Cambria TAX ETF may launch in December

hank

Cambria founder / CEO Meb Faber was interviewed on Bloomberg today. The proposed fund is under review by the SEC. Faber anticipates a December launch date. It would be the first of 3 similar etfs, each focused on different types of investments. It is unclear how he intends to provide such focus. I thought the topic might be of interest to some here whether as consideration as a future investment / investment strategy or simply a discussion of existing tax codes, tax efficient investing and the tax advantages of etfs in general.

This is not a recommendation. Nor can I vouch for the accuracy or impartiality of any sources linked. There are some very tax-aware folks on the board, so would enjoy hearing their take. Corrections / amplifications welcome.

”Tax-Busting Tactic Loved by Tech Millionaires Is Coming to ETFs”
Bloomberg / Yahoo

”Cambria Partners with ETF Architect to Launch Innovative Tax-Aware ETF”
Street Insider

”An ETF Strategy for Deferring Embedded Gains”
ETF/.com

”How ETFs can make capital gains more tax efficient” (general discussion)
Invesco

BenWP

Thanks @hank for doing the legwork and posting this. From what I gather from rapidly reading from the links provided, most of those who participate on this board may not qualify for the new ETFs. The strategy appears aimed at people who have north of $500,000 invested in a limited number of highly appreciated stocks and who could « seed » a new ETF for the purpose of avoiding CG taxes. This does not appear to be a DYI mechanism, nor does it pass my whiff test.

hank

Hi Ben. Thanks for the comments. Faber spoke in terms of “small investors” in the interview I watched, so the mention of $500,000 surprised me. Fortunately, the video is already available on Bloomberg. Scroll ahead to 16:00 if anyone wants to view. It’s the last of several segments on etfs.



I suspect Meb is a bit of a publicity hound. I’ve been listening to a trove of his old podcasts going back several years (The Meb Faber Show) for a month on a regular basis. These consist mostly of hour-long interviews with different money managers. 1 is 3 is pretty good. I don’t need to tell people that Cambria has more losers than winners. Or that it is very small player in a field of giants. That said, I like their global allocation fund (GAA) and have owned it a while - primarily for the exposure it provides to foreign markets, precious metals, commodities and bonds - although it is broader than just that.

msf

BenWP said:

Thanks @hank for doing the legwork and posting this. From what I gather from rapidly reading from the links provided, most of those who participate on this board may not qualify for the new ETFs. The strategy appears aimed at people who have north of $500,000 invested in a limited number of highly appreciated stocks and who could « seed » a new ETF for the purpose of avoiding CG taxes. This does not appear to be a DYI mechanism, nor does it pass my whiff test.

It sounds like something that cobbles together lots of different tax and investing rules to make it seem new, legitimate, and "democratizing". I agree that one should tread very carefully here.

Start with the second line in the prospectus's description of principal investment strategies:

Utilizing its own quantitative model, the Fund’s investment sub-adviser, Cambria Investment Management, L.P. (“Cambria” or the “Sub-Adviser”) selects value stocks with lower dividend distributions, which are generally taxed as ordinary income.

Say what?? My dividends are taxed as cap gains, how about yours?

The Bloomberg/Yahoo piece quotes Faber as saying that you exchange cap gain bearing securities for shares of the ETF in a tax free exchange. Bloomberg then goes on to say that this works like an "exchange fund" aka "swap fund" by way of explaining how your security exchange can be made tax free.

Here's a good primer on "exchange funds".
https://usecache.com/companion/what-is-an-exchange-fund

In short, a bunch of investors pool their appreciated assets into a partnership (the exchange fund). Since that's done as a tax-free swap, each investor retains their original cost basis and gets a pro-rata share of the partnership. Voila, instant diversification.

There are lots of government restrictions on exchange funds, including a seven year holding period and being limited to accredited investors. The $500K min does not appear to be a legal requirement, just a pragmatic one. The entity running the show doesn't want to deal with a lot of small potatoes in constructing the portfolio. It looks like that portfolio remains static (not sure about that).

Where the magic comes in (I think): once seeded, the partnership is converted into an ETF. This is the part that to me looks suspicious. It has the effect of removing the holding requirement on fund seeders and possibly some restrictions on the exchange fund portfolio composition.

I don't see how this "seeding" process (swapping securities for ETF shares) can continue once the ETF is up and running. The prospectus describes a conventional ETF where only Authorized Participants can buy and sell shares via creation units. To the rest of the world, this should look like any other ETF, including being open to all comers on the open market.

From that perspective, I would evaluate it like any other fund that hasn't launched yet.

hank

Thanks @msf for all the enlightenment. An eye-opener … Don’t really know what to think about the firm’s motives here. Questionable. That said, Cambria has a history of launching some really unorthodox products.

FWIW - Morningstar gives Cambria a “Below Average” parenting grade. It writes:

“Cambria added Toroso Investments as a subadvisor to its suite of ETFs in September 2023. Toroso quickly morphed into Tidal Investments, a subsidiary of Tidal Financial Group, following a private equity deal in November 2023. Toroso and Tidal's co-founder and CIO Michael Venuto had been an independent trustee on Cambria's three-person ETF board since 2019. Venuto abstained from voting on the Toroso hire and resigned from the board. Although Cambria's choice of subadvisor is reasonable, the decision nonetheless raises questions.” *

* Excerpted from: Morningstar Analysis of the Cambria Global Allocation etf.