Tabula targets European high-yield credit with second CDS ETF

Jan 16th, 2019 | By | Category: Fixed Income

Tabula Investment Management has launched the Tabula European iTraxx Crossover Credit UCITS ETF (TECC LN) on London Stock Exchange.

MJ Lytle, Chief Executive, Tabula Investment Management

Michael John Lytle, CEO of Tabula Investment Management.

The fund provides passive exposure to European high-yield credit through direct exposure to the corporate credit default swap (CDS) market. It is linked to the iTraxx European Crossover Credit Index, a new index developed by Tabula in partnership with IHS Markit.

The ETF aims to provide a competitive yield (currently 3.99%) without the direct interest rate risk inherent in traditional corporate bond indices.

Michael John Lytle, CEO of Tabula Investment Management, commented, “We strongly believe in democratizing access to CDS indices. They were previously only available to a small group of specialized institutional investors. We are making them available in a transparent UCITS ETF which extends the tool kit for fixed income investors to efficiently maneuver in difficult market environments.”

The strategy earns a regular coupon by taking on the credit risk embedded within issuers’ bonds; however, the occurrence of certain ‘credit events’ may lead to losses. In the case of credit events, the ISDA Credit Determinations Committee votes to determine if a credit event has occurred for an entity. Such events typically include late payment, bankruptcy, and restructuring.

The index reflects the return from selling protection on the current series within the iTraxx Crossover 5y Index. According to IHS Markit, this index includes issuers from across the continent (including the UK) with total outstanding public debt of at least €100 million. The universe covers credit issued in euros, pound sterling, or Swiss francs and includes issues with a maximum remaining maturity of 30 years.

The final index composition consists of 75 of the most liquid sub-investment grade issuers within the universe. Issuers are equally weighted and rebalanced monthly.

According to Tabula, CDS indices offer a high degree of liquidity; CDS trading on the iTraxx European Crossover indices attract around $1.8 billion daily. As a result, unlike traditional high-yield bond funds which have to manage the risk of illiquidity in individual bond holdings, trading CDS index exposure concentrates positions in one highly liquid contract that tends to attract increased turnover in volatile markets.

“A common investor concern surrounds owning high-yield bonds in a passive vehicle during times of market stress,” said Lytle. “A lack of liquidity in individual bonds can become a challenge. Spreads can widen significantly, and individual bonds can see varying levels of investor demand. This is exactly the time when investors want to adjust their positions.”

Lytle continued, “Several providers have launched short duration, high-yield funds in order to tap into the yield of lower-rated credits while limiting volatility and interest rate risk. Using CDS crossover indices offers a relatively stable full five-year credit spread duration but with only limited interest rate exposure and tight bid-offer spreads. Our ETF also benefits by capturing the roll yield of the credit curve which is not available via traditional cash bond funds.”

The ETF trades in euros and comes with a total expense ratio of 0.40%.

The fund is the second ETF launched by Tabula following the listing of the Tabula European Performance Credit UCITS ETF (TCEP LN) in September 2018. TCEP also provides exposure to European credit; it tracks the iTraxx European Performance Credit Index which includes protection on both investment grade and high-yield issues.

Tabula has stated it plans to further expand its offering with new strategies aimed at various segments of the fixed income asset class including inflation, credit volatility, money markets, and broader market exposure.

“We’re a specialized fixed income ETF provider, the team has many years’ experience, and we are focused on creating better passive products,” concluded Lytle.

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