U.S. convertibles provide downside protection during market downturns

U.S. convertible returns, measured by the ICE BofA All U.S. Convertibles index, returned 5.5% during the first eight months of the year compared with 10.4% for the Russell 2000 index. Traditionally, the convertible universe is made up of small and midcap stocks. The Bloomberg U.S. Corporate High Yield index has returned 6.3% so far this year.

The convertible index provided a measure of downside protection, outperforming the Russell 2000 when it posted negative annual returns in 2015, 2018 and 2022. Convertibles also outgained the Nasdaq Composite when the index had negative returns in 2018 and 2022.

U.S. convertibles’ 10-year annualized return was 8.9% for the period that ended December 2023. The period includes an outsized 46.2% return in 2020. Convertibles outperformed the Russell 2000 and Bloomberg U.S. Corporate High Yield indexes, which returned 7.2% and 4.6%, respectively, during the same period.

With the market favoring large-cap stocks, the S&P 500, with a 12% return and 15.9% volatility, had the best risk-adjusted return as measured by the Sharpe ratio.

Convertibles had a higher volatility vs. the other indexes except the Nasdaq Composite.