For wary and weary investors who find themselves a bit skittish to re-enter the markets, there’s a new exchange traded fund (ETF) that straddles the line between stocks and bonds.
A convertible bond is a hybrid tool for investors that offers exposure to both stocks and bonds and pays investors a coupon smaller than a comparable bond, but gives the investor the option to convert the unit into a stock at a later date if they wish, Tom Anderson, State Street Global Advisor’s head of research and strategy, told us.
State Street recently launched its first-to-market convertible bond ETF, SPDR Barclays Capital Convertible Bond ETF (CWB), just in time for this area of the market to experience a resurgence. These bonds, which have been around since the 1970s, are seeing renewed popularity for two reasons. One is their hybrid status. The other, Anderson says, is that “a lot of investors aren’t ready to get into stocks yet – this gives them a middle ground.”
For example, Treasuries aren’t paying much, but the thought of equities might be a little nerve-wracking. Enter these bonds, which offer the downside protection of fixed income securities and the upside potential of equities, Anderson points out.
The market cap for convertible bonds has ballooned from $65 billion in 1990 to $181 billion as of the end of last month.
The ETF’s underlying index, Barclays Capital U.S. Convertible Bond Index, will not convert these bonds into equities, however. Instead, the fund will hold convertible bonds to give investors exposure to the market similar to the way any other bond index would and will track the risk/return yield of its index. The fund is not actively managed in any way.