There's an ETF for that! Convertible Bonds

We consider convertible bonds to be  a "hybrid" investment.  They share characteristics of both stocks  and traditional bonds. The unique structure of convertible bonds allow them to participate in stock market upside, while also offering less volatility than the general stock market and a decent yield.  

Here's how they work.  Each convertible bond is exchangeable for equity shares. As stock prices increase, the value of the convertible bond moves up based on its conversion feature. This can lead to an increase in value, although not usually as much as the stock itself. When stocks fall, convertible bonds will fall in value as well. However, they generally will find support on the downside as they begin to be valued for their bond characteristics (interest rate, term, return of premium).

Convertible bonds generally have a relatively low correlation to traditional stocks and bonds which could help reduce volatility in shaky markets. We use them as part of our "alternatives" allocation in portfolios.

Below are some ETFs that invest in convertible bonds. We've listed the tickers, names and expense ratios of the funds to consider:

• CWB    SPDR Barclays Convertible Securities                  0.40%
• ICVT    iShares Convertible Bond                                      0.20%
• FCVT   First Trust SSI Strategic Convertible Securities    0.95%

Remember, these hybrids are more of a specialty fund. They should not be a core holding due to their concentration / non-diversification.  As with any specialty fund, make sure you understand the methodology and do your your due diligence.