WisdomTree has launched two actively managed ETFs that use autocallables to target defined levels of return, bringing a strategy more commonly associated with structured products into the UCITS ETF market.
The WisdomTree Defined Return Autocallable EUR Active UCITS ETF (DRTN) is targeting an annualised net return of 8% to 9% over the medium to long term, while the WisdomTree Defensive Defined Return Autocallable EUR Active UCITS ETF (DRTD) is aiming for 6% to 7%. Both charge 0.65% and have listed on Xetra and Borsa Italiana. Accumulating share classes are also available.
Autocallables are structured investments whose returns depend on the performance of an underlying asset, typically an equity index. At set dates, the index is checked against a predetermined level. If the condition is met, the investment is automatically redeemed – or “called” – and the investor receives their capital back plus a predefined return. If it is not, the investment continues to the next observation date. Autocallables typically provide some protection against market falls, although investors can lose capital if the underlying market falls sufficiently far, while their gains are generally capped if markets rise strongly.
Rather than holding a single structured product, WisdomTree’s ETFs spread their exposure across a portfolio of autocallables linked to large-cap equity indices such as the EURO STOXX 50. The manager can alter the underlying markets, autocall barriers, downside protection levels, maturities and other elements of the payoff as market conditions change. Proceeds from investments that mature or are called early can then be reinvested into new opportunities.
This also changes the nature of the counterparty risk. An investor buying a conventional structured product is exposed to the creditworthiness of the bank that issued it: if that bank fails, the investor could suffer a loss regardless of how the underlying index has performed. WisdomTree’s funds still have counterparty exposure because their returns depend on payments from the banks providing the swaps, but that risk is managed within a diversified UCITS fund structure rather than being concentrated in a single bank-issued product. WisdomTree monitors counterparty and issuer exposures within UCITS limits.
The funds are managed by the former Atlantic House team acquired by WisdomTree earlier this year. The team has managed autocallable strategies since 2013 and now oversees more than $4bn across the asset class. WisdomTree said it plans to use the acquisition to launch between 15 and 20 outcome and derivatives-based strategies globally over the next 18 months.
The launch follows Calamos’ introduction of what it described as the world’s first autocallable UCITS ETF in April. Its Calamos Autocallable Income UCITS ETF uses a swap-based index containing more than 50 autocallables and is listed on the London Stock Exchange and Xetra.
Our view
David Batchelor, senior analyst at QuotedData, said: “Autocallables have traditionally been the preserve of structured-product portfolios, but ETF providers are starting to package these strategies in a format that is easier to buy, sell and incorporate alongside conventional funds – in a way that spreads the counterparty credit risk over several issuers. The emergence of a second provider in Europe within a matter of months is significant: if investors embrace the approach, defined-return products could become another area in which the ETF structure expands well beyond traditional index tracking.”
