Convertible bond ETFs could be one answer for investors whom are concerned about the extended bull equity run and the pressure for high-yield bonds.
In the current market conditions, some investors argue that convertible bonds is especially attractive given stocks that are near record highs and concerns about a slowdown that could shift the markets, the Wall Street Journal reports.
Convertible bonds are a type of hybrid fixed-coupon security that allows 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. The fund, though, does not convert its holdings into shares, but investors are exposed to the equity premium due to the way the bonds are priced. If a company goes bankrupt, the convertible bond is paid out to the investor after secured creditors but before shareholders.
Convertible Bond ETF Strategies
These convertible bonds are seen as a middle ground between stocks and bonds. The securities pay lower coupons than regular unsecured debt securities, but they can also make up the difference if the company’s shares continue to appreciate.
“The end of bull markets can be the most profitable part of the bull market,” Eli Pars, co-chief investment officer at Calamos Investments, told the WSJ. “So you want to stay invested, but you want to have some protection for when the market turns.”
Convertibles, Pars argued, “are a great way to kind of have your cake and eat it too.”
Nevertheless, convertibles are not without risks. While convertibles may be less volatile than stocks, they can still experience volatility. For example, in 2018, convertible bonds had returned nearly 11% for the year through October, but those returns disappeared by the end of 2018 after investors dumped riskier assets.
Due to their equity-like traits, convertible bonds are considered a bit more adventurous than other corners of the fixed income space. Investors who are interested in this segment of the market can look to options like the SPDR Barclays Convertible Securities ETF (NYSEArca: CWB), iShares Convertible Bond ETF (Cboe: ICVT) and the First Trust SSI Strategic Convertible Securities ETF (FCVT).
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