There was a quick mention in the Streetwise column in Barron's about the strong year that the iShares Convertible Bond ETF (ICVT) is having.
CWB is the SPDR equivalent fund. Clearly, they are both having strong years so this is a good opportunity to reiterate from a few previous posts that convertible bonds, as opposed to convertible arbitrage which is a different strategy than just buying convertible bonds, don't really trade like bonds. Convertible bonds have equity-like volatility. There has been a history of performance differentiation from the S&P 500 which might be interesting but the point is convertible bonds don't really look like what most people expect bonds to look like. If stocks get hit for whatever reason, I would not rely on convertibles to offer real defensive attributes.
Here's the same grouping from 2022.
In both charts, ICVT and the S&P 500 look pretty similar. Here's the differentiation I was talking about, year by year.
Here are the top issuers in ICVT.
CWB reports by issues held not issuers.
Although not in the top ten, CWB holds the MicroStrategy converts, other crypto related converts, AI and meme company issues, pretty much just like ICVT. So there is quite a bit of heat under the hood of these funds. That isn't on its face bad by any means.
While I've been clear I want no part of Strategy, realistically a three-ish percent weighting in a fund that if anything would get a small portfolio weight probably isn't big enough to move the portfolio needle if something terrible happens to Strategy. If the entire crypto space blows up then these funds would probably feel it and if somehow, crypto, memes and AI all got badly damaged at the same time then I would guess ICVT and CWB would both go down a lot. That's not a prediction, it's simply an understanding of the holdings and an attempt to assess the risk. If part of the reason all three (crypto, memes and AI) are doing well is because of the same excesses and then there is a consequence for that excess then all three would probably go down a lot, impacting ICVT and CWB. I'm really hitting on this point not as a prediction but a risk study.
We've looked at the Calamos Autocallable Income ETF (CAIE) a couple of times since it listed. It's a complex product with a high yield that was expected to be a little more volatile than the S&P 500 which is its reference security.
It seems to be doing what it said it would in terms of volatility including a 3.21% decline on Friday. It has paid out $1 in distributions (ROC) since it listed on its way to what they say should be a 14% annual "yield." You can click above to get a little more detail but part of the story here is that bad things happen to CAIE if the S&P 500 hits a 40% decline/barrier. Obviously that is a very rare thing but in terms of framing one of the risks, that is one to learn about.
Autocallables are an institutional strategy that is usually wrapped in structured products so CAIE is an attempt to democratize access. GraniteShares filed to issue autocallable ETFs for 20 individual stocks.
There's a lot of heat on that list, I will not be responsible if your laptop melts from looking at that image for too long. GraniteShares of course has a lot of derivative income funds including the YieldBOOST suite which sells puts on 2x levered ETFs. Some sort of comparison between covered call funds and autocallable funds will be a fun exercise if we ever get the chance. Here's the filing.
At this point, I think that the performance of the underlying reference security is more of a determining factor for autocallables than products like YieldMax covered call funds and I think the manner is which the two harness/exploit volatility is a little different as well which if correct could be a useful point of differentiation for someone managing a drawdown portfolio and is hell bent for yield.
That's just an impression, it is way too early to know whether that is correct or not.
We got back safe and sound from Maui early Friday just ahead of what might be the start of the air traffic controller callout impacting the Phoenix airport. I don't know what the reality or magnitude of the callout is but if the story is real, then we got lucky. I've been taking pictures of this same truck for ten years. My wife asked if we were going to visit "your truck."
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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