By Timothy Strauts
It is well-known that a diversified portfolio will have a lower
volatility and more consistent returns than a portfolio
concentrated in only one asset class. But if volatility is as
extreme as we saw in 2008, even a diversified portfolio will suffer
large losses. For example, the Morningstar Moderate Target Risk
Index, which has a 60% equity/40% bond allocation, suffered a loss
of over 33% from October 2007 to March 2009. Losses of this size
are likely to cause many people to sell out of the market
completely--at exactly the wrong time. The strategy employed by
Cambria Global Tactical ETF (
seeks to reduce the chance of large negative returns by selling out
of the market early based on a systematic trend-following strategy.
GTAA may be a good choice for investors who can't tolerate large
losses in their investment portfolio.
GTAA is an allocation fund for those with a moderate to aggressive
risk tolerance who are interested in an actively managed
absolute-return strategy. It is intended to serve as a core
holding, either by itself or paired with other alpha-seeking active
funds. For investors who do not have the time or inclination to
research, monitor, and rebalance multiple funds, allocation funds
like this provide a simple solution.
GTAA follows a unique investment strategy based on the research
of portfolio manager Mebane Faber. The portfolio is designed to
produce absolute returns by following a systematic trend-following
strategy that employs very wide diversification of holdings. The
fund will invest in U.S. stocks, international stocks, bonds,
commodities, and foreign currencies all at the same time. The fund
gains exposure to each asset class through narrowly focused
exchange-traded funds. For example, instead of buying iShares MSCI
EAFE Index (
) for international exposure, the fund will instead buy each
individual country ETF. This creates a very large portfolio of
50-100 ETFs owned at any one time. The broad multiasset
diversification helps smooth out poor performance by any one asset
The trend-following component of GTAA seeks to invest only in
funds that are appreciating and to avoid funds that are declining.
It does so by using a fund's simple moving average, or SMA, as an
indicator. For example, the 200-day SMA is a fund's average price
over the past 200 trading days. A fund is in a positive trend when
the market price of the fund is higher than the SMA value. A basic
strategy is to own the fund when it is above its 200-day SMA and to
hold cash when it is below. Research shows that such a strategy
avoids large losses in market crashes but limits returns during
market turning points. GTAA does not disclose exactly what SMAs it
follows, but it likely uses multiple SMAs to allow it to scale into
and out of positions. It is possible that GTAA could move its
entire portfolio to cash in a market crash if all investments were
trading below their SMA.
The final component of GTAA is a relative strength overlay to
tactically overweight asset classes that are performing the best.
Relative strength is the measure of how a fund is performing
relative to other funds. GTAA will overweight asset classes that
have strong relative strength. These tactical changes will increase
or decrease each asset class' weight by a few percentage points and
do not dramatically change the composition of the overall
GTAA was launched on Oct. 25, 2010, so there is not enough
performance history for a star rating, but we can make some basic
comparisons. Since inception, GTAA has returned a negative 3.25%.
The most comparable benchmark would be the Morningstar Moderate
Target Risk Index, which is up 10.28% over the same time period.
Trend-following strategies like GTAA often underperform in periods
where there is no clear direction for the market. In the fourth
quarter of 2011, stock markets sold off because of the European
debt crisis. Equity and commodity ETFs traded below their moving
averages, and GTAA moved most of the portfolio to cash to protect
capital. When the European Central Bank announced its bank lending
program, the markets rebounded quickly and GTAA missed out because
it was positioned in cash.
Research shows that a moving-average timing strategy is
successful at avoiding the worst of bear markets. To avoid the risk
of substantial capital loss seen in 2008 the portfolio will
sometimes get caught in a large cash position when the market is
rallying. An investor in GTAA needs to understand that its returns
will deviate dramatically from major stock market indexes because
of its broad diversification and market-timing strategy. The value
of this fund will be seen over a full market cycle where it could
produce equitylike returns with lower volatility.
The fund is an active ETF that achieves its investment objective by
primarily investing in other ETFs to create a very diverse
portfolio. Assuming no tactical overweightings, the fund should
hold approximately 16% U.S. stocks, 15% international stocks, 17%
fixed income, 10% foreign currencies, 15% real estate, 14%
commodities, and 13% cash. While not explicitly stated in the
prospectus, the portfolio seems to equal-weight most positions. For
example, the fund owns all of the sector ETFs that make up the
S&P 500 in about the same percentage. Turnover will likely be
more than 100% per year because of the relative-strength
trend-following strategy that will move assets to cash in declining
markets. GTAA also has the ability to own closed-end funds but has
not done so yet.
GTAA's current allocation is 34% U.S. stocks, 9% international
stocks, 0% commodities, 38% fixed income, 6% foreign currencies,
and 13% cash.
With a fee of 1.42%, it is one of the more expensive ETFs on the
market today. The fund will get a fee breakpoint when it crosses
over $250 million in assets.
There are no ETFs that can be directly compared with GTAA because
of its unique strategy. There are iShares allocation ETFs, which
range from conservative to aggressive; these include iShares
S&P Conservative Allocation (
), iShares S&P Moderate Allocation (
), iShares S&P Growth Allocation (
), and iShares S&P Aggressive Allocation (AOA). Each of these
funds charges 0.11% on top of the fees charged by the underlying
funds, but at different weightings to reflect their varying risk
tolerance. These ETFs only invest in stocks and bonds and exclude
commodities, foreign currencies, and cash. Although the trading
volume in these allocation ETFs is relatively low, the underlying
ETFs these funds invest in are liquid. Investors should get good
execution, but when trading large dollar amounts, be sure to use
limit orders and be patient.
Morningstar licenses its indexes to certain ETF and ETN providers,
including BlackRock, Invesco, Merrill Lynch, Northern Trust, and
Scottrade for use in exchange-traded funds and notes. These ETFs
and ETNs are not sponsored, issued, or sold by Morningstar.
Morningstar does not make any representation regarding the
advisability of investing in ETFs or ETNs that are based on
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