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.
ETF.com: 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.
ETF.com: 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.
ETF.com: 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.
ETF.com: How do you come up with a new idea for a fund, and how do you know it’s a good idea?
Faber: We have lots of ideas we consider to be brilliant, revolutionary, industry-changing ideas. But as you can see by our firm’s assets, some people don't always agree. It's a little bit of a field-of-dreams problem.
But we have a few criteria. One is that we want it to be something that either doesn't exist, or where we can do much better, or in some cases, much cheaper.
And No. 2, is it something I would put my own money into? I have 100% of my net worth invested in our funds and strategies. And lastly—and this is the hardest one—is it something that somebody wants? In some cases, like for CCOR, yes. We know there's pent-up demand for it. For others, it may take a few years before this idea comes around.
GAA is a good example. I think the generational transfer of those 2% mutual fund asset allocation funds that do nothing—and manage almost $1 trillion—into the lower-cost alternatives is not going to happen overnight. But it may happen over 10 years.
ETF.com: Is it costly to put new ETFs in registration once you already have some in the market? Or is it a negligible cost?
Faber: It depends. Negligible for Vanguard may not be negligible for Cambria. But in general, the cost of filing for an ETF isn’t that expensive. And if you can group them into one filing, the result isn't necessarily additive.
The big cost is launching funds, particularly if they don't raise money. Subsidizing these low-fee funds can be difficult. If you look in the industry, something like half the ETFs out there are under $100 million in assets.
We see something like 300 launches a year, and only the top 10 usually cross $100 million in assets. Think about that. There are 200-plus funds each year that, for all intents and purposes, may or may not be profitable. That's a lot of attrition we're going to have over the next decade where you're going to start to see a lot of funds close.
We've seen a lot of me-too products launch, and you don't need 20 different dividend funds or 20 different midcap growth funds. They all do the same thing.
ETF.com: If the cost to put ideas into registration isn't high, how many of these proposed ETFs are in fact high-conviction ideas on the part of issuers? Is there a lot of spaghetti at the wall in registration?
Faber: There's a lot of that. Some of these firms take a VC approach; meaning, if one of our 10 or 20 funds hit and gets to $1 billion or $10 billion, it pays for everything else. You see lots of crazy—in my opinion—stupid ideas.
But that doesn't mean people don't want them. And I'm totally cool with that. If you want to invest in a quadruple leveraged biotech fund, that's totally fine with me. If you want to invest in a bitcoin ETF, cool. If you want to invest in an ETF that focuses on Nashville or cancer therapies, I'm fine with that. The vast majority of them we don't think are necessarily good investment options, but I'm fine with it.
We tend to be a lot more [selective]. We usually launch one fund at a time and try to have published research surrounding most of the funds, whether it's a book or a white paper. We're never going to be a shop that has 50 or 200 funds. But we also still think there are some really good ideas out there no one's tackling.
ETF.com: A $50 million fund may be a success to a new ETF issuer, and be a loser for another. Beyond assets under management, how do you know if your ETF and your ETF business is successful?
Faber: Something like 80% of ETF assets are in the big three: Vanguard, BlackRock, State Street. However, issuer No. 30 probably still manages $1 billion. And there are plenty that manage $1, $5, $10, $50 billion. That's still very good business.
Cambria only has six employees, and manages $800 million firmwide. There’s a long tail. Obviously, it's a business of scale, and so a lot of the benefits of being a really big manager allow you to do things the smaller guys can't.
But it doesn't mean that if you're a one-man shop and you partner up with one of these white label shops and launch a fund, it can’t easily get to $1 billion in assets, if not more. You can still be a great business even with one fund and one manager.
What’s harder being a smaller shop is that you don't get approved on the platforms; there are a lot of roadblocks and head winds.
ETF.com: Cambria has an ETF issuer side, and an advisory side. How do the two parts jive? Is there clear separation between one and the other?
Faber: The vast majority of the business is ETF business. But we launched last fall this Digital Advisor partner with Betterment. And similar to a few other ETF issuers—like Vanguard and Schwab—we have the ability for individual investors to invest in what we call our Trinity portfolios.
We charge a 0% management fee. In our case, we don't include only Cambria funds. That's had a great reception. The cool part about that is there's no management fee from us, no commissions. The bar has been set on the asset management side for these robos as well at 0%.
We found a lot of demand from other advisors saying they’d like to allocate to our models that comprise Cambria, Vanguard, State Street, WisdomTree funds. We're starting to add these to a number of different platforms.
ETF.com: If you charge no management fee and offer product-agnostic portfolios—not only Cambria ETFs—the only way to make money with this is to really get scale, right?
Faber: Yes. The asset management business at a small size is hard. But as it grows, it becomes a really incredible business. Now, part of that is that there's been a lot of fat for many years, and there are still S&P 500 Index mutual funds charging 2.3% with literal exact competitors in ETFs at 0.05%. There's still a lot of fat.
But the model does scale. That's one of the beauties of the asset management business. But it's hard. It's not easy to necessarily scale to $10, $50, $100 billion. But we're hoping to get there one day.
Contact Cinthia Murphy at [email protected]