European fixed income ETF provider Tabula Investment Management Limited (Tabula) has launched a new ETF for taking short exposure to North American high yield corporate credit.
The Tabula North American CDX High Yield Credit Short UCITS ETF (TABS) is the only ETF listed in Europe offering this type of exposure, and it launches at a time when the rate of year-to-date defaults in US corporate credit is at its highest since 2009.
The fund provides a liquid way to achieve exposure to the CDX North American High Yield Credit Short Index. The index takes exposure via credit derivatives capturing high yield credit risk without exposure to the interest rate risk inherent in high yield bonds. It delivers precise short exposure without the need for ISDAs or to source bonds to borrow.
The CDX North American High Yield Credit Short Index has been developed by Tabula and IHS Markit. It provides exposure to c100 sub-investment grade entities of equal weighting, reflecting the most widely traded segment of the North American High Yield credit market. It is rebalanced monthly providing a stable hedge, and a new on-the-run series of the Index is published twice a year, reflecting rating and liquidity changes. The index is calculated and maintained by IHS Markit. The current series (#34) has had six defaults and therefore has 94 issuers in the series.
Tabula’s North American CDX High Yield Credit Short UCITS ETF aims to directly replicate the index composition via CDS index positions and cash collateral. To minimise counterparty risk, CDS trades are executed through regulated brokers and are centrally cleared.
“This is a very opportune time to launch an ETF that enables investors to hedge against the North American high yield corporate credit market,” says Tabula CEO Michael John Lytle. “Defaults have been rising, and downgrades have accelerated sharply this year. We are also seeing an increase in the number of ‘fallen angels’ – companies that have their debt rating reduced to high yield status due to their deteriorating financial position – and this too could lead to further uncertainty.”
“Financial market indicators are optimistic relative to both credit and economic indicators,” adds Tabula CIO Jason Smith. “Defaults in North American corporate credit are at the highest rate for 11 years and predictions from leading rating agencies estimate they could increase to between 5 per cent and 15.5 per cent by March 2021. Investors need to review their exposure to high yield US debt and consider strategies for protecting against any rise in defaults.”
Lida Eslami, Head of Business Development, ETP, London Stock Exchange says: “We are pleased to welcome Tabula’s latest ETF exclusively to London Stock Exchange. Tabula continues to bring fixed income investors innovative and timely ETF solutions. The listing is also a testament to London Stock Exchange’s position as a leading listing and trading venue in Europe for a diverse range of exchange traded products and specifically reflects recent growth in fixed income trading activity. This is an area where we have seen significant growth in trading volumes in the first half of 2020, enabling investors to benefit from enhanced order-book liquidity. Today’s listing from Tabula will provide investors with an efficient tool to hedge against North America’s high yield credit market at a time when the impact of Covid-19 continues to pose challenges for businesses across all sectors.”
Tabula’s North American CDX High Yield Credit Short UCITS ETF listed on the London Stock Exchange on Tuesday 7th July 2020. It has an on-going charge of 0.50 per cent TER.
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