This Fund's Recent Surge Comes From Its Sector Bets
Be aware of this fund's heavy tech-sector exposure.
SPDR Bloomberg Barclays Convertible Securities ETF (CWB) provides market-cap-weighted exposure to the U.S. convertible-bond market across the credit-rating spectrum. While this market-cap-weighting approach reduces transaction costs, it leads to an unintended, concentrated bet in the technology sector. Tracking error has also been an issue, and there is a cheaper index alternative. These considerations limit the fund's Morningstar Analyst Rating to Neutral.
Roughly half the fund's portfolio is invested in the technology sector, which is a source of risk. Its exposure to this sector was less than a fourth of the portfolio at the end of December 2012. Any negative developments in the sector could significantly hurt the fund’s return. This concentration is driven by growth-oriented companies such as Intel (INTC), Lam Research (LRCX), and Microchip Technology (MCHP) that have issued large amounts of convertible debt in the past few years. The surge in high-tech-sector stock prices enabled these companies to tap the convertibles market at attractive terms. Convertible debts may also be more accessible than traditional debt financing for many high-tech firms because they often have volatile cash flows.
Phillip Yoo does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.