Transcript:
Caroline Woods:
Inflation expectations are creeping higher again and investors are wondering whether traditional income strategies are enough anymore. How does that change the income playbook? Matt Kaufman is global head of ETFs at Calamos Investments and joins us now. Matt, so good to have you. Thanks so much for being here.
Matt Kaufman:
Always a pleasure. Thanks for having me.
Caroline Woods:
So we’ll talk about inflation and its impact on income and growth. But before we get into that and the funds tell us does the traditional 60 portfolio still work. And if you’re building a portfolio today, how should you think about balancing both income and growth?
Matt Kaufman:
Okay. If we look at that traditional 6040 portfolio, I think it’s important to look at how it was historically constructed. You know, we have 60% in stocks, maybe 40% in bonds. The way that you usually would arrive at that is by meeting with maybe your financial advisor. He’d go through a list of checkboxes, a list of questions, and you would identify your risk tolerance, and then it would move you into this checkbox, whether it was a conservative or moderate or an aggressive portfolio.
Matt Kaufman:
And that would give you some mix of assets, stocks and bonds that would have historically moved differently from each other in order to give you, a risk tolerance or historical volatility level. You know, the only way to know if that actually succeeds is to live another 20 years and then look back and say, okay, did my 6040 portfolio hold up?
Matt Kaufman:
You know, we know at times that those assets can work together and become highly correlated, especially when markets fall. So at Calamus, we’re actually seeing people move away from the 6040 and more into maybe a 50, 30, 20 model where they’re moving into alternatives, exposure through private and through alternative assets, especially when it comes to income. You know, historically, people would look to bonds for risk management and for income at times it’s difficult to get both of those.
Matt Kaufman:
You know, interest rates are a little higher than they were a few years ago. And so you can maybe get income from bonds again if interest rates start to rise, that can, you know, hurt the value of those bonds. And so that becomes difficult from a risk management perspective. So we are seeing people move away from bonds for risk management and also for income.
Matt Kaufman:
You’re seeing a growth of derivative income strategies being able to generate income from nontraditional sources. And you know, to your point earlier towards sources that are more tied positively to inflation, you do not want to draw income from a source that’s going to hurt you when inflation continues to rise.
Caroline Woods:
So why should investors, even considering consider looking elsewhere outside of traditional bond funds today?
Matt Kaufman:
Yeah, I think for different types of investors, you know, let’s look at maybe somebody who’s looking to provide for themselves when they no longer work. Maybe a retiree. You know, we’re facing this retirement income crisis in America. There’s a retirement boom happening. We’ve got the baby boomers retiring. More than 11,000 people are retiring every single day. It is more humans in US history than we’ve ever seen before.
Matt Kaufman:
And these people have got to generate income for themselves. But in an interest rate environment that might be rising in an inflationary environment, relying solely on bonds for that income, you know, can provide, to be difficult or proved to be difficult. So we are seeing people move into more derivative income type strategies where you have equity linked income, you have an income source that’s derived from either maybe call options selling or in the case of auto, a long dated put option strategy that can generate high stable income.
Matt Kaufman:
But you’re positively tied to inflation because we know that inflation ultimately moves through the equity markets in a positive manner. And so in a risk management way, in a risk managed way, you need to be tied to inflation. But oftentimes just an outright exposure to the equity markets can be too risky. But if you use something like a bond that looks a lot like the equity markets, now, you can tie yourself to inflation, get a high stable income, and that can be part of an overall portfolio.
Matt Kaufman:
That’s not just tied to, you know, negatively impacted assets as inflation is moving on you.
Caroline Woods:
So that’s where your ETF comes in the most your auto callable income ETFs a I e. So tell us what does that ETF actually replace in the portfolio. That and does it replace bonds or cash or dividend stocks. Or is it something you should own alongside of those.
Matt Kaufman:
Yeah we’re seeing people replace high yield bonds. We’re seeing people use this as an equity alternative. So see I was the first auto callable ETF in the world, taking a very popular structured note type strategy, flattering it out, giving people ladder exposure to what’s known as auto callable yield notes. We’ve done that in a very systematic and evergreen way and put it into a single ticker C, I e and then we have C, I q, which is on the Nasdaq 100 framework.
Matt Kaufman:
But the goal is high, stable and tax efficient income. If you’re holding these outside of a retirement account or a qualified account, then the income you receive is largely treated as return of capital. So that’s just going to reduce your cost basis over time and gives you really tax efficient income. That’s going to be treated as long term capital gains if you’ve held for longer than a year.
Matt Kaufman:
So it’s a really tax efficient way to seek high stable income. We are seeing people use this in their retirement models, again, as an equity replacement, as a high yield bond replacement. Some that might not think the equity markets are going up by 14 or 18% every year. That’s the income that we are distributing from chi and chi.
Matt Kaufman:
Q so a really high income amount. So if you don’t think the equity markets are going to deliver that, this might be a way to achieve that without needing the equity markets to give it to you. Others are saying, you know, I don’t necessarily need 14 or 18% income from my portfolio, so they might take 4 or 5, 6%.
Matt Kaufman:
You know, you think of the 4% rule, which is a traditional standard for retirement withdrawal rates. If you take 4% from a 14% distributing asset, well, now you can create a cost basis, of maybe 20, 25 years. Very tax efficient income. Reinvest the difference and you’ll have it the other 10% as a growth vehicle just compounding over time.
Matt Kaufman:
So an interesting way for investors is essentially those who are providing for themselves through their portfolio to generate, increased and high stable income without needing to be tied to inflation. I think that is a very critical point. You know, we are still seeing inflation in the market, especially in food and energy and housing. You know, a lot of the boomers are now selling their homes and they are collecting, you know, pretty good capital gains from, from that sale, which is, great for them.
Matt Kaufman:
They’ve been in the housing market for a long time. What if we look at the growth portion of the market, those investors who maybe haven’t entered into the housing market yet, you know, they’re facing the opposite. Housing prices have gone up tremendously. Continue to do so. We see that through CPI just printed, you know, about a month ago here.
Matt Kaufman:
And so how do you keep up or outpace inflation in that type of environment. And for those investors we have built cage KG which is designed for amplified growth over time. No distributions but compounding high coupons inside of the fund. And so, you know, inflation can hit both sides of the spectrum here. Whether you’re in retirement needing income or whether you’re a growth investor who’s looking to outpace the market because, you know, you might be having a big spend coming up.
Matt Kaufman:
But if you can’t outpace inflation, it becomes very difficult for you.
Caroline Woods:
Okay, so let’s talk about Cage Your Growth Fund that was designed as an alternative to traditional leveraged ETFs. So without getting too technical, too complicated, what makes it different? And for those investors who want to outperform the S&P 500 to end up using leveraged ETFs, what are they getting wrong?
Matt Kaufman:
Sure. Maybe we’ll frame around covered calls. So a lot of folks understand covered call strategies. You sell off your upside collecting income payment for that. Well if you go to the auto call space it’s a lot like a put writing strategy. You collect a high premium income. And here we don’t distribute that. It stays in the fund.
Matt Kaufman:
And then it has an annual review to each of the notes so that at the end of the first year, if the reference index is positive, you collect and crystallize about a 25 to 30% coupon in the fund. And if the reference index is negative, you simply move into the second year, which at the end of the second year you’ll get twice the coupon if the reference index is positive.
Matt Kaufman:
So it has this unique feature where you can store growth when the market does not deliver it, and then you get all of that when the market recovers, you can almost go back in time to capture the growth, credits that were missed in the first year or two year. So I’ve got, cage in my own retirement portfolio.
Matt Kaufman:
I put my kids into cage. It is designed for amplified growth over time. To your point, on leveraged ETFs, you know, didn’t really designed this to compete with those products. They’re designed to give you daily to X exposure. Those tend to have a lot of nav decay, which is why you don’t want to hold those over the long term.
Matt Kaufman:
Well, this is a long term vehicle that has about 1.3 beta to the S&P. You would have historically, if you look at the index were trading on swap, you would have done about two and a half times the S&P over the last 20 years. And so that’s where we get the conclusion. This might be a better way to hold the S&P leveraged products long term.
Matt Kaufman:
The other way to think about it is as an S&P 500 replacement, you know, we’ve done the research and about a 70% allocation into cage would have historically in the index delivered about the same vol as the S&P 500. So 70% of the of the amount can get you about 100% of the exposure of SPI with even better historical average annual returns.
Matt Kaufman:
So we really like cage around here. You really can’t distribute, that type of product in structured note form because those have to distribute coupons here in the ETF. We can actually keep the coupons and compound them over time. A pretty remarkable opportunity. For those looking to grow their portfolio.
Caroline Woods:
Okay. So we’re not quite to the rapid fire segment yet, but I’m getting the rats signal and I have about five more questions. So we’ll have to keep this kind of quick, just in terms of, you know, so just quick questions and quick answers here. What kind of market, what actually disappoints or would make these ETFs disappoint investors?
Matt Kaufman:
Yeah, you can think of this a lot like an equity movement, like an equity like instrument that has a par value, like a bond. So it almost has this extra layer of protection where if the market is down, you might be trading at a discount to your par value. But as long as your barriers are not breached, which historically does not happen that often, sometimes, you know, never going back to zero five.
Matt Kaufman:
But as long as they’re not breached, you’re going to go back to par. And so that is a unique feature of an article where you’ve got equity like movement, which you’ve got a par value, to protect yourself.
Caroline Woods:
So who’s the right investor for stage and CIO and who probably isn’t.
Matt Kaufman:
Yeah. That suitability is not something I’m allowed to, you know, make for folks. But I would say if you’re seeking amplified growth over time, that’s how we design cage. And if you’re seeking high, stable and tax efficient income, Kai. And you are squarely designed for that purpose.
Caroline Woods:
And you talked about this 14% coupon when referencing Chi CE. That seems pretty incredible. So just break it down for us quickly. Where does that actually come from. And I guess what’s the catch. Because it sounds almost. Yeah yeah yeah.
Matt Kaufman:
We hear that a lot. It’s part of our product development process here is if it sounds too good to be true, if we’re able to deliver that, that, you know, it helps squeeze the products through the filter. We have tied your income to a high volatility version of the S&P 500. When you do that every time you sell an option.
Caroline Woods:
Inflation expectations are creeping higher again and investors are wondering whether traditional income strategies are enough anymore. How does that change the income playbook? Matt Kaufman is global head of ETFs at Calamos Investments and joins us now. Matt, so good to have you. Thanks so much for being here.
Matt Kaufman:
Always a pleasure. Thanks for having me.
Caroline Woods:
So we’ll talk about inflation and its impact on income and growth. But before we get into that and the funds tell us does the traditional 60 portfolio still work. And if you’re building a portfolio today, how should you think about balancing both income and growth?
Matt Kaufman:
Okay. If we look at that traditional 6040 portfolio, I think it’s important to look at how it was historically constructed. You know, we have 60% in stocks, maybe 40% in bonds. The way that you usually would arrive at that is by meeting with maybe your financial advisor. He’d go through a list of checkboxes, a list of questions, and you would identify your risk tolerance, and then it would move you into this checkbox, whether it was a conservative or moderate or an aggressive portfolio.
And that would give you some mix of assets, stocks and bonds that would have historically moved differently from each other in order to give you, a risk tolerance or historical volatility level. You know, the only way to know if that actually succeeds is to live another 20 years and then look back and say, okay, did my 6040 portfolio hold up?
You know, we know at times that those assets can work together and become highly correlated, especially when markets fall. So at Calamus, we’re actually seeing people move away from the 6040 and more into maybe a 50, 30, 20 model where they’re moving into alternatives, exposure through private and through alternative assets, especially when it comes to income. You know, historically, people would look to bonds for risk management and for income at times it’s difficult to get both of those.
You know, interest rates are a little higher than they were a few years ago. And so you can maybe get income from bonds again if interest rates start to rise, that can, you know, hurt the value of those bonds. And so that becomes difficult from a risk management perspective. So we are seeing people move away from bonds for risk management and also for income.
You’re seeing a growth of derivative income strategies being able to generate income from nontraditional sources. And you know, to your point earlier towards sources that are more tied positively to inflation, you do not want to draw income from a source that’s going to hurt you when inflation continues to rise.
Caroline Woods:
So why should investors, even considering consider looking elsewhere outside of traditional bond funds today?
Matt Kaufman:
Yeah, I think for different types of investors, you know, let’s look at maybe somebody who’s looking to provide for themselves when they no longer work. Maybe a retiree. You know, we’re facing this retirement income crisis in America. There’s a retirement boom happening. We’ve got the baby boomers retiring. More than 11,000 people are retiring every single day. It is more humans in US history than we’ve ever seen before.
And these people have got to generate income for themselves. But in an interest rate environment that might be rising in an inflationary environment, relying solely on bonds for that income, you know, can provide, to be difficult or proved to be difficult. So we are seeing people move into more derivative income type strategies where you have equity linked income, you have an income source that’s derived from either maybe call options selling or in the case of auto, a long dated put option strategy that can generate high stable income.
But you’re positively tied to inflation because we know that inflation ultimately moves through the equity markets in a positive manner. And so in a risk management way, in a risk managed way, you need to be tied to inflation. But oftentimes just an outright exposure to the equity markets can be too risky. But if you use something like a bond that looks a lot like the equity markets, now, you can tie yourself to inflation, get a high stable income, and that can be part of an overall portfolio.
That’s not just tied to, you know, negatively impacted assets as inflation is moving on you.
Caroline Woods:
So that’s where your ETF comes in the most your auto callable income ETFs a I e. So tell us what does that ETF actually replace in the portfolio. That and does it replace bonds or cash or dividend stocks. Or is it something you should own alongside of those.
Matt Kaufman:
Yeah we’re seeing people replace high yield bonds. We’re seeing people use this as an equity alternative. So see I was the first auto callable ETF in the world, taking a very popular structured note type strategy, flattering it out, giving people ladder exposure to what’s known as auto callable yield notes. We’ve done that in a very systematic and evergreen way and put it into a single ticker C, I e and then we have C, I q, which is on the Nasdaq 100 framework.
But the goal is high, stable and tax efficient income. If you’re holding these outside of a retirement account or a qualified account, then the income you receive is largely treated as return of capital. So that’s just going to reduce your cost basis over time and gives you really tax efficient income. That’s going to be treated as long term capital gains if you’ve held for longer than a year.
So it’s a really tax efficient way to seek high stable income. We are seeing people use this in their retirement models, again, as an equity replacement, as a high yield bond replacement. Some that might not think the equity markets are going up by 14 or 18% every year. That’s the income that we are distributing from chi and chi.
Q so a really high income amount. So if you don’t think the equity markets are going to deliver that, this might be a way to achieve that without needing the equity markets to give it to you. Others are saying, you know, I don’t necessarily need 14 or 18% income from my portfolio, so they might take 4 or 5, 6%.
You know, you think of the 4% rule, which is a traditional standard for retirement withdrawal rates. If you take 4% from a 14% distributing asset, well, now you can create a cost basis, of maybe 20, 25 years. Very tax efficient income. Reinvest the difference and you’ll have it the other 10% as a growth vehicle just compounding over time.
So an interesting way for investors is essentially those who are providing for themselves through their portfolio to generate, increased and high stable income without needing to be tied to inflation. I think that is a very critical point. You know, we are still seeing inflation in the market, especially in food and energy and housing. You know, a lot of the boomers are now selling their homes and they are collecting, you know, pretty good capital gains from, from that sale, which is, great for them.
They’ve been in the housing market for a long time. What if we look at the growth portion of the market, those investors who maybe haven’t entered into the housing market yet, you know, they’re facing the opposite. Housing prices have gone up tremendously. Continue to do so. We see that through CPI just printed, you know, about a month ago here.
And so how do you keep up or outpace inflation in that type of environment. And for those investors we have built cage KG which is designed for amplified growth over time. No distributions but compounding high coupons inside of the fund. And so, you know, inflation can hit both sides of the spectrum here. Whether you’re in retirement needing income or whether you’re a growth investor who’s looking to outpace the market because, you know, you might be having a big spend coming up.
But if you can’t outpace inflation, it becomes very difficult for you.
Caroline Woods:
Okay, so let’s talk about Cage Your Growth Fund that was designed as an alternative to traditional leveraged ETFs. So without getting too technical, too complicated, what makes it different? And for those investors who want to outperform the S&P 500 to end up using leveraged ETFs, what are they getting wrong?
Matt Kaufman:
Sure. Maybe we’ll frame around covered calls. So a lot of folks understand covered call strategies. You sell off your upside collecting income payment for that. Well if you go to the auto call space it’s a lot like a put writing strategy. You collect a high premium income. And here we don’t distribute that. It stays in the fund.
And then it has an annual review to each of the notes so that at the end of the first year, if the reference index is positive, you collect and crystallize about a 25 to 30% coupon in the fund. And if the reference index is negative, you simply move into the second year, which at the end of the second year you’ll get twice the coupon if the reference index is positive.
So it has this unique feature where you can store growth when the market does not deliver it, and then you get all of that when the market recovers, you can almost go back in time to capture the growth, credits that were missed in the first year or two year. So I’ve got, cage in my own retirement portfolio.
I put my kids into cage. It is designed for amplified growth over time. To your point, on leveraged ETFs, you know, didn’t really designed this to compete with those products. They’re designed to give you daily to X exposure. Those tend to have a lot of nav decay, which is why you don’t want to hold those over the long term.
Well, this is a long term vehicle that has about 1.3 beta to the S&P. You would have historically, if you look at the index were trading on swap, you would have done about two and a half times the S&P over the last 20 years. And so that’s where we get the conclusion. This might be a better way to hold the S&P leveraged products long term.
The other way to think about it is as an S&P 500 replacement, you know, we’ve done the research and about a 70% allocation into cage would have historically in the index delivered about the same vol as the S&P 500. So 70% of the of the amount can get you about 100% of the exposure of SPI with even better historical average annual returns.
So we really like cage around here. You really can’t distribute, that type of product in structured note form because those have to distribute coupons here in the ETF. We can actually keep the coupons and compound them over time. A pretty remarkable opportunity. For those looking to grow their portfolio.
Caroline Woods:
Okay. So we’re not quite to the rapid fire segment yet, but I’m getting the rats signal and I have about five more questions. So we’ll have to keep this kind of quick, just in terms of, you know, so just quick questions and quick answers here. What kind of market, what actually disappoints or would make these ETFs disappoint investors?
Matt Kaufman:
Yeah, you can think of this a lot like an equity movement, like an equity like instrument that has a par value, like a bond. So it almost has this extra layer of protection where if the market is down, you might be trading at a discount to your par value. But as long as your barriers are not breached, which historically does not happen that often, sometimes, you know, never going back to zero five.
But as long as they’re not breached, you’re going to go back to par. And so that is a unique feature of an article where you’ve got equity like movement, which you’ve got a par value, to protect yourself.
Caroline Woods:
So who’s the right investor for stage and CIO and who probably isn’t.
Matt Kaufman:
Yeah. That suitability is not something I’m allowed to, you know, make for folks. But I would say if you’re seeking amplified growth over time, that’s how we design cage. And if you’re seeking high, stable and tax efficient income, Kai. And you are squarely designed for that purpose.
Caroline Woods:
And you talked about this 14% coupon when referencing Chi CE. That seems pretty incredible. So just break it down for us quickly. Where does that actually come from. And I guess what’s the catch. Because it sounds almost. Yeah yeah yeah.
Matt Kaufman:
We hear that a lot. It’s part of our product development process here is if it sounds too good to be true, if we’re able to deliver that, that, you know, it helps squeeze the products through the filter. We have tied your income to a high volatility version of the S&P 500. When you do that every time you sell an option.
Matt Kaufman:
We collect about 10.5% over the risk free rate for Chi. That’s how we can confidently deliver, around a 14% income today. Historically, it’s about 10.5% over the risk free rate. When you ladder those out 52 or more times, you put protective barriers on at all. The historical vol is more like 17% right in line with the S&P 500.
So you can confidently make the statement if you’re comfortable with S&P 500 like risk, you can turn it in for a high stable coupon.
Caroline Woods:
What’s the biggest trade off of risk, though, that investors should understand before considering either of these funds?
Matt Kaufman:
Yeah. You’re taking on equity market tail risk. So you’re going to get paid that 14% coupon as long as the 52 underlying synthetic notes are trading above a -40% threshold. So that means the reference index that we’re tied to, as long as it’s above -40%, a very protective barrier, you’re going to earn that coupon. If we look at the index that we are trading on swap, you would have received about 97% of those coupons.
So the risk is you hit a global financial crisis type event where some of your coupons might turn off. And then eventually over the next 4 or 5 years, if there’s no recovery, you might have some principal impairment. Those would be the things to look at if you’re looking for auto call, ETFs. Look at the tenor. Look at how long, each of the life of the notes are.
You want to see a long life? 3 to 5 years. And from our perspective, so that you have time to recover, in order to get back to that par value.
Caroline Woods:
Okay. So you did a good job of sort of breaking down who should maybe think about even though you can’t certify people. You said, but I guess we should maybe think about this, some of the risks that they should consider. But if this if someone listening is hearing about auto callable ETFs for the first time today, what’s the first question they should ask before deciding whether one belongs in their portfolio?
Matt Kaufman:
Yeah, usually it’s what is an auto call sum of some of those terms might be new to you. You can think of an auto call a lot like a bond that trades like a stock. And so it’s a bond. And in the fact that it has a par value, it distributes a monthly coupon, and the underlying will move a lot like the stock market, and you’re going to get paid as long as that market is not down too far.
So if you can understand that, you can wrap your mind around an auto call and then understanding what the risk is, the risk is a severe, sustained market decline where your coupons might turn off. We give you all of that information on our website. You can look at the dashboard and see exactly where each of those auto calls history is trading.
There’s no guesswork involved. You don’t have to wonder, is my coupon going to be there or not? You can see exactly the health of every underlying, note in the portfolio. So we give you all that information so that you don’t have to wonder.
Caroline Woods:
Okay. All right. I think this is a great time to pivot to our rapid fire round. So this is very quick questions very quick answers. Are you ready?
Matt Kaufman:
I’m ready.
Caroline Woods:
Here we go. Sticky inflation. Biggest threat to this rally or overblown concern.
Matt Kaufman:
It’s a threat.
Caroline Woods:
6040 or something new.
Matt Kaufman:
Something new.
Caroline Woods:
Bigger mistake. Sitting in too much cash or taking too much risk.
Matt Kaufman:
Too much cash.
Caroline Woods:
Cash or income.
Matt Kaufman:
Ooh, I gotta go.
Caroline Woods:
Income diversification or concentration?
Matt Kaufman:
Diversification.
Caroline Woods:
Always for someone starting from scratch today, CE or GE.
Matt Kaufman:
If you are younger and starting from scratch, see a GE all the way, you’re going to get amplified growth over time. That’s the one I would do. If you’re entering the retirement risk zone, I would go chi chi Q.
Caroline Woods:
Traditional bond funds or alternative income.
Matt Kaufman:
I think you know that answer. I’m going to go out.
Caroline Woods:
Core ETFs or satellite strategies.
Matt Kaufman:
I think you got to do both. I think you need core ETFs. Sometimes alts can serve as your core and then use the satellite to explore.
Caroline Woods:
One asset class or strategy investors should be paying more attention to.
Matt Kaufman:
That’s a very good question. Six months ago I would have said memory stocks. I don’t know the future. And so I don’t have a good answer for that.
Caroline Woods:
What ETF trend do you think is still underappreciated?
Matt Kaufman:
The auto call trend, I’ve got to say, is going to be a big one. We built a framework for delivering structured strategies, equity derivative strategies into the ETF wrapper. It’s only a year old. You’re going to see, you know, dozens if not hundreds of these types of instruments over the next several years.
Caroline Woods:
Buy and hold or tactical allocation.
Matt Kaufman:
We’re a buy and hold shop. Calamus is, tagline that we use around here is it’s time in the market, not timing the market. So I don’t want to go against house, do you, on that one?
Caroline Woods:
We’ve heard that one before. Most common portfolio mistake.
Matt Kaufman:
Oh, that’s a great question. I would say, going back to the 6040. You don’t want to tie yourself to assets that are going to be hurt by inflation if you’re trying to outpace it or if you need to outpace it.
Caroline Woods:
And finally, complete this sentence. Investors spend too much time worrying about blank.
Matt Kaufman:
Volatility. Yeah. If you’re long term buy and hold investor we’ve got to ignore the headlines.
Caroline Woods:
All right. We’ll leave it there. Matt Kaufman, global head of ETFs at Cal Investments. Thanks so much for playing along and for shedding some light on auto callable ETFs.
Matt Kaufman:
No it’s fine. Appreciate it.
Caroline Woods:
If you enjoyed this talk check out our full interview with Thomas DeFazio. He breaks down his firm’s Deram ETF and why he believes this memory cycle is still in its early innings.
#Beat #SampP #heres #strategy #investors #switching