For many plain vanilla beta exchange traded funds, December 2018 has not been a December to remember. More to the point, the fourth quarter has been forgettable for traditional long equity strategies.
Various data points confirm as much, During the Christmas Eve trading day, just seven ETFs hit all-time highs, none of which was a traditional equity strategy. One of the seven funds delivering some holiday cheer to investors was the Cambria Tail Risk ETF (Cboe: TAIL).
TAIL tries to provide income and capital appreciation from investments in the U.S. markets while protecting against downside risk, according to a prospectus sheet. The active ETF will invest in cash and U.S. government bonds, and utilizing a put option strategy to manage the risk of a significant negative movement in the value of domestic equities, or more commonly known as tail risk, over rolling one-month periods.
TAIL’s tale of the tape is jaw-dropping at a time of struggles for U.S. equities. The fund is up nearly 10% over the past week, 16.51% this month and 9.34% year-to-date.
The Tale of TAIL’s Tape
“TAIL strategy offers the potential advantage of buying more puts when volatility is low and fewer puts when volatility is high,” according to Cambria. “While a portion of the fund’s assets will be invested in the basket of long put option premiums, the majority of fund assets will be invested in intermediate term US Treasuries.”
TAIL is actively managed. Tail risk refers to the normal distributions beyond three standard deviation, or more skewed distributions.