WEBVTT - Autocallable ETFs 0:00:05.760 --> 0:00:07.240 Loker trillions. I'm Joe Webber and. 0:00:07.200 --> 0:00:11.680 I'm Eric Balchernas. 0:00:11.800 --> 0:00:16.080 Eric, you sent a note that caught my attention because 0:00:16.079 --> 0:00:18.920 you were like, it's the wave of the future. Manufactured 0:00:18.960 --> 0:00:22.079 high yield gonna be a big category. I was like, 0:00:22.160 --> 0:00:27.400 that's like Eric Balchina's at his finest. Let's unpack those three. 0:00:27.640 --> 0:00:31.640 The category a new one Auto callables. Yeah. 0:00:31.720 --> 0:00:33.960 I honestly I'd heard the word a couple of times, 0:00:33.960 --> 0:00:35.920 didn't know what it meant. This is part of a 0:00:35.920 --> 0:00:38.239 bigger theme that we call yield three point zero where 0:00:38.320 --> 0:00:41.680 manufactured yield. We used to use the meme of the 0:00:41.720 --> 0:00:44.519 breaking bad where using the lab making the meth. They 0:00:44.520 --> 0:00:48.320 are making yield that isn't from like bonds or stoughts. 0:00:48.400 --> 0:00:52.559 They're just making it and it's very popular, especially if 0:00:52.600 --> 0:00:53.320 it's a big yield. 0:00:53.360 --> 0:00:55.480 So auto callibles are. 0:00:55.400 --> 0:00:58.240 One of the latest areas that has a big yield, 0:00:58.320 --> 0:01:02.160 usually thirteen fourteen percent at least in the colum most 0:01:02.160 --> 0:01:05.280 etf that I looked at, And there is a huge 0:01:05.280 --> 0:01:07.960 demand for this. People love income. I've been to the 0:01:08.000 --> 0:01:10.800 Money Show several times, especially older people. They just go 0:01:10.880 --> 0:01:15.320 crazy for income. So these products are quite complicated. In 0:01:15.360 --> 0:01:17.880 my opinion. I used to say VIX and China were 0:01:17.880 --> 0:01:21.000 the two most complicated areas of ETFs. This is more complicated. 0:01:21.120 --> 0:01:24.280 So I want to make sure that we understand this 0:01:24.480 --> 0:01:28.360 and that we could explain it to you know, our 0:01:28.400 --> 0:01:30.240 aunt or uncle, like just somebody in our lives. 0:01:30.360 --> 0:01:32.640 We're gonna try, but we can't. 0:01:32.600 --> 0:01:36.320 End this podcast until we both understand it. I think 0:01:36.360 --> 0:01:38.399 I get it, but I get it on a very 0:01:38.440 --> 0:01:40.480 superficial level that I just learned it quickly for the note, 0:01:40.520 --> 0:01:42.600 but I really want to get it, and also want 0:01:42.640 --> 0:01:44.360 to make sure that people are aware of like the 0:01:44.360 --> 0:01:47.080 pros and cons of these, because Joel, they're going to grow. 0:01:47.319 --> 0:01:50.000 This thing came out. This calumost One already has four 0:01:50.040 --> 0:01:53.800 hundred million, and for something complex to come out, it's 0:01:53.840 --> 0:01:55.920 pretty good money for that, so I would suspect. And 0:01:55.960 --> 0:01:57.360 I'm hearing a lot of other issuers are going to 0:01:57.400 --> 0:01:59.360 launch these, And it's a word I hear when I 0:01:59.360 --> 0:02:02.360 travel around, including from our index team. They bring up 0:02:02.400 --> 0:02:04.480 auto callables all the time. So it's a word you're 0:02:04.520 --> 0:02:06.280 gonna hear more and more. Might as well get get 0:02:06.280 --> 0:02:06.920 our heads around it. 0:02:06.960 --> 0:02:10.520 Now I'm surrounded by papers trying to make sense of this, 0:02:10.600 --> 0:02:11.720 it's kind of hilarious. 0:02:12.240 --> 0:02:14.840 Uh I don't think I understand it. 0:02:14.880 --> 0:02:18.919 So I'll be the litmus test and to help us 0:02:18.919 --> 0:02:21.080 make sense of this, we're gonna be joined by Matt 0:02:21.160 --> 0:02:26.400 Kaufman Global ahead of ETFs at Klamos Investments First market 0:02:26.520 --> 0:02:33.079 or this year with a UTF in this space, this 0:02:33.200 --> 0:02:38.639 time my trillions auto callibles. 0:02:38.639 --> 0:02:40.440 Matt, welcome jillions. 0:02:40.080 --> 0:02:42.040 Joel, thanks for having me. Great to be here. 0:02:42.560 --> 0:02:43.840 How does this stuff work? 0:02:45.040 --> 0:02:48.480 We are going to hopefully get off of the meth analogy. Yeah, 0:02:48.520 --> 0:02:52.919 that was We'll move toward first step something. 0:02:53.040 --> 0:02:55.400 Listen, Matt, Matt goes to work every day in like 0:02:55.440 --> 0:02:58.760 this white suit. Then he's in there testing different things. Yes, 0:02:59.120 --> 0:03:03.040 that was the hollow costing this year, so you might 0:03:03.080 --> 0:03:03.280 as well. 0:03:03.320 --> 0:03:06.000 You already have ramid lab. 0:03:06.080 --> 0:03:10.079 But Colam Moos came out with a ticker ce ai E. 0:03:10.240 --> 0:03:12.079 That's the ticker if you want to look into this more. 0:03:12.080 --> 0:03:16.480 That is the ticker Auto Callable Income ETF. So let's 0:03:16.720 --> 0:03:19.880 take our minds from the equity markets and move it 0:03:20.040 --> 0:03:23.200 toward the fixed income market. So think like a bond 0:03:23.600 --> 0:03:27.600 that will pay you a monthly income and return your principle. 0:03:28.280 --> 0:03:30.880 As long as the equity markets don't fall too far. 0:03:31.560 --> 0:03:34.720 If you can understand that, you can understand an auto callable. 0:03:35.080 --> 0:03:37.240 So it's a lot like a bond that pays a 0:03:37.240 --> 0:03:40.720 monthly income and delivers your principle back to you either 0:03:40.800 --> 0:03:45.040 at maturity or if you're called away early. That is 0:03:45.120 --> 0:03:48.640 the auto call feature. And it's tied to the equity markets. 0:03:48.640 --> 0:03:51.240 So bonds are usually tied to duration and credit. This 0:03:51.440 --> 0:03:54.839 is tied to the equity markets. That's essentially it. 0:03:54.960 --> 0:03:57.680 That was a really great way of breaking it down. 0:03:57.800 --> 0:03:59.520 It's also a quote that you had in the story 0:03:59.560 --> 0:04:02.200 Waltree Cream's more auto callables into ETFs and race for 0:04:02.280 --> 0:04:03.840 yield by our colleagues at Bloomberg News. 0:04:03.920 --> 0:04:07.200 Yes, Matt, though I got that part. Where does the 0:04:07.240 --> 0:04:10.200 yield come from? The income? Where am I getting? Where 0:04:10.200 --> 0:04:12.000 are you getting that income to give it to me from? 0:04:12.160 --> 0:04:15.320 Yeah, great question. I think one of the easiest ways 0:04:15.360 --> 0:04:17.640 to think about this is to you know, normally you 0:04:17.680 --> 0:04:20.240 would frame it around a covered call so that covered 0:04:20.279 --> 0:04:22.920 call space, as Eric was talking about, is a massive market. 0:04:23.040 --> 0:04:26.160 It's one hundred and fifty billion dollar market. I was 0:04:26.200 --> 0:04:28.680 fortunate enough to be at Power Shares in early two thousands. 0:04:28.680 --> 0:04:31.200 We built the first buy right ETF in two thousand 0:04:31.240 --> 0:04:33.640 and seven. I think it was a little before it's time. 0:04:33.760 --> 0:04:36.560 You know, nobody really bought it back then. Now that 0:04:36.680 --> 0:04:39.000 space is one hundred and fifty one hundred and sixty 0:04:39.040 --> 0:04:42.520 billion in assets. It's a massive market. And you know, 0:04:42.520 --> 0:04:44.400 what are you doing with a covered call? You're selling 0:04:44.440 --> 0:04:48.040 off your upside. It's a by right strategy. Twenty years ago, 0:04:48.279 --> 0:04:51.560 very few people understood that term. Today it's commonplace. There's 0:04:51.680 --> 0:04:55.560 equity premium income strategies. You're selling off upside collecting an 0:04:55.600 --> 0:04:59.520 income payment, and auto callable is a long dated put 0:04:59.600 --> 0:05:02.159 right stra strategy. So take the other side of the trade. 0:05:02.440 --> 0:05:06.359 It's a long dated, say five year put right with 0:05:06.440 --> 0:05:09.440 a call feature, and that's it. That's all. You're collecting. 0:05:10.160 --> 0:05:11.599 What he just said, and he goes, that's it. You 0:05:11.680 --> 0:05:14.320 come on, dude, it's okay. 0:05:14.120 --> 0:05:16.359 You want it simple. So we're starting simple. 0:05:16.480 --> 0:05:18.960 I'm gonna break this down. Okay, I have ten thousand dollars. 0:05:19.440 --> 0:05:22.120 I give you ten thousand dollars to this. So first 0:05:22.120 --> 0:05:25.279 of all, who makes the auto callable? Like is it 0:05:25.320 --> 0:05:27.400 a bank? And this is like what like a swap 0:05:27.440 --> 0:05:30.479 contract or? Like whom I am I doing? It's just 0:05:30.560 --> 0:05:33.320 like Michael Burry where I'm walking into Goldman and I 0:05:33.360 --> 0:05:35.880 say I have this idea and the bank just says, okay, 0:05:35.920 --> 0:05:38.080 I'll make a thing for you. Is that what we're 0:05:38.080 --> 0:05:38.479 doing here? 0:05:38.640 --> 0:05:38.839 Yeah. 0:05:38.880 --> 0:05:41.159 So you can't go to the market and you can't 0:05:41.160 --> 0:05:43.919 go to the listed options market and find an auto 0:05:43.960 --> 0:05:48.159 callable yield, you know, option that does not exist. You 0:05:48.200 --> 0:05:50.599 can go to the listed options markets and do put 0:05:50.600 --> 0:05:54.000 writing strategies, you can call writing strategies. But what we've 0:05:54.040 --> 0:05:57.320 done is we've partnered with JP Morgan. There you go, 0:05:57.360 --> 0:05:59.320 biggest bank in the world. So yes, it is a 0:05:59.320 --> 0:06:02.560 bank strategy. You cannot do this with listed options. So 0:06:02.600 --> 0:06:05.920 we've partnered with JP Morgan. We took their auto callable 0:06:06.000 --> 0:06:10.560 pricing methodology and we built a laddered version of this hold. 0:06:10.440 --> 0:06:14.839 On, hold on. What is JP Morgan's auto callable pricing methodology? 0:06:14.920 --> 0:06:17.000 So the first of all, what is the index that 0:06:17.040 --> 0:06:18.440 were based? What's the equity index? 0:06:18.640 --> 0:06:21.240 Sure, so let me let me explain this to you 0:06:21.279 --> 0:06:23.279 in a way that we can we can understand. So, 0:06:23.880 --> 0:06:26.080 you know, you talked about you know what happens if 0:06:26.120 --> 0:06:28.560 you have ten thousand dollars. So I brought monopoly money, 0:06:28.600 --> 0:06:31.280 you did I did. Yeah, I actually brought monopoly money 0:06:31.279 --> 0:06:33.200 here before, so we can we can play with this. 0:06:33.760 --> 0:06:37.359 So here, Eric, I'll give you one hundred dollars monopolyous. 0:06:37.520 --> 0:06:38.520 He just gave you a hundred back. 0:06:38.839 --> 0:06:40.840 It's easy. He would be a bad banker, and it's 0:06:40.880 --> 0:06:43.320 easier to think about that because it's a Let's let's 0:06:43.320 --> 0:06:45.240 pretend like that hundred dollars is the par amount. 0:06:45.480 --> 0:06:46.640 Okay, Okay, So. 0:06:46.760 --> 0:06:48.800 By the way, I get nothing. I don't like this game. 0:06:48.800 --> 0:06:50.080 You're going to be the Joel. You're going to be 0:06:50.120 --> 0:06:51.880 the market. You're going to go to the market here, 0:06:52.440 --> 0:06:55.360 all right, So Eric's gonna buy an auto callable. Note, 0:06:55.440 --> 0:06:57.640 I'll be the bank. So you're going to invest in 0:06:57.680 --> 0:06:59.200 an auto call but note, so give me your hundred 0:06:59.200 --> 0:07:02.880 oct here's sliding it across the table. Okay, now that's. 0:07:02.800 --> 0:07:04.119 Stuck in the middle. I'm moving it across. 0:07:04.200 --> 0:07:04.680 Let's put it. 0:07:04.680 --> 0:07:05.719 We don't want it in free parking. 0:07:05.800 --> 0:07:08.240 Sure, So let's put some terms to this note. Let's 0:07:08.279 --> 0:07:10.680 say it has a five year life, it has a 0:07:10.800 --> 0:07:15.120 sixty percent principal coupon barrier. So we're gonna pay you 0:07:15.360 --> 0:07:19.360 monthly income as long as an equity index does not 0:07:19.600 --> 0:07:21.320 fall by forty. 0:07:21.000 --> 0:07:22.440 Percent during what time period? 0:07:22.520 --> 0:07:23.040 Every month? 0:07:23.080 --> 0:07:25.200 It's a monthly look, so if the S and P. 0:07:25.360 --> 0:07:27.320 Let's say it's the SMP index. If it doesn't fall 0:07:27.360 --> 0:07:28.520 forty percent a month. 0:07:28.880 --> 0:07:31.160 In a month while a starting date, so then I 0:07:31.240 --> 0:07:34.320 get a little a little something. Yeah, that's right, and 0:07:34.360 --> 0:07:36.679 then there's so and then there's the same thing at maturity. 0:07:36.760 --> 0:07:37.680 So let's just play this out. 0:07:37.760 --> 0:07:39.920 But hold on, does the forty percent restart in the 0:07:39.960 --> 0:07:43.880 second month. Uh, it's from the starting point we're starting 0:07:43.920 --> 0:07:46.480 for interception. And let's say the first month the SMP 0:07:46.600 --> 0:07:48.559 is down two percent. I get I get paid. 0:07:48.720 --> 0:07:50.440 So Joel, Joel gets to decided he's going to be 0:07:50.480 --> 0:07:52.760 the market here. Okay, okay, So let's say this pays 0:07:52.800 --> 0:07:55.520 twelve percent annualized income every month. So I've got you 0:07:55.560 --> 0:07:58.800 one hundred dollars safe here. So Joel, let's go thirty 0:07:58.840 --> 0:08:01.200 days in the future. What is the market going to do? 0:08:01.320 --> 0:08:02.440 Pick a number up or down? 0:08:02.600 --> 0:08:02.800 Right? 0:08:02.960 --> 0:08:05.440 This year, I'm gonna say, if we're if we're playing 0:08:05.440 --> 0:08:07.160 this from the beginning of the year, market gove up. 0:08:07.400 --> 0:08:09.800 Okay, let's say you're up five percent. So market's of 0:08:09.920 --> 0:08:12.160 five percent in a month, Eric, you get a dollar 0:08:12.440 --> 0:08:12.760 you're good. 0:08:12.800 --> 0:08:13.200 You're good. 0:08:13.240 --> 0:08:15.960 Okay. Next month, let's say the market. 0:08:15.920 --> 0:08:19.320 Well it happened, okay, kind kind of was a little chaotic. 0:08:19.440 --> 0:08:20.880 Okay, let's say it happens. 0:08:20.960 --> 0:08:22.240 Let's say market went down. 0:08:22.800 --> 0:08:25.400 Market goes down how much? Ten percent? All right, Eric, 0:08:25.480 --> 0:08:27.440 you still get a dollar. Market's down ten. It's not 0:08:27.480 --> 0:08:29.000 down forty, it's down ten. 0:08:29.240 --> 0:08:30.280 It resets every month. 0:08:31.240 --> 0:08:33.640 Uh, it's not, it's it's from the inception of the 0:08:33.679 --> 0:08:35.000 note to that month. 0:08:35.040 --> 0:08:35.360 I see. 0:08:35.400 --> 0:08:37.600 So because it went up and down. Now year to date, 0:08:37.640 --> 0:08:39.199 what do we down six percent or something? 0:08:40.880 --> 0:08:43.520 We were up five, Now we're down ten, So down 0:08:43.559 --> 0:08:44.800 five so far? Yeah. 0:08:44.920 --> 0:08:46.640 Right, So let's let's just keep playing out. Let's say 0:08:46.679 --> 0:08:49.640 the market is down forty percent the next month from 0:08:49.679 --> 0:08:51.520 inception no dollar for you. 0:08:51.520 --> 0:08:54.840 Hold on, stop real quick. So we're down five percent, 0:08:55.000 --> 0:08:56.600 so the market would have to go down like another 0:08:56.880 --> 0:08:59.679 thirty five percent. Then, so it hits forty percent year 0:08:59.679 --> 0:09:02.240 to date. Correct that month, I don't get a dollar. 0:09:02.360 --> 0:09:02.839 That's correct. 0:09:02.840 --> 0:09:05.600 And then because this got called in other. 0:09:05.520 --> 0:09:06.920 Words, the whole getting called yet. 0:09:06.920 --> 0:09:08.280 Oh okay, so don't get a dollar. 0:09:08.400 --> 0:09:08.720 Correct. 0:09:08.760 --> 0:09:10.840 Now the next month it goes up five percent. 0:09:11.000 --> 0:09:12.040 Your dollar kicks back in. 0:09:12.160 --> 0:09:14.640 I get another dollar, You get a dollar. Okay, what 0:09:14.679 --> 0:09:16.560 if it goes down another twenty percent from. 0:09:16.440 --> 0:09:18.920 The forty then you do not get your dollar, gotcha? 0:09:19.080 --> 0:09:19.360 Yes? 0:09:19.520 --> 0:09:21.240 So in other words, as long as it doesn't come 0:09:21.280 --> 0:09:24.439 above the forty percent watermark, I get no dollars. If 0:09:24.440 --> 0:09:26.000 it comes up above the forty percent of water mark, 0:09:26.000 --> 0:09:26.400 I start. 0:09:26.280 --> 0:09:27.800 Getting my dollars again, exactly. 0:09:27.840 --> 0:09:29.319 And the one hundred you just hold on to. 0:09:30.000 --> 0:09:32.080 Who How is this a good deal for JP Morgan? 0:09:33.000 --> 0:09:33.120 Uh? 0:09:34.960 --> 0:09:37.000 It seems a little too good, Like I feel like 0:09:37.040 --> 0:09:38.920 the number should be ten percent. That'd be fair for 0:09:39.040 --> 0:09:39.640 JP Morgan. 0:09:39.720 --> 0:09:41.760 Sure, No, that's a good question. So let's keep playing 0:09:41.760 --> 0:09:44.000 this out. So now you've got your hundred dollars still here. 0:09:44.160 --> 0:09:44.400 Yep. 0:09:44.720 --> 0:09:48.240 So five years from now, let's say the market is 0:09:49.040 --> 0:09:52.439 down twenty percent, you are maturing at par. You get 0:09:52.440 --> 0:09:55.640 your hundred dollars back. If the market is down forty 0:09:55.640 --> 0:09:58.640 percent or more, that's when you have principle at risk. 0:09:58.720 --> 0:10:01.360 So let's say the market is down forty percent five 0:10:01.400 --> 0:10:03.480 years from now. If I can make the sound in 0:10:03.520 --> 0:10:05.920 the in the mic, we're gonna tear your one hundred 0:10:05.960 --> 0:10:09.360 dollars bill by forty percent. You're gonna get sixty percent 0:10:09.400 --> 0:10:12.240 of your principle back. Oh, that is the risk that 0:10:12.280 --> 0:10:12.959 you're taking on. 0:10:13.160 --> 0:10:17.480 But he's collected income along the way. Correct if if it. 0:10:16.920 --> 0:10:20.360 So after five years, if I collected a dollar every 0:10:20.400 --> 0:10:24.040 month minus say like five months, that would be fifty 0:10:24.080 --> 0:10:27.960 five dollars against my sixty forty percent that I lost. 0:10:28.000 --> 0:10:29.559 So it would cush it in a little bit. That's 0:10:29.559 --> 0:10:31.440 like a cover call. Okay, yes, exactly. 0:10:31.520 --> 0:10:34.280 Okay, So that's how a single auto call of works. 0:10:34.600 --> 0:10:37.520 The call feature then would be if the market is positive, 0:10:37.679 --> 0:10:41.320 usually after a non call period like one year, then 0:10:41.640 --> 0:10:44.960 you are called away. JP gets the money back, your prince, 0:10:45.120 --> 0:10:47.360 you get your principal, you get your hundred dollars back, 0:10:47.720 --> 0:10:51.080 you get your final coupon payment. Good job shows over, 0:10:51.240 --> 0:10:53.400 everyone goes home, you have to go buy a new note. 0:10:53.440 --> 0:10:54.160 That's how it works. 0:10:54.320 --> 0:10:56.960 Wait, wait, that's that's when it gets called. I thought 0:10:56.960 --> 0:10:58.520 it got called if it goes down too much, No 0:10:58.559 --> 0:11:00.920 one goes up. Correct, So so when does it get 0:11:00.920 --> 0:11:01.360 called again? 0:11:01.480 --> 0:11:04.679 Yeah, so you're getting called when the market is positive 0:11:04.920 --> 0:11:07.440 after a one year nine all period. 0:11:07.480 --> 0:11:09.840 So if the market's up seven percent after like the 0:11:09.840 --> 0:11:11.719 market is up this year, it's up fourteen percent, so 0:11:11.800 --> 0:11:14.160 let's just say correct the year under. Now we're up 0:11:14.200 --> 0:11:17.560 fourteen percent in twenty twenty five, and therefore I would 0:11:17.559 --> 0:11:20.400 get the one hundred dollars back correct, and then I 0:11:20.440 --> 0:11:22.760 would have my twelve dollars because it every went down 0:11:22.760 --> 0:11:25.360 below forty exactly, so I would have So at that 0:11:25.480 --> 0:11:27.559 point the fund would automatically reinvest in. 0:11:27.480 --> 0:11:29.640 A new auto callable. That's correct. 0:11:29.679 --> 0:11:31.880 So now in that getting on the hundred dollars back, 0:11:31.920 --> 0:11:34.360 big reset, Well right now, a loss of money in 0:11:34.400 --> 0:11:35.880 that one hundred dollars getting called. 0:11:35.640 --> 0:11:36.480 Back or not? 0:11:36.600 --> 0:11:39.400 Those resets correct and you you reset it automatically. 0:11:39.480 --> 0:11:41.960 Well, so I'm teaching you about an auto callable, so 0:11:42.000 --> 0:11:43.640 we know how the auto callable works. 0:11:43.800 --> 0:11:44.000 Now. 0:11:44.640 --> 0:11:48.640 So what we have done with CIE is we've laddered 0:11:48.679 --> 0:11:51.480 exposure to fifty two or more of these. It's a 0:11:51.520 --> 0:11:56.720 weekly ladder, a laddered portfolio of auto callables. So now 0:11:57.280 --> 0:12:00.000 at week fifty three, if the market's down, you might 0:12:00.160 --> 0:12:03.240 lose coupon on one, I say, but you have fifty 0:12:03.280 --> 0:12:06.040 one others in the portfolio. So it's highly diversified. 0:12:06.880 --> 0:12:11.960 Wow, And the answer is in reality, in this fun CIAE, 0:12:12.640 --> 0:12:14.640 it is forty percent. That's the number. You don't want 0:12:14.679 --> 0:12:15.880 the market to go down below. 0:12:16.000 --> 0:12:18.840 For a severe and sustained time period. 0:12:18.920 --> 0:12:20.559 That's correct, Like, what's that mean? 0:12:21.160 --> 0:12:24.400 So we built all of this with JP Morgan and Mercube, 0:12:24.840 --> 0:12:28.640 a custom indexing provider, and this is all built inside 0:12:28.640 --> 0:12:31.560 of an index that we trade on swap with JP Morgan. 0:12:32.040 --> 0:12:35.640 So the risk would be a severe sustained market decline 0:12:36.000 --> 0:12:40.720 that never recovers, and that in five years your autocollables 0:12:40.760 --> 0:12:42.880 start to mature below the barrier. 0:12:42.960 --> 0:12:43.760 Let's back test it. 0:12:44.000 --> 0:12:48.120 What happened, What happens at the if March twenty twenty happens, 0:12:48.160 --> 0:12:49.280 we're back in the pandemic. 0:12:49.360 --> 0:12:51.679 Yeah, use one hundred dollars, put one hundred dollars in. 0:12:51.840 --> 0:12:54.840 Let's say I get Let's say for a year it's fine, 0:12:54.920 --> 0:12:57.520 so I got twelve dollars back, but then this next 0:12:57.640 --> 0:12:59.520 year it's like a twenty Let's say it's a two 0:12:59.559 --> 0:13:01.880 thousand and eight where the market, well, the market wasn't 0:13:01.880 --> 0:13:04.080 even down forty percent. It was down thirty three percent, 0:13:04.720 --> 0:13:06.480 thirty five percent in two thousand and eight, right, So 0:13:06.720 --> 0:13:09.440 way it's down forty five percent that year, Yeah, and 0:13:09.480 --> 0:13:12.280 it stays down. What happens? 0:13:12.440 --> 0:13:14.640 So, because this is an index. We can look at 0:13:14.640 --> 0:13:16.640 that history. We go back to two thousand and five, 0:13:17.280 --> 0:13:21.120 and you would have lost on two point eight percent 0:13:21.400 --> 0:13:24.600 of those autocollables. Historically, it would have equated to a 0:13:24.679 --> 0:13:27.959 seventeen percent principle impairment. That was the only time you 0:13:27.960 --> 0:13:30.240 would have lost money. Again, you did not lose that 0:13:30.280 --> 0:13:31.280 forty percent. 0:13:31.040 --> 0:13:33.480 So you don't lose everything. You lost seventy percent, So 0:13:33.600 --> 0:13:36.760 you basically you bet a seventeen percent loss on something 0:13:36.800 --> 0:13:39.360 that's almost not never gonna happen because the Fed's going 0:13:39.440 --> 0:13:40.960 to step in and start buying assets if a go 0:13:41.120 --> 0:13:41.640 that low again. 0:13:41.679 --> 0:13:42.880 Probably I think you're right. 0:13:42.920 --> 0:13:45.120 That's why I don't get I look, it's in this 0:13:45.160 --> 0:13:45.839 for JP Morgan. 0:13:45.920 --> 0:13:48.800 Yeah, this sounds like genius from your point of view, 0:13:49.200 --> 0:13:51.720 But it feels like JP Morgan is pretty smart, Like 0:13:51.920 --> 0:13:54.160 we had them on, they're pretty smart people. I feel 0:13:54.200 --> 0:13:56.400 like they could almost get you to do this deal 0:13:56.720 --> 0:14:00.000 at like fifteen percent. What do you mean, like if 0:14:00.000 --> 0:14:03.360 if the market goes down below fifteen percent, that's the threshold, 0:14:03.800 --> 0:14:06.439 Like going down forty seems like almost like beyond a 0:14:06.480 --> 0:14:08.800 tail risk event. I feel like they could do the 0:14:08.800 --> 0:14:12.559 same deal with you at fifteen percent like that would 0:14:12.559 --> 0:14:14.400 be almost pretty good deal because I don't even mark 0:14:14.400 --> 0:14:17.200 go down. We'll go down fifteen percent before the government 0:14:17.240 --> 0:14:18.240 starts buying up assets. 0:14:18.320 --> 0:14:21.480 Sure, I think when you're trying to build something with 0:14:21.600 --> 0:14:23.960 risk management, you know, Calamos is a risk manager who's 0:14:23.960 --> 0:14:26.600 been doing this for nearly fifty years. We want to 0:14:26.640 --> 0:14:29.280 give people the risk managed exposure. We want to give 0:14:29.320 --> 0:14:32.680 them a high stable tax efficient income. If there is 0:14:32.720 --> 0:14:35.920 a payoff that we are after, it's that it's high 0:14:36.000 --> 0:14:39.280 stable tax efficient income. So when you take this and 0:14:39.400 --> 0:14:41.920 ladder it out fifty two or more times, you put 0:14:41.960 --> 0:14:45.280 forty percent principal barriers on it, you get this really 0:14:45.400 --> 0:14:47.160 high stable taxificient income. 0:14:55.440 --> 0:14:57.720 Just jpen working consider this like issuing a bond on 0:14:57.760 --> 0:15:00.680 their port, where it's a high yield bond, but with 0:15:00.760 --> 0:15:03.440 this tail risk possibility. Therefore, that's why they're giving you 0:15:03.440 --> 0:15:04.080 a higher yield. 0:15:04.280 --> 0:15:07.080 Well, they're issuing the auto callables, so they're the issuer 0:15:07.280 --> 0:15:09.000 of the auto callables, so they're going to take a 0:15:09.040 --> 0:15:11.320 spread on that note. They're going to make money on 0:15:11.400 --> 0:15:14.320 the on the swap that we're trading, so we trade 0:15:14.400 --> 0:15:18.320 so for plus ten basis points. It's much more efficient 0:15:18.560 --> 0:15:21.360 for JP Morgan to trade swap with us than it 0:15:21.440 --> 0:15:24.640 is for somebody to go buy a note from JP Morgan, 0:15:25.040 --> 0:15:27.280 where you tie up all of their balance sheet, tie 0:15:27.360 --> 0:15:30.560 up all their capital. You've got a subordinated debt structure 0:15:30.640 --> 0:15:33.720 to that note, whereas here, if you build it synthetically 0:15:34.160 --> 0:15:37.160 and just trade on swap, well, ninety five percent of 0:15:37.200 --> 0:15:39.960 the assets in the ETF are in treasuries, so that 0:15:40.040 --> 0:15:43.400 money is sitting at State Street at the custodian. There's 0:15:43.440 --> 0:15:46.600 no real credit risk from that perspective. And then post 0:15:46.680 --> 0:15:50.800 Dodd Frank, JP Morgan has got to pay variation margin 0:15:50.920 --> 0:15:53.560 on the swap, so the whole structure is nearly one 0:15:53.600 --> 0:15:56.800 hundred percent collateralized. So go back to eight. You know, 0:15:56.880 --> 0:15:59.240 when a couple banks went under, you're on the hook 0:15:59.280 --> 0:16:00.960 for a lot of that. Hopefully you get some of 0:16:01.000 --> 0:16:02.800 your money back if you're a note issue or if 0:16:02.840 --> 0:16:04.520 you're a note buyer, who's here. 0:16:04.360 --> 0:16:06.520 You don't have that whose money is in collateral? Does 0:16:06.600 --> 0:16:08.520 JPM Moore can get a cut of the interest from 0:16:08.560 --> 0:16:09.040 the collateral. 0:16:09.120 --> 0:16:12.480 No, it's the investor. So we pay JP Morgan SOFA 0:16:12.520 --> 0:16:13.600 plus ten bases points. 0:16:13.600 --> 0:16:13.960 I see. 0:16:13.960 --> 0:16:17.560 Okay, They in turn give us the performance of that 0:16:17.680 --> 0:16:23.840 auto callable index that we've created with Sofa overnight rate, so. 0:16:23.840 --> 0:16:25.800 You pay I see. So they get a little interest 0:16:25.800 --> 0:16:29.400 from you plus ten BIPs correct, and they feel like 0:16:29.480 --> 0:16:31.400 that's what they get out of it. That's right, and 0:16:31.440 --> 0:16:33.960 that balances out the income they have to give you. 0:16:34.520 --> 0:16:38.640 But they also have this like sort of you know, 0:16:39.400 --> 0:16:41.840 fine print that if it goes down for forty percent, 0:16:41.880 --> 0:16:43.880 they really wine that's right. 0:16:43.880 --> 0:16:45.200 They're taking the other side of the trade. 0:16:45.240 --> 0:16:46.600 I feel a little bit like the guy at the 0:16:46.600 --> 0:16:48.680 craps table that's like, now, I'm gonna just watch that 0:16:48.720 --> 0:16:50.240 game play out. 0:16:49.800 --> 0:16:53.400 What well I mean, I mean here, I'll if you 0:16:53.480 --> 0:16:55.600 yield is twelve is well, if you get a dollar 0:16:55.640 --> 0:16:57.520 a month, that's twelve percent, but this is like fourteen 0:16:57.560 --> 0:16:58.760 percent a little more of a dollar. 0:16:58.880 --> 0:17:01.400 The average weighted coop on which is based on that 0:17:01.440 --> 0:17:04.320 par amount of your note, is fourteen point four percent. 0:17:04.400 --> 0:17:06.359 Right now. Okay, So the thing that we did not 0:17:06.440 --> 0:17:08.640 get into yet, which we have to build a base 0:17:08.720 --> 0:17:12.760 understanding of auto callables. It's a one hundred billion dollar 0:17:12.800 --> 0:17:14.760 market in the United States. You know, as you alluded 0:17:14.800 --> 0:17:18.280 to the structured note world, Well, let me back up 0:17:18.680 --> 0:17:20.199 the cover call space. You know, he said is one 0:17:20.240 --> 0:17:23.920 hundred and fifty billion dollar market. Derivative income is dominating 0:17:24.040 --> 0:17:27.480 the ETF landscape. If you go to the other side 0:17:27.520 --> 0:17:31.600 of the house, the structured note house, derivative income dominates 0:17:31.600 --> 0:17:33.960 there as well, but it's through the auto call. The 0:17:34.000 --> 0:17:36.240