SWAN – A Review of the Amplify BlackSwan ETF for Downturns

Black swan events are impactful and unpredictable. The Amplify BlackSwan Growth & Treasury Core ETF (SWAN) was designed to protect against them. Let’s dive into it.

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What Is a Black Swan Event?

The term black swan is used to describe an extremely rare, inherently unpredictable event that has severe negative consequences. It has also been noted that hindsight bias is unusually common with black swan events, with people later claiming the event should have been obvious at the time.

Notable examples of black swan events include:

• 1987: Black Monday
• 1997: Asian Financial Crisis
• 2000: Dot-com Bubble
• 2001: 9/11 Terrorist Attacks
• 2008: Financial Crisis
• 2010: Flash Crash
• 2020: Global Pandemic

Future black swan events could be:

• Trade war
• Inverted yield curve
• Economic recession
• Eurozone political issues
• Policy shift on technology companies
• etc.

The idea of black swans was proposed by famed professor, author, and former trader Nassim Taleb. He has written several popular books on the concept of black swans and human beliefs related to risk and the asymmetry thereof. Some black swans do not necessarily result in bear markets. The point is we can’t predict how markets will react to them. Taleb asserts that because of the inherent unpredictability and significant impact of black swan events, investors – and people in general – should remember that they are possible and should plan accordingly.

Enter the SWAN ETF from Amplify

The BlackSwan ETF from Amplify was designed to do just that – protect against these unpredictable, adverse events. Appropriately, its ticker is SWAN. The fund, which launched in 2018, is designed to be a relatively safe, conservative investment vehicle that is still able to capture some upside while being more concerned with protecting the downside. Roughly 90% of the fund is invested in intermediate U.S. treasury bonds, with the other 10% in long-dated call options (LEAPS) on the S&P 500 (specifically, the SPY ETF) that target 70% participation (i.e. option delta of 70). In this sense, the fund’s target notional exposure can be described as 70/90 stocks/bonds. The fund’s proprietary index is the S-Network BlackSwan Core Total Return Index, which is rebalanced and reconstituted on a semi-annual basis.

Just like NTSX, the classic 60/40 Portfolio, and the famous Hedgefundie Adventure strategy, SWAN relies on the uncorrelation between stocks and treasury bonds, which tends to be conveniently amplified during periods of market turmoil, as treasury bonds tend to be the best diversifier (i.e. lowest correlation) for stocks. This diversification takes advantage of the flight to safety behavior that typically causes investors to rush into treasury bonds when the stock market is crashing. Interestingly, unlike other defensive funds that use active management to attempt (unsuccessfully) to time the market, SWAN doesn’t change its asset allocation and doesn’t limit upside gains in order to provide its defense. We would expect it to lag the market in bull markets, but it is still able to participate in them.

An intrinsic feature of SWAN’s ITM LEAPS on SPY is that its 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. That said, the fund still rebalances twice per year.

Here’s the video from Amplify themselves:

SWAN vs. NTSX

This fund reminds me of and is similar to NTSX from WisdomTree, but whereas NTSX is built for stock market participation with a secondary goal of downside protection, SWAN was sort of built for the opposite – downside protection and volatility minimization as the primary goal, with market participation (and specifically, above-inflation returns) being secondary. Also keep in mind that WisdomTree’s stated use case for NTSX is to use it to make room for other assets.

That said, these funds are pretty similar. In terms of exposure, NTSX is 1.5x 60/40 for effective 90/60, and SWAN is roughly 1.6x 44/56 for effective 70/90. Note that NTSX’s treasury bond futures ladder has an effective average duration of about 7 years, while SWAN’s treasury bond ladder aims to match the duration of the U.S. 10-Year Treasury Note.

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

Both funds are suitable for use as the core of the portfolio.

SWAN vs. DRSK

Let’s briefly touch on DRSK from Aptus. This fund launched around the same time as SWAN and is similar in terms of allocations, but different in terms of actual holdings. My guess is they got wind of the existing BlackSwan index and basically copied it but also tried to differentiate just so they don’t look exactly the same, but this might be totally false.

Unlike SWAN, DRSK is very much actively managed. Like, actual active management.

The fund invests “75-95%” (pretty vague, wide range if you ask me) of assets in a bond ladder with an effective intermediate duration, not unlike SWAN, but for some weird reason, DRSK uses entirely corporate bonds. We know treasury bonds should probably be preferable in diversified portfolios, especially in this context of mitigating volatility and risk.

The fund then takes about 5% of assets and buys call options on stocks, again not unlike SWAN. But here, DRSK buys call options on a handful of “10 to 20” individual stocks and sectors, and purposefully avoids indexes for this piece. That seems pretty silly to me, considering we know the data indicates that stock picking tends not to work. In their words, “a basket of options is greater than an option on a basket.” I disagree.

Then the fund takes 1% of assets and buys an undisclosed “market hedge,” which seems to change. This sounds like it would be something like gold, right? I think that’d be useful. But nope. Most recently, this allocation went to put options (betting against) on the NASDAQ 100 Index and the S&P 500 Index. So we’re simultaneously betting on the growth of a handful of individual stock picks and betting against the broader market. Seems weird to me.

In their brief history, SWAN has outperformed DRSK.

And of course, all this comes with a higher fee of 0.78% for DRSK. No thanks.

SWAN ETF Performance

SWAN has definitely delivered on its promise in its relatively short lifespan thus far. When the market fell roughly 17% in the Q4 2018 correction, SWAN fell only about 4%. When the market dropped by 30% in the crash in March, 2020, SWAN dropped by 8%. Here’s a backtest going back to SWAN’s inception in December 2018, through June, 2021:

As we’d expect, SWAN has lagged the market in terms of total return but has delivered a much higher risk-adjusted return. Notice its volatility is less than half that of the S&P 500, and its max drawdown during this time period was 1/4 that of the market.

We can go a little further back to 2006 using SWAN’s index data directly from their website. Here’s the historical performance versus the S&P 500:

Here are the annual returns for that:

Here are the volatility (st. dev.) and risk-adjusted return (Sharpe) metrics over that time period:

Here’s another stat illustrating SWAN doing its job. Looking at the GFC of 2008, the S&P 500’s peak-to-trough drawdown was 55%. SWAN’s index was less than 1/4 of that at a mere 13%!

While we can’t backtest options, we can get a very rough idea of how SWAN might have behaved prior to the inception of its index using its target notional exposure of 70/90 using the S&P 500 and 10-year treasury bonds. Again, this is a very rough approximation and the fund itself would have certainly looked different due to the aforementioned dynamic nature of the allocation from the 70-delta options. I’ve compared it to another rough approximation of NTSX and the S&P 500 below going back to 1991, during which period these funds would have provided returns above that of the market with lower volatility and risk:

Keep in mind this period was a great time for bonds, which helped result in the market outperformance. Moreover, since both SWAN’s exposure to bonds and its bond duration are considerably greater than that of NTSX, this also would have allowed for SWAN’s comparatively greater performance over this time period. The future may look different.

So we know SWAN is for de-risking the portfolio and for protecting against black swan events. Let’s briefly talk about a way to do that further.

As I’ve noted many times elsewhere, I’m not a big fan of gold, but there are a couple things it does do: reduces portfolio volatility and risk due to its usual uncorrelation to both stocks and bonds, and hedges against uncertainty. A perfect descriptor of a black swan event is uncertainty. And since the SWAN investor is likely more concerned with the portfolio’s volatility and risk than with maximizing its returns, I’d argue this is one of those instances where the addition of gold may make sense.

Let’s look at a rough idea of how this might have played out historically for SWAN if we set it at 80% and add 20% gold, again from 1991 through June, 2021:

Notice how we would have sacrificed a bit of CAGR for slightly lower volatility and, arguably more importantly, a slightly smaller max drawdown. Admittedly, the results don’t look super impressive, but I’d argue this will likely be a more prudent move for the future given the current historically-low yields of bonds, as bonds may not provide the same level of protection (or returns) in the future that we’ve seen in the recent past. So as usual, it comes down to how far you want to slide on that scale of risk and expected return.

I’ve created that 80/20 SWAN/gold pie here for anyone interested.

Conclusion, and Where To Buy SWAN

In my opinion, SWAN looks extremely attractive for a risk-averse investor looking to minimize volatility and protect against drawdowns but still get some market participation so as not to miss out on any potential upside. It is also appropriate for those at or nearing retirement, for whom market crashes are more detrimental. This fund focuses on minimizing volatility and drawdowns and navigating them unscathed, which it has demonstrated it can do quite effectively. Adding a dash of gold may improve that effort even more going forward.

SWAN provides what I’m a fan of: leveraged exposure to uncorrelated assets. Funds like SWAN make it more likely that the investor will stick with their strategy and “stay the course” through market turmoil, and I’m always trying to encourage that.

SWAN’s fee of 0.49% is obviously high compared to simply broad index funds from Vanguard like VTI, for example, 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. I still wish SWAN were a bit cheaper, considering NTSX is less than half the price at only 20 bps, but you’re paying for a slightly more complicated strategy. You can arguably get cheaper SWAN-like exposure by just buying NTSX plus some extra longer-duration treasury bonds and then levering that up a bit more with margin, if you wanted to go that route, but admittedly I haven’t done the math on whether or not that would actually save you anything.

In January, 2021, Amplify launched an international version, for which the ticker is ISWN, which may be a good addition for diversification considering SWAN only uses U.S. stocks. However, it’s only amassed about $30 million so far.

At this point, SWAN should be available at any major broker. My choice is M1 Finance. The broker has zero trade commissions and zero account fees, and offers fractional shares, dynamic rebalancing, and a modern, user-friendly interface and mobile app. I wrote a comprehensive review of M1 Finance here.

What do you think of SWAN? Let me know in the comments.

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Disclosure: I own NTSX.

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Disclaimer:  While I love diving into investing-related data and playing around with backtests, I am in no way a certified expert. I have no formal financial education. I am not a financial advisor, portfolio manager, or accountant. This is not financial advice, investing advice, or tax advice. The information on this website is for informational and recreational purposes only. Investment products discussed (ETFs, mutual funds, etc.) are for illustrative purposes only. It is not a recommendation to buy, sell, or otherwise transact in any of the products mentioned. Do your own due diligence. Past performance does not guarantee future returns. Read my lengthier disclaimer here.