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An Asset Allocator's Momentum ETF

An Asset Allocator's Momentum ETF

Asset allocators frequently embrace multiple asset classes. One exchange traded fund that makes that job more efficient is the Cambria Global Momentum ETF (CBOE: GMOM).

GMOM's asset selection universe includes bonds, commodities, currencies and domestic and international equities.

What Happened

The actively managed GMOM is an ETF of ETFs, meaning its holdings are comprised of other ETFs. That methodology can bolster efficiency and minimize costs in multi-asset funds.

GMOM's “structure reduces transaction costs compared with holding the underlying securities directly, as it reduces the number of trades required,” said Morningstar in a recent note. “It also promotes tax efficiency because the manager can leverage the ETF's in-kind redemption feature to purge low-cost-basis securities from the portfolio, reducing the likelihood of capital gains distributions. Cambria explicitly seeks to mitigate the tax impact of this strategy and may engage in tax-loss harvesting--selling losers to realize losses that can offset some of the portfolio's gains.”

Why It's Important

There are more than 2,200 ETFs trading in the U.S., but GMOM's selection universe is far smaller.

GMOM “intends to target investing in the top 33% of a target universe of approximately 50 ETFs based on measures of trailing momentum and trend,” according to Cambria.

From there, GMOM's roster is whittled down as highlighted by a current lineup of 17 ETFs. Of GMOM's top 10 holdings, five are iShares ETFs, three are Vanguard funds and two are Invesco ETFs. Commodities, real estate, utilities stocks and domestic and international bonds are among the asset classes represented among GMOM's top 10 holdings.

On a monthly basis, Cambria measures the relative performance of its selection space, looking to identify the top third of funds.

“This focus on relative performance represents the offensive part of the strategy, designed to deliver market-beating returns,” said Morningstar. “When the stock market is doing well, the portfolio should favor stocks and riskier areas of the market over high-quality bonds.”

What's Next

With GMOM being an actively managed fund, investors should not expect is asset allocations to remain constant over time.

“The composition of this portfolio can change significantly over time,” said Morningstar. “For example, at the end of 2017, about 91% of its assets were invested in stocks, and it did not hold any bond ETFs. By the end of 2018, its stock allocation had fallen to 37%, as stock markets sank, and its bond allocation climbed to 48%.”

Eight of GMOM's 17 holdings are fixed income funds while another four are equity funds with bond-like traits.

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