Why Autocallable ETFs Are Gaining Ground on Structured Notes 

The autocallables are calling. 

When you’re looking for a convenient wrapper for a complex financial instrument, you don’t normally think about ETFs. But structured products that redeem automatically when certain conditions are met are one of the hottest areas of the derivatives-based ETF market right now. Since Calamos launched the first fund last June, 11 more have debuted in the US with total assets just shy of $1.2 billion, according to data from Morningstar Direct. This week, Calamos introduced the strategy to investors across Europe, Asia and the Middle East with the Calamos Autocallable Income UCITS ETF. 

Commission-based advisors who have long used structured notes are starting to use the ETFs for several reasons, including simplicity and lower minimums, said Will Rhind, founder and CEO of GraniteShares, which launched single-stock autocallable ETFs tied to Nvidia and Tesla in February. But he said the biggest change is that the ETFs have opened the world of fee-based advice to autocallables. “In a way, it’s very similar to what happened with buffered ETFs or defined outcome ETFs in that the big growth area is for fee-based advisors who can now use a strategy like this in a fee-based account, just in a way that previously they couldn’t,” Rhind said. 

Calls Are Coming 

So is there a massive migration from traditional notes to autocallable ETFs? There’s not a lot of data to support that yet, said Morningstar analyst Zachary Evens. Part of the reason is that the ETFs are so new and there are only select ETF strategies that may not overlap with exposures a client’s existing note delivers. Take the largest autocallable ETF, the Calamos US Equity Autocallable Income ETF (CAIE), which has over $850 million. “That is substantial considering the product launched last summer,” Evens said. Still, “that product appealed to investors’ appetite for income, and competes not just with traditional notes, but income-oriented ETFs as well.” 

For investors looking for structured note-like investments, there are plenty of perks with autocallable ETFs, Rhind said: 

• Fees are typically higher for structured notes than autocallable ETFs and unlike ETFs, structured notes require re-investment when a note is cancelled. You’re also not taking on the same credit risk issues as the note issuer when you buy a share of an ETF. 
• Liquidity-wise, there’s no guarantee of a secondary market for structured notes, while ETFs have the benefit of being easily tradeable on an exchange. 

Call of Duty: Of course, there are risks, too. Since clients usually receive some outcome, like income or growth, if certain criteria are hit, it’s important that advisors know all the variables involved. There are a few factors that could create less than “ideal” scenarios, Evens said.