Last week, low-cost ETFs took another big step with the launch of the first fund with a permanent 0% management fee, Cambria’s Global Asset Allocation (GAA) ETF. Invested in 29 other ETFs, it gives investors an easy way to get instant exposure to more than 20,000 securities worldwide with a mix of asset classes.
“For the past five years we’ve railed on Wall Street for charging too much for buy and hold portfolios,” explains Cambria CIO and portfolio manager Meb Faber. “We said, look we can do this for essentially no cost.”
On April 9th 2021, Bruce Greenwald, the founding director of the Heilbrunn Center for Graham and Dodd Investing at Columbia Business School, sat down for a Fireside Chat with Li Lu, the founder and chairman of Himalaya Capital as part of the 13th Columbia China Business Conference. Q1 2021 hedge fund letters, conferences and more Read More
Cambria will essentially subsidize the first $100 million off GAA
While Cambria doesn’t charge a management fee for the GAA ETF, it’s not entirely free because the underlying ETFs do charge fees, adding up to 29 basis points in acquired fund fees. Since three of those ETFs are managed by Cambria, it will get about 5 bps from GAA via its other ETFs. That’s not enough to break even unless GAA gets at least $100 million in investments, but Meb Faber figures the most Cambria stands to lose if there isn’t enough interest is between $100,000 and $150,000, which wasn’t enough to deter a business that Meb Faber calls “small and lean, and also quite profitable”. Cambria’s other ETFs all pulled in $20 – $30 million in their first two months, and with more than $5 million after about a week GAA looks like it will do at least as well once the holidays are behind us.
Breaking market-cap weighting is the first step, says Meb Faber
Meb Faber expects interest in GAA to pick up next month when he releases a paper explaining the rationale behind how the portfolio is constructed. Essentially, it’s split 40/40/20 between stocks, bonds, and real assets, though he says the exact mix isn’t as important as having all three elements present. The fund also eliminates home bias and other common problems that people have when they try to put together a buy-and-hold portfolio. But the most important thing, Meb Faber says, is that it uses various tilts to get away from market-cap weighting.
“Market-cap weighting in general is sub-optimal because, while it was a great innovation, it only has one variable, which is price. So it’s essentially a momentum index,” says Meb Faber. “You can do anything other than market-cap weighting and it’s likely to outperform. Equal-weight, value weight, dividend-weight, what letters the ticker symbol has. Breaking the market-cap weight is an important first step.”