Black Swan, Niche ETFs May Help Investors Ride Out Wild Year

Black Swan, Niche ETFs May Help Investors Ride Out Wild Year

Outlier funds like XRMI, SPXT could help advisors position for what’s next.

Reviewed by: Staff
Edited by: Ron Day

As financial advisors and self-directed investors navigate one of the weirdest years in recent investment history, they may be hard-pressed to answer a basic question: are stocks up or down?  

Of the 2,694 stocks in the Russell 3000 Index, which is available in ETF form via the iShares Russell 3000 ETF (IWV), 54% are down year to date through Monday. That statistic is not a misprint, nor is the fact that the Russell 3000 is about 10% short of full membership due to shrinkage from mergers, lack of IPOs and companies no longer making the cut or out of business.  

The SPDR S&P 500 ETF Trust (SPY) is up 14.3% for the year so far, but the average stock in that index, depicted through the performance of the Invesco Equal Weight ETF (RSP) has gained only 1.2%. The stock market is very “top-heavy,” but that headline version of the index, up 14%, is not prompting calls for Ozempic.  

While the U.S. stock market has been a global performance leader, lately it’s not moved forward with the same vigor as during the ZIRP (zero interest rate policy) period that preceded the 11 Fed rate hikes since March 2022. 

RSP trades right where it did in way back in mid-April of 2021, which means 2 ½ years of zero returns including dividends. So, for a significant swath of the stock market, ZIRP has meant “zero investment return period.” 

Black Swan, Other Niche ETFs for an Up and Down Year 

What can advisors and investors do? That depends on whether they believe from their research that the gains that favored a small segment of the broader market is just taking a quick hydration break, or if we’ve already started one of those “lost decade” scenarios that creep up on confident investors every half a generation or so.  

To look beyond the usual suspects in equity exchange-traded funds, here is a trio that won’t appear on any “biggest” lists any time soon. They are smaller, niche funds that float under the radar for most investors, and are potentially hidden gems looking forward.  

The Amplify Black Swan Growth & Treasury Core ETF (SWAN), a $193 million fund, has its base in US Treasuries, with a 10-year average maturity. That comprises about 90% of the assets, with the rest invested in “LEAP” (long-term) call options on the S&P 500. Should the stock market break higher and bond yields drop, a reversal of two recent trends that have been in sync with each other, SWAN could win on both parts of its allocation. 

The Global X S&P 500 Risk Managed Income ETF (XRMI) is a recent entrant in the class of ETFs that pursues an option “collar” strategy. This $27 million ETF holds the S&P 500, and compresses its range of volatility by buying 5% out of the money put options and selling covered call options on that portfolio. This aims to capture some of the market’s return, while also generating additional income beyond the S&P 500’s dividend yield. XRMI has distributed an 11.5% yield over the past 12 months.  

And, for those who like the stock market’s outlook, but feel that the dominant tech sector will lag, not lead going forward, the ProShares S&P 500 Ex-Technology ETF (SPXT) is part of a series of ETFs launched back in 2015, each taking the S&P 500 and removing one of the 11 sectors. In the case of SPXT, its portfolio is sans technology, which is why it has lagged the full index since its inception, and only gathered $36 million in assets. SPXT represents a clean way to separate a portfolio’s tech holdings from the other 10 sectors. 

The future of the stock market won’t be identical to its past. It might not resemble it at all. This is where expanding the range of potential portfolio-filling ETF candidates can help financial advisors and investors adjust to whatever new realities present themselves. 

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.