SWAN: Strong Balanced Fund, For Risk-Averse Investors And Retirees

Summary

SWAN is a balanced equity and treasury fund.

SWAN performs well during most market conditions, including bull markets, bear markets, and in the long term.

An overview of the fund follows.

This idea was discussed in more depth with members of my private investing community, CEF/ETF Income Laboratory. Learn More »

Q PM Images/DigitalVision via Getty Images Author’s note: This article was released to CEF/ETF Income Laboratory members on October 31st, 2021.

The Amplify BlackSwan Growth & Treasury Core ETF ( SWAN ) is a balanced equity and treasury fund. The fund’s holdings provide investors with most equity upside while minimizing losses during downturns, a solid combination. SWAN is a buy, and particularly appropriate for more conservative investors and retirees. SWAN only yields 1.4%, and so is not an effective income vehicle. SWAN – Simple Overview and Analysis

The Amplify BlackSwan Growth & Treasury Core ETF ( SWAN ) is a balanced equity and treasury fund.

SWAN’s treasury exposure is comprised of investments in normal, simple treasuries, and accounts for 90% of the value of the fund.

SWAN’s equities exposure is comprised of in-the-money S&P 500 LEAP (long-term) calls. These options provide the fund and its shareholders with about 50-55% of the S&P 500’s upside, while capping losses at about 10% of the value of the fund.

SWAN’s holdings and strategy provide investors with most equity upside, due to its S&P 500 calls, while minimizing losses during downturns, due to its treasury holdings, and as equity losses are capped. Treasury yields and periodic rebalancing further boost returns.

SWAN’s holdings and strategy are simple, yet incredibly effective, with the fund experiencing most of the returns of the S&P 500, but almost none of the losses.

Specifically, since inception SWAN has returned 14.9% per year, versus 21.8% for the S&P 500. SWAN’s returns are equivalent to 72% of S&P 500 returns, so the fund experiences most of the returns of said index. Losses, on the other hand, have been significantly lower. In fact, SWAN actually posted positive returns during the last downturn, 1Q2020, the onset of the coronavirus pandemic. SWAN posted returns of 0.4% versus losses of 19.5% for the S&P 500. Data by YCharts Combining most of the returns of the S&P 500 with almost none of the losses is an incredibly rare, potent combination, and SWAN’s core investment thesis. As the fund focuses on reducing risk, volatility, and losses during downturns, it is more appropriate for more conservative investors and retirees. As SWAN’s long-term total returns will likely lag those of the S&P 500 and other broad-based equity indexes, it is less appropriate for more aggressive investors. SWAN – In-depth Holding Analysis

To understand how SWAN works in more detail, we need to take a closer look at its holdings.

SWAN’s more complicated holdings are its equity call options. SWAN bought two sets of options, but let’s focus on the one in bold below: (Source: SWAN Corporate Website)

Last December, SWAN bought some S&P 500 call options with a $324 strike price, equivalent to the index price at the time, and an expiration date of December 21st, 2021. These were worth around 5% of the value of the fund at the time.

These options give SWAN the right to buy shares in the S&P 500 at said date for $245, regardless of the actual price of the index. Option profits are dependent on the share price of the index at the termination date, of the strike price, and of the premiums paid for the options contract. The following diagram summarizes the situation: (Source: Wikipedia )

There are two basic scenarios to consider.

If at the expiration date, December 21st, 2021, the S&P 500 is trading higher than the option’s strike price, $324, then the options can be profitably exercised. SWAN would buy shares in the S&P 500 for $324, would sell them at market prices, and pocket the spread. As the S&P 500 is currently trading at a price of $468, this seems like the likeliest scenario. Assuming the S&P 500 is flat from here until December, SWAN’s shareholders would receive profits of $144 per option (really, $13,500 as each option is equivalent to 100 shares of the underlying).If at the expiration date, December 21st, 2021, the S&P 500 is trading lower than the option’s strike price, $324, then the options can’t be profitably exercised, and the fund’s investment is lost. SWAN invested the equivalent to 5% of its value in these options at the time, so losses are capped at 5%.SWAN invests another 5% […]

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