SWAN ETF - 10% Leaps / 90% Treasuries

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
nullisland
Posts: 34
Joined: Fri Dec 06, 2019 12:20 pm

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

Post by nullisland » Wed Mar 25, 2020 5:34 pm

DesertMan wrote:
Wed Mar 25, 2020 4:54 pm
No, I'm not trolling you. I just don't see how the math you've stated above worked out. The explanation you gave for SWAN going down on March 24, 2020 while the S&P 500 went up 7% is that long-term treasuries went down the same amount as the S&P went up so as to cancel out. But TLT (iShares Long Term Treasury ETF) went UP on March 24 (opened 161.25, closed 162.91 per Yahoo Finance CSV). VOO, the S&P 500 ETF, obviously also went up. (YF CSV). So, as I said, the numbers don't line up. Something else is going on. Options voodoo? Herd behavior? Who knows...
TLT gapped down significantly overnight, to get the returns from March 24 you need to measure from the March 23 close. 166 -> 162.91 is a decline of 1.86%.

ChrisBenn
Posts: 152
Joined: Mon Aug 05, 2019 7:56 pm

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

Post by ChrisBenn » Wed Mar 25, 2020 5:46 pm

DesertMan wrote:
Wed Mar 25, 2020 4:54 pm
nullisland wrote:
Wed Mar 25, 2020 2:49 pm
99% of the funds assets are in Treasuries, and Treasuries went down yesterday. Long-term treasuries dropped almost 2%. In percentage terms the options did increase quite dramatically in value, but if .6% of your portfolio doubles in value (which is approximately what happened) that's only a .6% gain for the fund overall. That roughly cancelled out the losses from the long-term treasury holdings, so you were left with the return of the intermediate term treasuries. Intermediate term treasuries and SWAN both went down about .7% yesterday, just as expected.

I feel like I may be getting trolled (if so, well played), but if you're serious then I guess I'm not sure why you think there's something suspicious happening here. I don't think a portfolio of call options and treasuries is necessarily appropriate for most people, but it is behaving exactly like that combination of assets is supposed to. I'd encourage you to read the prospectus.
No, I'm not trolling you. I just don't see how the math you've stated above worked out. The explanation you gave for SWAN going down on March 24, 2020 while the S&P 500 went up 7% is that long-term treasuries went down the same amount as the S&P went up so as to cancel out. But TLT (iShares Long Term Treasury ETF) went UP on March 24 (opened 161.25, closed 162.91 per Yahoo Finance CSV). VOO, the S&P 500 ETF, obviously also went up. (YF CSV). So, as I said, the numbers don't line up. Something else is going on. Options voodoo? Herd behavior? Who knows...

Again... I'm not here to judge you or anyone. I'm just doing due diligence as to whether I want an allocation to SWAN.
Also for your back of the napkin reckoning:
On the 24th swan closed at a ~1% discount to NAV. This means it should have been up about a percent more than it was (based on nav) - not unusual in our current high volatility env - was probably corrected at open today.
https://ycharts.com/companies/SWAN/disc ... ium_to_nav

glorat
Posts: 469
Joined: Thu Apr 18, 2019 2:17 am

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

Post by glorat » Wed Mar 25, 2020 6:55 pm

Does anyone know the "kappa" or "vega" number for this portfolio? That's the change in price of the fund due to change in implied vol.

If we have that and we also have implied vol from somewhere (or inferred from VIX if that makes it easier to understand) then we can determine the change in value of this portfolio due NOT to price levels of the underlying assets bue purely due to the volatile nature of the market.

(again, this portfolio is long vol whereas a 3-fund portfolio has zero vol exposure)

JBTX
Posts: 5978
Joined: Wed Jul 26, 2017 12:46 pm

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

Post by JBTX » Wed Mar 25, 2020 7:02 pm

All of these risk parity or leveraged strategies seem to assume that inflation won't go up materially or you won't get a stagflation type scenario. That seems like a risky assumption. Especially now that we are seeing trillions in fiscal and monetary stimulus. With historically low treasury yields leveraging treasuries seems like a poor risk return scenario.

ChrisBenn
Posts: 152
Joined: Mon Aug 05, 2019 7:56 pm

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

Post by ChrisBenn » Wed Mar 25, 2020 7:05 pm

glorat wrote:
Wed Mar 25, 2020 6:55 pm
Does anyone know the "kappa" or "vega" number for this portfolio? That's the change in price of the fund due to change in implied vol.

If we have that and we also have implied vol from somewhere (or inferred from VIX if that makes it easier to understand) then we can determine the change in value of this portfolio due NOT to price levels of the underlying assets bue purely due to the volatile nature of the market.

(again, this portfolio is long vol whereas a 3-fund portfolio has zero vol exposure)
It has two options in it -

SPY 200619C00245000 (QTY 1974)
SPY 201218C00283000 (QTY 2263)

So you could look it up from those. Not much point in quoting it here since it would change constantly.

Note that options are still only ~3.6% of the portfolios value. ( https://www.amplifyetfs.com/swan-holdings.html )

ChrisBenn
Posts: 152
Joined: Mon Aug 05, 2019 7:56 pm

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

Post by ChrisBenn » Wed Mar 25, 2020 7:10 pm

JBTX wrote:
Wed Mar 25, 2020 7:02 pm
All of these risk parity or leveraged strategies seem to assume that inflation won't go up materially or you won't get a stagflation type scenario. That seems like a risky assumption. Especially now that we are seeing trillions in fiscal and monetary stimulus. With historically low treasury yields leveraging treasuries seems like a poor risk return scenario.
Technically this fund is holding treasuries and leveraging s&p 500 through derivatives (options).

I don't think this strategy specifically assumes that inflation won't occur or you won't get stagflation. It assumes that, over your investment horizon, the market will go up - and specifically a stock/bond balanced portfolio will go up. Historically this has proved right more than wrong. The main nuance here is this portfolio pays for extra insurance, though the long call option premium, to hedge downside (vs. direct s&p exposure) - so if the market does nothing you loose money.

JBTX
Posts: 5978
Joined: Wed Jul 26, 2017 12:46 pm

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

Post by JBTX » Wed Mar 25, 2020 8:53 pm

ChrisBenn wrote:
Wed Mar 25, 2020 7:10 pm
JBTX wrote:
Wed Mar 25, 2020 7:02 pm
All of these risk parity or leveraged strategies seem to assume that inflation won't go up materially or you won't get a stagflation type scenario. That seems like a risky assumption. Especially now that we are seeing trillions in fiscal and monetary stimulus. With historically low treasury yields leveraging treasuries seems like a poor risk return scenario.
Technically this fund is holding treasuries and leveraging s&p 500 through derivatives (options).

I don't think this strategy specifically assumes that inflation won't occur or you won't get stagflation. It assumes that, over your investment horizon, the market will go up - and specifically a stock/bond balanced portfolio will go up. Historically this has proved right more than wrong. The main nuance here is this portfolio pays for extra insurance, though the long call option premium, to hedge downside (vs. direct s&p exposure) - so if the market does nothing you loose money.
The late 70s was horrible on stocks and bonds. If you thought there were any chance something close to that can happen you wouldn't leverage both. When interest rates drop for 30 years to near zero people assume such events like that won't happen again.

I don't expect interest rates to go up anytime soon, but it is the things we don't expect that get us. We have grown to assume all major market drops will be accompanied by bond market rallies.

ChrisBenn
Posts: 152
Joined: Mon Aug 05, 2019 7:56 pm

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

Post by ChrisBenn » Wed Mar 25, 2020 9:32 pm

JBTX wrote:
Wed Mar 25, 2020 8:53 pm
ChrisBenn wrote:
Wed Mar 25, 2020 7:10 pm
JBTX wrote:
Wed Mar 25, 2020 7:02 pm
All of these risk parity or leveraged strategies seem to assume that inflation won't go up materially or you won't get a stagflation type scenario. That seems like a risky assumption. Especially now that we are seeing trillions in fiscal and monetary stimulus. With historically low treasury yields leveraging treasuries seems like a poor risk return scenario.
Technically this fund is holding treasuries and leveraging s&p 500 through derivatives (options).

I don't think this strategy specifically assumes that inflation won't occur or you won't get stagflation. It assumes that, over your investment horizon, the market will go up - and specifically a stock/bond balanced portfolio will go up. Historically this has proved right more than wrong. The main nuance here is this portfolio pays for extra insurance, though the long call option premium, to hedge downside (vs. direct s&p exposure) - so if the market does nothing you loose money.
The late 70s was horrible on stocks and bonds. If you thought there were any chance something close to that can happen you wouldn't leverage both. When interest rates drop for 30 years to near zero people assume such events like that won't happen again.

I don't expect interest rates to go up anytime soon, but it is the things we don't expect that get us. We have grown to assume all major market drops will be accompanied by bond market rallies.
A 60/40 two funder also suffers in that scenario. It still comes down to "do we think the market is going to go up or not" (over a certain time horizon), and what is our risk aversion (ability to stomach volatility). Not denying there is risk; if there wasn't any real risk there wouldn't be any excess returns.

If the intent was to caution against bonds specifically in an inflationary/rising rates environment - then again, sure - that is a risk. Depending on ones tolerance you can hedge against it (TIPS, equities), or accept the risk and collect a premium for it. I don't believe inflation is impossible - if anything I don't believe anyone really has a good handle on what is and isn't going to cause inflation (witness ECB's desperate efforts); I prefer to hedge with more equity exposure as opposed to TIPS. Not trying to dismiss your point, I just don't really get what you are proposing as an alternate.

Also in regards to this fund, it's not really as predicated on the desired negative correlation between equities and treasuries as a risk parity or a normal balanced portfolio; The equity exposure through options gives implicit downside protection / a cap on losses; rather it's a bet on the market trending one way or another (if it goes up you get a decent amount of upside exposure through the call options, if it goes down you loose less than you otherwise would - but you still loose money). If anything it's more akin to the classic super basic hedge of holding equities and buying puts.

garlandwhizzer
Posts: 2691
Joined: Fri Aug 06, 2010 3:42 pm

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

Post by garlandwhizzer » Wed Mar 25, 2020 9:48 pm

There always seems to be enthusiasm for leveraging assets that have done well historically and there is no doubt that both Treasuries and US equity like the S&P 500 have done very well for a very long time. The 90% Treasuries have massively outperformed in the recent market collapse, more than making up for losses in the 10% Leaps. So if we were going backward in time SWAN would be a no-brainer for the recent time period and it would also have done well for risk adjusted returns over a multi-decade time period. If control of equity risk is the main thing that drives your decision making SWAN looks superb on backtesting. Important to bear in mind, however, is the fact that we've had 38 years of ever decreasing inflation and ever decreasing rates which has been the major driving force in Treasuries outstanding return performance with no risk. From where rates are now, the chances for a replay of that 38 years is essentially zero. In 1982, 10 year Treasuries yielded about 15%. They now yield 0.84%, a 14.16% difference in the starting point. Long term backtesting suggests we'll do just fine if we load up on what has performed well over the multi-decade time frame. If significant and increasing inflation occurs in the future, however, Treasuries with today's yields are toast and this portfolio has a 90% weight in them. No one expects that inflation outcome. No one expected COVID-19 would incite a global recession either. Investors in 1982 believed significant and probably increasing inflation would keep going for the next 4 decades, one reason why yields were so high then. Load the portfolio with Treasuries especially LTT now would be a sure winner if we were going backward in time, but their currently yields are the lowest in history. Generally in market history low yields at a starting point do not suggest a bond bull market in the long term future. History suggests the opposite as we see in the case of 1982 yields which started this bond bull market. The future of SWAN may not be as brilliant as its recent past.

Garland Whizzer

User avatar
ether161
Posts: 25
Joined: Tue Feb 07, 2017 12:23 pm

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

Post by ether161 » Wed Mar 25, 2020 9:57 pm

Reminds me of this strategy
viewtopic.php?f=10&t=288192

ChrisBenn
Posts: 152
Joined: Mon Aug 05, 2019 7:56 pm

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

Post by ChrisBenn » Wed Mar 25, 2020 11:13 pm

garlandwhizzer wrote:
Wed Mar 25, 2020 9:48 pm
There always seems to be enthusiasm for leveraging assets that have done well historically and there is no doubt that both Treasuries and US equity like the S&P 500 have done very well for a very long time. The 90% Treasuries have massively outperformed in the recent market collapse, more than making up for losses in the 10% Leaps. So if we were going backward in time SWAN would be a no-brainer for the recent time period and it would also have done well for risk adjusted returns over a multi-decade time period. If control of equity risk is the main thing that drives your decision making SWAN looks superb on backtesting. Important to bear in mind, however, is the fact that we've had 38 years of ever decreasing inflation and ever decreasing rates which has been the major driving force in Treasuries outstanding return performance with no risk. From where rates are now, the chances for a replay of that 38 years is essentially zero. In 1982, 10 year Treasuries yielded about 15%. They now yield 0.84%, a 14.16% difference in the starting point. Long term backtesting suggests we'll do just fine if we load up on what has performed well over the multi-decade time frame. If significant and increasing inflation occurs in the future, however, Treasuries with today's yields are toast and this portfolio has a 90% weight in them. No one expects that inflation outcome. No one expected COVID-19 would incite a global recession either. Investors in 1982 believed significant and probably increasing inflation would keep going for the next 4 decades, one reason why yields were so high then. Load the portfolio with Treasuries especially LTT now would be a sure winner if we were going backward in time, but their currently yields are the lowest in history. Generally in market history low yields at a starting point do not suggest a bond bull market in the long term future. History suggests the opposite as we see in the case of 1982 yields which started this bond bull market. The future of SWAN may not be as brilliant as its recent past.

Garland Whizzer

This strategy looks to treasuries to be more of a stable value store, and depends on equities for its upside. Its effective duration is intermediate, at 10 years - not lt (20+). I think you might be incorrectly conflating this with HEDGEFUNDIE'S strategy, which has a markedly different performance profile. I haven't seen anyone talk about backtesting this strategy (the options inclusion make that more complex).

JBTX
Posts: 5978
Joined: Wed Jul 26, 2017 12:46 pm

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

Post by JBTX » Thu Mar 26, 2020 12:54 am

ChrisBenn wrote:
Wed Mar 25, 2020 9:32 pm
JBTX wrote:
Wed Mar 25, 2020 8:53 pm
ChrisBenn wrote:
Wed Mar 25, 2020 7:10 pm
JBTX wrote:
Wed Mar 25, 2020 7:02 pm
All of these risk parity or leveraged strategies seem to assume that inflation won't go up materially or you won't get a stagflation type scenario. That seems like a risky assumption. Especially now that we are seeing trillions in fiscal and monetary stimulus. With historically low treasury yields leveraging treasuries seems like a poor risk return scenario.
Technically this fund is holding treasuries and leveraging s&p 500 through derivatives (options).

I don't think this strategy specifically assumes that inflation won't occur or you won't get stagflation. It assumes that, over your investment horizon, the market will go up - and specifically a stock/bond balanced portfolio will go up. Historically this has proved right more than wrong. The main nuance here is this portfolio pays for extra insurance, though the long call option premium, to hedge downside (vs. direct s&p exposure) - so if the market does nothing you loose money.
The late 70s was horrible on stocks and bonds. If you thought there were any chance something close to that can happen you wouldn't leverage both. When interest rates drop for 30 years to near zero people assume such events like that won't happen again.

I don't expect interest rates to go up anytime soon, but it is the things we don't expect that get us. We have grown to assume all major market drops will be accompanied by bond market rallies.
A 60/40 two funder also suffers in that scenario. It still comes down to "do we think the market is going to go up or not" (over a certain time horizon), and what is our risk aversion (ability to stomach volatility). Not denying there is risk; if there wasn't any real risk there wouldn't be any excess returns.

If the intent was to caution against bonds specifically in an inflationary/rising rates environment - then again, sure - that is a risk. Depending on ones tolerance you can hedge against it (TIPS, equities), or accept the risk and collect a premium for it. I don't believe inflation is impossible - if anything I don't believe anyone really has a good handle on what is and isn't going to cause inflation (witness ECB's desperate efforts); I prefer to hedge with more equity exposure as opposed to TIPS. Not trying to dismiss your point, I just don't really get what you are proposing as an alternate.

Also in regards to this fund, it's not really as predicated on the desired negative correlation between equities and treasuries as a risk parity or a normal balanced portfolio; The equity exposure through options gives implicit downside protection / a cap on losses; rather it's a bet on the market trending one way or another (if it goes up you get a decent amount of upside exposure through the call options, if it goes down you loose less than you otherwise would - but you still loose money). If anything it's more akin to the classic super basic hedge of holding equities and buying puts.


Most 60/40 funds are obviously only 40% bonds, and typically a bit shorter duration. This is putting 90% of your assets in something that does have significant duration risk that yields about 1.0% nominal. By stretching the duration and making it most of your portfolio you are effectively leveraging it, although not in the traditional sense.

JBTX
Posts: 5978
Joined: Wed Jul 26, 2017 12:46 pm

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

Post by JBTX » Thu Mar 26, 2020 12:55 am

garlandwhizzer wrote:
Wed Mar 25, 2020 9:48 pm
There always seems to be enthusiasm for leveraging assets that have done well historically and there is no doubt that both Treasuries and US equity like the S&P 500 have done very well for a very long time. The 90% Treasuries have massively outperformed in the recent market collapse, more than making up for losses in the 10% Leaps. So if we were going backward in time SWAN would be a no-brainer for the recent time period and it would also have done well for risk adjusted returns over a multi-decade time period. If control of equity risk is the main thing that drives your decision making SWAN looks superb on backtesting. Important to bear in mind, however, is the fact that we've had 38 years of ever decreasing inflation and ever decreasing rates which has been the major driving force in Treasuries outstanding return performance with no risk. From where rates are now, the chances for a replay of that 38 years is essentially zero. In 1982, 10 year Treasuries yielded about 15%. They now yield 0.84%, a 14.16% difference in the starting point. Long term backtesting suggests we'll do just fine if we load up on what has performed well over the multi-decade time frame. If significant and increasing inflation occurs in the future, however, Treasuries with today's yields are toast and this portfolio has a 90% weight in them. No one expects that inflation outcome. No one expected COVID-19 would incite a global recession either. Investors in 1982 believed significant and probably increasing inflation would keep going for the next 4 decades, one reason why yields were so high then. Load the portfolio with Treasuries especially LTT now would be a sure winner if we were going backward in time, but their currently yields are the lowest in history. Generally in market history low yields at a starting point do not suggest a bond bull market in the long term future. History suggests the opposite as we see in the case of 1982 yields which started this bond bull market. The future of SWAN may not be as brilliant as its recent past.

Garland Whizzer
This very much. Well said.

Post Reply