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What are Autocallables?
Have you been hearing a lot about autocallables lately? That might be because the issuance of autocallables has seen explosive growth over the last decade, as evidenced in the rise in US autocallable sales from $78 billion in 2020 to $132 billion in 2023.1 Autocallables are one of the fastest growing asset classes right now. And it’s not hard to see why. But what are they and what do they do? Let’s dig into it.
An autocallable note is an equity market-linked investment designed to provide regular, high income and return principal at a set maturity date—or earlier—if specific market conditions are met. Its performance is tied to a reference index, such as the S&P 500.
Key Terms to Know
- Non-call Period: Autocallables typically have a non-call period at the beginning of the term during which the autocallable cannot be called early. This ensures the investor has a chance for income.
- Observation Dates: Monthly dates when the reference index performance is checked against the predesignated thresholds to determine what happens with the investment.
- Coupon Threshold: The pre-set level which the reference index must stay above on observation dates in order for income to be paid.
- Coupon: On monthly observation dates, the coupon (fixed income) is paid, assuming the reference index is above the pre-set coupon threshold.
- Maturity Date: The date when the investor receives their principal back, assuming the autocallable was not redeemed early.
- Principal Barrier: This is the level the reference index needs to be above on the maturity date in order to return your principal back in full.
- Autocall Trigger: If the index rises to or above the specific autocall level on a monthly observation date, you get your principal back early.
The autocallable is designed to pay a fixed income stream until maturity. This income payment is paid on “observation dates,” but only if the reference index (e.g., S&P 500) stays above a pre-set level, known as the coupon threshold. As long as the reference index stays above the coupon threshold, even if that means the reference index is down, coupons continue to be paid. If at maturity, the reference index is above the principal barrier, the investor’s principal is returned, even if the market has declined overall. If at any of the monthly observation dates the reference index is at or above the specific autocall trigger, the autocallable is redeemed and the investor gets their principal back early.
Historically, autocallables were complex products with high minimums and poor liquidity, available only to institutional and high net-worth investors. Autocallables in an ETF wrapper represent a market opportunity with the potential to smooth cash flow, lower concentration risk, and provide more predictable, high-yield income — helping investors maintain their lifestyle and portfolio stability even when markets are volatile.
TrueShares offers two new autocallable ETFs, the S&P Autocallable High Income ETF (PAYH) and the S&P Autocallable Defensive Income ETF (PAYM). PAYH and PAYM bring the popular autocallable income strategy to investors seeking high, stable income with monthly coupon payments. The ETF wrapper seeks to offer predictable income, contingent protection, and built-in hedging, all in a tax efficient single-ticker solution.
To learn more about the funds, visit: https://www.true-shares.com/autocallable-income-etfs
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