Black Swan


Amplify lists black swan ETF

Amplify ETF is listing a black swan ETF – which is designed to shield investors from rare and unexpected events (what are called “fat tails” or “black swans” in statistics). The Amplify BlackSwan Growth & Treasury Core ETF (SWAN) will aim to provide investors with the performance of the S&P 500 while mitigating against the risk of significant loss via black swans.

To do this, SWAN will track an index with two portions. The first is made up of a portfolio of Treasuries, which will make up 90% of SWAN at every rebalance. The second is a portfolio of LEAP call options on SPY, which will make up 10% of the index’s market capitalisation. SWAN will aim to achieve the performance of the S&P 500 – despite being 90% invested in Treasuries – through long leverage, essentially, on S&P 500 call options. The options chosen will be “in the money” and a target delta of 0.70 (the options should move $0.70 for each $1.00 move in the S&P 500). The remaining performance of the S&P 500 will be gathered, one assumes, by the yield on the Treasuries. The options will be reconstituted every six months.

Analysis – interesting idea

The idea of a black swan ETF is certainly interesting (and has a marketing friendly name). And what’s there not to like? SWAN promises to give investors the performance of the S&P 500 but with less risk. But for us there are three quick questions.

The first is about potential contango on the options strategy. When SWAN’s options are rolled, it’s at very least possible that contango can kick in if the old options being sold are cheaper than the new ones coming in. How is this being managed? The second is why has SWAN been structured to go long on Treasuries and buy calls on SPY, rather than long on SPY and buy deep out-of-the-money puts? Surely the latter is the easier way to offer downside protection. The third is who is this for? The product offers an investment strategy that anyone can do in their brokerage account. Just hold the Treasuries yourself and then buy options every six months. Investors can use Yahoo Finance and Excel to pick options with deltas of 0.70.

Still, this is an interesting idea. We’ll be excited to see how closely it can track the S&P 500. Our feeling is that it could underperform its benchmark quite a bit. But we hope to be proven wrong.