As equity markets continue their swoon, many have marveled at the extended run that bond exchange traded funds such as those that invest in long or intermediate duration U.S. Treasuries have had.
For instance, iShares Barclays 7-10 Year Treasury Bond Fund (NYSEArca: IEF) continues to trade at multi-year highs, and is up 10.8% year to date, while iShares Barclays 20+ Year Treasury (NYSEArca: TLT) is up 17.2% year to date.
However, one segment of the fixed income market that has largely underperformed this year is that of convertible bonds.
SPDR Convertible Bond (NYSEArca: CWB) is a familiar name in the space, and is down 10.9% year to date, and based on yesterday’s close, is flirting with its lowest price levels in about a year.
CWB invests in corporate convertible bonds issued by companies that can be exchanged for preferred or common stock in that given company. Currently, CWB’s top holdings are convertible bonds from GM, WFC, C, BAC, and MET and the index methodology is based on the Barclays Capital U.S. Convertible Bond Index.
A newcomer to the space is PowerShares Convertible Securities (NYSEArca: CVRT), which is based on the BofA Merrill Lynch All U.S. Convertibles Index, and debuted in May of this year.
Currently, the top 5 holdings of CVRT are convertible bonds of AMGN, GM, UAL, MCHP, and WFC. Like CWB, CVRT’s performance has suffered as of late and it is near its lowest price levels since the fund’s inception.
It is no coincidence that as the equities that are linked to the top convertible bond positions in these ETFs have taken a drubbing recently, that the values of the convertible bonds have plummeted as well based on the nature of the optionality of the bonds themselves, and potential to exchange into shares of common or preferred stock.
Still, convertible bond portfolios appeal to many portfolio managers because they allow for participation in upside in bull market cycles while providing downside protection that does not exist in owning straight equities in bear market cycles.
SPDR Convertible Bond
iShares Barclays 20+ Year Treasury
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