Does anyone know SWAN?

[pb4uski]

As I have mentioned in prior posts, I bailed on stocks in March, specifically between March 17-23. I just has a feeling that this recession is going to be bad and there is too much uncertainty.

In any event, while I still want to participate in equities, I want to do so with less downside risk, even if I have to forfeit some upside potential. I was toying with buying Long-Term Equity AnticiPation Securities.. LEAPS... essentially a long-term option. I would buy LEAPS calls with a 6-month or one-year term or longer... probably on the SPY. If during the remaining term the SPY appreciates then the call would increase in value... if the SPY declines then my loss wold be limited to the cost of the option.

In the course of researching a strategy to do this I stumbled upon the Amplify Blackswan Growth & Treasury Core ETF (ticker SWAN). The ETF targets 90% of its assets in various Treasuries with an overall term of 10 years and 10% of its assets in in-the-money 6-month and 12-month SPY calls. The idea is that in times of market stress that there is often a flight to quality that increases the price of treasuries and that partially offsets the decrease in the price of the options.... and conversely, in good times the increase in the value of the options captures much of the increase in the SPY. In aggregate, they equate it to holding a portfolio of 65% treasuries and 35% SPY (I use VOO as a proxy for SPY since if I bought the S&P 500 it would be through VOO).

While the fund is only 16 months old it does seem to do the job well. There have been 6 months where the VOO has declined since the fund has been available... the average decline has been 5.87% and the average decline in SWAN has been 0.33%. Conversely, there have been 10 months where VOO has had positive returns averaging 3.63% and SWANs average returns for those same months was 1.96%.

The ER is 0.49%... more than I am used to paying but not outrageous. Interestingly, the founders of the fund were previously at Claymore and Guggenheim, the creators of the Bulletshare ETFs that many of us knew of and liked.

From the research that I have done so far, I haven't found any warts. During the market swoon in Dec 2018, SWANs first full month.... VOO declined 8.84% and SWAN declined 3.58%. During the 2019 bull market, VOO had a 31.35% return and SWAN had a 22.05% return. For YTD 2020, VOO has declined 19.58% and SWAN is UP 0.1%. For the entire 16 month period, SWAN has a average annual return of 13.08% vs -2.79% for VOO. SWANs correlation to stocks is 0.79.

In any event, I've seriously considering SWAN for my portfolio... perhaps not now but once the smoke clears and I do get in. Or alternatively, buyng some SPY LEAPS calls to provide my equity exposure.

Thoughts? Do any of you own SWAN? Or use LEAPS calls to go long on the market instead of buying equities directly?

https://amplifyetfs.com/Data/Sites/6/media/docs/Amplify_SWAN_FactSheet.pdf
https://amplifyetfs.com/swan.html
https://www.portfoliovisualizer.com...llocation3_3=33&symbol4=VGSH&allocation4_3=33
https://seekingalpha.com/article/43...ack-swan?utm_source=zacks&utm_medium=referral

 

[pb4uski]

This data is for the SWANXT index.... as I understand it an index of 90% UST and 10% LEAPS calls... useful only because they went back to 12/6/05 so one can get insights on how the strategy would have done prior to when SWAN was listed in Nov 2018.

https://snetworkglobalindexes.com/presentation/files/2019q4-swanxt-index-insights.pdf

 

[SecondCor521]

Possibly dumb question: Why not just buy 65% Treasuries and 35% VOO? You'd save the higher ER. Maybe you don't want to hassle with rebalancing.

 

[pb4uski]

Because with the VOO I'm at risk for a 35% or 50% drop if the SHTF.... whereas with a LEAP my maximum loss is the cost of the premium to buy the LEAP... and an at the money LEAP for Dec 2020 is about 10% of the cost of VOO.

OTOH, if VOO goes up 20% then I would have a 10% gain rather than a 20% gain.... if it goes up 30% then a 20% gain rather than a 30% gain (like SWAN vs VOO in 2019).

It's mainly downside protection.

I actually had that scenario that you suggested in the Portfolio Visualizer analysis as Portfolio 3.... it slightly underperformed SWAN for the 16 months in total and underperformed SWAN for 10 of the 16 months of available data (after ER of course).

 

[RetireAge50]

Not familiar with SWAN but in my gut it doesn’t feel right. Currently treasuries pay next to nothing, options are expensive, and stock prices are low. To me it make sense to do the opposite of what you are describing.

What would happen to the fund if interest rates rise quickly?

 

[pb4uski]

... What would happen to the fund if interest rates rise quickly?

It depends on why interest rates rise. If the most likely scenario is that they rise because the economy is doing well then the Treasuries would decline in value but the LEAPS would increase in value along with the value of stocks... and the net impact would be positive... very similar to a 35/65 portfolio of VOO and Treasuries.

Though I hear you on the options are expensive part for sure.... especially now... if I do this I may need to wait for the VIX to settle down to normal and the cost of the LEAPS might be more resaonable.

 

[gauss]

This sounds like a synthetic equity index annuity -- (without the annuity part.)

I tried playing around with this once, but it seemed like the spread when buying the options was going to significantly effect my upside. I might not have been using LEAPS however.

Kitces has a blog entry on this sort of thing.

-gauss

 

[OldShooter]

You made me look ....

• The fund has been in business for about a year.
• It is tiny.
• The top guy Magoon brokercheck comes up blank. Never been licensed, apparently.
• The fund is subadvised by a subadvisor who appears to be subadvised. Too complicated for me. Phil Bak, who appears to be running the sub-sub-advisor brokerchecks as having, in the past 10 years, two less-than-one-year brokerage jobs plus one one-year job.
• 0.49% fee is listed in the current prospectus with no indication that it has been bought down. IMO there is something stinky in there somewhere as 0.49% seems like not enough to support this contraption.

Surely, if this strategy is such a good idea, someone with a little more gravitas must also be offering it. I did not look at the strategy at all. I start this type of thing by wanting to know who I am doing business with.

 

[pb4uski]

Now you made me look. I found this from when he was named President of Claymore in 2008:

... Magoon, a native of Green Bay, Wisconsin, has a Master of Arts and BA in Communications from Wheaton (IL) College. He is Series 7, 24, 63 and 65- registered. ...

Claymore was later acquired by Guggenheim Investments.

As noted in the Kitces blog, it is a common strategy used by insurers who issue indexed-annuities.... I was familiar with it from when I worked in the industry, except our shop bought at-the-money calls and sold out-of the money calls to create a collar... it reduced the cost of the options but also limited the upside... hence the caps referred to in Kitces blog.

 

[OldShooter]

I dunno. There are no hits at https://brokercheck.finra.org for a "Christian Magoon." anywhere and no "Magoon" in IL. In my experience even expired registrations show up.

 

[pb4uski]

Yes, that is odd. I also looked up his CRD on their SEC filing and it gives no results but it gives results for some of the others. I kinda doubt that he would be doing interviews on CNBC, ringing the bell at the NYSE, etc if he wasn't registered.

 

[OldShooter]

Yes, that is odd. I also looked up his CRD on their SEC filing and it gives no results but it gives results for some of the others. I kinda doubt that he would be doing interviews on CNBC, ringing the bell at the NYSE, etc if he wasn't registered.

Well, it wouldn't be the first time a resume got padded. I was the victim of that one time, before HR departments made credential-checking part of the initial screening. I started to get suspicious of the guy and sent the personnel weenies off to check. Answer: Big hat, no cattle.

Lots of unregistered people talk to CNBC and ring that bell. I don't think those are criteria. YMMV.

Short of asking the guy why he's not at brokercheck I don't know what you do.

Personally I wouldn't deal with a company so new and so convoluted. If I couldn't find and buy from a more solid company offering a similar product I would wonder what might be wrong with it/what I had missed. It doesn't seem to be that revolutionary an idea that it really should have laid undiscovered for most of a century.

 

[pb4uski]

..... Personally I wouldn't deal with a company so new and so convoluted. If I couldn't find and buy from a more solid company offering a similar product I would wonder what might be wrong with it/what I had missed. It doesn't seem to be that revolutionary an idea that it really should have laid undiscovered for most of a century.

So I guess back in the day that Dell personal computers would not have been in your repetoire.... too new I suppose. You do realize that this ETF is registered with the SEC and traded on the NYSE Arca exchange... right? Not some black market listing.... prudence is good... paranoia.. not so much.

 

[OldShooter]

So I guess back in the day that Dell personal computers would not have been in your repetoire.... too new I suppose. ...

Probably correct. I spent much of my career in high tech. I wouldn't have bought Exidy, Burroughs (despite it being an old company), Sinclair, Goldstar, Data General, Northgate, ... I probably would have bought Digital Equipment, which would have been a mistake. That was a great company until it wasn't.

Risk management is Risk, Consequences aka Impact, and Cost to Mitigate. Legal risk with SWAN is not much. Believing 0.49% expense ratio is a stretch. I also saw 149% turnover which, though I'm not a bond guy, seems high. Consequences of the risk actually happening is probably some money tied up for a while but not totally lost. Cost to mitigate is zero if there is an similar alternative fund. I like zero. If no similar fund, Risk increases.

But you'll do what you decide, of course, as you should. I avoid complicated schemes on principle, so would not ordinarily have researched even this much.

This seems to be quite a leap for you from tracking CD yields. Maybe I misjudged.

 

[pb4uski]

....Believing 0.49% expense ratio is a stretch. ...

So where in the funds' audited financial statements where it states that the that the ratio of expenses to average net assets is 0.49% I am not to believe it? Why? Please explain.

 

[OldShooter]

So where in the funds' audited financial statements where it states that the that the ratio of expenses to average net assets is 0.49% I am not to believe it? Why? Please explain.

I am too lazy to look it up again, but IIRC the fund is only $150M. Is that right? If so the total fee is, round numbers, $750K. That's not a very big pie to split up between manager, subadvisors, etc. So my guess is that the books may be cooked a little bit -- maybe with overhead allocations or waivers of fees by the subadvisors. No proof, but certainly auditors have been hoodwinked before. Not outright fraud, but a maybe few unnoticed but, if necessary, defendable transactions to shine the right colored lights on the numbers.

I'm not a criminal court judge where the defendant's guilt must be proven beyond a reasonable doubt. I'll pull some elderly hamburger from the meat drawer and toss it without first testing to see if it makes me sick.

Interesting discussion, actually. You, a numbers guy, are coming at this from the numbers end. I am not even looking at most of the numbers, first looking at it from a business angle. Really, we should investigate a merger. Maybe the Morgan Stanley guys are not so busy right now.

 

[pb4uski]

Yes, but that is only one fund... the 10 fund family is $750 million... and annual advisory fees for the fund family is $5.474 million.... is that a big enough pie for you?

Mutual funds are frighteningly easy to audit so I wouldn't worry about the books being cooked too much.

 

[gerntz]

I think I know Black Swan.

 

[Dtail]

I found a Boglehead discussion on this concept.

https://www.bogleheads.org/forum/viewtopic.php?f=10&t=263557

 

[BeachOrCity]

Thinly traded etfs are always a warning flag for me.

You can buy leap spy puts easily. At the money you pay about 10-15 percent these days for 1 year to 18 months of protection and you control them.

It doesn’t cost a lot more to buy them in the money and have them pay out even if the market doesn’t steep decline.

For instance you can buy spy 300 puts for 65 bucks now and have protection til June 2021. Spy is trading at 248. So you make money above 235. Not bad. You can’t crush it leverage wise though but that may not be the goal.

The same dated option is 30 bucks for 245.

Personally I would take the more in the money option. Not looking to kill it. Just to get some profit off the decline.

Just be sure to pick a round number so your option is traded a bit more.

 

[tpkinsl]

SWAN

I bought $100k of SWAN back in December, a relatively small part of my portfolio - I had no idea about the pandemic, but was worred about some sort of black swan event, and also thought the market was getting to frothy. I have a fee based Financial Advisor - he looked at it and said the downside he saw was you give up gains if the market is going up. Anyway, since December, I'm -4% in the fund, vs. down a ton in the rest of my stock ETFs. I can't vouch for the fund managers or answer some of the questions on this post, but from my point of view, it greatly limited my downside, and I am glad I bought it. Sort of wish I put more in it, or took more off the table back in December!

 

[finnski1]

Thinly traded etfs are always a warning flag for me.

You can buy leap spy puts easily. At the money you pay about 10-15 percent these days for 1 year to 18 months of protection and you control them.

It doesn’t cost a lot more to buy them in the money and have them pay out even if the market doesn’t steep decline.

For instance you can buy spy 300 puts for 65 bucks now and have protection til June 2021. Spy is trading at 248. So you make money above 235. Not bad. You can’t crush it leverage wise though but that may not be the goal.

The same dated option is 30 bucks for 245.

Personally I would take the more in the money option. Not looking to kill it. Just to get some profit off the decline.

Just be sure to pick a round number so your option is traded a bit more.

I think you meant can make money below 235 not above

 

[BeachOrCity]

Yes, but that is only one fund... the 10 fund family is $750 million... and annual advisory fees for the fund family is $5.474 million.... is that a big enough pie for you?

Mutual funds are frighteningly easy to audit so I wouldn't worry about the books being cooked too much.

What about layering of fees? The fee for the top level might be .49. But then they invest in vehicles that have their own fees. Common way to make money wo it seeming outrageously expensive.

Just a question

 

[pb4uski]

What about layering of fees? The fee for the top level might be .49. But then they invest in vehicles that have their own fees. Common way to make money wo it seeming outrageously expensive.

Just a question

I guess that I don't see any layering at all... their assets are treasuries and SPY options... that's all there is to it. They rebalance to 90% treasuries and 10% options each June and December.

 

[OldShooter]

Yes, but that is only one fund... the 10 fund family is $750 million ...

Made me look again. I thought the thread had died.

This doesn't change my evaluation. Without even looking at total returns, running ten funds averaging $75M each after four years in existence? Really? They're not exactly knocking the investment world dead.

In my investment class I talk about critical looks at any investment opportunity and instant rejection of anything where there is any question at all. I'd call this one a frog just based on looking at the business. My point to the class is that among all those frogs there may be a prince, but how many frogs do you want to kiss looking for the prince? Especially when each kiss costs you time and money.

YMMV, as usual. Maybe it is a prince.