Cambria Getting Ready To FAIL

Cambria debuts international tail risk ETF with a world class ticker.
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Cambria Investment Management announced today that it is "launching" a global version of one of its existing popular ETFs. I put launching in quotes because technically it's converting one of its existing products into the new fund.

From the Cambria press release:

El Segundo, California – March 15, 2021 – The Cambria ETF Trust and its investment manager, Cambria Investment Management, LP, an independent, investment advisory firm focused on quantitative asset management and alternative investments, today converted the Cambria Sovereign Bond ETF (SOVB) to the Cambria Global Tail Risk ETF (FAIL). The investment strategy of the fund seeks to mitigate significant downside market risk in global ex-US equities. FAIL is listed on the CBOE BZX exchange.

The Cambria Tail Risk ETF (TAIL) is already the company's largest fund, which invests in a combination of out-of-the-money put options and U.S. Treasuries in order to provide a source of returns in the event of a significant market decline. The Cambria Global Tail Risk ETF (FAIL) will use the same general strategy, but will use put options on developed foreign equities instead of U.S. equities. Instead of solely U.S. Treasuries, FAIL will invest in U.S. Treasuries, TIPS and foreign sovereign bonds.

First of all, hats off to the great ticker. It takes a bit of audacity to use a ticker like FAIL to label your ETF. I'm sure that someone in Marketing probably encouraged Meb Faber to rethink the ticker choice, but I think it seems very on brand for a company that uses TOKE as the symbol for its cannabis ETF.

FAIL is ultimately going to perform a lot like TAIL, so we can use TAIL's 5-year history to give us an idea what to expect.

TAIL ETF Performance; source: ETF Action

TAIL ETF Performance; source: ETF Action

There are essentially two things you should expect with TAIL or FAIL.

  • Slow and steady losses in most market environments.
  • Sharp and steep gains in true bear markets.

In most markets, the Treasury positions will produce modest gains or losses, but the out-of-the-money put options will, in the majority of cases, expire worthless resulting in losses for the overall portfolio.

A significant market decline is where TAIL/FAIL makes its money.

There are three historical instances where TAIL really kicked in. In early 2018 during the VIX product meltdown, TAIL gained more than 10% during a time when U.S. equities fell 10% in pretty short order. In late 2018 during the Fed pivot when the S&P 500 fell roughly 20%, TAIL jumped more than 30% from valley to peak. And, of course, during the COVID bear market, TAIL rose 40%.

In a vacuum, TAIL makes a poor long-term investment on its own, but when used as a risk hedge in a broader portfolio, it does a great job. And I appreciate Cambria's truthfulness in advertising.

"As the fund is designed to be a hedge against market declines and rising volatility, Cambria expects the fund to produce negative returns in most years with rising markets or declining volatility."

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