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Allan Lane, Algo-Chain

Tabula looks to conquer ETF market share with a strategy based around cash bonds – Simples!


By Allan Lane, Algo-Chain – Welcome to the first column of 2020 and, barely a few days after the dulcet tones of Auld Lang Syne had died down, the Tabula iTraxx Europe IG Bond UCITS ETF was listed on the London Stock Exchange.

By Allan Lane, Algo-Chain – Welcome to the first column of 2020 and, barely a few days after the dulcet tones of Auld Lang Syne had died down, the Tabula iTraxx Europe IG Bond UCITS ETF was listed on the London Stock Exchange.

The evolution of the fixed income ETF market continues to attract much attention and for good reason.  With the total market cap of the bond market estimated to be in the region of USD100 trillion, which is 50 per cent larger than the market cap of the equity market, there’s a lot to shoot for as these numbers are out of kilter to the breakdown of the ETF market. 

Fixed Income ETFs only account for approximately 20 per cent of the USD6 trillion or so in assets under management, so don’t be surprised if more product providers covet this opportunity.

What gives and why such a disparity?  There are a number of reasons, some of which are easier to get one’s head around than others.  First and foremost, cash bonds were not originally traded on exchanges, which held the industry back in the beginning.  Subsequently this hasn’t stopped the daily trading volumes of bonds to exceed that of equities.  Yet, when I think of fixed income index funds, my mind turns to large Scandinavian pension funds with a very low turnover of assets.  Hardly the ideal business opportunity where the fund manager wants to pay a premium to have access to intraday trading opportunities.

In truth, the lack of full market penetration has mainly been about the lack of ‘product market fit’ as our friends in Silicon Valley might say.  The ‘kitchen sink’ approach to bond index construction, often favoured by the sell-side banks who on many occasions designed them, is largely behind us and the future will be more in tune with those ETF providers that look to offer exposures to much more tractable baskets of fixed income securities.  Too often in the past, bond indices were a blunt instrument often comprising thousands of securities that were included in the index.

The Tabula iTraxx IG Bond UCITS ETF, with ticker TTRX and an annual management fee of 0.29 per cent, is noteworthy in that it is the first ETF that offers exposure to a portfolio of European Investment Grade bonds issued by the same corporates that defines the iTraxx Europe CDS index. Put another way, this ETF is all about bonds issued in Euros by European corporates, rather than finding some additional US corporates in your Euro Corporate Bond ETF, which is typically the case.

In the same way that iShares’ landmark ETF offered exposure to the European High Yield market, quickly becoming the go to product in the HY space, there’s every reason to believe this ETF could also be a winner. If ever there was an ETF that does what it says on the tin, then this is it.  What might hold back that success though, is that proverbial small detail of low or negative interest rates that have riddled the European Bond market for quite some time.  

The team at Tabula, in partnership with IHS Market, has done a good job when constructing the iBoxx iTraxx Europe Bond Index. In the design they have addressed the distortion that the financial sector might have otherwise had by limiting this sector to 24 per cent.  Moving away from a pure market cap weighting scheme should always be decided upon with caution, but in this case, it seems a reasonable line of thinking.

Up until now, Tabula has built its reputation around a handful of products that owe their genesis to the Credit Default Swap market.  In fact, I had to do a double take as I worked my way through the factsheet that accompanied the launch of this new ETF, there wasn’t a CDS payment in sight as this product has been implemented using physical bonds!

I suspect we might have just witnessed the start of a new mega trend in fixed income ETFs, where simplicity rules the day.  Although this ETF is not country specific, I can easily envisage that in the future for every ETF that tracks a single country large cap equity index, there will be a bond ETF that offers exposure to a portfolio of Investment Grade Bonds of the same companies that comprise the equity index.  What a simple idea that would be.  The fact that Tabula managed to launch this ETF with a seed of EUR35 million Euros, suggests others thought so as well.

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