European fixed income ETF provider Tabula Investment Management Limited has launched an ETF designed to take advantage of the steepness in investment grade credit curves. The fund also benefits as IG credit curves become steeper, meaning the difference in spread between 5y and 10y CDS increases.
Credit curve steepening has historically been seen during periods of economic recovery and improving market sentiment. The Tabula iTraxx-CDX IG Global Credit Steepener UCITS ETF (EUR) is the only ETF listed in Europe with this type of exposure, providing a new opportunity for European investors.
“Steepener strategies are a well-known way to generate returns from interest rate curves,” says Tabula CEO Michael John Lytle. “This opportunity exists in credit markets too but has been more difficult to access, requiring specialist credit default swap infrastructure and execution capabilities. We have worked with Markit to create a liquid and transparent index that can be accessed via a UCITS ETF”.
The iTraxx-CDX IG Global Credit Steepener Index is designed to capture the steepness from both North American and European investment grade credit curves. It takes exposure to two liquid credit default swap indices, iTraxx Europe and CDX North American Investment Grade, selling 5y protection and buying 10y protection. The ratio between 5y and 10y exposure is adjusted to minimise exposure to credit spread movements.
An ETF you can use to trade credit curves
“This ETF can be used to take a view on credit curves or as a diversified source of returns over the long term,” commented Lytle. Since inception, the index had a Sharpe Ratio of 0.96, compared to 0.76 for iBoxx Euro Corporates, a typical investment grade bond benchmark.
The ETF listed on Deutsche Börse Xetra on Thursday 10 September 2020 and has an ongoing charge of 0.40%.
The iTraxx-CDX IG Global Credit Steepener Index aims to capture the steepness in North American and European investment grade credit curves. It takes exposure to two liquid CDS indices: 50% iTraxx Europe (125 investment grade entities, equally weighted) and 50% CDX North American Investment Grade (125 investment grade entities, equally weighted).
The index sells 5y protection (long credit position) on the current series of each CDS index and buys 10y protection (short credit position). It takes approximately 3x exposure to the 10y and sets the 5y exposure so as to minimise sensitivity to directional moves in credit spreads. The index is rebalanced monthly and accrues interest at rate of EONIA – 0.50% (subject to change).