The convertible bond market has long been an appealing place to look for total return potential. However, demand for convertible bond ETFs has been minimal. We think this could change now that Calamos Investments has entered this market with an active ETF that began trading today.
The firm launched its first equity ETF in February, the Calamos Antetokounmpo Global Sustainable Equities ETF (SROI ). However, we are more excited about its new fund, the Calamos Convertible Equity Alternative ETF (CVRT ). The issuer has more than four decades of experience investing in convertibles, through mutual funds, closed-end funds and other instruments. According to Calamos, investment-grade companies came to the convertible market in the first half of 2023 at a more rapid pace than in many years.
The Benefits of Convertible Bonds
Convertible debt securities are exchangeable for equity securities of the issuer at a predetermined price, and typically offer greater appreciation potential than nonconvertible debt securities like corporate bonds. Over time, a company’s convertible bonds may trade more like their corporate bond component or more in line with their underlying stock price. CVRT plans to provide targeted exposure to the equity-sensitive segment of the convertibles universe.
“Calamos has a core competency with convertible securities, having started investing in them in the 1970s.” explained Matt Kaufman, head of ETFs at Calamos Investments.
Its suite of products includes the Calamos Convertible Fund (CICVX), a three-star-rated mutual fund with a long record. In the last 15 years, the fund had an annualized total return of 8.0%.
Calamos ETF Takes an Active Approach to Convertibles
For CVRT, management plans to use a quantitative and qualitative screening process that consists of a proprietary convertible model and fundamental inputs to identify securities. The fund expects to make active adjustments to the portfolio based on fundamental analyses. Reasons could include an issuer’s financial soundness, ability to make interest and dividend payments, earnings and cash flow forecast, and quality of management. Changes can also be made based on portfolio-level characteristics like liquidity and value of the bonds outstanding.
Existing index-based convertible bond ETFs include the iShares Convertible Bond ETF (ICVT ) and the SPDR Bloomberg Convertible Securities ETF (CWB ). ICVT and CWB had risen 7.4% and 6.0%, respectively year to date as of early October, in contrast to the 1.9% loss incurred by the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD ).
According to Calamos, equity-sensitive convertibles may offer an improved risk profile relative to small- and mid-cap growth allocations.
Assets invested in actively managed ETFs have been climbing this year, as more advisors embrace the benefits of ETFs. While some prefer an index-based approach, others want management that incorporates fundamentals and valuation into the selection process. For those seeking an ETF with attributes of stocks and bonds, a convertible ETF might make sense.
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