The BlackSwan Growth & Treasury Core ETF (SWAN US) successfully navigated through the equity market rout earlier this year, safeguarding itself against significant losses while remaining exposed to upside performance.

The COVID-19 pandemic comfortably fits the definition of a black swan event.

That’s according to Christian Magoon, Founder and CEO of Amplify ETFs, the fund’s issuer. Nonetheless, the numbers back this up.

The fund, which launched in November 2018, delivers exposure to US large-cap equities, as referenced by the S&P 500, while protecting against the possibility of rare events causing significant market losses, so-called ‘black swan’ events.

The term was coined by author Nassim Nichols Taleb and is based on an ancient belief that black swans did not exist.

The Covid-19 pandemic, and the resulting global economic shutdown and stock market sell-off, comfortably fits the definition of a black swan event.

While the SPDR S&P 500 ETF (SPY US) crashed -32.7% between 21 February and 23 March amidst the worst of the equity market sell-off, the BlackSwan Growth & Treasury Core ETF dropped a modest -8.4%.

Moreover, the ETF has participated in most of the market’s rebound, leaving it up 3.4% year-to-date (27 April 2020) compared to an -11.0% loss for SPY (see chart below).

Magoon, an ETF veteran, commented, “This year investors have been grappling with unprecedented uncertainty in equity markets due to the growing impact of the COVID-19 outbreak. SWAN has delivered what it was designed to do during choppy equity markets: help investors mitigate significant losses.

“It’s important to note though that SWAN isn’t a “tail risk” strategy – one that only makes money in a downward market or BlackSwan event. SWAN has another dimension that tail risk strategies don’t have: the ability to participate in upward moving equity market returns. This is why SWAN has “growth” in its name. That ability was demonstrated in 2019 when SWAN rose 22% in a market that saw the S&P rise 31%.”

Methodology

The fund’s protective approach is constructed through a combination of US Treasuries and equity market options.

The underlying S-Network BlackSwan Core Total Return Index is composed of a 90% allocation to US Treasury securities (with an average duration that tracks the ten-year Treasury note) and a 10% allocation to in-the-money LEAP call options on the SPDR S&P 500 ETF. LEAPs are long-term equity options that typically extend for two years or more.

Equity returns are achieved from the options, while the allocation to Treasuries provides downside protection by capitalizing on the frequently negative correlation between Treasury bonds and US stocks during periods of market volatility – between 21 February and 23 March, the iShares 7-10 Year Treasury Bond ETF (IEF US) gained 5.7%.

According to the fund’s prospectus, the methodology results in an approximate 70% exposure to the S&P 500 Index during a full market cycle.

The fund has proved popular with investors since launch, pulling in between $5 million and $15m net inflows every month during 2019. Its popularity naturally shot up at the beginning of the pandemic crisis, attracting $38m in February 2020 as well as $62m month-to-date in April.

The consistent net inflows, combined with relatively strong performance, has led the fund’s assets under management to swell above $250m.

Monthly Net New Assets in USD.

Cumulative Assets Under Management in USD.