CCOR: Solid Portfolio Diversifier (NYSEARCA:CCOR)
The Core Alternative ETF (NYSEARCA:CCOR) is an actively managed ETF that combines high-quality stocks with a protection option strategy that minimizes portfolio loss.
Although CCOR’s historical returns have been modest, it compensates by having less than half of them market volatility. I believe the CCOR ETF can appeal to conservative investors who want modest exposure with limited downside. 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 selection with an options overlay to protect the portfolio from downturns in the market. The CCOR ETF was called Cambria Core Equity ETF prior to December 2019.
CCOR’s strategy is to participate in US equity growth while using volatility to reduce overall portfolio volatility and minimize drawdowns (Figure 1). Under Under normal market conditions, the CCOR ETF invests in 40-60 high-quality, large-cap US stocks, which make up 90-95% of the portfolio. The remainder of the portfolio is invested in protective put options on the S&P 500 covering at least 100% of the stock portfolio (Exhibit 1).
In rising markets, CCOR benefits from its equity portfolio, although its option hedging will hurt returns. In falling markets, the CCOR portfolio of put options will boost returns. After all, returns in volatile markets are primarily driven by dividends from its stock portfolio and profit-taking from its options portfolio (Figure 2).
The overall objective of the CCOR ETF is to enhance the portfolio’s risk-adjusted returns.
Figure 3 shows the sector weights of the CCOR ETF. Relative to the market, represented by the SPDR S&P 500 ETF Trust (SPY) in Figure 4, the CCOR ETF is in Information Technology (17.1% vs. 28.2%) and Communication Services (2.1% vs. 7.9%) underweight. 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 CCOR ETF’s top 10 holdings, which include well-known names such as JPMorgan and PepsiCo. Interestingly, CCOR doesn’t have large stakes in the mega-cap tech companies like Apple, Microsoft, and Amazon.
Distribution & Yield
The CCOR ETF pays a modest quarterly distribution with a trailing 12-month distribution of $0.35, or a 1.2% yield.
Figure 6 shows the historical returns of the CCOR ETF. At first glance, the fund’s 1/3/5 year average annual returns appear modest as it has delivered -0.6%/4.5%/5.0% through February 28, 2023 respectively.
However, when investors look under the hood, there’s a lot to like about CCOR’s returns. Impressively, in 2022, CCOR was unscathed, returning 3.0% while the SPY ETF was down 18.1%. In fact, it doesn’t appear to have suffered any year-round declines since inception, having returned 3-10% per year since 2018.
Looking at the fund’s risk metrics, we see that the CCOR ETF has a 3-year volatility of 8.9%, which is less than half the SPY’s 20.7% volatility (Figure 8).
In fact, according to the fund’s marketing literature, CCOR has shown only a minimum since inception beta to the S&P 500, with about 40% of the market’s volatility and a quarter of the market’s maximum drawdown (Figure 9).
Can be useful in a balanced portfolio
While CCOR may not outperform the S&P 500 due to its uncorrelated returns with 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 via the iShares Core US Aggregate Bond ETF (AGG).
Comparing portfolio performance from June 2017 (creation of CCOR) to February 2023, we can see that although the CAGR returns for the two portfolios are similar (8.2% vs. 8.1%), the CCOR portfolio is a exhibits 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 losses. Historically, CCOR has been successful in minimizing drawdowns and volatility, with the CCOR ETF delivering modest 5-year average returns of 5.0% at less than half the volatility of the market. I see the CCOR ETF appealing to conservative investors who want modest market exposure without much downside. Furthermore, due to the uncorrelated nature of CCOR’s returns, an allocation to CCOR can actually improve overall portfolio performance.