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The world's largest convertible bond manager has unveiled an exchange-traded “synthetic convertible bond” fund to spread the concept to companies so rich in cash that they don't need to issue real bonds.
Last year saw a boom in convertible bonds — a type of bond that can be exchanged for shares if a company's share price reaches a pre-agreed level — with issuance jumping 77 percent to $48 billion, according to LSEG.
The recovery, driven by rising interest rates as convertible bonds pay a lower coupon than mainstream bonds, has attracted more established companies to increase the newer technology and biotechnology groups that have traditionally dominated issuances.
However, cash-rich companies like Magnificent Seven shares that have a significant impact on global equity markets do not issue such debt, making them outside the bounds of convertible bond strategies.
Only 12 of the Nasdaq 100 companies currently issue convertible bonds, and none of the 25 largest companies by market cap do so, according to data from Illinois-based Calamos Investments, a $35.5 billion company with $11 billion in assets under management. Transferable.
It has now joined a few competing managers in trying to get around this by constructing synthetic, convertible-like strategies that can be applied to every company.
The Alternative Nasdaq & Bond ETF (CANQ) will purchase call options on many of the largest Nasdaq 100 stocks, as well as on the QQQE – the equal-weighted version of the index.
“We want to create $100 of exposure to stocks [for $100 of investment]Which can be achieved as a result of the leverage inherent in options,” said Shaheen Iqbal, Head of Quantitative Investments and Co-Head of Risk at Calamos.
However, the bulk of the assets will be invested in an actively managed bond portfolio, mostly in the form of relatively high-yield bank loans, high-yield bonds and emerging market debt, to provide income. He targets a return of about 5 percent after expenses.
CANQ “was inspired by company founder John Calamos’ idea of creating a strategy similar to synthetic conversions,” Calamos said, “with an objective of asset mix.”[ing] To reduce volatility and drawdowns while accessing the growth potential of American innovation and attractive income distributions.
“The convertible market is not a huge space, but the idea of offering risk management that is similar to a convertible — I think a lot of people can get behind that,” said Matt Kaufman, head of ETFs at Calamos.
Matt Freund, co-CEO of IT, added, “The advantage of CANQ is that it gives you exposure to the most dynamic companies on the Nasdaq. These companies have strong balance sheets and have a lot of free cash flow that they don't need to release.” [convertible bonds].
“John Calamos, years ago, had the idea that we could create converts in companies we like without being tied to the version they may or may not do,” he added.
This instrument is similar to the Aptus Defined Risk ETF (DRSK), which was launched in 2018 with a value of $408 million. DRSK invests between 90 and 95 percent of its assets in investment-grade corporate bonds, with the balance used to purchase call options on large-cap companies. Stocks and sectors in the S&P 500 Index.
Likewise, the $174 million Amplify BlackSwan Growth & Treasury Core ETF (SWAN), launched the same year, invests 90 percent of its assets in Treasuries, with the rest in S&P 500 call options,” he said. to[ing] Unlimited exposure to the S&P 500, while protecting against the potential for significant losses.
“The success of covered ETFs from JPMorgan and others has opened the door for asset managers to bring other relatively sophisticated options-based strategies into the world of ETFs,” said Todd Rosenbluth, head of research at consulting firm VettaFi, referring to ETFs. . Like the popular $31.9 billion JPMorgan Equity Premium Income ETF (JEPI), which sells call options rather than buying them.
“These products solve a problem,” he added. “You want to have income and mitigate risk, but you still need exposure to the huge growth stocks that have been driving the market higher.”
Rosenbluth said the “goal” of the convertible bonds was to create a “lower risk, higher income way to access the stock market,” and that CANQ offered a “creative way.” . . A deconstructed way to gain exposure to companies that do not offer bonds.
The success of such ETFs, he said, “will come down to the ability of Kalamos and others to educate the public about the advantages of the strategies — as opposed to owning the Nasdaq directly and through a covered buy strategy?”
Brian Armour, director of North American passive strategies research at Morningstar, believes it is accurate to classify what CANQ has created as synthetic convertibles “to some extent.”
However, a more pure synthetic convertible bond strategy would involve more overlap between bond and equity exposures, while “using calls on equal-weight bonds would require more overlap between bonds and stocks,” Armor said. [index] “Which further confuses the strategy.”
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Looking at the bigger picture, Kaufman said CANQ was an example of an ETF meeting the need for investors to put in place a “new risk regime,” now that global interest rates have returned to normal.
The likes of JEPI's were created for a time when rates were very low or zero. They used stock markets to get income that you couldn't get from fixed income. Now that interest rates are below zero, it makes sense to use fixed income again to manage risk and income. “this [approach used by CANQ] Don't cover your bullish head.
However, Armor said that while bond yields become more competitive with the level of income from covered calls, call option prices increase as interest rates increase.
“This means that CANQ is paying a higher price for long positions than it would have paid a year or two ago, all else being equal, which can erode the profitability of the strategy,” Armor said. “This does not make their statement incorrect, but it is a consideration worth paying attention to investors.”
