How A Small ETF Issuer Competes

January 23, 2019

ETF.com: Are you an active manager?

Faber: You just wanted to go down the rabbit hole, didn't you?

ETF.com: Of course!

Faber: My belief is that everything is active. The only passive portfolio is the market-cap-weighted portfolio. Any deviation from that is active. So, more than 90% people are active in some form, whether you call it value, equal weighting, dividends, whatever. No one holds the market-cap portfolio at all, not even close. The vast majority of U.S. investors put 80% of their equity allocation in U.S. stocks when market-cap weighting is only half.

There are all these little mistakes that add up over time, and they create portfolios that are woefully suboptimal. The biggest difference—and this is where we differ from, going back to your question of active—is that we manage both active and passive funds. Everything we do is rules-based. But to me, it's somewhat of a meaningless term.

We're of the belief that buy-and-hold is just fine if done correctly. The problem with buy-and-hold investing is that traditionally you have these large drawdowns, and that’s when investors behave foolishly.

You can’t create an asset allocation portfolio that doesn't decline by at least 25% at some point in 30 years. And on an after-inflation basis—we wrote a book on this topic called “Global Asset Allocation”; it's free on our website—most of them have declined by half at some point.

ETF.com: What is your oldest fund?

Faber: SYLD [Cambria Shareholder Yield ETF] is the oldest, going on five-plus years.

ETF.com: So, you're starting to get a track record; that's always important.

Faber: Yes. By next summer, we'll have seven funds with a three-year-plus track.

ETF.com: Do you see a correlation between assets and age—assets come in as the fund gets older?

Faber: It's been kind of two steps forward, one step back over the years with raising assets. But the trajectory is up to the right.

As you know with public funds, people are fickle and they chase performance. We see that, unfortunately. We'd like to think our shareholders are more rational, but I don't know if they are.

Contact Drew Voros at [email protected]

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