Fixed income ETF provider Tabula Investment Management has expanded its range with the launch of a global credit volatility premium ETF.
The Tabula J.P. Morgan Global Credit Volatility Premium Index UCITS ETF (TVOL) is listed on the London Stock Exchange with a total expense ratio (TER) of 0.50%.
TVOL looks to capture the difference between realised and implied volatility in the credit default swap index options markets.
Implied volatility is the current market price for volatility that is "implied" by options prices, whereas realised volatility represents the actual observed volatility for a given underlying over a specified period in history.
Tracking the J.P. Morgan Global Credit Volatility Premium index, a new index, TVOL sells options on the iTraxx Crossover index – consisting of 75 European securities – and CDX HY index – consisting of 100 North American securities – while hedging out the exposure to credit spreads daily.
TVOL replicates the index via total return swap while investing remaining cash in short-dated government bonds. It uses CDS index and CDS index options pricing from IHS Markit.
The firm said the limited number of credit option sellers compared to buyers has helped the historical difference between implied and realised volatility.
TVOL looks to capture this premium by selling CDS index options and regularly hedging the market exposure of the options with the underlying CDS indices.
Michael John Lytle (pictured), CEO of Tabula, commented: “Investors are very keen to find new sources of return that are structural and have limited correlation to other market index investments.
“We are very glad to be able to work with J.P. Morgan on harnessing this risk premium and delivering it to our clients.”
Danny White, head of credit index structuring at J.P. Morgan, added: “Investors are seeking easier ways of accessing the volatility premium available in CDS index options.
“While it is a long-established market, barriers to entry have meant that the pricing of these options has historically been inefficient relative to options in other asset classes. TVOL should allow investors without significant execution and operational infrastructure access to this type of strategy.”
Gavan Nolan, director of fixed income pricing at IHS Markit, said: “This segment of the credit derivative market is growing rapidly, and our multi-source, independent pricing for CDS index options will help ensure the transparency of the index’s performance.”
Tabula entered the market last September with the launch of the Tabula European Performance Credit UCITS ETF. It has since further unveiled two fixed income ETFs.