Tabula launches physical cash bond ETF mirroring iTraxx Europe CDS benchmark

Jan 9th, 2020 | By | Category: Fixed Income

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European fixed income ETF issuer Tabula Investment Management has 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.

Tabula launches physical cash bond ETF mirroring iTraxx Europe CDS benchmark

Tabula has launched its first cash bond ETF, listed on LSE, offering physical corporate bond exposure to an index mirroring the important iTraxx Europe CDS benchmark. (file image)

The 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 index selects up to three bonds for each issuer in the current iTraxx Europe series that have a minimum outstanding amount of EUR 500 million and remaining time to maturity of 3-7 years (extended to 1-10 years if an issuer has no bonds in the 3-7 year range).

The index is constructed with fixed sector weight bands. The base weights are autos & industrials 24%, consumers 20%, energy 16%, TMT 16%, and financials 24% – these are supersector categories composed of multiple conventional sectors and industries. With the exception of the financials sector, which is fixed, the sector weights are allowed to deviate by a maximum of 20% either side of base weight.

The index assigns an equal notional weighting to each issuer and targets an average maturity of 5.25 years. This is designed to facilitate more efficient hedging if required. The index is reviewed in March and September in line with iTraxx Europe.

To be eligible for the iTraxx Europe – effectively the selection pool for the index – a bond must have a fixed coupon, be denominated in euros and issued by a European-domiciled entity and command an investment-grade rating.

Owing to the bond selection criteria, the index may not always include all the 125 issuers in iTraxx Europe, though the weighting approach still delivers a materially more diversified portfolio compared to many of the traditional, market capitalization-weighted bonds indices that have around 40% exposure to financials and underly the majority of fixed income ETFs available today.

The index currently includes 232 bonds from 108 different issuers. It is well-diversified at the country level with France (25.6%), the UK (19.3%), Germany (14.0%), the Netherlands (11.4%) and Italy (5.8%) making up the top five country exposures. From a rating perspective, the majority of the index resides in the BBB category, constituting 57.1% of the index.

The fund is Tabula’s seventh ETF and is likely to appeal to investors seeking a well-diversified, pure-play position in high quality, genuinely European credit with a consistent and stable duration profile. It also potentially represents an effective investment vehicle by which to execute basis trades between bonds and CDS instruments.

Commenting on the launch, Michael John Lytle, CEO of Tabula, said, “We are very excited at the level of innovation offered by both the ETF and its benchmark index. The iBoxx iTraxx Europe Bond Index utilises index provider IHS Markit’s market-leading position in both cash bonds and CDS. Working together we are able to offer differentiated and truly European corporate bond exposure.”

Frans Scheepers, Managing Director for Indices at IHS Markit, added, “We’re excited to combine our expertise with CDS and bond markets in the iBoxx iTraxx Europe Bond Index. The new ETF from Tabula expands the range of products linked to our indices and provides investors a new instrument to gain exposure to the corporate credit market.”

The ETF has debuted on the London Stock Exchange (TTRX LN) and is scheduled to cross-list on Xetra (TABX GR) on Friday.

It has been seeded with €35m and comes with an ongoing charge of 0.29%.

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