Auto-Callable Notes | Note Investing - YouTube

Hey, today we're talking about auto-callable notes,

a really neat investment product that's gained a ton of traction,

especially in the last 10 years and could be a fit for you and your portfolio.

I'm going to tell you about what an auto-callable note is,

who might be for and how they work generally.

I'm Rob Tétrault,

Head of the Tétrault Wealth Advisory Group, from robtetrault.com,

Portfolio Manager here at Canaccord Genuity.

An auto callable note really kind of started getting big in the last,

I'll call it 10 years or so.

Historically it was quite simple.

You had an underlying asset,

so let's call it the TSX composite index.

So maybe it was XIU.

So it's an underlying index and we would... an issuer, usually a bank,

would issue a note...

an autocallable note is a note and investment note structured and issued by a

bank where the underlying asset was measured and will be evaluated at specific

intervals.

So day one XIU is at a hundred points.

Usually the valuation dates are annually.

So next year on this date,

if XUI is above 100 points, you get called,

you get automatically called, hence the word auto callable note.

The note automatically gets called provided that specific outcome arises.

The specific outcome, and the example I'm giving,

is that the index is in any way positive.

So positive by one 10th of a percent or positive by 1000% is irrelevant.

They get called and you get the promised coupon provided it was called.

So typically the notes,

we'll have a feature where if they don't get called at year one the roll over

will happen at year two and then at year two you will look again at the

evaluation date and look to see if the underlying asset is positive.

So for example, the in the example that I gave, if XIU is below par,

it's at 95 bucks on day 366, it doesn't get called.

Year two we take a look at the index.

Where's the index now?

Is it positive?

If it's not positive, it doesn't get called.

It gets rolled over.

Year three if it doesn't get called, all right it rolls over.

And eventually they have five or six year, potentially even longer durations,

but if and when they do get called, that pays out usually a cumulative coupon,

so the coupon might be, for example,

10% in year one 20% in year two 30% in year three so if you don't get called in

year one you typically participate in that coupon at that end date.

Now that's how the notes started and they were fairly simple concept.

Initially it was underlying asset evaluation date call feature and the call

feature was typically annually.

Now over time they've become much more complex and there's a whole bunch of

different features that can be done.

There can be a contingent income coupon where it gets called,

but you also pay an income provided an underlying asset class is not minus 30 or

minus minus 40%.

You can get a principal protected callable feature where the entire principal is

protected and you only get called if it's positive.

You could also get some step-down callable notes,

where in year one as long as it's positive, but in year two,

maybe as long as it's not minus five or worse and you get called as well.

So the callable features can vary.

They can fluctuate,

it could be a different number.

The coupon certainly varies.

You can get,

you can get some that pay a whole bunch more upfront and smaller at the back end.

These are very, very unique.

They're very, very customizable.

They're issued typically by all Canadian banks.

Now who do they belong to?

Like what are you replacing here?

This is typically not to be considered a fixed income component,

although it does pay a fixed income portion and although the taxable

consequences of the income is completely considered interest income,

it should not be confused with your typical fixed income.

These are typically replacing equity in most portfolios.

So that is the allocation in your portfolio that is allocated to equity.

Now the idea,

the reason why some would consider it useful is you can streamline the,

you can streamline the income over time.

So instead of getting the big swings of the equity markets, so the, you know the,

the 20% ups and the 20% downs and you can in theory smooth that out.

So some people like the predictability of it.

Some people like,

the fact it's predictable.

Some people like there's less volatility,

they like that they can pick their underlying asset class and that creates a

unique need.

And in fact the neat thing about these is most of the issuers will custom create

a note for a client typically at the million or $2 million level,

meaning that you can get in and custom create your own note,

if you're very specific on your sector.

Now these can get created on any sectors like energy, American securities,

Canadian securities, Canadian bank stocks, preferred shares, gold miners.

You can literally pick any sector and you can structure and create an auto

callable note.

So auto callable notes, they're not for everyone.

Make sure to talk to your tax professional about the tax consequences of the

income.

Make sure to talk to your adviser about how you think it fits in your portfolio.

But they do make sense for some people and it definitely makes sense for the

people who want to reduce volatility in their portfolio and create a consistent

income stream with a predictable outcome.

Again,

I'm Rob Tétrault from robtetrault.com,

Head of the Tétrault Wealth Advisory Group.

Thanks for joining us today.