Today's ETF disaster comes from Coinbase. Disaster might be too strong of a word but below is the GraniteShares Coinbase Yield BOOST ETF (COYY) and the underlying common.
It may not be as bad as it seems. It is a weekly pay and so far, all the distributions add up to $8.75 which is a little better than a 33% "yield" from the August price in about three months. It should be pointed out that the distributions have also been trending lower along with the share price. On a total return basis, COYY is only a couple of percentage points behind the common.
This chart compares the Nvidia Yield BOOST and the common.
The common up huge for just a few months and the price only chart for NVYY is still down double digits. It's not that these are malfunctioning in any way, I don't think they are, the point is how difficult these probably are to hold. I do think that as part of some sort of draw down strategy, a small slice can be useful with the right expectation. These are going to erode down to almost zero and then reverse split. Growth from the part of the portfolio that is some sort of normal equity exposure should more than offset any erosion from a very small slice someone allocates to a crazy high yielder. That will probably not be compelling to too many investors though.
Calamos is coming out with another autocallable ETF that will have symbol CAIQ and be tied to the NASDAQ. Eric Balchunas Tweeted that it will target a distribution rate of 18%.
These are billed as not having a problem with erosion like the crazy high yielders. Looking at the chart I would say erosion has in fact not been an issue for CAIE but even if you agree with me on that, I would not say the science is yet settled on this point.
The product in the ETF wrapper is a democratization of a a structured product that is usually only available to institutions. CAIE's distributions would be disrupted by a 40% decline the the S&P 500. I couldn't find the similar pivot point for CAIQ but some sort of hideous decline in the NASDAQ and CAIQ's distributions would be suspended too.
I don't think the risk is so much a decline of the magnitude that would cause distributions to suspended because of how rare they are. It is not clear to me whether the market price of the ETF might deviate from the NAV of the autocallables held by the funds if the underlying index fell 25%. Assuming no malfunction or something breaking, a 20% decline for the reference index doesn't impact the underlying holdings, the actual autocallables.
A key point in that last paragraph; "assuming no malfunction or something breaking." Anything that yields 14% like CAIE or 18% like CAIQ in a 4% world carries risk. Maybe you can figure the risk out and then you can make an informed decision as to whether the compensation is adequate for the risk taken. It is difficult for me at this point to think the only risk that the index falls 40% in a short period of time and that's it.
A small slice to an autocallable ETF wouldn't be ruinous if it malfunctioned. There are several unrelated niches that have very high yields and could be added to a diversified portfolio to meaningfully enhance the yield. A meltdown in the autocallable market would have nothing to do with catastrophe bonds or a bank loan fund.
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3 comments:
Agree with your last point and full disclosure in adding yield to a well diversified portfolio I’ve a slice each in leveraged loans, cat bonds, and autocallables. The autos now via CAIE. That said, CAIE definitely comes with its host of risk.
On the plus side I like that CAIE has a 52 week ladder of the autocallables and that mitigates some of the impact of a steep market decline.
On the much longer list of downsides, as I understand it they can use up to 5x leverage in the underlying merqube index. Looking at the merqube site they have a nice graph vs SPY showing that last April when SPY dropped nearly 20% the merqube index nearly broke the 40% payout level. So looks like less of an S&P500 drop (in the 20%+ range) to trigger a payout….
Including a few of the other key risks from their site to add the conversation here:
x Highly complex strategy dependent on over-the-counter swaps, introducing significant counterparty risk.
× Income is not guaranteed and will not be paid if the underlying index falls below the 60% coupon barrier.
× If the 60% maturity barrier is breached, the fund is exposed to the full downside of the underlying index, meaning capital is at risk.
× The underlying index uses leverage (up to 5x), which can magnify volatility and potential losses.
× Will likely underperform the S&P500 in strong bull markets due to the autocall feature capping upside participation for each note.
Meant to include a call out to please correct me if I am misunderstanding the trigger level. Would far prefer it to be an S&P500 drop of 40% vs one in the 20s. 🙂
Conversationally, " a drop in the S&P 500" but that is probably sloppy. I'm not as far along wrapping my head around these yet in terms of understanding the risks as you are.
Another wrinkle, is a question that came up on the trillions podcast about these, "what's in it for JP Morgan?" which is who is on the other side of these.
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