Introduction
The perfect equity investment would give unlimited exposure to potential capital gains without any risk of losing money. More sophisticated investors might know of such opportunities but I have yet to find one. Recently I reviewed the Innovator U.S. Equity Power Buffer ETF – October (POCT), which compromises on both desired outcomes: capping the upside and downside (article link). Calamos just launched the Calamos S&P 500 Structured Alt Protection ETF – May (NYSEARCA:CPSM), which improves on the Innovator ETF by providing 100% downside protection (after fees), though the upside is still capped. I liked the POCT ETF enough to rate it as a Strong Buy and opened up a position. The CPSM ETF is just a month old so too new to rate it a Buy at this point but worth keeping an eye on. Rating: Hold.
Calamos S&P 500 Structured Alt Protection ETF – May review
Seeking Alpha describes this ETF as:
The investment seeks to provide investment results that, before taking fees and expenses into account, match the positive price return of the SPDR® S&P 500® ETF Trust. Under normal market conditions, the fund will invest substantially all of its assets in FLexible EXchange Options (“FLEX Options”) that reference the price performance of the SPDR® S&P 500® ETF Trust. FLEX Options are customized equity or index option contracts that trade on an exchange but provide investors with the ability to customize key contract terms like exercise prices, styles and expiration dates. CPSM started on May 1, 2024.
Source: seekingalpha.com CPSM
CPSM has $109m in AUM and comes with 69bps in fees. The ETF has yet to pay a dividend and I suspect its structure minimizes, if not eliminates, that possibility.
This how the manager describes their ETF:
The Calamos Structured Protected ETFs™ are designed to match the positive price return of the S&P 500® up to a defined cap while protecting against 100% of losses over a one-year period (before fees and expenses).
Key Features
- 100% Capital Protection. No downside risk over the one-year outcome period.
- Defined Upside Participation. Exposure to S&P 500® to a cap.
- Tax Alpha. Seeks tax-deferred growth inside the tax-efficient ETF wrapper.
Portfolio Fit
As a tax-advantaged, cash alternative: activates cash on the sidelines with equity upside potential and no downside risk.
For retirees looking to derisk: preserves capital near or during retirement.
For equity risk control: offers 100% capital protection on equity exposure for investors unwilling to risk market drawdowns.
Source: calamos.com/funds/etf
The upside cap rate is reset each May. The starting cap rate for CPSM starting on May 1, 2024, was 9.81% gross of the annual expense ratio, which is 69bps. Both the cap and loss protection move so the initial cap rate and 100% protection (before fees) only applies for investors who bought on May 1st and held for the entire year. The current upside/downside limits are posted on the ETF’s website. As of today, the net Cap is 7.41%; the net downside is 97.67% as the ETF has appreciated since the “contract” year started.
Holdings review
The key holding for this ETF is the use of FLEX options, which are described in detail in the CPSM ETF Prospectus.
Exposure to the S&P 500 Index is via the first Call listed. The possible gain is capped by the sale of the second Call option listed. The downside protection is provided by buying the Put option. All the options expire at the end of the contract year thus no positions changes should be required, other than amounts. In effect, the managers are charging 69bps and only have to adjust each position as funds flow in/out of CPSM until the options are closed next April.
Distributions review
Since the ETF has no direct ownership of the stocks in the S&P 500 Index, the ETF is not entitled to dividends paid by the Index components, thus no payouts should be expected from this ETF.
Risk analysis
The underlying strategy is solid. The sold Call will call away all the shares represented by the FLEX Call option. The Put option, once below the strike price ($502.13) should cover 100% of the value lost by S&P 500 index. The premium earned, offset by the premiums paid, are used to set the initial strike prices on all the options. The FLEX options and Call/Put options are guaranteed for settlement by the Options Clearing Corporation. If they default, the US economy must be in a world of hurt.
Portfolio strategy
It seems there is a constant flow of unique investment choices. The Innovative and Calamos ETFs expand that universe and are oriented toward investors willing to forfeit some capital gains in exchange for limiting their losses. As a retiree slowly aging, that becomes more important. For my mom at age 93, these ETFs are a great way of having equity exposure without some or any loss risk.
Based on this Calamos Structured ETF report, they are launching over the next year, quarterly versions based on the S&P 500 Index, NASDAQ 100 Index and Russell 2000 Index.
Final thoughts
For these ETFs and similar ones, purchasing after the start date each year can drastically change the results as seen here. If the market has declined since the year’s inception, both values (cap and downside) would provide better values. That is not the case for CPSM and thus both values are not as good as when CPSM launched.
Read the full article here