2023-07-20 15:15:54 ET
Summary
- iShares Convertible Bond ETF portfolio holds over 300 cash-pay convertible bonds.
- Technology represents 38% of asset value.
- Correlation to stocks may mitigate risks in a bond ETF portfolio or a tactical allocation strategy.
ICVT strategy and portfolio
iShares Convertible Bond ETF (ICVT) started investing operations on 06/02/2015 and tracks the Bloomberg Barclays U.S. Convertible Cash-Pay Bond > $250MM Index . The expense ratio is 0.20% and the 12-month trailing distribution yield is 1.78%.
As described in the prospectus,
The universe of securities that are eligible for inclusion in the Underlying Index includes U.S. dollar-denominated securities with maturities of 31 days or more and $250 million or more of outstanding face value.
The index is market capitalization-weighted and rebalanced once a month. The Fund's portfolio turnover was 17% in the most recent fiscal year.
The fund has 327 holdings, exclusively cash-pay convertible bonds . It is a class of convertible bonds giving the option to convert into a pre-specified number of shares of the issuer's common stock, but do not require conversion. Other classes of convertibles (zero coupon, preferred and mandatory convertible bonds) are not eligible. Due to embedded optionality, ICVT may be classified by some brokers as a derivative product in the same category as leveraged, inverse and volatility ETFs. Therefore, buying it may require some adjustments in trading permissions.
Optionality allows growth companies to borrow money at a lower rate and possibly avoid paying the principal, should the bond be converted (in this case, the debt is "paid" by common shareholders in dilution). Optionality is also attractive for lenders willing to mix fixed income and speculation on share price. As a consequence, ICVT portfolio is growth-oriented. As a hybrid asset, its behavior is part equity, part fixed income. As of writing, the weighted-average coupon rate is 1.73% and the weighted-average maturity is 2.94 years.
Its heaviest sectors are technology (38.1% of asset value) and consumer discretionary (21.3%).
Sector breakdown (Chart: author; data: iShares)
The next table lists the top 20 issuers, representing 25.9% of asset value. Each issuer may correspond to several bonds held in the portfolio.
Name | Sector | Weight (%) |
PALO ALTO NETWORKS INC | Technology | 2.27 |
DEXCOM INC | Consumer Non-Cyclical | 1.77 |
WAYFAIR INC | Consumer Cyclical | 1.66 |
DISH NETWORK CORP | Communications | 1.65 |
ON SEMICONDUCTOR CORPORATION | Technology | 1.57 |
SNAP INC | Technology | 1.39 |
SEA LTD | Technology | 1.33 |
LIBERTY MEDIA CORP | Communications | 1.27 |
CARNIVAL CORP | Consumer Cyclical | 1.24 |
LUMENTUM HOLDINGS INC | Technology | 1.16 |
EXACT SCIENCES CORPORATION | Technology | 1.15 |
ROYAL CARIBBEAN CRUISES LTD | Consumer Cyclical | 1.13 |
AKAMAI TECHNOLOGIES INC | Technology | 1.12 |
FORD MOTOR COMPANY | Consumer Cyclical | 1.11 |
MONGODB INC | Technology | 1.1 |
SPLUNK INC | Technology | 1.09 |
RIVIAN AUTOMOTIVE INC | Consumer Cyclical | 1.02 |
ETSY INC | Consumer Cyclical | 0.98 |
NCL CORPORATION LTD | Consumer Cyclical | 0.97 |
WOLFSPEED INC | Technology | 0.95 |
Historical behavior
Due to its characteristics, ICVT price behavior is closer to a stock ETF than a bond ETF. Its correlation coefficient with the S&P 500 (SPY) is 0.79 since inception (measured on weekly returns). The next table shows that ICVT and SPY are quite close regarding risk metrics: maximum drawdown and volatility (standard deviation of weekly returns).
Total Return | Annual Return | Drawdown | Sharpe Ratio | Volatility | |
ICVT | 89.71% | 8.21% | -37.27% | 0.47 | 16.43% |
SPY | 153.56% | 12.15% | -33.72% | 0.65 | 17.64% |
Data calculated with Portfolio123
The next chart plots the equity value of $100 investments in ICVT and SPY since inception.
ICVT vs SPY (Chart: Author; data: Portfolio123)
ICVT-IEF rotation
Tactical allocation strategies consist of over-weighting assets with the highest probability of future gains. This probability is often arbitrarily measured by past performance. Many variants are possible depending on the performance metric, weight calculation, look-back period, decision frequency, asset list, number of positions. The next table tracks a strategy with only two ETFs: ICVT and the iShares 7-10 Year Treasury Bond ETF ( IEF ). Every week, it goes long 100% in the ETF with the highest 3-month return, or in cash if both have their prices below the 200-day simple moving average. This ICVT-IEF rotational model is compared to two bond benchmarks: a total bond market ETF (BND) and IEF itself. The rotational model not only improves the return of IEF alone, but also mitigates drawdowns.
Since ICVT inception | Total Return | Annual Return | Drawdown | Volatility |
ICVT-IEF rotation | 52.57% | 5.35% | -12.07% | 6.62% |
Bond Benchmark (BND) | 10.26% | 1.21% | -18.58% | 4.91% |
IEF | 7.34% | 0.88% | -22.65% | 6.20% |
ICVT | 89.71% | 8.21% | -37.27% | 16.43% |
Calculations with Portfolio123. Past performance, real or simulated, is not a guarantee of future returns.
Takeaway
iShares Convertible Bond ETF portfolio invests in over 300 cash-pay convertible bonds. It is overweight in information technology as of writing, but the sector breakdown may change significantly over time. The fund has performed exceptionally well in 2020, but returns from 2015 to 2019 and since 2021 have been underwhelming. ICVT correlation to stocks may improve the performance of a bond ETF portfolio when the stock market is trending up. It may also be used in a tactical allocation strategy with other bond ETFs. The ICVT-IEF rotation presented here is a simple example. QRV Bond Rotation is based on the same principle.
For further details see:
ICVT And Bond Tactical Allocation