This week we sit down with Matt Kaufman at Calamos to discuss the company’s entry into the active ETF market.
Calamos has a long-standing track record as an active asset manager, having launched its first investment strategies in the 1970s. The firm entered the active ETF market early last year with the launch of NYSE Arca listed Calamos Antetokounmpo Global Sustainable Equities ETF (SROI), an exciting collaboration with NBA star Giannis Antetokounmpo. Since then, the lineup has grown to include Calamos Convertible Equity Alternative ETF (CVRT) and Calamos CEF Income & Arbitrage (CCEF), both listed on NYSE Arca. Calamos has several more ETFs currently in registration. What led to the decision to enter the active ETF market, and what is on the horizon for Calamos?
Calamos was founded in 1977 by our current chairman John Calamos Sr., who established the firm through the launch of one of the first convertible bond funds in the U.S. Today, Calamos is one of the largest liquid alternatives and convertibles managers in the world. In early 2023, we made a strategic move to bring this expertise to the ETF marketplace.
Several drivers led to this decision. Externally, the adopted SEC ETF Rule (6c-11) and Derivatives Rule (18f-4) permitted ETFs to enter into derivatives transactions within a standardized framework. These clarifying rules enable active managers (especially alternatives managers) to deliver some of their best thinking via the transparent, liquid, and tax-efficient ETF wrapper.
Although roughly 30% of new ETF dollars go to active ETFs, only around 6% of the total $7 trillion space is currently allocated to active ETFs. However, we see a potential sea change in the growth of assets flowing into active ETFs over the next decade. This equates to a tremendous opportunity for Calamos because it’s a space we believe we’re well-positioned to capture.
Regarding what’s on the horizon, we’re approaching the Calamos ETF lineup thinking in terms of categories, disruption, and innovation. In other words, 1) What spaces exist today that can be disrupted and delivered back in a better way? 2) What problems do investors face that can be solved through the benefit-rich ETF wrapper? and 3) What categories do we have an edge in? For us, answering these questions is rooted in a resolve to listen well, think differently, and understand our edge as a firm. When the force of “what” we offer collides with “why” we offer it—that’s the intersection where people take notice.
Practically, we’re developing products to position clients for the next phase of economic growth. The rate environment has shifted nearly overnight, fundamentally altering the investment environment investors have grown accustomed to. Today, bonds may once again offer the income and risk management benefits that were hard to come by when rates were near or at zero. Regarding ETFs, an entire $7 trillion ETF industry has been built during a period of broadly declining and low interest rates, with more than 80% of the ETF industry’s assets coming in the period between the Global Financial Crisis (2007) and the recent post-COVID rate hikes (March 2022). As we enter a potentially new rate regime, we’re focused on developing ETFs designed for the next phase of growth in the ETF marketplace, without being locked into the risk-management tools of the past.
As a global asset manager what benefits and/or nuances come with operating an active ETF product lineup compared to other investment wrappers (i.e., Mutual Funds, CITs, etc.)?
The ETF has been a tremendous vehicle for democratizing and modernizing investment strategies, and we see this continuing to evolve for the foreseeable future. One advantage of being a newer entrant into the ETF space has been the ability to lay a groundbreaking, innovative, and robust foundation. Leading up to our fund launches in 2023 and continuing into 2024, Calamos is building an ETF platform that includes cutting-edge data science tools, world-class quantitative engines (e.g., in-house derivatives volatility surfaces), and multiple automated operational efficiencies. In a post-6c-11 world, we believe these innovations will lead to an improved overall client experience, more focused engagement with financial professionals, and overall better outcomes for investors.
What key considerations should investors contemplate when considering actively managed ETFs?
As the active ETF space is growing rapidly, more needs to be done to educate investors on the wide spectrum of meanings to the word of “active,” from being a fully discretionary, non-transparent investment strategy to a non-index tracking ETF that may only rebalance its holdings once per year. Looking at the flows, a good portion of active ETF flows are through products that employ a rules-based foundation with an active edge. This is the framework planned for several of our ETFs as well. CVRT, for example, is built on a rules-based foundation of equity-sensitive convertible bonds but with an active component that seeks to capitalize on investment opportunities. We think this type of fiduciary-level active management can add value to the popular ETF structure.
The simple but important takeaway for investors is to know what you own. This maxim is true for both active and passive ETFs.
Lastly, what guidance would you provide sponsors as they consider expanding their product lineup to include actively managed ETFs?
We think the ETF space could double in size over the next 5 to 10 years, largely led by growth in active ETFs. For new active managers looking to participate in this growth trajectory, there are multiple factors to consider, but we’ve boiled it down to three:
- Have an edge—Bring the strategies that you’re best at and meet a market need.
- Capital markets are key—Your relationships with authorized participants, market makers, and the New York Stock Exchange can make or break a product.
- Get your distribution right—Gathering assets requires a plan and daily execution of that plan.
