New Fund Launches Tracking Structured Products
A new fund aiming to track popular structured products hit the US market on Wednesday. This move highlights the growing complexity in financial vehicles available to retail investors.
The fund, referred to as auto-characteristics, provides a cash flow to buyers but comes with risks—investors could face losses if the stock market dips below a certain level. Typically, these structured products demand a hefty minimum investment of around $250,000. Their appeal has surged since the global financial crisis, mainly targeting wealthy clients seeking stable income.
Calamos Investments has packaged these instruments into ETFs, allowing purchasing or selling for just a dollar. The launch, supported by JPMorgan, seems to be the beginning of a wave of similar products as financial firms entice small investors with complex derivative strategies. Innovator Capital Management and First Trust are already moving to launch a competing ETF.
Ben Johnson, head of Client Solutions at Morningstar, stated, “This aligns well with trends we’re seeing in the ETF space.” He added, “ETFs are capturing market share across all types of financial products, not just the traditional funds.”
According to Morningstar data, US-listed derivative revenues in ETFs have experienced significant growth, jumping from $3.5 billion at the end of 2019 to an astonishing $179 billion.
Structured products in the US focus largely on auto-callables, which generated $100 billion last year. These products are designed to deliver income similar to high-yield bonds and are commonly tied to major indexes like the S&P 500, usually lasting around three years with periodic observation dates every three or six months.
On observation days, if the index surpasses a set threshold, the product is “auto-called,” rewarding investors with the promised annual coupon and returning the original principal. However, if the index falls below certain levels at any observation point, capital losses may occur.
There’s also a “final protection barrier” often set at 60% of the initial index value. If the index exceeds this barrier at maturity, investors regain their principal, but no coupons are paid. Should the index drop below the barrier, losses accrue similarly to the index with no added coupon incentives.
Calamos offers an Autocallable Income ETF that holds over 52 auto-callable notes linked to the S&P 500. Each note pays a monthly coupon as long as the index remains above 60% of its initial level. If the index is above 60%, notes are called after a year, returning both the principal and the coupon. If it hits the 60% mark and remains thus, the notes stay active until they’re called or mature after five years. If the index sits at 50% at that time, half the investment is recouped.
Current market volatility influences coupons, which are hovering around 14.7%. Morningstar suggests that the fund’s annual fee stands at 0.74%, higher than the average for US derivative revenue ETFs.
Elizabeth Kaschner, director of Global Fund Analysis at FactSet, mentioned that structured results ETFs might appeal to retirees focused on capital preservation and income generation. Yet, she expressed concern that advisors might struggle to explain these products to clients, especially if the potential for downside protection or coupon payments diminishes. Such scenarios could lead to unfortunate surprises for investors who mistakenly view these investments as similar to bonds.
