Tabula leads the way in fixed income ETFs 2.0

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This week, Algo-Chain’s Allan Lane takes a look at the Tabula JP Morgan Global Credit Volatility Premium Index UCITS ETF, one of the most innovative fixed income ETFs launched in Europe over the last twenty years…

This summer Bloomberg is holding a series of conferences across a number of cities in Europe entitled The Future of ETFs. Yesterday saw the first of those roadshows which was held at Bloomberg's headquarters in London and where the role of innovation was one of the key discussion topics covered during the panel sessions.

In that spirit, it is highly appropriate as this week we take a look at the Tabula JP Morgan Global Credit Volatility Premium Index UCITS ETF, which was launched in April 2019 and constitutes what is probably the most innovative fixed income ETF launched in Europe over the last twenty years.

Tabula is a boutique ETF provider whose aim is to deliver Fixed Income investment solutions previously off limits to all but the most sophisticated of investment firms, backed by Cheyne Capital, a well-known player in the Credit & Fixed Income space. Take a visit to their imposing offices overlooking St James Park, and you will be quickly reminded of how all-powerful the structured credit market still is.

This most recent of fund launches from Tabula looks to offer the investor a strategy where the returns are linked to the volatility of the Investment Grade & High Yield Bond market and provides an excellent example of what an ‘Alternative Risk Premia’ strategy would look like. The fund was listed on the London Stock Exchange with ticker TVOL, comes with an annual management fee of 0.5 per cent, and at the time of writing has amassed over EUR50 million in AUM.

The basic premise of this investment strategy is that the option risk premium that bond holders pay to hedge out their credit risk is typically higher than the realised volatility, leaving a net profit for the firms selling those insurance premiums.  Of course, in an increasingly volatile market, those profits can easily be eaten away, and the Tabula ETF would trend down rather than up.

Credit Default Swaps have been one of the biggest success stories of the last twenty years, with JP Morgan playing a central role in the quest to isolate the credit risk contained in a portfolio of corporate bonds. The challenge is to do this in such a way that a portfolio’s risk to changes in interest rates could be managed or hedged separately from the risks associated with a deteriorating or tightening credit cycle. As it happens, back in the mid 1990’s I worked at JP Morgan within the newly created Models Validation team which was given the task of getting to grips with the burgeoning pricing methodologies used to put a fair price on these brand-new derivative structures. At the time, very few of us would have imaged that barely twenty years later, any investor, both large and small, would be able to access an ETF that offered systematic exposure to these types of investments.  Now that’s what I call innovation.

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