Horizons Exchange Traded Funds Inc. launched the world’s first Black Swan ETFs today.
The two new funds will provide investors with exposure to North American stock market indices, as well as protection from significant market declines.
Horizons Universa Canadian Black Swan ETF and the Horizons Universa U.S. Black Swan ETF are the first funds in the world to pair a tail-risk hedge with an equity index investment. Both will begin trading tomorrow on the TSX, and have Class E and Advisor Class units.
Universa Investments, a firm specializing in convex-tail hedging and investing, will sub-advise both funds. The firm’s senior scientific advisor, Dr. Nassim Nicholas Taleb, coined the term “black swans” – which are unpredictable events – in his 2004 book Fooled By Randomness. He argues they happen more frequently than investors anticipate.
The Canadian Black Swan ETF will provide investors with exposure to the performance of the S&P/TSX 60 Index. It includes an actively managed basket of put and call options that offers protection from significant market declines over rolling one-month periods.
The U.S. Black Swan ETF exposes investors to the performance of the S&P 500 Index, and includes the same features as its Canadian counterpart. It’ll trade in U.S. dollars and won’t hedge its exposure to the U.S. dollar back to the Canadian dollar.
“Canadian investors want to invest in stocks, but are afraid of another serious stock market decline,” says Howard Atkinson, president and CEO of Horizons. “The Black Swan ETF portfolios will offer exposure to the upside potential returns of the underlying stock index, while also offering built-in crash protection.”
A portion of each fund will be invested in an options protection strategy run by Universa, known as the Universa Black Swan Protection Protocol (BSPP). The BSPP seeks to reduce left-tail risks, which occur during a market shock or crash, and will provide greater returns as the applicable index moves downward. During such declines, any revenue generated from the BSPP will be then reinvested into the equity portion of the fund.
While the two ETFs capture index gains, the BSPP will help clients avoid large losses. However, the implementation costs of the protocol will drag on the performance of the funds in healthy markets.
“During negative and volatile periods, investors in either fund could achieve superior compounded growth over the long term, which is preferred over passive investment in the indices,” says Atkinson.
Watch Advisor.ca tomorrow for coverage of a presentation by Dr. Taleb.