Home>Video>Reduce Volatility and Increase Yield With This ETF

Reduce Volatility and Increase Yield With This ETF

Thu, 20 Nov 2014

SPDR Barclays Convertible Securities ETF is a smart buy for equity investors willing to trade some of the upside of equities for some downside protection and yield.


Video Transcript

Tom Boccellari: Equity investors looking to reduce their portfolio volatility and increase their yield may consider SPDR Barclays Convertible Securities ETF (CWB). The fund tracks an index of convertible bonds.

Convertible bonds are bonds that allow the investor to convert their bonds into shares of the company at a strike price that is generally above the current market price. Because of the bond's equity option, it tends to pay less interest than traditional corporate bonds. Because of lower coupon payments, they tend to be a cheap and attractive way for non-investment-grade companies to raise capital.

Currently, more than 60% of the fund's assets are invested in non-investment-grade debt. Despite the fund's lower-quality holdings, its bond component actually gives it less volatility than the average large-cap equity fund, which can help it perform better during market downturns. Additionally, that bond component gives it a higher yield than the average equity fund. While the fund does not convert its bond holdings into shares, investors can still get the equity upside because of the way the bonds are priced.

When the stock is trading at or above its strike price, the bond tends to trade like the underlying equity. Conversely, when the stock is trading below the strike price, the bond tends to trade like a bond. While the 40-basis-point price tag may seem hefty, it is less than the average take of high-yield corporate bond and preferred share ETFs.

Currently, it's the only convertible bond ETF available. It could be a good investment for investors willing to give up some of the equity upside to protect downside and increase their yield.

  1. Related Videos
  2. Related Articles
  1. Become a Better Index Investor

    Roundtable Report: Experts dig into the ETF versus index fund debate, active and passive strategies, fixed-income benchmarks, factor investing, and much more.

  2. 5 Things Investors Can Be Thankful for in 2014

    A Goldilocks market, falling investment costs, and a few remaining pockets of value make the list this year.

  3. Indexes Don't Maximize High-Yield Bonds

    Morningstar's Alex Bryan walks investors through some of the pros and cons of index-based ETFs versus actively managed funds in the high-yield bond category.

  4. Bogle: How Bond Indexing Could Be Better

    Large foreign government ownership of U.S. Treasuries has overemphasized U.S. government bonds in the Barclays Aggregate Index, says the Vanguard founder.

  5. A Muni ETF for Investors Seeking Tax Relief

    SPDR Nuveen Barclays Municipal Bond ETF offers a portfolio of high-quality muni bonds at a low cost and a relatively attractive tax-equivalent yield.

  6. Top Investment Ideas for Retirement

    Retirement Readiness Bootcamp Part 5: Morningstar strategists share their top fund, ETF , and dividend stock picks to fill your retirement portfolio.

  7. Bond Funds: What to Know Before You Go Active

    Actively managed core bond funds have been able to beat the index in recent years, but investors need to understand why, says Morningstar senior analyst Sarah Bush.

  8. Key Themes for Fixed-Income ETFs

    Panelists at the Morningstar 2013 ETF Invest Conference addressed trending topics of high-yield duration, bank-loan vehicles, near-term credit and interest-rate risk, and the tendency for bond ETFs to smooth volatility.

©2017 Morningstar Advisor. All right reserved.