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Demystifying Structured Protection ETFs

August 27, 2024

How are these types of ETF’s built? Is there a catch?

With the launch of structured ETF products that promise downside protection, there are questions around how they work to provide that outcome. While it may seem too good to be true, we take a look under the hood of these types of products and help demystify the ability to deliver downside protection inside a tax-efficient ETF vehicle.

Structured Protection ETFs are designed to achieve three outcomes:

  1. Capture upside performance of an index (e.g., S&P 500®) to a defined cap
  2. Protect capital against loss
  3. Deliver results over a one-year outcome period (before fees and expenses)

In short, Structured Protection ETFs allow investors to know their upside potential, their downside protection level, and their investment timeframe, at all times.

Why hasn’t this product existed before?

While Structured ETFs are new to the marketplace, it is worth noting that the “capital protected” investment structure has existed for several decades, often in the form of bank products, like CDs and structured products, or through equity-linked insurance products. What’s changed? The investment structure and the ETF ecosystem.

Advancements in the ETF ecosystem allow the construction and delivery of these similar outcomes, now inside transparent, cost-effective, liquid and tax-efficient ETF vehicles. These factors, in combination with current interest rate dynamics, also make this a compelling investment in the current market.

How is it done? Looking at a 100% protection case.

A Structured Protection ETF is typically made up of three “layers” of options positions that work together to build the ETF’s respective target outcome. Each layer is constructed with varying strike prices (the price at which the option purchaser may buy or sell the security), the same expiration date (approximately one-year), and the same style (European style options).

construction of the calamos structured protection etfs

  1. The First Layer: Participation

    Generates full exposure to price return of an index

    For this layer, we’ll use the price return of the S&P 500 as our example. The blue dotted line represents the first layer, which involves purchasing a 1-year near zero-strike call on the S&P 500, meaning options with an exercise price of zero or very close to zero, at a predetermined strike price. This achieves full exposure to the price return of the S&P 500. This is the most expensive layer in the construction process, costing around 98% of portfolio’s value—one of the reasons many option investors choose not to utilize this approach themselves.

  2. The Second Layer: Protection

    Generates 100% downside protection over the outcome period

    The light blue line represents the second layer, which involves purchasing an at-the-money (ATM) put option. An ATM put option occurs when the strike price is very close to the current market price of the underlying security. As a result, if the price return of the S&P 500 is down at the end of the outcome period, the put option will have appreciated by the amount the S&P 500 is down, providing 100% downside protection (before fees and expenses). The cost of this capital protection layer today is around 4% of portfolio value.

    Those who have done the arithmetic up to this point will conclude, “I’ve overspent. I started with 100% and spent 102% of my portfolio value! (98% + 4% = 102%)." This is where the third layer comes into play…

  3. The Third Layer: Upside Participation

    Determines the upside cap

    The dark blue line illustrates the third and final upside participation layer, which involves selling an out-of-the-money (OTM) call at a level that will generate the premium needed to bring the portfolio value back to 100%. An OTM call occurs when an option has not reached its strike price. Let’s use 2%, as our example. The strike price of the OTM call ultimately establishes the upside cap.

    Said another way, the upside participation layer acts as a credit to the portfolio value, equal to the price that would make the total options package “no-cost” (or fully financed). In this example, the sold call would generate proceeds of 2%, making the total package equal to 100% (98% + 4% - 2%).

Why the ETF structure?

Advances in the ETF ecosystem enabled Calamos to use its four-decades of options investing expertise to construct the 100% downside protected profile. When combined with the several potential benefits gained from the ETF structure, it delivers a compelling value proposition for investors to consider:

  • Tax-Efficiency: Calamos Structured Protection ETFs seek tax-deferred growth, and do not anticipate distributing any gains along the way. Investors who hold the ETFs longer than one year are subject to long-term capital gains taxes
    (up to 20%). This is more tax-advantageous than other types of 100% downside protection products, which are often subject to ordinary income tax (up to 37%) and may also be subject to phantom income tax along the way.
  • Liquidity: ETFs are among the most liquid investment vehicles because they are traded throughout the day on an exchange, rather than at the end of the day, or at the discretion of the issuing institution as in the case of structured notes. Additionally, the options underlying the Structured Protection ETFs are derived from some of the largest and most recognized liquidity pools in the world (e.g., S&P 500, Nasdaq 100 and Russell 2000).
  • Cost-Efficient: Structured Protection ETFs are cost effective relative to other types of 100% downside protection products, which often have opaque and high upfront fees. The ETF structure provides clear and transparent pricing. All Calamos Structured Protection ETFs have an annual expense ratio of 0.69%, as of the prospectus dated May 1, 2024.
  • Increased Transparency: ETFs are by nature transparent vehicles. Investors can always know the holdings of an ETF.
  • Accessibility: ETFs do not have investment minimums and are generally easier to trade and incorporate into a portfolio.
  • No Counterparty Credit Risk: The options held by the ETFs are centrally cleared by the Options Clearing Corporation (OCC) and are not subject to counterparty risk.

Why learn more about Structured Protection ETFs?

Structured protection ETFs can be an attractive solution for investors with cash on the sidelines and those who would like to reduce equity exposure but maintain upside. Additionally, given the suite of benchmarks, investors can customize an allocation for their specific needs and tactically adjust as needed.

Reach out to your Calamos wealth advisor to learn more at 888-857-7604 or at wealthmanagement@calamos.com



This material is distributed for informational purposes only. The information contained herein is based on internal research derived from various sources and does not purport to be statements of all material facts relating to the information mentioned, and while not guaranteed as to the accuracy or completeness, has been obtained from sources we believe to be reliable. Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. The views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations. The opinions and views of third parties do not represent the opinions or views of Calamos Wealth Management LLC. Opinions referenced are as of the date of publication and are subject to change due to changes in the market, economic conditions, or changes in the legal and/or regulatory environment and may not necessarily come to pass. This information is provided for informational purposes only and should not be considered tax, legal, or investment advice.

Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by Calamos Wealth Management, LLC [“Calamos”]), or any non-investment related services, will be profitable, equal any historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Calamos is neither a law firm, nor a certified public accounting firm, and no portion of its services should be construed as legal or accounting advice. Moreover, you should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Calamos. Please remember that it remains your responsibility to advise Calamos, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. A copy of our current written disclosure Brochure discussing our advisory services and fees is available upon request or at wm.calamos.com. Diversification and asset allocation does not guarantee a profit or protect against a loss.

Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your accounts; and, (3) a description of each comparative benchmark/index is available upon request.

There are no assurances a Structured Protection ETF (“ETF”) will be successful in providing the sought-after protection. The outcomes that the ETF seeks to provide may only be realized if you are holding shares on the first day of the Outcome Period and continue to hold them on the last day of the Outcome Period, approximately one year. There is no guarantee that the Outcomes for an Outcome Period will be realized or that the ETF will achieve its investment objective. If the Outcome Period has begun and the Underlying ETF has increased in value, any appreciation of the ETF by virtue of increases in the Underlying ETF since the commencement of the Outcome Period will not be protected by the sought-after protection, and an investor could experience losses until the Underlying ETF returns to the original price at the commencement of the Outcome Period. ETF shareholders are subject to an upside return cap (the “Cap”) that represents the maximum percentage return an investor can achieve from an investment in the ETF for the Outcome Period, before fees and expenses. If the Outcome Period has begun and the ETF has increased in value to a level near to the Cap, an investor purchasing at that price has little or no ability to achieve gains but remains vulnerable to downside risks. Additionally, the Cap may rise or fall from one Outcome Period to the next. The Cap, and the ETF’s position relative to it, should be considered before investing in the ETF.

The ETF(s) are designed to provide point-to-point exposure to the price return of the reference asset via a basket of Flex Options. As a result, the ETFs are not expected to move directly in line with the reference asset during the interim period. Investors purchasing shares after an outcome period has begun may experience very different results than fund’s investment objective. Initial outcome periods are approximately 1-year beginning on the fund’s inception date. Following the initial outcome period, each subsequent outcome period will begin on the first day of the month the fund was incepted. After the conclusion of an outcome period, another will begin.