One of the winningest NFL coaches of all time, George Allen, was famous for saying that “the future is now.”
It’s a powerful idea… and it’s one by which Mebane Faber clearly abides.
You see, Faber’s firm, Cambria Investment Management, launched its brand-new (and powerfully disruptive) Global Asset Allocation ETF (GAA) this week.
And at first glance, it looks like Christmas has come early for retail investors…
The Global Asset Allocation ETF is essentially a diversified portfolio of global asset classes.
It’ll invest in about 29 different ETFs that “reflect the global universe of assets consisting of domestic and foreign stocks, bonds, real estate, commodities and currencies.”
But before we get too excited, let’s take a closer look to see if this powerful new ETF is all that it’s cracked up to be.
There’s a Lot to Like
The most obvious benefit of this ETF is its cost.
Cambria says GAA is “the first ETF to have a permanent 0% management fee,” which is an incredible development.
That means Cambria has effectively beaten Schwab to the punch in the race to zero and is offering the world’s first diversified portfolio without a management fee. (Of course, it’s not entirely free… but GAA’s fee is still an impressively low 0.29%, which represents the cost of the underlying ETFs.)
Heck, it’s comparable to being the first free robo-advisor – and that could be an incredibly disruptive development. You see, any fee-based robo-advisor – even an exceptionally well-executed one – is going to have a difficult time outperforming GAA over the long term.
This is fantastic news for retail investors who want a broadly diversified, low-cost, set-it-and-forget-it portfolio. In fact, GAA might be the closest thing to a passive global market portfolio that’s out there today – even if a few of its underlying funds are actively managed.
Finally, the new ETF should help Cambria assets reach critical mass in its other funds (which are included in the Global Asset Allocation ETF).
But no investment is perfect, right? So what are the downsides of this disruptive new ETF?
Not So Fast…
While GAA does have some tantalizing advantages, it has a few drawbacks, as well.
First of all, it’s not tailored to a specific risk tolerance. Older investors may want more fixed income assets than the fund holds, while younger investors may want to take more risks. Thus, GAA isn’t perfect for everyone – and some investors may feel the need to supplement in order to achieve their desired balance.
Yet the biggest flaw could be the fund’s passive government bond exposure, which in many cases is going to provide a negative real return. Indeed, the Vanguard Total International Bond ETF (BNDX), which makes up 5% of GAA’s holdings, is heavily exposed to Japanese government bonds (10-year yield of 0.40%) and German Bunds (10-year yield of 0.68%).
Again, this may not be an issue in the long term… but for many, it may not be acceptable at the moment. Every investor is different, and each person will have to decide whether GAA’s convenience and cost-effectiveness outweighs the minor drawback presented by these holdings.
Finally, GAA is bad for business if you’re a registered investment advisor (RIA). Private wealth management will always have its place… but for retail investors, the days of high-cost advisors are over.
Free, diversified portfolio construction is the future… and the future is now.