Tabula debuts on SIX Swiss with CHF-hedged US ‘enhanced inflation’ ETF

Feb 25th, 2021 | By | Category: Fixed Income

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Tabula Investment Management has expanded its footprint in Switzerland with the introduction of its US ‘enhanced inflation’ ETF on SIX Swiss Exchange.

Tabula SIX US inflation expectations ETF

Tabula has made its debut on SIX Swiss Exchange.

The Tabula US Enhanced Inflation CHF Hedged UCITS ETF has listed on SIX Swiss with a currency-hedged share class (TINC SW) that mitigates foreign exchange risk between the US dollar and the Swiss franc.

The fund is designed to help investors better manage the effects of US inflation by providing access to both realized and expected inflation in a single wrapper.

It is a potentially timely solution. Recent activity in the US Treasury bond market indicates that inflation is becoming an increasing concern for investors – the difference between ten-year and two-year Treasury yields is currently at its widest level in years.

A steep yield curve indicates that investors are optimistic about economic recovery but are also pricing in higher inflation for the future. As inflation erodes the real value of bonds’ fixed payments, higher inflation expectations lead investors to push up yields on longer-term bonds as compensation.

Increased fiscal spending under the Biden administration, ongoing monetary stimulus, and the Federal Reserve’s announced willingness to allow inflation to overshoot its target all highlight the growing need for investors to consider incorporating inflation-protection measures within their portfolios.

Michael John Lytle, CEO of Tabula Investment Management, commented: “The pandemic and associated economic lockdowns have created unprecedented uncertainty over the likely path of inflation. The pattern of our spending has changed dramatically, making it difficult to predict what the net effect will be on economy-wide price indexes.

“Central banks have injected trillions of dollars into financial markets with much more expected to follow, and policymakers are unlikely to tighten monetary policy in response to rising inflation until a sustained post-Covid global economic recovery is underway.

“Investors need to place a greater focus on inflation, and ETFs are a natural choice for taking inflation protection. However, most inflation ETFs force investors to choose between realized inflation and inflation expectations. For many investors, both are important measures and a more efficient solution is to combine them, which is what we have done with the Tabula US Enhanced Inflation UCITS ETF.”

Methodology

The fund is linked to the Bloomberg Barclays US Enhanced Inflation Index which was developed by Bloomberg, in consultation with Tabula. The index measures the performance of a diversified portfolio of US Treasury Inflation-Protected Securities (TIPS) combined with exposure to medium-term US inflation expectations. The two sleeves are weighted equally.

The TIPS portfolio is composed of securities with at least $500m face value outstanding and at least one year remaining until maturity. TIPS differ from regular Treasury bonds in that the principal amount of a TIPS issue is adjusted over time to reflect changes in the underlying Consumer Price Index, a measure of inflation. The yield on TIPS thus reflects a real interest rate where the effect of inflation has largely been stripped out.

The index’s exposure to inflation expectations is represented by a long position in 7-10 year TIPS and a short position in regular 7-10 year Treasuries to hedge out duration risk. An increase in 7-10 year inflation expectations will lead to a net appreciation in value as increasing inflation expectations cause the yields on regular Treasures to rise and their prices to fall, thus delivering positive performance for the short component of the trade. The short position is adjusted in order to offset the duration exposures of the two indices, thereby establishing a purer play on inflation expectations.

The fund replicates the index by taking a physical position in relevant TIPS and entering into an over-the-counter total return swap agreement in which it receives the return of the inflation expectations portfolio in exchange for agreed payments to the swap counterparty, BNP Paribas.

The ETF, which houses around $35 million in assets, is also listed on London Stock Exchange with US dollar (TINF LN) and GBP-hedged (TING LN) share classes, on Borsa Italiana with a EUR-hedged share class (TINE IM), and on BX Swiss with an unhedged US dollar share class (TINF SW).

The fund’s currency-hedged share classes come with an expense ratio of 0.34%, while the unhedged share class costs 0.29%.

Swiss expansion

Tabula’s arrival on Zurich’s SIX Swiss Exchange follows the issuer’s rollout of products Bern’s BX Swiss exchange in June 2019. SIX Swiss has established itself as the preeminent listing and trading venue for ETFs in Switzerland.

Stefan Garcia, Managing Director at Tabula Investment Management, said: “Switzerland is one of the biggest and fastest-growing ETF markets in Europe, and it is imperative that we have a strong foothold here. Listing a CHF-hedged share class of our US Enhanced Inflation ETF on the SIX Swiss Exchange demonstrates Tabula’s commitment to this important market.”

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