The Unusual World of Convertible & Preferred Share ETFs

Most folks never pay much attention to convertible bonds or preferred shares.

And yet… financial pros have started to show an unusual interest in related ETFs.

The top search by financial pros, the First Trust SSI Strategic Convertible Securities ETF (FCVT), gave us a chance to explore this lesser known part of the market.

And what we found was rather interesting.

Key Facts About FCVT

• Net assets: $83 million
• 12-month trailing yield: 1.64%
• Inception: November 3, 2015
• Expense ratio: 0.95%
• Number of holdings: 131

Let’s start by quickly reviewing how convertible bonds and preferred shares work.

Convertable bonds are debt instruments with a provision allowing holders to ‘convert’ the debt into equity. The downside is they typically come with lower interest payments.

Preferred shares pay a fixed dividend like bonds. And they’re a higher priority if and when a company liquidates than common stockholders. However, they don’t come with voting rights and typically have limited capital gains.

The FCVT is an actively managed fund that holds at least 80% of its net assets in a diversified portfolio of U.S. and non-U.S. convertible securities.

Source: etfdb.com

Because FCVT is actively managed, you get a bit of a mixed bag.

Surprisingly, the ETF holds more technology convertible bonds than any other sector.

Source: First Trust

Performance

The bond selloff we’ve seen over the last year didn’t leave FCVT unscathed.

Source: First Trust

The average returns listed above might not seem like much. 

However, it fared a LOT better than your typical bond fund.

Competition

When we compared FCVT to the other top convertible bond and preferred share ETFs, we got wide range in terms of dividends, performance, and liquidity.

• iShares Preferred and Income Securities ETF(PFF): The most liquid stock on our list, the PFF holds a extremely diverse basket of preferred shares, though it’s heavily towards the financial sector.
• Innovator S&P High Quality Preferred ETF (EPRF): EPRF sets itself apart by investing in preferred shares of companies with investment grade quality bonds.
• Global X U.S. Preferred ERF (PFFD): The PFFD invests in preferred shares while aiming to keep its expense ratio as low as possible.
• Virtus InfraCap U.S. Preferred Stock ETF (PFFA): PFFA is another preferred stock ETF that invests in companies with a market cap of $100 million or greater.

What quickly becomes apparent is onlytwo of these ETFs trade enough shares to make them worth investing.

And of them (PFF and PFFD) both have absolutely abysmal performances.

Our Opinion 2/10 

FCVT might one day be a quality ETF.

However, it doesn’t trade enough volume, nor does it have enough assets under management after nearly a decade in service.

Despite its decent performance, we think there is too much risk with this ETF.

If you want to invest in convertible bond funds, your best bet is to go with mutual funds for the time being.