Issuers Take Note and Roll Out Autocallable ETFs

There’s a growing category of funds that’s ready, willing and autocallable.

At least two such products launched last week: the Pacer Metaurus High Income Autocallable ETF (ACBH) and Pacer Metaurus Enhanced Core Income Autocallable ETF (ACBE). Those represent the first in the category for Pacer, which has partnered with Metaurus Advisors on other ETFs.

The trend, which saw the first autocallable ETF appear on the scene last year, has introduced the structured note format at a time when more investors are looking for income, said Sean O’Hara, president of Pacer ETF Distributors. “With an ETF, you can have multiple issues in one place,” he said. “There are tax advantages. There are liquidity advantages. And you’re not buying any bank balance-sheet risk.”

Incoming!

With about 10,000 people turning 65 every day, there’s an obvious market for funds that provide yields significantly higher than what people might get with Treasurys, O’Hara said. “You could look at the strategies as a fixed income replacement,” he said. “Equity returns over time have been 8-10%. I could [also] use this as a complement to my long-only equity portfolio.” The autocallables are linked to the Metaurus US Large Cap VolPath Index, and the two funds offer different levels of principal protection. ACBH, for example, uses 70% coupon and maturity barriers, whereas ACBE protects against a 50% decline in the reference index. The funds also have a “memory” feature, allowing income to be withheld if the barriers are pierced but then paid out if and when the index goes back above them, O’Hara noted.

Other recent additions to the autocallable ETF market:

• ProShares, which in August launched its first such funds: the S&P 500 Autocallable Income (ACSP), Nasdaq-100 Autocallable Income (ACQQ) and Russell 2000 Autocallable Income (ACRT) ETFs.
• Rex Shares, which last month added to its line with the Rex Defensive Autocallable Income ETF (DACL).

Variety Show: The category is providing one way that issuers can compete for new business without going up against the biggest asset managers that dominate the larger world of ETFs, said Zachary Evens, Morningstar analyst of passive strategies. And though autocallable ETFs are relatively new, there are significant differences in the approaches companies take with them, including the indexes they use and risks they assume, he noted. “As investors are exploring this space, and as advisors are starting to understand these products better, those differences are really key,” he said. “Anybody that wants income and has a little bit more risk tolerance than a 100% bond investor might find these interesting.”