SWAN ETF - 10% Leaps / 90% Treasuries

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Topic Author
Snowjob
Posts: 1634
Joined: Sun Jun 28, 2009 10:53 pm

SWAN ETF - 10% Leaps / 90% Treasuries

Post by Snowjob »

New ETF launched about a month ago. Goal is to participate in 70% of the market (total US market) movement via use of leaps (10% of assets) and then have exposure to long treasuries (90% of dollars invested) for the balance of the portfolio. Ignoring the lack of international diversification, this seems like an interesting all in one fund to protect your downside exposure and still give a lot to the upside. It will be interesting to see how this does over the next few years as interest rates look set to continue their rise. If we get to a more normal level of rates w/o much damage I might throw some $$$ at it.

https://www.etf.com/SWAN#overview
stlutz
Posts: 5572
Joined: Fri Jan 02, 2009 1:08 am

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by stlutz »

49 bps is a lot to pay for a strategy that one can easily execute themselves. They are only rebalancing/reconstituting twice per year.

The good thing about having the ETF is it will provide for a true real life test of this strategy which has been discussed on this forum in the past. The question has always been how much of the return gets lost in bid/ask spreads on the options and in the option price decay.
User avatar
Hodor
Posts: 236
Joined: Wed Jun 24, 2015 8:27 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by Hodor »

What's a leap?
User avatar
whodidntante
Posts: 9087
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by whodidntante »

Hodor wrote: Fri Nov 09, 2018 11:21 pm What's a leap?
It's a long term option. Basically the approach is leveraged equities and long bonds.
Northern Flicker
Posts: 6484
Joined: Fri Apr 10, 2015 12:29 am

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by Northern Flicker »

A LEAP is a call option on the S&P500 with longer term than a traditional option. This is a standard hedging strategy. To work you need the 90% in T-bills to earn enough interest to cover most or all of the cost of enough quantity of a LEAP to matter.
Last edited by Northern Flicker on Fri Nov 09, 2018 11:36 pm, edited 1 time in total.
Risk is not a guarantor of return.
User avatar
whodidntante
Posts: 9087
Joined: Thu Jan 21, 2016 11:11 pm
Location: outside the echo chamber

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by whodidntante »

If you want this asset allocation, why wouldn't you simply buy it? You don't need an ETF to accomplish it.
Daryl
Posts: 612
Joined: Thu May 22, 2008 9:34 am
Location: Malvern, PA (I like to sleep near my money!)

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by Daryl »

I know they are just buying call options, but aren't there a couple scenarios where these expire worthless (stocks are flat or negative)? It seems this strategy would offer a couple options on how I can turn $100 into $90! How would this compare to a 70/30 allocation, adjusted for fees? Is the only goal of this ETF to reduce volatility (and fee adjusted investor returns)?
User avatar
nisiprius
Advisory Board
Posts: 41947
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by nisiprius »

The good thing about having the ETF is it will provide for a true real life test of this strategy which has been discussed on this forum in the past.
Amen to that.

Morningstar is showing me inception on 11/6/2018, and $12 million-with-an-M in assets.

Speaking from total ignorance, I have to ask: can this possibly be a "passive" strategy? And, if not, how do we know how the managers are balancing risk and return? As noted below, the ETF holds only two LEAPs, two. I don't see how two LEAPS can be chosen "passively."

A Google search is showing me things like this:The Temptations and Dangers of Using LEAPS
The biggest temptation when utilizing LEAPS is to turn an otherwise good investment opportunity into a high-risk gamble by selecting options that have unfavorable pricing or would take a near miracle to hit strike. You may also be tempted to take on more time risk by choosing less expensive, shorter-duration options that are no longer considered LEAPS. The temptation gains fuel from the few, extraordinarily rare instances where a speculator has made an absolute mint.

Using LEAPS doesn't make sense for most investors. They should only be used with great caution and by those who enjoy strategic trading, have plenty of excess cash to spare, can afford to lose every penny they put into the market, and have a complete portfolio that won’t miss a beat by the losses generated in such an aggressive strategy.
That sounds like high-stakes, bust-or-jackpot speculation to me; how do we know the SWAN managers will resist "the temptations and dangers" of "turning an otherwise good investment opportunity into a high risk gamble," especially if performance seems to be lagging?

Currently, the ETF in fact only holds two LEAPs. There is a good deal of verbiage about "indexing" and "passive" but no LEAPS index is ever mentioned, and I think all of the index/passive statements refer only to the actual Treasury holdings.

Perhaps someone can tell me what they think of these. Are these about the sort of thing you'd expect from someone pursuing a 90% stocks, 10% LEAPs strategy?

SPDR S&P CLL OPT 12/18 244 SPY 181221C00244000 SPY 181221C00244000 222 $772,893 6.10%
SPDR S&P CLL OPT 6/19 250 SPY 190621C00250000 SPY 190621C00250000 175 $616,087 4.86%

The Prospectus says this. Perhaps someone can tell me what's meant by these and whether they constitute a serious risk. The boldfaced sentence suggest to me that even though the LEAPS only constitute 10% of the portfolio, possible losses due to LEAPS are not limited to 10%.
...The Fund may also purchase over-the-counter call options, which involves risks different from, and possibly greater than, the risks associated with exchange-listed call options. In some instances, over-the-counter call options may expose the Fund to the risk that a counterparty may be unable to perform according to a contract, and that any deterioration in a counterparty’s creditworthiness could adversely affect the instrument. In addition, the Fund may be exposed to a risk that losses may exceed the amount originally invested.
Last edited by nisiprius on Sat Nov 10, 2018 9:42 am, edited 3 times in total.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
User avatar
Rick Ferri
Posts: 9209
Joined: Mon Feb 26, 2007 11:40 am
Location: Georgetown, TX. Twitter: @Rick_Ferri
Contact:

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by Rick Ferri »

This is an old and common strategy.

You buy a zero coupon bond with a percentage of your investment and buy a long-term call option on a risky asset with the rest. Assume you invest $10,000. Assume the maturity of a 3 year $10,000 face value zero coupon T-bond is $9,000. You buy $9,000 of the 3 year zero and sit on it. You buy $1,000 in long-term S&P 500 leaps, or long-term options on some other risky asset.

The idea is to hit a home run with the 10% in the risky asset by employing as much leverage as you can through options and leaps. Since they are options, you never have to put another dime in if they go under (unlike futures or swaps where you would get a margin call). Worst case, in 3 years the options are worthless but you get back your original $10,000 when the zero coupon bond matures.

And that's how it's done!

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.
columbia
Posts: 2925
Joined: Tue Aug 27, 2013 5:30 am

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by columbia »

What’s the (supposed) advantage to this approach, which can’t be achieved through other methods?
bgf
Posts: 1534
Joined: Fri Nov 10, 2017 9:35 am

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by bgf »

and you can vary your "leverage" not just by how you allocate but also by how deep in or out of the money your call is... the more in the money, the less leverage and the more money you have to pay in premium up front (less for treasuries) but the less likely your option will expire worthless...
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
Topic Author
Snowjob
Posts: 1634
Joined: Sun Jun 28, 2009 10:53 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by Snowjob »

stlutz wrote: Fri Nov 09, 2018 11:08 pm 49 bps is a lot to pay for a strategy that one can easily execute themselves. They are only rebalancing/reconstituting twice per year.

The good thing about having the ETF is it will provide for a true real life test of this strategy which has been discussed on this forum in the past. The question has always been how much of the return gets lost in bid/ask spreads on the options and in the option price decay.
Agreed, I've been looking for some real life performance data. But with regard to implementing myself I look at Nisiprius' comments below and question if trying to save a few points on the expense ratio is worth it. Compared to a larger asset base I lack the scale that might be needed for diversification of the leaps themselves and further (the google link) I'm curious if I would be disciplined enough to not reach for returns when selecting the leaps. If this was something that is executed properly in ETF form I would be willing to outsource this decision making and just buy some shares.
nisiprius wrote: Sat Nov 10, 2018 7:04 am ..
Speaking from total ignorance, I have to ask: can this possibly be a "passive" strategy? And, if not, how do we know how the managers are balancing risk and return? As noted below, the ETF holds only two LEAPs, two. I don't see how two LEAPS can be chosen "passively."
..
The goal would be eliminate 2008 style events, while still providing a very competitive return to the upside. I think that value comes into play as you are going through a de-risking process heading into retirement. Unfortunately those last 10 years are when you have the most amount of money at your disposal to invest. Having a strategy like this as part of your asset allocation is appealing to me over that time frame when. If we don't have a massive melt down, I still likely outperformed treasuries and thus would be in a position to cash this in for an annuity or something like that. If we do crash and burn I'll have largely avoided the pain and will have lots of options on the table.

Daryl wrote: Sat Nov 10, 2018 6:26 am I know they are just buying call options, but aren't there a couple scenarios where these expire worthless (stocks are flat or negative)? It seems this strategy would offer a couple options on how I can turn $100 into $90! How would this compare to a 70/30 allocation, adjusted for fees? Is the only goal of this ETF to reduce volatility (and fee adjusted investor returns)?
User avatar
nisiprius
Advisory Board
Posts: 41947
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by nisiprius »

Snowjob wrote: Sat Nov 10, 2018 9:26 am...Compared to a larger asset base I lack the scale that might be needed for diversification of the leaps themselves and further (the google link) I'm curious if I would be disciplined enough to not reach for returns when selecting the leaps. If this was something that is executed properly in ETF form I would be willing to outsource this decision making and just buy some shares...
I don't know what the ETF intends to do when (if?) it gets a larger asset base, and I couldn't figure this out from the Prospectus. It's hard for me to consider two holdings as being diversified. The only way it could be less diversified would be for there to be one holding.

On closer inspection, I see that SWAN seeks to track "the S-Network BlackSwan Core Total Return Index," described here. I looked over this trying to figure out how many LEAPs are in the index and how they are selected. There's a good deal of detail on how the Treasury part of the index is determined, but I don't understand what it is saying here about LEAPs:
LEAP call option positions are reconstituted twice per year on or around the first trading days of June and December. At each June reconstitution, the index liquidates its existing June LEAP call options and purchases June LEAP call options that expire the following June. The December LEAP call option position will remain unchanged at each June reconstitution.

At each December reconstitution, the index liquidates its existing December LEAP call options and purchases December LEAP call options that expire the following December. The June LEAP call option position will remain unchanged at each December reconstitution.

Net gains or losses derived from the reconstitutions of the LEAP call option position will be added to or subtracted from the treasury portfolio at each reconstitution.

Share weights will be based on "ask" prices as of the close of trading on the date two trade days prior to the effective date of the reconstitution (“The Record Date”).
Is this a passive, rules-based approach that always calls for holding exactly two LEAPs? Does it leave any room for judgement about how the LEAPs are to be chosen, or could a simple computer program execute this part of the strategy? How would such a computer program know that it needs to buy "over-the-counter" options?

Are their any significant risks in this ETF beyond "the risk of earning only 90%, instead of 100%, of what you would earn in a 7-10 year Treasury ETF like IEF? Why does it need to leave open the possibility that "he Fund may also purchase over-the-counter call options? Is "In addition, the Fund may be exposed to a risk that losses may exceed the amount originally invested" just "lawyers made us do it" stuff or is it a real risk? (And what have I gained if I can quit worrying about black swans in stocks, only to worry about black swans in stock options?)
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
grok87
Posts: 9151
Joined: Tue Feb 27, 2007 9:00 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by grok87 »

duplicate
Last edited by grok87 on Sat Nov 10, 2018 12:38 pm, edited 1 time in total.
RIP Mr. Bogle.
grok87
Posts: 9151
Joined: Tue Feb 27, 2007 9:00 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by grok87 »

grok87 wrote: Sat Nov 10, 2018 12:28 pm
Snowjob wrote: Fri Nov 09, 2018 10:54 pm New ETF launched about a month ago. Goal is to participate in 70% of the market (total US market) movement via use of leaps (10% of assets) and then have exposure to long treasuries (90% of dollars invested) for the balance of the portfolio. Ignoring the lack of international diversification, this seems like an interesting all in one fund to protect your downside exposure and still give a lot to the upside. It will be interesting to see how this does over the next few years as interest rates look set to continue their rise. If we get to a more normal level of rates w/o much damage I might throw some $$$ at it.

https://www.etf.com/SWAN#overview
interesting.
here is a link to its current holdings
http://portfolios.morningstar.com/fund/ ... ture=en-US
on the run treasuries 2-30 years and the 2 leap options june and december
RIP Mr. Bogle.
bgf
Posts: 1534
Joined: Fri Nov 10, 2017 9:35 am

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by bgf »

grok87 wrote: Sat Nov 10, 2018 12:37 pm
grok87 wrote: Sat Nov 10, 2018 12:28 pm
Snowjob wrote: Fri Nov 09, 2018 10:54 pm New ETF launched about a month ago. Goal is to participate in 70% of the market (total US market) movement via use of leaps (10% of assets) and then have exposure to long treasuries (90% of dollars invested) for the balance of the portfolio. Ignoring the lack of international diversification, this seems like an interesting all in one fund to protect your downside exposure and still give a lot to the upside. It will be interesting to see how this does over the next few years as interest rates look set to continue their rise. If we get to a more normal level of rates w/o much damage I might throw some $$$ at it.

https://www.etf.com/SWAN#overview
interesting.
here is a link to its current holdings
http://portfolios.morningstar.com/fund/ ... ture=en-US
on the run treasuries 2-30 years and the 2 leap options june and december
ah that is very helpful. both leaps are well in the money and have been all year. they act more like holding the underlying sp500 etf as they get more and more in the money. its clear to me this is really just a bond allocation with an equity kicker. i dont think anyone with a substantial equity allocation would want this fund as a substitute.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"
Day9
Posts: 986
Joined: Mon Jun 11, 2012 6:22 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by Day9 »

The old Should I use margin to buy a balanced fund? thread has lots of discussion on leveraging up a high bond, low stock portfolio. Though I believe the person who started that thread uses futures, not Leaps.

The book Lifecycle Investing by Nalebuff and Ayres discusses using Leaps but it leverages a 100% stock allocation, no bonds, and the idea is for a young person to do this since, for example, a young person with $10,000 all in stocks is risking a lot less than a retiree with a 40/60 allocation. So the authors propose using leverage when one is young to help balance that out over a lifetime. They even wish for Target Date Retirement Funds to use this approach.
I'm just a fan of the person I got my user name from
maxDrawdown
Posts: 18
Joined: Mon Oct 29, 2018 6:49 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by maxDrawdown »

I'd think of this fund as an allocation of 70% US equity, 90% Treasuries, -80% cash, and some insurance on the equity portion in the form of puts. Nobody likes negative skewness, so you tend to pay richly for the latter (cf. the variance risk premium). IIRC, option-selling strategies produce robust alphas at the cost of highly negative skewness.

That said, the negative exposure to the variance risk premium should be relatively mild with long-term ITM calls (IIRC, it's most severe with short-term OTM options), so I guess you could do worse than this fund if you do like some equity crash insurance.
nisiprius wrote: Sat Nov 10, 2018 7:04 am The Prospectus says this. Perhaps someone can tell me what's meant by these and whether they constitute a serious risk. The boldfaced sentence suggest to me that even though the LEAPS only constitute 10% of the portfolio, possible losses due to LEAPS are not limited to 10%.
Yes, that's weird. Normally, you can't lose more than you paid when buying options. Must be something about their particular over-the-counter arrangements.

They will have to continuously rebalance to remain at 70% delta, so they could lose more than 10% by reallocating from the treasury portion to the calls and repeatedly losing money on the latter. But that can't lead to loss beyond invested capital.

EDIT: If you just buy and forget the options and don't rebalance often to hold the delta fixed, you get an additional implicit trend-following strategy. Market goes up -> delta goes up, and vice versa. See e.g. Covered Calls Uncovered (they cover the inverse case of selling calls and getting a reversal strategy, but same principle).

This is why I think that an option strategy index that's truly passive in spirit should be one that keeps exposures (delta, theta, ..) constant, not the pseudo-passive buy/sell-and-forget approach. Ordinary passive indices don't have wildly varying exposures over time either :)
grok87
Posts: 9151
Joined: Tue Feb 27, 2007 9:00 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by grok87 »

bgf wrote: Sat Nov 10, 2018 12:52 pm
grok87 wrote: Sat Nov 10, 2018 12:37 pm
grok87 wrote: Sat Nov 10, 2018 12:28 pm
Snowjob wrote: Fri Nov 09, 2018 10:54 pm New ETF launched about a month ago. Goal is to participate in 70% of the market (total US market) movement via use of leaps (10% of assets) and then have exposure to long treasuries (90% of dollars invested) for the balance of the portfolio. Ignoring the lack of international diversification, this seems like an interesting all in one fund to protect your downside exposure and still give a lot to the upside. It will be interesting to see how this does over the next few years as interest rates look set to continue their rise. If we get to a more normal level of rates w/o much damage I might throw some $$$ at it.

https://www.etf.com/SWAN#overview
interesting.
here is a link to its current holdings
http://portfolios.morningstar.com/fund/ ... ture=en-US
on the run treasuries 2-30 years and the 2 leap options june and december
ah that is very helpful. both leaps are well in the money and have been all year. they act more like holding the underlying sp500 etf as they get more and more in the money. its clear to me this is really just a bond allocation with an equity kicker. i dont think anyone with a substantial equity allocation would want this fund as a substitute.
agree, it's a little disappointing. i would be more interested if they were buying truly long dated leaps (like 3 years) and if they were out of the money.
RIP Mr. Bogle.
JackoC
Posts: 1719
Joined: Sun Aug 12, 2018 11:14 am

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by JackoC »

As others have said, this is a very well established strategy. Not to say necessarily a good or suitable one, but it's been around a long time. Banks outside the US (in a few cases in the US) often used to offer 'equity linked CD's' for example based on this idea: a low risk bond's nominal return pays, ideally fully, for call options on the stock market. Therefore, some of the upside of stocks with no nominal downside. But that depended on fairly high 'riskless' interest rates. Those optics can't be achieved obviously when bonds yield almost nothing (Japan or higher grade Eurozone issuers in recent years). And they didn't look as good at US interest rates till recently either. I guess at ~3% nominal yield the marketing equation might shift on such structures.

But this is like a number of simple, *potentially* worthwhile strategies: it's too simple to pay somebody a multi- 10's bps ER's to do it for you. If you learn to fully understand something like this you can do it yourself. If you don't care to understand you shouldn't buy the fund. I'm not seeing the population for whom it makes sense to pay multi-10's bp ER's. That's aside from whether the idea itself has merit. This one again I think is a little too much based on optics (limited or no nominal loss). But I don't think you can say it's definitely a bad strategy for somebody averse enough to big losses in stocks but troubled by the prospect of missing out on all of a bright future for stocks, if that turns out to be the case. Most people here seem to be, or at least claim to be, iron-stomached to big stock market declines on stock-heavy portfolios. This idea doesn't fit with their risk preference. There's no claim here of a favorable market anomaly*. It's just slicing market return a different way which could legitimately meet a certain type of risk preference, if costs were kept at a minimum.

*in contrast for example with PUTWRITE concept which also has limited risk, there's a fund or two doing it I think: without ER's that had seemingly anomalously high Sharpe Ratio for many years.
acanthurus
Posts: 397
Joined: Sun Aug 04, 2013 8:02 am

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by acanthurus »

removed
Last edited by acanthurus on Tue Oct 15, 2019 12:51 pm, edited 1 time in total.
ThrustVectoring
Posts: 771
Joined: Wed Jul 12, 2017 2:51 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by ThrustVectoring »

acanthurus wrote: Sun Nov 11, 2018 1:41 pm Are there any tax benefits to a strategy like this in an ETF wrapper vs. doing it myself? If I have to roll LEAP contracts myself that's quite the tax drag.
Yeah, the tax drag definitely makes the fund the wrong way to go. If you have the cash on hand required to not need the leverage of the call options, you can use put-call parity and buy the S&P 500 + put options at the same strike. This lets you defer realization of the long-term capital gains of the S&P 500. You still need leverage to get the benefits of the bond allocation, and this you can get efficiently via treasury futures. With the current yield curve, short-term treasury futures make the most sense to me, but targeting a DV01 equivalent to the funds should work out great regardless of which contract you pick. The bonus is that the ordinary income of physical treasuries gets replaced with the 60% long term / 40% short-term capital gains treatment of the futures market.

For the put options, you'd buy them at least 13 months out and sell them after holding them a year and a day. Not sure where the best strike to purchase them is, but the timing is important because selling them with at least a month left means that there's still quite a lot of time value left in the option that you can salvage. You definitely want them out of the money, though, only question is how much.

So, the tl;dr of how to best DIY this fund: put 70% of your money into the S&P 500, buy long-dated out-of-the-money put options to protect the downside, open up treasury futures contracts to target making your overall portfolio as sensitive to interest rates as SWAN is, and stuff the rest of the money in cash to back the futures positions and buy more put options later. You wind up being able to defer capital gains on the S&P 500, get long-term capital gains on the put options, and convert some of the treasury income into long-term capital gains.

I think there's restrictions on mutual funds and ETFs using futures contracts, which is why the fund is structured like it is. You don't have those restrictions, so you can use the futures market.
Current portfolio: 60% VTI / 40% VXUS
garlandwhizzer
Posts: 2987
Joined: Fri Aug 06, 2010 3:42 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by garlandwhizzer »

It's important to remember that there's another remedy for black swans that is more tax efficient, less costly, and produces higher long term returns than the Swan ETF. It requires a strong investor stomach, a balanced portfolio, and in the absence of a secure income stream, a liquid emergency fund with several years of living expenses. Vanguard's Balanced Index fund (standard 60/40 allocation) has doubled in value now relative to its pre-crisis high in early 2007, at the peak before the greatest black swan since the Great Depression even started. All you had to do was hold on and not do emotionally driven panic selling. With the balanced fund you not only survived but did quite handsomely over the next decade even in thee absence of an income stream if you had an emergency fund with several year of living expenses as I did. There's a reason why they call this an all weather portfolio. If you don't have a secure income stream it's worth it IMO to add an emergency fund which in the present fixed income market costs nothing, since MMF have outperformed all bond funds YTD and I YR. Black swans have an initial severe downside that lasts typically 1 - 3 yr before at least a strong cyclical rally takes over and gives you an opportunity to sell some equity if needed. So it was in 2007 - 9, and even in The Great Depression.

Garland Whizzer
maxDrawdown
Posts: 18
Joined: Mon Oct 29, 2018 6:49 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by maxDrawdown »

JackoC wrote: Sun Nov 11, 2018 1:23 pm in contrast for example with PUTWRITE concept which also has limited risk, there's a fund or two doing it I think: without ER's that had seemingly anomalously high Sharpe Ratio for many years.
I wouldn't be surprised if it continues to have a great Sharpe ratio - Sharpe only looks at the mean and variance, but the catch with PUT is the negative skewness. It's a decent strategy at low leverage I think. But think about it, how would one arbitrage it away? You can't just sell puts at high leverage if sudden wipeout is not an option.

I once made this little chart to better understand the impact of skewness. It compares a series of (biased) coin flip games, with each game having the same mean return of 7% of bet size, and standard deviation of 20%, but with different skewnesses.

The x axis represents the leverage, that is, the fraction of your capital that you allocate to the game in each round. On the y axis, the expected compound growth rate is plotted (to be precise, exp(E(log(1+R))) - 1, where R is the return). The maximum of each curve is the Kelly-optimal bet size, or in other words, the optimal bet size for an investor with logarithmic risk aversion.

Image

Magnified legend because I had to scale the image down

A few things stand out:
  • All games are very similar at low leverage.
  • The higher-skewness games have a higher compound growth rate at a given leverage, and an even higher growth rate at their respective Kelly-optimal leverages. The skew=3 game can't lose money and should be leveraged to infinity.
  • Most importantly: The negative-skewness games are much less forgiving if you overshoot the optimal leverage, in fact they quickly drop off the chart (growth rate becomes undefined when ruin becomes a possibility). This is critical in the real world, where you don't actually know the parameters of the game.
To link this back to the original topic... this is why I expect you're going to pay for the positive skewness in this strategy.

Edit: Sorry if I got carried away too far from the original topic, didn't mean to derail the thread. But to me, a higher skewness does look like the essence of what this fund is supposed to achieve.
Last edited by maxDrawdown on Sun Nov 11, 2018 3:45 pm, edited 1 time in total.
User avatar
stemikger
Posts: 4950
Joined: Thu Apr 08, 2010 5:02 am

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by stemikger »

This breaks one of the main golden rules of being a Bogehead which IMHO is Simplicity!

Forget all this and find an AA you can live with and stick with it through thick and thin!! That's as much as a SWAN portfolio you are going to get.
Choose Simplicity ~ Stay the Course!! ~ Press on Regardless!!!
TheJoelfather
Posts: 43
Joined: Wed Apr 17, 2019 9:49 am

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by TheJoelfather »

What exactly is the accounting exposure is for SWAN?

The WisdomTree 90/60 U.S. Balanced Fund (NTSX) is very clear in this case: 150% exposure in total: 90% equity and 60% treasury exposure. It's easy to construct a portfolio that mimics the price movement of NTSX.

But I haven't been able to construct a portfolio that matches SWAN. What is the accounting exposure? I'm missing something. Here are the details of the index that it tracks.
DB2
Posts: 928
Joined: Thu Jan 17, 2019 10:07 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by DB2 »

garlandwhizzer wrote: Sun Nov 11, 2018 2:59 pm It's important to remember that there's another remedy for black swans that is more tax efficient, less costly, and produces higher long term returns than the Swan ETF. It requires a strong investor stomach, a balanced portfolio, and in the absence of a secure income stream, a liquid emergency fund with several years of living expenses. Vanguard's Balanced Index fund (standard 60/40 allocation) has doubled in value now relative to its pre-crisis high in early 2007, at the peak before the greatest black swan since the Great Depression even started. All you had to do was hold on and not do emotionally driven panic selling. With the balanced fund you not only survived but did quite handsomely over the next decade even in thee absence of an income stream if you had an emergency fund with several year of living expenses as I did. There's a reason why they call this an all weather portfolio. If you don't have a secure income stream it's worth it IMO to add an emergency fund which in the present fixed income market costs nothing, since MMF have outperformed all bond funds YTD and I YR. Black swans have an initial severe downside that lasts typically 1 - 3 yr before at least a strong cyclical rally takes over and gives you an opportunity to sell some equity if needed. So it was in 2007 - 9, and even in The Great Depression.

Garland Whizzer
Great point.
Plain and Simple
Posts: 12
Joined: Wed Aug 10, 2016 10:10 am

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by Plain and Simple »

I am surprised that nobody has mentioned Zvi Bodie. He has published extensively on this type of strategy.
User avatar
crystalbank
Posts: 325
Joined: Wed Nov 01, 2017 12:21 am

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by crystalbank »

Plain and Simple wrote: Tue May 07, 2019 11:34 am I am surprised that nobody has mentioned Zvi Bodie. He has published extensively on this type of strategy.
Yes. I did read Zvi Bodie's books on this topic. Very well written but I've since found out that the author himself doesn't follow the strategy he advocates.
User avatar
unclescrooge
Posts: 5329
Joined: Thu Jun 07, 2012 7:00 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by unclescrooge »

crystalbank wrote: Tue May 07, 2019 11:55 am
Plain and Simple wrote: Tue May 07, 2019 11:34 am I am surprised that nobody has mentioned Zvi Bodie. He has published extensively on this type of strategy.
Yes. I did read Zvi Bodie's books on this topic. Very well written but I've since found out that the author himself doesn't follow the strategy he advocates.
Harry Markovitz didn't follow Modern Portfolio Theory even though he got the Nobel Prize for it. :mrgreen:
User avatar
alpenglow
Posts: 1027
Joined: Tue May 31, 2011 12:02 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by alpenglow »

unclescrooge wrote: Tue May 07, 2019 12:16 pm
crystalbank wrote: Tue May 07, 2019 11:55 am
Plain and Simple wrote: Tue May 07, 2019 11:34 am I am surprised that nobody has mentioned Zvi Bodie. He has published extensively on this type of strategy.
Yes. I did read Zvi Bodie's books on this topic. Very well written but I've since found out that the author himself doesn't follow the strategy he advocates.
Harry Markovitz didn't follow Modern Portfolio Theory even though he got the Nobel Prize for it. :mrgreen:
I certainly can't speak for Zvi, but, as a tenured professor, he should have a high ability to take risk thanks to job stability. I believe his strategy is suggested for those unable or less able to take risks.
garlandwhizzer
Posts: 2987
Joined: Fri Aug 06, 2010 3:42 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by garlandwhizzer »

This strategy has theoretical appeal and looks good in terms of risk/reward on backtesting like HEDGEFUNDIE's which takes a similar approach. Potential problems include the fact that Treasuries are at near record low yields at present in contrast to much of the backtesting past over the last 40 years which was the greatest Treasury bull market in history. No one expects Treasuries now to return nominal or real returns like they did when inflation and yields went from 15% to less than 2% now. Backtesting a 90% Treasury portfolio through this rosy past bond period may therefore may send a false signal about the future. Also the question of increased costs and trading frictions with LEAPs especially if this gets to be a crowded trade. There are countless highly intelligent, very knowledgeable investing professionals in private equity and hedge funds who are doubtless aware of its theoretical appeal. Given that, I wonder why the available risk/reward Sharpe ratio will not been arbitraged away by overgrazing. It sounds good on paper but if I were a betting man (I'm not), I would bet that its long term results will be much less impressive than it appears on paper and likely worse than a well chosen balanced portfolio.

Garland Whizzer
columbia
Posts: 2925
Joined: Tue Aug 27, 2013 5:30 am

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by columbia »

SWAN down over 1% today.

Is it acting like its supposed to?
MotoTrojan
Posts: 10650
Joined: Wed Feb 01, 2017 8:39 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by MotoTrojan »

columbia wrote: Tue May 07, 2019 1:18 pm SWAN down over 1% today.

Is it acting like its supposed to?
My 120/180 fund is down around 1%, seems about right. Better than what 70% equities along would do alone.

This fund seems reasonable with the ER of 0.49% for a complex strategy, but when you break it up you are paying nearly 5% ER for the leap, since you can very easily get long treasury expose for a low ER.
ohai
Posts: 1327
Joined: Wed Dec 27, 2017 2:10 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by ohai »

You should not calculate expense ratio as a percentage of option prices, as the spreads tend to reflect notional size, not option dollar premiums.

Anyway, from the prospectus, this fund buys 1y 70% Delta call options with the 10% premium. This doesn't strike me as particularly efficient, since spreads for high delta calls will be wider than that of puts of the same strike. Also, they will have to make some administrative effort to roll Treasuries continuously.

It seems more efficient if they were to buy the SPX constituent stocks and buy 30% Delta puts and achieve a materially similar result. 0.49% is not necessarily that high of an expense ratio, but they could probably get this to 0.39% by simplifying their trading method.

On the comments above, there are countless possible versions of option based strategies. These are not directly comparable just from the their theme.

Regarding Sharpe ratios, this might not be the best measure for a portfolio of only 70% Delta, as capital efficiency is important to investors, not just risk adjusted returns. For instance, an investment with 0.01% excess return but 0.0% volatility would have an infinite Sharpe ratio. However, you probably wouldn't want most of your portfolio in this thing.
TheJoelfather
Posts: 43
Joined: Wed Apr 17, 2019 9:49 am

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by TheJoelfather »

Snowjob wrote: Sat Nov 10, 2018 9:26 am
stlutz wrote: Fri Nov 09, 2018 11:08 pm 49 bps is a lot to pay for a strategy that one can easily execute themselves. They are only rebalancing/reconstituting twice per year.

The good thing about having the ETF is it will provide for a true real life test of this strategy which has been discussed on this forum in the past. The question has always been how much of the return gets lost in bid/ask spreads on the options and in the option price decay.
Agreed, I've been looking for some real life performance data. But with regard to implementing myself I look at Nisiprius' comments below and question if trying to save a few points on the expense ratio is worth it. Compared to a larger asset base I lack the scale that might be needed for diversification of the leaps themselves and further (the google link) I'm curious if I would be disciplined enough to not reach for returns when selecting the leaps. If this was something that is executed properly in ETF form I would be willing to outsource this decision making and just buy some shares.
I just watched the on-demand webinar that is hosted on their site and they claimed in the Q&A section that they have been able to buy/sell the options inside the bid/ask spread through their custodians when rebalancing.
TheJoelfather
Posts: 43
Joined: Wed Apr 17, 2019 9:49 am

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by TheJoelfather »

maxDrawdown wrote: Sat Nov 10, 2018 1:49 pm
nisiprius wrote: Sat Nov 10, 2018 7:04 am The Prospectus says this. Perhaps someone can tell me what's meant by these and whether they constitute a serious risk. The boldfaced sentence suggest to me that even though the LEAPS only constitute 10% of the portfolio, possible losses due to LEAPS are not limited to 10%.
Yes, that's weird. Normally, you can't lose more than you paid when buying options. Must be something about their particular over-the-counter arrangements.
In the on-demand webinar on the site, this was addressed in the Q&A. The option value can increase and be higher than value it had as a percentage of the portfolio at the time of purchase. In their backtest, the highest value the options ever reached was 22% of the portfolio. So if there's a crash right before a rebalance then the loss can be higher than 10%. But the value-at-risk is the call option, not more.
User avatar
Horton
Posts: 744
Joined: Mon Jan 21, 2008 3:53 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by Horton »

Here is a recent article on Advisor Perspectives discussing this ETF. Not my cup of tea, but some may find it useful.
HEDGEFUNDIE
Posts: 4801
Joined: Sun Oct 22, 2017 2:06 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by HEDGEFUNDIE »

Similar return as NTSX with significantly lower volatility. Interesting.

What exactly is the nominal exposure of this thing? 70/90/-60?
User avatar
jainn
Posts: 314
Joined: Tue Jun 28, 2011 6:41 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by jainn »

SWAN etf appears to perform roughly same over past 1/3/6/12month and YTD as VG Wellington or Balanced Index. VWENX/VBIAX
User avatar
Steve Reading
Posts: 2460
Joined: Fri Nov 16, 2018 10:20 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by Steve Reading »

HEDGEFUNDIE wrote: Sun Sep 29, 2019 6:50 pm Similar return as NTSX with significantly lower volatility. Interesting.

What exactly is the nominal exposure of this thing?
Looks like around 75/90/-65 ATM.

The premium on the calls are high, mostly due to the downside protection. The expense ratio is outrageous for something I could mimic by myself in 10 minutes.

Would recommend BHs stay away.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
guyinlaw
Posts: 701
Joined: Wed Jul 03, 2019 9:54 am

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by guyinlaw »

Assuming the following
NTSX - 90/60/-50
SWAM - 75/90/-65

Here is portfolio visualizer comparison.
PV Link

Their performance is pretty similar backtesting from 1992.

Max draw-down of simulated NTSX was 40% vs 27% for SWAN.

=======

NTSX has 0.2% expense vs SWAM has 0.49% -- this will add up.

AUM of NTSX is less $36M vs. $117M for SWAM . Both are relatively new ETFs (8/18 vs 11/18).

Which is a better implementation Treasury Futures (NTSX) OR SP500 leaps (SWAN)?

https://www.etf.com/SWAN
https://www.etf.com/NTSX
Time is your friend; impulse is your enemy. - John C. Bogle
User avatar
Steve Reading
Posts: 2460
Joined: Fri Nov 16, 2018 10:20 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by Steve Reading »

guyinlaw wrote: Mon Sep 30, 2019 11:32 am Assuming the following
NTSX - 90/60/-50
SWAM - 75/90/-65

Here is portfolio visualizer comparison.
PV Link

Their performance is pretty similar backtesting from 1992.

Max draw-down of simulated NTSX was 40% vs 27% for SWAN.

=======

NTSX has 0.2% expense vs SWAM has 0.49% -- this will add up.

AUM of NTSX is less $36M vs. $117M for SWAM . Both are relatively new ETFs (8/18 vs 11/18).

Which is a better implementation Treasury Futures (NTSX) OR SP500 leaps (SWAN)?

https://www.etf.com/SWAN
https://www.etf.com/NTSX
Except SWAN's negative cash exposure has a rate of ~5%. In other words, the "borrowing cost" for its stock exposure is far higher.
"... so high a present discounted value of wealth, it is only prudent for him to put more into common stocks compared to his present tangible wealth, borrowing if necessary" - Paul Samuelson
klaus14
Posts: 486
Joined: Sun Nov 25, 2018 7:43 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by klaus14 »

I am comparing this to other "safer" US Stock strategies like NTSX and USMV.
These 2 seems to behave similar to SWAN if you mix in more treasuries with them.
See with equal std portfolios.
They all beat regular 60/40. SWAN is slightly better than NTSX.
The problem is that this data is very limited.
35% US, 20 ExUS Dev, 10% EM, 10% EM Bonds, 10% Gold, 10% EDV, 5% I/EE Bonds. 50% value tilt in stocks.
klaus14
Posts: 486
Joined: Sun Nov 25, 2018 7:43 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by klaus14 »

klaus14 wrote: Tue Dec 10, 2019 3:26 pm I am comparing this to other "safer" US Stock strategies like NTSX and USMV.
These 2 seems to behave similar to SWAN if you mix in more treasuries with them.
See with equal std portfolios.
They all beat regular 60/40. SWAN is slightly better than NTSX.
The problem is that this data is very limited.
ignore this. portfolio visualizer is dangerous tool. Especially if you don't pay attention to the data size.
I did the same with mixing in EDV and now NTSX and USMV portfolios are much better. Obviously because rates went down this year.
35% US, 20 ExUS Dev, 10% EM, 10% EM Bonds, 10% Gold, 10% EDV, 5% I/EE Bonds. 50% value tilt in stocks.
guillemot
Posts: 21
Joined: Thu Dec 05, 2019 9:09 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by guillemot »

File hosting for data series for use with Portfolio Visualizer? I got SWANXT data from the S-Network website and modified it to work with Portfolio Visualizer.

Blue is SWANXT index value.
Red is Vanguard intermediate-term bond. Should I have used a different fund here? I know that includes some corporate bonds.
Yellow is Vanguard S&P 500 index fund.
Image
Image

It appears to do what it is supposed to.

Their rule is 5% of the 70-delta call 6 months out and 5% of the 70-delta call 12 months out. The rest treasuries. This rule appears to give 10x leverage on the S&P 500 most of the time. Another rule is not to rebalance the passive option, so they won't rebalance the December call when it's time to roll the June call.

It is unclear why the prospectus says they can lose more than you deposit. I thought that was inconsistent with an ETF. I thought the SEC cannot approve an ETF if it can lose more than is risked, and these types of investments are limited to your brokerage account, your financial advisor, or if you are an accredited investor, a hedge fund manager.

I agree about the trading costs. You have to pay the spread on the treasury ETF you select and $0.65 per contract for the options. I did the math for the cost of option trading. The 70 delta call for SPY trades for $3785, times 20 because you are trading 5% at a time and 1/5% = 20 gives $76k. And you need to open and close that contract twice a year, so the commission gets multiplied by 4. At today's prices you would need $2.60 for every $76k of account value at TD Ameritrade to trade that, or 0 basis points.
guyinlaw
Posts: 701
Joined: Wed Jul 03, 2019 9:54 am

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by guyinlaw »

guillemot wrote: Wed Dec 11, 2019 5:29 pm File hosting for data series for use with Portfolio Visualizer? I got SWANXT data from the S-Network website and modified it to work with Portfolio Visualizer.

Blue is SWANXT index value.
Red is Vanguard intermediate-term bond. Should I have used a different fund here? I know that includes some corporate bonds.
Yellow is Vanguard S&P 500 index fund.
I thought SWAN would be close to S&P500 or ahead. I looked at the website but could find data for SWANXT, could you share with me?

https://snetworkglobalindexes.com/prese ... sights.pdf

We had done an approximation for NTSX and that seems to do better than S&P 500 since 2006. Not sure how close to real this is..

https://www.portfoliovisualizer.com/bac ... ion4_1=-50

http://econompicdata.blogspot.com/2016/ ... funds.html

Does anyone know if NTSX is based on an index?
Time is your friend; impulse is your enemy. - John C. Bogle
guillemot
Posts: 21
Joined: Thu Dec 05, 2019 9:09 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by guillemot »

I got my data from the S-Network website like I said in my post. Try this: https://snetworkglobalindexes.com/Index ... /IndexData

To construct the data set for Portfolio Visualizer, I first removed all the zero values, which correspond to non-trading days. Then, I computed the daily return by (current day TR index value - prior day TR index value) / prior day TR index value.

I don't think 90% stock 60% bond is an index.
Last edited by guillemot on Wed Dec 11, 2019 8:52 pm, edited 1 time in total.
garlandwhizzer
Posts: 2987
Joined: Fri Aug 06, 2010 3:42 pm

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by garlandwhizzer »

Let me just make a point here. We had black swans in 2007-9 GR, WW2, WW1, Great Depression, massive inflation/stagflation in the 1970s, and perhaps the Tech Bubble Collapse of 2000-3. These were all massive unexpected threatening events. So how has the market done since these disasters started in 1929? US LC have averaged about 10% compound annual returns annually through all this mess. SC and SCV have averaged more than that. That means LC doubles about every 7 years on average, so $10K invested just before the start of the GD, terrible investment timing, and held onto until now would have doubled in value about 13 times by now in spite of all these disasters. Today your initial $10 K investment 90 years later would be worth $410,000,000. SC and SCV during that time period would have done massively better with their higher returns and shorter doubling times. But 410 mil is nothing to sneeze at. Of course there are taxes on dividends and inflation to modestly reduce these returns, but regardless of how you cut it, very long term gains have been incredibly massive in US equity in spite of all these black swans. Focusing a portfolio strictly on preparing for black swans is emotionally gratifying during black swan events but has a huge opportunity cost 90+% of the time when the black swans aren't around.

I personally do not believe that this Swan ETF will do what it sets out to do any better than a simple quality bond dominated portfolio with widely diversified index equity not using options or Leaps. Like many offerings from the fund industry it's a solution in search of a problem IMO.

Garland Whizzer
AlphaLess
Posts: 2679
Joined: Fri Sep 29, 2017 11:38 pm
Location: Kentucky

Re: SWAN ETF - 10% Leaps / 90% Treasuries

Post by AlphaLess »

whodidntante wrote: Fri Nov 09, 2018 11:25 pm
Hodor wrote: Fri Nov 09, 2018 11:21 pm What's a leap?
It's a long term option. Basically the approach is leveraged equities and long bonds.
Unfortunately, LEAP is *NOT* just leveraged equity.
"A Republic, if you can keep it". Benjamin Franklin. 1787. | Party affiliation: Vanguard. Religion: low-cost investing.
Post Reply