European ETF provider Tabula Investment Management Limited has launched an Article 9, Paris-aligned Global High Yield Fallen Angels Climate UCITS ETF. The ETF has USD50 million of assets with seed investment from a large Nordic institution.
The Tabula Global High Yield Fallen Angels Paris-aligned Climate UCITS ETF (Bloomberg: THFA LN) is designed to maximise the potential returns from fallen angels – bonds that have been downgraded from investment grade – while also aligning with the objectives of the Paris Agreement on climate change.
The ETF is designed to provide:
• EU SFDR Article 9 Paris-aligned exposure, which reduces portfolio GHG emissions (Scope 1, 2 and 3) by at least 50 per cent compared to the broad market
• MSCI ESG exclusions to reduce negative impacts. These exclusions could also be useful forward-looking quality filters, as rating agencies increasingly consider climate and other ESG risks
• Time-based weighting: The ETF is overweight newly fallen angels so as to increase exposure to any rebound, while retaining exposure over the longer
term so as to benefit from any upgrades
• Global exposure: Reduces concentration risk in a relatively small market segment by providing exposure to USD, EUR, GBP, CHD, SEK and more currencies
“This is Tabula’s third Article 9, Paris-aligned bond ETF launch to be backed by a leading Nordic institution,” says Stefan Garcia, Chief Commercial Officer at Tabula. “As we have developed partnerships with investors striving for better ESG outcomes, Tabula’s assets in SFDR Article 8 and 9 funds have grown to 80 per cent of ETF AuM. This launch highlights our market-leading expertise in sustainability-related exposures and Paris-aligned solutions for institutional investors.
“When comparing fallen angels to the broader high yield universe, they offer higher credit quality with the potential to return to investment grade over time,” says Tabula CEO Michael John Lytle. “Many fallen angels enter the high yield universe with a BB rating and don’t slip below that level. S&P’s long-term average global default rate is 0.59 per cent for BB, compared to 25.7 per cent for CCC and below, so the default rate for fallen angel exposure is likely to be significantly lower than for broad high yield exposure.”
Tabula CIO Jason Smith says: “In addition to their lower default risk, many fallen angels are also well positioned for upgrades. Fallen angels tend to be large, well-established names. Their business models and financing strategies are built around investment grade borrowing rates, so their management has a strong incentive to address the issues that triggered the downgrade. Obviously, there is good potential for price appreciation if they rebound.”
“For some cyclical issuers, upgrades and downgrades may be closely linked to the economic cycle. For example, recent downgrades have included cyclical names such as Yum! Brands and Bath & Body Works, which could be in a stronger position as the rate hiking cycle comes to an end.”
