ETF Spotlight: TAIL Thrives in Market Downturns
- TAIL soared 16% over three months amid the recent market selloff.
- The fund uses a put options strategy to hedge against equity market declines.
- Tail-risk ETFs like TAIL and CAOS serve as portfolio insurance but underperform in bull markets.
Recent market volatility has investors seeking protection, and one ETF has delivered exactly that. The Cambria Tail Risk ETF (TAIL) has jumped 16% over the past three months and 14.3% year to date, according to FactSet data, positioning it as a standout performer during market turbulence.
While most investors watch their portfolios decline during market selloffs, TAIL offers a counterbalance by employing an options strategy that turns market fear into positive returns, potentially making it a valuable defensive component in portfolios despite its underperformance during prolonged bull markets.
TAIL Tackles Tail Risk
TAIL is an actively managed fund that primarily holds cash and U.S. government bonds while implementing its core strategy: purchasing out-of-the-money put options on the S&P 500 Index. The fund invests about 1% of its holdings monthly in these options, according to FactSet data, buying more puts when volatility is low and fewer when volatility is high.
Managed by Cambria Investment Management, TAIL targets options that are 0% to 30% out of the money. This approach reduces the cost of hedging but also limits downside protection. The fund currently manages $155.8 million in assets with an expense ratio of 0.59%, according to FactSet.
The Mechanics of Market Insurance
According to Morningstar reporting, tail-risk ETFs function similarly to insurance policies. Like homeowners paying premiums to protect against catastrophic events, these funds pay option premiums to guard against market crashes. When markets are stable or rising, these premiums erode returns—but when indexes fall sharply, the payoff can be substantial.
TAIL has attracted $63 million over the past month and $80.1 million year to date amid recent market concerns. The fund's average daily trading volume stands at $5.3 million, according to FactSet data, showing growing interest in downside protection strategies.
Alternative Protection Strategies
Another player in this space, the Alpha Architect Tail Risk ETF (CAOS), employs a different approach while targeting similar outcomes. CAOS allocates up to 20% of its assets to long and/or short SPX Index options depending on market conditions, with between 1% and 10% specifically positioned for protection against market declines exceeding 25%, according to FactSet data. The fund maintains 70%-80% of its portfolio in collateral consisting of U.S. Treasury bills, box spreads and money market instruments.
CAOS has shown more modest gains in the recent downturn, up just slightly above 1% over three months, but it manages a larger asset base of $374.2 million with a slightly higher expense ratio of 0.63%, according to FactSet data.
Morningstar's research highlights the trade-off inherent in these strategies: Tail-risk ETFs tend to significantly underperform during prolonged bull markets. While TAIL has surged during recent volatility, its long-term performance has lagged broader market indexes.
