Cambria ETF Trust and its investment managing arm – Los Angeles based Cambria Investment Management, recently expanded its suite of so-called “smart beta” funds in an attempt to tap into stocks just when the domestic US economy seems poised for a strong take-off.
The newly launched Cambria Value and Momentum ETF (VAMO) aims to provide superior risk-adjusted returns through a combination of multi-factor strategies and an in-built hedging methodology using quantitative methods.
VAMO is the sixth fund from Mebane Faber promoted Cambria that has quickly gained over $400 million in assets. The actively managed VAMO seeks to exploit both value and momentum factors – considered to be complimentary, by investing in the top 100 ranked US stocks.
The methodology involves investing in undervalued stocks that are showing an upward price trend. Exposure to these two factors have historically provided higher returns compared to more traditional market-cap weighted benchmarks, according to Cambria’s research.
The fund uses the CAPE Shiller P/E ratio along with other such value metrics as free cash-flow yield and dividend yield to identify undervalued stocks, and tries to smooth volatilities that are typically associated with single-factors portfolios by combining the momentum factor.
One of the drawbacks of long-only exposure, according to Cambria research, is that investors can be exposed to long bear markets. The recent slump of the US markets was a classic example why investors would be interested in mitigating their downside risks.
VAMO can hedge up to 100 percent of the portfolio’s equity exposure by using derivative instruments if a top-down assessment by the fund manager determines the market is overvalued or in a downtrend.
To qualify for inclusion, stocks must have a minimum market cap of $200 million and display positive momentum and value traits. The fund avoids sector concentration by employing maximum industry caps and is well-diversified with about 100 stocks from small, medium and large-cap firms finding their fair-share of representation.
While stock allocations are rebalanced every month, hedges are scaled up and down on a weekly basis, which may result in higher turnover costs.
VAMO has an annual expense ratio of 0.59 percent.
Disclosure: No holdings