Tabula re-engineers its European CDS ETF

Apr 27th, 2021 | By | Category: Fixed Income

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Fixed income specialist Tabula Investment Management has made changes to the Tabula European Performance Credit UCITS ETF (TCEP LN), a passive fund offering European credit exposure through the corporate credit default swap (CDS) market.

MJ Lytle, Chief Executive, Tabula Investment Management

Michael John Lytle, CEO of Tabula Investment Management.

The fund has switched from tracking the iTraxx European Performance Credit Index to the iTraxx European IG Performance Credit Index.

The outgoing index reflected 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).

The allocation between the investment-grade and higher-yield indices was set to an 80/20 ratio and the entire position was leveraged to reflect a total market exposure of 300%. In other words, the fund delivered a 240% exposure to European investment-grade credit and a 60% exposure to European high-yield credit.

The strategy effectively earned a regular coupon by taking on the credit risk embedded within issuers’ bonds; however, the occurrence of certain ‘credit events’ (such as late payment, bankruptcy, and restructuring) could lead to losses.

The ETF’s new index has stripped out the exposure to high-yield credit and leveraged the entire position to reflect a total market exposure of 400% – investors will now have 400% exposure to European investment-grade credit only.

In terms of the underlying iTraxx Europe 5y (investment grade), the index consists of an equally weighted allocation to 125 of the most liquid investment-grade corporate issuers from across Europe (including the UK). Credit can be issued in euros, pound sterling, or Swiss francs.

The new strategy may appeal to investors seeking to reduce direct interest-rate risk while earning a yield by emphasizing credit risk specific to the European investment-grade segment. The ETF has an effective duration of 0.43 years and is currently yielding 2.3%.

Tabula CEO, Michael John Lytle, said: “Opportunities that provide real yield are becoming harder to source, with many investors having to take on more risk or increased duration to maintain attractive yields. With that in mind, we have re-engineered our European Performance Credit ETF to ensure investors can continue to receive an attractive yield but without additional credit risk.”

To reflect the change in strategy, the fund has been renamed the Tabula European IG Performance Credit UCITS ETF. It is listed on London Stock Exchange and BX Swiss and comes with an expense ratio of 0.50%.

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