For all attention paid to the bond market and its various segments, it feel as though convertible bonds aren’t getting their due – a situation made all the more odd when considering the Bloomberg US Convertible Liquid Bond Index is higher by 17.43% over the past 12 months.
Maybe it’s the result of the convertible market being small in comparison to Treasuries, municipal bonds and traditional corporate debt. Still, this is an opportunity-laden corner of the fixed income universe. Convertibles are known as hybrid securities, meaning they display both equity and fixed income trait. Equity traits are derived from the fact convertibles can be converted into shares of the issuer’s stocks. The debt part is self-explanatory.
Relative to other bonds, convertibles can be more attractive on the basis that clients can gain access to elevated income profiles and potential for superior capital appreciation – a coveted combination to be sure. Despite the advantages associated with convertibles, the asset class doesn’t get nearly as much attention as lauded upon traditional corporate bonds. Arguably, that shouldn’t be the case.
Thanks to exchange traded funds (ETFs), advisors have multiple avenues for efficiently accessing convertibles, including the following hidden gem fund.
Consider CVRT
The Calamos Convertible Equity Alternative ETF (CVRT), which debuted in October 2023, deserves more attention if for no other than reason than that Calamos is the largest manager of convertible securities in the U.S.
Knowing that, perhaps it’s not surprising that CVRT was the issuer’s first ETF, though its lineup and assets under management tally have since grown in significant fashion helped by some pioneering products. Beyond surface-level superlatives, there are other reasons this ETF merits consideration.
“CVRT is the first convertible ETF that provides access to the equity-sensitive segment of the US convertibles market,” notes the issuer.
Add to that, CVRT is actively managed so it offers flexibility and the ability to potentially capitalize on emerging trends in the convertibles space. Those include increasing artificial intelligence-fueled issuance. On that note, CVRT is overweight technology convertibles by 400 basis points relative to the ICE Bank of America All US Convertibles Index.
As of Feb. 18, 18 companies with ties to artificial intelligence sold $13.6 billion worth of convertibles, according to Bloomberg. That after record issuance of convertible debt by AI-linked companies last year.
CVRT Has Near-Term Allure
As advisors know, bonds are long-term investments and that’s true with convertibles and CVRT, but there are some reasons the Calamos ETF has near-term appeal. Notably, most convertibles have five-year maturities, meaning that many of the issues that came to market in 2021 are now being refinanced/replaced with bonds with higher equity sensitivity or better risk profiles.
From that, it may be inferred issuance will indeed surge this year, indicating active management is the right way for advisors to consider convertibles.
“Growth companies find convertible bonds desirable as a cheap financing tool compared to other types of bonds,” notes IndexBox. “These bonds can be exchanged for a company's stock under set conditions, offering lower interest costs in exchange for potential shareholder dilution if conversion occurs. Recent sharp stock price fluctuations have allowed many companies to sell these bonds with very low or zero coupon payments, as investors accept lower interest in return for the embedded option to convert to equity.”
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