In a market first, the ETF adopts a more targeted structure, with each synthetic autocall referencing one of 11 underlying indices and Goldman Sachs acting as the hedge provider.

VegaShares ETF Trust (VegaShares) has launched its first autocallable exchange-traded fund (ETF), six weeks after the startup co-founded by two former senior BMO bankers made its product debut.

The derivatives-focused ETF provider is adding a unique feature to the bustling segment by applying an adaptive volatility target (VT) mechanism to autocalls, as opposed to a static approach often seen across the ETF, structured notes and annuities market.  

“The goal is to optimise yield when vol is high and avoid overleverage when the market is calm. This helps achieve effective risk control for the underlying autocallable index,’ said Sunny Wong (pictured), co-founder of VegaShares.

Indices with a fixed VT level, such 35% and 40% used in existing autocallable ETFs, tend to result in a high leverage in a low vol environment, added Wong.

Listed on Arca since Tuesday, the VegaShares US Equity Autocallable Income ETF (VAIE) seeks to generate high weekly income while providing reduced downside market risk through a laddered portfolio of 52 synthetic autocalls. It has an expense ratio of 0.74%.

Those autocalls feature a maturity of 5 to 5.75 years and early redemption barriers that quarterly step down of 0.25%.  

The ETF is directly linked to the NYSE U.S. 500 Adaptive Vol Autocallable Index (ticker: AUTOC500), which is comprised of 11 indices, each targeting a specific vol level from 25% to 35%.

Each autocall, at the time of inception, references one of the 11 indices where its VT most closely matches the sum of the one-month implied volatility level of the SPY and a fixed 15%.

The ETF launch also marks the first time Goldman Sachs providing the hedge for an autocallable ETF on quantitative investment strategies (QIS). 

As a new entrant to the ETF space, VegaShares has partnered with Barnabas Capital, an active wholesaler in structured notes, as a strategic distributor for VAIE. The New York-based asset manager recently recruited Bryan Bondoc from UBS to lead the sales.  

Wong sees the use of adaptive VT a distinct advantage for autocallable ETFs compared with traditional structured notes and annuity products.

“You can’t ladder a group of notes in one structured note, whereas an ETF allows you to diversify timing as well as VT risk,” he said. 

The former equity derivatives trader acknowledged an added layer of complexity in the listed product, but argued that the mechanism adds “a degree of freedom” in managing vol.

Laurence Black, founder of The Index Standard which is uninvolved in VAIE, finds the adaptive VT mechanism innovative, describing it as “a structured product approach being combined with a higher level of active management”.

“It’s trying to replicate to how a wealth manager would handle a portfolio of autocallables to create diversified exposure across volatility levels,” he said.

Black also pointed to the way the leverage factor for underlying indices is calculated differently from most VT indices as they use the lower of realised vol on the SPY and a realised vol measure derived from the NYSE U.S. 500 Index.

“Traditionally, most indices choose the higher of the two realised vol measures to divide the VT, which results in lower leverage factor,” he explained. “Using the lower measure represents a slightly more aggressive approach as it increases the index’s exposure to equities.”

Leverage factor for VAIE is re-set daily and subject to a maximum cap of 300%.

Meanwhile, the realised vol on SPY is provided by truVol, a proprietary methodology developed by Salt Financial. It features the observation of intraday, 15-minute movements on the US large cap ETF.

“From a pricing perspective, the vol profile is effectively reversed,” said Alexander Gropper, chief operating office and head of structuring and QIS at Salt Financial.  “For principal-protected products like fixed index annuity (FIA), lower vol improves call option pricing, so the most conservative vol measure is preferred. For autocallables, however, higher vol is generally more favourable.”

The former Credit Suisse structurer sees a balance in using adaptive vol to reduce leverage in low-vol environments while allowing for a more aggressive leverage factor. “For autocallables, a lower vol typically means lower coupons, all else equal, but also lower risk since the principal barriers remain the same distance away.”

“Using multiple underlyings adds some complexity but represents a natural evolution from the first to the second version [of autocallable ETFs],” said Gropper.

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