Call it the snowball effect.

An inconspicuous fund filing just before Christmas contained a hidden gem. The Snowball ETF (CPD), a forthcoming product in the RBB Fund Trust, will be subadvised by Gabe Plotkin, part owner of the Charlotte Hornets and former owner of now-defunct hedge fund firm Melvin Capital. If all that doesn’t ring a bell, Plotkin’s firm was strained to the breaking point in 2021 amid the GameStop short squeeze. That episode was parodied in the 2023 film Dumb Money, in which Seth Rogan played Plotkin.

Hopefully, we also don’t need to remind anyone about stonks, tendies and how those words made it into our vernacular.

Exchange Policy

One of the juiciest bits of news, however, is that Plotkin is reportedly planning to use the Snowball ETF for a 351 exchange for some of his personal wealth, per Bloomberg. That strategy can allow certain investors to move appreciated assets into exchange-traded funds (a one-time event) and defer capital gains taxes. That mechanism has exploded in popularity over the past year, both among ETFs specializing in that capacity for affluent investors as well as for RIAs rolling out their own strategies for clients. But the Snowball ETF doesn’t appear to be shopping around for seed investors as many of the 351 exchange funds do; the process is hardly mentioned in its prospectus.

“It’s really just a vehicle to allow assets to change strategies without realizing capital gains,” Bryan Armour, director of ETF and passive strategies research at Morningstar, said of 351 exchange ETFs. “It’s a positive thing overall, but what then matters is: Do you want to move into this new strategy?” Selling shares can trigger capital gains taxes, after all.

Some details about Plotkin’s ETF:

• It has an objective of long-term capital appreciation, with a strategy focused on 15 to 25 companies in industries experiencing growth.
• Total fees are 233 basis points.
• “Gabe is a good long-only portfolio manager,” Armour said. “I can certainly understand why he would want to be long-only after what happened in 2021.”

Is No News Better News? The development has certainly drawn more attention to the 351 exchange, which has been cast as a tool for the wealthy to defer taxes. Plotkin’s fund is part of the trend, and “capital moves to where it is treated best,” said Wesley Gray, CEO and co-CIO of Alpha Architect, a firm that has come to specialize in 351 ETFs. “As long as their group follows the statute (I’m sure they will, since the scrutiny will be high!) and aren’t trying to get cute or do things outside of the intent of the law, it’s all a nothing-burger.”

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.

We’d say they’re selling like hotcakes, but the worldwide flapjack exchange is notoriously opaque.

Flows into active ETFs globally climbed 70% in the first quarter from the same period a year earlier, as investors poured more than $245 billion into the vehicles, per recent data from ETFGI. That’s a record, but it’s not a dramatic outlier, as March represented the 72nd consecutive month for net inflows to exchange-traded funds.

“It illustrates how ETFs have moved on to become a core part of the investing infrastructure,” said Deborah Fuhr, founder of ETFGI.

Still a US Story, for Now

Across ETFs both active and passive, total global inflows for the quarter were $637 billion, with nearly three quarters, $470 billion, of that in US-domiciled funds, the group found. Investors in Europe and Canada followed, with net inflows of $129 billion and $54 billion, respectively, in funds domiciled there. Still, the Asia-Pacific region has been growing considerably as regulations favor ETFs and more retail investors are seeking them, per a recent report from Citi. As of the end of February, total assets in ETFs were more than $1.8 trillion in the zone, projected to nearly double by 2030, the firm concluded. By comparison, total US assets in ETFs are about $13 trillion.

Product launches also illuminate the trend:

• Of the 626 net new funds appearing globally in the first quarter, 203 were US ETFs.
• Asia-Pacific (not including Japan) ETFs followed, at 174.
• Meanwhile, there were 138 new ETFs in Europe, 68 in Canada and 28 in Japan, on a net basis.

What People Want: While many of the new products are single-stock, leveraged or thematic funds, most of the ETFs seeing the highest flows are much more diversified and well-established. The State Street SPDR Portfolio S&P 500 ETF (SPYM), for example, brought in more than $27 billion, followed by the Vanguard S&P 500 ETF (VOO), at over $22 billion. However, a new fund, the ProShares Genius Money Market ETF, was not far behind, at nearly $22 billion in net flows. “A lot of people still think it’s a niche thing, especially outside the US,” Fuhr said. “People don’t realize how significant the use of ETFs really has become.”