Convertible securities can capture the upside of markets while protecting on the downside. Over the past year through May 14, the Bloomberg Barclays U.S. Convertible Composite Total Return index posted a 54.6% return. While this was largely driven by robust equity performance, convertibles also held up relatively well during last year's broad-based market sell-off from late February to late March, falling by about 26% compared with a 39% drop for the underlying equities.
Competitive returns: Over the past 10 years, the convertible index produced a 12.3% average annual return, besting the Russell 2000 index by 50 basis points, while the Nasdaq Composite index returned 18.3%.
Downside protection: During down years, such as 2015, the underlying equities in the index returned -5.6%, but convertibles dropped by only 2%. It was even better in 2018 when the convertible index declined by 2%, but equities lost 7.6%.
Returns vs. underlying equities
Spreads help: Most of convertibles' return has been driven by equity appreciation, but lower bond spreads have also helped. The option-adjusted spread on the Bloomberg Barclays U.S. High Yield index currently sits at about 300 basis points, about 50 basis points narrower than pre-pandemic levels.
High-yield OAS spread (basis points)
Issuance on the rise: With the rising stock market, convertibles issuance has been increasing. Last year, issuance topped $100 billion, an all-time high, more than double the annual totals of the past several years. This year is off to a good start, with more than $48 billion sold.
Total issuance (billions)
*Through May 14. Sources: Barclays PLC, Bloomberg LP