The rise of the autocallable ETF

Matt Kaufman of Calamos Investments returns to explain more about the background to the development of autocallable ETFs, the evolving competitive landscape of the product and the broader implications for both the US and global markets.

This episode is brought to you in partnership with Calamos Investments.

Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute Calamos’ judgment and are subject to change without notice. The views and strategies described may not be appropriate for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.

Listen on Apple Podcasts Listen on Spotify Beverly Chandler

Hello and welcome to our latest Off the Record podcast from ETF Express. My name is Beverly Chandler and I’m managing editor of ETF Express. I’m here with Matt Kaufman of Calamos Investments and in our second outing in a series that the firm has recorded with us. Matt, tell me a little bit about Calamos Investments just to recap in case you missed the first one.

Matt Kaufman

Sure. Thanks, Beverly. Thanks for having me. Appreciate the opportunity to be here again. For those not familiar, Calamos is one of the largest alts managers in the country, in the United States. We’re large globally as well. If you are following Calamos at all, you know we’re the largest convertible bond manager in the United States. That is our heritage. We’ve been doing options and convert strategies for a very long time. The Chicago Board Options Exchange opened in 1973, Calamos was founded just a few short laters, 1977. I was born in ‘82, just a few years after that. But Calamos has been doing these types of options strategies for a very long time. Fast forward to today, 2026, we are doing a lot in the ETF space. And sticking to our heritage, autocallables is a very popular and growing part of the ETF ecosystem now in the broader fund world. And that is largely on a base of reverse convertible, which is something very core to Calamos’ capabilities.

Beverly Chandler

Let’s take a moment there and you’re going to explain more about that. We did cover autocallable income ETFs briefly in the previous podcast and of course they are absolutely the flavour of the year.

Mat Kaufman

It does seem that way, yeah.

Beverly Chandler

Everywhere you turn, there seems to be an autocallable sort of hiding in the bushes. In this outing we’re going to take a deeper dive into how derivative income has evolved towards the creation of these new autocallable income ETFs. Can you tell me a bit of the background to it?

Matt Kaufman

Yeah, maybe I’ll weave some of my background into the history of the derivative income space as well. You know, the ETF in the United States was founded in 1993 through the State Street S&P 500, ETFs, SPY. In 2007, there was some more innovation in the ETF space. I was at a firm called PowerShares that was ultimately acquired by Invesco, one of the first ETF providers in the market with PowerShares there. And we built the first buy-write ETF. It was the first ETF to include options or derivative, also the first derivative income fund or ETF in the market where you would sell off your upside in the market, collect a premium income or a coupon for that sale. And then as long as the market didn’t fall down too far, where your break even point was, then that would be a good trade over time where you can take equity market risk and turn it into an income payment. A lot of people liked that idea because it was generating income that was not tied to traditional bond factors like credit or duration risk. So that first ETF in 2007 launched. I think it had a little bit of pickup early on. The market corrected. If you’re a student of history, the global financial crisis was just a few months after that launch. And so I think people stopped really paying attention to options-based strategies for a little while until the market started to recover. And then we saw a proliferation of options-based strategies in the 2016 to 17 range. I had moved on to an actuarial consulting firm at the time to build out a lot of risk managed funds that used options and futures to hedge the portfolios that we were running. And we were doing a lot of work in the insurance space as well. In a zero interest rate environment like we were all in after the financial crisis, it became very difficult to generate income from a buy-write strategy because interest rates were low. So you were kind of tied just to volatility and dividends there. And it was also true in the fixed indexed annuity world or your principal protected note space. Those don’t sell very well in a zero rate environment. So we saw this proliferation of buffered type strategies in the insurance space and also in the structured note space. You couldn’t give somebody valuable principal protection with meaningful upside, but you could do something less. You could give somebody partial principle protection and then do what’s known as a partial principle protection level or known as a buffer. And that would give you a little bit more upside. So those products were selling very well post GFC. And so we built the intellectual property to bring that into the ETF space in the United States. So not a derivative income product per se, but does involve using a put spread collar and selling off upside, but then being able to achieve that upside through market performance was a strategy that became known as buffered ETFs. We gave that to a client of ours and started that space in the US. It’s grown globally now. The buffered ETF space has grown pretty tremendously. Alongside of that, the derivative income market started to grow in popularity as well. Fast forward to today and it’s about a $200 billion fund market in the US alone and we are seeing growth in Europe as well in that derivative income space. There are a lot of funds that are using covered call strategies again to generate a premium income. The benefit is that you can take equity market risk in order to turn that into an income payment. The risk would be that if the market falls that it falls below the income you’ve received and now you have some losses. And then the other thing that people try to solve for in the covered call space is you have NAV decay that can often creep up on you over time. And that happens when the market is falling and you have to sell off your upside in that lower state that creates an inability to recover because you’ve capped your upside. Nonetheless, people have tried to solve for that over time. It’s a very large category. So to get to my point, if you go to the derivative income category in structured notes, derivative income dominates there as well, but it’s done so through a strategy known as the autocallable yield note. And that’s a lot like a long dated put writing strategy. So rather than selling a call, here we’re selling a long dated put and you’re collecting an income payment for that sale. And then you get your principal back as long as you don’t breach that put barrier, which is set, you know, let’s say three, four, five years down the road. And then to make things even more interesting and maybe more beneficial potentially is you can make that coupon contingent. So if you just take all the money up front, you’re going to get some number. If you instead say, I’m going to look at this every month, and as long as my option is above a barrier, you’re going to get paid. Well, now you have contingent income, and you can get paid a little bit more for that. So that’s a very popular strategy globally. It’s $150 billion market in the US, multiples of that globally. And what we’ve done at Calamos is brought that autocallable concept into the ETF framework where now you can get the same type of strategy but in a laddered form, diversified risk. It’s very tax efficient in the states here and then it’s very transparent as well. All the things that go well with a fund wrapper are working here for the autocall products.

Beverly Chandler

And you were the first, I believe, to launch autocallable.

Matt Kaufman

We were the first autocallable ETF in the world. Yeah, that’s a fun statement to be able to make. I have not seen a space copied so quickly, which is good. You know, that is showing that there is merit here. There is demand both from product issuers, but also from the financial professional community. They appreciate being able to access autocallable payoffs inside of a fund wrapper that delivers a host of efficiencies, as I said. But when we built the buffered space out in 2016, it took quite a while for a few people to get back into the market and to compete. Here we’ve seen in the states alone more than thirty autocallable funds go live and about the same number are still in registration. So we are seeing a whole host of asset managers looking to get into that autocall space. I think it’s going to be a very large market.

Beverly Chandler

And is it being driven by just simply the numbers, an aging population looking for income?

Matt Kaufman

Yeah, there is longevity risk associated with an aging population inherently. So there are good things about living longer as a society. One of the things to solve for as you live longer is the ability to provide for yourself when you no longer work. Your money has to potentially last longer, longer than it would have historically. Just to speak, my American book here, if you look at when Social Security was enacted in the United States, about one in sixteen people were of retirement age, 65 years old. If you go to today, we are fast approaching this demographic where one in four people will be of retirement age. We’re not seeing as many children born as we used to historically, and then people are also living longer. So that’s an interesting dichotomy that we have to sort out. When it comes to retirement income, I put it into an acronym called LIV, L-I-V. And it goes into solving three risk categories. You have to solve for Longevity risk, you have to solve for Inflation risk, and you have to solve for Volatility. And for folks who are trying to provide for themselves and they no longer work, you have to make sure your money can last long enough. That often requires being tied to the stock market. And that also is similar for inflation. If you’re going to have your money last a very long time, you’ve got to outpace inflation over time. If you go to the post-financial crisis, inflation was really not a concern for a lot of people because it just wasn’t there. We didn’t see a whole lot of inflation over the last twenty years. We hit COVID, the money supply increased tremendously. And that, I think, really introduced inflation into the market. And so now if you want to have your purchasing power remain, you have to tie yourself to inflation. I think one of the best ways to do that is to tie yourself to the stock market. But oftentimes that’s been too risky for people to stomach, especially in retirement. So you have this difficulty of needing to generate income, but not having the ability to generate too much risk or take on too much risk to do it. In the autocall space, if you have products that are designed to return your principal and return your par value and in turn you get this high stable coupon, well you might have an NAV movement or a share price movement that’s a lot like the equity markets, but your income can remain highly stable and you’re going to receive that income payment as long as the markets don’t go down too far. And then you’re going to get your principal back as well. So that can really help people solve some of their longevity and inflationary problems in retirement, being able to generate a high stable income stream.

Beverly Chandler

Thank you so much for that. It’s interesting and so detailed. I’m going to pose you some questions now that I’ve been told one should consider investing. If you’re considering investing in autocallable ETFs, the sort of questions you should ask an advisor or an advisor might want to be certain that they know the answers to before they advance with these sort of products. So let’s start with, can I see historical performance data and coupon rates?

Matt Kaufman

Yeah, so that’s a very good question that I think you should ask of an autocallable fund manager. When you are building an autocallable fund or how we’ve built ours is it’s based on a laddered portfolio of synthetic notes that all roll into an index. So that index has a history. We can illustrate that history so you can then know how many coupons did I receive, how much principal was impaired, if any, historically, and what was the volatility of that strategy? You can know all of these things on a historical basis. It’s not necessarily the fund performance, but because you’re tied to an index, you can ask those types of questions of the index that you’re tracking. I think it’s very important to be able to understand the risk that you’re taking on. So I think that’s an important question.

Beverly Chandler

My next question, how are my distributions taxed? And that’s of course different from the US and then the rest of the world.

Matt Kaufman

Yeah, every jurisdiction is different. In the United States, most of the income is tax deferred, and then here it’s treated as a long-term capital gain. I would encourage you to meet with your tax advisor to understand how things are taxed in your own jurisdiction that you’re in.

Beverly Chandler

And then is the strategy linked to a single index? I mean, is it a worst-of basket or single stocks?

Matt Kaufman

Yeah, this is a good question as well. So the strategy that we have in the UCITS framework, CAKE, this is a laddered portfolio of autocallable yield notes that are all synthetic and they have standardized terms. A five-year maturity, a one-year non-call period, minus 40% coupon barrier, minus 40% principal barrier. There’s 52 or more of them, one issued every single week. And if the reference asset is positive after one year, one of those notes can get called away. If it’s not, it stays in the fund. And so you can have this ladder, maybe an accordion is a better example where it grows and shrinks, but 52 is your minimum number. And then each of those notes, is tied to an S&P 500 35% volatility index with a 6% synthetic dividend. So that is how we’re able to achieve a high income. If we can stabilize your volatility, if we can stabilize your dividends, we can stabilize the income. It’s about 10.5% over the risk-free rate here, which right now is about 14% is the coupon rate. And so I think I got off track here. So back to your question, we are tied to a single index that is a high volatility target.

Beverly Chandler

Thank you for that. And then who prices and values the notes each day?

Matt Kaufman

Yeah, that’s very important as well. So we have built this index with Mercube, our index provider. They are the calculation agent and the index provider here. I think that’s very important because we have an independent calculation agent. All of the note pricing is very consistent. So we trade right now, I’ll swap with JP Morgan. They trade on that index price. We trade similarly on that index price. The market makers are making a market to the ETF, which is tied very precisely to that index. And then if you go one level deeper, the volatility target resets at the exact same time every week. Our counterparty hedges their books at the exact same time every week. So we can create this frictionless experience and that flows through to the bid-ask spread of the ETF that you’re buying, creates a really tight bid-ask spread and ultimately a good experience for the shareholder.

Beverly Chandler

And also I can refer you back to a podcast we recorded with you and Vinit Srivastava from Mercube.

Matt Kaufman

Yeah, Vinit, I remember.

Beverly Chandler

Yeah, it was one of my favourites actually, because again, it’s these subjects that are really quite difficult and you two made it sound as though it was possible for me to understand so anyone could.

Matt Kaufman

Good. I like doing those with Vinit. He’s very, very good, very smart.

Beverly Chandler

He’s clear. Yeah. So everyone, you have to, after you’ve finished listening to this one, obviously, go listen to the one with Vinit of Mercube. So you’ve been incredibly informative here and I feel I must just ask you this one question that lingers in my mind having been around for a few years watching markets. What happens if there is a massive market correction? What will happen to these products?

Matt Kaufman

Sure. So with all derivative income products, you are trading equity market risk for an income payment. With an autocall, you are going to get your principal back on those notes as long as the index you’re tied to is not down too far. So in your question, if you hit a severe sustained market decline, in our case, something that falls by 30, 40%, and then fails to recover over a rolling five-year period, that is where you would ultimately have some principal risk. So think a global financial crisis. If you look at the index that we are trading on swap and look at all of the notes that would have been in that index, historically about 29 out of about 1,100 notes would have breached that principal barrier. It was a 17% loss at that time. And so that is the risk that you’re taking on, deep equity market tail risk. Maybe to bring it full circle, going back to the covered calls, you have some risk of NAV decay or decline over time. With an autocall, you can think of taking that small amount of risk and moving it to the bottom of the barrel. And it will stay there until all the water falls out. And at that point, you might be exposed to that risk. But that is the risk you’re taking on, is that deep equity market drawdown risk.

Beverly Chandler

Thank you so much for explaining all of that, Matt, and for being so clear today. And thank you for being my guest. So this is Matt Kaufman of Calamos Investments. And I want to thank you for listening. Remember to subscribe and leave a review, and feel free to contact us at [email protected]. This has been an Off the Record podcast recording from ETF Express in partnership with Calamos Investments.

Outro

Off the Record is brought to you by Chandler Publishing, production by Imogen Rostron, music by Otto Balfour, and hosted by me, Beverley Chandler. Thank you to our guests on this episode of Off the Record and to you for listening. We look forward to you joining us next time.