Tom Lydon, CEO of ETF Trends, and Meb Faber, CIO of Cambria Investments, discuss momentum funds and trends following on this week’s “ETF Edge,” hosted by Bob Pisani on CNBC.
Cambria Investments has a fund focused on momentum broadly, the Cambria Global Momentum ETF (GMOM), which is up 6% YTD compared to the S&P 500, that is currently down 14%. The fund is one that is a trend following play that looks for intermediate term momentum and securities that have been in an uptrend. Currently, the fund is focused on real assets, commodities, and real estate, Faber explains.
“We have a moment in time that we haven’t seen for a long period, and to relate that to ETFs, coming out of the financial crisis, we only had one-tenth of the money in ETFs that we have today,” Lydon says.
Trend following and technical analysis allow investors to step back from sentiment-driven decisions and instead focus on the technical strategy. By making decisions based on 200-day moving averages, it allows investors to avoid leaning into decisions because they are what has been done historically. Lydon uses the example of gold, which has traditionally been a popular allocation in times of inflation but isn’t performing well during this inflationary cycle.
“Trend following is probably the ultimate diversifier to a traditional portfolio because usually, it does well when everything else is hitting the fan,” Faber says.
ETF Flows and Investing in Current Markets
ETF flows, on the other hand, can be very heavily sentiment-driven, and in a market that has seen substantial hits to fixed income with rising interest rates, it has meant increasing allocations into funds focused on commodities. There has also been a mass exodus from S&P 500 stocks because of the underperformance of tech stocks like the FAANGs.
“Most of the flows in the equity side are coming out of the S&P 500 and bond funds are very, very small; net positive but its less than $20 billion,” Lydon explains, something that Pisani sees as paradoxical given the rising rate environment.
The discussion moved on to Cambria’s fund, which focuses on tail risk and options that would help a portfolio in a period of downward market movement, the Cambria Tail Risk ETF (TAIL). The fund invests in the 10-Year Treasury and a ladder option of puts, and Lydon explains that it’s a good hedge for a time when bonds look flat and equities are expensive.
The Cambria Shareholder Yield ETF (SYLD) is also highlighted, both for the opportunities it provides investors through dividends and its focus on value and the value screens it utilizes. Lydon also discusses the continued faith that investors have in the ARK Innovation ETF (ARKK) and the opportunity for those that ascribe to Cathie Wood’s vision for innovation, and the longer timeline to purchase the fund at a 60% discount currently.
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