The benefits of convertible bonds are especially apparent in bad market years. In 2002, the stock market was down 22%, while the convertible bond market was down 8.5%. “Convertible bonds provide significant downside protection relative to stocks,” says Anderson. In 2003, the markets fared better and rose 28%; and convertible bonds were up 27%. This year, stocks are down 11% and convertible bonds are up 4%.
“Over the long-term, what you’re getting is an asset class with a lot of the upside. The whole hybrid concept puts it right between stocks and bonds. That’s why it’s appealing,” Anderson notes.
Geoffrey Rogow of The Wall Street Journal reports that convertible bonds have been noted for being an illiquid market, but State Street’s new ETF seeks to fix that issue. Anderson also points out that the ETF makes sense because there are a number of active strategies with this type of bond in mutual funds, but they’re very expensive. CWB, like most ETFs, will give investors lower-cost exposure to convertible bonds in their portfolios.
CWB’s current yield is 6.56%, and the expense ratio is 0.40%. Its holdings have an average credit quality of BAA3/BA1.
Kevin Grewal contributed to this article.