Tabula introduces USD-hedged share class for credit volatility premium ETF

Jan 20th, 2020 | By | Category: Alternatives / Multi-Asset

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Tabula Investment Management has introduced a currency-hedged share class for the Tabula JP Morgan Global Credit Volatility Premium Index UCITS ETF.

MJ Lytle, Chief Executive, Tabula Investment Management

Michael John Lytle, CEO of Tabula Investment Management.

The new share class, which trades on the London Stock Exchange under the ticker TVOU LN, mitigates currency risk between underlying euro-denominated credit default swap (CDS) index options and the share class’s trading currency, the US dollar.

Initially launched in April 2019, the fund provides a passive vehicle for capturing the difference between realized and implied volatility in CDS index options markets.

The ETF is linked to the JP Morgan Global Credit Volatility Premium Index which reflects the performance of selling options on European and North American high-yield CDS indices while hedging out the exposure to credit spreads on a daily basis through ‘delta hedging’.

The underlying high-yield CDS indices include the iTraxx Crossover 5y Index, consisting of 75 European entities, and the CDX HY 5y Index, consisting of 100 North American entities. Each index is equally weighted and rebalanced monthly.

The ETF replicates the index through the use of total return swaps while investing residual cash in short-dated government bonds.

The new currency-hedged share class comes with an expense ratio of 0.55% and distributes income, while the unhedged share class (TVOL LN) costs 0.50% and capitalizes income. The fund houses approximately $130 million in assets under management.

CDS index options are a large and liquid market with approximately $27 billion of daily turnover. According to Tabula, however, while there are a wide variety of credit option buyers, there are a limited number of sellers due to relatively high barriers to entry. This imbalance has historically driven the difference between implied and realized volatility to be higher than the equivalent premium available in the equity market.

By selling CDS index options and regularly hedging the market exposure of the options with the underlying CDS indices, the strategy seeks to capture this premium while aiming to minimize market risk.

The ETF makes this historically difficult-to-access premium in CDS index options available to investors in a liquid, passive instrument, without requiring an ISDA or the management of collateral or margin requirements.

Michael John Lytle, CEO of Tabula Investment Management, commented, “Investors have responded well to our first global credit volatility ETF, and we are pleased to add to our offering with a US dollar-hedged share class of the fund.

“The euro share class ended the year strongly, returning 2% in the final quarter with performance driven by a compression in volatility. Yields in US dollars are currently more than 2% higher than euros due to the currency interest rate differential.”

Tabula has carved out a niche delivering fixed income exposures that were previously typically the domain of institutional-size sophisticated investors to the mainstream via accessible ETF structures.

Earlier this month, the London-headquartered firm unveiled its first physical bond ETF, the Tabula iTraxx Europe IG Bond UCITS ETF, offering passive exposure to the newly created iBoxx iTraxx Europe Bond Index.

This index, which Tabula co-developed in partnership with index provider IHS Markit, provides corporate bond exposure that closely reflects the geographic and sector exposure of the iTraxx Europe, a widely followed credit benchmark measuring the performance of a long credit position in credit default swaps on 125 European issuers. The fund comes with an expense ratio of 0.29%.

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