Structured ETFs and Other Modern Portfolio Tools
Matt Kaufman of Calamos Investments talks us through the historical context of structured ETFs and their development into derivatives based products that suit a wide range of investor types.
This episode is brought to you in partnership with Calamos Investments.
Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute Calamos’ judgment and are subject to change without notice. The views and strategies described may not be appropriate for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.
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Beverly Chandler
Hello and welcome to our latest edition of the Off the Record podcast from ETF Express. My name is Beverly Chandler and I’m Managing Editor. This week I take great pleasure in welcoming back an old hand at Off the Record, Matt Kaufman of Calamos Investments, who first joined us back in December 2024 for Episode 18: Keeping It Structured, Structured Outcome ETFs with Vinit Srivastava of Mercube. I urge you to go and listen to this, but obviously only once you have concluded listening to our current outing. Many of the subjects that he and Vinit discussed will be under further scrutiny today in the first podcast, which is the first in a series of three from Calamos Investments, designed to help our audience understand active ETFs, structured outcome ETFs and ETFs that are based on derivatives, our old friends, the autocallable ETFs. Matt, welcome back to Off the Record. And can you start with giving me a little background on Calamos Investments?
Matt Kaufman
Sure, appreciate it, Beverly. And I’ll take your old comment as a compliment. Most of the time people say I look young. So old hand, I’ll take that one. I appreciate it. If you’re not familiar with Calamos, Calamos is a 50-year-old alternatives investment manager. We are the largest manager of convertible bonds in the United States, we’re second largest globally, and we have been around since 1977. To continue on the age theme. I was born in 1982, you know, after Calamos was founded. You would be hard-pressed to find an asset manager with more options experience than Calamos. The Chicago Board Options Exchange opened in 1973, and Calamos was just founded a few short years after that. Fast forward to today, the firm has multiple product lines, private credit funds. We have a handful of mutual funds that have been in the market for quite a while, and ETFs. A lot of the ETFs that we are building are bringing into the market this concept of structured ETF, which is to deliver outcome-based solutions and actually partnering with equity derivatives desks around the world to bring in their really good options strategies that aren’t necessarily even listed options. So we’re seeing that space grow tremendously fast in the United States, and we’re also seeing growth throughout the world as well.
Beverly Chandler
There’s been a huge growth in assets under management for ETFs over recent years. So let’s peel back and start with that. What’s your observations on that?
Matt Kaufman
Yeah, we’ve seen tremendous inflow into active ETFs in the United States in particular. The word active doesn’t really mean what it used to mean when it comes to ETFs. So active ETF simply means that it is no longer tracking an index. So if you’re familiar with the ETF landscape, the first ETF was launched in 1993 in the United States, and it was tracking the S&P 500 index, and then you had the NASDAQ 100 version. Until a few years ago most ETFs tracked an index, and then we had this idea of bringing discretionary ETFs, where you’re actually choosing stocks or bonds inside of a fund, does not track an index. Well options-based ETFs have tremendously grown in the US and that has led to a boom in active ETFs because most options-based ETFs are not passively filed. They don’t track an index. So you have two different categories here. You have active discretionary products where you’re actively selecting stocks and bonds. And then you have actively filed products that are more structured in nature that are using options to deliver income, to deliver growth or risk management. Those are essentially your three buckets you can do with options strategies. And that’s driving a majority of what we would call the active ETF landscape in the US. Starting to see that grow in Europe as well. Just in the first half of this year, we’ve seen more than 350 billion US dollars flowing into that active ETF category. One of the main things that’s driving that growth is derivative income. This idea of generating income from options strategies, selling off your market upside, maybe a buy right strategy, covered calls, where you’re collecting an income payment for that sale, and it creates a differentiated source of income. It is equity linked income, income tied to the stock market as opposed to traditional bond factors like duration or credit. So why would people want that? What is actually driving that demand? We are seeing demand for income that is not tied to those traditional factors like interest rates. Think of inflation that we have seen not just in the US but around the world. If inflation is rising, that has a negative impact on bond values. And so where historically a lot of investors would look to the fixed income markets for risk management and for income, they’re having trouble finding those today. And so they’re looking for alternative sources and they’re looking at the options ETF space to do it.
Beverly Chandler
And I think in our previous outing, I really liked the fact that you gave a historical context for the invention of structured outcome ETFs. I think it was from the insurance industry. Can you repeat that?
Matt Kaufman
Sure. Europe is very familiar with the banking industry. In the United States, a lot of money is managed through financial planners, financial professionals. There are a lot of what are known as registered investment advisors. And those folks will put you in a portfolio of mutual funds, of ETFs. When we look overseas, a lot of that money is managed through the large bank channels. And those banks are very good at structuring. They’re very good at structured products. And so that’s where a lot of the money is managed. And it’s not just in Europe. We see that throughout Asia as well. The structured note landscape outside of the United States is much more mature than it is in the US. And so what we’ve seen at Calamos is here in the ETF world, a lot of investors and advisors understand ETFs but they need to learn the structuring. And it’s the inverse when we go to other markets. They understand structuring, but need to understand and be educated on how that fits into the ETF wrapper in particular. But what we have done, I’ve been in the ETF market for about 23 years or so, spent about half of that at an actuarial consulting firm where we were building out insurance type products. An insurance company will issue products off of its balance sheet similarly to how a bank might issue products off of their balance sheet and largely structured solutions. If you look at the buffered space, the buffered note was a popular strategy in a lower interest rate environment where you could get the upside of the market to a cap rate with a built-in buffer over an outcome period. Those are termed vehicles. We built the defined outcome space through my seat at Milliman there. We saw a lot of bank products doing that as well. Insurers followed suit in 2012, building out what is known as the index linked annuity. The RILA is maybe a US term here. But that really gave rise to the ability to do that into the ETF wrapper. We didn’t necessarily need a bank’s balance sheet to deliver a put spread collar on a broad index. That’s a very liquid market. We have listed options on that liquid market. And so that means that those are now securities. So we can bring that into the ETF framework and deliver the same experience that people were used to getting at an institutional level and give it to them at an ETF level, which is now accessible. The $250,000 minimum became a $25 minimum, one share you can buy at any time the market is open. The other interesting point is you could sell it anytime the market is open. It now had a price. It had liquidity to that structured outcome. Fast forward to today, that was almost 10 years ago, believe it or not. Fast forward to today, and we are now partnering with those banks’ equity derivatives desks to bring non-listed options strategies into the ETF ecosystem. And it’s largely done so through swap. So one thing that we’ve done in the US here and in the UCITS forum as well is partnering with JP Morgan on some popular yield note strategies that they have, built an index out of that. Mercube built that laddered index. And then we trade that index on swap. And so that allowed us to then take very popular structured note strategies and bring it into the ETF wrapper, which is why we’re calling that structured ETFs. So maybe you have active discretionary, you have passive, and now we have structured, a structured ETF category. You are seeing the rise of that today. The first one was launched in the US June of 2025. And now there’s well north of 70 products in registration or in market around the world that are doing similar ideas.
Beverly Chandler
And switching to the end user from all of this, which is quite high knowledge-based investment, how do you explain and educate first the advisor and how do they explain to the end user how this all works?
Matt Kaufman
Great question. Education is key here. So depending on the strategy, we educate advisors so that they can then equip their end users or their clients with an understanding. You want to first understand what the product is, what it is designed to deliver, and what it’s not designed to deliver. We take a very balanced view of what are the risks associated with the strategy and what are the potential rewards. Because we’re dealing oftentimes with people’s life savings, we don’t want to get that wrong. We don’t want them to be misled. So if you’re talking about a buffered strategy, you can tell them that you are getting the upside to a cap rate. There is no free lunch. You can understand with certainty what that is and what the protection level is, what the trade-off is that you are getting for that upside and downside. And then it’s designed to be delivered over an outcome period. There are laddered strategies as well in the market that do that also, that ladder together different types of defined outcomes, and that will give you a smoother portfolio experience. So we want people to understand what they’re getting into. When you move more into structured ETFs, those are laddered portfolios, usually of autocallable yield notes or synthetic autocallable yield notes, which is a new term for this podcast in particular. And those are a lot like bonds. that are tied to the stock market. So you’re generating equity linked income and you’re going to receive that income as long as the index you’re tied to is not down too far. And so you can create illustrations to educate the market on how deep those protection levels are, when your income is paid, when it isn’t paid. And you can make it very clear as to when it will work and when that income will turn off or what those trade-offs are. You’re giving up the risk of losing income in a deep bear market for a little bit higher income in a positive market.
Beverly Chandler
And also it’s ETFs, so if they find they’re in a position they’re not comfortable with, they can just sell them, right?
Matt Kaufman
That’s a great point.
Beverly Chandler
Also, you can also use autocallable ETFs or structured outcome ETFs for growth, not just for income. Is that fair?
Matt Kaufman
Exactly. I bucket options in terms of their ability to deliver something to a client in three categories. You can deliver growth, you can deliver income, or risk management, or any combination of the three. And there’s trade-offs with all of them. You can’t give someone all of the upside and all of the protection. That is an impossible trade. There is no free lunch in the market. So we launched the first autocallable income ETF in the US. We did similar through UCITS form as well. And then we followed on in the US with an autocallable growth strategy. One interesting point when you do an autocallable growth strategy in an ETF, you do not have to distribute out the coupons. And so we can create a snowball-like note or a snowball effect where you’re capturing coupons and accumulating and compounding those over time. And then we do not anticipate distributing anything out. And so that creates an experience where you’re taxed when you sell. If you have a note, then that has a maturity date and it has a taxable event at the maturity date. So that’s how we do it in the US here again. But that’s an interesting way to deliver autocallable growth through the ETF mechanism. I think the higher level bullets here are when you take a strategy that’s worked very well for the bank channel for a very long time, you ladder it together, you put it inside of an ETF wrapper, you can introduce liquidity, you introduce transparency, you know the underlying holdings, And then at times you can introduce this compounding effect. So depending on the jurisdiction and not tax advice, but we do see some tax advantages in certain markets.
Beverly Chandler
And this means also that this product, which was originally developed to create income, is now of use to a wider range of investors. Is that correct?
Matt Kaufman
That’s right. Yeah, we are seeing a boom in derivative income strategies. In the United States alone, it’s more than $100 billion in funds. You have a lot of covered call strategies that will sell off upside, collect an income payment for that. The income you collect is largely dependent on interest rates, on volatility, on dividends. So if interest rates are low and volatility is low, the income you collect may be low for that month. And then the inverse is true. If volatility is high, when you make that sale, you sell off your upside, you might collect a higher income. Well, with autocallables sometimes you can manage the volatility of the underlying. You can stabilize that volatility, which helps create a more stable income. And then again, autocalls are a lot like bonds which will either mature at par or they will be called away early at par. The risk would be that you mature below your barrier and then you do not get par back. But you can design products that have historically returned par value 100% of the time if you look at that strategy historically. But that said, if you’re designed to mature at par and you can stabilize the income, you can create an experience through the ETF wrapper that delivers a high stable income that would be paid out in most market environments. And then one of the risks that people see with the covered calls is this NAV decay over time. Because as the market is declining, or if the market declines, you have to sell off your upside at a lower market level. And that creates difficulty to then appreciate back above that level that you’ve sold off. If you have a basket of bonds or a basket of notes that are designed to mature at par, you’ve got a natural pullback to par effect from those notes, which creates maybe a better experience for returning back to par, and that can help eliminate any NAV decay that might otherwise be associated with derivative income. So we see this $100 billion plus market in covered calls in the structured note market in the US, autocallable income, another type of derivative income is $100 billion plus per year in issuance. And it’s multiples of that globally. It’s a massive space that we see moving into the fund wrapper.
Beverly Chandler
Thank you. Thank you so much for this. And we look forward to re-meeting you. We’ve got another outing where we’ll drill down further into this subject. But let me thank you for your time today. Matt Kaufman of Calamot Investments, and to you for listening. Remember to subscribe and leave a review and feel free to contact us at podcast@chandlerpublishing.com. This has been an Off the Record recording from ETF Express in partnership with Calamos Investments.
Outro
Off the Record is brought to you by Chandler Publishing. Production by Imogen Rostron. Music by Otto Balfour and hosted by me, Beverly Chandler. Thank you to our guests on this episode of Off the Record and to you for listening. We look forward to you joining us next time.