European fixed income specialist Tabula Investment Management has entered the Italian ETF market with the cross-listing of the Tabula iTraxx Europe IG Bond UCITS ETF on Milan’s Borsa Italiana.
Franco Mancini, Tabula’s Italian country manager.
The fund provides exposure to high-quality European corporate bonds through an innovative index that is derived from Europe’s foremost credit default swap index.
The new share class trades in euros under the ticker TTRX IM. It is already tradeable in euros on the London Stock Exchange (TTRX LN) and Xetra (TABX GY).
The fund comes with an expense ratio of 0.29% and has accumulated €100 million in assets under management since launching in January.
According to Tabula, the Italian market presents a strong opportunity for fixed income ETF providers. It notes that Borsa Italiana’s ETFplus market stood at €90bn in local share class assets under management at the end of June 2020, of which almost 45% of this was invested in fixed income ETFs, significantly more than the European average of around 30%.
Michael John Lytle, CEO of Tabula, commented, “This is Tabula’s first Italian listing and demonstrates our commitment to bring innovative fixed income ETFs to a key and significant market. With almost half of Italian-listed ETF AUM in the fixed income asset class, Italian investors have shown themselves to be leaders in passive fixed income investing. Our entry into the market will undoubtedly spur the demand for precise credit exposures.”
Franco Mancini, Tabula’s Italian country manager, added, “With the introduction of TTRX, Tabula brings Italian investors an innovative and efficient product, the best expression of our expertise in fixed income. TTRX is the answer to the inefficiencies typical of generic European credit benchmarks. The methodology of the index has among its main objectives liquidity of the underlying assets, constant duration, and fixed sector limits. These are essential characteristics for precise allocations and targeted risk control.”
Methodology
The fund is linked to the iBoxx iTraxx Europe Bond Index which was created by Tabula and IHS Markit specifically to underlie the ETF.
The index provides corporate bond exposure that closely reflects the geographic and sector exposures of the iTraxx Europe, a widely followed 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 their base weight.
The index assigns equal notional weighting to each issuer and targets an average maturity of approximately 5 years. 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.
The index currently includes 235 bonds from 108 different issuers. It is well-diversified at the country level with France (26%), the UK (22%), Germany (17%), the Netherlands (8%), and Switzerland (7%) making up the top five country exposures. From a rating perspective, the majority of index constituents reside in the BBB category, which constitutes 57% of the index.
The fund is likely to appeal to investors seeking a well-diversified 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.