Fixed income specialist Tabula debuts with European CDS ETF

Sep 11th, 2018 | By | Category: Fixed Income

New European fixed income ETF provider Tabula Investment Management has launched its first ETF – the Tabula European Performance Credit UCITS ETF (TCEP LN) – on London Stock Exchange.

MJ Lytle, Chief Executive, Tabula Investment Management

MJ Lytle, Chief Executive, Tabula Investment Management

The ETF offers passive exposure to European credit through an index tracking the corporate credit default swap (CDS) market.

The fund aims to provide a competitive yield without the direct interest rate risk inherent in traditional corporate bond indices.

This may be a favourable feature for investors with many economists predicting the European Central Bank to raise rates when it concludes its asset purchase programme in December.

“European corporates look healthy and credit is reasonably priced but, with rate hikes on the horizon, not everyone wants the interest rate risk inherent in corporate bonds”, said Tabula CEO Michael John Lytle. “Specialist credit managers can isolate and manage credit risk using credit default swap indices. This is a liquid and efficient market, but it isn’t accessible to all asset managers. Our new ETF gives you the same kind of control – precise credit exposure and the ability to increase or decrease it whenever you want to.”

According to Tabula, the ETF could be used to replace long-term bond holdings or for tactical credit exposure.

The ETF tracks the iTraxx European Performance Credit Index through direct credit default swaps.

Developed through a partnership between Tabula and IHS Markit, the index offers well-diversified European credit exposure, mostly through investment grade issues but with a degree of high yield allocation as well. Credit can be issued in euros, pound sterling or Swiss francs, with issuers coming from across the continent (including the UK).

The strategy earns a regular coupon by taking on the credit risk embedded within issuers’ bonds; however, the occurrence of certain ‘credit events’ may lead to losses. In the case of credit events, the ISDA Credit Determinations Committee votes to determine if a credit event has occurred for an entity. Such events typically include late payment, bankruptcy and restructuring.

The index reflects the return from selling protection on the current series within two well-established credit default swap indices: the iTraxx Europe 5y (investment grade) and iTraxx Crossover 5y (sub-investment grade).

According to IHS Markit, these indices include European corporate issuers with total outstanding public debt of at least €100 million and a maximum remaining maturity of 30 years.

The investment grade component consists of 125 of the most liquid issuers within the eligible universe, while the sub-investment grade component consists of 75 issuers. Issuers are equally weighted within each index. Approximately half the total weight of the ETF’s index is allocated to bonds rated BBB, with a further quarter in bonds rated A, and 5% in bonds rated AA.

“When you remove interest rate risk, you’re removing one source of yield,” said Lytle. “Our ETF compensates for this by taking on more exposure to credit spread.”

To achieve this, the actual index position reflects a total market exposure of 300%, allocated in an 80/20 ratio to the investment grade and higher yield indices respectively.

Lytle added, “To enhance yield, you typically need to reduce credit quality or increase duration. However, if you have a positive view on European credit, it makes sense to scale up that exposure instead.”

The index currently yields approximately 5%, with Tabula noting it has outperformed both high yield and investment grade benchmarks over the past ten years.

The UK leads the index’s country exposure with over a quarter (26%) of the total weight allocated to selling protection on bonds from UK issuers. France, Germany and the Netherlands follow with weights of 20%, 15%, and 10% respectively. The largest sector exposure is companies in the consumer space with a weight of 26%, followed by financials (21%), autos & industrials (20%), TMT (20%), and energy firms (14%).

The index is rebalanced on a monthly basis, while the ETF comes with ongoing charges of 0.50%, trades in euros, and re-invests the income generated within its portfolio.

Tabula is already lining up further ETF launches on London Stock Exchange aimed at fixed income investors. The firm plans to bring to market strategies targeting various segments of the asset class, from investment grade and high yield credit to inflation, bank capital, money markets, ESG strategies and Solvency II-efficient funds.

Lida Eslami, Head of London ETP Business Development, London Stock Exchange Group, commented, “We are delighted to welcome Tabula as new issuer on London Stock Exchange and congratulate them on their ETF launch. Their new fixed income ETF adds to the diverse range of funds available on our markets offering exposure to a broad range of fixed income assets from government bonds to corporate credit. London is the premier listing and trading venue for ETFs in Europe and we look forward to developing our relationship with Tabula in the future.”

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