We’ve often talked about the rising uncertainty and volatility in today’s market. From rising tariff woes and geopolitical events to the path of interest rates and inflation, there are a lot of moving parts that investors need to navigate these days. It’s been tough to create an asset allocation plan that meets all these uncertainties head-on. Investors are truly stuck between a rock and a hard place.
Or are they really? There could be one often-ignored asset class that can provide the best of both worlds.
That would be convertible bonds. These hybrid securities could offer the best play on all the uncertainty, providing stock and bond-like potential depending on how the various risks unfold. And despite a year of significant gains, several key convertible bond metrics are still flashing value. For investors, the asset class could be a big buy heading into the final quarter of the year.
Rising Uncertainty, Rising Prices
9.6%. That’s the return of the BofA U.S. Convertible Index through the end of July. That’s an awe-inspiring return for a sector and underscores how investors are suddenly flocking to the convertible bond market. The reason for their recent interest? Rising uncertainty.
On the surface, convertibles are just like any other bond. They are issued with a coupon, par value, and higher placement in the bankruptcy ladder. However, tucked inside that normal bond is basically a hidden stock option. This feature enables the issuing firm to exchange the bonds for its own shares under specific conditions. The combination provides a steady income through interest payments and overall lower volatility, as well as the potential to benefit from a rising stock market.
This so-called asymmetric payoff- where the potential upside gain (equity side) is significantly greater than the potential downside loss (bond side)- comes in very handy during markets and economic conditions where uncertainty reigns supreme.
And right now, we are facing plenty of uncertainty.
A variety of new risk factors have entered the equation. 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. Traditional asset allocation strategies have become challenging to use due to the quickness of trend changes. To that end, convertibles and their ability to play both sides of the equation have been tapped by investors.
Still Plenty Of Potential
The issue is that much of the uncertainty surrounding the economic environment remains unaddressed. And in some cases, it got worse. Inflation has started to creep up, while economic data has begun to dwindle. But the Fed is poised to cut rates by the end of September.
The question is, given the continued uncertainty and volatility, are convertible bonds still worthy of investment? Especially after such an excellent run for the normally sleepy asset class? The answer may be a resounding yes.
For starters, deltas are still in the sweet zone.
Delta is a measure of a convertible bond’s price sensitivity to a change in the underlying stock’s price- measured from 0% to 100%. When a delta is high, the bond’s price moves closely with the stock and often indicates that conversion is just around the corner. A low delta means the bond is behaving more like a bond.
While a growing market and interest in convertibles have driven delta’s higher, going from 40 to about 50, they are still low when looking at the last decade. This chart from Lord Abbett highlights today’s delta versus previous years.
Source: Lord Abbett
That’s important when it comes to returns. Historically, when deltas are low, convertible bonds can deliver strong forward returns. According to Lord Abbett, when deltas are between 55 and 60, like we have now, convertible bonds deliver average three-year forward cumulative total returns of 38.1%. That’s a strong equity market beating return. Perhaps the best part is that converts can accomplish that with lower volatility than the broader equity market. 1
Secondly, the strength of the global stock market may also be a bullish sign for the continued rally in convertible bonds. The BofA U.S. Convertible Index has just moved past its previous peak, which was obtained back in 2021. However, many equity market measures are already well beyond their peaks. For example, the S&P 500 is about 42.8% above the 2021 convert market peak, and the NASDAQ is 38% above.
Given the significant performance gaps, convertible bonds can close the gap because of the embedded stock option.
Finally, supply and demand may be working in the investor’s favor. According to Fidelity, previously issued convertible bonds are continually “leaving the market” -with 14% of convertible bonds maturing by 2026, and almost 20% by 2027. This doesn’t include stock conversations. And yet, investors have continued to grab new issues in spades. For example, Nissan recently issued $1.4 billion in convertible bonds. While that may seem like a drop in the bucket when it comes to regular corporate bond issues, for convertible space, it was one of the most significant new issues ever. And it was quickly gobbled up by investors. With supply and demand out of balance, convertibles have much more room to grow. 2
Ultimately, the convertible bond sector could still make sense for portfolios, offering a hedge against uncertainty as well as the potential to outperform.
Adding Convertibles To Your Asset Allocation
With the uncertainty and risk still rising and convertibles still offering a sweet spot for future gains, adding them to a portfolio makes sense. They currently provide strong yields and have the potential to generate significant forward returns if market prices rise.
Adding them to a portfolio has only gotten easier thanks to the rise of ETFs. Compared to the broader bond market, convertible bonds are a tiny slice, and historically, it’s been tough for regular investors to get their hands on them. However, thanks to the rise of ETFs —both active and passive —there are now easy, one-ticker choices for adding these hybrid bonds to an asset allocation plan.
Because they are hybrid securities, advisors recommend that they occupy a space between a bond and a stock sleeve, taking a small allocation from both sides. A 5% to 10% weighting to convertibles may be enough to help generate lower portfolio volatility and substantial gains.
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 2.6% to 15%. They have expenses ranging from 0.20% to 0.95% and assets under management between $13 million and $ 3.9 billion. They are currently yielding between 1.7% and 2.9%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| CVRT | Calamos Convertible Equity Alternative ETF | $13M | 15% | 2.9% | 0.69% | ETF | Yes |
| ICVT | iShares Convertible Bond ETF | $2.9B | 12.4% | 1.7% | 0.20% | ETF | No |
| FCVT | First Trust SSI Strategic Convertible Securities ETF | $93.17M | 12% | 2.02% | 0.95% | ETF | Yes |
| CWB | SPDR Bloomberg Convertible Securities ETF | $3.88B | 11.9% | 2.1% | 0.40% | ETF | No |
| QCON | American Century Quality Convertible Securities ETF | $50M | 8% | 2.6% | 0.32% | ETF | Yes |
All in all, convertible bonds have gained prominence as investors look for ways to reduce the risk and uncertainty currently facing their portfolios today. By blending stock and bond attributes, these bonds can deliver in all sorts of market conditions. The best part is that these bonds remain cheap and offer plenty of forward potential. That means, investors still looking to ward off risk have the potential to do so with these securities.
Bottom Line
Convertible bonds have been on fire as uncertainty and risk continue to dominate the conversation. Going forward, the asset class still has plenty of potential to deliver. Thanks to low valuations and substantial upside, convertible bonds remain a great portfolio hedge.
1 Lord Abbett (August 2025). Checking In on Convertible Bonds
2 Fidelity (August 2025). A golden age for convertible bonds
