Structured Alt Protection ETF's

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Mlib24
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Structured Alt Protection ETF's

Post by Mlib24 »

Hello Board,

Has anyone invested in these new Structured Alt Protection ETF's. I Just read an article in the WSJ and they seem compelling. Sorry for lack of details as I truly don't understand them 100% and what better place than this board to get the full low down. They offer downsize protection with capped upside limits. They are not Annuities although they sure do sound like they function the same.
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Re: Structured Alt Protection ETF's

Post by Stinky »

Mlib24 wrote: Sat Jun 22, 2024 6:43 am Hello Board,

Has anyone invested in these new Structured Alt Protection ETF's. I Just read an article in the WSJ and they seem compelling. Sorry for lack of details as I truly don't understand them 100% and what better place than this board to get the full low down. They offer downsize protection with capped upside limits. They are not Annuities although they sure do sound like they function the same.
Welcome to the Forum!

Is this the WSJ article that you’re talking about? https://www.wsj.com/finance/investing/r ... yURL_share

If so, you’ll find many threads about these types of things. Here’s one. viewtopic.php?t=221908

And here’s another. viewtopic.php?t=318098

I agree that many of the features sound like either an indexed annuity or a buffered annuity.

None of these products are favored by most Bogleheads.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
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Re: Structured Alt Protection ETF's

Post by Mlib24 »

Yes, that is the article and thank you for the feedback...time to more posts and get some great insight/info!
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Re: Structured Alt Protection ETF's

Post by nisiprius »

Recently, there have been a number of various kinds of products that have launched and hyped, some in the form of ETFs, some in the form of annuities, that--in the accurate yet misleading words of the WSJ article--
Derivative strategies in ETFs allow investors to chase stock returns while also protecting against a potential market downturn.
For most investors these are bad products, not because they are dangerous or will lead to destructive losses, but because they don't understand them, and because they don't get what they think they are getting.

Since they are all different from each other and complex, it is easy for a salesperson to say "Sure, a lot of these products are bad but this one is good."

In the case of the Calamos product named in the article, the article says the Calamos’s S&P 500 Structured Alt Protection ETF, is designed to match
  1. to match the S&P 500’s return over one year
  2. with gains capped at 9.8%
  3. In exchange, investors who hold for the full outcome period are protected from capital losses entirely.
The gotchas here are
  1. to match the S&P 500's price return, not total return
  2. Capped, which is more important than investors might think
  3. The protection promise is ONLY if you hold it for exactly twelve months. During that year it fluctuates, and if you need money before the year is up you might well have a loss.
In general, the big catch is failing to understand the degree by which these products fall short of delivering the full upside of the stock market. The WSJ's use of the word "chase" in "chase stock returns" is sneaky. The motivation for buying them is a wish for downside protection while still participating in the stock market. The big gotcha is the failing to appreciate the impact of upside caps. It sounds good to say "it gives you the annual return of the S&P 500 price index up to a cap of 9.8%" because you might say, "hey, 9.8% is pretty good, I can sure live with that." The problem is that stock market returns are bursty and that the historic average return of the stock market doesn't come from moderate, steady 10% years, it comes from the occasional 30% years. Slicing them off at 9.8% provides enough "savings" to the fund to more than pay for the downside protection of the years of loss.

A significant catch is their conspicuous use of the phrase "the" S&P 500 without mentioning that they are talking about price return, not total return including stock dividends. Total return is what you would get in an S&P 500 index fund. It's a meaningful difference. We're about to see that in 2015, for example, it was the difference between a small loss (in the price return) and a small gain (in total return).

To see how the caps can take away more than the protection gives, let's use the MoneyChimp S&P calculator to show us the S&P 500 price return and total return (any S&P 500 for the last ten years.

Price return:
Image

Total return:
Image

Notice that the total return was higher than the price return in every single year, and that in 2015 the price return experienced a small loss, but the total return did not. Stock dividends were enough to make up for the decline in share prices.

The stock market is up a lot more often than it's down, and when it's up it's often more than 9.8%. There are only three years when Calamos' downside protection would have kicked in: 2015, 2018, and 2022. And frankly the losses in 2015 and 2018 were so small that you didn't really need protection. The cap would have kicked in all of the other seven years. Protection in three of the years, a haircut in seven of them. And in several of them it would have been pretty brutal. Getting 9.8% when the S&P 500 returned 26%, 28%, or 31% is meaningful.

To roughly approximate the behavior of a fund like the Calamos ETF, we tabulate the S&P 500 price return. Then we restrict the loss years to zero and cap the gain years at 9.8%. Then we calculate the of $10,000 in such an investment. Then in the right two columns, we do the same thing using total returns, similar to what we would get in an S&P 500 index fund.

Image

Now, on the one hand, the Calamos fund would have saved an investor from a $5,473 loss in 2022. Yet even so, the Calamos investor ended up with $12,000 less than they would have gotten in an S&P 500.

Now we understand that the caps, and failure to include stock dividends, can easily cost more in foregone return than the protection they provide in the down years. The hypothetical investor paid about $12,000 in foregone gain to get $6,000 worth of protection.

The big question to address is whether the lower return is justified by the lower risk. This can only be answered by taking into an investor's personal risk tolerance, and by comparing funds like these, not to the uncapped, full S&P 500, but to other simple alternatives that trade off return for lower risk. All I can say is that the price of insurance against ever have any annual loss is high.

The other thing that is hard to put a value on is the effective lack of liquidity implied by the fact that the "zero downside" is only achieved if you hold exactly for the full 12 months.
Last edited by nisiprius on Sat Jun 22, 2024 7:00 pm, edited 2 times in total.
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Re: Structured Alt Protection ETF's

Post by Stinky »

nisiprius wrote: Sat Jun 22, 2024 9:10 am Now that we understand that the caps, and failure to include stock dividends, can easily cost us more in foregone return than the protection they provide in the down years. We paid about $12,000 in foregone gain to get $6,000 worth of protection.
As always, nisiprius said it so much better than I could .......
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Boomer Candy

Post by rule of law guy »

[Thread merged into here --admin LadyGeek]

See https://www.wsj.com/finance/investing/r ... _permalink. [unlocked]

discusses equity ETFs that use options and derivatives to limit downside or enhance current income, at the expense of future upside.

as this bull market grows older, this is attracting retiree funds.

this one sounded interesting: "One such fund he owns from First Trust tracks the Nasdaq-100. Over a rolling one-year period, the fund aims to protect against the first 10% slide in the index, meaning that if Nasdaq-100 dropped 15%, the fund would be down about 5%. Investor gains are capped at roughly 20%."

losing bet over past year as N100 is up 37%, but a sensible bet going forward.

anyone invested in these ETFs? do they perform as advertised? Tax issues?

I know they have high fees, but it takes some smarts to hedge, and these days you have to pay up for smarts.
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Re: Boomer Candy

Post by Geologist »

Already being discussed here, I believe: viewtopic.php?f=1&t=434182&newpost=7922732
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Re: Structured Alt Protection ETF's

Post by LadyGeek »

I merged rule of law guy's thread into the ongoing discussion. The combined thread is now in the Investing - Theory, News & General forum (general discussion).

(Thanks to the member who reported the post and provided a link to this thread.)
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Re: Structured Alt Protection ETF's

Post by bog007 »

so how would these perform from 2000 to 2010. save your bacon :wink: :mrgreen:
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Re: Structured Alt Protection ETF's

Post by rule of law guy »

nisiprius wrote: Sat Jun 22, 2024 9:10 am Recently, there have been a number of various kinds of products that have launched and hyped, some in the form of ETFs, some in the form of annuities, that--in the accurate yet misleading words of the WSJ article--
Derivative strategies in ETFs allow investors to chase stock returns while also protecting against a potential market downturn.
For most investors these are bad products, not because they are dangerous or will lead to destructive losses, but because they don't understand them, and because they don't get what they think they are getting.

Since they are all different from each other and complex, it is easy for a salesperson to say "Sure, a lot of these products are bad but this one is good."

In the case of the Calamos product named in the article, the article says the Calamos’s S&P 500 Structured Alt Protection ETF, is designed to match
  1. to match the S&P 500’s return over one year
  2. with gains capped at 9.8%
  3. In exchange, investors who hold for the full outcome period are protected from capital losses entirely.
The gotchas here are
  1. to match the S&P 500's price return, not total return
  2. Capped, which is more important than investors might think
  3. The protection promise is ONLY if you hold it for exactly twelve months. During that year it fluctuates, and if you need money before the year is up you might well have a loss.
In general, the big catch is failing to understand the degree by which these products fall short of delivering the full upside of the stock market. The WSJ's use of the word "chase" in "chase stock returns" is sneaky. The motivation for buying them is a wish for downside protection while still participating in the stock market. The big gotcha is the failing to appreciate the impact of upside caps. It sounds good to say "it gives you the annual return of the S&P 500 price index up to a cap of 9.8%" because you might say, "hey, 9.8% is pretty good, I can sure live with that." The problem is that stock market returns are bursty and that the historic average return of the stock market doesn't come from moderate, steady 10% years, it comes from the occasional 30% years. Slicing them off at 9.8% provides enough "savings" to the fund to more than pay for the downside protection of the years of loss.

A significant catch is their conspicuous use of the phrase "the" S&P 500 without mentioning that they are talking about price return, not total return including stock dividends. Total return is what you would get in an S&P 500 index fund. It's a meaningful difference. We're about to see that in 2015, for example, it was the difference between a small loss (in the price return) and a small gain (in total return).

To see how the caps can take away more than the protection gives, let's use the MoneyChimp S&P calculator to show us the S&P 500 price return and total return (any S&P 500 for the last ten years.

Price return:
Image

Total return:
Image

Notice that the total return was higher than the price return in every single year, and that in 2015 the price return experienced a small loss, but the total return did not. Stock dividends were enough to make up for the decline in share prices.

The stock market is up a lot more often than it's down, and when it's up it's often more than 9.8%. There are only three years when Calamos' downside protection would have kicked in: 2015, 2018, and 2022. And frankly the losses in 2015 and 2018 were so small that you didn't really need protection. The cap would have kicked in all of the other seven years. Protection in three of the years, a haircut in seven of them. And in several of them it would have been pretty brutal. Getting 9.8% when the S&P 500 returned 26%, 28%, or 31% is meaningful.

To roughly approximate the behavior of a fund like the Calamos ETF, we tabulate the S&P 500 price return. Then we restrict the loss years to zero and cap the gain years at 9.8%. Then we calculate the of $10,000 in such an investment. Then in the right two columns, we do the same thing using total returns, similar to what we would get in an S&P 500 index fund.

Image

Now, on the one hand, the Calamos fund would have saved an investor from a $5,473 loss in 2022. Yet even so, the Calamos investor ended up with $12,000 less than they would have gotten in an S&P 500.

Now we understand that the caps, and failure to include stock dividends, can easily cost more in foregone return than the protection they provide in the down years. The hypothetical investor paid about $12,000 in foregone gain to get $6,000 worth of protection.

The big question to address is whether the lower return is justified by the lower risk. This can only be answered by taking into an investor's personal risk tolerance, and by comparing funds like these, not to the uncapped, full S&P 500, but to other simple alternatives that trade off return for lower risk. All I can say is that the price of insurance against ever have any annual loss is high.

The other thing that is hard to put a value on is the effective lack of liquidity implied by the fact that the "zero downside" is only achieved if you hold exactly for the full 12 months.
great job nisiprius.

I get the distinction between price and total return, and I get that we are in a secular bull market for my entire investing lifetime (40 years, with the occasional downdrafts, but not like the bear market period from 1929 to the break even point in the 1950s). good reasons for foregoing the product if the bull market continues.

but assume that the equity markets are flat over the next 5-10 years. yes, I know heresy.

I am 70% ST treasuries and 30% equities (mostly SPY), which works just fine for my purposes (married 70yo with adult children, with FI) given ST rates. I also dont think that ST rates go back to anything close to zero. but if they do, then my AA is too conservative, and increasing the equity allocation is called for, but risky given my objectives...hence my initial interest in these structured products.
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Re: Structured Alt Protection ETF's

Post by nedsaid »

Stinky wrote: Sat Jun 22, 2024 9:34 am
nisiprius wrote: Sat Jun 22, 2024 9:10 am Now that we understand that the caps, and failure to include stock dividends, can easily cost us more in foregone return than the protection they provide in the down years. We paid about $12,000 in foregone gain to get $6,000 worth of protection.
As always, nisiprius said it so much better than I could .......
Nisiprius puts on investing clinics and it is an amazing thing to see. It is like watching an old video of the late Vince Lombardi diagramming the famed Green Bay Packer power sweep led by guards Jerry Kramer and Fuzzy Thurston. I remember reading an account of a young Johnny Madden (later the Oakland Raiders coach) going to a football clinic where Lombardi, the master coach, spent an entire day lecturing on just one play. The Packers had a reputation for basic rock 'em, sock 'em football and weren't known for doing a lot of trick plays, just solid basic football. Despite Lombardi's emphasis upon the fundamentals and the basics, he had an amazing depth to his knowledge, he was what other coaches would call a technician.

Similarly, there is an awful lot to good old fashioned basic investing, it seems simple but there is a whole lot of thinking behnd it.

These posts are really good, sometimes I feel like a young Johnny Madden listening to the master and realizing that he had a lot to learn about the game of football.

This also reminds me of a Peter Lynch quote that said something like this: a lot more money was lost from trying to avoid bear markets than from the bear markets themselves. Big lesson, investors are better off just riding out the volatility instead of buying these fancy "buffer" products. If you want to reduce volatility in a portfolio just buy more bonds though at the expense of return. There are trade-offs made with these kind of products and trade-offs made in portfolio construction.
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Re: Structured Alt Protection ETF's

Post by bog007 »

10.5 to 11.2% for the latest etf by calamos. tracks small cap stocks. if market goes down 50% you lose nothing but goes up 1 to 11.2 you get that %. if market goes up 20% you only get 11.2. tax efficient to boot
Calamos Announces Russell 2000 Structured Alt Protection ETF – July (CPRJ), 10.5% -
11.2% Upside Cap Range with 100% Downside Protection Over One Year
- Calamos Russell 2000 Structured Alt Protection ETF – July (CPRJ) is slated to launch
July 1 with estimated cap range 10.5%-11.2% over a one-year outcome period.
- CPRJ is the first ever ETF to offer 100% downside protection to the US small cap
companies of the Russell 2000.
- The Calamos Structured Protection ETF suite combines Calamos’ decades-long
alternatives and options investing expertise with the liquid, cost-effective and taxefficient ETF structure.
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Re: Structured Alt Protection ETF's

Post by Lyrrad »

bog007 wrote: Sun Jun 23, 2024 12:33 am so how would these perform from 2000 to 2010. save your bacon :wink: :mrgreen:
Note that the cap is probably related to current interest rates. If you tried to get such a product from 2009-2015, or March 2020 to March 2022, the cap would have been much lower. My guess would be that the cap would have been under 2%.
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Re: Structured Alt Protection ETF's

Post by itsmeagain »

Here’s an analysis of the Innovator and Calamos ETFs with 100% downside protection, and what one can do oneself. Specifically, I’m comparing products based on SPY (S&P500) with a one-year duration.

The corresponding product from Innovator has the symbol ZJUL, and it is described here:
https://www.innovatoretfs.com/etf/defau ... icker=zjul

ZJUL has a cap (maximum return) of 9.50% and a downside before buffer of 0%, with both values before fund expenses. With a 0.79% expense ratio, those numbers become 8.71% and -0.79%, respectively.

The product from Calamos is CPSJ, and it’s described here:
https://www.calamos.com/funds/etf/calam ... july-cpsj/

CPSJ has a cap of 9.45% and a downside before buffer of 0%, again with these values before fund expenses. With a 0.69% expense ratio, the max and min returns become 8.76% and -0.69%, respectively.

Each fund is essentially a composite of 3 holdings. A long position in the S&P500, a put option that provides downside protection, and the sale of a call option that offsets some of the put option’s price but limits possible gains. The dividends that will be paid on the S&P500 also offset the cost of the put and are incorporated by the market into the pricing of the put and call options.

Let’s now build the same investment ourselves. As of the close on June 28, we could purchase SPY for $544.22. Note that is the same reference value used by both ETFs.

We could purchase a PUT option that expires June 30, 2025, with a strike value of $550 for $25.85. That gives us the right to sell SPY for $550 if it ends at any lower value on that date.

We could sell a CALL option that expires on that date with a strike value of $600 for $15.95. That gives the buyer the right to buy the SPY from us for $600 if it ends at any higher value on that date.

The net cost of our 3 positions is 544.22 + 25.85 – 15.95 = $554.12. The most recent quarterly dividend paid by SPY was $1.76. Let’s assume we get 4 x 1.75 = $7.00 in dividends over the coming year. It could be a bit higher or lower, but I think this is a reasonable estimate. (I used the ask and bid prices for the PUT and CALL, respectively. One could probably do slightly better by a few cents on each option.)

Our maximum gain is if SPY ends at $600 or higher, in which case we get a return of $607 / $554.12, which means 9.54%. Our worst outcome is if SPY ends at $550 or lower, in which case we get $557 / $554.12, which is still a tiny gain at +0.52%.

Thus, by rolling our own, we can beat either ETF on the high end by about the expense ratio, and by well over 1% on the low end. Taking the average of the best and worst cases yields 3.96% for ZJUL, 4.04% for CPSJ, and 5.03% for building the strategy ourselves.

It’s also interesting to compare this with a treasury bill that expires on June 30, 2025. That pays 5.14%. So, our do-it-yourself strategy is something like a double or nothing bet on that rate of return, in that our best and worst outcomes are +9.54% and +0.52%, respectively, with an average of the best and worst very near the treasury rate.

Finally, there are some differences between the ETFs and the do-it-yourself strategy. Owing to the ETF structure, there would be no taxable gains (or losses) unless / until you sold the ETF. By contrast, there would be taxable gains or losses on at least the dividends and one or both option positions each year, and the options would complicate the tax treatment of the dividends. None of this would matter, however, in a tax-deferred account. A second difference, of course, is you’d have to do the trades yourself, but it’s not too hard for a substantial savings, assuming one understands how to do this sort of stuff. A third difference is that controlling the separate options positions gives you the possibility of swapping options based on how SPY performs. For example, one could roll the options prices to lower or higher values (or shorter or longer durations) after a few months, if one thinks that gives a more favorable spectrum of returns.
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Re: Structured Alt Protection ETF's

Post by Stinky »

itsmeagain wrote: Sun Jun 30, 2024 2:46 pm Here’s an analysis of the Innovator and Calamos ETFs with 100% downside protection, and what one can do oneself. Specifically, I’m comparing products based on SPY (S&P500) with a one-year duration.......

Thus, by rolling our own, we can beat either ETF on the high end by about the expense ratio, and by well over 1% on the low end. Taking the average of the best and worst cases yields 3.96% for ZJUL, 4.04% for CPSJ, and 5.03% for building the strategy ourselves.
So, in other words, the difference in the yields is roughly the expense charge of the structured products.

If you buy the structured products, you're paying an expense charge for doing it.

That result isn't surprising at all.
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Re: Structured Alt Protection ETF's

Post by itsmeagain »

Stinky wrote: Sun Jun 30, 2024 2:59 pm
itsmeagain wrote: Sun Jun 30, 2024 2:46 pm Here’s an analysis of the Innovator and Calamos ETFs with 100% downside protection, and what one can do oneself. Specifically, I’m comparing products based on SPY (S&P500) with a one-year duration.......

Thus, by rolling our own, we can beat either ETF on the high end by about the expense ratio, and by well over 1% on the low end. Taking the average of the best and worst cases yields 3.96% for ZJUL, 4.04% for CPSJ, and 5.03% for building the strategy ourselves.
So, in other words, the difference in the yields is roughly the expense charge of the structured products.

If you buy the structured products, you're paying an expense charge for doing it.

That result isn't surprising at all.
That's right, Stinky. I'd just re-state three points. First, I thought it was useful to work though the numbers, as a point of education for myself and others who are interested. Second, I was surprised that I could do a bit better than just overcoming the expense ratio, especially on the downside. Third, I was intrigued to discover that the median outcome (before expenses, but none if do-it-yourself) is very close to the treasury bill rate, and roughly double or nothing for the best and worst outcomes.
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Re: Structured Alt Protection ETF's

Post by bog007 »

11.29% / 10.60% is the rate for cprj. follows the russell 2000. slightly down today so you actually get a better rate :beer
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Re: Structured Alt Protection ETF's

Post by nisiprius »

Matt Levine made a wonderful comment in his "Money Stuff" column. Obviously, this is a joke and not the way real buffered ETFs work, but I thought it was a brilliant clarification anyway.
Here is a simple, bad financial product:

You give me $100.

In a year, I give you back the return on the S&P 500 stock index, but (1) if the index is down, you don’t lose any money and just get your $100 back, and (2) if the index is up more than 5%, you only get the first 5% of returns. If the S&P goes up 3%, you get $103 back. If it goes up 5%, you get $105. If it goes up 37%, you get $105. If it goes down 5%, you get $100. If it goes down 37%, you get $100.

You have bought 100% downside protection by giving away the upside above 105%.

How do I manufacture this product? That is, how do I make sure that I have enough money in every scenario to pay you back? Well, I could probably do some stuff with options. But the simplest and most obvious approach is:

I use your $100 to buy a one-year Treasury bill, which pays roughly 5.1% interest.
In a year I have $105.10.

At that point, I look at the return on the S&P. If it’s 5% or more, I give you $105 and keep the remaining $0.10. If it’s zero or negative, I give you $100 and keep the remaining $5.10. In between, I give you $100 plus the S&P’s return and keep the rest.

This is, like I said, a very bad product. You should not buy it; you should just buy the Treasury bill yourself instead.
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Re: Structured Alt Protection ETF's

Post by itsmeagain »

For what it's worth, iShares has come out with a similar product, ticker MAXJ, that promises 100% downside protection (less expenses). The expense ratio is lower than the other two ETFs mentioned up thread, so the capped (maximum) gain and loss (expense only) are also a tad better.
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