Matt Kaufman

Which makes probably absolutely no sense. And so I was at Milliman Financial Risk Management. That was around 2010. They wanted to build funds out of the hedging strategies that they were running on the balance sheets of life insurance companies. It was a fantastic opportunity looking back. Learned a tremendous amount about the insurance world, about hedging strategies, what works, what maybe doesn't work. And what we saw there was largely rate-driven. A lot of insurance products are rate-driven. And so after the financial crisis, rates were extremely low and it was very difficult to, from an investor's perspective, it was difficult to provide or get risk management or income from bonds. And so people were looking toward the equity markets to do that. They were running equity risk management strategies,

Covered call strategies to generate income. People were looking at the equity markets to generate risk management and income. And that worked very well. We had built around 50, 55 funds, largely for life insurance companies, variable annuity sub-accounts, raised a significant amount of assets there. The other thing that we noticed is it was difficult for life insurance companies to deliver meaningful upside on their fixed indexed annuities, which for an ETF user may not be familiar with that marketplace, but that delivers equity-linked upside with no downside risk. So principal protection over an outcome period, those FIAs might be one year, three years, five years. And so just some background there.

But it was difficult to give anybody, anyone meaningful upside on those types of products. And so the insurance space and the structured product space really too started moving toward, what we would call this risk sharing model, where you could deliver something less than principal protection. You could deliver partial principal protection, where you would deliver 10%, buffer or 20% buffer. And so that would allow you to deliver, meaningful upside again. And so that we saw that space start to really take off the structured annuity market, the buffered structured note space. And by 2016, I would say, we were still at Milliman and we noticed that you could deliver that type of outcome very efficiently with options contracts. Like we could just take

Flex options, equity listed flex options on broad liquid markets, package those together, make them all expire at the same time, customize the strike prices, and then you could deliver that as an outcome via a package of options. And so because you can do it with options, those are securities. And so those securities can now sit inside of a wrapper like an exchange traded fund. So I don't know too many folks who spent time in the ETF space, and then also fortunate enough to be in the insurance space, but being able to merge those two worlds, and think through the theory, and the math, and the construct of outcomes delivered by, balance sheet based products, like insurance products, or structured notes, and then doing that inside of the tax efficient liquid, low cost

Wrapper. So the, backstory, the head trader at Milliman and a few other folks worked together to build this intellectual property, and then delivered that into innovator ETFs. Bruce is coming back into the ETF space. They hired Milliman as the sub advisor for those products. So they were still a client of Milliman, that business is growing strong, and really set the stage for the buffered ETF space. So obviously, we need to give innovator credit for building those that, products set out that ETF space out that products that's going really strong. It's about $50 billion across them and, other, other competitors as well.

What we saw, I've been at Calmos about a year and a half. And, what we've been watching is the rate environment. And so as rates have come up, off of zero, say, call it the lift of, March 2022. As rates are approaching, two, three percent, we're looking at that rate environment, and watching flows in other spaces. And like, guess what, people are buying CDs, again, they're buying money markets, again. And the same was true in the structured note and the, annuity world, people were buying capital protected structured notes, they were buying fixed index annuities again. And that space, the capital protected space, we would call it outside of the ETF world is about four times the size of the buffered space. And so

It's a massive industry that has really not been disrupted by the ETF vehicle. And so that's what we're doing at Calmos. We're taking this brand, they call it brand new to the ETF space. But it really couldn't have been developed when rates were, below one, two percent. But now that we're north of that, we're at a little over five percent. Now, we can deliver capital protection inside of an ETF wrapper. And so that's what we've launched today, we're filming this, May 1, we launched about an hour, two hours ago, hour and a half ago. And, the market is accepting this type of strategy. So CPSM is the ticker symbol for the first of 12 ETFs that we're launching. So we have an ETF today,

That's CPSM, that delivers 100% downside protection with upside exposure relative to the S&P 500. So there's capped upside here, there's no free lunch, but the upside is capped. But because rates are at a point where they're higher than they used to be, we can, the cap that we struck yesterday was 9.81%. So now investors can have a choice. If you think about like what your choices are between a CD or between this, you could choose your, guaranteed 5% CD rate that you would get, hold it for a year, and that would expire in a year. And then you would pay ordinary income tax on that, which if you're in the highest tax bracket, that turns into 3.2, 3.3%.

Or you can turn in that guaranteed 3.2, 3.3% and get the chance to earn your upside of the market. So you get the, you can link your cash essentially to the equity markets, get upwards of 9.8%, and then have no greater downside risk over that one year outcome period. So again, it's for folks who want to buy in at the beginning, hold till the end, they get that outcome period performance, but there's also, opportunities to buy in along the way. So like right now the market's been open for an hour or two, the NAV is still hovering right around $25. So people are still buying in, we're seeing really strong volume right out of the gate, which is good, good to see.

Um, but anytime that net asset value crosses back over its starting point along the way is another good entry point, because now you can obtain that 100% downside protection over an outcome period with, um, a shorter time, time horizon left. Uh, so I've, I've spoken a lot. I'll stop there and, uh, we can just keep, keep talking here.

Have a great CEO and John Kadunas came on, I think five, six years ago and is really positioning the firm for the future. I would say, uh, we have private credit, uh, funds now interval funds, working on other, uh, ideas in that space. And then an ETF land, um, really seeing the, um, SEC, ETF rule come out, seeing the subsequent derivatives rule come out. And so Calamos made a strategic move to go into the active ETF space, uh, which I think was, was the right call. Obviously I'm appreciative of the, of the position here as well. Um, I think there's massive amounts of assets that's going to move into active ETFs over, the next decade or so. Um, if you just

Track, assets under management across passive and actively managed flows or say assets, um, across mutual funds and across ETFs, they're pretty evenly split about $13 trillion is in passive products and about $13 trillion is in actively managed products. And on the passive side, that 13 trillion is split pretty evenly between mutual funds and ETFs. The trouble or the opportunity is on the mutual fund side, that active bucket, 13 trillion is almost exclusively in the mutual fund. And so we see a lot of that, um, having opportunity to move over to the ETF side, gain that tax efficiency, the liquidity. And so that's a goal of Calamos is to be a part of that

Taking your a hundred dollars and we're buying a zero strike call or a deep in the money call, which is going to be near a zero strike. And so that, uh, that option leg is going to be pretty expensive. It's going to cost you around 98 of your $100. And so, um, now we've spent $98 and we've essentially replicated our full upside and downside exposure to the market with a one year expiration. So that's option leg one, that's your exposure layer. The second layer is your protection layer. So we're going to buy an at the money put to give you full downside protection. Uh, let's just pretend that that leg costs $5. So now you've spent $103, but you only had a hundred. So you've,

You've busted your budget, you've overspent. And so the way to bring your 103 back to 100 is to sell and out of the money call. So we're going to sell off some of your upside exposure in order to collect or generate a $3 premium payment that will go back into your pocket to bring your $103 back to 100. So we've bought a zero strike call for $98. We've bought a put for five and now we were selling an out of the money call for three. So that there's your a hundred dollars and the strike price of that out of the money call determines your upside cap. So that price right now is 9.8%, which means over the next 12 months, if you buy in today, you get upside of the S&P 500 to 9.8% with your at the

Money put. So with 100% downside protection, and then any day after that, anytime the market's open, you're going to know what your NAV price is. You're going to know what your ETF price is. And so, because you know that, and you know where the S&P 500 is, you'll always have an outcome that you'll be able to buy into. So like tomorrow, let's just pretend like we're a month from now. And the S&P 500 has run up, let's say 5%. So the S&P is up 5%. You're not going to be up exactly 5% because there's time value built into those options. You might be up, one or 2%. You've still got 10 months to go. But if you bought in that day, you would have,

Instead of a 9.8% upside, if the market was up five, let's say your ETF is up 2%. So you would have a 7% cap because you've got a 7% left. And then you would have 2% of downside risk left. Or I said another way, you'd have 98% protection, still very strong protection, because the ETF price is up 2%. So that might be difficult to follow just on audio, but hopefully everybody's tracking there.

And then if you've held it for longer than a year, when you go to sell, you're paying long-term capital gains rates. So it's a huge tax alpha trade.

And you know that that minus one of your NAV is going to appreciate at a minimum, appreciate back to zero. So you're collecting almost a free 1% there is how I think of it. Yeah, that makes a ton of

That until the last day of the outcome period. But you get close. Yeah, no, that makes a ton of

Opportunities to generate risk management and income from bonds again. And so to the extent there's rate declines, I think that those bonds may perform well. So we have some other ETFs that are focused on that type of approach as well. CanQ is one of those ETFs that we launched a couple of months ago. One thing that we've seen advisors use these protection products for is just de-risking equity exposure. So one exercise we'll go through is, Brad, how much equity market risk do you want to take off the table? You've run the equity markets up. We're at, near all time highs. So how much equity risk do you want to take off the table today? So you can answer the question. Yeah,

This is a question. So just pick up percentage.

Profile, use those handles to kind of toggle your, your equity exposure. So I think that's a very interesting way that people are starting to use these products. But then again, once you put, 100% protection on something or even 98% protection, it really unlocks that cash bucket. And there's $9 trillion in CDs and money markets today. It's larger than the ETF space itself. It's a massive, massive complex. And so the giving somebody the liquid transparent ability and tax efficient ability to link their cash to the equity markets in a single trade, I think it makes a lot of

So I think that we're at the beginning of this, you view that, look at the target outcome kind of brand or structured ETF brand as an umbrella. And then underneath similar in the, in the other structured note space underneath, you've got growth products, you've got income based products, you've got capital protection type products. And so this capital protection category is the one that we have seen really not built yet. And it's something that we want to capture. So I think there's a lot of ways to build portfolios using these.

Then like it just, it changes your mindset a little bit. It's like, okay, well, what index do I actually want exposure to? And in that sense, like, well, which one do I think might grow well over the next 12 months? And so I think one of the reasons that we were looking at Russell 2000 is I think that it's set up to do well, over the next couple of years here. And so those are the three reference assets we're bringing. And then we're going to repeat that cycle four times. So after the Russell, planned Russell in July, we'll go back to S&P in August and the Nasdaq until we have 12 of these in the market. And we didn't really want to, we didn't want to saturate

The market with 36 of these. granted, if they're extremely popular and advisors want them, then we'll bring them. But we just wanted to have one ETF available every month that people could get into and get, 100% protection on.