Cabana unveils suite of ‘Target Drawdown’ ETFs

Sep 18th, 2020 | By | Category: Alternatives / Multi-Asset

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US investment adviser Cabana Asset Management has introduced its inaugural ETFs with the launch of five multi-asset, risk-managed funds.

Chadd Mason, CEO of The Cabana Group

Chadd Mason, CEO of The Cabana Group.

The ETFs have listed on NYSE Arca and come to market through a partnership with white label platform Exchange Traded Concepts.

The funds replicate Cabana’s ‘Target Drawdown’ investment strategies which the firm has offered through separately managed accounts since 2012.

Collectively, the five ETFs come to market with more than $1 billion in assets under management as a majority of existing investors voted in favour of switching to the new ETF wrapper.

Cabana’s Target Drawdown approach seeks to define risk in terms of the maximum expected percentage loss between adjacent peaks and troughs. The five initial ETFs come with target drawdown percentages ranging from 5% for the most conservative investor to 16% for those willing to take on more risk. The suite is as follows:

Cabana Target Drawdown 5 ETF (TDSA US)
Cabana Target Drawdown 7 ETF (TDSB US)
Cabana Target Drawdown 10 ETF (TDSC US)
Cabana Target Drawdown 13 ETF (TDSD US)
Cabana Target Drawdown 16 ETF (TDSE US)

According to Cabana, the Target Drawdown approach aims to help investors stay invested by reducing emotional biases that lead to selling out at the bottom of the market and missing the upside from any subsequent recovery. The strategy’s ETF debut is certainly timely as it comes shortly after the stock market bounced back in record time following the Covid-19 sell-off in February and March.

Chadd Mason, CEO of The Cabana Group, commented, “What we’ve experienced this year underscores the necessity of proper hedging, transparency, and risk mitigation as key parts of investor portfolios. It also makes clear the need to ensure that any strategy being put to use has a ‘real world’ track record and is backed by an experienced team that has lived and worked through times of significant market turbulence.

“We’ve built Cabana since 2008 with the goal of providing all of our clients, be they advisors or individuals, with rigorously tested, high-quality risk management tools, and we are thrilled to be bringing our strategies to market today in the low-cost, highly liquid ETF wrapper.”

Asset allocation is driven by the proprietary Cyclical Asset Reallocation Algorithm (CARA) which processes a combination of fundamental and technical data to help identify the current stage of the economic cycle and allocate to assets that are deemed attractive at that point.

CARA is designed to mitigate risk by incorporating inverse and non-correlated asset classes, as well as through reallocation in response to changing macroeconomic conditions.

Cabana utilizes an ETF-of-ETFs structure to gain the required multi-asset exposure. According to the ETFs’ prospectus document, these underlying ETFs cover a broad universe of US and foreign equities (including emerging markets) as well as investment-grade and high yield fixed income securities from any duration segment.

Each Target Drawdown ETF has gross expense ratios ranging from 0.93% to 0.95%, and net expense ratios, after contractual fee waivers, of 0.67% to 0.69%, which includes the cost of investing in the underlying ETFs. The fee waivers will be reviewed when they expire in September 2021.

Investors have demonstrated a significant appetite for risk-managed solutions as evidenced by the success of defined-outcome ETFs over the past two years. According to Cabana, however, their Target Drawdown ETFs offer a compelling, alternative take on risk management which avoids many of the pitfalls inherent in options-based defined-outcome investing.

Mason added, “In looking at the ETF space, we see certain funds being marketed in a similar way, but investors may be surprised in the trade-off they’re making in those cases between risk and reward. Our strategies never use derivatives and never get ‘out of the market.’ When investors use derivatives, it is inevitable they will see slippage and erosion in alpha.

“Instead, we use asset class ETFs to express our views on those parts of the market that are going into or coming out of favor. Put simply, we’ve built our firm and the strategy behind these ETFs seeking to do the two things necessary to be a successful investor: avoid large losses and stay invested.”

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