Tabula launches US dollar hedged share class of global credit volatility premium ETF

January 20, 2020

• The Tabula J.P. Morgan Global Credit Volatility Premium Index UCITS ETF (USD Hedged Distributing Class) seeks to capture the volatility premium available in credit markets via options on the iTraxx Crossover and CDX HY
• The risk premia in credit volatility has historically exceeded that seen in equity or rates volatility
• The Index has shown low to negative correlation with traditional equity and fixed income indices classes while exhibiting high risk-adjusted returns
• The strategy’s objective is to mitigate exposure to spread movements through daily delta hedging

European fixed income ETF provider Tabula Investment Management Limited (“Tabula”) has added to its global credit volatility ETF range by launching the Tabula J.P. Morgan Global Credit Volatility Premium Index UCITS ETF (USD hedged, distributing class), offering a dollar hedged passive vehicle for capturing the difference between realised and implied volatility in Credit Default Swap (CDS) index options markets.

The ETF joins the Tabula J.P. Morgan Global Credit Volatility Premium Index UCITS ETF (accumulating class) which launched in March 2019, and has current assets equivalent to $133m.

The ETF replicates the returns of the J.P. 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 the exposure to credit spreads daily. 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 $27 billion of daily turnover. However, while there are a wide variety of credit option buyers, there are a limited number of sellers of credit options as they have experienced relatively high barriers to entry. This imbalance helps to drive the historical difference between implied and realised volatility to be higher than the equivalent premium available in the equity market[1].

By selling CDS index options and regularly hedging the market exposure of the options with the underlying CDS indices (“delta hedging”), the strategy seeks to capture this premium while aiming to minimise market risk. The ETF makes this otherwise difficult to access premium in CDS index options available to investors in a liquid, passive instrument, without requiring an ISDA or the management of collateral or margin requirements. The ETF replicates the Index via total return swap while investing residual cash in short-dated government bonds.

“Investors have responded well to our first global credit volatility ETF, and we are pleased to add to our offering with a US dollar hedged share class of the Fund”, comments Tabula CEO Michael John Lytle, “the euro share class ended the year strongly, returning 2% in the final quarter[2], with performance driven by a compression in volatility. Yields in US dollars are currently more than 2% higher than euros, due to the currency interest rate differential.”

This ETF is the latest addition to the range of fixed income ETFs offered by Tabula. Earlier this month, Tabula launched the Tabula iTraxx Europe IG Bond UCITS ETF, offering passive exposure to the new iBoxx iTraxx Europe Bond Index. The innovative index, developed in partnership with IHS Markit, provides corporate bond exposure that closely reflects iTraxx Europe, a liquid and widely-used credit benchmark comprising 125 European investment grade entities.