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

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
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   . 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.
• Current Protection Level: 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, protection level, and time left in the outcome period are available at any given point.

It's important to note that both ETFs can trade above and below the starting NAV during the outcome period. While they will maintain a floor against loss at the starting net asset value (NAV) over the full period, an investor can lose principal should they invest in the fund after the outcome period has begun if they have appreciated.

Should these ETF's NAV then fall, an investor could lose a portion of their investment over the remainder of the annual outcome period.

Conversely, if the ETF trades below its starting NAV, the upside cap will effectively expand above the final cap announced at the launch of the fund. If shares are held through the remainder of the outcome period, an investor can expect the NAV to return to its starting level. Such instances can provide attractive entry points.

My thoughts on CPSM ETF

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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 $108.9 million in assets under management—an impressive feat for a complex ETF with a 0.69% expense ratio.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.