Mostly Voices [0:00]

A foolish consistency is the hobgoblin of little minds, adored by little statesmen and philosophers and divines. If a man does not keep pace with his companions, perhaps it is because he hears a different drummer. A different drummer.

Mostly Mary [0:18]

And now, coming to you from dead center on your dial, welcome to Risk Parity Radio, where we explore alternatives and asset allocations for the do-it-yourself investor. Broadcasting to you now from the comfort of his easy chair, here is your host, Frank Vasquez.

Mostly Uncle Frank [0:36]

Thank you, Mary, and welcome to episode 118 of Risk Parity Radio. Today on Risk Parity Radio, we are going to do a review of an ETF that is called the Amplify Black Swan Growth and Treasury Core ETF, ETF and the ticker symbol is SWAN. I'm putting you to sleep. And as always, we will be using David Stein's 10 questions to master successful investing to do this analysis. And so the first question is, what is it? Question one. Well, this is an ETF that is comprised of Two components, 90% of it is invested in US Treasuries and they are spread across the duration spectrum, but they essentially mimic an intermediate or 10-year kind of bond, US Treasury bond. And then it also has options on the S&P 500 and those options are called LEAPS. They're long-term options, and they are proportioned in this fund so that it is approximately a 70-90 portfolio, if you will. Using the options gives it some leverage, so this performs or is designed to perform like a portfolio that is leveraged and is 70% S&P 590%. Intermediate US Treasury bonds. And I will just read you a couple of statements from the FAQ that goes along with this fund. The first one is what is the Black Swan Growth and Treasury Core ETF? And it says the Black Swan ETF ticker symbol SWAN is an index-based ETF that seeks to offer investors exposure to the returns of the S&P 500 While seeking to provide a downside buffer against significant S&P 500 declines, often described as Black Swan events, the goal is to provide attractive risk adjusted returns relative the S&P 500 over an entire market cycle.

Mostly Voices [3:02]

Real wrath of God type stuff. And some more information from the FAQ.

Mostly Uncle Frank [3:06]

How does the Black Swan ETF work? The ETF tracks a rules based index, the S Network Black Swan Core Index. The index is comprised of approximately 90% US Treasury securities and approximately 10% S&P 500 leap in the money call options. These values can fluctuate throughout the year based on market movement, but the index rebalances twice a year. How does the downside buffer work for this? Black Swan's portfolio allocation is based on the historically low to inverse correlation of US Treasuries to the S&P 500. During significant equity market declines, there is often a flight to safety into US Treasuries due to the historic low to inverse correlation between the S&P 500 and US Treasuries. Black Swan's downside buffer is its targeted portfolio weighting of approximately 90% US Treasuries. And then about the S&P 500 LEAP options, it says the 10% portfolio allocation to S&P 500 LEAP options or LEAP allocation is divided into two 5% allocations, a December and a June call option or options. At each semiannual reconstitution date, the fund will rebalance the LEAP allocation that is expiring and purchase an allocation equal to 5% of the portfolio in the following year. This is done to maintain LEAP exposure and reduce the time decay of the option value over time. Cool.

Mostly Voices [4:34]

All right, let's move on to question two.

Mostly Uncle Frank [4:38]

Question two is, is it an investment, a speculation, or a gamble? Well, we would characterize this as an investment since it is comprised of bonds and stocks or options on stocks that are in the money. And so it is squarely within the investment category. All right, what is the upside? Well, the upside is that you could gain both from the stocks and from the bonds. I'll just read you another piece of the FAQ. which is what happens within Black Swan when the S&P 500 has positive returns. It says when the S&P 500 has positive returns, the LEAP options will increase in value. Specifically, the LEAP options owned within the ETF are 70 Delta and are expected to participate in approximately 70% of the S&P 500 returns. Thus, the more the S&P 500 goes up, the more Black Swan seeks to benefit. In fact, unlike many investment products that offer a buffer, there's no upside cap or limit on the returns Black Swan could deliver. Yeah, baby, yeah! And so as a shorthand, this fund makes most of its positive returns through its exposure to the S&P 500 options and then uses the treasury bonds largely as a buffer or a Hedge. And it says, the worse that the S&P 500 does over the course of the year, the more the strategy becomes hedged, because it'd be more proportionately treasury bonds. The better the S&P 500 does during the year, the more the Black Swan becomes sensitive to the S&P 500 returns, and then would be going up more. All right, question four, which is, what is the downside? Well, there's a question about this in the FAQ. What environment could cause Black Swan to perform poorly? It says Black Swan could perform poorly when the S&P 500 is flat to down less than 10%, while at the same time interest rates are rising, causing fixed income prices to decline as well. Since 1929, there have been just three calendar years where both the 10-year US Treasury and the S&P 500 were down from a price standpoint in the same year. That's essentially the downside. If the stock market goes down, and interest rates go up, this ETF could have a bad year. All right, question five, who is on the other side of the trade? Well, this is traded on financial markets where you can buy and sell stocks and ETFs. So it could be anyone in the market, could be institutional investors or individual investors. I would doubt that a lot of institutions would own this sort of thing because they would more likely simply buy the components themselves. But in terms of those components, you're just talking about people buying and selling the S&P 500 and US Treasury bonds, which are two of the largest markets in the world. All right, question six. What is the investment vehicle? It is an exchange traded fund in that format, which is relatively tax efficient and better for you than mutual fund constructions. What does it take to be successful? Well, this is kind of a buy and hold sort of thing. The FAQ indicates it could be in your portfolio as a core allocation, an alternative, or some kind of tactical approach. It could be used for any of those sorts of things. Given its relatively conservative nature, it's probably not going to be something that people would be trading in and out of. So it's basically decide whether this thing actually fits in your portfolio and then buy and hold it and perhaps rebalance into or out of it as your portfolio instructions would call for. All right, question eight. Who is getting a cut? Well, this has a fee of 0.49% Which is not bad for a managed thing involving options. It's not the greatest expense fee, but it's not terrible either. And that is the fee that is charged by the fund manager who is the Amplify group who puts out a number of different kinds of funds. All right, now to the best question, or the more interesting question. Yes! How does it impact your portfolio? Well, here we are talking about risk parity style portfolios, and the question really is whether you could use this as a risk parity style portfolio or the basis for one. And the answer to that is yes, you could. It's interesting that it compares with NTSX, which is a fund that we use in our sample portfolio, the Leverage Golden Ratio. and we've talked about on previous episodes. The NTSX, by contrast, is a 60-40 portfolio, 60% S&P 500, 40% treasury bonds that is leveraged up to make it perform like a 90-60 portfolio. The Swan portfolio, by contrast, is leveraged up and is effectively a 70-90 portfolio. so it's slightly more leveraged but has a lot more treasury bonds in it. So in fact you could use this as a more conservative base for a risk parity style portfolio, but then you would have to add other things into it. I did find a nice lengthy article about this fund comparing it to NTSX and other hedge type strategies involving treasuries and stocks. It's on the optimized portfolio page and I will link to that in the show notes so you can read about this and some comparisons with other strategies and other funds and over time. But I thought it would be useful for us to do some of our own analyses over at Portfolio Visualizer, which I will also link to the show notes and I'm going to describe here. The first one I did is I created a synthetic version of this. The reason I created a synthetic version of this is because it just hasn't been around that long. It's only been around a couple of years, so it doesn't have a long history. But if you take out its components, you can create something that goes back further in time and get a better idea for its performance. And in this case, we have something that goes back to December of 2004. So I created one version that is simply this synthetic swan portfolio with the proportions of 70% in S&P 500 and 90% in the treasury bonds. So it's leveraged up 1.6 to 1. And then I also created another version of this with some gold in it to make it more like a risk parity style portfolio. And the way I proportioned that one was putting 24% of gold in it, which corresponds to roughly 15% of the total, if you're thinking of it as 160%. And then that one for the swan part of the portfolio has 59.5 in the S&P 500 and 76.5 in intermediate term bonds. And then also as a comparison, I compared it to a synthetic version of the Levered Golden Ratio portfolio, which is portfolio number seven of our sample portfolios, just to see how these would compare out since the Levered Golden Ratio uses some of that NTSX fund, which is a more aggressive version of this kind of fund. So I ran these three things together, which I will link to in the show notes, and we can take a look at the portfolio returns for the 100% synthetic swan type portfolio. Since 2004, the compounded annual growth rate was 11.34%. It did a bit better when you put some gold in it. It went up to 11.74%, but it did not do as well as the synthetic levered golden ratio, which is similar to our sample portfolio, which is a compounded annual growth rate of 14.09%. What's also interesting is that the synthetic swan portfolio actually had a greater drawdown than the other two portfolios with the gold and other things in it. The max drawdown for the synthetic swan was 34.8% compared with 28. 8% for the synthetic swan with gold in it and 28.9% for the levered gold and ratio portfolio. They all came out with similar sharp ratios. It was interesting, the synthetic swan with gold was actually the best in the sharp ratio category at 0.95, and then the levered golden ratio was 0.94, and the synthetic swan portfolio by itself was 0.92. And Sortino ratios were similar, 1.4 for the synthetic swan portfolio, 1.52 for the synthetic swan with gold in it, and then 1.51 for the synthetic levered golden ratio. So what can we learn from that? We can learn that using that as a basis for a risk parity style portfolio will give you something more conservative than our, say, regular portfolios, the 60/40 type portfolios with the same amount of leverage in them. The returns will be lower though. I also did another analysis to compare this more with an all-weather style portfolio, that very conservative portfolio that we use as a base comparison portfolio, sample portfolio number one on our portfolios page. And what I did for that is a similar analysis where I created the synthetic swan portfolio, the one with gold in it. These are the same as they were for the other comparison. I'm going to link to this in the show notes as well. And then I also created a synthetic leveraged all weather portfolio. And that one is comprised of 48% in SPY, 62% in the intermediate treasury bonds. That would be like the swan part of this portfolio. And then it has 24% in gold and 26% in Tlt. So it adds more long-term treasury bonds. And so we call that the synthetic leveraged all-weather portfolio. And when we look at the comparison of these, the synthetic leveraged all-weather portfolio actually does a bit better in pretty much all metrics compared to just the swan portfolio or the swan with gold. If you use this to create a portfolio like that, we have compounded annual growth rate of 11.86, which is higher than the one with gold at 11.74 and higher than the synthetic swan with 11.34. The worst year is important to look at because it's only -5.5 for the synthetic leveraged all-weather portfolio, 17.7% for the synthetic swan with gold and 22 for the synthetic swan itself. Same thing with max drawdowns, it's maximum of -24% for the all-weather one, the one with gold is 28.86, and the plain old synthetic one was -34.83. And so the synthetic leveraged all-weather portfolio ended up having a sharp ratio of 1.02, which is better than the synthetic one with gold at 0.95, or the 100% Synthetic Swan at 0.92. So you can see it just has a better risk reward characteristic that's even more stark when you look at the Sortino ratio, which focuses on downside. The synthetic leverage all weather is 1.75 compared to synthetic swan with gold at 1.52 and the synthetic swan at 1.4. And it's interesting to note if you look across both of these analyses it is that synthetic all-weather portfolio using the Black Swan Fund as a basis that has the highest Sharpe and Sortino ratios. So what that tells you is that this can be a useful thing if you are looking for an even more conservative portfolio than say the Golden Butterfly or Golden Ratio and then wanted to get some leverage into it. in an easy way because this does provide an easy way of getting leverage into a portfolio that does not involve dealing with these three times levered funds, which are only really designed for daily trading. I'm referring to things like UPRO and TMF. But if you wanted to construct a conservative portfolio and lever it up, this would be a good way to be able to do something like that. What's interesting to me is this would allow a do-it-yourself investor to create the kind of classic risk parity style portfolio that hedge funds were talking about and implementing when they first started implementing these kind of portfolios. Get a very conservative portfolio and then put some leverage into it. This just gives an easier way of getting that leverage into a portfolio, a conservative portfolio, I should say. All right, question 10, should you invest? Well, looking at the returns on this, I wouldn't say you would invest in this on its own. It would have to be part of some other portfolio that had more diversification in it besides just the stocks and treasury bonds. And if you were looking for a more aggressive portfolio, you would probably go with the NTSX fund like we have done in the Levered Golden Ratio sample portfolio, because that gives you more stocks relative to the treasury bonds. But if you were looking for something that was more treasury bond heavy, that looked more like the all-weather portfolio that was very conservative, but you wanted to have leverage to it, this would be a good way to do it. You would just need to do a little bit algebra to figure figure out how the other proportions or other investments in it, which should probably include some gold. I love gold. And perhaps some commodities or other things that you might want to put into it, perhaps maybe some small cap funds. One thing this does not have is a very good layout for dealing with inflationary situations. But if you added some small cap funds or some REITs or some gold or some combination of those sorts of things, commodities perhaps, then it would be more balanced out in terms of being able to withstand all kinds of economic environments. So I would have to say this could be a reasonable option for some people seeking to construct risk parity style portfolios. But I wouldn't rely on it on its own. But now I see our signal is beginning to fade. A lot of links in the show notes here if you want to learn more about this fund or think about it. If you have comments or questions for me, please send them to frank@riskparityradio.com that email is frank@riskparityradio.com or you can go to the website www.riskparriyradio.com and fill out the contact form and I'll get your message that way. We will pick up this weekend with our weekly portfolio reviews and get back to some more emails. If you haven't had a chance to do it, please go to Apple Podcast or wherever you get this stitcher or whatever that is. Like it, follow it, give it some stars, a review that would be greatly appreciated. That would be great.

Mostly Voices [21:19]

Okay. Thank you once again for tuning in.

Mostly Uncle Frank [21:23]

This is Frank Vasquez with Risk Parity Radio. Signing off.

Mostly Mary [21:30]

The Risk Parity Radio show is hosted by Frank Vasquez. The content provided is for entertainment and informational purposes only and does not constitute financial, investment, tax, or legal advice. Please consult with your own advisors before taking any actions based on any information you have heard here. making sure to take into account your own personal circumstances.