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Convertible ETF: A Hybrid Stock, Bond Play

ETFtrends.com

Investors who are seeking additional yields but are also wary about volatility ahead can turn to a convertible bond-related exchange traded funds.

The SPDR Barclays Convertible Securities ETF (CWB) has a 1.94% 30-day SEC yield and increased 1.9% year-to-date.

Convertible bonds are a type of hybrid fixed-coupon security that allow the holder the option to swap the bond security for common or preferred stock at a specified strike price. Due to the bond’s equity option, convertible bonds typically pay less interest than traditional corporate bonds. The fund, though, does not convert its holdings into shares, but investors are exposed to the equity premium due to the way the bonds are priced. [A Bond ETF To Diminish Volatility and Boost Yields]

While the underlying holdings are a type of debt security, CWB can act more like a stock fund than a traditional fixed-income fund. Consequently, the ETF may be a good option for equity investors who are seeking to add yield and diminish their equity portfolio volatility.

“It will hold the bonds until they are called, matured, or no longer meet liquidity screens,” according to Morningstar analyst Thomas Boccellari. “Despite this, investors can still get the equity upside because of the way the bonds are priced. When the stock is trading near or above its strike price, the bond tends to trade like the underlying equity. Conversely, when the stock is trading significantly below the strike price, the bond tends to trade like a bond.”

Essentially, when the equities market dips, convertibles moves away from the price at which they can be exchanged for the stock and act more like fixed-income assets. On the other hand, as equities rise, convertibles will act more like stocks. Consequently, the asset class can have smaller up and down swings.

Companies, notably those with speculative-grade debt ratings, like convertible bonds because they can raise money at rates lower than those on ordinary bonds. According to Dealogic, companies have issued $5.7 billion in U.S.-listed convertible bonds, up 49% for the same period year-over-year, reports Stephen Grocer for the Wall Street Journal. Companies issued $44 billion in U.S.-listed convertibles last year, the most since 2008.

CWB also tracks a sizable chunk of speculative-grade debt, including below Baa 38.1% and not rated 31.4%.

SPDR Barclays Convertible Securities ETF

CWB_ETF

For more information on the fixed-income market, visit our bond ETFs category.

Max Chen contributed to this article.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.