State Street Global Advisors has launched a new currency-hedged share class for the SPDR Thomson Reuters Global Convertible Bond UCITS ETF. The new listing minimizes the exchange rate risk between the fund’s underlying currency exposures and the euro.
Convertible bonds are hybrid debt instruments that can be converted into a pre-determined number of the issuer’s shares.
The fund tracks the Thomson Reuters Qualified Global Convertible Index, which currently includes convertible bonds denominated in multiple currencies from issuers around the world.
The new share class is available to trade on Xetra (SPF1 GY) and Borsa Italiana (GCVE IM). It has a total expense ratio (TER) of 0.55%, slightly higher than the unhedged version which costs 0.50%. Income generated within the portfolio is treated as accumulating.
The hedging process follows a monthly cycle using forward currency contracts to enact the hedge. The major currency exposures of the fund are the US dollar (55.9%), euro (21.5%), Japanese yen (13.0%), and Hong Kong dollar (3.8%).
Convertible bonds are hybrid debt instruments that can be converted into a pre-determined number of the issuer’s shares. Thus the price of a convertible bond will mimic the price of the stock as stock prices increase. Specifically, the value will be a function of the amount of shares the bond can be converted into (known as the market conversion rate) and the prevailing price per share.
When stock prices fall, however, the bond trades more like a traditional fixed income security and will be valued at the present value of its future expected cash flows. Note that if a stock price falls dramatically this could be a signal that the creditworthiness of the issuer has worsened, which may also be reflected in falling bond prices.
It is worth noting that a significant number of convertible bonds are also callable. This poses a risk to the investor if interest rates begin to fall. Falling rates increase the likelihood of the bonds being called, requiring the investor to re-invest the proceeds in a lower interest rate environment.
Bonds from issuers in the US account for 40.9% of the total index weight, while there are also significant allocations to bonds from issuers in Japan (14.0%), China (8.8%), France (8.7%), and Germany (8.4%).
The largest sector exposures are information technology (22.3%), consumer discretionary (17.1%), industrials (11.0%) and real estate (8.1%).
There are 282 holdings in the fund which has an average duration of 4.2 years, a delta (the measure of the convertible bond’s price sensitivity to underlying stock price movements) of 0.5, and a current yield of 1.0%.
The original unhedged version of the ETF was listed on Xetra in October 2014 under the ticker ZPRC GY. It has since been cross-listed on London Stock Exchange, Borsa Italiana, and SIX Swiss Exchange. It has over $780 million in assets under management.