Podcast Summary: Animal Spirits – "Talk Your Book: Structured Notes in an ETF"

Date: January 19, 2026
Hosts: Michael Batnick & Ben Carlson
Guest: Jeff Schwarte, Simplify ETFs

Overview

In this episode, Michael and Ben dive deep into structured notes within an ETF wrapper, a relatively novel approach to income generation for investors. Their guest, Jeff Schwarte of Simplify ETFs, explains how what was once available only through specialized, illiquid, and often high-fee channels—like individual structured notes—can now be accessed through the ease and liquidity of ETFs. The conversation focuses on the mechanics, risks, rewards, and practical applications of Simplify’s auto-callable, barrier income ETFs. Throughout, the hosts challenge the concept, especially its behavior during equity drawdowns, and explore its place in a diversified portfolio.

Key Discussion Points & Insights

The Evolution of ETFs and Structured Notes

• ETFs Have Evolved: The hosts note how ETFs have moved from simple, low-cost index funds to complex instruments with new strategies emerging every year (01:00).
• Structured Notes 101: Jeff explains the “auto-callable barrier income strategy”—using principles from the $450 billion structured notes market, now packaged in an ETF for ease of access and operational efficiency, freeing investors from previous hurdles like illiquidity and paperwork (03:23).

Mechanics of Auto-Callable Barrier Notes

• How It Works:

  • Investors’ money is used to buy short-term Treasuries as collateral.
  • The fund sells "barrier options" to investment banks, earning an option premium.
  • The options include a maturity date (usually one year out), a non-call period (typically three months), and a barrier (commonly 30%) that defines when downside risk kicks in (04:23–06:12).
  • Key: Only if an index falls below the barrier at maturity does the investor participate in losses; otherwise, they keep the premium.
  • Positions are "laddered," with new contracts maturing weekly for diversification and smoother risk and return (08:22).

• Income Stream: Double-digit yields are generated from Treasury interest and option premiums, providing a new, diversified source of income for investors, although the underlying risk is equity-centric (06:28).

Risk Management & Downside Scenarios

• Barrier and Downside Participation:
  • If markets drop below the 30% barrier, investors participate directly in losses below this level, but if the market rebounds before contract expiry and finishes above the barrier, there’s no loss for that note (07:29–08:22).
  • Example: In 2020's Covid crash, structured notes would only suffer permanent loss if indices were down more than 30% on the maturity date, not just at the drawdown’s nadir (08:22–13:08).
• Historical Perspective:
  • Over 35 years, barriers were breached only 7.8% of the time, most notably during the Global Financial Crisis—otherwise, the vast majority of the time, investors pocket the premium (11:16).
• Operational Advantage:
  • Before, advisors needed to monitor each contract’s status. ETFs make it seamless, with continuous liquidity—no more tying up capital for years (09:13).

“Structuring it in an ETF removes the operational nightmares and makes it accessible for everyone, not just those with specialist brokers.”
— Jeff Schwarte (10:04)

Upside & Yield Considerations

• Capped Upside:
  • The strategy isn’t designed for bull markets. Maximum returns are limited to option premiums plus Treasury yield—about 9–13%, depending on market volatility (17:06).
  • “If you’re super bullish on the market, this is probably not the product for you.” – Jeff Schwarte (17:34)
• Yield Tiers—Product Breakdown:
  • SBAR: 30% barrier, 9–11% yield, broad equity indices.
  • XV: 25% barrier, ~15% yield, more concentrated risk.
  • XXV: Individual stocks, 40–50% barriers, 25% yield; higher risk, shorter call periods (18:26–19:33).
• Not Just High-Yield Gimmicks:
  • The hosts call out competitors who boost yield by returning investor capital; Jeff maintains their product distributes only true earnings (20:02).

Portfolio Role and Practical Considerations

• Alternative Income:
  • Jeff and the hosts agree that these funds are not fixed income substitutes, nor pure equity—think of them more like alternative income, similar to preferred securities but tied to equity volatility, not credit risk (14:34).
• Risk Transparency:
  • The strategy offers defined downside and upside, enabling more informed positioning in portfolios (21:21–22:00).
• Added Protection:
  • The funds embed out-of-the-money put options at a small extra cost (~12 bps), providing further “flood insurance” against catastrophic losses (23:18–23:23).

Adoption and Advisor Feedback

• Lower Barriers to Entry:
  • Now anyone can buy in—share price as low as ~$25—and compliance departments are usually satisfied, given the ETF structure (25:29).
• Fees:
  • The ETFs are priced at 75 basis points, justified, Jeff argues, by the operational efficiency and defined outcomes (26:28).
• Ideal Market Environment:
  • Rising markets with sustained volatility produce optimal results—high yield from options and minimal breach of barriers (27:18–27:38).

Notable Quotes & Memorable Moments

• On the Innovation in Structured Notes via ETF:
  “We took a concept that was already out there, time tested, very well used by lots of advisors, and we just made it more efficient.”
  — Jeff Schwarte (16:50)

• On Downside Risk:
  “Once you go through the barrier, you fully participate in the drawdown. However, you get to offset that drawdown with the income you receive from the product.”
  — Jeff Schwarte (07:37)

• On Upside Limits:
  “The upside is generally going to be limited to the option premium plus the Treasury income. That’s going to be your maximum upside.”
  — Jeff Schwarte (17:06)

• On Why Advisors Like the ETF Approach:
  “Structuring it in an ETF removes the operational nightmares and makes it accessible for everyone, not just those with specialist brokers.”
  — Jeff Schwarte (10:04)

• On Defining Product Use:
  “It kind of feels like an alternative income-oriented solution... Liquid alternatives.”
  — Jeff Schwarte (14:34)

• On Risk Definition and Transparency:
  “I love that an investor can make an informed decision: I understand the downside, I understand what happens in a Covid market, I know it happens 8% of the time... and now I can make a decision for myself.”
  — Michael Batnick (21:21)

Timestamps for Important Segments

• 01:00 – ETF evolution and the structured note landscape
• 03:23 – What is an auto-callable barrier income strategy?
• 04:23 – Mechanics of the barrier option within the ETF
• 06:28 – The objective: income and protection
• 07:29 – Explaining downside risk and the barrier concept
• 08:22 – How laddering contracts and rolling maturities work
• 11:16 – Historical context: barrier breaches and risk stats
• 13:08 – Mark-to-market risk during rapid market drawdowns
• 14:34 – Product classification: Is it fixed income? Alt income?
• 16:50 – Bringing structured notes to the ETF wrapper
• 17:06 – Limiting upside: yield targets and risk tiers
• 18:26 – Comparing SBAR, XV, and XXV funds
• 20:02 – Difference from competing high yield funds
• 21:21 – Defined risk and return for investors
• 23:18 – Embedded put options ("flood insurance") explanation
• 25:29 – Advisor adoption and client access
• 27:18 – Why volatility is (unexpectedly) good for the strategy

Conclusion

The episode presents a thorough, lively discussion on the innovation behind packaging structured notes within ETFs, emphasizing operational efficiency, potential for double-digit yield, and the real risks involved. Jeff Schwarte and the hosts demystify key aspects, provide historical context, and clarify exactly where these funds fit for both retail investors and advisors. This is an episode for listeners who want to go beyond yield inflation headlines to understand the practical mechanics, nuances, and consequences of using structured products in a portfolio.