Long-time readers and listeners know that I am an active manager of passive index ETFs. I favor exchange-traded index vehicles because the diversification comes with low expenses, exceptional tax-efficiency, and intra-day liquidity.
The media have regularly inquired why I rarely endorse the use of active ETFs. For one thing, these funds involve more frequent trading, creating a likelihood of adverse tax consequences for the shareholder. There are fewer tax concerns in an index fund that only rebalances quarterly or annually. What's more, indexes do not tend to change much, making it easy to understand what one owns. An active ETF that you bought five months earlier may not share much in common with the one that your portfolio holds today. Perhaps most importantly, indexing (via Index ETFs) often outperforms stock picking (via active ETFs) due to dramatically lower internal expenses.
Nevertheless, there are always exceptions to a general rule. And right now, the Cambria Shareholder Yield ETF (SYLD) is on my radar screen. Here are three reasons why I may embrace the recently released SYLD:
1. Reasonable Expense Ratio. According to WSJ.com, the average ETF expense ratio is 0.44%. Of course, there are many Vanguard ETFs with annual expenses closer to 0.15% and 0.2%, but it won't always be possible to get the fund that you want that cheaply. Still, when you buy an Index ETF, you will not be paying 1.4% for the privilege of owning a typical mutual fund -- a privilege that may carry early redemption penalties or a loaded commission or costly year-end capital gains distributions.
When you look at the active ETF landscape, unfortunately many are more expensive than mutual funds are. Expense ratios north of 1.4% in the active ETF world are not uncommon. Even the Cambria Global Tactical Fund (GTAA) publishes an annual fee of 1.41%. Yet SYLD offers a reasonable annual expense of 0.6%.
2. Dividends Are Wonderful, but Debt Reduction and Share Buybacks Are Spectacular Too. Research that goes back a century often demonstrates the enormous contributions of dividends on a portfolio's total return. Some studies maintain that as much as half of a stock's total return comes from dividends over time. Until recently, though, the impact of reducing debt and/or reducing the number of shares outstanding has received less attention.
Co-portfolio manager Mebane Faber has shown in his research that corporations with a desirable combination of debt paydowns, share repurchases and dividends have generated better results for shareholders than companies with high dividend yields alone. From my perspective, the effects of share repurchases are even greater in the era of endless quantitative easing. SYLD may even demonstrate superior staying power than a narrowly focused superstar like PowerShares Buyback Achievers (PKW).
3. Market Cap Flexibility. Research has shown a better risk/reward relationship with a multi-cap value orientation than with a reliance on the Dow alone. Granted, one might argue that not enough is known about ETFs that pull from large, medium, and small companies. On the other hand, the Cambria team has picked what I believe to be a sweet spot for a shareholder total return product -- stocks with market caps greater than $200 million and several dynamic criteria for inclusion.
The current breakdown for SYLD is 56% large, 34% mid-cap, and 10% small. Even though 44% of the companies represented may be riskier on a traditional risk spectrum, the overall focus on the 100 highest ranking stocks that serve up cash dividends, repurchase corporate shares and repair balance sheets should buffer against speculative selling. In other words, investors may be more likely to hold on to stocks from companies with low debt, fewer outstanding shares, and higher dividend yields.
Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. Gary Gordon, Pacific Park Financial, Inc, and/or its clients may hold positions in the ETFs, mutual funds, and/or any investment asset mentioned above. The commentary does not constitute individualized investment advice. The opinions offered herein are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial, Inc. or its subsidiaries for advertising at the ETF Expert web site. ETF Expert content is created independently of any advertising relationships.