One interesting, albeit smaller, niche of the bond world is convertible bonds. While they are considered debt, when looking at the capital structure, they offer an equity "kicker" by virtue of being convertible into common stock at a given price.
These bonds, when issued, allow the holder to convert each bond into a specified number of shares. As a hypothetical example, a bond may allow the purchaser to convert it into 50 shares of common stock. Since bonds are issued with a "face value" of $1000, as long as the common is trading below $20/sh, there's no incentive for a holder to convert. In that case, the holder is still receiving the interest payment on the debt.
However, should the stock rise above $20, it is to the holder's advantage to convert the bond to equity. In fact, it is likely that, even without the conversion, the bond will rise in price, to reflect the value of the debt/equity conversion, in the same way that a warrant, or call option would.
The benefit to the issuing company is that convertible bonds will typically carry a smaller coupon than a straight debt issue by the same company. The issuance of convertible securities (convertible preferred stock can be considered a "kissing cousin" to convertible bonds) is often used in early rounds of venture capital or private equity financing. (Note: Convertible preferreds ranks below debt on the capital structure, so in a "worst case" scenario, don't offer the same degree of protection as do the bonds).
An important factor for the investor to keep in mind is what's known as a "forced conversion", meaning that the issuer can "call" the bonds, and force a conversion into equity. This means that "the sky's NOT the limit", in terms of capital appreciation, as is the theoretical case with common stocks.
Here are 4 CEF/ETFs that are focused on the sector.
Advent Claymore Global Convert (AGC)
As the name suggests, this fund takes a global focus, which is fairly unique. 96.31% of the portfolio is ex-US, fairly broadly distributed among sectors. It's currently yielding 11.32%%, and pays monthly ($0.0664/sh). The annual expense ratio is 1.99%, consisting of a 1.60% management fee, and 0.39% for other expenses. As of 8-24-11, it trades at a discount of 6.38% to NAV. Over the last 52 weeks, the range has been as high as a 6.66% premium, and as low as an 11.32% discount to NAV.
Advent Claymore Conv & Income (AVK)
While managed by the same folks as AGC, this fund has an even higher concentration of holdings ex-US (99.37% is , vs. 96.31% for AGC). AVK currently yields 7.06%, also paying monthly ($0.0939/sh). AVK sports an expense ratio of 1.50%; broken down into 0.80% for the management fee, and 0.70% for other expenses. As 8-24-11, AVK traded at a 7.53% discount to NAV. Over the last 52 weeks, the range has been as high -0.05% (a very slight discount), and as low as a 12.71% discount to NAV.
Bancroft Fund (BCV)
This CEF is focused exclusively on US holdings and pays quarterly, rather than monthly, as do the first two CEFs mentioned. BCV is trading at a discount of - 13.87%, with a yield of 3.27% (pays $0.1275/sh quarterly). The expense ratio for BCV is 1.17%, comprised of a 0.75% management fee, and 0.41% other expenses. The 52 week range runs from -10.90% to -15.92%
Ellsworth Fund (ECF)
This final fund is also focused exclusively on U.S. holdings, and pays quarterly. The $0.061 sh/quarterly results in a yield of 3.62%. The expense ratio is 1.14%, comprised of a 0.75% management fee, and 0.39% other expenses. The current discount to NAV is -13.26%, with a 52 week range of -9.22% to -17.32%.
One more thing to keep in mind is that these securities tend to be thinly traded. The average daily volume for these 4 is as follows:
- AGC: 92k shares
- AVK: 95K shares
- BCV: 11k shares
- ECF 27k shares
Such light volumes require caution on an investor's part when entering and exiting a position.