What is GMOM? (Pros, Cons, and Strategies)

In an ever-evolving investment landscape, it's essential to explore various investment vehicles to diversify and grow your portfolio. One intriguing option is the Cambria Global Momentum ETF, commonly known as GMOM. This ETF is designed to capitalize on global momentum strategies, with a dynamic and adaptive approach to asset allocation. In this blog post, we will delve into what GMOM is, enumerate its key advantages and disadvantages, and discuss pertinent investment strategies.

What is GMOM?

GMOM stands for Cambria Global Momentum ETF. It is a part of the Cambria family of ETFs and follows an investment approach centered on global momentum. GMOM aims to generate absolute positive returns by investing in a globally diversified portfolio based on momentum indicators.

Key Features of GMOM

• Global Diversification: GMOM invests across global equity, fixed income, commodity, and currency markets.
• Momentum-Based Strategy: The ETF utilizes quantitative techniques to identify and invest in asset classes that are exhibiting strong momentum.
• Adaptive Allocation: GMOM's asset allocation is not static; it adjusts based on the prevailing market conditions to capture the best-performing assets.
• Managed by Cambria Investment Management: A company known for its innovative strategies and research-driven approach.

GMOM Composition

GMOM’s portfolio is constructed from a diverse selection of global asset classes. This includes developed and emerging market equities, U.S. Treasuries, corporate bonds, real estate investment trusts (REITs), and commodities. The allocation to these assets changes periodically based on momentum signals and market trends, aiming to optimize returns and manage risks effectively.

Pros of GMOM

Global Exposure & Diversification

GMOM offers a unique advantage by providing exposure to a broad spectrum of global markets. This broad diversification can mitigate risks associated with investing in a single market or asset class. Investors in GMOM can benefit from global growth opportunities and hedge against local market downturns.

Adaptive Strategy

One of GMOM's standout features is its adaptive allocation strategy. By continuously assessing market momentum, GMOM can shift its investments to favor asset classes and sectors that are showing the strongest performance. This proactive approach can potentially enhance returns and reduce volatility compared to static allocation strategies.

Risk Management

GMOM's approach inherently includes elements of risk management. By shifting allocations away from underperforming assets and towards those exhibiting positive momentum, GMOM can potentially avoid significant drawdowns during adverse market conditions. This can make it a more resilient option in volatile markets.

Cons of GMOM

Higher Expense Ratio

GMOM’s dynamic and diversified strategy comes at a cost, reflected in its expense ratio. The ETF's expense ratio tends to be higher than those of more traditional, passively managed ETFs. Over the long term, this can impact net returns, especially in low-return environments.

Complexity

The momentum and global diversification strategy used by GMOM is complex and may not be easy for all investors to understand. This can make it challenging for individuals to gauge its performance accurately or customize it within their broader portfolio strategy.

Potential for Underperformance

Despite the advantages of an adaptive strategy, there is always a risk that momentum signals may fail to predict the best performers, leading to periods of underperformance compared to more straightforward indices or benchmarks. Momentum strategies can sometimes lag in rapidly changing market conditions.

GMOM Investment Strategies

Despite its complexity, GMOM can be a valuable addition to a diversified portfolio, particularly for investors looking for a sophisticated approach to global investing.

Long-term Investment Strategy

Investors considering GMOM as part of their long-term strategy should focus on its ability to provide global diversification and adaptive risk management. Given its higher expense ratio, GMOM is more suited to investors who are willing to pay for active management and global exposure. Placing GMOM within a larger diversified portfolio can potentially smooth out returns and provide a hedge against regional risks.

Tactical Allocation

For more tactically minded investors, GMOM can be used to complement core holdings. Due to its adaptive investment strategy, GMOM can serve as a tactical allocation to capture global momentum trends that are not accessible through traditional market cap-weighted ETFs. This approach can enhance portfolio returns during periods when global diversification and momentum are in favor.

Satellite Investment

For those following a core-satellite portfolio structure, GMOM can be positioned as a satellite investment. It can provide uncorrelated performance potential and hedge against periods of U.S. market underperformance. This can help in achieving more balanced portfolio returns.

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In conclusion, GMOM stands as a compelling ETF for those interested in global diversification and momentum-driven strategies. While it does have a higher expense ratio and can be complex to understand, its adaptive approach and global reach offer unique benefits. Incorporating GMOM into a long-term, diversified investment strategy can potentially enhance returns and manage risks more effectively.