Matt Kaufman, Global Head of ETFs for Calamos Investments, joined Keith Black, Managing Director of RIA Channel, to discuss innovations that bring autocallable structured notes and protected bitcoin investments to the ETF wrapper.
Kaufman notes that we are witnessing a $200 billion revolution in derivative income. Investors seeking yield in traditional fixed income have been forced to extend duration, degrade credit quality, or sacrifice liquidity. These tradeoffs have driven investors to seek income in the equity market without exposure to duration or credit risks. Historically, equity ETFs earned income primarily through covered call strategies.
Derivative income dominates the structured note world, with 70% of the value in autocallable yield notes, which is a long-dated put writing strategy. This strategy evolved from reverse convertibles in the mid-2000s. An autocallable yield note can be thought of like a bond with the coupon and principal value based on equity markets.
The Calamos Autocallable Income ETF (CAIE) offers the payoff profile of the autocallable note market in an ETF wrapper, while avoiding the illiquidity, tax inefficiencies, and operational complexities of the original market. CAIE can be viewed as an equity alternative, where investors monetize equities as income while keeping some exposure to the underlying market. Much of the income earned by CAIE will be tax-deferred, where older clients can generate tax-free income and bequeath those shares to their heirs at a step-up in tax basis. Some investors use CAIE as yield diversification, reducing their dependence on duration and credit risk to earn yield. CAIE reports tax-efficient income on a Form 1099, which can replace less efficient income generated by structured notes or covered call strategies.
The Calamos Protected Bitcoin ETFs were the first ETFs that offer a portion of the upside exposure to bitcoin while limiting the amount of capital at risk. The ETF that offers 100% protection, or zero risk, over a one-year period, can be mapped to the risk tolerance of investors in money market funds. The ETF that offers 90% protection, or 10% risk, over a one-year period, can be compared to gold or bond market investments. The ETF that offers 80% protection, or zero risk, over a one-year period, can be a replacement for traditional equity investments. The more capital investors risk, the greater the capped return on bitcoin can be earned.
Resources:
Protected Bitcoin: Improving Portfolios Utilizing a Stable Risk Framework