The Core Alternative ETF (NYSEARCA:CCOR) is an actively managed ETF that combines high quality stocks with a protective options strategy that minimizes portfolio drawdown.
Although CCOR’s historical returns have been modest, it compensates by having less than half of the market’s volatility. I believe the CCOR ETF can have appeal to conservative investors who want modest exposure with limited downside capture. It can also be useful as a portfolio diversifier, due to the fund’s uncorrelated returns.
The Core Alternative ETF is an actively managed fund that combines stock picking with an options overlay to protect the portfolio against market drawdowns. The CCOR ETF was formerly called the Cambria Core Equity ETF prior to December 2019.
CCOR’s strategy is to participate in growth in U.S. equities while harnessing volatility to reduce overall portfolio volatility and minimize drawdowns (Figure 1). Under normal market conditions, the CCOR ETF will invest in 40-60 high quality large cap U.S. equities that make up 90-95% of the portfolio. The balance of the portfolio is invested in protective S&P 500 put options that cover a minimum of 100% of the equity portfolio (Figure 1).
In rising markets, CCOR benefits from its equities portfolio, although its option hedges will reduce returns. In falling markets, CCOR’s portfolio of put options will drive returns. Finally, in volatile markets, returns are primarily driven by dividends from its equity portfolio and profit taking on its options portfolio (Figure 2).
The overall goal of the CCOR ETF is to improve the risk-adjusted returns of the portfolio.
Figure 3 shows the sector weights of the CCOR ETF. Relative to the market, as represented by the SPDR S&P 500 ETF Trust (SPY) shown in figure 4, the CCOR ETF is underweight Information Technology (17.1% vs. 28.2%), and Communication Services (2.1% vs. 7.9%). CCOR is overweight Financials (14.8% vs. 10.7%), Industrials (12.7% vs. 8.5%), and Consumer Staples (10.1% vs. 6.8%).
Figure 5 shows the top 10 holdings of the CCOR ETF, which includes household names like JPMorgan and PepsiCo. Interestingly, CCOR does not have large holdings in the mega-cap technology companies like Apple, Microsoft, and Amazon.
Distribution & Yield
The CCOR ETF pays a modest quarterly distribution, with trailing 12 month distribution of $0.35 or 1.2% yield.
Figure 6 shows the historical returns of the CCOR ETF. On first glance, the fund’s 1/3/5Yr average annual returns appear modest, as it has delivered -0.6%/4.5%/5.0% respectively to February 28, 2023.
However, if investors look under the hood, there is much to like with CCOR’s returns. Impressively, CCOR was unscathed in 2022, returning 3.0% while the SPY ETF declined 18.1%. In fact, since inception, it does not appear to have suffered any full-year drawdowns, having returned 3-10% per year since 2018.
Looking at the fund’s risk metrics, we can see that the CCOR ETF has a 3Yr volatility of 8.9%, which is less than half of the SPY’s 20.7% volatility (Figure 8).
In fact, according to the fund’s marketing literature, since inception, CCOR has demonstrated minimal beta to the S&P 500, with roughly 40% of the market’s volatility and a quarter of the market’s maximum drawdown (Figure 9).
May Be Useful In A Balanced Portfolio
While CCOR may not outperform the S&P 500 by its own, due to its uncorrelated returns with the markets, an allocation to CCOR can actually improve overall portfolio performance. For example, in figure 10, we add a 10% allocation to a balanced portfolio of 60% equities via the SPY ETF and 40% bonds through the iShares Core U.S. Aggregate Bond ETF (AGG).
Comparing the portfolio performances from June 2017 (CCOR’s inception) to February 2023, we can see that although the CAGR returns are similar for the two portfolios (8.2% vs. 8.1%), the CCOR portfolio has lower volatility (20.9% vs. 22.8%) and lower maximum drawdowns (36.8% vs. 39.5%). In fact, on a risk adjusted basis, the CCOR portfolio has a higher Sharpe Ratio (0.41) compared to the 60/40 portfolio (0.40) (Figure 11).
The CCOR ETF combines high quality stocks with an options strategy that protects against portfolio downside. Historically, CCOR has been successful in minimizing drawdowns and volatility, with the CCOR ETF delivering modest 5Yr average annual returns of 5.0% at less than half the market’s volatility. I can see the CCOR ETF appeal to conservative investors who want modest market exposure without large downside capture. Furthermore, due to the uncorrelated nature of CCOR’s returns, an allocation to CCOR can actually improve overall portfolio performance.