How To Launch A Successful ETF

May 31, 2017

Cambria just launched its 11th ETF, an equity fund that relies on an options overlay to generate income and protect on the downside, the Cambria Core Equity ETF (CCOR). The firm, which also runs a digital advisory service, is known for its quant DNA and a focus on offering clients one-of-a-kind—or best-in-class—access for a competitive price. Cambria manages the only ETF in the market that comes with a zero management fee and only 0.25% in expense ratio: the Cambria Global Asset Allocation ETF (GAA). We caught up with Cambria founder and CEO Meb Faber to talk about CCOR and the business of bringing ETFs to market. Faber will be a speaker at the upcoming Global Indexing and ETFs Conference in June. Your new ETF, CCOR, is a relatively complex strategy that dabs into options. Why do we need this type of active strategy right now?

Meb Faber: We have a wide spectrum of products, from super-low-cost asset allocation ETFs, to much more active and tactical strategies, to stuff that buys emerging markets and sovereign bonds, and everything in between. Our goal is to launch strategies that people want, and strategies that we ourselves want to invest in that either don't exist in the marketplace or where we think we can do better.

The genesis of CCOR came from a few large investment advisors who wanted this fund. At its core, it's a very simple strategy. It's investing in high-quality value stocks, and then doing a little bit of option trading to hopefully reduce the volatility and drawdown. We sell some calls to generate income and premium, and then periodically buy some puts for downside protection.

It's a particularly interesting fund right now because we're in a world where U.S. stock returns will be muted. A fund that is meant to cushion some of the downside is appropriate right now. And it's raised over $90 million in assets in the first day—the second-largest launch of the year. Any time you use options, it can get pretty expensive. And CCOR comes with an expense ratio of 1.05%. What's the reward investors are getting for this relatively high price tag?

Faber: We consider CCOR to be a hedge-fundlike strategy. As such, compared to the 2-and-20 world [the compensation scheme most hedge funds use, 2% off assets and 20% of appreciation], and compared to the mutual fund world, this is still 25 basis points cheaper than the average fund.

We've always said if you're just buying beta, you should pay as little as possible, and 0.05% is where that world exists today. But CCOR is not just buying the S&P. Compared to the active world, it’s reasonably priced. We think there are plenty of strategies that can justify a higher fee. There are plenty of strategies that shouldn't. It's about total return with risk accounted for after all fees are included. As an issuer, how do you determine how much to charge for an ETF? Is there an easy math equation?

Faber: It's a little more subjective. For GAA, for example, it was us saying, “This fund does nothing. It's a buy-and-hold fund.” So we set the floor at 0%. [GAA charges 0.25% in expense ratio but no management fee]. But there are strategies out there that are much more active, where we think there's a lot of value to be added.

It's a bit of an art. It's a bit of saying, “How much alpha is here; how much potential benefit from this strategy is there?’ In general, we tend towards lower cost, but again, every fund we run is cheaper than the average mutual fund and hedge fund. So it's not an exact science equation, but we tend to take a lot of things into account.


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