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New Stock ETFs Offering ‘100%’ Downside Protection Are Coming
A huge problem during the GFC was the CDS (credit default swaps) sold by insurance companies and institutions. When the underlying credits collapsed, the CDS skyrocketed. At its worst, AIG had a liability of $150-200 billion - it was literally bankrupt many times over. It was rescued because AIG was also deeply into commercial insurance, and without a viable AIG, planes couldn't take off, ships couldn't leave the ports, etc.
Why did AIG do such a stupid thing? The CDS were the new game in town that not only had been mispriced, but they were not stress-tested (for another reason, that is what happened with LTCM, 1994-98 too).
Are there things today that haven't been stress-tested? Well, that is ODTE or 0-1-day options, that now have more than half the daily volume of some major indexes. Some day, people would say the same thing - why were people so crazy about the ODTE?
The Calamos products reset once a every year. So, if I were to invest in an investment grade fixed income product with 1yr effective duration, it seems I am guaranteed the current YTM and probably could strive to achieve the same zero loss (or 0.7% loss net of ER) CPSJ is offering. I have not checked how far down in investment grade I need to dip to get YTM of 6% but I am hoping at that YTM, the presumed zero loss of principal is achievable, given where we are in the credit cycle. The risk for the potential +3 / - 6% return band with the Calamos product does not seem worth it, given the current equity market environment.
6% in the hand or 0-9% in the bush seems to be the alternatives. The more I think about this product, it should be evaluated as an alternative to a fixed income and not as an alternative to an equity product (I should re-read the prospectus for the fund objective / target marketing). If you recall, some of the minimum volatility equity ETFs (SPLV and USMV) were marketed as beating SPY returns over intermediate and long term (in back testing) because of their lower volatility. They have been a disappointment starting Covid. Not all minimum vol equity products are good (may be low vol equity are good!) and I want to make sure I am not jumping into this Calamos product without through properly.
Any thoughts would be appreciated?
P.S.: I invested in CPSM (May) which has appreciated 3% in two months. The price volatility was acceptable relative to fixed income products. I own USMV in a taxable account and the opportunity cost is felt.
Edit: To lurkers, investment outcomes depend on when one buys and what price one pays.
A huge problem during the GFC was the CDS (credit default swaps) sold by insurance companies and institutions. When the underlying credits collapsed, the CDS skyrocketed. At its worst, AIG had a liability of $150-200 billion - it was literally bankrupt many times over. It was rescued because AIG was also deeply into commercial insurance, and without a viable AIG, planes couldn't take off, ships couldn't leave the ports, etc.
Why did AIG do such a stupid thing? The CDS were the new game in town that not only had been mispriced, but they were not stress-tested (for another reason, that is what happened with LTCM, 1994-98 too).
Are there things today that haven't been stress-tested? Well, that is ODTE or 0-1-day options, that now have more than half the daily volume of some major indexes. Some day, people would say the same thing - why were people so crazy about the ODTE?
Not to mention the prevailing herd mentality that "real estate would never go down...."
@Balubalu first CPSM. Can you see this chart? it shows that since May 1 the SPY is up 10.19% and the CPSM up about 3% This doesnt mean CPSM wont deliver. it needs time a full year to give you the capped 9.65% its promised if SPY stays at these levels. But in the meantime dont expect the ETF to grow with the SPY.
Now, let's talk about how the product can be created.
1. ETF provider asks you for $100 today. 2. 1yr interest rate in the options market is about 5.35% 3. If I invest $94.93 in some T-bill like options combinations I will get $100 in exactly 1yr time {94.93*(1+5.35%)}
4. After I am done investing the $94.93 (which by the way guarantees you 100% principal protection), I have $5.07 remaining
5. Now I also want to charge you some fees of 0.7%
6. After charging you $0.7 in fees, I have $4.36 remaining
7. I use that $4.37 to buy a SPY call spread
8. With CPSJ, ETF provider could buy a 100%-108.76% call spread on the SPY, which roughly relates to 546-593 Call Spread for $4.37
So, now, that's your ETF. ETF provider gets 70cents of fees You get your principal protection bcos 94.93 of your 100 was used to buy "Tbill" in the options market You get 8.76% upside for the next 1 year.
I hope this helps. (You can be your own ETF provider. Put 95 in TBills for 1yr and use the remaining 5 to buy Call Spreads). We can call your ETF "BLUJ" for Balu July.
PS: let me know when you are ready to send me my check for 70 cents. I accept all forms of payment
Thanks, @Devo, for the explanation about CPSJ construction.
I am not averse to paying fees but I would rather buy an investment grade fixed income product that more guarantees to give me a 6% return at the end of the measurement period than CPSJ's promised variable 0-9% return.
I shall keep an eye on CPSM and see how close to $25 (inception price) it gets if SPY were to drop to April 30 closing price.
For any future purchases of these Calamos products, I intend to compare them to then available fixed income prospects.
BlackRock, the world’s largest asset manager, has just launched an ETF that offers 100% downside protection to investors. The new ETF (MAXJ) will have its maximum gains capped at 10.6% while protecting against the downside for a duration of 12 months. 0.5% ER
Innovators has six 100% buffer ETFs, four of which are July products. 2, 1, & 0.5 yr measurement period (or defined outcome period) products. We discussed about innovators earlier in the thread.
I have to check out the Blackrock product which seems to have the best cap.
Please check out MAXJ holdings. Investing in IVV (not Treasuries) and using a collar (selling calls at the cap and buying a put at the buffer). Would love your insight into why MAXJ has gone for holding IVV when it could have held Treasuries easily and simply, as in your post. What could be their thinking? E.g., Is it that they can not sell naked calls without holding some variation of the underlying?
Please comment on how the effective Cap can drop if more inflows come in and the collar for newer assets costs them more. Fund started with $10m and now at 24m Assets.
Looks like Blackrock is trying to out compete the competition. Good for us in the short run.
@balubalu it holds IVV because it wants you to earn the dividends. In contrast, Tbills+CallSpreads dont earn dividends.
the Options market is vast vast vast. all Options fund products combined is not a drop in the ocean. the collars will be affected from execution slippage, not from the weight of aum in these strategies, not yet.
For MAXJ, looks like on June 28 they started fund with IVV at 547 and bought July 2025 puts at 547 and sold July 2025 calls at 608, which is about 11.1% upside minus the 0.5% fee and we get the 10.6% upside. Would have to check prices for this strategy over last 20 years to determine if 10.6% is at top of range. Suspect that during 2008 timeframe this strategy would pay out 2-3%? Seems like a reasonable strategy at todays prices…
Long term 100 year 1 year rolling returns shows market up about 75% of time and probably up 80% of time using last 40 years.
Thanks @Devo. if we are to earn the dividends, that is another 1.4%, for a total of 12% return if we the full cap is realized at the end. I will take that.
Thanks, Equalizer. Blackrock will make their ER one way or the other. I am assuming they did not write the collar and so whether the collar was mispriced (and thus offering us a higher cap) is not their problem. They would want the cap to be as high as possible so they load up on AUM (more fees). Yesterday's closing price was at a premium of 0.53%.
@balubalu, MAXJ needs further investigation but by your numbers it seems more attractive than the other stuff we have seen. let go over the fine print to see if we are missing something.
Starting NAV is $25. NAV as of 7/5 is $25.14, which is less than 0.6% above the starting NAV. Since inception, the reference Asset (index) increased by about 2% (from 547.2 to 557.8). May [be] it is the change in option prices that is causing the difference in the change in NAV vs change in reference Asset value.
@balubalu recall the options pieces in MFO. Most of options funds and ETFs are basically stocks plus t bills. In some format. Whether they pitch it or not. Whether they are aware of it or not.
As the reference Asset moved up, the put option MAXJ bought (long) would have decreased in value and the call option they sold (short) would have increased in value. I was surprised that the cumulative effective of those had such a large impact on the NAV.
Share count at inception of 400K increased to 960K as of Friday (five trading days), most of the increase coming on Friday. The cost of the collar related to the shares issued later may have been higher than the cost of collar for the issuances at inception which could easily impact the per share NAV.
Not 100% downside protection but another hedge equity ETF, KSPY. Dynamic hedging? This time from Kraneshares. Is this an indication Kraneshares feels a need to diversify from their China bets?
Whether we like it or not, the market place (providers) will keep providing what participants demand. I have no issue with the ETF wrapper. Majority of my equity investment is in ETFs.
Option strategies and their variations will keep coming until there is a spectacular failure. Not all option strategies are dogs - some forum participants own Option strategies in size and I have to be mindful of how broad a brush I paint with.
BlackRock, the world’s largest asset manager, has just launched an ETF that offers 100% downside protection to investors. The new ETF (MAXJ) will have its maximum gains capped at 10.6% while protecting against the downside for a duration of 12 months. 0.5% ER
Hearing stuff like that makes me wonder if we’re approaching a market top? “Risk-free equity investing” (So easy a cave man could do it).
I confess to not understanding the finer workings of these funds very well. That may be a plus. As I suspect a lot of people pouring money in don’t understand them (or equity investing in general) very well either. Never mind that the guarantee appears to last only 12 months. To some that’s an eternity. Hell, might “hit the jackpot” well before the term expires! Bail out at 364 days and let the next greater foolinvestor buy it.
Whether we like it or not, the market place (providers) will keep providing what participants demand. I have no issue with the ETF wrapper. Majority of my equity investment is in ETFs.
Option strategies and their variations will keep coming until there is a spectacular failure. Not all option strategies are dogs - some forum participants own Option strategies in size and I have to be mindful of how broad a brush I paint with.
DIVO is ticking right along in my taxable account. No regrets here. My 4% allocation won't count as size though.
It was a larger part of my dividend sleeve until everybody decided they needed ETF's like CSB and PEY after the 4th of July..
If you have held DIVO in 2022, do you by any chance know why about 50% of its distribution in that year was ROC? At least that is what M* shows. I am only curious. So, if you do not know the answer on top of your head, no need to research for me. Thanks
Comments
Why did AIG do such a stupid thing? The CDS were the new game in town that not only had been mispriced, but they were not stress-tested (for another reason, that is what happened with LTCM, 1994-98 too).
Are there things today that haven't been stress-tested? Well, that is ODTE or 0-1-day options, that now have more than half the daily volume of some major indexes. Some day, people would say the same thing - why were people so crazy about the ODTE?
I would appreciate you indulging us (me) in figuring out the usefulness of this product in the current fixed income environment.
(Reading the article from Oaktree (Oaktree thread by @Mark) spurred my curiosity to extend the discussion on these Calamos products.
https://www.oaktreecapital.com/insights/insight-commentary/market-commentary/the-roundup-top-takeaways-from-oaktree-conference-2024 )
The Calamos products reset once a every year. So, if I were to invest in an investment grade fixed income product with 1yr effective duration, it seems I am guaranteed the current YTM and probably could strive to achieve the same zero loss (or 0.7% loss net of ER) CPSJ is offering. I have not checked how far down in investment grade I need to dip to get YTM of 6% but I am hoping at that YTM, the presumed zero loss of principal is achievable, given where we are in the credit cycle. The risk for the potential +3 / - 6% return band with the Calamos product does not seem worth it, given the current equity market environment.
6% in the hand or 0-9% in the bush seems to be the alternatives. The more I think about this product, it should be evaluated as an alternative to a fixed income and not as an alternative to an equity product (I should re-read the prospectus for the fund objective / target marketing). If you recall, some of the minimum volatility equity ETFs (SPLV and USMV) were marketed as beating SPY returns over intermediate and long term (in back testing) because of their lower volatility. They have been a disappointment starting Covid. Not all minimum vol equity products are good (may be low vol equity are good!) and I want to make sure I am not jumping into this Calamos product without through properly.
Any thoughts would be appreciated?
P.S.: I invested in CPSM (May) which has appreciated 3% in two months. The price volatility was acceptable relative to fixed income products. I own USMV in a taxable account and the opportunity cost is felt.
Edit: To lurkers, investment outcomes depend on when one buys and what price one pays.
1. ETF provider asks you for $100 today.
2. 1yr interest rate in the options market is about 5.35%
3. If I invest $94.93 in some T-bill like options combinations I will get $100 in exactly 1yr time {94.93*(1+5.35%)}
4. After I am done investing the $94.93 (which by the way guarantees you 100% principal protection), I have $5.07 remaining
5. Now I also want to charge you some fees of 0.7%
6. After charging you $0.7 in fees, I have $4.36 remaining
7. I use that $4.37 to buy a SPY call spread
8. With CPSJ, ETF provider could buy a 100%-108.76% call spread on the SPY, which roughly relates to 546-593 Call Spread for $4.37
So, now, that's your ETF.
ETF provider gets 70cents of fees
You get your principal protection bcos 94.93 of your 100 was used to buy "Tbill" in the options market
You get 8.76% upside for the next 1 year.
I hope this helps.
(You can be your own ETF provider. Put 95 in TBills for 1yr and use the remaining 5 to buy Call Spreads). We can call your ETF "BLUJ" for Balu July.
PS: let me know when you are ready to send me my check for 70 cents. I accept all forms of payment
I am not averse to paying fees but I would rather buy an investment grade fixed income product that more guarantees to give me a 6% return at the end of the measurement period than CPSJ's promised variable 0-9% return.
I shall keep an eye on CPSM and see how close to $25 (inception price) it gets if SPY were to drop to April 30 closing price.
For any future purchases of these Calamos products, I intend to compare them to then available fixed income prospects.
https://www.msn.com/en-us/money/savingandinvesting/how-good-is-blackrock-s-new-100-downside-hedge-etf/ar-BB1pdRfO?ocid=BingNewsSerp
Innovators has six 100% buffer ETFs, four of which are July products. 2, 1, & 0.5 yr measurement period (or defined outcome period) products. We discussed about innovators earlier in the thread.
I have to check out the Blackrock product which seems to have the best cap.
Please check out MAXJ holdings. Investing in IVV (not Treasuries) and using a collar (selling calls at the cap and buying a put at the buffer). Would love your insight into why MAXJ has gone for holding IVV when it could have held Treasuries easily and simply, as in your post. What could be their thinking? E.g., Is it that they can not sell naked calls without holding some variation of the underlying?
https://www.blackrock.com/us/individual/products/337965/ishares-large-cap-max-buffer-jun-etf
Please comment on how the effective Cap can drop if more inflows come in and the collar for newer assets costs them more. Fund started with $10m and now at 24m Assets.
Looks like Blackrock is trying to out compete the competition. Good for us in the short run.
it holds IVV because it wants you to earn the dividends. In contrast, Tbills+CallSpreads dont earn dividends.
the Options market is vast vast vast. all Options fund products combined is not a drop in the ocean. the collars will be affected from execution slippage, not from the weight of aum in these strategies, not yet.
Seems like a reasonable strategy at todays prices…
Long term 100 year 1 year rolling returns shows market up about 75% of time and probably up 80% of time using last 40 years.
.
@equalizer,
"Long term 100 year 1 year rolling returns shows market up about 75% of time and probably up 80% of time using last 40 years."
Looks like you did not complete your thought or at least you did not say all of what you were thinking. Please elaborate / expand / conclude.
Thanks.
Just meant that market have 75-80% upside bias on one year returns, so that why Blackrock figured it would be a good bet on their part.
MAXJ remaining cap as of Friday is 8.53, down from Starting Cap of 10.64% (and closed at a premium of 0.24%).
https://www.blackrock.com/us/individual/products/337965/ishares-large-cap-max-buffer-jun-etf
Starting NAV is $25. NAV as of 7/5 is $25.14, which is less than 0.6% above the starting NAV. Since inception, the reference Asset (index) increased by about 2% (from 547.2 to 557.8). May [be] it is the change in option prices that is causing the difference in the change in NAV vs change in reference Asset value.
Share count at inception of 400K increased to 960K as of Friday (five trading days), most of the increase coming on Friday. The cost of the collar related to the shares issued later may have been higher than the cost of collar for the issuances at inception which could easily impact the per share NAV.
https://kraneshares.com/kraneshares-launches-kspy-tracking-an-index-powered-by-hedgeye-research-designed-to-reduce-volatility-and-provide-a-downside-hedge-on-sp-500/
The name is misleading. they plan on buying and selling puts and calls along with cash and making daily decisions on what to do. So much fun.
I think the promotional material is poorly worded or deliberately vague about the underlying to give them flexibility but
please see the holdings tab or the holdings at the bottom of the page.
https://kraneshares.com/kspy/
Option strategies and their variations will keep coming until there is a spectacular failure. Not all option strategies are dogs - some forum participants own Option strategies in size and I have to be mindful of how broad a brush I paint with.
I confess to not understanding the finer workings of these funds very well. That may be a plus. As I suspect a lot of people pouring money in don’t understand them (or equity investing in general) very well either. Never mind that the guarantee appears to last only 12 months. To some that’s an eternity. Hell, might “hit the jackpot” well before the term expires! Bail out at 364 days and let the next
greater foolinvestor buy it.It was a larger part of my dividend sleeve until everybody decided they needed ETF's like CSB and PEY after the 4th of July.
I should save further comments for Rotation City.
4% is nothing to sneeze about.
If you have held DIVO in 2022, do you by any chance know why about 50% of its distribution in that year was ROC? At least that is what M* shows. I am only curious. So, if you do not know the answer on top of your head, no need to research for me. Thanks