Are ‘Black Swan’ ETFs Worth a Gander?

A positive return for any fund this year is quite an achievement — but one with an unusual thesis is up 14%. What’s the catch?

The Cambria Tail Risk ETF, which earned the impressive number, has still fallen 45% over the past five years. That’s the rub with the small category of tail risk ETFs, also known as “black swan” funds. Such funds can shine when the market tanks and can add some insurance as a small portion of an investor’s portfolio. But in good times, which is a lot of the time for the stock market, the category doesn’t do so well. Tail risk funds “share a simple objective: profit during periods of maximum panic,” Morningstar manager research analyst Zachary Evens wrote in a recent post about them. The Cambria ETF and others use put options on indexes, which “is a losing bet in steady markets, but it can pay off big when markets decline.”

Test Case

The broader market has bounced back somewhat from its lows in recent weeks, so it’s anyone’s guess whether the utility of tail risk funds is over for now. And that’s a sticking point for advisors. Several told ETF Upside that they don’t use tail risk ETFs in client portfolios because of the cost and the timing requirement. “When we build a financial plan, we’re bucketing assets by time horizon so short-term needs are out of the market entirely and stocks live in the long-term bucket,” said Grant Joiner, founder of Vinyard Wealth Group. “Volatility is expected there, and we’d rather stay invested for the upside than pay to avoid normal market swings.” 

Asset allocation, liquidity buffers, and scenario planning are preferable for managing risk, another advisor said. “Even during market drops, timing matters — a tail risk ETF can be directionally right but still lose value if the volatility spike doesn’t align with its structure,” said Daniel Milks, owner of Woodmark Advisors. “If clients are nervous about tail events, I’d rather adjust exposure or build cash cushions than rely on instruments that are difficult to explain and even harder to stick with.”

Here’s how a few tail risk ETFs have performed year to date:

• Amplify BlackSwan Growth & Treasury Core ETF — (1)%, 49 basis points in fees
• Cambria Tail Risk ETF — 14%, 59 basis points
• Alpha Architect Tail Risk ETF — 1%, 63 basis points
• Global X S&P 500 Tail Risk ETF — (5)%, 25 basis points

Just Say No: If market drawdowns rattle investors, portfolio construction is to blame, said Sarah Maitre, founder of Camriel Advisors. “Many tail risk ETFs also fail to perform as expected in real world scenarios. Investors often discover this only after the fact,” she said. “While some advisors attempt to time these products during periods of economic stress, that approach amounts to market timing, and the odds are not in their favor.”