Italian global banking and financial services company UniCredit has become the latest firm to list an exchange-traded fund on SIX Swiss Exchange.
In a rising rate environment however stocks tend to outperform bonds, which may make an ETF based on convertibles more appealing than those based on regular bonds.
The firm has cross-listed the UC Thomson Rheuters Balanced European Convertible Bond UCITS ETF which is also listed on Xetra. The fund tracks the Thomson Reuters Monthly Europe Focus Convertible Index. UniCredit will also act as market maker for the fund.
Convertible bonds are hybrid debt instruments that can be converted into a pre-determined number of the issuer’s shares. This allows the bond to participate in the upside potential of a company’s stock price. 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 bond trades more like a traditional fixed income security and will be valued at the present value of its 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 also 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 as the likelihood of the bonds being called would increase, potentially requiring the investor to re-invest the proceeds in a lower interest rate environment.
In a rising rate environment however stocks tend to outperform bonds, which may make an ETF based on convertibles more appealing than those based on regular bonds. Indeed, during the ‘rising rate taper tantrum’ between May and September 2013, the Barclays Convertible Bond Index returned 3.8%, outperforming the Barclays’ broad bond Index (-3.3%) and even the S&P 500 (3%).
The fund offers the advantages of on-exchange trading for what was previously an asset class that was heavily OTC-traded. Furthermore, the fund may find appeal with investors seeking a supplement to the diversification of their portfolios.
The number of ETF issuers on SIX Swiss Exchange now numbers 22.