In today’s investing environment, it seems as though there is a constant effort to offer new and attention-grabbing products to investors. No longer are investors limited to a few simple large blend equity mutual funds or index tracking Exchange Traded Funds. There is a seemingly endless menu of investment options – some of which may be hard to understand at first glance.

A client shared a new investment offering with me they came across and suggested I dig into it for this weekly column. As it’s another great opportunity to showcase an investing mantra I subscribe to (“know what you own and why you own it”), I was up to the challenge!

The new investment product is called an Autocallable Income ETFs. Right off the bat, you may not fully understand what those terms in the name even mean and you wouldn’t be alone.

Upon some research, this ETF is being marketed by a very reputable investment manager who has a long and impressive track record in the mutual fund space. However, this product is a new innovation and one that is rather complex. It’s stated objective by the manager is – seeks to generate high monthly income while providing reduced downside risk through exposure to a portfolio of autocallables. Are we all clear on understanding how this works? I’m guessing maybe not- so let’s dive a little deeper.

Autcallable notes are a type of structured products (meaning they are investments that are created and underwritten by investment banks). They are part bond, part bet on the stock market. Think of it as a bond whose coupon payments over time are contingent upon an equity index staying within a given range. (This stands in contrast to traditional bonds whose coupon payments depend on credit rating of the issuer, prevailing market interest rates, and duration).

Every month, those managing the autocallable notes check the equity market index that’s specified within the debt agreement. If the index hasn’t fallen too far—usually it needs to stay above 60-70% of where it started when the debt was issued – the investor will receive a coupon payment that is typically much higher than prevailing bond rates. Said another way, as long as the equity index doesn’t fall more than 40%, the income payment will be made.

So what’s the risk? Investors in these notes may experience capped upside and potential unforseen downside. If the market does really well and far outpaces index levels in specified in the agreement, the issuer of the structured product has written terms into the agreement that they can call the investment back – meaning they can stop the investment early, refund the investor’s money, and then cease to pay the higher income payments (this is the auto-call feature). Typically, most of these notes have a one-year non call period, after which they are autocalled if the underlying equity index has risen from the benchmark level in the agreement. This dynamic shortens their life from the stated 5 year maturity to closer to 1.5 years.

What happens if the market falls below the barrier (ie: declines to 60-70% of the equity index level in the agreement)? The so-called safe bond/income investment is no longer safe, the income payments can be stopped, and the investor may even lose principal – resulting in a risk profile very similar to a standalone equity investment and no longer the high income instrument it was thought to be.

Why do investors seek such an investment? In a flat or slightly down market, income-hungry investors can earn above-market income all while retaining the possibility of earning above-average income if the market rises considerably. The downside is of course cessation of that income stream as well as exposure to equity-like risk in a severe market downturn. It’s a complex way to earn income from a product that has some protection (as traditional bonds do) but in theory less risk than pure equities (as the index can fall a decent amount before payments are at risk).

Autocallable notes have been used by wealthy investors for years and typically carried very high minimums and tax reporting complexities. This ETF aims to democratize access to this investing methodology. This ETF invests in a ladder of at least 52 autocallable notes – thereby diversifying the index levels and likelihood of an autocall – allowing it to hopefully fulfill its income payments as advertised.

In summary, it’s likely very clear by now that this is an extremely complex investment product. It is managed by a very reputable firm and has the potential to be a useful tool for a specific investor profile. However, as is always the case, my advice is “know what you own and why you own this.” Do not get swayed by the attention-grabbing income promise (investors could be easily drawn to this investment with its headlines of 15% yield in a 4% 10-year rate world). It may be possible to achieve your goals using “pure-play” bonds and equities versus investing in a hybrid of the two. As always, I’d encourage you to dig deeper and truly understand if you are comfortable with the methodology, trade offs, and costs of such a strategy.

When it comes to this strategy and any other investment strategy/product, the only way to invest in my view is with your eyes wide open and healthy dose of skepticism and discernment!