Cambria’s new smart beta ETF aims to limit downside risk

Sep 11th, 2015 | By | Category: Alternatives / Multi-Asset

Cambria Investment Management, a US-based provider of innovate exchange-traded funds, has launched the Cambria Value and Momentum ETF (VAMO), a smart beta fund that aims to provide superior risk-adjusted returns through a combination of multi-factor exposures and a hedging strategy.

Cambria's new smart beta ETF looks to limit downside risk

Meb Faber, Chief Investment Officer at Cambria Investment Management.

The fund invests in the top 100 ranked US stocks based on two complementary factors: value and momentum. Exposure to these factors has historically provided excess returns when compared to traditional market capitalisation-weighted benchmarks by investing in companies that are considered to be cheap and whose price is trending upwards.

By combining factors, the strategy should smooth the volatility associated with single-factor portfolios, which can often experience short- to medium-term underperformance.

According to Cambria, one of the drawbacks of long-only exposure is that the investor can be exposed to long bear markets. In an attempt to alleviate this downside risk the fund has the ability to hedge up to 100% of the portfolio’s equity exposure. This is determined based on a top-down objective assessment of whether the market is considered to be expensive or in a downtrend.

“The recent volatility in the US markets is a classic example of why investors may want to consider hedging their investments,” said Meb Faber, Cambria Chief Investment Officer. “Value and momentum have long been important factors when selecting equity investments. Combining these two factors with hedging provides a strong portfolio of companies with the potential to minimize downside losses.”

Eric Richardson, Cambria’s Chief Executive Officer, added: “As one of the fastest growing issuers of smart beta ETF strategies, we’re pleased to expand our offering of academically-driven funds which meet investors’ portfolio needs.”

The fund’s methodology seeks companies which are considered to be undervalued according to valuation metrics such as the cyclically adjusted price-to-earnings ratio, free cash flow yield and dividend yield, and also those that exhibit trailing outperformance over a medium-term timeframe (momentum). Cambria expects to rebalance to target allocations monthly. As a result, the fund may experience high portfolio turnover.

The fund employs maximum sector percentage caps to avoid overly concentrated positioning. The two largest sector exposures at launch were financials (25%) and consumer discretionary (21%) stocks.

The hedging strategy employs derivatives such as stock index futures to offset equity market exposure. The fund will scale the hedges up and down on a weekly basis. At launch, the fund was hedged approximately 100%.

The ETF has been listed on the NYSE Arca and has an expense ratio of 0.59%.

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