How Calamos Solved the Autocallable Dilemma for Advisors

Matt Kaufman, SVP, Head of ETFs at Calamos, does a deep dive on autocallables and the firm's ETF, CAIE, with Dave Nadig at Schwab's IMPACT 2025 Conference. The following is a full transcript of their conversation. 

Transcript

Nadig: Matt Kaufman, Calamos, I'm so glad to finally get a little bit of time to talk with you. You guys have had one of the hottest dot products of the year in your autocallables ETFs, which is CAIE, is that right?

Kaufman: CAIE, we are calling it Kai.

Nadig: Kai. Okay. You've been absolutely everywhere in the media explaining to virtually everybody in financial services what an autocallable is. I don't want to spend a lot of time on that. I'm going to summarize it, you tell me whether I got it wrong. An autocallable is a structured product. It's basically a note. I'm going to get a coupon off that note, and my risks, my risks are either I stop getting that coupon or if the thing that I'm tracking goes down a whole lot, I get a lot of left side tail risk. But in between, I kind of either just get my capital back, or I get a coupon and it feels like a bond.

Kaufman: I think that's great. Yeah. The way that I summarize it, it's like a bond tied to the equity markets instead of credit or duration.

Nadig: But, like, I want to, let's pause right there. The tied to the equity market people part, I think, screws people up. I've been bouncing this off of a bunch of advisors. A lot of them sort of look at it and think, "Well, it means it's going to go up and down with the S&P 500 every day, and that my principle is going to be going up and down with the S&P 500." That's not really true, though, is it?

Kaufman: That's correct. It's not true. Yeah. So, when you have an autocallable note, like you said, it's a lot like a bond. So, it has a par amount, and then based off of an underlying equity index, those bonds can trade at a discount. So, you know, think of it like a rubber band that could trade at a discount, but as long as you don't breach that barrier, like you said, at maturity, then you're going to snap back to par.

Nadig: So, what should people expect the NAV of CAIE to look like? You know you're going to be getting a coupon, a regular distribution. That's going to be return of capital. So, you can deal with the taxes later. I think advisors are starting to understand the pros and cons of that. Am I expecting the NAV to go down 10% when the S&P goes down 10%?

Kaufman: It could. The NAV is going to move a lot like the S&P 500, maybe a little bit more volatile depending on the market environment, maybe less at some point. If you look at this similar to a structured note, like when you buy a note, you kind of close your eyes, you go to sleep for a couple years, you wake up, you get the payoff of that note. When you put it in an ETF wrapper, now you have intraday liquidity.

Nadig: Right, you have the value it too.

Kaufman: You have the value of it, exactly. So, you've got mark-to-market pricing on those notes, which is why I say those can trade at a discount with the market drawing down. So, you know, that's drawdown risk, but also opportunity, if you buy at that discount and you don't think the barrier is going to breach, you're going to capture that discount as you go back to par.

The Power of Swaps 

Nadig: So, that's the working with one note. What you guys are doing is just buying one of these every week, or the index underneath this notionally grabs one of these every week, which mitigates sort of the flow problem there of like, oh, I bought it on a day that went crazy.

Kaufman: I think that's an important point. The structured note marketplace for autocalls is massive. You know, it's a $100 billion a year market for single vintage autocallables. We've worked with JP Morgan. We've taken autocallable pricing that they use, and we've laddered out exposure to a weekly issuance of an autocallable structure. So, we're not buying notes from JP Morgan. It's all synthetically built and delivered inside an index.

Nadig: Which I think is another really important point. Like a lot of ETFs these days, the exposure is actually the swap you have with JP Morgan. Theoretically, JP Morgan is probably offsetting their risk of that by going and buying all the individual notes because that's the pattern of returns that they've passed. But the individual investor in CAIE doesn't see or have to know or worry about any of that because the swap is the swap is the swap, right?

Kaufman: Exactly. So, we are giving JP Morgan SOFR, you know, risk-free rate, plus 10 basis points, and in turn, they are giving us the performance of that laddered index that we've built. It's a MerQube issued index. And so, JP Morgan has got to deliver us the performance of that index, and we give them risk-free rate plus 10 basis points for that.

Nadig: And is that like every other Schwab, it settles every day?

Kaufman: Exactly. Right.

Nadig: So, the big advantage of that is that you're eliminating counterparty risk, effectively, because you're never actually giving JP Morgan all of the money, right?

Kaufman: Yeah, exactly. So, post Dodd-Frank, well, you look at before Dodd-Frank, people had some exposure to structured products, some of those may have gone bad. Put a black eye on that industry, but what we have done is built that back, you know, better is how I would think about it, where we're not actually buying structured notes from JP Morgan. We're not exposed to counterparty risk that way, but we've got 95% of the fund of your investor dollars in Treasury bills, in collateral, that sits at State Street, at the custodian.

Nadig: So, in this weird world where you imagine where JP Morgan literally goes bankrupt overnight, which is sort of a little bit of a sci-fi scenario, I admit, got to be bombs dropping somewhere. Even in that scenario, now you have to worry about the Treasuries not being worth anything, which point we're doing something else for a living.

Kaufman: Yes. Maybe there's Bitcoin collateral or something.

How Advisors Should Think About CAIE's Strategy

Nadig: So, that gets that out of the way. Let's talk about how advisors should think about this absent all of the details here. Let's just think about it in terms of what they're getting for the risks they're taking with their client money. What they're getting is fundamentally a coupon, right? It's a yield product, right?

Kaufman: Correct. That’s right.

Nadig: And the risks that you're taking are not actually full equity market risks in the sense that you'll – every one of those autocallables should deliver back $100 on $100. The equity market risk is something happens bad enough that you knock out the floor and now you've just got basically unfettered left tail risk on the equity market. Am I right on that as being the trade-off here?

Kaufman: Think about it like having 52 checkpoints in the marketplace. So, if the market goes down swiftly and severely and never recovers, you know, each of the autocalls that we're using have a five-year life. So, the market would have to fall significantly and not recover for five years or longer for each of your notes to start expiring below that barrier.

Nadig: Right. And that's when you as the investor would get hit is when that actually goes all the way to five years, and they say, "I'm sorry the market's down 50%. You're not getting all of your money back."

Kaufman: That's right. So, we can model this out, you know, the index we have has a history. The only time you would have breached principle was during the Global Financial Crisis. You would have lost ultimately 17% of your principle. So, each of the autocalls has a 40% barrier, but you ladder those all together, and the worst-case scenario that we've seen is a 17% breach in principle.

Nadig: I want to, I do want to stop and address the barrier issue, because very smart people in this industry, I think, have gotten this part wrong. And this isn't a gotcha, it's just hard math. The down 40% does not mean the S&P 500 is down 40%, correct?

Kaufman: That's correct. So, to dive into what the autocallable is doing, they all have standardized terms. So, each one has a five-year maturity, a one-year period where you cannot get called away, and a 60% principal coupon value or principal coupon barrier, is what I was trying to say. And then you also have a 60% principal maturity barrier. So, what that means for each one is that the reference index, which we'll get to, cannot fall below 40% before your coupons turn off. And then it cannot fall by 40% in five years so that you lose principal.

Nadig: And that's the actual risk that's embedded in for an advisor.

Kaufman: That's correct.

Nadig: That's the thing you have to be, “What's the worst-case scenario?” The worst-case scenario is, “Oops, this reference index dropped 40%. We don't get the coupons anymore.” Now you've just got trapped money. Or that happens and it persists for five years and now we've lost a bunch of money.

Kaufman: That’s correct, yes.

Breaking Down the Volatility 

Nadig: So, those are the actual risks. Back to the index, though, it's not that the market has to fall 40% because this is not replicating the S&P 500. It's levered based on the volatility each week, right?

Kaufman: Yes. Up or down. Yeah. So, the underlying reference index is an S&P 500 base with a 35% volatility target. That's not the volatility of the fund. That's the volatility target of the reference index. And so, what that means is that if S&P volatility is low, that reference index will have left...

Nadig: And that's what we're talking about, recent realized volatility or are we talking implied?

Kaufman: It's implied.

Nadig: Implied volatility out of the options.

Kaufman: That's correct.

Nadig: So, when the IVOL [idiosyncratic volatility] is at 35%, you're 100% exposed to the…

Kaufman: 1x exposed.

Nadig: When the IVOL is 10%, you're 3x levered.

Kaufman: Correct. And then inverse is true. If vol is at 60, you're half as exposed. That's correct.

Nadig: So, that acts as a way of both taking advantage of some leverage, but also covering your butt a little bit on the downside. But that means that if one of these individual notes happened to be bought when vol was at 10, it doesn't have the S&P doesn't have to fall 40%. It has to fall 13%, and now you've blown through the 40%. If that was in fact the vol exposure of the fund. Right now you're sitting at less than two, right?

Kaufman: That's correct. Yes. We're at about two right now.

Nadig: So, in that case, you'd have to have the market fall not 20%, but something close to 20%, and the rest would get eaten away by the decrement in the index.

Kaufman: That would be true on an immediate basis.

Nadig: Right. That's what I mean. For one of the notes.

Kaufman: And it would have to happen suddenly. Yes. If it happened over a period of a few weeks, then the Vol control mechanism would come down. And so, if you play that out, but yeah, you mentioned the decrement. So, there's a decrement built in. I'll explain it kind of holistically, and then we can dive into the pieces.

We built an index that has largely been used for autocallable notes. It's very popular around the world. And JP Morgan sells a lot of autocalls on the MerQube Vol Advantage Index. And it has been optimized for autocallables. So, what does that mean? If you know, take the covered call space, you sell off your upside, you get an income payment for that. That income payment is largely tied to interest rates. It's tied to dividends. It's tied to volatility.

So, those last two components, we've eliminated that from the equation. And we've stabilized those parameters. We've stabilized volatility. We've stabilized dividends by way of the decrement. And so, now whenever we write an autocall, all we're tied to is interest rates. We're 11% around above the risk-free rate every single week we write an autocall. And so, we're able to deliver a high stable coupon with time diversification, where that coupon largely doesn't change relative to risk-free rate, near about 11% over risk-free, because we've stabilized Vol and we've stabilized the dividend.

Use Cases for CAIE

Nadig: So, let's talk about some use cases here. The advisors I've talked to are using these. Use them, I think, fairly appropriately in their equity thinking as opposed to, "I'm not replacing a bond." Even though it has a lot of bond-like characteristics, you're cutting 5% out of your equity sleeve to put this in. To me, that feels like you're trying to generate some income off some capped upside in your equity portfolio. It lets you stay invested while actually generating income. That's a competitive space right now. There's a lot of folks out there who do a lot of covered call strategies, all sorts of things. How do you compare what you're getting out of something like this versus a classic equity premium income style covered call strategy?

Kaufman: Yeah, there's a lot of different covered call ETFs in the market. You're selling off your upside, collecting an income, and then you have straight-line downside exposure, you know, which is offset by your income. Here you don't have that downside exposure on a par basis. You've got a barrier, and so you're getting a lot more protection over time because you have those built-in barriers. And then we can deliver a high stable coupon.

So, if you're comparing to the covered call space, you're going to get a little bit more of a stable coupon, and what we've seen is higher on average than if you're doing a covered call strategy and you're getting various coupons with volatility. The covered call space is about a $150 billion market. And structured notes, the autocall dominates derivative income, it's about a $100 billion market.

You know, to your point, we've met a lot of advisors that are using autocallable notes in their practice. They love that type of structure. What they don't really love is that they get called away in 6 to 12 months. They have to go buy a new one, the parameters change on them. It's operationally inefficient. They can't really use it in their models. And we built this initially for them. We knew there were a lot of folks looking for this type of strategy. They came out of the woodwork more than I expected. And they're saying, “This is the easy button for me”, you know, I'll take that marketing term. It's their word, it's not mine, but they're using that widely across their practices now. We had one advisor who said, "I fly to New York every quarter, meet with all the banks, try to find the right notes for my clients." Said, "I canceled my flight. I don't need that anymore. This makes my practice a lot more efficient." So we are seeing a lot of adoption that way.

Nadig: Is there a chance that as market conditions change, right? I mean, we are in a fairly frothy market right now. I'm certainly not calling for things to go down. I'm all in long. Tut, you know, if we did have another, like, with 2022 where, you know, we sort of grind down for down 20% year kind of thing, that doesn't cause these products to blow up or anything like that, but it would change the market for getting new autocallables, right? If we're in a vol depressed down market where we, like, you know, a stagflation kind of market, what's the implication for the pattern of returns you're going to see? Is it just that everything's going to compress and it's not going to seem quite as juicy?

Kaufman: That would be true for a covered call, but as I said, we are controlling those market dynamics. We are stabilizing volatility at 35%. So, it doesn't matter what happens in the market. Our volatility reference index is going to be 35%. Right. And so, we can stabilize around that high level. The only thing we're affected by is interest rates. So, let's take those kind of three scenarios you laid out because we have an index history we can look at.

So, that 2022 environment, where you had a drawdown in both bonds and equities, your principal was intact. You had no breaches. All of your coupons were paid. You might have traded at a little bit of a discount to par, but you did not breach your coupons. So, then we can take, like, Liberation Day. That would be the risk scenario. A severe fast drawdown in the market. You know, fortunately that recovered, but you would have had some outsized loss on your reference index. The actual, you know, fund strategy would have performed in line with the S&P, but then that recovered fast. And so, you're back, you know, now the whole portfolio is back at par.

So, then let's take severe sustained market downturn, like the Global Financial Crisis. That's the risk you're taking on where you got a deep severe correction. I don't always talk about the COVID correction, but that was a great environment for this strategy because vol was above 35. Right. And so, you were probably half as exposed to the market, and the drawdown in the strategy was about a third of what it was in the S&P. So, in that sense, the S&P would have had to have fallen 70 or 80% to breach your 40 barrier.

Nadig: But that change in volatility, right? Which again, for investors who are thinking about this in leverage terms, it's sort of the inverse of the vol in that sense. Right? When a low vol environment you're taking lots of leverage. High vol environment you can be taking, you know, fractional leverage, less than 100%. That's going to change fairly slowly. Like, even if we go from a vol 30 to a vol 10 to a vol 30 market over the course of a quarter, all that's going to do is impact, “Okay, well, one of our 52 got priced at vol 10”, and then a couple weeks ago go by, and you're like, “Well, now one gets priced at vol 35 because the market did a thing that made it vol 35”.

Kaufman: That's exactly right.

Risks and Digging Into Distributions

Nadig: So, it's going to be very smooth how that's going to adjust over time, right?

Kaufman: When you take a 35 target vol index with a decrement and tie it to a 40% five-year autocallable note and do that 52 or more times, you're left with just a smooth experience. It looks a lot like the S&P over time, 18% vol over the last 10 years. You had no principal breaches, no NAV drag, no coupon breaches outside of the financial crisis.

Nadig: And, you know, theoretically, yeah, you're giving up some upside, right? If the market goes up 30% next year, you're not getting 30% out of this.

Kaufman: There's a lot of upside risk. Yes.

Nadig: Well, but I mean, that's what you're doing. You're molding the volatility on the tails. You're accepting some deep left volatility. You're accepting not getting some deep right volatility, and instead, what you're getting is some of this protection and some of this pattern of returns that you get to mold. I do want to hit taxes as the last thing. The way you guys structured this, although I imagine you could have structured it in a number of ways, is that all of the distributions are RoC, is that right? Return of capital?

Kaufman: I'd say about 80 to 90%, yes.

Nadig: Okay. So, the Treasury component gets distributed…

Kaufman: We have to distribute the Treasury component. We can offset that by the fee, and then we also last week just moved into box spreads instead of Treasury. So, we can do about 60% box spreads. So, the end conclusion is about 90% will be that.

Nadig: So, the part that comes out of the collateral, which would either be box spreads or Treasuries, is going to get tax pass through. The part that's coming from the swap is getting passed through as return of capital. And so, for the advisor, that means at the end of the year, when most likely I'm going to get called, because most autocallables get called, because the market generally goes up, and then the person who issued it wants to issue new ones. So, they call this, reissue them. That capital gain's treatment is going to generally be long-term because it's been there for more than a year. Does it being rotated in this fund change that treatment at all, or do you expect that most folks are going to end up with long-term treatment?

Kaufman: Yeah, it's going to be from my perspective better than long-term treatment. When you ladder this all together and do it synthetically, you know, the most of that coupon, like I said, will be Return of Capital. That will reduce your cost basis over time. It'll show up on line three of your 1099. And then once you've exhausted that cost basis, that's when you'll start paying long-term cap gains. So, if you hold the ETF, you'll have largely tax-deferred income until you sell. Or, if you hold for a year and then sell, to your point, you'll pay long-term capital gains on that. But the ETF itself will not be kicking out any long-term capital gains.

Nadig: Right, right. That's going to be on your taxes. So, what happens when you exhaust your basis is your problem.

Kaufman: Yes. And it really is the beauty of doing this in an index approach because the coupons just accrete inside the index. We can look through that, see how much money we owe you, and just pay it off of the NAV from the ETF. And then from a trading perspective, JP Morgan is trading that swap with us that's based exactly on the index. We give the market makers that index, so they can see exactly what it's worth. And that, and we can trade it 1 to 3 cents wide all day long because you got all three pieces just communicating with each other, and they all have to match every minute of the day.

Nadig: Okay. Let's move on. You've carved out this chunk of the structured products market, particularly around the E-mini 500s, which is what all this is based on. I know you've got product in the works for other indexes. How far can you go with stuff like this? Because obviously you need a very liquid and efficient derivatives market to take all the other side of this. So, what can and can't you do with this?

Kaufman: That's a great question. You know, Calamos is a 50-year-old risk manager. We've been doing risk management and alts for a very long time. We're moving into what I would call the future of ETFs and carving out alts exposures. You have to do it on liquid underlyings. You need a liquid options market. You need a liquid underlying market.

So, what does that mean for us? It's S&P 500. We have CAIQ coming on the 12th, the Q's version. We've done protected Bitcoin, a $2 trillion asset. So those are the markets that we like to operate in, high levels of liquidity. And we can discuss with our counterparties before we even launch a product, "How big can we get? How much can you take down?" And, you know, how much.

Nadig: Because that's an issue. It's hard to close an ETF. You really need…

Kaufman: We don’t want to do that, yeah. Exactly. On the way up or down.

Nadig: Right. All right. Matt, it's been great catching up. Thanks for taking all the time.

Kaufman: Good to talk to you.

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