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Faber’s No-Fee ETF — and Why Asset Allocation Doesn’t Matter

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Investors have come to expect trendsetting low-fee funds from Vanguard, or if it’s free, then perhaps from Schwab, which offers commission-free ETF trading.

But the smaller-profile Cambria Investment Management, which runs five ETFs under the stewardship of investment maverick Mebane Faber, has beat the big boys to the punch: His new asset allocation fund sports the low, low price of 0.00% in management fees.

The Cambria Global Asset Allocation Fund (GAA), launched last month, has quickly topped $10 million in assets under management.

“It’s very disruptive,” Faber tells ThinkAdvisor in an interview, adding his expectation that Schwab or Vanguard will follow his lead.

Those mega-firms would seemingly have the capacity to offer a loss-leader fund, but how is Faber — who explicitly characterizes the zero fee as “permanent” (vs. the fund industry’s paradigmatic “temporary waiver”) — doing it?

While Faber says he is bearing the loss of operating the funds, he expects to reach profitability as the fund grows, since some of its underlying investments redound to Cambria’s bottom line.

That is to say, the fund, per its name, invests in a wide gamut of assets including domestic and foreign stocks, bonds, real estate, commodities and currencies, and it does so through holdings of other ETFs. Cambria’s other ETFs, which do charge fees, are counted among the fund’s 29 ETF holdings (though none are among the top 10 holdings, which are mostly Vanguard ETFs).

But the ETF’s total annual fund operating expense of 0.29% is on the low end of the cost spectrum, and there is a principled reason for that, apart from any marketing value the move confers.

Faber is an investment wonk who pores over data and blogs and conducts his own research, having written  three previous books with a fourth to be published in the coming weeks.

That book, called “Global Asset Allocation,” investigated more than a dozen of the best known asset allocation models — including the 60-40 stock-bond allocation, the Harvard and Yale endowment models, risk parity, Rob Arnott’s fundamental indexing, and the so-called permanent portfolio.

Faber compared all these approaches over a 40-year period starting in 1972, looking at real returns (net of inflation) to make an “apples to apples” comparison. The most surprising finding was not that Mohamed El-Erian’s Harvard portfolio performed best, or that the “permanent portfolio” performed worst.

No, what shocked Faber was that the difference between the best and worst portfolios over more than four decades was just 1.5% a year, “which is remarkably low,” he comments.

His conclusion? That asset allocation matters much less than investors think.

“Since the average mutual fund charges 1.25% in annual fees, [had you invested in the best portfolio through a mutual fund] you would have transformed the best fund into almost the worst.

“And if you hired an advisor,” Faber continues, “the average advisor charges a 1% annual fee, so now you’re up to 2.25%. So the average advisor would have taken the best portfolio to [a performance that is] worse than the worst [of the asset allocation models].

“So if all you’re doing is buy and hold, asset allocation — how much gold, stocks and bonds you own — as long as you have a little of each, doesn’t matter. But what does matter is how much you pay in fees.”

Faber’s thoughts on this take on added interest given his public proclamation during the 2008 financial crisis that buy and hold was dead.

The tactical asset allocation strategist confesses a unique ability to remain cognitively undisturbed while simultaneously holding two opposing views. He simply recognizes that passive investors may want to not delve deeply into portfolio optimization, and his research findings compelled him to offer a product for such people.

“I prefer tactical, but buy and hold is completely legitimate,” he says. “You just shouldn’t be paying much … And at 0.29% a year, GAA is the lowest-cost asset allocation ETF out there.”

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