As the saying goes: when you can't beat'em, join'em. Such is the theory behind trend investing. But when trend investing is paired with robust technical analysis, it might just be possible to still beat'em, too.
"This goes back a hundred years, back to the time of Charles Dow. Trend following is probably the ultimate diversifier to a traditional portfolio because usually it does well when everything else is hitting the fan," Cambria Investments CIO Meb Faber told CNBC's "ETF Edge" on Monday.
Cambria runs the Global Momentum ETF (GMOM), an actively managed fund that selects approximately 17 ETFs across several asset classes based on price momentum.
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Faber explained: "This fund is meant to be an outlier. So it can go anywhere, it can do anything. It looks for two things … what's been going up … over the past year or so, intermediate-term momentum ... it looks at a global opportunity set, so stocks bonds, real estate commodities, everything. But, the key criteria is, it has to be in an uptrend … long-term trend following … something like the 200-day moving average."
Faber admits that during good-time, bull runs, the strategy will likely more or less mirror the market. But that's not the point: "So, those two combinations sometimes can put you in a normal portfolio … in times like now it's a big outlier … it's a lot of real assets, a lot of commodities, some residential real estate, some utilities mixed in. But a portfolio, that for this environment, is unique … it's been a while since we've had this rising inflation."
ETF Trends' Tom Lydon pointed out in the same segment why this is especially applicable right now: "We have a moment in time that we haven't seen for a long period. Technical analysis and trend following can do an important thing for investors. It can remove emotions. There are a lot of folks – especially financial advisors – who use trend following."
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For investors who are looking for even more specific hedging tools, Cambria also has other funds.
Faber offered the Cambria Tail RISK ETF (TAIL) and the Cambria Global Tail Risk ETF (FAIL): "TAIL is the U.S., FAIL is the foreign. The concept is simple … when stocks do very poorly … what helps? ... So, what we do in this fund … 90% hangs out in the 10-year treasury. The rest, we buy ladder puts on the stock market. The goal is to try to – over a really bad day, month, bear market – get about a one to negative one exposure to U.S. stocks. "
Lydon added, "If you have an equity market that looks expensive … and the prospects for bonds are flat … this is a great way to hedge. Rather than go in short or inverse and leveraged … it's another option."
But if you're looking to go long the market, Cambria's biggest fund is its Shareholder Yield ETF (SYLD) and, as Faber put it, "It's a very Buffett-esque sort of strategy … it's looking for great companies that generate a lot of cash flow, that are trading for cheap valuations and the CEOs are behaving by returning cash to shareholders through dividends or net buybacks."
