Autocallable ETFs cross US$2.5bn as industry leaders debate innovation and risk

The numbers were striking. Calamos’s CAIE, widely regarded as the first autocallable ETF, crossed US$1 billion in assets under management in less than 12 months. Vest Financial’s ACEI, launched in partnership with First Trust in February, has already approached US$800m.

As of today, eight asset managers have now launched 22 swap-based autocallable ETFs in the US with a number of SEC filings in the pipeline. The current lineup currently hosts US$2.5 billion in total assets, offering exposure to quantitative investment strategy (QIS) indices, worst-of baskets, diversified individual stocks and single stock underlying assets.

Two philosophies

The sharpest exchange of ideas out of the webinar concerned product construction.

While Calamos has taken a QIS approach through a suite of volatility-controlled indices, which mark a flagship partnership between hedge provider J.P. Morgan and index provider MerQube that have been available in structured notes for seven years, Vest Financial’s products feature worst-of baskets – a laddered portfolio of classic autocallables referencing a basket of underlying equities.

Rishi Rajan, SVP, product development at Vest Financial, argued for the simpler approach. “The large part of the market is already familiar with worst-of autocallables as they’ve been in the market for decades,” he said. “We believe that in contrast to the quantitative‑driven payoffs where there are a lot more nuances investors are not ready for yet, worst‑of products are the right place to start with best execution.”

Calamos’s Matt Kaufman, head of ETFs, countered that volatility control mechanism, a key feature of QIS indices seen in the ETF market, serves the purpose of “delivering high, stable, and tax‑efficient income” by stabilising the underlying index’s volatility.

He cited that back-tests for CAIQ, Calamos’ autocallable ETF tracking the Nasdaq 100 Index, showing 97% coupon payment and zero principal impairment versus potential 50% principal loss for an equivalent worst-of basket in stress scenarios.

“For both QIS and worst-of strategies, I would ask the issuer for the back test, ask how many times you got your coupon, what percentage was that paid, what was the drawdown,” said Kaufman.

Ken Nuttall, CIO at BlackDiamond Wealth with over US$400m in asset, has invested in one ETF each from Vest Financial and Calamos. With over a decade of experience in running structured notes and income ETFs, Nuttall said the key benefit for autocallable ETFs in his case is to reduce manual work involved in purchasing and managing individual structured notes, which is “cumbersome” at times.  

“We have been doing worst-of autocallables for years. It is simpler. The QIS takes more getting your head around, trying to understand what it is, how that volatility control works, but I think both products are going to serve their purposes well.”

Counterparty risk

With CAIE relying on a single swap counterparty, J.P. Morgan, the panel addressed counterparty risk directly. Kaufman noted that the risk is structurally contained: roughly 95% of the ETF assets sit in risk-free collateral at the custodian - State Street, J.P. Morgan posts variation margin, and a backup counterparty exists.

“If J.P. Morgan goes under, I think we’d all be in a world of hurt, but in that case, you’d have a product that looks like a treasury instrument.”

Dolapo Lawal, Goldman Sachs’ head of Americas private investor product group (PIPG), drew a distinction from traditional structured notes, where investors sit in a bank's capital stack like bondholders. A collateralised swap separates principal risk from bank credit risk.

“Both vanilla and complex strategies can be poorly or well-executed. Both can be inexpensive or expensive from a cost perspective, even if done with a single firm or via an auction,” he said. “It depends on how the firm evaluates and selects these strategies, including the prices quoted for them.”

Meanwhile, Vest Financial’s Rajan contended that worst-of products tend to produce genuine pricing benefits by quoting the swap from multiple dealers, which a single-counterparty arrangement cannot match. “The question that should be asked is: what does competition among banks bring to price any payoff?”

Tax and distribution

Like other ETFs, tax efficiency emerged as a key selling point relative to structured notes. Kaufman explained that because income flows through a laddered index rather than an interest-bearing instrument, distributions reduce cost basis and are ultimately taxed as long-term capital gains on sale, instead of as ordinary income.

Meanwhile, Rajan added that the picture is still evolving as tax counsel consensus develops alongside the industry.

Going global

Calamos has already listed a version of CAIE in Europe under the ticker CAKE. Kaufman described an inverse education challenge: “In Europe, people understand autocalls and need ETF education. In the US, people understand ETFs and need to know autocalls.”

Lawal said his team is fielding inbound interest from issuers in multiple jurisdictions, adding that the autocallable payoff already exists in note form globally.

“Over the last 20 years the ability to generate yield by selling volatility on broad based indices, regardless of your wrapper, has been a very persuasive one,” said the investment banker. “I think you’re going to continue to see innovation in this space across jurisdictions, and that includes different considerations around currencies and target yields and regulatory regimes.”

What's next

The autocallable ETF space has seen variations of payoffs deployed including snowball, memory, maturity buffer, which in a way replicates the evolvement in structured notes, and most recently the use of adaptive volatility controls.

“Adaptive volatility targets may use less leverage than fixed target approaches, trading off some yield in calm markets for potentially better behaviour in stressed environments,” explained Lawal.

Kaufman drew a parallel with buffered ETFs: “A decade ago, very few ETF investors knew what a buffer was. We are at the same point with autocallables.” Rajan predicted a significantly broader product set within one to three years.

Despite the optimism, Nuttal noted that investor education remains critical, especially given the traction around QIS. “The other thing to be worried about is that sometimes people just buy [the product] because it’s got the highest yield and not exactly understand what they’re owning underneath it,” he said. “So, education is definitely going to be the calling card on this.”

A replay of the webinar can be accessed here.

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