New ETF With $100 Million Feeds Craze for Steepening Curve

(Bloomberg) -- The passive boom is weaponizing risky bets on the gap between short- and long-term interest rates as central banks kickstart a fresh era of stimulus.

Lyxor Asset Management, the third-largest issuer of exchange-traded funds in Europe, is launching an ETF on Thursday that gains when the two- to 10-year portion of the Treasury curve steepens.

Offering a derivatives strategy to amplify gains seven times, it's set to be the first of its kind in the region -- and the largest riding gyrations in global yield curves, as tracked by Bloomberg.

Thanks to backing from asset managers and private banks, the ETF has amassed $100 million before it even begins trading versus $4 million for a similar strategy in New York.

With Lyxor poised to list more such ETFs on European exchanges this August, fast-money traders will soon have a cornucopia of options to wager on shifts in yield curves across Germany and the U.S. These passive instruments all offer to execute multi-pronged trades with the ease of day-trading the S&P 500.

It's a timely pitch. The product launch this week capitalizes on Wall Street's growing conviction that a key section of the U.S. curve, which is still near the flattest since 2007, will steepen as the Fed's stimulative shift drives down near-term rates.

Most institutions use liquid bond futures to profit from the brewing shift. But Lyxor's pitch is that these vehicles save investors the hassle of executing the trade while democratizing the strategy for those without direct access.

“Given the speed with which the outlook can change at the moment -- and the increasing attention on the position of the yield curve -- the timing of the launch is quite apt,” said Adrian Lowcock, head of personal investing at Willis Owen, a U.K. wealth manager. “The benefit will be mainly for those who don't necessarily have the expertise or access to the futures market and want to access exposure through a liquid vehicle quickly.”

Another U.S. ETF issued by Krane Funds Advisors LLC that is designed to profit from rising fixed-income volatility, inflation expectations and a steepening yield curve has about $65 million in assets.

Tactical Trade

It's the latest example of the $5 trillion global ETF market's growing specialization, touting broad access to macro wagers for real-money managers, hedge funds and mom-and-pop investors. Offering documents for the new funds do, however, state that these ETFs “are designed for tactical use by professional investors; we do not recommend retail investors invest in these funds.”

Lyxor's steepener, ticker STPU, tracks a Solactive index by being short 10-year U.S. bond futures and long two-year contracts. The expense ratio is 40 basis points, only modestly higher than the average London-listed ETF tracking fixed income. For every basis-point increase in the spread, the product is designed to gain seven basis points.

“The investor feedback we have is that if you look at the U.S. yield curve, it is extremely flat,'' said Chanchal Samadder, head of ETF product strategy at Lyxor Asset Management. “Most investors believe the yield curve will steepen.''

STPU will be followed by another Lyxor listing in Europe on Aug. 10 that tracks a strategy profiting from a narrowing gap between short- and long-term U.S. yields, as well as two similar products based on German bunds -- a steepener and flattener.

To contact the reporter on this story: Justina Lee in London at jlee1489@bloomberg.net

To contact the editors responsible for this story: Blaise Robinson at brobinson58@bloomberg.net, Sid Verma, Rachel Evans

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