What’s an autocallable ETF and how can advisors use them?

The goal of these strategies, Rai explains, is to offer investors a chance to earn income tied to a stock price, while shielding them from downside risk up to a certain point. Even if the share price declines somewhat but remains above the coupon threshold, that income can offset any exposure to price decline.

Rai contrasts these strategies with covered call ETFs, which trade off some potential upside in a security for income, delivering returns in the form of muted capital appreciation and option income. Autocallable ETFs are primarily deriving returns from coupon income as well as any capital gains realized when contracts hit their autocall threshold which are then invested in new structured notes. Rai says that this form of return from autocalls creates the potential to avoid the price ‘lag’ that comes from covered call strategies.

The risk for investors, Rai says, comes primarily when the share price falls below its two low-end thresholds. Falling below the coupon threshold means the ETF is now losing out on the coupon income. Falling below the protection threshold means the ETF holder goes from experiencing none of the loss in the underlying stock to all of it. The downside risk, Rai says, can be “nonlinear.”

Who might want an autocallable ETF?

In conditions above the low-end thresholds, Rai says that autocallable ETFs can enhance the overall income yield of an investor’s portfolio while reducing the overall volatility through very limited price movements. He says that these products show themselves to be of greatest value when equities are moving sideways or slightly negative. These ETFs should, in his view, offset risk in the growth-oriented sides of the portfolio, lower beta to equities, and increase portfolio income.

ZACU paid its first distribution of $0.305 at the end of October, representing a roughly 12 per cent annualized yield on its then-price of $29.76. The single-stock ETFs have not yet paid a distribution but upon launch the funds targeted conditional coupon rates of 13.25 per cent for the Nvidia ETF, 14.25 per cent for Tesla, and 17.5 per cent for Palantir. ZACU comes with a management fee of 0.65 per cent while the single-stock ETFs have a management fee of 0.40 per cent. ZACU and the three single-stock autocallable ETFs will pay distributions on a monthly basis.