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Institutional Investors Consider the Convertible Bond ETF

NEW YORK (ETF Expert) -- There have been precious few opportunities to purchase U.S. stock weakness over the last seven months.

Specifically, the smallest dips have reversed course quickly, always finding a way to grind higher. On the other hand, some exchange-traded vehicles along the more modest rung of the risk ladder have caught the attention of institutional buyers.

Consider SPDR Barclays Convertible Securities (CWB). This ETF seeks the price and yield performance of the Barclays U.S. Convertible Bond Index > $500M -- an index that tracks U.S. convertibles with issue sizes greater than $500 million. With a slight increase in Treasury bond yields pressuring income assets over the past few days, sellers have pushed the price of CWB lower.

However, during last week, CWB witnessed $45 million flow into the fund for a 4% increase in assets under management. The trading occurred on nearly five times the average trading volume.

At present, CWB delivers an approximate annual yield of 3.75%. It has also been adept at capital appreciation in 2013. Year-to-date, CWB's total return is roughly 8.25%.

Since the November elections, CWB has rocketed higher alongside gains in broader U.S. equities. Technical analysts might be more impressed with the exchange-traded fund's ability to bounce higher on every minor pullback to a 50-day moving average.

Why would an institution that purchases in large blocks pursue convertible bonds in the first place? After all, the annual yield is not necessarily a steal at 200 basis points above comparable Treasurys, at least not with the potential for convertibles to sell off sharply alongside a stock scare.

The most likely reason is the pressure that institutional investors face with respect to putting cash to work.

Consider the money manager who has waited patiently all year for stocks to correct a modest 5% -- an event that has happened each year in the first five calendar months since 1996.

Alas, the market has kept on climbing like the Energizer Bunny on his way to the peak of Mount Everest. The institutional money manager may continue to wait with a higher-than-desired cash allocation, or he/she can look for a middle-of-the-road compromise.

I believe that a cautious institution determined that if the market keeps rising, CWB will garner some of that upside; if markets sell off, CWB should not experience as much of the downside.

Moreover, the monthly payouts of a decent annual yield could work well if the summertime moves sideways. In other words, someone may have made the decision to participate without chasing.

The question that an individual investor may need to ask himself/herself is whether CWB is a reasonable compromise for excess money market dollars.

Personally, I would be more inclined to wait for a modest pullback to a price point of $42.1 at the 50-day. What's more, I would be equally cognizant of an exit approach, utilizing a stop-limit loss order near $39.1.

When the S&P 500 fell 19.8% from top to bottom in the summer of 2011, CWB dropped roughly 17.8%. That may be more downside risk than a number of income enthusiasts have in mind.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Disclosure Statement: ETF Expert is a website that makes the world of ETFs easier to understand. Gary Gordon, Pacific Park Financial and/or its clients may hold positions in ETFs, mutual funds and investment assets mentioned. The commentary does not constitute individualized investment advice. The opinions offered are not personalized recommendations to buy, sell or hold securities. At times, issuers of exchange-traded products compensate Pacific Park Financial or its subsidiaries for advertising at the ETF Expert website. ETF Expert content is created independently of any advertising relationships. You may review additional ETF Expert at the site.

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