Today State Street filled another vacant ETF niche with the launch of SPDR Barclays Capital Convertible Bond ETF (CWB). This is the first ETF to cover the convertible bond space.
Convertible bonds are almost as much fun as windblown hair. A type of corporate bond, convertibles also carry the ability to convert the bond into common stock at the bondholder’s option. They were invented in the 1970s and for a long time were used mainly by institutional investors. In recent years many individuals have become interested. The primary attraction is risk control: convertibles tend to rise in value with the issuing company’s stock price, but the bond characteristic provides added downside protection. This paper from SPDR explains more.
CWB will follow an index of U.S. convertible bonds with an issue size of $500 million or more. Currently the index has 138 holdings, with the top issues coming from Bank of America (BAC), Nabors Industries (NBR), and Amgen (AMGN). According to the Fact Sheet from SPDR, the current yield on CWB is 6.56%. That’s a very attractive number compared to most fixed-income alternatives today – but it comes with a lot of principal risk. CWB carries most of the risks of owning equities as well as a few more, like interest rate fluctuations, inflation trends, and credit quality. Additionally, issuers of convertible securities may not be as financially strong as those issuing securities with higher credit ratings and may be more vulnerable to changes in the economy.
CWB adds another useful tool for income-oriented ETF investors. As always, read the Prospectus for the most complete information.
Disclosure: No positions