Is SWAN ETF Still a Safe Harbor in Rising Rates?

The Fed's aggressive rate-hike cycle from 2022 to 2025 has reshaped the investment landscape, testing the resilience of even the most defensively designed portfolios. Among these is the Amplify BlackSwan Growth & Treasury Core ETF (SWAN), a fund built to shield investors from “Black Swan” events—those rare, unpredictable market crashes. But as interest rates hit 16-year highs and Treasury prices tumbled, is SWAN still a viable defense, or has its structural design become a liability? Let's dissect its performance, strategy, and alternatives to find out.

The SWAN Playbook: Bonds + Options, but at What Cost?

SWAN's strategy hinges on a 90% allocation to intermediate U.S. Treasury bonds and 10% to long-dated S&P 500 call options (LEAPS), aiming for a 70/90 notional exposure to stocks and bonds. In theory, this blend should allow the ETF to fall less sharply than equities during crashes while participating in upside recoveries. However, its 0.49% expense ratio—more than five times that of the S&P 500 ETF (SPY) at 0.09%—raises questions about cost efficiency, especially when performance falters.

2022: SWAN's Defining Moment of Underperformance

The ETF's 18% peak-to-trough decline in early 2022 starkly contrasts with the S&P 500's 8% drop over the same period. Why the gap?
- Bond Drag: As the Fed hiked rates aggressively, Treasury prices plummeted. SWAN's 90% bond exposure amplified this pain, unlike SPY's pure equity focus.
- Options Limitations: The 10% equity-linked LEAPS, which have a 70% delta (meaning their value grows less than 1:1 with the S&P 500), failed to offset losses during the downturn. In a simultaneous equity-bond sell-off, SWAN's diversification failed to deliver.

Rate Hikes and the Bond Conundrum: SWAN's Achilles' Heel

The Fed's rate hikes from 0.25% in 2022 to 5.5% in 2023 exposed a critical flaw in SWAN's design: its bond-heavy portfolio thrives in falling rates but struggles when yields rise. Intermediate Treasuries (the core of SWAN) have an inverse relationship with rates—every 1% rate hike reduces bond prices by roughly their duration. SWAN's Treasury holdings track the 10-year note's duration, meaning each 1% rate rise could erase ~7-8% of their value. With rates now at multi-decade highs, this dynamic could persist.

Does SWAN Still Protect Against Black Swans?

Historically, yes—but recent data complicates the narrative.
- Pre-2022 Track Record: During the 2020 crash, SWAN fell just 8% versus the S&P 500's 30% drop. In 2008, its hypothetical index lost 13% versus the market's 55%.
- 2022 Reality Check: The simultaneous equity-bond sell-off revealed SWAN's vulnerability when both exposures are under pressure. Its max drawdown since inception (-31%) was smaller than SPY's (-55%), but its current drawdown of -6.66% (vs. SPY's -1.38%) shows lingering weakness.

The key question: Can SWAN's options strategy still provide meaningful upside participation without compounding losses? The 10% LEAPS allocation grows as the S&P 500 rises but shrinks during declines, leaving investors exposed to the bond portion's volatility.

Alternatives: NTSX, Gold, or a Hybrid Approach?

Investors seeking defense must weigh SWAN against cheaper, simpler alternatives:
1. NTSX (WisdomTree U.S. Total Return Fund):
- Structure: 90% stocks (via S&P 500 futures) + 10% Treasuries.
- Cost: 0.19% expense ratio (vs. SWAN's 0.49%).
- 2022 Performance: Outperformed SWAN, with a 10% decline vs. SWAN's 18%.
- Trade-off: Less downside protection in extreme crashes but better cost efficiency.

1. Gold (GLD):
2. Role: A non-correlated asset that often rises during inflationary or geopolitical crises.
3. 2022-2023: Gold fell 1% in 2022 but rebounded in 2023 as rate hikes slowed.

4. Pairing with SWAN: Adding 20% gold to SWAN reduced max drawdowns in simulations but sacrificed returns.

5. DIY Hybrid:

6. 60% Treasuries + 20% SPY + 20% Gold: Matches SWAN's risk profile at lower fees but requires active rebalancing.

Conclusion: SWAN's Place in a Rising Rate World

SWAN remains a valid core holding for risk-averse investors willing to pay a premium for its Black Swan protection—but with caveats:
- Use It Sparingly: Allocate a smaller portion (e.g., 10-20% of defensive assets) to offset equity exposure.
- Pair with Rate-Neutral Assets: Gold or short-term Treasuries can mitigate bond-related losses.
- Consider NTSX for Cost-Conscious Portfolios: Its stock-heavy tilt offers better returns in bull markets while retaining some downside cushion.

The Fed's pivot to cuts in 2024-2025 could ease pressure on bonds, but rates are unlikely to return to pre-pandemic lows soon. SWAN's efficacy will depend on whether its Treasury exposure stabilizes—and whether the next Black Swan hits in a low-rate environment. For now, it's a defensive tool with flaws, best deployed alongside cheaper alternatives.

Final Take: SWAN isn't dead, but it's no longer a standalone solution. Pair it strategically, or look elsewhere.