Convert to Defense in a Down Market
This column was originally published on RealMoney on June 8 at 11:16 a.m. EDT. It's being republished as a bonus for TheStreet.com readers.
I had thought 2006 might be a slight down year for U.S. stocks, but the recent downdraft has made me start to think about what to buy if the selling persists.
Convertible bonds have appeal in this environment. These are corporate bonds that can be converted into shares of common stock.
Convertible bonds tend to trade more like stocks in an up market as the underlying stock moves closer to the set conversion price for the bonds; conversely, they trade more like plain-vanilla bonds in a down market as they move away from the conversion price.Closed-end funds specializing in convertible bonds have a number of merits over buying individual issues: They have better liquidity, there is no single-issuer risk, and there is less trading slippage. One closed-end fund I have written about is the Calamos Convertible Opportunities & Income Fund (CHI). Although this is a fine fund, it trades with a whopping 20% premium to its NAV.
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