CAOS ETF: Your Portfolio's Insurance Against Black Swan Events

In the unpredictable world of financial markets, extreme tail events—like the 2008 crisis or the 2020 pandemic crash—can erase decades of gains in a matter of weeks. For investors seeking to mitigate such risks without sacrificing long-term growth, the CAOS ETF offers a specialized solution. Designed as a “tail risk hedge,” CAOS combines tactical derivatives strategies with stable collateral to provide asymmetric protection during market meltdowns while minimizing drag during calmer periods.

How CAOS Works: The Science of Crisis Alpha

The CAOS ETF's architecture is built around two core components: out-of-the-money (OTM) put options on the S&P 500 and exposure to the BOXX ETF, which uses box spreads to mimic Treasury Bill returns.

1. Tail Risk Protection via OTM Puts:
   CAOS purchases SPX puts at strikes 30-60% below current market levels. For instance, if the S&P 500 (SPX) is at 10,000, puts might be placed at 7,000 or lower. These contracts remain dormant during stable markets but explode in value if the market plunges 25% or more within 60 days. In March 2020, when the SPX fell nearly 34% in a month, CAOS surged ~40%, demonstrating its “crisis alpha” potential.

1. BOXX: The Collateral Engine:
   To offset the cost of maintaining OTM puts, CAOS allocates ~60% of its portfolio to BOXX, an ETF that uses box spreads—a combination of calls and puts—to replicate short-term Treasury Bill yields. BOXX provides liquidity, tax efficiency, and low volatility, acting as a cash-like buffer. This structure ensures CAOS doesn't bleed capital in normal markets, a common flaw in traditional hedging strategies.

Performance in Context: A Crisis-Focused Portfolio

Since its 2013 inception, CAOS has returned +3.53% annualized, a modest figure that belies its true value. During the 2008 crisis, CAOS would have gained ~25%, and in 2020, it delivered 4.83% for the year—despite its massive March surge—by offsetting losses in other portfolio holdings.

While CAOS may underperform in gradual bear markets (e.g., 2022), its purpose isn't to beat the market but to survive—and profit from—the most destructive crashes.

Why Allocate 5-10% to CAOS?

For most portfolios, a 5-10% allocation to CAOS strikes the optimal balance between cost and protection. Here's why:

• Diversification Beyond Bonds/Gold:
  CAOS complements—not replaces—traditional hedges like Treasuries or gold. While bonds thrive in low-rate environments and gold shines during inflation, CAOS's asymmetric payoff is uniquely tied to market dislocations.

• Tax Efficiency:
  The ETF structure minimizes taxable distributions, making it ideal for taxable accounts. Unlike mutual funds, CAOS avoids the “phantom income” issue common in derivatives-based strategies.

• Low Counterparty Risk:
  CAOS's derivatives are centrally cleared via exchanges, reducing exposure to counterparty defaults—a critical advantage over over-the-counter instruments.

Risks and Considerations

• Derivatives Complexity:
  The fund's reliance on options introduces volatility, and monthly roll costs can erode returns in prolonged sideways markets.

• Event-Driven Beta:
  CAOS's value isn't in steady returns but in its “insurance” payout during extreme events. Investors must resist the urge to treat it as a core holding.

Final Call: Build Robustness, Not Perfection

In a world where central banks are tightening, geopolitical tensions simmer, and valuations are stretched, CAOS offers a rare tool to fortify portfolios against black swan events. While its returns may lag in benign environments, its ability to deliver +40% during crashes makes it a prudent hedge for investors with long horizons and aversion to catastrophic losses.

Allocate 5-10%, keep expectations realistic, and remember: in a crisis, CAOS is the one asset that doesn't just survive—it thrives.