New Meb Faber ETF An Industry Disrupter

December 10, 2014

The latest from Cambria is a fund of funds so cheap its management fee is zero.

Cambria’s latest ETF, the Cambria Global Asset Allocation ETF (GAA), is a fund of funds that offers in a single wrapper a global portfolio of stocks, bonds, commodities and real estate that is designed to, alone, represent your entire core asset allocation.

What’s more, the fund comes without a management fee. Investors who buy GAA will only pay the acquired funds fee of 0.29 percent a year to cover the costs of the 29 ETFs that make up the fund. The passively managed GAA allocates about 43 percent to equities and 50 percent to fixed income, invests predominantly in low-cost Vanguard ETFs as well as Cambria’s three other offerings.

Meb Faber, the brain behind GAA and founder of Cambria, says charging zero management fees is a smart idea that should help reshape—or at least rattle—the way registered investment advisors, ETF strategists, brokers and robo advisors go about charging for a core buy-and-hold portfolio. GAA seems like a bit of departure from Cambria’s other funds in that it’s a buy-and hold strategy. How should investors look at it, or use it?

Meb Faber: Most of our funds have been under the smart beta tactical umbrella. The last fund we launched, the Cambria Global Momentum ETF (GMOM), for instance, was meant to be a more aggressive version of GTAA, but with a much lower fee.

This fund, GAA, is meant to be a true global market core portfolio. It’s a buy-and-hold allocation that’s meant to reflect the global market portfolio of stocks, real estate and commodities. It owns 29 ETFs that pass through more than 20,000 securities around the world. The goal is to offer this at the lowest cost possible.

To individual investors, this fund is meant as a one-stop shop for core global allocation. For RIAs or brokers, it’s a way to outsource a global market portfolio for a super-low cost. And to endowments and pension funds, it becomes the global benchmark—something they can compare themselves to. The biggest feature of GAA is perhaps that it comes without a management fee?

Faber: We are not charging a management fee on this product; that’s right. And acquired fund expenses total only 0.29 percent. It’s a very-low-cost fund. You must be taking a loss on this fund. Why are you doing that?

Faber: For a couple of reasons, but first, let me say that the fund will break even perhaps at $100 million because of the underlying ETFs we own that are in the fund. Even though they only represent 10 percent of GAA, we will eventually make money.

But the reason we can do this is that, 1) we are profitable. Our company is profitable, and is very lean; 2) we can do it because we don’t really offer buy-and-hold strategies, so we don’t have entrenched costs. The people who are offering these types of strategies, such as RIAs and brokers like Fidelity and Schwab, are already charging sometimes 1 or 2 percent in management fees. Those costs are already entrenched. We can offer it for free.

To be honest, in the worst-case scenario where this fund raises zero dollars—which, by the way, has never happened before—the most it costs me is about $100,000 a year. Even if it didn’t raise any money, and I could just offer it to my friends and family, I would still do it because it doesn’t cost that much money relative to the overall business.

Attend Inside ETFs, the World's Largest ETF Conference! If this single ETF is meant to fulfill an investor’s entire core portfolio allocation, are you essentially competing with robo advisors and ETF strategists who are out there trying to offer a similar portfolio comprising various ETFs for a fee?

Faber: I think GAA really sets out to compete with anyone charging a high fee for core buy-and-hold portfolio—people who are charging 1 to 2 percent. The average mutual fund at 1.25 percent is a good candidate here. Even the average ETF is around 0.6 percent.

A lot of robo advisors tend to charge a management fee of about 0.25 percent, plus acquired fund expenses, which puts them usually at around 0.5 percent in fees. We think GAA is a better offering than all of those with the added benefit of being more tax efficient. In the ETF structure, you don’t need to tax harvest in the same way you would have to in a separate account or a mutual fund because of the creation/redemption feature.

So, yes, to a degree, it competes with all of those, but most strongly with those charging high fees. Does this ETF work as a core holding for everybody? Say you’re an investor approaching retirement, and you want to trim your exposure to equities. GAA allocates more than 40 percent to stocks and, while it rebalances quarterly, that allocation shouldn’t change much, right?

Faber: Investors can simply use this is a core—say, representing 50 percent, or 80 percent, or 100 percent—and then round it out with something else that makes them more comfortable.

Someone who wants less risk is going to buy muni bonds and government bonds, and a more aggressive investor could buy 60 or 80 percent of GAA, and put the rest into equity ETFs. Satellite allocations can be whatever they may be.

But if you want a global core portfolio, this is the cheapest, best option. And we can’t really say this, because the fund is not running yet, but we plan on doing short lending on the portfolio down the road, and returning the cash into the fund, so that costs would come down further and people could eventually be getting paid to own this fund. That would be a pretty cool outcome. What else should investors know about GAA and Cambria? Are you going to be agitating the industry by charging zero management fees in the future?

Faber: The good news is that the only people we are going to upset are the people who are charging a lot in fees. A lot of people are going to be a lot happier because they can have a cheaper allocation.

We fully expect to do some more buy-and-hold allocation models in a similar style. My hope is that eventually Schwab and Vanguard are going to follow our lead and launch allocation funds that include ETFs that are the best offerings, not just their own proprietary funds—as most shops do.

This is a pretty simple story. It’s a good, cheap offering, and hopefully it will shake up the space.


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