Getting Active With Convertible Bonds
Not all fixed-income investors are destined to tumble when interest rates rise. In fact some bonds, actually thrive when rates move higher. Case and point: Convertible bonds and now investors have another convertibles exchange traded fund to consider.
First Trust, the sixth-largest U.S. issuer of ETFs, introduced the actively managed First Trust SSI Strategic Convertible Securities ETF (NASDAQ: FCVT) on Wednesday.
"During a shift in the economic climate, convertible securities may offer investors an attractive total return investment option with potentially meaningful participation in equity returns, current income, and a degree of principal protection," according to a statement issued by First Trust.
What Are Convertible Bonds?
Convertible bonds earn that moniker because they can be converted into shares of the issuer's common equity. Convertibles, which are seen as having equity-like traits, have actually outperformed stocks during periods of rising rates as well being the top-performing fixed income asset class in rising rate environments. The embedded conversion option in convertible bonds mutes their sensitivity to higher interest rates.
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California-based SSI Investment Management Inc. is the sub-adviser for the First Trust SSI Strategic Convertible Securities ETF. Although 10-year Treasury yields now reflect market participants' expectations that the Federal Reserve will raise interest rates in December, bond ETFs have been prolific asset gatherers this year.
"In the first nine months of 2015, investors added $7.7 billion to investment-grade corporate bond ETFs. While we think demand for high-quality fixed-income securities is strong, in light of modest Treasury yields, while in our view inflows have also been aided by actions banks have taken to reduce inventories of bonds Available for Sale," said S&P Capital IQ in a research note out last month.
Next In Line
Illinois-based First Trust is the second-largest issuer of actively managed ETFs, trailing only PIMCO. First Trust has $2.73 billion in active assets under management, good for 12.5 percent of the share of the U.S. actively managed ETF market, according to AdvisorShares data.
Any new entrant to the convertible bond ETF faces stiff competition from the king of the group, the $2.7 billion SPDR Barclays Convertible Securities ETF (NYSE: CWB). The SPDR Barclays Convertible Securities ETF, which debuted six and a half years ago, is passively managed and has a 30-day SEC yield of 2.81 percent.
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