iShares Rolls Out New Convertible Bond ETF

Up until this week, finding an index of convertible bonds has been limited to just a single participant in the exchange-traded fund world. The SPDR Barclays Convertible Securities ETF CWB debuted in 2009 and has been able to successfully gather over $3 billion in total assets.

Convertible Bonds

CWB invests in a basket of 100 convertible securities with outstanding issue sizes greater than $500 million. State Street defines convertible securities as "bonds that can be exchanged, at the option of the holder, for a specific number of shares of the issuer's preferred stock ('Preferred Securities') or common stock."

These securities essentially function as a hybrid debt and equity instrument that can take on characteristics of each asset class. For this reason, convertible bonds are considered an alternative income solution that is prized for a low overall sensitivity to interest rates.

Related Link: BATS Exchange Welcomes The iShares Convertible Bond ETF

New Peer In Town: iShares Convertible Bond ETF

Barclays has opted to introduce a competing fund this month that will give ETF investors another income option to consider. The iShares Convertible Bond ETF (ICVT) carries exposure to 137 convertible bonds with issue sizes greater than $250 million. ICVT is currently available trading on the BATS exchange.

The underlying index that ICVT tracks will allow for smaller companies to be admitted than the larger issue size restrictions imposed by CWB. This lower band will broaden the universe of available bonds for entry into the ICVT index and ultimately create a more diversified mix of securities.

At launch, this ETF has top holdings in convertible bonds from Intel Corporation INTC, Telsa Motors Inc TSLA, and Priceline Group Inc PCLN.

Sector Weight

The technology sector represents 39 percent of the exposure in ICVT, with consumer staples companies making up an additional 20 percent. In addition, this new ETF will charge a net expense ratio of 0.35 percent compared to 0.40 percent in CWB.

Broad Look At Fixed-Income Markets

Despite the volatility in many areas of the fixed-income markets this year, CWB has charted a relatively steady course and gained more than 5 percent in total return. 

This unique area of the income marketplace may warrant greater attention in coming years as ETF investors face the threat of rising interest rates weighing on prices of traditional fixed-income securities.

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