28 days later: Cambria Tax Aware ETF (ticker TAX) at launch and today
TAX looks like it did on launch day. Tracking error might be a problem.
Interesting reads from the tax-aware realm…
AQR’s Joseph Liberman and Nathan Sosner wrote A Brief Guide to Pricing and Taxation of Variable Prepaid Forwards,” which I’m very excited to read.
Parametric’s Fine-Tuning Risk Management for Highly Volatile Stocks suggests requiring deeper losses for more volatile stocks before tax-loss harvesting.
Dimensional has an exchange fund? They write about it in Addressing Concentrated Stock Positions in Client Portfolios.
Lede…
Meb Faber’s Cambria Tax Aware ETF (ticker TAX) launched on Dec 18, 2024.
TAX’s launch was notable because investors transferred $27 million into it tax-free.
The portfolio was roughly half ETFs and half direct equities. It looked like this.
I’ve been writing about TAX since late October:
Recorded LinkedIn Live event with Meb and Pat Cleary (ETF Architect)
$27 million AUM contributed in-kind to Cambria Tax Aware ETF (TAX)
As of Friday, Jan 17, 2025, TAX looked similar to launch day.
A week or two ago, I was surprised when TAX received an inflow and increased several ETF positions. Like, why? Isn’t an inflow the perfect time to buy on-thesis stocks? But I’m guessing we’ll see an outflow soon to clean up some of those legacy ETFs.
How long?
When considering contributing in-kind to an ETF, many investors understand it’ll take some time for the ETF to achieve its principal investment strategy. After all, the ETF just received a hodge podge of securities. But how long will investors have to wait before the portfolio matches their expected risk profile? Weeks? Months? A year? More?
How long will it take for an ETF to achieve its principal investment strategy following 351 conversion?
TAX’s prospectus says the following…
and…
Here’s TAX versus the Russell 1000 Value Total Return index.
Oof. There’s tracking error, for sure.
But this comparison isn’t exactly fair. First, a month of data isn't great for reasoning about tracking error.
Second, TAX should distribute less dividend income than a comparable index fund, which will boost relative after-tax returns.
Third, TAX launched a week before Christmas and Chaunaka and maybe folks weren't around to coordinate heartbeat trades or something. I don't know.
But if the pretax performance continues to suffer, investors might start thinking about a change. Other in-kind options are coming up.
I will revisit TAX after a handful of months to check progress.
The Routine Rebalancing Ideal
The “Routine Rebalancing Ideal” is when reallocating and rebalancing between ETFs has no tax cost.
I’d never heard of “The Routine Rebalancing Ideal” before, so I made it up a handful of blog posts ago.
To unlock the ideal, ETFs need to do 3 things:
Launch consistently (say, quarterly)
Launch with variety (investors need options)
Accept assets in-kind (via Section 351): this is rare
Seeding in-kind is very investor-friendly because it reduces tax friction, but asset managers likely prefer stickiness and don’t have a reason to drive the cost of launching an ETF in-kind down.
Nonetheless, the launch of TAX gave us a tiny glimpse of The Routine Rebalancing Ideal, with the significant contributions of other ETFs in-kind.
Memezine (pronounced “meme”-“zine”) is in production
I hate white papers. They feel like homework. So, I wrote and illustrated an adviser’s guide to seeding ETFs in-kind using some words, but mostly memes. For fun, here are a few pages.
P.S. Did I mention that Dave Nadig wrote the foreword?
For better or worse, a table of contents/checklist like you’ve never seen.
Diligence: consider the cost of 351 conversion
“There are rules” investors need to follow to pull off a successful 351 conversion.
The memezine book will be free.
So, just let me know if you’re interested, and I’ll send you a physical copy (digital too, but what fun is that?), when they are ready.
Until next time. Thanks for reading.