Product Panel: Lyxor US Curve Steepening 2-10 ETF

Scott Longley

a person standing on a mountain

With yield curves very much in the news right now, Lyxor has perhaps picked an opportune moment to launch a fund that delivers positive return when the yield on two-year T-bills steepens against 10-year Treasury yields.

Enter the US Curve Steepening 2-10 UCITS ETF (STPU), the first of its kind in Europe which will be listed on the London Stock Exchange. Coming with a total expense ratio (TER) of 0.40%, the ETF synthetically replicates the performance of the Solactive USD Daily (x7) Steepener 2-10 index.

The index’s returns are based on two components; a long position in the two-year US Treasury Bond Futures and a short position in the 10-year US Treasury Ultra Bond Futures.

Therefore, when the two-year and 10-year section of the yield curve inverts, STPU will rise. Because the ETF is seven times leveraged, for every 0.01% increase in the yield curve, STPU will return roughly 0.07%.

What the provider says

Adam Laird, head of ETF strategy for northern Europe at Lyxor, said of STPU’s launch: “Eyes are on central banks at the moment – who have the ability to make or break a fixed income portfolio. At Lyxor we are always looking for innovative ways to help investors protect and profit from bonds.”

What the panel says

Jose Garcia-Zarate, Morningstar Europe

In very broad terms there are two types of ETFs, those that can be classed as investment vehicles and those that are trading (some would say “gambling”) vehicles. This one falls in the latter camp.

This is not an ETF for investors, but for traders. Flatteners and steepeners are classic tactical strategies in the bond trading world, but the average investor is highly unlikely to be familiarised with their intricacies, nor they need to be.

Many of these product launches are timed to piggyback on a potential trading opportunity, so in that sense I guess you can argue it is timely.

Innovative? Well, in the sense that it’s the first in Europe to offer this. But ultimately I go back to my basic point: this is not for the common investor.

Nicolas Rabener, FactorResearch

Lyxor’s launch of STPU can be considered contrarian given that the ETF is offering investors to benefit from a steepening US yield curve while it has been flattening recently.

The product was launched with $100m of assets under management and offers investors a simpler way to express their fixed income views than manually constructing a portfolio with futures.

STPP is a competitive product, but is structured as ETN, has only $4m AUM, and is priced at 0.75%, compared to STPU's 0.40%. We would expect Lyxor to expand the product range by launching a complementary ETF focused on a flattening yield curve.

Peter Sleep, 7IM

Lyxor has rediscovered their mojo in the last couple of years, particularly in fixed income, and this ETF is a case in point. This innovative ETF is designed for sophisticated investors to profit from US yield curve steepening.

At the moment the US yield curve is as flat as a pancake but should the US Federal Reserve cut rates as expected and the yield curve steepen this ETF could be profitable.

There are of course other more bearish scenarios in which the yield curve could steepen and this could ETF could be seen as a tail risk hedge.

This ETF is unique, and quite specialist, and should be no surprise that this ETF is fully priced at 0.4%.

Oliver Smith, IG Portfolios

Due to the duration of the two instruments, there will be more money to be made (or lost) from the short position in the 10-year bond than the long in the two year.

It does a appear to be a timely launch, with many analysts believing the outsized gains in longer-dated bonds is overdone, and the leverage component allows investors to get significant exposure from a concentrated position.

It is unlikely to make the radar of many retail investors, but professional clients should be interested.


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