Swim Not Sink with the BlackSwan Tech & Treasury Index

01/24/22 | Roxanna Islam, CFA

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As discussed in an earlier white paper, both domestic and international equity markets have an uncertain year ahead in 2022. But while uncertainty and disruption are often feared—after all, the premise behind the BlackSwan indexes is to mitigate risk from disruptive events—uncertainty and disruption can also create opportunities for some investments to outperform. This is especially true for the technology sector, which has traditionally been at the forefront of innovation and has recently played a major role in responding to disruptions stemming from the COVID-19 pandemic. While the Nasdaq-100 (NDX) isn’t a pure technology index, its 56% weighting to technology (compared to 29% for the S&P 500 as of year-end 2021) gives it the potential to benefit from this high growth sector while also representing the broader large-cap U.S equity space, excluding financial stocks. A heavier allocation to tech, however, may also add some additional risk. For investors who want to participate in technology growth and innovation but hold a cautious outlook, the S-Network BlackSwan Tech & Treasury Index (QSWNXT) adds an extra layer of risk mitigation to the NDX, while retaining much of its upside potential.

Where will 2022 take tech-focused domestic equities?

The bull case assumes that tech-focused equities will continue to rally through 2022 as pandemic-related disruptions persist. Technology companies, in particular, benefited as the global digital transformation accelerated. Consumer goods and services companies with technologically advanced operations were able to weather supply chain shocks and create new ways to market, manufacture, and deliver their products during a worldwide shutdown. The NDX, which has large portfolio weightings in technology, consumer goods, and consumer services, exhibited many of these strengths through its high annual returns. The NDX gained nearly 28% in 2021 on top of an already impressive 49% annual return in 2020.

From a more bearish perspective, many investors are shifting to a cautious view as the Fed anticipates rate hikes in 2022. Large-cap technology stocks in particular could be hit harder given their higher prices and elevated valuations. An increase in interest rates would increase the cost of borrowing and reduce corporate earnings. If corporate earnings can’t support elevated valuation levels, then equity prices could see a correction.

Why QSWNXT?

QSWNXT provides exposure to the NDX with a 10% weighting to into in-the-money call options on QQQ (the Invesco QQQ ETF, which tracks the NDX). The remaining 90% of the index consists of U.S. Treasury securities as a buffer against significant losses. While this means that QSWNXT may only participate in some of NDX’s upside, QSWNXT is also protected from large swings to the downside, which are created by Black Swan events and other market disruptions.

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Another way to illustrate this is to examine daily price changes of the indexes. In the past two years, NDX’s price increased as much as 10% on a single day, but also fell as much as 12%. In contrast, the most QSWNXT moved on single day was +/- 4%. Investors who cannot afford large price swings or are near the distribution stages of their portfolio may prefer less volatility, particularly if they have a more cautious outlook on the U.S. economy and fear prices may soon correct.

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Bottom Line:

Investors who fear a market correction or more uncertainty from new COVID-19 strains, inflation, and Fed actions may be looking for less risky ways to participate in domestic tech equities. QSWNXT provides a strategy for investors who believe technology and innovation will remain a crucial driver behind the U.S. economy but want to minimize volatility in an uncertain environment.

Learn more about the S-Network BlackSwan Indexes here.

The S-Network BlackSwan Tech & Treasury Index (QSWNXT) is the underlying index for the Amplify BlackSwan Tech & Treasury ETF (QSWN).

 

Related Research:

Positioning for a Potential Market Correction

International Exposure with Minimized Volatility

Index Highlight: BlackSwan Index Weathers 2020 Swimmingly

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