NEW YORK (TheStreet) -- The continued selloff in the bond market is increasing the allure of alternative exchange-traded funds, including one that holds convertible bonds.
As the name implies, convertible bonds allow the holder to convert the bonds into common stock. Conversion terms are set forth by the issuer. For example, if a company issues convertible bonds at a ratio of 20:1, that means for each bond the investor buys, he or she can later convert that bond into 20 shares of common stock.
The only ETF dedicated to convertibles, the SPDR Barclays Convertible Securities ETF (CWB), has been on the market for more than six years and has $3 billion in assets under management. The fund is passively managed and tracks the Barclays U.S. Convertible Bond > $500MM Index.
CWB's approach is straightforward. As investors in the individual bonds convert them to stock, those bonds are removed from the index (and the ETF) and replaced with new convertible bonds. Like the index, the ETF is rebalanced monthly. The conversion process doesn't enable investors in the ETF to own the newly converted stock.
In the fixed income hierarchy, convertibles are often overlooked compared to government bonds and corporate debt, but convertibles should not be ignored. In fact, they could be a winning play at a time when fixed-income investors are fretting about rising interest rates while fleeing Treasury funds.
Companies issued $15 billion worth of convertibles in the first quarter of this year, with the pace of issuance rising to $8 billion in February, the highest level in nearly four years, according to Putnam Investments.