Investors looking for fixed income returns through ETFs are being offered the innovative Tabula JP Morgan Global Credit Volatility Premium Index UCITS ETF, designed to deliver access to credit volatility risk premia.
Tabula CEO Michael John Lytle says: “Many investors are looking for new sources of return in the fixed income space, especially those with limited correlation to existing traded assets.”
Lytle describes his ETF’s strategy as chasing a holy grail: “Similar to portable alpha, the strategy attempts to harness a premium which historical data suggests is both persistent and not highly correlated to the other market benchmarks.”
The ETF replicates the returns of the JP Morgan Global Credit Volatility Premium Index which sells options on the iTraxx Crossover (75 European names) and CDX HY indices (100 North American names) while hedging out its exposure to credit spreads on a daily basis.
The resulting strategy offers performance driven by the difference between implied and realised credit spread volatility. Historically, the CDS index options market predicts volatility that is higher than the actual level of volatility realised in the reference indices.
CDS index options are a large and liquid market with approximately USD27 billion of daily turnover.
Over a 10-year period, the index has produced attractive returns, Lytle says.
“The index has shown compelling performance even during volatile periods such as the 2008 credit crisis,” he says.
“We believe that the index taps into a different source of return from the common indices which are used as beta building blocks. Fixed rate corporate exposure delivered through ETFs do not harness this source of return which has limited to negative correlation to many fixed income and equity benchmarks.”
The ETF is aimed at the dominant institutional audience in Europe, estimated to be in excess of 90 per cent of invested assets. Much of the residual investment is what Lytle calls ‘the choregraphed’ retail, those who gain access through their wealth advisers or private banking channel purchasing assets approved by product specialist and often included in model portfolios.
A natural investor base is institutional multi asset investors. “They are focused on getting the right range of exposures so their portfolio has true diversification.”
Tabula is a fixed income ETF provider. “From a macro perspective, there are massive opportunities in fixed income,” Lytle says. “Fundamentally, the asset class is large and we have not seen the same move to passive yet with many fewer providers as well as fewer successful products. It’s helpful not to have an overcrowded space.”
The Index uses CDS index and CDS index options pricing from IHS Markit.
Lytle says: “I think there are a lot of unsolved problems in the fixed income passive investment space. I believe that we can deliver exposures where investors will say ‘that’s new and different and could be helpful in my quest to increase returns in my portfolios’.”
