Cambria Advisors recently sent out a mailing that was somewhat self-congratulatory noting the 10-year anniversary of the launch of its first ETF. As we will explore shortly, I contend that the congratulations are well-deserved from a number of perspectives. The email missive piqued my interest for a specific reason. The main comparisons made in the email citing Morningstar data were with traditionally structured mutual funds. That is not cherry-picking because restricting the comparisons to other active US equity ETFs with at least 10 years of history would have been a very small sample size of less than a dozen.
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The exchange-traded mutual fund in question is the Cambria Shareholder Yield ETF, SYLD. Cambria’s narrative states that a major inspiration for this launch was to provide dividend-focused ETF investors with a choice beyond the only other dividend-income-focused ETFs on the market at that time. They were algorithmic index funds focused singularly, or at least primarily, on maximizing the ETF’s dividend yield. Cambria’s management considered this approach suboptimal.
The thesis behind SYLD was to maximize the fund’s shareholder yield while screening out the stocks of companies with low-quality balance sheets, skyrocketing price multiples and dismal growth prospects. Shareholder yield is defined as the sum of a stock’s dividend yield (paid over previous twelve months minus special dividends) and the percentage of net share buybacks over the previous twelve months. Specifically, SYLD uses a quantitative approach to invest in liquid large-cap and midcap US equities with high cash distribution characteristics. The fund’s active management team prioritizes as candidates the stocks with the best combined rank of dividend payments and net stock buybacks, the key components of shareholder yield. The fund’s managers also screen for value and quality factors, including low financial leverage. All stocks are researched daily for extraordinary events and major signs of management disruption.
The email celebrates the success of SYLD with the following proclamations.
“So, looking back with the fullness of time, how did the thesis pan out?
SYLD was ranked the #1 best performing fund in Morningstar’s Mid-Cap Value Category over the 10-year period on an absolute, total return basis as of 6/30/2023.
The Cambria Shareholder Yield ETF ranked #1 out of 268 funds in the Morningstar Mid-Cap Value Category on an absolute, total return basis over the 10-year period as of 6/30/2023.
The Cambria Shareholder Yield ETF ranked #1 out of 361 funds in the Morningstar Mid-Cap Value Category on an absolute, total return basis over the 5-year period as of 6/30/2023.
The Cambria Shareholder Yield ETF ranked #5 out of 380 funds in the Morningstar Mid-Cap Value Category on an absolute, total return basis over the 3-year period as of 6/30/2023.
SYLD received a 5-star Overall Morningstar rating as of 6/30/23 out of 380 funds in the Mid-Cap Value Category based on risk-adjusted returns”
This campaign intrigued me for a number of reasons. I am probably the first documented advocate for using the more efficient ETF structure for active management in an article published in the December 2000 Journal of Investing still available on ETF.com. The URL for the article is https://www.academia.edu/27871526/ETFs Can Benefit Active Managers. More recently, I published a study on ResearchGate.com that is also available on the ValuEngine website showing that the many inefficiencies associated with having to redeem shares in cash everyday along with other operational inefficiencies costs the average actively managed mutual fund about 2.00% in pre-tax returns versus the same fund in the ETF structure. For investors being taxed on annual capital gains distributions, the savings can be even more. This article, leveling the playing field for active managers can be found here, https://www.valuengine.com/download/backtesting/210803LPFforActiveManagers.pdf.
Monthly research made available by S&P Global and maintained on their blogs have studies under the name of SPIVA, an acronym that stands for S&P Index vs. Active. The sheer volume of reference data presented over more than 25 years of these studies makes them well worth subscribing to on the S&P blog. The historical data presents a compelling case that investing in actively managed mutual funds is foolish because the majority of them do not perform as well as the relevant S&P benchmark index in the vast majority of years. Over five-year and 10-year periods, the percentage of outperforming actively managed mutual funds gets smaller and smaller.
As a long-time quantitative analyst who invests personal assets primarily in index ETFs and who also specializes in historical studies and backtests, I find the SPIVA research very valuable. However, there is a basic flaw in the argument that needs to be discussed. The returns are always displayed against the benchmark indexes themselves and the latter are not directly investible. I’ve long maintained that the best comparisons would be ETFs tracking these benchmarks vs. actively managed ETFs. Alas, until recently there were very few actively managed ETFs to match against benchmark-indexed ETFs. The success claims of SYLD caught my eye because it demonstrates that disciplined active management can hold its own against benchmark ETFs when the ETF structure is used, thus leveling the playing field. The one drawback was that in using Morningstar comparisons, the competitors mostly used the inefficient redeem-at-distributor-in-cash-daily structure. I wanted to compare “apples with apples.”
Toward that end, I went to ETFdb Pro and found that of the 315 ETFs classified as Actively Managed US Equity ETFs, only 264 were in existence in 2018. Many of the reasons for this are explained in my paper referenced above. Although actively managed and defined-outcomes are the two fastest growing categories of US ETFs, the fact is that there are very few actively managed ETFs with even 5 years of history. The 10 exemplary years posted by SYLD truly stand out.
In fact, of the top 12 performances that satisfied the criteria, the only two that had ten years of history were SYLD and WTV )the Wisdom Tree US Value Fund). Coincidentally, WTV also focuses on characteristics similar to shareholder yield. A closer look, however, reveals that WTV along with several other entries on this list began their lives as algorithmic index funds, then changed to actively managed ETFs within the past five years or less. Here is the table.
|Rank||Symbol||Name||Assets ($Mil)||YTD Price Change||5 Year Returns|
|1||IETC||iShares U.S. Tech Independence Focused ETF||$157||36.83%||16.60%|
|2||SYLD||Cambria Shareholder Yield ETF||$823||8.31%||12.72%|
|3||USMC||Principal U.S. Mega-Cap ETF||$1,516||23.53%||12.21%|
|4||PSET||Principal Quality ETF||$38||14.58%||12.16%|
|5||CWS||AdvisorShares Focused Equity ETF||$75||15.81%||11.77%|
|6||LRGE||ClearBridge Large Cap Growth ESG ETF||$156||32.73%||11.24%|
|7||FLLV||Franklin U.S. Low Volatility ETF||$153||7.30%||11.01%|
|8||WTV||WisdomTree U.S. Value Fund||$147||13.77%||10.62%|
|9||IEDI||iShares U.S. Consumer Focused ETF||$14||14.90%||10.61%|
|10||YLDE||ClearBridge Dividend Strategy ESG ETF||$30||9.79%||10.26%|
|11||TTAC||FCF US Quality ETF||$203||13.76%||10.21%|
|12||ARKQ||ARK Autonomous Technology & Robotics ETF||$1,165||37.58%||10.03%|
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
The analysis table below contains five actively managed ETFs among the top 12 performers listed above. Descriptions have been taken from a combination of two outside sources: ETF.com and ETFdb.com. The ETFs utilized in this analysis include:
Cambria Shareholder Yield ETF (SYLD) – The ETF is comprised of the 100 companies with the best combined rank of dividend payments and net stock buybacks, which are the key components of shareholder yield. The fund’s managers also screen for value and quality factors, including low financial leverage. All stocks are researched daily for extraordinary events and major signs of management disruption.
iShares U.S. Tech Independence Focused ETF (IETC) – IETC is an actively managed fund of US stocks in the information technology sector according to an alternative classification system defined by machine learning algorithms. The market cap-weighted fund targets increased exposure to firms with a high Technology Independence Score. IETC had been an indexed fund prior to 2019. Active management was added in an oversight capacity.
AdvisorShares Focused Equity ETF (CWS) – CWS holds a small basket of fundamentally sound US mid and large-cap companies in order to outperform the S&P 500 Index. These are companies that have shown strong sales history, high earnings quality and dominant positions in their respective markets, among other attributes. The fund manager uses a variety of proprietary models to evaluate companies’ intrinsic value and growth potential. Unlike other active equity funds on the market, CWS takes a longer-term view on its holdings and aims to minimize portfolio turnover.
Wisdom Tree Value ETF (WTV) – WTV is actively managed and aims to provide income and capital appreciation. The fund’s selection process uses a model that screens US large- and mid-cap for favorable quality characteristics that demonstrate profitability, mainly, strong ROE and ROA. The universe is then screened for minimum shareholder yield, which is the combined yield of dividends and share buybacks. The result is a portfolio of about 200 stocks, with an active approach to risk controls on sector weights based on market conditions. Prior to December 18, 2017 the fund was named WisdomTree US Large-cap Value Fund and traded under the ticker symbol EZY. The fund tracked the WisdomTree US Large-cap Value Index. Prior to June 29, 2017 the fund was passively managed; it was named WisdomTree Large-cap Value Fund and tracked the WisdomTree Large-cap Value Index
ARK Autonomous Technology & Robotics ETF (ARKQ) The third fund launched by ARK Investment Management is like many ETFs in the global technology segment. Rather than attempt to provide broad exposure to tech companies, the fund’s active mandate is to identify companies that will benefit from new technologies and automation. Specifically, ARKQ’s managers appear interested in specific technologies with transformative businesses in automation, energy, and artificial intelligence. Because of its thematic approach, pure-play portfolio implementation is more difficult. The fund uses its own internal research and analysis in selecting companies that capitalize on disruptive innovation that enable development in the markets they operate.
Two benchmark index ETFs are also shown for comparison. Since SYLD specifies its category as midcap value, confirmed as appropriate by grouped market cap constituent analysis from its ValuEngine Report, IWS, the iShares Russell Midcap Value ETF is included for comparison. As usual, IVV, the iShares S&P 500 ETF (more cost-effective and structurally efficient than SPY) is also used for comparison.
|ETF Name||Cambria Shareholder Yield ETF||iShares US Tech Independence-Focused ETF||AdvisorShares Focused Equity ETF||Wisdom Tree Value||ARK Autonomous Technology & Robotics||iShares Russell Midcap Value ETF||iShares S&P 500 ETF|
|Forecast 3-mo. Price Return||0.30%||2.93%||2.01%||0.34%||1.81%||2.05%||2.07%|
|Forecast 1-yr. Price Return||-6.09%||0.10%||0.14%||-6.01%||0.29%||-1.81%||-1.36%|
|Historic 1 mo. Price Return||3.01%||0.92%||2,14%||4.11%||-0.86%||1.61%||0.61%|
|Historic 3 mo. Price Return||14.62%||20.75%||9.84%||12.66%||24.57%||7.97%||10.38%|
|Historic 6 mo. Price Return||-3.99%||22.56%||6.04%||-2.17%||10.63%||-2.30%||8.38%|
|Historic 12-month Price Return||11.10%||16.30%||20.90%||14.58%||-3.27%||3.71%||10.21%|
|Historic 3-Yr. Ann. Price Return||25.34%||11.02%||12.80%||17.79%||1.85%||11.88%||11.76%|
|Historic 5-Yr Ann. Price Return||12.59%||16.25%||11.67%||10.51%||10.39%||6.45%||11.27%|
|Historic 10-Yr Ann. Price Return||12.17%||N/A||N/A||11.14%||N/A||8.41%||12.27%|
|Number of Holdings||100||172||26||123||37||700||500|
|Largest Holding||Ryerson Holdings (RYI)
|Microsoft (MSFT) 11.0%||TREX
|Meta Platforms (META) 2.3%||Tesla (TSLA) 13.5%||Parker Hannefin (PH) 0.7%||Apple (AAPL) 7.5%|
|Avg. Market Cap.($B)||17.6||691.9||48.9||46.9||208.2||21.2||678.9|
|Price/Earnings Ratio||6.3||39.9||20.1||9.3||Neg. Earnings||18.5||22.7|
|Assets ($Mil AUM)||824.4||154.5||75.5||146.8||1,208.2||1,330.8||3,550.0|
* Data as of August 6, 2023
Current ValuEngine reports on these stocks or ETFS can be viewed HERE
- The top performer by a wide margin in the sample was IETC, the iShares ETF using an AI algorithm to select technologically independent stocks, then weighting them by market cap. This is certainly a different definition of active management. It also has an even higher average market cap than IVV, the latter representing the S&P 500 Index. Close in many of its overall characteristics to QQQ, the Invesco Nasdaq-100 ETF, IETC benefited similarly to the tech boom during the past five years. That said, IETC holds more stocks than QQQ including some interesting lesser-known names with an expense ratio that is actually slightly lower than that of QQQ. (Invesco also offers QQQM which has a lower expense ratio than both). IETC also bested the performance of more traditionally active ARKQ from ARK Investment Management which charges, by far, the highest expense ratio in the study. All this taken together, IETC is probably worth looking into as an alternative to QQQ and ARK’s ETF offerings. Liquidity, however, may be an issue for some investors.
- Given that midcap value stocks were definitely out of favor during the past five- and ten-year periods as seen by the direct comparisons of midcap value benchmark ETF IWS with IVV, the performance of SYLD is quite impressive. SYLD handily outperformed IWS in every time frame while delivering a study-best dividend yield of 2.7%. With respect to IVV, SYLD outperformed in five out of the seven time frames measured. For the entire 10-year period, SYLD finished with a return just 0.10% lower than IVV in a period when large cap was king. For the 5-year period, SYLD’s annualized margin over IVV of 1.32% more than covered its fee of 0.59%. Like IVV, SYLD has never had a capital gains distribution.
- CWS, the AdvisorShares Focused Equity ETF, is most similar to a traditional mutual fund. With its first launch in 2009, AdvisorShares was the US pioneer of actively managed equity ETFs. In recruiting active managers to utilize his platform as a launch pad, firm founder Noah Hamman lit the slow-burning fuse that has now become an explosion of active equity ETF launches. In the case of CWS, well-known stock-picker and Blogger Eddie Effelbein is the portfolio manager, and the fund was launched in 2016. True to the word focus in its name, CWS buys and holds high-conviction names, generally less than 30 of them, then holds these stocks through good times and bad until there is a major structural change in the underlying companies. A full summary can be read here: https://advisorshares.com/wp-content/uploads/2019/05/CWS-Investment-Process.pdf. This stability has paid off in low price volatility. CWS has a beta of just 0.95 and the lowest-by-far price standard deviation in the sample. Perhaps most importantly, unlike the majority of low-number-of-names with low-turnover “focused” mutual funds, CWS has outperformed IVV for the one-, three-, and five-year time frames. Although once criticized in Barron’s for a 0.65% expense ratio, it has earned that fee in most time periods thus far.
- WTC from Wisdom tree has produced competitive rates of return vis-à-vis the benchmark index ETFs. It is not as strong as SYLD even though the two funds have very similar methodologies and try to maximize shareholder yield. In a side by side comparison, WTC has just one major advantage: a much lower expense ratio of 0.12% as compared with 0.59%.
- ARKQ underperformed IVV, QQQ and IETC in the majority of the time periods shown here. It also has the highest expense ratio at a whopping 0.75%. ARKQ had by far the best performance over the past five years of the actively managed funds in ARK’s stable. The general consensus among industry experts is that ARK’s expertise in selecting stocks in the emerging technologies space to produce superior returns attracted so much notice that major funds piled into the same stocks transforming a once-overlooked emerging tech space into one that is overcrowded. Somehow, IETC has been able to overcome that problem thus far.
- The past is not the future. ValuEngine’s predictive model for the next 12 months gives SYLD our lowest rating of 1 (Strong Sell). Similarly themed WTV gets the same rating. Alternatively, QQQ, IETC and CWS all have favorable ratings of 4 (Buy). Since IETC and CWS performed well in the past and are also rated highly for the year ahead, investors wanting active management might want to gather information and learn more about these funds.
In summary, SYLD, IETC and CWS all outperformed IVV in the 3-year and 5-year time frame. They benefited from a more level playing field with a more expensive structure. Unfortunately, only six out of the fifty one ETFs in the overall sample did so. These results are more similar to what SPIVA has documented as consistent underperformance by the majority of actively managed mutual funds. The question remains whether actively managed ETFs are worth the price. Looking backwards, some were but most were not. However, active oversight makes many investors more comfortable than trusting the vagaries of market cash flows to manage their retirements. Questions lurk such as:
What happens if huge, automated trades occur that don’t make sense?
Who will protect my investments then?
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As of this writing, the majority of investors are simply more comfortable with active hands at the tiller. With the explosion of active ETFs, there will be many more such options. My conclusion is that the funds reviewed here are among those worth investigating in screens and searches. Rarely in this world does one simple solution satisfy all needs.
By Herbert Blank
Senior Quantitative Analyst, ValuEngine Inc
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