How A Small ETF Issuer Competes

How A Small ETF Issuer Competes

Cambria’s Meb Faber on how his company has approached the ETF market differently, and is making an impact.

Reviewed by: Drew Voros
Edited by: Drew Voros

Meb FaberMeb Faber is the co-founder and chief investment officer of Cambria, an ETF issuer with 11 funds and $640 million in assets under management. The newest ETF in the company’s growing lineup is the Cambria Trinity ETF (TRTY), a multi-asset alternatives strategy that seeks absolute returns with lower risk than broader markets. Faber is the backbone of the company, from running the company to developing the company’s ETFs. Here he shares how his firm and his ETF product development process works. You’re a small ETF issuer competing with giants like BlackRock and Vanguard, and you do it all with a pretty low profile.

Meb Faber: We don't have any sales and distribution. That's why we keep a low profile. Not intentionally. Any entrepreneur can sympathize with starting and bootstrapping a company, and we've gone through three phases.

First, the two people in a garage when I started with my partner. Then it was a small boutique asset manager. And now it's [an ETF issuer] starting to sell to institutions.

The way we've done it has been very different, although not necessarily atypical—we did it through a lot of content. It started out with academic white papers, and then blogs and books. Content distribution is difficult. How do you get people to read it?

Faber: That's the beauty of the internet: It gives you a big soap box. We've been around for 10 years, and it's a nontrivial amount of content. We've done 2,000 blog posts, over a dozen white papers, seven books, hundreds of interviews and TV appearances. More recently, we’ve focused on our podcast, which we've done 130-plus episodes. That's a lot of words.

But when I say “not atypical,” if you look at how some very large firms have been built, you could argue that Ken Fisher did it through content, in Forbes articles, in direct mail. You could argue that Ric Edelman did it through radio shows. How do you come up with your ETF product ideas?

Faber: When we launch funds, they have to be something that doesn't exist, or that we think we can do much better and much cheaper. You can go out and buy a market-cap-weighted beta portfolio today essentially for free. We hope to exist in a little corner where there's not much competition.

Second, it has to be something that has a bunch of academic and/or—hopefully, both—practitioner research that supports the topic. Shareholder yield is a great example where there's research that goes back decades and not really any other ETFs that do it.

And third, it has to be something I want to put my own money into. It's the opposite model of how a lot of fund managers build funds. They see what sticks, and then they raise a $1 billion to keep it. It all comes down to what I want to invest in, and whether there’s a certain amount of people—we have over 30,000 investors—that say, “I like that approach to your idea, too.”

I'm not trying to convince anyone that our approach is the one right approach. There are lots of great investing approaches. There are lots of terrible investing approaches. What we're saying is that these are solutions we like, that I invest my own money into, and hopefully people like them as well. What’s Cambria’s mission?

Faber: The first part was, in a world where the vast majority of fund managers invest zero dollars in their own funds—and this is well-documented by Morningstar, like 50-80% of portfolio managers have zero dollars in their own fund.

We live in a world, in my mind, of conflicts of interest. So many of the Wall Street sorts of funds out there, in my mind, are crappy funds that are meant to be sold. And that's the way business has been built for 40 years.

There are a lot of great funds already out there. If Cambria didn't exist, could you be just fine with Vanguard and Schwab and BlackRock? Sure. We use all of their funds.

So, what we're trying to do is say that we also realize there are a lot of deficiencies in the traditional ways most people build portfolios. We think the way most people build portfolios is suboptimal. We think market-cap weighting is a good first step, but it's not optimal. We tilt toward things like value and momentum, which I think is additive performance. You can call that whatever you want—factor-based, smart beta, whatever. Are you an active manager?

Faber: You just wanted to go down the rabbit hole, didn't you? 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. What is your oldest fund?

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

Drew Voros has nearly 30 years' experience in financial journalism. He was a longtime business editor for the Oakland Tribune and sister papers of the Bay Area News Group, and finance writer for the Hollywood trade publication Variety. Voros' past roles have also included editor-in-chief at and ETF Report.