State Street SPDR Bloomberg Convertible Securities ETF

CWB

Market cap $6.39B

Convertible bonds sit in an odd corner of capital markets: corporate debt with an embedded equity option, paying coupon income while carrying upside tied to the issuer's stock.

Corporate America is tapping the convertible bond market at a record pace as companies linked to artificial intelligence drive a surge in demand for debt that often ​draws extra investor interest in hot markets because it can convert into equity.

Investors may be better off looking outside the world's core bond markets right now, Brij Khurana writes in a guest commentary.

State Street® SPDR® Bloomberg Convertible Securities ETF offers exposure in hybrid assets labelled as bonds, but with strong correlation to equities. CWB's portfolio has low company risk and is dominated by unrated convertible securities and short maturities. Performance and risk metrics position CWB as more compelling than competitors, though yields are variable and currently unattractive for income-focused investors.

CWB has some reflexive stocks and also more traditional exposures that are more macro exposed, meaning an ambiguous effect of the rate cuts motivated by labour market concerns. However, ambiguity does favour the embedded option a bit in convertible bonds. Our thinking is that large cap tech has more to benefit from iffy, but still alright, macro outlook together with a rate cut than the stocks associated to CWB convertibles.

The SPDR Bloomberg Barclays Convertible Securities ETF holds a portfolio of 300 convertible securities, mostly without credit rating. CWB has a stronger correlation with stocks than with bonds and should be handled like a low-volatility equity ETF. CWB is the oldest and best-performing ETF among its peers.

Convertible securities blend traits of bonds and stocks. They are worth considering given the way they balance growth with income. CWB's sector allocation highlights its approach of mixing income with growth.

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SPDR® Bloomberg Convertible Securities ETF holds a portfolio of convertible securities and is well-diversified. The CWB ETF is a hybrid asset with characteristics of both equity and fixed income, and its behavior is closer to a stock index than a bond index. CWB doesn't look attractive as a long-term investment, but it is a good instrument for tactical allocation in a rotational model.

CWB offers investors a way to access innovative companies but with historically lower risk than small cap stock ETFs like IWM. Convertible bonds have a favorable reward/risk profile over many years, with equity-like returns alongside payment of principal built into these securities. Credit markets' future refinancing needs, the so-called maturity wall, bode well for convertible demand as an alternative to traditional bonds' higher interest expense.