Tabula Investment Management has launched a new ETF in Europe, providing inverse exposure to European high-yield credit through direct access to the corporate credit default swap (CDS) market.
Michael John Lytle, CEO of Tabula Investment Management.
The Tabula European iTraxx Crossover Credit Short UCITS ETF (TECS LN) has listed on London Stock Exchange where it trades in euros.
The fund is linked to the iTraxx European Crossover Credit Short Index, an index developed by Tabula in partnership with IHS Markit, which provides short exposure to European high yield bonds without the direct interest rate risk inherent in traditional corporate bond indices.
The strategy incurs a charge (effectively an insurance premium for acquiring protection) for shorting the credit risk embedded within issuers’ bonds.
The occurrence of certain ‘credit events’ may then lead to gains. 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.
Michael John Lytle, CEO of Tabula Investment Management, commented, “Investors often need a liquid tool in order to hedge their exposure to high yield spreads. Derivative positions are highly efficient but not available to many investors. TECS is a fund which delivers access to this very liquid market in a fully funded, UCITS compliant product which can be traded OTC or on-exchange.”
The index reflects the return from buying protection on the current series within the iTraxx Crossover 5y Index. 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.
The iTraxx Crossover 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.
The ETF comes with a total expense ratio (TER) of 0.50%. Performance is accumulated within the fund’s portfolio.
Lytle said, “TECS offers a fund with a short position in European Crossover, a monthly reset, relatively stable position sizes, and stable duration exposure. It is a much easier and cheaper way to create a high yield short position than borrowing an ETF, selling it into the market, paying a lending fee and then unwinding the transaction later in order to close the position.”
The monthly reset differs from the approach traditionally used by inverse ETFs which tend to reset daily. This reduces the path dependency, particularly in volatile markets. According to Tabula, this allows for a more stable hedge ratio when used in combination with a long bond position.
“Focusing on target notional of a strategy rather than daily leverage makes this a solution better suited to tactical positioning rather than day-trading,” said Lytle. “It, therefore, matches the needs of the typical institutional investor more closely.”
The fund is the third European CDS strategy introduced by Tabula since it debuted its first product in September 2018.
The firm’s previous 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.
Lytle concluded, “We strongly believe in making CDS indices more accessible. 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 manoeuvre in difficult market environments.”