Liquid Alternatives: The Black Swan ETF, Holding Up as It was Meant To
By every definition, the coronavirus pandemic is a ‘black swan’ event. One that is unpredictable or unforeseen but with extreme consequences.
The Amplify Black Swan Growth & Treasury Core ETF (NYSEARCA: SWAN) is designed for times like these. The coronavirus epidemic has sent global stock markets into a tailspin on fears of a massive recession. In an emergency action on Sunday, the US Fed cut interest rates to zero. It also embarked on a $700 billion asset purchase program to counter recessionary fears and improve liquidity.
Markets voted on the action with their feet. As of the time of writing, US futures are locked limit down and the S&P 500 VIX future is up nearly 30% to 56.75. Gutwrenching volatility indeed!
Earlier this month, Sequoia Capital sent a memo to founders and CEOs of its portfolio companies. Titled “Coronavirus: The Black Swan of 2020,” it discussed the impact of the virus. Implications included falling business activity, supply chain disruptions, and travel challenges.
Amplify Black Swan Growth & Treasury Core ETF (NYSEARCA: SWAN)
This ETF invests in approximately 65% Treasury bonds and 35% S&P exposure through the purchase of LEAP options, or options contracts expire in at least one year.
This strategy works well when markets seize up as they are doing now.
“The theory behind Black Swan is to own S&P exposure, but to also own U.S. Treasurys,” said Amplify founder and CEO Christian Magoon told CNBC’s “ETF Edge.” “During times of market crisis, Treasurys are bought up like crazy and they act as a great negative-correlated asset to equity exposure.” (CNBC)
The performance of the ETF is a testament to the efficacy of this strategy. As we can see in the chart below, SWAN is down about 4% while the S&P 500 is off by nearly 20%.
“This works a lot like a traditional, balanced portfolio, but really shines during times of market crisis,” Magoon added. “This is a fund that does work [to] a hedge against black-swan risks, but [is] also something you can hold in an upward-moving market. So, it’s really a core holding.”
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