Cambria Investment Management has expanded its lineup of ‘tail risk’ ETFs with the introduction of the Cambria Global Tail Risk ETF (FAIL US), a strategy that protects against significant downturns in stocks listed outside of the US.
The fund is designed to serve as a tactical tool for investors looking to protect against significant market declines in global ex-US stocks.
The fund is listed on Cboe BZX Exchange and comes with an expense ratio of 0.69%. It has been created by repurposing one of Cambria’s less popular fixed income ETFs, the $13 million Cambria Sovereign Bond ETF.
The fund combines investment in global short and intermediate-term sovereign bonds with an actively managed, quant-driven portfolio of put options referenced to indices or ETFs covering stocks outside the US, including both developed and emerging markets.
Put options purchased for the portfolio will typically expire within a month and will be priced at-the-money or up to 30% out-of-the-money.
During significant bear markets and spiking volatility, the strategy is expected to produce positive returns, both from the government bonds which typically exhibit a negative correlation to equity markets as well as the put option portfolio as the prices of the underlying indices and ETFs fall below their option strike prices.
However, during normal market conditions when prices are rising and volatility is low, the ETF will typically produce a negative return primarily due to the regular cost of the option premiums.
As such, the fund may serve as a liquid, tactical tool for investors wishing to hedge their portfolios from a potential market downturn in the near future but may not be suitable as a long-term investment holding.
Meb Faber, Chief Investment Officer at Cambria Investment Management, said: “FAIL is a natural complement to our US-focused Cambria Tail Risk ETF, and provides an alternative to traditional inverse funds in hedging ex-US equity market risk.”
Cambria also offers a US-focused version of this strategy via the Cambria Tail Risk ETF (TAIL US). TAIL launched in April 2017 and currently houses $330m in assets. It comes with an expense ratio of 0.59%.
TAIL delivered on its investment objective during the Covid-19 market sell-off at the beginning of last year – between 21 February and 23 March, the SPDR S&P 500 ETF (SPY US) tumbled 24.8% while TAIL soared 44.0% over the same period. The subsequent fast recovery in equity markets, however, meant the outperformance gap had closed by November.
