From Structured Notes to ETFs: The Strategy Behind MPIM

Nicole (0:00)

It's time for the ETF Watchlist. Joining me right now, Nick Parcharidis, Managing Director of Private Wealth Solutions at iCapital. And I'm so glad you're with us. You said investors are seeking more consistent income. There's ways to do this. What have you been telling them, Nick?

Nick Parcharidis (0:15)

Yeah, so as investors continue to look for that alternative source of income that is somewhat consistent, you're finding new strategies, such as MPIM with these laddered auto calls, finding their way into ETFs.

Nicole (0:30)

So MPIM is the ticker symbol. It was recently launched, this ETF, and you're using this laddered strategy, which then means it's over time, so you're not, it's not one day, you're using options and it provides folks that are seeking the high monthly income, right? Let's go into this a little more.

Nick Parcharidis (0:47)

Yeah, so it's meant to fill the gap left by traditional bonds, dividend yielding stocks, as well as to a certain extent, high yield and other sources which are dependent on rates. What you're really doing is, is you're taking more equity risk in order to generate a higher yield on a monthly basis, which also is potentially tax advantaged in the form of return of capital. So it's twofold, higher income to fill the void, Nicole, as well as you're laddering in, so you're diversifying your market timing versus taking risk at one point in time in the market.

Nicole (1:21)

Right, understood. So this is obviously actively managed, right? You're doing this in full force, that's what it sounds like. And it really is taking place of something that was maybe more of what would, the old way of doing things, right? I had seen it within your notes, you talked about how this is sort of the step up from the old way of doing things.

Nick Parcharidis (1:40)

Yeah, so what we've been able to do is to deliver the strategy via an index, so it's much more systematic. It takes the subjectivity out of it, where you're laddering in on a weekly basis, and not having to make those kind of decisions. It's in essence finding its way into an ETF from previous wrappers such as notes because it makes it much more model portfolio ready.

Nicole (2:02)

Yeah, that was exactly what I was thinking about, how it used to be that you would have something like this with structured notes.

So now you hit the nail on the head now and how you're moving this forward. When someone's trying to now diversify your portfolio, instead it fills the gap really, right? But it comes with more risk. So if you have bonds or high yield bonds, how is this probably a good play and how much should someone allocate to something like this?

Nick Parcharidis (2:28)

That's a good question and it really changes the allocation decision. So when we look at traditional 60-40 portfolios, particularly that 40 percent which gets allocated to fixed income, that's traditional fixed income here because you're taking equity risk.

You obviously need to be somewhat sensitive for that. So of that 40 percent, whether the right number is 5 or 10, it really depends on the individual. One thing I will say is the strategy has this embedded memory mechanism, whereby if for whatever reason the market trades down and then recovers, you have the ability to make up some of those missing coupons or coupons you would have gotten, and that creates some stability to the coupon as well.

Nicole (3:12)

How many ETFs are like this with coupon memory and auto-callables that are laddered?

Nick Parcharidis (3:18)

Yeah. So in the ETF space over the last year, you've seen about 5 billion in issuance come to market. Again, as that need for more income starts to rise. However, the memory feature is somewhat unique to MPIN.

We did it because we wanted more consistency in the yield, and we wanted something that could be more conservative.

Nicole (3:43)

It's not quite AI, but it's sort of AI-ish, isn't it? This is technology that we did not have 10, 20 years ago, I would imagine.

Nick Parcharidis (3:52)

Absolutely. I used the term index before where it's much more systematic.

So from an investor standpoint, they can make a decision of what my allocation is, what I do know, the strategy does what it's intended to do, which is deliver monthly yield, which is basically driven by this equity performance of the underlying index. The index is a momentum index, which is linked to the S&P 500, Nasdaq and small cap.

Nicole (4:19)

So how that would bring me to my next big picture. I thought, how are you feeling about the markets at this point? Because that would matter for you.