A Next-Generation Income ETF

Derivative income exchange-traded funds have been wildly popular. These options-based ETFs typically use covered calls to deliver a high monthly distribution yield. Their emergence represents a departure from traditional income strategies like bonds or dividend stocks.

Investors have quickly caught on. The category of nearly 200 ETFs now holds about $147 billion, but two ETFs claimed half that at the end of September:

• JPMorgan Equity Premium Income ETF JEPI ($41.3 billion)
• JPMorgan Nasdaq Equity Premium Income ETF JEPQ ($30.9 billion)

These ETFs helped J.P. Morgan become the second-largest active ETF provider in the US, and they have inspired numerous copycats.

Most large asset managers now offer some form of covered-call ETF, but none have been able to hold a candle to J.P. Morgan’s offerings yet. One alternative asset manager is taking a different approach to try and change that.

Calamos Autocallable Income ETF CAIE began trading on June 25, 2025, making it the first ETF with an autocallable yield strategy. It has quickly caught on by promising to deliver high income with little risk most of the time. But this innovative ETF is no free lunch. It comes with several complexities and risks that shouldn’t be overlooked.

What Is an Autocallable Yield Strategy?

Autocallable yield is not a new phenomenon. Banks issue autocallable yield notes with a promise to deliver consistent payouts as long as the underlying asset stays above a predetermined “barrier” level. Advisors and investors have billions invested in these strategies to deliver high and (mostly) reliable income. Several outcomes are possible, and consistent income is not guaranteed. Below is the payoff chart for a hypothetical autocallable yield note with the following characteristics:

• Five-year term, linked to the S&P 500
• 75% barrier and 15% annual coupon paid monthly
• Callable after one year if the index is above 100% of its starting value

There are four possible outcomes:

1. The index remains between 75% and 100% of its starting value: You earn all coupons, the note won’t be called away, and your principal will be paid back after five years. This is the ideal scenario for the note holder.
2. The index appreciates from its starting value: The note will be called away after one year, stopping coupon payments and returning 100% of principal.
3. The index falls below 75% of its starting value: Coupon payments stop when the index breaks below the 75% barrier and resume when it rises back above the barrier.
4. The note is not called away, and the index ends five years below the barrier: You get back less than 75% of your principal, corresponding to the index’s decline. If the index falls 35%, you get 65% of your principal back. This is the worst-case scenario for note holders and could result in significant losses.

The appeal is clear for short-term income, but long-term risks could be severe. Calamos’ new ETF tries to mitigate those risks and smooth investor experience through its unique structure.

Calamos Autocallable Income ETF

CAIE spreads its bets across at least 52 weekly autocallable yield notes that expire in five years. All are linked to the MerQube US Large Cap Volatility Advantage Index. The ETF maintains a similar payoff chart and many of the same qualities as the above hypothetical example, but its coupon will fluctuate based on the terms of each individual note and market conditions.

Calamos quotes a weighted average annualized coupon of 14.4% on its website, but this may change depending on interest rate levels and the outcome of each underlying autocallable yield note.

The index that underpins these autocallable notes is unique: It uses futures contracts to achieve constant 35% annualized volatility on the S&P 500. This means that in quiet years, leverage goes up, and in volatile years, leverage goes down. Over the trailing 20 years through July 2025, the index was a little more than 2 times leveraged on average since annualized volatility for the S&P 500 was 15.1% over that span. Additionally, this index applies a deduction to daily returns to cover operational costs. These deductions, which equate to 6% annually, could be the difference between a note being called away or the index breaking below the barrier.

History tells us that the ETF’s stated 60% barrier is crossed when the S&P 500 falls by around 20%-25%. But the fluctuating leverage of the MerQube index makes the exact barrier level difficult to estimate in S&P 500 terms.

An analysis of rolling five-year periods for the MerQube US Large Cap Vol Advantage Index gives investors rough probabilities of various outcomes. The table below summarizes those results between January 2005 and July 2025, using monthly index data.

*For complete five-year periods only.

Calamos’ website has a dashboard showing the current performance of each autocallable yield note the ETF is exposed to. So far, none have fallen below the 60% barrier, and several are likely to be called away after one year.

The Yield and Risk Trade-Off

Yield cannot be achieved without risk. Investors in this ETF face two primary risks:

1. Coupons are not paid continuously or at consistent levels.
2. Not all principal is paid back.

A single autocallable yield note provides explicit terms for what outcomes will be in different market environments. Explicit terms still exist in the ETF, but they’re obscured by the numerous notes the fund is exposed to. Outcomes here may be less binary, but this diversified structure minimizes timing risk.

Shown in the earlier table, and based on historical index data, it’s unlikely for coupons not to be paid as planned and very unlikely for principal to not be paid back in full. A closer look at the numbers tells us that most of those unfavorable outcomes occurred during or around the 2008 global financial crisis. The ETF would still have suffered in 2008, but its investors likely would have done better than many single-note buyers.

The ETF does not eliminate timing risk, though. Prolonged bear markets are the strategy’s Achilles’ heel. It should always pay some coupon, but that coupon level may dip unexpectedly should the index fall sharply and stay at severely depressed levels. Further, if it stays at those low levels for five years, investors will suffer a loss in addition to diminished coupon payments.

Coupon rates also depend on the level of interest rates. Even if payments are consistent, the relative level of those payments will be influenced by prevailing interest rates: low rates = low coupons, high rates = high coupons.

This ETF falls when stocks fall sharply and don’t recover, and regular income payments could be interrupted as well. In contrast, bonds usually rise when stocks fall, acting as ballast in a portfolio. Prospective investors should consider these consequences during extended bear markets. Bonds or bond ETFs may be a better choice if capital preservation and ballast are needed from income-generating assets.

Tax Considerations

Monthly distributions from CAIE are classified as a return of capital, which can receive more favorable tax treatment than interest or options income.[1] ROCs are not taxed immediately: Instead, tax liability is deferred until the ETF is sold.

Each ROC distribution lowers your cost basis, meaning the longer you hold this ETF, the lower your basis gets. Once sold, you’ll pay a capital gains tax on the difference between your adjusted basis and the sale price. If held for more than one year, that difference is taxed at the long-term capital gains rate.

Distributions from most other income ETFs are not classified as long-term capital gains and incur an immediate tax hit. Bond ETF payouts are taxed as ordinary income, while the options income received from covered-call ETFs is taxed at a blended 60/40 long-term/short-term capital gains rate. Payouts from JEPI and JEPQ are treated a bit differently since they use equity-linked notes.

It should be noted that your cost basis could eventually fall to 0 if you hold CAIE long enough. At that point, your basis will remain at 0 and subsequent distributions will be taxed as capital gains in the year received. This could nullify future tax deferral benefits, but that shouldn’t occur in at least the first five years of ownership, assuming current pricing and similar distributions.

What’s Next for Derivative Income ETFs?

The explosion of options-based and outcome-oriented ETFs represents another revenue source for asset managers and more choice for investors. CAIE takes the ETF market one step closer to replicating structured notes and has already inspired other autocallable ETFs.

On one hand, current structured note buyers could benefit by moving over to a similar but cheaper ETF. On the other hand, these complex strategies may be hard for new investors to grasp, raising the risk of buying an ETF that’s not right for them. And with new ETFs minted daily, that risk will only increase.

Investor education has never been more important. Derivative income ETFs continue to evolve, and it’s critical that investors and advisors understand each new strategy to know whether it’s right for themselves or their clients. It’s easy to get swept up in claims of sky-high yield, no risk, or something else, but there’s always a catch. There never has been, nor ever will be, a free lunch in investing.

Autocallable ETFs deliver something novel, but they are not without their own risks.

[1] CAIE may distribute a portion of its income as ordinary income, but these distributions should be small and are the result of holding US Treasuries as collateral for total return swaps. The ETF doesn’t technically hold any notes in its portfolio; instead, it buys swaps that mimic the return of the MerQube US Large-Cap Vol Advantage Autocallable Index, an index full of autocallable yield notes. J.P. Morgan is the swap counterparty.

A previous version of this article ran on Aug. 20, 2025.