The SPDR Barclays Convertible Securities ETF (NYSEARCA: CWB) attempts to produce investment results that generally correspond, before fees and expenses, to the price and yield performance of the Barclays U.S. Convertible Bond > $500MM Index, or the underlying index. This index is built to replicate the price action of the U.S. convertible securities market, except it excludes all issues smaller than $500 million.

A convertible bond is a debt instrument that can be exchanged for a specific number of common or preferred shares from its issuer. Convertibility is normally limited but can occur at the behest of the bondholder. These bonds are almost always issued at lower interest rates than nonconvertible or standard bonds. This lower yield is mostly because bondholders have the added option to profit from the rise in the price of the issuer's underlying stock. The risk to investors is share prices dropping and the holder being forced to retain or try to sell a bond with below-market returns.

The emphasis on convertibility means CWB is designed to produce more price growth, and less yield, than a standard bond-focused ETF. The fund also includes some below-investment-grade bonds in the portfolio to add further fuel to potential returns. In fact, a sizable majority of holdings are concentrated into three noninvestment-grade categories: BBB rated, junk and unrated bonds.

Management does not actually exercise the option to convert its bonds into common shares. Instead, it relies on rising issuer stock prices to add an equity premium to the bond prices; in other words, investors pay more for convertible bonds if they believe they will later profit from the conversion feature.

How It Tracks It

Through its underlying index, CWB uses a market cap-weighted exposure to large convertible securities. The weighted average maturity of bonds in the portfolio is approximately 13 years, and yield is under 3%.

One way to encourage the attractiveness of a convertible bond portfolio is to concentrate on issuing companies from high-growth sectors. This is precisely what CWB does; the fund even takes on a bit of cyclical tilt thanks to its emphasis on technology and consumer discretionary sectors. In some regards, CWB acts more like an equities-based fund than a bond fund.

With approximately 100 holdings in the portfolio, CWB possesses an average level of diversification for its category. While the majority of these holdings are convertibles, there is a decent amount of preferred stock positions as well. Public sector bonds make up just a tiny fraction of less than 1% of total exposure. Top 10 holdings account for approximately 27.5% of net assets.

Among bond holdings, coupons are extremely low; greater than 50% of bond coupons are less than 2.5%. Fifty-six percent of CWB bonds carry a credit quality of BBB. The next largest credit grouping is unrated at 29%. Maturities occupy two different ends of the spectrum; one quarter of all assets belongs with bonds that have a maturity between three and five years, while 15% carry maturities between 20 and 30 years.


CWB is part of the SPDR fund series offered by State Street Global Advisors, or SSgA. SSgA is one of the premier names in investment fund management. The fund's investment adviser is SSgA Funds Management, Inc. This ETF may be traded commission-free on the Charles Schwab trading platform.


CWB is not a particularly efficient fund until you compare it to its competitors. It holds an expense ratio of 40 basis points, or 0.4%, which is far from a low-cost Vanguard or iShares ETF, but the 40 bps figure represents the lowest for the category.

The fund is also popular with nearly $3 billion in net assets and an average daily trading volume of $40 million. Spreads are reasonably low at 0.05%, and creation units cost 0.01%. Block traders likely experience more difficulty exiting and entering the market for CWB.

Tracking is a major issue for CWB. Despite heavy volume and a desirably long history, the fund often lags its underlying index by several times more than the advertised expense ratio. Fortunately for SSgA, the market is not exactly saturated with ready competition in this space.

Suitability and Recommendations

The SPDR Barclays Convertible Securities ETF is one of the premier bond funds for a rising-rate environment. Actually, there are probably no other significant convertibles ETFs in the marketplace. CWB experiences about-average risk for a bond ETF with a little higher-than-average performance.

Bond ETFs carry a unique blend of risks. ETFs track like mutual funds but trade like stocks, which means added equity risk. The underlying portfolio is comprised, mostly, of noninvestment-grade convertible bonds subject to counterparty risk. And the prices of convertible bonds are directly linked to the performance and expected performance of the issuer's stocks.

Despite some efficiency challenges and the niche nature of the portfolio, CWB is managed well by the SSgA team. Beta is low compared to the best-fit index, though a little high compared to a standard moderate target risk index. The trailing 36-month standard deviation is sub-7.00, which is strong considering the targeted bonds.

This ETF is best-suited for the cautious investor who does not want to settle for standard bond fund returns and is not looking for great yield performance. CWB offers indirect equity exposure through the convertibles feature without embracing total equity risk.

How Financial Adviser Clients Could Use This ETF

The only problem financial advisers might have with CWB is explaining its peculiar functionality. This is an equity that tracks bonds priced according to the expected returns of the issuer's corresponding equities, which might be enough to frighten those who do not like to invest in what they do not readily grasp.

If explained well enough, CWB makes an attractive play for uncertain markets and for those who embrace a moderate amount of risk. This could be a core holding for a middle-aged investor, but it probably plays best in a support capacity.

Main Alternatives and Competitors

There are few actual competitors to CWB for convertibles exposure. The Preferred Portfolio ETF is approximately the same size, but it tracks a very different index and does not have the same features as CWB. Every other large player is a preferred stock-based fund.

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