Source: Zhitong Finance

For defensive stock investors, this sounds like a steady profit deal: buying a stock ETF that claims to provide “100%” downside protection.

According to documents, Calamos Investments applied for so-called “structural protection” ETFs on Monday. These funds will track part of the returns of the S&P 500 Index, Nasdaq 100 Index, and Russell 2000 Index, while 100% hedging downside risks through the options market.

The first fund in this portfolio is the Calamos S&P 500 Structured Alt Protection ETF (CPSM), which aims to track the return on price of the SPDR S&P 500 ETF (SPY).

However, investors who want full protection will need to buy it on the day of issue (May 1, 2024) and hold it until April 30, 2025.

The documents show that, like other ETFs to be launched, CPSM will mainly invest its assets in derivatives by trading a combination of call and put options to cushion market fluctuations. According to a filing with regulators, there is no guarantee that the fund will successfully provide the much-sought downside protection.

Matt Kaufman, head of ETFs at Calamos, said: “Today, risk-free interest rates have surpassed 5%, and issuers of options-based products can provide meaningful upward participation with 100% capital protection.” “For companies that issue 'protected' products, the hedging cost of selling one or a series of options to offset the premium on buying a protected put option will become lower as interest rates rise.”

Are investors buying it?

As investors struggle to cope with increased interest rate fluctuations, issuers are testing the need for funds that provide stock exposure and downside protection. Since it was launched in July last year,$INNOVATOR EQUITY DEFINED PROTECTION ETF - 2 YR TO JULY 2025 (TJUL.US)$The size has grown to $230 million, and the ETF provides 100% downside protection over two years. BlackRock, the world's largest ETF issuer, has also applied for funds they believe will provide complete downside protection.

Compared to so-called “buffer ETFs” that were first listed in 2018, funds with 100% capital protection provide investors with additional protection. Buffer funds provide downside risk protection at a certain level of buffering, such as the first 10% loss, but after this level, investors still face the risk of loss.

Calamos' new funds generally offer less upside exposure, but they also provide more downside protection.

Kaufman said, “As they get older, people nearing retirement — they can't bear the sharp drop in the market, but they also can't afford the consequences of not entering the market. So it gave them a chance.”

CPSM is expected to go public on May 1. Calamos plans to launch new funds every few months.

The investment firm manages approximately $37 billion in assets and specializes in options strategies for various funds, including ETFs, individually managed portfolios, and mutual funds.

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