Published: August 21, 2009
The
correct answer is
(B.) Convertible BondsThe Dow
Jones Industrial Average has just
rallied more than 2,500 points,
climbing from a March low near 6,500
to retake the 9,000 level. That's a
furious +40% advance in less time
than it takes to grow a tomato. But
it also took less time than that to
wipe it all out just a few short
months ago. It's hard to know what
to do next. Fortunately, there is a
middle ground that allows investors
to participate in a rising market
without getting whipsawed if the
bottom drops out.
Convertible bonds were made for this
kind of volatile environment.
Convertible bonds work like
traditional corporate bonds,
offering fixed, semi-annual interest
payments. The difference is these
securities come with the opportunity
to convert into a pre-determined
number of regular common shares at
some point in the future. You don't
have to convert if the common stock
fails to budge or even loses ground.
Just sit on the bond until maturity
and your principal will be repaid in
full while you collect regular
interest checks all the way. This
versatility is what makes
convertibles the perfect all-weather
asset class. According to John
Calamos (whose firm manages nearly
$5 billion in convertible assets),
these securities typically capture
two-thirds of the market's upside
potential, with only one-third of
its downside exposure.
You can look no further than the
past six months to see this behavior
in action. During the first quarter
of the year when the S&P fell -11%,
convertibles posted a +3% gain. And
when the market perked up in the
second quarter and rallied +16%,
convertibles soaked up every bit of
that gain. That's a risk/reward
imbalance that anyone can
appreciate.
Any many people do. More than 90 new
issues have come to market since
January, raising a combined $33
billion. Through the first half of
the year, convertibles shined with a
robust gain of +21% -- trouncing the
+11% return of the S&P 500. After
looking at a number of funds
dedicated to this sector,
StreetAuthority editor Nathan
Slaughter has singled out the
strongest candidates in his latest
issue of The ETF Authority.
All of Nathan's picks have posted
double-digit year-to-date returns --
one ETF has run up a whopping +86%!
-- and in the latest issue of ETF
Authority, he explores two of
his favorites. To learn the names of
these ETFs, and to learn more about
ETF Authority,
please visit this link.
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