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Market Overview

ETF Showdown: Calling On Convertibles (CWB, CVRT)


The evolution of the exchange-traded products industry has clearly helped investors gain exposure to myriad asset classes and investment themes ranging from the mundane to the obscure. That's particularly true among bond funds, which now go well beyond boring Treasury products to include ETFs that track everything from high-yield debt to Latin American sovereigns.

Investors can even gain access to convertible securities through ETFs. A "convertible security" is a security - usually a bond or a preferred stock - that can be converted into a different security - typically shares of the company's common stock, according to the SEC.

Believe it or not, there are multiple ETFs tracking convertible securities and they face off in this week's "ETF Showdown." Those funds are the SPDR Barclays Capital Convertible Securities ETF (NYSE: CWB) and the PowerShares Convertible Securities Portfolio (NYSE: CVRT).

The PowerShares Convertible Securities Portfolio is the newer of the pair, having debuted almost exactly a year ago. CVRT, which charges 0.36% per year, has $9 million in assets under management. By comparison, the SPDR Barclays Capital Convertible Securities ETF, which came to market three years ago and charges 0.4%, is much larger with $829.3 million in assets under management.

Home to 60 holdings, CVRT features convertibles from the biotech, financial services, Internet, technology, and energy sectors just to name a few. Convertible securities issued by Amgen (Nasdaq: AMGN), United-Continental (NYSE: UAL), General Motors (NYSE: GM), Wells Fargo (NYSE: WFC) and Intel (Nasdaq: INTC) comprise the ETF's top-five holdings.

CWB features 99 convertibles, but even with a lineup that is nearly two-thirds larger than CVRT's, there is significant overlap in terms of issuers between the two funds. CWB's top-five holdings include Wells Fargo, GM, Bank of America (NYS: BAC), Citigroup (NYSE: C) and EMC (NYSE: EMC). CWB also features Amgen and Intel convertibles, among other duplicative holdings between the two funds.

Overall, CWB allocates almost a third of its weight to the tech sector, 18% to financials and almost 17% to consumer non-cyclical names. All of CWB's issues are greater than $500 million in value.

What investors need to realize about convertibles is that they're a two-way street. These securities allow holders to convert into common shares at prices below the current market price. That's great for the holders, but converted bonds or preferred shares mean new common shares added to the shares outstanding total, which is to say convertibles dilute existing shareholders. The bigger the dilution, the worse the impact on the stock's price.

Regarding credit quality, just over 27% of CWB's issues are rated Baa and almost 30% are rated lower than that. Sixteen percent of CVRT's issues are rated A by S&P, 18% are rated BBB, 15% BB and 16% are B-rated.

Convertibles do feature a bit of a yield kicker and that is the case with CWB and CVRT. The PowerShares offering yields just over 3% while CWB is higher at 3.6%.

Despite what appear to be two very similar funds on the surface, there are clear differences between these convertible plays and if the factors highlighted here aren't enough to help investors make an informed decision, then just make things simple and boil it down to performance. Year-to-date the smaller CVRT has slightly outperformed its larger rival. The performance gaps grow in CVRT's favor over the past year, the past month and the most recent 90 and 180-day periods as well.

For more on bond ETFs, please click HERE.


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