Transcript

Autocallable ETFs · Trillions

0:05
Speaker 1: Loker trillions. I'm Joe Webber and.
0:07
Speaker 2: I'm Eric Balchernas.
0:11
Speaker 3: Eric, you sent a note that caught my attention because
0:16
Speaker 3: you were like, it's the wave of the future. Manufactured
0:18
Speaker 3: high yield gonna be a big category. I was like,
0:22
Speaker 3: that's like Eric Balchina's at his finest. Let's unpack those three.
0:27
Speaker 3: The category a new one Auto callables. Yeah.
0:31
Speaker 2: I honestly I'd heard the word a couple of times,
0:33
Speaker 2: didn't know what it meant. This is part of a
0:35
Speaker 2: bigger theme that we call yield three point zero where
0:38
Speaker 2: manufactured yield. We used to use the meme of the
0:41
Speaker 2: breaking bad where using the lab making the meth. They
0:44
Speaker 2: are making yield that isn't from like bonds or stoughts.
0:48
Speaker 2: They're just making it and it's very popular, especially if
0:52
Speaker 2: it's a big yield.
0:53
Speaker 4: So auto callibles are.
0:55
Speaker 2: One of the latest areas that has a big yield,
0:58
Speaker 2: usually thirteen fourteen percent at least in the colum most
1:02
Speaker 2: etf that I looked at, And there is a huge
1:05
Speaker 2: demand for this. People love income. I've been to the
1:08
Speaker 2: Money Show several times, especially older people. They just go
1:10
Speaker 2: crazy for income. So these products are quite complicated. In
1:15
Speaker 2: my opinion. I used to say VIX and China were
1:17
Speaker 2: the two most complicated areas of ETFs. This is more complicated.
1:21
Speaker 2: So I want to make sure that we understand this
1:24
Speaker 2: and that we could explain it to you know, our
1:28
Speaker 2: aunt or uncle, like just somebody in our lives.
1:30
Speaker 1: We're gonna try, but we can't.
1:32
Speaker 2: End this podcast until we both understand it. I think
1:36
Speaker 2: I get it, but I get it on a very
1:38
Speaker 2: superficial level that I just learned it quickly for the note,
1:40
Speaker 2: but I really want to get it, and also want
1:42
Speaker 2: to make sure that people are aware of like the
1:44
Speaker 2: pros and cons of these, because Joel, they're going to grow.
1:47
Speaker 2: This thing came out. This calumost One already has four
1:50
Speaker 2: hundred million, and for something complex to come out, it's
1:53
Speaker 2: pretty good money for that, so I would suspect. And
1:55
Speaker 2: I'm hearing a lot of other issuers are going to
1:57
Speaker 2: launch these, And it's a word I hear when I
1:59
Speaker 2: travel around, including from our index team. They bring up
2:02
Speaker 2: auto callables all the time. So it's a word you're
2:04
Speaker 2: gonna hear more and more. Might as well get get
2:06
Speaker 2: our heads around it.
2:06
Speaker 3: Now I'm surrounded by papers trying to make sense of this,
2:10
Speaker 3: it's kind of hilarious.
2:12
Speaker 1: Uh I don't think I understand it.
2:14
Speaker 3: So I'll be the litmus test and to help us
2:18
Speaker 3: make sense of this, we're gonna be joined by Matt
2:21
Speaker 3: Kaufman Global ahead of ETFs at Klamos Investments First market
2:26
Speaker 3: or this year with a UTF in this space, this
2:33
Speaker 3: time my trillions auto callibles.
2:38
Speaker 1: Matt, welcome jillions.
2:40
Speaker 4: Joel, thanks for having me. Great to be here.
2:42
Speaker 1: How does this stuff work?
2:45
Speaker 4: We are going to hopefully get off of the meth analogy. Yeah,
2:48
Speaker 4: that was We'll move toward first step something.
2:53
Speaker 2: Listen, Matt, Matt goes to work every day in like
2:55
Speaker 2: this white suit. Then he's in there testing different things. Yes,
2:59
Speaker 2: that was the hollow costing this year, so you might
3:03
Speaker 2: as well.
3:03
Speaker 4: You already have ramid lab.
3:06
Speaker 3: But Colam Moos came out with a ticker ce ai E.
3:10
Speaker 3: That's the ticker if you want to look into this more.
3:12
Speaker 4: That is the ticker Auto Callable Income ETF. So let's
3:16
Speaker 4: take our minds from the equity markets and move it
3:20
Speaker 4: toward the fixed income market. So think like a bond
3:23
Speaker 4: that will pay you a monthly income and return your principle.
3:28
Speaker 4: As long as the equity markets don't fall too far.
3:31
Speaker 4: If you can understand that, you can understand an auto callable.
3:35
Speaker 4: So it's a lot like a bond that pays a
3:37
Speaker 4: monthly income and delivers your principle back to you either
3:40
Speaker 4: at maturity or if you're called away early. That is
3:45
Speaker 4: the auto call feature. And it's tied to the equity markets.
3:48
Speaker 4: So bonds are usually tied to duration and credit. This
3:51
Speaker 4: is tied to the equity markets. That's essentially it.
3:54
Speaker 3: That was a really great way of breaking it down.
3:57
Speaker 3: It's also a quote that you had in the story
3:59
Speaker 3: Waltree Cream's more auto callables into ETFs and race for
4:02
Speaker 3: yield by our colleagues at Bloomberg News.
4:03
Speaker 1: Yes, Matt, though I got that part. Where does the
4:07
Speaker 1: yield come from? The income? Where am I getting? Where
4:10
Speaker 1: are you getting that income to give it to me from?
4:12
Speaker 4: Yeah, great question. I think one of the easiest ways
4:15
Speaker 4: to think about this is to you know, normally you
4:17
Speaker 4: would frame it around a covered call so that covered
4:20
Speaker 4: call space, as Eric was talking about, is a massive market.
4:23
Speaker 4: It's one hundred and fifty billion dollar market. I was
4:26
Speaker 4: fortunate enough to be at Power Shares in early two thousands.
4:28
Speaker 4: We built the first buy right ETF in two thousand
4:31
Speaker 4: and seven. I think it was a little before it's time.
4:33
Speaker 4: You know, nobody really bought it back then. Now that
4:36
Speaker 4: space is one hundred and fifty one hundred and sixty
4:39
Speaker 4: billion in assets. It's a massive market. And you know,
4:42
Speaker 4: what are you doing with a covered call? You're selling
4:44
Speaker 4: off your upside. It's a by right strategy. Twenty years ago,
4:48
Speaker 4: very few people understood that term. Today it's commonplace. There's
4:51
Speaker 4: equity premium income strategies. You're selling off upside collecting an
4:55
Speaker 4: income payment, and auto callable is a long dated put
4:59
Speaker 4: right stra strategy. So take the other side of the trade.
5:02
Speaker 4: It's a long dated, say five year put right with
5:06
Speaker 4: a call feature, and that's it. That's all. You're collecting.
5:10
Speaker 2: What he just said, and he goes, that's it. You
5:11
Speaker 2: come on, dude, it's okay.
5:14
Speaker 4: You want it simple. So we're starting simple.
5:16
Speaker 2: I'm gonna break this down. Okay, I have ten thousand dollars.
5:19
Speaker 2: I give you ten thousand dollars to this. So first
5:22
Speaker 2: of all, who makes the auto callable? Like is it
5:25
Speaker 2: a bank? And this is like what like a swap
5:27
Speaker 2: contract or? Like whom I am I doing? It's just
5:30
Speaker 2: like Michael Burry where I'm walking into Goldman and I
5:33
Speaker 2: say I have this idea and the bank just says, okay,
5:35
Speaker 2: I'll make a thing for you. Is that what we're
5:38
Speaker 2: doing here?
5:38
Speaker 1: Yeah.
5:38
Speaker 4: So you can't go to the market and you can't
5:41
Speaker 4: go to the listed options market and find an auto
5:43
Speaker 4: callable yield, you know, option that does not exist. You
5:48
Speaker 4: can go to the listed options markets and do put
5:50
Speaker 4: writing strategies, you can call writing strategies. But what we've
5:54
Speaker 4: done is we've partnered with JP Morgan. There you go,
5:57
Speaker 4: biggest bank in the world. So yes, it is a
5:59
Speaker 4: bank strategy. You cannot do this with listed options. So
6:02
Speaker 4: we've partnered with JP Morgan. We took their auto callable
6:06
Speaker 4: pricing methodology and we built a laddered version of this hold.
6:10
Speaker 2: On, hold on. What is JP Morgan's auto callable pricing methodology?
6:14
Speaker 2: So the first of all, what is the index that
6:17
Speaker 2: were based? What's the equity index?
6:18
Speaker 4: Sure, so let me let me explain this to you
6:21
Speaker 4: in a way that we can we can understand. So,
6:23
Speaker 4: you know, you talked about you know what happens if
6:26
Speaker 4: you have ten thousand dollars. So I brought monopoly money,
6:28
Speaker 4: you did I did. Yeah, I actually brought monopoly money
6:31
Speaker 4: here before, so we can we can play with this.
6:33
Speaker 4: So here, Eric, I'll give you one hundred dollars monopolyous.
6:37
Speaker 1: He just gave you a hundred back.
6:38
Speaker 4: It's easy. He would be a bad banker, and it's
6:40
Speaker 4: easier to think about that because it's a Let's let's
6:43
Speaker 4: pretend like that hundred dollars is the par amount.
6:45
Speaker 2: Okay, Okay, So.
6:46
Speaker 1: By the way, I get nothing. I don't like this game.
6:48
Speaker 4: You're going to be the Joel. You're going to be
6:50
Speaker 4: the market. You're going to go to the market here,
6:52
Speaker 4: all right, So Eric's gonna buy an auto callable. Note,
6:55
Speaker 4: I'll be the bank. So you're going to invest in
6:57
Speaker 4: an auto call but note, so give me your hundred
6:59
Speaker 4: oct here's sliding it across the table. Okay, now that's.
7:02
Speaker 1: Stuck in the middle. I'm moving it across.
7:04
Speaker 4: Let's put it.
7:04
Speaker 2: We don't want it in free parking.
7:05
Speaker 4: Sure, So let's put some terms to this note. Let's
7:08
Speaker 4: say it has a five year life, it has a
7:10
Speaker 4: sixty percent principal coupon barrier. So we're gonna pay you
7:15
Speaker 4: monthly income as long as an equity index does not
7:19
Speaker 4: fall by forty.
7:21
Speaker 2: Percent during what time period?
7:22
Speaker 4: Every month?
7:23
Speaker 2: It's a monthly look, so if the S and P.
7:25
Speaker 2: Let's say it's the SMP index. If it doesn't fall
7:27
Speaker 2: forty percent a month.
7:28
Speaker 4: In a month while a starting date, so then I
7:31
Speaker 4: get a little a little something. Yeah, that's right, and
7:34
Speaker 4: then there's so and then there's the same thing at maturity.
7:36
Speaker 4: So let's just play this out.
7:37
Speaker 2: But hold on, does the forty percent restart in the
7:39
Speaker 2: second month. Uh, it's from the starting point we're starting
7:43
Speaker 2: for interception. And let's say the first month the SMP
7:46
Speaker 2: is down two percent. I get I get paid.
7:48
Speaker 4: So Joel, Joel gets to decided he's going to be
7:50
Speaker 4: the market here. Okay, okay, So let's say this pays
7:52
Speaker 4: twelve percent annualized income every month. So I've got you
7:55
Speaker 4: one hundred dollars safe here. So Joel, let's go thirty
7:58
Speaker 4: days in the future. What is the market going to do?
8:01
Speaker 4: Pick a number up or down?
8:02
Speaker 1: Right?
8:02
Speaker 3: This year, I'm gonna say, if we're if we're playing
8:05
Speaker 3: this from the beginning of the year, market gove up.
8:07
Speaker 4: Okay, let's say you're up five percent. So market's of
8:09
Speaker 4: five percent in a month, Eric, you get a dollar
8:12
Speaker 4: you're good.
8:12
Speaker 1: You're good.
8:13
Speaker 4: Okay. Next month, let's say the market.
8:15
Speaker 1: Well it happened, okay, kind kind of was a little chaotic.
8:19
Speaker 4: Okay, let's say it happens.
8:20
Speaker 1: Let's say market went down.
8:22
Speaker 4: Market goes down how much? Ten percent? All right, Eric,
8:25
Speaker 4: you still get a dollar. Market's down ten. It's not
8:27
Speaker 4: down forty, it's down ten.
8:29
Speaker 2: It resets every month.
8:31
Speaker 4: Uh, it's not, it's it's from the inception of the
8:33
Speaker 4: note to that month.
8:35
Speaker 1: I see.
8:35
Speaker 2: So because it went up and down. Now year to date,
8:37
Speaker 2: what do we down six percent or something?
8:40
Speaker 1: We were up five, Now we're down ten, So down
8:43
Speaker 1: five so far? Yeah.
8:44
Speaker 4: Right, So let's let's just keep playing out. Let's say
8:46
Speaker 4: the market is down forty percent the next month from
8:49
Speaker 4: inception no dollar for you.
8:51
Speaker 2: Hold on, stop real quick. So we're down five percent,
8:55
Speaker 2: so the market would have to go down like another
8:56
Speaker 2: thirty five percent. Then, so it hits forty percent year
8:59
Speaker 2: to date. Correct that month, I don't get a dollar.
9:02
Speaker 4: That's correct.
9:02
Speaker 2: And then because this got called in other.
9:05
Speaker 4: Words, the whole getting called yet.
9:06
Speaker 2: Oh okay, so don't get a dollar.
9:08
Speaker 4: Correct.
9:08
Speaker 2: Now the next month it goes up five percent.
9:11
Speaker 4: Your dollar kicks back in.
9:12
Speaker 2: I get another dollar, You get a dollar. Okay, what
9:14
Speaker 2: if it goes down another twenty percent from.
9:16
Speaker 4: The forty then you do not get your dollar, gotcha?
9:19
Speaker 1: Yes?
9:19
Speaker 2: So in other words, as long as it doesn't come
9:21
Speaker 2: above the forty percent watermark, I get no dollars. If
9:24
Speaker 2: it comes up above the forty percent of water mark,
9:26
Speaker 2: I start.
9:26
Speaker 4: Getting my dollars again, exactly.
9:27
Speaker 1: And the one hundred you just hold on to.
9:30
Speaker 2: Who How is this a good deal for JP Morgan?
9:33
Speaker 4: Uh?
9:34
Speaker 2: It seems a little too good, Like I feel like
9:37
Speaker 2: the number should be ten percent. That'd be fair for
9:39
Speaker 2: JP Morgan.
9:39
Speaker 4: Sure, No, that's a good question. So let's keep playing
9:41
Speaker 4: this out. So now you've got your hundred dollars still here.
9:44
Speaker 1: Yep.
9:44
Speaker 4: So five years from now, let's say the market is
9:49
Speaker 4: down twenty percent, you are maturing at par. You get
9:52
Speaker 4: your hundred dollars back. If the market is down forty
9:55
Speaker 4: percent or more, that's when you have principle at risk.
9:58
Speaker 4: So let's say the market is down forty percent five
10:01
Speaker 4: years from now. If I can make the sound in
10:03
Speaker 4: the in the mic, we're gonna tear your one hundred
10:05
Speaker 4: dollars bill by forty percent. You're gonna get sixty percent
10:09
Speaker 4: of your principle back. Oh, that is the risk that
10:12
Speaker 4: you're taking on.
10:13
Speaker 1: But he's collected income along the way. Correct if if it.
10:16
Speaker 2: So after five years, if I collected a dollar every
10:20
Speaker 2: month minus say like five months, that would be fifty
10:24
Speaker 2: five dollars against my sixty forty percent that I lost.
10:28
Speaker 2: So it would cush it in a little bit. That's
10:29
Speaker 2: like a cover call. Okay, yes, exactly.
10:31
Speaker 4: Okay, So that's how a single auto call of works.
10:34
Speaker 4: The call feature then would be if the market is positive,
10:37
Speaker 4: usually after a non call period like one year, then
10:41
Speaker 4: you are called away. JP gets the money back, your prince,
10:45
Speaker 4: you get your principal, you get your hundred dollars back,
10:47
Speaker 4: you get your final coupon payment. Good job shows over,
10:51
Speaker 4: everyone goes home, you have to go buy a new note.
10:53
Speaker 1: That's how it works.
10:54
Speaker 2: Wait, wait, that's that's when it gets called. I thought
10:56
Speaker 2: it got called if it goes down too much, No
10:58
Speaker 2: one goes up. Correct, So so when does it get
11:00
Speaker 2: called again?
11:01
Speaker 4: Yeah, so you're getting called when the market is positive
11:04
Speaker 4: after a one year nine all period.
11:07
Speaker 2: So if the market's up seven percent after like the
11:09
Speaker 2: market is up this year, it's up fourteen percent, so
11:11
Speaker 2: let's just say correct the year under. Now we're up
11:14
Speaker 2: fourteen percent in twenty twenty five, and therefore I would
11:17
Speaker 2: get the one hundred dollars back correct, and then I
11:20
Speaker 2: would have my twelve dollars because it every went down
11:22
Speaker 2: below forty exactly, so I would have So at that
11:25
Speaker 2: point the fund would automatically reinvest in.
11:27
Speaker 4: A new auto callable. That's correct.
11:29
Speaker 2: So now in that getting on the hundred dollars back,
11:31
Speaker 2: big reset, Well right now, a loss of money in
11:34
Speaker 2: that one hundred dollars getting called.
11:35
Speaker 4: Back or not?
11:36
Speaker 2: Those resets correct and you you reset it automatically.
11:39
Speaker 4: Well, so I'm teaching you about an auto callable, so
11:42
Speaker 4: we know how the auto callable works.
11:43
Speaker 1: Now.
11:44
Speaker 4: So what we have done with CIE is we've laddered
11:48
Speaker 4: exposure to fifty two or more of these. It's a
11:51
Speaker 4: weekly ladder, a laddered portfolio of auto callables. So now
11:57
Speaker 4: at week fifty three, if the market's down, you might
12:00
Speaker 4: lose coupon on one, I say, but you have fifty
12:03
Speaker 4: one others in the portfolio. So it's highly diversified.
12:06
Speaker 2: Wow, And the answer is in reality, in this fun CIAE,
12:12
Speaker 2: it is forty percent. That's the number. You don't want
12:14
Speaker 2: the market to go down below.
12:16
Speaker 4: For a severe and sustained time period.
12:18
Speaker 1: That's correct, Like, what's that mean?
12:21
Speaker 4: So we built all of this with JP Morgan and Mercube,
12:24
Speaker 4: a custom indexing provider, and this is all built inside
12:28
Speaker 4: of an index that we trade on swap with JP Morgan.
12:32
Speaker 4: So the risk would be a severe sustained market decline
12:36
Speaker 4: that never recovers, and that in five years your autocollables
12:40
Speaker 4: start to mature below the barrier.
12:42
Speaker 1: Let's back test it.
12:44
Speaker 3: What happened, What happens at the if March twenty twenty happens,
12:48
Speaker 3: we're back in the pandemic.
12:49
Speaker 2: Yeah, use one hundred dollars, put one hundred dollars in.
12:51
Speaker 2: Let's say I get Let's say for a year it's fine,
12:54
Speaker 2: so I got twelve dollars back, but then this next
12:57
Speaker 2: year it's like a twenty Let's say it's a two
12:59
Speaker 2: thousand and eight where the market, well, the market wasn't
13:01
Speaker 2: even down forty percent. It was down thirty three percent,
13:04
Speaker 2: thirty five percent in two thousand and eight, right, So
13:06
Speaker 2: way it's down forty five percent that year, Yeah, and
13:09
Speaker 2: it stays down. What happens?
13:12
Speaker 4: So, because this is an index. We can look at
13:14
Speaker 4: that history. We go back to two thousand and five,
13:17
Speaker 4: and you would have lost on two point eight percent
13:21
Speaker 4: of those autocollables. Historically, it would have equated to a
13:24
Speaker 4: seventeen percent principle impairment. That was the only time you
13:27
Speaker 4: would have lost money. Again, you did not lose that
13:30
Speaker 4: forty percent.
13:31
Speaker 2: So you don't lose everything. You lost seventy percent, So
13:33
Speaker 2: you basically you bet a seventeen percent loss on something
13:36
Speaker 2: that's almost not never gonna happen because the Fed's going
13:39
Speaker 2: to step in and start buying assets if a go
13:41
Speaker 2: that low again.
13:41
Speaker 4: Probably I think you're right.
13:42
Speaker 1: That's why I don't get I look, it's in this
13:45
Speaker 1: for JP Morgan.
13:45
Speaker 2: Yeah, this sounds like genius from your point of view,
13:49
Speaker 2: But it feels like JP Morgan is pretty smart, Like
13:51
Speaker 2: we had them on, they're pretty smart people. I feel
13:54
Speaker 2: like they could almost get you to do this deal
13:56
Speaker 2: at like fifteen percent. What do you mean, like if
14:00
Speaker 2: if the market goes down below fifteen percent, that's the threshold,
14:03
Speaker 2: Like going down forty seems like almost like beyond a
14:06
Speaker 2: tail risk event. I feel like they could do the
14:08
Speaker 2: same deal with you at fifteen percent like that would
14:12
Speaker 2: be almost pretty good deal because I don't even mark
14:14
Speaker 2: go down. We'll go down fifteen percent before the government
14:17
Speaker 2: starts buying up assets.
14:18
Speaker 4: Sure, I think when you're trying to build something with
14:21
Speaker 4: risk management, you know, Calamos is a risk manager who's
14:23
Speaker 4: been doing this for nearly fifty years. We want to
14:26
Speaker 4: give people the risk managed exposure. We want to give
14:29
Speaker 4: them a high stable tax efficient income. If there is
14:32
Speaker 4: a payoff that we are after, it's that it's high
14:36
Speaker 4: stable tax efficient income. So when you take this and
14:39
Speaker 4: ladder it out fifty two or more times, you put
14:41
Speaker 4: forty percent principal barriers on it, you get this really
14:45
Speaker 4: high stable taxificient income.
14:55
Speaker 2: Just jpen working consider this like issuing a bond on
14:57
Speaker 2: their port, where it's a high yield bond, but with
15:00
Speaker 2: this tail risk possibility. Therefore, that's why they're giving you
15:03
Speaker 2: a higher yield.
15:04
Speaker 4: Well, they're issuing the auto callables, so they're the issuer
15:07
Speaker 4: of the auto callables, so they're going to take a
15:09
Speaker 4: spread on that note. They're going to make money on
15:11
Speaker 4: the on the swap that we're trading, so we trade
15:14
Speaker 4: so for plus ten basis points. It's much more efficient
15:18
Speaker 4: for JP Morgan to trade swap with us than it
15:21
Speaker 4: is for somebody to go buy a note from JP Morgan,
15:25
Speaker 4: where you tie up all of their balance sheet, tie
15:27
Speaker 4: up all their capital. You've got a subordinated debt structure
15:30
Speaker 4: to that note, whereas here, if you build it synthetically
15:34
Speaker 4: and just trade on swap, well, ninety five percent of
15:37
Speaker 4: the assets in the ETF are in treasuries, so that
15:40
Speaker 4: money is sitting at State Street at the custodian. There's
15:43
Speaker 4: no real credit risk from that perspective. And then post
15:46
Speaker 4: Dodd Frank, JP Morgan has got to pay variation margin
15:50
Speaker 4: on the swap, so the whole structure is nearly one
15:53
Speaker 4: hundred percent collateralized. So go back to eight. You know,
15:56
Speaker 4: when a couple banks went under, you're on the hook
15:59
Speaker 4: for a lot of that. Hopefully you get some of
16:01
Speaker 4: your money back if you're a note issue or if
16:02
Speaker 4: you're a note buyer, who's here.
16:04
Speaker 2: You don't have that whose money is in collateral? Does
16:06
Speaker 2: JPM Moore can get a cut of the interest from
16:08
Speaker 2: the collateral.
16:09
Speaker 4: No, it's the investor. So we pay JP Morgan SOFA
16:12
Speaker 4: plus ten bases points.
16:13
Speaker 1: I see.
16:13
Speaker 4: Okay, They in turn give us the performance of that
16:17
Speaker 4: auto callable index that we've created with Sofa overnight rate, so.
16:23
Speaker 2: You pay I see. So they get a little interest
16:25
Speaker 2: from you plus ten BIPs correct, and they feel like
16:29
Speaker 2: that's what they get out of it. That's right, and
16:31
Speaker 2: that balances out the income they have to give you.
16:34
Speaker 2: But they also have this like sort of you know,
16:39
Speaker 2: fine print that if it goes down for forty percent,
16:41
Speaker 2: they really wine that's right.
16:43
Speaker 4: They're taking the other side of the trade.
16:45
Speaker 3: I feel a little bit like the guy at the
16:46
Speaker 3: craps table that's like, now, I'm gonna just watch that
16:48
Speaker 3: game play out.
16:49
Speaker 2: What well I mean, I mean here, I'll if you
16:53
Speaker 2: yield is twelve is well, if you get a dollar
16:55
Speaker 2: a month, that's twelve percent, but this is like fourteen
16:57
Speaker 2: percent a little more of a dollar.
16:58
Speaker 4: The average weighted coop on which is based on that
17:01
Speaker 4: par amount of your note, is fourteen point four percent.
17:04
Speaker 4: Right now. Okay, So the thing that we did not
17:06
Speaker 4: get into yet, which we have to build a base
17:08
Speaker 4: understanding of auto callables. It's a one hundred billion dollar
17:12
Speaker 4: market in the United States. You know, as you alluded
17:14
Speaker 4: to the structured note world, Well, let me back up
17:18
Speaker 4: the cover call space. You know, he said is one
17:20
Speaker 4: hundred and fifty billion dollar market. Derivative income is dominating
17:24
Speaker 4: the ETF landscape. If you go to the other side
17:27
Speaker 4: of the house, the structured note house, derivative income dominates
17:31
Speaker 4: there as well, but it's through the auto call. The
17:34
Speaker 4: auto callable is one hundred billion dollar market in the
17:36
Speaker 4: United States alone, multiples of that globally. People love this
17:40
Speaker 4: type of exposure.
17:41
Speaker 1: And it's never been in an ETF until this show.
17:43
Speaker 4: We built the first ETF correct.
17:45
Speaker 2: This is really interesting. You know that when he talks
17:48
Speaker 2: about people wanting income that is derivatives based. If you
17:51
Speaker 2: look at all the flows into income ETFs that would
17:54
Speaker 2: be equity, including which we've talked about before, that could
17:58
Speaker 2: be divid in ETFs which a plane vanilla or these
18:00
Speaker 2: derivative yield three point zero, over eighty percent goes into
18:04
Speaker 2: the derivative ones, which again would include the covered call.
18:08
Speaker 2: So this is again that the ones the stock ETFs
18:11
Speaker 2: that pay dividends like those old school, they're less than
18:14
Speaker 2: twenty percent of the flow. So this yield three point
18:16
Speaker 2: zero is taking the lion's share of all the income
18:20
Speaker 2: seeking money in the equity space. And I'm not counting
18:22
Speaker 2: bonds but.
18:23
Speaker 1: You were talking about since the CTF has come out.
18:26
Speaker 2: I'm talking about this year, so this is TF came
18:28
Speaker 2: out after this year. So like the thing is to me,
18:31
Speaker 2: I'm going to put this into a category with JEPY.
18:34
Speaker 2: This is a little more complex than JEPY, but the
18:37
Speaker 2: covered call space is huge now.
18:40
Speaker 4: But I might push back on you a little bit
18:42
Speaker 4: if you look at equity premium income strategies. You know,
18:45
Speaker 4: again another JP Morgan, you know tide product, but JEPI
18:48
Speaker 4: and JEFQ will hold actual equity linked notes and then
18:53
Speaker 4: deliver you know, that income which is somewhat tax inefficient,
18:57
Speaker 4: but you don't really know what's going on side those notes.
19:01
Speaker 4: Like you, you have to look at what they're publishing,
19:03
Speaker 4: which a lot of times they do it late and
19:06
Speaker 4: so there's there's not a lot of transparency all those.
19:08
Speaker 2: To be fair to them, though, in the yield that
19:11
Speaker 2: you get like that we display on the des is
19:13
Speaker 2: pretty good. I mean, I think what's like nine ten percent?
19:16
Speaker 2: And I think to some degree, like some of these
19:18
Speaker 2: products I've seen over the years, you just either trust
19:21
Speaker 2: the issue or you don't because correct a lot of advisors,
19:24
Speaker 2: they're not going to get what you're selling, they're gonna say, Matt,
19:27
Speaker 2: I trust you, You're a good guy. Calamos has a reputation.
19:30
Speaker 2: I also think the target altcome ETFs. The buffers are
19:33
Speaker 2: also like I just trust Innovator and Bruce Bond or
19:36
Speaker 2: I trust black Rock, because these are very complicated. The
19:39
Speaker 2: good news is the ETF industry does have this like
19:42
Speaker 2: really good track record, and from what you're describing it
19:45
Speaker 2: does seem like a pretty good bet to me. I'm
19:48
Speaker 2: not really seeing anything too outrageous, except the fact that
19:52
Speaker 2: obviously if there's somebody very bearish, this might not be
19:55
Speaker 2: the product for them.
19:56
Speaker 3: So who who was doing it before the ETF going
20:00
Speaker 3: to a bank and saying I want.
20:01
Speaker 1: That autocullable, autocullable thing that you guys have told me about.
20:05
Speaker 3: And then how is that changing now that it's you know,
20:08
Speaker 3: potentially retail friendly.
20:11
Speaker 4: You mentioned the buffer at ETF, so I had a
20:13
Speaker 4: hand in building though, so if you trust the bus
20:15
Speaker 4: buffer ETF SO, those have been working phenomenally for nearly
20:18
Speaker 4: a decade. It's a very big space. Now that model
20:21
Speaker 4: is very commoditized. Everybody who builds buffers tends to do
20:25
Speaker 4: it closely the same way, So yeah, if you understand
20:28
Speaker 4: that space or that was something that was mildly confusing.
20:32
Speaker 4: Back then, people had to get their heads around it.
20:34
Speaker 4: It was new. Now it's not. Most people understand it.
20:38
Speaker 4: The same is going to happen with auto calls. It's
20:40
Speaker 4: a new space for ETFs. People are going to wrap
20:42
Speaker 4: their heads around it. They're going to understand it, you know.
20:45
Speaker 4: But what we did with the buffers was largely disruptive
20:48
Speaker 4: to the banks. They did not really appreciate that there
20:52
Speaker 4: were flex options being built around this. It wasn't a
20:54
Speaker 4: bank driven product, whereas here this is collaborative with the banks.
20:59
Speaker 4: You know, we're seeing a tremendous amount of demand to
21:02
Speaker 4: actually bring in those structured note strategies and do that
21:06
Speaker 4: inside the ETF world. That's going to be a massive space.
21:09
Speaker 4: We've opened this huge gate where we can now partner
21:12
Speaker 4: with banks and bring their structured strategies into a liquid,
21:16
Speaker 4: transparent and ETF ETF wrapper. I'd say it's also tax efficient.
21:22
Speaker 4: So most large banks around the world have an equity
21:25
Speaker 4: derivatives desk, they have an autocallable business JP Morgan, Morgan Stanley, RBC,
21:31
Speaker 4: like you name it, SoC Chan, Barclays, They all have
21:34
Speaker 4: these types of products that they issue, and it's on
21:37
Speaker 4: a massive scale, hundreds of billions of dollars. And so
21:40
Speaker 4: we've taken one of the most popular versions, laddered it together,
21:44
Speaker 4: did it in swap form, and did it in a
21:46
Speaker 4: way where we can deliver really high stable income in
21:50
Speaker 4: a very tax efficient way. Most derivative income products are
21:54
Speaker 4: a little less tax efficient. They'll give you either ordinary
21:57
Speaker 4: income or they'll give you maybe sixty four already treatment
22:00
Speaker 4: if it's index options. Here the coupon that we're delivering,
22:06
Speaker 4: about eighty to ninety percent of it will be treated.
22:09
Speaker 4: Our expectation is that it'll be return of capital, so
22:13
Speaker 4: that will be tax deferred until you sell, and then
22:16
Speaker 4: if you held for a year, it'll be long term
22:18
Speaker 4: capital gains.
22:19
Speaker 3: So his ten thousand spits out this income for the
22:23
Speaker 3: duration and then you give up whatever the market gains.
22:27
Speaker 1: But you're going to get your principle back.
22:29
Speaker 4: That's correct.
22:30
Speaker 3: And at what percentage of the time do you get
22:33
Speaker 3: your principle back when you did this.
22:34
Speaker 4: If you look historically, it would have been ninety seven
22:37
Speaker 4: point two percent of the time for our our US
22:39
Speaker 4: large cat version. We're launching a NASDAK version that historically
22:42
Speaker 4: had never breached principle. Yeah, so I know, I know
22:47
Speaker 4: what you're saying. It sounds too good to be true.
22:49
Speaker 4: So the piece that we have not unlocked yet now
22:52
Speaker 4: that we know understand auto calls is the reference index.
22:56
Speaker 4: So if you just tied this to the S and
22:59
Speaker 4: P five hundred, you would get a low coupon. You'd
23:02
Speaker 4: get maybe seven eight percent something like that, a little
23:06
Speaker 4: bit over risk free. If you're familiar with covered call strategies,
23:11
Speaker 4: the income that you collect changes with market parameters, it
23:15
Speaker 4: changes with volatility, interest rates, dividends. So what we have
23:19
Speaker 4: done is we've built an equity index that has been
23:23
Speaker 4: customized for auto callables. So it's an S and P
23:26
Speaker 4: five hundred base and it has a high volatility target.
23:30
Speaker 4: It's a stable vault target of thirty five percent, so
23:34
Speaker 4: that every week when we write a new auto callable
23:38
Speaker 4: inside that index, the volatility is the same. So that's
23:43
Speaker 4: how I can come here confidently and say you're going
23:45
Speaker 4: to get a high stable income because we've stabilized the
23:49
Speaker 4: parameter inside that options pricing model. I know we're getting
23:53
Speaker 4: really deep. But then when you compile all that together,
23:56
Speaker 4: the VALL of the strategy historically has been around eighteen percent.
24:00
Speaker 1: But what happens in those moments where the volatility spikes.
24:03
Speaker 4: Then your VALL will come down in the VALL target.
24:06
Speaker 4: So you mentioned twenty twenty, so I put that on
24:08
Speaker 4: pause for a reason. So in twenty twenty, what was
24:11
Speaker 4: equity market volatility sixty seventy percent, So you're at thirty five.
24:16
Speaker 4: So in that environment you're defending the barrier. Not only
24:20
Speaker 4: do you now have a forty percent barrier, but it's
24:23
Speaker 4: even more powerful because your VALL is at thirty five
24:26
Speaker 4: while the SMP is at seventy.
24:31
Speaker 2: But in twenty twenty.
24:33
Speaker 3: Only that was like when Eric's quite it that long,
24:37
Speaker 3: He's like, it's like next level, We've done it.
24:39
Speaker 4: We have never made Eric Roy too like.
24:41
Speaker 2: A physics conversation you can have in like our podcast.
24:45
Speaker 1: This is.
24:47
Speaker 2: I mean, we're about to get into black holes and
24:48
Speaker 2: like dark matters.
24:49
Speaker 4: No, no, no, black shoals, not black holes.
24:53
Speaker 2: But in twenty twenty, you still got your thing. You
24:56
Speaker 2: still got the there was no call. It didn't get called.
24:59
Speaker 4: Over the last ten years, you would have gotten every
25:01
Speaker 4: single coupon and you never would have breached barrier.
25:04
Speaker 2: So I think this is something When you go talk
25:06
Speaker 2: to advisors and people about this, it sounds like you're
25:09
Speaker 2: gonna get interest. But I'm assuming they put like two
25:12
Speaker 2: percent to.
25:13
Speaker 4: Three percent of the portfolio.
25:14
Speaker 2: Wouldn't go too crazy and where do you put it?
25:16
Speaker 2: What do you ad this?
25:17
Speaker 4: This has equity market like volatility. So think of fifty
25:21
Speaker 4: two auto callables like rubber bands that will trade at par.
25:25
Speaker 4: And as the market goes down, the rubber bands will
25:28
Speaker 4: start to stretch. You'll trade at a discount to par.
25:31
Speaker 4: And as long as they don't break, then you're going
25:34
Speaker 4: to snap back to par. Those rubber bands will go
25:36
Speaker 4: back to par. So we want to make sure that
25:39
Speaker 4: people are comfortable with equity market like volatility. If you're
25:43
Speaker 4: comfortable with that, you can exchange it for a high, stable,
25:46
Speaker 4: tax efficient coupon.
25:47
Speaker 2: So if the markets go down, say twenty percent, and
25:50
Speaker 2: you're seeing a discount in these, there's a certain kind
25:53
Speaker 2: of trader who may think that's the braid yeah, Versus
25:57
Speaker 2: in the flip side, if the market keeps going up,
26:00
Speaker 2: a trader may be like, you know what, let me
26:02
Speaker 2: not buy that right now because it's looking a little pricey.
26:05
Speaker 2: I get it.
26:06
Speaker 4: I mean we have so let me.
26:08
Speaker 2: Ask you this. Are these used mostly by buy and
26:11
Speaker 2: hold with a little traders if it gets into a discount,
26:14
Speaker 2: like what's the buy and hold trader ratio here for
26:17
Speaker 2: something like this?
26:17
Speaker 4: It's both early adopters. There's more than ten thousand shareholders
26:22
Speaker 4: in KAI right now. Let's what we're calling ci E KAI.
26:25
Speaker 4: A lot of them are financial advisors who use auto
26:27
Speaker 4: callable notes. They said, we've been using these for decades.
26:31
Speaker 4: We get called away after you know, six months to
26:33
Speaker 4: a year, we have to go buy a new note
26:35
Speaker 4: of all changes on us. The parameters are different, might
26:38
Speaker 4: not be able to get the same terms. I've got
26:40
Speaker 4: a hundred of these things on the books, one for
26:43
Speaker 4: every different client. I can't keep it all straight. One
26:46
Speaker 4: advisor that we were talking to said, I go to
26:47
Speaker 4: New York every quarter, meet with the banks, find good
26:51
Speaker 4: you know, good products. He said, I'm canceling my flights
26:54
Speaker 4: to New York. I've got this. This ETF gives me
26:57
Speaker 4: what I'm looking for. It's an evergreen solution. I'm going
27:00
Speaker 4: to play golf and this makes things easy for me.
27:02
Speaker 2: Where does he live?
27:03
Speaker 4: He's out West.
27:04
Speaker 2: Yeah, that's it. That's a long flight. Yeah, well this
27:08
Speaker 2: is the this is what ETFs do, drool. They take complicated, messy,
27:12
Speaker 2: institutional type stuff and they just make it simple, fast,
27:15
Speaker 2: good cheap.
27:24
Speaker 3: Okay, so fast, good cheap. How do you what color
27:27
Speaker 3: of uh light do you give this?
27:30
Speaker 4: We have what we do.
27:31
Speaker 1: I don't believe if we.
27:32
Speaker 2: Could dress this one yet, I think, hold on, hold on,
27:36
Speaker 2: what do you give?
27:37
Speaker 4: What do you give? Covered? Call ETFs? What light do
27:39
Speaker 4: they get?
27:41
Speaker 2: I gotta look. I believe they're green. They might get
27:43
Speaker 2: dinged once for using derivatives. Okay, so maybe you'd be
27:47
Speaker 2: the same green, but one little note for like the
27:50
Speaker 2: fact that it uses derivatives. But I guess that's it.
27:53
Speaker 2: I mean there's no leverage thet there's no rolling of commodities,
27:58
Speaker 2: and there's no hidden fees. Correct, those would be the
28:01
Speaker 2: things we ding them. But I'd have to look deeper.
28:04
Speaker 2: But I would to me, these feel you know, between
28:08
Speaker 2: PG and PG thirteen somewhere.
28:11
Speaker 3: So the risk really is I'm not going to get
28:13
Speaker 3: my principal back if there's some you know, real big downturn,
28:19
Speaker 3: or I'm going to give up some upside.
28:22
Speaker 4: Yeah, your risk is largely to the other side.
28:25
Speaker 1: Here's what I.
28:26
Speaker 2: Don't get like, if I'm in the VU, right, I'm
28:28
Speaker 2: a SAP five hundred, and I get Oh, I know
28:32
Speaker 2: why you don't get the return of the index.
28:34
Speaker 1: You just get the Yeah. Yeah, the principle just comes back. Yeah.
28:36
Speaker 2: So in the end, VU could be up twenty percent
28:39
Speaker 2: that would outperform this. This is more like just getting
28:43
Speaker 2: a little income based on VU not going down a
28:45
Speaker 2: super amount, which I feel like is a sort of
28:48
Speaker 2: the words. This would be kind of a little less
28:51
Speaker 2: risky than VU in a way.
28:55
Speaker 4: At times it could be forget volatility. Yeah, if you're
28:57
Speaker 4: looking for income, yeah, or if you don't think the
29:00
Speaker 4: market's going up fourteen and a half percent next year,
29:03
Speaker 4: then this would be a way to essentially lock that
29:05
Speaker 4: in as long as you're not going to fall by
29:07
Speaker 4: that barrier.
29:07
Speaker 1: So maybe instead of buying a.
29:12
Speaker 3: Rental property real estate property like this, this is in
29:16
Speaker 3: that category if you're thinking about it from like what
29:18
Speaker 3: a financial advisor would tell a client.
29:21
Speaker 4: Yeah, that's an interesting here.
29:22
Speaker 2: It is. It's a rental property in Florida. But you've
29:27
Speaker 2: got to pray there's nothing once everything in your hurricane.
29:29
Speaker 2: That's what it is.
29:31
Speaker 4: It is your God kind of like that. Yeah, so
29:33
Speaker 4: let's pretend like you are the insurer and you are
29:36
Speaker 4: collecting premiums from people all over the country.
29:40
Speaker 1: It was way more fun when we were doing it
29:41
Speaker 1: a way.
29:42
Speaker 2: I'm an insured I think we nailed it, and that's
29:45
Speaker 2: I don't think you're can improve on it though.
29:47
Speaker 4: No, I say, if you're an insurer, you're collecting premiums,
29:50
Speaker 4: maybe there's a storm in Florida, but everyone else is
29:52
Speaker 4: still paying you.
29:53
Speaker 2: Yeah, but aren't you doing these fifty or so all
29:56
Speaker 2: are on equity indexes, right, I mean one of them.
29:58
Speaker 5: Insures got out of not but there's fifty starting in
30:03
Speaker 5: the starting You're right, I say, Oh, I say, okay,
30:06
Speaker 5: so it's like all over the country, but there's one
30:08
Speaker 5: hurricane in Miami.
30:09
Speaker 1: Okay.
30:09
Speaker 4: Correct. You're diversified by time instead of geography.
30:12
Speaker 2: That's a lot of work. Yeah, Like do you have
30:15
Speaker 2: like associates that like do all this like keep up
30:18
Speaker 2: Kai take like an army of people like putting these
30:21
Speaker 2: new notes on like just seems like a lot of effort.
30:24
Speaker 4: The beauty of KAI is that it's all swap based.
30:27
Speaker 4: So we built everything.
30:28
Speaker 2: JP Morgan is the rest. It's all in them.
30:30
Speaker 4: Well, we built everything inside that Mercube index. And so Mercube, Yeah.
30:36
Speaker 2: That sounds like like matrix or something that sounds like
30:40
Speaker 2: what's that sounds too much? Merkcube? Who is that somebody's
30:44
Speaker 2: last name?
30:44
Speaker 4: Mercube is an indexing provider that was ok yeah, founded
30:47
Speaker 4: by the former head of custom indexing at S.
30:49
Speaker 2: And P the Mercube theory.
30:52
Speaker 1: Okay, so you're not alone anymore?
30:54
Speaker 2: Right?
30:55
Speaker 3: You got Kai was out there first. Yeah, you got
30:57
Speaker 3: some competition. What does the competition look like?
30:59
Speaker 4: Can I backup for thirty seconds? And we're going to
31:02
Speaker 4: spend a while on this. So on the ETF side,
31:05
Speaker 4: the last point here, because we did this index based
31:08
Speaker 4: it trades extremely tight. We don't have to post Greeks
31:11
Speaker 4: to the website. There's not a lot of active management here.
31:16
Speaker 4: So we take this index by Greeks.
31:17
Speaker 2: By the way, Ajoul, he doesn't mean Athnosios. He means
31:20
Speaker 2: like formulas like Vega, Gamma, Kalamos. He's picturing Athnosios and
31:27
Speaker 2: John Stamos on your website and.
31:28
Speaker 4: That's not true, that's right. Not yet. We do have
31:31
Speaker 4: Yanis though. Yeah, yeah, so where was I We take
31:36
Speaker 4: that index, We give that price almost like an intra
31:39
Speaker 4: day nave to the market makers, so they are very
31:42
Speaker 4: tight to that index level. JP Morgan is trading swap
31:45
Speaker 4: on the index. It is trading at one to three
31:48
Speaker 4: cents wide every day, and that's largely because of that index.
31:52
Speaker 4: So it's extremely operationally light.
31:56
Speaker 3: Okay, now my question, yes, oh yes, you were first.
31:58
Speaker 3: Now there's some competition. Yes, how do you feel about
32:01
Speaker 3: the competition?
32:02
Speaker 4: I think it's great. Competition is good for the market.
32:05
Speaker 4: It's going to grow. We're not going to raise you know,
32:08
Speaker 4: one hundred billion dollars all by ourselves. I hope we do,
32:11
Speaker 4: but I know it's going to be because a rising
32:13
Speaker 4: tide is lifting all boats. If there's an encouragement, I
32:17
Speaker 4: hope that it's done correctly. The covered call space took
32:21
Speaker 4: fifteen twenty years to grow and then become more risky.
32:24
Speaker 4: You've got weekly daily single stock. My fear is the
32:28
Speaker 4: auto call space does that too fast, and you go
32:30
Speaker 4: into this risky stuff and then people get hurt and
32:33
Speaker 4: they get burned, and like I thought, I had a barrier,
32:35
Speaker 4: I was tied to a single stock. It went down fast.
32:38
Speaker 4: That's what we don't want.
32:39
Speaker 2: Oh yeah, because somebody filed for single stock auto call
32:42
Speaker 2: Yeah you too. I see so that well, let's go
32:46
Speaker 2: I know you don't do those, but like let's say
32:48
Speaker 2: you're doing Navidia. Let's say you did Navidia single stock
32:51
Speaker 2: auto call Well, what would.
32:52
Speaker 1: The barrier be?
32:53
Speaker 4: You think, Well, the volatility would be you know, fairly
32:56
Speaker 4: high higher, but it comes at it.
32:57
Speaker 2: Could the barrier be sixty?
32:59
Speaker 4: It depends. You know, you can pull those levers and
33:01
Speaker 4: change your coupon.
33:02
Speaker 2: So what you're worried about is somebody going for the
33:05
Speaker 2: jacked up yield with a lower barrier and people being
33:08
Speaker 2: like not understanding the auto callable. Correct, yeah, and then
33:11
Speaker 2: it changed the whole camera and you know the industry
33:13
Speaker 2: is going to do this and you and they like
33:15
Speaker 2: to push the envelope.
33:16
Speaker 4: Oh for sure, for sure and you and we've seen
33:18
Speaker 4: this in Korea. We've seen this in other markets where
33:21
Speaker 4: folks these are big. In South Korea, I extremely they
33:24
Speaker 4: love risk, they love risk.
33:26
Speaker 2: Going theo is it's a gen per capita in South
33:29
Speaker 2: Korea is like off the charts.
33:31
Speaker 3: The the Calamost strategy is we're just going to go
33:35
Speaker 3: to indexes S and P five hundred.
33:40
Speaker 4: Yeah, let's build an index that is customized for auto
33:44
Speaker 4: callables to give you the best chance of getting a high, stable,
33:48
Speaker 4: tax efficient coupon.
33:50
Speaker 2: By the way, has have you talked to Bruce Bond regularly?
33:53
Speaker 4: I have you talked to him in about this strategy?
33:55
Speaker 1: Yeah?
33:55
Speaker 2: I feel like he's an eye in this. I don't know,
33:57
Speaker 2: I just feel like this is Bruce bondish.
33:59
Speaker 4: Oh that's funny. You know Innovator brought out were First Trust.
34:02
Speaker 2: I feel like they might just.
34:03
Speaker 4: Like, so we all filed around the same time. Okay,
34:06
Speaker 4: Innovator brought out some single stock products. I don't know
34:10
Speaker 4: how well those that have done, like you do the
34:12
Speaker 4: research on that, and then the other competitors have not
34:15
Speaker 4: come to market yet. There's about four or five in
34:17
Speaker 4: the market. So you know why you probably feel that way.
34:20
Speaker 2: Is because you guys all live in the same town
34:22
Speaker 2: and what and Illinois?
34:22
Speaker 4: Wow, this is true?
34:23
Speaker 2: Like by the way, in Wheaton, like where he lives,
34:26
Speaker 2: he has like a cul de sac. His next door
34:28
Speaker 2: neighbor is Innovator and this other nextraor neighbor is First
34:31
Speaker 2: Trust and all their kids are friends. But they hate
34:33
Speaker 2: each other at work?
34:34
Speaker 1: Is that true?
34:35
Speaker 4: Something like that hate each other?
34:37
Speaker 3: Okay, all right, but just confront of me, are you
34:39
Speaker 3: on the same kids baseball teams.
34:41
Speaker 4: It is a small town, and well, we have seven kids,
34:43
Speaker 4: so there's a good chance that we're on everybody's baseball team.
34:46
Speaker 1: All right, you have seven kids. We do? Wow? Yeah,
34:49
Speaker 1: we do.
34:49
Speaker 2: Oh my god, that's going. Wow, that must be you're wow.
34:52
Speaker 2: You look pretty good for seven kids.
34:54
Speaker 4: I don't sit down. You just got to keep keep
34:56
Speaker 4: on going.
34:56
Speaker 1: Yeah.
34:57
Speaker 2: Yeah, that's your exercise, I guess. But I think the
34:58
Speaker 2: reason amazing.
35:00
Speaker 4: I think the reason you are thinking that way is,
35:03
Speaker 4: you know, the buffers at the time replicated the largest
35:06
Speaker 4: structured note market, and in a zero rate environment, buffers
35:09
Speaker 4: were the king. When rates rose to five percent, what
35:12
Speaker 4: are people doing. They're buying fixed indexinuities. They're buying capital
35:15
Speaker 4: protected notes. So that was what we brought at Calamos,
35:18
Speaker 4: one hundred percent protected products. I helped Bruce build innovator
35:22
Speaker 4: when I was at Milliman. I was there for twelve years.
35:25
Speaker 4: So what are people doing now? They won income? You know,
35:27
Speaker 4: rates are coming back down, they're chasing that, you know,
35:30
Speaker 4: high stable income. The forty year run in bonds is over.
35:35
Speaker 4: You cannot get ballast and income from bonds anymore, and
35:38
Speaker 4: so they're parsing it out and so the auto call
35:41
Speaker 4: space was always the golden goose. We happened to win
35:44
Speaker 4: the race this time.
35:46
Speaker 2: Yeah, No, he Matt comes from that world. This is
35:49
Speaker 2: organic to because I've known him for quite a while
35:52
Speaker 2: and his work on the early days of the target outcome,
35:56
Speaker 2: having worked in an options industry. But what you will
36:00
Speaker 2: find is a lot of the issuers who don't normally
36:02
Speaker 2: do this are going to get involved. That's just the
36:04
Speaker 2: way it goes, but it is I also think ETFs
36:07
Speaker 2: everybody who's seen the Big Short and then Mayor Michael
36:09
Speaker 2: Burry going over to Goldman and JP Morgan and being like,
36:12
Speaker 2: I want to make this specific bet against the housing market,
36:16
Speaker 2: and at first JP More they're like laughing at them.
36:18
Speaker 2: They're like, no problem. That idea of a swap contract
36:21
Speaker 2: with a bank. People don't realize, like the levere ETFs,
36:24
Speaker 2: like so many ETFs are basically just democratizing what you
36:27
Speaker 2: saw in the Big Short, and that's kind of cool
36:30
Speaker 2: as long as it's done responsibly. Obviously, some of the
36:32
Speaker 2: leverage that are they're trying to file his five X
36:34
Speaker 2: where you're gonna get like irresponsible. But for the most part,
36:37
Speaker 2: you know those two guys who are waiting the lobby
36:39
Speaker 2: of JP Morgan in the beginning that this is what Matt.
36:42
Speaker 2: Matt has access to those desks that those guys were
36:46
Speaker 2: trying to get access to. These are just customized contracts
36:49
Speaker 2: with a big bank. It's almost like a high roller
36:51
Speaker 2: to casino. Who can get a special table.
36:53
Speaker 1: Yeah, and I'm at that special table just watching it happen.
36:56
Speaker 2: I know now you now you can just get the
36:58
Speaker 2: for twenty five dollars that can be Let me ask
37:02
Speaker 2: you this, you have seven kids, you have other film members.
37:08
Speaker 2: Would you feel safe putting your own family in here?
37:10
Speaker 2: Is this more for a sophisticated investor?
37:12
Speaker 4: No, I would what we've done here, you know, going
37:15
Speaker 4: all the way back to the beginning, if you tie
37:17
Speaker 4: all of your money or tie your money to a
37:19
Speaker 4: single auto callable, you have single point coupon risk, single
37:23
Speaker 4: point maturity risk where you can lose forty percent or
37:26
Speaker 4: more of your money when you ladder that out fifty
37:29
Speaker 4: two or more times and do it weekly. Now you've
37:31
Speaker 4: got an opportunity to diversify out that risk. You've got a
37:35
Speaker 4: product that looks a lot like the equity markets, but
37:37
Speaker 4: delivers that high stable coupon, So you know, I own
37:40
Speaker 4: this in my account, you know, not to create suitability.
37:43
Speaker 4: My parents, you know, are doing similar. They own a
37:45
Speaker 4: lot of buffers. They own this for income. When you
37:47
Speaker 4: can tie your money to the equity markets, now you
37:51
Speaker 4: can keep pace with inflation. You can do remarkably better
37:54
Speaker 4: than your fixed income, which would be inversely correlated to inflation.
37:58
Speaker 4: So there's a lot of ways to think about it.
38:00
Speaker 3: Best time we talked about this space, boomer candy was
38:03
Speaker 3: the phrase that came out of your mouth.
38:04
Speaker 1: Is this boomer candy?
38:06
Speaker 2: Yeah, I mean I think so, because it's a way
38:09
Speaker 2: to participate boomer's love income. But then again, sort of
38:12
Speaker 2: the gen z ers too, So I would say the
38:14
Speaker 2: only thing that doesn't make this boomer candy is that
38:18
Speaker 2: there isn't a protection element. I mean, you're betting the
38:21
Speaker 2: market won't get on forty percent, and that actual income
38:25
Speaker 2: can be a buffer if it does go down. But
38:28
Speaker 2: I think, I don't know. It might be like half
38:30
Speaker 2: boomer candy. I consider boomer candy something that helps you
38:32
Speaker 2: sleep at night and cures anxiety.
38:35
Speaker 1: This is angiin boom boomer candy.
38:39
Speaker 2: Maybe, or I don't know, it's just it's ancillary, but
38:42
Speaker 2: I could see this appealing, especially we like guy from
38:44
Speaker 2: Texas who's a YouTube star. I could see the other
38:49
Speaker 2: younger investors actually getting into this because it does have
38:52
Speaker 2: you know, that's a pretty big yield. I mean, that's
38:54
Speaker 2: going to excite some people. Although some of the yield
38:56
Speaker 2: max field like eighty to one hundred percent. But with those,
38:59
Speaker 2: you're giving up so much much total return.
39:01
Speaker 4: What makes me nervous with those? Well, so you, if
39:03
Speaker 4: I remember correctly, you came up with the boomer candy
39:06
Speaker 4: term after we launched the one hundred percent protected ETFs.
39:09
Speaker 2: Yeah, well it was that I camera when I camp
39:12
Speaker 2: with it, but it was that it was the buffers
39:14
Speaker 2: combined with the cover calls. Yes, those are both. I
39:17
Speaker 2: don't know.
39:17
Speaker 4: They just feel it as a specific protection amount. Yes,
39:21
Speaker 4: here you're taking diet market correct. Here you're taking on
39:25
Speaker 4: tail risks. So there's a chance some of those coupons.
39:27
Speaker 2: That's why it's a little.
39:28
Speaker 4: Bit I would agree with you. You got to be
39:31
Speaker 4: comfortable with equity market like volatility, the single stock covered
39:35
Speaker 4: call ETFs as a risk manager, you know, coming from
39:38
Speaker 4: an actuarial consulting firm, not something we would build Calamos. As
39:42
Speaker 4: a forty five year old risk manager, we would not
39:45
Speaker 4: build those. But the yield that those are stating is
39:49
Speaker 4: not a yield that you will likely get.
39:52
Speaker 1: You know.
39:52
Speaker 4: It's if it's a daily by ride or a weekly
39:54
Speaker 4: by right, they'll take that number that they've collected and
39:57
Speaker 4: they'll annualize it. So if it's a daily buy right
40:00
Speaker 4: and the market's volatile, I'm going to get a good
40:02
Speaker 4: coupon today and now times that by two hundred and
40:04
Speaker 4: fifty two trading days, and it looks like this massive number.
40:08
Speaker 4: The odds of you actually achieving that are next to zero.
40:12
Speaker 3: All right, Matt, I have one final question for you,
40:14
Speaker 3: which is what is your favorite ETF ticker other than
40:17
Speaker 3: any of your own.
40:19
Speaker 4: Oh that's a good question. A Power Shares product. I
40:24
Speaker 4: don't work there anymore. We launched food and Beverage ETF. Eric,
40:28
Speaker 4: do you remember the ticker PBJ.
40:30
Speaker 2: Here you go, Yes, that is a good one. Yeah,
40:33
Speaker 2: no one's ever picked it.
40:34
Speaker 3: And it really PBJ protein beverage, I know, healthy fads.
40:38
Speaker 2: Yeah, nice kicker, that's a good one PBJ.
40:41
Speaker 1: Matt Koffman, thanks so much for joining us on trillions.
40:44
Speaker 4: Thanks for having me.
40:51
Speaker 3: Thanks for listening to Trillions until next time. You can
40:54
Speaker 3: find us on the Bloomberg terminal, Bloomberg dot com, Apple Podcasts, Spotify,
40:59
Speaker 3: or wherever you'd like to listen. We'd love to hear
41:01
Speaker 3: from you. Hit us up on social I'm at Joel
41:03
Speaker 3: Weber Show, He's at Eric Balcino's. Trillions is produced by
41:07
Speaker 3: Magnus Hendrickson. Sage Bauman is the head of Bloomberg Podcast