Convertible Bond ETFs

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Contributor, Benzinga
August 17, 2023

Investors who are looking for fixed-income investments that offer higher returns than traditional bonds often turn to convertible bonds. These types of bonds offer the potential for higher returns because they come with the option to convert into equity. However, they also come with the risk that the underlying stock may not live up to fund performance as expected, resulting in lower returns.

Convertible bond ETFs are a way for investors to gain exposure to convertible bonds while also enjoying the benefits of exchange-traded funds (ETFs). These funds invest in a basket of convertible bonds, providing diversification and liquidity.

Benefits of Convertible Bond ETFs

One of the primary benefits of convertible bond ETFs is the potential for higher returns. These ETFs invest in a basket of convertible bonds, which offer the potential for higher returns than traditional bonds. Additionally, because the ETFs are traded on an exchange, they offer liquidity, making it easier to buy and sell shares.

Another benefit of convertible bond ETFs is diversification. By investing in a basket of convertible bonds, investors can spread their risk across a variety of issuers, industries and credit ratings. This diversification can help reduce the risk of default or other credit-related events.

Risks of Convertible Bond ETFs

While convertible bond ETFs offer the potential for higher returns, they also come with risks. One of the primary risks is the risk of the underlying stock not performing as expected. If the stock market price falls, the value of the convertible bond may also decline.

Another risk is interest rate risk. If interest rates rise, the value of the bonds held by the ETF may decline, as investors will demand higher yields to compensate for the increased risk.

Pros and Cons of Convertible Bond ETFs


  • Provides exposure to a diversified portfolio of convertible bonds
  • Offers potential for both income and capital appreciation
  • Provides a way to gain exposure to the convertible bond market without the need to individually select and manage bonds
  • Allows for liquidity and ease of trading, similar to any other ETF market


  • May be subject to interest rate risk, as changes in interest rates can impact the value of the underlying bonds
  • May have lower yields compared to other fixed-income investments due to the potential for capital appreciation
  • May have higher expense ratios compared to traditional bond funds

Convertible Bond ETFs vs. Traditional Bonds

Convertible bond ETFs and traditional bonds serve different investment purposes and offer varying risk-reward profiles. Convertible bond ETFs consist of convertible bonds, which can be converted into a predetermined amount of the issuer's equity. This benefit gives investors the potential for capital appreciation if the underlying stock performs well, alongside the regular interest payments of a bond. Traditional bonds provide fixed interest payments and are generally considered less risky as they do not have an equity component. While traditional bonds typically offer more stable returns, convertible bond ETFs provide an opportunity for participation in the equity market, potentially leading to higher returns but with increased risk. The choice between these two investment options depends on individual risk tolerance, investment goals and market conditions and outlook.

How to Invest in Convertible Bond ETFs

Investing in convertible bond ETFs can be an attractive option for those looking to combine elements of fixed income with the potential upside of equity investments. To invest in convertible bond ETFs, you start by researching available ETFs that align with your investment goals, risk tolerance and desired exposure to specific sectors or companies. Many online brokerages and investment platforms offer access to convertible bonds, allowing investors to purchase shares of these funds just like individual stocks. It may also be wise to consult a financial adviser or other investment professional who is familiar with bond markets to understand their unique characteristics and risks. Paying attention to factors like fees, underlying assets, liquidity and the fund's track record can help investors make informed decisions about which convertible bond ETFs to add to their portfolio.

Best ETF Brokers

How to Choose the Right Convertible Bond ETF

When choosing a convertible bond ETF, there are several factors to consider:

  • Credit quality of the bonds held by the ETF: Higher credit quality bonds are less likely to default but may offer lower returns.
  • Expense ratio: Consider the expense ratio of the ETF. Lower expense ratios will result in higher returns for investors.
  • Liquidity: Determine the liquidity of the ETF. More liquid ETFs will be easier to buy and sell, making it easier for investors to manage their positions.

A Balanced Investment Option

Convertible bond ETFs can offer investors the potential for higher returns by combining fixed-income investments with the option to convert into equity. They can provide diversification, liquidity and exposure to a basket of convertible bonds. However, risks are involved, such as the performance of the underlying equity in the stock market and interest rate fluctuations. Investors should research options and consider credit quality and liquidity. Convertible bond ETFs can provide a balanced option for those seeking fixed income and potential equity gains.

Frequently Asked Questions


Are convertible bond ETFs suitable for all investors?


No, convertible bond ETFs are not suitable for all investors. These ETFs come with risks, and investors should consider their risk tolerance and investment objectives before investing.


Are there tax implications when investing in convertible bond ETFs?


Yes, there may be tax implications — such as capital gains or income tax — when investing in convertible bond ETFs. Investors should consult a tax professional before investing.


What is the typical expense ratio for convertible bond ETFs?


The typical expense ratio for convertible bond ETFs ranges from 0.30% to 0.75%.