November 6, 2025 • 41 mins
You may not know the term autocallable, but you will. There’s a new type of high income ETF that tracks autocallable notes that yield 14% a year and is having instant success with flows coming in every single week since it launched in June. It’s all part of the boom in ETFs using derivatives (instead of stocks or bonds) to generate income streams.
On this episode of Trillions Joel and Eric speak with Matt Kaufman, head of ETFs at Calamos Investments, about how autocallables work and the risks and rewards of investing in ETFs that track them.
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Episode Transcript
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Speaker 1 (00:05):
Loker trillions. I'm Joe Webber and.
Speaker 2 (00:07):
I'm Eric Balchernas.
Speaker 3 (00:11):
Eric, you sent a note that caught my attention because
you were like, it's the wave of the future. Manufactured
high yield gonna be a big category. I was like,
that's like Eric Balchina's at his finest. Let's unpack those three.
The category a new one Auto callables. Yeah.
Speaker 2 (00:31):
I honestly I'd heard the word a couple of times,
didn't know what it meant. This is part of a
bigger theme that we call yield three point zero where
manufactured yield. We used to use the meme of the
breaking bad where using the lab making the meth. They
are making yield that isn't from like bonds or stoughts.
They're just making it and it's very popular, especially if
(00:52):
it's a big yield.
Speaker 4 (00:53):
So auto callibles are.
Speaker 2 (00:55):
One of the latest areas that has a big yield,
usually thirteen fourteen percent at least in the colum most
etf that I looked at, And there is a huge
demand for this. People love income. I've been to the
Money Show several times, especially older people. They just go
crazy for income. So these products are quite complicated. In
my opinion. I used to say VIX and China were
(01:17):
the two most complicated areas of ETFs. This is more complicated.
So I want to make sure that we understand this
and that we could explain it to you know, our
aunt or uncle, like just somebody in our lives.
Speaker 1 (01:30):
We're gonna try, but we can't.
Speaker 2 (01:32):
End this podcast until we both understand it. I think
I get it, but I get it on a very
superficial level that I just learned it quickly for the note,
but I really want to get it, and also want
to make sure that people are aware of like the
pros and cons of these, because Joel, they're going to grow.
This thing came out. This calumost One already has four
hundred million, and for something complex to come out, it's
(01:53):
pretty good money for that, so I would suspect. And
I'm hearing a lot of other issuers are going to
launch these, And it's a word I hear when I
travel around, including from our index team. They bring up
auto callables all the time. So it's a word you're
gonna hear more and more. Might as well get get
our heads around it.
Speaker 3 (02:06):
Now I'm surrounded by papers trying to make sense of this,
it's kind of hilarious.
Speaker 1 (02:12):
Uh I don't think I understand it.
Speaker 3 (02:14):
So I'll be the litmus test and to help us
make sense of this, we're gonna be joined by Matt
Kaufman Global ahead of ETFs at Klamos Investments First market
or this year with a UTF in this space, this
time my trillions auto callibles.
Speaker 1 (02:38):
Matt, welcome jillions.
Speaker 4 (02:40):
Joel, thanks for having me. Great to be here.
Speaker 1 (02:42):
How does this stuff work?
Speaker 4 (02:45):
We are going to hopefully get off of the meth analogy. Yeah,
that was We'll move toward first step something.
Speaker 2 (02:53):
Listen, Matt, Matt goes to work every day in like
this white suit. Then he's in there testing different things. Yes,
that was the hollow costing this year, so you might
as well.
Speaker 4 (03:03):
You already have ramid lab.
Speaker 3 (03:06):
But Colam Moos came out with a ticker ce ai E.
That's the ticker if you want to look into this more.
Speaker 4 (03:12):
That is the ticker Auto Callable Income ETF. So let's
take our minds from the equity markets and move it
toward the fixed income market. So think like a bond
that will pay you a monthly income and return your principle.
As long as the equity markets don't fall too far.
If you can understand that, you can understand an auto callable.
(03:35):
So it's a lot like a bond that pays a
monthly income and delivers your principle back to you either
at maturity or if you're called away early. That is
the auto call feature. And it's tied to the equity markets.
So bonds are usually tied to duration and credit. This
is tied to the equity markets. That's essentially it.
Speaker 3 (03:54):
That was a really great way of breaking it down.
It's also a quote that you had in the story
Waltree Cream's more auto callables into ETFs and race for
yield by our colleagues at Bloomberg News.
Speaker 1 (04:03):
Yes, Matt, though I got that part. Where does the
yield come from? The income? Where am I getting? Where
are you getting that income to give it to me from?
Speaker 4 (04:12):
Yeah, great question. I think one of the easiest ways
to think about this is to you know, normally you
would frame it around a covered call so that covered
call space, as Eric was talking about, is a massive market.
It's one hundred and fifty billion dollar market. I was
fortunate enough to be at Power Shares in early two thousands.
We built the first buy right ETF in two thousand
and seven. I think it was a little before it's time.
(04:33):
You know, nobody really bought it back then. Now that
space is one hundred and fifty one hundred and sixty
billion in assets. It's a massive market. And you know,
what are you doing with a covered call? You're selling
off your upside. It's a by right strategy. Twenty years ago,
very few people understood that term. Today it's commonplace. There's
equity premium income strategies. You're selling off upside collecting an
(04:55):
income payment, and auto callable is a long dated put
right stra strategy. So take the other side of the trade.
It's a long dated, say five year put right with
a call feature, and that's it. That's all. You're collecting.
Speaker 2 (05:10):
What he just said, and he goes, that's it. You
come on, dude, it's okay.
Speaker 4 (05:14):
You want it simple. So we're starting simple.
Speaker 2 (05:16):
I'm gonna break this down. Okay, I have ten thousand dollars.
I give you ten thousand dollars to this. So first
of all, who makes the auto callable? Like is it
a bank? And this is like what like a swap
contract or? Like whom I am I doing? It's just
like Michael Burry where I'm walking into Goldman and I
say I have this idea and the bank just says, okay,
I'll make a thing for you. Is that what we're
(05:38):
doing here?
Speaker 1 (05:38):
Yeah.
Speaker 4 (05:38):
So you can't go to the market and you can't
go to the listed options market and find an auto
callable yield, you know, option that does not exist. You
can go to the listed options markets and do put
writing strategies, you can call writing strategies. But what we've
done is we've partnered with JP Morgan. There you go,
biggest bank in the world. So yes, it is a
(05:59):
bank strategy. You cannot do this with listed options. So
we've partnered with JP Morgan. We took their auto callable
pricing methodology and we built a laddered version of this hold.
Speaker 2 (06:10):
On, hold on. What is JP Morgan's auto callable pricing methodology?
So the first of all, what is the index that
were based? What's the equity index?
Speaker 4 (06:18):
Sure, so let me let me explain this to you
in a way that we can we can understand. So,
you know, you talked about you know what happens if
you have ten thousand dollars. So I brought monopoly money,
you did I did. Yeah, I actually brought monopoly money
here before, so we can we can play with this.
So here, Eric, I'll give you one hundred dollars monopolyous.
Speaker 1 (06:37):
He just gave you a hundred back.
Speaker 4 (06:38):
It's easy. He would be a bad banker, and it's
easier to think about that because it's a Let's let's
pretend like that hundred dollars is the par amount.
Speaker 2 (06:45):
Okay, Okay, So.
Speaker 1 (06:46):
By the way, I get nothing. I don't like this game.
Speaker 4 (06:48):
You're going to be the Joel. You're going to be
the market. You're going to go to the market here,
all right, So Eric's gonna buy an auto callable. Note,
I'll be the bank. So you're going to invest in
an auto call but note, so give me your hundred
oct here's sliding it across the table. Okay, now that's.
Speaker 1 (07:02):
Stuck in the middle. I'm moving it across.
Speaker 4 (07:04):
Let's put it.
Speaker 2 (07:04):
We don't want it in free parking.
Speaker 4 (07:05):
Sure, So let's put some terms to this note. Let's
say it has a five year life, it has a
sixty percent principal coupon barrier. So we're gonna pay you
monthly income as long as an equity index does not
fall by forty.
Speaker 2 (07:21):
Percent during what time period?
Speaker 4 (07:22):
Every month?
Speaker 2 (07:23):
It's a monthly look, so if the S and P.
Let's say it's the SMP index. If it doesn't fall
forty percent a month.
Speaker 4 (07:28):
In a month while a starting date, so then I
get a little a little something. Yeah, that's right, and
then there's so and then there's the same thing at maturity.
So let's just play this out.
Speaker 2 (07:37):
But hold on, does the forty percent restart in the
second month. Uh, it's from the starting point we're starting
for interception. And let's say the first month the SMP
is down two percent. I get I get paid.
Speaker 4 (07:48):
So Joel, Joel gets to decided he's going to be
the market here. Okay, okay, So let's say this pays
twelve percent annualized income every month. So I've got you
one hundred dollars safe here. So Joel, let's go thirty
days in the future. What is the market going to do?
Pick a number up or down?
Speaker 1 (08:02):
Right?
Speaker 3 (08:02):
This year, I'm gonna say, if we're if we're playing
this from the beginning of the year, market gove up.
Speaker 4 (08:07):
Okay, let's say you're up five percent. So market's of
five percent in a month, Eric, you get a dollar
you're good.
Speaker 1 (08:12):
You're good.
Speaker 4 (08:13):
Okay. Next month, let's say the market.
Speaker 1 (08:15):
Well it happened, okay, kind kind of was a little chaotic.
Speaker 4 (08:19):
Okay, let's say it happens.
Speaker 1 (08:20):
Let's say market went down.
Speaker 4 (08:22):
Market goes down how much? Ten percent? All right, Eric,
you still get a dollar. Market's down ten. It's not
down forty, it's down ten.
Speaker 2 (08:29):
It resets every month.
Speaker 4 (08:31):
Uh, it's not, it's it's from the inception of the
note to that month.
Speaker 1 (08:35):
I see.
Speaker 2 (08:35):
So because it went up and down. Now year to date,
what do we down six percent or something?
Speaker 1 (08:40):
We were up five, Now we're down ten, So down
five so far? Yeah.
Speaker 4 (08:44):
Right, So let's let's just keep playing out. Let's say
the market is down forty percent the next month from
inception no dollar for you.
Speaker 2 (08:51):
Hold on, stop real quick. So we're down five percent,
so the market would have to go down like another
thirty five percent. Then, so it hits forty percent year
to date. Correct that month, I don't get a dollar.
Speaker 4 (09:02):
That's correct.
Speaker 2 (09:02):
And then because this got called in other.
Speaker 4 (09:05):
Words, the whole getting called yet.
Speaker 2 (09:06):
Oh okay, so don't get a dollar.
Speaker 4 (09:08):
Correct.
Speaker 2 (09:08):
Now the next month it goes up five percent.
Speaker 4 (09:11):
Your dollar kicks back in.
Speaker 2 (09:12):
I get another dollar, You get a dollar. Okay, what
if it goes down another twenty percent from.
Speaker 4 (09:16):
The forty then you do not get your dollar, gotcha?
Speaker 1 (09:19):
Yes?
Speaker 2 (09:19):
So in other words, as long as it doesn't come
above the forty percent watermark, I get no dollars. If
it comes up above the forty percent of water mark,
I start.
Speaker 4 (09:26):
Getting my dollars again, exactly.
Speaker 1 (09:27):
And the one hundred you just hold on to.
Speaker 2 (09:30):
Who How is this a good deal for JP Morgan?
Speaker 4 (09:33):
Uh?
Speaker 2 (09:34):
It seems a little too good, Like I feel like
the number should be ten percent. That'd be fair for
JP Morgan.
Speaker 4 (09:39):
Sure, No, that's a good question. So let's keep playing
this out. So now you've got your hundred dollars still here.
Speaker 1 (09:44):
Yep.
Speaker 4 (09:44):
So five years from now, let's say the market is
down twenty percent, you are maturing at par. You get
your hundred dollars back. If the market is down forty
percent or more, that's when you have principle at risk.
So let's say the market is down forty percent five
years from now. If I can make the sound in
the in the mic, we're gonna tear your one hundred
(10:05):
dollars bill by forty percent. You're gonna get sixty percent
of your principle back. Oh, that is the risk that
you're taking on.
Speaker 1 (10:13):
But he's collected income along the way. Correct if if it.
Speaker 2 (10:16):
So after five years, if I collected a dollar every
month minus say like five months, that would be fifty
five dollars against my sixty forty percent that I lost.
So it would cush it in a little bit. That's
like a cover call. Okay, yes, exactly.
Speaker 4 (10:31):
Okay, So that's how a single auto call of works.
The call feature then would be if the market is positive,
usually after a non call period like one year, then
you are called away. JP gets the money back, your prince,
you get your principal, you get your hundred dollars back,
you get your final coupon payment. Good job shows over,
everyone goes home, you have to go buy a new note.
Speaker 1 (10:53):
That's how it works.
Speaker 2 (10:54):
Wait, wait, that's that's when it gets called. I thought
it got called if it goes down too much, No
one goes up. Correct, So so when does it get
called again?
Speaker 4 (11:01):
Yeah, so you're getting called when the market is positive
after a one year nine all period.
Speaker 2 (11:07):
So if the market's up seven percent after like the
market is up this year, it's up fourteen percent, so
let's just say correct the year under. Now we're up
fourteen percent in twenty twenty five, and therefore I would
get the one hundred dollars back correct, and then I
would have my twelve dollars because it every went down
below forty exactly, so I would have So at that
point the fund would automatically reinvest in.
Speaker 4 (11:27):
A new auto callable. That's correct.
Speaker 2 (11:29):
So now in that getting on the hundred dollars back,
big reset, Well right now, a loss of money in
that one hundred dollars getting called.
Speaker 4 (11:35):
Back or not?
Speaker 2 (11:36):
Those resets correct and you you reset it automatically.
Speaker 4 (11:39):
Well, so I'm teaching you about an auto callable, so
we know how the auto callable works.
Speaker 1 (11:43):
Now.
Speaker 4 (11:44):
So what we have done with CIE is we've laddered
exposure to fifty two or more of these. It's a
weekly ladder, a laddered portfolio of auto callables. So now
at week fifty three, if the market's down, you might
lose coupon on one, I say, but you have fifty
one others in the portfolio. So it's highly diversified.
Speaker 2 (12:06):
Wow, And the answer is in reality, in this fun CIAE,
it is forty percent. That's the number. You don't want
the market to go down below.
Speaker 4 (12:16):
For a severe and sustained time period.
Speaker 1 (12:18):
That's correct, Like, what's that mean?
Speaker 4 (12:21):
So we built all of this with JP Morgan and Mercube,
a custom indexing provider, and this is all built inside
of an index that we trade on swap with JP Morgan.
So the risk would be a severe sustained market decline
that never recovers, and that in five years your autocollables
start to mature below the barrier.
Speaker 1 (12:42):
Let's back test it.
Speaker 3 (12:44):
What happened, What happens at the if March twenty twenty happens,
we're back in the pandemic.
Speaker 2 (12:49):
Yeah, use one hundred dollars, put one hundred dollars in.
Let's say I get Let's say for a year it's fine,
so I got twelve dollars back, but then this next
year it's like a twenty Let's say it's a two
thousand and eight where the market, well, the market wasn't
even down forty percent. It was down thirty three percent,
thirty five percent in two thousand and eight, right, So
way it's down forty five percent that year, Yeah, and
(13:09):
it stays down. What happens?
Speaker 4 (13:12):
So, because this is an index. We can look at
that history. We go back to two thousand and five,
and you would have lost on two point eight percent
of those autocollables. Historically, it would have equated to a
seventeen percent principle impairment. That was the only time you
would have lost money. Again, you did not lose that
forty percent.
Speaker 2 (13:31):
So you don't lose everything. You lost seventy percent, So
you basically you bet a seventeen percent loss on something
that's almost not never gonna happen because the Fed's going
to step in and start buying assets if a go
that low again.
Speaker 4 (13:41):
Probably I think you're right.
Speaker 1 (13:42):
That's why I don't get I look, it's in this
for JP Morgan.
Speaker 2 (13:45):
Yeah, this sounds like genius from your point of view,
But it feels like JP Morgan is pretty smart, Like
we had them on, they're pretty smart people. I feel
like they could almost get you to do this deal
at like fifteen percent. What do you mean, like if
if the market goes down below fifteen percent, that's the threshold,
Like going down forty seems like almost like beyond a
(14:06):
tail risk event. I feel like they could do the
same deal with you at fifteen percent like that would
be almost pretty good deal because I don't even mark
go down. We'll go down fifteen percent before the government
starts buying up assets.
Speaker 4 (14:18):
Sure, I think when you're trying to build something with
risk management, you know, Calamos is a risk manager who's
been doing this for nearly fifty years. We want to
give people the risk managed exposure. We want to give
them a high stable tax efficient income. If there is
a payoff that we are after, it's that it's high
stable tax efficient income. So when you take this and
(14:39):
ladder it out fifty two or more times, you put
forty percent principal barriers on it, you get this really
high stable taxificient income.
Speaker 2 (14:55):
Just jpen working consider this like issuing a bond on
their port, where it's a high yield bond, but with
this tail risk possibility. Therefore, that's why they're giving you
a higher yield.
Speaker 4 (15:04):
Well, they're issuing the auto callables, so they're the issuer
of the auto callables, so they're going to take a
spread on that note. They're going to make money on
the on the swap that we're trading, so we trade
so for plus ten basis points. It's much more efficient
for JP Morgan to trade swap with us than it
is for somebody to go buy a note from JP Morgan,
(15:25):
where you tie up all of their balance sheet, tie
up all their capital. You've got a subordinated debt structure
to that note, whereas here, if you build it synthetically
and just trade on swap, well, ninety five percent of
the assets in the ETF are in treasuries, so that
money is sitting at State Street at the custodian. There's
no real credit risk from that perspective. And then post
(15:46):
Dodd Frank, JP Morgan has got to pay variation margin
on the swap, so the whole structure is nearly one
hundred percent collateralized. So go back to eight. You know,
when a couple banks went under, you're on the hook
for a lot of that. Hopefully you get some of
your money back if you're a note issue or if
you're a note buyer, who's here.
Speaker 2 (16:04):
You don't have that whose money is in collateral? Does
JPM Moore can get a cut of the interest from
the collateral.
Speaker 4 (16:09):
No, it's the investor. So we pay JP Morgan SOFA
plus ten bases points.
Speaker 1 (16:13):
I see.
Speaker 4 (16:13):
Okay, They in turn give us the performance of that
auto callable index that we've created with Sofa overnight rate, so.
Speaker 2 (16:23):
You pay I see. So they get a little interest
from you plus ten BIPs correct, and they feel like
that's what they get out of it. That's right, and
that balances out the income they have to give you.
But they also have this like sort of you know,
fine print that if it goes down for forty percent,
they really wine that's right.
Speaker 4 (16:43):
They're taking the other side of the trade.
Speaker 3 (16:45):
I feel a little bit like the guy at the
craps table that's like, now, I'm gonna just watch that
game play out.
Speaker 2 (16:49):
What well I mean, I mean here, I'll if you
yield is twelve is well, if you get a dollar
a month, that's twelve percent, but this is like fourteen
percent a little more of a dollar.
Speaker 4 (16:58):
The average weighted coop on which is based on that
par amount of your note, is fourteen point four percent.
Right now. Okay, So the thing that we did not
get into yet, which we have to build a base
understanding of auto callables. It's a one hundred billion dollar
market in the United States. You know, as you alluded
to the structured note world, Well, let me back up
the cover call space. You know, he said is one
(17:20):
hundred and fifty billion dollar market. Derivative income is dominating
the ETF landscape. If you go to the other side
of the house, the structured note house, derivative income dominates
there as well, but it's through the auto call. The
auto callable is one hundred billion dollar market in the
United States alone, multiples of that globally. People love this
(17:40):
type of exposure.
Speaker 1 (17:41):
And it's never been in an ETF until this show.
Speaker 4 (17:43):
We built the first ETF correct.
Speaker 2 (17:45):
This is really interesting. You know that when he talks
about people wanting income that is derivatives based. If you
look at all the flows into income ETFs that would
be equity, including which we've talked about before, that could
be divid in ETFs which a plane vanilla or these
derivative yield three point zero, over eighty percent goes into
the derivative ones, which again would include the covered call.
(18:08):
So this is again that the ones the stock ETFs
that pay dividends like those old school, they're less than
twenty percent of the flow. So this yield three point
zero is taking the lion's share of all the income
seeking money in the equity space. And I'm not counting
bonds but.
Speaker 1 (18:23):
You were talking about since the CTF has come out.
Speaker 2 (18:26):
I'm talking about this year, so this is TF came
out after this year. So like the thing is to me,
I'm going to put this into a category with JEPY.
This is a little more complex than JEPY, but the
covered call space is huge now.
Speaker 4 (18:40):
But I might push back on you a little bit
if you look at equity premium income strategies. You know,
again another JP Morgan, you know tide product, but JEPI
and JEFQ will hold actual equity linked notes and then
deliver you know, that income which is somewhat tax inefficient,
but you don't really know what's going on side those notes.
(19:01):
Like you, you have to look at what they're publishing,
which a lot of times they do it late and
so there's there's not a lot of transparency all those.
Speaker 2 (19:08):
To be fair to them, though, in the yield that
you get like that we display on the des is
pretty good. I mean, I think what's like nine ten percent?
And I think to some degree, like some of these
products I've seen over the years, you just either trust
the issue or you don't because correct a lot of advisors,
they're not going to get what you're selling, they're gonna say, Matt,
I trust you, You're a good guy. Calamos has a reputation.
(19:30):
I also think the target altcome ETFs. The buffers are
also like I just trust Innovator and Bruce Bond or
I trust black Rock, because these are very complicated. The
good news is the ETF industry does have this like
really good track record, and from what you're describing it
does seem like a pretty good bet to me. I'm
not really seeing anything too outrageous, except the fact that
(19:52):
obviously if there's somebody very bearish, this might not be
the product for them.
Speaker 3 (19:56):
So who who was doing it before the ETF going
to a bank and saying I want.
Speaker 1 (20:01):
That autocullable, autocullable thing that you guys have told me about.
Speaker 3 (20:05):
And then how is that changing now that it's you know,
potentially retail friendly.
Speaker 4 (20:11):
You mentioned the buffer at ETF, so I had a
hand in building though, so if you trust the bus
buffer ETF SO, those have been working phenomenally for nearly
a decade. It's a very big space. Now that model
is very commoditized. Everybody who builds buffers tends to do
it closely the same way, So yeah, if you understand
that space or that was something that was mildly confusing.
(20:32):
Back then, people had to get their heads around it.
It was new. Now it's not. Most people understand it.
The same is going to happen with auto calls. It's
a new space for ETFs. People are going to wrap
their heads around it. They're going to understand it, you know.
But what we did with the buffers was largely disruptive
to the banks. They did not really appreciate that there
were flex options being built around this. It wasn't a
(20:54):
bank driven product, whereas here this is collaborative with the banks.
You know, we're seeing a tremendous amount of demand to
actually bring in those structured note strategies and do that
inside the ETF world. That's going to be a massive space.
We've opened this huge gate where we can now partner
with banks and bring their structured strategies into a liquid,
(21:16):
transparent and ETF ETF wrapper. I'd say it's also tax efficient.
So most large banks around the world have an equity
derivatives desk, they have an autocallable business JP Morgan, Morgan Stanley, RBC,
like you name it, SoC Chan, Barclays, They all have
these types of products that they issue, and it's on
(21:37):
a massive scale, hundreds of billions of dollars. And so
we've taken one of the most popular versions, laddered it together,
did it in swap form, and did it in a
way where we can deliver really high stable income in
a very tax efficient way. Most derivative income products are
a little less tax efficient. They'll give you either ordinary
income or they'll give you maybe sixty four already treatment
(22:00):
if it's index options. Here the coupon that we're delivering,
about eighty to ninety percent of it will be treated.
Our expectation is that it'll be return of capital, so
that will be tax deferred until you sell, and then
if you held for a year, it'll be long term
capital gains.
Speaker 3 (22:19):
So his ten thousand spits out this income for the
duration and then you give up whatever the market gains.
Speaker 1 (22:27):
But you're going to get your principle back.
Speaker 4 (22:29):
That's correct.
Speaker 3 (22:30):
And at what percentage of the time do you get
your principle back when you did this.
Speaker 4 (22:34):
If you look historically, it would have been ninety seven
point two percent of the time for our our US
large cat version. We're launching a NASDAK version that historically
had never breached principle. Yeah, so I know, I know
what you're saying. It sounds too good to be true.
So the piece that we have not unlocked yet now
that we know understand auto calls is the reference index.
(22:56):
So if you just tied this to the S and
P five hundred, you would get a low coupon. You'd
get maybe seven eight percent something like that, a little
bit over risk free. If you're familiar with covered call strategies,
the income that you collect changes with market parameters, it
changes with volatility, interest rates, dividends. So what we have
(23:19):
done is we've built an equity index that has been
customized for auto callables. So it's an S and P
five hundred base and it has a high volatility target.
It's a stable vault target of thirty five percent, so
that every week when we write a new auto callable
inside that index, the volatility is the same. So that's
(23:43):
how I can come here confidently and say you're going
to get a high stable income because we've stabilized the
parameter inside that options pricing model. I know we're getting
really deep. But then when you compile all that together,
the VALL of the strategy historically has been around eighteen percent.
Speaker 1 (24:00):
But what happens in those moments where the volatility spikes.
Speaker 4 (24:03):
Then your VALL will come down in the VALL target.
So you mentioned twenty twenty, so I put that on
pause for a reason. So in twenty twenty, what was
equity market volatility sixty seventy percent, So you're at thirty five.
So in that environment you're defending the barrier. Not only
do you now have a forty percent barrier, but it's
(24:23):
even more powerful because your VALL is at thirty five
while the SMP is at seventy.
Speaker 2 (24:31):
But in twenty twenty.
Speaker 3 (24:33):
Only that was like when Eric's quite it that long,
He's like, it's like next level, We've done it.
Speaker 4 (24:39):
We have never made Eric Roy too like.
Speaker 2 (24:41):
A physics conversation you can have in like our podcast.
Speaker 1 (24:45):
This is.
Speaker 2 (24:47):
I mean, we're about to get into black holes and
like dark matters.
Speaker 4 (24:49):
No, no, no, black shoals, not black holes.
Speaker 2 (24:53):
But in twenty twenty, you still got your thing. You
still got the there was no call. It didn't get called.
Speaker 4 (24:59):
Over the last ten years, you would have gotten every
single coupon and you never would have breached barrier.
Speaker 2 (25:04):
So I think this is something When you go talk
to advisors and people about this, it sounds like you're
gonna get interest. But I'm assuming they put like two
percent to.
Speaker 4 (25:13):
Three percent of the portfolio.
Speaker 2 (25:14):
Wouldn't go too crazy and where do you put it?
What do you ad this?
Speaker 4 (25:17):
This has equity market like volatility. So think of fifty
two auto callables like rubber bands that will trade at par.
And as the market goes down, the rubber bands will
start to stretch. You'll trade at a discount to par.
And as long as they don't break, then you're going
to snap back to par. Those rubber bands will go
back to par. So we want to make sure that
(25:39):
people are comfortable with equity market like volatility. If you're
comfortable with that, you can exchange it for a high, stable,
tax efficient coupon.
Speaker 2 (25:47):
So if the markets go down, say twenty percent, and
you're seeing a discount in these, there's a certain kind
of trader who may think that's the braid yeah, Versus
in the flip side, if the market keeps going up,
a trader may be like, you know what, let me
not buy that right now because it's looking a little pricey.
I get it.
Speaker 4 (26:06):
I mean we have so let me.
Speaker 2 (26:08):
Ask you this. Are these used mostly by buy and
hold with a little traders if it gets into a discount,
like what's the buy and hold trader ratio here for
something like this?
Speaker 4 (26:17):
It's both early adopters. There's more than ten thousand shareholders
in KAI right now. Let's what we're calling ci E KAI.
A lot of them are financial advisors who use auto
callable notes. They said, we've been using these for decades.
We get called away after you know, six months to
a year, we have to go buy a new note
of all changes on us. The parameters are different, might
(26:38):
not be able to get the same terms. I've got
a hundred of these things on the books, one for
every different client. I can't keep it all straight. One
advisor that we were talking to said, I go to
New York every quarter, meet with the banks, find good
you know, good products. He said, I'm canceling my flights
to New York. I've got this. This ETF gives me
what I'm looking for. It's an evergreen solution. I'm going
(27:00):
to play golf and this makes things easy for me.
Speaker 2 (27:02):
Where does he live?
Speaker 4 (27:03):
He's out West.
Speaker 2 (27:04):
Yeah, that's it. That's a long flight. Yeah, well this
is the this is what ETFs do, drool. They take complicated, messy,
institutional type stuff and they just make it simple, fast,
good cheap.
Speaker 3 (27:24):
Okay, so fast, good cheap. How do you what color
of uh light do you give this?
Speaker 4 (27:30):
We have what we do.
Speaker 1 (27:31):
I don't believe if we.
Speaker 2 (27:32):
Could dress this one yet, I think, hold on, hold on,
what do you give?
Speaker 4 (27:37):
What do you give? Covered? Call ETFs? What light do
they get?
Speaker 2 (27:41):
I gotta look. I believe they're green. They might get
dinged once for using derivatives. Okay, so maybe you'd be
the same green, but one little note for like the
fact that it uses derivatives. But I guess that's it.
I mean there's no leverage thet there's no rolling of commodities,
and there's no hidden fees. Correct, those would be the
(28:01):
things we ding them. But I'd have to look deeper.
But I would to me, these feel you know, between
PG and PG thirteen somewhere.
Speaker 3 (28:11):
So the risk really is I'm not going to get
my principal back if there's some you know, real big downturn,
or I'm going to give up some upside.
Speaker 4 (28:22):
Yeah, your risk is largely to the other side.
Speaker 1 (28:25):
Here's what I.
Speaker 2 (28:26):
Don't get like, if I'm in the VU, right, I'm
a SAP five hundred, and I get Oh, I know
why you don't get the return of the index.
Speaker 1 (28:34):
You just get the Yeah. Yeah, the principle just comes back. Yeah.
Speaker 2 (28:36):
So in the end, VU could be up twenty percent
that would outperform this. This is more like just getting
a little income based on VU not going down a
super amount, which I feel like is a sort of
the words. This would be kind of a little less
risky than VU in a way.
Speaker 4 (28:55):
At times it could be forget volatility. Yeah, if you're
looking for income, yeah, or if you don't think the
market's going up fourteen and a half percent next year,
then this would be a way to essentially lock that
in as long as you're not going to fall by
that barrier.
Speaker 1 (29:07):
So maybe instead of buying a.
Speaker 3 (29:12):
Rental property real estate property like this, this is in
that category if you're thinking about it from like what
a financial advisor would tell a client.
Speaker 4 (29:21):
Yeah, that's an interesting here.
Speaker 2 (29:22):
It is. It's a rental property in Florida. But you've
got to pray there's nothing once everything in your hurricane.
That's what it is.
Speaker 4 (29:31):
It is your God kind of like that. Yeah, so
let's pretend like you are the insurer and you are
collecting premiums from people all over the country.
Speaker 1 (29:40):
It was way more fun when we were doing it
a way.
Speaker 2 (29:42):
I'm an insured I think we nailed it, and that's
I don't think you're can improve on it though.
Speaker 4 (29:47):
No, I say, if you're an insurer, you're collecting premiums,
maybe there's a storm in Florida, but everyone else is
still paying you.
Speaker 2 (29:53):
Yeah, but aren't you doing these fifty or so all
are on equity indexes, right, I mean one of them.
Speaker 5 (29:58):
Insures got out of not but there's fifty starting in
the starting You're right, I say, Oh, I say, okay,
so it's like all over the country, but there's one
hurricane in Miami.
Speaker 1 (30:09):
Okay.
Speaker 4 (30:09):
Correct. You're diversified by time instead of geography.
Speaker 2 (30:12):
That's a lot of work. Yeah, Like do you have
like associates that like do all this like keep up
Kai take like an army of people like putting these
new notes on like just seems like a lot of effort.
Speaker 4 (30:24):
The beauty of KAI is that it's all swap based.
So we built everything.
Speaker 2 (30:28):
JP Morgan is the rest. It's all in them.
Speaker 4 (30:30):
Well, we built everything inside that Mercube index. And so Mercube, Yeah.
Speaker 2 (30:36):
That sounds like like matrix or something that sounds like
what's that sounds too much? Merkcube? Who is that somebody's
last name?
Speaker 4 (30:44):
Mercube is an indexing provider that was ok yeah, founded
by the former head of custom indexing at S.
Speaker 2 (30:49):
And P the Mercube theory.
Speaker 1 (30:52):
Okay, so you're not alone anymore?
Speaker 2 (30:54):
Right?
Speaker 3 (30:55):
You got Kai was out there first. Yeah, you got
some competition. What does the competition look like?
Speaker 4 (30:59):
Can I backup for thirty seconds? And we're going to
spend a while on this. So on the ETF side,
the last point here, because we did this index based
it trades extremely tight. We don't have to post Greeks
to the website. There's not a lot of active management here.
So we take this index by Greeks.
Speaker 2 (31:17):
By the way, Ajoul, he doesn't mean Athnosios. He means
like formulas like Vega, Gamma, Kalamos. He's picturing Athnosios and
John Stamos on your website and.
Speaker 4 (31:28):
That's not true, that's right. Not yet. We do have
Yanis though. Yeah, yeah, so where was I We take
that index, We give that price almost like an intra
day nave to the market makers, so they are very
tight to that index level. JP Morgan is trading swap
on the index. It is trading at one to three
cents wide every day, and that's largely because of that index.
(31:52):
So it's extremely operationally light.
Speaker 3 (31:56):
Okay, now my question, yes, oh yes, you were first.
Now there's some competition. Yes, how do you feel about
the competition?
Speaker 4 (32:02):
I think it's great. Competition is good for the market.
It's going to grow. We're not going to raise you know,
one hundred billion dollars all by ourselves. I hope we do,
but I know it's going to be because a rising
tide is lifting all boats. If there's an encouragement, I
hope that it's done correctly. The covered call space took
fifteen twenty years to grow and then become more risky.
(32:24):
You've got weekly daily single stock. My fear is the
auto call space does that too fast, and you go
into this risky stuff and then people get hurt and
they get burned, and like I thought, I had a barrier,
I was tied to a single stock. It went down fast.
That's what we don't want.
Speaker 2 (32:39):
Oh yeah, because somebody filed for single stock auto call
Yeah you too. I see so that well, let's go
I know you don't do those, but like let's say
you're doing Navidia. Let's say you did Navidia single stock
auto call Well, what would.
Speaker 1 (32:52):
The barrier be?
Speaker 4 (32:53):
You think, Well, the volatility would be you know, fairly
high higher, but it comes at it.
Speaker 2 (32:57):
Could the barrier be sixty?
Speaker 4 (32:59):
It depends. You know, you can pull those levers and
change your coupon.
Speaker 2 (33:02):
So what you're worried about is somebody going for the
jacked up yield with a lower barrier and people being
like not understanding the auto callable. Correct, yeah, and then
it changed the whole camera and you know the industry
is going to do this and you and they like
to push the envelope.
Speaker 4 (33:16):
Oh for sure, for sure and you and we've seen
this in Korea. We've seen this in other markets where
folks these are big. In South Korea, I extremely they
love risk, they love risk.
Speaker 2 (33:26):
Going theo is it's a gen per capita in South
Korea is like off the charts.
Speaker 3 (33:31):
The the Calamost strategy is we're just going to go
to indexes S and P five hundred.
Speaker 4 (33:40):
Yeah, let's build an index that is customized for auto
callables to give you the best chance of getting a high, stable,
tax efficient coupon.
Speaker 2 (33:50):
By the way, has have you talked to Bruce Bond regularly?
Speaker 4 (33:53):
I have you talked to him in about this strategy?
Speaker 1 (33:55):
Yeah?
Speaker 2 (33:55):
I feel like he's an eye in this. I don't know,
I just feel like this is Bruce bondish.
Speaker 4 (33:59):
Oh that's funny. You know Innovator brought out were First Trust.
Speaker 2 (34:02):
I feel like they might just.
Speaker 4 (34:03):
Like, so we all filed around the same time. Okay,
Innovator brought out some single stock products. I don't know
how well those that have done, like you do the
research on that, and then the other competitors have not
come to market yet. There's about four or five in
the market. So you know why you probably feel that way.
Speaker 2 (34:20):
Is because you guys all live in the same town
and what and Illinois?
Speaker 4 (34:22):
Wow, this is true?
Speaker 2 (34:23):
Like by the way, in Wheaton, like where he lives,
he has like a cul de sac. His next door
neighbor is Innovator and this other nextraor neighbor is First
Trust and all their kids are friends. But they hate
each other at work?
Speaker 1 (34:34):
Is that true?
Speaker 4 (34:35):
Something like that hate each other?
Speaker 3 (34:37):
Okay, all right, but just confront of me, are you
on the same kids baseball teams.
Speaker 4 (34:41):
It is a small town, and well, we have seven kids,
so there's a good chance that we're on everybody's baseball team.
Speaker 1 (34:46):
All right, you have seven kids. We do? Wow? Yeah,
we do.
Speaker 2 (34:49):
Oh my god, that's going. Wow, that must be you're wow.
You look pretty good for seven kids.
Speaker 4 (34:54):
I don't sit down. You just got to keep keep
on going.
Speaker 1 (34:56):
Yeah.
Speaker 2 (34:57):
Yeah, that's your exercise, I guess. But I think the
reason amazing.
Speaker 4 (35:00):
I think the reason you are thinking that way is,
you know, the buffers at the time replicated the largest
structured note market, and in a zero rate environment, buffers
were the king. When rates rose to five percent, what
are people doing. They're buying fixed indexinuities. They're buying capital
protected notes. So that was what we brought at Calamos,
one hundred percent protected products. I helped Bruce build innovator
(35:22):
when I was at Milliman. I was there for twelve years.
So what are people doing now? They won income? You know,
rates are coming back down, they're chasing that, you know,
high stable income. The forty year run in bonds is over.
You cannot get ballast and income from bonds anymore, and
so they're parsing it out and so the auto call
space was always the golden goose. We happened to win
(35:44):
the race this time.
Speaker 2 (35:46):
Yeah, No, he Matt comes from that world. This is
organic to because I've known him for quite a while
and his work on the early days of the target outcome,
having worked in an options industry. But what you will
find is a lot of the issuers who don't normally
do this are going to get involved. That's just the
way it goes, but it is I also think ETFs
(36:07):
everybody who's seen the Big Short and then Mayor Michael
Burry going over to Goldman and JP Morgan and being like,
I want to make this specific bet against the housing market,
and at first JP More they're like laughing at them.
They're like, no problem. That idea of a swap contract
with a bank. People don't realize, like the levere ETFs,
like so many ETFs are basically just democratizing what you
saw in the Big Short, and that's kind of cool
(36:30):
as long as it's done responsibly. Obviously, some of the
leverage that are they're trying to file his five X
where you're gonna get like irresponsible. But for the most part,
you know those two guys who are waiting the lobby
of JP Morgan in the beginning that this is what Matt.
Matt has access to those desks that those guys were
trying to get access to. These are just customized contracts
with a big bank. It's almost like a high roller
(36:51):
to casino. Who can get a special table.
Speaker 1 (36:53):
Yeah, and I'm at that special table just watching it happen.
Speaker 2 (36:56):
I know now you now you can just get the
for twenty five dollars that can be Let me ask
you this, you have seven kids, you have other film members.
Would you feel safe putting your own family in here?
Is this more for a sophisticated investor?
Speaker 4 (37:12):
No, I would what we've done here, you know, going
all the way back to the beginning, if you tie
all of your money or tie your money to a
single auto callable, you have single point coupon risk, single
point maturity risk where you can lose forty percent or
more of your money when you ladder that out fifty
two or more times and do it weekly. Now you've
got an opportunity to diversify out that risk. You've got a
(37:35):
product that looks a lot like the equity markets, but
delivers that high stable coupon, So you know, I own
this in my account, you know, not to create suitability.
My parents, you know, are doing similar. They own a
lot of buffers. They own this for income. When you
can tie your money to the equity markets, now you
can keep pace with inflation. You can do remarkably better
than your fixed income, which would be inversely correlated to inflation.
(37:58):
So there's a lot of ways to think about it.
Speaker 3 (38:00):
Best time we talked about this space, boomer candy was
the phrase that came out of your mouth.
Speaker 1 (38:04):
Is this boomer candy?
Speaker 2 (38:06):
Yeah, I mean I think so, because it's a way
to participate boomer's love income. But then again, sort of
the gen z ers too, So I would say the
only thing that doesn't make this boomer candy is that
there isn't a protection element. I mean, you're betting the
market won't get on forty percent, and that actual income
can be a buffer if it does go down. But
(38:28):
I think, I don't know. It might be like half
boomer candy. I consider boomer candy something that helps you
sleep at night and cures anxiety.
Speaker 1 (38:35):
This is angiin boom boomer candy.
Speaker 2 (38:39):
Maybe, or I don't know, it's just it's ancillary, but
I could see this appealing, especially we like guy from
Texas who's a YouTube star. I could see the other
younger investors actually getting into this because it does have
you know, that's a pretty big yield. I mean, that's
going to excite some people. Although some of the yield
max field like eighty to one hundred percent. But with those,
you're giving up so much much total return.
Speaker 4 (39:01):
What makes me nervous with those? Well, so you, if
I remember correctly, you came up with the boomer candy
term after we launched the one hundred percent protected ETFs.
Speaker 2 (39:09):
Yeah, well it was that I camera when I camp
with it, but it was that it was the buffers
combined with the cover calls. Yes, those are both. I
don't know.
Speaker 4 (39:17):
They just feel it as a specific protection amount. Yes,
here you're taking diet market correct. Here you're taking on
tail risks. So there's a chance some of those coupons.
Speaker 2 (39:27):
That's why it's a little.
Speaker 4 (39:28):
Bit I would agree with you. You got to be
comfortable with equity market like volatility, the single stock covered
call ETFs as a risk manager, you know, coming from
an actuarial consulting firm, not something we would build Calamos. As
a forty five year old risk manager, we would not
build those. But the yield that those are stating is
(39:49):
not a yield that you will likely get.
Speaker 1 (39:52):
You know.
Speaker 4 (39:52):
It's if it's a daily by ride or a weekly
by right, they'll take that number that they've collected and
they'll annualize it. So if it's a daily buy right
and the market's volatile, I'm going to get a good
coupon today and now times that by two hundred and
fifty two trading days, and it looks like this massive number.
The odds of you actually achieving that are next to zero.
Speaker 3 (40:12):
All right, Matt, I have one final question for you,
which is what is your favorite ETF ticker other than
any of your own.
Speaker 4 (40:19):
Oh that's a good question. A Power Shares product. I
don't work there anymore. We launched food and Beverage ETF. Eric,
do you remember the ticker PBJ.
Speaker 2 (40:30):
Here you go, Yes, that is a good one. Yeah,
no one's ever picked it.
Speaker 3 (40:34):
And it really PBJ protein beverage, I know, healthy fads.
Speaker 2 (40:38):
Yeah, nice kicker, that's a good one PBJ.
Speaker 1 (40:41):
Matt Koffman, thanks so much for joining us on trillions.
Speaker 4 (40:44):
Thanks for having me.
Speaker 3 (40:51):
Thanks for listening to Trillions until next time. You can
find us on the Bloomberg terminal, Bloomberg dot com, Apple Podcasts, Spotify,
or wherever you'd like to listen. We'd love to hear
from you. Hit us up on social I'm at Joel
Weber Show, He's at Eric Balcino's. Trillions is produced by
Magnus Hendrickson. Sage Bauman is the head of Bloomberg Podcast
Loker trillions. I'm Joe Webber and.
Speaker 2 (00:07):
I'm Eric Balchernas.
Speaker 3 (00:11):
Eric, you sent a note that caught my attention because
you were like, it's the wave of the future. Manufactured
high yield gonna be a big category. I was like,
that's like Eric Balchina's at his finest. Let's unpack those three.
The category a new one Auto callables. Yeah.
Speaker 2 (00:31):
I honestly I'd heard the word a couple of times,
didn't know what it meant. This is part of a
bigger theme that we call yield three point zero where
manufactured yield. We used to use the meme of the
breaking bad where using the lab making the meth. They
are making yield that isn't from like bonds or stoughts.
They're just making it and it's very popular, especially if
(00:52):
it's a big yield.
Speaker 4 (00:53):
So auto callibles are.
Speaker 2 (00:55):
One of the latest areas that has a big yield,
usually thirteen fourteen percent at least in the colum most
etf that I looked at, And there is a huge
demand for this. People love income. I've been to the
Money Show several times, especially older people. They just go
crazy for income. So these products are quite complicated. In
my opinion. I used to say VIX and China were
(01:17):
the two most complicated areas of ETFs. This is more complicated.
So I want to make sure that we understand this
and that we could explain it to you know, our
aunt or uncle, like just somebody in our lives.
Speaker 1 (01:30):
We're gonna try, but we can't.
Speaker 2 (01:32):
End this podcast until we both understand it. I think
I get it, but I get it on a very
superficial level that I just learned it quickly for the note,
but I really want to get it, and also want
to make sure that people are aware of like the
pros and cons of these, because Joel, they're going to grow.
This thing came out. This calumost One already has four
hundred million, and for something complex to come out, it's
(01:53):
pretty good money for that, so I would suspect. And
I'm hearing a lot of other issuers are going to
launch these, And it's a word I hear when I
travel around, including from our index team. They bring up
auto callables all the time. So it's a word you're
gonna hear more and more. Might as well get get
our heads around it.
Speaker 3 (02:06):
Now I'm surrounded by papers trying to make sense of this,
it's kind of hilarious.
Speaker 1 (02:12):
Uh I don't think I understand it.
Speaker 3 (02:14):
So I'll be the litmus test and to help us
make sense of this, we're gonna be joined by Matt
Kaufman Global ahead of ETFs at Klamos Investments First market
or this year with a UTF in this space, this
time my trillions auto callibles.
Speaker 1 (02:38):
Matt, welcome jillions.
Speaker 4 (02:40):
Joel, thanks for having me. Great to be here.
Speaker 1 (02:42):
How does this stuff work?
Speaker 4 (02:45):
We are going to hopefully get off of the meth analogy. Yeah,
that was We'll move toward first step something.
Speaker 2 (02:53):
Listen, Matt, Matt goes to work every day in like
this white suit. Then he's in there testing different things. Yes,
that was the hollow costing this year, so you might
as well.
Speaker 4 (03:03):
You already have ramid lab.
Speaker 3 (03:06):
But Colam Moos came out with a ticker ce ai E.
That's the ticker if you want to look into this more.
Speaker 4 (03:12):
That is the ticker Auto Callable Income ETF. So let's
take our minds from the equity markets and move it
toward the fixed income market. So think like a bond
that will pay you a monthly income and return your principle.
As long as the equity markets don't fall too far.
If you can understand that, you can understand an auto callable.
(03:35):
So it's a lot like a bond that pays a
monthly income and delivers your principle back to you either
at maturity or if you're called away early. That is
the auto call feature. And it's tied to the equity markets.
So bonds are usually tied to duration and credit. This
is tied to the equity markets. That's essentially it.
Speaker 3 (03:54):
That was a really great way of breaking it down.
It's also a quote that you had in the story
Waltree Cream's more auto callables into ETFs and race for
yield by our colleagues at Bloomberg News.
Speaker 1 (04:03):
Yes, Matt, though I got that part. Where does the
yield come from? The income? Where am I getting? Where
are you getting that income to give it to me from?
Speaker 4 (04:12):
Yeah, great question. I think one of the easiest ways
to think about this is to you know, normally you
would frame it around a covered call so that covered
call space, as Eric was talking about, is a massive market.
It's one hundred and fifty billion dollar market. I was
fortunate enough to be at Power Shares in early two thousands.
We built the first buy right ETF in two thousand
and seven. I think it was a little before it's time.
(04:33):
You know, nobody really bought it back then. Now that
space is one hundred and fifty one hundred and sixty
billion in assets. It's a massive market. And you know,
what are you doing with a covered call? You're selling
off your upside. It's a by right strategy. Twenty years ago,
very few people understood that term. Today it's commonplace. There's
equity premium income strategies. You're selling off upside collecting an
(04:55):
income payment, and auto callable is a long dated put
right stra strategy. So take the other side of the trade.
It's a long dated, say five year put right with
a call feature, and that's it. That's all. You're collecting.
Speaker 2 (05:10):
What he just said, and he goes, that's it. You
come on, dude, it's okay.
Speaker 4 (05:14):
You want it simple. So we're starting simple.
Speaker 2 (05:16):
I'm gonna break this down. Okay, I have ten thousand dollars.
I give you ten thousand dollars to this. So first
of all, who makes the auto callable? Like is it
a bank? And this is like what like a swap
contract or? Like whom I am I doing? It's just
like Michael Burry where I'm walking into Goldman and I
say I have this idea and the bank just says, okay,
I'll make a thing for you. Is that what we're
(05:38):
doing here?
Speaker 1 (05:38):
Yeah.
Speaker 4 (05:38):
So you can't go to the market and you can't
go to the listed options market and find an auto
callable yield, you know, option that does not exist. You
can go to the listed options markets and do put
writing strategies, you can call writing strategies. But what we've
done is we've partnered with JP Morgan. There you go,
biggest bank in the world. So yes, it is a
(05:59):
bank strategy. You cannot do this with listed options. So
we've partnered with JP Morgan. We took their auto callable
pricing methodology and we built a laddered version of this hold.
Speaker 2 (06:10):
On, hold on. What is JP Morgan's auto callable pricing methodology?
So the first of all, what is the index that
were based? What's the equity index?
Speaker 4 (06:18):
Sure, so let me let me explain this to you
in a way that we can we can understand. So,
you know, you talked about you know what happens if
you have ten thousand dollars. So I brought monopoly money,
you did I did. Yeah, I actually brought monopoly money
here before, so we can we can play with this.
So here, Eric, I'll give you one hundred dollars monopolyous.
Speaker 1 (06:37):
He just gave you a hundred back.
Speaker 4 (06:38):
It's easy. He would be a bad banker, and it's
easier to think about that because it's a Let's let's
pretend like that hundred dollars is the par amount.
Speaker 2 (06:45):
Okay, Okay, So.
Speaker 1 (06:46):
By the way, I get nothing. I don't like this game.
Speaker 4 (06:48):
You're going to be the Joel. You're going to be
the market. You're going to go to the market here,
all right, So Eric's gonna buy an auto callable. Note,
I'll be the bank. So you're going to invest in
an auto call but note, so give me your hundred
oct here's sliding it across the table. Okay, now that's.
Speaker 1 (07:02):
Stuck in the middle. I'm moving it across.
Speaker 4 (07:04):
Let's put it.
Speaker 2 (07:04):
We don't want it in free parking.
Speaker 4 (07:05):
Sure, So let's put some terms to this note. Let's
say it has a five year life, it has a
sixty percent principal coupon barrier. So we're gonna pay you
monthly income as long as an equity index does not
fall by forty.
Speaker 2 (07:21):
Percent during what time period?
Speaker 4 (07:22):
Every month?
Speaker 2 (07:23):
It's a monthly look, so if the S and P.
Let's say it's the SMP index. If it doesn't fall
forty percent a month.
Speaker 4 (07:28):
In a month while a starting date, so then I
get a little a little something. Yeah, that's right, and
then there's so and then there's the same thing at maturity.
So let's just play this out.
Speaker 2 (07:37):
But hold on, does the forty percent restart in the
second month. Uh, it's from the starting point we're starting
for interception. And let's say the first month the SMP
is down two percent. I get I get paid.
Speaker 4 (07:48):
So Joel, Joel gets to decided he's going to be
the market here. Okay, okay, So let's say this pays
twelve percent annualized income every month. So I've got you
one hundred dollars safe here. So Joel, let's go thirty
days in the future. What is the market going to do?
Pick a number up or down?
Speaker 1 (08:02):
Right?
Speaker 3 (08:02):
This year, I'm gonna say, if we're if we're playing
this from the beginning of the year, market gove up.
Speaker 4 (08:07):
Okay, let's say you're up five percent. So market's of
five percent in a month, Eric, you get a dollar
you're good.
Speaker 1 (08:12):
You're good.
Speaker 4 (08:13):
Okay. Next month, let's say the market.
Speaker 1 (08:15):
Well it happened, okay, kind kind of was a little chaotic.
Speaker 4 (08:19):
Okay, let's say it happens.
Speaker 1 (08:20):
Let's say market went down.
Speaker 4 (08:22):
Market goes down how much? Ten percent? All right, Eric,
you still get a dollar. Market's down ten. It's not
down forty, it's down ten.
Speaker 2 (08:29):
It resets every month.
Speaker 4 (08:31):
Uh, it's not, it's it's from the inception of the
note to that month.
Speaker 1 (08:35):
I see.
Speaker 2 (08:35):
So because it went up and down. Now year to date,
what do we down six percent or something?
Speaker 1 (08:40):
We were up five, Now we're down ten, So down
five so far? Yeah.
Speaker 4 (08:44):
Right, So let's let's just keep playing out. Let's say
the market is down forty percent the next month from
inception no dollar for you.
Speaker 2 (08:51):
Hold on, stop real quick. So we're down five percent,
so the market would have to go down like another
thirty five percent. Then, so it hits forty percent year
to date. Correct that month, I don't get a dollar.
Speaker 4 (09:02):
That's correct.
Speaker 2 (09:02):
And then because this got called in other.
Speaker 4 (09:05):
Words, the whole getting called yet.
Speaker 2 (09:06):
Oh okay, so don't get a dollar.
Speaker 4 (09:08):
Correct.
Speaker 2 (09:08):
Now the next month it goes up five percent.
Speaker 4 (09:11):
Your dollar kicks back in.
Speaker 2 (09:12):
I get another dollar, You get a dollar. Okay, what
if it goes down another twenty percent from.
Speaker 4 (09:16):
The forty then you do not get your dollar, gotcha?
Speaker 1 (09:19):
Yes?
Speaker 2 (09:19):
So in other words, as long as it doesn't come
above the forty percent watermark, I get no dollars. If
it comes up above the forty percent of water mark,
I start.
Speaker 4 (09:26):
Getting my dollars again, exactly.
Speaker 1 (09:27):
And the one hundred you just hold on to.
Speaker 2 (09:30):
Who How is this a good deal for JP Morgan?
Speaker 4 (09:33):
Uh?
Speaker 2 (09:34):
It seems a little too good, Like I feel like
the number should be ten percent. That'd be fair for
JP Morgan.
Speaker 4 (09:39):
Sure, No, that's a good question. So let's keep playing
this out. So now you've got your hundred dollars still here.
Speaker 1 (09:44):
Yep.
Speaker 4 (09:44):
So five years from now, let's say the market is
down twenty percent, you are maturing at par. You get
your hundred dollars back. If the market is down forty
percent or more, that's when you have principle at risk.
So let's say the market is down forty percent five
years from now. If I can make the sound in
the in the mic, we're gonna tear your one hundred
(10:05):
dollars bill by forty percent. You're gonna get sixty percent
of your principle back. Oh, that is the risk that
you're taking on.
Speaker 1 (10:13):
But he's collected income along the way. Correct if if it.
Speaker 2 (10:16):
So after five years, if I collected a dollar every
month minus say like five months, that would be fifty
five dollars against my sixty forty percent that I lost.
So it would cush it in a little bit. That's
like a cover call. Okay, yes, exactly.
Speaker 4 (10:31):
Okay, So that's how a single auto call of works.
The call feature then would be if the market is positive,
usually after a non call period like one year, then
you are called away. JP gets the money back, your prince,
you get your principal, you get your hundred dollars back,
you get your final coupon payment. Good job shows over,
everyone goes home, you have to go buy a new note.
Speaker 1 (10:53):
That's how it works.
Speaker 2 (10:54):
Wait, wait, that's that's when it gets called. I thought
it got called if it goes down too much, No
one goes up. Correct, So so when does it get
called again?
Speaker 4 (11:01):
Yeah, so you're getting called when the market is positive
after a one year nine all period.
Speaker 2 (11:07):
So if the market's up seven percent after like the
market is up this year, it's up fourteen percent, so
let's just say correct the year under. Now we're up
fourteen percent in twenty twenty five, and therefore I would
get the one hundred dollars back correct, and then I
would have my twelve dollars because it every went down
below forty exactly, so I would have So at that
point the fund would automatically reinvest in.
Speaker 4 (11:27):
A new auto callable. That's correct.
Speaker 2 (11:29):
So now in that getting on the hundred dollars back,
big reset, Well right now, a loss of money in
that one hundred dollars getting called.
Speaker 4 (11:35):
Back or not?
Speaker 2 (11:36):
Those resets correct and you you reset it automatically.
Speaker 4 (11:39):
Well, so I'm teaching you about an auto callable, so
we know how the auto callable works.
Speaker 1 (11:43):
Now.
Speaker 4 (11:44):
So what we have done with CIE is we've laddered
exposure to fifty two or more of these. It's a
weekly ladder, a laddered portfolio of auto callables. So now
at week fifty three, if the market's down, you might
lose coupon on one, I say, but you have fifty
one others in the portfolio. So it's highly diversified.
Speaker 2 (12:06):
Wow, And the answer is in reality, in this fun CIAE,
it is forty percent. That's the number. You don't want
the market to go down below.
Speaker 4 (12:16):
For a severe and sustained time period.
Speaker 1 (12:18):
That's correct, Like, what's that mean?
Speaker 4 (12:21):
So we built all of this with JP Morgan and Mercube,
a custom indexing provider, and this is all built inside
of an index that we trade on swap with JP Morgan.
So the risk would be a severe sustained market decline
that never recovers, and that in five years your autocollables
start to mature below the barrier.
Speaker 1 (12:42):
Let's back test it.
Speaker 3 (12:44):
What happened, What happens at the if March twenty twenty happens,
we're back in the pandemic.
Speaker 2 (12:49):
Yeah, use one hundred dollars, put one hundred dollars in.
Let's say I get Let's say for a year it's fine,
so I got twelve dollars back, but then this next
year it's like a twenty Let's say it's a two
thousand and eight where the market, well, the market wasn't
even down forty percent. It was down thirty three percent,
thirty five percent in two thousand and eight, right, So
way it's down forty five percent that year, Yeah, and
(13:09):
it stays down. What happens?
Speaker 4 (13:12):
So, because this is an index. We can look at
that history. We go back to two thousand and five,
and you would have lost on two point eight percent
of those autocollables. Historically, it would have equated to a
seventeen percent principle impairment. That was the only time you
would have lost money. Again, you did not lose that
forty percent.
Speaker 2 (13:31):
So you don't lose everything. You lost seventy percent, So
you basically you bet a seventeen percent loss on something
that's almost not never gonna happen because the Fed's going
to step in and start buying assets if a go
that low again.
Speaker 4 (13:41):
Probably I think you're right.
Speaker 1 (13:42):
That's why I don't get I look, it's in this
for JP Morgan.
Speaker 2 (13:45):
Yeah, this sounds like genius from your point of view,
But it feels like JP Morgan is pretty smart, Like
we had them on, they're pretty smart people. I feel
like they could almost get you to do this deal
at like fifteen percent. What do you mean, like if
if the market goes down below fifteen percent, that's the threshold,
Like going down forty seems like almost like beyond a
(14:06):
tail risk event. I feel like they could do the
same deal with you at fifteen percent like that would
be almost pretty good deal because I don't even mark
go down. We'll go down fifteen percent before the government
starts buying up assets.
Speaker 4 (14:18):
Sure, I think when you're trying to build something with
risk management, you know, Calamos is a risk manager who's
been doing this for nearly fifty years. We want to
give people the risk managed exposure. We want to give
them a high stable tax efficient income. If there is
a payoff that we are after, it's that it's high
stable tax efficient income. So when you take this and
(14:39):
ladder it out fifty two or more times, you put
forty percent principal barriers on it, you get this really
high stable taxificient income.
Speaker 2 (14:55):
Just jpen working consider this like issuing a bond on
their port, where it's a high yield bond, but with
this tail risk possibility. Therefore, that's why they're giving you
a higher yield.
Speaker 4 (15:04):
Well, they're issuing the auto callables, so they're the issuer
of the auto callables, so they're going to take a
spread on that note. They're going to make money on
the on the swap that we're trading, so we trade
so for plus ten basis points. It's much more efficient
for JP Morgan to trade swap with us than it
is for somebody to go buy a note from JP Morgan,
(15:25):
where you tie up all of their balance sheet, tie
up all their capital. You've got a subordinated debt structure
to that note, whereas here, if you build it synthetically
and just trade on swap, well, ninety five percent of
the assets in the ETF are in treasuries, so that
money is sitting at State Street at the custodian. There's
no real credit risk from that perspective. And then post
(15:46):
Dodd Frank, JP Morgan has got to pay variation margin
on the swap, so the whole structure is nearly one
hundred percent collateralized. So go back to eight. You know,
when a couple banks went under, you're on the hook
for a lot of that. Hopefully you get some of
your money back if you're a note issue or if
you're a note buyer, who's here.
Speaker 2 (16:04):
You don't have that whose money is in collateral? Does
JPM Moore can get a cut of the interest from
the collateral.
Speaker 4 (16:09):
No, it's the investor. So we pay JP Morgan SOFA
plus ten bases points.
Speaker 1 (16:13):
I see.
Speaker 4 (16:13):
Okay, They in turn give us the performance of that
auto callable index that we've created with Sofa overnight rate, so.
Speaker 2 (16:23):
You pay I see. So they get a little interest
from you plus ten BIPs correct, and they feel like
that's what they get out of it. That's right, and
that balances out the income they have to give you.
But they also have this like sort of you know,
fine print that if it goes down for forty percent,
they really wine that's right.
Speaker 4 (16:43):
They're taking the other side of the trade.
Speaker 3 (16:45):
I feel a little bit like the guy at the
craps table that's like, now, I'm gonna just watch that
game play out.
Speaker 2 (16:49):
What well I mean, I mean here, I'll if you
yield is twelve is well, if you get a dollar
a month, that's twelve percent, but this is like fourteen
percent a little more of a dollar.
Speaker 4 (16:58):
The average weighted coop on which is based on that
par amount of your note, is fourteen point four percent.
Right now. Okay, So the thing that we did not
get into yet, which we have to build a base
understanding of auto callables. It's a one hundred billion dollar
market in the United States. You know, as you alluded
to the structured note world, Well, let me back up
the cover call space. You know, he said is one
(17:20):
hundred and fifty billion dollar market. Derivative income is dominating
the ETF landscape. If you go to the other side
of the house, the structured note house, derivative income dominates
there as well, but it's through the auto call. The
auto callable is one hundred billion dollar market in the
United States alone, multiples of that globally. People love this
(17:40):
type of exposure.
Speaker 1 (17:41):
And it's never been in an ETF until this show.
Speaker 4 (17:43):
We built the first ETF correct.
Speaker 2 (17:45):
This is really interesting. You know that when he talks
about people wanting income that is derivatives based. If you
look at all the flows into income ETFs that would
be equity, including which we've talked about before, that could
be divid in ETFs which a plane vanilla or these
derivative yield three point zero, over eighty percent goes into
the derivative ones, which again would include the covered call.
(18:08):
So this is again that the ones the stock ETFs
that pay dividends like those old school, they're less than
twenty percent of the flow. So this yield three point
zero is taking the lion's share of all the income
seeking money in the equity space. And I'm not counting
bonds but.
Speaker 1 (18:23):
You were talking about since the CTF has come out.
Speaker 2 (18:26):
I'm talking about this year, so this is TF came
out after this year. So like the thing is to me,
I'm going to put this into a category with JEPY.
This is a little more complex than JEPY, but the
covered call space is huge now.
Speaker 4 (18:40):
But I might push back on you a little bit
if you look at equity premium income strategies. You know,
again another JP Morgan, you know tide product, but JEPI
and JEFQ will hold actual equity linked notes and then
deliver you know, that income which is somewhat tax inefficient,
but you don't really know what's going on side those notes.
(19:01):
Like you, you have to look at what they're publishing,
which a lot of times they do it late and
so there's there's not a lot of transparency all those.
Speaker 2 (19:08):
To be fair to them, though, in the yield that
you get like that we display on the des is
pretty good. I mean, I think what's like nine ten percent?
And I think to some degree, like some of these
products I've seen over the years, you just either trust
the issue or you don't because correct a lot of advisors,
they're not going to get what you're selling, they're gonna say, Matt,
I trust you, You're a good guy. Calamos has a reputation.
(19:30):
I also think the target altcome ETFs. The buffers are
also like I just trust Innovator and Bruce Bond or
I trust black Rock, because these are very complicated. The
good news is the ETF industry does have this like
really good track record, and from what you're describing it
does seem like a pretty good bet to me. I'm
not really seeing anything too outrageous, except the fact that
(19:52):
obviously if there's somebody very bearish, this might not be
the product for them.
Speaker 3 (19:56):
So who who was doing it before the ETF going
to a bank and saying I want.
Speaker 1 (20:01):
That autocullable, autocullable thing that you guys have told me about.
Speaker 3 (20:05):
And then how is that changing now that it's you know,
potentially retail friendly.
Speaker 4 (20:11):
You mentioned the buffer at ETF, so I had a
hand in building though, so if you trust the bus
buffer ETF SO, those have been working phenomenally for nearly
a decade. It's a very big space. Now that model
is very commoditized. Everybody who builds buffers tends to do
it closely the same way, So yeah, if you understand
that space or that was something that was mildly confusing.
(20:32):
Back then, people had to get their heads around it.
It was new. Now it's not. Most people understand it.
The same is going to happen with auto calls. It's
a new space for ETFs. People are going to wrap
their heads around it. They're going to understand it, you know.
But what we did with the buffers was largely disruptive
to the banks. They did not really appreciate that there
were flex options being built around this. It wasn't a
(20:54):
bank driven product, whereas here this is collaborative with the banks.
You know, we're seeing a tremendous amount of demand to
actually bring in those structured note strategies and do that
inside the ETF world. That's going to be a massive space.
We've opened this huge gate where we can now partner
with banks and bring their structured strategies into a liquid,
(21:16):
transparent and ETF ETF wrapper. I'd say it's also tax efficient.
So most large banks around the world have an equity
derivatives desk, they have an autocallable business JP Morgan, Morgan Stanley, RBC,
like you name it, SoC Chan, Barclays, They all have
these types of products that they issue, and it's on
(21:37):
a massive scale, hundreds of billions of dollars. And so
we've taken one of the most popular versions, laddered it together,
did it in swap form, and did it in a
way where we can deliver really high stable income in
a very tax efficient way. Most derivative income products are
a little less tax efficient. They'll give you either ordinary
income or they'll give you maybe sixty four already treatment
(22:00):
if it's index options. Here the coupon that we're delivering,
about eighty to ninety percent of it will be treated.
Our expectation is that it'll be return of capital, so
that will be tax deferred until you sell, and then
if you held for a year, it'll be long term
capital gains.
Speaker 3 (22:19):
So his ten thousand spits out this income for the
duration and then you give up whatever the market gains.
Speaker 1 (22:27):
But you're going to get your principle back.
Speaker 4 (22:29):
That's correct.
Speaker 3 (22:30):
And at what percentage of the time do you get
your principle back when you did this.
Speaker 4 (22:34):
If you look historically, it would have been ninety seven
point two percent of the time for our our US
large cat version. We're launching a NASDAK version that historically
had never breached principle. Yeah, so I know, I know
what you're saying. It sounds too good to be true.
So the piece that we have not unlocked yet now
that we know understand auto calls is the reference index.
(22:56):
So if you just tied this to the S and
P five hundred, you would get a low coupon. You'd
get maybe seven eight percent something like that, a little
bit over risk free. If you're familiar with covered call strategies,
the income that you collect changes with market parameters, it
changes with volatility, interest rates, dividends. So what we have
(23:19):
done is we've built an equity index that has been
customized for auto callables. So it's an S and P
five hundred base and it has a high volatility target.
It's a stable vault target of thirty five percent, so
that every week when we write a new auto callable
inside that index, the volatility is the same. So that's
(23:43):
how I can come here confidently and say you're going
to get a high stable income because we've stabilized the
parameter inside that options pricing model. I know we're getting
really deep. But then when you compile all that together,
the VALL of the strategy historically has been around eighteen percent.
Speaker 1 (24:00):
But what happens in those moments where the volatility spikes.
Speaker 4 (24:03):
Then your VALL will come down in the VALL target.
So you mentioned twenty twenty, so I put that on
pause for a reason. So in twenty twenty, what was
equity market volatility sixty seventy percent, So you're at thirty five.
So in that environment you're defending the barrier. Not only
do you now have a forty percent barrier, but it's
(24:23):
even more powerful because your VALL is at thirty five
while the SMP is at seventy.
Speaker 2 (24:31):
But in twenty twenty.
Speaker 3 (24:33):
Only that was like when Eric's quite it that long,
He's like, it's like next level, We've done it.
Speaker 4 (24:39):
We have never made Eric Roy too like.
Speaker 2 (24:41):
A physics conversation you can have in like our podcast.
Speaker 1 (24:45):
This is.
Speaker 2 (24:47):
I mean, we're about to get into black holes and
like dark matters.
Speaker 4 (24:49):
No, no, no, black shoals, not black holes.
Speaker 2 (24:53):
But in twenty twenty, you still got your thing. You
still got the there was no call. It didn't get called.
Speaker 4 (24:59):
Over the last ten years, you would have gotten every
single coupon and you never would have breached barrier.
Speaker 2 (25:04):
So I think this is something When you go talk
to advisors and people about this, it sounds like you're
gonna get interest. But I'm assuming they put like two
percent to.
Speaker 4 (25:13):
Three percent of the portfolio.
Speaker 2 (25:14):
Wouldn't go too crazy and where do you put it?
What do you ad this?
Speaker 4 (25:17):
This has equity market like volatility. So think of fifty
two auto callables like rubber bands that will trade at par.
And as the market goes down, the rubber bands will
start to stretch. You'll trade at a discount to par.
And as long as they don't break, then you're going
to snap back to par. Those rubber bands will go
back to par. So we want to make sure that
(25:39):
people are comfortable with equity market like volatility. If you're
comfortable with that, you can exchange it for a high, stable,
tax efficient coupon.
Speaker 2 (25:47):
So if the markets go down, say twenty percent, and
you're seeing a discount in these, there's a certain kind
of trader who may think that's the braid yeah, Versus
in the flip side, if the market keeps going up,
a trader may be like, you know what, let me
not buy that right now because it's looking a little pricey.
I get it.
Speaker 4 (26:06):
I mean we have so let me.
Speaker 2 (26:08):
Ask you this. Are these used mostly by buy and
hold with a little traders if it gets into a discount,
like what's the buy and hold trader ratio here for
something like this?
Speaker 4 (26:17):
It's both early adopters. There's more than ten thousand shareholders
in KAI right now. Let's what we're calling ci E KAI.
A lot of them are financial advisors who use auto
callable notes. They said, we've been using these for decades.
We get called away after you know, six months to
a year, we have to go buy a new note
of all changes on us. The parameters are different, might
(26:38):
not be able to get the same terms. I've got
a hundred of these things on the books, one for
every different client. I can't keep it all straight. One
advisor that we were talking to said, I go to
New York every quarter, meet with the banks, find good
you know, good products. He said, I'm canceling my flights
to New York. I've got this. This ETF gives me
what I'm looking for. It's an evergreen solution. I'm going
(27:00):
to play golf and this makes things easy for me.
Speaker 2 (27:02):
Where does he live?
Speaker 4 (27:03):
He's out West.
Speaker 2 (27:04):
Yeah, that's it. That's a long flight. Yeah, well this
is the this is what ETFs do, drool. They take complicated, messy,
institutional type stuff and they just make it simple, fast,
good cheap.
Speaker 3 (27:24):
Okay, so fast, good cheap. How do you what color
of uh light do you give this?
Speaker 4 (27:30):
We have what we do.
Speaker 1 (27:31):
I don't believe if we.
Speaker 2 (27:32):
Could dress this one yet, I think, hold on, hold on,
what do you give?
Speaker 4 (27:37):
What do you give? Covered? Call ETFs? What light do
they get?
Speaker 2 (27:41):
I gotta look. I believe they're green. They might get
dinged once for using derivatives. Okay, so maybe you'd be
the same green, but one little note for like the
fact that it uses derivatives. But I guess that's it.
I mean there's no leverage thet there's no rolling of commodities,
and there's no hidden fees. Correct, those would be the
(28:01):
things we ding them. But I'd have to look deeper.
But I would to me, these feel you know, between
PG and PG thirteen somewhere.
Speaker 3 (28:11):
So the risk really is I'm not going to get
my principal back if there's some you know, real big downturn,
or I'm going to give up some upside.
Speaker 4 (28:22):
Yeah, your risk is largely to the other side.
Speaker 1 (28:25):
Here's what I.
Speaker 2 (28:26):
Don't get like, if I'm in the VU, right, I'm
a SAP five hundred, and I get Oh, I know
why you don't get the return of the index.
Speaker 1 (28:34):
You just get the Yeah. Yeah, the principle just comes back. Yeah.
Speaker 2 (28:36):
So in the end, VU could be up twenty percent
that would outperform this. This is more like just getting
a little income based on VU not going down a
super amount, which I feel like is a sort of
the words. This would be kind of a little less
risky than VU in a way.
Speaker 4 (28:55):
At times it could be forget volatility. Yeah, if you're
looking for income, yeah, or if you don't think the
market's going up fourteen and a half percent next year,
then this would be a way to essentially lock that
in as long as you're not going to fall by
that barrier.
Speaker 1 (29:07):
So maybe instead of buying a.
Speaker 3 (29:12):
Rental property real estate property like this, this is in
that category if you're thinking about it from like what
a financial advisor would tell a client.
Speaker 4 (29:21):
Yeah, that's an interesting here.
Speaker 2 (29:22):
It is. It's a rental property in Florida. But you've
got to pray there's nothing once everything in your hurricane.
That's what it is.
Speaker 4 (29:31):
It is your God kind of like that. Yeah, so
let's pretend like you are the insurer and you are
collecting premiums from people all over the country.
Speaker 1 (29:40):
It was way more fun when we were doing it
a way.
Speaker 2 (29:42):
I'm an insured I think we nailed it, and that's
I don't think you're can improve on it though.
Speaker 4 (29:47):
No, I say, if you're an insurer, you're collecting premiums,
maybe there's a storm in Florida, but everyone else is
still paying you.
Speaker 2 (29:53):
Yeah, but aren't you doing these fifty or so all
are on equity indexes, right, I mean one of them.
Speaker 5 (29:58):
Insures got out of not but there's fifty starting in
the starting You're right, I say, Oh, I say, okay,
so it's like all over the country, but there's one
hurricane in Miami.
Speaker 1 (30:09):
Okay.
Speaker 4 (30:09):
Correct. You're diversified by time instead of geography.
Speaker 2 (30:12):
That's a lot of work. Yeah, Like do you have
like associates that like do all this like keep up
Kai take like an army of people like putting these
new notes on like just seems like a lot of effort.
Speaker 4 (30:24):
The beauty of KAI is that it's all swap based.
So we built everything.
Speaker 2 (30:28):
JP Morgan is the rest. It's all in them.
Speaker 4 (30:30):
Well, we built everything inside that Mercube index. And so Mercube, Yeah.
Speaker 2 (30:36):
That sounds like like matrix or something that sounds like
what's that sounds too much? Merkcube? Who is that somebody's
last name?
Speaker 4 (30:44):
Mercube is an indexing provider that was ok yeah, founded
by the former head of custom indexing at S.
Speaker 2 (30:49):
And P the Mercube theory.
Speaker 1 (30:52):
Okay, so you're not alone anymore?
Speaker 2 (30:54):
Right?
Speaker 3 (30:55):
You got Kai was out there first. Yeah, you got
some competition. What does the competition look like?
Speaker 4 (30:59):
Can I backup for thirty seconds? And we're going to
spend a while on this. So on the ETF side,
the last point here, because we did this index based
it trades extremely tight. We don't have to post Greeks
to the website. There's not a lot of active management here.
So we take this index by Greeks.
Speaker 2 (31:17):
By the way, Ajoul, he doesn't mean Athnosios. He means
like formulas like Vega, Gamma, Kalamos. He's picturing Athnosios and
John Stamos on your website and.
Speaker 4 (31:28):
That's not true, that's right. Not yet. We do have
Yanis though. Yeah, yeah, so where was I We take
that index, We give that price almost like an intra
day nave to the market makers, so they are very
tight to that index level. JP Morgan is trading swap
on the index. It is trading at one to three
cents wide every day, and that's largely because of that index.
(31:52):
So it's extremely operationally light.
Speaker 3 (31:56):
Okay, now my question, yes, oh yes, you were first.
Now there's some competition. Yes, how do you feel about
the competition?
Speaker 4 (32:02):
I think it's great. Competition is good for the market.
It's going to grow. We're not going to raise you know,
one hundred billion dollars all by ourselves. I hope we do,
but I know it's going to be because a rising
tide is lifting all boats. If there's an encouragement, I
hope that it's done correctly. The covered call space took
fifteen twenty years to grow and then become more risky.
(32:24):
You've got weekly daily single stock. My fear is the
auto call space does that too fast, and you go
into this risky stuff and then people get hurt and
they get burned, and like I thought, I had a barrier,
I was tied to a single stock. It went down fast.
That's what we don't want.
Speaker 2 (32:39):
Oh yeah, because somebody filed for single stock auto call
Yeah you too. I see so that well, let's go
I know you don't do those, but like let's say
you're doing Navidia. Let's say you did Navidia single stock
auto call Well, what would.
Speaker 1 (32:52):
The barrier be?
Speaker 4 (32:53):
You think, Well, the volatility would be you know, fairly
high higher, but it comes at it.
Speaker 2 (32:57):
Could the barrier be sixty?
Speaker 4 (32:59):
It depends. You know, you can pull those levers and
change your coupon.
Speaker 2 (33:02):
So what you're worried about is somebody going for the
jacked up yield with a lower barrier and people being
like not understanding the auto callable. Correct, yeah, and then
it changed the whole camera and you know the industry
is going to do this and you and they like
to push the envelope.
Speaker 4 (33:16):
Oh for sure, for sure and you and we've seen
this in Korea. We've seen this in other markets where
folks these are big. In South Korea, I extremely they
love risk, they love risk.
Speaker 2 (33:26):
Going theo is it's a gen per capita in South
Korea is like off the charts.
Speaker 3 (33:31):
The the Calamost strategy is we're just going to go
to indexes S and P five hundred.
Speaker 4 (33:40):
Yeah, let's build an index that is customized for auto
callables to give you the best chance of getting a high, stable,
tax efficient coupon.
Speaker 2 (33:50):
By the way, has have you talked to Bruce Bond regularly?
Speaker 4 (33:53):
I have you talked to him in about this strategy?
Speaker 1 (33:55):
Yeah?
Speaker 2 (33:55):
I feel like he's an eye in this. I don't know,
I just feel like this is Bruce bondish.
Speaker 4 (33:59):
Oh that's funny. You know Innovator brought out were First Trust.
Speaker 2 (34:02):
I feel like they might just.
Speaker 4 (34:03):
Like, so we all filed around the same time. Okay,
Innovator brought out some single stock products. I don't know
how well those that have done, like you do the
research on that, and then the other competitors have not
come to market yet. There's about four or five in
the market. So you know why you probably feel that way.
Speaker 2 (34:20):
Is because you guys all live in the same town
and what and Illinois?
Speaker 4 (34:22):
Wow, this is true?
Speaker 2 (34:23):
Like by the way, in Wheaton, like where he lives,
he has like a cul de sac. His next door
neighbor is Innovator and this other nextraor neighbor is First
Trust and all their kids are friends. But they hate
each other at work?
Speaker 1 (34:34):
Is that true?
Speaker 4 (34:35):
Something like that hate each other?
Speaker 3 (34:37):
Okay, all right, but just confront of me, are you
on the same kids baseball teams.
Speaker 4 (34:41):
It is a small town, and well, we have seven kids,
so there's a good chance that we're on everybody's baseball team.
Speaker 1 (34:46):
All right, you have seven kids. We do? Wow? Yeah,
we do.
Speaker 2 (34:49):
Oh my god, that's going. Wow, that must be you're wow.
You look pretty good for seven kids.
Speaker 4 (34:54):
I don't sit down. You just got to keep keep
on going.
Speaker 1 (34:56):
Yeah.
Speaker 2 (34:57):
Yeah, that's your exercise, I guess. But I think the
reason amazing.
Speaker 4 (35:00):
I think the reason you are thinking that way is,
you know, the buffers at the time replicated the largest
structured note market, and in a zero rate environment, buffers
were the king. When rates rose to five percent, what
are people doing. They're buying fixed indexinuities. They're buying capital
protected notes. So that was what we brought at Calamos,
one hundred percent protected products. I helped Bruce build innovator
(35:22):
when I was at Milliman. I was there for twelve years.
So what are people doing now? They won income? You know,
rates are coming back down, they're chasing that, you know,
high stable income. The forty year run in bonds is over.
You cannot get ballast and income from bonds anymore, and
so they're parsing it out and so the auto call
space was always the golden goose. We happened to win
(35:44):
the race this time.
Speaker 2 (35:46):
Yeah, No, he Matt comes from that world. This is
organic to because I've known him for quite a while
and his work on the early days of the target outcome,
having worked in an options industry. But what you will
find is a lot of the issuers who don't normally
do this are going to get involved. That's just the
way it goes, but it is I also think ETFs
(36:07):
everybody who's seen the Big Short and then Mayor Michael
Burry going over to Goldman and JP Morgan and being like,
I want to make this specific bet against the housing market,
and at first JP More they're like laughing at them.
They're like, no problem. That idea of a swap contract
with a bank. People don't realize, like the levere ETFs,
like so many ETFs are basically just democratizing what you
saw in the Big Short, and that's kind of cool
(36:30):
as long as it's done responsibly. Obviously, some of the
leverage that are they're trying to file his five X
where you're gonna get like irresponsible. But for the most part,
you know those two guys who are waiting the lobby
of JP Morgan in the beginning that this is what Matt.
Matt has access to those desks that those guys were
trying to get access to. These are just customized contracts
with a big bank. It's almost like a high roller
(36:51):
to casino. Who can get a special table.
Speaker 1 (36:53):
Yeah, and I'm at that special table just watching it happen.
Speaker 2 (36:56):
I know now you now you can just get the
for twenty five dollars that can be Let me ask
you this, you have seven kids, you have other film members.
Would you feel safe putting your own family in here?
Is this more for a sophisticated investor?
Speaker 4 (37:12):
No, I would what we've done here, you know, going
all the way back to the beginning, if you tie
all of your money or tie your money to a
single auto callable, you have single point coupon risk, single
point maturity risk where you can lose forty percent or
more of your money when you ladder that out fifty
two or more times and do it weekly. Now you've
got an opportunity to diversify out that risk. You've got a
(37:35):
product that looks a lot like the equity markets, but
delivers that high stable coupon, So you know, I own
this in my account, you know, not to create suitability.
My parents, you know, are doing similar. They own a
lot of buffers. They own this for income. When you
can tie your money to the equity markets, now you
can keep pace with inflation. You can do remarkably better
than your fixed income, which would be inversely correlated to inflation.
(37:58):
So there's a lot of ways to think about it.
Speaker 3 (38:00):
Best time we talked about this space, boomer candy was
the phrase that came out of your mouth.
Speaker 1 (38:04):
Is this boomer candy?
Speaker 2 (38:06):
Yeah, I mean I think so, because it's a way
to participate boomer's love income. But then again, sort of
the gen z ers too, So I would say the
only thing that doesn't make this boomer candy is that
there isn't a protection element. I mean, you're betting the
market won't get on forty percent, and that actual income
can be a buffer if it does go down. But
(38:28):
I think, I don't know. It might be like half
boomer candy. I consider boomer candy something that helps you
sleep at night and cures anxiety.
Speaker 1 (38:35):
This is angiin boom boomer candy.
Speaker 2 (38:39):
Maybe, or I don't know, it's just it's ancillary, but
I could see this appealing, especially we like guy from
Texas who's a YouTube star. I could see the other
younger investors actually getting into this because it does have
you know, that's a pretty big yield. I mean, that's
going to excite some people. Although some of the yield
max field like eighty to one hundred percent. But with those,
you're giving up so much much total return.
Speaker 4 (39:01):
What makes me nervous with those? Well, so you, if
I remember correctly, you came up with the boomer candy
term after we launched the one hundred percent protected ETFs.
Speaker 2 (39:09):
Yeah, well it was that I camera when I camp
with it, but it was that it was the buffers
combined with the cover calls. Yes, those are both. I
don't know.
Speaker 4 (39:17):
They just feel it as a specific protection amount. Yes,
here you're taking diet market correct. Here you're taking on
tail risks. So there's a chance some of those coupons.
Speaker 2 (39:27):
That's why it's a little.
Speaker 4 (39:28):
Bit I would agree with you. You got to be
comfortable with equity market like volatility, the single stock covered
call ETFs as a risk manager, you know, coming from
an actuarial consulting firm, not something we would build Calamos. As
a forty five year old risk manager, we would not
build those. But the yield that those are stating is
(39:49):
not a yield that you will likely get.
Speaker 1 (39:52):
You know.
Speaker 4 (39:52):
It's if it's a daily by ride or a weekly
by right, they'll take that number that they've collected and
they'll annualize it. So if it's a daily buy right
and the market's volatile, I'm going to get a good
coupon today and now times that by two hundred and
fifty two trading days, and it looks like this massive number.
The odds of you actually achieving that are next to zero.
Speaker 3 (40:12):
All right, Matt, I have one final question for you,
which is what is your favorite ETF ticker other than
any of your own.
Speaker 4 (40:19):
Oh that's a good question. A Power Shares product. I
don't work there anymore. We launched food and Beverage ETF. Eric,
do you remember the ticker PBJ.
Speaker 2 (40:30):
Here you go, Yes, that is a good one. Yeah,
no one's ever picked it.
Speaker 3 (40:34):
And it really PBJ protein beverage, I know, healthy fads.
Speaker 2 (40:38):
Yeah, nice kicker, that's a good one PBJ.
Speaker 1 (40:41):
Matt Koffman, thanks so much for joining us on trillions.
Speaker 4 (40:44):
Thanks for having me.
Speaker 3 (40:51):
Thanks for listening to Trillions until next time. You can
find us on the Bloomberg terminal, Bloomberg dot com, Apple Podcasts, Spotify,
or wherever you'd like to listen. We'd love to hear
from you. Hit us up on social I'm at Joel
Weber Show, He's at Eric Balcino's. Trillions is produced by
Magnus Hendrickson. Sage Bauman is the head of Bloomberg Podcast
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