difficulty is in knowing the length of any particular phase of the cycle or of the cycle itself. At different phases of the cycle, certain asset classes become more relatively attractive. What we really do is break things down to their most basic fundamentals. You would not find a more top-down advisor or management style than what we do,” he added.  

Contact Heather Bell at [email protected]