Convertible ETF

Convertible ETF is an ETF that could be converted to another type of security. As these types of products are very new, there are not many of them around

These products could be exchanged for common stock or number of shares of the issuers preferred stock. So they are basically a hybrid security that has both characteristics of a debt and equity alike. Investors are likely to be interested in them due to the fact that they offer the bond safety, yet the earning potential of equities. However, the yields they pay are lower than other corporate bonds.

Convertible ETFs are suitable for investors that are less prone to risk, yet still want to get higher yields. So for investors who are looking to slowly get back into the stock market Convertible ETFs offer this opportunity by combining the best of both worlds- stocks and bonds.

The first Convertible ETF that came to the market was SPDR Barclays Capital Convertible Bond ETF (CWB) in 2009 by Ishares, with Barclays Capital U.S. Convertible Bond as an underlying index with outstanding issues greater than $500 M. However the fund itself is not actively managed in any way.

Large share of this particular Convertible ETF holdings is made up from securities that are at or below investment grade. Less than 1/5th are actually rated A or higher. 1/4th of the holdings are made up from non cyclical bonds (divided between financial and technology firms). Around 20 % of the holdings are to mature in less than 2 years and rest of them as long as 30 years from now.

Convertible ETFs are expected to do well in bad market years, as they do offer quite a good downside protection. One could see the benefits of convertible bonds in 2002, when the stocks were down more than 20 %, yet convertible bonds on average lost only around 8% of their value. And as the stocks plummeted in 2009, convertible bonds were up by 4 %.

Lot of financial advisors like Convertible ETFs as they are an asset class with various benefits, and because of its hybrid nature it appeals to lot of investors.

SPDR Barclays Capital Convertible Bond ETF CWB IShares

Vanguard Convertible Securities Bond Fund