Access Convertibles Without Full Commitment in this ETF | ETF Trends

Investors looking for the coveted combination of more income and more upside potential in a fixed income portfolio may want to give the newly minted Principal Spectrum Tax-Advantaged Dividend Active ETF (PQDI) a look.

PQDI “seeks to provide current income. Under normal circumstances, the fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in dividend-paying securities at the time of purchase,” according to Principal. “Such securities include, without limitation, preferred securities and capital securities of U.S. and non-U.S. issuers. The fund invests significantly in securities that, at the time of issuance, are eligible to pay dividends that qualify for favorable U.S. federal income tax treatment.”

Included in PQDI’s portfolio is 34.63% weight to convertible bonds, a fixed income asset class that is often more correlated to equities than traditional bonds.

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 it.

PQDI Good for a Convertible Allocation

“First and foremost, it is a bond. It has a maturity, a coupon and a reimbursement at maturity, all organised in a normal prospectus. But there is something extra in the prospectus: the holding can convert into stock at a predetermined price,” according to Lazard Asset Management‘s Arnaud Brillois. “If the underlying equity has been rising, it will be more attractive to convert into equity. On the other hand, if the underlying equity has fallen, the security acts as an ordinary bond with the benefits of a bond floor.”

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.


An advantage of using PQDI as an avenue to convertibles is yield. A widely followed gauge of convertible bonds yields 2.79%. That’s solid by the standards of today’s bond market, but because PQDI isn’t a dedicated convertible ETF, it sources income from other asset classes and, as a result, yields 3.72%.

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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.