It’s no secret that volatility has come back to roost in the markets. Driven by a number of factors—from economic to geopolitical—both the major stock and bond benchmarks have been swaying around trying to find direction. We’ve seen some big swings, both up and down. For investors, dealing with this volatility has been a major headache. Moreover, trying to figure out whether they should play defense or offense has added extra complications to the situation.
But there may be one way investors can have their cake and eat it too.
Convertible bonds could offer a port in the storm. These hybrid securities offer income potential today with a chance to pay rising growth tomorrow. This combination of benefits might make them a top draw for the next few quarters as investors deal with volatility ahead of future potential. And now with plenty of new funds available, adding the asset class is as easy as ever.
Rising Uncertainty
Investor enthusiasm has dissipated to say the least. At the same time, uncertainty has risen. Today, a variety of new risk factors have entered the so-called chat. The on again, off again tariff policies; uncertainty about inflation and the Federal Reserve’s policy path; lower global growth and rising recession fears; and the recent U.S. debt downgrade are some of the new worries that have now entered investors’ minds.
This doesn’t factor in some of the geopolitical conflicts, such as the Ukraine or the Gaza Strip, which have continued to persist. Nor does it consider the recent tech meltdown and investors starting to question the surge of A.I. and market valuations
All of these factors have only enhanced volatility. The CBOE Volatility Index—commonly referred to as the ‘fear index’—has gone from doubling to falling to rising once again.
This uncertainty and risk has made investing a tough nut to crack. There are positives and negatives. With that, both the stock and broader bond markets have spent much of their time rising and falling, nearly in lock-step. Investors are truly facing a quandary. Are the risks a temporary blip or is this the start of something longer term?
Stocks? Bonds? Both!
There may be a way for investors to reduce their volatility while still potentially participating in the market’s upside after the storm clears. Convertible bonds could offer a solution.
Convertibles are just like any other bonds. They are issued with a coupon, par value, and higher placement in the bankruptcy ladder. This provides steady income via the interest payments and overall lower volatility.
However, tucked inside that normal bond is basically a hidden stock option. Convertible bonds have a feature that allows the issuing firm to exchange the bonds for shares of its own stock under certain conditions. Typically, one condition is when the price of the firm’s underlying shares hit a certain point.
This combination of both sides of the pie creates what’s called an asymmetric payoff. Investors get steady bond-like income and the ability to gain from a rising stock market. Overall, the potential upside gain (equity side) is significantly greater than the potential downside loss (bond side).
According to investment manager Voya, this asymmetric return and convertible’s dual nature has allowed the asset class to produce equity-like performance with lower volatility over the last 30 years. Digging into the data, the asset manager found that convertibles have managed to produce average annualized returns of 6.6%—very close to the S&P 500’s returns—over the last 30 years, while being less volatile than the index. This chart sums up their findings. As you can see, convertibles have had lower drawdowns as well. 1
Source: Voya
Right now, convertible bonds make a ton of sense. As a dynamic asset class, they can swiftly adapt to different market environments. Today’s quickly changing environment is a perfect example. When underlying equities decline, convertibles take on the protective characteristics of a bond, offering yield. When underlying equities move higher, they start behaving like stocks.
Where it gets interesting for investors is that convertible bonds are trading in a very sweet spot when it comes to yields. Right now, converts are trading only slightly below their investment grade counterparts in terms of yields: 3.49% vs. 3.66%. However, convertible bonds are trading for yields well above the average dividend yield of the S&P 500. By buying convertibles today, investors have the ability to gain the income/stability of standard corporate bonds but still capture the upside of stocks. They don’t have to pick and choose or lose out on yield. 2
Adding Convertible Bond Muscle
The ability to win in both upward and downward scenarios makes convertible bonds an ideal selection for investors. The best part is there are now more choices than ever to get exposure. Issuance of converts has grown as the weird rate environment has made them a great choice for companies to save on debt expenses and borrowing costs.
For investors, the number of choices has expanded as well. There are now numerous ETFs that cover the sector, both active and passive. And some have gathered some impressive assets.
Convertible Bond ETFs
These funds were selected based on their assets under management and represent the largest convertible bond ETFs. They are sorted by their YTD total returns, which range from 1.7% to 14%. They have expenses between 0.20% and 0.95% and assets under management between $5M and $3.5B. They are currently yielding between 0% and 2.85%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|
All in all, convertible bonds’ unique blend of attributes makes them perfect for the environment today. With uncertainty rising, converts are able to act like a bond. But if conditions improve, they perform more like stocks. This combination makes them a top draw for portfolios today.
The Bottom Line
With uncertainty and volatility rising, investors need a plan to navigate the changing markets. Convertible bonds could be the answer. Blending both stocks and bonds, these hybrid securities offer plenty of benefits for investors today.
1 Voya (May 2025). Understanding Convertible Securities and Why They’re Attractive Today
2 State Street (January 2025). Convertible Securities: What They Are and How They Work
Social Media
Market volatility has investors on edge: tariff threats, geopolitical issues, inflationary pressures, and more. The list goes on.
But convertible bonds might be the answer to fighting the fear. With built-in income and equity upside, they offer a smart way to stay defensive while still participating in growth. Here are some ETFs to consider: $ICVT, $CWB, $QCON, $ECVT and $CVRT
Here’s why they deserve a spot in your portfolio. LINK
