The Case for a Laddered Approach to Structured Protection ETFs |

The Rise in Popularity of Laddered Protection Strategies

Over the past few years, the US market has seen a rise in the popularity of Structured Outcome ETFs—primarily comprised of ETFs offering partial downside protection (e.g., 10% or 20% buffer) and more recently those offering 100% downside protection. In May 2024, Calamos Investments introduced the world’s first suite of ETFs designed to deliver 100% protection and upside participation (to a cap) over a one-year outcome period relative to the S&P 500, Nasdaq 100 or Russell 2000.

Today the entire Structured Outcome ETF space encompasses more than $50b in assets. While investors can buy and sell a Structured ETF anytime the market is open, ETF issuers (like Calamos) often issue multiple “series” of the same protection level, typically on a monthly cadence, to give investors multiple opportunities to buy in near the beginning of an outcome period so they can achieve the stated protection level and cap rate.

The increasing popularity of these products has led to the development of a laddered approach to Structured Outcome ETFs, offering an even more turnkey approach seeking to mitigate risk and capture growth while maintaining flexibility, liquidity and tax efficiency. A laddered strategy enables single-ticker access to a full suite of ETFs and structurally involves:

• Staggering the multiple ETFs across different outcome periods (e.g., rolling 1-year).
• Offering the same underlying exposure across the bundled ETFs (e.g., S&P 500).
• Affording a high level of protection for each underlying fund.

The result is a continuously and highly hedged experience, with measurable upside participation along the way.

Today, nearly $8b (of the ~$50b in Structured Outcome ETF assets) are tied to laddered approaches. This swift demand has mainly stemmed from financial advisors increasingly implementing model portfolios and looking for a turnkey approach to allocate across multiple client accounts through a single ticker. Institutional clients looking for upside while preserving assets have also spurred additional demand.

Why a Laddered Approach Makes Sense

1. Continuous Protection: By investing in multiple Structured Protection ETFs with different reset dates, investors can access some level of continuous downside protection. As each ETF reaches its reset date, a new one begins, providing an uninterrupted hedge. This is illustrated in the chart below.
2. Smoother Return Experience: A laddered approach minimizes timing risks. If an investor buys a single Structured Protection ETF, the outcome is dependent on the market’s performance over that specific defined period. By laddering, investors reduce the risk of entering at an unfavorable point and can experience smoother returns with much less volatility over time, especially relative to stocks, bonds, and even other buffer strategies that offer less than 100% protection.
3. Diversified Time Horizons: Markets are inherently unpredictable. A laddered approach spreads exposure across different market conditions, capturing periods of volatility or growth more effectively. This diversification of time horizons can lead to better long-term outcomes by capturing various phases of the market cycle.
4. Turnkey Solution with Daily Liquidity: One of the key advantages of Structured Protection ETFs is that they can be bought and sold any day the market is open. This liquidity, combined with a laddered approach, offers flexibility to rebalance or adjust allocations based on market conditions while maintaining a hedged position.
5. Tax Efficiency – Structured Protection ETFs maintain tax efficiency and anticipate distributing no capital gains from the ETF. Investors’ capital grows and compounds tax-deferred inside the ETF. At the end of each outcome period, the options inside each Structured Protection ETF simply roll into a new outcome period. The ETF will never “mature” or expire, which contrasts with most capital protected solutions in the market today, where returns are often treated as ordinary income upon a set expiration date.

Why Now?

In today’s environment, where market volatility and interest rate uncertainty are ever-present, a laddered strategy offers a compelling balance between risk and reward, especially for those looking to allocate “safe” money or for those nearing or in retirement. And for those looking for a way to hedge without completely forfeiting growth potential, a laddered approach to Structured Protection ETFs may be a straightforward solution.

Historical Performance of Laddered Protection Strategies

Below are several charts illustrating the recent performance of various laddered protection strategies. For ease of reference, each of the strategies below deliver laddered…