As investors seek to optimize portfolio performance, looking at convertible bond exchange traded funds (ETFs) may be the answer.

Convertible bonds are hybrid investment tools that can be converted into a predetermined amount of a company’s equity at certain times during the bond’s life. They are essentially bonds with a stock option hidden inside, so they offer the downside protection of fixed income securities and the upside potential of equities. (Other opportunities in bond ETFs).

To take the convertible bond market to the next step, ETF provider PowerShares has recently registered a new ETF, the PowerShares Convertible Fund to track the Merrill Lynch All Investment Grade U.S. Convertibles Index. According to Gary Gordon at ETF Expert, this new ETF will be worth watching because it will track smaller companies, which could potentially lead to higher yields. (Why junk bonds are popular).

For more on bond ETFs, visit our bond ETF category.

The SPDR Barclays Capital Convertible Bond (NYSEArca: CWB) is another way to access convertible bonds.  CWB is up about 24% since its April inception and has a yield of 3.1%. For the last six months, CWB has been outperforming the SPDR High Yield Junk Bond Fund (NYSEArca: JNK) and keeping pace with the S&P 500 SPDR Trust (NYSEArca: SPY) over the last six months.

CWB tracks an index of the biggest of the big securities, with market values of $500 million or more. The new PowerShares fund will track companies with a market value at issuance of $50 million, Gordon notes.

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.