New ETFs Cover Preferreds, Convertibles

Today, American Century added to its lineup by launching two funds covering the preferred and convertible securities spaces. The American Century Quality Preferred ETF (QPFF) and the American Century Quality Convertible Securities ETF (QCON) are fully transparent actively managed funds.

QPFF and QCON each come with an expense ratio of 0.32% and list on Cboe Global Markets.

Underserved Areas

Neither fund is based on an existing strategy offered by American Century, according to Ed Rosenberg, the firm’s head of ETFs. He says American Century looks for areas of the market where it can add value, and he considers both preferreds and convertibles to be fairly underserved by the ETF market.

Indeed, the convertible securities space is only covered by four ETFs, and only one of those is actively managed. The situation is different for preferred securities, which are covered by 18 ETFs; however, just four of them are actively managed.

“We’re in a lower-for-longer environment, and we all thought it would have ended by now. In a lower environment, preferreds can offer a differentiating factor and also a higher yield than fixed income like traditional corporate bonds, and they can create a better risk/reward profile,” said Rosenberg.

“Convertibles have the potential for growth,” he added, citing the exposure many convertibles products have to companies like Tesla, and noting that many convertible securities products had returns in 2020 in the area of 50% or higher.

“You can actually take some of your large cap growth sleeve and put it into something like convertibles. Your growth might be a little tapered, potentially, but you’re also going to get exposure and dividends that you never would have gotten before,” Rosenberg explained.

Investment Approach

The funds both use the same managers, who take a rules-based quantitative approach to building a portfolio. Rosenberg says that American Century also applies a quality screen to all its fund portfolios. In the case of QPFF and QCON, that means securities that are called are removed from the portfolios, and the quality screen can create a higher yield for the products.

“We look at quality as companies you would want to own, like a fundamental manager would. We’re investing in this company because it’s a good company,” Rosenberg said, noting that many investors look at quality as a factor.

Contact Heather Bell at [email protected]