Investors looking to limit risk in exposure to European high yield assets are being targeted by the Tabula European iTraxx Crossover Credit Short Ucits ETF, which is positioning itself as a passive way to short European sub-investment grade corporate credit, while taking on limited interest rate risk.
The fund, listed on the London Stock Exchange, buys protection on high yield debt through credit default swap (CDS) positions in the European iTraxx Crossover index. The index has data going back more than a decade.
Daily turnover on CDS instruments is over $80bn daily, with the European Crossover accounting for some $1.8bn of trading daily, according to Tabula figures. The benefit to investors is that rather than holding less liquid individual bonds, the traded CDS index exposure is more liquid, and can also attract more turnover in volatile conditions. Because of the ETF structure, it means all investors can trade CDS indices, and reduce counterparty risk because of the use of central clearing.
Tabula CEO Michael John Lytle, said: "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. The 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."
"We strongly believe in making CDS indices more accessible. They were previously only available to a small group of specialised 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."
"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."
"Focusing on target notional of a strategy rather the daily leverage makes this a solution better suited to tactical positioning rather than day-trading. It therefore matches the needs of the typical institutional investor more closely."
The fund rebalances the position notional to NAV monthly, rather than daily, on the basis that the hedge ratio is more stable when used in combination with a long bond position.
Looking forward, Lytle added that besides high yield, Tabula's range of passive products is set to encompass investment grade, inflation, credit volatility, money markets and broader market exposure.
"Investors are more than ever looking for ways to tactically position themselves in volatile market environments like the one we observed in late Q4 2018. But selling a portfolio of high yield bonds to go into cash is often not the preferred option."