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Morningstar, Inc. Commentaries


Should You Become a Convert to Convertibles Funds?

Feb 14, 2014
Click here to access Should You Become a Convert to Convertibles Funds?

As a steady economic recovery pushed equity securities higher in 2013, convertible securities also benefited. A convertible security is a bond that also carries the right to buy the stock of the issuing firm once it hits a certain (conversion) price. As a result, convertibles funds tend to provide much, but not all, of equities' upside with less of their downside risk. For example, last year,  SPDR S&P 500 (SPY) gained 32%, the typical open-end convertible fund gained nearly 22%, and the typical convertibles closed-end fund gained nearly 20%. In an equity bear market, convertible securities should provide some downside protection--in 2008, SPY dropped nearly 37%, but the typical open-end convertibles fund lost 26% and the typical CEF lost 34%. 



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