Global investment manager Calamos Investments has launched a new actively managed ETF providing exposure to equity-sensitive US convertible securities.
John Koudounis, President and CEO of Calamos Investments.
The Calamos Convertible Equity Alternative ETF (CVRT US) has been listed on NYSE Arca with an expense ratio of 0.69%.
Convertible securities are hybrid debt instruments that can be converted into a pre-determined number of an issuer’s common shares. As such, they tend to have both equity and fixed income characteristics.
Specifically, these securities will tend to track the issuer’s stock price when that stock price is increasing; however, they will trade more like traditional fixed income securities (i.e. valued at the present value of expected cash flows) when stock prices are low.
Although simple in principle, convertibles can be complex to manage. The dual nature of convertibles is part of what makes them difficult to analyze, and the evaluation process must take both parts into consideration. The market also consists of several different types of convertible securities – bonds, structured notes, debentures, and preferred stocks – which may be fixed- or floating-rate and contain certain provisions such as put or call options.
All of these factors strengthen the argument for adopting an actively managed approach to the asset class. Calamos boasts a robust pedigree in convertible securities investing, having pioneered investing in the asset class more than four decades ago. The firm is currently the largest manager of convertible securities in the US, overseeing over $11 billion in related assets held within mutual funds and separately managed accounts.
CVRT represents Calamos’ inaugural foray into offering a convertible strategy within the liquid, transparent, and tax-efficient ETF structure.
“We see tremendous opportunity across the ETF landscape, and it is fitting that one of our earliest products in this space reflects our convertibles heritage,” said John Koudounis, President and CEO of Calamos Investments.
The ETF also stands apart from its competitors by focusing on a specific segment of the convertibles market, targeting securities that are relatively more sensitive to changes in their issuer’s stock price – the ETF’s performance benchmark is the ICE US Core Equity Alternative Convertible Index, a custom index developed by Calamos in collaboration with ICE, which covers US convertible securities with Deltas of 65 and higher (Delta represents the sensitivity of a convertible’s price to changes in the firm’s stock price).
According to Calamos, by targeting convertibles with relatively higher Deltas, CVRT may offer greater equity upside potential compared to traditional broad market convertible strategies.
“CVRT is not just another ETF; it’s a new strategy both for the ETF market and for Calamos,” added Matt Kaufman, Senior Vice President and Head of ETFs at Calamos Investments. “It identifies equity-sensitive opportunities through a rules-based approach, combining credit, convertible, and equity analysis processes to identify areas of potential outperformance within the equity-sensitive universe.”
Investment strategy
Calamos utilizes quantitative and qualitative screens to identify securities that meet the fund’s criteria for investing. Both investment-grade and high yield securities will be eligible for portfolio inclusion.
While ensuring diversification across the targeted segment, Calamos will also make active security-level weighting adjustments based on fundamental analyses regarding factors such as an issuer’s financial soundness, its ability to make interest and dividend payments, its earnings and cash flow forecast, and the quality of management.
The firm will also monitor and actively manage certain portfolio-level characteristics such as the size of an issue (value of bonds outstanding), liquidity, trade execution, and exposure to macro-level investment themes.
Calamos intends to rebalance the portfolio regularly to ensure that the desired exposures are maintained.
CVRT’s launch comes amid favourable performance and renewed interest in convertibles and convertibles-based funds this year. The $4.1 billion SPDR Bloomberg Convertible Securities ETF (CWB US), the largest passive ETF to track the convertible securities market, has gained 6.6% year-to-date (as of the end of September) while attracting over $800 million in net new assets over the past six months. CWB comes with an expense ratio of 0.40%.