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Horizons ETFs launches Black Swan ETFs


Horizons Exchange Traded Funds Inc and its affiliate AlphaPro Management Inc have launched two new exchange traded funds (ETFs) which will seek to allow investors to gain exposure to North American stock market indices while providing protection from sudden and significant market declines.

Horizons Universa Canadian Black Swan ETF (HUT) and the Horizons Universa US Black Swan ETF (HUS.U) (together, the Black Swan ETFs) are the first ETFs to be launched that pair a tail risk hedge with an equity index investment.

The Black Swan ETFs will begin trading tomorrow morning on the Toronto Stock Exchange ("TSX") under the below ticker symbols with both Class E units and Advisor Class units.

Universa Investments will sub-advise the Black Swan ETFs and employ its proprietary portfolio protection strategies which have been the career focus of Universa’s senior investment staff. Universa is an investment management firm that specialises in convex tail hedging and investing. Universa was founded in 2007 by Mark Spitznagel, its Chief Investment Officer, with over a decade of implementation and development of its focused, positive asymmetric investment approach.  Universa’s Senior Scientific Advisor, Dr Nassim Nicholas Taleb, is considered the premier specialist of rare events (Black Swans) and has had a working relationship with Universa since its inception.

As it relates to stock investing, a Black Swan event refers to sudden and unpredictable events that have widespread systemic impact like the one witnessed during the financial crisis in 2008. Dr Taleb, who coined the term "Black Swan", has argued that Black Swan events happen far more frequently than investors anticipate and can have a devastating effect on an investor’s portfolio.

Universa has an investment discipline focused on tail hedging and was a pioneer in hedging risks for client portfolios prior to the events of 2008, reaching back to the late ’90s. Additionally, Dr Taleb has been working with Universa for over a decade, acting as a constant sounding board for their ongoing tail risk research, as well as a key spokesman about rare events.  Such a role has helped Universa refine its protection strategies, which will be utilised in the Black Swan ETFs to attempt to provide protection from sudden and significant market declines.

The investment objective of HUT is to provide its unitholders with exposure to (a) the performance of the S&P/TSX 60TM Index through a portfolio of equity securities and/or index funds and (b) an actively managed basket of put and call options that seeks to provide protection from significant market declines over rolling one-month periods and seeks to reduce the overall volatility of HUT’s returns.

The investment objective of HUS.U is to provide its unitholders with exposure to (a) the performance of the S&P 500® Index through a portfolio of equity securities and/or index funds and (b) an actively managed basket of put and call options that seeks to provide protection from significant market declines over rolling one-month periods and seeks to reduce the overall volatility of HUS.U’s returns. Horizons HUS.U will trade in US dollars and as a result it will not to seek to hedge its exposure to the U.S. dollar back to the Canadian dollar.

"I think many Canadian investors want to be fully invested in stocks but they are afraid of having to weather another serious stock market decline. The Black Swan ETFs are simply index ETFs with a hedging component that should provide protection from the kinds of significant declines that keep investors up at night," says Howard Atkinson (pictured), President & CEO of Horizons ETFs. "The Black Swan ETF portfolios are designed to provide investors with exposure to the upside potential returns of the underlying stock index while also providing protection from their most serious and sudden declines, so you can invest with crash protection built in."

A portion of each Black Swan ETF will be invested in an options protection strategy run by Universa, which is known as the Universa Black Swan Protection Protocol (the "Universa BSPP"). The Black Swan ETFs will seek to capture the upside gains of the applicable stock index while the Universa BSPP seeks to avoid losses in the event of a significant market decline over a one-month period.  Other than during significant market declines, the costs associated with the implementation of the Universa BSPP will generally result in a drag on the performance of the Black Swan ETFs.

Specifically, the Universa BSPP seeks to reduce the downside, or "left tail" risk, which is the occurrence of a significant market decline, such as a market shock or generalised market crash. The Universa BSPP attempts to provide increasingly greater returns as the applicable index moves further downward during a Black Swan event. During such significant market declines, revenue generated from the Universa BSPP, if any, will be reinvested into the equity portion of the Black Swan ETF’s portfolio.

"Not only do investors get protection from a significant market decline, but any gains generated from Universa’s protection strategy will be reinvested into the stock portion of the portfolio at times when valuations in the stock markets are the least expensive," says Atkinson. "If a Black Swan event were to occur, investors in the Black Swan ETFs have the opportunity to achieve superior compounded growth over the long term, compared to a passive investment in the underlying stock index, by reducing the drawdowns of the investment."

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