State Street Global Advisors has introduced euro and Swiss franc currency-hedged share classes for its global convertible bond ETF on Borsa Italiana, SIX Swiss Exchange and Deutsche Börse.
SSGA has introduced currency-hedged share classes for convertible bond ETF on SIX Swiss Exchange and Borsa Italiana, plus Deutsche Borse.
Each listing tracks a currency-hedged version of the Thomson Reuters Qualified Global Convertible Index, which includes convertible bonds denominated in multiple currencies from issuers around the world.
The new listings mitigate the currency risk between the portfolio’s underlying holdings – based in USD, EUR, JPY, HKD, CNY plus six other currencies – and the euro or Swiss franc.
The SPDR Thomson Reuters Global Convertible Bond EUR-Hedged UCITS ETF has been listed across the three exchanges, trading in EUR, with the ticker codes GCVE IM, GCVE SE and SPF1 GY.
The SPDR Thomson Reuters Global Convertible Bond CHF-Hedged UCITS ETF has been listed only on SIX Swiss Exchange, in CHF, and with ticker code GCVC SE.
Each share class has a total expense ratio (TER) of 0.55%, which is slightly more than the 0.50% for the unhedged version. Income generated within the portfolio is revinvested.
The hedging process follows a monthly cycle using forward currency contracts to enact the hedge. The major currency exposures of the fund are the US dollar (57.8%), euro (20.7%), Japanese yen (12.8%), and Hong Kong dollar (3.7%).
Convertible bonds are hybrid debt instruments that can be converted into a pre-determined number of the issuer’s shares. Thus the price of a convertible bond will reflect the price of the stock as stock prices increase. Specifically, the value will be a function of the amount of shares the bond can be converted into (known as the market conversion rate) and the prevailing price per share.
When stock prices fall, however, the bonds trade more like traditional fixed income securities and will be valued at the present value of their future expected cash flows. Note that if a stock price falls dramatically this could be a signal that the creditworthiness of the issuer has worsened, which may also be reflected in falling bond prices.
It is worth noting that a significant number of convertible bonds are also callable. This poses a risk to the investor if interest rates begin to fall. Falling rates increase the likelihood of the bonds being called, requiring the investor to re-invest the proceeds in a lower interest rate environment.
Bonds from issuers in the US account for 42.5% of the total index weight, while there are also significant allocations to issuers from Japan (13.7%), China (8.4%), France (8.4%), and Germany (8.3%). The largest sector exposures are information technology (21.7%), consumer discretionary (17.4%), industrials (10.1%) and real estate (7.8%).
There are 279 holdings in the fund which in aggregate have an average duration of 4.2 years, a delta (the measure of the convertible bond’s price sensitivity to underlying stock price movements) of 0.5, and a current yield of 1.0%.
The original unhedged version of the ETF was listed on Xetra in October 2014 under the ticker ZPRC GY. It was then cross-listed on London Stock Exchange, Borsa Italiana, and SIX Swiss Exchange, and now has over €780 million in assets under management.