Considering SWAN for my Bond Portfolio
Considering SWAN for my Bond Portfolio
This past year has led me to reevaluate my long-term investment portfolio and I am 100% on board with the Boglehead low-cost index approach.
With 30+ years before retirement, I am currently 100% in equities. Almost every reference recommends having something in bonds, but with interest rates as low as they are, I don't see the value. For the next 10 years or so, I am have been planning to simply buy and hold equities and ride out the lows (which I know can be as much as 50%).
Recently I have been considering using the SWAN ETF (https://amplifyetfs.com/swan.html) as a bond option that will provide higher returns than vanilla bond funds like BND or SCHP. SWAN holds ~90% of the fund in US Treasury securities and 10% in leveraged equity investments by using SPY LEAP Options. I see the following trade-offs comparing SWAN to the vanilla funds, much higher fees, 0.49 expense ratio (vs 0.04 and 0.05), more volatility, increased complexity, and less security downside protection, but in exchange SWAN provides higher expected returns and more downside protection compared to 100% equities.
Are there other factors I should consider? I would greatly appreciate input from others as I recognize I have limited experience and certainly have blind spots.
I will note, I would only consider this for a tax-sheltered account because it holds bonds and has a high turnover.
For reference, here is a Yahoo finance comparison link of SWAN, BND, and SCHP: https://tinyurl.com/3tus4pc5
With 30+ years before retirement, I am currently 100% in equities. Almost every reference recommends having something in bonds, but with interest rates as low as they are, I don't see the value. For the next 10 years or so, I am have been planning to simply buy and hold equities and ride out the lows (which I know can be as much as 50%).
Recently I have been considering using the SWAN ETF (https://amplifyetfs.com/swan.html) as a bond option that will provide higher returns than vanilla bond funds like BND or SCHP. SWAN holds ~90% of the fund in US Treasury securities and 10% in leveraged equity investments by using SPY LEAP Options. I see the following trade-offs comparing SWAN to the vanilla funds, much higher fees, 0.49 expense ratio (vs 0.04 and 0.05), more volatility, increased complexity, and less security downside protection, but in exchange SWAN provides higher expected returns and more downside protection compared to 100% equities.
Are there other factors I should consider? I would greatly appreciate input from others as I recognize I have limited experience and certainly have blind spots.
I will note, I would only consider this for a tax-sheltered account because it holds bonds and has a high turnover.
For reference, here is a Yahoo finance comparison link of SWAN, BND, and SCHP: https://tinyurl.com/3tus4pc5
Re: Considering SWAN for my Bond Portfolio
Welcome to the forum.
It is true that bonds are not paying a lot these days. But having a bit of bonds in a portfolio can have a benefit. For example, bonds are handy during a downturn because you can sell bonds to buy stocks...which will be helpful when the market starts rising again. It does not take a large allocation to bonds to get this benefit.
I'm not familiar with SWAN and have no idea how it works. It seems to be a concoction of bonds trying to act like stocks. Like a pig trying to be a chicken. I'm just not convinced that such schemes work or if they do work, if they are worth what they cost.
An expense ratio of .49% is not low cost for an index fund and in my mind is inconsistent with the "Boglehead low-cost index approach".
Of course, you should use SWAN if you want, but I think it is a mistake to consider it as a "bond option". If "holding SWAN provides higher expected returns compared to 100% equities", how is it a bond? Sounds like it would be increasing portfolio risk. Bonds should decrease portfolio risk. If you want bonds, you should buy bonds.
It is true that bonds are not paying a lot these days. But having a bit of bonds in a portfolio can have a benefit. For example, bonds are handy during a downturn because you can sell bonds to buy stocks...which will be helpful when the market starts rising again. It does not take a large allocation to bonds to get this benefit.
I'm not familiar with SWAN and have no idea how it works. It seems to be a concoction of bonds trying to act like stocks. Like a pig trying to be a chicken. I'm just not convinced that such schemes work or if they do work, if they are worth what they cost.
An expense ratio of .49% is not low cost for an index fund and in my mind is inconsistent with the "Boglehead low-cost index approach".
Of course, you should use SWAN if you want, but I think it is a mistake to consider it as a "bond option". If "holding SWAN provides higher expected returns compared to 100% equities", how is it a bond? Sounds like it would be increasing portfolio risk. Bonds should decrease portfolio risk. If you want bonds, you should buy bonds.
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Re: Considering SWAN for my Bond Portfolio
If your plan was 90/10 stocks to bonds using SWAN for the bonds then you could just as easily allocate 91/9 and use a Treasury bond fund.
The big lever on risk is the allocation while the (mostly just spins ineffectively) fine tuning knob is which bond fund to use. In the meantime you'll develop blisters trying to spin knobs all day.
Someone will be happy taking away half a percent of your money in that fund all year every year though.
The big lever on risk is the allocation while the (mostly just spins ineffectively) fine tuning knob is which bond fund to use. In the meantime you'll develop blisters trying to spin knobs all day.
Someone will be happy taking away half a percent of your money in that fund all year every year though.
Re: Considering SWAN for my Bond Portfolio
SWAN is not a bond fund. 10% of in-the-money stock options represents much more than 10% equity exposure, so it's a type of balanced fund. Morningstar has it in the Moderate Conservative Target Risk category. So you're question comes down to "Should I use a balanced fund for my bond fund?" Well, does that make sense to you?
- randyharris
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Re: Considering SWAN for my Bond Portfolio
Bonds did the ole dipsy doo. Didn't go up when stocks went down.
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- randyharris
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Re: Considering SWAN for my Bond Portfolio
I would suggest asking yourself why SWAN? If the answer is to maximize returns, I would just stick with 100% equities. If the answer is to provide some ballast to your portfolio, and get a little zig when stocks zag (usually), you would better off with a more traditional bond fund.
You might try a correlation tool like portfoilvisualizer.com to test different funds zig/zag relationship.
l2r
You might try a correlation tool like portfoilvisualizer.com to test different funds zig/zag relationship.
l2r
- randyharris
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Re: Considering SWAN for my Bond Portfolio
Very familiar with the why, and PV - had the need for some accounts to want some growth with downside protection and SWAN looked interesting, end of story.like2read wrote: ↑Thu May 26, 2022 1:59 pm I would suggest asking yourself why SWAN? If the answer is to maximize returns, I would just stick with 100% equities. If the answer is to provide some ballast to your portfolio, and get a little zig when stocks zag (usually), you would better off with a more traditional bond fund.
You might try a correlation tool like portfoilvisualizer.com to test different funds zig/zag relationship.
l2r
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Re: Considering SWAN for my Bond Portfolio
It is a bad idea, because SWAN is supposed to resemble stocks, not bonds. It is supposed to be a risk-mitigated stock fund. It is intended to be a stock substitute, not a bond substitute.
According to the provider
Or, one might say, the mechanism for not achieving it, because since its high in 2021 it has fallen -17% while the S&P 500 only fell -12%.
According to the provider
It uses bonds and LEAP options but that is just the mechanism for achieving its goal.The Index’s investment strategy seeks uncapped exposure to the S&P 500, while buffering against the possibility of significant losses.
Or, one might say, the mechanism for not achieving it, because since its high in 2021 it has fallen -17% while the S&P 500 only fell -12%.
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Re: Considering SWAN for my Bond Portfolio
The fund’s goal is to provide a cheap alternative for leverage. It represents roughly a 44/56 allocation levered 1.6x for 70/90 exposure. A 44/56 allocation hasn’t done well either this year. NTSX is similar but a 1.5x levered 60/40 for 90/60 exposure.nisiprius wrote: ↑Thu May 26, 2022 9:28 pm It is a bad idea, because SWAN is supposed to resemble stocks, not bonds. It is supposed to be a risk-mitigated stock fund. It is intended to be a stock substitute, not a bond substitute.
According to the providerIt uses bonds and LEAP options but that is just the mechanism for achieving its goal.The Index’s investment strategy seeks uncapped exposure to the S&P 500, while buffering against the possibility of significant losses.
Or, one might say, the mechanism for not achieving it, because since its high in 2021 it has fallen -17% while the S&P 500 only fell -12%.
Either fund could potentially have a place for someone that wanted to be levered, or for someone who wanted full exposure to a 40/60 or 60/40 stocks/bonds portfolio while allowing “room” for other things (gold, commodities, i bonds, etc.).
Whether that is right or wrong is probably a personal decision. While not necessarily Boglehead in nature, it is cheaper and/or easier than doing this yourself (cheaper than margin, easier than managing SPY options or ZN contracts).
The fallacy is that you buy 100% of SWAN and think you have a less risky portfolio because it’s 90% bonds; but you still have 70% equity exposure as well.
Re: Considering SWAN for my Bond Portfolio
Honestly, if you are 30 years from retirement and you want Bonds :
1. to help you sleep well at night
2 give an offset to your 100% equities
3. provide emergency money and dry powder
Consider Ibonds. I wish I knew about them 30 years ago.
1. it is inflation matching (to a degree people will say excluding tax when sold)
2. it's there as an emergency fund when you need it
will it Zig when stocks Zag? maybe , definitely not this time,,,, but at 60/40 portfolio for 30+ years, I don't recall once saying "boy my bonds saved me and kept the portfolio up"
People always say $10K of ibonds isn't enough to move the needle, but if it was part of the strategy for 30 years, it would definitely be a good piece of it.
1. to help you sleep well at night
2 give an offset to your 100% equities
3. provide emergency money and dry powder
Consider Ibonds. I wish I knew about them 30 years ago.
1. it is inflation matching (to a degree people will say excluding tax when sold)
2. it's there as an emergency fund when you need it
will it Zig when stocks Zag? maybe , definitely not this time,,,, but at 60/40 portfolio for 30+ years, I don't recall once saying "boy my bonds saved me and kept the portfolio up"
People always say $10K of ibonds isn't enough to move the needle, but if it was part of the strategy for 30 years, it would definitely be a good piece of it.