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Reduce Volatility and Increase Yield With This ETF

Thomas Boccellari

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.