Talk Your Book: Juicing Your Returns

0:00Ben Carlson:Today's Animal Spirits Talk, your book, is brought to you by Calamos. Go to calamos.com to learn more about their whole suite of auto-callable ETFs, including the new auto-callable growth ETF, ticker CAGE. That's calamos.com to learn more. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

0:38Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:46Michael Batnick:Welcome to Animal Spirits with Michael and Ben. We continue the conversation with Matt Kauffman and Calamos about their autocallable ETFs, which is when your phone is ringing, you don't automatically... What is that? This is an exciting conversation. It's not too often that you speak to one of these people in the product space and the wheel starts spinning.

1:07Ben Carlson:I can see the gears turning in your head throughout this conversation.

1:10Michael Batnick:Listen, the ETF land is exciting. There's all sorts of innovation that is not destructive. I mean, there's certainly destructive innovation too. But the conversation that we had with Matt, basically, I think the TLDR is, this is an efficient, non-insane way for you to get more upside, more exposures to the S &P 500. I was looking for a sense to follow it up, like without blowing yourself up, without blah, blah, blah. It's just, it doesn't even need the caveat. It just is. And of course there are caveats and there are things to learn, which we get into in the conversation.

1:43Ben Carlson:It's like a higher risk, higher reward, higher volatility strategy. I think it is really interesting. And the point you make at the beginning is that we're taking this structured product stuff, which was difficult for a lot of people to access. We did a, we did a, we created our own structured product trade. One of the guys I worked with had tinkering in a lab to create this, this trade and the trade didn't work out, but it was like Hong Kong and China. But was it fun? It was kind of interesting, but the amount of paperwork necessary to put on a structured trade like blew my mind. And the fact that you You can now take these structured products that people have been using for years and now do them in an ETF wrapper and make it easier to take all the paperwork away.

2:25Ben Carlson:That's pretty interesting stuff. Obviously, not for everyone, but I think a lot of people will listen to this and go, OK, I'm intrigued. I think that's a good selling point for a strategy is like, OK, I could see this. That makes sense. I'm intrigued.

2:39Michael Batnick:I'm curious if I could fast forward three years, curious to see what the uptake on these strategies are. But innovation, it's happening. All right, let's not step on any more of this. Here's our conversation with Matt Kaufman from Calamos.

2:53Ben Carlson:Matt, welcome back on the show. Ben, thanks for having me. Always good to be here. Got a big picture question for you to start with and we can narrow things down. Okay. It feels like this decade, the innovation among ETFs is probably about as much as we have seen. Like there are strategies available to individual investors now that, you know, I don't know, maybe just hedge funds were using them in the past. In some cases, it seems like they're brand new. I'm curious what the process looks like for you as someone who oversees these strategies and develops. What does a development process look like when you're trying to put together a new strategy that uses these instruments and derivatives and options unlike things that people are used to in the past?

3:29Ben Carlson:How do you put these things together? Yeah, how much time you got? 30 minutes. There you go. It's a great point. The innovation is real. We are seeing a tremendous amount of innovation, especially in the ETF landscape. You know, that is not just an ETF thing. It's happening all over the world. You've got AI, technology is expanding at an ever increasing rate. We're flying around the moon now. There's some remarkable things happening in the world. The ETF is just over 30 years old. So you're seeing a tremendous amount of scale, adoption, growth there. the way that we think about how to bring strategies into the market.

4:09We try to do things that haven't been done before, but might exist in other ecosystems or tangential areas, the word I'm looking for. So for us, we look a lot at other industries, like look at insurance, we look at structured products. But when you bring those things into the ETF landscape, You've got to think through a lens of liquidity, of tax efficiency, of scale. How big can you get? This has to exist in perpetuity. We can't do something that's going to scale out. And then how does tax efficiency play into it? You know, people love tax efficiency inside the ETF wrapper, and we have to deliver that.

4:47So those are the four lenses that we've looked through. A strategy might work well in one area, but might not be able to be brought into ETFs yet. We had the derivatives rule a few years ago. We had a new framework for issuing ETFs, and that really has allowed for an exponential growth in options-based strategies and derivatives-based strategies. But the overarching framework and the way that we do things is, especially for financial services products, you have to innovate, but you have to innovate with security. Like I can go out and build the iPhone. I can give you an iOS operating system and it'll break.

5:24And then you got to fix it. And then you'll get version two and three. And I think we're on version 37. They don't even ask your permission anymore. It just updates automatically.

5:31Michael Batnick:How far can you push the boundaries of, all right, this is a really cool idea, but it's going to take an extraordinary amount of time and effort educating and re-educating and re-educating people. Absolutely. Yeah. So with our, to finish the thought there on tech, like for us, we try to build things and you have to build with certainty and build things that don't break. And so that is what we do at Calamos. I've been doing that personally for more than 20 years, building strategies, innovating with things that were actually work. So, you know, how do we think about that in terms of educating the market?

6:06You know, let's look 20 years ago when everything in the ETF space was passive. So then we introduced something called smart beta and very few people understood what that was. is we're going to weight your companies by something other than market cap. And heads were exploding. What the heck is this? How do I think about this? You fast forward and you've got buy-write ETFs that came out in 2007, selling off your upside, you're teaching people about options. A lot of these strategies have existed for a long time, since the late 70s. The ETF wrapper didn't hit the market until 93 in the U.S. earlier in Canada.

6:41And so we're seeing a lot of that development coming through the ETF landscape, the ETF ecosystem. So what are we doing today? Like maybe 10 years ago, we had buffers. That was a brand new term to the financial landscape. And now I say the word buffer and everyone kind of knows what we're talking about. It's a brand new thing.

6:57Michael Batnick:I saw BlackRock is getting in the game. I'm surprised it took them so long. Yeah, yeah. BlackRock just got into the buffered game. You saw the Goldman deal. So that is now a common household term where you get buffered exposure to the markets. No one had a clue what that was 10 years ago. So what are we doing now? We're bringing the auto call space into the market. There's a whole host of products that can be made better and more efficient and liquid inside the ETF wrapper that hundreds of billions of dollars worth of investor dollars are already tied to, and we're giving them efficient, operationally efficient access to.

7:36So that's what we did last June with the auto callable income space. It's a way to achieve really high, stable income with an underlying volatility that looks a lot like the S &P or a lot like the NASDAQ 100 for our CAIQ product. CAIE is the S &P 500 framework. So you can reliably tell your client if you're comfortable with equity market-like risk, you can turn it in for a high, stable coupon, which is about 14 % for the S &P version, 17 % for the NASDAQ version. You can make it really simple.

8:08Michael Batnick:Before we get into these products, the ticker is CAGE, which is, I'm surprised I was available. Have you guys been squatting on that or was that like? No. Yeah, we came up with the idea for the growth note ETF. So I guess to jump to the conclusion, growth notes with memory is now in an ETF. That is the thing. So there's two more terms that we have to teach people, which we will do. But CAGE, CAGE, Calamos Auto Callable Growth ETF is the acronym there. So it made sense. It was available. We locked it down. All right, before we get into these memory ETFs, I don't even know what you're talking about, but I'm excited to learn.

8:45Michael Batnick:Yeah. Which of your products, with the benefit of hindsight, or maybe that's a weird way to put it, which of your products has been the most difficult for people to fully understand? Fully understand is a good question. I might go out on a limb and say Bitcoin. So we launched Protected Bitcoin in January of 2025. We created a bridge to owning Bitcoin. I think you and I were on talking about that in 2025 as well. Ben, I think you actually may have invested in Protected Bitcoin. Ben, are you still hodling the paper hands version of Bitcoin? I did.

9:27Ben Carlson:I sold half of my Bitcoin position and I was worried, okay, this thing's going to run to$150 ,000 on me, and I need to have some sort of upside with a downside. So I did. What were your different buffers? You had 11 %? Yeah, so we had three different risk levels where you could choose to put 0 % at risk, and you'd get about twice the risk-free rate, which is kind of a mind-bender to begin with. We had a 10 % at risk that gave you about a 20 % to 30 % upside cap rate, and then a 20 % floor where you put 20 % of your money at risk, and you get about a 40 % to 50 % upside. Okay. So I think I did the first two, and I think I held them for a year, and it worked because Bitcoin went up for a little bit, then it bought and came off under it.

10:06Michael Batnick:We discussed this. Obviously, Ben was intrigued. He bought it. Yeah, it worked. I was like, I felt like a sucker. Like, what am I missing? Because the way that you just described it, it's like, hey, wait a minute. Zero percent downside. Now, I believe there's a maturity date in there we can discuss. But with that, there's twice the risk for it. It sounds like a free lunch. Yeah. And we know - There's no free lunch. There's no free lunch. So what is the catch? Yeah. So Bitcoin has to appreciate for you to capture that upside. You're not getting an 8 % payment. It is the appreciation. So Bitcoin is down over the last year.

10:42And so you would have been flat. That was the trade-off that you made. You were 100 % protected over the outcome period. And you had the upside potential of about twice the risk-free rate. So getting people to actually wrap their minds around that And then turn in their Bitcoin or choose to invest in Bitcoin, where we're creating this bridge for people to now have protected exposure to Bitcoin. Maybe you're curious about the asset. You know, it's historically really volatile. It goes through these crypto winters, which you might be in the middle of one right now. And so going through that, it actually showed people it worked.

11:16Like we saw Todd Sohn do a piece about it. Like it actually worked. We knew it would, but it worked. And so that's the maybe one I would choose because showing people that you can actually deliver on what you say you're going to do, giving you protected exposure to Bitcoin is kind of hard to get your head around.

11:32Ben Carlson:So that's the idea of, like you said, we're taking ideas from different areas and applying them to new vehicles. So, yeah, you took like an insurance or option-based strategy and applied it to Bitcoin or structured products. That's so cool.

11:43Michael Batnick:Could you do that with other instruments, like 0 % downside risk? I'll make a very bold prediction. the structured product world is in the trillions of dollars globally. And we have unlocked a door to bring all of those strategies into the ETF wrapper. This is sort of like the prediction markets, but like maybe the opposite. What I mean is when you enter the prediction markets, you know exactly at the time that you are making the prediction, the bet, whatever, you know exactly what the odds are. And you could say, I either find this risk reward attractive or I don't, right? Like, okay, 86 cents that the Seahawks won't win the Super Bowl, that's a free 14 % return.

12:24Michael Batnick:Whoops. I found that very attractive. I was wrong, but I found that very attractive. Sure. Similarly, with products like this, you can say, okay, if this happens, that happens. And if this happens, that happens. No, I don't like this one, but maybe I think this one is interesting. Here's the simple sentence you can use to think about options-based strategies. they deliver certainty to your portfolio. It's great. That's it. That is literally what they do. Like what were you doing 15 years ago? How do you achieve a certain amount of risk in your portfolio? You use stocks, bonds, alts, cash, and you try to hit this risk tolerance profile based off of a 20-year historical look of how did those assets perform together?

13:11Well, you and I both have lived through two, three, four environments where a lot of those assets are highly correlated on the upside and on the downside. Here, you don't have to do it that way anymore. There is a better way. You can use option strategies to define your risk profile. And you all have clients, investment clients. You can nail it. You can tell them how much risk do you want to take over the next 12 months, 24 months. We're going to meet in 12 months, and I'm going to deliver exactly the risk tolerance you were looking for. Or I can deliver the coupon you're looking for. I can deliver the growth target you're looking for.

13:45There is a whole measure of protection of income and growth that can be delivered with remarkable certainty that really was not possible until, frankly, until we launched the AutoCall product about a year ago.

13:57Ben Carlson:So where did that idea come from? Was that an insurance product? Was it an options? Where did the AutoCallable idea come from? Yeah, AutoCallable is a type of derivative income strategy that was squarely in the structured note space. So if you look at the covered call market, It's about a$200 billion per year market. Pick your favorite covered call strategy. You sell off your upside. You collect an income payment for that. If you go to the other side of the house, you go to the structured note side of the house, derivative income dominates there as well, but it's done so through a strategy called the auto-callable yield note.

14:31And that's where basically a long-dated put writing strategy with some bells and whistles on it. You can't use the listed markets to develop it. You've got to work with a bank. And so that's why we worked with JP Morgan. We took their auto callable pricing model on a vol advantage index and built a laddered portfolio out. We launched the world's first auto callable income ETF last June. There's about a billion dollars between that one and the Q's version that we have in the market. The other half of that auto call pie, you know, we've talked about this before. Not everybody wants income. Some people want growth.

15:03And so we've now launched the auto callable growth ETF, CAGE. And you look at the index that we are trading on swap. It has the same vol advantage framework that we've done on the income side, but it is a purely a growth strategy. And if you look over the whole time horizon since 2005, it's delivered about two and a half times the S &P since inception. How? Great question. The way that we do it, think of it like a bunch of bonds.

15:31Michael Batnick:Is Jim Simons managing the CTF? No, exactly. Exactly. The way to think about it is like a bunch of bonds that will pay you a really high coupon if the market is positive at the end of one year. So it's a laddered portfolio of these. Every week, there's one in the portfolio. So let's just play this out. After one year, if the market's positive, it pays you about a 29 % coupon. And that is the price you can get, the premium you can collect for a five-year put option with a 35-vol target. That is what you can collect if you build that type of strategy. How consistent is that component of it? It's very consistent because the reference index we're using has consistent volatility.

16:12And so it's a pretty consistent coupon.

16:15Michael Batnick:All right. So just talk that part over one more time. Yeah. So if the market is positive after a year, the reference index that we're tied to, if it's positive after one year, you are going to earn a 29 % coupon. So what if it's not? Like, what if the market is negative? What if it's down, you know, 1 %? You do not get that 29%. But here's where the memory feature comes in. This is a brand new term for the ETF world. If you're an advisor who uses structured notes, you hear growth notes with memory. Now in an ETF, you're like, holy crap, it's here now. I'm excited. If you don't know what a memory feature is, is if the market is not positive after one year, you don't lose that 29 % coupon.

16:57You simply bank it for the next year. So then we go to year two. Come on. I'm serious. I'm all in. I'm all in.

17:04Ben Carlson:So all you're out is then the premium you pay for the option? You're not actually out because at year two, if the market's positive, you're going to get both of those coupons. You're going to get 29 times two. All right. What if there's three down years? 29 times three the next year. All right. What if that? Is there a limit? If you go to our tool, go to the dashboard on our website, you can see exactly where all of these are trading. and you'll see that we have some that are one times coupon multiplier. Some are two times multipliers. There's one that was hit by the 22 drawdown, hit by Liberation Day.

17:43And so that one's got about four or 5 % to go on the upside over the next six months. If that happens, that one note is going to pay about 108%.

17:52Michael Batnick:I'm guessing, and that's for existing holders? Like you can't just buy that and bank that, right? If that exists on the day that you buy, you can see it, then it will be banked to you. So we've only captured about 36 of that 100 % right now. Hang on. You're telling me that if the market goes up 4%, I can get 60 % return? On one of the 52 notes. It's only going to be a couple percent. Oh, okay. Yeah, there's your catch. Okay, okay. But I do love getting you that way.

18:18Ben Carlson:I've got a number of follow-up questions. So why do you buy one every single week? You're just diversifying against the market being down and going - Yeah, think about owning that one note. if the market doesn't move, you have not made a penny in five years. And so you ladder it out every week. There's 52 of these. And so it gives you an opportunity to capture significant upside. And if the market doesn't give it to you for that year, you bank the coupons. You're either earning it or you're storing it. And so you can see years where you might not make much in that year, like a rubber band drawing down.