Convertible Securities Climb With Stocks
Another group of fixed income funds getting the best of both worlds are convertible securities ETFs. The SPDR Bloomberg Barclays Convertible Securities ETF (CWB), the First Trust SSI Strategic Convertible Securities ETF (FCVT) and the iShares Convertible Bond ETF (ICVT) are each up 10% or more this year.
Convertible securities are typically bonds that can be exchanged for common stock or preferred stock. Convertible securities usually have lower yields than their vanilla counterparts, but their advantage is that they can be converted into equity at a specified price. That allows investors in convertible securities to share in a stock’s upside, while limiting downside if things go wrong. With stocks swinging upward in 2019, convertibles have rallied in tandem.
Fallen Angels Rise
Hybrid securities like preferreds and convertibles aren’t the only fixed income ETFs surging this year. High yield corporate bonds are also moving up.
The iShares Fallen Angels USD Bond ETF (FALN), the VanEck Vectors Fallen Angel High Yield Bond ETF (ANGL) and the Invesco BulletShares 2026 High Yield Corporate Bond ETF (BSJQ) all made the top-performers list.
Junk bonds, as high yield bonds are also known, climbed this year as investors grew more optimistic about the health of the U.S. economy. A more robust economy translates into fewer defaults for the least creditworthy companies.
The “fallen angel” ETFs, FALN and ANGL, have done particularly well by holding bonds of issuers that have recently been downgraded from investment grade to junk—essentially the highest-rated junk bonds on the market.
Long Duration Corporates
Investors haven’t had to wade into junk bonds to get solid returns in corporate bonds this year. ETFs that hold long term investment-grade corporate bonds, like the iShares 10+ Year Investment Grade Corporate Bond ETF (LLQD) and the Vanguard Long-Term Corporate Bond ETF (VCLT) delivered returns in excess of 8.5% so far in 2019.
Though investment-grade bond ETFs typically yield less than their high yield counterparts, investors can make up for that with longer duration. That’s what LLQD and VCLT offer.