Autocallable income ETFs have caught the attention of advisors and investors in recent months, attracting significant inflows—and for good reason. Autocallable income ETFs can offer a compelling alternative source of yield in a highly risk-managed strategy, all made possible through the unique structure of the autocallable note itself.
This all sounds good, except many investors may be asking, “What’s an autocallable note?” If they don’t understand the basic building block, they may be wary about allocating money to an ETF portfolio of them. That said, it’s important to first understand the nuts and bolts of how these notes function.
An Autocallable Note Is All About the Coupon and the Barrier
In simple terms, an autocallable note is a structured product that pays regular coupons linked to an equity index and can be called early; it provides downside protection up to a specified barrier level. To appreciate the advantages and limitations of an autocallable note, it’s important to understand how its two main components work together.
Coupon: Like most income securities, an autocallable note pays a coupon. However, this coupon has several unique characteristics. First, the payout is typically higher than most fixed-income bonds, and second, it is tied to equity market performance based on a reference equity index.
Barrier: As mentioned, the note is based on a reference index with a barrier or threshold. As long as the reference index does not drop below that floor, for example, a -30% decline, the note will continue to pay its coupon. If the reference index experiences a severe downturn and breaches -30%, coupon payments will cease. However, payments will resume if the index recovers above the threshold.
How CAIQ’s Laddered Autocallable Portfolio Utilizes Barriers
Now let’s examine how a portfolio of autocallable notes functions in a laddered ETF, such as the Calamos Nasdaq Autocallable Income ETF (CAIQ), which provides investors with continuous exposure to a portfolio of 52 or more autocallables, staggered weekly, each with similar terms and whose coupon payments and principal at maturity are tied to the same reference index. All autocallables within CAIQ’s portfolio have a coupon and maturity barrier of -30%.
In addition, all of CAIQ’s notes use the MerQube Nasdaq-100 Vol Advantage Autocallable Index as their reference index. The performance of this index will then determine how each autocallable delivers income and eventual principal.
If the MerQube index either performs positively or stays neutral, the autocallable will generate income on a monthly basis until the note is called. Then the investor will receive the principal in return.
Should the index decline slightly but remain above the -30% level, the same thing happens. The investor still receives income and gets the principal back once the note is called.
However, the risk comes into play if the index drops below -30%. In this scenario, income payments will stop until the index rises above the -30% threshold. Furthermore, if a note reaches maturity below the barrier, the investor will experience a loss of principal relative to the decline. The good news is that downturns of this magnitude are historically rare.
This is how the barrier levels of autocallable notes can provide a more attractive risk profile and deliver equity income. Funds like CAIQ can let you enjoy income and maintain principal, even if the market is encountering a bit of turbulence. As long as the index stays above its barrier level, CAIQ’s laddered notes can continue generating income.
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Before investing, carefully consider the Fund’s investment objectives, risks, charges and expenses. Please see the prospectus and summary prospectus containing this and other information which can be obtained by calling 1-866-363-9219. Read it carefully before investing.
An investment in the Fund is subject to risks, and you could lose money on your investment in the Fund. There can be no assurance that the Fund will achieve its investment objective. Your investment in the Fund is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. The risks associated with an investment in the Fund can increase during times of significant market volatility. The Fund also has specific principal risks, which are described below. More detailed information regarding these risks can be found in the Fund’s prospectus.
The principal risks of investing in the Calamos Autocallable Income ETF include: autocallable structure risk, contingent income risk, early redemption risk, barrier risk, authorized participant concentration risk, calculation methodology risk, cash holdings risk, correlation risk, costs of buying and selling fund shares, counterparty risk, credit risk, derivatives risk, equity securities risk, index risk, interest rate risk, investment in a subsidiary, laddered portfolio risk, liquidity risk, market maker risk, market risk, new fund risk, non-diversification risk, premium-discount risk, secondary market trading risk, swap agreement risk, tax risk, trading issues risk, valuation risk, and volatility target index risk.
Autocallable Structure Risk: The Fund’s returns are correlated to the performance of a synthetic portfolio of autocallable notes tracked by the Laddered Autocall Index. Autocallable notes have specific structural features that may be unfamiliar to many investors.
Contingent Income Risk: Coupon payments from the Autocalls are not guaranteed and will not be made if the Underlying Index falls below the Coupon Barrier on observation dates. This means the Fund may generate significantly less income than anticipated during market downturns.
Early Redemption Risk: Autocalls in the Portfolio may be called before their scheduled maturity if the Underlying Reference Index reaches or exceeds the Autocall Barrier on observation dates. This automatic early redemption could force reinvestment of that portion of the portfolio at lower rates if market yields have declined.
Barrier Risk: If the Underlying Reference Index falls below the Protection Level Barrier at the maturity of an Autocall in the Portfolio, that portion of the Portfolio will be fully exposed to the negative performance of the Underlying Reference Index from its initial level. This conditional protection creates a binary outcome that can result in sudden, significant losses if barriers are breached.
The MerQube Nasdaq-100 Vol Advantage Autocallable Index is designed to reflect the collective performance of a theoretical portfolio of 52 to 260 synthetic Autocallables arranged in a laddered structure with staggered entry points with similar fixed parameters (the “Parameters”) as described below within the section entitled “Autocallable Index Portfolio Characteristics”.
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