Autocallable strategies can sound complex. Explaining them does not have to be.

Autocallable notes combine equity market exposure, predefined thresholds and the potential for regular income within a structured investment. Historically, accessing and managing these strategies could also bring challenges including individual note selection, liquidity, reinvestment and ongoing portfolio management. TrueShares brought the strategy into an ETF structure through the TrueShares S&P Autocallable Income ETFs (PAYH & PAYM).

For advisors who want to better understand the mechanics behind the funds, we’ve created a series of short animated videos covering some of the most important features of the strategy.

Think of it as Autocallables 101, in five quick lessons.

1. Start Here: How Does an Autocallable Work?

Understanding PAYH and PAYM starts with understanding the building block: the autocallable.

Autocallable notes are equity market-linked investments designed to generate income and return principal at maturity, or potentially earlier, subject to predefined conditions. Concepts including observation dates, coupon thresholds, principal barriers and autocall triggers determine how an individual autocallable behaves.

Our first explainer walks through these mechanics and shows how PAYH and PAYM use autocallable structures within an ETF.

Watch: Features of an Autocallable | PAYH & PAYM

2. The Reference Index: Designed to React to Volatility

A key feature of PAYH and PAYM is what happens beneath the autocallable structure.

The funds' reference indices are designed to provide volatility-adjusted exposure to E-mini S&P 500 futures, targeting implied volatility levels of 35% for PAYH and 20% for PAYM.

Rather than maintaining static market exposure, the reference index framework is designed to adjust equity exposure as volatility changes. The indices are capable of adjusting exposure up to seven times daily, increasing it during calmer environments and reducing it when volatility rises.

Watch: Autocallable Reference Index Overview

3. What Happens When Markets Are Flat or Rising?

Income-oriented investors don't necessarily need the market to rally sharply for an autocallable strategy to work as designed.

Depending on the terms of an individual note, the reference index may be able to decline while remaining above its coupon threshold, allowing the note to continue paying its coupon. If the index meets or exceeds the autocall trigger on an observation date, the note can instead be called and principal returned early.

This video illustrates how those mechanics can play out when markets are flat or rising, including what happens when a note is called and new structures are subsequently issued.

Watch: How Autocallables Behave in Flat and Rising Markets | PAYH & PAYM

4. Understanding the Strategy in Declining Markets

The other side of the equation is seeking to understand what happens when markets don't cooperate.

The child tranche mechanism is an important part of how PAYH and PAYM manage autocallable exposure and seek to preserve coupon-generating potential over time. Rather than concentrating the portfolio in a single issuance or market entry point, the strategy creates child tranches with different starting points and reference levels. This diversification across vintages can help maintain coupon opportunities even when certain tranches come under pressure.

The video explains how the child tranche mechanism is designed to work and how it seeks to support coupon preservation within the funds.

Watch: The Child Tranche Mechanism in Declining Markets

5. Adding Another Layer: The Two-Layer Hedge

PAYH and PAYM aren't simply portfolios of autocallables.

The strategy incorporates a two-layer hedge framework, consisting of a Tail Risk Hedge Strategy and Tactical Put Buying Strategy. Each is designed to play a role in managing risk across changing market conditions.

For advisors, this is an important part of understanding the overall construction of the funds. The objective isn't to eliminate market risk. Rather, the hedging framework is incorporated into the broader autocallable strategy to help manage potential downside risk.

Watch: The Two-Layer Hedge Strategy | PAYH & PAYM

Two Potential Approaches to Autocallable Income

PAYH and PAYM bring the autocallable concept into professionally managed, single-ticker ETFs, each with a distinct income and risk profile. For advisors, the funds offer a way to incorporate an autocallable-based strategy into client portfolios without directly sourcing and managing individual notes.

The funds combine diversified autocallable exposures, dynamic reference indices and a hedging framework, while the child tranche mechanism is designed to help preserve coupon-generating potential by establishing new exposures at different reference levels over time. Together, these features seek to provide a systematic approach to accessing autocallable income within an ETF structure.

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E-mini S&P 500 futures are a type of futures contract based on the S&P 500 index, a widely recognized barometer of the U.S. stock market. An investor cannot invest directly in an index. The outcomes outlined are not guaranteed, and actual results may vary. Diversification does not guarantee a profit or protect against loss in a declining market. The funds seek high income, but predictable income is not a guarantee and actual income may decline in certain market conditions. A decline in the index or failure to meet certain performance thresholds may reduce or eliminate monthly income. There is no assurance that the Funds’ investment strategy, including their use of derivatives, contingent downside features, or income-generation techniques, will be successful. The strategy may not achieve its objectives, may not perform as expected in different market environments, and could result in investment losses.