A new ETF offers investors '100% downside protection' on the stock market. The catch is that it also limits upside.
"There's no free lunch here, so a cap of right around 9.65% is what we're seeing now, with 100% protection over the next 365 days," Calamos said.
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- A new ETF is designed to offer investors "100% downside protection" to the stock market.
- But there's a catch in that buying the ETF also caps the stock market's upside potential.
- The Calamos S&P 500 Structured Alt Protection ETF will launch on Wednesday under the ticker symbol "CPSM".
A new ETF promises to offer investors "100% downside protection" to the stock market, but it comes with a few caveats.
The Calamos S&P 500 Structured Alt Protection ETF – May will launch this Wednesday under the ticker symbol "CPSM".
The ETF is designed to offer investors who buy the ETF on May 1, its first day of issuance, 100% protection to the S&P 500 over a one-year time period.
The catch is that it also limits investors' upside gains to the S&P 500 at a range of 9.20% to 9.65%.
"These are a package of options positions all customized to expire on the same day, one-year from now that can deliver the upside to a cap, there's no free lunch here, so a cap of right around 9.65% is what we're seeing now, with 100% protection over the next 365 days," Calamos' head of ETFs Matt Kaufman told CNBC on Monday.
The other catch is that for investors to secure the 100% downside protection, they must buy the ETF on its first day of issuance. While investors can purchase the ETF after May 1, their downside protection will vary at a level below 100% depending on option prices.
"The earlier you get in, day one, the better, you're going to get close to that 100% protection," Kaufman said.
The ETF offers investors a tantalizing risk-reward profile: upwards of 9.65% gains with no downside. That's the type of product that will likely appeal to retired investors who want some exposure to the stock market without its potential downside, which history has shown can be extreme.
The ETF will have an annual expense ratio of 0.69%, and Calamos plans to offer 11 more structured ETFs over the next year, tied to different indexes, including the Nasdaq 100 and the Russell 2000. The upside cap has not yet been determined for those ETFs.
While the S&P 500 has on average delivered an annual gain of about 10%, or 7% after inflation, it does have a tendency to deliver annual gains that are far below or above that average return.
For example, in 2023 the S&P 500 delivered a gain of about 25%. That's the scenario where investors may wish they hadn't bought a structured ETF product like CPSM.
But on the flipside, investors in structured note investments like CPSM were probably pretty happy in 2022, when the S&P 500 delivered a stinging loss of nearly 20%.
Structured note investments that limit the downside and cap the upside to the stock market have always been around, but they were hard to access can came with hefty fees. The new product offerings by Calamos are unique in that they're wrapping these products into ETFs, making them much more accessible to investors.