Tabula launches global credit volatility premium ETF

Apr 3rd, 2019 | By | Category: Fixed Income

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Tabula Investment Management has launched a new ETF in Europe – the Tabula JP Morgan Global Credit Volatility Premium Index UCITS ETF (TVOL LN).

MJ Lytle, Chief Executive, Tabula Investment Management

Michael John Lytle, CEO of Tabula Investment Management.

The fund, which has been listed on London Stock Exchange in euros, provides a passive vehicle for capturing the difference between realized and implied volatility in credit default swap (CDS) index options markets.

Tabula has partnered with JP Morgan on the launch with the ETF being linked to the newly developed JP Morgan Global Credit Volatility Premium Index.

The index 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.

In calculating the strategy’s performance, the JP Morgan index harnesses CDS index and CDS index options pricing from IHS Markit.

The ETF replicates its index through the use of total return swaps while investing residual cash in short-dated government bonds. It is offered with a total expense ratio (TER) of 0.50%.

CDS index options are a large and liquid market with approximately $27 billion of daily turnover.  However, according to Tabula, 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.

“Investors are very keen to find new sources of return that are structural and have limited correlation to other market index investments,” said Michael John Lytle, CEO of Tabula Investment Management. “We are very glad to be able to work with JP Morgan on harnessing this risk premium and delivering it to our clients.”

Danny White, Head of Credit Index Structuring at JP Morgan, added, “Investors are seeking easier ways of accessing the volatility premium available in CDS index options. While it’s a long-established market, barriers to entry have meant that the pricing of these options has historically been inefficient relative to options in other asset classes. Today’s launch should allow investors without significant execution and operational infrastructure access to this type of strategy.”

Gavan Nolan, Director of Fixed Income Pricing at IHS Markit, said, “As a leading provider of CDS pricing data with long-standing expertise across financial markets, we are pleased to extend the reach of our best-in-class service to support the launch of this innovative ETF. This segment of the credit derivative market is growing rapidly, and our multi-source, independent pricing for CDS index options will help ensure the transparency of the index’s performance.”

The ETF becomes the fourth fund within Tabula’s range of fixed income ETFs and the first in alternative risk premia.

The firm’s first two strategies provide long exposure to European credit through corporate CDS markets. The Tabula European iTraxx Crossover Credit UCITS ETF (TECC LN) exclusively targets high yield issuers, while the Tabula European Performance Credit UCITS ETF (TCEP LN) includes both investment grade and high yield bonds. Their TERs are 0.50% and 0.40%, respectively.

Tabula’s other fund – the Tabula European iTraxx Crossover Credit Short UCITS ETF (TECS LN) – provides short exposure to European high yield credit and costs 0.50%.

Tabula has stated it plans to further expand its offering to inflation, money markets, and broader market exposure.

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