There are hundreds of fixed income exchange traded funds on the market, but for two and a half years, the SPDR Barclays Convertible Securities ETF (NYSEArca: CWB) was the lone convertible bond ETF available to investors.
That changed today with the debut of the iShares Convertible Bond ETF (BATS: ICVT). The iShares Convertible Bond ETF seeks to track the investment results of an index composed of U.S. dollar-denominated convertible securities, specifically cash pay bonds, with outstanding issue sizes greater than $250 million, according to iShares, the world’s largest ETF issuer.
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. CWB and ICVT do not convert holdings into equity, 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]
ICVT holds 137 convertible issues, with nearly 39% coming from technology companies. Consumer discretionary and staples issuers combine for 31.1% of the new ETF’s weight. ICVT’s top 10 holdings include convertible issued by Dow component Intel (NasdaqGS: INTC), Elon Musk’s Tesla (NasdaqGS: TSLA), Priceline (NasdaqGS: PCLN) and biotech giant Gilead Sciences (NasdaqGS: GILD). [This ETF has Tesla Convertibles]
Convertibles are among the bond world’s best performers in environments of rising interest rates, explaining why CWB was one of 2013’s top bond ETFs. Convertible bonds can be looked at as “best of both worlds” securities. Since the bonds can be converted into stock of the issuer, convertibles are often more intimately correlated to equities than other segments of the bond market. But like bonds, convertibles promise coupon payments and return of principal at a set date. [Convertibles are Cruising]
Convertible bonds are not often highly rated, but that does not mean investors are taking on significant credit risk with ETFs like CWB and ICVT. For example, nearly 20% of ICVT’s portfolio is rated BB and almost 23% of the new ETF’s holdings are rated BBB or A, according to issuer data. However, nearly 36% of ICVT’s holdings are not rated.
ICVT charges 0.35% per year, just below the 0.4% charged by CWB.
ICVT Maturity Breakdown
Chart Courtesy: iShares