It’s easy to look back at previous market selloffs and wonder how market participants did not see all the warning signs of an imminent selloff.
But the very nature of black swan events makes them difficult, if not impossible, to predict. Below are a handful of events that sparked selloffs in the equity markets that few could have predicted.
Black Swan Events Over the Last 35 Years:
We cannot always predict the potential black swan events that can impact the market. What we can do is identify some of the potential threats to continued market prominence. Remember, we need to take these with a grain of salt and understand that while these could happen, we are not indicating that any of these scenarios are going to imminently retain the potential for upside participation.
Amplify BlackSwan ETFs BlackSwan ETFs seeks investment results that correspond to its respective S-Network Index. The Index’s investment strategy seeks uncapped exposure to its respective equity index target, while buffering against the possibility of significant losses.
Approximately 90% of the ETF will be invested in U.S. Treasury securities, while approximately 10% will be invested in long-term (LEAP) call options in the form of in-the-money calls. The Fund is not a money market fund. Investing involves risk, including the possible loss of principal. You could lose money by investing in the Fund. There can be no assurance that the Fund’s investment objective will be achieved.
Scenario 1: Geopolitical Concerns – China
We have seen markets move rapidly on geopolitical news regarding China. Over the last year, China has kicked off an extensive crackdown on its most powerful corporation revolving around the technology sector. This heightened regulatory tightening has caused foreign capital to look elsewhere for emerging market growth opportunities. This is causing many to question the endgame of this tightening cycle and the growth aspects of the Chinese markets as the government looks to re-establish control.
How Amplify BlackSwan ETFs May Benefit Investors:
If China’s crackdown of large tech-centric businesses continues and affects global markets. The BlackSwan ETFs seek to provide protection from significant losses, as investors move to the safety of US Treasuries, the 90% allocation to Treasuries is positioned to take advantage.
Scenario 2: Inflation
Consumer prices have been on the rise the United States with an average over 6 percent year over year change. Inflation has run hot at an average of 3.2%, still higher than the Federal Reserve’s target of 2%. Can the Fed properly manage inflation, or will the Fed have to step in to alleviate the markets?
How Amplify BlackSwan ETFs May Benefit Investors:
If the Fed properly can properly manage inflation, the equity market could continue to do well, the Amplify BlackSwan ETFs is positioned to participate in continued upside with the allocation to equity market options. If inflation rises higher than Fed expectations, BlackSwan may suffer in the short-term, but equities have proven to be a good long-term hedge against inflation.
Scenario 3: Interest Rates
Since the emergence of the COVID-19 virus, the Federal Reserve took decisive action to lower interest rates to combat an economic recession as the world shut down. Since the lowering of rates, the economy has roared back to record highs, lower unemployment, but higher inflation readings. Once again, will the Fed have to take decisive action to combat higher inflation by raising interest rates?
How Amplify BlackSwan ETFs May Benefit Investors:
If the Fed decides to raise interest rates, the fixed income allocation will lag, as any bond allocation would, in a rising rate environment. However, the equity option allocation is poised to perform well in those times. Only four times since 1926, have we had a rising rate and falling stock market environment.
Scenario 4: Economic Recession
There is a pathway to an economic slowdown in the U.S. where consumers start spending less, causing business hiring to slow. This could cause the job market to lose momentum and further reduce consumer spending, thus creating a downward spiral.
How Amplify BlackSwan ETFs May Benefit Investors:
The BlackSwan ETF Suite seeks to protect against significant losses when equity markets turn in recessions by providing the flight-to-safety of the US Treasury allocation. As an example, the graph above shows the performance of SWAN compared to the S&P 500 index in the first two quarters of 2020.
Scenario 5: Variants of COVID-19
In recent news, the global market has seen the introduction of a new COVID-19 variant known as Omicron. These new variants bring fear to the financial markets as threats of restriction and lockdown renew to combat the spread of the virus around the world. The introduction of new variant is a trend that will continue to happen periodically due to mutation of the virus. Whether these variants are more contagious or deadly, takes time to accumulate the data and could pose serious threats to markets.
How Amplify BlackSwan ETFs May Benefit Investors:
If COVID-19 continues to mutate, financial markets may be spooked due to the uncertainty that the mutation might pose around the world. Many things are still unknown about the virus and may continue for many years. If a mutation turns bad, then Amplify BlackSwan ETFs is designed to buffer against a dramatic drop in the market. If the mutations turn out to be mild or less severe, then the BlackSwan ETFs may still allow for upward continuation in the equity market.
Carefully consider the Fund’s investment objectives, risk factors, charges, and expenses before investing. This and additional information can be found in Amplify Funds statutory and summary prospectus, which may be obtained above or by calling 855-267-3837, or by visiting AmplifyETFs.com. Read the prospectus carefully before investing.
Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. It is not possible to invest directly in an index.
Amplify ETFs are distributed by Foreside Fund Services, LLC.
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