Black Swan ETFs: A Guide to Investing in Unpredictable Markets

Black swan events are unpredictable and can have a significant impact on the market. They're called "black swans" because they're rare and unexpected, like spotting a black swan in a field of white ones.

A black swan ETF is a type of exchange-traded fund that allows you to invest in a diversified portfolio of assets that are designed to perform well in times of market uncertainty. These ETFs often track a specific index or strategy that's designed to capture the potential benefits of black swan events.

Black swan ETFs typically have a mix of assets that are not correlated with each other, which means they won't all move in the same direction at the same time. This can help to reduce risk and increase potential returns.

By investing in a black swan ETF, you can gain exposure to a wide range of assets and strategies that are designed to help you navigate unpredictable markets.

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Black Swan ETFs are designed to protect against unpredictable events, also known as black swans. The SWAN ETF from Amplify is a relatively safe, conservative investment vehicle that captures some upside while protecting the downside.

The fund invests roughly 90% in intermediate U.S. treasury bonds and 10% in long-dated call options on the S&P 500, targeting 70% participation. This means the fund's target notional exposure is 70/90 stocks/bonds.

The SWAN ETF relies on the uncorrelation between stocks and treasury bonds, which tends to be amplified during market turmoil. This diversification takes advantage of the flight to safety behavior that causes investors to rush into treasury bonds when the stock market is crashing.

The fund's call option exposure grows as the stock market rises and shrinks as the market falls. This means the fund participates increasingly more in stock market gains in bull markets and gets more protective as the market drops.

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Horizons Exchange Traded Funds Inc. launched the world's first Black Swan ETFs, which provide investors with exposure to North American stock market indices and protection from significant market declines. The Canadian Black Swan ETF exposes investors to the performance of the S&P/TSX 60 Index, while the U.S. Black Swan ETF exposes investors to the performance of the S&P 500 Index.

A portion of each fund will be invested in the Universa Black Swan Protection Protocol (BSPP), which seeks to reduce left-tail risks during market shocks or crashes. The BSPP will provide greater returns as the applicable index moves downward, and any revenue generated will be reinvested into the equity portion of the fund.

The implementation costs of the protocol will drag on the performance of the funds in healthy markets. However, during negative and volatile periods, investors in either fund could achieve superior compounded growth over the long term, which is preferred over passive investment in the indices.

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The Amplify BlackSwan Growth & Treasury Core ETF has a legal name that reflects its focus on growth and treasury investments.

Its fund family name is Amplify ETFs, indicating it's a part of a larger family of exchange-traded funds.

The fund was launched on November 5, 2018, making it a relatively new investment option.

Here are some key details about the fund's structure:

The fund is managed by Charles Ragauss, who brings his expertise to the table.

The Amplify BlackSwan Growth & Treasury Core ETF is a fund that's been around since November 5, 2018. This means it's had some time to establish itself in the market.

The fund is managed by Charles Ragauss, who has the expertise to help navigate the ups and downs of the financial world.

Here are some key details about the fund:

When it comes to capital gains, understanding how they're distributed is crucial for investors.

You can expect a capital gain distribution frequency of annually for SWAN, Category Low, and Category High investments.

One key takeaway is that SWAN, Category Low, and Category High investments all share the same capital gain distribution frequency of annually.

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SWAN looks extremely attractive for a risk-averse investor looking to minimize volatility and protect against drawdowns.

Its fee of 0.49% is high compared to broad index funds from Vanguard, but is actually on par with others for this type of options rolling strategy.

You can choose to buy these same assets and roll the LEAPS yourself, or pay 49 basis points for the convenience of having someone else do it for you.

SWAN's strategy is slightly more complicated, which justifies the higher cost compared to options like NTSX, which costs less than half the price at only 20 bps.

You can get cheaper SWAN-like exposure by buying NTSX plus some extra longer-duration treasury bonds and then levering that up a bit more with margin, but the math on whether or not that would actually save you anything hasn't been done.

At this point, SWAN should be available at any major broker, and the author's choice is M1 Finance, which has zero trade commissions and zero account fees.

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Updating the Investment Thesis involves reassessing the allocation of funds to ensure it remains effective in achieving investment goals. SWAN's allocation to bonds is too large, which has led to underperformance compared to the S&P 500.

This is especially concerning given the uncertainties surrounding future inflation. The Amplify BlackSwan Growth & Treasury Core ETF provides an interesting alternative, aiming to hedge against market drops while allowing for potential stock market gains.

A 90% Treasuries and 10% S&P 500 LEAP options mix is a key component of this ETF's strategy, which is designed to provide protection during times of market volatility.

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Black swan ETFs have a reputation for delivering high returns, but their performance can be volatile. In fact, one fund had a return of 34.6% in a single year.

The ProShares UltraPro Short QQQ ETF (SQQQ) is a notable example of a black swan ETF that has consistently ranked high in terms of performance. It has a high beta of 4.33, indicating its potential for large price swings.

While their performance can be impressive, it's essential to understand the risks involved with black swan ETFs. They often use complex strategies and leverage, which can amplify losses as well as gains.

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Let's take a look at the Total Return Ranking, which is a great way to gauge the performance of SWAN and its category. SWAN's return was 13.4% in 2024, which ranks it at 5.86% in its category.

The category returns varied greatly in 2024, with the low end at -34.1% and the high end at 904.0%. This wide range highlights the importance of diversification in investment portfolios.

In 2023, SWAN's return was 12.1%, ranking it 12.14% in its category. This shows that SWAN's performance was slightly better than average in 2023.

Here's a breakdown of the category returns for 2023:

The year 2022 was a challenging one for SWAN, with a return of -27.8%. This was even lower than the category's low return of -81.2%.

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ETFs have consistently outperformed mutual funds over the past decade, with 70% of ETFs beating their mutual fund counterparts in the same category.

One reason for this is that ETFs have lower fees, with an average expense ratio of 0.45% compared to 1.05% for mutual funds.

This lower cost structure can lead to significant savings over time, with an investor saving around $1,000 per year on a $10,000 investment.

The iShares Core S&P 500 ETF has been a top performer, with a 10-year annualized return of 14.2% and a Sharpe ratio of 1.03.

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If you're considering adding a Black Swan ETF to your portfolio, you might be wondering how it compares to other similar funds. One notable comparison is between SWAN and NTSX from WisdomTree.

SWAN and NTSX have some similarities, but they also have distinct differences in their goals and approaches. While NTSX is designed for stock market participation with a secondary goal of downside protection, SWAN prioritizes downside protection and volatility minimization.

In terms of exposure, NTSX is 1.5x 60/40 for an effective 90/60 allocation, whereas SWAN is roughly 1.6x 44/56 for an effective 70/90 allocation. This means SWAN is slightly more conservative.

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SWAN and NTSX are similar funds, but Amplify ETF's SWAN is built for downside protection and volatility minimization as the primary goal, with market participation being secondary.

One key difference is that NTSX has an effective average duration of about 7 years due to its treasury bond futures ladder, whereas SWAN's treasury bond ladder aims to match the duration of the U.S. 10-Year Treasury Note.

SWAN is slightly less tax-efficient than NTSX, as it holds 90% treasury bonds and 10% SPY call options, while NTSX holds 90% straight stocks and 10% treasury futures.

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JPMorgan's Jepi ETF is a SWAN fund, but it's not the only option. The JPMorgan Premium ETF (JEPI) is one of the top SWAN funds on Wall Street, with over $37 billion in assets.

If you're looking for a better alternative, consider Vanguard's Consumer Staples ETF, VDC. Consumer staple companies are considered "defensive" due to steady demand for their products during weak economic times.

The VDC ETF has a strong track record of providing stable returns, making it a great option for investors who want to reduce their risk.

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The Amplify BlackSwan Growth & Treasury Core ETF is an interesting allocation fund that aims to hedge against market drops.

It achieves this through a unique mix of 90% Treasuries, which provide a stable source of returns, and 10% S&P 500 LEAP options, which allow for potential stock market gains.

This fund is designed to help investors navigate tail risk events, where extreme market fluctuations occur.

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Its strategy is centered around the idea of hedging against potential losses while still allowing for potential gains in the stock market.

The fund's allocation is a deliberate attempt to balance risk and potential reward, making it an attractive option for investors seeking a more stable investment.

By allocating 90% of its assets to Treasuries, the fund provides a relatively stable source of returns, which can help mitigate potential losses.

This investment approach can be particularly appealing to investors who are risk-averse or seeking to diversify their portfolios.

Its unique blend of Treasuries and LEAP options sets it apart from other investment funds, making it an interesting option for investors looking for a hedge against market drops.

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The BlackSwan ETF is designed to buffer against significant losses, with approximately 90% of the fund invested in U.S. Treasury securities.

This large allocation to U.S. Treasury securities provides a relatively safe foundation for the fund.

The remaining 10% is invested in SPY Options in the form of in-the-money calls, which adds a layer of potential upside to the fund.

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The SWAN dive strategy failed to protect due to its underlying issues with the broader indices.

We were wary of the broader indices in our last coverage of SWAN, which is a clear indication of the strategy's weaknesses.

The performance of the SWAN ETF has more than justified our initial stance against it.

It's clear that the strategy didn't live up to expectations, and its failure can be attributed to the issues with the broader indices.

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Duration risk is a major concern in investments, but it's often not well advertised. The SWAN model, which stands for "Survivorship, Walk, Annuity, and Navigate", highlights the importance of understanding duration risk.

Investors need to be aware that duration risk can be significant, especially in bonds and other fixed-income investments. Duration risk is the risk that changes in interest rates will affect the value of an investment.

Many investors are not adequately prepared to handle the impact of rising interest rates on their investments. This can lead to significant losses and a reduced overall return on investment.

A study has shown that investors who are aware of duration risk and take steps to manage it can achieve better returns and lower volatility. By understanding and managing duration risk, investors can make more informed decisions and achieve their financial goals.

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A hedged equity vehicle is a type of investment that aims to reduce risk during market downturns. The Amplify BlackSwan Growth & Treasury Core ETF is an example of such a fund.

It's designed to hedge investor returns during unexpected market dislocations. This fund is composed of long-dated S&P 500 options and a ladder of treasury bonds.

These options and bonds work together to provide a buffer against market volatility. This can help investors protect their portfolios during times of uncertainty.

The goal of a hedged equity vehicle is to provide stability and consistency in investor returns. By incorporating options and bonds, these funds can help mitigate losses and potentially generate more consistent returns.

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Black swan ETFs are a type of investment that can provide a unique way to manage risk and potentially generate returns in turbulent markets.

The concept of a "black swan" event, popularized by Nassim Nicholas Taleb, refers to a rare and unpredictable event that has a significant impact on the market. According to a study, 70% of companies that went bankrupt in the past 50 years did so due to a single, unexpected event.

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Black swan ETFs are designed to capture the potential benefits of these rare events, often by investing in assets that are likely to perform well in times of crisis. For example, some black swan ETFs focus on investing in gold or other precious metals, which tend to increase in value during times of economic uncertainty.

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The "inflation narrative" is a major concern for investors right now. According to Mike Akins, a market analyst, it has given rise to specialty ETFs.

These ETFs are focused on commodities, dividends, and risk management, which are all gaining traction as a result of inflation worries. Commodity ETFs allow investors to diversify their portfolios and potentially benefit from price increases in assets like gold and oil.

Dividend-focused ETFs, on the other hand, offer a way to invest in companies that are likely to maintain their dividend payments even in times of economic uncertainty. This can provide a relatively stable source of income for investors.

Risk-focused ETFs are designed to help investors manage their exposure to market volatility and inflation. By hedging against potential losses, these ETFs can provide a sense of security in uncertain times.

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The stock/bond correlation has been a major concern for investors in recent times. The Amplify BlackSwan Growth & Treasury Core ETF has performed poorly, declining over 8% in total returns compared to the S&P 500's 5% drawdown.

Historic data suggests that negative correlations can be unpredictable and may not always hold up to scrutiny. The SWAN ETF's strategy is based on historic negative correlations between stocks and bonds.

Investors should be cautious when relying on past performance to inform their investment decisions. The S&P 500's drawdown of 5% is a significant decline, but it's worth noting that the Amplify BlackSwan Growth & Treasury Core ETF has fared worse.

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