(Bloomberg) -- Exchange-traded funds set up to profit from a Wall Street doomsday are facing their own sort of apocalypse. 

The surprisingly resilient US economy and record-setting stock market have delivered massive losses to a breed of ETFs designed to withstand so-called Black Swan events — or unexpected calamities, like the 2008 credit crash, that drive markets into a tailspin. 

The Simplify Tail Risk Strategy ETF (ticker CYA) late Friday said it was calling it quits and liquidating after losing 99.8% since it was started in September 2021. Its assets had dwindled from $110 million to about $2 million, and even after a 1-for—20 reverse split it was stuck in penny-stock status. Simplify Asset Management, which manages it, declined to comment on the decision. 

A similar fund, the Cambria Tail Risk ETF (TAIL), hasn’t done all that much better: It has seen a 46% loss since its 2017 start, cutting its assets from a high of nearly $500 million down to $90 million. 

For spells, it looked like such strategies would pay off, with the world shut down by the pandemic, war in Ukraine, surging inflation and interest-rate hikes that were once seen as virtually dooming the US to a recession. But the stock market has defied the odds, sending the S&P 500 Index rebounding more than 40% from its 2022 lows. That’s hammered the ETFs with losses because — month after month — they were effectively buying insurance policies against disasters that never came. 

“Tail risk strategies won’t fare well when the market is on an upward trajectory,” said Jeffrey Ptak, chief ratings officer at Morningstar Research Services. “It kind of goes with the territory.”

The ETFs can follow a number of strategies, though they often buy deeply out-of-the-money put options on the S&P 500 — allowing them to sell at a profit if the market tumbles deeply — or call options that would gain from a big spike in the Cboe Volatility Index, or Vix. The Simplify Tail Risk fund used a mix of both.

But when those events don’t occur, the derivative contracts wind up worthless as they expire, with the funds losing whatever they paid. The Janus Velocity Tail Risk Hedged Large Cap ETF also liquidated in 2018. Another — called the Fat Tail Risk ETF — followed suit in 2022.

The Simplify Tail Risk fund was battered badly late last year, when US bonds and stocks both rallied on optimism that the Fed had wrapped up its rate hikes with the economy still intact. 

Such tail-risk hedging can deliver big payouts in sharp, sudden market contractions, like the ones set off by the pandemic in March 2020 or the collapse of Lehman Brothers in 2008. And the funds, by design, take losses until such a disaster strikes and big payoffs roll in.

Meb Faber, chief executive officer of Cambria Investment Management, said its tail-risk fund is performing well relative to others by “losing less” in the up market. He said he expects interest in the fund will increase as the risk-on mood fades and heady stock valuations come under renewed scrutiny. 

“If and when the market rolls over into a downtrend,” he said,  “we will see big inflows back into TAIL.”

--With assistance from Sam Potter.

©2024 Bloomberg L.P.