The Liquidity Myths on ETFs
Perhaps the most common ETF misconception is that low daily trading volumes or small amounts of assets under management (AUM) indicate that an ETF is illiquid. The reality however is that ETFs function fundamentally different than individual stocks or closed-end funds.
Unlike individual stocks or closed-end funds, which usually have a fixed supply of shares in circulation on the secondary market, ETFs are open-ended investment vehicles. This means that ETFs are able to issue or withdraw shares on the secondary market according to investor supply and demand, otherwise known as creations and redemptions. This ability gives ETFs a unique liquidity profile in comparison with stocks and closed-end funds.
Securities lending is a long-held practice whereby ETFs make loans of stocks or bonds to seek an incremental increase in returns for fund shareholders. While not without risk, securities lending seeks to benefi t ETF shareholders.
To understand securities lending, let’s start with the basics of understanding how it works. First, a large fi nancial institution asks to borrow a stock or bond from an ETF. In order to borrow the stock or bond, the fi nancial institution will negotiate fi nancial terms with the lending agent of the ETF and provide collateral. The ETF keeps the collateral to secure repayment in case the borrower fails to return the loaned stock or bond. The value of the collateral is required to be at least equal to the market value of the loaned stock or bond and usually even more than the value. The fi nancial institution typically uses the stock or bond to hedge against market risks, facilitate a short sale, or to use as collateral in another transaction.
The Cambria ETFs are distributed by ALPS Distributors Inc., 1290 Broadway Suite 1000 Denver CO 80203, which is not affiliated with Cambria Investment Management, LP, the Investment Adviser for the Fund. Check the background of ALPS on FINRA's BrokerCheck.
BLDG, EYLD, FAIL, FYLD, GAA, GMOM, GVAL, SYLD, TAIL, TOKE, TRTY, and VAMO are actively managed using proprietary investment strategies and processes. There can be no guarantee that these strategies and processes will produce the intended results and no guarantee that the Fund will achieve its investment objective. This could result in the Fund's underperformance compared to other funds with similar investment objectives.
ETFs are subject to commission costs each time a "buy" or "sell" is executed. Depending on the amount of trading activity, the low costs of ETFs may be outweighed by commissions and related trading costs. Shares are bought and sold at market price (closing price) not net asset value (NAV) are not individually redeemed from the Fund. Market price returns are based on the midpoint of the bid/ask spread at 4:00 pm Eastern Time (when NAV is normally determined), and do not represent the return you would receive if you traded at other times.
There is no guarantee that the Fund will achieve its investment goal. Investing involves risk, including the possible loss of principal. In addition to the normal risks associated with investing, international investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from social, economic, or political instability in other nations. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume. Bonds and bond funds are subject to interest rate risk and will decline in value as interest rates rise.
Investments in sovereign and quasi-sovereign debt obligations involve special risks not present in corporate debt obligations. The issuer of the sovereign debt or the authorities that control the repayment of the debt may be unable or unwilling to repay principal or interest when due, and the Fund may have limited recourse in the event of a default. Investments in commodities are subject to higher volatility than more traditional investments. The fund may invest in derivatives, which are often more volatile than other investments and may magnify the Fund's gains or losses. The use of leverage by the fund managers may accelerate the velocity of potential losses. The Fund employs a "momentum" style of investing that emphasizes investing in securities that have had higher recent price performance compared to other securities. This style of investing is subject to the risk that these securities may be more volatile than a broad cross-section of securities or that the returns on securities that have previously exhibited price momentum are less than returns on other styles of investing or the overall stock market. Investments in smaller companies typically exhibit higher volatility. Diversification may not protect against market loss. Emerging markets involve heightened risks related to the same factors as well as increased volatility and lower trading volume.
Shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Buying and selling shares will result in brokerage commissions. Brokerage commissions will reduce returns.
There are special risks associated with margin investing. As with stocks, you may be called upon to deposit additional cash or securities if your account equity declines.
On June 1, 2020, SYLD’s and FYLD’s investment objective and investment strategy changed. FYLD and SYLD went from being passively managed to actively managed on that same date.
On July 1, 2020, GVAL’s and EYLD’s investment objective and investment strategy changed. GVAL and EYLD went from being passively managed to actively managed on that same date.
Prior to 3/15/2021, Cambria Global Tail Risk ETF (FAIL) operated as Cambria Sovereign Bond ETF (SOVB). On that date, the investment strategy and the objective also changed. Any performance prior to 3/15/2021 was achieved under the previous investment strategy.