This New ETF From Calamos Offers 100% Downside Protection: What You Need to Know

We've previously covered buffer ETFs in part 3 of our series on options strategies in ETFs, explaining the typical setup where these funds mitigate a certain percentage of losses (usually between 10-20%) over a defined outcome period—often a calendar year starting in a specific month.

They manage this at the cost of capping upside potential and excluding dividends, usually through a multi-leg options strategy. These ETFs aren't a free lunch – rather, they're a way to redefine the risk and return trade-off in your portfolio.

Now, Calamos, a renowned alternative investment manager with substantial derivatives expertise, has introduced a new twist with its Calamos S&P 500 Structured Alt Protection ETF – May CPSM-0.18%. Bradley Roth covered it earlier in depth with Matt Kaufman in Episode 40 of "Behind the Ticker".

But, for those of you who prefer a written format, here's a detailed look at how CPSM works and my thoughts on its potential impact. Also, keep your eye out as Calamos will be launching similar products with exposure to the Nasdaq-100 and Russell 2000 in June and July, respectively.

How CPSM ETF works

As with most buffer ETFs, understanding the mechanics of the CPSM is straightforward when we break it down into three key components:

1. Outcome Period: This is the specific timeframe over which the ETF aims to provide its structured returns. For CPSM, the current outcome period runs from May 1, 2024, to April 30, 2025. It's important to note that this period resets annually, so you can hold onto the ETF indefinitely with the terms resetting each year.
2. Defined Upside Participation: During the outcome period, CPSM aims to capture up to 9.81% of the price return (excluding dividends) of the SPDR S&P 500 ETF Trust SPY (NYSE:SPY) -0.68%. This cap is a crucial detail as it limits the maximum gain you can achieve from increases in the SPY price during the outcome period. It will also reset annually at the start of a new outcome period.
3. Downside Protection: One of the most appealing features of CPSM is its promise to eliminate 100% of downside risk, but this guarantee holds only if the ETF is purchased at the beginning of the outcome period and held throughout its entirety. If you buy the ETF mid-way through the outcome period, the protection and potential returns could be different.

Currently, as of May 6, 2024, the CPSM shows:

• Cap: 8.90% current, 8.21% net.
• Buffer: 99.17% current, 98.49% net.
• Outcome Period: 359 days remaining.

These figures are continuously updated and can be tracked on the ETF's webpage to see how much of the upside cap, buffer, and time left in the outcome period are available at any given point.

My thoughts on CPSM ETF CSPM

While buffer ETFs might seem like a straightforward win due to their 'defined outcome' feature, they're essentially an insurance policy. The cost of this insurance is embedded in the options pricing, which aims to provide more predictable outcomes.

These ETFs are particularly well-suited for investors who are risk-averse and find market volatility unnerving. The guaranteed limit on losses can provide the emotional and financial security needed to remain invested during market downturns, which can be particularly beneficial when advised by a financial professional.

I also see significant value in considering CPSM as an alternative to traditional fixed-income investments, especially in light of the hefty losses sustained by aggregate bond and long-duration Treasury ETFs during the tumultuous rate hikes and high inflation of 2022.

However, it's important to temper expectations with the 9.81% upside cap. While this might seem attractive, remember that historically, the S&P 500 has often delivered returns well above this threshold. In a bull market, an investment in CPSM could significantly lag due to this cap, which is the trade-off for downside protection.

Moreover, the exclusion of dividends in the calculation of the return is a critical consideration. Historically, reinvested dividends have accounted for about a third of the total returns of the S&P 500. Missing out on these can impact the compounding benefits significantly over time.

Despite these considerations, CPSM has demonstrated strong market appeal. Since its launch on May 1, 2024, it has quickly attracted $33.3 million in assets under management—an impressive feat for a complex ETF with a 0.69% expense ratio.

This content was originally published by our partners at ETF Central.