Cambria Value and Momentum ETF by Meb Faber | VAMO ETF Review

As investors we’re often guilty of making excuses for mainstream strategies when they inevitably struggle, whereas we’re quick to pillory alternative investments when they experience a similar challenging sequence of returns.

What’s the best example of this?

How about the S&P 500 in the 2000s when it was a wealth destroyer for an entire decade?

Negative nominal returns and even worse real returns with the dual knock-out combo of the Dot Com Bubble and Great Financial Crisis.

Let’s consider Gold from the early 1980s until the mid 2000s?

One of the most severe bear markets and under-water periods of all-time for an asset class that burst severely after unsustainably high returns in the 1970s.

At the end of the day ALL investing strategies have prolonged periods in the sun and in the shade.

Name me one that doesn’t?

Crickets.

We’ll notice articles pronouncing “value is dead” for it to return shortly thereafter to considerably outperform growth stocks.

Likewise, we’ll witness a strategy such as managed futures experience a rough 2010s where it is abandoned at mass to the point where very few products actually exist in the marketplace.

Cleary that doesn’t work anymore!

And then it does.

Ah, that forever swinging pendulum that perpetually rattles impatient investors and rewards those who understand its persistent back and forth nature.

This year many managed futures strategies have delivered “crisis alpha” that has conspired to save portfolios from absolute carnage when most other conventional investment strategies have been taken to the wood chipper.

Hence, today we’re going to review an alternative fund that faced challenges out of the gate but has since turned things around by offering stellar returns the past couple of years.

Cambria Value and Momentum ETF.

Ticker: VAMO

VAMO ETF combines three distinct research supported investing strategies that have proven to be worthy of consideration for informed investors.

  1. Value
  2. Momentum
  3. Tactical Hedges

Let’s unpack things further!

VAMO ETF Review covering Cambria Value and Momentum ETF by Meb Faber with a pendulum swinging
source: 849356 on pixabay.com

VAMO ETF Review | Cambria Value and Momentum ETF Review

Hey guys! Here is the part where I mention I’m a travel blogger, vlogger and content creator! This investing opinion blog post ETF Fund Review article is entirely for entertainment purposes only. There could be considerable errors in the data I gathered. This is not financial advice. Do your own due diligence and research. Consult with a financial advisor. 

Why VAMO ETF? The Case for Cambria Value and Momentum ETF by Meber Faber
source: cambriafunds.com

The Case For VAMO ETF: Value + Momentum + Tactical Hedges

The case for Cambria Value and Momentum ETF has been laid out clearly by Meb Faber in this investment case PDF:

“Cambria Value & Momentum ETF (VAMO) utilizes a quantitative approach to actively manage a portfolio of domestic equities that focus on value and momentum factors.

Value’s motto is ‘buy low, sell high,’ while momentum’s motto is ‘buy high, sell higher.’ Together, both strategies tend to perform well at different times.

Momentum Investing: Follows trends in the market by taking a long position in high-returning assets. It is based on the assumption that recent return trends will persist into the future.

Value Investing: This approach targets assets which are undervalued relative to their theoretical intrinsic value. This style of investing is based on the assumption that over time, the value of undervalued securities will eventually revert to their fair value.”

VAMO ETF Investment Universe

VAMO ETF Investment Methodology from step to step
source: cambriafunds.com

“Value, Momentum, & Tactical Hedging Cambria believes that a focus on all three factors – value, momentum and tactical hedging – produces a portfolio of companies that offer strong characteristics, with the potential added benefit of lower volatility and mitigating against market downturns.” 

In summary, this means the defensive playbook will involve hedging half of the portfolio by shorting the S&P 500 index when stocks are expensive. Likewise, when stocks are going down, Cambria will hedge half of the portfolio by shorting the S&P 500 Index. This means the portfolio can be anywhere from 100% long stocks, to 50% hedged, to completely market neutral (long the stocks in the portfolio, but short the S&P 500 Index).”


source: The Meb Faber Show on YouTube

Let’s Unpack This More: VAMO ETF Strategy

In a nutshell, we can unpack VAMO ETF strategically as follows:

  1. Long 100 US Equity Stocks: “Undervalued” + “Recent Winners” = 100% Long
  2. Short S&P 500 Futures if/when: “Expensive” + “Downward Trending” = 0 to 100% Short

Hence, Cambria Value and Momentum ETF is dynamic in the sense that it can range from being 100% long only momentum + value stocks all the way to market neutral where it’s a 100-100 (Net 0 / Gross 200).

Let’s explore a few different scenarios to better understand its “dynamic” nature.

Scenario A: The S&P 500 is not relatively expensive and markets are generally trending upwards = no hedge (100% long) 

Scenario B: The S&P 500 is extremely expensive and markets are downtrending severely = complete hedge (100-100 market neutral) 

Scenario C: The S&P 500 is somewhat expensive and markets are downtrending slightly = 1/2 hedge (100-50 long/short)

Scenario D: The S&P 500 is not relatively expensive but markets are downtrending slightly = partial hedge (100-25 long/short) 

Is The S&P 500 Expensive from a Relative P/E Standpoint?

Is the S&P 500 relatively expensive in terms of its current valuations?

In other words, from a P/E standpoint?

Let’s find out.

S&P 500 vs S&P 400 vs S&P 600 P/E

S&P 500 Forward P/E Ratios vs S&P 400 vs S&P 600
source: yardeni.com

When the US S&P 500 Large Cap is compared with the S&P 400 Mid Cap and S&P 600 Small Cap it certainly is relatively expensive:

17.4 vs 13.4 vs 12.8 

If you feast your eyes upon the middle of this figure you’ll notice that this wasn’t always the case.

From roughly 2004 until 2017 the S&P 500 was “less expensive” than its mid-cap and small-cap counterparts.

MSCI US vs ACW ex-US Forward P/E

MSCI US vs ACW ex-US Forward P/E
source: yardeni.com

Are US large cap stocks expensive relative to the rest of the world?

In a word.

Yes!!!

16.8 vs 11.6

S&P 500 Forward P/E Growth vs Value

S&P 500 Growth vs Value Forward P/E
source: yardeni.com

Surely, typically “growth tilted” S&P 500 can squeak out a win somewhere along the line.

Nope.

Growth vs Value looking awfully expensive too.

19.5 vs 14.6

Historical Precedent For When US Large Cap = Expensive?

What happened the last time the US large cap stocks were grossly overvalued relative to domestic mid-cap and small-cap equities, global stocks and value companies?

Lost decade.

Ah, the 2000s.

US Large Cap vs US Small Cap Value vs Emerging Markets Equities Portfolio Returns
source: portfoliovisualizer.com
US Large Cap vs International ex-US Small Cap vs REIT 2000s
source: portfoliovisualizer.com

Everything got beat up back then, right?

Nope.

Diversified investors with allocations to small-cap value and REIT for domestic equities, International small-caps and Emerging Markets made out just fine.

The S&P 500 seems generationally prone to investor exuberance with painful lessons as part of the overall equation.

Will history repeat itself again?

Likely not.

But a strategy that could potentially capture value and momentum in the 2000s while shorting the S&P 500 when it was “expensive” plus “downward trending” would have cleaned up handsomely.

The Case For Value + Momentum Investing

Value and Momentum investing strategies have historically beaten down on large-cap MCW indexes.

Let’s start with Value.

US Large Cap vs US Mid Cap vs US Small Cap 1972 to 2022 returns
source: portfoliovisualizer.com

Investors hanging out in US mid-cap and US small-cap value territory since 1972 have been rewarded by 100s of basis points of relative outperformance vs US large cap equities.

US Large Cap: 10.27 CAGR
US Mid Cap Value: 12.60% CAGR
US Small Cap Value: 13.56% CAGR

Ah, but most of that outperformance came in the 20th century though, right?

Nope.

Different Century.

Same story.

US Large Cap vs US Mid Cap Value vs US Small Cap Value 2000 until 2022
source: portfoliovisualizer.com

US Large Cap: 6.21 CAGR
US Mid Cap Value: 9.35% CAGR
US Small Cap Value: 9.44% CAGR

Let’s move on to Momentum where we can consult MSCI index results between its Global Momentum Index vs its parent Market Cap Weighted Index.

MSCI World Momentum vs MSCI World Parent Index MCW
source: msci.com

It’s another drubbing for the factor focused strategy of Momentum versus its Market-Cap Weighted parent index.

Past 10 Years: 11.76 vs 9.52
Since Inception (1994): 10.59 vs 7.52

Value and Momentum strategies have outperformed Market Cap Weighted Index strategies by 100s of basis points historically.

Got it.

But why value and momentum as a dual factor strategy?

Momentum as a persistence factor versus value as a pro-cyclical factor
source: msci.com

The reason Value and Momentum sure make a great Batman and Robin duo (and vice versa as they perpetually swap roles) is because they typically perform well during different stages of the economic cycle.

Momentum is a persistence factor. 

Value is a pro-cyclical factor. 

Hence, they’re not going gangbusters and/or bust usually at the same time.

Therefore, they make a great duo.

Why Long-Short Equities?

There are three main reasons to go long-short as opposed to long-only.

  1. Defensive (Hedge Downside Risk)
  2. Excess Returns (Attractive versus Unattractive)
  3. Provide Uncorrelated Returns

When markets are downtrending and you’re capturing the short-side of the equation it can significantly reduce losses.

Consider the following market neutral scenario:

A: -10 (long)   B: -15 (short)

If you’re 100% long A and 100% short B you’re net +5% returns whereas long-only investor A is -10%.

We’ve already discussed excess returns from the long-side of the equation where value-momentum strategies outperform market-cap weighted indexes.

On the short side of the equation by dynamically hedging you have the following potential scenario.

Value/Momentum = +15%
US S&P 500 = -10%

In a partial hedge scenario where your long end of the stick is up +15% and you’re partially hedged at 50% you stack +5% return for a total of 20%.

Finally, by investing in value and momentum stocks and hedging you’re delivering returns that aren’t correlated with the market.

This provides the potential for an overall portfolio diversification benefit.

VAMO ETF Overview, Holdings and Info

Whew!

We’ve been busy discussing the strategy behind value + momentum + tactical hedges as an investment strategy.

Now it’s time to pop open the hood of this fund.

VAMO ETF Top Positions

VAMO ETF top holdings
source: cambriafunds.com

Here are the top positions for VAMO ETF currently.

Where’s Tesla?

Just kidding.

One noteworthy company is Dillard’s Inc which seems to be a darling value stalwart.

VAMO ETF Monthly Target Hedge

VAMO ETF Target Hedge By Month
source: cambriafunds.com

Here we can see Cambria Value and Momentum ETF currently hedged in a market neutral configuration.

That’s hardly surprising.

US Large Cap equities are relatively expensive and certainly have been downward trending on the year.

It has triggered both clauses.

VAMO ETF Info

Ticker: VAMO
Net Expense Ratio: 0.59
Distributions: Quarterly
AUM: 131.4 Million
Inception: 09/08/2015

If you compare VAMO ETF versus other long-short equity ETFs and Mutual Funds its management fee is extremely reasonable at 0.59.

Additionally, the fund is well beyond the 50 Million AUM threshold that would potentially have it on the chopping block coming in at 131.4 Million AUM.

It’s been around since 2015 and pays quarterly dividends for investors seeking income.

VAMO ETF – Sector Exposure

VAMO ETF Sector Allocations
source: morningstar.com

For investors seeking differentiated sector exposure relative to vanilla funds, VAMO ETF delivers in spades.

It is overweight Energy, Basic Materials and Financials and underweight Technology, Healthcare and Consumer Cyclical.

VAMO ETF – Style Measures

VAMO ETF Measures Value and Growth
source: morningstar.com

Measures is where Cambria Value and Momentum ETF really shines.

It’s an across the board triumph of lower is better from a price/earnings, price/book, price/sales and price/cash flow perspective.

Where you’d want higher scores you’ve got VAMO ETF with significant wins in Dividend Yield and Historical earnings.

VAMO ETF – Stock Style

VAMO ETF Stock Style
source: morningstar.com

VAMO ETF will delight value investors seeking small and mid-cap exposure specifically.

Notice that the currently “expensive” large-cap equities aren’t clogging up much space in the style box?

VAMO ETF Alpha Architect Screening

How would I cope in this world without Alpha Architect’s incredible Fund Screener?

SPY ETF Alpha Architect Screener
source: alphaarchitect.com
Cambria Value and Momentum ETF VAMO Alpha Architect Screener
source: alphaarchitect.com

EBIT/TEV: 22.49% vs 5.55% 
Earnings/Price: 16.67% vs 4.71%
Momentum (2-12): 23.05% vs -14.81%
Returns on Assets: 15.98% vs 11.33%

VAMO ETF is clearly delivering on its “value” and “momentum” mandate with an across the board drubbing versus the S&P 500.

Cambria Value and Momentum ETF Performance

Here is where things get a bit tricky.

VAMO ETF hit the frying pan during the midst of US Large Cap Equities triumphing over global stocks and most factor strategies despite stretched valuations.

Hence, out of the gate Cambria Value and Momentum ETF struggled mightily as it was underperforming relatively on the long-side of the equation and also not helping itself on the short side either.

The results from 2015 until 2020 were indeed challenging.

VAMO ETF 2015 to 2020 Returns

Cambria Value and Momentum ETF returns from 2015 until 2020
source: portfoliovisualizer.com

How many investors would have hit the eject button at some point?

It takes a lot of patience to succeed as an investor and if you’re not willing to put up with the “shade” you don’t get to witness the “sunshine”.

VAMO ETF 2021 to 2022 Returns

VAMO ETF vs SPY from 2021 until 2022
source: portfoliovisualizer.com

Here is where being patient with a specific strategy pays off big time.

You’ll notice VAMO ETF beating the tar out of the S&P 500 over the past two years.

2021 during good times.

2022 when shit hit the fan.

Here the long-side of the equation outperformed as did the tactical hedges.

Cambria Value and Momentum Pros and Cons Thumbs Up and Thumbs Down
source: pixabay.com

VAMO ETF Pros and Cons

Let’s examine the pros and cons of Cambria Value and Momentum ETF.

VAMO Pros

  1. Concentrated exposure to both “value” and “momentum” equity strategies which historically have outperformed market-cap weighted indexes by 100s of basis points
  2. Hanging out mostly in small-cap and mid-cap territory which historically outperforms large-cap equities
  3. Robust EBIT/TEV and ROA versus vanilla funds
  4. The ability to hedge (or not hedge) with a dynamic quantitative strategy that gauges whether or not the S&P 500 is “expensive” and/or “downward” on the short side of the equation
  5. Low correlation with market returns offering investors a puzzle piece that can help diversify a portfolio at large
  6. The unique potential to outperform and be more defensive than other equity strategies
  7. Very reasonable fee of 0.59 for long-short equity (maybe best in class?)
  8. A chance to support a boutique ETF provider offering innovative funds

VAMO Cons

  1. The strategy can clearly underperform when value/momentum stocks are trailing market-cap weighted strategies and tactical hedges get whipsawed adding insult to injury
  2. The patience required to hold a strategy such as this one is not for investors who have weak hands and soft chins

VAMO ETF Potential Portfolio Solution

Now that we’ve taken a thorough look at VAMO let’s see how it can potentially fit into a portfolio at large.

Diversified Quant Portfolio

A simple 4 fund portfolio is something worth considering:

40% AVGE
20% VAMO
30% DBMF
10% TYA

Here we’ve got a four fund portfolio offering investors four unique strategies.

AVGE offering up global core equities with a “value tilt”.

VAMO provides a long-short concentrated “value” and “momentum” fund with the potential for tactical hedges.

DBMF offers us Managed Futures exposure with its long-short capabilities.

TYA creates efficient portfolio space by offering 30% notional fixed income allocation.

Nomadic Samuel Final Thoughts

Whew!

We’re at 2598 words at this point.

I know I’ve spent considerably more time going over the strategy of this fund compared to other ETF reviews but I felt I had to do it.

Firstly, its a strategy that takes a bit more time to unpack and understand.

Secondly, it struggled mightily out of the gate BUT has also performed otherworldly in recent years.

As investors I think we need to have the same level of patience for alternative strategies as we do with our mainstream ones.

If we’re willing to put up with a decade of below water performance for the S&P 500 in the 2000s is it not hypocritical to want to eject during a rough five year patch for this particular fund?

At the end of the day we’re promised a strategy and nothing more.

Results come for those who can sit patiently with it when it inevitably underperforms.

Consider the wise words of Larry Swedroe on the subject of investor psychology and patience from his article “Patient Investing Is Hard

“Patient investing is the ability to endure long periods of underperformance — adhering to your well-thought-out plan in the form of an investment policy statement — in hopes of achieving your investment objective. Unfortunately, my more than 25 years of experience in advising investors has taught me that when it comes to judging the performance of investment strategies involving risk assets, far too many investors believe that three years is a long time, five years a very long time and 10 years an eternity.”

So that’s where I’ll leave things today.

I’m in Argentina at the moment and I’ve got a bottle of Malbec calling my name.

Now over to you.

What do you think about VAMO ETF?

Is it on your radar?

Let me know in the comments below.

Ciao for now.

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