(Bloomberg) -- It sounds like a surefire, slam-dunk trade for stock investors playing defense: ETFs that will bet on equity markets without — the pitch says — going down.
Calamos Investments filed Monday for so-called “structured-protection” exchange-traded funds that will track a portion of the returns of the S&P 500, Nasdaq 100 and Russell 2000 while hedging 100% of the downside via the options market, according to a Monday filing.
The first fund launching within the suite is the Calamos S&P 500 Structured Alt Protection ETF, which aims to match the price return of the SPDR S&P 500 ETF Trust (ticker SPY) up to a cap of 9.65%.
The catch: Investors looking to reap the full protection will need to buy it on launch day — May 1, 2024 — and hold it, come rain or shine, through April 30, 2025. After that, a new defined period of cover kicks in.
CPSM, like others in the upcoming ETF lineup, will primarily invest its assets in derivatives by buying and selling a combination of call and put options to cushion against market volatility, according to the fund’s prospectus. A regulatory filing notes there’s no guarantee the fund will be successful in providing the much sought-after downside protection.
“With risk-free rates north of 5% today, options-based product issuers are able to deliver meaningful upside participation with 100% capital protection,” said Matt Kaufman, head of ETFs at Calamos. “For those issuing ‘protective’ products, the cost of hedging by selling an option — or series of options — to offset the premium to buy a protective put becomes cheaper as rates rise.”
Assessing Appetite
Issuers are testing demand for funds that offer equity exposure and downside protection as investors grapple with elevated rates volatility. The Innovator Equity Defined Protection ETF (TJUL), which provides 100% downside protection over a two-year outcome period, has grown to $230 million since launching in July. BlackRock, the world’s largest ETF issuer, has also filed for funds they say offer complete downside protection.
The 100% capital-protected funds offer investors an additional layer of protection than so-called “buffer ETFs,” which first came to the market in 2018. Those funds offer downside risk protection to a certain buffer level, say the first 10% of losses. But after that level, investors are still exposed to losses.
These new funds by Calamos will generally offer less upside exposure but also provide more downside protection.
“For people as they age, nearing retirement — they can’t afford the significant drawdowns of the market, but they also can’t afford to not be in the market. So this gives them an opportunity,” said Kaufman.
CPSM is expected to launch on May 1. Calamos plans to roll out new funds every several months.
The investment firm, with roughly $37 billion in assets under management, specializes in options-based strategies across various fund wrappers including ETFs, separately managed portfolios and mutual funds.
