Cambria Fund Profile Series – Cambria Tail Risk ETF (TAIL)

Episode Summary

Executive Summary: This episode explains Cambria’s Tail Risk ETF (TAIL), a defensive strategy built to profit from sharp market declines by buying S&P 500 put options and pairing them with mostly 10-year U.S. Treasuries. Using the COVID-era crash as a live example, the host argues TAIL can offset or even mirror equity losses, though it will likely lag in flat or rising markets due to option-premium costs.

Main Topics: Why the episode focuses on TAIL: The show aims to educate investors about Cambria’s Tail Risk ETF and how it works as a defensive tool during market stress, especially after the coronavirus-induced selloff. Market backdrop: record expansion and sudden crash: The host frames the case for tail risk hedging by describing the longest U.S. economic expansion, the longest bull market, and the fastest bear market decline in history during COVID. Portfolio hedging alternatives: Several common hedging methods are discussed: reducing equity exposure, diversifying internationally, adding bonds/real assets, and using liquid alternative strategies such as trend following or managed futures. How TAIL is structured: TAIL seeks to profit from downside moves by systematically buying a ladder of monthly slightly out-of-the-money S&P 500 put options, funded partly by income from a large allocation to long-term U.S. Treasuries. Real-world performance during the COVID selloff: The episode highlights that TAIL gained significantly while the S&P 500 fell sharply, presenting this as evidence the strategy worked as intended in an actual out-of-sample environment. Costs, tradeoffs, and appropriate use: The host emphasizes TAIL is not meant as a core long-term holding because option premiums create drag in rising markets; it is better used tactically for downside protection. Risk disclosures and performance caveats: The episode closes with standardized performance figures and extensive disclosures about risk, tracking, trading costs, and the fact that past performance is not predictive.

Key Arguments: Tail-risk hedging does not require selling all equities; investors can reduce risk through asset allocation, diversification, and alternative strategies. TAIL is designed to profit from extreme downside events by holding S&P 500 put options that increase in value when the market falls. Pairing puts with long-duration Treasuries helps offset the ongoing cost of buying option protection. The coronavirus selloff offered a real-world, out-of-sample test rather than just a backtest, and TAIL performed close to its intended objective. TAIL should generally be used tactically, not as a permanent core holding, because option premiums create a performance headwind in flat or rising markets. The fund’s low expense ratio is presented as an advantage relative to peers in the Morningstar bear-market category.

Data Points: U.S. economic expansion length: 126 straight months - Longest U.S. expansion on record through December 2019 Bull market gain: ~400% - S&P 500 rise from March 2009 through February 2020 Speed into bear market: 20 days - Time for the S&P 500 to fall from an all-time high into a bear market during COVID Bear market decline: 33.7% - S&P 500 drop from Feb. 14, 2020 high to March 23, 2020 low TAIL gain during selloff: 28.44% - Performance from the S&P 500 peak to its bear-market bottom Barclays short-term index during selloff: 0.63% - Performance of the benchmark for TAIL over the same period Expense ratio: 0.59% - Cambria Tail Risk ETF net expense ratio as of April 30, 2020 Morningstar bear market category ranking: Lowest among 59 funds - TAIL’s prospectus net expense ratio relative to peers 1-year TAIL NAV return: 18.44% - As of March 31, 2020 1-year TAIL market price return: 18.31% - As of March 31, 2020 1-year Barclays Index return: 2.64% - As of March 31, 2020 1-year S&P 500 return: -6.98% - As of March 31, 2020 3-year Barclays Index return: 1.96% - As of March 31, 2020 3-year S&P 500 return: 5.10% - As of March 31, 2020 5-year Barclays Index return: 1.32% - As of March 31, 2020 5-year S&P 500 return: 6.73% - As of March 31, 2020 10-year Barclays Index return: 0.74% - As of March 31, 2020 10-year S&P 500 return: 10.53% - As of March 31, 2020 Since inception TAIL NAV return: -0.30% - Since April 6, 2017 through March 31, 2020 Since inception TAIL market price return: -0.27% - Since April 6, 2017 through March 31, 2020 Since inception Barclays Index return: 1.96% - Since April 6, 2017 through March 31, 2020 Since inception S&P 500 return: 5.26% - Since April 6, 2017 through March 31, 2020

Pivotal Quotes: "We believe that TAIL provided a near-mirror image of opposite returns of the S&P 500 as it fell from its all-time high to its bear market low." — Host: Summarizing the fund’s performance during the COVID crash "The best way to hedge a risk is not to take the risk in the first place." — Host: Explaining broader portfolio hedging alternatives before introducing TAIL "That said, when used wisely and strategically, it has the ability not only to help hedge the portfolio during drawdowns, but positions the portfolio to potentially profit from it." — Host: Defining the value proposition of the tail-risk strategy

Implications: For investors worried about severe drawdowns, TAIL illustrates a tradable hedge that can benefit from market panic. But protection has a cost, so it’s best viewed as a tactical satellite allocation rather than a perpetual core holding.