Thesis

The Amplify BlackSwan Growth & Treasury Core ETF (NYSEARCA: SWAN) is a traded index fund that aims to provide investors with exposure to the S&P 500 while providing hedged downside protection should the market decline. As according to fund documentation:

The BlackSwan ETF seeks investment results that correspond to the base S-Network BlackSwan Index (the Index). The Index’s investment strategy seeks uncapped exposure to the S&P 500, while hedging against the possibility of significant losses. Approximately 90% of the ETF will be invested in US Treasury securities, while approximately 10% will be invested in SPY LEAP options in the form of in-the-money calls.

The fund is relatively new and hits the market in November 2018. During its relatively short lifespan, the fund has indeed performed in line with its stated mandate, outside of 2022. Until this year, SWAN has posted very small drawdowns (-5% maximum drawdown when calculated on a monthly basis), with a Sharpe ratio of 0.56 and a standard deviation of 10.36%.

Year-to-date, the fund is down more than -17%, underperforming the S&P 500 by around 3.5%, with the index down only -13.5% until now this year (as of this writing). The abysmal performance in 2022 and the lack of coverage of the global SWAN market is explained by its composition. The fund attempts to cushion bearish moves in equities by investing a very large portion of the portfolio in Treasury securities. The mechanics behind this composition relate to a historic drop in yields in a risk-free environment, which translates into a higher price for Treasuries and therefore for the entire SWAN fund. This year has been different. We entered the year after historically low levels of return, the result of Fed actions and quantitative easing, which led to record equity prices and abundant market liquidity. The year 2022 was marked by a violent monetary tightening, with an upward shift of the yield curve, which led to significant losses on fixed income products. This year, the composition of the SWAN has produced a massive underperformance of the index due to the significant decline seen in Treasuries. The takeaway here is that any vehicle that provides downside protection via a portfolio of Treasuries will have outsized negative outcomes relative to the index in a tightening monetary environment. Higher rates lead to lower Treasury prices and the “hedging” component of the vehicle is negated.

Equally important is the fact that a retail investor can easily replicate the composition of the fund with a notional portfolio that produces better analytics and returns. We put together a theoretical 60/40 portfolio using the SPY and IEF exchange-traded funds (ETFs with very low fees) and obtained better analyzes and returns for the period from November 2018 to May 2022:

We can observe how a 60/40 portfolio, consisting of the SPY and IEF exchange-traded funds, gives a higher CAGR and Sharpe ratio compared to SWAN.

SWAN is a relatively new fund that has served its mandate quite well outside of 2022. Its performance has been abysmal this year, and it highlights the fact that a composition of Treasury bills to act as a hedge does not work in an environment of monetary tightening. Additionally, a retail investor can easily replicate and even optimize SWAN returns using a simple 60/40 portfolio comprised of SPY and IEF.

In our mind, for an investor who hates balancing and actively managing a portfolio, SWAN could be a solid long-term choice. Individuals who are happy to tinker twice a year with their holdings have better risk/reward options in the market starting with a simple 60% SPY, 40% IEF portfolio. We therefore rate SWAN as an expectation.

Performance

The fund has lost more than -17% since the start of the year:

We can observe that SWAN underperformed the S&P 500 index in 2022 instead of providing hedged performance when the stock market sells.

Since inception, the fund has been rising with a CAGR of around 6.32%, significantly underperforming the S&P 500:

We can also build a 60/40 portfolio where we use the S&P 500 ETF (SPY) for the equity portion and the iShares 7-10 Year Treasury Bond ETF (IEF) for the bond portion. The idea is to see if a simple stock/cash portfolio composition using very low fee ETFs performs better than SWAN since the fund’s inception. The returns and analytics for the respective portfolio are:

We can observe that the theoretical portfolio has a CAGR close to 9%, against a CAGR of just over 6% for SWAN.

Putting all the analyzes side by side, we get the following table for the period from November 2018 to May 2022, with all figures calculated on a monthly period by Portfolio Visualizer:

We can observe that the best Sharpe ratio is presented by our theoretical portfolio of 60/40 SPY/IEF, which means that it presents the best risk/reward ratio. A pure stock portfolio has the highest CAGR, while our theoretical portfolio has a CAGR that is almost 50% higher compared to SWAN, with a similar standard deviation.

As time passes since its inception, an investor may have a clearer idea of ​​SWAN risk/reward metrics in different currency environments, but ultimately the ETF’s portfolio can be replicated and even optimized using other low-fee ETFs.

Assets

As described in the fund’s fact sheet, more than 90% of the portfolio is made up of treasury bills:

It can be seen that the managers have chosen a laddered approach, with Treasury bills of different maturities in the portfolio. This is because the fund takes interest rate risk across the entire yield curve. The fund, according to its documentation, aims for a duration of 10 years:

Approximately 90% of the BlackSwan ETF will be invested in US Treasury securities (with a target Treasury duration of 10 years)

The fund replicates the rise seen in the S&P 500 via at-the-money call options on the S&P 500. We can see from the table above that the fund contains a June 2022 call option with a price of exercise of 375 and a call option of December 2022 with a strike price of 400. the strike. At-the-money calls have higher deltas, meaning they move more with spot prices in the S&P 500 than with at-the-money or out-of-the-money calls.

Conclusion

SWAN is an ETF that attempts to cushion bearish moves in the broader equity markets through a portfolio of Treasury bills. Outside of monetary tightening environments, SWAN managed to achieve partial capture of the upside in the S&P 500 with downside hedging, resulting in overall lower annual CAGRs and declines relative to the broader index . 2022 has been a different story, with an abysmal negative performance for SWAN, its Treasuries portfolio adding to a significant negative performance this year. A retail investor can easily replicate and optimize the SWAN portfolio through a simple 60/40 allocation to SPY and IEF exchange-traded funds. In our opinion, SWAN is only suitable for a retail investor who hates balancing and actively managing a portfolio and who has a holding period of more than 5 years in mind. We therefore assess it as a Hold.