Michael Batnick and Ben Carlson interview Jeff Schwartz from Simplify ETFs about their innovative barrier income strategies. Schwartz brings 30 years of money management experience, having previously managed $80 billion in assets for institutional clients globally.

The conversation explores Simplify's auto-callable barrier income ETFs, which package structured notes into liquid ETF wrappers. These products target double-digit distribution yields while providing downside protection through barrier options set at various levels depending on the strategy.

The discussion covers three main products: S-BAR (targeting 9-11% yield with 30% barriers), XV (15% target), and XXV (25% target using individual stocks). Schwartz explains how these strategies differ from traditional covered call ETFs and other high-yield products that often return investor capital rather than generating actual income.

ETF Innovation Evolution and Structured Note Integration

ETF landscape evolved from basic index funds and factor ETFs to a "Cambrian explosion" of innovative strategies over recent years

Simplify transformed the $450 billion structured notes market by packaging individual contracts into liquid ETF wrappers with continuous liquidity

"We've taken that operational burden away from advisors who had to monitor every single position for callability and maturity dates" - Jeff

Auto-Callable Barrier Mechanics and Treasury Collateral

Strategy uses treasury bonds as collateral while selling barrier options to investment banks, generating income from both sources

Barrier options have one-year maturities with 3-month non-call periods - positions get called early if underlying indices rise above initial values

"European knock-in" structure means barrier breach only matters on the final maturity date, not during interim volatility

S-BAR maintains 52 weekly-laddered positions to provide diversification and reduce single-contract concentration risk

Risk Profile and Historical Performance Data

30% barriers on worst-performing index among NASDAQ, S&P 500, and Russell 2000 were breached only 7.8% of the time over 35 years

During COVID crash, strategy experienced 27% mark-to-market drawdown but avoided barrier breach as markets recovered above 30% threshold

"If you're down 29%, there's no participation in the drawdown. If you're down 32%, you're down 32%" - Jeff on barrier mechanics

Additional long put options provide "flood insurance" at 12 basis points cost, offering 100% notional protection below barrier levels

Product Variants and Yield Targeting Strategies

S-BAR targets 9-11% distribution yield with 30% barriers on broad market indices as core portfolio allocation

XV targets 15% yield using three equity indices with 20% barriers, accepting higher risk for increased income

XXV targets 25% yield using individual stocks like NVIDIA with 40-50% barriers and one-month call periods

"We're distributing the earnings that we make from the product" versus competitors doing return of capital distributions - Jeff

Market Conditions and Volatility Benefits

Strategy benefits from rising markets with heightened volatility - positions get called early while option premiums increase

S-BAR distributed 12.9% versus 10% target due to elevated volatility from "tariff tantrum" and government shutdown concerns

"Best case scenario is we have rising equity markets with heightened volatility" - Jeff on optimal market conditions

Advisor Adoption and Positioning Considerations

Advisors familiar with structured notes immediately understand the concept, while others need education on the mechanics

Morningstar categorizes these as "derivative income" strategies, distinct from traditional stocks and bonds allocations

All three strategies charge 75 basis points management fees with no account minimums - accessible for $25 minimum investment

Compliance departments approve easily since products trade as standard ETFs despite complex underlying derivative structures