New Canadian ETFs Hedge Against ‘Black Swan’ Events
June 5th, 2012 at 8:00am by Tom Lydon
The exchange traded fund industry is rapidly expanding across the globe. For instance, in the growing Canadian ETF market, fund provider Horizons ETFs, parterning with AlphaPro, has launched the first ever “Black Swan” ETF that pair a tail risk hedge with equities, essentially limiting an investor’s downside risk.
According to a press release, the Horizons Universa Canadian Black Swan ETF (HUT) and the Horizons Universa U.S. Black Swan ETF (HUS.U) will provide exposure to the S&P/TSX 60 and the S&P 500 Index through an actively managed basket of put and call options that will help mitigate potential market declines over a rolling one-month period, which will reduce overall volatility of the investment baskets. Both ETFs have an expense ratio of 0.95%.
The Black Swan: The Impact of the Highly Improbable is the best-selling book written by Nassim Nicholas Taleb, who is an advisor for Universa Investments.
Basically, the ETFs promise to prevent any wayward, so-called Black Swan events that could suddenly shift the direction of the markets. Black Swan events are described as any sudden and unpredictable events that have widespread systemic impact, such as the 2008 financial crisis.
Horizons quantifies Black Swan events as any market declines of 20% or more. For the S&P/TSX 60, there have been 12 instances where monthly losses over the last 20 years were more than 20%. For the S&P 500, there have been 25 instances of losses over 20% in the past 50 years.
“The Black Swan ETFs are simply index ETFs with a hedging component that should provide protection from the kinds of significant declines that keep investors up at night,” Howard Atkinson, President & CEO of Horizons ETFs, said in the press release. “The Black Swan ETF portfolios are designed to provide investors with exposure to the upside potential returns of the underlying stock index while also providing protection from their most serious and sudden declines, so you can invest with crash protection built in.”
“If a Black Swan event were to occur, investors in the Black Swan ETFs have the opportunity to achieve superior compounded growth over the long term, compared to a passive investment in the underlying stock index, by reducing the draw downs of the investment,” Atkinson added.
For more information on new launches, visit our new ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.