The Market-Beating Answer to the Big Mac of Investing
Today, we've asked special guest editor Meb Faber to reveal the inner workings of one of his proprietary funds ⎼ and we're adding that fund to our portfolio for fully paid-up subscribers.
How can $971 billion be wrong?
Buy this – instead of the McDonald’s of ETFs
A Big Mac isn’t great for your body… just like index funds aren’t the best for your portfolio.
The three largest ETFs in the United States, in order: An S&P 500 index ETF… followed by an S&P 500 index ETF… and then an S&P 500 index ETF.
Put together, that’s $971 billion in the Big Mac of an investment portfolio (550 million of the flagship McDonald’s burger are sold every year in the U.S. alone): These funds, like the Big Mac, are dull, predictable, and lack nutrition.
(And that’s only the three biggest S&P 500 index ETFs… other market index ETFs for different slices of the market easily double that figure.)
Of course, if you’re not a gourmand (or concerned about your waistline), McDonald’s for dinner (and lunch… and breakfast…) is fine.
And if you don’t have a lot of time to spend tracking your investment portfolio, or if you want to allocate a portion to something easy to get access to “the market”… an S&P 500 index ETF is a reasonable alternative. After all, the vast majority – around 80%, according to a report released in March – of actively managed funds underperform their benchmark. So buying the benchmark is a wiser decision most of the time.
But for that portion of your portfolio where you want more bang for your buck, there’s a far better alternative. An actively managed stock selection strategy, which has delivered better performance than a standard index fund by focusing on a key metric that separates the wheat from the chaff in corporate America: “shareholder yield.” Shareholder yield is the amount of capital returned to shareholders, via dividends and share repurchases – the ultimate superfood for your portfolio.
This approach has delivered better long-term investment results than its Big Mac-like alternatives, and for good reason. Only those companies that generate high returns, and which are shareholder friendly, return a substantial portion of those profits to investors through dividends and repurchases.
In this issue of The Big Secret on Wall Street, we’re adding a new section to our portfolio, Better Than The Market. The ETF we’re recommending today systematically selects for stocks with the best shareholder returns in the market.
And there’s no better person to introduce this ETF than our special guest editor, Meb Faber… who came up with the research behind this strategy – and manages a fund that we’re recommending to ensure that it does what it promises to do.
What’s more, Meb is a good friend of many of us here at Porter & Co. He’s a co-founder, and the CEO and Chief Investment Officer, of Cambria Investment Management, an investment advisory firm focused on quantitative asset management and alternative investments. He’s also a prolific podcaster and writer (find him here).
Cambria aims to “preserve and grow capital by producing above-average absolute returns with low correlation to traditional assets and manageable risk”… and here, Meb is giving us a close look at how this particular ETF achieves these goals.
In the following article published by Meb as part of the Cambria research library, he makes an excellent case for his shareholder yield approach to stock selection, which is a foundation for the capital efficient stocks that populate our portfolio. (You’ll see a few sections that are a bit dated… but Meb’s underlying points are timeless.)
And best of all… the ETF that he shows us here is a great alternative to the Big Mac of portfolio construction, which is why we’re adding it into the portfolio of The Big Secret on Wall Street today.
(Needless to say… Porter & Co. doesn’t have any kind of financial arrangement with Cambria, or Meb. We’ve asked him to help us out because there’s no one on Earth better to explain these key investment concepts… and we don’t think there’s a better vehicle than Cambria’s.)
So without further ado, we give you Meb…