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New Stock ETFs Offering ‘100%’ Downside Protection Are Coming

Via BBG:

"Calamos Investments filed Monday for so-called “structured-protection” exchange-traded funds that will track a portion of the returns of the S&P 500, Nasdaq 100 and Russell 2000 while hedging 100% of the downside via the options market, according to a Monday filing.

The first fund launching within the suite is the Calamos S&P 500 Structured Alt Protection ETF, which aims to match the price return of the SPDR S&P 500 ETF Trust (ticker SPY) up to a cap of 9.65%.

The catch: Investors looking to reap the full protection will need to buy it on launch day — May 1, 2024 — and hold it, come rain or shine, through April 30, 2025. After that, a new defined period of cover kicks in.

CPSM, like others in the upcoming ETF lineup, will primarily invest its assets in derivatives by buying and selling a combination of call and put options to cushion against market volatility, according to the fund’s prospectus. A regulatory filing notes there’s no guarantee the fund will be successful in providing the much sought-after downside protection."


I'll need to read the prospectus to fully understand the mechanics, but this sounds kind of like those 'Principal Protection Notes' that Wall Street was foisting on retail investors in the years just before the GFC. Back then, with those products, if the index closed even ONE day outside of the collar, you forfeited everything but your principal -- so it became more like an unsecured loan to the issuer. But that said, if someone could guarantee (key word!) that vaunted zero downside and a 9.65% cap on the upside, I'd probably take it.

... of course if/when treasuries get back to 8% or more, that'd be a different story and I'd probably pounce on that. :)
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Comments

  • edited April 22
    rforno said:

    A regulatory filing notes there’s no guarantee the fund will be successful in providing the much sought-after downside protection."

    A guaranteed return of 0% - 9.65%? There's simply no free lunch out there, so I remain skeptical.
    Let's see how it eventually performs.

    Kind of annoying that, at least in theory, you have to purchase on May 1st (and then hold for 1 year) to get the full benefit.

  • edited April 22
    Hi Ron,

    Thanks.

    Have you compared this with the Innovator ETFs?

    https://www.innovatoretfs.com/define/etfs/

    I have not looked at them in nearly two years but my recollection is they carry similar flavor to this. I am hoping this being a newest one, it is better and improved for the consumer over all the earlier ones. With so many ETF launches these days, I can not keep up with the ETF universe. May be we should start an ETF thread! Look forward to what you learn when you finish reading the literature.

    "aims to match the price return of the SPDR S&P 500 ETF Trust (ticker SPY) up to a cap of 9.65%"

    Before or after fees and expenses?

    I like the 0-9.65% collar.
  • Innovator recently issued "AAPR" which is capped at 18% gains, and supposedly offers 100% "buffer" protection against losses (for 2 years, until April 2026).

    There are a lot buffer funds flooding the market.
  • edited April 22
    @JD_co,

    Am I correct in assuming that the Innovator defined outcome and buffer products just get rolled, rather than get liquidated, when the current outcome period ends so investor's do not have a taxable event? Of course, when the current outcome period ends, the fund would have to assess and announce new outcomes for the subsequent outcome period which outcomes we may or may not like to continue to hold the ETF. I would not hold these in taxable accounts anyway because I may have to sell these at some point.

    Imagine all the derivatives being used for these protection / buffer strategies and if the counter party risks are to be considered.

    In any case, looking at AAPR, I think the 100% loss protection is by the end of the 2 year outcome period. Similarly, the 18% upside cap is by the end of the 2 yr period, which comes to less than 9% per year total return. Both anticipated outcomes before fees and expenses. As of 4/22, it lost 1.54% vs SPY 4.59%. At some point some investors may think they had more loss than they anticipated and exit. So, I think having right expectations is important for investors.

    https://www.innovatoretfs.com/etf/default.aspx?ticker=aapr

    The quest for the magic (no loss and returns in excess of fixed income) investment product, like the quest for eternal youth, continues!
  • I am very skeptical about it. There is no free lunch. The derivatives they are going to buy to protect downside will cost money and will be a huge drag in good times. And from the buy and hold requirements it sounds like it will function more like a closed end fund and if at any point investors decide to see the ETF, it is possible that there are no buyers. I see this sort of structures are very problematic for ETF. That's why they include language that the fund may fail to achieve its objectives and I say it is more like will end up like that. It's a gimmick I'd say.
  • edited April 22
    Well said @Investor. Nice to hear from you.

    Calamos has been on a binge lately opening new funds. Several this year. No complaint. I have significant exposure to two of their more established funds. One wonders however whether they might be spreading themselves too thin.

    Two-month old CANQ is a curious bird. Supposed to provide NASDAQ upside with bond backed downside protection.
  • hank said:

    Well said @Investor. Nice to hear from you.

    Hi Hank. I am stopping by every now and then. I have become largely a passive investor so still working in simplifying the leftovers of my complicated active portfolio as time goes on.

    In this regard, I remember John Hussman and Hussman Funds and how he has failed to deliver over and over again despite writing very eloquent reports and his is mutual fund which is a bit more flexible than actively managed ETF.
  • edited April 27
    rforno said:

    "Calamos Investments filed Monday for so-called “structured-protection” exchange-traded funds that will track a portion of the returns of the S&P 500, Nasdaq 100 and Russell 2000 while hedging 100% of the downside via the options market, according to a Monday filing.

    Investor said:

    It's a gimmick I'd say.

    I agree, if for a different reason.

    In the world where you would get any benefit from 100% downside protection - if there is a world left by then - SP500 would be down to '0' and, should they still be around to pay out, your money would be worthless anyway. (In fact, if they really wanted to get attention, they should offer a fund hedging in $'s up to, say, 95% downside and switching payout to 'chips' - my choice: potato - if the reference index drops any further.)

    Historically, since 1950, there has been one instance of > 50% DD on SP500 and four in the 30-40%'s (if you believe this link). So, when dabbling in hedged ETFs, I find ~ 15-20% downside protection more reasonable - which also allows for a higher upside.
  • It's not as though it costs the same amount for each rung of protection - that the first 10% of protection costs $X, the next 10% of protection costs the same amount, and so on. As the risk declines, so does the cost of incremental protection. That last 5% you want in chips should come as a freebee.

    Still, seek and ye shall find. ETFs with 15% and 20% downside protection:
    https://preservingwealth.com/15-20-buffer-etfs-moderate-downside-protection/

    More generally, here's M*'s column on buffer ETFs (including variants designed to address the need to buy on a fixed date and hold for precisely a year)
    https://www.morningstar.com/etfs/going-beyond-defined-outcome-etfs

    The protection is not a drag, but a cap. That is, participation rate is 100%, but only up to a given return. And as with principal protection notes, "participation" is in price only; it doesn't include divs.

    Here's the generic investment return vs. reference return graph (from Blackrock).
    image
    https://www.blackrock.com/us/financial-professionals/insights/buffer-etfs
  • My investment rules
    1) I ever lock my money or give it away for good in return for a promise.

    2) There are plenty of funds with free lunch according to my definition. A fund that matches or exceded an index performance with lower volatility and/or a better Sharp ratio is a free lunch.
    PRWCX vs VFINX since 1990 = https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=1TnNzrkY22eTB4YvbDRCiw

    PIMIX(bonds VS SPY (stocks) 2010-2013 = lots of free lunch. PIMIX Sharpe at 3.6 is amazing.
    https://www.portfoliovisualizer.com/backtest-portfolio?s=y&sl=3saXCD3G0ejh3EDr0GGTws
  • PIMIX is a prime example of why it's helpful to have access to the Institutional class of any fund - you can save anywhere from 25 to 75 bps per year in expenses. Especially for bond funds, it's a difference maker.

    Having to pay a Transaction Fee always feels "wrong", but should work out fine in the long run - assuming you hold on.
  • edited April 29
    Let's not kid, or let anyone else, kid us.

    If you "held onto" PIMIX for the last 5 years, you got yourself an average annual TR of of 3.07%, and for 10 years, 4.27%.

    Again, in an attempt to beat a dead horse, our 5-yr CP CD ladder was paying ~4% during that 5-yr period and is paying over 5% now.

    PIMIX sounds like a "free lunch" (sic) at McDonald's or worse to me.
  • edited April 29
    Looks like PIMIX has done a little better longer term than the previous post reveals. (+7.68% over 15 years). Let’s remember how dastardly low interest rates were over most of the past decade. That said, for a fund that’s invested about 35% in sub-investment grade paper, I’m not overly impressed either. The .62% fee is a bit high as well.

    Take a look at (probably riskier) RPSIX over that same term: 3 yr -1.06%, 5 yr +2.03%, 10 yr +2.62%, 15 yr +4.83% . Interestingly, RPSIX carries an identical .62% fee.

    So, with a 10-15% equity component, RPSIX lagged PIMIX over all the terms cited. No horse in the fight. Just adding to what’s already been said.

  • edited April 29
    @rforno,
    May 1st is only a couple of days away.

    Any additional info you are able to share about CPSM?

    The mechanics may be simple. The fund could just buy 1 year collar from a legitimate counterparty.

    Below are my notes for me to explore and if you already have answers, please share.

    Do they disclose who the counterparties are for the derivatives they are employing? Does the ER include upfront cost of the collar the fund purchases when it launches? unlikely!
    Does the fund allow new investors (via creations) after the launch?
    (If the fund is greedy and lets other investors to come in after the launch when the cost of the collar is high, that cost will be shared by all investors if the defined outcome (0-9.65%) is before all expenses and fees.)

    I think the idea is legitimate. My only concern would be how it is implemented. JPM and BLK have buffer products but not products with complete down protection (even at the end of the defined period). May be @David_snowball can find out if they are planning to launch.
  • BaluBalu said:

    @rforno,
    May 1st is only a couple of days away.

    Any additional info you are able to share about CPSM?

    The mechanics may be simple. The fund could just buy 1 year collar from a legitimate counterparty.

    Nope, I was just passing along the BBG snippet.

    And IMO nothing in the markets is ever *that* simple/easy!
  • edited April 29
    I think it is worth reading the articles @msf posted in this thread.

    I would be interested in posters' comments comparing BUFB (and BUFF) and HELO, the laddered buffering ETFs. if you have to choose one, which one would it be to buy on May 1?

    https://www.innovatoretfs.com/etf/?ticker=bufb (buffering against first 9% loss)
    https://www.innovatoretfs.com/etf/?ticker=buff (buffering against first 15% loss)
    https://am.jpmorgan.com/us/en/asset-management/adv/products/jpmorgan-hedged-equity-laddered-overlay-etf-etf-shares-46654q724 (buffering against the losses from 5 to 20%)

    BUFB has been around for two years and BUFF has been around since Aug 11, 2020 (a different fund before this date) and neither made any distributions - management fees 0.1% and acquired fund fees 0.79%. If we like the returns and risk, tax efficiency is a welcome bonus here.
  • Thanks, Ron and Shadow.

    May 1, with FOMC activity, could be a market moving day.
  • edited April 29
    BaluBalu said:

    Thanks, Ron and Shadow.

    May 1, with FOMC activity, could be a market moving day.

    [narrator] "It's actually 'Rick'". :)
  • @rforno,

    Apologies. I am sure you corrected me before. I am terrible at remembering names. Hopefully, it will stick this time. Thanks
  • BaluBalu said:

    @rforno,

    Apologies. I am sure you corrected me before. I am terrible at remembering names. Hopefully, it will stick this time. Thanks

    No worries!
  • edited April 29
    PIMIX outperformance was largely due to MBS acquistions in the aftermath of the Global Financial Crisis.
    Messrs. Ivascyn and Murata backed up the proverbial truck. Kudos to them!
    This may have been a once-in-a-generation opportunity.
    PIMIX returns have generally been decent the past five calendar years but they pale compared to the past.
    The fund's 5 Yr and 10 Yr trailing returns were in the top 1% of the Multisector Bond category as of 10/31/2017.
    PIMIX returned 6.87% and 9.33% during these periods which exceeded the BBgBarc US Universal
    benchmark's return by 4.38% and 4.85% respectively.
  • edited April 30
    How did we get on this extended PIMIX conversation? Is it OK if talk in this thread about buffer and other downside protection funds?
  • update:

    https://www.sec.gov/ix?doc=/Archives/edgar/data/1579881/000110465924055004/tm245814d13_497.htm

    File No. 333-191151

    CALAMOS ETF TRUST
    (the “Trust”)

    Calamos S&P 500 Structured Alt Protection ETF – May
    (the “Fund”)

    Supplement dated April 30, 2024
    to the Fund’s Prospectus dated May 1, 2024

    This supplement updates certain information contained in the Fund’s prospectus and should be attached to the prospectus and retained for future reference.

    Capitalized terms not defined herein have the same meaning as in the Fund’s prospectus.

    As described in the Fund’s prospectus, an investment in shares of the Fund is subject to an upside return cap (the “Cap”) that represents the maximum percentage return an investor can achieve from an investment in the Fund for the Outcome Period of approximately one year. The Fund’s initial Outcome Period will begin on May 1, 2024 and end on April 30, 2025. The Fund’s Cap for the Outcome Period beginning on May 1, 2024 is set forth below.

    9.81%

    (9.12% after taking into account the Fund’s management fees)

    The Fund’s return will be further reduced by brokerage commissions, trading fees, taxes and non-routine or extraordinary expenses not included in the Fund’s management fee, as described in the prospectus.


    The Fund’s prospectus is amended to revise all references to the Cap to reflect the Cap for the initial Outcome Period, as set forth above.



  • Thank you, @Theshadow.

    "The Fund’s return will be further reduced by brokerage commissions, trading fees, taxes and non-routine or extraordinary expenses not included in the Fund’s management fee, as described in the prospectus."

    I am reading the above to mean the cost of the collar is accounted for in arriving at 9.81% / 9.12% cap. I plan to read the prospectus later.

    More likely than not I am biting this tomorrow or day after.
  • edited May 1
    Bought before FOMC. Could not tell the inception AUM but the Volume was good. It is possible it was marketed well.
  • 3 days old. AUM $33.3M
  • edited June 12
    BaluBalu said:

    Bought before FOMC. Could not tell the inception AUM but the Volume was good. It is possible it was marketed well.

    I did not add after the initial purchase because AUM is not increasing after the first 10 days when it gathered about $90M- current AUM $110M. Currently, BUFB AUM is about the same.

    It is intriguing to me why BUFB (discussed earlier in this thread) has not gathered more AUM (and interest in this forum), given how well it has done in the 28 months since inception. It has done better than most moderate allocation funds and surrogates (like JHQAX (HELO)) forum members appear to use.
  • edited July 2
    CPSJ for July started yesterday. Not well subscribed yet. In the July version, Starting cap dropped from the May version, CPSM.

    https://www.calamos.com/funds/etf/

    Note that with these products, there is no guaranteed positive return, there is only a max return (cap).

    Pre GFC, there were products from insurance companies that I recall guaranteed the FF rate and capped as a percentage of positive SPY price return. I wonder why those are not better than the zero (negative net of ER) guaranteed return on the Calamos products, which also have counterparty risk but presumably are more liquid as ETFs.
  • Because insurance companies mispriced those products and lost billions and so dont do it anymore.
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